<PAGE>
As filed with the Securities and Exchange Commission on March 1, 1999
REGISTRATION NO. 333-05227
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM N-4
POST-EFFECTIVE AMENDMENT NO. 3 TO
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 3 /X/
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
(EXACT NAME OF REGISTRANT)
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(NAME OF DEPOSITOR)
ONE SUN LIFE EXECUTIVE PARK
WELLESLEY HILLS, MASSACHUSETTS 02181
(ADDRESS OF DEPOSITOR'S PRINCIPAL EXECUTIVE OFFICES)
DEPOSITOR'S TELEPHONE NUMBER: (781) 237-6030
MARGARET HANKARD, SENIOR ASSOCIATE COUNSEL
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
RETIREMENT PRODUCTS AND SERVICES
ONE COPLEY PLACE
BOSTON, MASSACHUSETTS 02116
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPIES OF COMMUNICATIONS TO:
DAVID N. BROWN, ESQ.
COVINGTON & BURLING
1201 PENNSYLVANIA AVENUE, N.W.
P.O. BOX 7566
WASHINGTON, D.C. 20044
/X/ It is proposed that this filing will become effective immediately
pursuant to paragraph (b) of Rule 485.
<PAGE>
PART A
INFORMATION REQUIRED IN A PROSPECTUS
Attached hereto and made a part hereof is:
Prospectus dated May 1, 1998 (MFS Regatta Classic)
Supplement dated March , 1999 to Prospectus dated May 1, 1998
(MFS Regatta Classic)
Prospectus dated March , 1999 (Futurity Focus)
<PAGE>
PROSPECTUS
MAY 1, 1998
MFS REGATTA CLASSIC
--------------------------------------------------
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. The Contracts are
issued on 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 02181, telephone (781)
237-6030. The Contracts provide that annuity payments will begin on a selected
future date. The Contracts provide for the accumulation of values on either a
variable basis, a fixed basis, or a fixed and variable basis and provide for
fixed and variable annuity payments as elected. In some states, Individual
Contracts may be 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 both individual
Contract owners and participating individuals under Group Contracts.
The initial Purchase Payment for each Contract must be at least $25,000 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.
The 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 divided between the Fixed Account and the Variable Account. The
assets of the Variable Account are divided into Sub-Accounts. Each Sub-Account
uses its assets to purchase, at their net asset value, shares of a specific
series of MFS/Sun Life Series Trust (the "Series Fund"), a mutual fund
registered under the Investment Company Act of 1940, and advised by
Massachusetts Financial Services Company, an affiliate of the Company.
Twenty-five series are available for investment under the Contracts: (1) Bond
Series; (2) Capital Appreciation Series; (3) Capital Opportunities Series
(before May 1, 1998, called the Value Series); (4) Conservative Growth Series;
(5) Emerging Growth Series; (6) Equity Income Series; (7) Government Securities
Series; (8) High Yield Series; (9) International Growth Series; (10)
International Growth and Income Series; (11) Managed Sectors Series; (12)
Massachusetts Investors Growth Stock Series; (13) MFS/Foreign & Colonial
Emerging Markets Equity Series; (14) Money Market Series; (15) New Discovery
Series; (16) Research Series;
(CONTINUED ON NEXT PAGE)
THE CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY,
ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS CONTAINS THE BASIC INFORMATION YOU SHOULD KNOW BEFORE INVESTING
IN A CONTRACT AND IS VALID ONLY WHEN ACCOMPANIED BY THE CURRENT PROSPECTUS OF
MFS/SUN LIFE SERIES TRUST. YOU SHOULD RETAIN THESE PROSPECTUSES FOR FUTURE
REFERENCE.
*ANY REFERENCE IN THIS PROSPECTUS TO RECEIPT BY THE COMPANY MEANS RECEIPT AT ITS
ANNUITY SERVICE MAILING ADDRESS, C/O SUN LIFE ASSURANCE COMPANY OF CANADA
(U.S.), RETIREMENT PRODUCTS AND SERVICES, P.O. BOX 1024, BOSTON, MASSACHUSETTS
02103.
<PAGE>
(17) Research Growth and Income Series;(18) Research International Series; (19)
Strategic Income Series; (20) Total Return Series; (21) Utilities Series; (22)
World Asset Allocation Series; (23) World Governments Series; (24) World Growth
Series; and (25) World Total Return Series. The Bond Series, Equity Income
Series, Massachusetts Investors Growth Stock Series, New Discovery Series,
Research International Series and Strategic Income Series are new series
available for the first time on May 1, 1998. The Series Fund pays its investment
adviser certain fees charged against the assets of each series. The value of the
variable portion, if any, of a Participant's Account and the amount of variable
annuity payments will vary to reflect the investment performance of the series
of the Series Fund selected by the Participant and the deduction of the contract
charges described under "How the Contract Charges Are Assessed" on page 29. For
more information about the Series Fund, see "The Series Fund" on page 18 and the
accompanying Series Fund prospectus.
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 as selected by the
Participant. The Fixed Account is the general account of the Company (See "The
Fixed Account" on page 15). 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 of three percent (3%)). 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. After a Purchase Payment has been held by the Company for one
year it may be withdrawn without charge. Also, no withdrawal charge is assessed
upon annuitization, upon payment of the death benefit or upon transfers. In
addition, when a withdrawal is made from a Qualified Contract to comply with
mandatory distribution requirements, no withdrawal charge will be applied to the
amount required to be distributed. Other amounts withdrawn, adjusted by any
applicable Market Value Adjustment with respect to the Fixed Account, will be
subject to a withdrawal charge of 1%. In no event will the the withdrawal
charges assessed against a Participant's Account exceed 1% of Purchase Payments
(See "Withdrawal Charges" on page 26).
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, 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 or, if the Guarantee Period was established through
the Monthly or Quarterly Dollar Cost Averaging Options, for current allocations
to these options) 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"
on page 27).
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 with Tax
Sheltered Annuities established pursuant to Section 403(b) of the Internal
Revenue Code (See "Section 403(b) Annuities" on page 27).
2
<PAGE>
In addition, under certain circumstances withdrawals may result in tax
penalties (See "Federal Tax Status" on page 38). 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
25.
On each Account Anniversary and on surrender of a Contract for full value
the Company will deduct a $50 annual account administration fee ("Account Fee")
from the Participant's Account. After the Annuity Commencement Date the annual
Account Fee will be deducted in equal amounts 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 at an effective 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 will be waived by the Company when
a Participant's Account Value is greater than $100,000 on the Account
Anniversary (See "Administrative Charges" on page 29).
The Company also deducts a mortality and expense risk charge at the end of
each Valuation Period equal to an effective annual rate of 1.00% 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 30).
In addition, the 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" on
page 37).
In the event of the death of the Annuitant prior to the Annuity Commencement
Date, the Company will pay a death benefit to the Beneficiary. If the death of
the Annuitant occurs on or after the Annuity Commencement Date, no death benefit
will be payable except as may be provided under the Annuity Option elected (See
"Death Benefit" on page 28).
Annuity Payments will begin on the Annuity Commencement Date. The
Participant selects the Annuity Commencement Date, frequency of payments and the
Annuity Option (See "Annuity Provisions" on page 31).
Premium taxes payable to any governmental entity will be deducted from the
Participant's Account (See "Premium Taxes" on page 30).
Subject to certain conditions, and during the Accumulation Period, the
Participant may transfer amounts among the Sub-Accounts or Guarantee Periods
available under the Contract. Currently there is no charge for transfers.
Transfers 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" on page
24).
After the Annuity Commencement Date, the Payee may, subject to certain
restrictions, exchange the value of a designated number of Annuity Units of
particular Sub-Accounts then credited with respect to the particular Payee for
other Annuity Units, the value of which would be such that the dollar amount of
an annuity payment made on the date of the exchange would be unaffected by the
fact of the exchange (See "Exchange of Variable Annuity Units" on page 33).
The Company will vote Series Fund shares held by the Sub-Accounts at
meetings of shareholders of the Series Fund or in connection with similar
solicitations, but will follow voting instructions received from persons having
the right to give voting instructions. Except in the case of a particular 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 instructions prior
to the Annuity Commencement Date. On or after the Annuity Commencement Date the
Payee is the person having such voting rights. Any shares attributable to the
Company and Series Fund shares for which no timely voting instructions are
received will be voted by the Company in the same proportion as the shares for
which instructions are received from persons having such right (See "Voting of
Series Fund Shares" on page 36).
3
<PAGE>
The Company will furnish Participants and such other persons having voting
rights with certain reports and statements described under "Periodic Reports" on
page 36. Such reports, other than prospectuses, will not include the Company's
financial statements.
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 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. 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 (See "Right to Return" on page 38).
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 WebSite that contains reports, proxy and information statements and
other information about the Company, which files such documents electronically
with the Commission, at the following address: http://www.sec.gov.
The Company has filed registration statements (the "Registration
Statements") with the Commission under the Securities Act of 1933 relating to
the Contracts offered by this Prospectus. This Prospectus has been filed as a
part of the Registration Statements and does not contain all of the information
set forth in the Registration Statements and exhibits thereto, and reference is
hereby made to such Registration Statements and exhibits for further information
relating to the Company and the Contracts. The Registration Statements and the
exhibits thereto may be inspected and copied, and copies can be obtained at
prescribed rates, in the manner set forth in the preceding paragraph.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Annual Report on Form 10-K for the year ended December 31, 1997 and the
Current Report on Form 8-K dated January 8, 1998 heretofore filed by the Company
with the Commission under the 1934 Act are incorporated by reference in this
Prospectus.
Any statement contained in a document incorporated herein by reference shall
be deemed modified or superseded hereby to the extent that a statement contained
in a later-filed document or herein shall modify or supersede such statement.
Any statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
The Company will furnish, without charge, to each person to whom a copy of
this Prospectus is delivered, upon the written or oral request of such person, a
copy of the documents referred to above which have been incorporated by
reference in this Prospectus, other than exhibits to such documents (unless such
exhibits are specifically incorporated by reference in this Prospectus).
Requests for such documents should be directed to the Secretary, Sun Life
Assurance Company of Canada (U.S.), One Sun Life Executive Park, Wellesley
Hills, Massachusetts 02181, telephone (800) 225-3950.
4
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Definitions 7
Expense Summary 10
Performance Data 14
This Prospectus Is a Catalog of Facts 14
Uses of the Contracts 14
A Word About the Company, the Fixed Account, the Variable
Account and the Series Fund 15
The Company 15
The Fixed Account 15
The Variable Account 17
The Series Fund 18
Purchase Payments and Contract Values During Accumulation
Period 20
Purchase Payments 20
Participant's Account 21
Variable Accumulation Value 21
Fixed Accumulation Value 22
Guarantee Periods 22
Guaranteed Interest Rates 23
Dollar Cost Averaging 23
Asset Allocation 24
Transfer Privilege; Telephone Transfers; Restriction on
Market Timers 24
Waivers; Reduced Charges; Credits; Bonus Guaranteed
Interest Rates 25
Cash Withdrawals, Withdrawal Charges and Market Value
Adjustment 25
Cash Withdrawals 25
Withdrawal Charges 26
Amount of Withdrawal Charge 26
Section 403(b) Annuities 27
Market Value Adjustment 27
Death Benefit 28
Death Benefit Provided by the Contracts 28
Election and Effective Date of Election 28
Payment of Death Benefit 29
Amount of Death Benefit 29
How the Contract Charges Are Assessed 29
Administrative Charges 29
Premium Taxes 30
Mortality and Expense Risk Charge 30
Withdrawal Charges 31
Annuity Provisions 31
Annuity Commencement Date 31
Election--Change of Annuity Option 31
Annuity Options 32
Determination of Annuity Payments 33
Fixed Annuity Payments 33
Variable Annuity Payments 33
Annuity Unit Value 33
Exchange of Variable Annuity Units 33
Annuity Payment Rates 34
</TABLE>
5
<PAGE>
TABLE OF CONTENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C>
Other Contractual Provisions 34
Payment Limits 34
Designation and Change of Beneficiary 34
Exercise of Contract Rights 34
Change of Ownership 35
Death of Participant 35
Voting of Series Fund Shares 36
Periodic Reports 36
Substituted Securities 37
Change in Operation of Variable Account 37
Splitting Units 37
Modification 37
Discontinuance of New Participants 38
Custodian 38
Right to Return 38
Federal Tax Status 38
Introduction 38
Tax Treatment of the Company and the Variable Account 39
Taxation of Annuities in General 39
Qualified Retirement Plans 41
Pension and Profit-Sharing Plans 41
Tax-Sheltered Annuities 41
Individual Retirement Accounts 41
Roth IRAs 41
Administration of the Contracts 42
Distribution of the Contracts 42
Additional Information About the Company 43
Selected Financial Data 43
Management's Discussion and Analysis of Financial
Condition and Results of Operations 43
Liquidity 46
Year 2000 Compliance 46
Recent Reorganization 46
Asset/Liability Management and Information about Market
Risk 47
Sun Life (Canada) 48
Reinsurance 48
Reserves 48
Investments 48
Competition 49
Employees 49
Properties 49
The Company's Directors and Executive Officers 49
State Regulation 52
Legal Proceedings 53
Accountants 53
Registration Statements 53
Financial Statements 53
Appendix A--Variable Accumulation Unit Value, Annuity Unit
Value and Variable Annuity Payment Calculations 91
Appendix B--Withdrawals, Withdrawal Charges and the Market
Value Adjustment 92
Appendix C--Calculation of Performance Data; Advertising and
Sales Literature 94
</TABLE>
6
<PAGE>
DEFINITIONS
The following terms as used in this Prospectus have the indicated meanings:
ACCOUNT YEARS AND ACCOUNT ANNIVERSARIES: The first Account Year shall be
the period of 12 months plus a part of a month as measured from the Date of
Coverage for each Participant to the first day of the calendar month which
follows the calendar month of coverage. All Account Years and Anniversaries
thereafter shall be 12 month periods based upon such first day of the calendar
month which follows the calendar month of coverage. If, for example, the Date of
Coverage is in March, the first Account Year will be determined from the Date of
Coverage but will end on the last day of March in the following year; all other
Account Years and all Account Anniversaries will be measured from April 1.
ACCUMULATION PERIOD: The period before the Annuity Commencement Date and
during the lifetime of the Annuitant.
ANNUITANT: The person or persons named in the Application and on whose life
the first annuity payment is to be made. The Participant may not designate a
"Co-Annuitant" unless the Participant and Annuitant are different persons. If
more than one person is so named, all provisions of the Contract which are based
on the death of the "Annuitant" will be based on the date of death of the last
surviving of the persons so named. By example, the death benefit will become due
only upon the death, prior to the Annuity Commencement Date, of the last
survivor of the persons so named. Collectively, these persons are referred to in
the Contract as "Annuitants." The Participant is not permitted to name a
"Co-Annuitant" under a Qualified Contract.
*ANNUITY COMMENCEMENT DATE: The date on which the first annuity payment
under each Certificate is to be made.
*ANNUITY OPTION: The method for making annuity payments.
ANNUITY UNIT: A unit of measure used in the calculation of the amount of
the second and each subsequent variable annuity payment from the Variable
Account.
APPLICATION: The document signed by each Participant that serves as his or
her application for participation under a Group Contract or purchase of an
Individual Contract.
*BENEFICIARY: The person or entity having the right to receive the death
benefit set forth in each Certificate and, for Non-Qualified Contracts, who is
the "designated beneficiary" for purposes of Section 72(s) of the Internal
Revenue Code in the event of the Participant's death.
CERTIFICATE: The document for each Participant which evidences the coverage
of the Participant under a Group Contract. Unless otherwise expressly indicated,
references in this Prospectus to "Contracts" includes Certificates.
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.
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.
EXPIRATION DATE: The last day of a Guarantee Period.
FIXED ACCOUNT: The Fixed Account consists of all assets of the Company
other than those allocated to a separate account of the Company.
FIXED ACCUMULATION VALUE: The sum of the values of all Guarantee Amounts
credited to a Participant's Account.
FIXED ANNUITY: An annuity with payments which do not vary as to dollar
amount.
GROUP CONTRACT: A Contract issued by the Company on a group basis.
- ---------
*As specified in the Application, 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 the Contract becomes effective.
NET PURCHASE PAYMENT: That portion of a Purchase Payment which remains
after deduction of any applicable premium or similar tax.
NON-QUALIFIED CONTRACT: A Contract used in connection with a retirement
plan which does not receive favorable federal income tax treatment under
Sections 401, 403, or 408 of the Internal Revenue Code. The Participant's
interest in the Contract must be owned by a natural person or agent for a
natural person for the Contract to receive favorable income tax treatment as an
annuity.
*OWNER: The person, persons or entity entitled to the ownership rights
stated in the Contract and in whose name or names the 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 Internal Revenue Code to serve as legal owner of assets
of a retirement plan, but the term "Owner", as used herein, shall refer to the
organization entering into the 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 Certificate
who is entitled to exercise all rights and privileges of ownership under the
Certificate, except as reserved by the Owner.
PARTICIPANT'S ACCOUNT: An account established for each Participant to which
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 the Contract. The term includes an
Annuitant or a Beneficiary who becomes entitled to benefits upon the death of
the Annuitant.
PURCHASE PAYMENT (PAYMENT): An amount paid to the Company as consideration
for the benefits provided by the Contract.
QUALIFIED CONTRACT: A Contract used in connection with a retirement plan
which receives favorable federal income tax treatment under Sections 401, 403,
408 or 408A of the Internal Revenue Code of 1986, as amended.
RECEIPT: Receipt by the Company at its Annuity Service Mailing Address
shown on the cover of this Prospectus.
SERIES FUND: MFS/Sun Life Series Trust.
SUB-ACCOUNT: That portion of the Variable Account which invests in shares
of a specific series or sub-series of the Series Fund.
VALUATION PERIOD: The period of time from one determination of Variable
Accumulation Unit and Annuity Unit values to the next subsequent determination
of these values. Such determination shall be made as of the close of the New
York Stock Exchange on each day the Exchange is open for trading and on such
other days on which there is a sufficient degree of trading in the portfolio
securities of the Variable Account so that the values of the Variable Account's
Accumulation Units and Annuity Units might be materially affected.
VARIABLE ACCOUNT: A separate account of the Company consisting of assets
set aside by the Company, the investment performance of which is kept separate
from that of the general assets of the Company.
VARIABLE ACCUMULATION UNIT: A unit of measure used in the calculation of
the value of the variable portion of a Participant's Account.
- ---------
*As specified in the Application, unless changed.
8
<PAGE>
VARIABLE ACCUMULATION VALUE: The sum of the value of all Variable
Accumulation Units credited to 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.
YEAR: Any consecutive period of 365 days.
9
<PAGE>
EXPENSE SUMMARY
The purpose of the following table and Example is to help Participants and
prospective purchasers to understand the costs and expenses that are borne,
directly and indirectly, by Participants WHEN PAYMENTS ARE ALLOCATED TO THE
VARIABLE ACCOUNT. The table reflects expenses of the Variable Account as well as
of the Series Fund. The information set forth should be considered together with
the narrative provided under the heading "How the Contract Charges Are Assessed"
in this Prospectus, and with the Series Fund's prospectus. In addition to the
expenses listed below, premium taxes may be applicable.
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)
Number of Complete Account Years Purchase Payment in Account
less than 1........................................................................................ 1.00%
1 or more.......................................................................................... 0.00%
Exchange fee (1)..................................................................................... $ 0
-----------
ANNUAL ACCOUNT FEE PER PARTICIPANT'S ACCOUNT (2)..................................................... $ 50
-----------
SEPARATE ACCOUNT ANNUAL EXPENSES
(as a percentage of average separate account assets)
Mortality & Expense Risk Fees........................................................................ 1.00%
-----------
Administrative Expense Charge........................................................................ 0.15%
Other Fees & Expenses of the Separate Account........................................................ 0.00%
Total Separate Account Annual Expenses............................................................... 1.15%
</TABLE>
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(1) A Market Value Adjustment may be imposed on amounts transferred from or
within the Fixed Account.
(2) The Annual Account Fee is $50. The Company will waive the Annual Account Fee
when the Participant's Account value is greater than $100,000 on the Account
Anniversary.
10
<PAGE>
SERIES FUND ANNUAL EXPENSES
(as a percentage of Series Fund average net assets)
<TABLE>
<CAPTION>
TOTAL SERIES
MANAGEMENT OTHER FUND ANNUAL
FEES EXPENSES EXPENSES
----------- ---------- ------------
<S> <C> <C> <C>
Bond Series(1)....................................................................... 0.60% 0.40% 1.00%
Capital Appreciation Series.......................................................... 0.73% 0.05% 0.78%
Capital Opportunities Series(2)...................................................... 0.75% 0.15% 0.90%
Conservative Growth Series........................................................... 0.55% 0.06% 0.61%
Emerging Growth Series............................................................... 0.73% 0.08% 0.81%
Equity Income Series(1).............................................................. 0.75% 0.25% 1.00%
Government Securities Series......................................................... 0.55% 0.08% 0.63%
High Yield Series.................................................................... 0.75% 0.09% 0.84%
International Growth Series.......................................................... 0.97% 0.32% 1.29%
International Growth and Income Series............................................... 0.97% 0.25% 1.22%
Managed Sectors Series............................................................... 0.74% 0.08% 0.82%
Massachusetts Investors Growth Stock Series(1)....................................... 0.75% 0.25% 1.00%
MFS/Foreign & Colonial Emerging Markets Equity Series................................ 1.25% 0.30% 1.55%
Money Market Series.................................................................. 0.50% 0.07% 0.57%
New Discovery Series(1).............................................................. 0.90% 0.35% 1.25%
Research Series...................................................................... 0.72% 0.07% 0.79%
Research Growth and Income Series.................................................... 0.75% 0.75%(3) 1.50%
Research International Series(1)..................................................... 1.00% 0.50% 1.50%
Strategic Income Series(1)........................................................... 0.75% 0.50% 1.25%
Total Return Series.................................................................. 0.66% 0.05% 0.71%
Utilities Series..................................................................... 0.75% 0.11% 0.86%
World Asset Allocation Series........................................................ 0.75% 0.17% 0.92%
World Governments Series............................................................. 0.75% 0.16% 0.91%
World Growth Series.................................................................. 0.90% 0.12% 1.02%
World Total Return Series............................................................ 0.75% 0.29% 1.04%
</TABLE>
(1) Other expenses of the Bond Series, Equity Income Series, Massachusetts
Investors Growth Stock Series, New Discovery Series, Research International
Series, and Strategic Income Series are based on estimated amounts for the
current fiscal year. The Adviser has agreed to bear the expenses of these
series so that "other expenses" (defined to include all series expenses
except for management fees, taxes, extraordinary expenses, brokerage and
transaction costs) do not exceed 0.40%, 0.25%, 0.25%, 0.35%, 0.50%, and
0.50% of the average daily net assets of these series, respectively, on an
annualized basis, as more fully described in the Series Fund's prospectus.
Absent such reimbursement, total expenses of these series are expected to
have been as follows: Bond Series -- 1.25%; Equity Income Series -- 1.40%;
Massachusetts Investors Growth Stock Series -- 1.40%; New Discovery Series
-- 1.55%; Research International Series -- 1.65%; and Strategic Income
Series -- 1.40%.
(2) Before May 1, 1998, called the Value Series.
(3) Other expenses of the Research Growth and Income Series, which commenced
operations on May 13, 1997, are based on estimated amounts for the current
fiscal year.
11
<PAGE>
EXAMPLE
If you do or 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>
3 10
1 YEAR YEARS 5 YEARS YEARS
------ ------ ------- -------
<S> <C> <C> <C> <C>
Bond Series*............................ $22 $67 -- --
Capital Appreciation Series............. $20 $61 $104 $225
Capital Opportunities Series............ $21 $64 $110 $238
Conservative Growth Series.............. $18 $55 $ 95 $207
Emerging Growth Series.................. $20 $62 $106 $229
Equity Income Series*................... $22 $67 -- --
Government Securities Series............ $18 $56 $ 96 $209
High Yield Series....................... $20 $62 $107 $232
International Growth Series............. $35 $76 $130 $278
International Growth & Income Series.... $24 $74 $127 $271
Managed Sectors Series.................. $20 $62 $106 $230
Massachusetts Investors Growth Stock
Series*................................ $22 $67 -- --
MFS/Foreign & Colonial Emerging Markets
Equity Series.......................... $37 $84 $143 $303
Money Market Series..................... $17 $54 $ 93 $203
New Discovery Series*................... $24 $75 -- --
Research Series......................... $20 $61 $105 $226
Research Growth & Income Series......... $27 $82 -- --
Research International Series*.......... $27 $82 -- --
Strategic Income Series*................ $24 $75 -- --
Total Return Series..................... $19 $58 $101 $218
Utilities Series........................ $20 $63 $108 $234
World Asset Allocation Series........... $21 $65 $111 $240
World Governments Series................ $21 $65 $111 $239
World Growth Series..................... $22 $68 $116 $250
World Total Return Series............... $22 $69 $117 $252
</TABLE>
* These series are new. Therefore, the examples are provided for 1 year and 3
year periods only.
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSE, AND ACTUAL EXPENSES MAY BE GREATER OR LOWER THAN THOSE SHOWN.
12
<PAGE>
CONDENSED FINANCIAL INFORMATION--ACCUMULATION UNIT VALUES
The following information should be read in conjunction with the Variable
Account's financial statements appearing elsewhere in this Prospectus, all of
which has been audited by Deloitte & Touche LLP, independent auditors.
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31,
1997
-------------
<S> <C>
CAPITAL APPRECIATION SERIES
Unit Value
Beginning of period........................... $ 9.8765
End of period................................. $ 11.9926
Units outstanding end of period................. 265,497
CAPITAL OPPORTUNITIES SERIES*
Unit Value
Beginning of period........................... $ 10.1034
End of period................................. $ 12.7132
Units outstanding end of period................. 160,778
CONSERVATIVE GROWTH SERIES
Unit Value
Beginning of period........................... $ 9.8549
End of period................................. $ 12.8247
Units outstanding end of period................. 554,216
EMERGING GROWTH SERIES
Unit Value
Beginning of period........................... $ 9.5644
End of period................................. $ 11.5023
Units outstanding end of period................. 318,028
GOVERNMENT SECURITIES SERIES
Unit Value
Beginning of period........................... $ 9.9631
End of period................................. $ 10.6850
Units outstanding end of period................. 113,243
HIGH YIELD SERIES
Unit Value
Beginning of period........................... $ 10.0910
End of period................................. $ 11.2665
Units outstanding end of period................. 155,306
INTERNATIONAL GROWTH SERIES
Unit Value
Beginning of period........................... $ 10.0270
End of period................................. $ 9.7271
Units outstanding end of period................. 67,892
INTERNATIONAL GROWTH AND INCOME SERIES
Unit Value
Beginning of period........................... $ 10.0000**
End of period................................. $ 10.5716
Units outstanding end of period................. 51,038
MANAGED SECTORS SERIES
Unit Value
Beginning of period........................... $ 10.0000**
End of period................................. $ 11.9091
Units outstanding end of period................. 118,243
MFS/FOREIGN & COLONIAL EMERGING MARKETS EQUITY
SERIES
Unit Value
Beginning of period........................... $ 10.4127
End of period................................. $ 11.3377
Units outstanding end of period................. 40,698
<CAPTION>
PERIOD ENDED
DECEMBER 31,
1997
-------------
<S> <C>
MONEY MARKET SERIES
Unit Value
Beginning of period........................... $ 10.0239
End of period................................. $ 10.3869
Units outstanding end of period................. 77,105
RESEARCH SERIES
Unit Value
Beginning of period........................... $ 9.8296
End of period................................. $ 11.7136
Units outstanding end of period................. 553,996
RESEARCH GROWTH AND INCOME SERIES
Unit Value
Beginning of period........................... $ 10.0000**
End of period................................. $ 10.7281
Units outstanding end of period................. 6,085
TOTAL RETURN SERIES
Unit Value
Beginning of period........................... $ 9.9034
End of period................................. $ 11.9123
Units outstanding end of period................. 951,205
UTILITIES SERIES
Unit Value
Beginning of period........................... $ 10.0000**
End of period................................. $ 12.7649
Units outstanding end of period................. 77,009
WORLD ASSET ALLOCATION SERIES
Unit Value
Beginning of period........................... $ 10.0430
End of period................................. $ 10.9812
Units outstanding end of period................. 50,531
WORLD GOVERNMENTS SERIES
Unit Value
Beginning of period........................... $ 10.0000**
End of period................................. $ 10.0247
Units outstanding end of period................. 19,394
WORLD GROWTH SERIES
Unit Value
Beginning of period........................... $ 10.0000**
End of period................................. $ 11.3725
Units outstanding end of period................. 85,526
WORLD TOTAL RETURN SERIES
Unit Value
Beginning of period........................... $ 10.0000**
End of period................................. $ 11.1546
Units outstanding end of period................. 45,122
</TABLE>
- ------------
* Before May 1, 1998, called the Value Series.
** Reflects unit value on date of commencement of operations.
13
<PAGE>
PERFORMANCE DATA
From time to time the Variable Account may publish reports to shareholders,
sales literature and advertisements containing performance data relating to the
Sub-Accounts. Performance data will consist of total return quotations which
will always include quotations for the period subsequent to the date each Sub-
Account became available for investment under the Contracts, and for recent one
year and, when applicable, five and ten year periods. Such quotations for such
periods will be the average annual rates of return required for an initial
Purchase Payment of $1,000 to equal the actual variable accumulation value
attributable to such Purchase Payment on the last day of the period, after
reflection of all applicable withdrawal and Contract charges. In addition, the
Variable Account may calculate non-standardized rates of return that do not
reflect withdrawal and Contract charges. Results calculated without withdrawal
and/or Contract charges will be higher. Performance figures used by the Variable
Account are based on the actual historical performance of the Series Fund for
specified periods, and the figures are not intended to indicate future
performance. The Variable Account may also from time to time compare its
investment performance to various unmanaged indices or other variable annuities
and may refer to certain rating and other organizations in its marketing
materials. More detailed information on the computations is set forth in
Appendix C.
THIS PROSPECTUS IS A CATALOG OF FACTS
This Prospectus contains information about the master group and individual
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 Series Fund. It has
been carefully prepared in non-technical language to help you decide whether the
purchase of a Contract will fit the needs of your retirement plan. We urge you
to read it carefully and retain it for future reference. The 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 Internal
Revenue 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, 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").
14
<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 SERIES FUND
THE COMPANY
The Company is a stock life insurance company incorporated under the laws of
Delaware on January 12, 1970. Its Executive Office mailing address is One Sun
Life Executive Park, Wellesley Hills, Massachusetts 02181. It has obtained
authorization to do business in forty-eight states, the District of Columbia and
Puerto Rico, and it is anticipated that the Company will be authorized to do
business in all states except New York. The Company issues life insurance
policies and individual and group annuities. The Company has formed a
wholly-owned subsidiary, Sun Life Insurance and Annuity Company of New York,
which issues individual fixed and combination fixed/variable annuity contracts
and group life and long-term disability insurance in New York and 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,
and Sun Life Financial Services Limited which provides off-shore administrative
services to the Company and Sun Life Assurance Company of Canada ("Sun Life
(Canada)").
The Company is a wholly-owned subsidiary of Sun Life of Canada (U.S.)
Holdings, Inc. ("Life Holdco"), which, on December 18, 1997, became a
wholly-owned subsidiary of Sun Life Assurance Company of Canada -- U.S.
Operations Holdings, Inc. ("U.S. Holdco"). U.S. Holdco is a wholly-owned
subsidiary of Sun Life (Canada), 150 King Street West, Toronto, Ontario, Canada.
Sun Life (Canada) is a mutual life insurance company incorporated pursuant to
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" on page 24. 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
15
<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
rate of not less than 3% per year, compounded annually, to amounts allocated to
the Fixed Account under the Contract. The Company may credit interest at a rate
in excess of 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
16
<PAGE>
ALLOCATED TO THE FIXED ACCOUNT IN EXCESS OF 3% WILL BE DETERMINED IN THE SOLE
DISCRETION OF THE COMPANY. THE PARTICIPANT ASSUMES THE RISK THAT INTEREST
CREDITED ON AMOUNTS ALLOCATED TO THE FIXED ACCOUNT MAY NOT EXCEED 3% 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 Series
Fund shares, its investment performance reflects the investment performance of
the Series Fund. Values of Series Fund shares held by the Variable Account
fluctuate and are subject to the risks of changing economic conditions as well
as the risk inherent in the ability of the Series Fund's management to make
necessary changes in its portfolios to anticipate changes in economic
conditions. Therefore, the Participant bears the entire investment risk that the
basic objectives of the Contracts 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 objectives
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 maintained in the Variable Account will not be charged with
any liabilities arising out of any other business conducted by the Company, all
obligations arising under the Contracts, including the promise to make annuity
payments, are general corporate obligations of the Company.
The Variable Account meets the definition of a "separate account" under the
federal securities laws and is registered as a unit investment trust under the
Investment Company Act of 1940. Registration with the Securities and Exchange
Commission does not involve supervision of the management or investment
practices or policies of the Variable Account or of the Company by the
Commission.
The assets of the Variable Account are divided into Sub-Accounts. Each
Sub-Account invests exclusively in shares of a specific series of the Series
Fund. All amounts allocated to the Variable Account will be used to purchase
Series Fund shares as designated by the Participant at their net asset value.
Any and all distributions made by the Series Fund with respect to the shares
held by the Variable Account will be reinvested to purchase additional shares at
their net asset value. Deductions from the Variable Account for cash
withdrawals, annuity payments, death benefits, Account Fees, contract charges
against the assets of
17
<PAGE>
the Variable Account for the assumption of mortality and expense risks,
distribution expenses, administrative expenses and any applicable taxes will, in
effect, be made by redeeming the number of Series Fund shares at their net asset
value equal in total value to the amount to be deducted. The Variable Account
will be fully invested in Series Fund shares at all times.
THE SERIES FUND
MFS/Sun Life Series Trust (the "Series Fund") is an open-end management
investment company registered under the Investment Company Act of 1940.
Currently shares of the Series Fund are also sold to other separate accounts
established by the Company and Sun Life Insurance and Annuity Company of New
York in connection with individual and group variable annuity contracts and
variable life insurance contracts. In the future, shares of the Series Fund may
be sold to other separate accounts established by the Company or its affiliates
to fund other variable annuity or variable life insurance contracts. The Company
and its affiliates will be responsible for reporting to the Series Fund's Board
of Trustees any potential or existing conflicts between the interests of
variable annuity contract owners/participants and the interests of owners of
variable life insurance contracts that provide for investment in shares of the
Series Fund. The Board of Trustees, a majority of whom are not "interested
persons" of the Series Fund, as that term is defined in the Investment Company
Act of 1940, also intends to monitor the Series Fund to identify the existence
of any such irreconcilable material conflicts and to determine what action, if
any, should be taken by the Series Fund and/or the Company and its affiliates
(see "Management of the Series Fund" in the Series Fund prospectus).
The Series Fund is composed of twenty-six independent portfolios of
securities, each of which has separate investment objectives and policies.
Shares of the Series Fund are issued in twenty-six series, each corresponding to
one of the portfolios; however, the Contracts provide for investment only in
shares of the twenty-five series of the Series Fund described below. Additional
portfolios may be added to the Series Fund which may or may not be available for
investment by the Variable Account.
(1) BOND SERIES will primarily seek as high a level of current income as is
believed to be consistent with prudent investment risk; its secondary objective
is to seek to protect shareholders capital.
(2) CAPITAL APPRECIATION SERIES will seek capital appreciation by investing
in securities of all types, with a major emphasis on common stocks.
(3) CAPITAL OPPORTUNITIES SERIES will seek capital appreciation (before May
1,1998, this series was called the Value Series).
(4) CONSERVATIVE GROWTH SERIES will seek long-term growth of capital and
future income while providing more current dividend income than is normally
obtainable from a portfolio of only growth stocks by investing a substantial
proportion of its assets in the common stocks or securities convertible into
common stocks of companies believed to possess better than average prospects for
long-term growth and a smaller proportion of its assets in securities whose
principal characteristic is income production.
(5) EMERGING GROWTH SERIES will seek to provide 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, including
companies that the series' investment adviser 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.
(6) EQUITY INCOME SERIES will primarily seek reasonable income by investing
mainly in income producing securites; its secondary objective is to seek capital
appreciation.
(7) GOVERNMENT SECURITIES SERIES will seek current income and preservation
of capital by investing in U.S. Government and U.S. Government-related
Securities.
(8) HIGH YIELD SERIES will seek high current income and capital appreciation
by investing primarily in fixed income securities of U.S. and foreign issuers
which may be in the lower rated categories or unrated (commonly known as "junk
bonds") and which may include equity features. The series may invest up to 100%
of its net assets in these securities, which generally involve greater risks,
including volatility of price,
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risk to principal and income, default risks and less liquidity, than securities
in the higher rated categories. Any person contemplating allocating Purchase
Payments to the Sub-Account investing in shares of the High Yield Series should
review the risk disclosure in the Series Fund prospectus carefully and consider
the investment risks involved.
(9) INTERNATIONAL GROWTH SERIES will seek capital appreciation by investing,
under normal market conditions, at least 65% of its total assets in equity
securities of companies whose principal activities are outside the U.S. and
which are growing at rates expected to be well above the growth rate of the
overall U.S. economy. (Before September 8, 1997, this series was called the
MFS/Foreign & Colonial International Growth Series.)
(10) INTERNATIONAL GROWTH AND INCOME SERIES will seek capital appreciation
and current income by investing, under normal market conditions, at least 65% of
its total assets in equity securities of issuers whose principal activities are
outside the U.S. (Before September 8, 1997, this series was called the MFS/
Foreign & Colonial International Growth and Income Series.)
(11) MANAGED SECTORS SERIES will seek capital appreciation by varying the
weighting of its portfolio of common stocks among certain industry sectors.
Dividend income, if any, is incidental to its objective of capital appreciation.
(12) MASSACHUSETTS INVESTORS GROWTH STOCK SERIES will seek to provide
long-term growth of capital and future income rather than current income.
(13) MFS/FOREIGN & COLONIAL EMERGING MARKETS EQUITY SERIES will seek capital
appreciation by investing, under normal market conditions, at least 65% of its
total assets in equity securities of issuers whose principal activities are
located in emerging market countries.
(14) MONEY MARKET SERIES will seek maximum current income to the extent
consistent with stability of principal by investing exclusively in money market
instruments maturing in less than 13 months. An investment in this series is
neither insured nor guaranteed by the U.S. Government. There can be no assurance
that the series will be able to maintain a stable net asset value of $1.00 per
share.
(15) NEW DISCOVERY SERIES will seek capital appreciation by investing in
equity securities of companies of any size which the series' investment adviser
believes offer superior prospects for growth, and in particular, emphasizes
companies in the developing stages of their life cycle that offer the potential
for accelerated earnings or revenue growth.
(16) RESEARCH SERIES will seek to provide long-term growth of capital and
future income.
(17) RESEARCH GROWTH AND INCOME SERIES will seek to provide long-term growth
of capital, current income and growth of income.
(18) RESEARCH INTERNATIONAL SERIES will seek capital appreciation by
investing in equity securities of companies whose principal activities are
located outside the United States as well as other securities offering an
opportunity for capital appreciation.
(19) STRATEGIC INCOME SERIES will seek to provide high current income by
investing in fixed income securities and will seek to take advantage of
opportunities to realize significant capital appreciation while maintaining a
high level of current income. The series may invest up to 100% of its net assets
in lower rated bonds (commonly known as "junk bonds") that generally involve
greater risks, including volatility of price, risk to principal and income,
default risks, and less liquidity, than those found in higher rated securities.
These bonds may be issued by domestic and foreign corporate issuers, as well as
by foreign governments and their political subdivisions. Any person
contemplating allocating Purchase Payments to the Sub-Account investing in
shares of the Strategic Income Series should review the risk disclosure in the
Series Fund prospectus carefully and consider the investment risks involved.
(20) TOTAL RETURN SERIES will seek primarily to obtain above-average income
(compared to a portfolio entirely invested in equity securities) consistent with
prudent employment of capital; its secondary objective is to take advantage of
opportunities for growth of capital and income. Assets will be allocated and
reallocated from time to time between money market, fixed income and equity
securities. Under normal market conditions, at least 25% of the Total Return
Series' assets will be invested in fixed income securities and at least 40% and
no more than 75% of its assets will be invested in equity securities.
(21) UTILITIES SERIES will seek capital growth and current income (income
above that available from a portfolio invested entirely in equity securities) by
investing, under normal market conditions, at least 65% of its assets in equity
and debt securities issued by both domestic and foreign utility companies.
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(22) WORLD ASSET ALLOCATION SERIES will seek total return over the long term
through investments in foreign and domestic equity and fixed income securities
and will also seek to have low volatility of share price (i.e. net asset value
per share) and reduced risk (compared to an aggressive equity/fixed income
portfolio). The series may invest up to 70% of its net assets (and expects to
invest not more than 50% of its net assets) in lower-rated bonds, commonly known
as "junk bonds," 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. Any person contemplating allocating
Purchase Payments to the Sub-Account investing in shares of the World Asset
Allocation Series should review the risk disclosure in the Series Fund
prospectus carefully and consider the investment risks involved.
(23) WORLD GOVERNMENTS SERIES will seek moderate current income and
preservation and growth of capital by investing in a portfolio of U.S. and
Foreign Government Securities.
(24) WORLD GROWTH SERIES will seek capital appreciation by investing in
securities of companies worldwide growing at rates expected to be well above the
growth rate of the overall U.S. economy.
(25) WORLD TOTAL RETURN SERIES will seek total return by investing in
securities which will provide above average current income (compared to a
portfolio invested entirely in equity securities) and opportunities for
long-term growth of capital and income. The series will invest primarily in
global equity and fixed income securities (i.e. those of U.S. and non-U.S.
issuers).
The investment adviser of the Series Fund, Massachusetts Financial Services
Company ("MFS"), is paid fees by the Series Fund for its services pursuant to
investment advisory agreements. MFS, a Delaware corporation, is an affiliate of
the Company. MFS also serves as investment adviser to each of the funds in the
MFS Family of Funds, and to certain other investment companies established or
distributed by MFS and/or the Company. MFS Institutional Advisors, Inc., a
wholly-owned subsidiary of MFS, provides investment advice to substantial
private clients. MFS and its predecessor organizations have a history of money
management dating from 1924. MFS operates as an autonomous organization and the
obligation of performance with respect to the investment advisory and
underwriting agreements (including supervision of the sub-advisers noted below)
is solely that of MFS. The Company undertakes no obligation in this regard.
MFS has retained, as subadvisers to each of International Growth Series,
MFS/Foreign & Colonial Emerging Markets Equity Series and World Growth Series,
Foreign & Colonial Management Limited ("FCM") and its subsidiary, Foreign &
Colonial Emerging Markets Limited ("FCEM").
A more detailed description of the Series Fund, its management, its
investment objectives, policies and restrictions and its expenses may be found
in the accompanying current prospectus of the Series Fund and in the Series
Fund's Statement of Additional Information, which is available by calling
1-800-752-7215.
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 $25,000, 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.
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
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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 Annuitant 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.
The allocation factors for new Payments among the Guarantee Period(s) 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.
(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 of 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 in (3) below. For a hypothetical example of the calculation of the
value of a Variable Accumulation Unit, see Appendix A.
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(3) NET INVESTMENT FACTOR
The Net Investment Factor is an index applied to measure the investment
performance of a Sub-Account from one Valuation Period to the next. The Net
Investment Factor may be greater or less than or equal to one; therefore the
value of a Variable Accumulation Unit may increase, decrease or remain the same.
The Net Investment Factor for any Sub-Account for any Valuation Period is
determined by dividing (a) by (b) and then subtracting (c) from the result
where:
(a) is the net result of:
(1) the net asset value of a Series Fund share held in the
Sub-Account determined as of the end of the Valuation Period, plus
(2) the per share amount of any dividend or other distribution
declared by the Series Fund on the shares held in the Sub-Account if the
"ex-dividend" date occurs during the Valuation Period, plus or minus
(3) a per share credit or charge with respect to any taxes paid or
reserved for by the Company during the Valuation Period which are
determined by the Company to be attributable to the operation of the
Sub-Account (no federal income taxes are applicable under present law);
(b) is the net asset value of a Series Fund share held in the
Sub-Account determined as of the end of the preceding Valuation Period; and
(c) is the asset charge factor determined by the Company for the
Valuation Period to reflect the charges for assuming the mortality and
expense risks and 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) 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) allocated to a particular Guarantee Period, less any applicable
premium tax or similar tax and any amounts subsequently withdrawn, will earn
interest at 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 months 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 except for
Guarantee Amounts held under a Dollar Cost Averaging Option described below. A
new Guarantee Period of the same duration as the previous Guarantee Period will
commence automatically on the first day following the Expiration Date of the
previous Guarantee Period unless the Company receives, prior to the Expiration
Date, a written election by the Participant of a new Guarantee Period from among
those being offered by the Company at such time, or
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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 unless it is equal to the entire
Guarantee Amount being tranferred.
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. 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 3% per year, compounded
annually. The Company has no specific formula for determining the rate of
interest that it will declare as a Guaranteed Interest Rate, as these rates will
be reflective of interest rates available on the types of debt instruments in
which the Company intends to invest amounts allocated to the Fixed Account (See
"The Fixed Account"). In addition, the Company's management may consider other
factors in determining Guaranteed Interest Rates 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 3% per year.
DOLLAR COST AVERAGING
The Participant may also elect at no extra charge an available Dollar Cost
Averaging Option in connection with selected Initial Guarantee Periods (subject
to a minimum amount of $1,000). Dollar Cost Averaging Options are available
monthly or quarterly:
1. Monthly Dollar Cost Averaging Option: Amounts allocated will be divided
among 12 separate sequentially maturing Guarantee Periods. The first
Guarantee Period ends one full calendar month following the date the Net
Purchase Payment is applied and each subsequent Guarantee Period shall
end one full calendar month later, sequentially thereafter. The Guarantee
Amount at the Expiration Date of each such Guarantee Period will equal
1/12 of the Net Purchase Payment applied under this Option, with the
Guarantee Amount at the last Expiration Date including all interest
earned in the 12 Guarantee Periods.
2. Quarterly Dollar Cost Averaging: Amounts allocated will be divided among
four separate sequentially maturing Guarantee Periods. The first
Guarantee Period ends three full calendar months following the date the
Net Purchase Payment is applied and each subsequent Guarantee Period
shall end three full calendar months later, sequentially thereafter. The
Guarantee Amount at the Expiration Date of each such Guarantee Period
will equal 1/4 of the Net Purchase Payment applied under this Option,
with the Guarantee Amount at the last Expiration Date including all
interest earned in the four Guarantee Periods.
Only initial and subsequent Purchase Payments may be allocated to a Dollar
Cost Averaging Option. Previously applied amounts may not be transferred to any
Dollar Cost Averaging Option.
The main objective of a dollar cost averaging program is to minimize the
impact of short-term price fluctuations. Since the same dollar amount is
transferred to other available investment options at set intervals, dollar cost
averaging allows a Participant to purchase more Variable Accumulation Units
(and, indirectly, more Series Fund shares) when prices are low and fewer
Variable Accumulation Units (and, indirectly, fewer Series Fund shares) when
prices are high. Therefore, a lower average cost per Variable 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.
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ASSET ALLOCATION
One or more asset allocation investment programs may be made 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 the
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.
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; (2) a minimum of 30 days must elapse between transfers made
to or from the Fixed Account or among Guarantee Periods; (3) 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;
(4) any Participant's Account Value remaining in a Sub-Account may not be less
than $1,000; (5) the total Participant's Account Value attributable to the
Guarantee Amount must be transferred; and (6) transfers may not be allocated to
the Monthly or Quarterly Dollar Cost Averaging Options described above. 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 Series Fund. 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 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 by telephone are genuine. Such procedures may
include one or more of the following: requesting identifying information, such
as name, Contract number, Social Security Number, and/or personal identification
number; tape recording all telephone transactions; or providing written
confirmation thereof to both the Participant and any agent of record, at the
last address of record; or such other procedures as the Company may deem
reasonable. Although the Company's failure to follow reasonable procedures may
result in the Company's liability for any losses due to unauthorized or
fraudulent telephone transfers, the Company will not be liable for following
instructions communicated by telephone which it reasonably believed to be
genuine. Any losses incurred pursuant to actions taken by the Company in
reliance on telephone instructions reasonably believed to be genuine shall be
borne by the Participant.
The 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 restriction 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 by market timing firms or other third parties on behalf
of more than one Participant. The Company will not impose any such restrictions
or otherwise modify transfer rights unless such action is reasonably intended to
prevent the use of such rights in a manner that will disadvantage or potentially
impair the contract rights of other Participants.
In addition, the Series Fund has reserved the right to temporarily or
permanently refuse exchange requests if, in the judgment of the Series Fund's
investment adviser, a series would be unable to invest effectively in accordance
with its investment objective and policies, or would otherwise potentially be
adversely affected. In particular, a pattern of exchanges that coincide with a
"market timing" strategy may be disruptive to a series and therefore may be
refused. Accordingly, the Variable Account may not be in a
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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, credit additional amounts, or 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,
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,
credit additional amounts, or 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 and during the lifetime of
the Annuitant, the Participant may elect to receive a cash withdrawal payment
from the Company. Any such election shall specify the amount of the withdrawal
and will be effective on the date that it is received by the Company.
The Participant may request a full surrender or partial withdrawal. A full
surrender will result in a cash withdrawal payment equal to the value of the
Participant's Account at the end of the Valuation Period during which the
election becomes effective less the Account Fee, plus or minus any applicable
Market Value Adjustment, and less any applicable withdrawal charge. A request
for a partial withdrawal will result in the cancellation of a portion of the
Participant's Account Value equal to the dollar amount of the cash withdrawal
payment, plus or minus any applicable Market Value Adjustment and plus any
applicable withdrawal charge. If a partial withdrawal is requested which would
leave a Participant's Account Value of less than the Account Fee, then such
partial withdrawal will be treated as a full surrender. The Account Fee and any
applicable Market Value Adjustment will be deducted from the Participant's
Account before the application of any withdrawal charge.
In the case of a partial withdrawal, the Participant may instruct the
Company as to the amounts to be withdrawn from each Sub-Account and/or Guarantee
Amount. If not so instructed, the Company will effect such withdrawal pro-rata
from each Sub-Account and Guarantee Amount in which the Participant's Account
Value is invested at the end of the Valuation Period during which the withdrawal
becomes effective. ALL CASH WITHDRAWALS OF ANY GUARANTEE AMOUNT, EXCEPT THOSE
EFFECTIVE WITHIN 30 DAYS PRIOR TO THE EXPIRATION DATE OF SUCH GUARANTEE AMOUNT,
WILL BE SUBJECT TO THE MARKET VALUE ADJUSTMENT.
