N-CSR 1 a2129717zn-csr.txt N-CSR 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 811-4009 -------------------------------------------------------------------------------- COMPASS GOVERNMENT SECURITIES VARIABLE ACCOUNT -------------------------------------------------------------------------------- (Exact name of registrant as specified in charter) 500 Boylston Street, Boston, Massachusetts 02116 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) Stephen E. Cavan 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: 12/31/03 -------------------------------------------------------------------------------- Date of reporting period: 12/31/03 -------------------------------------------------------------------------------- ITEM 1. REPORTS TO STOCKHOLDERS. [COMPASS LOGO] PROFESSIONALLY MANAGED COMBINATION FIXED/VARIABLE ANNUITIES FOR PERSONAL INVESTMENTS AND QUALIFIED RETIREMENT PLANS ANNUAL REPORT - DECEMBER 31, 2003 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 Chairman 1 Management Reviews 2 Performance Summary 6 Portfolio of Investments 7 Financial Statements 24 Notes to Financial Statements 41 Board of Managers and Officers Back Cover
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE NOT A DEPOSIT NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY LETTER FROM THE CHAIRMAN DEAR CONTRACT OWNERS, In our view, the past year has been a promising one for investors. Financial markets have improved steadily, spurred by indications of a global economic recovery. These developments make this an encouraging time for our contract owners. But we also think it's a time to reinforce the fundamentals of a sound investment strategy. We think in any market environment the best approach for investors is disciplined diversification. This method of investing involves three simple steps. First, ALLOCATE your holdings across the major asset classes. Second, DIVERSIFY within each class so that you get exposure to different investment styles, such as growth and value, and market sectors, such as government and corporate bonds. Finally, to respond to the way market activity can shift the value of your accounts, REBALANCE your accounts on a routine schedule, such as once per year. Doing so will help you maintain your desired allocation across each asset class. These investing fundamentals are often lost when markets are on an upswing. At such times, it's easy to be tempted to shift your holdings into the current, "hottest" performing investment. History suggests, however, that it is difficult to predict year after year what the best performing sector or market will be. While it is true that the past cannot offer any guarantees for the future, the markets historically have demonstrated the benefits of taking the prudent approach and spreading your assets across a variety of holdings. For investors with a long-term goal such as retirement, a balanced approach usually makes the most sense. As always, your investment professional can help you identify an appropriate mix of investments for your needs. Respectfully, /s/ C. James Prieur C. James Prieur President and Chief Operating Officer, Sun Life Financial, Inc. January 19, 2004 The opinions expressed in this letter are those of C. James Prieur, and no forecasts can be guaranteed. Note to Contract Owners: Effective January 1, 2004, J. Kermit Birchfield, an independent Trustee, was appointed Chairman of the Compass Board, which oversees the Compass Variable Accounts. MARKET ENVIRONMENT In the early months of 2003, investors were battered by economic and geopolitical uncertainty. By year-end, however, investors were celebrating 2003 as the first positive year for global markets since 1999. The turnaround in global stock markets began in March and April, when it became apparent that the U.S.- and British-led coalition was on the verge of military success in Iraq. The release of increasingly positive economic numbers as 2003 progressed, particularly in the corporate earnings area, helped drive the ensuing equity rally. In addition, investor concern over issues that held back the market in the first quarter -- including the Iraq situation, a short-lived SARS epidemic, and corporate misdeeds -- largely faded as the year progressed. In the equity markets, the big surprise of 2003 was investors' appetite for risk. After a brutal three-year market decline, many observers -- including MFS and Sun Life -- believed investors would avoid risky investments. Instead, we experienced an equity rally led by relatively low-quality, higher-risk stocks -- stocks of companies with substantial debt on their balance sheets, low profit margins, and/or second- and third-tier competitive positioning. For most of 2003, investors seemed to favor the stocks that had previously fallen the hardest, rather than bidding up industry leaders that had weathered the global downturn relatively well. Toward the end of the year, however, we felt the market was beginning to rotate toward less risky companies with stronger fundamentals (business factors such as earnings and cash flow growth). For U.S. investors in overseas stock markets, the big story of 2003 was the decline of the dollar relative to other currencies. While many developed-nation stock markets performed roughly in line with the broad U.S. market -- and developing nations in general did even better -- the declining dollar increased those returns for U.S. investors in overseas equities. For example, the Morgan Stanley Capital International (MSCI) EAFE (Europe, Australasia, Far East) Index, a commonly used measure of the international stock market, returned 20.8% measured in local currencies but 39.2% when returns were converted into dollars. (Source: Morgan Stanley Capital International) Factors that contributed to the dollar's decline against most currencies included a U.S. trade deficit that overseas investors viewed as excessive; low interest rates that decreased the attractiveness of dollar-denominated investments; and the Bush administration's apparent abandonment of a long-standing U.S. policy of publicly advocating a strong dollar. In the bond market, we saw interest rates in many developed nations fall to historical lows in 2003. But by year-end, an improving global economy began to put upward pressure on rates, and Australia and the United Kingdom became the first major developed nations to raise rates. In the United States, the Federal Reserve Board kept short-term rates at a four-decade low through year-end. However, long-term U.S. Treasury rates -- which are largely determined by investor sentiment -- rose modestly for the period as a whole and experienced sharp volatility in the spring and summer. Ten-year rates fell when the Fed, after its May meeting, expressed a strong desire to keep rates low and implied that it might use some unconventional strategies to do so -- such as buying longer-term bonds. Then long-term rates shot up in late June and July after the Fed lowered the short-term rate by only a quarter point at its June meeting, disappointing a market that had expected a half-point drop. Many investors read the quarter-point move as a sign that perhaps the economy was improving faster than the Fed had expected. In contrast, U.S. corporate bonds generally benefited from an accelerating recovery. Growth in GDP (gross domestic product), employment, and other economic measures pointed toward improving corporate bond fundamentals (factors such as earnings, cash flow growth, and credit quality). In response, investors became less risk adverse, and the "flight to quality" that had characterized the bond market in late 2002 began to fade. With Treasury yields at four-decade lows, investors in 2003 sought out higher-yielding corporate debt. Riskier, lower-rated bonds showed the best performance for the year. 1 MANAGEMENT REVIEWS CAPITAL APPRECIATION VARIABLE ACCOUNT For the 12 months ended December 31, 2003, the Compass 2 account provided a total return of 27.48%, the Compass 3 account provided a total return of 27.36% and the Compass 3 -- level 2 provided a total return of 27.55%. These returns, which include the reinvestment of any dividends and capital gains distributions, compare with a return of 29.75% over the same period for the account's benchmark, the Russell 1000 Growth Index, which measures the performance of large-cap U.S. growth stocks. PORTFOLIO MANAGEMENT UPDATE Gregory W. Locraft, Jr. assumed investment responsibilities for the portfolio in November 2003, replacing John E. Lathrop. There has been no change to the account's investment philosophy or objective: the portfolio will continue to pursue reasonably priced large cap growth stocks identified through MFS' bottom-up Original Research(SM) process. DETRACTORS FROM PERFORMANCE The portfolio's weakest-performing areas over the period were technology and business services. In technology, the portfolio's stock selection and an underweighted position in semiconductor stocks in general, and industry leader Intel in particular, hurt relative results as stocks of electronic component makers and equipment suppliers rallied strongly over the period. While we were encouraged by evidence of strength in specific product markets, our positioning in technology remained somewhat cautious because we felt stock valuations in the sector were overly high and we believed the market was pricing in somewhat optimistic views of future growth. However, the portfolio's relative performance was helped by our overweighted positions in semiconductor maker Analog Devices and storage software firm VERITAS Software. Stock selection among business services concerns also held back performance during the period. Business outsourcing firm BISYS Group lost value amid a negative market environment for its insurance and education divisions and problems with executing its business strategy. Our holding in payroll giant Automatic Data Processing was another source of weakness in the business services area. A shift from cost cutting to increasing business spending in the face of poor sales trends made us concerned that ADP's issues were more longer-term in nature. We sold ADP out of the portfolio. Outside of the business services and technology areas, individual stock detractors included media concern Viacom, which lost traction on continued weak demand for radio advertising. We believe conditions in 2004 should offer good growth opportunities for advertising-sensitive media companies, given the confluence of a stronger economy, a U.S. presidential election, and the summer Olympics in Greece. As of period-end, Viacom remained a significant position in the portfolio. Our holding in retailer Kohl's also hurt performance. Weakness in the moderate-price apparel area led the company to report disappointing sales and earnings. We see this setback as temporary in nature, and, as of the end of the period, we viewed Kohl's as offering attractive longer-term growth potential. Other detractors from performance included insurance and reinsurance firm XL Capital and aerospace and defense company Northrop Grumman. The portfolio's cash position also detracted from relative performance. As with nearly all annuity subaccounts, this account holds some cash to buy new holdings and to cover investor exchanges