<PAGE>
As Filed with the Securities and Exchange Commission on April 17, 1998
REGISTRATION NO. 33-31711
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
POST-EFFECTIVE AMENDMENT NO. 9
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
(781) 237-6030
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
COPIES TO:
MARGARET HANKARD, SENIOR ASSOCIATE COUNSEL DAVID N. BROWN, ESQ.
SUN LIFE ASSURANCE COMPANY OF COVINGTON & BURLING
CANADA (U.S.) 1201 PENNSYLVANIA AVENUE N.W.
RETIREMENT PRODUCTS & SERVICES P.O. BOX 7566
ONE COPLEY PLACE WASHINGTON, D.C. 20044
BOSTON, MASSACHUSETTS 02116 (202) 662-5238
(617) 348-9600
(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. 9 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
Mutual Funds
5. Determination of Offering Price Not Applicable
6. Dilution Not Applicable
7. Selling Security Holders Not Applicable
8. Plan of Distribution Distribution of the Contracts
9. Description of Securities to be Cover Pages; A Word About the Company,
Registered the Fixed Account, the Variable
Account and the Mutual Funds; Purchase
Payments and Contract Values During
Accumulation Period; Cash Withdrawals,
Withdrawal Charges and Market Value
Adjustment and Loan Provision; 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
Mutual Funds; Other Contractual
Provisions; Additional Information
About the Company; The Company's
Directors and Executive Officers;
Legal Proceedings; Legal Matters;
Financial Statements
<PAGE>
Form S-2 Item Number
and Caption Location in Prospectus; Caption
- -------------------------------------- --------------------------------------
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, 1998.
<PAGE>
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MAY 1, 1998
(PASTEUP LOGO)
- ------------------------
COMBINATION FIXED/VARIABLE
GROUP ANNUITY FOR QUALIFIED
AND NON-QUALIFIED
RETIREMENT PLANS
ISSUED IN CONNECTION WITH
SUN LIFE OF CANADA (U.S.)
VARIABLE ACCOUNT D
PROSPECTUS
- ---------------------------------------------------------
ISSUED BY
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
*ANNUITY SERVICE MAILING ADDRESS:
C/O RETIREMENT PRODUCTS AND SERVICES DIVISION
P.O. BOX 1024
BOSTON, MASSACHUSETTS 02103
PRINCIPAL EXECUTIVE OFFICES:
ONE SUN LIFE EXECUTIVE PARK
WELLESLEY HILLS, MASSACHUSETTS 02181
(781) 237-6030
- --------------------------------------------------------------------------------
The master group deferred annuity contracts (the "Contracts") offered by
this Prospectus are designed for use in connection with employer, association
and other group retirement plans which may qualify as retirement programs under
Section 401 (including Section 401(k)), Section 403, Sections 408(c), 408(k) or
408(p) of the Internal Revenue Code and non-qualified group programs such as
payroll savings plans (collectively the "Plans"). A Contract may be entered into
by any employer, association or other bona fide group. The Contracts provide
that annuity payments will begin on a selected future date. The Contracts
provide for the accumulation of values on either a variable basis, a fixed
basis, or a fixed and variable basis and provide for fixed and variable annuity
payments as elected.
(CONTINUED ON NEXT PAGE)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS CONTAINS THE BASIC INFORMATION YOU SHOULD KNOW BEFORE INVESTING
IN A CONTRACT AND IS VALID ONLY WHEN ACCOMPANIED BY THE CURRENT PROSPECTUSES OF
MFS/SUN LIFE SERIES TRUST (FOR QUALIFIED AND NON-QUALIFIED CONTRACTS), AND
MFS-REGISTERED TRADEMARK- WORLD GOVERNMENTS FUND, MFS-REGISTERED TRADEMARK- BOND
FUND, MFS-REGISTERED TRADEMARK- TOTAL RETURN FUND, MASSACHUSETTS INVESTORS
TRUST, MASSACHUSETTS INVESTORS GROWTH STOCK FUND AND MFS-REGISTERED TRADEMARK-
GROWTH OPPORTUNITIES FUND (FOR QUALIFIED CONTRACTS UNDER TRUST/CUSTODIAL
ACCOUNTS ONLY). YOU SHOULD RETAIN ALL PROSPECTUSES FOR FUTURE REFERENCE.
*ANY REFERENCE IN THIS PROSPECTUS TO RECEIPT BY THE COMPANY MEANS RECEIPT AT THE
ANNUITY SERVICE MAILING ADDRESS SHOWN ABOVE.
<PAGE>
Each Participant under a Contract will receive a Certificate evidencing such
Participant's coverage under the Contract.
The entity which establishes this Contract on behalf of Participants will be
referred to in this Prospectus as the "Owner," even though certain retirement
programs will be set up with a trustee as legal owner of the assets. The Owner
of this Contract is responsible for providing all communications and
instructions concerning Participant Accounts to Sun Life Assurance Company of
Canada (U.S.) (the "Company"). It is important to understand that while the
Owner has the responsibility for transmitting such instructions for each
Participant, the Participant may be permitted or required to make certain
decisions and elections under this Contract, as specified by the Owner in the
plan, trust or other appropriate document. Thus, where this Contract provides
for selections and elections by the Owner, the Owner shall be solely responsible
for giving such instructions to the Company, but the Owner shall have the right
to determine whether Participants or others make such elections in the first
instance.
The Owner of a Contract may elect to have Contract values accumulate on a
fixed basis in the Fixed Account which pays interest at a fixed rate which is
guaranteed for a specific period (one (1), three (3), five (5) or seven (7)
years) or on a variable basis in the Variable Account, or divided among the
Fixed Account and the Variable Account.
If the Owner elects to have Contract values accumulated on a variable basis,
Purchase Payments are allocated to Sun Life of Canada (U.S.) Variable Account D
(the "Variable Account"), a separate account of the Company. The Variable
Account uses its assets to purchase, at their net asset value, shares in one or
more of the following mutual funds selected by the Owner from among a group of
mutual funds advised by Massachusetts Financial Services Company, an affiliate
of the Company: MFS-Registered Trademark-/Sun Life Series Trust;
MFS-Registered Trademark- World Governments Fund; MFS-Registered Trademark- Bond
Fund; MFS-Registered Trademark- Total Return Fund; Massachusetts Investors
Trust; Massachusetts Investors Growth Stock Fund; and MFS-Registered Trademark-
Growth Opportunities Fund (the "Mutual Fund(s)" or "Fund(s)"). IN THE CASE OF
NON-TRUSTEED RETIREMENT PROGRAMS SUCH AS SECTION 403(b) TAX-SHELTERED ANNUITIES
AND NON-TAX-QUALIFIED DEFERRED COMPENSATION AND PAYROLL SAVINGS PLANS, PURCHASE
PAYMENTS ALLOCATED TO THE VARIABLE ACCOUNT MAY BE ALLOCATED ONLY TO MFS/SUN LIFE
SERIES TRUST. Each Mutual Fund pays its investment adviser certain fees charged
against the assets of the Mutual Fund. The value of the variable portion, if
any, of the Contract's Accumulation Account, the value of each Participant's
Account and the amount of variable annuity payments will vary to reflect the
investment performance of the Mutual Fund(s) selected and the deduction of the
contract charges described under "How the Contract Charges Are Assessed" on page
26. (For more information about the Mutual Funds, see "The Mutual Funds" on page
16.)
If the Owner elects to have Contract values accumulated on a fixed basis,
Purchase Payments are allocated to the Fixed Account. The Company will invest
Purchase Payments which are allocated to the Fixed Account in federal, state and
municipal obligations, corporate bonds, preferred and common stocks, real estate
mortgages, real estate and certain other investments in accordance with the
requirements established by applicable state insurance laws regarding the nature
and quality of investments that may be made by life insurance companies (See
"The Fixed Account" on page 15). The Company will credit interest at a rate of
not less than four percent (4%) per year, compounded annually, to amounts
allocated to the Fixed Account under the Contracts and guarantee these amounts
at various interest rates (the "Guarantee Rate") for one (1), three (3), five
(5) or seven (7) years, as elected by the Owner, subject to the imposition of
any applicable withdrawal charge, market value adjustment, or account
administration fee ("Account Fee"). The Company may not change an Initial or
Subsequent Guarantee Rate for the balance of the Guarantee Period; however,
future Guarantee Rates cannot be predicted and will be determined at the sole
discretion of the Company (subject to the minimum guarantee of four percent
(4%)). Fixed Accumulation Units in the Fixed Account will be credited to the
Contract's Accumulation Account. That part of the Contract relating to the Fixed
Account is registered under the Securities Act of 1933, but the Fixed Account is
not subject to the restrictions of the Investment Company Act of 1940.
The Company does not deduct a sales charge from Purchase Payments made for
the Contracts. However, if any part of a Participant's Account is surrendered,
the Company will, with certain exceptions,
2
<PAGE>
deduct from the amount requested a withdrawal charge (which may be deemed a
contingent deferred sales charge). This charge varies from a maximum of six
percent (6%) for Purchase Payments that have been in a Participant's Account for
less than two (2) years to zero (0) for Payments which have been in the
Participant's Account for seven (7) years. This charge is intended to reimburse
the Company for expenses relating to the distribution of the Contracts. A
portion of a Participant's Account may be withdrawn each year without any
withdrawal charge imposed by the Company, and after a Purchase Payment has been
held by the Company for seven (7) years it may be withdrawn without imposition
of any withdrawal charge by the Company. In addition, after a Participant's
Account has been established for 12 years no withdrawal charges will be imposed
on any amounts withdrawn. Contracts which are used in connection with
tax-qualified retirement programs ("Qualified Contracts") also have a loan
provision (See "Withdrawal Charges" and "Loans" on pages 23 and 25,
respectively).
In addition, if Fixed Accumulation Units having a three (3), five (5), or
seven (7) year Guarantee Period are canceled to effect a full surrender or
partial withdrawal, a Market Value Adjustment will be imposed. The Market Value
Adjustment will reflect the relationship between the Current Rate for a
Guarantee Period of the same duration as that of the amount being surrendered
and the Guarantee Rate applicable to the amount being surrendered. It also
reflects the time remaining in the Guarantee Period. Generally, if the Guarantee
Rate is lower than the applicable Current Rate, the application of the Market
Value Adjustment will result in a lower payment upon surrender. Similarly, if
the Guarantee Rate is higher than the applicable Current Rate, the application
of the Market Value Adjustment will result in a higher payment upon surrender.
If the Current Rate and the Guarantee Rate are the same, the Market Value
Adjustment is zero. IF A FULL SURRENDER IS REQUESTED WHEN THE GUARANTEE RATE IS
LOWER THAN THE APPLICABLE CURRENT RATE THE MARKET VALUE ADJUSTMENT WILL IN
EFFECT REDUCE THE AMOUNT OF INTEREST ALLOCATED TO A PARTICIPANT'S ACCOUNT AND
COULD RESULT IN A CASH WITHDRAWAL PAYMENT IN AN AMOUNT IESS THAN TOTAL PURCHASE
PAYMENTS (NET OF DEDUCTIONS FOR CONTRACT CHARGES) (SEE "MARKET VALUE ADJUSTMENT"
ON PAGE 24).
The Company reserves the right to defer the payment of amounts withdrawn
from the Fixed Account for a period not to exceed six (6) months from the date
written request for such withdrawal is received by the Company.
Special restrictions on withdrawals apply to Contracts used with
Tax-Sheltered Annuities established pursuant to Section 403(b) of the Internal
Revenue Code (See "Section 403(b) Annuities" on page 23).
In addition, under certain circumstances withdrawals may result in tax
penalties (See "Taxation of Annuities in General" on page 36).
For a discussion of cash withdrawal procedures see "Cash Withdrawals" on
page 22.
On each Account Anniversary and on surrender of the Participant's Account
for full value if it is not surrendered on an Account Anniversary, the Company
will deduct an annual account administration fee ("Account Fee") from the
Participant's Account. After the Annuity Commencement Date the Account Fee will
be deducted pro rata from each annuity payment made during the year. The amount
of the Account Fee varies from $12 to $25. These charges are to reimburse the
Company for administrative expenses related to the maintenance of the
Participant's Account (See "Account Fee" on page 26).
The Company also deducts a mortality and expense risk charge at the end of
each Valuation Period at an annual rate ranging from 1.30% to 0.95% of the daily
net assets of the Variable Account for mortality and expense risks assumed by
the Company (See "Charges Against the Variable Account for Mortality and Expense
Risks" on page 27).
Total annualized Purchase Payments allocated to a Participant's Account for
the first Account Year must be at least $300 and are payable in amounts of at
least $25 per payment (See "Purchase Payments" on page 18).
The Contracts provide that the Company may modify the withdrawal charges,
Account Fee, mortality and expense risk charges, the tables used in determining
the amount of the first monthly variable
3
<PAGE>
annuity payment and the formula used to calculate the Market Value Adjustment,
provided that such modification shall apply only with respect to Participant's
Accounts established after the effective date of such modification (See
"Modification" on page 34).
Premium taxes payable to any governmental entity will be charged against the
Participant's Account (See "Premium Taxes" on page 27).
Subject to certain conditions, and during the Accumulation Period, the Owner
may convert the value of a designated number of Fixed Accumulation Units then
credited to a Participant's Account into other Fixed Accumulation Units having
an equal aggregate value but having a different Guarantee Period or into
Variable Accumulation Units of particular Sub-Accounts having an equal aggregate
value, or convert the value of a designated number of Variable Accumulation
Units then credited to a Participant's Account into other Variable Accumulation
Units and/or Fixed Accumulation Units having an equal aggregate value.
Transfers/conversions involving Fixed Accumulation Units with three (3), five
(5) or seven (7) year Guarantee Periods will be subject to a Market Value
Adjustment (See "Conversion of Accumulation Units" on page 21).
After the Annuity Commencement Date, the Payee may, subject to certain
restrictions, exchange the value of a designated number of Variable Annuity
Units of particular Sub-Accounts then credited to the Contract with respect to
the particular Payee, for other Variable Annuity Units, the value of which would
be such that the dollar amount of an annuity payment made on the date of the
exchange would be unaffected by the fact of the exchange (See "Exchange of
Variable Annuity Units" on page 31).
The Company will vote Fund shares held by the Sub-Accounts at meetings of
shareholders of the Fund(s), but will follow voting instructions received from
persons having the right to give voting instructions. The Owner is the person
having the right to give voting instructions prior to the Annuity Commencement
Date. On or after the Annuity Commencement Date the Payee is the person having
such voting rights. Any shares attributable to the Company and Fund shares for
which no timely voting instructions are received will be voted by the Company in
the same proportion as the shares for which instructions are received from
persons having such right (See "Voting of Fund Shares" on page 33).
The Company will furnish Participants and other persons having voting rights
with certain reports and statements, as described under "Periodic Reports" on
page 33. Such reports, other than prospectuses, will not include the Company's
financial statements.
4
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "1934 Act"), as amended, and in accordance therewith
files reports and other information with the Securities and Exchange Commision
(the "Commission"). Such reports and other information can be inspected and
copied at the public reference facilities of the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. and at the Commission's Regional Offices
located at 75 Park Place, New York, New York and the Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois. 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 Commission
maintains a Website that contains reports, proxy and information statements and
other information about the Company, which files such documents electronically
with the Commission, at the following address: http:// www.sec.gov.
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, 1997 and the
Current Report on Form 8-K dated January 8, 1998 heretofore filed by the Company
with the Commission under the 1934 Act are incorporated by reference in this
Prospectus.
Any statement contained in a document incorporated herein by reference 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 documents referred to above which have been incorporated by
reference in this Prospectus, other than exhibits to such documents (unless such
exhibits are specifically incorporated by reference in this Prospectus).
Requests for such documents should be directed to the Secretary, Sun Life
Assurance Company of Canada (U.S.), One Sun Life Executive Park, Wellesley
Hills, Massachusetts 02181, telephone (781) 237-6030.
5
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
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Definitions 8
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Expense Summary 10
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Condensed Financial Information--Accumulation Unit Values 12
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This Prospectus Is a Catalog of Facts 13
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Uses of the Contracts 13
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A Word About the Company, the Variable Account, the Fixed Account and the Mutual Funds 13
The Company 13
The Variable Account 14
The Fixed Account 15
The Mutual Funds 16
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Purchase Payments and Contract Values During Accumulation Period 18
Purchase Payments 18
Accumulation Account and Participant's Account 19
Variable Accumulation Value 19
Fixed Accumulation Value 20
Conversion of Accumulation Units 21
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Cash Withdrawals, Withdrawal Charges, Market Value Adjustment and Loan Provision 22
Cash Withdrawals 22
Withdrawal Charges 23
Section 403(b) Annuities 23
Market Value Adjustment 24
Loans (Qualified Contracts Only) 25
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Death Benefit 25
Death Benefit Provided by the Contracts 25
Election and Effective Date of Election 25
Payment of Death Benefit 26
Amount of Death Benefit 26
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How the Contract Charges Are Assessed 26
Account Fee 26
Premium Taxes 27
Charges Against the Variable Account for Mortality and Expense Risks 27
Withdrawal Charges 28
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Annuity Provisions 28
Annuity Commencement Date 28
Election--Change of Annuity Option 29
Annuity Options 29
Determination of Annuity Payments 30
Fixed Annuity Payments 30
Variable Annuity Payments 30
Variable Annuity Unit Value 31
Exchange of Variable Annuity Units 31
Annuity Payment Rates 31
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</TABLE>
6
<PAGE>
TABLE OF CONTENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C>
- ---------------------------------------------------------------------------------------------------------------------------
Other Contractual Provisions 32
Payment Limits 32
Owner 32
Change of Ownership 32
Designation and Change of Beneficiary 32
Voting of Fund Shares 33
Periodic Reports 33
Substituted Securities 34
Change in Operation of Variable Account 34
Splitting Units 34
Modification 34
Discontinuance of New Participants 35
Custodian 35
Right to Return Contract (Individual Retirement Accounts Only) 35
- ---------------------------------------------------------------------------------------------------------------------------
Federal Tax Status 35
Introduction 35
Tax Treatment of the Company and the Variable Account 35
Taxation of Annuities in General 36
Qualified Retirement Plans 38
Pension and Profit-Sharing Plans 38
Tax-Sheltered Annuities 38
Individual Retirement Accounts 39
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Texas Optional Retirement Program 39
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Administration of the Contracts 39
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Distribution of the Contracts 39
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Additional Information About the Company 40
Selected Financial Data 40
Management's Discussion and Analysis of Financial Condition and Results of Operations 40
Liquidity 43
Year 2000 Compliance 43
Recent Reorganization 43
Asset/Liability Management and Information about Market Risk 44
Sun Life of Canada 45
Reinsurance 45
Reserves 45
Investments 46
Competition 46
Employees 46
Properties 46
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The Company's Directors and Executive Officers 46
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State Regulation 49
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Legal Proceedings 50
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Accountants 50
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Registration Statements 50
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Financial Statements 50
- ---------------------------------------------------------------------------------------------------------------------------
Appendix A--Illustrative Examples of Calculations of Variable Accumulation Unit Value, Variable Annuity Unit
Value and Variable Annuity Payment 78
Appendix B--Withdrawals, Surrenders, Withdrawal Charges and Market Value Adjustment 80
</TABLE>
7
<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 twelve (12) months plus a part of a month as measured from the Date of
Coverage for each Participant to the first day of the calendar month which
follows the calendar month of coverage. All Account Years and Anniversaries
thereafter shall be twelve (12) month periods based upon such first day of the
calendar month which follows the calendar month of coverage. If, for example,
the Date of Coverage is in March, the first Account Year will be determined from
the Date of Coverage but will end on the last day of March in the following
year; all other Account Years and all Account Anniversaries will be measured
from April 1.
Accumulation Account: An account established for the Contract.
Accumulation Period: The period before the Annuity Commencement Date and during
the lifetime of the Participant.
Accumulation Unit: A unit of measure used in the calculation of the value of the
Accumulation Account and the Participant's Account. There are two types of
Accumulation Units: Variable Accumulation Units and Fixed Accumulation Units.
*Annuitant: The Participant named in each Certificate.
Annuity Commencement Date: The date on which the first annuity payment under
each Certificate is to be made.
*Annuity Option: The method for making annuity payments.
Annuity Unit: A unit of measure used in the calculation of the second and each
subsequent variable annuity payment from the Variable Account.
Application: The document signed by the Owner that serves as the Owner's
application to the Company for the Contract.
*Beneficiary: The person or entity having the right to the death benefit set
forth in each Certificate.
Certificate: The document for each Participant which evidences the coverage of
the Participant under the Contract.
Company: Sun Life Assurance Company of Canada (U.S.).
Current Rate: As of a particular date, the interest rate for a Guarantee Period
that would be credited on a compound annual basis on Payments allocated to the
Fixed Account on that date. The Current Rate for a particular Guarantee Period
is contained in a schedule of rates published by the Company from time to time,
but in no event is the Current Rate less than four percent (4%), compounded
annually.
Date of Coverage: The date on which the Participant's Account becomes effective.
Due Proof of Death: An original certified copy of an official death certificate,
an original certified copy of a decree of a court of competent jurisdiction as
to the finding of death, or any other proof satisfactory to the Company.
Fixed Account: The Fixed Account consists of all assets of the Company other
than those allocated to a separate account of the Company.
Fixed Annuity: An annuity with payments which do not vary as to dollar amount.
Guarantee Period: The number of years for which an Initial Guarantee Rate or
Subsequent Guarantee Rate is credited. This period may be one (1), three (3),
five (5) or seven (7) years, as elected by the Owner. There are two types of
Guarantee Periods: an Initial Guarantee Period and a Subsequent Guarantee
Period.
- ------------------------
* As specified in the Participant Enrollment Form, unless changed.
8
<PAGE>
Guarantee Rate: The rate of interest credited by the Company on a compound
annual basis during any Initial or Subsequent Guarantee Period on Payments
allocated to the Fixed Account.
Issue Date: The date on which a Contract becomes effective.
Net Loan Interest: Loan interest due the Company, minus any interest credited by
the Company on the principal amount of the loan and any unpaid interest thereon.
Non-Qualified Contract: A Contract used in connection with a retirement plan
which does not receive favorable federal income tax treatment under Sections
401, 403 or 408 of the Internal Revenue Code.
*Owner: An employer, association or other bona fide group entitled to the
ownership rights stated in the Contract and in whose name or names the Contract
is issued. The Owner may designate a trustee or custodian of a retirement plan
which meets the requirements of Section 401, Section 408(c) or Section 408(k) of
the Internal Revenue Code to serve as legal owner of Plan assets, but the term
"Owner," as used herein, shall refer to the organization entering into the
Contract.
Participant: An eligible employee, member or other person named in the
Certificate who is entitled to benefits under the Plan as determined and
reported to the Company by the Owner.
Participant Enrollment Form: The document signed by each Participant that serves
as his or her application for enrollment under the Contract.
Participant's Account: An account established for each Participant to which net
Purchase Payments are credited in the form of Variable Accumulation Units and/or
Fixed Accumulation Units.
Payee: A recipient of annuity payments under the Contract. The term includes an
Annuitant or a Beneficiary who becomes entitled to benefits upon the death of
the Annuitant.
Plan: The retirement plan under which the Contract is issued.
Purchase Payment (Payment): An amount paid to the Company as consideration for
the benefits provided by the Contract.
Qualified Contract: A Contract used in connection with a retirement plan which
receives favorable federal income tax treatment under Sections 401, 403, 408(c),
408(k) or 408(p) of the Internal Revenue Code of 1986, as amended ("Code").
Receipt: Receipt by the Company at its Annuity Service Mailing Address shown on
the cover of this Prospectus.
Sub-Account: That portion of the Variable Account which invests in shares of a
specific Mutual Fund or a specific series of MFS/Sun Life Series Trust.
*Successor Beneficiary: The person or persons named to become the Beneficiary if
the Beneficiary is not alive.
Valuation Period: The period of time from one determination of Accumulation Unit
and Annuity Unit values to the next subsequent determination of these values.
Such determination shall be made as of the close of the New York Stock Exchange
on each day the Exchange is open for trading and on such other days on which
there is a sufficient degree of trading in the portfolio securities of the
Variable Account so that the values of the Variable Account's Accumulation Units
and Annuity Units might be materially affected.
Variable Account: A separate account of the Company consisting of assets set
aside by the Company, the investment performance of which is kept separate from
that of the general assets of the Company.
Variable Annuity: An annuity with payments which vary as to dollar amount in
relation to the investment performance of specified Sub-Accounts of the Variable
Account.
- ------------------------
* As specified in the Participant Enrollment Form, unless changed.
9
<PAGE>
EXPENSE SUMMARY
The purpose of the following table is to help Owners, Participants and
prospective purchasers to understand the costs and expenses that are borne,
directly and indirectly, by Owners and/or Participants WHEN PAYMENTS ARE
ALLOCATED TO THE VARIABLE ACCOUNT. The table reflects expenses of the Variable
Account as well as of the Funds. The expense information for certain Funds has
been restated to reflect current fees. The information set forth should be
considered together with the narrative provided under the heading "How the
Contract Charges Are Assessed" in this Prospectus, and with the Funds'
prospectuses. In addition to the expenses listed below, premium taxes may be
applicable.
<TABLE>
<CAPTION>
MONEY HIGH CAPITAL GOVERNMENT
MARKET YIELD APPRECIATION SECURITIES
OWNER TRANSACTION EXPENSES SERIES SERIES SERIES SERIES
- ------------------------------------------------ --------- --------- --------------- -------------
<S> <C> <C> <C> <C>
Sales Load Imposed on Purchases................. 0 0 0 0
Deferred Sales Load (as a percentage of Purchase
Payments withdrawn) (1)
Years Payment in Participant's Account
0-2......................................... 6% 6% 6% 6%
3........................................... 5% 5% 5% 5%
4........................................... 4% 4% 4% 4%
5........................................... 3% 3% 3% 3%
6........................................... 2% 2% 2% 2%
7........................................... 1% 1% 1% 1%
8........................................... 0% 0% 0% 0%
Exchange Fee.................................... 0 0 0 0
ANNUAL CONTRACT FEE (2) $25 per Contract
- ------------------------------------------------
SEPARATE ACCOUNT ANNUAL EXPENSES
- ------------------------------------------------
(as a percentage of average separate account assets)
Mortality and Expense Risk Fees (2)............. 1.30% 1.30% 1.30% 1.30%
Other Fees and Expenses of the Separate
Account....................................... 0.00% 0.00% 0.00% 0.00%
Total Separate Account Annual Expenses.......... 1.30% 1.30% 1.30% 1.30%
FUND ANNUAL EXPENSES
- ------------------------------------------------
(as a percentage of Fund average net assets)
Management Fees................................. 0.50% 0.75% 0.73% 0.55%
Other Expenses.................................. 0.07% 0.09% 0.05% 0.08%
Total Fund Annual Expenses...................... 0.57% 0.84% 0.78% 0.63%
</TABLE>
<TABLE>
<CAPTION>
OWNER TRANSACTION EXPENSES MWG MFB MTR MIT MIG MGO
- ------------------------------------------------ ------- ---------- ------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Sales Load Imposed on Purchases................. 0 0 0 0 0 0
Deferred Sales Load (as a percentage of Purchase
Payments withdrawn) (1)
Years Payment in Participant's Account
0-2......................................... 6% 6% 6% 6% 6% 6%
3........................................... 5% 5% 5% 5% 5% 5%
4........................................... 4% 4% 4% 4% 4% 4%
5........................................... 3% 3% 3% 3% 3% 3%
6........................................... 2% 2% 2% 2% 2% 2%
7........................................... 1% 1% 1% 1% 1% 1%
8........................................... 0% 0% 0% 0% 0% 0%
Exchange Fee.................................... 0 0 0 0 0 0
ANNUAL CONTRACT FEE (2) $25 per Contract
- ------------------------------------------------
SEPARATE ACCOUNT ANNUAL EXPENSES
- ------------------------------------------------
(as a percentage of average separate account assets)
Mortality and Expense Risk Fees (2)............. 1.30% 1.30% 1.30% 1.30% 1.30% 1.30%
Other Fees and Expenses of the Separate
Account....................................... 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Total Separate Account Annual Expenses.......... 1.30% 1.30% 1.30% 1.30% 1.30% 1.30%
FUND ANNUAL EXPENSES
- ------------------------------------------------
(as a percentage of Fund average net assets)
Management Fees................................. 0.75% 0.41% 0.38% 0.22% 0.63% 0.39%
Other Expenses(3)............................... 0.60% 0.59% 0.55% 0.52% 0.08% 0.45%
Total Fund Annual Expenses...................... 1.35% 1.00% 0.93% 0.74% 0.71% 0.84%
</TABLE>
(See footnotes on next page)
10
<PAGE>
- ------------------------------
(1) A portion of the Participant's Account may be withdrawn each year without
imposition of any withdrawal charge, and after a Purchase Payment has been
held by the Company for seven years it may be withdrawn free of any
withdrawal charge.
(2) The Annual Contract Fee ("Account Fee") and Mortality and Expense Risk Fees
("Asset Charge") decline based on total Purchase Payments credited to all
Participant's Accounts under a Contract in accordance with the following
schedule:
<TABLE>
<CAPTION>
PURCHASE PAYMENTS ACCOUNT FEE ASSET CHARGE
- ------------------------------------------------- ----------- ------------
<C> <S> <C> <C>
up to $250,000 ......................... $25 1.30%
$250,000 to $1,499,999 ......................... $18 1.25%
$1,500,000 to $4,999,999 ......................... $15 1.10%
$5,000,000 and over ......................... $12 0.95%
</TABLE>
(3) Other expenses include annualized fees assessed under the Distribution Plans
adopted pursuant to Section 12(b) of the Investment Company Act of 1940 and
Rule 12b-1 thereunder (See the Funds' prospectuses). The Distribution Plans
commenced on the following dates: MTR and MWG, October 1, 1989; MIT, January
2, 1991; and MFB, MIG and MGO, March 1, 1991.
