<PAGE>
RULE 497(e)
REG. NO. 33-41628
SUPPLEMENT DATED DECEMBER 9, 1998 TO PROSPECTUS DATED MAY 1, 1998
FUTURITY II
VARIABLE AND FIXED ANNUITY
----------------------------------------------------------------------
The flexible payment deferred annuity contracts (the "Contracts") offered by
this Prospectus are designed for use in connection with retirement and deferred
compensation plans, some of which may qualify as retirement programs under
Sections 401, 403, 408, or 408A of the Internal Revenue Code of 1986, as amended
(the "Code"). The Contracts are issued on either a group or individual basis by
Sun Life Assurance Company of Canada (U.S.) (the "Company"), an indirect
wholly-owned subsidiary of Sun Life Assurance Company of Canada, having its
Principal Executive Offices at One Sun Life Executive Park, Wellesley Hills,
Massachusetts 02481, telephone (781) 237-6030. The Contracts provide that
annuity payments will begin on a selected future date. The Contracts provide for
the accumulation of values on either a variable basis, a fixed basis, or a fixed
and variable basis and provide for fixed and variable annuity payments as
elected. In some states, individual Contracts may be made available on a
variable basis only.
The issuance of an individual Contract ("Individual Contract") will be
evidenced by the Contract. Participation in a group Contract ("Group Contract")
will be evidenced by the issuance of a certificate ("Certificate") describing
the participating individual's interest under the Group Contract. Unless
otherwise expressly indicated, references in this Prospectus to "Contracts"
include Individual Contracts, Group Contracts and Certificates issued under
Group Contracts, and references to "Participants" include Individual Contract
Owners and participating individuals under Group Contracts.
The initial Purchase Payment for each Contract must be at least $10,000 and
each additional Purchase Payment must be at least $1,000, unless waived by the
Company. The prior approval of the Company is required before it will accept a
Purchase Payment in excess of $1,000,000.
A Participant may elect to have values under the Contract accumulate on a
fixed basis in the Fixed Account, which pays interest at the applicable
Guaranteed Interest Rate(s) for the duration of the particular Guarantee
Period(s) selected by the Participant, or on a variable basis in Sun Life of
Canada (U.S.) Variable Account F (the "Variable Account"), a separate account of
the Company, or may elect to divide such values between the Fixed Account and
the Variable Account. The assets of the Variable Account are divided into
Sub-Accounts. Each Sub-Account uses its assets to purchase, at their net asset
value, shares of the following mutual funds or series thereof (the "Funds"):
<TABLE>
<S> <C>
AIM VARIABLE INSURANCE FUNDS, INC. MFS/SUN LIFE SERIES TRUST
V.I. Capital Appreciation Fund Capital Appreciation Series
V.I. Growth Fund Emerging Growth Series
V.I. Growth and Income Fund Government Securities Series
V.I. International Equity Fund High Yield Series
Utilities Series
THE ALGER AMERICAN FUND
Growth Portfolio OCC ACCUMULATION TRUST
Income and Growth Portfolio Equity Portfolio
Small Capitalization Portfolio Managed Portfolio
Mid Cap Portfolio
GOLDMAN SACHS VARIABLE INSURANCE TRUST Small Cap Portfolio
CORE Large Cap Growth Fund
CORE Small Cap Equity Fund SUN CAPITAL ADVISERS TRUST
CORE U.S. Equity Fund Sun Capital Investment Grade Bond Fund
Growth and Income Fund Sun Capital Money Market Fund
International Equity Fund Sun Capital Real Estate Fund
J.P. MORGAN SERIES TRUST II WARBURG PINCUS TRUST
Equity Portfolio Emerging Markets Portfolio
International Opportunities Portfolio International Equity Portfolio
Small Company Portfolio Post-Venture Capital Portfolio
Small Company Growth Portfolio
LORD ABBETT SERIES FUND, INC.
Growth and Income Portfolio
</TABLE>
(CONTINUED ON NEXT PAGE)
THE CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY,
ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
YOU SHOULD RETAIN THIS PROSPECTUS AND THE CURRENT PROSPECTUSES FOR THE FUNDS FOR
FUTURE REFERENCE.
<PAGE>
*ANY REFERENCE IN THIS PROSPECTUS TO RECEIPT BY THE COMPANY MEANS RECEIPT AT ITS
ANNUITY SERVICE MAILING ADDRESS, C/O SUN LIFE ASSURANCE COMPANY OF CANADA
(U.S.), RETIREMENT PRODUCTS AND SERVICES, P.O. BOX 9133, BOSTON, MASSACHUSETTS
02117.
2
<PAGE>
Each Fund pays its investment adviser certain fees charged against the
assets of each series. The value of the variable portion, if any, of a
Participant's Account and the amount of variable annuity payments will vary to
reflect the investment performance of the series of the Fund selected by the
Participant and the deduction of the Contract charges described under "How the
Contract Charges Are Assessed" on page 29. For more information about the Funds,
see "The Funds" on page 16 and the accompanying Fund prospectuses.
If the Participant elects to have values accumulated on a fixed basis,
Purchase Payments are allocated to one or more Guarantee Periods made available
by the Company in connection with the Fixed Account with durations of up to ten
years, as selected by the Participant. The Fixed Account is the general account
of the Company (See "The Fixed Account," page 13). The Company will credit
interest at a rate of not less than three percent (3%) per year, compounded
annually, to amounts allocated to the Fixed Account and guarantees these amounts
at various interest rates (the "Guaranteed Interest Rates") for the duration of
the Guarantee Period elected by the Participant, subject to the imposition of
any applicable withdrawal charge, Market Value Adjustment, or account
administration fee. The Company may not change a Guaranteed Interest Rate for
the duration of the Guarantee Period; however, Guaranteed Interest Rates
applicable to subsequent Guarantee Periods cannot be predicted and will be
determined at the sole discretion of the Company (subject to the minimum
guarantee). That part of the Contract relating to the Fixed Account is
registered under the Securities Act of 1933, but the Fixed Account is not
subject to the restrictions of the Investment Company Act of 1940.
The Company does not deduct a sales charge from Purchase Payments. However,
if any part of a Participant's Account is withdrawn, a withdrawal charge
(contingent deferred sales charge) may be assessed by the Company. This charge
is intended to reimburse the Company for expenses relating to the distribution
of the Contracts. A portion (specified in the applicable Contract) of the
Participant's Account Value may be withdrawn in each Account Year without the
imposition of a withdrawal charge, and after a Purchase Payment has been held by
the Company for seven years it may be withdrawn without charge. Also, no
withdrawal charge is assessed upon annuitization or upon transfers. Other
amounts withdrawn, adjusted by any applicable Market Value Adjustment with
respect to the Fixed Account, will be subject to a withdrawal charge ranging
from 6% to 0%. In no event will the withdrawal charges assessed against a
Participant's Account exceed 6% of Purchase Payments (See "Withdrawal Charges,"
page 24).
In addition, any cash withdrawal of amounts allocated to the Fixed Account,
other than a withdrawal effective within 30 days prior to the Expiration Date of
the applicable Guarantee Period or the withdrawal of interest credited to a
Guarantee Amount during the current Account Year, will be subject to a Market
Value Adjustment. The Market Value Adjustment will reflect the relationship
between the Current Rate (which is the Guaranteed Interest Rate currently
declared by the Company for Guarantee Periods equal to the balance of the
Guarantee Period applicable to the amount being withdrawn) and the Guaranteed
Interest Rate applicable to the amount being withdrawn. Generally, if the
Guaranteed Interest Rate is lower than the Current Rate, then the application of
the Market Value Adjustment will result in a lower payment upon withdrawal.
Similarly, if the Guaranteed Interest Rate is higher than the Current Rate, the
application of the Market Value Adjustment will result in a higher payment upon
withdrawal (See "Market Value Adjustment," page 26).
The Company reserves the right to defer the payment of amounts withdrawn
from the Fixed Account for a period not to exceed six months from the date
written request for such withdrawal is received by the Company.
Special restrictions on withdrawals apply to Contracts used in connection
with Tax Sheltered Annuities established pursuant to Section 403(b) of the Code
(See "Section 403(b) Annuities," page 26).
In addition, under certain circumstances withdrawals may result in tax
penalties (See "Federal Tax Status," page 37). For a discussion of cash
withdrawals, withdrawal charges and the Market Value Adjustment see "Cash
Withdrawals, Withdrawal Charges and Market Value Adjustment," beginning on page
23.
On each Account Anniversary and upon surrender of a Contract for full value
the Company will deduct an annual account administration fee ("Account Fee")
from the Participant's Account. The amount of this fee
3
<PAGE>
is $35 in Account Years one through five; thereafter, it may be changed
annually, subject to a maximum of $50. After the Annuity Commencement Date an
Account Fee of $35 will be deducted on an equal basis from each variable annuity
payment made during the year. In addition, the Company makes a deduction from
the Variable Account at the end of each Valuation Period equal to an annual rate
of 0.15% of the daily net assets of the Variable Account. These charges are to
reimburse the Company for administrative expenses related to the issuance and
maintenance of the Contracts. The Account Fee may be waived by the Company under
certain circumstances (See "Administrative Charges," page 29).
The Company also deducts a mortality and expense risk charge at the end of
each Valuation Period equal to an annual rate of 1.25% of the daily net assets
of the Variable Account for mortality and expense risks assumed by the Company
(See "Mortality and Expense Risk Charge," on page 29).
In addition, the Group Contracts provide that the Company may change the
withdrawal charges, Account Fee, mortality and expense risk charges,
administrative expense charges, transfer charges, the tables used in determining
the amount of the first monthly variable annuity payment and fixed annuity
payments and the formula used to calculate the Market Value Adjustment, provided
that such modification shall apply only with respect to Participant's Accounts
established after the effective date of such modification (See "Modification,"
page 36).
In the event of the death of the Participant prior to the Annuity
Commencement Date, the Company will pay a death benefit to the Beneficiary. In
the event of the death of the Annuitant on or after the Annuity Commencement
Date, no death benefit will be payable except as may be provided under the
Annuity Option elected (See "Death Benefit," page 27).
Annuity Payments will begin on the Annuity Commencement Date. The
Participant selects the Annuity Commencement Date, frequency of payments and the
Annuity Option (See "Annuity Provisions," page 30).
Premium taxes payable to any governmental entity will be deducted from the
Participant's Account (See "Premium Taxes," page 29).
Subject to certain conditions and during the Accumulation Period, a
Participant may transfer amounts among the Sub-Accounts or Guarantee Periods
available under the Contract. Currently there is no charge for transfers.
Transfers (except of interest credited during the current Account Year to the
Guarantee Amount transferred) from or within the Fixed Account will be subject
to the Market Value Adjustment unless the transfer is effective within 30 days
prior to the Expiration Date of the amount transferred and other restrictions
may apply (See "Transfer Privilege; Telephone Transfers; Restriction on Market
Timers," page 22).
After the Annuity Commencement Date, the Payee may, subject to certain
restrictions, exchange the value of a designated number of Annuity Units of
particular Sub-Accounts then credited with respect to the particular Payee for
other Annuity Units, the value of which would be such that the dollar amount of
an annuity payment made on the date of the exchange would be unaffected by the
fact of the exchange (See "Exchange of Variable Annuity Units," page 33).
The Company will vote Fund shares held by the Sub-Accounts at meetings of
shareholders of the Funds or in connection with similar solicitations, but will
follow voting instructions received from persons having the right to give voting
instructions. Except in the case of a particular Group Contract where the right
to give voting instructions is reserved by the Owner, the Owner or Participant
is the person having the right to give voting instructions prior to the Annuity
Commencement Date. On or after the Annuity Commencement Date the Payee is the
person having such voting rights. Any shares attributable to the Company and
Fund shares for which no timely voting instructions are received will be voted
by the Company in the same proportion as the shares for which instructions are
received from persons having such right (See "Voting of Fund Shares," page 34).
The Company will furnish Participants and such other persons having voting
rights with certain reports and statements described under "Periodic Reports" on
page 35. Such reports, other than prospectuses, will not include the Company's
financial statements.
4
<PAGE>
If a Participant 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 Participant. When the Company receives the returned Contract it
will be canceled and the Participant's Account Value at the end of the Valuation
Period during which the Contract was received by the Company will be refunded.
However, if applicable state or federal law so requires, the full amount of any
Purchase Payment received by the Company will be refunded, the "free look"
period may be greater than ten days and alternative methods of returning the
Contract may be acceptable.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "1934 Act"), as amended, and in accordance therewith
files reports and other information with the Securities and Exchange Commission
(the "Commission"). Such reports and other information can be inspected and
copied at the public reference facilities of the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. and at the Commission's Regional Offices
located at 75 Park Place, New York, New York and Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois. Copies of such materials
also can be obtained from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
maintains a Web Site that contains reports, proxy and information statements,
and other information about the Company, which files documents electronically
with the Commission at the following address: http://www.sec.gov.
The Company has filed registration statements (the "Registration
Statements") with the Commission under the Securities Act of 1933 relating to
the Contracts offered by this Prospectus. This Prospectus has been filed as a
part of the Registration Statements and does not contain all of the information
set forth in the Registration Statements and exhibits thereto, and reference is
hereby made to such Registration Statements and exhibits for further information
relating to the Company and the Contracts. The Registration Statements and the
exhibits thereto may be inspected and copied, and copies can be obtained at
prescribed rates, in the manner set forth in the preceding paragraph.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Annual Report on Form 10-K for the year ended December 31, 1997 and the
Current Report on Form 8-K dated January 8, 1998, heretofore filed by the
Company with the Commission under the 1934 Act, are incorporated by reference in
this Prospectus.
Any statement contained in a document incorporated herein by reference shall
be deemed modified or superseded hereby to the extent that a statement contained
in a later-filed document or herein shall modify or supersede such statement.
Any statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
The Company will furnish, without charge, to each person to whom a copy of
this Prospectus is delivered, upon the written or oral request of such person, a
copy of the documents referred to above which have been incorporated by
reference in this Prospectus, other than exhibits to such documents (unless such
exhibits are specifically incorporated by reference in this Prospectus).
Requests for such documents should be directed to the Secretary, Sun Life
Assurance Company of Canada (U.S.), One Sun Life Executive Park, Wellesley
Hills, Massachusetts 02481, telephone (800) 225-3950.
5
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Definitions 7
Expense Summary 9
Performance Data 12
This Prospectus Is a Catalog of Facts 12
Uses of the Contracts 12
A Word About the Company, the Fixed Account, the Variable
Account and the Funds 13
The Company 13
The Fixed Account 13
The Variable Account 15
The Funds 16
Purchase Payments and Contract Values During Accumulation
Period 19
Purchase Payments 19
Participant's Account 19
Variable Accumulation Value 19
Fixed Accumulation Value 20
Guarantee Periods 20
Guaranteed Interest Rates 21
Dollar Cost Averaging 21
Asset Allocation 22
Transfer Privilege; Telephone Transfers; Restriction on
Market Timers 22
Waivers; Reduced Charges; Credits; Bonus Guaranteed
Interest Rates 23
Cash Withdrawals, Withdrawal Charges and Market Value
Adjustment 23
Cash Withdrawals 23
Withdrawal Charges 24
Amount of Withdrawal Charge 25
Section 403(b) Annuities 26
Market Value Adjustment 26
Death Benefit 27
Death Benefit Provided by the Contracts 27
Election and Effective Date of Election 27
Payment of Death Benefit 27
Amount of Death Benefit 28
How the Contract Charges Are Assessed 29
Administrative Charges 29
Premium Taxes 29
Mortality and Expense Risk Charge 29
Withdrawal Charges 30
Annuity Provisions 30
Annuity Commencement Date 30
Election -- Change of Annuity Option 31
Annuity Options 31
Determination of Annuity Payments 32
Fixed Annuity Payments 32
Variable Annuity Payments 32
Variable Annuity Unit Value 33
Exchange of Variable Annuity Units 33
Annuity Payment Rates 33
</TABLE>
5
<PAGE>
TABLE OF CONTENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C>
Other Contract Provisions 33
Payment Limits 33
Designation and Change of Beneficiary 34
Exercise of Contract Rights 34
Change of Ownership 34
Voting of Fund Shares 34
Periodic Reports 35
Substituted Securities 35
Change in Operation of Variable Account 36
Splitting Units 36
Modification 36
Discontinuance of New Participants 36
Custodian 36
Right to Return 37
Federal Tax Status 37
Introduction 37
Tax Treatment of the Company and the Variable Account 37
Taxation of Annuities in General 38
Qualified Retirement Plans 39
Pension and Profit-Sharing Plans 40
Tax-Sheltered Annuities 40
Individual Retirement Accounts 40
Roth IRAs 40
Administration of the Contracts 40
Distribution of the Contracts 41
Additional Information About the Company 42
Selected Financial Data 42
Management's Discussion and Analysis of Financial
Condition and Results of Operations 42
Liquidity 45
Year 2000 Compliance 45
Recent Reorganization 45
Asset/Liability Management and Information about Market
Risk 46
Sun Life (Canada) 47
Reinsurance 47
Reserves 47
Investments 47
Competition 48
Employees 48
Properties 48
The Company's Directors and Executive Officers 48
State Regulation 51
Legal Proceedings 52
Accountants 52
Registration Statements 52
Financial Statements 52
Appendix A -- Variable Accumulation Unit Value, Variable
Annuity Unit Value and Variable Annuity Payment
Calculations 73
Appendix B -- Withdrawals, Withdrawal Charges and the Market
Value Adjustment 74
Appendix C -- Calculation of Performance Data 77
</TABLE>
6
<PAGE>
DEFINITIONS
The following terms as used in this Prospectus have the indicated meanings:
ACCOUNT YEARS and ACCOUNT ANNIVERSARIES: The first Account Year shall be
the period of 12 months plus a part of a month as measured from the Date of
Coverage for each Participant through the last day of the calendar month of
coverage. All Account Years and Account Anniversaries thereafter shall be 12
month periods based upon such first day of the calendar month which follows the
calendar month of coverage. If, for example, the Date of Coverage is in March,
the first Account Year will be determined from the Date of Coverage but will end
on the last day of March in the following year; all other Account Years and all
Account Anniversaries will be measured from April 1.
ACCUMULATION PERIOD: The period before the Annuity Commencement Date and
during the lifetime of the Annuitant.
ANNUITANT: The person or persons named on the Contract Specifications page
or Certificate Specifications page, as applicable, and on whose life the first
annuity payment is to be made. If the Annuitant dies prior to the Annuity
Commencement Date, the new Annuitant will be the Co-Annuitant, if any. If the
Co-Annuitant dies or if no Co-Annuitant is named, the Participant becomes the
Annuitant upon the Annuitant's death prior to the Annuity Commencement Date. The
Participant may not designate a "Co-Annuitant" unless the Participant and
Annuitant are different persons. The Participant is not permitted to name a "Co-
Annuitant" under a Qualified Contract.
*ANNUITY COMMENCEMENT DATE: The date on which the first annuity payment
under each Contract is to be made.
*ANNUITY OPTION: The method for making annuity payments.
ANNUITY UNIT: A unit of measure used in the calculation of the amount of
the second and each subsequent variable annuity payment from the Variable
Account.
APPLICATION: The document signed by each Participant that serves as his or
her application for participation under a Group Contract or purchase of an
Individual Contract.
*BENEFICIARY: Prior to the Annuity Commencement Date, the person or entity
having the right to receive the death benefit set forth in each Contract and,
for Non-Qualified Contracts, who, in the event of the Participant's death, is
the "designated beneficiary" for purposes of Section 72(s) of the Code. After
the Annuity Commencement Date, the person or entity having the right to receive
any payments due under the Annuity Option elected, if applicable, upon the death
of the Payee.
CERTIFICATE: The document for each Participant which evidences the coverage
of the Participant under a Group Contract. Unless otherwise expressly indicated,
references in this Prospectus to "Contracts" include Certificates.
CODE: Internal Revenue Code of 1986, as amended.
COMPANY: Sun Life Assurance Company of Canada (U.S.).
CONTRACT APPLICATION: The document signed by the Owner that evidences the
Owner's application for a Group Contract.
DATE OF COVERAGE: The date on which a Participant's Account becomes
effective.
DEATH BENEFIT DATE: The date on which the death benefit election is
effective or is deemed to become effective, which is the date on which the
Company receives Due Proof of Death.
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: Part of the general account of the Company, consisting of
all assets of the Company other than those allocated to a separate account of
the Company.
FIXED ANNUITY: An annuity with payments which do not vary as to dollar
amount.
FUND: A registered management investment company, or series thereof, in
which the assets of a Sub-Account may be invested.
GROUP CONTRACT: A Contract issued by the Company on a group basis.
- ------------------------
*As specified on the Contract Specifications page or Certificate Specifications
page, unless changed.
7
<PAGE>
GUARANTEE AMOUNT: Any portion of a Participant's Account Value allocated to
a particular Guarantee Period with a particular Expiration Date (including
interest earned thereon).
GUARANTEE PERIOD: The period for which a Guaranteed Interest Rate is
credited.
GUARANTEED INTEREST RATE: The rate of interest credited by the Company on a
compound annual basis during any Guarantee Period.
INDIVIDUAL CONTRACT: A Contract issued by the Company on an individual
basis.
ISSUE DATE: The date on which a Group Contract becomes effective.
NON-QUALIFIED CONTRACT: A Contract used in connection with a retirement
plan which does not receive favorable federal income tax treatment under
Sections 401, 403, 408, or 408A of the Code. The Participant's interest in the
Contract must be owned by a natural person or agent for a natural person for the
Contract to receive favorable income tax treatment as an annuity.
OWNER: The person, persons or entity entitled to the ownership rights
stated in a Group Contract and in whose name or names the Group Contract is
issued. The Owner may designate a trustee or custodian of a retirement plan
which meets the requirements of Section 401, Section 408(c), Section 408(k),
Section 408(p) or Section 408A of the Code to serve as legal owner of assets of
a retirement plan, but the term "Owner", as used herein, shall refer to the
organization entering into the Group Contract.
PARTICIPANT: In the case of an Individual Contract, the owner of the
Contract. In the case of a Group Contract, the person named in the Contract who
is entitled to exercise all rights and privileges of ownership under the
Contract, except as reserved by the Owner.
PARTICIPANT'S ACCOUNT: An account established for each Participant to which
Net Purchase Payments are credited.
PARTICIPANT'S ACCOUNT VALUE: The Variable Accumulation Value, if any, plus
the Fixed Accumulation Value, if any, of a Participant's Account for any
Valuation Period.
PAYEE: A recipient of payments under a Contract. The term includes an
Annuitant or a Beneficiary who becomes entitled to benefits upon the death of
the Participant.
PURCHASE PAYMENT (PAYMENT): An amount paid to the Company as consideration
for the benefits provided by a Contract.
QUALIFIED CONTRACT: A Contract used in connection with a retirement plan
which may receive favorable federal income tax treatment under Sections 401,
403, 408 or 408A of the Code.
RECEIPT: Receipt by the Company at its Annuity Service Mailing Address
shown on the cover of this Prospectus.
SEVEN YEAR ANNIVERSARY: The seventh Account Anniversary and each succeeding
Account Anniversary occurring at any seven year interval thereafter; for
example, the 14th, 21st and 28th Account Anniversaries.
SUB-ACCOUNT: That portion of the Variable Account which invests in shares
of a specific series or sub-series of the Series Fund.
VALUATION PERIOD: The period of time from one determination of Variable
Accumulation Unit and Annuity Unit values to the next subsequent determination
of these values. Such determination shall be made as of the close of the New
York Stock Exchange on each day that the Exchange is open for trading.
VARIABLE ACCOUNT: A separate account of the Company consisting of assets
set aside by the Company, the investment performance of which is kept separate
from that of the general assets of the Company.
VARIABLE ACCUMULATION UNIT: A unit of measure used in the calculation of
the value of the variable portion of a Participant's Account.
VARIABLE ANNUITY: An annuity with payments which vary as to dollar amount
in relation to the investment performance of specified Sub-Accounts of the
Variable Account.
8
<PAGE>
EXPENSE SUMMARY
The purpose of the following table and Examples is to help Participants and
prospective purchasers to understand the costs and expenses that are borne,
directly and indirectly, by Participants WHEN PAYMENTS ARE ALLOCATED TO THE
VARIABLE ACCOUNT. The tables reflect expenses of the Variable Account as well as
of the Funds. The information set forth should be considered together with the
narrative provided under the heading "How the Contract Charges Are Assessed" in
this Prospectus, and with each Fund's prospectus. In addition to the expenses
listed below, premium taxes may be applicable.
SUMMARY OF CONTRACT EXPENSES
<TABLE>
<CAPTION>
PARTICIPANT TRANSACTION EXPENSES
<S> <C>
Sales Load Imposed on Purchases......... $ 0
Deferred Sales Load (as a percentage of
Purchase Payments
withdrawn) (1)
Number of Complete Account Years
Purchase Payment in Account
0-1................................. 6%
2-3................................. 5%
4-5................................. 4%
6................................... 3%
7 or more........................... 0%
Exchange fee (2)........................ $ 0
ANNUAL ACCOUNT FEE Per Participant's
Account (3)........................... $35
SEPARATE ACCOUNT ANNUAL EXPENSES (as a
percentage of average separate account
assets)
Mortality and Expense Risk Fees......... 1.25%
Administrative Expense Charge........... 0.15%
Other Fees and Expenses of the Separate
Account............................... 0.00%
Total Separate Account Annual
Expenses.............................. 1.40%
</TABLE>
- ------------
(1) A portion of the Participant's Account may be withdrawn each year without
imposition of any withdrawal charge, and after a Purchase Payment has been
held by the Company for seven years it may be withdrawn free of any
withdrawal charge.
(2) A Market Value Adjustment may be imposed on amounts transferred from or
within the Fixed Account.
(3) The Annual Account Fee is the lesser of $35 and 2% of the Participant's
Account Value in Account Years one through five; thereafter, the fee may be
changed annually, but it may not exceed the lesser of $50 and 2% of the
Participant's Account Value.
UNDERLYING FUND ANNUAL EXPENSES (1)
(AS A PERCENTAGE OF UNDERLYING FUND AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
TOTAL FUND
MANAGEMENT OTHER ANNUAL
FEES 12B-1 FEES EXPENSES EXPENSES
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
AIM V.I. Capital Appreciation Fund
(2)................................... 0.63 % 0.05 % 0.68 %
AIM V.I. Growth Fund (2)................ 0.65 % 0.08 % 0.73 %
AIM V.I. Growth and Income Fund (2)..... 0.63 % 0.06 % 0.69 %
AIM V.I. International Equity Fund
(2)................................... 0.75 % 0.18 % 0.93 %
Alger American Growth Portfolio......... 0.75 % 0.04 % 0.79 %
Alger American Income and Growth
Portfolio............................. 0.62 % 0.12 % 0.74 %
Alger American Small Capitalization
Portfolio............................. 0.85 % 0.04 % 0.89 %
Goldman Sachs CORE Large Cap Growth Fund
(3)................................... 0.70 % 0.10 % 0.80 %
Goldman Sachs CORE Small Cap Equity Fund
(3)................................... 0.75 % 0.15 % 0.90 %
Goldman Sachs CORE U.S. Equity Fund
(3)................................... 0.70 % 0.10 % 0.80 %
Goldman Sachs Growth and Income Fund
(3)................................... 0.75 % 0.15 % 0.90 %
Goldman Sachs International Equity Fund
(3)................................... 1.00 % 0.25 % 1.25 %
J.P. Morgan Equity Portfolio (4)........ 0.40 % 0.50 % 0.90 %
J.P. Morgan International Opportunities
Portfolio (4)......................... 0.60 % 0.60 % 1.20 %
J.P. Morgan Small Company Portfolio
(4)................................... 0.60 % 0.55 % 1.15 %
Lord Abbett Growth and Income Portfolio
(5)................................... 0.50 % 0.15% 0.02 % 0.67 %
MFS/Sun Life Capital Appreciation
Series................................ 0.73 % 0.05 % 0.78 %
MFS/Sun Life Emerging Growth Series..... 0.73 % 0.08 % 0.81 %
MFS/Sun Life Government Securities
Series................................ 0.55 % 0.08 % 0.63 %
MFS/Sun Life High Yield Series.......... 0.75 % 0.09 % 0.84 %
MFS/Sun Life Utilities Series........... 0.75 % 0.11 % 0.86 %
OCC Equity Portfolio (4)................ 0.80 % 0.19 % 0.99 %
OCC Managed Portfolio................... 0.80 % 0.07 % 0.87 %
OCC Mid Cap Portfolio (3)............... 0.65 % 0.35 % 1.00 %
OCC Small Cap Portfolio (4)............. 0.80 % 0.17 % 0.97 %
Sun Capital Investment Grade Bond Fund
(3)................................... 0.60 % 0.15 % 0.75 %
Sun Capital Money Market Fund (3)....... 0.50 % 0.15 % 0.65 %
Sun Capital Real Estate Fund (3)........ 0.95 % 0.30 % 1.25 %
Warburg Pincus Emerging Markets
Portfolio (3)......................... 0.81 % 0.59 % 1.40 %
Warburg Pincus International Equity
Portfolio (4)......................... 1.00 % 0.36 % 1.36 %
Warburg Pincus Post-Venture Capital
Portfolio (4)......................... 1.07 % 0.33 % 1.40 %
Warburg Pincus Small Company Growth
Portfolio (4)......................... 0.90 % 0.25 % 1.15 %
</TABLE>
- ---------
(1) Unless otherwise indicated, the information in the table is based on amounts
incurred during the Fund's fiscal year ended December 31, 1997. The
information relating to Fund expenses was provided by the Funds and has not
been independently verified by the Company. Participants should consult the
Fund prospectuses for more information about Fund expenses.
(2) A I M Advisors, Inc. ("AIM") may from time to time voluntarily waive or
reduce its respective fees. The Funds reimburse AIM in an amount up to 0.25%
of the average net asset value of each Fund, for expenses incurred in
providing, or assuring that participating insurance companies provide,
certain administrative services.
(3) These Funds commenced operations in 1998. Accordingly, "Other Expenses" are
based on estimates for the current fiscal year, net of any applicable
expense reimbursement or waiver. The investment advisers for the indicated
Funds have voluntarily agreed to waive or reimburse a portion of the
management fees and/ or operating expenses resulting in a reduction of the
total expenses. Absent any such waiver or reimbursement, "Management Fees,"
"Other Expenses" and "Total Fund Annual Expenses" are expected to be: 0.70%,
0.50% and 1.20% for the Goldman Sachs CORE Large Cap Growth Fund; 0.75%,
1.03%, and 1.78% for the Goldman Sachs CORE Small Cap Equity Fund; 0.70%,
0.76%, and 1.46% for the Goldman Sachs CORE U.S. Equity Fund; 0.75%, 0.76%,
and 1.51% for the Goldman Sachs Growth and Income Fund; 1.00%, 1.22%, and
2.22% for the Goldman Sachs International Equity Fund; 0.80%, 0.35%, and
1.15% for the
9
<PAGE>
OCC Mid Cap Portfolio; and 1.25%, 0.71%, and 1.96% for the Warburg Pincus
Emerging Markets Portfolio. To the extent that the expense ratio of any Fund
in the Sun Capital Advisers Trust falls below the Fund's expense limit, the
Fund's advisor reserves the right to be reimbursed for management fees
waived and Fund expenses paid by it during the prior two years.
(4) The investment advisers and, in certain cases, the administrators for the
indicated Funds have voluntarily agreed to waive or reimburse a portion of
the management fees and/or operating expenses, resulting in a reduction of
the total expenses. Absent any such waiver or reimbursement, "Management
Fees," "Other Expenses" and "Total Fund Annual Expenses" would have been:
0.80%, 0.19%, and 0.99% for the OCC Equity Portfolio; 0.80%, 0.07% and 0.87%
for the OCC Managed Portfolio; 0.80%, 0.17%, and 0.97% for the OCC Small Cap
Portfolio, and 1.25%, 0.44%, and 1.69% for the Warburg Pincus Post-Venture
Capital Portfolio. Absent any waiver or reimbursement, "Total Fund Annual
Expenses" would have been 2.31% for the J.P. Morgan Equity Portfolio, 4.25%
for the J.P. Morgan International Opportunities Portfolio, and 4.41% for the
J.P. Morgan Small Company Portfolio.
(5) This Fund has a 12b-1 plan which provides for payments to Lord Abbett
Distributor LLC for remittance to a life insurance company for certain
distribution expenses (see the Fund prospectus). The 12b-1 plan provides
that such remittances, in the aggregate, will not exceed 0.15% on an annual
basis, of the daily net assets of shares of the Growth and Income Portfolio.