or redemptions. In a period when equity markets rose sharply, cash hurt performance against our benchmark, the Russell 1000 Growth Index, which has no cash position. CONTRIBUTORS TO PERFORMANCE Holdings in the health care sector boosted portfolio results. We avoided or underweighted a number of large-cap pharmaceutical stocks because we felt their medium-term growth prospects would be limited by patent expirations on key products as well as by a dearth of new drugs in the development pipeline. Instead, we trained our sights on concerns elsewhere in health care that we believed would offer stronger sustainable growth. For example, we favored Genentech over Johnson & Johnson and Pfizer, in which we were relatively underweighted over the period, and Merck, which we did not own. This positioning proved beneficial for results, and we sold our Genentech position after it reached our price target. However, several health care holdings did detract from relative performance, including Schering-Plough, Wyeth, and AmerisourceBergen. Underweighting consumer staples concerns also contributed to performance as that sector lagged the broader market. For example, Coca-Cola, which we avoided over the period, underperformed as volume growth failed to live up to investor expectations. Not owning Anheuser-Busch over the period also helped relative results. Stock selection in the financial services sector also helped performance. In particular, our position in Merrill Lynch did well over the period. Other contributors to performance included our holdings in travel and real estate firm Cendant, satellite television broadcaster Echostar, and conglomerate Tyco International. Underweighting retail giant Wal-Mart also helped performance as that firm's stock underperformed the broad market. In addition, a cash settlement from a class-action lawsuit contributed to performance over the period. The series was a participant in a suit against Cendant related to alleged accounting fraud that was uncovered in 1998, after Cendant was formed by the merger of HFS and CUC International. The series had owned both HFS and CUC, and then Cendant, during the merger period. Along with other participants in the lawsuit, the portfolio had suffered losses on Cendant stock in 1998. GLOBAL GOVERNMENTS VARIABLE ACCOUNT For the 12 months ended December 31, 2003, the Compass 2 account provided a total return of 13.76%, the Compass 3 account provided a total return of 13.59%, and Compass 3 -- level 2 account provided a total return of 13.76%. These returns, which include the reinvestment of any dividends and capital gains distributions, compare with a return of 14.91% over the same period for the account's benchmark, the Citigroup World Government Bond Index. The Citigroup World Government Bond Index includes developed country government bond markets around the world. A BOND-FRIENDLY ENVIRONMENT The global environment was characterized by weak economic activity during the first half (H1) of 2003 (especially during the lead up to, and subsequent intervention, in Iraq), followed by a moderate upswing in second-half (H2) growth. This growth was primarily driven by more buoyant conditions in the United States as well as improving prospects for Japan and Europe. Despite improved conditions, excess global production capacity and low 2 inflation led most of the major developed countries to follow H1 interest rate cuts with steady low and accommodative rates in H2. All of this fostered a bond-friendly environment as central bankers were more concerned with the risk of excess disinflation than with excess inflation. With the exception of a brief upswing mid year, the dollar displayed persistent weakness against most major global currencies during 2003. The large and growing U.S. current account deficit demanded an increasingly large share of global savings, which, in turn caused a sharp depreciation of the currency. The dollar depreciated by approximately 20% against the euro in 2003, and by between 20%-35% against the "dollar bloc" currencies of Canada, Australia, and New Zealand. Heavy Japanese official intervention tempered the appreciation of the yen to only 10% versus the U.S. dollar. KEY CONTRIBUTORS TO PERFORMANCE The portfolio benefited from a significant underweighted position relative to its benchmark in the U.S. dollar, as the currency decline was both broad based and precipitous. The overweighted position in the euro was particularly beneficial. The overweighted bond position in the euro area also benefited performance. The "dollar bloc" and Scandinavia were additional sources of outperformance. The portfolio's overweighted bond and currency positions in Canada boosted performance as did the overweighted currency and underweighted bond positions in Australia. The overweighted bond positions in Denmark and Sweden also provided a means of outperformance. KEY DETRACTORS FROM PERFORMANCE Our underweighting in Japanese government bonds and the Swiss franc were modest detractors from performance. GOVERNMENT SECURITIES VARIABLE ACCOUNT For the 12 months ended December 31, 2003, the Compass 2 account provided a total return of 0.96%, the Compass 3 account provided a total return of 0.86%, and the Compass 3 -- level 2 account provided a total return of 1.01%. These returns, which include the reinvestment of any dividends and capital gain distributions, compare with a return of 2.73% over the same period for the account's benchmark, the Lehman Brothers Government/Mortgage Index (the Lehman Index). The Lehman Brothers Government/Mortgage Index measures the performance of the government and mortgage securities markets. MARKET ENVIRONMENT The bond market for the 12 months ended December 31, 2003 was influenced by an accommodative U.S. monetary policy and low interest rates paid by U.S. government bonds. Although interest rates on December 31, 2003 were not that different from what they had been a year earlier, they were fairly volatile during the 12-month period, especially in June and July. For example, the 10-year U.S. Treasury bond reached 3.10% in June -- a four-decade low. However, Treasury interest rates then backed up from late June through August and reached 4.60% in September 2003. ACCOUNT POSITIONING The biggest shifts in portfolio holdings occurred primarily in the second half of 2003. We reduced the account's holdings in U.S. Treasury bonds and mortgage-backed securities because we expected the early summer's volatility to continue through year end. By December 31, 2003, the account's Treasury position was cut nearly in half and the mortgage-backed holdings were reduced by nearly 10%. At the same time, we increased the account's holdings in U.S. government agency bonds. DETRACTORS AND CONTRIBUTORS TO PERFORMANCE Mortgage-backed securities performed well for most of the year, with the exception of the summer months. However, our mortgage strategy detracted from the account's overall results because we had reduced our holdings in the group in the second half of 2003. As a result, the account did not participate fully in the sector's second-half performance. Contributions to return came from the account's allocations to 15-year mortgage-backed securities and to government agency securities, especially those issued Financing Corporation (FICO). Issues from FICO are less liquid than other agency securities because they are traded less frequently. As a consequence, FICO provides a slight yield advantage over other government agencies and U.S. Treasury issues. (The principal value and interest of U.S. Treasury securities are guaranteed by the U.S. government if held to maturity. FICO was formed in the late 1980s by the Federal Home Loan Bank board to help rescue thrift institutions.) HIGH YIELD VARIABLE ACCOUNT For the 12 months ended December 31, 2003, the Compass Level 2 account provided a total return of 19.47%; Compass Level 3 account provided a total return of 19.35%; and the Compass 3 -- Level 2 account returned 19.53%. These returns include the reinvestment of any dividends and capital gains distributions and compare to returns over the same period of 28.97% and 26.36%, respectively, for the series' 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 and do not include mortality and expense risk charges. DETRACTORS FROM PERFORMANCE Overall, the portfolio's holdings were decidedly defensive relative to the high-yield market at large. While the series' defensiveness served investors well in recent years, it contributed to its underperformance during this period, as investors favored riskier options. The series continued to have significant underweight exposure to the wireline segment of the telecommunications industry, which still faced many fundamental challenges, including significant overcapacity. The series also had underweight exposure to the utilities sector, which proved to be one of the leaders of the high-yield rally during the period. In general, our strategy is to focus on credit issuers with improving fundamentals and to not take excessive risk. We continue to remain true to our discipline focus because we believe fundamentals drive performance over the long term. CONTRIBUTORS TO PERFORMANCE The rebound in the high-yield market was led by the telecommunications, utilities, and media sectors. While we were underweight in some of these sectors, or portions of them, we were able to strategically take advantage of the rally in the utilities sector and in the wireline segment of the telecommunications sector by choosing select names we felt were attractive from fundamental and valuation standpoints. 