<PAGE>
As Filed with the Securities and Exchange Commission on April 16, 1998
REGISTRATION NO. 33-41858
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
POST-EFFECTIVE AMENDMENT NO. 7
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 AND SERVICES P.O. BOX 7566
ONE COPLEY PLACE WASHINGTON, D.C. 20044
BOSTON, MASSACHUSETTS 02116 (202) 662-5238
(617) 348-9615
(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. 7 to
Registration Statement on Form S-2
Cross Reference Sheet Pursuant To
Regulation S-K, Item 501(b)
Form S-2 Item Number
and Caption Location in Prospectus; Caption
- -------------------------------------- --------------------------------------
1. Forepart of the Registration Cover Pages
Statement and Outside Front Cover
Page of Prospectus
2. Inside Front and Outside Back Cover Pages; Table of Contents
Cover Pages of Prospectus
3. Summary Information, Risk Factors Cover Pages (Summary); Expense Summary
and Ratio of Earnings to Fixed
Charges
4. Use of Proceeds A Word About the Company, the Fixed
Account,the Variable Account and the
Series Fund
5. Determination of Offering Price Not Applicable
6. Dilution Not Applicable
7. Selling Security Holders Not Applicable
8. Plan of Distribution Distribution of the Contracts
9. Description of Securities to be Cover Pages; A Word About the Company,
Registered the Fixed Account, the Variable
Account and the Series Fund; Purchase
Payments and Contract Values During
Accumulation Period; Cash Withdrawals,
Withdrawal Charges and Market Value
Adjustment; Other Contractual
Provisions
10. Interests of Named Experts and Not Applicable
Counsel
11. Information with Respect to A Word About the Company, the Fixed
Registrant Account, the Variable Account and the
Series Fund; Other Contractual
Provisions; Additional Information
About the Company; The Company's
Directors and Executive Officers;
Legal Proceedings; Legal Matters;
Financial Statements
<PAGE>
Form S-2 Item Number
and Caption Location in Prospectus; Caption
- -------------------------------------- --------------------------------------
12. Incorporation of Certain Cover Pages
Information by Reference
13. Disclosure of Commission Position Not Applicable
on Indemnification for Securities
Act Liabilities
<PAGE>
PROSPECTUS
MAY 1, 1998
MFS REGATTA
--------------------------------------------------
The master group deferred annuity contracts (the "Contracts") and related
certificates offered by this Prospectus are designed for use in connection with
retirement and deferred compensation plans, some of which may qualify as
retirement programs under Sections 401, 403, or 408 of the Internal Revenue
Code. The Contracts are issued by Sun Life Assurance Company of Canada (U.S.)
(the "Company"), an indirect wholly-owned subsidiary of Sun Life Assurance
Company of Canada, having its Principal Executive Offices at One Sun Life
Executive Park, Wellesley Hills, Massachusetts 02181, telephone (781) 237-6030.
The Contracts provide that annuity payments will begin on a selected future
date. The Contracts provide for the accumulation of values on either a variable
basis, a fixed basis, or a fixed and variable basis and provide for fixed and
variable annuity payments as elected.
Each Participant under a Contract will receive a Certificate evidencing such
Participant's coverage under the Contract. Only one Purchase Payment will be
accepted by the Company for each Certificate. A Purchase Payment must be at
least $5,000 and the prior approval of the Company is required before it will
accept a Purchase Payment in excess of $1,000,000.
The Participant may elect to have values under the Certificate accumulate on
a fixed basis in the Fixed Account, which pays interest at the applicable
Guaranteed Interest Rate(s) for the duration of the particular Guarantee
Period(s) selected by the Participant, or on a variable basis in Sun Life of
Canada (U.S.) Variable Account F (the "Variable Account"), a separate account of
the Company, or divided between the Fixed Account and the Variable Account. The
assets of the Variable Account are divided into Sub-Accounts. Each Sub-Account
uses its assets to purchase, at net asset value, shares of a specific series of
MFS/Sun Life Series Trust (the "Series Fund"), a mutual fund registered under
the Investment Company Act of 1940, and advised by Massachusetts Financial
Services Company, an affiliate of the Company. Seven series are available for
investment under the Contracts: (1) Money Market Series; (2) High Yield Series;
(3) Capital Appreciation Series; (4) Government Securities Series; (5) World
Governments Series; (6) Total Return Series; and (7) Managed Sectors Series. The
Series Fund pays its investment adviser certain fees charged against the assets
of each Series. The value of the variable portion, if any, of a Participant's
Account and the amount of Variable Annuity payments will vary to reflect the
investment performance of the series of the Series Fund selected by the
Participant and the deduction of the contract charges described under "How the
Contract Charges Are Assessed" on page 23. For more information about the Series
Fund, see "The Series Fund" on page 14 and the accompanying Series Fund
prospectus.
(CONTINUED ON NEXT PAGE)
THE CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY,
ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS CONTAINS THE BASIC INFORMATION YOU SHOULD KNOW BEFORE INVESTING
IN A CONTRACT AND IS VALID ONLY WHEN ACCOMPANIED BY THE CURRENT PROSPECTUS OF
MFS/SUN LIFE SERIES TRUST. YOU SHOULD RETAIN THIS PROSPECTUS FOR FUTURE
REFERENCE.
*ANY REFERENCE IN THIS PROSPECTUS TO RECEIPT BY THE COMPANY MEANS RECEIPT AT ITS
ANNUITY SERVICE MAILING ADDRESS, C/O SUN LIFE ASSURANCE COMPANY OF CANADA,
RETIREMENT PRODUCTS AND SERVICES, P.O. BOX 1024, BOSTON, MASSACHUSETTS 02103.
<PAGE>
If the Participant elects to have values accumulated on a fixed basis, the
Purchase Payment is allocated to one or more Guarantee Periods available in
connection with the Fixed Account with durations of from one to ten years, as
selected by the Participant. The Fixed Account is the general account of the
Company (See "The Fixed Account" on page 12). The Company will credit interest
at a rate of not less than four percent (4%) per year, compounded annually, to
amounts allocated to the Fixed Account and guarantees these amounts at various
interest rates (the "Guaranteed Interest Rates") for the duration of the
Guarantee Period elected by the Participant, subject to the imposition of any
applicable withdrawal charge, Market Value Adjustment, or account administration
fee. The Company may not change a Guaranteed Interest Rate for the duration of
the Guarantee Period; however, Guaranteed Interest Rates applicable to
subsequent Guarantee Periods cannot be predicted and will be determined at the
sole discretion of the Company (subject to the minimum guarantee of four percent
(4%)). That part of the Contract relating to the Fixed Account is registered
under the Securities Act of 1933, but the Fixed Account is not subject to the
restrictions of the Investment Company Act of 1940.
The Company does not deduct a sales charge from the Purchase Payment made
for a Certificate. However, if any part of a Participant's Account is withdrawn,
a withdrawal charge (contingent deferred sales charge) may be assessed by the
Company against the Participant's Account. This charge is intended to reimburse
the Company for expenses relating to the distribution of the Contracts and
Certificates. During the first seven Account Years up to ten percent (10%) of
the Net Purchase Payment may be withdrawn in each Account Year on a
non-cumulative basis without the imposition of the withdrawal charge by the
Company. Amounts withdrawn in excess of such amount (adjusted by an applicable
Market Value Adjustment with respect to the Fixed Account) will be subject to a
withdrawal charge ranging from 6% to 0%. The withdrawal charge is not imposed
after the end of the seventh Account Year (See "Withdrawal Charges" on page 19).
In addition, for the first seven Account Years the Company deducts a
distribution expense charge at the end of each Valuation Period equal to an
annual rate of 0.15% of the daily net assets of the Variable Account (the staff
of the Securities and Exchange Commission deems this charge a deferred sales
charge). There is no deduction for the distribution expense charge after the
seventh Account Anniversary. (See "Charges Against the Variable Account for
Mortality and Expense Risks and Distribution Expense Charges" on page 23).
In addition, any cash withdrawal of amounts allocated to the Fixed Account,
other than a withdrawal effective within 30 days of the Expiration Date of the
applicable Guarantee Period, will be subject to a Market Value Adjustment. The
Market Value Adjustment will reflect the relationship between the Current Rate
(which is the Guaranteed Interest Rate currently declared by the Company for
Guarantee Periods equal to the balance of the Guarantee Period applicable to the
amount being withdrawn) and the Guaranteed Interest Rate applicable to the
amount being withdrawn. Generally, if the applicable Guaranteed Interest Rate is
more than .50% higher than the Current Rate, the application of the Market Value
Adjustment will result in a higher payment upon withdrawal. Otherwise, the
application of the Market Value Adjustment will result in a lower payment upon
withdrawal (See "Market Value Adjustment" on page 21).
The Company reserves the right to defer the payment of amounts withdrawn
from the Fixed Account for a period not to exceed six months from the date
written request for such withdrawal is received by the Company.
Special restrictions on withdrawals apply to Certificates used with Tax
Sheltered Annuities established pursuant to Section 403(b) of the Internal
Revenue Code (See "Section 403(b) Annuities" on page 20).
In addition, under certain circumstances withdrawals may result in tax
penalties (See "Federal Tax Status"). For a discussion of cash withdrawals,
withdrawal charges and the Market Value Adjustment see "Cash Withdrawals,
Withdrawal Charges and Market Value Adjustment" on page 19.
On each Account Anniversary and on surrender of a Certificate for full value
the Company will deduct an annual account administration fee ("Account Fee") of
$30 from the Participant's Account. After the Annuity Commencement Date the
Account Fee will be deducted pro rata from each variable annuity payment made
during the year. This charge is to reimburse the Company for administrative
expenses related to the issuance and maintenance of the Contracts and
Certificates (See "Account Fee" on page 23).
2
<PAGE>
The Company also deducts a mortality and expense risk charge at the end of
each Valuation Period equal to an annual rate of 1.25% of the daily net assets
of the Variable Account for mortality and expense risks assumed by the Company
(See "Charges Against the Variable Account for Mortality and Expense Risks and
Distribution Expense Charges" on page 23).
In addition, the Contracts provide that the Company may change the
withdrawal charges, Account Fee, mortality and expense risk charges,
distribution expense charges, the tables used in determining the amount of the
first monthly variable annuity payment and fixed annuity payments and the
formula used to calculate the Market Value Adjustment, provided that such
modification shall apply only with respect to Participant's Accounts established
after the effective date of such modification (See "Modification" on page 30).
In the event of the death of the Annuitant prior to the Annuity Commencement
Date, the Company will pay a death benefit to the Beneficiary. If the death of
the Annuitant occurs on or after the Annuity Commencement Date, no death benefit
will be payable except as may be provided under the Annuity Option elected (See
"Death Benefit" on page 22).
Annuity Payments will begin on the Annuity Commencement Date. The
Participant selects the Annuity Commencement Date, the frequency of annuity
payments and the Annuity Option (See "Annuity Provisions" on page 24).
Premium taxes payable to any governmental entity will be deducted from the
Participant's Account (See "Premium Taxes" on page 23).
Subject to certain conditions, and during the Accumulation Period, the
Participant may, without charge, transfer amounts among the Sub-Accounts or
Guarantee Periods available under the Contract. Transfers from or within the
Fixed Account will be subject to the Market Value Adjustment unless the transfer
is effective within 30 days of the Expiration Date of the amount transferred
(See "Transfer Privilege; Telephone Transfers; Restriction on Market Timers" on
page 18).
After the Annuity Commencement Date, the Payee may, subject to certain
restrictions, exchange the value of a designated number of Annuity Units of
particular Sub-Accounts then credited with respect to the particular Payee for
other Annuity Units, the value of which would be such that the dollar amount of
an annuity payment made on the date of the exchange would be unaffected by the
fact of the exchange (See "Exchange of Variable Annuity Units" on page 27).
The Company will vote Series Fund shares held by the Sub-Accounts at
meetings of shareholders of the Series Fund, but will follow voting instructions
received from persons having the right to give voting instructions. The Owner or
Participant is the person having the right to give voting instructions prior to
the Annuity Commencement Date. On or after the Annuity Commencement Date the
Payee is the person having such voting rights. Any shares attributable to the
Company and Series Fund shares for which no timely voting instructions are
received will be voted by the Company in the same proportion as the shares for
which instructions are received from persons having such right (See "Voting of
Series Fund Shares" on page 29).
The Company will furnish Participants and such other persons having voting
rights with certain reports and statements described under "Periodic Reports" on
page 29. Such reports, other than prospectuses, will not include the Company's
financial statements.
If a Participant is not satisfied with the Certificate it may be returned to
the Company at its Annuity Service Mailing Address within ten days after it was
delivered to the Participant. When the Company receives the returned Certificate
it will be cancelled and the Participant's Account Value at the end of the
Valuation Period during which the Certificate was received by the Company will
be refunded. However, if applicable state law so requires, the full amount of
any Purchase Payment received by the Company will be refunded, the "free look"
period may be greater than ten days and alternative methods of returning the
Certificate may be acceptable.
3
<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 Commission
(the "Commission"). Such reports and other information can be inspected and
copied at the public reference facilities of the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. and at the Commission's Regional Offices
located at 75 Park Place, New York, New York and Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
materials also can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The 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
interim 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 Secretary, Sun Life Assurance
Company of Canada (U.S.), One Sun Life Executive Park, Wellesley Hills,
Massachusetts 02181, telephone (800) 225-3950.
4
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Definitions 7
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Expense Summary 9
- --------------------------------------------------------------------------------
Condensed Financial Information--Accumulation Unit Values 10
- --------------------------------------------------------------------------------
Performance Data 11
- --------------------------------------------------------------------------------
This Prospectus is a Catalog of Facts 11
- --------------------------------------------------------------------------------
Uses of the Contract 11
- --------------------------------------------------------------------------------
A Word About the Company, the Fixed Account, the Variable Account and the
Series Fund 12
The Company 12
The Fixed Account 12
The Variable Account 13
The Series Fund 14
- --------------------------------------------------------------------------------
Purchase Payments and Contract Values During Accumulation Period 16
Purchase Payments 16
Participant's Account 16
Variable Accumulation Value 16
Fixed Accumulation Value 17
Guarantee Periods 17
Guaranteed Interest Rates 18
Transfer Privilege; Telephone Transfers; Restriction on Market Timers 18
- --------------------------------------------------------------------------------
Cash Withdrawals, Withdrawal Charges and Market Value Adjustment 19
Cash Withdrawals 19
Withdrawal Charges 20
Section 403(b) Annuities 20
Market Value Adjustment 21
- --------------------------------------------------------------------------------
Death Benefit 22
Death Benefit Provided by the Contract 22
Election and Effective Date of Election 22
Payment of Death Benefit 22
Amount of Death Benefit 22
- --------------------------------------------------------------------------------
How the Contract Charges Are Assessed 23
Account Fee 23
Premium Taxes 23
Charges Against the Variable Account for Mortality and Expense Risks
and Distribution Expense Charges 23
Withdrawal Charges 24
- --------------------------------------------------------------------------------
Annuity Provisions 24
Annuity Commencement Date 24
Election--Change of Annuity Option 25
Annuity Options 25
Determination of Annuity Payments 26
Fixed Annuity Payments 26
Variable Annuity Payments 26
Variable Annuity Unit Value 27
Exchange of Variable Annuity Units 27
Annuity Payment Rates 27
- --------------------------------------------------------------------------------
Other Contractual Provisions 27
Payment Limits 27
Designation and Change of Beneficiary 27
</TABLE>
5
<PAGE>
TABLE OF CONTENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Exercise of Contract Rights 28
Change of Ownership 28
Death of Participant 28
Voting of Series Fund Shares 29
Periodic Reports 29
Substituted Securities 30
Change in Operation of Variable Account 30
Splitting Units 30
Modification 30
Discontinuance of New Participants 31
Custodian 31
Right to Return 31
- --------------------------------------------------------------------------------
Federal Tax Status 31
Introduction 31
Tax Treatment of the Company and the Variable Account 32
Taxation of Annuities in General 32
Qualified Retirement Plans 34
Pension and Profit-Sharing Plans 34
Tax-Sheltered Annuities 34
Individual Retirement Accounts 34
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Administration of the Contracts 34
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Distribution of the Contracts 35
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Additional Information About the Company 36
Selected Financial Data 36
Management's Discussion and Analysis of Financial Condition and
Results of Operations 36
Liquidity 39
Year 2000 Compliance 39
Recent Reorganization 39
Asset/Liability Management and Information About Market Risk 40
Sun Life of Canada 41
Reinsurance 41
Reserves 41
Investments 41
Competition 42
Employees 42
Properties 42
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The Company's Directors and Executive Officers 42
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State Regulation 45
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Legal Proceedings 45
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Accountants 45
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Registration Statements 45
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Financial Statements 46
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Appendix A--Variable Accumulation Unit Value, Variable Annuity Unit Value
and Variable Annuity Payment Calculations 85
Appendix B--State Premium Taxes 85
Appendix C--Withdrawals, Withdrawal Charges and the Market Value
Adjustment 86
Appendix D--Calculation of Performance Data; Advertising and Sales
Literature 88
</TABLE>
6
<PAGE>
DEFINITIONS
The following terms as used in this Prospectus have the indicated meanings:
ACCOUNT YEARS AND ACCOUNT ANNIVERSARIES: The first Account Year shall be
the period of 12 months plus a part of a month as measured from the Date of
Coverage for each Participant to the first day of the calendar month which
follows the calendar month of coverage. All Account Years and Anniversaries
thereafter shall be 12 month periods based upon such first day of the calendar
month which follows the calendar month of coverage. If, for example, the Date of
Coverage is in March, the first Account Year will be determined from the Date of
Coverage but will end on the last day of March in the following year; all other
Account Years and all Account Anniversaries will be measured from April 1.
ACCUMULATION PERIOD: The period before the Annuity Commencement Date and
during the lifetime of the Annuitant.
*ANNUlTANT: The person or persons named in the Application and on whose
life the first annuity payment is to be made. The Participant may not designate
a "Co-Annuitant" unless the Participant and Annuitant are different persons. If
more than one person is so named, all provisions of the Contract which are based
on the death of the "Annuitant" will be based on the date of death of the last
survivor of the persons so named. By example, the death benefit will become due
only upon the death, prior to the Annuity Commencement Date, of the last
survivor of the persons so named. Collectively, these persons are referred to in
the Contract as "Annuitants." The Participant is not permitted to name a
"Co-Annuitant" under a Qualified Contract.
*ANNUITY COMMENCEMENT DATE: The date on which the first annuity payment
under each Certificate is to be made.
*ANNUITY OPTION: The method for making annuity payments.
ANNUITY UNIT: A unit of measure used in the calculation of the amount of
the second and each subsequent variable annuity payment from the Variable
Account.
APPLICATION: The document signed by each Participant that serves as his or
her application for participation under the Contract.
*BENEFICIARY: The person or entity having the right to receive the death
benefit set forth in each Certificate and, for Non-Qualified Contracts, who is
the "designated beneficiary" for purposes of Section 72(s) of the Internal
Revenue Code in the event of the Participant's death.
CERTIFICATE: The document for each Participant which evidences the coverage
of the Participant under the Contract.
COMPANY: Sun Life Assurance Company of Canada (U.S.).
CONTRACT APPLICATION: The document signed by the Owner that evidences the
Owner's application for the Contract.
DATE OF COVERAGE: The date on which a Participant's Account becomes
effective.
DUE PROOF OF DEATH: An original certified copy of an official death
certificate, an original certified copy of a decree of a court of competent
jurisdiction as to the finding of death, or any other proof satisfactory to the
Company.
FIXED ACCOUNT: The Fixed Account consists of all assets of the Company
other than those allocated to a separate account of the Company.
FIXED ANNUITY: An annuity with payments which do not vary as to dollar
amount.
GUARANTEE AMOUNT: Any portion of a Participant's Account Value allocated to
a particular Guarantee Period with a particular Expiration Date (including
interest earned thereon).
GUARANTEE PERIOD: The period for which a Guaranteed Interest Rate is
credited. This period may be one to ten years, as elected by the Participant.
- ------------------------
*As specified in the Application, unless changed.
7
<PAGE>
GUARANTEED INTEREST RATE: The rate of interest credited by the Company on a
compound annual basis during any Guarantee Period.
ISSUE DATE: The date on which the Contract becomes effective.
NON-QUALIFIED CONTRACT: A Contract used in connection with a retirement
plan which does not receive favorable federal income tax treatment under
Sections 401, 403, or 408 of the Internal Revenue Code. The Participant's
interest in the Contract must be owned by a natural person or agent for a
natural person for the Contract to receive favorable income tax treatment as an
annuity.
*OWNER: The person, persons or entity entitled to the ownership rights
stated in the Contract and in whose name or names the Contract is issued. The
Owner may designate a trustee or custodian of a retirement plan which meets the
requirements of Section 401, Section 408(c) or Section 408(k) of the Internal
Revenue Code to serve as legal owner of assets of a retirement plan, but the
term "Owner", as used herein, shall refer to the organization entering into the
Contract.
PARTICIPANT: The person named in the Certificate who is entitled to
exercise all rights and privileges of ownership under the Certificate, except as
reserved by the Owner.
PARTICIPANT'S ACCOUNT: An account established for each Participant to which
the Net Purchase Payment is credited.
PARTICIPANT'S ACCOUNT VALUE: The Variable Accumulation Value, if any, plus
the Fixed Accumulation Value, if any, of a Participant's Account for any
Valuation Period.
PAYEE: A recipient of payments under the Contract. The term includes an
Annuitant or a Beneficiary who becomes entitled to benefits upon the death of
the Annuitant.
PURCHASE PAYMENT (PAYMENT): An amount paid to the Company as consideration
for the benefits provided by the Contract.
QUALIFIED CONTRACT: A Contract used in connection with a retirement plan
which receives favorable federal income tax treatment under Sections 401, 403,
or 408 of the Internal Revenue Code of 1986, as amended.
RECEIPT: Receipt by the Company at its Annuity Service Mailing Address
shown on the cover of this Prospectus.
SERIES FUND: MFS/Sun Life Series Trust.
SEVEN YEAR ANNIVERSARY: The seventh Account Anniversary and each succeeding
Account Anniversary occurring at any seven year interval thereafter, for
example, the 14th, 21st and 28th Account Anniversaries.
SUB-ACCOUNT: That portion of the Variable Account which invests in shares
of a specific series or sub-series of the Series Fund.
VALUATION PERIOD: The period of time from one determination of Variable
Accumulation Unit and Annuity Unit values to the next subsequent determination
of these values. Such determination shall be made as of the close of the New
York Stock Exchange on each day the Exchange is open for trading and on such
other days on which there is a sufficient degree of trading in the portfolio
securities of the Variable Account so that the values of the Variable Account's
Accumulation Units and Annuity Units might be materially affected.
VARIABLE ACCOUNT: A separate account of the Company consisting of assets
set aside by the Company, the investment performance of which is kept separate
from that of the general assets of the Company.
VARIABLE ACCUMULATION UNIT: A unit of measure used in the calculation of
the value of the variable portion of a Participant's Account.
VARIABLE ANNUITY: An annuity with payments which vary as to dollar amount
in relation to the investment performance of specified Sub-Accounts of the
Variable Account.
- ------------------------
*As specified in the Application, unless changed.
8
<PAGE>
EXPENSE SUMMARY
The purpose of the following table and Example is to help Participants and
prospective purchasers under the Contracts to understand the costs and expenses
that are borne, directly and indirectly, by Participants WHEN PURCHASE PAYMENTS
ARE ALLOCATED TO THE VARIABLE ACCOUNT. The table reflects expenses of the
Variable Account as well as of the Series Fund. The information set forth should
be considered together with the narrative provided under the heading "How the
Contract Charges Are Assessed" in this Prospectus, and with the Series Fund's
prospectus. In addition to the expenses listed below, premium taxes may be
applicable under the Contracts.
<TABLE>
<CAPTION>
CAPITAL
MONEY APPRE- GOVERNMENT WORLD TOTAL MANAGED
PARTICIPANT MARKET HIGH YIELD CIATION SECURITIES GOVERNMENTS RETURN SECTORS
TRANSACTION EXPENSES SERIES SERIES SERIES SERIES SERIES SERIES SERIES
- ----------------------------------- ---------- ---------- --------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales Load Imposed on Purchases.... 0 0 0 0 0 0 0
Deferred Sales Load (as a
percentage of Participant's
Account Value withdrawn) (1)
Account Year
1.............................. 6% 6% 6% 6% 6% 6% 6%
2.............................. 6% 6% 6% 6% 6% 6% 6%
3.............................. 5% 5% 5% 5% 5% 5% 5%
4.............................. 5% 5% 5% 5% 5% 5% 5%
5.............................. 4% 4% 4% 4% 4% 4% 4%
6.............................. 4% 4% 4% 4% 4% 4% 4%
7.............................. 3% 3% 3% 3% 3% 3% 3%
thereafter..................... 0% 0% 0% 0% 0% 0% 0%
Exchange fee (2)................... 0 0 0 0 0 0 0
<CAPTION>
ANNUAL ACCOUNT FEE $30 Per Participant's Account
- -----------------------------------
SEPARATE ACCOUNT ANNUAL EXPENSES
- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(as a percentage of average
separate account assets)
Mortality and Expense Risk Fees.... 1.25% 1.25% 1.25% 1.25% 1.25% 1.25% 1.25%
Distribution Expense Charge (3).... 0.15% 0.15% 0.15% 0.15% 0.15% 0.15% 0.15%
Other Fees and Expenses of the
Separate Account................. 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Total Separate Account Annual
Expenses......................... 1.40% 1.40% 1.40% 1.40% 1.40% 1.40% 1.40%
<CAPTION>
SERIES FUND ANNUAL EXPENSES
- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(as a percentage of Series Fund
average net assets)
Management Fees.................... 0.50% 0.75% 0.73% 0.55% 0.75% 0.66% 0.74%
Other Expenses..................... 0.07% 0.09% 0.05% 0.08% 0.16% 0.05% 0.08%
Total Series Fund Annual
Expenses......................... 0.57% 0.84% 0.78% 0.63% 0.91% 0.71% 0.82%
</TABLE>
- ------------------------
(1) A portion of the Participant's Account may be withdrawn each year without
imposition of any withdrawal charge, and after a Purchase Payment has been
held by the Company for seven years the entire Participant's Account Value
may be withdrawn free of the withdrawal charge.