Although it could have done so, the Fund did not implement its 12b-1 plan
during the fiscal year ended December 31, 1997. Because it may at its
discretion implement such plan for the fiscal year ended December 31, 1998,
the examples below for this Fund reflect the maximum 0.15% remittance level,
and therefore, the maximum fees that may be charged during the fiscal year
ended December 31, 1998.
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
------ -------
<S> <C> <C>
AIM V.I. Capital Appreciation Fund...... $78 $108
AIM V.I. Growth Fund.................... $78 $109
AIM V.I. Growth and Income Fund......... $78 $108
AIM V.I. International Equity Fund...... $80 $115
Alger American Growth Portfolio......... $79 $111
Alger American Income and Growth
Portfolio............................... $78 $109
Alger American Small Capitalization
Portfolio............................... $80 $114
Goldman Sachs CORE Large Cap Growth
Fund.................................... $79 $111
Goldman Sachs CORE Small Cap Equity
Fund.................................... $80 $114
Goldman Sachs CORE U.S. Equity Fund..... $79 $111
Goldman Sachs Growth and Income Fund.... $80 $114
Goldman Sachs International Equity
Fund.................................... $83 $124
J.P. Morgan Equity Portfolio............ $80 $114
J.P. Morgan International Opportunities
Portfolio............................... $83 $122
J.P. Morgan Small Company Portfolio..... $82 $121
Lord Abbett Growth and Income
Portfolio............................... $78 $107
MFS/Sun Life Capital Appreciation
Series.................................. $79 $110
MFS/Sun Life Emerging Growth Series..... $79 $111
MFS/Sun Life Government Securities
Series.................................. $77 $106
MFS/Sun Life High Yield Series.......... $79 $112
MFS/Sun Life Utilities Series........... $79 $113
OCC Equity Portfolio.................... $81 $116
OCC Managed Portfolio................... $80 $113
OCC Mid Cap Portfolio................... $81 $117
OCC Small Cap Portfolio................. $81 $116
Sun Capital Investment Grade Bond
Fund.................................... $78 $110
Sun Capital Money Market Fund........... $78 $107
Sun Capital Real Estate Fund............ $83 $124
Warburg Pincus Emerging Markets
Portfolio............................... $85 $128
Warburg Pincus International Equity
Portfolio............................... $84 $127
Warburg Pincus Post-Venture Capital
Portfolio............................... $85 $128
Warburg Pincus Small Company Growth
Portfolio............................... $82 $121
</TABLE>
10
<PAGE>
EXAMPLE
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
------ -------
<S> <C> <C>
AIM V.I. Capital Appreciation Fund...... $22 $68
AIM V.I. Growth Fund.................... $23 $70
AIM V.I. Growth and Income Fund......... $22 $69
AIM V.I. International Equity Fund...... $25 $76
Alger American Growth Portfolio......... $23 $72
Alger American Income and Growth
Portfolio............................... $23 $70
Alger American Small Capitalization
Portfolio............................... $24 $75
Goldman Sachs CORE Large Cap Growth
Fund.................................... $23 $72
Goldman Sachs CORE Small Cap Equity
Fund.................................... $24 $75
Goldman Sachs CORE U.S. Equity Fund..... $23 $72
Goldman Sachs Growth and Income Fund.... $24 $75
Goldman Sachs International Equity
Fund.................................... $28 $85
J.P. Morgan Equity Portfolio............ $24 $75
J.P. Morgan International Opportunities
Portfolio............................... $27 $84
J.P. Morgan Small Company Portfolio..... $27 $82
Lord Abbett Growth and Income
Portfolio............................... $22 $68
MFS/Sun Life Capital Appreciation
Series.................................. $23 $71
MFS/Sun Life Emerging Growth Series..... $23 $72
MFS/Sun Life Government Securities
Series.................................. $22 $67
MFS/Sun Life High Yield Series.......... $24 $73
MFS/Sun Life Utilities Series........... $24 $74
OCC Equity Portfolio.................... $25 $78
OCC Managed Portfolio................... $24 $74
OCC Mid Cap Portfolio................... $25 $78
OCC Small Cap Portfolio................. $25 $77
Sun Capital Investment Grade Bond
Fund.................................... $23 $70
Sun Capital Money Market Fund........... $22 $67
Sun Capital Real Estate Fund............ $28 $85
Warburg Pincus Emerging Markets
Portfolio............................... $29 $90
Warburg Pincus International Equity
Portfolio............................... $29 $89
Warburg Pincus Post-Venture Capital
Portfolio............................... $29 $90
Warburg Pincus Small Company Growth
Portfolio............................... $27 $82
</TABLE>
THE ABOVE EXAMPLES SHOULD NOT BE CONSIDERED TO BE REPRESENTATIONS OF PAST OR
FUTURE EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LOWER THAN THOSE SHOWN.
11
<PAGE>
PERFORMANCE DATA
From time to time the Variable Account may publish reports to shareholders,
sales literature and advertisements containing performance data relating to the
Sub-Accounts. Performance data will consist of total return quotations which
will always include quotations for the period subsequent to the date each Sub-
Account became available for investment under the Contracts, and for recent one
year and, when applicable, five and ten year periods. Such quotations for such
periods will be the average annual rates of return required for an initial
Purchase Payment of $1,000 to equal the actual variable accumulation value
attributable to such Purchase Payment on the last day of the period, after
reflection of all applicable withdrawal and Contract charges. In addition, the
Variable Account may calculate non-standardized rates of return that do not
reflect withdrawal and Contract charges. Results calculated without withdrawal
and/or Contract charges will be higher. Performance figures used by the Variable
Account are based on the actual historical performance of the Funds for
specified periods, and the figures are not intended to indicate future
performance. The Variable Account may also from time to time compare its
investment performance to various unmanaged indices or other variable annuities
and may refer to certain rating and other organizations in its marketing
materials. More detailed information on the computations is set forth in
Appendix C.
THIS PROSPECTUS IS A CATALOG OF FACTS
This Prospectus contains information about the master group and individual
flexible payment deferred annuity contracts (the "Contracts") which provide
fixed benefits, variable benefits or a combination of both. It describes their
uses and objectives, their benefits and costs, and the rights and privileges of
the Owner and the Participant, as applicable. It also contains information about
the Company, the Variable Account, the Fixed Account and the Funds. It has been
carefully prepared in non-technical language to help you decide whether the
purchase of a Contract will fit the needs of your retirement plan. We urge you
to read it carefully and retain it for future reference. The Contracts have
appropriate provisions relating to variable and fixed accumulation values and
variable and fixed annuity payments. A Variable Annuity and a Fixed Annuity have
certain similarities. Both provide that Purchase Payments, less certain
deductions, will be accumulated prior to the Annuity Commencement Date. After
the Annuity Commencement Date, annuity payments will be made to the Annuitant.
The Company assumes the mortality and expense risks under the Contracts, for
which it receives certain amounts. The significant difference between a Variable
Annuity and a Fixed Annuity is that under a Variable Annuity, all investment
risk is assumed by the Participant or Payee and the amounts of the annuity
payments vary with the investment performance of the Variable Account; under a
Fixed Annuity, the investment risk is assumed by the Company (except in the case
of early withdrawals (See "Cash Withdrawals" and "Market Value Adjustment")) and
the amounts of the annuity payments do not vary. However, the Participant bears
the risk that the Guaranteed Interest Rate to be credited on amounts allocated
to the Fixed Account may not exceed the minimum guaranteed rate for any
Guarantee Period.
USES OF THE CONTRACTS
The Contracts are designed for use in connection with retirement plans which
meet the requirements of Section 401 (including Section 401(k)), Section 403,
Section 408(b), Section 408(c), Section 408(k) or Section 408(p) of the Code;
however, the Company may discontinue offering new Contracts in connection with
certain types of qualified plans. In addition, the Company may begin offering
Participants under Contracts used in connection with individual retirement plans
under Section 408 the opportunity to convert the Contracts into Contracts used
in connection with Roth IRAs under Section 408A of the Code, and may also begin
offering new Contracts for use in connection with Roth IRAs. Certain federal tax
advantages are currently available to retirement plans which qualify as (1)
self-employed individuals' retirement plans under Section 401; (2) corporate or
association retirement plans under Section 401; (3) annuity purchase plans
sponsored by certain tax exempt organizations or public school systems under
Section 403(b); or (4) individual retirement accounts, including employer or
association of employees individual retirement accounts under Section 408(c),
SEP-IRAs under Section 408(k), Simple Retirement Accounts under Section 408(p),
and Roth IRAs under Section 408A (See "Federal Tax Status").
12
<PAGE>
The Contracts are also designed so that they may be used in connection with
certain non-tax-qualified retirement plans, such as payroll savings plans and
such other groups (trusteed or nontrusteed) as may be eligible under applicable
law.
The Contracts are available on a group basis and, in certain states, may be
available on an individual basis. An Individual Contract is issued directly to
the Owner of the Contract. A Group Contract is issued to the Owner covering all
individuals participating under the Group Contract. Each such individual
receives a Certificate which evidences his or her participation under the Group
Contract. In this Prospectus, unless otherwise indicated, both the owners of
Individual Contracts and participating individuals under Group Contracts are
referred to as Participants; the term "Contracts" includes Individual Contracts,
Group Contracts and Certificates issued under Group Contracts. For the purposes
of determining benefits under both Individual Contracts and Group Contracts, a
Participant's Account is established for each Participant.
A WORD ABOUT THE COMPANY,
THE FIXED ACCOUNT, THE VARIABLE ACCOUNT AND THE FUNDS
THE COMPANY
The Company is a stock life insurance company incorporated under the laws of
Delaware on January 12, 1970. Its Executive Office mailing address is One Sun
Life Executive Park, Wellesley Hills, Massachusetts 02481. It has obtained
authorization to do business in 48 states, the District of Columbia and Puerto
Rico, and it is anticipated that the Company will be authorized to do business
in all states except New York. The Company issues life insurance policies and
individual and group annuities. The Company has formed a wholly-owned
subsidiary, Sun Life Insurance and Annuity Company of New York, which issues
individual fixed and combination fixed/variable annuity contracts and group life
and long-term disability insurance in New York and which offers in New York
contracts similar to the Contracts offered by this Prospectus. The Company's
other active subsidiaries are Sun Capital Advisers, Inc., a registered
investment adviser, Clarendon Insurance Agency, Inc., a registered broker-dealer
that acts as the general distributor of the Contracts and other annuity and life
insurance contracts issued by the Company and its affiliates, Sun Life of Canada
(U.S.) Distributors, Inc., a registered broker-dealer and investment adviser,
New London Trust, F.S.B., a federally chartered savings bank, Massachusetts
Casualty Insurance Company, which issues individual disability income policies,
Sun Life Financial Services Limited, which provides off-shore administrative
services to the Company and Sun Life Assurance Company of Canada ("Sun Life
(Canada)"); and Sun Life Information Services Ireland Limited, an offshore
technology center.
The Company is a wholly-owned subsidiary of Sun Life of Canada (U.S.)
Holdings, Inc. ("Life Holdco"). Life Holdco is a wholly-owned subsidiary of Sun
Life Assurance Company of Canada -- U.S. Operations Holdings, Inc. ("U.S.
Holdco"). U.S. Holdco is a wholly-owned subsidiary of Sun Life (Canada), 150
King Street West, Toronto, Ontario, Canada. Sun Life (Canada) is a mutual life
insurance company incorporated pursuant to Act of Parliament of Canada in 1865
and currently transacts business in all of the Canadian provinces and
territories, all U.S. states (except New York), the District of Columbia, Puerto
Rico, the Virgin Islands, Great Britain, Ireland, Hong Kong, Bermuda and the
Philippines.
THE FIXED ACCOUNT
The Fixed Account is made up of all of the general assets of the Company
other than those allocated to any separate account. Purchase Payments will be
allocated to Guarantee Periods available in connection with the Fixed Account to
the extent elected by the Participant at the time of the establishment of a
Participant's Account or as subsequently changed. In addition, all or part of
the Participant's Account Value may be transferred to Guarantee Periods
available under the Contracts as described under "Transfer Privilege; Telephone
Transfers; Restriction on Market Timers." Assets supporting amounts allocated to
Guarantee Periods become part of the Company's general account assets and are
available to fund the claims of all classes of customers of the Company,
including claims for benefits under the Contracts.
The Company will invest the assets of the Fixed Account in those assets
chosen by the Company and allowed by applicable state laws regarding the nature
and quality of investments that may be made by life insurance companies and the
percentage of their assets that may be committed to any particular type of
13
<PAGE>
investment. In general, these laws permit investments, within specified limits
and subject to certain qualifications, in federal, state and municipal
obligations, corporate bonds, preferred and common stocks, real estate
mortgages, real estate and certain other investments.
The Company intends to invest the assets of the Fixed Account primarily in
debt instruments as follows: (1) securities issued by the United States
Government or its agencies or instrumentalities, which issues may or may not be
guaranteed by the United States Government; (2) debt securities which have an
investment grade, at the time of purchase, within the four highest grades
assigned by Moody's Investors Services, Inc. (Aaa, Aa, A or Baa), Standard &
Poor's Corporation (AAA, AA, A or BBB) or any other nationally recognized rating
service; (3) other debt instruments, including, but not limited to, issues of or
guaranteed by banks or bank holding companies and other corporations, which
obligations, although not rated by Moody's or Standard & Poor's, are deemed by
the Company's management to have an investment quality comparable to securities
which may be purchased as stated above; and (4) other evidences of indebtedness
secured by mortgages or deeds of trust representing liens upon real estate.
Notwithstanding the foregoing, the Company may also invest a portion of the
Fixed Account in below investment grade debt instruments. Instruments rated Baa
and/or BBB or lower normally involve a higher risk of default and are less
liquid than higher rated instruments. If the rating of an investment grade debt
security held by the Company is subsequently downgraded to below investment
grade, the decision to retain or dispose of the security will be made based upon
the Company's evaluation of the individual circumstances surrounding the
downgrading and the prospects for continued deterioration, stabilization and/or
improvement.
The Company is not obligated to invest amounts allocated to the Fixed
Account according to any particular strategy, except as may be required by
applicable state insurance laws. Investment income from such Fixed Account
assets will be allocated between the Company and all contracts participating in
the Fixed Account, including the Contracts offered by this Prospectus, in
accordance with the terms of such contracts.
Fixed annuity payments made to Annuitants under the Contracts will not be
affected by the mortality experience (death rate) of persons receiving such
payments or of the general population. The Company assumes this "mortality risk"
by virtue of annuity rates incorporated in the Contracts which cannot be changed
(except as described under "Modification" with respect to Participant's Accounts
established after the effective date of such modification). In addition, the
Company guarantees that it will not increase charges for maintenance of the
Contracts, regardless of its actual expenses (except as described under
"Modification" with respect to Participant's Accounts established after the
effective date of such modification).
Investment income from the Fixed Account allocated to the Company includes
compensation for mortality and expense risks, distribution expenses and
administrative expenses borne by the Company in connection with contracts
participating in the Fixed Account. The Company expects to derive a profit from
this compensation. The amount of investment income allocated to the Contracts
will vary from Guarantee Period to Guarantee Period in the sole discretion of
the Company. However, the Company guarantees that it will credit interest at a
minimum rate of three percent (3%) per year, compounded annually, to amounts
allocated to the Fixed Account under the Contracts. The Company may credit
interest at a rate in excess of the minimum rate; however, the Company is not
obligated to credit any interest in excess of such rate. There is no specific
formula for the determination of excess interest credits. Such credits, if any,
will be determined by the Company based on information as to expected investment
yields. Some of the factors that the Company may consider in determining whether
to credit interest to amounts allocated to the Fixed Account and the amount
thereof, are: general economic trends; rates of return currently available and
anticipated on the Company's investments; regulatory and tax requirements; and
competitive factors. The Company's general investment strategy will be to invest
amounts allocated to the Fixed Account in investment-grade debt securities and
mortgages using immunization strategies with respect to the applicable Guarantee
Periods. This includes, with respect to investments and average terms of
investments, using dedication (cash flow matching) and/or duration matching to
minimize the Company's risk of not achieving the rates it is crediting under
Guarantee Periods in volatile interest rate environments. ANY INTEREST CREDITED
TO AMOUNTS ALLOCATED TO THE FIXED ACCOUNT IN EXCESS OF THREE PERCENT (3%) WILL
BE
14
<PAGE>
DETERMINED IN THE SOLE DISCRETION OF THE COMPANY. THE PARTICIPANT ASSUMES THE
RISK THAT INTEREST CREDITED ON AMOUNTS ALLOCATED TO THE FIXED ACCOUNT MAY NOT
EXCEED THE MINIMUM GUARANTEE FOR ANY GIVEN YEAR.
The Company is aware of no statutory limitations on the maximum amount of
interest it may credit, and the Company's Board of Directors has set no
limitations. However, inherent in the Company's exercise of discretion in this
regard is the equitable allocation of distributable earnings and surplus among
its various policyholders and contract owners and to its sole stockholder.
THE VARIABLE ACCOUNT
The basic objective of a variable annuity contract is to provide variable
annuity payments which will be to some degree responsive to changes in the
economic environment, including inflationary forces and changes in rates of
return available from various types of investments. The Contracts are designed
to seek to accomplish this objective by providing that variable annuity payments
(1) will reflect the investment performance of the Variable Account with respect
to amounts allocated to the Variable Account before the Annuity Commencement
Date and (2) will reflect the investment performance of the Variable Account
after that date. Since the Variable Account is always fully invested in Fund
shares, its investment performance reflects the investment performance of the
Funds. Values of Fund shares held by the Variable Account fluctuate and are
subject to the risks of changing economic conditions as well as the risk
inherent in the ability of a Fund's management to make necessary changes in its
portfolios to anticipate changes in economic conditions. Therefore, the
Participant bears the entire investment risk that the basic objectives of the
Contract may not be realized, and that the adverse effects of inflation may not
be lessened and there can be no assurance that the aggregate amount of variable
annuity payments will equal or exceed the aggregate amount of Purchase Payments
made with respect to a particular Participant's Account for the reasons
described above or because of the premature death of a Payee.
Another important feature of the Contracts related to their basic objective
is the Company's promise that the dollar amount of variable annuity payments
made during the lifetime of the Payee(s) will not be adversely affected by the
actual mortality experience of the Company or by the actual expenses incurred by
the Company in excess of expense deductions provided for in the Contracts.
Sun Life of Canada (U.S.) Variable Account F (the "Variable Account") was
established by the Company as a separate account on July 13, 1989 pursuant to a
resolution of its Board of Directors. Under Delaware insurance law and the
Contract, the income, gains or losses of the Variable Account are credited to or
charged against the assets of the Variable Account without regard to the other
income, gains, or losses of the Company. These assets are held in relation to
the Contracts described in this Prospectus and such other variable annuity
contracts issued by the Company and designated by it as providing benefits which
vary in accordance with the investment performance of the Variable Account.
Although the assets main-
tained in the Variable Account will not be charged with any liabilities arising
out of any other business conducted by the Company, all obligations arising
under the Contracts, including the promise to make annuity payments, are general
corporate obligations of the Company.
The Variable Account meets the definition of a "separate account" under the
federal securities laws and is registered as a unit investment trust under the
Investment Company Act of 1940. Registration with the Commission does not
involve supervision of the management or investment practices or policies of the
Variable Account or of the Company by the Commission.
The assets of the Variable Account are divided into Sub-Accounts. Each
Sub-Account invests exclusively in shares of a specific Fund. All amounts
allocated to the Variable Account will be used to purchase Fund shares as
designated by the Participant at their net asset value. Any and all
distributions made by a Fund with respect to the shares held by the Variable
Account will be reinvested to purchase additional shares at their net asset
value. Deductions from the Variable Account for cash withdrawals, annuity
payments, death benefits, Account Fees, contract charges against the assets of
the Variable Account for the
15
<PAGE>
assumption of mortality and expense risks, distribution expenses, administrative
expenses and any applicable taxes will, in effect, be made by redeeming the
number of Fund shares at their net asset value equal in total value to the
amount to be deducted. The Variable Account will be fully invested in Fund
shares at all times.
THE FUNDS
The Contract offers a number of Fund options, which are briefly discussed
below. Each Fund is a mutual fund registered under the Investment Company Act of
1940, or a separate series of shares of such a mutual fund. More comprehensive
information, including a discussion of potential risks, is found in the current
prospectuses for the Funds (the "Fund Prospectuses"). The Fund Prospectuses
should be read in conjunction with this Prospectus. A copy of each Fund
Prospectus may be obtained without charge from the Company by calling
1-888-388-8748, or writing to Sun Life Assurance Company of Canada (U.S.),
Retirement Products and Services, P.O. Box 9133, Boston Massachusetts 02117.
The Funds currently available are:
AIM VARIABLE INSURANCE FUNDS, INC. (advised by A I M Advisors, Inc.)
AIM V.I. CAPITAL APPRECIATION FUND seeks to provide capital appreciation
through investments in common stocks, with emphasis on medium-sized and smaller
emerging growth companies.
AIM V.I. GROWTH FUND seeks to provide growth of capital through investments
primarily in common stocks of seasoned and better capitalized U.S. companies
considered by AIM to have strong earnings momentum.
AIM V.I. GROWTH AND INCOME FUND seeks to provide growth of capital, with
current income as a secondary objective by investing primarily in dividend
paying common stocks which have prospects for both growth of capital and
dividend income.
AIM V.I. INTERNATIONAL EQUITY FUND seeks to provide long-term growth of
capital by investing in diversified international equity securities, the issuers
of which are considered by AIM to have strong earnings momentum.
THE ALGER AMERICAN FUND (advised by Fred Alger Management, Inc.)
ALGER AMERICAN GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of companies with market
capitalizations of $1 billion or more.
ALGER AMERICAN INCOME AND GROWTH PORTFOLIO seeks primarily to provide a high
level of dividend income by investing in dividend paying equity securities.
Capital appreciation is a secondary objective.
ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO seeks long-term capital
appreciation by investing primarily in equity securities of companies with
market capitalizations within the range of the Russell 2000 Growth Index or the
S&P SmallCap 600 Index.
GOLDMAN SACHS VARIABLE INSURANCE TRUST (advised by Goldman Sachs Asset
Management, a separate operating division of Goldman, Sachs & Co., except for
Goldman Sachs International Equity Fund, which is advised by Goldman Sachs Asset
Management International, an affiliate of Goldman, Sachs & Co.)
GOLDMAN SACHS CORE LARGE CAP GROWTH FUND seeks long-term growth of capital
through a broadly diversified portfolio of equity securities of large cap U.S.
issuers that are expected to have better prospects for earnings growth than the
growth rate of the general domestic economy. Dividend income is a secondary
consideration.
GOLDMAN SACHS CORE SMALL CAP EQUITY FUND seeks long-term growth of capital
through a broadly diversified portfolio of equity securities of U.S. issuers
which are included in the Russell 2000 Index at the time of investment.
16
<PAGE>
GOLDMAN SACHS CORE U.S. EQUITY FUND seeks long-term growth of capital and
dividend income through a broadly diversified portfolio of large cap and blue
chip equity securities representing all major sectors of the U.S. economy.
GOLDMAN SACHS GROWTH AND INCOME FUND seeks long-term growth of capital and
growth of income through investments in equity securities that are considered to
have favorable prospects for capital appreciation and/or dividend paying
ability.
GOLDMAN SACHS INTERNATIONAL EQUITY FUND seeks long-term capital appreciation
through investments in equity securities of companies that are organized outside
the U.S. or whose securities are principally traded outside the U.S.
J.P. MORGAN SERIES TRUST II (advised by J.P. Morgan Investment Management Inc.)
J.P. MORGAN EQUITY PORTFOLIO seeks to provide a high total return from a
portfolio comprised of selected equity securities.
J.P. MORGAN INTERNATIONAL OPPORTUNITIES PORTFOLIO seeks to provide a high
total return from a portfolio of equity securities of foreign corporations.
J.P. MORGAN SMALL COMPANY PORTFOLIO seeks to provide a high total return
from a portfolio of equity securities of small companies.
LORD ABBETT SERIES FUND, INC. (advised by Lord Abbett & Co.)
GROWTH AND INCOME PORTFOLIO seeks to provide long-term growth of capital and
income without excessive fluctuation in market value.
MFS/SUN LIFE SERIES TRUST (advised by Massachusetts Financial Services Company,
an affiliate of the Company)
CAPITAL APPRECIATION SERIES seeks capital appreciation by investing in
securities of all types, with a major emphasis on common stocks.
EMERGING GROWTH SERIES seeks long-term growth of capital by investing
primarily (I.E., at least 80% of its assets under normal circumstances) in
common stocks of emerging growth companies. Emerging growth companies include
companies that MFS believes are early in their life cycle but which have the
potential to become major enterprises. Dividend and interest income from
portfolio securities, if any, is incidental to its objective of long-term growth
of capital.
GOVERNMENT SECURITIES SERIES seeks current income and preservation of
capital by investing in U.S. Government and U.S. Government-related Securities.
HIGH YIELD SERIES seeks 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. The series may invest up to 100%
of its assets in these securities, which generally involve greater risks,
including volatility of price, risk to principal and income, default risks and
less liquidity, than securities in the higher rated categories.
UTILITIES SERIES seeks capital growth and current income (income above that
available from a portfolio invested entirely in equity securities) by investing
at least 65% of its assets under normal market conditions in equity and debt
securities issued by domestic and foreign utility companies.
OCC ACCUMULATION TRUST (advised by OpCap Advisors)
EQUITY PORTFOLIO seeks long-term capital appreciation through investment in
a diversified portfolio of equity securities selected on the basis of a value
oriented approach to investing.
MANAGED PORTFOLIO seeks to achieve growth of capital over time through
investment in a portfolio consisting of common stocks, bonds and cash
equivalents, the percentages of which will vary based on the portfolio manager's
assessments of the relative outlook for such investments.
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MID CAP PORTFOLIO seeks long-term capital appreciation through investment in
a diversified portfolio of equity securities. The portfolio will invest
primarily in companies with market capitalizations of between $500 million and
$5 billion.
SMALL CAP PORTFOLIO seeks capital appreciation through investment in a
diversified portfolio of equity securities of companies with market
capitalizations of under $1 billion.
SUN CAPITAL ADVISERS TRUST (advised by Sun Capital Advisers, Inc., an affiliate
of the Company)
SUN CAPITAL INVESTMENT GRADE BOND FUND seeks high current income consistent
with relative stability of principal by investing primarily in investment grade
bonds, including those issued by U.S. and foreign companies (including companies
in emerging market countries), the U.S. Government and its agencies and
instrumentalities (including those which issue mortgage-backed securities),
foreign governments (including those of emerging market countries), and
multinational organizations such as the World Bank.
SUN CAPITAL MONEY MARKET FUND seeks to maximize current income, consistent
with maintaining liquidity and preserving capital, by investing exclusively in
high quality U.S. dollar-denominated money market securities, including those
issued by U.S. and foreign banks, corporate issuers, the U.S. Government and its
agencies and instrumentalities, foreign governments and multinational
organizations such as the World Bank. The fund may invest in all types of money
market securities, including commercial paper, certificates of deposit, bankers'
acceptances, mortgage-backed and asset-backed securities, repurchase agreements
and other short-term debt securities.
SUN CAPITAL REAL ESTATE FUND primarily seeks long-term capital growth and,
secondarily, seeks current income and growth of income. The Fund invests at
least 80% of its assets in securities of real estate trusts and other real
estate companies. The Fund generally focuses its investments in equity REITs,
which invest most of their assets directly in U.S. or foreign real property,
receive most of their income from rents and may also realize gains by selling
appreciated properties.
WARBURG PINCUS TRUST (advised by Warburg Pincus Asset Management,
Inc.("Warburg"); with respect to the Post-Venture Capital Portfolio, Warburg has
retained Abbott Capital Management, L.P. regarding investments in private
limited partnerships or other investment funds.)
EMERGING MARKETS PORTFOLIO seeks long-term growth of capital by investing
primarily in equity securities of non-United States issuers consisting of
companies in emerging securities markets.
INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing in equity securities of non-U.S. issuers.
POST-VENTURE CAPITAL PORTFOLIO seeks long-term growth of capital by
investing primarily in equity securities of issuers in their post-venture
capital stage of development and pursues an aggressive investment strategy.
SMALL COMPANY GROWTH PORTFOLIO seeks capital growth by investing in equity
securities of small-sized domestic companies.
The Funds may also be available to registered separate accounts offering
variable annuity and variable life products of other affiliated and unaffiliated
insurance companies, as well as to the Variable Account and other separate
accounts of the Company. Although the Company does not anticipate any
disadvantages to this, there is a possibility that a material conflict may arise
between the interests of the Variable Account and one or more of the other
separate accounts participating in the Funds. A conflict may occur due to a
change in law affecting the operations of variable life and variable annuity
separate accounts, differences in the voting instructions of the Participants
and Payees and those of other companies, or some other reason. In the event of
conflict, the Company will take any steps necessary to protect Participants and
Payees, including withdrawal of the Variable Account from participation in the
underlying Funds which are involved in the conflict or substitution of shares of
other Funds.
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PURCHASE PAYMENTS AND CONTRACT VALUES DURING ACCUMULATION PERIOD
PURCHASE PAYMENTS
(1) PLACE, AMOUNT AND FREQUENCY
All Purchase Payments are to be paid to the Company at its Annuity Service
Mailing Address. The amount of Purchase Payments may vary; however, the Company
will not accept an initial Purchase Payment to be allocated to a Participant's
Account which is less than $10,000, and each additional Purchase Payment must be
at least $1,000, unless waived by the Company. In addition, the prior approval
of the Company is required before it will accept a Purchase Payment which would
cause the value of a Participant's Account to exceed $1,000,000. If the value of
a Participant's Account exceeds $1,000,000, no additional Purchase Payments will
be allocated without the prior approval of the Company.
A completed Application (and, in the case of a Group Contract, a completed
Contract Application, if required) and the initial Purchase Payment are
forwarded to the Company for acceptance. Upon acceptance, in the case of an
Individual Contract, the Contract is issued to the Participant, and, in the case
of a Group Contract, the Contract and Certificate(s), as applicable, are issued
to the Owner and/or Participant(s), respectively, and the initial Purchase
Payment is then credited to the Participant's Account. The initial Purchase
Payment must be applied within two business days of receipt by the Company of a
completed Application. The Company may retain the Purchase Payment for up to
five business days while attempting to complete an incomplete Application. If
the Application cannot be made complete within five business days, the
prospective Participant will be informed of the reasons for the delay and the
Purchase Payment will be returned immediately unless the prospective participant
specifically consents to the Company's retaining the Purchase Payment until the
Application is made complete. Thereafter, the Purchase Payment must be applied
within two business days. Subsequent Purchase Payments are applied at the end of
the Valuation Period during which they are received by the Company.
(2) ACCOUNT CONTINUATION
A Participant's Account shall be continued automatically in full force
during the lifetime of the Participant until the Annuity Commencement Date or
until the Participant's Account is surrendered. Purchase Payments may be made at
any time while the Participant's Account is in force.
(3) ALLOCATION OF NET PURCHASE PAYMENTS
The Net Purchase Payment is that portion of a Purchase Payment which remains
after deduction of any applicable premium tax or similar tax. Each Net Purchase
Payment will be allocated either to Guarantee Periods available in connection
with the Fixed Account or to Sub-Accounts of the Variable Account or to both
Sub-Accounts and the Fixed Account in accordance with the allocation factors
specified in the particular Participant's Application, or as subsequently
changed by the Participant.
The allocation factors for new Payments among the Guarantee Periods and the
Sub-Accounts may be changed by the Participant at any time by giving written
notice of the change to the Company, in accordance with the Company's procedures
then in effect. Any change will take effect with the first Purchase Payment
received with or after receipt of notice of the change by the Company and will
continue in effect until subsequently changed.
PARTICIPANT'S ACCOUNT
The Company will establish a Participant's Account for each Participant
under a Contract and will maintain the Participant's Account during the
Accumulation Period. The Participant's Account Value for any Valuation Period is
equal to the sum of the variable accumulation value, if any, plus the fixed
accumulation value, if any, of the Participant's Account for that Valuation
Period.
VARIABLE ACCUMULATION VALUE
The variable accumulation value of a Participant's Account, if any, for any
Valuation Period is equal to the sum of the value of all Variable Accumulation
Units credited to the Participant's Account for such Valuation Period.
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(1) CREDITING VARIABLE ACCUMULATION UNITS
Upon receipt of a Purchase Payment by the Company, all or that portion, if
any, of the Net Purchase Payment to be allocated to any Sub-Accounts in
accordance with the allocation factors will be credited to the Participant's
Account in the form of Variable Accumulation Units. The number of particular
Variable Accumulation Units to be credited is determined by dividing the dollar
amount allocated to the particular Sub-Account by the Variable Accumulation Unit
value for the particular Sub-Account for the Valuation Period during which the
Purchase Payment is applied by the Company to the Participant's Account.