3 We were overweighted in the media sector, where we also favored companies with the ability to generate strong free cash flow. Many of these were broadcasting companies, which have tended to benefit from an increase in advertising revenue in past economic recoveries. MANAGED SECTORS VARIABLE ACCOUNT For the 12 months ended December 31, 2003, the Compass level 2 account provided a total return of 23.16%, the Compass level 3 account provided a total return of 22.98% and the Compass 3 -- level 2 account provided a total return of 23.16%. These returns, which include the reinvestment of any dividends and capital gains distributions, compare with a return of 29.75% 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. The account's return also compares with a return over the same period of 30.97% for the Russell 3000 Growth Index and 35.39% for the Lipper Multi-cap Growth Index. The Russell 3000 Growth Index measures the performance of U.S. growth stocks. DETRACTORS FROM PERFORMANCE On a sector basis, our positioning among leisure stocks proved the most significant impediment to performance. Media conglomerate Viacom lost traction on continued near-term weak demand for radio advertising. As of period-end, however, Viacom remained a significant position in the portfolio because we believe market conditions in 2004 could offer growth opportunities for advertising-sensitive media companies -- given the confluence of a stronger economy, a U.S. presidential election, and the summer Olympics. Elsewhere in the leisure sector, holdings in newspaper concerns Tribune Co. and The New York Times Co. also detracted from results as the firms' ad sales in their respective major metropolitan areas were slow to rebound. By period-end we had sold our position in Tribune Co. Two holdings in the business services group also hurt relative performance. In early 2003, Automatic Data Processing, which had benefited from conservative expense management amid soft demand for its payroll and trade processing services, announced plans to increase spending. We felt that this change in strategy would dampen future earnings growth. ADP stock fell on the news, and we sold our position. BISYS Group, which supports financial institutions and corporate clients with investment and educational services, also weighed on results. Soft demand for the company's high-end insurance products led BISYS to post disappointing earnings. As we believed the company would be able to address this issue in time, we maintained a position in the stock. On an individual stock basis, the most significant detractor from performance was Intel. We initiated a position in the stock based on our view that the company's new focus on microprocessor battery life and size could give the firm a sustainable competitive edge. Staying true to our valuation discipline, however, kept us from moving to an overweighted position as the stock soared higher in the second half of the year. Unfortunately, successful stockpicking elsewhere in technology -- including strong-performing positions in VERITAS Software, Analog Devices, and Cisco Systems -- was not sufficient to offset the impact of being underweighted in Intel. Moderate-priced apparel retailer Kohl's also hurt performance. Mediocre merchandising, together with adverse weather in key markets, led Kohl's to report weak operating results. We viewed these issues as surmountable and increased our holdings over the period. Other detractors from performance included insurance and reinsurance firm XL Capital and aerospace and defense company Northrop Grumman -- which were sold out of the portfolio during the period -- and pharmaceutical and health care products firm Wyeth. CONTRIBUTORS TO PERFORMANCE In the health care sector, we avoided or underweighted several large-cap pharmaceutical firms because we felt their medium-term growth prospects would be limited by patent expirations on key products as well as by a dearth of new drugs in the development pipeline. Instead, we invested in companies elsewhere in health care that we believed would offer stronger sustainable growth. For example, we favored Genentech over Johnson & Johnson, in which we were relatively underweighted, and Merck, which we did not own. This positioning proved beneficial for results. Underweighting consumer staples concerns also helped performance as that sector lagged the overall market. Avoiding Coca-Cola was particularly helpful, as the company reported lackluster volume growth. Exiting positions in Colgate Palmolive and Anheuser-Busch in favor of other opportunities earlier in 2003 also proved beneficial to performance. Positions in capital-markets-sensitive companies such as Merrill Lynch and Goldman Sachs also helped portfolio performance as bond spreads narrowed, trading volumes rose, and underwriting activity showed signs of renewed life. In addition, a cash settlement from a class-action lawsuit contributed to performance over the period. The account was a participant in a suit against Cendant related to alleged accounting fraud that was uncovered in 1998, after Cendant was formed by the merger of HFS and CUC International. The account had owned both HFS and CUC, and then Cendant, during the merger period. Along with other participants in the lawsuit, the portfolio had suffered losses on Cendant stock in 1998. NOTE TO SHAREHOLDERS: EFFECTIVE MAY 21, 2003, THE RUSSELL 1000 GROWTH INDEX REPLACED THE RUSSELL 3000 GROWTH INDEX AND THE LIPPER MULTI-CAP GROWTH INDEX AS THE BENCHMARK OF THE ACCOUNT. WE BELIEVE THE RUSSELL 1000 GROWTH INDEX MORE ACCURATELY REFLECTS THE PORTFOLIO'S INVESTMENT DISCIPLINE, OFFERING INVESTORS A MORE RELIABLE OBJECTIVE MEASURE OF THE ACCOUNT'S PERFORMANCE. MONEY MARKET VARIABLE ACCOUNT For the 12 months ended December 31, 2003, the Compass level 2 account provided a total return of -0.66%, the Compass level 3 account provided a total return of -0.76% and the Compass 3 level 2 account provided a total return of -0.61%. These returns includes the reinvestment of any distributions. As of December 31, 2003 the account's 7 day yield with and without waiver was 0.38%. The yield quotation more closely reflects the current earnings of the series than the total return quotation. MARKET ENVIRONMENT The reporting period began with an unsettled market environment that was characterized by geopolitical concerns, high jobless claims, mixed economic news, and volatile energy prices. By the end of the period on December 31, 2003, economic conditions appeared to be significantly improved, jobless claims were down, but energy prices were still high. A key event for the marketplace was the Federal Reserve Board's late June decision to cut short-term interest rates by 25 basis points (0.25%). The quarter of a percent reduction was less than the 50 basis points (0.50%) that some investment professionals had anticipated. The Fed made no other adjustment to short-term 4 interest rates for the remainder of 2003 and indicated that it wouldn't make any further changes "for a considerable period." ACCOUNT POSITIONING On December 31, 2002, when there was significant volatility in interest rate expectations, the account's weighted average maturity was 33 days. With the easing of both geopolitical tensions and the reduction in the Fed funds rate, we extended our average maturity. By December 31, 2003, the weighted average for the account was 52 days. Results for the account were negative due to the additional Sun Life charges which are separate from and in addition to the management fee. Consequently, we concentrated portfolio investments in high-quality commercial paper and asset-backed commercial paper. CONTINUED SHORT SUPPLY OF COMMERCIAL PAPER In the first half of 2003, the precarious nature of the economy caused companies to pull back on spending. That pull-back reduced need for short-term financing and limited the supply of new commercial paper. Despite growing economic strength in the second half of 2003, the supply of commercial paper continued to be constrained by cautious corporate spending. Businesses also took advantage of the low interest rate environment by issuing longer-term debt in place of commercial paper. On December 31, 2003, approximately 71% of the account was invested in commercial paper with the balance of the portfolio invested in government paper and repurchase agreements. COMMITMENT TO QUALITY Regardless of market or economic conditions, we intend to maintain the account's high quality as we focus on the account's objectives of income, capital preservation, and liquidity. TOTAL RETURN VARIABLE ACCOUNT For the 12 months ended December 31, 2003, the Compass level 2 account provided a total return of 15.64%, the Compass level 3 account provided a total return of 15.46%, and the Compass 3 -- level 2 account provided a total return of 15.64%. These returns, which include the reinvestment of any capital gains and dividend distributions, compare with returns of 28.67% and 4.10%, 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. ACCOUNT POSITIONING This account normally invests between 55% to 60% of its assets in inexpensive, lower-risk stocks with the balance in higher-quality bonds and a relatively small position in short-term cash equivalent securities. (Cash-equivalent securities are used to facilitate transactions and provide liquidity.) While this allocation has provided a competitive historical long-term track record, the account's results over the past year lagged stock market returns as represented by the S&P 500. In 2003, stocks outperformed bonds and cash, and higher-risk, lower-quality issues led returns within the equity and fixed-income markets. During periods of rising equity markets such as we saw in 2003, the account's cash holdings detracted from performance versus the S&P 500 benchmark. DETRACTORS TO PERFORMANCE Our underweighted position in technology and conservative positioning in leisure and overweighting telecommunications were the primary reasons the account underperformed its stock benchmark. We maintained an underweighting in technology primarily because we felt that many stocks in the sector did not meet our valuation criteria. However, the sector rose through much of the period, buoyed by signs of economic growth, potential increases in capital spending, and possible pent-up demand for personal computers, servers, and software. In absolute terms, the group was one of the best performing portfolio sectors. For example, the account received very strong returns from Texas Instruments. However, our underweighting in stocks such as Intel (or avoiding companies such as Cisco Systems) caused the account's relative performance to lag benchmark returns. The performance of the account's leisure holdings was disappointing. Investors stayed away from publisher Reed Elsevier because of concerns about the company's US textbook business. Lower-than-expected advertising revenues negatively affected the stock prices of newspaper publishers Tribune and New York Times. In the utilities and communications sector, our overweighted position in telephone services stocks such as BellSouth detracted from performance as competitive pressures intensified and outweighed inexpensive valuations. CONTRIBUTORS TO PERFORMANCE Holdings in the financial services sector provided strong relative returns for the period. Banks benefited from falling interest rates, an improving outlook for corporate credit, and strength in mortgage lending activity. FleetBoston's stock price received a significant boost following Bank of America's announcement of a $47 billion takeover offer. In addition, the market rally boosted stock prices of companies such as T. Rowe Price and Merrill Lynch. The strong performance of these and other financial stocks was offset somewhat by the decline of Federal Home Loan Mortgage Corporation's (Freddie Mac) stock. T. Rowe Price stock was sold when it reached our performance target. Our underweighted position in consumer staples stocks, especially beverage stocks such as Coca-Cola, contributed to performance when investors turned toward cyclical companies whose earnings tend to be more sensitive to an economic recovery. The account also received strong results from Alcoa and Occidental Petroleum. Rising commodity prices helped boost Alcoa's stock price. Continued high oil prices buoyed the stock price of Occidental. In the fixed income market, corporate bonds in general outperformed U.S. Treasuries over the period (Principal and interest of U.S. Treasury securities, however, are guaranteed by the U.S. government if held to maturity). In that environment, our relative overweighting in corporate debt and underweighting in Treasuries helped the fixed-income portion of the acount outperform the overall U.S. bond market, as measured by the Lehman Brothers Aggregate Bond Index. The opinions expressed in this report are those of the portfolio managers and are current only through the end of the period of the report as stated on the cover. These views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed. 5 The portfolios are actively managed, and current holdings may be different. It is not possible to invest directly in an index. 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 website at HTTP://WWW.SEC.GOV. 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 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. Government guarantees apply to underlying securities only and not to the prices and yields of the portfolio. 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. YEAR END PERFORMANCE THROUGH DECEMBER 31, 2003
