-----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, Rka6PelIv5R6DNjv7/oHzaQYG/6yAc9XcWO/KOblaY+wP/DHwbH6aykOeP00cwfP xC2QPfsg9sOJSSWUneRgdQ== 0001047469-04-028078.txt : 20040907 0001047469-04-028078.hdr.sgml : 20040906 20040907141154 ACCESSION NUMBER: 0001047469-04-028078 CONFORMED SUBMISSION TYPE: N-CSRS PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040907 DATE AS OF CHANGE: 20040907 EFFECTIVENESS DATE: 20040907 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-CSRS SEC ACT: 1940 Act SEC FILE NUMBER: 811-03561 FILM NUMBER: 041018489 BUSINESS ADDRESS: STREET 1: C/O SUN LIFE ASSURANCE CO OF CANADA STREET 2: ONE SUN LIFE EXECUTIVE PARK CITY: WELLESLEY HILLS STATE: MA ZIP: 02181 BUSINESS PHONE: 6179545244 MAIL ADDRESS: STREET 1: C/O SUN LIFE ASSURANCE CO OF CANADA STREET 2: ONE SUN LIFE EXECUTIVE PARK CITY: WELLESLEY HILLS STATE: MA ZIP: 02181 FORMER COMPANY: FORMER CONFORMED NAME: COMPASS CAPITAL APPRECIATION VARIABLE ACCOUNT/MA DATE OF NAME CHANGE: 19880121 N-CSRS 1 a2142631zn-csrs.txt N-CSRS 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) James R. Bordewick, Jr. 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: June 30, 2004 ITEM 1. REPORTS TO STOCKHOLDERS. [COMPASS LOGO] PROFESSIONALLY MANAGED COMBINATION FIXED/VARIABLE ANNUITIES FOR PERSONAL INVESTMENTS AND QUALIFIED RETIREMENT PLANS SEMIANNUAL REPORT - JUNE 30, 2004 CAPITAL APPRECIATION VARIABLE ACCOUNT GLOBAL GOVERNMENTS VARIABLE ACCOUNT GOVERNMENT SECURITIES VARIABLE ACCOUNT HIGH YIELD VARIABLE ACCOUNT MANAGED SECTORS 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 2 Performance Summary 6 Portfolio of Investments 7 Financial Statements 24 Notes to Financial Statements 42 Managers and Officers 51
ANNUITIES ARE DESIGNED FOR LONG-TERM RETIREMENT INVESTING. PROSPECTUSES FOR THE VARIABLE ANNUITY PRODUCT AND THE VARIABLE INVESTMENT OPTIONS CAN BE OBTAINED FROM YOUR INVESTMENT PROFESSIONAL. YOU SHOULD READ BOTH PROSPECTUSES CAREFULLY BEFORE INVESTING AS THEY CONTAIN COMPLETE INFORMATION ON THE INVESTMENT OBJECTIVES AND RISKS, CHARGES, EXPENSES SUCH AS MORTALITY AND EXPENSE RISK, OPTIONAL DEATH AND LIVING BENEFIT CHARGES, AND SURRENDER AND INVESTMENT OPTION CHARGES. THESE ELEMENTS, AS WELL AS OTHER INFORMATION CONTAINED IN THE PROSPECTUSES, SHOULD BE CONSIDERED CAREFULLY BEFORE INVESTING. NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE NOT A DEPOSIT NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY LETTER FROM THE CEO OF MFS DEAR CONTRACT OWNERS, Our firm was built on the strength of MFS Original Research(R), our in-depth analysis of every security we consider for our portfolios. We've been honing this process since 1932, when we created one of the mutual fund industry's first research departments. And we continue to fine-tune this process so that we can provide strong and consistent long-term investment performance to help you achieve your financial goals. While we have achieved strong investment performance in many of our portfolios, our goal is to achieve the same strong results across all asset classes. To ensure that our portfolio teams are doing the best possible job for our firm's clients and shareholders, I am focusing the vast majority of my time on the three key elements that I believe truly differentiate MFS from its competitors: people, process, and culture. PEOPLE Our people have always been our most valuable resource. Our philosophy is to deliver consistent, repeatable investment results by hiring the most talented investors in our industry. We recruit from the nation's top business schools and hire experienced analysts, both domestically and around the globe. Our analysts are the engine that powers our entire investment team because their recommendations have a direct impact on the investment performance of our portfolios. To demonstrate our ongoing commitment in this area, we increased the number of equity analysts at MFS from less than 40 at the end of 2000 to about 50 in June 2004. During that same period, we doubled the average investment experience of our domestic equity analysts, in part by recruiting more seasoned analysts to the firm. Moreover, our international network of investment personnel now spans key regions of the world with offices in London, Mexico City, Singapore, and Tokyo, as well as Boston. One of the major advantages that MFS has over many of its competitors is that the position of research analyst is a long-term career for many members of our team, not simply a steppingstone toward becoming a portfolio manager. We have worked to elevate the stature of the analyst position to be on par with that of a portfolio manager. In fact, an exceptional research analyst has the opportunity to earn more at MFS than some portfolio managers. At the same time, we look within the firm to promote talented analysts who choose a path toward becoming a portfolio manager. We rarely hire portfolio managers from our competitors because we believe the best investors are those steeped in the MFS process and culture. In the past few months, we have identified three senior research analysts who will assume roles on the management teams of several of our larger portfolios. MFS is fortunate to have a deep bench of talented investment personnel, and we welcome the opportunity to put their skills to work for our clients. PROCESS MFS was built on the strength of its bottom-up approach to researching securities. We have enhanced the mentoring process for our research analysts by calling on several of our most seasoned portfolio managers to supplement the work of Director of Global Equity Research David A. Antonelli. These portfolio managers are taking a special interest in developing the careers of our research analysts and strengthening our investment process. Kenneth J. Enright of our value equity group is working with a team of domestic analysts; David E. Sette-Ducati of our small- and mid-cap equity team is working with analysts concentrating on small- and mid-cap companies; and Barnaby Wiener of our international equity team in London heads the European equity research team. We have combined the bottom-up approach of our research process with a top-down approach to risk controls on portfolio composition. We have a very strong quantitative team under the leadership of industry veteran Deborah H. Miller, who represents the equity management department on the Management Committee of the firm. Quantitative analysis helps us generate investment ideas and, more importantly, assess the appropriate level of risk for each portfolio. The risk assessment is designed to assure that each portfolio operates within its investment objectives. Additionally, we have increased the peripheral vision of our investment personnel across asset classes through the collaboration of our Equity, Fixed Income, Quantitative Analysis, and Risk Management teams. We recently codified this key aspect of our culture by forming an Investment Management Committee,composed of key members of these teams. This committee will work to ensure that all teams are sharing information, actively debating investment ideas, and creating a unified investment team. CULTURE Teamwork is at the heart of our ability to deliver consistent and competitive investment performance over time. At MFS, each member of our team is involved in our success; we have no superstars. The collaborative nature of our process works to assure a consistent investment approach across all of our products and provides a high level of continuity in portfolio management because our investment performance never depends on the contributions of just a single individual. Our culture is based on an environment of teamwork that allows our investment personnel to be successful. In turn, we demand superior investment results from every member of our team. We have created a meritocracy at our firm based on investment results. We hold all of our portfolio managers accountable for the performance of their portfolios and their contributions to the team. We also track the equity and fixed-income ratings of our analysts so we can evaluate them based on the performance of their recommendations. We align bonus compensation to investment performance by weighting rewards to those who have created the greatest long-term benefit for our shareholders and who contribute most successfully to the Original ResearchSM process. The strength of our culture has resulted in a tremendous amount of stability. Although we have dismissed members of our team whose performance did not meet MFS' high standards, only one portfolio manager has voluntarily left the firm over the past six months, based on a decision to retire from the industry. In short, we can help you achieve your financial goals by hiring talented people, following a disciplined process, and maintaining our firm's unique culture. The enhancements described in this letter reflect the collaborative spirit and the depth of resources in our investment teams. 1 As always, we appreciate your confidence in MFS and welcome any questions or comments you may have. Respectfully, /s/ Robert J. Manning Robert J. Manning Chief Executive Officer and Chief Investment Officer MFS Investment Management(R), investment advisor to the MFS(R)/Compass Variable Accounts July 19, 2004 PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. The opinions expressed in this letter are those of MFS, and no forecasts can be guaranteed. MARKET ENVIRONMENT By most measures, global economic conditions improved during the first half of 2004. The period, however, was a volatile one for investors as market sentiment turned somewhat negative in the second quarter of the year. STOCK MARKET ENVIRONMENT The turnaround in global stock markets that began in the spring of 2003 continued into the first quarter of 2004. The release of increasingly positive economic, corporate earnings, and corporate capital spending numbers helped drive global equity markets. In the second quarter of 2004, many measures of the global economy -- including employment, consumer spending, corporate capital expenditures, and earnings -- continued to improve. However, stock prices, which made only modest gains in the second quarter, generally did not reflect these improvements. We believe that several factors began to hold back equity markets. One was the expectation that we were entering a period of rising interest rates, particularly in the United States. Investors may also have feared that corporate earnings growth would moderate in the second half of 2004 after showing exceptional improvement in the past several quarters. Investor concerns about geopolitical instability seemed, in our view, to hold back stock prices as well. We believe the March 2004 train bombings in Spain, continued unrest in Iraq, and terrorism in Saudi Arabia brought international political concerns to the forefront of investors' minds. Political instability in the Middle East, which could constrict oil supplies and bring additional oil price hikes, caused many investors, we think, to worry that the global economic recovery might slow down. Finally, in our view, worries that the Chinese economic engine could sputter acted as a drag on the global economy. Companies around the world supply China with raw materials and finished goods. As a result, any changes in the conditions of China's economy can have considerable ripple effects around the world. BOND MARKET ENVIRONMENT The six-month period was a volatile one in global bond markets as well. Investors, in our view, favored higher-quality debt early in the year but by the second quarter began to shift into higher-yielding bonds. When 2004 began, interest rates in many developed nations were at historical lows. However, the bond market changed dramatically over the next few months, after the U.S. Department of Labor began releasing a string of strong monthly jobs reports that indicated that the U.S. economy was in a full recovery. Inflation concerns appeared to mount. Investors, therefore, began to anticipate that the U.S. Federal Reserve Board (the Fed) would raise short-term interest rates from their 46-year lows. The Fed fulfilled these expectations on the last day of the period, instituting a rate increase of 0.25% on June 30. We believe that anticipation of this increase is what caused investors to move from higher-quality debt into lower-quality issues. While bonds across most asset classes were hurt by rising rates in the final months of the period, lower-rated debt was less affected than higher-rated issues and tended to show better performance. MANAGEMENT REVIEWS CAPITAL APPRECIATION VARIABLE ACCOUNT For the 6 months ended June 30, 2004, the Compass 2 account provided a total return of 2.86%; the Compass 3 account provided a total return of 2.80%; and the Compass 3 -- Level 2 account provided a total return of 2.88%. These returns, which include the reinvestment of any dividends and capital gains distributions, compare with a return of 2.74% over the same period for the account's benchmark, the Russell 1000 Growth Index. The Russell 1000 Growth Index measures the performance of large-cap U.S. growth stocks. CONTRIBUTORS TO PERFORMANCE Stock selection in the utilities and communications, special products and services, and industrial goods and services sectors had a strong positive impact on the account's relative performance against its benchmark, the Russell 1000 Growth Index, during the period. An overweighting in the industrial goods and services sector also aided results. Our positions in two of the account's top-performing individual stocks, wireless carrier company Sprint PCS Group and wireless telecom equipment maker Andrew Corp., helped drive the account's performance in the utilities and communications sector. We sold our Sprint PCS holdings during the period. While no individual special products and services holding was among the account's largest contributors during the period, stock selection in this sector helped boost returns. Stockpicking in the industrial goods and services area proved to be another source of relative strength, led by our position in manufacturing conglomerate Tyco International. Several technology holdings also helped relative returns including network company Netscreen Technologies, electronics company Marvell Technology, and internet auction site eBay. Also, in the transportation sector, express carrier FedEx delivered a positive contribution. Underweighting computer chip maker Intel helped as the stock declined over the period. We sold Netscreen Technologies before the period ended. DETRACTORS FROM PERFORMANCE Stock selection in the leisure and health care sectors detracted significantly from relative performance. An overweighting in leisure also hurt relative results. 2 In the leisure sector, our positions in radio broadcasting company Clear Channel and cable operator Comcast held back performance. Among the account's health care holdings, our position in pharmaceutical company Wyeth detracted the most from relative returns. Other holdings that hurt relative performance included automobile dealer CarMax and online travel vendor InterActiveCorp. In addition, underweighting cellular communications products firm QUALCOMM and missing most of the stock's significant rise over the period also detracted from relative results. We sold QUALCOMM out of the account by period-end. NOTE TO CONTRACT OWNERS: GREGORY W. LOCRAFT, JR. BECAME PORTFOLIO MANAGER OF THE ACCOUNT IN NOVEMBER 2003, REPLACING JOHN E. LATHROP. EFFECTIVE JULY 1, 2004, MARGARET W. ADAMS ALSO BECAME A MANAGER OF THE PORTFOLIO. GLOBAL GOVERNMENTS VARIABLE ACCOUNT For the six months ended June 30, 2004, the Compass 2 account provided a total return of -2.44%, the Compass 3 account provided a total return of -2.51%, and the Compass 3 -- Level 2 account provided a total return of -2.44%. These returns, which include the reinvestment of any dividends and capital gains distributions, compare with the return of -1.53% over the same period for the account's benchmark, the Citigroup World Government Bond Index. The Citigroup World Government Bond Index measures developed country government bond markets around the world. GLOBAL BOND MARKET ENVIRONMENT During the first two months of 2004, the global environment was dominated by disappointing U.S. labor-market data. Despite a global market characterized by rising inflationary pressures, buoyant economic sentiment, and robust economic activity, we believe that weak employment conditions in the United States caused market participants to question the sustainability of the global economic recovery. In this setting, global bonds performed well through March. However, U.S. labor markets displayed surprisingly vigorous growth beginning in March (the data being released in early April). In addition, we feel that rising commodity prices, particularly in oil and gas, fostered a considerable rise in global inflationary expectations. These two elements in concert precipitated a very sharp selloff in global bonds from early April until mid-May, as the global market prepared for a period of rate tightening by the U.S. Federal Reserve Board. Regionally, Japan's economic expansion became significantly more vigorous and somewhat more balanced in the first half of 2004, and the eurozone witnessed disappointingly low growth. Australia, New Zealand, and the United Kingdom demonstrated particularly strong growth during the period, which resulted in rate-tightening measures in the latter two countries and a tightening bias in Australia. In our view, the dollar weakened relative to major currencies during the first half of the period apparently due to concerns related to the labor market, but it rebounded in the second half as expectations of Fed rate hikes rose. KEY DETRACTORS FROM PERFORMANCE Our overweighted position relative to the benchmark in New Zealand bonds, as well as the non-TIPS U.S. position, underperformed modestly. Our overweighting in the Australian dollar also detracted slightly from performance. KEY CONTRIBUTORS TO PERFORMANCE Japanese government bonds "JGBs" sold off sharply in June due to increased confidence that the Japanese recovery was sustainable. The portfolio benefited from a significantly underweighted position relative to its benchmark in JGBs. The overweighted position in the euro, as well as the underweighted position in the Swedish krona, also boosted performance. An overweighting in U.S. TIPS (Treasury inflation-protected securities) provided additional outperformance as inflationary expectations rose during the period. GOVERNMENT SECURITIES VARIABLE ACCOUNT For the six months ended June 30, 2004, the Compass 2 account provided a total return of -0.45%, the Compass 3 account provided a total return of -0.50%, and the Compass 3 -- Level 2 account provided a total return of -0.43%. These returns, which include the reinvestment of any dividends and capital gains distributions, compare with a return of 0.31% over the same period for the account's benchmark, the Lehman Brothers Government/Mortgage Index. The Lehman Brothers Government/Mortgage Index measures the performance of the government and mortgage securities markets. DETRACTORS FROM PERFORMANCE The most significant detractors from performance during the six-month period were the portfolio's investments in higher-yielding, 30-year mortgage pools during the first three months of the period when interest rates were continuing to trend lower. While many of those pools had interest rates of 6% or higher, they suffered high rates of prepayments as homeowners refinanced their homes to take advantage of lower interest rates. Prepayments tend to erode the value of mortgage pools as well as detract from current income of bondholders. CONTRIBUTORS TO PERFORMANCE The portfolio's defensive strategy of lowering exposure to interest-rate risk helped relative performance as rising interest rates undermined the market price of Treasuries and other high-quality investments. Duration -- a measure of sensitivity to interest-rate risk -- was maintained at a lower level than the duration of the Lehman Brothers Government/Mortgage Index. We believe this reduced the portfolio's price risk during a time of slipping bond prices. The portfolio's investments in 15-year maturity mortgage pools also helped relative performance. Those mortgage pools outperformed comparable Treasuries and agency paper, largely because the mortgages experienced less price volatility. Among the portfolio's Treasury holdings, our focus on TIPS, or Treasury Inflation-Protected Securities, also helped performance as they showed less price volatility than ordinary Treasuries. (The principal value and interest of U.S. Treasury securities are guaranteed by the U.S. government if held to maturity.) HIGH YIELD VARIABLE ACCOUNT For the six months ended June 30, 2004, the Compass 2 account provided a total return of -0.67%; the Compass 3 account provided a total return of -0.72%; and the Compass 3 -- Level 2 account provided a total return -0.64%. These returns include the reinvestment of any dividends and capital gains distributions and compare to returns over the same period of 1.36% and 1.37%, 3 respectively, for the accounts' benchmarks, the Lehman Brothers High Yield Index (the Lehman Index) and the Lipper High Yield Bond Index (the Lipper Index). The Lehman Index measures the performance of the high-yield bond market. The Lipper indices measure the performance of funds within their respective classifications. DETRACTORS FROM PERFORMANCE The portfolio's underperformance versus its benchmarks was attributable in part to our virtual avoidance of several volatile sectors of the high-yield market, including textiles and finance companies, which rallied strongly during the period. Several specific holdings also detracted from relative performance, including Dobson Communications, a regional wireless services provider that was hampered by slower-than-expected subscriber growth. Another laggard was bankrupt textile manufacturer WestPoint Stevens, whose financial situation deteriorated further during the period, sending the price of its bonds lower. CONTRIBUTORS TO PERFORMANCE The portfolio's relative performance was helped by an underweighted position in utilities moderated in part by some negative security selection and by an overweighting in the securities of media companies. Among the holdings contributing to performance was IMC Global, a provider of nutrients for the agricultural industry and ingredients for the animal feed industry. During the period Cargill Crop Nutrition, whose bonds carried an investment-grade rating, announced its intention to acquire IMC Global, boosting the price of the latter's bonds. Also aiding the portfolio's relative performance was newspaper chain Hollinger International, as proceeds from the ongoing sale of the company continued to support its bonds amid management turmoil. NOTE TO CONTRACT OWNERS: BERNARD SCOZZAFAVA IS NO LONGER A MANAGER OF THE PORTFOLIO. HE WAS REPLACED BY JOHN F. ADDEO ON APRIL 7, 2004. SCOTT B. RICHARDS WAS ALSO NAMED AS A PORTFOLIO MANAGER ON MAY 24, 2004. MANAGED SECTORS VARIABLE ACCOUNT For the six months ended June 30, 2004, the Compass 2 account provided a total return of 0.94%, the Compass 3 account provided a total return of 0.86%, and the Compass 3 -- Level 2 account provided a total return of 0.94%. These returns, which include the reinvestment of any dividends and capital gains distributions, compare with a return of 2.74% over the same period for the account's benchmark, the Russell 1000 Growth Index (the Russell Index), which measures the performance of large-cap U.S. growth stocks. DETRACTORS FROM PERFORMANCE Stock selection in leisure, as well as an overweighted position in the sector, held back relative returns. Several media companies in the account, including Viacom, Clear Channel Communications, and Westwood One, fell short of our growth expectations as they failed to enjoy the strong increases in advertising revenues we had anticipated in an improving economy. By period-end we had sold our Westwood One position. Elsewhere in the leisure sector, our holding in cable operator Comcast fell after the firm's unsuccessful bid to acquire Disney. We believe Comcast and other cable company stocks remained under pressure because of fears of increasing competition from satellite and DSL (digital subscriber line) operators. Although technology holdings as a group detracted only modestly from relative results, several stocks in the sector were among the portfolio's most significant individual detractors. These included storage management software firm VERITAS Software and semiconductor fabrication equipment company Novellus Systems. VERITAS stock declined as the firm lowered its earnings projections and moved to restate prior-year results. Despite beating consensus earnings estimates and raising forward earnings projections, we believe Novellus Systems languished because investors questioned the sustainability of the semiconductor business cycle. The account's Novellus Systems stock was sold during the period. Elsewhere in technology, underweighting cellular communications products firm QUALCOMM and missing nearly all of the stock's strong rise over the period also subtracted from relative results. The account did not own QUALCOMM at period-end. CONTRIBUTORS TO PERFORMANCE On a sector basis, stock selection in utilities and communications and retailing contributed most strongly to relative performance. In the utilities and communications sector, cellular phone stocks in general rose during the bidding war for AT&T Wireless that culminated in the firm's purchase by Cingular, a joint venture of BellSouth and SBC Communications. We sold our holdings in both AT&T Wireless and rival Sprint PCS during the rally. The portfolio's underweighted position in Wal-Mart was the largest relative contributor in the retailing sector. Disappointing sales and a class action lawsuit exerted pressure on the stock during the period. At period-end the portfolio did not hold any Wal-Mart shares. A number of technology stocks were also among the account's largest relative contributors. Business infrastructure software provider Akamai Technologies, whose core service essentially allows customers to enhance Web site performance while lowering costs, was propelled by robust financial results. Online auctioneer eBay likewise delivered strong relative performance. In our view, eBay benefited from a growing trend toward online business transactions. Underweighting semiconductor giant Intel also helped relative results as the stock declined over the period. Individual stock contributors elsewhere in the portfolio included cosmetics firm Avon Products and analytical tool maker Waters Corporation. Avon enjoyed solid revenue growth across all geographies. Waters experienced improving end-market demand for its products as a range of companies -- from industrial to biotechnology concerns -- invested more money in research and development. MONEY MARKET VARIABLE ACCOUNT For the six months ended June 30, 2004, the Compass 2 account provided a total return of -0.45%, the Compass 3 account provided a total return of -0.50%, and the Compass 3 -- Level 2 account provided a total return of -0.43%. These returns include the reinvestment of any distributions. As of June 30, 2004 the account's seven-day yield with and without waivers was 0.48%. The yield quotation is based on the latest seven days ended with dividends annualized. It more closely reflects the account's current earnings than does the total return quotation. PORTFOLIO PERFORMANCE With anticipation of rising interest rates so high during the period, we shortened the weighted average maturity for the account significantly, from 52 days at the start of the period to 15 days as the period concluded on June 30. Essentially, we looked to cut our 4 interest-rate risk, in the anticipation that rates would begin to rise and continue to rise in the foreseeable future. In our view, the portfolio was impacted by a continued short supply of commercial paper in the market. Companies were reluctant during the period to issue longer-term commercial paper, in an effort to lock in at current low interest rates. While evidence of U.S. and global economic improvements appeared to strengthen during the period, we believe this short supply could be attributed to some mixed economic signals (such as those in the U.S. labor market) that may have led to cautious corporate spending. On June 30, approximately 54% of the account was invested in commercial paper and certificates of deposit, with the balance invested in government paper and repurchase agreements. Regardless of market or economic conditions, we intend to maintain a focus on high quality as we concentrate on the objectives of income, capital preservation, and liquidity. TOTAL RETURN VARIABLE ACCOUNT For the six months ended June 30, 2004, the Compass 2 account provided a total return of 1.94%, the Compass 3 account provided a total return of 1.86%, and the Compass 3 -- Level 2 account provided a total return of 1.94%. These returns, which include in the reinvestment of any capital gains and dividend distributions, compare with returns of 3.44% and 0.15%, respectively for the account's benchmarks, the Standard & Poor's 500 Stock Index (S&P 500) and the Lehman Brothers Aggregate Bond Index (the Lehman Index). The S&P 500 is a commonly used measure of the broad U.S. stock market. The Lehman Index is an unmanaged, market-value-weighted index of U.S. Treasuries, government-agency securities (excluding mortgage-backed securities), and investment-grade domestic corporate debt. EQUITY CONTRIBUTORS TO PERFORMANCE Utilities and communications, energy, and technology were the three sectors that provided the largest positive relative performance to the account. In utilities and communications, it was our overweighted position and stock selection in the sector that were the main sources of positive returns. In fact, the top two positive contributors to the account's relative performance during the period were utilities and communication holdings AT&T Wireless and TXU. An overweighted position in the energy sector added to positive relative performance. One strong performer in this sector was Schlumberger. Our underweighted position in technology, coupled with stock selection, helped the account's performance. Specifically avoiding tech stock Intel, which is in the S&P 500 Stock Index, helped in this sector. Other stocks that performed well were Owens-Illinois, Hartford Financial Services, and Kimberly Clark. Our underweighted position in Pfizer was also a positive. FIXED-INCOME CONTRIBUTORS TO PERFORMANCE During the period, the account was positioned for a rising interest-rate environment. As a result, we had less interest-rate exposure than the benchmark. Mortgage-backed securities, including residential and commercial mortgages, also performed well during the period. EQUITY DETRACTORS TO PERFORMANCE The two principal detractors from performance during the period were the leisure and financial services sectors. In both cases, the main sources of underperformance were stock selection and overweighted positions. The primary detractors in leisure were our overweighted positions in Viacom and Comcast, both of which performed poorly. In financial services, positions in Mellon Financial and Merrill Lynch were significant detractors. While technology was one of our most positive sectors overall, we did miss out on some technology opportunities by not owning strong tech stocks Yahoo, eBay, and QUALCOMM, all three of which are in the benchmark and performed well. Vodafone was another stock that held back the account's performance. FIXED-INCOME DETRACTORS TO PERFORMANCE During the period, we were overweighted in investment-grade corporate bonds. This market, in general, slightly underperformed Treasuries. 