<PAGE>
REGISTRATION NOS. 2-79141 33-19739
2-79142 33-19738
2-79143 33-19740
2-90805
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 9 /X/
POST-EFFECTIVE AMENDMENT NO. 21 / /
POST-EFFECTIVE AMENDMENT NO. 16 / /
MONEY MARKET VARIABLE ACCOUNT
HIGH YIELD VARIABLE ACCOUNT
CAPITAL APPRECIATION VARIABLE ACCOUNT
GOVERNMENT SECURITIES VARIABLE ACCOUNT
WORLD GOVERNMENTS VARIABLE ACCOUNT
TOTAL RETURN VARIABLE ACCOUNT
MANAGED SECTORS VARIABLE ACCOUNT
(EXACT NAMES OF REGISTRANTS)
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(NAME OF INSURANCE COMPANY)
ONE SUN LIFE EXECUTIVE PARK
WELLESLEY HILLS, MASSACHUSETTS 02181
(ADDRESS OF INSURANCE COMPANY'S PRINCIPAL EXECUTIVE OFFICES)
INSURANCE COMPANY'S TELEPHONE NUMBER: (617) 237-6030
BONNIE S. ANGUS, SECRETARY
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
ONE SUN LIFE EXECUTIVE PARK
WELLESLEY HILLS, MASSACHUSETTS 02181
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPIES OF COMMUNICATIONS TO:
DAVID N. BROWN, ESQ.
COVINGTON & BURLING
1201 PENNSYLVANIA AVENUE, N.W.
P.O. BOX 7566
WASHINGTON, D.C. 20044
/X/ It is proposed that this filing will become effective immediately
upon filing pursuant to paragraph (b) of Rule 485.
PURSUANT TO RULE 24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940, THE
REGISTRANT HAS REGISTERED AN INDEFINITE AMOUNT OF SECURITIES UNDER THE
SECURITIES ACT OF 1933. THE RULE 24F-2 NOTICE FOR THE REGISTRANT'S FISCAL YEAR
ENDED DECEMBER 31, 1995 WAS FILED ON FEBRUARY 29, 1996.
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- --------------------------------------------------------------------------------
<PAGE>
MONEY MARKET VARIABLE ACCOUNT
HIGH YIELD VARIABLE ACCOUNT
CAPITAL APPRECIATION VARIABLE ACCOUNT
GOVERNMENT SECURITIES VARIABLE ACCOUNT
WORLD GOVERNMENTS VARIABLE ACCOUNT
TOTAL RETURN VARIABLE ACCOUNT
MANAGED SECTORS VARIABLE ACCOUNT
Cross Reference Sheet Required by Rule 495(a) under
The Securities Act of 1933
<TABLE>
<CAPTION>
ITEM NUMBER IN FORM N-3 LOCATION IN PROSPECTUS; CAPTION
------------------------------------ ------------------------------------------
<C> <S> <C>
PART A
1. Cover Page Cover Page
2. Definitions Definitions
3. Synopsis Synopsis: Expense Summary
4. Condensed Financial Information Condensed Financial Information
5. General Description of
Registrant and Insurance A Word About the Company and the Variable
Company Accounts
6. Management Management of the Variable Accounts
7. Deductions and Expenses Contract Charges
8. General Description of Variable Purchase Payments and Contract Values
Annuity Contracts During Accumulation Period; Other
Cobtractual Provisions
9. Annuity Period Annuity Provisions
10. Death Benefit Death Benefit
11. Purchases and Contract Value Purchase Payments and Contract Values
During Accumulation Period
12. Redemptions Cash Withdrawals
13. Taxes Federal Tax Status
14. Legal Proceedings Legal Proceedings
15. Table of Contents of the
Statement of Additional Table of Contents for Statement of
Information Additional Information
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LOCATION IN STATEMENT OF ADDITIONAL
ITEM NUMBER IN FORM N-3 INFORMATION; CAPTION
------------------------------------ ------------------------------------------
PART B
<C> <S> <C>
16. Cover Page Cover Page
17. Table of Contents Table of Contents
18. General Information and History General Information and History
19. Investment Objectives and The Variable Accounts' Investment
Policies Objectives, Policies and Restrictions; A
Word About the Company and the Variable
Accounts*
20. Management Management of the Variable Accounts
21. Investment Advisory and Other
Services Management of the Variable Accounts
22. Brokerage Allocation Management of the Variable Accounts
23. Purchase and Pricing of Purchase Payments and Contract Values
Securities being Offered During Accumulation Period*
24. Underwriters Distribution of the Contracts
25. Calculation of Performance Data Not Applicable
26. Annuity Payments Annuity Provisions
27. Financial Statements Accountants and Financial Statements
<FN>
* In the Prospectus.
</TABLE>
<PAGE>
PART A
INFORMATION REQUIRED IN A PROSPECTUS
Attached hereto and made a part hereof is the Prospectus dated May 1, 1996.
<PAGE>
PROSPECTUS
MAY 1, 1996
COMPASS 2
The individual flexible payment deferred annuity contracts (the "Contracts")
offered by this Prospectus are designed for use in connection with personal
retirement plans, some of which may qualify for federal income tax advantages
available under Sections 401, 403, 408 or 457 of the Internal Revenue Code. The
Contracts are issued by Sun Life Assurance Company of Canada (U.S.) (the
"Company") in connection with Money Market Variable Account, High Yield Variable
Account, Capital Appreciation Variable Account, Government Securities Variable
Account, World Governments Variable Account, Total Return Variable Account, and
Managed Sectors Variable Account. The Company's Annuity Service Mailing Address
is: Sun Life Annuity Service Center, P.O. Box 1024, Boston, Massachusetts 02103.
The Owner of a Contract may elect to have Contract values accumulated on a
fixed basis in the Fixed Account (which is part of the Company's general account
and pays interest at a guaranteed fixed rate) or on a variable basis in one or
more of the Variable Accounts described in this Prospectus, or divided among the
Fixed Account and Variable Accounts. If the Owner elects certain forms of an
annuity as a retirement benefit, payments may be funded from all or any of the
Accounts. Contract values allocated to the Variable Accounts and annuity
payments elected on a variable basis will vary to reflect the investment
performance of the Variable Accounts selected by the Owner.
Money Market Variable Account 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 ACCOUNT IS
NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT.
High Yield Variable Account will seek high current income and capital
appreciation by investing primarily in fixed income securities of United States
and foreign issuers which may be in the lower rated categories or unrated
(commonly known as "junk bonds") and 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.
Capital Appreciation Variable Account will seek capital appreciation by
investing in securities of all types, with major emphasis on common stocks.
Government Securities Variable Account will seek current income and
preservation of capital by investing in U.S. Government and Government-related
Securities.
World Governments Variable Account will seek moderate current income and
preservation and growth of capital by investing in a portfolio of U.S. and
Foreign Government Securities.
Total Return Variable Account 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
Account's 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.
Managed Sectors Variable Account 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.
This Prospectus sets forth information about the Contracts and the Variable
Accounts that a prospective purchaser should know before investing. Additional
information about the Contracts and the Variable Accounts has been filed with
the Securities and Exchange Commission in a Statement of Additional Information
dated May 1, 1996, which is incorporated herein by reference. The Statement of
Additional Information is available from the Company without charge upon written
request to the above address or by telephoning (800) 752-7215. The Table of
Contents for the Statement of Additional Information is shown on page 32 of this
Prospectus.
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 SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Definitions 2
Synopsis 3
Expense Summary 4
Condensed Financial Information 5
Financial Statements 10
A Word About the Company and the Variable Accounts 10
Portfolio Transactions 20
Management of the Variable Accounts 20
Purchase Payments and Contract Values During Accumulation Period 21
Cash Withdrawals 23
Death Benefit 24
Contract Charges 25
Annuity Provisions 27
Other Contractual Provisions 28
Federal Tax Status 30
Distribution of the Contracts 31
Legal Proceedings 32
Contract Owner Inquiries 32
Table of Contents for Statement of Additional Information 32
Appendix A--State Premium Taxes 33
Appendix B--Commercial Paper and Bond Ratings 33
Appendix C--Investment Techniques 37
Appendix D--Industry Sectors 48
Appendix E--Portfolio Composition Chart 51
</TABLE>
DEFINITIONS
The following terms as used in this Prospectus have the indicated meanings:
Accumulation Account: An account established for the Contract to which net
Purchase Payments are credited in the form of Accumulation Units.
Accumulation Unit: A unit of measure used in the calculation of the value of
the Accumulation Account. There are two types of Accumulation Units: Variable
Accumulation Units and Fixed Accumulation Units.
Annuitant: The person or persons named in the Contract and on whose life the
first annuity payment is to be made.
Annuity Commencement Date: The date on which the first annuity payment is to be
made.
Annuity Unit: A unit of measure used in the calculation of the amount of the
second and each subsequent Variable Annuity payment.
Beneficiary: The person who has the right to the death benefit set forth in the
Contract.
Contract Years and Contract Anniversaries: The first Contract Year shall be the
period of 12 months plus a part of a month as measured from the date the
Contract is issued to the first day of the calendar month which follows the
calendar month of issue. All Contract Years and Anniversaries thereafter shall
be 12 month periods based upon such first day of the calendar month which
follows the calendar month of issue.
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 separate accounts of the Company.
2
<PAGE>
Fixed Annuity: An annuity with payments which do not vary as to dollar amount.
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, 408 or 457 of the Internal Revenue Code of 1986, as amended (the
"Code"). Such 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.
Payee: The recipient of payments under the Contract. The term may include an
Annuitant, a Beneficiary who becomes entitled to benefits upon the death of the
Annuitant and any person who is designated as the beneficiary of distributions
made as a result of the death of the Owner.
Purchase Payment (Payment): An amount paid to the Company by the Owner or on
the Owner's behalf as consideration for the benefits provided by the Contract.
Qualified Contract: A Contract used in connection with a retirement plan which
receives favorable federal income tax treatment under Sections 401, 403, 408 or
457 of the Code.
Valuation Period: The period of time from one determination of Accumulation
Unit and Annuity Unit values to the next subsequent determination of these
values.
Variable Annuity: An annuity with payments which vary as to dollar amount in
relation to the investment performance of specified Variable Accounts.
SYNOPSIS
Purchase Payments are allocated to the Variable Accounts or the Fixed
Account or to both the Variable Accounts and the Fixed Account as selected by
the Owner. Purchase Payments must total at least $300 for the first Contract
Year and each Purchase Payment must be at least $25 (see "Purchase Payments" on
page 21). Subject to certain conditions, during the accumulation period, the
Owner may, without charge, transfer amounts among the Variable Accounts and
between the Variable Accounts and the Fixed Account (see "Transfers/Conversions
of Accumulation Units" on page 23).
No sales charge is deducted from Purchase Payments; however, if any portion
of a Contract's Accumulation Account is surrendered, the Company will, with
certain exceptions, deduct a 5% withdrawal charge (contingent deferred sales
charge) to cover certain expenses relating to the sale of the Contracts. A
portion of the Accumulation Account may be withdrawn each year without the
assessment of a withdrawal charge and after a Purchase Payment has been held by
the Company for five years it may be withdrawn without charge. Also, no
withdrawal charge is assessed upon annuitization or upon the
transfers/conversions described above (see "Cash Withdrawals" and "Withdrawal
Charges" on pages 23 and 26, respectively).
Special restrictions on withdrawals apply to Contracts used with
Tax-Sheltered Annuities established pursuant to Section 403(b) of the Code (see
"Cash Withdrawals--Section 403(b) Annuities" on page 23).
In addition, under certain circumstances, withdrawals may result in tax
penalties (see "Federal Tax Status" 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 under the Contract except as may be provided under the annuity
option elected (see "Death Benefit" on page 24).
On each Contract Anniversary and on surrender of the Contract for full
value, the Company will deduct a contract maintenance charge of $25 from the
Accumulation Account to reimburse it for administrative expenses related to the
issuance and maintenance of the Contracts. After the Annuity Commencement Date
the charge will be deducted pro rata from each annuity payment made during the
year (see "Contract Maintenance Charge" on page 25).
3
<PAGE>
The Company also deducts a mortality and expense risk charge at the end of
each Valuation Period equal to an annual rate of 1.30% of the daily net assets
of Money Market Variable Account, High Yield Variable Account, Capital
Appreciation Variable Account and Government Securities Variable Account
attributable to the Contracts and 1.25% of the daily net assets of World
Governments Variable Account, Total Return Variable Account and Managed Sectors
Variable Account attributable to the Contracts for mortality and expense risks
assumed by the Company (see "Mortality and Expense Risk Charge" on page 26).
The Company makes a deduction from the Variable Accounts at the end of each
Valuation Period for the investment management fees payable to the investment
adviser, Massachusetts Financial Services Company ("MFS" or the "Adviser").
These fees are based upon average daily net assets of each Variable Account (see
"Management of the Variable Accounts" and "Investment Management Fees" on pages
20 and 26, respectively).
Premium taxes payable to any governmental entity will be charged against the
Contracts (see "Premium Taxes" on page 27).
Annuity payments will begin on the Annuity Commencement Date. The Owner
selects the Annuity Commencement Date, frequency of payments, and the annuity
option (see "Annuity Provisions" on page 27).
If the Owner is not satisfied with the Contract it may be returned to the
Company at its Annuity Service Mailing Address within ten days after it was
delivered to the Owner. When the Company receives the returned Contract it will
be cancelled and the value of the Contract's Accumulation Account at the end of
the Valuation Period during which the Contract was received by the Company will
be refunded. However, if applicable state law so requires, the full amount of
any Purchase Payment(s) received by the Company will be refunded.
EXPENSE SUMMARY
The purpose of the following table is to help Owners and prospective
purchasers of the Contracts to understand the costs and expenses that are borne,
directly and indirectly, by Contract Owners. The information set forth should be
considered together with the narrative provided under the heading "Contract
Charges" in this Prospectus. In addition to the expenses listed below, premium
taxes may be applicable.
<TABLE>
<CAPTION>
MONEY HIGH CAPITAL GOVERNMENT WORLD MANAGED TOTAL
MARKET YIELD APPRECIATION SECURITIES GOVERNMENTS SECTORS RETURN
CONTRACT OWNER TRANSACTION VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
EXPENSES ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------------------------------ ------- ------- ------------ ---------- ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales Load Imposed on
Purchases.................... 0 0 0 0 0 0 0
Deferred Sales Load (as a
percentage of Purchase
Payments withdrawn)(1)
Years Payment in Account
0-5....................... 5 % 5 % 5 % 5 % 5 % 5 % 5 %
more than 5............... 0 % 0 % 0 % 0 % 0 % 0 % 0 %
Exchange Fee.................. 0 0 0 0 0 0 0
ANNUAL CONTRACT FEE $25 per contract
ANNUAL EXPENSES
(as a percentage of average
net assets)
Management Fees............... 0.50% 0.75% 0.75% 0.55% 0.75% 0.75% 0.75%
Mortality and Expense Risk
Fees......................... 1.30% 1.30% 1.30% 1.30% 1.25% 1.25% 1.25%
Other Expenses................ 0.08% 0.13% 0.05% 0.08% 0.25% 0.12% 0.08%
Total Annual Expenses......... 1.88% 2.18% 2.10% 1.93% 2.25% 2.12% 2.08%
<FN>
- ------------------------------
(1) A portion of the Accumulation Account value may be withdrawn each year
without imposition of any withdrawal charge, and after a Purchase Payment
has been held by the Company for five years it may be withdrawn free of any
withdrawal charge.
</TABLE>
4
<PAGE>
EXAMPLE
If you surrender your Contract at the end of the applicable time period, you
would pay the following expenses on a $1,000 investment, assuming a 5% annual
return on assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Money Market Variable Account............. $64 $104 $147 $220
High Yield Variable Account............... $67 $113 $162 $251
Capital Appreciation Variable Account..... $66 $111 $158 $243
Government Securities Variable Account.... $65 $106 $149 $225
World Governments Variable Account........ $68 $115 $165 $258
Managed Sectors Variable Account.......... $67 $111 $159 $245
Total Return Variable Account............. $66 $110 $157 $241
</TABLE>
If you do NOT surrender your Contract, or if you annuitize at the end of the
applicable time period, you would pay the following expenses on a $1,000
investment, assuming a 5% annual return on assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Money Market Variable Account............. $19 $59 $102 $220
High Yield Variable Account............... $22 $68 $117 $251
Capital Appreciation Variable Account..... $21 $66 $113 $243
Government Securities Variable Account.... $20 $61 $104 $225
World Governments Variable Account........ $23 $70 $120 $258
Managed Sectors Variable Account.......... $22 $66 $114 $245
Total Return Variable Account............. $21 $65 $112 $241
</TABLE>
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LOWER THAN THOSE SHOWN.
CONDENSED FINANCIAL INFORMATION--PER ACCUMULATION
UNIT INCOME AND CAPITAL CHANGES
The following information should be read in conjunction with the financial
statements included in the Variable Accounts' Annual Report to Contract Owners
which is incorporated by reference into the Statement of Additional Information,
all of which has been audited by Deloitte & Touche LLP, independent certified
public accountants.
5
<PAGE>
PER UNIT AND OTHER DATA
<TABLE>
<CAPTION>
MONEY MARKET VARIABLE ACCOUNT
--------------------------------------------------------------------------------------------------
COMPASS 2
--------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER UNIT DATA*
Investment Income........... $ 0.9560 $ 0.6615 $ 0.4864 $ 0.5772 $ 0.9108 $ 1.1445 $ 1.1960 $ 0.9241 $ 0.7777 $ 0.7663
Expenses.................... 0.3046 0.2919 0.2837 0.2741 0.2670 0.2627 0.2374 0.2255 0.2130 0.2176
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net investment income....... $ 0.6514 $ 0.3696 $ 0.2027 $ 0.3031 $ 0.6438 $ 0.8818 $ 0.9586 $ 0.6986 $ 0.5647 $ 0.5487
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net increase in unit
value...................... $ 0.6514 $ 0.3696 $ 0.2027 $ 0.3031 $ 0.6438 $ 0.8818 $ 0.9586 $ 0.6986 $ 0.5647 $ 0.5487
Unit value:
Beginning of year......... 15.8699 15.5003 15.2976 14.9945 14.3507 13.4689 12.5103 11.8117 11.2470 10.6983
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
End of year............... $16.5213 $15.8699 $15.5003 $15.2976 $14.9945 $14.3507 $13.4689 $12.5103 $11.8117 $11.2470
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
RATIOS (TO AVERAGE NET
ASSETS):
Expenses (excluding
mortality and expense risk
charges)#.................. 0.58% 0.58% 0.59% 0.59% 0.58% 0.57% 0.56% 0.58% 0.61% 0.65%
Net investment income....... 4.00% 2.37% 1.30% 2.03% 4.46% 6.35% 7.44% 5.84% 5.09% 4.89%
NUMBER OF UNITS OUTSTANDING AT
END OF YEAR (000'S
OMITTED)..................... 6,501 6,851 6,418 8,026 12,023 20,431 23,445 25,541 20,516 9,659
</TABLE>
<TABLE>
<CAPTION>
HIGH YIELD VARIABLE ACCOUNT
--------------------------------------------------------------------------------------------------
COMPASS 2
--------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER UNIT DATA*
Investment Income........... $ 2.5137 $ 2.2324 $ 2.0867 $ 2.0657 $ 1.9834 $ 2.0156 $ 1.6801 $ 1.5637 $ 2.1786 $ 0.7996
Expenses.................... 0.5356 0.5062 0.4797 0.4061 0.3287 0.2819 0.3029 0.2871 0.4004 0.1392
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net investment income....... $ 1.9781 $ 1.7262 $ 1.6070 $ 1.6596 $ 1.6547 $ 1.7337 $ 1.3772 $ 1.2766 $ 1.7782 $ 0.6604
Net realized and unrealized
gains (losses) on
investments................ 1.4936 (2.4077) 2.0365 0.7352 3.8799 (3.6674) (1.7552) 0.2637 (2.1693) 0.3267
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net increase (decrease) in
unit value................. $ 3.4717 $(0.6815) $ 3.6435 $ 2.3948 $ 5.5346 $(1.9337) $(0.3780) $ 1.5403 $(0.3911) $ 0.9871
Unit value:
Beginning of year......... 22.6776 23.3591 19.7156 17.3208 11.7862 13.7199 14.0979 12.5576 12.9487 11.9616
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
End of year............... $26.1493 $22.6776 $23.3591 $19.7156 $17.3208 $11.7862 $13.7199 $14.0979 $12.5576 $12.9487
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
RATIOS (TO AVERAGE NET
ASSETS):
Expenses (excluding
mortality and expense risk
charges)#.................. 0.88% 0.91% 0.86% 0.93% 0.87% 0.86% 0.80% 0.82% 0.78% 0.81%
Net investment income....... 7.91% 7.41% 6.97% 9.03% 10.85% 13.14% 9.47% 9.43% 9.21% 10.00%
PORTFOLIO TURNOVER............ 88% 77% 67% 61% 38% 14% 34% 37% 50% 50%
NUMBER OF UNITS OUTSTANDING AT
END OF YEAR (000'S
OMITTED)..................... 5,649 6,433 7,564 8,218 9,376 11,578 18,700 25,673 30,554 34,304
<FN>
*Per unit data for the years ended December 31, 1988 through 1995 has
been computed based on the average number of units outstanding during
each year. Per unit data for the years ended December 31, 1987 and
earlier has been computed for a unit outstanding throughout each year.
#For years ending on or after December 31, 1995, the expense ratio is
calculated without reduction for fees paid indirectly.
</TABLE>
6
<PAGE>
PER UNIT AND OTHER DATA -- CONTINUED
<TABLE>
<CAPTION>
CAPITAL APPRECIATION VARIABLE ACCOUNT
--------------------------------------------------------------------------------------------------
COMPASS 2
--------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER UNIT DATA*
Investment Income........... $ 0.3624 $ 0.4277 $ 0.3914 $ 0.2670 $ 0.4256 $ 0.7721 $ 0.4744 $ 0.3827 $ 0.3337 $ 0.4319
Expenses.................... 0.6989 0.6325 0.6436 0.5467 0.4756 0.4357 0.4027 0.3144 0.3504 0.3973
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net investment income
(expense).................. $(0.3365) $(0.2048) $(0.2522) $(0.2797) $(0.0500) $ 0.3364 $ 0.0717 $ 0.0683 $(0.0167) $ 0.0346
Net realized and unrealized
gains (losses) on
investments................ 10.0409 (4.6898) 3.8863 2.9108 6.8100 (2.2521) 6.2337 1.3821 0.4016 1.0929
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net increase (decrease) in
unit value................. $ 9.7044 $(4.8946) $ 3.6341 $ 2.6311 $ 6.7600 $(1.9157) $ 6.3054 $ 1.4504 $ 0.3849 $ 1.1275
Unit value:
Beginning of year......... 28.0107 32.9053 29.2712 26.6401 19.8801 21.7958 15.4904 14.0400 13.6551 12.5276
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
End of year............... $37.7151 $28.0107 $32.9053 $29.2712 $26.6401 $19.8801 $21.7958 $15.4904 $14.0400 $13.6551
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
RATIOS (TO AVERAGE NET
ASSETS):
Expenses (excluding
mortality and expense risk
charges)#.................. 0.80% 0.79% 0.78% 0.80% 0.79% 0.79% 0.78% 0.81% 0.78% 0.82%
Net investment income
(expense).................. (1.02% ) (0.69% ) (0.83% ) (1.08% ) (0.23% ) 1.58% 0.36% 0.46% (0.10% ) 0.18%
PORTFOLIO TURNOVER............ 96% 95% 56% 34% 62% 36% 83% 73% 105% 127%
NUMBER OF UNITS OUTSTANDING AT
END OF YEAR (000'S
OMITTED)..................... 10,014 11,310 13,833 14,914 16,570 17,753 19,680 22,356 29,999 29,771
<FN>
*Per unit data for the years ended December 31, 1988 through 1995 has
been computed based on the average number of units outstanding during
each year. Per unit data for the years ended December 31, 1987 and
earlier has been computed for a unit outstanding throughout each year.
#For years ending on or after December 31, 1995, the expense ratio is
calculated without reduction for fees paid indirectly.
</TABLE>
7
<PAGE>
PER UNIT AND OTHER DATA -- CONTINUED
<TABLE>
<CAPTION>
GOVERNMENT SECURITIES VARIABLE ACCOUNT
--------------------------------------------------------------------------------------------------
COMPASS 2
--------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER UNIT DATA*
Investment Income........... $ 1.7836 $ 1.5648 $ 1.5732 $ 1.4340 $ 1.5470 $ 1.4496 $ 1.3206 $ 1.1517 $ 0.9243 $ 0.7841
Expenses.................... 0.4564 0.4229 0.4238 0.3672 0.3476 0.3143 0.2824 0.2641 0.2023 0.1457
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net investment income....... $ 1.3272 $ 1.1419 $ 1.1494 $ 1.0668 $ 1.1994 $ 1.1353 $ 1.0382 $ 0.8876 $ 0.7220 $ 0.6384
Net realized and unrealized
gains (losses) on
investments................ 2.2488 (1.8508) 0.4454 0.0662 1.3572 0.0972 0.6573 (0.0194) (0.8901) 0.7116
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net increase (decrease) in
unit value................. $ 3.5760 $(0.7089) $ 1.5948 $ 1.1330 $ 2.5566 $ 1.2325 $ 1.6955 $ 0.8682 $(0.1681) $ 1.3500
Unit value:
Beginning of year......... 22.0031 22.7120 21.1172 19.9842 17.4276 16.1951 14.4996 13.6314 13.7995 12.4495
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
End of year............... $25.5791 $22.0031 $22.7120 $21.1172 $19.9842 $17.4276 $16.1951 $14.4996 $13.6314 $13.7995
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
RATIOS (TO AVERAGE NET
ASSETS):
Expenses (excluding
mortality and expense risk
charges)#.................. 0.63% 0.61% 0.61% 0.62% 0.60% 0.60% 0.55% 0.56% 0.56% 0.58%
Net investment income....... 5.51% 5.09% 5.11% 5.51% 6.50% 6.81% 6.70% 6.24% 6.61% 8.14%
PORTFOLIO TURNOVER............ 80% 41% 81% 175% 149% 107% 156% 498% 384% 194%
NUMBER OF UNITS OUTSTANDING AT
END OF YEAR (000'S
OMITTED)..................... 8,361 11,308 12,679 15,059 17,986 20,248 23,744 28,085 33,406 30,365
<FN>
*Per unit data for the years ended December 31, 1988 through 1995 has
been computed based on the average number of units outstanding during
each year. Per unit data for the years ended December 31, 1987 and
earlier has been computed for a unit outstanding throughout each year.