COMPASS 2 COMPASS 3 COMPASS 3 - (U.S.) (U.S.) LEVEL 2 (U.S.) --------- --------- -------------- Capital Appreciation 27.48% 27.36% 27.55% Variable Account* Global Government 13.76% 13.59% 13.76% Variable Account Government Securities 0.96% 0.86% 1.01% Variable Account High Yield Variable 19.47% 19.35% 19.53% Account Managed Sectors Variable Account* 23.16% 22.98% 23.16% Money Market Variable Account (0.66)% (0.76)% (0.61)% Total Return Variable Account 15.64% 15.46% 15.64%
THESE PERFORMANCE RESULTS REFLECT ANY APPLICABLE CONTRACT OR SURRENDER CHARGES. VISIT sunlife-usa.com FOR THE MOST RECENT MONTH-END PERFORMANCE RESULTS. MARKET VOLATILITY CAN SIGNIFICANTLY AFFECT SHORT-TERM PERFORMANCE, AND MORE CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE PERFORMANCE DATA QUOTED. 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. * 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 -- December 31, 2003 CAPITAL APPRECIATION VARIABLE ACCOUNT STOCKS -- 95.8%
ISSUER SHARES VALUE U.S. STOCKS -- 90.9% AEROSPACE -- 1.5% Honeywell International, Inc. 20,800 $ 695,344 L-3 Communications Holding, Inc.* 15,900 816,624 Lockheed Martin Corp. 63,600 3,269,040 ------------- $ 4,781,008 ------------- APPAREL MANUFACTURERS -- 0.7% Nike, Inc., "B" 13,800 $ 944,748 Reebok International Ltd. 32,200 1,266,104 ------------- $ 2,210,852 ------------- AUTOMOTIVE -- 0.3% Harley-Davidson, Inc. 19,600 $ 931,588 ------------- BANKS & CREDIT COMPANIES -- 5.0% American Express Co. 77,840 $ 3,754,223 Citigroup, Inc. 135,796 6,591,538 Fannie Mae 54,400 4,083,264 MBNA Corp. 56,500 1,404,025 ------------- $ 15,833,050 ------------- BIOTECHNOLOGY -- 3.5% Amgen, Inc.* 103,440 $ 6,392,592 Genzyme Corp.* 60,800 2,999,872 Gilead Sciences, Inc.* 29,600 1,720,944 ------------- $ 11,113,408 ------------- BROADCAST & CABLE TV -- 5.6% Citadel Broadcasting Corp.* 22,600 $ 505,562 Clear Channel Communications, Inc. 99,336 4,651,905 Comcast Corp., "A"* 182,200 5,988,914 EchoStar Communications Corp., "A"* 87,185 2,964,290 NTL, Inc.* 13,500 941,625 Time Warner, Inc.* 66,400 1,194,536 Westwood One, Inc.* 41,900 1,433,399 ------------- $ 17,680,231 ------------- BROKERAGE & ASSET MANAGERS -- 2.3% Goldman Sachs Group, Inc. 30,880 $ 3,048,782 Merrill Lynch & Co., Inc. 68,750 4,032,188 ------------- $ 7,080,970 ------------- BUSINESS SERVICES -- 2.3% BISYS Group, Inc.* 53,200 $ 791,616 DST Systems, Inc.* 41,300 1,724,688 Getty Images, Inc.* 34,500 1,729,485 Manpower, Inc. 26,500 1,247,620 SunGard Data Systems, Inc.* 65,230 1,807,523 ------------- $ 7,300,932 ------------- CHEMICALS -- 1.1% 3M Co. 39,740 $ 3,379,092 ------------- COMPUTER SOFTWARE -- 6.4% BEA Systems, Inc.* 83,400 $ 1,025,820 Manhattan Associates, Inc.* 21,100 583,204 Microsoft Corp. 467,520 12,875,501 Netscreen Technologies, Inc.* 69,400 1,717,650 Networks Associates, Inc.* 112,300 1,688,992 Symantec Corp.* 18,400 637,560 VERITAS Software Corp.* 41,810 1,553,660 ------------- $ 20,082,387 ------------- COMPUTER SOFTWARE -- SYSTEMS -- 2.1% Hewlett-Packard Co. 82,000 $ 1,883,540 IBM Corp. 49,600 4,596,928 ------------- $ 6,480,468 ------------- CONSUMER GOODS & SERVICES -- 2.6% Colgate-Palmolive Co. 59,600 $ 2,982,980 Procter & Gamble Co. 50,600 5,053,928 ------------- $ 8,036,908 ------------- U.S. STOCKS -- continued CONSUMER SERVICES -- 0.8% Apollo Group, Inc., "A"* 18,700 $ 1,271,600 Career Education Corp.* 33,400 1,338,338 Orbitz, Inc., "A" 9,900 229,600 ------------- $ 2,839,618 ------------- CONTAINERS -- 0.3% Smurfit-Stone Container Corp.* 55,300 $ 1,026,921 ------------- ELECTRICAL EQUIPMENT -- 5.0% Emerson Electric Co. 7,700 $ 498,575 General Electric Co. 292,700 9,067,846 Molex, Inc. 18,500 645,465 Tyco International Ltd. 208,800 5,533,200 ------------- $ 15,745,086 ------------- ELECTRONICS -- 6.9% Agere Systems, Inc., "B"* 412,800 $ 1,197,120 Amphenol Corp., "A"* 12,400 792,732 Analog Devices, Inc. 67,790 3,094,613 Applied Materials, Inc.* 38,400 862,080 Intel Corp. 253,700 8,169,140 Maxim Integrated Products, Inc. 19,390 965,622 Novellus Systems, Inc.* 30,270 1,272,854 Texas Instruments, Inc. 122,300 3,593,174 Xilinx, Inc.* 43,400 1,681,316 ------------- $ 21,628,651 ------------- ENTERTAINMENT -- 1.8% Viacom, Inc., "B" 93,043 $ 4,129,248 Walt Disney Co. 65,900 1,537,447 ------------- $ 5,666,695 ------------- FOOD & DRUG STORES -- 1.6% CVS Corp. 90,710 $ 3,276,445 Walgreen Co. 46,300 1,684,394 ------------- $ 4,960,839 ------------- FOOD & NON ALCOHOLIC BEVERAGES -- 1.9% PepsiCo, Inc. 104,220 $ 4,858,736 Sysco Corp. 33,500 1,247,205 ------------- $ 6,105,941 ------------- GAMING & LODGING -- 1.2% Carnival Corp. 31,900 $ 1,267,387 Cendant Corp.* 105,320 2,345,476 ------------- $ 3,612,863 ------------- GENERAL MERCHANDISE -- 3.1% Kohl's Corp.* 33,890 $ 1,523,017 Target Corp. 136,560 5,243,904 Wal-Mart Stores, Inc. 58,190 3,086,979 ------------- $ 9,853,900 ------------- INSURANCE -- 2.1% American International Group, Inc. 98,700 $ 6,541,836 ------------- INTERNET -- 2.3% Ebay, Inc.* 55,800 $ 3,604,122 InterActive Corp.* 106,600 3,616,938 ------------- $ 7,221,060 ------------- MACHINERY & TOOLS -- 0.8% Eaton Corp. 11,500 $ 1,241,770 Illinois Tool Works, Inc. 14,700 1,233,477 ------------- $ 2,475,247 ------------- MEDICAL & HEALTH TECHNOLOGY & SERVICES -- 1.7% Cardinal Health, Inc. 37,600 $ 2,299,616 Caremark Rx, Inc.* 73,300 1,856,689 Tenet Healthcare Corp.* 72,000 1,155,600 ------------- $ 5,311,905 -------------
7
ISSUER SHARES VALUE U.S. STOCKS -- continued MEDICAL EQUIPMENT -- 5.1% AmerisourceBergen Corp. 38,200 $ 2,144,930 Baxter International, Inc. 61,900 1,889,188 C.R. Bard, Inc. 17,400 1,413,750 CTI Molecular Imaging, Inc* 69,500 1,175,245 Cyberonics, Inc.* 14,400 460,944 Edwards Lifesciences Corp.* 15,400 463,232 Guidant Corp. 37,900 2,281,580 Medtronic, Inc. 93,800 4,559,618 Thermo Electron Corp.* 67,500 1,701,000 ------------- $ 16,089,487 ------------- OIL SERVICES -- 1.9% BJ Services Co.* 25,300 $ 908,270 GlobalSantaFe Corp. 70,400 1,748,032 Noble Corp.* 51,300 1,835,514 Smith International, Inc.* 36,700 1,523,784 ------------- $ 6,015,600 ------------- PERSONAL COMPUTERS & PERIPHERALS -- 1.4% Dell, Inc.* 128,720 $ 4,371,331 ------------- PHARMACEUTICALS -- 9.6% Abbott Laboratories, Inc. 67,300 $ 3,136,180 Eli Lilly & Co. 21,400 1,505,062 Johnson & Johnson Co. 177,600 9,174,816 Pfizer, Inc. 270,235 9,547,403 Schering-Plough Corp. 100,100 1,740,739 Wyeth 118,500 5,030,325 ------------- $ 30,134,525 ------------- POLLUTION CONTROL -- 0.1% Waste Management, Inc. 10,600 $ 313,760 ------------- RESTAURANTS -- 0.5% Outback Steakhouse, Inc. 36,300 $ 1,604,823 ------------- SPECIALTY CHEMICALS -- 0.2% Georgia Gulf Corp. 17,100 $ 493,848 ------------- SPECIALTY STORES -- 3.1% Best Buy Co., Inc. 23,700 $ 1,238,088 CarMax, Inc.* 47,500 1,469,175 Home Depot, Inc. 43,660 1,549,494 Staples, Inc.* 54,500 1,487,850 The TJX Cos., Inc. 114,000 2,513,700 Williams-Sonoma, Inc.* 39,600 1,376,892 ------------- $ 9,635,199 ------------- TELECOMMUNICATIONS -- WIRELESS -- 0.8% AT&T Wireless Services, Inc.* 124,300 $ 993,157 Sprint Corp. (PCS Group)* 265,000 1,489,300 ------------- $ 2,482,457 ------------- TELECOMMUNICATIONS -- WIRELINE -- 4.1% ADTRAN, Inc. 18,800 $ 582,800 Andrew Corp.* 107,700 1,239,627 Cisco Systems, Inc.* 430,800 10,464,132 QUALCOMM, Inc. 10,300 555,479 ------------- $ 12,842,038 ------------- TRUCKING -- 1.2% Fedex Corp. 33,200 $ 2,241,000 United Parcel Service, Inc., "B" 19,200 1,431,360 ------------- $ 3,672,360 ------------- Total U.S. Stocks $ 285,556,884 ------------- FOREIGN STOCKS -- 4.9% BERMUDA -- 0.8% Accenture Ltd., "A" (Business Services)* 44,200 $ 1,163,344 Marvell Technology Group Ltd. (Electronics)* 33,800 1,282,034 ------------- $ 2,445,378 ------------- FOREIGN STOCKS -- continued CANADA -- 0.5% Nortel Networks Corp. (Telecommunications -- Wireline)* 372,100 $ 1,573,983 ------------- GERMANY -- 0.2% Bayerische Motoren Werke AG (Automotive) 16,800 $ 777,894 ------------- NETHERLANDS -- 0.3% STMicroelectronics N.V. (Electronics) 34,200 $ 923,742 ------------- SWITZERLAND -- 1.6% Alcon, Inc. (Medical Equipment) 26,200 $ 1,586,148 Novartis AG (Pharmaceuticals) 38,200 1,733,557 Roche Holdings AG (Pharmaceuticals) 17,000 1,714,014 ------------- $ 5,033,719 ------------- TAIWAN -- 0.5% Taiwan Semiconductor Manufacturing Co. Ltd., ADR (Electronics) 157,600 $ 1,613,824 ------------- UNITED KINGDOM -- 1.0% Amdocs Ltd. (Computer Software)* 70,600 $ 1,587,088 AstraZeneca Group PLC (Pharmaceuticals) 33,200 1,588,267 ------------- $ 3,175,355 ------------- Total Foreign Stocks $ 15,543,895 ------------- Total Stocks (Identified Cost, $272,570,505) $ 301,100,779 ------------- REPURCHASE AGREEMENT -- 3.9% PRINCIPAL AMOUNT (000 OMITTED) Merrill Lynch, dated 12/31/03, due 01/02/04, total to be received $12,240,646 (secured by various U.S. Treasury and Federal Agency obligations in a jointly traded account), at cost $ 12,240 $ 12,240,000 ------------- Total Investments (Identified Cost, $284,810,505) $ 313,340,779 ------------- OTHER ASSETS, LESS LIABILITIES -- 0.3% 984,975 ------------- Net Assets -- 100.0% $ 314,325,754 =============
See portfolio footnotes and notes to financial statements. 8 PORTFOLIO OF INVESTMENTS -- December 31, 2003 GLOBAL GOVERNMENTS VARIABLE ACCOUNT BONDS -- 86.4%