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 as 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. The portfolios are actively managed, and current holdings may be different. It is not possible to invest directly in an index. INVESTMENT OBJECTIVES AND POLICIES Variable annuities are designed for long-term retirement investing; please see your investment professional for more information. The key risks listed may increase unit price volatility. See the prospectus for further information on these and other risk considerations. CAPITAL APPRECIATION VARIABLE ACCOUNT (CAVA) seeks to maximize capital appreciation by investing in securities of all types, with a major emphasis on common stocks. Investments in foreign and/or emerging markets securities involves risks relating to interest rates, currency-exchange-rates, economic, and political conditions. GLOBAL GOVERNMENTS VARIABLE ACCOUNT (GGVA) seeks moderate current income and preservation and growth of capital by investing in a portfolio of U.S. and foreign government and government-related securities. Investments in foreign and/or emerging market securities involves risks relating to interest rates, currency-exchange-rates, economic, and political conditions. Because the portfolio may invest in a limited number of companies, a change in one security's value may have a more significant effect on the portfolio's value. The portfolio may invest in mortgage-backed 5 securities, which during times of fluctuating interest rates may increase or decrease more than those of other fixed income securities. The portfolio may invest a substantial amount of its assets in issuers located in a single country or in a limited number of countries and therefore is more susceptible to adverse economic, political, or regulatory developments affecting those countries. GOVERNMENT SECURITIES VARIABLE ACCOUNT (GSVA) seeks current income and preservation of capital by investing in U.S. government securities. Government guarantees apply to the underlying securities only and not to the prices and yields of the portfolio. The portfolio may invest in mortgage-backed securities, which during times of fluctuating interest rates may increase or decrease more than those of other fixed income securities. HIGH YIELD VARIABLE ACCOUNT (HYVA) seeks high current income and capital appreciation by investing primarily in fixed-income securities of U.S. and foreign issuers that may be in the lower-rated categories or unrated and may include equity features. Investments in foreign and/or emerging markets securities involves risks relating to interest rates, currency-exchange-rates, economic, and political conditions. Investments in high yield and lower-rated securities may provide greater returns but may have greater-than-average risk. Because, the portfolio invests in a limited number of companies, a change in one security's value may have a more significant effect on the portfolio's value. MANAGED SECTORS VARIABLE ACCOUNT (MSVA) seeks capital appreciation by varying the weighting of its portfolio among 13 industry sectors. Investments in foreign and/or emerging market securities involves risks relating to interest rates, currency-exchange-rates, economic, and political conditions. The portfolio focuses on companies in a limited number of sectors, making it more susceptible to adverse economic, political, or regulatory developments affecting those sectors than a portfolio that invests more broadly. When concentrating on one issuer, the portfolio is sensitive to changes in the value of their securities. MONEY MARKET VARIABLE ACCOUNT (MMVA) seeks maximum current income to the extent consistent with stability of principal by investing exclusively in money market instruments maturing in less than 13 months. Government guarantees apply to the underlying securities only and not to the prices and yields of the portfolio. Investments in the portfolio are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the portfolio seeks to preserve the value of your investment, it is possible to lose money by investing in the portfolio. The portfolio's yield will fluctuate with changes in market conditions. TOTAL RETURN VARIABLE ACCOUNT (TRVA) seeks to provide above-average income (compared to a portfolio entirely invested in equity securities), consistent with prudent employment of capital; its secondary objective is to take advantage of opportunities for growth of capital and income. Investments in foreign and/or emerging markets securities involves risks relating to interest rates, currency-exchange-rates, economic, and political conditions. Investments in high yield and lower-rated securities may provide greater returns but may have greater-than-average risk. VISIT sunlife-usa.com FOR THE MOST RECENT MONTH-END PERFORMANCE RESULTS. MARKET VOLATILITY CAN SIGNIFICANTLY AFFECT SHORT-TERM PERFORMANCE, AND MORE RECENT RETURNS MAY BE DIFFERENT FROM THOSE SHOWN. THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE OF FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND UNITS, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. ANY HIGH SHORT-TERM RETURNS WERE PRIMARILY ACHIEVED DURING FAVORABLE MARKET CONDITIONS, WHICH MAY NOT BE REPEATED. THESE PERFORMANCE RESULTS REFLECT ANY APPLICABLE CONTRACT OR SURRENDER CHARGES. SIX MONTH PERFORMANCE THROUGH JUNE 30, 2004
COMPASS 2 COMPASS 3 COMPASS 3 - (U.S.) (U.S.) LEVEL 2 (U.S.) --------- --------- -------------- Capital Appreciation Variable Account* 2.86% 2.80% 2.88% Global Governments Variable Account (2.44)% (2.51)% (2.44)% Government Securities Variable Account (0.45)% (0.50)% (0.43)% High Yield Variable Account (0.67)% (0.72)% (0.64)% Managed Sectors Variable Account** 0.94% 0.86% 0.94% Money Market Variable Account (0.45)% (0.50)% (0.43)% Total Return Variable Account 1.94% 1.86% 1.94%
* A portion of the returns is attributable to the receipt of non-recurring payments in settlement of two class action lawsuits. ** A portion of the returns shown is attributable to the receipt of a non-recurring payment in settlement of a class action lawsuit. See Notes to Financial Statements. 6 PORTFOLIO OF INVESTMENTS (Unaudited) -- June 30, 2004 CAPITAL APPRECIATION VARIABLE ACCOUNT
ISSUER SHARES VALUE STOCKS -- 96.4% U.S. STOCKS -- 91.5% AEROSPACE -- 1.5% Lockheed Martin Corp. 86,600 $ 4,510,128 ------------- AIRLINES -- 1.1% Southwest Airlines Co. 193,500 $ 3,244,995 ------------- APPAREL MANUFACTURERS -- 0.7% Nike, Inc., "B" 18,400 $ 1,393,800 Polo Ralph Lauren Corp., "A" 23,500 809,575 ------------- $ 2,203,375 ------------- AUTOMOTIVE -- 0.6% Harley-Davidson, Inc. 30,400 $ 1,882,976 ------------- BANKS & CREDIT COMPANIES -- 3.2% American Express Co. 75,640 $ 3,886,383 Citigroup, Inc. 127,996 5,951,814 ------------- $ 9,838,197 ------------- BIOTECHNOLOGY -- 5.8% Amgen, Inc.* 174,540 $ 9,524,648 Genzyme Corp.* 106,600 5,045,378 Gilead Sciences, Inc.* 45,100 3,021,700 ------------- $ 17,591,726 ------------- BROADCAST & CABLE TV -- 3.6% Citadel Broadcasting Corp.* 121,200 $ 1,765,884 Comcast Corp., "A"* 205,800 5,768,574 EchoStar Communications Corp., "A"* 108,985 3,351,289 ------------- $ 10,885,747 ------------- BROKERAGE & ASSET MANAGERS -- 1.5% Ameritrade Holding Corp.* 62,800 $ 712,780 Goldman Sachs Group, Inc. 15,980 1,504,677 Merrill Lynch & Co., Inc. 42,350 2,286,053 ------------- $ 4,503,510 ------------- BUSINESS SERVICES -- 2.0% DST Systems, Inc.* 41,300 $ 1,986,117 Getty Images, Inc.* 29,400 1,764,000 Manpower, Inc. 42,600 2,162,802 ------------- $ 5,912,919 ------------- CHEMICALS -- 0.3% E.I. du Pont de Nemours & Co. 17,300 $ 768,466 ------------- COMPUTER SOFTWARE -- 5.0% Ascential Software Corp.* 51,200 $ 818,688 Microsoft Corp. 427,520 12,209,971 VERITAS Software Corp.* 75,700 2,096,890 ------------- $ 15,125,549 ------------- COMPUTER SOFTWARE -- SYSTEMS -- 2.6% Hewlett-Packard Co. 106,500 $ 2,247,150 International Business Machines Corp. 64,000 5,641,600 ------------- $ 7,888,750 ------------- CONSUMER GOODS & SERVICES -- 3.9% Career Education Corp.* 24,400 $ 1,111,664 Colgate-Palmolive Co. 56,100 3,279,045 Orbitz, Inc.* 68,200 1,474,484 Procter & Gamble Co. 109,600 5,966,624 ------------- $ 11,831,817 ------------- ELECTRICAL EQUIPMENT -- 5.7% Emerson Electric Co. 37,400 $ 2,376,770 General Electric Co. 317,400 10,283,760 Tyco International Ltd. 144,200 4,778,788 ------------- $ 17,439,318 ------------- ELECTRONICS -- 5.4% Amphenol Corp., "A"* 37,800 $ 1,259,496 Analog Devices, Inc. 52,190 2,457,105 Applied Materials, Inc.* 97,100 1,905,102 Intel Corp. 287,200 $ 7,926,720 Texas Instruments, Inc. 119,100 2,879,838 ------------- $ 16,428,261 ------------- ENTERTAINMENT -- 0.9% Clear Channel Communications, Inc. 72,536 $ 2,680,205 ------------- FOOD & DRUG STORES -- 1.5% CVS Corp. 71,910 $ 3,021,658 Rite Aid Corp.* 308,200 1,608,804 ------------- $ 4,630,462 ------------- FOOD & NON-ALCOHOLIC BEVERAGES -- 2.2% PepsiCo, Inc. 101,820 $ 5,486,062 SYSCO Corp. 33,500 1,201,645 ------------- $ 6,687,707 ------------- GAMING & LODGING -- 1.1% Carnival Corp. 31,900 $ 1,499,300 Cendant Corp. 76,620 1,875,658 ------------- $ 3,374,958 ------------- GENERAL MERCHANDISE -- 2.5% Kohl's Corp.* 39,990 $ 1,690,777 Target Corp. 135,260 5,744,492 ------------- $ 7,435,269 ------------- INSURANCE -- 2.7% American International Group, Inc. 84,700 $ 6,037,416 St. Paul Travelers Cos., Inc. 51,700 2,095,918 ------------- $ 8,133,334 ------------- INTERNET -- 3.9% eBay, Inc.* 38,100 $ 3,503,295 InterActiveCorp* 202,900 6,115,406 Yahoo!, Inc.* 61,500 2,234,295 ------------- $ 11,852,996 ------------- LEISURE & TOYS -- 0.5% Electronic Arts, Inc.* 29,500 $ 1,609,225 ------------- MACHINERY & TOOLS -- 2.3% Caterpillar, Inc. 41,100 $ 3,264,984 Eaton Corp. 24,900 1,612,026 Illinois Tool Works, Inc. 22,400 2,147,936 ------------- $ 7,024,946 ------------- MEDICAL & HEALTH TECHNOLOGY & SERVICES -- 1.1% Caremark Rx, Inc.* 73,300 $ 2,414,502 HCA, Inc. 22,300 927,457 ------------- $ 3,341,959 ------------- MEDICAL EQUIPMENT -- 3.9% Baxter International, Inc. 46,800 $ 1,615,068 C.R. Bard, Inc. 2,200 124,630 CTI Molecular Imaging, Inc.* 76,000 1,077,680 Guidant Corp. 25,200 1,408,176 Medtronic, Inc. 112,300 5,471,256 Thermo Electron Corp.* 71,900 2,210,206 ------------- $ 11,907,016 ------------- OIL SERVICES -- 2.1% BJ Services Co.* 24,600 $ 1,127,664 GlobalSantaFe Corp. 60,600 1,605,900 Noble Corp.* 44,500 1,686,105 Smith International, Inc.* 33,600 1,873,536 ------------- $ 6,293,205 ------------- PERSONAL COMPUTERS & PERIPHERALS -- 1.9% Dell, Inc.* 151,820 $ 5,438,192 Lexmark International, Inc., "A"* 4,900 472,997 ------------- $ 5,911,189 -------------
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ISSUER SHARES VALUE STOCKS -- continued U.S. STOCKS -- continued PHARMACEUTICALS -- 11.2% Abbott Laboratories 92,500 $ 3,770,300 Eli Lilly & Co. 32,400 2,265,084 Johnson & Johnson 196,500 10,945,050 Pfizer, Inc. 326,035 11,176,480 Wyeth 163,500 5,912,160 ------------- $ 34,069,074 ------------- POLLUTION CONTROL -- 0.5% Waste Management, Inc. 52,600 $ 1,612,190 ------------- RESTAURANTS -- 0.8% ARAMARK Corp., "B" 35,200 $ 1,012,352 Outback Steakhouse, Inc. 36,300 1,501,368 ------------- $ 2,513,720 ------------- SPECIALTY STORES -- 3.0% Best Buy Co., Inc. 35,900 $ 1,821,566 CarMax, Inc.* 70,800 1,548,396 Lowe's Co., Inc. 48,500 2,548,675 PETsMART, Inc. 48,100 1,560,845 TJX Cos., Inc. 62,900 1,518,406 ------------- $ 8,997,888 ------------- TELECOMMUNICATIONS -- WIRELESS -- 0.5% Andrew Corp.* 76,900 $ 1,538,769 ------------- TELECOMMUNICATIONS -- WIRELINE -- 3.8% Cisco Systems, Inc.* 487,700 $ 11,558,490 ------------- TELEPHONE SERVICES -- 0.8% Sprint FON Group 134,550 $ 2,368,080 ------------- TRUCKING -- 1.4% FedEx Corp. 50,800 $ 4,149,852 ------------- Total U.S. Stocks $ 277,746,268 ------------- FOREIGN STOCKS -- 4.9% BERMUDA -- 1.9% Accenture Ltd., "A" (Business Services)* 82,900 $ 2,278,092 Marvell Technology Group Ltd. (Electronics)* 67,600 1,804,920 XL Capital Ltd., "A" (Insurance) 24,100 1,818,586 ------------- $ 5,901,598 ------------- BRAZIL -- 0.3% Companhia Vale do Rio Doce, ADR (Metals & Mining) 17,200 $ 817,860 ------------- JAPAN -- 0.2% SOFTBANK CORP. (Business Services) 15,600 $ 684,805 ------------- SWITZERLAND -- 0.6% Roche Holding AG (Pharmaceuticals) 17,000 $ 1,683,841 ------------- UNITED KINGDOM -- 1.9% Amdocs Ltd. (Computer Software)* 101,500 $ 2,378,145 AstraZeneca PLC (Pharmaceuticals) 33,200 1,489,059 Vodafone Group PLC, ADR (Telecommunications -- Wireless) 80,431 1,777,525 ------------- $ 5,644,729 ------------- Total Foreign Stocks $ 14,732,833 ------------- Total Stocks (Identified Cost, $268,135,850) $ 292,479,101 ------------- PAR AMOUNT ISSUER (000 OMITTED) VALUE SHORT-TERM OBLIGATION -- 0.6% General Electric Capital Corp., 1.48%, due 7/01/04, at Amortized Cost $ 1,837 $ 1,837,000 ------------- REPURCHASE AGREEMENTS -- 2.5% Morgan Stanley, 1.50%, dated 6/30/04, due 7/01/04, total to be received $7,502,313 (secured by various U.S. Treasury and Federal Agency obligations in a jointly traded account), at Cost $ 7,502 $ 7,502,000 ------------- Total Investments (Identified Cost, $277,474,850) $ 301,818,101 ------------- OTHER ASSETS, LESS LIABILITIES -- 0.5% 1,611,555 ------------- Net Assets -- 100.0% $ 303,429,656 =============
See portfolio footnotes and notes to financial statements. 8 PORTFOLIO OF INVESTMENTS (Unaudited) -- June 30, 2004 GLOBAL GOVERNMENTS VARIABLE ACCOUNT
PAR AMOUNT ISSUER (000 OMITTED) VALUE BONDS -- 95.2% FOREIGN BONDS -- 68.8% AUSTRALIA -- 0.7% Government of Australia, 6.25%, 2015 AUD 115 $ 81,783 ------------- AUSTRIA -- 4.1% Republic of Austria, 5.5%, 2007 EUR 263 $ 342,971 Republic of Austria, 5%, 2012 70 90,055 Republic of Austria, 4.65%, 2018 39 47,785 ------------- $ 480,811 ------------- BELGIUM -- 3.1% Kingdom of Belgium, 3.75%, 2009 EUR 157 $ 192,481 Kingdom of Belgium, 5%, 2012 132 169,761 ------------- $ 362,242 ------------- CANADA -- 2.0% Government of Canada, 5.5%, 2009 CAD 135 $ 105,918 Government of Canada, 5.25%, 2012 139 106,750 Government of Canada, 8%, 2023 25 24,616 ------------- $ 237,284 ------------- DENMARK -- 3.8% Kingdom of Denmark, 7%, 2007 DKK 955 $ 174,285 Kingdom of Denmark, 6%, 2009 1,147 206,807 Kingdom of Denmark, 5%, 2013 376 63,994 ------------- $ 445,086 ------------- FINLAND -- 6.9% Republic of Finland, 2.75%, 2006 EUR 267 $ 325,273 Republic of Finland, 3%, 2008 398 477,621 ------------- $ 802,894 ------------- FRANCE -- 8.3% Republic of France, 4.75%, 2007-2012 EUR 711 $ 904,688 Republic of France, 6%, 2025 46 64,432 ------------- $ 969,120 ------------- GERMANY -- 12.4% Federal Republic of Germany, 3.5%, 2008 EUR 634 $ 773,214 Federal Republic of Germany, 5.25%, 2010 313 409,971 Kreditanstalt fur Wiederaufbau, 3.25%, 2008 220 266,800 ------------- $ 1,449,985 ------------- IRELAND -- 5.8% Republic of Ireland, 4.25%, 2007 EUR 505 $ 635,106 Republic of Ireland, 4.6%, 2016 40 49,340 ------------- $ 684,446 ------------- ITALY -- 1.8% Republic of Italy, 5.25%, 2017 EUR 160 $ 206,180 ------------- JAPAN -- 2.0% Development Bank of Japan, 1.4%, 2012 JPY 26,000 $ 234,785 ------------- MEXICO -- 1.1% Pemex Project Funding Master Trust, 8.625%, 2022 $ 117 $ 121,680 United Mexican States, 8%, 2022 10 10,385 ------------- $ 132,065 ------------- NETHERLANDS -- 5.5% Kingdom of Netherlands, 5.75%, 2007 EUR 465 $ 605,031 Kingdom of Netherlands, 5%, 2012 31 39,485 ------------- $ 644,516 ------------- NEW ZEALAND -- 4.1% Government of New Zealand, 7%, 2009 NZD 142 $ 92,784 Government of New Zealand, 6.5%, 2013 604 386,055 ------------- $ 478,839 ------------- PORTUGAL -- 0.9% Republic of Portugal, 5.45%, 2013 EUR 84 $ 110,959 ------------- QATAR -- 0.5% State of Qatar, 9.75%, 2030 # $ 47 $ 64,390 ------------- SOUTH AFRICA -- 0.5% Republic of South Africa, 8.5%, 2017 $ 52 $ 58,890 ------------- SPAIN -- 2.7% Kingdom of Spain, 6%, 2008 EUR 220 $ 292,638 Kingdom of Spain, 5.35%, 2011 20 26,292 ------------- $ 318,930 ------------- UNITED KINGDOM -- 2.6% United Kingdom Treasury, 5%, 2012 GBP 170 $ 306,036 ------------- Total Foreign Bonds $ 8,069,241 ------------- U.S. BONDS -- 26.4% ASSET BACKED & SECURITIZED -- 3.6% Commercial Mortgage Asset Trust, 1.146%, 2032 ## $ 1,650 $ 89,222 Deutsche Mortgage & Asset Receiving Corp., 6.538%, 2031 59 63,177 First Union National Bank Commercial Mortgage Trust, 7.39%, 2031 60 67,873 First Union National Bank Commercial Mortgage Trust, 1.218%, 2043 ## 1,772 90,954 First Union-Lehman Brothers Bank of America, 6.56%, 2035 29 31,791 GMAC Commercial Mortgage Securities, Inc., 6.42%, 2035 29 31,752 LB-UBS Commercial Mortgage Trust, 7.95%, 2010 45 52,193 ------------- $ 426,962 ------------- MORTGAGE BACKED -- 1.5% Fannie Mae, 6%, 2017-2018 $ 170 $ 177,351 ------------- MUNICIPALS -- 1.3% North Carolina St. Public Improvement, "A", 5.25%, 2015 $ 135 $ 147,435 ------------- SUPRANATIONAL -- 6.5% Inter-American Development Bank, 1.9%, 2009 JPY 79,000 $ 758,505 ------------- U.S. GOVERNMENT AGENCIES -- 3.3% Fannie Mae, 1.75%, 2008 JPY 40,000 $ 381,313 ------------- U.S. TREASURY OBLIGATIONS -- 10.2% U.S. Treasury Bonds, 8%, 2021 $ 56 $ 73,399 U.S. Treasury Bonds, 5.375%, 2031 65 65,556 U.S. Treasury Notes, 2.375%, 2006 343 340,066 U.S. Treasury Notes, 2.625%, 2008 111 107,518 U.S. Treasury Notes, 4.25%, 2013 272 264,743 U.S. Treasury Notes, 2%, 2014 351 348,892 ------------- $ 1,200,174 ------------- Total U.S. Bonds $ 3,091,740 ------------- Total Bonds (Identified Cost, $10,969,640) $ 11,160,981 -------------
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PAR AMOUNT ISSUER (000 OMITTED) VALUE REPURCHASE AGREEMENT -- 3.7% Morgan Stanley, 1.50%, dated 6/30/04, due 7/01/04, total to be received $433,018 (secured by various U.S. Treasury and Federal Agency obligations in a jointly traded account), at Cost $ 433 $ 433,000 ------------- Total Investments (Identified Cost, $11,402,640) $ 11,593,981 ------------- OTHER ASSETS, LESS LIABILITIES -- 1.1% 124,215 ------------- Net Assets -- 100.0% $ 11,718,196 =============
See portfolio footnotes and notes to financial statements. PORTFOLIO OF INVESTMENTS (Unaudited) -- June 30, 2004 GOVERNMENT SECURITIES VARIABLE ACCOUNT
PAR AMOUNT ISSUER (000 OMITTED) VALUE BONDS -- 97.3% AGENCY -- OTHER -- 7.2% Financing Corp., 10.35%, 2018 $ 1,150 $ 1,698,964 Resolution Funding Corp., 8.875%, 2020 1,700 2,327,186 SLM Corp., 5.25%, 2006 3,520 3,661,877 ------------- $ 7,688,027 ------------- ASSET BACKED & SECURITIZED -- 0.2% Freddie Mac, 3.108%, 2035 $ 195 $ 194,671 ------------- MORTGAGE BACKED -- 57.4% Fannie Mae, 4.5%, 2019 $ 2,794 $ 2,735,108 Fannie Mae, 5%, 2018-2019 7,081 7,105,656 Fannie Mae, 5.5%, 2017-2034 23,712 23,942,684 Fannie Mae, 5.989%, 2020 6 6,199 Fannie Mae, 6%, 2016-2034 14,214 14,628,987 Fannie Mae, 6.5%, 2005-2032 6,701 6,977,512 Fannie Mae, 7.5%, 2022-2031 504 541,786 Fannie Mae, 8.5%, 2007 11 11,595 Fannie Mae, 10%, 2018 428 477,510 Freddie Mac, 5.5%, 2034 1,698 1,695,795 Freddie Mac, 6.5%, 2032 1,756 1,831,347 Freddie Mac, 7.5%, 2027-2028 228 246,531 Ginnie Mae, 6.5%, 2028 910 951,610 Ginnie Mae, 7.5%, 2032 126 136,042 Ginnie Mae, 11%, 2010-2019 72 80,554 Ginnie Mae, 12.5%, 2015 19 21,394 ------------- $ 61,390,310 ------------- U.S. GOVERNMENT AGENCIES -- 18.8% Aid to Israel, 5.5%, 2023 $ 1,097 $ 1,069,740 Aid to Israel, 6.6%, 2008 985 1,044,690 Aid to Peru, 9.98%, 2008 819 924,730 Empresa Energetica Cornito Ltd., 6.07%, 2010 2,672 2,827,350 Fannie Mae, 5.5%, 2011 1,504 1,573,097 Freddie Mac, 7%, 2010 1,641 1,848,739 Small Business Administration, 4.34%, 2024 405 380,206 Small Business Administration, 4.72%, 2024 749 723,246 Small Business Administration, 4.77%, 2024 697 673,879 Small Business Administration, 4.89%, 2023 730 713,024 Small Business Administration, 4.98%, 2023 283 278,674 Small Business Administration, 5.52%, 2024 383 387,394 Small Business Administration, 6.07%, 2022 622 651,896 Small Business Administration, 6.34%, 2021 808 855,916 Small Business Administration, 6.44%, 2021 785 835,279 Small Business Administration, 6.625%, 2021 848 908,845 Small Business Administration, 8.4%, 2007 24 24,864 Small Business Administration, 8.7%, 2009 116 125,047 Small Business Administration, 10.05%, 2009 20 21,161 Tennessee Valley Authority, 0% to 2012, 8.25% to 2042 2,250 1,526,760 U.S. Department of Housing & Urban Development, 6.36%, 2016 500 536,883
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PAR AMOUNT ISSUER (000 OMITTED) VALUE BONDS -- continued U.S. GOVERNMENT AGENCIES -- continued U.S. Department of Housing & Urban Development, 6.59%, 2016 $ 2,045 $ 2,166,739 ------------- $ 20,098,159 ------------- U.S. TREASURY OBLIGATIONS -- 13.7% U.S. Treasury Bonds, 5.25%, 2028 $ 346 $ 338,986 U.S. Treasury Bonds, 5.375%, 2031 353 356,020 U.S. Treasury Bonds, 6.25%, 2030 1,072 1,200,263 U.S. Treasury Bonds, 6.875%, 2025 928 1,103,595 U.S. Treasury Bonds, 12%, 2013 19 25,080 U.S. Treasury Notes, 0%, 2012 1,233 846,800 U.S. Treasury Notes, 3.375%, 2007 4,523 4,844,586 U.S. Treasury Notes, 3.625%, 2008 ### 4,430 4,841,019 U.S. Treasury Notes, 4%, 2014 84 80,056 U.S. Treasury Notes, 5.5%, 2009 1,008 1,085,490 ------------- $ 14,721,895 ------------- Total Bonds (Identified Cost, $103,164,318) $ 104,093,062 ------------- REPURCHASE AGREEMENT -- 1.9% Goldman Sachs, 1.50%, dated 6/30/04, due 7/01/04, total to be received $2,068,086 (secured by various U.S. Treasury and Federal Agency obligations in a jointly traded account), at Cost $ 2,068 $ 2,068,000 ------------- Total Investments (Identified Cost, $105,232,318) $ 106,161,062 ------------- OTHER ASSETS, LESS LIABILITIES -- 0.8% 862,390 ------------- NET ASSETS -- 100.0% $ 107,023,452 =============
See portfolio footnotes and notes to financial statements. PORTFOLIO OF INVESTMENTS (Unaudited) -- June 30, 2004 HIGH YIELD VARIABLE ACCOUNT
PAR AMOUNT ISSUER (000 OMITTED) VALUE BONDS -- 92.5% U.S. BONDS -- 80.8% ADVERTISING & BROADCASTING -- 5.5% Allbritton Communications Co., 7.75%, 2012 $ 465 $ 458,025 Echostar DBS Corp., 6.375%, 2011 1,000 985,000 Emmis Operating Co., 6.875%, 2012 ## 185 181,300 Granite Broadcasting Corp., 9.75%, 2010 ## 510 474,300 Lamar Media Corp., 7.25%, 2013 255 259,463 Muzak LLC, 10%, 2009 160 145,600 Paxson Communications Corp., 0% to 2006, 12.25% to 2009 600 522,000 PRIMEDIA, Inc., 8.875%, 2011 340 336,600 Spanish Broadcasting System, Inc., 9.625%, 2009 475 501,125 XM Satellite Radio, Inc., 6.65%, 2009 ## 125 125,313 XM Satellite Radio, Inc., 12%, 2010 31 35,534 ------------- $ 4,024,260 ------------- AEROSPACE -- 2.0% Argo-Tech Corp., 9.25%, 2011 ## $ 215 $ 221,450 BE Aerospace, Inc., 8.875%, 2011 310 288,300 Hexcel Corp., 9.75%, 2009 460 482,425 K & F Industries, Inc., 9.25%, 2007 84 86,520 K & F Industries, Inc., 9.625%, 2010 145 158,956 TransDigm Holding Co., 8.375%, 2011 230 233,450 ------------- $ 1,471,101 ------------- AIRLINES -- 0.7% Continental Airlines, Inc., 6.748%, 2017 $ 74 $ 56,585 Continental Airlines, Inc., 6.9%, 2017 81 62,264 Continental Airlines, Inc., 6.795%, 2020 180 140,642 Continental Airlines, Inc., 7.566%, 2020 251 196,931 Delta Air Lines, Inc., 7.92%, 2012 70 45,832 ------------- $ 502,254 ------------- APPAREL MANUFACTURERS -- 0% WestPoint Stevens, Inc., 7.875%, 2005-2008** $ 870 $ 21,750 ------------- ASSET BACKED & SECURITIZED -- 1.9% Airplane Pass-Through Trust, 10.875%, 2019** $ 741 $ 3,704 Asset Securitization Corp., 8.2885%, 2026 150 149,649 First Union National Bank Commercial Mortgage Corp., 6.75%, 2010 165 146,258 GE Capital Commercial Mortgage Corp., 7.7905%, 2033 ## 145 143,844 GMAC Commercial Mortgage Securities, Inc., 7.8988%, 2034 ## 192 200,019 Morgan Stanley Capital I, Inc., 7.7279%, 2010 215 236,130 Mortgage Capital Funding, Inc., 7.214%, 2007 500 499,251 ------------- $ 1,378,855 ------------- AUTOMOTIVE -- 3.9% Advanced Accessory Systems LLC, 10.75%, 2011 $ 155 $ 150,350 Dana Corp., 6.5%, 2009 100 104,000 Dana Corp., 10.125%, 2010 110 124,575 Dana Corp., 9%, 2011 95 111,150 Dana Corp., 7%, 2029 180 172,800 Delco Remy International, Inc., 9.375%, 2012 ## 95 92,388 Dura Operating Corp., 9%, 2009 235 230,300 Eagle-Picher Industries, Inc., 9.75%, 2013 155 166,625
