-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PlWgUCbX2hlIKoqDfk9lr9xQQYbA2ezw1zVOoXeaepmHGVfF9SJ5TmND6bkWvfJQ nSwLRP3ItSCvJzJOOG3oAg== 0000950156-07-000156.txt : 20070307 0000950156-07-000156.hdr.sgml : 20070307 20070307143057 ACCESSION NUMBER: 0000950156-07-000156 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20061231 FILED AS OF DATE: 20070307 DATE AS OF CHANGE: 20070307 EFFECTIVENESS DATE: 20070307 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAPITAL APPRECIATION VARIABLE ACCOUNT/MA CENTRAL INDEX KEY: 0000706111 IRS NUMBER: 042461439 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-03561 FILM NUMBER: 07677546 BUSINESS ADDRESS: STREET 1: 500 BOYLSTON STREET CITY: BOSTON STATE: MA ZIP: 02116 BUSINESS PHONE: 6179545244 MAIL ADDRESS: STREET 1: 500 BOYLSTON STREET CITY: BOSTON STATE: MA ZIP: 02116 FORMER COMPANY: FORMER CONFORMED NAME: COMPASS CAPITAL APPRECIATION VARIABLE ACCOUNT/MA DATE OF NAME CHANGE: 19880121 0000706111 S000002616 CAPITAL APPRECIATION VARIABLE ACCOUNT/MA C000007195 Compass 2 C000007196 Compass 3 C000007197 Compass 3 - Level 2 N-CSR 1 d663491.txt COMPASS CAPITAL APPRECIATION VARIABLE ACCT: UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-3561 - ------------------------------------------------------------------------------- CAPITAL APPRECIATION VARIABLE ACCOUNT - ------------------------------------------------------------------------------- (Exact name of registrant as specified in charter) 500 Boylston Street, Boston, Massachusetts 02116 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) Susan S. Newton Massachusetts Financial Services Company 500 Boylston Street Boston, Massachusetts 02116 - ------------------------------------------------------------------------------- (Name and address of agents for service) Registrant's telephone number, including area code: (617) 954-5000 - ------------------------------------------------------------------------------- Date of fiscal year end: December 31 - ------------------------------------------------------------------------------- Date of reporting period: December 31, 2006 - ------------------------------------------------------------------------------- ITEM 1. REPORTS TO STOCKHOLDERS. COMPASS [Graphic Omitted] PROFESSIONALLY MANAGED COMBINATION FIXED/VARIABLE ANNUITIES FOR PERSONAL INVESTMENTS AND QUALIFIED RETIREMENT PLANS ANNUAL REPORT o DECEMBER 31, 2006 Capital Appreciation Variable Account Global Governments Variable Account Government Securities Variable Account High Yield Variable Account Money Market Variable Account Total Return Variable Account Issued by Sun Life Assurance Company of Canada (U.S.), A Wholly Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc. TABLE OF CONTENTS Letter from the CEO of MFS ................................................ 1 Management Reviews ........................................................ 1 Performance Summary ....................................................... 4 Portfolio Composition ..................................................... 5 Portfolio of Investments .................................................. 11 Financial Statements ...................................................... 31 Notes to Financial Statements ............................................. 48 Report of Independent Registered Public Accounting Firm ................... 55 Managers and Officers ..................................................... 56 Board Review of Investment Advisory Agreements ............................ 60 MFS(R) PRIVACY NOTICE ..................................................... 63 Proxy Voting Policies and Information ............................. Back Cover Quarterly Portfolio Disclosure .................................... Back Cover - ------------------------------------------------------------------------------- THIS REPORT IS PREPARED FOR THE GENERAL INFORMATION OF CONTRACT OWNERS. IT IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY WHEN PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------ NOT FDIC INSURED MAY LOSE VALUE NO BANK OR CREDIT UNION GUARANTEE NOT A DEPOSIT NOT INSURED BY ANY FEDEAL GOVERNMENT AGENCY OR NCUA/NCUSIF - ------------------------------------------------------------------------------ LETTER FROM THE CEO OF MFS DEAR CONTRACT OWNERS: The year 2006 proved to be a very good one for many of the world's financial markets. The U.S. stock market, as one notable example, posted strong gains as the Dow Jones Industrial Average hit record highs and the Standard & Poor's 500 Stock Index rose to levels not seen since 2000. While investors were undoubtedly encouraged by these positive developments, we think it is important to maintain the proper perspective on what appears to be happening with the world's financial markets. Around the globe, economies seem to have reached a state of equilibrium. Both stock and bond markets have simply been less volatile than they were in years past. While there are many factors behind the low levels of volatility, one of the key reasons is that the U.S. Federal Reserve Board and other central banks around the world seem to have found the right formula for simultaneously promoting economic growth and keeping inflation under control. This new, calmer state of affairs is no doubt welcomed by many investors, but with less volatility, the possibilities for earning exceptional returns also diminish. Investors may have to lower their expectations about what are reasonable returns from the markets. Those still looking for the types of returns they had been accustomed to in the past may have to work much harder to seek out those opportunities and perhaps also accept more risk than they customarily did. In any market climate, even in a relatively benign one, we think investors are still best served by spreading their holdings across a variety of investments that will give them exposure to a range of market opportunities and varying levels of risk. Respectfully, /s/ Robert J. Manning Robert J. Manning Chief Executive Officer and Chief Investment Officer MFS Investment Management(R) February 15, 2007 The opinions expressed in this letter are subject to change, may not be relied upon for investment advice, and no forecasts can be guaranteed. MANAGEMENT REVIEWS The following management reviews, for the twelve months ended December 31, 2006, exclude the Money Market Variable Account. CAPITAL APPRECIATION VARIABLE ACCOUNT SUMMARY OF RESULTS For the twelve months ended December 31, 2006, Compass 2 provided a total return of 4.79%, Compass 3 provided a total return of 4.69%, and Compass 3 - Level 2 provided a total return of 4.84%. These returns, which include the reinvestment of any dividends and capital gains distributions, compare with a return of 9.07% over the same period for the account's benchmark, the Russell 1000 Growth Index. DETRACTORS FROM PERFORMANCE Our overweighted position in the technology sector held back performance relative to the benchmark. Technology stocks that detracted from results included networking chip maker Marvell Technology Group(c), data storage systems provider EMC Corp., flash memory products maker SanDisk, and producer of thin-film transistor liquid crystal displays (TFT-LCDs) LG Philips(c)(g). The sources of underperformance at Marvell included a dilutive acquisition, a stock options backdating investigation, and disappointing second and third quarter results. EMC's stock suffered after the company lowered earnings guidance. Stock selection in the retailing and leisure sectors dampened relative results over the reporting period. In the leisure sector, cruise operator Carnival Cruise Line(c)(g) hindered relative returns. Within the retailing sector, specialty apparel retailer Chico's and home products retailer Williams-Sonoma were among the portfolio's top detractors. Chico's shares came under pressure following tepid same store sales results and weaker-than-expected financial guidance. Our underweighted position in the industrial goods and services sector and stock selection in the financial services sector also hurt, although no individual stocks within either of these sectors were among the top detractors. Individual securities in the health care sector that had a negative impact on relative performance included cardiovascular medical devices manufacturer St. Jude Medical, medical device maker Advanced Medical Optics, and biotechnology firm Genzyme. Shares of Genzyme declined after the company missed their first quarter earnings target and reported slightly lower sales of their drugs, Fabrazyme and Synvisc. Higher operating expenses also held back the stock's performance. CONTRIBUTORS TO PERFORMANCE Stock selection in the basic materials sector aided relative returns, although no individual stocks within this sector were among the portfolio's top contributors. Several names within the leisure and retailing sectors helped overall relative performance. These included casino resorts operator Las Vegas Sands, slot machine maker International Game Technology, and discount department store Kohl's(g). Shares of Kohl's gained from strong results for the second quarter, with earnings well above guidance. In addition, the company's margins continued to improve from inventory management initiatives implemented in the last few years. Elsewhere, biotechnology firm Gilead Sciences(g), software giant Oracle, billing software company Amdocs Ltd.(c), biotechnology company Celgene, and network equipment company Cisco Systems were strong contributors over the period. Cisco's shares rose as the company reported strong earnings. In the latter half of the period, the company gave better-than-expected fiscal second quarter guidance and reiterated their confidence that the company's full year earnings would be at the high end of their projected range. Our positioning in wireless communications software company QUALCOMM and underweighted position in General Electric stock also helped. GLOBAL GOVERNMENTS VARIABLE ACCOUNT SUMMARY OF RESULTS For the twelve months ended December 31, 2006, Compass 2 provided a total return of 3.49%; Compass 3 provided a total return of 3.34%; and Compass 3 - Level 2 provided a total return of 3.49%. These returns, which include the reinvestment of any dividends and capital gains distributions, compare with a return of 5.94% over the same period for the account's benchmark, the JPMorgan Global Government Bond Index. DETRACTORS FROM PERFORMANCE Although yield was a factor that negatively affected the portfolio's relative performance, this was more than offset by the benefit from the portfolio's short bond position in Japan. The portfolio's positioning in bonds from the United Kingdom and New Zealand also held back results. CONTRIBUTORS TO PERFORMANCE The portfolio's short duration(d) stance contributed to performance during the period. Our underweighted position in U.S. dollars and overweighted position in the Euro also helped. Sector and security selection in U.S. and EMU (European Monetary Unit) bonds contributed to results, as did our emerging markets exposure. GOVERNMENT SECURITIES VARIABLE ACCOUNT SUMMARY OF RESULTS For the twelve months ended December 31, 2006, Compass 2 provided a total return of 2.50%, Compass 3 provided a total return of 2.40%, and Compass 3 - Level 2 provided a total return of 2.55%. These returns, which include the reinvestment of any dividends and capital gains distributions, compare with a return of 4.35% over the same period for the account's benchmark, the Lehman Brothers U.S. Government/Mortgage Bond Index. DETRACTORS FROM PERFORMANCE Relative to the benchmark, the portfolio's positioning in Israeli government debt held back performance. Within the agency sector, a Tennessee Valley Authority (TVA) bond, which underperformed the agency sector as a whole, was among the top detractors. CONTRIBUTORS TO PERFORMANCE The portfolio's overweighted position in agency securities contributed to relative performance as the sector outperformed the overall benchmark over the reporting period. Holdings of mortgage-backed securities also helped. HIGH YIELD VARIABLE ACCOUNT SUMMARY OF RESULTS For the twelve months ended December 31, 2006, the Compass 2 provided a total return of 9.04%, Compass 3 provided a total return of 8.94%, and Compass 3 - Level 2 provided a total return of 9.10%. These returns, which include the reinvestment of any dividends and capital gains distributions, compare with a return of 11.87% over the same period for the account's benchmark, Lehman Brothers U.S. High-Yield Corporate Bond Index. DETRACTORS FROM PERFORMANCE Yield was a negative factor in performance relative to the Lehman Brothers U.S. High-Yield Corporate Bond Index. The portfolio's relative exposure to "BB" rated(s) bonds also hurt. Holdings of hospital operator HCA and gaming company Station Casinos were among the portfolio's largest detractors. CONTRIBUTORS TO PERFORMANCE Our positioning in "B" rated securities helped relative performance over the reporting period. Individual contributors that helped relative results included broadband communications company CCH Holdings, financing company General Motors Acceptance Corp. (GMAC), and packaging company Smurfit Kappa(g). TOTAL RETURN VARIABLE ACCOUNT SUMMARY OF RESULTS For the twelve months ended December 31, 2006, the Compass 2 provided a total return of 10.58%, Compass 3 provided a total return of 10.42%, and Compass 3 - Level 2 provided a total return of 10.58%. These returns, which include the reinvestment of any dividends and capital gains distributions, compare with a return of 15.79% over the same period for the account's benchmark, the Standard & Poor's 500 Stock Index (S&P 500 Index). The account's other benchmark, the Lehman Brothers U.S. Aggregate Bond Index (Lehman Index), provided a total return of 4.33%. DETRACTORS FROM PERFORMANCE Within the equity portion of the portfolio, stock selection in the basic materials and energy sectors detracted from performance relative to the S&P 500 Index. In basic materials, packaging manufacturer Owens-Illinois(c) and newsprint maker Bowater(c) were among the portfolio's top detractors. The profitability of both companies was negatively affected by higher energy prices. Additionally, Bowater faced weaker demand for newsprint. In energy, our underweighted position in integrated oil and gas company Exxon Mobil held back relative returns. Elsewhere, telecommunications equipment manufacturer Nortel Networks(c), wireless service provider Sprint Nextel, insurance company Conseco(c), and home improvement products maker Masco dampened results. We believe Nortel's delay in filing the 2005 annual reports and restatement of certain prior period results, along with weaker-than-expected fundamentals and management's inability to turn around the business, contributed to the decline of the company's stock price. Shares of Sprint Nextel struggled after the company lowered its wireless subscriber guidance for 2006. Not holding communications service provider BellSouth also detracted from relative returns as this stock outperformed the S&P 500 Index. The cash position in the equity portion of the portfolio was also a detractor from relative performance. The portfolio holds cash to buy new holdings and to provide liquidity. In a period when equity markets rose, as measured by the portfolio's benchmark, holding cash hurt performance versus the benchmark, which has no cash position. Within the fixed income portion of the portfolio, several Treasury securities and long-maturity corporate issues held back returns relative to the Lehman Index. CONTRIBUTORS TO PERFORMANCE Within the equity portion of the portfolio, the health care, financial services, and retailing sectors were the principal contributors to performance relative to the S&P 500 Index. Stock selection was the primary factor in the strong relative performance in the health care sector. This was supported by our decision to underweight this otherwise weak-performing sector. Pharmaceutical company Merck was among the portfolio's top contributors. Merck rebounded after struggling with the recall of its pain medication Vioxx. Shares of Merck also benefited from the company's cost cutting efforts and solid growth in several key products. Our underweighting of benchmark constituent UnitedHealth Group also helped as this stock's performance trailed that of the benchmark. The strong showing in the financial services and retailing sectors also resulted from security selection. Within the financial services sector, PNC Financial Services Group was the top relative contributor. In the retailing sector, office products retailer OfficeMax was the largest contributor to relative returns. In other sectors, defense contractor Lockheed Martin was a strong performer as shares gained on strong revenue growth, improved margins, and key contract awards over the period. Other individual stocks that contributed to results included electric utility company FPL Group, telecommunications services provider Verizon Communications, and agricultural equipment manufacturer Deere & Co. Underweighting or avoiding several poor-performing benchmark constituents, such as semiconductor company Intel and online information portal Yahoo!, further strengthened relative performance. Within the fixed income portion of the portfolio, our overweighted positions in "BBB" rated(s) securities and our limited exposure to "BB" rated bonds added to performance relative to the Lehman Index (the Lehman Index does not include bonds rated lower than "BBB"). While we do not generally position the portfolio for changes in interest rates, the portfolio's short duration(d) stance boosted results as interest rates rose over the reporting period. The portfolio's yield advantage and mortgage convexity positioning (exposure to interest rate volatility) were also positive factors in relative returns. The views expressed in this report are those of the portfolio managers only through the end of the period of the report as stated on the cover and do not necessarily reflect the views of MFS or any other person in the MFS organization. These views are subject to change at any time based on market and other conditions, and MFS disclaims any responsibility to update such views. These views may not be relied upon as investment advice or an indication of trading intent on behalf of any MFS portfolio. References to specific securities are not recommendations of such securities, and may not be representative of any MFS portfolio's current or future investments. (c) Security is not a benchmark constituent. (d) Duration is a measure of how much a bond's price is likely to fluctuate with general changes in interest rates, e.g., if rates rise 1.00%, a bond with a 5-year duration is likely to lose about 5.00% of its value. (g) Security was not held in the portfolio at period end. (s) Bonds rated "BBB", "Baa", or higher are considered investment grade; bonds rated "BB", "Ba", or below are considered non-investment grade. The primary source for bond quality ratings is Moody's Investors Service. If not available, ratings by Standard & Poor's are used, else ratings by Fitch, Inc. For securities which are not rated by any of the three agencies, the security is considered Not Rated. INDEX DEFINITIONS JPMORGAN GLOBAL GOVERNMENT BOND INDEX - measures developed government bond markets around the world. LEHMAN BROTHERS U.S. AGGREGATE BOND INDEX - measures the U.S. investment grade, fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities. LEHMAN BROTHERS U.S. GOVERNMENT/MORTGAGE BOND INDEX - measures debt issued by the U.S. Government as well as mortgage-backed pass-through securities of Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC). LEHMAN BROTHERS U.S. HIGH-YIELD CORPORATE BOND INDEX - measures the universe of non-investment grade, fixed rate debt. Eurobonds, and debt issues from countries designated as emerging markets (e.g., Argentina, Brazil, Venezuela, etc.) are excluded. RUSSELL 1000 GROWTH INDEX - constructed to provide a comprehensive barometer for growth securities in the large-cap segment of the U.S. equity universe. Companies in this index generally have higher price-to-book ratios and higher forecasted growth values. STANDARD & POOR'S 500 STOCK INDEX - a capitalization-weighted index of 500 widely held equity securities, designed to measure broad U.S. equity performance. It is not possible to invest directly in an index. PERFORMANCE SUMMARY THESE PERFORMANCE RESULTS REFLECT THE MORTALITY AND EXPENSE RISKS CHARGES BUT DO NOT REFLECT THE DEDUCTION OF SURRENDER CHARGES OR ANY OTHER APPLICABLE CONTRACT FEES. IF SURRENDER CHARGES AND ALL OTHER CONTRACT FEES WERE INCLUDED, THE RESULTS WOULD BE LOWER. YEAR END PERFORMANCE THROUGH DECEMBER 31, 2006 Compass 3 - Compass 2 Compass 3 Level 2 -------- -------- -------- Capital Appreciation Variable Account 4.79% 4.69% 4.84% Global Governments Variable Account 3.49% 3.34% 3.49% Government Securities Variable Account 2.50% 2.40% 2.55% High Yield Variable Account 9.04% 8.94% 9.10% Money Market Variable Account 3.19% 3.09% 3.24% Total Return Variable Account 10.58% 10.42% 10.58% BEFORE INVESTING, YOU SHOULD CONSIDER CAREFULLY THE INVESTMENT OBJECTIVES, RISKS, AND CHARGES AND EXPENSES OF EACH INVESTMENT OPTION. ALL OF THIS INFORMATION IS EXPLAINED IN THE PROSPECTUS FOR EACH OF THE VARIABLE ACCOUNTS. YOU SHOULD READ THE PROSPECTUS CAREFULLY BEFORE INVESTING. PERFORMANCE DATA SHOWN REPRESENTS PAST PERFORMANCE AND IS NO GUARANTEE OF FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE FLUCTUATE SO YOUR UNITS, WHEN SOLD, MAY BE WORTH MORE OR LESS THAN THE ORIGINAL COST; CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN QUOTED. FOR MOST RECENT MONTH-END PERFORMANCE, PLEASE VISIT SUNLIFE-USA.COM. THE PERFORMANCE SHOWN DOES NOT REFLECT THE DEDUCTION OF TAXES, IF ANY, THAT A CONTRACT HOLDER WOULD PAY ON DISTRIBUTIONS OR REDEMPTION OF CONTRACT UNITS. Performance results reflect any applicable expense subsidies and waivers in effect during the periods shown. Without such subsidies and waivers the accounts' performance results would be less favorable. Please see the prospectus and financial statements for complete details. All results are historical and assume the reinvestment of dividends and capital gains. Money Market Variable Account performance results reflect any applicable expense subsidies, waivers and adjustments in effect during the periods shown. Subsidies and fee waivers may be imposed to enhance a portfolio's yield during periods when the portfolio's operating expenses have a significant impact on the portfolio's yield due to lower interest rates. Without such subsidies, waivers and adjustments, the results would have been less favorable. See the prospectus for details. All results are historical and assume the reinvestment of dividends and capital gains. From time to time the variable accounts may receive proceeds from litigation settlements, without which performance would be lower. See notes to financial statements. PORTFOLIO COMPOSITION -- CAPITAL APPRECIATION VARIABLE ACCOUNT PORTFOLIO STRUCTURE Common Stock 98.8% Cash & Other Net Assets 1.2% TOP TEN HOLDINGS Cisco Systems, Inc. 3.8% - -------------------------------------------------- General Electric Co. 3.2% - -------------------------------------------------- Intel Corp. 2.7% - -------------------------------------------------- Johnson & Johnson 2.3% - -------------------------------------------------- Adobe Systems, Inc. 2.2% - -------------------------------------------------- Microsoft Corp. 2.1% - -------------------------------------------------- Proctor & Gamble Co. 2.0% - -------------------------------------------------- Medtronic, Inc. 2.0% - -------------------------------------------------- Google, Inc., "A" 2.0% - -------------------------------------------------- Amdocs Ltd. 1.8% - -------------------------------------------------- COMMON STOCK SECTORS Technology 23.5% - -------------------------------------------------- Health Care 19.9% - -------------------------------------------------- Industrial Goods & Services 9.5% - -------------------------------------------------- Retailing 9.1% - -------------------------------------------------- Financial Services 8.9% - -------------------------------------------------- Special Products & Services 6.8% - -------------------------------------------------- Consumer Staples 6.0% - -------------------------------------------------- Leisure 5.5% - -------------------------------------------------- Energy 3.8% - -------------------------------------------------- Transportation 2.6% - -------------------------------------------------- Basic Materials 1.5% - -------------------------------------------------- Utilities & Communications 1.0% - -------------------------------------------------- Autos & Housing 0.7% - -------------------------------------------------- Percentages are based on net assets as of 12/31/06. The portfolio is actively managed and current holdings may be different. PORTFOLIO COMPOSITION -- GLOBAL GOVERNMENTS VARIABLE ACCOUNT PORTFOLIO STRUCTURE (i) Bonds 94.0% Cash & Other Net Assets 6.0% FIXED INCOME SECTORS (i) Non-U.S. Government Bonds 63.7% - -------------------------------------------------------------------- U.S. Treasury Securities 11.0% - -------------------------------------------------------------------- Commercial Mortgage-Backed Securities 8.7% - -------------------------------------------------------------------- U.S. Government Agencies 6.2% - -------------------------------------------------------------------- Emerging Market Bonds 4.1% - -------------------------------------------------------------------- Mortgage-Backed Securities 0.3% - -------------------------------------------------------------------- CREDIT QUALITY OF BONDS (r) AAA 76.9% - -------------------------------------------------------------------- AA 14.8% - -------------------------------------------------------------------- A 3.9% - -------------------------------------------------------------------- BBB 4.4% - -------------------------------------------------------------------- PORTFOLIO FACTS Average Duration (d) 6.0 - -------------------------------------------------------------------- Average Life (m) 8.9 yrs. - -------------------------------------------------------------------- Average Maturity (m) 11.2 yrs. - -------------------------------------------------------------------- Average Credit Quality of Rated Securities (long-term) (a) AA+ - -------------------------------------------------------------------- Average Credit Quality of Rated Securities (short-term) (a) A-1 - -------------------------------------------------------------------- COUNTRY WEIGHTINGS (i) United States 31.9% - -------------------------------------------------------------------- Germany 18.4% - -------------------------------------------------------------------- Japan 13.8% - -------------------------------------------------------------------- Canada 9.1% - -------------------------------------------------------------------- United Kingdom 9.0% - -------------------------------------------------------------------- France 3.4% - -------------------------------------------------------------------- Spain 1.8% - -------------------------------------------------------------------- Finland 1.8% - -------------------------------------------------------------------- Malaysia 1.4% - -------------------------------------------------------------------- Other Countries 9.4% - -------------------------------------------------------------------- (a) The average credit quality of rated securities is based upon a market weighted average of portfolio holdings that are rated by public rating agencies. (d) Duration is a measure of how much a bond's price is likely to fluctuate with general changes in interest rates, e.g., if rates rise 1.00%, a bond with a 5-year duration is likely to lose about 5.00% of its value. (i) For purposes of this graphical presentation, the bond component includes both accrued interest amounts and the equivalent exposure from any derivative holdings, if applicable. (m) The average maturity shown is calculated using the final stated maturity on the portfolio's holdings without taking into account any holdings which have been pre-refunded or pre-paid to an earlier date or which have a mandatory put date prior to the stated maturity. The average life shown takes into account these earlier dates. (r) Each security is assigned a rating from Moody's Investors Service. If not rated by Moody's, the rating will be that assigned by Standard & Poor's. Likewise, if not assigned a rating by Standard & Poor's, it will be based on the rating assigned by Fitch, Inc. For those portfolios that hold a security which is not rated by any of the three agencies, the security is considered Not Rated. Holdings in U.S. Treasuries and government agency mortgage-backed securities, if any, are included in the "AAA"-rating category. Percentages are based on the total market value of investments as of 12/31/06. Percentages are based on net assets as of 12/31/06, unless otherwise noted. The portfolio is actively managed and current holdings may be different. PORTFOLIO COMPOSITION -- GOVERNMENT SECURITIES VARIABLE ACCOUNT PORTFOLIO STRUCTURE (i) Bonds 96.8% Cash & Other Net Assets 3.2% FIXED INCOME SECTORS (i) Mortgage-Backed Securities 54.6% - ---------------------------------------------------------------------- U.S. Government Agencies 39.0% - ---------------------------------------------------------------------- U.S. Treasury Securities 3.2% - ---------------------------------------------------------------------- CREDIT QUALITY OF BONDS (r) AAA 100.0% - ---------------------------------------------------------------------- PORTFOLIO FACTS Average Duration (d) 4.2 - ---------------------------------------------------------------------- Average Life (m) 7.5 yrs. - ---------------------------------------------------------------------- Average Maturity (m) 16.1 yrs. - ---------------------------------------------------------------------- Average Credit Quality of Rated Securities (long-term) (a) AAA - ---------------------------------------------------------------------- Average Credit Quality of Rated Securities (short-term) (a) A-1 - ---------------------------------------------------------------------- (a) The average credit quality of rated securities is based upon a market weighted average of portfolio holdings that are rated by public rating agencies. (d) Duration is a measure of how much a bond's price is likely to fluctuate with general changes in interest rates, e.g., if rates rise 1.00%, a bond with a 5-year duration is likely to lose about 5.00% of its value. (i) For purposes of this graphical presentation, the bond component includes both accrued interest amounts and the equivalent exposure from any derivative holdings, if applicable. (m) The average maturity shown is calculated using the final stated maturity on the portfolio's holdings without taking into account any holdings which have been pre-refunded or pre-paid to an earlier date or which have a mandatory put date prior to the stated maturity. The average life shown takes into account these earlier dates. (r) Each security is assigned a rating from Moody's Investors Service. If not rated by Moody's, the rating will be that assigned by Standard & Poor's. Likewise, if not assigned a rating by Standard & Poor's, it will be based on the rating assigned by Fitch, Inc. For those portfolios that hold a security which is not rated by any of the three agencies, the security is considered Not Rated. Holdings in U.S. Treasuries and government agency mortgage-backed securities, if any, are included in the "AAA"-rating category. Percentages are based on the total market value of investments as of 12/31/06. Percentages are based on net assets as of 12/31/06, unless otherwise noted. The portfolio is actively managed and current holdings may be different. PORTFOLIO COMPOSITION -- HIGH YIELD VARIABLE ACCOUNT PORTFOLIO STRUCTURE (i) Bonds 90.7% Floating Rate Loans 6.6% Common Stocks 1.3% Common Bonds 0.4% Convertible Preferred Stocks 0.1% Preferred Stocks 0.1% Cash & Other Net Assets 0.8% TOP FIVE INDUSTRIES (i) Medical & Health Technology & Services 7.8% - ---------------------------------------------------------------------- Automotive 7.4% - ---------------------------------------------------------------------- Gaming & Lodging 7.0% - ---------------------------------------------------------------------- Printing & Publishing 5.2% - ---------------------------------------------------------------------- Broadcasting 4.9% - ---------------------------------------------------------------------- CREDIT QUALITY OF BONDS (r) AAA 2.1% - ---------------------------------------------------------------------- A 0.3% - ---------------------------------------------------------------------- BBB 2.7% - ---------------------------------------------------------------------- BB 24.9% - ---------------------------------------------------------------------- B 52.7% - ---------------------------------------------------------------------- CCC 15.9% - ---------------------------------------------------------------------- Not