Cash withdrawals from a Sub-Account will result in the cancellation of
Variable Accumulation Units attributable to the Participant's Account with an
aggregate value on the effective date of the withdrawal equal to the total
amount by which the Sub-Account is reduced. The cancellation of such units will
be based on the Variable Accumulation Unit values of the Sub-Account for 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
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Investment Company Act of 1940 and applicable state insurance law. Deferral of
amounts withdrawn from the Variable Account is currently permissible only (1)
for any period (a) during which the New York Stock Exchange is closed other than
customary week-end and holiday closings or (b) during which trading on the New
York Stock Exchange is restricted as determined by the Securities and Exchange
Commission, (2) for any period during which an emergency exists as a result of
which (a) disposal of securities held by the Series Fund is not reasonably
practicable or (b) it is not reasonably practicable to determine the value of
the net assets of the Series Fund or (3) for such other periods as the
Securities and Exchange Commission may by order permit for the protection of
security holders. The Company reserves the right to defer the payment of amounts
withdrawn from the Fixed Account for a period not to exceed six months from the
date written request for such withdrawal is received by the Company. The Company
is not required to pay interest on amounts so deferred.
Since the Qualified Contracts offered by this Prospectus will be issued in
connection with retirement plans which meet the requirements of Sections 401,
403, 408, and 408A of the Internal Revenue Code, reference should be made to the
terms of the particular retirement plan for any limitations or restrictions on
cash withdrawals. For special restrictions applicable to withdrawals from
Contracts used with Tax-Sheltered Annuities established pursuant to Section
403(b) of the Internal Revenue Code, see "Section 403(b) Annuities" below.
A cash withdrawal under either a Qualified or Non-Qualified Contract offered
by this Prospectus also may result in a tax penalty. The tax consequences of a
cash withdrawal payment under both Qualified 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").
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.
When a withdrawal is made from a Qualified Contract to comply with mandatory
minimum distribution requirements, no withdrawal charge will be applied to the
amount required to be distributed during each Account Year. These required
distributions may commence during and continue after the year in which the
Annuitant attains age 70 1/2 (or, beginning in 1997, after the year in which the
Annuitant retires if that is later). Any amounts withdrawn in excess of the
required minimum distribution during each Account Year will be subject to any
applicable withdrawal charge.
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
Purchase Payments derived from the surrender of other annuity contracts and/or
certificates issued by the Company.
For purposes of a full surrender or partial withdrawal, each withdrawal is
allocated to previously unliquidated Purchase Payments on a first-in, first-out
basis until all Purchase Payments have been liquidated. Once all Purchase
Payments have been liquidated, any additional withdrawals will come from the
earnings on the Contract and are not subject to a withdrawal charge. The amount
subject to a withdrawal charge is the amount of the partial withdrawal or full
surrender up to the maximum of the sum of all unliquidated Purchase Payments.
AMOUNT OF WITHDRAWAL CHARGE
A withdrawal charge percentage of 1% is applied to Purchase Payments
withdrawn which have been credited to a Participant's Account for less than one
year (365 days).
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In no event shall the aggregate withdrawal charges assessed against a
Participant's Account exceed 1% 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 charge, provided that such modification shall
apply only to Participant's Accounts established after the effective date of
such modification (See "Modification").
SECTION 403(b) ANNUITIES
The Internal Revenue Code imposes restrictions on cash withdrawals from
Contracts used with Section 403(b) Annuities. In order for the Contracts to
receive tax deferred treatment, the 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 will be
subject to a Market Value Adjustment ("MVA") (for this purpose, transfers,
distributions on the death of a Participant and amounts applied to purchase an
annuity are treated as cash withdrawals). The MVA will be applied to the amount
being withdrawn 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.
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<PAGE>
The Market Value Adjustment is determined by the application of the
following formula:
<TABLE>
<S> <C>
N/12
1 + I
( ----- ) -1
1 + J
</TABLE>
where,
I is the Guaranteed Interest Rate being credited to the Guarantee Amount
subject to the Market Value Adjustment,
J is the Guaranteed Interest Rate declared by the Company, as of the
effective date of the application of the Market Value Adjustment, for current
allocations to Guarantee Period(s). If the Guarantee Period was originally
established through Monthly or Quarterly Dollar Cost Averaging Options, J is the
Guaranteed Interest Rate declared for current allocations to these options. For
all other Guarantee Periods, J is the Guaranteed Interest Rate declared for
current allocations to Guarantee Periods equal to the balance of the Guarantee
Period of the Guarantee Amount subject to the Market Value Adjustment, rounded
to the next higher number of complete years (the "Current Rate"). In the
determination of J for Guarantee Periods other than those established under the
Monthly or Quarterly Dollar Cost Averaging Options, if the Company does not
currently offer the applicable Guarantee Period, then J will be determined by
linear interpolation of Current Rates for Guarantee Periods that are available.
N is the number of complete months remaining in the Guarantee Period of the
Guarantee Amount subject to the Market Value Adjustment.
The Company may, upon notice to the Owner, modify 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 (See "Modification").
See Appendix B for examples of the application of the Market Value
Adjustment.
DEATH BENEFIT
DEATH BENEFIT PROVIDED BY THE CONTRACTS
In the event of the death of the Annuitant prior to the Annuity Commencement
Date, the Company will pay a death benefit to the Beneficiary. If there is no
designated Beneficiary living on the date of death of the Annuitant, the Company
will, upon receipt of Due Proof of Death of both the Annuitant and the
designated Beneficiary, pay the death benefit in one sum to the Participant or,
if the Annuitant was the Participant, to the estate of the
Participant/Annuitant. If the death of the Annuitant occurs on or after the
Annuity Commencement Date, no death benefit will be payable under the Contract
except as may be provided under the Annuity Option elected.
ELECTION AND EFFECTIVE DATE OF ELECTION
During the lifetime of the Annuitant and prior to the Annuity Commencement
Date, the Participant may elect to have the death benefit applied under one or
more Annuity Options to effect a Variable Annuity or a Fixed Annuity or a
combination of both for the Beneficiary as Payee after the death of the
Annuitant. If no election of a method of settlement of the death benefit by the
Participant is in effect on the date of death of the Annuitant, the Beneficiary
may elect (a) to receive the death benefit in the form of a single cash payment;
or (b) to have the death benefit applied under one or more of the Annuity
Options (on the Annuity Commencement Date described under "Payment of Death
Benefit") to effect a Variable Annuity or a Fixed Annuity or a combination of
both for the Beneficiary as Payee. Either election described above may be made
by filing with the Company a written election in such form as the Company may
require. Any election of a method of settlement of the death benefit by the
Participant will become effective on the date it is received by the Company. For
the purposes of the Payment of Death Benefit and Amount of Death Benefit
sections below, any election of the method of settement of the death benefit by
the Participant which is in effect on the date of death of the Annuitant will be
deemed effective on the date Due Proof of Death of the Annuitant is received by
the Company. Any election of a method of settlement of the death benefit by the
Beneficiary will become effective on the later of: (a) the date the election is
received by the Company; or (b) the date Due
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<PAGE>
Proof of Death of the Annuitant is received by the Company. If an election by
the Beneficiary is not received by the Company within 60 days following the date
Due Proof of Death of the Annuitant is received by the Company, the Beneficiary
will be deemed to have elected a cash payment as of the last day of the 60 day
period.
In all cases, no Participant or Beneficiary shall be entitled to exercise
any rights that would adversely affect the treatment of the Contracts as annuity
contracts under the Internal Revenue Code. (See "Other Contractual Provisions --
Death of Participant").
PAYMENT OF DEATH BENEFIT
If the death benefit is to be paid in cash to the Beneficiary, payment will
be made within seven days of the date the election becomes effective or is
deemed to become effective, except as the Company may be permitted to defer any
such payment of amounts derived from the Variable Account in accordance with the
Investment Company Act of 1940. If the death benefit is to be paid in one lump
sum to the Participant or, if the Annuitant was the Participant, to the estate
of the deceased Participant/Annuitant, payment will be made within seven days of
the date Due Proof of Death of the Annuitant, the Participant and/or the
designated Beneficiary, as applicable, is received by the Company. If settlement
under one or more of the Annuity Options is elected the Annuity Commencement
Date will be the first day of the second calendar month following the effective
date or the deemed effective date of the election, and the Participant's Account
will be maintained in effect until the Annuity Commencement Date.
AMOUNT OF DEATH BENEFIT
The death benefit is determined as of the effective date or deemed effective
date of the death benefit election.
If the Annuitant was less than age 86 on the Date of Coverage, the death
benefit is equal to the greatest of (1) the Participant's Account Value for the
Valuation Period during which the death benefit election is effective or is
deemed to become effective; (2) the amount that would have been payable in the
event of a full surrender of the Participant's Account on the date the death
benefit election is effective or is deemed to become effective; and (3) total
Purchase Payments made with respect to the Participant's Account, minus the sum
of all partial withdrawals.
If the Annuitant was age 86 or older on the Date of Coverage, the death
benefit is equal to (2) above.
If (2) or (3) is operative, the Participant's Account Value will be
increased by the excess of (2) or (3), 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 date the amount of the death benefit is determined. If no
portion of the Participant's Account is allocated to the Sub-Accounts on that
date, the entire increase will be allocated to the Sub-Account invested in the
Money Market Series of the Series Fund.
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
Series Fund for investment management fees and expenses. These fees and expenses
are described in the Series Fund's prospectus and Statement of Additional
Information.
ADMINISTRATIVE CHARGES
Prior to the Annuity Commencement Date, on each Account Anniversary the
Company deducts from the value of each Participant's Account an annual account
administration fee ("Account Fee") in the amount of $50 as partial compensation
for expenses relating to the issue and maintenance of the Contract and the
Participant's Account. 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
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<PAGE>
which the Participant's Account is invested at the time of such deduction. Also,
the Company will waive the Account Fee when the Participant's Account Value is
greater than $100,000 on the Account Anniversary. 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 $50 will be deducted in equal
amounts from each variable annuity payment made during the year. No such
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 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 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 Participant's Accounts established after the effective
date of such change, as provided in the section of this Prospectus entitled
"Modification". The expense risk assumed by the Company is the risk that the
administrative charges assessed under the Contracts 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 1.00%. 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 charge (contingent deferred sales charge) described below.
However, the withdrawal charge 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").
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<PAGE>
WITHDRAWAL CHARGES
No deduction for sales charges is made from Purchase Payments. However, a
withdrawal charge (i.e., a contingent deferred sales charge) of 1% of Purchase
Payments, 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. (See "Cash Withdrawals" and "Withdrawal Charges").
ANNUITY PROVISIONS
ANNUITY COMMENCEMENT DATE
Annuity payments will begin on the Annuity Commencement Date which is
selected by the Participant, as specified in the Application. The date selected
by the Participant may not be sooner than the first day of the second calendar
month following the Date of Coverage. This date may be changed by the
Participant from time to time by written notice to the Company, provided that
notice of each change is received by the Company at least 30 days prior to the
then current Annuity Commencement Date and the new Annuity Commencement Date is
a date which is: (1) at least 30 days after the date notice of the change is
received by the Company; (2) the first day of a month; and (3) not later than
the first day of the first month following the Annuitant's 90th birthday, unless
otherwise restricted, in the case of a Qualified Contract, by the particular
retirement plan or by applicable law. In most situations, current law requires
that the Annuity Commencement Date under a Qualified Contract be no later than
April 1 following the year the Annuitant reaches age 70 1/2 (or, for Qualified
Contracts other than IRAs, no later than April 1 following the year the
Annuitant retires, if later than the year the Annuitant reaches age 70 1/2), and
the terms of the particular retirement plan may impose additional limitations.
The Annuity Commencement Date may also be changed by an election of an Annuity
Option as described in the Death Benefit section of this Prospectus.
On the Annuity Commencement Date the Participant's Account will be cancelled
and its adjusted value will be applied to provide an annuity under one or more
of the options described below. No withdrawal charge will be imposed upon
amounts applied to purchase an annuity. However, the Market Value Adjustment may
apply, as noted under "Determination of Annuity Payments" below. NO PAYMENTS MAY
BE REQUESTED UNDER THE CONTRACT'S CASH WITHDRAWAL PROVISIONS ON OR AFTER THE
ANNUITY COMMENCEMENT DATE, AND NO CASH WITHDRAWAL WILL BE PERMITTED EXCEPT AS
MAY BE AVAILABLE UNDER THE ANNUITY OPTION ELECTED.
Since the Contracts offered by this Prospectus may be issued in connection
with retirement plans which meet the requirements of Section 401, 403, 408, or
408A of the Internal Revenue Code, as well as certain non-qualified plans,
reference should be made to the terms of the particular plan for any limitations
or restrictions on the Annuity Commencement Date.
ELECTION--CHANGE OF ANNUITY OPTION
During the lifetime of the Annuitant and prior to the Annuity Commencement
Date, the Participant may elect one or more of the Annuity Options described
below, or such other settlement option as may be agreed to by the Company, for
the Annuitant as Payee. The Participant may also change any election, but
written notice of any election or change of election must be received by the
Company at least 30 days prior to the Annuity Commencement Date. If no election
is in effect on the 30th day prior to the Annuity Commencement Date, Annuity
Option B, for a Life Annuity with 120 monthly payments certain, will be deemed
to have been elected. If there is no election of a sole Annuitant in effect on
the 30th day prior to the Annuity Commencement Date, the person designated as
"Co-Annuitant" will be the Payee under the applicable Annuity Option.
Any election may specify the proportion of the adjusted value of the
Participant's Account to be applied to provide a Fixed Annuity and a Variable
Annuity. In the event the election does not so specify, or if no election is in
effect on the 30th day prior to the Annuity Commencement Date, then the portion
of the adjusted value of the Participant's Account to be applied to provide a
Fixed Annuity and a Variable Annuity will be determined on a pro rata basis from
the composition of the Participant's Account on the Annuity Commencement Date.
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<PAGE>
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 of 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.
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 on an annual basis 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 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. 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 unpaid balance of the
proceeds and interest will be paid in one sum.
- ---------
* The election of this Annuity Option may result in the imposition of a penalty
tax.
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<PAGE>
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 for the Valuation Period which ends immediately
preceding the Annuity Commencement Date, reduced by a proportionate amount of
the Account Fee to reflect the time elapsed between the last Account Anniversary
and the day before the Annuity Commencement Date, plus or minus any applicable
Market Value Adjustment and minus any applicable premium or similar taxes.
If the amount to be applied under any annuity option is less than $2,000, or
if the first annuity payment payable in accordance with such option is less than
$20, the Company will pay the amount to be applied in a single payment to the
Payee.
FIXED ANNUITY PAYMENTS
The dollar amount of each fixed annuity payment will be determined in
accordance with the Annuity Payment Rates found in the Contract which are based
on a minimum guaranteed interest rate of 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 Contract which are
based on an assumed interest rate of at least 3% per year, unless these rates
are changed with respect to a Group Contract (See "Modification"). All variable
annuity payments other than the first are determined by means of Annuity Units
credited to the Contract with respect to the particular Payee. The number of
Annuity Units to be credited in respect of a particular Sub-Account is
determined by dividing that portion of the first variable annuity payment
attributable to that Sub-Account by the Annuity Unit value of that Sub-Account
at the end of the Valuation Period which ends immediately preceding the Annuity
Commencement Date. The number of Annuity Units of each particular Sub-Account
credited with respect to the particular Payee then remains fixed unless an
exchange of Annuity Units is made as described below. The dollar amount of each
variable annuity payment after the first may increase, decrease or remain
constant, and is equal to the sum of the amounts determined by multiplying the
number of Annuity Units of a particular Sub-Account credited with respect to the
particular Payee by the Annuity Unit value for the particular Sub-Account for
the Valuation Period which ends immediately preceding the due date of each
subsequent payment. If the net investment return on the assets of the Variable
Account is the same as the assumed interest rate (3% per year), variable annuity
payments will remain level. If the net investment return exceeds the assumed
interest rate variable annuity payments will increase and, conversely, if it is
less than the assumed interest rate the payments will decrease.
For a hypothetical example of the calculation of a Variable Annuity Payment,
see Appendix A.
ANNUITY UNIT VALUE
The Annuity Unit value for each Sub-Account was established at $10.00 for
the first Valuation Period of the particular Sub-Account. The Annuity Unit value
for the particular Sub-Account for any subsequent Valuation Period is determined
by multiplying the Annuity Unit value for the particular Sub-Account for the
immediately preceding Valuation Period by the Net Investment Factor (See
"Variable Accumulation Value, Net Investment Factor") for the particular
Sub-Account for the current Valuation Period and then multiplying that product
by a factor to neutralize the assumed interest rate of 3% per year used to
establish the Annuity Payment Rates found in the applicable Contract.
For a hypothetical example of the calculation of the value of an Annuity
Unit, see Appendix A.
EXCHANGE OF VARIABLE ANNUITY UNITS
After the Annuity Commencement Date the Payee may, by filing a written
request with the Company, exchange the value of a designated number of Annuity
Units of particular Sub-Accounts then credited with respect to the particular
Payee into other Annuity Units, the value of which would be such that the dollar
amount of an annuity payment made on the date of the exchange would be
unaffected by the fact of the exchange. No more than twelve (12) exchanges may
be made within each Account Year.
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Exchanges may be made only among 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 Contract; and (b) the monthly Fixed
Annuity payment, when this payment is based on the minimum guaranteed interest
rate of 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 A.
OTHER CONTRACTUAL PROVISIONS
PAYMENT LIMITS
The initial Purchase Payment credited to each Participant's Account must be
at least $25,000 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 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. The interest of any Beneficiary is subject to the
particular Beneficiary surviving the Annuitant and, in the case of a Non-
Qualified Contract, the Participant as well.
Subject to the rights of an irrevocably designated Beneficiary, the
Participant may change or revoke the designation of a Beneficiary at any time
while the Annuitant is living by filing with the Company a written beneficiary
designation or revocation in such form as the Company may require. The change or
revocation will not be binding upon the Company until it is received by the
Company. When it is so received the change or revocation will be effective as of
the date on which the beneficiary designation or revocation was signed, but the
change or revocation will be without prejudice to the Company on account of any
payment made or any action taken by the Company prior to receiving the change or
revocation.
Reference should be made to the terms of a particular retirement plan and
any applicable legislation for any restrictions on the beneficiary designation.
EXERCISE OF CONTRACT RIGHTS
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.
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The Annuitant becomes the Payee on and after the Annuity Commencement Date.
The Beneficiary becomes the Payee on the death of the Annuitant. Such Payees may
thereafter exercise such rights and privileges, if any, of ownership which
continue.
CHANGE OF OWNERSHIP
Ownership of a Qualified Contract may not be transferred except to: (1) the
Annuitant; (2) a trustee or successor trustee of a pension or profit sharing
trust which is qualified under Section 401 of the Internal Revenue Code; (3) the
employer of the Annuitant provided that the Qualified Contract after transfer is
maintained under the terms of a retirement plan qualified under Section 403(a)
of the Internal Revenue Code for the benefit of the Annuitant; (4) the trustee
of an individual retirement account plan qualified under Section 408 of the
Internal Revenue Code for the benefit of the 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 during the lifetime of any Annuitant and prior to the last Annuity
Commencement Date; and each Participant, in like manner, may change the
ownership interest in a Contract. A change of ownership will not be binding upon
the Company until written notification is received by the Company. When such
notification is so received, the change will be effective as of the date on
which the request for change was signed by the Owner or Participant, as
appropriate, but the change will be without prejudice to the Company on account
of any payment made or any action taken by the Company prior to receiving the
change.
DEATH OF PARTICIPANT
If a Participant under a Non-Qualified Contract dies prior to the Annuitant
and before the Annuity Commencement Date, that Participant's Account Value, plus
or minus any applicable Market Value Adjustment, must be distributed to the
"designated beneficiary" (as defined below) either (1) 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 Internal
Revenue 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.
When the deceased Participant was also the Annuitant, the Death Benefit
provision of the Contract controls unless the deceased Participant's surviving
spouse is the designated beneficiary and elects to continue the Contract in the
spouse's own name as both Participant and Annuitant.
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
Contract for the purposes of Section 72(s) of the Internal Revenue 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.
In all cases, no Participant or Beneficiary shall be entitled to exercise
any rights that would adversely affect the treatment of the Contract as an
annuity contract under the Internal Revenue Code.
Any distributions upon the death of a Participant under a Qualified Contract
will be subject to the laws and regulations governing the particular retirement
or deferred compensation plan in connection with which the Qualified Contract
was issued.
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VOTING OF SERIES FUND SHARES
The Company will vote Series Fund shares held by the Sub-Accounts at
meetings of shareholders, or in connection with similar solicitations, of the
Series Fund, 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 instructions prior to
the Annuity Commencement Date. On or after the Annuity Commencement Date the
Payee is the person having such voting rights. Any shares attributable to the
Company and Series Fund shares for which no timely voting instructions are
received will be voted by the Company in the same proportion as the shares for
which instructions are received from Owners, Participants and Payees, 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
Series Fund shares attributable to their contributions. Such plans may also
provide the additional extent, if any, to which the Owners shall follow voting
instructions of persons with rights under the plans. If no voting instructions
are received from any such person with respect to a particular Participant's
Account, the Owner may instruct the Company as to how to vote the number of
Series Fund shares for which instructions may be given.
Neither the Variable Account nor the Company is under any duty to provide
information concerning the voting instruction rights of persons who may have
such rights under plans, other than rights afforded by the Investment Company
Act of 1940, nor any duty to inquire as to the instructions received or the
authority of Owners, Participants or others, as applicable, to instruct the
voting of Series Fund shares. Except as the Variable Account or the Company has
actual knowledge to the contrary, the instructions given by Owners 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 Series Fund proxy material, together with an appropriate form to be used
to give voting instructions, will be provided to each person having the right to
give voting instructions at least ten days prior to each meeting of the
shareholders of the Series Fund. The number of Series Fund shares as to which
each such person is entitled to give instructions will be determined by the
Company on a date not more than 90 days prior to each such meeting. Prior to the
Annuity Commencement Date, the number of Series Fund shares as to which voting
instructions may be given to the Company is determined by dividing the value of
all of the Variable Accumulation Units of the particular Sub-Account credited to
the Participant's Account by the net asset value of one Series Fund share as of
the same date. On or after the Annuity Commencement Date, the number of Series
Fund shares as to which such instructions may be given by a Payee is determined
by dividing the reserve held by the Company in the Sub-Account with respect to
the particular Payee by the net asset value of a Series Fund share as of the
same date. After the Annuity Commencement Date, the number of Series Fund shares
as to which a Payee is entitled to give voting instructions will generally
decrease due to the decrease in the reserve.
PERIODIC REPORTS
During the Accumulation Period the Company will send the Participant, or
such other person having voting rights, at least once during each Account Year,
a statement showing the number, type and value of Accumulation Units credited to
the Participant's Account and the Fixed Accumulation Value of such account,
which statement shall be accurate as of a date not more than two months previous
to the date of mailing. These periodic statements contain important information
concerning the Participant's Account transactions with respect to a Contract. It
is the obligation of the Participant to review each such statement carefully and
to report to the Company, at the address or telephone number provided on the
statement, any errors or discrepancies in the information presented therein
within 60 days of the date of such statement. Unless the Company receives notice
of any such error or discrepancy from the Participant within such time period,
the Company may not be responsible for correcting the error or discrepancy.
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In addition, every person having voting rights will receive such reports or
prospectuses concerning the Variable Account and the Series Fund as may be
required by the Investment Company Act of 1940 and the Securities Act of 1933.
The Company will also send such statements reflecting transactions in the
Participant's Account as may be required by applicable laws, rules and
regulations.
Upon request, the Company will provide the Participant with information
regarding fixed and variable accumulation values.
SUBSTITUTED SECURITIES
Shares of any or all series of the Series Fund may not always be available
for purchase by the Sub-Accounts of the Variable Account or the Company may
decide that further investment in any such shares is no longer appropriate in
view of the purposes of the Variable Account or in view of legal, regulatory or
federal income tax restrictions. In such event, shares of another series or
shares of another registered open-end investment company or unit investment
trust may be substituted both for Series Fund shares already purchased by the
Variable Account and/or as the security to be purchased in the future provided
that these substitutions meet applicable Internal Revenue Service
diversification guidelines and have been approved, if required, by the
Securities and Exchange Commission. In the event of any substitution pursuant to
this provision, the Company may make appropriate endorsement to the Contract to
reflect the substitution.
CHANGE IN OPERATION OF VARIABLE ACCOUNT
At the Company's election and subject to any necessary vote by persons
having the right to give instructions with respect to the voting of Series Fund
shares held by the Sub-Accounts, the Variable Account may be operated as a
management company under the Investment Company Act of 1940 or it may be
deregistered under the Investment Company Act of 1940 in the event registration
is no longer required. Deregistration of the Variable Account requires an order
by the Securities and Exchange Commission. In the event of any change in the
operation of the Variable Account pursuant to this provision, the Company may
make appropriate endorsement to the Contract to reflect the change and take such
other action as may be necessary and appropriate to effect the change.
SPLITTING UNITS
The Company reserves the right to split or combine the value of Variable
Accumulation Units, Annuity Units or any of them. In effecting any such change
of unit values, strict equity will be preserved and no change will have a
material effect on the benefits or other provisions of the Contract.
MODIFICATION
Upon notice to the 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 Internal Revenue Code or other
federal or state laws relating to retirement annuities or annuity contracts; or
(iii) is necessary to reflect a change in the operation of the Variable Account
or the Sub-Account(s) (See "Change in Operation of Variable Account"); or (iv)
provides additional Variable Account and/or fixed accumulation options; 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 to 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
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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 Series Fund shares at net asset value in connection with
amounts allocated to the Sub-Accounts in accordance with the instructions of the
Participant and redeem Series Fund shares at net asset value for the purpose of
meeting the contractual obligations of the Variable Account, paying charges
relative to the Variable Account or making adjustments for annuity reserves held
in the Variable Account.
RIGHT TO RETURN
If the Participant is not satisfied with the 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 Contract may
be acceptable.
With respect to Individual Retirement Accounts, under the Internal Revenue
Code a Participant establishing an Individual Retirement Account ("IRA") must be
furnished with a disclosure statement containing certain information about the
Contract and applicable legal requirements. This statement must be furnished on
or before the date the IRA is established. If the Participant is furnished with
such disclosure statement before the seventh day preceding the date the IRA is
established, the Participant will not have any right of revocation. If the
disclosure statement is furnished after the seventh day preceding the
establishment of the IRA, 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 Internal Revenue 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 Internal Revenue Code, as amended, is not in force in the Commonwealth of
Puerto Rico, some
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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.
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 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 discussion as applied to the 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 first as a withdrawal from the increase in the
Participant's Account Value, rather than as a return of Purchase Payments. The
amount of the withdrawal allocable to this increase will be includible in the
Participant's income and subject to tax at ordinary income rates. If part or all
of a Participant's Account Value is assigned or pledged as collateral for a
loan, the amount assigned or pledged must be treated as if it were withdrawn
from the 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
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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
Contracts are purchased.
If the Participant under a Non-Qualified Certificate dies, the value of the
Contract generally must be distributed within a specified period (See "Other
Contractual Provisions -- Death of Participant"). For contracts owned by
non-natural persons, a change in the Annuitant is treated as the death of the
Participant.
A purchaser of a Qualified 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 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 series of the Series Fund
complies with the regulations.
The preamble to the regulations states that the Internal Revenue Service may
promulgate guidelines under which a variable contract will not be treated as an
annuity for tax purposes if the owner has excessive control over the investments
underlying the contract. It is not known whether such guidelines, if in fact
promulgated, would have retroactive effect. If guidelines are promulgated, the
Company will take any action (including modification of the Contract 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
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annuity contract (as defined above) purchased together with a deferred annuity
contract. The Company believes that any adverse change in the existing tax
treatment of such immediate annuity contracts is likely to be prospective, that
is, it would not apply to contracts issued before such a change is announced.
However, there can be no assurance that any such change, if adopted, would not
be applied retroactively.
QUALIFIED RETIREMENT PLANS
The Qualified Contracts described in this Prospectus are designed for use
with several types of qualified retirement plans. The tax rules applicable to
participants in such qualified retirement plans vary according to the type of
plan and its terms and conditions. Therefore, no attempt is made herein to
provide more than general information about the use of the Qualified Contracts
with the various types of qualified retirement plans. Participants under such
plans as well as Owners, Annuitants, Payees and Beneficiaries are cautioned that
the rights of any person to any benefits under these plans may be subject to the
terms and conditions of the plans themselves, regardless of the terms and
conditions of the Qualified Contracts issued in connection therewith. These
terms and conditions may include restrictions on, among other things, ownership,
transferability, assignability, contributions and distributions. Any person
contemplating the purchase of a Qualified Contract should consult a qualified
tax advisor. In addition, Owners, Participants, Payees, Beneficiaries and
administrators of qualified retirement plans should consider and consult their
tax 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
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are not made on tax-deferred basis, but distributions are tax-free if certain
requirements are satisfied. Like regular IRAs, Roth IRAs are subject to
limitations on the amount that may be contributed and the time when
distributions may commence. A regular 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, the 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,
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 02181, a wholly-owned subsidiary of the Company. Clarendon
is registered with the Securities and Exchange Commission under the Securities
Exchange Act of 1934 as 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
1.20% 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 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." During
1997 approximately $75,000 was paid to and retained by Clarendon in connection
with the distribution of the Contracts.
42
<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 71.
<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.
43
<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.
44
<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,
45
<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.
46
<PAGE>
ASSET/LIABILITY MANAGEMENT AND INFORMATION ABOUT MARKET RISK
The following discussion about the Company's risk management activities
includes "forward-looking statements" that involve risk and uncertainties.
Assets within the general account are segmented by product or groups of
products. This allows the Company to better manage assets relative to
liabilities. Asset management for each segment is conducted within the context
of an investment policy, reviewed each quarter with business unit managers to
ensure that investment policy remains appropriate, taking into account a
segment's liability characteristics. The review of investment policy includes
cash flow estimates, liquidity requirements and targets for asset mix, duration
and quality.
Market risks associated with investment portfolios supporting products that
are funded by separate accounts where results are not guaranteed and where the
policyholder assumes the risks are not included in this discussion.
All of the Company's assets are held for other than trading purposes and
generally fixed interest rate liabilities are supported by well diversified
portfolios of fixed interest investments including publicly issued and privately
placed bonds and commercial mortgage loans. Public bonds can include Treasuries,
corporates, money market instruments, Mortgage Backed Securities and Asset
Backed Securities. Credit risk is managed by the Company's underwriting
standards which have resulted in high average quality portfolios. For example,
the Company does not purchase below investment grade securities. Also, as a
result of investment policy, there is no foreign currency, commodity or equity
price risk exposure in the portfolios. However, changes in the level of domestic
interest rates will impact the market value of fixed interest assets and
liabilities. The management of interest rate risk exposure and immunization
strategies are discussed below.
Immunization strategies which minimize the loss from wide fluctuations in
interest rates are pursued in segments where the bulk of the liabilities arise
from the sale of products containing interest rate guarantees for certain terms.
These strategies are supported by investment and asset liability analytical
software acquired from outside vendors. The significant features of the
immunization framework include: an economic or market value basis for both
assets and liabilities; an option pricing methodology; the use of effective
duration and convexity to measure price sensitivity; the use of key rate
durations (KRDs) to capture interest rate exposure to different parts of the
yield curve and manage non-parallel curve movements; and active portfolio
management, including the use of derivatives (e.g., interest rate swaps) for
portfolio restructuring.
An Interest Rate Risk Committee meets monthly and after reviewing the
duration reports for various portfolios, market conditions and forecasts, the
committee develops asset management strategies for interest sensitive
portfolios. These strategies may involve managing assets to small intentional
mismatches, either at the total effective duration level or at certain KRDs but,
in any event, the overall duration gap between interest sensitive assets and
liabilities is managed within a tolerance range of +/- 0.25 effective duration.
The estimates presented here are from computer model simulations which,
because they are predictions about the future, contain a certain degree of
uncertainty. For example, there are algorithms for assumptions about
policyholder behavior and asset cash flows and consequently estimates of
duration and market values which may or may not represent what actually will
occur. Also there is no provision in the estimates to incorporate any management
decisions which might be taken to mitigate against adverse results. The Company
is sufficiently comfortable with its interest rate risk management process to
feel the exposure to interest rate changes will not materially affect the
near-term financial position, results of operations or cash flows of the
Company.
The Company's fixed interest investments had an aggregate fair value at
December 31, 1997 of $3,276,174,000. Certain of the Company's general account
liabilities of $3,682,582,000 are categorized as financial instruments. The
portion of the liabilities so categorized had a carrying value of $1,958,229,000
and a fair value of $1,985,106,000 at December 31, 1997. Using its modeling and
analytical software the Company performed sensitivity analysis of its financial
instruments at December 31, 1997. Assuming an
47
<PAGE>
immediate increase of 100 basis points in interest rates the net hypothetical
decrease in the fair value of the Company's assets is estimated to be
$108,000,000. A corresponding decrease in the fair value of the liabilities
categorized as financial instruments is estimated to be $56,000,000 at December
31, 1997.
SUN LIFE (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.
48
<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 assigned the Company an
unsolicited rating of Aa1 for financial strength.
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, Chairman and Director (1982*)
150 King Street West
Toronto, Ontario, Canada M5H 1J9
He is Chairman and a Director of Sun Life Assurance Company of Canada and
Sun Life Insurance and Annuity Company of New York; a Director of Massachusetts
Financial Services Company; Chairman and a Trustee of MFS/Sun Life Series Trust;
Chairman and a Member of the Boards of Managers of Money Market Variable
Account, High Yield Variable Account, Capital Appreciation Variable Account,
Government Securities Variable Account, World Governments Variable Account,
Total Return Variable Account and Managed Sectors Variable Account; and a
Director of Shell (Canada) Limited and Canadian Pacific, Ltd.
DONALD A. STEWART, 51, President and Director (1996*)
150 King Street West
Toronto, Ontario, Canada M5H 1J9
He is President and a Director of Sun Life Assurance Company of Canada and
Sun Life Insurance and Annuity Company of New York; and a Director of
Massachusetts Financial Services Company, Massachusetts Casualty Insurance
Company and Sun Life Financial Services Limited.
DAVID D. HORN, 56, Director (1985*)
56 Pinckney Street
Boston, Massachusetts 02114
He was formerly Senior Vice President and General Manager for the United
States of Sun Life Assurance Company of Canada, retiring in December, 1997. He
is a Director of Sun Life Insurance and Annuity Company of New York; a Trustee
of MFS/Sun Life Series Trust; and a Member of the Boards of Managers of Money
Market
- ---------
* Year Elected Director
49
<PAGE>
Variable Account, High Yield Variable Account, Capital Appreciation Variable
Account, Government Securities Variable Account, World Governments Variable
Account, Total Return Variable Account and Managed Sectors Variable Account.
ANGUS A. MACNAUGHTON, 66, Director (1985*)
Metro Tower, Suite 1170
950 Tower Lane
Foster City, California 94404
He is President of Genstar Investment Corporation and a Director of Sun Life
Assurance Company of Canada, Sun Life Insurance and Annuity Company of New York,
Canadian Pacific, Ltd., Varian Associates, Inc., Diversified Collection
Services, Inc., the San Francisco Opera, and Barrick Gold Corporation.
JOHN S. LANE, 63, Director (1991*)
150 King Street West
Toronto, Ontario, Canada M5H 1J9
He is Senior Vice President, Investments of Sun Life Assurance Company of
Canada; and a Director of Sun Life Insurance and Annuity Company of New York.
RICHARD B. BAILEY, 71, Director (1983*)
500 Boylston Street
Boston, Massachusetts 02116
He is a Director of Sun Life Insurance and Annuity Company of New York and a
Director/Trustee of certain Funds in the MFS Family of Funds.
M. COLYER CRUM, 65, Director (1986*)
104 Westcliff Street
Weston, Massachusetts 02193
He is Professor Emeritus of the Harvard Business School; and a Director of
Sun Life Assurance Company of Canada, Sun Life Insurance and Annuity Company of
New York, Cambridge Bancorp, Cambridge Trust, Merrill Lynch Ready Assets Trust,
Merrill Lynch Basic Value Fund, Inc., Merrill Lynch Special Value Fund, Inc.,
Merrill Lynch Capital Fund, Inc., Merrill Lynch U.S.A. Government Reserves,
Merrill Lynch Global Resources Trust, Merrill Lynch U.S. Treasury Money Fund,
MuniVest California Insured Fund, Inc., MuniVest Florida Fund, Inc., MuniVest
Michigan Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniYield Florida
Insured Fund, MuniYield Michigan Insured Fund, Inc., MuniYield New Jersey
Insured Fund, Inc., MuniYield Pennsylvania Fund, and Phaeton International/N.V.
Prior to July, 1996, he was a Professor at the Harvard Business School.
S. CAESAR RABOY, 61, Senior Vice President and Deputy General Manager and
Director (1996*)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02181
He is Senior Vice President and Deputy General Manager for the United States
of Sun Life Assurance Company of Canada; Senior Vice President and a Director of
Sun Life Insurance and Annuity Company of New York; Vice President and a
Director of Sun Life Financial Services Limited; and a Director of Sun Life of
Canada (U.S.) Distributors, Inc. and Clarendon Insurance Agency, Inc.
JAMES M.A. ANDERSON, 48, Vice President, Investments (1998)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02181
He is Vice President, Investments, of Sun Life Assurance Company of Canada
and Sun Life Insurance and Annuity Company of New York; President and a Director
of Sun Capital Advisers, Inc.; Vice President and a Director of Sun Life of
Canada (U.S.) Holdings, Inc., Sun Life of Canada (U.S.) Financial Services
Holdings, Inc., and Sun Canada Financial Co.; Vice President, Investments, and a
Director of Sun Life of Canada (U.S.) Distributors, Inc; and a Director of
Massachusetts Casualty Insurance Company, New London Trust, F.S.B., and Sun
Benefit Services Company, Inc.
ROBERT A. BONNER, 53, Vice President, Individual Insurance (1986)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02181
He is Vice President, Individual Insurance for the United States of Sun Life
Assurance Company of Canada.
- ----------
* Year Elected Director
50
<PAGE>
C. JAMES PRIEUR, 47, Senior Vice President, General Manager and Director (1998*)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02181
He is Senior Vice President and General Manager for the United States of Sun
Life Assurance Company of Canada; Senior Vice President and a Director of Sun
Life Insurance and Annuity Company of New York; Chairman and a Director of Sun
Life of Canada (U.S.) Distributors, Inc. and Sun Capital Advisers, Inc.;
President and a Director of Sun Life of Canada (U.S.) Holdings, Inc., Sun Life
Assurance Company of Canada -- U.S. Operations Holdings, Inc., Sun Life of
Canada (U.S.) Financial Services Holdings, Inc., Sun Canada Financial Co., Sun
Life of Canada (U.S.) SPE 97-1, Inc., and Sun Benefit Services Company; and a
Director of Clarendon Insurance Agency, Inc. and Massachusetts Casualty
Insurance Company.
L. BROCK THOMSON, 56, Vice President and Treasurer (1974)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02181
He is Vice President, Portfolio Management for the United States of Sun Life
Assurance Company of Canada; Vice President and Treasurer of Sun Life of Canada
(U.S.) Distributors, Inc., Sun Benefit Services Company, Inc., Sun Life
Insurance and Annuity Company of New York, and Clarendon Insurance Agency, Inc.;
and Assistant Treasurer of Massachusetts Casualty Insurance Company.
ROBERT P. VROLYK, 44, Vice President and Actuary (1986)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02181
He is Vice President, Finance of Sun Life Assurance Company of Canada; Vice
President, Controller and Actuary of Sun Life Insurance and Annuity Company of
New York; Vice President and a Director of Sun Life of Canada (U.S.) Holdings,
Inc., Sun Canada Financial Co., Sun Life of Canada (U.S.) Distributors, Inc.,
Sun Life of Canada (U.S.) Financial Services Holdings, Inc., and Sun Life
Assurance Company of Canada -- U.S. Operations Holdings, Inc.; Vice President,
Treasurer and a Director of Sun Capital Advisers, Inc.; Treasurer and a Director
of Sun Life of Canada (U.S.) SPE 97-1, Inc.; and a Director of Clarendon
Insurance Agency, Inc. and Sun Benefit Services Company, Inc.
MARGARET SEARS MEAD, 47, Assistant Vice President and Secretary (1996)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02181
She is Assistant Vice President and Counsel for the United States of Sun
Life Assurance Company of Canada; Assistant Vice President and Secretary of Sun
Life Insurance and Annuity Company of New York; Secretary of Sun Life of Canada
(U.S.) Holdings, Inc., Sun Life of Canada (U.S.) Distributors, Inc., Sun Life of
Canada (U.S.) Financial Services Holdings, Inc., Sun Life Assurance Company of
Canada -- U.S. Operations Holdings, Inc., Sun Life of Canada (U.S.) SPE 97-1,
Inc., Sun Canada Financial Co., Sun Capital Advisers, Inc., and Sun Benefit
Services Company, Inc.; and Assistant Secretary of Clarendon Insurance Agency,
Inc.
The directors, officers and employees of the Company are covered under a
commercial blanket bond and a liability policy. The directors, officers and
employees of Massachusetts Financial Services Company and Clarendon Insurance
Agency, Inc. are covered under a fidelity bond and errors and omissions policy.
- ---------
* Year Elected Director
51
<PAGE>
EXECUTIVE COMPENSATION
All of the executive officers of the Company also serve as officers of Sun
Life (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 (Canada) or its
affiliates receive no compensation in addition to their compensation as officers
of Sun Life (Canada) or its affiliates. Messrs. Bailey, Crum and MacNaughton
receive compensation in the amount of $8,000 per year, plus $1,000 for each
meeting attended, plus expenses.
No shares of the Company are owned by any executive officer or director. The
Company is a wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings,
Inc., One Sun Life Executive Park, Wellesley Hills, Massachusetts 02181, which
is in turn a wholly-owned subsidiary of Sun Life Assurance Company of
Canada-U.S. Operations Holdings, Inc., a wholly-owned subsidiary of Sun Life
(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 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.
52
<PAGE>
LEGAL PROCEEDINGS
There are no pending legal proceedings affecting the Variable Account. The
Company and its subsidiaries are engaged in various kinds of routine litigation
which, in management's judgment, is not of material importance to their
respective total assets or material with respect to the Variable Account.
ACCOUNTANTS
The financial statements of the Variable Account for the year ended December
31, 1997 and the statutory financial statements of the Company for the years
ended December 31, 1997, 1996 and 1995 included in this Prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports appearing herein, and are included in reliance upon the reports of such
firm given upon their authority as experts in accounting and auditing.
REGISTRATION STATEMENTS
Registration statements have been filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act of 1933 as amended, with
respect to the Contracts offered by this Prospectus. This Prospectus does not
contain all the information set forth in the registration statements and the
exhibits filed as part of the registration statements, to all of which reference
is hereby made for further information concerning the Variable Account, the
Fixed Account, the Company, the Series Fund, 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. The financial statements of the Variable
Account reflect units outstanding and expenses incurred under the Contracts and
other contracts participating in the Variable Account which impose certain
contract charges that are different from those imposed under the Contracts.