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PAR AMOUNT ISSUER (000 OMITTED) VALUE BONDS -- continued U.S. BONDS -- continued AUTOMOTIVE -- continued Metaldyne Corp., 11%, 2012 $ 85 $ 72,250 Metaldyne Corp., 10%, 2013 ## 145 142,100 Navistar International Corp., 7.5%, 2011 365 374,125 Oxford Automotive, Inc., 12%, 2010 ## 120 93,600 Tenneco Automotive, Inc., 10.25%, 2013 ## 470 531,100 TRW Automotive, Inc., 9.375%, 2013 214 241,285 TRW Automotive, Inc., 11%, 2013 179 211,220 ------------- $ 2,817,868 ------------- BASIC INDUSTRY -- 0.5% Thermadyne Holdings Corp., 9.25%, 2014 $ 165 $ 162,938 Trimas Corp., 9.875%, 2012 195 206,700 ------------- $ 369,638 ------------- BROADCAST & CABLE TV -- 4.2% CSC Holdings, Inc., 8.125%, 2009 $ 200 $ 208,000 CSC Holdings, Inc., 6.75%, 2012 ## 215 206,400 Cablevision Systems Corp., 8%, 2012 ## 355 351,450 Charter Communications Holdings LLC, 8.75%, 2013 ## 150 143,625 Charter Communications, Inc., 8.625%, 2009 510 406,725 Charter Communications, Inc., 9.92%, 2011 915 722,850 Charter Communications, Inc., 8.375%, 2014 ## 120 116,100 DIRECTV Holdings LLC, 8.375%, 2013 155 171,469 Frontiervision Operating Partners LP, 11%, 2006 160 195,200 Insight Midwest LP, 9.75%, 2009 200 211,000 Mediacom Broadband LLC, 11%, 2013 295 314,175 ------------- $ 3,046,994 ------------- BUILDING -- 1.3% D.R. Horton, Inc., 8%, 2009 $ 225 $ 246,375 Formica Corp., 10.875%, 2009** 310 58,900 Interface, Inc., 10.375%, 2010 204 227,460 Jacuzzi Brands, Inc., 9.625%, 2010 90 96,300 Williams Scotsman, Inc., 9.875%, 2007 250 248,125 Williams Scotsman, Inc., 10%, 2008 50 54,500 ------------- $ 931,660 ------------- BUSINESS SERVICES -- 1.4% Amkor Technologies, Inc., 7.75%, 2013 $ 230 $ 217,925 Iron Mountain, Inc., 8.625%, 2013 280 296,800 Iron Mountain, Inc., 7.75%, 2015 5 4,963 Lucent Technologies, Inc., 5.5%, 2008 230 217,350 Xerox Corp., 7.625%, 2013 290 296,525 ------------- $ 1,033,563 ------------- CHEMICALS -- 4.6% Equistar Chemicals LP, 10.625%, 2011 $ 525 $ 582,750 Hercules, Inc., 6.75%, 2029 ## 260 249,600 Huntsman International LLC, 0%, 2009 100 49,000 Huntsman International LLC, 10.125%, 2009 390 397,800 IMC Global, Inc., 10.875%, 2013 280 333,900 JohnsonDiversey Holding, Inc., 10.67%, 2013 200 154,000 JohnsonDiversey Holding, Inc., "B", 9.625%, 2012 475 517,750 Lyondell Chemical Co., 11.125%, 2012 45 49,838 Nalco Co., 7.75%, 2011 ## 110 115,225 Nalco Co., 8.875%, 2013 ## $ 100 $ 104,750 Resolution Performance Products LLC, 13.5%, 2010 85 79,263 Rockwood Specialties Group, Inc., 10.625%, 2011 220 234,300 Sovereign Specialty Chemicals, Inc., 11.875%, 2010 425 437,750 ------------- $ 3,305,926 ------------- CONGLOMERATES -- 0.7% Rexnord Industries, Inc., 10.125%, 2012 $ 170 $ 187,000 SPX Corp., 7.5%, 2013 315 322,875 ------------- $ 509,875 ------------- CONSTRUCTION -- 0.3% Technical Olympic USA, Inc., 9%, 2010 $ 75 $ 76,875 Technical Olympic USA, Inc., 7.5%, 2011 50 46,500 WCI Communities, Inc., 7.875%, 2013 75 75,750 ------------- $ 199,125 ------------- CONSUMER GOODS & SERVICES -- 1.8% K2, Inc., 7.375%, 2014 ## $ 40 $ 40,700 Kindercare Learning Centers, Inc., 9.5%, 2009 292 296,380 Remington Arms Co., Inc., 10.5%, 2011 355 344,350 Revlon Consumer Products Corp., 8.625%, 2008 270 238,950 Samsonite Corp., 8.875%, 2011 ## 125 129,375 Tempur-Pedic International, Inc., 10.25%, 2010 111 125,153 Werner Holding Co., Inc., 10%, 2007 135 112,725 ------------- $ 1,287,633 ------------- CONTAINERS -- 1.3% Graham Packaging Co., Inc., 8.75%, 2008 $ 285 $ 286,425 Owens-Brockway Glass Container, Inc., 8.25%, 2013 280 289,100 Plastipak Holdings, Inc., 10.75%, 2011 175 188,125 Pliant Corp., 13%, 2010 180 161,100 Portola Packaging, Inc., 8.25%, 2012 ## 45 36,675 ------------- $ 961,425 ------------- ELECTRONICS -- 0.1% ON Semiconductor Corp., 13%, 2008 $ 55 $ 63,113 ------------- ENERGY -- INDEPENDENT -- 2.0% Chesapeake Energy Corp., 6.875%, 2016 $ 490 $ 477,750 Encore Acquisition Co., 8.375%, 2012 380 406,600 Magnum Hunter Resources, Inc., 9.6%, 2012 225 247,500 Pioneer Natural Resources Co., 7.5%, 2012 10 11,324 Plains E&P Co., 7.125%, 2014 ## 65 66,138 Vintage Petroleum, Inc., 8.25%, 2012 210 222,600 ------------- $ 1,431,912 ------------- ENTERTAINMENT -- 1.6% AMC Entertainment, Inc., 9.5%, 2011 $ 360 $ 374,400 AMF Bowling Worldwide, Inc., 10%, 2010 ## 130 133,250
12
PAR AMOUNT ISSUER (000 OMITTED) VALUE BONDS -- continued U.S. BONDS -- continued ENTERTAINMENT -- continued Six Flags, Inc., 9.75%, 2013 $ 320 $ 321,600 Vail Resorts, Inc., 6.75%, 2014 340 322,150 ------------- $ 1,151,400 ------------- FOOD & NON-ALCOHOLIC BEVERAGES -- 1.0% Merisant Co., 9.5%, 2013 ## $ 185 $ 197,025 Michael Foods, Inc., 8%, 2013 225 232,313 Pinnacle Foods Corp., 8.25%, 2013 ## 50 48,250 Seminis Vegetable Seeds, Inc., 10.25%, 2013 250 271,875 ------------- $ 749,463 ------------- FOREST & PAPER PRODUCTS -- 2.6% Buckeye Technologies, Inc., 9.25%, 2008 $ 300 $ 294,000 Buckeye Technologies, Inc., 8%, 2010 45 41,288 Buckeye Technologies, Inc., 8.5%, 2013 240 242,400 Graphic Packaging International, Inc., 8.5%, 2011 70 74,900 Graphic Packaging International, Inc., 9.5%, 2013 320 347,200 Greif, Inc., 8.875%, 2012 270 290,588 Jefferson Smurfit Corp., 8.25%, 2012 345 358,800 Newark Group, Inc., 9.75%, 2014 ## 275 263,313 ------------- $ 1,912,489 ------------- GAMING & LODGING -- 5.8% Aztar Corp., 7.875%, 2014 ## $ 130 $ 131,300 Boyd Gaming Corp., 6.75%, 2014 ## 380 358,150 Caesers Entertainment, Inc., 8.875%, 2008 80 86,800 Caesars Entertainment, Inc., 8.125%, 2011 375 397,969 Corrections Corp. of America, 9.875%, 2009 205 227,550 Corrections Corp. of America, 7.5%, 2011 150 151,500 GEO Group, Inc., 8.25%, 2013 140 138,600 Hilton Hotels Corp., 7.625%, 2012 320 344,000 Isle Capri Casinos, Inc., 7%, 2014 ## 265 245,788 Mandalay Resort Group, 9.375%, 2010 115 125,350 Meristar Hospitality Corp., 10.5%, 2009 60 63,900 MGM Mirage, Inc., 8.5%, 2010 140 151,200 MGM Mirage, Inc., 8.375%, 2011 410 428,450 Pinnacle Entertainment, Inc., 9.25%, 2007 19 19,475 Pinnacle Entertainment, Inc., 8.25%, 2012 ## 200 191,500 Pinnacle Entertainment, Inc., 8.75%, 2013 170 168,725 Royal Caribbean Cruises Ltd., 6.875%, 2013 210 207,638 Starwood Hotels & Resorts Worldwide, Inc., 7.875%, 2012 330 353,100 Station Casinos, Inc., 6.5%, 2014 245 235,813 Venetian Casino Resort LLC, 11%, 2010 170 196,350 ------------- $ 4,223,158 ------------- INDUSTRIAL -- 1.0% Blount, Inc., 7%, 2005 $ 100 $ 102,000 Blount, Inc., 13%, 2009 215 230,319 Communications & Power Industries, Inc., 8%, 2012 75 75,000 MSW Energy Holdings, 7.375%, 2010 ## 195 194,025 Valmont Industries, Inc., 6.875%, 2014 115 112,700 ------------- $ 714,044 ------------- MACHINERY & TOOLS -- 3.2% AGCO Corp., 9.5%, 2008 $ 365 $ 397,850 AGCO Corp., 6.875%, 2014 EUR 150 174,493 Amsted Industries, Inc., 10.25%, 2011 ## $ 190 206,150 Case New Holland, Inc., 9.25%, 2011 ## 65 68,250 Columbus McKinnon Corp., 10%, 2010 110 116,600 JLG Industries, Inc., 8.25%, 2008 115 120,750 Joy Global, Inc., 8.75%, 2012 220 246,400 Manitowoc Co., Inc., 10.375%, 2011 EUR 130 174,980 Manitowoc Co., Inc., 10.5%, 2012 $ 85 97,325 Terex Corp., 10.375%, 2011 340 379,100 United Rentals, Inc., 6.5%, 2012 200 189,000 United Rentals, Inc., 7%, 2014 140 124,600 ------------- $ 2,295,498 ------------- MEDICAL & HEALTH TECHNOLOGY & SERVICES -- 2.7% Alliance Imaging, Inc., 10.375%, 2011 $ 255 $ 267,113 Beverly Enterprises, Inc., 7.875%, 2014 ## 150 148,125 Extendicare Health Services, Inc., 6.875%, 2014 ## 140 131,600 Fisher Scientific International, Inc., 8.125%, 2012 174 186,180 HCA, Inc., 7.875%, 2011 535 586,774 Mariner Health Care, Inc., 8.25%, 2013 ## 260 273,000 NDCHealth Corp., 10.5%, 2012 130 143,325 Tenet Healthcare Corp., 6.5%, 2012 200 174,000 Tenet Healthcare Corp., 9.875%, 2014 ## 70 70,438 ------------- $ 1,980,555 ------------- MEDICAL EQUIPMENT -- 0.4% Alpharma, Inc., 8.625%, 2011 ## $ 290 $ 300,150 ------------- METALS & MINING -- 2.6% Arch Western Finance, 6.75%, 2013 ## $ 200 $ 200,000 Commonwealth Aluminum Corp., 10.75%, 2006 160 161,600 Doe Run Resources Corp., 8.5%, 2008 239 184,072 Earle M. Jorgensen Co., 9.75%, 2012 275 301,125 Ispat Inland PLC, 9.75%, 2014 ## 140 144,200 Kaiser Aluminum & Chemical Corp., 9.875%, 2002** 210 219,975 Oregon Steel Mills, Inc., 10%, 2009 40 42,400 Peabody Energy Corp., 6.875%, 2013 220 222,750 Steel Dynamics, Inc., 9.5%, 2009 ## 260 287,300 U.S. Steel Corp., 9.75%, 2010 118 130,685 ------------- $ 1,894,107 ------------- NATURAL GAS -- DISTRIBUTION -- 0.7% AmeriGas Partners LP, 8.875%, 2011 $ 275 $ 292,875 CenterPoint Energy Resources Corp., 7.875%, 2013 189 211,474 ------------- $ 504,349 ------------- NATURAL GAS -- PIPELINE -- 2.7% ANR Pipeline Co., 9.625%, 2021 $ 320 $ 358,400 El Paso Energy Corp., 7.625%, 2010 205 210,125 El Paso Energy Corp., 7%, 2011 555 485,625 El Paso Energy Corp., 7.75%, 2013 390 357,825 GulfTerra Energy Partners LP, 8.5%, 2010 173 188,138 Williams Cos., Inc., 7.125%, 2011 388 393,820 ------------- $ 1,993,933 -------------
13
PAR AMOUNT ISSUER (000 OMITTED) VALUE BONDS -- continued U.S. BONDS -- continued OIL SERVICES -- 1.3% Dresser, Inc., 9.375%, 2011 $ 200 $ 214,000 GulfMark Offshore, Inc., 8.75%, 2008 125 128,125 Hanover Equipment Trust, 8.75%, 2011 380 406,600 Parker Drilling Co., 9.625%, 2013 70 72,625 Pride International, Inc., 7.375%, 2014 ## 120 121,200 ------------- $ 942,550 ------------- OILS -- 0.8% Citgo Petroleum Corp., 11.375%, 2011 $ 220 $ 255,200 Giant Industries, Inc., 8%, 2014 90 90,000 Premcor Refining Group, Inc., 7.75%, 2012 200 207,500 ------------- $ 552,700 ------------- POLLUTION CONTROL -- 1.5% Allied Waste North America, Inc., 6.5%, 2010 ## $ 305 $ 301,188 Allied Waste North America, Inc., 7.875%, 2013 785 820,325 ------------- $ 1,121,513 ------------- PRINTING & PUBLISHING -- 2.7% Dex Media East LLC, 12.125%, 2012 $ 225 $ 262,688 Dex Media West LLC, 9.875%, 2013 155 170,113 Dex Media, Inc., 0% to 2008, 9% to 2013 ## 555 357,975 Hollinger International, Inc., 9%, 2010 205 236,775 Houghton Mifflin Co., 9.875%, 2013 150 150,000 Mail-Well Corp., 9.625%, 2012 185 198,875 Mail-Well Corp., 7.875%, 2013 ## 100 91,000 Media News Group, Inc., 6.875%, 2013 305 288,225 R.H. Donnelley Finance Corp., 10.875%, 2012 160 185,600 ------------- $ 1,941,251 ------------- RAILROADS -- 0.5% Kansas City Southern Railway Co., 7.5%, 2009 $ 360 $ 360,000 ------------- REAL ESTATE -- 0.1% CB Richard Ellis Services, Inc., 9.75%, 2010 $ 36 $ 39,600 ------------- RETAILERS -- 4.1% Cole National Group, Inc., 8.875%, 2012 $ 200 $ 213,500 Couche-Tard, Inc., 7.5%, 2013 505 505,000 Dollar General Corp., 8.625%, 2010 360 400,050 Finlay Fine Jewelry Corp., 8.375%, 2012 ## 185 192,400 J. Crew Operating Corp., 10.375%, 2007 485 492,275 Levi Strauss & Co., 7%, 2006 175 163,406 PCA LLC, 11.875%, 2009 300 322,500 Rite Aid Corp., 9.5%, 2011 25 27,563 Rite Aid Corp., 6.875%, 2013 375 345,000 Rite Aid Corp., 9.25%, 2013 120 126,000 Saks, Inc., 7%, 2013 170 167,875 ------------- $ 2,955,569 ------------- SUPERMARKETS -- 0.4% Roundy's, Inc., 8.875%, 2012 $ 290 $ 307,400 ------------- TELECOMMUNICATIONS -- WIRELESS -- 4.3% Alamosa Holdings, Inc., 0% to 2005, 12% to 2009 $ 125 $ 120,625 Alamosa Holdings, Inc., 11%, 2010 175 190,750 American Tower Corp., 9.375%, 2009 200 213,500 Centennial Communications Corp., 10.125%, 2013 420 433,650 Crown Castle International Corp., 7.5%, 2013 315 313,425 Dobson Communications Corp., 8.875%, 2013 $ 315 $ 239,400 Nextel Communications, Inc., 7.375%, 2015 1,135 1,146,350 Rural Cellular Corp., 9.75%, 2010 149 135,218 Rural Cellular Corp., 9.875%, 2010 205 203,463 Rural Cellular Corp., 8.25%, 2012 ## 60 61,350 U.S. Unwired, Inc., 10%, 2012 ## 75 75,750 ------------- $ 3,133,481 ------------- TELECOMMUNICATIONS -- WIRELINE -- 2.5% Citizens Communications Co., 9%, 2031 $ 288 $ 277,691 MCI, Inc., 5.908%, 2007 43 41,710 MCI, Inc., 6.688%, 2009 43 39,775 MCI, Inc., 7.735%, 2014 37 33,115 Qwest Capital Funding, Inc., 7.25%, 2011 400 342,000 Qwest Services Corp., 14%, 2010 ## 750 871,875 Time Warner Telecom Holdings, Inc., 10.125%, 2011 200 182,000 ------------- $ 1,788,166 ------------- UTILITIES -- ELECTRIC POWER -- 6.1% AES Corp., 8.75%, 2013 ## $ 450 $ 482,063 AES Corp., 9%, 2015 ## 300 321,375 Allegheny Energy Supply Co. LLC, 8.25%, 2012 ## 300 296,625 Calpine Corp., 8.5%, 2011 150 97,875 Calpine Corp., 8.75%, 2013 ## 660 541,200 CMS Energy Corp., 8.5%, 2011 280 285,600 Dynegy Holdings, Inc., 9.875%, 2010 ## 155 166,625 Dynegy Holdings, Inc., 6.875%, 2011 110 94,738 FirstEnergy Corp., 6.45%, 2011 210 217,719 Illinois Power Co., 11.5%, 2010 180 212,850 Midwest Generation LLC, 8.75%, 2034 ## 320 323,200 Mirant Americas Generation, Inc., 8.3%, 2011 300 225,000 Nevada Power Co., 6.5%, 2012 ## 50 47,500 NRG Energy, Inc., 8%, 2013 ## 230 232,300 PG&E Corp., 6.875%, 2008 ## 70 73,150 Reliant Resources, Inc., 9.25%, 2010 230 245,525 Reliant Resources, Inc., 9.5%, 2013 210 226,275 Sierra Pacific Power Co., 6.25%, 2012 ## 90 84,600 Sierra Pacific Resources, 8.625%, 2014 ## 160 156,000 TECO Energy, Inc., 7.5%, 2010 60 60,600 ------------- $ 4,390,820 ------------- Total U.S. Bonds $ 58,609,148 ------------- FOREIGN BONDS -- 11.7% AUSTRALIA -- 0.9% Burns, Philp & Co. Ltd., 9.75%, 2012 (Food & Non-Alcoholic Beverages) $ 655 $ 677,925 ------------- BRAZIL -- 0.3% Federal Republic of Brazil, 8%, 2014 (Emerging Market Sovereign) $ 21 $ 19,263 Federal Republic of Brazil, 11%, 2040 (Emerging Market Sovereign) 177 166,823 ------------- $ 186,086 ------------- CANADA -- 3.0% Abitibi-Consolidated, Inc., 8.55%, 2010 (Forest & Paper Products) $ 400 $ 421,773 Acetex Corp., 10.875%, 2009 (Chemicals) 195 213,525
14
PAR AMOUNT ISSUER (000 OMITTED) VALUE BONDS -- continued FOREIGN BONDS -- continued CANADA -- continued Bombardier, Inc., 8.375%, 2013 (Industrial) $ 250 $ 248,125 CHC Helicopter Corp., 7.375%, 2014 (Transportation -- Services) 155 152,288 Hollinger, Inc., 12.875%, 2011 (Printing & Publishing) 104 121,680 Norske Skog Canada, 8.625%, 2011 (Forest & Paper Products) 185 196,100 Norske Skog Canada, 7.375%, 2014 (Forest & Paper Products) 125 120,938 Nortel Networks Ltd., 6.125%, 2006 (Business Services) 235 236,175 Nova Chemicals Corp., 6.5%, 2012 (Chemicals) 150 147,750 Rogers Wireless, Inc., 6.375%, 2014 (Telecommunications -- Wireless) 135 124,538 Russel Metals, Inc., 6.375%, 2014 (Metals & Mining) 190 178,125 ------------- $ 2,161,017 ------------- CHILE -- 0.4% Empresa Nacional de Electricidad S.A., 8.35%, 2013 (Utilities -- Electric Power) $ 250 $ 266,879 ------------- FRANCE -- 1.3% Crown European Holdings S.A., 9.5%, 2011 (Containers) $ 425 $ 463,250 Rhodia S.A., 8.875%, 2011 (Chemicals) 535 452,075 ------------- $ 915,325 ------------- GERMANY -- 0% Kronos International, Inc., 8.875%, 2009 (Chemicals) EUR 15 $ 19,368 ------------- IRELAND -- 0.6% Eircom Funding PLC, 8.25%, 2013 (Telecommunications -- Wireline) $ 140 $ 145,600 MDP Acquisitions PLC, 9.625%, 2012 (Forest & Paper Products) 260 284,700 ------------- $ 430,300 ------------- LUXEMBOURG -- 1.4% BCP Caylux Holdings Luxembourg S.A., 9.625%, 2014 (Chemicals) $ 245 $ 254,188 Lighthouse International Co. S.A., 8%, 2014 (Printing & Publishing) EUR 300 352,640 Safilo Capital International S.A., 9.625%, 2013 (Consumer Goods & Services) 225 256,258 SGL Carbon International S.A., 8.5%, 2012 (Metals & Mining) 105 123,424 ------------- $ 986,510 ------------- MEXICO -- 0.6% Corporacion Durango S.A. de C.V., 13.75%, 2009 (Forest & Paper Products)** $ 360 $ 180,000 Innova S.A. de R.L., 9.375%, 2013 (Telecommunications -- Wireless) 200 209,500 TFM S.A. de C.V., 12.5%, 2012 (Transportation -- Services) 51 54,315 ------------- $ 443,815 ------------- NETHERLANDS -- 0.3% Kappa Beheer B.V., 10.625%, 2009 (Forest & Paper Products) $ 210 $ 219,450 ------------- NORWAY -- 0.5% Ocean Rig Norway S.A., 10.25%, 2008 (Oil Services) $ 190 $ 188,100 Petroleum Geo-Services A.S.A., 10%, 2010 (Oil Services) $ 200 $ 207,000 ------------- $ 395,100 ------------- PANAMA -- 0.2% Republic of Panama, 9.375%, 2023 (Emerging Market Sovereign) $ 159 $ 162,180 ------------- RUSSIA -- 0.6% Gaz Capital S.A., 9.625%, 2013 (Oils) $ 120 $ 123,966 Gaz Capital S.A., 8.625%, 2034 (Oils) 220 214,225 Russian Ministry of Finance, 12.75%, 2028 (Emerging Market Sovereign) 84 122,220 ------------- $ 460,411 ------------- SINGAPORE -- 0.3% Flextronics International Ltd., 6.5%, 2013 (Electronics) $ 225 $ 219,375 ------------- SWEDEN -- 0.1% Stena AB, 9.625%, 2012 (Transportation -- Services) $ 80 $ 88,800 ------------- UNITED KINGDOM -- 1.2% COLT Telecom Group PLC, 7.625%, 2009 (Telecommunications -- Wireline) EUR 200 $ 243,010 Dunlop Standard Aerospace Holdings PLC, 11.875%, 2009 (Aerospace) $ 19 20,168 Dunlop Standard Aerospace Holdings PLC, 11.875%, 2009 (Aerospace) 154 163,625 NTL Cable PLC, 8.75%, 2014 (Broadcast & Cable TV) 20 20,500 Telewest Communications PLC, 11%, 2007 (Broadcast & Cable TV)** 160 94,000 Telewest Communications PLC, 0%, 2009 (Broadcast & Cable TV)** 400 186,000 Telewest Communications PLC, 0% to 2005, 11.375% to 2010 (Broadcast & Cable TV)** 85 37,400 United Biscuits Finance PLC, 10.625%, 2011 (Food & Non-Alcoholic Beverages) EUR 80 106,706 ------------- $ 871,409 ------------- Total Foreign Bonds $ 8,503,950 ------------- Total Bonds (Identified Cost, $68,242,098) $ 67,113,098 ------------- SHARES STOCKS -- 1.5% U.S. STOCKS -- 1.1% AUTOMOTIVE -- 0.1% Hayes Lemmerz International, Inc.* 3,536 $ 53,394 Oxford Automotive, Inc.* 53 1 ------------- $ 53,395 ------------- BROADCAST & CABLE TV -- 0.5% NTL, Inc.* 6,473 $ 372,974 ------------- MACHINERY & TOOLS Thermadyne Holdings Corp.* 2,586 $ 36,204 ------------- SPECIALTY CHEMICALS Sterling Chemicals, Inc.* 31 $ 744 ------------- TELEPHONE SERVICES -- 0.2% MCI, Inc.* 12,022 $ 173,477 XO Communications, Inc.* 198 822 ------------- $ 174,299 -------------
15
ISSUER SHARES VALUE STOCKS -- continued U.S. STOCKS -- continued UTILITIES -- ELECTRIC POWER -- 0.3% DPL, Inc. 10,070 $ 195,559 ------------- Total U.S. Stocks $ 833,175 ------------- FOREIGN STOCKS -- 0.4% NETHERLANDS -- 0.1% Completel Europe N.V (Telephone Services)* 3,011 $ 84,357 VersaTel Telecom International N.V (Telephone Services)* 7,740 15,085 ------------- $ 99,442 ------------- SWEDEN -- 0.2% Song Networks Holding AB (Telephone Services)* 18,013 $ 126,852 ------------- UNITED KINGDOM -- 0.1% Jazztel PLC (Telephone Services)* 165,342 $ 52,365 ------------- Total Foreign Stocks $ 278,659 ------------- Total Stocks (Identified Cost, $2,355,381) $ 1,111,834 ------------- CONVERTIBLE PREFERRED STOCKS FOREIGN STOCK SWEDEN Song Networks Holding AB (Telephone Services) * 5,040 $ 24,778 ------------- U.S. STOCKS AUTOMOTIVE HLI Operating Co., Inc., "A" * 11 $ 924 ------------- Total Convertible Preferred Stocks (Identified Cost, $18,601) $ 25,702 ------------- PREFERRED STOCKS TELEPHONE SERVICES PTV, Inc., "A", 10% (Identified Cost, $--) 11 $ 80 ------------- WARRANTS AT&T Canada, Inc. (Broadcast & Cable TV) ##* 600 $ 6 Loral Space & Communications Ltd. (Business Services)* 1,000 0 Loral Space & Communications Ltd. (Business Services)* 1,100 0 Sterling Chemicals, Inc. (Specialty Chemicals)* 51 54 Thermadyne Holdings Corp. (Basic Industry)* 2,705 947 XO Communications, Inc. (Telecommunications-Wireline)* 298 313 XO Communications, Inc. (Telecommunications -- Wireline)* 298 218 XO Communications, Inc. (Telecommunications -- Wireline)* 397 596 XM Satellite Radio, Inc. (Broadcast & Cable TV)* 425 23,375 ------------- Total Warrants (Identified Cost, $219,283) $ 25,509 ------------- PAR AMOUNT ISSUER (000 OMITTED) VALUE SHORT-TERM OBLIGATION -- 3.9% General Electric Capital Corp., 1.48%, due 7/01/04, at Amortized Cost $ 2,796 $ 2,796,000 ------------- Total Investments (Identified Cost, $73,631,363)~ $ 71,072,223 ------------- OTHER ASSETS, LESS LIABILITIES -- 2.1% 1,527,039 ------------- Net Assets -- 100.0% $ 72,599,262 =============
See portfolio footnotes and notes to financial statements. 16 PORTFOLIO OF INVESTMENTS (Unaudited) -- June 30, 2004 MANAGED SECTORS VARIABLE ACCOUNT
ISSUER SHARES VALUE STOCKS -- 97.2% U.S. STOCKS -- 96.3% CONSUMER STAPLES -- 1.2% Avon Products, Inc. 8,700 $ 401,418 Colgate-Palmolive Co. 6,100 356,545 ------------- $ 757,963 ------------- FINANCIAL SERVICES -- 9.4% American Express Co. 22,800 $ 1,171,464 American International Group, Inc. 20,800 1,482,624 Citigroup, Inc. 34,200 1,590,300 Goldman Sachs Group, Inc. 5,500 517,880 Hartford Financial Services Group, Inc. 8,200 563,668 Merrill Lynch & Co., Inc. 15,000 809,700 ------------- $ 6,135,636 ------------- HEALTHCARE -- 23.2% Abbott Laboratories 29,500 $ 1,202,420 Amgen, Inc.* 21,200 1,156,884 C.R. Bard, Inc. 12,400 702,460 Celgene Corp.* 5,700 326,382 Eli Lilly & Co. 15,000 1,048,650 Genentech, Inc.* 4,200 236,040 Genzyme Corp.* 22,700 1,074,391 Gilead Sciences, Inc.* 18,100 1,212,700 Guidant Corp. 7,700 430,276 Johnson & Johnson 44,500 2,478,650 Medtronic, Inc. 26,100 1,271,592 Pfizer, Inc. 50,900 1,744,852 Waters Corp.* 27,800 1,328,284 Wyeth 24,600 889,536 ------------- $ 15,103,117 ------------- INDUSTRIAL GOODS & SERVICES -- 8.4% Caterpillar, Inc. 7,200 $ 571,968 Emerson Electric Co. 9,400 597,370 General Electric Co. 74,700 2,420,280 Illinois Tool Works, Inc. 5,700 546,573 Lockheed Martin Corp. 26,000 1,354,080 ------------- $ 5,490,271 ------------- LEISURE -- 6.8% Carnival Corp. 22,200 $ 1,043,400 Clear Channel Communications, Inc. 19,400 716,830 Comcast Corp., "A"* 33,400 936,202 Lamar Advertising Co.,"A"* 4,900 212,415 Outback Steakhouse, Inc. 8,900 368,104 Time Warner, Inc.* 22,200 390,276 Viacom, Inc., "B" 21,700 775,124 ------------- $ 4,442,351 ------------- MISCELLANEOUS -- 2.9% Apollo Group, Inc., "A"* 4,600 $ 406,134 Career Education Corp.* 8,300 378,148 Fiserv, Inc.* 15,300 595,017 Getty Images, Inc.* 8,500 510,000 ------------- $ 1,889,299 ------------- RETAIL -- 10.2% Best Buy Co., Inc. 14,500 $ 735,730 Coach, Inc.* 5,800 262,102 CVS Corp. 23,500 987,470 Kohl's Corp.* 20,500 866,740 Lowe's Co., Inc. 11,200 588,560 Nike, Inc., "B" 7,600 575,700 Pacific Sunwear of California, Inc.* 19,600 383,572 PETsMART, Inc. 16,000 519,200 Reebok International Ltd. 12,600 453,348 Target Corp. 29,500 1,252,865 ------------- $ 6,625,287 ------------- TECHNOLOGY -- 32.2% ADTRAN, Inc. 20,600 $ 687,422 Akamai Technologies, Inc.* 67,000 1,202,650 Analog Devices, Inc. 24,900 1,172,292 Cisco Systems, Inc.* 106,700 2,528,790 Corning, Inc.* 38,200 498,892 Dell, Inc.* 41,400 1,482,948 eBay, Inc.* 14,600 1,342,470 Intel Corp. 41,500 1,145,400 InterActiveCorp* 26,100 786,654 International Business Machines Corp. 14,100 1,242,915 Lexmark International, Inc., "A"* 5,700 550,221 Maxim Integrated Products, Inc. 7,400 387,908 Microsoft Corp. 108,300 3,093,048 Network Appliance, Inc.* 6,200 133,486 Oracle Corp.* 26,700 318,531 Symantec Corp.* 21,500 941,270 Texas Instruments, Inc. 48,000 1,160,640 VERITAS Software Corp.* 32,800 908,560 Xilinx, Inc. 16,900 562,939 Yahoo!, Inc.* 22,400 813,792 ------------- $ 20,960,828 ------------- TRANSPORTATION -- 1.1% FedEx Corp. 8,900 $ 727,041 ------------- UTILITIES & COMMUNICATIONS -- 0.9% Andrew Corp.* 29,100 $ 582,291 ------------- Total U.S. Stocks $ 62,714,084 ------------- FOREIGN STOCK -- 0.9% BERMUDA -- 0.9% Ace Ltd. (Financial Services) 13,800 $ 583,464 ------------- Total Stocks (Identified Cost, $55,410,482) $ 63,297,548 ------------- PAR AMOUNT (000 OMITTED) SHORT-TERM OBLIGATION -- 0.3% General Electric Capital Corp., 1.48%, due 7/01/04, at Amortized Cost $ 178 $ 178,000 ------------- REPURCHASE AGREEMENT -- 1.8% Morgan Stanley, 1.50%, dated 6/30/04, due 7/01/04, total to be received $1,163,048 (secured by various U.S. Treasury and Federal Agency obligations in a jointly traded account), at Cost $ 1,163 $ 1,163,000 ------------- Total Investments (Identified Cost, $56,751,482) $ 64,638,548 ------------- OTHER ASSETS, LESS LIABILITIES -- 0.7% 447,150 ------------- Net Assets -- 100.0% $ 65,085,698 =============
See portfolio footnotes and notes to financial statements. 17 PORTFOLIO OF INVESTMENTS (Unaudited) -- June 30, 2004 MONEY MARKET VARIABLE ACCOUNT
PAR AMOUNT ISSUER (000 OMITTED) VALUE CERTIFICATES OF DEPOSIT -- 3.0% Wells Fargo & Co., due 7/13/04, at Amortized Cost $ 1,709 $ 1,709,000 ------------- COMMERCIAL PAPER -- 51.4% Abbey National LLC, due 10/01/04 $ 1,000 $ 997,266 Alpine Securitization Corp., due 7/01/04 1,682 1,682,000 Archer Daniels Midland Co., due 7/13/04-8/03/04 1,300 1,299,176 Barton Capital Corp., due 7/13/04 458 457,838 CRC Funding LLC, due 7/20/04 1,320 1,319,262 Cargill, Inc., due 7/01/04 1,682 1,682,000 Citibank Credit Card Issuance Trust, due 7/01/04 1,682 1,682,000 Citicorp, Inc., due 7/01/04 420 420,000 Citigroup, Inc., due 7/01/04 1,262 1,262,000 Delaware Funding Corp., due 7/08/04 300 299,936 Dexia Delaware LLC, due 7/02/04 713 712,979 Edison Asset Securitization LLC, due 9/03/04 400 399,211 Falcon Asset Securitization, due 7/22/04 1,721 1,719,745 General Electric Capital Corp., due 9/03/04 - 9/27/04 1,315 1,311,709 Genworth Financial, Inc., due 7/22/04 405 404,705 Goldman Sachs Group, Inc., due 10/25/04 1,375 1,369,462 ING North America Insurance Holdings, Inc., due 8/04/04 140 139,859 J.P. Morgan & Co., Inc., due 7/01/04 1,785 1,785,000 Merrill Lynch & Co., Inc., due 7/01/04 1,682 1,682,000 MetLife Funding, Inc., due 7/21/04 1,035 1,034,385 Morgan Stanley Dean Witter, Inc., due 7/02/04 1,677 1,676,951 New Center Asset Trust, due 7/01/04 1,682 1,682,000 Preferred Receivables Funding, due 7/07/04 937 936,827 Receivables Capital Corp., due 7/16/04 1,700 1,699,200 Royal Bank of Canada, due 10/14/04 1,189 1,185,151 ------------- Total Commercial Paper, at Amortized Cost $ 28,840,662 ------------- U.S. GOVERNMENT AGENCY OBLIGATIONS -- 27.9% Fannie Mae, due 8/11/04 $ 1,900 $ 1,897,641 Federal Farm Credit Bank, due 7/28/04 400 399,679 Freddie Mac, due 7/01/04 13,343 13,343,000 ------------- Total U.S. Government Agency Obligations, at Amortized Cost $ 15,640,320 ------------- FLOATING RATE DEMAND NOTES -- 1.6% Bay Area Toll Authority, CA, Toll Bridge Rev. "A", due 7/07/04, at Identified Cost $ 900 $ 900,000 ------------- REPURCHASE AGREEMENTS -- 16.0% Goldman Sachs, 1.50%, dated 6/30/04, due 7/01/04, total to be received $5,608,234 (secured by various U.S. Treasury and Federal Agency obligations in a jointly traded account) $ 5,608 $ 5,608,000 Morgan Stanley, 1.50%, dated 6/30/04, due 7/01/04, total to be received $3,403,142 (secured by various U.S. Treasury and Federal Agency obligations in a jointly traded account) 3,403 3,403,000 ------------- Total Repurchase Agreements, at cost $ 9,011,000 ------------- Total Investments, at Amortized Cost and Value $ 56,100,982 ------------- OTHER ASSETS, LESS LIABILITIES -- 0.1% 54,397 ------------- Net Assets -- 100.0% $ 56,155,379 =============
See portfolio footnotes and notes to financial statements. 18 PORTFOLIO OF INVESTMENTS (Unaudited) -- June 30, 2004 TOTAL RETURN VARIABLE ACCOUNT
ISSUER SHARES VALUE STOCKS -- 60.6% U.S. STOCKS -- 54.3% AEROSPACE -- 1.8% Lockheed Martin Corp. 53,100 $ 2,765,448 Northrop Grumman Corp. 9,600 515,520 Raytheon Co. 8,100 289,737 ------------- $ 3,570,705 ------------- AIRLINES -- 0.2% Southwest Airlines Co. 19,500 $ 327,015 ------------- ALCOHOLIC BEVERAGES -- 0.2% Anheuser-Busch Cos., Inc. 6,800 $ 367,200 ------------- APPAREL MANUFACTURERS -- 0.1% Reebok International Ltd. 5,300 $ 190,694 ------------- BANKS & CREDIT COMPANIES -- 10.1% American Express Co. 15,500 $ 796,390 Bank of America Corp. 55,386 4,686,763 BANK ONE Corp. 26,900 1,371,900 Citigroup, Inc. 89,806 4,175,979 Fannie Mae 17,100 1,220,256 Freddie Mac 19,550 1,237,515 MBNA Corp. 21,400 551,906 Mellon Financial Corp. 80,610 2,364,291 PNC Financial Services Group, Inc. 33,810 1,794,635 SouthTrust Corp. 4,200 163,002 SunTrust Banks, Inc. 21,800 1,416,782 U.S. Bancorp 16,552 456,173 ------------- $ 20,235,592 ------------- BIOTECHNOLOGY -- 0.1% Genzyme Corp.* 4,800 $ 227,184 ------------- BROADCAST & CABLE TV -- 1.6% Comcast Corp., "Special A"* 75,730 $ 2,090,905 Cox Communications, Inc., "A"* 5,500 152,845 EchoStar Communications Corp., "A"* 6,400 196,800 Time Warner, Inc.* 38,900 683,862 ------------- $ 3,124,412 ------------- BROKERAGE & ASSET MANAGERS -- 2.0% Franklin Resources, Inc. 4,700 $ 235,376 Goldman Sachs Group, Inc. 8,300 781,528 Lehman Brothers Holdings, Inc. 5,300 398,825 Merrill Lynch & Co., Inc. 34,070 1,839,099 Morgan Stanley 12,600 664,902 ------------- $ 3,919,730 ------------- CHEMICALS -- 2.6% Air Products & Chemicals, Inc. 11,720 $ 614,714 Dow Chemical Co. 17,100 695,970 E.I. du Pont de Nemours & Co. 39,390 1,749,704 Lyondell Chemical Co. 28,330 492,659 Monsanto Co. 14,900 573,650 PPG Industries, Inc. 14,000 874,860 Praxair, Inc. 3,100 123,721 ------------- $ 5,125,278 ------------- COMPUTER SOFTWARE -- 1.9% Cadence Design Systems, Inc.* 12,400 $ 181,412 Computer Associates International, Inc. 27,400 768,844 Microsoft Corp. 88,640 2,531,558 Network Associates, Inc.* 22,560 409,013 ------------- $ 3,890,827 ------------- COMPUTER SOFTWARE -- SYSTEMS -- 0.2% Hewlett-Packard Co. 4,800 $ 101,280 International Business Machines Corp. 2,800 246,820 Xerox Corp.* 7,900 114,550 ------------- $ 462,650 ------------- CONSTRUCTION -- 0.2% Masco Corp. 12,700 $ 395,986 ------------- CONSUMER GOODS & SERVICES -- 1.2% Kimberly-Clark Corp. 18,250 $ 1,202,310 Newell Rubbermaid, Inc. 52,090 1,224,115 ------------- $ 2,426,425 ------------- CONTAINERS -- 0.8% Owens-Illinois, Inc.* 67,020 $ 1,123,255 Smurfit-Stone Container Corp.* 28,930 577,154 ------------- $ 1,700,409 ------------- ELECTRICAL EQUIPMENT -- 1.7% Cooper Industries Ltd., "A" 2,300 $ 136,643 Emerson Electric Co. 7,350 467,093 General Electric Co. 33,170 1,074,708 Tyco International Ltd. 50,670 1,679,204 ------------- $ 3,357,648 ------------- ELECTRONICS -- 0.2% Agere Systems, Inc., "B"* 52,100 $ 112,015 Novellus Systems, Inc.* 9,900 311,256 ------------- $ 423,271 ------------- ENERGY -- INDEPENDENT -- 1.3% Devon Energy Corp. 20,650 $ 1,362,900 EOG Resources, Inc. 2,900 173,159 Newfield Exploration Co.* 5,290 294,865 Unocal Corp. 18,100 687,800 ------------- $ 2,518,724 ------------- ENERGY -- INTEGRATED -- 1.2% ChevronTexaco Corp. 1,150 $ 108,226 ConocoPhillips 10,100 770,529 Exxon Mobil Corp. 33,392 1,482,939 ------------- $ 2,361,694 ------------- ENTERTAINMENT -- 2.0% Viacom, Inc., "B" 69,968 $ 2,499,257 Walt Disney Co. 55,700 1,419,793 ------------- $ 3,919,050 ------------- FOOD & DRUG STORES -- 0.5% Kroger Co.* 14,920 $ 271,544 Rite Aid Corp.* 139,010 725,632 ------------- $ 997,176 ------------- FOOD & NON-ALCOHOLIC BEVERAGES -- 2.0% Archer Daniels Midland Co. 44,507 $ 746,827 General Mills, Inc. 27,300 1,297,569 H.J. Heinz Co. 16,900 662,480 Kellogg Co. 14,700 615,195 PepsiCo, Inc. 1,500 80,820 Sara Lee Corp. 28,100 646,019 ------------- $ 4,048,910 ------------- FOREST & PAPER PRODUCTS -- 0.7% Bowater, Inc. 13,840 $ 575,605 Georgia-Pacific Corp. 5,300 195,994 International Paper Co. 15,450 690,615 ------------- $ 1,462,214 ------------- GAMING & LODGING -- 0.1% Hilton Hotels Corp. 12,100 $ 225,786 ------------- INSURANCE -- 2.8% AFLAC, Inc. 3,200 $ 130,592 Allstate Corp. 33,600 1,564,080 Chubb Corp. 2,600 177,268 Conseco, Inc.* 32,600 648,740 Hartford Financial Services Group, Inc. 20,090 1,380,987 Marsh & McLennan Cos., Inc. 1,600 72,608 MetLife, Inc. 28,500 1,021,725 St. Paul Travelers Cos., Inc. 16,426 665,910 ------------- $ 5,661,910 -------------