Rated 1.4% - ---------------------------------------------------------------------- PORTFOLIO FACTS Average Duration (d) 4.2 - ---------------------------------------------------------------------- Average Life (m) 7.9 yrs. - ---------------------------------------------------------------------- Average Maturity (m) 8.3 yrs. - ---------------------------------------------------------------------- Average Credit Quality of Rated Securities (long-term) (a) B+ - ---------------------------------------------------------------------- Average Credit Quality of Rated Securities (short-term) (a) A-1 - ---------------------------------------------------------------------- (a) The average credit quality of rated securities is based upon a market weighted average of portfolio holdings that are rated by public rating agencies. (d) Duration is a measure of how much a bond's price is likely to fluctuate with general changes in interest rates, e.g., if rates rise 1.00%, a bond with a 5-year duration is likely to lose about 5.00% of its value. (i) For purposes of this graphical presentation, the bond component includes both accrued interest amounts and the equivalent exposure from any derivative holdings, if applicable. (m) The average maturity shown is calculated using the final stated maturity on the portfolio's holdings without taking into account any holdings which have been pre-refunded or pre-paid to an earlier date or which have a mandatory put date prior to the stated maturity. The average life shown takes into account these earlier dates. (r) Each security is assigned a rating from Moody's Investors Service. If not rated by Moody's, the rating will be that assigned by Standard & Poor's. Likewise, if not assigned a rating by Standard & Poor's, it will be based on the rating assigned by Fitch, Inc. For those portfolios that hold a security which is not rated by any of the three agencies, the security is considered Not Rated. Holdings in U.S. Treasuries and government agency mortgage-backed securities, if any, are included in the "AAA"-rating category. Percentages are based on the total market value of investments as of 12/31/06. Percentages are based on net assets as of 12/31/06, unless otherwise noted. The portfolio is actively managed and current holdings may be different. PORTFOLIO COMPOSITION -- MONEY MARKET VARIABLE ACCOUNT PORTFOLIO STRUCTURE (u) Commercial Paper 85.7% Certificates of Deposit 8.9% Repurchase Agreements 5.9% Other Assets Less Liabilities (0.5)% SHORT-TERM CREDIT QUALITY (q) Average Credit Quality of Short-Term Bonds (a) A-1 - -------------------------------------------------------------------- All holdings are rated A-1 MATURITY BREAKDOWN (u) 0 - 29 59.5% - -------------------------------------------------------------------- 30 - 59 20.0% - -------------------------------------------------------------------- 60 - 89 15.0% - -------------------------------------------------------------------- 90 - 366 6.0% - -------------------------------------------------------------------- Other Assets Less Liabilities (0.5)% - -------------------------------------------------------------------- (a) The average credit quality is based upon a market weighted average of portfolio holdings that are rated by public rating agencies. (q) Each security is assigned a rating from Moody's Investors Service. If not rated by Moody's, the rating will be that assigned by Standard & Poor's. Likewise, if not assigned a rating by Standard & Poor's, it will be based on the rating assigned by Fitch, Inc. If not rated by any of the three agencies, the security is considered Not Rated. U.S. Treasuries and U.S. Agency securities are included in the "A-1"- rating category. Percentages are based on the total market value of investments as of 12/31/06. (u) For purposes of this graphical presentation, accrued interest, where applicable, is included. From time to time "Other Assets Less Liabilities" may be negative due to timing of cash receipts. Percentages are based on net assets as of 12/31/06, unless otherwise noted. The portfolio is actively managed and current holdings may be different. PORTFOLIO COMPOSITION -- TOTAL RETURN VARIABLE ACCOUNT PORTFOLIO STRUCTURE (i) Common Stocks 60.0% Bonds 39.3% Cash & Other Net Assets 0.7% TOP TEN HOLDINGS (i) Fannie Mae 5.5%, 30 years 4.2% - ---------------------------------------------------------------------- Bank of America Corp. 1.9% - ---------------------------------------------------------------------- Altria Group, Inc. 1.8% - ---------------------------------------------------------------------- U.S. Treasury Notes, 3.125%, 2009 1.6% - ---------------------------------------------------------------------- JPMorgan Chase & Co. 1.5% - ---------------------------------------------------------------------- Citigroup, Inc. 1.5% - ---------------------------------------------------------------------- Bank of New York Co., Inc. 1.4% - ---------------------------------------------------------------------- Exxon Mobil Corp. 1.3% - ---------------------------------------------------------------------- Masco Corp. 1.3% - ---------------------------------------------------------------------- U.S. Treasury Notes, 3.125%, 2008 1.2% - ---------------------------------------------------------------------- COMMON STOCK SECTORS Financial Services 17.8% - ---------------------------------------------------------------------- Energy 6.7% - ---------------------------------------------------------------------- Health Care 6.2% - ---------------------------------------------------------------------- Utilities & Communications 5.9% - ---------------------------------------------------------------------- Industrial Goods & Services 5.1% - ---------------------------------------------------------------------- Consumer Staples 4.5% - ---------------------------------------------------------------------- Technology 3.5% - ---------------------------------------------------------------------- Basic Materials 3.3% - ---------------------------------------------------------------------- Leisure 2.6% - ---------------------------------------------------------------------- Retailing 1.8% - ---------------------------------------------------------------------- Autos & Housing 1.8% - ---------------------------------------------------------------------- Transportation 0.6% - ---------------------------------------------------------------------- Special Products & Services 0.2% - ---------------------------------------------------------------------- FIXED INCOME SECTORS (i) Mortgage-Backed Securities 14.2% - ---------------------------------------------------------------------- High Grade Corporates 9.5% - ---------------------------------------------------------------------- U.S. Treasury Securities 8.5% - ---------------------------------------------------------------------- Commercial Mortgage-Backed Securities 3.7% - ---------------------------------------------------------------------- U.S. Government Agencies 2.0% - ---------------------------------------------------------------------- Asset-Backed Securities 0.6% - ---------------------------------------------------------------------- Emerging Market Bonds 0.4% - ---------------------------------------------------------------------- Non U.S. Government Bonds 0.3% - ---------------------------------------------------------------------- High Yield Corporates 0.1% - ---------------------------------------------------------------------- (i) For purposes of this graphical presentation, the bond component includes both accrued interest amounts and the equivalent exposure from any derivative holdings, if applicable. Percentages are based on net assets as of 12/31/06. The portfolio is actively managed and current holdings may be different. PORTFOLIO OF INVESTMENTS -- December 31, 2006 CAPITAL APPRECIATION VARIABLE ACCOUNT ISSUER SHARES/PAR VALUE ($) COMMON STOCKS - 98.8% AEROSPACE - 3.2% Boeing Co. ............................... 27,680 $ 2,459,091 Precision Castparts Corp. ................ 17,400 1,362,072 United Technologies Corp. ................ 51,870 3,242,912 ------------- $ 7,064,075 ------------- APPAREL MANUFACTURERS - 2.0% Coach, Inc. (a) .......................... 36,000 $ 1,546,560 NIKE, Inc., "B" .......................... 27,700 2,743,131 ------------- $ 4,289,691 ------------- AUTOMOTIVE - 0.7% Harman International Industries, Inc. .... 15,580 $ 1,556,598 ------------- BIOTECHNOLOGY - 5.4% Amgen, Inc. (a) .......................... 55,770 $ 3,809,649 Celgene Corp. (a) ........................ 54,300 3,123,879 Genzyme Corp. (a) ........................ 60,830 3,745,911 Millipore Corp. (a) ...................... 16,100 1,072,260 ------------- $ 11,751,699 ------------- BROADCASTING - 1.6% News Corp., "A" .......................... 109,750 $ 2,357,430 Viacom, Inc., "B" (a) .................... 28,540 1,170,996 ------------- $ 3,528,426 ------------- BROKERAGE & ASSET MANAGERS - 3.8% Charles Schwab Corp. ..................... 129,220 $ 2,499,115 Chicago Mercantile Exchange Holdings, Inc., "A" .............................. 4,090 2,084,878 Mellon Financial Corp. ................... 39,470 1,663,661 Merrill Lynch & Co., Inc. ................ 22,730 2,116,163 ------------- $ 8,363,817 ------------- BUSINESS SERVICES - 5.6% Amdocs Ltd. (a) .......................... 101,020 $ 3,914,525 Automatic Data Processing, Inc. .......... 36,960 1,820,280 CheckFree Corp. (a) ...................... 27,090 1,087,934 First Data Corp. ......................... 147,430 3,762,414 Western Union Co. ........................ 71,540 1,603,927 ------------- $ 12,189,080 ------------- CHEMICALS - 1.3% Ecolab, Inc. ............................. 19,370 $ 875,524 Monsanto Co. ............................. 36,940 1,940,458 ------------- $ 2,815,982 ------------- COMPUTER SOFTWARE - 5.8% Adobe Systems, Inc. (a) .................. 115,640 $ 4,755,117 Microsoft Corp. .......................... 152,340 4,548,872 Oracle Corp. (a) ......................... 196,340 3,365,268 ------------- $ 12,669,257 ------------- COMPUTER SOFTWARE - SYSTEMS - 2.9% Apple Computer, Inc. (a) ................. 30,650 $ 2,600,346 Dell, Inc. (a) ........................... 44,200 1,108,978 Hewlett-Packard Co. ...................... 65,810 2,710,714 ------------- $ 6,420,038 ------------- CONSUMER GOODS & SERVICES - 4.0% Colgate-Palmolive Co. .................... 26,410 $ 1,722,988 eBay, Inc. (a) ........................... 56,290 1,692,640 Monster Worldwide, Inc. (a) .............. 17,890 834,390 Procter & Gamble Co. ..................... 69,500 4,466,765 ------------- $ 8,716,783 ------------- ELECTRICAL EQUIPMENT - 5.1% General Electric Co. ..................... 185,500 $ 6,902,455 Rockwell Automation, Inc. ................ 38,160 2,330,813 W.W. Grainger, Inc. ...................... 26,480 1,852,011 ------------- $ 11,085,279 ------------- ELECTRONICS - 5.9% Applied Materials, Inc. .................. 110,710 $ 2,042,600 Intel Corp. .............................. 295,800 5,989,950 Marvell Technology Group Ltd. (a) ........ 103,760 1,991,154 Samsung Electronics Co. Ltd., GDR ........ 4,665 1,534,785 SanDisk Corp. (a) ........................ 32,630 1,404,069 ------------- $ 12,962,558 ------------- FOOD & BEVERAGES - 2.4% Nestle S.A ............................... 7,034 $ 2,498,746 PepsiCo, Inc. ............................ 42,480 2,657,124 ------------- $ 5,155,870 ------------- FOOD & DRUG STORES - 0.5% CVS Corp. ................................ 35,120 $ 1,085,559 ------------- GAMING & LODGING - 2.4% International Game Technology ............ 72,230 $ 3,337,026 Las Vegas Sands Corp. (a) ................ 7,290 652,309 Starwood Hotels & Resorts, Inc. .......... 18,690 1,168,125 ------------- $ 5,157,460 ------------- GENERAL MERCHANDISE - 2.0% Family Dollar Stores, Inc. ............... 38,460 $ 1,128,032 Target Corp. ............................. 55,050 3,140,603 ------------- $ 4,268,635 ------------- HEALTH MAINTENANCE ORGANIZATIONS - 0.5% UnitedHealth Group, Inc. ................. 21,040 $ 1,130,479 ------------- INTERNET - 2.7% Google, Inc., "A" (a) .................... 9,420 $ 4,337,722 Yahoo!, Inc. (a) ......................... 63,190 1,613,873 ------------- $ 5,951,595 ------------- LEISURE & TOYS - 1.5% Electronic Arts, Inc. (a) ................ 65,860 $ 3,316,710 ------------- MACHINERY & TOOLS - 1.2% Deere & Co. .............................. 27,170 $ 2,583,052 ------------- MAJOR BANKS - 1.7% JPMorgan Chase & Co. ..................... 35,390 $ 1,709,337 State Street Corp. ....................... 29,030 1,957,783 ------------- $ 3,667,120 ------------- MEDICAL & HEALTH TECHNOLOGY & SERVICES - 1.4% Caremark Rx, Inc. ........................ 53,160 $ 3,035,968 ------------- MEDICAL EQUIPMENT - 5.1% Advanced Medical Optics, Inc. (a) ........ 58,290 $ 2,051,808 Baxter International, Inc. ............... 43,420 2,014,254 DENTSPLY International, Inc. ............. 36,780 1,097,883 Medtronic, Inc. .......................... 83,070 4,445,076 Respironics, Inc. (a) .................... 14,900 562,475 St. Jude Medical, Inc. (a) ............... 29,670 1,084,735 ------------- $ 11,256,231 ------------- NETWORK & TELECOM - 5.3% Cisco Systems, Inc. (a) .................. 304,640 $ 8,325,811 Corning, Inc. (a) ........................ 54,810 1,025,495 Juniper Networks, Inc. (a) ............... 27,180 514,789 QUALCOMM, Inc. ........................... 43,420 1,640,842 ------------- $ 11,506,937 ------------- OIL SERVICES - 3.8% Noble Corp. .............................. 31,660 $ 2,410,909 Schlumberger Ltd. ........................ 36,360 2,296,498 Transocean, Inc. (a) ..................... 30,120 2,436,407 Weatherford International Ltd. (a) ....... 25,820 1,079,018 ------------- $ 8,222,832 ------------- OTHER BANKS & DIVERSIFIED FINANCIALS - 3.4% American Express Co. ..................... 58,170 $ 3,529,174 SLM Corp. ................................ 58,160 2,836,463 UBS AG ................................... 17,740 1,070,254 ------------- $ 7,435,891 ------------- PERSONAL COMPUTERS & PERIPHERALS - 0.9% EMC Corp. (a) ............................ 157,180 $ 2,074,776 ------------- PHARMACEUTICALS - 7.5% Allergan, Inc. ........................... 24,010 $ 2,874,957 Eli Lilly & Co. .......................... 59,420 3,095,782 Johnson & Johnson ........................ 76,570 5,055,151 Roche Holding AG ......................... 16,640 2,982,886 Wyeth .................................... 47,470 2,417,172 ------------- $ 16,425,948 ------------- RAILROAD & SHIPPING - 0.8% Burlington Northern Santa Fe Corp. ....... 24,010 $ 1,772,178 ------------- SPECIALTY CHEMICALS - 0.2% Praxair, Inc. ............................ 8,900 $ 528,037 ------------- SPECIALTY STORES - 4.6% Aeropostale, Inc. (a) .................... 28,260 $ 872,386 Best Buy Co., Inc. ....................... 18,380 904,112 Chico's FAS, Inc. (a) .................... 46,190 955,671 Lowe's Cos., Inc. ........................ 53,570 1,668,706 Staples, Inc. ............................ 110,170 2,941,539 Urban Outfitters, Inc. (a) ............... 45,340 1,044,180 Williams-Sonoma, Inc. .................... 52,340 1,645,570 ------------- $ 10,032,164 ------------- TELEPHONE SERVICES - 1.0% American Tower Corp., "A" (a) ............ 55,880 $ 2,083,206 ------------- TOBACCO - 0.8% Altria Group, Inc. ....................... 19,870 $ 1,705,243 ------------- TRUCKING - 1.8% FedEx Corp. .............................. 14,500 $ 1,574,990 United Parcel Service, Inc., "B" ......... 32,240 2,417,355 ------------- $ 3,992,345 ------------- TOTAL COMMON STOCKS (IDENTIFIED COST, $198,448,972) ......................... $ 215,801,519 ------------- REPURCHASE AGREEMENTS - 1.0% Merrill Lynch, 5.32%, dated 12/29/06, due 1/02/07, total to be received $2,141,265 (secured by various U.S. Treasury and Federal Agency obligations and Mortgage Backed securities in a jointly traded account), at Cost ...................... $2,140,000 $ 2,140,000 ------------- TOTAL INVESTMENTS (IDENTIFIED COST, $200,588,972) ......................... $ 217,941,519 ------------- OTHER ASSETS, LESS LIABILITIES - 0.2% ................................... 466,332 ------------- NET ASSETS - 100.0% ....................................... $ 218,407,851 ------------- See portfolio footnotes and notes to financial statements. PORTFOLIO OF INVESTMENTS -- December 31, 2006 GLOBAL GOVERNMENTS VARIABLE ACCOUNT ISSUER SHARES/PAR VALUE ($) BONDS - 92.8% FOREIGN BONDS - 66.8% AUSTRALIA - 1.2% Commonwealth of Australia, 6.5%, 2013 .... AUD 66,000 $ 53,552 Commonwealth of Australia, 6%, 2017 ...... AUD 66,000 52,575 ------------- $ 106,127 ------------- AUSTRIA - 1.3% Republic of Austria, 5%, 2012 ............ EUR 87,000 $ 120,677 ------------- BELGIUM - 0.8% Kingdom of Belgium, 3.75%, 2009 .......... EUR 29,000 $ 38,141 Kingdom of Belgium, 5%, 2012 ............. EUR 22,000 30,569 ------------- $ 68,710 ------------- CANADA - 8.7% Canada Housing Trust, 4.6%, 2011 ......... CAD 98,000 $ 85,884 Government of Canada, 5.5%, 2009 ......... CAD 189,000 167,863 Government of Canada, 4.5%, 2015 ......... CAD 80,000 70,696 Government of Canada, 8%, 2023 ........... CAD 72,000 89,746 Government of Canada, 5.75%, 2033 ........ CAD 50,000 53,953 Quebec Province, 1.6%, 2013 .............. JPY 39,000,000 329,936 ------------- $ 798,078 ------------- DENMARK - 1.0% Kingdom of Denmark, 4%, 2015 ............. DKK 519,000 $ 92,398 ------------- FINLAND - 1.7% Republic of Finland, 3%, 2008 ............ EUR 105,000 $ 136,828 Republic of Finland, 5.375%, 2013 ........ EUR 15,000 21,387 ------------- $ 158,215 ------------- FRANCE - 3.3% Republic of France, 6%, 2025 ............. EUR 58,000 $ 95,457 Republic of France, 4.75%, 2035 .......... EUR 144,000 209,594 ------------- $ 305,051 ------------- GERMANY - 17.8% Federal Republic of Germany, 3.5%, 2008 .. EUR 60,000 $ 78,662 Federal Republic of Germany, 5.25%, 2010 . EUR 70,000 96,299 Federal Republic of Germany, 3.75%, 2015 . EUR 276,000 359,152 Federal Republic of Germany, 6.25%, 2024 . EUR 194,000 323,701 Federal Republic of Germany, 6.25%, 2030 . EUR 250,000 432,977 KfW Bankengruppe, FRN, 3.528%, 2007 ...... EUR 252,000 332,438 ------------- $ 1,623,229 ------------- IRELAND - 1.0% Republic of Ireland, 4.6%, 2016 .......... EUR 66,000 $ 91,274 ------------- JAPAN - 13.8% Development Bank of Japan, 1.4%, 2012 .... JPY 53,000,000 $ 447,831 Development Bank of Japan, 1.6%, 2014 .... JPY 40,000,000 338,714 Development Bank of Japan, 1.05%, 2023 ... JPY 54,000,000 389,709 Japan Finance Corp. for Municipal Enterprises, 2%, 2016 .................. JPY 10,000,000 86,679 ------------- $ 1,262,933 ------------- MALAYSIA - 1.4% Petronas Capital Ltd., 7.875%, 2022 ...... $ 100,000 $ 123,066 ------------- MEXICO - 1.3% Pemex Project Funding Master Trust, 8.625%, 2022 ........................... $ 23,000 $ 28,428 United Mexican States, 8.125%, 2019 ...... 54,000 65,610 United Mexican States, 10%, 2024 ......... MXN 220,000 25,237 ------------- $ 119,275 ------------- NETHERLANDS - 1.3% Kingdom of Netherlands, 5%, 2012 ......... EUR 84,697 $ 117,547 ------------- RUSSIA - 0.6% Gazprom International S.A., 7.201%, 2020 . $ 54,000 $ 56,970 ------------- SOUTH AFRICA - 0.5% Republic of South Africa, 7.375%, 2012 ... $ 42,000 $ 45,150 ------------- SPAIN - 1.8% Kingdom of Spain, 5.35%, 2011 ............ EUR 115,000 $ 160,817 ------------- TUNISIA - 0.3% Banque Centrale de Tunisie, 7.375%, 2012 . $ 25,000 $ 27,075 ------------- UNITED KINGDOM - 9.0% Network Rail MTN Finance PLC, FRN, 3.618%, 2007 ................................... EUR 297,000 $ 391,871 United Kingdom Treasury, 5.75%, 2009 ..... GBP 36,000 71,666 United Kingdom Treasury, 8%, 2015 ........ GBP 90,000 217,100 United Kingdom Treasury, 8%, 2021 ........ GBP 27,000 71,285 United Kingdom Treasury, 4.25%, 2036 ..... GBP 34,000 67,085 ------------- $ 819,007 ------------- Total Foreign Bonds ...................... $ 6,095,599 ------------- U.S. BONDS - 26.0% ASSET BACKED & SECURITIZED - 8.7% Bayview Commercial Asset Trust, 4.83%, 2023 (n) ........................ CAD 30,000 $ 25,753 Citigroup/Deutsche Bank Commercial Mortgage Trust, 5.648%, 2048 .................... $ 100,000 101,881 Commercial Mortgage Asset Trust, FRN, 0.8834%, 2032 (i)(n) ................... 1,395,668 54,044 Commercial Mortgage Pass-Through Certificates, FRN, 5.54%, 2017 (n) ..... 59,000 59,003 Commercial Mortgage Pass-Through Certificates, FRN, 5.55%, 2017 (n) ..... 100,000 100,034 Credit Suisse Commercial Mortgage Trust, 5.509%, 2039 ........................... 23,010 23,191 Deutsche Mortgage & Asset Receiving Corp., 6.538%, 2031 ........................... 27,943 28,128 First Union National Bank Commercial Mortgage Trust, FRN, 0.9457%, 2043 (i)(n) ................... 1,604,142 51,785 IMPAC CMB Trust, FRN, 5.7%, 2036 ......... 96,297 96,701 JPMorgan Chase Commercial Mortgage Securities Corp., 5.44%, 2045 (z) ...... 19,156 19,219 JPMorgan Chase Commercial Mortgage Securities Corp., FRN, 5.2115%, 2041 ... 55,952 55,743 Lehman Brothers Floating Rate Commercial Mortgage Trust, FRN, 5.51%, 2018 (n) ... 100,000 100,001 Merrill Lynch/Countrywide Commercial Mortgage Trust, FRN, 5.204%, 2049 ...... 50,000 49,215 Wachovia Bank Commercial Mortgage Trust, FRN, 5.795%, 2045 ...................... 30,000 30,869 ------------- $ 795,567 ------------- MORTGAGE BACKED - 0.3% Fannie Mae, 5.423%, 2016 ................. $ 24,796 $ 25,192 ------------- U.S. GOVERNMENT AGENCIES - 6.2% Aid-Egypt, 4.45%, 2015 ................... $ 49,000 $ 47,349 Fannie Mae, 4.25%, 2007 .................. 171,000 169,626 Fannie Mae, 6%, 2011 ..................... 88,000 91,628 Freddie Mac, 4.2%, 2007 .................. 99,000 98,102 Small Business Administration, 4.57%, 2025 ............................ 45,831 44,000 Small Business Administration, 5.21%, 2026 ............................ 117,213 116,909 ------------- $ 567,614 ------------- U.S. TREASURY OBLIGATIONS - 10.8% U.S. Treasury Bonds, 8%, 2021 ............ $ 65,000 $ 86,166 U.S. Treasury Bonds, 5.25%, 2028 ......... 123,000 128,987 U.S. Treasury Notes, 3.125%, 2008 ........ 1,000 971 U.S. Treasury Notes, 4%, 2010 ............ 314,000 307,254 U.S. Treasury Notes, 4.25%, 2013 ......... 236,000 229,768 U.S. Treasury Notes, 4%, 2015 ............ 249,000 237,202 ------------- $ 990,348 ------------- Total U.S. Bonds ............................................ $ 2,378,721 ------------- TOTAL BONDS (IDENTIFIED COST, $8,376,368) ........................... $ 8,474,320 ------------- CALL OPTIONS PURCHASED - 0.0% JPY Currency - January 2007 @ $0.9759 (Premiums Paid, $1,995) ................ JPY 16,259,600 $ 16 ------------- PUT OPTIONS PURCHASED - 0.1% USD Currency - January 2007 @ EUR 0.96631 (Premiums Paid, $1,947) ................ $ 140,250 $ 4,984 ------------- SHORT-TERM OBLIGATIONS - 4.0% Federal Home Loan Bank, 4.95%, due 1/02/07, at Amortized Cost and Value (y) ..................... $ 363,000 $ 362,950 ------------- REPURCHASE AGREEMENTS - 4.5% Merrill Lynch, 5.32%, dated 12/29/06, due 1/02/07, total to be received $408,241 (secured by various U.S. Treasury and Federal Agency obligations and Mortgage Backed securities in a jointly traded account), at Cost ...................... $ 408,000 $ 408,000 ------------- TOTAL INVESTMENTS (IDENTIFIED COST, $9,151,260) (k) ....................... $ 9,250,270 ------------- OTHER ASSETS, LESS LIABILITIES - (1.4)% ................................. (123,653) ------------- NET ASSETS - 100.0% ....................................... $ 9,126,617 ------------- FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS Sales and Purchases in the table below are reported by currency.
NET UNREALIZED CONTRACTS TO CONTRACTS APPRECIATION DELIVER/RECEIVE SETTLEMENT DATE IN EXCHANGE FOR AT VALUE (DEPRECIATION) - -------------------------------------------------------------------------------------------------------------------------- SALES AUD 136,989 2/06/07 $ 107,710 $ 108,078 $ (368) CAD 427,212 1/22/07 - 2/06/07 376,004 367,145 8,859 DKK 1,069,078 1/02/07 - 2/15/07 188,634 189,428 (794) EUR 359,340 1/10/07 - 2/28/07 467,963 475,073 (7,110) GBP 12,500 2/26/07 24,156 24,489 (333) JPY 69,916,470 1/10/07 - 2/20/07 598,094 589,596 8,498 MXN 221,739 1/05/07 20,418 20,524 (106) NZD 48,139 2/05/07 32,948 33,912 (964) ---------- ---------- -------- $1,815,927 $1,808,245 $ 7,682 ========== ========== ======== PURCHASES BRL 47,475 1/29/07 $ 21,995 $ 22,110 $ 115 DKK 534,539 1/02/07 94,147 94,624 477 EUR 464,254 1/29/07 - 5/17/07 614,281 613,658 (623) GBP 24,788 2/26/07 47,063 48,563 1,500 JPY 271,359,855 1/18/07 - 2/20/07 2,315,681 2,285,662 (30,019) MXN 152,961 1/05/07 14,013 14,157 144 MYR 68,471 1/26/07 19,364 19,435 71 NOK 158,144 1/08/07 24,450 25,384 934 NZD 48,139 2/05/07 33,626 33,912 286 PLN 52,816 1/08/07 18,378 18,188 (190) RUB 363,625 1/22/07 13,821 13,808 (13) SEK 815,671 2/06/07 121,016 119,431 (1,585) ---------- ---------- -------- $3,337,835 $3,308,932 $(28,903) ========== ========== ========
At December 31, 2006, forward foreign currency purchases and sales under master netting agreements excluded above amounted to a net receivable of $98 and $12,136 with Goldman Sachs & Co. and Merrill Lynch International Bank, respectively. At December 31, 2006, the variable account had sufficient cash and/or securities to cover any commitments under these derivative contracts. See portfolio footnotes and notes to financial statements. PORTFOLIO OF INVESTMENTS -- December 31, 2006 GOVERNMENT SECURITIES VARIABLE ACCOUNT ISSUER SHARES/PAR VALUE ($) BONDS - 98.2% AGENCY - OTHER - 7.3% Financing Corp., 9.4%, 2018 .............. $ 780,000 $ 1,061,893 Financing Corp., 10.35%, 2018 ............ 1,150,000 1,669,399 Financing Corp., STRIPS, 0%, 2017 ........ 1,220,000 702,217 Resolution Funding Corp., 8.875%, 2020 ... 1,700,000 2,329,439 ------------- $ 5,762,948 ------------- MORTGAGE BACKED - 54.6% Fannie Mae, 4.73%, 2012 .................. $ 94,241 $ 92,147 Fannie Mae, 4.79%, 2012 .................. 934,169 906,768 Fannie Mae, 4.8%, 2013 ................... 88,846 87,129 Fannie Mae, 4.845%, 2013 ................. 260,281 254,457 Fannie Mae, 5%, 2013 - 2027 .............. 2,793,362 2,757,980 Fannie Mae, 5.06%, 2013 .................. 104,843 103,641 Fannie Mae, 4.45%, 2014 .................. 319,683 306,809 Fannie Mae, 4.519%, 2014 ................. 160,445 154,555 Fannie Mae, 4.6%, 2014 ................... 125,068 120,981 Fannie Mae, 4.666%, 2014 ................. 826,634 802,996 Fannie Mae, 4.77%, 2014 .................. 105,806 102,696 Fannie Mae, 4.848%, 2014 ................. 895,398 878,211 Fannie Mae, 4.871%, 2014 ................. 479,474 471,589 Fannie Mae, 5.1%, 2014 ................... 137,181 136,335 Fannie Mae, 4.56%, 2015 .................. 161,204 155,006 Fannie Mae, 4.62%, 2015 .................. 179,626 173,504 Fannie Mae, 4.665%, 2015 ................. 108,764 105,259 Fannie Mae, 4.69%, 2015 .................. 88,699 85,993 Fannie Mae, 4.7%, 2015 ................... 124,972 121,204 Fannie Mae, 4.74%, 2015 .................. 100,000 96,682 Fannie Mae, 4.815%, 2015 ................. 117,000 113,584 Fannie Mae, 4.82%, 2015 .................. 342,111 332,941 Fannie Mae, 4.85%, 2015 .................. 88,796 86,921 Fannie Mae, 4.89%, 2015 .................. 87,952 86,292 Fannie Mae, 4.925%, 2015 ................. 346,497 341,016 Fannie Mae, 5.471%, 2015 ................. 123,593 125,901 Fannie Mae, 6.5%, 2016 - 2036 ............ 1,755,912 1,794,362 Fannie Mae, 4.996%, 2017 ................. 329,147 325,514 Fannie Mae, 5.5%, 2017 - 2034 ............ 12,930,223 12,815,733 Fannie Mae, 6%, 2017 - 2034 .............. 2,380,115 2,403,866 Fannie Mae, 4.5%, 2019 - 2020 ............ 3,718,466 3,591,528 Fannie Mae, 4.88%, 2020 .................. 91,984 90,741 Fannie Mae, 7.5%, 2022 - 2031 ............ 226,235 236,044 Freddie Mac, 4.5%, 2013 - 2015 ........... 547,955 543,047 Freddie Mac, 4.375%, 2015 ................ 575,104 560,789 Freddie Mac, 5%, 2016 - 2025 ............. 2,569,262 2,554,372 Freddie Mac, 6%, 2021 - 2035 ............. 2,574,814 2,599,709 Freddie Mac, 5.5%, 2025 - 2035 ........... 4,052,778 4,013,751 Freddie Mac, 6.5%, 2032 .................. 721,726 737,941 Ginnie Mae, 5.5%, 2033 ................... 1,619,343 1,613,430 ------------- $ 42,881,424 ------------- U.S. GOVERNMENT AGENCIES - 31.1% Aid-Egypt, 4.45%, 2015 ................... $ 473,000 $ 457,065 Aid-Israel, 6.6%, 2008 ................... 399,640 400,447 Aid-Israel, 0%, 2021 - 2024 .............. 2,041,000 857,628 Aid-Israel, 5.5%, 2023 ................... 1,097,000 1,141,466 Aid-Peru, 9.98%, 2008 .................... 364,016 372,676 Empresa Energetica Cornito Ltd., 6.07%, 2010 ............................ 1,765,000 1,789,128 Fannie Mae, 4.25%, 2009 .................. 1,073,000 1,055,821 Fannie Mae, 4.625%, 2013 ................. 213,000 208,676 Farmer Mac, 5.5%, 2011 (n) ............... 690,000 702,666 Federal Home Loan Bank, 4.5%, 2007 ....... 150,000 149,656 Federal Home Loan Bank, 4.625%, 2008 ..... 1,750,000 1,739,413 Freddie Mac, 4.2%, 2007 .................. 705,000 698,605 Freddie Mac, 5.625%, 2011 ................ 2,214,000 2,270,887 Freddie Mac, 5.05%, 2015 ................. 956,000 955,789 Overseas Private Investment Corp., 0%, 2007 ............................... 161,000 170,258 Small Business Administration, 8.4%, 2007 ............................. 1,104 1,107 Small Business Administration, 8.7%, 2009 ............................. 26,213 27,091 Small Business Administration, 10.05%, 2009 ........................... 3,829 3,947 Small Business Administration, 6.34%, 2021 ............................ 539,812 558,983 Small Business Administration, 6.44%, 2021 ............................ 543,221 563,664 Small Business Administration, 6.625%, 2021 ........................... 632,327 660,584 Small Business Administration, 6.07%, 2022 ............................ 450,738 464,134 Small Business Administration, 4.89%, 2023 ............................ 600,437 590,824 Small Business Administration, 4.98%, 2023 ............................ 243,482 240,816 Small Business Administration, 4.34%, 2024 ............................ 350,137 333,751 Small Business Administration, 4.72%, 2024 ............................ 615,092 599,776 Small Business Administration, 4.77%, 2024 ............................ 577,356 564,007 Small Business Administration, 4.86%, 2024 ............................ 312,294 306,125 Small Business Administration, 4.87%, 2024 ............................ 367,745 360,393 Small Business Administration, 4.88%, 2024 ............................ 279,535 274,217 Small Business Administration, 4.99%, 2024 ............................ 405,005 400,105 Small Business Administration, 5.52%, 2024 ............................ 320,790 325,014 Small Business Administration, 4.76%, 2025 ............................ 537,806 522,276 Small Business Administration, 5.11%, 2025 ............................ 320,300 318,080 Tennessee Valley Authority STRIPS, 0% to 2012, 8.25% to 2042 .............. 2,256,000 1,786,143 U.S. Department of Housing & Urban Development, 6.36%, 2016 ............... 500,000 516,081 U.S. Department of Housing & Urban Development, 6.59%, 2016 ............... 2,045,000 2,076,753 ------------- $ 24,464,052 ------------- U.S. TREASURY OBLIGATIONS - 5.2% U.S. Treasury Bonds, 12%, 2013 ........... $ 19,000 $ 21,103 U.S. Treasury Bonds, 9.25%, 2016 ......... 409,000 544,865 U.S. Treasury Bonds, 6%, 2026 ............ 717,000 813,179 U.S. Treasury Bonds, 5.25%, 2028 ......... 346,000 362,841 U.S. Treasury Bonds, 4.5%, 2036 .......... 517,000 491,635 U.S. Treasury Bonds, TIPS, 3.875%, 2009 .. 675,654 694,235 U.S. Treasury Note, 6.5%, 2010 (f) ....... 1,066,000 1,119,842 ------------- $ 4,047,700 ------------- TOTAL BONDS (IDENTIFIED COST, $77,285,442) .......................... $ 77,156,124 ------------- REPURCHASE AGREEMENTS - 1.0% Merrill Lynch & Co., 5.32%, dated 12/29/06, due 1/02/07, total to be received $773,457 (secured by U.S. Treasury and Federal Agency obligations and Mortgage Backed securities in a jointly traded account), at Cost ................................ $ 773,000 $ 773,000 ------------- TOTAL INVESTMENTS (IDENTIFIED COST, $78,058,442) (k) ...................... $ 77,929,124 ------------- OTHER ASSETS, LESS LIABILITIES - 0.8% ................................... 666,176 ------------- NET ASSETS - 100.0% ....................................... $ 78,595,300 ------------- FUTURES CONTRACTS OUTSTANDING AT 12/31/06:
UNREALIZED EXPIRATION APPRECIATION DESCRIPTION CONTRACTS VALUE DATE (DEPRECIATION) - ----------------------------------------------------------------------------------------------------------------------------------- U.S. Treasury Bond (Short) .................................................... 14 $1,560,125 Mar-07 $ 28,170 U.S. Treasury Note 5 yr (Long) ................................................ 26 2,731,625 Mar-07 (19,583) U.S. Treasury Note 10 yr (Short) .............................................. 26 2,794,188 Mar-07 34,029 -------- $ 42,616 ======== At December 31, 2006, the variable account had sufficient cash and/or securities to cover any commitments under these derivative contracts.