-------------------
53
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
STATEMENT OF CONDITION -- December 31, 1997
<TABLE>
<CAPTION>
Assets:
Investments in MFS/Sun Life Series Trust: Shares Cost Value
----------- -------------- --------------
<S> <C> <C> <C>
Capital Appreciation Series ("CAS").............................................. 28,327,640 $ 971,058,013 $1,137,027,008
Conservative Growth Series ("CGS")............................................... 32,185,770 781,636,519 1,067,020,252
Emerging Growth Series ("EGS")................................................... 24,512,514 371,308,167 441,300,870
MFS/Foreign & Colonial Emerging Markets Equity Series ("FCE").................... 2,158,089 25,489,668 23,816,248
International Growth Series ("FCI").............................................. 2,416,539 23,732,818 23,314,806
International Growth and Income Series ("FCG")................................... 4,416,730 46,918,882 49,344,675
Government Securities Series ("GSS")............................................. 25,395,141 319,875,125 331,168,206
High Yield Series ("HYS")........................................................ 24,483,510 225,092,980 237,752,900
Managed Sectors Series ("MSS")................................................... 10,730,225 272,360,416 312,886,223
Money Market Series ("MMS")...................................................... 294,418,620 294,418,620 294,418,620
Research Series ("RES").......................................................... 33,411,001 537,910,799 649,201,574
Research Growth & Income Series ("RGS").......................................... 535,127 5,634,111 5,897,527
Total Return Series ("TRS")...................................................... 74,122,506 1,282,241,828 1,580,088,581
Utilities Series ("UTS")......................................................... 7,154,185 89,007,969 117,388,621
Value Series ("VAL")............................................................. 6,249,006 75,222,506 87,073,588
World Asset Allocation Series ("WAA")............................................ 8,282,062 110,929,238 120,415,491
World Governments Series ("WGS")................................................. 9,215,733 104,555,220 98,853,956
World Growth Series ("WGR")...................................................... 16,149,857 205,219,774 237,130,808
World Total Return Series ("WTR")................................................ 4,740,158 61,458,713 69,682,180
-------------- --------------
$5,804,071,366 $6,883,782,134
Liability:
Payable to Sponsor.............................................................................................. 379,086
--------------
Net Assets................................................................................................ $6,883,403,048
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
Applicable to Owners of
Deferred Variable Annuity Contracts Reserve for
------------------------------------- Variable
NET ASSETS APPLICABLE TO CONTRACT OWNERS: Units Unit Value Value Annuities Total
---------- ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
MFS Regatta Contracts:
CAS -- Level 1......................... 2,993,020 $29.9999 $ 89,794,911 $ 261,144 $ 90,056,055
CAS -- Level 2......................... 5,390,680 12.0916 65,070,131 150,610 65,220,741
GSS -- Level 1......................... 1,462,222 16.6923 24,418,411 18,136 24,436,547
GSS -- Level 2......................... 1,514,633 10.7020 16,194,876 64,936 16,259,812
HYS -- Level 1......................... 537,033 22.0555 11,850,184 16,775 11,866,959
HYS -- Level 2......................... 975,126 11.1721 10,896,986 12,433 10,909,419
MSS -- Level 1......................... 941,686 27.2960 25,592,815 159,135 25,751,950
MSS -- Level 2......................... 2,022,757 12.2808 24,919,825 -- 24,919,825
MMS -- Level 1......................... 1,518,722 13.1780 20,192,268 28,250 20,220,518
MMS -- Level 2......................... 1,845,809 10.4025 18,979,267 2,900 18,982,167
TRS -- Level 1......................... 5,756,653 24.1056 138,772,465 468,018 139,240,483
TRS -- Level 2......................... 7,838,741 12.0683 94,536,757 813,685 95,350,442
WGS -- Level 1......................... 700,338 16.4146 11,504,956 60,591 11,565,547
WGS -- Level 2......................... 483,253 9.8243 4,735,735 -- 4,735,735
------------ ----------- ------------
$557,459,587 $ 2,056,613 $559,516,200
------------ ----------- ------------
(continued)
</TABLE>
See notes to financial statements
54
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
STATEMENT OF CONDITION -- continued
<TABLE>
<CAPTION>
Applicable to Owners of Reserve
Deferred Variable Annuity Contracts for
NET ASSETS APPLICABLE TO CONTRACT OWNERS --------------------------------------- Variable
(CONTINUED): Units Unit Value Value Annuities Total
---------- ---------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
MFS Regatta Gold Contracts:
CAS.................................... 35,528,897 $27.4057 $ 973,517,756 $5,128,123 $ 978,645,879
CGS.................................... 40,709,531 25.9656 1,056,959,876 2,935,772 1,059,895,648
EGS.................................... 25,039,986 17.4544 437,038,206 572,103 437,610,309
FCE.................................... 2,159,228 10.8010 23,320,823 31,734 23,352,557
FCI.................................... 2,390,056 9.4566 22,601,714 51,282 22,652,996
FCG.................................... 4,441,911 10.9674 48,715,282 90,715 48,805,997
GSS.................................... 20,508,844 14.0763 288,725,451 670,845 289,396,296
HYS.................................... 11,699,195 18.1622 212,466,548 680,947 213,147,495
MSS.................................... 11,326,719 22.9770 259,980,813 763,493 260,744,306
MMS.................................... 21,463,139 11.8058 253,465,466 756,260 254,221,726
RES.................................... 35,654,917 19.4490 640,927,304 1,856,694 642,783,998
RGS.................................... 533,928 10.9235 5,832,209 -- 5,832,209
TRS.................................... 66,303,467 20.0793 1,331,170,967 2,674,657 1,333,845,624
UTS.................................... 6,101,638 19.0140 116,000,626 325,222 116,325,848
VAL.................................... 6,175,224 13.7450 84,879,388 143,701 85,023,089
WAA.................................... 7,928,833 15.0565 119,370,688 511,208 119,881,896
WGS.................................... 6,127,641 13.3854 82,033,695 365,168 82,398,863
WGR.................................... 15,058,757 15.6398 235,505,032 667,184 236,172,216
WTR.................................... 4,676,853 14.7153 68,817,872 362,558 69,180,430
-------------- ---------- --------------
$6,261,329,716 $18,587,666 $6,279,917,382
-------------- ---------- --------------
MFS Regatta Classic Contracts:
CAS.................................... 265,497 $11.9926 $ 3,187,739 $ -- $ 3,187,739
CGS.................................... 554,216 12.8247 7,115,038 -- 7,115,038
EGS.................................... 318,028 11.5023 3,662,876 -- 3,662,876
FCE.................................... 40,698 11.3377 462,223 -- 462,223
FCI.................................... 67,892 9.7271 661,393 -- 661,393
FCG.................................... 51,038 10.5716 540,221 -- 540,221
GSS.................................... 113,243 10.6850 1,211,587 -- 1,211,587
HYS.................................... 155,306 11.2665 1,751,539 -- 1,751,539
MSS.................................... 118,243 11.9091 1,409,445 -- 1,409,445
MMS.................................... 77,105 10.3869 803,078 -- 803,078
RES.................................... 553,996 11.7136 6,497,188 -- 6,497,188
RGS.................................... 6,085 10.7281 65,318 -- 65,318
TRS.................................... 951,205 11.9123 11,347,435 -- 11,347,435
UTS.................................... 77,009 12.7649 980,227 -- 980,227
VAL.................................... 160,778 12.7132 2,046,243 -- 2,046,243
WAA.................................... 50,531 10.9812 555,886 -- 555,886
WGS.................................... 19,394 10.0247 194,687 -- 194,687
WGR.................................... 85,526 11.3725 973,485 -- 973,485
WTR.................................... 45,122 11.1546 503,858 -- 503,858
-------------- ---------- --------------
$ 43,969,466 $ -- $ 43,969,466
-------------- ---------- --------------
Net Assets................................................. $6,862,758,769 $20,644,279 $6,883,403,048
-------------- ---------- --------------
-------------- ---------- --------------
</TABLE>
See notes to financial statements
55
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
STATEMENTS OF OPERATIONS -- Year Ended December 31, 1997
<TABLE>
<CAPTION>
CAS CGS EGS FCE FCI
Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account
------------- ------------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
INCOME AND EXPENSES:
Dividend income and capital gain
distributions received.................... $ 88,676,113 $ 35,535,241 $ 1,301,804 $ 7,806 $ 24,244
Mortality and expense risk charges......... 12,773,766 9,692,978 4,247,913 212,763 194,393
Distribution expense charges............... 187,950 -- -- -- --
Administrative expense charges............. 1,344,902 1,163,157 509,750 25,532 23,327
------------- ------------- ------------ ------------ -----------
Net investment income (expense)........ $ 74,369,495 $ 24,679,106 $ (3,455,859) $ (230,489) $ (193,476)
------------- ------------- ------------ ------------ -----------
REALIZED AND UNREALIZED GAINS (LOSSES):
Realized gains (losses) on investment
transactions:
Proceeds from sales...................... $ 362,027,612 $ 21,055,175 $ 38,221,566 $ 8,602,108 $4,272,586
Cost of investments sold................. 275,358,831 11,642,272 29,914,344 7,627,967 4,428,832
------------- ------------- ------------ ------------ -----------
Net realized gains (losses)............ $ 86,668,781 $ 9,412,903 $ 8,307,222 $ 974,141 $ (156,246)
------------- ------------- ------------ ------------ -----------
Net unrealized appreciation (depreciation)
on investments:
End of year.............................. $ 165,968,995 $ 285,383,733 $ 69,992,703 $(1,673,420) $ (418,012)
Beginning of year........................ 133,626,673 122,871,165 16,355,150 47,389 (64,127)
------------- ------------- ------------ ------------ -----------
Change in unrealized appreciation
(depreciation)........................ $ 32,342,322 $ 162,512,568 $ 53,637,553 $(1,720,809) $ (353,885)
------------- ------------- ------------ ------------ -----------
Realized and unrealized gains............ $ 119,011,103 $ 171,925,471 $ 61,944,775 $ (746,668) $ (510,131)
------------- ------------- ------------ ------------ -----------
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS................................ $ 193,380,598 $ 196,604,577 $ 58,488,916 $ (977,157) $ (703,607)
------------- ------------- ------------ ------------ -----------
------------- ------------- ------------ ------------ -----------
<CAPTION>
FCG GSS HYS
Sub-Account Sub-Account Sub-Account
------------ ------------ -------------
<S> <C> <C> <C>
INCOME AND EXPENSES:
Dividend income and capital gain
distributions received.................... $ 506,953 $ 20,574,577 $ 12,574,875
Mortality and expense risk charges......... 530,474 3,854,558 2,392,767
Distribution expense charges............... -- 54,703 26,937
Administrative expense charges............. 63,657 407,844 260,195
------------ ------------ -------------
Net investment income (expense)........ $ (87,178) $ 16,257,472 $ 9,894,976
------------ ------------ -------------
REALIZED AND UNREALIZED GAINS (LOSSES):
Realized gains (losses) on investment
transactions:
Proceeds from sales...................... $ 10,589,095 $ 83,661,016 $ 118,787,839
Cost of investments sold................. 10,013,247 83,981,234 112,595,872
------------ ------------ -------------
Net realized gains (losses)............ $ 575,848 $ (320,218) $ 6,191,967
------------ ------------ -------------
Net unrealized appreciation (depreciation)
on investments:
End of year.............................. $ 2,425,793 $ 11,293,081 $ 12,659,920
Beginning of year........................ 801,687 5,399,156 7,187,592
------------ ------------ -------------
Change in unrealized appreciation
(depreciation)........................ $ 1,624,106 $ 5,893,925 $ 5,472,328
------------ ------------ -------------
Realized and unrealized gains............ $ 2,199,954 $ 5,573,707 $ 11,664,295
------------ ------------ -------------
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS................................ $ 2,112,776 $ 21,831,179 $ 21,559,271
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
See notes to financial statements
56
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
STATEMENTS OF OPERATIONS -- continued
<TABLE>
<CAPTION>
MSS MMS RES RGS TRS
Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account
------------ ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
INCOME AND EXPENSES:
Dividend income and capital gain
distributions received.................... $ 29,226,909 $ 16,987,640 $ 12,704,276 $ -- $ 136,291,376
Mortality and expense risk charges......... 3,465,231 4,240,349 6,128,811 21,762 17,430,043
Distribution expense charges............... 55,830 50,924 -- -- 295,032
Administrative expense charges............. 359,998 457,918 735,457 20 1,796,573
------------ ------------- ------------- ----------- -------------
Net investment income (expense)........ $ 25,345,850 $ 12,238,449 $ 5,840,008 $ (21,782 ) $ 116,769,728
------------ ------------- ------------- ----------- -------------
REALIZED AND UNREALIZED GAINS:
Realized gains on investment transactions:
Proceeds from sales...................... $ 87,092,003 $ 838,532,223 $ 12,619,108 $ 323,191 $ 244,278,623
Cost of investments sold................. 67,538,913 838,532,223 7,561,117 314,450 177,638,566
------------ ------------- ------------- ----------- -------------
Net realized gains..................... $ 19,553,090 $ -- $ 5,057,991 $ 8,741 $ 66,640,057
------------ ------------- ------------- ----------- -------------
Net unrealized appreciation on investments:
End of year.............................. $ 40,525,807 $ -- $ 111,290,775 $ 263,416 $ 297,846,753
Beginning of year........................ 28,912,535 -- 42,800,056 -- 223,195,771
------------ ------------- ------------- ----------- -------------
Change in unrealized appreciation...... $ 11,613,272 $ -- $ 68,490,719 $ 263,416 $ 74,650,982
------------ ------------- ------------- ----------- -------------
Realized and unrealized gains............ $ 31,166,362 $ -- $ 73,548,710 $ 272,157 $ 141,291,039
------------ ------------- ------------- ----------- -------------
INCREASE IN NET ASSETS FROM OPERATIONS..... $ 56,512,212 $ 12,238,449 $ 79,388,718 $ 250,375 $ 258,060,767
------------ ------------- ------------- ----------- -------------
------------ ------------- ------------- ----------- -------------
<CAPTION>
UTS VAL WAA
Sub-Account Sub-Account Sub-Account
------------ ------------ ------------
<S> <C> <C> <C>
INCOME AND EXPENSES:
Dividend income and capital gain
distributions received.................... $ 8,922,718 $ 287,830 $ 4,694,705
Mortality and expense risk charges......... 1,065,516 592,023 1,285,189
Distribution expense charges............... -- -- --
Administrative expense charges............. 127,862 71,043 154,223
------------ ------------ ------------
Net investment income (expense)........ $ 7,729,340 $ (375,236) $ 3,255,293
------------ ------------ ------------
REALIZED AND UNREALIZED GAINS:
Realized gains on investment transactions:
Proceeds from sales...................... $ 6,071,320 $ 1,955,133 $ 11,129,872
Cost of investments sold................. 3,987,579 1,617,454 8,517,555
------------ ------------ ------------
Net realized gains..................... $ 2,083,741 $ 337,679 $ 2,612,317
------------ ------------ ------------
Net unrealized appreciation on investments:
End of year.............................. $ 28,380,652 $ 11,851,082 $ 9,486,253
Beginning of year........................ 13,599,433 744,641 7,002,678
------------ ------------ ------------
Change in unrealized appreciation...... $ 14,781,219 $ 11,106,441 $ 2,483,575
------------ ------------ ------------
Realized and unrealized gains............ $ 16,864,960 $ 11,444,120 $ 5,095,892
------------ ------------ ------------
INCREASE IN NET ASSETS FROM OPERATIONS..... $ 24,594,300 $ 11,068,884 $ 8,351,185
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See notes to financial statements
57
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
STATEMENTS OF OPERATIONS -- continued
<TABLE>
<CAPTION>
WGS WGR WTR
Sub-Account Sub-Account Sub-Account Total
------------ ------------ ----------- ---------------
<S> <C> <C> <C> <C>
INCOME AND EXPENSES:
Dividend income and capital gain
distributions received.................... $ 4,501,932 $ 4,834,251 $1,265,181 $ 378,918,431
Mortality and expense risk charges......... 1,360,007 2,776,755 666,680 72,931,978
Distribution expense charges............... 26,253 -- -- 697,629
Administrative expense charges............. 136,948 333,211 80,002 8,051,619
------------ ------------ ----------- ---------------
Net investment income.................. $ 2,978,724 $ 1,724,285 $ 518,499 $ 297,237,205
------------ ------------ ----------- ---------------
REALIZED AND UNREALIZED GAINS (LOSSES):
Realized gains (losses) on investment
transactions:
Proceeds from sales...................... $ 40,039,812 $ 44,132,898 $6,760,428 $ 1,940,151,608
Cost of investments sold................. 45,636,831 35,561,253 5,241,601 1,727,710,141
------------ ------------ ----------- ---------------
Net realized gains (losses)............ $ (5,597,019) $ 8,571,645 $1,518,827 $ 212,441,467
------------ ------------ ----------- ---------------
Net unrealized appreciation (depreciation)
on investments:
End of year.............................. $ (5,701,264) $ 31,911,034 $8,223,467 $ 1,079,710,768
Beginning of year........................ (5,431,957) 15,241,453 3,870,720 616,160,015
------------ ------------ ----------- ---------------
Change in unrealized appreciation
(depreciation)........................ $ (269,307) $ 16,669,581 $4,352,747 $ 463,550,753
------------ ------------ ----------- ---------------
Realized and unrealized gains (losses)... $ (5,866,326) $ 25,241,226 $5,871,574 $ 675,992,220
------------ ------------ ----------- ---------------
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS................................ $ (2,887,602) $ 26,965,511 $6,390,073 $ 973,229,425
------------ ------------ ----------- ---------------
------------ ------------ ----------- ---------------
</TABLE>
See notes to financial statements
58
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
CAS CGS
Sub-Account Sub-Account
------------------------------- -------------------------------
Year Ended Year Ended
December 31, December 31,
------------------------------- -------------------------------
1997 1996 1997 1996
--------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (expense)............ $ 74,369,495 $ 52,941,263 $ 24,679,106 $ 8,788,822
Net realized gains......................... 86,668,781 62,169,749 9,412,903 4,512,770
Net unrealized gains....................... 32,342,322 27,056,227 162,512,568 69,960,621
--------------- ------------- --------------- -------------
Increase in net assets from
operations............................ $ 193,380,598 $ 142,167,239 $ 196,604,577 $ 83,262,213
--------------- ------------- --------------- -------------
CONTRACT OWNER TRANSACTIONS:
Accumulation Activity:
Purchase payments received............... $ 191,209,464 $ 148,876,483 $ 211,472,643 $ 153,852,554
Net transfers between Sub-Accounts and
Fixed Account........................... 28,967,751 (5,608,366) 176,163,947 36,048,717
Withdrawals, surrenders, annuitizations
and contract charges.................... (177,738,789) (47,835,347) (42,133,444) (19,835,752)
--------------- ------------- --------------- -------------
Net accumulation activity.............. $ 42,438,426 $ 95,432,770 $ 345,503,146 $ 170,065,519
--------------- ------------- --------------- -------------
Annuitization Activity:
Annuitizations........................... $ 1,367,156 $ 1,193,495 $ 947,612 $ 437,102
Annuity payments and contract charges.... (736,487) (347,090) (271,967) (129,806)
Net transfers between Sub-Accounts and
Fixed Account........................... 40,842 119,425 354,557 116,806
Adjustments to annuity reserves.......... (64,938) (50,462) 52,749 (87,515)
--------------- ------------- --------------- -------------
Net annuitization activity............. $ 606,573 $ 915,368 $ 1,082,951 $ 336,587
--------------- ------------- --------------- -------------
Increase in net assets from contract owner
transactions.............................. $ 43,044,999 $ 96,348,138 $ 346,586,097 $ 170,402,106
--------------- ------------- --------------- -------------
Increase in net assets................... $ 236,425,597 $ 238,515,377 $ 543,190,674 $ 253,664,319
NET ASSETS:
Beginning of year.......................... 900,684,817 662,169,440 523,820,012 270,155,693
--------------- ------------- --------------- -------------
End of year................................ $ 1,137,110,414 $ 900,684,817 $ 1,067,010,686 $ 523,820,012
--------------- ------------- --------------- -------------
--------------- ------------- --------------- -------------
<CAPTION>
EGS
Sub-Account
-----------------------------
Year Ended
December 31,
-----------------------------
1997 1996
------------- -------------
<S> <C> <C>
OPERATIONS:
Net investment income (expense)............ $ (3,455,859) $ (1,968,496)
Net realized gains......................... 8,307,222 4,277,168
Net unrealized gains....................... 53,637,553 12,802,194
------------- -------------
Increase in net assets from
operations............................ $ 58,488,916 $ 15,110,866
------------- -------------
CONTRACT OWNER TRANSACTIONS:
Accumulation Activity:
Purchase payments received............... $ 95,095,489 $ 122,215,402
Net transfers between Sub-Accounts and
Fixed Account........................... 57,336,795 50,369,380
Withdrawals, surrenders, annuitizations
and contract charges.................... (16,909,470) (8,085,001)
------------- -------------
Net accumulation activity.............. $ 135,522,814 $ 164,499,781
------------- -------------
Annuitization Activity:
Annuitizations........................... $ 158,875 $ 286,409
Annuity payments and contract charges.... (58,246) (13,624)
Net transfers between Sub-Accounts and
Fixed Account........................... 21,015 44,347
Adjustments to annuity reserves.......... 7,823 21,044
------------- -------------
Net annuitization activity............. $ 129,467 $ 338,176
------------- -------------
Increase in net assets from contract owner
transactions.............................. $ 135,652,281 $ 164,837,957
------------- -------------
Increase in net assets................... $ 194,141,197 $ 179,948,823
NET ASSETS:
Beginning of year.......................... 247,131,988 67,183,165
------------- -------------
End of year................................ $ 441,273,185 $ 247,131,988
------------- -------------
------------- -------------
</TABLE>
See notes to financial statements
59
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
STATEMENTS OF CHANGES IN NET ASSETS -- continued
<TABLE>
<CAPTION>
FCE FCI
Sub-Account Sub-Account
-------------------------- --------------------------
Year Ended Year Ended
December 31, December 31,
-------------------------- --------------------------
1997 1996* 1997 1996
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment expense..................... $ (230,489) $ (13,026) $ (193,476) $ (21,609)
Net realized gains (losses)................ 974,141 (5,712) (156,246) (1,678)
Net unrealized gains (losses).............. (1,720,809) 47,389 (353,885) (64,127)
------------ ----------- ------------ -----------
Increase (decrease) in net assets from
operations............................ $ (977,157) $ 28,651 $ (703,607) $ (87,414)
------------ ----------- ------------ -----------
CONTRACT OWNER TRANSACTIONS:
Accumulation Activity:
Purchase payments received............... $ 9,918,873 $ 1,048,658 $ 10,356,882 $ 2,460,672
Net transfers between Sub-Accounts and
Fixed Account........................... 12,522,767 2,213,104 8,764,120 3,215,694
Withdrawals, surrenders, annuitizations
and contract charges.................... (953,005) (18,977) (683,649) (60,665)
------------ ----------- ------------ -----------
Net accumulation activity.............. $ 21,488,635 $ 3,242,785 $ 18,437,353 $ 5,615,701
------------ ----------- ------------ -----------
Annuitization Activity:
Annuitizations........................... $ 39,195 $ -- $ 55,177 $ --
Annuity payments and contract charges.... (5,864) -- (2,405) --
Net transfers between Sub-Accounts and
Fixed Account........................... -- -- -- --
Adjustments to annuity reserves.......... (1,465) -- (416) --
------------ ----------- ------------ -----------
Net annuitization activity............. $ 31,866 $ -- $ 52,356 $ --
------------ ----------- ------------ -----------
Increase in net assets from contract owner
transactions.............................. $ 21,520,501 $ 3,242,785 $ 18,489,709 $ 5,615,701
------------ ----------- ------------ -----------
Increase in net assets................... $ 20,543,344 $ 3,271,436 $ 17,786,102 $ 5,528,287
------------ ----------- ------------ -----------
NET ASSETS:
Beginning of year.......................... 3,271,436 -- 5,528,287 --
------------ ----------- ------------ -----------
End of year................................ $ 23,814,780 $ 3,271,436 $ 23,314,389 $ 5,528,287
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
<CAPTION>
FCG
Sub-Account
---------------------------
Year Ended
December 31,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
OPERATIONS:
Net investment expense..................... $ (87,178) $ (328,431)
Net realized gains (losses)................ 575,848 251,398
Net unrealized gains (losses).............. 1,624,106 690,250
------------ ------------
Increase (decrease) in net assets from
operations............................ $ 2,112,776 $ 613,217
------------ ------------
CONTRACT OWNER TRANSACTIONS:
Accumulation Activity:
Purchase payments received............... $ 8,465,356 $ 19,437,825
Net transfers between Sub-Accounts and
Fixed Account........................... 5,802,185 8,809,224
Withdrawals, surrenders, annuitizations
and contract charges.................... (2,204,864) (951,163)
------------ ------------
Net accumulation activity.............. $ 12,062,677 $ 27,295,886
------------ ------------
Annuitization Activity:
Annuitizations........................... $ 45,941 $ 43,066
Annuity payments and contract charges.... (6,247) (1,385)
Net transfers between Sub-Accounts and
Fixed Account........................... -- --
Adjustments to annuity reserves.......... 62 1,480
------------ ------------
Net annuitization activity............. $ 39,756 $ 43,161
------------ ------------
Increase in net assets from contract owner
transactions.............................. $ 12,102,433 $ 27,339,047
------------ ------------
Increase in net assets................... $ 14,215,209 $ 27,952,264
------------ ------------
NET ASSETS:
Beginning of year.......................... 35,131,009 7,178,745
------------ ------------
End of year................................ $ 49,346,218 $ 35,131,009
------------ ------------
------------ ------------
</TABLE>
*For the period July 1, 1996 (commencement of operations of the Sub-Account) to
December 31, 1996.
See notes to financial statements
60
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
STATEMENTS OF CHANGES IN NET ASSETS -- continued
<TABLE>
<CAPTION>
GSS HYS
Sub-Account Sub-Account
----------------------------- -----------------------------
Year Ended Year Ended
December 31, December 31,
----------------------------- -----------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income...................... $ 16,257,472 $ 13,823,215 $ 9,894,976 $ 7,621,505
Net realized gains (losses)................ $ (320,218) (2,504,323) 6,191,967 5,703,568
Net unrealized gains (losses).............. $ 5,893,925 (10,551,635) 5,472,328 840,341
------------- ------------- ------------- -------------
Increase in net assets from
operations............................ $ 21,831,179 $ 767,257 $ 21,559,271 $ 14,165,414
------------- ------------- ------------- -------------
CONTRACT OWNER TRANSACTIONS:
Accumulation Activity:
Purchase payments received............... $ 45,924,248 $ 54,669,405 $ 56,445,474 $ 33,898,269
Net transfers between Sub-Accounts and
Fixed Account........................... 9,720,766 (14,448,899) 35,346,824 4,326,619
Withdrawals, surrenders, annuitizations
and contract charges.................... (58,612,247) (21,010,408) (37,189,764) (11,758,613)
------------- ------------- ------------- -------------
Net accumulation activity.............. $ (2,967,233) $ 19,210,098 $ 54,602,534 $ 26,466,275
------------- ------------- ------------- -------------
Annuitization Activity:
Annuitizations........................... $ 142,666 $ 268,329 $ 403,156 $ 137,217
Annuity payments and contract charges.... (181,979) (240,819) (164,426) (79,990)
Net transfers between Sub-Accounts and
Fixed Account........................... (55,523) (309,558) -- 14,805
Adjustments to annuity reserves.......... 111,855 (40,665) 2,369 (42,595)
------------- ------------- ------------- -------------
Net annuitization activity............... $ 17,019 $ (322,713) $ 241,099 $ 29,437
------------- ------------- ------------- -------------
Increase (decrease) in net assets from
contract owner transactions............... $ (2,950,214) $ 18,887,385 $ 54,843,633 $ 26,495,712
------------- ------------- ------------- -------------
Increase in net assets................... $ 18,880,965 $ 19,654,642 $ 76,402,904 $ 40,661,126
NET ASSETS:
Beginning of year.......................... 312,423,277 292,768,635 161,272,508 120,611,382
------------- ------------- ------------- -------------
End of year................................ $ 331,304,242 $ 312,423,277 $ 237,675,412 $ 161,272,508
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
<CAPTION>
MSS
Sub-Account
-----------------------------
Year Ended
December 31,
-----------------------------
1997 1996
------------- -------------
<S> <C> <C>
OPERATIONS:
Net investment income...................... $ 25,345,850 $ 24,096,088
Net realized gains (losses)................ 19,553,090 2,898,908
Net unrealized gains (losses).............. 11,613,272 4,637,529
------------- -------------
Increase in net assets from
operations............................ $ 56,512,212 $ 31,632,525
------------- -------------
CONTRACT OWNER TRANSACTIONS:
Accumulation Activity:
Purchase payments received............... $ 56,177,555 $ 40,598,625
Net transfers between Sub-Accounts and
Fixed Account........................... 12,554,894 7,831,933
Withdrawals, surrenders, annuitizations
and contract charges.................... (57,321,938) (13,315,281)
------------- -------------
Net accumulation activity.............. $ 11,410,511 $ 35,115,277
------------- -------------
Annuitization Activity:
Annuitizations........................... $ 558,077 $ 82,609
Annuity payments and contract charges.... (166,248) (76,110)
Net transfers between Sub-Accounts and
Fixed Account........................... -- 41,877
Adjustments to annuity reserves.......... (43,539) (12,576)
------------- -------------
Net annuitization activity............... $ 348,290 $ 35,800
------------- -------------
Increase (decrease) in net assets from
contract owner transactions............... $ 11,758,801 $ 35,151,077
------------- -------------
Increase in net assets................... $ 68,271,013 $ 66,783,602
NET ASSETS:
Beginning of year.......................... 244,554,513 177,770,911
------------- -------------
End of year................................ $ 312,825,526 $ 244,554,513
------------- -------------
------------- -------------
</TABLE>
See notes to financial statements
61
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
STATEMENTS OF CHANGES IN NET ASSETS -- continued
<TABLE>
<CAPTION>
MMS RES RGS
Sub-Account Sub-Account Sub-Account
------------------------------ ----------------------------- ------------------
Year Ended Year Ended Year Ended
December 31, December 31, December 31, 1997*
------------------------------ ----------------------------- ------------------
1997 1996 1997 1996
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income (expense)............ $ 12,238,449 $ 9,789,043 $ 5,840,008 $ (428,000) $ (21,782)
Net realized gains......................... -- -- 5,057,991 1,850,763 8,741
Net unrealized gains....................... -- -- 68,490,719 34,176,685 263,416
-------------- ------------- ------------- ------------- ----------
Increase in net assets from
operations............................ $ 12,238,449 $ 9,789,043 $ 79,388,718 $ 35,599,448 $ 250,375
-------------- ------------- ------------- ------------- ----------
CONTRACT OWNER TRANSACTIONS:
Accumulation Activity:
Purchase payments received............... $ 151,523,026 $ 208,990,259 $ 153,316,348 $ 156,881,700 $ 2,950,897
Net transfers between Sub-Accounts and
Fixed Account........................... (1,240,893) (43,233,439) 119,233,197 64,021,188 2,726,224
Withdrawals, surrenders, annuitizations
and contract charges.................... (229,658,956) (46,733,186) (24,008,616) (7,956,041) (29,969)
-------------- ------------- ------------- ------------- ----------
Net accumulation activity.............. $ (79,376,823) $ 119,023,634 $ 248,540,929 $ 212,946,847 $ 5,647,152
-------------- ------------- ------------- ------------- ----------
Annuitization Activity:
Annuitizations........................... $ 79,534 $ 1,121,927 $ 415,748 $ 557,791 $ --
Annuity payments and contract charges.... (200,563) (206,726) (139,282) (62,358) --
Net transfers between Sub-Accounts and
Fixed Account........................... (312,207) (190,340) 12,992 118,346 --
Adjustments to annuity reserves.......... (31,750) (23,831) (40,528) 38,061 --
-------------- ------------- ------------- ------------- ----------
Net annuitization activity............. $ (464,986) $ 701,030 $ 248,930 $ 651,840 $ --
-------------- ------------- ------------- ------------- ----------
Increase (decrease) in net assets from
contract owner transactions............... $ (79,841,809) $ 119,724,664 $ 248,789,859 $ 213,598,687 $ 5,647,152
-------------- ------------- ------------- ------------- ----------
Increase (decrease) in net assets........ $ (67,603,360) $ 129,513,707 $ 328,178,577 $ 249,198,135 $ 5,897,527
NET ASSETS:
Beginning of year.......................... 361,830,849 232,317,142 321,102,609 71,904,474 --
-------------- ------------- ------------- ------------- ----------
End of year................................ $ 294,227,489 $ 361,830,849 $ 649,281,186 $ 321,102,609 $ 5,897,527
-------------- ------------- ------------- ------------- ----------
-------------- ------------- ------------- ------------- ----------
</TABLE>
*For the period June 1, 1997 (commencement of operations of the Sub-Account) to
December 31, 1997.
See notes to financial statements
62
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
STATEMENTS OF CHANGES IN NET ASSETS -- continued
<TABLE>
<CAPTION>
TRS UTS
Sub-Account Sub-Account
--------------------------------- ----------------------------
Year Ended Year Ended
December 31, December 31,
--------------------------------- ----------------------------
1997 1996 1997 1996
--------------- --------------- ------------- ------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (expense)............ $ 116,769,728 $ 64,654,089 $ 7,729,340 $ 1,926,985
Net realized gains......................... 66,640,057 20,511,061 2,083,741 1,617,706
Net unrealized gains....................... 74,650,982 50,461,971 14,781,219 6,572,565
--------------- --------------- ------------- ------------
Increase in net assets from
operations............................ $ 258,060,767 $ 135,627,121 $ 24,594,300 $ 10,117,256
--------------- --------------- ------------- ------------
CONTRACT OWNER TRANSACTIONS:
Accumulation Activity:
Purchase payments received............... $ 260,379,742 $ 158,550,497 $ 16,090,619 $ 18,235,404
Net transfers between Sub-Accounts and
Fixed Account........................... 90,568,461 7,794,293 13,552,388 835,305
Withdrawals, surrenders, annuitizations
and contract charges.................... (276,158,725) (79,238,642) (5,005,318) (3,059,763)
--------------- --------------- ------------- ------------
Net accumulation activity.............. $ 74,789,478 $ 87,106,148 $ 24,637,689 $ 16,010,946
--------------- --------------- ------------- ------------
Annuitization Activity:
Annuitizations........................... $ 1,271,371 $ 505,447 $ 165,628 $ 116,582
Annuity payments and contract charges.... (935,550) (762,883) (60,528) (18,434)
Net transfers between Sub-Accounts and
Fixed Account........................... 87,811 56,990 28,886 --
Adjustments to annuity reserves.......... (136,590) (87,530) 2,804 (82,561)
--------------- --------------- ------------- ------------
Net annuitization activity............. $ 287,042 $ (287,976) $ 136,790 $ 15,587
--------------- --------------- ------------- ------------
Increase in net assets from contract owner
transactions.............................. $ 75,076,520 $ 86,818,172 $ 24,774,479 $ 16,026,533
--------------- --------------- ------------- ------------
Increase in net assets................... $ 333,137,287 $ 222,445,293 $ 49,368,779 $ 26,143,789
NET ASSETS:
Beginning of year.......................... 1,246,646,697 1,024,201,404 67,937,296 41,793,507
--------------- --------------- ------------- ------------
End of year................................ $ 1,579,783,984 $ 1,246,646,697 $ 117,306,075 $ 67,937,296
--------------- --------------- ------------- ------------
--------------- --------------- ------------- ------------
<CAPTION>
VAL
Sub-Account
---------------------------
Year Ended
December 31,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
OPERATIONS:
Net investment income (expense)............ $ (375,236) $ (53,621)
Net realized gains......................... 337,679 23,298
Net unrealized gains....................... 11,106,441 744,641
------------ ------------
Increase in net assets from
operations............................ $ 11,068,884 $ 714,318
------------ ------------
CONTRACT OWNER TRANSACTIONS:
Accumulation Activity:
Purchase payments received............... $ 29,587,412 $ 10,936,155
Net transfers between Sub-Accounts and
Fixed Account........................... 31,786,583 5,122,274
Withdrawals, surrenders, annuitizations
and contract charges.................... (2,199,052) (63,860)
------------ ------------
Net accumulation activity.............. $ 59,174,943 $ 15,994,569
------------ ------------
Annuitization Activity:
Annuitizations........................... $ 136,454 $ --
Annuity payments and contract charges.... (15,580) --
Net transfers between Sub-Accounts and
Fixed Account........................... -- --
Adjustments to annuity reserves.......... (4,256) --
------------ ------------
Net annuitization activity............. $ 116,618 $ --
------------ ------------
Increase in net assets from contract owner
transactions.............................. $ 59,291,561 $ 15,994,569
------------ ------------
Increase in net assets................... $ 70,360,445 $ 16,708,887
NET ASSETS:
Beginning of year.......................... 16,708,887 --
------------ ------------
End of year................................ $ 87,069,332 $ 16,708,887
------------ ------------
------------ ------------
</TABLE>
*For the period June 3, 1996 (commencement of operations of the Sub-Account) to
December 31, 1996.
See notes to financial statements
63
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
STATEMENTS OF CHANGES IN NET ASSETS -- continued
<TABLE>
<CAPTION>
WAA WGS
Sub-Account Sub-Account
---------------------------- -----------------------------
Year Ended Year Ended
December 31, December 31,
---------------------------- -----------------------------
1997 1996 1997 1996
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income...................... $ 3,255,293 $ 595,575 $ 2,978,724 $ 16,535,862
Net realized gains (losses)................ 2,612,317 1,629,596 (5,597,019) (2,712,091)
Net unrealized gains (losses).............. 2,483,575 4,425,108 (269,307) (9,808,667)
------------- ------------ ------------- -------------
Increase (decrease) in net assets from
operations............................ $ 8,351,185 $ 6,650,279 $ (2,887,602) $ 4,015,104
------------- ------------ ------------- -------------
CONTRACT OWNER TRANSACTIONS:
Accumulation Activity:
Purchase payments received............... $ 23,232,543 $ 33,549,719 $ 11,552,959 $ 10,730,732
Net transfers between Sub-Accounts and
Fixed Account........................... 17,783,698 13,363,954 (19,473,409) (13,803,477)
Withdrawals, surrenders, annuitizations
and contract charges.................... (5,742,891) (2,987,226) (17,997,612) (11,401,973)
------------- ------------ ------------- -------------
Net accumulation activity.............. $ 35,273,350 $ 43,926,447 $ (25,918,062) $ (14,474,718)
------------- ------------ ------------- -------------
Annuitization Activity:
Annuitizations........................... $ 167,170 $ 174,043 $ 101,934 $ 55,515
Annuity payments and contract charges.... (51,214) (17,132) (132,080) (171,649)
Net transfers between Sub-Accounts and
Fixed Account........................... 79,307 -- (8,188) (25,947)
Adjustments to annuity reserves.......... 487 16,443 (5,055) (4,679)
------------- ------------ ------------- -------------
Net annuitization activity............. $ 195,750 $ 173,354 $ (43,389) $ (146,760)
------------- ------------ ------------- -------------
Increase (decrease) in net assets from
contract owner transactions............... $ 35,469,100 $ 44,099,801 $ (25,961,451) $ (14,621,478)
------------- ------------ ------------- -------------
Increase (decrease) in net assets........ $ 43,820,285 $ 50,750,080 $ (28,849,053) $ (10,606,374)
NET ASSETS:
Beginning of year.......................... 76,617,497 25,867,417 127,743,885 138,350,259
------------- ------------ ------------- -------------
End of year................................ $ 120,437,782 $ 76,617,497 $ 98,894,832 $ 127,743,885
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
<CAPTION>
WGR
Sub-Account
-----------------------------
Year Ended
December 31,
-----------------------------
1997 1996
------------- -------------
<S> <C> <C>
OPERATIONS:
Net investment income...................... $ 1,724,285 $ 9,576,256
Net realized gains (losses)................ 8,571,645 6,018,165
Net unrealized gains (losses).............. 16,669,581 1,415,056
------------- -------------
Increase (decrease) in net assets from
operations............................ $ 26,965,511 $ 17,009,477
------------- -------------
CONTRACT OWNER TRANSACTIONS:
Accumulation Activity:
Purchase payments received............... $ 26,811,741 $ 40,398,624
Net transfers between Sub-Accounts and
Fixed Account........................... 3,906,046 3,588,236
Withdrawals, surrenders, annuitizations
and contract charges.................... (13,503,627) (9,375,496)
------------- -------------
Net accumulation activity.............. $ 17,214,160 $ 34,611,364
------------- -------------
Annuitization Activity:
Annuitizations........................... $ 112,909 $ 157,641
Annuity payments and contract charges.... (92,720) (71,968)
Net transfers between Sub-Accounts and
Fixed Account........................... (249,492) 13,731
Adjustments to annuity reserves.......... (31,480) 8,938
------------- -------------
Net annuitization activity............. $ (260,783) $ 108,342
------------- -------------
Increase (decrease) in net assets from
contract owner transactions............... $ 16,953,377 $ 34,719,706
------------- -------------
Increase (decrease) in net assets........ $ 43,918,888 $ 51,729,183
NET ASSETS:
Beginning of year.......................... 193,226,813 141,497,630
------------- -------------
End of year................................ $ 237,145,701 $ 193,226,813
------------- -------------
------------- -------------
</TABLE>
See notes to financial statements
64
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
STATEMENTS OF CHANGES IN NET ASSETS -- continued
<TABLE>
<CAPTION>
WTR
Sub-Account Total
--------------------------------- ---------------------------------
Year Ended Year Ended
December 31, December 31,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income...................... $ 518,499 $ 71,547 $ 297,237,205 $ 207,607,067
Net realized gains......................... 1,518,827 545,390 212,441,467 106,785,736
Net unrealized gains....................... 4,352,747 2,845,849 463,550,753 196,251,997
--------------- --------------- --------------- ---------------
Increase in net assets from
operations............................ $ 6,390,073 $ 3,462,786 $ 973,229,425 $ 510,644,800
--------------- --------------- --------------- ---------------
CONTRACT OWNER TRANSACTIONS:
Accumulation Activity:
Purchase payments received............... $ 15,459,554 $ 16,294,987 $ 1,375,970,825 $ 1,231,625,970
Net transfers between Sub-Accounts and
Fixed Account........................... 13,106,711 5,434,372 619,129,055 135,880,112
Withdrawals, surrenders, annuitizations
and contract charges.................... (2,840,427) (1,579,132) (970,892,363) (285,266,526)
--------------- --------------- --------------- ---------------
Net accumulation activity.............. $ 25,725,838 $ 20,150,227 $ 1,024,207,517 $ 1,082,239,556
--------------- --------------- --------------- ---------------
Annuitization Activity:
Annuitizations........................... $ 215,870 $ -- $ 6,384,473 $ 5,137,173
Annuity payments and contract charges.... (28,925) (17,146) (3,250,311) (2,217,120)
Net transfers between Sub-Accounts and
Fixed Account........................... -- -- -- 482
Adjustments to annuity reserves.......... (3,240) (10,126) (185,108) (356,574)
--------------- --------------- --------------- ---------------
Net annuitization activity............. $ 183,705 $ (27,272) $ 2,949,054 $ 2,563,961
--------------- --------------- --------------- ---------------
Increase in net assets from contract owner
transactions.............................. $ 25,909,543 $ 20,122,955 $ 1,027,156,571 $ 1,084,803,517
--------------- --------------- --------------- ---------------
Increase in net assets................... $ 32,299,616 $ 23,585,741 $ 2,000,385,996 $ 1,595,448,317
NET ASSETS:
Beginning of year.......................... 37,384,672 13,798,931 4,883,017,052 3,287,568,735
--------------- --------------- --------------- ---------------
End of year................................ $ 69,684,288 $ 37,384,672 $ 6,883,403,048 $ 4,883,017,052
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
</TABLE>
See notes to financial statements
65
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION
Sun Life of Canada (U.S.) Variable Account F (the "Variable Account"), a
separate account of Sun Life Assurance Company of Canada (U.S.), the Sponsor,
was established on July 13, 1989 as a funding vehicle for the variable portion
of certain group combination fixed/variable annuity contracts. The Variable
Account is registered with the Securities and Exchange Commission under the
Investment Company Act of 1940 as a unit investment trust.
The assets of the Variable Account are divided into Sub-Accounts. Each
Sub-Account is invested in shares of a specific series of MFS/Sun Life Series
Trust (the "Series Trust"), an open-end management investment company registered
under the Investment Company Act of 1940. Massachusetts Financial Services
Company, an affiliate of the Sponsor, is investment adviser to the Series Trust.
(2) SIGNIFICANT ACCOUNTING POLICIES
GENERAL
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
INVESTMENT VALUATIONS
Investments in shares of the Series Trust are recorded at their net asset value.
Realized gains and losses on sales of shares of the Series Trust are determined
on the identified cost basis. Dividend income and capital gain distributions
received by the Sub-Accounts are reinvested in additional Series Trust shares
and are recognized on the ex-dividend date.
Exchanges between Sub-Accounts requested by participants are recorded in the new
Sub-Account upon receipt of the redemption proceeds.
FEDERAL INCOME TAX STATUS
The operations of the Variable Account are part of the operations of the Sponsor
and are not taxed separately. The Variable Account is not taxed as a regulated
investment company. The Sponsor qualifies for the federal income tax treatment
granted to life insurance companies under Subchapter L of the Internal Revenue
Code. Under existing federal income tax law, investment income and capital gains
earned by the Variable Account on contract owner reserves are not subject to
tax.
(3) CONTRACT CHARGES
A mortality and expense risk charge based on the value of the Variable Account
is deducted from the Variable Account at the end of each valuation period for
the mortality and expense risks assumed by the Sponsor. The deductions are
transferred periodically to the Sponsor. Currently, the deduction is at an
effective annual rate of 1.25% for Regatta and Regatta Gold contracts and 1.00%
for Regatta Classic contracts.
66
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
NOTES TO FINANCIAL STATEMENTS -- continued
Each year on the account anniversary, an account administration fee ("Account
Fee") equal to the lesser of $30 or 2% of the participant's account value in the
case of Regatta and Regatta Gold and $50 for Regatta Classic is deducted from
the participant's account to reimburse the Sponsor for certain administrative
expenses. After the annuity commencement date the Account Fee will be deducted
pro rata from each variable annuity payment made during the year.
The Sponsor does not deduct a sales charge from purchase payments. However, in
the case of Regatta and Regatta Gold, a withdrawal charge (contingent deferred
sales charge) of up to 6% of certain amounts withdrawn, when applicable, may be
deducted to cover certain expenses relating to the sale of the contracts and
certificates. In the case of Regatta Classic, a withdrawal charge of 1% is
applied to purchase payments withdrawn which have been credited to a
participant's account for less than one year.
For assuming the risk that withdrawal charges may be insufficient to compensate
it for the costs of distributing the Regatta contracts, the Sponsor makes a
deduction from the Variable Account at the end of each valuation period for the
first seven account years at an effective annual rate of 0.15% of the net assets
attributable to such contracts. Accounts are transferred from MFS Regatta --
Level 1 to MFS Regatta -- Level 2 in the month following the seventh account
anniversary. No deduction for the distribution expense charge is made after the
seventh account anniversary.
As reimbursement for administrative expenses attributable to Regatta Gold and
Regatta Classic contracts which exceed the revenues received from the Account
Fees described above derived from such contracts, the Sponsor makes a deduction
from the Variable Account at the end of each valuation period at an effective
annual rate of 0.15% of the net assets attributable to such contracts.
(4) ANNUITY RESERVES
Annuity reserves are calculated using the 1983 Individual Annuitant Mortality
Table and an assumed interest rate of 4% or 3%, as stated in each participant's
certificate. Required adjustments to the reserves are accomplished by transfers
to or from the Sponsor.
67
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
NOTES TO FINANCIAL STATEMENTS -- continued
(5) UNIT ACTIVITY FROM PARTICIPANT TRANSACTIONS
<TABLE>
<CAPTION>
Units Transferred
Between Sub-Accounts and
Units Outstanding
Beginning of Year Units Purchased Fixed Account
---------------------- ---------------------- ---------------------------
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
---------------------- ---------------------- ---------------------------
1997 1996 1997 1996 1997 1996
---------- ---------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
MFS REGATTA CONTRACTS:
------------------------------
CAS - Level 1................. 6,316,305 6,615,207 860 3,487 (2,421,311) 267,320
CAS - Level 2 *............... 58,968 -- 624,374 62,873 6,542,104 142
GSS - Level 1................. 3,362,650 3,535,152 -- 1,574 (1,340,875) 206,595
GSS - Level 2 *............... 55,891 -- 265,628 59,729 2,012,610 3,442
HYS - Level 1................. 1,204,380 1,068,412 -- -- (510,706) 271,328
HYS - Level 2**............... -- -- 64,893 -- 1,416,411 --
MSS - Level 1................. 2,202,213 2,150,361 881 -- (924,959) 253,891
MSS - Level 2 *............... 14,270 -- 240,391 18,662 2,378,532 --
MMS - Level 1................. 3,859,738 3,453,907 1,948 7,940 3,301,197 1,420,458
MMS - Level 2 *............... 59,562 -- 310,378 74,316 6,074,695 (3,576)
TRS - Level 1................. 12,461,003 13,106,997 1,598 2,594 (4,580,966) 580,878
TRS - Level 2 *............... 32,548 -- 815,196 61,666 10,202,663 --
WGS - Level 1................. 1,460,289 1,730,002 -- -- (584,950) (4,348)
WGS - Level 2 *............... 3,325 -- 34,073 4,988 686,256 --
<CAPTION>
Units Withdrawn,
Surrendered and Units Outstanding
Annuitized End of Year
------------------------- ----------------------
Year Ended Year Ended
December 31, December 31,
------------------------- ----------------------
1997 1996 1997 1996
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
MFS REGATTA CONTRACTS:
------------------------------
CAS - Level 1................. (902,834) (569,709) 2,993,020 6,316,305
CAS - Level 2 *............... (1,834,766) (4,047) 5,390,680 58,968
GSS - Level 1................. (559,553) (380,671) 1,462,222 3,362,650
GSS - Level 2 *............... (819,496) (7,280) 1,514,633 55,891
HYS - Level 1................. (156,641) (135,360) 537,033 1,204,380
HYS - Level 2**............... (506,178) -- 975,126 --
MSS - Level 1................. (336,449) (202,039) 941,686 2,202,213
MSS - Level 2 *............... (610,436) (4,392) 2,022,757 14,270
MMS - Level 1................. (5,644,161) (1,022,567) 1,518,722 3,859,738
MMS - Level 2 *............... (4,598,826) (11,178) 1,845,809 59,562
TRS - Level 1................. (2,124,982) (1,229,466) 5,756,653 12,461,003
TRS - Level 2 *............... (3,211,666) (29,118) 7,838,741 32,548
WGS - Level 1................. (175,001) (265,365) 700,338 1,460,289
WGS - Level 2 *............... (240,401) (1,663) 483,253 3,325
</TABLE>
*For the period December 9, 1996 (commencement of operations) to December 31,
1996.
**For the period January 6, 1997 (commencement of operations of the Sub-Account)
to December 31, 1997.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
MFS REGATTA GOLD
CONTRACTS:
------------------------------
CAS........................... 32,796,793 27,782,739 4,171,857 7,263,696 753,855 (496,244)
CGS........................... 26,199,975 16,712,586 8,951,992 8,644,701 7,405,405 2,000,284
EGS........................... 16,998,044 5,346,104 5,826,649 8,728,028 3,279,517 3,530,938
FCE *......................... 329,630 -- 815,491 107,088 1,097,883 224,483
FCI *......................... 564,742 -- 997,740 250,279 902,857 323,501
FCG........................... 3,360,596 711,179 760,057 1,891,793 531,069 856,286
GSS........................... 19,714,114 18,082,586 1,627,923 4,278,441 723,328 (1,392,606)
HYS........................... 8,424,289 6,880,080 2,340,052 2,241,058 1,768,446 (53,191)
MSS........................... 10,541,726 8,542,869 1,191,194 2,422,482 289,858 147,148
MMS........................... 27,275,583 17,186,041 7,818,118 18,886,918 (8,894,337) (5,479,056)
RES........................... 19,577,745 5,341,160 10,988,440 10,525,524 6,437,281 4,302,978
RGS........................... -- -- 276,177 -- 260,605 --
TRS........................... 59,508,016 53,091,748 7,069,596 10,291,268 4,111,016 (170,571)
UTS........................... 4,671,192 3,410,047 966,544 1,448,517 773,360 68,243
VAL **........................ 1,520,787 -- 2,333,873 1,039,259 2,499,269 492,924
WAA........................... 5,539,010 2,141,041 1,565,894 2,590,553 1,218,708 1,048,013
WGS........................... 7,510,766 8,272,858 324,862 818,386 (1,252,245) (1,036,800)
WGR........................... 13,989,946 11,421,691 1,725,746 3,069,026 242,250 227,986
WTR........................... 2,836,079 1,170,586 1,085,978 1,353,637 962,291 448,221
<CAPTION>
MFS REGATTA GOLD
<C> <C> <C> <C>
------------------------------
CAS........................... (2,193,608) (1,753,398) 35,528,897 32,796,793
CGS........................... (1,847,841) (1,157,596) 40,709,531 26,199,975
EGS........................... (1,064,224) (607,026) 25,039,986 16,998,044
FCE *......................... (83,776) (1,941) 2,159,228 329,630
FCI *......................... (75,283) (9,038) 2,390,056 564,742
FCG........................... (209,811) (98,662) 4,441,911 3,360,596
GSS........................... (1,556,521) (1,254,307) 20,508,844 19,714,114
HYS........................... (833,592) (643,658) 11,699,195 8,424,289
MSS........................... (696,059) (570,773) 11,326,719 10,541,726
MMS........................... (4,736,225) (3,318,320) 21,463,139 27,275,583
RES........................... (1,348,549) (591,917) 35,654,917 19,577,745
RGS........................... (2,854) -- 533,928 --
TRS........................... (4,385,161) (3,704,429) 66,303,467 59,508,016
UTS........................... (309,458) (255,615) 6,101,638 4,671,192
VAL **........................ (178,705) (11,396) 6,175,224 1,520,787
WAA........................... (394,779) (240,597) 7,928,833 5,539,010
WGS........................... (455,742) (543,678) 6,127,641 7,510,766
WGR........................... (899,185) (728,757) 15,058,757 13,989,946
WTR........................... (207,495) (136,365) 4,676,853 2,836,079
<CAPTION>
CONTRACTS:
</TABLE>
*For the period July 1, 1996 (commencement of operations) to December 31,
1996.
**For the period June 3, 1996 (commencement of operations of the Sub-Account)
to December 31, 1996.
68
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
NOTES TO FINANCIAL STATEMENTS -- continued
(5) UNIT ACTIVITY FROM PARTICIPANT TRANSACTIONS -- continued
<TABLE>
<CAPTION>
Units Transferred
Between Sub-Accounts and
Units Outstanding
Beginning of Year Units Purchased Fixed Account
---------------------- ---------------------- ---------------------------
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
---------------------- ---------------------- ---------------------------
1997 1996 1997 1996 1997 1996
---------- ---------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
MFS REGATTA CLASSIC
CONTRACTS:
------------------------------
CAS *......................... 1,892 -- 246,247 1,892 23,978 --
CGS *......................... 3,545 -- 446,522 8,005 122,228 (4,460)
EGS *......................... 9,744 -- 289,836 11,935 22,223 (2,191)
FCE **........................ 140 -- 44,896 352 (3,278) (212)
FCI **........................ 2,249 -- 75,178 2,249 (7,901) --
FCG +......................... -- -- 42,039 -- 9,735 --
GSS **........................ 6,514 -- 89,817 6,514 21,240 --
HYS *......................... 8,219 -- 120,521 7,097 30,370 1,122
MSS ++........................ -- -- 92,458 -- 28,860 --
MMS **........................ 13,813 -- 366,163 13,813 (259,749) --
RES ***....................... 25,665 -- 497,934 25,659 37,701 6
RGS #......................... -- -- 5,777 -- 320 --
TRS ***....................... 40,575 -- 859,444 33,797 66,034 6,778
UTS ++........................ -- -- 41,263 -- 36,412 --
VAL *......................... 9,578 -- 107,548 8,416 46,458 1,162
WAA *......................... 6,448 -- 44,701 7,086 (150) (638)
WGS ++++...................... -- -- 18,266 -- 2,357 --
WGR ****...................... 71 -- 77,864 -- 7,879 71
WTR +++....................... -- -- 49,398 -- (3,919) --
<CAPTION>
Units Withdrawn,
Surrendered and Units Outstanding
Annuitized End of Year
------------------------- ----------------------
Year Ended Year Ended
December 31, December 31,
------------------------- ----------------------
1997 1996 1997 1996
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
MFS REGATTA CLASSIC
CONTRACTS:
------------------------------
CAS *......................... (6,620) -- 265,497 1,892
CGS *......................... (18,079) -- 554,216 3,545
EGS *......................... (3,775) -- 318,028 9,744
FCE **........................ (1,060) -- 40,698 140
FCI **........................ (1,634) -- 67,892 2,249
FCG +......................... (736) -- 51,038 --
GSS **........................ (4,328) -- 113,243 6,514
HYS *......................... (3,804) -- 155,306 8,219
MSS ++........................ (3,075) -- 118,243 --
MMS **........................ (43,122) -- 77,105 13,813
RES ***....................... (7,304) -- 553,996 25,665
RGS #......................... (12) -- 6,085 --
TRS ***....................... (14,848) -- 951,205 40,575
UTS ++........................ (666) -- 77,009 --
VAL *......................... (2,806) -- 160,778 9,578
WAA *......................... (468) -- 50,531 6,448
WGS ++++...................... (1,229) -- 19,394 --
WGR ****...................... (288) -- 85,526 71
WTR +++....................... (357) -- 45,122 --
</TABLE>
*For the period December 2, 1996 (commencement of operations of the
Sub-Account) to December 31, 1996.
**For the period December 9, 1996 (commencement of operations of the
Sub-Account) to December 31, 1996.
***For the period November 27, 1996 (commencement of operations of the
Sub-Account) to December 31, 1996.
****Operations of the Sub-Account commenced on December 31, 1996.
+For the period January 7, 1997 (commencement of operations of the
Sub-Account) to December 31, 1997.
++For the period January 22, 1997 (commencement of operations of the
Sub-Account) to December 31, 1997.
+++For the period February 11, 1997 (commencement of operations of the
Sub-Account) to December 31, 1997.
++++For the period February 21, 1997 (commencement of operations of the
Sub-Account) to December 31, 1997.
#For the period July 7, 1997 (commencement of operations of the Sub-Account)
to December 31, 1997.
69
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Participants in Sun Life of Canada (U.S.) Variable Account F
and the Board of Directors of Sun Life Assurance Company of Canada (U.S.):
We have audited the accompanying statement of condition of Sun Life of Canada
(U.S.) Variable Account F (the "Variable Account") as of December 31, 1997, the
related statement of operations for the year then ended and the statements of
changes in net assets for the years ended December 31, 1997 and 1996. These
financial statements are the responsibility of management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities held at December 31, 1997 by correspondence with the
custodian. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Variable Account as of December 31,
1997, the results of its operations and the changes in its net assets for the
respective stated periods in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 6, 1998
70
<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.
71
<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.
72
<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.
73
<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.
74
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS
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 currently 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 an affiliate, 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.
75
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
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.
76
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
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.
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 is a life insurance company which 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.
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 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.