(2) A Market Value Adjustment may be imposed on amounts transferred from or
within the Fixed Account.
(3) The Distribution Expense Charge is imposed only during the first seven
Account Years. This charge may be deemed a deferred sales charge.
9
<PAGE>
EXAMPLES
If you surrender your Certificate at the end of the applicable time period,
you would pay the following expenses on a $1,000 investment, assuming a 5%
annual return on assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Money Market Series $ 74 $ 107 $ 142 $ 224
High Yield Series 77 115 156 252
Capital Appreciation Series 76 113 153 246
Government Securities Series 75 109 145 230
World Governments Series 77 117 160 259
Total Return Series 75 111 149 239
Managed Sectors Series 77 114 115 250
</TABLE>
If you do not surrender your Certificate, or if you annuitize at the end of
the applicable time period, you would pay the following expenses on a $1,000
investment, assuming a 5% annual return on assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Money Market Series $ 20 $ 62 $ 106 $ 224
High Yield Series 23 70 120 252
Capital Appreciation Series 22 68 117 246
Government Securities Series 21 64 109 230
World Governments Series 23 72 124 259
Total Return Series 21 66 113 239
Managed Sectors Series 23 69 119 250
</TABLE>
THE ABOVE EXAMPLES SHOULD NOT BE CONSIDERED TO BE REPRESENTATIONS OF PAST OR
FUTURE EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LOWER THAN THOSE SHOWN.
CONDENSED FINANCIAL INFORMATION--ACCUMULATION UNIT VALUES
The following information should be read in conjunction with the Variable
Account's financial statements included elsewehere in this Prospectus, all of
which has been audited by Deloitte & Touche LLP, independent certified public
accountants.
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, ----------------------------------------------------------------------
1989* 1990 1991 1992 1993 1994 1995
------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
CAPITAL APPRECIATION SERIES
Unit Value:
Beginning of period $ 10.0000 $ 10.1193 $ 9.0168 $ 12.5296 $ 14.0559 $ 16.3574 $ 15.5512
End of period $ 10.1193 $ 9.0168 $ 12.5296 $ 14.0559 $ 16.3574 $ 15.5512 $ 20.6225
Units outstanding end of period 264,632 3,677,247 7,517,358 8,168,037 7,272,302 6,184,731 6,615,207
GOVERNMENT SECURITIES SERIES
Unit Value:
Beginning of period $ 10.0000 $ 10.0333 $ 10.7567 $ 12.2849 $ 12.9408 $ 13.8738 $ 13.3872
End of period $ 10.0333 $ 10.7567 $ 12.2849 $ 12.9408 $ 13.8738 $ 13.3872 $ 15.5323
Units outstanding end of period 179,505 2,723,676 5,194,019 4,761,049 4,708,841 4,235,203 3,535,152
HIGH YIELD SERIES
Unit Value:
Beginning of period $ 10.0000 $ 9.8487 $ 8.3800 $ 12.1924 $ 13.8294 $ 16.0549 $ 15.4801
End of period $ 9.8487 $ 8.3800 $ 12.1924 $ 13.8294 $ 16.0549 $ 15.4801 $ 17.8678
Units outstanding end of period 24,369 247,285 795,298 1,031,001 1,087,265 839,825 1,068,412
MANAGED SECTORS SERIES
Unit Value:
Beginning of period $ 10.0000 $ 9.8911 $ 8.7393 $ 13.9725 $ 14.6738 $ 15.0587 $ 14.5653
End of period $ 9.8911 $ 8.7393 $ 13.9725 $ 14.6738 $ 15.0587 $ 14.5653 $ 18.9987
Units outstanding end of period 126,499 1,410,497 2,409,951 2,768,568 2,431,072 2,066,642 2,150,361
MONEY MARKET SERIES
Unit Value:
Beginning of period $ 10.0000 $ 10.0971 $ 10.7366 $ 11.2031 $ 11.4176 $ 11.5560 $ 11.8185
End of period $ 10.0971 $ 10.7366 $ 11.2031 $ 11.4176 $ 11.5560 $ 11.8185 $ 12.2910
Units outstanding end of period 221,039 5,562,419 6,380,774 4,115,845 3,081,737 3,873,044 3,453,907
TOTAL RETURN SERIES
Unit Value:
Beginning of period $ 10.0000 $ 10.1677 $ 10.2969 $ 12.3469 $ 13.2211 $ 14.7834 $ 14.2495
End of period $ 10.1677 $ 10.2969 $ 12.3469 $ 13.2211 $ 14.7834 $ 14.2495 $ 17.8165
Units outstanding end of period 391,244 8,211,655 15,599,909 16,375,301 15,806,723 14,225,539 13,106,997
WORLD GOVERNMENTS SERIES
Unit Value:
Beginning of period $ 10.0000 $ 10.2725 $ 11.4930 $ 13.0187 $ 12.8985 $ 15.1215 $ 14.2437
End of period $ 10.2725 $ 11.4930 $ 13.0187 $ 12.8985 $ 15.1215 $ 14.2437 $ 16.2514
Units outstanding end of period 20,710 748,280 2,220,300 2,205,650 2,300,611 1,967,375 1,730,002
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
CAPITAL APPRECIATION SERIES
Unit Value:
Beginning of period $ 20.6225 $ 24.7064
End of period $ 24.7064 $ 29.9999
Units outstanding end of period 6,316,305 2,993,020
GOVERNMENT SECURITIES SERIES
Unit Value:
Beginning of period $ 15.5323 $ 15.5644
End of period $ 15.5644 $ 16.6923
Units outstanding end of period 3,362,650 1,462,222
HIGH YIELD SERIES
Unit Value:
Beginning of period $ 17.8678 $ 19.7545
End of period $ 19.7545 $ 22.0555
Units outstanding end of period 1,204,380 537,033
MANAGED SECTORS SERIES
Unit Value:
Beginning of period $ 18.9987 $ 22.0312
End of period $ 22.0312 $ 27.2960
Units outstanding end of period 2,202,213 941,686
MONEY MARKET SERIES
Unit Value:
Beginning of period $ 12.2910 $ 12.7175
End of period $ 12.7175 $ 13.1780
Units outstanding end of period 3,859,738 1,518,722
TOTAL RETURN SERIES
Unit Value:
Beginning of period $ 17.8165 $ 20.0405
End of period $ 20.0405 $ 24.1056
Units outstanding end of period 12,461,003 5,756,653
WORLD GOVERNMENTS SERIES
Unit Value:
Beginning of period $ 16.2514 $ 16.7734
End of period $ 16.7734 $ 16.4146
Units outstanding end of period 1,460,289 700,338
</TABLE>
- ------------------------
* From July 13, 1989 (date of commencement of operations) to December 31, 1989.
10
<PAGE>
PERFORMANCE DATA
From time to time the Variable Account may publish reports to shareholders,
sales literature and advertisements containing performance data relating to the
Sub-Accounts. Performance data will consist of total return quotations which
will always include quotations for the period subsequent to the date each Sub-
Account became available for investment under the Contracts, and for recent one
year and, when applicable, five and ten year periods. Such quotations for such
periods will be the average annual rates of return required for an initial
Purchase Payment of $1,000 to equal the actual variable accumulation value
attributable to such Purchase Payment on the last day of the period, after
reflection of all applicable withdrawal and Contract charges. In addition, the
Variable Account may calculate non-standardized rates of return that do not
reflect withdrawal charges and Contract charges. Results calculated without
withdrawal charges and/or Contract charges will be higher. Performance figures
used by the Variable Account are based on the actual historical performance of
the Series Fund for specified periods, and the figures are not intended to
indicate future performance. The Variable Account may also from time to time
compare its investment performance to various unmanaged indices or other
variable annuities and may refer to certain rating and other organizations in
its marketing materials. More detailed information on the computations is set
forth in Appendix D.
THIS PROSPECTUS IS A CATALOG OF FACTS
This Prospectus contains information about the master group deferred annuity
contract (the "Contract") which provides fixed benefits, variable benefits or a
combination of both. It describes its uses and objectives, its benefits and
costs, and the rights and privileges of the Owner and the Participant, as
applicable. It also contains information about the Company, the Variable
Account, the Fixed Account and the Series Fund. This Prospectus has been
carefully prepared in non-technical language to help you decide whether the
purchase of a Contract will fit the needs of your retirement plan. We urge you
to read it carefully and retain it for future reference. The Contract has
appropriate provisions relating to variable and fixed accumulation values and
variable and fixed annuity payments. A Variable Annuity and a Fixed Annuity have
certain similarities. Both provide that the Purchase Payment, less certain
deductions, will be accumulated prior to the Annuity Commencement Date. After
the Annuity Commencement Date, annuity payments will be made to the Annuitant.
The Company assumes the mortality and expense risks under the Contract, for
which it receives certain amounts. The significant difference between a Variable
Annuity and a Fixed Annuity is that under a Variable Annuity, all investment
risk is assumed by the Participant or Payee and the amounts of the annuity
payments vary with the investment performance of the Variable Account; under a
Fixed Annuity, the investment risk is assumed by the Company (except in the case
of early withdrawals (See "Cash Withdrawals" and "Market Value Adjustment")) and
the amounts of the annuity payments do not vary. However, the Participant bears
the risk that the Guaranteed Interest Rate to be credited on amounts allocated
to the Fixed Account may not exceed the minimum guaranteed rate of 4% for any
Guarantee Period.
USES OF THE CONTRACT
The Contract is designed for use in connection with retirement plans which
meet the requirements of Section 401 (including Section 401(k)), Section 403,
Section 408(b), Section 408(c) or Section 408(k) of the Internal Revenue Code,
however, the Company may discontinue offering new Contracts in connection with
certain types of qualified plans. Certain federal tax advantages are currently
available to retirement plans which qualify as (1) self-employed individuals'
retirement plans under Section 401; (2) corporate or association retirement
plans under Section 401; (3) annuity purchase plans sponsored by certain tax
exempt organizations or public school systems under Section 403(b); or (4)
individual retirement accounts, including employer or association of employees
individual retirement accounts under Section 408(c) and SEP-IRAs under Section
408(k) (See "Federal Tax Status").
The Contract is also designed so that it may be used in connection with
certain non-tax-qualified retirement plans, such as payroll savings plans and
such other groups (trusteed or nontrusteed) as may be eligible under applicable
law.
A Contract is issued to the Owner covering all Participants. Each
Participant receives a Certificate which evidences his or her participation
under the Contract. For the purposes of determining benefits under the Contract,
a Participant's Account is established for each Participant.
11
<PAGE>
A WORD ABOUT THE COMPANY,
THE FIXED ACCOUNT, THE VARIABLE ACCOUNT AND THE SERIES FUND
THE COMPANY
The Company was incorporated as a stock life insurance company 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 is
currently authorized to do business in 48 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 and offers in New York group life and long-term disability
insurance and individual fixed and combination fixed/ variable annuity contracts
which are similar to the Contract offered by this Prospectus. The Company's
other active subsidiaries are Sun Capital Advisers, Inc., a registered
investment adviser, Clarendon Insurance Agency, Inc., a registered broker-dealer
that acts as the general distributor of the Contracts and other annuity and life
insurance contracts issued by the Company and its affiliates, Sun Life of Canada
(U.S.) Distributors, Inc., a registered broker-dealer and investment adviser,
New London Trust, F.S.B., a federally chartered savings bank, Massachusetts
Casualty Insurance Company, which issues individual disability income policies,
and Sun Life Financial Services Limited, which provides off-shore administrative
services to the Company and Sun Life Assurance Company of Canada ("Sun Life
(Canada)").
The Company is a wholly-owned subsidiary of Sun Life of Canada (U.S.)
Holdings, Inc., ("Life Holdco"), which, on December 18, 1997 became a
wholly-owned subsidiary of Sun Life Assurance Company of Canada -- U.S.
Operations Holdings, Inc. ("U.S. Holdco"). U.S. Holdco is a wholly-owned
subsidiary of Sun Life (Canada), 150 King Street West, Toronto, Ontario, Canada.
Sun Life (Canada) is a mutual life insurance company incorporated pursuant to an
Act of the Parliament of Canada in 1865 and currently transacts business in all
of the Canadian provinces and territories, all U.S. states except New York, the
District of Columbia, Puerto Rico, the Virgin Islands, Great Britain, Ireland,
Hong Kong, Bermuda and the Philippines.
THE FIXED ACCOUNT
The Fixed Account consists of all of the general assets of the Company other
than those allocated to any separate account. A Purchase Payment will be
allocated to Guarantee Periods available in connection with the Fixed Account to
the extent elected by the Participant at the time of the establishment of such
Participant's Account. In addition, all or part of the Participant's Account
Value may be transferred to Guarantee Periods available under the Contract as
described under "Transfer Privilege; Telephone Transfers; Restriction on Market
Timers" on page 18. Assets supporting amounts allocated to Guarantee Periods
become part of the Company's general account assets and are available to fund
the claims of all classes of customers of the Company, including claims for
benefits under the Certificates.
The Company will invest the assets of the Fixed Account in those assets
chosen by the Company and allowed by applicable state laws regarding the nature
and quality of investments that may be made by life insurance companies and the
percentage of their assets that may be committed to any particular type of
investment. In general, these laws permit investments, within specified limits
and subject to certain qualifications, in federal, state and municipal
obligations, corporate bonds, preferred and common stocks, real estate
mortgages, real estate and certain other investments.
The Company intends to invest the assets of the Fixed Account primarily in
debt instruments as follows: (1) Securities issued by the United States
Government or its agencies or instrumentalities, which issues may or may not be
guaranteed by the United States Government; (2) Debt securities which have an
investment grade, at the time of purchase, within the four highest grades
assigned by Moody's Investors Services, Inc. (Aaa, Aa, A or Baa), Standard &
Poor's Corporation (AAA, AA, A or BBB), or any other nationally recognized
rating service; (3) Other debt instruments, including, but not limited to,
issues of or guaranteed by banks or bank holding companies and other
corporations, which obligations, although not rated by Moody's or Standard &
Poor's, are deemed by the Company's management to have an investment quality
comparable to securities which may be purchased as stated above; and (4) Other
evidences of indebtedness secured by mortgages or deeds of trust representing
liens upon real estate. Notwithstanding the foregoing, the Company may also
invest a portion of the Fixed Account in below investment grade debt
instruments.
12
<PAGE>
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 contract.
Fixed annuity payments made to Annuitants under the Contracts will not be
affected by the mortality experience (death rate) of persons receiving such
payments or of the general population. The Company assumes this "mortality risk"
by virtue of annuity rates incorporated in the Contract which cannot be changed
(except as described under "Modification" with respect to Participant's Accounts
established after the effective date of such modification). In addition, the
Company guarantees that it will not increase charges for maintenance of the
Contracts, regardless of its actual expenses (except as described under
"Modification" with respect to Participant's Accounts established after the
effective date of such modification).
Investment income from the Fixed Account allocated to the Company includes
compensation for mortality and expense risks and distribution expense risks
borne by the Company in connection with contracts participating in the Fixed
Account. The Company expects to derive a profit from this compensation. The
amount of investment income allocated to the Contracts will vary from Guarantee
Period to Guarantee Period in the sole discretion of the Company. However, the
Company guarantees that it will credit interest at a rate of not less than 4%
per year, compounded annually, to amounts allocated to the Fixed Account under
the Contract. The Company may credit interest at a rate in excess of 4% per
year; however, the Company is not obligated to credit any interest in excess of
4% per year. There is no specific formula for the determination of excess
interest credits. Such credits, if any, will be determined by the Company based
on information as to expected investment yields. Some of the factors that the
Company may consider in determining whether to credit interest to amounts
allocated to the Fixed Account and the amount thereof, are: general economic
trends; rates of return currently available and anticipated on the Company's
investments; regulatory and tax requirements; and competitive factors. The
Company's general investment strategy will be to invest amounts allocated to the
Fixed Account in investment-grade debt securities and mortgages using
immunization strategies with respect to the applicable Guarantee Periods. This
includes, with respect to investments and average terms of investments, using
dedication (cash flow matching) and/ or duration matching to minimize the
Company's risk of not achieving the rates it is crediting under Guarantee
Periods in volatile interest rate environments. ANY INTEREST CREDITED TO AMOUNTS
ALLOCATED TO THE FIXED ACCOUNT IN EXCESS OF 4% PER YEAR WILL BE DETERMINED IN
THE SOLE DISCRETION OF THE COMPANY. THE PARTICIPANT ASSUMES THE RISK THAT
INTEREST CREDITED ON AMOUNTS ALLOCATED TO THE FIXED ACCOUNT MAY NOT EXCEED THE
MINIMUM GUARANTEE OF 4% FOR ANY GIVEN YEAR.
The Company is aware of no statutory limitations on the maximum amount of
interest it may credit, and the 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 VARIABLE ACCOUNT
The basic objective of a variable annuity contract is to provide variable
annuity payments which will be to some degree responsive to changes in the
economic environment, including inflationary forces and changes in rates of
return available from various types of investments. The Contract is designed to
seek to accomplish this objective by providing that variable annuity payments
(1) will reflect the investment performance of the Variable Account with respect
to amounts allocated to the Variable Account before the Annuity Commencement
Date and (2) will reflect the investment performance of the Variable Account
after that date.
13
<PAGE>
Since the Variable Account is always fully invested in Series Fund shares, its
investment performance reflects the investment performance of the Series Fund.
Values of Series Fund shares held by the Variable Account fluctuate and are
subject to the risks of changing economic conditions as well as the risk
inherent in the ability of the Series Fund's management to make necessary
changes in its portfolios to anticipate changes in economic conditions.
Therefore, the Participant bears the entire investment risk that the basic
objectives of the Contract may not be realized, and that the adverse effects of
inflation may not be lessened and there can be no assurance that the aggregate
amount of variable annuity payments will equal or exceed the Purchase Payment
made with respect to a particular Participant's Account for the reasons
described above or because of the premature death of a Payee.
Another important feature of the Contract related to its basic objective is
the Company's promise that the dollar amount of variable annuity payments made
during the lifetime of the Payee(s) will not be adversely affected by the actual
mortality experience of the Company or by the actual expenses incurred by the
Company in excess of expense deductions provided for in the Contract.
Sun Life of Canada (U.S.) Variable Account F (the "Variable Account") was
established by the Company as a separate account on July 13,1989 pursuant to a
resolution of its Board of Directors. Under Delaware insurance law and the
Contract, the income, gains or losses of the Variable Account are credited to or
charged against the assets of the Variable Account without regard to the other
income, gains, or losses of the Company. These assets are held in relation to
the Contracts described in this Prospectus and such other variable annuity
contracts as may be issued by the Company and designated by it as providing
benefits which vary in accordance with the investment performance of the
Variable Account. Although the assets maintained in the Variable Account will
not be charged with any liabilities arising out of any other business conducted
by the Company, all obligations arising under the Contracts, including the
promise to make annuity payments, are general corporate obligations of the
Company.
The Variable Account meets the definition of a "separate account" under the
federal securities laws and is registered as a unit investment trust under the
Investment Company Act of 1940. Registration with the Securities and Exchange
Commission does not involve supervision of the management or investment
practices or policies of the Variable Account or of the Company by the
Commission.
The assets of the Variable Account are divided into Sub-Accounts. Each
Sub-Account invests exclusively in shares of a specific series of the Series
Fund. All amounts allocated by the Participant to the Variable Account will be
used to purchase Series Fund shares as designated by the Participant at their
net asset value. Any and all distributions made by the Series Fund with respect
to the shares held by the Variable Account will be reinvested to purchase
additional Series Fund shares at net asset value. Deductions from the Variable
Account for cash withdrawals, annuity payments, death benefits, Account Fees,
contract charges against the assets of the Variable Account for the assumption
of mortality and expense risks, distribution expense risks, and any applicable
taxes will, in effect, be made by redeeming the number of Series Fund shares at
their net asset value equal in total value to the amount to be deducted. The
Variable Account will be fully invested in Series Fund shares at all times.
THE SERIES FUND
MFS/Sun Life Series Trust (the "Series Fund") is an open-end investment
management company registered under the Investment Company Act of 1940.
Currently shares of the Series Fund are also sold to other separate accounts
established by the Company and Sun Life Insurance and Annuity Company of New
York in connection with individual and group variable annuity contracts and
variable life insurance contracts. In the future, shares of the Series Fund may
be sold to other separate accounts established by the Company or its affiliates
to fund other variable annuity or variable life insurance contracts. The Company
and its affiliates will be responsible for reporting to the Series Fund's Board
of Trustees any potential or existing conflicts between the interests of
variable annuity contract owners/participants and the interests of owners of
variable life insurance contracts that provide for investment in shares of the
Series Fund. The Board of Trustees, a majority of whom are not "interested
persons" of the Series Fund, as that term is defined in the Investment Company
Act of 1940, also intends to monitor the Series Fund to identify the existence
of any
14
<PAGE>
such irreconcilable material conflicts and to determine what action, if any,
should be taken by the Series Fund and/or the Company and its affiliates (see
"Management of the Series Fund" in the Series Fund prospectus).
The Series Fund is composed of twenty-six independent portfolios of
securities, each of which has separate investment objectives and policies.
Shares of the Series Fund are issued in twenty-six series, each corresponding to
one of the portfolios; however, the Contracts provide for investment only in
shares of the seven series of the Series Fund described below. Additional
portfolios may be added to the Series Fund which may or may not be available for
investment by the Variable Account.
(1) MONEY MARKET SERIES ("MMS") will seek maximum current income to the
extent consistent with stability of principal by investing exclusively in money
market instruments maturing in less than 13 months. 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 net 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
Fund prospectus carefully and consider the investment risks involved.
(3) CAPITAL APPRECIATION SERIES ("CAS") will seek capital appreciation by
investing in securities of all types, with a major emphasis on common stocks.
(4) GOVERNMENT SECURITIES SERIES ("GSS") will seek current income and
preservation of capital by investing in U.S. Government and government-related
Securities.
(5) WORLD GOVERNMENTS SERIES ("WGS") will seek moderate current income and
preservation and growth of capital by investing in a portfolio of U.S. and
Foreign Government Securities.
(6) TOTAL RETURN SERIES ("TRS") will seek primarily to obtain above-average
income (compared to a portfolio entirely invested in equity securities)
consistent with prudent employment of capital. Its secondary objective is to
take advantage of opportunities for growth of capital and income. Assets will be
allocated and reallocated from time to time between money market, fixed income
and equity securities. Under normal market conditions, at least 25% of the Total
Return Series' assets will be invested in fixed income securities and at least
40% and no more than 75% of its assets will be invested in equity securities.
(7) MANAGED SECTORS SERIES ("MSS") will seek capital appreciation by varying
the weighting of its portfolio of common stocks among certain industry sectors.
Dividend income, if any, is incidental to its objective of capital appreciation.
The investment adviser of the Series Fund, Massachusetts Financial Services
Company ("MFS"), is paid fees by the Series Fund for its services pursuant to
investment advisory agreements. MFS, a Delaware corporation, is an affiliate of
the Company. MFS also serves as investment adviser to each of the funds in the
MFS Family of Funds, and to certain other investment companies established or
distributed by MFS and/or the Company. MFS Institutional Advisors, Inc., a
subsidiary of MFS, provides investment advice to substantial private clients.
MFS and its predecessor organizations have a history of money management dating
from 1924. MFS operates as an autonomous organization and the obligation of
performance with respect to the investment advisory and underwriting agreements
is solely that of MFS. The Company undertakes no obligation in this regard.
A more detailed description of the Series Fund, its management, its
investment objectives, policies and restrictions and its expenses may be found
in the accompanying current prospectus of the Series Fund and in the Series
Fund's Statement of Additional Information, which is available by calling
1-800-752-7215.
15
<PAGE>
PURCHASE PAYMENTS AND CONTRACT VALUES DURING ACCUMULATION PERIOD
PURCHASE PAYMENTS
(1) PLACE, AMOUNT AND FREQUENCY
All Purchase Payments are to be paid to the Company at its Annuity Service
Mailing Address. The Company will not accept a Purchase Payment to be allocated
to a Participant's Account which is less than $5,000. In addition, the prior
approval of the Company is required before it will accept a Purchase Payment in
excess of $1,000,000. Only one Purchase Payment may be made per Certificate.