See portfolio footnotes and notes to financial statements. PORTFOLIO OF INVESTMENTS -- December 31, 2006 HIGH YIELD VARIABLE ACCOUNT ISSUER SHARES/PAR VALUE ($) BONDS - 88.9% AEROSPACE - 1.5% Argo-Tech Corp., 9.25%, 2011 ............. $ 225,000 $ 243,000 Bombardier, Inc., 8%, 2014 (n) ........... 176,000 180,400 DRS Technologies, Inc., 7.625%, 2018 ..... 400,000 412,000 Vought Aircraft Industry, Inc., 8%, 2011 . 80,000 77,000 ------------- $ 912,400 ------------- AIRLINES - 0.8% Continental Airlines, Inc., 6.9%, 2017 ... $ 69,833 $ 69,212 Continental Airlines, Inc., 6.748%, 2017 . 67,219 66,547 Continental Airlines, Inc., 6.795%, 2018 . 111,945 111,385 Continental Airlines, Inc., 7.566%, 2020 . 235,991 238,351 ------------- $ 485,495 ------------- APPAREL MANUFACTURERS - 0.5% Levi Strauss & Co., 12.25%, 2012 ......... $ 150,000 $ 166,875 Levi Strauss & Co., 9.75%, 2015 .......... 115,000 123,913 ------------- $ 290,788 ------------- ASSET BACKED & SECURITIZED - 1.6% ARCap REIT, Inc., "H", 6.1%, 2045 (n) .... $ 165,567 $ 147,920 Asset Securitization Corp., FRN, 8.3571%, 2029 (z) ...................... 200,000 216,317 Crest Ltd., 7%, 2040 (n) ................. 154,000 153,754 First Union National Bank Commercial Mortgage Corp., 6.75%, 2032 ............ 165,000 167,272 Wachovia Credit, CDO, FRN, 6.7156%, 2026 (p)(z) ................... 250,000 250,625 ------------- $ 935,888 ------------- AUTOMOTIVE - 5.0% Cooper-Standard Automotive, Inc., 8.375%, 2014 ........................... $ 230,000 $ 181,125 Ford Motor Credit Co., 5.8%, 2009 ........ 460,000 451,648 Ford Motor Credit Co., 9.75%, 2010 (n) ... 700,000 744,667 Ford Motor Credit Co., 8.625%, 2010 ...... 190,000 195,578 Ford Motor Credit Co., 7%, 2013 .......... 228,000 217,736 Ford Motor Credit Co., 8%, 2016 .......... 270,000 266,801 Ford Motor Credit Co., FRN, 8.11%, 2012 ............................ 160,000 158,547 General Motors Corp., 7.2%, 2011 ......... 98,000 95,060 General Motors Corp., 8.375%, 2033 ....... 358,000 331,150 Goodyear Tire & Rubber Co., 9%, 2015 ..... 300,000 314,250 ------------- $ 2,956,562 ------------- BROADCASTING - 4.7% Allbritton Communications Co., 7.75%, 2012 ............................ $ 355,000 $ 358,550 Barrington Broadcasting Group, 10.5%, 2014 (n) ........................ 180,000 182,700 Clear Channel Communications, 5.5%, 2014 ............................. 320,000 269,939 EchoStar DBS Corp., 6.375%, 2011 ......... 160,000 159,000 Hughes Network Systems LLC, 9.5%, 2014 ............................. 165,000 172,219 Intelsat Ltd., 9.25%, 2016 (n) ........... 175,000 188,125 Intelsat Ltd., 11.25%, 2016 (n) .......... 405,000 444,488 Intelsat Ltd., 0% to 2010, 9.25% to 2015 . 235,000 178,600 Intelsat Subsidiary Holding Co. Ltd., 8.625%, 2015 ........................... 150,000 156,000 ION Media Networks, Inc., FRN, 11.6238%, 2013 (n) ..................... 370,000 374,625 XM Satellite Radio, Inc., 9.75%, 2014 .... 155,000 155,000 Young Broadcasting, Inc., 10%, 2011 ...... 140,000 133,000 ------------- $ 2,772,246 ------------- BUILDING - 1.8% Goodman Global Holdings, Inc., 7.875%, 2012 ........................... $ 140,000 $ 137,550 Interface, Inc., 10.375%, 2010 ........... 167,000 184,535 Interface, Inc., 9.5%, 2014 .............. 30,000 31,500 Masonite Corp., 11%, 2015 (z) ............ 205,000 189,625 Nortek Holdings, Inc., 8.5%, 2014 ........ 200,000 196,000 Nortek Holdings, Inc., 0% to 2009, 10.75% to 2014 ......................... 503,000 352,100 ------------- $ 1,091,310 ------------- BUSINESS SERVICES - 2.1% Iron Mountain, Inc., 8.625%, 2013 ........ $ 240,000 $ 247,800 Iron Mountain, Inc., 7.75%, 2015 ......... 5,000 5,100 Nortel Networks Ltd., 10.75%, 2016 (n) ... 140,000 153,125 Northern Telecom Corp., 6.875%, 2023 ..... 115,000 96,600 SunGard Data Systems, Inc., 10.25%, 2015 ........................... 410,000 437,675 Xerox Corp., 7.625%, 2013 ................ 275,000 288,750 ------------- $ 1,229,050 ------------- CABLE TV - 3.6% CCH I Holdings LLC, 11%, 2015 ............ $ 520,000 $ 533,650 CCH II Holdings LLC, 10.25%, 2010 ........ 425,000 444,656 CCO Holdings LLC, 8.75%, 2013 ............ 275,000 285,656 CSC Holdings, Inc., 6.75%, 2012 (n) ...... 355,000 346,125 Mediacom LLC, 9.5%, 2013 ................. 275,000 283,250 NTL Cable PLC, 9.125%, 2016 .............. 228,000 240,825 ------------- $ 2,134,162 ------------- CHEMICALS - 4.0% BCP Crystal Holdings Corp., 9.625%, 2014 ........................... $ 121,000 $ 133,705 Crystal U.S. Holdings LLC, "B", 0% to 2009, 10.5% to 2014 .............. 437,000 375,820 Equistar Chemicals LP, 10.125%, 2008 ..... 225,000 239,063 Equistar Chemicals LP, 10.625%, 2011 ..... 60,000 63,900 Innophos, Inc., 8.875%, 2014 ............. 195,000 197,925 KI Holdings, Inc., 0% to 2009, 9.875% to 2014 ......................... 348,000 278,400 Lyondell Chemical Co., 11.125%, 2012 ..... 130,000 139,750 Momentive Performance Materials, Inc., 11.5%, 2016 (n) ........................ 365,000 357,700 Mosaic Co., 7.625%, 2016 (n) ............. 300,000 310,875 Nalco Co., 8.875%, 2013 .................. 285,000 301,744 Rockwood Specialties Group, Inc., 10.625%, 2011 .......................... 1,000 1,065 ------------- $ 2,399,947 ------------- CONGLOMERATES - 0.1% Esco Corp., 8.625%, 2013 (z) ............. $ 80,000 $ 82,200 ------------- CONSUMER GOODS & SERVICES - 2.5% GEO Group, Inc., 8.25%, 2013 ............. $ 280,000 $ 288,400 Jarden Corp., 9.75%, 2012 ................ 145,000 153,338 Playtex Products, Inc., 9.375%, 2011 ..... 180,000 187,650 Service Corp. International, 7.375%, 2014 .. 115,000 120,175 Service Corp. International, 8%, 2017 .... 370,000 374,625 Spectrum Brands, Inc., 7.375%, 2015 ...... 90,000 77,850 Visant Holding Corp., 8.75%, 2013 ........ 280,000 288,400 ------------- $ 1,490,438 ------------- CONTAINERS - 2.0% Berry Plastics Holding Corp., 8.875%, 2014 (n) ....................... $ 250,000 $ 253,750 Graham Packaging Co. LP, 9.875%, 2014 .... 315,000 318,150 Owens-Brockway Glass Container, Inc., 8.25%, 2013 ............................ 580,000 599,575 ------------- $ 1,171,475 ------------- DEFENSE ELECTRONICS - 0.8% L-3 Communications Corp., 5.875%, 2015 ........................... $ 255,000 $ 246,075 L-3 Communications Holdings, Inc., 6.125%, 2014 ........................... 230,000 224,825 ------------- $ 470,900 ------------- ELECTRONICS - 0.7% NXP B.V./NXP Funding LLC, 7.875%, 2014 (n) ....................... $ 110,000 $ 113,713 Sensata Technologies B.V., 8%, 2014 (n) .. 295,000 283,200 ------------- $ 396,913 ------------- EMERGING MARKET QUASI-SOVEREIGN - 0.2% Gazprom OAO, 9.625%, 2013 (n) ............ $ 120,000 $ 143,700 ------------- EMERGING MARKET SOVEREIGN - 0.2% Federative Republic of Brazil, 8.875%, 2019 ........................... $ 51,000 $ 62,220 Russian Ministry of Finance, 12.75%, 2028 ........................... 42,000 75,853 ------------- $ 138,073 ------------- ENERGY - INDEPENDENT - 3.4% Chesapeake Energy Corp., 7%, 2014 ........ $ 184,000 $ 186,990 Chesapeake Energy Corp., 6.375%, 2015 .... 430,000 425,700 Chesapeake Energy Corp., 6.875%, 2016 .... 285,000 287,494 Hilcorp Energy I, 9%, 2016 (n) ........... 225,000 237,938 Newfield Exploration Co., 6.625%, 2014 ... 365,000 365,000 Quicksilver Resources, Inc., 7.125%, 2016 ........................... 305,000 298,138 Whiting Petroleum Corp., 7%, 2014 ........ 195,000 194,513 ------------- $ 1,995,773 ------------- ENTERTAINMENT - 1.1% AMC Entertainment, Inc., 9.5%, 2011 ...... $ 160,000 $ 160,600 AMC Entertainment, Inc., 11%, 2016 ....... 165,000 185,213 Six Flags, Inc., 8.875%, 2010 ............ 175,000 169,313 Six Flags, Inc., 9.75%, 2013 ............. 139,000 130,486 ------------- $ 645,612 ------------- FINANCIAL INSTITUTIONS - 2.6% General Motors Acceptance Corp., 6.875%, 2011 ........................... $ 550,000 $ 564,134 General Motors Acceptance Corp., 6.75%, 2014 ............................ 945,000 970,641 ------------- $ 1,534,775 ------------- FOOD & BEVERAGES - 1.0% B&G Foods Holding Corp., 8%, 2011 ........ $ 175,000 $ 176,750 Dole Foods Co., Inc., 8.875%, 2011 ....... 155,000 152,675 Michael Foods, Inc., 8%, 2013 ............ 250,000 259,375 ------------- $ 588,800 ------------- FOREST & PAPER PRODUCTS - 2.5% Buckeye Technologies, Inc., 8%, 2010 ..... $ 65,000 $ 65,000 Buckeye Technologies, Inc., 8.5%, 2013 ... 375,000 395,625 Jefferson Smurfit Corp., 8.25%, 2012 ..... 351,000 342,225 JSG Funding PLC, 7.75%, 2015 ............. 25,000 24,000 MDP Acquisitions PLC, 9.625%, 2012 ....... 205,000 217,300 Millar Western Forest Products Ltd., 7.75%, 2013 ............................ 140,000 125,650 Verso Paper Holdings LLC, 9.125%, 2014 (n) ....................... 130,000 135,525 Verso Paper Holdings LLC, 11.375%, 2016 (n) ...................... 155,000 162,750 ------------- $ 1,468,075 ------------- GAMING & LODGING - 6.3% Greektown Holdings, 10.75%, 2013 (n) ..... $ 220,000 $ 229,900 Harrah's Entertainment, Inc., 5.75%, 2017 .. 630,000 527,818 Majestic Star Casino LLC, 9.75%, 2011 .... 250,000 247,500 Mandalay Resort Group, 9.375%, 2010 ...... 175,000 187,250 MGM Mirage, Inc., 8.5%, 2010 ............. 140,000 149,800 MGM Mirage, Inc., 8.375%, 2011 ........... 325,000 337,188 MGM Mirage, Inc., 6.75%, 2013 ............ 200,000 195,500 MGM Mirage, Inc., 5.875%, 2014 ........... 195,000 180,375 MGM Mirage, Inc., 6.875%, 2016 ........... 175,000 168,000 Pinnacle Entertainment, Inc., 8.25%, 2012 .. 185,000 186,850 Pokagon Gaming Authority, 10.375%, 2014 (n) ...................... 130,000 142,350 Station Casinos, Inc., 6.5%, 2014 ........ 590,000 524,363 Trump Entertainment Resorts Holdings, Inc.,8.5%, 2015 ........................ 185,000 184,075 Wimar Opco LLC, 9.625%, 2014 (z) ......... 165,000 163,350 Wynn Las Vegas LLC, 6.625%, 2014 ......... 310,000 308,063 ------------- $ 3,732,382 ------------- INDUSTRIAL - 2.7% Amsted Industries, Inc., 10.25%, 2011(z) .. $ 300,000 $ 321,000 Blount, Inc., 8.875%, 2012 ............... 245,000 249,900 Education Management LLC, 8.75%, 2014 (n) ........................ 175,000 181,125 Education Management LLC, 10.25%, 2016 (n) ....................... 135,000 142,763 JohnsonDiversey Holdings, Inc., "B", 9.625%, 2012 ........................... 370,000 387,575 JohnsonDiversey Holdings, Inc., 0% to 2007, 10.67% to 2013 ............. 56,000 54,040 Knowledge Learning Corp., 7.75%, 2015 (z) ........................ 125,000 119,688 RBS Global & Rexnord Corp., 9.5%, 2014 (n) ......................... 120,000 124,800 ------------- $ 1,580,891 ------------- MACHINERY & TOOLS - 1.2% Case Corp., 7.25%, 2016 .................. $ 125,000 $ 126,563 Case New Holland, Inc., 9.25%, 2011 ...... 100,000 105,875 Case New Holland, Inc., 7.125%, 2014 ..... 460,000 466,900 ------------- $ 699,338 ------------- MEDICAL & HEALTH TECHNOLOGY & SERVICES - 7.1% CDRV Investors, Inc., 0% to 2010, 9.625% to 2015 ......................... $ 295,000 $ 228,625 DaVita, Inc., 6.625%, 2013 ............... 125,000 125,313 DaVita, Inc., 7.25%, 2015 ................ 445,000 453,900 HCA, Inc., 6.375%, 2015 .................. 710,000 601,725 HCA, Inc., 9.25%, 2016 (n) ............... 810,000 867,713 HealthSouth Corp., 10.75%, 2016 (n) ...... 280,000 301,350 Omnicare, Inc., 6.875%, 2015 ............. 315,000 311,063 Psychiatric Solutions, Inc., 7.75%, 2015 . 165,000 164,588 Select Medical Corp., 7.625%, 2015 ....... 260,000 215,800 Tenet Healthcare Corp., 9.25%, 2015 ...... 260,000 260,000 U.S. Oncology, Inc., 10.75%, 2014 ........ 365,000 403,325 Vanguard Health Holding II, 9%, 2014 ..... 295,000 298,688 ------------- $ 4,232,090 ------------- METALS & MINING - 3.8% Aleris International, Inc., 10%, 2016 (z) $ 100,000 $ 101,000 Arch Western Finance LLC, 6.75%, 2013 .... 470,000 466,475 Chaparral Steel Co., 10%, 2013 ........... 225,000 251,156 FMG Finance Ltd., 10.625%, 2016 (n) ...... 340,000 364,650 Griffin Coal Mining Co., 9.5%, 2016 (z) .. 143,000 147,290 Massey Energy Co., 6.875%, 2013 .......... 330,000 310,200 Peabody Energy Corp., 5.875%, 2016 ....... 275,000 268,125 Peabody Energy Corp., 7.375%, 2016 ....... 175,000 186,375 PNA Group, Inc., 10.75%, 2016 (n) ........ 155,000 160,231 ------------- $ 2,255,502 ------------- NATURAL GAS - DISTRIBUTION - 0.3% AmeriGas Partners LP, 7.125%, 2016 ....... $ 175,000 $ 175,000 ------------- NATURAL GAS - PIPELINE - 3.1% ANR Pipeline Co., 9.625%, 2021 ........... $ 108,000 $ 143,319 Atlas Pipeline Partners LP, 8.125%, 2015 . 185,000 190,088 Colorado Interstate Gas Co., 5.95%, 2015 ............................ 140,000 138,133 El Paso Energy Corp., 7%, 2011 ........... 335,000 347,563 El Paso Energy Corp., 7.75%, 2013 ........ 260,000 272,025 El Paso Performance-Linked Trust, 7.75%, 2011 (n) ........................ 335,000 354,263 Transcontinental Gas Pipe Line Corp., 7%, 2011 ............................... 135,000 138,713 Williams Cos., Inc., 7.125%, 2011 ........ 132,000 137,280 Williams Partners LP, 7.25%, 2017 (z) .... 140,000 142,800 ------------- $ 1,864,184 ------------- NETWORK & TELECOM - 3.9% Cincinnati Bell, Inc., 8.375%, 2014 ...... $ 300,000 $ 308,250 Citizens Communications Co., 9.25%, 2011 ............................ 225,000 248,906 Hawaiian Telecom Communications, Inc., 9.75%, 2013 ............................ 165,000 165,413 Nordic Telephone Co. Holdings, 8.875%, 2016 (n) ....................... 255,000 272,850 Qwest Capital Funding, Inc., 7.25%, 2011 . 175,000 178,719 Qwest Corp., 7.875%, 2011 ................ 195,000 207,675 Qwest Corp., 8.875%, 2012 ................ 370,000 412,088 Time Warner Telecom Holdings, Inc., 9.25%, 2014 ............................ 180,000 192,375 Windstream Corp., 8.625%, 2016 (n) ....... 285,000 312,075 ------------- $ 2,298,351 ------------- OIL SERVICES - 1.2% Basic Energy Services, Inc., 7.125%, 2016 ........................... $ 325,000 $ 320,125 GulfMark Offshore, Inc., 7.75%, 2014 ..... 180,000 183,600 Hanover Compressor Co., 9%, 2014 ......... 190,000 205,200 ------------- $ 708,925 ------------- PHARMACEUTICALS - 0.3% Warner Chilcott Corp., 8.75%, 2015 ....... $ 192,000 $ 196,800 ------------- PRINTING & PUBLISHING - 3.6% American Media Operations, Inc., 10.25%, 2009 ........................... $ 110,000 $ 106,563 American Media Operations, Inc., 8.875%, 2011 ........................... 75,000 68,438 Dex Media, Inc., 0% to 2008, 9% to 2013 ............................. 425,000 379,313 Dex Media, Inc., 0% to 2008, 9% to 2013 ............................. 300,000 267,750 Idearc, Inc., 8%, 2016 (n) ............... 590,000 598,850 MediaNews Group, Inc., 6.875%, 2013 ...... 330,000 298,650 PRIMEDIA, Inc., 8%, 2013 ................. 80,000 77,400 R.H. Donnelley Corp., 8.875%, 2016 ....... 305,000 320,250 ------------- $ 2,117,214 ------------- RAILROAD & SHIPPING - 0.4% TFM S.A. de C.V., 9.375%, 2012 ........... $ 202,000 $ 215,635 TFM S.A. de C.V., 12.5%, 2012 ............ 26,000 28,080 ------------- $ 243,715 ------------- RESTAURANTS - 0.3% Denny's Corp. Holdings, Inc., 10%, 2012 .. $ 150,000 $ 158,250 ------------- RETAILERS - 1.5% Buhrmann U.S., Inc., 7.875%, 2015 ........ $ 195,000 $ 190,125 Couche-Tard, Inc., 7.5%, 2013 ............ 180,000 184,050 Jean Coutu Group (PJC), Inc., 7.625%, 2012 ........................... 160,000 168,400 Neiman Marcus Group, Inc., 9%, 2015 ...... 185,000 201,881 Neiman Marcus Group, Inc., 10.375%, 2015 .......................... 115,000 127,938 ------------- $ 872,394 ------------- SPECIALTY STORES - 1.3% GSC Holdings Corp., 8%, 2012 ............. $ 250,000 $ 261,250 Michaels Stores, Inc., 11.375%, 2016 (n) . 295,000 307,538 Payless ShoeSource, Inc., 8.25%, 2013 .... 210,000 218,400 ------------- $ 787,188 ------------- TELECOMMUNICATIONS - WIRELESS - 1.9% Centennial Communications Corp., 10%, 2013 .............................. $ 50,000 $ 53,188 Centennial Communications Corp., 10.125%, 2013 .......................... 120,000 129,300 Rogers Wireless, Inc., 6.375%, 2014 ...... 250,000 253,125 Rogers Wireless, Inc., 7.5%, 2015 ........ 175,000 189,875 Rural Cellular Corp., 9.875%, 2010 ....... 210,000 223,388 Wind Acquisition Finance S.A., 10.75%, 2015 (n) ....................... 250,000 284,375 ------------- $ 1,133,251 ------------- TOBACCO - 0.6% Reynolds American, Inc., 7.25%, 2012 ..... $ 185,000 $ 192,863 Reynolds American, Inc., 7.3%, 2015 ...... 155,000 160,881 ------------- $ 353,744 ------------- TRANSPORTATION - SERVICES - 1.0% Hertz Corp., 8.875%, 2014 (n) ............ $ 360,000 $ 377,100 Stena AB, 7%, 2016 ....................... 221,000 209,950 ------------- $ 587,050 ------------- U.S. TREASURY OBLIGATIONS - 2.0% U.S. Treasury Bonds, 4.5%, 2036 .......... $1,244,000 $ 1,182,967 ------------- UTILITIES - ELECTRIC POWER - 3.7% Edison Mission Energy, 7.75%, 2016 ....... $ 125,000 $ 132,500 Midwest Generation LLC, 8.75%, 2034 ...... 360,000 390,600 Mirant North American LLC, 7.375%, 2013 ........................... 240,000 243,600 Mission Energy Holding Co., 13.5%, 2008 .. 250,000 275,625 NRG Energy, Inc., 7.375%, 2016 ........... 775,000 778,875 NRG Energy, Inc., 7.375%, 2017 ........... 90,000 90,225 Reliant Energy, Inc., 6.75%, 2014 ........ 115,000 112,413 Reliant Resources, Inc., 9.25%, 2010 ..... 140,000 147,000 ------------- $ 2,170,838 ------------- TOTAL BONDS (IDENTIFIED COST, $51,348,049) .......................... $ 52,684,656 ------------- COMMON STOCKS - 1.3% CHEMICALS - 0.3% Huntsman Corp. (a) ....................... 9,100 $ 172,627 ------------- CONTAINERS - 0.3% Crown Holdings, Inc. (a) ................. 7,700 $ 161,084 ------------- ENERGY - INDEPENDENT - 0.4% Chesapeake Energy Corp. .................. 2,100 $ 61,005 Foundation Coal Holdings, Inc. ........... 5,760 182,938 ------------- $ 243,943 ------------- MACHINERY & TOOLS - 0.1% Titan International, Inc. ................ 3,300 $ 66,495 ------------- METALS & MINING - 0.0% Oxford Automotive, Inc. (a) .............. 53 $ 0 ------------- PRINTING & PUBLISHING - 0.0% Golden Books Family Entertainment, Inc. (a) ................ 21,250 $ 0 ------------- TELEPHONE SERVICES - 0.2% Windstream Corp. ......................... 10,100 $ 143,622 ------------- TOTAL COMMON STOCKS (IDENTIFIED COST, $764,905) ............................. $ 787,771 ------------- FLOATING RATE LOANS(g)(r) - 6.6% AUTOMOTIVE - 1.9% Ford Motor Co., Term Loan B, 8.36%, 2013 ............................ $ 555,887 $ 556,003 General Motors, Term Loan B, 7.745%, 2013 (o) ....................... 397,378 397,461 Mark IV Industries, Inc., Second Lien Term Loan, 2011 (o) ......................... 169,464 169,605 ------------- $ 1,123,069 ------------- CONTAINERS - 0.4% Altivity Packaging LLC, Second Lien Term Loan, 10.35%, 2013 ..................... $ 50,424 $ 50,907 Altivity Packaging LLC, Second Lien Term Loan, 10.3494%, 2013 ................... 157,576 158,955 ------------- $ 209,862 ------------- ENERGY - INDEPENDENT - 0.2% MEG Energy Corp., Bridge Term Loan, 10.12%, 2013 ........................... $ 142,720 $ 142,006 ------------- FOOD & BEVERAGES - 0.3% Dole Food Co., Inc., Letter of Credit, 5.2438%, 2013 (o) ...................... $ 13,949 $ 13,842 Dole Food Co., Inc., Term Loan, 7.5455%, 2013 (o) ...................... 31,149 30,910 Dole Food Co., Inc., Term Loan C, 7.4603%, 2013 (o) ...................... 103,831 103,035 ------------- $ 147,787 ------------- FOREST & PAPER PRODUCTS - 0.5% Georgia-Pacific Corp., Term Loan, 7.3561%, 2012 .......................... $ 292,261 $ 293,654 Georgia-Pacific Corp., Term Loan B-2, 2013 (o) .......................... 19,153 19,241 ------------- $ 312,895 ------------- GAMING & LODGING - 0.5% Gulfside Casino, Term Loan B, 10.3703%, 2012 ......................... $ 318,909 $ 320,504 ------------- MEDICAL & HEALTH TECHNOLOGY & SERVICES - 0.5% HCA, Inc., Term Loan B, 8.1138%, 2013 .... $ 289,251 $ 292,472 ------------- POLLUTION CONTROL - 0.3% Allied Waste North America, Inc., Term Loan, 7.1576%, 2012 .................... $ 93,400 $ 93,497 Allied Waste North America, Inc., Term Loan A, 7.27%, 2012 .................... 41,418 41,501 ------------- $ 134,998 ------------- PRINTING & PUBLISHING - 1.5% Idearc, Inc., Term Loan B, 7.35%, 2014 ... $ 655,458 $ 658,736 Nielsen Finance LLC, Term Loan B, 8.1254%, 2013 .......................... 249,077 250,767 ------------- $ 909,503 ------------- SPECIALTY STORES - 0.5% Michaels Stores, Inc., Term Loan, 8.375%, 2013 ........................... $ 285,715 $ 287,323 ------------- TOTAL FLOATING RATE LOANS (IDENTIFIED COST, $3,867,689) ........................... $ 3,880,419 ------------- CONVERTIBLE PREFERRED STOCKS - 0.1% REAL ESTATE - 0.1% Mills Corp., "F", 6.75% (Identified Cost, $77,375) ............. 100 $ 89,625 ------------- PREFERRED STOCKS - 0.1% BROADCASTING - 0.1% ION Media Networks, Inc. (p) ............. 8 $ 59,200 ------------- REAL ESTATE - 0.0% HRPT Properties Trust, REIT, "B" ......... 200 $ 5,142 ------------- TOTAL PREFERRED STOCKS (IDENTIFIED COST, $69,456) .............................. $ 64,342 ------------- STRIKE FIRST ISSUER PRICE EXERCISE SHARE/PAR VALUE ($) WARRANTS - 0.0% BUSINESS SERVICES - 0.0% Loral Space & Communications Ltd. (a) . $0.14 1/28/97 1,000 $ 0 Loral Space & Communications Ltd. (a) . $0.14 1/28/97 1,100 0 ------------- $ 0 ------------- NETWORK & TELECOM - 0.0% Knology, Inc. (a)(z) ...... $0.10 11/22/97 500 $ 1,249 ------------- TOTAL WARRANTS (IDENTIFIED COST, $29,924) ............................ $ 1,249 ------------- ISSUER SHARES/PAR VALUE ($) CONVERTIBLE BONDS - 0.4% AUTOMOTIVE - 0.4% Ford Motor Co., 4.25%, 2036 (Identified Cost, $215,000) ............ $ 215,000 $ 229,781 ------------- SHORT-TERM OBLIGATIONS - 1.7% General Electric Capital Corp., 5.29%, due 1/02/07, at Amortized Cost and Value (y) .......................... $ 982,000 $ 981,856 ------------- TOTAL INVESTMENTS (IDENTIFIED COST, $57,354,254) (k) ...................... $ 58,719,699 ------------- OTHER ASSETS, LESS LIABILITIES - 0.9% ................................... 553,979 ------------- NET ASSETS - 100.0% ....................................... $ 59,273,678 ------------- See portfolio footnotes and notes to financial statements. PORTFOLIO OF INVESTMENTS -- December 31, 2006 MONEY MARKET VARIABLE ACCOUNT ISSUER SHARES/PAR VALUE ($) CERTIFICATES OF DEPOSIT - 8.8% OTHER BANKS & DIVERSIFIED FINANCIALS - 8.8% Barclays Bank PLC, NY, 5.31%, due 1/22/07 $1,207,000 $ 1,207,000 Credit Suisse, NY, 5.31%, due 2/28/07 .... 1,448,000 1,448,000 UBS AG, Stamford CT Branch, 5.355%, due 3/06/07 .................... 1,530,000 $ 1,530,000 ------------- TOTAL CERTIFICATES OF DEPOSIT, AT AMORTIZED COST AND VALUE ............................. $4,185,000 ------------- COMMERCIAL PAPER(y) - 85.5% ASSET BACKED & SECURITIZED - 3.1% Yorktown Capital LLC, 5.26%, due 1/04/07 (t) ................. $1,495,000 $ 1,494,345 ------------- BROKERAGE & ASSET MANAGERS - 6.3% Merrill Lynch & Co., Inc., 5.22%, due 2/23/07 ..................... $1,583,000 $ 1,570,835 Morgan Stanley, Inc., 5.25%, due 2/21/07 . 1,450,000 1,439,216 ------------- $ 3,010,051 ------------- FINANCIAL INSTITUTIONS - 54.9% Alpine Securitization Corp., 5.23%, due 1/02/07 (t) ................. $1,494,000 $ 1,493,783 American General Finance Corp., 5.19%, due 5/11/07 ..................... 1,452,000 1,424,787 Barton Capital LLC, 5.26%, due 1/10/07 (t) ................. 1,494,000 1,492,035 Bryant Park Funding LLC, 5.25%, due 1/18/07 (t) ................. 1,540,000 1,536,182 CAFCO LLC, 5.26%, due 1/05/07 (t) ........ 1,416,000 1,415,172 CRC Funding LLC, 5.25%, due 1/11/07 (t) .. 1,494,000 1,491,821 Ciesco LLC, 5.26%, due 1/04/07 - 2/09/07 (t) .............. 1,450,000 1,446,998 Citibank Credit Card Issuance Trust, 5.27%, due 1/12/07 (t) ................. 1,474,000 1,471,626 Fairway Finance Corp., 5.265%, due 1/12/07 (t) ................ 1,000,000 998,391 Govco, Inc., 5.25%, due 1/18/07 (t) ...... 1,000,000 997,521 Govco, Inc., 5.26%, due 2/05/07 (t) ...... 496,000 493,464 Jupiter Securitization Co., LLC, 5.25%, due 1/25/07 - 2/01/07 (t) ....... 1,459,000 1,453,557 Kitty Hawk Funding Corp., 5.25%, due 3/30/07 (t) ................. 1,440,000 1,421,520 Old Line Funding LLC, 5.33%, due 1/02/07 (t) ................. 126,000 125,981 Old Line Funding LLC, 5.28%, due 1/26/07 (t) ................. 1,463,000 1,457,636 Ranger Funding Co. LLC, 5.25%, due 3/12/07 (t) ................. 1,468,000 1,453,014 Regency Markets No. 1, LLC, 5.28%, due 1/08/07 (t) ................. 700,000 699,281 Scaldis Capital LLC, 5.25%, due 1/16/07 (t) ................. 1,541,000 1,537,629 Sheffield Receivables Corp., 5.25%, due 1/22/07 (t) ................. 722,000 719,789 Thunder Bay Funding LLC, 5.25%, due 1/10/07 (t) ................. 1,542,000 1,539,976 Windmill Funding Corp., 5.26%, due 2/02/07 (t) ................. 1,458,000 1,451,183 ------------- $ 26,121,346 ------------- FOOD & BEVERAGES - 1.2% Archer Daniels Midland Co., 5.27%, due 1/17/07 (t) ................. $ 575,000 $ 573,653 ------------- MAJOR BANKS - 5.7% HBOS Treasury Services PLC, 5.26%, due 1/30/07 ..................... $ 368,000 $ 366,441 Royal Bank of Canada, 5.27%, due 2/05/07 ..................... 199,000 197,980 Royal Bank of Canada, 5.28%, due 2/05/07 ..................... 750,000 746,150 Societe Generale North America, 5.27%, due 2/09/07 ..................... 200,000 198,858 Societe Generale North America, 5.25%, due 3/08/07 ..................... 1,200,000 1,188,450 ------------- $ 2,697,879 ------------- OTHER BANKS & DIVERSIFIED FINANCIALS - 14.3% Calyon North America, Inc., 5.27%, due 2/20/07 ..................... $1,365,000 $ 1,355,075 Citigroup Funding, Inc., 5.245%, due 1/16/07 .................... 525,000 523,853 Citigroup Funding, Inc., 5.26%, due 2/15/07 ..................... 933,000 926,866 Depfa Bank PLC, 5.25%, due 1/22/07 (t) ... 1,570,000 1,565,192 Dexia Delaware LLC, 5.26%, due 1/16/07 ... 968,000 965,878 Svenska Handelsbanken, Inc., 5.23%, due 2/28/07 ..................... 1,467,000 1,454,639 ------------- $ 6,791,503 ------------- TOTAL COMMERCIAL PAPER, AT AMORTIZED COST AND VALUE ............................. $ 40,688,777 ------------- REPURCHASE AGREEMENTS - 5.9% Merrill Lynch, 5.32%, dated 12/29/06, due 1/02/07, total to be received $2,798,653 (secured by various U.S. Treasury and Federal Agency obligations and Mortgage Backed securities in a jointly traded account), at Cost ....... $2,797,000 $ 2,797,000 ------------- TOTAL INVESTMENTS, AT AMORTIZED COST AND VALUE ............................. $ 47,670,777 ------------- OTHER ASSETS, LESS LIABILITIES - (0.2)% ................................. (80,146) ------------- NET ASSETS - 100.0% ....................................... $ 47,590,631 ------------- See portfolio footnotes and notes to financial statements. PORTFOLIO OF INVESTMENTS -- December 31, 2006 TOTAL RETURN VARIABLE ACCOUNT ISSUER SHARES/PAR VALUE ($) COMMON STOCKS - 60.0% AEROSPACE - 2.0% Lockheed Martin Corp. .................... 20,970 $ 1,930,708 Northrop Grumman Corp. ................... 10,650 721,005 United Technologies Corp. ................ 15,590 974,687 ------------- $ 3,626,400 ------------- ALCOHOLIC BEVERAGES - 0.5% Diageo PLC ............................... 33,416 $ 656,122 Molson Coors Brewing Co. ................. 3,580 273,655 ------------- $ 929,777 ------------- APPAREL MANUFACTURERS - 0.4% Hanesbrands, Inc. (a) .................... 1,172 $ 27,683 NIKE, Inc., "B" .......................... 7,520 744,706 ------------- $ 772,389 ------------- AUTOMOTIVE - 0.3% Johnson Controls, Inc. ................... 6,250 $ 537,000 ------------- BIOTECHNOLOGY - 1.0% Amgen, Inc. (a) .......................... 22,710 $ 1,551,320 Millipore Corp. (a) ...................... 3,970 264,402 ------------- $ 1,815,722 ------------- BROADCASTING - 1.4% CBS Corp., "B" ........................... 26,684 $ 832,007 E.W. Scripps Co., "A" .................... 8,450 421,993 Idearc, Inc. (a) ......................... 2,601 74,519 Time Warner, Inc. ........................ 8,260 179,903 Viacom, Inc., "B" (a) .................... 11,475 470,819 Walt Disney Co. .......................... 4,210 144,277 WPP Group PLC ............................ 24,400 329,989 ------------- $ 2,453,507 ------------- BROKERAGE & ASSET MANAGERS - 2.5% Franklin Resources, Inc. ................. 5,300 $ 583,901 Goldman Sachs Group, Inc. ................ 4,930 982,795 KKR Private Equity Investments LP, IEU ... 6,600 150,810 Lehman Brothers Holdings, Inc. ........... 9,840 768,701 Mellon Financial Corp. ................... 20,200 851,430 Merrill Lynch & Co., Inc. ................ 7,650 712,215 Morgan Stanley ........................... 6,360 517,895 ------------- $ 4,567,747 ------------- BUSINESS SERVICES - 0.2% Accenture Ltd., "A" ...................... 11,290 $ 416,940 ------------- CHEMICALS - 1.1% 3M Co. ................................... 3,480 $ 271,196 Dow Chemical Co. ......................... 6,330 252,820 Nalco Holding Co. (a) .................... 12,180 249,203 PPG Industries, Inc. ..................... 11,010 706,952 Syngenta AG .............................. 2,460 457,529 ------------- $ 1,937,700 ------------- COMPUTER SOFTWARE - 1.4% Compuware Corp. (a) ...................... 163,480 $ 1,361,788 Oracle Corp. (a) ......................... 29,610 507,515 Symantec Corp. (a) ....................... 