EXAMPLE
If you surrender your Contract at the end of the applicable time period, you
would pay the following expenses on a $1,000 investment, assuming a 5% annual
return on assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Money Market Series..................................... $ 73 $ 104 $ 128 $ 219
High Yield Series....................................... 76 112 142 247
Capital Appreciation Series............................. 75 110 139 241
Government Securities Series............................ 74 106 131 225
MFS-Registered Trademark- World Governments Fund
(MWG)................................................. 81 127 168 298
MFS-Registered Trademark- Bond Fund (MFB)............... 77 117 150 264
MFS-Registered Trademark- Total Return Fund (MTR)....... 77 115 146 256
Massachusetts Investors Trust (MIT)..................... 75 109 137 237
Massachusetts Investors Growth Stock Fund (MIG)......... 74 108 135 234
MFS-Registered Trademark- Growth Opportunities Fund
(MGO)................................................. 76 112 142 247
</TABLE>
If you do NOT surrender your Contract, or if you annuitize at the end of the
applicable time period, you would pay the following expenses on a $1,000
investment, assuming a 5% annual return on assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Money Market Series..................................... $ 19 $ 59 $ 101 $ 219
High Yield Series....................................... 22 67 115 247
Capital Appreciation Series............................. 21 65 112 241
Government Securities Series............................ 20 61 104 225
MFS-Registered Trademark- World Governments Fund
(MWG)................................................. 27 82 141 298
MFS-Registered Trademark- Bond Fund (MFB)............... 23 72 123 264
MFS-Registered Trademark- Total Return Fund (MTR)....... 23 70 119 256
Massachusetts Investors Trust (MIT)..................... 21 64 110 237
Massachusetts Investors Growth Stock Fund (MIG)......... 20 63 108 234
MFS-Registered Trademark- Growth Opportunities Fund
(MGO)................................................. 22 67 115 247
</TABLE>
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LOWER THAN THOSE SHOWN.
11
<PAGE>
CONDENSED FINANCIAL INFORMATION--ACCUMULATION UNIT VALUES
The following information should be read in conjunction with the Variable
Accounts financial statements appearing elsewhere in this Prospectus, all of
which has been audited by Deloitte & Touche LLP, independent certified public
accountants.
<TABLE>
<CAPTION>
1997 1997
--------- ---------
<S> <C> <C> <C>
MIT MWG
Unit value Unit value
Beginning of period $ 33.9934 Beginning of period $ 21.7932
End of period $ 44.1981 End of period $ 21.6012
Units outstanding end of period 668,603 Units outstanding end of period 50,083
MIG CAS
Unit value Unit value
Beginning of period $ 29.9956 Beginning of period $ 35.6224
End of period $ 43.9157 End of period $ 43.3190
Units outstanding end of period 225,178 Units outstanding end of period 680,351
MTR GSS
Unit value Unit value
Beginning of period $ 29.9279 Beginning of period $ 18.7159
End of period $ 33.2755 End of period $ 20.1019
Units outstanding end of period 759,684 Units outstanding end of period 377,706
MGO HYS
Unit value Unit value
Beginning of period $ 26.5992 Beginning of period $ 22.0500
End of period $ 32.3990 End of period $ 24.6550
Units outstanding end of period 100,623 Units outstanding end of period 161,891
MFB MMS
Unit value Unit value
Beginning of period $ 19.3773 Beginning of period $ 15.2586
End of period $ 21.1171 End of period $ 15.8347
Units outstanding end of period 86,309 Units outstanding end of period 246,919
</TABLE>
12
<PAGE>
THIS PROSPECTUS IS A CATALOG OF FACTS
This Prospectus contains information about the master group deferred annuity
contract (the "Contract") which provides fixed benefits, variable benefits or a
combination of both as elected by the Owner. It describes its uses and
objectives, its benefits and costs, and the rights and privileges of the Owner
and the Participant. It also contains information about the Company, the
Variable Account, the Fixed Account and the Mutual Funds. It has been carefully
prepared in non-technical language to help you decide whether the purchase of a
Contract will fit the needs of your retirement plan. We urge you to read it
carefully and retain it for future reference. The Contract has appropriate
provisions relating to variable and fixed accumulation values and variable and
fixed annuity payments. A Variable Annuity and a Fixed Annuity have certain
similarities. Both provide that Purchase Payments, less certain deductions, will
be accumulated prior to the Annuity Commencement Date. After the Annuity
Commencement Date, annuity payments will be made to the Annuitant. The Company
assumes the mortality and expense risks under the Contract, for which it
receives certain amounts. The significant difference between a Variable Annuity
and a Fixed Annuity is that under a Variable Annuity, all investment risk is
assumed by the Owner and the Participant or Payee and the amounts of the annuity
payments vary with the investment performance of the Variable Account; under a
Fixed Annuity, the investment risk is assumed by the Company (except in the case
of early withdrawals (See "Cash Withdrawals" and "Market Value Adjustment")) and
the amounts of the annuity payments do not vary. However, the Owner bears the
risk that the Guarantee Rate to be credited on amounts allocated to the Fixed
Account may not exceed the minimum guaranteed rate of four percent (4%) for any
Guarantee Period.
USES OF THE CONTRACTS
The Contracts are designed for use in connection with retirement plans which
meet the requirements of Section 401 (including Section 401(k)), Section 403,
Section 408(c), Section 408(k) or Section 408(p) of the Internal Revenue Code.
Effective May 1,1990, no new Contracts will be issued for use in connection with
deferred compensation plans established pursuant to Section 457 of the Code.
Certain federal tax advantages are currently available to retirement plans which
qualify as (1) self-employed individuals' retirement plans under Section 401;
(2) corporate or association retirement plans under Section 401; (3) annuity
purchase plans sponsored by certain tax exempt organizations or public school
systems under Section 403(b); and (4) employer or association of employees
individual retirement accounts under Section 408(c), SEP-IRAs under Section
408(k) and Simple Retirement Accounts under Section 408(p). (See "Federal Tax
Status").
The Contracts are also designed to be used in connection with
non-tax-qualified deferred compensation and payroll savings plans.
A Contract is issued to the Owner covering all present and future
Participants. Each Participant receives a Certificate which evidences his or her
participation in the Plan established by the Owner. For the purposes of
determining benefits under the Plan, a Participant's Account is established for
each Participant.
A WORD ABOUT THE COMPANY,
THE VARIABLE ACCOUNT, THE FIXED ACCOUNT AND THE MUTUAL FUNDS
THE COMPANY
The Company is a stock life insurance corporation incorporated under the
laws of Delaware on January 12, 1970. Its Executive Office mailing address is
One Sun Life Executive Park, Wellesley Hills, Massachusetts 02181. It has
obtained authorization to do business in forty-eight states, the District of
Columbia and Puerto Rico, and it is anticipated that the Company will be
authorized to do business in all states except New York. The Company issues life
insurance policies and individual and group annuities. The Company has formed a
wholly-owned subsidiary, Sun Life Insurance and Annuity Company of New York,
which issues individual fixed and combination fixed/variable annuity contracts
and group life and long-term disability insurance in New York. The Company's
other active subsidiaries are Sun Capital Advisers, Inc., a registered
investment adviser, Clarendon Insurance Agency, Inc., a registered broker-dealer
that acts as the general distributor of the contracts and other annuity and life
insurance contracts
13
<PAGE>
issued by the Company and its affiliates, Sun Life of Canada (U.S.)
Distributors, Inc., a registered broker-dealer and investment adviser, New
London Trust, F.S.B., a federally chartered savings bank, and Sun Life Financial
Services Limited, which provides off-shore administrative services to the
Company and Sun Life Assurance Company of Canada (Sun Life (Canada)).
The Company is a wholly-owned subsidiary of Sun Life of Canada (U.S.)
Holdings Inc. ("Life Holdco"), which, on December 18, 1997, became a
wholly-owned subsidiary of Sun Life Assurance Company of Canada -- U.S.
Operations Holdings, Inc. ("U.S. Holdco"). U.S. Holdco is a wholly-owned
subsidiary of Sun Life (Canada), 150 King Street West, Toronto, Ontario, Canada.
Sun Life (Canada) is a mutual life insurance company incorporated pursuant to an
Act of Parliament of Canada in 1865 and currently transacts business in all of
the Canadian provinces and territories, all U.S. states except New York, the
District of Columbia, Puerto Rico, the Virgin Islands, Great Britain, Ireland,
Hong Kong, Bermuda and the Philippines.
THE VARIABLE ACCOUNT
The basic objective of a variable annuity contract is to provide variable
annuity payments which to some degree will be responsive to changes in the
economic environment, including inflationary forces and changes in rates of
return available from various types of investments. The Contract is designed to
seek to accomplish this objective by providing that the variable annuity
payments (1) will reflect the investment performance of the Variable Account
with respect to amounts allocated to the Variable Account before the Annuity
Commencement Date, and (2) will reflect the investment performance of the
Variable Account after that date. Since the Variable Account is always fully
invested in Fund(s) shares, its investment performance reflects the investment
performance of the Fund(s). Values of Fund(s) shares held by the Variable
Account fluctuate and are subject to the risks of changing economic conditions
as well as the risks inherent in the ability of the Fund(s)' management to make
necessary changes in the Fund(s)' portfolios to anticipate changes in economic
conditions. Therefore, the Owner bears the entire investment risk that the basic
objectives of the Contract may not be realized, and that the adverse effects of
inflation may not be lessened. There can be no assurance that the aggregate
amount of variable annuity payments will equal or exceed the aggregate amount of
Purchase Payments made with respect to a particular Participant's Account for
the reasons described above or because of the premature death of a Payee.
Another important feature of the Contracts related to their basic objective
is the Company's promise that the dollar amount of variable annuity payments
made during the lifetime of the Payee(s) will not be adversely affected by the
actual mortality experience of the Company or by the actual expenses incurred by
the Company in excess of expense deductions provided for in the Contract.
Sun Life of Canada (U.S.) Variable Account D (the "Variable Account") was
established by the Company on August 20,1985, pursuant to a resolution of its
Board of Directors. Under Delaware insurance law and the terms of the Contracts,
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 Commission does not
involve supervision of the management or investment practices or policies of the
Variable Account or of the Company by the Commission.
The assets of the Variable Account are divided into Sub-Accounts. Each
Sub-Account invests exclusively in Class A shares of a specific Mutual Fund or,
in the case of MFS/Sun Life Series Trust, in shares of a designated series of
the Fund. All amounts allocated to the Variable Account will be used to purchase
Fund(s) shares as designated by the Owner at their net asset value. Any and all
distributions
14
<PAGE>
made by the Fund(s) with respect to the shares held by the Variable Account will
be reinvested to purchase additional shares at their net asset value. Deductions
from the Variable Account for cash withdrawals, loans, annuity payments, death
benefits, Account Fees, contract charges against the assets of the Variable
Account for the assumption of mortality and expense risks and any applicable
taxes will, in effect, be made by redeeming the number of Fund(s) shares at
their net asset value equal in total value to the amount to be deducted. The
Variable Account will be fully invested in Fund(s) shares at all times.
THE FIXED ACCOUNT
The Fixed Account is made up of all of the general assets of the Company
other than those allocated to any separate account. Purchase Payments will be
allocated to Guarantee Periods available in connection with the Fixed Account to
the extent elected at the time of the establishment of a Participant's Account
or as subsequently changed. The Company will invest the assets of the Fixed
Account in those assets chosen by the Company and allowed by applicable state
laws regarding the nature and quality of investments that may be made by life
insurance companies and the percentage of their assets that may be committed to
any particular type of investment. In general, these laws permit investments,
within specified limits and subject to certain qualifications, in federal, state
and municipal obligations, corporate bonds, preferred and common stocks, real
estate mortgages, real estate and certain other investments.
The Company intends to invest Purchase Payments allocated to the Fixed
Account primarily in debt instruments, as follows: (1) Securities issued by the
U.S. Government or its agencies or instrumentalities, which issues may or may
not be guaranteed by the U.S. Government; (2) Debt securities which have an
investment grade, at the time of purchase, within the four highest grades
assigned by Moody's Investors Services, Inc. (Aaa, Aa, A or Baa), Standard &
Poor's Corporation (AAA, AA, A or BBB) or any other nationally recognized rating
service; (3) Other debt instruments, including but not limited to, issues of or
guaranteed by banks or bank holding companies and other corporations, which
obligations, although not rated by Moody's or Standard & Poor's, are deemed by
the Company's management to have an investment quality comparable to securities
which may be purchased as stated above; and (4) Other evidences of indebtedness
secured by mortgages or deeds of trust representing liens upon real estate.
Notwithstanding the foregoing, the Company may also invest a portion of the
Fixed Account in below investment grade debt instruments. Instruments rated Baa
and/or BBB or lower normally involve a higher risk of default and are less
liquid than higher rated instruments. If the rating of an investment grade debt
security held by the Company is subsequently downgraded to below investment
grade, the decision to retain or dispose of the security will be made based upon
the Company's evaluation of the individual circumstances surrounding the
downgrading and the prospects for continued deterioration, stabilization and/or
improvement.
The Company is not obligated to invest amounts allocated to the Fixed
Account according to any particular strategy, except as may be required by
applicable state insurance laws. Investment income from such Fixed Account
assets will be allocated between the Company and all contracts participating in
the Fixed Account, including the Contracts offered by this Prospectus, in
accordance with the terms of such contracts.
Fixed annuity payments made to Annuitants under the Contracts will not be
affected by the mortality experience (death rate) of persons receiving such
payments or of the general population. The Company assumes this "mortality risk"
by virtue of annuity rates incorporated in the Contract which cannot be changed
(except, as described under "Modification," with respect to Participants'
Accounts established after the effective date of such modification). In
addition, the Company guarantees that it will not increase charges for
maintenance of the Contracts, regardless of its actual expenses (except as
described under "Modification" with respect to Participants' Accounts
established after the effective date of such modification).
Investment income from the Fixed Account allocated to the Company includes
compensation for mortality and expense risks borne by the Company in connection
with contracts participating in the Fixed Account. The Company expects to derive
a profit from this compensation. The amount of such
15
<PAGE>
investment income allocated to the Contracts will vary from Guarantee Period to
Guarantee Period in the sole discretion of the Company. However, the Company
guarantees that it will credit interest at a rate of not less than four percent
(4%) per year, compounded annually, to amounts allocated to the Fixed Account
under the Contract. The Company may credit interest at a rate in excess of four
(4%) per year; however, the Company is not obligated to credit any interest in
excess of four percent (4%) per year. There is no specific formula for the
determination of excess interest credits. Such credits, if any, will be
determined by the Company based on information as to expected investment yields.
Some of the factors that the Company may consider in determining whether to
credit interest to amounts allocated to the Fixed Account and the amount
thereof, are general economic trends, rates of return currently available and
anticipated on the Company's investments, regulatory and tax requirements and
competitive factors. The Company's general investment strategy will be to invest
amounts allocated to the Fixed Account in investment-grade debt securities and
mortgages using immunization strategies with respect to the applicable Guarantee
Periods. This includes, with respect to investments and average terms of
investments, using dedication (cash flow matching) and/or duration matching to
minimize the Company's risk of not achieving the rates it is crediting under
Initial and Subsequent Guarantee Periods in volatile interest rate environments.
ANY INTEREST CREDITED TO AMOUNTS ALLOCATED TO THE FIXED ACCOUNT lN SUBSEQUENT
GUARANTEE PERIODS IN EXCESS OF FOUR PERCENT (4%) PER YEAR WILL BE DETERMINED IN
THE SOLE DISCRETION OF THE COMPANY. THE OWNER ASSUMES THE RISK THAT INTEREST
CREDITED TO FIXED ACCOUNT ALLOCATIONS MAY NOT EXCEED THE MINIMUM GUARANTEE OF
FOUR PERCENT (4%) FOR ANY GIVEN YEAR.
The Company is aware of no statutory limitations on the maximum amount of
interest it may credit, and the Company's 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 MUTUAL FUNDS
The Company will allocate each Purchase Payment to either the Variable
Account, the Fixed Account or both the Variable Account and the Fixed Account in
accordance with the instructions of the Owner. Purchase Payments allocated to
the Variable Account are used to purchase, at net asset value, shares of the
Mutual Fund(s) described below, as specified by the Owner. IN THE CASE OF
NON-TRUSTEED RETIREMENT PROGRAMS, SUCH AS SECTION 403(b) TAX-SHELTERED ANNUITIES
AND NON-QUALIFIED DEFERRED COMPENSATION AND PAYROLL SAVINGS PLANS, PURCHASE
PAYMENTS AILOCATED TO THE VARIABLE ACCOUNT MAY BE ALLOCATED ONLY TO SUB-ACCOUNTS
INVESTING IN SHARES OF ONE OR MORE SERIES OF MFS-REGISTERED TRADEMARK-/SUN LIFE
SERIES TRUST.
The Owner designates the Fund(s) to which Purchase Payments attributable to
the Contract are to be allocated. Allocation of Purchase Payments or transfer of
Participant's Account values from one Fund to another may be changed or effected
by the Owner pursuant to such terms and conditions as may be imposed by each
Fund, in addition to those set forth in the Contract.
The investment adviser of each of the Funds, Massachusetts Financial
Services Company ("MFS"), is paid fees by the Funds for its services pursuant to
investment advisory agreements. MFS, a Delaware corporation, is an affiliate of
the Company. MFS also serves as investment adviser to the other funds in the MFS
Family of Funds and to certain other investment companies established or
distributed by MFS and/or the Company. MFS Institutional Advisers, Inc., a
wholly-owned 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 summary of the investment objectives of each Fund is contained in the
description below. More detailed information with regard to the Funds, their
investment objectives, policies and restrictions and their expenses may be found
in the current prospectuses of the Funds and their Statements of Additional
Information which may be obtained by calling 1-800-752-7215. A prospectus for
each Fund must accompany this Prospectus and should be read in conjunction
herewith.
16
<PAGE>
MFS-REGISTERED TRADEMARK-/SUN LIFE SERIES TRUST
MFS-Registered Trademark-/Sun Life Series Trust (the "Series Trust"), an
open-end investment management company registered under the Investment Company
Act of 1940, is composed of twenty-six independent portfolios of securities,
each of which has separate investment objectives and policies. Shares of the
Series Trust are issued in twenty-six series, each corresponding to one of the
portfolios. Shares of four (4) of these series are available for investment by
Owners of the Contracts offered by this Prospectus. Each Sub-Account of the
Variable Account invests exclusively in shares of one such series. Additional
portfolios may be added to the Series Trust which may or may not be available
for investment by the Variable Account. Shares of the Series Trust will be sold
only to separate accounts established by the Company and its affiliates to fund
benefits under variable life insurance and variable annuity products, including
the Contracts. Certain risks involved in funding benefits under both life
insurance and annuity contracts are discussed in the prospectus of the Series
Trust under the caption "Management of the Series Fund."
(1) MONEY MARKET SERIES ("MMS") will seek maximum current income to the
extent consistent with stability of principal by investing exclusively in money
market instruments maturing in less than thirteen (13) months. An investment in
this series is neither insured nor guaranteed by the U.S. Government. There can
be no assurance that the series will be able to maintain a stable asset value of
$1.00 per share.
(2) HIGH YIELD SERIES ("HYS") will seek high current income and capital
appreciation by investing primarily in fixed income securities of U.S. and
foreign issuers which may be in the lower rated categories or unrated (commonly
known as "junk bonds") and which may include equity features. These securities
generally involve greater volatility of price and risk to principal and income
and less liquidity than securities in the higher rated categories. Any person
contemplating allocating Purchase Payments to the Sub-Account investing in
shares of the High Yield Series should review the risk disclosure in the Series
Trust prospectus carefully and consider the investment risks involved.
(3) CAPITAL APPRECIATION SERIES ("CAS") will seek capital appreciation by
investing in securities of all types, with a major emphasis on common stocks.
(4) GOVERNMENT SECURITIES SERIES ("GSS") will seek current income and
preservation of capital by investing in U.S. Government and Government-related
Securities.
MFS-REGISTERED TRADEMARK- WORLD GOVERNMENTS FUND ("MWG")
The objectives of MWG are to seek preservation and growth of capital,
together with moderate current income through a professionally managed,
internationally diversified portfolio consisting primarily of debt securities,
and, to a lesser extent, equity securities.
MFS-REGISTERED TRADEMARK- BOND FUND ("MFB")
MFB invests a major portion of its assets in "investment grade" debt
securities. Its primary investment objective is to provide as high a level of
current income as is believed to be consistent with prudent investment risk. A
secondary objective is to protect shareholders' capital.
MFS-REGISTERED TRADEMARK- TOTAL RETURN FUND ("MTR")
MTR's primary investment objective is to obtain above-average income
consistent with what its management believes to be prudent employment of
capital. While current income is the primary objective, the Fund believes that
there also should be a reasonable opportunity for growth of capital and income,
since many securities offering a better-than-average yield may also possess
growth potential. Under normal market conditions, at least 25% of the Fund's
assets will be invested in fixed income securities and at least 40% and no more
than 75% of the Fund's assets will be invested in equity securities.
MASSACHUSETTS INVESTORS TRUST ("MIT")
The objectives of MIT are to provide reasonable current income and long-term
growth of capital and income. The Fund is believed to constitute a conservative
medium for that portion of capital which an investor wishes to have invested in
securities considered to be of high or improving investment quality. The assets
of the Fund are normally invested in common stocks or securities convertible
into common
17
<PAGE>
stocks. However, the Fund may hold its assets in cash or invest in commercial
paper, repurchase agreements or other forms of debt securities either to provide
reserves for future purchases of common stock or as a defensive measure in
certain economic environments.
MASSACHUSETTS INVESTORS GROWTH STOCK FUND ("MIG")
The investment objective of MIG is to provide long-term growth of capital
and future income (rather than current income). To achieve this objective it is
the policy of the Fund to keep its assets, except working cash balances,
invested in the common stocks, or securities convertible into common stocks, of
companies believed by the Fund's management to possess better-than-average
prospects for long-term growth. Emphasis is placed on the selection of
progressive, well-managed companies.
MFS-REGISTERED TRADEMARK- GROWTH OPPORTUNITIES FUND ("MGO")
MGO's investment objective is to seek growth of capital. Dividend income, if
any, is a consideration incidental to the objective of capital growth. The Fund
maintains a flexible approach towards types of companies as well as types of
securities, depending upon the economic environment and the relative
attractiveness of the various securities markets. Generally, emphasis is placed
upon companies believed to possess above average growth opportunities.
PURCHASE PAYMENTS AND CONTRACT VALUES DURING ACCUMULATION PERIOD
PURCHASE PAYMENTS
(1) PLACE, AMOUNT AND FREQUENCY
All Purchase Payments are to be paid to the Company at its Annuity Service
Mailing Address.
Completed Contract application forms, together with the initial Purchase
Payment, are forwarded to the Company for acceptance. Upon acceptance, a
Contract and Certificate(s) are issued to the Owner and Participant(s),
respectively, and the initial Purchase Payment is credited to the Participant's
Account(s) in the form of Accumulation Units. The initial Purchase Payment must
be applied within two (2) business days of the Company's receipt of a completed
application. The Company may retain the Purchase Payment for up to five (5)
business days while attempting to complete an incomplete application. If the
application cannot be made complete within five (5) business days, the
prospective Participant will be informed of the reasons for the delay and the
Purchase Payment will be returned immediately unless the prospective Participant
specifically consents to the Company's retaining the Purchase Payment until the
application is made complete. Thereafter, Purchase Payments must be applied by
the Company to the Participant's Account within two (2) business days of
receipt. Subsequent Purchase Payments are applied at the end of the Valuation
Period during which they are received by the Company.
The amount of Purchase Payments may vary; however, the Company will not
accept Purchase Payments to be allocated to a Participant's Account which, on an
annualized basis, are less than $300 for the first Account Year, and each
Purchase Payment must be at least $25. In addition, the prior approval of the
Company is required before it will accept a Purchase Payment which would cause
the value of a Participant's Account to exceed $1,000,000. lf the value of a
Participant's Account exceeds $1,000,000, no additional Purchase Payments will
be accepted without the prior approval of the Company.
A Participant's Account shall be continued automatically in full force
during the lifetime of the Participant until the Annuity Commencement Date or
until the Participant's Account is withdrawn or the Contract is surrendered.
Unless the Owner has surrendered the Contract or the Participant's Account has
been withdrawn, Purchase Payments may be made at any time during the life of the
particular Participant and before such Participant's Annuity Commencement Date.
(2) ALLOCATION OF NET PURCHASE PAYMENTS
The net Purchase Payment is that portion of a Purchase Payment which remains
after deduction of any applicable premium tax or similar tax. Each net Purchase
Payment will be allocated to either the
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<PAGE>
Fixed Account or to Sub-Accounts of the Variable Account or to both Sub-Accounts
and the Fixed Account in accordance with the allocation factors specified in the
Participant Enrollment Form, or as subsequently changed.
The allocation factors for new Payments between the Fixed Account and the
Variable Account and among the Sub-Accounts may be changed by the Owner at any
time by giving written notice of the change to the Company. Any change will take
effect with the first Purchase Payment received with or after receipt of notice
of the change by the Company and will continue in effect until subsequently
changed.
ACCUMULATION ACCOUNT AND PARTICIPANT'S ACCOUNT
The Company will establish an Accumulation Account for each Contract and
will maintain the Accumulation Account during the Accumulation Period. The
Contract's Accumulation Account value for any Valuation Period is equal to the
sum of the variable accumulation values, if any, plus the fixed accumulation
values, if any, of all Participants' Accounts under the Contract for that
Valuation Period.
The Company will establish a Participant's Account for each Participant
under a Contract and will maintain the Participant's Account during the
Accumulation Period. The Participant's Account value for any Valuation Period is
equal to the sum of the variable accumulation value, if any, plus the fixed
accumulation value, if any, of the Participant's Account for that Valuation
Period.
VARIABLE ACCUMULATION VALUE
(1) CREDITING VARIABLE ACCUMULATION UNITS
Upon receipt of a Purchase Payment by the Company, all or that portion, if
any, of the net Purchase Payment to be allocated to any Sub-Accounts in
accordance with the allocation factors will be credited to the Participant's
Account in the form of Variable Accumulation Units. The number of particular
Variable Accumulation Units to be credited is determined by dividing the dollar
amount allocated to the particular Sub-Account by the Variable Accumulation Unit
value for the particular Sub-Account for the Valuation Period during which the
Purchase Payment is received by the Company.
(2) VARIABLE ACCUMULATION UNIT VALUE
The Variable Accumulation Unit value for each Sub-Account was established at
$10.00 for the first Valuation Period of the particular Sub-Account. The
Variable Accumulation Unit value for the particular Sub-Account for any
subsequent Valuation Period is determined by methodology which is the
mathematical equivalent of multiplying the Variable Accumulation Unit value for
the particular Sub-Account for the immediately preceding Valuation Period by the
Net Investment Factor for the particular Sub-Account for such subsequent
Valuation Period. The Variable Accumulation Unit value for each Sub-Account for
any Valuation Period is the value determined as of the end of the particular
Valuation Period and may increase, decrease or remain the same from Valuation
Period to Valuation Period in accordance with the Net Investment Factor
described below. For a hypothetical example of the calculation of the value of a
Variable Accumulation Unit, see Appendix A.
(3) VARIABLE ACCUMULATION VALUE
The variable accumulation value of a Contract, if any, for any Valuation
Period is equal to the sum of the value of all Variable Accumulation Units
credited to all Participant's Accounts under the Contract for such Valuation
Period.
The variable accumulation value of a Participant's Account, if any, for any
Valuation Period is equal to the sum of the value of all Variable Accumulation
Units credited to the Participant's Account for such Valuation Period.
(4) NET INVESTMENT FACTOR
The Net Investment Factor is an index applied to measure the investment
performance of a Sub-Account from one Valuation Period to the next. The Net
Investment Factor may be greater or less than or equal to one; therefore the
value of a Variable Accumulation Unit may increase, decrease or remain the same.
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<PAGE>
The Net Investment Factor for any Sub-Account for any Valuation Period is
determined by dividing (a) by (b) and then subtracting (c) from the result where
(a) is the net result of:
(1) the net asset value of a Fund share held in the Sub-Account
determined as of the end of the Valuation Period, plus
(2) the per share amount of any dividend or other distribution declared
by the Fund issuing the shares held in the Sub-Account if the
"ex-dividend" date occurs during the Valuation Period, plus or minus
(3) a per share credit or charge with respect to any taxes paid or
reserved for by the Company during the Valuation Period which are
determined by the Company to be attributable to the operation of the
Sub-Account (no federal income taxes are applicable under present
law).
(b) is the net asset value of a Fund share held in the Sub-Account
determined as of the end of the preceding Valuation Period; and
(c) is the risk charge factor determined by the Company for the Valuation
Period to reflect the charge for assuming the mortality and expense
risks.
FIXED ACCUMULATION VALUE
(1) INITIAL AND SUBSEQUENT GUARANTEE PERIODS
The Owner elects an Initial Guarantee Period of one (1), three (3), five
(5), or seven (7) years or any combination thereof. The period(s) elected will
determine the Initial Guarantee Rate(s) and the Purchase Payment or portion
thereof allocated to the particular Initial Guarantee Period (less any
surrenders, loans and applicable premium taxes, if any,) will earn interest at
the Initial Guarantee Rate during the Initial Guarantee Period.
Unless a Participant's Account is surrendered, a Subsequent Guarantee Period
will automatically commence at the end of an Initial Guarantee Period or another
Subsequent Guarantee Period. Each Subsequent Guarantee Period will be of the
same duration as the previous Initial or Subsequent Guarantee Period unless the
Owner elects, within the thirty (30) day period prior to the end of the previous
Initial or Subsequent Guarantee Period, a different Subsequent Guarantee Period
from among those Subsequent Guarantee Periods being offered by the Company at
such time. The Guarantee Rate for the Guarantee Period automatically applied in
these circumstances may be higher or lower than the Guarantee Rate for other
Guarantee Periods. The Owner will not receive prior written notice of the
Guarantee Rate for any Guarantee Period automatically applied and a Market Value
Adjustment will be applied to any amounts withdrawn from the Fixed Account
(except in the case of the death of the Participant prior to the Annuity
Commencement Date or annuitization over a period of at least five (5) years).
(2) CREDITING FIXED ACCUMULATION UNITS
Upon receipt of a Purchase Payment by the Company, all or that portion, if
any, of the net Purchase Payment to be allocated to the Fixed Account in
accordance with the allocation factor will be credited to the Participant's
Account in the form of Fixed Accumulation Units. Fixed Accumulation Units are
established and valued separately for the one (1), three (3), five (5) and seven
(7) year Guarantee Periods. The number of particular Fixed Accumulation Units to
be credited is determined by dividing the dollar amount allocated to a Guarantee
Period by the Fixed Accumulation Unit value of the particular type of Fixed
Accumulation Unit for the Valuation Period during which the Purchase Payment is
received by the Company.
(3) FIXED ACCUMULATION UNIT VALUE
The Fixed Accumulation Unit value for each type of Fixed Accumulation Unit
is established at $10.00 for the first Valuation Period of the calendar month in
which a Purchase Payment is credited to the Participant's Account and will
increase for each successive Valuation Period as interest is accrued. All
20
<PAGE>
Participants' Accounts established in a particular calendar month for a
particular Guarantee Period and at a particular Initial Guarantee Rate, as
specified in advance by the Company from time to time, will use the same series
of Fixed Accumulation Unit values throughout the Initial Guarantee Period.