A completed Application and the Purchase Payment are forwarded to the
Company for acceptance. Upon acceptance, the Contract and Certificate(s), as
applicable, are issued to the Owner and/or Participant(s), respectively, and the
Purchase Payment is then credited to the Participant's Account. A Purchase
Payment must be applied within two business days of receipt by the Company of a
completed Application. The Company may retain the Purchase Payment for up to
five business days while attempting to complete an incomplete Application. If
the Application cannot be made complete within five business days, the
prospective participant will be informed of the reasons for the delay and the
Purchase Payment will be returned immediately unless the prospective participant
specifically consents to the Company's retaining the Purchase Payment until the
Application is made complete. Thereafter, the Purchase Payment must be applied
to the Participant's Account within two business days.
(2) ACCOUNT CONTINUATION
A Participant's Account shall be continued automatically in full force
during the lifetime of the Annuitant until the Annuity Commencement Date or
until the Participant's Account is surrendered.
(3) ALLOCATION OF NET PURCHASE PAYMENT
The Net Purchase Payment is that portion of the Purchase Payment which
remains after deduction of any applicable premium tax or similar tax. The Net
Purchase Payment will be allocated either to Guarantee Periods available in
connection with the Fixed Account or to Sub-Accounts of the Variable Account or
to both Sub-Accounts and the Fixed Account in accordance with the allocation
factors specified in the particular Participant's Application.
PARTICIPANT'S ACCOUNT
The Company will establish a Participant's Account for each Participant
under a Contract and will maintain the Participant's Account during the
Accumulation Period. The Participant's Account Value for any Valuation Period is
equal to the sum of the variable accumulation value, if any, plus the fixed
accumulation value, if any, of the Participant's Account for that Valuation
Period.
VARIABLE ACCUMULATION VALUE
The variable accumulation value of a Participant's Account, if any, for any
Valuation Period is equal to the sum of the value of all Variable Accumulation
Units credited to the Participant's Account for such Valuation Period.
(1) CREDITING VARIABLE ACCUMULATION UNITS
Upon receipt of a Purchase Payment by the Company, all or that portion, if
any, of the Net Purchase Payment to be allocated to any Sub-Accounts in
accordance with the allocation factors will be credited to the Participant's
Account in the form of Variable Accumulation Units. The number of particular
Variable Accumulation Units to be credited is determined by dividing the dollar
amount allocated to a particular Sub-Account by the Variable Accumulation Unit
value for the particular Sub-Account for the Valuation Period during which the
Purchase Payment is applied by the Company to the Participant's Account.
(2) VARIABLE ACCUMULATION UNIT VALUE
The Variable Accumulation Unit value for each Sub-Account was established at
$10.00 for the first Valuation Period of the particular Sub-Account. The
Variable Accumulation Unit value for a particular Sub-Account for any subsequent
Valuation Period is determined by methodology which is the mathematical
equivalent of multiplying the Variable Accumulation Unit value for the
particular Sub-Account for the immediately preceding Valuation Period by the Net
Investment Factor for the particular Sub-Account for such
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<PAGE>
subsequent Valuation Period. The Variable Accumulation Unit value for each
Sub-Account for any Valuation Period is the value determined as of the end of
the particular Valuation Period and may increase, decrease or remain the same
from Valuation Period to Valuation Period in accordance with the Net Investment
Factor described in (3) below. For a hypothetical example of the calculation of
the value of a Variable Accumulation Unit, see Appendix A.
(3) NET INVESTMENT FACTOR
The Net Investment Factor is an index applied to measure the investment
performance of a Sub-Account from one Valuation Period to the next. The Net
Investment Factor may be greater or less than or equal to one; therefore the
value of a Variable Accumulation Unit may increase, decrease or remain the same.
The Net Investment Factor for any Sub-Account for any Valuation Period is
determined by dividing (a) by (b) and then subtracting (c) from the result
where:
(a) is the net result of:
(1) the net asset value of a Series Fund share held in the
Sub-Account determined as of the end of the Valuation Period, plus
(2) the per share amount of any dividend or other distribution
declared by the Series Fund on the shares held in the Sub-Account if the
"ex-dividend" date occurs during the Valuation Period, plus or minus
(3) a per share credit or charge with respect to any taxes paid or
reserved for by the Company during the Valuation Period which are
determined by the Company to be attributable to the operation of the
Sub-Account (no federal income taxes are applicable under present law);
(b) is the net asset value of a Series Fund share held in the
Sub-Account determined as of the end of the preceding Valuation Period; and
(c) is the asset charge factor determined by the Company for the
Valuation Period to reflect the charges for assuming the mortality and
expense risks and distribution expenses.
FIXED ACCUMULATION VALUE
The fixed accumulation value of a Participant's Account, if any, for any
Valuation Period is equal to the sum of the values of all Guarantee Amounts
credited to the Participant's Account for such Valuation Period.
GUARANTEE PERIODS
The Participant may elect one or more Guarantee Period(s) with durations of
one to ten years. The period(s) elected will determine the Guaranteed Interest
Rate(s). The Purchase Payment, or the portion thereof (or the amount transferred
in accordance with the Transfer Privilege) allocated to a particular Guarantee
Period, less any applicable premium taxes or similar taxes and any amounts
subsequently withdrawn, will earn interest at the Guaranteed Interest Rate
during the Guarantee Period. Initial Guarantee Periods begin on the Date of
Coverage or, in the case of a transfer, on the effective date of the transfer,
and end the number of calendar years in the Guarantee Period elected from the
end of the calendar month in which the amount was allocated to the Guarantee
Period (the "Expiration Date"). Subsequent Guarantee Periods begin on the first
day following the Expiration Date.
Any portion of a Participant's Account Value allocated to a particular
Guarantee Period with a particular Expiration Date (including interest earned
thereon) will be referred to herein as a "Guarantee Amount". Interest will be
credited daily at a rate equivalent to the compound annual rate. As a result of
renewals and transfers of portions of the Participant's Account Value described
under "Transfer Privilege" below, which will begin new Guarantee Periods,
Guarantee Amounts allocated to Guarantee Periods of the same duration may have
different Expiration Dates. Thus each Guarantee Amount will be treated
separately for purposes of determining any Market Value Adjustment (see "Market
Value Adjustment").
The Company will notify the Participant in writing at least 45 and no more
than 75 days prior to the Expiration Date for any Guarantee Amount. A new
Guarantee Period of the same duration as the previous
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<PAGE>
Guarantee Period will commence automatically at the end of the previous
Guarantee Period unless the Company receives, prior to the end of such Guarantee
Period, a written election by the Participant of a different Guarantee Period
from among those being offered by the Company at such time, or instructions to
transfer all or a portion of the Guarantee Amount to one or more Sub-Accounts in
accordance with the Transfer Privilege Provision.
GUARANTEED INTEREST RATES
The Company periodically will establish an applicable Guaranteed Interest
Rate for each of the ten Guarantee Periods. Current Guaranteed Interest Rates
may be changed by the Company frequently or infrequently depending on interest
rates available to the Company and other factors as described below, but once
established rates will be guaranteed for the duration of the respective
Guarantee Periods. However, Participant's Account Value withdrawn from the Fixed
Account will be subject to any applicable withdrawal charge and Account Fee and
may be subject to a Market Value Adjustment on withdrawal or surrender (See
"Market Value Adjustment").
The Guaranteed Interest Rate will not be less than 4% per year compounded
annually. The Company has no specific formula for determining the rate of
interest that it will declare as a Guaranteed Interest Rate, as these rates will
be reflective of interest rates available on the types of debt instruments in
which the Company intends to invest amounts allocated to the Fixed Account (See
"The Fixed Account"). In addition, the Company's management may consider other
factors in determining Guaranteed Interest Rates for a particular duration
including: regulatory and tax requirements; sales commissions and administrative
and distribution expenses borne by the Company; general economic trends; and
competitive factors. The Participant bears the risk that the Guaranteed Interest
Rate to be credited on amounts allocated to the Fixed Account may not exceed the
minimum guaranteed rate of 4% for any Guarantee Period.
TRANSFER PRIVILEGE; TELEPHONE TRANSFERS; RESTRICTIONS ON MARKET TIMERS
During the Accumulation Period the Participant may, upon written request
received by the Company, transfer all or part of the Participant's Account Value
to one or more Sub-Accounts or Guarantee Periods available under the Contract,
subject to the following conditions: (1) not more than 12 transfers may be made
in any Account Year; (2) the amount being transferred may not be less than
$1,000, unless the total Participant's Account Value attributable to a
Sub-Account or Guarantee Amount is being transferred; and (3) any Participant's
Account Value remaining in a Sub-Account or Guarantee Amount may not be less
than $100. In addition, transfers of all or a portion of a Guarantee Amount will
be subject to the Market Value Adjustment described below unless the transfer is
effective within 30 days prior to the Expiration Date applicable to the
Guarantee Amount; and transfers involving Variable Accumulation Units shall be
subject to such terms and conditions as may be imposed by the Series Fund. A
transfer generally will be effective on the date the request for transfer is
received by the Company. Under current law, there will not be any tax liability
to the Participant if a Participant makes a transfer.
Transfers may be requested by the Participant either in writing or by
telephone. The telephone exchange privilege is made available to Participants
automatically without the Participant's election. The Company will employ
reasonable procedures to confirm that instructions communicated to it by
telephone are genuine. Such procedures may include one or more of the following:
requesting identifying information, such as name, Contract number, Social
Security Number, and/or personal identification number; tape recording all
telephone transactions; or providing written confirmation thereof to both the
Participant and any agent of record, at the last address of record; or such
other procedures as the Company may deem reasonable. Although the Company's
failure to follow reasonable procedures may result in the Company's liability
for any losses due to unauthorized or fraudulent telephone transfers, the
Company will not be liable for following instructions communicated by telephone
which it reasonably believed to be genuine. Any losses incurred pursuant to
actions taken by the Company in reliance on telephone instructions reasonably
believed to be genuine shall be borne by the Participant.
The Contract is not designed for professional market timing organizations or
other entities using programmed and frequent transfers. Persons who wish to
employ such strategies should not purchase a Contract. Accordingly, transfers
may be subject to restrictions if exercised by a market timing firm or any other
third party authorized to initiate transfer transactions on behalf of multiple
Participants. In imposing
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<PAGE>
such restrictions, the Company may, among other things, not accept (1) the
transfer instructions of any agent acting under a power of attorney on behalf of
more than one Participant, or (2) the transfer instructions of individual
Participants who have executed preauthorized transfer forms that are submitted
at the same time by market timing firms or other third parties on behalf of more
than one Participant. The Company will not impose any such restrictions or
otherwise modify transfer rights unless such action is reasonably intended to
prevent the use of such rights in a manner that will disadvantage or potentially
impair the Contract rights of other Participants.
In addition, the Series Fund has reserved the right to temporarily or
permanently refuse exchange requests from the Variable Account if, in the
judgment of the Series Fund's investment adviser, a series would be unable to
invest effectively in accordance with its investment objective and policies, or
would otherwise potentially be adversely affected. In particular, a pattern of
exchanges that coincide with a "market timing" strategy may be disruptive to a
series and therefore may be refused. Accordingly, the Variable Account may not
be in a position to effectuate transfers and may refuse transfer requests
without prior notice. The Company also reserves the right, for similar reasons,
to refuse or delay exchange requests involving transfers to or from the Fixed
Account.
CASH WITHDRAWALS, WITHDRAWAL CHARGES AND MARKET VALUE ADJUSTMENT
CASH WITHDRAWALS
At any time before the Annuity Commencement Date and during the lifetime of
the Annuitant, the Participant may elect to receive a cash withdrawal payment
from the Company. Any such election shall specify the amount of the withdrawal
and will be effective on the date that it is received by the Company. Amounts
withdrawn may not be redeposited.
The Participant may request a full surrender or partial withdrawal. A full
surrender will result in a cash withdrawal payment equal to the value of the
Participant's Account at the end of the Valuation Period during which the
election becomes effective less the Account Fee, plus or minus any applicable
Market Value Adjustment, and less any applicable withdrawal charge. A request
for a partial withdrawal will result in the cancellation of a portion of the
Participant's Account Value equal to the dollar amount of the cash withdrawal
payment, plus or minus any applicable Market Value Adjustment and plus any
applicable withdrawal charge. If a partial withdrawal is requested which would
leave a Participant's Account Value of less than the Account Fee, then such
partial withdrawal will be treated as a full surrender. The Account Fee and any
applicable Market Value Adjustment will be deducted from the Participant's
Account before the application of any withdrawal charge.
In the case of a partial withdrawal, the Participant may instruct the
Company as to the amounts to be withdrawn from each Sub-Account and/or Guarantee
Amount. If not so instructed, the Company will effect such withdrawal pro-rata
from each Sub-Account and Guarantee Amount in which the Participant's Account
Value is invested at the end of the Valuation Period during which the withdrawal
becomes effective. ALL CASH WITHDRAWALS OF ANY GUARANTEE AMOUNT, EXCEPT THOSE
EFFECTIVE WITHIN 30 DAYS PRIOR TO THE EXPIRATION DATE OF SUCH GUARANTEE AMOUNT,
WILL BE SUBJECT TO THE MARKET VALUE ADJUSTMENT.
Cash withdrawals from a Sub-Account will result in the cancellation of
Variable Accumulation Units attributable to the Participant's Account with an
aggregate value on the effective date of the withdrawal equal to the total
amount by which the Sub-Account is reduced. The cancellation of such units will
be based on the Variable Accumulation Unit values of the Sub-Account at the end
of the Valuation Period during which the cash withdrawal is effective.
The Company, upon request, will advise the Participant of the amounts that
would be payable in the event of a full surrender or partial withdrawal.
Any cash withdrawal payment will be paid within seven days from the date the
election becomes effective, except as the Company may be permitted to defer such
payment in accordance with the Investment Company Act of 1940 and applicable
state insurance law. Deferral of amounts withdrawn from the Variable Account is
currently permissible only (1) for any period (a) during which the New York
Stock
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<PAGE>
Exchange is closed other than customary week-end and holiday closings or (b)
during which trading on the New York Stock Exchange is restricted as determined
by the Securities and Exchange Commission, (2) for any period during which an
emergency exists as a result of which (a) disposal of securities held by the
Series Fund is not reasonably practicable or (b) it is not reasonably
practicable to determine the value of the net assets of the Series Fund or (3)
for such other periods as the Securities and Exchange Commission may by order
permit for the protection of security holders. The Company reserves the right to
defer the payment of amounts withdrawn from the Fixed Account for a period not
to exceed six months from the date written request for such withdrawal is
received by the Company. The Company is not required to pay interest on amounts
so deferred.
Since the Qualified Contracts offered by this Prospectus will be issued in
connection with retirement plans which meet the requirements of Sections 401,
403, and 408 of the Internal Revenue Code, reference should be made to the terms
of the particular retirement plan for any limitations or restrictions on cash
withdrawals. For special restrictions applicable to withdrawals from Contracts
used with Tax-Sheltered Annuities established pursuant to Section 403(b) of the
Internal Revenue Code, see "Section 403(b) Annuities" below.
A cash withdrawal under either a Qualified 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 is made, a withdrawal charge (contingent deferred sales
charge) may be assessed by the Company. During the first seven Account Years, up
to 10% of the Net Purchase Payment may be withdrawn in each Account Year on a
non-cumulative basis without the imposition of the withdrawal charge. Amounts
withdrawn from a Participant's Account in excess of such amount (adjusted by any
applicable Market Value Adjustment) will be subject to the withdrawal charge
assessed against such excess amount as follows:
<TABLE>
<CAPTION>
ACCOUNT YEAR WITHDRAWAL CHARGE
- ------------- -------------------------
<S> <C>
1 6%
2 6%
3 5%
4 5%
5 4%
6 4%
7 3%
thereafter 0%
</TABLE>
The withdrawal charge is not imposed after the end of the seventh Account
Year, nor is the withdrawal charge imposed upon payment of the death benefit or
upon amounts applied to purchase an annuity.
The withdrawal charge is not assessed with respect to a Participant's
Account established for the personal account of an employee of the Company or of
any of its affiliates, or of a licensed insurance agent engaged in distributing
the Contracts.
In no event shall the aggregate withdrawal charges (together with the
distribution expense charge described under "How the Contract Charges Are
Assessed") assessed against a Participant's Account exceed 9% of the Purchase
Payment. The Company may, upon notice to the Owner, modify the withdrawal
charges provided that such modification shall apply only to Participant's
Accounts established after the effective date of such modification (See
"Modification").
For illustrative examples of withdrawals, surrenders, withdrawal charges and
the Market Value Adjustment, see Appendix C.
SECTION 403(b) ANNUITIES
The Internal Revenue Code imposes restrictions on cash withdrawals from
Contracts used with Section 403(b) Annuities. In order for the Contracts to
receive tax deferred treatment, the Contract must provide
20
<PAGE>
that cash withdrawals of amounts attributable to salary reduction contributions
(other than withdrawals of accumulation account value as of December 31, 1988
("Pre-1989 Account Value")) may be made only when the Participant attains age
59 1/2, separates from service with the employer, dies or becomes disabled
(within the meaning of Section 72(m)(7) of the Code). These restrictions apply
to any growth or interest on or after January 1, 1989 on Pre-1989 Account Value,
salary reduction contributions made on or after January 1, 1989, and any growth
or interest on such contributions ("Restricted Account Value").
Withdrawals of Restricted Account Value are also permitted in cases of
financial hardship, but only to the extent of contributions; earnings on
contributions cannot be withdrawn for hardship reasons. While specific rules
defining hardship have not been issued by the Internal Revenue Service, it is
expected that to qualify for a hardship distribution, the Participant must have
an immediate and heavy bona fide financial need and lack other resources
reasonably available to satisfy the need. Hardship withdrawals (as well as
certain other premature withdrawals) will be subject to a 10% tax penalty, in
addition to any withdrawal charge applicable under the Contract (See "Federal
Tax Status").
Under the terms of a particular Section 403(b) plan, the Participant may be
entitled to transfer all or a portion of the Participant's Account Value to one
or more alternative funding options. Participants should consult the documents
governing their plan and the person who administers the plan for information as
to such investment alternatives.
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 of a Guarantee Amount, other than a withdrawal effective
within 30 days prior to the Expiration Date of the Guarantee Amount, will be
subject to a Market Value Adjustment ("MVA") (for this purpose, transfers,
distributions on the death of a Participant and amounts applied to purchase an
annuity are treated as cash withdrawals). The MVA will be applied to the amount
being withdrawn after deduction of any applicable Account Fee and before
deduction of any applicable withdrawal charge.
The MVA will reflect the relationship between the Current Rate (as defined
below) for the Guarantee Amount being withdrawn and the Guaranteed Interest Rate
applicable to the amount being withdrawn. It also reflects the time remaining in
the applicable Guarantee Period. If the applicable Guaranteed Interest Rate is
more than .50% higher than the Current Rate, the application of the MVA will
result in a higher payment upon withdrawal. Otherwise, the application of the
MVA will result in a lower payment upon withdrawal.
The Market Value Adjustment is determined by the application of the
following formula:
1 + I N/12
( -----------)
1 + J + .005 - 1
where,
I is the Guaranteed Interest Rate being credited to the Guarantee Amount
subject to the Market Value Adjustment,
J is the Guaranteed Interest Rate declared by the Company, as of the
effective date of the application of the Market Value Adjustment, for current
allocations to Guarantee Periods equal to the balance of the Guarantee Period of
the Guarantee Amount subject to the Market Value Adjustment, rounded to the next
higher number of complete years (the "Current Rate"), and
N is the number of complete months remaining in the Guarantee Period of the
Guarantee Amount subject to the Market Value Adjustment.
See Appendix C for examples of the application of the Market Value
Adjustment.
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<PAGE>
DEATH BENEFIT
DEATH BENEFIT PROVIDED BY THE CONTRACT
In the event of the death of the Annuitant prior to the Annuity Commencement
Date, the Company will pay a death benefit to the Beneficiary. If there is no
designated Beneficiary living on the date of death of the Annuitant, the Company
will, upon receipt of Due Proof of Death of both the Annuitant and the
designated Beneficiary, pay the death benefit in one sum to the Participant or,
if the Annuitant was the Participant, to the estate of the
Participant/Annuitant. If the death of the Annuitant occurs on or after the
Annuity Commencement Date, no death benefit will be payable under the Contract
except as may be provided under the Annuity Option elected.
ELECTION AND EFFECTIVE DATE OF ELECTION
During the lifetime of the Annuitant and prior to the Annuity Commencement
Date, the Participant may elect to have the death benefit applied under one or
more Annuity Options to effect a Variable Annuity or a Fixed Annuity or a
combination of both for the Beneficiary as Payee after the death of the
Annuitant. If no election of a method of settlement of the death benefit by the
Participant is in effect on the date of death of the Annuitant, the Beneficiary
may elect (a) to receive the death benefit in the form of a single cash payment;
or (b) to have the death benefit applied under one or more of the Annuity
Options (on the Annuity Commencement Date described under "Payment of Death
Benefit") to effect a Variable Annuity or a Fixed Annuity or a combination of
both for the Beneficiary as Payee. Either election described above may be made
by filing with the Company a written election in such form as the Company may
require. Any election of a method of settlement of the death benefit by the
Participant will become effective on the date it is received by the Company. For
the purposes of the Payment of Death Benefit and Amount of Death Benefit
sections below, any election of the method of settlement of the death benefit by
the Participant which is in effect on the date of death of the Annuitant will be
deemed effective on the date Due Proof of Death of the Annuitant is received by
the Company. Any election of a method of settlement of the death benefit by the
Beneficiary will become effective on the later of: (a) the date the election is
received by the Company; or (b) the date due proof of the death of the Annuitant
is received by the Company. If an election by the Beneficiary is not received by
the Company within 60 days following the date due proof of the death of the
Annuitant is received by the Company, the Beneficiary will be deemed to have
elected a cash payment as of the last day of the 60 day period.
In all cases, no Participant or Beneficiary shall be entitled to exercise
any rights that would adversely affect the treatment of the Contract as an
annuity contract under the Internal Revenue Code (see "Other Contractual
Provisions -- Death of Participant").
PAYMENT OF DEATH BENEFIT
If the death benefit is to be paid in cash to the Beneficiary, payment will
be made within seven days of the date the election becomes effective or is
deemed to become effective, except as the Company may be permitted to defer any
such payment of amounts derived from the Variable Account in accordance with the
Investment Company Act of 1940. If the death benefit is to be paid in one lump
sum to the Participant or, if the Annuitant was the Participant, to the estate
of the deceased Participant/Annuitant, payment will be made within seven days of
the date due proof of the death of the Annuitant, the Participant and/or the
designated Beneficiary, as applicable, is received by the Company. If settlement
under one or more of the Annuity Options is elected the Annuity Commencement
Date will be the first day of the second calendar month following the effective
date or the deemed effective date of the election, and the Participant's Account
will be maintained in effect until the Annuity Commencement Date.
AMOUNT OF DEATH BENEFIT
The death benefit is determined as of the effective date or deemed effective
date of the death benefit election and is equal to the greatest of (1) the
Participant's Account Value for the Valuation Period during which the death
benefit election is effective or is deemed to become effective; (2) the Purchase
Payment made with respect to the Participant's Account, minus the sum of all
partial withdrawals; (3) the amount that would have been payable in the event of
a full surrender of the Participant's Account on the date the death benefit
election is effective or is deemed to become effective; and (unless prohibited
by applicable state
22
<PAGE>
law) (4) the Participant's Account Value on the Seven Year Anniversary
immediately preceding the date the death benefit election is effective or is
deemed to become effective, adjusted for any subsequent partial withdrawals.
HOW THE CONTRACT CHARGES ARE ASSESSED
As more fully described below, charges under the Contract offered by this
Prospectus are assessed in three ways: (1) as deductions for administrative
expenses and, if applicable, for premium taxes; (2) as charges against the
assets of the Variable Account for the assumption of mortality and expense risks
and distribution expense charges; and (3) as withdrawal charges (contingent
deferred sales charges). In addition, certain deductions are made from the
assets of the Series Fund for investment management fees and expenses. These
fees and expenses are described in the Series Fund's prospectus and Statement of
Additional Information.
ACCOUNT FEE
Each year on the Account Anniversary, the Company deducts from each
Participant's Account an annual account administration fee ("Account Fee") equal
to the lesser of $30 and 2% of the Participant's Account Value to reimburse it
for administrative expenses relating to the issue and maintenance of the
Contract, the Certificate and the Participant's Account. If the Participant's
Account is surrendered for its full value on other than the Account Anniversary,
the Account Fee will be deducted in full at the time of such surrender. The
Account Fee will be deducted on a pro rata basis from amounts allocated to each
Guarantee Period and each Sub-Account in which the Participant's Account is
invested at the time of such deduction. On the Annuity Commencement Date, the
value of the Participant's Account will be reduced by a proportionate amount of
the Account Fee to reflect the time elapsed between the last Account Anniversary
and the day before the Annuity Commencement Date. After the Annuity
Commencement, the Account Fee will be deducted in equal amounts from each
variable annuity payment made during the year. No deduction will be made from
fixed annuity payments.
The Contract provides that the Company may modify the Account Fee provided
that such modification shall apply only with respect to Participant's Accounts
established after the effective date of such modification (See "Modification").
PREMIUM TAXES
A deduction, when applicable, is made for premium or similar state or local
taxes (See Appendix B). It is currently the policy of the Company to deduct the
tax from the amount applied to provide an annuity at the time annuity payments
commence; however, the Company reserves the right to deduct such taxes on or
after the date they are incurred.