34,830 726,205 ------------- $ 2,595,508 ------------- COMPUTER SOFTWARE - SYSTEMS - 0.3% Hewlett-Packard Co. ...................... 14,480 $ 596,431 ------------- CONSTRUCTION - 1.5% D.R. Horton, Inc. ........................ 7,700 $ 203,973 Masco Corp. .............................. 77,310 2,309,250 Sherwin-Williams Co. ..................... 2,850 181,203 Toll Brothers, Inc. (a) .................. 2,760 88,955 ------------- $ 2,783,381 ------------- CONSUMER GOODS & SERVICES - 0.7% Alberto Culver Co. ....................... 20,510 $ 439,940 Estee Lauder Cos., Inc., "A" ............. 19,030 776,805 ------------- $ 1,216,745 ------------- CONTAINERS - 1.0% Owens-Illinois, Inc. (a) ................. 99,460 $ 1,835,037 Smurfit-Stone Container Corp. (a) ........ 6,080 64,205 ------------- $ 1,899,242 ------------- ELECTRICAL EQUIPMENT - 2.4% Cooper Industries Ltd., "A" .............. 750 $ 67,822 General Electric Co. ..................... 30,920 1,150,533 Rockwell Automation, Inc. ................ 7,760 473,981 Tyco International Ltd. .................. 70,130 2,131,952 W.W. Grainger, Inc. ...................... 6,620 463,003 ------------- $ 4,287,291 ------------- ELECTRONICS - 0.4% Analog Devices, Inc. ..................... 1,590 $ 52,263 Applied Materials, Inc. .................. 3,720 68,634 Intel Corp. .............................. 29,970 606,892 ------------- $ 727,789 ------------- ENERGY - INDEPENDENT - 2.1% Apache Corp. ............................. 22,790 $ 1,515,763 Devon Energy Corp. ....................... 28,190 1,890,985 EOG Resources, Inc. ...................... 3,310 206,709 Sunoco, Inc. ............................. 3,500 218,260 ------------- $ 3,831,717 ------------- ENERGY - INTEGRATED - 3.7% Chevron Corp. ............................ 8,935 $ 656,991 ConocoPhillips ........................... 10,170 731,731 Exxon Mobil Corp. ........................ 31,742 2,432,389 Hess Corp. ............................... 28,550 1,415,224 Royal Dutch Shell PLC, ADR ............... 2,560 181,222 TOTAL S.A., ADR .......................... 18,870 1,357,130 ------------- $ 6,774,687 ------------- FOOD & BEVERAGES - 1.5% Coca-Cola Co. ............................ 6,970 $ 336,302 General Mills, Inc. ...................... 3,170 182,592 Kellogg Co. .............................. 13,550 678,313 Nestle S.A ............................... 1,694 601,774 PepsiCo, Inc. ............................ 7,660 479,133 Tyson Foods, Inc., "A" ................... 22,190 365,025 ------------- $ 2,643,139 ------------- FOOD & DRUG STORES - 0.4% CVS Corp. ................................ 14,430 $ 446,031 Kroger Co. ............................... 6,930 159,875 Sally Beauty Holdings, Inc. (a) .......... 22,810 177,918 ------------- $ 783,824 ------------- FOREST & PAPER PRODUCTS - 0.7% Bowater, Inc. ............................ 35,930 $ 808,425 International Paper Co. .................. 5,100 173,910 MeadWestvaco Corp. ....................... 7,940 238,676 ------------- $ 1,221,011 ------------- GENERAL MERCHANDISE - 0.6% Federated Department Stores, Inc. ........ 26,010 $ 991,761 Wal-Mart Stores, Inc. .................... 3,490 161,168 ------------- $ 1,152,929 ------------- HEALTH MAINTENANCE ORGANIZATIONS - 0.5% UnitedHealth Group, Inc. ................. 1,880 $ 101,012 WellPoint, Inc. (a) ...................... 9,120 717,653 ------------- $ 818,665 ------------- INSURANCE - 5.2% Aflac, Inc. .............................. 9,930 $ 456,780 Allstate Corp. ........................... 33,570 2,185,743 Chubb Corp. .............................. 4,120 217,989 Conseco, Inc. (a) ........................ 60,200 1,202,796 Genworth Financial, Inc., "A" ............ 66,020 2,258,544 Hartford Financial Services Group, Inc. .. 9,380 875,248 MetLife, Inc. ............................ 17,370 1,025,004 St. Paul Travelers Cos., Inc. ............ 21,920 1,176,885 ------------- $ 9,398,989 ------------- LEISURE & TOYS - 0.3% Hasbro, Inc. ............................. 3,910 $ 106,548 Mattel, Inc. ............................. 22,260 504,412 ------------- $ 610,960 ------------- MACHINERY & TOOLS - 0.7% Deere & Co. .............................. 13,210 $ 1,255,875 Finning International, Inc. (n) .......... 440 18,051 Illinois Tool Works, Inc. ................ 1,450 66,975 ------------- $ 1,340,901 ------------- MAJOR BANKS - 6.3% Bank of America Corp. .................... 66,418 $ 3,546,057 Bank of New York Co., Inc. ............... 66,530 2,619,286 JPMorgan Chase & Co. ..................... 58,342 2,817,919 PNC Financial Services Group, Inc. ....... 17,060 1,263,122 SunTrust Banks, Inc. ..................... 14,640 1,236,348 ------------- $ 11,482,732 ------------- MEDICAL & HEALTH TECHNOLOGY & SERVICES - 0.4% Caremark Rx, Inc. ........................ 5,550 $ 316,960 Tenet Healthcare Corp. (a) ............... 65,340 455,420 ------------- $ 772,380 ------------- MEDICAL EQUIPMENT - 1.1% Boston Scientific Corp. (a) .............. 44,010 $ 756,092 Pall Corp. ............................... 33,540 1,158,807 ------------- $ 1,914,899 ------------- METALS & MINING - 0.1% BHP Billiton PLC ......................... 11,240 $ 205,727 ------------- NATURAL GAS - DISTRIBUTION - 0.1% Questar Corp. ............................ 2,150 $ 178,557 ------------- NATURAL GAS - PIPELINE - 0.6% Williams Cos., Inc. ...................... 38,800 $ 1,013,456 ------------- NETWORK & TELECOM - 1.4% Cisco Systems, Inc. (a) .................. 17,510 $ 478,548 Nortel Networks Corp. (a) ................ 75,337 2,013,758 ------------- $ 2,492,306 ------------- OIL SERVICES - 0.9% GlobalSantaFe Corp. ...................... 13,480 $ 792,354 Noble Corp. .............................. 10,985 836,508 ------------- $ 1,628,862 ------------- OTHER BANKS & DIVERSIFIED FINANCIALS - 3.8% American Express Co. ..................... 10,460 $ 634,608 Capital One Financial Corp. .............. 2,630 202,037 Citigroup, Inc. .......................... 48,576 2,705,683 Countrywide Financial Corp. .............. 8,100 343,845 Fannie Mae ............................... 19,130 1,136,131 Freddie Mac .............................. 2,490 169,071 New York Community Bancorp, Inc. ......... 41,110 661,871 SLM Corp. ................................ 4,740 231,170 UBS AG ................................... 7,572 460,010 UBS AG ................................... 6,330 381,889 ------------- $ 6,926,315 ------------- PHARMACEUTICALS - 3.2% Abbott Laboratories ...................... 4,050 $ 197,275 Eli Lilly & Co. .......................... 14,350 747,635 Johnson & Johnson ........................ 29,380 1,939,668 Merck & Co., Inc. ........................ 8,730 380,628 Warner Chilcott Ltd., "A" (a) ............ 23,360 322,835 Wyeth .................................... 43,390 2,209,419 ------------- $ 5,797,460 ------------- PRINTING & PUBLISHING - 0.9% New York Times Co., "A" .................. 65,610 $ 1,598,260 ------------- RAILROAD & SHIPPING - 0.6% Burlington Northern Santa Fe Corp. ....... 7,600 $ 560,956 Norfolk Southern Corp. ................... 10,960 551,178 ------------- $ 1,112,134 ------------- SPECIALTY CHEMICALS - 0.4% Air Products & Chemicals, Inc. ........... 7,610 $ 534,831 Praxair, Inc. ............................ 3,630 215,368 ------------- $ 750,199 ------------- SPECIALTY STORES - 0.4% OfficeMax, Inc. .......................... 16,060 $ 797,379 ------------- TELECOMMUNICATIONS - WIRELESS - 0.2% Vodafone Group PLC, ADR .................. 12,869 $ 357,501 ------------- TELEPHONE SERVICES - 2.2% AT&T, Inc. ............................... 15,604 $ 557,843 Embarq Corp. ............................. 8,700 457,272 Qwest Communications International, Inc. (a) ............................... 27,000 225,990 Sprint Nextel Corp. ...................... 26,600 502,474 TELUS Corp. .............................. 4,130 189,748 TELUS Corp. (non-voting shares) .......... 1,300 58,064 Verizon Communications, Inc. ............. 56,390 2,099,964 ------------- $ 4,091,355 ------------- TOBACCO - 1.8% Altria Group, Inc. ....................... 37,460 $ 3,214,817 ------------- TRUCKING - 0.0% Con-way, Inc. ............................ 610 $ 26,864 ------------- UTILITIES - ELECTRIC POWER - 2.8% Dominion Resources, Inc. ................. 11,640 $ 975,898 Edison International ..................... 5,890 267,877 Entergy Corp. ............................ 2,560 236,339 FirstEnergy Corp. ........................ 4,500 271,350 FPL Group, Inc. .......................... 41,150 2,239,383 NRG Energy, Inc. (a) ..................... 6,230 348,942 PPL Corp. ................................ 2,480 88,883 Public Service Enterprise Group, Inc. .... 6,640 440,763 TXU Corp. ................................ 4,550 246,655 ------------- $ 5,116,090 ------------- TOTAL COMMON STOCKS (IDENTIFIED COST, $91,766,887) .......................... $ 109,217,684 ------------- BONDS - 39.1% AEROSPACE - 0.1% Boeing Capital Corp., 6.5%, 2012 ......... $ 263,000 $ 277,302 ------------- AGENCY - OTHER - 0.0% Financing Corp., 9.65%, 2018 ............. $ 45,000 $ 62,859 ------------- ASSET BACKED & SECURITIZED - 4.4% Banc of America Commercial Mortgage, Inc., FRN, 4.857%, 2043 ...................... $ 200,000 $ 193,736 Banc of America Commercial Mortgage, Inc., FRN, 5.1814%, 2047 ..................... 102,153 101,415 Banc of America Commercial Mortgage, Inc., FRN, 5.1814%, 2047 ..................... 100,000 99,366 Bayview Financial Revolving Mortgage Loan Trust, FRN, 6.15%, 2040 (z) ............ 250,000 250,335 Bear Stearns Commercial Mortgage Securities, Inc., FRN, 5.116%, 2041 .... 82,288 81,191 Blackrock Capital Finance LP, 7.75%, 2026 (n) ........................ 41,414 41,000 Chase Commercial Mortgage Securities Corp., 7.543%, 2032 .................... 54,894 56,026 Citigroup Commercial Mortgage Trust, 5.462%, 2049 ........................... 219,581 220,459 Citigroup/Deutsche Bank Commercial Mortgage Trust, 5.648%, 2048 ........... 200,000 203,762 Citigroup/Deutsche Bank Commercial Mortgage Trust, FRN, 5.2255%, 2044 ..... 200,000 199,637 Countrywide Asset-Backed Certificates, FRN, 4.823%, 2035 ...................... 66,606 66,133 Countrywide Asset-Backed Certificates, FRN, 5.689%, 2036 ...................... 90,000 90,218 Credit Suisse Commercial Mortgage Trust, 5.509%, 2039 ........................... 128,277 129,288 Credit Suisse Mortgage Capital Certificate, 5.343%, 2039 .............. 220,000 218,724 CRIIMI MAE CMBS Corp., 6.7%, 2030 (n) .... 71,367 71,237 CRIIMI MAE Commercial Mortgage Trust, 7%, 2033 (n) ........................... 161,348 159,621 Deutsche Mortgage & Asset Receiving Corp., 6.538%, 2031 ........................... 106,563 107,267 Falcon Franchise Loan LLC, 7.382%, 2010 (n) ....................... 39,740 40,746 GE Commercial Mortgage Corp., FRN, 5.3394%, 2044 .......................... 130,000 130,180 GMAC Mortgage Corp. Loan Trust, FRN, 5.805%, 2036 ........................... 115,000 115,058 Greenwich Capital Commercial Funding Corp., 4.305%, 2042 .................... 107,385 104,540 Greenwich Capital Commercial Funding Corp., FRN, 5.317%, 2036 ............... 60,728 60,667 Greenwich Capital Commercial Funding Corp., FRN, 5.9123%, 2038 .............. 100,000 104,486 JPMorgan Chase Commercial Mortgage Securities Corp., 4.78%, 2042 .......... 152,000 145,936 JPMorgan Chase Commercial Mortgage Securities Corp., 5.552%, 2045 ......... 210,000 213,016 JPMorgan Chase Commercial Mortgage Securities Corp., 5.44%, 2045 (z) ...... 106,496 106,845 JPMorgan Chase Commercial Mortgage Securities Corp., 5.372%, 2047 ......... 170,000 169,815 JPMorgan Chase Commercial Mortgage Securities Corp., FRN, 5.2115%, 2041 ... 39,903 39,754 JPMorgan Chase Commercial Mortgage Securities Corp., FRN, 5.2943%, 2043 ... 200,000 200,181 JPMorgan Chase Commercial Mortgage Securities Corp., FRN, 5.475%, 2043 .... 210,000 211,851 JPMorgan Chase Commercial Mortgage Securities Corp., FRN, 5.855%, 2043 .... 200,000 207,358 JPMorgan Chase Commercial Mortgage Securities Corp., FRN, 5.8755%, 2045 ... 210,000 219,391 JPMorgan Chase Commercial Mortgage Securities Corp., FRN, 5.038%, 2046 .... 197,476 193,618 LB-UBS Commercial Mortgage Trust, FRN, 5.413%, 2039 ........................... 56,518 56,651 Merrill Lynch Mortgage Trust, FRN, 5.6601%, 2039 .......................... 197,000 202,212 Merrill Lynch Mortgage Trust, FRN, 5.2643%, 2044 .......................... 88,000 87,829 Merrill Lynch/Countrywide Commercial Mortgage Trust, FRN, 5.204%, 2049 ...... 220,000 216,545 Morgan Stanley Capital I, Inc., 5.168%, 2042 ........................... 48,533 47,978 Morgan Stanley Capital I, Inc., FRN, 0.5376%, 2030 (i)(n) ................... 7,288,683 91,575 Multi-Family Capital Access One, Inc., 6.65%, 2024 ............................ 43,344 44,006 Residential Asset Mortgage Products, Inc., 4.109%, 2035 ........................... 112,691 111,174 Residential Asset Mortgage Products,Inc., FRN, 4.9708%, 2034 ..................... 92,000 89,923 Residential Funding Mortgage Securities, Inc., FRN, 5.32%, 2035 ................. 129,000 128,080 Spirit Master Funding LLC, 5.05%, 2023 (z) 187,677 180,672 Structured Asset Securities Corp., FRN, 4.67%, 2035 ............................ 298,098 294,792 Wachovia Bank Commercial Mortgage Trust, 4.935%, 2042 ........................... 240,000 233,583 Wachovia Bank Commercial Mortgage Trust, 5.339%, 2048 ........................... 220,000 218,876 Wachovia Bank Commercial Mortgage Trust, FRN, 4.847%, 2041 ...................... 50,000 48,429 Wachovia Bank Commercial Mortgage Trust, FRN, 5.083%, 2042 ...................... 185,000 181,676 Wachovia Bank Commercial Mortgage Trust, FRN, 5.118%, 2042 ...................... 200,000 196,780 Wachovia Bank Commercial Mortgage Trust, FRN, 5.1959%, 2044 ..................... 130,000 129,150 Wachovia Bank Commercial Mortgage Trust, FRN, 5.3161%, 2044 ..................... 149,000 148,882 Wachovia Bank Commercial Mortgage Trust, FRN, 5.466%, 2045 ...................... 189,000 189,966 Wachovia Bank Commercial Mortgage Trust, FRN, 5.962%, 2045 (n) .................. 140,000 146,564 Wachovia Bank Commercial Mortgage Trust, FRN, 5.795%, 2045 ...................... 150,000 154,343 Wachovia Bank Commercial Mortgage Trust, FRN, 5.603%, 2048 ...................... 200,000 202,782 ------------- $ 7,955,325 ------------- AUTOMOTIVE - 0.1% Johnson Controls, Inc., 5.5%, 2016 ....... $ 136,000 $ 133,347 ------------- BROADCASTING - 0.2% CBS Corp., 6.625%, 2011 .................. $ 137,000 $ 141,503 News America Holdings, 8.5%, 2025 ........ 99,000 117,168 News America, Inc., 6.2%, 2034 ........... 42,000 40,539 ------------- $ 299,210 ------------- BROKERAGE & ASSET MANAGERS - 0.6% Goldman Sachs Group, Inc., 5.7%, 2012 ............................. $ 137,000 $ 139,526 Lehman Brothers Holdings, Inc., 8.25%, 2007 ............................ 334,000 338,315 Merrill Lynch & Co., Inc., 5.45%, 2014 ... 127,000 127,678 Merrill Lynch & Co., Inc., 6.05%, 2016 ... 200,000 207,008 Morgan Stanley Group, Inc., 6.75%, 2011 ............................ 156,000 164,888 Morgan Stanley Group, Inc., 4.75%, 2014 ............................ 78,000 74,578 ------------- $ 1,051,993 ------------- BUILDING - 0.2% CRH America, Inc., 6.95%, 2012 ........... $ 208,000 $ 219,857 Lafarge S.A., 6.5%, 2016 ................. 74,000 77,265 ------------- $ 297,122 ------------- BUSINESS SERVICES - 0.1% Cisco Systems, Inc., 5.5%, 2016 .......... $ 135,000 $ 135,086 ------------- CABLE TV - 0.3% Cox Communications, Inc., 4.625%, 2013 ... $ 159,000 $ 149,610 TCI Communications Financing III, 9.65%, 2027 ............................ 425,000 448,415 ------------- $ 598,025 ------------- CONGLOMERATES - 0.1% Kennametal, Inc., 7.2%, 2012 ............. $ 211,000 $ 222,201 ------------- CONSUMER GOODS & SERVICES - 0.2% Fortune Brands, Inc., 5.125%, 2011 ....... $ 158,000 $ 155,044 Western Union Co., 5.4%, 2011 (n) ........ 210,000 207,076 ------------- $ 362,120 ------------- DEFENSE ELECTRONICS - 0.1% BAE Systems Holdings, Inc., 5.2%, 2015 (n) $ 103,000 $ 98,112 Raytheon Co., 6.15%, 2008 ................ 114,000 115,459 ------------- $ 213,571 ------------- EMERGING MARKET QUASI-SOVEREIGN - 0.0% Pemex Project Funding Master Trust, 8.625%, 2022 ........................... $ 39,000 $ 48,204 ------------- EMERGING MARKET SOVEREIGN - 0.2% State of Israel, 4.625%, 2013 ............ $ 112,000 $ 106,576 United Mexican States, 6.375%, 2013 ...... 111,000 116,716 United Mexican States, 6.625%, 2015 ...... 10,000 10,735 United Mexican States, 5.625%, 2017 ...... 100,000 100,100 ------------- $ 334,127 ------------- ENERGY - INDEPENDENT - 0.3% Anadarko Petroleum Corp., 5.95%, 2016 .... $ 80,000 $ 80,167 Nexen, Inc., 5.875%, 2035 ................ 100,000 93,608 Ocean Energy, Inc., 7.25%, 2011 .......... 165,000 176,039 XTO Energy, Inc., 5.65%, 2016 ............ 190,000 187,830 ------------- $ 537,644 ------------- ENTERTAINMENT - 0.2% Walt Disney Co., 6.375%, 2012 ............ $ 156,000 $ 163,493 Walt Disney Co., 5.625%, 2016 ............ 137,000 137,953 ------------- $ 301,446 ------------- FINANCIAL INSTITUTIONS - 0.5% American Express Co., 5.5%, 2016 ......... $ 200,000 $ 201,591 Capital One Financial Co., 6.15%, 2016 ... 130,000 134,448 Countrywide Financial Corp., 6.25%, 2016 ............................ 171,000 174,289 General Electric Capital Corp., 8.75%, 2007 ............................ 130,000 131,643 HSBC Finance Corp., 5.25%, 2011 .......... 145,000 145,004 ORIX Corp., 5.48%, 2011 .................. 210,000 209,595 ------------- $ 996,570 ------------- FOOD & BEVERAGES - 0.3% Diageo Finance B.V., 5.5%, 2013 .......... $ 190,000 $ 189,632 Miller Brewing Co., 5.5%, 2013 (n) ....... 276,000 272,936 ------------- $ 462,568 ------------- FOOD & DRUG STORES - 0.1% CVS Corp., 5.75%, 2011 ................... $ 70,000 $ 70,842 CVS Corp., 6.125%, 2016 .................. 110,000 113,498 ------------- $ 184,340 ------------- FOREST & PAPER PRODUCTS - 0.0% MeadWestvaco Corp., 6.8%, 2032 ........... $ 69,000 $ 65,619 ------------- GAMING & LODGING - 0.1% Marriott International, Inc., 6.2%, 2016 .. $ 164,000 $ 165,392 Wyndham Worldwide Corp., 6%, 2016 (n) .... 100,000 98,241 ------------- $ 263,633 ------------- INSURANCE - 0.5% AIG SunAmerica Institutional Funding II, 5.75%, 2009 ............................ $ 441,000 $ 445,406 American International Group, 5.05%, 2015 ............................ 150,000 145,856 ING Groep N.V., 5.775% to 2015, FRN to 2049 ............................ 223,000 220,664 MetLife, Inc., 6.5%, 2032 ................ 48,000 52,009 ------------- $ 863,935 ------------- INSURANCE - PROPERTY & CASUALTY - 0.2% Allstate Corp., 6.125%, 2032 ............. $ 185,000 $ 192,781 Fund American Cos., Inc., 5.875%, 2013 ........................... 117,000 116,301 ------------- $ 309,082 ------------- INTERNATIONAL MARKET QUASI-SOVEREIGN - 0.3% Hydro-Quebec, 6.3%, 2011 ................. $ 262,000 $ 273,857 Providence of Ontario, 5%, 2011 .......... 200,000 199,699 ------------- $ 473,556 ------------- MAJOR BANKS - 1.2% Bank of America Corp., 5.375%, 2014 ...... $ 110,000 $ 109,962 Bank of America Corp., 5.49%, 2019 (n) ... 100,000 98,523 DBS Capital Funding Corp., 7.657% to 2011, FRN to 2049 (n) ........ 170,000 182,825 HBOS Capital Funding LP, 6.071% to 2014, FRN to 2049 (n) ........ 100,000 101,396 MUFG Capital Finance 1 Ltd., 6.346% to 2016, FRN to 2049 ............ 200,000 202,978 Socgen Real Estate LLC, 7.64% to 2007, FRN to 2049 (n) ........................ 361,000 366,580 UniCredito Italiano Capital Trust II, 9.2% to 2010, FRN to 2049 (n) .......... 208,000 233,399 Wachovia Corp., 5.25%, 2014 .............. 343,000 338,822 Wells Fargo National Bank, 4.75%, 2015 ... 315,000 301,583 Wells Fargo National Bank, 5.75%, 2016 ... 250,000 256,042 ------------- $ 2,192,110 ------------- MEDICAL & HEALTH TECHNOLOGY & SERVICES - 0.3% Baxter International, Inc., 5.9%, 2016 ... $ 136,000 $ 139,710 Cardinal Health, Inc., 5.85%, 2017 ....... 175,000 174,016 HCA, Inc., 8.75%, 2010 ................... 40,000 41,700 HCA, Inc., 6.95%, 2012 ................... 139,000 131,702 ------------- $ 487,128 ------------- METALS & MINING - 0.1% Vale Overseas Ltd., 6.25%, 2017 .......... $ 150,000 $ 150,682 ------------- MORTGAGE BACKED - 14.2% Fannie Mae, 5.722%, 2009 ................. $ 415,000 $ 415,754 Fannie Mae, 4.01%, 2013 .................. 19,027 17,892 Fannie Mae, 4.519%, 2014 ................. 173,592 167,219 Fannie Mae, 4.63%, 2014 .................. 47,074 45,377 Fannie Mae, 4.848%, 2014 ................. 71,672 70,296 Fannie Mae, 4.925%, 2015 ................. 265,111 260,918 Fannie Mae, 5.5%, 2016 - 2036 ............ 9,014,854 8,933,739 Fannie Mae, 6%, 2017 - 2036 .............. 3,008,676 3,038,068 Fannie Mae, 4.5%, 2018 - 2035 ............ 1,046,861 1,003,268 Fannie Mae, 5%, 2018 - 2035 .............. 2,819,792 2,749,624 Fannie Mae, 6.5%, 2031 - 2036 ............ 876,399 896,110 Fannie Mae, 7.5%, 2031 ................... 31,057 32,313 Freddie Mac, 6%, 2016 - 2036 ............. 1,543,637 1,559,733 Freddie Mac, 5%, 2017 - 2035 ............. 2,311,029 2,239,844 Freddie Mac, 4.5%, 2018 - 2035 ........... 853,985 820,417 Freddie Mac, 5.5%, 2020 - 2035 ........... 1,723,339 1,709,779 Freddie Mac, 6.5%, 2034 .................. 219,014 223,288 Ginnie Mae, 4.5%, 2033 - 2034 ............ 155,668 146,643 Ginnie Mae, 5%, 2033 - 2034 .............. 170,607 165,886 Ginnie Mae, 5.5%, 2033 - 2035 ............ 763,166 760,278 Ginnie Mae, 6%, 2033 - 2034 .............. 454,636 461,362 Ginnie Mae, 6.5%, 2035 - 2036 ............ 95,928 98,066 ------------- $ 25,815,874 ------------- NATURAL GAS - PIPELINE - 0.2% CenterPoint Energy Resources Corp., 7.875%, 2013 ........................... $ 82,000 $ 90,980 Kinder Morgan Energy Partners LP, 6.75%, 2011 ............................ 165,000 171,680 Kinder Morgan Energy Partners LP, 5.125%, 2014 ........................... 46,000 43,810 Kinder Morgan Energy Partners LP, 7.75%, 2032 ............................ 71,000 80,856 ------------- $ 387,326 ------------- NETWORK & TELECOM - 0.4% AT&T, Inc., 6.15%, 2034 .................. $ 139,000 $ 136,716 BellSouth Corp., 6.55%, 2034 ............. 146,000 149,668 Telecom Italia Capital, 5.25%, 2013 ...... 60,000 57,209 Telefonica Europe B.V., 7.75%, 2010 ...... 50,000 53,702 Verizon New York, Inc., 6.875%, 2012 ..... 286,000 296,501 ------------- $ 693,796 ------------- OIL SERVICES - 0.0% Halliburton Co., 5.5%, 2010 .............. $ 50,000 $ 49,911 ------------- OILS - 0.1% Valero Energy Corp., 6.875%, 2012 ........ $ 111,000 $ 117,361 ------------- OTHER BANKS & DIVERSIFIED FINANCIALS - 0.8% Citigroup, Inc., 5%, 2014 ................ $ 250,000 $ 244,099 Credit Suisse (USA), Inc., 4.125%, 2010 .. 171,000 165,900 Credit Suisse (USA), Inc., 4.875%, 2010 .. 121,000 119,684 Mizuho Capital Investment 1 Ltd., 6.686% to 2016, FRN to 2049 (n) ........ 190,000 191,695 Nordea Bank AB, 5.424% to 2015, FRN to 2049 (n) ........................ 100,000 95,920 UBS AG, 5.875%, 2016 ..................... 140,000 144,700 UBS Preferred Funding Trust V, 6.243% to 2016, FRN to 2049 ............ 190,000 196,743 UFJ Finance Aruba AEC, 6.75%, 2013 ....... 145,000 154,739 Woori Bank, 6.125% to 2011, FRN to 2016 (n) ........................ 220,000 224,396 ------------- $ 1,537,876 ------------- PHARMACEUTICALS - 0.2% Allergan, Inc., 5.75%, 2016 .............. $ 160,000 $ 161,812 Wyeth, 5.5%, 2013 ........................ 123,000 123,796 ------------- $ 285,608 ------------- POLLUTION CONTROL - 0.1% Waste Management, Inc., 7.375%, 2010 ..... $ 134,000 $ 142,537 ------------- RAILROAD & SHIPPING - 0.0% CSX Corp., 6.75%, 2011 ................... $ 35,000 $ 36,750 Union Pacific Corp., 6.125%, 2012 ........ 50,000 51,510 ------------- $ 88,260 ------------- REAL ESTATE - 0.6% Boston Properties, Inc., REIT, 5%, 2015 .. $ 42,000 $ 40,375 EOP Operating LP, 6.8%, 2009 ............. 29,000 29,967 HRPT Properties Trust, REIT, 6.25%, 2016 ............................ 180,000 185,535 Kimco Realty Corp., REIT, 5.783%, 2016 ... 100,000 101,275 ProLogis, REIT, 5.75%, 2016 .............. 179,000 180,093 Simon Property Group LP, REIT, 5.1%, 2015 ............................. 193,000 187,706 Vornado Realty Trust, REIT, 5.625%, 2007 ........................... 383,000 382,746 ------------- $ 1,107,697 ------------- RETAILERS - 0.3% Federated Retail Holdings, Inc., 5.9%, 2016 ............................. $ 160,000 $ 159,751 Home Depot, Inc., 5.4%, 2016 ............. 122,000 119,322 Limited Brands, Inc., 5.25%, 2014 ........ 165,000 156,770 Wal-Mart Stores, Inc., 5.25%, 2035 ....... 194,000 178,150 ------------- $ 613,993 ------------- TELECOMMUNICATIONS - WIRELESS - 0.0% Cingular Wireless LLC, 6.5%, 2011 ........ $ 35,000 $ 36,674 ------------- U.S. GOVERNMENT AGENCIES - 1.9% Aid-Egypt, 4.45%, 2015 ................... $ 152,000 $ 146,879 Fannie Mae, 3%, 2007 ..................... 244,000 243,125 Fannie Mae, 5.25%, 2007 .................. 397,000 397,081 Fannie Mae, 6.625%, 2009 - 2010 .......... 1,428,000 1,507,351 Fannie Mae, 6%, 2011 ..................... 165,000 171,803 Federal Home Loan Bank, 3.9%, 2008 ....... 40,000 39,432 Small Business Administration, 4.35%, 2023 40,577 38,853 Small Business Administration, 4.77%, 2024 101,886 99,531 Small Business Administration, 4.99%, 2024 138,859 137,179 Small Business Administration, 5.18%, 2024 164,267 164,042 Small Business Administration, 5.52%, 2024 237,033 240,154 Small Business Administration, 4.95%, 2025 106,793 104,502 Small Business Administration, 5.09%, 2025 130,227 129,004 Small Business Administration, 5.39%, 2025 101,146 101,828 ------------- $ 3,520,764 ------------- U.S. TREASURY OBLIGATIONS - 8.4% U.S. Treasury Bonds, 6.5%, 2010 .......... $ 128,000 $ 134,465 U.S. Treasury Bonds, 10.375%, 2012 ....... 140,000 146,223 U.S. Treasury Bonds, 8%, 2021 ............ 37,000 49,048 U.S. Treasury Bonds, 6.25%, 2023 ......... 511,000 588,169 U.S. Treasury Bonds, 6%, 2026 ............ 393,000 445,717 U.S. Treasury Bonds, 5.375%, 2031 ........ 1,912,000 2,048,081 U.S. Treasury Bonds, 4.5%, 2036 .......... 175,000 166,414 U.S. Treasury Notes, 4.375%, 2007 ........ 146,000 145,635 U.S. Treasury Notes, 5.625%, 2008 ........ 1,855,000 1,871,957 U.S. Treasury Notes, 3.125%, 2008 ........ 2,315,000 2,248,173 U.S. Treasury Notes, 4.75%, 2008 ......... 942,000 940,786 U.S. Treasury Notes, 3.125%, 2009 ........ 3,000,000 2,893,827 U.S. Treasury Notes, 4%, 2009 ............ 23,000 22,604 U.S. Treasury Notes, 5.125%, 2011 ........ 1,400,000 1,423,625 U.S. Treasury Notes, 3.875%, 2013 ........ 199,000 190,457 U.S. Treasury Notes, 4.25%, 2013 ......... 250,000 243,398 U.S. Treasury Notes, 4.75%, 2014 ......... 150,000 150,387 U.S. Treasury Notes, TIPS, 4.25%, 2010 ... 802,566 844,701 U.S. Treasury Notes, TIPS, 2%, 2014 ...... 713,298 692,902 ------------- $ 15,246,569 ------------- UTILITIES - ELECTRIC POWER - 1.2% Dominion Resources, Inc., 5.15%, 2015 .... $ 141,000 $ 136,574 Duke Capital Corp., 8%, 2019 ............. 53,000 61,615 Exelon Generation Co. LLC, 6.95%, 2011 ... 74,000 77,957 FirstEnergy Corp., 6.45%, 2011 ........... 209,000 217,947 MidAmerican Energy Holdings Co., 3.5%, 2008 ............................. 118,000 115,054 MidAmerican Energy Holdings Co., 5.875%, 2012 ........................... 61,000 62,095 MidAmerican Funding LLC, 6.927%, 2029 .... 454,000 503,973 Oncor Electric Delivery Co., 7%, 2022 .... 152,000 163,500 Pacific Gas & Electric Co., 4.8%, 2014 ... 45,000 43,134 Progress Energy, Inc., 7.1%, 2011 ........ 96,000 102,235 PSEG Power LLC, 6.95%, 2012 .............. 71,000 75,061 PSEG Power LLC, 5.5%, 2015 ............... 90,000 88,088 System Energy Resources, Inc., 5.129%, 2014 (n) ....................... 94,907 92,671 TXU Energy Co., 7%, 2013 ................. 132,000 138,119 Waterford 3 Funding Corp., 8.09%, 2017 ... 332,449 334,906 ------------- $ 2,212,929 ------------- TOTAL BONDS (IDENTIFIED COST, $71,534,952) .......................... $ 71,135,980 ------------- SHORT-TERM OBLIGATIONS - 0.8% General Electric Capital Corp., 5.29%, due 1/02/07, at Amortized Cost and Value (y) .......................... $1,450,000 $ 1,449,787 ------------- TOTAL INVESTMENTS (IDENTIFIED COST, $164,751,626) (k) ..................... $ 181,803,451 ------------- OTHER ASSETS, LESS LIABILITIES - 0.1% ................................... 230,012 ------------- NET ASSETS - 100.0% ....................................... $ 182,033,463 ------------- See portfolio footnotes and notes to financial statements. Portfolio Footnotes: (a) Non-income producing security. (f) All or portion of the security has been segregated as collateral for an open futures contract. (g) The rate shown represents a weighted average coupon rate on settled positions at period end. (i) Interest only security for which the variable account receives interest on notional principal (Par amount). Par amount shown is the notional principal and does not reflect the cost of the security. (k) As of December 31, 2006, the Variable Accounts held securities fair valued in accordance with the policies adopted by the Board of Managers. An independent pricing service provided an evaluated bid for a percent of the market value.