#For years ending on or after December 31, 1995, the expense ratio is
calculated without reduction for fees paid indirectly.
</TABLE>
8
<PAGE>
PER UNIT AND OTHER DATA -- CONTINUED
<TABLE>
<CAPTION>
MANAGED SECTORS VARIABLE ACCOUNT
------------------------------------------------------------------------------
COMPASS 2
------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988*
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER UNIT DATA**
Investment Income........... $ 0.3277 $ 0.3066 $ 0.1822 $ 0.1121 $ 0.2357 $ 0.3501 $ 0.4276 $ 0.2608
Expenses.................... 0.6066 0.5155 0.4994 0.4782 0.3848 0.3465 0.3783 0.1869
-------- -------- -------- -------- -------- -------- -------- --------
Net investment income
(expense).................. $(0.2789) $(0.2089) $(0.3172) $(0.3661) $(0.1491) $ 0.0036 $ 0.0493 $ 0.0739
Net realized and unrealized
gains (losses) on
investments................ 7.7615 (0.6162) 1.2397 1.5079 8.8466 (2.3247) 5.2969 0.8687
-------- -------- -------- -------- -------- -------- -------- --------
Net increase (decrease) in
unit value................. $ 7.4826 $(0.8251) $ 0.9225 $ 1.1418 $ 8.6975 $(2.3211) $ 5.3462 $ 0.9426
Unit value:
Beginning of year......... 23.9044 24.7295 23.8070 22.6652 13.9677 16.2888 10.9426 10.0000++
-------- -------- -------- -------- -------- -------- -------- --------
End of year............... $31.3870 $23.9044 $24.7295 $23.8070 $22.6652 $13.9677 $16.2888 $10.9426
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
RATIOS (TO AVERAGE NET
ASSETS):
Expenses (excluding
mortality and expense risk
charges)#.................. 0.87% 0.90% 0.91% 0.92% 0.98% 1.08% 1.25% 1.25% +
Net investment income
(expense).................. (1.07% ) (0.97% ) (1.49% ) (1.75% ) (0.97% ) (0.05% ) 0.25% 0.92% +
PORTFOLIO TURNOVER............ 115% 111% 122% 34% 52% 71% 66% 66%
NUMBER OF UNITS OUTSTANDING AT
END OF YEAR
(000'S OMITTED).............. 788 800 878 1,041 899 706 623 279
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURN VARIABLE ACCOUNT
------------------------------------------------------------------------------
COMPASS 2
------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988*
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER UNIT DATA**
Investment Income........... $ 1.0394 $ 0.8583 $ 0.8513 $ 0.9191 $ 0.9092 $ 0.7861 $ 0.8633 $ 0.4933
Expenses.................... 0.4118 0.3704 0.3616 0.3303 0.2828 0.2550 0.2396 0.1585
-------- -------- -------- -------- -------- -------- -------- --------
Net investment income....... $ 0.6276 $ 0.4879 $ 0.4897 $ 0.5888 $ 0.6264 $ 0.5311 $ 0.6237 $ 0.3348
Net realized and unrealized
gains (losses) on
investments................ 4.1572 (1.0193) 1.5255 0.7552 1.9553 (0.7112) 1.0596 0.2254
-------- -------- -------- -------- -------- -------- -------- --------
Net increase (decrease) in
unit value................. $ 4.7848 $(0.5314) $ 2.0152 $ 1.3440 $ 2.5817 $(0.1801) $ 1.6833 $ 0.5602
Unit value:
Beginning of year......... 17.4729 18.0043 15.9891 14.6451 12.0634 12.2435 10.5602 10.0000++
-------- -------- -------- -------- -------- -------- -------- --------
End of year............... $22.2577 $17.4729 $18.0043 $15.9891 $14.6451 $12.0634 $12.2435 $10.5602
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
RATIOS (TO AVERAGE NET
ASSETS):
Expenses (excluding
mortality and expense risk
charges)#.................. 0.83% 0.82% 0.76% 0.86% 0.84% 0.85% 0.81% 0.94% +
Net investment income....... 2.99% 2.60% 2.43% 3.63% 4.52% 4.26% 5.24% 4.65% +
PORTFOLIO TURNOVER............ 105% 63% 89% 94% 80% 53% 78% 13%
NUMBER OF UNITS OUTSTANDING AT
END OF YEAR
(000'S OMITTED).............. 4,801 5,410 5,889 5,732 5,215 5,738 5,464 3,455
<FN>
+Annualized.
*From commencement date, April 12, 1988, to December 31, 1988.
**Per unit data has been computed based on the average number of units
outstanding during each year.
++Unit value on date of commencement of operations.
#For years ending on or after December 31, 1995, the expense ratio is
calculated without reduction for fees paid indirectly.
</TABLE>
9
<PAGE>
PER UNIT AND OTHER DATA -- CONTINUED
<TABLE>
<CAPTION>
WORLD GOVERNMENTS VARIABLE ACCOUNT
------------------------------------------------------------------------------
COMPASS 2
------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988*
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER UNIT DATA**
Investment Income........... $ 1.3112 $ 1.0805 $ 1.1460 $ 1.2892 $ 1.1907 $ 0.9632 $ 0.9867 $ 0.6303
Expenses.................... 0.3863 0.3565 0.3704 0.3624 0.3190 0.2938 0.2561 0.1731
-------- -------- -------- -------- -------- -------- -------- --------
Net investment income....... $ 0.9249 $ 0.7240 $ 0.7756 $ 0.9268 $ 0.8717 $ 0.6694 $ 0.7306 $ 0.4572
Net realized and unrealized
gains (losses) on
investments................ 1.3509 (1.7959) 1.6880 (1.0654) 0.7237 0.9654 0.0077 0.1549
-------- -------- -------- -------- -------- -------- -------- --------
Net increase (decrease) in
unit value................. $ 2.2758 $(1.0719) $ 2.4636 $(0.1386) $ 1.5954 $ 1.6348 $ 0.7383 $ 0.6121
Unit value:
Beginning of year......... 15.8337 16.9056 14.4420 14.5806 12.9852 11.3504 10.6121 10.0000++
-------- -------- -------- -------- -------- -------- -------- --------
End of year............... $18.1095 $15.8337 $16.9056 $14.4420 $14.5806 $12.9852 $11.3504 $10.6121
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
RATIOS (TO AVERAGE NET
ASSETS):
Expenses (excluding
mortality and expense risk
charges)#.................. 1.00% 1.00% 0.94% 1.15% 1.18% 1.22% 1.22% 1.25% +
Net investment income....... 5.25% 4.45% 4.12% 6.03% 6.51% 5.55% 6.92% 9.55% +
PORTFOLIO TURNOVER............ 330% 256% 202% 133% 229% 120% 148% 87%
NUMBER OF UNITS OUTSTANDING AT
END OF YEAR
(000'S OMITTED).............. 824 983 1,092 949 884 836 874 876
<FN>
+Annualized.
*From commencement date, April 12, 1988, to December 31, 1988.
**Per unit data has been computed based on the average number of units
outstanding during each year.
++Unit value on date of commencement of operations.
#For years ending on or after December 31, 1995, the expense ratio is
calculated without reduction for fees paid indirectly.
</TABLE>
FINANCIAL STATEMENTS
Financial Statements of the Variable Accounts and the Company are included
in the Statement of Additional Information.
A WORD ABOUT THE COMPANY AND THE VARIABLE ACCOUNTS
THE COMPANY
Sun Life Assurance Company of Canada (U.S.) (the "Company") is a stock life
insurance company incorporated under the laws of Delaware on January 12, 1970.
Its Executive Office is located at One Sun Life Executive Park, Wellesley Hills,
Massachusetts 02181. The Company is a wholly-owned subsidiary of Sun Life
Assurance Company of Canada, 150 King Street West, Toronto, Ontario, Canada M5H
IJ9, a mutual life insurance company incorporated in Canada in 1865.
THE VARIABLE ACCOUNTS
Money Market Variable Account ("MMVA"), High Yield Variable Account ("HYVA")
and Capital Appreciation Variable Account ("CAVA") were established as separate
accounts of the Company on July 22, 1982 pursuant to a resolution of its Board
of Directors. Government Securities Variable Account ("GSVA") was established on
April 20, 1984. World Governments Variable Account ("WGVA"), Total Return
Variable Account ("TRVA") and Managed Sectors Variable Account ("MSVA") were
established on January 4, 1988. Under Delaware insurance law and the Contracts,
the income, gains or losses of the Variable Accounts are credited to or charged
against the assets of the Variable Accounts without regard to the other income,
gains or losses of the Company. Although the assets maintained in the Variable
Accounts will not be charged with any liabilities arising out of any other
business conducted by the Company, all obligations arising under the Contracts,
including the promise to make annuity payments, are general corporate
obligations of the Company.
In addition to the Contracts offered by this Prospectus, the Company issues
other variable annuity contracts participating in the Variable Accounts.
10
<PAGE>
MMVA, CAVA, GSVA and TRVA are registered with the Securities and Exchange
Commission as open-end, diversified, management investment companies under the
Investment Company Act of 1940. HYVA, WGVA and MSVA are registered as open-end,
non-diversified management investment companies. Each of the Variable Accounts
meets the definition of a separate account under federal securities laws.
INVESTMENT OBJECTIVES AND POLICIES
The following is a description of the Variable Accounts' investment
objectives and policies. The objectives may not be changed without approval of
owners of and payees under the Contracts and other contracts participating in
the investment experience of the Variable Accounts. The Statement of Additional
Information also includes a discussion of specific investment restrictions which
govern the Variable Accounts' investment policies. These specific investment
restrictions may not be changed without approval of owners of and payees under
the Contracts and other contracts participating in the investment experience of
the Variable Accounts (see "Voting Rights").
MONEY MARKET VARIABLE ACCOUNT
MMVA will seek maximum current income to the extent consistent with
stability of principal by investing exclusively in the following types of U.S.
dollar denominated money market instruments which mature in less than 13 months:
(a) Obligations of, or guaranteed by, the U.S. government, its agencies
or instrumentalities.
(b) Bank certificates of deposit issued by domestic or foreign branches
of any U.S. or Canadian chartered bank which has total assets in excess of
$1 billion (U.S.) ("Eurodollar CD's") and bankers' acceptances issued by
domestic branches of any such bank.
(c) Commercial paper which at the date of investment is rated A-1 by
Standard & Poor's Corporation or P-1 by Moody's Investors Service, Inc. (see
Appendix B for a description of the ratings).
(d) Repurchase agreements for the purchase of obligations which are
suitable for investment under paragraph (a) above.
Under regulations currently in effect, the average maturity of investments
in the Account may not exceed 90 days.
To the extent the investment adviser attempts to increase yield by trading
to take advantage of short-term market variations, a high turnover rate could
result, but this should not adversely affect the Account. Higher portfolio
turnover may result in additional transaction costs.
HIGH YIELD VARIABLE ACCOUNT
HYVA will seek high current income and capital appreciation by investing
primarily in fixed-income securities of U.S. and foreign issuers. These
securities may be denominated in U.S. dollars or foreign currencies. Securities
offering the high current income sought by HYVA are ordinarily in the lower
rated (that is, rated BBB or lower by Standard & Poor's Corporation ("S&P") or
Fitch's Investors Service, Inc. ("Fitch") or Baa or lower by Moody's Investors
Service, Inc. ("Moody's")) or non-rated categories and may include equity
features. Securities which are in the lower rated categories of recognized
rating agencies or are unrated may involve greater volatility of price and risk
of principal and income than securities in the higher rated categories (see
Appendix B for a description of the ratings). In particular, securities rated
BBB by S&P or Fitch or Baa by Moody's (and comparable unrated securities) are
considered to have speculative characteristics, while securities rated lower
than BBB by S&P or Fitch or Baa by Moody's (and comparable unrated securities)
(commonly known as "junk bonds") are considered speculative (see "Additional
Risk Factors Regarding Lower Rated Securities" below and Appendix B to this
Prospectus for a further description of the risks associated with investing in
these securities; see Appendix E for a chart indicating the composition of
HYVA's portfolio for the year ended December 31, 1995, with the debt securities
separated into rating categories and comparable unrated securities).
Fixed-income securities include preferred and preference stocks and all
types of debt obligations of both domestic and foreign corporate and government
issuers, such as bonds, debentures, notes, repurchase agreements, equipment
lease contracts, loan participations, corporate asset-backed securities,
11
<PAGE>
commercial paper, and obligations issued or guaranteed by the U.S. government,
any foreign government or any of their respective political subdivisions,
agencies or instrumentalities (including obligations secured by such
instruments). HYVA may invest in restricted securities, subject to the
restriction against investing more than 10% of its net assets in securities that
are not readily marketable. HYVA may also enter into mortgage "dollar roll"
transactions on up to 10% of its total assets. See Appendix C for a description
of the risks associated with these investments and techniques.
Corporate debt securities may bear fixed, fixed and contingent, or variable
rates of interest and may involve equity features, such as conversion or
exchange rights or warrants for the acquisition of stock of the same or a
different issuer; participations based on revenues, sales or profits; or the
purchase of common stock in a unit transaction (where corporate debt securities
and common stock are offered as a unit). Under normal market conditions, no more
than 25% of the value of HYVA's total assets will be invested in equity
securities, including common stock, warrants and stock subscription rights, but
excluding convertible debt securities.
The fixed income securities in which HYVA may invest also include zero
coupon bonds, deferred interest bonds and bonds on which the interest is payable
in kind ("PlK Bonds") (see Appendix C, "Investment Techniques--Zero Coupon
Bonds, Deferred Interest Bonds and PlK Bonds"). To the extent permitted by its
investment restrictions, HYVA may also invest a portion of its assets in
collateralized mortgage obligations, multi-class pass-through securities and
stripped mortgage-backed securities (see Appendix C, "Investment
Techniques--Collateralized Mortgage Obligations and Multi-Class Pass-Through
Securities" and "Stripped Mortgage-Backed Securities") and in interests in
trusts or other entities representing interests in fixed income securities or
holding fixed income securities in amounts sufficient to cover all payments due
from such entities. HYVA may purchase securities on a "when-issued" basis (see
Appendix C). HYVA may also invest in foreign securities without limitation,
which may include emerging market securities and Brady Bonds, and may invest in
American Depositary Receipts ("ADRs") (see Appendix C). Risks involved in
investing in foreign securities are described below.
In seeking to achieve its objectives and lessen risks, HYVA will engage in
portfolio trading to take advantage of market developments and yield
disparities. HYVA's portfolio turnover rate cannot be accurately predicted.
However, it is anticipated that the annual turnover rate will not exceed 100%
(excluding short-term obligations). For example, a 100% annual portfolio
turnover rate would occur if all of the securities in HYVA's portfolio were
replaced once in a period of one year. Higher portfolio turnover may result in
increased brokerage commissions. HYVA is aggressively managed and, thus, is
subject to greater fluctuations in the value of its Variable Accumulation Units
and Annuity Units and involves the assumption of a higher degree of risk as
compared to a conservative income fund. HYVA is registered as a
"non-diversified" investment company so that it will be able to invest more than
5% of its assets in the securities of a particular issuer. Accordingly, an
investment in HYVA should not constitute a complete investment program and may
not be appropriate for prospective purchasers who cannot bear the greater risk
of capital depreciation inherent in seeking higher yields.
HYVA also will utilize credit analysis of the issues in which it invests and
evaluation of changes and trends in the world economies and international
financial markets. Investing in foreign securities involves considerations and
risks not typically associated with investing in U.S. markets. Such investments
may be favorably or unfavorably affected by changes in interest rates, currency
exchange rates and exchange control regulations. There may be less publicly
available information about a foreign company than about a domestic company, and
foreign companies may not be subject to accounting, auditing and financial
reporting standards and requirements comparable to those of U.S. companies.
Foreign securities markets, while growing in volume, have substantially less
volume than U.S. markets, and securities of many foreign companies are less
liquid and their prices more volatile than securities of comparable domestic
companies. Fixed brokerage commissions and other transaction costs are generally
higher than in the United States. There is generally less government supervision
and regulation of exchanges, brokers and issuers in foreign countries than there
is in the United States. In addition, investments in foreign countries could be
affected by other factors generally not thought to be present in the United
States, including the possibility of heavy
12
<PAGE>
taxation, political or social instability, limitations on the removal of funds
or other assets of HYVA, expropriation of assets, diplomatic developments
adverse to U.S. investors and difficulties in enforcing contractual obligations.
The risks of investing in foreign securities may be intensified in the case
of investments in emerging markets. For a discussion of these risks, see
Appendix C "Investment Techniques--Emerging Market Securities."
As a result of its investments in foreign securities, HYVA may receive
interest or dividend payments, or the proceeds of the sale or redemption of such
securities, in the foreign currencies in which such securities are denominated.
In that event, the Account may promptly convert such currencies into dollars at
the current exchange rate. Under certain circumstances, however, such as where
the Adviser believes that the applicable exchange rate is unfavorable at the
time the currencies are received or the Adviser anticipates, for any other
reason, that the exchange rate will improve, the Account may hold such
currencies for an indefinite period of time. The Account may also hold foreign
currency in anticipation of purchasing foreign securities.
While the holding of currencies will permit the Account to take advantage of
favorable movements in the applicable exchange rate, it also exposes the Account
to risk of loss if such rates move in a direction adverse to the Account's
position. Such losses could reduce any profits or increase any losses sustained
by the Account from the sale or redemption of securities, and could reduce the
dollar value of interest or dividend payments received. Costs may also be
incurred in connection with conversions between various currencies.
Additional Risk Factors Regarding Lower Rated Securities--Investments in
fixed income securities offering the high current income sought by HYVA, while
generally providing greater income and opportunity for gain than investments in
higher rated securities, usually entail greater risk of principal and income
(including the possibility of default or bankruptcy of the issuers of such
securities), and may involve greater volatility of price (especially during
periods of economic uncertainty or change) than investments in higher rated
securities. In addition, since yields may vary over time, no specific level of
income or yield differential can ever be assured.
Securities rated lower than Baa by Moody's or BBB by S&P or Fitch (or
comparable unrated securities) (commonly known as "junk bonds") are considered
speculative. These high yielding fixed income securities generally tend to
reflect economic changes and short-term corporate and industry developments to a
greater extent than higher rated securities, which react primarily to
fluctuations in the general level of interest rates (although these lower rated
securities are also affected by changes in interest rates, as described below).
These fixed income securities also will be affected by the market's perception
of their credit quality (especially during times of adverse publicity) and the
outlook for economic growth. In the past, economic downturns or an increase in
interest rates have under certain circumstances caused a higher incidence of
default by the issuers of these securities and may do so in the future,
especially in the case of highly leveraged issuers. During certain periods, the
higher yields on the Account's lower rated high yielding fixed income securities
are paid primarily because of the increased risk of loss of principal and
income, arising from such factors as the heightened possibility of default or
bankruptcy of the issuers of such securities. Due to the fixed income payments
of these securities, the Account may continue to earn the same level of interest
income while its Variable Accumulation and Annuity Unit values decline due to
portfolio losses, which could result in an increase in the Account's yield
despite the actual loss of principal. The prices for these securities may be
affected by legislative and regulatory developments. Change in the value of
securities subsequent to their acquisition will not affect cash income or yield
to maturity to the Account but will be reflected in the value of its Variable
Accumulation and Annuity Units. The market for these lower rated fixed income
securities may be less liquid than the market for investment grade fixed income
securities. Furthermore, the liquidity of these lower rated securities may be
affected by the market's perception of their credit quality. Therefore, credit
judgment may at times play a greater role in valuing these securities than in
the case of investment grade fixed income securities, and it also may be more
difficult during certain adverse market conditions to sell these lower rated
securities at their fair value to meet redemption requests or to respond to
changes in the market.
13
<PAGE>
Securities rated Baa by Moody's or BBB by S&P or Fitch (and comparable
unrated securities), while normally exhibiting adequate protection parameters,
may have speculative characteristics and changes in economic conditions and
other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than in the case of higher grade fixed income
securities.
While the Adviser may refer to ratings issued by established credit rating
agencies, it is not the policy of the Account to rely exclusively on ratings
issued by these credit rating agencies, but rather to supplement such ratings
with the Adviser's own independent and ongoing review of credit quality. The
Account's achievement of its investment objectives may be more dependent on the
Adviser's own credit analysis than it would be in the case of an account or a
fund investing primarily in higher quality bonds.
The value of the Account's Variable Accumulation and Annuity Units changes
as the general levels of interest rates fluctuate; when interest rates decline,
the value of a portfolio invested at higher yields can be expected to rise, and
conversely when interest rates rise, the value of a portfolio invested at lower
yields can be expected to decline.
PROSPECTIVE PURCHASERS SHOULD REVIEW THIS SECTION CAREFULLY AND CONSIDER THE
INVESTMENT RISKS INVOLVED BEFORE ALLOCATING PURCHASE PAYMENTS TO HYVA.
CAPITAL APPRECIATION VARIABLE ACCOUNT
CAVA will seek to maximize capital appreciation by investing in securities
of all types. In seeking to achieve its objectives, a flexible approach toward
the type of securities and the relative attractiveness of the various securities
markets is maintained. Securities are selected based upon their potential for
capital appreciation. Income is not a significant factor in portfolio selection.
While CAVA usually will invest primarily in common stocks, CAVA will seek
capital appreciation in other types of securities, including fixed-income
securities, convertible bonds and preferred stocks and warrants when they appear
attractive for capital appreciation. CAVA may hold part or all of its assets in
cash or short-term commercial paper or other forms of debt securities for
temporary defensive purposes or as a buying reserve, may enter into Futures
Contracts and Options on Futures Contracts for hedging purposes, and may write
covered call and put options and purchase call and put options on securities and
stock indexes in an effort to increase current income and for hedging purposes
(see Appendix C "Investment Techniques" and Appendix D to the Statement of
Additional Information). CAVA's use of options, Futures Contracts and Options on
Futures Contracts may result in the loss of principal under certain market
conditions.
CAVA may invest up to 50% of its total assets in foreign securities, which
may include emerging market securities, and may invest in American Depositary
Receipts ("ADRs"), and may enter into forward foreign currency exchange
contracts ("Forward Contracts") for the purchase or sale of foreign currency for
hedging purposes (see Appendix C "Investment Techniques--Forward Foreign
Currency Exchange Contracts", "American Depositary Receipts" and "Emerging
Market Securities" and Appendix D to the Statement of Additional Information).
For a description of the risks involved in investing in foreign securities see
the discussion under "High Yield Variable Account" above.
CAVA may invest in restricted securities, subject to the restriction against
investing more than 10% of its net assets in securities that are not readily
marketable (see Appendix C "Investment Techniques -- Restricted Securities").
CAVA is focused on growth companies and may be subject to fluctuations in
the value of its Variable Accumulation Units and Annuity Units during periods of
stock market volatility. CAVA involves the assumption of a higher degree of risk
as compared to a conservative equity fund. While it is not CAVA's policy
generally to invest or trade for short-term profits, portfolio securities may be
disposed of without regard to the length of time held whenever the investment
adviser is of the opinion that a security no longer has an appropriate
appreciation potential or has reached its anticipated level of performance, or
when another security appears to offer relatively greater appreciation potential
or a relatively greater anticipated level of performance. The rate of portfolio
turnover is not a limiting factor when changes are appropriate. High levels of
portfolio activity result in higher brokerage commissions.
14
<PAGE>
GOVERNMENT SECURITIES VARIABLE ACCOUNT
GSVA will seek current income and preservation of capital by investing in
debt obligations that are issued or guaranteed as to principal and interest by
the U.S. government, its agencies, authorities or instrumentalities ("Government
Securities") and obligations that are fully collateralized or otherwise fully
backed by government securities ("Government-related Securities"). GSVA may also
engage in transactions involving options, Futures Contracts and Options on
Futures Contracts as a hedge against anticipated future changes in interest
rates that otherwise might adversely affect the value of GSVA's portfolio of
securities and may enter into mortgage "dollar roll" transactions on up to 30%
of its total assets. GSVA's use of options, Futures Contracts and Options on
Futures Contracts may result in the loss of principal under certain market
conditions (see Appendix C "Investment Techniques" and Appendix D to the
Statement of Additional Information). GSVA may also hold cash or invest in
short-term U.S. government debt securities and related repurchase agreements for
temporary defensive purposes or as a buying reserve.