CHARGES AGAINST THE VARIABLE ACCOUNT FOR MORTALITY AND EXPENSE RISKS AND
DISTRIBUTION EXPENSE CHARGES
The mortality risk assumed by the Company arises from the contractual
obligation to continue to make annuity payments to each Annuitant regardless of
how long the Annuitant lives and regardless of how long all annuitants as a
group live. This assures each annuitant that neither the longevity of fellow
annuitants nor an improvement in life expectancy generally will have an adverse
effect on the amount of any annuity payment received under the Contract. The
Company assumes this mortality risk by virtue of annuity rates incorporated into
the Contract which cannot be changed except with respect to Participant's
Accounts established after the effective date of such change, as provided in the
section of this Prospectus entitled "Modification". The expense risk assumed by
the Company is the risk that the administrative charges assessed under the
Contract may be insufficient to cover the actual total administrative expenses
incurred by the Company.
For assuming these risks, the Company makes a deduction from the Variable
Account at the end of each Valuation Period during both the Accumulation Period
and after annuity payments begin at an effective annual rate of 1.25%. If the
deduction is insufficient to cover the actual cost of the mortality and expense
risk undertaking, the Company will bear the loss. Conversely, if the deduction
proves more than sufficient, the excess will be profit to the Company and would
be available for any proper corporate purpose including,
23
<PAGE>
among other things, payment of distribution expenses. The Company will recoup
its expected costs associated with registering and distributing the Contracts by
the assessment of the withdrawal charges (contingent deferred sales charges) and
the distribution expense charge described below. However, the withdrawal charges
and distribution expense charges may prove to be insufficient to cover actual
distribution expenses. If this is the case, the deficiency will be met from the
Company's general corporate funds which may include amounts derived from the
mortality and expense risk charges.
The Company assumes the risk that withdrawal charges assessed under the
Contracts may be insufficient to compensate the Company for the costs of
distributing the Contracts. For assuming such risk the Company makes a deduction
from the Variable Account at the end of each Valuation Period for the first
seven Account Years (during both the accumulation period and, if applicable,
after annuity payments begin) at an effective annual rate of 0.15% (the staff of
the Securities and Exchange Commission deems this charge a deferred sales
charge). No deduction is made after the seventh Account Anniversary. If the
distribution expense charge is insufficient to cover the actual risk assumed,
the Company will bear the loss; however, if the charge is more than sufficient,
any excess will be profit to the Company and would be available for any proper
corporate purpose. In no event will the distribution expense charges and the
withdrawal charges assessed against a Participant's Account exceed 9% of the
Purchase Payment.
The Contract provides that the Company may modify the mortality and expense
risk and distribution expense charges; however, such modification shall apply
only with respect to Participant's Accounts established after the effective date
of such modification (See "Modification").
WITHDRAWAL CHARGES
No deduction for sales charges is made from a Purchase Payment. However, a
withdrawal charge (i.e., a contingent deferred sales charge) of up to 6% of
certain amounts withdrawn, when applicable, will be used to cover certain
expenses relating to the sale of the Contract and Certificates thereunder,
including commissions paid to sales personnel, the costs of preparation of sales
literature and other promotional costs and acquisition expenses.
ANNUITY PROVISIONS
ANNUITY COMMENCEMENT DATE
Annuity payments will begin on the Annuity Commencement Date which is
selected by the Participant, as specified in the Application. The date selected
by the Participant may not be sooner than the first day of the second calendar
month following the Date of Coverage. This date may be changed by the
Participant from time to time by written notice to the Company, provided that
notice of each change is received by the Company at least 30 days prior to the
then current Annuity Commencement Date and the new Annuity Commencement Date is
a date which is: (1) at least 30 days after the date notice of the change is
received by the Company; (2) the first day of a month; and (3) not later than
the first day of the first month following the Annuitant's 85th birthday, unless
otherwise restricted, in the case of a Qualified Contract, by the particular
retirement plan or by applicable law. In most situations, current law requires
that the Annuity Commencement Date under a Qualified Contract be no later than
April 1 following the year the Annuitant reaches age 70 1/2 (or, for Qualified
Contracts other than IRAs, no later than April 1 following the year the
Annuitant retires, if later than the year the Annuitant reaches age 70 1/2), and
the terms of the particular retirement plan may impose additional limitations.
The Annuity Commencement Date may also be changed by an election of an Annuity
Option as described in the Death Benefit section of this Prospectus.
On the Annuity Commencement Date the Participant's Account will be cancelled
and its adjusted value will be applied to provide an annuity under one or more
of the options described below. No withdrawal charge will be imposed upon
amounts applied to purchase an annuity. However, the Market Value Adjustment may
apply, as noted under "Determination of Amount." NO PAYMENTS MAY BE REQUESTED
UNDER THE CONTRACT'S CASH WITHDRAWAL PROVISIONS ON OR AFTER THE ANNUITY
COMMENCEMENT DATE, AND NO CASH WITHDRAWAL WILL BE PERMITTED EXCEPT AS MAY BE
AVAILABLE UNDER THE ANNUITY OPTION ELECTED.
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Since the Contracts offered by this Prospectus may be issued in connection
with retirement plans which meet the requirements of Section 401, 403 or 408 of
the Internal Revenue Code, as well as certain non-qualified plans, reference
should be made to the terms of the particular plan for any limitations or
restrictions on the Annuity Commencement Date.
ELECTION--CHANGE OF ANNUITY OPTION
During the lifetime of the Annuitant and prior to the Annuity Commencement
Date, the Participant may elect one or more of the Annuity Options described
below, or such other settlement option as may be agreed to by the Company, for
the Annuitant as Payee. The Participant may also change any election, but
written notice of any election or change of election must be received by the
Company at least 30 days prior to the Annuity Commencement Date. If no election
is in effect on the 30th day prior to the Annuity Commencement Date, Annuity
Option B, for a Life Annuity with 120 monthly payments certain, will be deemed
to have been elected. If there is no election of a sole Annuitant in effect on
the 30th day prior to the Annuity Commencement Date, the person designated as
"Co-Annuitant" will be the Payee under the applicable Annuity Option.
Any election may specify the proportion of the adjusted value of the
Participant's Account to be applied to provide a Fixed Annuity and a Variable
Annuity. In the event the election does not so specify, or if no election is in
effect on the 30th day prior to the Annuity Commencement Date, then the portion
of the adjusted value of the Participant's Account to be applied to provide a
Fixed Annuity and a Variable Annuity will be determined on a pro rata basis from
the composition of the Participant's Account on the Annuity Commencement Date.
Annuity Options may also be elected by the Participant or the Beneficiary as
provided in the Death Benefit section of this Prospectus.
Reference should be made to the terms of a particular retirement plan and
any applicable legislation for any limitations or restrictions on the options
which may be elected.
NO CHANGE OF ANNUITY OPTION IS PERMITTED AFTER THE ANNUITY COMMENCEMENT
DATE.
ANNUITY OPTIONS
No lump sum settlement option is available under the Contract. The
Participant may surrender a Certificate prior to the Annuity Commencement Date;
however, any applicable surrender charge will be deducted from the cash
withdrawal payment and a Market Value Adjustment, if applicable, will be
applied.
Annuity Options A, B, C and D are available to provide either a Fixed
Annuity or a Variable Annuity. Annuity Option E is available only to provide a
Fixed Annuity.
Annuity Option A. Life Annuity: Monthly payments during the lifetime of
the Payee. This option offers a higher level of monthly payments than Annuity
Options B or C because no further payments are payable after the death of the
Payee and there is no provision for a death benefit payable to a Beneficiary.
Annuity Option B. Life Annuity with 60, 120, 180 or 240 Monthly Payments
Certain: Monthly payments during the lifetime of the Payee and in any event for
60, 120, 180 or 240 months certain as elected. The election of a longer period
certain results in smaller monthly payments than would be the case if a shorter
period certain were elected. In the event of the death of the Payee under this
option, the Contract provides that if there is no designated beneficiary
entitled to the remaining payments then living, the discounted value of the
remaining payments, if any, will be calculated and paid in one sum to the
deceased Payee's estate. In addition, any beneficiary who becomes entitled to
any remaining payments under this option may elect to receive the amounts due
under this option in one sum. The discounted value for variable annuity payments
will be based on interest compounded annually at the assumed interest rate of
4%. The discounted value for payments being made on a fixed basis will be based
on the interest rate initially used by the Company to determine the amount of
each payment.
Annuity Option C. Joint and Survivor Annuity: Monthly payments payable
during the joint lifetime of the Payee and a designated second person and during
the lifetime of the survivor. During the lifetime of the survivor, variable
monthly payments, if any, will be determined using the percentage chosen at the
time of
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election of this option of the number of each type of Annuity Unit credited to
the Contract with respect to the Payee and fixed monthly payments, if any, will
be equal to the same percentage of the fixed monthly payment payable during the
joint lifetime of the Payee and the designated second person.
* Annuity Option D. Monthly Payments for a Specified Period
Certain: Monthly payments for a specified period of time, as elected. In the
event of the death of the Payee under this option, the Contract provides that,
as described under Annuity Option B above, in certain circumstances the
discounted value of the remaining payments, if any, will be calculated and paid
in one sum.
* Annuity Option E. Fixed Payments: The amount applied to provide fixed
payments in accordance with this option will be held by the Company at interest.
Fixed payments will be made in such amounts and at such times as may be agreed
upon with the Company and will continue until the amount held by the Company
with interest is exhausted. The final payment will be for the balance remaining
and may be less than the amount of each preceding payment. Interest will be
credited yearly on the amount remaining unpaid at a rate which shall be
determined by the Company from time to time but which shall not be less than 4%
per year, compounded annually. The rate so determined may be changed at any time
and as often as may be determined by the Company, provided, however, that the
rate may not be reduced more frequently than once during each calendar year.
DETERMINATION OF ANNUITY PAYMENTS
On the Annuity Commencement Date the Participant's Account will be cancelled
and its adjusted value will be applied to provide a Variable Annuity or a Fixed
Annuity or a combination of both. The adjusted value will be equal to the
Participant's Account Value at the end of the Valuation Period which ends
immediately preceding the Annuity Commencement Date, reduced by a proportionate
amount of the Account Fee to reflect the time elapsed between the last Account
Anniversary and the day before the Annuity Commencement Date, plus or minus any
applicable Market Value Adjustment and minus any applicable premium or similar
taxes.
If the amount to be applied under any annuity option is less than $2,000, or
if the first annuity payment payable in accordance with such option is less than
$20, the Company will pay the amount to be applied in a single payment to the
Payee.
FIXED ANNUITY PAYMENTS
The dollar amount of each fixed annuity payment will be determined in
accordance with the Annuity Payment Rates found in the Contract which are based
on a minimum guaranteed interest rate of 4% per year, or, if more favorable to
the Payee(s), in accordance with the Annuity Payment Rates published by the
Company and in use on the Annuity Commencement Date.
VARIABLE ANNUITY PAYMENTS
The dollar amount of the first variable annuity payment will be determined
in accordance with the Annuity Payment Rates found in the Contract which are
based on an assumed interest rate of 4% per year, unless these rates are changed
(See "Modification"). All variable annuity payments other than the first are
determined by means of Annuity Units credited to the Contract with respect to
the particular Payee. The number of Annuity Units to be credited in respect of a
particular Sub-Account is determined by dividing that portion of the first
variable annuity payment attributable to that Sub-Account at the end of the
Valuation Period by the Annuity Unit value of that Sub-Account at the end of the
Valuation Period which ends immediately preceding the Annuity Commencement Date.
The number of Annuity Units of each particular Sub-Account credited with respect
to the particular Payee then remains fixed unless an exchange of Annuity Units
is made as described below. The dollar amount of each variable annuity payment
after the first may increase, decrease or remain constant, and is equal to the
sum of the amounts determined by multiplying the number of Annuity Units of a
particular Sub-Account credited with respect to the particular Payee by the
Annuity Unit value for the particular Sub-Account for the Valuation Period which
ends immediately preceding the due date of each subsequent payment. If the net
investment return on the assets of the Variable Account
- ------------------------
* The election of this annuity option may result in the imposition of a penalty
tax.
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is the same as the assumed interest rate of 4% per year, variable annuity
payments will remain level. If the net investment return exceeds the assumed
interest rate variable annuity payments will increase and, conversely, if it is
less than the assumed interest rate the payments will decrease.
For a hypothetical example of the calculation of a Variable Annuity Payment,
see Appendix A.
VARIABLE ANNUITY UNIT VALUE
The Annuity Unit value for each Sub-Account was established at $10.00 for
the first Valuation Period of the particular Sub-Account. The Annuity Unit Value
for the particular Sub-Account for any subsequent Valuation Period is determined
by multiplying the Annuity Unit value for the particular Sub-Account for the
immediately preceding Valuation Period by the Net Investment Factor (See
"Variable Accumulation Value, Net Investment Factor") for the particular
Sub-Account for the current Valuation Period and then multiplying that product
by a factor to neutralize the assumed interest rate of 4% per year used to
establish the Annuity Payment Rates found in the Contract. The factor is
0.99989255 for a one day Valuation Period.
For a hypothetical example of the calculation of the value of a Variable
Annuity Unit, see Appendix A.
EXCHANGE OF VARIABLE ANNUITY UNITS
After the Annuity Commencement Date the Payee may, by filing a written
request with the Company, exchange the value of a designated number of Annuity
Units of particular Sub-Accounts then credited with respect to the particular
Payee into other Annuity Units, the value of which would be such that the dollar
amount of an annuity payment made on the date of the exchange would be
unaffected by the fact of the exchange. No more than twelve (12) exchanges may
be made within each Account Year.
Exchanges may be made only between Sub-Accounts. Exchanges will be made
using the Annuity Unit values for the Valuation Period during which any request
for exchange is received by the Company.
ANNUITY PAYMENT RATES
The Contract contains Annuity Payment Rates for each Annuity Option
described in this Prospectus. The rates show, for each $1,000 applied, the
dollar amount of: (a) the first monthly variable annuity payment based on the
assumed interest rate of 4%; and (b) the monthly fixed annuity payment, when
this payment is based on the minimum guaranteed interest rate of 4% per year.
These rates may be changed by the Company with respect to Participant's Accounts
established after the effective date of such change (See "Modification").
The annuity payment rates may vary according to the Annuity Option elected
and the adjusted age of the Payee. The Contract also describes the method of
determining the adjusted age of the Payee. The mortality table used in
determining the annuity payment rates for Options A, B and C is the 1983
Individual Annuitant Mortality Table.
OTHER CONTRACTUAL PROVISIONS
PAYMENT LIMITS
Only one Purchase Payment may be made per Certificate. The single Purchase
Payment credited to each Participant's Account must be at least $5,000. In
addition, the prior approval of the Company is required before it will accept a
Purchase Payment in excess of $1,000,000.
DESIGNATION AND CHANGE OF BENEFICIARY
The beneficiary designation contained in the Application will remain in
effect until changed. The interest of any Beneficiary is subject to the
particular Beneficiary surviving the Annuitant and, in the case of a Non-
Qualified Contract, the Participant as well.
Subject to the rights of an irrevocably designated Beneficiary, the
Participant may change or revoke the designation of a Beneficiary at any time
while the Annuitant is living by filing with the Company a written beneficiary
designation or revocation in such form as the Company may require. The change or
revocation will not be binding upon the Company until it is received by the
Company. When it is so received the change
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or revocation will be effective as of the date on which the beneficiary
designation or revocation was signed, but the change or revocation will be
without prejudice to the Company on account of any payment made or any action
taken by the Company prior to receiving the change or revocation.
Reference should be made to the terms of a particular retirement plan and
any applicable legislation for any restrictions on the beneficiary designation.
EXERCISE OF CONTRACT RIGHTS
The Contract shall belong to the Owner. All Contract rights and privileges
may be expressly reserved by the Owner, failing which, each Participant shall be
entitled to exercise such rights and privileges in connection with such
Participant's Certificate. In any case, such rights and privileges can be
exercised without the consent of the Beneficiary (other than an irrevocably
designated Beneficiary) or any other person. Such rights and privileges may be
exercised only during the lifetime of the Annuitant and prior to the Annuity
Commencement Date, except as otherwise provided in the Contract.
The Annuitant becomes the Payee on and after the Annuity Commencement Date.
The Beneficiary becomes the Payee on the death of the Annuitant. Such Payees may
thereafter exercise such rights and privileges, if any, of ownership which
continue.
CHANGE OF OWNERSHIP
Ownership of a Qualified Contract may not be transferred except to: (1) the
Annuitant; (2) a trustee or successor trustee of a pension or profit sharing
trust which is qualified under Section 401 of the Internal Revenue Code; (3) the
employer of the Annuitant provided that the Qualified Contract after transfer is
maintained under the terms of a retirement plan qualified under Section 403(a)
of the Internal Revenue Code for the benefit of the Annuitant; (4) the trustee
of an individual retirement account plan qualified under Section 408 of the
Internal Revenue Code for the benefit of the Owner; or (5) as otherwise
permitted from time to time by laws and regulations governing the retirement or
deferred compensation plans for which a Qualified Contract may be issued.
Subject to the foregoing, a Qualified Contract may not be sold, assigned,
transferred, discounted or pledged as collateral for a loan or as security for
the performance of an obligation or for any other purpose to any person other
than the Company.
The Owner of a Non-Qualified Contract may change the ownership of the
Contract during the lifetime of any Annuitant and prior to the last Annuity
Commencement Date; and each Participant, in like manner, may change the
ownership interest in a Contract evidenced by that Participant's Certificate. A
change of ownership will not be binding upon the Company until written
notification is received by the Company. When such notification is so received,
the change will be effective as of the date on which the request for change was
signed by the Owner or Participant, as appropriate, but the change will be
without prejudice to the Company on account of any payment made or any action
taken by the Company prior to receiving the change.
DEATH OF PARTICIPANT
If a Participant under a Non-Qualified Contract dies prior to the Annuitant
and before the Annuity Commencement Date, the Participant's Account Value, plus
or minus any applicable Market Value Adjustment, must be distributed to the
Beneficiary, if then alive, either (1) within five years after the date of death
of the Participant, or (2) over some period not greater than the life or
expected life of the Beneficiary, with annuity payments beginning within one
year after the date of death of the Participant. The person named as the
Participant's Beneficiary shall be considered the designated beneficiary for the
purposes of Section 72(s) of the Internal Revenue Code and if no person then
living has been so named, then the Annuitant shall automatically be the
designated beneficiary for this purpose.
These mandatory distribution requirements will not apply when the designated
beneficiary is the spouse of the Participant, if the spouse elects to continue
the Certificate in the spouse's own name, as Participant. When the Participant
was also the Annuitant, the surviving spouse (if the designated beneficiary) may
elect to be named as both Participant and Annuitant and continue the
Certificate, but if that election is not made, the Death Benefit provision of
the Contract shall then be controlling. In all other cases where the Participant
and the Annuitant are the same individual, the Death Benefit provision of the
Contract controls.
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If the Payee dies on or after the Annuity Commencement Date and before the
entire accumulation under such Participant's Account has been distributed, the
remaining portion of such Participant's Account, if any, must be distributed at
least as rapidly as the method of distribution then in effect.
In all cases, no Participant or Beneficiary shall be entitled to exercise
any rights that would adversely affect the treatment of the Contract as an
annuity contract under the Internal Revenue Code.
Any distributions upon the death of a Participant under a Qualified Contract
will be subject to the laws and regulations governing the particular retirement
or deferred compensation plan in connection with which the Qualified Contract
was issued.
VOTING OF SERIES FUND SHARES
The Company will vote Series Fund shares held by the Sub-Accounts at
meetings of shareholders of the Series Fund or in connection with similar
solicitations, but will follow voting instructions received from persons having
the right to give voting instructions. The Owner or Participant is the person
having the right to give voting instructions prior to the Annuity Commencement
Date. On or after the Annuity Commencement Date the Payee is the person having
such voting rights. Any shares attributable to the Company and Series Fund
shares for which no timely voting instructions are received will be voted by the
Company in the same proportion as the shares for which instructions are received
from Owners, Participants and Payees.
Owners of Qualified Contracts may be subject to other voting provisions of
the particular plan and of the Investment Company Act of 1940. Employees who
contribute to plans which are funded by the Contracts may be entitled to
instruct the Owners as to how to instruct the Company to vote the Series Fund
shares attributable to their contributions. Such plans may also provide the
additional extent, if any, to which the Owners shall follow voting instructions
of persons with rights under the plans. If no voting instructions are received
from any such person with respect to a particular Participant's Account, the
Owner may instruct the Company as to how to vote the number of Series Fund
shares for which instructions may be given.
Neither the Variable Account nor the Company is under any duty to provide
information concerning the voting instruction rights of persons who may have
such rights under plans, other than rights afforded by the Investment Company
Act of 1940, nor any duty to inquire as to the instructions received or the
authority of Owners or others to instruct the voting of Series Fund shares.
Except as the Variable Account or the Company has actual knowledge to the
contrary, the instructions given by Owners and Payees will be valid as they
affect the Variable Account, the Company and any others having voting
instruction rights with respect to the Variable Account.
All Series Fund proxy material, together with an appropriate form to be used
to give voting instructions, will be provided to each person having the right to
give voting instructions at least ten days prior to each meeting of the
shareholders of the Series Fund. The number of Series Fund shares as to which
each such person is entitled to give instructions will be determined by the
Company on a date not more than 90 days prior to each such meeting. Prior to the
Annuity Commencement Date, the number of Series Fund shares as to which voting
instructions may be given to the Company is determined by dividing the value of
all of the Variable Accumulation Units of the particular Sub-Account credited to
the Participant's Account by the net asset value of one Series Fund share as of
the same date. On or after the Annuity Commencement Date, the number of Series
Fund shares as to which such instructions may be given by a Payee is determined
by dividing the reserve held by the Company in the Sub-Account with respect to
the particular Payee by the net asset value of a Series Fund share as of the
same date. After the Annuity Commencement Date, the number of Series Fund shares
as to which a Payee is entitled to give voting instructions will generally
decrease due to the decrease in the reserve.
PERIODIC REPORTS
During the Accumulation Period the Company will send the Participant, or
such other person having voting rights, at least once during each Account Year,
a statement showing the number, type and value of Accumulation Units credited to
the Participant's Account and the Fixed Accumulation Value of such account,
which statement shall be accurate as of a date not more than two months previous
to the date of mailing. These periodic statements contain important information
concerning the Participant's Account transactions with respect to a Certificate.
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
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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 Series Fund as may be
required by the Investment Company Act of 1940 and the Securities Act of 1933.
The Company will also send such statements reflecting transactions in the
Participant's Account as may be required by applicable laws, rules and
regulations.
Upon request, the Company will provide the Participant with information
regarding fixed and variable accumulation values.
SUBSTITUTED SECURITIES
Shares of any or all series of the Series Fund may not always be available
for purchase by the Sub-Accounts of the Variable Account or the Company may
decide that further investment in any such shares is no longer appropriate in
view of the purposes of the Variable Account. In either event, shares of another
registered open-end investment company or unit investment trust may be
substituted for Series Fund shares already purchased by the Variable Account
and/or as the security to be purchased in the future provided that these
substitutions have been approved, 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 Series 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, Annuity Units or any of them. In effecting any such change
of unit values, strict equity will be preserved and no change will have a
material effect on the benefits or other provisions of the Contract.
MODIFICATION
Upon notice to the Owner and Participant(s) (or the Payee(s) during the
annuity period), the Contract may be modified by the Company if such
modification: (i) is necessary to make the Contract or the Variable Account
comply with any law or regulation issued by a governmental agency to which the
Company or the Variable Account is subject; or (ii) is necessary to assure
continued qualification of the Contract under the Internal Revenue Code or other
federal or state laws relating to retirement annuities or annuity contracts; or
(iii) is necessary to reflect a change in the operation of the Variable Account
or the Sub-Account(s) (See "Change in Operation of Variable Account"); (iv)
provides additional Variable Account and/or fixed accumulation options; or (v)
as may otherwise be in the best interest of Owners, Participants, or Payees, as
applicable. In the event of any such modification, the Company may make
appropriate endorsement in the Contract to reflect such modification.
In addition, upon notice to the Owner the Contract may be modified by the
Company to change the withdrawal charges, Account Fees, mortality and expense
risk charges, distribution expense charges, the tables used in determining the
amount of the first monthly variable annuity and fixed annuity payments and the
formula used to calculate the Market Value Adjustment, provided that such
modification shall apply only to Participant's Accounts established after the
effective date of such modification. In order to exercise its modification
rights in these particular instances, the Company must notify the Owner of such
modification in writing. The notice shall specify the effective date of such
modification which must be at least 60 days following the date of mailing of the
notice of modification by the Company. All of the charges and the annuity
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tables which are provided in the Contract prior to any such modification will
remain in effect permanently, unless improved by the Company, with respect to
Participant's Accounts established prior to the effective date of such
modification.
DISCONTINUANCE OF NEW PARTICIPANTS
The Company, by giving 30 days' prior written notice to the Owner, may limit
or discontinue the acceptance of new Applications and the issuance of new
Certificates under a Contract. Such limitation or discontinuance shall have no
effect on rights or benefits with respect to any Participant's Accounts
established prior to the effective date of such limitation or discontinuance.