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ISSUER SHARES VALUE STOCKS -- continued U.S. STOCKS -- continued LEISURE & TOYS -- 0.2% Hasbro, Inc. 4,500 $ 85,500 Mattel, Inc. 20,700 377,775 ------------- $ 463,275 ------------- MACHINERY & TOOLS -- 0.7% Caterpillar, Inc. 5,000 $ 397,200 Deere & Co. 4,300 301,602 Eaton Corp. 6,500 420,810 Precision Castparts Corp. 4,400 240,636 ------------- $ 1,360,248 ------------- MEDICAL & HEALTH TECHNOLOGY & SERVICES -- 1.0% Apria Healthcare Group, Inc.* 7,770 $ 222,999 Cardinal Health, Inc. 4,700 329,235 HCA, Inc. 6,700 278,653 Lincare Holdings, Inc.* 10,800 354,888 Tenet Healthcare Corp.* 65,500 878,355 ------------- $ 2,064,130 ------------- MEDICAL EQUIPMENT -- 0.1% Baxter International, Inc. 3,900 $ 134,589 Guidant Corp. 1,100 61,468 ------------- $ 196,057 ------------- NATURAL GAS -- DISTRIBUTION -- 0.4% AGL Resources, Inc. 6,600 $ 191,730 KeySpan Corp. 4,100 150,470 National Fuel Gas Co. 4,400 110,000 NiSource, Inc. 13,611 280,659 ------------- $ 732,859 ------------- OIL SERVICES -- 3.2% BJ Services Co.* 15,990 $ 732,982 Cooper Cameron Corp.* 16,790 817,673 GlobalSantaFe Corp. 70,830 1,876,995 Noble Corp.* 54,535 2,066,331 Schlumberger Ltd. 13,100 831,981 ------------- $ 6,325,962 ------------- PHARMACEUTICALS -- 4.5% Abbott Laboratories 29,500 $ 1,202,420 Eli Lilly & Co. 4,300 300,613 Johnson & Johnson 52,200 2,907,540 Merck & Co., Inc. 44,660 2,121,350 Pfizer, Inc. 10,100 346,228 Wyeth 57,900 2,093,664 ------------- $ 8,971,815 ------------- PRINTING & PUBLISHING -- 0.3% New York Times Co., "A" 4,200 $ 187,782 Tribune Co. 9,800 446,292 ------------- $ 634,074 ------------- RAILROAD & SHIPPING -- 0.4% Burlington Northern Santa Fe Corp. 14,860 $ 521,140 Union Pacific Corp. 4,600 273,470 ------------- $ 794,610 ------------- RESTAURANTS -- 0.2% ARAMARK Corp., "B" 6,400 $ 184,064 McDonald's Corp. 8,100 210,600 ------------- $ 394,664 ------------- SPECIALTY STORES -- 0.5% Home Depot, Inc. 17,270 $ 607,904 TJX Cos., Inc. 15,700 378,998 ------------- $ 986,902 ------------- TELECOMMUNICATIONS -- WIRELINE -- 0.2% Cisco Systems, Inc.* 16,700 $ 395,790 ------------- TELEPHONE SERVICES -- 4.0% SBC Communications, Inc. 41,424 $ 1,004,532 Sprint FON Group 200,480 3,528,448 Verizon Communications, Inc. 97,676 3,534,894 ------------- $ 8,067,874 ------------- TOBACCO -- 0.6% Altria Group, Inc. 26,300 $ 1,316,315 ------------- UTILITIES -- ELECTRIC POWER -- 2.5% Ameren Corp. 2,080 $ 89,357 Calpine Corp.* 232,860 1,005,955 Cinergy Corp. 10,200 387,600 Dominion Resources, Inc. 5,300 334,324 Energy East Corp. 8,000 194,000 Entergy Corp. 14,200 795,342 Exelon Corp. 12,240 407,470 FirstEnergy Corp. 2,700 101,007 NSTAR 1,900 90,972 PPL Corp. 11,800 541,620 TXU Corp. 25,610 1,037,461 ------------- $ 4,985,108 ------------- Total U.S. Stocks $ 108,630,173 ------------- FOREIGN STOCKS -- 6.3% AUSTRALIA -- 0.2% News Corp. Ltd. Preferred, ADR (Broadcast & Cable TV) 11,600 $ 381,408 ------------- BERMUDA -- 0.4% Accenture Ltd., "A" (Business Services)* 17,650 $ 485,022 Ingersoll-Rand Co. Ltd., "A" (Machinery & Tools) 3,900 266,409 ------------- $ 751,431 ------------- BRAZIL -- 0.5% Companhia Vale do Rio Doce, ADR (Metals & Mining) 18,600 $ 884,430 ------------- CANADA -- 1.2% EnCana Corp. (Energy -- Independent) 9,200 $ 397,072 Magna International, Inc., "A" (Automotive) 9,780 832,963 Nortel Networks Corp. (Telecommunications -- Wireline)* 224,400 1,119,756 ------------- $ 2,349,791 ------------- FINLAND -- 0.6% Nokia Corp., ADR (Telecommunications -- Wireless) 85,000 $ 1,235,900 ------------- FRANCE -- 0.5% Sanofi-Synthelabo (Pharmaceuticals) 3,000 $ 190,389 TOTAL S.A., ADR (Energy -- Integrated) 8,500 816,680 ------------- $ 1,007,069 ------------- SWITZERLAND -- 0.6% Novartis AG (Pharmaceuticals) 6,400 $ 282,451 Roche Holding AG (Pharmaceuticals) 7,000 693,346 Syngenta AG (Chemicals) 3,300 276,779 ------------- $ 1,252,576 ------------- UNITED KINGDOM -- 2.3% BHP Billiton PLC (Metals & Mining) 20,400 $ 176,964 BP PLC, ADR (Energy -- Integrated) 36,770 1,969,769 Diageo PLC (Alcoholic Beverages) 13,050 175,900 Reed Elsevier PLC (Printing & Publishing) 78,900 766,683 Vodafone Group PLC, ADR (Telecommunications -- Wireless) 71,047 1,570,139 ------------- $ 4,659,455 ------------- Total Foreign Stocks $ 12,522,060 ------------- Total Stocks (Identified Cost, $109,165,089) $ 121,152,233 -------------
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PAR AMOUNT ISSUER (000 OMITTED) VALUE BONDS -- 37.6% U.S. BONDS -- 36.3% AEROSPACE -- 0.5% BAE Systems Holdings, Inc., 6.4%, 2011 ## $ 223 $ 237,394 Boeing Capital Corp., 6.5%, 2012 373 401,957 Northrop Grumman Corp., 7.75%, 2031 326 379,192 ------------- $ 1,018,543 ------------- AIRLINES -- 0.3% Continental Airlines, Inc., 6.648%, 2019 $ 595 $ 555,680 ------------- ALCOHOLIC BEVERAGES -- 0.1% Miller Brewing Co., 5.5%, 2013 ## $ 261 $ 261,911 ------------- ASSET BACKED & SECURITIZED -- 2.5% AmeriCredit Automobile Receivables Trust, 2.18%, 2008 $ 236 $ 232,059 Bear Stearns Commercial Mortgage Securities, Inc., 6.8%, 2008 227 237,935 Beneficial Home Equity Loan Trust, 1.44%, 2037 321 319,262 Blackrock Capital Finance LP, 7.75%, 2026 ## 71 70,230 CRIIMI MAE CMBS Corp., 6.7%, 2008 ## 190 200,416 CRIIMI MAE Commercial Mortgage Trust, 7%, 2011 ## 320 338,187 Chase Commercial Mortgage Securities Corp., 6.39%, 2008 369 397,629 Chase Commercial Mortgage Securities Corp., 7.543%, 2009 114 123,068 Citibank Credit Card Issuance Trust, 6.65%, 2008 623 658,325 Countrywide Alternative Loan Trust, 8%, 2030 332 331,546 Credit Suisse First Boston Mortgage, 6.38%, 2035 35 37,755 Deutsche Mortgage & Asset Receiving Corp., 6.538%, 2031 225 240,931 First Union-Lehman Brothers Bank of America, 6.56%, 2035 101 108,875 First Union-Lehman Brothers Commercial Mortgage Trust, 7.38%, 2029 85 91,685 First Union-Lehman Brothers Commercial Mortgage Trust, 6.65%, 2029 38 40,389 Goldman Sachs Mortgage Securities Corp., 6.06%, 2030 273 280,163 J.P. Morgan Commercial Mortgage Finance Corp., 6.613%, 2030 175 187,842 Merrill Lynch Mortgage Investors, Inc., 6.39%, 2030 93 98,899 Morgan Stanley Capital I, Inc., 0.8104%, 2030 ## 9,110 234,305 Mortgage Capital Funding, Inc., 6.337%, 2031 326 348,598 Multi-Family Capital Access One, Inc., 6.65%, 2024 66 71,846 Residential Accredit Loans, Inc., 7%, 2028 89 88,595 Residential Asset Mortgage Products, Inc., 3.8%, 2030 101 99,070 Residential Funding Mortgage Securities I, 6%, 2016 150 149,620 ------------- $ 4,987,230 ------------- AUTOMOTIVE -- 0.7% DaimlerChrysler N.A. Holdings Corp., 6.5%, 2013 $ 163 $ 167,114 Ford Motor Co., 7.45%, 2031 195 185,878 Ford Motor Credit Co., 6.875%, 2006 16 16,782 Ford Motor Credit Co., 7.875%, 2010 $ 180 $ 195,851 Ford Motor Credit Co., 7%, 2013 110 111,041 General Motors Acceptance Corp., 7.25%, 2011 185 194,164 General Motors Acceptance Corp., 6.875%, 2011 277 284,007 General Motors Acceptance Corp., 8%, 2031 176 180,327 General Motors Corp., 7.2%, 2011 41 42,960 ------------- $ 1,378,124 ------------- BANKS & CREDIT COMPANIES -- 1.2% Abbey National Capital Trust I, 8.963%, 2049 $ 179 $ 223,227 Bank of America Corp., 7.4%, 2011 299 338,862 Credit Suisse First Boston USA, Inc., 4.625%, 2008 736 749,710 Credit Suisse First Boston USA, Inc., 6.125%, 2011 67 70,519 Popular North America, Inc., 4.25%, 2008 211 210,885 RBS Capital Trust II, 6.425%, 2049 161 154,125 Socgen Real Estate LLC, 7.64%, 2049 ## 361 398,507 UniCredito Italiano Capital Trust II, 9.2%, 2049 208 252,374 ------------- $ 2,398,209 ------------- BROADCAST & CABLE TV -- 0.3% Cox Communications, Inc., 7.75%, 2010 $ 88 $ 99,754 TCI Communications Financing III, 9.65%, 2027 425 500,017 ------------- $ 599,771 ------------- BROKERAGE & ASSET MANAGERS -- 0.3% Lehman Brothers Holdings, Inc., 8.25%, 2007 $ 334 $ 375,578 Morgan Stanley Group, Inc., 6.1%, 2006 93 97,844 Morgan Stanley Group, Inc., 6.75%, 2011 156 170,956 ------------- $ 644,378 ------------- BUILDING -- 0.1% CRH North America, Inc., 6.95%, 2012 $ 208 $ 228,546 ------------- CHEMICALS -- 0.1% Dow Chemical Co., 5.75%, 2008 $ 162 $ 169,999 ------------- CONGLOMERATES -- 0.4% General Electric Capital Corp., 7.5%, 2005 $ 536 $ 559,282 General Electric Capital Corp., 8.75%, 2007 130 148,689 ------------- $ 707,971 ------------- CONSUMER CYCLICAL -- 0.1% Cendant Corp., 6.875%, 2006 $ 147 $ 157,070 Cendant Corp., 6.25%, 2008 90 95,977 ------------- $ 253,047 ------------- DEFENSE ELECTRONICS -- 0.1% Raytheon Co., 6.15%, 2008 $ 192 $ 204,811 ------------- ENERGY -- INDEPENDENT -- 0.1% Devon Financing Corp. U.L.C., 6.875%, 2011 $ 142 $ 154,589 ------------- ENERGY -- INTEGRATED -- 0.1% Amerada Hess Corp., 7.3%, 2031 $ 62 $ 62,951 Phillips Petroleum Co., 8.5%, 2005 40 42,054 ------------- $ 105,005 -------------
21
PAR AMOUNT ISSUER (000 OMITTED) VALUE BONDS -- continued U.S. BONDS -- continued ENTERTAINMENT -- 0.1% Time Warner Entertainment Co. LP, 10.15%, 2012 $ 1 $ 1,273 Walt Disney Co., 6.75%, 2006 69 73,091 Walt Disney Co., 6.375%, 2012 98 105,158 ------------- $ 179,522 ------------- FINANCIAL INSTITUTIONS -- 0.2% SLM Corp., 4%, 2009 $ 153 $ 150,276 SLM Corp., 5.375%, 2013 195 194,895 ------------- $ 345,171 ------------- FOOD & NON-ALCOHOLIC BEVERAGES -- 0.1% Kraft Foods, Inc., 6.25%, 2012 $ 122 $ 128,465 ------------- FOREST & PAPER PRODUCTS -- 0.2% MeadWestvaco Corp., 6.8%, 2032 $ 104 $ 102,908 Weyerhaeuser Co., 6.75%, 2012 254 275,070 ------------- $ 377,978 ------------- GAMING & LODGING -- 0.1% Harrah's Operating Co., Inc., 7.125%, 2007 $ 193 $ 207,825 ------------- INSURANCE -- 0.7% AIG SunAmerica Institutional Funding II, 5.75%, 2009 $ 441 $ 463,996 AIG SunAmerica, Inc, 7.6%, 2005 ## 444 464,913 MetLife, Inc., 6.5%, 2032 180 184,359 Prudential Funding Corp., 6.6%, 2008 ## 179 195,201 ------------- $ 1,308,469 ------------- INSURANCE -- PROPERTY & CASUALTY -- 0.2% Allstate Corp., 6.125%, 2032 $ 185 $ 181,712 Fund American Cos., Inc., 5.875%, 2013 117 116,751 Safeco Corp., 4.875%, 2010 32 32,226 Travelers Property Casualty Corp., 6.375%, 2033 84 82,740 ------------- $ 413,429 ------------- MACHINERY & TOOLS -- 0.1% Kennametal, Inc., 7.2%, 2012 $ 211 $ 223,158 ------------- MEDICAL & HEALTH TECHNOLOGY & SERVICES -- 0.2% HCA, Inc., 8.75%, 2010 $ 60 $ 68,512 HCA, Inc., 6.95%, 2012 276 287,958 HCA, Inc., 6.25%, 2013 32 31,809 ------------- $ 388,279 ------------- MORTGAGE BACKED -- 13.0% Fannie Mae, 5.722%, 2009 $ 830 $ 876,243 Fannie Mae, 6%, 2012-2033 4,367 4,507,305 Fannie Mae, 5.5%, 2016-2034 6,379 6,404,208 Fannie Mae, 5%, 2018 1,853 1,859,314 Fannie Mae, 4.5%, 2018-2019 1,047 1,025,268 Fannie Mae, 6.5%, 2028-2034 2,966 3,092,267 Fannie Mae, 7.5%, 2030-2031 158 169,749 Federal Home Loan Bank, 4.5%, 2019 324 317,459 Federal Home Loan Bank, 5%, 2019 214 214,646 Federal Home Loan Bank, 6%, 2023 284 293,324 Federal Home Loan Bank, 5.5%, 2033 128 128,107 Freddie Mac, 5%, 2017-2033 1,471 1,436,995 Freddie Mac, 4.5%, 2018 957 937,930 Freddie Mac, 5.5%, 2019-2034 1,338 1,336,461 Freddie Mac, 6%, 2033-2034 304 310,561 Ginnie Mae, 7.5%, 2023-2024 110 119,142 Ginnie Mae, 6.5%, 2028 370 387,351 Ginnie Mae, 6%, 2033-2034 914 937,501 Ginnie Mae, 5.5%, 2033 1,679 1,680,369 ------------- $ 26,034,200 ------------- NATURAL GAS -- DISTRIBUTION -- 0% CenterPoint Energy Resources Corp., 7.875%, 2013 $ 65 $ 72,729 ------------- NATURAL GAS -- PIPELINE -- 0.2% Kinder Morgan Energy Partners LP, 6.75%, 2011 $ 315 $ 339,278 Kinder Morgan Energy Partners LP, 7.75%, 2032 117 129,817 ------------- $ 469,095 ------------- PHARMACEUTICALS -- 0% Wyeth, 6.5%, 2034 $ 96 $ 90,484 ------------- POLLUTION CONTROL -- 0.3% Waste Management, Inc., 7.375%, 2010 $ 508 $ 570,754 ------------- PRINTING & PUBLISHING -- 0.1% Belo Corp., 7.75%, 2027 $ 226 $ 251,571 ------------- REAL ESTATE -- 0.2% Boston Properties, Inc., 5%, 2015 $ 42 $ 38,946 EOP Operating LP, 6.8%, 2009 29 31,387 Vornado Realty Trust, 5.625%, 2007 383 405,184 ------------- $ 475,517 ------------- TELECOMMUNICATIONS -- WIRELESS -- 0.1% AT&T Wireless Services, Inc., 7.35%, 2006 $ 107 $ 114,179 ------------- TELECOMMUNICATIONS -- WIRELINE -- 0.6% ALLTEL Corp., 7.875%, 2032 $ 127 $ 146,931 Citizens Communications Co., 8.5%, 2006 125 133,177 Citizens Communications Co., 7.625%, 2008 94 97,038 Sprint Capital Corp., 6.875%, 2028 124 119,195 Telecomunicaciones de Puerto Rico, Inc., 6.65%, 2006 270 285,238 Verizon New York, Inc., 6.875%, 2012 486 521,047 ------------- $ 1,302,626 ------------- U.S. GOVERNMENT AGENCIES -- 4.8% Fannie Mae, 2.5%, 2006 $ 360 $ 356,557 Fannie Mae, 5.25%, 2007 1,147 1,199,989 Fannie Mae, 6.625%, 2009-2010 4,434 4,917,819 Fannie Mae, 5.125%, 2014 299 290,976 Federal Home Loan Bank, 2.875%, 2006 365 363,402 Federal Home Loan Bank, 5.25%, 2014 390 392,094 Freddie Mac, 2.875%, 2006 1,405 1,391,308 Freddie Mac, 6%, 2011 94 100,933 Small Business Administration, 4.35%, 2023 51 48,206 Small Business Administration, 4.77%, 2024 123 118,920 Small Business Administration, 5.18%, 2024 200 198,591 Small Business Administration, 5.52%, 2024 283 286,247 ------------- $ 9,665,042 ------------- U.S. TREASURY OBLIGATIONS -- 6.6% U.S. Treasury Bonds, 4.25%, 2010 $ 747 $ 855,507 U.S. Treasury Bonds, 8%, 2021 703 921,424 U.S. Treasury Bonds, 6.25%, 2023 2,489 2,756,179 U.S. Treasury Bonds, 5.375%, 2031 623 628,330 U.S. Treasury Notes, 1.625%, 2005 52 51,898 U.S. Treasury Notes, 6.5%, 2005 978 1,015,439 U.S. Treasury Notes, 1.25%, 2005 387 384,309 U.S. Treasury Notes, 5.75%, 2005 665 695,315 U.S. Treasury Notes, 7%, 2006 2,545 2,757,449 U.S. Treasury Notes, 4.375%, 2007 146 150,905 U.S. Treasury Notes, 4%, 2009 23 23,197
22
PAR AMOUNT ISSUER (000 OMITTED) VALUE BONDS -- continued U.S. BONDS -- continued U.S. TREASURY OBLIGATIONS -- continued U.S. Treasury Notes, 3%, 2012 $ 1,167 $ 1,261,385 U.S. Treasury Notes, 3.875%, 2013 303 289,661 U.S. Treasury Notes, 4.75%, 2014 1,417 1,431,779 ------------- $ 13,222,777 ------------- UTILITIES -- ELECTRIC POWER -- 1.6% DTE Energy Co., 7.05%, 2011 $ 238 $ 257,983 Exelon Generation Co. LLC, 6.95%, 2011 77 84,310 FirstEnergy Corp., 6.45%, 2011 147 152,404 MidAmerican Energy Holdings Co., 3.5%, 2008 118 113,822 MidAmerican Energy Holdings Co., 5.875%, 2012 61 61,940 MidAmerican Funding LLC, 6.927%, 2029 454 479,921 Niagara Mohawk Power Corp., 7.75%, 2006 1 1,081 Northeast Utilities, 8.58%, 2006 155 163,376 Oncor Electric Delivery Co., 7%, 2022 240 256,802 PSEG Power LLC, 6.95%, 2012 124 134,836 PSEG Power LLC, 8.625%, 2031 91 111,148 Pacific Gas & Electric Co., 4.8%, 2014 125 118,443 Progress Energy, Inc., 7.1%, 2011 69 75,610 Progress Energy, Inc., 6.85%, 2012 195 210,721 System Energy Resources, Inc., 5.129%, 2014 ## 116 114,026 System Energy Resources, Inc., 8.09%, 2017 339 373,703 TXU Energy Co., 7%, 2013 75 81,671 Toledo Edison Co., 7.875%, 2004 320 321,300 ------------- $ 3,113,097 ------------- Total U.S. Bonds $ 72,622,181 ------------- FOREIGN BONDS -- 1.3% CANADA -- 0.2% EnCana Holdings Finance Corp., 5.8%, 2014 (Energy -- Independent) $ 98 $ 100,083 Hydro-Quebec, 6.3%, 2011 (International Market Agencies) 262 285,338 TELUS Corp., 8%, 2011 (Telecommunications -- Wireline) 52 59,101 ------------- $ 444,522 ------------- CAYMAN ISLANDS -- 0.1% DBS Capital Funding Corp., 7.657%, 2049 (Banks & Credit Companies) ## $ 170 $ 189,827 ------------- FRANCE -- 0% France Telecom S.A., 8.75%, 2011 (Telecommunications -- Wireline) $ 85 $ 98,500 ------------- GERMANY -- 0.1% Deutsche Telekom International Finance B.V., 8.75%, 2030 (Telecommunications -- Wireline) $ 152 $ 185,005 ------------- HONG KONG -- 0.1% PCCW-HKTC Capital II Ltd., 6%, 2013 (Telecommunications -- Wireline) ## $ 150 $ 148,283 ------------- ISRAEL -- 0% State of Israel, 4.625%, 2013 (International Market Sovereign) $ 112 $ 103,305 ------------- ITALY -- 0.2% Republic of Italy, 4.625%, 2005 (International Market Sovereign) $ 363 $ 371,909 ------------- LUXEMBOURG -- 0.1% Telecom Italia S.P.A., 5.25%, 2013 (Telecommunications -- Wireline) $ 246 $ 238,090 ------------- MEXICO -- 0.3% Pemex Project Funding Master Trust, 7.375%, 2014 (Oil Services) $ 316 $ 322,320 Pemex Project Funding Master Trust, 8.625%, 2022 (Oil Services) 39 40,560 United Mexican States, 8.125%, 2019 (Emerging Market Sovereign) 85 90,950 United Mexican States, 8%, 2022 (Emerging Market Sovereign) 55 57,118 ------------- $ 510,948 ------------- UNITED KINGDOM -- 0.2% Cadbury Schweppes U.S. Finance, 5.125%, 2013 (Food & Non-Alcoholic Beverages) ## $ 270 $ 263,674 HBOS Capital Funding LP, 6.071%, 2049 (Banks & Credit Companies) 100 100,399 ------------- $ 364,073 ------------- Total Foreign Bonds $ 2,654,462 ------------- Total Bonds (Identified Cost, $74,850,721) $ 75,276,643 ------------- SHORT-TERM OBLIGATION -- 1.5% General Electric Capital Corp., 1.48%, due 7/01/04, at Amortized Cost $ 2,947 $ 2,947,000 ------------- Total Investments (Identified Cost, $186,962,810) $ 199,375,876 ------------- OTHER ASSETS, LESS LIABILITIES -- 0.3% 582,822 ------------- Net Assets -- 100.0% $ 199,958,698 =============
See notes to financial statements. PORTFOLIO FOOTNOTES: * Non-income producing security. ** Non-income producing security - in default. # Regulation S security. ## SEC Rule 144A restriction. ### Security segregated as collateral for open futures contracts. ~ As of June 30, 2004 the High Yield Variable Account had 1 security representing $93,600 and 0.13% of net assets that was fair valued in accordance with the policies adopted by the Board of Trustees. Abbreviations have been used throughout this report to indicate amounts shown in currencies other than the U.S. dollar. A list of abbreviations is shown below. AUD=Australian Dollar JPY=Japanese Yen CAD=Canadian Dollar KRW=Korean Won CHF=Swiss Franc NOK=Norwegian Kroner DKK=Danish Krone NZD=New Zealand Dollar EUR=Euro PLN=Polish Zloty GBP=British Pound SEK=Swedish Krona 23 STATEMENTS OF ASSETS AND LIABILITIES (Unaudited) -- June 30, 2004 (000 Omitted)
CAPITAL GLOBAL GOVERNMENT HIGH MANAGED MONEY TOTAL APPRECIATION GOVERNMENTS SECURITIES YIELD SECTORS MARKET RETURN VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ------------ ----------- ---------- -------- -------- -------- --------- Assets: Investments Investments cost $ 269,973 $ 10,970 $ 103,164 $ 73,631 $ 55,588 $ 47,090 $ 186,963 Unrealized appreciation (depreciation) 24,343 191 929 (2,559) 7,887 -- 12,413 Repurchase agreements, at value 7,502 433 2,068 -- 1,163 9,011 -- ------------ ----------- ---------- -------- -------- -------- --------- Total investments, at value $ 301,818 $ 11,594 $ 106,161 $ 71,072 $ 64,638 $ 56,101 $ 199,376 Cash $ 1 $ 1 $ 0* $ 0* $ 1 $ 0* $ 15 Receivable for forward foreign currency exchange contracts -- 38 -- 3 -- -- -- Receivable for forward currency exchange contracts subject to master netting agreements -- 4 -- -- -- -- -- Receivable for investments sold 3,794 211 -- 881 1,945 -- 630 Receivable for units sold 92 1 5 1 9 4 9 Interest and dividends receivable 175 232 970 1,369 32 2 941 Receivable from sponsor 30 0* -- 4 -- 54 -- Other assets 4 0* 2 1 1 13 2 ------------ ----------- ---------- -------- -------- -------- --------- Total assets $ 305,914 $ 12,081 $ 107,138 $ 73,331 $ 66,626 $ 56,174 $ 200,973 ============ =========== ========== ======== ======== ======== ========= Liabilities: Payable for forward foreign currency exchange contracts $ -- $ 17 $ -- $ 14 $ -- $ -- $ -- Payable for daily variation margin on open futures contracts -- -- 2 -- -- -- -- Payable for investments purchased 2,343 324 -- 537 1,496 -- 895 Payable for units surrendered 111 5 53 152 31 5 80 Payable to affiliates -- Investment adviser 6 0* 2 1 1 -- 4 Administrative fee 0* 0* 0* 0* 0* 0* 0* Sponsor -- -- 30 -- 0* -- 12 Accrued expenses and other liabilities 24 17 28 28 12 14 23 ------------ ----------- ---------- -------- -------- -------- --------- Total liabilities $ 2,484 $ 363 $ 115 $ 732 $ 1,540 $ 19 $ 1,014 ------------ ----------- ---------- -------- -------- -------- --------- Net assets $ 303,430 $ 11,718 $ 107,023 $ 72,599 $ 65,086 $ 56,155 $ 199,959 ============ =========== ========== ======== ======== ======== =========
* Amount less than $500. See notes to financial statements. 24 (000 Omitted except for unit values)
CAPITAL GLOBAL GOVERNMENT HIGH MANAGED MONEY TOTAL APPRECIATION GOVERNMENTS SECURITIES YIELD SECTORS MARKET RETURN UNIT VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE UNIT VALUE ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ----- -------- ------------ ----------- ---------- -------- -------- -------- --------- Net assets applicable to contract owners: Capital Appreciation Variable Account -- Compass 2 3,766 $ 52.265 $ 196,995 Compass 3 514 34.479 17,703 Compass 3 - Level 2 5,964 14.341 85,534 Global Governments Variable Account -- Compass 2 138 $ 24.556 $ 3,380 Compass 3 34 23.962 831 Compass 3 - Level 2 530 14.045 7,442 Government Securities Variable Account -- Compass 2 2,230 $ 36.305 $ 80,923 Compass 3 124 25.374 3,135 Compass 3 - Level 2 1,448 14.848 21,500 High Yield Variable Account -- Compass 2 1,672 $ 33.828 $ 56,545 Compass 3 86 24.868 2,137 Compass 3 - Level 2 962 13.300 12,792 Managed Sectors Variable Account -- Compass 2 378 $ 41.914 $ 15,851 Compass 3 176 41.190 7,239 Compass 3 - Level 2 3,133 13.339 41,802 Money Market Variable Account -- Compass 2 1,181 $ 20.096 $ 23,669 Compass 3 118 16.470 1,925 Compass 3 - Level 2 2,422 12.337 29,876 Total Return Variable Account -- Compass 2 1,589 $ 42.377 $ 67,372 Compass 3 387 41.354 15,957 Compass 3 - Level 2 5,733 19.979 114,538 ------------ ----------- ---------- -------- -------- -------- --------- Net assets applicable to owners of deferred contracts 300,232 11,653 105,558 71,474 64,892 55,470 197,867 Reserve for variable annuities -- Compass 2 Contracts 2,888 17 1,409 1,082 87 568 1,315 Compass 3 Contracts 1 40 -- 2 20 16 162 Compass 3 - Level 2 Contracts 309 8 56 41 87 101 615 ------------ ----------- ---------- -------- -------- -------- --------- Net assets $ 303,430 $ 11,718 $ 107,023 $ 72,599 $ 65,086 $ 56,155 $ 199,959 ============ =========== ========== ======== ======== ======== =========
See notes to financial statements. 25 STATEMENTS OF OPERATIONS (Unaudited) -- Six Months Ended June 30, 2004 (000 Omitted)
CAPITAL GLOBAL GOVERNMENT HIGH MANAGED MONEY TOTAL APPRECIATION GOVERNMENTS SECURITIES YIELD SECTORS MARKET RETURN VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ------------ ----------- ---------- -------- -------- -------- --------- Net investment income (loss): Income Interest $ 40 $ 215 $ 2,658 $ 3,399 $ 1 $ 257 $ 2,030 Dividends 1,301 -- -- 4 250 -- 1,215 ------------ ----------- ---------- -------- -------- -------- --------- Total investment income $ 1,341 $ 215 $ 2,658 $ 3,403 $ 251 $ 257 $ 3,245 ------------ ----------- ---------- -------- -------- -------- --------- Expenses Mortality and expense risk charges $ 1,960 $ 78 $ 709 $ 529 $ 412 $ 305 $ 1,252 Management fee 1,158 47 308 315 249 121 762 Boards of Managers fees 24 1 10 7 5 3 16 Distribution fee 14 1 2 2 6 2 13 Administrative fee 22 1 8 6 5 3 15 Custodian fee 50 7 14 14 13 6 34 Printing 27 3 11 12 11 9 15 Auditing fees 15 18 16 20 15 8 22 Legal fees 5 4 5 4 4 5 4 Miscellaneous 4 0* 6 0* 1 7 7 ------------ ----------- ---------- -------- -------- -------- --------- Total expenses $ 3,279 $ 160 $ 1,089 $ 909 $ 721 $ 469 $ 2,140 Fees paid indirectly (2) (0)* (1) (2) (1) -- (0)* Reduction of expenses by investment adviser -- (3) -- -- -- -- -- ------------ ----------- ---------- -------- -------- -------- --------- Net expenses $ 3,277 $ 157 $ 1,088 $ 907 $ 720 $ 469 $ 2,140 ------------ ----------- ---------- -------- -------- -------- --------- Net investment income (loss) $ (1,936) $ 58 $ 1,570 $ 2,496 $ (469) $ (212) $ 1,105 ------------ ----------- ---------- -------- -------- -------- --------- Realized and unrealized gain (loss) on investments: Realized gain (loss) (identified cost basis)-- Investment transactions** $ 14,982 $ 693 $ 1,060 $ (638) $ 3,221 $ -- $ 9,282 Written option transactions -- 3 -- -- -- -- -- Futures contracts -- 11 -- -- -- -- -- Foreign currency transactions 2 (26) -- (21) -- -- 0* ------------ ----------- ---------- -------- -------- -------- --------- Net realized gain (loss) on investments and foreign currency transactions $ 14,984 $ 681 $ 1,060 $ (659) $ 3,221 $ -- $ 9,282 ------------ ----------- ---------- -------- -------- -------- --------- Change in unrealized appreciation (depreciation)-- Investments $ (4,187) $ (1,126) $ (3,075) $ (2,603) $ (2,142) $ -- $ (6,429) Futures contracts -- 1 3 -- -- -- -- Translation of assets and liabilities in foreign currencies (1) 75 -- 45 -- -- -- ------------ ----------- ---------- -------- -------- -------- --------- Net unrealized loss on investments and foreign currency translation $ (4,188) $ (1,050) $ (3,072) $ (2,558) $ (2,142) $ -- $ (6,429) ------------ ----------- ---------- -------- -------- -------- --------- Net realized and unrealized gain (loss) on investments and foreign currency $ 10,796 $ (369) $ (2,012) $ (3,217) $ 1,079 $ -- $ 2,853 ------------ ----------- ---------- -------- -------- -------- --------- Increase (decrease) in net assets from operations $ 8,860 $ (311) $ (442) $ (721) $ 610 $ (212) $ 3,958 ============ =========== ========== ======== ======== ======== =========
* Amount less than $500. ** Includes proceeds received from a non-recurring cash settlement in the amount of $33,833 from a class-action lawsuit against Rite Aid Corporation for the Capital Appreciation Variable Account and the remaining proceeds received from a non-recurring cash settlement in the amount of $622,626 and $14,555 from a class-action lawsuit against Cendant Corporation for the Capital Appreciation Variable Account and Managed Sectors Variable Account, respectively. See notes to financial statements. 26 STATEMENTS OF CHANGES IN NET ASSETS (000 Omitted)