Government Securities include: (1) U.S. Treasury obligations, which differ
only in their interest rates, maturities and times of issuance: U.S. Treasury
bills (maturity of one year or less), U.S. Treasury notes (maturities of one to
10 years), and U.S. Treasury bonds (generally maturities of greater than 10
years), all of which are backed by the full faith and credit of the United
States; and (2) obligations issued or guaranteed by U.S. government agencies or
instrumentalities, some of which are backed by the full faith and credit of the
U.S. Treasury, e.g., direct pass-through certificates of the Government National
Mortgage Association; some of which are supported by the right of the issuer to
borrow from the U.S. government, e.g., obligations of Federal Home Loan Banks;
and some of which are backed only by the credit of the issuer itself, e.g.,
obligations of the Student Loan Marketing Association.
Government-related Securities include collateralized mortgage obligations
("CMOs") and government backed trust certificates ("GBTs"). CMOs are debt
obligations issued by U.S. government agencies or by financial institutions and
other mortgage lenders and collateralized by mortgage pass-through securities
such as Government National Mortgage Association ("Ginnie Mae"), Federal
National Mortgage Association ("Fannie Mae"), and Federal Home Loan Mortgage
Corporation ("Freddie Mac") certificates. Payments of principal and interest on
the underlying collateral and any reinvestment income thereon provide the funds
to pay debt service obligations on the CMOs. CMOs are issued in a number of
classes or series, each with its own maturity and interest rate. While the
classes or series are often retired in sequence as the underlying mortgages are
repaid, payments of principal and interest on the underlying mortgages may be
allocated among the different series or classes in innumerable ways. As with any
mortgage-related security, principal prepayment on the collateral may cause the
CMOs to be retired substantially earlier than the stated maturities or final
distribution dates. Prepayment may thus shorten the stated maturity of the
obligation and can result in the loss of premium if any has been paid. Certain
of these securities may have variable or floating interest rates and others may
be stripped (securities which provide only the principal or interest feature of
the underlying security). GSVA intends to invest in privately issued CMOs only
if they are rated at the time of purchase in the two highest ratings by
nationally recognized rating agencies (see Appendix B for a description of the
ratings).
GBTs are obligations of certain private trusts formed for the purpose of
refinancing certain foreign government loans. The assets of the trust typically
include (a) a foreign government loan (the "Note"), 90% of principal and
interest payments on which are backed by a full faith and credit guaranty of the
United States government and (b) a beneficial interest in a trust holding direct
obligations of the United States Government, calculated to provide amounts equal
to at least 10% of all principal and interest payments on the Note. Funds
scheduled to be received from these assets are calculated to cover all scheduled
distributions on the GBTs.
GBTs and certain CMOs and other Government-related Securities are issued by
private entities, are not Government Securities and are not directly guaranteed
by any government agency. They are secured by the underlying collateral held by
the private issuer.
Government Securities and Government-related Securities do not generally
involve the credit risks associated with other types of interest bearing
securities, although, as a result, yields available from these securities are
generally lower than the yields available from corporate interest bearing
securities. Like other
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interest bearing securities, however, the values of Government Securities and
Government-related Securities change as interest rates fluctuate. Therefore,
when interest rates decline the market value of a portfolio invested at higher
yields can be expected to rise. Conversely, when interest rates rise the market
value of a portfolio invested at lower yields can be expected to decline.
Therefore, GSVA will engage in portfolio trading to take advantage of market
developments and yield disparities, e.g. shortening the average maturity of the
portfolio in anticipation of a rise in interest rates so as to minimize
depreciation of principal or lengthening the average maturity of the portfolio
in anticipation of a decline in interest rates so as to maximize the
appreciation of principal.
TOTAL RETURN VARIABLE ACCOUNT
TRVA's primary investment objective is to obtain above-average income
(compared to a portfolio entirely invested in equity securities) consistent with
the prudent employment of capital. While current income is the primary
objective, TRVA also will seek a reasonable opportunity for growth of capital
and income, since many securities offering a better than average yield may also
possess growth potential. 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 TRVA's assets will be invested in fixed
income securities and at least 40% and no more than 75% of TRVA's assets will be
invested in equity securities, including preferred stocks.
TRVA's policy is to invest in a broad portfolio of securities, including
short-term obligations. The portfolio may be diversified not only by companies
and industries, but also by type of securities, for example, equity securities,
fixed income securities, and securities representing cash equivalents. Thus
fixed income securities, such as bonds, may be held as well as common stocks. In
addition, some fixed income securities held by TRVA may include a right to
purchase common stock by means of a conversion privilege or attached warrants.
TRVA may vary the percentage of assets invested in any one type of security in
accordance with its interpretation of economic and money market conditions,
fiscal and monetary policy, and underlying security values. Most of TRVA's
long-term debt investments will consist of "investment grade" securities (rated
Baa or better by Moody's Investors Service, Inc. ("Moody's") or BBB or better by
Standard & Poor's Corporation ("S&P") or Fitch Investors Service, Inc.
("Fitch")), although TRVA may invest up to 20% of its net assets in lower rated
securities (see Appendix B for a description of these ratings; for a description
of risks associated with securities rated Baa or lower by Moody's or BBB or
lower by S&P or Fitch, see the discussion of "Additional Risk Factors Regarding
Lower Rated Securities" under "High Yield Variable Account" above.) TRVA may
enter into repurchase agreements only with member banks of the Federal Reserve
System, member firms (and subsidiaries thereof) of the New York Stock Exchange,
recognized primary U.S. Government securities dealers, or institutions which
TRVA's investment adviser has determined to be of comparable creditworthiness,
and only for U.S. Government securities and may seek to increase its income by
lending its portfolio securities to the extent consistent with present
regulatory policies. TRVA may invest in restricted securities, subject to the
restriction against investing more than 15% of its net assets in securities that
are not readily marketable. TRVA may enter into mortgage "dollar roll"
transactions and invest in corporate asset-backed securities (see Appendix C for
a discussion of repurchase agreements, corporate asset-backed securities,
lending of portfolio securities, restricted securities and mortgage "dollar
roll" transactions).
Securities offering above-average yield may at times involve greater than
average risk. For this reason, and because the value of securities and the
income earned on them may fluctuate according to the earnings of the issuers and
changes in economic and money market conditions, there can be no assurance that
TRVA's investment objectives will be achieved.
TRVA may invest up to 20% of its total assets in foreign securities, which
may include emerging market securities and Brady Bonds, and may invest in
American Depositary Receipts ("ADRs") (see Appendix C). Such investments may
represent a greater degree of risk than an investment in domestic securities due
to possible exchange rate fluctuations, less publicly available information,
more volatile markets, less securities regulation, less favorable tax
provisions, war or expropriation. For a description of the risks involved in
investing in foreign securities see the discussion under "High Yield Variable
Account" above and Appendix C "Investment Techniques--Emerging Market
Securities" and "Brady Bonds".
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The portfolio will be managed actively with respect to fixed income
securities, and the asset allocations will be modified as the Adviser deems
necessary. Although TRVA does not intend to seek short-term profits, fixed
income securities in its portfolio will be sold whenever the Adviser believes it
is appropriate to do so without regard to the length of time the particular
asset may have been held. With respect to equity securities, TRVA does not
intend to trade in securities for short-term profits and anticipates that equity
securities will ordinarily be held for one year or longer. However, TRVA will
trade whenever it believes that changes in the portfolio are appropriate.
WORLD GOVERNMENTS VARIABLE ACCOUNT
WGVA will seek to provide moderate current income and preservation and
growth of capital by investing in a portfolio of "U.S. Government Securities"
and "Foreign Government Securities" (to the extent WGVA's investment adviser
believes that the higher yields available from such Foreign Government
Securities are sufficient to justify the risks of investing in such securities).
WGVA may also hold its assets in cash or short-term obligations. In pursuing its
objectives, WGVA will consider the preservation and growth of capital by
balancing the yields of various fixed income securities against their attendant
risks.
WGVA will seek to provide purchasers with an opportunity to enhance the
value and increase the protection of their investment against inflation and
otherwise by taking advantage of investment opportunities in the United States
as well as in other countries where opportunities may be more rewarding. It is
believed that diversification of assets on an international basis decreases the
degree to which events in any one country, including the United States, can
affect the entire portfolio. Although the percentage of the Account's assets
invested in securities issued abroad and denominated in foreign currencies
("non-dollar securities") will vary depending on the state of the economies of
the principal countries of the world, their financial markets and the
relationships of their currencies to the U.S. dollar, under normal conditions
the Account's portfolio will be internationally diversified. However, for
defensive reasons or during times of international, political or economic
uncertainty or turmoil, most or all of the Account's investments may be in the
United States.
The Account will purchase non-dollar securities denominated in the currency
of countries where the interest rate environment as well as the general economic
climate provide an opportunity for declining interest rates and currency
appreciation. If interest rates decline, such non-dollar securities will
appreciate in value. If the currency also appreciates against the dollar, the
total investment in such non-dollar securities would be enhanced further.
Conversely, a rise in interest rates or decline in currency exchange rates would
adversely affect the Account's return. Investments in non-dollar securities are
evaluated primarily on the strength of a particular currency against the dollar
and on the interest rate climate of that country. Currency is judged on the
basis of fundamental economic criteria (e.g., relative inflation levels and
trends, growth rate forecasts, balance of payments status, and economic
policies) as well as technical and political data. In addition to the foregoing,
interest rates are evaluated on the basis of differentials or anomalies that may
exist between different countries.
The phrase "preservation of capital" is generally understood to imply the
portfolio is invested in very low risk securities and that the major risk is
loss of purchasing power through the effects of inflation or major changes in
interest rates. However, while the Account will invest in securities which are
believed by its investment adviser to have minimal credit risk, an error of
judgment in selecting a currency or an interest rate environment could result in
a loss of capital.
WGVA intends to invest in the following securities: (1) U.S. GOVERNMENT
SECURITIES--U.S. Government Securities include (i) direct obligations of the
U.S. Treasury (i.e., Treasury bills, notes and bonds) with a wide range of
maturities, all of which are backed by the full faith and credit of the United
States; and (ii) obligations issued or guaranteed by U.S. Government agencies or
instrumentalities, some of which are backed by the full faith and credit of the
U.S. Treasury (e.g., direct pass through certificates of the Government National
Mortgage Association); some of which are supported by the right of the issuer to
borrow from the U.S. Government (e.g., obligations of the Federal Home Loan
Banks); and some of which are backed only by the credit of the issuer itself
(e.g., obligations of the Student Loan Marketing Association). Some U.S.
Government Securities do not generally involve the credit risks associated with
other types of interest bearing securities, although, as a result, the yields
available from such securities are generally lower than the yields
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available from other interest bearing securities. Like other interest bearing
securities, however, the values of U.S. Government Securities change as interest
rates fluctuate; (2) FOREIGN GOVERNMENT SECURITIES--WGVA may invest in Foreign
Government Securities of issuers considered stable by WGVA's investment adviser.
The investment adviser does not believe that the credit risk inherent in the
obligations of such stable foreign governments is significantly greater than
that of U.S. Government Securities. The risk considerations involved in
investing in Foreign Government Securities are described below. The percentage
of WGVA's assets invested in Foreign Government Securities will vary depending
on the relative yields of such securities, the economies of the countries in
which the investments are made and such countries' financial markets, the
interest rate climate of such countries and the relationship of such countries'
currencies to the U.S. dollar. To the extent that WGVA invests in Foreign
Government Securities, its portfolio, under normal conditions, will include
securities of a number of foreign countries. As a "non-diversified" investment
company, WGVA will be able to invest more than 5% of its assets in obligations
of one or more foreign governments, to the extent consistent with federal income
tax diversification requirements; WGVA may also hold foreign currency for
hedging purposes; and (3) OTHER INVESTMENTS--When the investment adviser
believes that investing for temporary defensive purposes is appropriate, such as
during periods of unusual market conditions, or when relative yields are deemed
attractive, part or all of WGVA's assets may be invested in cash (including
foreign currency) or cash equivalent short-term obligations including, but not
limited to, certificates of deposit, commercial paper, notes, U.S. Government
Securities, Foreign Government Securities and repurchase agreements.
In order to achieve its investment objectives, WGVA may employ the following
investment practices: (1) writing covered put and call options and purchasing
put and call options on U.S. and Foreign Government Securities that are traded
on United States and foreign securities exchanges and over the counter in an
effort to increase current income and to reduce fluctuations in Variable
Accumulation Unit and Annuity Unit values; (2) entering into contracts for the
purchase or sale for future delivery of fixed income securities or foreign
currencies, or contracts based on financial indexes, including any index of U.S.
or Foreign Government Securities ("Futures Contracts") and purchasing and
writing options to buy or sell Futures Contracts ("Options on Futures
Contracts") but only as a hedge against anticipated further changes in interest
or exchange rates; (3) purchasing and writing put and call options on foreign
currencies traded on U.S. and foreign exchanges or over the counter for the
purpose of protecting against declines in the dollar value of foreign portfolio
securities and against increase in the dollar cost of foreign securities to be
acquired; (4) entering into forward foreign currency exchange contracts
("Forward Contracts") to attempt to minimize the risk to WGVA from adverse
changes in the relationship between the U.S. dollar and foreign currencies; (5)
lending portfolio securities to the extent consistent with present regulatory
policies for the purpose of increasing WGVA's income; (6) purchasing securities
on a "when-issued" or on a "forward delivery" basis; (7) entering into
repurchase agreements for U.S. Government Securities with member banks of the
Federal Reserve System, member firms (and subsidiaries thereof) of the New York
Stock Exchange, recognized primary U.S. Government securities dealers, or
institutions which WGVA's investment adviser has determined to be of comparable
creditworthiness; (8) entering into mortgage "dollar roll" transactions; (9)
entering into interest rate swaps, currency swaps and other types of available
swap agreements, such as caps, collars and floors; (10) entering into indexed
securities whose value is linked to foreign currencies, interest rates,
commodities, indexes or other financial indicators; and (11) investing in
restricted securities, subject to the restriction against investing more than
15% of its net assets in securities that are not readily marketable. These
investment practices, the instruments involved and their use, risks and costs
are more fully described in Appendix C "Investment Techniques" and in Appendix D
in the Statement of Additional Information. WGVA's use of options, Futures
Contracts, Options on Futures Contracts, Forward Contracts and options on
foreign currencies may result in the loss of principal under certain market
conditions.
WGVA will engage in portfolio trading if it believes that a transaction, net
of costs, will help in achieving its investment objective. WGVA cannot
accurately predict its portfolio turnover rate, but it is anticipated that the
annual turnover rate generally will not exceed 400% (excluding turnover of
securities having a maturity of one year or less). A 400% annual turnover rate
would occur, for example, if all the securities in the portfolio were replaced
four times in a period of one year. WGVA's anticipated portfolio turnover rate
would be substantially higher than that experienced by most investment
companies. A high turnover rate necessarily involves greater expenses to WGVA.
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Investment in Foreign Government Securities involves considerations and
possible risks not typically associated with investing in U.S. Government
Securities. The value of Foreign Government Securities investments will be
affected by changes in currency rates or exchange control regulations,
application of foreign tax laws, including withholding taxes, changes in
governmental administration or economic or monetary policy (in the U.S. or
abroad) or changed circumstances between nations. Costs may be incurred in
connection with conversions between various currencies. Foreign brokerage
commissions are generally higher than U.S. commissions, and foreign securities
markets may be less liquid, more volatile and less subject to governmental
supervision than in the United States. Investments in foreign countries could be
affected by other factors not present in the United States, including
expropriation, confiscatory taxation and potential difficulties in enforcing
contractual obligations and could be subject to extended settlement periods. For
a description of the risks involved in investing in foreign securities, see the
discussion under "High Yield Variable Account" above.
PROSPECTIVE PURCHASERS SHOULD REVIEW THIS SECTION CAREFULLY AND CONSIDER THE
INVESTMENT RISKS INVOLVED BEFORE ALLOCATING PURCHASE PAYMENTS TO WGVA.
MANAGED SECTORS VARIABLE ACCOUNT
MSVA will seek capital appreciation by varying the weighting of its
portfolio among thirteen industry sectors. Dividend income, if any, is
incidental to MSVA's objective of capital appreciation.
The thirteen sectors from among which MSVA chooses its investments are:
autos and housing; basic materials and consumer staples; defense and aerospace;
energy; financial services; health care; industrial goods and services; leisure;
retailing; technology; transportation; utilities; and foreign. (See Appendix D
for a description of the scope of and potential risks associated with each of
these industry sectors.) Certain sectors may overlap; for example, the defense
and aerospace sector and the technology sector both include companies involved
in the development of computer-related products. Therefore, securities of
certain companies or industries may simultaneously be held in more than one
industry sector.
In response to changes or anticipated changes in the general economy or
within one or more particular industry sectors, MSVA may increase, decrease or
eliminate entirely a particular sector's representation in its portfolio;
similarly, it may acquire securities of a sector not then represented in its
portfolio. A sector or stock of a particular company will be added to or
eliminated from the portfolio based upon such factors as such sector's or
company's economic cycle and sensitivity to interest rates. For example, as
interest rates rise and the performance of interest-sensitive stocks declines,
MSVA expects to remove such stocks from its portfolio. Any one sector may
comprise up to 50% of the portfolio, as may cash held as a temporary defensive
measure or to meet anticipated redemption requests. MSVA has registered as a
"non-diversified" investment company so that more than 5% of the Account's
assets may be invested in the securities of each of one or more issuers. As a
result of such non-diversified status, MSVA may be more susceptible to adverse
changes in the value of securities of a particular company than would be a
diversified investment company. Similarly, due to the Account's ability to
concentrate in as few as two industry sectors, MSVA's assets may be more
susceptible to any single economic, political or regulatory occurrence than
would be those of an investment company without a policy of concentration in
particular industry sectors.
While MSVA's policy is to invest primarily in common stocks, it may seek
appreciation in other types of securities such as non-convertible and
convertible bonds, convertible preferred stocks, and in warrants to purchase
common stock, when relative values make such investments appear attractive
either as individual issues or as types of securities in certain economic
environments. The non-convertible bonds invested in by MSVA will include (i)
obligations issued or guaranteed by the U.S. Treasury or U.S. government
agencies or instrumentalities, and (ii) obligations of the U.S. Treasury that
have been issued without interest coupons or stripped of their unmatured
interest coupons, interest coupons that have been stripped from such debt
obligations, and receipts and certificates for such stripped debt obligations
and stripped coupons. MSVA may invest in restricted securities, subject to the
restriction against investing more than 15% of its net assets in securities that
are not readily marketable (see Appendix C "Investment Techniques--Restricted
Securities"). MSVA may invest up to 20% of its total assets in foreign
securities, which may include emerging market securities, and may invest in
American Depositary Receipts ("ADRs") (for a description of the risks involved
in investing in foreign securities see the discussion under "High Yield Variable
Account" above and
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Appendix C "Investment Techniques--Emerging Market Securities") and may enter
into forward foreign currency exchange contracts ("Forward Contracts") for the
purchase or sale of foreign currency for hedging purposes. MSVA may write
covered put and call options and purchase put and call options on securities and
stock indexes in an effort to increase current income and for hedging purposes.
MSVA may also purchase and sell stock index futures contracts and may write and
purchase options thereon for hedging purposes. MSVA's use of options, Futures
Contracts, Options on Futures Contracts and Forward Contracts may result in loss
of principal under certain market conditions. See Appendix C "American
Depositary Receipts" and "Investment Techniques" and Appendix D to the Statement
of Additional Information for a description of ADR's, options, Futures
Contracts, Options on Futures Contracts and Forward Contracts and the risks and
costs associated therewith.
MSVA's portfolio is aggressively managed and the Account assumes above
average risk of loss. Therefore an investment in MSVA should not constitute a
complete investment program. Portfolio changes are made without regard to the
length of time a security has been held, or whether a sale would result in a
profit or loss. Therefore, the rate of portfolio turnover is not a limiting
factor when changes are believed by the Account's investment adviser to be
appropriate, and the annual portfolio turnover rate may exceed 100%. A
relatively high level of portfolio activity may result in relatively substantial
brokerage commissions.
PORTFOLIO TRANSACTIONS
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain, and maintain the availability of,
execution at the most favorable prices and in the most effective manner
possible. Consistent with the foregoing primary consideration, the Rules of Fair
Practice of the National Association of Securities Dealers, Inc. and such other
policies as the Boards of Managers may determine, MFS may consider the sale of
the Contracts and other contracts participating in the Variable Accounts as a
factor in the selection of broker-dealers to execute the Variable Accounts'
portfolio transactions. For a further discussion of portfolio transactions see
the Statement of Additional Information.
MANAGEMENT OF THE VARIABLE ACCOUNTS
The Boards of Managers of the Variable Accounts provide broad supervision
over the affairs of the Variable Accounts and the officers of the Variable
Accounts are responsible for their operation. Massachusetts Financial Services
Company ("MFS"), 500 Boylston Street, Boston, Massachusetts 02116 is the
investment adviser for each of the Variable Accounts. MFS is a subsidiary of the
Company. MFS and its predecessor organizations have a history of money
management dating from 1924. MFS serves as investment adviser to each of the
funds in the MFS Family of Funds and to certain other investment companies
established by MFS and/or the Company. MFS Asset Management, Inc., a subsidiary
of MFS, provides investment advice to substantial private clients.
MFS provides the Variable Accounts with overall investment advisory services
and furnishes some general office facilities and equipment. Administrative
functions relating to the Contracts and the Variable Accounts are performed by
the Company. For a description of expenses paid by each Variable Account see
"Management of the Variable Accounts" in the Statement of Additional
Information.
MFS has established a strategic alliance with Foreign & Colonial Management
Ltd. ("Foreign & Colonial"). Foreign & Colonial is a subsidiary of two of the
world's oldest financial services institutions, the London-based Foreign &
Colonial Investment Trust PLC, which pioneered the idea of investment management
in 1868, and HYPO-BANK (Bayerische Hypotheken-und Weschsel-Bank AG), the oldest
publicly listed bank in Germany, founded in 1835. As part of this alliance, the
portfolio managers and investment analysts of MFS and Foreign & Colonial will
share their views on a variety of investment related issues, such as the
economy, securities markets, portfolio securities and their issuers, investment
recommendations, strategies and techniques, risk analysis, trading strategies
and other portfolio management matters. MFS will have access to the extensive
international equity investment expertise of Foreign & Colonial, and Foreign &
Colonial will have access to the extensive U.S. equity investment expertise of
MFS. One or more MFS
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investment analysts are expected to work for an extended period with Foreign &
Colonial's portfolio managers and investment analysts at their offices in
London. In return, one or more Foreign & Colonial employees are expected to work
in a similar manner at MFS' Boston offices.
In certain instances there may be securities which are suitable for an
Account's portfolio as well as for portfolios of other clients of MFS or clients
of Foreign & Colonial. Some simultaneous transactions are inevitable when
several clients receive investment advice from MFS and Foreign & Colonial,
particularly when the same security is suitable for more than one client. While
in some cases this arrangement could have a detrimental effect on the price or
availability of the security as far as an Account is concerned, in other cases,
however, it may produce increased investment opportunities for the Account.
PURCHASE PAYMENTS AND CONTRACT VALUES
DURING ACCUMULATION PERIOD
PURCHASE PAYMENTS
All Purchase Payments are to be paid to the Company at its Annuity Service
Mailing Address. Purchase Payments may be made annually, semi-annually,
quarterly, monthly or on any other frequency acceptable to the Company. Unless
the Contract has been surrendered, Purchase Payments may be made at any time
during the life of the Annuitant and before the Annuity Commencement Date (the
"Accumulation Period"). The amount of Purchase Payments may vary; however,
Purchase Payments must total at least $300 for the first Contract Year, and each
Purchase Payment must be at least $25. In addition, the prior approval of the
Company is required before it will accept a Purchase Payment which would cause
the value of a Contract's Accumulation Account to exceed $1,000,000. If the
value of a Contract's Accumulation Account exceeds $1,000,000, no additional
Purchase Payments will be accepted without prior approval.
Completed application forms, together with the initial Purchase Payment, are
forwarded to the Company. Upon acceptance, the Contract is issued to the Owner
and the initial Purchase Payment is credited to the Contract in the form of
Accumulation Units. The initial Purchase Payment must be applied within two
business days of receipt 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 applicant will be informed of the reasons for the delay and
the Purchase Payment will be returned immediately unless the applicant
specifically consents to the Company's retaining the Purchase Payment until the
application is made complete. Thereafter, the Purchase Payment must be applied
within two business days. All subsequent Purchase Payments will be applied using
the Accumulation Unit values for the Valuation Period during which the Purchase
Payment is received by the Company.
The Company will establish an Accumulation Account for each Contract. The
Contract's Accumulation Account value for any Valuation Period is equal to the
variable accumulation value, if any, plus the fixed accumulation value, if any,
for that Valuation Period. The variable accumulation value is equal to the sum
of the value of all Variable Accumulation Units credited to the Contract's
Accumulation Account.
Each net Purchase Payment will be allocated to either the Variable Accounts
or the Fixed Account (see Appendix A to the Statement of Additional Information
for a description of the Fixed Account) or to both the Variable Accounts and the
Fixed Account in accordance with the allocation factors specified by the Owner
in the application or as subsequently changed. Upon receipt of a Purchase
Payment, all or that portion, if any, of the net Purchase Payment to be
allocated to the Variable Accounts will be credited to the Accumulation Account
in the form of Variable Accumulation Units. The number of particular Variable
Accumulation Units to be credited is determined by dividing the dollar amount
allocated to the particular Variable Account by the Variable Accumulation Unit
value for the particular Variable Account for the Valuation Period during which
the Purchase Payment is received.