PRINCIPAL AMOUNT ISSUER (000 OMITTED) VALUE FOREIGN BONDS -- 68.0% AUSTRALIA -- 0.5% Commomwealth of Australia, 6.5s, 2013 AUD 85 $ 68,049 ------------- AUSTRIA -- 5.0% Republic of Austria, 5.5s, 2007 EUR 297 $ 402,769 Republic of Austria, 5s, 2012 62 82,467 Republic of Austria, 4.65s, 2018 134 169,471 ------------- $ 654,707 ------------- BELGIUM -- 1.6% Kingdom of Belgium, 3.75s, 2009 EUR 142 $ 179,534 Kingdom of Belgium, 5s, 2012 21 27,892 ------------- $ 207,426 ------------- CANADA -- 2.9% Government of Canada, 5.5s, 2009 CAD 209 $ 172,571 Government of Canada, 5.25s, 2012 170 137,636 Government of Canada, 8s, 2023 66 68,820 ------------- $ 379,027 ------------- DENMARK -- 2.7% Kingdom of Denmark, 7s, 2007 DKK 614 $ 117,225 Kingdom of Denmark, 6s, 2009 1,110 207,955 Kingdom of Denmark, 5s, 2013 203 35,773 ------------- $ 360,953 ------------- FINLAND -- 5.0% Republic of Finland, 2.75s, 2006 EUR 64 $ 80,470 Republic of Finland, 3s, 2008 366 451,140 Republic of Finland, 5.375s, 2013 96 131,022 ------------- $ 662,632 ------------- FRANCE -- 5.2% Republic of France, 4.75s, 2007 EUR 95 $ 125,998 Republic of France, 4s, 2009 383 488,854 Republic of France, 6s, 2025 52 75,236 ------------- $ 690,088 ------------- GERMANY -- 12.7% Federal Republic of Germany, 4.75s, 2008 EUR 259 $ 344,654 Federal Republic of Germany, 4.5s, 2009 644 843,528 Federal Republic of Germany, 5.25s, 2010 160 216,818 Kreditanstalt Fur Wiederaufbau, 3.25s, 2008 220 274,976 ------------- $ 1,679,976 ------------- GREECE -- 1.1% Republc of Greece, 3.5s, 2008 EUR 114 $ 143,587 ------------- IRELAND -- 4.9% Republic of Ireland, 4.25s, 2007 EUR 178 $ 231,893 Republic of Ireland, 3.25s, 2009 126 155,832 Republic of Ireland, 5s, 2013 139 184,740 Republic of Ireland, 4.6s, 2016 54 68,630 ------------- $ 641,095 ------------- ITALY -- 4.6% Republic of Italy, 4.75s, 2013 EUR 238 $ 309,663 Republic of Italy, 5.25s, 2017 220 293,110 ------------- $ 602,773 ------------- MEXICO -- 0.6% Pemex Project Funding Master Trust (Oil Services), 8.625s, 2022 $ 72 $ 79,740 ------------- NETHERLANDS -- 5.6% Kingdom of Netherlands, 5.75s, 2007 EUR 103 $ 139,932 Kingdom of Netherlands, 3.75s, 2009 283 357,516 Kingdom of Netherlands, 5s, 2012 185 246,440 ------------- $ 743,888 ------------- NEW ZEALAND -- 1.6% Government of New Zealand, 7s, 2009 NZD 95 $ 65,573 Government of New Zealand, 6.5s, 2013 214 145,690 ------------- $ 211,263 ------------- PORTUGAL -- 1.3% Republic of Portugal, 5.45s, 2013 EUR 127 $ 173,585 ------------- QATAR -- 0.4% State of Qatar, 9.75s, 2030 $ 37 $ 52,170 ------------- SOUTH AFRICA -- 0.4% Republic of South Africa, 8.5s, 2017 $ 43 $ 51,278 ------------- SPAIN -- 7.8% Kingdom of Spain, 6s, 2008 EUR 472 $ 654,618 Kingdom of Spain, 5.35s, 2011 227 309,344 Kingdom of Spain, 5.5s, 2017 50 68,746 ------------- $ 1,032,708 ------------- SWEDEN -- 2.7% Kingdom of Sweden, 5.5s, 2012 SEK 610 $ 89,845 Spintab AB (Banks & Credit Companies), 5s, 2008 1,900 270,772 ------------- $ 360,617 ------------- UNITED KINGDOM -- 1.4% United Kingdom Treasury, 5s, 2012 GBP 103 $ 186,765 ------------- Total Foreign Bonds $ 8,982,327 ------------- U.S. BONDS -- 18.4% ASSET BACKED & SECURITIZED -- 3.4% Commercial Mortgage Asset Trust, 0s, 2032 ## $ 1,661 $ 94,500 Deutsche Mortgage and Asset Receiving Corp., 6.538s, 2031 59 64,615 First Union Lehman Brothers Bank, 6.56s, 2035 29 32,862 First Union National Bank Commercial, 0s, 2043 ## 1,783 97,548 First Union National Bank Commercial Mortgage Trust, 7.39s, 2031 60 69,932 GMAC Commercial Mortgage Security, Inc., 6.42s, 2035 29 32,774 LB-UBS Commercial Mortgage Trust, 7.95s, 2010 45 54,005 ------------- $ 446,236 ------------- MUNICIPALS -- 1.8% New Jersey Turnpike Authority Turnpike Rev., Series A, 6s, 2013 $ 145 $ 172,808 University of California Rev., Series Q, 5s, 2033 65 66,668 ------------- $ 239,476 ------------- U.S. GOVERNMENT AGENCIES -- 5.2% Federal National Mortgage Assn., 1.75s, 2008 $ 70,000 $ 686,009 ------------- U.S. TREASURY OBLIGATIONS -- 8.0% U.S. Treasury Bonds, 8s, 2021 $ 56 $ 75,631 U.S. Treasury Notes, 2s, 2004 217 218,551 U.S. Treasury Notes, 3.5s, 2006 122 126,103 U.S. Treasury Notes, 6.125s, 2007 ### 68 76,104 U.S. Treasury Notes, 3.125s, 2008 32 31,981 U.S. Treasury Notes, 4.25s, 2010 166 193,038 U.S. Treasury Notes, 1.875s, 2013 65 65,005 U.S. Treasury Notes, 4.25s, 2013 265 265,331 ------------- $ 1,051,744 ------------- TOTAL U.S. BONDS $ 2,423,465 ------------- TOTAL BONDS (IDENTIFIED COST, $10,087,491) $ 11,405,792 -------------
9
PRINCIPAL AMOUNT ISSUER (000 OMITTED) VALUE SHORT-TERM OBLIGATIONS -- 7.3% Federal National Mortgage Assn., Dsc Note, due 1/02/04 at Amortized Cost $ 964 $ 963,979 REPURCHASE AGREEMENT -- 5.7% Morgan Stanley, dated 12/31/03, due 1/2/04, total to be received $153,008 (secured by various U.S. Treasury and Federal Agency obligations in a jointly traded account) $ 153 $ 153,000 Merrill Lynch, dated 12/31/03, due 1/2/04, total to be received $592,031 (secured by various U.S. Treasury and Federal Agency obligations in a jointly traded account) 592 592,000 ------------- TOTAL REPURCHASE AGREEMENT, AT COST $ 745,000 ------------- CALL OPTIONS PURCHASED PRINCIPAL AMOUNT OF CONTRACTS ISSUER/EXPIRATION MONTH/STRIKE PRICE (000 OMITTED) Japenese Yen/February/103 $ 49,470 $ 395 Japenese Yen/February/103 49,470 396 ------------- TOTAL CALL OPTIONS PURCHASED (PREMIUMS PAID, $1,981) $ 791 ------------- TOTAL INVESTMENTS (IDENTIFIED COST, $11,798,451) $ 13,115,562 ------------- OTHER ASSETS, LESS LIABILITIES -- 0.6% 81,676 ------------- NET ASSETS -- 100.0% $ 13,197,238 =============
See portfolio footnotes and notes to financial statements. PORTFOLIO OF INVESTMENTS -- December 31, 2003 GOVERNMENT SECURITIES VARIABLE ACCOUNT BONDS -- 95.8%
PRINCIPAL AMOUNT ISSUER (000 OMITTED) VALUE MORTGAGE BACKED -- 45.1% Federal Home Loan Mortgage Corp., 3.108s, 2035 $ 195 $ 194,025 Federal Home Loan Mortgage Corp., 5.5s, 2033 1,751 1,773,293 Federal Home Loan Mortgage Corp., 6.5s, 2032 2,484 2,601,649 Federal Home Loan Mortgage Corp., 7.5s, 2027-2028 301 323,341 Federal National Mortgage Assn., 5s, 2018 1,469 1,500,455 Federal National Mortgage Assn., 5.5s, 2017-2033 9,818 9,985,867 Federal National Mortgage Assn., 5.976s, 2020 7 7,040 Federal National Mortgage Assn., 6s, 2016-2033 12,979 13,501,333 Federal National Mortgage Assn., 6.5s, 2005-2032 8,998 9,418,715 Federal National Mortgage Assn., 7.5s, 2022-2032 744 796,077 Federal National Mortgage Assn., 8.5s, 2007 14 14,876 Federal National Mortgage Assn., 10s, 2018 511 570,784 Financing Corp., 9.8s, 2018 1,290 1,895,615 Financing Corp., 10.35s, 2018 1,150 1,761,332 Government National Mortgage Assn., 6.5s, 2028 1,210 1,276,673 Government National Mortgage Assn., 7.5s, 2032 226 240,913 Government National Mortgage Assn., 11s, 2010-2019 75 84,730 Government National Mortgage Assn., 12.5s, 2015 19 22,111 Government National Mortgage Assn., 14s, 2014 2 1,789 Resolution Funding Corp., 8.875s, 2020 1,700 2,370,087 Small Business Administration, 8.4s, 2007 49 51,723 Small Business Administration, 8.7s, 2009 128 137,048 Small Business Administration, 10.05s, 2009 28 30,556 Small Business Administration, 6.34s, 2021 857 930,341 Small Business Administration, 6.44s, 2021 869 947,074 Small Business Administration, 6.625s, 2021 901 989,992 Small Business Administration, 6.07s, 2022 661 707,955 Small Business Administration, 4.89s, 2023 745 740,884 Small Business Administration, 4.98s, 2023 288 288,374 ------------- $ 53,164,652 ------------- U.S. GOVERNMENT AGENCIES-- 35.6% Aid to Israel, 6.6s, 2008 $ 985 $ 1,062,804 Aid to Peru, 9.98s, 2008 910 1,040,834 Empresa Energetica Cornito Ltd., 6.07s, 2010 2,838 3,139,083 Federal Home Loan Bank, 2.25s, 2006 4,090 4,090,920 Federal Home Loan Bank, 2.875s, 2006 2,525 2,551,821 Federal Home Loan Bank, 4.5s, 2013 910 896,529 Federal Home Loan Mortgage Corp., 2.875s, 2006 2,342 2,358,790 Federal Home Loan Mortgage Corp., 2.75s, 2008 390 383,764 Federal Home Loan Mortgage Corp., 3.625s, 2008 2,173 2,187,379 Federal Home Loan Mortgage Corp., 7s, 2010 4,296 5,013,058
10
PRINCIPAL AMOUNT ISSUER (000 OMITTED) VALUE U.S. GOVERNMENT AGENCIES -- continued Federal National Mortgage Assn., 3.25s, 2008 $ 610 $ 605,147 Federal National Mortgage Assn., 6s, 2008 648 718,306 Federal National Mortgage Assn., 7.25s, 2010 5,684 6,701,641 Federal National Mortgage Assn., 5.5s, 2011 1,504 1,621,927 Federal National Mortgage Assn., 5.125s, 2014 1,600 1,605,565 Student Loan Marketing Assn., 5.25s, 2006 3,520 3,753,204 Tennessee Valley Authority, 0s, to 2012, 8.25s to 2042 2,250 1,524,758 U.S. Department of Housing & Urban Development, 6.36s, 2016 500 552,766 U.S. Department of Housing & Urban Development, 6.59s, 2016 2,045 2,225,443 ------------- TOTAL U.S. GOVERNMENT AGENCIES $ 42,033,739 ------------- U.S. TREASURY OBLIGATIONS -- 15.1% U.S. Treasury Bonds, 12.375s, 2004 $ 755 $ 786,320 U.S. Treasury Bonds, 10.375s, 2012 211 269,198 U.S. Treasury Bonds, 12s, 2013 19 26,251 U.S. Treasury Bonds, 0s, 2017 3,250 1,659,516 U.S. Treasury Bonds, 0s, 2023 1,877 661,377 U.S. Treasury Bonds, 6.875s, 2025 1,470 1,798,280 U.S. Treasury Bonds, 5.25s, 2028 346 348,501 U.S. Treasury Bonds, 6.125s, 2029 375 424,951 U.S. Treasury Bonds, 6.25s, 2030 1,251 1,443,634 U.S. Treasury Bonds, 5.375s, 2031 353 368,127 U.S. Treasury Notes, 1.625s, 2005 3,730 3,744,424 U.S. Treasury Notes, 3.25s, 2007 1,176 1,199,566 U.S. Treasury Notes, 3.375s, 2007 2,961 3,207,934 U.S. Treasury Notes, 5s, 2011 652 700,212 U.S. Treasury Notes, 1.875s, 2013 1,207 1,198,083 ------------- $ 17,836,374 ------------- TOTAL BONDS (IDENTIFIED COST, $109,030,848) $ 113,034,765 ------------- REPURCHASE AGREEMENT -- 3.3% Goldman Sachs, dated 12/31/03 due 01/02/04, total to be received $3,865,213 (secured by various U.S. Treasury and Federal Agency obligations in a jointly traded account), at Cost $ 3,865 $ 3,865,000 ------------- TOTAL INVESTMENTS (IDENTIFIED COST, $112,895,848) $ 116,899,765 ------------- OTHER ASSETS, LESS LIABILITIES -- 0.9% 1,105,265 ------------- NET ASSETS -- 100.0% $ 118,005,030 =============
See portfolio footnotes and notes to financial statements. PORTFOLIO OF INVESTMENTS -- December 31, 2003 HIGH YIELD VARIABLE ACCOUNT BONDS -- 92.8%
PRINCIPAL AMOUNT ISSUER (000 OMITTED) VALUE U.S. BONDS -- 80.8% ADVERTISING & BROADCASTING -- 6.0% Allbritton Communications Co., 7.75s, 2012 $ 465 $ 482,438 Echostar Broadband, 9.375s, 2009 2,250 2,365,312 Emmis Communications Corp. 0s to 2006, 12.5s to 2011 458 424,223 Granite Broadcasting Corp., 10.375s, 2005 155 155,194 Granite Broadcasting Corp., 9.75s, 2010 ## 510 508,725 Lamar Media Corp., 7.25s, 2013 255 274,125 Muzak LLC, 10s, 2009 160 170,400 Paxson Communications Corp. 0s to 2006, 12.25s to 2009 600 526,500 Primedia, Inc., 8.875s, 2011 340 357,850 Radio One, Inc., 8.875s, 2011 250 275,625 Spanish Broadcasting Systems, Inc., 9.625s, 2009 475 507,062 ------------- $ 6,047,454 ------------- AEROSPACE -- 1.8% Alliant Techsystems, Inc., 8.5s, 2011 $ 360 $ 396,000 BE Aerospace, Inc., 8.5s, 2010 ## 45 48,263 BE Aerospace, Inc., 8.875s, 2011 150 140,625 Hexcel Corp., 9.75s, 2009 500 523,750 K&F Industries, Inc., 9.25s, 2007 259 267,094 K&F Industries, Inc., 9.625s, 2010 145 162,581 Transdigm, Inc., 8.375s, 2011 230 244,662 ------------- $ 1,782,975 ------------- AIRLINES -- 0.5% Continental Airlines, Inc., 6.748s, 2017 $ 76 $ 62,792 Continental Airlines, Inc., 6.9s, 2017 81 67,688 Continental Airlines, Inc., 6.795s, 2020 184 155,437 Continental Airlines, Inc., 7.566s, 2020 251 211,924 Delta Air Lines, Inc., 7.92s, 2012 70 63,380 ------------- $ 561,221 ------------- AIRLINES PASS-THROUGH Airplane Pass-Through Trust, 10.875s, 2019 $ 741 $ 14,816 ------------- APPAREL MANUFACTURERS -- 0.1% Westpoint Stevens, Inc., 7.875s, 2005** $ 730 $ 94,900 Westpoint Stevens, Inc., 7.875s, 2008** 140 18,200 ------------- $ 113,100 ------------- AUTOMOTIVE -- 4.0% Advanced Accesory Systems LLC, 10.75s, 2011 $ 85 $ 93,606 Arvinmeritor, Inc., 8.75s, 2012 315 360,675 Collins & Aikman Products Co., 10.75s, 2011 255 250,538 Cummins, Inc., 9.5s, 2010 ## 155 178,250 Dana Corp., 6.5s, 2009 100 106,125 Dana Corp., 10.125s, 2010 110 128,150 Dana Corp., 9s, 2011 95 114,475 Dura Operating Corp., 9s, 2009 235 235,000 Eagle-Picher, Inc., 9.75s, 2013 ## 155 167,400 Ford Motor Credit Co., 7s, 2013 495 522,066 Metaldyne Corp., 11s, 2012 360 331,200 Metaldyne Corp., 10s, 2013 ## 145 146,450 Tenneco Automotive, Inc., 11.625s, 2009 260 280,800 Tenneco Automative, Inc., 10.25s, 2013 470 534,625 TRW Automotive Acquisition, Inc., 9.375s, 2013 240 274,200 TRW Automotive Acquisition, Inc., 11s, 2013 275 323,812 Venture Holdings, 9.5s, 2005** 250 6,250 ------------- $ 4,053,622 -------------