CAPITAL APPRECIATION GLOBAL GOVERNMENTS VARIABLE ACCOUNT VARIABLE ACCOUNT ----------------------------- ----------------------------- SIX MONTHS SIX MONTHS ENDED YEAR ENDED ENDED YEAR ENDED JUNE 30, 2004 DECEMBER 31, JUNE 30, 2004 DECEMBER 31, (UNAUDITED) 2003 (UNAUDITED) 2003 ------------- ------------ ------------- ------------ Increase (decrease) in net assets: From operations: Net investment income (loss) $ (1,936) $ (3,503) $ 58 $ 158 Net realized gain (loss) on investments and foreign currency transactions 14,984 (458) 681 1,009 Net unrealized gain (loss) on investments and foreign currency translation (4,188) 74,556 (1,050) 500 ------------- ------------ ------------- ------------ Increase (decrease) in net assets from operations $ 8,860 $ 70,595 $ (311) $ 1,667 ------------- ------------ ------------- ------------ Participant transactions: Accumulation activity: Purchase payments received $ 3,853 $ 7,367 $ 205 $ 357 Net transfers between variable and fixed accumulation accounts (693) (4,305) (351) 621 Withdrawals, surrenders, annuitizations and contract charges (22,775) (30,559) (1,019) (1,497) ------------- ------------ ------------- ------------ Net accumulation activity $ (19,615) $ (27,497) $ (1,165) $ (519) ------------- ------------ ------------- ------------ Annuitization activity: Annuitizations $ -- $ 13 $ -- $ -- Annuity payments and contract charges (172) (469) (3) (6) Net transfers among accounts for annuity reserves (1) (792) 0* (118) Adjustments to annuity reserves 32 625 0* 111 ------------- ------------ ------------- ------------ Net annuitization activity $ (141) $ (623) $ (3) $ (13) ------------- ------------ ------------- ------------ Decrease in net assets from participant transactions $ (19,756) $ (28,120) $ (1,168) $ (532) ------------- ------------ ------------- ------------ Total increase (decrease) in net assets $ (10,896) $ 42,475 $ (1,479) $ 1,135 Net assets: At beginning of period 314,326 271,851 13,197 12,062 ------------- ------------ ------------- ------------ At end of period $ 303,430 $ 314,326 $ 11,718 $ 13,197 ============= ============ ============= ============ GOVERNMENT SECURITES VARIABLE ACCOUNT ----------------------------- SIX MONTHS ENDED YEAR ENDED JUNE 30, 2004 DECEMBER 31, (UNAUDITED) 2003 ------------- ------------ Increase (decrease) in net assets: From operations: Net investment income (loss) $ 1,570 $ 2,660 Net realized gain (loss) on investments and foreign currency transactions 1,060 1,504 Net unrealized gain (loss) on investments and foreign currency translation (3,072) (2,844) ------------- ------------ Increase (decrease) in net assets from operations $ (442) $ 1,320 ------------- ------------ Participant transactions: Accumulation activity: Purchase payments received $ 878 $ 2,312 Net transfers between variable and fixed accumulation accounts (3,680) (2,752) Withdrawals, surrenders, annuitizations and contract charges (7,442) (14,350) ------------- ------------ Net accumulation activity $ (10,244) $ (14,790) ------------- ------------ Annuitization activity: Annuitizations $ -- $ 11 Annuity payments and contract charges (180) (504) Net transfers among accounts for annuity reserves (81) (388) Adjustments to annuity reserves (35) 480 ------------- ------------ Net annuitization activity $ (296) $ (401) ------------- ------------ Decrease in net assets from participant transactions $ (10,540) $ (15,191) ------------- ------------ Total increase (decrease) in net assets $ (10,982) $ (13,871) Net assets: At beginning of period 118,005 131,876 ------------- ------------ At end of period $ 107,023 $ 118,005 ============= ============
* Amount less than $500. See notes to financial statements. 27
HIGH YIELD MANAGED SECTORS VARIABLE ACCOUNT VARIABLE ACCOUNT ----------------------------- ------------------------------ SIX MONTHS SIX MONTHS ENDED YEAR ENDED ENDED YEAR ENDED JUNE 30, 2004 DECEMBER 31, JUNE 30, 2004 DECEMBER 31, (UNAUDITED) 2003 (UNAUDITED) 2003 ------------- ------------ ------------- ------------ Increase (decrease) in net assets: From operations: Net investment income (loss) $ 2,496 $ 5,943 $ (469) $ (779) Net realized gain (loss) on investments and foreign currency transactions (659) (1,399) 3,221 2,925 Net unrealized gain (loss) on investments and foreign currency translation (2,558) 11,526 (2,142) 10,825 ------------- ------------ ------------- ------------ Increase (decrease) in net assets from operations $ (721) $ 16,070 $ 610 $ 12,971 ------------- ------------ ------------- ------------ Participant transactions: Accumulation activity: Purchase payments received $ 545 $ 1,245 $ 1,388 $ 3,037 Net transfers between variable and fixed accumulation accounts (23,517) 1,632 194 (169) Withdrawals, surrenders, annuitizations and contract charges (5,126) (11,148) (5,150) (7,142) ------------- ------------ ------------- ------------ Net accumulation activity $ (28,098) $ (8,271) $ (3,568) $ (4,274) ------------- ------------ ------------- ------------ Annuitization activity: Annuitizations $ -- $ -- $ -- $ -- Annuity payments and contract charges (88) (229) (22) (42) Net transfers among accounts for annuity reserves 2 (363) 0* (53) Adjustments to annuity reserves 3 106 0* 52 ------------- ------------ ------------- ------------ Net annuitization activity $ (83) $ (486) $ (22) $ (43) ------------- ------------ ------------- ------------ Decrease in net assets from participant transactions $ (28,181) $ (8,757) $ (3,590) $ (4,317) ------------- ------------ ------------- ------------ Total increase (decrease) in net assets $ (28,902) $ 7,313 $ (2,980) $ 8,654 Net assets: At beginning of period 101,501 94,188 68,066 59,412 ------------- ------------ ------------- ------------ At end of period $ 72,599 $ 101,501 $ 65,086 $ 68,066 ============= ============ ============= ============
* Amount less than $500. See notes to financial statements. 28
MONEY MARKET TOTAL RETURN VARIABLE ACCOUNT VARIABLE ACCOUNT ----------------------------- ------------------------------ SIX MONTHS SIX MONTHS ENDED YEAR ENDED ENDED YEAR ENDED JUNE 30, 2004 DECEMBER 31, JUNE 30, 2004 DECEMBER 31, (UNAUDITED) 2003 (UNAUDITED) 2003 ------------- ------------ ------------- ------------ Increase (decrease) in net assets: From operations: Net investment income (loss) $ (212) $ (329) $ 1,105 $ 2,186 Net realized gain on investments and foreign currency transactions -- -- 9,282 333 Net unrealized gain (loss) on investments and foreign currency translation -- -- (6,429) 26,254 ------------- ------------ ------------- ------------ Increase (decrease) in net assets from operations $ (212) $ (329) $ 3,958 $ 28,773 ------------- ------------ ------------- ------------ Participant transactions: Accumulation activity: Purchase payments received $ 971 $ 2,440 $ 2,858 $ 5,581 Net transfers between variable and fixed accumulation accounts 23,600 (1,613) 2,314 596 Withdrawals, surrenders, annuitizations and contract charges (6,103) (13,195) (16,271) (24,545) ------------- ------------ ------------- ------------ Net accumulation activity $ 18,468 $ (12,368) $ (11,099) $ (18,368) ------------- ------------ ------------- ------------ Annuitization activity: Annuitizations $ -- $ 121 $ -- $ 259 Annuity payments and contract charges (47) (148) (229) (444) Net transfers among accounts for annuity reserves 88 (376) 8 (302) Adjustments to annuity reserves 50 349 (14) 61 ------------- ------------ ------------- ------------ Net annuitization activity $ 91 $ (54) $ (235) $ (426) ------------- ------------ ------------- ------------ Increase (decrease) in net assets from participant transactions $ 18,559 $ (12,422) $ (11,334) $ (18,794) ------------- ------------ ------------- ------------ Total increase (decrease) in net assets $ 18,347 $ (12,751) $ (7,376) $ 9,979 Net assets: At beginning of period 37,808 50,559 207,335 197,356 ------------- ------------ ------------- ------------ At end of period $ 56,155 $ 37,808 $ 199,959 $ 207,335 ============= ============ ============= ============
See notes to financial statements. 29 FINANCIAL HIGHLIGHTS The financial highlights table is intended to help you understand the variable accounts' financial performance for the semiannual period and the past 5 fiscsal years (or, if shorter, the period of the variable accounts' operation). 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 (assuming reinvestment of all distributions) held for the entire period.
CAPITAL APPRECIATION VARIABLE ACCOUNT -------------------------------------------------------- COMPASS 2 -------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2004 ------------------------------- (UNAUDITED) 2003 2002 ---------------- ------------ ------------ Per unit data:* Net asset value -- beginning of period $ 50.814 $ 39.859 $ 59.446 ---------------- ------------ ------------ Investment income $ 0.226 $ 0.402 $ 0.369 Expenses (0.554) (0.951) (1.002) ---------------- ------------ ------------ Net investment loss $ (0.328) $ (0.549) $ (0.633) Net realized and unrealized gain (loss) on investments and foreign currency transactions 1.779 11.504 (18.954) ---------------- ------------ ------------ Net increase (decrease) in unit value $ 1.451 $ 10.955 $ (19.587) ---------------- ------------ ------------ Unit value: Net asset value -- end of period $ 52.265 $ 50.814 $ 39.859 ================ ============ ============ Total Return 2.86%#+++^^ 27.48%+++^ (32.95)%+++ Ratios (to average net assets): Expenses## 2.14%++ 2.12% 2.12% Net investment loss (1.25)%++ (1.20)% (1.36)% Portfolio turnover 31% 104% 80% Number of units outstanding at end of period (000 Omitted) 3,766 4,040 4,521 CAPITAL APPRECIATION VARIABLE ACCOUNT -------------------------------------------------------- COMPASS 2 -------------------------------------------------------- YEAR ENDED DECEMBER 31, -------------------------------------------------------- 2001 2000 1999 ---------------- ------------ ------------ Per unit data:* Net asset value -- beginning of period $ 80.578 $ 92.242 $ 70.426 ---------------- ------------ ------------ Investment income $ 0.598 $ 0.907 $ 0.401 Expenses (1.401) (1.920) (1.519) ---------------- ------------ ------------ Net investment loss $ (0.803) $ (1.013) $ (1.118) Net realized and unrealized gain (loss) on investments and foreign currency transactions (20.329) (10.651) 22.934 ---------------- ------------ ------------ Net increase (decrease) in unit value $ (21.132) $ (11.664) $ 21.816 ---------------- ------------ ------------ Unit value: Net asset value -- end of period $ 59.446 $ 80.578 $ 92.242 ================ ============ ============ Total Return (26.22)%+++ -- -- Ratios (to average net assets): Expenses## 0.79%+ 0.76%+ 0.76%+ Net investment loss (1.19)%+ (1.08)%+ (1.51)%+ Portfolio turnover 123% 140% 85% Number of units outstanding at end of period (000 Omitted) 5,340 5,818 6,403
CAPITAL APPRECIATION VARIABLE ACCOUNT -------------------------------------------------------- COMPASS 3 -------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2004 ------------------------------- (UNAUDITED) 2003 2002 ---------------- ------------ ------------ Per unit data:* Net asset value -- beginning of period $ 33.539 $ 26.334 $ 39.314 ---------------- ------------ ------------ Investment income $ 0.146 $ 0.260 $ 0.240 Expenses (0.379) (0.648) (0.688) ---------------- ------------ ------------ Net investment loss $ (0.233) $ (0.388) $ (0.448) Net realized and unrealized gain (loss) on investments and foreign currency transactions 1.173 7.593 (12.532) ---------------- ------------ ------------ Net increase (decrease) in unit value $ 0.940 $ 7.205 $ (12.980) ---------------- ------------ ------------ Unit value: Net asset value -- end of period $ 34.479 $ 33.539 $ 26.334 ================ ============ ============ Total Return 2.80%#+++^^ 27.36%+++^ (33.02)%+++ Ratios (to average net assets): Expenses## 2.24%++ 2.22% 2.22% Net investment loss (1.37)%++ (1.31)% (1.42)% Portfolio turnover 31% 104% 80% Number of units outstanding at end of period (000 Omitted) 514 621 812 CAPITAL APPRECIATION VARIABLE ACCOUNT -------------------------------------------------------- COMPASS 3 -------------------------------------------------------- YEAR ENDED DECEMBER 31, -------------------------------------------------------- 2001 2000 1999 ---------------- ------------ ------------ Per unit data:* Net asset value -- beginning of period $ 53.342 $ 61.123 $ 46.713 ---------------- ------------ ------------ Investment income $ 0.417 $ 0.581 $ 0.261 Expenses (1.025) (1.317) (1.042) ---------------- ------------ ------------ Net investment loss $ (0.608) $ (0.736) $ (0.781) Net realized and unrealized gain (loss) on investments and foreign currency transactions (13.420) (7.045) 15.191 ---------------- ------------ ------------ Net increase (decrease) in unit value $ (14.028) $ (7.781) $ 14.410 ---------------- ------------ ------------ Unit value: Net asset value -- end of period $ 39.314 $ 53.342 $ 61.123 ================ ============ ============ Total Return (26.30)%+++ -- -- Ratios (to average net assets): Expenses## 0.79%+ 0.76%+ 0.76%+ Net investment loss (1.19)%+ (1.08)%+ (1.51)%+ Portfolio turnover 123% 140% 85% Number of units outstanding at end of period (000 Omitted) 999 1,327 1,824
* Per unit data are based on the average number of units outstanding during each year. + Excluding mortality and expense risk charges and distribution expense charges. ++ Annualized +++ The total return does not reflect load fees in conjuction with the redemption of units. # Not Annualized. ## Ratios do not reflect reductions from fees paid indirectly. ^ The account's total return calculation includes 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 and $0.594 per unit for Compass 2 and Compass 3, respectively, based on units outstanding on the day the proceeds were received. Excluding the effect of this payment from the account's ending net asset value per unit, total return per unit value for the year ended Decemeber 31, 2003 would have been 25.24% and 25.12%, for Compass 2 and Compass 3, respectively. ^^ The account's total return calculation includes proceeds received on February 18, 2004 from a non-recurring litigation settlement from Rite Aid Corporation and on March 19, 2004 for the remaining 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 $0.108 and $0.071 per unit for Compass 2 and Compass 3, respectively, based on units outstanding on the days the proceeds were received. Excluding the effect of these payments from the account's ending net asset value per unit, total return for the six months ended June 30, 2004 would have been 2.64% and 2.59%, for Compass 2 and Compass 3, respectively. See notes to financial statements. 30
CAPITAL APPRECIATION VARIABLE ACCOUNT -------------------------------------------------------- COMPASS 3 - LEVEL 2 -------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2004 ------------------------------- (UNAUDITED) 2003 2002 ---------------- ------------ ------------ Per unit data:* Net asset value -- beginning of period $ 13.940 $ 10.929 $ 16.292 ---------------- ------------ ------------ Investment income $ 0.062 $ 0.109 $ 0.100 Expenses (0.149) (0.254) (0.260) ---------------- ------------ ------------ Net investment loss $ (0.087) $ (0.145) $ (0.160) Net realized and unrealized gain (loss) on investments and foreign currency transactions 0.488 3.156 (5.203) ---------------- ------------ ------------ Net increase (decrease) in unit value $ 0.401 $ 3.011 $ (5.363) ---------------- ------------ ------------ Unit value: Net asset value -- end of period $ 14.341 $ 13.940 $ 10.929 ================ ============ ============ Total Return 2.88%#+++^^ 27.55%+++^ (32.92)%+++ Ratios (to average net assets): Expenses## 2.09%++ 2.07% 2.07% Net investment loss (1.22)%++ (1.17)% (1.32)% Portfolio turnover 31% 104% 80% Number of units outstanding at end of period (000 Omitted) 5,964 6,086 6,148 CAPITAL APPRECIATION VARIABLE ACCOUNT -------------------------------------------------------- COMPASS 3 - LEVEL 2 -------------------------------------------------------- YEAR ENDED DECEMBER 31, -------------------------------------------------------- 2001 2000 1999 ---------------- ------------ ------------ Per unit data:* Net asset value -- beginning of period $ 22.072 $ 25.255 $ 19.272 ---------------- ------------ ------------ Investment income $ 0.154 $ 0.247 $ 0.109 Expenses (0.357) (0.513) (0.409) ---------------- ------------ ------------ Net investment loss $ (0.203) $ (0.266) $ (0.300) Net realized and unrealized gain (loss) on investments and foreign currency transactions (5.577) (2.917) 6.283 ---------------- ------------ ------------ Net increase (decrease) in unit value $ (5.780) $ (3.183) $ 5.983 ---------------- ------------ ------------ Unit value: Net asset value -- end of period $ 16.292 $ 22.072 $ 25.255 ================ ============ ============ Total Return (26.19)%+++ -- -- Ratios (to average net assets): Expenses## 0.79%+ 0.76%+ 0.76%+ Net investment loss (1.19)%+ (1.08)%+ (1.51)%+ Portfolio turnover 123% 140% 85% Number of units outstanding at end of period (000 Omitted) 6,705 6,283 5,632
* Per unit data are based on the average number of units outstanding during each year. + Excluding mortality and expense risk charges and distribution expense charges. ++ Annualized +++ The total return does not reflect load fees in conjuction with the redemption of units. # Not Annualized. ## Ratios do not reflect reductions from fees paid indirectly. ^ The account's total return calculation includes 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 $0.247 per unit based on units outstanding on the day the proceeds were received. Excluding the effect of this payment from the account's ending net asset value per unit, total return per unit value for the year ended December 31, 2003 would have been 25.30% for Compass 3 -- Level 2. ^^ The account's total return calculation includes proceeds received on February 18, 2004 from a non-recurring litigation settlement from Rite Aid Corporation and on March 19, 2004 for the remaining 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 $0.029 per unit based on units outstanding on the days the proceeds were received. Excluding the effect of these payments from the account's ending net asset value per unit, total return for the six months ended June 30, 2004 would have been 2.67% for Compass 3 -- Level 2. See notes to financial statements. 31
GLOBAL GOVERNMENTS VARIABLE ACCOUNT -------------------------------------------------------- COMPASS 2 -------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2004 ------------------------------- (UNAUDITED) 2003 2002 ---------------- ------------ ------------ Per unit data:* Net asset value -- beginning of period $ 25.169 $ 22.125 $ 18.653 ---------------- ------------ ------------ Investment income@@ $ 0.372 $ 0.877 $ 0.861 Expenses (0.275) (0.584) (0.486) ---------------- ------------ ------------ Net investment income@ $ 0.097 $ 0.293 $ 0.375 Net realized and unrealized gain (loss) on investments and foreign currency transactions (0.710) 2.751 3.097 ---------------- ------------ ------------ Net increase (decrease) in unit value $ (0.613) $ 3.044 $ 3.472 ---------------- ------------ ------------ Unit value: Net asset value -- end of period $ 24.556 $ 25.169 $ 22.125 ================ ============ ============ Total Return (2.44)%#+++ 13.76%+++ 18.61%+++ Ratios (to average net assets): Expenses## 2.50%++ 2.47% 2.50% Net investment income@@ 0.89%++ 1.23% 1.73% Portfolio turnover 80% 130% 126% Number of units outstanding at end of period (000 Omitted) 138 161 160 GLOBAL GOVERNMENTS VARIABLE ACCOUNT -------------------------------------------------------- COMPASS 2 -------------------------------------------------------- YEAR ENDED DECEMBER 31, -------------------------------------------------------- 2001 2000 1999 ---------------- ------------ ------------ Per unit data:* Net asset value -- beginning of period $ 19.378 $ 19.459 $ 20.830 ---------------- ------------ ------------ Investment income@@ $ 0.946 $ 1.144 $ 1.095 Expenses (0.500) (0.471) (0.479) ---------------- ------------ ------------ Net investment income@ $ 0.446 $ 0.673 $ 0.616 Net realized and unrealized gain (loss) on investments and foreign currency transactions (1.171) (0.754) (1.987) ---------------- ------------ ------------ Net increase (decrease) in unit value $ (0.725) $ (0.081) $ (1.371) ---------------- ------------ ------------ Unit value: Net asset value -- end of period $ 18.653 $ 19.378 $ 19.459 ================ ============ ============ Total Return (3.74)%+++ -- -- Ratios (to average net assets): Expenses## 1.28%+ 1.25%+ 1.11%+ Net investment income@@ 2.23%+ 3.50%+ 3.07%+ Portfolio turnover 72% 130% 172% Number of units outstanding at end of period (000 Omitted) 134 167 212
@ The investment adviser contractually agreed under a temporary expense agreement to pay all of the account's operating expenses, exclusive of mortality and expense risk fees; in excess of 1.25% of average daily net assets. To the extent actual expenses were over this limitation net investment income per unit and the ratios would have been:
GLOBAL GOVERNMENTS VARIABLE ACCOUNT -------------------------------------------------------- COMPASS 2 -------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2004 ------------------------------- (UNAUDITED) 2003 2002 ---------------- ------------ ------------ Net investment income@@ $ 0.092 $ -- $ 0.850 Ratios (to average net assets): Expenses## 2.54%++ -- 2.44% Net investment income@@ 0.85%++ -- 1.79% GLOBAL GOVERNMENTS VARIABLE ACCOUNT -------------------------------------------------------- COMPASS 2 -------------------------------------------------------- YEAR ENDED DECEMBER 31, -------------------------------------------------------- 2001 2000 1999 ---------------- ------------ ------------ Net investment income@@ $ 0.470 $ -- $ -- Ratios (to average net assets): Expenses## 1.39%+ -- -- Net investment income@@ 2.12%+ -- --
GLOBAL GOVERNMENTS VARIABLE ACCOUNT -------------------------------------------------------- COMPASS 3 -------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2004 ------------------------------- (UNAUDITED) 2003 2002 ---------------- ------------ ------------ Per unit data:* Net asset value -- beginning of period $ 24.578 $ 21.638 $ 18.269 ---------------- ------------ ------------ Investment income@@ $ 0.450 $ 0.869 $ 0.846 Expenses (0.344) (0.600) (0.511) ---------------- ------------ ------------ Net investment income@ $ 0.106 $ 0.269 $ 0.335 Net realized and unrealized gain (loss) on investments and foreign currency transactions (0.722) 2.671 3.034 ---------------- ------------ ------------ Net increase (decrease) in unit value $ (0.616) $ 2.940 $ 3.369 ---------------- ------------ ------------ Unit value: Net asset value -- end of period $ 23.962 $ 24.578 $ 21.638 ================ ============ ============ Total Return (2.51)%#+++ 13.59%+++ 18.44%+++ Ratios (to average net assets): Expenses## 2.65%++ 2.62% 2.65% Net investment income@@ 0.80%++ 1.15% 1.77% Portfolio turnover 80% 130% 126% Number of units outstanding at end of period (000 Omitted) 34 41 58 GLOBAL GOVERNMENTS VARIABLE ACCOUNT -------------------------------------------------------- COMPASS 3 -------------------------------------------------------- YEAR ENDED DECEMBER 31, -------------------------------------------------------- 2001 2000 1999 ---------------- ------------ ------------ Per unit data:* Net asset value -- beginning of period $ 19.007 $ 19.115 $ 20.492 ---------------- ------------ ------------ Investment income@@ $ 1.063 $ 1.103 $ 0.986 Expenses (0.579) (0.480) (0.442) ---------------- ------------ ------------ Net investment income@ $ 0.484 $ 0.623 $ 0.544 Net realized and unrealized gain (loss) on investments and foreign currency transactions (1.222) (0.731) (1.921) ---------------- ------------ ------------ Net increase (decrease) in unit value $ (0.738) $ (0.108) $ (1.377) ---------------- ------------ ------------ Unit value: Net asset value -- end of period $ 18.269 $ 19.007 $ 19.115 ================ ============ ============ Total Return (3.88)%+++ -- -- Ratios (to average net assets): Expenses## 1.28%+ 1.25%+ 1.11%+ Net investment income@@ 2.23%+ 3.50%+ 3.07%+ Portfolio turnover 72% 130% 172% Number of units outstanding at end of period (000 Omitted) 68 108 186
@ The investment adviser contractually agreed under a temporary expense agreement to pay all of the account's operating expenses, exclusive of mortality and expense risk fees; in excess of 1.25% of average daily net assets. To the extent actual expenses were over this limitation net investment income per unit and the ratios would have been:
GLOBAL GOVERNMENTS VARIABLE ACCOUNT -------------------------------------------------------- COMPASS 3 -------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2004 ------------------------------- (UNAUDITED) 2003 2002 ---------------- ------------ ------------ Net investment income@@ $ 0.101 $ -- $ 0.840 Ratios (to average net assets): Expenses## 2.69%++ -- 2.56% Net investment income@@ 0.76%++ -- 1.87% GLOBAL GOVERNMENTS VARIABLE ACCOUNT -------------------------------------------------------- COMPASS 3 -------------------------------------------------------- YEAR ENDED DECEMBER 31, -------------------------------------------------------- 2001 2000 1999 ---------------- ------------ ------------ Net investment income@@ $ 0.500 $ -- $ -- Ratios (to average net assets): Expenses## 1.39%+ -- -- Net investment income@@ 2.12%+ -- --
@@ As required, effective January 1, 2001 the account has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium on debt securities. The effect of this change for the year ended December 31, 2001 was to decrease net investment income per unit by $0.080 and $0.080, respectively, increase net realized and unrealized gains and losses per unit by $0.080 and $0.080, respectively, and decrease the ratio of net investment income to average net assets by 0.41% and 0.41%, respectively. Per unit, ratios, and supplemental data for periods prior to January 1, 2001 have not been restated to reflect this change in presentation. * Per unit data are based on the average number of units outstanding during each year. + Excluding mortality and expense risk charges and distribution expense charges. ++ Annualized. +++ The total return does not reflect load fees in conjunction with the redemption of units. # Not annualized. ## Ratios do not reflect reductions from fees paid indirectly. See notes to financial statements. 32
GLOBAL GOVERNMENTS VARIABLE ACCOUNT -------------------------------------------------------- COMPASS 3 - LEVEL 2 -------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2004 ------------------------------- (UNAUDITED) 2003 2002 ---------------- ------------ ------------ Per unit data:* Net asset value -- beginning of period $ 14.396 $ 12.655 $ 10.669 ---------------- ------------ ------------ Investment income@@ $ 0.235 $ 0.494 $ 0.499 Expenses (0.174) (0.331) (0.281) ---------------- ------------ ------------ Net investment income@ $ 0.061 $ 0.163 $ 0.218 Net realized and unrealized gain (loss) on investments and foreign currency transactions (0.412) 1.578 1.768 ---------------- ------------ ------------ Net increase (decrease) in unit value $ (0.351) $ 1.741 $ 1.986 ---------------- ------------ ------------ Unit value: Net asset value -- end of period $ 14.045 $ 14.396 $ 12.655 ================ ============ ============ Total Return (2.44)%#+++ 13.76%+++ 18.61%+++ Ratios (to average net assets): Expenses## 2.50%++ 2.47% 2.50% Net investment income@@ 0.89%++ 1.21% 1.70% Portfolio turnover 80% 130% 126% Number of units outstanding at end of period (000 Omitted) 530 559 568 GLOBAL GOVERNMENTS VARIABLE ACCOUNT -------------------------------------------------------- COMPASS 3 - LEVEL 2 -------------------------------------------------------- YEAR ENDED DECEMBER 31, -------------------------------------------------------- 2001 2000 1999 ---------------- ------------ ------------ Per unit data:* Net asset value -- beginning of period $ 11.083 $ 11.130 $ 11.914 ---------------- ------------ ------------ Investment income@@ $ 0.520 $ 0.654 $ 1.826 Expenses (0.274) (0.270) (0.782) ---------------- ------------ ------------ Net investment income@ $ 0.246 $ 0.384 $ 1.044 Net realized and unrealized gain (loss) on investments and foreign currency transactions (0.660) (0.431) (1.828) ---------------- ------------ ------------ Net increase (decrease) in unit value $ (0.414) $ (0.047) $ (0.784) ---------------- ------------ ------------ Unit value: Net asset value -- end of period $ 10.669 $ 11.083 $ 11.130 ================ ============ ============ Total Return (3.74)%+++ -- -- Ratios (to average net assets): Expenses## 1.28%+ 1.25%+ 1.11%+ Net investment income@@ 2.23%+ 3.50%+ 3.07%+ Portfolio turnover 72% 130% 172% Number of units outstanding at end of period (000 Omitted) 574 619 641
@ The investment adviser contractually agreed under a temporary expense agreement to pay all of the account's operating expenses, exclusive of mortality and expense risk fees; in excess of 1.25% of average daily net assets. To the extent actual expenses were over this limitation net investment income per unit and the ratios would have been:
GLOBAL GOVERNMENTS VARIABLE ACCOUNT -------------------------------------------------------- COMPASS 3 - LEVEL 2 -------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2004 ------------------------------- (UNAUDITED) 2003 2002 ---------------- ------------ ------------ Net investment income@@ $ 0.058 $ -- $ 0.490 Ratios (to average net assets): Expenses## 2.54%++ -- 2.42% Net investment income@@ 0.85%++ -- 1.78% GLOBAL GOVERNMENTS VARIABLE ACCOUNT -------------------------------------------------------- COMPASS 3 - LEVEL 2 -------------------------------------------------------- YEAR ENDED DECEMBER 31, -------------------------------------------------------- 2001 2000 1999 ---------------- ------------ ------------ Net investment income@@ $ 0.260 $ -- $ -- Ratios (to average net assets): Expenses## 1.40%+ -- -- Net investment income@@ 2.12%+ -- --