CUSTODIAN
The Company is the custodian of the assets of the Variable Account. The
Company will purchase Series Fund shares at net asset value in connection with
amounts allocated to the Sub-Accounts in accordance with the instructions of the
Participant and redeemed Series Fund shares at net asset value for the purpose
of meeting the contractual obligations of the Variable Account, paying charges
relative to the Variable Account or making adjustments for annuity reserves held
in the Variable Account.
RIGHT TO RETURN
If the Participant is not satisfied with the Certificate it may be returned
by mailing it to the Company at the Annuity Service Mailing Address on the cover
of this Prospectus within ten days after it was delivered to the Participant.
When the Company receives the returned Certificate it will be cancelled and the
Participant's Account Value at the end of the Valuation Period during which the
Certificate was received by the Company will be refunded to the Participant.
However, if applicable state law so requires, the full amount of any Purchase
Payment received by the Company will be refunded, the "free look" period may be
greater than ten days and alternative methods of returning the Certificate may
be acceptable.
With respect to Individual Retirement Accounts, under the Internal Revenue
Code a Participant 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 Participant is furnished with
such disclosure statement before the seventh day preceding the date the IRA is
established, the Participant will not have any right of revocation. If the
disclosure statement is furnished after the seventh day preceding the
establishment of the IRA, then the Participant may give a notice of revocation
to the Company at any time within seven days after the Date of Coverage. Upon
such revocation, the Company will refund the Purchase Payment made by the
Participant. The foregoing right of revocation with respect to an IRA is in
addition to the return privilege set forth in the preceding paragraph. The
Company will allow a participant establishing an IRA a "ten day free-look,"
notwithstanding the provisions of the Internal Revenue Code.
FEDERAL TAX STATUS
INTRODUCTION
The Contracts and related Certificates described in this Prospectus are
designed for use by employer, association and other group retirement plans under
the provisions of Sections 401 (including Section 401(k)), 403, 408(b), 408(c)
and 408(k) of the Internal Revenue Code (the "Code"), as well as certain non-
qualified retirement plans, such as payroll savings plans. The ultimate effect
of federal income taxes may depend upon the type of retirement plan for which
the Contract and/or Certificate is purchased and a number of different factors.
This discussion is general in nature, is based upon the Company's understanding
of current federal income tax laws, and is not intended as tax advice. Congress
has the power to enact legislation affecting the tax treatment of annuity
contracts, and such legislation could be applied retroactively to Contracts
purchased before the date of enactment. Also, because the Internal Revenue Code,
as amended, is not in force in the Commonwealth of Puerto Rico, some references
in this discussion will not apply to Contracts and/or Certificates issued in
Puerto Rico. Any person contemplating the purchase of a Contract or Certificate
should consult a qualified tax adviser. THE COMPANY DOES NOT MAKE ANY GUARANTEE
REGARDING THE FEDERAL, STATE OR LOCAL TAX STATUS OF ANY CONTRACT AND/OR
CERTIFICATE OR ANY TRANSACTION INVOLVING THE CONTRACTS AND/OR CERTIFICATES.
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TAX TREATMENT OF THE COMPANY AND THE VARIABLE ACCOUNT
The Company is taxed as a life insurance company under the Code. The
operations of the Variable Account are accounted for separately from other
operations of the Company for purposes of federal income taxation, but the
Variable Account is not taxable as a regulated investment company or otherwise
as an entity separate from the Company. The income (consisting primarily of
interest, dividends and net capital gains) of the Variable Account is not
taxable to the Company to the extent that such income is applied to increase
reserves under contracts participating in the Variable Account, including the
Contracts.
TAXATION OF ANNUITIES IN GENERAL
Purchase Payments made under Non-Qualified Contracts are not deductible from
the Participant's income for federal income tax purposes. Participants under
Qualified Contracts should consult a tax adviser regarding the tax treatment of
Purchase Payments.
Generally, no taxes are imposed on the increase in the value of a Contract
or Certificate until a distribution occurs, either as an annuity payment or as a
cash withdrawal or lump-sum payment prior to the Annuity Commencement Date.
However, corporate Owners and Participants and other Owners and Participants
that are not natural persons are subject to current taxation on the annual
increase in the value of a Non-Qualified Contract, unless the non-natural person
holds the Contract as agent for a natural person (e.g., a bank or other entity
holds a Contract as trustee under a trust agreement). The current taxation of
annuities held by non-natural persons does not apply to earnings accumulated
under an immediate annuity, which the Code defines as a single premium contract
with an annuity commencement date within one year of the date of purchase.
Because the Code is unclear in its application to a group annuity contract
where the owner is distinct from the individuals who receive the contract
benefits, the following discussion is the Company's best understanding of the
operation of the Code in the context of group contracts. However, Owners and
Participants should consult a qualified tax adviser.
A partial cash withdrawal (i.e., a withdrawal of less than the entire
Participant's Account Value) from a Certificate issued under a Non-Qualified
Contract (a "Non-Qualified Certificate") before the Annuity Commencement Date is
treated first as a withdrawal from the increase in the Participant's Account
Value, rather than as a return of Purchase Payments. The amount of the
withdrawal allocable to this increase will be includible in the Participant's
income and subject to tax at ordinary income rates. If part or all of a
Participant's Account Value is assigned or pledged as collateral for a loan, the
amount assigned or pledged must be treated as if it were withdrawn from the
Certificate.
In the case of annuity payments under a Non-Qualified Certificate after the
Annuity Commencement Date, a portion of each payment is treated as a nontaxable
return of Purchase Payments. The nontaxable portion is determined by applying to
each annuity payment an "exclusion ratio," which, in general, is the ratio that
the total amount the Participant paid for the Certificate bears to the Payee's
expected return under the Certificate. The remainder of the payment is taxable
at ordinary income rates.
The total amount that a Payee may exclude from income through application of
the "exclusion ratio" is limited to the amount the Participant paid for the
Certificate. If the Annuitant survives for his or her full life expectancy, so
that the Payee recovers the entire amount paid for the Certificate, any
subsequent annuity payments will be fully taxable as income. Conversely, if the
Annuitant dies before the Payee recovers the entire amount paid, the Payee will
be allowed a deduction for the amount of unrecovered Purchase Payments.
Taxable cash withdrawals and lump-sum payments from Non-Qualified
Certificates may be subject to a penalty tax equal to 10% of the amount treated
as taxable income. This 10% penalty also may apply to certain annuity payments.
This penalty will not apply in certain circumstances (such as where the
distribution is made upon the death of the Participant). The withdrawal penalty
also does not apply to distributions under an immediate annuity (as defined
above).
In the case of a Certificate issued under a Qualified Contract (a "Qualified
Certificate"), distributions generally are taxable and distributions made prior
to age 59 1/2 are subject to a 10% penalty tax, although this penalty tax will
not apply in certain circumstances. Certain distributions, known as "eligible
rollover distributions," if rolled over to certain other qualified retirement
plans (either directly or after being distributed to the
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Participant or Payee), are not taxable until distributed from the plan to which
they are rolled over. In general, an eligible rollover distribution is any
taxable distribution other than a distribution that is part of a series of
payments made for life or for a specified period of 10 years or more. Owners,
Participants, Annuitants, Payees and Beneficiaries should seek qualified advice
about the tax consequences of distributions, withdrawals, rollovers and payments
under the retirement plans in connection with which the Certificates are
purchased.
If the Participant under a Non-Qualified Certificate dies, the value of the
Certificate generally must be distributed within a specified period (See "Other
Contractual Provisions -- Death of Participant"). For contracts owned by
non-natural persons, a change in the Annuitant is treated as the death of the
Participant.
A purchaser of a Qualified Certificate should refer to the terms of the
applicable retirement plan and consult a tax adviser regarding distribution
requirements upon the death of the Participant.
A transfer of a Non-Qualified Certificate by gift (other than to the
Participant's spouse) is treated as the receipt by the Participant of income in
an amount equal to the Participant's Account Value minus the total amount paid
for the Certificate.
The Company will withhold and remit to the U.S. government a part of the
taxable portion of each distribution made under a Non-Qualified Certificate or
under a Qualified Certificate issued for use with an individual retirement
account unless the Participant or Payee provides his or her taxpayer
identification number to the Company and notifies the Company (in the manner
prescribed) before the time of the distribution that he or she chooses not to
have any amounts withheld.
In the case of distributions from a Qualified Certificate (other than
distributions from a Certificate issued for use with an individual retirement
account), the Company or the plan administrator must withhold and remit to the
U.S. government 20% of each distribution that is an eligible rollover
distribution (as defined above) unless the Participant or Payee elects to make a
direct rollover of the distribution to another qualified retirement plan that is
eligible to receive the rollover. If a distribution from a Qualified Certificate
is not an eligible rollover distribution, then the Participant or Payee can
choose not to have amounts withheld as described above for Non-Qualified
Certificates and individual retirement accounts.
Amounts withheld from any distribution may be credited against the
Participant's or Payee's federal income tax liability for the year of the
distribution.
The Internal Revenue Service has issued regulations that prescribe
investment diversification requirements for mutual fund series underlying
nonqualified variable contracts. Contracts that do not comply with these
regulations do not qualify as annuities for federal income tax purposes, and
therefore the annual increase in the value of such contracts is subject to
current taxation. The Company believes that each series of the Series Fund
complies with the regulations.
The preamble to the regulations states that the Internal Revenue Service may
promulgate guidelines under which a variable contract will not be treated as an
annuity for tax purposes if the owner has excessive control over the investments
underlying the contract. It is not known whether such guidelines, if in fact
promulgated, would have retroactive effect. If guidelines are promulgated, the
Company will take any action (including modification of the Contract, the
Certificate and/or the Variable Account) necessary to comply with the
guidelines.
THE FOLLOWING INFORMATION SHOULD BE CONSIDERED ONLY WHEN AN IMMEDIATE
ANNUITY CONTRACT AND A DEFERRED ANNUITY CONTRACT ARE PURCHASED TOGETHER: The
Company understands that the Treasury Department is in the process of
reconsidering the tax treatment of annuity payments under an immediate annuity
contract (as defined above) purchased together with a deferred annuity contract.
The Company believes that any adverse change in the existing tax treatment of
such immediate annuity contracts is likely to be prospective, that is, it would
not apply to contracts issued before such a change is announced. However, there
can be no assurance that any such change, if adopted, would not be applied
retroactively.
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QUALIFIED RETIREMENT PLANS
The Qualified Contracts described in this Prospectus are designed for use
with several types of qualified retirement plans. The tax rules applicable to
participants in such qualified retirement plans vary according to the type of
plan and its terms and conditions. Therefore, no attempt is made herein to
provide more than general information about the use of the Qualified Contracts
with the various types of qualified retirement plans. Participants under such
plans as well as Owners, Annuitants, Payees and Beneficiaries are cautioned that
the rights of any person to any benefits under these plans may be subject to the
terms and conditions of the plans themselves, regardless of the terms and
conditions of the Qualified Contracts issued in connection therewith. 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. Following are brief descriptions of various types of qualified
retirement plans and the use of the Qualified Contracts in connection therewith.
PENSION AND PROFIT-SHARING PLANS
Sections 401(a), 401(k) and 403(a) of the Code permit business employers and
certain associations to establish various types of retirement plans for
employees. The Tax Equity and Fiscal Responsibility Act of 1982 eliminated most
differences between qualified retirement plans of corporations and those of
self-employed individuals. The Contract may be purchased by those who would have
been covered under the rules governing old H.R. 10 (Keogh) Plans as well as by
corporate plans. Such retirement plans may permit the purchase of the Qualified
Contracts to provide benefits under the plans. Employers intending to use the
Qualified Contracts in connection with such plans should seek qualified advice
in connection therewith.
TAX-SHELTERED ANNUITIES
Section 403(b) of the Code permits public school employees and employees of
certain types of charitable, educational and scientific organizations specified
in Section 501(c) (3) of the Code to purchase annuity contracts and, subject to
certain limitations, exclude the amount of purchase payments from gross income
for tax purposes. These annuity contracts are commonly referred to as
"Tax-Sheltered Annuities." Purchasers of the Qualified Contracts for such
purposes should seek qualified advice as to eligibility, limitations on
permissible amounts of Purchase Payments and tax consequences of distributions.
Only one Purchase Payment per Certificate will be accepted (See "Section 403(b)
Annuities").
INDIVIDUAL RETIREMENT ACCOUNTS
Sections 219 and 408 of the Code permit eligible individuals to contribute
to an individual retirement program, including Simplified Employee Pension Plans
and Employer/Association of Employees Established Individual Retirement Account
Trusts, known as an Individual Retirement Account ("IRA"). These IRA's are
subject to limitations on the amount that may be contributed, the persons who
may be eligible, and on the time when distributions may commence. In addition,
certain distributions from some other types of retirement plans may be placed on
a tax-deferred basis in an IRA. Sale of the Contracts for use with IRA's may be
subject to special requirements imposed by the Internal Revenue Service.
Purchasers of the Contracts for such purposes will be provided with such
supplementary information as may be required by the Internal Revenue Service or
other appropriate agency, and will have the right to revoke the Contract under
certain circumstances as described in the section of this Prospectus entitled
"Right to Return Contract."
ADMINISTRATION OF THE CONTRACTS
The Company performs certain administrative functions relating to the
Contracts, the Participant's Accounts, and the Variable Account. These functions
include, among other things, maintaining the books and records of the Variable
Account and the Sub-Accounts, and maintaining records of the name, address,
taxpayer identification number, Contract number, Participant's Account number
and type, the status of each Participant's Account and other pertinent
information necessary to the administration and operation of the Contracts.
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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, Clarendon
Insurance Agency, Inc. ("Clarendon"), One Sun Life Executive Park, Wellesley
Hills, Massachusetts 02181, a wholly-owned subsidiary of the Company. Clarendon
is registered with the Securities and Exchange Commission under the Securities
Exchange Act of 1934 as a broker-dealer and is a member of the National
Association of Securities Dealers, Inc. Clarendon also acts as the general
distributor of certain other annuity contracts issued by the Company and its
wholly-owned subsidiary, Sun Life Insurance and Annuity Company of New York, and
variable life insurance contracts issued by the Company. Commissions and other
distribution compensation will be paid by the Company and will not be more than
6.86% of Purchase Payments. In addition to commissions, the Company may, from
time to time, pay or allow additional promotion incentives, in the form of cash
or other compensation. In some instances, such other incentives may be offered
only to certain broker-dealers that sell, or are expected to sell, during
specified time periods, certain minimum amounts of the Contracts or Certificates
or other contracts offered by the Company. Commissions will not be paid with
respect to Participant's Accounts established for the personal account of
employees of the Company or any of its affiliates, or of persons engaged in the
distribution of the Contracts and the Certificates. During 1995, 1996 and 1997,
approximately $85, $0, and $0, respectively, was paid to and retained by
Clarendon in connection with the distribution of the Contracts.
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ADDITIONAL INFORMATION ABOUT THE COMPANY
SELECTED FINANCIAL DATA
The following selected financial data for the Company should be read in
conjunction with the financial statements and notes thereto included in this
Prospectus beginning on page 47.
<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.
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.
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<PAGE>
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 $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.
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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 $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
38
<PAGE>
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 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.
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<PAGE>
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 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
40
<PAGE>
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.
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.
41
<PAGE>
COMPETITION
The Company is engaged in a business that is highly competitive because of
the large number of stock and mutual life insurance companies and other entities
marketing insurance products. 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.
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
- ------------------------
* Year Elected Director
42
<PAGE>
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 and Deputy General Manager and
Director (1996*)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02181
He is Senior Vice President and Deputy General Manager for the United States
of Sun Life Assurance Company of Canada; Senior Vice President 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.
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.
- --------------------------
* Year Elected Director
43
<PAGE>
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., and 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.
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; 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., 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.
- ------------------------
* Year Elected Director
44
<PAGE>
STATE REGULATION
The Company is subject to the laws of the State of Delaware governing life
insurance companies and to regulation by the Commissioner of Insurance of
Delaware. An annual statement is filed with the Commissioner of Insurance on or
before March 1st in each year relating to the operations of the Company for the
preceding year and its financial condition on December 31st of such year. Its
books and records are subject to review or examination by the Commissioner or
his agents at any time and a full examination of its operations is conducted at
periodic intervals.
The Company is also subject to the insurance laws and regulations of the
other states and jurisdictions in which it is licensed to operate. The laws of
the various jurisdictions establish supervisory agencies with broad
administrative powers with respect to licensing to transact business, overseeing
trade practices, licensing agents, approving policy forms, establishing reserve
requirements, fixing maximum interest rates on life insurance policy loans and
minimum rates for accumulation of surrender values, prescribing the form and
content of required financial statements and regulating the type and amounts of
investments permitted. Each insurance company is required to file detailed
annual reports with supervisory agencies in each of the jurisdictions in which
it does business and its operations and accounts are subject to examination by
such agencies at regular intervals.
In addition, many states regulate affiliated groups of insurers, such as the
Company, its parent and its affiliates, under insurance holding company
legislation. Under such laws, inter-company transfers of assets and dividend
payments from insurance subsidiaries may be subject to prior notice or approval,
depending on the size of such transfers and payments in relation to the
financial positions of the companies involved.
Under insurance guaranty fund laws in most states, insurers doing business
therein can be assessed (up to prescribed limits) for policyholder losses
incurred by insolvent companies. The amount of any future assessments of the
Company under these laws cannot be reasonably estimated. However, most of these
laws do provide that an assessment may be excused or deferred if it would
threaten an insurer's own financial strength and many permit the deduction of
all or a portion of any such assessment from any future premium or similar taxes
payable.
Although the U.S. 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 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 such registration statements and the
exhibits filed as part of the registration statements, to all of which reference
is hereby made for further information
45
<PAGE>
concerning the Variable Account, the Fixed Account, the Company, the Series
Fund, the Contracts 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 included in this Prospectus should
be considered only as bearing on the ability of the Company to meet its
obligations under the Contracts 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.