11
PRINCIPAL AMOUNT ISSUER (000 OMITTED) VALUE U.S. BONDS -- continued BASIC INDUSTRY -- 0.4% Foamex LP/ Capital Corp., 10.75s, 2009 $ 200 $ 190,500 Trimas Corp., 9.875s, 2012 195 203,288 ------------- $ 393,788 ------------- BROADCAST & CABLE TV -- 3.7% CCO Holdings LLC, 8.75s, 2013 ## $ 150 $ 152,625 Charter Communications Holdings, 8.625s, 2009 510 444,975 CSC Holdings, Inc., 8.125s, 2009 810 870,750 Directv Holdings LLC, 8.375s, 2013 405 469,800 Insight Midwest Corp., 9.75s, 2009 415 438,863 Mediacom Broadband LLC, 11s, 2013 200 224,500 Mediacom LLC/Capital Corp., 9.5s, 2013 515 545,900 XM Satellite Radio, Inc., 0s, 2009 620 554,192 XM Satellite Radio, Inc., 12s, 2010 50 56,500 ------------- $ 3,758,105 ------------- BUILDING -- 1.9% Atrium Cos., Inc., 10.5s, 2009 $ 300 $ 321,000 Formica Corp., 10.875s, 2009** 310 54,250 Interface, Inc., 10.375s, 2010 299 316,192 Jacuzzi Brands, Inc., 9.625s, 2010 ## 135 148,500 MMI Products, Inc., 11.25s, 2007 110 89,650 Nortek, Inc., 9.25s, 2007 670 688,425 Nortek, Inc., 9.875s, 2011 30 33,075 Williams Scotsman, Inc., 9.875s, 2007 250 253,125 Williams Scotsman, Inc., 10s, 2008 50 54,813 ------------- $ 1,959,030 ------------- BUSINESS SERVICES -- 1.3% Iron Mountain, Inc., 8.625s, 2013 $ 280 $ 302,400 Lucent Technologies, Inc., 5.5s, 2008 500 465,000 Xerox Corp., 7.625s, 2013 530 572,400 ------------- $ 1,339,800 ------------- CHEMICALS -- 4.3% Compass Minerals Group, Inc., 10s, 2011 $ 305 $ 341,600 Equistar Chemicals LP, 10.625s, 2011 400 439,000 Equistar Chemicals LP, 10.625s, 2011 ## 125 137,179 Huntsman ICI Holdings, 0s, 2009 100 48,250 Huntsman ICI Holdings, 9.875s, 2009 90 98,550 Huntsman ICI Holdings, 10.125s, 2009 750 772,500 IMC Global, Inc., 10.875s, 2013 ## 310 339,450 Johnson Diversey, Inc., 9.625s, 2012 EUR 460 524,809 Johnson Diversey, Inc., 10.67s, 2013 ## $ 200 153,000 Koppers, Inc., 9.875s, 2013 ## 60 66,150 Lyondell Chemical Co., 9.875s, 2007 250 263,750 Lyondell Chemical Co., 11.125s, 2012 35 38,850 Nalco Co., 7.75s, 2011 ## 110 117,700 Nalco Co., 8.875s, 2013 ## 205 217,300 Resolution Performance, 8s, 2009 ## 100 103,500 Rockwood Specialties Group, Inc., 10.625s, 2011 ## 245 273,175 Sovereign Specialty Chemicals, 11.875s, 2010 425 425,000 ------------- $ 4,359,763 ------------- CONGLOMERATES -- 0.5% Rexnord Corp., 10.125s, 2012 $ 170 $ 186,150 SPX Corp., 7.5s, 2013 315 342,562 ------------- $ 528,712 ------------- CONSUMER GOODS & SERVICES -- 1.5% American Safety Razor Co., 9.875s, 2005 $ 200 $ 200,000 Kindercare Learning Centers, Inc., 9.5s, 2009 380 385,700 Remington Arms, Inc., 10.5s, 2011 355 378,075 Revlon Consumer Products Corp., 12s, 2005 $ 120 $ 120,000 Samsonite Corp., 10.75s, 2008 235 243,225 Tempur Pedic, Inc., 10.25s, 2010 ## 146 162,790 ------------- $ 1,489,790 ------------- CONTAINERS -- 0.8% Graham Packaging Co., 8.75s, 2008 ## $ 285 $ 291,412 Huntsman Packaging Corp., 13s, 2010 370 338,550 Plastipak Holdings, Inc., 10.75s, 2011 175 194,688 ------------- $ 824,650 ------------- CORPORATE ASSET-BACKED -- 0.9% Morgan Stanley Capital, Inc., 7.738s, 2039 $ 430 $ 414,674 Mortgage Capital Funding, Inc., 7.214s, 2007 500 508,294 ------------- $ 922,968 ------------- ENERGY -- INDEPENDENT -- 2.0% Chesapeake Energy Corp., 6.875s, 2016 ## $ 240 $ 247,200 Encore Acquisition Co., 8.375s, 2012 380 411,350 Magnum Hunter Resources, Inc., 9.6s, 2012 225 255,375 Pioneer Natural Resources Co., 9.625s, 2010 250 311,105 Pioneer Natural Resources Co., 7.5s, 2012 10 11,493 Stone Energy Corp., 8.25s, 2011 165 179,438 Vintage Petroleum, Inc., 8.25s, 2012 260 282,750 Westport Resources Corp., 8.25s, 2011 340 374,000 ------------- $ 2,072,711 ------------- ENTERTAINMENT -- 2.1% AMC Entertainment, Inc., 9.5s, 2011 $ 500 $ 525,000 Premier Parks, Inc., 9.75s, 2007 43 45,096 Regal Cinemas Corp., 9.375s, 2012 470 531,100 Six Flags, Inc., 9.75s, 2013 380 399,950 Six Flags, Inc., 9.625s, 2014 ## 165 172,838 Vail Resorts, Inc., 8.75s, 2009 405 427,275 ------------- $ 2,101,259 ------------- FOOD & NON ALCOHOLIC BEVERAGES -- 0.7% Merisant Co., 9.5s, 2013 ## $ 335 $ 356,775 Michael Foods, Inc., 8s, 2013 ## 225 234,562 Pinnacle Foods Holding Corp., 8.25s, 2013 ## 50 51,000 Seminis Vegetable Seeds, Inc., 10.25s, 2013 ## 50 53,750 ------------- $ 696,087 ------------- FOREST & PAPER PRODUCTS -- 2.9% Boise Cascade Corp., 7s, 2013 $ 260 $ 270,281 Buckeye Technologies, Inc., 9.25s, 2008 300 303,750 Buckeye Technologies, Inc., 8s, 2010 75 73,500 Buckeye Technologies, Inc., 8.5s, 2013 240 256,800 Fibermark, Inc., 10.75s, 2011 25 15,500 Georgia Pacific Corp., 9.375s, 2013 495 569,250 Graphic Packaging International, Inc., 8.5s, 2011 ## 70 76,650 Graphic Packaging International, Inc., 9.5s, 2013 ## 350 386,750 Greif Brothers Corp., 8.875s, 2012 305 335,500 Jefferson Smurfit Corp., 8.25s, 2012 345 374,325 Speciality Paperboard, Inc., 9.375s, 2006 480 297,600 ------------- $ 2,959,906 -------------
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PRINCIPAL AMOUNT ISSUER (000 OMITTED) VALUE U.S. BONDS -- continued GAMING & LODGING -- 7.6% Aztar Corp., 8.875s, 2007 $ 290 $ 302,687 Aztar Corp., 9s, 2011 50 54,875 CBRE Escrow, Inc., 9.75s, 2010 ## 55 61,050 Coast Hotels & Casinos, Inc., 9.5s, 2009 295 311,963 Corrections Corp. of America, 9.875s, 2009 205 228,831 Corrections Corp. of America, 7.5s, 2011 150 157,500 Forest City Enterprises, Inc., 7.625s, 2015 45 47,756 Hilton Hotels Corp., 7.625s, 2012 2,680 3,011,650 HMH Properties, Inc., 8.45s, 2008 1,134 1,182,195 Hollywood Park, Inc., 9.25s, 2007 315 326,025 Host Marriott LP, 9.5s, 2007 250 278,125 Mandalay Resort Group, 9.375s, 2010 315 366,975 MGM Mirage, Inc., 8.5s, 2010 390 447,525 Pinnacle Entertainment, Inc., 8.75s, 2013 170 172,975 Starwood Hotels & Resorts Corp., 7.875s, 2012 80 90,000 Venetian Casino Resort LLC, 11s, 2010 450 522,000 Wackenhut Corrections Corp., 8.25s, 2013 ## 140 148,400 ------------- $ 7,710,532 ------------- HOME CONSTRUCTION -- 0.7% D. R. Horton, Inc., 8s, 2009 $ 225 $ 254,250 Technical Olympic USA, Inc., 9s, 2010 75 80,625 WCI Communities, Inc., 7.875s, 2013 ## 400 422,000 ------------- $ 756,875 ------------- INDUSTRIAL -- 1.0% Blount, Inc., 7s, 2005 $ 385 $ 386,925 Blount, Inc., 13s, 2009 215 231,662 Motors & Gears, Inc., 10.75s, 2006 200 162,000 MSW Energy Holdings LLC, 7.375s, 2010 ## 195 203,775 ------------- $ 984,362 ------------- INSURANCE -- PROPERTY & CASUALTY -- 0.5% Willis Corroon Corp., 9s, 2009 $ 500 $ 525,000 ------------- MACHINERY & TOOLS -- 3.3% Agco Corp., 9.5s, 2008 $ 605 $ 660,962 Amsted Industries, Inc., 10.25s, 2011 ## 245 270,725 Case New Holland, Inc., 9.25s, 2011 ## 340 380,800 Columbus McKinnon Corp., 8.5s, 2008 175 163,625 Columbus McKinnon Corp., 10s, 2010 110 117,150 JLG Industries Inc., 8.25s, 2008 115 124,919 Joy Global, Inc., 8.75s, 2012 220 245,300 Manitowoc Co., Inc., 10.5s, 2012 85 96,794 Terex Corp., 10.375s, 2011 550 616,000 United Rentals, Inc., 10.75s, 2008 580 652,500 ------------- $ 3,328,775 ------------- MEDICAL & HEALTH TECHNOLOGY & SERVICES -- 3.2% Alliance Imaging, Inc., 10.375s, 2011 $ 270 $ 286,200 Beverly Enterprises, Inc., 9.625s, 2009 140 154,700 Fisher Scientific International, Inc., 8.125s, 2012 174 186,615 Genesis Healthcare Corp., 8s, 2013 ## 45 46,913 HCA Healthcare Co., 7.875s, 2011 1,100 1,254,562 Mariner Health Care, Inc., 8.25s, 2013 ## 245 248,062 NDC Health Corp., 10.5s, 2012 110 123,750 Prime Medical Services, Inc., 8.75s, 2008 135 130,275 Tenet Healthcare Corp., 6.5s, 2012 305 292,419 Triad Hospitals, Inc., 8.75s, 2009 $ 205 $ 222,169 Triad Hospitals, Inc., 7s, 2013 ## 330 332,475 ------------- $ 3,278,140 ------------- MEDICAL EQUIPMENT -- 0.3% Alpharma, Inc., 8.625s, 2011 ## $ 290 $ 293,625 ------------- METALS & MINING -- 1.6% Arch Western Finance LLC, 6.75s, 2013 ## $ 230 $ 236,325 Doe Run Resources Corp., 8.5s, 2008 226 83,641 Kaiser Aluminum & Chemical Corp., 9.875s, 2049 360 324,000 P&L Coal Holdings Corp., 6.875s, 2013 505 532,775 Steel Dynamics, Inc., 9.5s, 2009 ## 260 288,600 U.S. Steel Corp., 9.75s, 2010 140 157,500 ------------- $ 1,622,841 ------------- NATURAL GAS -- DISTRIBUTION -- 0.3% Amerigas Partners LLP, 8.875s, 2011 $ 275 $ 302,500 ------------- NATURAL GAS -- PIPELINE -- 3.0% ANR Pipeline Co., 8.875s, 2010 $ 75 $ 84,375 ANR Pipeline Co., 9.625s, 2021 420 499,275 El Paso Energy Corp., 7.75s, 2013 ## 300 295,500 El Paso Natural Gas Co., 7.625s, 2010 515 529,162 Gulfterra Energy Partners LP, 8.5s, 2010 204 231,540 Northwest Pipeline Corp., 8.125s, 2010 65 72,150 Plains All American Pipeline Corp., 7.75s, 2012 340 392,275 Southern Natural Gas Co., 8.875s, 2010 325 365,625 Williams Companies, Inc., 8.625s, 2010 110 124,575 Williams Companies, Inc., 7.125s, 2011 450 475,875 ------------- $ 3,070,352 ------------- OIL SERVICES -- 1.7% Dresser, Inc., 9.375s, 2011 $ 310 $ 337,125 Gulfmark Offshore, Inc., 8.75s, 2008 625 646,875 Hanover Compressor Co., 0s, 2007 45 33,075 Hanover Compressor Co., 8.625s, 2010 60 63,037 Hanover Equipment Trust, 8.75s, 2011 380 402,800 Parker Drilling Co., 9.625s, 2013 ## 70 72,625 Premcor Refining Group, Inc., 7.75s, 2012 ## 125 128,750 ------------- $ 1,684,287 ------------- OILS -- 0.4% Citgo Petroleum Corp., 11.375s, 2011 $ 220 $ 255,200 Tesoro Petroleum Corp., 8s, 2008 105 111,563 ------------- $ 366,763 ------------- POLLUTION CONTROL-- 1.0% Allied Waste North America, Inc., 7.875s, 2013 $ 910 $ 985,075 ------------- PRINTING & PUBLISHING -- 2.5% Dex Media East LLC, 9.875s, 2009 $ 220 $ 251,900 Dex Media West LLC, 8.5s, 2010 ## 30 33,412 Dex Media West LLC, 9.875s, 2013 ## 330 383,625 Dex Media, Inc., 8s, 2013 ## 420 441,000 Hollinger International Publishing, Inc., 9s, 2010 205 217,812 Hollinger International Publishing, Inc., 11.875s, 2011 ## 160 173,800 Mail-Well Corp., 9.625s, 2012 185 205,350 Medianews Group, Inc., 6.875s, 2013 ## 305 310,338 Moore North America Finance, Inc., 7.875s, 2011 ## 200 226,500