@@ As required, effective January 1, 2001 the account has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium on debt securities. The effect of this change for the year ended December 31, 2001 was to decrease net investment income per unit by $0.040, increase net realized and unrealized gains and losses per unit by $0.040, and decrease the ratio of net investment income to average net assets by 0.41%. Per unit, ratios, and supplemental data for periods prior to January 1, 2001 have not been restated to reflect this change in presentation. * Per unit data are based on the average number of units outstanding during each year. + Excluding mortality and expense risk charges and distribution expense charges. ++ Annualized. +++ The total return does not reflect load fees in conjunction with the redemption of units. # Not annualized. ## Ratios do not reflect reductions from fees paid indirectly. See notes to financial statements. 33
GOVERNMENT SECURITIES VARIABLE ACCOUNT -------------------------------------------------------- COMPASS 2 -------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2004 ------------------------------- (UNAUDITED) 2003 2002 ---------------- ------------ ------------ Per unit data:* Net asset value -- beginning of period $ 36.470 $ 36.124 $ 33.448 ---------------- ------------ ------------ Investment income@@ $ 0.853 $ 1.482 $ 1.862 Expenses (0.350) (0.711) (0.677) ---------------- ------------ ------------ Net investment income $ 0.503 $ 0.771 $ 1.185 Net realized and unrealized gain (loss) on investments (0.668) (0.425) 1.491 ---------------- ------------ ------------ Net increase (decrease) in unit value $ (0.165) $ 0.346 $ 2.676 ---------------- ------------ ------------ Unit value: Net asset value -- end of period $ 36.305 $ 36.470 $ 36.124 ================ ============ ============ Total Return (0.45)%#+++ 0.96%+++ 8.00%+++ Ratios (to average net assets): Expenses## 1.97%++ 1.95% 1.94% Net investment income@@ 2.79%++ 2.08% 3.19% Portfolio turnover 70% 138% 139% Number of units outstanding at end of period (000 Omitted) 2,230 2,447 2,759 GOVERNMENT SECURITIES VARIABLE ACCOUNT -------------------------------------------------------- COMPASS 2 -------------------------------------------------------- YEAR ENDED DECEMBER 31, -------------------------------------------------------- 2001 2000 1999 ---------------- ------------ ------------ Per unit data:* Net asset value -- beginning of period $ 31.521 $ 28.523 $ 29.418 ---------------- ------------ ------------ Investment income@@ $ 2.183 $ 2.169 $ 2.053 Expenses (0.661) (0.572) (0.558) ---------------- ------------ ------------ Net investment income $ 1.522 $ 1.597 $ 1.495 Net realized and unrealized gain (loss) on investments 0.405 1.401 (2.390) ---------------- ------------ ------------ Net increase (decrease) in unit value $ 1.927 $ 2.998 $ (0.895) ---------------- ------------ ------------ Unit value: Net asset value -- end of period $ 33.448 $ 31.521** $ 28.523 ================ ============ ============ Total Return 6.12%+++ -- -- Ratios (to average net assets): Expenses## 0.66%+ 0.64%+ 0.63%+ Net investment income@@ 4.42%+ 5.28%+ 5.06%+ Portfolio turnover 89% 51% 75% Number of units outstanding at end of period (000 Omitted) 3,043 3,210 4,228
GOVERNMENT SECURITIES VARIABLE ACCOUNT -------------------------------------------------------- COMPASS 3 -------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2004 ------------------------------- (UNAUDITED) 2003 2002 ---------------- ------------ ------------ Per unit data:* Net asset value -- beginning of period $ 25.501 $ 25.284 $ 23.434 ---------------- ------------ ------------ Investment income@@ $ 0.607 $ 1.045 $ 1.300 Expenses (0.266) (0.514) (0.495) ---------------- ------------ ------------ Net investment income $ 0.341 $ 0.531 $ 0.805 Net realized and unrealized gain (loss) on investments (0.468) (0.314) 1.045 ---------------- ------------ ------------ Net increase (decrease) in unit value $ (0.127) $ 0.217 $ 1.850 ---------------- ------------ ------------ Unit value: Net asset value -- end of period $ 25.374 $ 25.501 $ 25.284 ================ ============ ============ Total Return (0.50)%#+++ 0.86%+++ 7.89%+++ Ratios (to average net assets): Expenses## 2.07%++ 2.05% 2.04% Net investment income@@ 2.65%++ 2.08% 3.36% Portfolio turnover 70% 138% 139% Number of units outstanding at end of period (000 Omitted) 124 147 205 GOVERNMENT SECURITIES VARIABLE ACCOUNT -------------------------------------------------------- COMPASS 3 -------------------------------------------------------- YEAR ENDED DECEMBER 31, -------------------------------------------------------- 2001 2000 1999 ---------------- ------------ ------------ Per unit data:* Net asset value -- beginning of period $ 22.106 $ 20.023 $ 20.672 ---------------- ------------ ------------ Investment income@@ $ 1.590 $ 1.476 $ 1.410 Expenses (0.510) (0.412) (0.407) ---------------- ------------ ------------ Net investment income $ 1.080 $ 1.064 $ 1.003 Net realized and unrealized gain (loss) on investments 0.248 1.019 (1.652) ---------------- ------------ ------------ Net increase (decrease) in unit value $ 1.328 $ 2.083 $ (0.649) ---------------- ------------ ------------ Unit value: Net asset value -- end of period $ 23.434 $ 22.106** $ 20.023 ================ ============ ============ Total Return 6.01%+++ -- -- Ratios (to average net assets): Expenses## 0.66%+ 0.64%+ 0.63%+ Net investment income@@ 4.42%+ 5.28%+ 5.06%+ Portfolio turnover 89% 51% 75% Number of units outstanding at end of period (000 Omitted) 254 398 701
@@ As required, effective January 1, 2001, the account adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium on debt securities. The effect of this change for the year ended December 31, 2001 was to decrease net investment income per unit by $0.06, $0.04 and $0.03, respectively, increase net realized and unrealized gains and losses per unit by $0.06, $0.04 and $0.03, respectively, and decrease the ratio of net investment income to average net assets by 0.19%, 0.19% and 0.19%, respectively. Per unit, ratios, and supplemental data for periods prior to January 1, 2001 have not been restated to reflect this change in presentation. * Per unit data are based on the average number of units outstanding during each year. ** The per unit net asset value has been restated to a rounded third decimal place where previously the amount was truncated. + Excluding mortality and expense risk charges and distribution expense charges. ++ Annualized. +++ The total return does not reflect load fees in conjuction with redemption of units. # Not annualized. ## Ratios do not reflect reductions from fees paid indirectly. See notes to financial statements. 34
GOVERNMENT SECURITIES VARIABLE ACCOUNT -------------------------------------------------------- COMPASS 3 - LEVEL 2 -------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2004 ------------------------------- (UNAUDITED) 2003 2002 ---------------- ------------ ------------ Per unit data:* Net asset value -- beginning of period $ 14.912 $ 14.763 $ 13.663 ---------------- ------------ ------------ Investment income@@ $ 0.327 $ 0.597 $ 0.732 Expenses (0.132) (0.282) (0.267) ---------------- ------------ ------------ Net investment income $ 0.195 $ 0.315 $ 0.465 Net realized and unrealized gain (loss) on investments (0.259) (0.166) 0.635 ---------------- ------------ ------------ Net increase (decrease) in unit value $ (0.064) $ 0.149 $ 1.100 ---------------- ------------ ------------ Unit value: Net asset value -- end of period $ 14.848 $ 14.912 $ 14.763 ================ ============ ============ Total Return (0.43)%#+++ 1.01%+++ 8.05%+++ Ratios (to average net assets): Expenses## 1.92%++ 1.90% 1.89% Net investment income@@ 2.83%++ 2.10% 3.17% Portfolio turnover 70% 138% 139% Number of units outstanding at end of period (000 Omitted) 1,448 1,562 1,692 GOVERNMENT SECURITIES VARIABLE ACCOUNT -------------------------------------------------------- COMPASS 3 - LEVEL 2 -------------------------------------------------------- YEAR ENDED DECEMBER 31, -------------------------------------------------------- 2001 2000 1999 ---------------- ------------ ------------ Per unit data:* Net asset value -- beginning of period $ 12.869 $ 11.639 $ 11.998 ---------------- ------------ ------------ Investment income@@ $ 0.826 $ 0.876 $ 0.833 Expenses (0.248) (0.228) (0.222) ---------------- ------------ ------------ Net investment income $ 0.578 $ 0.648 $ 0.611 Net realized and unrealized gain (loss) on investments 0.216 0.582 (0.970) ---------------- ------------ ------------ Net increase (decrease) in unit value $ 0.794 $ 1.230 $ (0.359) ---------------- ------------ ------------ Unit value: Net asset value -- end of period $ 13.663 $ 12.869** $ 11.639 ================ ============ ============ Total Return 6.17%+++ -- -- Ratios (to average net assets): Expenses## 0.66%+ 0.64%+ 0.63%+ Net investment income@@ 4.42%+ 5.28%+ 5.06%+ Portfolio turnover 89% 51% 75% Number of units outstanding at end of period (000 Omitted) 1,617 1,542 1,641
@@ As required, effective January 1, 2001, the account adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium on debt securities. The effect of this change for the year ended December 31, 2001 was to decrease net investment income per unit by $0.06, $0.04 and $0.03, respectively, increase net realized and unrealized gains and losses per unit by $0.06, $0.04 and $0.03, respectively, and decrease the ratio of net investment income to average net assets by 0.19%, 0.19% and 0.19%, respectively. Per unit, ratios, and supplemental data for periods prior to January 1, 2001 have not been restated to reflect this change in presentation. * Per unit data are based on the average number of units outstanding during each year. ** The per unit net asset value has been restated to a rounded third decimal place where previously the amount was truncated. + Excluding mortality and expense risk charges and distribution expense charges. ++ Annualized. +++ The total return does not reflect load fees in conjuction with redemption of units. # Not annualized. ## Ratios do not reflect reductions from fees paid indirectly. See notes to financial statements. 35
HIGH YIELD VARIABLE ACCOUNT -------------------------------------------------------- COMPASS 2 -------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2004 ------------------------------- (UNAUDITED) 2003 2002 ---------------- ------------ ------------ Per unit data:* Net asset value -- beginning of period $ 34.056 $ 28.505 $ 28.969 ---------------- ------------ ------------ Investment income@@ $ 1.401 $ 2.769 $ 3.015 Expenses (0.374) (0.689) (0.617) ---------------- ------------ ------------ Net investment income $ 1.027 $ 2.080 $ 2.398 Net realized and unrealized gain (loss) on investments and foreign currency (1.255) 3.471 (2.862) ---------------- ------------ ------------ Net increase (decrease) in unit value $ (0.228) $ 5.551 $ (0.464) ---------------- ------------ ------------ Unit value: Net asset value -- end of period $ 33.828 $ 34.056 $ 28.505 ================ ============ ============ Total return (0.67)%#+++ 19.47%+++ (1.60)%+++ Ratios (to average net assets) Expenses## 2.20%++ 2.20% 2.18% Investment income@@ 6.01%++ 6.53% 7.84% Portfolio turnover 45% 164% 172% Number of units outstanding at end of period (000 Omitted) 1,672 1,827 2,069 HIGH YIELD VARIABLE ACCOUNT -------------------------------------------------------- COMPASS 2 -------------------------------------------------------- YEAR ENDED DECEMBER 31, -------------------------------------------------------- 2001 2000 1999 ---------------- ------------ ------------ Per unit data:* Net asset value -- beginning of period $ 29.882 $ 33.630 $ 31.973 ---------------- ------------ ------------ Investment income@@ $ 3.684 $ 3.786 $ 3.424 Expenses (0.699) (0.725) (0.728) ---------------- ------------ ------------ Net investment income $ 2.985 $ 3.061 $ 2.696 Net realized and unrealized gain (loss) on investments and foreign currency (3.898) (6.809) (1.039) ---------------- ------------ ------------ Net increase (decrease) in unit value $ (0.913) $ (3.748) $ 1.657 ---------------- ------------ ------------ Unit value: Net asset value -- end of period $ 28.969 $ 29.882 $ 33.630 ================ ============ ============ Total return (3.05)%+++ -- -- Ratios (to average net assets) Expenses## 0.90%+ 0.89%+ 0.90%+ Investment income@@ 9.16%+ 9.00%+ 7.93%+ Portfolio turnover 103% 109% 153% Number of units outstanding at end of period (000 Omitted) 2,328 2,677 3,065
HIGH YIELD VARIABLE ACCOUNT -------------------------------------------------------- COMPASS 3 -------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2004 ------------------------------- (UNAUDITED) 2003 2002 ---------------- ------------ ------------ Per unit data:* Net asset value -- beginning of period $ 25.048 $ 20.986 $ 21.349 ---------------- ------------ ------------ Investment income@@ $ 1.022 $ 1.964 $ 2.141 Expenses (0.288) (0.514) (0.469) ---------------- ------------ ------------ Net investment income $ 0.734 $ 1.450 $ 1.672 Net realized and unrealized gain (loss) on investments and foreign currency (0.914) 2.612 (2.035) ---------------- ------------ ------------ Net increase (decrease) in unit value $ (0.180) $ 4.062 $ (0.363) ---------------- ------------ ------------ Unit value: Net asset value -- end of period $ 24.868 $ 25.048 $ 20.986 ================ ============ ============ Total return (0.72)%#+++ 19.35%+++ (1.70)%+++ Ratios (to average net assets) Expenses## 2.30%++ 2.30% 2.28% Investment income@@ 5.83%++ 6.41% 8.45% Portfolio turnover 45% 164% 172% Number of units outstanding at end of period (000 Omitted) 86 115 178 HIGH YIELD VARIABLE ACCOUNT -------------------------------------------------------- COMPASS 3 -------------------------------------------------------- YEAR ENDED DECEMBER 31, -------------------------------------------------------- 2001 2000 1999 ---------------- ------------ ------------ Per unit data:* Net asset value -- beginning of period $ 22.043 $ 24.832 $ 23.633 ---------------- ------------ ------------ Investment income@@ $ 3.188 $ 2.730 $ 2.451 Expenses (0.643) (0.557) (0.552) ---------------- ------------ ------------ Net investment income $ 2.545 $ 2.173 $ 1.899 Net realized and unrealized gain (loss) on investments and foreign currency (3.239) (4.962) (0.700) ---------------- ------------ ------------ Net increase (decrease) in unit value $ (0.694) $ (2.789) $ 1.199 ---------------- ------------ ------------ Unit value: Net asset value -- end of period $ 21.349 $ 22.043 $ 24.832 ================ ============ ============ Total return (3.15)%+++ -- -- Ratios (to average net assets) Expenses## 0.90%+ 0.89%+ 0.90%+ Investment income@@ 9.16%+ 9.00%+ 7.93%+ Portfolio turnover 103% 109% 153% Number of units outstanding at end of period (000 Omitted) 231 297 427
@@ As required, effective January 1, 2001, the account adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium on debt securities. The effect of this change for the year ended December 31, 2001 was to decrease net investment income by $0.02, increase net realized and unrealized gains and losses per unit by $0.02, and decrease the ratio of net investment income to average net assets by 0.06%. Per unit, ratios, and supplemental data for periods prior to January 1, 2001, have not been restated to reflect this change in presentation. * Per unit data are based on the average number of units outstanding during each year. + Excluding mortality and expense risk charges and distribution expense charges. ++ Annualized. +++ The total return does not reflect load fees in conjunction with the redemption of units. # Not annualized. ## Ratios do not reflect reductions from fees paid indirectly. See notes to financial statements. 36
HIGH YIELD VARIABLE ACCOUNT -------------------------------------------------------- COMPASS 3 - LEVEL 2 -------------------------------------------------------- SIX MONTHS, ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2004 ------------------------------- (UNAUDITED) 2003 2002 ---------------- ------------ ------------ Per unit data:* Net asset value -- beginning of period $ 13.386 $ 11.199 $ 11.376 ---------------- ------------ ------------ Investment income@@ $ 0.431 $ 1.161 $ 1.220 Expenses (0.116) (0.286) (0.257) ---------------- ------------ ------------ Net investment income $ 0.315 $ 0.875 $ 0.963 Net realized and unrealized gain (loss) on investments and foreign currency (0.401) 1.312 (1.140) ---------------- ------------ ------------ Net increase (decrease) in unit value $ (0.086) $ 2.187 $ (0.177) ---------------- ------------ ------------ Unit value: Net asset value -- end of period $ 13.300 $ 13.386 $ 11.199 ================ ============ ============ Total return (0.64)%#+++ 19.53%+++ (1.55)%+++ Ratios (to average net assets) Expenses## 2.15%++ 2.15% 2.13% Investment income@@ 5.72%++ 6.57% 6.08% Portfolio turnover 45% 164% 172% Number of units outstanding at end of period (000 Omitted) 962 2,631 2,684 HIGH YIELD VARIABLE ACCOUNT -------------------------------------------------------- COMPASS 3 - LEVEL 2 -------------------------------------------------------- YEAR ENDED DECEMBER 31, -------------------------------------------------------- 2001 2000 1999 ---------------- ------------ ------------ Per unit data:* Net asset value -- beginning of period $ 11.728 $ 13.193 $ 12.537 ---------------- ------------ ------------ Investment income@@ $ 0.784 $ 1.527 $ 1.414 Expenses (0.151) (0.290) (0.296) ---------------- ------------ ------------ Net investment income $ 0.633 $ 1.237 $ 1.118 Net realized and unrealized gain (loss) on investments and foreign currency (0.985) (2.702) (0.462) ---------------- ------------ ------------ Net increase (decrease) in unit value $ (0.352) $ (1.465) $ 0.656 ---------------- ------------ ------------ Unit value: Net asset value -- end of period $ 11.376 $ 11.728 $ 13.193 ================ ============ ============ Total return (3.01)%+++ -- -- Ratios (to average net assets) Expenses## 0.90%+ 0.89%+ 0.90%+ Investment income@@ 9.16%+ 9.00%+ 7.93%+ Portfolio turnover 103% 109% 153% Number of units outstanding at end of period (000 Omitted) 1,131 2,619 1,001
@@ As required, effective January 1, 2001, the account adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium on debt securities. The effect of this change for the year ended December 31, 2001 was to decrease net investment income per unit and increase net realized and unrealized gains and losses per unit. The impact of this change calculates to less than $0.01 per unit. In addition, the ratio of net investment income to average net assets decreased by 0.06%. Per unit, ratios, and supplemental data for periods prior to January 1, 2001 have not been restated to reflect this change in presentation. * Per unit data are based on the average number of units outstanding during each year. + Excluding mortality and expense risk charges and distribution expense charges. ++ Annualized. +++ The total return does not reflect load fees in conjunction with the redemption of units. # Not annualized. ## Ratios do not reflect reductions from fees paid indirectly. See notes to financial statements. 37
MANAGED SECTORS VARIABLE ACCOUNT -------------------------------------------------------- COMPASS 2 -------------------------------------------------------- SIX MONTH ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2004 ------------------------------- (UNAUDITED) 2003 2002 ---------------- ------------ ------------ Per unit data:* Net asset value -- beginning of period $ 41.525 $ 33.716 $ 46.116 ---------------- ------------ ------------ Investment income $ 0.161 $ 0.333 $ 0.270 Expenses (0.458) (0.788) (0.810) ---------------- ------------ ------------ Net investment loss $ (0.297) $ (0.455) $ (0.540) Net realized and unrealized gain (loss) on investments and foreign currency transactions 0.686 8.264 (11.860) ---------------- ------------ ------------ Net increase (decrease) in unit value $ 0.389 $ 7.809 $ (12.400) ---------------- ------------ ------------ Unit value: Net asset value -- end of period $ 41.914 $ 41.525 $ 33.716 ================ ============ ============ Total Return 0.94%#+++^^ 23.16%+++^ (26.89)%+++ Ratios (to average net assets): Expenses## 2.16%++ 2.12% 2.10% Net investment loss (1.39)%++ (1.22)% (1.45)% Portfolio turnover 45% 80% 264% Number of units outstanding at end of period (000 Omitted) 378 409 455 MANAGED SECTORS VARIABLE ACCOUNT -------------------------------------------------------- COMPASS 2 -------------------------------------------------------- YEAR ENDED DECEMBER 31, -------------------------------------------------------- 2001 2000 1999 ---------------- ------------ ------------ Per unit data:* Net asset value -- beginning of period $ 72.313 $ 92.865 $ 50.488 ---------------- ------------ ------------ Investment income $ 0.465 $ 0.633 $ 0.493 Expenses (1.179) (1.817) (1.236) ---------------- ------------ ------------ Net investment loss $ (0.714) $ (1.184) $ (0.743) Net realized and unrealized gain (loss) on investments and foreign currency transactions (25.483) (19.368) 43.120 ---------------- ------------ ------------ Net increase (decrease) in unit value $ (26.197) $ (20.552) $ 42.377 ---------------- ------------ ------------ Unit value: Net asset value -- end of period $ 46.116 $ 72.313** $ 92.865 ================ ============ ============ Total Return (36.23)%+++ -- -- Ratios (to average net assets): Expenses## 0.88%+ 0.83%+ 0.84%+ Net investment loss (1.32)%+ (1.39)%+ (1.30)%+ Portfolio turnover 295% 447% 417% Number of units outstanding at end of period (000 Omitted) 573 697 686
MANAGED SECTORS VARIABLE ACCOUNT -------------------------------------------------------- COMPASS 3 -------------------------------------------------------- SIX MONTH ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2004 ------------------------------- (UNAUDITED) 2003 2002 ---------------- ------------ ------------ Per unit data:* Net asset value -- beginning of period $ 40.837 $ 33.207 $ 45.487 ---------------- ------------ ------------ Investment income $ 0.165 $ 0.321 $ 0.251 Expenses (0.502) (0.817) (0.852) ---------------- ------------ ------------ Net investment loss $ (0.337) $ (0.496) $ (0.601) Net realized and unrealized gain (loss) on investments and foreign currency transactions 0.690 8.126 (11.679) ---------------- ------------ ------------ Net increase (decrease) in unit value $ 0.353 $ 7.630 $ (12.280) ---------------- ------------ ------------ Unit value: Net asset value -- end of period $ 41.190 $ 40.837 $ 33.207 ================ ============ ============ Total Return 0.86%#+++^^ 22.98%+++^ (27.00)%+++ Ratios (to average net assets): Expenses## 2.31%++ 2.27% 2.25% Net investment loss (1.54)%++ (1.37)% (1.56)% Portfolio turnover 45% 80% 264% Number of units outstanding at end of period (000 Omitted) 176 202 296 MANAGED SECTORS VARIABLE ACCOUNT -------------------------------------------------------- COMPASS 3 -------------------------------------------------------- YEAR ENDED DECEMBER 31, -------------------------------------------------------- 2001 2000 1999 ---------------- ------------ ------------ Per unit data:* Net asset value -- beginning of period $ 71.434 $ 91.870 $ 50.021 ---------------- ------------ ------------ Investment income $ 0.487 $ 0.602 $ 0.473 Expenses (1.297) (1.908) (1.290) ---------------- ------------ ------------ Net investment loss $ (0.810) $ (1.306) $ (0.817) Net realized and unrealized gain (loss) on investments and foreign currency transactions (25.137) (19.130) 42.666 ---------------- ------------ ------------ Net increase (decrease) in unit value $ (25.947) $ (20.436) $ 41.849 ---------------- ------------ ------------ Unit value: Net asset value -- end of period $ 45.487 $ 71.434 $ 91.870 ================ ============ ============ Total Return (36.32)%+++ -- -- Ratios (to average net assets): Expenses## 0.88%+ 0.83%+ 0.84%+ Net investment loss (1.32)%+ (1.39)%+ (1.30)%+ Portfolio turnover 295% 447% 417% Number of units outstanding at end of period (000 Omitted) 390 576 785
* Per unit data are based on the average number of units outstanding during each year. ** The per unit net asset value has been restated to a rounded third decimal place where previously the amount was truncated. + Excluding mortality and expense risk charges and distribution expense charges. ++ Annualized. +++ The total return does not reflect load fees in conjuction with the redemption of units. # Not annualized. ## Ratios do not reflect reductions from fees paid indirectly. ^ The account's total return calculation includes 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 $0.083 and $0.081 per unit for Compass 2 and Compass 3, respectively, based on units outstanding on the day the proceeds were received. Excluding the effect of this payment from the account's ending net asset value per unit, total return per unit value for the year ended December 31, 2003 would have been 22.92% and 22.73% for Compass 2 and Compass 3, respectively. ^^ The account's total return calculation includes proceeds received on March 19, 2004 for the remaining 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 $0.008 and $0.008 per unit for Compass 2 and Compass 3, respectively, based on units outstanding on the day the proceeds were received. Excluding the effect of this payment from the account's ending net asset value per unit, total return for the six months ended June 30, 2004 would have been 0.92% and 0.84% for Compass 2 and Compass 3, respectively. See notes to financial statements. 38
MANAGED SECTORS VARIABLE ACCOUNT -------------------------------------------------------- COMPASS 3 - LEVEL 2 -------------------------------------------------------- SIX MONTH ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2004 ------------------------------- (UNAUDITED) 2003 2002 ---------------- ------------ ------------ Per unit data:* Net asset value -- beginning of period $ 13.215 $ 10.730 $ 14.676 ---------------- ------------ ------------ Investment income $ 0.050 $ 0.106 $ 0.083 Expenses (0.142) (0.252) (0.259) ---------------- ------------ ------------ Net investment loss $ (0.092) $ (0.146) $ (0.176) Net realized and unrealized gain (loss) on investments and foreign currency transactions 0.216 2.631 (3.770) ---------------- ------------ ------------ Net increase (decrease) in unit value $ 0.124 $ 2.485 $ (3.946) ---------------- ------------ ------------ Unit value: Net asset value -- end of period $ 13.339 $ 13.215 $ 10.730 ================ ============ ============ Total Return 0.94%#+++^^ 23.16%+++^ (26.89)%+++ Ratios (to average net assets): Expenses## 2.16%++ 2.12% 2.10% Net investment loss (1.40)%++ (1.22)% (1.46)% Portfolio turnover 45% 80% 264% Number of units outstanding at end of period (000 Omitted) 3,133 3,228 3,173 MANAGED SECTORS VARIABLE ACCOUNT -------------------------------------------------------- COMPASS 3 - LEVEL 2 -------------------------------------------------------- YEAR ENDED DECEMBER 31, -------------------------------------------------------- 2001 2000 1999 ---------------- ------------ ------------ Per unit data:* Net asset value -- beginning of period $ 23.014 $ 29.554 $ 16.068 ---------------- ------------ ------------ Investment income $ 0.136 $ 0.201 $ 0.159 Expenses (0.350) (0.578) (0.401) ---------------- ------------ ------------ Net investment loss $ (0.214) $ (0.377) $ (0.242) Net realized and unrealized gain (loss) on investments and foreign currency transactions (8.124) (6.163) 13.728 ---------------- ------------ ------------ Net increase (decrease) in unit value $ (8.338) $ (6.540) $ 13.486 ---------------- ------------ ------------ Unit value: Net asset value -- end of period $ 14.676 $ 23.014 $ 29.554 ================ ============ ============ Total Return (36.23)%+++ -- -- Ratios (to average net assets): Expenses## 0.88%+ 0.83%+ 0.84%+ Net investment loss (1.32)%+ (1.39)%+ (1.30)%+ Portfolio turnover 295% 447% 417% Number of units outstanding at end of period (000 Omitted) 3,559 3,548 3,115
* Per unit data are based on the average number of units outstanding during each year. + Excluding mortality and expense risk charges and distribution expense charges. ++ Annualized. +++ The total return does not reflect load fees in conjuction with the redemption of units. # Not annualized. ## Ratios do not reflect reductions from fees paid indirectly. ^ The account's total return calculation includes 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 $0.026 per unit based on units outstanding on the day the proceeds were received. Excluding the effect of this payment from the account's ending net asset value per unit, total return per unit value for the year ended December 31, 2003 would have been 22.92% for Compass 3 -- Level 2. ^^ The account's total return calculation includes proceeds received on March 19, 2004 for the remaining 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 $0.003 per unit based on units outstanding on the day the proceeds were received. Excluding the effect of this payment from the account's ending net asset value per unit, total return for the six months ended June 30, 2004 would have been 0.92% for Compass 3 -- Level 2. See notes to financial statements. 39