(2) VARIABLE ACCUMULATION UNIT VALUE
The Variable Accumulation Unit value for each Sub-Account was established at
$10.00 for the first Valuation Period of the particular Sub-Account. The
Variable Accumulation Unit value for the particular Sub-Account for any
subsequent Valuation Period is determined by methodology which is the
mathematical equivalent of multiplying the Variable Accumulation Unit value for
the particular Sub-Account for the immediately preceding Valuation Period by the
Net Investment Factor for the particular Sub-Account for such subsequent
Valuation Period. The Variable Accumulation Unit value for each Sub-Account for
any Valuation Period is the value determined as of the end of the particular
Valuation Period and may increase, decrease or remain the same from Valuation
Period to Valuation Period in accordance with the Net Investment Factor
described below. For a hypothetical example of the calculation of the value of a
Variable Accumulation Unit, see Appendix A.
(3) NET INVESTMENT FACTOR
The Net Investment Factor is an index applied to measure the investment
performance of a Sub-Account from one Valuation Period to the next. The Net
Investment Factor may be greater or less than or equal to one; therefore the
value of a Variable Accumulation Unit may increase, decrease or remain the same.
The Net Investment Factor for any Sub-Account for any Valuation Period is
determined by dividing (a) by (b) and then subtracting (c) from the result
where:
(a) is the net result of:
(1) the net asset value of a Fund share held in the Sub-Account,
determined as of the end of the Valuation Period, plus
(2) the per share amount of any dividend or other distribution declared
by a Fund on the shares held in the Sub-Account if the "ex-dividend"
date occurs during the Valuation Period, plus or minus
(3) a per share credit or charge with respect to any taxes paid or
reserved for by the Company during the Valuation Period which are
determined by the Company to be attributable to the operation of the
Sub-Account (no federal income taxes are applicable under present
law);
(b) is the net asset value of a Fund share held in the Sub-Account,
determined as of the end of the preceding Valuation Period; and
(c) is the asset charge factor determined by the Company for the Valuation
Period to reflect the charges for assuming the mortality and expense
risks and administrative expenses.
FIXED ACCUMULATION VALUE
The fixed accumulation value of a Participant's Account, if any, for any
Valuation Period is equal to the sum of the values of all Guarantee Amounts
credited to the Participant's Account for such Valuation Period.
GUARANTEE PERIODS
The Participant may elect one or more Guarantee Period(s) with durations of
up to ten years from among those made available by the Company. The period(s)
elected will determine the Guaranteed Interest Rate(s). A Purchase Payment, or
the portion thereof (at least $1,000) (or the amount transferred in accordance
with the "Transfer Privilege" provision under the Contract) allocated to a
particular Guarantee Period, less any applicable premium tax or similar tax and
any amounts subsequently withdrawn, will earn interest at
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the Guaranteed Interest Rate in effect during the Guarantee Period. Initial
Guarantee Periods begin on the date the net Purchase Payment is applied, or, in
the case of a transfer, on the effective date of the transfer, and end the
number of calendar years or months, as applicable, in the Guarantee Period
elected from the end of the calendar month in which the amount was allocated to
the Guarantee Period (the "Expiration Date"). Subsequent Guarantee Periods begin
on the first day following the Expiration Date.
Any portion of a Participant's Account Value allocated to a particular
Guarantee Period with a particular Expiration Date (including interest earned
thereon) will be referred to herein as a "Guarantee Amount". Interest will be
credited daily at a rate equivalent to the compound annual rate. As a result of
additional Purchase Payments, renewals and transfers of portions of the
Participant's Account Value described under "Transfer Privilege" below, which
will begin new Guarantee Periods, Guarantee Amounts allocated to Guarantee
Periods of the same duration may have different Expiration Dates. Thus each
Guarantee Amount will be treated separately for purposes of determining any
Market Value Adjustment (See "Market Value Adjustment").
The Company will notify the Participant in writing at least 45 and no more
than 75 days prior to the Expiration Date for any Guarantee Amount. A new
Guarantee Period of the same duration as the previous Guarantee Period will
commence automatically at the end of the previous Guarantee Period, unless the
Company receives, prior to the end of such Guarantee Period, a written election
by the Participant of a different Guarantee Period from among those being
offered by the Company at such time, or instructions to transfer all or a
portion of the Guarantee Amount to one or more Sub-Accounts in accordance with
the Transfer Privilege Provision. Each new Guarantee Amount must be at least
$1,000.
GUARANTEED INTEREST RATES
The Company periodically will establish an applicable Guaranteed Interest
Rate for each Guarantee Period offered by the Company. Current Guaranteed
Interest Rates may be changed by the Company frequently or infrequently,
depending on interest rates available to the Company and other factors as
described below, but once established rates will be guaranteed for the duration
of the respective Guarantee Periods. However, Participant's Account Value
withdrawn from the Fixed Account will be subject to any applicable withdrawal
charge and Account Fee and may be subject to a Market Value Adjustment on
withdrawal or surrender (See "Market Value Adjustment").
The Guaranteed Interest Rate will not be less than three percent (3%),
compounded annually. The Company has no specific formula for determining the
rate of interest that it will declare as a Guaranteed Interest Rate, as such
interest rates will be reflective of interest rates available on the types of
debt instruments in which the Company intends to invest amounts allocated to the
Fixed Account (See "The Fixed Account"). In addition, the Company's management
may consider other factors in determining Guaranteed Interest Rates for a
particular duration including: regulatory and tax requirements; sales
commissions and administrative and distribution expenses borne by the Company;
general economic trends; and competitive factors. The Participant bears the risk
that the Guaranteed Interest Rate to be credited on amounts allocated to the
Fixed Account may not exceed three percent (3%) per year for any Guarantee
Period.
DOLLAR COST AVERAGING
The Participant may select, at no extra charge, a dollar cost averaging
program by allocating a minimum of $5,000 to a designated Sub-Account or to the
Fixed Account. Amounts allocated to the Fixed Account under the dollar cost
averaging program will earn interest at a specified rate declared by the
Company. Each month or quarter a level amount will be transferred automatically,
at no cost, to one or more Sub-Accounts chosen by the Participant, up to a
maximum of 12. The program continues until the Participant's Account Value
allocated to the program is depleted or the Participant elects to stop the
program. The final amount transferred from the Fixed Account will include all
interest earned.
Only initial and subsequent Purchase Payments (subject to a minimum of
$1,000) may be allocated to a Fixed Account dollar cost averaging program.
Previously applied amounts may only be transferred to a Sub-Account dollar cost
averaging program. Only one dollar cost averaging program may be selected at the
time of payment.
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No Market Value Adjustment (either positive or negative) will apply to
amounts automatically transferred from the Fixed Account under the dollar cost
averaging program, except that if the program is discontinued or altered prior
to completion, amounts remaining in the Fixed Account will be liquidated and the
Market Value Adjustment will be applied. Any additions to the program will be
treated as commencing a new dollar cost averaging program.
The main objective of a dollar cost averaging program is to minimize the
impact of short-term price fluctuations on a Participant's Account Value. Since
the same dollar amount is transferred to other available investment options at
set intervals, dollar cost averaging allows a Participant to purchase more
Accumulation Units (and, indirectly, more Fund shares) when prices are low and
fewer Accumulation Units (and, indirectly, fewer Fund shares) when prices are
high. Therefore, a lower average cost per Accumulation Unit may be achieved over
the long term. A dollar cost averaging program allows Participants to take
advantage of market fluctuations. However, it is important to understand that a
dollar cost averaging program does not assure a profit or protect against loss
in a declining market.
ASSET ALLOCATION
The Company may make one or more asset allocation investment programs
available in connection with the Contracts, at no extra charge. An asset
allocation program provides for the allocation of the Participant's Account
Value among certain available investment options. These programs will be fully
described in a separate brochure. Participants may elect to enter into an asset
allocation investment program, under the terms and conditions described in the
brochure. Certain asset allocation programs may recommend Funds managed by
Massachusetts Financial Services Company and/or Sun Capital Advisers, Inc.,
affiliates of the Company.
TRANSFER PRIVILEGE; TELEPHONE TRANSFERS; RESTRICTION ON MARKET TIMERS
At any time during the Accumulation Period the Participant may, upon request
received by the Company, transfer all or part of the Participant's Account Value
to one or more Sub-Accounts or Guarantee Periods available under the Contract,
subject to the following conditions: (1) not more than 12 transfers may be made
in any Account Year (excluding transfers made pursuant to a dollar cost
averaging or asset allocation program approved by the Company) and a minimum of
30 days must elapse between transfers made to or from the Fixed Account or among
Guarantee Periods; (2) the amount being transferred from a Sub-Account may not
be less than $1,000, unless the total Participant's Account Value attributable
to a Sub-Account is being transferred; (3) any Participant's Account Value
remaining in a Sub-Account may not be less than $1,000; and (4) the total
Participant's Account Value attributable to the Guarantee Amount must be
transferred; however, the transfer of interest credited to such Guarantee Amount
during the current Account Year is not subject to this restriction. In addition,
transfers of a Guarantee Amount will be subject to the Market Value Adjustment
described below unless the transfer is effective within 30 days prior to the
Expiration Date applicable to the Guarantee Amount; and transfers involving
Variable Accumulation Units shall be subject to such terms and conditions as may
be imposed by the Funds. Currently, there is no charge for transfers; however,
the Company reserves the right to impose a charge of up to $15 for each
transfer. A transfer generally will be effective on the date the request for
transfer is received by the Company. Under current law, there will be no tax
liability to the Participant if a Participant makes a transfer.
Transfers may be requested by the Participant either in writing or by
telephone. The telephone exchange privilege is made available to Participants
automatically without the Participant's election. The Company will employ
reasonable procedures to confirm that instructions communicated to it by
telephone are genuine. Such procedures may include one or more of the following:
requesting identifying information, such as name, Contract number, Social
Security Number, and/or personal identification number; tape recording all
telephone transactions; or providing written confirmation thereof to both the
Participant and any agent of record, at the last address of record; or such
other procedures as the Company may deem reasonable. Although the Company's
failure to follow reasonable procedures may result in the Company's liability
for any losses due to unauthorized or fraudulent telephone transfers, the
Company will not be liable for following instructions communicated by telephone
which it reasonably believed to be genuine. Any losses incurred pursuant to
actions taken by the Company in reliance on telephone instructions reasonably
believed to be genuine shall be borne by the Participant.
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The Contracts are not designed for professional market timing organizations
or other entities using programmed and frequent transfers. Persons who wish to
employ such strategies should not purchase a Contract. Accordingly, transfers
may be subject to restrictions if exercised by a market timing firm or any other
third party authorized to initiate transfer transactions on behalf of multiple
Participants. In imposing such restrictions, the Company may, among other
things, not accept (1) the transfer instructions of any agent acting under a
power of attorney on behalf of more than one Participant, or (2) the transfer
instructions of individual Participants who have executed preauthorized transfer
forms that are submitted at the same time by market timing firms or other third
parties on behalf of more than one Participant. The Company will not impose any
such restrictions or otherwise modify transfer rights unless such action is
reasonably intended to prevent the use of such rights in a manner that will
disadvantage or potentially impair the Contract rights of other Participants.
In addition, certain of the Funds have reserved the right to temporarily or
permanently refuse exchange requests from the Variable Account if, in the
judgment of such Fund's investment adviser, the Fund would be unable to invest
effectively in accordance with its investment objective and policies, or would
otherwise potentially be adversely affected. In particular, a pattern of
exchanges that coincide with a "market timing" strategy may be disruptive to a
Fund and therefore may be refused. Accordingly, the Variable Account may not be
in a position to effectuate transfers and may refuse transfer requests without
prior notice. The Company also reserves the right, for similar reasons, to
refuse or delay exchange requests involving transfers to or from the Fixed
Account.
WAIVERS; REDUCED CHARGES; CREDITS; BONUS GUARANTEED INTEREST RATES
The Company may reduce or waive the withdrawal charge or Account Fee, credit
additional amounts, or grant bonus Guaranteed Interest Rates in situations where
selling and/or maintenance costs associated with the Contracts are reduced, such
as the sale of several Contracts to the same Participant, sales of large
Contracts, and certain group sales. In addition, the Company may waive the
Account Fee, may credit additional amounts, or may grant bonus Guaranteed
Interest Rates in connection with Contracts sold to officers, directors and
employees of the Company or its affiliates, registered representatives and
employees of broker-dealers with a current selling agreement with the Company
and affiliates of such representatives and broker-dealers, employees of
affiliated asset management firms, and persons who have retired from such
positions ("Eligible Employees") and immediate family members of Eligible
Employees. The Company may reduce or waive such charges and fees, may credit
additional amounts, or may grant bonus Guaranteed Interest Rates on any Contract
where, for example, expenses associated with the sale of the Contract and/or
costs or services associated with administering and maintaining the Contract are
reduced. Eligible Employees and their immediate family members may also purchase
a Contract without regard to minimum Purchase Payment requirements. For other
situations in which withdrawal charges may be waived, see "Withdrawal Charges."
CASH WITHDRAWALS, WITHDRAWAL CHARGES AND MARKET VALUE ADJUSTMENT
CASH WITHDRAWALS
At any time before the Annuity Commencement Date, the Participant may elect
to receive a cash withdrawal payment from the Company. Any such election shall
specify the amount of the withdrawal and will be effective on the date that it
is received by the Company.
The Participant may request a full surrender or partial withdrawal. A full
surrender will result in a cash withdrawal payment equal to the value of the
Participant's Account at the end of the Valuation Period during which the
election becomes effective less the Account Fee, plus or minus any applicable
Market Value Adjustment, and less any applicable withdrawal charge. A request
for a partial withdrawal will result in the cancellation of a portion of the
Participant's Account Value equal to the dollar amount of the cash withdrawal
payment, plus or minus any applicable Market Value Adjustment and plus any
applicable withdrawal charge. If a partial withdrawal is requested which would
leave a Participant's Account Value of less than the Account Fee, then such
partial withdrawal will be treated as a full surrender. The Account Fee and any
applicable Market Value Adjustment will be deducted from the Participant's
Account before the application of any withdrawal charge.
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In the case of a partial withdrawal, the Participant may instruct the
Company as to the amounts to be withdrawn from each Sub-Account and/or Guarantee
Amount. If not so instructed, the Company will effect such withdrawal pro rata
from each Sub-Account and Guarantee Amount in which the Participant's Account
Value is invested at the end of the Valuation Period during which the withdrawal
becomes effective. ALL CASH WITHDRAWALS OF ANY GUARANTEE AMOUNT, EXCEPT THOSE
EFFECTIVE WITHIN 30 DAYS PRIOR TO THE EXPIRATION DATE OF SUCH GUARANTEE AMOUNT
OR THE WITHDRAWAL OF INTEREST CREDITED DURING THE CURRENT ACCOUNT YEAR, WILL BE
SUBJECT TO THE MARKET VALUE ADJUSTMENT.
Cash withdrawals from a Sub-Account will result in the cancellation of
Variable Accumulation Units attributable to the Participant's Account with an
aggregate value on the effective date of the withdrawal equal to the total
amount by which the Sub-Account is reduced. The cancellation of such units will
be based on the Variable Accumulation Unit values of the Sub-Account at the end
of the Valuation Period during which the cash withdrawal is effective.
The Company, upon request, will advise the Participant of the amounts that
would be payable in the event of a full surrender or partial withdrawal.
Any cash withdrawal payment will be paid within seven days from the date the
election becomes effective, except as the Company may be permitted to defer such
payment in accordance with the Investment Company Act of 1940 and applicable
state insurance law. Deferral of amounts withdrawn from the Variable Account is
currently permissible only (1) for any period (a) during which the New York
Stock Exchange is closed other than customary week-end and holiday closings or
(b) during which trading on the New York Stock Exchange is restricted as
determined by the Commission, (2) for any period during which an emergency
exists as a result of which (a) disposal of securities held by a Fund is not
reasonably practicable or (b) it is not reasonably practicable to determine the
value of the net assets of a Fund or (3) for such other periods as the
Commission may by order permit for the protection of security holders. The
Company reserves the right to defer the payment of amounts withdrawn from the
Fixed Account for a period not to exceed six months from the date written
request for such withdrawal is received by the Company. The Company is not
required to pay interest on amounts so deferred.
Since the Qualified Contracts offered by this Prospectus will be issued in
connection with retirement plans which meet the requirements of Sections 401,
403, 408, and 408A of the Code, reference should be made to the terms of the
particular retirement plan for any limitations or restrictions on cash
withdrawals. For special restrictions applicable to withdrawals from Contracts
used with Tax-Sheltered Annuities established pursuant to Section 403(b) of the
Code, see "Section 403(b) Annuities" below.
A cash withdrawal under either a Qualified Contract or Non-Qualified
Contract offered by this Prospectus also may result in a tax penalty. The tax
consequences of a cash withdrawal payment under both Qualified Contracts and
Non-Qualified Contracts should be carefully considered (See "Federal Tax
Status").
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. Cash withdrawals may result in
a 10% tax penalty in addition to any withdrawal charge applicable under the
Contracts (See "Federal Tax Status").
A portion of the Participant's 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 seven years it may be withdrawn free of any
withdrawal charge. In addition, no withdrawal charge is assessed upon
annuitization, upon payment of the death benefit or upon the transfer of
Participant's Account Value among the Sub-Accounts or between the Sub-Accounts
and the Fixed Account or within the Fixed Account.
The withdrawal charge is not assessed with respect to a Participant's
Account established for the personal account of an employee of the Company or of
any of its affiliates, or of a licensed insurance agent engaged in distributing
the Contracts, and the Company may waive the withdrawal charge with respect to
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Purchase Payments derived from the surrender of other annuity contracts and/or
certificates issued by the Company. In addition, if approval has been received
from state regulatory authorities having jurisdiction over the applicable
Contract, the Company will waive the withdrawal charge arising from a full
surrender if: (1) at least one year has elapsed since the Participant's Date of
Coverage; and (2) the Participant is confined to an eligible nursing home (i.e.,
a licensed hospital or licensed skilled or intermediate care nursing facility at
which treatment is available on a daily basis and daily medical records are kept
for each patient) and has been confined there for the preceding 180 days or for
such shorter period as may be provided for, depending upon the jurisdiction in
which the Contract was issued. Such withdrawal may be subject to the 10% tax
penalty described above.
All other full or partial withdrawals are subject to a withdrawal charge
which will be applied in accordance with the applicable methodology described
below:
The Contracts provide for the accumulation of the 10% annual free withdrawal
amount into future years. The applicable withdrawal charge will be determined on
the following basis:
(1) Old Payments and new Payments: With respect to a particular Account
Year, "new Payments" are those Payments made in that Account Year or in the six
immediately preceding Account Years, and "old Payments" are those Payments not
defined as new Payments.
(2) Order of liquidation: To effect a full surrender or partial withdrawal,
each withdrawal is allocated first to the free withdrawal amount and then to
previously unliquidated Payments (on a first-in, first-out basis) until all
Purchase Payments have been liquidated.
(3) Free withdrawal amount: The free withdrawal amount is equal to 10% of
any new Payments, irrespective of whether these new Payments have been
liquidated. Any portion of the free withdrawal amount that is not used in the
current Account Year is cumulative into future years.
(4) Maximum withdrawal amount without a withdrawal charge: The maximum
amount that can be withdrawn without a withdrawal charge in an Account Year is
equal to the sum of (a) any previously unliquidated free withdrawal amount, and
(b) any previously unliquidated old Payments.
(5) Amount subject to withdrawal charge: The amount subject to the
withdrawal charge is the amount of the partial withdrawal or full surrender less
the maximum withdrawal amount without a withdrawal charge, up to a maximum of
the sum of all unliquidated new Payments.
AMOUNT OF WITHDRAWAL CHARGE
The withdrawal charge percentage varies according to the number of complete
Account Years between the Account Year in which a Purchase Payment was credited
to a Participant's Account and the Account Year in which it was withdrawn. The
amount of the withdrawal charge is determined by multiplying the amount subject
to the withdrawal charge by the withdrawal charge percentage, in accordance with
the following table:
<TABLE>
<CAPTION>
NUMBER OF COMPLETE
ACCOUNT YEARS WITHDRAWAL CHARGE
------------------ -----------------
<S> <C>
0-1 6%
2-3 5%
4-5 4%
6 3%
7 or more 0%
</TABLE>
In no event shall the aggregate withdrawal charges assessed against a
Participant's Account exceed 6% of the aggregate Purchase Payments made under a
Contract (See Appendix B for examples of withdrawals, withdrawal charges and the
Market Value Adjustment). The Company may, upon notice to the Owner of a Group
Contract, modify the withdrawal charges, provided that such modification shall
apply only to Participant's Accounts established after the effective date of
such modification (See "Modification").
25
<PAGE>
SECTION 403(B) ANNUITIES
The Code imposes restrictions on cash withdrawals from Contracts used with
Section 403(b) Annuities. In order for the Contracts to receive tax deferred
treatment, the Contracts must provide that cash withdrawals of amounts
attributable to salary reduction contributions (other than withdrawals of
accumulation account value as of December 31, 1988 ("Pre-1989 Account Value"))
may be made only when the Participant attains age 59 1/2, separates from service
with the employer, dies or becomes disabled (within the meaning of Section
72(m)(7) of the Code). These restrictions apply to any growth or interest on or
after January 1, 1989 on Pre-1989 Account Value, salary reduction contributions
made on or after January 1, 1989, and any growth or interest on such
contributions ("Restricted Account Value").
Withdrawals of Restricted Account Value are also permitted in cases of
financial hardship, but only to the extent of contributions; earnings on
contributions cannot be withdrawn for hardship reasons. While specific rules
defining hardship have not been issued by the Internal Revenue Service, it is
expected that to qualify for a hardship distribution, the Participant must have
an immediate and heavy bona fide financial need and lack other resources
reasonably available to satisfy the need. Hardship withdrawals (as well as
certain other premature withdrawals) will be subject to a 10% tax penalty, in
addition to any withdrawal charge applicable under the Contracts (See "Federal
Tax Status"). Under certain circumstances the 10% tax penalty will not apply if
the withdrawal is made to pay medical expenses.
Under the terms of a particular Section 403(b) plan, the Participant may be
entitled to transfer all or a portion of the Participant's Account Value to one
or more alternative funding options. Participants should consult the documents
governing their plan and the person who administers the plan for information as
to such investment alternatives.
For information on the federal income tax withholding rules that apply to
distributions from Qualified Contracts (including Section 403(b) Annuities) see
"Federal Tax Status".
MARKET VALUE ADJUSTMENT
Any cash withdrawal of a Guarantee Amount, other than a withdrawal effective
within 30 days prior to the Expiration Date of the Guarantee Amount or the
withdrawal of interest credited on such Guarantee Amount during the current
Account Year, will be subject to a Market Value Adjustment ("MVA") (for this
purpose, transfers (except automatic transfers to a Sub-Account of amounts
allocated to a Guarantee Period in connection with an approved dollar cost
averaging program) and amounts applied to purchase an annuity are treated as
cash withdrawals). The MVA will be applied to the amount being withdrawn which
is subject to the MVA, after deduction of any applicable Account Fee and before
deduction of any applicable withdrawal charge.
The MVA will reflect the relationship between the Current Rate (as defined
below) for the Guarantee Amount being withdrawn and the Guaranteed Interest Rate
applicable to the amount being withdrawn. It also reflects the time remaining in
the applicable Guarantee Period. Generally, if the Guaranteed Interest Rate is
lower than the applicable Current Rate, then the application of the MVA will
result in a lower payment upon withdrawal. Similarly, if the Guaranteed Interest
Rate is higher than the applicable Current Rate, the application of the MVA will
result in a higher payment upon withdrawal.
The Market Value Adjustment is determined by the application of the
following formula:
<TABLE>
<C> <C>
N/12
1 + I
-----
( 1 + J ) -1
+ b
</TABLE>
where:
I is the Guaranteed Interest Rate being credited to the Guarantee Amount
subject to the MVA,
J is the Guaranteed Interest Rate declared by the Company, as of the
effective date of the application of the MVA, for current allocations to
Guarantee Periods equal to the balance of the Guarantee Period of the Guarantee
Amount subject to the MVA, rounded to the next higher number of complete years,
or in the case of Guarantee Periods of less than one year, the Guarantee Period
will equal the entire Guarantee Period (the "Current Rate"),
26
<PAGE>
b is a factor which is currently 0% but which the Company may increase up to
.25% for future Contracts, and
N is the number of complete months remaining in the Guarantee Period of the
Guarantee Amount subject to the MVA.
In the determination of J, if the Company currently does not offer the
applicable Guarantee Period, then the rate will be determined by linear
interpolation of the current rates for Guarantee Periods that are available.
See Appendix B for examples of the application of the MVA.
DEATH BENEFIT
DEATH BENEFIT PROVIDED BY THE CONTRACTS
In the event of the death of the Participant prior to the Annuity
Commencement Date, the Company will pay, upon receipt of Due Proof of Death of
the Participant, a death benefit to the Beneficiary. If there is no designated
Beneficiary living on the date of death of the Participant, the Company will,
upon receipt of Due Proof of Death of the Participant or the Beneficiary, if
applicable, pay the death benefit in one sum to the estate of the deceased
Participant. In the event of the death of the Annuitant on or after the Annuity
Commencement Date, no death benefit will be payable under the Contract except as
may be provided under the Annuity Option elected.
ELECTION AND EFFECTIVE DATE OF ELECTION
During the lifetime of the Participant and prior to the Annuity Commencement
Date, the Participant may elect to have the death benefit applied under one or
more Annuity Options to effect a Variable Annuity or a Fixed Annuity or a
combination of both for the Beneficiary as Payee after the death of the
Participant. If no election of a method of settlement of the death benefit by
the Participant is in effect on the date of death of the Participant, the
Beneficiary may elect (a) to receive the death benefit in the form of a single
cash payment; or (b) to have the death benefit applied under one or more of the
Annuity Options (on the Annuity Commencement Date described under "Payment of
Death Benefit") to effect a Variable Annuity or a Fixed Annuity or a combination
of both for the Beneficiary as Payee. Either election described above may be
made by filing with the Company a written election in such form as the Company
may require. Any election of a method of settlement of the death benefit by the
Participant will become effective on the date it is received by the Company. For
the purposes of the "Payment of Death Benefit" and "Amount of Death Benefit"
sections below, any election of the method of settement of the death benefit by
the Participant which is in effect on the date of death of the Participant will
be deemed effective on the date Due Proof of Death of the Participant is
received by the Company. Any election of a method of settlement of the death
benefit by the Beneficiary will become effective on the later of: (a) the date
the election is received by the Company; or (b) the date Due Proof of Death of
the Participant is received by the Company. If an election by the Beneficiary is
not received by the Company within 60 days following the date Due Proof of Death
of the Participant is received by the Company, the Beneficiary will be deemed to
have elected a cash payment as of the last day of the 60 day period.
In all cases, no Participant or Beneficiary shall be entitled to exercise
any rights that would adversely affect the treatment of the Contracts as annuity
contracts under the Code.
PAYMENT OF DEATH BENEFIT
If the death benefit is to be paid in cash, payment will be made within
seven days of the Death Benefit Date, except as the Company may be permitted to
defer any such payment of amounts derived from the Variable Account in
accordance with the Investment Company Act of 1940. If settlement under one or
more of the Annuity Options is elected the Annuity Commencement Date will be the
first day of the second calendar month following the effective date or the
deemed effective date of the election, and the Participant's Account will be
maintained in effect until the Annuity Commencement Date.
27
<PAGE>
If a Participant under a Non-Qualified Contract dies prior to the Annuity
Commencement Date, that Participant's Account Value must be distributed to the
"designated beneficiary" (as defined below) either (1) as a lump sum within five
years after the date of death of the Participant, or (2) as an annuity over some
period not greater than the life or expected life of the designated beneficiary,
with annuity payments beginning within one year after the date of death of the
Participant. For this purpose (and for purposes of Section 72(s) of the Code),
the person named as Beneficiary shall be considered the designated beneficiary,
and if no person then living has been so named, then the Annuitant shall
automatically be the designated beneficiary. If the designated beneficiary is
the surviving spouse of the deceased Participant, the spouse can elect to
continue the Contract in the spouse's own name as Participant, in which case
these mandatory distribution requirements will apply on the spouse's death.
If the Payee dies on or after the Annuity Commencement Date and before the
entire accumulation under such Participant's Account has been distributed, the
remaining portion of such Participant's Account, if any, must be distributed at
least as rapidly as the method of distribution then in effect.
In any case in which a non-natural person constitutes a holder of the
Certificate for the purposes of Section 72(s) of the Code, (1) the distribution
requirements described above shall apply upon the death of any Annuitant, and
(2) a change in any Annuitant shall be treated as the death of an Annuitant.
Any distributions upon the death of a Participant under a Qualified Contract
will be subject to the laws and regulations governing the particular retirement
or deferred compensation plan in connection with which the Qualified Contract
was issued.
AMOUNT OF DEATH BENEFIT
The death benefit is determined as of the Death Benefit Date.
If the Participant was age 85 or younger on the Date of Coverage, the death
benefit is equal to the greatest of:
(1) the Participant's Account Value for the Valuation Period in which the
Death Benefit Date occurs;
(2) the amount that would have been payable in the event of a full surrender
of the Participant's Account on the Death Benefit Date;
(3) the Participant's Account Value on the Seven Year Anniversary
immediately preceding the Death Benefit Date, adjusted for any subsequent
Purchase Payments and partial withdrawals and charges made between such Seven
Year Anniversary and the Death Benefit Date;
(4) the greatest of the Participant's Account Values on any Account
Anniversay prior to the Participant's 81st birthday, adjusted for any subsequent
Purchase Payments and any partial withdrawals and charges made between such
Account Anniversary and the Death Benefit Date; and
(5) the total Purchase Payments made with respect to the Participant's
Account, accumulated as indicated below, minus the sum of all partial
withdrawals.
In determining the amount payable under (5), each Purchase Payment applied
to and amount transferred to the Participant's Account will accumulate daily at
a rate equivalent to 5% per year until the first day of the month following the
Participant's 80th birthday. No such accumulation will apply to a Purchase
Payment or amount transferred once that Purchase Payment or amount so
transferred has, as a result of such accumulation, grown to double its original
amount.
A partial withdrawal will affect the amount payable under (3), (4) and (5)
on a basis proportional to the reduction in the Participant's Account Value
brought about by such withdrawal. Transfers between the Fixed Account and the
Variable Account will affect the amounts accumulating under (5) on a basis
proportional to the reduction in the Participant's Account from which the
transfer will be made.
If the Participant was age 86 or older on the Date of Coverage, the death
benefit is equal to (2) above.
28
<PAGE>
If (2), (3) ,(4), or (5) is operative, the Participant's Account Value will
be increased by the excess of (2), (3) ,(4), or (5), as applicable, over (1),
and the increase will be allocated to the Sub-Accounts based on the respective
values of the Sub-Accounts on the Death Benefit Date. If no portion of the
Participant's Account is allocated to the Sub-Accounts, the entire increase will
be allocated to the Sub-Account invested in the Sun Capital Money Market Fund of
the Sun Capital Advisers Trust.
HOW THE CONTRACT CHARGES ARE ASSESSED
As more fully described below, charges under the Contract offered by this
Prospectus are assessed in three ways: (1) as deductions for the Account Fee
and, if applicable, for premium taxes; (2) as charges against the assets of the
Variable Account for the assumption of mortality and expense risks and
administrative expenses; and (3) as withdrawal charges (contingent deferred
sales charges). In addition, certain deductions are made from the assets of the
Funds for investment management fees and expenses. These fees and expenses are
described in the Fund prospectuses.
ADMINISTRATIVE CHARGES
Each year on the Account Anniversary, the Company deducts from each
Participant's Account an annual account administration fee ("Account Fee") as
partial compensation for expenses relating to the issue and maintenance of the
Contract and the Participant's Account. In Account Years one through five the
Account Fee is equal to the lesser of $35 and 2% of the Participant's Account
Value; thereafter the Account Fee may be changed annually, but in no event may
it exceed the lesser of $50 and 2% of the Participant's Account Value. If a
Participant's Account is surrendered for its full value on other than the
Account Anniversary, the Account Fee will be deducted in full at the time of
such surrender. The Account Fee will be deducted on a pro rata basis from
amounts allocated to each Guarantee Period and each Sub-Account in which the
Participant's Account is invested at the time of such deduction. Also, the
Account Fee will be waived by the Company when: (1) the entire Participant's
Account Value has been allocated to the Fixed Account during the entire previous
Account Year, or (2) the Participant's Account Value is greater than $75,000 at
the time of such deduction. On the Annuity Commencement Date, the value of the
Participant's Account will be reduced by a proportionate amount of the Account
Fee to reflect the time elapsed between the last Account Anniversary and the day
before the Annuity Commencement Date. After the Annuity Commencement Date, an
annual Account Fee of $35 will be deducted in equal amounts from each variable
annuity payment made during the year. No deduction will be made from fixed
annuity payments.