At the end of the Initial Guarantee Period the Fixed Accumulation Units
credited to a Participant's Account will be exchanged for a second type of Fixed
Accumulation Unit with an equal aggregate value. The value of this second type
of Fixed Accumulation Unit will increase for each Valuation Period during each
Subsequent Guarantee Period as interest is accrued at the Subsequent Guarantee
Rate which shall have been determined by the Company prior to the first day of
each Subsequent Guarantee Period.
(4) FIXED ACCUMULATION VALUE
The fixed accumulation value of a Participant's Account, if any, for any
Valuation Period is equal to the sum of the values of all Fixed Accumulation
Units credited to the Participant's Account for such Valuation Period.
(5) INITIAL AND SUBSEQUENT GUARANTEE RATES
The Company periodically will establish applicable Initial and Subsequent
Guarantee Rates for the four Guarantee Periods. Current Rates may be changed by
the Company frequently or infrequently depending on interest rates available to
the Company and other factors as described below, but once established, rates
will be guaranteed for the respective Guarantee Periods. Fixed Accumulation
Units will be subject to any applicable withdrawal charge and/or Account Fee and
may be subject to a market value adjustment on surrender or withdrawal (See
"Market Value Adjustment").
The Company will credit interest to the fixed portion of a Participant's
Account at a rate of not less than four percent (4%) per year, compounded
annually. Once the Initial or Subsequent Guarantee Rate applicable to a specific
Fixed Accumulation Unit is established by the Company, it may not be changed for
the balance of the Guarantee Period.
The Company has no specific formula for determining the rate of interest
that it will declare as an Initial or Subsequent Guarantee Rate, as these rates
will be reflective of interest rates available on the types of debt instruments
in which the Company intends to invest Purchase Payments allocated to the Fixed
Account (See "The Fixed Account"). In addition, the Company's management may
consider other factors in determining Initial or Subsequent Guarantee Rates for
a particular duration including: regulatory and tax requirements; sales
commissions and administrative expenses borne by the Company; general economic
trends; and competitive factors.
The Owner bears the risk that the Guarantee Rate to be credited on amounts
allocated to the Fixed
Account may not exceed the minimum guaranteed rate of four percent (4%) for any
Guarantee Period.
CONVERSION OF ACCUMULATION UNITS
During the Accumulation Period the Owner may, upon written request received
by the Company, convert the value of a designated number of Fixed Accumulation
Units then credited to a Participant's Account into other Fixed Accumulation
Units having an equal aggregate value but having a different Guarantee Period or
into Variable Accumulation Units of particular Sub-Accounts having an equal
aggregate value, or convert the value of a designated number of Variable
Accumulation Units then credited to the Participant's Account into other
Variable Accumulation Units and/or Fixed Accumulation Units having an equal
aggregate value. These transfers/conversions shall, however, be subject to the
following conditions: (1) not more than twelve (12) conversions may be made in
any Account Year; and (2) the value of Accumulation Units converted may not be
less than $1,000 unless all of the Fixed Accumulation Units and/or all of the
Variable Accumulation Units of a particular Sub-Account credited to the
Participant's Account are being converted. IN ADDITION, TRANSFERS/CONVERSIONS
INVOLVING FIXED ACCUMULATION UNITS WITH THREE (3), FIVE (5) OR SEVEN (7) YEAR
GUARANTEE PERIODS WILL BE SUBJECT TO A MARKET VALUE ADJUSTMENT (SEE "MARKET
VALUE ADJUSTMENT" ON PAGE 23), AND TRANSFERS/CONVERSIONS INVOLVING VARIABLE
ACCUMULATION UNITS SHALL BE SUBJECT TO SUCH TERMS AND CONDITIONS AS MAY BE
IMPOSED BY EACH FUND. The conversion will be made using the Accumulation Unit
values for the Valuation Period during which the request for conversion is
received by the Company. Under current tax law there will not be any tax
liability to the Owner if the Owner makes a conversion of Accumulation Units.
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<PAGE>
CASH WITHDRAWALS, WITHDRAWAL CHARGES, MARKET VALUE ADJUSTMENT
AND LOAN PROVISION
CASH WITHDRAWALS
At any time before the Annuity Commencement Date and during the lifetime of
the Participant, the Owner may elect to receive a cash withdrawal payment from
the Company. Any such election shall specify the amount of the withdrawal and
will be effective on the date that it is received by the Company. For
withdrawals in excess of $5,000, the signature of the Owner must be guaranteed
by a member firm of the New York, American, Boston, Midwest, Philadelphia, or
Pacific Stock Exchange, or by a commercial bank (not a savings bank) which is a
member of the Federal Deposit Insurance Corporation, or, in certain cases, by a
member firm of the National Association of Securities Dealers, Inc. which has
entered into an appropriate agreement with the Company. This requirement may be
waived by the Company. In some cases, for example requests by a corporation,
partnership, agent or fiduciary, the Company will require additional
documentation of a customary nature.
The Owner may request a full surrender or a partial withdrawal. A full
surrender will result in a cash withdrawal payment equal to the value of the
Participant's Account at the end of the Valuation Period during which the
election becomes effective less the Account Fee and any applicable withdrawal
charge and/or unpaid Net Loan Interest, plus or minus any applicable Market
Value Adjustment. A request for a partial withdrawal will result in the
cancellation of Accumulation Units with an aggregate value equal to the dollar
amount requested, and the Participant will receive the specified amount, less
any applicable Account Fee and any withdrawal charge and/or unpaid Net Loan
Interest and plus or minus any applicable Market Value Adjustment. If a partial
withdrawal is requested which would leave a Participant's Account value of less
than the Account Fee, then such partial withdrawal will be treated as a full
surrender. Partial withdrawals may be restricted by the maximum loan limitation.
The Account Fee and any applicable withdrawal charge and/or unpaid Net Loan
Interest will be deducted from the Participant's Account before the application
of the Market Value Adjustment.
UNLESS INSTRUCTED TO THE CONTRARY, the Company will cancel Fixed
Accumulation Units and Variable Accumulation Units of the particular
Sub-Accounts in the same proportion that the total value of Fixed Accumulation
Units and Variable Accumulation Units of the particular Sub-Accounts then
credited to the Participant's Account bear to the value of the Participant's
Account at the end of the Valuation Period during which the election becomes
effective. Since Fixed Accumulation Units with a three (3), five (5) or seven
(7) year Guarantee Period are subject to a Market Value Adjustment in addition
to any applicable withdrawal charge, an Owner electing a cash withdrawal payment
should carefully consider whether Fixed Accumulation Units and/or Variable
Accumulation Units should be canceled to provide the requested payment.
The Company, upon request, will advise the Owner or Participant of the
amounts that would be payable in the event of a full surrender or partial
withdrawal.
Any cash withdrawal payment will be paid within seven (7) days from the date
the election becomes
effective, except as the Company may be permitted to defer such payment in
accordance with the Investment Company Act of 1940 and applicable state
insurance law. Deferral of amounts withdrawn from the Variable Account is
currently permissible only (1) for any period (a) during which the New York
Stock Exchange is closed other than customary week-end and holiday closings, or
(b) during which trading on the New York Stock Exchange is restricted as
determined by the Securities and Exchange Commission, (2) for any period during
which an emergency exists as a result of which (a) disposal of securities held
by the Fund(s) is not reasonably practicable, or (b) it is not reasonably
practicable to determine the value of the net assets of the Fund(s) or (3) for
such other periods as the Securities and Exchange Commission may by order permit
for the protection of security holders. The Company reserves the right to defer
the payment of amounts withdrawn from the Fixed Account for a period not to
exceed six (6) months from the date written request for such withdrawal is
received by the Company.
Since the Qualified Contracts offered by this Prospectus will be issued in
connection with retirement plans which meet the requirements of Section 401,
Section 403, Section 408(c), Section 408(k) and
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<PAGE>
Section 408(p) 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 Contract or Non-Qualified
Contract offered by this Prospectus also may result in a tax penalty. The tax
consequences of a cash withdrawal payment under both Qualified and Non-Qualified
Contracts should be carefully considered (See "Federal Tax Status").
WITHDRAWAL CHARGES
If a cash withdrawal payment is made, a withdrawal charge may be assessed by
the Company. Up to ten percent (10%) of Purchase Payments credited to a
Participant's Account for less than seven (7) years may be withdrawn in any
Account Year on a non-cumulative basis without the imposition of a withdrawal
charge. Amounts withdrawn from a Participant's Account in excess of ten percent
(10%) will be subject to a withdrawal charge assessed against Purchase Payments
credited to the Participant's Account (not against the accumulated value of the
Participant's Account) as follows:
<TABLE>
<CAPTION>
NUMBER OF
YEARS PAYMENTS IN
PARTICIPANT'S ACCOUNT WITHDRAWAL CHARGE
- --------------------------- -------------------------
<S> <C>
1 6%
2 6%
3 5%
4 4%
5 3%
6 2%
7 1%
8 0%
</TABLE>
To effect a full surrender or partial withdrawal, the oldest previously
unliquidated Payment will be deemed to have been liquidated first, then the next
oldest and so forth. Once all Payments have been withdrawn, additional amounts
withdrawn will be attributed to accumulated value.
No withdrawal charge is imposed upon amounts withdrawn from a Participant's
Account to provide a death benefit or to purchase an annuity (provided that the
payment under the Annuity Option elected is over a period of at least five (5)
years), nor is any withdrawal charge imposed upon amounts withdrawn after a
Participant's Account has been established for twelve (12) years, irrespective
of when a Purchase Payment or a cash withdrawal payment is made. Also no
withdrawal charge is imposed upon the conversion of Accumulation Units. HOWEVER,
EXCEPT IN THE CASE OF DEATH OR ANNUITIZATION, ALL WITHDRAWALS FROM THE FIXED
ACCOUNT OF AMOUNTS WITH A THREE (3), FIVE (5) OR SEVEN (7) YEAR GUARANTEE PERIOD
ARE SUBJECT TO A MARKET VALUE ADJUSTMENT AS DESCRIBED BELOW IN ADDITION TO ANY
APPLICABLE WITHDRAWAL CHARGES.
In no event shall the aggregate withdrawal charges assessed against a
Participant's Account exceed six percent (6%) of the aggregate Purchase Payments
made to a Participant's Account. The Company may, upon notice to the Owner,
modify the withdrawal charges provided that such modification shall apply only
to Participants' Accounts established after the effective date of such
modification.
For illustrative examples of withdrawals, surrenders, withdrawal charges and
the market value adjustment, see Appendix B.
SECTION 403(b) Annuities
The Internal Revenue Code imposes restrictions on cash withdrawals from
Contracts used with Section 403(b) Annuities. In order for these Contracts to
receive tax deferred treatment, the Contract must provide that cash withdrawals
of amounts attributable to salary reduction contributions (other than
withdrawals of Accumulation Account value as of December 31, 1988 ("Pre-1989
Account Value")) may be made only when the Contract Owner attains age 59 1/2,
separates from service with the employer, dies or becomes disabled (within the
meaning of Section 72(m)(7) of the Code). These restrictions apply to
23
<PAGE>
any growth or interest on or after January 1, 1989 on Pre-1989 Account Value,
salary reduction contributions made on or after January 1, 1989, and any growth
or interest on such contributions ("Restricted Account Value").
Withdrawals of Restricted Account Value are also permitted in cases of
financial hardship, but only to the extent of contributions; earnings on
contributions cannot be withdrawn for hardship reasons. While specific rules
defining hardship have not been issued by the Internal Revenue Service, it is
expected that to qualify for a hardship distribution, the Owner must have an
immediate and heavy bona fide financial need and lack other resources reasonably
available to satisfy the need. Hardship withdrawals (as well as certain other
premature withdrawals) will be subject to a ten percent (10%) tax penalty, in
addition to any withdrawal charge applicable under the Contract (See "Federal
Tax Status"). Under certain circumstances the 10% tax penalty may not apply if
the withdrawal is made to pay medical expenses.
Under the terms of a particular Section 403(b) plan, the Owner may be
entitled to transfer all or a portion of the Accumulation Account value to one
or more alternative funding options. Contract Owners should consult the
documents governing their plan and the person who administers the plan for
information as to such investment alternatives.
For information on the federal income tax withholding rules that apply to
distributions from Qualified Contracts (including Section 403(b) Annuities) see
"Federal Tax Status".
MARKET VALUE ADJUSTMENT
Any cash withdrawal from the Fixed Account of amounts with a three (3), five
(5) or seven (7) year Guarantee Period will be subject to a Market Value
Adjustment ("MVA"), except in the case of payment of a guaranteed death benefit,
or in the event of annuitization over a payout period of at least five (5)
years. The MVA will be applied to the amount being withdrawn after deduction of
any applicable Account Fee, withdrawal charge and/or unpaid Net Loan Interest.
The MVA will reflect the relationship between the Current Rate for the
Guarantee Period of the amount being surrendered and the Guarantee Rate
applicable to the amount being surrendered. It also reflects the time remaining
in the Guarantee Period. Generally, if the Guarantee Rate is lower than the
applicable Current Rate, then the application of the MVA will result in a lower
payment upon surrender. Similarly, if the Guarantee Rate is higher than the
applicable Current Rate, the application of the MVA will result in a higher
payment upon surrender. If the Current Rate and the Guarantee Rate are the same,
then the MVA is zero.
The Market Value Adjustment is determined by the application of the
following formula:
.75 (A-B) x C/12 where:
A = interest rate being credited to the amount being surrendered
(Guarantee Rate);
B = the rate the Company has established at the time of surrender on
allocations to Initial or Subsequent Guarantee Periods with the same
Guarantee Period as that of the amount being surrendered (Current Rate);
and
C = the months remaining in the Guarantee Period of the amount being
surrendered.
For example, assume Purchase Payments are allocated to the Fixed Account for
a Guarantee Period of five (5) years and the Guarantee Rate is five percent (5%)
per year. Assume at the end of three (3) years this amount is surrendered. If
the Current Rate for five (5) years is four percent (4%), then the amount
payable after application of the MVA will increase. On the other hand, if the
Current Rate is higher than the Guarantee Rate, for example, six percent (6%),
the application of the MVA will cause a decrease in the amount payable upon
surrender.
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<PAGE>
Since current yields are based in part upon the investment yields available
to the Company, the effect of the MVA will be closely related to the levels of
such yields. It is possible, therefore, that should such yields increase
significantly from the time Purchase Payments are allocated to the Fixed
Account, with the application of the MVA, Account Fee, withdrawal charges and/or
unpaid Net Loan Interest the amount payable upon surrender could be less than
the original Purchase Payment.
The Company may, upon notice to the Owner, modify the MVA formula, provided
that such modification shall apply only to Participants' Accounts established
after the effective date of such modification.
See Appendix C for additional illustrations of the application of the MVA.
LOANS (QUALIFIED CONTRACTS ONLY)
Loans will be permitted (to the extent permitted by Plans) UNDER QUALIFIED
CONTRACTS ONLY. The maximum loan amount is the amount determined under the
Company's maximum loan formula for qualified plans. The minimum loan amount is
$1,000. Loans will be secured by a security interest in the Contract. Loans are
subject to applicable retirement program legislation and their taxation is
determined under the Federal income tax laws. The amount borrowed may be subject
to the Market Value Adjustment described above. A negative Market Value
Adjustment will result in a higher effective loan interest rate. The amount
borrowed will be transferred to a fixed minimum guarantee accumulation account
in the Company's general account where it will accrue interest at a specified
rate below the then current loan interest rate established by the Company. The
latter rate is the maximum fixed interest rate established by state regulatory
authorities. Generally, loans must be repaid within five (5) years.
The amount of the death benefit, the amount payable on a full surrender and
the amount applied to provide an annuity on the Annuity Commencement Date will
be reduced to reflect any unpaid Net Loan Interest. Partial withdrawals may be
restricted by the maximum loan limitation.
The tax consequences of a loan from the Contract (or the pledge of the
Contract as collateral for a loan) should be carefully considered (See "Federal
Tax Status").
Additional information regarding loans under Qualified Contracts will be
provided by the Company upon request.
DEATH BENEFIT
DEATH BENEFIT PROVIDED BY THE CONTRACTS
In the event of the death of the Participant prior to the Annuity
Commencement Date, the Company will pay a death benefit to the Beneficiary. If
there is no designated Beneficiary living on the date of death of the
Participant, the Company will, upon receipt of Due Proof of Death of both the
Participant and the designated Beneficiary, pay the death benefit in one lump
sum to the estate of the Participant. If the death of the Participant occurs on
or after the Annuity Commencement Date, no death benefit will be payable under
the Contract except as may be provided under the Annuity Option elected.
ELECTION AND EFFECTIVE DATE OF ELECTION
During the lifetime of the Participant and prior to the Annuity Commencement
Date, the Owner may elect to have the value of the Participant's Account applied
under one or more Annuity Options to effect a Variable Annuity or a Fixed
Annuity or a combination of both for the Beneficiary as Payee after the death of
the Participant. If no election of a method of settlement of the death benefit
by the Owner is in effect on the date of death of the Participant, the
Beneficiary may elect (a) to receive the death benefit in the form of a cash
payment; or (b) to have the value of the Participant's Account applied under one
or more of the Annuity Options (on the Annuity Commencement Date described under
"Payment of Death Benefit") to effect a Variable Annuity or a Fixed Annuity or a
combination of both for the Beneficiary as Payee. Either election described
above may be made by filing with the Company a written election in such form as
the Company may require. Any election of a method of settlement of the death
benefit by the Owner (or by the Participant, as permitted by the Plan) will
become effective on the date it is received by the Company. Any election of a
method of settlement of the death benefit by the Beneficiary will become
effective on the later of: (a) the date the election is received by the Company;
or (b) the date due proof of the death of
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<PAGE>
the Participant and any required release or consent from any inheritance taxing
authority or surviving spouse, if applicable, is received by the Company. If an
election by the Beneficiary is not received by the Company within sixty (60)
days following the date due proof of the death of the Participant and any
required release or consent is received by the Company, the Beneficiary will be
deemed to have elected a cash payment as of the last day of the sixty (60) day
period.
In all cases, no Participant or Beneficiary shall be entitled to exercise
any rights that would adversely affect the treatment of the Contract as an
annuity contract under the Internal Revenue Code.
Reference should be made to the terms of the particular retirement plan and
any applicable legislation for any limitations or restrictions on the election
of a method of settlement and payment of the death benefit.
PAYMENT OF DEATH BENEFIT
If the death benefit is to be paid in cash to the Beneficiary, payment will
be made within seven (7) days of the date the election becomes effective or is
deemed to become effective, except as the Company may be permitted to defer any
such payment of amounts derived from the Variable Account in accordance with the
Investment Company Act of 1940. If the death benefit is to be paid in one lump
sum to the estate of the deceased Participant, payment will be made within seven
(7) days of the date due proof of the death of the Participant and the
Beneficiary is received by the Company. If settlement under one or more of the
Annuity Options is elected by the Owner with respect to the Participant's
Account, the Annuity Commencement Date will be the first day of the second
calendar month following the date due proof of the death of the Participant and
the Beneficiary, if any, is received by the Company. In the case of an election
by the Beneficiary, the Annuity Commencement Date will be the first day of the
second calendar month following the effective date of the election. An Annuity
Commencement Date later than that described above may be elected by an Owner or
a Beneficiary subject to certain restrictions (See "Annuity Commencement Date").
AMOUNT OF DEATH BENEFIT
The death benefit is equal to the greater of the value of the Participant's
Account or total Purchase Payments made with respect to the Participant's
Account, minus the sum of all withdrawals and loans. The death benefit will be
reduced by any unpaid Net Loan Interest. No Market Value Adjustment will be
applied to amounts derived from the Fixed Account. The Accumulation Unit values
used in determining the amount of the death benefit will be the values for the
Valuation Period during which due proof of the death of the Participant is
received by the Company if settlement is elected by the Owner (or the
Participant, if permitted by the Plan) under one or more of the Annuity Options
or, if no election by the Owner is in effect, either the values for the
Valuation Period during which an election by the Beneficiary either becomes
effective or is deemed effective, or the values for the Valuation Period during
which due proof of the death of both the Participant and the designated
Beneficiary is received by the Company if the amount of the death benefit is to
be paid in one sum to the deceased Participant's estate.
HOW THE CONTRACT CHARGES ARE ASSESSED
As more fully described below, charges under the Contract offered by this
Prospectus are assessed in three ways: (1) as deductions for administrative
expenses and, if applicable, for premium taxes; (2) as charges against the
assets of the Variable Account for the assumption of mortality and expense
risks; and (3) as withdrawal charges (contingent deferred sales charges). In
addition, certain deductions are made from the assets of the Fund(s) for
investment management fees and expenses. These fees and expenses are described
in the Funds' prospectuses and Statements of Additional Information.
ACCOUNT FEE
Each year on the Account Anniversary, the Company deducts from each
Participant's Account an annual account administration fee ("Account Fee") to
reimburse it for administrative expenses relating to the Contract and the
Participant's Account. If the Participant's Account is surrendered for its full
value on other than the Account Anniversary, the Account Fee will be deducted in
full at the time of such surrender. The Account Fee will be deducted in equal
amounts from the Fixed Account and each Sub-Account in which the Participant has
Accumulation Units at the time of such deduction. On the Annuity
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<PAGE>
Commencement Date, the value of the Participant's Account will be reduced by a
proportionate amount of the Account Fee to reflect the time elapsed between the
last Account Anniversary and the day before the Annuity Commencement Date. After
the Annuity Commencement Date, the Account Fee will be deducted pro rata from
each annuity payment made during the year.
The amount of the Account Fee assessed against each Participant's Account is
based on total Purchase Payments credited to all Participants' Accounts under a
Contract in accordance with the following schedule:
<TABLE>
<CAPTION>
PURCHASE PAYMENTS ACCOUNT FEE
- ------------------------ -----------
<S> <C>
up to $250,000 $25
$250,000 to $1,499,999 $18
$1,500,000 to $4,999,999 $15
$5,000,000 and over $12
</TABLE>
The level of Purchase Payments credited to all Participants' Accounts under
a Contract is reviewed semi-annually and the Account Fee to be assessed against
Participants' Accounts during the next six (6) month period is determined. Once
Purchase Payments credited to all Participants' Accounts under a Contract reach
a level which produces a lower Account Fee, the Account Fee applicable to
existing Participants' Accounts under the Contract will not be increased
irrespective of subsequent withdrawals from Participants' Accounts under the
Contract. The Contract provides that the Company may modify the Account Fee
provided that such modification shall apply only with respect to Participants'
Accounts established after the effective date of such modification (See
"Modification").
PREMIUM TAXES
A deduction, when applicable, is made for premium or similar state or local
taxes. The amount of such applicable tax varies by jurisdiction and is subject
to change by the legislature or other authority. In many jurisdictions, there is
no premium tax at all. The Company believes that such premium taxes or similar
taxes currently range from 0% to 3.50%. For more complete information, a tax
adviser should be consulted. 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
The mortality risk assumed by the Company arises from the contractual
obligation to continue to make annuity payments to each Annuitant regardless of
how long the Annuitant lives and regardless of how long all annuitants as a
group live. This assures each annuitant that neither the longevity of fellow
annuitants nor an improvement in life expectancy generally will have an adverse
effect on the amount of any annuity payment received under the Contract. The
Company assumes this mortality risk by virtue of annuity rates incorporated into
the Contract which cannot be changed except with respect to Participants'
Accounts established after the effective date of such change, as provided in the
section of this Prospectus entitled "Modification." The expense risk assumed by
the Company is the risk that the administrative charges provided in the Contract
may be insufficient to cover the actual total administrative expenses incurred
by the Company.
For assuming these risks, the Company makes a deduction from the Variable
Account at the end of each Valuation Period during both the Accumulation Period
and after annuity payments begin. The amount of this deduction is based on all
Variable Accumulation Units credited to a Participant's Account or on all
Variable Annuity Units credited to a Participant's Account, as the case may be.
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<PAGE>
The rate of this deduction varies and is based on total Purchase Payments
credited to all Participants' Accounts under a Contract in accordance with the
following schedule:
<TABLE>
<CAPTION>
PURCHASE PAYMENTS ASSET CHARGE
- ------------------------ ------------
<S> <C>
up to $250,000 1.30%
$250,000 to $1,499,999 1.25%
$1,500,000 to $4,999,999 1.10%
$5,000,000 and over 0.95%
</TABLE>
The level of Purchase Payments credited to all Participants' Accounts under
a Contract is reviewed semi-annually and the asset charge for the next six (6)
month period is determined. The rate of this deduction may be changed
semi-annually by the Company but in no event may it exceed 1.30% on an annual
basis except as provided in the section of this Prospectus entitled
"Modification." Once Purchase Payments credited to all Participants' Accounts
under a Contract reach a level which produces a lower asset charge, the asset
charges applicable to existing Participants' Accounts under the Contract will
not be increased irrespective of subsequent withdrawals from Participants'
Accounts under the Contract. The Company does not believe it is feasible to
identify precisely that portion of the deduction applicable to either the
mortality risk or expense risk, but estimates that a reasonable allocation would
be 0.80% for the mortality risk at all asset charge levels, and 0.50%, 0.45%,
0.30% or 0.15% for the expense risk with respect to the asset charges described
above. If the deduction is insufficient to cover the actual cost of the
mortality and expense risk undertaking, the Company will bear the loss.
Conversely, if the deduction proves more than sufficient, the excess will be
profit to the Company and would be available for any proper corporate purpose
including, among other things, payment of distribution expenses. The Company
will recoup its expected costs associated with registering and distributing the
Contracts by the assessment of the withdrawal charges (contingent deferred sales
charges). However, the withdrawal charges may prove to be insufficient to cover
actual distribution expenses. If this is the case, the deficiency will be met
from the Company's general corporate funds which may include amounts derived
from the mortality and expense risk charges.
The Contract provides that the Company may modify the asset charges;
however, such modification shall apply only with respect to Participants'
Accounts established after the effective date of such modification (See
"Modification").
WITHDRAWAL CHARGES
No deduction for sales charges is made from Purchase Payments. However, a
withdrawal charge (i.e., a contingent deferred sales charge), when applicable,
will be used to cover certain expenses relating to the sale of the Contract,
including commissions paid to sales personnel, the costs of preparation of sales
literature and other promotional costs and acquisition expenses. Gross
commissions paid on the sale of these contracts are not more than 5.5% of the
Purchase Payments (See "Cash Withdrawals" and "Withdrawal Charges").
ANNUITY PROVISIONS
ANNUITY COMMENCEMENT DATE
Annuity payments will begin on the Annuity Commencement Date which is
selected by the Owner (or by the Participant, if permitted by the Plan) at the
time the Participant's Account is established. This date may be changed from
time to time by the Owner by written notice to the Company, provided that notice
of each change is received by the Company at least thirty (30) days prior to the
then current Annuity Commencement Date and the new Annuity Commencement Date is
a date which is: (1) at least thirty (30) days after the date notice of the
change is received by the Company; (2) the first day of a month; and (3) not
later than the first day of the first month following the Participant's 85th
birthday, unless otherwise restricted in the case of a Qualified Contract by the
particular retirement plan or by applicable law. In most situations, current law
requires that the Annuity Commencement Date under a Qualified Contract be no
later than April 1 following the year the Annuitant reaches age 70 1/2 (or, for
Qualified Contracts other than IRAs, no later than April 1 following the year
the Annuitant retires, if later
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<PAGE>
than 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 canceled
and its adjusted value will be applied to provide an annuity under one of the
options described below. No withdrawal charge or Market Value Adjustment will be
applied: (1) if annuitization occurs after the twelfth (12th) Account
Anniversary; or (2) provided that payment is over a period of at least five (5)
years. The asset charge applied after annuity payments begin will be the same as
that in effect for the Participant's Account on the Annuity Commencement Date.
NO PAYMENTS MAY BE REQUESTED UNDER THE CONTRACT'S CASH WITHDRAWAL PROVISIONS ON
OR AFTER THE ANNUITY COMMENCEMENT DATE AND NO CASH WITHDRAWAL WILL BE PERMITTED
EXCEPT AS MAY BE AVAILABLE UNDER THE ANNUITY OPTION ELECTED.
Since the Contracts offered by this Prospectus will be issued in connection
with retirement plans which meet the requirements of Section 401 (including
Section 401(k)), Section 403, Section 408(c), Section 408(k) or Section 408(p)
of the Internal Revenue Code as well as non-qualified deferred compensation and
payroll savings plans, reference should be made to the terms of the particular
Plan for any limitations or restrictions on the Annuity Commencement Date.
ELECTION--CHANGE OF ANNUITY OPTION
During the lifetime of the Participant and prior to the Annuity Commencement
Date, the Owner (or the Participant, if permitted by the Plan) may, subject to
the age limitation on period certain or fixed periods, elect one or more of the
Annuity Options described below, or such other settlement option as may be
agreed to by the Company, for the Annuitant as Payee. The Owner may also change
any election, but written notice of any election or change of election must be
received by the Company at least thirty (30) days prior to the Annuity
Commencement Date. If no election is in effect on the 30th day prior to the
Annuity Commencement Date, Annuity Option B, for a Life Annuity with 120 monthly
payments certain will be deemed to have been elected.
Any election may specify the proportion of the adjusted value of the
Participant's Account to be applied to the Fixed Account and the Sub-Accounts.
In the event the election does not so specify, then the portion of the adjusted
value of the Participant's Account to be applied to the Fixed Account and the
Sub-Accounts will be determined on a pro rata basis from the composition of the
Participant's Account on the Annuity Commencement Date.
Annuity Options may also be elected by the Owner or the Beneficiary as
provided in the Death Benefit section of this Prospectus.
Reference should be made to the terms of the particular retirement plan and
any applicable legislation for any limitations or restrictions on the options
which may be elected.
NO CHANGE OF ANNUITY OPTION IS PERMITTED AFTER THE ANNUITY COMMENCEMENT
DATE.
ANNUITY OPTIONS
No lump sum settlement option is available under the Contract. The Owner may
surrender the Contract prior to the Annuity Commencement Date; however, any
applicable surrender charge will be deducted from the cash withdrawal payment
and a Market Value Adjustment, if appropriate, will be applied.
Annuity Options A, B and C are available to provide either a Fixed Annuity
or a Variable Annuity. Annuity Options D and E are available only to provide a
Fixed Annuity.