% OF EVALUATED VARIABLE ACCOUNT MARKET VALUE MARKET VALUE BID % - ----------------------------------------------------------------------------------------------------------------------------- Global Governments Variable Account ................................... $ 8,399,358 90.80% 89.47% Government Securities Variable Account ................................ 76,985,867 98.79 98.31 High Yield Variable Account ........................................... 52,069,423 88.66 88.66(1) Total Return Variable Account ......................................... 69,920,545 38.44 38.35 (1) Non evaluated bid percentage less than 0.01%. (n) Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be sold in the ordinary course of business in transactions exempt from registration, normally to qualified institutional buyers. At period end, the aggregate valu e of these securities was: % OF VARIABLE ACCOUNT MARKET VALUE NET ASSETS ---------------------------------------------------------------------------------------------------------------------- Global Governments Variable Account .............................................. $ 390,620 4.3% Government Securities Variable Account ........................................... 702,666 0.9 High Yield Variable Account ...................................................... 9,937,013 16.8 Total Return Variable Account .................................................... 2,920,249 1.6 (o) All or portion of this position has not settled. Upon settlement date, interest rates will be determined. (p) Payment-in-kind security. (r) Remaining maturities of floating rate loans may be less than stated maturities shown as a result of contractual or optional prep ayments by the borrower. Such prepayments cannot be predicted with certainty. These loans may be subject to restrictions on resale. Floating ra te loans generally have rates of interest which are determined periodically by reference to a base lending rate plus a premium. (t) Security exempt from registration with the U.S. Securities and Exchange Commission under Section 4(2) of the Securities Act of 1 933. (y) The rate shown represents an annualized yield at time of purchase. (z) Restricted securities are not registered under the Securities Act of 1933 and are subject to legal restrictions on resale. These securities generally may be resold in transactions exempt from registration or to the public if the securities are subsequently registered. Disposal of these securities may involve time-consuming negotiations and prompt sale at an acceptable price may be difficult. The variable a ccounts hold the following restricted securities: ACQUISITION ACQUISITION CURRENT TOTAL % OF VARIABLE ACCOUNT RESTRICTED SECURITIES DATE COST MARKET VALUE NET ASSETS - -------------------------------------------------------------------------------------------------------------------------------- GLOBAL GOVERNMENTS JPMorgan Chase Commercial Mortgage VARIABLE ACCOUNT Securities Corp., 5.44%, 2045 ......... 9/22/06 $ 19,252 $ 19,219 0.2% ========== ==== HIGH YIELD Aleris International, Inc., 10%, 2016 ... 12/13/06 $100,000 $ 101,000 VARIABLE ACCOUNT Amsted Industries, Inc., 10.25%, 2011 ... 8/08/03 - 4/25/06 319,950 321,000 Asset Securitization Corp., FRN, 8.3571%, 2029 .................... 1/25/05 172,565 216,317 Esco Corp., 8.625%, 2013 ................ 12/12/06 80,000 82,200 Griffin Coal Mining Co., 9.5%, 2016 ..... 11/10/06 143,000 147,290 Knology, Inc. ........................... 10/16/97 0 1,249 Knowledge Learning Corp., 7.75%, 2015 ... 1/28/05 125,000 119,688 Masonite Corp., 11%, 2015 ............... 11/07/06 - 12/05/06 188,606 189,625 Wachovia Credit, CDO, FRN, 6.7156%, 2026 ......................... 6/08/06 250,000 250,625 Williams Partners LP, 7.25%, 2017 ....... 12/06/06 140,000 142,800 Wimar Opco LLC, 9.625%, 2014 ............ 12/14/06 165,000 163,350 - ----------------------------------------------------------------------------------------------------------------------------- Total Restricted Securities ............. $1,735,144 2.9% ========== ==== TOTAL RETURN Bayview Financial Revolving Mortgage VARIABLE ACCOUNT Loan Trust, FRN, 6.15%, 2040 .......... 3/01/06 $250,000 $ 250,335 JPMorgan Chase Commercial Mortgage Securities Corp., 5.44%, 2045 ......... 9/22/06 107,027 106,845 Spirit Master Funding LLC, 5.05%, 2023 .. 10/04/05 195,344 180,672 - ----------------------------------------------------------------------------------------------------------------------------- Total Restricted Securities ............. $ 537,852 0.3% ========== ====
The following abbreviations are used in this report and are defined: ADR American Depository Receipt CDO Collateralized Debt Obligation GDR Global Depository Receipt FRN Floating Rate Note. Interest rate resets periodically and may not be the rate reported at period end. IEU International Equity Unit REIT Real Estate Investment Trust STRIPS Separate Trading of Registered Interest and Principal of Securities TIPS Treasury Inflation Protected Security Abbreviations indicate amounts shown in currencies other than the U.S. dollar. All amounts are stated in U.S. dollars unless otherwise indicated. A list of abbreviations is shown below: AUD Australian Dollar MXN Mexican Peso BRL Brazilian Real MYR Malaysian Ringgit CAD Canadian Dollar NOK Norwegian Krone DKK Danish Krone NZD New Zealand Dollar EUR Euro PLN Polish Zloty GBP British Pound RUB Russian Ruble JPY Japanese Yen SEK Swedish Krona See notes to financial statements. STATEMENTS OF ASSETS AND LIABILITIES -- December 31, 2006 (000 Omitted)
Capital Global Government High Money Total Appreciation Governments Securities Yield Market Return Variable Variable Variable Variable Variable Variable Account Account Account Account Account Account -------- -------- -------- -------- -------- -------- Assets: Investments -- Investments, cost .................. $200,589 $ 9,151 $ 78,058 $ 57,354 $ 47,671 $164,752 Unrealized appreciation (depreciation) ................... 17,353 99 (129) 1,366 -- 17,051 -------- -------- -------- -------- -------- -------- Total investments, at value ...... $217,942 $ 9,250 $ 77,929 $ 58,720 $ 47,671 $181,803 Cash ................................. 0* 1 0* 29 1 6 Receivable for forward foreign currency exchange contracts ........ -- 21 -- -- -- -- Receivable for forward currency exchange contracts subject to master netting agreements ....... -- 12 -- -- -- -- Receivable for daily variation margin on open futures contracts ... -- -- 3 -- -- -- Receivable for investments sold ...... 589 1 -- 198 -- 186 Receivable for units sold ............ 7 0* 7 0* 8 14 Interest and dividends receivable .... 223 112 766 1,089 45 832 Receivable from Investment Adviser ... -- 30 -- 12 -- -- Receivable from Sponsor .............. -- 5 -- 34 -- 13 Other assets ......................... 9 1 3 3 2 8 -------- -------- -------- -------- -------- -------- Total assets ..................... $218,770 $ 9,433 $ 78,708 $ 60,085 $ 47,727 $182,862 ======== ======== ======== ======== ======== ======== Liabilities: Payable for forward foreign currency exchange contracts ......... $ -- $ 42 $ -- $ -- $ -- $ -- Payable for investments purchased .... -- 184 -- 679 -- 406 Payable for units surrendered ........ 249 3 37 55 27 318 Payable to affiliates -- Investment Adviser ................. 18 1 5 5 3 15 Administrative services fee ........ 1 0* 0* 0* 0* 1 Sponsor ............................ 33 -- 17 -- 78 -- Accrued expenses and other liabilities 61 76 54 72 28 89 -------- -------- -------- -------- -------- -------- Total liabilities ................ $ 362 $ 306 $ 113 $ 811 $ 136 $ 829 -------- -------- -------- -------- -------- -------- Net assets ..................... $218,408 $ 9,127 $ 78,595 $ 59,274 $ 47,591 $182,033 ======== ======== ======== ======== ======== ======== * Amount was less than $500. See notes to financial statements.
STATEMENTS OF ASSETS AND LIABILITIES -- December 31, 2006 -- continued (000 Omitted except for unit values)
Capital Global Government High Money Total Appreciation Governments Securities Yield Market Return Unit Variable Variable Variable Variable Variable Variable Unit Value Account Account Account Account Account Account ------ -------- ----------- ------------ ------------ -------- ------- -------- Net assets applicable to contract owners: Capital Appreciation Variable Account -- Compass 2 ............................... 2,419 $58.101 $140,559 Compass 3 ............................... 128 38.235 4,908 Compass 3 - Level 2 ..................... 4,378 15.963 69,891 Global Governments Variable Account -- Compass 2 ............................... 104 $25.732 $2,671 Compass 3 ............................... 18 25.017 457 Compass 3 - Level 2 ..................... 403 14.718 5,937 Government Securities Variable Account -- Compass 2 ............................... 1,538 $38.619 $59,382 Compass 3 ............................... 40 26.924 1,085 Compass 3 - Level 2 ..................... 1,054 15.814 16,670 High Yield Variable Account -- Compass 2 ............................... 1,119 $40.172 $44,946 Compass 3 ............................... 34 29.459 986 Compass 3 - Level 2 ..................... 774 15.814 12,239 Money Market Variable Account -- Compass 2 ............................... 928 $20.979 $19,483 Compass 3 ............................... 131 17.152 2,251 Compass 3 - Level 2 ..................... 1,969 12.895 25,389 Total Return Variable Account -- Compass 2 ............................... 1,156 $51.373 $59,376 Compass 3 ............................... 142 49.947 7,108 Compass 3 - Level 2 ..................... 4,695 24.220 113,714 -------- ------ ------- ------- ------- -------- Net assets applicable to owners of deferred contracts ....... 215,358 9,065 77,137 58,171 47,123 180,198 Reserve for variable annuities -- Compass 2 Contracts ..................................... 2,755 20 1,413 1,054 350 1,233 Compass 3 Contracts ..................................... 1 8 -- 2 7 9 Compass 3 - Level 2 Contracts ........................... 294 34 45 47 111 593 -------- ------ ------- ------- ------- -------- Net assets ............................................ $218,408 $9,127 $78,595 $59,274 $47,591 $182,033 ======== ====== ======= ======= ======= ======== See notes to financial statements.
STATEMENTS OF OPERATIONS -- Year Ended December 31, 2006 (000 Omitted)
Capital Global Government High Money Total Appreciation Governments Securities Yield Market Return Variable Variable Variable Variable Variable Variable Account Account Account Account Account Account -------- -------- -------- -------- -------- -------- Net investment income (loss): Income -- Interest ........................... $ 262 $ 377 $ 4,457 $ 4,856 $ 2,652 $ 3,894 Dividends .......................... 2,047 -- -- 52 -- 2,696 -------- -------- -------- -------- -------- -------- Total investment income .......... $ 2,309 $ 377 $ 4,457 $ 4,908 $ 2,652 $ 6,590 -------- -------- -------- -------- -------- -------- Expenses -- Mortality and expense risk charges . $ 2,936 $ 117 $ 1,068 $ 768 $ 654 $ 2,270 Management fee ..................... 1,756 72 468 459 262 1,388 Boards of Managers fees ............ 24 1 9 6 5 18 Distribution fee ................... 9 1 2 2 4 12 Administrative fee ................. 57 7 21 15 13 46 Custodian fee ...................... 62 72 43 79 17 119 Printing ........................... 13 1 5 6 9 8 Auditing fees ...................... 33 43 39 44 21 46 Legal fees ......................... 4 5 5 5 3 5 Miscellaneous ...................... 36 3 12 12 10 22 -------- -------- -------- -------- -------- -------- Total expenses ................... $ 4,930 $ 322 $ 1,672 $ 1,396 $ 998 $ 3,934 Fees paid indirectly ............... (5) (0)* (7) (4) (1) (4) Reduction of expenses by Investment Adviser ........................... -- (85) -- (61) -- -- -------- -------- -------- -------- -------- -------- Net expenses ..................... $ 4,925 $ 237 $ 1,665 $ 1,331 $ 997 $ 3,930 -------- -------- -------- -------- -------- -------- Net investment income (loss) ..... $ (2,616) $ 140 $ 2,792 $ 3,577 $ 1,655 $ 2,660 -------- -------- -------- -------- -------- -------- Realized and unrealized gain (loss) on investments: Realized gain (loss) (identified cost basis) -- Investment transactions ............ $ 3,542 $ (117) $ (438) $ (1,009) $ -- $ 10,963 Futures contracts .................. -- 5 5 -- -- -- Foreign currency transactions ...... (3) 12 -- (37) -- (1) -------- -------- -------- -------- -------- -------- Net realized gain (loss) on investments and foreign currency transactions .......... $ 3,539 $ (100) $ (433) $ (1,046) $ -- $ 10,962 -------- -------- -------- -------- -------- -------- Change in unrealized appreciation (depreciation) -- Investments ........................ $ 9,410 $ 326 $ (423) $ 2,720 $ -- $ 4,841 Translation of assets and liabilities in foreign currencies .. -- (44) 31 10 -- -- -------- -------- -------- -------- -------- -------- Net unrealized gain (loss) on investments and foreign currency translation ........... $ 9,410 $ 282 $ (392) $ 2,730 $ -- $ 4,841 -------- -------- -------- -------- -------- -------- Net realized and unrealized gain (loss) on investments and foreign currency ........... $ 12,949 $ 182 $ (825) $ 1,684 $ -- $ 15,803 -------- -------- -------- -------- -------- -------- Change in net assets from operations . $ 10,333 $ 322 $ 1,967 $ 5,261 $ 1,655 $ 18,463 ======== ======== ======== ======== ======== ======== * Amount less than $500. See notes to financial statements.
STATEMENTS OF CHANGES IN NET ASSETS (000 Omitted) Capital Appreciation Global Governments Government Securities Variable Account Variable Account Variable Account ---------------------- ---------------------- ---------------------- Years Ended 12/31 Years Ended 12/31 Years Ended 12/31 ---------------------- ---------------------- ---------------------- 2006 2005 2006 2005 2006 2005 --------- --------- --------- --------- --------- --------- Change in net assets: From operations: Net investment income (loss) ................... $ (2,616) $ (2,976) $ 140 $ 117 $ 2,792 $ 3,067 Net realized gain (loss) on investments and foreign currency transactions ............ 3,539 34,399 (100) 72 (433) (283) Net unrealized gain (loss) on investments and foreign currency translation ............. 9,410 (33,087) 282 (1,228) (392) (1,853) --------- --------- --------- --------- --------- --------- Change in net assets from operations ......... $ 10,333 $ (1,664) $ 322 $ (1,039) $ 1,967 $ 931 --------- --------- --------- --------- --------- --------- Participant transactions: Accumulation activity: Purchase payments received ..................... $ 4,393 $ 5,857 $ 279 $ 366 $ 1,459 $ 2,303 Net transfers between variable and fixed accumulation accounts ........................ (6,547) (294) (22) 977 (1,158) 821 Withdrawals, surrenders, annuitizations, and contract charges ............................. (48,533) (48,945) (1,676) (2,169) (16,396) (15,664) --------- --------- --------- --------- --------- --------- Net accumulation activity .................... $ (50,687) $ (43,382) $ (1,419) $ (826) $ (16,095) $ (12,540) --------- --------- --------- --------- --------- --------- Annuitization activity: Annuitizations ................................... $ 293 $ 167 $ -- $ 3 $ 309 $ 151 Annuity payments and contract charges ............ (449) (425) (7) (6) (234) (249) Net transfers among accounts for annuity reserves -- (14) -- -- -- 5 Adjustments to annuity reserves .................. (39) 53 5 0* (24) 15 --------- --------- --------- --------- --------- --------- Net annuitization activity ..................... $ (195) $ (219) $ (2) $ (3) $ 51 $ (78) --------- --------- --------- --------- --------- --------- Change in net assets from participant transactions $ (50,882) $ (43,601) $ (1,421) $ (829) $ (16,044) $ (12,618) --------- --------- --------- --------- --------- --------- Total change in net assets ..................... $ (40,549) $ (45,265) $ (1,099) $ (1,868) $ (14,077) $ (11,687) Net assets: At beginning of period ........................... 258,957 304,222 10,226 12,094 92,672 104,359 --------- --------- --------- --------- --------- --------- At end of period ................................. $ 218,408 $ 258,957 $ 9,127 $ 10,226 $ 78,595 $ 92,672 ========= ========= ========= ========= ========= ========= * Amount less than $500. See notes to financial statements.
STATEMENTS OF CHANGES IN NET ASSETS -- continued (000 Omitted)
High Yield Money Market Total Return Variable Account Variable Account Variable Account ---------------------- ---------------------- ---------------------- Years Ended 12/31 Years Ended 12/31 Years Ended 12/31 ---------------------- ---------------------- ---------------------- 2006 2005 2006 2005 2006 2005 --------- --------- --------- --------- --------- --------- Change in net assets: From operations: Net investment income .......................... $ 3,577 $ 3,901 $ 1,655 $ 797 $ 2,660 $ 2,320 Net realized gain (loss) on investments and foreign currency transactions ............ (1,046) 139 -- 0* 10,962 10,302 Net unrealized gain (loss) on investments and foreign currency translation ............. 2,730 (3,665) -- -- 4,841 (9,613) --------- --------- --------- --------- --------- --------- Change in net assets from operations ......... $ 5,261 $ 375 $ 1,655 $ 797 $ 18,463 $ 3,009 --------- --------- --------- --------- --------- --------- Participant transactions: Accumulation activity: Purchase payments received ..................... $ 761 $ 1,227 $ 1,321 $ 1,798 $ 4,300 $ 5,339 Net transfers between variable and fixed accumulation accounts ........................ (749) (42) (342) 35,078 2,227 14,789 Withdrawals, surrenders, annuitizations, and contract charges ............................. (10,582) (12,450) (11,845) (30,896) (36,753) (35,779) --------- --------- --------- --------- --------- --------- Net accumulation activity .................... $ (10,570) $ (11,265) $ (10,866) $ 5,980 $ (30,226) $ (15,651) --------- --------- --------- --------- --------- --------- Annuitization activity: Annuitizations ................................... $ 69 $ 21 $ 15 $ 57 $ 35 $ 125 Annuity payments and contract charges ............ (172) (169) (161) (156) (341) (426) Net transfers among accounts for annuity reserves -- -- -- 156 -- 5 Adjustments to annuity reserves .................. 30 (74) (75) 12 6 (44) --------- --------- --------- --------- --------- --------- Net annuitization activity ..................... $ (73) $ (222) $ (221) $ 69 $ (300) $ (340) --------- --------- --------- --------- --------- --------- Change in net assets from participant transactions $ (10,643) $ (11,487) $ (11,087) $ 6,049 $ (30,526) $ (15,991) --------- --------- --------- --------- --------- --------- Total change in net assets ..................... $ (5,382) $ (11,112) $ (9,432) $ 6,846 $ (12,063) $ (12,982) Net assets: At beginning of period ........................... 64,656 75,768 57,023 50,177 194,096 207,078 --------- --------- --------- --------- --------- --------- At end of period ................................. $ 59,274 $ 64,656 $ 47,591 $ 57,023 $ 182,033 $ 194,096 ========= ========= ========= ========= ========= ========= * Amount less than $500. See notes to financial statements.
FINANCIAL HIGHLIGHTS The financial highlights table is intended to help you understand the variable accounts' financial performance for the past 5 years. Certain information reflects financial results for a single unit value. The total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the variable account held for the entire period. This information has been audited by the variable accounts' independent registered public accounting firm, whose report, together with the variable accounts' financial statements, are included in this report.
Capital Appreciation Variable Account -------------------------------------------------------------------------- Compass 2 -------------------------------------------------------------------------- Years Ended 12/31 -------------------------------------------------------------------------- 2006 2005 2004 2003 2002 ----------- ----------- ----------- ----------- ----------- Per unit data: (d) Net asset value -- beginning of period .. $ 55.446 $ 55.625 $ 50.814 $ 39.859 $ 59.446 ----------- ----------- ----------- ----------- ----------- Investment income ....................... $ 0.560 $ 0.580 $ 0.744 $ 0.402 $ 0.369 Expenses ................................ (1.198) (1.179) (1.109) (0.951) (1.002) ----------- ----------- ----------- ----------- ----------- Net investment loss ................. $ (0.638) $ (0.599) $ (0.365) $ (0.549) $ (0.633) Net realized and unrealized gain (loss) on investments and foreign currency transactions .......................... 3.293 0.420 5.176 11.504 (18.954) ----------- ----------- ----------- ----------- ----------- Change in unit value .................... $ 2.655 $ (0.179) $ 4.811 $ 10.955 $ (19.587) ----------- ----------- ----------- ----------- ----------- Unit value: Net asset value -- end of period ........ $ 58.101 $ 55.446 $ 55.625 $ 50.814 $ 39.859 =========== =========== =========== =========== =========== Total Return (%) (k)(s) ................. 4.79 (0.32) 9.47(b) 27.48(j) (32.95) Ratios (%) (to average net assets): Expenses (f) ............................ 2.15 2.16 2.14 2.12 2.12 Net investment loss ..................... (1.11) (1.08) (0.70) (1.20) (1.36) Portfolio turnover (%) .................... 61 130 65 104 80 Number of units outstanding at end of period (000 Omitted) .................... 2,419 3,018 3,544 4,040 4,521 Capital Appreciation Variable Account -------------------------------------------------------------------------- Compass 3 -------------------------------------------------------------------------- Years Ended 12/31 -------------------------------------------------------------------------- 2006 2005 2004 2003 2002 ----------- ----------- ----------- ----------- ----------- Per unit data: (d) Net asset value -- beginning of period .. $ 36.524 $ 36.678 $ 33.539 $ 26.334 $ 39.314 ----------- ----------- ----------- ----------- ----------- Investment income ....................... $ 0.355 $ 0.370 $ 0.458 $ 0.260 $ 0.240 Expenses ................................ (0.807) (0.795) (0.753) (0.648) (0.688) ----------- ----------- ----------- ----------- ----------- Net investment loss ................. $ (0.452) $ (0.425) $ (0.295) $ (0.388) $ (0.448) Net realized and unrealized gain (loss) on investments and foreign currency transactions .......................... 2.163 0.271 3.434 7.593 (12.532) ----------- ----------- ----------- ----------- ----------- Change in unit value .................... $ 1.711 $ (0.154) $ 3.139 $ 7.205 $ (12.980) ----------- ----------- ----------- ----------- ----------- Unit value: Net asset value -- end of period ........ $ 38.235 $ 36.524 $ 36.678 $ 33.539 $ 26.334 =========== =========== =========== =========== =========== Total Return (%) (k)(s) ................. 4.69 (0.42) 9.36(b) 27.36(j) (33.02) Ratios (%) (to average net assets): Expenses (f) ............................ 2.25 2.26 2.24 2.22 2.22 Net investment loss ..................... (1.30) (1.20) (0.87) (1.31) (1.42) Portfolio turnover ........................ 61 130 65 104 80 Number of units outstanding at end of period (000 Omitted) .................... 128 237 413 621 812
FINANCIAL HIGHLIGHTS -- continued Capital Appreciation Variable Account -------------------------------------------------------------------------- Compass 3 - Level 2 -------------------------------------------------------------------------- Years Ended 12/31 -------------------------------------------------------------------------- 2006 2005 2004 2003 2002 ----------- ----------- ----------- ----------- ----------- Per unit data: (d) Net asset value -- beginning of period .. $ 15.226 $ 15.267 $ 13.940 $ 10.929 $ 16.292 ----------- ----------- ----------- ----------- ----------- Investment income ....................... $ 0.152 $ 0.158 $ 0.205 $ 0.109 $ 0.100 Expenses ................................ (0.320) (0.316) (0.297) (0.254) (0.260) ----------- ----------- ----------- ----------- ----------- Net investment loss ................. $ (0.168) $ (0.158) $ (0.092) $ (0.145) $ (0.160) Net realized and unrealized gain (loss) on investments and foreign currency transactions .......................... 0.905 0.117 1.419 3.156 (5.203) ----------- ----------- ----------- ----------- ----------- Change in unit value .................... $ 0.737 $ (0.041) $ 1.327 $ 3.011 $ (5.363) ----------- ----------- ----------- ----------- ----------- Unit value: Net asset value -- end of period ........ $ 15.963 $ 15.226 $ 15.267 $ 13.940 $ 10.929 =========== =========== =========== =========== =========== Total Return (%) (k)(s) ................. 4.84 (0.27) 9.52(b) 27.55(j) (32.92) Ratios (%) (to average net assets): Expenses (f) ............................ 2.10 2.11 2.09 2.07 2.07 Net investment loss ..................... (1.13) (1.05) (0.65) (1.17) (1.32) Portfolio turnover(%) ..................... 61 130 65 104 80 Number of units outstanding at end of period (000 Omitted) .................... 4,378 5,248 5,798 6,086 6,148 (b) The accounts' net asset value and total return calculation include a non-recurring accrual recorded as a result of an administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund sales. The non-recurring accrual resulted in an increase in the net asset value of $0.039, $0.026, and $0.010 per unit for Compass 2, Compass 3, and Compass 3 - Level 2, respectively, based on units outstanding on the day the proceeds were recorded. (d) Per unit data are based on the average number of units outstanding during each year. (f) Ratios do not reflect reductions from fees paid indirectly. (j) The accounts' net asset value and total return calculation include proceeds received on March 26, 2003 for the partial payment of a non-recurring litigation settlement from Cendant Corporation, recorded as a realized gain on investment transactions. The proceeds resulted in an increase in the net asset value of $0.900, $0.594, and $0.247 per unit for Compass 2, Compass 3, and Compass 3 - Level 2, respectively, based on units outstanding on the day the proceeds were received. Excluding the effect of this payment from the ending net asset value per unit, the Compass 2, Compass 3, and Compass 3 - Level 2 total return per unit value for the year ended December 31, 2003 would have been lower by approximately 2.24%, 2.24%, and 2.25%, respectively. (k) The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. (s) From time to time the variable account may receive proceeds from litigation settlements, without which performance would be lower. See notes to financial statements.
FINANCIAL HIGHLIGHTS -- continued The financial highlights table is intended to help you understand the variable accounts' financial performance for the past 5 years. Certain information reflects financial results for a single unit value. The total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the variable account held for the entire period. This information has been audited by the variable accounts' independent registered public accounting firm, whose report, together with the variable accounts' financial statements, are included in this report.