The Company makes a deduction from the Variable Account at the end of each
Valuation Period (during both the Accumulation Period and after annuity payments
begin) at an effective annual rate of 0.15% to reimburse the Company for those
administrative expenses attributable to the Contracts, the Certificates, the
Participant's Accounts and the Variable Account which exceed the revenues
received from the Account Fee. For a description of administrative services
provided see "Administration of the Contracts."
The Contract provides that the Company may modify the Account Fee and the
administrative expense charge, provided that such modification shall apply only
with respect to Participant's Accounts established after the effective date of
such modification (See "Modification").
PREMIUM TAXES
A deduction, when applicable, is made for premium or similar state or local
taxes. The amount of such applicable tax varies by jurisdiction and is subject
to change by the legislature or other authority. In many jurisdictions, there is
no premium tax at all. The Company believes that such premium taxes or similar
taxes currently range from 0% to 3.5%. For more complete information, a tax
adviser should be consulted. It is currently the policy of the Company to deduct
the tax from the amount applied to provide an annuity at the time annuity
payments commence; however, the Company reserves the right to deduct such taxes
on or after the date they are incurred.
MORTALITY AND EXPENSE RISK CHARGE
The mortality risk assumed by the Company arises from the contractual
obligation to continue to make annuity payments to each Annuitant regardless of
how long the Annuitant lives and regardless of how long all annuitants as a
group live. This assures each annuitant that neither the longevity of fellow
annuitants nor
29
<PAGE>
an improvement in life expectancy generally will have an adverse effect on the
amount of any annuity payment received under the Contract. The Company assumes
this mortality risk by virtue of annuity rates incorporated into the Contract
which cannot be changed except, in the case of a Group Contract only, with
respect to Participants' Accounts established after the effective date of such
change, as provided in the "Modification" section of this Prospectus. The
expense risk assumed by the Company is the risk that the administrative charges
assessed under the Contract may be insufficient to cover the actual total
administrative expenses incurred by the Company.
For assuming these risks, the Company makes a deduction from the Variable
Account at the end of each Valuation Period during both the Accumulation Period
and after annuity payments begin at an effective annual rate of 1.25%. If the
deduction is insufficient to cover the actual cost of the mortality and expense
risk undertaking, the Company will bear the loss. Conversely, if the deduction
proves more than sufficient, the excess will be profit to the Company and would
be available for any proper corporate purpose including, among other things,
payment of distribution expenses. The Company will recoup its expected costs
associated with registering and distributing the Contracts by the assessment of
the withdrawal charges (contingent deferred sales charges) described below.
However, the withdrawal charges may prove to be insufficient to cover actual
distribution expenses. If this is the case, the deficiency will be met from the
Company's general corporate funds which may include amounts derived from the
mortality and expense risk charges.
A Group Contract provides that the Company may modify the mortality and
expense risk charge; however, such modification shall apply only with respect to
Participant's Accounts established after the effective date of such modification
(See "Modification").
WITHDRAWAL CHARGES
No deduction for sales charges is made from Purchase Payments. However, a
withdrawal charge (i.e., a contingent deferred sales charge) of up to 6% of
certain amounts withdrawn, when applicable, will be used to cover certain
expenses relating to the sale of the Contracts, including commissions paid to
sales personnel, the costs of preparation of sales literature and other
promotional costs and acquisition expenses.
ANNUITY PROVISIONS
ANNUITY COMMENCEMENT DATE
Annuity payments will begin on the Annuity Commencement Date which is
selected by the Participant, as specified in the Application. The date selected
by the Participant may not be sooner than the first day of the second calendar
month following the Date of Coverage. This date may be changed by the
Participant from time to time by written notice to the Company, provided that
notice of each change is received by the Company at least 30 days prior to the
then current Annuity Commencement Date and the new Annuity Commencement Date is
a date which is: (1) at least 30 days after the date notice of the change is
received by the Company; (2) the first day of a month; and (3) not later than
the first day of the first month following the Annuitant's 90th birthday, unless
otherwise restricted, in the case of a Qualified Contract, by the particular
retirement plan or by applicable law. If more than one person is named as
Annuitant, due to the designation of a Co-Annuitant, the Annuity Commencement
Date will be not later than the first day of the first month following the 90th
birthday of the youngest of those persons so named. In most situations, current
law requires that the Annuity Commencement Date under a Qualified Contract be no
later than April 1 following the year the Annuitant reaches age 70 1/2 (or, for
Qualified Contracts other than IRAs, no later than April 1 following the year
the Annuitant retires, if later than the year the Annuitant reaches age 70 1/2),
and the terms of the particular retirement plan may impose additional
limitations. The Annuity Commencement Date may also be changed by an election of
an Annuity Option as described in the "Death Benefit" section of this
Prospectus.
On the Annuity Commencement Date the Participant's Account will be cancelled
and its adjusted value will be applied to provide an annuity under one or more
of the options described below. No withdrawal charge will be imposed upon
amounts applied to purchase an annuity. However, the Market Value Adjustment may
apply, as noted under "Determination of Amount." NO PAYMENTS MAY BE REQUESTED
UNDER
30
<PAGE>
THE CONTRACT'S CASH WITHDRAWAL PROVISIONS ON OR AFTER THE ANNUITY COMMENCEMENT
DATE, AND NO CASH WITHDRAWAL WILL BE PERMITTED EXCEPT AS MAY BE AVAILABLE UNDER
THE ANNUITY OPTION ELECTED.
Since the Contracts offered by this Prospectus may be issued in connection
with retirement plans which meet the requirements of Section 401, 403, 408 or
408A of the Code, as well as certain non-qualified plans, reference should be
made to the terms of the particular plan for any limitations or restrictions on
the Annuity Commencement Date.
ELECTION -- CHANGE OF ANNUITY OPTION
During the lifetime of the Participant and prior to the Annuity Commencement
Date, the Participant may elect one or more of the Annuity Options described
below, or such other settlement option as may be agreed to by the Company, for
the Annuitant as Payee. The Participant may also change any election, but
written notice of any election or change of election must be received by the
Company at least 30 days prior to the Annuity Commencement Date. If no election
is in effect on the 30th day prior to the Annuity Commencement Date, Annuity
Option B, for a Life Annuity with 120 monthly payments certain, will be deemed
to have been elected. If there is no election of a sole Annuitant in effect on
the 30th day prior to the Annuity Commencement Date, the person designated as
"Co-Annuitant" will be the Payee under the applicable Annuity Option.
Any election may specify the proportion of the adjusted value of the
Participant's Account to be applied to provide a Fixed Annuity and a Variable
Annuity. In the event the election does not so specify, or if no election is in
effect on the 30th day prior to the Annuity Commencement Date, then the portion
of the adjusted value of the Participant's Account to be applied to provide a
Fixed Annuity and a Variable Annuity will be determined on a pro rata basis from
the composition of the Participant's Account on the Annuity Commencement Date.
Annuity Options may also be elected by the Participant or the Beneficiary as
provided in the "Death Benefit" section of this Prospectus.
Reference should be made to the terms of a particular retirement plan and
any applicable legislation for any limitations or restrictions on the options
which may be elected.
NO CHANGE OF ANNUITY OPTION IS PERMITTED AFTER THE ANNUITY COMMENCEMENT
DATE.
ANNUITY OPTIONS
No lump sum settlement option is available under the Contract. The
Participant may surrender a Contract prior to the Annuity Commencement Date;
however, any applicable surrender charge will be deducted from the cash
withdrawal payment and a Market Value Adjustment, if applicable, will be
applied.
Annuity Options A, B, C and D are available to provide either a Fixed
Annuity or a Variable Annuity. Annuity Option E is available only to provide a
Fixed Annuity.
Annuity Option A. Life Annuity: Monthly payments during the lifetime of
the Payee. This option offers a higher level of monthly payments than Annuity
Options B or C because no further payments are payable after the death of the
Payee and there is no provision for a death benefit payable to a Beneficiary.
Annuity Option B. Life Annuity with 60, 120, 180 or 240 Monthly Payments
Certain: Monthly payments during the lifetime of the Payee and in any event for
60, 120, 180 or 240 months certain as elected. The election of a longer period
certain results in smaller monthly payments than would be the case if a shorter
period certain were elected. In the event of the death of the Payee under this
option, the Contract provides that if there is no designated beneficiary
entitled to the remaining payments then living, the discounted value of the
remaining payments, if any, will be calculated and paid in one sum to the
deceased Payee's estate. In addition, any beneficiary who becomes entitled to
any remaining payments under this option may elect to receive the amounts due
under this option in one sum. The discounted value for variable annuity payments
will be based on interest compounded annually at the assumed interest rate,
which will not be less than three percent (3%) per year. The discounted value
for payments being made on a fixed basis will be based on the interest rate
initially used by the Company to determine the amount of each payment.
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<PAGE>
Annuity Option C. Joint and Survivor Annuity: Monthly payments payable
during the joint lifetime of the Payee and a designated second person and during
the lifetime of the survivor. During the lifetime of the survivor, variable
monthly payments, if any, will be determined using the percentage chosen at the
time of election of this option of the number of each type of Annuity Unit
credited to the Contract with respect to the Payee and fixed monthly payments,
if any, will be equal to the same percentage of the fixed monthly payment
payable during the joint lifetime of the Payee and the designated second person.
* Annuity Option D. Monthly Payments for a Specified Period
Certain: Monthly payments for a specified period of time (at least five years
but not exceeding 30 years), as elected. In the event of the death of the Payee
under this option, the Contract provides that, as described under Annuity Option
B above, in certain circumstances the discounted value of the remaining
payments, if any, will be calculated and paid in one sum.
* Annuity Option E. Fixed Payments: The amount applied to provide fixed
payments in accordance with this option will be held by the Company at interest.
Fixed payments will be made in such amounts and at such times (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. The final
payment will be for the balance remaining and may be less than the amount of
each preceding payment. Interest will be credited yearly on the amount remaining
unpaid at a rate which shall be determined by the Company from time to time but
which shall not be less than the minimum rate specified in the applicable
Contract and Certificate (at least 3% per year), compounded annually. The rate
so determined may be changed at any time and as often as may be determined by
the Company, provided, however, that the rate may not be reduced more frequently
than once during each calendar year.
DETERMINATION OF ANNUITY PAYMENTS
On the Annuity Commencement Date the Participant's Account will be cancelled
and its adjusted value will be applied to provide a Variable Annuity or a Fixed
Annuity or a combination of both. The adjusted value will be equal to the
Participant's Account Value at the end of the Valuation Period which ends
immediately preceding the Annuity Commencement Date, reduced by a proportionate
amount of the Account Fee to reflect the time elapsed between the last Account
Anniversary and the day before the Annuity Commencement Date, plus or minus any
applicable Market Value Adjustment and minus any applicable premium or similar
taxes.
If the amount to be applied under any annuity option is less than $2,000, or
if the first annuity payment payable in accordance with such option is less than
$20, the Company will pay the amount to be applied in a single payment to the
Payee.
FIXED ANNUITY PAYMENTS
The dollar amount of each fixed annuity payment will be determined in
accordance with the Annuity Payment Rates found in the Contract which are based
on the minimum guaranteed interest rate specified in the applicable Contract and
Certificate (at least 3% per year), or, if more favorable to the Payee(s), in
accordance with the Annuity Payment Rates published by the Company and in use on
the Annuity Commencement Date.
VARIABLE ANNUITY PAYMENTS
The dollar amount of the first variable annuity payment will be determined
in accordance with the Annuity Payment Rates found in the applicable Contract
which are based on an assumed interest rate of at least 3% per year, unless
these rates are changed (See "Modification"). All variable annuity payments
other than the first are determined by means of Annuity Units credited to the
Contract with respect to the particular Payee. The number of Annuity Units to be
credited in respect of a particular Sub-Account is determined by dividing that
portion of the first variable annuity payment attributable to that Sub-Account
by the Annuity Unit value of that Sub-Account at the end of the Valuation Period
which ends immediately preceding the Annuity Commencement Date. The number of
Annuity Units of each particular Sub-Account credited with respect to the
particular Payee then remains fixed unless an exchange of Annuity Units is made
as described below. The dollar amount of each variable annuity payment after the
first may increase, decrease or remain
- ------------------------
* The election of this Annuity Option may result in the imposition of a penalty
tax.
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<PAGE>
constant, and is equal to the sum of the amounts determined by multiplying the
number of Annuity Units of a particular Sub-Account credited with respect to the
particular Payee by the Annuity Unit value for the particular Sub-Account for
the Valuation Period which ends immediately preceding the due date of each
subsequent payment. If the net investment return on the assets of the Variable
Account is the same as the assumed interest rate, variable annuity payments will
remain level. If the net investment return exceeds the assumed interest rate
variable annuity payments will increase and, conversely, if it is less than the
assumed interest rate the payments will decrease.
For a hypothetical example of the calculation of a Variable Annuity Payment,
see Appendix A.
VARIABLE ANNUITY UNIT VALUE
The Annuity Unit value for each Sub-Account was established at $10.00 for
the first Valuation Period of the particular Sub-Account. The Annuity Unit Value
for the particular Sub-Account for any subsequent Valuation Period is determined
by multiplying the Annuity Unit value for the particular Sub-Account for the
immediately preceding Valuation Period by the Net Investment Factor (See
"Variable Accumulation Value, Net Investment Factor") for the particular
Sub-Account for the current Valuation Period and then multiplying that product
by a factor to neutralize the assumed interest rate used to establish the
Annuity Payment Rates found in the applicable Contract.
For a hypothetical example of the calculation of the value of a Variable
Annuity Unit, see Appendix A.
EXCHANGE OF VARIABLE ANNUITY UNITS
After the Annuity Commencement Date, the Payee may, by filing a written
request with the Company, exchange the value of a designated number of Annuity
Units of particular Sub-Accounts then credited with respect to the particular
Payee into other Annuity Units, the value of which would be such that the dollar
amount of an annuity payment made on the date of the exchange would be
unaffected by the fact of the exchange. No more than 12 exchanges may be made
within each Account Year.
Exchanges may be made only between Sub-Accounts. Exchanges will be made
using the Annuity Unit values for the Valuation Period during which any request
for exchange is received by the Company.
ANNUITY PAYMENT RATES
The Contract contains Annuity Payment Rates for each Annuity Option
described in this Prospectus. The rates show, for each $1,000 applied, the
dollar amount of: (a) the first monthly Variable Annuity payment based on the
assumed interest rate specified in the applicable Contract and Certificate (at
least 3%); and (b) the monthly Fixed Annuity payment, when this payment is based
on the minimum guaranteed interest rate specified in the Contract and
Certificate (at least 3% per year). These rates may be changed by the Company
with respect to Participant's Accounts established after the effective date of
such change (See "Modification").
The annuity payment rates may vary according to the Annuity Option elected
and the adjusted age of the Payee. The Contract also describes the method of
determining the adjusted age of the Payee. The mortality table used in
determining the annuity payment rates for Options A, B and C is the 1983
Individual Annuitant Mortality Table.
OTHER CONTRACT PROVISIONS
PAYMENT LIMITS
The initial Purchase Payment credited to each Participant's Account must be
at least $10,000 and each additional Purchase Payment must be at least $1,000,
unless waived by the Company. In addition, the prior approval of the Company is
required before it will accept a Purchase Payment which would cause the value of
a Participant's Account to exceed $1,000,000. If the value of a Participant's
Account exceeds $1,000,000, no additional Purchase Payments will be accepted
without the prior approval of the Company. Purchase Payments may be made
annually, semi-annually, quarterly, monthly or at any other frequency acceptable
to the Company. The Participant may, subject to the minimum payment, increase or
decrease the amount of Purchase Payments or change the frequency of payment, but
the Participant is not obligated to continue
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Purchase Payments in the amount or frequency elected. There are no penalties for
failure to continue to make Purchase Payments. While the Contract and the
Participant's Account are in force, Purchase Payments may be made at any time
prior to the Annuity Commencement Date.
DESIGNATION AND CHANGE OF BENEFICIARY
The Beneficiary designation contained in the Application will remain in
effect until changed.
Subject to the rights of an irrevocably designated Beneficiary, the
designation of Beneficiary may be changed or revoked. Any change or revocation
must be filed with the Company in such form as the Company may require. The
change or revocation will not be binding upon the Company until it is received
by the Company. When it is so received the change or revocation will be
effective as of the date on which the Beneficiary designation or revocation was
signed, but the change or revocation will be without prejudice to the Company on
account of any payment made or any action taken by the Company prior to
receiving the change or revocation.
Reference should be made to the terms of a particular retirement plan and
any applicable legislation for any restrictions on the Beneficiary designation.
EXERCISE OF CONTRACT RIGHTS
An Individual Contract shall belong to the individual Participant to whom
the Contract is issued. A Group Contract shall belong to the Owner. In the case
of a Group Contract, all Contract rights and privileges may be expressly
reserved by the Owner, failing which, each Participant shall be entitled to
exercise such rights and privileges. In any case, such rights and privileges can
be exercised without the consent of the Beneficiary (other than an irrevocably
designated Beneficiary) or any other person. Such rights and privileges may be
exercised only during the lifetime of the Annuitant and prior to the Annuity
Commencement Date, except as otherwise provided in the Contract.
The Annuitant becomes the Payee on and after the Annuity Commencement Date.
The Beneficiary becomes the Payee on the death of the Participant prior to the
Annuity Commencement Date, or on the death of the Annuitant after the Annuity
Commencement Date. Such Payees may thereafter exercise such rights and
privileges, if any, of ownership which continue.
CHANGE OF OWNERSHIP
Ownership of a Qualified Contract may not be transferred except to: (1) the
Annuitant; (2) a trustee or successor trustee of a pension or profit sharing
trust which is qualified under Section 401 of the Code; (3) the employer of the
Annuitant provided that the Qualified Contract after transfer is maintained
under the terms of a retirement plan qualified under Section 403(a) of the Code
for the benefit of the Annuitant; (4) the trustee of an individual retirement
account plan qualified under Section 408 of the Code for the benefit of the
Participants under a Group Contract; or (5) as otherwise permitted from time to
time by laws and regulations governing the retirement or deferred compensation
plans for which a Qualified Contract may be issued. Subject to the foregoing, a
Qualified Contract may not be sold, assigned, transferred, discounted or pledged
as collateral for a loan or as security for the performance of an obligation or
for any other purpose to any person other than the Company.
The Owner of a Non-Qualified Contract may change the ownership of the
Contract prior to the last Annuity Commencement Date; and each Participant, in
like manner, may change the ownership interest in a Contract. A change of
ownership will not be binding upon the Company until written notification is
received by the Company. When such notification is so received, the change will
be effective as of the date on which the request for change was signed by the
Owner or Participant, as appropriate, but the change will be without prejudice
to the Company on account of any payment made or any action taken by the Company
prior to receiving the change.
VOTING OF FUND SHARES
The Company will vote Fund shares held by the Sub-Accounts at meetings of
shareholders of the Funds or in connection with similar solicitations, but will
follow voting instructions received from persons having the right to give voting
instructions. Except in the case of a Group Contract where the right to give
voting instructions is reserved by the Owner, the Participant is the person
having the right to give voting
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instructions prior to the Annuity Commencement Date. On or after the Annuity
Commencement Date the Payee is the person having such voting rights. Any shares
attributable to the Company and Fund shares for which no timely voting
instructions are received will be voted by the Company in the same proportion as
the shares for which instructions are received from Owners, Participants and
Payees, as applicable.
Owners of Qualified Contracts issued on a group basis may be subject to
other voting provisions of the particular plan and of the Investment Company Act
of 1940. Employees who contribute to plans which are funded by the Contracts may
be entitled to instruct the Owners as to how to instruct the Company to vote the
Fund shares attributable to their contributions. Such plans may also provide the
additional extent, if any, to which the Owners shall follow voting instructions
of persons with rights under the plans. If no voting instructions are received
from any such person with respect to a particular Participant's Account, the
Owner may instruct the Company as to how to vote the number of Fund shares for
which instructions may be given.
Neither the Variable Account nor the Company is under any duty to provide
information concerning the voting instruction rights of persons who may have
such rights under plans, other than rights afforded by the Investment Company
Act of 1940, nor any duty to inquire as to the instructions received or the
authority of Owners, Participants or others, as applicable, to instruct the
voting of Fund shares. Except as the Variable Account or the Company has actual
knowledge to the contrary, the instructions given by Owners under Group
Contracts and Payees will be valid as they affect the Variable Account, the
Company and any others having voting instruction rights with respect to the
Variable Account.
All Fund proxy material, together with an appropriate form to be used to
give voting instructions, will be provided to each person having the right to
give voting instructions at least ten days prior to each meeting of the
shareholders of a Fund. The number of Fund shares as to which each such person
is entitled to give instructions will be determined by the Company on a date not
more than 90 days prior to each such meeting. Prior to the Annuity Commencement
Date, the number of Fund shares as to which voting instructions may be given to
the Company is determined by dividing the value of all of the Variable
Accumulation Units of the particular Sub-Account credited to the Participant's
Account by the net asset value of one Fund share as of the same date. On or
after the Annuity Commencement Date, the number of Fund shares as to which such
instructions may be given by a Payee is determined by dividing the reserve held
by the Company in the Sub-Account with respect to the particular Payee by the
net asset value of a Fund share as of the same date. After the Annuity
Commencement Date, the number of Fund shares as to which a Payee is entitled to
give voting instructions will generally decrease due to the decrease in the
reserve.
PERIODIC REPORTS
During the Accumulation Period, the Company will send the Participant, or
such other person having voting rights, at least once during each Account Year,
a statement showing the number, type and value of Accumulation Units credited to
the Participant's Account and the Fixed Accumulation Value of such account,
which statement shall be accurate as of a date not more than two months previous
to the date of mailing. These periodic statements contain important information
concerning the Participant's Account transactions with respect to a Contract. It
is the obligation of the Participant to review each such statement carefully and
to report to the Company, at the address or telephone number provided on the
statement, any errors or discrepancies in the information presented therein
within 60 days of the date of such statement. Unless the Company receives notice
of any such error or discrepancy from the Participant within such period, the
Company may not be responsible for correcting the error or discrepancy.
In addition, every person having voting rights will receive such reports or
prospectuses concerning the Variable Account and the Series Fund as may be
required by the Investment Company Act of 1940 and the Securities Act of 1933.
The Company will also send such statements reflecting transactions in the
Participant's Account as may be required by applicable laws, rules and
regulations.
Upon request, the Company will provide the Participant with information
regarding fixed and variable accumulation values.
SUBSTITUTED SECURITIES
Shares of any or all Funds may not always be available for purchase by the
Sub-Accounts of the Variable Account or the Company may decide that further
investment in any such shares is no longer
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appropriate in view of the purposes of the Variable Account. In either event,
shares of another registered open-end investment company or unit investment
trust may be substituted both for Fund shares already purchased by the Variable
Account and/or as the security to be purchased in the future provided that these
substitutions have been approved, if required, by the Commission. In the event
of any substitution pursuant to this provision, the Company may make appropriate
endorsement to the Contract to reflect the substitution.
CHANGE IN OPERATION OF VARIABLE ACCOUNT
At the Company's election and subject to any necessary vote by persons
having the right to give instructions with respect to the voting of Fund shares
held by the Sub-Accounts, the Variable Account may be operated as a management
company under the Investment Company Act of 1940 or it may be deregistered under
the Investment Company Act of 1940 in the event registration is no longer
required. Deregistration of the Variable Account requires an order by the
Commission. In the event of any change in the operation of the Variable Account
pursuant to this provision, the Company may make appropriate endorsement to the
Contract to reflect the change and take such other action as may be necessary
and appropriate to effect the change.
SPLITTING UNITS
The Company reserves the right to split or combine the value of Variable
Accumulation Units, Annuity Units or any of them. In effecting any such change
of unit values, strict equity will be preserved and no change will have a
material effect on the benefits or other provisions of the Contract.
MODIFICATION
Upon notice to the Participant, in the case of an Individual Contract, and
the Owner and Participant(s), in the case of a Group Contract (or the Payee(s)
during the annuity period), the Contract may be modified by the Company if such
modification: (i) is necessary to make the Contract or the Variable Account
comply with any law or regulation issued by a governmental agency to which the
Company or the Variable Account is subject; or (ii) is necessary to assure
continued qualification of the Contract under the Code or other federal or state
laws relating to retirement annuities or annuity contracts; or (iii) is
necessary to reflect a change in the operation of the Variable Account or the
Sub-Account(s) (See "Change in Operation of Variable Account"); or (iv) provides
additional Variable Account and/or fixed accumulation options; or (v) as may
otherwise be in the best interests of Owners, Participants, or Payees, as
applicable. In the event of any such modification, the Company may make
appropriate endorsement in the Contract to reflect such modification.
In addition, upon notice to the Owner, a Group Contract may be modified by
the Company to change the withdrawal charges, Account Fees, mortality and
expense risk charges, administrative expense charges, the tables used in
determining the amount of the first monthly variable annuity and fixed annuity
payments and the formula used to calculate the Market Value Adjustment, provided
that such modification shall apply only to Participant's Accounts established
after the effective date of such modification. In order to exercise its
modification rights in these particular instances, the Company must notify the
Owner of such modification in writing. The notice shall specify the effective
date of such modification which must be at least 60 days following the date of
mailing of the notice of modification by the Company. All of the charges and the
annuity tables which are provided in the Group Contract prior to any such
modification will remain in effect permanently, unless improved by the Company,
with respect to Participant's Accounts established prior to the effective date
of such modification.
DISCONTINUANCE OF NEW PARTICIPANTS
The Company, by giving 30 days' prior written notice to the Owner, may limit
or discontinue the acceptance of new Applications and the issuance of new
Certificates under a Group Contract. Such limitation or discontinuance shall
have no effect on rights or benefits with respect to any Participant's Accounts
established under such Group Contract prior to the effective date of such
limitation or discontinuance.
CUSTODIAN
The Company is the Custodian of the assets of the Variable Account. The
Company will purchase Fund shares at net asset value in connection with amounts
allocated to the Sub-Accounts in accordance with the
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instructions of the Participant and redeem Fund shares at net asset value for
the purpose of meeting the contractual obligations of the Variable Account,
paying charges relative to the Variable Account or making adjustments for
annuity reserves held in the Variable Account.
RIGHT TO RETURN
If the Participant is not satisfied with the Contract, it may be returned by
mailing it to the Company at the Annuity Service Mailing Address on the cover of
this Prospectus within ten days after it was delivered to the Participant. When
the Company receives the returned Contract, it will be cancelled and the
Participant's Account Value at the end of the Valuation Period during which the
Contract was received by the Company will be refunded to the Participant.
However, if applicable state law so requires, the full amount of any Purchase
Payment(s) received by the Company will be refunded, the "free look" period may
be greater than ten days and alternative methods of returning the Certificate
may be acceptable.
With respect to Individual Retirement Accounts, under the Code a Participant
establishing an Individual Retirement Account ("IRA") must be furnished with a
disclosure statement containing certain information about the Contract and
applicable legal requirements. This statement must be furnished on or before the
date the IRA is established. If the Participant is furnished with such
disclosure statement before the seventh day preceding the date the IRA is
established, the Participant will not have any right of revocation. If the
disclosure statement is furnished after the seventh day preceding the
establishment of the IRA, then the Participant may give a notice of revocation
to the Company at any time within seven days after the Date of Coverage. Upon
such revocation, the Company will refund the Purchase Payment(s) made by the
Participant. The foregoing right of revocation with respect to an IRA is in
addition to the return privilege set forth in the preceding paragraph. The
Company will allow a participant establishing an IRA a "ten day free-look,"
notwithstanding the provisions of the Code.
FEDERAL TAX STATUS
INTRODUCTION
The Contracts described in this Prospectus are designed for use in
connection with personal retirement plans and by employer, association and other
group retirement plans under the provisions of Sections 401 (including Section
401(k)), 403, 408(b), 408(c), 408(k) and 408(p) of the Internal Revenue Code
(the "Code"), as well as certain non-qualified retirement plans, such as payroll
savings plans. As noted above, the Company may begin offering Participants under
Contracts used in connection with individual retirement plans under Section 408
the opportunity to convert such Contracts into Contracts used in connection with
Roth IRAs under Section 408A, and may also begin offering new Contracts for use
in connection with Roth IRAs. The ultimate effect of federal income taxes may
depend upon the type of retirement plan for which the Contract is purchased and
a number of different factors. This discussion is general in nature, is based
upon the Company's understanding of current federal income tax laws, and is not
intended as tax advice.
Congress has the power to enact legislation affecting the tax treatment of
annuity contracts, and such legislation could be applied retroactively to
Contracts purchased before the date of enactment. Also, because the Code, is not
in force in the Commonwealth of Puerto Rico, some references in this discussion
will not apply to Contracts issued in Puerto Rico. Any person contemplating the
purchase of a Contract should consult a qualified tax adviser. THE COMPANY DOES
NOT MAKE ANY GUARANTEE REGARDING THE FEDERAL, STATE OR LOCAL TAX STATUS OF ANY
CONTRACT OR ANY TRANSACTION INVOLVING THE CONTRACTS.
TAX TREATMENT OF THE COMPANY AND THE VARIABLE ACCOUNT
The Company is taxed as a life insurance company under the Code. The
operations of the Variable Account are accounted for separately from other
operations of the Company for purposes of federal income taxation, but the
Variable Account is not taxable as a regulated investment company or otherwise
as an entity separate from the Company. The income of the Variable Account
(consisting primarily of interest, dividends and net capital gains) is not
taxable to the Company to the extent that it is applied to increase reserves
under contracts participating in the Variable Account.
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TAXATION OF ANNUITIES IN GENERAL
Purchase Payments made under Non-Qualified Contracts are not deductible from
the Participant's income for federal income tax purposes. Participants under
Qualified Contracts should consult a tax adviser regarding the tax treatment of
Purchase Payments.
Generally, no taxes are imposed on the increase in the value of a Contract
until a distribution occurs, either as an annuity payment or as a cash
withdrawal or lump-sum payment prior to the Annuity Commencement Date. However,
corporate Owners and Participants and other Owners and Participants that are not
natural persons are subject to current taxation on the annual increase in the
value of a Non-Qualified Contract, unless the non-natural person holds the
Contract as agent for a natural person (such as where a bank or other entity
holds a Contract as trustee under a trust agreement). This current taxation of
annuities held by non-natural persons does not apply to earnings accumulated
under an immediate annuity, which the Code defines as a single premium contract
with an annuity commencement date within one year of the date of purchase. Also,
the Internal Revenue Service could assert that Owners or Participants under both
Qualified Contracts and Non-Qualified Contracts annually receive and are subject
to tax on a deemed distribution equal to the cost of any life insurance benefit
provided by the Contract.
The following discussion applies both with respect to Individual Contracts
and Group Contracts. Because the Code is unclear in its application to a group
annuity contract where the owner is distinct from the individuals who receive
the contract benefits, the following discussion as applied to Group Contracts is
the Company's best understanding of the operation of the Code in the context of
group contracts. However, Owners and Participants should consult a qualified tax
adviser.
A partial cash withdrawal (i.e., a withdrawal of less than the entire
Participant's Account Value) under a Non-Qualified Contract before the Annuity
Commencement Date is treated as a withdrawal from the increase in the
Participant's Account Value, rather than as a return of Purchase Payments. The
amount of the withdrawal allocable to this increase will be includible in the
Participant's income and subject to tax at ordinary income rates. If part or all
of a Participant's Account Value is assigned or pledged as collateral for a
loan, the amount assigned or pledged must be treated as if it were withdrawn
from the Contract.
In the case of annuity payments under a Non-Qualified Contract after the
Annuity Commencement Date, a portion of each payment is treated as a nontaxable
return of Purchase Payments. The nontaxable portion is determined by applying to
each annuity payment an "exclusion ratio," which, in general, is the ratio that
the total amount the Participant paid for the Contract bears to the Payee's
expected return under the Contract. The remainder of the payment is taxable at
ordinary income rates.
The total amount that a Payee may exclude from income through application of
the "exclusion ratio" is limited to the amount the Participant paid for the
Contract. If the Annuitant survives for his full life expectancy, so that the
Payee recovers the entire amount paid for the Contract, any subsequent annuity
payments will be fully taxable as income. Conversely, if the Annuitant dies
before the Payee recovers the entire amount paid, the Payee will be allowed a
deduction for the amount of unrecovered Purchase Payments.