The Variable Accumulation Unit value for each Variable Account was
established at $10.00 for the first Valuation Period of the particular Variable
Account. The Variable Accumulation Unit value for any subsequent Valuation
Period is determined by methodology which is the mathematical equivalent of
multiplying the Variable Accumulation Unit value for the immediately preceding
Valuation Period by the appropriate Net Investment Factor for such subsequent
Valuation Period.
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NET INVESTMENT FACTOR
The Net Investment Factor is an index applied to measure the investment
performance of a Variable Account from one Valuation Period to the next. The Net
Investment Factor may be greater or less than or equal to one; therefore, the
value of a Variable Accumulation Unit may increase, decrease or remain the same.
The Net Investment Factor for any Valuation Period is determined by adding
(a) and (b), subtracting the sum of (c) and (d), and dividing the result of the
subtraction by (a). For the purposes of this calculation:
(a) is the value of the Variable Account's net assets attributable to the
Contracts at the end of the preceding Valuation Period;
(b) is the investment income and capital gains, realized or unrealized,
that are credited to such assets of the Variable Account during the
Valuation Period;
(c) is the capital losses, realized or unrealized, charged against such
assets of the Variable Account in the Valuation Period plus, with
respect to such assets, any amount charged against the Variable Account or
set aside as a reserve to maintain or operate the Variable Account for the
Valuation Period;
(d) is the expenses of the Variable Account attributable to the Contracts
incurred during the Valuation Period including the mortality and
expense risk charge and the investment management fee and the other expenses
of the Variable Account, subject to any applicable expense limitation.
The assets of the Variable Accounts will normally be composed chiefly of
investment securities. The assets of each Variable Account are valued as of the
close of trading on the New York Stock Exchange on each day the Exchange is open
for trading, and on such other days on which there was a sufficient degree of
trading in the Variable Account's portfolio securities so that the values of the
Variable Account's Accumulation Units and Annuity Units might be materially
affected. The assets of MMVA are valued at amortized cost in accordance with
Rule 2a-7 under the Investment Company Act of 1940. The assets of the other
Variable Accounts are valued as follows:
(a) Equity securities are normally valued at the last sale price on the
exchange on which they are primarily traded or on the NASDAQ system
for unlisted national market issues or at the last quoted bid price for
unlisted securities not reported on the NASDAQ system or listed securities
in which there were no sales during the day.
(b) Debt securities (other than short-term obligations, but including
listed issues) and forward foreign currency exchange contracts are
normally valued on the basis of valuations provided by a pricing service
since such valuations are believed to reflect the fair value of such
securities. Use of the pricing service has been approved by the Boards of
Managers. (Valuations provided by the pricing service may be determined
without exclusive reliance on quoted prices and may take into account
appropriate factors such as institution-size trading in similar groups of
securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics and other market data.)
(c) Short-term debt securities (i.e. those maturing in not more than
sixty days) owned by a Variable Account are valued on the basis of
amortized cost, which the Board of Managers has determined approximates
market value.
(d) Options, Futures Contracts and Options on Futures Contracts are
normally valued at the settlement price on the exchange on which they
are primarily traded.
(e) The Board of Managers of each Variable Account is required to
determine in good faith the fair value of securities and other assets
that do not have a readily available market price. The Board of Managers may
delegate the making of such determinations to others, e.g., the Variable
Account's investment adviser.
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TRANSFERS/CONVERSIONS OF ACCUMULATION UNITS
During the accumulation period the Owner may convert the value of a
designated number of Fixed Accumulation Units then credited to a Contract's
Accumulation Account into Variable Accumulation Units of particular Variable
Accounts having an equal aggregate value, or convert the value of a designated
number of Variable Accumulation Units into other Variable Accumulation Units
and/or Fixed Accumulation Units having an equal aggregate value. These
transfers/conversions are subject to the following conditions: (1) conversions
involving Fixed Accumulation Units may be made only during the 45 day period
before and the 45 day period after each Contract Anniversary; (2) not more than
12 conversions may be made in any Contract Year; and (3) the value of
Accumulation Units converted may not be less than $1,000 unless all of the Fixed
Accumulation Units or all of the Variable Accumulation Units of a particular
Variable Account credited to the Accumulation Account are being converted. The
conversion will be made using the Accumulation Unit values for the Valuation
Period during which the request for conversion is received by the Company. Under
current tax law a conversion will not result in any tax liability to the Owner.
Conversions may be made pursuant to telephoned instructions.
CASH WITHDRAWALS
At any time before the Annuity Commencement Date and during the lifetime of
the Annuitant, the Owner may elect to receive a cash withdrawal payment from the
Company. Any such election shall specify the amount of the withdrawal and will
be effective on the date that it is received by the Company. For withdrawals in
excess of $5,000 the Company may require a signature guarantee. The withdrawal
will result in the cancellation of Accumulation Units with an aggregate value
equal to the dollar amount of the cash withdrawal payment plus, if applicable,
the contract maintenance charge and any withdrawal charge. Unless instructed to
the contrary, the Company will cancel Fixed Accumulation Units and Variable
Accumulation Units on a pro rata basis reflecting the existing composition of
the Contract's Accumulation Account. If a partial withdrawal is requested which
would leave an Accumulation Account value of less than the contract maintenance
charge, then such partial withdrawal will be treated as a full surrender.
Under certain conditions, the Company will assess a withdrawal charge if a
cash withdrawal payment is made. The amount of any withdrawal charge and the
conditions under which the charge will apply are discussed under "Withdrawal
Charges".
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. Deferment is
currently permissible only (1) for any period (a) during which the New York
Stock Exchange is closed other than customary week-end and holiday closings, or
(b) during which trading on the New York Stock Exchange is restricted as
determined by the Securities and Exchange Commission, (2) for any period during
which an emergency exists as a result of which (a) disposal of securities held
by the Accounts is not reasonably practicable, or (b) it is not reasonably
practicable to determine the value of the net assets of the Accounts, or (3) for
such other periods as the Securities and Exchange Commission may by order permit
for the protection of security holders.
Special restrictions on withdrawals apply to certain Qualified Contracts
including Contracts used with Tax Sheltered Annuities established pursuant to
Section 403(b) of the Code ("Section 403(b) Annuities") and under the Texas
Optional Retirement Program discussed below.
Reference should be made to the terms of the particular retirement plan for
which Qualified Contracts are issued for any limitations or restrictions on cash
withdrawals. A cash withdrawal under either a Qualified or Non-Qualified
Contract also may result in the imposition of a tax penalty (see "Federal Tax
Status").
SECTION 403(B) ANNUITIES
The Internal Revenue Code imposes restrictions on cash withdrawals from
Contracts used with Section 403(b) Annuities. In order for these Contracts to
receive tax deferred treatment, the Contract must provide that cash withdrawals
of amounts attributable to salary reduction contributions (other than
withdrawals of Accumulation Account value as of December 31, 1988 ("Pre-1989
Account Value")) may be made only when the Contract Owner attains age 59 1/2,
separates from service with the employer, dies or becomes
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disabled (within the meaning of Section 72(m)(7) of the Code). These
restrictions apply to any growth or interest on or after January 1,1989 on
Pre-1989 Account Value, salary reduction contributions made on or after January
1,1989, and any growth or interest on such contributions ("Restricted Account
Value").
Withdrawals of Restricted Account Value are also permitted in cases of
financial hardship, but only to the extent of contributions; earnings on
contributions cannot be withdrawn for hardship reasons. While specific rules
defining hardship have not been issued by the Internal Revenue Service, it is
expected that to qualify for a hardship distribution, the Owner must have an
immediate and heavy bona fide financial need and lack other resources reasonably
available to satisfy the need. Hardship withdrawals (as well as certain other
premature withdrawals) will be subject to a 10% tax penalty, in addition to any
withdrawal charge applicable under the Contract (see "Federal Tax Status").
Under the terms of a particular Section 403(b) plan, the Owner may be
entitled to transfer all or a portion of the Accumulation Account value to one
or more alternative funding options. Contract Owners should consult the
documents governing their plan and the person who administers the plan for
information as to such investment alternatives.
In imposing these restrictions on withdrawals, the Company is relying upon a
no-action letter dated November 28, 1988 from the staff of the Securities and
Exchange Commission to the American Council of Life Insurance, the requirements
for which have been complied with by the Company.
For information on the federal income tax withholding rules that apply to
distributions from Qualified Contracts (including Section 403(b) Annuities) see
"Federal Tax Status".
TEXAS OPTIONAL RETIREMENT PROGRAM
Under the terms of the Optional Retirement Program, if a participant makes
the required contribution, the State of Texas will contribute a specified amount
to the participant's retirement account. If a participant does not commence the
second year of participation in the plan as a "faculty member" as defined in
Title 110B of the State of Texas Statutes, the Company will return the State's
contribution. If a participant does begin a second year of participation, the
employer's first year contributions will then be applied as a Purchase Payment
under the Qualified Contract, as will the employer's subsequent contributions.
The Attorney General of the State of Texas has ruled that under Title 110B
of the State of Texas Statutes, withdrawal benefits of contracts issued under
the Optional Retirement Program are available only in the event of a
participant's death, retirement, termination of employment due to total
disability, or other termination of employment in a Texas public institution of
higher education. A participant will not, therefore, be entitled to exercise the
right of withdrawal in order to receive the cash values credited to such
participant under the Qualified Contract unless one of the foregoing conditions
has been satisfied. The value of such Qualified Contracts may, however, be
transferred to other contracts or other carriers during the period of
participation in the Program.
DEATH BENEFIT
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 under the Contract except as may be provided under the annuity
option elected.
During the lifetime of the Annuitant and prior to the Annuity Commencement
Date, the Owner may elect to have the value of the Accumulation Account applied
under one or more annuity options to effect a Variable Annuity or a Fixed
Annuity or a combination of both for the Beneficiary as Payee after the death of
the Annuitant. If no election of a method of settlement of the death benefit by
the Owner is in effect on the date of death of the Annuitant, the Beneficiary
may elect (a) to receive the death benefit in the form of a cash payment; or (b)
to have the value of the Accumulation Account applied under one or more of the
annuity options (on the Annuity Commencement Date described under "Payment of
Death Benefit") to effect a Variable Annuity or a Fixed Annuity or a combination
of both for the Beneficiary as Payee. If an election by the Beneficiary is not
received by the Company within 60 days following the date Due Proof of Death of
the Annuitant and any required release or consent is received, the Beneficiary
will be deemed to have elected a cash payment as of the last day of the 60 day
period.
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In all cases, no Owner or Beneficiary 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 Owner").
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 such
payment in accordance with the Investment Company Act of 1940 under the
circumstances described under "Cash Withdrawals". If the death benefit is to be
paid in one sum to the Owner, or to the estate of the deceased Owner/Annuitant,
payment will be made within seven days of the date Due Proof of Death of the
Annuitant, the Owner, and/or the Beneficiary, as applicable, is received. If
settlement under one or more of the annuity options is elected by the Owner, the
Annuity Commencement Date will be the first day of the second calendar month
following receipt of Due Proof of Death of the Annuitant and the Beneficiary, if
any. In the case of an election by the Beneficiary, the Annuity Commencement
Date will be the first day of the second calendar month following the effective
date of the election. An Annuity Commencement Date later than that described
above may be elected by an Owner or Beneficiary provided that such date is (a)
the first day of a calendar month, and (b) not later than the first day of the
first month following the 85th birthday of the Owner or Beneficiary, as the case
may be, unless otherwise restricted, in the case of a Qualified Contract, by the
applicable retirement plan or by applicable law (see "Annuity Commencement
Date").
AMOUNT OF DEATH BENEFIT
The death benefit is equal to the greatest of: (1) the value of the
Contract's Accumulation Account; (2) the total Purchase Payments made under the
Contract reduced by all withdrawals; or (unless prohibited by applicable state
law) (3) the value of the Contract's Accumulation Account on the fifth (5th)
Contract Anniversary, adjusted for any Purchase Payments or cash withdrawal
payments made and contract charges assessed subsequent to such fifth (5th)
Contract Anniversary. The Accumulation Unit values used in determining the
amount of the death benefit under (1) above will be the values for the Valuation
Period during which Due Proof of Death of the Annuitant is received by the
Company if settlement is elected by the Owner under one or more of the annuity
options or, if no election by the Owner is in effect, either the values for the
Valuation Period during which an election by the Beneficiary is effective or the
values for the Valuation Period during which Due Proof of Death of both the
Annuitant and the designated Beneficiary is received by the Company if the
amount of the death benefit is to be paid in one sum to the deceased
Owner/Annuitant's estate.
CONTRACT CHARGES
Contract charges may be assessed under the Contracts as follows:
CONTRACT MAINTENANCE CHARGE
On each Contract Anniversary and on surrender of the Contract for full value
on other than the Contract Anniversary the Company deducts from the Accumulation
Account a contract maintenance charge of $25 to reimburse it for administrative
expenses relating to the issuance and maintenance of the Contract. The contract
maintenance charge will be deducted in equal amounts from the Fixed Account and
each Variable Account in which the Owner has Accumulation Units at the time of
such deduction. On the Annuity Commencement Date the value of the Contract's
Accumulation Account will be reduced by a proportionate amount of the contract
maintenance charge to reflect the time elapsed between the last Contract
Anniversary and the day before the Annuity Commencement Date. After the Annuity
Commencement Date, the contract maintenance charge will be deducted pro rata
from each annuity payment made during the year.
The amount of the contract maintenance charge may not be increased by the
Company. The Company reserves the right to reduce the amount of the contract
maintenance charge for groups of participants with individual Contracts under an
employer's retirement program in situations in which the size of the group and
established administrative efficiencies contribute to a reduction in
administrative expenses. The Company does not expect to make a profit from the
contract maintenance charge.
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MORTALITY AND EXPENSE RISK CHARGE
The mortality and expense risks assumed by the Company are the risks that
Annuitants may live for a longer period of time than estimated by the Company in
establishing the guaranteed annuity rates incorporated into the Contract, and
the risk that administrative charges assessed under the Contracts may be
insufficient to cover actual administrative expenses incurred by the Company.
For assuming these risks, the Company makes a deduction from the Variable
Accounts with respect to the Contracts at the end of each Valuation Period
during both the accumulation period and after annuity payments begin at an
effective annual rate of 1.30% with respect to MMVA, HYVA, CAVA and GSVA, and
1.25% with respect to WGVA, TRVA and MSVA. The rate of this deduction may be
changed annually but in no event may it exceed 1.30% and 1.25%, respectively, on
an annual basis. If the deduction is insufficient to cover the actual cost of
the mortality and expense risk undertaking, the Company will bear the loss.
Conversely, if the deduction proves more than sufficient, the excess will be
profit to the Company and would be available for any proper corporate purpose
including, among other things, payment of distribution expenses. If the
withdrawal charges described below prove insufficient to cover expenses
associated with the distribution of the Contracts, the deficiency will be met
from the Company's general corporate funds, which may include amounts derived
from the mortality and expense risk charges.
INVESTMENT MANAGEMENT FEES
The Company makes a deduction from the Variable Accounts at the end of each
Valuation Period for the investment management fees payable to MFS. For the year
ended December 31, 1995 the investment management fees paid to MFS by the
Variable Accounts were equal to the following percentages of the average daily
net assets of the respective Accounts: MMVA, 0.50%; HYVA, 0.75%; CAVA, 0.75%;
GSVA, 0.55%; WGVA, 0.75%; TRVA, 0.75%; and MSVA, 0.75%.
WITHDRAWAL CHARGES
No sales charges are deducted from Purchase Payments. However, a withdrawal
charge (contingent deferred sales charge), when applicable, will be assessed to
reimburse the Company for certain expenses relating to the distribution of the
Contracts, including commissions, costs of preparation of sales literature and
other promotional costs and acquisition expenses.
A portion of the Accumulation Account value may be withdrawn each year
without imposition of any withdrawal charge, and after a Purchase Payment has
been held by the Company for five years it may be withdrawn free of any
withdrawal charge. In addition, no withdrawal charge is assessed upon
annuitization or upon the transfer of Accumulation Account values among the
Variable Accounts or between the Variable Accounts and the Fixed Account.
All other full or partial withdrawals are subject to a withdrawal charge
equal to 5% of the amount withdrawn which is subject to the charge. The charge
will be applied as follows:
(1) Old Payments, new Payments and accumulated value: With respect to a
particular Contract Year, "new Payments" are those Payments made in
that Contract Year or in the four immediately preceding Contract Years; "old
Payments" are those Payments not defined as new Payments; and "accumulated
value" is the value of the Accumulation Account less the sum of old and new
Payments.
(2) Order of liquidation: To effect a full surrender or partial
withdrawal, the oldest previously unliquidated Payment will be deemed
to have been liquidated first, then the next oldest, and so forth. Once all
old and new Payments have been withdrawn, additional amounts withdrawn will
be attributed to accumulated value.
(3) Maximum free withdrawal amount: The maximum amount that can be
withdrawn without a withdrawal charge in a Contract Year is equal to
the sum of (a) any old Payments not already liquidated and (b) 10% of any
new Payments, irrespective of whether these new Payments have been
liquidated.
(4) Amount subject to withdrawal charge: The amount subject to the
withdrawal charge will be the excess, if any, of (a) amounts
liquidated from old and new Payments over (b) the remaining maximum free
withdrawal amount at the time of the withdrawal.
In no event shall the aggregate withdrawal charges assessed against a
Contract exceed 5% of the aggregate Purchase Payments made under the Contract
(see Appendix C in the Statement of Additional Information for examples of
withdrawals and withdrawal charges).
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PREMIUM TAXES
A deduction, when applicable, is made for premium or similar state or local
taxes ranging from 0% to 3.5% (see Appendix A). It is currently the Company's
policy to deduct the tax from the amount applied to provide an annuity at the
time annuity payments commence; however, the Company reserves the right to
deduct such taxes when incurred.
ANNUITY PROVISIONS
ANNUITY COMMENCEMENT DATE
Annuity payments under a Contract will begin on the Annuity Commencement
Date which is selected by the Owner at the time the Contract is applied for.
This date may be changed by the Owner as provided in the Contract; however the
new Annuity Commencement Date must be the first day of a month and not later
than the first day of the first month following the Annuitant's 85th birthday,
unless otherwise limited or restricted, in the case of a Qualified Contract, by
the particular retirement plan or by applicable law. In most situations, current
law requires that the Annuity Commencement Date under a Qualified Contract be no
later than April 1 following the year the Annuitant reaches age 70 1/2, and the
terms of the particular retirement plan may impose additional limitations. The
Annuity Commencement Date may also be changed by an election of an annuity
option as described under "Death Benefit."
On the Annuity Commencement Date the Contract's Accumulation Account will be
cancelled and its adjusted value will be applied to provide an annuity. The
adjusted value will be equal to the value of the Accumulation Account for the
Valuation Period which ends immediately preceding the Annuity Commencement Date,
reduced by any applicable premium or similar taxes and a proportionate amount of
the contract maintenance charge (see "Contract Maintenance Charge"). NO CASH
WITHDRAWALS WILL BE PERMITTED AFTER THE ANNUITY COMMENCEMENT DATE EXCEPT AS MAY
BE AVAILABLE UNDER THE ANNUITY OPTION ELECTED.
ANNUITY OPTIONS
Unless restricted by the particular retirement plan or any applicable
legislation, during the lifetime of the Annuitant and prior to the Annuity
Commencement Date the Owner 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. Annuity options may also be elected by the
Owner or the Beneficiary as provided under "Death Benefit." The Owner may not
change any election after 30 days prior to the Annuity Commencement Date, and NO
CHANGE OF ANNUITY OPTION IS PERMITTED AFTER THE ANNUITY COMMENCEMENT DATE. If no
election is in effect on the 30th day prior to the Annuity Commencement Date,
Annuity Option B, for a Life Annuity with 120 monthly payments certain, will be
deemed to have been elected.
Any election may specify the proportion of the adjusted value of the
Contract's Accumulation Account to be applied to the Fixed Account and the
Variable Accounts. In the event the election does not so specify, then the
portion of the adjusted value of the Accumulation Account to be applied to the
Fixed Account and the Variable Accounts will be determined on a pro rata basis
from the composition of the Accumulation Account on the Annuity Commencement
Date.
Annuity options A, B and C are available to provide either a Fixed Annuity
or a Variable Annuity. Annuity options D and E are available only to provide a
Fixed Annuity.
Annuity Option A. Life Annuity: Monthly payments during the lifetime of the
Payee. This option offers a higher level of monthly payments than 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.
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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the election of this option of the number of each type of Annuity Unit credited
to the Contract and each fixed monthly payment, if any, will be equal to the
same percentage of the fixed monthly payment payable during the joint lifetime
of the Payee and the designated second person.
*Annuity Option D. Fixed Payments for a Specified Period Certain: Fixed
monthly payments for a specified period of time (at least five years, but not
exceeding 30 years), as elected.
*Annuity Option E. Fixed Payments: 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 (at least over a
period of five years) as may be agreed upon with the Company and will continue
until the amount held by the Company with interest is exhausted. 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 by the
Company at any time; however, the rate may not be reduced more frequently than
once during each calendar year.
DETERMINATION OF ANNUITY PAYMENTS
The dollar amount of the first variable annuity payment will be determined
in accordance with the annuity payment rates found jn the Contract which are
based on an assumed interest rate of 4% per year. All variable annuity payments
other than the first are determined by means of Annuity Units credited to the
Contract. The number of Annuity Units to be credited in respect of a particular
Variable Account is determined by dividing that portion of the first variable
annuity payment attributable to that Variable Account by the Annuity Unit value
of that Variable Account for the Valuation Period which ends immediately
preceding the Annuity Commencement Date. The number of Annuity Units of each
particular Variable Account credited to the Contract then remains fixed unless
an exchange of Annuity Units is made as described below. The dollar amount of
each variable annuity payment after the first may increase, decrease or remain
constant depending on the investment performance of the Variable Accounts.
The Statement of Additional Information contains detailed disclosure
regarding the method of determining the amount of each variable annuity payment
and calculating the value of a Variable Annuity Unit, as well as hypothetical
examples of these calculations.
EXCHANGE OF VARIABLE ANNUITY UNITS
After the Annuity Commencement Date the Payee may exchange the value of a
designated number of Variable Annuity Units of particular Variable Accounts then
credited to the Contract for other Variable Annuity Units, the value of which
would be such that the dollar amount of an annuity payment made on the date of
the exchange would be unaffected by the fact of the exchange. Exchanges may be
made only between the Variable Accounts. Twelve such exchanges may be made
within each Contract Year.
ANNUITY PAYMENT RATES
The Contract contains annuity payment rates for each annuity option
described above. The rates show, for each $1,000 applied, the dollar amount of
(a) the first monthly variable annuity payment based on the assumed interest
rate of 4%; and (b) the monthly fixed annuity payment, when this payment is
based on the minimum guaranteed interest rate of 4% per year. The annuity
payment rates may vary according to the annuity option elected and the adjusted
age of the Payee. Over a period of time, if the Variable Accounts achieved a net
investment return exactly equal to the assumed interest rate of 4%, the amount
of each variable annuity payment would remain constant. However if the Variable
Accounts achieved a net investment result greater than 4%, the amount of each
variable annuity payment would increase; conversely, a net investment result
smaller than 4% would decrease the amount of each variable annuity payment.
OTHER CONTRACTUAL PROVISIONS
OWNER
The Owner is entitled to exercise all Contract rights and privileges without
the consent of the Beneficiary or any other person. Such rights and privileges
may be exercised only during the lifetime of the Annuitant and prior to the
Annuity Commencement Date, except as otherwise provided in the Contract. The
Owner of a Non-Qualified Contract may change the ownership of the Contract,
subject to the provisions of the Contract, although such change may result in
the imposition of tax (see "Federal Tax Status--Taxation of Annuities In
- ------------------------
* The election of this annuity option may result in the imposition of a penalty
tax.
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General"). Transfer of ownership of a Qualified Contract is governed by the laws
and regulations applicable to the retirement or deferred compensation plan for
which the Contract was issued. Subject to the foregoing, a Qualified Contract
may not be sold, assigned, tranferred, discounted or pledged as collateral for a
loan or as security for the performance of an obligation or for any other
purpose to any person other than the Company.
Subject to the rights of an irrevocably designated Beneficiary, the Owner
may change or revoke the designation of a Beneficiary at any time while the
Annuitant is living.
DEATH OF OWNER
lf the Owner of a Non-Qualified Contract dies before the Annuity
Commencement Date, the entire value of the Contract's Accumulation Account must
be either (1) distributed within five years after the date of death of the
Owner, or (2) distributed over some period not greater than the life or expected
life of the "designated beneficiary" as defined below, with annuity payments
beginning within one year after the date of death of the Owner. The person named
as "successor Owner" shall be considered the "designated beneficiary" for the
purposes of Section 72(s) of the Internal Revenue Code and if no person then
living has been so named, then the Annuitant shall automatically be the
"designated beneficiary" for this purpose. These distribution requirements will
not apply where the Beneficiary is the spouse of the Owner; rather, in such a
case the Contract may be continued in the name of the spouse as Owner. Where the
deceased Owner is also the Annuitant (other than where a Beneficiary spouse
elects to continue the Contract), the Death Benefit provision will control. If
the Owner/Annuitant dies on or after the Annuity Commencement Date and before
the entire accumulation under the Contract has been distributed, the remaining
portion of such accumulation, if any, must be distributed at least as rapidly as
the method of distribution then in effect.
In all cases, no Owner or Beneficiary shall be entitled to exercise any
rights that would adversely affect the treatment of the Contract as an annuity
contract under the Internal Revenue Code.
Any distributions upon the death of the Owner of a Qualified Contract will
be subject to the laws and regulations governing the particular retirement or
deferred compensation plan in connection with which the Qualified Contract was
issued.