77
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
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
---------- ----------- ----------- ----------
(IN 000'S)
<S> <C> <C> <C> <C>
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>
78
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
3. BONDS (CONTINUED):
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
---------- ----------- ----------- ----------
(IN 000'S)
<S> <C> <C> <C> <C>
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
---------- ----------
(IN 000'S)
<S> <C> <C>
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.
79
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
4. SECURITIES LENDING:
The Company has a securities lending program operated on its behalf by the
Company's primary custodian, Chemical Bank of New York. The custodian has
indemnified the Company against losses arising from this program. The total par
value of securities out on loan was $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.
80
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
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>
81
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
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
82
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
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.
83
<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>
84
<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.
85
<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.
86
<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
87
<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
88
<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.
89
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
We have audited the accompanying statutory statements of admitted assets,
liabilities, and capital stock and surplus of Sun Life Assurance Company of
Canada (U.S.) as of December 31, 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
90
<PAGE>
APPENDIX A
ILLUSTRATIVE EXAMPLE OF VARIABLE ACCUMULATION UNIT VALUE CALCULATIONS:
Suppose the net asset value of a Series Fund share at the end of the current
Valuation Period is $18.38; at the end of the immediately preceding Valuation
Period was $18.32; the Valuation Period is one day; and no dividends or
distributions caused Series Fund shares to go "ex-dividend" during the current
Valuation Period. $18.38 divided by $18.32 is 1.00327511. Subtracting the one
day risk factor for mortality and expense risks and the administrative expense
charge of .00003133 (the daily equivalent of the current maximum charge of 1.15%
on an annual basis) gives a Net Investment Factor of 1.00324378. 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
14.6118115 (14.5645672 X 1.00324378).
ILLUSTRATIVE EXAMPLE OF 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 three percent (3%) per year, the value of
the Annuity Unit for the current Valuation Period would be 12.3847226
(12.3456789 X 1.00324378 (the Net Investment Factor) X 0.99991902). 0.99991902
is the factor, for a one day Valuation Period, that neutralizes the assumed
interest rate of three percent (3%) per year used to establish the Annuity
Payment Rates found in the Contract.
ILLUSTRATIVE EXAMPLE OF VARIABLE ANNUITY PAYMENT CALCULATIONS:
Suppose that a Participant's Account is credited with 8,765.4321 Variable
Accumulation Units of a particular Sub-Account but is not credited with any
fixed accumulation units; that the Variable Accumulation Unit value and the
Annuity Unit value for the particular Sub-Account for the Valuation Period which
ends immediately preceding the Annuity Commencement Date are 14.5645672 and
12.3456789 respectively; that the Annuity Payment Rate for the age and option
elected is $6.78 per $1,000; and that the Annuity Unit value on the day prior to
the second variable annuity payment date is 12.3847226. 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 $868.31 (70.1112
X 12.3847226).
91
<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)
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 two examples of the withdrawal charge resulting from a full
surrender of the Participant's Account, based on hypothetical Account Values.
<TABLE>
<CAPTION>
WITHDRAWAL
NUMBER OF YEARS PURCHASE HYPOTHETICAL PURCHASE CHARGE WITHDRAWAL CHARGE
PAYMENT IN ACCOUNT ACCOUNT VALUE PAYMENT PERCENTAGE AMOUNT
- -------------------------- -------------- ----------- --------------- -----------------
<S> <C> <C> <C> <C>
Less than one $ 41,000 $ 40,000 1.0% $ 400
One or greater $ 44,000 $ 40,000 0.0% $ 0
</TABLE>
Minimum Distribution withdrawals from a Qualified Contract will not incur a
withdrawal charge.
PARTIAL SURRENDER
Assume a Purchase Payment of $40,000 is made on the Date of Coverage, no
additional Purchase Payments are made and there is a sequence of two partial
withdrawals made prior to the end of the first Year of $9,000 and $32,000.
<TABLE>
<CAPTION>
PARTIAL PURCHASE WITHDRAWAL
HYPOTHETICAL WITHDRAWAL PAYMENT CHARGE WITHDRAWAL
ACCOUNT VALUE AMOUNT LIQUIDATED PERCENTAGE CHARGE AMOUNT
-------------- ----------- ----------- --------------- -------------
<S> <C> <C> <C> <C> <C>
1. $ 41,000 $ 9,000 $ 9,000 1.00% $ 90
2. $ 36,000 $ 32,000 $ 31,000 1.00% $ 310
</TABLE>
1. The $9,000 partial withdrawal during the first Year incurs a 1% withdrawal
charge, totaling $90.
2. The 1% withdrawal charge applies only to $31,000 of the $32,000 withdrawn.
The withdrawal charge is not applied to the total partial withdrawal because
the amount of the unliquidated Purchase Payment of $31,000 ($40,000 -
$9,000) is less than the withdrawal amount.
Minimum Distribution withdrawals from a Qualified Contract will not incur a
withdrawal charge.
PART 2--FIXED ACCOUNT--EXAMPLES OF THE MARKET VALUE ADJUSTMENT (MVA)
The MVA factor is:
<TABLE>
<S> <C> <C>
N/12
1 + I
( ----- )TO THE POWER OF -1
1 + J
</TABLE>
These examples assume the following:
1. the Guarantee Amount was allocated to a one year Guarantee Period
with a Guaranteed Interest Rate of 4% or .04 (l).
2. the date of full surrender is six months from the Expiration Date (N
= 6).
3. the value of the Guarantee Amount on the date of surrender is
$40,792.16.
4. no transfers or partial withdrawals affecting this Guarantee Amount
have been made
5. withdrawal charges, if any, are calculated in the same manner as
shown in the examples in Part 1.
92
<PAGE>
EXAMPLE OF A NEGATIVE MVA:
Assume that on the date of surrender the Current Rate (J) is 5% or .05.
<TABLE>
<C> <S> <C> <C>
N/12
1 + l
The MVA factor = ( ------ ) -1
1 + J
6/12
1 + .04
= ( ------ ) -1
1 + .05
= - .0047733
</TABLE>
The value of the Guarantee Amount is multiplied by the MVA factor to
determine the MVA.
($40,792.16) X (-.0047733) = -$194.71
-$194.71 represents the MVA that will be deducted from 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 X -.0047733) = -$9.55.
-$9.55 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 3% or .03.
N/12
1 + I
The MVA factor = ( ------ ) -1
1 + J
6/12
1 + .04
= ( ------ ) -1
1 + .03
= .00484264
The value of the Guarantee Amount is multiplied by the MVA factor to
determine the MVA.
$40,792.16 X .00484264 = $197.54
$197.54 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 X .00484264 = $9.69.
$9.69 represents the MVA that would be added to the value of the partial
withdrawal amount before the deduction of any withdrawal charge.
93
<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 below the table. For
purposes of determining these investment results, the actual investment
performance of each Series of the Series Fund is reflected from the date such
Series commenced investment operations ("Inception"), although the Contracts
have been offered only since October, 1996. No information is shown for the Bond
Series, Equity Income Series, Massachusetts Investors Growth Stock Series, New
Discovery Series, Research International Series and Strategic Income Series as
such series had not yet commenced operations as of December 31, 1997.
AVERAGE ANNUAL TOTAL RETURN
PERIOD ENDING DECEMBER 31, 1997
<TABLE>
<CAPTION>
1 YEAR 5 YEAR 10 YEAR DATE OF
PERIOD PERIOD PERIOD LIFE* INCEPTION
------- ------- ------- ------- -----------------
<S> <C> <C> <C> <C> <C>
Capital Appreciation Series............. 21.04% 16.47% 16.51% -- August 13, 1985
Capital Opportunities Series**.......... 25.59% -- -- 22.17% June 3, 1996
Conservative Growth Series.............. 29.50% 17.84% -- 16.75% December 5, 1986
Government Securities Series............ 7.13% 5.22% 7.06% -- August 12, 1985
High Yield Series....................... 11.42% 9.84% 9.52% -- August 13, 1985
International Growth Series............. (3.10)% -- -- (3.54)% June 3, 1996
International Growth and Income
Series................................. 4.95% -- -- 4.19% October 2, 1995
Managed Sectors Series.................. 23.72% 13.40% -- 16.08% May 27, 1988
MFS/Foreign & Colonial Emerging Markets
Equity Series.......................... 8.74% -- -- 4.95% June 5, 1996
Money Market Series..................... 3.44% 2.88% 4.04% -- August 29, 1985
Research Series......................... 18.42% -- -- 22.79% November 7, 1994
Research Growth and Income Series....... -- -- -- 8.56% May 12, 1997
Total Return Series..................... 19.58% 12.09% -- 11.12% May 16, 1988
Utilities Series........................ 30.77% -- -- 17.03% November 16, 1993
World Asset Allocation Series........... 9.25% -- -- 13.94% November 7, 1994
World Governments Series................ (2.15)% 5.13% -- 6.46% May 16, 1988
World Growth Series..................... 13.58% -- -- 11.48% November 16, 1993
World Total Return Series............... 12.33% -- -- 13.30% November 7, 1994
</TABLE>
- ---------
* From commencement of investment operations.
**Before May 1, 1998, called the Value Series.
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 footnote 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:
P(1 + T) exponent n = 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.
As the Contracts have only been offered since October, 1996, the $50 Account
Fee has been allocated equally among the Sub-Accounts. In future calculations,
the $50 annual Account Fee will be allocated
94
<PAGE>
among the Sub-Accounts so that each Sub-Account's allocated portion of the
Account Fee is proportional to the percentage of the number of Certificates that
have amounts allocated to that Sub-Account. Because the impact of Account Fees
on a particular Certificate may differ from those assumed in the computation due
to differences between actual allocations and the assumed ones, the total return
that would have been experienced by an actual Certificate over these same time
periods may have been different from that shown above.
NON-STANDARDIZED INVESTMENT PERFORMANCE:
The Variable Account may illustrate its results over various periods and
compare its results to indices and other variable annuities in sales materials
including advertisements, brochures and reports. Such results may be computed on
a "cumulative" and/or "annualized" basis.
"Cumulative" quotations are arrived at by calculating the change in the
Accumulation Unit value of a Sub-Account between the first and last day of the
base period being measured, and expressing the difference as a percentage of the
Accumulation Unit value at the beginning of the base period.
"Annualized" quotations (described in the following table as "Compound
Growth Rate") are calculated by applying a formula which determines the level
rate of return which, if earned over the entire base period, would produce the
cumulative return.
NON-STANDARDIZED INVESTMENT PERFORMANCE:
$10,000 INVESTED IN ...WOULD HAVE GROWN TO THIS AMOUNT ON
THIS SUB-ACCOUNT UNDER A DECEMBER 31, 1997*
REGATTA CLASSIC CONTRACT,
THIS MANY YEARS AGO...
<TABLE>
<CAPTION>
CAPITAL APPRECIATION SERIES GOVERNMENT SECURITIES SERIES
---------------------------------------------------- ----------------------------------------------------
NUMBER CUMULATIVE COMPOUND CUMULATIVE COMPOUND
OF GROWTH GROWTH GROWTH GROWTH
YEARS PERIODS AMOUNT RATE RATE PERIODS AMOUNT RATE RATE
- --------- ---------------- ----------- ---------- -------- ---------------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 12/31/96-12/31/97 $ 12,142.54 21.43% 21.43% 12/31/96-12/31/97 $ 10,724.62 7.25% 7.25%
2 12/31/95-12/31/97 $ 14,580.59 45.81% 20.75% 12/31/95-12/31/97 $ 10,771.64 7.72% 3.79%
3 12/31/94-12/31/97 $ 19,382.95 93.83% 24.68% 12/31/94-12/31/97 $ 12,528.41 25.28% 7.80%
4 12/31/93-12/31/97 $ 18,472.96 84.73% 16.58% 12/31/93-12/31/97 $ 12,118.68 21.19% 4.92%
5 12/31/92-12/31/97 $ 21,549.94 115.50% 16.60% 12/31/92-12/31/97 $ 13,021.95 30.22% 5.42%
10 12/31/87-12/31/97 $ 46,403.84 364.04% 16.59% 12/31/87-12/31/97 $ 20,107.80 101.08% 7.23%
Life 8/13/85-12/31/97 $ 60,104.86 501.05% 15.57% 8/12/85-12/31/97 $ 24,535.32 145.35% 7.51%
<CAPTION>
MONEY MARKET SERIES MANAGED SECTORS SERIES
---------------------------------------------------- ----------------------------------------------------
NUMBER CUMULATIVE COMPOUND CUMULATIVE COMPOUND
OF GROWTH GROWTH GROWTH GROWTH
YEARS PERIODS AMOUNT RATE RATE PERIODS AMOUNT RATE RATE
- --------- ---------------- ----------- ---------- -------- ---------------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 12/31/96-12/31/97 $ 10,362.16 3.62% 3.62% 12/31/96-12/31/97 $ 12,391.16 23.91% 23.91%
2 12/31/95-12/31/97 $ 10,746.41 7.46% 3.66% 12/31/95-12/31/97 $ 14,397.58 43.98% 19.99%
3 12/31/94-12/31/97 $ 11,203.49 12.03% 3.86% 12/31/94-12/31/97 $ 18,819.95 88.20% 23.46%
4 12/31/93-12/31/97 $ 11,486.14 14.86% 3.52% 12/31/93-12/31/97 $ 18,248.32 82.48% 16.23%
5 12/31/92-12/31/97 $ 11,653.94 16.54% 3.11% 12/31/92-12/31/97 $ 18,773.52 87.74% 13.43%
10 12/31/87-12/31/97 $ 15,143.26 51.43% 4.24%
Life 8/29/85-12/31/97 $ 16,868.52 68.69% 4.33% 5/27/88-12/31/97 $ 41,910.68 319.11% 16.09%
<CAPTION>
WORLD GOVERNMENTS SERIES CONSERVATIVE GROWTH SERIES
---------------------------------------------------- ----------------------------------------------------
NUMBER CUMULATIVE COMPOUND CUMULATIVE COMPOUND
OF GROWTH GROWTH GROWTH GROWTH
YEARS PERIODS AMOUNT RATE RATE PERIODS AMOUNT RATE RATE
- --------- ---------------- ----------- ---------- -------- ---------------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 12/31/96-12/31/97 $ 9,788.79 (2.11)% (2.11)% 12/31/96-12/31/97 $ 13,013.58 30.14% 30.14%
2 12/31/95-12/31/97 $ 10,123.29 1.23% 0.61% 12/31/95-12/31/97 $ 16,129.57 61.30% 27.00%
3 12/31/94-12/31/97 $ 11,574.89 15.75% 5.00% 12/31/94-12/31/97 $ 21,915.84 119.16% 29.89%
4 12/31/93-12/31/97 $ 10,929.89 9.30% 2.25% 12/31/93-12/31/97 $ 21,426.84 114.27% 20.99%
5 12/31/92-12/31/97 $ 12,844.78 28.45% 5.13% 12/31/92-12/31/97 $ 22,965.43 129.65% 18.09%
Life 5/16/88-12/31/97 $ 18,277.19 82.77% 6.46% 11/8/92-12/31/97 $ 26,290.54 162.91% 17.02%
</TABLE>
95
<PAGE>
NON-STANDARDIZED INVESTMENT PERFORMANCE -- continued:
$10,000 INVESTED IN ...WOULD HAVE GROWN TO THIS AMOUNT ON
THIS SUB-ACCOUNT UNDER A DECEMBER 31, 1997*
REGATTA CLASSIC CONTRACT
THIS MANY YEARS AGO...
<TABLE>
<CAPTION>
UTILITIES SERIES WORLD GROWTH SERIES
---------------------------------------------------- ----------------------------------------------------
NUMBER CUMULATIVE COMPOUND CUMULATIVE COMPOUND
OF GROWTH GROWTH GROWTH GROWTH
YEARS PERIODS AMOUNT RATE RATE PERIODS AMOUNT RATE RATE
- --------- ---------------- ----------- ---------- -------- ---------------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 12/31/96-12/31/97 $ 13,091.53 30.92% 30.92% 12/31/96-12/31/97 $ 11,372.50 13.73% 13.73%
2 12/31/95-12/31/97 $ 15,574.54 55.75% 24.80% 12/31/95-12/31/97 $ 12,713.52 27.14% 12.75%
3 12/31/94-12/31/97 $ 20,386.71 103.87% 26.80% 12/31/94-12/31/97 $ 14,579.18 45.79% 13.39%
4 12/31/93-12/31/97 $ 19,234.20 92.34% 17.77% 12/31/93-12/31/97 $ 14,836.16 48.36% 10.36%
Life 11/16/93-12/31/97 $ 19,163.19 91.63% 17.07% 11/16/93-12/31/97 $ 15,760.25 57.60% 11.66%
<CAPTION>
RESEARCH SERIES WORLD ASSET ALLOCATION SERIES
---------------------------------------------------- ----------------------------------------------------
NUMBER CUMULATIVE COMPOUND CUMULATIVE COMPOUND
OF GROWTH GROWTH GROWTH GROWTH
YEARS PERIODS AMOUNT RATE RATE PERIODS AMOUNT RATE RATE
- --------- ---------------- ----------- ---------- -------- ---------------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 12/31/96-12/31/97 $ 11,916.69 19.17% 19.17% 12/31/96-12/31/97 $ 10,934.17 9.34% 9.34%
2 12/31/95-12/31/97 $ 14,583.32 45.83% 20.76% 12/31/95-12/31/97 $ 12,534.30 25.34% 11.96%
3 12/31/94-12/31/97 $ 19,816.69 98.17% 25.61% 12/31/94-12/31/97 $ 15,073.62 50.74% 14.66%
Life 11/7/94-12/31/97 $ 19,547.22 95.47% 23.71% 11/7/94-12/31/97 $ 15,132.86 51.33% 14.05%
<CAPTION>
MFS/FOREIGN & COLONIAL EMERGING MARKETS EQUITY
CAPITAL OPPORTUNITIES SERIES** SERIES
---------------------------------------------------- ----------------------------------------------------
NUMBER CUMULATIVE COMPOUND CUMULATIVE COMPOUND
OF GROWTH GROWTH GROWTH GROWTH
YEARS PERIODS AMOUNT RATE RATE PERIODS AMOUNT RATE RATE
- --------- ---------------- ----------- ---------- -------- ---------------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 12/31/96-12/31/97 $ 12,583.08 25.83% 25.83% 12/31/96-12/31/97 $ 10,888.25 8.88% 8.88%
Life 6/3/96-12/31/97 $ 13,761.63 37.62% 22.43% 6/5/96-12/31/97 $ 10,815.31 8.15% 5.11%
<CAPTION>
HIGH YIELD SERIES TOTAL RETURN SERIES
---------------------------------------------------- ----------------------------------------------------
NUMBER CUMULATIVE COMPOUND CUMULATIVE COMPOUND
OF GROWTH GROWTH GROWTH GROWTH
YEARS PERIODS AMOUNT RATE RATE PERIODS AMOUNT RATE RATE
- --------- ---------------- ----------- ---------- -------- ---------------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 12/31/96-12/31/97 $ 11,164.81 11.65% 11.65% 12/31/96-12/31/97 $ 12,028.46 20.28% 20.28%
2 12/31/95-12/31/97 $ 12,371.67 23.72% 11.23% 12/31/95-12/31/97 $ 13,554.25 35.54% 16.42%
3 12/31/94-12/31/97 $ 14,314.96 43.15% 12.70% 12/31/94-12/31/97 $ 16,983.37 69.83% 19.31%
4 12/31/93-12/31/97 $ 13,836.41 38.36% 8.46% 12/31/93-12/31/97 $ 16,410.49 64.10% 13.18%
5 12/31/92-12/31/97 $ 16,104.69 61.05% 10.00% 12/31/92-12/31/97 $ 18,395.33 83.95% 12.96%
10 12/31/87-12/31/97 $ 25,151.02 151.51% 9.66%
Life 8/13/85-12/31/97 $ 29,486.23 194.86% 9.12% 5/16/88-12/31/97 $ 29,391.74 193.92% 11.84%
<CAPTION>
INTERNATIONAL GROWTH AND INCOME SERIES INTERNATIONAL GROWTH SERIES
---------------------------------------------------- ----------------------------------------------------
NUMBER CUMULATIVE COMPOUND CUMULATIVE COMPOUND
OF GROWTH GROWTH GROWTH GROWTH
YEARS PERIODS AMOUNT RATE RATE PERIODS AMOUNT RATE RATE
- --------- ---------------- ----------- ---------- -------- ---------------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 12/31/96-12/31/97 $ 10,505.15 5.05% 5.50% 12/31/96-12/31/97 $ 9,700.99 (2.99)% (2.99)%
2 12/31/95-12/31/97 $ 10,892.33 8.92% 4.37%
Life 10/2/95-12/31/97 $ 11,001.46 10.01% 4.33% 6/3/96-12/31/97 $ 9,468.78 (5.31)% (3.40)%
<CAPTION>
EMERGING GROWTH SERIES WORLD TOTAL RETURN SERIES
---------------------------------------------------- ----------------------------------------------------
NUMBER CUMULATIVE COMPOUND CUMULATIVE COMPOUND
OF GROWTH GROWTH GROWTH GROWTH
YEARS PERIODS AMOUNT RATE RATE PERIODS AMOUNT RATE RATE
- --------- ---------------- ----------- ---------- -------- ---------------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 12/31/96-12/31/97 $ 12,026.24 20.26% 20.26% 12/31/96-12/31/97 $ 11,238,26 12.38% 12.38%
2 12/31/95-12/31/97 $ 13,919.77 39.20% 17.98% 12/31/95-12/31/97 $ 12,694.50 26.94% 12.67%
3 12/31/94-12/31/97 $ 14,799.99 48.00% 13.96%
Life 9/28/95-12/31/97 $ 17,504.60 75.05% 28.11% 11/7/94-12/31/97 $ 14,832.73 48.33% 13.33%
</TABLE>
- ------------------------------
*For purposes of determining these investment results, the actual investment
performance of each series of the Series Fund is reflected from the date such
series commenced investment operations, although the Contracts have been
offered only since October, 1996. No information is shown for the Bond Series,
Equity Income Series, Massachusetts Investors Growth Stock Series, New
Discovery Series, Research International Series and Strategic Income Series as
such series had not yet commenced operations as of December 31, 1997. 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.
**Before May 1, 1998, called the Value Series.
96
<PAGE>
ADVERTISING AND SALES LITERATURE
As set forth in the Prospectus, the Company may refer to the following
organizations (and others) in its marketing materials:
A.M. BEST'S RATING SYSTEM is designed to evaluate the various factors
affecting the overall performance of an insurance company in order to provide an
opinion as to an insurance company's relative financial strength and ability to
meet its contractual obligations. The procedure includes both a quantitative and
qualitative review of each company.
DUFF & PHELPS CREDIT RATING COMPANY's Insurance Company Claims Paying
Ability Rating is an independent evaluation by a nationally accredited rating
organization of an insurance company's ability to meet its future obligations
under the contracts and products it sells. The rating takes into account both
quantitative and qualitative factors.
LIPPER VARIABLE INSURANCE PRODUCTS PERFORMANCE ANALYSIS SERVICE is a
publisher of statistical data covering the investment company industry in the
United States and overseas. Lipper is recognized as the leading source of data
on open-end and closed-end funds. Lipper currently tracks the performance of
over 5,000 investment companies and publishes numerous specialized reports,
including reports on performance and portfolio analysis, fee and expense
analysis.
STANDARD & POOR's insurance claims-paying ability rating is an opinion of an
operating insurance company's financial capacity to meet obligations of its
insurance policies in accordance with their terms.
VARDS (Variable Annuity Research Data Service) provides a comprehensive
guide to variable annuity contract features and historical fund performance. The
service also provides a readily understandable analysis of the comparative
characteristics and market performance of funds included in variable contracts.
MOODY'S Investors Services, Inc.'s insurance 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" matricies. 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 varity 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 Series Fund, 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 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.
97
<PAGE>
THE COMPANY'S OR MFS'S CUSTOMERS. Sales literature for the Variable Account
and the Series Fund may refer to the number of clients which they serve. As of
the date of this Prospectus MFS serves approximately 2.9 million investor
accounts.
THE COMPANY'S OR MFS'S ASSETS, SIZE. The Company may discuss its general
financial condition (see, for example, the references to Standard & Poor's, Duff
& Phelps and A.M. Best Company above); it may refer to its assets; it may also
discuss its relative size and/or ranking among companies in the industry or
among any sub-classification of those companies, based upon recognized
evaluation criteria. For example, at year-end 1996 the Company was the 38th
largest U.S. life insurance company based upon overall assets and its parent
company, Sun Life Assurance Company of Canada, was the 19th largest.
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.
98
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
ANNUITY SERVICE MAILING ADDRESS:
RETIREMENT PRODUCTS AND SERVICES
P.O. BOX 1024
BOSTON, MASSACHUSETTS 02103
TELEPHONE:
Toll Free (800) 752-7215
In Massachusetts (617) 348-9600
GENERAL DISTRIBUTOR
Clarendon Insurance Agency, Inc.
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02181
LEGAL COUNSEL
Covington & Burling
1201 Pennsylvania Avenue, N.W.
P.O. Box 7566
Washington, D.C. 20044
AUDITORS
Deloitte & Touche LLP
125 Summer Street
Boston, Massachusetts 02110
CLASSIC-
<PAGE>
SUPPLEMENT DATED MARCH , 1999 TO PROSPECTUS DATED MAY 1, 1998
MFS REGATTA CLASSIC
ISSUED BY
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
-------------------
The following statutory financial statements of the Company for the nine
months ended September 30, 1998 and 1997 and Management's Discussion and
Analysis of Financial Conditions and Results of Operations at September 30, 1998
are hereby attached to and made a part of the Prospectus.
<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
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- --------------
(IN 000'S)
<S> <C> <C>
ADMITTED ASSETS
Bonds $ 1,878,905 $ 1,910,699
Common stocks 127,545 117,229
Mortgage loans on real estate 554,135 684,035
Properties acquired in satisfaction of debt 17,330 22,475
Investment real estate 78,040 78,426
Policy loans 42,149 40,348
Cash & short-term investments 197,542 544,418
Other invested assets 62,787 55,716
Life insurance premiums and annuity considerations due & uncollected 7,790 9,203
Investment income due and accrued 38,507 39,279
Receivable from parent, subsidiaries and affiliates 0 28,825
Funds withheld on reinsurance assumed 1,062,112 982,653
Other assets 23,923 1,841
-------------- --------------
General account assets 4,090,765 4,515,147
Separate account assets
Unitized 10,091,576 9,068,021
Non-unitized 2,161,951 2,343,877
-------------- --------------
Total Admitted Assets $ 16,344,292 $ 15,927,045
-------------- --------------
-------------- --------------
LIABILITIES
Aggregate reserve for life policies and contracts $ 2,283,326 $ 2,188,243
Supplementary contracts 1,787 2,247
Policy and contract claims 3,436 2,460
Provision for policyholders' dividends and coupons payable 37,000 32,500
Liability for premium and other deposit funds 1,080,881 1,450,705
Surrender values on cancelled policies 142 215
Interest maintenance reserve 38,409 33,830
Commissions to agents due or accrued 2,114 2,826
General expenses due or accrued 8,098 7,202
Transfers from Separate Accounts due or accrued (379,065) (284,078)
Taxes, licenses and fees due or accrued, excluding FIT 108 105
Federal income taxes due or accrued 61,628 58,073
Unearned investment income 26 34
Amounts withheld or retained by company as agent or trustee 342 47
Remittances and items not allocated 2,038 1,363
Borrowed money 0 110,142
Asset valuation reserve 43,359 47,605
Reinsurance in unauthorized companies 964 0
Payable to parent, subsidiaries, and affiliates 27,206 0
Payable for securities 23,404 27,104
Other liabilities 19,022 1,959
-------------- --------------
General account liabilities 3,254,225 3,682,582
Separate account liabilities
Unitized 10,091,396 9,067,891
Non-unitized 2,161,951 2,343,877
-------------- --------------
Total liabilities 15,507,572 15,094,350
-------------- --------------
Common capital stock 5,900 5,900
-------------- --------------
Surplus notes 565,000 565,000
Gross paid in and contributed surplus 199,355 199,355
Unassigned funds 66,465 62,440
-------------- --------------
Surplus 830,820 826,795
-------------- --------------
Total common capital stock and surplus 836,720 832,695
-------------- --------------
Total Liabilities, Capital Stock and Surplus $ 16,344,292 $ 15,927,045
-------------- --------------
-------------- --------------
</TABLE>
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS.
1
<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
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
(IN 000'S)
INCOME:
Premiums and annuity considerations $ 203,852 $ 181,809
Deposit-type funds 1,564,472 1,691,235
Considerations for supplementary
contracts without life
contingencies and dividend
accumulations 1,424 940
Net investment income 144,129 209,363
Amortization of interest maintenance
reserve 1,504 813
Net gain from operations from
Separate Accounts Statement 1 4
Other income 80,779 73,614
---------- ----------
Total 1,996,161 2,157,778
---------- ----------
BENEFITS AND EXPENSES
Death benefits 17,892 15,994
Annuity benefits 113,713 109,690
Surrender benefits and other fund
withdrawals 1,466,827 1,388,459
Interest on policy or contract funds 461 194
Payments on supplementary contracts
without life contingencies and of
dividend accumulations 1,946 766
Increase in aggregate reserves for
life and accident and health
policies and contracts 95,083 92,567
Decrease in liability for premium
and other deposit funds (369,825) (349,640)
Increase (decrease) in reserve for
supplementary contracts without
life contingencies and for dividend
and coupon accumulations (461) 255
---------- ----------
Total 1,325,636 1,258,285
Commissions on premiums and annuity
considerations (direct business
only) 102,544 104,650
Commissions and expense allowances
on reinsurance assumed 13,032 12,858
General insurance expenses 42,788 31,150
Insurance taxes, licenses and fees,
excluding federal income taxes 5,213 6,175
Decrease in loading on and cost of
collection in excess of loading on
deferred and uncollected premiums (331) (286)
Net transfers to Separate Accounts 396,163 621,996
---------- ----------
Total 1,885,045 2,034,828
---------- ----------
Net gain from operations before
dividends to policyholders and FIT 111,116 122,950
Dividends to policyholders 31,019 24,227
---------- ----------
Net gain from operations after
dividends to policyholders and
before FIT 80,097 98,723
Federal income tax expense (benefit)
(excluding tax on capital gains) 32,206 (833)
---------- ----------
Net gain from operations after
dividends to policyholders and FIT
and before realized capital gains 47,891 99,556
Net realized capital gains less
capital gains tax and transferred
to the IMR 4,807 5,183
---------- ----------
NET INCOME $ 52,698 $ 104,739
---------- ----------
---------- ----------
</TABLE>
SEE NOTES TO UNAUDITED STATUTORY FINANCIAL STATEMENTS.
2
<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
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------
1998 1997
-------- --------
(IN 000'S)
<S> <C> <C>
INCOME:
Premiums and annuity considerations $ 67,719 $ 63,122
Deposit-type funds 568,447 530,735
Considerations for supplementary
contracts without life
contingencies and dividend
accumulations 280 390
Net investment income 44,398 68,033
Amortization of interest maintenance
reserve 581 432
Net gain from operations from
Separate Accounts (2) 4
Statement
Other income 27,400 27,226
-------- --------
Total 708,823 689,942
-------- --------
BENEFITS AND EXPENSES
Death benefits 2,059 9,624
Annuity benefits 40,636 38,763
Surrender benefits and other fund
withdrawals 478,645 494,811
Interest on policy or contract funds 199 39
Payments on supplementary contracts
without life contingencies and of
dividend accumulations 747 315
Increase in aggregate reserves for
life and accident and health
policies and contracts 36,834 26,880
Decrease in liability for premium
and other deposit funds (88,386) (123,462)
Increase (decrease) in reserve for
supplementary contracts without
life contingencies and for dividend
and coupon accumulations (447) 110
-------- --------
Total 470,287 447,080
Commissions on premiums and annuity
considerations (direct business
only) 35,929 33,663
Commissions and expense allowances
on reinsurance assumed 4,806 4,502
General insurance expenses 13,004 12,267
Insurance taxes, licenses and fees,
excluding federal income taxes 1,483 1,698
Decrease in loading on and cost of
collection in excess of loading on
deferred and uncollected premiums (98) (56)
Net transfers to Separate Accounts 138,845 148,926
-------- --------
Total 664,256 648,080
-------- --------
Net gain from operations before
dividends to policyholders and FIT 44,567 41,862
Dividends to policyholders 11,111 8,114
-------- --------
Net gain from operations after
dividends to policyholders and
before FIT 33,456 33,748
Federal income tax expense (benefit)
(excluding tax on capital gains) 17,652 (6,193)
-------- --------
Net gain from operations after
dividends to policyholders and FIT
and before realized capital gains 15,804 39,941
Net realized capital gains less
capital gains tax and transferred
to the IMR 1,692 3,164
-------- --------
NET INCOME $ 17,496 $ 43,105
-------- --------
-------- --------
</TABLE>
SEE NOTES TO UNAUDITED STATUTORY FINANCIAL STATEMENTS.
3
<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
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
---------- ----------
(IN 000'S)
<S> <C> <C>
Capital and surplus, beginning of period $ 832,695 $ 567,143
---------- ----------
Net income 52,698 104,739
Change in net unrealized capital gains (1,421) 2,329
Change in non-admitted assets and related items (581) 556
Change in liability for reinsurance in unauthorized companies (964) 0
Change in asset valuation reserve 4,245 (9,092)
Other changes in surplus in Separate Accounts Statement 48 0
Dividends to stockholders (50,000) 0
---------- ----------
Net change in capital and surplus for the period 4,025 98,532
---------- ----------
Capital and surplus, end of period $ 836,720 $ 665,675
---------- ----------
---------- ----------
</TABLE>
SEE NOTES TO UNAUDITED STATUTORY FINANCIAL STATEMENTS.
4
<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
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
----------- -----------
(IN 000'S)
<S> <C> <C>
Cash Provided
Premiums, annuity considerations and
deposit funds received $ 1,770,069 $ 1,875,447
Considerations for supplementary
contracts and dividend accumulations
received 1,424 940
Net investment income received 182,263 236,074
Other income received 82,206 73,614
----------- -----------
Total receipts 2,035,962 2,186,075
----------- -----------
Benefits paid (other than dividends) 1,599,475 1,513,599
Insurance expenses and taxes paid
(other than federal income and
capital gains taxes) 166,425 147,956
Net cash transfers to Separate Accounts 491,151 683,534
Dividends paid to policyholders 26,519 20,477
Federal income tax payments (excluding
tax on capital gains) 28,224 (317)
Other--net 461 194
----------- -----------
Total payments 2,312,255 2,365,443
----------- -----------
Net cash from operations (276,293) (179,368)
----------- -----------
Proceeds from long-term investments
sold, matured or repaid (after
deducting taxes on capital gains of
$428,228 for 1998, $374,528 for 1997) 1,075,039 820,973
Other cash provided (50,530) 607,676
----------- -----------
Total cash provided 1,024,509 1,428,649
----------- -----------
Cash Applied
Cost of long-term investments acquired 919,918 554,900
Other cash applied 175,174 135,425
----------- -----------
Total cash applied 1,095,092 690,325
----------- -----------
Net change in cash and short-term
investments (346,877) 558,956
Cash and short-term investments:
Beginning of period 544,418 90,059
----------- -----------
End of period $ 197,542 $ 649,015
----------- -----------
----------- -----------
</TABLE>
SEE NOTES TO UNAUDITED STATUTORY FINANCIAL STATEMENTS.
5
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(1) GENERAL
In management's opinion all adjustments, which include only normal recurring
adjustments, necessary for a fair presentation of the financial statements have
been made.
(2) MANAGEMENT AND SERVICE CONTRACTS
The Company has an agreement with its ultimate parent, Sun Life Assurance
Company of Canada ('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 $2,879,000 and
$15,677,000 for the three and nine month periods in 1998 and $5,337,000 and
$13,871,000 for the same periods in 1997.
(3) INVESTMENTS IN SUBSIDIARIES
The following is combined unaudited summarized financial information of the
subsidiaries as of:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- --------------
(IN 000'S)
<S> <C> <C>
Other assets $ 1,233,207 $ 1,190,951
Liabilities (1,105,654) (1,073,966)
-------------- --------------
Total net assets $ 127,553 $ 116,985
-------------- --------------
-------------- --------------
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
----------- -----------
(IN 000'S)
<S> <C> <C>
Total revenue $ 175,856 $ 665,904
Operating expenses (173,093) (585,857)
Income tax expense (1,710) (36,944)
----------- -----------
Net income $ 1,053 $ 43,103
----------- -----------
----------- -----------
</TABLE>
The following is combined unaudited summarized financial information of the
subsidiaries as of:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1998 1997
---------- -----------
(IN 000'S)
<S> <C> <C>
Total revenue $ 49,704 $ 237,369
Operating expenses (48,704) (205,368)
Income tax expense 85 (15,303)
---------- -----------
Net income $ 1,085 $ 16,698
---------- -----------
---------- -----------
</TABLE>
In determining the equity in income of subsidiaries for the periods, the Company
has excluded expenses of approximately $396,000 and $2,369,000 for the three and
nine month periods in 1998 and $11,819,000 and $28,443,000 for the same periods
in 1997, representing payables to the Company in lieu of federal income taxes.
On December 24, 1997, the Company transferred all of its shares of Massachusetts
Financial Services Company ("MFS") to its parent Sun Life of Canada (U.S.)
Holdings, Inc. ("Life Holdco").
6
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO UNAUDITED FINANCIAL STATEMENTS (CONTINUED)
(4) INVESTMENT INCOME
Net investment income consisted of:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
---------- ----------
(IN 000'S)
<S> <C> <C>
Interest income from bonds $ 128,687 $ 141,610
Income from investment in common stocks of affiliates 3,000 33,681
Interest income from mortgage loans 41,025 59,716
Real estate investment income 11,729 10,290
Interest income from policy loans 2,115 2,230
Other (264) (353)
---------- ----------
Gross investment income 186,292 246,874
Interest on surplus notes and borrowed money 34,087 29,375
Investment expenses 8,076 8,136
---------- ----------
$ 144,129 $ 209,363
---------- ----------
---------- ----------
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1998 1997
--------- ---------
(IN 000'S)
<S> <C> <C>
Interest income from bonds $ 40,609 $ 50,284
Income from investment in common stocks of affiliates 0 11,040
Interest income from mortgage loans 13,140 18,500
Real estate investment income 3,848 4,020
Interest income from policy loans 723 734
Other (506) (263)
--------- ---------
Gross investment income 57,814 84,315
Interest on surplus notes and borrowed money 10,816 13,727
Investment expenses 2,600 2,555
--------- ---------
$ 44,398 $ 68,033
--------- ---------
--------- ---------
</TABLE>
(5) SUBSEQUENT EVENT
In October 1998, the Company entered into a definitive agreement to sell its
wholly-owned subsidiary, Massachusetts Casualty Insurance Company to Centre
Reinsurance Holdings, Ltd. This transaction is expected to be completed by or
near year-end 1998, subject to regulatory approvals. This transaction is not
expected to have a significant effect on the ongoing operations of the Company.
7
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FINANCIAL CONDITION -- SEPTEMBER 30, 1998
ASSETS
Total admitted assets increased by $417.2 million to $16,344.3 million in the
nine months ended September 30, 1998. This increase reflected a decline of
$424.4 million in general account assets offset by an increase in separate
account assets of $841.6 million.
The major element of the decline in general account assets was a $494.9 million
decrease in cash and invested assets. Partially offsetting this decline was a
$101.5 million increase in other assets. These changes are discussed in more
detail below.
Cash decreased during 1998, by $346.9 million partly as a result of the
deployment of $250.0 million of proceeds from the Company's surplus note issued
in December 1997. Cash also decreased as a result of the Company's payment, in
the first half of 1998, of $46.0 million of dividends to its parent, Sun Life of
Canada (U.S.) Holdings, Inc. ("Life Holdco") and by its repayment, in January
1998, of its $110.0 million short-term note to its penultimate parent, Sun Life
Assurance Company of Canada--U.S. Operations Holdings, Inc. ("U.S. Holdco").
General account invested assets other than cash declined by $148.0 million. The
decline in general account invested assets during the first nine months of 1998
was mostly evident in mortgages, which decreased by $129.9 million to $554.1
million at September 30, 1998, mainly as a result of scheduled maturities and
early repayments. The decline is also reflected in the fact that maturities of
pension and fixed annuity contracts exceeded general account fixed asset
deposits. This trend resulted in part from the Company's decision in 1997 to
discontinue selling group pension and GIC contracts and to focus its marketing
efforts on its combination fixed/variable annuity products. As a result,
separate account assets have increased while general account assets have
decreased. The Company expects these trends to continue, as sales of separate
account products continue to be emphasized.
Other general account assets increased $101.5 million in the nine months ended
September 30, 1998, almost entirely reflecting an increase in funds withheld for
reinsurance assumed.
LIABILITIES
The majority of the Company's liabilities consist of reserves for life insurance
and annuity contracts and deposit funds. Although total liabilities increased by
$413.2 million to $15,507.6 million in the nine months ended September 30, 1998,
general account liabilities decreased by $428.3 million to $3,254.2 million. The
liability for premium and other deposits decreased $369.8 million over the first
nine months of 1998. The Company expects this declining trend in general account
liabilities to continue, since net maturities are expected to exceed sales for
the fixed contracts associated with these liabilities, particularly in view of
the Company's decision in 1997 to discontinue selling group pension and GIC
contracts and to focus its marketing efforts on its combination fixed/variable
annuity products. Also contributing to this decline was the Company's repayment,
during the first quarter of 1998, of its $110.0 million short-term note payable
to U.S. Holdco.
CAPITAL AND SURPLUS
Capital and surplus increased by $4.0 million to $836.7 million over the first
nine months of 1998. This net change primarily reflected net income during the
period of $52.7 million, offset in part by the Company's having declared during
the second quarter of 1998 a shareholder dividend of $50.0 million. As noted
above, $46.0 million of this dividend has been paid through September 30, 1998.
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
8
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
primarily to pay out death benefits and other maturing insurance and annuity
contract obligations, pay out on contract terminations, fund investment
commitments, and pay normal operating expenses and taxes. Cash outflows are met
from the normal net cash inflows.
The Company segments its general account business internally in order to better
manage projected cash inflows and outflows within each segment defined to be an
identifiable pool of assets. 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 necessary funds. Government and publicly
traded bonds comprise 55.0% 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.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
NET INCOME
Net income decreased by $52.0 million from $104.7 million to $52.7 million, for
the nine months ended September 30, 1998 as compared to the same period in 1997.
Three factors primarily affected the decrease in net income period over period.
First, a reorganization by the Company in December 1997 (discussed below)
resulted in lower earnings from subsidiaries (by $30.7 million) and higher
federal income taxes (by $33.0 million). Second, the growth in the Company's
direct business, primarily its fixed/variable annuity products, resulted in
higher net income, by approximately $10.1 million. (Increasing annuity account
balances, resulting from both strong market performance and sales, has generated
corresponding increases in annuity fee income.) Third, the effects of
reinsurance arrangements with its ultimate parent, Sun Life Assurance Company of
Canada ("SLOC"), resulted in higher net income of $1.6 million. These items are
discussed in more detail below.
INCOME
Total income decreased by $161.6 million to $1,996.2 million for the first nine
months of 1998. This decrease mainly reflected lower premiums and deposits, of
$104.2 million, and lower net investment income of $65.2 million.
The reinsurance arrangements with SLOC had the effect of increasing income by
approximately $13.7 million due to increased premiums of $8.0 million resulting
from policyholders using dividends to purchase "paid-up additions" to their
policies; and higher interest income of $5.8 million on the funds withheld in
conjunction with the reinsurance arrangements.
With respect to the company's direct business, deposits from sales of the
company's combination fixed/ variable annuity products (net of annuitizations)
declined by $126.8 million in the first nine months of 1998 compared to the same
period in 1997, primarily as a result of lower deposits (approximately $173.0
million) into these products' dollar cost averaging ("DCA") programs. Under
these programs, which were introduced in late 1996, deposits are made into the
fixed portion of the annuity contract and receive a bonus rate of interest for
the policy year. During the year, the fixed deposit is exchanged to the variable
portion of the contract in equal periodic installments. The Company believes the
decline in DCA deposits in 1998, in part, has resulted from heightened
competition, as other companies have introduced similar DCA programs within the
past year. In early 1998, the Company took steps to diversify the marketing of
its variable annuity business by offering variable annuity funds managed by a
variety of non-affiliated managers. Premiums and annuity considerations
increased by $22.0 million in the first nine months of 1998 compared to the same
prior-year period partially as a result of the introduction of a new corporate
owned life insurance product.
9
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
Net investment income decreased by $65.2 million period over period. This
decrease mainly reflected lower interest income on bonds and mortgages of $31.6
million; and lower dividends from subsidiaries of $30.7 million. It also
reflected higher interest expense on surplus notes and borrowed money (by $4.7
million).
The lower interest income on bonds and mortgages was a direct function of
declining general account invested assets. As noted above, the Company expects
that, absent other factors, the declining trend in general account invested
assets will continue and will have a corresponding effect on interest income.
The decrease in dividends from subsidiaries resulted primarily from the
reorganization, completed in December 1997, under which the Company transferred
all of its outstanding shares of Massachusetts Financial Services Company
("MFS") to its parent, Life Holdco. As a result of this reorganization, the
Company received no dividends from MFS in 1998, whereas in the first nine months
of 1997, the Company received $33.1 million of dividends from MFS. Dividends
from other subsidiaries, however, were higher by $2.4 million period over
period.
The increase in interest expense on surplus notes and borrowed money reflected
the higher surplus notes balance in 1998, resulting from the Company's issuance,
in December 1997, of a $250.0 million surplus note. It also reflected interest
expense related to the Company's $110 million note payable, issued in December
1997 and repaid in January 1998 to U.S. Holdco.
BENEFITS & EXPENSES
Benefits and expenses decreased by $149.8 million from $2,034.8 to $1,885.0
million for the nine-month period ended September 30, 1998 as compared to the
same period in 1997.
Reinsurance arrangements with SLOC had the effect of increasing benefits and
expenses by $5.4 million. This increase mainly reflected higher death benefits
on reinsurance assumed of $4.4 million, resulting from the occurrence of a small
number of relatively large claims during 1998.
With respect to direct business, the sum of death benefits, annuity payments,
and surrender benefits and other fund withdrawals increased by $78.8 million.
Partially offsetting this aggregate change was a greater decrease of $20.4
million in the liability for premium and other deposit funds in the first nine
months of 1998 compared to the same period in 1997. These changes mainly
reflected surrenders and withdrawals, primarily occurring in the first half of
1998, related to separate account contracts issued at least seven years
previously, for which the surrender charge period has now expired.
Commissions decreased by $2.1 million reflecting the decrease in total sales of
combination fixed/variable annuities. General insurance expenses and insurance
taxes, licenses and fees, taken together, increased by $10.7 million. This
increase mainly reflected increased investment in technology, both to support
the growth of the Company's in-force business, particularly its fixed/variable
annuities, and to assure that the Company's information systems are Year 2000
compliant. (See below.) Net transfers to the separate accounts decreased by
$225.8 million due to the maturing block of annuity business and to the decrease
in annuity sales period over period.
FEDERAL INCOME TAXES
As a result of the reorganization by the Company in December 1997, certain
subsidiary tax benefits are no longer available to the Company. Federal income
taxes were $33.0 million higher in the first nine months of 1998 than in the
same period in 1997.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
NET INCOME
Net income decreased by $25.6 million from $43.1 million to $17.5 million, for
the three months ended September 30, 1998 as compared to the same period in
1997.
10
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
Key factors affecting the decrease in net income period over period were: lower
earnings from subsidiaries (by $11.0 million) and higher federal income taxes
(by $23.8 million), mainly as a result of the Company's reorganization in
December 1997; the growth in the Company's direct business, primarily its
fixed/variable annuity products, resulting in higher net income (approximately
$3.9 million); and the effects of reinsurance arrangements with SLOC, resulting
in higher net income of $5.3 million. These items are discussed in more detail
below.
INCOME
Total income increased by $18.9 million to $708.8 million for the third quarter
of 1998 compared to the same period in 1997. This increase mainly reflected
higher premiums and deposits of $42.3 million, partially offset by lower net
investment income of $23.6 million.
With respect to the increase in premiums and deposits, annuity deposits
increased by $37.7 million overall, mainly from higher deposits into variable
accounts (approximately $50.0 million) while DCA deposits remained flat overall.
Fixed annuity deposits were down by $10.7 million. Corporate owned life premiums
were higher by $1.0 million quarter over quarter.
The reinsurance arrangements with SLOC had the effect of increasing income by
approximately $6.2 million mainly due to increased premiums resulting from
policyholders using dividends to purchase "paid-up additions" to their policies.
Net investment income decreased $23.6 million period over period. This decrease
mainly reflected lower interest income on bonds and mortgages of $15.0 million;
and lower earnings from subsidiaries of $11.0 million. Lower interest expense on
surplus notes and borrowed money (by $2.9 million) partially offset these
factors.
The lower interest income on bonds and mortgages was a direct function of
declining general account invested assets. As noted above, the Company expects
that, absent countervailing factors, the declining trend in general account
invested assets will continue and will have a corresponding effect on interest
income.
The decrease in dividends from subsidiaries resulted primarily from the
reorganization, completed in December 1997, under which the Company transferred
all of its outstanding shares of Massachusetts Financial Services Company
("MFS") to its parent, Life Holdco. As a result of this reorganization, the
Company received no dividends from MFS in 1998. In the third quarter of 1997,
the Company received $11.0 million of dividends from MFS.
BENEFITS & EXPENSES
Benefits and expenses increased by $16.2 million to $664.3 million for the
three-months ended September 30, 1998 as compared to the same period in 1997.
Reinsurance arrangements with SLOC had the effect of decreasing benefits and
expenses by $2.1 million. This increase mainly reflected lower death and
surrender benefits of $5.1 million on reinsurance assumed. The change in
aggregate reserves for life policies, however, increased by $2.8 million
reflecting growth in the underlying block of business.
With respect to direct business, the sum of death benefits, annuity payments,
and surrender benefits and other fund withdrawals decreased by $16.7 million.
However, more than offsetting this aggregate change was a lower decrease of
$35.1 million in the liability for premium and other deposit funds in the third
quarter of 1998 compared to the same period in 1997. Commissions increased by
$2.3 million reflecting the increase in sales of combination fixed/variable
annuities.
FEDERAL INCOME TAXES
As a result of the reorganization by the Company in December 1997, certain
subsidiary tax benefits are no longer available to the Company. Federal income
taxes were $23.8 million higher in the third quarter of 1998 than in the same
period in 1997.
11
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
OTHER
In October 1998, the Company entered into a definitive agreement to sell its
wholly-owned subsidiary, Massachusetts Casualty Insurance Company to Centre
Reinsurance Holdings, Ltd. This transaction is expected to be completed by or
near year-end 1998, subject to regulatory approvals. This transaction is not
expected to have a significant effect on the ongoing operations of the Company.
YEAR 2000 COMPLIANCE
During the fourth quarter of 1996, the Company began a comprehensive analysis of
its information technology ("IT") and non-IT systems, including its hardware,
software, data, data feed products, and internal and external supporting
services, to address the ability of these systems to correctly process date
calculations through the year 2000 and beyond. The Company created a full-time
Year 2000 project team in early 1997 to manage this endeavor across the Company.