Annuity Option A. Life Annuity: Monthly payments during the lifetime of
the Payee. This option offers a higher level of monthly payments than Annuity
Options B or C because no further payments are payable after the death of the
Payee and there is no provision for a death benefit payable to a Beneficiary.
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<PAGE>
It would be possible for only one variable annuity payment to be made under this
option if the Payee died before the due date of the second variable annuity
payment, two if the Payee died before the due date of the third variable annuity
payment, etc.
Annuity Option B. Life Annuity with 60, 120, 180 or 240 Monthly Payments
Certain: Monthly payments during the lifetime of the Payee and in any event for
sixty (60), one hundred twenty (120), one hundred eighty (180) or two hundred
forty (240) months certain as elected. The election of a longer period certain
results in smaller monthly payments than would be the case if a shorter period
certain were elected. In the event of the death of the Payee under this option,
the Contract provides that in certain circumstances, the discounted value of the
remaining payments, if any, will be calculated and paid in one sum. The
discounted value for variable annuity payments will be based on interest
compounded annually at the assumed interest rate of four percent (4%).
Annuity Option C. Joint and Survivor Annuity: Monthly payments payable
during the joint lifetime of the Payee and a designated second person and during
the lifetime of the survivor. During the lifetime of the survivor, variable
monthly payments, if any, will be determined using the percentage chosen at the
time of election of this option of the number of each type of Annuity Unit
credited to the Contract with respect to the Payee and fixed monthly payments,
if any, will be equal to the same percentage of the fixed monthly payment
payable during the joint lifetime of the Payee and the designated second person.
It would be possible for only one variable annuity payment to be made under this
option if the Payee and the designated person died before the due date of the
second variable annuity payment, two if they died before the due date of the
third variable annuity payment, etc.
*Annuity Option D. Fixed Payments for a Specified Period Certain: Fixed
monthly payments for a specified period of time, as elected. In the event of the
death of the Payee under this option, the Contract provides that in certain
circumstances, the discounted value of the remaining payments, if any, will be
calculated and paid in one sum. The discounted value, if any, will be based on
the interest rate initially used in determining the amount of each payment.
*Annuity Option E. Fixed Payments: The amount applied to provide fixed
payments in accordance with this option will be held by the Company at interest.
Fixed payments will be made in such amounts and at such times as may be agreed
upon with the Company and will continue until the amount held by the Company
with interest is exhausted. The final payment will be for the balance remaining
and may be less than the amount of each preceding payment. Interest will be
credited yearly on the amount remaining unpaid at a rate which shall be
determined by the Company from time to time but which shall not be less than
four percent (4%) per year compounded annually. The rate so determined may be
changed at any time and as often as may be determined by the Company, provided,
however, that the rate may not be reduced more frequently than once during each
calendar year.
DETERMINATION OF ANNUITY PAYMENTS
On the Annuity Commencement Date the Participant's Account will be canceled
and its adjusted value will be applied to provide a Variable Annuity or a Fixed
Annuity or a combination of both. The adjusted value will be equal to the value
of the Participant's Account for the Valuation Period which ends immediately
preceding the Annuity Commencement Date, reduced by any applicable premium or
similar taxes, a proportionate amount of the Account Fee to reflect the time
elapsed between the last Account Anniversary and the day before the Annuity
Commencement Date and any applicable withdrawal charge and/or unpaid Net Loan
Interest and plus or minus any applicable Market Value Adjustment.
FIXED ANNUITY PAYMENTS
The dollar amount of each fixed annuity payment will be determined in
accordance with the Annuity Payment Rates found in the Contract which are based
on a minimum guaranteed interest rate of four
- ------------------------
* The election of this Annuity Option may result in the imposition of a penalty
tax.
30
<PAGE>
percent (4%) per year, or, if more favorable to the Payee(s), in accordance with
the Single Premium Immediate Settlement Rates published by the Company and in
use on the Annuity Commencement Date.
VARIABLE ANNUITY PAYMENTS
The dollar amount of the first variable annuity payment will be determined
in accordance with the Annuity Payment Rates found in the Contract which are
based on an assumed interest rate of four percent (4%) per year, unless these
rates are changed (See "Modification"). All variable annuity payments other than
the first are determined by means of Annuity Units credited to the Contract with
respect to the particular Payee. The number of Annuity Units to be credited in
respect of a particular Sub-Account is determined by dividing that portion of
the first variable annuity payment attributable to that Sub-Account by the
Annuity Unit value of that Sub-Account 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 to the Contract with respect to
the particular Payee then remains fixed unless an exchange of Annuity Units is
made as described below. The dollar amount of each variable annuity payment
after the first may increase, decrease or remain constant, and is equal to the
sum of the amounts determined by multiplying the number of Annuity Units of a
particular Sub-Account credited to the Contract with respect to the particular
Payee by the Annuity Unit value for the particular Sub-Account for the Valuation
Period which ends immediately preceding the due date of each subsequent payment.
If the net investment return on the assets of the Variable Account is the same
as the assumed interest rate of four percent (4%) per year, variable annuity
payments will remain level. If the net investment return exceeds the assumed
interest rate variable annuity payments will increase and, conversely, if it is
less than the assumed interest rate the payments will decrease.
For a hypothetical example of the calculation of a Variable Annuity Payment,
see Appendix A.
VARIABLE ANNUITY UNIT VALUE
The Annuity Unit value for each Sub-Account was established at $10.00 for
the first Valuation Period of the particular Sub-Account. The Annuity Unit value
for the particular Sub-Account for any subsequent Valuation Period is determined
by multiplying the Annuity Unit value for the particular Sub-Account for the
immediately preceding Valuation Period by the Net Investment Factor (See
"Variable Accumulation Value, Net Investment Factor") for the particular
Sub-Account for the current Valuation Period and then multiplying that product
by a factor to neutralize the assumed interest rate of four percent (4%) per
year used to establish the Annuity Payment Rates found in the Contract. The
factor is 0.99989255 for a one day Valuation Period.
For a hypothetical example of the calculation of the value of a Variable
Annuity Unit, see Appendix A.
EXCHANGE OF VARIABLE ANNUITY UNITS
After the Annuity Commencement Date the Payee may, by filing a written
request with the Company, exchange the value of a designated number of Variable
Annuity Units of particular Sub-Accounts then credited to the Contract with
respect to the particular Payee into other Variable Annuity Units, the value of
which would be such that the dollar amount of an annuity payment made on the
date of the exchange would be unaffected by the fact of the exchange. No more
than twelve (12) exchanges may be made within each Account Year.
Exchanges may be made only within the Variable Account. Exchanges will be
made using the Annuity Unit values for the Valuation Period during which any
request for exchange is received by the Company.
ANNUITY PAYMENT RATES
The Contract contains unisex annuity payment rates for each Annuity Option
described in this Prospectus. The rates show, for each $1,000 applied, the
dollar amount of: (a) the first monthly Variable Annuity payment based on the
assumed interest rate of four percent (4%); and (b) the monthly Fixed
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<PAGE>
Annuity payment, when this payment is based on the minimum guaranteed interest
rate of four percent (4%) per year. These rates may be changed by the Company
with respect to Participants' Accounts established after the effective date of
such change (See "Modification").
The annuity payment rates may vary according to the Annuity Option elected
and the adjusted age of the Payee. The Contract also describes the method of
determining the adjusted age of the Payee. The mortality table used in
determining the annuity payment rates for Options A, B, and C is the 1971
Individual Annuitant Mortality Table with ages reduced by one year for Annuity
Commencement Dates occurring during the 1980s, two years for Annuity
Commencement Dates occurring during the 1990s, etc.
OTHER CONTRACTUAL PROVISIONS
PAYMENT LIMITS
Purchase Payments credited to a Participant's Account on an annualized basis
for the first Account Year must total at least $300 and must be payable in
amounts of at least $25 per Payment. These minimums may, however, be waived by
the Company. In addition, the prior approval of the Company is required before
it will accept a Purchase Payment which would cause the value of a Participant's
Account to exceed $1,000,000. If the value of a Participant's Account exceeds
$1,000,000, no additional Purchase Payments will be accepted without the prior
approval of the Company. Purchase Payments may be made annually, semi-annually,
quarterly, monthly or on any other frequency acceptable to the Company. The
Owner may increase or decrease the amount of Purchase Payments or change the
frequency of payment. The Owner is not obligated to continue Purchase Payments
in the amount or frequency elected. There are no penalties for failure to
continue to make Purchase Payments. While the Contract and the Participant's
Account are in force, Purchase Payments may be made at any time prior to the
Annuity Commencement Date.
OWNER
The Contract shall belong to the Owner. All Contract rights and privileges
may be exercised by the Owner without the consent of the Participant or the
Beneficiary or any other person, except as the Owner may have provided under the
Plan or other appropriate documents. Such rights and privileges may be
exercised, with respect to a particular Participant, only during the lifetime of
the Participant and prior to the Annuity Commencement Date, except as otherwise
provided in the Contract. Each Participant becomes the Payee on and after the
Annuity Commencement Date. The Beneficiary becomes the Payee on the death of the
Participant.
CHANGE OF OWNERSHIP
Ownership of a Qualified Contract may not be transferred except to: (1) the
Participant or Beneficiary; (2) a trustee or successor trustee of a pension or
profit sharing trust which is qualified under Section 401 of the Internal
Revenue Code; (3) the employer of the Annuitant provided that the Qualified
Contract after transfer is maintained under the terms of a retirement plan
qualified under Section 403(a) of the Internal Revenue Code for the benefit of
the Annuitant; (4) the trustee of an individual retirement account plan
qualified under Section 408 of the Internal Revenue Code; or (5) as otherwise
permitted from time to time by laws and regulations governing the retirement,
deferred compensation or other programs for which the Contract may be issued.
Subject to the foregoing, a Qualified Contract may not be sold, assigned,
transferred, discounted or pledged as collateral for a loan or as security for
the performance of an obligation or for any other purpose to any person other
than the Company.
The Owner of a Non-Qualified Contract may change the ownership of the
Contract during the lifetime of any Participant and prior to the last remaining
Participant's Annuity Commencement Date, although such change may result in the
imposition of tax (See "Federal Tax Status--Taxation of Annuities in General").
A change of ownership will not be binding upon the Company until written
notification is received by the Company. Once received by the Company the change
will be effective as of the date on which the request for change was signed by
the Owner, but the change will be without prejudice to the Company on account of
any payment made or any action taken by the Company prior to receiving the
change. The Company may require that the signature of the Owner be guaranteed by
a member firm
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<PAGE>
of the New York, American, Boston, Midwest, Philadelphia or Pacific Stock
Exchange, or by a commercial bank (not a savings bank) which is a member of the
Federal Deposit Insurance Corporation or, in certain cases, by a member firm of
the National Association of Securities Dealers, Inc. which has entered into an
appropriate agreement with the Company.
DESIGNATION AND CHANGE OF BENEFICIARY
The Beneficiary designation contained in a Participant Enrollment Form will
remain in effect until changed. The interest of any Beneficiary is subject to
the particular Beneficiary surviving the Participant.
Subject to the rights of an irrevocably designated Beneficiary, the Owner
(or the Participant, as permitted by the Plan) may change or revoke the
designation of a Beneficiary at any time while the Participant is living by
filing with the Company a written beneficiary designation or revocation in such
form as the Company may require. The change or revocation will not be binding
upon the Company until it is received by the Company. When it is so received the
change or revocation will be effective as of the date on which the beneficiary
designation or revocation was signed by the Owner or the Participant, as
applicable, but the change or revocation will be without prejudice to the
Company on account of any payment made or any action taken by the Company prior
to receiving the change or revocation.
Reference should be made to the terms of the particular retirement plan and
any applicable legislation for any restrictions on the beneficiary designation.
VOTING OF FUND SHARES
The Company will vote Fund shares held by the Sub-Accounts at meetings of
shareholders of the Fund(s) or in connection with similar solicitations, but
will follow voting instructions received from persons having the right to give
voting instructions. The Owner is the person having the right to give voting
instructions prior to the Annuity Commencement Date. On or after the Annuity
Commencement Date the Payee is the person having such voting rights. Any shares
attributable to the Company and Fund shares for which no timely voting
instructions are received will be voted by the Company in the same proportion as
the shares for which instructions are received from Owners and Payees.
Owners of Contracts held pursuant to Plans may be subject to other voting
provisions of the particular Plan and of the Investment Company Act of 1940.
Employees who contribute to Plans which are funded by the Contracts are entitled
to instruct the Owners as to how to instruct the Company to vote the Fund(s)
shares attributable to their contributions. Such Plans may also provide the
additional extent, if any, to which the Owners shall follow voting instructions
of persons with rights under the Plans. If no voting instructions are received
from any such person with respect to a particular Participant's Account, the
Owner may instruct the Company as to how to vote the number of Fund shares for
which instructions may be given.
Neither the Variable Account nor the Company is under any duty to provide
information concerning the voting instruction rights of persons who may have
such rights under Plans, other than rights afforded by the Investment Company
Act of 1940, nor any duty to inquire as to the instructions received or the
authority of Owners or others to instruct the voting of Fund shares. Except as
the Variable Account or the Company has actual knowledge to the contrary, the
instructions given by Owners and Payees will be valid as they affect the
Variable Account, the Company and any others having voting instruction rights
with respect to the Variable Account.
All Fund proxy material, together with an appropriate form to be used to
give voting instructions, will be provided to each Owner and each Payee having
the right to give voting instructions at least ten (10) days prior to each
meeting of the shareholders of the particular Fund. The number of particular
Fund shares as to which each such person is entitled to give instructions will
be determined by the Company on a date not more than ninety (90) days prior to
each such meeting. Prior to the Annuity Commencement Date, the number of
particular Fund shares as to which voting instructions may be given to the
Company is determined by dividing the value of all of the Variable Accumulation
Units of the particular Sub-Account credited to the Contract's Accumulation
Account by the net asset value of one particular Fund share as of the same date.
On or after the Annuity Commencement Date, the number of particular Fund shares
as to which such instructions may be given by a Payee is determined by dividing
the
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<PAGE>
reserve held by the Company in the particular Sub-Account for the Contract with
respect to the particular Payee by the net asset value of a particular Fund
share as of the same date. After the Annuity Commencement Date, the number of
the particular Fund shares as to which a Payee is entitled to give voting
instructions will generally decrease due to the decrease in the reserve.
PERIODIC REPORTS
The Company will send the Owner and the Participant, at least once during
each Account and/or Contract Year, a statement showing the number, type and
value of Accumulation Units or Annuity Units credited to the Contract or the
Participant's Account as the case may be, which statement shall be accurate as
of a date not more than two (2) months previous to the date of mailing. These
periodic statements contain important information concerning Participant's
Account transactions with respect to a Contract. It is the obligation of the
Participant to review each such statement carefully and to report to the
Company, at the address or telephone number provided on the statement, any
errors or discrepancies in the information presented therein within 60 days of
the date of such statement. Unless the Company receives notice of any such error
or discrepancy from the participant within such time period, the Company may not
be responsible for correcting the error. In addition, every person having voting
rights will receive such reports or prospectuses concerning the Variable Account
and the particular Fund(s) as may be required by the Investment Company Act of
1940 and the Securities Act of 1933. The Company will also send such statements
reflecting transactions in the Contract's Accumulation Account and each
Participant's Account as may be required by applicable laws, rules and
regulations.
SUBSTITUTED SECURITIES
Shares of any of the particular Funds may not always be available for
purchase by the Sub-Accounts of the Variable Account or the Company may decide
that further investment in any such Fund's shares is no longer appropriate in
view of the purposes of the Variable Account. In either event, shares of another
registered open-end investment company may be substituted both for Fund shares
already purchased by the Variable Account and/or as the security to be purchased
in the future provided that these substitutions have been approved, if required,
by the Securities and Exchange Commission. In the event of any substitution
pursuant to this provision, the Company may make appropriate endorsement to the
Contract to reflect the substitution.
CHANGE IN OPERATION OF VARIABLE ACCOUNT
At the Company's election and subject to any necessary vote by persons
having the right to give instructions with respect to the voting of Fund shares
held by the Sub-Accounts, the Variable Account may be operated as a management
company under the Investment Company Act of 1940 or it may be deregistered under
the Investment Company Act of 1940 in the event registration is no longer
required. Deregistration of the Variable Account requires an order by the
Securities and Exchange Commission. In the event of any change in the operation
of the Variable Account pursuant to this provision, the Company may make
appropriate endorsement to the Contract to reflect the change and take such
other action as may be necessary and appropriate to effect the change.
SPLITTING UNITS
The Company reserves the right to split or combine the value of Variable
Accumulation Units, Fixed Accumulation Units, Annuity Units or any of them. In
effecting any such change of unit values, strict equity will be preserved and no
change will have a material effect on the benefits or other provisions of the
Contract.
MODIFICATION
Upon notice to the Owner, or to the Payee(s) during the annuity period, the
Contract may be modified by the Company if such modification: (i) is necessary
to make the Contract or the Variable Account comply with any law or regulation
issued by a governmental agency to which the Company or the Variable Account is
subject; or (ii) is necessary to assure continued qualification of the Contract
under the Internal Revenue Code or other federal or state laws relating to
retirement annuities or annuity contracts; or (iii) is necessary to reflect a
change in the operation of the Variable Account or the Sub-
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Account(s) (See "Change in Operation of Variable Account"); or (iv) provides
additional Variable Account and/or fixed accumulation options; or (v) as may
otherwise be in the best interests of the Owners, Participants, or Payees, as
applicable. In the event of any such modification, the Company may make
appropriate endorsement to the Contract to reflect such modification.
In addition, upon notice to the Owner the Contract may be modified by the
Company to change the withdrawal charges, Account Fees, mortality and expense
risk charges, the tables used in determining the amount of the first monthly
Variable Annuity and Fixed Annuity payments and the formula used to calculate
the Market Value Adjustment provided that such modification shall apply only to
Participant Accounts established after the effective date of such modification.
In order to exercise its modification rights in these particular instances, the
Company must notify the Owner of such modification in writing. The notice shall
specify the effective date of such modification which must be at least sixty
(60) days following the date of mailing of the notice of modification by the
Company. All of the charges and the annuity tables which are provided in the
Contract prior to any such modification will remain in effect permanently,
unless improved by the Company, with respect to Participant Accounts established
prior to the effective date of such modification.
DISCONTINUANCE OF NEW PARTICIPANTS
The Company, by giving thirty (30) days' prior written notice to the Owner,
may limit or discontinue the acceptance of new Participant Enrollment Forms
under a Contract. Such limitation or discontinuance shall have no effect on
rights or benefits with respect to any Participant's Account established prior
to the effective date of such limitation or discontinuance.
CUSTODIAN
The Company is the Custodian of the assets of the Variable Account. The
Company will purchase Fund shares at net asset value in connection with amounts
allocated to the particular Sub-Account in accordance with the instructions of
the Owner and redeem Fund shares at net asset value for the purpose of meeting
the contractual obligations of the Variable Account, paying charges relative to
the Variable Account or making adjustments for annuity reserves held in the
Variable Account.
RIGHT TO RETURN CONTRACT (INDIVIDUAL RETIREMENT ACCOUNTS ONLY)
Under the Internal Revenue Code an Owner establishing an Individual
Retirement Account ("IRA") 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 IRA is
established. If the Owner is furnished with such disclosure statement before the
seventh (7th) day preceding the date the IRA is established, the Owner will not
have any right of revocation. If the disclosure statement is furnished after the
seventh (7th) day preceding the establishment of the IRA, then the Owner may
revoke the Contract any time within seven (7) days after the Issue Date. Upon
such revocation, the Company will refund all Purchase Payments made by the
Owner.
FEDERAL TAX STATUS
INTRODUCTION
The Contracts described in this Prospectus are designed for use by employer,
association and other group retirement plans under the provisions of Sections
401 (including Section 401(k)), 403, 408(c), 408(k) and 408(p) of the Internal
Revenue Code (the "Code"), as well as certain non-qualified retirement plans,
such as payroll savings plans. The ultimate effect of federal income taxes on
the Contract's Accumulation Account and the Participant's Account, on annuity
payments and on the economic benefit to the Owner, the Participant, the
Annuitant, the Payee or the Beneficiary may depend upon the type of Plan for
which the Contract is purchased and a number of different factors. The
discussion contained herein is general in nature, is based upon the Company's
understanding of current federal income tax laws (including recently enacted
amendments), and is not intended as tax advice. Congress has the power to enact
legislation affecting the tax treatment of annuity contracts, and such
legislation could be applied retroactively to Contracts purchased before the
date of enactment. Also, because the Internal Revenue Code, as amended, is not
in force in the Commonwealth of Puerto Rico, some references
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<PAGE>
herein will not be applicable to Contracts issued in Puerto Rico. Any person
contemplating the purchase of a Contract should consult a qualified tax adviser.
THE COMPANY DOES NOT MAKE ANY GUARANTEE REGARDING THE TAX STATUS, FEDERAL, STATE
OR LOCAL, OF ANY CONTRACT OR ANY TRANSACTION INVOLVING THE CONTRACTS.
TAX TREATMENT OF THE COMPANY AND THE VARIABLE ACCOUNT
The Company is taxed as a life insurance company under the Code. Although
the operations of the Variable Account are accounted for separately from other
operations of the Company for purposes of federal income taxation, the Variable
Account is not separately taxable as a regulated investment company or otherwise
as a taxable entity separate from the Company. Under existing federal income tax
laws, the income and capital gains of the Variable Account, to the extent
applied to increase reserves under the Contracts, are not taxable to the
Company.
TAXATION OF ANNUITIES IN GENERAL
Generally, no taxes are imposed on the increases in the value of a Contract
until a distribution occurs, either as annuity payments under the Annuity Option
elected or in the form of cash withdrawals or lump-sum payments prior to the
Annuity Commencement Date. Corporate Owners and other Owners that are not
natural persons (other than the estate of a decedent Owner) are subject to
current taxation on the annual increase in the value of a Non-Qualified
Contract's Accumulation Account. This rule does not apply where a non-natural
person holds the Contract as agent for a natural person (such as where a bank
holds a Contract as trustee under a trust agreement). This provision does not
apply to earnings accumulated where the Annuity Commencement Date occurs within
one year of the Date of Coverage. This provision applies to earnings on Purchase
Payments made after February 28,1986.
The following discussion of annuity taxation applies only to contributions
(and attributable earnings) made to Non-Qualified Contracts after August 13,
1982. If an Owner has made contributions before August 14, 1982 to another
annuity contract and exchanges that contract for the Contract offered by this
Prospectus, then different tax treatment will apply to the contributions (and
attributable earnings) made before August 14, 1982. For example, non-taxable
principal may be withdrawn before taxable earnings and the ten percent (10%)
penalty tax for early withdrawal is not applicable.
The Code is unclear in its application to a group annuity contract where the
Owner is distinct from the individuals with respect to whom the Contract
benefits are accumulated (the Participants). The following discussion is the
Company's best understanding of the operation of the Code in the context of
group contracts. However, Owners and Participants should consult a qualified tax
adviser.
For Contracts offered by this Prospectus (other than Contracts issued in
exchange for contracts issued prior to August 14, 1982, as described above), in
the case of a Non-Qualified Contract a partial cash withdrawal (that is, a
withdrawal of less than the entire value of the Participant's Account) must be
treated first as a withdrawal from the increase in the Participant's Account's
value over the Contract's cost basis. The amount of the withdrawal so allocable
will be includible in the Participant's income. Similarly, if a Participant
receives a loan under a Contract or if part or all of a Participant's Account is
assigned or pledged as collateral for a loan, the amount of the loan or the
amount assigned or pledged must be treated as if withdrawn from the Contract.
(For Non-Qualified Contracts entered into after October 21, 1988 (or any annuity
contract entered into on or before such date that is exchanged for a
Non-Qualified Contract issued after such date), any withdrawal or loan amount
that is includible in the Participant's income will increase the Contract's cost
basis. Repayment of a loan or payment of interest on a loan will not affect the
Contract's cost basis. For these purposes the Participant's Account value will
not be reduced by the amount of any loan, assignment or pledge of the Contract.
In addition, all non-qualified deferred annuity certificates or other
non-qualified deferred annuity contracts that are issued by the Company to the
same Participant during any calendar year will be treated as a single annuity
contract. Therefore, the proceeds of a withdrawal from, or assignment or pledge
of, one or more such contracts or certificates will be fully includible in the
Participant's income to the extent of the aggregate excess of the accumulation
account values over the cost bases of all such contracts or certificates entered
into during the calendar year.)
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The taxable portion of a cash withdrawal or a lump-sum payment prior to the
Annuity Commencement Date is subject to tax at ordinary income rates. In the
case of payments after the Annuity Commencement Date under the Annuity Option
elected, a portion of each payment generally is taxable at ordinary income
rates. The nontaxable portion is determined by applying to each payment an
"exclusion ratio" which is the ratio that the Participant's cost basis in the
Contract bears to the Payee's expected return under the Contract. The remainder
of the payment is taxable.
The total amount that a Payee may exclude from income through application of
the "exclusion ratio" is limited to the cost basis in the Contract. If the Payee
survives for his full life expectancy, and thereby recovers the entire basis in
the Contract, any subsequent annuity payment after basis recovery will be fully
taxable as income. Conversely, if the Payee dies prior to recovering the entire
basis, he will be allowed a deduction on his final income tax return for the
amount of the unrecovered basis. This limitation applies to distributions made
under a Contract with an Annuity Commencement Date after December 31, 1986.
In the case of Non-Qualified Contracts, taxable cash withdrawals and
lump-sum payments will be subject to a ten percent (10%) penalty, except in the
circumstances described below. This ten percent (10%) penalty also affects
certain annuity payments. In a situation where this penalty applies, the
recipient's tax for the tax year in which the amount is received shall be
increased by an amount equal to ten percent (10%) of the portion of the amount
which is includible in the recipient's gross income. The circumstances in which
this penalty will not apply are distributions which are: (a) made upon the death
of the Participant; or (b) allocable to Purchase Payments made before August 14,
1982. Further, in the case of Contracts issued prior to January 18, 1985, the
ten percent (10%) penalty on taxable cash withdrawals and lump-sum distributions
will not apply if the amount withdrawn is allocable to a Purchase Payment made
prior to the preceding ten (10) year period. For this purpose, a "first in,
first out" rule is used, so that the earliest Purchase Payment with respect to
which amounts have not been previously fully allocated will be deemed to be the
source of the amount.
In the case of Non-Qualified Contracts, if the Participant dies before the
Annuity Commencement Date the entire value of the Participant's Account must be
either (1) distributed within five (5) years after the date of death of the
Participant, or (2) distributed over some period not greater than the expected
life of the designated Beneficiary, with annuity payments beginning within one
(1) year after the date of death of the Participant. If a Payee dies on or after
the Annuity Commencement Date and before the entire Participant's Account has
been distributed, the remaining portion of such accumulation, if any, must be
distributed at least as rapidly as the method of distribution then in effect.
These distribution requirements will not apply where the Beneficiary is the
spouse of the Participant; rather, in such a case, the Contract may be continued
in the name of the spouse as Participant or Payee. In the case of Contracts
issued prior to January 18, 1985, these rules regarding distributions upon the
death of the Participant or the Annuitant will not apply. In the case of
Contracts issued after April 22, 1987, a change in the Participant would be
treated as the death of the Participant. Distributions required due to the death
of the Participant will not be subject to the ten percent (10%) penalty on
premature distributions. A purchaser of a Qualified Contract should refer to the
terms of the applicable retirement plan and contact a tax adviser regarding
distribution requirements upon the death of the Participant.
A transfer of a Non-Qualified Contract by gift (other than to the
Participant's spouse) is treated as the receipt by the Participant of income in
an amount equal to the excess of the cash surrender value over the Contract's
cost basis. This provision applies to Contracts issued after April 22, 1987.
In the case of Qualified Contracts, distributions made prior to age 59 1/2
generally are subject to a ten percent (10%) penalty tax, although this tax will
not apply in certain circumstances. Certain distributions, known as "eligible
rollover distributions," if rolled over to certain other qualified retirement
plans (either directly or after being distributed to the Participant or Payee),
are not taxable until distributed from the plan to which they are rolled over.
In general, an eligible rollover distribution is any taxable distribution other
than a distribution that is part of a series of payments made for life or for a
specified period of ten
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years or more. Owners, Participants, Annuitants, Payees and Beneficiaries should
seek qualified advice about the tax consequences of distributions, withdrawals,
rollovers and payments under the retirement plans in connection with which the
Contracts are purchased.
The Company will withhold and remit to the U.S. Government a part of the
taxable portion of each distribution made under a Non-Qualified Contract or
under a Qualified Contract issued for use with an individual retirement account
unless the Participant or Payee provides his or her taxpayer identification
number to the Company and notifies the Company (in the manner prescribed) before
the time of the distribution that the Participant or Payee chooses not to have
any amounts withheld.
In the case of distributions from a Qualified Contract (other than
distributions from a Contract issued for use with an individual retirement
account), the Company or the plan administrator must withhold and remit to the
U.S. Government 20% of each distribution that is an eligible rollover
distribution (as defined above) unless the Participant or Payee elects to make a
direct rollover of the distribution to another qualified retirement plan that is
eligible to receive the rollover. If a distribution from a Qualified Contract is
not an eligible rollover distribution, then the Participant or Payee can choose
not to have amounts withheld as described above for Non-Qualified Contracts and
Qualified Contracts issued for use with individual retirement accounts.
Amounts withheld from any distribution may be credited against the
Participant's or Payee's federal income tax liability for the year of the
distribution.
The Internal Revenue Service has issued regulations that prescribe
investment diversification requirements for mutual fund series underlying
nonqualified variable contracts. Contracts that do not comply with these
regulations do not qualify as annuities for income tax purposes. The Company
believes that each series of the Series Fund complies with the regulations.
The preamble to the regulations states that the Internal Revenue Service may
promulgate guidelines under which a variable contract will not be treated as an
annuity for tax purposes if the owner has excessive control over the investments
underlying the contract. It is not known whether such guidelines, if in fact
promulgated, would have retroactive effect. If guidelines are promulgated, the
Company will take any action (including modification of the Contract or the
Variable Account) necessary to comply with the guidelines.