VOTING RIGHTS
Owners of and payees under the Contracts and other contracts participating
in the investment experience of each Variable Account have the right to vote at
meetings of owners/payees of the particular Variable Account, upon such matters
as the election of Members of the Board of Managers, the ratification of the
selection of the independent certified public accountants, proposed changes in
the Variable Accounts' investment objectives and/or restrictions and such other
matters as the Investment Company Act of 1940 may require.
Prior to the Annuity Commencement Date the Owner may cast one vote for each
Variable Accumulation Unit in the particular Variable Account credited to the
Contract's Accumulation Account on the record date. On or after the Annuity
Commencement Date, the number of votes that a Payee may cast is determined by
dividing the reserve held in the particular Variable Account for the Contract by
the Variable Accumulation Unit value of the Variable Account on the record date.
Employees who contribute to retirement plans which are funded by Qualified
Contracts are entitled to instruct the Owners as to how to vote at meetings of
Owners/ Payees of Contracts participating in the investment experience of the
Variable Account.
MODIFICATION
Upon notice to the Owner, or to the Payee during the annuity period, the
Contract may be modified by the Company, but only 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 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 variable annuity contracts or (iii) is necessary to reflect a
change in the operation of the Variable Accounts or (iv) provides additional
Variable Account and/or fixed accumulation options. In the event of any such
modification, the Company may make appropriate endorsement to the Contract to
reflect such modification.
CHANGE IN OPERATION OF VARIABLE ACCOUNTS
At the Company's election and subject to any necessary vote by persons
having the right to vote, the Variable Accounts may be operated as unit
investment trusts under the Investment Company Act of 1940 or
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they may be deregistered under the Investment Company Act of 1940 in the event
registration is no longer required. Deregistration of the Variable Accounts
requires an order by the Securities and Exchange Commission. In the event of any
change in the operation of the Variable Accounts pursuant to this provision, the
Company may make appropriate endorsement to the Contract to reflect the change
and take such other action as may be necessary and appropriate to effect the
change.
SPLITTING UNITS
The Company reserves the right to split or combine the value of Variable
Accumulation Units, Fixed Accumulation Units, Annuity Units or any of them. In
effecting any such change of unit values, strict equity will be preserved and no
change will have a material effect on the benefits or other provisions of the
Contract.
FEDERAL TAX STATUS
INTRODUCTION
The following discussion of the treatment of the Contracts and of the
Company under the federal income tax laws is general in nature, is based upon
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. A more
detailed discussion of the federal tax status of the Contracts is contained in
the Statement of Additional Information. Any person contemplating the purchase
of a Contract should consult a qualified tax adviser. THE COMPANY DOES NOT MAKE
ANY GUARANTEE REGARDING ANY TAX STATUS, FEDERAL, STATE OR LOCAL, OF ANY CONTRACT
OR ANY TRANSACTION INVOLVING THE CONTRACTS.
TAX TREATMENT OF THE COMPANY
Under existing federal income tax laws, the income of the Variable Accounts,
to the extent that it is applied to increase reserves under the Contracts, is
not taxable to the Company.
TAXATION OF ANNUITIES IN GENERAL
Generally no tax is imposed on the increase in the value of a Contract held
by an individual Owner until a distribution occurs, either as an annuity payment
or in the form of a cash withdrawal, a lump sum payment or a loan from (or
pledge of) the Contract prior to the Annuity Commencement Date. Corporate Owners
and other Owners that are not natural persons are subject to current taxation on
the annual increase in the value of a Non-Qualified Contract's Accumulation
Account. This rule does not apply where a non-natural person holds the Contract
as agent for a natural person (such as where a bank holds a Contract as trustee
under a trust agreement).
Taxable cash withdrawals from either Qualified or Non-Qualified Contracts
are subject to a 10% penalty, except in certain circumstances (such as where the
distribution is made after the Owner has reached age 59 1/2 or upon the death of
the Owner). In the case of a Qualified Contract, certain distributions, known as
"eligible rollover distributions," if rolled over to certain other qualified
retirement plans (either directly or after being distributed to the Owner or
Payee), are not taxable until distributed from the plan to which they are rolled
over. In general, an eligible rollover distribution is any taxable distribution
other than a distribution that is part of a series of payments made for life or
for a specified period of ten years or more. Owners, Annuitants, Payees and
Beneficiaries should seek qualified advice about the tax consequences of
distributions, withdrawals, rollovers and payments under the retirement plans in
connection with which the Contracts are purchased.
If the Owner dies before the Annuity Commencement Date, the Contract's
Accumulation Account must be distributed within a specified period. In the case
of a Non-Qualified Contract, this distribution requirement does not apply where
the spouse of the Owner is the successor Owner.
A transfer of a Non-Qualified Contract by gift (other than to the Owner's
spouse) is treated as the receipt by the Owner of income in an amount equal to
the excess of the cash surrender value over the Contract's cost basis.
The Company will withhold and remit to the U.S. government part of the
taxable portion of each distribution made under a Non-Qualified Contract or
under a Qualified Contract issued for use with an individual retirement account
unless the Owner or Payee provides his or her taxpayer identification number to
the Company and notifies the Company (in the manner prescribed) that he or she
chooses not to have amounts withheld.
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In the case of distributions from a Qualified Contract (other than
distributions from a Contract issued for use with an individual retirement
account), the Company or the plan administrator must withhold and remit to the
U.S. government 20% of each distribution that is an eligible rollover
distribution (as defined above) unless the Owner or Payee elects to make a
direct rollover of the distribution to another qualified retirement plan that is
eligible to receive the rollover. If a distribution from a Qualified Contract is
not an eligible rollover distribution, then the Owner or Payee can choose not to
have amounts withheld as described above for Non-Qualified Contracts and
individual retirement accounts.
Amounts withheld from any distribution may be credited against the Owner's
or Payee's federal income tax liability for the year of the distribution.
The Internal Revenue Service has issued regulations that prescribe
investment diversification requirements for segregated asset accounts underlying
nonqualified variable contracts. Contracts that do not comply with these
regulations do not qualify as annuities for income tax purposes. The Company
believes that the Variable Accounts comply with the regulations.
The preamble to the regulations states that the Service may promulgate
guidelines under which a variable contract will not be treated as an annuity for
tax purposes if the owner has excessive control over the investments underlying
the contract. It is not known whether such guidelines, if in fact promulgated,
would have retroactive effect. If guidelines are promulgated, the Company will
take any action (including modification of the Contract or the Variable
Accounts) necessary to comply with the guidelines.
QUALIFIED RETIREMENT PLANS
The Qualified Contracts described in this Prospectus are designed for use
with the following types of qualified retirement plans:
(1) Individual Retirement Annuities permitted by Sections 219 and 408 of
the Code, including Simplified Employee Pensions established by
employers pursuant to Section 408(k);
(2) Tax Sheltered Annuities established pursuant to the provisions of
Section 403(b) of the Code for public school employees and employees
of certain types of charitable, educational and scientific organizations
specified in Section 501(c)(3) of the Code;
(3) Various Pension and Profit-Sharing Plans established by business
employers and certain associations, as permitted by Sections 401(a),
401(k) and 403(a) of the Code, including those purchasers who would have
been covered under the rules governing old H.R. 10 (Keogh) Plans; and
(4) State and Local Government Deferred Compensation Plans established
pursuant to Section 457 of the Code.
The tax rules applicable to participants in such plans vary according to the
type of plan and its terms and conditions. Therefore, no attempt is made herein
to provide more than general information about the use of Qualified Contracts.
Participants in such plans as well as Owners, Annuitants, Payees and
Beneficiaries are cautioned that the rights of any person to any benefits under
these plans are subject to the terms and conditions of the plans themselves,
regardless of the terms and conditions of the Qualified Contracts. The Company
will provide purchasers of Qualified Contracts for use in connection with
Individual Retirement Annuities with such supplemental information as may be
required by the Internal Revenue Service or other appropriate agency. Any person
contemplating the purchase of a Qualified Contract should consult a qualified
tax adviser.
DISTRIBUTION OF THE CONTRACTS
The Contracts will be sold by licensed insurance agents in those states
where the Contracts may be Iawfully sold. Such agents will be registered
representatives of broker-dealers registered under the Securities Exchange Act
of 1934 who are members of the National Association of Securities Dealers, Inc.
The Contracts will be distributed by Clarendon Insurance Agency, Inc., 500
Boylston Street, Boston, Massachusetts 02116, a wholly-owned subsidiary of MFS.
Commissions and other distribution compensation will be paid by the Company and
will not be more than 5.11% of Purchase Payments. In addition, after the fifth
Contract Year, broker-dealers who have entered into distribution agreements with
the Company may receive an annual renewal commission of no more than 0.20% of
the Contract's Accumulation Account value.
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LEGAL PROCEEDINGS
The Variable Accounts, the Company and MFS are engaged in various kinds of
routine litigation which, in management's opinion, is not material with respect
to the Variable Accounts.
CONTRACT OWNER INQUIRIES
All Contract Owner inquiries should be directed to the Company at its
Annuity Service Mailing Address.
TABLE OF CONTENTS FOR STATEMENT OF ADDITIONAL INFORMATION
General Information
The Variable Accounts' Investment Objectives, Policies and Restrictions
Management of the Variable Accounts
Annuity Provisions
Other Contractual Provisions
Federal Tax Status
Administration of the Contracts
Distribution of the Contracts
Legal Matters
Accountants and Financial Statements
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APPENDIX A
STATE PREMIUM TAXES
The amount of applicable tax varies depending on the jurisdiction and is
subject to change by the legislature or other authority. In many jurisdictions
there is no tax at all. The Company believes that as of April 30, 1996 premium
taxes will be imposed on Contracts offered by this Prospectus only by the
jurisdictions listed below at the rates indicated. For information subsequent to
April 30, 1996 a tax adviser should be consulted.
<TABLE>
<CAPTION>
RATE OF TAX
---------------------------
QUALIFIED NON-QUALIFIED
STATE CONTRACTS CONTRACTS
- ---------------------------------------- ----------- -------------
<S> <C> <C>
California .50% 2.35%
District of Columbia 2.25% 2.25%
Kansas -- 2.00%
Kentucky 2.00% 2.00%
Maine -- 2.00%
Mississippi -- 1.00%*
Nevada -- 3.50%
Pennsylvania -- 2.00%
South Dakota -- 1.25%
West Virginia 1.00% 1.00%
Wyoming -- 1.00%
<FN>
* No tax on purchase payments received on or after July 1, 1995.
</TABLE>
APPENDIX B
DESCRIPTION OF COMMERCIAL PAPER RATINGS
STANDARD & POOR'S CORPORATION ("S&P"): A-1
The rating "A" is the highest commercial paper rating assigned by S&P and issues
so rated are regarded as having the greatest capacity for timely payment. Issues
in the "A" category are delineated with the numbers 1, 2 and 3 to indicate the
relative degree of safety. The A-1 designation indicates that the degree of
safety regarding timely payment is either overwhelming or very strong. Those A-1
issues determined to possess overwhelming safety characteristics will be denoted
with a plus (+) sign designation.
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S"): P-1
The rating P-1 is the highest commercial paper rating assigned by Moody's.
Issuers rated P-1 have a superior ability for repayment. P-1 repayment capacity
will normally be evidenced by the following characteristics: (1) leading market
positions in well established industries; (2) high rates of return on funds
employed; (3) conservative capitalization structure with moderate reliance on
debt and ample asset protection; (4) broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and (5) well established
access to a range of financial markets and assured sources of alternate
liquidity.
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the
quality of various debt instruments. It should be emphasized, however, that
ratings are not absolute standards of quality. Consequently, debt instruments
with the same maturity, coupon and rating may have different yields while debt
instruments of the same maturity and coupon with different ratings may have the
same yield.
STANDARD & POOR'S CORPORATION:
AAA: Bonds rated AAA are highest grade debt obligations. This rating indicates
an extremely strong capacity to pay principal and interest.
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AA: Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.
A: Bonds rated A have a strong capacity to pay principal and interest, although
they are more susceptible to the adverse effects of changes in circumstances and
economic conditions.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB, B, CCC, CC: Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and CC the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
BB: Bonds rated BB have less near-term vulnerability to default than other
speculative issues. However, they face major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B: Bonds rated B have a greater vulnerability to default but currently have the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB -
rating.
CCC: Bonds rated CCC have a currently identifiable vulnerability to default,
and are dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, they are not likely to have
the capacity to pay interest and repay principal. The CCC rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied B or B - rating.
CC: The rating CC is typically applied to debt subordinated to senior debt that
is assigned an actual or implied CCC rating.
C: The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC - debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
CI: The rating CI is reserved for income bonds on which no interest is being
paid.
D: Bonds rated D are in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
Plus(+) or Minus(-): The ratings from AA to CCC may be modified by the addition
of a plus or minus sign to show relative standing within the major categories.
NR: indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
FITCH'S INVESTORS SERVICE, INC.:
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
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AA: Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is considered to be
very strong, although not quite as strong as bonds rated "AAA". Because bonds
rated in the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated "F-1+".
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
Plus (+) Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "AAA" category.
NR: Indicates that Fitch does not rate the specific issue.
Conditional: A conditional rating is premised on the successful completion of a
project or the occurrence of a specific event.
Suspended: A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
Withdrawn: A rating will be withdrawn when an issue matures or is called or
refinanced, and, at Fitch's discretion, when an issuer fails to furnish proper
and timely information.
FitchAlert: Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the likely direction
of such change. These are designated as "Positive", indicating a potential
upgrade, "Negative", for potential downgrade, or "Evolving", where ratings may
be raised or lowered. FitchAlert is relatively short-term and should be resolved
within 12 months.
MOODY'S INVESTORS SERVICE, INC.:
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best
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bonds because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may be
other elements present which make the long-term risks appear somewhat larger
than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Absence of Rating: Where no rating has been assigned or where a rating has
been suspended or withdrawn, it may be for reasons unrelated to the quality of
the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies
that are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
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APPENDIX C
INVESTMENT TECHNIQUES
As part of their strategies for attaining their investment objectives, the
Variable Accounts may employ the following investment techniques. Each of CAVA,
GSVA, WGVA and MSVA may engage in transactions involving options, Futures
Contracts, and Options on Futures Contracts. CAVA, WGVA and MSVA may also
participate in Forward Contracts. In addition, all the Accounts may engage in
repurchase agreement transactions; WGVA and TRVA may engage in securities
lending; GSVA, HYVA, TRVA and WGVA may enter into mortgage "dollar roll"
transactions; HYVA and TRVA may invest in corporate asset-backed securities;
HYVA may purchase loan participations; and WGVA may trade options on foreign
currencies, purchase indexed securities and enter into swap agreements. All the
Accounts except MMVA, GSVA and WGVA may purchase emerging market securities, and
HYVA and TRVA may invest in Brady Bonds. All the Accounts except MMVA may invest
in restricted securities, subject to applicable restrictions on purchasing
securities that are not readily marketable. An Account's use of options, Futures
Contracts, Options on Futures Contracts, Forward Contracts and options on
foreign currencies may result in loss of principal under certain market
conditions. These various techniques are described below.
OPTIONS ON SECURITIES
An option on a security provides the purchaser, or "holder", with the right,
but not the obligation, to purchase, in the case of a "call" option, or sell, in
the case of a "put" option, the security or securities underlying the option,
for a fixed exercise price up to a stated expiration date or, in the case of
certain options, on such date. The holder pays a non-refundable purchase price
for the option, known as the "premium". If the price of the underlying security
moves adversely to the holder's position, the maximum amount of risk the holder
assumes is equal to the premium plus related transaction costs, although this
entire amount may be lost. The risk to the seller, or "writer", in the case of
an adverse market movement, is that the option may be exercised and the writer
will be required to purchase or sell the underlying security at a
disadvantageous price, which may be only partially offset by the amount of
premium received. The writer's risk is potentially unlimited, unless the option
is "covered", which is generally accomplished through the writer's ownership of
the underlying security, in the case of a call option, or the writer's
segregation of an amount of cash or securities equal to the exercise price in
the case of a put option. If the writer's obligation is not so covered, it is
subject to the risk of the full change in value of the underlying security from
the time the option is written until exercise.
Upon exercise of the option, the holder is required to pay the purchase
price of the underlying security, in the case of a call option, or to deliver
the security in return for the purchase price in the case of a put option.
Conversely, the writer is required to deliver the security in the case of a call
option, or to purchase the security in the case of a put option. Options on
securities which have been purchased or written may be closed out prior to
exercise or expiration by entering into an offsetting transaction on the
exchange on which the initial position was established, subject to the
availability of a liquid secondary market.
Options on securities and options on indexes of securities discussed below
are traded on national securities exchanges such as the Chicago Board Options
Exchange and the New York Stock Exchange, which are regulated by the Securities
and Exchange Commission. The Options Clearing Corporation guarantees the
performance of each party to an exchange-traded option, by in effect taking the
opposite side of each such option. A holder or writer may engage in transactions
in exchange-traded options on securities and options on indexes of securities
only through a registered broker-dealer which is a member of the exchange on
which the option is traded.
In addition, options on securities and options on indexes of securities may
be traded on exchanges located outside the United States and over-the-counter
through financial institutions dealing in such options as well as the underlying
instruments. The particular risks of over-the-counter transactions are set forth
more fully in the Statement of Additional Information.
OPTIONS ON INDEXES
In contrast to an option on a security, an option on an index (which may be
a stock index, fixed income security index or other financial index, as
appropriate) provides the holder with the right, but not the
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obligation, to make or receive a cash settlement upon exercise of the option,
rather than the right to purchase or sell a security. The amount of this
settlement is equal to (i) the amount, if any, by which the fixed exercise price
of the option exceeds (in the case of a call) or is below (in the case of a put)
the closing value of the underlying index on the date of exercise, multiplied by
(ii) a fixed "index multiplier". The purchaser of the option receives this cash
settlement amount if the closing level of the index on the day of exercise is
greater than, in the case of a call, or less than, in the case of a put, the
exercise price of the option. The writer of the option is obligated, in return
for the premium received, to make delivery of this amount if the option is
exercised. As in the case of options on securities, the writer or holder may
liquidate positions in index options prior to exercise or expiration by entering
into closing transactions on the exchange on which such positions were
established, subject to the availability of a liquid secondary market. Trading
of options on indexes is described above under "Options on Securities."
The index underlying a stock index option may be a "broad-based" index, such
as the Standard & Poor's 500 Index or the New York Stock Exchange Composite
Index, the changes in value of which ordinarily will reflect movements in the
stock market in general. In contrast, certain options may be based on narrower
market indexes, such as the Standard & Poor's 100 Index, or on indexes of
securities of particular industry groups, such as those of oil and gas or
technology companies. An index assigns relative values to the securities
included in the index and the index fluctuates with changes in the market values
of the securities so included. The composition of the index is changed
periodically.
FUTURES CONTRACTS
A Futures Contract is a bilateral agreement providing for the making and
acceptance of a cash settlement at a stated time in the future for a fixed
price. By its terms, a Futures Contract provides for a specified settlement date
on which, in the case of the majority of interest rate and foreign currency
futures contracts, the fixed income securities or currency underlying the
contract are delivered by the seller and paid for by the purchaser, or on which,
in the case of stock index futures contracts and certain interest rate and
foreign currency futures contracts, the difference between the price at which
the contract was entered into and the contract's closing value is settled
between the purchaser and seller in cash. Futures Contracts differ from options
in that they are bilateral agreements, with both the purchaser and the seller
equally obligated to complete the transaction. In addition, Futures Contracts
call for settlement only on the expiration date, and cannot be "exercised" at
any other time during their term.
This investment technique is designed only to hedge against anticipated
future changes in interest or exchange rates which otherwise might either
adversely affect the value of the Account's portfolio securities or adversely
affect the price of securities which the Account intends to purchase at a later
date. Should interest or exchange rates move in an unexpected manner, an Account
may not achieve the anticipated benefits of this technique, or may realize a
loss.
The purchase or sale of a Futures Contract also differs from the purchase or
sale of a security or the purchase of an option in that no purchase price is
paid or received. Instead, an amount of cash or cash equivalents, which
generally varies between 5% and 15% of the value of the contract, must be
deposited with the broker as "initial margin". Subsequent payments to and from
the broker, referred to as "variation margin", are made on a daily basis as the
value of the index or instrument underlying the Futures Contract fluctuates,
making positions in the Futures Contract more or less valuable, a process known
as "marking to the market".
U.S. Futures Contracts may be purchased or sold only on an exchange, known
as a "contract market", designated by the Commodity Futures Trading Commission
("CFTC") for the trading of such contracts, and only through a registered
futures commission merchant which is a member of such contract market. A
commission must be paid on each completed purchase and sale transaction. The
contract market clearing house guarantees the performance of each party to a
Futures Contract, by in effect taking the opposite side of such Contract. At any
time prior to the expiration of a Futures Contract, a trader may elect to close
out its position by taking an opposite position on the contract market on which
the position was entered into, subject to the availability of a secondary
market, which will operate to terminate the initial position. At that
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time, a final determination of variation margin is made and any loss experienced
by the trader is required to be paid to the contract market clearing house while
any profit due to the trader must be delivered to it. Futures Contracts may also
be traded on foreign exchanges.
Interest rate Futures Contracts currently are traded on a variety of fixed
income securities, including long-term U.S. Treasury Bonds, Treasury Notes,
Government National Mortgage Association modified pass-through mortgage-backed
securities, U.S. Treasury Bills and Eurodollar deposits. Foreign currency
Futures Contracts currently are traded on the British pound, Canadian dollar,
Japanese yen, Swiss franc and West German mark.
A stock index futures contract provides for the making and acceptance of a
cash settlement in much the same manner as the settlement of an option on a
stock index. The types of indexes underlying stock index futures contracts are
essentially the same as those underlying stock index options, as described
above. The index assigns weighted values to the securities included in the index
and its composition is changed periodically.
The Accounts' Boards of Managers (the "Boards") have adopted the requirement
that Futures Contracts and Options on Futures Contracts discussed below only be
used as a hedge and not for speculation. In addition to this requirement, the
Boards have also adopted two percentage restrictions on the use of Futures
Contracts. The first restriction is that an Account will not enter into any
Futures Contracts and Options on Futures Contracts if immediately thereafter the
amount of initial margin deposits on all the Futures Contracts of the Account
and premiums paid on Options on Futures Contracts would exceed 5% of the market
value of the Account's total assets. The second restriction is that the
aggregate market value of securities and other obligations underlying the
Futures Contracts held by an Account may not exceed 50% of the market value of
the Account's total assets. Neither of these restrictions will be changed by the
Boards without considering the policies and concerns of various federal and
state regulatory agencies.
OPTIONS ON FUTURES CONTRACTS
An Option on a Futures Contract provides the holder with the right to enter
into a "long" position in the underlying Futures Contract, in the case of a call
option, or a "short" position in the underlying Futures Contract, in the case of
a put option, at a fixed exercise price up to a stated expiration date, or in
the case of certain options, on such date. Upon exercise of the option by the
holder, the contract market clearing house establishes a corresponding short
position for the writer of the option in the case of a call option, or a
corresponding long position in the case of a put option. In the event that an
option is exercised, the parties will be subject to all the risks associated
with the trading of Futures Contracts, such as payment of margin deposits. In
addition, the writer of an Option on a Futures Contract, unlike the holder, is
subject to initial and variation margin requirements on the option position.
This investment technique is designed only to hedge against anticipated
future changes in interest or exchange rates which otherwise might either
adversely affect the value of the Account's portfolio securities or adversely
affect the price of securities which the Account intends to purchase at a later
date. Should interest or exchange rates move in an unexpected manner, the
Account may not achieve the anticipated benefits of this technique, or may
realize a loss. For restrictions on the use of Options on Futures Contracts see
the discussion under "Futures Contracts" above.
A position in an Option on a Futures Contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or sale
transaction, subject to the availability of a liquid secondary market, which is
the purchase or sale of an option of the same series (I.E.,the same exercise
price and expiration date) as the option previously purchased or sold. The
difference between the premiums paid and received represents the trader's profit
or loss on the transaction.
Options on Futures Contracts that are written or purchased by a Variable
Account on United States exchanges are traded on the same contract market as the
underlying Futures Contract and, like Futures Contracts, are subject to
regulation by the CFTC and the performance guarantee of the exchange clearing
house. In addition, Options on Futures Contracts may be traded on foreign
exchanges.
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An option, whether based on a Futures Contract, an index or a security,
becomes worthless to the holder when it expires. Upon exercise of an option, the
exchange or contract market clearing house assigns exercise notices on a random
basis to those of its members which have written options of the same series and
with the same expiration date. A brokerage firm receiving such notices then
assigns them on a random basis to those of its customers which have written
options of the same series and expiration date. A writer therefore has no
control over whether an option will be exercised against it, nor over the timing
of such exercise.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
A Forward Contract is a contractual obligation to purchase or sell a
specific quantity of a given foreign currency for a fixed exchange rate at a
future date. Forward Contracts are individually negotiated and are traded
through the "interbank currency market", an informal network of banks and
brokerage firms which operates around the clock and throughout the world.
Transactions in the interbank market may be executed only through financial
institutions acting as market-makers in the interbank market, or through brokers
executing purchases and sales through such institutions. Market-makers in the
interbank market generally act as principals in taking the opposite side of
their customers' positions in Forward Contracts, and ordinarily charge a mark-up
or commission which may be included in the cost of the Forward Contract. In
addition, market-makers may require their customers to deposit collateral upon
entering into a Forward Contract as security for the customer's obligation to
make or receive delivery of currency, and to deposit additional collateral if
exchange rates move adversely to the customer's position. Such deposits may
function in a manner similar to the margining of Futures Contracts, described
above.