-------------------
46
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
STATEMENT OF CONDITION -- December 31, 1997
<TABLE>
<CAPTION>
Assets:
Investments in MFS/Sun Life Series Trust: Shares Cost Value
----------- -------------- --------------
<S> <C> <C> <C>
Capital Appreciation Series ("CAS").............................................. 28,327,640 $ 971,058,013 $1,137,027,008
Conservative Growth Series ("CGS")............................................... 32,185,770 781,636,519 1,067,020,252
Emerging Growth Series ("EGS")................................................... 24,512,514 371,308,167 441,300,870
MFS/Foreign & Colonial Emerging Markets Equity Series ("FCE").................... 2,158,089 25,489,668 23,816,248
International Growth Series ("FCI").............................................. 2,416,539 23,732,818 23,314,806
International Growth and Income Series ("FCG")................................... 4,416,730 46,918,882 49,344,675
Government Securities Series ("GSS")............................................. 25,395,141 319,875,125 331,168,206
High Yield Series ("HYS")........................................................ 24,483,510 225,092,980 237,752,900
Managed Sectors Series ("MSS")................................................... 10,730,225 272,360,416 312,886,223
Money Market Series ("MMS")...................................................... 294,418,620 294,418,620 294,418,620
Research Series ("RES").......................................................... 33,411,001 537,910,799 649,201,574
Research Growth & Income Series ("RGS").......................................... 535,127 5,634,111 5,897,527
Total Return Series ("TRS")...................................................... 74,122,506 1,282,241,828 1,580,088,581
Utilities Series ("UTS")......................................................... 7,154,185 89,007,969 117,388,621
Value Series ("VAL")............................................................. 6,249,006 75,222,506 87,073,588
World Asset Allocation Series ("WAA")............................................ 8,282,062 110,929,238 120,415,491
World Governments Series ("WGS")................................................. 9,215,733 104,555,220 98,853,956
World Growth Series ("WGR")...................................................... 16,149,857 205,219,774 237,130,808
World Total Return Series ("WTR")................................................ 4,740,158 61,458,713 69,682,180
-------------- --------------
$5,804,071,366 $6,883,782,134
Liability:
Payable to Sponsor.............................................................................................. 379,086
--------------
Net Assets................................................................................................ $6,883,403,048
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
Applicable to Owners of
Deferred Variable Annuity Contracts Reserve for
------------------------------------- Variable
NET ASSETS APPLICABLE TO CONTRACT OWNERS: Units Unit Value Value Annuities Total
---------- ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
MFS Regatta Contracts:
CAS -- Level 1......................... 2,993,020 $29.9999 $ 89,794,911 $ 261,144 $ 90,056,055
CAS -- Level 2......................... 5,390,680 12.0916 65,070,131 150,610 65,220,741
GSS -- Level 1......................... 1,462,222 16.6923 24,418,411 18,136 24,436,547
GSS -- Level 2......................... 1,514,633 10.7020 16,194,876 64,936 16,259,812
HYS -- Level 1......................... 537,033 22.0555 11,850,184 16,775 11,866,959
HYS -- Level 2......................... 975,126 11.1721 10,896,986 12,433 10,909,419
MSS -- Level 1......................... 941,686 27.2960 25,592,815 159,135 25,751,950
MSS -- Level 2......................... 2,022,757 12.2808 24,919,825 -- 24,919,825
MMS -- Level 1......................... 1,518,722 13.1780 20,192,268 28,250 20,220,518
MMS -- Level 2......................... 1,845,809 10.4025 18,979,267 2,900 18,982,167
TRS -- Level 1......................... 5,756,653 24.1056 138,772,465 468,018 139,240,483
TRS -- Level 2......................... 7,838,741 12.0683 94,536,757 813,685 95,350,442
WGS -- Level 1......................... 700,338 16.4146 11,504,956 60,591 11,565,547
WGS -- Level 2......................... 483,253 9.8243 4,735,735 -- 4,735,735
------------ ----------- ------------
$557,459,587 $ 2,056,613 $559,516,200
------------ ----------- ------------
(continued)
</TABLE>
See notes to financial statements
47
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
STATEMENT OF CONDITION -- continued
<TABLE>
<CAPTION>
Applicable to Owners of Reserve
Deferred Variable Annuity Contracts for
NET ASSETS APPLICABLE TO CONTRACT OWNERS --------------------------------------- Variable
(CONTINUED): Units Unit Value Value Annuities Total
---------- ---------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
MFS Regatta Gold Contracts:
CAS.................................... 35,528,897 $27.4057 $ 973,517,756 $5,128,123 $ 978,645,879
CGS.................................... 40,709,531 25.9656 1,056,959,876 2,935,772 1,059,895,648
EGS.................................... 25,039,986 17.4544 437,038,206 572,103 437,610,309
FCE.................................... 2,159,228 10.8010 23,320,823 31,734 23,352,557
FCI.................................... 2,390,056 9.4566 22,601,714 51,282 22,652,996
FCG.................................... 4,441,911 10.9674 48,715,282 90,715 48,805,997
GSS.................................... 20,508,844 14.0763 288,725,451 670,845 289,396,296
HYS.................................... 11,699,195 18.1622 212,466,548 680,947 213,147,495
MSS.................................... 11,326,719 22.9770 259,980,813 763,493 260,744,306
MMS.................................... 21,463,139 11.8058 253,465,466 756,260 254,221,726
RES.................................... 35,654,917 19.4490 640,927,304 1,856,694 642,783,998
RGS.................................... 533,928 10.9235 5,832,209 -- 5,832,209
TRS.................................... 66,303,467 20.0793 1,331,170,967 2,674,657 1,333,845,624
UTS.................................... 6,101,638 19.0140 116,000,626 325,222 116,325,848
VAL.................................... 6,175,224 13.7450 84,879,388 143,701 85,023,089
WAA.................................... 7,928,833 15.0565 119,370,688 511,208 119,881,896
WGS.................................... 6,127,641 13.3854 82,033,695 365,168 82,398,863
WGR.................................... 15,058,757 15.6398 235,505,032 667,184 236,172,216
WTR.................................... 4,676,853 14.7153 68,817,872 362,558 69,180,430
-------------- ---------- --------------
$6,261,329,716 $18,587,666 $6,279,917,382
-------------- ---------- --------------
MFS Regatta Classic Contracts:
CAS.................................... 265,497 $11.9926 $ 3,187,739 $ -- $ 3,187,739
CGS.................................... 554,216 12.8247 7,115,038 -- 7,115,038
EGS.................................... 318,028 11.5023 3,662,876 -- 3,662,876
FCE.................................... 40,698 11.3377 462,223 -- 462,223
FCI.................................... 67,892 9.7271 661,393 -- 661,393
FCG.................................... 51,038 10.5716 540,221 -- 540,221
GSS.................................... 113,243 10.6850 1,211,587 -- 1,211,587
HYS.................................... 155,306 11.2665 1,751,539 -- 1,751,539
MSS.................................... 118,243 11.9091 1,409,445 -- 1,409,445
MMS.................................... 77,105 10.3869 803,078 -- 803,078
RES.................................... 553,996 11.7136 6,497,188 -- 6,497,188
RGS.................................... 6,085 10.7281 65,318 -- 65,318
TRS.................................... 951,205 11.9123 11,347,435 -- 11,347,435
UTS.................................... 77,009 12.7649 980,227 -- 980,227
VAL.................................... 160,778 12.7132 2,046,243 -- 2,046,243
WAA.................................... 50,531 10.9812 555,886 -- 555,886
WGS.................................... 19,394 10.0247 194,687 -- 194,687
WGR.................................... 85,526 11.3725 973,485 -- 973,485
WTR.................................... 45,122 11.1546 503,858 -- 503,858
-------------- ---------- --------------
$ 43,969,466 $ -- $ 43,969,466
-------------- ---------- --------------
Net Assets................................................. $6,862,758,769 $20,644,279 $6,883,403,048
-------------- ---------- --------------
-------------- ---------- --------------
</TABLE>
See notes to financial statements
48
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
STATEMENTS OF OPERATIONS -- Year Ended December 31, 1997
<TABLE>
<CAPTION>
CAS CGS EGS FCE FCI
Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account
------------- ------------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
INCOME AND EXPENSES:
Dividend income and capital gain
distributions received.................... $ 88,676,113 $ 35,535,241 $ 1,301,804 $ 7,806 $ 24,244
Mortality and expense risk charges......... 12,773,766 9,692,978 4,247,913 212,763 194,393
Distribution expense charges............... 187,950 -- -- -- --
Administrative expense charges............. 1,344,902 1,163,157 509,750 25,532 23,327
------------- ------------- ------------ ------------ -----------
Net investment income (expense)........ $ 74,369,495 $ 24,679,106 $ (3,455,859) $ (230,489) $ (193,476)
------------- ------------- ------------ ------------ -----------
REALIZED AND UNREALIZED GAINS (LOSSES):
Realized gains (losses) on investment
transactions:
Proceeds from sales...................... $ 362,027,612 $ 21,055,175 $ 38,221,566 $ 8,602,108 $4,272,586
Cost of investments sold................. 275,358,831 11,642,272 29,914,344 7,627,967 4,428,832
------------- ------------- ------------ ------------ -----------
Net realized gains (losses)............ $ 86,668,781 $ 9,412,903 $ 8,307,222 $ 974,141 $ (156,246)
------------- ------------- ------------ ------------ -----------
Net unrealized appreciation (depreciation)
on investments:
End of year.............................. $ 165,968,995 $ 285,383,733 $ 69,992,703 $(1,673,420) $ (418,012)
Beginning of year........................ 133,626,673 122,871,165 16,355,150 47,389 (64,127)
------------- ------------- ------------ ------------ -----------
Change in unrealized appreciation
(depreciation)........................ $ 32,342,322 $ 162,512,568 $ 53,637,553 $(1,720,809) $ (353,885)
------------- ------------- ------------ ------------ -----------
Realized and unrealized gains............ $ 119,011,103 $ 171,925,471 $ 61,944,775 $ (746,668) $ (510,131)
------------- ------------- ------------ ------------ -----------
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS................................ $ 193,380,598 $ 196,604,577 $ 58,488,916 $ (977,157) $ (703,607)
------------- ------------- ------------ ------------ -----------
------------- ------------- ------------ ------------ -----------
<CAPTION>
FCG GSS HYS
Sub-Account Sub-Account Sub-Account
------------ ------------ -------------
<S> <C> <C> <C>
INCOME AND EXPENSES:
Dividend income and capital gain
distributions received.................... $ 506,953 $ 20,574,577 $ 12,574,875
Mortality and expense risk charges......... 530,474 3,854,558 2,392,767
Distribution expense charges............... -- 54,703 26,937
Administrative expense charges............. 63,657 407,844 260,195
------------ ------------ -------------
Net investment income (expense)........ $ (87,178) $ 16,257,472 $ 9,894,976
------------ ------------ -------------
REALIZED AND UNREALIZED GAINS (LOSSES):
Realized gains (losses) on investment
transactions:
Proceeds from sales...................... $ 10,589,095 $ 83,661,016 $ 118,787,839
Cost of investments sold................. 10,013,247 83,981,234 112,595,872
------------ ------------ -------------
Net realized gains (losses)............ $ 575,848 $ (320,218) $ 6,191,967
------------ ------------ -------------
Net unrealized appreciation (depreciation)
on investments:
End of year.............................. $ 2,425,793 $ 11,293,081 $ 12,659,920
Beginning of year........................ 801,687 5,399,156 7,187,592
------------ ------------ -------------
Change in unrealized appreciation
(depreciation)........................ $ 1,624,106 $ 5,893,925 $ 5,472,328
------------ ------------ -------------
Realized and unrealized gains............ $ 2,199,954 $ 5,573,707 $ 11,664,295
------------ ------------ -------------
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS................................ $ 2,112,776 $ 21,831,179 $ 21,559,271
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
See notes to financial statements
49
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
STATEMENTS OF OPERATIONS -- continued
<TABLE>
<CAPTION>
MSS MMS RES RGS TRS
Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account
------------ ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
INCOME AND EXPENSES:
Dividend income and capital gain
distributions received.................... $ 29,226,909 $ 16,987,640 $ 12,704,276 $ -- $ 136,291,376
Mortality and expense risk charges......... 3,465,231 4,240,349 6,128,811 21,762 17,430,043
Distribution expense charges............... 55,830 50,924 -- -- 295,032
Administrative expense charges............. 359,998 457,918 735,457 20 1,796,573
------------ ------------- ------------- ----------- -------------
Net investment income (expense)........ $ 25,345,850 $ 12,238,449 $ 5,840,008 $ (21,782 ) $ 116,769,728
------------ ------------- ------------- ----------- -------------
REALIZED AND UNREALIZED GAINS:
Realized gains on investment transactions:
Proceeds from sales...................... $ 87,092,003 $ 838,532,223 $ 12,619,108 $ 323,191 $ 244,278,623
Cost of investments sold................. 67,538,913 838,532,223 7,561,117 314,450 177,638,566
------------ ------------- ------------- ----------- -------------
Net realized gains..................... $ 19,553,090 $ -- $ 5,057,991 $ 8,741 $ 66,640,057
------------ ------------- ------------- ----------- -------------
Net unrealized appreciation on investments:
End of year.............................. $ 40,525,807 $ -- $ 111,290,775 $ 263,416 $ 297,846,753
Beginning of year........................ 28,912,535 -- 42,800,056 -- 223,195,771
------------ ------------- ------------- ----------- -------------
Change in unrealized appreciation...... $ 11,613,272 $ -- $ 68,490,719 $ 263,416 $ 74,650,982
------------ ------------- ------------- ----------- -------------
Realized and unrealized gains............ $ 31,166,362 $ -- $ 73,548,710 $ 272,157 $ 141,291,039
------------ ------------- ------------- ----------- -------------
INCREASE IN NET ASSETS FROM OPERATIONS..... $ 56,512,212 $ 12,238,449 $ 79,388,718 $ 250,375 $ 258,060,767
------------ ------------- ------------- ----------- -------------
------------ ------------- ------------- ----------- -------------
<CAPTION>
UTS VAL WAA
Sub-Account Sub-Account Sub-Account
------------ ------------ ------------
<S> <C> <C> <C>
INCOME AND EXPENSES:
Dividend income and capital gain
distributions received.................... $ 8,922,718 $ 287,830 $ 4,694,705
Mortality and expense risk charges......... 1,065,516 592,023 1,285,189
Distribution expense charges............... -- -- --
Administrative expense charges............. 127,862 71,043 154,223
------------ ------------ ------------
Net investment income (expense)........ $ 7,729,340 $ (375,236) $ 3,255,293
------------ ------------ ------------
REALIZED AND UNREALIZED GAINS:
Realized gains on investment transactions:
Proceeds from sales...................... $ 6,071,320 $ 1,955,133 $ 11,129,872
Cost of investments sold................. 3,987,579 1,617,454 8,517,555
------------ ------------ ------------
Net realized gains..................... $ 2,083,741 $ 337,679 $ 2,612,317
------------ ------------ ------------
Net unrealized appreciation on investments:
End of year.............................. $ 28,380,652 $ 11,851,082 $ 9,486,253
Beginning of year........................ 13,599,433 744,641 7,002,678
------------ ------------ ------------
Change in unrealized appreciation...... $ 14,781,219 $ 11,106,441 $ 2,483,575
------------ ------------ ------------
Realized and unrealized gains............ $ 16,864,960 $ 11,444,120 $ 5,095,892
------------ ------------ ------------
INCREASE IN NET ASSETS FROM OPERATIONS..... $ 24,594,300 $ 11,068,884 $ 8,351,185
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See notes to financial statements
50
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
STATEMENTS OF OPERATIONS -- continued
<TABLE>
<CAPTION>
WGS WGR WTR
Sub-Account Sub-Account Sub-Account Total
------------ ------------ ----------- ---------------
<S> <C> <C> <C> <C>
INCOME AND EXPENSES:
Dividend income and capital gain
distributions received.................... $ 4,501,932 $ 4,834,251 $1,265,181 $ 378,918,431
Mortality and expense risk charges......... 1,360,007 2,776,755 666,680 72,931,978
Distribution expense charges............... 26,253 -- -- 697,629
Administrative expense charges............. 136,948 333,211 80,002 8,051,619
------------ ------------ ----------- ---------------
Net investment income.................. $ 2,978,724 $ 1,724,285 $ 518,499 $ 297,237,205
------------ ------------ ----------- ---------------
REALIZED AND UNREALIZED GAINS (LOSSES):
Realized gains (losses) on investment
transactions:
Proceeds from sales...................... $ 40,039,812 $ 44,132,898 $6,760,428 $ 1,940,151,608
Cost of investments sold................. 45,636,831 35,561,253 5,241,601 1,727,710,141
------------ ------------ ----------- ---------------
Net realized gains (losses)............ $ (5,597,019) $ 8,571,645 $1,518,827 $ 212,441,467
------------ ------------ ----------- ---------------
Net unrealized appreciation (depreciation)
on investments:
End of year.............................. $ (5,701,264) $ 31,911,034 $8,223,467 $ 1,079,710,768
Beginning of year........................ (5,431,957) 15,241,453 3,870,720 616,160,015
------------ ------------ ----------- ---------------
Change in unrealized appreciation
(depreciation)........................ $ (269,307) $ 16,669,581 $4,352,747 $ 463,550,753
------------ ------------ ----------- ---------------
Realized and unrealized gains (losses)... $ (5,866,326) $ 25,241,226 $5,871,574 $ 675,992,220
------------ ------------ ----------- ---------------
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS................................ $ (2,887,602) $ 26,965,511 $6,390,073 $ 973,229,425
------------ ------------ ----------- ---------------
------------ ------------ ----------- ---------------
</TABLE>
See notes to financial statements
51
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
CAS CGS
Sub-Account Sub-Account
------------------------------- -------------------------------
Year Ended Year Ended
December 31, December 31,
------------------------------- -------------------------------
1997 1996 1997 1996
--------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (expense)............ $ 74,369,495 $ 52,941,263 $ 24,679,106 $ 8,788,822
Net realized gains......................... 86,668,781 62,169,749 9,412,903 4,512,770
Net unrealized gains....................... 32,342,322 27,056,227 162,512,568 69,960,621
--------------- ------------- --------------- -------------
Increase in net assets from
operations............................ $ 193,380,598 $ 142,167,239 $ 196,604,577 $ 83,262,213
--------------- ------------- --------------- -------------
CONTRACT OWNER TRANSACTIONS:
Accumulation Activity:
Purchase payments received............... $ 191,209,464 $ 148,876,483 $ 211,472,643 $ 153,852,554
Net transfers between Sub-Accounts and
Fixed Account........................... 28,967,751 (5,608,366) 176,163,947 36,048,717
Withdrawals, surrenders, annuitizations
and contract charges.................... (177,738,789) (47,835,347) (42,133,444) (19,835,752)
--------------- ------------- --------------- -------------
Net accumulation activity.............. $ 42,438,426 $ 95,432,770 $ 345,503,146 $ 170,065,519
--------------- ------------- --------------- -------------
Annuitization Activity:
Annuitizations........................... $ 1,367,156 $ 1,193,495 $ 947,612 $ 437,102
Annuity payments and contract charges.... (736,487) (347,090) (271,967) (129,806)
Net transfers between Sub-Accounts and
Fixed Account........................... 40,842 119,425 354,557 116,806
Adjustments to annuity reserves.......... (64,938) (50,462) 52,749 (87,515)
--------------- ------------- --------------- -------------
Net annuitization activity............. $ 606,573 $ 915,368 $ 1,082,951 $ 336,587
--------------- ------------- --------------- -------------
Increase in net assets from contract owner
transactions.............................. $ 43,044,999 $ 96,348,138 $ 346,586,097 $ 170,402,106
--------------- ------------- --------------- -------------
Increase in net assets................... $ 236,425,597 $ 238,515,377 $ 543,190,674 $ 253,664,319
NET ASSETS:
Beginning of year.......................... 900,684,817 662,169,440 523,820,012 270,155,693
--------------- ------------- --------------- -------------
End of year................................ $ 1,137,110,414 $ 900,684,817 $ 1,067,010,686 $ 523,820,012
--------------- ------------- --------------- -------------
--------------- ------------- --------------- -------------
<CAPTION>
EGS
Sub-Account
-----------------------------
Year Ended
December 31,
-----------------------------
1997 1996
------------- -------------
<S> <C> <C>
OPERATIONS:
Net investment income (expense)............ $ (3,455,859) $ (1,968,496)
Net realized gains......................... 8,307,222 4,277,168
Net unrealized gains....................... 53,637,553 12,802,194
------------- -------------
Increase in net assets from
operations............................ $ 58,488,916 $ 15,110,866
------------- -------------
CONTRACT OWNER TRANSACTIONS:
Accumulation Activity:
Purchase payments received............... $ 95,095,489 $ 122,215,402
Net transfers between Sub-Accounts and
Fixed Account........................... 57,336,795 50,369,380
Withdrawals, surrenders, annuitizations
and contract charges.................... (16,909,470) (8,085,001)
------------- -------------
Net accumulation activity.............. $ 135,522,814 $ 164,499,781
------------- -------------
Annuitization Activity:
Annuitizations........................... $ 158,875 $ 286,409
Annuity payments and contract charges.... (58,246) (13,624)
Net transfers between Sub-Accounts and
Fixed Account........................... 21,015 44,347
Adjustments to annuity reserves.......... 7,823 21,044
------------- -------------
Net annuitization activity............. $ 129,467 $ 338,176
------------- -------------
Increase in net assets from contract owner
transactions.............................. $ 135,652,281 $ 164,837,957
------------- -------------
Increase in net assets................... $ 194,141,197 $ 179,948,823
NET ASSETS:
Beginning of year.......................... 247,131,988 67,183,165
------------- -------------
End of year................................ $ 441,273,185 $ 247,131,988
------------- -------------
------------- -------------
</TABLE>
See notes to financial statements
53
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
STATEMENTS OF CHANGES IN NET ASSETS -- continued
<TABLE>
<CAPTION>
FCE FCI
Sub-Account Sub-Account
-------------------------- --------------------------
Year Ended Year Ended
December 31, December 31,
-------------------------- --------------------------
1997 1996* 1997 1996
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment expense..................... $ (230,489) $ (13,026) $ (193,476) $ (21,609)
Net realized gains (losses)................ 974,141 (5,712) (156,246) (1,678)
Net unrealized gains (losses).............. (1,720,809) 47,389 (353,885) (64,127)
------------ ----------- ------------ -----------
Increase (decrease) in net assets from
operations............................ $ (977,157) $ 28,651 $ (703,607) $ (87,414)
------------ ----------- ------------ -----------
CONTRACT OWNER TRANSACTIONS:
Accumulation Activity:
Purchase payments received............... $ 9,918,873 $ 1,048,658 $ 10,356,882 $ 2,460,672
Net transfers between Sub-Accounts and
Fixed Account........................... 12,522,767 2,213,104 8,764,120 3,215,694
Withdrawals, surrenders, annuitizations
and contract charges.................... (953,005) (18,977) (683,649) (60,665)
------------ ----------- ------------ -----------
Net accumulation activity.............. $ 21,488,635 $ 3,242,785 $ 18,437,353 $ 5,615,701
------------ ----------- ------------ -----------
Annuitization Activity:
Annuitizations........................... $ 39,195 $ -- $ 55,177 $ --
Annuity payments and contract charges.... (5,864) -- (2,405) --
Net transfers between Sub-Accounts and
Fixed Account........................... -- -- -- --
Adjustments to annuity reserves.......... (1,465) -- (416) --
------------ ----------- ------------ -----------
Net annuitization activity............. $ 31,866 $ -- $ 52,356 $ --
------------ ----------- ------------ -----------
Increase in net assets from contract owner
transactions.............................. $ 21,520,501 $ 3,242,785 $ 18,489,709 $ 5,615,701
------------ ----------- ------------ -----------
Increase in net assets................... $ 20,543,344 $ 3,271,436 $ 17,786,102 $ 5,528,287
------------ ----------- ------------ -----------
NET ASSETS:
Beginning of year.......................... 3,271,436 -- 5,528,287 --
------------ ----------- ------------ -----------
End of year................................ $ 23,814,780 $ 3,271,436 $ 23,314,389 $ 5,528,287
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
<CAPTION>
FCG
Sub-Account
---------------------------
Year Ended
December 31,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
OPERATIONS:
Net investment expense..................... $ (87,178) $ (328,431)
Net realized gains (losses)................ 575,848 251,398
Net unrealized gains (losses).............. 1,624,106 690,250
------------ ------------
Increase (decrease) in net assets from
operations............................ $ 2,112,776 $ 613,217
------------ ------------
CONTRACT OWNER TRANSACTIONS:
Accumulation Activity:
Purchase payments received............... $ 8,465,356 $ 19,437,825
Net transfers between Sub-Accounts and
Fixed Account........................... 5,802,185 8,809,224
Withdrawals, surrenders, annuitizations
and contract charges.................... (2,204,864) (951,163)
------------ ------------
Net accumulation activity.............. $ 12,062,677 $ 27,295,886
------------ ------------
Annuitization Activity:
Annuitizations........................... $ 45,941 $ 43,066
Annuity payments and contract charges.... (6,247) (1,385)
Net transfers between Sub-Accounts and
Fixed Account........................... -- --
Adjustments to annuity reserves.......... 62 1,480
------------ ------------
Net annuitization activity............. $ 39,756 $ 43,161
------------ ------------
Increase in net assets from contract owner
transactions.............................. $ 12,102,433 $ 27,339,047
------------ ------------
Increase in net assets................... $ 14,215,209 $ 27,952,264
------------ ------------
NET ASSETS:
Beginning of year.......................... 35,131,009 7,178,745
------------ ------------
End of year................................ $ 49,346,218 $ 35,131,009
------------ ------------
------------ ------------
</TABLE>
*For the period July 1, 1996 (commencement of operations of the Sub-Account) to
December 31, 1996.
See notes to financial statements
54
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
STATEMENTS OF CHANGES IN NET ASSETS -- continued
<TABLE>
<CAPTION>
GSS HYS
Sub-Account Sub-Account
----------------------------- -----------------------------
Year Ended Year Ended
December 31, December 31,
----------------------------- -----------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income...................... $ 16,257,472 $ 13,823,215 $ 9,894,976 $ 7,621,505
Net realized gains (losses)................ $ (320,218) (2,504,323) 6,191,967 5,703,568
Net unrealized gains (losses).............. $ 5,893,925 (10,551,635) 5,472,328 840,341
------------- ------------- ------------- -------------
Increase in net assets from
operations............................ $ 21,831,179 $ 767,257 $ 21,559,271 $ 14,165,414
------------- ------------- ------------- -------------
CONTRACT OWNER TRANSACTIONS:
Accumulation Activity:
Purchase payments received............... $ 45,924,248 $ 54,669,405 $ 56,445,474 $ 33,898,269
Net transfers between Sub-Accounts and
Fixed Account........................... 9,720,766 (14,448,899) 35,346,824 4,326,619
Withdrawals, surrenders, annuitizations
and contract charges.................... (58,612,247) (21,010,408) (37,189,764) (11,758,613)
------------- ------------- ------------- -------------
Net accumulation activity.............. $ (2,967,233) $ 19,210,098 $ 54,602,534 $ 26,466,275
------------- ------------- ------------- -------------
Annuitization Activity:
Annuitizations........................... $ 142,666 $ 268,329 $ 403,156 $ 137,217
Annuity payments and contract charges.... (181,979) (240,819) (164,426) (79,990)
Net transfers between Sub-Accounts and
Fixed Account........................... (55,523) (309,558) -- 14,805
Adjustments to annuity reserves.......... 111,855 (40,665) 2,369 (42,595)
------------- ------------- ------------- -------------
Net annuitization activity............... $ 17,019 $ (322,713) $ 241,099 $ 29,437
------------- ------------- ------------- -------------
Increase (decrease) in net assets from
contract owner transactions............... $ (2,950,214) $ 18,887,385 $ 54,843,633 $ 26,495,712
------------- ------------- ------------- -------------
Increase in net assets................... $ 18,880,965 $ 19,654,642 $ 76,402,904 $ 40,661,126
NET ASSETS:
Beginning of year.......................... 312,423,277 292,768,635 161,272,508 120,611,382
------------- ------------- ------------- -------------
End of year................................ $ 331,304,242 $ 312,423,277 $ 237,675,412 $ 161,272,508
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
<CAPTION>
MSS
Sub-Account
-----------------------------
Year Ended
December 31,
-----------------------------
1997 1996
------------- -------------
<S> <C> <C>
OPERATIONS:
Net investment income...................... $ 25,345,850 $ 24,096,088
Net realized gains (losses)................ 19,553,090 2,898,908
Net unrealized gains (losses).............. 11,613,272 4,637,529
------------- -------------
Increase in net assets from
operations............................ $ 56,512,212 $ 31,632,525
------------- -------------
CONTRACT OWNER TRANSACTIONS:
Accumulation Activity:
Purchase payments received............... $ 56,177,555 $ 40,598,625
Net transfers between Sub-Accounts and
Fixed Account........................... 12,554,894 7,831,933
Withdrawals, surrenders, annuitizations
and contract charges.................... (57,321,938) (13,315,281)
------------- -------------
Net accumulation activity.............. $ 11,410,511 $ 35,115,277
------------- -------------
Annuitization Activity:
Annuitizations........................... $ 558,077 $ 82,609
Annuity payments and contract charges.... (166,248) (76,110)
Net transfers between Sub-Accounts and
Fixed Account........................... -- 41,877
Adjustments to annuity reserves.......... (43,539) (12,576)
------------- -------------
Net annuitization activity............... $ 348,290 $ 35,800
------------- -------------
Increase (decrease) in net assets from
contract owner transactions............... $ 11,758,801 $ 35,151,077
------------- -------------
Increase in net assets................... $ 68,271,013 $ 66,783,602
NET ASSETS:
Beginning of year.......................... 244,554,513 177,770,911
------------- -------------
End of year................................ $ 312,825,526 $ 244,554,513
------------- -------------
------------- -------------
</TABLE>
See notes to financial statements
55
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
STATEMENTS OF CHANGES IN NET ASSETS -- continued
<TABLE>
<CAPTION>
MMS RES RGS
Sub-Account Sub-Account Sub-Account
------------------------------ ----------------------------- ------------------
Year Ended Year Ended Year Ended
December 31, December 31, December 31, 1997*
------------------------------ ----------------------------- ------------------
1997 1996 1997 1996
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income (expense)............ $ 12,238,449 $ 9,789,043 $ 5,840,008 $ (428,000) $ (21,782)
Net realized gains......................... -- -- 5,057,991 1,850,763 8,741
Net unrealized gains....................... -- -- 68,490,719 34,176,685 263,416
-------------- ------------- ------------- ------------- ----------
Increase in net assets from
operations............................ $ 12,238,449 $ 9,789,043 $ 79,388,718 $ 35,599,448 $ 250,375
-------------- ------------- ------------- ------------- ----------
CONTRACT OWNER TRANSACTIONS:
Accumulation Activity:
Purchase payments received............... $ 151,523,026 $ 208,990,259 $ 153,316,348 $ 156,881,700 $ 2,950,897
Net transfers between Sub-Accounts and
Fixed Account........................... (1,240,893) (43,233,439) 119,233,197 64,021,188 2,726,224
Withdrawals, surrenders, annuitizations
and contract charges.................... (229,658,956) (46,733,186) (24,008,616) (7,956,041) (29,969)
-------------- ------------- ------------- ------------- ----------
Net accumulation activity.............. $ (79,376,823) $ 119,023,634 $ 248,540,929 $ 212,946,847 $ 5,647,152
-------------- ------------- ------------- ------------- ----------
Annuitization Activity:
Annuitizations........................... $ 79,534 $ 1,121,927 $ 415,748 $ 557,791 $ --
Annuity payments and contract charges.... (200,563) (206,726) (139,282) (62,358) --
Net transfers between Sub-Accounts and
Fixed Account........................... (312,207) (190,340) 12,992 118,346 --
Adjustments to annuity reserves.......... (31,750) (23,831) (40,528) 38,061 --
-------------- ------------- ------------- ------------- ----------
Net annuitization activity............. $ (464,986) $ 701,030 $ 248,930 $ 651,840 $ --
-------------- ------------- ------------- ------------- ----------
Increase (decrease) in net assets from
contract owner transactions............... $ (79,841,809) $ 119,724,664 $ 248,789,859 $ 213,598,687 $ 5,647,152
-------------- ------------- ------------- ------------- ----------
Increase (decrease) in net assets........ $ (67,603,360) $ 129,513,707 $ 328,178,577 $ 249,198,135 $ 5,897,527
NET ASSETS:
Beginning of year.......................... 361,830,849 232,317,142 321,102,609 71,904,474 --
-------------- ------------- ------------- ------------- ----------
End of year................................ $ 294,227,489 $ 361,830,849 $ 649,281,186 $ 321,102,609 $ 5,897,527
-------------- ------------- ------------- ------------- ----------
-------------- ------------- ------------- ------------- ----------
</TABLE>
*For the period June 1, 1997 (commencement of operations of the Sub-Account) to
December 31, 1997.