MONEY MARKET VARIABLE ACCOUNT -------------------------------------------------------- COMPASS 2 -------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2004 ------------------------------- (UNAUDITED) 2003 2002 ---------------- ------------ ------------ Per unit data:* Net asset value -- beginning of period $ 20.188 $ 20.322 $ 20.341 ---------------- ------------ ------------ Investment income $ 0.110 $ 0.247 $ 0.382 Expenses (0.202) (0.381) (0.401) ---------------- ------------ ------------ Net Increase (decrease) in unit value $ (0.092) $ (0.134) $ (0.019) ---------------- ------------ ------------ Unit value: Net asset value -- end of period $ 20.096 $ 20.188 $ 20.322 ================ ============ ============ Total Return (0.45)%#+++ (0.66)%+++ (0.09)%+++ Ratios (to average net assets): Expenses## 1.97%++ 1.87% 1.96% Net investment income (0.89)%++ (0.63)% (0.12)% Number of units outstanding at end of period (000 Omitted) 1,181 1,172 1,626 MONEY MARKET VARIABLE ACCOUNT -------------------------------------------------------- COMPASS 2 -------------------------------------------------------- YEAR ENDED DECEMBER 31, -------------------------------------------------------- 2001 2000 1999 ---------------- ------------ ------------ Per unit data:* Net asset value -- beginning of period $ 19.862 $ 18.997 $ 18.391 ---------------- ------------ ------------ Investment income $ 0.950 $ 1.232 $ 0.960 Expenses (0.471) (0.367) (0.354) ---------------- ------------ ------------ Net Increase (decrease) in unit value $ 0.479 $ 0.865 $ 0.606 ---------------- ------------ ------------ Unit value: Net asset value -- end of period $ 20.341 $ 19.862 $ 18.997 ================ ============ ============ Total Return 2.41%+++ -- -- Ratios (to average net assets): Expenses## 0.65%+ 0.60%+ 0.58%+ Net investment income 2.51%+ 4.45%+ 3.25%+ Number of units outstanding at end of period (000 Omitted) 1,986 3,304 3,749
MONEY MARKET VARIABLE ACCOUNT -------------------------------------------------------- COMPASS 3 -------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2004 ------------------------------- (UNAUDITED) 2003 2002 ---------------- ------------ ------------ Per unit data:* Net asset value -- beginning of period $ 16.553 $ 16.680 $ 16.712 ---------------- ------------ ------------ Investment income $ 0.074 $ 0.198 $ 0.318 Expenses (0.157) (0.325) (0.350) ---------------- ------------ ------------ Net increase (decrease) in unit value $ (0.083) $ (0.127) $ (0.032) ---------------- ------------ ------------ Unit value: Net asset value -- end of period $ 16.470 $ 16.553 $ 16.680 ================ ============ ============ Total Return (0.50)%#+++ (0.76)%+++ (0.19)%+++ Ratios (to average net assets): Expenses## 2.07%++ 1.97% 2.06% Net investment income (1.01)%++ (0.74)% (0.14)% Number of units outstanding at end of period (000 Omitted) 118 155 186 MONEY MARKET VARIABLE ACCOUNT -------------------------------------------------------- COMPASS 3 -------------------------------------------------------- YEAR ENDED DECEMBER 31, -------------------------------------------------------- 2001 2000 1999 ---------------- ------------ ------------ Per unit data:* Net asset value -- beginning of period $ 16.334 $ 15.638 $ 15.154 ---------------- ------------ ------------ Investment income $ 0.784 $ 1.002 $ 0.781 Expenses (0.406) (0.306) (0.297) ---------------- ------------ ------------ Net increase (decrease) in unit value $ 0.378 $ 0.696 $ 0.484 ---------------- ------------ ------------ Unit value: Net asset value -- end of period $ 16.712 $ 16.334 $ 15.638 ================ ============ ============ Total Return 2.31%+++ -- -- Ratios (to average net assets): Expenses## 0.65%+ 0.60%+ 0.58%+ Net investment income 2.51%+ 4.45%+ 3.25%+ Number of units outstanding at end of period (000 Omitted) 222 468 863
MONEY MARKET VARIABLE ACCOUNT -------------------------------------------------------- COMPASS 3 - LEVEL 2 -------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2004 ------------------------------- (UNAUDITED) 2003 2002 ---------------- ------------ ------------ Per unit data:* Net asset value -- beginning of period $ 12.390 $ 12.466 $ 12.472 ---------------- ------------ ------------ Investment income $ 0.090 $ 0.131 $ 0.223 Expenses (0.143) (0.207) (0.229) ---------------- ------------ ------------ Net increase (decrease) in unit value $ (0.053) $ (0.076) $ (0.006) ---------------- ------------ ------------ Unit value: Net asset value -- end of period $ 12.337 $ 12.390 $ 12.466 ================ ============ ============ Total Return (0.43)%#+++ (0.61)%+++ (0.04)%+++ Ratios (to average net assets): Expenses## 1.92%++ 1.82% 1.91% Net investment income (0.85)%++ (0.61)% (0.01)% Number of units outstanding at end of period (000 Omitted) 2,422 896 1,113 MONEY MARKET VARIABLE ACCOUNT -------------------------------------------------------- COMPASS 3 - LEVEL 2 -------------------------------------------------------- YEAR ENDED DECEMBER 31, -------------------------------------------------------- 2001 2000 1999 ---------------- ------------ ------------ Per unit data:* Net asset value -- beginning of period $ 12.172 $ 11.636 $ 11.259 ---------------- ------------ ------------ Investment income $ 0.710 $ 0.747 $ 0.579 Expenses (0.410) (0.211) (0.202) ---------------- ------------ ------------ Net increase (decrease) in unit value $ 0.300 $ 0.536 $ 0.377 ---------------- ------------ ------------ Unit value: Net asset value -- end of period $ 12.472 $ 12.172 $ 11.636 ================ ============ ============ Total Return 2.46%+++ -- -- Ratios (to average net assets): Expenses## 0.65%+ 0.60%+ 0.58%+ Net investment income 2.51%+ 4.45%+ 3.25%+ Number of units outstanding at end of period (000 Omitted) 2,835 1,562 3,875
* Per unit data are based on the average number of units outstanding during each year. + Excluding mortality and expense risk charges and distribution expense charges. ++ Annualized. +++ The total return does not reflect load fees in conjunction with the redemption of units. # Not annualized. ## Ratios do not reflect reductions from fees paid indirectly. See notes to financial statements. 40
TOTAL RETURN VARIABLE ACCOUNT -------------------------------------------------------- COMPASS 2 -------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2004 ------------------------------- (UNAUDITED) 2003 2002 ---------------- ------------ ------------ Per unit data:* Net asset value -- beginning of period $ 41.571 $ 35.950 $ 38.562 ---------------- ------------ ------------ Investment income@@ $ 0.692 $ 1.237 $ 1.407 Expenses (0.451) (0.800) (0.777) ---------------- ------------ ------------ Net investment income $ 0.241 $ 0.437 $ 0.630 Net realized and unrealized gain (loss) on investments and foreign currency transactions 0.565 5.184 (3.242) ---------------- ------------ ------------ Net increase (decrease) in unit value $ 0.806 $ 5.621 $ (2.612) ---------------- ------------ ------------ Unit value: Net asset value -- end of period $ 42.377 $ 41.571 $ 35.950 ================ ============ ============ Total Return 1.94%#+++ 15.64%+++ (6.77)%+++ Ratios (to average net assets): Expenses## 2.11%++ 2.10% 2.08% Net investment income@@ 1.11%++ 1.13% 1.43% Portfolio turnover 40% 62% 76% Number of units outstanding at end of period (000 Omitted) 1,589 1,688 1,871 TOTAL RETURN VARIABLE ACCOUNT -------------------------------------------------------- COMPASS 2 -------------------------------------------------------- YEAR ENDED DECEMBER 31, -------------------------------------------------------- 2001 2000 1999 ---------------- ------------ ------------ Per unit data:* Net asset value -- beginning of period $ 39.126 $ 33.728 $ 33.250 ---------------- ------------ ------------ Investment income@@ $ 1.513 $ 1.464 $ 1.374 Expenses (0.830) (0.727) (0.701) ---------------- ------------ ------------ Net investment income $ 0.683 $ 0.737 $ 0.673 Net realized and unrealized gain (loss) on investments and foreign currency transactions (1.247) 4.661 (0.195) ---------------- ------------ ------------ Net increase (decrease) in unit value $ (0.564) $ 5.398 $ 0.478 ---------------- ------------ ------------ Unit value: Net asset value -- end of period $ 38.562 $ 39.126 $ 33.728** ================ ============ ============ Total Return (1.44)%+++ -- -- Ratios (to average net assets): Expenses## 0.85%+ 0.83%+ 0.83%+ Net investment income@@ 1.67%+ 2.02%+ 1.90%+ Portfolio turnover 104% 105% 106% Number of units outstanding at end of period (000 Omitted) 2,080 2,240 2,925
TOTAL RETURN VARIABLE ACCOUNT -------------------------------------------------------- COMPASS 3 -------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2004 ------------------------------- (UNAUDITED) 2003 2002 ---------------- ------------ ------------ Per unit data:* Net asset value -- beginning of period $ 40.597 $ 35.160 $ 37.771 ---------------- ------------ ------------ Investment income@@ $ 0.694 $ 1.200 $ 1.360 Expenses (0.488) (0.823) (0.804) ---------------- ------------ ------------ Net investment income $ 0.206 $ 0.377 $ 0.556 Net realized and unrealized gain (loss) on investments and foreign currency transactions 0.551 5.060 (3.167) ---------------- ------------ ------------ Net increase (decrease) in unit value $ 0.757 $ 5.437 $ (2.611) ---------------- ------------ ------------ Unit value: Net asset value -- end of period $ 41.354 $ 40.597 $ 35.160 ================ ============ ============ Total Return 1.86%#+++ 15.46%+++ (6.91)%+++ Ratios (to average net assets): Expenses## 2.26%++ 2.25% 2.23% Net investment income@@ 0.94%++ 1.01% 1.61% Portfolio turnover 40% 62% 76% Number of units outstanding at end of period (000 Omitted) 387 453 634 TOTAL RETURN VARIABLE ACCOUNT -------------------------------------------------------- COMPASS 3 -------------------------------------------------------- YEAR ENDED DECEMBER 31, -------------------------------------------------------- 2001 2000 1999 ---------------- ------------ ------------ Per unit data:* Net asset value -- beginning of period $ 38.380 $ 33.134 $ 32.713 ---------------- ------------ ------------ Investment income@@ $ 1.599 $ 1.395 $ 1.315 Expenses (0.939) (0.749) (0.727) ---------------- ------------ ------------ Net investment income $ 0.660 $ 0.646 $ 0.588 Net realized and unrealized gain (loss) on investments and foreign currency transactions (1.269) 4.600 (0.167) ---------------- ------------ ------------ Net increase (decrease) in unit value $ (0.609) $ 5.246 $ 0.421 ---------------- ------------ ------------ Unit value: Net asset value -- end of period $ 37.771 $ 38.380** $ 33.134 ================ ============ ============ Total Return (1.59)%+++ -- -- Ratios (to average net assets): Expenses## 0.85%+ 0.83%+ 0.83%+ Net investment income@@ 1.67+ 2.02%+ 1.90%+ Portfolio turnover 104% 105% 106% Number of units outstanding at end of period (000 Omitted) 838 1,253 2,125
TOTAL RETURN VARIABLE ACCOUNT -------------------------------------------------------- COMPASS 3 - LEVEL 2 -------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2004 ------------------------------- (UNAUDITED) 2003 2002 ---------------- ------------ ------------ Per unit data:* Net asset value -- beginning of period $ 19.599 $ 16.949 $ 18.180 ---------------- ------------ ------------ Investment income@@ $ 0.315 $ 0.575 $ 0.658 Expenses (0.207) (0.376) (0.367) ---------------- ------------ ------------ Net investment income $ 0.108 $ 0.199 $ 0.291 Net realized and unrealized gain (loss) on investments and foreign currency transactions 0.272 2.451 (1.522) ---------------- ------------ ------------ Net increase (decrease) in unit value $ 0.380 $ 2.650 $ (1.231) ---------------- ------------ ------------ Unit value: Net asset value -- end of period $ 19.979 $ 19.599 $ 16.949 ================ ============ ============ Total Return 1.94%#+++ 15.64%+++ (6.77)%+++ Ratios (to average net assets): Expenses## 2.11%++ 2.10% 2.08% Net investment income@@ 1.09%++ 1.11% 1.55% Portfolio turnover 40% 62% 76% Number of units outstanding at end of period (000 Omitted) 5,733 5,946 6,236 TOTAL RETURN VARIABLE ACCOUNT -------------------------------------------------------- COMPASS 3 - LEVEL 2 -------------------------------------------------------- YEAR ENDED DECEMBER 31, -------------------------------------------------------- 2001 2000 1999 ---------------- ------------ ------------ Per unit data:* Net asset value -- beginning of period $ 18.446 $ 15.901 $ 15.676 ---------------- ------------ ------------ Investment income@@ $ 0.687 $ 0.683 $ 0.642 Expenses (0.382) (0.343) (0.331) ---------------- ------------ ------------ Net investment income $ 0.305 $ 0.340 $ 0.311 Net realized and unrealized gain (loss) on investments and foreign currency transactions (0.571) 2.205 (0.086) ---------------- ------------ ------------ Net increase (decrease) in unit value $ (0.266) $ 2.545 $ 0.225 ---------------- ------------ ------------ Unit value: Net asset value -- end of period $ 18.180 $ 18.446** $ 15.901 ================ ============ ============ Total Return (1.44)%+++ -- -- Ratios (to average net assets): Expenses## 0.85%+ 0.83%+ 0.83%+ Net investment income@@ 1.67%+ 2.02%+ 1.90%+ Portfolio turnover 104% 105% 106% Number of units outstanding at end of period (000 Omitted) 6,537 6,382 6,729
@@ As required, effective January 1, 2001 the account has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium on debt securities. The effect of this change for the year ended December 31, 2001 was to decrease net investment income per unit by $0.020, $0.020, and $0.010 respectively, increase net realized and unrealized gains and losses per unit by $0.020, $0.020, and $0.010 respectively, and decrease the ratio of net investment income to average net assets by 0.05%, 0.05%, and 0.05% respectively. Per unit, ratios, and supplemental data for periods prior to January 1, 2001 have not been restated to reflect this change in presentation. * Per unit data are based on the average number of units outstanding during each year. ** The per unit net asset value has been restated to a rounded third decimal place where previously the amount was truncated. + Excluding mortality and expense risk charges and distribution expense charges. ++ Annualized +++ The total return does not reflect load fees in conjuction with the redemption of units. # Not annualized ## Ratios do not reflect reductions from fees paid indirectly. 41 NOTES TO FINANCIAL STATEMENTS (Unaudited) (1) BUSINESS AND ORGANIZATION Capital Appreciation Variable Account, Global Governments Variable Account, Government Securities Variable Account, High Yield Variable Account, Managed Sectors 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. Capital Appreciation Variable Account, Government Securities Variable Account, Money Market Variable Account, and Total Return Variable Account operate as open-end, diversified management investment companies, and Global Governments Variable Account, High Yield Variable Account, and Managed Sectors Variable Account operate as open-end, non-diversified 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 accounting principles generally accepted in the United States of America 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 Capital Appreciation Variable Account, Global Governments Variable Account, High Yield Variable Account, Managed Sectors Variable Account, and Total Return Variable Account can invest in foreign securities. 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 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. Investment Valuations - Equity securities in the variable accounts' portfolios for which market quotations are available are valued at the last sale or official closing price as reported by an independent pricing service on the primary market or exchange on which they are primarily traded, or at the last quoted bid price for securities in which there were no sales during the day. Equity securities traded over the counter are valued at the last sales price traded each day as reported by an independent pricing service, or to the extent there are no sales reported, such securities are valued on the basis of quotations obtained from brokers and dealers. Bonds and other fixed income securities (other than short-term obligations) in the variable accounts' portfolios are valued at an evaluated bid price as reported by an independent pricing service, or to the extent a valuation is not reported by a pricing service, such securities are valued on the basis of quotes from brokers and dealers. Prices obtained from pricing services utilize both dealer-supplied valuations and electronic data processing techniques which take into account appropriate 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 without exclusive reliance upon quoted prices or exchange or over-the-counter prices, since such valuations are believed to reflect more accurately the fair value of such securities. Foreign currency options are valued by MFS using an external pricing model approved by the Board of Trustees that uses market data from an independent pricing source. Futures contracts are valued at the settlement price as reported by an independent pricing service on the primary exchange on which they are traded. Forward foreign currency contracts are valued using spot rates and forward points as reported by an independent pricing source. Short-term obligations with a remaining maturity in excess of 60 days will be valued upon dealer-supplied valuations. All other short-term obligations in the variable accounts' portfolios are valued at amortized cost, which constitutes market value as determined by the Board of Trustees. Money market instruments are valued at amortized cost, which the Trustees have determined in good faith approximates market value. The Money Market Variable Account use of amortized cost is subject to the variable account's compliance with certain conditions as specified under Rule 2a-7 of the Investment Company Act of 1940. Investment valuations, other assets, and liabilities initially expressed in foreign currencies are converted each business day into U.S. dollars based upon current exchange rates. When pricing service information or market quotations are not readily available, securities are priced at fair value as determined under the direction of the Board of Trustees. For example, significant events (such as movement in the U.S. securities market, or other regional and local developments) may occur between the time that foreign markets close (where the security is principally traded) and the time that the variable accounts calculate its net asset value (generally, the close of the NYSE) that may impact the value of securities traded in these foreign markets. In these cases, the variable accounts may utilize information from an external vendor or other sources to adjust closing market quotations of foreign equity securities to reflect what it believes to be the fair value of the securities as of the variable accounts' valuation time. Because the frequency of significant events is not predictable, fair valuation of foreign equity securities may occur on a frequent basis. Repurchase Agreements - Certain variable accounts 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 accounts 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. 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 result from fluctuations in foreign currency exchange rates are not separately disclosed. 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 account is 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 42 account. The variable account's investment in futures contracts is designed to hedge against anticipated future changes in interest rates or securities prices. Investments in interest rate futures for purposes other than hedging may be made to modify the duration of the portfolio without incurring the additional transaction costs involved in buying and selling the underlying securities. Investments in equity index contracts or contracts on related options for purposes other than hedging, may be made when the variable account has cash on hand and wishes to participate in anticipated market appreciation while the cash is being invested. Should interest rates or securities prices move unexpectedly, the variable account 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 a foreign currency relative to the U.S. dollar. 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. Dollar Roll Transactions - The Government Securities Variable account enters into dollar roll transactions, with respect to mortgage backed securities issued by GNMA, FNMA, and FHLMC, in which the variable account sells mortgage backed securities to financial institutions and simultaneously agrees to accept substantially similar (same type, coupon, and maturity) securities at a later date at an agreed-upon price. The variable accounts' total return is enhanced through either a reduced purchase price on the buy, or receipt of an income fee from the broker. Investment Transactions and Income - Investment transactions are recorded on the trade date. Interest income is recorded on the accrual basis. All premium and discount is amortized or accreted for financial statement purposes in accordance with accounting principles generally accepted in the United States of America. For the Money Market Variable Account, all premium and discount is amortized and accreted for financial statement purposes in accordance with generally accepted accounting principles and federal tax regulations, respectively. Dividends received in cash are recorded on the ex-dividend date. The following variable accounts were participants in a class-action lawsuit against Cendant Corporation. On March 26, 2003 these variable accounts received a partial cash settlement recorded as a realized gain on investment transactions. The partial proceeds from the non-recurring litigation settlement resulted in an increase in net asset value per unit based on the units outstanding on the day proceeds were received.
CAPITAL MANAGED APPRECIATION SECTORS VARIABLE VARIABLE ACCOUNT ACCOUNT - -------------------------------------------------------------------------------------------- Cash Settlement $ 6,006,689 $ 140,332 Increase in net asset value per unit Compass 2 Contracts $ 0.900 $ 0.083 Compass 3 Contracts $ 0.594 $ 0.081 Compass 3 -- Level 2 Contracts $ 0.247 $ 0.026
Exluding the effect of these payments from the variable accounts' ending net asset value per unit, total return for the year ended December 31, 2003 would have been lower by:
CAPITAL MANAGED APPRECIATION SECTORS VARIABLE VARIABLE ACCOUNT ACCOUNT - -------------------------------------------------------------------------------------------- Compass 2 Contracts 2.24% 0.24% Compass 3 Contracts 2.24% 0.25% Compass 3 -- Level 2 Contracts 2.25% 0.24%
The following variable accounts were participants in a class-action lawsuit against Cendant Corporation. On March 19, 2004 these variable accounts received the remaining cash settlement recorded as a realized gain on investment transactions. The remaining proceeds from the non-recurring litigation settlement resulted in an increase in net asset value per unit based on the units outstanding on the day proceeds were received.
CAPITAL MANAGED APPRECIATION SECTORS VARIABLE VARIABLE ACCOUNT ACCOUNT - -------------------------------------------------------------------------------------------- Cash Settlement $ 622,626 $ 14,555 Increase in net asset value per unit Compass 2 Contracts $ 0.108 $ 0.008 Compass 3 Contracts $ 0.071 $ 0.008 Compass 3 -- Level 2 Contracts $ 0.029 $ 0.003
43 Exluding the effect of these payments from the variable accounts' ending net asset value per unit, total return for the six months ended June 30, 2004 would have been lower by:
CAPITAL MANAGED APPRECIATION SECTORS VARIABLE VARIABLE ACCOUNT ACCOUNT - -------------------------------------------------------------------------------------------- Compass 2 Contracts 0.22% 0.02% Compass 3 Contracts 0.21% 0.02% Compass 3 -- Level 2 Contracts 0.21% 0.02%
The Capital Appreciation Variable Account was a participant in a class-action lawsuit against Rite Aid Corporation. On February 18, 2004 the variable account received a cash settlement in the amount of $33,833, recorded as a realized gain on investment transactions. The proceeds from the non-recurring litigation settlement resulted in an increase in net asset value of $0.108, $0.071, and $0.029 per unit based on the shares outstanding on the day the proceeds were received for Compass 2, Compass 3, and Compass 3 -- Level 2, respectively. Excluding the effect of this payment from the variable accounts' ending net asset value per unit, total return for the six months ended June 30, 2004, would have been lower by 0.22%, 0.21%, and 0.22% for Compass 2, Compass 3, and Compass 3 -- Level 2, respectively. Some securities may be purchased on a "when-issued" or "forward delivery" basis, which means that the securities will be delivered to the variable account at a future date, usually beyond customary settlement time. Certain variable accounts may enter in "TBA" (to be announced) purchase commitments to purchase securities for a fixed unit price at a future date. Although the unit price has been established, the principal value has not been finalized. However, the principal amount of the commitments will not fluctuate more than 0.01%. Each variable account holds, and maintains until settlement date, cash or high-grade debt obligations in an amount sufficient to meet the purchase price, or the variable account may enter into offsetting contracts for the forward sale of other securities it owns. Income on the securities will not be earned until settlement date. TBA purchase commitments may be considered securities in themselves, and involve a risk of loss if the value of the security to be purchased declines prior to settlement date, which is in addition to the risk of decline in the value of the variable accounts other assets. Unsettled TBA purchase commitments are valued at the current market value of the underlying securities, according to the procedures described under "Investment Valuations" above. Certain variable accounts may enter into "TBA" (to be announced) sale commitments to hedge its portfolio positions or to sell mortgage-backed securities it owns under delayed delivery arrangements. Proceeds of TBA sale commitments are not received until the contractual settlement date. During the time a TBA sale commitment is outstanding, equivalent deliverable securities, or an offsetting TBA purchase commitment deliverable on or before the sale commitment date, are held as "cover" for the transaction. Legal fees and other related expenses incurred to preserve and protect the value of a security owned are added to the cost of the security; other legal fees are expensed. Capital infusions made directly to the security issuer, which are generally non-recurring, incurred to protect or enhance the value of high-yield debt securities, are reported as additions to the cost basis of the security. Costs that are incurred to negotiate the terms or conditions of capital infusions or that are expected to result in a plan of reorganization are reported as realized losses. Ongoing costs incurred to protect or enhance an investment, or costs incurred to pursue other claims or legal actions, are expensed. Fees Paid Indirectly - The variable accounts' custody fees are reduced according to an arrangement that measures the value of cash deposited with the custodian by the variable accounts. During the six months ended June 30, 2004, each variable account's custodian fee was reduced by the amount listed below under this arrangement. Each variable account has entered into a commission recapture agreement, under which certain brokers will credit each variable account a portion of the commissions generated, to offset certain expenses of the variable account. For six months ended June 30, 2004, each variable account's miscellaneous expense was reduced under this agreement. These amounts are shown as a reduction of total expenses on the Statement of Operations.