This team, which works with dedicated personnel from all business units and with
the legal and audit departments, reports directly to the Company's senior
management on a monthly basis. In addition, the Company's Year 2000 project is
periodically reviewed by internal and external auditors.
To date, relevant systems have been identified and their components inventoried,
needed resolutions have been documented, timelines and project plans have been
developed, remediation and testing are in process, and over 70% of Company
applications have been certified as compliant. The Company's goal is to complete
the majority of the effort by the end of 1998. However, a small number of tasks
will be pushed into the first quarter of 1999 to accommodate testing of vendor
upgrades not available until late 1998, re-testing interfaces once all systems
are certified as compliant, and re-testing of mission critical functions.
In mid-1997, the project team contacted all key vendors to obtain either their
certification for the products and services provided or their plan to make those
products and services compliant. To date, approximately 90% of these vendors
have responded, and the project team is in the process of reviewing these
responses. In addition, the project team recently has opened communications with
critical business partners, such as third-party administrators, investment
property managers, investment mortgage correspondents, and others, with the goal
that these partners will continue to be able to support the Company's objective
of assuring Year 2000 compliance.
Non-IT applications will be tested in accordance with the Company's standard
Year 2000 test strategy, including building security, HVAC systems, and other
such systems. Compliant client server and mainframe environments have been built
which allow for testing of critical dates such as December 31, 1999, January 1,
2000, February 28, 2000, February 29, 2000, and March 1, 2000 without impact to
current production.
Although the Company expects all critical systems to be Year 2000 compliant
before the end of 1999, there can be no assurance that this result will be
completely achieved. Factors giving rise to this uncertainty include possible
loss of technical resources to perform the work, failure to identify all
susceptible systems, non-compliance by third-parties whose systems and
operations affect the company, and other similar uncertainties. A possible
worst-case scenario might include one or more of the Company's significant
systems being non-compliant. Such a scenario could result in material disruption
to the company's operations. Consequences of such disruptions could include,
among other possibilities, the inability to update customers' accounts, process
payments and other financial transactions; and report accurate data to
management, customers, regulators, and others. Consequences also could include
business interruptions or shutdowns, reputational harm, increased scrutiny by
regulators, and litigation related to Year 2000 issues. Such potential
consequences, depending on their nature and duration, could have a material
impact on the Company's results of operations and financial position.
In order to mitigate the risks to the Company of material adverse operational or
financial impacts from failure to achieve planned Year 2000 compliance, the
Company has established contingency planning at the business unit and corporate
levels. Each business unit has ranked its applications as being of high, medium
or low business risk to ensure that the most critical are addressed first. The
business units also have developed alternate plans of action where possible, and
established dates for the alternate plans to be
12
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
enacted. On the corporate level, the Company is in the process of enhancing its
business continuation plan, by identifying minimum requirements for facilities,
computing, staffing, and other factors; and it is developing a plan to support
those requirements.
By year-end 1998, the Company expects to have expended, cumulatively,
approximately $7 million on its Year 2000 effort, and it expects to incur a
further $4.8 million on this effort in 1999.
CAUTIONARY STATEMENT
Statements by the Company in the Registration Statement and in other contexts
that are not historical fact are forward-looking statements as defined in the
Private Securities Litigation Reform Act of 1995. These may include, among
others, forward-looking statements relating to Year 2000 compliance, volume
growth, market share, and financial goals. These forward-looking statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those anticipated in the forward-looking statements,
including but not limited to the following: (1) uncertainties relating to the
ability of the Company to identify and address Year 2000 issues successfully and
in a timely manner and at costs that are reasonably in line with the Company's
estimates, and the ability of the Company's vendors, suppliers, other service
providers, and customers to identify and address successfully their own Year
2000 issues in a timely manner; (2) heightened competition, particularly with
respect to price, product features, and distribution capability, which could
constrain growth and profitability in the Company's businesses; (3) significant
changes in interest rates and market conditions; and (4) regulatory and
legislative uncertainties and developments.
QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 any 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 fixed interest investments 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. 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 deployed 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
13
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
interest rate exposure to different parts of the yield curve and manage
non-parallel curve movements; and active portfolio management, including the use
of derivatives (e.g. interest rate swaps) for portfolio restructuring.
An Interest Rate Risk Committee meets monthly and after reviewing the duration
reports for various portfolios, market conditions and forecasts, the committee
develops asset management strategies for interest sensitive portfolios. These
strategies may involve managing assets to small intentional mismatches, either
at the total effective duration level or at certain KRDs but, in any event, the
overall duration gap between interest sensitive assets and liabilities is
managed within a tolerance range of +/- 0.25 effective duration.
The estimates presented here are from computer model simulations which, because
they are predictions about the future, contain a certain degree of uncertainty.
For example, there are algorithms for assumptions about policyholder behavior
and asset cash flows and consequently estimates of duration and market values
which may or may not represent what actually will occur. Also there is no
provision in the estimates to incorporate any management decisions which might
be taken to mitigate against adverse results. The company is sufficiently
comfortable with its interest rate risk management process to feel the exposure
to interest rate changes will not materially affect the near-term financial
position, results of operations or cash flows of the Company.
The Company's fixed interest investments had an aggregate fair value at
September 30, 1998 of $2,844.1 million. A portion of the Company's general
account liabilities of $3,254.2 million are categorized as financial
instruments. The portion of the liabilities so categorized had a carrying value
of $1,584.8 million and a fair value of $1,641.5 million at September 30, 1998.
Using modeling and analytical software, the Company performed sensitivity
analysis of its financial instruments at September 30, 1998. 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 $118.8
million. A corresponding decrease in the fair value of the liabilities
categorized as financial instruments is estimated to be $50.8 million at
September 30, 1998.
14
<PAGE>
PROSPECTUS
MARCH , 1999
FUTURITY FOCUS
- --------------------------------------------------------------------------------
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 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 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 both individual
Contract owners and participating individuals under Group Contracts.
The initial Purchase Payment for each Contract must be at least $25,000 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.
THIS PROSPECTUS SETS FORTH INFORMATION ABOUT THE CONTRACTS AND THE VARIABLE
ACCOUNT THAT A PROSPECTIVE PURCHASER SHOULD KNOW BEFORE INVESTING. YOU SHOULD
RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE.
*ANY REFERENCE IN THIS PROSPECTUS TO RECEIPT BY THE COMPANY MEANS RECEIPT AT ITS
ANNUITY SERVICE MAILING ADDRESS, C/O SUN LIFE ASSURANCE COMPANY OF CANADA
(U.S.), RETIREMENT PRODUCTS AND SERVICES, P.O. BOX 9133, BOSTON, MASSACHUSETTS
02117.
<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 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 18 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 as selected by the
Participant. The Fixed Account is the general account of the Company (See "The
Fixed Account," page 15). The Company will credit interest at a rate of not less
than 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 of 3%). 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. After a Purchase Payment has been held by the Company for one
year it may be withdrawn without charge. Also, no withdrawal charge is assessed
upon annuitization, upon payment of the death benefit or upon transfers. In
addition, when a withdrawal is made from a Qualified Contract to comply with
mandatory distribution requirements, no withdrawal charge will be applied to the
amount required to be distributed. Other amounts withdrawn, adjusted by any
applicable Market Value Adjustment with respect to the Fixed Account, will be
subject to a withdrawal charge of 1%. In no event will the the withdrawal
charges assessed against a Participant's Account exceed 1% of Purchase Payments
(See "Withdrawal Charges," page 26).
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, 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 or, if the Guarantee Period was established through
the Monthly or Quarterly Dollar Cost Averaging Options, for current allocations
to these options) 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 28).
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 with Tax
Sheltered Annuities established pursuant to Section 403(b) of the Code (See
"Section 403(b) Annuities," page 27).
In addition, under certain circumstances withdrawals may result in tax
penalties (See "Federal Tax Status" on page 38). 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
25.
On each Account Anniversary and on surrender of a Contract for full value
the Company will deduct a $50 annual account administration fee ("Account Fee")
from the Participant's Account. After the Annuity Commencement Date, the annual
Account Fee will be deducted in equal amounts from each variable annuity payment
made during the year. In addition, the Company makes a deduction from the
Variable
2
<PAGE>
Account at the end of each Valuation Period at an effective 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 will be waived by the Company when a
Participant's Account Value is greater than $100,000 on the Account Anniversary
(See "Administrative Charges," page 30).
The Company also deducts a mortality and expense risk charge at the end of
each Valuation Period equal to an effective annual rate of 1.00% of the daily
net assets of the Variable Account for mortality and expense risks assumed by
the Company (See "Mortality and Expense Risk Charge," page 30).
In addition, the 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 37).
In the event of the death of the Annuitant prior to the Annuity Commencement
Date, the Company will pay a death benefit to the Beneficiary. If the death of
the Annuitant occurs on or after the Annuity Commencement Date, no death benefit
will be payable except as may be provided under the Annuity Option elected (See
"Death Benefit," page 28).
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 31).
Premium taxes payable to any governmental entity will be deducted from the
Participant's Account (See "Premium Taxes," page 30).
Subject to certain conditions, and during the Accumulation Period, the
Participant may transfer amounts among the Sub-Accounts or Guarantee Periods
available under the Contract. Currently there is no charge for transfers.
Transfers 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
24).
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 34).
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 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 36).
The Company will furnish Participants and such other persons having voting
rights with certain reports and statements (See "Periodic Reports," page 36).
Such reports, other than prospectuses, will not include the Company's financial
statements.
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 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. However, if applicable state or
3
<PAGE>
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 (See "Right
to Return," page 38).
AVAILABLE INFORMATION
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "1934 Act"), 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 7 World Trade Center, 13th Floor, 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 WebSite that contains reports, proxy and
information statements and other information about the Company, which files such
documents electronically with the Commission, at the following address:
http://www.sec.gov.
The Company has filed registration statements (the "Registration
Statements") with the Commission under the Securities Act of 1933 relating to
the Contracts. 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, the
Current Report on Form 8-K dated January 8, 1998, and the Quarterly Reports on
Form 10-Q for the three-month periods ended March 31, 1998, June 30, 1998 and
September 30, 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.
4
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Definitions 7
Expense Summary 10
Performance Data 14
This Prospectus Is a Catalog of Facts 14
Uses of the Contracts 14
A Word About the Company, the Fixed Account, the Variable
Account and the Funds 15
The Company 15
The Fixed Account 15
The Variable Account 17
The Funds 18
Purchase Payments and Contract Values During Accumulation
Period 21
Purchase Payments 21
Participant's Account 21
Variable Accumulation Value 21
Fixed Accumulation Value 22
Guarantee Periods 22
Guaranteed Interest Rates 23
Dollar Cost Averaging 23
Asset Allocation 24
Transfer Privilege; Telephone Transfers; Restriction on
Market Timers 24
Waivers; Reduced Charges; Credits; Bonus Guaranteed
Interest Rates 25
Cash Withdrawals, Withdrawal Charges and Market Value
Adjustment 25
Cash Withdrawals 25
Withdrawal Charges 26
Amount of Withdrawal Charge 27
Section 403(b) Annuities 27
Market Value Adjustment 28
Death Benefit 28
Death Benefit Provided by the Contracts 28
Election and Effective Date of Election 28
Payment of Death Benefit 29
Amount of Death Benefit 29
How the Contract Charges Are Assessed 29
Administrative Charges 30
Premium Taxes 30
Mortality and Expense Risk Charge 30
Withdrawal Charges 31
Annuity Provisions 31
Annuity Commencement Date 31
Election--Change of Annuity Option 31
Annuity Options 32
Determination of Annuity Payments 33
Fixed Annuity Payments 33
Variable Annuity Payments 33
Annuity Unit Value 33
Exchange of Variable Annuity Units 33
Annuity Payment Rates 34
</TABLE>
5
<PAGE>
TABLE OF CONTENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C>
Other Contract Provisions 34
Payment Limits 34
Designation and Change of Beneficiary 34
Exercise of Contract Rights 34
Change of Ownership 35
Death of Participant 35
Voting of Fund Shares 36
Periodic Reports 36
Substituted Securities 37
Change in Operation of Variable Account 37
Splitting Units 37
Modification 37
Discontinuance of New Participants 38
Custodian 38
Right to Return 38
Federal Tax Status 38
Introduction 38
Tax Treatment of the Company and the Variable Account 39
Taxation of Annuities in General 39
Qualified Retirement Plans 41
Pension and Profit-Sharing Plans 41
Tax-Sheltered Annuities 41
Individual Retirement Accounts 41
Roth IRAs 41
Administration of the Contracts 42
Distribution of the Contracts 42
Additional Information About the Company 43
Selected Financial Data 43
Management's Discussion and Analysis of Financial
Condition and Results of Operations 43
Liquidity 46
Year 2000 Compliance 46
Recent Reorganization 46
Asset/Liability Management and Information about Market
Risk 47
Sun Life (Canada) 48
Reinsurance 48
Reserves 48
Investments 48
Competition 49
Employees 49
Properties 49
The Company's Directors and Executive Officers 49
State Regulation 52
Legal Proceedings 53
Accountants 53
Registration Statements 53
Financial Statements 53
Appendix A--Variable Accumulation Unit Value, Annuity Unit
Value and Variable Annuity Payment Calculations 100
Appendix B--Withdrawals, Withdrawal Charges and the Market
Value Adjustment 101
Appendix C--Calculation of Performance Data; Advertising and
Sales Literature 103
</TABLE>
6
<PAGE>
DEFINITIONS
The following terms as used in this Prospectus have the indicated meanings:
ACCOUNT YEARS and ACCOUNT ANNIVERSARIES: The first Account Year shall be
the period of 12 months plus a part of a month as measured from the Date of
Coverage for each Participant to the first day of the calendar month which
follows the calendar month of coverage. All Account Years and Anniversaries
thereafter shall be 12 month periods based upon such first day of the calendar
month which follows the calendar month of coverage. If, for example, the Date of
Coverage is in March, the first Account Year will be determined from the Date of
Coverage but will end on the last day of March in the following year; all other
Account Years and all Account Anniversaries will be measured from April 1.
ACCUMULATION PERIOD: The period before the Annuity Commencement Date and
during the lifetime of the Annuitant.
*ANNUITANT: The person (or persons) on whose life the first annuity payment
is to be made. The Participant may not designate a "Co-Annuitant" unless the
Participant and Annuitant are different persons. If more than one person is so
named, all provisions of the Contract which are based on the death of the
"Annuitant" will be based on the date of death of the last surviving of the
persons so named. By example, the death benefit will become due only upon the
death, prior to the Annuity Commencement Date, of the last survivor of the
persons so named. Collectively, these persons are referred to in the Contract as
"Annuitants." The Participant is not permitted to name a "Co-Annuitant" under a
Qualified Contract.
*ANNUITY COMMENCEMENT DATE: The date on which the first annuity payment
under each Certificate is to be made.
*ANNUITY OPTION: The method for making annuity payments.
ANNUITY UNIT: A unit of measure used in the calculation of the amount of
the second and each subsequent variable annuity payment from the Variable
Account.
APPLICATION: The document signed by each Participant that serves as his or
her application for participation under a Group Contract or purchase of an
Individual Contract.
*BENEFICIARY: The person or entity having the right to receive the death
benefit set forth in each Certificate and, for Non-Qualified Contracts, who is
the "designated beneficiary" for purposes of Section 72(s) of the Code in the
event of the Participant's death.
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" includes Certificates.
CODE: The 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.
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.
EXPIRATION DATE: The last day of a Guarantee Period.
FIXED ACCOUNT: The Fixed Account consists of all assets of the Company
other than those allocated to a separate account of the Company.
- ---------
*As specified in the Application, unless changed.
7
<PAGE>
FIXED ACCUMULATION VALUE: The sum of the values of all Guarantee Amounts
credited to a Participant's Account.
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.
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 the Contract becomes effective.
NET PURCHASE PAYMENT: That portion of a Purchase Payment which remains
after deduction of any applicable premium or similar tax.
NON-QUALIFIED CONTRACT: A Contract used in connection with a retirement
plan which does not receive favorable federal income tax treatment under
Sections 401, 403, or 408 of the Code. The Participant's interest in the
Contract must be owned by a natural person or agent for a natural person for the
Contract to receive favorable income tax treatment as an annuity.
*OWNER: The person, persons or entity entitled to the ownership rights
stated in the Contract and in whose name or names the 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 Certificate
who is entitled to exercise all rights and privileges of ownership under the
Certificate, except as reserved by the Owner.
PARTICIPANT'S ACCOUNT: An account established for each Participant to which
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 the Contract. The term includes an
Annuitant or a Beneficiary who becomes entitled to benefits upon the death of
the Annuitant.
PURCHASE PAYMENT (PAYMENT): An amount paid to the Company as consideration
for the benefits provided by the Contract.
QUALIFIED CONTRACT: A Contract used in connection with a retirement plan
which receives favorable federal income tax treatment under Sections 401, 403,
408 or 408A of the Code.
RECEIPT: Receipt by the Company at its Annuity Service Mailing Address
shown on the cover of this Prospectus.
SUB-ACCOUNT: That portion of the Variable Account which invests in shares
of a specific Fund or sub-series of a Fund.
- ---------
*As specified in the Application, unless changed.
8
<PAGE>
VALUATION PERIOD: The period of time from one determination of Variable
Accumulation Unit and Annuity Unit values to the next subsequent determination
of these values. Such determination shall be made as of the close of the New
York Stock Exchange on each day the Exchange is open for trading and on such
other days on which there is a sufficient degree of trading in the portfolio
securities of the Variable Account so that the values of the Variable Account's
Accumulation Units and Annuity Units might be materially affected.
VARIABLE ACCOUNT: A separate account of the Company consisting of assets
set aside by the Company, the investment performance of which is kept separate
from that of the general assets of the Company.
VARIABLE ACCUMULATION UNIT: A unit of measure used in the calculation of
the value of the variable portion of a Participant's Account.
VARIABLE ACCUMULATION VALUE: The sum of the value of all Variable
Accumulation Units credited to 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.
YEAR: Any consecutive period of 365 days.
9
<PAGE>
EXPENSE SUMMARY
The purpose of the following table and Example is to help Participants and
prospective purchasers to understand the costs and expenses that are borne,
directly and indirectly, by Participants WHEN PAYMENTS ARE ALLOCATED TO THE
VARIABLE ACCOUNT. The table reflects expenses of the Variable Account as well as
of the 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)
Number of Complete Account Years Purchase Payment in Account
less than 1........................................................................................ 1.00%
1 or more.......................................................................................... 0.00%
Exchange fee (1)..................................................................................... $ 0
-----------
ANNUAL ACCOUNT FEE PER PARTICIPANT'S ACCOUNT (2)..................................................... $ 50
-----------
SEPARATE ACCOUNT ANNUAL EXPENSES
(as a percentage of average separate account assets)
Mortality & Expense Risk Fees........................................................................ 1.00%
-----------
Administrative Expense Charge........................................................................ 0.15%
Other Fees & Expenses of the Separate Account........................................................ 0.00%
Total Separate Account Annual Expenses............................................................... 1.15%
</TABLE>
- ---------
(1) A Market Value Adjustment may be imposed on amounts transferred from or
within the Fixed Account.
(2) The Annual Account Fee is $50. The Company will waive the Annual Account Fee
when the Participant's Account Value is greater than $100,000 on the Account
Anniversary.
10
<PAGE>
UNDERLYING FUND ANNUAL EXPENSES
(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 VIT CORE Large Cap Growth
Fund (3).............................. 0.70 % 0.10 % 0.80 %
Goldman Sachs VIT CORE Small Cap Equity
Fund (3).............................. 0.75 % 0.15 % 0.90 %
Goldman Sachs VIT CORE U.S. Equity Fund
(3)................................... 0.70 % 0.10 % 0.80 %
Goldman Sachs VIT Growth and Income Fund
(3)................................... 0.75 % 0.15 % 0.90 %
Goldman Sachs VIT 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) "Other Expenses" are based on actual expenses for the last fiscal year ended
December 31, 1998, 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" were: 0.70%, 2.17%, and 2.87% for the Goldman Sachs VIT
CORE Large Cap Growth Fund; 0.75%, 3.17%, and 3.92% for the Goldman Sachs
VIT CORE Small Cap Equity Fund; 0.70%, 2.13%, and 2.83% for the Goldman
Sachs VIT CORE U.S. Equity Fund; 0.75%, 1.94%, and 2.69% for the Goldman
Sachs VIT Growth and Income Fund; 1.00%, 1.97%, and 2.97% for the Goldman
Sachs VIT International Equity Fund; %, %, and % for the OCC Mid
Cap Portfolio; 0.60%, 3.50% and 4.10% for the Sun Capital Investment Grade
Bond Fund; 0.50%, 11.64% and 12.29% for the Sun Capital Money Market Fund;
0.95%, 6.49% and 7.44% for the Sun Capital Real Estate Fund; and %, %,
and % 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.
11
<PAGE>
EXAMPLE
If you surrender your Contract at the end of the applicable time period, you
would pay the following expenses on a $1,000 investment, assuming a 5% annual
return on assets:
<TABLE>
<CAPTION>
10
1 YEAR 3 YEARS 5 YEARS YEARS
------ ------- ------- -------
<S> <C> <C> <C> <C>
AIM V.I. Capital Appreciation Fund...... $30 $ 61 $104 $225
AIM V.I. Growth Fund.................... $30 $ 62 $107 $231
AIM V.I. Growth and Income Fund......... $30 $ 61 $105 $226
AIM V.I. International Equity Fund...... $32 $ 68 $117 $251
Alger American Growth Portfolio......... $31 $ 64 $110 $237
Alger American Income and Growth
Portfolio............................... $30 $ 62 $107 $232
Alger American Small Capitalization
Portfolio............................... $32 $ 67 $115 $247
Goldman Sachs VIT CORE Large Cap Growth
Fund.................................... $31 $ 64 $110 $238
Goldman Sachs VIT CORE Small Cap Equity
Fund.................................... $32 $ 67 $115 $248
Goldman Sachs VIT CORE U.S. Equity
Fund.................................... $31 $ 64 $110 $238
Goldman Sachs VIT Growth and Income
Fund.................................... $32 $ 67 $115 $248
Goldman Sachs VIT International Equity
Fund.................................... $35 $ 78 $133 $284
J.P. Morgan Equity Portfolio............ $32 $ 67 $115 $248
J.P. Morgan International Opportunities
Portfolio............................... $35 $ 76 $131 $279
J.P. Morgan Small Company Portfolio..... $34 $ 75 $128 $274
Lord Abbett Growth and Income
Portfolio............................... $29 $ 60 $104 $224
MFS/Sun Life Capital Appreciation
Series.................................. $31 $ 64 $109 $236
MFS/Sun Life Emerging Growth Series..... $31 $ 65 $111 $239
MFS/Sun Life Government Securities
Series.................................. $29 $ 59 $102 $220
MFS/Sun Life High Yield Series.......... $31 $ 65 $112 $242
MFS/Sun Life Utilities Series........... $31 $ 66 $113 $244
OCC Equity Portfolio.................... $33 $ 70 $120 $257
OCC Managed Portfolio................... $32 $ 66 $114 $245
OCC Mid Cap Portfolio................... $33 $ 70 $120 $258
OCC Small Cap Portfolio................. $33 $ 69 $119 $255
Sun Capital Investment Grade Bond
Fund.................................... $30 $ 63 $108 $233
Sun Capital Money Market Fund........... $29 $ 60 $103 $222
Sun Capital Real Estate Fund............ $35 $ 78 $133 $284
Warburg Pincus Emerging Markets
Portfolio............................... $37 $ 82 $141 $298
Warburg Pincus International Equity
Portfolio............................... $36 $ 81 $139 $294
Warburg Pincus Post-Venture Capital
Portfolio............................... $37 $ 82 $141 $298
Warburg Pincus Small Company Growth
Portfolio............................... $34 $ 75 $128 $274
</TABLE>
12
<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>
10
1 YEAR 3 YEARS 5 YEARS YEARS
------ ------- ------- -------
<S> <C> <C> <C> <C>
AIM V.I. Capital Appreciation Fund...... $20 $61 $104 $225
AIM V.I. Growth Fund.................... $20 $62 $107 $231
AIM V.I. Growth and Income Fund......... $20 $61 $105 $226
AIM V.I. International Equity Fund...... $22 $68 $117 $251
Alger American Growth Portfolio......... $21 $64 $110 $237
Alger American Income and Growth
Portfolio............................... $20 $62 $107 $232
Alger American Small Capitalization
Portfolio............................... $22 $67 $115 $247
Goldman Sachs VIT CORE Large Cap Growth
Fund.................................... $21 $64 $110 $238
Goldman Sachs VIT CORE Small Cap Equity
Fund.................................... $22 $67 $115 $248
Goldman Sachs VIT CORE U.S. Equity
Fund.................................... $21 $64 $110 $238
Goldman Sachs VIT Growth and Income
Fund.................................... $22 $67 $115 $248
Goldman Sachs VIT International Equity
Fund.................................... $25 $78 $133 $284
J.P. Morgan Equity Portfolio............ $22 $67 $115 $248
J.P. Morgan International Opportunities
Portfolio............................... $25 $76 $131 $279
J.P. Morgan Small Company Portfolio..... $24 $75 $128 $274
Lord Abbett Growth and Income
Portfolio............................... $19 $60 $104 $224
MFS/Sun Life Capital Appreciation
Series.................................. $21 $64 $109 $236
MFS/Sun Life Emerging Growth Series..... $21 $65 $111 $239
MFS/Sun Life Government Securities
Series.................................. $19 $59 $102 $220
MFS/Sun Life High Yield Series.......... $21 $65 $112 $242
MFS/Sun Life Utilities Series........... $21 $66 $113 $244
OCC Equity Portfolio.................... $23 $70 $120 $257
OCC Managed Portfolio................... $22 $66 $114 $245
OCC Mid Cap Portfolio................... $23 $70 $120 $258
OCC Small Cap Portfolio................. $23 $69 $119 $255
Sun Capital Investment Grade Bond
Fund.................................... $20 $63 $108 $233
Sun Capital Money Market Fund........... $19 $60 $103 $222
Sun Capital Real Estate Fund............ $25 $78 $133 $284
Warburg Pincus Emerging Markets
Portfolio............................... $27 $82 $141 $298
Warburg Pincus International Equity
Portfolio............................... $26 $81 $139 $294
Warburg Pincus Post-Venture Capital
Portfolio............................... $27 $82 $141 $298
Warburg Pincus Small Company Growth
Portfolio............................... $24 $75 $128 $274
</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.
13
<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, 5 and 10 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
deferred annuity contracts (the "Contract" or "Contracts") which provide fixed
benefits, variable benefits or a combination of both. It describes the
Contract's uses and objectives, its benefits and costs, and the rights and
privileges of the Owner and the Participant, as applicable. It also contains
information about the Company, the Variable Account, the Fixed Account and the
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, 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").
14
<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 in all states where the
Contracts are offered, except in the states of Florida, Maryland, Missouri,
North Carolina, Oregon, Pennsylvania, Texas and Utah, where the Contracts are
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 may offer 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
which distributes the Contracts; New London Trust, F.S.B., a federally chartered
savings bank; 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 the Participant's Account is
established 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. (See "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
15
<PAGE>
insurance companies and the percentage of their assets that may be committed to
any particular type of investment. In general, these laws permit investments,
within specified limits and subject to certain qualifications, in federal, state
and municipal obligations, corporate bonds, preferred and common stocks, real
estate mortgages, real estate and certain other investments.
The Company intends to invest the assets of the Fixed Account primarily in
debt instruments as follows: (1) securities issued by the United States
Government or its agencies or instrumentalities, which issues may or may not be
guaranteed by the United States Government; (2) debt securities which have an
investment grade, at the time of purchase, within the four highest grades
assigned by Moody's Investors Services, Inc. (Aaa, Aa, A or Baa), Standard &
Poor's Corporation (AAA, AA, A or BBB), or any other nationally recognized
rating service; (3) other debt instruments, including, but not limited to,
issues of or guaranteed by banks or bank holding companies and other
corporations, which obligations, although not rated by Moody's or Standard &
Poor's, are deemed by the Company's management to have an investment quality
comparable to securities which may be purchased as stated above; and (4) other
evidences of indebtedness secured by mortgages or deeds of trust representing
liens upon real estate. Notwithstanding the foregoing, the Company may also
invest a portion of the Fixed Account in below investment grade debt
instruments. Instruments rated Baa and/or BBB or lower normally involve a higher
risk of default and are less liquid than higher rated instruments. If the rating
of an investment grade debt security held by the Company is 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, 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
rate of not less than 3% per year, compounded annually, to amounts allocated to
the Fixed Account under the Contract. The Company may credit interest at a rate
in excess of 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
16
<PAGE>
ALLOCATED TO THE FIXED ACCOUNT IN EXCESS OF 3% WILL BE DETERMINED IN THE SOLE
DISCRETION OF THE COMPANY. THE PARTICIPANT ASSUMES THE RISK THAT INTEREST
CREDITED ON AMOUNTS ALLOCATED TO THE FIXED ACCOUNT MAY NOT EXCEED 3% FOR ANY
GIVEN YEAR.
The Company is aware of no statutory limitations on the maximum amount of
interest it may credit, and its 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 each 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
Contracts 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 objectives
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 the Company's 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 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 maintained
in the Variable Account will not be charged with any liabilities arising out of
any other business conducted by the Company, all obligations arising under the
Contracts, including the promise to make annuity payments, are general corporate
obligations of the Company.
The Variable Account meets the definition of a "separate account" under the
federal securities laws and is registered as a unit investment trust under the
Investment Company Act of 1940. Registration with the Commission does not
involve the Commission's supervision of the management or investment practices
or policies of the Variable Account or of the Company.
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 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.
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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 ITS MANAGEMENT,
INVESTMENT OBJECTIVES, EXPENSES, AND 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 BEFORE YOU INVEST. A COPY OF
EACH FUND PROSPECTUS MAY BE OBTAINED WITHOUT CHARGE FROM THE COMPANY BY CALLING
1-888-786-2435, 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"))
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 VIT 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 VIT 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.
GOLDMAN SACHS VIT 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.
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GOLDMAN SACHS VIT 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 VIT 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
("MFS"), 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.
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.
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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., a subsidiary
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 purchasers of other contracts participating
in 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 the Annuity Service
Mailing Address shown on the cover of this Prospectus. 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 $25,000,
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.
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 2 business days of receipt by the Company of a
completed Application. The Company may retain the Purchase Payment for up to 5
business days while attempting to complete an incomplete Application. If the
Application cannot be made complete within 5 business days, the prospective
Participant will be informed of the reasons for the delay and the Purchase
Payment will be returned immediately unless the prospective Participant
specifically consents to the Company's retaining the Purchase Payment until the
Application is made complete. Thereafter, 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 Annuitant 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.
The allocation factors for new Payments among the Guarantee Period(s) 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
of 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 in (3) below. For a hypothetical example of the calculation of the
value of a Variable Accumulation Unit, see Appendix A.
(3) NET INVESTMENT FACTOR
The Net Investment Factor is an index applied to measure the investment
performance of a Sub-Account from one Valuation Period to the next. The Net
Investment Factor may be greater or less than or equal to one; therefore the
value of a Variable Accumulation Unit may increase, decrease or remain the same.
The Net Investment Factor for any Sub-Account for any Valuation Period is
determined by dividing (a) by (b) and then subtracting (c) from the result
where:
(a) is the net result of:
(1) the net asset value of a 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) 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) allocated
to a particular Guarantee Period, less any applicable premium tax or similar tax
and any amounts subsequently withdrawn, will earn interest at 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
months in the Guarantee
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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 except for
Guarantee Amounts held under a Dollar Cost Averaging Option described below. A
new Guarantee Period of the same duration as the previous Guarantee Period will
commence automatically on the first day following the Expiration Date of the
previous Guarantee Period unless the Company receives, prior to the Expiration
Date, a written election by the Participant of a new 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 unless it is equal to the entire Guarantee Amount being tranferred.
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.
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 3% per year, compounded
annually. The Company has no specific formula for determining the rate of
interest that it will declare as a Guaranteed Interest Rate, as these rates will
be reflective of interest rates available on the types of debt instruments in
which the Company intends to invest amounts allocated to the Fixed Account (See
"The Fixed Account"). In addition, the Company's management may consider other
factors in determining Guaranteed Interest Rates 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 3% per year.
DOLLAR COST AVERAGING
The Participant may also elect at no extra charge an available Dollar Cost
Averaging Option in connection with selected Initial Guarantee Periods (subject
to a minimum amount of $1,000). Dollar Cost Averaging Options are available
monthly or quarterly:
1. Monthly Dollar Cost Averaging Option: Amounts allocated will be divided
among 12 separate sequentially maturing Guarantee Periods. The first
Guarantee Period ends one full calendar month following the date the Net
Purchase Payment is applied and each subsequent Guarantee Period shall
end one full calendar month later, sequentially thereafter. The Guarantee
Amount at the Expiration Date of each such Guarantee Period will equal
1/12 of the Net Purchase Payment applied under this Option, with the
Guarantee Amount at the last Expiration Date including all interest
earned in the 12 Guarantee Periods.
2. Quarterly Dollar Cost Averaging: Amounts allocated will be divided among
4 separate sequentially maturing Guarantee Periods. The first Guarantee
Period ends 3 full calendar months following the
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date the Net Purchase Payment is applied and each subsequent Guarantee
Period shall end 3 full calendar months later, sequentially thereafter.
The Guarantee Amount at the Expiration Date of each such Guarantee Period
will equal 1/4 of the Net Purchase Payment applied under this Option,
with the Guarantee Amount at the last Expiration Date including all
interest earned in the 4 Guarantee Periods.
Only initial and subsequent Purchase Payments may be allocated to a Dollar
Cost Averaging Option. Previously applied amounts may not be transferred to any
Dollar Cost Averaging Option.
The main objective of a dollar cost averaging program is to minimize the
impact of short-term price fluctuations. Since the same dollar amount is
transferred to other available investment options at set intervals, dollar cost
averaging allows a Participant to purchase more Variable Accumulation Units
(and, indirectly, more Fund shares) when prices are low and fewer Variable
Accumulation Units (and, indirectly, fewer Fund shares) when prices are high.
Therefore, a lower average cost per Variable 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
One or more asset allocation investment programs may be made 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 the
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.
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; (2) a minimum of 30 days must elapse between transfers made
to or from the Fixed Account or among Guarantee Periods; (3) 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;
(4) any Participant's Account Value remaining in a Sub-Account may not be less
than $1,000; (5) the total Participant's Account Value attributable to the
Guarantee Amount must be transferred; and (6) transfers may not be allocated to
the Monthly or Quarterly Dollar Cost Averaging Options described above. In
addition, except in connection with dollar cost averaging and asset allocation
programs, 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 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 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 restriction 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 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 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 series and therefore may be
refused. Accordingly, the Variable Account may not be in a position to
effectuate transfers and may refuse transfer requests without prior notice. The
Company also reserves the right, for similar reasons, to refuse or delay
exchange requests involving transfers to or from the Fixed Account.
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, credit additional amounts, or 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,
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,
credit additional amounts, or 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 and during the lifetime of
the Annuitant, the Participant may elect to receive a cash withdrawal payment
from the Company. Any such election shall specify the amount of the withdrawal
and will be effective on the date that it is received by the Company.
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, plus any
applicable withdrawal charge. If a partial withdrawal is requested which would
leave a Participant's Account Value of less than the Account Fee, then such
partial withdrawal will be treated as a full surrender. The Account Fee and any
applicable Market Value Adjustment will be deducted from the Participant's
Account before the application of any withdrawal charge.
In the case of a partial withdrawal, the Participant may instruct the
Company as to the amounts to be withdrawn from each Sub-Account and/or Guarantee
Amount. If not so instructed, the Company will effect
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such withdrawal pro rata from each Sub-Account and Guarantee Amount in which the
Participant's Account Value is invested at the end of the Valuation Period
during which the withdrawal becomes effective. ALL CASH WITHDRAWALS OF ANY
GUARANTEE AMOUNT, EXCEPT THOSE EFFECTIVE WITHIN 30 DAYS PRIOR TO THE EXPIRATION
DATE OF SUCH GUARANTEE AMOUNT, WILL BE SUBJECT TO THE MARKET VALUE ADJUSTMENT.
Cash withdrawals from a Sub-Account will result in the cancellation of
Variable Accumulation Units attributable to the Participant's Account with an
aggregate value on the effective date of the withdrawal equal to the total
amount by which the Sub-Account is reduced. The cancellation of such units will
be based on the Variable Accumulation Unit values of the Sub-Account for 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 7 days from the date the
election becomes effective, except as the Company may be permitted to defer such
payment in accordance with the Investment Company Act of 1940 and applicable
state insurance law. Deferral of amounts withdrawn from the Variable Account is
currently permissible only (1) for any period (a) during which the New York
Stock Exchange is closed other than customary weekend 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 6 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 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".
A cash withdrawal under either a Qualified Contract or a Non-Qualified
Contract 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, 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").
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.
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<PAGE>
When a withdrawal is made from a Qualified Contract to comply with mandatory
minimum distribution requirements, no withdrawal charge will be applied to the
amount required to be distributed during each Account Year. These required
distributions may commence during and continue after the later of the year in
which the Annuitant attains age 70 1/2 or, beginning in 1997, after the year in
which the Annuitant retires if that is later. Any amounts withdrawn in excess of
the required minimum distribution during each Account Year will be subject to
any applicable withdrawal charge.
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
Purchase Payments derived from the surrender of other annuity contracts and/or
certificates issued by the Company.
For purposes of a full surrender or partial withdrawal, each withdrawal is
allocated to previously unliquidated Purchase Payments on a first-in, first-out
basis until all Purchase Payments have been liquidated. Once all Purchase
Payments have been liquidated, any additional withdrawals will come from the
earnings on the Contract and are not subject to a withdrawal charge. The amount
subject to a withdrawal charge is the amount of the partial withdrawal or full
surrender up to the maximum of the sum of all unliquidated Purchase Payments.
AMOUNT OF WITHDRAWAL CHARGE
A withdrawal charge percentage of 1% is applied to Purchase Payments withdrawn
which have been credited to a Participant's Account for less than one Year.
In no event shall the aggregate withdrawal charges assessed against a
Participant's Account exceed 1% of the aggregate Purchase Payments made under a
Contract (For examples of withdrawals, withdrawal charges and the Market Value
Adjustment, see Appendix B). The Company may, upon notice to the Owner of a
Group Contract, modify the withdrawal charge, provided that such modification
shall apply only to Participant's Accounts established after the effective date
of such modification (See "Modification").
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".
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<PAGE>
MARKET VALUE ADJUSTMENT
Any cash withdrawal of a Guarantee Amount, other than a withdrawal effective
within 30 days prior to the Expiration Date of the Guarantee Amount will be
subject to a Market Value Adjustment ("MVA") (for this purpose, transfers,
distributions on the death of a Participant and amounts applied to purchase an
annuity are treated as cash withdrawals). The MVA will be applied to the amount
being withdrawn 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 MVA is determined by the application of the following formula:
<TABLE>
<S> <C>
N/12
1 + I
( ----- ) -1
1 + J
</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 Period(s). If the Guarantee Period was originally established through
Monthly or Quarterly Dollar Cost Averaging Options, J is the Guaranteed Interest
Rate declared for current allocations to these options. For all other Guarantee
Periods, J is the Guaranteed Interest Rate declared 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
(the "Current Rate"). In the determination of J for Guarantee Periods other than
those established under the Monthly or Quarterly Dollar Cost Averaging Options,
if the Company does not currently offer the applicable Guarantee Period, then J
will be determined by linear interpolation of Current Rates for Guarantee
Periods that are available.
N is the number of complete months remaining in the Guarantee Period of the
Guarantee Amount subject to the MVA.
The Company may, upon notice to the Owner, modify the formula used to
calculate the MVA, provided that such modification shall apply only to
Participant's Accounts established after the effective date of such modification
(See "Modification").
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 Annuitant prior to the Annuity Commencement
Date, the Company will pay a death benefit to the Beneficiary. If there is no
designated Beneficiary living on the date of death of the Annuitant, the Company
will, upon receipt of Due Proof of Death of both the Annuitant and the
designated Beneficiary, pay the death benefit in one sum to the Participant or,
if the Annuitant was the Participant, to the estate of the
Participant/Annuitant. If the death of the Annuitant occurs on or after the
Annuity Commencement Date, no death benefit will be payable under the Contract,
except as may be provided under the Annuity Option elected.
ELECTION AND EFFECTIVE DATE OF ELECTION
During the lifetime of the Annuitant and prior to the Annuity Commencement Date,
the Participant may elect to have the death benefit applied under one or more
Annuity Options to effect a Variable Annuity or a Fixed Annuity or a combination
of both for the Beneficiary as Payee after the death of the Annuitant. If no
election of
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<PAGE>
a method of settlement of the death benefit by the Participant is in effect on
the date of death of the Annuitant, the Beneficiary may elect (a) to receive the
death benefit in the form of a single cash payment; or (b) to have the death
benefit applied under one or more of the Annuity Options (on the Annuity
Commencement Date described under "Payment of Death Benefit") to effect a
Variable Annuity or a Fixed Annuity or a combination of both for the Beneficiary
as Payee. Either election described above may be made by filing with the Company
a written election in such form as the Company may require. Any election of a
method of settlement of the death benefit by the Participant will become
effective on the date it is received by the Company. For the purposes of the
"Payment of Death Benefit" and "Amount of Death Benefit" sections below, any
election of the method of settement of the death benefit by the Participant
which is in effect on the date of death of the Annuitant will be deemed
effective on the date Due Proof of Death of the Annuitant is received by the
Company. Any election of a method of settlement of the death benefit by the
Beneficiary will become effective on the later of: (a) the date the election is
received by the Company; or (b) the date Due Proof of Death of the Annuitant is
received by the Company. If an election by the Beneficiary is not received by
the Company within 60 days following the date Due Proof of Death of the
Annuitant is received by the Company, the Beneficiary will be deemed to have
elected a cash payment as of the last day of the 60 day period.
In all cases, no Participant or Beneficiary shall be entitled to exercise
any rights that would adversely affect the treatment of the Contracts as annuity
contracts under the Code. (See "Other Contract Provisions -- Death of
Participant").
PAYMENT OF DEATH BENEFIT
If the death benefit is to be paid in cash to the Beneficiary, payment will be
made within 7 days of the date the election becomes effective or is deemed to
become effective, except as the Company may be permitted to defer any such
payment of amounts derived from the Variable Account in accordance with the
Investment Company Act of 1940. If the death benefit is to be paid in one sum to
the Participant or, if the Annuitant was the Participant, to the estate of the
deceased Participant/Annuitant, payment will be made within 7 days of the date
Due Proof of Death of the Annuitant, the Participant and/or the designated
Beneficiary, as applicable, is received by the Company. If settlement under one
or more of the Annuity Options is elected, the Annuity Commencement Date will be
the first day of the second calendar month following the effective date or the
deemed effective date of the election, and the Participant's Account will be
maintained in effect until the Annuity Commencement Date.
AMOUNT OF DEATH BENEFIT
The death benefit is determined as of the effective date or deemed effective
date of the death benefit election.
If the Annuitant was less than age 86 on the Date of Coverage, the death
benefit is equal to the greatest of (1) the Participant's Account Value for the
Valuation Period during which the death benefit election is effective or is
deemed to become effective; (2) the amount that would have been payable in the
event of a full surrender of the Participant's Account on the date the death
benefit election is effective or is deemed to become effective; and (3) total
Purchase Payments made with respect to the Participant's Account, minus the sum
of all partial withdrawals.
If the Annuitant was age 86 or older on the Date of Coverage, the death
benefit is equal to (2) above.
If (2) or (3) is operative, the Participant's Account Value will be
increased by the excess of (2) or (3), 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 date the amount of the death benefit is determined. If no
portion of the Participant's Account is allocated to the Sub-Accounts on that
date, 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 Contracts 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)
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<PAGE>
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
Prior to the Annuity Commencement Date, on each Account Anniversary the Company
deducts from the value of each Participant's Account an annual account
administration fee ("Account Fee") in the amount of $50 as partial compensation
for expenses relating to the issue and maintenance of the Contract and the
Participant's Account. 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 Company will waive the Account Fee when the Participant's Account
Value is greater than $100,000 on the Account Anniversary. 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 $50 will be deducted in
equal amounts from each variable annuity payment made during the year. No such
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 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 taxes 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 Company's policy to deduct
the tax from the amount applied to provide an annuity at the time annuity
payments commence; however, the Company reserves the right to deduct such taxes
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
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; however, in the case of a Group Contract only, the
Company may modify the mortality and expense risk charge under the Group
Contract only with respect to Participant's Accounts established after the
effective date of such modification (See "Modification"). The expense risk
assumed by the Company is the risk that the administrative charges assessed
under the Contracts 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 1.00%. 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 charge
30
<PAGE>
described below. However, the withdrawal charge 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.
WITHDRAWAL CHARGES
No deduction for sales charges is made from Purchase Payments. However, a
withdrawal charge of 1% of Purchase Payments, 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. (See "Cash
Withdrawals" and "Withdrawal Charges").
ANNUITY PROVISIONS
ANNUITY COMMENCEMENT DATE
Annuity payments will begin on the Annuity Commencement Date which is
selected by the Participant, as specified in the Application. The date selected
by the Participant may not be sooner than the first day of the second calendar
month following the Date of Coverage. This date may be changed by the
Participant from time to time by written notice to the Company, provided that
notice of each change is received by the Company at least 30 days prior to the
then current Annuity Commencement Date and the new Annuity Commencement Date is
a date which is: (1) at least 30 days after the date notice of the change is
received by the Company; (2) the first day of a month; and (3) not later than
the first day of the first month following the Annuitant's 90th birthday, unless
otherwise restricted, in the case of a Qualified Contract, by the particular
retirement plan or by applicable law. In most situations, current law requires
that the Annuity Commencement Date under a Qualified Contract be no later than
April 1 following the year the Annuitant reaches age 70 1/2 (or, for Qualified
Contracts other than IRAs, no later than April 1 following the year the
Annuitant retires, if later than the year the Annuitant reaches age 70 1/2), and
the terms of the particular retirement plan may impose additional limitations.
The Annuity Commencement Date may also be changed by an election of an Annuity
Option as described in the Death Benefit section of this Prospectus.
On the Annuity Commencement Date the Participant's Account will be cancelled
and its adjusted value will be applied to provide an annuity under one or more
of the options described below. No withdrawal charge will be imposed upon
amounts applied to purchase an annuity. However, the Market Value Adjustment may
apply. (See "Determination of Annuity Payments"). NO PAYMENTS MAY BE REQUESTED
UNDER THE CONTRACT'S CASH WITHDRAWAL PROVISIONS ON OR AFTER THE ANNUITY
COMMENCEMENT DATE, AND NO CASH WITHDRAWAL WILL BE PERMITTED EXCEPT AS MAY BE
AVAILABLE UNDER THE ANNUITY OPTION ELECTED.
Since the Contracts 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 Annuitant and prior to the Annuity Commencement Date,
the Participant may elect one or more of the Annuity Options described below, or
such other settlement option as may be agreed to by the Company, for the
Annuitant as Payee. The Participant may also change any election, but written
notice of any election or change of election must be received by the Company at
least 30 days prior to the Annuity Commencement Date. If no election is in
effect on the 30th day prior to the Annuity Commencement Date, Annuity Option B,
for a Life Annuity with 120 monthly payments certain, will be deemed to have
been elected. If there is no election of a sole Annuitant in effect on the 30th
day prior to the Annuity Commencement Date, the person designated as
"Co-Annuitant" will be the Payee under the applicable Annuity Option.
Any election may specify the proportion of the adjusted value of the
Participant's Account to be applied to provide a Fixed Annuity and a Variable
Annuity. In the event the election does not so specify, or if no election is in
effect on the 30th day prior to the Annuity Commencement Date, then the portion
of the
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<PAGE>
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
(See "Death Benefit").
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 of 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.
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 5 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 5 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 on an annual basis 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 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 election of this Annuity Option may result in the imposition of a penalty
tax.
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<PAGE>
the rate may not be reduced more frequently than once during each calendar year.
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
unpaid balance of the proceeds and interest will be paid in one sum.
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 for 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 taxes or similar taxes.
If the amount to be applied under any annuity option is less than $2,000, or
if the first annuity payment payable in accordance with such option is less than
$20, the Company will pay the amount to be applied in a single payment to the
Payee.
FIXED ANNUITY PAYMENTS
The dollar amount of each fixed annuity payment will be determined in accordance
with the Annuity Payment Rates found in the Contract, which are based on a
minimum guaranteed interest rate of 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 Contract, which are based
on an assumed interest rate of at least 3% per year, unless these rates are
changed with respect to a Group Contract (See "Modification"). All variable
annuity payments other than the first are determined by means of Annuity Units
credited to the Contract with respect to the particular Payee. The number of
Annuity Units to be credited in respect of a particular Sub-Account is
determined by dividing that portion of the first variable annuity payment
attributable to that Sub-Account by the Annuity Unit value of that Sub-Account
at the end of the Valuation Period which ends immediately preceding the Annuity
Commencement Date. The number of Annuity Units of each particular Sub-Account
credited with respect to the particular Payee then remains fixed unless an
exchange of Annuity Units is made as described below. The dollar amount of each
variable annuity payment after the first may increase, decrease or remain
constant, and is equal to the sum of the amounts determined by multiplying the
number of Annuity Units of a particular Sub-Account credited with respect to the
particular Payee by the Annuity Unit value for the particular Sub-Account for
the Valuation Period which ends immediately preceding the due date of each
subsequent payment. If the net investment return on the assets of the Variable
Account is the same as the assumed interest rate (3% per year), variable annuity
payments will remain level. If the net investment return exceeds the assumed
interest rate variable annuity payments will increase and, conversely, if it is
less than the assumed interest rate the payments will decrease.
For a hypothetical example of the calculation of a variable annuity payment,
see Appendix A.
ANNUITY UNIT VALUE
The Annuity Unit value for each Sub-Account was established at $10.00 for the
first Valuation Period of the particular Sub-Account. The Annuity Unit value for
the particular Sub-Account for any subsequent Valuation Period is determined by
multiplying the Annuity Unit value for the particular Sub-Account for the
immediately preceding Valuation Period by the Net Investment Factor (See
"Variable Accumulation Value -- Net Investment Factor") for the particular
Sub-Account for the current Valuation Period and then multiplying that product
by a factor to neutralize the assumed interest rate of 3% per year used to
establish the Annuity Payment Rates found in the applicable Contract.
For a hypothetical example of the calculation of the value of an 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
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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 among 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 Contract; and (b) the monthly Fixed Annuity payment, when
this payment is based on the minimum guaranteed interest rate of 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 A.
OTHER CONTRACT PROVISIONS
PAYMENT LIMITS
The initial Purchase Payment credited to each Participant's Account must be
at least $25,000 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 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. The interest of any Beneficiary is subject to the particular
Beneficiary surviving the Annuitant and, in the case of a Non-Qualified
Contract, the Participant as well.