Taxable cash withdrawals and lump-sum payments from Non-Qualified Contracts
may be subject to a penalty tax equal to 10% of the amount treated as taxable
income. This 10% penalty also may apply to certain annuity payments. This
penalty will not apply in certain circumstances (such as where the distribution
is made upon the death of the Participant). The withdrawal penalty also does not
apply to distributions under an immediate annuity (as defined above).
In the case of a Qualified Contract, distributions generally are taxable and
distributions made prior to age 59 1/2 are subject to a 10% penalty tax,
although this penalty tax will not apply in certain circumstances. Certain
distributions, known as "eligible rollover distributions," if rolled over to
certain other qualified retirement plans (either directly or after being
distributed to the Participant or Payee), are not taxable until distributed from
the plan to which they are rolled over. In general, an eligible rollover
distribution is any taxable distribution other than a distribution that is part
of a series of payments made for life or for a specified period of ten years or
more. Owners, Participants, Annuitants, Payees and Beneficiaries should seek
qualified advice about the tax consequences of distributions, withdrawals,
rollovers and payments under the retirement plans in connection with which the
Certificates are purchased.
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If the Participant under a Non-Qualified Certificate dies, the value of the
Contract generally must be distributed within a specified period (See "Death
Benefit"). For Contracts owned by non-natural persons, a change in the Annuitant
is treated as the death of the Participant.
A purchaser of a Qualified Contract should refer to the terms of the
applicable retirement plan and consult a tax adviser regarding distribution
requirements upon the death of the Participant.
A transfer of a Non-Qualified Contract by gift (other than to the
Participant's spouse) is treated as the receipt by the Participant of income in
an amount equal to the Participant's Account Value minus the total amount paid
for the Contract.
The Company will withhold and remit to the U.S. Government a part of the
taxable portion of each distribution made under a Non-Qualified Contract or
under a Qualified Contract issued for use with an individual retirement account
unless the Participant or Payee provides his or her taxpayer identification
number to the Company and notifies the Company (in the manner prescribed) before
the time of the distribution that he or she chooses not to have any amounts
withheld.
In the case of distributions from a Qualified Contract (other than
distributions from a Contract issued for use with an individual retirement
account), the Company or the plan administrator must withhold and remit to the
U.S. Government 20% of each distribution that is an eligible rollover
distribution (as defined above) unless the Participant or Payee elects to make a
direct rollover of the distribution to another qualified retirement plan that is
eligible to receive the rollover. If a distribution from a Qualified Contract is
not an eligible rollover distribution, then the Participant or Payee can choose
not to have amounts withheld as described above for Non-Qualified Contracts and
Qualified Contracts issued for use with individual retirement accounts.
Amounts withheld from any distribution may be credited against the
Participant's or Payee's federal income tax liability for the year of the
distribution.
The Internal Revenue Service has issued regulations that prescribe
investment diversification requirements for mutual fund series underlying
nonqualified variable contracts. Contracts that do not comply with these
regulations do not qualify as annuities for federal income tax purposes, and
therefore the annual increase in the value of such contracts is subject to
current taxation. The Company believes that each of the Funds complies with the
regulations.
The preamble to the regulations states that the Internal Revenue Service may
promulgate guidelines under which a variable contract will not be treated as an
annuity for tax purposes if the owner has excessive control over the investments
underlying the contract. It is not known whether such guidelines, if in fact
promulgated, would have retroactive effect. If guidelines are promulgated, the
Company will take any action (including modification of the Contract and/or the
Variable Account) necessary to comply with the guidelines.
THE FOLLOWING INFORMATION SHOULD BE CONSIDERED ONLY WHEN AN IMMEDIATE
ANNUITY CONTRACT AND A DEFERRED ANNUITY CONTRACT ARE PURCHASED TOGETHER: The
Company understands that the Treasury Department is in the process of
reconsidering the tax treatment of annuity payments under an immediate annuity
contract (as defined above) purchased together with a deferred annuity contract.
The Company believes that any adverse change in the existing tax treatment of
such immediate annuity contracts is likely to be prospective, that is, it would
not apply to contracts issued before such a change is announced. However, there
can be no assurance that any such change, if adopted, would not be applied
retroactively.
QUALIFIED RETIREMENT PLANS
The Qualified Contracts described in this Prospectus are designed for use
with several types of qualified retirement plans. The tax rules applicable to
participants in such qualified retirement plans vary according to the type of
plan and its terms and conditions. Therefore, no attempt is made herein to
provide more than general information about the use of the Qualified Contracts
with the various types of qualified retirement plans. Participants under such
plans as well as Owners, Annuitants, Payees and Beneficiaries are cautioned that
the rights of any person to any benefits under these plans may be subject to the
terms and conditions of the plans themselves, regardless of the terms and
conditions of the Qualified Contracts issued
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in connection therewith. These terms and conditions may include restrictions on,
among other things, ownership, transferability, assignability, contributions and
distributions. Any person contemplating the purchase of a Qualified Contract
should consult a qualified tax adviser. In addition, Owners, Participants,
Payees, Beneficiaries and administrators of qualified retirement plans should
consider and consult their tax adviser concerning whether the death benefit
payable under the Contract affects the qualified status of their retirement
plan. Following are brief descriptions of various types of qualified retirement
plans and the use of the Qualified Contracts in connection therewith.
PENSION AND PROFIT-SHARING PLANS
Sections 401(a), 401(k) and 403(a) of the Code permit business employers and
certain associations to establish various types of retirement plans for
employees. The Tax Equity and Fiscal Responsibility Act of 1982 eliminated most
differences between qualified retirement plans of corporations and those of
self-employed individuals. The Contract may be purchased by those who would have
been covered under the rules governing old H.R. 10 (Keogh) Plans as well as by
corporate plans. Such retirement plans may permit the purchase of the Qualified
Contracts to provide benefits under the plans. Employers intending to use the
Qualified Contracts in connection with such plans should seek qualified advice
in connection therewith.
TAX-SHELTERED ANNUITIES
Section 403(b) of the Code permits public school employees and employees of
certain types of charitable, educational and scientific organizations specified
in Section 501(c) (3) of the Code to purchase annuity contracts and, subject to
certain limitations, exclude the amount of purchase payments from gross income
for tax purposes. These annuity contracts are commonly referred to as
"Tax-Sheltered Annuities." Purchasers of the Qualified Contracts for such
purposes should seek qualified advice as to eligibility, limitations on
permissible amounts of Purchase Payments and tax consequences of distributions
(See "Section 403(b) Annuities").
INDIVIDUAL RETIREMENT ACCOUNTS
Sections 219 and 408 of the Code permit eligible individuals to contribute
to an individual retirement program, including Simplified Employee Pension
Plans, Employer/Association of Employees Established Individual Retirement
Account Trusts, and Simple Retirement Accounts, known as an Individual
Retirement Account ("IRA"). These IRAs are subject to limitations on the amount
that may be contributed, the persons who may be eligible, and on the time when
distributions may commence. In addition, certain distributions from some other
types of retirement plans may be placed on a tax-deferred basis in an IRA. Sale
of the Contracts for use with IRAs may be subject to special requirements
imposed by the Internal Revenue Service. Purchasers of the Contracts for such
purposes will be provided with such supplementary information as may be required
by the Internal Revenue Service or other appropriate agency, and will have the
right to revoke the Contract under certain circumstances, as described in the
section of this Prospectus entitled "Right to Return Contract."
ROTH IRAS
Section 408A of the Code permits an individual to contribute to an
individual retirement program called a Roth IRA. Unlike contributions to a
regular IRA under Section 408 of the Code, contributions to a Roth IRA are not
made on a tax-deductible basis, but distributions are tax-free if certain
requirements are satisfied. Like traditional IRAs, Roth IRAs are subject to
limitations on the amount that may be contributed and the time when
distributions may commence. A traditional IRA may be converted into a Roth IRA,
and the resulting income may be spread over four years if the conversion occurs
before January 1, 1999. If and when Contracts are made available for use with
Roth IRAs, they may be subject to special requirements imposed by the Internal
Revenue Service. Purchasers of the Contracts for this purpose will be provided
with such supplementary information as may be required by the Internal Revenue
Service or other appropriate agency.
ADMINISTRATION OF THE CONTRACTS
The Company performs certain administrative functions relating to the
Contracts, Participant's Accounts, and the Variable Account. These functions
include, but are not limited to, maintaining the books and records of the
Variable Account and the Sub-Accounts; maintaining records of the name, address,
40
<PAGE>
taxpayer identification number, Contract number, Participant's Account number
and type, the status of each Participant's Account and other pertinent
information necessary to the administration and operation of the Contracts;
processing Applications, Purchase Payments, transfers and full and partial
surrenders; issuing Contracts and Certificates; administering annuity payments;
furnishing accounting and valuation services; reconciling and depositing cash
receipts; providing confirmations; providing toll-free customer service lines;
and furnishing telephonic transfer services.
DISTRIBUTION OF THE CONTRACTS
The offering of the Contracts is continuous. The Contracts will be sold by
licensed insurance agents in those states where the Contracts may be lawfully
sold. Such agents will be registered representatives of broker-dealers
registered under the Securities Exchange Act of 1934 who are members of the
National Association of Securities Dealers, Inc. and who have entered into
distribution agreements with the Company and the General Distributor, Clarendon
Insurance Agency, Inc. ("Clarendon"), One Sun Life Executive Park, Wellesley
Hills, Massachusetts 02481, a wholly-owned subsidiary of the Company. Clarendon
is registered with the Commission under the Securities Exchange Act of 1934 as
broker-dealer and is a member of the National Association of Securities Dealers,
Inc. Clarendon also acts as the general distributor of certain other annuity
contracts issued by the Company and its wholly-owned subsidiary, Sun Life
Insurance and Annuity Company of New York, and variable life insurance contracts
issued by the Company. Commissions and other distribution compensation will be
paid by the Company and will not be more than 7.46% of Purchase Payments. In
addition, after the first Account Year, broker-dealers who have entered into
distribution agreements with the Company may receive an annual renewal
commission of no more than 1.00% of the Participant's Account Value. In addition
to commissions, the Company may, from time to time, pay or allow additional
promotional incentives, in the form of cash or other compensation. In some
instances, such other incentives may be offered only to certain broker-dealers
that sell or are expected to sell during specified time periods certain minimum
amounts of the Contracts or Certificates or other contracts offered by the
Company. Commissions will not be paid with respect to Participant's Accounts
established for the personal account of employees of the Company or any of its
affiliates, or of persons engaged in the distribution of the Contracts, or of
immediate family members of such employees or persons. In addition, commissions
may be waived or reduced in connection with certain transactions described under
"Waivers; Reduced Charges; Credits; Bonus Guaranteed Interest Rates."
41
<PAGE>
ADDITIONAL INFORMATION ABOUT THE COMPANY
SELECTED FINANCIAL DATA
The following selected financial data for the Company should be read in
conjunction with the statutory financial statements of the Company and notes
thereto included in this Prospectus beginning on page 53.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
(IN 000'S)
Revenues
Premiums, annuity deposits and
other revenue................. $ 2,513,741 $ 2,131,939 $ 1,883,901 $ 1,997,525 $ 2,443,310
Net investment income and
realized gains................ 301,524 312,870 315,966 312,583 311,322
-------------- -------------- -------------- -------------- --------------
2,815,265 2,444,809 2,199,867 2,310,108 2,754,632
-------------- -------------- -------------- -------------- --------------
Benefits and expenses
Policyholder benefits.......... 2,469,215 2,149,145 1,995,208 2,102,290 2,515,320
Other expenses................. 206,066 175,342 150,937 186,892 232,365
-------------- -------------- -------------- -------------- --------------
2,675,281 2,324,487 2,146,145 2,289,182 2,747,685
-------------- -------------- -------------- -------------- --------------
Operating gain................... 139,984 120,322 53,722 20,926 6,947
Federal income tax expense
(benefit)...................... 10,742 (2,702) 17,807 19,469 3,691
-------------- -------------- -------------- -------------- --------------
Net income....................... $ 129,242 $ 123,024 $ 35,915 $ 1,457 $ 3,256
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
Assets........................... $ 15,927,045 $ 13,621,952 $ 12,359,683 $ 10,117,822 $ 9,179,090
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
Surplus notes.................... $ 565,000 $ 315,000 $ 650,000 $ 335,000 $ 335,000
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
</TABLE>
See Item 1 for the effect of the reinsurance agreements on net income.
See Note 1 to financial statements for changes in accounting principles and
reporting.
See discussion under "Recent Reorganization," below.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FINANCIAL CONDITION
ASSETS
For management purposes, it is the Company's practice to segment its general
account to facilitate the matching of assets and liabilities; nonetheless, all
general account assets stand behind all general account liabilities. A majority
of the Company's assets are income producing investments. Particular attention
is paid to the quality of these assets.
The Company's bond holdings consist of a diversified portfolio of both
public and private issues. It is the Company's policy to acquire only investment
grade securities. Private placements are rated internally with reference to the
National Association of Insurance Commissioners ("NAIC") designation issued by
the NAIC Securities Valuation Office. The overall quality of the Company's bond
portfolio remains high. At December 31, 1997, 4.6% of the Company's holdings of
bonds were rated below investment grade (i.e. below NAIC rating "1" or "2").
The Company holds real estate primarily because such investments
historically have offered better yields over the long-term than fixed income
investments. Real estate investments are used to enhance the yield and due to
their long term nature are matched with products with long-term liability
durations.
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<PAGE>
Properties for which market value is lower than cost adjusted for depreciation
(book value) are reported at market value. During 1997, the change in the
difference between the market value and book value for properties reported at
market value was $3,377,000.
Significant attention has been given to insurance companies' exposure to
mortgage loans secured by real estate. The Company had a mortgage portfolio of
$684,035,000 at December 31, 1997, representing 19.8% of cash and invested
assets. At December 31, 1996, mortgage loans represented 26.9% of cash and
invested assets. The Company underwrites commercial mortgages with a maximum
loan to value ratio of 75%. The Company, as a rule, invests only in properties
that are almost fully leased. The portfolio is diversified by region and by
property type. The level of arrears in the portfolio is substantially below the
industry average. At December 31, 1997, the Company's portfolio did not contain
any mortgage loans which were 60 days or more in arrears, which compares
favorably to the most recent industry delinquency ratio published by the
American Council of Life Insurance of 1.35%. The expense in the year for the
provision for losses and for losses on foreclosures was $711,000.
In the normal course of business, the Company makes commitments to purchase
investments at a future date. As of December 31, 1997 the Company had
outstanding mortgage commitments of $12,300,000 which will be funded during
1998.
On December 24, 1997, the Company transferred all of its outstanding shares
of MFS to its parent, Life Holdco, in the form of a dividend, valued at
$159,722,000. This dividend included an intercompany tax receivable of
$91,000,000. As a result of this transaction, the Company also realized a
$21,195,000 capital gain of undistributed earnings. See "Recent Reorganization,"
below, for a discussion of the effect of this transaction on ongoing operations.
LIABILITIES
The majority of the Company's liabilities consist of reserves for life
insurance and annuity contracts and deposit funds.
CAPITAL AND SURPLUS
Total capital stock and surplus of the Company was $832,695,000 at December
31, 1997. The Company issued surplus notes during 1997 totaling $250,000,000 to
its parent, Life Holdco. The Company's management considers its surplus position
to be adequate.
RESULTS OF OPERATIONS
1997 COMPARED TO 1996
Net income from operations after dividends to policyholders and before
federal income taxes decreased by $2.9 million for the year ending December 31,
1997 as compared to December 31, 1996. Net income associated with the
reinsurance agreements with the ultimate parent increased $2.1 million in 1997.
The net income improvement in the reinsured business results primarily from
improved investment performance. Prior to reinsurance, earnings from the life
line of business remained relatively flat. The earnings of the Company's
retirement products and services line, which markets combination fixed/variable
annuities, decreased $5.0 million. During 1997, the Company focused its
marketing efforts on its fixed/variable annuity sales and discontinued sales of
its group pension contracts.
Total income increased by $347.9 million for the year ended December 31,
1997 as compared to December 31, 1996. Sales of combination fixed/variable
annuities (net of annuitizations) increased by $527.4 million primarily due to
the introduction in late 1996, of a dollar cost averaging (DCA) sales program.
This program credits a bonus rate of interest on the fixed annuity deposit
during the first year. Purchase payments allocated to the DCA program are
deposited into the fixed account and systematically transferred to the variable
sub-accounts during the following year. Reinsurance had the effect of increasing
income by approximately $8.9 million. Premiums and annuity considerations
decreased by $6.6 million reflecting decreased annuitizations. Sales of group
pension guaranteed interest contracts decreased by $133 million. Net investment
income decreased by $33.5 million reflecting both the decrease in the general
account invested assets and $9.2 million decrease in dividends from
subsidiaries.
43
<PAGE>
Benefits and expenses increased by $346.6 million for the year ended
December 31, 1997 as compared to December 31, 1996. Reinsurance had the effect
of increasing benefits and expenses by $2.7 million. Death benefits, annuity
payments and surrender benefits and other fund withdrawals increased by $338.4
million primarily as a result of increased surrenders and withdrawals from
separate account contracts for which the surrender charge had expired. Policy
reserves decreased by $23 million, reflecting decreased annuitizations and lower
increases in reserves for minimum death benefit guarantees. The decrease in
liability for premium and other deposit funds of $55.3 million reflects higher
surrenders of contracts described above. Commissions increased by $22.8 million,
reflecting the increase in total sales of combination fixed/variable annuities.
General expenses increased by $9.9 million reflecting an increase in salaries
due to staff increases associated with increased sales and non-recurring costs
associated with moving the retirement products and services facility to a new
location. Transfers to separate accounts increased by $53.9 million, reflecting
increased exchange activity out of the fixed account into the separate account,
associated with the DCA activity.
See "Recent Reorganization," below, for a discussion of the effect on
ongoing operations of the Company's transfer of its shares of MFS.
1996 COMPARED TO 1995
Net income from operations after dividends to policyholders and before
federal income taxes increased by $61.1 million for the year ending December 31,
1996 as compared to December 31, 1995. Net income associated with the
reinsurance agreements with Sun Life Assurance Company of Canada (sometimes
referred to as "Sun Life (Canada)") increased by $23.9 million in 1996. The net
income improvement in the reinsured business results from improved mortality
experience, improved investment performance and fewer significant death claims
in 1996 as compared to 1995. Prior to reinsurance, earnings from the life line
of business remained relatively flat. The remaining $37.2 million increase is
attributable to the Company's retirement products and services line of business,
which markets combination fixed/variable annuities and group pension guaranteed
investment contracts. The decline in interest rates during 1995 resulted in the
split of these combination fixed/variable annuity sales to change from 45% fixed
and 55% variable in 1995 to 25% fixed and 75% variable in 1996. In addition,
total gross sales increased by $235.9 million in 1996 as compared to 1995. The
declining interest rate environment and strong market performance in 1995
resulted in unrealized gains on assets held in the separate accounts, which
generated a substantial increase in fees calculated as a percentage of the
separate account net assets, which are then transferred to the general account.
The declining interest rates also resulted in increases in reserves due to the
increase in the market value adjustment provision of certain fixed annuities.
The resultant reserve increases were in excess of the unrealized gains causing
strain on the 1995 earnings. In 1996, interest rates increased, resulting in a
reduction in the unrealized gains on assets held in the separate accounts and a
corresponding reduction in reserves and a release of some of the reserve strain
incurred in 1995. The earnings on these market value adjusted products fluctuate
as the change in the market value of the assets do not move precisely in tandem
with the change in the market value of the liabilities.
Total income increased by $239.4 million for the year ended December 31,
1996 as compared to December 31, 1995. Sales of combination fixed/variable
annuities (net of annuitizations) increased by $282.7 million primarily due to
an increase in variable sales held in the separate accounts. This increase in
variable sales was driven by strong performance in the stock market. Reinsurance
had the effect of increasing income by approximately $9.4 million. Premiums and
annuity considerations increased by $8.2 million reflecting increased
annuitizations. Considerations from supplementary contracts increased by $1.2
million. Sales of group pension guaranteed investment contracts decreased by $53
million as this market remained highly competitive and sensitive to small
changes in guaranteed interest rates. Net investment income decreased by $9.1
million, reflecting a decrease in the general account invested assets.
Benefits and expenses increased by $178.3 million for the year ended
December 31, 1996 as compared to December 31, 1995. Reinsurance had the effect
of decreasing benefits and expenses by $14.5 million. Deaths, annuity payments
and surrender benefits and other fund withdrawals increased by $438.9 million as
a result of increased surrenders of fixed annuities for which interest rate
guarantee periods have expired as well as withdrawals from the separate
accounts. Policy reserves increased by $9.4 million,
44
<PAGE>
reflecting increased annuitizations and increased reserves for minimum death
benefit guarantees. The decrease in liability for premium and other deposit
funds of $405.9 reflects lower interest rates and higher surrenders of contracts
described above. Commissions increased by $21.8 million, reflecting the increase
in total sales of combination fixed/variable annuities. General expenses
increased by $2.6 million reflecting an increase in salaries due to staff
increases and retainer fees. Transfers to separate accounts increased by $126.8
million, reflecting increased exchange activity out of the general account into
the separate accounts.
LIQUIDITY
The Company's cash inflow consists primarily of premiums on insurance and
annuity products, income from investments, repayments of investment principal
and sales of investments. The Company's cash outflow is primarily to meet death
and other maturing insurance and annuity contract obligations, to pay out on
contract terminations, to fund investment commitments and to pay normal
operating expenses and taxes. Cash outflows are met from the normal net cash
inflows.
The Company segments its business internally in order to better manage
projected cash inflows and outflows within each segment. Targets for money
market holdings are established for each segment, which in the aggregate meet
the day to day cash needs of the Company. If greater liquidity is required,
government issued bonds, which are highly liquid, are sold to provide the
necessary funds. Government and publicly traded corporate bonds comprise 58% of
the Company's long-term bond holdings.
Management believes that the Company's sources of liquidity are more than
adequate to meet its anticipated needs.
YEAR 2000 COMPLIANCE
The Company's business, financial condition, and results of operations could
be materially and adversely affected by the failure of its systems and
applications (or those either provided or operated by third-parties) to properly
operate or manage dates beyond the year 1999. However, the Company has
investigated the nature and extent of the work necessary to render its computer
systems capable of processing beyond the turn of the century ("Year 2000
compliant"), and has made substantial progress toward achieving this goal,
including upgrading and/or replacing existing systems. The Company expects that
its principal systems will be Year 2000 compliant by the end of 1998, leaving
1999 for extensive testing. While it is believed that these efforts do involve
substantial costs, the Company closely monitors associated costs and continues
to evaluate associated risks based on actual testing. Based on available
information, the Company believes that it will be able to manage its total Year
2000 transition without a material adverse effect on its business operations,
financial condition, or results of operations.
RECENT REORGANIZATION
Effective December 24, 1997, the Company and its ultimate parent, Sun Life
(Canada), reorganized the corporate structure of a part of their United States
business operations, by completing, with the approval of the Delaware Insurance
Department, the establishment of a two-tier holding company structure. In
connection with this reorganization, Massachusetts Financial Services Company
("MFS"), the registered investment adviser that serves as adviser to the MFS
Family of Funds, including the MFS/Sun Life Series Trust and the Compass
Variable Accounts, is no longer a subsidiary of the Company, but remains under
the control of Sun Life (Canada) through two other wholly-owned holding company
subsidiaries. On December 24, 1997, the Company's stock in MFS was transferred
via a dividend to the Company's immediate parent, Sun Life of Canada (U.S.)
Holdings, Inc. There is no change in directors, officers, or day-to-day
management of any of the companies within this holding company system and, in
the case of MFS, its executive officers continue to report to the Chairman of
Sun Life (Canada).
MFS, which was acquired by the Company in 1982, has approximately
$70,200,000,000 under management as of December 31, 1997. For the years ended
December 31, 1997, 1996 and 1995, the Company's Statutory Statements of
Operations reflected earnings attributable to the operations of MFS of
$80,114,000 (which includes dividends from MFS of $33,110,000, an income tax
benefit of $25,809,000, and a realized gain of $21,195,000), $79,263,000, and
$58,599,000, respectively. The reorganization is not expected to have any
significant effect on the ongoing operations of MFS or the Company. However,
future net income of the Company will not include the results of operations of
MFS.
45
<PAGE>
ASSET/LIABILITY MANAGEMENT AND INFORMATION ABOUT MARKET RISK
The following discussion about the Company's risk management activities
includes "forward-looking statements" that involve risk and uncertainties.
Assets within the general account are segmented by product or groups of
products. This allows the Company to better manage assets relative to
liabilities. Asset management for each segment is conducted within the context
of an investment policy, reviewed each quarter with business unit managers to
ensure that investment policy remains appropriate, taking into account a
segment's liability characteristics. The review of investment policy includes
cash flow estimates, liquidity requirements and targets for asset mix, duration
and quality.
Market risks associated with investment portfolios supporting products that
are funded by separate accounts where results are not guaranteed and where the
policyholder assumes the risks are not included in this discussion.
All of the Company's assets are held for other than trading purposes and
generally fixed interest rate liabilities are supported by well diversified
portfolios of fixed interest investments including publicly issued and privately
placed bonds and commercial mortgage loans. Public bonds can include Treasuries,
corporates, money market instruments, Mortgage Backed Securities and Asset
Backed Securities. Credit risk is managed by the Company's underwriting
standards which have resulted in high average quality portfolios. For example,
the Company does not purchase below investment grade securities. Also, as a
result of investment policy, there is no foreign currency, commodity or equity
price risk exposure in the portfolios. However, changes in the level of domestic
interest rates will impact the market value of fixed interest assets and
liabilities. The management of interest rate risk exposure and immunization
strategies are discussed below.
Immunization strategies which minimize the loss from wide fluctuations in
interest rates are pursued in segments where the bulk of the liabilities arise
from the sale of products containing interest rate guarantees for certain terms.
These strategies are supported by investment and asset liability analytical
software acquired from outside vendors. The significant features of the
immunization framework include: an economic or market value basis for both
assets and liabilities; an option pricing methodology; the use of effective
duration and convexity to measure price sensitivity; the use of key rate
durations (KRDs) to capture interest rate exposure to different parts of the
yield curve and manage non-parallel curve movements; and active portfolio
management, including the use of derivatives (e.g., interest rate swaps) for
portfolio restructuring.
An Interest Rate Risk Committee meets monthly and after reviewing the
duration reports for various portfolios, market conditions and forecasts, the
committee develops asset management strategies for interest sensitive
portfolios. These strategies may involve managing assets to small intentional
mismatches, either at the total effective duration level or at certain KRDs but,
in any event, the overall duration gap between interest sensitive assets and
liabilities is managed within a tolerance range of +/- 0.25 effective duration.
The estimates presented here are from computer model simulations which,
because they are predictions about the future, contain a certain degree of
uncertainty. For example, there are algorithms for assumptions about
policyholder behavior and asset cash flows and consequently estimates of
duration and market values which may or may not represent what actually will
occur. Also there is no provision in the estimates to incorporate any management
decisions which might be taken to mitigate against adverse results. The Company
is sufficiently comfortable with its interest rate risk management process to
feel the exposure to interest rate changes will not materially affect the
near-term financial position, results of operations or cash flows of the
Company.
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The Company's fixed interest investments had an aggregate fair value at
December 31, 1997 of $3,276,174,000. Certain of the Company's general account
liabilities of $3,682,582,000 are categorized as financial instruments. The
portion of the liabilities so categorized had a carrying value of $1,958,229,000
and a fair value of $1,985,106,000 at December 31, 1997. Using its modeling and
analytical software the Company performed sensitivity analysis of its financial
instruments at December 31, 1997. Assuming an immediate increase of 100 basis
points in interest rates the net hypothetical decrease in the fair value of the
Company's assets is estimated to be $108,000,000. A corresponding decrease in
the fair value of the liabilities categorized as financial instruments is
estimated to be $56,000,000 at December 31, 1997.
SUN LIFE (CANADA)
On January 27, 1998, the Company's ultimate parent, Sun Life (Canada),
announced that its Board of Directors had requested management to develop a plan
to convert from a mutual life insurance company into a publicly traded stock
company through demutualization. Management has put in place a full time task
force which, together with a worldwide team of actuarial, financial, and legal
advisers, has begun work on a plan. The Board of Directors will decide later in
1998 whether to proceed with demutualization, following the completion of such
plan. Demutualization would require regulatory approval and approval by
policyholders of Sun Life (Canada). Based on information known to date, the
potential demutualization of Sun Life (Canada) is not expected to have any
significant impact on the Company.
REINSURANCE
The Company has agreements with Sun Life (Canada) which provide that Sun
Life (Canada) will reinsure the mortality risks of the individual life insurance
contracts previously sold by the Company. Under these agreements basic death
benefits and supplementary benefits are reinsured on a yearly renewable term
basis and coinsurance basis, respectively. Reinsurance transactions under these
agreements in 1997 had the effect of decreasing net income from operations by
$1,381,000.
Effective January 1, 1991 the Company entered into an agreement with Sun
Life (Canada) under which certain individual life insurance contracts issued by
Sun Life (Canada) were reinsured by the Company on a 90% coinsurance basis. Also
effective January 1, 1991 the Company entered into an agreement with Sun Life
(Canada) which provides that Sun Life (Canada) will reinsure the mortality risks
in excess of $500,000 per policy for the individual life insurance contracts
assumed by the Company in the reinsurance agreement described above. Death
benefits are reinsured on a yearly renewable term basis. These agreements had
the effect of increasing income from operations by approximately $37,050,000 for
the year ended December 31, 1997.
The life reinsurance assumed agreement requires the reinsurer to withhold
funds in an amount equal to the reserves assumed.
The Company has also executed reinsurance agreements with unaffiliated
companies. These agreements provide reinsurance of certain individual life
insurance contracts on a modified coinsurance basis under which all deficiency
reserves are ceded; as well as reinsurance for variable universal life on a
yearly renewable term basis for which the Company has a maximum retention of
$2,000,000.
RESERVES
In accordance with the life insurance laws and regulations under which the
Company operates, it is obligated to carry on its books, as liabilities,
actuarially determined reserves to meet its obligations on its outstanding
contracts. Reserves are based on mortality tables in general use in the United
States and are computed to equal amounts that, with additions from premiums to
be received, and with interest on such reserves compounded annually at certain
assumed rates, will be sufficient to meet the Company's policy obligations at
their maturities or in the event of an insured's death. In the accompanying
Financial Statements, these reserves are determined in accordance with statutory
regulations.
INVESTMENTS
Of the Company's total assets of $15.9 billion at December 31, 1997, 71.7%
consisted of unitized and non-unitized separate account assets, 12.0% were
invested in bonds and similar securities, 4.3% in mortgages, 0.7% in
subsidiaries, 0.6% in real estate, and the remaining 10.7% in cash and other
assets.
47
<PAGE>
COMPETITION
The Company is engaged in a business that is highly competitive because of
the large number of stock and mutual life insurance companies and other entities
marketing insurance products. According to the most recent Best's Review,
Life-Health Edition, as of December 31, 1996 the Company ranked 38th among all
life insurance companies in the United States based upon total assets. Its
ultimate parent company, Sun Life (Canada), ranked 19th. Best's Insurance
Reports, Life-Health Edition, 1997, assigned the Company and Sun Life (Canada)
its highest classification, A++, as of December 31, 1996. This rating was
affirmed by A.M. Best on November 24, 1997. Standard & Poor's and Duff & Phelps
have assigned the Company and Sun Life (Canada) their highest ratings for claims
paying ability, AAA. Moody's Investor Service, Inc. has lowered the Company's
assigned unsolicited rating for financial strength from Aa1 to Aa2.
EMPLOYEES
The Company and Sun Life (Canada) have entered into a Service Agreement
which provides that the latter will furnish the Company, as required, with
personnel as well as certain services and facilities on a cost reimbursement
basis. As of December 31, 1997 the Company had 317 direct employees who are
employed at its Principal Executive Office in Wellesley Hills, Massachusetts and
its Retirement Products & Services Division in Boston, Massachusetts.
PROPERTIES
The Company occupies office space owned by it and leased to Sun Life
(Canada), and certain unrelated parties for lease terms not exceeding five
years.
THE COMPANY'S DIRECTORS AND EXECUTIVE OFFICERS
The directors and principal officers of the Company are listed below,
together with information as to their ages, dates of election and principal
business occupations during the last five years (if other than their present
business occupations). Except as otherwise indicated, the directors and officers
of the Company who are associated with Sun Life Assurance Company of Canada
and/or its subsidiaries have been associated with Sun Life Assurance Company of
Canada for more than five years either in the position shown or in other
positions.