See notes to financial statements
56
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
STATEMENTS OF CHANGES IN NET ASSETS -- continued
<TABLE>
<CAPTION>
TRS UTS
Sub-Account Sub-Account
--------------------------------- ----------------------------
Year Ended Year Ended
December 31, December 31,
--------------------------------- ----------------------------
1997 1996 1997 1996
--------------- --------------- ------------- ------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (expense)............ $ 116,769,728 $ 64,654,089 $ 7,729,340 $ 1,926,985
Net realized gains......................... 66,640,057 20,511,061 2,083,741 1,617,706
Net unrealized gains....................... 74,650,982 50,461,971 14,781,219 6,572,565
--------------- --------------- ------------- ------------
Increase in net assets from
operations............................ $ 258,060,767 $ 135,627,121 $ 24,594,300 $ 10,117,256
--------------- --------------- ------------- ------------
CONTRACT OWNER TRANSACTIONS:
Accumulation Activity:
Purchase payments received............... $ 260,379,742 $ 158,550,497 $ 16,090,619 $ 18,235,404
Net transfers between Sub-Accounts and
Fixed Account........................... 90,568,461 7,794,293 13,552,388 835,305
Withdrawals, surrenders, annuitizations
and contract charges.................... (276,158,725) (79,238,642) (5,005,318) (3,059,763)
--------------- --------------- ------------- ------------
Net accumulation activity.............. $ 74,789,478 $ 87,106,148 $ 24,637,689 $ 16,010,946
--------------- --------------- ------------- ------------
Annuitization Activity:
Annuitizations........................... $ 1,271,371 $ 505,447 $ 165,628 $ 116,582
Annuity payments and contract charges.... (935,550) (762,883) (60,528) (18,434)
Net transfers between Sub-Accounts and
Fixed Account........................... 87,811 56,990 28,886 --
Adjustments to annuity reserves.......... (136,590) (87,530) 2,804 (82,561)
--------------- --------------- ------------- ------------
Net annuitization activity............. $ 287,042 $ (287,976) $ 136,790 $ 15,587
--------------- --------------- ------------- ------------
Increase in net assets from contract owner
transactions.............................. $ 75,076,520 $ 86,818,172 $ 24,774,479 $ 16,026,533
--------------- --------------- ------------- ------------
Increase in net assets................... $ 333,137,287 $ 222,445,293 $ 49,368,779 $ 26,143,789
NET ASSETS:
Beginning of year.......................... 1,246,646,697 1,024,201,404 67,937,296 41,793,507
--------------- --------------- ------------- ------------
End of year................................ $ 1,579,783,984 $ 1,246,646,697 $ 117,306,075 $ 67,937,296
--------------- --------------- ------------- ------------
--------------- --------------- ------------- ------------
<CAPTION>
VAL
Sub-Account
---------------------------
Year Ended
December 31,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
OPERATIONS:
Net investment income (expense)............ $ (375,236) $ (53,621)
Net realized gains......................... 337,679 23,298
Net unrealized gains....................... 11,106,441 744,641
------------ ------------
Increase in net assets from
operations............................ $ 11,068,884 $ 714,318
------------ ------------
CONTRACT OWNER TRANSACTIONS:
Accumulation Activity:
Purchase payments received............... $ 29,587,412 $ 10,936,155
Net transfers between Sub-Accounts and
Fixed Account........................... 31,786,583 5,122,274
Withdrawals, surrenders, annuitizations
and contract charges.................... (2,199,052) (63,860)
------------ ------------
Net accumulation activity.............. $ 59,174,943 $ 15,994,569
------------ ------------
Annuitization Activity:
Annuitizations........................... $ 136,454 $ --
Annuity payments and contract charges.... (15,580) --
Net transfers between Sub-Accounts and
Fixed Account........................... -- --
Adjustments to annuity reserves.......... (4,256) --
------------ ------------
Net annuitization activity............. $ 116,618 $ --
------------ ------------
Increase in net assets from contract owner
transactions.............................. $ 59,291,561 $ 15,994,569
------------ ------------
Increase in net assets................... $ 70,360,445 $ 16,708,887
NET ASSETS:
Beginning of year.......................... 16,708,887 --
------------ ------------
End of year................................ $ 87,069,332 $ 16,708,887
------------ ------------
------------ ------------
</TABLE>
*For the period June 3, 1996 (commencement of operations of the Sub-Account) to
December 31, 1996.
See notes to financial statements
57
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
STATEMENTS OF CHANGES IN NET ASSETS -- continued
<TABLE>
<CAPTION>
WAA WGS
Sub-Account Sub-Account
---------------------------- -----------------------------
Year Ended Year Ended
December 31, December 31,
---------------------------- -----------------------------
1997 1996 1997 1996
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income...................... $ 3,255,293 $ 595,575 $ 2,978,724 $ 16,535,862
Net realized gains (losses)................ 2,612,317 1,629,596 (5,597,019) (2,712,091)
Net unrealized gains (losses).............. 2,483,575 4,425,108 (269,307) (9,808,667)
------------- ------------ ------------- -------------
Increase (decrease) in net assets from
operations............................ $ 8,351,185 $ 6,650,279 $ (2,887,602) $ 4,015,104
------------- ------------ ------------- -------------
CONTRACT OWNER TRANSACTIONS:
Accumulation Activity:
Purchase payments received............... $ 23,232,543 $ 33,549,719 $ 11,552,959 $ 10,730,732
Net transfers between Sub-Accounts and
Fixed Account........................... 17,783,698 13,363,954 (19,473,409) (13,803,477)
Withdrawals, surrenders, annuitizations
and contract charges.................... (5,742,891) (2,987,226) (17,997,612) (11,401,973)
------------- ------------ ------------- -------------
Net accumulation activity.............. $ 35,273,350 $ 43,926,447 $ (25,918,062) $ (14,474,718)
------------- ------------ ------------- -------------
Annuitization Activity:
Annuitizations........................... $ 167,170 $ 174,043 $ 101,934 $ 55,515
Annuity payments and contract charges.... (51,214) (17,132) (132,080) (171,649)
Net transfers between Sub-Accounts and
Fixed Account........................... 79,307 -- (8,188) (25,947)
Adjustments to annuity reserves.......... 487 16,443 (5,055) (4,679)
------------- ------------ ------------- -------------
Net annuitization activity............. $ 195,750 $ 173,354 $ (43,389) $ (146,760)
------------- ------------ ------------- -------------
Increase (decrease) in net assets from
contract owner transactions............... $ 35,469,100 $ 44,099,801 $ (25,961,451) $ (14,621,478)
------------- ------------ ------------- -------------
Increase (decrease) in net assets........ $ 43,820,285 $ 50,750,080 $ (28,849,053) $ (10,606,374)
NET ASSETS:
Beginning of year.......................... 76,617,497 25,867,417 127,743,885 138,350,259
------------- ------------ ------------- -------------
End of year................................ $ 120,437,782 $ 76,617,497 $ 98,894,832 $ 127,743,885
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
<CAPTION>
WGR
Sub-Account
-----------------------------
Year Ended
December 31,
-----------------------------
1997 1996
------------- -------------
<S> <C> <C>
OPERATIONS:
Net investment income...................... $ 1,724,285 $ 9,576,256
Net realized gains (losses)................ 8,571,645 6,018,165
Net unrealized gains (losses).............. 16,669,581 1,415,056
------------- -------------
Increase (decrease) in net assets from
operations............................ $ 26,965,511 $ 17,009,477
------------- -------------
CONTRACT OWNER TRANSACTIONS:
Accumulation Activity:
Purchase payments received............... $ 26,811,741 $ 40,398,624
Net transfers between Sub-Accounts and
Fixed Account........................... 3,906,046 3,588,236
Withdrawals, surrenders, annuitizations
and contract charges.................... (13,503,627) (9,375,496)
------------- -------------
Net accumulation activity.............. $ 17,214,160 $ 34,611,364
------------- -------------
Annuitization Activity:
Annuitizations........................... $ 112,909 $ 157,641
Annuity payments and contract charges.... (92,720) (71,968)
Net transfers between Sub-Accounts and
Fixed Account........................... (249,492) 13,731
Adjustments to annuity reserves.......... (31,480) 8,938
------------- -------------
Net annuitization activity............. $ (260,783) $ 108,342
------------- -------------
Increase (decrease) in net assets from
contract owner transactions............... $ 16,953,377 $ 34,719,706
------------- -------------
Increase (decrease) in net assets........ $ 43,918,888 $ 51,729,183
NET ASSETS:
Beginning of year.......................... 193,226,813 141,497,630
------------- -------------
End of year................................ $ 237,145,701 $ 193,226,813
------------- -------------
------------- -------------
</TABLE>
See notes to financial statements
58
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
STATEMENTS OF CHANGES IN NET ASSETS -- continued
<TABLE>
<CAPTION>
WTR
Sub-Account Total
--------------------------------- ---------------------------------
Year Ended Year Ended
December 31, December 31,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income...................... $ 518,499 $ 71,547 $ 297,237,205 $ 207,607,067
Net realized gains......................... 1,518,827 545,390 212,441,467 106,785,736
Net unrealized gains....................... 4,352,747 2,845,849 463,550,753 196,251,997
--------------- --------------- --------------- ---------------
Increase in net assets from
operations............................ $ 6,390,073 $ 3,462,786 $ 973,229,425 $ 510,644,800
--------------- --------------- --------------- ---------------
CONTRACT OWNER TRANSACTIONS:
Accumulation Activity:
Purchase payments received............... $ 15,459,554 $ 16,294,987 $ 1,375,970,825 $ 1,231,625,970
Net transfers between Sub-Accounts and
Fixed Account........................... 13,106,711 5,434,372 619,129,055 135,880,112
Withdrawals, surrenders, annuitizations
and contract charges.................... (2,840,427) (1,579,132) (970,892,363) (285,266,526)
--------------- --------------- --------------- ---------------
Net accumulation activity.............. $ 25,725,838 $ 20,150,227 $ 1,024,207,517 $ 1,082,239,556
--------------- --------------- --------------- ---------------
Annuitization Activity:
Annuitizations........................... $ 215,870 $ -- $ 6,384,473 $ 5,137,173
Annuity payments and contract charges.... (28,925) (17,146) (3,250,311) (2,217,120)
Net transfers between Sub-Accounts and
Fixed Account........................... -- -- -- 482
Adjustments to annuity reserves.......... (3,240) (10,126) (185,108) (356,574)
--------------- --------------- --------------- ---------------
Net annuitization activity............. $ 183,705 $ (27,272) $ 2,949,054 $ 2,563,961
--------------- --------------- --------------- ---------------
Increase in net assets from contract owner
transactions.............................. $ 25,909,543 $ 20,122,955 $ 1,027,156,571 $ 1,084,803,517
--------------- --------------- --------------- ---------------
Increase in net assets................... $ 32,299,616 $ 23,585,741 $ 2,000,385,996 $ 1,595,448,317
NET ASSETS:
Beginning of year.......................... 37,384,672 13,798,931 4,883,017,052 3,287,568,735
--------------- --------------- --------------- ---------------
End of year................................ $ 69,684,288 $ 37,384,672 $ 6,883,403,048 $ 4,883,017,052
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
</TABLE>
See notes to financial statements
59
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION
Sun Life of Canada (U.S.) Variable Account F (the "Variable Account"), a
separate account of Sun Life Assurance Company of Canada (U.S.), the Sponsor,
was established on July 13, 1989 as a funding vehicle for the variable portion
of certain group combination fixed/variable annuity contracts. The Variable
Account is registered with the Securities and Exchange Commission under the
Investment Company Act of 1940 as a unit investment trust.
The assets of the Variable Account are divided into Sub-Accounts. Each
Sub-Account is invested in shares of a specific series of MFS/Sun Life Series
Trust (the "Series Trust"), an open-end management investment company registered
under the Investment Company Act of 1940. Massachusetts Financial Services
Company, an affiliate of the Sponsor, is investment adviser to the Series Trust.
(2) SIGNIFICANT ACCOUNTING POLICIES
GENERAL
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
INVESTMENT VALUATIONS
Investments in shares of the Series Trust are recorded at their net asset value.
Realized gains and losses on sales of shares of the Series Trust are determined
on the identified cost basis. Dividend income and capital gain distributions
received by the Sub-Accounts are reinvested in additional Series Trust shares
and are recognized on the ex-dividend date.
Exchanges between Sub-Accounts requested by participants are recorded in the new
Sub-Account upon receipt of the redemption proceeds.
FEDERAL INCOME TAX STATUS
The operations of the Variable Account are part of the operations of the Sponsor
and are not taxed separately. The Variable Account is not taxed as a regulated
investment company. The Sponsor qualifies for the federal income tax treatment
granted to life insurance companies under Subchapter L of the Internal Revenue
Code. Under existing federal income tax law, investment income and capital gains
earned by the Variable Account on contract owner reserves are not subject to
tax.
(3) CONTRACT CHARGES
A mortality and expense risk charge based on the value of the Variable Account
is deducted from the Variable Account at the end of each valuation period for
the mortality and expense risks assumed by the Sponsor. The deductions are
transferred periodically to the Sponsor. Currently, the deduction is at an
effective annual rate of 1.25% for Regatta and Regatta Gold contracts and 1.00%
for Regatta Classic contracts.
Each year on the account anniversary, an account administration fee ("Account
Fee") equal to the lesser of $30 or 2% of the participant's account value in the
case of Regatta and Regatta Gold and $50 for Regatta
60
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
NOTES TO FINANCIAL STATEMENTS -- continued
Classic is deducted from the participant's account to reimburse the Sponsor for
certain administrative expenses. After the annuity commencement date the Account
Fee will be deducted pro rata from each variable annuity payment made during the
year.
The Sponsor does not deduct a sales charge from purchase payments. However, in
the case of Regatta and Regatta Gold, a withdrawal charge (contingent deferred
sales charge) of up to 6% of certain amounts withdrawn, when applicable, may be
deducted to cover certain expenses relating to the sale of the contracts and
certificates. In the case of Regatta Classic, a withdrawal charge of 1% is
applied to purchase payments withdrawn which have been credited to a
participant's account for less than one year.
For assuming the risk that withdrawal charges may be insufficient to compensate
it for the costs of distributing the Regatta contracts, the Sponsor makes a
deduction from the Variable Account at the end of each valuation period for the
first seven account years at an effective annual rate of 0.15% of the net assets
attributable to such contracts. Accounts are transferred from MFS Regatta --
Level 1 to MFS Regatta -- Level 2 in the month following the seventh account
anniversary. No deduction for the distribution expense charge is made after the
seventh account anniversary.
As reimbursement for administrative expenses attributable to Regatta Gold and
Regatta Classic contracts which exceed the revenues received from the Account
Fees described above derived from such contracts, the Sponsor makes a deduction
from the Variable Account at the end of each valuation period at an effective
annual rate of 0.15% of the net assets attributable to such contracts.
(4) ANNUITY RESERVES
Annuity reserves are calculated using the 1983 Individual Annuitant Mortality
Table and an assumed interest rate of 4% or 3%, as stated in each participant's
certificate. Required adjustments to the reserves are accomplished by transfers
to or from the Sponsor.
61
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
NOTES TO FINANCIAL STATEMENTS -- continued
(5) UNIT ACTIVITY FROM PARTICIPANT TRANSACTIONS
<TABLE>
<CAPTION>
Units
Units Transferred Withdrawn,
Between Sub-Accounts and Surrendered
Units Outstanding and
Beginning of Year Units Purchased Fixed Account Annuitized
---------------------- ---------------------- --------------------------- -----------
Year Ended
Year Ended Year Ended Year Ended December
December 31, December 31, December 31, 31,
---------------------- ---------------------- --------------------------- -----------
1997 1996 1997 1996 1997 1996 1997
---------- ---------- ---------- ---------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
MFS REGATTA CONTRACTS:
------------------------------
CAS - Level 1................. 6,316,305 6,615,207 860 3,487 (2,421,311) 267,320 (902,834)
CAS - Level 2 *............... 58,968 -- 624,374 62,873 6,542,104 142 (1,834,766)
GSS - Level 1................. 3,362,650 3,535,152 -- 1,574 (1,340,875) 206,595 (559,553)
GSS - Level 2 *............... 55,891 -- 265,628 59,729 2,012,610 3,442 (819,496)
HYS - Level 1................. 1,204,380 1,068,412 -- -- (510,706) 271,328 (156,641)
HYS - Level 2**............... -- -- 64,893 -- 1,416,411 -- (506,178)
MSS - Level 1................. 2,202,213 2,150,361 881 -- (924,959) 253,891 (336,449)
MSS - Level 2 *............... 14,270 -- 240,391 18,662 2,378,532 -- (610,436)
MMS - Level 1................. 3,859,738 3,453,907 1,948 7,940 3,301,197 1,420,458 (5,644,161)
MMS - Level 2 *............... 59,562 -- 310,378 74,316 6,074,695 (3,576) (4,598,826)
TRS - Level 1................. 12,461,003 13,106,997 1,598 2,594 (4,580,966) 580,878 (2,124,982)
TRS - Level 2 *............... 32,548 -- 815,196 61,666 10,202,663 -- (3,211,666)
WGS - Level 1................. 1,460,289 1,730,002 -- -- (584,950) (4,348) (175,001)
WGS - Level 2 *............... 3,325 -- 34,073 4,988 686,256 -- (240,401)
<CAPTION>
Units Outstanding
End of Year
----------------------
Year Ended
December 31,
----------------------
1996 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
MFS REGATTA CONTRACTS:
------------------------------
CAS - Level 1................. (569,709) 2,993,020 6,316,305
CAS - Level 2 *............... (4,047) 5,390,680 58,968
GSS - Level 1................. (380,671) 1,462,222 3,362,650
GSS - Level 2 *............... (7,280) 1,514,633 55,891
HYS - Level 1................. (135,360) 537,033 1,204,380
HYS - Level 2**............... -- 975,126 --
MSS - Level 1................. (202,039) 941,686 2,202,213
MSS - Level 2 *............... (4,392) 2,022,757 14,270
MMS - Level 1................. (1,022,567) 1,518,722 3,859,738
MMS - Level 2 *............... (11,178) 1,845,809 59,562
TRS - Level 1................. (1,229,466) 5,756,653 12,461,003
TRS - Level 2 *............... (29,118) 7,838,741 32,548
WGS - Level 1................. (265,365) 700,338 1,460,289
WGS - Level 2 *............... (1,663) 483,253 3,325
</TABLE>
*For the period December 9, 1996 (commencement of operations) to December 31,
1996.
**For the period January 6, 1997 (commencement of operations of the Sub-Account)
to December 31, 1997.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
MFS REGATTA GOLD
CONTRACTS:
------------------------------
CAS........................... 32,796,793 27,782,739 4,171,857 7,263,696 753,855 (496,244) (2,193,608)
CGS........................... 26,199,975 16,712,586 8,951,992 8,644,701 7,405,405 2,000,284 (1,847,841)
EGS........................... 16,998,044 5,346,104 5,826,649 8,728,028 3,279,517 3,530,938 (1,064,224)
FCE *......................... 329,630 -- 815,491 107,088 1,097,883 224,483 (83,776)
FCI *......................... 564,742 -- 997,740 250,279 902,857 323,501 (75,283)
FCG........................... 3,360,596 711,179 760,057 1,891,793 531,069 856,286 (209,811)
GSS........................... 19,714,114 18,082,586 1,627,923 4,278,441 723,328 (1,392,606) (1,556,521)
HYS........................... 8,424,289 6,880,080 2,340,052 2,241,058 1,768,446 (53,191) (833,592)
MSS........................... 10,541,726 8,542,869 1,191,194 2,422,482 289,858 147,148 (696,059)
MMS........................... 27,275,583 17,186,041 7,818,118 18,886,918 (8,894,337) (5,479,056) (4,736,225)
RES........................... 19,577,745 5,341,160 10,988,440 10,525,524 6,437,281 4,302,978 (1,348,549)
RGS........................... -- -- 276,177 -- 260,605 -- (2,854)
TRS........................... 59,508,016 53,091,748 7,069,596 10,291,268 4,111,016 (170,571) (4,385,161)
UTS........................... 4,671,192 3,410,047 966,544 1,448,517 773,360 68,243 (309,458)
VAL **........................ 1,520,787 -- 2,333,873 1,039,259 2,499,269 492,924 (178,705)
WAA........................... 5,539,010 2,141,041 1,565,894 2,590,553 1,218,708 1,048,013 (394,779)
WGS........................... 7,510,766 8,272,858 324,862 818,386 (1,252,245) (1,036,800) (455,742)
WGR........................... 13,989,946 11,421,691 1,725,746 3,069,026 242,250 227,986 (899,185)
WTR........................... 2,836,079 1,170,586 1,085,978 1,353,637 962,291 448,221 (207,495)
<CAPTION>
MFS REGATTA GOLD
------------------------------
CAS........................... (1,753,398) 35,528,897 32,796,793
CGS........................... (1,157,596) 40,709,531 26,199,975
EGS........................... (607,026) 25,039,986 16,998,044
FCE *......................... (1,941) 2,159,228 329,630
FCI *......................... (9,038) 2,390,056 564,742
FCG........................... (98,662) 4,441,911 3,360,596
GSS........................... (1,254,307) 20,508,844 19,714,114
HYS........................... (643,658) 11,699,195 8,424,289
MSS........................... (570,773) 11,326,719 10,541,726
MMS........................... (3,318,320) 21,463,139 27,275,583
RES........................... (591,917) 35,654,917 19,577,745
RGS........................... -- 533,928 --
TRS........................... (3,704,429) 66,303,467 59,508,016
UTS........................... (255,615) 6,101,638 4,671,192
VAL **........................ (11,396) 6,175,224 1,520,787
WAA........................... (240,597) 7,928,833 5,539,010
WGS........................... (543,678) 6,127,641 7,510,766
WGR........................... (728,757) 15,058,757 13,989,946
WTR........................... (136,365) 4,676,853 2,836,079
<CAPTION>
CONTRACTS:
</TABLE>
*For the period July 1, 1996 (commencement of operations) to December 31,
1996.
**For the period June 3, 1996 (commencement of operations of the Sub-Account)
to December 31, 1996.
62
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
NOTES TO FINANCIAL STATEMENTS -- continued
(5) UNIT ACTIVITY FROM PARTICIPANT TRANSACTIONS -- continued
<TABLE>
<CAPTION>
Units
Units Transferred Withdrawn,
Between Sub-Accounts and Surrendered
Units Outstanding and
Beginning of Year Units Purchased Fixed Account Annuitized
---------------------- ---------------------- --------------------------- -----------
Year Ended
Year Ended Year Ended Year Ended December
December 31, December 31, December 31, 31,
---------------------- ---------------------- --------------------------- -----------
1997 1996 1997 1996 1997 1996 1997
---------- ---------- ---------- ---------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
MFS REGATTA CLASSIC
CONTRACTS:
------------------------------
CAS *......................... 1,892 -- 246,247 1,892 23,978 -- (6,620)
CGS *......................... 3,545 -- 446,522 8,005 122,228 (4,460) (18,079)
EGS *......................... 9,744 -- 289,836 11,935 22,223 (2,191) (3,775)
FCE **........................ 140 -- 44,896 352 (3,278) (212) (1,060)
FCI **........................ 2,249 -- 75,178 2,249 (7,901) -- (1,634)
FCG +......................... -- -- 42,039 -- 9,735 -- (736)
GSS **........................ 6,514 -- 89,817 6,514 21,240 -- (4,328)
HYS *......................... 8,219 -- 120,521 7,097 30,370 1,122 (3,804)
MSS ++........................ -- -- 92,458 -- 28,860 -- (3,075)
MMS **........................ 13,813 -- 366,163 13,813 (259,749) -- (43,122)
RES ***....................... 25,665 -- 497,934 25,659 37,701 6 (7,304)
RGS #......................... -- -- 5,777 -- 320 -- (12)
TRS ***....................... 40,575 -- 859,444 33,797 66,034 6,778 (14,848)
UTS ++........................ -- -- 41,263 -- 36,412 -- (666)
VAL *......................... 9,578 -- 107,548 8,416 46,458 1,162 (2,806)
WAA *......................... 6,448 -- 44,701 7,086 (150) (638) (468)
WGS ++++...................... -- -- 18,266 -- 2,357 -- (1,229)
WGR ****...................... 71 -- 77,864 -- 7,879 71 (288)
WTR +++....................... -- -- 49,398 -- (3,919) -- (357)
<CAPTION>
Units Outstanding
End of Year
----------------------
Year Ended
December 31,
----------------------
1996 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
MFS REGATTA CLASSIC
CONTRACTS:
------------------------------
CAS *......................... -- 265,497 1,892
CGS *......................... -- 554,216 3,545
EGS *......................... -- 318,028 9,744
FCE **........................ -- 40,698 140
FCI **........................ -- 67,892 2,249
FCG +......................... -- 51,038 --
GSS **........................ -- 113,243 6,514
HYS *......................... -- 155,306 8,219
MSS ++........................ -- 118,243 --
MMS **........................ -- 77,105 13,813
RES ***....................... -- 553,996 25,665
RGS #......................... -- 6,085 --
TRS ***....................... -- 951,205 40,575
UTS ++........................ -- 77,009 --
VAL *......................... -- 160,778 9,578
WAA *......................... -- 50,531 6,448
WGS ++++...................... -- 19,394 --
WGR ****...................... -- 85,526 71
WTR +++....................... -- 45,122 --
</TABLE>
*For the period December 2, 1996 (commencement of operations of the
Sub-Account) to December 31, 1996.