QUALIFIED RETIREMENT PLANS
The Qualified Contracts described in this Prospectus are designed for use
with several types of qualified retirement plans. Following are brief
descriptions of various types of qualified retirement plans and the use of the
Qualified Contracts in connection therewith. The tax rules applicable to
participants in such qualified retirement plans vary according to the type of
plan and its terms and conditions. Therefore, no attempt is made herein to
provide more than general information about the use of the Qualified Contracts
with the various types of qualified retirement plans. Participants under such
plans as well as Owners, Annuitants, Payees and Beneficiaries are cautioned that
the rights of any person to any benefits under these plans may be subject to the
terms and conditions of the plans themselves, regardless of the terms and
conditions of the Qualified Contracts issued in connection therewith. These
terms and conditions may include restrictions on, among other things, ownership,
transferability, assignability, contributions and distributions. Any person
contemplating the purchase of a Qualified Contract should consult a qualified
tax advisor. In addition, Owners, Participants, Payees, Beneficiaries and
administrators of qualified retirement plans should consider and consult their
tax advisor concerning whether the Death Benefit payable under the Contract
affects the qualified status of their retirement plan. 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
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the rules governing old H.R. 10 (Keogh) Plans, as well as by corporate plans.
Such retirement plans may permit the purchase of the Qualified Contracts to
provide benefits under the plans. Employers intending to use the Qualified
Contracts in connection with such plans should seek qualified advice in
connection therewith.
TAX-SHELTERED ANNUITIES
Section 403(b) of the Code permits public school employees and employees of
certain types of charitable, educational and scientific organizations specified
in Section 501(c)(3) of the Code to purchase annuity contracts and, subject to
certain limitations, exclude the amount of purchase payments from gross income
for tax purposes. These annuity contracts are commonly referred to as "Tax-
Sheltered Annuities." Purchasers of the Qualified Contracts for such purposes
should seek qualified advice as to eligibility, limitations on permissible
amounts of Purchase Payments and tax consequences of distributions.
INDIVIDUAL RETIREMENT ACCOUNTS
Sections 219 and 408 of the Code permit eligible individuals to contribute
to an individual retirement program, including Simplified Employee Pension
Plans, Employer/Association of Employees Established Individual Retirement
Account Trusts and Simple Retirement Accounts, known as an Individual Retirement
Account ("IRA"). These IRA's are subject to limitations on the amount that may
be contributed, the persons who may be eligible, and on the time when
distributions may commence. In addition, certain distributions from some other
types of retirement plans may be placed on a tax-deferred basis in an IRA.
Contracts are offered by this Prospectus for IRA Trusts, but not for IRA's
established as "Individual Retirement Annuities" under Section 408(b) of the
Code. Sale of the Contracts for use with IRA's may be subject to special
requirements imposed by the Internal Revenue Service. Purchasers of the
Contracts for such purposes will be provided with such supplementary information
as may be required by the Internal Revenue Service or other appropriate agency,
and will have the right to revoke the Contract under certain circumstances as
described in the section of this Prospectus entitled "Right to Return Contract."
TEXAS OPTIONAL RETIREMENT PROGRAM
Under the terms of the Optional Retirement Program, if a participant makes
the required contribution the State of Texas will contribute a specified amount
to the participant's retirement account. If a participant does not commence the
second year of participation in the plan as a "faculty member" as defined in
Title 110B of the State of Texas Statutes, the Company will return the state's
contribution. If a participant does begin a second year of participation, the
employer's first year contributions will then be applied as a Purchase Payment
under the Qualified Contract, as will the employer's subsequent contributions.
The Attorney General of the State of Texas has ruled that under Title 110B
of the State of Texas Statutes, withdrawal benefits of contracts issued under
the Optional Retirement Program are available only in the event of a
participant's death, retirement, termination of employment due to total
disability, or other termination of employment in a Texas public institution of
higher education. A participant will not, therefore, be entitled to exercise the
right of withdrawal in order to receive the cash values credited to such
participant under the Qualified Contract unless one of the foregoing conditions
has been satisfied. The value of such Qualified Contracts may, however, be
transferred to other contracts or other carriers during the period of
participation in the Program.
ADMINISTRATION OF THE CONTRACTS
The Company performs certain administrative functions relating to the
Contracts, the Participant's Accounts, and the Variable Account. These functions
include, among other things, maintaining the books and records of the Variable
Account and the Sub-Accounts, and maintaining records of the name, address,
taxpayer identification number, Contract number, Participant's Account number,
type of Contract issued to each Owner, the status of the Contract's Accumulation
Account and each Participant's Account and other pertinent information necessary
to the administration and operation of the Contracts.
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DISTRIBUTION OF THE CONTRACTS
The offering of the Contracts is continuous. The Contracts will be sold by
licensed insurance agents in those states where the Contracts may be lawfully
sold. Such agents will be registered representatives of broker-dealers
registered under the Securities Exchange Act of 1934 who are members of the
National Association of Securities Dealers, Inc. and who have entered into
distribution agreements with the Company and the General Distributor. The
Contracts will be distributed by Clarendon Insurance Agency, Inc. ("Clarendon"),
One Sun Life Executive Park, Wellesley Hills, Massachusetts 02181, the General
Distributor, a wholly-owned subsidiary of the Company. Clarendon is registered
as a broker-
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dealer with the Commission under the Securities Exchange Act of 1934 and is a
member of the National Association of Securities Dealers, Inc. Clarendon also
acts as the general distributor of other individual and group combination
fixed/variable annuity contracts issued by the Company and its wholly-owned
subsidiary, Sun Life Insurance and Annuity Company of New York, and variable
life insurance contracts issued by the Company. Commissions and other
distribution compensation will be paid by the Company and will not be more than
5.5% of Purchase Payments. During 1995, 1996 and 1997 approximately $431,302,
$381,758 and $312,588, respectively, was paid to and retained by Clarendon in
connection with the distribution of the Contracts.
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 51.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
(IN 000'S)
Revenues
Premiums, annuity deposits and
other revenue................. $ 2,513,741 $ 2,131,939 $ 1,883,901 $ 1,997,525 $ 2,443,310
Net investment income and
realized gains................ 301,524 312,870 315,966 312,583 311,322
-------------- -------------- -------------- -------------- --------------
2,815,265 2,444,809 2,199,867 2,310,108 2,754,632
-------------- -------------- -------------- -------------- --------------
Benefits and expenses
Policyholder benefits.......... 2,469,215 2,149,145 1,995,208 2,102,290 2,515,320
Other expenses................. 206,066 175,342 150,937 186,892 232,365
-------------- -------------- -------------- -------------- --------------
2,675,281 2,324,487 2,146,145 2,289,182 2,747,685
-------------- -------------- -------------- -------------- --------------
Operating gain................... 139,984 120,322 53,722 20,926 6,947
Federal income tax expense
(benefit)...................... 10,742 (2,702) 17,807 19,469 3,691
-------------- -------------- -------------- -------------- --------------
Net income....................... $ 129,242 $ 123,024 $ 35,915 $ 1,457 $ 3,256
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
Assets........................... $ 15,927,045 $ 13,621,952 $ 12,359,683 $ 10,117,822 $ 9,179,090
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
Surplus notes.................... $ 565,000 $ 315,000 $ 650,000 $ 335,000 $ 335,000
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
</TABLE>
See Item 1 for the effect of the reinsurance agreements on net income.
See Note 1 to financial statements for changes in accounting principles and
reporting.
See discussion under Recent Reorganization, below.
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; nonetheless, 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.
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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, 1997, 4.6% of the Company's holdings of
bonds were rated below investment grade (i.e. below NAIC rating "1" or "2").
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 and due to
their long term nature are matched with products with long-term liability
durations. Properties for which market value is lower than cost adjusted for
depreciation (book value) are reported at market value. During 1997, the change
in the difference between the market value and book value for properties
reported at market value was $3,377,000.
Significant attention has been given to insurance companies' exposure to
mortgage loans secured by real estate. The Company had a mortgage portfolio of
$684,035,000 at December 31, 1997, representing 19.8% of cash and invested
assets. At December 31, 1996, mortgage loans represented 26.9% of cash and
invested assets. The Company underwrites commercial mortgages with a maximum
loan to value ratio of 75%. The Company, as a rule, invests only in properties
that are almost fully leased. The portfolio is diversified by region and by
property type. The level of arrears in the portfolio is substantially below the
industry average. At December 31, 1997, the Company's portfolio did not contain
any mortgage loans which were 60 days or more in arrears, which compares
favorably to the most recent industry delinquency ratio published by the
American Council of Life Insurance of 1.35%. The expense in the year for the
provision for losses and for losses on foreclosures was $711,000.
In the normal course of business, the Company makes commitments to purchase
investments at a future date. As of December 31, 1997 the Company had
outstanding mortgage commitments of $12,300,000 which will be funded during
1998.
On December 24, 1997, the Company transferred all of its outstanding shares
of MFS to its parent, Life Holdco, in the form of a dividend, valued at
$159,722,000. This dividend included an intercompany tax receivable of
$91,000,000. As a result of this transaction, the Company also realized a
$21,195,000 capital gain of undistributed earnings. See "Recent Reorganization,"
below, for a discussion of the effect of this transaction on ongoing operations.
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 $832,695,000 at December
31, 1997. The Company issued surplus notes during 1997 totaling $250,000,000 to
its parent, Life Holdco. The Company's management considers its surplus position
to be adequate.
RESULTS OF OPERATIONS
1997 COMPARED TO 1996
Net income from operations after dividends to policyholders and before
federal income taxes decreased by $2.9 million for the year ending December 31,
1997 as compared to December 31, 1996. Net income associated with the
reinsurance agreements with the ultimate parent increased $2.1 million in 1997.
The net income improvement in the reinsured business results primarily from
improved investment performance. Prior to reinsurance, earnings from the life
line of business remained relatively flat. The earnings of the Company's
retirement products and services line, which markets combination fixed/variable
annuities, decreased $5.0 million. During 1997, the Company focused its
marketing efforts on its fixed/variable annuity sales and discontinued sales of
its group pension contracts.
Total income increased by $347.9 million for the year ended December 31,
1997 as compared to December 31, 1996. Sales of combination fixed/variable
annuities (net of annuitizations) increased by
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$527.4 million primarily due to the introduction in late 1996, of a dollar cost
averaging (DCA) sales program. This program credits a bonus rate of interest on
the fixed annuity deposit during the first year. Purchase payments allocated to
the DCA program are deposited into the fixed account and systematically
transferred to the variable sub-accounts during the following year. Reinsurance
had the effect of increasing income by approximately $8.9 million. Premiums and
annuity considerations decreased by $6.6 million reflecting decreased
annuitizations. Sales of group pension guaranteed interest contracts decreased
by $133 million. Net investment income decreased by $33.5 million reflecting
both the decrease in the general account invested assets and $9.2 million
decrease in dividends from subsidiaries.
Benefits and expenses increased by $346.6 million for the year ended
December 31, 1997 as compared to December 31, 1996. Reinsurance had the effect
of increasing benefits and expenses by $2.7 million. Death benefits, annuity
payments and surrender benefits and other fund withdrawals increased by $338.4
million primarily as a result of increased surrenders and withdrawals from
separate account contracts for which the surrender charge had expired. Policy
reserves decreased by $23 million, reflecting decreased annuitizations and lower
increases in reserves for minimum death benefit guarantees. The decrease in
liability for premium and other deposit funds of $55.3 million reflects higher
surrenders of contracts described above. Commissions increased by $22.8 million,
reflecting the increase in total sales of combination fixed/variable annuities.
General expenses increased by $9.9 million reflecting an increase in salaries
due to staff increases associated with increased sales and non-recurring costs
associated with moving the retirement products and services facility to a new
location. Transfers to separate accounts increased by $53.9 million, reflecting
increased exchange activity out of the fixed account into the separate account,
associated with the DCA activity.
See "Recent Reorganization," below, for a discussion of the effect on
ongoing operations of the Company's transfer of its shares of MFS.
1996 COMPARED TO 1995
Net income from operations after dividends to policyholders 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 SLOC 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
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 precisely 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
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$1.2 million. Sales of group pension guaranteed investment contracts decreased
by $53 million as this market remained 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 fund 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 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.
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 in order to better manage
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 58% 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.
YEAR 2000 COMPLIANCE
The Company's business, financial condition, and results of operations could
be materially and adversely affected by the failure of its systems and
applications (or those either provided or operated by third-parties) to properly
operate or manage dates beyond the year 1999. However, the Company has
investigated the nature and extent of the work necessary to render its computer
systems capable of processing beyond the turn of the century ("Year 2000
compliant"), and has made substantial progress toward achieving this goal,
including upgrading and/or replacing existing systems. The Company expects that
its principal systems will be Year 2000 compliant by the end of 1998, leaving
1999 for extensive testing. While it is believed that these efforts do involve
substantial costs, the Company closely monitors associated costs and continues
to evaluate associated risks based on actual testing. Based on available
information, the Company believes that it will be able to manage its total Year
2000 transition without a material adverse effect on its business operations,
financial condition, or results of operations.
RECENT REORGANIZATION
Effective December 24, 1997, the Company and its ultimate parent, Sun Life
Assurance Company of Canada ("SLOC"), reorganized the corporate structure of a
part of their United States business operations, by completing, with the
approval of the Delaware Insurance Department, the establishment of a two-tier
holding company structure. In connection with this reorganization, Massachusetts
Financial Services Company ("MFS"), the registered investment adviser that
serves as adviser to the MFS Family of Funds, including the MFS/Sun Life Series
Trust and the Compass Variable Accounts, is no longer a subsidiary of the
Company, but remains under the control of Sun Life of Canada through two other
wholly-owned holding company subsidiaries. On December 24, 1997, the Company's
stock in MFS was transferred via a dividend
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to the Company's immediate parent, Sun Life of Canada (U.S.) Holdings, Inc.
There is no change in directors, officers, or day-to-day management of any of
the companies within this holding company system and, in the case of MFS, its
executive officers continue to report to the Chairman of Sun Life of Canada.
MFS, which was acquired by the Company in 1982, has approximately
$70,200,000,000 under management as of December 31, 1997. For the years ended
December 31, 1997, 1996 and 1995, the Company's Statutory Statements of
Operations reflected earnings attributable to the operations of MFS of
$80,114,000 (which includes dividends from MFS of $33,110,000, an income tax
benefit of $25,809,000, and a realized gain of $21,195,000), $79,263,000, and
$58,599,000, respectively. The reorganization is not expected to have any
significant effect on the ongoing operations of MFS or the Company. However,
future net income of the Company will not include the results of operations of
MFS.
ASSET/LIABILITY MANAGEMENT AND INFORMATION ABOUT MARKET RISK
The following discussion about the Company's risk management activities
includes "forward-looking statements" that involve risk and uncertainties.
Assets within the general account are segmented by product or groups of
products. This allows the Company to better manage assets relative to
liabilities. Asset management for each segment is conducted within the context
of an investment policy, reviewed each quarter with business unit managers to
ensure that investment policy remains appropriate, taking into account a
segment's liability characteristics. The review of investment policy includes
cash flow estimates, liquidity requirements and targets for asset mix, duration
and quality.
Market risks associated with investment portfolios supporting products that
are funded by separate accounts where results are not guaranteed and where the
policyholder assumes the risks are not included in this discussion.
All of the Company's assets are held for other than trading purposes and
generally fixed interest rate liabilities are supported by well diversified
portfolios of fixed interest investments including publicly issued and privately
placed bonds and commercial mortgage loans. Public bonds can include Treasuries,
corporates, money market instruments, Mortgage Backed Securities and Asset
Backed Securities. Credit risk is managed by the Company's underwriting
standards which have resulted in high average quality portfolios. For example,
the Company does not purchase below investment grade securities. Also, as a
result of investment policy, there is no foreign currency, commodity or equity
price risk exposure in the portfolios. However, changes in the level of domestic
interest rates will impact the market value of fixed interest assets and
liabilities. The management of interest rate risk exposure and immunization
strategies are discussed below.
Immunization strategies which minimize the loss from wide fluctuations in
interest rates are pursued in segments where the bulk of the liabilities arise
from the sale of products containing interest rate guarantees for certain terms.
These strategies are supported by investment and asset liability analytical
software acquired from outside vendors. The significant features of the
immunization framework include: an economic or market value basis for both
assets and liabilities; an option pricing methodology; the use of effective
duration and convexity to measure price sensitivity; the use of key rate
durations (KRDs) to capture interest rate exposure to different parts of the
yield curve and manage non-parallel curve movements; and active portfolio
management, including the use of derivatives (e.g., interest rate swaps) for
portfolio restructuring.
An Interest Rate Risk Committee meets monthly and after reviewing the
duration reports for various portfolios, market conditions and forecasts, the
committee develops asset management strategies for interest sensitive
portfolios. These strategies may involve managing assets to small intentional
mismatches, either at the total effective duration level or at certain KRDs but,
in any event, the overall duration gap between interest sensitive assets and
liabilities is managed within a tolerance range of +/- 0.25 effective duration.
The estimates presented here are from computer model simulations which,
because they are predictions about the future, contain a certain degree of
uncertainty. For example, there are algorithms for
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assumptions about policyholder behavior and asset cash flows and consequently
estimates of duration and market values which may or may not represent what
actually will occur. Also there is no provision in the estimates to incorporate
any management decisions which might be taken to mitigate against adverse
results. The Company is sufficiently comfortable with its interest rate risk
management process to feel the exposure to interest rate changes will not
materially affect the near-term financial position, results of operations or
cash flows of the Company.
The Company's fixed interest investments had an aggregate fair value at
December 31, 1997 of $3,276,174,000. Certain of the Company's general account
liabilities of $3,682,582,000 are categorized as financial instruments. The
portion of the liabilities so categorized had a carrying value of $1,958,229,000
and a fair value of $1,985,106,000 at December 31, 1997. Using its modeling and
analytical software the Company performed sensitivity analysis of its financial
instruments at December 31, 1997. Assuming an immediate increase of 100 basis
points in interest rates the net hypothetical decrease in the fair value of the
Company's assets is estimated to be $108,000,000. A corresponding decrease in
the fair value of the liabilities categorized as financial instruments is
estimated to be $56,000,000 at December 31, 1997.
SUN LIFE OF CANADA
On January 27, 1998, the Company's ultimate parent, SLOC, announced that its
Board of Directors had requested management to develop a plan to convert from a
mutual life insurance company into a publicly traded stock company through
demutualization. Management has put in place a full time task force which,
together with a worldwide team of actuarial, financial, and legal advisers, has
begun work on a plan. The Board of Directors will decide later in 1998 whether
to proceed with demutualization, following the completion of such plan.
Demutualization would require regulatory approval and approval by policyholders
of SLOC. Based on information known to date, the potential demutualization of
SLOC is not expected to have any significant impact on the Company.
REINSURANCE
The Company has agreements with SLOC which provide that SLOC 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 1997 had the
effect of decreasing net income from operations by $1,381,000.
Effective January 1, 1991 the Company entered into an agreement with SLOC
under which certain individual life insurance contracts issued by SLOC were
reinsured by the Company on a 90% coinsurance basis. Also effective January 1,
1991 the Company entered into an agreement with SLOC which provides that SLOC
will reinsure the mortality risks in excess of $500,000 per policy for the
individual life insurance contracts assumed by the Company in the reinsurance
agreement described above. Death benefits are reinsured on a yearly renewable
term basis. These agreements had the effect of increasing income from operations
by approximately $37,050,000 for the year ended December 31, 1997.
The life reinsurance assumed agreement requires the reinsurer to withhold
funds in an amount equal to the reserves assumed.
The Company has also executed reinsurance agreements with unaffiliated
companies. These agreements provide reinsurance of certain individual life
insurance contracts on a modified coinsurance basis under which all deficiency
reserves are ceded; as well as reinsurance for variable universal life on a
yearly renewable term basis for which the Company has a maximum retention of
$2,000,000.
RESERVES
In accordance with the life insurance laws and regulations under which the
Company operates, it is obligated to carry on its books, as liabilities,
actuarially determined reserves to meet its obligations on its outstanding
contracts. Reserves are based on mortality tables in general use in the United
States and are computed to equal amounts that, with additions from premiums to
be received, and with interest on such reserves compounded annually at certain
assumed rates, will be sufficient to meet the Company's policy obligations at
their maturities or in the event of an insured's death. In the accompanying
Financial Statements, these reserves are determined in accordance with statutory
regulations.
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INVESTMENTS
Of the Company's total assets of $15.9 billion at December 31, 1997, 71.7%
consisted of unitized and non-unitized separate account assets, 12.0% were
invested in bonds and similar securities, 4.3% in mortgages, 0.7% in
subsidiaries, 0.6% in real estate, and the remaining 10.7% 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, 1996 the Company ranked 38th among all
life insurance companies in the United States based upon total assets. Its
ultimate parent company, SLOC, ranked 19th. Best's Insurance Reports,
Life-Health Edition, 1997, assigned the Company and SLOC its highest
classification, A++, as of December 31, 1996. This rating was affirmed by A.M.
Best on November 24, 1997. Standard & Poor's and Duff & Phelps have assigned the
Company and SLOC their highest ratings for claims paying ability, AAA. Moody's
Investor Service, Inc. has assigned the Company an unsolicited rating of Aa1 for
financial strength.
EMPLOYEES
The Company and SLOC 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, 1997 the Company had 317 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 SLOC, 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, 64, 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.
DONALD A. STEWART, 51, 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.
- ------------------------
* Year Elected Director
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DAVID D. HORN, 56, Director (1985*)
56 Pinckney Street
Boston, Massachusetts 02114
He was formerly Senior Vice President and General Manager for the United
States of Sun Life Assurance Company of Canada, retiring in December 1997. He is
a Director of Sun Life Insurance and Annuity Company of New York; 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, 66, 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., Varian Associates, Inc., Diversified Collection
Services, Inc., the San Francisco Opera, and Barrick Gold Corporation.
JOHN S. LANE, 63, 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 Life Insurance and Annuity Company of New York.
RICHARD B. BAILEY, 71, 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.
M. COLYER CRUM, 65, Director (1986*)
104 Westcliff Street
Weston, Massachusetts 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, Cambridge Bancorp, Cambridge Trust, 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 Global 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., MuniYield Florida
Insured Fund, MuniYield Michigan Insured Fund, Inc., MuniYield New Jersey
Insured Fund, Inc., MuniYield Pennsylvania Fund, and Phaeton International N.V.
Prior to July, 1996, he was a Professor at the Harvard Business School.
S. CAESAR RABOY, 61, Senior Vice President, 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 and a Director of
Sun Life Insurance and Annuity Company of New York; Vice President and a
Director of Sun Life Financial Services Limited; and a Director of Sun Life of
Canada (U.S.) Distributors, Inc. and Clarendon Insurance Agency, Inc.
- ------------------------
* Year Elected Director
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JAMES M.A. ANDERSON, 48, Vice President, Investments (1998)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02181
He is Vice President, Investments, of Sun Life Assurance Company of Canada
and Sun Life Insurance and Annuity Company of New York; President and a Director
of Sun Capital Advisers, Inc.; Vice President and a Director of Sun Life of
Canada (U.S.) Holdings, Inc., Sun Life of Canada (U.S.) Financial Services
Holdings, Inc., and Sun Canada Financial Co.; Vice President, Investments, and a
Director of Sun Life of Canada (U.S.) Distributors, Inc; and a Director of
Massachusetts Casualty Insurance Company, New London Trust, F.S.B., and Sun
Benefit Services Company, Inc.
ROBERT A. BONNER, 53, Vice President, Individual Insurance (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, 47, Senior Vice President, General Manager and Director (1998*)
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; Senior Vice President and a Director of Sun
Life Insurance and Annuity Company of New York; Chairman and a Director of Sun
Life of Canada (U.S.) Distributors, Inc. and Sun Capital Advisers, Inc.;
President and a Director of Sun Life of Canada (U.S.) Holdings, Inc., Sun Life
Assurance Company of Canada -- U.S. Operations Holdings, Inc., Sun Life of
Canada (U.S.) Financial Services Holdings, Inc., Sun Canada Financial Co., Sun
Life of Canada (U.S.) SPE 97-1, Inc., and Sun Benefit Services Company; and a
Director of Clarendon Insurance Agency, Inc. and Massachusetts Casualty
Insurance Company.
L. BROCK THOMSON, 56, 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 Life of Canada
(U.S.) Distributors, Inc., Sun Benefit Services Company, Inc., Sun Life
Insurance and Annuity Company of New York, and Clarendon Insurance Agency, Inc.;
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 of Sun Life Assurance Company of Canada; Vice
President, Controller and Actuary of Sun Life Insurance and Annuity Company of
New York; Vice President and a Director of Sun Life of Canada (U.S.) Holdings,
Inc., Sun Canada Financial Co., Sun Life of Canada (U.S.) Distributors, Inc.,
Sun Life of Canada (U.S.) Financial Services Holdings, Inc., Sun Life Assurance
Company of Canada -- U.S. Operations Holdings, Inc.; Vice President, Treasurer
and a Director of Sun Capital Advisers, Inc.; Treasurer and a Director of Sun
Life of Canada (U.S.) SPE 97-1, Inc.; and a Director of Clarendon Insurance
Agency, Inc., and Sun Benefit Services Company, Inc.
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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; Assistant Vice President and Secretary of Sun
Life Insurance and Annuity Company of New York; and Secretary of Sun Life of
Canada (U.S.) Holdings, Inc., Sun Life of Canada (U.S.) Distributors, Inc., Sun
Life of Canada (U.S.) Financial Services Holdings, Inc., Sun Life Assurance
Company of Canada -- U.S. Operations Holdings, Inc., Sun Life of Canada (U.S.)
SPE 97-1, Inc., Sun Canada Financial Co., and Sun Capital Advisers, Inc., and
Sun Benefit Services Company, Inc.; and Assistant Secretary of Clarendon
Insurance Agency, Inc.
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 1997
totalled $824,000.
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 $8,000 per year, plus $1,000 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 of Canada (U.S.) Holdings,
Inc., One Sun Life Executive Park, Wellesley Hills, Massachusetts 02181, which
is in turn a wholly-owned subsidiary of Sun Life Assurance Company of Canada --
U.S. Operations Holdings, Inc., a wholly-owned subsidiary of Sun Life Assurance
Company of Canada.
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.
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Under insurance guaranty fund laws in most states, insurers doing business
therein can be assessed (up to prescribed limits) for policyholder losses
incurred by insolvent companies. The amount of any future assessments of the
Company under these laws cannot be reasonably estimated. However, most of these
laws do provide that an assessment may be excused or deferred if it would
threaten an insurer's own financial strength and many permit the deduction of
all or a portion of any such assessment from any future premium or similar taxes
payable.
Although the federal government generally does not directly regulate the
business of insurance, federal initiatives often have an impact on the business
in a variety of ways. Current and proposed federal measures which may
significantly affect the insurance business include employee benefit regulation,
removal of barriers preventing banks from engaging in the insurance business,
tax law changes affecting the taxation of insurance companies, the tax treatment
of insurance products and its impact on the relative desirability of various
personal investment vehicles.
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.
ACCOUNTANTS
The financial statements of the Variable Account for the year ended December
31, 1997 and the statutory financial statements of the Company for the years
ended December 31, 1997, 1996 and 1995 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 (the "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.
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SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT D
STATEMENT OF CONDITION-- December 31, 1997
<TABLE>
<CAPTION>
ASSETS:
<S> <C> <C> <C>
Investments in mutual funds: Shares Cost Value
---------- ------------ ------------
Massachusetts Investors Trust
("MIT")*............................. 2,566,191 $ 35,973,786 $ 44,954,184
Massachusetts Investors Growth Stock
Fund ("MIG")*........................ 1,260,336 14,191,936 15,655,513
MFS Total Return Fund ("MTR")*........ 2,367,141 34,452,574 37,448,566
MFS Growth Opportunities Fund
("MGO")*............................. 310,025 4,100,632 4,315,629
MFS Bond Fund ("MFB")*................ 203,087 2,652,888 2,765,166
MFS World Governments Fund ("MWG")*... 197,529 2,229,092 2,141,903
MFS/Sun Life Series Trust:
Capital Appreciation Series
("CAS")............................ 1,238,336 38,570,681 49,704,867
Government Securities Series
("GSS")............................ 924,758 11,626,944 12,059,410
High Yield Series ("HYS")........... 623,498 5,418,842 6,054,623
Money Market Series ("MMS")......... 6,341,994 6,341,994 6,341,994
------------ ------------
$155,559,369 $181,441,855
------------
------------
<CAPTION>
LIABILITIES:
<S> <C> <C> <C>
Payable to sponsor................................................ 1,358
------------
Net Assets.................................................. $181,440,497
------------
------------
</TABLE>
NET ASSETS:
<TABLE>
<CAPTION>
Applicable to Owners of
Deferred Variable Annuity Contracts Reserve for
----------------------------------- Variable
Units Unit Value Value Annuities Total
--------- ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
MIT-Level 2................... 668,603 $ 44.1981 $ 29,541,406 $ -- $ 29,541,406
MIT-Level 3................... 347,926 44.5374 15,412,778 -- 15,412,778
MIG-Level 2................... 225,178 43.9157 9,888,833 -- 9,888,833
MIG-Level 3................... 118,801 48.5502 5,766,680 -- 5,766,680
MTR-Level 2................... 759,684 33.2755 25,226,540 -- 25,226,540
MTR-Level 3................... 403,015 30.3501 12,221,632 -- 12,221,632
MTR-Level 4................... 17 23.1768 394 -- 394
MGO-Level 2................... 100,623 32.3990 3,278,893 -- 3,278,893
MGO-Level 3................... 29,668 34.7993 1,036,736 -- 1,036,736
MFB-Level 2................... 86,309 21.1171 1,853,463 -- 1,853,463
MFB-Level 3................... 41,360 21.3778 911,703 -- 911,703
MWG-Level 2................... 50,083 21.6012 1,081,666 -- 1,081,666
MWG-Level 3................... 55,415 19.1324 1,060,237 -- 1,060,237
CAS-Level 2................... 680,351 43.3190 29,464,142 129,273 29,593,415
CAS-Level 3................... 431,268 46.0988 19,875,434 7,478 19,882,912
CAS-Level 4................... 5,247 44.9674 228,881 -- 228,881
GSS-Level 2................... 377,706 20.1019 7,590,175 3,257 7,593,432
GSS-Level 3................... 225,343 19.5696 4,411,356 4,816 4,416,172
GSS-Level 4................... 2,450 19.3101 47,992 -- 47,992
HYS-Level 2................... 161,891 24.6550 3,991,546 2,929 3,994,475
HYS-Level 3................... 89,331 22.9753 2,053,428 4,455 2,057,883
HYS-Level 4................... 102 22.4774 2,292 -- 2,292
MMS-Level 2................... 246,919 15.8347 3,904,270 2,712 3,906,982
MMS-Level 3................... 158,492 14.7470 2,335,608 -- 2,335,608
MMS-Level 4................... 6,803 14.4723 99,492 -- 99,492
------------ ----------- ------------
Net Assets....................................... $181,300,730 $154,920 $181,440,497
------------ ----------- ------------
------------ ----------- ------------
</TABLE>
*Investments are made in Class A shares of the Fund.