Global Governments Variable Account -------------------------------------------------------------------------- Compass 2 -------------------------------------------------------------------------- Years Ended 12/31 -------------------------------------------------------------------------- 2006 2005 2004 2003 2002 ----------- ----------- ----------- ----------- ----------- Per unit data: (d) Net asset value -- beginning of period .. $ 24.865 $ 27.240 $ 25.169 $ 22.125 $ 18.653 ----------- ----------- ----------- ----------- ----------- Investment income ....................... $ 1.003 $ 0.925 $ 0.872 $ 0.877 $ 0.861 Expenses ................................ (0.629) (0.651) (0.633) (0.584) (0.486) ----------- ----------- ----------- ----------- ----------- Net investment income ............... $ 0.374 $ 0.274 $ 0.239 $ 0.293 $ 0.375 Net realized and unrealized gain (loss) on investments and foreign currency transactions ........................... 0.493 (2.649) 1.832 2.751 3.097 ----------- ----------- ----------- ----------- ----------- Change in unit value .................... $ 0.867 $ (2.375) $ 2.071 $ 3.044 $ 3.472 ----------- ----------- ----------- ----------- ----------- Unit value: Net asset value -- end of period ........ $ 25.732 $ 24.865 $ 27.240 $ 25.169 $ 22.125 =========== =========== =========== =========== =========== Total Return (%) (k)(r) ................. 3.49 (8.72) 8.23 13.76 18.61 Ratios (%) (to average net assets): Expenses before expense reductions (f) .. 3.39 2.95 2.67 2.47 2.44 Expenses after expense reductions (f) ... 2.50 2.50 2.50 N/A 2.50(e) Net investment income ................... 1.48 1.04 0.94 1.23 1.73 Portfolio turnover (%) .................... 118 144 128 130 126 Number of units outstanding at end of period (000 Omitted) .................... 104 116 128 161 160 Global Governments Variable Account -------------------------------------------------------------------------- Compass 3 -------------------------------------------------------------------------- Years Ended 12/31 -------------------------------------------------------------------------- 2006 2005 2004 2003 2002 ----------- ----------- ----------- ----------- ----------- Per unit data: (d) Net asset value -- beginning of period .. $ 24.209 $ 26.561 $ 24.578 $ 21.638 $ 18.269 ----------- ----------- ----------- ----------- ----------- Investment income ....................... $ 1.025 $ 0.949 $ 0.883 $ 0.869 $ 0.846 Expenses ................................ (0.659) (0.688) (0.662) (0.600) (0.511) ----------- ----------- ----------- ----------- ----------- Net investment income ............... $ 0.366 $ 0.261 $ 0.221 $ 0.269 $ 0.335 Net realized and unrealized gain (loss) on investments and foreign currency transactions ............................ 0.442 (2.613) 1.762 2.671 3.034 ----------- ----------- ----------- ----------- ----------- Change in unit value .................... $ 0.808 $ (2.352) $ 1.983 $ 2.940 $ 3.369 ----------- ----------- ----------- ----------- ----------- Unit value: Net asset value -- end of period ........ $ 25.017 $ 24.209 $ 26.561 $ 24.578 $ 21.638 =========== =========== =========== =========== =========== Total Return (%) (k)(r) ................. 3.34 (8.85) 8.07 13.59 18.44 Ratios (%) (to average net assets): Expenses before expense reductions (f) .. 3.54 3.10 2.82 2.62 2.56 Expenses after expense reductions (f) ... 2.65 2.65 2.65 N/A 2.65(e) Net investment income ................... 1.41 0.97 0.85 1.15 1.77 Portfolio turnover ........................ 118 144 128 130 126 Number of units outstanding at end of period (000 Omitted) .................... 18 26 28 41 58 Global Governments Variable Account -------------------------------------------------------------------------- Compass 3 - Level 2 -------------------------------------------------------------------------- Years Ended 12/31 -------------------------------------------------------------------------- 2006 2005 2004 2003 2002 ----------- ----------- ----------- ----------- ----------- Per unit data: (d) Net asset value -- beginning of period .. $ 14.221 $ 15.580 $ 14.396 $ 12.655 $ 10.669 ----------- ----------- ----------- ----------- ----------- Investment income ....................... $ 0.574 $ 0.526 $ 0.497 $ 0.494 $ 0.499 Expenses ................................ (0.361) (0.371) (0.361) (0.331) (0.281) ----------- ----------- ----------- ----------- ----------- Net investment income ............... $ 0.213 $ 0.155 $ 0.136 $ 0.163 $ 0.218 Net realized and unrealized gain (loss) on investments and foreign currency transactions ................. 0.284 (1.514) 1.048 1.578 1.768 ----------- ----------- ----------- ----------- ----------- Change in unit value .................... $ 0.497 $ (1.359) $ 1.184 $ 1.741 $ 1.986 ----------- ----------- ----------- ----------- ----------- Unit value: Net asset value -- end of period ........ $ 14.718 $ 14.221 $ 15.580 $ 14.396 $ 12.655 =========== =========== =========== =========== =========== Total Return (%) (k)(r) ................. 3.49 (8.72) 8.23 13.76 18.61 Ratios (%) (to average net assets): Expenses before expense reductions (f) .. 3.39 2.95 2.67 2.47 2.42 Expenses after expense reductions (f) ... 2.50 2.50 2.50 N/A 2.50(e) Net investment income ................... 1.47 1.04 0.94 1.21 1.70 Portfolio turnover (%) .................... 118 144 128 130 126 Number of units outstanding at end of period (000 Omitted) ................ 403 468 500 559 568 (d) Per unit data are based on the average number of units outstanding during each year. (e) Ratio includes a reimbursement fee for expenses borne by MFS in prior years under the then existing expense reimbursement agreement. (f) Ratios do not reflect reductions from fees paid indirectly. (k) The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. (r) Certain expenses have been reduced without which performance would have been lower. See notes to financial statements.
FINANCIAL HIGHLIGHTS -- continued The financial highlights table is intended to help you understand the variable accounts' financial performance for the past 5 years. Certain information reflects financial results for a single unit value. The total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the variable account held for the entire period. This information has been audited by the variable accounts' independent registered public accounting firm, whose report, together with the variable accounts' financial statements, are included in this report. Government Securities Variable Account -------------------------------------------------------------------------- Compass 2 -------------------------------------------------------------------------- Years Ended 12/31 -------------------------------------------------------------------------- 2006 2005 2004 2003 2002 ----------- ----------- ----------- ----------- ----------- Per unit data: (d) Net asset value -- beginning of period .. $ 37.679 $ 37.338 $ 36.470 $ 36.124 $ 33.448 ----------- ----------- ----------- ----------- ----------- Investment income ....................... $ 2.024 $ 1.936 $ 1.834 $ 1.482 $ 1.862 Expenses ................................ (0.757) (0.752) (0.726) (0.711) (0.677) ----------- ----------- ----------- ----------- ----------- Net investment income ............... $ 1.267 $ 1.184 $ 1.108 $ 0.771 $ 1.185 Net realized and unrealized gain (loss) on investments and foreign currency transactions ........................... (0.327) (0.843) (0.240) (0.425) 1.491 ----------- ----------- ----------- ----------- ----------- Change in unit value .................... $ 0.940 $ 0.341 $ 0.868 $ 0.346 $ 2.676 ----------- ----------- ----------- ----------- ----------- Unit value: Net asset value -- end of period ........ $ 38.619 $ 37.679 $ 37.338 $ 36.470 $ 36.124 =========== =========== =========== =========== =========== Total Return (%) (k) .................... 2.50 0.91 2.38 0.96 8.00 Ratios (%) (to average net assets): Expenses (f) ............................ 2.01 2.01 1.97 1.95 1.94 Net investment income ................... 3.28 3.09 2.96 2.08 3.19 Portfolio turnover (%) .................... 17 69 89 138 139 Number of units outstanding at end of period (000 Omitted) ................. 1,538 1,852 2,125 2,447 2,759 Government Securities Variable Account -------------------------------------------------------------------------- Compass 3 -------------------------------------------------------------------------- Years Ended 12/31 -------------------------------------------------------------------------- 2006 2005 2004 2003 2002 ----------- ----------- ----------- ----------- ----------- Per unit data: (d) Net asset value -- beginning of period .. $ 26.295 $ 26.082 $ 25.501 $ 25.284 $ 23.434 ----------- ----------- ----------- ----------- ----------- Investment income ....................... $ 1.352 $ 1.316 $ 1.244 $ 1.045 $ 1.300 Expenses ................................ (0.538) (0.543) (0.525) (0.514) (0.495) ----------- ----------- ----------- ----------- ----------- Net investment income ............... $ 0.814 $ 0.773 $ 0.719 $ 0.531 $ 0.805 Net realized and unrealized gain (loss) on investments and foreign currency transactions ........................... (0.185) (0.560) (0.138) (0.314) 1.045 ----------- ----------- ----------- ----------- ----------- Change in unit value .................... $ 0.629 $ 0.213 $ 0.581 $ 0.217 $ 1.850 ----------- ----------- ----------- ----------- ----------- Unit value: Net asset value -- end of period ........ $ 26.924 $ 26.295 $ 26.082 $ 25.501 $ 25.284 =========== =========== =========== =========== =========== Total Return (%) (k) .................... 2.40 0.82 2.28 0.86 7.89 Ratios (%) (to average net assets): Expenses (f) ............................ 2.11 2.11 2.07 2.05 2.04 Net investment income ................... 3.15 2.96 2.82 2.08 3.36 Portfolio turnover ........................ 17 69 89 138 139 Number of units outstanding at end of period (000 Omitted) .................... 40 69 100 147 205 Government Securities Variable Account -------------------------------------------------------------------------- Compass 3 - Level 2 -------------------------------------------------------------------------- Years Ended 12/31 -------------------------------------------------------------------------- 2006 2005 2004 2003 2002 ----------- ----------- ----------- ----------- ----------- Per unit data: (d) Net asset value -- beginning of period .. $ 15.421 $ 15.274 $ 14.912 $ 14.763 $ 13.663 ----------- ----------- ----------- ----------- ----------- Investment income ....................... $ 0.813 $ 0.781 $ 0.742 $ 0.597 $ 0.732 Expenses ................................ (0.300) (0.299) (0.289) (0.282) (0.267) ----------- ----------- ----------- ----------- ----------- Net investment income ............... $ 0.513 $ 0.482 $ 0.453 $ 0.315 $ 0.465 Net realized and unrealized gain (loss) on investments and foreign currency transactions ........................... (0.120) (0.335) (0.091) (0.166) 0.635 ----------- ----------- ----------- ----------- ----------- Change in unit value .................... $ 0.393 $ 0.147 $ 0.362 $ 0.149 $ 1.100 ----------- ----------- ----------- ----------- ----------- Unit value: Net asset value -- end of period ........ $ 15.814 $ 15.421 $ 15.274 $ 14.912 $ 14.763 =========== =========== =========== =========== =========== Total Return (%) (k) .................... 2.55 0.96 2.43 1.01 8.05 Ratios (%) (to average net assets): Expenses (f) ............................ 1.96 1.96 1.92 1.90 1.89 Net investment income ................... 3.30 3.12 2.99 2.10 3.17 Portfolio turnover (%) .................... 17 69 89 138 139 Number of units outstanding at end of period (000 Omitted) .................... 1,054 1,280 1,377 1,562 1,692 (d) Per unit data are based on the average number of units outstanding during each year. (f) Ratios do not reflect reductions from fees paid indirectly. (k) The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. See notes to financial statements.
FINANCIAL HIGHLIGHTS -- continued The financial highlights table is intended to help you understand the variable accounts' financial performance for the past 5 years. Certain information reflects financial results for a single unit value. The total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the variable account held for the entire period. This information has been audited by the variable accounts' independent registered public accounting firm, whose report, together with the variable accounts' financial statements, are included in this report. High Yield Variable Account -------------------------------------------------------------------------- Compass 2 -------------------------------------------------------------------------- Years Ended 12/31 -------------------------------------------------------------------------- 2006 2005 2004 2003 2002 ----------- ----------- ----------- ----------- ----------- Per unit data: (d) Net asset value -- beginning of period .. $ 36.840 $ 36.669 $ 34.056 $ 28.505 $ 28.969 ----------- ----------- ----------- ----------- ----------- Investment income ....................... $ 3.121 $ 2.959 $ 2.857 $ 2.769 $ 3.015 Expenses ................................ (0.847) (0.820) (0.770) (0.689) (0.617) ----------- ----------- ----------- ----------- ----------- Net investment income ............... $ 2.274 $ 2.139 $ 2.087 $ 2.080 $ 2.398 Net realized and unrealized gain (loss) on investments and foreign currency transactions ........................... 1.058 (1.968) 0.526 3.471 (2.862) ----------- ----------- ----------- ----------- ----------- Change in unit value .................... $ 3.332 $ 0.171 $ 2.613 $ 5.551 $ (0.464) ----------- ----------- ----------- ----------- ----------- Unit value: Net asset value -- end of period ........ $ 40.172 $ 36.840 $ 36.669 $ 34.056 $ 28.505 =========== =========== =========== =========== =========== Total Return (%) (k)(r)(s) .............. 9.04 0.47 7.67 19.47 (1.60) Ratios (%) (to average net assets): Expenses before expense reduction (f) ... 2.32 2.28(o) 2.21 2.20 2.18 Expenses after expense reductions (f) ... 2.22 2.25 N/A N/A N/A Net investment income ................... 5.84 5.76 5.91 6.53 7.84 Portfolio turnover (%) .................... 88 53 81 164 172 Number of units outstanding at end of period (000 Omitted) ................. 1,119 1,323 1,601 1,827 2,069 High Yield Variable Account -------------------------------------------------------------------------- Compass 3 -------------------------------------------------------------------------- Years Ended 12/31 -------------------------------------------------------------------------- 2006 2005 2004 2003 2002 ----------- ----------- ----------- ----------- ----------- Per unit data: (d) Net asset value -- beginning of period .. $ 27.043 $ 26.943 $ 25.048 $ 20.986 $ 21.349 ----------- ----------- ----------- ----------- ----------- Investment income ....................... $ 2.212 $ 2.118 $ 2.021 $ 1.964 $ 2.141 Expenses ................................ (0.635) (0.620) (0.576) (0.514) (0.469) ----------- ----------- ----------- ----------- ----------- Net investment income ............... $ 1.577 $ 1.498 $ 1.445 $ 1.450 $ 1.672 Net realized and unrealized gain (loss) on investments and foreign currency transactions ........................... 0.839 (1.398) 0.450 2.612 (2.035) ----------- ----------- ----------- ----------- ----------- Change in unit value .................... $ 2.416 $ 0.100 $ 1.895 $ 4.062 $ (0.363) ----------- ----------- ----------- ----------- ----------- Unit value: Net asset value -- end of period ........ $ 29.459 $ 27.043 $ 26.943 $ 25.048 $ 20.986 =========== =========== =========== =========== =========== Total Return (%) (k)(r)(s) .............. 8.94 0.37 7.57 19.35 (1.70) Ratios (%) (to average net assets): Expenses before expense reductions (f) .. 2.42 2.38(o) 2.31 2.30 2.28 Expenses after expense reductions (f) ... 2.32 2.35 N/A N/A N/A Net investment income ................... 5.71 5.64 5.75 6.41 8.45 Portfolio turnover ........................ 88 53 81 164 172 Number of units outstanding at end of period (000 Omitted) ................... 34 47 67 115 178 High Yield Variable Account -------------------------------------------------------------------------- Compass 3 - Level 2 -------------------------------------------------------------------------- Years Ended 12/31 -------------------------------------------------------------------------- 2006 2005 2004 2003 2002 ----------- ----------- ----------- ----------- ----------- Per unit data: (d) Net asset value -- beginning of period .. $ 14.495 $ 14.421 $ 13.386 $ 11.199 $ 11.376 ----------- ----------- ----------- ----------- ----------- Investment income ....................... $ 1.202 $ 1.142 $ 1.019 $ 1.161 $ 1.220 Expenses ................................ (0.323) (0.312) (0.275) (0.286) (0.257) ----------- ----------- ----------- ----------- ----------- Net investment income ............... $ 0.879 $ 0.830 $ 0.744 $ 0.875 $ 0.963 Net realized and unrealized gain (loss) on investments and foreign currency transactions ........................... 0.440 (0.756) 0.291 1.312 (1.140) ----------- ----------- ----------- ----------- ----------- Change in unit value .................... $ 1.319 $ 0.074 $ 1.035 $ 2.187 $ (0.177) ----------- ----------- ----------- ----------- ----------- Unit value: Net asset value -- end of period ........ $ 15.814 $ 14.495 $ 14.421 $ 13.386 $ 11.199 =========== =========== =========== =========== =========== Total Return (%) (k)(r)(s) .............. 9.10 0.52 7.73 19.53 $ (1.55) Ratios (%) (to average net assets): Expenses before expense reductions (f) .. 2.27 2.23(o) 2.16 2.15 2.13 Expenses after expense reductions (f) ... 2.17 2.20 N/A N/A N/A Net investment income ................... 5.86 5.81 5.77 6.57 6.08 Portfolio turnover (%) .................... 88 53 81 164 172 Number of units outstanding at end of period (000 Omitted) ................... 774 937 971 2,631 2,684 (d) Per share data are based on average number of units outstanding during each year. (f) Ratios do not reflect reductions from fees paid indirectly. (k) The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. (o) Due to a revision, the ratios of expenses before expense reductions for the year ended December 31, 2005 not previously reported, were 2.28%, 2.38% and 2.23% for Compass 2, Compass 3, and Compass 3 - Level 2, respectively. There was no impact to net assets or the expenses charged to the shareholder. (r) Certain expenses have been reduced without which performance would have been lower. (s) From time to time the variable account may receive proceeds from litigation settlements, without which performance would be lower. See notes to financial statements.
FINANCIAL HIGHLIGHTS -- continued The financial highlights table is intended to help you understand the variable accounts' financial performance for the past 5 years. Certain information reflects financial results for a single unit value. The total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the variable account held for the entire period. This information has been audited by the variable accounts' independent registered public accounting firm, whose report, together with the variable accounts' financial statements, are included in this report.
Money Market Variable Account -------------------------------------------------------------------------- Compass 2 -------------------------------------------------------------------------- Years Ended 12/31 -------------------------------------------------------------------------- 2006 2005 2004 2003 2002 ----------- ----------- ----------- ----------- ----------- Per unit data: (d) Net asset value -- beginning of period .. $ 20.331 $ 20.073 $ 20.188 $ 20.322 $ 20.341 ----------- ----------- ----------- ----------- ----------- Investment income ....................... $ 1.051 $ 0.661 $ 0.281 $ 0.247 $ 0.382 Expenses ................................ (0.403) (0.403) (0.396) (0.381) (0.401) ----------- ----------- ----------- ----------- ----------- Net investment income (loss) ........ $ 0.648 $ 0.258 $ (0.115) $ (0.134) $ (0.019) Net realized and unrealized gain (loss) on investments ......................... -- (0.000)(w) -- -- -- ----------- ----------- ----------- ----------- ----------- Change in unit value .................... $ 0.648 $ 0.258 $ (0.115) $ (0.134) $ (0.019) ----------- ----------- ----------- ----------- ----------- Unit value: Net asset value -- end of period ........ $ 20.979 $ 20.331 $ 20.073 $ 20.188 $ 20.322 =========== =========== =========== =========== =========== Total Return (%) (k) .................... 3.19 1.29 (0.57) (0.66) (0.09) Ratios (%) (to average net assets): Expenses (f) ............................ 1.95 1.99 1.96 1.87 1.96 Net investment income (loss) ............ 3.15 1.38 (0.56) (0.63) (0.12) Number of units outstanding at end of period (000 Omitted) .................... 928 1,128 1,009 1,172 1,626 Money Market Variable Account -------------------------------------------------------------------------- Compass 3 -------------------------------------------------------------------------- Years Ended 12/31 -------------------------------------------------------------------------- 2006 2005 2004 2003 2002 ----------- ----------- ----------- ----------- ----------- Per unit data: (d) Net asset value -- beginning of period .. $ 16.638 $ 16.443 $ 16.553 $ 16.680 $ 16.712 ----------- ----------- ----------- ----------- ----------- Investment income ....................... $ 0.852 $ 0.539 $ 0.229 $ 0.198 $ 0.318 Expenses ................................ (0.338) (0.344) (0.339) (0.325) (0.350) ----------- ----------- ----------- ----------- ----------- Net investment income (loss) ........ $ 0.514 $ 0.195 $ (0.110) $ (0.127) $ (0.032) Net realized and unrealized gain (loss) on investments ........................ -- (0.000)(w) -- -- -- ----------- ----------- ----------- ----------- ----------- Change in unit value .................... $ 0.514 $ 0.195 $ (0.110) $ (0.127) $ (0.032) ----------- ----------- ----------- ----------- ----------- Unit value: Net asset value -- end of period ........ $ 17.152 $ 16.638 $ 16.443 $ 16.553 $ 16.680 =========== =========== =========== =========== =========== Total Return (%) (k) .................... 3.09 1.19 (0.67) (0.76) (0.19) Ratios (%) (to average net assets): Expenses (f) ............................ 2.05 2.09 2.06 1.97 2.06 Net investment income (loss) ............ 3.00 1.42 (0.71) (0.74) (0.14) Number of units outstanding at end of period (000 Omitted) .................. 131 218 97 155 186 Money Market Variable Account -------------------------------------------------------------------------- Compass 3 - Level 2 -------------------------------------------------------------------------- Years Ended 12/31 -------------------------------------------------------------------------- 2006 2005 2004 2003 2002 ----------- ----------- ----------- ----------- ----------- Per unit data: (d) Net asset value -- beginning of period .. $ 12.491 $ 12.326 $ 12.390 $ 12.466 $ 12.472 ----------- ----------- ----------- ----------- ----------- Investment income ....................... $ 0.644 $ 0.405 $ 0.181 $ 0.131 $ 0.223 Expenses ................................ (0.240) (0.240) (0.245) (0.207) (0.229) ----------- ----------- ----------- ----------- ----------- Net investment income (loss) ........ $ 0.404 $ 0.165 $ (0.064) $ (0.076) $ (0.006) Net realized and unrealized gain (loss) on investments ......................... -- (0.000)(w) -- -- -- ----------- ----------- ----------- ----------- ----------- Change in unit value .................... $ 0.404 $ 0.165 $ (0.064) $ (0.076) $ (0.006) ----------- ----------- ----------- ----------- ----------- Unit value: Net asset value -- end of period ........ $ 12.895 $ 12.491 $ 12.326 $ 12.390 $ 12.466 =========== =========== =========== =========== =========== Total Return (%) (k) .................... 3.24 1.34 (0.52) (0.61) (0.04) Ratios (%) (to average net assets): Expenses (f) ............................ 1.90 1.94 1.91 1.82 1.91 Net investment income (loss) ............ 3.18 1.39 (0.48) (0.61) (0.01) Number of units outstanding at end of period (000 Omitted) ................... 1,969 2,384 2,259 896 1,113 (d) Per unit data are based on the average number of units outstanding during each year. (f) Ratios do not reflect reductions from fees paid indirectly. (k) The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. (w) Per unit amount was less than $0.001. See notes to financial statements.
FINANCIAL HIGHLIGHTS -- continued The financial highlights table is intended to help you understand the variable accounts' financial performance for the past 5 years. Certain information reflects financial results for a single unit value. The total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the variable account held for the entire period. This information has been audited by the variable accounts' independent registered public accounting firm, whose report, together with the variable accounts' financial statements, are included in this report.
Total Return Variable Account -------------------------------------------------------------------------- Compass 2 -------------------------------------------------------------------------- Years Ended 12/31 -------------------------------------------------------------------------- 2006 2005 2004 2003 2002 ----------- ----------- ----------- ----------- ----------- Per unit data: (d) Net asset value -- beginning of period .. $ 46.459 $ 45.729 $ 41.571 $ 35.950 $ 38.562 ----------- ----------- ----------- ----------- ----------- Investment income ....................... $ 1.749 $ 1.521 $ 1.450 $ 1.237 $ 1.407 Expenses ................................ (1.033) (0.970) (0.905) (0.800) (0.777) ----------- ----------- ----------- ----------- ----------- Net investment income ............... $ 0.716 $ 0.551 $ 0.545 $ 0.437 $ 0.630 Net realized and unrealized gain (loss) on investments and foreign currency transactions ........................... 4.198 0.179 3.613 5.184 (3.242) ----------- ----------- ----------- ----------- ----------- Change in unit value .................... $ 4.914 $ 0.730 $ 4.158 $ 5.621 $ (2.612) ----------- ----------- ----------- ----------- ----------- Unit value: Net asset value -- end of period ........ $ 51.373 $ 46.459 $ 45.729 $ 41.571 $ 35.950 =========== =========== =========== =========== =========== Total Return (%) (k)(s) ................. 10.58 1.60 10.00(b) 15.64 (6.77) Ratios (%) (to average net assets): Expenses (f) ............................ 2.14 2.12 2.11 2.10 2.08 Net investment income ................... 1.46 1.18 1.25 1.13 1.43 Portfolio turnover (%) .................... 45 49 64 62 76 Number of units outstanding at end of period (000 Omitted) ................... 1,156 1,349 1,511 1,688 1,871 Total Return Variable Account -------------------------------------------------------------------------- Compass 3 -------------------------------------------------------------------------- Years Ended 12/31 -------------------------------------------------------------------------- 2006 2005 2004 2003 2002 ----------- ----------- ----------- ----------- ----------- Per unit data: (d) Net asset value -- beginning of period .. $ 45.236 $ 44.592 $ 40.597 $ 35.160 $ 37.771 ----------- ----------- ----------- ----------- ----------- Investment income ....................... $ 1.645 $ 1.450 $ 1.375 $ 1.200 $ 1.360 Expenses ................................ (1.051) (1.019) (0.929) (0.823) (0.804) ----------- ----------- ----------- ----------- ----------- Net investment income ............... $ 0.594 $ 0.431 $ 0.446 $ 0.377 $ 0.556 Net realized and unrealized gain (loss) on investments and foreign currency transactions ........................... 4.117 0.213 3.549 5.060 (3.167) ----------- ----------- ----------- ----------- ----------- Change in unit value .................... $ 4.711 $ 0.644 $ 3.995 $ 5.437 $ (2.611) ----------- ----------- ----------- ----------- ----------- Unit value: Net asset value -- end of period ........ $ 49.947 $ 45.236 $ 44.592 $ 40.597 $ 35.160 =========== =========== =========== =========== =========== Total Return (%) (k)(s) ................. 10.42 1.45 9.84(b) 15.46 (6.91) Ratios (%) (to average net assets): Expenses (f) ............................ 2.29 2.27 2.26 2.25 2.23 Net investment income ................... 1.28 0.97 1.07 1.01 1.61 Portfolio turnover ........................ 45 49 64 62 76 Number of units outstanding at end of period (000 Omitted) ................... 142 217 315 453 634 Total Return Variable Account -------------------------------------------------------------------------- Compass 3 - Level 2 -------------------------------------------------------------------------- Years Ended 12/31 -------------------------------------------------------------------------- 2006 2005 2004 2003 2002 ----------- ----------- ----------- ----------- ----------- Per unit data: (d) Net asset value -- beginning of period .. $ 21.903 $ 21.559 $ 19.599 $ 16.949 $ 18.180 ----------- ----------- ----------- ----------- ----------- Investment income ....................... $ 0.812 $ 0.710 $ 0.676 $ 0.575 $ 0.658 Expenses ................................ (0.484) (0.457) (0.425) (0.376) (0.367) ----------- ----------- ----------- ----------- ----------- Net investment income ............... $ 0.328 $ 0.253 $ 0.251 $ 0.199 $ 0.291 Net realized and unrealized gain (loss) on investments and foreign currency transactions ........................... 1.989 0.091 1.709 2.451 (1.522) ----------- ----------- ----------- ----------- ----------- Change in unit value .................... $ 2.317 $ 0.344 $ 1.960 $ 2.650 $ (1.231) ----------- ----------- ----------- ----------- ----------- Unit value: Net asset value -- end of period ........ $ 24.220 $ 21.903 $ 21.559 $ 19.599 $ 16.949 =========== =========== =========== =========== =========== Total Return (%) (k)(s) ................. 10.58 1.60 10.00(b) 15.64 (6.77) Ratios (%) (to average net assets): Expenses (f) ............................ 2.14 2.12 2.11 2.10 2.08 Net investment income ................... 1.44 1.17 1.24 1.11 1.55 Portfolio turnover (%) .................... 45 49 64 62 76 Number of units outstanding at end of period (000 Omitted) ................... 4,695 5,462 5,646 5,946 6,236 (b) The account's net asset value and total return calculation include a non-recurring accrual recorded as a result of an administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund sales. The non-recurring accrual did not have a material impact on the net asset value per unit based on the units outstanding on the day the proceeds were recorded. (d) Per unit data are based on the average number of units outstanding during each year. (f) Ratios do not reflect reductions from fees paid indirectly. (k) The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. (s) From time to time the variable account may receive proceeds from litigation settlements, without which performance would be lower. See notes to financial statements.