**For the period December 9, 1996 (commencement of operations of the
Sub-Account) to December 31, 1996.
***For the period November 27, 1996 (commencement of operations of the
Sub-Account) to December 31, 1996.
****Operations of the Sub-Account commenced on December 31, 1996.
+For the period January 7, 1997 (commencement of operations of the
Sub-Account) to December 31, 1997.
++For the period January 22, 1997 (commencement of operations of the
Sub-Account) to December 31, 1997.
+++For the period February 11, 1997 (commencement of operations of the
Sub-Account) to December 31, 1997.
++++For the period February 21, 1997 (commencement of operations of the
Sub-Account) to December 31, 1997.
#For the period July 7, 1997 (commencement of operations of the Sub-Account)
to December 31, 1997.
63
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Participants in Sun Life of Canada (U.S.) Variable Account F
and the Board of Directors of Sun Life Assurance Company of Canada (U.S.):
We have audited the accompanying statement of condition of Sun Life of Canada
(U.S.) Variable Account F (the "Variable Account") as of December 31, 1997, the
related statement 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
----------------------------------------
This report is prepared for the general information of contract owners and
participants. It is authorized for distribution to prospective purchasers only
when preceded or accompanied by an effective prospectus.
64
<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.
65
<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.
66
<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.
67
<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.
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
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.
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
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.
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
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.
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
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>
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
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
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
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.
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
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>
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
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
76
<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.
77
<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>
78
<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.
79
<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.
80
<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
81
<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
82
<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.
83
<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
84
<PAGE>
APPENDIX A
VARIABLE ACCUMULATION UNIT VALUE, VARIABLE ANNUITY UNIT VALUE
AND VARIABLE ANNUITY PAYMENT CALCULATIONS
ILLUSTRATIVE EXAMPLE OF VARIABLE ACCUMULATION UNIT VALUE CALCULATIONS:
Suppose the net asset value of a Series Fund share at the end of the current
valuation period is $18.38; at the end of the immediately preceding valuation
period was $18.32; the Valuation Period is one day; and no dividends or
distributions caused Series Fund shares to go "ex-dividend" during the current
Valuation Period. $18.38 divided by $18.32 is 1.00327511. Subtracting the one
day risk factor for mortality and expense risks and the distribution expense
charge of .00003809 (the daily equivalent of the current maximum charge of 1.40%
on an annual basis) gives a net investment factor of 1.00323702. If the value of
the variable accumulation unit for the immediately preceding valuation period
had been 14.5645672, the value for the current valuation period would be
14.6117130 (14.5645672 X 1.00323702).
ILLUSTRATIVE EXAMPLE OF VARIABLE ANNUITY UNIT VALUE CALCULATIONS:
Suppose the circumstances of the first example exist, and the value of an
annuity unit for the immediately preceding valuation period had been 12.3456789.
If the first variable annuity payment is determined by using an annuity payment
based on an assumed interest rate of 4% per year, the value of the annuity unit
for the current valuation period would be 12.3843113 (12.3456789 X 1.00323702
(the Net Investment Factor) X 0.99989255). 0.99989255 is the factor, for a one
day Valuation Period, that neutralizes the assumed interest rate of four percent
(4%) per year used to establish the Annuity Payment Rates found in the Contract.
ILLUSTRATIVE EXAMPLE OF VARIABLE ANNUITY PAYMENT CALCULATIONS:
Suppose that a Participant's Account is credited with 8,765.4321 variable
accumulation units of a particular Sub-Account but is not credited with any
fixed accumulation units; that the variable accumulation unit value and the
annuity unit value for the particular Sub-Account for the valuation period which
ends immediately preceding the annuity commencement date are 14.5645672 and
12.3456789 respectively; that the annuity payment rate for the age and option
elected is $6.78 per $1,000; and that the annuity unit value on the day prior to
the second variable annuity payment date is 12.3843113. The first variable
annuity payment would be $865.57 (8,765.4321 X 14.5645672 X 6.78 divided by
1,000). The number of annuity units credited would be 70.1112 ($865.57 divided
by 12.3456789) and the second variable annuity payment would be $868.28 (70.1112
X 12.3843113).
APPENDIX B
STATE PREMIUM TAXES
The amount of applicable tax varies depending on the jurisdiction and is
subject to change by the legislature or other authority. In many jurisdictions
there is no tax at all. The Company believes that as of February 27, 1998 the
Contracts were subject to premium taxes by the following jurisdictions at the
rates indicated. For more current information tax adviser should be consulted.
<TABLE>
<CAPTION>
RATE OF TAX
-----------------------------
QUALIFIED NON-QUALIFIED
STATE CONTRACTS CONTRACTS
- ------------------------------ ---------- --------------
<S> <C> <C>
California .50% 2.35%
District of Columbia 2.25% 2.25%
Kentucky 2.00% 2.00%
Maine -- 2.00%
Nevada -- 3.50%
South Dakota -- 1.25%
West Virginia 1.00% 1.00%
Wyoming -- 1.00%
</TABLE>
85
<PAGE>
APPENDIX C
WITHDRAWALS, WITHDRAWAL CHARGES AND THE MARKET VALUE ADJUSTMENT
PART 1: VARIABLE ACCOUNT (THE MARKET VALUE ADJUSTMENT DOES NOT APPLY TO THE
VARIABLE ACCOUNT)
These examples assume the following:
1) The Purchase Payment was $10,000
2) The date of full surrender or partial withdrawal occurs during the
3rd Account Year and
a) the Participant's Account Value is $12,000 and is attributable to
the value of Variable Accumulation Units of one Sub-Account,
b) no previous partial withdrawals have been made.
EXAMPLE A--FULL SURRENDER:
1) 10% or .10 of the Purchase Payment is available without imposition
of a withdrawal charge: (.10 X $10,000 = $1,000).
2) The balance of the full surrender ($12,000 - $1,000 = $11,000) is
subject to the withdrawal charge applicable during the 3rd Account Year (5%
or .05).
3) The amount of the withdrawal charge is .05 X $11,000 = $550.
4) The amount of the full surrender is $12,000 - $550 = $11,450.
EXAMPLE B--PARTIAL WITHDRAWAL (IN THE AMOUNT OF $2,000):
1) 10% or .10 of the Purchase Payment is available without imposition
of a withdrawal charge: (.10 X $10,000 = $1,000).
2) The balance of the partial withdrawal ($2,000 - $1,000 = $1,000) is
subject to the withdrawal charge applicable during the 3rd Account Year (5%
or .05).
3) The amount of the withdrawal charge is equal to the amount required
to complete the partial withdrawal ($2,000 - $1,000 = $1,000) divided by 1 -
.05 or .95 less the amount required to complete the balance of the partial
withdrawal.
Withdrawal Charge = $1,000 - $1,000
---------
.95
= $52.63
In this example, in order for the Participant to receive the amount
requested ($2,000), a gross withdrawal of $2052.63 must be processed with $52.63
representing the withdrawal charge calculated above.
PART 2--FIXED ACCOUNT--EXAMPLES OF THE MARKET VALUE ADJUSTMENT (MVA)
The MVA factor is:
N/12
( 1 + I
-------------
1 + J + .005 ) -1
These examples assume the following:
1) the Guarantee Amount was allocated to a four year Guarantee Period
with a Guaranteed Interest Rate of 5% or .05 (l).
2) the date of surrender is two years from the Expiration Date (N =
24).
3) the value of the Guarantee Amount on the date of surrender is
$11,025 and,
4) no transfers or partial withdrawals affecting this Guarantee Amount
have been made
5) withdrawal charges, if any, are calculated in the same manner as
shown in the examples in Part 1.
86
<PAGE>
EXAMPLE OF A NEGATIVE MVA:
Assume that on the date of surrender, the current rate (J) is 7% or .07.
N/12
The MVA factor = ( 1 + l
--------------
1 + J + .005 ) -1
24/12
= ( 1 + .05
--------------
1 + .07 + .005 ) -1
= (.977)(2) -1
= .954 -1
= - .046
The value of the Guarantee Amount is multiplied by the MVA factor to
determine the MVA
$11,025 X (-.046) = -$507.15
-$507.15 represents the MVA that will be deducted from the value of the
Guarantee Amount before the application of any withdrawal charge.
EXAMPLE OF A POSITIVE MVA:
Assume that on the date of surrender, the current rate (J) is 4% or .04.
N/12
The MVA factor = ( 1 + l
--------------
1 + J + .005 ) -1
24/12
= ( 1 + .05
--------------
1 + .04 + .005 ) -1
= (1.005)(2) -1
= 1.010 -1
= .010
The value of the Guarantee Amount is multiplied by the MVA factor to
determine the MVA
$11,025 X .010 = $110.25
$110.25 represents the MVA that would be added to the value of the
Guarantee Amount before the application of any withdrawal charge.
If the above examples had been for partial withdrawals, the MVA's would be
reduced proportionally. For example, if only 25% of the value of the Guarantee
Amount were being surrendered, the MVA would be -$126.79 and $27.56 for the
negative MVA and positive MVA, respectively.
87
<PAGE>
APPENDIX D
CALCULATION OF PERFORMANCE DATA
AVERAGE ANNUAL TOTAL RETURN:
The table below shows, for various Sub-Accounts of the Variable Account, the
Average Annual Total Return for the stated periods, based upon a hypothetical
initial Purchase Payment of $1,000, calculated in accordance with the formula
set out below the table.
AVERAGE ANNUAL TOTAL RETURN
PERIOD ENDING DECEMBER 31, 1997
<TABLE>
<CAPTION>
1 YEAR 5 YEAR
PERIOD PERIOD LIFE* DATE OF INCEPTION
------ ------ ------ -----------------
<S> <C> <C> <C> <C>
Capital Appreciation Series........ 14.37% 15.17% 14.11% November 2, 1989
Government Securities Series....... 1.22% 4.25% 6.32% November 8, 1989
High Yield Series.................. 5.47% 8.89% 10.25% December 6, 1989
Managed Sectors Series............. 16.88% 12.19% 12.95% November 2, 1989
Money Market Series................ -2.32% 1.82% 3.10% November 6, 1989
Total Return Series................ 13.14% 11.42% 10.92% November 2, 1989
World Governments Series........... -7.54% 4.04% 6.21% November 24, 1989
</TABLE>
- ------------------------
*From Date of Inception of the Sub-Account investing in the series.
The Average Annual Total Return for each period in the table above was
determined by finding the average annual compounded rate of return over each
period that would equate the initial amount invested to the ending redeemable
value for that period, in accordance with the following formula:
P(1 + T)(n) = ERV
Where: P = a hypothetical Purchase Payment of $1,000
T = average annual total return for the period
n = number of years
ERV = redeemable value (as of the end of the period) of a
hypothetical $1,000 Purchase Payment made at the beginning
of the 1-year or 5-year period (or fractional portion
thereof).
The formula assumes that: 1) all recurring fees have been deducted from the
Participant's Account; 2) all applicable non-recurring Contract charges are
deducted at the end of the period; and 3) there will be a full surrender at
the end of the period.
The $30 annual Account Fee will be allocated among the Sub-Accounts so that
each Sub-Account's allocated portion of the Account Fee is proportional to the
percentage of the number of Certificates that have amounts allocated to that
Sub-Account. Because the impact of Account Fees on a particular Certificate may
differ from those assumed in the computation due to differences between actual
allocations and the assumed ones, the total return that would have been
experienced by an actual Certificate over these same time periods may have been
different from that shown above.
NON-STANDARDIZED INVESTMENT PERFORMANCE:
The Variable Account may illustrate its results over various periods and
compare its results to indices and other variable annuities in sales materials
including advertisements, brochures and reports. Such results may be computed on
a "cumulative" and/or "annualized" basis.
"Cumulative" quotations are arrived at by calculating the change in the
Accumulation Unit value of a Sub-Account between the first and last day of the
base period being measured, and expressing the difference as a percentage of the
Accumulation Unit value at the beginning of the base period.
"Annualized" quotations (described in the following table as "Compound
Growth Rate") are calculated by applying a formula which determines the level
rate of return which, if earned over the entire base period, would produce the
cumulative return.
88
<PAGE>
NON-STANDARDIZED INVESTMENT PERFORMANCE:
$10,000 INVESTED IN ...WOULD HAVE GROWN TO THIS AMOUNT ON
THIS SUB-ACCOUNT UNDER A DECEMBER 31, 1997*
REGATTA CONTRACT
THIS MANY YEARS AGO...
<TABLE>
<CAPTION>
CAPITAL APPRECIATION SERIES GOVERNMENT SECURITIES SERIES
--------------------------------- ---------------------------------
NUMBER CUMULATIVE COMPOUND NUMBER CUMULATIVE COMPOUND
OF GROWTH GROWTH OF GROWTH GROWTH
YEARS PERIODS AMOUNT RATE RATE YEARS PERIODS AMOUNT RATE RATE
- -------- ----------------- ---------- ---------- ---------- -------- ----------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 12/31/96-12/31/97 $12,142.54 21.43% 21.43% 1 12/31/96-12/31/97 $10,724.62 7.25% 7.25%
2 12/31/95-12/31/97 $14,547.15 45.47% 20.61% 2 12/31/95-12/31/97 $10,746.78 7.47% 3.67%
3 12/31/94-12/31/97 $19,921.10 92.91% 24.49% 3 12/31/94-12/31/97 $12,468.86 24.69% 7.63%
4 12/31/93-12/31/97 $18,340.49 83.40% 16.37% 4 12/31/93-12/31/97 $12,031.47 20.31% 4.73%
5 12/31/92-12/31/97 $21,343.25 113.43% 16.37% 5 12/31/92-12/31/97 $12,898.94 28.99% 5.22%
Life 11/2/89-12/31/97 $29,999.90 200.00% 14.40% Life 11/8/89-12/31/97 $16,692.27 66.92% 6.49%
</TABLE>
<TABLE>
<CAPTION>
HIGH YIELD SERIES MANAGED SECTORS SERIES
--------------------------------- ---------------------------------
NUMBER CUMULATIVE COMPOUND NUMBER CUMULATIVE COMPOUND
OF GROWTH GROWTH OF GROWTH GROWTH
YEARS PERIODS AMOUNT RATE RATE YEARS PERIODS AMOUNT RATE RATE
- -------- ----------------- ---------- ---------- ---------- -------- ----------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 12/31/96-12/31/97 $11,164.81 11.65% 11.65% 1 12/31/96-12/31/97 $12,389.72 23.90% 23.90%
2 12/31/95-12/31/97 $12,343.73 23.44% 11.10% 2 12/31/95-12/31/97 $14,367.36 43.67% 19.86%
3 12/31/94-12/31/97 $14,247.63 42.48% 12.52% 3 12/31/94-12/31/97 $18,740.49 87.40% 23.29%
4 12/31/93-12/31/97 $13,737.53 37.38% 8.26% 4 12/31/93-12/31/97 $18,126.41 81.26% 16.03%
5 12/31/92-12/31/97 $15,948.30 59.48% 9.78% 5 12/31/92-12/31/97 $18,601.84 86.02% 13.22%
Life 12/6/89-12/31/97 $22,055.53 120.56% 10.29% Life 11/2/89-12/31/97 $27,296.05 172.96% 13.08%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURN SERIES WORLD GOVERNMENTS SERIES
--------------------------------- ---------------------------------
NUMBER CUMULATIVE COMPOUND NUMBER CUMULATIVE COMPOUND
OF GROWTH GROWTH OF GROWTH GROWTH
YEARS PERIODS AMOUNT RATE RATE YEARS PERIODS AMOUNT RATE RATE
- -------- ----------------- ---------- ---------- ---------- -------- ----------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 12/31/96-12/31/97 $12,028.47 20.28% 20.28% 1 12/31/96-12/31/97 $ 9,786,06 -2.14% -2.14%
2 12/31/95-12/31/97 $13,529.96 35.30% 16.32% 2 12/31/95-12/31/97 $10,100.40 1.00% 0.50%
3 12/31/94-12/31/97 $16,916.86 69.17% 19.15% 3 12/31/94-12/31/97 $11,524.14 15.24% 4.84%
4 12/31/93-12/31/97 $16,305.87 63.06% 13.00% 4 12/31/93-12/31/97 $10,855.12 8.55% 2.07%
5 12/31/92-12/31/97 $18,232.70 82.33% 12.76% 5 12/31/92-12/31/97 $12,725.94 27.26% 4.94%
Life 11/2/89-12/31/97 $24,105.62 141.06% 11.37% Life 11/24/89-12/31/97 $16,414.59 64.15% 6.30%
</TABLE>
- ------------------------
* For purposes of determining these investment results, the actual investment
performance of each Series of MFS/Sun Life Series Trust is reflected from the
date of inception of the Sub-Account investing in the Series. The charges
imposed under the Contract against the assets of the Variable Account for
mortality and expense risks and distribution expense risks have been deducted.
However, the annual Account Fee is not reflected and these examples do not
assume surrender at the end of the period.
89
<PAGE>
ADVERTISING AND SALES LITERATURE
As set forth in the Prospectus, the Company may refer to the following
organizations (and others) in its marketing materials:
A.M. BEST'S RATING SYSTEM is designed to evaluate the various factors
affecting the overall performance of an insurance company in order to provide an
opinion as to an insurance company's relative financial strength and ability to
meet its contractual obligations. The procedure includes both a quantitative and
qualitative review of each company.
DUFF & PHELPS CREDIT RATING COMPANY's Insurance Company Claims Paying
Ability Rating is an independent evaluation by a nationally accredited rating
organization of an insurance company's ability to meet its future obligations
under the contracts and products it sells. The rating takes into account both
quantitative and qualitative factors.
LIPPER VARIABLE INSURANCE PRODUCTS PERFORMANCE ANALYSIS SERVICE is a
publisher of statistical data covering the investment company industry in the
United States and overseas. Lipper is recognized as the leading source of data
on open-end and closed-end funds. Lipper currently tracks the performance of
over 5,000 investment companies and publishes numerous specialized reports,
including reports on performance and portfolio analysis, fee and expense
analysis.
STANDARD & POOR's insurance claims-paying ability rating is an opinion of an
operating insurance company's financial capacity to meet obligations of its
insurance policies in accordance with their terms.
VARDS (Variable Annuity Research Data Service) provides a comprehensive
guide to variable annuity contract features and historical fund performance. The
service also provides a readily understandable analysis of the comparative
characteristics and market performance of funds included in variable contracts.
MOODY'S INVESTORS SERVICES, INC.'s insurance and claims-paying rating is a
system of rating an insurance company's financial strength, market leadership,
and ability to meet financial obligations. The purpose of Moody's ratings is to
provide investors with a simple system of gradation by which the relative
quality of insurance companies may be noted.
STANDARD & POOR'S INDEX--broad-based measurement of changes in stock-market
conditions based on the average performance of 500 widely held common stocks;
commonly known as the Standard & Poor's 500 (S&P 500). The selection of stocks,
their relative weightings to reflect differences in the number of outstanding
shares, and publication of the index itself are services of Standard & Poor's
Corporation, a financial advisory, securities rating, and publishing firm. The
index tracks 400 industrial company stocks, 20 transportation stocks, 40
financial company stocks, and 40 public utilities.
NASDAQ-OTC Price Index--this index is based on the National Association of
Securities Dealers Automated Quotations (NASDAQ) and represents all domestic
over-the-counter stocks except those traded on exchanges and those having only
one market maker, a total of some 3,500 stocks. It is market value-weighted and
was introduced with a base of 100.00 on February 5, 1971.
DOW JONES INDUSTRIAL AVERAGE (DJIA)--price-weighted average of 30 actively
traded blue chip stocks, primarily industrials, but including American Express
Company and American Telephone and Telegraph Company. Prepared and Published by
Dow Jones & Company, it is the oldest and most widely quoted of all the market
indicators. The average is quoted in points, not dollars.
In its advertisements and other sales literature for the Variable Account
and the Series Fund, the Company intends to illustrate the advantages of the
Contracts in a number of ways:
COMPOUND INTEREST ILLUSTRATIONS. These will emphasize several advantages of
the variable annuity contract. For example, but not by way of limitation, the
literature may emphasize the potential savings through tax deferral; the
potential advantage of the Variable Account over the fixed account; and the
compounding effect when a Participant makes regular deposits to his or her
Account.
DOLLAR COST AVERAGING ILLUSTRATIONS. These illustrations will generally
discuss the price-leveling effect of making regular investments in the same
Sub-Accounts over a period of time, to take advantage of the trends in market
prices of the portfolio securities purchased by those Sub-Accounts.
SYSTEMATIC WITHDRAWAL PROGRAM. A service provided by the Company, through
which a Participant may take any distribution allowed by Code Section 401(a)(9)
in the case of Qualified Contracts, or permitted under Code Section 72 in the
case of Non-Qualified Contracts, by way of a series of partial withdrawals.
Withdrawals under this program may be fully or partially includible in income
and may be subject to a 10% penalty tax. Consult your tax adviser.
THE COMPANY'S OR MFS'S CUSTOMERS. Sales literature for the Variable Account
and the Series Fund may refer to the number of clients which they serve. As of
the date of this Prospectus, MFS serves approximately 2.9 million investor
accounts.
THE COMPANY'S OR MFS'S ASSETS, SIZE. The Company may discuss its general
financial condition (see, for example, the references to Standard & Poor's, Duff
& Phelps and A.M. Best Company above); it may refer to its assets; it may also
discuss its relative size and/or ranking among companies in the industry or
among any sub-classification of those companies, based upon recognized
evaluation criteria. For example, at year-end 1996 the Company was the 38th
largest U.S. life insurance company based upon overall assets and its parent
company, Sun Life Assurance Company of Canada, was the 19th largest.
90
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
ANNUITY SERVICE MAILING ADDRESS:
RETIREMENT PRODUCTS AND SERVICES
P.O. BOX 1024
BOSTON, MASSACHUSETTS 02103
TELEPHONE:
Toll Free (800) 752-7215
In Massachusetts (617) 348-9600
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
REGUS-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 Form of 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 Filed Herewith
24 Powers of Attorney Filed Herewith
* Incorporated herein by reference from Pre-Effective Amendment No. 1
to the Registration Statement on Form N-4, File No. 333-37907, filed
on January 16, 1998.
** Incorporated herein by reference from the Registration Statement on
Form N-4, File No. 333-37907, filed on October 14, 1997.
*** Incorporated herein by reference from Post-effective Amendment No. 9
to the Registration Statement on Form N-4, File No. 33-29852, filed on
April 16, 1998.
Item 17. Undertakings
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in the registration statement;
II-3
<PAGE>
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
Provided, however, that paragraphs (a)(1)(i) and a(1)(ii) do
not apply if the registration statement is on Form S-3 or Form S-8,
and the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed
by the registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in
the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post- effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to Section 13(a) or Section 15(d) of
the Securities Exchange Act of 1934 (and where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant, Sun Life Assurance Company of Canada (U.S.), certifies that it
has reasonable grounds to believe that it meets all of the requirements for
filing on Form S-2 and has duly caused this Post-Effective Amendment No. 7 to
its Registration Statement on Form S-2 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Town of Wellesley, Commonwealth
of Massachusetts, on the 14th 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. 7 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 14, 1998
John D. McNeil
* /s/ ROBERT P. VROLYK Vice President and Actuary
- ---------------------------- (Principal Financial
Robert P. Vrolyk & Accounting Officer) April 14, 1998
* /s/ RICHARD B. BAILEY Director April 14, 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 14, 1998
M. Colyer Crum
* /s/ DONALD A. STEWART President and Director April 14, 1998
- -------------------------------
Donald A. Stewart
* /s/ DAVID D. HORN Director
- -------------------------------- April 14, 1998
David D. Horn
* /s/ JOHN S. LANE Director April 14, 1998
- --------------------------------
John S. Lane
* /s/ ANGUS A. MacNAUGHTON Director April 14, 1998
- ---------------------------------
Angus A. MacNaughton
* /s/ S. CAESAR RABOY Senior Vice President April 14, 1998
- --------------------------------- and Deputy General
S. Caesar Raboy Manager and Director
* /s/ C. JAMES PRIEUR Senior Vice President April 14, 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 Page
23 Independent Auditors' Consent.............
24 Powers of Attorney........................
II-7
<PAGE>
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the use in Post-Effective Amendment No. 7 to the
Registration Statement on Form S-2 of Sun Life Assurance Company of
Canada (U.S.) (Reg. No. 33-41858) of our report dated February 6, 1998
accompanying the financial statements of Sun Life of Canada (U.S.) Variable
Account F 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 16, 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. 33-41852), 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
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<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. 33-41852), 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
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<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. 33-41852), 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
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<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. 33-41852), 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
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<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. 33-41852), 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
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<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. 33-41852), 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/ Caesar Raboy
--------------------
Caesar Raboy
March 23, 1998
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<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. 33-41852), 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
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<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. 33-41852), 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
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<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. 33-41852), 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
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<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. 33-41852), 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
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