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PRINCIPAL AMOUNT ISSUER (000 OMITTED) VALUE U.S. BONDS -- continued PRINTING & PUBLISHING -- continued R.H. Donnelley Finance Corp, 8.875s, 2010 $ 95 $ 106,875 R.H. Donnelley Finance Corp., 10.875s, 2012 160 189,800 ------------- $ 2,540,412 ------------- RAILROAD & SHIPPING -- 0.4% Kansas City Southern Railway Co., 7.5s, 2009 $ 360 $ 369,000 ------------- RETAILERS -- 3.5% Cole National Group, Inc., 8.875s, 2012 $ 675 $ 722,250 Couche-Tard United States LP, 7.5s, 2013 ## 70 73,850 Dollar General Corp., 8.625s, 2010 360 404,550 Finlay Enterprises, Inc., 9s, 2008 250 255,937 Finlay Fine Jewelry Corp., 8.375s, 2008 375 388,125 J.Crew Operating Corp., 10.375s, 2007 485 495,306 Oxford Industries, Inc., 8.875s, 2011 ## 185 202,344 PCA LLC, 11.875s, 2009 360 394,200 Rite Aid Corp, 12.5s, 2006 260 301,600 Rite Aid Corp., 9.5s, 2011 25 28,188 Rite Aid Corp., 9.25s, 2013 295 323,762 ------------- $ 3,590,112 ------------- STEEL -- 0.6% Commonwealth Aluminum Corp., 10.75s, 2006 $ 330 $ 336,600 Jorgensen (Earle M. Co.), 9.75s, 2012 275 305,250 WCI Steel, Inc., 10s, 2004 10 3,250 ------------- $ 645,100 ------------- SUPERMARKETS -- 0.7% Roundys, Inc., 8.875s, 2012 $ 670 $ 715,225 ------------- TELECOMMUNICATIONS -- WIRELINE -- 1.6% Qwest Capital Funding, Inc., 7.25s, 2011 $ 400 $ 394,000 Qwest Services Corp., 9.125s, 2012 ## 450 516,375 Time Warner Telecom, Inc., 10.125s, 2011 200 213,000 Worldcom, Inc., 7.5s, 2011 1,450 485,750 ------------- $ 1,609,125 ------------- UTILITIES -- ELECTRIC POWER -- 5.2% AES Corp., 8.875s, 2011 $ 500 $ 545,000 AES Corp., 8.75s, 2013 ## 300 335,250 AES Corp., 9s, 2015 ## 300 339,000 Allegheny Energy Supply Co., 8.75s, 2012 ## 300 282,750 Calpine Corp., 8.5s, 2011 300 237,375 Calpine Corp., 8.75s, 2013 ## 570 551,475 Centerpoint Energy Resources Corp., 7.875s, 2013 ## 439 496,991 CMS Energy Corp., 8.5s, 2011 550 594,000 Dynegy Holdings, Inc., 9.875s, 2010 ## 155 174,375 Dynegy Holdings, Inc., 6.875s, 2011 550 506,687 Illinois Power Co., 11.5s, 2010 180 216,000 NRG Energy, Inc., 8s, 2013 ## 145 152,250 PG&E Corp., 6.875s, 2008 ## 70 75,775 Reliant Resources, Inc., 9.25s, 2010 ## 230 243,800 Reliant Resources, Inc., 9.5s, 2013 ## 210 224,700 Teco Energy, Inc., 10.5s, 2007 165 192,638 Teco Energy, Inc., 7.5s, 2010 60 64,200 ------------- $ 5,232,266 ------------- UTILITIES -- TELEPHONE -- 0.3% Cincinnati Bell, Inc., 7.25s, 2013 ## $ 210 $ 220,500 Cincinnati Bell, Inc., 8.375s, 2014 ## 115 123,625 ------------- $ 344,125 ------------- WIRELESS COMMUNICATIONS -- 6.0% Alamosa Delaware, Inc., 0s to 2005, 12s to 2009 $ 125 $ 112,500 Alamosa Delaware, Inc., 11s, 2010 175 189,875 American Tower Corp., 9.375s, 2009 200 213,000 American Towers, Inc., 7.25s, 2011 ## 130 132,275 Centennial Cellular Operating Co., 10.75s, 2008 315 332,325 Crown Castle International Corp., 7.5s, 2013 ## 315 316,575 Dobson Communications Corp., 8.875s, 2013 ## 420 425,250 Nextel Communications, Inc., 7.375s, 2015 2,590 2,784,250 Rural Cellular Corp., 9.75s, 2010 405 395,887 Rural Cellular Corp., 9.875s, 2010 205 218,325 Triton PSC, Inc., 8.75s, 2011 265 261,025 Triton PSC, Inc., 8.5s, 2013 200 215,000 Western Wireless Corp., 9.25s, 2013 505 532,775 ------------- $ 6,129,062 ------------- TOTAL U.S. BONDS $ 82,063,311 ------------- FOREIGN BONDS -- 12.0% AUSTRALIA -- 0.7% Burns Phillip Capital Ltd., 9.75s, 2012 (Food & Non Alcoholic Beverages) ## $ 655 $ 700,850 ------------- BELGIUM -- 0.2% Telenet Communications NV, 9s, 2013(Broadcast & Cable TV) ## EUR 200 $ 259,550 ------------- CANADA -- 4.5% Abitibi Consolidated, Inc., 8.55s, 2010 (Forest & Paper Products) $ 2,700 $ 3,006,720 Acetex Corp., 10.875s, 2009(Chemicals) 345 382,950 Bombardier Recreational Products, 8.375s, 2013(Industrial) ## 115 120,175 Canwest Media, Inc., 10.625s, 2011 (Advertising & Broadcasting) 100 114,250 Canwest Media, Inc., 7.625s, 2013 (Advertising & Broadcasting) 105 114,975 Norske Skog Canada Ltd., 8.625s, 2011 (Forest & Paper Products) 435 456,750 Russel Metals, Inc., 10s, 2009 (Metals & Mining) 295 313,437 Videotron Life Ltd., 6.875s, 2014 (Broadcast & Cable TV) ## 90 92,925 ------------- $ 4,602,182 ------------- CHILE -- 0.3% Empresa Nacional de Electric, 8.35s, 2013 (Utilities -- Electric Power) $ 250 $ 281,036 ------------- FRANCE -- 3.2% Crown European Holdings S.A., 9.5s, 2011(Containers) $ 425 $ 481,313 Crown European Holdings S.A., 10.875s, 2013(Containers) 1,710 2,011,387 Rhodia S.A., 8.875s, 2011(Chemicals) ## 335 308,200 Vivendi Universal S.A., 6.25s, 2008 (Advertising & Broadcasting) ## 160 169,400 Vivendi Universal S.A., 9.25s, 2010 (Advertising & Broadcasting) ## 220 260,700 ------------- $ 3,231,000 -------------
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PRINCIPAL AMOUNT ISSUER (000 OMITTED) VALUE FOREIGN BONDS -- continued GERMANY Kronos International, Inc., 8.875s, 2009(Chemicals) EUR 15 $ 20,411 ------------- IRELAND -- 0.5% Eircom FDG, 8.25s, 2013 (Telecommunications-Wireline) $ 140 $ 155,050 MDP Acquisitions PLC, 9.625s, 2012 (Forest & Paper Products) 345 386,400 ------------- $ 541,450 ------------- LUXEMBOURG -- 0.2% Millicom International Cellular S.A., 10s, 2013 (Wireless Communications) ## $ 200 $ 211,000 ------------- MEXICO -- 0.5% Corporacion Durango S.A. de C.V., 13.75s, 2009 (Forest & Paper Products), ## $ 360 $ 216,000 Innova S.A. de C.V., 9.375s, 2013 (Wireless Communications) ## 200 205,250 TFM S.A. de C.V., 12.5s, 2012 (Transportation Services) 51 58,140 ------------- $ 479,390 ------------- NETHERLANDS-- 0.4% Kappa Beheer BV, 10.625s, 2009 (Forest & Paper Products) $ 350 $ 374,500 ------------- NORWAY -- 0.2% Ocean Rig Norway AS, 10.25s, 2008 (Oil Services) $ 190 $ 178,600 ------------- RUSSIA -- 0.1% Gazprom, 9.625s, 2013(Utilities-Gas) ## $ 120 $ 132,300 ------------- SINGAPORE -- 0.2% Flextronics International Ltd, 6.5s, 2013 (Electronics) $ 165 $ 170,775 ------------- UNITED KINGDOM -- 1.0% Colt Telecom PLC, 7.625s, 2009 (Telecommunications-Wireline), EUR 400 503,980 Energis PLC, 9.75s, 2009 (Telecommunications-Wireline) $ 275 $ 5,500 Telewest Communications PLC, 11s, 2007(Broadcast & Cable TV)** 160 104,000 Telewest Communications PLC, 0s to 2004, 9.25s to 2009 (Broadcast & Cable TV)** 400 210,000 Telewest Communications PLC, 0s to 2005, 11.375s to 2010 (Broadcast & Cable TV)** 85 41,650 United Biscuits Finance PLC, 10.625s, 2011 (Food & Non Alcoholic Beverages) EUR 80 115,412 ------------- $ 980,542 ------------- TOTAL FOREIGN BONDS $ 12,163,586 ------------- TOTAL BONDS (IDENTIFIED COST, $90,333,715) $ 94,226,897 ------------- SHARES STOCKS -- 1.7% U.S. STOCKS -- 0.8% AUTOMOTIVE -- 0.1% Hayes Lemmerz International, Inc.* 3,536 $ 64,072 Oxford Automotive, Inc.* 53 11,794 ------------- $ 75,866 ------------- BASIC INDUSTRY Thermadyne Holdings Corp.* 2,827 $ 34,772 ------------- BROADCAST & CABLE TV -- 0.5% NTL, Inc.* 6,867 $ 478,973 ------------- CHEMICALS Sterling Chemicals, Inc.* 384 $ 9,600 ------------- ISSUER SHARES VALUE U.S. STOCKS -- continued MACHINERY & TOOLS Simonds Industries, Inc.* 823 $ 2,214 ------------- SPECIAL PRODUCTS & SERVICES Ranger Industries, Inc.* 10,842 $ 542 ------------- TELECOMMUNICATIONS -- WIRELINE XO Communications, Inc.* 198 $ 1,139 ------------- UTILITIES -- TELEPHONE -- 0.2% ITC Deltacom, Inc.* 26,300 $ 159,352 ------------- TOTAL U.S. STOCKS $ 762,458 ------------- FOREIGN STOCKS -- 0.9% NETHERLANDS -- 0.4% Completel Europe N.V. (Telephone Services)* EUR 10,711 $ 379,488 Versatel Telecom International N.V. (Telephone Services)* EUR 7,740 16,871 ------------- $ 396,359 ------------- SWEDEN -- 0.4% Song Networks Holding AB (Telephone Services) SEK 46,549 $ 436,834 ------------- UNITED KINGDOM -- 0.1% Jazztel PLC (Wireless Communications) EUR 165,342 $ 70,830 TOTAL FOREIGN STOCKS $ 904,023 ------------- TOTAL STOCKS (IDENTIFIED COST, $5,097,734) $ 1,666,481 ------------- PREFERRED STOCK 0.4% AUTOMOTIVE Hayes Lemmerz International, Inc., 8s* (Automotive) 11 $ 814 ------------- BROADCAST & CABLE TV -- 0.4% CSC Holdings, Inc., 11.125s* 3,646 $ 382,830 NTL, Inc., 10.5s (Broadcast & Cable TV) 11 82 ------------- $ 382,912 ------------- TELECOMMUNICATIONS -- WIRELINE Global Crossings Holdings Ltd. 10.5s* 1,789 $ 17,443 ------------- TELEPHONE SERVICES Song Networks Holding AB* 5,040 $ 27,327 ------------- TOTAL PREFERRED STOCK (IDENTIFIED COST, $409,662) $ 428,496 ------------- CONVERTIBLE PREFERRED STOCK -- 0.1% PRINCIPAL AMOUNT (000 OMITTED) UNITED STATES -- 0.1% TELEPHONE SERVICES -- 0.1% Alamosa Holdings, Inc. 7.5s* (Identified Cost, $107,000) $ 428 $ 136,960 ------------- CONVERTIBLE BOND UNITED KINGDOM Jazztel PLC, 12s, 2012 (Wireless Communications) $ 51 $ 32,445 ------------- (Identified Cost $80,613) SHARES WARRANTS GT Group Telecom, Inc. (Telephone Services)* 1,050 $ 262 Loral Orion Network Systems, Inc. (Business Services)* 1,000 25 Loral Orion Network Systems, Inc. (Business Services)* 1,100 31
15
ISSUER SHARES VALUE WARRANTS -- continued Metronet Communications Corp. (Broadcast & Cable TV)* ## 600 $ 6 Ono Finance PLC (Broadcast & Cable TV)* 1,490 15 Sterling Chemicals, Inc. (Chemicals)* 17 17 Thermadyne Holdings Corp. (Basic Industries)* 4,471 4,024 Thermadyne Holdings Corp. (Basic Industries)* 2,705 2,705 XM Satellite Radio, Inc. (Broadcast & Cable TV)* 425 8,819 XO Communications, Inc. (Telecommunications-Wireline)* 397 774 XO Communications, Inc. (Telecommunications-Wireline)* 298 507 XO Communications, Inc. (Telecommunications-Wireline)* 298 328 ------------- TOTAL WARRANTS (IDENTIFIED COST, $436,441) $ 17,513 ------------- SHORT-TERM OBLIGATIONS -- 3.0% PRINCIPAL AMOUNT (000 OMITTED) New Center Asset Trust, due 1/02/04 at Amortized Cost $ 3,012 $ 3,011,919 ------------- TOTAL INVESTMENTS (IDENTIFIED COST, $99,477,084) $ 99,520,711 ------------- OTHER ASSETS, LESS LIABILITIES -- 2.0% 1,980,360 ------------- NET ASSETS -- 100.0% $ 101,501,071 =============
See portfolio footnotes and notes to financial statements. PORTFOLIO OF INVESTMENTS -- December 31, 2003 MANAGED SECTORS VARIABLE ACCOUNT STOCKS -- 99.4%
ISSUER SHARES VALUE U.S. STOCKS -- 98.7% BASIC MATERIALS -- 1.1% 3M Co. 8,600 $ 731,258 CONSUMER STAPLES -- 2.5% Avon Products, Inc. 12,100 $ 816,629 PepsiCo, Inc. 19,000 885,780 ------------- $ 1,702,409 ------------- FINANCIAL SERVICES -- 13.5% American Express Co. 24,800 $ 1,196,104 American International Group, Inc. 23,400 1,550,952 Bank of New York Co., Inc. 15,900 526,608 Citigroup, Inc. 30,100 1,461,054 Fannie Mae 9,100 683,046 Goldman Sachs Group, Inc. 7,400 730,602 MBNA Corp. 39,700 986,545 Mellon Financial Corp. 16,300 523,393 Merrill Lynch & Co., Inc. 13,000 762,450 Northern Trust Corp. 8,900 413,138 SLM Corp. 9,800 369,264 ------------- $ 9,203,156 ------------- HEALTHCARE -- 16.0% Abbott Laboratories, Inc. 17,400 $ 810,840 Amgen, Inc.* 16,400 1,013,520 Caremark Rx, Inc.* 15,600 395,148 Genentech, Inc.* 2,100 196,497 Genzyme Corp.* 18,800 927,592 Gilead Sciences, Inc.* 19,200 1,116,288 Guidant Corp. 7,700 463,540 Johnson & Johnson Co. 32,400 1,673,784 Medtronic, Inc. 15,000 729,150 Pfizer, Inc. 65,000 2,296,450 Thermo Electron Corp.* 17,300 435,960 Wyeth 20,300 861,735 ------------- $ 10,920,504 ------------- INDUSTRIAL GOODS & SERVICES -- 4.9% Danaher Corp. 5,300 $ 486,275 Emerson Electric Co. 6,800 440,300 General Electric Co. 59,000 1,827,820 Illinois Tool Works, Inc. 6,600 553,806 ------------- $ 3,308,201 ------------- LEISURE -- 13.8% Clear Channel Communications, Inc. 25,800 $ 1,208,214 Comcast Corp., "A"* 33,400 1,097,858 Cox Communications, Inc.* 11,000 378,950 EchoStar Communications Corp., "A"* 21,800 741,200 InterActiveCorp* 29,200 990,756 Lamar Advertising Co., "A"* 12,500 466,500 New York Times Co., "A" 9,300 444,447 Outback Steakhouse, Inc. 6,800 300,628 Starwood Hotels & Resorts Co., "B" 12,200 438,834 Time Warner, Inc.* 57,700 1,038,023 Viacom, Inc., "B" 32,600 1,446,788 Walt Disney Co. 6,500 151,645 Westwood One, Inc.* 19,700 673,937 ------------- $ 9,377,780 ------------- MISCELLANEOUS -- 2.3% Apollo Group, Inc.,"A"* 8,800 $ 598,400 BISYS Group, Inc.* 25,800 383,904 Career Education Corp.* 7,400 296,518 DST Systems, Inc.* 7,000 292,320 ------------- $ 1,571,142 ------------- RETAIL -- 10.8% CVS Corp. 7,100 $ 256,452 Home Depot, Inc. 12,700 450,723 Kohl's Corp.* 28,300 1,271,802