Prior to the stated maturity date of a Forward Contract, it may be possible
to liquidate the transaction by entering into an offsetting contract. In order
to do so, however, a customer may be required to maintain both contracts as open
positions until maturity and to make or receive a settlement of the difference
owed to or from the market-maker or broker at that time.
An Account may enter into Forward Contracts to attempt to minimize the risk
to the Account from adverse changes in the relationship between the U.S. dollar
and foreign currencies. An Account may enter into a Forward Contract, for
example, at the same time as it enters into a contract for the purchase or sale
of a security denominated in a foreign currency, in order to "lock in" the U.S.
dollar price of the security. Additionally, for example, when an Account
believes that a foreign currency may suffer a substantial decline against the
U.S. dollar, it may enter into a Forward Contract to sell an amount of that
foreign currency approximating the value of some or all of the Account's
portfolio securities denominated in such foreign currency, or when an Account
believes that the U.S. dollar may suffer a substantial decline against a foreign
currency, it may enter into a Forward Contract to buy that foreign currency for
a fixed dollar amount. An Account may also enter into Forward Contracts for
"cross hedging" purposes; e.g. the purchase or sale of a Forward Contract on one
type of currency as a hedge against adverse fluctuations in the value of a
second type of currency. CAVA, WGVA and MSVA have established procedures
consistent with the statements of the Securities and Exchange Commission
concerning such purchases. Since that policy currently requires the use of
"cover" or that an amount of the Account's assets equal to the amount of the
purchase be held aside or segregated in a separate account to be used to pay for
the commitment, the Account always will use "cover" or have cash, cash
equivalents or high quality debt securities available sufficient to cover any
commitments under these contracts or to limit any potential risk. The segregated
account will be marked to market on a daily basis.
An Account may be required to receive delivery of the foreign currency
underlying forward foreign currency exchange contracts that it has entered into.
This could occur, for example, if the Account were unable to close out a Forward
Contract. An Account may also elect to take delivery of the currencies
underlying Forward Contracts, if, in the judgment of the Adviser, it is the best
interests of the Account to do so. In such instances, the Account may promptly
convert the foreign currencies to dollars at the then current exchange rate, or
may hold such currencies for an indefinite period of time.
While the holding of currencies will permit an Account to take advantage of
favorable movement in the applicable exchange rates, it also exposes the Account
to risk of loss if such rates move in a direction adverse to an Account's
position. Such losses could reduce any profits or increase any losses sustained
by
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an Account from the sale or redemption of securities, and could reduce the
dollar value of interest or dividend payments received. In addition, the holding
of currencies could adversely affect an Account's profit or loss on Forward
Contracts, as well as in its hedging strategies.
Forward Contracts may limit potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies. Unanticipated
changes in currency prices may result in poorer overall performance for an
Account than if it had not engaged in such contracts. Furthermore, while these
contracts are not presently regulated by the CFTC, the CFTC may in the future
assert authority to regulate Forward Contracts. In such event, the ability of an
Account to utilize Forward Contracts in the manner set forth above may be
restricted.
Forward Contracts are traded over the counter and not on organized
commodities or securities exchanges; as a result, such contracts operate in a
manner distinct from exchange-traded instruments, and their use involves certain
risks beyond those associated with transactions in Futures Contracts or options
traded on exchanges.
OPTIONS ON FOREIGN CURRENCIES
WGVA may purchase and write put and call options on foreign currencies for
the purpose of protecting against declines in the dollar value of foreign
portfolio securities and against increases in the dollar cost of foreign
securities to be acquired. As in the case of other kinds of options, however,
the writing of an option on foreign currency will constitute only a partial
hedge, up to the amount of the premium received. Furthermore, as a result of
writing such options, WGVA could be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. While
the purchase of an option on foreign currency may constitute an effective hedge
against fluctuations in exchange rates, in the event of rate movement adverse to
WGVA's position, WGVA may forfeit the entire amount of the premium plus related
transaction costs. Options on foreign currencies to be written or purchased by
WGVA will be traded on U.S. and foreign exchanges or over the counter.
Options on foreign currencies are traded in a manner substantially similar
to options on securities. In particular, an option on foreign currency provides
the holder with the right to purchase, in the case of a call option, or to sell,
in the case of a put option, a stated quantity of a particular currency for a
fixed price up to a stated expiration date or, in the case of certain options,
on such date. The writer of the option undertakes the obligation to deliver, in
the case of a call option, or to purchase in the case of a put option, the
quantity of the currency called for in the option, upon exercise of the option
by the holder.
As in the case of other types of options, the holder of an option on foreign
currency is required to pay a one-time, non-refundable premium, which represents
the cost of purchasing the option. The holder can lose the entire amount of this
premium, as well as related transaction costs, but not more than this amount.
The writer of the option, in contrast, generally is required to make initial and
variation margin payments, similar to margin deposits required in the trading of
Futures Contracts and the writing of other types of options. The writer is
therefore subject to risk of loss beyond the amount originally invested and
above the value of the option at the time it is entered into.
Options on foreign currencies may result in an Account's holding foreign
currency, and expose the Account to risks similar to those described above under
"Forward Foreign Currency Exchange Contracts".
Certain options on foreign currencies, like Forward Contracts, are traded
over-the-counter through financial institutions acting as market-makers in such
options and the underlying currencies. Such transactions therefore involve risks
not generally associated with exchange-traded instruments, which are discussed
in the Statement of Additional Information. Options on foreign currencies may
also be traded on national securities exchanges regulated by the SEC and on
exchanges located in foreign countries.
LENDING OF PORTFOLIO SECURITIES
WGVA and TRVA may seek to increase their income by lending portfolio
securities to the extent consistent with present regulatory policies, including
those of the Board of Governors of the Federal Reserve System and the Securities
and Exchange Commission ("SEC"). Such loans may be made to member banks of the
Federal Reserve System and to member firms of the New York Stock Exchange (and
subsidiaries
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thereof), and would be required to be secured continuously by collateral,
including cash, U.S. Government Securities, or an irrevocable letter of credit
maintained on a current basis at an amount at least equal to the market value of
the securities loaned. An Account would have the right to call a loan and obtain
the securities loaned at any time on five days' notice. For the duration of a
loan, the Account would continue to receive the equivalent of the interest or
dividends paid by the issuer on the securities loaned and would also receive
compensation from the investment of the collateral. An Account would not,
however, have the right to vote any securities having voting rights during the
existence of the loan, but would call the loan in anticipation of an important
vote to be taken among holders of the securities or of the giving or withholding
of their consent on a material matter affecting the investment. As with other
extensions of credit, there are risks of delay in recovery or even loss of
rights in the collateral should the borrower of the securities fail financially.
However, the loans would be made only to firms deemed by the investment adviser
to be of good standing, and when, in the judgment of the investment adviser, the
consideration which could be earned currently from securities loans of this type
justified the attendant risk. If the investment adviser determines to make
securities loans, it is intended that the value of the securities loaned would
not exceed 30% of the value of an Account's total assets.
"WHEN-ISSUED SECURITIES"
Securities may be purchased on a "when-issued" or on a "forward delivery"
basis, which means that the obligations will be delivered at a future date
beyond customary settlement time. The commitment to purchase a security for
which payment will be made on a future date may be deemed a separate security.
Although an Account is not limited to the amount of securities for which it may
have commitments to purchase on such basis, it is expected that under normal
circumstances, an Account will not commit more than 30% of its assets to such
purchases. An Account does not pay for the securities until received or start
earning interest on them until the settlement date. In order to invest its
assets immediately, while awaiting delivery of securities purchased on such
basis, an Account will normally invest in short-term securities that offer
same-day settlement and earnings, but that may bear interest at a lower rate
than longer term securities.
When an Account commits to purchase a security on a "when issued" or
"forward delivery" basis it will set up a segregated account consistent with the
General Statement of Policy of the SEC referred to above under "Forward Foreign
Currency Exchange Contracts." While WGVA does not intend to make such purchases
for speculative purposes and intends to adhere to the provisions of the SEC
policy, purchases of securities on such bases may involve more risk than other
types of purchases. For example, if an Account determines it is necessary to
sell the "when-issued" or "forward delivery" securities before delivery, it may
incur a gain or a loss because of market fluctuations since the time the
commitment to purchase such securities was made.
REPURCHASE AGREEMENTS
An Account may enter into repurchase agreements (a purchase of and a
simultaneous commitment to resell a security at an agreed upon price on an
agreed upon date) only with member banks of the Federal Reserve System, member
firms (and subsidiaries thereof) of the New York Stock Exchange, recognized
primary U.S. Government Securities dealers, or institutions which the Account's
investment adviser has determined to be of comparable creditworthiness, and only
for U.S. Government Securities. When participating in repurchase agreements the
Account buys securities with the agreement that the seller will repurchase the
securities at a higher price at a later date. Such transactions afford an
opportunity for the Account to earn a return on available cash, although the
Account may be subject to various delays and risks of loss (including risk of
decline in market value of the underlying securities) if the seller is unable to
meet its obligation to repurchase. In evaluating whether to enter into a
repurchase agreement the investment adviser will carefully consider the
creditworthiness of the seller and will follow guidelines regarding the
determination of creditworthiness established by the Board of Managers of the
Account. If the member bank or securities dealer that is the party to the
repurchase agreement petitions for bankruptcy or otherwise becomes subject to
the U.S. Bankruptcy Code, the law regarding the rights of the Account is
unsettled. The securities underlying a repurchase agreement will be marked to
market every business day so that the value of the underlying securities,
including accrued interest, is at least equal to the repurchase price.
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ZERO COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS
Zero coupon and deferred interest bonds are debt obligations which are
issued or purchased at a significant discount from face value. The discount
approximates the total amount of interest the bonds will accrue and compound
over the period until maturity or the first interest payment date at a rate of
interest reflecting the market rate of the security at the time of issuance.
While zero coupon bonds do not require the periodic payment of interest,
deferred interest bonds provide for a period of delay before the regular payment
of interest begins. PIK bonds are debt obligations which provide that the issuer
thereof may, at its option, pay interest on such bonds in cash or in the form of
additional debt obligations. Such investments benefit the issuer by mitigating
its need for cash to meet debt service, but also require a higher rate of return
to attract investors who are willing to defer receipt of such cash. Such
investments may experience greater volatility in market value due to changes in
interest rates and/or credit quality than debt obligations which make regular
payments of interest. An Account will accrue income on such investments for
accounting purposes.
EMERGING MARKET SECURITIES
Emerging market securities are securities of issuers whose principal
activities are located in emerging market countries. Emerging market countries
include any country determined by the Adviser to have an emerging market
economy, taking into account a number of factors, including whether the country
has a low- to middle-income economy according to the International Bank for
Reconstruction and Development, the country's foreign currency debt rating, its
political and economic stability and the development of its financial and
capital markets. The Adviser determines whether an issuer's principal activities
are located in an emerging market country by considering such factors as its
country of organization, the principal trading market for its securities and the
source of its revenues and assets. The issuer's principal activities generally
are deemed to be located in a particular country if: (a) the security is issued
or guaranteed by the government of that country or any of its agencies,
authorities or instrumentalities; (b) the issuer is organized under the laws of,
and maintains a principal office in, that country; (c) the issuer has its
principal securities trading market in that country; (d) the issuer derives 50%
or more of its total revenues from goods sold or services performed in that
country; or (e) the issuer has 50% or more of its assets in that country.
The risks of investing in foreign securities may be intensified in the case
of investments in emerging markets. Securities prices in emerging markets can be
significantly more volatile and less liquid than in the more developed nations
of the world, reflecting the greater uncertainties of investing in less
established markets and economies. In particular, countries with emerging
markets may have relatively unstable governments, present the risk of
nationalization of businesses, restrictions on foreign ownership, or
prohibitions of repatriation of assets, and may have less protection of property
rights than more developed countries. The economies of countries with emerging
markets may be predominantly based on only a few industries, may be highly
vulnerable to changes in local or global trade conditions, and may suffer from
extreme and volatile debt burdens or inflation rates. Local securities markets
may trade a small number of securities and may be unable to respond effectively
to increases in trading volume, potentially making prompt liquidation of
substantial holdings difficult or impossible at times. Securities of issuers
located in countries with emerging markets may have limited marketability and
may be subject to more abrupt or erratic price movements.
These securities may be considered speculative and, while generally offering
higher income and the potential for capital appreciation, may present
significantly greater risk. Emerging markets may have different clearance and
settlement procedures, and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when a portion of the assets of a
Variable Account is uninvested and no return is earned thereon. The inability of
a Variable Account to make intended security purchases due to settlement
problems could cause the Variable Account to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result in losses to the Variable Account due to subsequent
declines in values of the portfolio securities, a decrease in the level of
liquidity in the Account's portfolio, or, if the Variable Account has entered
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into a contract to sell the security, possible liability to the purchaser.
Certain markets may require payment for securities before delivery, and in such
markets the Account bears the risk that the securities will not be delivered and
that the Account's payments will not be returned.
Certain emerging markets may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in an
emerging market's balance of payments or for other reasons, a country could
impose temporary restrictions on foreign capital remittances. A Variable Account
could be adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by the application
to a Variable Account of any restrictions on investments.
Investment in certain foreign emerging market debt obligations may be
restricted or controlled to varying degrees. These restrictions or controls may
at times preclude investment in certain foreign emerging market debt obligations
and increase the expenses of a Variable Account.
BRADY BONDS
Brady Bonds are securities created through the exchange of existing
commercial bank loans to public and private entities in certain emerging markets
for new bonds in connection with debt restructurings under a debt restructuring
plan introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady (the
"Brady Plan"). Brady Plan debt restructurings have been implemented to date in
Mexico, Uruguay, Venezuela, Costa Rica, Dominican Republic, Argentina, Jordan,
Nigeria, Panama, Brazil, Bulgaria, Ecuador, Poland and the Philippines. Brady
Bonds have been issued only recently, and for that reason do not have a long
payment history. Brady Bonds may be collateralized or uncollateralized, are
issued in various currencies (but primarily the U.S. dollar) and are actively
traded in over-the-counter secondary markets. U.S. dollar-denominated,
collateralized Brady Bonds, which may be fixed-rate bonds or floating-rate
bonds, are generally collateralized in full as to principal by U.S. Treasury
zero coupon bonds having the same maturity as the bonds. Brady Bonds are often
viewed as having three of four valuation components: the collateralized
repayment of principal at final maturity; the collateralized interest payments;
the uncollateralized interest payments; and any uncollateralized repayment of
principal at maturity (these uncollateralized amounts constituting the "residual
risk"). In light of the residual risk of Brady Bonds and the history of defaults
of countries issuing Brady Bonds with respect to commercial bank loans by public
and private entities, investments in Brady Bonds may be viewed as speculative.
AMERICAN DEPOSITARY RECEIPTS
American Depositary Receipts ("ADRs") are certificates issued by a U.S.
depository (usually a bank) and represent a specified quantity of shares of an
underlying non-U.S. stock on deposit with a custodian bank as collateral. ADRs
may be sponsored or unsponsored. A sponsored ADR is issued by a depository which
has an exclusive relationship with the issuer of the underlying security. An
unsponsored ADR may be issued by any number of U.S. depositories. Under the
terms of most sponsored arrangements, depositaries agree to distribute notices
of shareholder meetings and voting instructions, and to provide shareholder
communications and other information to the ADR holders at the request of the
issuer of the deposited securities. The depositary of an unsponsored ADR, on the
other hand, is under no obligation to distribute shareholder communications
received from the issuer of the deposited securities or to pass through voting
rights to ADR holders in respect of the deposited securities. Each Variable
Account that invests in foreign securities may invest in either type of ADR.
Although the U.S. investor holds a substitute receipt of ownership rather than
direct stock certificates, the use of the depository receipts in the United
States can reduce costs and delays as well as potential currency exchange and
other difficulties. The Variable Accounts may purchase securities in local
markets and direct delivery of these ordinary shares to the local depository of
an ADR agent bank in the foreign country. Simultaneously, the ADR agents create
a certificate which settles at the Variable Account's custodian in five days.
Each such Variable Account may also execute trades on the U.S. markets using
existing ADRs. Because ADRs trade on United States securities exchanges, the
Accounts' adviser does not treat them as foreign securities. However, they are
subject to many of the risks of foreign securities. For example, a foreign
issuer of the security underlying an ADR is generally not subject to the same
reporting requirements in the United States as a domestic issuer. Accordingly
the information available to a U.S. investor will be limited to the information
the foreign issuer is required to disclose in its
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own country and the market value of an ADR may not reflect undisclosed material
information concerning the issuer of the underlying security. ADRs may also be
subject to exchange rate risks if the underlying foreign securities are traded
in foreign currency.
RESTRICTED SECURITIES
Restricted securities are securities that are subject to legal or
contractual restrictions on resale, including securities which cannot be sold to
the public without registration under the Securities Act of 1933 (the
"Securities Act"). Unless registered for sale, such securities can only be sold
in privately negotiated transactions or pursuant to an exemption from
registration, such as pursuant to Rule 144A under the Securities Act for offers
and sales to "qualified institutional buyers." Consequently, there may be a more
limited trading market for these securities and market quotations may be less
readily available. However, as to certain restricted securities, a substantial
market of qualified institutional buyers may develop pursuant to Rule 144A
("Rule 144A Securities"). A Variable Account's Board of Managers may determine
based upon a continuing review of the trading markets for the specific Rule 144A
Security that such securities are readily marketable. The Board has adopted
guidelines and delegated to the Adviser the daily function of determining and
monitoring liquidity of Rule 144A Securities. The Board, however, will retain
sufficient oversight and is ultimately responsible for the determinations. The
Board will carefully monitor the Variable Account's investments in Rule 144A
Securities, focusing on such important factors, among others, as valuation,
liquidity and availability of information. This investment practice could have
the effect of decreasing the level of liquidity in a Variable Account to the
extent that qualified institutional buyers become for a time uninterested in
purchasing Rule 144A Securities held in the Variable Account's portfolio. As a
result, the Variable Account might not be able to sell these securities when the
Adviser wishes to do so, or might have to sell them at less than fair value. In
addition, market quotations are less readily available. Therefore, judgment may
at times play a greater role in valuing these securities than in the case of
unrestricted securities. A Variable Account may invest in restricted securities
as to which the Board has made such a determination of ready marketability, to
the extent consistent with its investment objectives. Where the Board has not
made such a determination, investments in restricted securities are subject to
the Variable Account's investment restrictions on investments in securities that
are not readily marketable.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS PASS-THROUGH SECURITIES
Collateralized mortgage obligations or "CMOs' are debt obligations
collateralized by mortgage loans or mortgage pass-through securities. Typically,
CMOs are collateralized by certificates issued by the Government National
Mortgage Association, the Federal National Mortgage Association or the Federal
Home Loan Mortgage Corporation but also may be collateralized by whole loans or
private mortgage pass-through securities (such collateral collectively
hereinafter referred to as "Mortgage Assets"). Multi-class pass-through
securities are equity interests in a trust composed of Mortgage Assets. Unless
the context indicates otherwise, all references herein to CMOs include
multi-class pass-through securities. Payments of principal of and interest on
the Mortgage Assets and any reinvestment income thereon provide the funds to pay
debt service on the CMOs or make scheduled distributions on the multi-class
pass-through securities. CMOs may be issued by agencies or instrumentalities of
the United States government or by private originators of, or investors in,
mortgage loans, including savings and loan associations, mortgage banks,
commercial banks, investment banks and special purpose subsidiaries of the
foregoing.
In a CMO, a series of bonds or certificates is usually issued in multiple
classes. Each class of CMOs, often referred to as a "tranche", is issued at a
specific fixed or floating coupon rate and has a stated maturity or final
distribution date. Principal prepayment on a Mortgage Asset may cause the CMOs
to be retired substantially earlier than their stated maturities or final
distribution dates, resulting in a loss of all or part of the premium if any has
been paid. Interest is paid or accrues on all classes of the CMOs on a monthly,
quarterly or semi-annual basis. The principal of and interest on the Mortgage
Assets may be allocated under several classes of a series of a CMO in
innumerable ways. In a common structure, payments of principal, including any
principal prepayment, on the Mortgage Assets are applied to the classes of the
series of a CMO in the order of their respective stated maturities or final
distribution dates, so that no payment of principal will be made on any class of
CMOs until all other classes having an earlier stated maturity or final
distribution date have been paid in full.
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Parallel pay CMOs are structured to provide payments of principal on each
payment date to more than one class. These simultaneous payments are taken into
account in calculating the stated maturity date or final distribution date of
each class, which, as with other CMO structures, must be retired by its stated
maturity date or final distribution date but may be retired earlier. Planned
amortization class CMOs ("PAC Bonds") generally require payments of the
specified amount of principal on each payment date. PAC Bonds are always
parallel pay CMOs with the required principal payment of such securities having
the highest priority after interest has been paid to all classes.
STRIPPED MORTGAGE-BACKED SECURITIES
Stripped Mortgage-Backed Securities ("SMBS") are derivative multi-class
mortgage securities issued by agencies or instrumentalities of the United States
Government or by private originators of, or investors in, mortgage loans
including savings and loan associations, mortgage banks, commercial banks and
investment banks.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions from a pool of Mortgage
Assets. A common type of SMBS will have one class receiving some of the interest
and most of the principal from the Mortgage Assets while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest while the other class
will receive all of the principal. If the underlying Mortgage Assets experience
more than anticipated prepayments of principal, the Account may fail to fully
recoup its initial investment in these securities. The market value of the class
consisting primarily or entirely of principal payments generally is unusually
volatile in response to changes in interest rates. Because SMBS were only
recently introduced, established trading markets for these securities have not
yet developed, although these securities are traded among institutional
investors and investment banking firms.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS
GSVA, HYVA, TRVA and WGVA may enter into mortgage "dollar roll" transactions
with selected banks and broker-dealers pursuant to which the Account sells
mortgage-backed securities for delivery in the future (generally within 30 days)
and simultaneously contracts to repurchase substantially similar (same type,
coupon and maturity) securities on a specified future date. The Accounts will
only enter into covered rolls. A "covered roll" is a specific type of dollar
roll for which there is an offsetting cash position or a cash equivalent
security position which matures on or before the forward settlement date of the
dollar roll transaction. During the roll period, the Account foregoes principal
and interest paid on the mortgage-backed securities. The Account is compensated
for the lost interest by the difference between the current sales price and the
lower price for the futures purchase (often referred to as the "drop") as well
as by the interest earned on the cash proceeds of the initial sale. The Account
may also be compensated by receipt of a commitment fee.
In the event that the party with whom the Account contracts to repurchase
substantially similar securities on a future date fails to deliver such
securities, the Account may not be able to obtain such securities at the price
specified in such contract and thus may not benefit from the price differential
between the current sales price and the repurchase price. The market value of
securities purchased by the Account may decline below the price of securities
that the Account has sold but is obligated to repurchase under the agreement.
Under the terms of these transactions, the securities purchased may have
different prepayment characteristics and both the Account and the dealer may be
permitted to over or underdeliver the aggregate principal amount of the
securities by 2%.
CORPORATE ASSET-BACKED SECURITIES
HYVA and TRVA may invest in corporate asset-backed securities. These
securities, issued by trusts and special purpose corporations, are backed by a
pool of assets, such as credit card and automobile loan receivables,
representing the obligations of a number of different parties.
Corporate asset-backed securities present certain risks. For instance, in
the case of credit card receivables, these securities may not have the benefit
of any security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the
46
<PAGE>
servicers to retain possession of the underlying obligations. If the servicer
were to sell these obligations to another party, there is a risk that the
purchaser would acquire an interest superior to that of the holders of the
related automobile receivables. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of the automobile receivables may not have a
proper security interest in all of the obligations backing such receivables.
Therefore, there is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on these securities.
The underlying assets (e.g. loans) are also subject to prepayments which shorten
the securities' weighted average life and may lower their return.
As noted above, corporate asset-backed securities are often backed by a pool
of assets representing the obligations of a number of different parties. To
lessen the effect of failures by obligors on underlying assets to make payments,
the securities may contain elements of credit support which fall into two
categories: (i) liquidity protection; and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from ultimate default ensures payment through insurance policies or
letters of credit obtained by the issuer or sponsor from third parties. The
series will not pay any additional or separate fees for credit support. The
degree of credit support provided for each issue is generally based on
historical information respecting the level of credit risk associated with the
underlying assets. Delinquency or loss in excess of that anticipated or failure
of the credit support could adversely affect the return on an investment in such
a security.
LOAN PARTICIPATIONS AND OTHER DIRECT INDEBTEDNESS
HYVA may invest a portion of its assets in "loan participations". By
purchasing a loan participation, the Account acquires some or all of the
interest of a bank or other lending institution in a loan to a corporate
borrower. Many such loans are secured, and most impose restrictive covenants
which must be met by the borrower. These loans are made generally to finance
internal growth, mergers, acquisitions, stock repurchases, leveraged buy-outs
and other corporate activities. Such loans may be in default at the time of
purchase. The Account may also purchase trade or other claims against companies,
which generally represent money owed by the company to a supplier of goods or
services. These claims may also be purchased at a time when the company is in
default. Certain of the loan participations acquired by the Account may involve
revolving credit facilities or other standby financing commitments which
obligate the Account to pay additional cash on a certain date or on demand.
The highly leveraged nature of many such loans may make such loans
especially vulnerable to adverse changes in economic or market conditions. Loan
participations and other direct investments may not be in the form of securities
or may be subject to restrictions on transfer, and only limited opportunities
may exist to resell such instruments. As a result, the Account may be unable to
sell such investments at an opportune time or may have to resell them at less
than fair market value. For a further discussion of loan participations and the
risks related to transactions therein, see Appendix D in the Statement of
Additional Information.