See notes to financial statements
51
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT D
STATEMENTS OF OPERATIONS-- Year Ended December 31, 1997
<TABLE>
<CAPTION>
MIT MIG MTR MGO MFB MWG
Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account
----------- ----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
INCOME AND EXPENSES:
Dividend income and capital gain
distributions received............... $ 3,576,267 $ 2,503,163 $ 4,775,114 $ 540,786 $ 314,816 $ 102,827
Mortality and expense risk charges.... 584,251 179,472 528,249 53,591 48,523 31,794
----------- ----------- ----------- ----------- ------------ -----------
Net investment income............. $ 2,992,016 $ 2,323,691 $ 4,246,865 $ 487,195 $ 266,293 $ 71,033
----------- ----------- ----------- ----------- ------------ -----------
REALIZED AND UNREALIZED GAINS (LOSSES):
Realized gains (losses) on investment
transactions:
Proceeds from sales................. $29,532,831 $ 7,350,937 $27,407,019 $ 1,943,627 $ 3,888,216 $1,453,186
Cost of investments sold............ 21,338,109 6,174,599 23,014,779 1,441,879 3,748,442 1,473,275
----------- ----------- ----------- ----------- ------------ -----------
Net realized gains (losses)....... $ 8,194,722 $ 1,176,338 $ 4,392,240 $ 501,748 $ 139,774 $ (20,089)
----------- ----------- ----------- ----------- ------------ -----------
Net unrealized appreciation
(depreciation) on investments:
End of year......................... $ 8,980,397 $ 1,463,577 $ 2,995,992 $ 214,997 $ 112,279 $ (87,189)
Beginning of year................... 7,387,121 (734,918) 3,660,194 339,931 131,161 (5,732)
----------- ----------- ----------- ----------- ------------ -----------
Change in unrealized appreciation
(depreciation)................... $ 1,593,276 $ 2,198,495 $ (664,202) $ (124,934) $ (18,882) $ (81,457)
----------- ----------- ----------- ----------- ------------ -----------
Realized and unrealized gains
(losses)........................... $ 9,787,998 $ 3,374,833 $ 3,728,038 $ 376,814 $ 120,892 $ (101,546)
----------- ----------- ----------- ----------- ------------ -----------
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS............................. $12,780,014 $ 5,698,524 $ 7,974,903 $ 864,009 $ 387,185 $ (30,513)
----------- ----------- ----------- ----------- ------------ -----------
----------- ----------- ----------- ----------- ------------ -----------
</TABLE>
<TABLE>
<CAPTION>
CAS GSS HYS MMS
Sub-Account Sub-Account Sub-Account Sub-Account Total
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
INCOME AND EXPENSES:
Dividend income and capital gain
distributions received............... $ 4,746,173 $ 1,501,159 $ 647,242 $ 520,316 $ 19,227,863
Mortality and expense risk charges.... 619,019 214,567 96,313 118,704 2,474,483
----------- ----------- ----------- ----------- ------------
Net investment income............. $ 4,127,154 $ 1,286,592 $ 550,929 $ 401,612 $ 16,753,380
----------- ----------- ----------- ----------- ------------
REALIZED AND UNREALIZED GAINS (LOSSES):
Realized gains on investment
transactions:
Proceeds from sales................. $22,063,515 $15,612,388 $ 5,935,864 $15,510,305 $130,697,888
Cost of investments sold............ 15,738,062 15,549,778 5,420,620 15,510,305 109,409,848
----------- ----------- ----------- ----------- ------------
Net realized gains................ $ 6,325,453 $ 62,610 $ 515,244 $ -- $ 21,288,040
----------- ----------- ----------- ----------- ------------
Net unrealized appreciation on
investments:
End of year......................... $11,134,186 $ 432,466 $ 635,781 $ -- $ 25,882,486
Beginning of year................... 10,533,155 452,216 666,274 -- 22,429,402
----------- ----------- ----------- ----------- ------------
Change in unrealized
appreciation..................... $ 601,031 $ (19,750) $ (30,493) $ -- $ 3,453,084
----------- ----------- ----------- ----------- ------------
Realized and unrealized gains....... $ 6,926,484 $ 42,860 $ 484,751 $ -- $ 24,741,124
----------- ----------- ----------- ----------- ------------
INCREASE IN NET ASSETS FROM
OPERATIONS............................. $11,053,638 $ 1,329,452 $ 1,035,680 $ 401,612 $ 41,494,504
----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ------------
</TABLE>
See notes to financial statements
52
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT D
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
MIT MIG MTR
Sub-Account Sub-Account Sub-Account
-------------------------- ------------------------ --------------------------
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
-------------------------- ------------------------ --------------------------
1997 1996 1997 1996 1997 1996
------------ ------------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income........................ $ 2,992,016 $ 4,320,604 $ 2,323,691 $ 3,076,432 $ 4,246,865 $ 4,866,763
Net realized gains (losses).................. 8,194,722 1,322,346 1,176,338 (187,382) 4,392,240 2,787,930
Net unrealized gains (losses)................ 1,593,276 4,752,859 2,198,495 (390,114) (664,202) (1,349,654)
------------ ------------ ----------- ----------- ------------ ------------
Increase in net assets from operations... $ 12,780,014 $ 10,395,809 $ 5,698,524 $ 2,498,936 $ 7,974,903 $ 6,305,039
------------ ------------ ----------- ----------- ------------ ------------
PARTICIPANT TRANSACTIONS:
Accumulation Activity:
Purchase payments received................. $ 7,414,274 $ 8,484,377 $ 1,659,301 $ 2,166,246 $ 6,596,639 $ 9,144,366
Net transfers between Sub-Accounts and
Fixed Account............................. 926,030 818,874 277,942 44,987 (1,493,129) (1,402,954)
Withdrawals, surrenders, annuitizations,
and contract charges...................... (26,661,131) (15,324,516) (5,570,136) (3,595,513) (25,159,273) (17,519,924)
------------ ------------ ----------- ----------- ------------ ------------
Net accumulation activity................ $(18,320,827) $ (6,021,265) $(3,632,893) $(1,384,280) $(20,055,763) $ (9,778,512)
------------ ------------ ----------- ----------- ------------ ------------
Annuitization Activity:
Adjustments to annuity reserve............. $ -- $ 214 $ -- $ -- $ -- $ 217
------------ ------------ ----------- ----------- ------------ ------------
Net annuitization activity............... $ -- $ 214 $ -- $ -- $ -- $ 217
------------ ------------ ----------- ----------- ------------ ------------
Decrease in net assets from participant
transactions................................ $(18,320,827) $ (6,021,051) $(3,632,893) $(1,384,280) $(20,055,763) $ (9,778,295)
------------ ------------ ----------- ----------- ------------ ------------
Increase (decrease) in net assets.......... $ (5,540,813) $ 4,374,758 $ 2,065,631 $ 1,114,656 $(12,080,860) $ (3,473,256)
NET ASSETS:
Beginning of year............................ 50,494,997 46,120,239 13,589,882 12,475,226 49,529,426 53,002,682
------------ ------------ ----------- ----------- ------------ ------------
End of year.................................. $ 44,954,184 $ 50,494,997 $15,655,513 $13,589,882 $ 37,448,566 $ 49,529,426
------------ ------------ ----------- ----------- ------------ ------------
------------ ------------ ----------- ----------- ------------ ------------
<CAPTION>
MG0 MFB MWG
Sub-Account Sub-Account Sub-Account
-------------------------- ------------------------ --------------------------
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
-------------------------- ------------------------ --------------------------
1997 1996 1997 1996 1997 1996
------------ ------------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income........................ $ 487,195 $ 408,265 $ 266,293 $ 336,345 $ 71,033 $ 43,609
Net realized gains (losses).................. 501,748 255,782 139,774 (79,670) (20,089) (231,857)
Net unrealized gains (losses)................ (124,934) 185,013 (18,882) (109,340) (81,457) 306,316
------------ ------------ ----------- ----------- ------------ ------------
Increase (decrease) in net assets from
operations.............................. $ 864,009 $ 849,060 $ 387,185 $ 147,335 $ (30,513) $ 118,068
------------ ------------ ----------- ----------- ------------ ------------
PARTICIPANT TRANSACTIONS:
Accumulation Activity:
Purchase payments received................. $ 671,571 $ 757,184 $ 614,719 $ 822,947 $ 410,460 $ 490,349
Net transfers between Sub-Accounts and
Fixed Account............................. 19,958 361 (247,713) (213,342) (339,526) (178,620)
Withdrawals, surrenders, annuitizations,
and contract charges...................... (1,534,890) (1,699,049) (3,388,353) (1,301,908) (1,019,371) (1,256,945)
------------ ------------ ----------- ----------- ------------ ------------
Net accumulation activity................ $ (843,361) $ (941,504) $(3,021,347) $ (692,303) $ (948,437) $ (945,216)
------------ ------------ ----------- ----------- ------------ ------------
Increase (decrease) in net assets.......... $ 20,648 $ (92,444) $(2,634,162) $ (544,968) $ (978,950) $ (827,148)
NET ASSETS:
Beginning of year............................ 4,294,981 4,387,425 5,399,328 5,944,296 3,120,853 3,948,001
------------ ------------ ----------- ----------- ------------ ------------
End of year.................................. $ 4,315,629 $ 4,294,981 $ 2,765,166 $ 5,399,328 $ 2,141,903 $ 3,120,853
------------ ------------ ----------- ----------- ------------ ------------
------------ ------------ ----------- ----------- ------------ ------------
</TABLE>
See notes to financial statements
53
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT D
STATEMENTS OF CHANGES IN NET ASSETS-- continued
<TABLE>
<CAPTION>
CAS GSS HYS
Sub-Account Sub-Account Sub-Account
-------------------------- -------------------------- -------------------------
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
-------------------------- -------------------------- -------------------------
1997 1996 1997 1996 1997 1996
------------ ------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income................. $ 4,127,154 $ 3,233,560 $ 1,286,592 $ 1,046,631 $ 550,929 $ 596,805
Net realized gains.................... 6,325,453 2,669,928 62,610 307,873 515,244 145,630
Net unrealized gains (losses)......... 601,031 2,455,689 (19,750) (1,354,993) (30,493) 179,227
------------ ------------ ------------ ------------ ----------- ------------
Increase (decrease) in net assets
from operations.................. $ 11,053,638 $ 8,359,177 $ 1,329,452 $ (489) $ 1,035,680 $ 921,662
------------ ------------ ------------ ------------ ----------- ------------
PARTICIPANT TRANSACTIONS:
Accumulation Activity:
Purchase payments received.......... $ 6,447,175 $ 6,939,855 $ 2,574,283 $ 3,634,713 $ 1,164,890 $ 1,337,369
Net transfers between Sub-Accounts
and Fixed Account.................. 865,318 1,007,214 (1,799,091) (2,176,253) (275,269) (690,101)
Withdrawals, surrenders,
annuitizations, and contract
charges............................ (18,586,687) (7,071,186) (13,777,389) (5,692,379) (5,055,478) (1,364,716)
------------ ------------ ------------ ------------ ----------- ------------
Net accumulation activity......... $(11,274,194) $ 875,883 $(13,002,197) $ (4,233,919) $(4,165,857) $ (717,448)
------------ ------------ ------------ ------------ ----------- ------------
Annuitization Activity:
Annuitizations...................... $ -- $ 102,853 $ -- $ --
Annuity payments and contract
charges............................ (12,103) (8,376) (2,042) (2,033) (1,847) (1,716)
Adjustments to annuity reserve...... (7,554) 365 (170) (82) (12) (40)
------------ ------------ ------------ ------------ ----------- ------------
Net annuitization activity........ $ (19,657) $ 94,842 $ (2,212) $ (2,115) $ (1,859) $ (1,756)
------------ ------------ ------------ ------------ ----------- ------------
Increase (decrease) in net assets from
participant transactions............. $(11,293,851) $ 970,725 $(13,004,409) $ (4,236,034) $(4,167,716) $ (719,204)
------------ ------------ ------------ ------------ ----------- ------------
Increase (decrease) in net assets... $ (240,213) $ 9,329,902 $(11,674,957) $ (4,236,523) $(3,132,036) $ 202,458
NET ASSETS:
Beginning of year..................... 49,945,421 40,615,519 23,732,553 27,969,076 9,186,686 8,984,228
------------ ------------ ------------ ------------ ----------- ------------
End of year........................... $ 49,705,208 $ 49,945,421 $ 12,057,596 $ 23,732,553 $ 6,054,650 $ 9,186,686
------------ ------------ ------------ ------------ ----------- ------------
------------ ------------ ------------ ------------ ----------- ------------
<CAPTION>
MMS
Sub-Account Total
-------------------------- ----------------------------
Year Ended Year Ended
December 31, December 31,
-------------------------- ----------------------------
1997 1996 1997 1996
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income................. $ 401,612 $ 521,549 $ 16,753,380 $ 18,450,563
Net realized gains.................... -- -- 21,288,040 6,990,580
Net unrealized gains (losses)......... -- -- 3,453,084 4,675,003
------------ ------------ ------------- -------------
Increase (decrease) in net assets
from operations.................. $ 401,612 $ 521,549 $ 41,494,504 $ 30,116,146
------------ ------------ ------------- -------------
PARTICIPANT TRANSACTIONS:
Accumulation Activity:
Purchase payments received.......... $ 1,325,566 $ 2,033,183 $ 28,878,878 $ 35,810,589
Net transfers between Sub-Accounts
and Fixed Account.................. 210,852 2,860,850 (1,854,628) 71,016
Withdrawals, surrenders,
annuitizations, and contract
charges............................ (8,920,064) (7,496,733) (109,672,772) (62,322,869)
------------ ------------ ------------- -------------
Net accumulation activity......... $ (7,383,646) $ (2,602,700) $ (82,648,522) $ (26,441,264)
------------ ------------ ------------- -------------
Annuitization Activity:
Annuitizations...................... $ -- $ -- $ -- $ 102,853
Annuity payments and contract
charges............................ (221) (222) (16,213) (12,347)
Adjustments to annuity reserve...... (9) (16) (7,745) 658
------------ ------------ ------------- -------------
Net annuitization activity........ $ (230) $ (238) $ (23,958) $ 91,164
------------ ------------ ------------- -------------
Increase (decrease) in net assets from
participant transactions............. $ (7,383,876) $ (2,602,938) $ (82,672,480) $ (26,350,100)
------------ ------------ ------------- -------------
Increase (decrease) in net assets... $ (6,982,264) $ (2,081,389) $ (41,177,976) $ 3,766,046
NET ASSETS:
Beginning of year..................... 13,324,346 15,405,735 222,618,473 218,852,427
------------ ------------ ------------- -------------
End of year........................... $ 6,342,082 $ 13,324,346 $ 181,440,497 $ 222,618,473
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
</TABLE>
See notes to financial statements
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION
Sun Life of Canada (U.S.) Variable Account D (the "Variable Account"), a
separate account of Sun Life Assurance Company of Canada (U.S.), the Sponsor,
was established on August 20, 1985 as a funding vehicle for the variable portion
of group combination fixed/variable annuities. The Variable Account is
registered with the Securities and Exchange Commission under the Investment
Company Act of 1940 as a unit investment trust.
The assets of the Variable Account are divided into Sub-Accounts. Each
Sub-Account is invested in shares of a specific mutual fund or series thereof
selected by contract owners from among available mutual funds (the "Funds")
advised by Massachusetts Financial Services Company (MFS), an affiliate of the
Sponsor.
54
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT D
NOTES TO FINANCIAL STATEMENTS -- continued
(2) SIGNIFICANT ACCOUNTING POLICIES
GENERAL
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
INVESTMENT VALUATIONS
Investments in the Funds are recorded at their net asset value. Realized
gains and losses on sales of shares of the Funds are determined on the
identified cost basis. Dividend income and capital gain distributions received
by the Sub-Accounts are reinvested in additional Fund shares and are recognized
on the ex-dividend date.
Exchanges between Sub-Accounts requested by contract owners are recorded in the
new Sub-Account upon receipt of the redemption proceeds.
FEDERAL INCOME TAX STATUS
The operations of the Variable Account are part of the operations of the
Sponsor and are not taxed separately. The Variable Account is not taxed as a
regulated investment company. The Sponsor qualifies for the federal income tax
treatment granted to life insurance companies under Subchapter L of the Internal
Revenue Code. Under existing federal income tax law, investment income and
capital gains earned by the Variable Account on contract owner reserves are not
subject to tax.
(3) CONTRACT CHARGES
A mortality and expense risk charge is deducted from the Variable Account at the
end of each valuation period for the mortality and expense risks assumed by the
Sponsor. These deductions are transferred periodically to the Sponsor. The rate
of this deduction varies based on total purchase payments credited to all
participants' accounts under a contract as follows:
<TABLE>
<CAPTION>
Mortality
and Expense
Level Purchase Payments Risk Charge
- ---------- --------------------------------- ------------
<C> <S> <C>
1 $ up to $250,000 1.30 %
2 250,000 to 1,499,999 1.25 %
3 1,500,000 to 4,999,999 1.10 %
4 5,000,000 and over 0.95 %
</TABLE>
Since 1987 the Sponsor has reduced the Level 1 mortality and expense risk charge
to 1.25% and, therefore, has been accounting for all Level 1 units as Level 2
units.
Each year on the account anniversary, an account administration fee is deducted
from the participant's account to cover administrative expenses relating to the
contract and the participant's account. The amount of the fee varies from $12 to
$25 and is based on total purchase payments credited to all participants'
accounts under a contract. After the annuity commencement date the account fee
is deducted pro rata from each annuity payment made during the year.
The Sponsor does not deduct a sales charge from purchase payments. However, a
withdrawal charge (contingent deferred sales charge) may be deducted to cover
certain expenses relating to the sale of the contract. In no event shall the
aggregate withdrawal charges exceed 6% of the purchase payments made under the
contract.
(4) ANNUITY RESERVES
Annuity reserves are calculated using the 1983 Individual Annuitant Mortality
Table and an assumed interest rate of 4%. Required adjustments to the reserve
are accomplished by transfers to or from the Sponsor.
55
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT D
NOTES TO FINANCIAL STATEMENTS -- continued
(5) UNIT ACTIVITY FROM PARTICIPANT TRANSACTIONS
<TABLE>
<CAPTION>
Units Transferred Units Withdrawn,
Units Outstanding Between Sub-Accounts Surrendered and Units Outstanding
Beginning of Year Units Purchased and Fixed Account Annuitized End of Year
--------------------- ----------------- ---------------------- ---------------------- ------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31, December 31,
--------------------- ----------------- ---------------------- ---------------------- ------------------------
Sub-Accounts 1997 1996 1997 1996 1997 1996 1997 1996 1997 1996
--------------- ---------- ---------- -------- -------- ---------- ---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MIT-Level 2 1,035,562 1,325,017 119,997 213,227 (78,771) (137,127) (408,185) (365,555) 668,603 1,035,562
MIT-Level 3 374,426 317,412 56,588 54,820 87,556 146,277 (170,644) (144,083) 347,926 374,426
MIT-Level 4 101,111 59,347 20,016 20,336 13,893 22,513 (135,020) (1,085) -- 101,111
MIG-Level 2 286,668 382,429 24,657 52,364 (6,604) (39,167) (79,543) (108,958) 225,178 286,668
MIG-Level 3 146,881 108,010 18,311 23,827 9,095 35,946 (55,486) (20,902) 118,801 146,881
MIG-Level 4 7,527 4,837 995 696 5,279 2,133 (13,801) (139) -- 7,527
MTR-Level 2 1,220,754 1,642,626 122,825 250,489 (95,836) (147,071) (488,059) (525,290) 759,684 1,220,754
MTR-Level 3 447,243 423,134 69,668 71,193 59,761 116,241 (173,657) (163,325) 403,015 447,243
MTR-Level 4 212,122 177,310 45,961 56,047 (11,935) (16,491) (246,131) (4,744) 17 212,122
MGO-Level 2 128,456 172,600 14,964 26,515 (2,534) (6,753) (40,263) (63,906) 100,623 128,456
MGO-Level 3 27,750 21,847 6,533 3,963 3,047 5,491 (7,662) (3,551) 29,668 27,750
MGO-Level 4 3,601 2,467 641 684 (624) 578 (3,618) (128) -- 3,601
MFB-Level 2 119,172 157,192 13,246 20,762 (6,694) (16,500) (39,415) (42,282) 86,309 119,172
MFB-Level 3 74,041 78,816 7,182 8,920 (1,215) 11,059 (38,648) (24,754) 41,360 74,041
MFB-Level 4 98,114 90,684 12,307 17,356 (5,773) (7,565) (104,648) (2,361) -- 98,114
MWG-Level 2 80,813 128,962 7,813 11,616 (14,242) (8,539) (24,301) (51,226) 50,083 80,813
MWG-Level 3 70,547 67,461 13,242 13,383 (2,198) 28 (26,176) (10,325) 55,415 70,547
CAS-Level 2 779,654 834,945 78,476 117,027 (28,613) (21,021) (149,166) (151,297) 680,351 779,654
CAS-Level 3 408,890 362,964 55,556 62,771 45,603 36,328 (78,781) (53,173) 431,268 408,890
CAS-Level 4 178,569 143,089 22,562 27,585 (180) 15,496 (195,704) (7,601) 5,247 178,569
GSS-Level 2 496,576 726,698 51,339 87,437 (55,743) (142,794) (114,466) (174,765) 377,706 496,576
GSS-Level 3 344,849 309,543 43,387 48,880 7,712 109,394 (170,605) (122,968) 225,343 344,849
GSS-Level 4 454,901 494,152 43,269 66,642 (48,251) (86,710) (447,469) (19,183) 2,450 454,901
HYS-Level 2 177,022 213,240 20,630 27,922 (9,930) (20,980) (25,831) (43,160) 161,891 177,022
HYS-Level 3 97,148 99,034 8,624 8,703 9,157 5,818 (25,598) (16,407) 89,331 97,148
HYS-Level 4 163,622 160,381 23,922 31,305 (11,531) (19,915) (175,911) (8,149) 102 163,622
MMS-Level 2 364,557 530,592 52,788 84,555 32,929 139,608 (203,355) (390,198) 246,919 364,557
MMS-Level 3 281,464 265,443 19,839 31,809 11,873 88,273 (154,684) (104,061) 158,492 281,464
MMS-Level 4 271,307 296,406 15,511 23,924 (31,926) (34,336) (248,089) (14,687) 6,803 271,307
</TABLE>
56
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Participants in Sun Life of Canada (U.S.) Variable Account D
and the Board of Directors of Sun Life Assurance Company of Canada (U.S.):
We have audited the accompanying statement of condition of Sun Life of Canada
(U.S.) Variable Account D (the "Variable Account") as of December 31, 1997, the
related statements of operations for the year then ended and the statements of
changes in net assets for the years ended December 31, 1997 and 1996. 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, 1997 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,
1997, 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 6, 1998
57
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
STATUTORY STATEMENTS OF ADMITTED ASSETS, LIABILITIES AND
CAPITAL STOCK AND SURPLUS
DECEMBER 31, 1997 AND 1996 (IN 000'S)
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
ADMITTED ASSETS
Bonds $ 1,910,699 $ 2,170,103
Common stocks 117,229 144,043
Mortgage loans on real estate 684,035 938,932
Properties acquired in satisfaction of debt 22,475 23,391
Investment real estate 78,426 76,995
Policy loans 40,348 40,554
Cash and short-term investments 544,418 148,059
Other invested assets 55,716 51,378
Premiums and annuity considerations due and uncollected 9,203 11,282
Investment income due and accrued 39,279 68,191
Receivable from parent, subsidiaries and affiliates 28,825 40,829
Funds withheld on reinsurance assumed 982,653 878,798
Other assets 1,841 1,343
-------------- --------------
General account assets 4,515,147 4,593,898
Separate account assets
Unitized 9,068,021 6,919,219
Non-unitized 2,343,877 2,108,835
-------------- --------------
Total Admitted Assets $ 15,927,045 $ 13,621,952
-------------- --------------
-------------- --------------
LIABILITIES
Aggregate reserve for life policies and contracts $ 2,188,243 $ 2,099,980
Supplementary contracts 2,247 2,205
Policy and contract claims 2,460 2,108
Policyholders' dividends and coupons payable 32,500 27,500
Liability for premium and other deposit funds 1,450,705 1,898,309
Surrender values on cancelled policies 215 72
Interest maintenance reserve 33,830 28,675
Commissions to agents due or accrued 2,826 3,245
General expenses due or accrued 7,202 4,654
Transfers from Separate Accounts due or accrued (284,078) (232,743)
Taxes, licenses and fees accrued, excluding federal income taxes 105 342
Federal income taxes due or accrued 58,073 49,479
Unearned investment income 34 19
Amounts withheld or retained by company as agent or trustee 47 27
Remittances and items not allocated 1,363 1,359
Borrowed money 110,142 58,000
Asset valuation reserve 47,605 53,911
Payable for securities 27,104 22,177
Other liabilities 1,959 7,561
-------------- --------------
General account liabilities 3,682,582 4,026,880
Separate account liabilities
Unitized 9,067,891 6,919,094
Non-unitized 2,343,877 2,108,835
-------------- --------------
Total liabilities 15,094,350 13,054,809
-------------- --------------
CAPITAL STOCK AND SURPLUS
Capital stock par value $1,000; Authorized, 10,000 shares;
issued and outstanding, 5,900 shares 5,900 5,900
-------------- --------------
Surplus notes 565,000 315,000
Gross paid in and contributed surplus 199,355 199,355
Unassigned funds 62,440 46,888
-------------- --------------
Surplus 826,795 561,243
-------------- --------------
Total capital stock and surplus 832,695 567,143
-------------- --------------
Total Liabilities, Capital Stock and Surplus $ 15,927,045 $ 13,621,952
-------------- --------------
-------------- --------------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
58
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
STATUTORY STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN 000'S)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
INCOME:
Premiums and annuity considerations $ 270,700 $ 282,466 $ 279,407
Deposit-type funds 2,155,298 1,775,230 1,545,542
Considerations for supplementary
contracts without life
contingencies and dividend
accumulations 1,615 2,340 1,088
Net investment income 270,249 303,753 312,872
Amortization of interest maintenance
reserve 1,166 1,557 1,025
Net gain from operations from
Separate Accounts 5 -- --
Other income 86,123 71,903 57,864
---------- ---------- ----------
Total 2,785,156 2,437,249 2,197,798
---------- ---------- ----------
BENEFITS AND EXPENSES:
Death benefits 17,284 12,394 15,317
Annuity benefits 148,135 146,654 140,497
Surrender benefits and other fund
withdrawals 1,854,004 1,507,263 1,074,396
Interest on policy or contract funds 699 2,205 739
Payments on supplementary contracts
without life contingencies and of
dividend accumulations 1,687 2,120 1,888
Increase in aggregate reserves for
life and accident and health
policies and contracts 127,278 162,678 171,975
Increase (decrease) in liability for
premium and other deposit funds (447,603) (392,348) 13,553
Increase (decrease) in reserve for
supplementary contracts without
life contingencies and for dividend
and coupon accumulations 42 327 (663)
---------- ---------- ----------
Total 1,701,526 1,441,293 1,417,702
Commissions on premiums and annuity
considerations (direct business
only) 132,700 109,894 88,037
Commissions and expense allowances
on reinsurance assumed 17,951 18,910 22,012
General insurance expenses 47,102 37,206 34,580
Insurance taxes, licenses and fees,
excluding federal income taxes 7,790 8,431 7,685
Increase (decrease) in loading on
and cost of collection in excess of
loading on deferred and uncollected
premiums 523 901 (1,377)
Net transfers to separate accounts 734,373 678,663 551,784
---------- ---------- ----------
Total 2,641,965 2,295,298 2,120,423
---------- ---------- ----------
Net gain from operations before
dividends to policyholders and
federal income taxes 143,191 141,951 77,375
Dividends to policyholders 33,316 29,189 25,722
---------- ---------- ----------
Net gain from operations after
dividends to policyholders and
before federal income taxes 109,875 112,762 51,653
Federal income tax expense (benefit)
(excluding tax on capital gains) 10,742 (2,702) 17,807
---------- ---------- ----------
Net gain from operations after
dividends to policyholders and
federal income taxes and before
realized capital gains 99,133 115,464 33,846
Net realized capital gains less
capital gains tax and transfers to
the interest maintenance reserve 30,109 7,560 2,069
---------- ---------- ----------
NET INCOME $ 129,242 $ 123,024 $ 35,915
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
59
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
STATUTORY STATEMENTS OF CHANGES IN CAPITAL STOCK AND SURPLUS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN 000'S)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Capital and surplus, beginning of year $ 567,143 $ 792,452 $ 455,489
---------- ---------- ----------
Net income 129,242 123,024 35,915
Change in net unrealized capital gains 1,153 (1,715) 2,009
Change in non-admitted assets and related items (463) 67 (2,270)
Change in reserve on account of change in valuation basis 39,016 -- --
Change in asset valuation reserve 6,306 (11,812) (13,690)
Other changes in surplus in Separate Accounts Statement -- 100 (4,038)
Change in surplus notes 250,000 (335,000) 315,000
Dividends to stockholder (159,722) -- --
Miscellaneous gains in surplus 20 27 4,037
---------- ---------- ----------
Net change in capital and surplus for the year 265,552 (225,309) 336,963
---------- ---------- ----------
Capital and surplus, end of year $ 832,695 $ 567,143 $ 792,452
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
60
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
STATUTORY STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN 000'S)
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash Provided
Premiums, annuity considerations and
deposit funds received $ 2,427,554 $ 2,059,577 $ 1,826,456
Considerations for supplementary
contracts and dividend accumulations
received 1,615 2,340 1,088
Net investment income received 323,199 324,914 374,398
Other income received 81,701 88,295 25,348
----------- ----------- -----------
Total receipts 2,834,069 2,475,126 2,227,290
----------- ----------- -----------
Benefits paid (other than dividends) 2,020,615 1,671,483 1,231,936
Insurance expenses and taxes paid
(other than federal income and
capital gains taxes) 203,650 172,015 150,463
Net cash transferred to Separate
Accounts 785,708 755,605 568,188
Dividends paid to policyholders 28,316 22,689 17,722
Federal income tax (recoveries)
payments (excluding tax on capital
gains) 1,397 (15,363) (20,655)
Other--net 699 2,205 739
----------- ----------- -----------
Total payments 3,040,385 2,608,634 1,948,393
----------- ----------- -----------
Net cash from operations (206,316) (133,508) 278,897
----------- ----------- -----------
Proceeds from long-term investments
sold, matured or repaid (after
deducting taxes on capital gains of
$750,449, $1,554,873 and $8,610,951) 1,343,803 1,768,147 1,658,655
Issuance of surplus notes 250,000 (335,000) 315,000
Other cash provided 117,297 147,956 419,446
----------- ----------- -----------
Total cash provided 1,711,100 1,581,103 2,393,101
----------- ----------- -----------
Cash Applied
Cost of long-term investments acquired 773,721 1,318,880 1,749,714
Other cash applied 334,704 177,982 796,207
----------- ----------- -----------
Total cash applied 1,108,425 1,496,862 2,545,921
----------- ----------- -----------
Net change in cash and short-term
investments 396,359 (49,267) 126,077
Cash and short term investments
Beginning of year 148,059 197,326 71,249
----------- ----------- -----------
End of year $ 544,418 $ 148,059 $ 197,326
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
61
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
GENERAL
Sun Life Assurance Company of Canada (U.S.) (the "Company") is incorporated as a
life insurance company and is engaged in the sale of individual variable life
insurance, individual fixed and variable annuities, group fixed and variable
annuities and group pension contracts. The Company also underwrites a block of
individual life insurance business through a reinsurance contract with the
Company's ultimate parent, Sun Life Assurance Company of Canada ("SLOC"). SLOC
is a mutual life insurance company.