JOHN D. MCNEIL, 64, Director (1982*)
150 King Street West
Toronto, Ontario, Canada M5H 1J9
He is Chairman and a Director of Sun Life Assurance Company of Canada and
Sun Life Financial Holdings Inc.; Chairman and a Trustee of MFS/Sun Life Series
Trust; Chairman and a Member of the Boards of Managers of Money Market Variable
Account, High Yield Variable Account, Capital Appreciation Variable Account,
Government Securities Variable Account, World Governments Variable Account,
Total Return Variable Account and Managed Sectors Variable Account; and a
Director of Sun Life Insurance and Annuity Company of New York, Massachusetts
Financial Services Company, SLC Services Peru S.A., Spectrum United Holdings,
Inc., Sun Life Trust Company, Sun Life Savings & Mortgage Corporation, Sun Life
of Canada UK Holdings plc, Shell Capital Limited, Canadian Pacific, Ltd., and
Canadian Pacific Securities (Ontario) Limited.
DONALD A. STEWART, 52, Chairman and Director (1996*)
150 King Street West
Toronto, Ontario, Canada M5H 1J9
He is President, Chief Executive Officer and a Director of Sun Life
Assurance Company of Canada; Chairman and a Director of Sun Life Insurance and
Annuity Company of New York; and a Director of Massachusetts Financial Services
Company, Massachusetts Casualty Insurance Company, Sun Life Financial Services
Limited, Spectrum United Holdings, Inc., and Sun Life of Canada (U.K.) Holdings
plc.
- ------------------------
* Year Elected Director
48
<PAGE>
DAVID D. HORN, 57, Director (1985*)
Strong Road
New Vineyard, Maine 04956
He was formerly Senior Vice President and General Manager for the United
States of Sun Life Assurance Company of Canada, retiring in December, 1997. He
is a Director of Sun Life Insurance and Annuity Company of New York; a Trustee
of MFS/Sun Life Series Trust; and a Member of the Boards of Managers of Money
Market Variable Account, High Yield Variable Account, Capital Appreciation
Variable Account, Government Securities Variable Account, World Governments
Variable Account, Total Return Variable Account and Managed Sectors Variable
Account.
ANGUS A. MACNAUGHTON, 67, Director (1985*)
Metro Tower, Suite 1170
950 Tower Lane
Foster City, California 94404
He is President of Genstar Investment Corporation and a Director of Sun Life
Assurance Company of Canada, Sun Life Insurance and Annuity Company of New York,
Canadian Pacific, Ltd., Varian Associates, Inc., Diversified Collection
Services, Inc., the San Francisco Opera, Genstar Investment L.L.C., and Genstar
Capital Corporation; and Vice Chairman and a Director of Barrick Gold
Corporation.
JOHN S. LANE, 63, Director (1991*)
150 King Street West
Toronto, Ontario, Canada M5H 1J9
He is Senior Vice President, Investments of Sun Life Assurance Company of
Canada; and a Director of Sun Life Insurance and Annuity Company of New York.
RICHARD B. BAILEY, 72, Director (1983*)
63 Atlantic Avenue
Boston, Massachusetts 02116
He is a Director of Sun Life Insurance and Annuity Company of New York; and
a Director/Trustee of certain Funds in the MFS Family of Funds.
M. COLYER CRUM, 66, Director (1986*)
104 Westcliff Street
Weston, Massachusetts 02193
He is Professor Emeritus of the Harvard Business School; and a Director of
Sun Life Assurance Company of Canada, Sun Life Insurance and Annuity Company of
New York, Cambridge Bancorp, Cambridge Trust Company, Merrill Lynch Global
Growth Fund, Inc., Merrill Lynch Basic Value Fund, Inc., Merrill Lynch Special
Value Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch U.S.A.
Government Reserves, Merrill Lynch U.S. Treasury Money Fund, MuniVest Florida
Fund, MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund, Inc.,
MuniYield Michigan Insured Fund, Inc., MuniYield New Jersey Insured Fund, Inc.,
and Phaeton International/N.V.; and a Trustee of Merrill Lynch Global Resources
Trust, Merrill Lynch Ready Assets Trust, MuniYield Florida Insured Fund, and
MuniYield Pennsylvania Fund. Prior to July, 1996, he was a Professor at the
Harvard Business School.
S. CAESAR RABOY, 62, Senior Vice President and Deputy General Manager and
Director (1996*)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02481
He is Senior Vice President and Deputy General Manager for the United States
of Sun Life Assurance Company of Canada; Senior Vice President and a Director of
Sun Life Insurance and Annuity Company of New York; Vice President and a
Director of Sun Life Financial Services Limited; and a Director of Sun Life of
Canada (U.S.) Distributors, Inc. and Clarendon Insurance Agency, Inc.
- ------------------------
* Year Elected Director
49
<PAGE>
JAMES M.A. ANDERSON, 49, Vice President, Investments (1998)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02481
He is Vice President, Investments, of Sun Life Assurance Company of Canada
and Sun Life Insurance and Annuity Company of New York; President and a Director
of Sun Capital Advisers, Inc.; President and Chief Executive Officer of Sun
Capital Advisers Trust; Vice President and a Director of Sun Life of Canada
(U.S.) Holdings, Inc., Sun Life of Canada (U.S.) Financial Services Holdings,
Inc., and Sun Canada Financial Co.; Vice President, Investments, and a Director
of Sun Life of Canada (U.S.) Distributors, Inc; and a Director of Massachusetts
Casualty Insurance Company, New London Trust, F.S.B., Sun Benefit Services
Company, Inc., Sun Life Information Services Ireland Limited, and Clarendon
Insurance Agency, Inc.
C. JAMES PRIEUR, 47, President and Director (1998*)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02481
He is Senior Vice President and General Manager for the United States of Sun
Life Assurance Company of Canada; Chairman and a Director of Sun Life of Canada
(U.S.) Distributors, Inc. and Sun Capital Advisers, Inc.; Chairman of Sun
Capital Advisers Trust; President and a Director of Sun Life of Canada (U.S.)
Holdings, Inc., Sun Life Assurance Company of Canada -- U.S. Operations
Holdings, Inc., Sun Life of Canada (U.S.) Financial Services Holdings, Inc., Sun
Life Insurance and Annuity Company of New York, Sun Canada Financial Co., Sun
Life of Canada (U.S.) SPE 97-1, Inc., and Sun Benefit Services Company; and a
Director of Sun Life Financial Services, Ltd., Clarendon Insurance Agency, Inc.,
Massachusetts Casualty Insurance Company and Sun Information Services Ireland
Limited.
L. BROCK THOMSON, 57, Vice President and Treasurer (1974)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02481
He is Vice President, Portfolio Management for the United States of Sun Life
Assurance Company of Canada; Vice President and Treasurer of Sun Life of Canada
(U.S.) Distributors, Inc., Sun Benefit Services Company, Inc., Sun Life
Insurance and Annuity Company of New York, and Clarendon Insurance Agency, Inc.;
and Assistant Treasurer of Massachusetts Casualty Insurance Company.
ROBERT P. VROLYK, 45, Vice President and Actuary (1986)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02481
He is Vice President, Finance of Sun Life Assurance Company of Canada; Vice
President, Controller and Actuary of Sun Life Insurance and Annuity Company of
New York; Vice President and a Director of Sun Life of Canada (U.S.) Holdings,
Inc., Sun Canada Financial Co., Sun Life of Canada (U.S.) Distributors, Inc.,
Sun Life of Canada (U.S.) Financial Services Holdings, Inc., and Sun Life
Assurance Company of Canada -- U.S. Operations Holdings, Inc.; Vice President,
Treasurer and a Director of Sun Capital Advisers, Inc.; Treasurer and Chief
Financial Officer of Sun Capital Advisers Trust; and a Director of Clarendon
Insurance Agency, Inc., Sun Benefit Services Company, Inc., and Sun Life
Information Services Ireland Limited.
PETER F. DEMUTH, 40, Vice President, Chief Counsel and Assistant Secretary
(1998)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02481
He is Vice President and Chief Counsel for the United States of Sun Life
Assurance Company of Canada; and Assistant Secretary of Sun Life Insurance and
Annuity Company of New York and Sun Capital Advisers Trust.
ELLEN B. KING, 41, Secretary (1998)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02481
She is Assistant Counsel of Sun Life Assurance Company of Canada.
- ------------------------
* Year Elected Director
50
<PAGE>
The directors, officers and employees of the Company are covered under a
commercial blanket bond and a liability policy. The directors, officers and
employees of Massachusetts Financial Services Company and Clarendon Insurance
Agency, Inc. are covered under a fidelity bond and errors and omissions policy.
EXECUTIVE COMPENSATION
All of the executive officers of the Company also serve as officers of Sun
Life Assurance Company of Canada and receive no compensation directly from the
Company. Allocations have been made as to such officers' time devoted to duties
as executive officers of the Company and its subsidiaries. The allocated cash
compensation of all executive officers of the Company as a group for services
rendered in all capacities to the Company and its subsidiaries during 1997
totalled $824,000.
Directors of the Company who are also officers of Sun Life Assurance Company
of Canada or its affiliates receive no compensation in addition to their
compensation as officers of Sun Life Assurance Company of Canada or its
affiliates. Messrs. Bailey, Crum and MacNaughton receive compensation in the
amount of $7,000 per year, plus $1,000 for each meeting attended, plus expenses.
No shares of the Company are owned by any executive officer or director. The
Company is a wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings,
Inc., One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481, which
is in turn a wholly-owned subsidiary of Sun Life Assurance Company of
Canada-U.S. Operations Holdings, Inc., a wholly-owned subsidiary of Sun Life
Assurance Company of Canada.
STATE REGULATION
The Company is subject to the laws of the State of Delaware governing life
insurance companies and to regulation by the Commissioner of Insurance of
Delaware. An annual statement is filed with the Commissioner of Insurance on or
before March 1st in each year relating to the operations of the Company for the
preceding year and its financial condition on December 31st of such year. Its
books and records are subject to review or examination by the Commissioner or
his agents at any time and a full examination of its operations is conducted at
periodic intervals.
The Company is also subject to the insurance laws and regulations of the
other states and jurisdictions in which it is licensed to operate. The laws of
the various jurisdictions establish supervisory agencies with broad
administrative powers with respect to licensing to transact business, overseeing
trade practices, licensing agents, approving policy forms, establishing reserve
requirements, fixing maximum interest rates on life insurance policy loans and
minimum rates for accumulation of surrender values, prescribing the form and
content of required financial statements and regulating the type and amounts of
investments permitted. Each insurance company is required to file detailed
annual reports with supervisory agencies in each of the jurisdictions in which
it does business and its operations and accounts are subject to examination by
such agencies at regular intervals.
In addition, many states regulate affiliated groups of insurers, such as the
Company, its parent and its affiliates, under insurance holding company
legislation. Under such laws, inter-company transfers of assets and dividend
payments from insurance subsidiaries may be subject to prior notice or approval,
depending on the size of such transfers and payments in relation to the
financial positions of the companies involved.
Under insurance guaranty fund laws in most states, insurers doing business
therein can be assessed (up to prescribed limits) for policyholder losses
incurred by insolvent companies. The amount of any future assessments of the
Company under these laws cannot be reasonably estimated. However, most of these
laws do provide that an assessment may be excused or deferred if it would
threaten an insurer's own financial strength and many permit the deduction of
all or a portion of any such assessment from any future premium or similar taxes
payable.
Although the federal government generally does not directly regulate the
business of insurance, federal initiatives often have an impact on the business
in a variety of ways. Current and proposed federal measures which may
significantly affect the insurance business include employee benefit regulation,
removal of
51
<PAGE>
barriers preventing banks from engaging in the insurance business, tax law
changes affecting the taxation of insurance companies, the tax treatment of
insurance products and its impact on the relative desirability of various
personal investment vehicles.
LEGAL PROCEEDINGS
There are no pending legal proceedings affecting the Variable Account. The
Company and its subsidiaries are engaged in various kinds of routine litigation
which, in management's judgment, is not of material importance to their
respective total assets or material with respect to the Variable Account.
ACCOUNTANTS
The statutory financial statements of the Company as of December 31, 1997
and 1996 and for each of the three years in the period ended December 31, 1997,
included and incorporated by reference in this Prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their reports
appearing herein and elsewhere in the registratioon statements, which are
included and incorporated by reference herein and have been included and
incorporated in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
REGISTRATION STATEMENTS
Registration statements have been filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act of 1933 as amended, with
respect to the Contracts offered by this Prospectus. This Prospectus does not
contain all the information set forth in the registration statements and the
exhibits filed as part of the registration statements, to all of which reference
is hereby made for further information concerning the Variable Account, the
Fixed Account, the Company, the Funds and the Contracts. Statements found in
this Prospectus as to the terms of the Contracts and other legal instruments are
summaries, and reference is made to such instruments as filed.
FINANCIAL STATEMENTS
The financial statements of the Company which are included in this
Prospectus should be considered only as bearing on the ability of the Company to
meet its obligations with respect to amounts allocated to the Fixed Account and
with respect to the death benefit and the Company's assumption of the mortality
and expense risks. They should not be considered as bearing on the investment
performance of the Fund shares held in the Sub-Accounts of the Variable Account.
The Variable Account value of the interests of Owners, Participants, Annuitants,
Payees and Beneficiaries under the Contracts is affected primarily by the
investment results of the Funds. No financial statements are included for the
Variable Account because, as of December 31, 1997, the Variable Account had not
commenced operations with respect to the Sub-Accounts and had no assets or
liabilities attributable to the Contracts.
-------------------
52
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
STATUTORY STATEMENTS OF ADMITTED ASSETS, LIABILITIES AND
CAPITAL STOCK AND SURPLUS
DECEMBER 31, 1997 AND 1996 (IN 000'S)
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
ADMITTED ASSETS
Bonds $ 1,910,699 $ 2,170,103
Common stocks 117,229 144,043
Mortgage loans on real estate 684,035 938,932
Properties acquired in satisfaction of debt 22,475 23,391
Investment real estate 78,426 76,995
Policy loans 40,348 40,554
Cash and short-term investments 544,418 148,059
Other invested assets 55,716 51,378
Premiums and annuity considerations due and uncollected 9,203 11,282
Investment income due and accrued 39,279 68,191
Receivable from parent, subsidiaries and affiliates 28,825 40,829
Funds withheld on reinsurance assumed 982,653 878,798
Other assets 1,841 1,343
-------------- --------------
General account assets 4,515,147 4,593,898
Separate account assets
Unitized 9,068,021 6,919,219
Non-unitized 2,343,877 2,108,835
-------------- --------------
Total Admitted Assets $ 15,927,045 $ 13,621,952
-------------- --------------
-------------- --------------
LIABILITIES
Aggregate reserve for life policies and contracts $ 2,188,243 $ 2,099,980
Supplementary contracts 2,247 2,205
Policy and contract claims 2,460 2,108
Policyholders' dividends and coupons payable 32,500 27,500
Liability for premium and other deposit funds 1,450,705 1,898,309
Surrender values on cancelled policies 215 72
Interest maintenance reserve 33,830 28,675
Commissions to agents due or accrued 2,826 3,245
General expenses due or accrued 7,202 4,654
Transfers from Separate Accounts due or accrued (284,078) (232,743)
Taxes, licenses and fees accrued, excluding federal income taxes 105 342
Federal income taxes due or accrued 58,073 49,479
Unearned investment income 34 19
Amounts withheld or retained by company as agent or trustee 47 27
Remittances and items not allocated 1,363 1,359
Borrowed money 110,142 58,000
Asset valuation reserve 47,605 53,911
Payable for securities 27,104 22,177
Other liabilities 1,959 7,561
-------------- --------------
General account liabilities 3,682,582 4,026,880
Separate account liabilities
Unitized 9,067,891 6,919,094
Non-unitized 2,343,877 2,108,835
-------------- --------------
Total liabilities 15,094,350 13,054,809
-------------- --------------
CAPITAL STOCK AND SURPLUS
Capital stock par value $1,000; Authorized, 10,000 shares;
issued and outstanding, 5,900 shares 5,900 5,900
-------------- --------------
Surplus notes 565,000 315,000
Gross paid in and contributed surplus 199,355 199,355
Unassigned funds 62,440 46,888
-------------- --------------
Surplus 826,795 561,243
-------------- --------------
Total capital stock and surplus 832,695 567,143
-------------- --------------
Total Liabilities, Capital Stock and Surplus $ 15,927,045 $ 13,621,952
-------------- --------------
-------------- --------------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
53
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
STATUTORY STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN 000'S)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
INCOME:
Premiums and annuity considerations $ 270,700 $ 282,466 $ 279,407
Deposit-type funds 2,155,298 1,775,230 1,545,542
Considerations for supplementary
contracts without life
contingencies and dividend
accumulations 1,615 2,340 1,088
Net investment income 270,249 303,753 312,872
Amortization of interest maintenance
reserve 1,166 1,557 1,025
Net gain from operations from
Separate Accounts 5 -- --
Other income 86,123 71,903 57,864
---------- ---------- ----------
Total 2,785,156 2,437,249 2,197,798
---------- ---------- ----------
BENEFITS AND EXPENSES:
Death benefits 17,284 12,394 15,317
Annuity benefits 148,135 146,654 140,497
Surrender benefits and other fund
withdrawals 1,854,004 1,507,263 1,074,396
Interest on policy or contract funds 699 2,205 739
Payments on supplementary contracts
without life contingencies and of
dividend accumulations 1,687 2,120 1,888
Increase in aggregate reserves for
life and accident and health
policies and contracts 127,278 162,678 171,975
Increase (decrease) in liability for
premium and other deposit funds (447,603) (392,348) 13,553
Increase (decrease) in reserve for
supplementary contracts without
life contingencies and for dividend
and coupon accumulations 42 327 (663)
---------- ---------- ----------
Total 1,701,526 1,441,293 1,417,702
Commissions on premiums and annuity
considerations (direct business
only) 132,700 109,894 88,037
Commissions and expense allowances
on reinsurance assumed 17,951 18,910 22,012
General insurance expenses 47,102 37,206 34,580
Insurance taxes, licenses and fees,
excluding federal income taxes 7,790 8,431 7,685
Increase (decrease) in loading on
and cost of collection in excess of
loading on deferred and uncollected
premiums 523 901 (1,377)
Net transfers to separate accounts 734,373 678,663 551,784
---------- ---------- ----------
Total 2,641,965 2,295,298 2,120,423
---------- ---------- ----------
Net gain from operations before
dividends to policyholders and
federal income taxes 143,191 141,951 77,375
Dividends to policyholders 33,316 29,189 25,722
---------- ---------- ----------
Net gain from operations after
dividends to policyholders and
before federal income taxes 109,875 112,762 51,653
Federal income tax expense (benefit)
(excluding tax on capital gains) 10,742 (2,702) 17,807
---------- ---------- ----------
Net gain from operations after
dividends to policyholders and
federal income taxes and before
realized capital gains 99,133 115,464 33,846
Net realized capital gains less
capital gains tax and transfers to
the interest maintenance reserve 30,109 7,560 2,069
---------- ---------- ----------
NET INCOME $ 129,242 $ 123,024 $ 35,915
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
54
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
STATUTORY STATEMENTS OF CHANGES IN CAPITAL STOCK AND SURPLUS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN 000'S)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Capital and surplus, beginning of year $ 567,143 $ 792,452 $ 455,489
---------- ---------- ----------
Net income 129,242 123,024 35,915
Change in net unrealized capital gains 1,153 (1,715) 2,009
Change in non-admitted assets and related items (463) 67 (2,270)
Change in reserve on account of change in valuation basis 39,016 -- --
Change in asset valuation reserve 6,306 (11,812) (13,690)
Other changes in surplus in Separate Accounts Statement -- 100 (4,038)
Change in surplus notes 250,000 (335,000) 315,000
Dividends to stockholder (159,722) -- --
Miscellaneous gains in surplus 20 27 4,037
---------- ---------- ----------
Net change in capital and surplus for the year 265,552 (225,309) 336,963
---------- ---------- ----------
Capital and surplus, end of year $ 832,695 $ 567,143 $ 792,452
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
55
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
STATUTORY STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN 000'S)
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash Provided
Premiums, annuity considerations and
deposit funds received $ 2,427,554 $ 2,059,577 $ 1,826,456
Considerations for supplementary
contracts and dividend accumulations
received 1,615 2,340 1,088
Net investment income received 323,199 324,914 374,398
Other income received 81,701 88,295 25,348
----------- ----------- -----------
Total receipts 2,834,069 2,475,126 2,227,290
----------- ----------- -----------
Benefits paid (other than dividends) 2,020,615 1,671,483 1,231,936
Insurance expenses and taxes paid
(other than federal income and
capital gains taxes) 203,650 172,015 150,463
Net cash transferred to Separate
Accounts 785,708 755,605 568,188
Dividends paid to policyholders 28,316 22,689 17,722
Federal income tax (recoveries)
payments (excluding tax on capital
gains) 1,397 (15,363) (20,655)
Other--net 699 2,205 739
----------- ----------- -----------
Total payments 3,040,385 2,608,634 1,948,393
----------- ----------- -----------
Net cash from operations (206,316) (133,508) 278,897
----------- ----------- -----------
Proceeds from long-term investments
sold, matured or repaid (after
deducting taxes on capital gains of
$750,449, $1,554,873 and $8,610,951) 1,343,803 1,768,147 1,658,655
Issuance of surplus notes 250,000 (335,000) 315,000
Other cash provided 117,297 147,956 419,446
----------- ----------- -----------
Total cash provided 1,711,100 1,581,103 2,393,101
----------- ----------- -----------
Cash Applied
Cost of long-term investments acquired 773,721 1,318,880 1,749,714
Other cash applied 334,704 177,982 796,207
----------- ----------- -----------
Total cash applied 1,108,425 1,496,862 2,545,921
----------- ----------- -----------
Net change in cash and short-term
investments 396,359 (49,267) 126,077
Cash and short term investments
Beginning of year 148,059 197,326 71,249
----------- ----------- -----------
End of year $ 544,418 $ 148,059 $ 197,326
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
56
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
GENERAL
Sun Life Assurance Company of Canada (U.S.) (the "Company") is incorporated as a
life insurance company and is engaged in the sale of individual variable life
insurance, individual fixed and variable annuities, group fixed and variable
annuities and group pension contracts. The Company also underwrites a block of
individual life insurance business through a reinsurance contract with the
Company's ultimate parent, Sun Life Assurance Company of Canada ("SLOC"). SLOC
is a mutual life insurance company.
Effective May 1, 1997, the Company became a wholly-owned subsidiary of the newly
established Sun Life of Canada (U.S.) Holdings, Inc. ("Life Holdco"). On
December 18, 1997, Life Holdco became a wholly-owned subsidiary of the Sun Life
Assurance Company of Canada - U.S. Operations Holdings, Inc. ("US Holdco"). US
Holdco is a wholly-owned subsidiary of SLOC. Prior to December 18, 1997 Life
Holdco was a direct wholly-owned subsidiary of SLOC.
The Company, which is domiciled in the State of Delaware, prepares its financial
statements in accordance with statutory accounting practices prescribed or
permitted by the State of Delaware Insurance Department. Prescribed accounting
practices include practices described in a variety of publications of the
National Association of Insurance Commissioners ("NAIC"), as well as state laws,
regulations and general administrative rules. Permitted accounting practices
encompass all accounting practices not so prescribed. The permitted accounting
practices adopted by the Company are not material to the financial statements.
Prior to 1996, statutory accounting practices were recognized by the insurance
industry and the accounting profession as generally accepted accounting
principles for mutual life insurance companies and stock life insurance
companies wholly-owned by mutual life insurance companies. In April 1993, the
Financial Accounting Standards Board ("FASB") issued an interpretation (the
"Interpretation"), that became effective in 1996, which changed the previous
practice of mutual life insurance companies (and stock life insurance companies
that are wholly-owned subsidiaries of mutual life insurance companies) with
respect to utilizing statutory basis financial statements for general purposes,
in that it will no longer allow such financial statements to be described as
having been prepared in conformity with generally accepted accounting principles
("GAAP"). Consequently, these financial statements prepared in conformity with
statutory accounting practices as described above, vary from and are not
intended to present the Company's financial position, results of operations or
cash flow in conformity with generally accepted accounting principles. (See Note
19 for further discussion relative to the Company's basis of financial statement
presentation.) The effects on the financial statements of the variances between
the statutory basis of accounting and GAAP, although not reasonably
determinable, are presumed to be material.
INVESTED ASSETS AND RELATED RESERVES
Bonds are carried at cost adjusted for amortization of premium or accrual of
discount. Investments in non-insurance subsidiaries are carried on the equity
basis. Investments in insurance subsidiaries are carried at their statutory
surplus values. Mortgage loans acquired at a premium or discount are carried at
amortized values and other mortgage loans are carried at the amounts of the
unpaid balances. Real estate investments are carried at the lower of cost
adjusted for accumulated depreciation or appraised value, less encumbrances.
Short-term investments are carried at amortized cost, which approximates fair
value. Depreciation of buildings and improvements is calculated using the
straight-line method over the estimated useful life of the property, generally
40 to 50 years.
57
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED):
POLICY AND CONTRACT RESERVES
The reserves for life insurance and annuity contracts, developed by accepted
actuarial methods, have been established and maintained on the basis of
published mortality tables using assumed interest rates and valuation methods
that will provide reserves at least as great as those required by law and
contract provisions.
INCOME AND EXPENSES
For life and annuity contracts, premiums are recognized as revenues over the
premium paying period, whereas commissions and other costs applicable to the
acquisition of new business are charged to operations as incurred.
SEPARATE ACCOUNTS
The Company has established unitized separate accounts applicable to various
classes of contracts providing for variable benefits. Contracts for which funds
are invested in separate accounts include variable life insurance and individual
and group qualified and non-qualified variable annuity contracts.
Assets and liabilities of the separate accounts, representing net deposits and
accumulated net investment earnings less fees, held primarily for the benefit of
contract holders, are shown as separate captions in the financial statements.
Assets held in the separate accounts are carried at market value.
The Company has also established a non-unitized separate account for amounts
allocated to the fixed portion of certain combination fixed/variable deferred
annuity contracts. The assets of this account are available to fund general
account liabilities and general account assets are available to fund liabilities
of this account.
Gains (losses) from mortality experience and investment experience of the
separate accounts, not applicable to contract owners, are transferred to (from)
the general account. Accumulated gains (losses) that have not been transferred
are recorded as a payable (receivable) to (from) the general account. Amounts
payable to the general account of the Company were $284,078,000 in 1997 and
$232,743,000 in 1996.
CHANGES IN ACCOUNTING PRINCIPLES AND REPORTING
Prior to 1996, dividends paid to the Company by its subsidiaries and the
undistributed gains (losses) of those subsidiaries were included in net income
of the Company. For Annual Statement reporting, dividends were (and continue to
be) reported in net income while undistributed gains (losses) are reported
directly to surplus (as a separate component of unassigned surplus). As a
result, net income as reported in these financial statements is $2.5 million
less than net income reported in the Annual Statement in 1995. Effective for
1996, the Company changed its method of accounting for investments in
subsidiaries to conform with a preferable prescribed statutory accounting
practices used in the preparation of its Annual Statement. As a result of the
change, $5.7 million in undistributed losses of subsidiaries are reported
directly as a separate component of unassigned surplus rather than being
included in net income for the year ended December 31, 1996. The amounts as
reported in prior years have not been restated.
As described more fully in Note 10, during 1997 the Company changed certain
assumptions used in determining actuarial reserves.
58
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED):
OTHER
Preparation of the financial statements requires management to make estimates
and assumptions that affect reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
Certain prior year amounts have been reclassified to conform to amounts as
presented in the current year.
2. INVESTMENTS IN SUBSIDIARIES:
The Company owns all of the outstanding shares of Sun Life Insurance and Annuity
Company of New York ("Sun Life (N.Y.)"), Massachusetts Casualty Insurance
Company ("MCIC"), Sun Life of Canada (U.S.) Distributors, Inc. (formerly Sun
Investment Services Company) ("Sundisco"), New London Trust, F.S.B. ("NLT"), Sun
Life Financial Services Limited, ("SLFSL"), Sun Benefit Services Company, Inc.
("Sunbesco"), Sun Capital Advisers, Inc. ("Sun Capital"), and Sun Life Finance
Corporation ("Sunfinco").
On October 30, 1997, the Company established a wholly-owned special purpose
corporation, Sun Life of Canada (U.S.) SPE 97-1, Inc. (SPE 97-1). SPE 97-1 was
organized for the purpose of engaging in activities incidental to securitizing
mortgage loans.
Prior to December 24, 1997, the Company owned 93.6% of the outstanding shares of
Massachusetts Financial Services Company ("MFS"). On December 24, 1997, the
Company transferred all of its shares of MFS to Life Holdco in the form of a
dividend valued at $159,722,000. As a result of this transaction the Company
realized a gain of $21,195,000 of undistributed earnings.
MFS, a registered investment adviser, serves as investment adviser to the mutual
funds in the MFS family of funds as well as certain mutual funds and separate
accounts established by the Company. The MFS Asset Management Group provides
investment advice to substantial private clients.
On December 31, 1997, the Company purchased all of the outstanding shares of
Clarendon Insurance Agency, Inc. ("Clarendon") from MFS.
Sun Life (N.Y.) is engaged in the sale of individual fixed and variable annuity
contracts and group life and disability insurance contracts in the State of New
York. MCIC issues only individual disability income policies. Sundisco is a
registered investment adviser and broker-dealer. NLT is a federally chartered
savings bank. SLFSL serves as the marketing administrator for the distribution
of the offshore products of SLOC, an affiliate. Sun Capital is a registered
investment adviser. Sunfinco and Sunbesco are currently inactive. Clarendon is a
registered broker-dealer that acts as the general distributor of certain annuity
and life insurance contracts issued by the Company and its affiliates.
On December 23, 1997, the Company issued a $110,000,000 note to US Holdco at an
interest rate of 5.80%, which is scheduled for repayment on March 1, 1998, and
is included in borrowed money. A $110,000,000 note was also issued by MFS on
December 23, 1997 to the Company at an interest rate of 5.85% due on March 1,
1998 and is included in cash and short-term investments.
On December 31, 1996, the Company issued a $58,000,000 note to SLOC which was
repaid on February 10, 1997 at an interest rate of 5.70%. Also on December 31,
1996, the Company was issued a $58,000,000 note by MFS at an interest rate of
5.76%. This note was repaid to the Company on February 10, 1997. On December 31,
1997 and 1996 the Company had an additional $20,000,000 in notes issued by MFS,
scheduled to mature in 2000.
59
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
2. INVESTMENTS IN SUBSIDIARIES (CONTINUED):
During 1997, 1996, and 1995, the Company contributed capital in the following
amounts to its subsidiaries:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- ------------
<S> <C> <C> <C>
MCIC $ 2,000,000 $ 10,000,000 $ 6,000,000
SLFSL 1,000,000 1,500,000 --
SPE 97-1 20,377,000 -- --
</TABLE>
Summarized combined financial information of the Company's subsidiaries as of
December 31, 1997, 1996 and 1995 and for the years then ended, follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
(IN 000'S)
<S> <C> <C> <C>
Intangible assets $ 0 $ 9,646 $ 12,174
Other assets 1,190,951 1,376,014 1,233,372
Liabilities (1,073,966) (1,241,617) (1,107,264)
------------- ------------- -------------
Total net assets $ 116,985 $ 144,043 $ 138,282
------------- ------------- -------------
------------- ------------- -------------
Total revenues $ 750,364 $ 717,280 $ 570,794
Operating expenses (646,896) (624,199) (504,070)
Income tax expense (43,987) (42,820) (31,193)
------------- ------------- -------------
Net income $ 59,481 $ 50,261 $ 35,531
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
3. BONDS:
Investments in debt securities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
(IN 000'S)
Long-term bonds:
United States government and government agencies and
authorities $ 126,923 $ 5,529 $ -- $ 132,452
States, provinces and political subdivisions 22,361 2,095 -- 24,456
Public utilities 398,939 35,338 (91) 434,186
Transportation 214,130 22,000 (390) 235,740
Finance 157,891 5,885 (120) 163,656
All other corporate bonds 990,455 52,678 (5,456) 1,037,677
------------ ----------- ----------- ------------
Total long-term bonds 1,910,699 123,525 (6,057) 2,028,167
------------ ----------- ----------- ------------
Short-term bonds:
U.S. Treasury Bills, bankers acceptances and
commercial paper 431,032 -- -- 431,032
Affiliates 110,000 -- -- 110,000
------------ ----------- ----------- ------------
Total short-term bonds 541,032 -- -- 541,032
Total bonds $ 2,451,731 $ 123,525 $ (6,057) $ 2,569,199
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
60
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
3. BONDS (CONTINUED):
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
(IN 000'S)
Long-term bonds:
United States government and government agencies and
authorities $ 267,756 $ 12,272 $ (8,927) $ 271,101
States, provinces and political subdivisions 2,253 20 -- 2,273
Foreign governments 18,812 1,351 -- 20,163
Public utilities 415,641 24,728 (1,223) 439,146
Transportation 167,937 14,107 (2,243) 179,801
Finance 290,024 7,914 (472) 297,466
All other corporate bonds 1,007,680 42,338 (14,496) 1,035,522
------------ ----------- ----------- ------------
Total long-term bonds 2,170,103 102,730 (27,361) 2,245,472
------------ ----------- ----------- ------------
Short-term bonds:
U.S. Treasury Bills, bankers acceptances and
commercial paper 88,754 -- -- 88,754
Affiliates 58,000 -- -- 58,000
------------ ----------- ----------- ------------
Total short-term bonds 146,754 -- -- 146,754
------------ ----------- ----------- ------------
Total bonds $ 2,316,857 $ 102,730 $ (27,361) $ 2,392,226
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
The amortized cost and estimated fair value of bonds at December 31, 1997 are
shown below by contractual maturity. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call and/or prepayment penalties.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
------------ ------------
<S> <C> <C>
(IN 000'S)
Maturities:
Due in one year or less $ 699,548 $ 700,280
Due after one year through five years 533,901 541,382
Due after five years through ten years 270,607 286,651
Due after ten years 735,624 821,002
------------ ------------
2,239,680 2,349,315
Mortgage-backed securities 212,051 219,884
------------ ------------
Total bonds $ 2,451,731 $ 2,569,199
------------ ------------
------------ ------------
</TABLE>
Proceeds from sales and maturities of investments in debt securities during
1997, 1996, and 1995 were $980,264,000, $1,554,016,000, and $1,510,553,000,
gross gains were $10,732,000, $16,975,000, and $24,757,000 and gross losses were
$2,446,000, $10,885,000, and $5,742,000, respectively.