Subject to the rights of an irrevocably designated Beneficiary, the
Participant may change or revoke the designation of a Beneficiary at any time
while the Annuitant is living by filing with the Company a written Beneficiary
designation or revocation in such form as the Company may require. The change or
revocation will not be binding upon the Company until it is received by the
Company. When it is so received, the change or revocation will be effective as
of the date on which the beneficiary designation or revocation was signed, but
the change or revocation will be without prejudice to the Company on account of
any payment made or any action taken by the Company prior to receiving the
change or revocation.
Reference should be made to the terms of a particular retirement plan and
any applicable legislation for any restrictions on the beneficiary designation.
EXERCISE OF CONTRACT RIGHTS
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
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Beneficiary (other than an irrevocably designated Beneficiary) or any other
person. Such rights and privileges may be exercised only during the lifetime of
the Annuitant and prior to the Annuity Commencement Date, except as otherwise
provided in the Contract.
The Annuitant becomes the Payee on and after the Annuity Commencement Date.
The Beneficiary becomes the Payee on the death of the Annuitant. Such Payees may
thereafter exercise such rights and privileges, if any, of ownership which
continue.
CHANGE OF OWNERSHIP
Ownership of a Qualified Contract may not be transferred except to: (1) the
Annuitant; (2) a trustee or successor trustee of a pension or profit sharing
trust which is qualified under Section 401 of the 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 during the lifetime of any Annuitant and prior to the last Annuity
Commencement Date; and each Participant, in like manner, may change the
ownership interest in a Contract. A change of ownership will not be binding upon
the Company until written notification is received by the Company. When such
notification is so received, the change will be effective as of the date on
which the request for change was signed by the Owner or Participant, as
appropriate, but the change will be without prejudice to the Company on account
of any payment made or any action taken by the Company prior to receiving the
change.
DEATH OF PARTICIPANT
If a Participant under a Non-Qualified Contract dies prior to the Annuitant and
before the Annuity Commencement Date, that Participant's Account Value, plus or
minus any applicable Market Value Adjustment, must be distributed to the
"designated beneficiary" (as defined below) either (1) within 5 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.
When the deceased Participant was also the Annuitant, the death benefit
provision of the Contract controls, unless the deceased Participant's surviving
spouse is the designated beneficiary and elects to continue the Contract in the
spouse's own name as both Participant and Annuitant.
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
Contract 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.
In all cases, no Participant or Beneficiary shall be entitled to exercise
any rights that would adversely affect the treatment of the Contract as an
annuity contract under the Code.
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Any distributions upon the death of a Participant under a Qualified Contract
will be subject to the laws and regulations governing the particular retirement
or deferred compensation plan in connection with which the Qualified Contract
was issued.
VOTING OF FUND SHARES
The Company will vote Fund shares held by the Sub-Accounts at meetings of
shareholders, or in connection with similar solicitations, of the Funds, 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 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 10 days prior to each meeting of the
shareholders of the Fund. The number of Fund shares as to which each such person
is entitled to give instructions will be determined by the Company as of the
record date set by the Fund for such meeting, which is expected to be 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 2 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 time period,
the Company may not be responsible for correcting the error or discrepancy.
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In addition, every person having voting rights will receive such reports or
prospectuses concerning the Variable Account and the Funds 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 of the Funds may not always be available for purchase by
the Sub-Accounts or the Company may decide that further investment in any such
shares is no longer appropriate in view of the purposes of the Variable Account
or in view of legal, regulatory or federal income tax restrictions. In such
event, shares of another Fund or 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 meet applicable
Internal Revenue Service diversification guidelines and have been approved, if
required, by the Commission. In the event of any such substitution, the Company
may make appropriate endorsement to the Contracts 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, 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 to the Contracts 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.
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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 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 10 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 10 days, and alternative methods of returning the Contract may
be acceptable.
With respect to Individual Retirement Accounts, the Code requires that the
Company furnish a disclosure statement containing certain information about the
Contract and applicable legal requirements to a Participant establishing an
Individual Retirement Account ("IRA"). 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, 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 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 of 1986, as amended (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.
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TAX TREATMENT OF THE COMPANY AND THE VARIABLE ACCOUNT
The Company is taxed as a life insurance company under the Code. The operations
of the Variable Account are accounted for separately from other operations of
the Company for purposes of federal income taxation, but the Variable Account is
not taxable as a regulated investment company or otherwise as an entity separate
from the Company. The income of the Variable Account (consisting primarily of
interest, dividends and net capital gains) is not taxable to the Company to the
extent that it is applied to increase reserves under contracts participating in
the Variable Account.
TAXATION OF ANNUITIES IN GENERAL
Purchase Payments made under Non-Qualified Contracts are not deductible from the
Participant's income for federal income tax purposes. Participants under
Qualified Contracts should consult a tax adviser regarding the tax treatment of
Purchase Payments.
Generally, no taxes are imposed on the increase in the value of a Contract
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 Contracts.
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 discussion as applied to the 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 first as a withdrawal from the increase in the
Participant's Account Value, rather than as a return of Purchase Payments. The
amount of the withdrawal allocable to this increase will be includible in the
Participant's income and subject to tax at ordinary income rates. If part or all
of a Participant's Account Value is assigned or pledged as collateral for a
loan, the amount assigned or pledged must be treated as if it were withdrawn
from the Contract.
In the case of annuity payments under a Non-Qualified Contract made 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 annuity 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.
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Certain distributions, known as "eligible rollover distributions," if rolled
over to certain other qualified retirement plans (either directly or after being
distributed to the Participant or Payee), are not taxable until distributed from
the plan to which they are rolled over. In general, an eligible rollover
distribution is any taxable distribution other than a distribution that is part
of a series of payments made for life or for a specified period of 10 years or
more. Owners, Participants, Annuitants, Payees and Beneficiaries should seek
qualified advice about the tax consequences of distributions, withdrawals,
rollovers and payments under the retirement plans in connection with which the
Contracts are purchased.
If the Participant under a Non-Qualified Certificate dies, the value of the
Contract generally must be distributed within a specified period (See "Other
Contractual Provisions -- Death of Participant"). For contracts owned by
non-natural persons, a change in the Annuitant is treated as the death of the
Participant.
A Participant under 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 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 Fund complies with the
regulations.
The preamble to the regulations states that the Internal Revenue Service may
promulgate guidelines under which a variable contract will not be treated as an
annuity for tax purposes if the owner has excessive control over the investments
underlying the contract. It is not known whether such guidelines, if in fact
promulgated, would have retroactive effect. If guidelines are promulgated, the
Company will take any action (including modification of the Contract and/or the
Variable Account) necessary to comply with the guidelines.
THE FOLLOWING INFORMATION SHOULD BE CONSIDERED ONLY WHEN AN IMMEDIATE
ANNUITY CONTRACT AND A DEFERRED ANNUITY CONTRACT ARE PURCHASED TOGETHER: The
Company understands that the Treasury Department is in the process of
reconsidering the tax treatment of annuity payments under an immediate annuity
contract (as defined above) purchased together with a deferred annuity contract.
The Company believes that any adverse change in the existing tax treatment of
such immediate annuity contracts is likely to be prospective, that is, it would
not apply to Contracts issued before such a change is announced. However, there
can be no assurance that any such change, if adopted, would not be applied
retroactively.
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QUALIFIED RETIREMENT PLANS
The Qualified Contracts are designed for use with several types of qualified
retirement plans. The tax rules applicable to participants in such qualified
retirement plans vary according to the type of plan and its terms and
conditions. Therefore, no attempt is made herein to provide more than general
information about the use of the Qualified Contracts with the various types of
qualified retirement plans. Participants under such plans as well as Owners,
Annuitants, Payees and Beneficiaries are cautioned that the rights of any person
to any benefits under these plans may be subject to the terms and conditions of
the plans themselves, regardless of the terms and conditions of the Qualified
Contracts issued in connection therewith. These terms and conditions may include
restrictions on, among other things, ownership, transferability, assignability,
contributions and distributions. Any person contemplating the purchase of a
Qualified Contract should consult a qualified tax advisor. 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 (See "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
tax-deferred basis, but distributions are tax-free if certain requirements are
satisfied. Like regular IRAs, Roth IRAs are subject to limitations on the amount
that may be contributed and the time when distributions may commence. A regular
IRA may be converted into a Roth IRA, and the resulting income may be spread
over 4 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.
41
<PAGE>
ADMINISTRATION OF THE CONTRACTS
The Company performs certain administrative functions relating to the
Contracts, the Participant's Accounts, and the Variable Account. These functions
include, but are not limited to: maintaining the books and records of the
Variable Account and the Sub-Accounts; maintaining records of the name, address,
taxpayer identification number, Contract number, Participant's Account number
and type, the status of each Participant's Account, and other pertinent
information necessary to the administration and operation of the Contracts;
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. Clarendon, a wholly-owned subsidiary of the Company,
is registered with the Securities and Exchange Commission under the Securities
Exchange Act of 1934 as broker-dealer and is a member of the National
Association of Securities Dealers, Inc. Clarendon also acts as the general
distributor of certain other annuity contracts issued by the Company and its
wholly-owned subsidiary, Sun Life Insurance and Annuity Company of New York, and
variable life insurance contracts issued by the Company. Commissions and other
distribution compensation will be paid by the Company and will not be more than
1.20% 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 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 (See "Waivers, Reduced Charges; Credits; Bonus Guaranteed Interest
Rates").
42
<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 73.
<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--DECEMBER 31, 1997
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.
43
<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.
44
<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,
45
<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.
46
<PAGE>
ASSET/LIABILITY MANAGEMENT AND INFORMATION ABOUT MARKET RISK
The following discussion about the Company's risk management activities includes
"forward-looking statements" that involve risk and uncertainties.
Assets within the general account are segmented by product or groups of
products. This allows the Company to better manage assets relative to
liabilities. Asset management for each segment is conducted within the context
of an investment policy, reviewed each quarter with business unit managers to
ensure that investment policy remains appropriate, taking into account a
segment's liability characteristics. The review of investment policy includes
cash flow estimates, liquidity requirements and targets for asset mix, duration
and quality.
Market risks associated with investment portfolios supporting products that
are funded by separate accounts where results are not guaranteed and where the
policyholder assumes the risks are not included in this discussion.
All of the Company's assets are held for other than trading purposes and
generally fixed interest rate liabilities are supported by well diversified
portfolios of fixed interest investments including publicly issued and privately
placed bonds and commercial mortgage loans. Public bonds can include Treasuries,
corporates, money market instruments, Mortgage Backed Securities and Asset
Backed Securities. Credit risk is managed by the Company's underwriting
standards which have resulted in high average quality portfolios. For example,
the Company does not purchase below investment grade securities. Also, as a
result of investment policy, there is no foreign currency, commodity or equity
price risk exposure in the portfolios. However, changes in the level of domestic
interest rates will impact the market value of fixed interest assets and
liabilities. The management of interest rate risk exposure and immunization
strategies are discussed below.
Immunization strategies which minimize the loss from wide fluctuations in
interest rates are pursued in segments where the bulk of the liabilities arise
from the sale of products containing interest rate guarantees for certain terms.
These strategies are supported by investment and asset liability analytical
software acquired from outside vendors. The significant features of the
immunization framework include: an economic or market value basis for both
assets and liabilities; an option pricing methodology; the use of effective
duration and convexity to measure price sensitivity; the use of key rate
durations (KRDs) to capture interest rate exposure to different parts of the
yield curve and manage non-parallel curve movements; and active portfolio
management, including the use of derivatives (e.g., interest rate swaps) for
portfolio restructuring.
An Interest Rate Risk Committee meets monthly and after reviewing the
duration reports for various portfolios, market conditions and forecasts, the
committee develops asset management strategies for interest sensitive
portfolios. These strategies may involve managing assets to small intentional
mismatches, either at the total effective duration level or at certain KRDs but,
in any event, the overall duration gap between interest sensitive assets and
liabilities is managed within a tolerance range of +/- 0.25 effective duration.
The estimates presented here are from computer model simulations which,
because they are predictions about the future, contain a certain degree of
uncertainty. For example, there are algorithms for assumptions about
policyholder behavior and asset cash flows and consequently estimates of
duration and market values which may or may not represent what actually will
occur. Also there is no provision in the estimates to incorporate any management
decisions which might be taken to mitigate against adverse results. The Company
is sufficiently comfortable with its interest rate risk management process to
feel the exposure to interest rate changes will not materially affect the
near-term financial position, results of operations or cash flows of the
Company.
The Company's fixed interest investments had an aggregate fair value at
December 31, 1997 of $3,276,174,000. Certain of the Company's general account
liabilities of $3,682,582,000 are categorized as financial instruments. The
portion of the liabilities so categorized had a carrying value of $1,958,229,000
and a fair value of $1,985,106,000 at December 31, 1997. Using its modeling and
analytical software the Company performed sensitivity analysis of its financial
instruments at December 31, 1997. Assuming an
47
<PAGE>
immediate increase of 100 basis points in interest rates the net hypothetical
decrease in the fair value of the Company's assets is estimated to be
$108,000,000. A corresponding decrease in the fair value of the liabilities
categorized as financial instruments is estimated to be $56,000,000 at December
31, 1997.
SUN LIFE (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.
48
<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, 1997 the Company ranked 37th among all
life insurance companies in the United States based upon total assets. Its
ultimate parent company, Sun Life (Canada), ranked 21st. Best's Insurance
Reports, Life-Health Edition, 1998, assigned the Company and Sun Life (Canada)
its highest classification, A++, as of December 31, 1997. 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 assigned the Company an
unsolicited rating of Aa2 for financial strength.
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 426 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 5 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 5 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
49
<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, Consultant and Director (1996*)
200 Boylston Street
Boston, Massachusetts 02116
He formerly was Senior Vice President and Deputy General Manager for the
United States of Sun Life Assurance Company of Canada; Senior Vice President of
Sun Life Insurance and Annuity Company of New York; and Vice President of Sun
Life Financial Services Limited, retiring in December, 1998. He is a Director of
Sun Life Insurance and Annuity Company of New York, Sun Life Financial Services
Limited, Sun Life of Canada (U.S.) Distributors, Inc. and Clarendon Insurance
Agency, Inc.
- ----------
* Year Elected Director
50
<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 Vice President and Chief Counsel and Assistant
Secretary of Sun Life Insurance and Annuity Company of New York; and Assistant
Secretary of 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; and
Secretary of Sun Life Insurance and Annuity Company of New York.
The directors, officers and employees of the Company are covered under a
commercial blanket bond and a liability policy. The directors, officers and
employees of Massachusetts Financial Services Company and Clarendon Insurance
Agency, Inc. are covered under a fidelity bond and errors and omissions policy.
- ----------
* Year Elected Director
51
<PAGE>
EXECUTIVE COMPENSATION
All of the executive officers of the Company also serve as officers of Sun Life
(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 (Canada) or its
affiliates receive no compensation in addition to their compensation as officers
of Sun Life (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
(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 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.
52
<PAGE>
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 for the years ended
December 31, 1997, 1996 and 1995 included in this Prospectus have been audited
by Deloitte & Touche LLP, independent auditors, as stated in their report
appearing herein, and are included in reliance upon the reports of such firm
given upon their authority as experts in accounting and auditing.
REGISTRATION STATEMENTS
Registration statements have been filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act of 1933 as amended, with
respect to the Contracts. 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 Series Fund shares held in the Sub-Accounts of the Variable
Account.
The financial statements of the Variable Account which are included in this
Prospectus pertain to that portion of the Variable Account to which
Participant's Purchase Payments will be allocated and to which participants in
other contracts currently participating in the Variable Account are allocated.
The Variable Account value of the interests of Owners, Participants, Annuitants,
Payees and Beneficiaries under the Contracts is affected primarily by the
investment results of the Series Fund. The financial statements of the Variable
Account reflect units outstanding and expenses incurred under other contracts
currently participating in the Variable Account which impose certain contract
charges that are different from those imposed under the Contracts.
-------------------
53
<PAGE>
FUTURITY AND FUTURITY II SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.)
VARIABLE ACCOUNT F
STATEMENT OF CONDITION -- December 31, 1998
<TABLE>
<CAPTION>
ASSETS:
Investments in: Shares Cost Value
---------- ------------ ------------
<S> <C> <C> <C>
AIM Variable Insurance Funds, Inc.
V.I. Capital Appreciation Fund
("AIM1")........................... 61,653 $ 1,425,203 $ 1,553,666
V.I. Growth Fund ("AIM2")........... 103,597 2,338,409 2,569,205
V.I. Growth and Income Fund
("AIM3")........................... 159,010 3,374,591 3,776,476
V.I. International Equity Fund
("AIM4")........................... 122,897 2,275,430 2,411,238
The Alger American Fund
Growth Portfolio ("AL1")............ 68,386 3,143,210 3,639,502
Income and Growth Portfolio
("AL2")............................ 177,491 2,056,754 2,328,678
Small Capitalization Portfolio
("AL3")............................ 18,330 709,561 805,956
Goldman Sachs Variable Insurance Trust
CORE Large Cap Growth Fund
("GS1")............................ 199,410 2,099,757 2,329,110
CORE Small Cap Equity Fund
("GS2")............................ 31,269 272,617 282,676
CORE US Equity Fund ("GS3")......... 281,905 2,922,399 3,219,352
Growth and Income Fund ("GS4")...... 176,926 1,920,797 1,848,880
International Equity Fund ("GS5")... 27,320 308,722 325,384
J.P. Morgan Series Trust II
Equity Portfolio ("JP1")............ 201,127 3,112,186 3,185,847
International Equity Portfolio
("JP2")............................ 46,142 478,044 485,416
Small Cap Stock Portfolio ("JP3")... 16,051 191,610 190,370
Lord Abbett Series Fund, Inc.
Growth and Income Portfolio
("LA1")............................ 163,870 3,361,117 3,382,278
MFS/Sun Life Series Trust
Capital Appreciation Series
("CAS")............................ 100,566 3,989,435 4,619,240
Emerging Growth Series ("EGS")...... 209,516 4,099,958 4,877,239
Government Securities Series
("GSS")............................ 122,595 1,629,018 1,642,109
High Yield Series ("HYS")........... 230,697 2,116,785 2,113,993
Money Market Series ("MMS")......... 3,829,919 3,829,919 3,829,919
Utilities Series ("UTS")............ 169,613 2,694,298 2,897,748
OCC Accumulation Trust
Equity Portfolio ("OP1")............ 99,730 3,657,753 3,859,556
Mid Cap Portfolio ("OP2")........... 92,501 863,619 905,583
Small Cap Portfolio ("OP3")......... 30,984 686,779 715,731
Managed Portfolio ("OP4")........... 24 999 1,053
Salomon Brothers Variable Series
Funds, Inc.
Variable Capital Fund ("SB1")....... 19,989 207,998 231,269
Variable Investors Fund ("SB2")..... 29,980 310,630 330,084
Variable Strategic Bond Fund
("SB3")............................ 287,433 2,978,552 2,911,700
Variable Total Return Fund
("SB4")............................ 286,820 2,918,463 2,982,932
Sun Capital Advisers Trust
Sun Capital Money Market Fund
("SCA1")........................... 2,003 2,003 2,003
Sun Capital Investment Grade Bond
Fund ("SCA2")...................... 1,808 18,012 18,033
Sun Capital Real Estate Fund
("SCA3")........................... 721 6,999 7,096
Warburg Pincus Trust
Emerging Markets Portolio ("WP1")... 20,125 168,179 164,827
International Equity Portfolio
("WP2")............................ 15,073 167,510 165,652
Post-Venture Capital Portfolio
("WP3")............................ 11,625 129,509 136,947
Small Company Growth Portfolio
("WP4")............................ 23,191 341,750 371,281
------------ ------------
$ 60,808,575 $ 65,118,029
------------
------------
LIABILITY:
Payable to sponsor................................................ (475)
------------
Net assets.................................................. $ 65,117,554
------------
------------
</TABLE>
See notes to financial statements
54
<PAGE>
FUTURITY AND FUTURITY II SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.)
VARIABLE ACCOUNT F
STATEMENT OF CONDITION -- continued
<TABLE>
<CAPTION>
Applicable to Owners of
Deferred Variable Annuity Contracts Reserve for
----------------------------------- Variable
Units Unit Value Value Annuities Total
--------- ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
NET ASSETS APPLICABLE TO CONTRACT OWNERS:
FUTURITY CONTRACTS:
AIM Variable Insurance Funds, Inc.
V.I. Capital Appreciation Fund........... 141,292 $11.2634 $ 1,552,536 $ -- $ 1,552,536
V.I. Growth Fund......................... 204,502 12.5052 2,557,319 -- 2,557,319
V.I. Growth and Income Fund.............. 332,662 11.2957 3,757,624 -- 3,757,624
V.I. International Equity Fund........... 216,812 10.9969 2,384,292 -- 2,384,292
The Alger American Fund
Growth Portfolio......................... 285,990 12.6460 3,616,606 -- 3,616,606
Income and Growth Portfolio.............. 194,995 11.8414 2,308,987 -- 2,308,987
Small Capitalization Portfolio........... 77,472 10.3887 804,820 -- 804,820
Goldman Sachs Variable Insurance Trust
CORE Large Cap Growth Fund............... 210,952 11.0000 2,320,458 -- 2,320,458
CORE Small Cap Equity Fund............... 31,476 8.9463 281,589 -- 281,589
CORE US Equity Fund...................... 282,488 11.3062 3,193,980 -- 3,193,980
Growth and Income Fund................... 199,770 9.2498 1,847,844 -- 1,847,844
International Equity Fund................ 30,394 10.5032 319,257 -- 319,257
J.P. Morgan Series Trust II
Equity Portfolio......................... 293,787 10.8269 3,180,766 -- 3,180,766
International Opportunities Portfolio.... 52,419 9.2403 484,365 -- 484,365
Small Company Portfolio.................. 22,655 8.3553 189,285 -- 189,285
Lord Abbett Series Fund, Inc.
Growth and Income Portfolio.............. 333,805 10.0766 3,363,604 -- 3,363,604
MFS/Sun Life Series Trust
Capital Appreciation Series.............. 403,733 11.3759 4,592,910 -- 4,592,910
Emerging Growth Series................... 397,132 12.1772 4,835,955 -- 4,835,955
Government Securities Series............. 150,350 10.5829 1,591,131 40,272 1,631,403
High Yield Series........................ 217,924 9.6667 2,106,712 -- 2,106,712
Money Market Series...................... 371,404 10.3120 3,829,919 -- 3,829,919
Utilities Series......................... 278,221 10.3843 2,889,100 -- 2,889,100
OCC Accumulation Trust
Equity Portfolio......................... 363,748 10.5664 3,843,506 -- 3,843,506
Mid Cap Portfolio........................ 93,160 9.7036 903,990 -- 903,990
Small Cap Portfolio...................... 86,567 8.2560 714,696 -- 714,696
Salomon Brothers Variable Series Funds,
Inc.
Variable Capital Fund.................... 21,329 10.8433 231,269 -- 231,269
Variable Investors Fund.................. 32,282 10.2249 330,084 -- 330,084
Variable Strategic Bond Fund............. 277,473 10.4937 2,911,700 -- 2,911,700
Variable Total Return Fund............... 293,921 10.1488 2,982,932 -- 2,982,932
Warburg Pincus Trust
Emerging Markets Portfolio............... 22,480 7.2856 163,778 -- 163,778
International Equity Portfolio........... 18,253 9.0185 164,615 -- 164,615
Post-Venture Capital Portfolio........... 14,715 9.2305 135,822 -- 135,822
Small Company Growth Portfolio........... 41,843 8.8466 370,171 -- 370,171
------------ ----------- ------------
$ 64,761,622 $ 40,272 $ 64,801,894
------------ ----------- ------------
------------ ----------- ------------
</TABLE>
See notes to financial statements
55
<PAGE>
FUTURITY AND FUTURITY II SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.)
VARIABLE ACCOUNT F
STATEMENT OF CONDITION -- continued
<TABLE>
<CAPTION>
Applicable to Owners of
Deferred Variable Annuity Contracts Reserve for
----------------------------------- Variable
Units Unit Value Value Annuities Total
--------- ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
FUTURITY II CONTRACTS:
AIM Variable Insurance Funds, Inc.
V.I. Capital Appreciation Fund........... 100 $11.2991 $ 1,130 $ -- $ 1,130
V.I. Growth Fund......................... 1,049 11.3293 11,886 -- 11,886
V.I. Growth & Income Fund................ 1,704 11.0655 18,852 -- 18,852
V.I. International Equity Fund........... 2,553 10.5553 26,946 -- 26,946
The Alger American Fund
Growth Portfolio......................... 2,044 11.1993 22,896 -- 22,896
Income and Growth Portfolio.............. 1,785 11.0273 19,691 -- 19,691
Small Capitalization Portfolio........... 100 11.3603 1,136 -- 1,136
Goldman Sachs Variable Insurance Trust.....
CORE Large-Cap Growth Fund............... 786 11.0085 8,652 -- 8,652
CORE Small Cap Equity Fund............... 100 10.8679 1,087 -- 1,087
CORE US Equity Fund...................... 2,341 10.8370 25,372 25,372
Growth and Income Fund................... 100 10.3642 1,036 -- 1,036
International Equity Fund................ 578 10.5999 6,127 -- 6,127
J.P. Morgan Series Trust II................
Equity Portfolio......................... 474 10.7114 5,081 -- 5,081
International Opportunities Portfolio.... 100 10.5058 1,051 -- 1,051
Small Company Portfolio.................. 100 10.8537 1,085 -- 1,085
Lord Abbett Series Fund, Inc.
Growth and Income Portfolio.............. 1,763 10.5917 18,674 -- 18,674
MFS/Sun Life Series Trust
Capital Appreciation Series.............. 2,367 11.1244 26,330 -- 26,330
Emerging Growth Series................... 3,662 11.2723 41,284 -- 41,284
Government Securities Series............. 1,027 9.9595 10,231 -- 10,231
High Yield Series........................ 729 9.9916 7,281 -- 7,281
Utilities Series......................... 821 10.5369 8,648 -- 8,648
OCC Accumulation Trust
Equity Portfolio......................... 1,517 10.5784 16,050 -- 16,050
Mid Cap Portfolio........................ 150 10.6171 1,593 -- 1,593
Small Cap Portfolio...................... 100 10.3520 1,035 -- 1,035
Managed Portfolio........................ 100 10.5329 1,053 -- 1,053
Sun Capital Advisers Trust
Sun Capital Money Market Fund............ 200 10.0143 2,003 -- 2,003
Sun Capital Investment Grade Bond Fund... 1,806 9.9809 18,033 -- 18,033
Sun Capital Real Estate Fund............. 705 10.0837 7,096 -- 7,096
Warburg Pincus Trust
Emerging Markets Portfolio............... 100 10.4931 1,049 -- 1,049
International Equity Portfolio........... 100 10.3709 1,037 -- 1,037
Post-Venture Capital Portfolio........... 100 11.2546 1,125 -- 1,125
Small Company Growth Portfolio........... 100 11.0954 1,110 -- 1,110
------------ ----------- ------------
$ 315,660 $ -- $ 315,660
------------ ----------- ------------
$ 65,077,282 $ 40,272 $ 65,117,554
------------ ----------- ------------
------------ ----------- ------------
</TABLE>
See notes to financial statements
56
<PAGE>
FUTURITY AND FUTURITY II SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.)
VARIABLE ACCOUNT F
STATEMENT OF OPERATIONS -- Period Ended December 31, 1998
<TABLE>
<CAPTION>
AIM1 AIM2 AIM3 AIM4 AL1
Sub-Account* Sub-Account* Sub-Account** Sub-Account* Sub-Account**
------------- -------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
INCOME AND EXPENSES:
Dividend income and capital gain
distributions received............... $ 6,285 $ 156,348 $ 44,556 $ 18,795 $ 15,307
Mortality and expense risk charges.... (5,754) (10,256) (10,435) (9,450) (8,129)
Distribution expense charges.......... (690) (1,231) (1,252) (1,134) (975)
------------- -------------- ------------- ------------- -------------
Net investment income (loss)...... $ (159) $ 144,861 $ 32,869 $ 8,211 $ 6,203
------------- -------------- ------------- ------------- -------------
REALIZED AND UNREALIZED GAINS (LOSSES):
Realized gains (losses) on investment
transactions:
Proceeds from sales................. $ 51,118 $ 262,798 $ 194,277 $ 606,332 $ 134,431
Cost of investments sold............ (57,244) (260,107) (194,824) (658,114) (152,992)
------------- -------------- ------------- ------------- -------------
Net realized gain (losses)........ $ (6,126) $ 2,691 $ (547) $ (51,782) $ (18,561)
------------- -------------- ------------- ------------- -------------
Net unrealized appreciation on
investments:
End of period....................... $128,463 $ 230,796 $ 401,885 $ 135,808 $ 496,292
Beginning of period................. -- -- -- -- --
------------- -------------- ------------- ------------- -------------
Change in unrealized
appreciation..................... $128,463 $ 230,796 $ 401,885 $ 135,808 $ 496,292
------------- -------------- ------------- ------------- -------------
Realized and unrealized gains....... $122,337 $ 233,487 $ 401,338 $ 84,026 $ 477,731
------------- -------------- ------------- ------------- -------------
INCREASE IN NET ASSETS FROM
OPERATIONS............................. $122,178 $ 378,348 $ 434,207 $ 92,237 $ 483,934
------------- -------------- ------------- ------------- -------------
------------- -------------- ------------- ------------- -------------
<CAPTION>
AL3 GS1 GS2 GS3 GS4
Sub-Account** Sub-Account*** Sub-Account* Sub-Account* Sub-Account*
------------- -------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
INCOME AND EXPENSES:
Dividend income and capital gain
distributions received............... $ 833 $ 3,540 $ 874 $ 14,485 $ 16,477
Mortality and expense risk charges.... (2,460) (8,520) (1,123) (13,699) (9,031)
Distribution expense charges.......... (296) (1,022) (134) (1,644) (1,084)
------------- -------------- ------------- ------------- -------------
Net investment income (loss)...... $ (1,923) $ (6,002) $ (383) $ (858) $ 6,362
------------- -------------- ------------- ------------- -------------
REALIZED AND UNREALIZED LOSSES:
Realized losses on investment
transactions:
Proceeds from sales................. $ 28,682 $ 145,615 $ 31,350 $ 420,752 $ 53,455
Cost of investments sold............ (31,697) (152,360) (36,619) (430,572) (62,276)
------------- -------------- ------------- ------------- -------------
Net realized losses............... $ (3,015) $ (6,745) $ (5,269) $ (9,820) $ (8,821)
------------- -------------- ------------- ------------- -------------
Net unrealized appreciation
(depreciation) on investments:
End of period....................... $ 96,395 $ 229,353 $ 10,059 $ 296,953 $ (71,917)
Beginning of period................. -- -- -- -- --
------------- -------------- ------------- ------------- -------------
Change in unrealized appreciation
(depreciation)................... $ 96,395 $ 229,353 $ 10,059 $ 296,953 $ (71,917)
------------- -------------- ------------- ------------- -------------
Realized and unrealized gains
(losses)........................... $ 93,380 $ 222,608 $ 4,790 $ 287,133 $ (80,738)
------------- -------------- ------------- ------------- -------------
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS.................... $ 91,457 $ 216,606 $ 4,407 $ 286,275 $ (74,376)
------------- -------------- ------------- ------------- -------------
------------- -------------- ------------- ------------- -------------
<CAPTION>
AL2
Sub-Account**
-------------
<S> <C>
INCOME AND EXPENSES:
Dividend income and capital gain
distributions received............... $ 14,144
Mortality and expense risk charges.... (6,477)
Distribution expense charges.......... (777)
-------------
Net investment income (loss)...... $ 6,890
-------------
REALIZED AND UNREALIZED GAINS (LOSSES):
Realized gains (losses) on investment
transactions:
Proceeds from sales................. $ 70,034
Cost of investments sold............ (75,270)
-------------
Net realized gain (losses)........ $ (5,236)
-------------
Net unrealized appreciation on
investments:
End of period....................... $271,924
Beginning of period................. --
-------------
Change in unrealized
appreciation..................... $271,924
-------------
Realized and unrealized gains....... $266,688
-------------
INCREASE IN NET ASSETS FROM
OPERATIONS............................. $273,578
-------------
-------------
GS5
Sub-Account+
-------------
<S> <C>
INCOME AND EXPENSES:
Dividend income and capital gain
distributions received............... $ 2,340
Mortality and expense risk charges.... (1,316)
Distribution expense charges.......... (158)
-------------
Net investment income (loss)...... $ 866
-------------
REALIZED AND UNREALIZED LOSSES:
Realized losses on investment
transactions:
Proceeds from sales................. $ 40,264
Cost of investments sold............ (43,080)
-------------
Net realized losses............... $ (2,816)
-------------
Net unrealized appreciation
(depreciation) on investments:
End of period....................... $ 16,662
Beginning of period................. --
-------------
Change in unrealized appreciation
(depreciation)................... $ 16,662
-------------
Realized and unrealized gains
(losses)........................... $ 13,846
-------------
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS.................... $ 14,712
-------------
-------------
</TABLE>
*For the period February 20, 1998 (commencement of operations) through
December 31, 1998.
**For the period March 27, 1998 (commencement of operations) through December
31, 1998.
***For the period March 12, 1998 (commencement of operations) through December
31, 1998.
+For the period March 17, 1998 (commencement of operations) through December
31, 1998.
See notes to financial statements
57
<PAGE>
FUTURITY AND FUTURITY II SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.)
VARIABLE ACCOUNT F
STATEMENT OF OPERATIONS -- continued
<TABLE>
<CAPTION>
JP1 JP2 JP3 LA1 CAS
Sub-Account** Sub-Account** Sub-Account** Sub-Account** Sub-Account*
-------------- ------------ -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
INCOME AND EXPENSES:
Dividend income and capital gain
distributions received............... $ 241,743 $ 4,493 $ 4,121 $ 205,897 $ 9,457
Mortality and expense risk charges.... (8,628) (1,808) (717) (11,202) (16,870)
Distribution expense charges.......... (1,035) (217) (86) (1,344) (2,024)
-------------- ------------ -------------- ------------- -------------
Net investment income (loss)...... $ 232,080 $ 2,468 $ 3,318 $ 193,351 $ (9,437)
-------------- ------------ -------------- ------------- -------------
REALIZED AND UNREALIZED LOSSES:
Realized losses on investment
transactions:
Proceeds from sales................. $ 576,853 $ 10,067 $ 55,312 $ 315,782 $ 1,184,955
Cost of investments sold............ (618,907) (11,959) (58,372) (319,246) (1,219,402)
-------------- ------------ -------------- ------------- -------------
Net realized losses............... $ (42,054) $ (1,892) $ (3,060) $ (3,464) $ (34,447)
-------------- ------------ -------------- ------------- -------------
Net unrealized appreciation
(depreciation) on investments:
End of period....................... $ 73,661 $ 7,372 $ (1,240) $ 21,161 $ 629,805
Beginning of period................. -- -- -- -- --
-------------- ------------ -------------- ------------- -------------
Change in unrealized appreciation
(depreciation)................... $ 73,661 $ 7,372 $ (1,240) $ 21,161 $ 629,805
-------------- ------------ -------------- ------------- -------------
Realized and unrealized gains
(losses)........................... $ 31,607 $ 5,480 $ (4,300) $ 17,697 $ 595,358
-------------- ------------ -------------- ------------- -------------
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS............................. $ 263,687 $ 7,948 $ (982) $ 211,048 $ 585,921
-------------- ------------ -------------- ------------- -------------
-------------- ------------ -------------- ------------- -------------
<CAPTION>
GSS HYS MMS UTS OP1
Sub-Account*** Sub-Account* Sub-Account*** Sub-Account** Sub-Account***
-------------- ------------ -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
INCOME AND EXPENSES:
Dividend income and capital gain
distributions received............... $ 1,514 $ 9,226 $ 69,015 $ 2,328 $ 296
Mortality and expense risk charges.... (5,898) (8,450) (17,964) (9,095) (12,274)
Distribution expense charges.......... (708) (1,015) (2,156) (1,092) (1,473)
-------------- ------------ -------------- ------------- -------------
Net investment income (loss)...... $ (5,092) $ (239) $ 48,895 $ (7,859) $ (13,451)
-------------- ------------ -------------- ------------- -------------
REALIZED AND UNREALIZED GAINS (LOSSES):
Realized gains (losses) on investment
transactions:
Proceeds from sales................. $ 658,482 $ 201,108 $ 6,791,349 $ 61,276 $ 121,931
Cost of investments sold............ (635,156) (218,864) (6,791,349) (62,407) (137,860)
-------------- ------------ -------------- ------------- -------------
Net realized gains (losses)....... $ 23,326 $ (17,756) $ -- $ (1,131) $ (15,929)
-------------- ------------ -------------- ------------- -------------
Net unrealized appreciation
(depreciation) on investments:
End of period....................... $ 13,091 $ (2,792) $ -- $ 203,450 $ 201,803
Beginning of period................. -- -- -- -- --
-------------- ------------ -------------- ------------- -------------
Change in unrealized appreciation
(depreciation)....................... $ 13,091 $ (2,792) $ -- $ 203,450 $ 201,803
-------------- ------------ -------------- ------------- -------------
Realized and unrealized gains
(losses)........................... $ 36,417 $ (20,548) $ -- $ 202,319 $ 185,874
-------------- ------------ -------------- ------------- -------------
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS............................. $ 31,325 $ (20,787) $ 48,895 $ 194,460 $ 172,423
-------------- ------------ -------------- ------------- -------------
-------------- ------------ -------------- ------------- -------------
<CAPTION>
EGS
Sub-Account***
--------------
<S> <C>
INCOME AND EXPENSES:
Dividend income and capital gain
distributions received............... $ 9,770
Mortality and expense risk charges.... (17,496)
Distribution expense charges.......... (2,099)
--------------
Net investment income (loss)...... $ (9,825)
--------------
REALIZED AND UNREALIZED LOSSES:
Realized losses on investment
transactions:
Proceeds from sales................. $ 1,285,214
Cost of investments sold............ (1,329,156)
--------------
Net realized losses............... $ (43,942)
--------------
Net unrealized appreciation
(depreciation) on investments:
End of period....................... $ 777,281
Beginning of period................. --
--------------
Change in unrealized appreciation
(depreciation)................... $ 777,281
--------------
Realized and unrealized gains
(losses)........................... $ 733,339
--------------
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS............................. $ 723,514
--------------
--------------
OP2
Sub-Account***
--------------
<S> <C>
INCOME AND EXPENSES:
Dividend income and capital gain
distributions received............... $ 4,411
Mortality and expense risk charges.... (3,729)
Distribution expense charges.......... (447)
--------------
Net investment income (loss)...... $ 235
--------------
REALIZED AND UNREALIZED GAINS (LOSSES):
Realized gains (losses) on investment
transactions:
Proceeds from sales................. $ 185,099
Cost of investments sold............ (204,397)
--------------
Net realized gains (losses)....... $ (19,298)
--------------
Net unrealized appreciation
(depreciation) on investments:
End of period....................... $ 41,964
Beginning of period................. --
--------------
Change in unrealized appreciation
(depreciation)....................... $ 41,964
--------------
Realized and unrealized gains
(losses)........................... $ 22,666
--------------
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS............................. $ 22,901
--------------
--------------
</TABLE>
*For the period February 26, 1998 (commencement of operations) through
December 31, 1998.
**For the period March 27, 1998 (commencement of operations) through December
31, 1998.
***For the period February 20, 1998 (commencement of operations) through
December 31, 1998.
See notes to financial statements
58
<PAGE>
FUTURITY AND FUTURITY II SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.)
VARIABLE ACCOUNT F
STATEMENT OF OPERATIONS -- continued
<TABLE>
<CAPTION>
OP3 OP4 SB1 SB2 SB3 SB4
Sub-Account** Sub-Account+ Sub-Account** Sub-Account** Sub-Account* Sub-Account**
------------- ------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
INCOME AND EXPENSES:
Dividend income and capital gain
distributions received.......... $ -- $ -- $ 4,723 $ 1,344 $ 133,766 $ 51,585
Mortality and expense risk
charges......................... (1,648) (1) (1,045) (1,425) (11,087) (10,981)
Distribution expense charges..... (198) -- (125) (171) (1,331) (1,318)
------------- ------------- ------------- ------------- ------------- ------------
Net investment income
(loss)...................... $ (1,846) $ (1) $ 3,553 $ (252) $ 121,348 $ 39,286
------------- ------------- ------------- ------------- ------------- ------------
REALIZED AND UNREALIZED GAINS
(LOSSES):
Realized gains (losses) on
investment transactions:
Proceeds from sales............ $ 41,674 $ -- $ 14,423 $ 17,667 $ 287,467 $ 76,303
Cost of investments sold....... (48,893) -- (16,180) (18,524) (277,837) (77,449)
------------- ------------- ------------- ------------- ------------- ------------
Net realized gains
(losses).................... $ (7,219) $ -- $ (1,757) $ (857) $ 9,630 $ (1,146)
------------- ------------- ------------- ------------- ------------- ------------
Net unrealized appreciation
(depreciation) on investments:
End of period.................. $ 28,952 $ 54 $ 23,271 $ 19,454 $ (66,852) $ 64,469
Beginning of period............ -- -- -- -- -- --
------------- ------------- ------------- ------------- ------------- ------------
Change in unrealized
appreciation
(depreciation).............. $ 28,952 $ 54 $ 23,271 $ 19,454 $ (66,852) $ 64,469
------------- ------------- ------------- ------------- ------------- ------------
Realized and unrealized gains
(losses)...................... $ 21,733 $ 54 $ 21,514 $ 18,597 $ (57,222) $ 63,323
------------- ------------- ------------- ------------- ------------- ------------
INCREASE IN NET ASSETS FROM
OPERATIONS........................ $ 19,887 $ 53 $ 25,067 $ 18,345 $ 64,126 $102,609
------------- ------------- ------------- ------------- ------------- ------------
------------- ------------- ------------- ------------- ------------- ------------
<CAPTION>
SCA1 SCA2 SCA3 WP1 WP2 WP3
Sub-Account+ Sub-Account+ Sub-Account+ Sub-Account* Sub-Account** Sub-Account**
------------- ------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
INCOME AND EXPENSES:
Dividend income and capital gain
distributions received.......... $ 4 $ 18 $-- $-- $ -- $--
Mortality and expense risk
charges......................... (1) (4) (1) (606) (1,215) (478)
Distribution expense charges..... -- (1) -- (73) (146) (57)
------------- ------------- ------------- ------------- ------------- ------------
Net investment income
(loss)...................... $ 3 $ 13 $ (1) $ (679) $ (1,361) $ (535)
------------- ------------- ------------- ------------- ------------- ------------
REALIZED AND UNREALIZED LOSSES:
Realized losses on investment
transactions:
Proceeds from sales............ $ 1 $ 5 $ 1 $ 10,430 $ 969,366 $ 1,327
Cost of investments sold....... (1) (6) (1) (15,247) (1,002,396) (1,566)
------------- ------------- ------------- ------------- ------------- ------------
Net realized losses.......... $-- $ (1) $-- $ (4,817) $ (33,030) $ (239)
------------- ------------- ------------- ------------- ------------- ------------
Net unrealized appreciation
(depreciation) on investments:
End of period.................. $-- $ 21 $ 97 $ (3,352) $ (1,858) $ 7,438
Beginning of period............ -- -- -- -- -- --
------------- ------------- ------------- ------------- ------------- ------------
Change in unrealized
appreciation
(depreciation).............. $-- $ 21 $ 97 $ (3,352) $ (1,858) $ 7,438
------------- ------------- ------------- ------------- ------------- ------------
Realized and unrealized gains
(losses)...................... $-- $ 20 $ 97 $ (8,169) $ (34,888) $ 7,199
------------- ------------- ------------- ------------- ------------- ------------
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS................... $ 3 $ 33 $ 96 $ (8,848) $ (36,249) $ 6,664
------------- ------------- ------------- ------------- ------------- ------------
------------- ------------- ------------- ------------- ------------- ------------
</TABLE>
*For the period February 20, 1998 (commencement of operations) through December
31, 1998.
**For the period March 27, 1998 (commencement of operations) through December
31, 1998.
+For the period December 15, 1998 (commencement of operations) through December
31, 1998.
See notes to financial statements
59
<PAGE>
FUTURITY AND FUTURITY II SUB-ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.)
VARIABLE ACCOUNT F
STATEMENT OF OPERATIONS -- continued
<TABLE>
<CAPTION>
WP4
Sub-Account** Total
------------- -------------
<S> <C> <C>
INCOME AND EXPENSES:
Dividend income and capital gain
distributions received............... $ -- $ 1,047,695
Mortality and expense risk charges.... (2,028) (231,301)
Distribution expense charges.......... (243) (27,756)
------------- -------------
Net investment income (loss)...... $ (2,271) $ 788,638
------------- -------------
REALIZED AND UNREALIZED LOSSES:
Realized losses on investment
transactions:
Proceeds from sales................. $ 130,688 15,035,888
Cost of investments sold............ (156,790) (15,377,120)
------------- -------------
Net realized losses............... $ (26,102) $ (341,232)
------------- -------------
Net unrealized appreciation on
investments:
End of period....................... $ 29,531 4,309,454
Beginning of period................. -- --
------------- -------------
Change in unrealized
appreciation...................... $ 29,531 $ 4,309,454
------------- -------------
Realized and unrealized gains....... $ 3,429 $ 3,968,222
------------- -------------
INCREASE IN NET ASSETS FROM
OPERATIONS............................. $ 1,158 $ 4,756,860
------------- -------------
------------- -------------
</TABLE>
**For the period March 27, 1998 (commencement of operations) through December
31, 1998.
See notes to financial statements
60
<PAGE>
FUTURITY AND FUTURITY II SUB ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.)
VARIABLE ACCOUNT F
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
AIM1 AIM2 AIM3 AIM4 AL1 AL2
Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account
------------ ------------ ------------ ------------ ------------ ------------
Period Ended Period Ended Period Ended Period Ended Period Ended Period Ended
December 31, December 31, December 31, December 31, December 31, December 31,
1998* 1998* 1998** 1998* 1998** 1998**
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss).......... $ (159) $ 144,861 $ 32,869 $ 8,211 $ 6,203 $ 6,890
Net realized gains (losses)........... (6,126) 2,691 (547) (51,782) (18,561) (5,236)
Net unrealized gains.................. 128,463 230,796 401,885 135,808 496,292 271,924
------------ ------------ ------------ ------------ ------------ ------------
Increase in net assets from
operations....................... $ 122,178 $ 378,348 $ 434,207 $ 92,237 $ 483,934 $ 273,578
------------ ------------ ------------ ------------ ------------ ------------
PARTICIPANT TRANSACTIONS:
Accumulation activity:
Purchase payments received.......... $1,229,109 $2,015,774 $2,099,297 $1,910,796 $2,399,047 $1,751,908
Net transfers between Sub-Accounts
and Fixed Account.................. 212,774 193,750 1,293,608 416,832 768,779 350,911
Withdrawals, surrenders,
annuitizations and contract
charges............................ (10,395) (18,667) (50,636) (8,627) (12,258) (47,719)
------------ ------------ ------------ ------------ ------------ ------------
Net accumulation activity......... $1,431,488 $2,190,857 $3,342,269 $2,319,001 $3,155,568 $2,055,100
------------ ------------ ------------ ------------ ------------ ------------
Increase in net assets from
participant transactions............. $1,431,488 $2,190,857 $3,342,269 $2,319,001 $3,155,568 $2,055,100
------------ ------------ ------------ ------------ ------------ ------------
Increase in net assets.............. $1,553,666 $2,569,205 $3,776,476 $2,411,238 $3,639,502 $2,328,678
NET ASSETS:
Beginning of period................... -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
End of period......................... $1,553,666 $2,569,205 $3,776,476 $2,411,238 $3,639,502 $2,328,678
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
</TABLE>
*For the period February 20, 1998 (commencement of operations) through
December 31, 1998.
**For the period March 27, 1998 (commencement of operations) through December
31, 1998.
See notes to financial statements
61
<PAGE>
FUTURITY AND FUTURITY II SUB ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.)
VARIABLE ACCOUNT F
STATEMENTS OF CHANGES IN NET ASSETS -- continued
<TABLE>
<CAPTION>
AL3 GS1 GS2 GS3 GS4
Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account
------------ ------------ ------------ ------------ ------------
Period Ended Period Ended Period Ended Period Ended Period Ended
December 31, December 31, December 31, December 31, December 31,
1998** 1998*** 1998* 1998* 1998*
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss).............. $ (1,923) $ (6,002) $ (383) $ (858) $ 6,362
Net realized losses....................... (3,015) (6,745) (5,269) (9,820) (8,821)
Net unrealized gains (loss)............... 96,395 229,353 10,059 296,953 (71,917)
------------ ------------ ------------ ------------ ------------
Increase (decrease) in net assets from
operations............................. $ 91,457 $ 216,606 $ 4,407 $ 286,275 $ (74,376)
------------ ------------ ------------ ------------ ------------
PARTICIPANT TRANSACTIONS:
Accumulation activity:
Purchase payments received.............. $ 437,232 $1,763,717 $ 258,204 $2,581,300 $1,443,172
Net transfers between Sub-Accounts and
Fixed Account.......................... 285,561 357,499 20,679 407,943 493,897
Withdrawals, surrenders, annuitizations
and contract
charges................................ (8,294) (8,712) (614) (56,166) (13,813)
------------ ------------ ------------ ------------ ------------
Net accumulation activity............. $ 714,499 $2,112,504 $ 278,269 $2,933,077 $1,923,256
------------ ------------ ------------ ------------ ------------
Increase in net assets from participant
transactions............................. $ 714,499 $2,112,504 $ 278,269 $2,933,077 $1,923,256
------------ ------------ ------------ ------------ ------------
Increase in net assets.................. $ 805,956 $2,329,110 $ 282,676 $3,219,352 $1,848,880
NET ASSETS:
Beginning of period....................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
End of period............................. $ 805,956 $2,329,110 $ 282,676 $3,219,352 $1,848,880
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
<CAPTION>
GS5
Sub-Account
------------
Period Ended
December 31,
1998+
------------
<S> <C>
OPERATIONS:
Net investment income (loss).............. $ 866
Net realized losses....................... (2,816)
Net unrealized gains (loss)............... 16,662
------------
Increase (decrease) in net assets from
operations............................. $ 14,712
------------
PARTICIPANT TRANSACTIONS:
Accumulation activity:
Purchase payments received.............. $ 238,188
Net transfers between Sub-Accounts and
Fixed Account.......................... 72,560
Withdrawals, surrenders, annuitizations
and contract
charges................................ (76)
------------
Net accumulation activity............. $ 310,672
------------
Increase in net assets from participant
transactions............................. $ 310,672
------------
Increase in net assets.................. $ 325,384
NET ASSETS:
Beginning of period....................... --
------------
End of period............................. $ 325,384
------------
------------
</TABLE>
*For the period February 20, 1998 (commencement of operations) through
December 31, 1998.
**For the period March 27, 1998 (commencement of operations) through December
31, 1998.
***For the period March 12, 1998 (commencement of operations) through December
31, 1998.
+For the period March 17, 1998 (commencement of operations) through December
31, 1998.
See notes to financial statements
62
<PAGE>
FUTURITY AND FUTURITY II SUB ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.)