Effective May 1, 1997, the Company became a wholly-owned subsidiary of the newly
established Sun Life of Canada (U.S.) Holdings, Inc. ("Life Holdco"). On
December 18, 1997, Life Holdco became a wholly-owned subsidiary of the Sun Life
Assurance Company of Canada - U.S. Operations Holdings, Inc. ("US Holdco"). US
Holdco is a wholly-owned subsidiary of SLOC. Prior to December 18, 1997 Life
Holdco was a direct wholly-owned subsidiary of SLOC.
The Company, which is domiciled in the State of Delaware, prepares its financial
statements in accordance with statutory accounting practices prescribed or
permitted by the State of Delaware Insurance Department. Prescribed accounting
practices include practices described in a variety of publications of the
National Association of Insurance Commissioners ("NAIC"), as well as state laws,
regulations and general administrative rules. Permitted accounting practices
encompass all accounting practices not so prescribed. The permitted accounting
practices adopted by the Company are not material to the financial statements.
Prior to 1996, statutory accounting practices were recognized by the insurance
industry and the accounting profession as generally accepted accounting
principles for mutual life insurance companies and stock life insurance
companies wholly-owned by mutual life insurance companies. In April 1993, the
Financial Accounting Standards Board ("FASB") issued an interpretation (the
"Interpretation"), that became effective in 1996, which changed the previous
practice of mutual life insurance companies (and stock life insurance companies
that are wholly-owned subsidiaries of mutual life insurance companies) with
respect to utilizing statutory basis financial statements for general purposes,
in that it will no longer allow such financial statements to be described as
having been prepared in conformity with generally accepted accounting principles
("GAAP"). Consequently, these financial statements prepared in conformity with
statutory accounting practices as described above, vary from and are not
intended to present the Company's financial position, results of operations or
cash flow in conformity with generally accepted accounting principles. (See Note
19 for further discussion relative to the Company's basis of financial statement
presentation.) The effects on the financial statements of the variances between
the statutory basis of accounting and GAAP, although not reasonably
determinable, are presumed to be material.
INVESTED ASSETS AND RELATED RESERVES
Bonds are carried at cost adjusted for amortization of premium or accrual of
discount. Investments in non-insurance subsidiaries are carried on the equity
basis. Investments in insurance subsidiaries are carried at their statutory
surplus values. Mortgage loans acquired at a premium or discount are carried at
amortized values and other mortgage loans are carried at the amounts of the
unpaid balances. Real estate investments are carried at the lower of cost
adjusted for accumulated depreciation or appraised value, less encumbrances.
Short-term investments are carried at amortized cost, which approximates fair
value. Depreciation of buildings and improvements is calculated using the
straight-line method over the estimated useful life of the property, generally
40 to 50 years.
62
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED):
POLICY AND CONTRACT RESERVES
The reserves for life insurance and annuity contracts, developed by accepted
actuarial methods, have been established and maintained on the basis of
published mortality tables using assumed interest rates and valuation methods
that will provide reserves at least as great as those required by law and
contract provisions.
INCOME AND EXPENSES
For life and annuity contracts, premiums are recognized as revenues over the
premium paying period, whereas commissions and other costs applicable to the
acquisition of new business are charged to operations as incurred.
SEPARATE ACCOUNTS
The Company has established unitized separate accounts applicable to various
classes of contracts providing for variable benefits. Contracts for which funds
are invested in separate accounts include variable life insurance and individual
and group qualified and non-qualified variable annuity contracts.
Assets and liabilities of the separate accounts, representing net deposits and
accumulated net investment earnings less fees, held primarily for the benefit of
contract holders, are shown as separate captions in the financial statements.
Assets held in the separate accounts are carried at market value.
The Company has also established a non-unitized separate account for amounts
allocated to the fixed portion of certain combination fixed/variable deferred
annuity contracts. The assets of this account are available to fund general
account liabilities and general account assets are available to fund liabilities
of this account.
Gains (losses) from mortality experience and investment experience of the
separate accounts, not applicable to contract owners, are transferred to (from)
the general account. Accumulated gains (losses) that have not been transferred
are recorded as a payable (receivable) to (from) the general account. Amounts
payable to the general account of the Company were $284,078,000 in 1997 and
$232,743,000 in 1996.
CHANGES IN ACCOUNTING PRINCIPLES AND REPORTING
Prior to 1996, dividends paid to the Company by its subsidiaries and the
undistributed gains (losses) of those subsidiaries were included in net income
of the Company. For Annual Statement reporting, dividends were (and continue to
be) reported in net income while undistributed gains (losses) are reported
directly to surplus (as a separate component of unassigned surplus). As a
result, net income as reported in these financial statements is $2.5 million
less than net income reported in the Annual Statement in 1995. Effective for
1996, the Company changed its method of accounting for investments in
subsidiaries to conform with a preferable prescribed statutory accounting
practices used in the preparation of its Annual Statement. As a result of the
change, $5.7 million in undistributed losses of subsidiaries are reported
directly as a separate component of unassigned surplus rather than being
included in net income for the year ended December 31, 1996. The amounts as
reported in prior years have not been restated.
As described more fully in Note 10, during 1997 the Company changed certain
assumptions used in determining actuarial reserves.
63
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED):
OTHER
Preparation of the financial statements requires management to make estimates
and assumptions that affect reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
Certain prior year amounts have been reclassified to conform to amounts as
presented in the current year.
2. INVESTMENTS IN SUBSIDIARIES:
The Company owns all of the outstanding shares of Sun Life Insurance and Annuity
Company of New York ("Sun Life (N.Y.)"), Massachusetts Casualty Insurance
Company ("MCIC"), Sun Life of Canada (U.S.) Distributors, Inc. (formerly Sun
Investment Services Company) ("Sundisco"), New London Trust, F.S.B. ("NLT"), Sun
Life Financial Services Limited, ("SLFSL"), Sun Benefit Services Company, Inc.
("Sunbesco"), Sun Capital Advisers, Inc. ("Sun Capital"), and Sun Life Finance
Corporation ("Sunfinco").
On October 30, 1997, the Company established a wholly-owned special purpose
corporation, Sun Life of Canada (U.S.) SPE 97-1, Inc. (SPE 97-1). SPE 97-1 was
organized for the purpose of engaging in activities incidental to securitizing
mortgage loans.
Prior to December 24, 1997, the Company owned 93.6% of the outstanding shares of
Massachusetts Financial Services Company ("MFS"). On December 24, 1997, the
Company transferred all of its shares of MFS to Life Holdco in the form of a
dividend valued at $159,722,000. As a result of this transaction the Company
realized a gain of $21,195,000 of undistributed earnings.
MFS, a registered investment adviser, serves as investment adviser to the mutual
funds in the MFS family of funds as well as certain mutual funds and separate
accounts established by the Company. The MFS Asset Management Group provides
investment advice to substantial private clients.
On December 31, 1997, the Company purchased all of the outstanding shares of
Clarendon Insurance Agency, Inc. ("Clarendon") from MFS.
Sun Life (N.Y.) is engaged in the sale of individual fixed and variable annuity
contracts and group life and disability insurance contracts in the State of New
York. MCIC issues only individual disability income policies. Sundisco is a
registered investment adviser and broker-dealer. NLT is a federally chartered
savings bank. SLFSL serves as the marketing administrator for the distribution
of the offshore products of SLOC, an affiliate. Sun Capital is a registered
investment adviser. Sunfinco and Sunbesco are currently inactive. Clarendon is a
registered broker-dealer that acts as the general distributor of certain annuity
and life insurance contracts issued by the Company and its affiliates.
On December 23, 1997, the Company issued a $110,000,000 note to US Holdco at an
interest rate of 5.80%, which is scheduled for repayment on March 1, 1998, and
is included in borrowed money. A $110,000,000 note was also issued by MFS on
December 23, 1997 to the Company at an interest rate of 5.85% due on March 1,
1998 and is included in cash and short-term investments.
On December 31, 1996, the Company issued a $58,000,000 note to SLOC which was
repaid on February 10, 1997 at an interest rate of 5.70%. Also on December 31,
1996, the Company was issued a $58,000,000 note by MFS at an interest rate of
5.76%. This note was repaid to the Company on February 10, 1997. On December 31,
1997 and 1996 the Company had an additional $20,000,000 in notes issued by MFS,
scheduled to mature in 2000.
64
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
2. INVESTMENTS IN SUBSIDIARIES (CONTINUED):
During 1997, 1996, and 1995, the Company contributed capital in the following
amounts to its subsidiaries:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- ------------
<S> <C> <C> <C>
MCIC $ 2,000,000 $ 10,000,000 $ 6,000,000
SLFSL 1,000,000 1,500,000 --
SPE 97-1 20,377,000 -- --
</TABLE>
Summarized combined financial information of the Company's subsidiaries as of
December 31, 1997, 1996 and 1995 and for the years then ended, follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
(IN 000'S)
<S> <C> <C> <C>
Intangible assets $ 0 $ 9,646 $ 12,174
Other assets 1,190,951 1,376,014 1,233,372
Liabilities (1,073,966) (1,241,617) (1,107,264)
------------- ------------- -------------
Total net assets $ 116,985 $ 144,043 $ 138,282
------------- ------------- -------------
------------- ------------- -------------
Total revenues $ 750,364 $ 717,280 $ 570,794
Operating expenses (646,896) (624,199) (504,070)
Income tax expense (43,987) (42,820) (31,193)
------------- ------------- -------------
Net income $ 59,481 $ 50,261 $ 35,531
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
3. BONDS:
Investments in debt securities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------
GROSS GROSS 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 $ 126,923 $ 5,529 $ -- $ 132,452
States, provinces and political subdivisions 22,361 2,095 -- 24,456
Public utilities 398,939 35,338 (91) 434,186
Transportation 214,130 22,000 (390) 235,740
Finance 157,891 5,885 (120) 163,656
All other corporate bonds 990,455 52,678 (5,456) 1,037,677
------------ ----------- ----------- ------------
Total long-term bonds 1,910,699 123,525 (6,057) 2,028,167
------------ ----------- ----------- ------------
Short-term bonds:
U.S. Treasury Bills, bankers acceptances and
commercial paper 431,032 -- -- 431,032
Affiliates 110,000 -- -- 110,000
------------ ----------- ----------- ------------
Total short-term bonds 541,032 -- -- 541,032
Total bonds $ 2,451,731 $ 123,525 $ (6,057) $ 2,569,199
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
65
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
3. BONDS (CONTINUED):
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
------------ ----------- ----------- ------------
<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 -- 2,273
Foreign governments 18,812 1,351 -- 20,163
Public utilities 415,641 24,728 (1,223) 439,146
Transportation 167,937 14,107 (2,243) 179,801
Finance 290,024 7,914 (472) 297,466
All other corporate bonds 1,007,680 42,338 (14,496) 1,035,522
------------ ----------- ----------- ------------
Total long-term bonds 2,170,103 102,730 (27,361) 2,245,472
------------ ----------- ----------- ------------
Short-term bonds:
U.S. Treasury Bills, bankers acceptances and
commercial paper 88,754 -- -- 88,754
Affiliates 58,000 -- -- 58,000
------------ ----------- ----------- ------------
Total short-term bonds 146,754 -- -- 146,754
------------ ----------- ----------- ------------
Total bonds $ 2,316,857 $ 102,730 $ (27,361) $ 2,392,226
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
The amortized cost and estimated fair value of bonds at December 31, 1997 are
shown below by contractual maturity. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call and/or prepayment penalties.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
------------ ------------
<S> <C> <C>
(IN 000'S)
Maturities:
Due in one year or less $ 699,548 $ 700,280
Due after one year through five years 533,901 541,382
Due after five years through ten years 270,607 286,651
Due after ten years 735,624 821,002
------------ ------------
2,239,680 2,349,315
Mortgage-backed securities 212,051 219,884
------------ ------------
Total bonds $ 2,451,731 $ 2,569,199
------------ ------------
------------ ------------
</TABLE>
Proceeds from sales and maturities of investments in debt securities during
1997, 1996, and 1995 were $980,264,000, $1,554,016,000, and $1,510,553,000,
gross gains were $10,732,000, $16,975,000, and $24,757,000 and gross losses were
$2,446,000, $10,885,000, and $5,742,000, respectively.
Bonds included above with an amortized cost of approximately $2,578,000 and
$2,060,000 at December 31, 1997 and 1996, respectively, were on deposit with
governmental authorities as required by law.
4. SECURITIES LENDING:
The Company has a securities lending program operated on its behalf by the
Company's primary custodian, Chase Manhattan of New York. The custodian has
indemnified the Company against losses arising from this
66
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
4. SECURITIES LENDING (CONTINUED):
program. The total par value of securities out on loan was $0 and $51,537,000 at
December 31, 1997 and 1996 respectively. Income resulting from this program was
$200,000, $137,000 and $2,000 for the years ended December 31, 1997, 1996 and
1995, respectively.
5. MORTGAGE LOANS:
The Company invests in commercial first mortgage loans throughout the United
States. The Company monitors the condition of the mortgage loans in its
portfolio. In those cases where mortgages have been restructured, appropriate
allowances for losses have been made. In those cases where, in management's
judgment, the mortgage loans' values are impaired, appropriate losses are
recorded.
The following table shows the geographical distribution of the mortgage loan
portfolio.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---------- ----------
(IN 000'S)
<S> <C> <C>
California $ 119,122 $ 154,272
Massachusetts 58,981 79,929
Michigan 42,912 57,119
New York 45,696 67,742
Ohio 51,862 75,405
Pennsylvania 97,949 115,584
Washington 54,948 75,819
All other 212,565 313,062
---------- ----------
$ 684,035 $ 938,932
---------- ----------
---------- ----------
</TABLE>
The Company has restructured mortgage loans totaling $26,284,000 and $29,261,000
at December 31, 1997 and 1996, respectively, against which there are allowances
for losses of $3,026,000 and $5,893,000, respectively.
Mortgage loans from Sun Life (U.S.)'s portfolio with an approximate book value
of $53,188,000 were included in a transaction also involving loans from the
portfolios of other SLOC entities with an aggregate book value of $256 million,
whereby such loans were securitized for sale to the public markets.
The Company has made commitments of mortgage loans on real estate into the
future. The outstanding commitments for these mortgages amount to $12,300,000
and $9,800,000 at December 31, 1997 and 1996, respectively.
67
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
6. INVESTMENT GAINS AND LOSSES:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN 000'S)
<S> <C> <C> <C>
Net realized gains (losses)
Bonds $ 2,882 $ 5,631 $ 3,935
Common stock of affiliates 21,195 -- --
Mortgage loans 3,837 763 292
Real estate 2,912 599 391
Other invested assets (717) 567 (2,549)
--------- --------- ---------
$ 30,109 $ 7,560 $ 2,069
--------- --------- ---------
--------- --------- ---------
Changes in unrealized gains (losses):
Common stock of affiliates $ (2,894) $ (5,739) $ --
Mortgage loans 1,524 (600) (1,574)
Real estate 3,377 4,624 3,583
Other invested assets (854) -- --
--------- --------- ---------
$ 1,153 $ (1,715) $ 2,009
--------- --------- ---------
--------- --------- ---------
</TABLE>
Realized capital gains and losses on bonds and mortgages which relate to changes
in levels of interest rates are charged or credited to an interest maintenance
reserve ("IMR") and amortized into income over the remaining contractual life of
the security sold. The net realized capital gains credited to the interest
maintenance reserve were $6,321,000 in 1997, $7,710,000 in 1996, and $12,714,000
in 1995. All gains and losses are transferred net of applicable income taxes.
7. NET INVESTMENT INCOME:
Net investment income consisted of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
(IN 000'S)
<S> <C> <C> <C>
Interest income from bonds $ 188,924 $ 178,695 $ 205,445
Income from investment in common stock of affiliates 41,181 50,408 35,403
Interest income from mortgage loans 76,073 92,591 99,766
Real estate investment income 17,161 16,249 14,979
Interest income from policy loans 3,582 2,790 2,777
Other (193) 1,710 2,672
---------- ---------- ----------
Gross investment income 326,728 342,443 361,042
---------- ---------- ----------
Interest on surplus notes and notes payable (42,481) (23,061) (31,813)
Investment expenses (13,998) (15,629) (16,357)
---------- ---------- ----------
Net investment income $ 270,249 $ 303,753 $ 312,872
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
68
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
8. DERIVATIVES:
The Company uses derivative instruments for interest risk management purposes,
including hedges against specific interest rate risk and to minimize the
Company's exposure to fluctuations in interest rates. The Company's use of
derivatives has included U.S. Treasury futures, conventional interest rate
swaps, and forward spread lock interest rate swaps.
In the case of interest rate futures, gains or losses on contracts that qualify
as hedges are deferred until the earliest of the completion of the hedging
transaction, determination that the transaction will no longer take place, or
determination that the hedge is no longer effective. Upon completion of the
hedge, where it is impractical to allocate gains (losses) to specific hedged
assets or liabilities, gains (losses) are deferred in IMR and amortized over the
remaining life of the hedged assets. At December 31, 1997 and 1996 there were no
futures contracts outstanding.
In the case of interest rate and foreign currency swap agreements and forward
spread lock interest rate swap agreements, gains or losses on terminated swaps
are deferred in IMR and amortized over the shorter of the remaining life of the
hedged asset or the remaining term of the swap contract. The net differential to
be paid or received on interest rate swaps is recorded monthly as interest rates
change.
Options are used to hedge the stock market interest exposure in the mortality
and expense risk charges and guaranteed minimum death benefit features of the
Company's variable annuities. The Company's open positions are as follows:
<TABLE>
<CAPTION>
SWAPS OUTSTANDING
AT DECEMBER 31, 1997
---------------------------------
NOTIONAL MARKET VALUE
PRINCIPAL AMOUNTS OF POSITIONS
------------------ -------------
(IN 000'S)
<S> <C> <C>
Conventional interest rate swaps $ 80,000 $ (2,891)
Foreign currency swap 1,700 208
Forward spread lock swaps 50,000 274
Asian Put Option S & P 500 70,000 693
</TABLE>
<TABLE>
<CAPTION>
SWAPS OUTSTANDING
AT DECEMBER 31, 1996
---------------------------------
NOTIONAL MARKET VALUE
PRINCIPAL AMOUNTS OF POSITIONS
------------------ -------------
(IN 000'S)
<S> <C> <C>
Conventional interest rate swaps $ 429,000 $ (2,443)
Foreign currency swap 2,100 70
Forward spread lock swaps 50,000 (50)
</TABLE>
The market value of swaps is the estimated amount that the Company would receive
or pay on termination or sale, taking into account current interest rates and
the current credit worthiness of the counterparties. The Company is exposed to
potential credit loss in the event of non-performance by counterparties. The
counterparties are major financial institutions and management believes that the
risk of incurring losses related to credit risk is remote.
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
69
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
9. LEVERAGED LEASES (CONTINUED):
the purchase price was furnished by third-party long-term debt financing,
collateralized by the equipment and non-recourse to the Company. At the end of
the lease term, the Master Lessee may exercise a fixed price purchase option to
purchase the equipment.
The Company's net investment in leveraged leases is composed of the following
elements:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
----------------------
1997 1996
---------- ----------
(IN 000'S)
<S> <C> <C>
Lease contracts receivable $ 92,605 $ 101,244
Less non-recourse debt (92,589) (101,227)
---------- ----------
16 17
Estimated residual value of leased assets 41,150 41,150
Less unearned and deferred income (10,324) (11,501)
---------- ----------
Investment in leveraged leases 30,842 29,666
Less fees (163) (188)
---------- ----------
Net investment in leveraged leases $ 30,679 $ 29,478
---------- ----------
---------- ----------
</TABLE>
The net investment is included as an other invested asset.
10. REINSURANCE:
The Company has agreements with SLOC which provide that SLOC will reinsure the
mortality risks of the individual life insurance contracts sold by the Company.
Under these agreements basic death benefits and supplementary benefits are
reinsured on a yearly renewable term basis and coinsurance basis, respectively.
Reinsurance transactions under these agreements had the effect of decreasing
income from operations by approximately $1,381,000, $1,603,000 and $2,184,000
for the years ended December 31, 1997, 1996 and 1995, respectively.
Effective January 1, 1991, the Company entered into an agreement with SLOC under
which certain individual life insurance contracts issued by SLOC were reinsured
by the Company on a 90% coinsurance basis. During 1997 SLOC changed certain
assumptions used in determining the gross and the ceded reserve balance. The
Company reflected the effect of the changes in assumptions to its assumed
reserves as a direct credit to surplus. The effect of the change was a
$39,016,000 decrease in reserves. Also, effective January 1, 1991, the Company
entered into an agreement with SLOC which provides that SLOC will reinsure the
mortality risks in excess of $500,000 per policy for the individual life
insurance contracts assumed by the Company in the reinsurance agreement
described above. Such death benefits are reinsured on a yearly renewable term
basis. These agreements had the effect of increasing income from operations by
approximately $37,050,000, $35,161,000 and $11,821,000 for the years ended
December 31, 1997,1996 and 1995, respectively. The life reinsurance assumed
agreement requires the reinsurer to withhold funds in amounts equal to the
reserves assumed.
70
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
10. REINSURANCE (CONTINUED):
The following are summarized pro-forma results of operations of the Company for
the years ended December 31, 1997, 1996 and 1995 before the effect of
reinsurance transactions with SLOC.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
(IN 000'S)
<S> <C> <C> <C>
Income:
Premiums, annuity deposits and other revenues $ 2,230,980 $ 1,858,145 $ 1,619,337
Net investment income and realized gains 300,669 312,870 315,967
------------ ------------ ------------
Subtotal 2,531,649 2,171,015 1,935,304
------------ ------------ ------------
Benefits and Expenses:
Policyholder benefits 2,240,597 1,928,720 1,760,917
Other expenses 187,591 155,531 130,302
------------ ------------ ------------
Subtotal 2,428,188 2,084,251 1,891,219
------------ ------------ ------------
Income from operations $ 103,461 $ 86,764 $ 44,085
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The Company has an agreement with an unrelated company which provides
reinsurance of certain individual life insurance contracts on a modified
coinsurance basis and under which all deficiency reserves related to these
contracts are reinsured. Reinsurance transactions under this agreement had the
effect of decreasing income from operations by $2,658,000 in 1997, $46,000 in
1996, and by $1,599,000 in 1995.
11. WITHDRAWAL CHARACTERISTICS OF ANNUITY ACTUARIAL RESERVES AND DEPOSIT
LIABILITIES:
The withdrawal characteristics of general account and separate account annuity
reserves and deposits are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------
AMOUNT % OF TOTAL
-------------- -------------
(IN 000'S)
<S> <C> <C>
Subject to discretionary withdrawal-with adjustment:
With market value adjustment $ 3,415,394 25%
At book value less surrender charges (surrender charge >5%) 7,672,211 57
At book value (minimal or no charge or adjustment) 1,259,698 9
Not subject to discretionary withdrawal provision 1,164,651 9
-------------- ---
Total annuity actuarial reserves and deposit liabilities $ 13,511,954 100%
-------------- ---
-------------- ---
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------
AMOUNT % OF TOTAL
-------------- -------------
(IN 000'S)
<S> <C> <C>
Subject to discretionary withdrawal-with adjustment:
With market value adjustment $ 3,547,683 31%
At book value less surrender charges (surrender charge >5%) 5,626,117 48
At book value (minimal or no charge or adjustment) 1,264,586 11
Not subject to discretionary withdrawal provision 1,218,157 10
-------------- ---
Total annuity actuarial reserves and deposit liabilities $ 11,656,543 100%
-------------- ---
-------------- ---
</TABLE>
71
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
12. RETIREMENT PLANS:
The Company participates with SLOC in a non-contributory defined benefit pension
plan covering essentially all employees. The benefits are based on years of
service and compensation.
The funding policy for the pension plan is to contribute an amount which at
least satisfies the minimum amount required by ERISA; currently the plan is
fully funded. The Company is charged for its share of the pension cost based
upon its covered participants. Pension plan assets consist principally of
separate accounts of SLOC.
The Company's share of the group's accrued pension cost at December 31, 1997,
1996 and 1995 was $593,000, $446,000 and $420,000, respectively. The Company's
share of net periodic pension cost was $146,000, $27,000 and $3,000, for 1997,
1996 and 1995, respectively.
The Company also participates with SLOC and certain affiliates in a 401(k)
savings plan for which substantially all employees are eligible. The Company
matches, up to specified amounts, employees' contributions to the plan. Company
contributions were $259,000, $233,000 and $185,000 for the years ended December
31, 1997, 1996 and 1995, respectively.
OTHER POST-RETIREMENT BENEFIT PLANS
In addition to pension benefits, the Company provides certain health, dental,
and life insurance benefits ("post-retirement benefits") for retired employees
and dependents. Substantially all employees may become eligible for these
benefits if they reach normal retirement age while working for the Company, or
retire early upon satisfying an alternate age plus service condition. Life
insurance benefits are generally set at a fixed amount.
72
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
13. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------
CARRYING AMOUNT ESTIMATED FAIR VALUE
----------------- --------------------
(IN 000'S)
<S> <C> <C>
ASSETS:
Bonds $ 2,451,731 $ 2,569,199
Mortgages 684,035 706,975
LIABILITIES:
Insurance reserves $ 123,128 $ 123,128
Individual annuities 307,668 302,165
Pension products 1,527,433 1,561,108
Derivatives -- (1,716)
<CAPTION>
DECEMBER 31, 1996
---------------------------------------
CARRYING AMOUNT ESTIMATED FAIR VALUE
----------------- --------------------
(IN 000'S)
<S> <C> <C>
ASSETS:
Bonds $ 2,316,857 $ 2,392,226
Mortgages 938,932 958,909
LIABILITIES:
Insurance reserves $ 122,606 $ 122,606
Individual annuities 373,488 367,878
Pension products 1,911,284 1,922,602
Derivatives -- (2,423)
</TABLE>
The major methods and assumptions used in estimating the fair values of
financial instruments are as follows:
The fair values of short-term bonds are estimated to be the amortized cost. The
fair values of long-term bonds which are publicly traded are based upon market
prices or dealer quotes. For privately placed bonds, fair values are estimated
by taking into account prices for publicly traded bonds of similar credit risk
and maturity and repayment and liquidity characteristics.
The fair values of the Company's general account insurance reserves and
liabilities under investment-type contracts (insurance, annuity and pension
contracts that do not involve mortality or morbidity risks) are estimated using
discounted cash flow analyses or surrender values. Those contracts that are
deemed to have short-term guarantees have a carrying amount equal to the
estimated market value.
The fair values of mortgages are estimated by discounting future cash flows
using current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.
The fair values of derivative financial instruments are estimated using the
process described in Note 8.
73
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
14. STATUTORY INVESTMENT VALUATION RESERVES:
The asset valuation reserve ("AVR") provides a reserve for losses from
investments in bonds, stocks, mortgage loans, real estate and other invested
assets with related increases or decreases being recorded directly to surplus.
Realized capital gains and losses on bonds and mortgages which relate to changes
in levels of interest rates are charged or credited to an interest maintenance
reserve ("IMR") and amortized into income over the remaining contractual life of
the security sold.
The tables shown below present changes in the major elements of the AVR and IMR.
<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
AVR IMR AVR IMR
--------- --------- --------- ---------
(IN 000'S) (IN 000'S)
<S> <C> <C> <C> <C>
Balance, beginning of year $ 53,911 $ 28,675 $ 42,099 $ 25,218
Net realized investment gains, net of tax 17,400 6,321 3,160 5,011
Amortization of net investment gains -- (1,166) -- (1,557)
Unrealized investment gains (losses) (2,340) -- 1,502 --
Required by formula (21,366) -- 7,150 3
--------- --------- --------- ---------
Balance, end of year $ 47,605 $ 33,830 $ 53,911 $ 28,675
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
15. FEDERAL INCOME TAXES:
The Company and its subsidiaries file a consolidated federal income tax return.
Federal income taxes are calculated for the consolidated group based upon
amounts determined to be payable as a result of operations within the current
year. No provision is recognized for timing differences which may exist between
financial statement and taxable income. Such timing differences include
reserves, depreciation and accrual of market discount on bonds. Cash payments
for federal income taxes were approximately $31,000,000, $19,264,000 and
$12,429,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
16. SURPLUS NOTES AND NOTES RECEIVABLE (PAYABLE):
On December 22, 1997, the Company issued a $250,000,000 surplus note to Life
Holdco. This note has an interest rate of 8.625% and is due on or after November
6, 2027.
On May 9, 1997, the Company issued a short-term note of $600,000,000 to Life
Holdco at an interest rate of 5.10%, which was extended at various interest
rates. This note was repaid on December 22, 1997.
The Company had issued and outstanding surplus notes to SLOC with an aggregate
carrying value of $335,000,000, during the period 1982 through January 16, 1996
at interest rates between 7.25% and 10%. The Company repaid all principal and
interest associated with these surplus notes on January 16, 1996.
On December 19, 1995 the Company issued surplus notes totaling $315,000,000 to
an affiliate, Sun Canada Financial Co., at interest rates between 5.75% and
7.25%. Of these notes, $157,500,000 will mature in the year 2007 and
$157,500,000 will mature in the year 2015. Interest on these notes is payable
semi-annually.