Bonds included above with an amortized cost of approximately $2,578,000 and
$2,060,000 at December 31, 1997 and 1996, respectively, were on deposit with
governmental authorities as required by law.
4. SECURITIES LENDING:
The Company has a securities lending program operated on its behalf by the
Company's primary custodian, Chase Manhattan of New York. The custodian has
indemnified the Company against losses arising from this
61
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
4. SECURITIES LENDING (CONTINUED):
program. The total par value of securities out on loan was $0 and $51,537,000 at
December 31, 1997 and 1996 respectively. Income resulting from this program was
$200,000, $137,000 and $2,000 for the years ended December 31, 1997, 1996 and
1995, respectively.
5. MORTGAGE LOANS:
The Company invests in commercial first mortgage loans throughout the United
States. The Company monitors the condition of the mortgage loans in its
portfolio. In those cases where mortgages have been restructured, appropriate
allowances for losses have been made. In those cases where, in management's
judgment, the mortgage loans' values are impaired, appropriate losses are
recorded.
The following table shows the geographical distribution of the mortgage loan
portfolio.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---------- ----------
(IN 000'S)
<S> <C> <C>
California $ 119,122 $ 154,272
Massachusetts 58,981 79,929
Michigan 42,912 57,119
New York 45,696 67,742
Ohio 51,862 75,405
Pennsylvania 97,949 115,584
Washington 54,948 75,819
All other 212,565 313,062
---------- ----------
$ 684,035 $ 938,932
---------- ----------
---------- ----------
</TABLE>
The Company has restructured mortgage loans totaling $26,284,000 and $29,261,000
at December 31, 1997 and 1996, respectively, against which there are allowances
for losses of $3,026,000 and $5,893,000, respectively.
Mortgage loans from Sun Life (U.S.)'s portfolio with an approximate book value
of $53,188,000 were included in a transaction also involving loans from the
portfolios of other SLOC entities with an aggregate book value of $256 million,
whereby such loans were securitized for sale to the public markets.
The Company has made commitments of mortgage loans on real estate into the
future. The outstanding commitments for these mortgages amount to $12,300,000
and $9,800,000 at December 31, 1997 and 1996, respectively.
62
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
6. INVESTMENT GAINS AND LOSSES:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN 000'S)
<S> <C> <C> <C>
Net realized gains (losses)
Bonds $ 2,882 $ 5,631 $ 3,935
Common stock of affiliates 21,195 -- --
Mortgage loans 3,837 763 292
Real estate 2,912 599 391
Other invested assets (717) 567 (2,549)
--------- --------- ---------
$ 30,109 $ 7,560 $ 2,069
--------- --------- ---------
--------- --------- ---------
Changes in unrealized gains (losses):
Common stock of affiliates $ (2,894) $ (5,739) $ --
Mortgage loans 1,524 (600) (1,574)
Real estate 3,377 4,624 3,583
Other invested assets (854) -- --
--------- --------- ---------
$ 1,153 $ (1,715) $ 2,009
--------- --------- ---------
--------- --------- ---------
</TABLE>
Realized capital gains and losses on bonds and mortgages which relate to changes
in levels of interest rates are charged or credited to an interest maintenance
reserve ("IMR") and amortized into income over the remaining contractual life of
the security sold. The net realized capital gains credited to the interest
maintenance reserve were $6,321,000 in 1997, $7,710,000 in 1996, and $12,714,000
in 1995. All gains and losses are transferred net of applicable income taxes.
7. NET INVESTMENT INCOME:
Net investment income consisted of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
(IN 000'S)
<S> <C> <C> <C>
Interest income from bonds $ 188,924 $ 178,695 $ 205,445
Income from investment in common stock of affiliates 41,181 50,408 35,403
Interest income from mortgage loans 76,073 92,591 99,766
Real estate investment income 17,161 16,249 14,979
Interest income from policy loans 3,582 2,790 2,777
Other (193) 1,710 2,672
---------- ---------- ----------
Gross investment income 326,728 342,443 361,042
---------- ---------- ----------
Interest on surplus notes and notes payable (42,481) (23,061) (31,813)
Investment expenses (13,998) (15,629) (16,357)
---------- ---------- ----------
Net investment income $ 270,249 $ 303,753 $ 312,872
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
63
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
8. DERIVATIVES:
The Company uses derivative instruments for interest risk management purposes,
including hedges against specific interest rate risk and to minimize the
Company's exposure to fluctuations in interest rates. The Company's use of
derivatives has included U.S. Treasury futures, conventional interest rate
swaps, and forward spread lock interest rate swaps.
In the case of interest rate futures, gains or losses on contracts that qualify
as hedges are deferred until the earliest of the completion of the hedging
transaction, determination that the transaction will no longer take place, or
determination that the hedge is no longer effective. Upon completion of the
hedge, where it is impractical to allocate gains (losses) to specific hedged
assets or liabilities, gains (losses) are deferred in IMR and amortized over the
remaining life of the hedged assets. At December 31, 1997 and 1996 there were no
futures contracts outstanding.
In the case of interest rate and foreign currency swap agreements and forward
spread lock interest rate swap agreements, gains or losses on terminated swaps
are deferred in IMR and amortized over the shorter of the remaining life of the
hedged asset or the remaining term of the swap contract. The net differential to
be paid or received on interest rate swaps is recorded monthly as interest rates
change.
Options are used to hedge the stock market interest exposure in the mortality
and expense risk charges and guaranteed minimum death benefit features of the
Company's variable annuities. The Company's open positions are as follows:
<TABLE>
<CAPTION>
SWAPS OUTSTANDING
AT DECEMBER 31, 1997
---------------------------------
NOTIONAL MARKET VALUE
PRINCIPAL AMOUNTS OF POSITIONS
------------------ -------------
(IN 000'S)
<S> <C> <C>
Conventional interest rate swaps $ 80,000 $ (2,891)
Foreign currency swap 1,700 208
Forward spread lock swaps 50,000 274
Asian Put Option S & P 500 70,000 693
</TABLE>
<TABLE>
<CAPTION>
SWAPS OUTSTANDING
AT DECEMBER 31, 1996
---------------------------------
NOTIONAL MARKET VALUE
PRINCIPAL AMOUNTS OF POSITIONS
------------------ -------------
(IN 000'S)
<S> <C> <C>
Conventional interest rate swaps $ 429,000 $ (2,443)
Foreign currency swap 2,100 70
Forward spread lock swaps 50,000 (50)
</TABLE>
The market value of swaps is the estimated amount that the Company would receive
or pay on termination or sale, taking into account current interest rates and
the current credit worthiness of the counterparties. The Company is exposed to
potential credit loss in the event of non-performance by counterparties. The
counterparties are major financial institutions and management believes that the
risk of incurring losses related to credit risk is remote.
9. LEVERAGED LEASES:
The Company is a lessor in a leveraged lease agreement entered into on October
21, 1994, under which equipment having an estimated economic life of 25-40 years
was leased for a term of 9.75 years. The Company's equity investment represented
22.9% of the purchase price of the equipment. The balance of
64
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
9. LEVERAGED LEASES (CONTINUED):
the purchase price was furnished by third-party long-term debt financing,
collateralized by the equipment and non-recourse to the Company. At the end of
the lease term, the Master Lessee may exercise a fixed price purchase option to
purchase the equipment.
The Company's net investment in leveraged leases is composed of the following
elements:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
----------------------
1997 1996
---------- ----------
(IN 000'S)
<S> <C> <C>
Lease contracts receivable $ 92,605 $ 101,244
Less non-recourse debt (92,589) (101,227)
---------- ----------
16 17
Estimated residual value of leased assets 41,150 41,150
Less unearned and deferred income (10,324) (11,501)
---------- ----------
Investment in leveraged leases 30,842 29,666
Less fees (163) (188)
---------- ----------
Net investment in leveraged leases $ 30,679 $ 29,478
---------- ----------
---------- ----------
</TABLE>
The net investment is included as an other invested asset.
10. REINSURANCE:
The Company has agreements with SLOC which provide that SLOC will reinsure the
mortality risks of the individual life insurance contracts sold by the Company.
Under these agreements basic death benefits and supplementary benefits are
reinsured on a yearly renewable term basis and coinsurance basis, respectively.
Reinsurance transactions under these agreements had the effect of decreasing
income from operations by approximately $1,381,000, $1,603,000 and $2,184,000
for the years ended December 31, 1997, 1996 and 1995, respectively.
Effective January 1, 1991, the Company entered into an agreement with SLOC under
which certain individual life insurance contracts issued by SLOC were reinsured
by the Company on a 90% coinsurance basis. During 1997 SLOC changed certain
assumptions used in determining the gross and the ceded reserve balance. The
Company reflected the effect of the changes in assumptions to its assumed
reserves as a direct credit to surplus. The effect of the change was a
$39,016,000 decrease in reserves. Also, effective January 1, 1991, the Company
entered into an agreement with SLOC which provides that SLOC will reinsure the
mortality risks in excess of $500,000 per policy for the individual life
insurance contracts assumed by the Company in the reinsurance agreement
described above. Such death benefits are reinsured on a yearly renewable term
basis. These agreements had the effect of increasing income from operations by
approximately $37,050,000, $35,161,000 and $11,821,000 for the years ended
December 31, 1997,1996 and 1995, respectively. The life reinsurance assumed
agreement requires the reinsurer to withhold funds in amounts equal to the
reserves assumed.
65
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
10. REINSURANCE (CONTINUED):
The following are summarized pro-forma results of operations of the Company for
the years ended December 31, 1997, 1996 and 1995 before the effect of
reinsurance transactions with SLOC.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
(IN 000'S)
<S> <C> <C> <C>
Income:
Premiums, annuity deposits and other revenues $ 2,230,980 $ 1,858,145 $ 1,619,337
Net investment income and realized gains 300,669 312,870 315,967
------------ ------------ ------------
Subtotal 2,531,649 2,171,015 1,935,304
------------ ------------ ------------
Benefits and Expenses:
Policyholder benefits 2,240,597 1,928,720 1,760,917
Other expenses 187,591 155,531 130,302
------------ ------------ ------------
Subtotal 2,428,188 2,084,251 1,891,219
------------ ------------ ------------
Income from operations $ 103,461 $ 86,764 $ 44,085
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The Company has an agreement with an unrelated company which provides
reinsurance of certain individual life insurance contracts on a modified
coinsurance basis and under which all deficiency reserves related to these
contracts are reinsured. Reinsurance transactions under this agreement had the
effect of decreasing income from operations by $2,658,000 in 1997, $46,000 in
1996, and by $1,599,000 in 1995.
11. WITHDRAWAL CHARACTERISTICS OF ANNUITY ACTUARIAL RESERVES AND DEPOSIT
LIABILITIES:
The withdrawal characteristics of general account and separate account annuity
reserves and deposits are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------
AMOUNT % OF TOTAL
-------------- -------------
(IN 000'S)
<S> <C> <C>
Subject to discretionary withdrawal-with adjustment:
With market value adjustment $ 3,415,394 25%
At book value less surrender charges (surrender charge >5%) 7,672,211 57
At book value (minimal or no charge or adjustment) 1,259,698 9
Not subject to discretionary withdrawal provision 1,164,651 9
-------------- ---
Total annuity actuarial reserves and deposit liabilities $ 13,511,954 100%
-------------- ---
-------------- ---
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------
AMOUNT % OF TOTAL
-------------- -------------
(IN 000'S)
<S> <C> <C>
Subject to discretionary withdrawal-with adjustment:
With market value adjustment $ 3,547,683 31%
At book value less surrender charges (surrender charge >5%) 5,626,117 48
At book value (minimal or no charge or adjustment) 1,264,586 11
Not subject to discretionary withdrawal provision 1,218,157 10
-------------- ---
Total annuity actuarial reserves and deposit liabilities $ 11,656,543 100%
-------------- ---
-------------- ---
</TABLE>
66
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
12. RETIREMENT PLANS:
The Company participates with SLOC in a non-contributory defined benefit pension
plan covering essentially all employees. The benefits are based on years of
service and compensation.
The funding policy for the pension plan is to contribute an amount which at
least satisfies the minimum amount required by ERISA; currently the plan is
fully funded. The Company is charged for its share of the pension cost based
upon its covered participants. Pension plan assets consist principally of
separate accounts of SLOC.
The Company's share of the group's accrued pension cost at December 31, 1997,
1996 and 1995 was $593,000, $446,000 and $420,000, respectively. The Company's
share of net periodic pension cost was $146,000, $27,000 and $3,000, for 1997,
1996 and 1995, respectively.
The Company also participates with SLOC and certain affiliates in a 401(k)
savings plan for which substantially all employees are eligible. The Company
matches, up to specified amounts, employees' contributions to the plan. Company
contributions were $259,000, $233,000 and $185,000 for the years ended December
31, 1997, 1996 and 1995, respectively.
OTHER POST-RETIREMENT BENEFIT PLANS
In addition to pension benefits, the Company provides certain health, dental,
and life insurance benefits ("post-retirement benefits") for retired employees
and dependents. Substantially all employees may become eligible for these
benefits if they reach normal retirement age while working for the Company, or
retire early upon satisfying an alternate age plus service condition. Life
insurance benefits are generally set at a fixed amount.
67
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
13. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------
CARRYING AMOUNT ESTIMATED FAIR VALUE
----------------- --------------------
(IN 000'S)
<S> <C> <C>
ASSETS:
Bonds $ 2,451,731 $ 2,569,199
Mortgages 684,035 706,975
LIABILITIES:
Insurance reserves $ 123,128 $ 123,128
Individual annuities 307,668 302,165
Pension products 1,527,433 1,561,108
Derivatives -- (1,716)
<CAPTION>
DECEMBER 31, 1996
---------------------------------------
CARRYING AMOUNT ESTIMATED FAIR VALUE
----------------- --------------------
(IN 000'S)
<S> <C> <C>
ASSETS:
Bonds $ 2,316,857 $ 2,392,226
Mortgages 938,932 958,909
LIABILITIES:
Insurance reserves $ 122,606 $ 122,606
Individual annuities 373,488 367,878
Pension products 1,911,284 1,922,602
Derivatives -- (2,423)
</TABLE>
The major methods and assumptions used in estimating the fair values of
financial instruments are as follows:
The fair values of short-term bonds are estimated to be the amortized cost. The
fair values of long-term bonds which are publicly traded are based upon market
prices or dealer quotes. For privately placed bonds, fair values are estimated
by taking into account prices for publicly traded bonds of similar credit risk
and maturity and repayment and liquidity characteristics.
The fair values of the Company's general account insurance reserves and
liabilities under investment-type contracts (insurance, annuity and pension
contracts that do not involve mortality or morbidity risks) are estimated using
discounted cash flow analyses or surrender values. Those contracts that are
deemed to have short-term guarantees have a carrying amount equal to the
estimated market value.
The fair values of mortgages are estimated by discounting future cash flows
using current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.
The fair values of derivative financial instruments are estimated using the
process described in Note 8.
68
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
14. STATUTORY INVESTMENT VALUATION RESERVES:
The asset valuation reserve ("AVR") provides a reserve for losses from
investments in bonds, stocks, mortgage loans, real estate and other invested
assets with related increases or decreases being recorded directly to surplus.
Realized capital gains and losses on bonds and mortgages which relate to changes
in levels of interest rates are charged or credited to an interest maintenance
reserve ("IMR") and amortized into income over the remaining contractual life of
the security sold.
The tables shown below present changes in the major elements of the AVR and IMR.
<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
AVR IMR AVR IMR
--------- --------- --------- ---------
(IN 000'S) (IN 000'S)
<S> <C> <C> <C> <C>
Balance, beginning of year $ 53,911 $ 28,675 $ 42,099 $ 25,218
Net realized investment gains, net of tax 17,400 6,321 3,160 5,011
Amortization of net investment gains -- (1,166) -- (1,557)
Unrealized investment gains (losses) (2,340) -- 1,502 --
Required by formula (21,366) -- 7,150 3
--------- --------- --------- ---------
Balance, end of year $ 47,605 $ 33,830 $ 53,911 $ 28,675
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
15. FEDERAL INCOME TAXES:
The Company and its subsidiaries file a consolidated federal income tax return.
Federal income taxes are calculated for the consolidated group based upon
amounts determined to be payable as a result of operations within the current
year. No provision is recognized for timing differences which may exist between
financial statement and taxable income. Such timing differences include
reserves, depreciation and accrual of market discount on bonds. Cash payments
for federal income taxes were approximately $31,000,000, $19,264,000 and
$12,429,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
16. SURPLUS NOTES AND NOTES RECEIVABLE (PAYABLE):
On December 22, 1997, the Company issued a $250,000,000 surplus note to Life
Holdco. This note has an interest rate of 8.625% and is due on or after November
6, 2027.
On May 9, 1997, the Company issued a short-term note of $600,000,000 to Life
Holdco at an interest rate of 5.10%, which was extended at various interest
rates. This note was repaid on December 22, 1997.
The Company had issued and outstanding surplus notes to SLOC with an aggregate
carrying value of $335,000,000, during the period 1982 through January 16, 1996
at interest rates between 7.25% and 10%. The Company repaid all principal and
interest associated with these surplus notes on January 16, 1996.
On December 19, 1995 the Company issued surplus notes totaling $315,000,000 to
an affiliate, Sun Canada Financial Co., at interest rates between 5.75% and
7.25%. Of these notes, $157,500,000 will mature in the year 2007 and
$157,500,000 will mature in the year 2015. Interest on these notes is payable
semi-annually.
Principal and interest on surplus notes are payable only to the extent that the
Company meets specified requirements regarding free surplus exclusive of the
principal amount and accrued interest, if any, on these notes and with the
consent of the Delaware Insurance Commissioner. In addition, with regard to
surplus notes outstanding through January 16, 1996, subsequent to December 31,
1994 interest payments required
69
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
16. SURPLUS NOTES AND NOTES RECEIVABLE (PAYABLE) (CONTINUED):
the consent of the Delaware Insurance Commissioner. Payment of principal and
interest on the notes issued in 1995 and in 1997 also requires the consents of
the Delaware Insurance Commissioner and Canadian Office of the Superintendent of
Financial Institutions.
The Company obtained the required consents and expensed $42,481,000, $23,061,000
and $31,813,000 for interest on surplus notes and notes payable for the years
ended December 31, 1997, 1996 and 1995, respectively.
17. MANAGEMENT AND SERVICE CONTRACTS:
The Company has an agreement with SLOC which provides that SLOC will furnish, as
requested, personnel as well as certain services and facilities on a
cost-reimbursement basis. Expenses under this agreement amounted to
approximately $15,997,000 in 1997, $20,192,000 in 1996, and $20,293,000 in 1995.
18. RISK-BASED CAPITAL:
Effective December 31, 1993 the NAIC adopted risk-based capital requirements for
life insurance companies. The risk-based capital requirements provide a method
for measuring the minimum acceptable amount of adjusted capital that a life
insurer should have, as determined under statutory accounting practices, taking
into account the risk characteristics of its investments and products. The
Company has met the minimum risk-based capital requirements at December 31, 1997
and 1996.
19. ACCOUNTING POLICIES AND PRINCIPLES:
The financial statements of the Company have been prepared on the basis of
statutory accounting practices which, prior to 1996, were considered by the
insurance industry and the accounting profession to be in accordance with GAAP
for mutual life insurance companies. The primary differences between statutory
accounting practices and GAAP are described as follows. Under statutory
accounting practices, financial statements are not consolidated and investments
in subsidiaries are shown at net equity value. Accordingly, the assets,
liabilities and results of operations of the Company's subsidiaries are not
consolidated with the assets, liabilities and results of operations,
respectively, of the Company. Changes in net equity value of the common stock of
the Company's United States life insurance subsidiaries are directly reflected
in the Company's surplus. Changes in the net equity value of the common stock of
all other subsidiaries are directly reflected in the Company's Asset Valuation
Reserve. Dividends paid by subsidiaries to the Company are included in the
Company's net investment income.
Other differences between statutory accounting practices and GAAP include the
following: statutory accounting practices do not recognize the following assets
or liabilities which are reflected under GAAP - deferred policy acquisition
costs, deferred federal income taxes and statutory non-admitted assets. Asset
Valuation Reserves and Interest Maintenance Reserves are established under
statutory accounting practices but not under GAAP. Methods for calculating real
estate depreciation and investment valuation allowances differ under statutory
accounting practices and GAAP. Actuarial assumptions and reserving methods
differ under statutory accounting practices and GAAP. Premiums for universal
life and investment type products are recognized as income for statutory
purposes and as deposits to policyholders' accounts for GAAP.
Because the Company's management uses financial information prepared in
conformity with accounting principles generally accepted in Canada in the normal
course of business, the management of Sun Life Assurance Company of Canada
(U.S.) has determined that the cost of complying with Statement No. 120
"Accounting and Reporting by Mutual Insurance Enterprises and by Insurance
Enterprises for Certain Long
70
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
19. ACCOUNTING POLICIES AND PRINCIPLES (CONTINUED):
Duration Participating Contracts" exceed the benefits that the Company, or the
users of its financial statements, would experience. Consequently, the Company
has elected not to apply such standards in the preparation of these financial
statements.
71
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
We have audited the accompanying statutory statements of admitted assets,
liabilities, and capital stock and surplus of Sun Life Assurance Company of
Canada (U.S.) as of December 31, 1997 and 1996, and the related statutory
statements of operations, changes in capital stock and surplus, and cash flow
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described more fully in Notes 1 and 19 to the financial statements, the
Company prepared these financial statements using accounting practices
prescribed or permitted by the Insurance Department of the State of Delaware,
which practices differ from generally accepted accounting principles. The
effects on the financial statements of the variances between the statutory basis
of accounting and generally accepted accounting principles, although not
reasonably determinable, are presumed to be material.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the admitted assets, liabilities, and capital stock and
surplus of Sun Life Assurance Company of Canada (U.S.) as of December 31, 1997
and 1996, and the results of its operations and its cash flow for each of the
three years in the period ended December 31, 1997 on the basis of accounting
described in Notes 1 and 19.
However, because of the effects of the matter discussed in the second preceding
paragraph, in our opinion, the financial statements referred to above do not
present fairly, in conformity with generally accepted accounting principles, the
financial position of Sun Life Assurance Company of Canada (U.S.) as of December
31, 1997 and 1996 or the results of its operations or its cash flow for each of
the three years in the period ended December 31, 1997.
As management has stated in Note 19, because the Company's management uses
financial information prepared in accordance with accounting principles
generally accepted in Canada in the normal course of business, the management of
Sun Life Assurance Company of Canada (U.S.) has determined that the cost of
complying with Statement No. 120 would exceed the benefits that the Company, or
the users of its financial statements, would experience. Consequently, the
Company has elected not to apply such standards in the preparation of these
financial statements.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 5, 1998
72
<PAGE>
APPENDIX A
ILLUSTRATIVE EXAMPLE OF VARIABLE ACCUMULATION UNIT VALUE CALCULATIONS:
Suppose the net asset value of a Fund share at the end of the current
valuation period is $18.38; at the end of the immediately preceding valuation
period was $18.32; the Valuation Period is one day; and no dividends or
distributions caused Fund shares to go "ex-dividend" during the current
Valuation Period. $18.38 divided by $18.32 is 1.00327511. Subtracting the one
day risk factor for mortality and expense risks and the administrative expense
charge of .00003863 (the daily equivalent of the current maximum charge of 1.40%
on an annual basis) gives a net investment factor of 1.00323648. If the value of
the variable accumulation unit for the immediately preceding valuation period
had been 14.5645672, the value for the current valuation period would be
14.6117051 (14.5645672 X 1.00323648).
ILLUSTRATIVE EXAMPLE OF VARIABLE ANNUITY UNIT VALUE CALCULATIONS:
Suppose the circumstances of the first example exist, and the value of an
annuity unit for the immediately preceding valuation period had been 12.3456789.
If the first variable annuity payment is determined by using an annuity payment
based on an assumed interest rate of 4% per year, the value of the annuity unit
for the current valuation period would be 12.3843046 (12.3456789 X 1.00323648
(the Net Investment Factor) X 0.99989255). 0.99989255 is the factor, for a one
day Valuation Period, that neutralizes the assumed interest rate of four percent
(4%) per year used to establish the Annuity Payment Rates found in certain
Contracts. (The factor that neutralizes the assumed interest rate of three
percent (3%) per year used to establish the Annuity Payment Rates found in other
Contracts is 0.99991902.)
ILLUSTRATIVE EXAMPLE OF VARIABLE ANNUITY PAYMENT CALCULATIONS:
Suppose that a Participant's Account is credited with 8,765.4321 variable
accumulation units of a particular Sub-Account but is not credited with any
fixed accumulation units; that the variable accumulation unit value and the
annuity unit value for the particular Sub-Account for the valuation period which
ends immediately preceding the annuity commencement date are 14.5645672 and
12.3456789 respectively; that the annuity payment rate for the age and option
elected is $6.78 per $1,000; and that the annuity unit value on the day prior to
the second variable annuity payment date is 12.3843046. The first variable
annuity payment would be $865.57 (8,765.4321 X 14.5645672 X 6.78 DIVIDED BY
1,000). The number of annuity units credited would be 70.1112 ($865.57
DIVIDED BY 12.3456789) and the second variable annuity payment would be $868.28
(70.1112 X 12.3843046).
73
<PAGE>
APPENDIX B
WITHDRAWALS, WITHDRAWAL CHARGES AND THE MARKET VALUE ADJUSTMENT
PART 1: VARIABLE ACCOUNT (THE MARKET VALUE ADJUSTMENT DOES NOT APPLY TO THE
VARIABLE ACCOUNT)
WITHDRAWAL CHARGE CALCULATION:
FULL SURRENDER:
Assume a Purchase Payment of $40,000 is made on the Date of Coverage, no
additional Purchase Payments are made and there are no partial withdrawals. The
table below presents four examples of the withdrawal charge resulting from a
full surrender of the Participant's Account, based on hypothetical Account
Values.
<TABLE>
<CAPTION>
HYPOTHETICAL FREE PURCHASE WITHDRAWAL WITHDRAWAL
ACCOUNT ACCOUNT WITHDRAWAL PAYMENTS CHARGE CHARGE
YEAR VALUE AMOUNT LIQUIDATED PERCENTAGE AMOUNT
------- ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1 $41,000 $ 4,000(a) $37,000 6.00% $2,220
3 $52,000 $12,000(b) $40,000 5.00% $2,000
7 $80,000 $28,000(c) $40,000 3.00% $1,200
9 $98,000 $28,000(d) $40,000 0.00% $ 0
</TABLE>
- ------------------------
(a) The free withdrawal amount during an Account Year is equal to 10% of new
payments (those payments made in current Account Year or in the six
immediately preceding Account Years) less any prior partial withdrawals in
that Account Year. Any portion of the free withdrawal amount that is not
used in the current Account Year is carried forward into future years. In
the first Account Year 10% of new payments is $4,000. Therefore, on full
surrender $4,000 is withdrawn free of the withdrawal charge and the Purchase
Payment liquidated is $37,000 (account value less free withdrawal amount).
The withdrawal charge amount is determined by applying the withdrawal charge
percentage to the Purchase Payment liquidated.
(b) In the third account year, the free withdrawal amount is equal to $12,000
($4,000 for the current Account Year, plus an additional $8,000 for Account
Years 1 and 2 because no partial withdrawals were taken and the unused free
withdrawal amount is carried forward into future Account Years). The
withdrawal charge percentage is applied to the liquidated Purchase Payment
(account value less free withdrawal amount).
(c) In the seventh Account Year, the free withdrawal amount is equal to $28,000
($4,000 for the current Account Year, plus an additional $24,000 for Account
Years 1-6, $4,000 for each Account Year because no partial withdrawals were
taken and the unused free withdrawal amount is carried forward into future
Account Years). The withdrawal charge percentage is applied to the
liquidated Purchase Payment (account value less free withdrawal amount, but
not greater than actual Purchase Payments).
(d) There is no withdrawal charge on any Purchase Payment liquidated that has
been in the Participant's Account for at least seven years.
PARTIAL WITHDRAWAL:
Assume a single purchase payment of $40,000 is deposited at issue, no
additional Purchase Payments are made, no partial withdrawals have been taken
prior to the fifth Account Year, and there are a series of three partial
withdrawals made during the fifth Account Year of $9,000, $12,000, and $15,000.
<TABLE>
<CAPTION>
HYPOTHETICAL PARTIAL FREE PURCHASE WITHDRAWAL WITHDRAWAL
ACCOUNT WITHDRAWAL WITHDRAWAL PAYMENTS CHARGE CHARGE
VALUE AMOUNT AMOUNT LIQUIDATED PERCENTAGE AMOUNT
------------ ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
(a) $64,000 $ 9,000 $20,000 $ 0 4.00% $ 0
(b) $56,000 $12,000 $11,000 $ 1,000 4.00% $ 40
(c) $40,000 $15,000 $ 0 $15,000 4.00% $600
</TABLE>
- ------------------------
(a) The free withdrawal amount during an Account Year is equal to 10% of new
payments (those payments made in current Account Year or in the six
immediately preceding Account Years) less any prior partial withdrawals in
that Account Year. Any portion of the free withdrawal amount that is not
used in the
74
<PAGE>
current Account Year is carried forward into future years. In the fifth
Account Year, the free withdrawal amount is equal to $20,000 ($4,000 for the
current Account Year, plus an additional $16,000 for account years 1-4,
$4,000 for each Account Year because no partial withdrawals were taken). The
partial withdrawal amount ($9,000) is less than the free withdrawal amount
so no Purchase Payments are liquidated and no withdrawal charge applies.
(b) Since a partial withdrawal of $9,000 was taken, the remaining free
withdrawal amount is equal to $11,000. The $12,000 partial withdrawal will
first be applied against the $11,000 free withdrawal amount, and then will
liquidate Purchase Payments of $1,000, incurring a withdrawal charge of $40.
(c) The free withdrawal amount is zero since the previous partial withdrawals
have already used the free withdrawal amount. The entire partial withdrawal
amount will result in Purchase Payments being liquidated and will incur a
withdrawal charge. At the beginning of the next Account Year, 10% of
Purchase Payments would be available for withdrawal requests during that
Account Year.
PART 2--FIXED ACCOUNT--EXAMPLES OF THE MARKET VALUE ADJUSTMENT (MVA)
The MVA factor is:
<TABLE>
<C> <C>
N/12
1 + I
( -------- ) -1
1 + J + b
</TABLE>
These examples assume the following:
1) the Guarantee Amount was allocated to a five year Guarantee Period
with a Guaranteed Interest Rate of 6% or .06 (l).
2) the date of surrender is two years from the Expiration Date (N =
24).
3) the value of the Guarantee Amount on the date of surrender is
$11,910.16.
4) the interest earned in the current Account Year is $674.16.
5) no transfers or partial withdrawals affecting this Guarantee Amount
have been made.
6) withdrawal charges, if any, are calculated in the same manner as
shown in the examples in Part 1.
EXAMPLE OF A NEGATIVE MVA:
Assume that on the date of surrender, the current rate (J) is 8% or .08 and
the b factor is zero.