VARIABLE ACCOUNT F
STATEMENTS OF CHANGES IN NET ASSETS -- continued
<TABLE>
<CAPTION>
JP1 JP2 JP3 LA1 CAS
Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account
------------ ------------ ------------ ------------ ------------
Period Ended Period Ended Period Ended Period Ended Period Ended
December 31, December 31, December 31, December 31, December 31,
1998** 1998** 1998** 1998** 1998*
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss).............. $ 232,080 $ 2,468 $ 3,318 $ 193,351 $ (9,437)
Net realized losses....................... (42,054) (1,892) (3,060) (3,464) (34,447)
Net unrealized gains (losses)............. 73,661 7,372 (1,240) 21,161 629,805
------------ ------------ ------------ ------------ ------------
Increase(decrease) in net assets from
operations........................... $ 263,687 $ 7,948 $ (982) $ 211,048 $ 585,921
------------ ------------ ------------ ------------ ------------
PARTICIPANT TRANSACTIONS:
Accumulation activity:
Purchase payments received.............. $1,481,091 $401,185 $126,177 $2,829,156 $1,880,023
Net transfers between Sub-Accounts and
Fixed Account.......................... 1,474,721 78,547 65,945 363,979 2,200,342
Withdrawals, surrenders, annuitizations
and contract
charges................................ (33,652) (2,264) (770) (21,905) (47,046)
------------ ------------ ------------ ------------ ------------
Net accumulation activity............. $2,922,160 $477,468 $191,352 $3,171,230 $4,033,319
------------ ------------ ------------ ------------ ------------
Annuitization activity:
Annuitizations.......................... $ -- $-- $-- $ -- $ --
Annuity payments........................ -- -- -- -- --
Annuity transfers....................... -- -- -- -- --
Adjustments to annuity reserve.......... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Net annuitization activity............ $ -- $-- $-- $ -- $ --
------------ ------------ ------------ ------------ ------------
Increase in net assets from participant
transactions............................. $2,922,160 $477,468 $191,352 $3,171,230 $4,033,319
------------ ------------ ------------ ------------ ------------
Increase in net assets.................. $3,185,847 $485,416 $190,370 $3,382,278 $4,619,240
NET ASSETS:
Beginning of period....................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
End of period............................. $3,185,847 $485,416 $190,370 $3,382,278 $4,619,240
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
<CAPTION>
EGS
Sub-Account
------------
Period Ended
December 31,
1998***
------------
<S> <C>
OPERATIONS:
Net investment income (loss).............. $ (9,825)
Net realized losses....................... (43,942)
Net unrealized gains (losses)............. 777,281
------------
Increase(decrease) in net assets from
operations........................... $ 723,514
------------
PARTICIPANT TRANSACTIONS:
Accumulation activity:
Purchase payments received.............. $3,011,641
Net transfers between Sub-Accounts and
Fixed Account.......................... 1,178,725
Withdrawals, surrenders, annuitizations
and contract
charges................................ (36,641)
------------
Net accumulation activity............. $4,153,725
------------
Annuitization activity:
Annuitizations.......................... $ --
Annuity payments........................ --
Annuity transfers....................... --
Adjustments to annuity reserve.......... --
------------
Net annuitization activity............ $ --
------------
Increase in net assets from participant
transactions............................. $4,153,725
------------
Increase in net assets.................. $4,877,239
NET ASSETS:
Beginning of period....................... --
------------
End of period............................. $4,877,239
------------
------------
</TABLE>
*For the period February 26, 1998 (commencement of operations) through
December 31, 1998.
**For the period March 27, 1998 (commencement of operations) through December
31, 1998.
***For the period February 20, 1998 (commencement of operations) through
December 31, 1998.
See notes to financial statements
63
<PAGE>
FUTURITY AND FUTURITY II SUB ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.)
VARIABLE ACCOUNT F
STATEMENTS OF CHANGES IN NET ASSETS -- continued
<TABLE>
<CAPTION>
GSS HYS MMS UTS OP1
Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account
------------ ------------ ------------ ------------ ------------
Period Ended Period Ended Period Ended Period Ended Period Ended
December 31, December 31, December 31, December 31, December 31,
1998* 1998+ 1998* 1998** 1998*
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss).............. $ (5,092) $ (239) $ 48,895 $ (7,859) $ (13,451)
Net realized gain (losses)................ 23,326 (17,756) -- (1,131) (15,929)
Net unrealized gains (losses)............. 13,091 (2,792) -- 203,450 201,803
------------ ------------ ------------ ------------ ------------
Increase (decrease) in net assets from
operations........................... $ 31,325 $ (20,787) $ 48,895 $ 194,460 $ 172,423
------------ ------------ ------------ ------------ ------------
PARTICIPANT TRANSACTIONS:
Accumulation activity:
Purchase payments received.............. $1,300,822 $1,355,408 $5,275,423 $1,634,726 $2,532,266
Net transfers between Sub-Accounts and
Fixed Account.......................... 323,387 786,221 (1,482,996) 1,078,739 1,176,486
Withdrawals, surrenders, annuitizations
and contract
charges................................ (92,714) (6,849) (11,403) (10,177) (21,619)
------------ ------------ ------------ ------------ ------------
Net accumulation activity............. $1,531,495 $2,134,780 $3,781,024 $2,703,288 $3,687,133
------------ ------------ ------------ ------------ ------------
Annuitization activity:
Annuitizations.......................... $ 40,389 $ -- $ -- $ -- $ --
Annuity payments........................ (1,490) -- -- -- --
Annuity transfers....................... 40,390 -- -- -- --
Adjustments to annuity reserve.......... (475) -- -- -- --
------------ ------------ ------------ ------------ ------------
Net annuitization activity............ $ 78,814 $ -- $ -- $ -- $ --
------------ ------------ ------------ ------------ ------------
Increase in net assets from participant
transactions............................. $1,610,309 $2,134,780 $3,781,024 $2,703,288 $3,687,133
------------ ------------ ------------ ------------ ------------
Increase in net assets.................. $1,641,634 $2,113,993 $3,829,919 $2,897,748 $3,859,556
NET ASSETS:
Beginning of period....................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
End of period............................. $1,641,634 $2,113,993 $3,829,919 $2,897,748 $3,859,556
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
<CAPTION>
OP2
Sub-Account
------------
Period Ended
December 31,
1998*
------------
<S> <C>
OPERATIONS:
Net investment income (loss).............. $ 235
Net realized gain (losses)................ (19,298)
Net unrealized gains (losses)............. 41,964
------------
Increase (decrease) in net assets from
operations........................... $ 22,901
------------
PARTICIPANT TRANSACTIONS:
Accumulation activity:
Purchase payments received.............. $772,014
Net transfers between Sub-Accounts and
Fixed Account.......................... 114,451
Withdrawals, surrenders, annuitizations
and contract
charges................................ (3,783)
------------
Net accumulation activity............. $882,682
------------
Annuitization activity:
Annuitizations.......................... $--
Annuity payments........................ --
Annuity transfers....................... --
Adjustments to annuity reserve.......... --
------------
Net annuitization activity............ $--
------------
Increase in net assets from participant
transactions............................. $882,682
------------
Increase in net assets.................. $905,583
NET ASSETS:
Beginning of period....................... --
------------
End of period............................. $905,583
------------
------------
</TABLE>
*For the period February 20, 1998 (commencement of operations) through
December 31, 1998.
**For the period March 27, 1998 (commencement of operations) through December
31, 1998.
+For the period February 26, 1998 (commencement of operations) through
December 31, 1998.
See notes to financial statements
64
<PAGE>
FUTURITY AND FUTURITY II SUB ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.)
VARIABLE ACCOUNT F
STATEMENTS OF CHANGES IN NET ASSETS -- continued
<TABLE>
<CAPTION>
OP3 OP4 SB1 SB2 SB3
Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account
------------ ------------ ------------ ------------ ------------
Period Ended Period Ended Period Ended Period Ended Period Ended
December 31, December 31, December 31, December 31, December 31,
1998** 1998* 1998** 1998** 1998***
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss).............. $ (1,846) $ (1) $ 3,553 $ (252) $ 121,348
Net realized gain (losses)................ (7,219) -- (1,757) (857) 9,630
Net unrealized gains (losses)............. 28,952 54 23,271 19,454 (66,852)
------------ ------------ ------------ ------------ ------------
Increase in net assets from
operations........................... $ 19,887 $ 53 $ 25,067 $ 18,345 $ 64,126
------------ ------------ ------------ ------------ ------------
PARTICIPANT TRANSACTIONS:
Accumulation activity:
Purchase payments received.............. $507,596 $ 1,000 $200,980 $263,704 $2,139,351
Net transfers between Sub-Accounts and
Fixed Account.......................... 197,133 -- 8,030 49,888 722,156
Withdrawals, surrenders, annuitizations
and contract
charges................................ (8,885) -- (2,808) (1,853) (13,933)
------------ ------------ ------------ ------------ ------------
Net accumulation activity............. $695,844 $ 1,000 $206,202 $311,739 $2,847,574
------------ ------------ ------------ ------------ ------------
Annuitization activity:
Annuitizations.......................... $-- $ -- $-- $-- $ --
Annuity payments........................ -- -- -- -- --
Annuity transfers....................... -- -- -- -- --
Adjustments to annuity reserve.......... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Net annuitization activity............ $-- $ -- $-- $-- $ --
------------ ------------ ------------ ------------ ------------
Increase in net assets from participant
transactions............................. $695,844 $ 1,000 $206,202 $311,739 $2,847,574
------------ ------------ ------------ ------------ ------------
Increase in net assets.................. $715,731 $ 1,053 $231,269 $330,084 $2,911,700
NET ASSETS:
Beginning of period....................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
End of period............................. $715,731 $ 1,053 $231,269 $330,084 $2,911,700
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
<CAPTION>
SB4
Sub-Account
------------
Period Ended
December 31,
1998**
------------
<S> <C>
OPERATIONS:
Net investment income (loss).............. $ 39,286
Net realized gain (losses)................ (1,146)
Net unrealized gains (losses)............. 64,469
------------
Increase in net assets from
operations........................... $ 102,609
------------
PARTICIPANT TRANSACTIONS:
Accumulation activity:
Purchase payments received.............. $1,946,618
Net transfers between Sub-Accounts and
Fixed Account.......................... 945,488
Withdrawals, surrenders, annuitizations
and contract
charges................................ (11,783)
------------
Net accumulation activity............. $2,880,323
------------
Annuitization activity:
Annuitizations.......................... $ --
Annuity payments........................ --
Annuity transfers....................... --
Adjustments to annuity reserve.......... --
------------
Net annuitization activity............ $ --
------------
Increase in net assets from participant
transactions............................. $2,880,323
------------
Increase in net assets.................. $2,982,932
NET ASSETS:
Beginning of period....................... --
------------
End of period............................. $2,982,932
------------
------------
</TABLE>
*For the period December 15, 1998 (commencement of operations) through
December 31, 1998.
**For the period March 27, 1998 (commencement of operations) through December
31, 1998.
***For the period February 20, 1998 (commencement of operations) through
December 31, 1998.
See notes to financial statements
65
<PAGE>
FUTURITY AND FUTURITY II SUB ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.)
VARIABLE ACCOUNT F
STATEMENTS OF CHANGES IN NET ASSETS -- continued
<TABLE>
<CAPTION>
SCA1 SCA2 SCA3 WP1 WP2
Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account
------------ ------------ ------------ ------------ ------------
Period Ended Period Ended Period Ended Period Ended Period Ended
December 31, December 31, December 31, December 31, December 31,
1998*** 1998*** 1998*** 1998* 1998**
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income(loss)............... $ 3 $ 13 $ (1) $ (679) $ (1,361)
Net realized losses....................... -- (1) -- (4,817) (33,030)
Net unrealized gains (losses)............. -- 21 97 (3,352) (1,858)
------------ ------------ ------------ ------------ ------------
Increase(decrease) in net assets from
operations........................... $ 3 $ 33 $ 96 $ (8,848) $(36,249)
------------ ------------ ------------ ------------ ------------
PARTICIPANT TRANSACTIONS:
Accumulation activity:
Purchase payments received.............. $2,000 $18,000 $7,000 $133,941 $169,921
Net transfers between Sub-Accounts and
Fixed Account.......................... -- -- -- 40,476 32,859
Withdrawals, surrenders, annuitizations
and contract
charges................................ -- -- -- (742) (879)
------------ ------------ ------------ ------------ ------------
Net accumulation activity............. $2,000 $18,000 $7,000 $173,675 $201,901
------------ ------------ ------------ ------------ ------------
Annuitization activity:
Annuitizations.......................... $-- $-- $-- $-- $--
Annuity payments........................ -- -- -- -- --
Annuity transfers....................... -- -- -- -- --
Adjustments to annuity reserve.......... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Net annuitization activity............ $-- $-- $-- $-- $--
------------ ------------ ------------ ------------ ------------
Increase in net assets from participant
transactions............................. $2,000 $18,000 $7,000 $173,675 $201,901
------------ ------------ ------------ ------------ ------------
Increase in net assets.................. $2,003 $18,033 $7,096 $164,827 $165,652
NET ASSETS:
Beginning of period....................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
End of period............................. $2,003 $18,033 $7,096 $164,827 $165,652
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
<CAPTION>
WP3
Sub-Account
------------
Period Ended
December 31,
1998**
------------
<S> <C>
OPERATIONS:
Net investment income(loss)............... $ (535)
Net realized losses....................... (239)
Net unrealized gains (losses)............. 7,438
------------
Increase(decrease) in net assets from
operations........................... $ 6,664
------------
PARTICIPANT TRANSACTIONS:
Accumulation activity:
Purchase payments received.............. $113,755
Net transfers between Sub-Accounts and
Fixed Account.......................... 17,358
Withdrawals, surrenders, annuitizations
and contract
charges................................ (830)
------------
Net accumulation activity............. $130,283
------------
Annuitization activity:
Annuitizations.......................... $--
Annuity payments........................ --
Annuity transfers....................... --
Adjustments to annuity reserve.......... --
------------
Net annuitization activity............ $--
------------
Increase in net assets from participant
transactions............................. $130,283
------------
Increase in net assets.................. $136,947
NET ASSETS:
Beginning of period....................... --
------------
End of period............................. $136,947
------------
------------
</TABLE>
*For the period February 20, 1998 (commencement of operations) through
December 31, 1998.
**For the period March 27, 1998 (commencement of operations) through December
31, 1998.
***For the period December 15, 1998 (commencement of operations) through
December 31, 1998.
See notes to financial statements
66
<PAGE>
FUTURITY AND FUTURITY II SUB ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.)
VARIABLE ACCOUNT F
STATEMENTS OF CHANGES IN NET ASSETS -- continued
<TABLE>
<CAPTION>
WP4
Sub-Account Total
------------ ------------
Period Ended Period Ended
December 31, December 31,
1998** 1998
------------ ------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss)............... $ (2,271) $ 788,638
Net realized losses........................ (26,102) (341,232)
Net unrealized gains....................... 29,531 4,309,454
------------ ------------
Increase in net assets from
operations............................. $ 1,158 $ 4,756,860
------------ ------------
PARTICIPANT TRANSACTIONS:
Accumulation activity:
Purchase payments received............... $378,201 $46,609,743
Net transfers between Sub-Accounts and
Fixed Account........................... (5,371) 14,241,357
Withdrawals, surrenders, annuitizations
and contract charges.................... (2,707) (569,220)
------------ ------------
Net accumulation activity.............. $370,123 $60,281,880
------------ ------------
Annuitization activity:
Annuitizations........................... $-- $ 40,389
Annuity payments......................... -- (1,490)
Annuity transfers........................ -- 40,390
Adjustments to annuity reserve........... -- (475)
------------ ------------
Net annuitization activity............. $-- $ 78,814
------------ ------------
Increase in net assets from participant
transactions.............................. $370,123 $60,360,694
------------ ------------
Increase in net assets................... $371,281 $65,117,554
NET ASSETS:
Beginning of period........................ -- --
------------ ------------
End of period.............................. $371,281 $65,117,554
------------ ------------
------------ ------------
</TABLE>
**For the period March 27, 1998 (commencement of operations) though December 31,
1998.
See notes to financial statements
67
<PAGE>
FUTURITY AND FUTURITY II SUB ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.)
VARIABLE ACCOUNT F
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION
Sun Life of Canada (U.S.) Variable Account F (the "Variable Account") is a
separate account of Sun Life Assurance Company of Canada (U.S.), (the
"Sponsor"), and was established on July 13, 1989 as a funding vehicle for the
variable portion of Futurity contracts, Futurity II contracts (collectively, the
"Contracts") and certain other group and individual fixed and variable annuity
contracts issued by the Sponsor. The Variable Account is registered with the
Securities and Exchange Commission under the Investment Company Act of 1940 as a
unit investment trust.
The assets of the Variable Account are divided into Sub-Accounts. Each
Sub-Account is invested in shares of a single corresponding investment portfolio
of certain registered open-end mutual funds. With respect to the Futurity
contracts the funds are: AIM Variable Insurance Funds, Inc., The Alger American
Fund, Goldman Sachs Variable Insurance Trust, J.P. Morgan Series Trust II, Lord
Abbett Series Fund, Inc., MFS/Sun Life Series Trust, OCC Accumulation Trust,
Salomon Brothers Variable Series Funds Inc. and Warburg Pincus Trust. With
respect to the Futurity II contracts the funds are: AIM Variable Insurance
Funds, Inc., The Alger American Fund, Goldman Sachs Variable Insurance Trust,
J.P. Morgan Series Trust II, Lord Abbett Series Fund, Inc., MFS/Sun Life Series
Trust, OCC Accumulation Trust, Sun Capital Advisers Trust and Warburg Pincus
Trust (collectively, the "Funds").
(2) SIGNIFICANT ACCOUNTING POLICIES
GENERAL
The preparation of financial statements in conformity with generally accepted
accounting principles requires the Sponsor's management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
INVESTMENT VALUATIONS
Investments in shares of the Funds are recorded at their net asset value.
Realized gains and losses on sales of shares of the Funds are determined on the
identified cost basis. Dividend income and capital gain distributions received
by the Sub-Accounts are reinvested in additional Fund shares and are recognized
on the ex-dividend date.
Exchanges between Sub-Accounts requested by contract participants are recorded
in the new Sub-Account upon receipt of the redemption proceeds.
FEDERAL INCOME TAX STATUS
The operations of the Variable Account are part of the operations of the Sponsor
and are not taxed separately. The Variable Account is not taxed as a regulated
investment company. The Sponsor qualifies for the federal income tax treatment
granted to life insurance companies under Subchapter L of the Internal Revenue
Code. Under existing federal income tax law, investment income and capital gains
earned by the Variable Account on contract owner reserves are not taxable and,
therefore, no provision has been made for federal income taxes.
(3) CONTRACT CHARGES
A mortality and expense risk charge based on the value of the Sub-Accounts
included in the Variable Account is deducted from the Variable Account at the
end of each valuation period for the mortality and expense risks assumed by the
Sponsor. The deductions are transferred periodically to the Sponsor. Currently,
the deduction is at an effective annual rate of 1.25%.
Each year on the account anniversary, an account administration fee ("Account
Fee") equal to the lesser of $30 in the case of Futurity contracts and $35 in
the case of Futurity II contracts or 2% of the participant's account value in
Account Years one through five (thereafter, the Account fee may be changed
annually, but it
68
<PAGE>
FUTURITY AND FUTURITY II SUB ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.)
VARIABLE ACCOUNT F
NOTES TO FINANCIAL STATEMENTS -- continued
may not exceed the lesser of $50 or 2% of the participant's account value) is
deducted from the participant's account to reimburse the Sponsor for certain
administrative expenses. After the annuity commencement date the Account Fee
will be deducted pro rata from each variable annuity payment made during the
year. As reimbursement for administrative expenses attributable to Contracts
which exceed the revenues received from the Account Fees, the Sponsor makes a
deduction from the Variable Account at the end of each valuation period at an
effective annual rate of 0.15% of the net assets attributable to such Contracts.
The Sponsor does not deduct a sales charge from purchase payments. However, a
withdrawal charge (contingent deferred sales charge) of up to 6% of certain
amounts withdrawn, when applicable, may be deducted to cover certain expenses
relating to the sale of the Contracts, including commissions paid to sales
personnel, the costs of preparation of sales literature, and other promotional
costs and acquisition expenses.
(4) ANNUITY RESERVES
Annuity reserves are calculated using the 1983 Individual Annuitant Mortality
Table and an assumed interest rate of 3% per year. Required adjustments to the
reserves are accomplished by transfers to or from the Sponsor.
69
<PAGE>
FUTURITY AND FUTURITY II SUB ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.)
VARIABLE ACCOUNT F
NOTES TO FINANCIAL STATEMENTS -- continued
(5) UNIT ACTIVITY FROM PARTICIPANT TRANSACTIONS
<TABLE>
<CAPTION>
Units Transferred
Between Sub-Accounts Units Withdrawn,
Units Outstanding and Fixed Surrendered,
Beginning of Period Units Purchased Accumulation Account and Annuitized
------------------- ----------------- ---------------------- -------------------
Period Ended Period Ended Period Ended Period Ended
December 31, December 31, December 31, December 31,
1998 1998 1998 1998
------------------- ----------------- ---------------------- -------------------
<S> <C> <C> <C> <C>
FUTURITY CONTRACTS:
AIM1 *........................ -- 120,297 21,989 (994)
AIM2 *........................ -- 188,055 18,286 (1,839)
AIM3 **....................... -- 211,522 126,191 (5,051)
AIM4 *........................ -- 175,562 42,064 (814)
AL1 **........................ -- 220,381 66,702 (1,093)
AL2 **........................ -- 166,134 33,387 (4,526)
AL3 **........................ -- 46,464 31,855 (847)
GS1 ***....................... -- 174,066 37,773 (887)
GS2 *......................... -- 28,820 2,730 (74)
GS3 *......................... -- 245,810 41,721 (5,043)
GS4 *......................... -- 146,654 54,644 (1,528)
GS5 +......................... -- 22,922 7,479 (7)
JP1 **........................ -- 153,409 143,890 (3,512)
JP2 **........................ -- 43,568 9,107 (256)
JP3 **........................ -- 14,226 8,529 (100)
LA1 **........................ -- 295,576 40,527 (2,298)
CAS ++........................ -- 182,671 225,749 (4,687)
EGS *......................... -- 286,458 114,747 (4,073)
GSS *......................... -- 124,697 30,755 (5,102)
HYS ++........................ -- 136,139 82,554 (769)
MMS *......................... -- 520,396 (145,427) (3,565)
UTS **........................ -- 168,365 110,939 (1,083)
OP1 *......................... -- 249,514 116,381 (2,147)
OP2 *......................... -- 80,719 12,844 (403)
OP3 **........................ -- 62,966 24,744 (1,143)
SB1 **........................ -- 20,954 660 (285)
SB2 **........................ -- 27,151 5,324 (193)
SB3 *......................... -- 208,817 69,996 (1,340)
SB4 **........................ -- 199,267 95,844 (1,190)
WP1 *......................... -- 17,004 5,576 (100)
WP2 **........................ -- 17,656 697 (100)
WP3 **........................ -- 12,602 2,213 (100)
WP4 **........................ -- 42,727 (84) (800)
<CAPTION>
Units Outstanding
End of Year
-----------------
Period Ended
December 31,
1998
-----------------
<S> <C>
FUTURITY CONTRACTS:
AIM1 *........................ 141,292
AIM2 *........................ 204,502
AIM3 **....................... 332,662
AIM4 *........................ 216,812
AL1 **........................ 285,990
AL2 **........................ 194,995
AL3 **........................ 77,472
GS1 ***....................... 210,952
GS2 *......................... 31,476
GS3 *......................... 282,488
GS4 *......................... 199,770
GS5 +......................... 30,394
JP1 **........................ 293,787
JP2 **........................ 52,419
JP3 **........................ 22,655
LA1 **........................ 333,805
CAS ++........................ 403,733
EGS *......................... 397,132
GSS *......................... 150,350
HYS ++........................ 217,924
MMS *......................... 371,404
UTS **........................ 278,221
OP1 *......................... 363,748
OP2 *......................... 93,160
OP3 **........................ 86,567
SB1 **........................ 21,329
SB2 **........................ 32,282
SB3 *......................... 277,473
SB4 **........................ 293,921
WP1 *......................... 22,480
WP2 **........................ 18,253
WP3 **........................ 14,715
WP4 **........................ 41,843
</TABLE>
*For the period February 20, 1998 (commencement of operations) through
December 31, 1998.
**For the period March 27, 1998 (commencement of operations) through December
31, 1998.
***For the period March 12, 1998 (commencement of operations) through December
31, 1998.
+For the period March 17, 1998 (commencement of operations) through December
31, 1998.
++For the period February 26, 1998 (commencement of operations) through
December 31, 1998.
70
<PAGE>
FUTURITY AND FUTURITY II SUB ACCOUNTS INCLUDED IN SUN LIFE OF CANADA (U.S.)
VARIABLE ACCOUNT F
NOTES TO FINANCIAL STATEMENTS -- continued
(5) UNIT ACTIVITY FROM PARTICIPANT TRANSACTIONS -- continued
<TABLE>
<CAPTION>
Units Transferred
Units Outstanding Between Sub-Accounts Units Withdrawn, Units
Beginning of and Fixed Surrendered, Outstanding End
Period Units Purchased Accumulation Account and Annuitized of Year
----------------- ----------------- --------------------- ----------------- ---------------
Period Ended Period Ended Period Ended Period Ended Period Ended
December 31, December 31, December 31, December 31, December 31,
1998 1998 1998 1998 1998
----------------- ----------------- --------------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
FUTURITY II CONTRACTS:
AIM1#......................... -- 100 -- -- 100
AIM2#......................... -- 1,049 -- -- 1,049
AIM3#......................... -- 1,704 -- -- 1,704
AIM4##........................ -- 2,553 -- -- 2,553
AL1#.......................... -- 2,044 -- -- 2,044
AL2##......................... -- 1,785 -- -- 1,785
AL3#.......................... -- 100 -- -- 100
GS1###........................ -- 786 -- -- 786
GS2#.......................... -- 100 -- -- 100
GS3##......................... -- 2,341 -- -- 2,341
GS4#.......................... -- 100 -- -- 100
GS5###........................ -- 578 -- -- 578
JP1#.......................... -- 474 -- -- 474
JP2#.......................... -- 100 -- -- 100
JP3#.......................... -- 100 -- -- 100
LA1##......................... -- 1,763 -- -- 1,763
CAS#.......................... -- 2,367 -- -- 2,367
EGS###........................ -- 3,662 -- -- 3,662
GSS##......................... -- 1,027 -- -- 1,027
HYS##......................... -- 729 -- -- 729
UTS###........................ -- 821 -- -- 821
OP1##......................... -- 1,517 -- -- 1,517
OP2#.......................... -- 150 -- -- 150
OP3#.......................... -- 100 -- -- 100
OP4#.......................... -- 100 -- -- 100
SCA1#......................... -- 200 -- -- 200
SCA2#......................... -- 1,806 -- -- 1,806
SCA3#......................... -- 705 -- -- 705
WP1#.......................... -- 100 -- -- 100
WP2#.......................... -- 100 -- -- 100
WP3#.......................... -- 100 -- -- 100
WP4#.......................... -- 100 -- -- 100
</TABLE>
#For the period December 15, 1998 (commencement of operations) through
December 31, 1998.
##For the period December 17, 1998 (commencement of operations) through
December 31, 1998.
###For the period December 29, 1998 (commencement of operations) through
December 31, 1998.
71
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Participants in Futurity and Futurity II
and the Board of Directors of Sun Life Assurance Company of Canada (U.S.):
We have audited the accompanying statement of condition of AIM V.I. Capital
Appreciation Sub-Account, AIM V.I. Growth Sub-Account, AIM V.I. Growth and
Income Sub-Account, AIM V.I. International Equity Sub-Account, The Alger
American Growth Sub-Account, The Alger American Income and Growth Sub-Account,
The Alger American Small Capitalization Sub-Account, Goldman Sachs CORE Large
Cap Growth Sub-Account, Goldman Sachs CORE Small Cap Equity Sub-Account, Goldman
Sachs CORE U.S. Equity Sub-Account, Goldman Sachs Growth and Income Sub-Account,
Goldman Sachs International Equity Sub-Account, J.P. Morgan Equity Sub-Account,
J.P. Morgan International Opportunities Sub-Account, J.P. Morgan Small Company
Sub-Account, Lord Abbett Growth and Income Sub-Account, MFS/Sun Life Capital
Appreciation Sub-Account, MFS/Sun Life Emerging Growth Sub-Account, MFS/Sun Life
Government Securities Sub-Account, MFS/Sun Life High Yield Sub-Account, MFS/Sun
Life Money Market Sub-Account, MFS/Sun Life Utilities Sub-Account, OCC Equity
Sub-Account, OCC Mid Cap Sub-Account, OCC Managed Sub-Account, OCC Small Cap
Sub-Account, Salomon Brothers Variable Capital Sub-Account, Salomon Brothers
Variable Investors Sub-Account, Salomon Brothers Variable Strategic Bond
Sub-Account, Salomon Brothers Variable Total Return Sub-Account, Sun Capital
Investment Grade Bond Sub-Account, Sun Capital Money Market Sub-Account, Sun
Capital Real Estate Sub-Account, Warburg Pincus Emerging Markets Sub-Account,
Warburg Pincus International Equity Sub-Account, Warburg Pincus Post-Venture
Capital Sub-Account and Warburg Pincus Small Company Growth Sub-Account of Sun
Life of Canada (U.S.) Variable Account F, (the "Sub-Accounts") as of December
31, 1998, the related statement of operations and the statement of changes in
net assets for the period then ended. These financial statements are the
responsibility of management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities held at December 31, 1998 by correspondence with the
custodian. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Sub-Accounts as of December 31, 1998,
the results of their operations and the changes in their net assets for the
respective stated periods in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 4, 1999
72
<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.
73
<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.
74
<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.
75
<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.
76
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS
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 currently 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 an affiliate, 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.
77
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
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.
78
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
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.
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 is a life insurance company which 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.
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 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.
79
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
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>
80
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
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, Chemical Bank of New York. The custodian has
indemnified the Company against losses arising from this
81
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
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.
82
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
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>
83
<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
84
<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.
85
<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>
86
<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.
87
<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.
88
<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
89
<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
90
<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.
91
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
We have audited the accompanying statutory statements of admitted assets,
liabilities, and capital stock and surplus of Sun Life Assurance Company of
Canada (U.S.) as of December 31, 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
92
<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
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- --------------
(IN 000'S)
<S> <C> <C>
ADMITTED ASSETS
Bonds $ 1,878,905 $ 1,910,699
Common stocks 127,545 117,229
Mortgage loans on real estate 554,135 684,035
Properties acquired in satisfaction of debt 17,330 22,475
Investment real estate 78,040 78,426
Policy loans 42,149 40,348
Cash & short-term investments 197,542 544,418
Other invested assets 62,787 55,716
Life insurance premiums and annuity considerations due & uncollected 7,790 9,203
Investment income due and accrued 38,507 39,279
Receivable from parent, subsidiaries and affiliates 0 28,825
Funds withheld on reinsurance assumed 1,062,112 982,653
Other assets 23,923 1,841
-------------- --------------
General account assets 4,090,765 4,515,147
Separate account assets
Unitized 10,091,576 9,068,021
Non-unitized 2,161,951 2,343,877
-------------- --------------
Total Admitted Assets $ 16,344,292 $ 15,927,045
-------------- --------------
-------------- --------------
LIABILITIES
Aggregate reserve for life policies and contracts $ 2,283,326 $ 2,188,243
Supplementary contracts 1,787 2,247
Policy and contract claims 3,436 2,460
Provision for policyholders' dividends and coupons payable 37,000 32,500
Liability for premium and other deposit funds 1,080,881 1,450,705
Surrender values on cancelled policies 142 215
Interest maintenance reserve 38,409 33,830
Commissions to agents due or accrued 2,114 2,826
General expenses due or accrued 8,098 7,202
Transfers from Separate Accounts due or accrued (379,065) (284,078)
Taxes, licenses and fees due or accrued, excluding FIT 108 105
Federal income taxes due or accrued 61,628 58,073
Unearned investment income 26 34
Amounts withheld or retained by company as agent or trustee 342 47
Remittances and items not allocated 2,038 1,363
Borrowed money 0 110,142
Asset valuation reserve 43,359 47,605
Reinsurance in unauthorized companies 964 0
Payable to parent, subsidiaries, and affiliates 27,206 0
Payable for securities 23,404 27,104
Other liabilities 19,022 1,959
-------------- --------------
General account liabilities 3,254,225 3,682,582
Separate account liabilities
Unitized 10,091,396 9,067,891
Non-unitized 2,161,951 2,343,877
-------------- --------------
Total liabilities 15,507,572 15,094,350
-------------- --------------
Common capital stock 5,900 5,900
-------------- --------------
Surplus notes 565,000 565,000
Gross paid in and contributed surplus 199,355 199,355
Unassigned funds 66,465 62,440
-------------- --------------
Surplus 830,820 826,795
-------------- --------------
Total common capital stock and surplus 836,720 832,695
-------------- --------------
Total Liabilities, Capital Stock and Surplus $ 16,344,292 $ 15,927,045
-------------- --------------
-------------- --------------
</TABLE>
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS.
93
<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
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
(IN 000'S)
INCOME:
Premiums and annuity considerations $ 203,852 $ 181,809
Deposit-type funds 1,564,472 1,691,235
Considerations for supplementary
contracts without life
contingencies and dividend
accumulations 1,424 940
Net investment income 144,129 209,363
Amortization of interest maintenance
reserve 1,504 813
Net gain from operations from
Separate Accounts Statement 1 4
Other income 80,779 73,614
---------- ----------
Total 1,996,161 2,157,778
---------- ----------
BENEFITS AND EXPENSES
Death benefits 17,892 15,994
Annuity benefits 113,713 109,690
Surrender benefits and other fund
withdrawals 1,466,827 1,388,459
Interest on policy or contract funds 461 194
Payments on supplementary contracts
without life contingencies and of
dividend accumulations 1,946 766
Increase in aggregate reserves for
life and accident and health
policies and contracts 95,083 92,567
Decrease in liability for premium
and other deposit funds (369,825) (349,640)
Increase (decrease) in reserve for
supplementary contracts without
life contingencies and for dividend
and coupon accumulations (461) 255
---------- ----------
Total 1,325,636 1,258,285
Commissions on premiums and annuity
considerations (direct business
only) 102,544 104,650
Commissions and expense allowances
on reinsurance assumed 13,032 12,858
General insurance expenses 42,788 31,150
Insurance taxes, licenses and fees,
excluding federal income taxes 5,213 6,175
Decrease in loading on and cost of
collection in excess of loading on
deferred and uncollected premiums (331) (286)
Net transfers to Separate Accounts 396,163 621,996
---------- ----------
Total 1,885,045 2,034,828
---------- ----------
Net gain from operations before
dividends to policyholders and FIT 111,116 122,950
Dividends to policyholders 31,019 24,227
---------- ----------
Net gain from operations after
dividends to policyholders and
before FIT 80,097 98,723
Federal income tax expense (benefit)
(excluding tax on capital gains) 32,206 (833)
---------- ----------
Net gain from operations after
dividends to policyholders and FIT
and before realized capital gains 47,891 99,556
Net realized capital gains less
capital gains tax and transferred
to the IMR 4,807 5,183
---------- ----------
NET INCOME $ 52,698 $ 104,739
---------- ----------
---------- ----------
</TABLE>
SEE NOTES TO UNAUDITED STATUTORY FINANCIAL STATEMENTS.
94
<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
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------
1998 1997
-------- --------
<S> <C> <C>
(IN 000'S)
INCOME:
Premiums and annuity considerations $ 67,719 $ 63,122
Deposit-type funds 568,447 530,735
Considerations for supplementary
contracts without life
contingencies and dividend
accumulations 280 390
Net investment income 44,398 68,033
Amortization of interest maintenance
reserve 581 432
Net gain from operations from
Separate Accounts (2) 4
Statement
Other income 27,400 27,226
-------- --------
Total 708,823 689,942
-------- --------
BENEFITS AND EXPENSES
Death benefits 2,059 9,624
Annuity benefits 40,636 38,763
Surrender benefits and other fund
withdrawals 478,645 494,811
Interest on policy or contract funds 199 39
Payments on supplementary contracts
without life contingencies and of
dividend accumulations 747 315
Increase in aggregate reserves for
life and accident and health
policies and contracts 36,834 26,880
Decrease in liability for premium
and other deposit funds (88,386) (123,462)
Increase (decrease) in reserve for
supplementary contracts without
life contingencies and for dividend
and coupon accumulations (447) 110
-------- --------
Total 470,287 447,080
Commissions on premiums and annuity
considerations (direct business
only) 35,929 33,663
Commissions and expense allowances
on reinsurance assumed 4,806 4,502
General insurance expenses 13,004 12,267
Insurance taxes, licenses and fees,
excluding federal income taxes 1,483 1,698
Decrease in loading on and cost of
collection in excess of loading on
deferred and uncollected premiums (98) (56)
Net transfers to Separate Accounts 138,845 148,926
-------- --------
Total 664,256 648,080
-------- --------
Net gain from operations before
dividends to policyholders and FIT 44,567 41,862
Dividends to policyholders 11,111 8,114
-------- --------
Net gain from operations after
dividends to policyholders and
before FIT 33,456 33,748
Federal income tax expense (benefit)
(excluding tax on capital gains) 17,652 (6,193)
-------- --------
Net gain from operations after
dividends to policyholders and FIT
and before realized capital gains 15,804 39,941
Net realized capital gains less
capital gains tax and transferred
to the IMR 1,692 3,164
-------- --------
NET INCOME $ 17,496 $ 43,105
-------- --------
-------- --------
</TABLE>
SEE NOTES TO UNAUDITED STATUTORY FINANCIAL STATEMENTS.
95
<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
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
---------- ----------
(IN 000'S)
<S> <C> <C>
Capital and surplus, beginning of period $ 832,695 $ 567,143
---------- ----------
Net income 52,698 104,739
Change in net unrealized capital gains (1,421) 2,329
Change in non-admitted assets and related items (581) 556
Change in liability for reinsurance in unauthorized companies (964) 0
Change in asset valuation reserve 4,245 (9,092)
Other changes in surplus in Separate Accounts Statement 48 0
Dividends to stockholders (50,000) 0
---------- ----------
Net change in capital and surplus for the period 4,025 98,532
---------- ----------
Capital and surplus, end of period $ 836,720 $ 665,675
---------- ----------
---------- ----------
</TABLE>
SEE NOTES TO UNAUDITED STATUTORY FINANCIAL STATEMENTS.
96
<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
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
----------- -----------
(IN 000'S)
<S> <C> <C>
Cash Provided
Premiums, annuity considerations and
deposit funds received $ 1,770,069 $ 1,875,447
Considerations for supplementary
contracts and dividend accumulations
received 1,424 940
Net investment income received 182,263 236,074
Other income received 82,206 73,614
----------- -----------
Total receipts 2,035,962 2,186,075
----------- -----------
Benefits paid (other than dividends) 1,599,475 1,513,599
Insurance expenses and taxes paid
(other than federal income and
capital gains taxes) 166,425 147,956
Net cash transfers to Separate Accounts 491,151 683,534
Dividends paid to policyholders 26,519 20,477
Federal income tax payments (excluding
tax on capital gains) 28,224 (317)
Other--net 461 194
----------- -----------
Total payments 2,312,255 2,365,443
----------- -----------
Net cash from operations (276,293) (179,368)
----------- -----------
Proceeds from long-term investments
sold, matured or repaid (after
deducting taxes on capital gains of
$428,228 for 1998, $374,528 for 1997) 1,075,039 820,973
Other cash provided (50,530) 607,676
----------- -----------
Total cash provided 1,024,509 1,428,649
----------- -----------
Cash Applied
Cost of long-term investments acquired 919,918 554,900
Other cash applied 175,174 135,425
----------- -----------
Total cash applied 1,095,092 690,325
----------- -----------
Net change in cash and short-term
investments (346,877) 558,956
Cash and short-term investments:
Beginning of period 544,418 90,059
----------- -----------
End of period $ 197,542 $ 649,015
----------- -----------
----------- -----------
</TABLE>
SEE NOTES TO UNAUDITED STATUTORY FINANCIAL STATEMENTS.
97
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(1) GENERAL
In management's opinion all adjustments, which include only normal recurring
adjustments, necessary for a fair presentation of the financial statements have
been made.
(2) MANAGEMENT AND SERVICE CONTRACTS
The Company has an agreement with its ultimate parent, Sun Life Assurance
Company of Canada ('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 $2,879,000 and
$15,677,000 for the three and nine month periods in 1998 and $5,337,000 and
$13,871,000 for the same periods in 1997.
(3) INVESTMENTS IN SUBSIDIARIES
The following is combined unaudited summarized financial information of the
subsidiaries as of:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- --------------
(IN 000'S)
<S> <C> <C>
Other assets $ 1,233,207 $ 1,190,951
Liabilities (1,105,654) (1,073,966)
-------------- --------------
Total net assets $ 127,553 $ 116,985
-------------- --------------
-------------- --------------
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
----------- -----------
(IN 000'S)
<S> <C> <C>
Total revenue $ 175,856 $ 665,904
Operating expenses (173,093) (585,857)
Income tax expense (1,710) (36,944)
----------- -----------
Net income $ 1,053 $ 43,103
----------- -----------
----------- -----------
</TABLE>
The following is combined unaudited summarized financial information of the
subsidiaries as of:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1998 1997
---------- -----------
(IN 000'S)
<S> <C> <C>
Total revenue $ 49,704 $ 237,369
Operating expenses (48,704) (205,368)
Income tax expense 85 (15,303)
---------- -----------
Net income $ 1,085 $ 16,698
---------- -----------
---------- -----------
</TABLE>
In determining the equity in income of subsidiaries for the periods, the Company
has excluded expenses of approximately $396,000 and $2,369,000 for the three and
nine month periods in 1998 and $11,819,000 and $28,443,000 for the same periods
in 1997, representing payables to the Company in lieu of federal income taxes.
On December 24, 1997, the Company transferred all of its shares of Massachusetts
Financial Services Company ("MFS") to its parent Sun Life of Canada (U.S.)
Holdings, Inc. ("Life Holdco").
98
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO UNAUDITED FINANCIAL STATEMENTS (CONTINUED)
(4) INVESTMENT INCOME
Net investment income consisted of:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
---------- ----------
(IN 000'S)
<S> <C> <C>
Interest income from bonds $ 128,687 $ 141,610
Income from investment in common stocks of affiliates 3,000 33,681
Interest income from mortgage loans 41,025 59,716
Real estate investment income 11,729 10,290
Interest income from policy loans 2,115 2,230
Other (264) (353)
---------- ----------
Gross investment income 186,292 246,874
Interest on surplus notes and borrowed money 34,087 29,375
Investment expenses 8,076 8,136
---------- ----------
$ 144,129 $ 209,363
---------- ----------
---------- ----------
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1998 1997
--------- ---------
(IN 000'S)
<S> <C> <C>
Interest income from bonds $ 40,609 $ 50,284
Income from investment in common stocks of affiliates 0 11,040
Interest income from mortgage loans 13,140 18,500
Real estate investment income 3,848 4,020
Interest income from policy loans 723 734
Other (506) (263)
--------- ---------
Gross investment income 57,814 84,315
Interest on surplus notes and borrowed money 10,816 13,727
Investment expenses 2,600 2,555
--------- ---------
$ 44,398 $ 68,033
--------- ---------
--------- ---------
</TABLE>
(5) SUBSEQUENT EVENT
In October 1998, the Company entered into a definitive agreement to sell its
wholly-owned subsidiary, Massachusetts Casualty Insurance Company to Centre
Reinsurance Holdings, Ltd. This transaction is expected to be completed by or
near year-end 1998, subject to regulatory approvals. This transaction is not
expected to have a significant effect on the ongoing operations of the Company.
99
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FINANCIAL CONDITION -- SEPTEMBER 30, 1998
ASSETS
Total admitted assets increased by $417.2 million to $16,344.3 million in the
nine months ended September 30, 1998. This increase reflected a decline of
$424.4 million in general account assets offset by an increase in separate
account assets of $841.6 million.
The major element of the decline in general account assets was a $494.9 million
decrease in cash and invested assets. Partially offsetting this decline was a
$101.5 million increase in other assets. These changes are discussed in more
detail below.
Cash decreased during 1998, by $346.9 million partly as a result of the
deployment of $250.0 million of proceeds from the Company's surplus note issued
in December 1997. Cash also decreased as a result of the Company's payment, in
the first half of 1998, of $46.0 million of dividends to its parent, Sun Life of
Canada (U.S.) Holdings, Inc. ("Life Holdco") and by its repayment, in January
1998, of its $110.0 million short-term note to its penultimate parent, Sun Life
Assurance Company of Canada--U.S. Operations Holdings, Inc. ("U.S. Holdco").
General account invested assets other than cash declined by $148.0 million. The
decline in general account invested assets during the first nine months of 1998
was mostly evident in mortgages, which decreased by $129.9 million to $554.1
million at September 30, 1998, mainly as a result of scheduled maturities and
early repayments. The decline is also reflected in the fact that maturities of
pension and fixed annuity contracts exceeded general account fixed asset
deposits. This trend resulted in part from the Company's decision in 1997 to
discontinue selling group pension and GIC contracts and to focus its marketing
efforts on its combination fixed/variable annuity products. As a result,
separate account assets have increased while general account assets have
decreased. The Company expects these trends to continue, as sales of separate
account products continue to be emphasized.
Other general account assets increased $101.5 million in the nine months ended
September 30, 1998, almost entirely reflecting an increase in funds withheld for
reinsurance assumed.
LIABILITIES
The majority of the Company's liabilities consist of reserves for life insurance
and annuity contracts and deposit funds. Although total liabilities increased by
$413.2 million to $15,507.6 million in the nine months ended September 30, 1998,
general account liabilities decreased by $428.3 million to $3,254.2 million. The
liability for premium and other deposits decreased $369.8 million over the first
nine months of 1998. The Company expects this declining trend in general account
liabilities to continue, since net maturities are expected to exceed sales for
the fixed contracts associated with these liabilities, particularly in view of
the Company's decision in 1997 to discontinue selling group pension and GIC
contracts and to focus its marketing efforts on its combination fixed/variable
annuity products. Also contributing to this decline was the Company's repayment,
during the first quarter of 1998, of its $110.0 million short-term note payable
to U.S. Holdco.
CAPITAL AND SURPLUS
Capital and surplus increased by $4.0 million to $836.7 million over the first
nine months of 1998. This net change primarily reflected net income during the
period of $52.7 million, offset in part by the Company's having declared during
the second quarter of 1998 a shareholder dividend of $50.0 million. As noted
above, $46.0 million of this dividend has been paid through September 30, 1998.
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
100
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
primarily to pay out death benefits and other maturing insurance and annuity
contract obligations, pay out on contract terminations, fund investment
commitments, and pay normal operating expenses and taxes. Cash outflows are met
from the normal net cash inflows.
The Company segments its general account business internally in order to better
manage projected cash inflows and outflows within each segment defined to be an
identifiable pool of assets. 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 necessary funds. Government and publicly
traded bonds comprise 55.0% 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.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
NET INCOME
Net income decreased by $52.0 million from $104.7 million to $52.7 million, for
the nine months ended September 30, 1998 as compared to the same period in 1997.
Three factors primarily affected the decrease in net income period over period.
First, a reorganization by the Company in December 1997 (discussed below)
resulted in lower earnings from subsidiaries (by $30.7 million) and higher
federal income taxes (by $33.0 million). Second, the growth in the Company's
direct business, primarily its fixed/variable annuity products, resulted in
higher net income, by approximately $10.1 million. (Increasing annuity account
balances, resulting from both strong market performance and sales, has generated
corresponding increases in annuity fee income.) Third, the effects of
reinsurance arrangements with its ultimate parent, Sun Life Assurance Company of
Canada ("SLOC"), resulted in higher net income of $1.6 million. These items are
discussed in more detail below.
INCOME
Total income decreased by $161.6 million to $1,996.2 million for the first nine
months of 1998. This decrease mainly reflected lower premiums and deposits, of
$104.2 million, and lower net investment income of $65.2 million.
The reinsurance arrangements with SLOC had the effect of increasing income by
approximately $13.7 million due to increased premiums of $8.0 million resulting
from policyholders using dividends to purchase "paid-up additions" to their
policies; and higher interest income of $5.8 million on the funds withheld in
conjunction with the reinsurance arrangements.
With respect to the company's direct business, deposits from sales of the
company's combination fixed/ variable annuity products (net of annuitizations)
declined by $126.8 million in the first nine months of 1998 compared to the same
period in 1997, primarily as a result of lower deposits (approximately $173.0
million) into these products' dollar cost averaging ("DCA") programs. Under
these programs, which were introduced in late 1996, deposits are made into the
fixed portion of the annuity contract and receive a bonus rate of interest for
the policy year. During the year, the fixed deposit is exchanged to the variable
portion of the contract in equal periodic installments. The Company believes the
decline in DCA deposits in 1998, in part, has resulted from heightened
competition, as other companies have introduced similar DCA programs within the
past year. In early 1998, the Company took steps to diversify the marketing of
its variable annuity business by offering variable annuity funds managed by a
variety of non-affiliated managers. Premiums and annuity considerations
increased by $22.0 million in the first nine months of 1998 compared to the same
prior-year period partially as a result of the introduction of a new corporate
owned life insurance product.
101
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
Net investment income decreased by $65.2 million period over period. This
decrease mainly reflected lower interest income on bonds and mortgages of $31.6
million; and lower dividends from subsidiaries of $30.7 million. It also
reflected higher interest expense on surplus notes and borrowed money (by $4.7
million).
The lower interest income on bonds and mortgages was a direct function of
declining general account invested assets. As noted above, the Company expects
that, absent other factors, the declining trend in general account invested
assets will continue and will have a corresponding effect on interest income.
The decrease in dividends from subsidiaries resulted primarily from the
reorganization, completed in December 1997, under which the Company transferred
all of its outstanding shares of Massachusetts Financial Services Company
("MFS") to its parent, Life Holdco. As a result of this reorganization, the
Company received no dividends from MFS in 1998, whereas in the first nine months
of 1997, the Company received $33.1 million of dividends from MFS. Dividends
from other subsidiaries, however, were higher by $2.4 million period over
period.
The increase in interest expense on surplus notes and borrowed money reflected
the higher surplus notes balance in 1998, resulting from the Company's issuance,
in December 1997, of a $250.0 million surplus note. It also reflected interest
expense related to the Company's $110 million note payable, issued in December
1997 and repaid in January 1998 to U.S. Holdco.
BENEFITS & EXPENSES
Benefits and expenses decreased by $149.8 million from $2,034.8 to $1,885.0
million for the nine-month period ended September 30, 1998 as compared to the
same period in 1997.
Reinsurance arrangements with SLOC had the effect of increasing benefits and
expenses by $5.4 million. This increase mainly reflected higher death benefits
on reinsurance assumed of $4.4 million, resulting from the occurrence of a small
number of relatively large claims during 1998.
With respect to direct business, the sum of death benefits, annuity payments,
and surrender benefits and other fund withdrawals increased by $78.8 million.