NOTES TO FINANCIAL STATEMENTS (1) BUSINESS AND ORGANIZATION Capital Appreciation Variable Account, Global Governments Variable Account, Government Securities Variable Account, High Yield Variable Account, Money Market Variable Account, and Total Return Variable Account (the variable account(s)) are separate accounts established by Sun Life Assurance Company of Canada (U.S.), the Sponsor, in connection with the issuance of Compass 2 and Compass 3 combination fixed/variable annuity contracts. The variable accounts operate as open-end management investment companies as those terms are defined in the Investment Company Act of 1940, as amended. (2) SIGNIFICANT ACCOUNTING POLICIES General - The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The High Yield Variable Account can invest up to 100% of its portfolio in high- yield securities rated below investment grade. Investments in high-yield securities involve greater degrees of credit and market risk than investments in higher-rated securities and tend to be more sensitive to economic conditions. The Capital Appreciation Variable Account, Global Governments Variable Account, High Yield Variable Account and Total Return Variable Account can invest in foreign securities, including securities of emerging market issuers. Investments in foreign securities are vulnerable to the effects of changes in the relative values of the local currency and the U.S. dollar and to the effects of changes in each country's legal, political, and economic environment. The markets of emerging markets countries are generally more volatile than the markets of developed countries with more mature economies. All of the risks of investing in foreign securities previously described are heightened when investing in emerging markets countries. Investment Valuations - Money market instruments are valued at amortized cost, which approximates market value. Amortized cost involves valuing an instrument at its cost as adjusted for amortization of premium or accretion of discount rather than its current market value. Each money market fund's use of amortized cost is subject to the fund's compliance with Rule 2a-7 under the Investment Company Act of 1940. The amortized cost value of an instrument can be different from the market value of an instrument. Equity securities, including restricted equity securities, are generally valued at the last sale or official closing price as reported by an independent pricing service on the market or exchange on which they are primarily traded. For securities for which there were no sales reported that day, equity securities are generally valued at the last quoted daily bid quotation as reported by an independent pricing service on the market or exchange on which they are primarily traded. Debt instruments (other than short-term instruments), including restricted debt instruments, are generally valued at an evaluated or composite bid as reported by an independent pricing service. Values of debt instruments obtained from pricing services can utilize both dealer-supplied valuations and electronic data processing techniques, which take into account factors such as institutional-size trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics, and other market data. Short-term instruments with a maturity at issuance of 60 days or less may be valued at amortized cost, which approximates market value. Exchange-traded options are generally valued at the last sale or official closing price as reported by an independent pricing service on the exchange on which they are primarily traded. Exchange-traded options for which there were no sales reported that day are generally valued at the last daily bid quotation as reported by an independent pricing service on the exchange on which they are primarily traded. Options not traded on an exchange are generally valued at a broker-dealer bid quotation. Foreign currency options are generally valued using an external pricing model that uses market data from an independent source. Futures contracts are generally valued at last posted settlement price as reported by an independent pricing service on the market on which they are primarily traded. Futures contracts for which there were no trades that day for a particular position are generally valued at the closing bid quotation as reported by an independent pricing service on the market on which they are primarily traded. Forward foreign currency contracts are generally valued at the mean of bid and asked prices for the time period interpolated from rates reported by an independent pricing service for proximate time periods. Securities and other assets generally valued on the basis of information from an independent pricing service may also be valued at a broker-dealer bid quotation. The values of foreign securities and other assets and liabilities expressed in foreign currencies are converted to U.S. dollars using the mean of bid and asked prices for rates reported by an independent pricing service. The Board of Managers has delegated primary responsibility for determining or causing to be determined the value of the variable accounts' investments (including any fair valuation) to the adviser pursuant to valuation policies and procedures approved by the Board. If the adviser determines that reliable market quotations are not readily available, investments are valued at fair value as determined in good faith by the adviser in accordance with such procedures under the oversight of the Board of Managers. Under the variable accounts' valuation policies and procedures, market quotations are not considered to be readily available for many types of debt instruments. These investments are generally valued at fair value based on information from independent pricing services. In addition, investments may be valued at fair value if the adviser determines that an investment's value has been materially affected by events occurring after the close of the exchange or market on which the investment is principally traded (such as foreign exchange or market) and prior to the determination of the variable accounts' net asset value, or after the halting of trading of a specific security where trading does not resume prior to the close of the exchange or market on which the security is principally traded. Events that occur on a frequent basis after foreign markets close (such as developments in foreign markets and significant movements in the U.S. markets) and prior to the determination of the variable accounts' net asset value may be deemed to have a material affect on the value of securities traded in foreign markets. Accordingly, the variable accounts' foreign equity securities may often be valued at fair value. The adviser may rely on independent pricing services or other information (such as the correlation with price movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the business and financial condition of the issuer; and trading and other market data) to assist in determining whether to fair value and at what value to fair value an investment. The value of an investment for purposes of calculating the variable accounts' net asset value can differ depending on the source and method used to determine value. When fair valuation is used, the value of investments used to determine the variable accounts' net asset value may differ from quoted or published prices for the same investments. In September 2006, FASB Statement No. 157, Fair Value Measurements (the "Statement") was issued, and is effective for fiscal years beginning after November 15, 2007 and for all interim periods within those fiscal years. This Statement provides a single definition of fair value, a hierarchy for measuring fair value and expanded disclosures about fair value measurements. Management is evaluating the application of the Statement to the variable accounts, and believes the impact will be limited to expanded disclosures resulting from the adoption of this Statement in the variable accounts' financial statements. Repurchase Agreements - Each variable account may enter into repurchase agreements with institutions that the variable accounts' investment adviser has determined are creditworthy. Each repurchase agreement is recorded at cost. The variable accounts require that the securities collateral in a repurchase transaction be transferred to the custodian in a manner sufficient to enable the variable account to obtain those securities in the event of a default under the repurchase agreement. The variable accounts monitor, on a daily basis, the value of the collateral to ensure that its value, including accrued interest, is greater than amounts owed to the variable accounts under each such repurchase agreement. The variable accounts, along with other affiliated entities of Massachusetts Financial Services Company (MFS), may utilize a joint trading account for the purpose of entering into one or more repurchase agreements. Inflation-Adjusted Debt Securities - Certain variable accounts invest in inflation-adjusted debt securities issued by the U.S. Treasury. The variable accounts may also invest in inflation-adjusted debt securities issued by U.S. Government agencies and instrumentalities other than the U.S. Treasury and by other entities such as U.S. and foreign corporations and foreign governments. The principal value of these debt securities is adjusted by references to changes in the Consumer Price Index or another general price or wage index. These debt securities typically pay a fixed rate of interest, but this fixed rate is applied to the inflation-adjusted principal amount. The principal paid at maturity of the debt security is typically equal to the inflation-adjusted principal amount, or the security's original par value, whichever is greater. Other types of inflation-adjusted securities may use other methods to adjust for other measures of inflation. Foreign Currency Translation - Purchases and sales of foreign investments, income, and expenses are converted into U.S. dollars based upon currency exchange rates prevailing on the respective dates of such transactions. Gains and losses attributable to foreign currency exchange rates on sales of securities are recorded for financial statement purposes as net realized gains and losses on investments. Gains and losses attributable to foreign exchange rate movements on income and expenses are recorded for financial statement purposes as foreign currency transaction gains and losses. That portion of both realized and unrealized gains and losses on investments that results from fluctuations in foreign currency exchange rates is not separately disclosed. Derivative Risk - Certain variable accounts may invest in derivatives for hedging or non-hedging purposes. While hedging can reduce or eliminate losses, it can also reduce or eliminate gains. When the variable accounts use derivatives as an investment to gain market exposure, or for hedging purposes, gains and losses from derivative instruments may be substantially greater than the derivative's original cost. Derivative instruments include purchased options, futures contracts, and forward currency exchange contracts for the Global Governments Variable Account and futures contracts for the Government Securities Variable Account. Purchased Options - Certain variable accounts may purchase call or put options for a premium. Purchasing call options may be a hedge against an anticipated increase in the dollar cost of securities to be acquired or to increase the variable account's exposure to the underlying instrument. Purchasing put options may hedge against a decline in the value of portfolio securities. The premium paid is included as an investment in the Statements of Assets and Liabilities and is subsequently adjusted to the current value of the option. Premiums paid for purchased options which have expired are treated as realized losses on investments in the Statements of Operations. Premiums paid for purchased options which are exercised or closed are added to the amount paid or offset against the proceeds on the underlying security or financial instrument to determine the realized gain or loss. The risk of loss associated with purchased options is limited to the premium paid. Futures Contracts - Certain variable accounts may enter into futures contracts for the delayed delivery of securities or currency, or contracts based on financial indices at a fixed price on a future date. In entering such contracts, the variable accounts are required to deposit with the broker either in cash or securities an amount equal to a certain percentage of the contract amount. Subsequent payments are made or received by the variable account each day, depending on the daily fluctuations in the value of the contract, and are recorded for financial statement purposes as unrealized gains or losses by the variable accounts. Upon entering into such contracts, the variable accounts bears the risk of interest or exchange rates or securities prices moving unexpectedly, in which case, the variable accounts may not achieve the anticipated benefits of the futures contracts and may realize a loss. Forward Foreign Currency Exchange Contracts - Certain variable accounts may enter into forward foreign currency exchange contracts for the purchase or sale of a specific foreign currency at a fixed price on a future date. Risks may arise upon entering into these contracts from the potential inability of counterparties to meet the terms of their contracts and from unanticipated movements in the value of the contract. The variable accounts may enter into forward foreign currency exchange contracts for hedging purposes as well as for non-hedging purposes. For hedging purposes, the variable accounts may enter into contracts to deliver or receive foreign currency it will receive from or require for its normal investment activities. The variable accounts may also use contracts in a manner intended to protect foreign currency denominated securities from declines in value due to unfavorable exchange rate movements. For non-hedging purposes, the variable accounts may enter into contracts with the intent of changing the relative exposure of the variable accounts' portfolio of securities to different currencies to take advantage of anticipated changes. The forward foreign currency exchange contracts are adjusted by the daily exchange rate of the underlying currency and any gains or losses are recorded as unrealized until the contract settlement date. On contract settlement date, the gains or losses are recorded as realized gains or losses on foreign currency transactions. Loans and Other Direct Debt Instruments - Certain variable accounts may invest in loans and loan participations or other receivables. These investments may include standby financing commitments, including revolving credit facilities, which obligate the variable account to supply additional cash to the borrower on demand. Loan participations involve a risk of insolvency of the lending bank or other financial intermediary. Indemnifications - Under the variable account's organizational documents, its officers and trustees may be indemnified against certain liabilities and expenses arising out of the performance of their duties to the variable account. Additionally, in the normal course of business, each variable account enters into agreements with service providers that may contain indemnification clauses. The variable account's maximum exposure under these agreements is unknown as this would involve future claims that may be made against the variable account that have not yet occurred. Investment Transactions and Income - Investment transactions are recorded on the trade date. Interest income is recorded on the accrual basis. For the Money Market Variable Account all premium and discount is amortized and accreted for financial statement purposes and tax reporting purposes in accordance with generally accepted accounting principles and federal tax regulations, respectively. For all other variable accounts, all premium and discount is amortized or accreted for financial statement purposes in accordance with U.S. generally accepted accounting principles; and all discount is accreted for tax reporting purposes as required by federal income tax regulations. Certain variable accounts earn certain fees in connection with its floating rate loan purchasing activities. These fees are in addition to interest payments earned and may include amendment fees, commitment fees, consent fees, and prepayment fees. These fees are recorded on an accrual basis as income in the accompanying financial statements. Dividends received in cash are recorded on the ex-dividend date. Certain dividends from foreign securities will be recorded when the variable account is informed of the dividend if such information is obtained subsequent to the ex-dividend date. Dividend and interest payments received in additional securities are recorded on the ex-dividend or ex-interest date in an amount equal to the value of the security on such date. The variable accounts may receive proceeds from litigation settlements involving its portfolio holdings. Any proceeds received are reflected in realized gain/loss in the Statements of Operations, or in unrealized gain/loss if the security is still held by the variable accounts. Fees Paid Indirectly - The variable accounts' custody fee is reduced according to an arrangement that measures the value of cash deposited with the custodian by the variable accounts. This amount, for the year ended December 31, 2006 is shown as a reduction of total expenses on the Statements of Operations. Federal Income Taxes - The variable accounts are funding vehicles for individual variable annuities. The operations of the variable accounts are part of the operations of Sun Life Assurance Company of Canada (U.S.), the Sponsor, and are not taxed separately; the variable accounts are not taxed as regulated investment companies. The Sponsor qualifies for the federal income tax treatment granted to life insurance companies under Subchapter L of the Internal Revenue Code. Accordingly, no provision for federal income or excise tax is necessary. Foreign taxes have been provided for on interest and dividend income earned on foreign investments in accordance with the applicable country's tax rates and to the extent unrecoverable are recorded as a reduction of investment income. (3) CONTRACT CHARGES The Sponsor makes a deduction from the variable accounts at the end of each valuation period, during both the accumulation period and after annuity payments begin, for assuming the mortality and expense risks under the contracts. The rate of the deduction may be changed annually but in no event may it exceed 1.25% of the average net assets of each variable account attributable to Compass 3 contracts, or, with respect to Compass 2 contracts, 1.30% of the assets of Capital Appreciation Variable Account, Government Securities Variable Account, High Yield Variable Account, and Money Market Variable Account, or 1.25% of the assets of Global Governments Variable Account, and Total Return Variable Account attributable to such contracts. For assuming the distribution expense risk under Compass 3 contracts, the Sponsor makes a deduction from the variable accounts at the end of each valuation period for the first seven contract years at an effective annual rate of 0.15% of the net assets of the variable accounts attributable to such contracts. Contracts are transferred from Compass 3 to Compass 3 -- Level 2 in the month following the seventh contract anniversary. No deduction is made after the seventh contract anniversary. No deduction is made with respect to assets attributable to Compass 2 contracts. Each year, on the contract anniversary, a contract maintenance charge of $25 with respect to Compass 2 contracts and $30 with respect to Compass 3 contracts is deducted from each contract's accumulation account and paid to the Sponsor to cover administrative expenses relating to the contract. After the annuity commencement date, the annual contract maintenance charge is deducted pro rata from each annuity payment made during the year. The Sponsor does not deduct a sales charge from purchase payments. However, a withdrawal charge (contingent deferred sales charge) may be deducted to cover certain expenses relating to the sale of the contract. In no event shall the aggregate withdrawal charges (including the distribution expense charge described above applicable to Compass 3 contracts) exceed 5% of the purchase payments made under a Compass 2 contract or 9% of the purchase payments made under a Compass 3 contract. (4) ANNUITY RESERVES Annuity reserves for contracts with annuity commencement dates prior to February 1, 1987 have been calculated using the 1971 Individual Annuitant Mortality Table. Annuity reserves for contracts with annuity commencement dates between February 1, 1987 and December 31, 1998 have been calculated using the 1983 Individual Annuitant Mortality Table. Annuity reserves for contracts with annuity commencement dates on or after January 1, 1999 have been calculated using the Annuity Mortality 2000 table. Annuity reserves for contracts in the current payment period are calculated using an assumed interest rate of 4%. Required adjustments are accomplished by transfers to or from the Sponsor. (5) TRANSACTIONS WITH AFFILIATES Investment Adviser - Each variable account has an investment advisory agreement with MFS to provide overall investment management and related administrative services and facilities to the variable accounts. The management fee is computed daily and paid monthly at the following annual rates based on a percentage of each variable account's average daily net assets:
Annual Rate of Management Annual Rate of Management Fee Fee Annual Based on Average Based on Average Effective Daily Net Assets Daily Net Assets Management Up to $300 Million In Excess of $300 Million Fee Rate - ---------------------------------------------------------------------------------------------------------------------------------- Capital Appreciation Variable Account ...................... 0.75% 0.675% 0.75% Global Governments Variable Account ........................ 0.75% 0.675% 0.75% Government Securities Variable Account ..................... 0.55% 0.495% 0.55% High Yield Variable Account ................................ 0.75%(a) 0.675% 0.68% Money Market Variable Account .............................. 0.50%(b) 0.50%(b) 0.50% Total Return Variable Account .............................. 0.75% 0.675% 0.75% (a) At the commencement of the period, the investment adviser had agreed to reduce its management fee to 0.675% of average daily net assets. Effective September 1, 2006, the investment adviser has agreed in writing to reduce its management fee to 0.70% for the first $300 million of average daily net assets. This written agreement will continue through August 31, 2007, unless changed or rescinded by the variable accounts' Board of Managers. This management fee reduction amounted to $40,938, which is shown as a reduction of total expenses in the Statements of Operations. (b) The investment adviser has agreed in writing to reduce its management fee to 0.45% of average daily net assets in excess of $500 million. This written agreement may be rescinded only upon consent of the variable accounts' Board of Managers. For the year ended December 31, 2006, the Money Market Variable Account's average daily net assets did not exceed $500 million and therefore, the management fee was not reduced.
At the commencement of the period, the investment adviser had agreed to pay each variable accounts' operating expenses, exclusive of taxes, extraordinary expenses, brokerage and transaction costs, mortality and expense risk charges, distribution expense risk charges, and contract maintenance charges, such that operating expenses did not exceed 1.25% annually of the average daily net assets of each variable account. This agreement is contained in the investment advisory agreement between MFS and the variable accounts and may not be rescinded without shareholder approval. Effective September 1, 2006, the investment adviser has agreed in writing to pay the High Yield Variable Account's operating expenses, exclusive of taxes, extraordinary expenses, brokerage and transaction costs, mortality and expense risk charges, distribution expense risk charges, and contract maintenance charges, such that operating expenses do not exceed 0.90% annually of the average daily net assets of the High Yield Variable Account. This written agreement will continue through August 31, 2007 unless changed or rescinded by the variable account's Board of Managers. For the year ended December 31, 2006, this reduction amounted to $84,512 and $20,169 for the Global Governments Variable Account and High Yield Variable Account, respectively, and is reflected as a reduction of total expenses in the Statements of Operations. For the year ended December 31, 2006, the actual operating expenses for the Capital Appreciation Variable Account, Government Securities Variable Account, Money Market Variable Account, and Total Return Variable Account did not exceed the limit and therefore, the investment adviser did not pay any portion of these variable accounts' expenses. Administrator - MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to each variable account. Under an administrative services agreement, each variable account partially reimburses MFS the costs incurred to provide these services. Prior to June 1, 2006, each variable account was allocated a portion of these administrative costs based on its size and relative average net assets. Effective June 1, 2006, each variable account is charged an annual fixed amount of $10,000 plus a fee based on calendar year average net assets. The administrative services fee incurred for the year ended December 31, 2006 was equivalent to the following annual effective rate of the variable accounts' average daily net assets:
Capital Global Government High Money Total Appreciation Governments Securities Yield Market Return Variable Variable Variable Variable Variable Variable Account Account Account Account Account Account - -------------------------------------------------------------------------------------------------------------------------------- Percent of average daily net assets ...................... 0.0245% 0.0692% 0.0245% 0.0243% 0.0243% 0.0247% ====== ====== ====== ====== ====== ======
Managers' and Officers' Compensation - Each variable account pays compensation to Independent Managers in the form of a retainer, attendance fees, and additional compensation to the Board chairperson. Each variable account does not pay compensation directly to officers or members of the Board of Managers who are affiliated with the Investment Adviser or the Sponsor. Certain officers and managers of the variable accounts are officers or directors of MFS, MFD, and MFSC. Other - These variable accounts and certain other MFS funds (the funds) have entered into a services agreement (the Agreement) which provides for payment of fees by the funds to Tarantino LLC in return for the provision of services of an Independent Chief Compliance Officer (ICCO) for the funds. The ICCO is an officer of the funds and the sole member of Tarantino LLC. The funds can terminate the Agreement with Tarantino LLC at any time under the terms of the Agreement. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO. For the year ended December 31, 2006, the fees paid to Tarantino LLC were as follows: Capital Appreciation Variable Account .... $1,197 Global Governments Variable Account ...... 49 Government Securities Variable Account ... 438 High Yield Variable Account .............. 314 Money Market Variable Account ............ 271 Total Return Variable Account ............ 949 (6) PORTFOLIO SECURITIES Purchases and sales of investments, other than U.S. government securities, purchased option transactions, and short-term obligations were as follows: Purchases Sales - -------------------------------------------------------------------------- Capital Appreciation Variable Account ........ $139,981,685 $187,252,271 Global Governments Variable Account .......... 5,533,581 6,930,975 Government Securities Variable Account ....... 1,385,157 806,537 High Yield Variable Account .................. 51,630,690 56,781,385 Total Return Variable Account ................ 63,051,273 81,352,650 Purchases and sales of investments for the Money Market Variable Account, exclusive of securities subject to repurchase agreements, aggregated $656,414,713 and $667,087,700, respectively. Purchases and sales of U.S. government securities, other than purchased option transactions and short-term obligations, were as follows: Purchases Sales - -------------------------------------------------------------------------- Global Governments Variable Account .......... $ 3,968,496 $ 3,349,384 Government Securities Variable Account ....... 12,499,717 26,469,320 Total Return Variable Account ................ 18,728,895 28,186,798 (7) PARTICIPANT TRANSACTIONS The changes in net assets from changes in numbers of outstanding units were as follows:
Year Ended 12/31/06 (000 Omitted) ------------------------------------------------------------------------ Transfers Between Withdrawals, Variable Accounts Surrenders, Purchase and Fixed Annuitizations, Payments Accumulation and Contract Received Account Charges -------------------- -------------------- -------------------- Units Dollar Units Dollars Units Dollars -------- -------- -------- -------- -------- -------- Capital Appreciation Variable Account Compass 2 Contracts .................. 28 $ 1,602 (78) $ (4,354) (549) $(30,610) Compass 3 Contracts .................. 20 756 (99) (3,657) (30) (1,105) Compass 3 - Level 2 Contracts ........ 133 2,035 93 1,464 (1,096) (16,818) -------- -------- -------- $ 4,393 $ (6,547) $(48,533) ======== ======== ======== Global Governments Variable Account Compass 2 Contracts .................. 2 $ 41 9 $ 229 (23) $ (568) Compass 3 Contracts .................. 4 109 (7) (177) (5) (127) Compass 3 - Level 2 Contracts ........ 8 129 (5) (74) (68) (981) -------- -------- -------- $ 279 $ (22) $ (1,676) ======== ======== ======== Government Securities Variable Account Compass 2 Contracts .................. 22 $ 834 (21) $ (771) (315) $(11,902) Compass 3 Contracts .................. 8 204 (29) (763) (8) (205) Compass 3 - Level 2 Contracts ........ 27 421 25 376 (278) (4,289) -------- -------- -------- $ 1,459 $ (1,158) $(16,396) ======== ======== ======== High Yield Variable Account Compass 2 Contracts .................. 9 $ 332 (13) $ (465) (200) $ (7,644) Compass 3 Contracts .................. 6 163 (13) (374) (6) (158) Compass 3 - Level 2 Contracts ........ 18 266 3 90 (184) (2,780) -------- -------- -------- $ 761 $ (749) $(10,582) ======== ======== ======== Money Market Variable Account Compass 2 Contracts .................. 9 $ 188 2 $ 41 (211) $ (4,359) Compass 3 Contracts .................. 21 356 (80) (1,346) (28) (473) Compass 3 - Level 2 Contracts ........ 62 777 77 963 (554) (7,013) -------- -------- -------- $ 1,321 $ (342) $(11,845) ======== ======== ======== Total Return Variable Account Compass 2 Contracts .................. 11 $ 492 27 $ 1,266 (231) $(11,129) Compass 3 Contracts .................. 24 1,119 (74) (3,480) (25) (1,142) Compass 3 - Level 2 Contracts ........ 119 2,689 193 4,441 (1,079) (24,482) -------- -------- -------- $ 4,300 $ 2,227 $(36,753) ======== ======== ======== Year Ended 12/31/06 (000 Omitted) ----------------------------------------------- Net Net Net Accumulation Annuitization Increase Activity Activity (Decrease) --------------------- -------- -------- Units Dollars Dollars Dollars --------- -------- -------- -------- Capital Appreciation Variable Account Compass 2 Contracts .................. (599) $(33,362) $ (159) $(33,521) Compass 3 Contracts .................. (109) (4,006) 0* (4,006) Compass 3 - Level 2 Contracts ........ (870) (13,319) (36) (13,355) -------- -------- -------- $(50,687) $ (195) $(50,882) ======== ======== ======== Global Governments Variable Account Compass 2 Contracts .................. (12) $ (298) $ 1 $ (297) Compass 3 Contracts .................. (8) (195) (38) (233) Compass 3 - Level 2 Contracts ........ (65) (926) 35 (891) -------- -------- -------- $ (1,419) $ (2) $ (1,421) Government Securities Variable Account Compass 2 Contracts .................. (314) $(11,839) $ 51 $(11,788) Compass 3 Contracts .................. (29) (764) -- (764) Compass 3 - Level 2 Contracts ........ (226) (3,492) 0* (3,492) -------- -------- -------- $(16,095) $ 51 $(16,044) ======== ======== ======== High Yield Variable Account Compass 2 Contracts .................. (204) $ (7,777) $ (72) $ (7,849) Compass 3 Contracts .................. (13) (369) 0* (369) Compass 3 - Level 2 Contracts ........ (163) (2,424) (1) (2,425) -------- -------- -------- $(10,570) $ (73) $(10,643) ======== ======== ======== Money Market Variable Account Compass 2 Contracts .................. (200) $ (4,130) $ (178) $ (4,308) Compass 3 Contracts .................. (87) (1,463) (9) (1,472) Compass 3 - Level 2 Contracts ........ (415) (5,273) (34) (5,307) -------- -------- -------- $(10,866) $ (221) $(11,087) ======== ======== ======== Total Return Variable Account Compass 2 Contracts .................. (193) $ (9,371) $ (174) $ (9,545) Compass 3 Contracts .................. (75) (3,503) (48) (3,551) Compass 3 - Level 2 Contracts ........ (767) (17,352) (78) (17,430) -------- -------- -------- $(30,226) $ (300) $(30,526) ======== ======== ======== * Amount less than 500. Year Ended 12/31/05 (000 Omitted) ------------------------------------------------------------------- Transfers Between Withdrawals, Variable Accounts Surrenders, Purchase and Fixed Annuitizations, Payments Accumulation and Contract Received Account Charges -------------------- -------------------- -------------------- Units Dollar Units Dollars Units Dollars -------- -------- -------- -------- -------- -------- Capital Appreciation Variable Account Compass 2 Contracts .................. 35 $ 1,936 (21) $ (1,091) (540) $(29,700) Compass 3 Contracts .................. 38 1,358 (152) (5,445) (62) (2,250) Compass 3 - Level 2 Contracts ........ 171 2,563 412 6,242 (1,133) (16,995) -------- -------- -------- $ 5,857 $ (294) $(48,945) ======== ======== ======== Global Governments Variable Account Compass 2 Contracts .................. 1 $ 29 12 $ 324 (25) $ (653) Compass 3 Contracts .................. 4 103 0* 7 (6) (157) Compass 3 - Level 2 Contracts ........ 16 234 43 646 (91) (1,359) -------- -------- -------- $ 366 $ 977 $ (2,169) ======== ======== ======== Government Securities Variable Account Compass 2 Contracts .................. 31 $ 1,174 7 $ 275 (311) $(11,710) Compass 3 Contracts .................. 13 341 (29) (746) (15) (383) Compass 3 - Level 2 Contracts ........ 51 788 84 1,292 (232) (3,571) -------- -------- -------- $ 2,303 $ 821 $(15,664) ======== ======== ======== High Yield Variable Account Compass 2 Contracts .................. 18 $ 671 (27) $ (1,007) (269) $ (9,848) Compass 3 Contracts .................. 9 250 (15) (416) (14) (371) Compass 3 - Level 2 Contracts ........ 21 306 100 1,381 (155) (2,231) -------- -------- -------- $ 1,227 $ (42) $(12,450) ======== ======== ======== Money Market Variable Account Compass 2 Contracts .................. 12 $ 326 349 $ 7,007 (242) $ (4,879) Compass 3 Contracts .................. 33 568 142 2,330 (54) (884) Compass 3 - Level 2 Contracts ........ 71 904 2,082 25,741 (2,028) (25,133) -------- -------- -------- $ 1,798 $ 35,078 $(30,896) ======== ======== ======== Total Return Variable Account Compass 2 Contracts .................. 11 $ 557 104 $ 4,770 (277) $(12,683) Compass 3 Contracts .................. 31 1,416 (84) (3,724) (45) (2,024) Compass 3 - Level 2 Contracts ........ 156 3,366 635 13,743 (975) (21,072) -------- -------- -------- $ 5,339 $ 14,789 $(35,779) ======== ======== ======== Year Ended 12/31/05 (000 Omitted) ----------------------------------------------- Net Net Net Accumulation Annuitization Increase Activity Activity (Decrease) --------------------- -------- -------- Units Dollars Dollars Dollars --------- -------- -------- -------- Capital Appreciation Variable Account Compass 2 Contracts .................. (526) $(28,855) $ (212) $(29,067) Compass 3 Contracts .................. (176) (6,337) 0* (6,337) Compass 3 - Level 2 Contracts ........ (550) (8,190) (7) (8,197) -------- -------- -------- $(43,382) $ (219) $(43,601) ======== ======== ======== Global Governments Variable Account Compass 2 Contracts .................. (12) $ (300) $ 1 $ (299) Compass 3 Contracts .................. (2) (47) (3) (50) Compass 3 - Level 2 Contracts ........ (32) (479) (1) (480) -------- -------- -------- $ (826) $ (3) $ (829) ======== ======== ======== Government Securities Variable Account Compass 2 Contracts .................. (273) $(10,261) $ (68) $(10,329) Compass 3 Contracts .................. (31) (788) -- (788) Compass 3 - Level 2 Contracts ........ (97) (1,491) (10) (1,501) -------- -------- -------- $(12,540) $ (78) $(12,618) ======== ======== ======== High Yield Variable Account Compass 2 Contracts .................. (278) $(10,184) $ (200) $(10,384) Compass 3 Contracts .................. (20) (537) (8) (545) Compass 3 - Level 2 Contracts ........ (34) (544) (14) (558) -------- -------- -------- $(11,265) $ (222) $(11,487) ======== ======== ======== Money Market Variable Account Compass 2 Contracts .................. 119 $ 2,454 $ 9 $ 2,463 Compass 3 Contracts .................. 121 2,014 4 2,018 Compass 3 - Level 2 Contracts ........ 125 1,512 56 1,568 -------- -------- -------- $ 5,980 $ 69 $ 6,049 ======== ======== ======== Total Return Variable Account Compass 2 Contracts .................. (162) $ (7,356) $ (135) $ (7,491) Compass 3 Contracts .................. (98) (4,332) (86) (4,418) Compass 3 - Level 2 Contracts ........ (184) (3,963) (119) (4,082) -------- -------- -------- $(15,651) $ (340) $(15,991) ======== ======== ======== * Amount less than 500.
On July 18, 2005, $41,059,121 was transferred to the Money Market Variable Account from the Managed Sectors Variable Account as a result of its termination. (8) LINE OF CREDIT The variable accounts and other funds managed by MFS participate in a $1 billion unsecured committed line of credit provided by a syndication of banks under a credit agreement. In addition, the variable accounts and other funds managed by MFS have established uncommitted borrowing arrangements with certain banks. Borrowings may be made for temporary financing needs. Interest is charged to each fund, based on its borrowings, generally at a rate equal to the Federal Reserve funds rate plus 0.35%. In addition, a commitment fee, based on the average daily unused portion of the committed line of credit, is allocated among the participating funds at the end of each calendar quarter. For the year ended December 31, 2006, the variable accounts' commitment fee and interest expense are included in miscellaneous expense on the Statements of Operations and were as follows: Commitment fee Interest expense - ------------------------------------------------------------------------------ Capital Appreciation Variable Account .... $2,008 $-- Global Governments Variable Account ...... 83 -- Government Securities Variable Account ... 737 -- High Yield Variable Account .............. 510 -- Money Market Variable Account ............ 671 221 Total Return Variable Account ............ 1,573 -- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Participants in and the Board of Managers of Capital Appreciation Variable Account, Global Governments Variable Account, Government Securities Variable Account, High Yield Variable Account, Money Market Variable Account and Total Return Variable Account and the Board of Directors of Sun Life Insurance Company of Canada: We have audited the accompanying statements of assets and liabilities, including the portfolios of investments, of Capital Appreciation Variable Account, Global Governments Variable Account, Government Securities Variable Account, High Yield Variable Account, Money Market Variable Account and Total Return Variable Account (the "Variable Accounts") as of December 31, 2006, and the related statements of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Variable Accounts' management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Variable Accounts are not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Variable Accounts' internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2006, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements and financial highlights present fairly, in all material respects, the financial positions of Capital Appreciation Variable Account, Global Governments Variable Account, Government Securities Variable Account, High Yield Variable Account, Money Market Variable Account and Total Return Variable Account as of December 31, 2006, the results of their operations for the year then ended, the changes in their net assets for each of the two years in the period then ended, and their financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP Boston, Massachusetts February 20, 2007 COMPASS VARIABLE ACCOUNTS MEMBERS OF BOARDS OF MANAGERS AND OFFICERS -- IDENTIFICATION AND BACKGROUND The members of the Boards of Managers ("Managers") and the officers of each Account, as of February 1, 2007, are listed below, together with their principal occupations during the past five years. (Their titles may have varied during that period.) The address of each Manager and officer is 500 Boylston Street, Boston, Massachusetts 02116.
POSITION(s) HELD MANAGER/OFFICER PRINCIPAL OCCUPATIONS DURING THE PAST NAME, DATE OF BIRTH WITH FUND SINCE(1) FIVE YEARS AND OTHER DIRECTORSHIPS(2) - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- INTERESTED MANAGER - ----------------------------------------------------------------------------------------------------------------------------------- David D. Horn(3) Manager April 1986 Private investor; Retired; Sun Life Assurance Company (born 06/07/41) of Canada, Former Senior Vice President and General Manager for the United States (until 1997) - ----------------------------------------------------------------------------------------------------------------------------------- INDEPENDENT MANAGERS - ----------------------------------------------------------------------------------------------------------------------------------- J. Kermit Birchfield Chairman May 1997 Consultant; Century Partners, Inc. (investments), (born 01/08/40) Managing Director; Displaytech, Inc. (manufacturer of liquid crystal display technology), Director; Dessin Fournir LLC (furniture manufacturer), Director (October 2005 to present) - ----------------------------------------------------------------------------------------------------------------------------------- Robert C. Bishop Manager May 2001 AutoImmune Inc. (pharmaceutical product development), (born 01/13/43) Chairman, President and Chief Executive Officer; Caliper Life Sciences Corp. (laboratory analytical instruments), Director; Millipore Corporation (purification/ filtration products), Director; Quintiles Transnational Corp. (contract services to the medical industry), Director - ----------------------------------------------------------------------------------------------------------------------------------- Frederick H. Dulles Manager May 2001 Attorney; Ten State Street LLP (law firm), (born 03/12/42) Partner (July 2003 to May 2005); McFadden, Pilkington & Ward LLP (solicitors and registered foreign lawyers), Partner (until June 2003); Jackson & Nash, LLP (law firm), Of Counsel (January 2000 to November 2000) - ----------------------------------------------------------------------------------------------------------------------------------- Marcia A. Kean Manager April 2005 Feinstein Kean Healthcare (consulting), Chief Executive (born 06/30/48) Officer (since December 2002), Managing Director (prior to May 2001); Ardais Corporation (biotech products), Senior Vice President - Commercialization (February 2002 until November 2002) - ----------------------------------------------------------------------------------------------------------------------------------- Ronald G. Steinhart Manager May 2001 Private investor; Bank One, Texas N.A., Vice Chairman and (born 06/15/40) Director (January 2000 to January 2001); Bank One Corporation, Officer (until January 2000); Carreker Corporation (consultant and technology provider to financial institutions), Director; Prentiss Properties Trust (real estate investment trust), Director; United Auto Group, Inc. (automotive retailer), Director - ----------------------------------------------------------------------------------------------------------------------------------- Haviland Wright Manager May 2001 Hawaii Small Business Development Center, Kaua'l (born 07/21/48) Center, Center Director (since March 2002); Displaytech, Inc. (manufacturer of liquid crystal display technology), Chairman and Chief Executive Officer (until March 2002) - ----------------------------------------------------------------------------------------------------------------------------------- MANAGER EMERITUS - ----------------------------------------------------------------------------------------------------------------------------------- Samuel Adams Manager Emeritus Retired (born 10/19/25) - ----------------------------------------------------------------------------------------------------------------------------------- OFFICERS - ----------------------------------------------------------------------------------------------------------------------------------- Maria F. Dwyer(4) President November 2005 Massachusetts Financial Services Company, Executive (born 12/01/58) Vice President and Chief Regulatory Officer (since March 2004); Fidelity Management & Research Company, Vice President (prior to March 2004); Fidelity Group of Funds, President and Treasurer (prior to March 2004) - ----------------------------------------------------------------------------------------------------------------------------------- Tracy Atkinson(4) Treasurer September 2005 Massachusetts Financial Services Company, Senior (born 12/30/64) Vice President (since September 2004); PricewaterhouseCoo pers LLP, Partner (prior to September 2004) - ----------------------------------------------------------------------------------------------------------------------------------- Christopher R. Bohane(4) Assistant Secretary July 2005 Massachusetts Financial Services Company, Vice (born 01/18/74) and Assistant Clerk President and Senior Counsel (since April 2003); Kirkpatrick & Lockhart LLP (law firm), Associate (prior to April 2003) - ----------------------------------------------------------------------------------------------------------------------------------- Ethan D. Corey(4) Assistant Secretary July 2005 Massachusetts Financial Services Company, Special (born 11/21/63) and Assistant Clerk Counsel (since December 2004); Dechert LLP (law firm), Counsel (prior to December 2004) - ----------------------------------------------------------------------------------------------------------------------------------- David L. DiLorenzo(4) Assistant Treasurer July 2005 Massachusetts Financial Services Company, Vice (born 08/10/68) President (since June 2005); JP Morgan Investor Services, Vice President (January 2001 to June 2005) - ----------------------------------------------------------------------------------------------------------------------------------- Timothy M. Fagan(4) Assistant Secretary September 2005 Massachusetts Financial Services Company, Vice (born 07/10/68) and Assistant Clerk President and Senior Counsel (since September 2005); John Hancock Advisers, LLC, Vice President and Chief Compliance Officer (September 2004 to August 2005) Senior Attorney (prior to September 2004); John Hancock Group of Funds, Vice President and Chief Compliance Officer (September 2004 to December 2004) - ----------------------------------------------------------------------------------------------------------------------------------- Mark D. Fischer(4) Assistant Treasurer July 2005 Massachusetts Financial Services Company, Vice (born 10/27/70) President (since May 2005); JP Morgan Investment Management Company, Vice President (prior to May 2005) - ----------------------------------------------------------------------------------------------------------------------------------- Brian E. Langenfeld(4) Assistant Secretary May 2006 Massachusetts Financial Services Company, Assistant (born 03/07/73) and Assistant Clerk Vice President and Counsel (since May 2006); John Hancock Advisers, LLC, Assistant Vice President and Counsel (May 2005 to April 2006); John Hancock Advisers, LLC, Attorney and Assistant Secretary (prior to May 2005) - ----------------------------------------------------------------------------------------------------------------------------------- Ellen Moynihan(4) Assistant Treasurer May 1997 Massachusetts Financial Services Company, Vice President (born 11/13/57) - ----------------------------------------------------------------------------------------------------------------------------------- Susan S. Newton(4) Assistant Secretary May 2005 Massachusetts Financial Services Company, Senior (born 03/07/50) and Assistant Clerk Vice President and Assistant General Counsel (since April 2005); John Hancock Advisers, LLC, Senior Vice President, Secretary and Chief Legal Officer (prior to April 2005); John Hancock Group of Funds, Senior Vice President, Secretary and Chief Legal Officer (prior to April 2005) - ----------------------------------------------------------------------------------------------------------------------------------- Susan A. Pereira(4) Assistant Secretary July 2005 Massachusetts Financial Services Company, Vice (born 11/05/70) and Assistant Clerk President and Senior Counsel (since June 2004); Bingham McCutchen LLP (law firm), Associate (January 2001 to June 2004) - ----------------------------------------------------------------------------------------------------------------------------------- Mark N. Polebaum(4) Secretary and February 2006 Massachusetts Financial Services Company, Executive (born 05/01/52) Assistant Clerk Vice President, General Counsel and Secretary (since January 2006); Wilmer Cutler Pickering Hale and Dorr LLP (law firm), Partner (prior to January 2006) - ----------------------------------------------------------------------------------------------------------------------------------- Frank L. Tarantino Independent Chief September 2004 Tarantino LLC (provider of compliance services), (born 03/07/44) Compliance Officer Principal (since June 2004); CRA Business Strategies Group (consulting services), Executive Vice President (April 2003 to June 2004); David L. Babson & Co. (investment adviser), Managing Director, Chief Administrative Officer and Director (February 1997 to March 2003) - ----------------------------------------------------------------------------------------------------------------------------------- James O. Yost(4) Assistant Treasurer April 1992 Massachusetts Financial Services Company, Senior (born 06/12/60) Vice President - ----------------------------------------------------------------------------------------------------------------------------------- - ------------ (1) Date first appointed to serve as Manager/Trustee/Officer of an MFS/Sun Life Product. Each Manager has served continuously since appointment. (2) Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., "public companies"). (3) "Interested person" of the Sun Life of Canada (U.S.), within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the Series. The address of Sun Life of Canada (U.S.) is One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481. (4) "Interested person" of MFS within the meaning of the 1940 Act. The address of MFS is 500 Boylston Street, Boston, Massachusetts 02116.