<TABLE>
<C> <S> <C> <C>
N/12
1 + l
The MVA factor = ( -------- ) -1
1 + J + b
24/12
1 + .06
= ( ------ ) -1
1 + .08
= (.981)2 -1
= .963 -1
= - .037
</TABLE>
The value of the Guarantee Amount less interest credited to the Guarantee
Amount in the current Account Year is multiplied by the MVA factor to determine
the MVA
($11,910.16 - $674.16)/(-.037) = -$415.73
-$415.73 represents the MVA that will be deducted from the value of the
Guarantee Amount before the deduction of any withdrawal charge.
75
<PAGE>
For a partial withdrawal of $2,000 from this Guarantee Amount, the MVA would
be ($2,000.00 - $674.16)/(-.037) = -$49.06. -$49.06 represents the MVA that will
be deducted from the partial withdrawal amount before the deduction of any
withdrawal charge.
EXAMPLE OF A POSITIVE MVA:
Assume that on the date of surrender, the current rate (J) is 5% or .05 and the
b factor is zero.
N/12
1 + l
The MVA factor = ( -------- ) -1
1 + J + b
24/12
1 + .06
= ( ------ ) -1
1 + .05
= (1.010)2 -1
= 1.019 -1
= .019
The value of the Guarantee Amount less interested credited to the Guarantee
Amount in the current Account Year is multiplied by the MVA factor to determine
the MVA
($11,910.16 - $674.16)/.019 = $213.48
$213.48 represents the MVA that would be added to the value of the Guarantee
Amount before the deduction of any withdrawal charge.
For a partial withdrawal of $2,000 from this Guarantee Amount, the MVA would
be ($2,000.00 - $674.16)/.019 = $25.19.
$25.19 represents the MVA that would be added to the value of the partial
withdrawal amount before the deduction of any withdrawal charge.
76
<PAGE>
APPENDIX C
CALCULATION OF PERFORMANCE DATA
AVERAGE ANNUAL TOTAL RETURN:
The table below shows, for various Sub-Accounts of the Variable Account, the
Average Annual Total Return for the stated periods (or shorter period indicated
in the note below), based upon a hypothetical initial Purchase Payment of
$1,000, calculated in accordance with the formula set out after the table. For
purposes of determining the investment results in this table, the actual
investment performance of each Fund is reflected from the date the Fund
commenced operations ("Inception"). No Information is shown for the Funds that
have not commenced operations or that have been in operation for less than one
year.
The Securities and Exchange Commission defines "standardized" total return
information to mean Average Annual Total Return, based on a hypothetical initial
purchase payment of $1,000 and calculated in accordance with the formula set
forth after the table, but presented only for periods subsequent to the
commencement of the Sub-Account in question. Since as of the date of this
Prospectus, the Sub-Accounts have no performance history, no standardized total
return information is currently provided. Standardized total return information
will be provided after the Sub-Accounts have been in operation for one year.
AVERAGE ANNUAL TOTAL RETURN
PERIOD ENDING DECEMBER 31, 1997
<TABLE>
<CAPTION>
1 YEAR 5 YEAR 10 YEAR DATE OF
PERIOD PERIOD PERIOD LIFE (1) INCEPTION
----------- ----------- ----------- ----------- -----------------------
<S> <C> <C> <C> <C> <C>
AIM V.I. Capital Appreciation Fund...... 5.74% -- -- 15.87% June 1, 1993
AIM V.I. Growth Fund.................... 18.90% -- -- 15.28% June 1, 1993
AIM V.I. Growth and Income Fund......... 17.77% -- -- 18.41% May 2, 1994
AIM V.I. International Equity Fund...... (0.43)% -- -- 10.50% June 1, 1993
Alger American Growth Portfolio......... 17.85% 17.08% -- 17.73% January 9, 1989
Alger American Income and Growth
Portfolio.............................. 28.24% 15.17% -- 12.08% November 15, 1988
Alger American Small Capitalization
Portfolio.............................. 3.71% 10.42% -- 17.50% September 21, 1988
J.P. Morgan Equity Portfolio(2)......... 19.58% -- -- 24.50% January 3, 1995
J.P. Morgan International Opportunities
Portfolio(2)........................... (1.82)% -- -- 7.18% January 3, 1995
J.P. Morgan Small Company Portfolio(2).. 14.64% -- -- 22.73% January 3, 1995
Lord Abbett Growth and Income
Portfolio.............................. 16.74% 15.71% -- 14.85% December 11, 1989
MFS/Sun Life Capital Appreciation
Series................................. 15.05% 15.57% 15.99% -- August 13, 1985
MFS/Sun Life Emerging Growth Series..... 14.06% -- -- 21.69% May 1, 1995
MFS/Sun Life Government Securities
Series................................. 1.27% 4.47% 6.72% -- August 12, 1985
MFS/Sun Life High Yield Series.......... 5.55% 9.14% 9.35% -- August 13, 1985
MFS/Sun Life Utilities Series........... 24.84% -- -- 16.20% November 16, 1993
OCC Equity Portfolio(3)................. 18.71% 17.21% -- 15.85% August 1, 1988
OCC Managed Portfolio(3)................ 22.29% 19.86% -- 20.32% August 1, 1998
OCC Small Cap Portfolio(3).............. 14.39% 12.40% -- 13.76% August 1, 1988
Warburg Pincus International Equity
Portfolio.............................. (8.95)% -- -- 2.69% June 30, 1995
Warbug Pincus Post-Venture Capital
Portfolio.............................. 5.61% -- -- 2.45% September 30, 1996
Warburg Pincus Small Company Growth
Portfolio.............................. 7.97% -- -- 18.68% June 30, 1995
</TABLE>
(1) From commencement of investment operations.
(2) From January 3, 1995 (commencement of operations) to December 31, 1996,
Chubb Investment Advisory Corporation ("Chubb Investment Advisory"), a
wholly owned subsidiary of Chubb Life Insurance Company of America ("Chubb
LIfe"), served as each of these Fund's investment manager, and
77
<PAGE>
Morgan Guaranty Trust Company of New York, an affiliate of J.P. Morgan
Investment Management Inc. ("J.P. Morgan") served as each Fund's
sub-investment adviser. Effective January 1, 1997, J.P. Morgan began serving
as each Fund's investment adviser.
(3) On September 16, 1994, an investment company then called Quest for Value
Accumulation Trust (the "Old Trust") was effectively divided into two
investment funds, the Old Trust and the OCC Accumulation Trust, at which
time the OCC Accumulation Trust commenced operations. The total net assets
for each of the Equity, Managed, and Small Cap Portfolios immediately after
the transaction were $86,789,755, $682,601,380, and $139,812,573,
respectively, with respect to the Old Trust, and for each of the Equity,
Managed, and Small Cap Portfolios, $3,764,598, $51,345,102, and $8,129,274,
respectively, with respect to the OCC Accumulation Trust. The Equity,
Managed, and Small Cap Portfolios commenced operations as part of the OCC
Accumulation Trust on September 16, 1994. The Old Trust commenced operations
on August 1, 1988. For the period prior to September 16, 1994, the
performance figures above for each of the Equity, Managed, and Small Cap
Portfolios reflect the performance of the corresponding Portfolios of the
Old Trust.
The length of the period and the last day of each period used in the above
table are set out in the table heading and in the footnotes above. The Average
Annual Total Return for each period was determined by finding the average annual
compounded rate of return over each period that would equate the initial amount
invested to the ending redeemable value for that period, in accordance with the
following formula:
n
P(1 + T) = ERV
Where: P = a hypothetical initial Purchase Payment
of $1,000
T = average annual total return for the
period
n = number of years
ERV = redeemable value (as of the end of the
period) of a hypothetical $1,000
Purchase Payment made at the beginning
of the 1-year, 5-year, or 10-year period
(or fractional portion thereof)
The formula assumes that: 1) all recurring fees have been deducted from the
Participant's Account; 2) all applicable non-recurring Contract charges are
deducted at the end of the period; and 3) there will be a full surrender at
the end of the period.
The $35 annual Account Fee will be allocated among the Sub-Accounts so that
each Sub-Account's allocated portion of the Account Fee is proportional to the
percentage of the number of Individual Contracts and Certificates that have
amounts allocated to that Sub-Account. Because the impact of Account Fees on a
particular Contract may differ from those assumed in the computation due to
differences between actual allocations and the assumed ones, the total return
that would have been experienced by an actual Contract over these same time
periods may have been different from that shown above.
ADDITIONAL NON-STANDARDIZED INVESTMENT PERFORMANCE:
The Variable Account may illustrate its results over various periods and
compare its results to indices and other variable annuities in sales materials
including advertisements, brochures and reports. Such results may be computed on
a "cumulative" and/or "annualized" basis.
"Cumulative" quotations are arrived at by calculating the change in the
Accumulation Unit value of a Sub-Account between the first and last day of the
base period being measured, and expressing the difference as a percentage of the
Accumulation Unit value at the beginning of the base period.
"Annualized" quotations (described in the following table as "Compound
Growth Rate") are calculated by applying a formula which determines the level
rate of return which, if earned over the entire base period, would produce the
cumulative return.
78
<PAGE>
NON-STANDARDIZED INVESTMENT PERFORMANCE
$10,000 INVESTED IN THIS SUB-ACCOUNT ...WOULD HAVE GROWN TO THIS AMOUNT ON
UNDER A DECEMBER 31, 1997*
FUTURITY II CONTRACT, THIS MANY YEARS
AGO...
<TABLE>
<CAPTION>
AIM V.I. CAPITAL APPRECIATION FUND AIM V.I. GROWTH FUND
------------------------------------------------- -------------------------------------------------
NUMBER CUMULATIVE COMPOUND NUMBER CUMULATIVE COMPOUND
OF GROWTH GROWTH OF GROWTH GROWTH
YEARS PERIODS AMOUNT RATE RATE YEARS PERIODS AMOUNT RATE RATE
- ------ ----------------- ---------- ---------- -------- ------ ----------------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 12/31/96-12/31/97 $11,190.41 11.90% 11.90% 1 12/31/96-12/31/97 $12,506.94 25.07% 25.07%
2 12/31/95-12/31/97 $12,978.77 29.79% 13.90% 2 12/31/95-12/31/97 $14,572.11 45.72% 20.68%
3 12/31/94-12/31/97 $17,363.98 73.64% 20.17% 3 12/31/94-12/31/97 $19,363.09 93.63% 24.62%
4 12/31/93-12/31/97 $17,552.58 75.53% 15.09% 4 12/31/93-12/31/97 $18,622.89 86.23% 16.81%
Life 6/1/93-12/31/97 $20,159.47 101.59% 16.52% Life 6/1/93-12/31/97 $19,712.84 97.13% 15.95%
<CAPTION>
AIM V.I. INTERNATIONAL EQUITY FUND ALGER AMERICAN GROWTH PORTFOLIO
------------------------------------------------- -------------------------------------------------
NUMBER CUMULATIVE COMPOUND NUMBER CUMULATIVE COMPOUND
OF GROWTH GROWTH OF GROWTH GROWTH
YEARS PERIODS AMOUNT RATE RATE YEARS PERIODS AMOUNT RATE RATE
- ------ ----------------- ---------- ---------- -------- ------ ----------------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 12/31/96-12/31/97 $10,545.18 5.45% 5.45% 1 12/31/96-12/31/97 $12,401.24 24.01% 24.01%
2 12/31/95-12/31/97 $12,484.78 24.85% 11.72% 2 12/31/95-12/31/97 $13,861.08 38.61% 17.71%
3 12/31/94-12/31/97 $14,435.16 44.35% 13.00% 3 12/31/94-12/31/97 $18,641.89 86.42% 23.05%
4 12/31/93-12/31/97 $14,006.60 40.07% 8.78% 4 12/31/93-12/31/97 $18,651.05 86.51% 16.85%
5 12/31/92-12/31/97 $22,525.97 125.26% 17.62%
Life 6/1/93-12/31/97 $16,307.31 63.07% 11.25% Life 1/9/89-12/31/97 $43,631.90 336.32% 17.83%
<CAPTION>
ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO J.P. MORGAN EQUITY PORTFOLIO**
------------------------------------------------- -------------------------------------------------
NUMBER CUMULATIVE COMPOUND NUMBER CUMULATIVE COMPOUND
OF GROWTH GROWTH OF GROWTH GROWTH
YEARS PERIODS AMOUNT RATE RATE YEARS PERIODS AMOUNT RATE RATE
- ------ ----------------- ---------- ---------- -------- ------ ----------------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 12/31/96-12/31/97 $10,985.37 9.85% 9.85% 1 12/31/96-12/31/97 $12,574.38 25.74% 25.74%
2 12/31/95-12/31/97 $11,285.25 12.85% 6.22% 2 12/31/95-12/31/97 $15,039.85 50.40% 22.60%
3 12/31/94-12/31/97 $16,061.16 60.61% 17.09%
4 12/31/93-12/31/97 $15,146.60 51.47% 10.93%
5 12/31/92-12/31/97 $16.921.08 69.21% 11.09%
Life 9/21/88-12/31/97 $44,953.90 349.54% 17.58% Life 1/3/95-12/31/97 $19,834.70 98.35% 25.70%
<CAPTION>
J.P. MORGAN SMALL COMPANY PORTFOLIO** LORD ABBETT GROWTH AND INCOME PORTFOLIO
------------------------------------------------- -------------------------------------------------
NUMBER CUMULATIVE COMPOUND NUMBER CUMULATIVE COMPOUND
OF GROWTH GROWTH OF GROWTH GROWTH
YEARS PERIODS AMOUNT RATE RATE YEARS PERIODS AMOUNT RATE RATE
- ------ ----------------- ---------- ---------- -------- ------ ----------------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 12/31/96-12/31/97 $12,080.92 20.81% 20.81% 1 12/31/96-12/31/97 $12,291.06 22.91% 22.91%
2 12/31/95-12/31/97 $14,513.12 45.13% 20.44% 2 12/31/95-12/31/97 $14,473.71 44.74% 20.28%
3 12/31/94-12/31/97 $18,531.15 85.31% 22.81%
4 12/31/93-12/31/97 $18,783.34 87.83% 17.06%
5 12/31/92-12/31/97 $21,268.66 112.69% 16.28%
Life 1/3/95-12/31/97 $19,025.40 23.96% Life 12/11/89-12/31/97 $30,793.40 207.93% 14.97%
<CAPTION>
AIM V.I. GROWTH AND INCOME FUND
-------------------------------------------------
NUMBER CUMULATIVE COMPOUND
OF GROWTH GROWTH
YEARS PERIODS AMOUNT RATE RATE
- ------ ----------------- ---------- ---------- --------
<S> <C> <C> <C> <C>
1 12/31/96-12/31/97 $12,393.44 23.93% 23.93%
2 12/31/95-12/31/97 $14,661.19 46.61% 21.05%
3 12/31/94-12/31/97 $19,358.07 93.58% 24.60%
4
Life 5/2/94-12/31/97 $19,178.60 91.79% 19.42%
ALGER AMERICAN INCOME AND GROWTH PORTFOLIO
-------------------------------------------------
NUMBER CUMULATIVE COMPOUND
OF GROWTH GROWTH
YEARS PERIODS AMOUNT RATE RATE
- ------ ----------------- ---------- ---------- --------
<S> <C> <C> <C> <C>
1 12/31/96-12/31/97 $13,440.63 34.41% 34.41%
2 12/31/95-12/31/97 $15,861.80 58.62% 25.90%
3 12/31/94-12/31/97 $21,128.43 111.28% 28.29%
4 12/31/93-12/31/97 $19,111.76 91.12% 17.56%
12/31/92-12/31/97 $20,796.99 107.97% 15.76%
Life 11/15/88-12/31/97 $28,649.10 186.49% 12.22%
J.P. MORGAN INTERNATIONAL OPPORTUNITIES
PORTFOLIO**
-------------------------------------------------
NUMBER CUMULATIVE COMPOUND
OF GROWTH GROWTH
YEARS PERIODS AMOUNT RATE RATE
- ------ ----------------- ---------- ---------- --------
<S> <C> <C> <C> <C>
1 12/31/96-12/31/97 $10,397.65 3.98% 3.98%
2 12/31/95-12/31/97 $11,601.95 16.02% 7.70%
3
4
5
Life 1/3/95-12/31/97 $12,851.60 28.52% 8.74%
MFS/SUN LIFE CAPITAL APPRECIATION SERIES
-------------------------------------------------
NUMBER CUMULATIVE COMPOUND
OF GROWTH GROWTH
YEARS PERIODS AMOUNT RATE RATE
- ------ ----------------- ---------- ---------- --------
<S> <C> <C> <C> <C>
1 12/31/96-12/31/97 $12,142.53 21.43% 21.43%
2 12/31/95-12/31/97 $14,547.17 45.47% 20.58%
12/31/94-12/31/97 $19,291.09 92.91% 24.46%
12/31/93-12/31/97 $18,340.28 83.40% 16.36%
12/31/92-12/31/97 $21,343.67 113.44% 16.36%
12/31/87-12/31/97 $45,230.64 352.31% 16.28%
Life 8/13/85-12/31/97 $58,242.19 482.42% 15.28%
</TABLE>
- ----------------------------------------
*For purposes of determining these investment results, the actual investment
performance of each Fund is reflected from the date the Fund commenced
operations, although the Contracts have been offered only since February 17,
1998. No information is shown for Funds that have not commenced operations or
that have been in operation for less than one year. The charges imposed under
the Contract against the assets of the Variable Account for mortality and
expense risks and administrative expenses have been deducted. However, the
annual Account Fee is not reflected and these examples do not assume surrender
at the end of the period.
**See footnote 2 on page 2 of this Statement of Additional Information.
79
<PAGE>
NON-STANDARDIZED INVESTMENT PERFORMANCE (CONTINUED)
$10,000 INVESTED IN THIS SUB-ACCOUNT ...WOULD HAVE GROWN TO THIS AMOUNT ON
UNDER A DECEMBER 31, 1997*
FUTURITY II CONTRACT, THIS MANY YEARS
AGO...
<TABLE>
<CAPTION>
MFS/SUN LIFE EMERGING GROWTH SERIES MFS/SUN LIFE GOVERNMENT SECURITIES SERIES
------------------------------------------------- ------------------------------------------------
NUMBER CUMULATIVE COMPOUND NUMBER CUMULATIVE COMPOUND
OF GROWTH GROWTH OF GROWTH GROWTH
YEARS PERIODS AMOUNT RATE RATE YEARS PERIODS AMOUNT RATE RATE
- ------ ----------------- ---------- ---------- -------- ------ ----------------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 12/31/96-12/31/97 $12,026.23 20.26% 20.26% 1 12/31/96-12/31/97 $10,724.62 7.25% 7.25%
2 12/31/95-12/31/97 $13,888.44 38.88% 17.82% 2 12/31/95-12/31/97 $10,746.79 7.47% 3.66%
3 12/31/94-12/31/97 $12,468.86 24.69% 7.62%
4 12/31/93-12/31/97 $12,031.47 20.31% 4.73%
5 12/31/92-12/31/97 $12,894.35 28.94% 5.21%
10 12/31/87-12/31/97 $19,660.25 96.60% 6.99%
Life 5/1/95-12/31/97 $17,454.36 74.54% 23.19% Life 8/12/85-12/31/97 $23,852.82 138.53% 7.27%
<CAPTION>
MFS/SUN LIFE HIGH YIELD SERIES
-------------------------------------------------
NUMBER CUMULATIVE COMPOUND
OF GROWTH GROWTH
YEARS PERIODS AMOUNT RATE RATE
- ------ ----------------- ---------- ---------- --------
<S> <C> <C> <C> <C>
1 12/31/96-12/31/97 $11,164.81 11.65% 11.65%
2 12/31/95-12/31/97 $12,343.72 23.44% 11.09%
12/31/94-12/31/97 $14,247.62 42.48% 12.51%
12/31/93-12/31/97 $13,737.52 37.38% 8.26%
12/31/92-12/31/97 $15,950.73 59.51% 9.78%
12/31/87-12/31/97 $24,627.72 146.28% 9.42%
Life 8/13/85-12/31/97 $28,703.62 187.04% 8.88%
</TABLE>
<TABLE>
<CAPTION>
MFS/SUN LIFE UTILITIES SERIES OCC EQUITY PORTFOLIO**
------------------------------------------------- -------------------------------------------------
NUMBER CUMULATIVE COMPOUND NUMBER CUMULATIVE COMPOUND
OF GROWTH GROWTH OF GROWTH GROWTH
YEARS PERIODS AMOUNT RATE RATE YEARS PERIODS AMOUNT RATE RATE
- ------ ----------------- ---------- ---------- -------- ------ ----------------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 12/31/96-12/31/97 $13,089.68 30.90% 30.90% 1 12/31/96-12/31/97 $12,488.12 24.88% 24.88%
2 12/31/95-12/31/97 $15,533.96 55.34% 24.60% 2 12/31/95-12/31/97 $15,191.41 51.91% 23.22%
3 12/31/94-12/31/97 $20,283.91 102.84% 26.56% 3 12/31/94-12/31/97 $20,803.52 108.04% 27.63%
4 12/31/93-12/31/97 $19,195.34 91.95% 17.73% 4 12/31/93-12/31/97 $21,299.21 112.99% 20.79%
5 12/31/92-12/31/97 $22,653.68 126.54% 17.76%
Life 11/16/93-12/31/97 $19,014.01 90.14% 16.85% Life 8/1/88-12/31/97 $40,350.50 303.51% 15.96%
<CAPTION>
OCC SMALL CAPITALIZATION PORTFOLIO** WARBURG PINCUS INTERNATIONAL EQUITY PORTFOLIO
------------------------------------------------- -------------------------------------------------
NUMBER CUMULATIVE COMPOUND NUMBER CUMULATIVE COMPOUND
OF GROWTH GROWTH OF GROWTH GROWTH
YEARS PERIODS AMOUNT RATE RATE YEARS PERIODS AMOUNT RATE RATE
- ------ ----------------- ---------- ---------- -------- ------ ----------------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 12/31/96-12/31/97 $12,055.38 20.55% 20.55% 1 12/31/96-12/31/97 $ 9,639.33 -3.61% -3.61%
2 12/31/95-12/31/97 $14,113.22 41.13% 18.77% 2 12/31/95-12/31/97 $10,454.22 4.54% 2.24%
3 12/31/94-12/31/97 $16,038.51 60.39% 17.04% 4 12/31/93-12/31/97 $15,658.08 56.58% 11.85%
5 12/31/92-12/31/97 $18,454.69 84.55% 13.03%
Life 8/1/88-12/31/97 $33,989.30 239.89% 13.87% Life 6/30/95-12/31/97 $11,139.60 11.40% 4.40%
<CAPTION>
OCC MANAGED PORTFOLIO**
-------------------------------------------------
NUMBER CUMULATIVE COMPOUND
OF GROWTH GROWTH
YEARS PERIODS AMOUNT RATE RATE
- ------ ----------------- ---------- ---------- --------
<S> <C> <C> <C> <C>
1 12/31/96-12/31/97 $12,058.41 20.58% 20.58%
2 12/31/95-12/31/97 $14,595.90 45.96% 20.78%
3 12/31/94-12/31/97 $20,948.40 109.48% 27.92%
4 12/31/93-12/31/97 $21,195.97 111.96% 20.64%
5 12/31/92-12/31/97 $23,070.69 130.71% 18.19%
Life 8/1/88-12/31/97 $50,074.00 400.74% 18.65%
WARBURG PINCUS POST-VENTURE CAPITAL PORTFOLIO
-------------------------------------------------
NUMBER CUMULATIVE COMPOUND
OF GROWTH GROWTH
YEARS PERIODS AMOUNT RATE RATE
- ------ ----------------- ---------- ---------- --------
<S> <C> <C> <C> <C>
1 12/31/96-12/31/97 $11,177.24 11.77% 11.77%
2
3
5
Life 9/30/96-12/31/97 $10,870.80 8.71% 6.90%
</TABLE>
<TABLE>
<CAPTION>
WARBURG PINCUS SMALL COMPANY GROWTH PORTFOLIO
----------------------------------------------------
NUMBER CUMULATIVE COMPOUND
OF GROWTH GROWTH
YEARS PERIODS AMOUNT RATE RATE
- ------ ----------------- ---------- ---------- --------
<S> <C> <C> <C> <C>
1 12/31/96-12/31/97 $11,413.28 14.13% 14.13%
2 12/31/95-12/31/97 $12,810.76 28.11% 13.17%
Life 6/30/95-12/31/97 $15,915.70 59.16% 20.37%
<FN>
- ----------------------------------------
*For purposes of determining these investment results, the actual investment
performance of each Fund is reflected from the date the Fund commenced
operations, although the Contracts have been offered only since February 17,
1998. No information is shown for Funds that have not commenced operations or
that have been in operation for less than one year. The charges imposed under
the Contract against the assets of the Variable Account for mortality and
expense risks and administrative expenses have been deducted. However, the
annual Account Fee is not reflected and these examples do not assume surrender
at the end of the period.
**See footnote 3 on page 78 of this Prospectus.
</TABLE>
80
<PAGE>
ADVERTISING AND SALES LITERATURE
As set forth in the Prospectus, the Company may refer to the following
organizations (and others) in its marketing materials:
A.M. BEST'S RATING SYSTEM is designed to evaluate the various factors
affecting the overall performance of an insurance company in order to provide an
opinion as to an insurance company's relative financial strength and ability to
meet its contractual obligations. The procedure includes both a quantitative and
qualitative review of each company.
DUFF & PHELPS CREDIT RATING COMPANY's Insurance Company Claims Paying
Ability Rating is an independent evaluation by a nationally accredited rating
organization of an insurance company's ability to meet its future obligations
under the contracts and products it sells. The rating takes into account both
quantitative and qualitative factors.
LIPPER VARIABLE INSURANCE PRODUCTS PERFORMANCE ANALYSIS SERVICE is a
publisher of statistical data covering the investment company industry in the
United States and overseas. Lipper is recognized as the leading source of data
on open-end and closed-end funds. Lipper currently tracks the performance of
over 5,000 investment companies and publishes numerous specialized reports,
including reports on performance and portfolio analysis, fee and expense
analysis.
STANDARD & POOR's insurance claims-paying ability rating is an opinion of an
operating insurance company's financial capacity to meet obligations of its
insurance policies in accordance with their terms.
VARDS (Variable Annuity Research Data Service) provides a comprehensive
guide to variable annuity contract features and historical fund performance. The
service also provides a readily understandable analysis of the comparative
characteristics and market performance of funds inclusive in variable contracts.
MOODY'S Investors Services, Inc.'s insurance claims-paying rating is a
system of rating on insurance company's financial strength, market leadership,
and ability to meet financial obligations. The purpose of Moody's ratings is to
provide investors with a simple system of gradation by which the relative
quality of insurance companies may be noted.
STANDARD & POOR'S INDEX--broad-based measurement of changes in stock-market
conditions based on the average performance of 500 widely held common stocks;
commonly known as the Standard & Poor's 500 (S&P 500). The selection of stocks,
their relative weightings to reflect differences in the number of outstanding
shares, and publication of the index itself are services of Standard & Poor's
Corporation, a financial advisory, securities rating, and publishing firm. The
index tracks 400 industrial company stocks, 20 transportation stocks, 40
financial company stocks, and 40 public utilities.
NASDAQ-OTC Price Index--this index is based on the National Association of
Securities Dealers Automated Quotations (NASDAQ) and represents all domestic
over-the-counter stocks except those traded on exchanges and those having only
one market maker, a total of some 3,500 stocks. It is market value-weighted and
was introduced with a base of 100.00 on February 5, 1971.
DOW JONES INDUSTRIAL AVERAGE (DJIA)--price-weighted average of 30 actively
traded blue chip stocks, primarily industrials, but including American Express
Company and American Telephone and Telegraph Company. Prepared and Published by
Dow Jones & Company, it is the oldest and most widely quoted of all the market
indicators. The average is quoted in points, not dollars.
MORNINGSTAR, Inc. is an independent financial publisher offering
comprehensive statistical and analytical coverage of open-end and closed-end
funds and variable annuities. This coverage for mutual funds includes, among
other information, performance analysis rankings, risk rankings (e.g.
aggressive, moderate or conservative), and "style box" matrices. Style box
matrices display, for equity funds, the investment philosophy and size of the
companies in which the fund invests and, for fixed-income funds, interest rate
sensitivity and credit quality of the investment instruments.
IBBOTSON ASSOCIATES, Inc. is a consulting firm that provides a variety of
historical data, including total return, capital appreciation and income, on the
stock market as well as other investment asset classes, and inflation. This
information will be used primarily for comparative purposes and to illustrate
general financial planning principles.
In its advertisements and other sales literature for the Variable Account
and the Funds, the Company intends to illustrate the advantages of the Contracts
in a number of ways:
DOLLAR COST AVERAGING ILLUSTRATIONS. These illustrations will generally
discuss the price-leveling effect of making regular investments in the same
Sub-Accounts over a period of time, to take advantage of the trends in market
prices of the portfolio securities purchased by those Sub-Accounts.
SYSTEMATIC WITHDRAWAL PROGRAM. A service provided by the Company, through
which a Participant may take any distribution allowed by Code Section 401(a)(9)
in the case of Qualified Contracts, or permitted
81
<PAGE>
under Code Section 72 in the case of Non-Qualified Contracts, by way of a series
of partial withdrawals. Withdrawals under this program may be fully or partially
includible in income and may be subject to a 10% penalty tax. Consult your tax
advisor.
THE COMPANY'S OR A FUND'S CUSTOMERS. Sales literature for the Variable
Account and the Funds may refer to the number of clients which they serve.
THE COMPANY'S OR A FUND'S ASSETS, SIZE. The Company may discuss its general
financial condition (see, for example, the references to Standard & Poor's, Duff
& Phelps and A.M. Best Company above); it may refer to its assets; it may also
discuss its relative size and/or ranking among companies in the industry or
among any sub-classification of those companies, based upon recognized
evaluation criteria. For example, at year-end 1996 the Company was the 38th
largest U.S. life insurance company based upon overall assets and its parent
company, Sun Life Assurance Company of Canada, was the 19th largest.
COMPOUND INTEREST ILLUSTRATIONS. These will emphasize several advantages of
the variable annuity contract. For example, but not by way of limitation, the
literature may emphasize the potential savings through tax deferral; the
potential advantage of the Variable Account over the fixed account; and the
compounding effect when a participant makes regular deposits to his or her
account.
The Company may use hypothetical illustrations of the benefits of tax
deferral, including but not limited to the following chart:
The chart below assumes an initial investment of $10,000 which remains fully
invested for the entire time period, an 8% annual return, and a 33% combined
federal and state income tax rate. It compares how three different investments
might fare over 10, 20, and 30 years. The first example illustrates an
investment in a non-tax-deferred account and assumes that taxes are paid
annually out of that account. The second example illustrates how the same
investment would grow in a tax-deferred investment, such as an annuity. And the
third example illustrates the net value of the tax-deferred investment AFTER
paying taxes on the full account value.
<TABLE>
<CAPTION>
10 YEARS 20 YEARS 30 YEARS
--------- --------- ----------
<S> <C> <C> <C>
Non-Tax-Deferred Account............................................ $ 16,856 $ 28,413 $ 47,893
Tax-Deferred Account................................................ $ 21,589 $ 46,610 $ 100,627
Tax-Deferred Account After Paying Taxes............................. $ 17,765 $ 34,528 $ 70,720
</TABLE>
THIS ILLUSTRATION IS HYPOTHETICAL AND DOES NOT REPRESENT THE PROJECTED
PERFORMANCE OF THE FUTURITY VARIABLE ANNUITY II OR ANY OF ITS INVESTMENT
OPTIONS. THE ILLUSTRATION DOES NOT REFLECT THE DEDUCTION OF ANY CHARGES OR FEES
RELATED TO PORTFOLIO MANAGEMENT, MORTALITY AND EXPENSE, OR ACCOUNT
ADMINISTRATION. TAXES ON EARNINGS WITHIN AN ANNUITY ARE DUE UPON WITHDRAWAL.
WITHDRAWALS MAY ALSO BE SUBJECT TO SURRENDER CHARGES AND, IF MADE PRIOR TO AGE
59 1/2, A 10% FEDERAL PENALTY TAX.
82
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
ANNUITY SERVICE MAILING ADDRESS:
C/O RETIREMENT PRODUCTS AND SERVICES
P.O. BOX 9133
BOSTON, MASSACHUSETTS 02117
TELEPHONE:
Toll Free (888) 786-2435
In Massachusetts (617) 348-9600
GENERAL DISTRIBUTOR
Clarendon Insurance Agency, Inc.
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02481
AUDITORS
Deloitte & Touche LLP
125 Summer Street
Boston, Massachusetts 02110
FUTII-1 12/98