Partially offsetting this aggregate change was a greater decrease of $20.4
million in the liability for premium and other deposit funds in the first nine
months of 1998 compared to the same period in 1997. These changes mainly
reflected surrenders and withdrawals, primarily occurring in the first half of
1998, related to separate account contracts issued at least seven years
previously, for which the surrender charge period has now expired.
Commissions decreased by $2.1 million reflecting the decrease in total sales of
combination fixed/variable annuities. General insurance expenses and insurance
taxes, licenses and fees, taken together, increased by $10.7 million. This
increase mainly reflected increased investment in technology, both to support
the growth of the Company's in-force business, particularly its fixed/variable
annuities, and to assure that the Company's information systems are Year 2000
compliant. (See below.) Net transfers to the separate accounts decreased by
$225.8 million due to the maturing block of annuity business and to the decrease
in annuity sales period over period.
FEDERAL INCOME TAXES
As a result of the reorganization by the Company in December 1997, certain
subsidiary tax benefits are no longer available to the Company. Federal income
taxes were $33.0 million higher in the first nine months of 1998 than in the
same period in 1997.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
NET INCOME
Net income decreased by $25.6 million from $43.1 million to $17.5 million, for
the three months ended September 30, 1998 as compared to the same period in
1997.
102
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
Key factors affecting the decrease in net income period over period were: lower
earnings from subsidiaries (by $11.0 million) and higher federal income taxes
(by $23.8 million), mainly as a result of the Company's reorganization in
December 1997; the growth in the Company's direct business, primarily its
fixed/variable annuity products, resulting in higher net income (approximately
$3.9 million); and the effects of reinsurance arrangements with SLOC, resulting
in higher net income of $5.3 million. These items are discussed in more detail
below.
INCOME
Total income increased by $18.9 million to $708.8 million for the third quarter
of 1998 compared to the same period in 1997. This increase mainly reflected
higher premiums and deposits of $42.3 million, partially offset by lower net
investment income of $23.6 million.
With respect to the increase in premiums and deposits, annuity deposits
increased by $37.7 million overall, mainly from higher deposits into variable
accounts (approximately $50.0 million) while DCA deposits remained flat overall.
Fixed annuity deposits were down by $10.7 million. Corporate owned life premiums
were higher by $1.0 million quarter over quarter.
The reinsurance arrangements with SLOC had the effect of increasing income by
approximately $6.2 million mainly due to increased premiums resulting from
policyholders using dividends to purchase "paid-up additions" to their policies.
Net investment income decreased $23.6 million period over period. This decrease
mainly reflected lower interest income on bonds and mortgages of $15.0 million;
and lower earnings from subsidiaries of $11.0 million. Lower interest expense on
surplus notes and borrowed money (by $2.9 million) partially offset these
factors.
The lower interest income on bonds and mortgages was a direct function of
declining general account invested assets. As noted above, the Company expects
that, absent countervailing factors, the declining trend in general account
invested assets will continue and will have a corresponding effect on interest
income.
The decrease in dividends from subsidiaries resulted primarily from the
reorganization, completed in December 1997, under which the Company transferred
all of its outstanding shares of Massachusetts Financial Services Company
("MFS") to its parent, Life Holdco. As a result of this reorganization, the
Company received no dividends from MFS in 1998. In the third quarter of 1997,
the Company received $11.0 million of dividends from MFS.
BENEFITS & EXPENSES
Benefits and expenses increased by $16.2 million to $664.3 million for the
three-months ended September 30, 1998 as compared to the same period in 1997.
Reinsurance arrangements with SLOC had the effect of decreasing benefits and
expenses by $2.1 million. This increase mainly reflected lower death and
surrender benefits of $5.1 million on reinsurance assumed. The change in
aggregate reserves for life policies, however, increased by $2.8 million
reflecting growth in the underlying block of business.
With respect to direct business, the sum of death benefits, annuity payments,
and surrender benefits and other fund withdrawals decreased by $16.7 million.
However, more than offsetting this aggregate change was a lower decrease of
$35.1 million in the liability for premium and other deposit funds in the third
quarter of 1998 compared to the same period in 1997. Commissions increased by
$2.3 million reflecting the increase in sales of combination fixed/variable
annuities.
FEDERAL INCOME TAXES
As a result of the reorganization by the Company in December 1997, certain
subsidiary tax benefits are no longer available to the Company. Federal income
taxes were $23.8 million higher in the third quarter of 1998 than in the same
period in 1997.
103
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
OTHER
In October 1998, the Company entered into a definitive agreement to sell its
wholly-owned subsidiary, Massachusetts Casualty Insurance Company to Centre
Reinsurance Holdings, Ltd. This transaction is expected to be completed by or
near year-end 1998, subject to regulatory approvals. This transaction is not
expected to have a significant effect on the ongoing operations of the Company.
YEAR 2000 COMPLIANCE
During the fourth quarter of 1996, the Company began a comprehensive analysis of
its information technology ("IT") and non-IT systems, including its hardware,
software, data, data feed products, and internal and external supporting
services, to address the ability of these systems to correctly process date
calculations through the year 2000 and beyond. The Company created a full-time
Year 2000 project team in early 1997 to manage this endeavor across the Company.
This team, which works with dedicated personnel from all business units and with
the legal and audit departments, reports directly to the Company's senior
management on a monthly basis. In addition, the Company's Year 2000 project is
periodically reviewed by internal and external auditors.
To date, relevant systems have been identified and their components inventoried,
needed resolutions have been documented, timelines and project plans have been
developed, remediation and testing are in process, and over 70% of Company
applications have been certified as compliant. The Company's goal is to complete
the majority of the effort by the end of 1998. However, a small number of tasks
will be pushed into the first quarter of 1999 to accommodate testing of vendor
upgrades not available until late 1998, re-testing interfaces once all systems
are certified as compliant, and re-testing of mission critical functions.
In mid-1997, the project team contacted all key vendors to obtain either their
certification for the products and services provided or their plan to make those
products and services compliant. To date, approximately 90% of these vendors
have responded, and the project team is in the process of reviewing these
responses. In addition, the project team recently has opened communications with
critical business partners, such as third-party administrators, investment
property managers, investment mortgage correspondents, and others, with the goal
that these partners will continue to be able to support the Company's objective
of assuring Year 2000 compliance.
Non-IT applications will be tested in accordance with the Company's standard
Year 2000 test strategy, including building security, HVAC systems, and other
such systems. Compliant client server and mainframe environments have been built
which allow for testing of critical dates such as December 31, 1999, January 1,
2000, February 28, 2000, February 29, 2000, and March 1, 2000 without impact to
current production.
Although the Company expects all critical systems to be Year 2000 compliant
before the end of 1999, there can be no assurance that this result will be
completely achieved. Factors giving rise to this uncertainty include possible
loss of technical resources to perform the work, failure to identify all
susceptible systems, non-compliance by third-parties whose systems and
operations affect the company, and other similar uncertainties. A possible
worst-case scenario might include one or more of the Company's significant
systems being non-compliant. Such a scenario could result in material disruption
to the company's operations. Consequences of such disruptions could include,
among other possibilities, the inability to update customers' accounts, process
payments and other financial transactions; and report accurate data to
management, customers, regulators, and others. Consequences also could include
business interruptions or shutdowns, reputational harm, increased scrutiny by
regulators, and litigation related to Year 2000 issues. Such potential
consequences, depending on their nature and duration, could have a material
impact on the Company's results of operations and financial position.
In order to mitigate the risks to the Company of material adverse operational or
financial impacts from failure to achieve planned Year 2000 compliance, the
Company has established contingency planning at the business unit and corporate
levels. Each business unit has ranked its applications as being of high, medium
or low business risk to ensure that the most critical are addressed first. The
business units also have developed alternate plans of action where possible, and
established dates for the alternate plans to be
104
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
enacted. On the corporate level, the Company is in the process of enhancing its
business continuation plan, by identifying minimum requirements for facilities,
computing, staffing, and other factors; and it is developing a plan to support
those requirements.
By year-end 1998, the Company expects to have expended, cumulatively,
approximately $7 million on its Year 2000 effort, and it expects to incur a
further $4.8 million on this effort in 1999.
CAUTIONARY STATEMENT
Statements by the Company in the Registration Statement and in other contexts
that are not historical fact are forward-looking statements as defined in the
Private Securities Litigation Reform Act of 1995. These may include, among
others, forward-looking statements relating to Year 2000 compliance, volume
growth, market share, and financial goals. These forward-looking statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those anticipated in the forward-looking statements,
including but not limited to the following: (1) uncertainties relating to the
ability of the Company to identify and address Year 2000 issues successfully and
in a timely manner and at costs that are reasonably in line with the Company's
estimates, and the ability of the Company's vendors, suppliers, other service
providers, and customers to identify and address successfully their own Year
2000 issues in a timely manner; (2) heightened competition, particularly with
respect to price, product features, and distribution capability, which could
constrain growth and profitability in the Company's businesses; (3) significant
changes in interest rates and market conditions; and (4) regulatory and
legislative uncertainties and developments.
QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 any 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 fixed interest investments 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. 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 deployed 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
105
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
interest rate exposure to different parts of the yield curve and manage
non-parallel curve movements; and active portfolio management, including the use
of derivatives (e.g. interest rate swaps) for portfolio restructuring.
An Interest Rate Risk Committee meets monthly and after reviewing the duration
reports for various portfolios, market conditions and forecasts, the committee
develops asset management strategies for interest sensitive portfolios. These
strategies may involve managing assets to small intentional mismatches, either
at the total effective duration level or at certain KRDs but, in any event, the
overall duration gap between interest sensitive assets and liabilities is
managed within a tolerance range of +/- 0.25 effective duration.
The estimates presented here are from computer model simulations which, because
they are predictions about the future, contain a certain degree of uncertainty.
For example, there are algorithms for assumptions about policyholder behavior
and asset cash flows and consequently estimates of duration and market values
which may or may not represent what actually will occur. Also there is no
provision in the estimates to incorporate any management decisions which might
be taken to mitigate against adverse results. The company is sufficiently
comfortable with its interest rate risk management process to feel the exposure
to interest rate changes will not materially affect the near-term financial
position, results of operations or cash flows of the Company.
The Company's fixed interest investments had an aggregate fair value at
September 30, 1998 of $2,844.1 million. A portion of the Company's general
account liabilities of $3,254.2 million are categorized as financial
instruments. The portion of the liabilities so categorized had a carrying value
of $1,584.8 million and a fair value of $1,641.5 million at September 30, 1998.
Using modeling and analytical software, the Company performed sensitivity
analysis of its financial instruments at September 30, 1998. 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 $118.8
million. A corresponding decrease in the fair value of the liabilities
categorized as financial instruments is estimated to be $50.8 million at
September 30, 1998.
106
<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 .00003133 (the daily equivalent of the current maximum charge of 1.15%
on an annual basis) gives a Net Investment Factor of 1.00324378. 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
14.6118115 (14.5645672 X 1.00324378).
ILLUSTRATIVE EXAMPLE OF 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 3% per year, the value of the Annuity Unit
for the current Valuation Period would be 12.3847226 (12.3456789 X 1.00324378
(the Net Investment Factor) X 0.99991902). 0.99991902 is the factor, for a one
day Valuation Period, that neutralizes the assumed interest rate of 3% per year
used to establish the Annuity Payment Rates found in the Contract.
ILLUSTRATIVE EXAMPLE OF VARIABLE ANNUITY PAYMENT CALCULATIONS:
Suppose that a Participant's Account is credited with 8,765.4321 Variable
Accumulation Units of a particular Sub-Account but is not credited with any
fixed accumulation units; that the Variable Accumulation Unit value and the
Annuity Unit value for the particular Sub-Account for the Valuation Period which
ends immediately preceding the Annuity Commencement Date are 14.5645672 and
12.3456789 respectively; that the Annuity Payment Rate for the age and option
elected is $6.78 per $1,000; and that the Annuity Unit value on the day prior to
the second variable annuity payment date is 12.3847226. 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 $868.31 (70.1112
X 12.3847226).
107
<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)
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 two examples of the withdrawal charge resulting from a full
surrender of the Participant's Account, based on hypothetical Account Values.
<TABLE>
<CAPTION>
WITHDRAWAL
NUMBER OF YEARS PURCHASE HYPOTHETICAL PURCHASE CHARGE WITHDRAWAL CHARGE
PAYMENT IN ACCOUNT ACCOUNT VALUE PAYMENT PERCENTAGE AMOUNT
- -------------------------- -------------- ----------- --------------- -----------------
<S> <C> <C> <C> <C>
Less than one $ 41,000 $ 40,000 1.0% $ 400
One or greater $ 44,000 $ 40,000 0.0% $ 0
</TABLE>
Minimum Distribution withdrawals from a Qualified Contract will not incur a
withdrawal charge.
PARTIAL SURRENDER
Assume a Purchase Payment of $40,000 is made on the Date of Coverage, no
additional Purchase Payments are made and there is a sequence of two partial
withdrawals made prior to the end of the first Year of $9,000 and $32,000.
<TABLE>
<CAPTION>
PARTIAL PURCHASE WITHDRAWAL
HYPOTHETICAL WITHDRAWAL PAYMENT CHARGE WITHDRAWAL
ACCOUNT VALUE AMOUNT LIQUIDATED PERCENTAGE CHARGE AMOUNT
-------------- ----------- ----------- --------------- -------------
<S> <C> <C> <C> <C> <C>
1. $ 41,000 $ 9,000 $ 9,000 1.00% $ 90
2. $ 36,000 $ 32,000 $ 31,000 1.00% $ 310
</TABLE>
1. The $9,000 partial withdrawal during the first Year incurs a 1% withdrawal
charge, totaling $90.
2. The 1% withdrawal charge applies only to $31,000 of the $32,000 withdrawn.
The withdrawal charge is not applied to the total partial withdrawal because
the amount of the unliquidated Purchase Payment of $31,000 ($40,000 -
$9,000) is less than the withdrawal amount.
Minimum Distribution withdrawals from a Qualified Contract will not incur a
withdrawal charge.
PART 2--FIXED ACCOUNT--EXAMPLES OF THE MARKET VALUE ADJUSTMENT (MVA)
The MVA factor is:
<TABLE>
<S> <C>
N/12
1 + I
( ----- ) -1
1 + J
</TABLE>
These examples assume the following:
1. The Guarantee Amount was allocated to a one year Guarantee Period
with a Guaranteed Interest Rate of 4% or .04 (l).
2. The date of full surrender is 6 months from the Expiration Date (N =
6).
3. The value of the Guarantee Amount on the date of surrender is
$40,792.16.
4. No transfers or partial withdrawals affecting this Guarantee Amount
have been made
5. Withdrawal charges, if any, are calculated in the same manner as
shown in the examples in Part 1.
108
<PAGE>
EXAMPLE OF A NEGATIVE MVA:
Assume that on the date of surrender the Current Rate (J) is 5% or .05.
<TABLE>
<C> <S> <C> <C>
N/12
1 + l
The MVA factor = ( ------ ) -1
1 + J
6/12
1 + .04
= ( ------ ) -1
1 + .05
= - .0047733
</TABLE>
The value of the Guarantee Amount is multiplied by the MVA factor to
determine the MVA.
($40,792.16) X (-.0047733) = -$194.71
-$194.71 represents the MVA that will be deducted from 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 X -.0047733) = -$9.55.
-$9.55 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 3% or .03.
N/12
1 + I
The MVA factor = ( ------ ) -1
1 + J
6/12
1 + .04
= ( ------ ) -1
1 + .03
= .00484264
The value of the Guarantee Amount is multiplied by the MVA factor to
determine the MVA.
$40,792.16 X .00484264 = $197.54
$197.54 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 X .00484264 = $9.69.
$9.69 represents the MVA that would be added to the value of the partial
withdrawal amount before the deduction of any withdrawal charge.
109
<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 below the table. For
purposes of determining these investment results, the actual investment
performance of Fund is reflected from the date the Fund commenced investment
operations ("Inception"). No information is shown for the Funds that have not
yet commenced operations or that have been in operation for less than 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...... 10.90% -- -- 16.58% June 1, 1993
AIM V.I. Growth Fund.................... 24.10% -- -- 15.98% June 1, 1993
AIM V.I. Growth and Income Fund......... 22.96% -- -- 19.47% May 2, 1994
AIM V.I. International Equity Fund...... 4.43% -- -- 11.28% June 1, 1993
Alger American Growth Portfolio......... 23.04% 17.71% -- 17.96% January 9, 1989
Alger American Income and Growth
Portfolio.............................. 33.46% 15.81% -- 12.27% November 15, 1988
Alger American Small Capitalization
Portfolio.............................. 8.85% 11.14% -- 17.73% September 21, 1988
J.P. Morgan Equity Portfolio(2)......... 24.78% -- -- 25.79% January 3, 1995
J.P. Morgan International Opportunities
Portfolio(2)........................... 2.96% -- -- 8.76% January 3, 1995
J.P. Morgan Small Company Portfolio(2).. 19.83% -- -- 24.04% January 3, 1995
Lord Abbett Growth and Income
Portfolio.............................. 21.94% 16.35% -- 15.05% December 11, 1989
MFS/Sun Life Capital Appreciation
Series................................. 20.09% 16.06% 16.08% -- August 13, 1985
MFS/Sun Life Emerging Growth Series..... 19.22% -- -- 23.27% May 1, 1995
MFS/Sun Life Government Securities
Series................................. 6.26% 5.09% 6.81% -- August 12, 1985
MFS/Sun Life High Yield Series.......... 10.76% 9.91% 9.57% -- August 13, 1985
MFS/Sun Life Utilities Series........... 30.13% -- -- 17.05% November 16, 1993
OCC Equity Portfolio(3)................. 23.91% 17.83% -- 16.06% August 1, 1988
OCC Managed Portfolio(3)................ 19.63% 18.29% -- 18.51% August 1, 1998
OCC Small Cap Portfolio(3).............. 21.58% 13.09% -- 13.96% August 1, 1988
Warburg Pincus International Equity
Portfolio.............................. (4.60)% -- -- 4.37% June 30, 1995
Warbug Pincus Post-Venture Capital
Portfolio.............................. 10.76% -- -- 6.73% September 30, 1996
Warburg Pincus Small Company Growth
Portfolio.............................. 13.13% -- -- 20.39% 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, served
as each of these Fund's investment manager, and 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
110
<PAGE>
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 $50 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.
111
<PAGE>
ADVERTISING AND SALES LITERATURE
As set forth in the Prospectus, the Company may refer to the following
organizations (and others) in its marketing materials:
A.M. BEST'S RATING SYSTEM is designed to evaluate the various factors
affecting the overall performance of an insurance company in order to provide an
opinion as to an insurance company's relative financial strength and ability to
meet its contractual obligations. The procedure includes both a quantitative and
qualitative review of each company.
DUFF & PHELPS CREDIT RATING COMPANY's Insurance Company Claims Paying
Ability Rating is an independent evaluation by a nationally accredited rating
organization of an insurance company's ability to meet its future obligations
under the contracts and products it sells. The rating takes into account both
quantitative and qualitative factors.
LIPPER VARIABLE INSURANCE PRODUCTS PERFORMANCE ANALYSIS SERVICE is a
publisher of statistical data covering the investment company industry in the
United States and overseas. Lipper is recognized as the leading source of data
on open-end and closed-end funds. Lipper currently tracks the performance of
over 5,000 investment companies and publishes numerous specialized reports,
including reports on performance and portfolio analysis, fee and expense
analysis.
STANDARD & POOR's insurance claims-paying ability rating is an opinion of an
operating insurance company's financial capacity to meet obligations of its
insurance policies in accordance with their terms.
VARDS (Variable Annuity Research Data Service) provides a comprehensive
guide to variable annuity contract features and historical fund performance. The
service also provides a readily understandable analysis of the comparative
characteristics and market performance of funds included in variable contracts.
MOODY'S Investors Services, Inc.'s insurance 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" matricies. 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 varity 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:
112
<PAGE>
DOLLAR COST AVERAGING ILLUSTRATIONS. These illustrations will generally
discuss the price-leveling effect of making regular investments in the same
Sub-Accounts over a period of time, to take advantage of the trends in market
prices of the portfolio securities purchased by those Sub-Accounts.
SYSTEMATIC WITHDRAWAL PROGRAM. A service provided by the Company, through
which a Participant may take any distribution allowed by Code Section 401(a)(9)
in the case of Qualified Contracts, or permitted under Code Section 72 in the
case of Non-Qualified Contracts, by way of a series of partial withdrawals.
Withdrawals under this program may be fully or partially includible in income
and may be subject to a 10% penalty tax. Consult your tax 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, A.M. Best Company, and Moody's 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 December 31, 1997 the Company
was the 37th largest U.S. life insurance company based upon overall assets and
its parent company, Sun Life Assurance Company of Canada, was the 21st 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.
113
<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 FOCUS 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 $11,218.21 12.18% 12.18% 1 12/31/96-12/31/97 $12,537.63 25.38% 25.38%
2 12/31/95-12/31/97 $13,043.85 30.44% 14.19% 2 12/31/95-12/31/97 $14,644.21 46.44% 20.98%
3 12/31/94-12/31/97 $17,493.16 74.93% 20.47% 3 12/31/94-12/31/97 $19,506.48 95.06% 24.92%
4 12/31/93-12/31/97 $17,726.97 77.27% 15.38% 4 12/31/93-12/31/97 $18,808.13 88.08% 17.10%
Life 6/1/93-12/31/97 $20,389.36 103.89% 16.81% Life 6/1/93-12/31/97 $19,937.16 99.37% 16.24%
<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 $10,571.18 5.71% 5.71% 1 12/31/96-12/31/97 $12,432.07 24.32% 24.32%
2 12/31/95-12/31/97 $12,547.16 25.47% 12.00% 2 12/31/95-12/31/97 $13,930.18 39.30% 18.00%
3 12/31/94-12/31/97 $14,543.08 45.43% 13.28% 3 12/31/94-12/31/97 $18,780.79 87.81% 23.35%
4 12/31/93-12/31/97 $14,146.26 41.46% 9.05% 4 12/31/93-12/31/97 $18,836.30 88.36% 17.14%
5 12/31/92-12/31/97 $22,805.58 128.06% 17.91%
Life 6/1/93-12/31/97 $16,493.28 64.93% 11.53% Life 1/9/89-12/31/97 $44,610.00 346.10% 18.12%
<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 $11,012.52 10.13% 10.13% 1 12/31/96-12/31/97 $12,605.35 26.05% 26.05%
2 12/31/95-12/31/97 $11,341.36 13.41% 6.49% 2 12/31/95-12/31/97 $15,114.98 51.15% 22.91%
3 12/31/94-12/31/97 $16,180.96 61.81% 17.38%
4 12/31/93-12/31/97 $15,297.33 52.97% 11.20%
5 12/31/92-12/31/97 $17,131.36 71.31% 11.36%
Life 9/21/88-12/31/97 $45,996.00 359.96% 17.87% Life 1/3/95-12/31/97 $19,982.00 99.82% 26.01%
<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 $12,110.45 21.10% 21.10% 1 12/31/96-12/31/97 $12,321.33 23.21% 23.21%
2 12/31/95-12/31/97 $14,584.89 45.85% 20.74% 2 12/31/95-12/31/97 $14,545.96 45.46% 20.58%
3 12/31/94-12/31/97 $18,668.73 86.69% 23.11%
4 12/31/93-12/31/97 $18,969.74 89.70% 17.35%
5 12/31/92-12/31/97 $21,532.77 115.33% 16.57%
Life 1/3/95-12/31/97 $19,166.00 24.27% Life 12/11/89-12/31/97 $31,412.00 214.12% 15.26%
<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 $12,424.09 24.24% 24.24%
2 12/31/95-12/31/97 $14,733.92 47.34% 21.35%
3 12/31/94-12/31/97 $19,501.21 95.01% 24.91%
4
Life 5/2/94-12/31/97 $19,353.00 93.53% 19.72%
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 $13,474.04 34.74% 34.74%
2 12/31/95-12/31/97 $15,940.59 59.41% 26.22%
3 12/31/94-12/31/97 $21,285.78 112.86% 28.61%
4 12/31/93-12/31/97 $19,301.76 93.02% 17.86%
12/31/92-12/31/97 $21,054.83 110.55% 16.05%
Life 11/15/88-12/31/97 $29,302.00 193.02% 12.49%
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 $10,423.48 4.23% 4.23%
2 12/31/95-12/31/97 $11,659.76 16.60% 7.97%
3
4
5
Life 1/3/95-12/31/97 $12,947.00 29.47% 9.01%
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 $12,172.68 21.73% 21.73%
2 12/31/95-12/31/97 $14,619.48 46.19% 20.88%
12/31/94-12/31/97 $19,435.23 94.35% 24.77%
12/31/93-12/31/97 $18,522.29 85.22% 16.65%
12/31/92-12/31/97 $21,609.22 116.09% 16.65%
12/31/87-12/31/97 $46,361.51 363.62% 16.56%
Life 8/13/85-12/31/97 $60,050.24 500.50% 15.56%
</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 77 of this Prospectus.
114
<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 FOCUS 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 $12,055.03 20.55% 20.55% 1 12/31/96-12/31/97 $10,751.12 7.51% 7.51%
2 12/31/95-12/31/97 $13,955.83 39.56% 18.11% 2 12/31/95-12/31/97 $10,800.21 8.00% 3.92%
3 12/31/94-12/31/97 $12,561.38 25.61% 7.89%
4 12/31/93-12/31/97 $12,149.89 21.50% 4.99%
5 12/31/92-12/31/97 $13,054.65 30.55% 5.47%
10 12/31/87-12/31/97 $20,151.50 101.51% 7.25%
Life 5/1/95-12/31/97 $17,569.46 75.69% 23.49% Life 8/12/85-12/31/97 $24,593.46 145.93% 7.53%
<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 $11,192.88 11.93% 11.93%
2 12/31/95-12/31/97 $12,404.88 24.05% 11.36%
12/31/94-12/31/97 $14,353.12 43.53% 12.79%
12/31/93-12/31/97 $13,873.90 38.74% 8.52%
12/31/92-12/31/97 $16,149.91 61.50% 10.06%
12/31/87-12/31/97 $25,243.04 152.43% 9.69%
Life 8/13/85-12/31/97 $29,594.30 195.94% 9.15%
</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 $13,122.69 31.23% 31.23% 1 12/31/96-12/31/97 $12,518.95 25.19% 25.19%
2 12/31/95-12/31/97 $15,612.00 56.12% 24.91% 2 12/31/95-12/31/97 $15,266.74 52.67% 23.52%
3 12/31/94-12/31/97 $20,435.11 104.35% 26.87% 3 12/31/94-12/31/97 $20,958.74 109.59% 27.95%
4 12/31/93-12/31/97 $19,385.41 93.85% 18.02% 4 12/31/93-12/31/97 $21,511.17 115.11% 21.09%
5 12/31/92-12/31/97 $22,935.30 129.35% 18.05%
Life 11/16/93-12/31/97 $19,209.00 92.09% 17.14% Life 8/1/88-12/31/97 $41,295.00 312.95% 16.24%
<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 $12,091.12 20.91% 20.91%
2 12/31/95-12/31/97 $14,676.87 46.77% 21.12%
3 12/31/94-12/31/97 $21,123.93 111.24% 28.28%
4 12/31/93-12/31/97 $21,427.26 114.27% 20.97%
5 12/31/92-12/31/97 $23,383.88 133.84% 18.51%
Life 8/1/88-12/31/97 $51,362.00 413.62% 18.97%
</TABLE>
<TABLE>
<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 $12,085.39 20.85% 20.85% 1 12/31/96-12/31/97 $ 9,663.76 (3.36)% (3.36)%
2 12/31/95-12/31/97 $14,183.38 41.83% 19.07% 2 12/31/95-12/31/97 $10,506.14 5.06% 2.50%
3 12/31/94-12/31/97 $16,158.38 61.58% 17.33%
4 12/31/93-12/31/97 $15,813.90 58.14% 12.13%
5 12/31/92-12/31/97 $18,684.68 86.85% 13.31%
Life 8/1/88-12/31/97 $34,789.00 247.89% 14.15% Life 6/30/95-12/31/97 $11,209.00 12.09% 4.66%
<CAPTION>
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 $11,204.27 12.04% 12.04%
2
3
4
5
Life 9/30/96-12/31/97 $10,904.00 9.04% 7.16%
</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 $11,441.02 14.41% 14.41%
2 12/31/95-12/31/97 $12,874.03 28.74% 13.44%
Life 6/30/95-12/31/97 $16,014.00 60.14% 20.66%
<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>
115
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
ANNUITY SERVICE MAILING ADDRESS:
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
LEGAL COUNSEL
Covington & Burling
1201 Pennsylvania Avenue, N.W.
P.O. Box 7566
Washington, D.C. 20044
AUDITORS
Deloitte & Touche LLP
125 Summer Street
Boston, Massachusetts 02110
FUTFOC-1 3/99
<PAGE>
PART B
INFORMATION REQUIRED IN A STATEMENT OF
ADDITIONAL INFORMATION
The information required in a Statement of Additional Information
is contained in the Prospectuses and the Supplement to the Prospectus
included in Part A of this Post-Effective Amendment to the Registration
Statement.
PART C
OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) The following Financial Statements are included in the Registration
Statement:
Included in Part A:
A. Financial Statements of the Registrant:
1. Statement of Condition, December 31, 1998;
2. Statement of Operations, Year Ended December 31, 1998;
3. Statements of Changes in Net Assets, Years Ended December 31, 1998 and
December 31, 1997;
4. Notes to Financial Statements; and
5. Independent Auditors' Report.
B. Financial Statements of the Depositor:
Audited:
1. Statutory Statements of Admitted Assets, Liabilities and Capital
Stock and Surplus, December 31, 1997 and 1996;
2. Statutory Statement of Operations, Year Ended December 31, 1997;
1996 and 1995;
3. Statutory Statement of Changes in Capital Stock and Surplus, Years
Ended December 31, 1997, 1996 and 1995;
4. Statutory Statement of Cash Flow, Years Ended December 31, 1997,
1996 and 1995;
5. Notes to Statutory Statements; and
6. Independent Auditors' Report.
Unaudited:
1. Statutory Statements of Admitted Assets, Liabilities and Capital
Stock and Surplus, September 30, 1998 and December 31, 1997
2. Statutory Statement of Operations, Nine Months Ended September 30,
1998 and 1997
3. Statutory Statements of Operations, Three Months Ended September 30,
1998 and 1997
4. Statutory Statements of Changes in Capital Stock and Surplus, Nine
Months Ended September 30, 1998 and 1997
5. Statutory Statements of Cash Flow, Nine Months Ended September 30,
1998 and 1997
6. Notes to Unaudited Financial Statements
<PAGE>
(b) The following Exhibits are incorporated in the Registration
Statement by reference unless otherwise indicated:
(1) Resolution of Board of Directors of the depositor dated
December 3, 1985 authorizing the establishment of the Registrant*;
(2) Not Applicable;
(3) (a) Form of Marketing Services Agreement between the
depositor, Sun Life of Canada (U.S.) Distributors, Inc., and Clarendon
Insurance Agency, Inc.**;
(b)(i) Specimen Sales Operations and General Agent
Agreement**;
(b)(ii) Specimen Broker-Dealer Supervisory and Service
Agreement**; and
(b)(iii) Specimen General Agent Agreement**;
(4) (a) Form of Flexible Payment Deferred Combination Variable
and Fixed Group Annuity Contract***;
(b) Form of Certificate to be issued in connection with
the Contract filed as Exhibit 4(a)***;
(c) Form of Flexible Payment Deferred Combination Variable
and Fixed Individual Annuity Contract***;
(5) (a) Form of Application to be used with the Certificate
filed as Exhibit 4(b) and the Contract filed as Exhibit 4(c)***;
(6) Certificate of Incorporation and By-laws of the Depositor*;
(7) Not Applicable;
(8) None;
<PAGE>
(9) Previously filed
(10) (a) Consent of Deloitte & Touche, LLP****;
(b) Previously filed*;
(11) Financial Statement Schedules I and VI (to be filed by
amendment);
(12) Not Applicable;
(13) Schedule for computation of performance quotations (to be
filed by amendment);
(14) Not Applicable.
(15) Powers of Attorney****
* Incorporated by reference to the Registration Statement of the Registrant
on Form N-4, File No. 333-37907, filed on October 14, 1997.
** Incorporated by reference to Pre-effective Amendment No. 1 to the
Registration Statement of the Registrant on Form N-4,
File No. 333-37907, filed on January 16, 1998.
*** Incorporated by reference to Post-Effective Amendment No. 2 to the
Registration Statement of the Registrant on Form N-4, File No. 333-05227,
filed on April 10, 1998.
**** Filed herewith.
Item 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
Name and Principal Positions and Offices
Business Address with Depositor
- ------------------ ----------------------
Donald A. Stewart Chairman and Director
150 King Street West
Toronto, Ontario
Canada M5H 1J9
C. James Prieur President and Director
One Sun Life Executive Park
Wellesley Hills, MA 02481
John D. McNeil Director
150 King Street West
Toronto, Ontario
Canada M5H 1J9
David D. Horn Director
Strong Road
New Vineyard, ME 04956
John S. Lane Director
150 King Street West
Toronto, Ontario
Canada M5H 1J9
Richard B. Bailey Director
63 Atlantic Avenue
Boston, MA 02110
<PAGE>
Name and Principal Positions and Offices
Business Address with Depositor
- ------------------ ---------------------
M. Colyer Crum Director
104 Westcliff Road
Weston, MA 02193
Angus A. MacNaughton Director
950 Tower Lane
Metro Tower, Suite 1170
Foster City, CA 94404
S. Caesar Raboy Director
220 Boylston Street
Boston, MA 02110
L. Brock Thomson Vice President
One Sun Life Executive Park and Treasurer
Wellesley Hills, MA 02481
Robert P. Vrolyk Vice President; Finance and Actuary
One Sun Life Executive Park
Wellesley Hills, MA 02481
James M.A. Anderson Vice President, Investments
One Sun Life Executive Park
Wellesley Hills, MA 02481
Peter F. Demuth Vice President and Chief Counsel
One Sun Life Executive Park and Assistant Secretary
Wellesley Hills, MA 02481
Ellen B. King Secretary
One Sun Life Executive Park
Wellesley Hills, MA 02481
Item 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR
REGISTRANT
No person is directly or indirectly controlled by the Registrant. The
Registrant is a separate account of Sun Life Assurance Company of Canada (U.S.),
an indirect wholly-owned subsidiary of Sun Life Assurance Company of Canada.
The following is a list of all corporations directly or indirectly
controlled by or under common control with Sun Life Assurance Company of Canada,
showing the state or other sovereign power under the laws of which each is
organized and the percentage ownership of voting securities giving rise to the
control relationship:
<PAGE>
Percent of
State or Country Ownership
or Jurisdiction of Voting
of Incorporation Securities
---------------- ----------
Sun Life Assurance Company of Canada........ Canada 100%
- --------------------------------------------------------------------------------
Sun Life Assurance Company of Canada --
U.S. Operations Holdings, Inc............. Delaware 100%
Sun Life Assurance Company of Canada
(U.K.) Limited ........................... United Kingdom 100%
Sun Life of Canada Investment Management
Limited .................................. Canada 100%
Sun Life of Canada Benefit Management
Limited .................................. Canada 100%
Spectrum United Holdings, Inc............... Canada 100%
Sun Canada Financial Co..................... Delaware 100%
Sun Life of Canada (U.S.) Holdings,
Inc. ..................................... Delaware 0%*
Sun Life of Canada (U.S.) Financial
Services Holdings, Inc. .................. Delaware 0%*
Sun Life Assurance Company of Canada
(U.S.) ................................... Delaware 0%**
Sun Life Insurance and Annuity Company of
New York ................................. New York 0%****
Sun Life of Canada (U.S.)
Distributors, Inc. ....................... Delaware 0%****
Sun Benefit Services Company, Inc. ......... Delaware 0%****
Sun Life of Canada (U.S.) SPE 97-1, Inc..... Delaware 0%****
Massachusetts Financial Services Company ... Delaware 0%***
New London Trust, F.S.B..................... Federally Chartered 0%****
Sun Life Information Services
Ireland Limited ......................... Republic of Ireland 0%****
Clarendon Insurance Agency, Inc. ........... Massachusetts 0%****
MFS Service Center, Inc..................... Delaware 0%*****
MFS/Sun Life Series Trust .................. Massachusetts 0%******
Sun Capital Advisers, Inc. ................. Delaware 0%****
MFS International, Ltd. .................... Ireland 0%*****
MFS Institutional Advisors, Inc. ........... Delaware 0%*****
MFS Fund Distributors, Inc. ................ Delaware 0%*****
MFS Retirement Services, Inc. .............. Delaware 0%*****
Sun Life Financial Service Limited.......... Bermuda 0%****
- --------
* 100% of the issued and outstanding voting securities of Sun Life
of Canada (U.S.) Holdings, Inc. and Sun Life of Canada (U.S.)
Financial Services Holdings, Inc. is owned by Sun Life Assurance
Company of Canada - U.S. Operations Holdings, Inc.
** 100% of the issued and outstanding voting securities of Sun Life
Assurance Company of Canada (U.S.) is owned by Sun Life of Canada
(U.S.) Holdings, Inc.
*** 93.6% of the issued and outstanding voting securities of Massachusetts
Financial Services Company is owned by Sun Life of Canada (U.S.)
Financial Services Holdings, Inc.
**** 100% of the issued and outstanding voting securities of New London
Trust, F.S.B., Sun Life Insurance and Annuity Company of New York,
Sun Life of Canada (U.S.) Distributors, Inc., Sun Benefit Services
Company, Inc., Sun Capital Advisers, Inc., Sun Life Financial Services
Limited, Sun Life of Canada (U.S.) SPE 97-1, Inc., Clarendon Insurance
Agency, Inc., and Sun Life Information Services Ireland Limited is
owned by Sun Life Assurance Company of Canada (U.S.).
***** 100% of the issued and outstanding voting securities of MFS Service
Center, Inc., MFS International, Ltd., MFS Institutional Advisors,
Inc., MFS Fund Distributors, Inc., and MFS Retirement Services, Inc.
is owned by Massachusetts Financial Services Company.
****** 100% of the issued and outstanding voting securities of MFS/Sun Life
Series Trust is owned by separate accounts of Sun Life Assurance
Company of Canada (U.S.) and Sun Life Insurance and Annuity Company
of New York.
<PAGE>
Omitted from the list are subsidiaries of Sun Life Assurance Company of
Canada which, considered in the aggregate, would not constitute a "significant
subsidiary" (as that term is defined in Rule 8b-2 under Section 8 of the
Investment Company Act of 1940) of Sun Life Assurance Company of Canada.
None of the companies listed is a subsidiary of the Registrant; therefore,
the only financial statements being filed are those of Sun Life Assurance
Company of Canada (U.S.).
Item 27. NUMBER OF CONTRACT OWNERS:
As of January 31, 1998 there were 294 qualified and 999 non-qualified
Contracts issued by the Registrant.
Item 28. INDEMNIFICATION
Pursuant to Section 145 of the Delaware Corporation Law, Article 8 of the
By-laws of Sun Life Assurance Company of Canada (U.S.), a copy of which was
filed as Exhibit 3(b) to the Registration Statement of the Depositor on Form S-
1, File No. 33-29851, provides for the indemnification of directors, officers
and employees of Sun Life Assurance Company of Canada (U.S.).
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
of Sun Life Assurance Company of Canada (U.S.) pursuant to the certificate of
incorporation, by-laws, or otherwise, Sun Life (U.S.) has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by Sun Life (U.S.) of expenses incurred
or paid by a director, officer, controlling person of Sun Life (U.S.) in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, Sun Life (U.S.) will, unless in the opinion of their
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification
by them is against public policy as expressed in the Act and will be governed
by the final adjudication of such issue.
Item 29. PRINCIPAL UNDERWRITERS
(a) Clarendon Insurance Agency, Inc., which is a wholly-owned
subsidiary of Sun Life Assurance Company of Canada (U.S.), acts as general
distributor for the Registrant, Sun Life of Canada (U.S.) Variable Accounts
C, D, E, G, and I, Sun Life (N.Y.) Variable Accounts A, B and C and 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.
<PAGE>
Name and Principal Positions and Offices
Business Address* with Underwriter
- ------------------ ---------------------
Jane M. Mancini.................. President and Director
Robert P. Vrolyk................. Director
James M.A. Anderson ............. Director
S. Caesar Raboy.................. Director
C. James Prieur.................. Director
L. Brock Thompson................ Vice President and Treasurer
Donald E. Kaufman................ Vice President
Cynthia M. Orcutt................ Vice President
Laurie Lennox.................... Vice President
Roy P. Creedon................... Secretary
Maura A. Murphy.................. Assistant Secretary
Peter Marion..................... Tax Officer
- ------------------
* The principal business address of all directors and officers of the
principal underwriter except Ms. Mancini and Ms. Lennox is One Sun Life
Executive Park, Wellesley Hills, Massachusetts 02481. The principal
buisness address of Ms. Mancini and Ms. Lennox is One Copley Place,
Boston, Massachusetts 02116.
(c) Inapplicable.
Item 30. LOCATION OF ACCOUNTS AND RECORDS
Accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules promulgated
thereunder are maintained by Sun Life Assurance Company of Canada (U.S.), in
whole or in part, at its executive office at One Sun Life Executive Park,
Wellesley Hills, Massachusetts 02481, at the offices of Retirement Products
and Services Division at One Copley Place, Boston, Massachusetts 02116, at
the offices of Massachusetts Financial Services Company at 500 Boylston
Street, Boston, Massachusetts 02116 or at the offices of Clarendon Insurance
Agency, Inc., One Sun Life Executive Park, Wellesley Hills, Massachusetts
02481.
Item 31. MANAGEMENT SERVICES
Not Applicable.
Item 32. UNDERTAKINGS
Representation with respect to Section 26(e) of the Investment Company
Act of 1940.
Sun Life Assurance Company of Canada (U.S.) represents that the fees
and charges deducted under the Contract, in the aggregate, are reasonable in
relation to the services rendered, the expenses expected to be incurred, and
therisks assumed by the insurance company.
The Registrant is relying on the no-action letter issued by the
Division of Investment Management of the Securities and Exchange Commission
to the American Council of Life Insurance, Ref. No. IP-6-88, dated November
28, 1988, the requirements for which have been complied with by the
Registrant.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company
Act of 1940, the Registrant certifies that it meets all of the requirements
for effectiveness of this Post-Effective Amendment No. 3 to the Registration
Statement and has caused this Post-Effective Amendment No. 3 to its
Registration Statement to be signed on its behalf in the Town of Wellesley
Hills and Commonwealth of Massachusetts on the 1st day of March, 1999.
Sun Life of Canada (U.S.)
Variable Account F
(Registrant)
Sun Life Assurance Company of
Canada (U.S.)
(Depositor)
By: /s/ C. JAMES PRIEUR
---------------------
C. JAMES PRIEUR
President
Attest: /s/ ELLEN B. KING
-----------------------
Ellen B. King
Secretary
As required by the Securities Act of 1933, this Amendment to the
Registration Statement has been signed by the following persons in the
capacities with the Depositor, Sun Life Assurance Company of Canada (U.S.), and
on the dates indicated.
Signature Title Date
---------- ----- ----
/s/ C. JAMES PRIEUR President and March 1, 1999
- -------------------------- Director
C. James Prieur (Principal Executive Officer)
Vice President, Finance
/s/ ROBERT P. VROLYK and Actuary
- -------------------------- (Principal Financial March 1, 1999
Robert P. Vrolyk and Accounting
Officer)
- -------------------------
* By Edward M. Shea pursuant to Power of Attorney filed herewith.
<PAGE>
Signatures Title Date
---------- ----- ----
* /s/ DONALD A. STEWART Chairman and March 1, 1999
- ------------------------------- Director
Donald A. Stewart
* /s/ RICHARD B. BAILEY Director March 1, 1999
- -------------------------------
Richard B. Bailey
* /s/ M. COLYER CRUM Director March 1, 1999
- -------------------------------
M. Colyer Crum
* /s/ JOHN D. McNEIL Director March 1, 1999
- --------------------------
John D. McNeil
* /s/ DAVID D. HORN Director March 1, 1999
- -------------------------------
David D. Horn
* /s/ JOHN S. LANE Director March 1, 1999
- -------------------------------
John S. Lane
* /s/ ANGUS A. MacNAUGHTON Director March 1, 1999
- -------------------------------
Angus A. MacNaughton
* /s/ S. CAESAR RABOY
- ------------------------------- Director March 1, 1999
S. Caesar Raboy
- ---------------------------
* By Edward. M. Shea pursuant to Power of Attorney filed herewith.
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in Post-Effective Amendment No. 3 to the Registration
Statement on Form N-4 of Sun Life Assurance Company of Canada (U.S.)
(Reg. No. 333-05227) of our report dated February 4, 1999 accompanying the
financial statements of the Futurity and Futurity II Sub-Accounts included in
Sun Life of Canada (U.S.) Variable Account F, the use of our report dated
February 6, 1999 accompanying the financial statements of Sun Life (U.S.)
Variable Account F, and to the use of our report dated February 5, 1998
accompanying the financial statements of Sun Life Assurance Company of Canada
(U.S.) appearing in the Prospectus, which is part of such Registration
Statement, and to the incorporation by reference of our reports dated
February 5, 1998 appearing on the Annual Report on Form 10-K of Sun Life
Assurance Company of Canada (U.S.) for the year ended December 31, 1997.
We also consent to the reference to us under the "Accountants" appearing in
such Prospectus.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 24, 1999
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that Donald A. Stewart, whose signature
appears below, constitutes and appoints Edward M. Shea, Ellen B. King, Peter
F. Demuth and C. James Prieur, and each of them, his attorneys-in-fact, each
with the power of substitution, for him in any capacities, to sign a
Registration Statement of Form N-4 of Sun Life of Canada (U.S.) Variable
Account F (Reg. No. 333-05227), and any amendments thereto, and to file the
same, with exhibits thereto, and other documents in connection therewith, with
the securities and exchange Commission, hereby ratifying and confirming
all that each of said attorneys-in-fact or his substitute or substitutes, may
do or cause to be done by virtue hereof.
/s/ Donald A. Stewart
-----------------------
Donald A. Stewart
February 4, 1999
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that John D. McNeil, whose signature
appears below, constitutes and appoints Edward M. Shea, Ellen B. King, Peter
F. Demuth and C. James Prieur, and each of them, his attorneys-in-fact, each
with the power of substitution, for him in any capacities, to sign a
Registration Statement of Form N-4 of Sun Life of Canada (U.S.) Variable
Account F (Reg. No. 333-05227), and any amendments thereto, and to file the
same, with exhibits thereto, and other documents in connection therewith,
with the securities and exchange Commission, hereby ratifying and confirming
all that each of said attorneys-in-fact or his substitute or substitutes, may
do or cause to be done by virtue hereof.
/s/ John D. McNeil
-----------------------
John D. McNeil
February 4, 1999
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that Richard B. Bailey, whose signature
appears below, constitutes and appoints Edward M. Shea, Ellen B. King, Peter
F. Demuth and C. James Prieur, and each of them, his attorneys-in-fact, each
with the power of substitution, for him in any capacities, to sign a
Registration Statement of Form N-4 of Sun Life of Canada (U.S.) Variable
Account F (Reg. No. 333-05227), and any amendments thereto, and to file the
same, with exhibits thereto, and other documents in connection therewith,
with the securities and exchange Commission, hereby ratifying and confirming
all that each of said attorneys-in-fact or his substitute or substitutes, may
do or cause to be done by virtue hereof.
/s/ Richard B. Bailey
-----------------------
Richard B. Bailey
February 4, 1999
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that M. Colyer Crum, whose signature
appears below, constitutes and appoints Edward M. Shea, Ellen B. King, Peter
F. Demuth and C. James Prieur, and each of them, his attorneys-in-fact, each
with the power of substitution, for him in any capacities, to sign a
Registration Statement of Form N-4 of Sun Life of Canada (U.S.) Variable
Account F (Reg. No. 333-05227), and any amendments thereto, and to file the
same, with exhibits thereto, and other documents in connection therewith,
with the securities and exchange Commission, hereby ratifying and confirming
all that each of said attorneys-in-fact or his substitute or substitutes, may
do or cause to be done by virtue hereof.
/s/ M. Colyer Crum
-----------------------
M. Colyer Crum
February 4, 1999
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that David D. Horn, whose signature
appears below, constitutes and appoints Edward M. Shea, Ellen B. King, Peter
F. Demuth and C. James Prieur, and each of them, his attorneys-in-fact, each
with the power of substitution, for him in any capacities, to sign a
Registration Statement of Form N-4 of Sun Life of Canada (U.S.) Variable
Account F (Reg. No. 333-05227), and any amendments thereto, and to file the
same, with exhibits thereto, and other documents in connection therewith,
with the securities and exchange Commission, hereby ratifying and confirming
all that each of said attorneys-in-fact or his substitute or substitutes, may
do or cause to be done by virtue hereof.
/s/ David D. Horn
-----------------------
David D. Horn
February 4, 1999
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that John S. Lane, whose signature
appears below, constitutes and appoints Edward M. Shea, Ellen B. King, Peter
F. Demuth and C. James Prieur, and each of them, his attorneys-in-fact, each
with the power of substitution, for him in any capacities, to sign a
Registration Statement of Form N-4 of Sun Life of Canada (U.S.) Variable
Account F (Reg. No. 333-05227), and any amendments thereto, and to file the
same, with exhibits thereto, and other documents in connection therewith,
with the securities and exchange Commission, hereby ratifying and confirming
all that each of said attorneys-in-fact or his substitute or substitutes, may
do or cause to be done by virtue hereof.
/s/ John S. Lane
-----------------------
John S. Lane
February 4, 1999
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that Angus A. MacNaughton, whose signature
appears below, constitutes and appoints Edward M. Shea, Ellen B. King, Peter
F. Demuth and C. James Prieur, and each of them, his attorneys-in-fact, each
with the power of substitution, for him in any capacities, to sign a
Registration Statement of Form N-4 of Sun Life of Canada (U.S.) Variable
Account F (Reg. No. 333-05227), and any amendments thereto, and to file the
same, with exhibits thereto, and other documents in connection therewith,
with the securities and exchange Commission, hereby ratifying and confirming
all that each of said attorneys-in-fact or his substitute or substitutes, may
do or cause to be done by virtue hereof.
/s/ Angus A. MacNaughton
----------------------------
Angus A. MacNaughton
February 4, 1999
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that S. Caesar Raboy, whose signature
appears below, constitutes and appoints Edward M. Shea, Ellen B. King, Peter
F. Demuth and C. James Prieur, and each of them, his attorneys-in-fact, each
with the power of substitution, for him in any capacities, to sign a
Registration Statement of Form N-4 of Sun Life of Canada (U.S.) Variable
Account F (Reg. No. 333-05227), and any amendments thereto, and to file the
same, with exhibits thereto, and other documents in connection therewith,
with the securities and exchange Commission, hereby ratifying and confirming
all that each of said attorneys-in-fact or his substitute or substitutes, may
do or cause to be done by virtue hereof.
/s/ S. Caesar Raboy
----------------------------
S. Caesar Raboy
February 4, 1999