SWAPS AND RELATED TRANSACTIONS
As one way of managing its exposure to different types of investments, WGVA
may enter into interest rate swaps, currency swaps and other types of available
swap agreements, such as caps, collars and floors. Swaps involve the exchange by
the Account with another party of cash payments based upon different interest
rate indexes, currencies, and other prices or rates, such as the value of
mortgage prepayment rates. For example, in the typical interest rate swap, the
Account might exchange a sequence of cash payments based on a floating rate
index for cash payments based on a fixed rate. Payments made by both parties to
a swap transaction are based on a principal amount determined by the parties.
The Account may also purchase and sell caps, floors and collars. In a
typical cap or floor agreement, one party agrees to make payments only under
specified circumstances, usually in return for payment of a fee by the
counterparty. For example, the purchase of an interest rate cap entitles the
buyer, to the extent that a specified index exceeds a predetermined interest
rate, to receive payments of interest on a contractually-
47
<PAGE>
based principal amount from the counterparty selling such interest rate cap. The
sale of an interest rate floor obligates the seller to make payments to the
extent that a specified interest rate falls below an agreed-upon level. A collar
arrangement combines elements of buying a cap and selling a floor.
Swap agreements will tend to shift the Account's investment exposure from
one type of investment to another. For example, if the Account agreed to
exchange payments in dollars for payments in foreign currency, in each case
based on a fixed rate, the swap agreement would tend to decrease the Account's
exposure to U.S. interest rates and increase its exposure to foreign currency
and interest rates. Caps and floors have an effect similar to buying or writing
options. Depending on how they are used, swap agreements may increase or
decrease the overall volatility of the Account's investments and its share price
and yield.
Swap agreements are sophisticated hedging instruments that typically involve
a small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on the
Account's performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. The Account may also suffer losses
if it is unable to terminate outstanding swap agreements or reduce its exposure
through offsetting transactions.
Swaps, caps, floors and collars are highly specialized activities which
involve certain risks. See the Statement of Additional Information on the risks
involved in these activities.
INDEXED SECURITIES
The value of indexed securities is linked to foreign currencies, interest
rates, commodities, indices, or other financial indicators. Most indexed
securities are short to intermediate term fixed-income securities whose values
at maturity or interest rates rise or fall according to the change in one or
more specified underlying instruments. Indexed securities may be positively or
negatively indexed (i.e., their value may increase or decrease if the underlying
instrument appreciates), and may have return characteristics similar to direct
investments in the underlying instrument or to one or more options on the
underlying instrument. Indexed securities may be more volatile than the
underlying instrument itself.
The performance of indexed securities depends to a great extent on the
performance of the securities, currencies, or other instruments to which they
are indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
government agencies.
APPENDIX D
INDUSTRY SECTORS
MSVA seeks to achieve its investment objective by varying the weighting of
its portfolio among the following thirteen industry sectors (i.e., industry
groupings):
(1) AUTOS AND HOUSING SECTOR: companies engaged in the design,
production and sale of automobiles, automobile parts, mobile homes and
related products, and in the design, construction, renovation and
refurbishing of residential dwellings. The value of automobile industry
securities is affected by foreign competition, consumer confidence, consumer
debt and installment loan rates. The housing construction industry is
affected by the level of consumer confidence, consumer debt, mortgage rates
and the inflation outlook.
(2) BASIC MATERIALS AND CONSUMER STAPLES SECTOR: companies engaged in
providing consumer goods and services such as: the design, processing,
production and storage of packaged, canned, bottled and frozen foods and
beverages; and the design, production and sale of home furnishings,
appliances, clothing, accessories, cosmetics and perfumes. Certain such
companies are subject to government regulation affecting the permissibility
of using various food additives and
48
<PAGE>
production methods, which regulations could affect company profitability.
Also, the success of food-and fashion-related products may be strongly
affected by fads, marketing campaigns and other factors affecting supply and
demand.
(3) DEFENSE AND AEROSPACE SECTOR: companies engaged in the research,
manufacture, or sale of products or services related to the defense and
aerospace industries, such as: air transport; data processing or
computer-related services; communications systems; military weapons and
transportation; general aviation equipment, missiles, space launch vehicles
and spacecraft; units for guidance, propulsion and control of flight
vehicles; and airborne and ground-based equipment essential to the test,
operation and maintenance of flight vehicles. Since such companies rely
largely on U.S. (and other) governmental demand for their products and
services, their financial conditions are heavily influenced by federal (and
other governmental) defense spending policies.
(4) ENERGY SECTOR: companies in the energy field, including oil, gas,
electricity and coal as well as nuclear, geothermal, oil shale and solar
sources of energy. The business activities of companies comprising this
sector may include: production, generation, transmission, marketing, control
or measurement of energy or energy fuels; provision of component parts or
services to companies engaged in such activities; energy research or
experimentation; environmental activities related to the solution of energy
problems; and activities resulting from technological advances or research
discoveries in the energy field. The value of such companies' securities
varies based on the price and supply of energy fuels and may be affected by
events relating to international politics, energy conservation, the success
of exploration projects, and the tax and other regulatory policies of
various governments.
(5) FINANCIAL SERVICES SECTOR: companies providing financial services
to consumers and industry, such as: commercial banks and savings and loan
associations; consumer and industrial finance companies; securities
brokerage companies; leasing companies; and firms in all segments of the
insurance field (such as multiline, property and casualty, and life
insurance). These kinds of companies are subject to extensive governmental
regulations, some of which regulations are currently being studied by
Congress. The profitability of these groups may fluctuate significantly as a
result of volatile interest rates and general economic conditions.
(6) HEALTH CARE SECTOR: companies engaged in the design, manufacture or
sale of products or services used in connection with health care or
medicine, such as: pharmaceutical companies; firms that design, manufacture,
sell or supply medical, dental and optical products, hardware or services;
companies involved in biotechnology, medical diagnostic and biochemical
research and development; and companies involved in the operation of health
care facilities. Many of these companies are subject to government
regulation, which could affect the price and availability of their products
and services. Also, products and services in this sector could quickly
become obsolete.
(7) INDUSTRIAL GOODS AND SERVICES SECTOR: companies engaged in the
research, development, manufacture or marketing of products, processes or
services related to the agriculture, chemicals, containers, forest products,
non-ferrous metals, steel and pollution control industries, such as:
synthetic and natural materials, for example, chemicals, plastics,
fertilizers, gases, fibers, flavorings and fragrances; paper; wood products;
steel and cement. Certain companies in this sector are subject to regulation
by state and federal authorities, which could require alteration or
cessation of production of a product, payment of fines or cleaning of a
disposal site. In addition, since some of the materials and processes used
by these companies involve hazardous components, there are risks associated
with their production, handling and disposal. The risk of product
obsolescence is also present.
(8) LEISURE SECTOR: companies engaged in the design, production or
distribution of goods or services in the leisure industry, such as:
television and radio broadcast or manufacture; motion pictures and
photography; recordings and musical instruments; publishing; sporting goods,
camping and recreational equipment; sports arenas; toys and games; amusement
and theme parks; travel-related services and airlines; hotels and motels;
fast food and other restaurants; and gaming casinos. Many products produced
by companies in this sector--for example, video and electronic games--may
quickly become obsolete.
49
<PAGE>
(9) RETAILING SECTOR: companies engaged in the retail distribution of
home furnishings, food products, clothing, pharmaceuticals, leisure products
and other consumer goods, such as: department stores; supermarkets; and
retail chains specializing in particular items such as shoes, toys or
pharmaceuticals. The value of securities in this sector will fluctuate based
on consumer spending patterns, which depend on inflation and interest rates,
level of consumer debt and seasonal shopping habits. The success or failure
of a particular company in this highly competitive sector will depend on
such company's ability to predict rapidly changing consumer tastes.
(10) TECHNOLOGY SECTOR: companies which are expected to have or develop
products, processes or services which will provide or will benefit
significantly from technological advances and improvements or future
automation trends in the office and factory, such as: semiconductors;
computers and peripheral equipment; scientific instruments; computer
software; telecommunications; and electronic components, instruments and
systems. Such companies are sensitive to foreign competition and import
tariffs. Also, many products produced by companies in this sector may
quickly become obsolete.
(11) TRANSPORTATION SECTOR: companies involved in the provision of
transportation of people and products, such as: airlines, railroads and
trucking firms. Revenues of companies in this sector will be affected by
fluctuations in fuel prices resulting from domestic and international
events, and government regulation of fares.
(12) UTILITIES SECTOR: companies in the public utilities industry and
companies deriving a substantial majority of their revenues through
supplying public utilities such as: companies engaged in the manufacture,
production, generation, transmission and sale of gas and electric energy;
and companies engaged in the communications field, including telephone,
telegraph, satellite, microwave and the provision of other communication
facilities to the public. The gas and electric public utilities industries
are subject to various uncertainties, including the outcome of political
issues concerning the environment, prices of fuel for electric generation,
availability of natural gas, and risks associated with the construction and
operation of nuclear power facilities.
(13) FOREIGN SECTOR: companies whose primary business activity takes
place outside of the United States. The securities of foreign companies
would be heavily influenced by the strength of national economies, inflation
levels and the value of the U.S. dollar versus foreign currencies. Foreign
investments will be subject to certain risks not generally associated with
domestic investments. Such investments may be favorably or unfavorably
affected by changes in interest rates, currency exchange rates and exchange
control regulations, and costs may be incurred in connection with
conversions between currencies. In addition, investments in foreign
countries could be affected by less favorable tax provisions, less publicly
available information, less securities regulation, political or social
instability, limitations on the removal of funds or other assets of the
Account, expropriation of assets, diplomatic developments adverse to U.S.
investments and difficulties in enforcing contractual obligations.
Diversified companies will generally be included in the sector of their
predominant industry activity, as determined by the Adviser.
50
<PAGE>
APPENDIX E
PORTFOLIO COMPOSITION CHART
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
HIGH YIELD VARIABLE ACCOUNT
The table below shows the percentages of HYVA's assets at December 31, 1995
invested in securities assigned to the various rating categories by S&P, Moody's
(provided only for securities not rated by S&P) and Fitch (provided only for
securities not rated by S&P or Moody's) and in unrated securities determined by
MFS to be of comparable quality:
<TABLE>
<CAPTION>
UNRATED
SECURITIES OF
COMPILED COMPARABLE
RATING RATINGS QUALITY TOTAL
- ----------- -------------- ------------------- -----------
<S> <C> <C> <C>
AAA/Aaa -- -- --
AA/Aa -- -- --
A/A -- -- --
BBB/Baa -- -- --
BB/Ba 25.3% -- 25.3%
B/B 59.1% 2.6% 61.7%
CCC/Caa 4.0% 0.3% 4.3%
CC/Ca 0.8% -- 0.8%
C/C -- -- --
Default 0.9% -- 0.9%
Total 90.1% 2.9% 93.0%
</TABLE>
The chart does not necessarily indicate what the composition of HYVA's
portfolio will be in subsequent years. Rather, the Account's investment
objective, policies and restrictions indicate the extent to which it may
purchase securities in the various categories.
51
<PAGE>
This Prospectus sets forth information about the Contracts and the Variable
Accounts that a prospective purchaser should know before investing. Additional
information about the Contracts and the Variable Accounts has been filed with
the Securities and Exchange Commission in a Statement of Additional Information
dated May 1, 1996 which is incorporated herein by reference. The Statement of
Additional Information is available upon request and without charge from Sun
Life Assurance Company of Canada (U.S.). To receive a copy, return this request
form to the address shown below or telephone (800) 752-7215.
- ---------------------------------------------------------------------------
To: Sun Life Assurance Company of Canada (U.S.)
c/o Sun Life Annuity Service Center
P.O. Box 1024
Boston, Massachusetts 02103
Please send me a Statement of Additional Information for Compass 2--Money
Market Variable Account, High Yield Variable Account, Capital Appreciation
Variable Account, Government Securities Variable Account, Total Return Variable
Account, World Governments Variable Account and Managed Sectors Variable
Account.
<TABLE>
<S> <C> <C>
Name -------------------------------------------
Address -------------------------------------------
-------------------------------------------
City -------------------------- State ------------ Zip --------------
Telephone ---------------------
</TABLE>
52
<PAGE>
PROSPECTUS
MAY 1, 1996
COMBINATION FIXED/VARIABLE
ANNUITY FOR PERSONAL AND
QUALIFIED RETIREMENT PLANS
ISSUED BY
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
Annuity Service Mailing Address:
c/o Sun Life Annuity Service Center
P.O. Box 1024
Boston, Massachusetts 02103
GENERAL DISTRIBUTOR
Clarendon Insurance Agency, Inc.
500 Boylston Street
Boston, Massachusetts 02116
CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
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
ISSUED IN CONNECTION WITH
- MONEY MARKET VARIABLE ACCOUNT
- HIGH YIELD VARIABLE ACCOUNT
- CAPITAL APPRECIATION VARIABLE ACCOUNT
- GOVERNMENT SECURITIES VARIABLE ACCOUNT
- WORLD GOVERNMENTS VARIABLE ACCOUNT
- TOTAL RETURN VARIABLE ACCOUNT
- MANAGED SECTORS VARIABLE ACCOUNT
CO2US-1 5/96
<PAGE>
PART B
INFORMATION REQUIRED IN A STATEMENT OF
ADDITIONAL INFORMATION
Incorporated herein by reference from the Statement of Additional
Information dated May 1, 1996 filed with Post-effective Amendment No. 9 to
the Registration Statement on Form N-3 of Money Market Variable Account
(File No. 33-19628).
<PAGE>
PART C
OTHER INFORMATION
Item 28. Financial Statements and Exhibits
(a) The Following Financial Statements are included in
this Registration Statement:
Included in Part A:
A. Condensed Financial Information--Per Accumulation Unit
Income and Capital Changes.
Included in Part B:
A. Financial Statements of Money Market Variable Account,
High Yield Variable Account, Capital Appreciation
Variable Account, Government Securities Variable
Account, World Governments Variable Account, Total
Return Variable Account and Managed Sectors Variable
Account.*
1. Portfolios of Investments, December 31, 1995;
2. Statements of Assets and Liabilities, December 31,
1995;
3. Statements of Operations, Year Ended December 31,
1995;
4. Statements of Changes in Net Assets, Years Ended
December 31, 1995 and 1994;
5. Notes to Financial Statements; and
6. Independent Auditors' Report.
B. Financial Statements of Sun Life Assurance Company of
Canada (U.S.).
1. Balance Sheets, December 31, 1995 and December 31,
1994;
2. Statements of Operations, Years Ended December 31,
1995, 1994 and 1993;
3. Statements of Capital Stock and Surplus, Years
Ended December 31, 1995, 1994 and 1993;
4. Statements of Cash Flows, Years Ended December 31,
1995, 1994 and 1993;
5. Notes to Financial Statements; and
6. Independent Auditors' Report.
* Incorporated herein by reference from the Registrants'
Annual Report to contact owners for the year ended
December 31, 1995.
<PAGE>
(b) The following Exhibits are incorporated in this
Registration Statement by reference unless otherwise
indicated:
(1) Resolution of the Board of Directors of the Insurance Company dated
July 21, 1982 authorizing the establishment of Money Market Variable Account
("MMVA"), High Yield Variable Account ("HYVA"), Capital Appreciation Variable
Account ("CAVA"), Government Guaranteed Variable Account ("GGVA"),
Government Markets Variable Account ("GMVA"), Total Return Variable Account
("TRVA") and Managed Sectors Variable Account ("MSVA") (collectively, the
"Registrants") (Filed as Exhibit 1 to the Registration Statements of the
Registrants on Form N-3 (File Nos. 33-19628 (MMVA), 33-19631 (HYVA), 33-19632
(CAVA), 33-19630 (GGVA), 33-19629 (GMVA), 33-19626 (TRVA) and 33-19627 (MSVA)
(collectively, the "Registration Statements")). MMVA, HYVA, CAVA and GGVA
are referred to herein collectively as the "Previous Registrants."
(2) (a) Rules and Regulations of the Previous Registrants (Filed as
Exhibits 2.4 to the Registration Statements of the Previous Registrants on
Form N-1 (File Nos. 2-79141 (MMVA), 2-79142 (HYVA), 2-79143 (CAVA) and
2-90805 (GGVA);
(b) Rules and Regulations of GMVA (Filed as Exhibit 2(b) to the
Registration Statement of GMVA on Form N-3 (File No. 33-19629));
(c) Rules and Regulations of TRVA (Filed as Exhibit 2(c) to the
Registration Statement of TRVA on Form N-3 (File No. 33-19626)); and
(d) Rules and Regulations of MSVA (Filed as Exhibit 2(d) to the
Registration Statement of MSVA on Form N-3 (File No. 33-19627));
(3) (a) Custodian Agreements between State Street Bank and Trust
Company and the Previous Registrants (Filed as Exhibits 8.1, 8.2 and 8.3 to
Amendment No. 1 to the Registration Statements of MMVA, HYVA and CAVA on Form
N-1 and as Exhibit 8 to the Registration Statement of GGVA on Form N-1);
(b) Custodian Agreement between State Street Bank and Trust
Company and GMVA (Filed as Exhibit 3(b) to Pre-effective Amendment No. 1 to
the Registration Statement of GMVA on Form N-3 (File No. 33-19629));
(c) Custodian Agreement between State Street Bank and Trust
Company and TRVA (Filed as Exhibit 3(c) to Pre-effective Amendment No. 1 to
the Registration Statement of TRVA on Form N-3 (File No. 33-19626)); and
(d) Custodian Agreement between State Street Bank and Trust
Company and MSVA (Filed as Exhibit 3(d) to Pre-effective Amendment No. 1 to
the Registration Statement of MSVA on Form N-3 (File No. 33-19627));
<PAGE>
(4) (a) Investment Management Agreements between Massachusetts Financial
Services Company and the Previous Registrants (filed as Exhibits 5.1, 5.2 and
5.3 to Amendment No. 1 to the Registration Statements of MMVA, HYVA and CAVA
on Form N-1 and as Exhibit 5 to the Registration Statement of GGVA on Form N-1);
(b) Investment Management Agreement between Massachusetts Financial
Services Company and GMVA (Filed as Exhibit 4(b) to Pre-effective Amendment
No. 1 to the Registration Statement of GMVA on Form N-3 (File No. 33-19629));
(c) Investment Management Agreement between Massachusetts Financial
Services Company and TRVA (Filed as Exhibit 4(c) to Pre-effective Amendment
No. 1 to the Registration Statement of TRVA on Form N-3 (File No. 33-19626));
and
(d) Investment Management Agreement between Massachusetts Financial
Services Company and MSVA (Filed as Exhibit 4(d) to Pre-effective Amendment
No. 1 to the Registration Statement of MSVA on Form N-3 (File No. 33-19627));
(5) (a) Marketing Coordination and Administrative Services Agreement
between the Insurance Company, Massachusetts Financial Services Company and
Clarendon Insurance Agency, Inc. dated July 22, 1982 (Filed as Exhibit 6.1
to Amendment No. 6 to the Registration Statements of MMVA, HYVA and CAVA
on Form N-1 and as Exhibit 6.1 to the Registration Statement
of GGVA on Form N-1);
(b)(i) Specimen Sales Operations and General Agent Agreement;
(b)(ii) Specimen Broker-Dealer Supervisory and Service Agreement;
(b)(iii) Specimen Registered Representatives Agent Agreement; (Filed
as Exhibits 6.2, 6.3 and 6.4, respectively, to the Registration Statements of
the Previous Registrants on Form N-1);
(6) Compass 2 Flexible Payment Deferred Combination Variable and Fixed
Annuity Contract (Filed as Exhibit 6 to Pre-effective Amendment No. 1 to the
Registration Statements of GMVA, TRVA and MSVA, Post-effective Amendment No. 12
to the Registration Statements of MMVA, HYVA and CAVA and Post Effective
Amendment No. 7 to the Registration Statement of GGVA on Form N-3);
(7) Form of Application used with the Compass 2 variable annuity contract
filed as Exhibit 6 (Filed as Exhibit 7 to Pre-effective Amendment No. 1 to the
Registration Statements of GMVA, TRVA and MSVA, Post-effective Amendment No. 12
to the Registration Statements of MMVA, HYVA and CAVA and Post Effective
Amendment No. 7 to the Registration Statement of GGVA on Form N-3);
<PAGE>
(8) Certificate of Incorporation and By-laws of the Insurance Company
(Filed as Exhibits 1 and 2.1, respectively, to the Registration Statements
of the Previous Registrants on Form N-1);
(9) Not Applicable;
(10) Not Applicable;
(11) Service Agreement between Sun Life Assurance Company of Canada and
the Insurance Company dated January 18, 1971 (Filed as Exhibit No. 9 to the
Registration Statements of the Previous Registrants on Form N-1);
(12) Opinion of David D. Horn, Esq. and Consent to its use as to the
legality of the securities being registered (Filed as Exhibit No. 12 to
Pre-effective Amendment No. 1 to the Registration Statements of GMVA, TRVA
and MSVA, Post-effective Amendment No. 12 to the Registration Statements of
MMVA, HYVA and CAVA and Post-effective Amendment No. 7 to the Registration
Statement of GGVA on Form N-3);
(13) (a) Consent of Deloitte & Touche (Filed herewith);
(b) Consent of David D. Horn, Esq. (Filed herewith); and
(c) Certification of Counsel (Filed herewith).
(14) None;
(15) Not Applicable;
(16) Not Applicable; and
(17) Financial Data Schedule meeting the requirements of Rule 483 under the
Securities Act of 1933 (Filed herewith).
Item 29. Directors and Officers of the Insurance Company
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address with Insurance Company with Registrants
- ------------------ ---------------------- ----------------------
<S> <C> <C>
John D. McNeil Chairman and Director Chairman and Member,
150 King Street West Boards of Managers
Toronto, Ontario
Canada M5H 1J9
John R. Gardner President and Director None
150 King Street West
Toronto, Ontario
Canada M5H 1J9
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address with Insurance Company with Registrants
- ------------------ ---------------------- -----------------------
<S> <C> <C>
David D. Horn Senior Vice President Member, Boards of
One Sun Life Executive and General Manager Managers
Park and Director
Wellesley Hills, MA
02181
John S. Lane Director None
150 King Street West
Toronto, Ontario
Canada M5H 1J9
Richard B. Bailey Director None
500 Boylston Street
Boston, MA 02116
A. Keith Brodkin Director None
500 Boylston Street
Boston, MA 02116
M. Colyer Crum Director None
Harvard Business School
Soldiers Field Road
Boston, MA 02163
Angus A. MacNaughton Director None
950 Tower Lane
Metro Tower, Suite 1170
Foster City, CA 94404
Robert P. Vrolyk Vice President None
One Sun Life Executive and Actuary
Park
Wellesley Hills, MA
02181
Robert A. Bonner Vice President, None
One Sun Life Executive Pensions
Park
Wellesley Hills, MA
02181
Robert E. McGinness Vice President and Counsel None
One Sun Life Executive
Park
Wellesley Hills, MA
02181
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address with Insurance Company with Registrants
- ------------------ ---------------------- ----------------------
<S> <C> <C>
S. Caesar Raboy Vice President, None
One Sun Life Executive Individual Insurance
Park
Wellesley Hills, MA
02181
C. James Prieur Vice President, Investments None
One Sun Life Executive
Park
Wellesley Hills, MA
02181
L. Brock Thomson Vice President None
One Sun Life Executive and Treasurer
Park
Wellesley Hills, MA
02181
Bonnie S. Angus Secretary Secretary, Boards of
One Sun Life Executive Managers
Park
Wellesley Hills, MA
02181
</TABLE>
Item 30. Persons Controlled by or Under Common Control with
the Insurance Company
No person is directly or indirectly controlled by Registrants.
Registrants are separate accounts of Sun Life Assurance Company
of Canada (U.S.), a wholly-owned subsidiary of Sun Life Assurance Company
of Canada. Massachusetts Financial Services Company, a wholly-owned
subsidiary of Sun Life Assurance Company of Canada (U.S.), is the
investment adviser to the Registrants and Clarendon Insurance Agency, Inc.,
a wholly-owned subsidiary of Massachusetts Financial Services Company is the
general distributor of the contracts issued in connection with the
separate accounts.
The following is a list of all corporations directly or indirectly
controlled by or under common control with Sun Life Assurance Company of
Canada, showing the state or other sovereign power under the laws of which
each is organized and the percentage ownership of voting securities giving
rise to the control relationship:
<PAGE>
<TABLE>
<CAPTION>
Percent of
State or Country Ownership
or Jurisdiction of Voting
of Incorporation Securities
Sun Life Assurance Company of Canada Canada 100%
- --------------------------------------------------------------------------
<S> <C>
Sun Life Assurance Company of Canada
(U.S.).................................... Delaware 100%
Sun Life Assurance Company of Canada
(U.K.) Limited ........................... United Kingdom 100%
Sun Life of Canada Investment Management
Limited .................................. Canada 100%
Sun Life of Canada Benefit Management
Limited .................................. Canada 100%
Spectrum United Holdings, Inc............... Canada 100%
Sun Canada Financial Co..................... Delaware 100%
Sun Life Insurance and Annuity Company of
New York ................................. New York 0%**
Sun Investment Services Company ............ Delaware 0%**
Sun Benefit Services Company, Inc. ......... Delaware 0%**
Sun Growth Variable Annuity Fund, Inc. ..... Delaware 0%*
Massachusetts Financial Services Company ... Delaware 0%+
New London Trust, F.S.B..................... Federally Chartered 0%**
Massachusetts Casualty Insurance Company.... Massachusetts 0%**
Clarendon Insurance Agency, Inc. ........... Massachusetts 0%***
MFS Service Center, Inc..................... Delaware 0%***
MFS/Sun Life Series Trust .................. Massachusetts 0%****
Lifetime Advisers, Inc. .................... Delaware 0%***
MFS Financial Services, Inc. ............... Delaware 0%***
Sun Capital Advisers, Inc. ................. Delaware 0%**
MFS International, Ltd. .................... Ireland 0%***
MFS Asset Management, Inc. ................. Delaware 0%***
MFS Fund Distributors, Inc. ................ Delaware 0%***
MFS Retirement Services, Inc. .............. Delaware 0%***
Sun Life Financial Services Limited......... Bermuda 0%**
<FN>
- ------
* 100% of the issued and outstanding voting securities of Sun
Growth Variable Annuity Fund, Inc. are owned by separate
accounts of Sun Life Assurance Company of Canada (U.S.).