CAPITAL GLOBAL GOVERNMENT HIGH MANAGED MONEY TOTAL APPRECIATION GOVERNMENTS SECURITIES YIELD SECTORS MARKET RETURN VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT -------------------------------------------------------------------------------------------------------------------------- Balance credits $ -- $ -- $ (586) $ (1,623) $ -- $ -- $ (177) Directed brokerage credits (2,246) (45) -- -- (488) -- -- ============ =========== ========== ======== ======== ======== ========
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, Managed Sectors Variable Account, and Total Return Variable Account attributable to such contracts. 44 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 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 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 Massachusetts Financial Services Company (MFS), an affiliate of the Sponsor, to provide overall investment advisory and administrative services, and general office facilities. The management fee is computed daily and paid monthly at an effective annual rate based on a percentage of each variable account's average daily net assets as follows:
ANNUAL RATE OF MANAGEMENT FEE ANNUAL RATE OF MANAGEMENT FEE BASED ON AVERAGE BASED ON AVERAGE DAILY NET ASSETS DAILY NET ASSETS NOT EXCEEDING $300 MILLION IN EXCESS OF $300 MILLION - -------------------------------------------------------------------------------------------------------------------------------- Capital Appreciation Variable Account 0.75% 0.675% Global Governments Variable Account 0.75% 0.675% Government Securities Variable Account 0.55% 0.495% High Yield Variable Account 0.75% 0.675% Managed Sectors Variable Account 0.75% 0.675% Money Market Variable Account 0.50% 0.500% Total Return Variable Account 0.75% 0.675%
The agreement also provides that the Investment Adviser will pay certain variable account expenses in excess of 1.25% of the average daily net assets of each variable account for any calendar year. The variable accounts pay no compensation directly to their officers or members of the Board of Managers who are affiliated with the Investment Adviser or the Sponsor. Administrator - MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to certain funds for which MFS acts as investment adviser. Under an administrative services agreement between the variable accounts and MFS, MFS is entitled to partial reimbursement of the costs MFS incurs to provide these services, subject to review and approval by the Board of Trustees. Each variable account is allocated a portion of these administrative costs based on its size and relative average net assets. Prior to April 1, 2004, each variable account paid MFS an administrative fee up to the following annual percentage rates of the variable accounts' average daily net assets: First $2 billion 0.0175% Next $2.5 billion 0.0130% Next $2.5 billion 0.0005% In excess of $7 billion 0.0000%
Effective April 1, 2004, each variable account paid MFS an administrative fee up to the following annual percentage rates of the variable accounts' average daily net assets: First $2 billion 0.01120% Next $2.5 billion 0.00832% Next $2.5 billion 0.00032% In excess of $7 billion 0.00000%
45 For the six months ended June 30, 2004, the variable accounts paid MFS the following to partially reimburse MFS for the costs of providing administrative services:
CAPITAL GLOBAL GOVERNMENT HIGH MANAGED MONEY TOTAL APPRECIATION GOVERNMENTS SECURITIES YIELD SECTORS MARKET RETURN VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT --------------------------------------------------------------------------------------------------------------------------- Administrative fees $ 22,342 $ 910 $ 8,106 $ 6,113 $ 4,786 $ 3,427 $ 14,647 Percent of average daily net assets 0.01441% 0.01449% 0.01445% 0.01458% 0.01442% 0.01417% 0.01441% ============ =========== ========== ========= ========= ========== ==========
(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 $ 92,086,783 $ 110,846,681 Global Governments Variable Account 6,677,053 6,508,179 Government Securities Variable Account -- 2,051,680 High Yield Variable Account 36,355,396 61,454,706 Managed Sectors Variable Account 29,821,974 35,249,434 Total Return Variable Account 65,127,024 77,621,012
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 $ 2,657,243 $ 2,586,704 Government Securities Variable Account 76,659,129 81,572,742 Total Return Variable Account 14,889,762 10,245,274
Purchases and sales of investments for Money Market Variable Account, which consist solely of short-term obligations, amounted to $974,195,568 and $974,657,568, respectively, excluding repurchase agreements. 46 (7) PARTICIPANT TRANSACTIONS The changes in net assets from changes in numbers of outstanding units were as follows:
SIX MONTHS ENDED JUNE 30, 2004 (000 OMITTED) -------------------------------------------------------------------------------------------------- TRANSFERS BETWEEN WITHDRAWALS, VARIABLE ACCOUNTS SURRENDERS, PURCHASE AND FIXED ANNUITIZATIONS, NET NET NET PAYMENTS ACCUMULATION AND CONTRACT ACCUMULATION ANNUITIZATION INCREASES RECEIVED ACCOUNT CHARGES ACTIVITY ACTIVITY (DECREASE) -------------- ----------------- ---------------- ----------------- ------------- ---------- UNITS DOLLARS UNITS DOLLARS UNITS DOLLARS UNITS DOLLARS DOLLARS DOLLARS ----- ------- ------ --------- ----- --------- ------ --------- ------------- ---------- Capital Appreciation Variable Account Compass 2 Contracts 20 $ 962 (15) $ (643) (279) $ (14,520) (274) $ (14,201) $ (120) $ (14,321) Compass 3 Contracts 45 1,505 (106) (3,613) (46) (1,583) (107) (3,691) (0)* (3,691) Compass 3 -- Level 2 Contracts 103 1,386 243 3,563 (468) (6,672) (122) (1,723) (21) (1,744) ------- --------- --------- --------- ------------- ---------- $ 3,853 $ (693) $ (22,775) $ (19,615) $ (141) $ (19,756) ======= ========= ========= ========= ============= ========== Global Governments Variable Account Compass 2 Contracts 2 $ 38 (15) $ (377) (10) $ (245) (23) $ (584) $ (2) $ (586) Compass 3 Contracts 3 76 (8) (202) (2) (39) (7) (165) (1) (166) Compass 3 -- Level 2 Contracts 7 91 16 228 (52) (735) (29) (416) (0)* (416) ------- --------- --------- --------- ------------- ---------- $ 205 $ (351) $ (1,019) $ (1,165) $ (3) $ (1,168) ======= ========= ========= ========= ============= ========== Government Securities Variable Account Compass 2 Contracts 11 $ 351 (84) $ (3,029) (144) $ (5,250) (217) $ (7,928) $ (270) $ (8,198) Compass 3 Contracts 12 283 (22) (557) (13) (329) (23) (603) 6 (597) Compass 3 -- Level 2 Contracts 17 244 (8) (94) (123) (1,863) (114) (1,713) (32) (1,745) ------- --------- --------- --------- ------------- ---------- $ 878 $ (3,680) $ (7,442) $ (10,244) $ (296) $ (10,540) ======= ========= ========= ========= ============= ========== High Yield Variable Account Compass 2 Contracts 6 $ 209 (52) $ (1,739) (109) $ (3,725) (155) $ (5,255) $ (80) $ (5,335) Compass 3 Contracts 7 171 (30) (738) (6) (141) (29) (708) 0* (708) Compass 3 -- Level 2 Contracts 14 165 (1,589) (21,040) (94) (1,260) (1,669) (22,135) (3) (22,138) ------- --------- --------- --------- ------------- ---------- $ 545 $ (23,517) $ (5,126) $ (28,098) $ (83) $ (28,181) ======= ========= ========= ========= ============= ========== Managed Sectors Variable Account Compass 2 Contracts 4 $ 103 0* $ 80 (35) $ (1,438) (31) $ (1,255) $ (8) $ (1,263) Compass 3 Contracts 14 564 (30) (1,233) (10) (395) (26) (1,064) (7) (1,071) Compass 3 -- Level 2 Contracts 58 721 97 1,347 (250) (3,317) (95) (1,249) (7) (1,256) ------- --------- --------- --------- ------------- ---------- $ 1,388 $ 194 $ (5,150) $ (3,568) $ (22) $ (3,590) ======= ========= ========= ========= ============= ========== Money Market Variable Account Compass 2 Contracts 6 $ 113 173 $ 3,504 (170) $ (3,428) 9 $ 189 $ 98 $ 287 Compass 3 Contracts 45 735 (56) (914) (26) (428) (37) (607) (11) (618) Compass 3 -- Level 2 Contracts 12 123 1,697 21,010 (183) (2,247) 1,526 18,886 4 18,890 ------- --------- --------- --------- ------------- ---------- $ 971 $ 23,600 $ (6,103) $ 18,468 $ 91 $ 18,559 ======= ========= ========= ========= ============= ========== Total Return Variable Account Compass 2 Contracts 8 $ 300 35 $ 1,529 (142) $ (5,968) (99) $ (4,139) $ (97) $ (4,236) Compass 3 Contracts 30 1,234 (67) (2,747) (29) (1,202) (66) (2,715) (44) (2,759) Compass 3 -- Level 2 Contracts 71 1,324 174 3,532 (458) (9,101) (213) (4,245) (94) (4,339) ------- --------- --------- --------- ------------- ---------- $ 2,858 $ 2,314 $ (16,271) $ (11,099) $ (235) $ (11,334) ======= ========= ========= ========= ============= ==========
*Amount less than $500 47
YEAR ENDED DECEMBER 31, 2003 (OOO OMITTED) ------------------------------------------------------------------------------------------------ TRANSFERS BETWEEN WITHDRAWALS, VARIABLE ACCOUNTS SURRENDERS, PURCHASE AND FIXED ANNUITIZATIONS, NET NET NET PAYMENTS ACCUMULATION AND CONTRACT ACCUMULATION ANNUITIZATION INCREASES RECEIVED ACCOUNT CHARGES ACTIVITY ACTIVITY (DECREASE) -------------- ----------------- ---------------- ---------------- ------------- ---------- UNITS DOLLARS UNITS DOLLARS UNITS DOLLARS UNITS DOLLARS DOLLARS DOLLARS ----- ------- ----- --------- ----- --------- ----- --------- ------------- ---------- Capital Appreciation Variable Account Compass 2 Contracts 52 $ 2,088 (57) $ (1,996) (476) $ (21,416) (481) $ (21,324) $ (565) $ (21,889) Compass 3 Contracts 104 3,003 (26) (6,888) (59) (1,700) (191) (5,585) (34) (5,619) Compass -- 3 Level 2 Contracts 205 2,276 338 4,579 (605) (7,443) (62) (588) (24) (612) ------- --------- --------- --------- ------------- ---------- $ 7,367 $ (4,305) $ (30,559) $ (27,497) $ (623) $ (28,120) ======= ========= ========= ========= ============= ========== Global Governments Variable Account Compass 2 Contracts 1 $ 22 15 $ 346 (15) $ (365) 1 $ 3 $ (6) $ (3) Compass 3 Contracts 9 195 (19) (422) (7) (165) (17) (392) (2) (394) Compass -- 3 Level 2 Contracts 12 140 52 697 (73) (967) 9 (130) (5) (135) ------- --------- --------- --------- ------------- ---------- $ 357 $ 621 $ (1,497) $ (519) $ (13) $ (532) ======= ========= ========= ========= ============= ========== Government Securities Variable Account Compass 2 Contracts 25 $ 845 (39) $ (1,440) (298) $ (10,778) (312) $ (11,373) $ (377) $ (11,750) Compass 3 Contracts 33 816 (71) (1,792) (20) (512) (58) (1,488) 0 (1,488) Compass 3 -- Level 2 Contracts 47 651 29 480 (206) (3,060) (130) (1,929) (24) (1,953) ------- --------- --------- --------- ------------- ---------- $ 2,312 $ (2,752) $ (14,350) $ (14,790) $ (401) $ (15,191) ======= ========= ========= ========= ============= ========== High Yield Variable Account Compass 2 Contracts 17 $ 475 30 $ 1,123 (289) $ (9,021) (242) $ (7,423) $ (480) $ (7,903) Compass 3 Contracts 19 413 (65) (1,440) (17) (392) (63) (1,419) 0 (1,419) Compass 3 -- Level 2 Contracts 33 357 53 1,949 (139) (1,735) (53) 571 (6) 565 ------- --------- --------- --------- ------------- ---------- $ 1,245 $ 1,632 $ (11,148) $ (8,271) $ (486) $ (8,757) ======= ========= ========= ========= ============= ========== Managed Sectors Variable Account Compass 2 Contracts 10 $ 340 2 $ 215 (58) $ (2,163) (46) $ (1,608) $ (23) $ (1,631) Compass 3 Contracts 42 1,477 (114) (4,104) (22) (789) (94) (3,416) (8) (3,424) Compass 3 -- Level 2 Contracts 114 1,220 294 3,720 (353) (4,190) 55 750 (12) 738 ------- --------- --------- --------- ------------- ---------- $ 3,037 $ (169) $ (7,142) $ (4,274) $ (43) $ (4,317) ======= ========= ========= ========= ============= ========== Money Market Variable Account Compass 2 Contracts 27 $ 498 (138) $ (2,740) (343) $ (6,957) (454) $ (9,199) $ (128) $ (9,327) Compass 3 Contracts 71 1,160 (63) (1,035) (39) (635) (31) (510) (11) (521) Compass 3 -- Level 2 Contracts 65 782 168 2,162 (450) (5,603) (217) (2,659) 85 (2,574) ------- --------- --------- --------- ------------- ---------- $ 2,440 $ (1,613) $ (13,195) $ (12,368) $ (54) $ (12,422) ======= ========= ========= ========= ============= ========== Total Return Variable Account Compass 2 Contracts 21 $ 727 14 $ 822 (218) $ (8,126) (183) $ (6,577) $ (462) $ (7,039) Compass 3 Contracts 71 2,577 (208) (7,554) (44) (1,622) (181) (6,599) (107) (6,706) Compass 3 -- Level 2 Contracts 140 2,277 396 7,328 (826) (14,797) (290) (5,192) 143 (5,049) ------- --------- --------- --------- ------------- ---------- $ 5,581 $ 596 $ (24,545) $ (18,368) $ (426) $ (18,794) ======= ========= ========= ========= ============= ==========
(8) LINE OF CREDIT Each variable account and other affiliated funds participate in an $800 million unsecured line of credit provided by a syndication of banks under a line of credit agreement. Borrowings may be made for temporary financing needs. Interest is charged to each variable account, based on its borrowings, at a rate equal to the bank's base rate plus 0.50%. In addition, a commitment fee, based on the average daily, unused portion of the line of credit, is allocated among the participating variable accounts at the end of each calendar quarter. The commitment fee allocated to each variable account for the six months ended June 30, 2004, ranged from $71 and $1,526 and is included in miscellaneous expense. None of the variable accounts had significant borrowings during the six months ended June 30, 2004. (9) FINANCIAL INSTRUMENTS Certain variable accounts trades financial instruments with off-balance-sheet risk in the normal course of its investing activities in order to manage exposure to market risks such as interest rates and foreign currency exchange rates. These financial instruments include written options, forward foreign currency exchange contracts, and futures contracts. The notional or contractual amounts of these instruments represent the investment the variable account has in particular classes of financial instruments and does not necessarily represent the amounts potentially subject to risk. The measurement of the risks associated with these instruments is meaningful only when all related and offsetting transactions are considered. 48 FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
NET UNREALIZED CONTRACTS TO CURRENCY CONTRACTS APPRECIATON SETTLEMENT DATE DELIVER/RECEIVE ABBREVIATIONS IN EXCHANGE FOR AT VALUE (DEPRECIATION) - ----------------------------------------------------------------------------------------------------------------------------------- Global Governments Sales 8/16/04 49,522 AUD $ 34,412 $ 34,242 $ 170 Variable Account 8/16/04 1,999,452 DKK 324,727 327,370 (2,643) 8/4/04-8/16/04 1,656,614 EUR 2,004,030 2,016,405 (12,375) 8/17/04 64,000 GBP 115,971 115,542 429 8/11/04 19,917,892 JPY 181,997 182,468 (471) 7/6/04 113,308,228 KRW 97,755 98,014 (259) 8/9/04 773,698 NZD 484,770 486,906 (2,136) 8/16/04 3,723 SEK 489 494 (5) --------------- ----------- -------------- $ 3,244,151 $ 3,261,441 $ (17,290) =============== =========== ============== Purchases 8/16/04 16,681 AUD $ 11,376 $ 11,534 $ 158 8/16/04 149,565 CHF 120,325 119,631 (694) 8/4/04-8/16/04 375,540 EUR 453,159 457,096 3,937 8/17/04 199,763 GBP 360,173 360,643 470 8/4/04-8/11/04 397,171,686 JPY 3,606,074 3,638,469 32,395 7/6/04 113,308,228 KRW 97,335 98,015 680 8/16/04 157,275 NOK 22,767 22,680 (87) 7/28/04 231,369 PLN 61,689 62,275 586 8/16/04 924,858 SEK 121,866 122,778 912 --------------- ----------- -------------- $ 4,854,764 $ 4,893,121 $ 38,357 =============== =========== ============== High Yield Sales 8/14/04 1,674,925 EUR $ 2,025,206 $ 2,038,545 $ (13,339) Variable Account 8/16/04 469,274 SEK 61,626 62,298 (672) --------------- ----------- -------------- $ 2,086,832 $ 2,100,843 $ (14,011) =============== =========== ============== Purchases 8/4/04 408,198 EUR $ 493,793 $ 496,885 $ 3,092 =============== =========== ==============
At June 30, 2004, forward currency purchases and sales under master netting agreements excluded above amounted to a net receivable of $4,380 with Merrill Lynch International for the Global Governments Variable Account. See page 23 for an explanation of abbreviations used to indicate amounts show in currencies other than U.S. Dollar. At June 30, 2004 the variable accounts had sufficient cash and/or securities to cover any commitments under these contracts. FUTURES CONTRACTS
UNREALIZED APPRECIATION DESCRIPTION EXPIRATION CONTRACTS POSITION (DEPRECIATION) - ----------------------------------------------------------------------------------------------------------------------------------- Government Securities Variable Account U.S. Treasury Notes-10 Year Futures September 2004 30 Long $ 10,304 U.S. Treasury Notes-2 Year Futures September 2004 47 Short (6,805) --------- $ 3,499
At June 30, 2004 the variable accounts had sufficient cash and/or securities to cover any margin requirements under these contracts. (10) LEGAL PROCEEDINGS On March 31, 2004, MFS settled an administrative proceeding regarding disclosure of brokerage allocation practices in connection with the sale of funds sponsored by MFS (including the Variable Accounts). Under the terms of the settlement, in which MFS neither admitted nor denied any wrongdoing, MFS agreed to pay (one dollar) $1.00 in disgorgement and $50 million in penalty to certain MFS funds, pursuant to a plan administered by an independent distribution consultant. The agreement with the SEC is reflected in an order of the SEC. The settlement order states that MFS failed to adequately disclose to the Boards of Trustees and to shareholders of the MFS funds the specifics of its preferred arrangements with certain brokerage firms selling MFS fund shares. The settlement order states that MFS had in place policies designed to obtain best execution of all fund trades. As part of the settlement, MFS also agreed to retain an independent compliance consultant to review the completeness of its disclosure to fund trustees and to fund shareholders of strategic alliances between MFS or its affiliates and broker-dealers and other financial advisers who support the sale of fund shares. The brokerage allocation practices which were the subject of this proceeding were discontinued by MFS in November 2003. In addition, in February, 2004, MFS reached agreement with the Securities and Exchange Commission ("SEC"), the New York Attorney General ("NYAG") and the Bureau of Securities Regulation of the State of New Hampshire ("NH") to settle administrative proceedings alleging false and misleading information in certain retail fund prospectuses regarding market timing and related matters (the "February Settlements"). These regulators alleged that prospectus language for certain MFS funds was false and misleading because, although the prospectuses for those funds in the regulators' view indicated that the funds prohibited market timing, MFS did not limit trading activity in 11 domestic large cap stock, high grade 49 bond and money market funds. The complaints by these regulatory authorities did not involve the Variable Accounts, but rather involved MFS' retail funds. MFS' former Chief Executive Officer, John W. Ballen, and former President, Kevin R. Parke, have also reached agreement with the SEC. Under the terms of the February Settlements, MFS and the executives neither admit nor deny wrongdoing. Under the terms of the February Settlements, a $225 million pool has been established and funded by MFS for distribution to retail fund shareholders. MFS has further agreed with the NYAG to reduce its management fees by approximately $25 million annually over the next five years, and not to increase certain management fees during this period. MFS has also paid an administrative fine to NH in the amount of $1 million. In addition, MFS and the retail funds will adopt certain governance changes. Messrs. Ballen and Parke have agreed to temporary suspensions from association with any registered investment company or investment adviser, will pay approximately $315,000 each to the SEC, and resigned their positions as trustees of all MFS funds, and Mr. Ballen resigned his position as President of all MFS funds. Messrs. Ballen and Parke will not be returning to MFS or the MFS funds after their suspensions. MFS and certain MFS funds and their trustees and affiliates have been named as defendants in class action and other lawsuits alleging similar claims concerning market timing and use of fund assets in recognition of fund sales and seeking damages of unspecified amounts. Although MFS does not believe that these regulatory developments will have a material adverse effect on the Variable Accounts, there can be no assurance that these developments and/or the ongoing adverse publicity resulting from these developments will not result in increased redemptions, reduced sales or other adverse consequences. (11) SUBSEQUENT EVENT The following variable accounts' investment adviser, MFS, has been the subject of an administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund sales, as described in the Legal Proceedings Footnote. Pursuant to the SEC Order, MFS, on July 28, 2004 transferred $1.00 in disgorgement and $50 million in penalty to the SEC (the "Payments"). A plan for distribution of these Payments has been submitted to the SEC. Contemporaneous with the transfer, certain variable accounts accrued an estimate of the amount to be received upon final approval of the plan of distribution as follows:
CAPITAL MANAGED TOTAL APPRECIATION SECTORS RETURN VARIABLE VARIABLE VARIABLE ACCOUNT ACCOUNT ACCOUNT - -------------------------------------------------------------------------------------------- Cash Settlement $ 227,161 $ 63,230 $ 20,000 Increase in net asset value per unit Compass 2 Contracts $ 0.040 $ 0.041 $ 0.008 Compass 3 Contracts $ 0.026 $ 0.040 $ 0.008 Compass 3 -- Level 2 Contracts $ 0.011 $ 0.013 $ 0.004
50 COMPASS VARIABLE ACCOUNTS MEMBERS OF BOARDS OF MANAGERS AND OFFICERS -- IDENTIFICATION AND BACKGROUND The Board of Managers of the Variable Accounts provides broad supervision over the affairs of each Account. MFS is responsible for the investment management of each Account's assets and the officers of the Variable Accounts are responsible for its operations.
POSITION(S) HELD MANAGER/OFFICER PRINCIPAL OCCUPATION AND OTHER NAME, DATE OF BIRTH WITH FUND SINCE(1) DIRECTORSHIPS(2) DURING THE PAST FIVE YEARS - ----------------------------------------------------------------------------------------------------------------------------- INTERESTED MEMBERS C. James Prieur(3) Member July 1999 Sun Life Assurance Company of Canada, President and (born 04/21/51) Chief Operating Officer (since April 1999), General Manager, U.S. (until April 1999) David D. Horn(3) Member April 1986 Private investor; Retired; Sun Life Assurance Company of (born 06/07/41) Canada, Former Senior Vice President and General Manager for the United States (until 1997) INDEPENDENT MEMBERS 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 Robert C. Bishop Member 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 Member May 2001 Ten State Street LLP (law firm), Partner; McFadden, (born 03/12/42) Pilkington & Ward LLP (solicitors and registered foreign lawyers), Partner (until June 2003); Jackson & Nash, LLP (law firm), Of Counsel (January 2000 to November 2000) Derwyn F. Phillips Member April 1986 Retired (born 08/31/30)
- ---------- (1) Date first appointed to serve as Trustee/Officer of an MFS/Sun Life Product. Each Member 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 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. 51
POSITION(S) HELD MANAGER/OFFICER PRINCIPAL OCCUPATION AND OTHER NAME, DATE OF BIRTH WITH FUND SINCE(1) DIRECTORSHIPS(2) DURING THE PAST FIVE YEARS - ----------------------------------------------------------------------------------------------------------------------------- Ronald G. Steinhart Member May 2001 Private investor; Bank One, Texas N.A., Vice Chairman (born 06/15/40) and 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 Member May 2001 Hawaii Small Business Development Center, Kaua'i (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) MEMBERS EMERITUS Garth Marston Member Emeritus Retired (born 04/28/26) Samuel Adams Member Emeritus Retired (born 10/19/25) OFFICERS Robert J. Manning(4) President February 2004 Massachusetts Financial Services Company, Chief (born 10/20/63) Executive Officer, President, Chief Investment Officer and Director John W. Ballen(4) President and August 2001 Massachusetts Financial Services Company, Chief (born 09/12/59) Member until Executive Officer and Director (until February 2004) February 2004 James R. Bordewick, Jr.(4) Assistant February 1997 Massachusetts Financial Services Company, Senior Vice (born 03/06/59) Secretary President and Associate General Counsel and Assistant Clerk Stephen E. Cavan(4) Secretary and December 1989 Massachusetts Financial Services Company, Senior Vice (born 11/06/53) Clerk until President, General Counsel and Secretary (until March March 2004 2004)
- ---------- (1) Date first appointed to serve as Trustee/Officer of an MFS/Sun Life Product. Each Trustee 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 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. 52
POSITION(S) HELD MANAGER/OFFICER PRINCIPAL OCCUPATION AND OTHER NAME, DATE OF BIRTH WITH FUND SINCE(1) DIRECTORSHIPS(2) DURING THE PAST FIVE YEARS - ----------------------------------------------------------------------------------------------------------------------------- Stephanie A. DeSisto(4) Assistant May 2003 Massachusetts Financial Services Company, Vice (born 10/01/53) Treasurer President (since April 2003); Brown Brothers Harriman & Co., Senior Vice President (November 2002 to April 2003); ING Groep N.V./Aeltus Investment Management, Senior Vice President (prior to November 2002) Robert R. Flaherty(4) Assistant May 2001 Massachusetts Financial Services Company, Vice (born 09/18/63) Treasurer President (since August 2000); UAM Fund Services, Senior Vice President (prior to August 2000) Richard M. Hisey(4) Treasurer August 2002 Massachusetts Financial Services Company, Senior Vice (born 08/29/58) President (since July 2002); The Bank of New York, Senior Vice President (September 2000 to July 2002); Lexington Global Asset Managers, Inc., Executive Vice President and Chief Financial Officer (prior to September 2000); Lexington Funds, Chief Financial Officer (prior to September 2000) Ellen Moynihan(4) Assistant May 2001 Massachusetts Financial Services Company, Vice President (born 11/13/57) Treasurer 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 May 2001 Massachusetts Financial Services Company, Senior Vice (born 06/12/60) Treasurer President
- ---------- (1) Date first appointed to serve as Trustee/Officer of an MFS/Sun Life Product. Each Member 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 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 Members of the Board of Managers ("Managers"), and Managers are not elected for fixed terms. The Accounts will hold a shareholders' meeting in 2005 and at least once every five years thereafter to elect Managers. 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 Manager 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 36 Accounts/Series. The Statement of Additional Information contains further information about the Trustees and is available without charge upon request by calling 1-800-752-7215. 53 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 A general description of the MFS Funds proxy voting policies is available without charge, upon request, by calling 1-800-225-2606, by visiting the About MFS section of mfs.com or by visiting the SEC's website at http://www.sec.gov. Information regarding how the variable 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. PORTFOLIO MANAGERS++ Margaret Adams William J. Adams John F. Addeo David A. Antonelli David M. Calabro James J. Calmas Kenneth J. Enright Steven R. Gorham Alan Langsner John D. Laupheimer, Jr. Gregory Locraft Kate Mead Constantinos Mokas Edward L. O'Dette Stephen Pesek Scott B.Richards Michael W. Roberge Matthew W. Ryan James T. Swanson Brooks Taylor Peter C. Vaream Terri A. Vitozzi (C) 2004 MFS/Sun Life Financial Distributors Inc. ++MFS Investment Management(R) COUS-SEM 8/04 45M ITEM 2. CODE OF ETHICS. Applicable for semi-annual reports if the registrant has amended the code of ethics during the period covered by the report or has granted a waiver, including an implicit waiver, from a provision of the code of ethics. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. Not Applicable for semi-annual reports. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. Not Applicable for semi-annual reports. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable to the Registrant. ITEM 6. SCHEDULE OF INVESTMENTS Not applicable at this time. [Applicable for periods ending on or after July 9, 2004 (beginning with Form N-CSRs filed at the end of September, 2004 for July 31, 2004 reporting period.)] ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable to the Registrant. ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. Not applicable to the Registrant. ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Board of Trustees of the Registrant has adopted procedures by which shareholders may send communications, including recommendations for nominees to the Registrant's Board, to the Board. Shareholders may mail written communications to the Board to the attention of the Board of Trustees, [name of series of the Registrant], Massachusetts Financial Services Company, 500 Boylston Street, Boston, MA 02116, c/o Frank Tarantino, Independent Chief Compliance Officer of the Fund. Shareholder communications must (i) be in writing and be signed by the shareholder, (ii) identify the series of the Registrant to which it relates, and (iii) identify the class and number of shares held by the shareholder. ITEM 10. CONTROLS AND PROCEDURES. (a) Based upon their evaluation of the registrant's disclosure controls and procedures as conducted within 90 days of the filing date of this 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 registrant's last fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. ITEM 11. EXHIBITS. (a) File the exhibits listed below as part of this Form. Letter or number the exhibits in the sequence indicated. (1) [**An amendment to the code of ethics, 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: The amendment is attached hereto.**][**APPLICABLE IF THE REGISTRANT HAS AMENDED ITS CODE OF ETHICS DURING THE PERIOD COVERED BY REPORT**] (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)* ROBERT J. MANNING ------------------------------------------------------- Robert J. Manning, President Date: August 23, 2004 --------------- 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)* ROBERT J. MANNING ------------------------------------------------------- Robert J. Manning, President (Principal Executive Officer) Date: August 23, 2004 --------------- By (Signature and Title)* RICHARD M. HISEY ------------------------------------------------------- Richard M. Hisey, Treasurer (Principal Financial Officer and Accounting Officer) Date: August 23, 2004 --------------- * Print name and title of each signing officer under his or her signature. EX-99.CERT 2 a2142631zex-99_cert.txt EXHIBIT-99.CERT Exhibit 99.CERT CAPITAL APPRECIATION VARIABLE ACCOUNT CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT I, Richard M. Hisey, 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 officers 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) 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. 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 c. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual 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 officers 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: August 23, 2004 RICHARD M. HISEY --------------- ------------------------------------------ Richard M. Hisey Treasurer (Principal Financial Officer and Accounting Officer) CAPITAL APPRECIATION VARIABLE ACCOUNT CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT I, Robert J. Manning, 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 officers 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) 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. 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 c. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual 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 officers 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: August 23, 2004 ROBERT J. MANNING --------------- ------------------------------------------ Robert J. Manning President (Principal Executive Officer) EX-99.906CERT 3 a2142631zex-99_906cert.txt EXHIBIT-99.906CERT Exhibit 99.906CERT CAPITAL APPRECIATION VARIABLE ACCOUNT CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT I, Richard M. Hisey, certify that, to my knowledge: 1. The Form N-CSR (the "Report") of Capital Appreciation Variable Account (the "Registrant") fully complies 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: August 23, 2004 RICHARD M. HISEY --------------- ------------------------------------------ Richard M. Hisey 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. CAPITAL APPRECIATION VARIABLE ACCOUNT CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT I, Robert J. Manning, certify that, to my knowledge: 1. The Form N-CSR (the "Report") of Capital Appreciation Variable Account (the "Registrant") fully complies 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: August 23, 2004 ROBERT J. MANNING --------------- ------------------------------------------ Robert J. Manning 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-----