Principal and interest on surplus notes are payable only to the extent that the
Company meets specified requirements regarding free surplus exclusive of the
principal amount and accrued interest, if any, on these notes and with the
consent of the Delaware Insurance Commissioner. In addition, with regard to
surplus notes outstanding through January 16, 1996, subsequent to December 31,
1994 interest payments required
74
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
16. SURPLUS NOTES AND NOTES RECEIVABLE (PAYABLE) (CONTINUED):
the consent of the Delaware Insurance Commissioner. Payment of principal and
interest on the notes issued in 1995 and in 1997 also requires the consents of
the Delaware Insurance Commissioner and Canadian Office of the Superintendent of
Financial Institutions.
The Company obtained the required consents and expensed $42,481,000, $23,061,000
and $31,813,000 for interest on surplus notes and notes payable for the years
ended December 31, 1997, 1996 and 1995, respectively.
17. MANAGEMENT AND SERVICE CONTRACTS:
The Company has an agreement with SLOC which provides that SLOC will furnish, as
requested, personnel as well as certain services and facilities on a
cost-reimbursement basis. Expenses under this agreement amounted to
approximately $15,997,000 in 1997, $20,192,000 in 1996, and $20,293,000 in 1995.
18. RISK-BASED CAPITAL:
Effective December 31, 1993 the NAIC adopted risk-based capital requirements for
life insurance companies. The risk-based capital requirements provide a method
for measuring the minimum acceptable amount of adjusted capital that a life
insurer should have, as determined under statutory accounting practices, taking
into account the risk characteristics of its investments and products. The
Company has met the minimum risk-based capital requirements at December 31, 1997
and 1996.
19. ACCOUNTING POLICIES AND PRINCIPLES:
The financial statements of the Company have been prepared on the basis of
statutory accounting practices which, prior to 1996, were considered by the
insurance industry and the accounting profession to be in accordance with GAAP
for mutual life insurance companies. The primary differences between statutory
accounting practices and GAAP are described as follows. Under statutory
accounting practices, financial statements are not consolidated and investments
in subsidiaries are shown at net equity value. Accordingly, the assets,
liabilities and results of operations of the Company's subsidiaries are not
consolidated with the assets, liabilities and results of operations,
respectively, of the Company. Changes in net equity value of the common stock of
the Company's United States life insurance subsidiaries are directly reflected
in the Company's surplus. Changes in the net equity value of the common stock of
all other subsidiaries are directly reflected in the Company's Asset Valuation
Reserve. Dividends paid by subsidiaries to the Company are included in the
Company's net investment income.
Other differences between statutory accounting practices and GAAP include the
following: statutory accounting practices do not recognize the following assets
or liabilities which are reflected under GAAP - deferred policy acquisition
costs, deferred federal income taxes and statutory non-admitted assets. Asset
Valuation Reserves and Interest Maintenance Reserves are established under
statutory accounting practices but not under GAAP. Methods for calculating real
estate depreciation and investment valuation allowances differ under statutory
accounting practices and GAAP. Actuarial assumptions and reserving methods
differ under statutory accounting practices and GAAP. Premiums for universal
life and investment type products are recognized as income for statutory
purposes and as deposits to policyholders' accounts for GAAP.
Because the Company's management uses financial information prepared in
conformity with accounting principles generally accepted in Canada in the normal
course of business, the management of Sun Life Assurance Company of Canada
(U.S.) has determined that the cost of complying with Statement No. 120
"Accounting and Reporting by Mutual Insurance Enterprises and by Insurance
Enterprises for Certain Long
75
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
19. ACCOUNTING POLICIES AND PRINCIPLES (CONTINUED):
Duration Participating Contracts" exceed the benefits that the Company, or the
users of its financial statements, would experience. Consequently, the Company
has elected not to apply such standards in the preparation of these financial
statements.
76
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
We have audited the accompanying statutory statements of admitted assets,
liabilities, and capital stock and surplus of Sun Life Assurance Company of
Canada (U.S.) as of December 31, 1997 and 1996, and the related statutory
statements of operations, changes in capital stock and surplus, and cash flow
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described more fully in Notes 1 and 19 to the financial statements, the
Company prepared these financial statements using accounting practices
prescribed or permitted by the Insurance Department of the State of Delaware,
which practices differ from generally accepted accounting principles. The
effects on the financial statements of the variances between the statutory basis
of accounting and generally accepted accounting principles, although not
reasonably determinable, are presumed to be material.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the admitted assets, liabilities, and capital stock and
surplus of Sun Life Assurance Company of Canada (U.S.) as of December 31, 1997
and 1996, and the results of its operations and its cash flow for each of the
three years in the period ended December 31, 1997 on the basis of accounting
described in Notes 1 and 19.
However, because of the effects of the matter discussed in the second preceding
paragraph, in our opinion, the financial statements referred to above do not
present fairly, in conformity with generally accepted accounting principles, the
financial position of Sun Life Assurance Company of Canada (U.S.) as of December
31, 1997 and 1996 or the results of its operations or its cash flow for each of
the three years in the period ended December 31, 1997.
As management has stated in Note 19, because the Company's management uses
financial information prepared in accordance with accounting principles
generally accepted in Canada in the normal course of business, the management of
Sun Life Assurance Company of Canada (U.S.) has determined that the cost of
complying with Statement No. 120 would exceed the benefits that the Company, or
the users of its financial statements, would experience. Consequently, the
Company has elected not to apply such standards in the preparation of these
financial statements.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 5, 1998
77
<PAGE>
APPENDIX A
ILLUSTRATIVE EXAMPLES
ILLUSTRATIVE EXAMPLE OF VARIABLE ACCUMULATION UNIT VALUE CALCULATIONS:
Suppose the net asset value of a Fund share at the end of the current
valuation period is $18.38; at the end of the immediately preceding valuation
period was $18.32; the valuation period is one day; no dividends or
distributions caused Fund shares to go "ex-dividend" during the current
valuation period. $18.38 divided by $18.32 is 1.00327511. Subtracting the one
day risk factor for mortality and expense risks of .00003539 (the daily
equivalent of the current maximum charge of 1.3% on an annual basis) gives a net
investment factor of 1.00323972. If the value of the variable accumulation unit
for the immediately preceding valuation period had been 14.5645672, the value
for the current valuation period would be 14.6117523 (14.5645672 X 1.00323972).
ILLUSTRATIVE EXAMPLE OF VARIABLE ANNUITY UNIT VALUE CALCULATIONS:
Suppose the circumstances of the first example exist, and the value of an
annuity unit for the immediately preceding valuation period had been 12.3456789.
If the first variable annuity payment is determined by using an annuity payment
based on an assumed interest rate of 4% per year, the value of the annuity unit
for the current valuation period would be 12.3843446 (12.3456789 X 1.00323972
(the Net Investment Factor) X 0.99989255). 0.99989255 is the factor, for a one
day valuation period, that neutralizes the assumed interest rate of four percent
(4%) per year used to establish the Annuity Payment Rates found in the Contract.
ILLUSTRATIVE EXAMPLE OF VARIABLE ANNUITY PAYMENT CALCULATIONS:
Suppose that a Participant's Account is credited with 8,756.4321 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 annuity unit value on the day prior to the
second variable annuity payment date is 12.3843446. The first variable annuity
payment would be $865.57 (8,765.4321 X 14.564572 X 6.78 divided by 1,000). The
number of annuity units credited would be 70.1112 ($865.57 divided by
12.3456789) and the second variable annuity payment would be $868.28 (70.1112 X
12.3843446).
78
<PAGE>
APPENDIX B
WITHDRAWALS, SURRENDERS, WITHDRAWAL CHARGES AND THE MARKET VALUE ADJUSTMENT
A. FIXED ACCOUNT--3, 5 AND 7 YEAR GUARANTEE PERIODS:
For the purposes of this illustration, the following assumptions have been made:
1. 100% of Purchase Payments have been allocated to the Fixed Account and
the Owner has elected Initial Guarantee Periods of five (5) years.
2. The date of full surrender or partial withdrawal is the last day of the
12th month following the Date of Coverage.
3. The Guarantee Rate being credited on Payments allocated to the five (5)
year Guarantee Period on the date of full surrender or partial withdrawal
is 4.40%.
4. The Account Fee is $25.
PLEASE REFER TO THE TABLE BELOW.
TABLE 1*
<TABLE>
<CAPTION>
1 2 3 4 5 6 7 8 9 10
- --- ------ ----- --------- ----- ------ ------------------- ------ -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 100 4.25% $ 104.25 -- $ 0.00 $ 104.25($79.25) -0.45% -($0.47)(-$0.36) $103.78($78.89)
2 100 4.25 103.90 6.00% 4.80 99.10 -0.46 -(0.46) 98.64
3 100 4.50 103.75 6.00 6.00 97.75 0.31 0.31 98.06
4 100 4.50 103.38 6.00 6.00 97.38 0.32 0.31 97.69
5 100 4.70 103.13 6.00 6.00 97.13 0.98 0.95 98.08
6 100 4.70 102.74 6.00 6.00 96.74 0.99 0.96 97.70
7 100 4.70 102.35 6.00 6.00 96.35 1.01 0.98 97.33
8 100 4.50 101.88 6.00 6.00 95.88 0.34 0.33 96.20
9 100 4.50 101.50 6.00 6.00 95.50 0.35 0.33 95.83
10 100 4.50 101.13 6.00 6.00 95.13 0.36 0.34 95.46
11 100 4.50 100.75 6.00 6.00 94.75 0.36 0.34 95.09
12 100 4.40 100.37 6.00 6.00 94.37 0.00 0.00 94.37
------ --------- ------ ---------- -------------- -------------
$1,200 $1,229.11 $64.80 $ 1,164.31 $ 3.92 $1,168.23
------ --------- ------ ---------- -------------- -------------
------ --------- ------ ---------- -------------- -------------
($1,139.31) ($4.03) ($1,143.34)
</TABLE>
*See next page for Explanation of Columns
79
<PAGE>
EXPLANATION OF COLUMNS IN TABLE 1.
COLUMNS 1 AND 2:
Represent Payments and Payment amounts, respectively. Each Payment of $100 was
made on the first (1st) day of each month for one year (12 payments).
COLUMN 3:
Represents the Initial Guarantee Rate being credited to each Payment.
COLUMN 4:
Represents the value of each Payment on the date of full surrender or partial
withdrawal before the imposition of any Withdrawal Charge and Market Value
Adjustment.
COLUMN 5:
Represents the Withdrawal Charge percentage that is applied to each Payment on
the date of full surrender or partial withdrawal.
The percentage is 6% for Payments 2-12 because these Payments have been in the
Account for less than one year. No Withdrawal Charge is imposed on Payment 1
because up to ten percent (10%) of Payments credited to a Participant's Account
may be withdrawn each Account Year without imposition of this charge. In this
example, 10% represents (10% x $1,200) = $120. The 10% amount is applied to the
oldest previously unliquidated Payment, then the next oldest and so forth. This
results in no Withdrawal Charge being imposed on Payment 1 and a Withdrawal
Charge imposed on $80 of Payment 2.
COLUMN 6:
Represents the amount of Withdrawal Charge imposed on each Payment. It is
calculated by multiplying the Payment in Column 2 by the Withdrawal Charge
percentage in Column 5.
For example, the Withdrawal Charge imposed on Payment 8 = $100 X 6% = $6.00.
The Withdrawal Charge imposed on Payment 2 = ($100 - $20) X 6% = $4.80. The $20
represents the portion of the Payment on which no Withdrawal Charge is imposed
as described under the explanation of Column 5 above.
COLUMN 7:
Represents the value of each Payment in Column 4 on the date of full surrender
or partial withdrawal after the imposition of the Withdrawal Charge in Column 6.
In the case of a full surrender, the Account Fee is deducted from the oldest
unliquidated payment. This deduction is reflected in the Table by the amount in
parentheses beside Column 7, $79.25.
COLUMN 8:
Represents the Market Value Adjustment (MVA) percentage applied to the value of
each Payment on the date of full surrender or partial withdrawal after
imposition of the Withdrawal Charge.
FOR EXAMPLE:
The MVA% applied to Payment 3 = .75 (A - B) X C/12
<TABLE>
<S> <C> <C> <C>
Where A = The Guarantee Rate of the Payment being surrendered (Column 3)
= 4.50%,
B = The Guarantee Rate being credited to Payments allocated to the five (5)
year
Guarantee Period on the date of full surrender or partial withdrawal
= 4.40% and
C = The number of months remaining in the Guarantee Period of the Payment
being
surrendered
= 60 (5 years) - 10
= 50
MVA% = .75 (A - B) X C/12
= .75 (4.50 - 4.40) X 50/12
= .75 (.10) X 50/12
= .31%
</TABLE>
80
<PAGE>
COLUMN 9:
Represents the dollar amount of the MVA. For each Payment, it is determined by
multiplying the value in Column 7 by the MVA percentage in Column 8.
For example, the MVA for Payment 3
<TABLE>
<C> <S> <C> <C>
= Column 7 X Column 9
= $97.75 X .31%
= $0.31
</TABLE>
COLUMN 10:
Represents the values of Payments on the date of full surrender or partial
withdrawal after deducting the Withdrawal Charge and either deducting or adding
the MVA. For any Payment, the amount in Column 10 is determined by adding the
amounts in Columns 7 and 9.
In each of Columns 9 and 10, the amounts in parentheses, -$.36 and $78.89,
respectively, reflect the deduction of the Account Fee, in the case of a full
surrender.
FULL SURRENDER:
The total of Column 10, in parentheses ($1,143.34), reflects the amount of a
full surrender after imposition of Withdrawal Charges, Account Fee and Market
Value Adjustments.
PARTIAL WITHDRAWAL:
The sum of amounts in Column 10 for as many payments as are liquidated reflects
the amount of a partial withdrawal.
For example, if $1,000 of Payments were withdrawn, the amount of the withdrawal
would be the sum of the amounts in Column 10 for Payments 1 through 10 which is
$978.77.
B. VARIABLE ACCOUNT AND FIXED ACCOUNT--1 YEAR GUARANTEE PERIOD (NO MARKET VALUE
ADJUSTMENT APPLICABLE):
For the purposes of this illustration, the following assumptions have been made:
1. Purchase Payments have been allocated to either the Variable Account,
the Fixed Account-- one (1) Year Guarantee Period or to a combination of
both.
2. The date of full surrender or partial withdrawal is during the ninth
(9th) Account Year.
PLEASE REFER TO THE TABLE BELOW.
<TABLE>
<CAPTION>
TABLE 2*
1 2 3 4 5 6
--------- --------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
1 $ 1,000 $ 1,000 $ 0 0% $ 0
2 1,200 1,200 0 0 0
3 1,400 1,280 120 1 1.20
4 1,600 0 1,600 2 32.00
5 1,800 0 1,800 3 54.00
6 2,000 0 2,000 4 80.00
7 2,000 0 2,000 5 100.00
8 2,000 0 2,000 6 120.00
9 2,000 0 2,000 6 120.00
--------- --------- --------- ---------
$ 15,000 $ 3,480 $ 11,520 $ 507.20
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
* See next page for Explanation of Columns
81
<PAGE>
EXPLANATION OF COLUMNS IN TABLE 2
COLUMNS 1 AND 2:
Represent Payments and amounts of Payments. Each Payment was made at the
beginning of each Account Year.
COLUMN 3:
Represents the amounts that may be withdrawn without the imposition of
withdrawal charges, as follows:
a) Payments 1 and 2, $1,000 and $1,200, respectively, have been credited to the
Participant's Account for more than seven (7) years.
b) $1,280 of Payment 3 represents 10% of Payments that have been credited to
the Participant's Account for less than seven (7) years. The 10% amount is
applied to the oldest unliquidated Payment, then the next oldest and so
forth.
COLUMN 4:
Represents the amount of each Payment that is subject to a withdrawal charge. It
is determined by subtracting the amount in Column 3 from the Payment in Column
2.
COLUMN 5:
Represents the withdrawal charge percentages imposed on the amounts in Column 4.
COLUMN 6:
Represents the withdrawal charge imposed on each Payment. It is determined by
multiplying the amount in Column 4 by the percentage in Column 5.
For example, the withdrawal charge imposed on Payment 8
<TABLE>
<C> <S>
= Payment 8 Column 4 X Payment 8 Column 5
= $2,000 X 6%
= $120
</TABLE>
FULL SURRENDER:
The total of Column 6, $507.20, represents the total amount of withdrawal
charges imposed on Payments in this illustration.
PARTIAL WITHDRAWAL:
The sum of amounts in Column 6 for as many Payments as are liquidated reflects
the withdrawal charges imposed in the case of a partial withdrawal.
For example, if $7,000 of Payments (Payments 1, 2, 3, 4 and 5) were withdrawn,
the amount of the withdrawal charges imposed would be the sum of amounts in
Column 6 for Payments 1, 2, 3, 4 and 5 which is $87.20.
82
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
ANNUITY SERVICE MAILING ADDRESS:
C/O RETIREMENT PRODUCTS AND SERVICES
P.O. BOX 1024
BOSTON, MASSACHUSETTS 02103
GENERAL DISTRIBUTOR
Clarendon Insurance Agency, Inc.
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02181
LEGAL COUNSEL
Covington & Burling
1201 Pennsylvania Avenue, N.W.
P.O. Box 7566
Washington, D.C. 20044
AUDITORS
Deloitte & Touche LLP
125 Summer Street
Boston, Massachusetts 02110
COG-1 5/98
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS.
Item 14. Other Expenses of Issuance and Distribution
Not applicable.
Item 15. Indemnification of Directors and Officers
Article 8 of the By-Laws of Sun Life Assurance Company of Canada (U.S.)
provides for indemnification of directors and officers as follows:
"Section 8.01 (a). Every person who is or was a director, officer or
employee of this corporation or of any other corporation which he served at
the request of this corporation and in which this corporation owns or owned
shares of capital stock or of which it is or was a creditor shall have a
right to be indemnified by this corporation against all liability and
reasonable expenses incurred by him in connection with or resulting from any
claim, action, suit or proceeding in which he may become involved as a party
or otherwise by reason of his being or having been a director, officer or
employee of this corporation or such other corporation, provided (1) said
claim, action, suit or proceeding shall be prosecuted to a final
determination and he shall be vindicated on the merits, or (2) in the absence
of such a final determination vindicating him on the merits, the board of
directors shall determine that he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful; said determination to
be made by the board of directors acting through a quorum of disinterested
directors, or in its absence on the opinion of counsel.
(b) For purposes of the preceding subsection: (1) "liability and
reasonable expenses" shall include but not be limited to reasonable counsel
fees and disbursements, amounts of any judgment, fine or penalty, and
reasonable amounts paid in settlement; (2) "claim, action, suit or
proceeding" shall include every such claim, action, suit or proceeding,
whether civil or criminal, derivative or otherwise, administrative, judicial
or legislative, any appeal relating thereto, and shall include any reasonable
apprehension or threat of such a claim, action, suit or proceeding; (3) a
settlement, plea of nolo contendere, consent judgment, adverse civil
judgment, or conviction shall not of itself create a presumption that the
conduct of the person seeking indemnification did not meet the standard of
conduct set forth in subsection (a)(2) hereof.
II-1
<PAGE>
(c) Notwithstanding the foregoing, the following limitations shall
apply with respect to any action by or in the right of the Corporation: (1)
no indemnification shall be made in respect of any claim, issue or matter as
to which the person seeking indemnification shall have been adjudged to be
liable for negligence or misconduct in the performance of his duty to the
corporation unless and only to the extent that the Court of Chancery of the
State of Delaware or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper; and (2) indemnification shall
extend only to reasonable expenses, including reasonable counsel's fees and
disbursements.
(d) The right of indemnification shall extend to any person otherwise
entitled to it under this by-law whether or not that person continues to be a
director, officer or employee of this corporation or such other corporation
at the time such liability or expense shall be incurred. The right of
indemnification shall extend to the legal representative and heirs of any
person otherwise entitled to indemnification. If a person meets the
requirements of this by-law with respect to some matters in a claim, action,
suit or proceeding, but not with respect to others, he shall be entitled to
indemnification as the former. Advances against liability and expenses may
be made by the corporation on terms fixed by the board of directors subject
to an obligation to repay if indemnification proves unwarranted.
(e) This by-law shall not exclude any other rights of indemnification or
other rights to which any director, officer or employee may be entitled to by
contract, vote of the stockholders or as a matter of law. If any clause,
provision or application of this section shall be determined to be invalid,
the other clauses, provisions or applications of this section shall not be
affected but shall remain in full force and effect. The provisions of this
by-law shall be applicable to claims, actions, suits or proceedings made or
commenced after the adoption hereof, whether arising from acts or omissions
to act occurring before or after the adoption hereof.
(f) Nothing contained in this by-law shall be construed to protect any
director or officer of the corporation against any liability to the
corporation or its security holders to which he would otherwise be subject by
reason of wilful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office."
II-2
<PAGE>
Item 16. Exhibits
Exhibits:
Exhibit
Number Description Method of Filing
1 Underwriting Agreement *
3(a) Certificate of Incorporation **
3(b) By-laws **
4(a) Combination Fixed/Variable Group
Annuity Contract ***
4(b) Certificate to be used in con-
nection with Contract filed as
Exhibit 4(a) ***
23 Independent Auditors' Consent ****
24 Financial Data Schedules *****
25 Powers of Attorney ****
* Incorporated herein by reference from Pre-Effective Amendment No. 1 to
the Registration Statement of the Registrant on Form N-4,
File No. 333-37907, filed on January 16, 1998.
** Incorporated herein by reference from the Registration Statement of the
Registrant on Form N-4, File No. 333-37907, filed on October 14, 1997.
*** Incorporated by reference from the Registration Statement of the
Registrant on Form N-4, File No. 2-99958, filed on April 17, 1998.
**** Filed herewith.
***** Previously filed.
Item 17. Undertakings
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in the registration statement;
II-3
<PAGE>
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
Provided, however, that paragraphs (a)(1)(i) and a(1)(ii) do
not apply if the registration statement is on Form S-3 or Form S-8,
and the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed
by the registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in
the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post- effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to Section 13(a) or Section 15(d) of
the Securities Exchange Act of 1934 (and where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant, Sun Life Assurance Company of Canada (U.S.), certifies that it
has reasonable grounds to believe that it meets all of the requirements for
filing on Form S-2 and has duly caused this Post-Effective Amendment No. 9 to
its Registration Statement on Form S-2 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth
of Massachusetts, on the 16th day of April, 1998.
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. 9 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 16, 1998
John D. McNeil
* /s/ ROBERT P. VROLYK Vice President and Actuary
- ---------------------------- (Principal Financial
Robert P. Vrolyk & Accounting Officer) April 16, 1998
* /s/ RICHARD B. BAILEY Director April 16, 1998
- ----------------------------
Richard B. Bailey
- --------------------
* By Margaret Hankard pursuant to Power of Attorney filed herewith.
II-5
<PAGE>
SIGNATURE TITLE DATE
* /s/ M. COLYER CRUM
- ------------------------------- Director April 16, 1998
M. Colyer Crum
* /s/ DONALD A. STEWART President and Director
- -------------------------------
Donald A. Stewart
* /s/ DAVID D. HORN Director April 16, 1998
- --------------------------------
David D. Horn
* /s/ JOHN S. LANE Director April 16, 1998
- --------------------------------
John S. Lane
* /s/ ANGUS A. MacNAUGHTON Director April 16, 1998
- --------------------------------
Angus A. MacNaughton
* /s/ S. CAESAR RABOY Senior Vice President April 16, 1998
- -------------------------------- and Deputy General
S. Caesar Raboy Manager and Director
* /s/ C. JAMES PRIEUR Senior Vice President April 16, 1998
- -------------------------------- and General Manager
C. James Prieur and Director
- -----------------------
* By Margaret Hankard pursuant to Power of Attorney filed
herewith.
II-6
<PAGE>
EXHIBIT INDEX
Exhibit
Number
23 Independent Auditors' Consent
25 Powers of Attorney
II-7
<PAGE>
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the use in Post-Effective Amendment No. 9 to the
Registration Statement on Form S-2 of Sun Life Assurance Company of
Canada (U.S.) (Reg. No. 33-31711) of our report dated February 6, 1998
accompanying the financial statements of Sun Life of Canada (U.S.) Variable
Account D and to the use of our report dated February 5, 1998 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 5, 1998
appearing in the Annual Report on Form 10-K of Sun Life Assurance Company of
Canada (U.S.) for the year ended December 31, 1997.
We also consent to the references to us under the headings "Condensed
Financial Information -- Accumulation Unit Values" and "Accountants" in such
Prospectus.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
April 17, 1998
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that Robert P. Vrolyk, whose signature
appears below, constitutes and appoints Margaret E. Hankard, Margaret Sears
Mead and David N. Brown, and each of them, his attorneys-in-fact, each with
the power of substitution, for him in any and all capacities, to sign a
Registration Statement on Form S-2 of Sun Life Assurance Company of Canada
(U.S.) (Reg. No. 033-31711), and any amendments thereto, and to file the
same, with exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming
all that each of said attorneys-in-fact or his substitute or substitutes, may
do or cause to be done by virtue hereof.
/s/ Robert P. Vrolyk
---------------------------
Robert P. Vrolyk
March 23, 1998
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that John D. McNeil, whose signature
appears below, constitutes and appoints Margaret E. Hankard, Margaret Sears
Mead and David N. Brown, and each of them, his attorneys-in-fact, each with
the power of substitution, for him in any and all capacities, to sign a
Registration Statement on Form S-2 of Sun Life Assurance Company of Canada
(U.S.) (Reg. No. 033-31711), and any amendments thereto, and to file the
same, with exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming
all that each of said attorneys-in-fact or his substitute or substitutes, may
do or cause to be done by virtue hereof.
/s/ John D. McNeil
---------------------------
John D. McNeil
March 23, 1998
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that John S. Lane, whose signature
appears below, constitutes and appoints Margaret E. Hankard, Margaret Sears
Mead and David N. Brown, and each of them, his attorneys-in-fact, each with
the power of substitution, for him in any and all capacities, to sign a
Registration Statement on Form S-2 of Sun Life Assurance Company of Canada
(U.S.) (Reg. No. 033-31711), and any amendments thereto, and to file the
same, with exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming
all that each of said attorneys-in-fact or his substitute or substitutes, may
do or cause to be done by virtue hereof.
/s/ John S. Lane
---------------------------
John S. Lane
March 23, 1998
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that Donald A. Stewart, whose signature
appears below, constitutes and appoints Margaret E. Hankard, Margaret Sears
Mead and David N. Brown, and each of them, his attorneys-in-fact, each with
the power of substitution, for him in any and all capacities, to sign a
Registration Statement on Form S-2 of Sun Life Assurance Company of Canada
(U.S.) (Reg. No. 033-31711), and any amendments thereto, and to file the
same, with exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming
all that each of said attorneys-in-fact or his substitute or substitutes, may
do or cause to be done by virtue hereof.
/s/ Donald A. Stewart
---------------------------
Donald A. Stewart
March 23, 1998
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that Angus A. MacNaughton, whose
signature appears below, constitutes and appoints Margaret E. Hankard,
Margaret Sears Mead and David N. Brown, and each of them, his
attorneys-in-fact, each with the power of substitution, for him in any and
all capacities, to sign a Registration Statement on Form S-2 of Sun Life
Assurance Company of Canada (U.S.) (Reg. No. 033-31711), and any amendments
thereto, and to file the same, with exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact or his
substitute or substitutes, may do or cause to be done by virtue hereof.
/s/ Angus A. MacNaughton
---------------------------
Angus A. MacNaughton
March 23, 1998
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that S. Caesar Raboy, whose signature
appears below, constitutes and appoints Margaret E. Hankard, Margaret Sears
Mead and David N. Brown, and each of them, his attorneys-in-fact, each with
the power of substitution, for him in any and all capacities, to sign a
Registration Statement on Form S-2 of Sun Life Assurance Company of Canada
(U.S.) (Reg. No. 033-31711), and any amendments thereto, and to file the
same, with exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming
all that each of said attorneys-in-fact or his substitute or substitutes, may
do or cause to be done by virtue hereof.
/s/ S. Caesar Raboy
---------------------------
S. Caesar Raboy
March 23, 1998
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that M. Colyer Crum, whose signature
appears below, constitutes and appoints Margaret E. Hankard, Margaret Sears
Mead and David N. Brown, and each of them, his attorneys-in-fact, each with
the power of substitution, for him in any and all capacities, to sign a
Registration Statement on Form S-2 of Sun Life Assurance Company of Canada
(U.S.) (Reg. No. 033-31711), and any amendments thereto, and to file the
same, with exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming
all that each of said attorneys-in-fact or his substitute or substitutes, may
do or cause to be done by virtue hereof.
/s/ M. Colyer Crum
---------------------------
M. Colyer Crum
March 23, 1998
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that David D. Horn, whose signature
appears below, constitutes and appoints Margaret E. Hankard, Margaret Sears
Mead and David N. Brown, and each of them, his attorneys-in-fact, each with
the power of substitution, for him in any and all capacities, to sign a
Registration Statement on Form S-2 of Sun Life Assurance Company of Canada
(U.S.) (Reg. No. 033-31711), and any amendments thereto, and to file the
same, with exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming
all that each of said attorneys-in-fact or his substitute or substitutes, may
do or cause to be done by virtue hereof.
/s/ David D. Horn
---------------------------
David D. Horn
March 23, 1998
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that C. James Prieur, whose signature
appears below, constitutes and appoints Margaret E. Hankard, Margaret Sears
Mead and David N. Brown, and each of them, his attorneys-in-fact, each with
the power of substitution, for him in any and all capacities, to sign a
Registration Statement on Form S-2 of Sun Life Assurance Company of Canada
(U.S.) (Reg. No. 033-31711), and any amendments thereto, and to file the
same, with exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming
all that each of said attorneys-in-fact or his substitute or substitutes, may
do or cause to be done by virtue hereof.
/s/ C. James Prieur
---------------------------
C. James Prieur
March 23, 1998
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that Richard B. Bailey, whose signature
appears below, constitutes and appoints Margaret E. Hankard, Margaret Sears
Mead and David N. Brown, and each of them, his attorneys-in-fact, each with
the power of substitution, for him in any and all capacities, to sign a
Registration Statement on Form S-2 of Sun Life Assurance Company of Canada
(U.S.) (Reg. No. 033-31711), and any amendments thereto, and to file the
same, with exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming
all that each of said attorneys-in-fact or his substitute or substitutes, may
do or cause to be done by virtue hereof.
/s/ Richard B. Bailey
---------------------------
Richard B. Bailey
March 23, 1998