** 100% of the issued and outstanding voting securities of
New London Trust, F.S.B., Sun Life Insurance and Annuity
Company of New York, Sun Investment Services Company, Sun
Benefit Services Company, Inc., Sun Capital Advisers, Inc.,
Sun Life Financial Service Limited and Massachusetts Casualty
Insurance Company are owned by Sun Life Assurance Company
of Canada (U.S.).
*** 100% of the issued and outstanding voting securities of
Clarendon Insurance Agency, Inc., MFS Service Center, Inc.,
Lifetime Advisers, Inc., MFS Financial Services, Inc., MFS
International, Ltd., MFS Asset Management, Inc., MFS Fund
Distributors, Inc., and MFS Retirement Services, Inc. are
owned by Massachusetts Financial Services Company.
**** 100% of the issued and outstanding voting securities of
MFS/Sun Life Series Trust are owned by separate accounts of
Sun Life Assurance Company of Canada (U.S.) and Sun Life
Insurance and Annuity Company of New York.
+ 94.8% of the issued and outstanding voting securities of
Massachusetts Financial Services Company are owned by Sun
Life Assurance Company of Canada (U.S.).
</TABLE>
<PAGE>
Omitted from the list are subsidiaries of Sun Life Assurance
Company of Canada which, considered in the aggregate, would not constitute a
"significant subsidiary" (as that term is defined in Rule 8b-2 under Section
8 of the Investment Company Act of 1940) of Sun Life Assurance Company of
Canada.
None of the companies listed is a subsidiary of the Registrants,
therefore the only financial statements being filed are those of Sun Life
Assurance Company of Canada (U.S.).
Item 31. Number of Contract Owners (as of March 31, 1996):
<TABLE>
<CAPTION>
Number of
Contract Owners*
----------------------------
Qualified Non-Qualified
Registrant Contracts Contracts
- ---------- ---------- -------------
<S> <C> <C>
Money Market Variable Account 7,403 4,536
High Yield Variable Account 13,681 7,189
Capital Appreciation Variable
Account 17,270 8,748
Government Securities Variable
Account 11,338 6,539
World Governments Variable Account 944 591
Total Return Variable Account 3,338 1,742
Managed Sectors Variable Account 1,418 827
- ------------------
* Number of Compass 2 Contracts participating in the
investment experience of the Variable Account.
</TABLE>
Item 32. Indemnification
Pursuant to Section 145 of the Delaware Corporation Law, Article 8 of
the By-laws of Sun Life Assurance Company of Canada (U.S.), a copy of which
was filed as Exhibit 2.1 to Form N-1, provides for the indemnification of
directors, officers and employees of Sun Life Assurance Company of Canada
(U.S.). At a meeting held on October 21, 1982, the board of directors of
Sun Life Assurance Company of Canada (U.S.) adopted the following resolution
with respect to indemnification of the boards of managers of the
Registrants.
"(a) Every person who is or was a member of the board of managers of any
separate account of this corporation shall have a right to be indemnified by
this corporation against all liability and reasonable expenses incurred by
him in connection with or resulting from any claim, action, suit or proceeding
in which he may become involved as a party or otherwise by reason of his
being or having been a member of the board of managers of any separate
account of this corporation, provided (1) said claim, action, suit or
proceeding shall be prosecuted to a final determination and he shall be
vindicated on the merits, or (2) in the absence of such a final determination
vindicating him on the merits, the board of directors shall determine that he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the separate accounts and/or the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful; said determination to
be made by the board of directors acting through a quorum of disinterested
directors, or in its absence on the opinion of counsel.
<PAGE>
(b) For purposes of the preceding subsection (a): (1) "liability and
reasonable expenses" shall include but not be limited to reasonable counsel
fees and disbursements, amounts of any judgment, fine or penalty, and
reasonable amounts paid in settlement; (2) "claim, action, suit or
proceeding" shall include every such claim, action, suit or proceeding,
whether civil or criminal, derivative or otherwise, administrative, judicial
or legislative, any appeal relating thereto, and shall include any reasonable
apprehension or threat of such a claim, action, suit or proceeding; (3) a
settlement, plea of nolo contendere, consent judgment, adverse civil
judgment, or conviction shall not of itself create a presumption that the
conduct of the person seeking indemnification did not meet the standard of
conduct set forth in subsection (a)(2) above.
(c) Notwithstanding the foregoing, the following limitations shall
apply with respect to any action by or in the right of the corporation:
(1) no indemnification shall be made in respect of any claim, issue or matter
as to which the person seeking indemnification shall have been adjudged to be
liable for negligence or misconduct in the performance of his duty to the
corporation unless and only to the extent that the Court of Chancery of the
State of Delaware or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the court of
Chancery or such other court shall deem proper; and (2) indemnification shall
extend only to reasonable expenses, including reasonable counsel's fees and
disbursements.
(d) The right of indemnification shall extend to any person otherwise
entitled to it under this resolution whether or not that person continues to
be a member of the board of managers of any separate account of this
corporation at the time such liability or expense shall be incurred. The
right of indemnification shall extend to the legal representative and heirs
of any person otherwise entitled to indemnification. If a person meets the
requirements of this resolution with respect to some matters in a claim,
action, suit, or proceeding, but not with respect to others, he shall be
entitled to indemnification as to the former. Advances against liability and
expenses may be made by the corporation on terms fixed by the board of
directors subject to an obligation to repay if indemnification proves
unwarranted.
<PAGE>
(e) This resolution shall not exclude any other rights of indemnification
or other rights to which any member of the board of managers of any separate
account of the corporation may be entitled to by contract, vote of the
stockholders or as a matter of law. If any clause, provision or application
of this resolution shall be determined to be invalid, the other clauses,
provisions or applications of this section shall not be affected but shall
remain in full force and effect. The provisions of this resolution shall
be applicable to claims, actions, suits or proceedings made or commenced
after the adoption hereof, whether arising from acts or omissions to act
occurring before or after the adoption hereof.
(f) Nothing contained in this resolution shall be construed to protect
any member of the board of managers of any separate account of the
corporation against any liability to any separate account, the corporation or
its security holders to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office."
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
Sun Life Assurance Company of Canada (U.S.) and to the boards of managers and
officers of the Registrants pursuant to the certificate of incorporation,
by-laws, or otherwise, Sun Life (U.S.) has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by Sun Life (U.S.) or the Registrants of expenses incurred
or paid by a director, officer, controlling person of Sun Life (U.S.) or the
Registrants in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, Sun Life (U.S.) and/or the Registrants
will, unless in the opinion of their counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by them is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
<PAGE>
Item 33. Business and Other Connections of Investment Adviser
Incorporated herein by reference from Item 33. of Part C.
of Post-Effective Amendment No. 9 to the Registration
Statement on Form N-3 of Money Market Variable Account, Reg.
No. 33-19628.
Item 34. Principal Underwriters
(a) Clarendon Insurance Agency, Inc., which is a wholly-owned subsidiary
of Massachusetts Financial Services Company, acts as general distributor for
Registrants, Sun Life of Canada (U.S.) Variable Accounts C, D, E and F and
Sun Life (N.Y.) Variable Accounts A, B and C.
(b)
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address* with Underwriter with Registrants
- ------------------ --------------------- ----------------------
<S> <C> <C>
A. Keith Brodkin.......... Chairman and Director None**
Jeffrey L. Shames......... Director None
Arnold D. Scott........... Director None
Cynthia M. Orcutt......... President None
Bruce C. Avery............ Vice President None
Joseph W. Dello Russo..... Treasurer None
Stephen E. Cavan.......... Secretary and Clerk None
Robert T. Burns........... Assistant Secretary None
Thomas B. Hastings........ Assistant Treasurer None
<FN>
- -----------------
* The principal business address of all directors and
officers of the principal underwriter except Ms.
Orcutt is 500 Boylston Street, Boston, Massachusetts
02116. The principal business address of Ms. Orcutt
is One Sun Life Executive Park, Wellesley Hills,
Massachusetts 02181.
** Mr. Brodkin is a Director of Sun Life Assurance
Company of Canada (U.S.) and Sun Life Insurance and
Annuity Company of New York.
</TABLE>
(c) Inapplicable.
Item 35. Location of Accounts and Records
Accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940 and the Rules promulgated
thereunder are maintained by Sun Life Assurance Company of Canada (U.S.), in
whole or in part, at its executive office at One Sun Life Executive Park,
Wellesley Hills, Massachusetts 02181, at the offices of Massachusetts
Financial Services Company at 500 Boylston Street, Boston, Massachusetts
02116, at the offices of Sun Life Annuity Service Center at 50 Milk Street,
Boston, Massachusetts 02109, or at the offices of the custodian, State
Street Bank and Trust Company, at either 225 Franklin Street, Boston,
Massachusetts 02110 or 5-West, North Quincy, Massachusetts 02171.
<PAGE>
Item 36. Management Services
Registrants assert that all management-related service contracts have
been described in the Prospectus or Statement of Additional Information.
Item 37. Undertakings
(a)(b)(c)(d) Inapplicable.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act
of 1940, the Registrants certify that they meet all of the requirements for
effectiveness of this Amendment to the Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and have caused this Amendment
to the Registration Statement to be signed on their behalf in the Town of
Wellesley and Commonwealth of Massachusetts on the 29th day of April, 1996.
Money Market Variable Account
High Yield Variable Account
Capital Appreciation Variable Account
Government Securities Variable Account
World Governments Variable Account
Total Return Variable Account
Managed Sectors Variable Account
(Registrants)
By: /s/ BONNIE S. ANGUS
-----------------------------------
Bonnie S. Angus, Secretary
Boards of Managers
As required by the Securities Act of 1933 and the Investment Company Act
of 1940, Sun Life Assurance Company of Canada (U.S.) has caused this Amendment
to the Registration Statement to be signed on its behalf in the Town of
Wellesley and Commonwealth of Massachusetts on the 29th day of April, 1996.
Sun Life Assurance Company of Canada (U.S.)
By:* /s/ JOHN D. MCNEIL
-----------------------------------
John D. McNeil, Chairman
* By Bonnie S. Angus pursuant to Power of Attorney filed with Post-effective
Amendment No. 7 to the Registration Statement on Form N-3 of the Capital
Appreciation Variable Account (File No. 33-19632).
<PAGE>
As required by the Securities Act of 1933, this Amendment to the Registration
Statement has been signed below by the following persons in the capacities with
the Registrants and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
Chairman and
Member of the
* /s/ JOHN D. MCNEIL Boards of Managers April 29, 1996
- --------------------------
John D. McNeil
Member of the
* /s/ SAMUEL ADAMS Boards of Managers April 29, 1996
- --------------------------
Samuel Adams
Member of the
* /s/ GEOFFREY CROFTS Boards of Managers April 29, 1996
- --------------------------
Geoffrey Crofts
Member of the
* /s/ DAVID D. HORN Boards of Managers April 29, 1996
- --------------------------
David D. Horn
Member of the
* /s/ GARTH MARSTON Boards of Managers April 29, 1996
- --------------------------
Garth Marston
Member of the
* /s/ DERWYN F. PHILLIPS Boards of Managers April 29, 1996
- ---------------------------
Derwyn F. Phillips
<FN>
* By Bonnie S. Angus pursuant to Power of Attorney filed with
Post-effective Amendment No. 7 to the Registration Statement on
Form N-3 of the Capital Appreciation Variable Account (File No. 33-19632).
</TABLE>
<PAGE>
As required by the Securities Act of 1933, this Amendment to the
Registration Statement has been signed below by the following persons in the
capacities with Sun Life Assurance Company of Canada (U.S.) and on the dates
indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
Chairman and Director
(Principal
* /s/ JOHN D. MCNEIL Executive Officer) April 29, 1996
- ----------------------------
John D. McNeil
Vice President and Actuary
(Principal Financial &
/s/ ROBERT P. VROLYK Accounting Officer April 29, 1996
- ----------------------------
Robert P. Vrolyk
* /s/ JOHN R. GARDNER President and Director April 29, 1996
- ----------------------------
John R. Gardner
* /s/ RICHARD B. BAILEY Director April 29, 1996
- ----------------------------
Richard B. Bailey
* /s/ A. KEITH BRODKIN Director April 29, 1996
- ----------------------------
A. Keith Brodkin
Senior Vice President
and General Manager
* /s/ DAVID D. HORN and Director April 29, 1996
- ----------------------------
David D. Horn
* /s/ JOHN S. LANE Director April 29, 1996
- ----------------------------
John S. Lane
* /s/ ANGUS A. MACNAUGHTON Director April 29, 1996
- -----------------------------
Angus A. MacNaughton
* /s/ M. COLYER CRUM Director April 29, 1996
- ----------------------------
M. Colyer Crum
<FN>
* By Bonnie S. Angus pursuant to Power of Attorney filed
with Post-effective Amendment No. 7 to the Registration
Statement on Form N-3 of the Capital Appreciation Variable
Account (File No. 33-19632).
</TABLE>
<PAGE>
Exhibit 13(a)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Post-effective
Amendment to the Registration Statements on Form N-3 of Money Market Variable
Account, High Yield Variable Account, Capital Appreciation Variable Account,
Government Securities Variable Account, World Governments Variable Account,
Total Return Variable Account and Managed Sectors Variable Account of our
report dated February 2, 1996 appearing in the annual report to contract
owners for the year ended December 31, 1995, and to the use of our report
dated February 7, 1996 accompanying the financial statements of Sun Life
Assurance Company of Canada (U.S.) contained in the Statement of Additional
Information, which is part of such Registration Statements. We also consent
to the references to us under the headings "Condensed Financial Information"
in the Prospectus, which is part of such Registration Statements, and
"Accountants and Financial Statements" in the Statement of Additional
Information.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
April 29, 1996
<PAGE>
Exhibit 13(b)
CONSENT OF COUNSEL
I hereby consent to the reference to me in this Amendment to the
Registration Statement on Form N-3 of Money Market Variable Account, High
Yield Variable Account, Capital Appreciation Variable Account, Government
Securities Variable Account, World Governments Variable Account, Total Return
Variable Account and Managed Sectors Variable Account under the caption
"Legal Matters" in the Statement of Additional Information contained therein.
DAVID D. HORN, ESQ.
April 29, 1996
<PAGE>
Exhibit 13(c)
CERTIFICATION OF COUNSEL
I, David D. Horn, in my capacity as counsel to Sun Life Assurance
Company of Canada (U.S.), have reviewed this Amendment to the Registration
Statement 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, which is being filed pursuant to
paragraph (b) of Rule 485 under the Securities Act of 1933. Based on my
review of this Post-effective Amendment and such other material relating to
the operations of the Account as I deemed relevant, I hereby certify as of
May 1, 1996, the date of filing of this Amendment, that the Amendment does
not contain disclosure which would render it ineligible to become effective
pursuant to paragraph (b) of Rule 485.
I hereby consent to the filing of this certification as part of this
Amendment to the Registration Statement of the Accounts.
DAVID D. HORN, ESQ.
May 1, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MONEY MARKET VARIABLE ACCOUNT COMPASS 2 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 01
<NAME> MONEY MARKET VARIABLE ACCOUNT COMPASS 2
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 164711028
<INVESTMENTS-AT-VALUE> 164711028
<RECEIVABLES> 1586411
<ASSETS-OTHER> 2339
<OTHER-ITEMS-ASSETS> 2128977
<TOTAL-ASSETS> 168428755
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 452848
<TOTAL-LIABILITIES> 452848
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 170282943
<SHARES-COMMON-STOCK> 6500586
<SHARES-COMMON-PRIOR> 6581492
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 170282943
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 10326891
<OTHER-INCOME> 0
<EXPENSES-NET> 3321359
<NET-INVESTMENT-INCOME> 7005532
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 7005532
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 9312568
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1386978
<NUMBER-OF-SHARES-REDEEMED> 1737884
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 2472857
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 2333907
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 878426
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3323850
<AVERAGE-NET-ASSETS> 175211260
<PER-SHARE-NAV-BEGIN> 15.87
<PER-SHARE-NII> 0.65
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 16.52
<EXPENSE-RATIO> 0.58
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HIGH YIELD VARIABLE ACCOUNT COMPASS 2 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 02
<NAME> HIGH YIELD VARIABLE ACCOUNT COMPASS 2
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 196914962
<INVESTMENTS-AT-VALUE> 195987225
<RECEIVABLES> 6690258
<ASSETS-OTHER> 19377
<OTHER-ITEMS-ASSETS> 211317
<TOTAL-ASSETS> 202908177
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1382736
<TOTAL-LIABILITIES> 1382736
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 5649207
<SHARES-COMMON-PRIOR> 6443028
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 926985
<NET-ASSETS> 201525441
<DIVIDEND-INCOME> 13
<INTEREST-INCOME> 19666661
<OTHER-INCOME> 0
<EXPENSES-NET> 4235858
<NET-INVESTMENT-INCOME> 15430816
<REALIZED-GAINS-CURRENT> (8850139)
<APPREC-INCREASE-CURRENT> 21176832
<NET-CHANGE-FROM-OPS> 27757509
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 106669
<NUMBER-OF-SHARES-REDEEMED> 900490
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 11057716
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1467065
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4237225
<AVERAGE-NET-ASSETS> 195081781
<PER-SHARE-NAV-BEGIN> 22.68
<PER-SHARE-NII> 1.98
<PER-SHARE-GAIN-APPREC> 1.49
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 26.15
<EXPENSE-RATIO> 0.88
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF CAPITAL APPRECIATION VARIABLE ACCOUNT COMPASS 2 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 03
<NAME> CAPITAL APPRECIATION VARIABLE ACCOUNT COMPASS 2
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 397325994
<INVESTMENTS-AT-VALUE> 501892854
<RECEIVABLES> 3918080
<ASSETS-OTHER> 11550
<OTHER-ITEMS-ASSETS> 33263
<TOTAL-ASSETS> 505855747
<PAYABLE-FOR-SECURITIES> 3366507
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3271707
<TOTAL-LIABILITIES> 6638214
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 49452555
<SHARES-COMMON-STOCK> 8367931
<SHARES-COMMON-PRIOR> 9320986
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 104509530
<NET-ASSETS> 499217533
<DIVIDEND-INCOME> 4273714
<INTEREST-INCOME> 710836
<OTHER-INCOME> 0
<EXPENSES-NET> 9723310
<NET-INVESTMENT-INCOME> (4738760)
<REALIZED-GAINS-CURRENT> 70307227
<APPREC-INCREASE-CURRENT> 70402879
<NET-CHANGE-FROM-OPS> 135971346
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2941022
<NUMBER-OF-SHARES-REDEEMED> 3894077
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 91437346
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3366566
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 9729044
<AVERAGE-NET-ASSETS> 464074586
<PER-SHARE-NAV-BEGIN> 28.01
<PER-SHARE-NII> 0.34
<PER-SHARE-GAIN-APPREC> 10.05
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 37.72
<EXPENSE-RATIO> 0.80
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONATAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF GOVERNMENT SECURITIES VARIABLE ACCOUNT COMPASS 2 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 04
<NAME> GOVERNMENT SECURITIES VARIABLE ACCOUNT COMPASS 2
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 234312574
<INVESTMENTS-AT-VALUE> 253773171
<RECEIVABLES> 4763350
<ASSETS-OTHER> 4094
<OTHER-ITEMS-ASSETS> 49857
<TOTAL-ASSETS> 258590472
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1357635
<TOTAL-LIABILITIES> 1357635
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 74663889
<SHARES-COMMON-STOCK> 8361288
<SHARES-COMMON-PRIOR> 11307674
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 19460597
<NET-ASSETS> 55203292
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 20337507
<OTHER-INCOME> 0
<EXPENSES-NET> 5248421
<NET-INVESTMENT-INCOME> 15089086
<REALIZED-GAINS-CURRENT> (1545838)
<APPREC-INCREASE-CURRENT> 27975267
<NET-CHANGE-FROM-OPS> 41518515
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 141651
<NUMBER-OF-SHARES-REDEEMED> 3088037
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 39317542
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1510782
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5252229
<AVERAGE-NET-ASSETS> 273946636
<PER-SHARE-NAV-BEGIN> 22.00
<PER-SHARE-NII> 1.33
<PER-SHARE-GAIN-APPREC> 2.25
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 25.58
<EXPENSE-RATIO> 0.63
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF WORLD GOVERNMENTS VARIABLE ACCOUNT COMPASS 2 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 05
<NAME> WORLD GOVERNMENTS VARIABLE ACCOUNT COMPASS 2
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 36082818
<INVESTMENTS-AT-VALUE> 36826023
<RECEIVABLES> 1480238
<ASSETS-OTHER> 503
<OTHER-ITEMS-ASSETS> 152468
<TOTAL-ASSETS> 38459232
<PAYABLE-FOR-SECURITIES> 537481
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1205909
<TOTAL-LIABILITIES> 1743390
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 824064
<SHARES-COMMON-PRIOR> 983341
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 743205
<NET-ASSETS> 36715845
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2828432
<OTHER-INCOME> 0
<EXPENSES-NET> 862965
<NET-INVESTMENT-INCOME> 1965467
<REALIZED-GAINS-CURRENT> 1671899
<APPREC-INCREASE-CURRENT> 1327112
<NET-CHANGE-FROM-OPS> 4964479
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 19660
<NUMBER-OF-SHARES-REDEEMED> 178937
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 337824
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 281714
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 865943
<AVERAGE-NET-ASSETS> 37460661
<PER-SHARE-NAV-BEGIN> 15.83
<PER-SHARE-NII> 0.93
<PER-SHARE-GAIN-APPREC> 1.35
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 18.11
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF TOTAL RETURN VARIABLE ACCOUNT COMPASS 2 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 06
<NAME> TOTAL RETURN VARIABLE ACCOUNT COMPASS 2
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 221937118
<INVESTMENTS-AT-VALUE> 264883088
<RECEIVABLES> 8678539
<ASSETS-OTHER> 3086
<OTHER-ITEMS-ASSETS> 115047
<TOTAL-ASSETS> 273680760
<PAYABLE-FOR-SECURITIES> 4597219
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3243181
<TOTAL-LIABILITIES> 7840400
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 129609833
<SHARES-COMMON-STOCK> 4800530
<SHARES-COMMON-PRIOR> 5409930
<ACCUMULATED-NII-CURRENT> 52365312
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 40919113
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 42946102
<NET-ASSETS> 265840360
<DIVIDEND-INCOME> 5059123
<INTEREST-INCOME> 7469511
<OTHER-INCOME> (38895)
<EXPENSES-NET> 5195517
<NET-INVESTMENT-INCOME> 7294222
<REALIZED-GAINS-CURRENT> 26520304
<APPREC-INCREASE-CURRENT> 24711044
<NET-CHANGE-FROM-OPS> 58525570
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 279239
<NUMBER-OF-SHARES-REDEEMED> 888639
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 42091664
<ACCUMULATED-NII-PRIOR> 42045094
<ACCUMULATED-GAINS-PRIOR> 14398807
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1834114
<INTEREST-EXPENSE> 2991881
<GROSS-EXPENSE> 5212140
<AVERAGE-NET-ASSETS> 243890508
<PER-SHARE-NAV-BEGIN> 17.47
<PER-SHARE-NII> 0.63
<PER-SHARE-GAIN-APPREC> 4.16
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 22.26
<EXPENSE-RATIO> 0.83
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MANAGED SECTORS VARIABLE ACCOUNT COMPASS 2 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 07
<NAME> MANAGED SECTORS VARIABLE ACCOUNT COMPASS 2
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 74616778
<INVESTMENTS-AT-VALUE> 82156252
<RECEIVABLES> 1902222
<ASSETS-OTHER> 1793
<OTHER-ITEMS-ASSETS> 15690
<TOTAL-ASSETS> 84075957
<PAYABLE-FOR-SECURITIES> 359960
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 769980
<TOTAL-LIABILITIES> 1129940
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 40301787
<SHARES-COMMON-STOCK> 787602
<SHARES-COMMON-PRIOR> 800068
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 7537917
<NET-ASSETS> 47839714
<DIVIDEND-INCOME> 723089
<INTEREST-INCOME> 134719
<OTHER-INCOME> 0
<EXPENSES-NET> 1666740
<NET-INVESTMENT-INCOME> (808932)
<REALIZED-GAINS-CURRENT> 15458345
<APPREC-INCREASE-CURRENT> 5160197
<NET-CHANGE-FROM-OPS> 19809610
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 128747
<NUMBER-OF-SHARES-REDEEMED> 141213
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 20642650
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 569227
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1668491
<AVERAGE-NET-ASSETS> 75692718
<PER-SHARE-NAV-BEGIN> 23.90
<PER-SHARE-NII> 0.28
<PER-SHARE-GAIN-APPREC> 7.76
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 31.38
<EXPENSE-RATIO> 0.87
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