The Accounts do not hold annual meetings for the purpose of electing Managers, and Managers are not elected for fixed terms. Each Manager and officer holds office until his or her successor is chosen and qualified, or until his or her earlier death, resignation, retirement or removal. All Managers currently serve as Managers of each Account and have served in that capacity since originally elected or appointed. All of the Managers are also Trustees of the MFS Sun/Life Series Trust. The executive officers of the Compass Variable Accounts hold similar offices for the MFS Sun/Life Series Trust and other funds in the MFS fund complex. Each Manager serves as a Trustee or Manager of 34 Accounts/Series. The Statement of Additional Information contains further information about the Managers and is available without charge upon request by calling 1-800-752-7215. BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENTS The Investment Company Act of 1940 requires that both the full Board of Managers and a majority of the non-interested ("independent") Managers, voting separately, annually approve the continuation of each Variable Account's investment advisory agreement with Massachusetts Financial Services Company (MFS) on behalf of the Variable Accounts. The Managers consider matters bearing on the Variable Accounts and their advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Managers met several times over the course of three months beginning in May and ending in July 2006 ("contract review meetings") for the specific purpose of considering whether to approve the continuation of the investment advisory agreements for the Variable Accounts. The independent Managers were assisted in their evaluation of the investment advisory agreements by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS management during various contract review meetings. The independent Managers were also assisted in this process by the Variable Accounts" Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Managers. In connection with their deliberations, the Managers, including the independent Managers, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. Each investment advisory agreement was considered separately for each Variable Account, although the Managers also took into account the common interests of all Variable Accounts in their review. As described below, the Managers considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreements and other arrangements with the Variable Accounts. In connection with their contract review meetings, the Managers received and relied upon materials which included, among other items: (i) information provided by Lipper Inc. on the investment performance of each Variable Account for various time periods ended December 31, 2005, compared to the investment performance of a group of funds with substantially similar investment classifications/objectives (the "Lipper performance universe"), as well as the investment performance of a group of funds identified by objective criteria suggested by MFS ("peer funds"), (ii) information provided by Lipper Inc. on each Variable Account's advisory fees and other expenses compared to the advisory fees and other expenses of comparable funds identified by Lipper (the "Lipper expense group"), as well as the advisory fees and other expenses of peer funds identified by objective criteria suggested by MFS, (iii) information provided by MFS on the advisory fees of comparable portfolios of its other clients, including institutional separate account and other clients, (iv) information as to whether, and to what extent applicable, expense waivers, reimbursements or fee "breakpoints" are observed for a Variable Account, (v) information regarding MFS" financial results and financial condition, including MFS' and certain of its affiliates' estimated profitability from services performed for the Variable Accounts, (vi) MFS' views regarding the outlook for the mutual fund industry and its strategic business plans, (vii) descriptions of various functions performed by MFS for the Variable Accounts, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS' senior management and other personnel providing investment advisory, administrative and other services to the Variable Accounts. The comparative performance, fee and expense information prepared and provided by Lipper Inc. was not independently verified, and the independent Managers did not independently verify any information provided to them by MFS. The Managers' conclusions as to the continuation of the investment advisory agreements were based on comprehensive consideration of all information provided to the Managers and not the result of any single factor. Some of the factors that figured particularly in the Managers' deliberations are described below for each Variable Account, while individual Managers may have given different weight to various factors and evaluated the information presented as a whole differently than another Manager. The Managers recognized that the fee arrangements for the Variable Accounts reflect years of review and discussion between the independent Managers and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than others, and that the Managers' conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years. Based on information provided by Lipper Inc. and MFS, the Managers compared each Variable Account's total return investment performance to the performance of peer groups of funds and its Lipper performance universe over the one-, three- and five-year periods. The Managers did not rely on performance results for more recent periods, including those shown elsewhere in this report. In the course of their deliberations, the Managers took into account information provided by MFS during contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year. For Variable Accounts whose performance lagged their peer groups, they discussed the factors that contributed thereto and MFS' efforts to improve such Variable Account's performance. After reviewing this information, the Managers concluded, within the context of their overall conclusions regarding the investment advisory agreements, that they were satisfied with MFS' responses and efforts relating to investment performance. In assessing the reasonableness of each Variable Account's advisory fee, the Managers considered, among other information, each Variable Account's advisory fee and the total expense ratio as a percentage of average net assets, compared to the advisory fees and total expense ratios of peer groups of funds based on information provided by Lipper Inc. and MFS. The Managers also considered the advisory fees charged by MFS to institutional accounts. In comparing these fees, the Managers considered the generally broader scope of services provided by MFS to the Variable Accounts than those provided to institutional accounts. The Managers also considered the higher demands placed on MFS' investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Variable Accounts, and the impact on MFS and related expenses due to the more extensive regulatory regime to which the Variable Accounts are subject, compared to institutional accounts. The Managers also considered whether a Variable Account is likely to benefit from any economies of scale due to future asset growth. In this regard, the Managers reviewed the adequacy of breakpoints and discussed with MFS any adjustments necessary for the shareholders' benefits. The Managers also considered information prepared by MFS relating to its costs and profits with respect to each Variable Account and other investment companies and accounts advised by MFS, as well as MFS' methodologies used to determine and allocate its costs to the Variable Accounts and other accounts and products for purposes of estimating profitability. After reviewing these and other factors described below, the Managers concluded that the advisory fees charged to the Variable Accounts represent reasonable compensation in light of the nature and quality of the services being provided by MFS. In addition, the Managers considered MFS' resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Variable Accounts. The Managers also considered the financial resources of MFS and its parent, Sun Life Financial Inc. The Managers further considered any advantages and possible disadvantages of having an adviser which also serves other investment companies as well as institutional accounts. The Managers also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Variable Accounts by MFS and its affiliates under agreements and plans other than the investment advisory agreements. The Managers also considered the nature, extent and quality of certain other services MFS performs or arranges on the Variable Accounts' behalf, including directed expense payment programs, class action recovery programs, and MFS' interaction with third-party service providers, principally custodians and sub-custodians. The Managers concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Variable Accounts were satisfactory. The Managers also considered the benefits to MFS from the use of the Variable Accounts' portfolio brokerage commissions to pay for research and other similar services (including MFS' policy not to use "soft dollars" generated by Variable Account portfolio transactions to pay for third-party research), and various other factors. Additionally, the Managers considered so-called "fall-out benefits" to MFS such as reputational value derived from serving as investment manager to the Variable Accounts, and determined that any such benefits derived by MFS were reasonable and fair. Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Managers, including a majority of the independent Managers, concluded that the investment advisory agreements should be continued for an additional one-year period, commencing September 1, 2006. CAPITAL APPRECIATION VARIABLE ACCOUNT The Managers noted the Variable Account's performance was in the 5th quintile relative to the other funds in the Lipper performance universe for the one- year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Variable Account was in the 4th quintile for the three-year period and the 5th quintile for the five-year period ended December 31, 2005, relative to the Lipper performance universe. Based on the nature and quality of services provided by MFS and MFS' explanation of recent steps taken to improve performance, the Board of Managers concluded that the Variable Account's performance was adequate. In considering the fees, the Managers noted from the Lipper data that the Variable Account's effective advisory fee rate and total expense ratio were each approximately at the median of such fees and expenses of funds in the Lipper expense group. The Managers further concluded that the existing breakpoints were sufficient to allow the Variable Account to benefit from economies of scale as its assets grow. In addition, the Managers considered that MFS observes a total expense limitation for the Account. The Managers concluded that the fees were reasonable in light of the nature and quality of services provided. GLOBAL GOVERNMENTS VARIABLE ACCOUNT The Managers noted the Variable Account's performance was in the 5th quintile relative to the other funds in the Lipper performance universe for the one- year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Variable Account was in the 4th quintile for the three-year period and the 4th quintile for the five-year period ended December 31, 2005, relative to the Lipper performance universe. Based on the nature and quality of services provided by MFS and MFS' explanation of recent steps taken to improve performance, the Board of Managers concluded that the Variable Account's performance was adequate. In considering the fees, the Managers noted from the Lipper data that the Variable Account's effective advisory fee rate was below the median and total expense ratio was above the median of such fees and expenses of funds in the Lipper expense group. The Managers further concluded that the existing breakpoints were sufficient to allow the Variable Account to benefit from economies of scale as its assets grow. In addition, the Managers considered that MFS observes a total expense limitation for the Account. The Managers concluded that the fees were reasonable in light of the nature and quality of services provided. GOVERNMENT SECURITIES VARIABLE ACCOUNT The Managers noted the Variable Account's performance was in the 3rd quintile relative to the other funds in the Lipper performance universe for the one- year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Variable Account was in the 3rd quintile for the three-year period and the 3rd quintile for the five-year period ended December 31, 2005, relative to the Lipper performance universe. Based on the nature and quality of services provided by MFS and MFS' explanation of recent steps taken to improve performance, the Board of Managers concluded that the Variable Account's performance was satisfactory. In considering the fees, the Managers noted from the Lipper data that the Variable Account's effective advisory fee rate and total expense ratio were each approximately at the median of such fees and expenses of funds in the Lipper expense group. The Managers further concluded that the existing breakpoints were sufficient to allow the Variable Account to benefit from economies of scale as its assets grow. In addition, the Managers considered that MFS observes a total expense limitation for the Account. The Managers concluded that the fees were reasonable in light of the nature and quality of services provided. HIGH YIELD VARIABLE ACCOUNT The Managers noted the Variable Account's performance was in the 4th quintile relative to the other funds in the Lipper performance universe for the one- year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Variable Account was in the 4th quintile for the three-year period and the 5th quintile for the five-year period ended December 31, 2005, relative to the Lipper performance universe. Based on the nature and quality of services provided by MFS and MFS' explanation of recent steps taken to improve performance, the Board of Managers concluded that the Variable Account's performance was adequate. In considering the fees, the Managers noted from the Lipper data that the Variable Account's effective advisory fee rate and total expense ratio were each above the median of such fees and expenses of funds in the Lipper expense group. The Managers noted that MFS agreed to reduce its advisory fee to an annual rate of 0.70% on the first $300 million of assets. In addition, the Managers considered that MFS observes a total expense limitation for the Account. The Managers concluded that the reduced fees were reasonable in light of the nature and quality of services provided. MONEY MARKET VARIABLE ACCOUNT The Managers noted the Variable Account's performance was in the 4th quintile relative to the other funds in the Lipper performance universe for the one- year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Variable Account was in the 4th quintile for the three-year period and the 4th quintile for the five-year period ended December 31, 2005, relative to the Lipper performance universe. Based on the nature and quality of services provided by MFS and MFS' explanation of recent steps taken to improve performance, the Board of Managers concluded that the Variable Account's performance was adequate. In considering the fees, the Managers noted from the Lipper data that the Variable Account's effective advisory fee rate and total expense ratio were each above the median of such fees and expenses of funds in the Lipper expense group. The Managers further concluded that the existing breakpoints were sufficient to allow the Variable Account to benefit from economies of scale as its assets grow. In addition, the Managers considered that MFS observes a total expense limitation for the Account. The Managers concluded that the fees were reasonable in light of the nature and quality of services provided. TOTAL RETURN VARIABLE ACCOUNT The Managers noted the Variable Account's performance was in the 5th quintile relative to the other funds in the Lipper performance universe for the one- year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Variable Account was in the 3rd quintile for the three-year period and the 2nd quintile for the five-year period ended December 31, 2005, relative to the Lipper performance universe. Based on the nature and quality of services provided by MFS and MFS' explanation of recent steps taken to improve performance, the Board of Managers concluded that the Variable Account's performance was satisfactory. In considering the fees, the Managers noted from the Lipper data that the Variable Account's effective advisory fee rate and total expense ratio were each above the median of such fees and expenses of funds in the Lipper expense group. The Managers further concluded that the existing breakpoints were sufficient to allow the Variable Account to benefit from economies of scale as its assets grow. In addition, the Managers considered that MFS observes a total expense limitation for the Account. The Managers concluded that the fees were reasonable in light of the nature and quality of services provided. A discussion regarding the Board's most recent review and renewal of the series' Investment Advisory Agreement with MFS is available by clicking on "Sun Life Annuities" in the "Products and Performance" section of the MFS Web site (mfs.com). MFS(R) PRIVACY NOTICE Privacy is a concern for every investor today. At MFS Investment Management(R) and the MFS funds, we take this concern very seriously. We want you to understand our policies about the investment products and services that we offer, and how we protect the nonpublic personal information of investors who have a direct relationship with us and our wholly owned subsidiaries. Throughout our business relationship, you provide us with personal information. We maintain information and records about you, your investments, and the services you use. Examples of the nonpublic personal information we maintain include o data from investment applications and other forms o share balances and transactional history with us, our affiliates, or others o facts from a consumer reporting agency We do not disclose any nonpublic personal information about our customers or former customers to anyone, except as permitted by law. We may share nonpublic personal information with third parties or certain of our affiliates in connection with servicing your account or processing your transactions. We may share information with companies or financial institutions that perform marketing services on our behalf or with other financial institutions with which we have joint marketing arrangements, subject to any legal requirements. Authorization to access your nonpublic personal information is limited to appropriate personnel who provide products, services, or information to you. We maintain physical, electronic, and procedural safeguards to help protect the personal information we collect about you. If you have any questions about the MFS privacy policy, please call 1-800-225-2606 any business day between 8 a.m. and 8 p.m. Eastern time. Note: If you own MFS products or receive MFS services in the name of a third party such as a bank or broker-dealer, their privacy policy may apply to you instead of ours. INVESTMENT ADVISER Massachusetts Financial Services Company 500 Boylston Street, Boston, MA 02116-3741 CUSTODIAN AND DIVIDEND DISBURSING AGENT State Street Bank and Trust Company 225 Franklin Street, Boston, MA 02110-2875 PROXY VOTING POLICIES AND INFORMATION A general description of the accounts' proxy voting policies and procedures is available without charge, upon request, by calling 1-800-225-2606, by visiting the Proxy Voting section of mfs.com or by visiting the SEC's website at http:/ /www.sec.gov. Information regarding how the accounts voted proxies relating to portfolio securities during the most recent twelve month period ended June 30 is available without charge by visiting the Proxy Voting section of mfs.com or by visiting the SEC's website at http://www.sec.gov. QUARTERLY PORTFOLIO DISCLOSURE The accounts will file a complete schedule of portfolio holdings with the Securities and Exchange Commission (the Commission) for the first and third quarters of each fiscal year on Form N-Q. The accounts' Form N-Q may be reviewed and copied at the: Public Reference Room Securities and Exchange Commission Washington, D.C. 20549 0102 Information on the operation of the Public Reference Room may be obtained by calling the Commission at 1-800-SEC-0330. The accounts' Form N-Q is available on the EDGAR database on the Commission's Internet website at http:// www.sec.gov, and copies of this information may be obtained, upon payment of a duplicating fee, by electronic request at the following e-mail address: publicinfor@sec.gov or by writing the Public Reference Section at the above address. Sun Life Financial Distributors Inc. COUS-ANN-12/06 ITEM 2. CODE OF ETHICS. The Registrant has adopted a Code of Ethics pursuant to Section 406 of the Sarbanes-Oxley Act and as defined in Form N-CSR that applies to the Registrant's principal executive officer and principal financial and accounting officer. The Registrant has not amended any provision in its Code of Ethics (the "Code") that relates to an element of the Code's definitions enumerated in paragraph (b) of Item 2 of this Form N-CSR. A copy of the Code of Ethics is filed as an exhibit to this Form N-CSR. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. Messrs. J. Kermit Birchfield, Robert C. Bishop, Ronald G. Steinhart and Haviland Wright, members of the Audit Committee, have been determined by the Board of Trustees in their reasonable business judgment to meet the definition of "audit committee financial expert" as such term is defined in Form N-CSR. In addition, Messrs. J. Kermit Birchfield, Robert C. Bishop, Ronald G. Steinhart and Haviland Wright are "independent" members of the Audit Committee as defined in Form N-CSR. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. ITEMS 4(a) THROUGH 4(d) AND 4(g): The Board of Trustees has appointed Deloitte & Touche LLP ("Deloitte") to serve as independent accountants to the Registrant (referred to as the "Account"). The tables below set forth the audit fees billed to the Account as well as fees for non-audit services provided to the Account and/or to the Account's investment adviser, Massachusetts Financial Services Company ("MFS"), and to various entities either controlling, controlled by, or under common control with MFS that provide ongoing services to the Account ("MFS Related Entities"). For the fiscal years ended December 31, 2006 and 2005, audit fees billed to the Account by Deloitte were as follows: Audit Fees FEES BILLED BY DELOITTE: 2006 2005 ---- ---- Capital Appreciation Variable Account $33,440 $33,085 For the fiscal years ended December 31, 2006 and 2005, fees billed by Deloitte for audit-related, tax and other services provided to the Account and for audit-related, tax and other services provided to MFS and MFS Related Entities were as follows:
Audit-Related Fees(1) Tax Fees(2) All Other Fees(3) FEES BILLED BY DELOITTE: 2006 2005 2006 2005 2006 2005 ---- ---- ---- ---- ---- ---- To Capital Appreciation $0 $0 $0 $0 $379 $0 Variable Account To MFS and MFS Related $981,825 $841,371 $0 $0 $418,092 $403,825 Entities of Capital Appreciation Variable Account* AGGREGATE FEES FOR NON-AUDIT SERVICES: 2006 2005 ---- ---- To Capital Appreciation $1,903,431 $1,680,652 Variable Account, MFS and MFS Related Entities# * This amount reflects the fees billed to MFS and MFS Related Entities for non-audit services relating directly to the operations and financial reporting of the Account (portions of which services also related to the operations and financial reporting of other funds within the MFS Funds complex). # This amount reflects the aggregate fees billed by Deloitte, for non-audit services rendered to the Account and for non-audit services rendered to MFS and the MFS Related Entities. (1) The fees included under "Audit-Related Fees" are fees related to assurance and related services that are reasonably related to the performance of the audit or review of financial statements, but not reported under "Audit Fees," including accounting consultations, agreed-upon procedure reports, attestation reports, comfort letters and internal control reviews. (2) The fees included under "Tax Fees" are fees associated with tax compliance, tax advice and tax planning, including services relating to the filing or amendment of federal, state or local income tax returns, regulated investment company qualification reviews and tax distribution and analysis. (3) The fees included under "All Other Fees" are fees for products and services provided by Deloitte other than those reported under "Audit Fees," "Audit-Related Fees" and "Tax Fees," including fees for services related to sales tax refunds, consultation on internal cost allocations, consultation on allocation of monies pursuant to an administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund sales, analysis of certain portfolio holdings versus investment styles, review of internal controls and review of Rule 38a-1 compliance program.
ITEM 4(e)(1): Set forth below are the policies and procedures established by the Audit Committee of the Board of Trustees relating to the pre-approval of audit and non-audit related services: To the extent required by applicable law, pre-approval by the Audit Committee of the Board is needed for all audit and permissible non-audit services rendered to the Funds and all permissible non-audit services rendered to MFS or MFS Related Entities if the services relate directly to the operations and financial reporting of the Registrant. Pre-approval is currently on an engagement-by-engagement basis. In the event pre-approval of such services is necessary between regular meetings of the Audit Committee and it is not practical to wait to seek pre-approval at the next regular meeting of the Audit Committee, pre-approval of such services may be referred to the Chair of the Audit Committee for approval; provided that the Chair may not pre-approve any individual engagement for such services exceeding $50,000 or multiple engagements for such services in the aggregate exceeding $100,000 in each period between regular meetings of the Audit Committee. Any engagement pre-approved by the Chair between regular meetings of the Audit Committee shall be presented for ratification by the entire Audit Committee at its next regularly scheduled meeting. ITEM 4(e)(2): None, or 0%, of the services relating to the Audit-Related Fees, Tax Fees and All Other Fees paid by the Fund and MFS and MFS Related Entities relating directly to the operations and financial reporting of the Registrant disclosed above were approved by the audit committee pursuant to paragraphs (c)(7)(i)(C) of Rule 2-01 of Regulation S-X (which permits audit committee approval after the start of the engagement with respect to services other than audit, review or attest services, if certain conditions are satisfied). ITEM 4(f): Not applicable. ITEM 4(h): The Registrant's Audit Committee has considered whether the provision by a Registrant's independent registered public accounting firm of non-audit services to MFS and MFS Related Entities that were not pre-approved by the Committee (because such services did not relate directly to the operations and financial reporting of the Registrant) was compatible with maintaining the independence of the independent registered public accounting firm as the Registrant's principal auditors. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable to the Registrant. ITEM 6. SCHEDULE OF INVESTMENTS A schedule of investments of the Registrant is included as part of the report to shareholders of such series under Item 1 of this Form N-CSR. ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable to the Registrant. ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable to the Registrant. ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. Not applicable to the Registrant. ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There were no material changes to the procedures by which shareholders may send recommendations to the Board for nominees to the Registrant's Board since the Registrant last provided disclosure as to such procedures in response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (as required by Item 22(b)(15) of Schedule 14A), or this Item. ITEM 11. CONTROLS AND PROCEDURES. (a) Based upon their evaluation of the effectiveness of the registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940 (the "Act")) as conducted within 90 days of the filing date of this report on Form N-CSR, the registrant's principal financial officer and principal executive officer have concluded that those disclosure controls and procedures provide reasonable assurance that the material information required to be disclosed by the registrant on this report is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. (b) There were no changes in the registrant's internal controls over financial reporting (as defined in Rule 30a-3(d) under the Act) that occurred during the second fiscal quarter of the period covered by the report that have materially affected, or are reasonably likely to materially affect, the registrant's internal control over financial reporting. ITEM 12. EXHIBITS. (a) File the exhibits listed below as part of this Form. Letter or number the exhibits in the sequence indicated. (1) Any code of ethics, or amendment thereto, that is the subject of the disclosure required by Item 2, to the extent that the registrant intends to satisfy the Item 2 requirements through filing of an exhibit: Code of Ethics attached hereto. (2) A separate certification for each principal executive officer and principal financial officer of the registrant as required by Rule 30a-2 under the Act (17 CFR 270.30a-2): Attached hereto. (b) If the report is filed under Section 13(a) or 15(d) of the Exchange Act, provide the certifications required by Rule 30a-2(b) under the Act (17 CFR 270.30a-2(b)), Rule 13a-14(b) or Rule 15d-14(b) under the Exchange Act (17 CFR 240.13a-14(b) or 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350) as an exhibit. A certification furnished pursuant to this paragraph will not be deemed "filed" for the purposes of Section 18 of the Exchange Act (15 U.S.C. 78r), or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference: Attached hereto. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) CAPITAL APPRECIATION VARIABLE ACCOUNT ----------------------------------------------------------------- By (Signature and Title)* MARIA F. DWYER ----------------------------------------------------- Maria F. Dwyer, President Date: February 20, 2007 ----------------- Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By (Signature and Title)* MARIA F. DWYER ----------------------------------------------------- Maria F. Dwyer, President (Principal Executive Officer) Date: February 20, 2007 ----------------- By (Signature and Title)* TRACY ATKINSON ----------------------------------------------------- Tracy Atkinson, Treasurer (Principal Financial Officer and Accounting Officer) Date: February 20, 2007 ----------------- * Print name and title of each signing officer under his or her signature. EX-99.CODE ETH 2 ex99_ethics-663491.txt CODE OF ETHICS EXHIBIT 12(A)(1) SEPTEMBER 2003 (AS REVISED FEBRUARY, 2004, MAY, 2005, SEPTEMBER, 2005 AND NOVEMBER, 2005) CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND PRINCIPAL FINANCIAL OFFICERS I. COVERED OFFICERS/PURPOSE OF THE CODE This code of ethics (this "Code") has been adopted by the funds (collectively, "Funds" and each, "Fund") under supervision of the MFS Funds Board and Compass Board of Trustees/Managers (the "Boards") and applies to the Funds' Principal Executive Officer and Principal Financial Officer (the "Covered Officers" each of whom is set forth in Exhibit A) for the purpose of promoting: o honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; o full, fair, accurate, timely and understandable disclosure in reports and documents that the Funds file with, or submits to, the Securities and Exchange Commission ("SEC") and in other public communications made by the Funds; o compliance by the Funds with applicable laws and governmental rules and regulations; o the prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code; and o accountability for adherence to the Code. II. CONDUCT GUIDELINES Each Covered Officer should adhere to a high standard of business ethics and should be sensitive to situations that may give rise to actual as well as apparent conflicts of interest. In addition, each Covered Officer should not place his or her personal interests ahead of the Funds' interests and should endeavor to act honestly and ethically. In furtherance of the foregoing, each Covered Officer must: o not use his or her personal influence or personal relationships improperly to influence investment decisions or financial reporting for any Fund whereby the Covered Officer would benefit personally to the detriment of the Fund; and o not cause a Fund to take action, or fail to take action, for the individual personal benefit of the Covered Officer rather than the benefit the Fund. The following activities, which could create the appearance of a conflict of interest, are permitted only with the approval of the Funds' Chief Legal Officer ("CLO"): o service as a director on the board of any "for profit" company; o running for political office; o the receipt of any Fund business-related gift in excess of $300; o the receipt of any entertainment from any company with which a Fund has current or prospective business dealings unless such entertainment is business-related, reasonable in cost, appropriate as to time and place, and not so frequent as to raise any question of impropriety; o any material ownership interest in, or any consulting or employment relationship with, any Fund service providers (e.g., custodian banks, audit firms), other than the Funds' investment adviser, principal underwriter, administrator or any affiliated person thereof; o a direct or indirect financial interest in commissions, transaction charges or spreads paid by a Fund for effecting portfolio transactions or for selling or redeeming shares, other than an interest arising from the Covered Officer's employment or securities ownership. III. DISCLOSURE AND COMPLIANCE o Each Covered Officer should familiarize himself or herself with the disclosure requirements generally applicable to the Funds; o each Covered Officer should not knowingly misrepresent, or cause others to misrepresent, facts about a Fund to others, whether within or outside the Fund, including to the Fund's trustees and auditors, and to governmental regulators and self-regulatory organizations; o each Covered Officer should, to the extent appropriate within his or her area of Fund responsibility, consult with other officers and employees of the Funds and the adviser with the goal of promoting full, fair, accurate, timely and understandable disclosure in the reports and documents the Funds file with, or submit to, the SEC and in other public communications made by the Funds; and o it is the responsibility of each Covered Officer to promote compliance within his or her area of Fund responsibility with the standards and restrictions imposed by applicable laws, rules and regulations. IV. REPORTING AND ACCOUNTABILITY Each Covered Officer must: o upon adoption of the Code (or thereafter as applicable, upon becoming a Covered Officer), affirm in writing to the Boards that he or she has received, read, and understands the Code; o annually thereafter affirm to the Boards that he or she has complied with the requirements of the Code; o annually report to the CLO affiliations and relationships which are or may raise the appearance of a conflict of interest with the Covered Officer's duties to the Funds, as identified in the annual Trustee and Officer Questionnaire; o not retaliate against any other Covered Officer or any officer or employee of the Funds or their affiliated persons for reports of potential violations that are made in good faith; and o notify the CLO promptly if he or she knows of any violation of this Code. Failure to do so is itself a violation of this Code. The CLO is responsible for applying this Code to specific situations in which questions are presented under it, granting waivers upon consultation with the appropriate Board or its designee, investigating violations, and has the authority to interpret this Code in any particular situation. The CLO will report requests for waivers to the appropriate Board (or a designee thereof) promptly upon receipt of a waiver request and will periodically report to the appropriate Board any approvals granted since the last report. The CLO will take all appropriate action to investigate any potential violations reported to him or her and to report any violations to the appropriate Board. If the Board concurs that a violation has occurred, it will consider appropriate action, which may include review of, and appropriate modifications to, applicable policies and procedures; notification to appropriate personnel of the investment adviser or its board; or a recommendation to dismiss the Covered Officer. Any changes to or waivers of this Code will, to the extent required, be disclosed as provided by SEC rules. V. OTHER POLICIES AND PROCEDURES This Code shall be the sole code of ethics adopted by the Funds for purposes of Section 406 of the Sarbanes-Oxley Act and the rules and forms applicable to registered investment companies thereunder. Insofar as other policies or procedures of the Funds, the Funds' adviser, principal underwriter, or other service providers govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superseded by this Code to the extent that they overlap or conflict with the provisions of this Code. The Funds' and their investment adviser's codes of ethics under Rule 17j-1 under the Investment Company Act and any other codes or policies or procedures adopted by the Funds or their investment adviser or other service providers are separate requirements and are not part of this Code. VI. AMENDMENTS Any amendments to this Code, other than amendments to Exhibit A, must be approved or ratified by a majority vote of each Board, including a majority of independent trustees. VII. CONFIDENTIALITY All reports and records prepared or maintained pursuant to this Code and under the direction of the CLO will be considered confidential and shall be maintained and protected accordingly. Except as otherwise required by law or this Code, such matters shall not be disclosed to anyone other than the appropriate Funds' Board, its counsel, counsel to the Board's independent trustees and senior management and the board of directors of the Fund's investment adviser and its counsel. VIII. INTERNAL USE The Code is intended solely for the internal use by the Funds and does not constitute an admission, by or on behalf of any Fund, as to any fact, circumstance, or legal conclusion. EXHIBIT A PERSONS COVERED BY THIS CODE OF ETHICS Funds' Principal Executive Officer: Maria F. Dwyer Funds' Principal Financial Officer: Tracy Atkinson EX-99.CERT 3 ex99_cert-663491.txt CERTIFICATION EX-99.CERT CAPITAL APPRECIATION VARIABLE ACCOUNT CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT I, Tracy Atkinson, certify that: 1. I have reviewed this report on Form N-CSR of Capital Appreciation Variable Account; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of a date within 90 days prior to the filing date of this report based on such evaluation; and d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by the report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 20, 2007 TRACY ATKINSON ----------------- --------------------------------------- Tracy Atkinson Treasurer (Principal Financial Officer and Accounting Officer) EX-99.CERT CAPITAL APPRECIATION VARIABLE ACCOUNT CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT I, Maria F. Dwyer, certify that: 1. I have reviewed this report on Form N-CSR of Capital Appreciation Variable Account; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of a date within 90 days prior to the filing date of this report based on such evaluation; and d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by the report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 20, 2007 MARIA F. DWYER ----------------- --------------------------------------- Maria F. Dwyer President (Principal Executive Officer) EX-99.906CERT CAPITAL APPRECIATION VARIABLE ACCOUNT CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT I, Tracy Atkinson, certify that, to my knowledge: 1. The Form N-CSR (the "Report") of Capital Appreciation Variable Account (the "Registrant") fully complies for the period covered by the Report with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Date: February 20, 2007 TRACY ATKINSON ----------------- --------------------------------------- Tracy Atkinson Treasurer (Principal Financial Officer and Accounting Officer) A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906 HAS BEEN PROVIDED TO THE REGISTRANT AND WILL BE RETAINED BY THE REGISTRANT AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST. EX-99.906CERT CAPITAL APPRECIATION VARIABLE ACCOUNT CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT I, Maria F. Dwyer, certify that, to my knowledge: 1. The Form N-CSR (the "Report") of Capital Appreciation Variable Account (the "Registrant") fully complies for the period covered by the Report with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Date: February 20, 2007 MARIA F. DWYER ----------------- --------------------------------------- Maria F. Dwyer President (Principal Executive Officer) A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906 HAS BEEN PROVIDED TO THE REGISTRANT AND WILL BE RETAINED BY THE REGISTRANT AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST. -----END PRIVACY-ENHANCED MESSAGE-----