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ISSUER SHARES VALUE U.S. STOCKS -- continued RETAIL -- continued Nike, Inc., "B" 8,000 $ 547,680 Staples, Inc.* 21,400 584,220 Target Corp. 35,700 1,370,880 The TJX Cos., Inc. 33,400 736,470 Wal-Mart Stores, Inc. 26,800 1,421,740 Walgreen Co. 12,400 451,112 Williams-Sonoma, Inc.* 6,700 232,959 ------------- $ 7,324,038 ------------- TECHNOLOGY -- 29.6% ADTRAN, Inc. 15,200 $ 471,200 Analog Devices, Inc. 25,600 1,168,640 BEA Systems, Inc.* 24,400 300,120 Cisco Systems, Inc.* 121,900 2,960,951 Corning, Inc.* 31,800 331,674 Dell, Inc.* 41,400 1,405,944 Ebay, Inc.* 9,700 626,523 IBM Corp. 15,500 1,436,540 Intel Corp. 34,200 1,101,240 Linear Technology Corp. 13,100 551,117 Maxim Integrated Products, Inc. 10,200 507,960 Mercury Interactive Corp.* 13,900 676,096 Microchip Technology, Inc. 18,000 600,480 Microsoft Corp. 112,400 3,095,496 Network Associates, Inc.* 19,000 285,760 Novellus Systems, Inc.* 12,300 517,215 Oracle Corp.* 58,800 776,160 QUALCOMM, Inc. 7,200 388,296 Texas Instruments, Inc. 29,100 854,958 VERITAS Software Corp.* 32,800 1,218,848 Xilinx, Inc.* 23,300 902,642 ------------- $ 20,177,860 ------------- TRANSPORTATION -- 2.7% Fedex Corp. 11,000 $ 742,500 Southwest Airlines Co. 38,100 614,934 United Parcel Service, Inc., "B" 6,500 484,575 ------------- $ 1,842,009 ------------- UTILITIES & COMMUNICATIONS -- 1.5% AT&T Wireless Services, Inc.* 77,600 $ 620,024 Sprint Corp. (PCS Group)* 71,800 403,516 ------------- $ 1,023,540 ------------- TOTAL U.S. STOCKS $ 67,181,897 ------------- FOREIGN STOCKS -- 0.7% BERMUDA -- 0.7% Ace Ltd. (Financial Services), 11,700 $ 484,614 ------------- TOTAL STOCKS (IDENTIFIED COST, $57,637,875) $ 67,666,511 ------------- PRINCIPAL AMOUNT (000 OMITTED) REPURCHASE AGREEMENT -- 0.4% Merrill Lynch, dated 12/31/03, due 1/02/04, total to be received $261,014 (secured by various U.S. Treasury and Federal Agency obligations in a jointly traded account), at cost $ 261 $ 261,000 ------------- TOTAL INVESTMENTS (IDENTIFIED COST, $57,898,875) $ 67,927,511 ------------- OTHER ASSETS, LESS LIABILITIES -- 0.2% 138,761 ------------- NET ASSETS -- 100.0% $ 68,066,272 =============
See portfolio footnotes and notes to financial statements. PORTFOLIO OF INVESTMENTS -- December 31, 2003 MONEY MARKET VARIABLE ACCOUNT
PRINCIPAL AMOUNT ISSUER (000 OMITTED) VALUE COMMERCIAL PAPER -- 71.2% Archer Daniels Midland Co., due 3/16/04 $ 571 $ 569,691 Bank of America Corp., due 3/15/04 1,195 1,192,298 Barclays Bank, PLC, due 3/05/04 960 958,140 Barton Capital Corp., due 1/08/04 - 1/21/04 1,173 1,172,614 Blue Ridge Asset, due 1/09/04 1,100 1,099,734 Citibank Credit Card, due 1/13/04 - 2/10/04 1,177 1,175,948 Citigroup, Inc., due 1/12/04 500 499,835 Coca-Cola Co., due 3/05/04 1,184 1,181,832 Dexia Delaware LLC, due 1/09/04 1,165 1,164,718 Edison Asset Securitization LLC, due 1/13/04 1,000 999,637 Equitable Resources, Inc., due 1/13/04 1,163 1,162,597 Falcon Asset Securitization, due 1/27/04 1,183 1,182,073 Florida Power & Light Co., due 2/27/04 1,164 1,162,065 General Electric Capital Corp., due 3/03/04 - 4/06/04 1,180 1,176,944 Goldman Sachs Group LP, due 1/30/04 1,154 1,152,977 Govco, Inc., due 2/23/04 568 567,088 HBOS Treasury Services PLC, due 2/04/04 1,121 1,119,835 HSBC America, Inc., due 2/06/04 611 610,322 ING America Insurance Holdings, due 5/27/04 1,176 1,170,574 Jupiter Securitization, due 1/08/04 1,101 1,100,767 Metropolitan Life Funding, Inc., due 3/04/04 1,100 1,097,844 Morgan Stanley Dean Witter, due 1/21/04 1,160 1,159,304 New Center Asset Trust, due 1/02/04 695 694,981 Preferred Receivables Funding, due 1/15/04 624 623,735 Salomon Smith Barney Holdings, Inc., due 3/25/04 682 680,281 Svenska Handelsbanken, Inc, due 2/25/04 1,164 1,162,062 Thunder Bay Funding, Inc., due 1/14/04 1,100 1,099,563 ------------- TOTAL COMMERCIAL PAPER, AT AMORTIZED COST $ 26,937,459 ------------- U.S. GOVERNMENT AND AGENCY OBLIGATIONS -- 18.7% Federal Home Loan Bank, due 2/26/04 - 6/18/04 $ 5,000 $ 4,980,612 Federal National Mortgage Assn., due 4/14/04 2,100 2,093,115 ------------- TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS, AT AMORTIZED COST AND VALUE $ 7,073,727 -------------
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PRINCIPAL AMOUNT ISSUER (000 OMITTED) VALUE REPURCHASE AGREEMENT -- 10.0% Goldman Sachs, dated 12/31/03, due 1/2/04, total to be received $3,775,208 (secured by various U.S. Treasury and Federal Agency obligations in a jointly traded account, at Cost $ 3,775 $ 3,775,000 ------------- TOTAL INVESTMENTS (IDENTIFIED COST, $37,786,186) $ 37,786,186 ------------- OTHER ASSETS, LESS LIABILITIES -- 0.1% 21,742 ------------- NET ASSETS -- 100.0% $ 37,807,928 =============
See portfolio footnotes and notes to financial statements. PORTFOLIO OF INVESTMENTS -- December 31, 2003 TOTAL RETURN VARIABLE ACCOUNT STOCKS -- 60.7%
ISSUER SHARES VALUE U.S. STOCKS -- 57.3% AEROSPACE -- 0.8% Honeywell International, Inc. 3,700 $ 123,691 Lockheed Martin Corp. 21,400 1,099,960 Northrop Grumman Corp. 4,200 401,520 ------------- $ 1,625,171 ------------- BANKS & CREDIT COMPANIES -- 9.0% American Express Co. 9,200 $ 443,716 Bank of America Corp. 16,870 1,356,854 Bank One Corp. 22,500 1,025,775 Citigroup, Inc. 81,986 3,979,600 Fannie Mae 19,400 1,456,164 FleetBoston Financial Corp. 49,330 2,153,255 Freddie Mac 23,780 1,386,850 J. P. Morgan Chase & Co. 16,300 598,699 Mellon Financial Corp. 92,430 2,967,927 PNC Financial Services Group Co. 8,000 437,840 SouthTrust Corp. 13,001 425,523 SunTrust Banks, Inc. 21,100 1,508,650 U.S. Bancorp 19,152 570,347 Wachovia Corp. 5,899 274,834 Wells Fargo Co. 2,400 141,336 ------------- $ 18,727,370 ------------- BROADCAST & CABLE TV -- 1.7% Comcast Corp.* 81,630 $ 2,553,386 Comcast Corp., "A"* 1 33 Cox Communications, Inc.* 17,000 585,650 Time Warner, Inc.* 24,500 440,755 ------------- $ 3,579,824 ------------- BROKERAGE & ASSET MANAGERS -- 1.6% Franklin Resources, Inc. 2,800 $ 145,768 Merrill Lynch & Co., Inc. 38,810 2,276,206 Morgan Stanley Dean Witter & Co. 16,500 954,855 ------------- $ 3,376,829 ------------- CHEMICALS -- 1.8% Air Products & Chemicals, Inc. 26,220 $ 1,385,203 Dow Chemical Co. 20,600 856,342 Lyondell Chemical Co. 24,240 410,868 PPG Industries, Inc. 17,300 1,107,546 ------------- $ 3,759,959 ------------- COMPUTER SOFTWARE -- 1.2% Microsoft Corp. 72,040 $ 1,983,982 Network Associates, Inc.* 30,680 461,427 ------------- $ 2,445,409 ------------- COMPUTER SOFTWARE -- SYSTEMS -- 0.6% Hewlett-Packard Co. 23,700 $ 544,389 IBM Corp. 6,560 607,981 ------------- $ 1,152,370 ------------- CONSUMER GOODS & SERVICES -- 2.2% Colgate-Palmolive Co. 3,200 $ 160,160 Gillette Co. 11,000 404,030 Kimberly-Clark Corp. 43,900 2,594,051 Newell Rubbermaid, Inc. 59,100 1,345,707 Procter & Gamble Co. 1,320 131,842 ------------- $ 4,635,790 ------------- CONTAINERS -- 0.7% Owens-Illinois, Inc.* 74,930 $ 890,918 Smurfit-Stone Container Corp.* 33,900 629,523 ------------- $ 1,520,441 ------------- ELECTRICAL EQUIPMENT -- 1.7% Emerson Electric Co. 12,700 $ 822,325 General Electric Co. 54,520 1,689,030 Tyco International Ltd. 40,910 1,084,115 ------------- $ 3,595,470 -------------
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ISSUER SHARES VALUE U.S. STOCKS -- continued ELECTRONICS -- 0.3% Texas Instruments, Inc. 23,920 $ 702,770 ------------- ENERGY -- INDEPENDENT -- 1.3% Devon Energy Corp. 41,870 $ 2,397,476 Unocal Corp. 7,700 283,591 ------------- $ 2,681,067 ------------- ENERGY -- INTEGRATED -- 2.0% ConocoPhillips Corp. 7,000 $ 458,990 Exxon Mobil Corp. 58,392 2,394,072 Occidental Petroleum Corp. 32,300 1,364,352 ------------- $ 4,217,414 ------------- ENTERTAINMENT -- 1.7% Viacom, Inc., "B" 71,593 $ 3,177,297 Walt Disney Co. 13,850 323,121 ------------- $ 3,500,418 ------------- FOOD & DRUG STORES -- 0.7% Kroger Co.* 69,420 $ 1,284,964 Rite Aid Corp.* 19,300 116,572 ------------- $ 1,401,536 ------------- FOOD & NON ALCOHOLIC BEVERAGES -- 1.1% Archer-Daniels-Midland Co. 53,107 $ 808,289 Kellogg Co. 33,100 1,260,448 PepsiCo, Inc. 5,286 246,433 ------------- $ 2,315,170 ------------- FOREST & PAPER PRODUCTS -- 0.9% Boise Cascade Corp. 3,600 $ 118,296 Bowater, Inc. 18,440 853,956 International Paper Co. 23,100 995,841 ------------- $ 1,968,093 ------------- GAMING & LODGING -- 0.2% Hilton Hotels Corp. 14,680 $ 251,468 Starwood Hotels & Resorts Co., "B" 4,600 165,462 ------------- $ 416,930 ------------- GENERAL MERCHANDISE -- 1.0% May Department Stores Co. 8,300 $ 241,281 Sears, Roebuck & Co. 40,180 1,827,788 ------------- $ 2,069,069 ------------- INSURANCE -- 3.6% Allstate Corp. 60,810 $ 2,616,046 Chubb Corp. 12,700 864,870 Hartford Financial Services Group, Inc. 36,360 2,146,331 Marsh & McLennan Cos., Inc. 1,700 81,413 MetLife, Inc. 18,600 626,262 Travelers Property Casualty Corp., "A" 72,701 1,219,923 Travelers Property Casualty Corp., "B" 1 17 ------------- $ 7,554,862 ------------- MACHINERY & TOOLS -- 0.3% Deere & Co. 9,590 $ 623,829 ------------- MEDICAL & HEALTH TECHNOLOGY & SERVICES -- 0.3% Tenet Healthcare Corp.* 35,400 $ 568,170 ------------- MEDICAL EQUIPMENT -- 0.4% Baxter International, Inc. 25,080 $ 765,442 ------------- METALS & MINING -- 0.9% Alcoa, Inc. 47,440 $ 1,802,720 ------------- NATURAL GAS -- DISTRIBUTION -- 0.2% National Fuel Gas Co. 16,300 $ 398,372 WGL Holdings, Inc. 4,610 128,112 ------------- $ 526,484 ------------- OIL SERVICES -- 3.9% BJ Services Co.* 24,750 $ 888,525 Cooper Cameron Corp.* 13,290 619,314 GlobalSantaFe Corp. 91,030 $ 2,260,275 Noble Corp.* 72,055 2,578,128 Schlumberger Ltd. 32,680 1,788,249 ------------- $ 8,134,491 ------------- PHARMACEUTICALS -- 5.0% Eli Lilly & Co. 10,380 $ 730,025 Johnson & Johnson Co. 53,100 2,743,146 Merck & Co., Inc. 30,260 1,398,012 Pfizer, Inc. 74,200 2,621,486 Schering-Plough Corp. 147,660 2,567,808 Wyeth 6,800 288,660 ------------- $ 10,349,137 ------------- PRINTING & PUBLISHING -- 0.9% New York Times Co., "A" 19,600 $ 936,684 Tribune Co. 18,500 954,600 ------------- $ 1,891,284 ------------- RAILROAD & SHIPPING -- 0.9% Burlington Northern Santa Fe Railway Co. 28,860 $ 933,621 Union Pacific Corp. 12,300 854,604 ------------- $ 1,788,225 ------------- REAL ESTATE -- 0.4% Equity Residential Properties Trust 26,760 $ 789,688 Healthcare Reality Trust 1,100 39,325 ------------- $ 829,013 ------------- RESTAURANTS -- 0.3% McDonald's Corp. 23,500 $ 583,505 ------------- SPECIALTY CHEMICALS -- 0.1% Praxair, Inc. 3,800 $ 145,160 ------------- SPECIALTY STORES -- 0.4% Home Depot, Inc. 21,000 $ 745,290 ------------- TELECOMMUNICATIONS -- WIRELESS -- 1.9% AT&T Wireless Services, Inc.* 359,847 $ 2,875,177 Telephone & Data Systems, Inc. 16,940 1,059,597 ------------- $ 3,934,774 ------------- TELEPHONE SERVICES -- 3.9% AT&T Corp. 100,974 $ 2,049,772 BellSouth Corp. 24,400 690,520 SBC Communications, Inc. 50,424 1,314,554 Verizon Communications, Inc. 112,216 3,936,537 ------------- $ 7,991,383 ------------- TOBACCO -- 0.6% Altria Group, Inc. 22,200 $ 1,208,124 ------------- UTILITIES -- ELECTRIC POWER -- 2.8% Calpine Corp.* 198,400 $ 954,304 Cinergy Corp. 8,100 314,361 Dominion Resources, Inc. 3,400 217,022 Entergy Corp. 5,200 297,076 Exelon Corp. 5,420 359,671 FirstEnergy Corp. 12,530 441,056 FPL Group, Inc. 4,060 265,605 NiSource, Inc. 36,011 790,081 PPL Corp. 13,600 595,000 TXU Corp. 64,090 1,520,215 ------------- $ 5,754,391 ------------- Total U.S. Stocks $ 118,887,384 ------------- FOREIGN STOCKS -- 3.4% AUSTRALIA -- 0.3% BHP Billiton Ltd. (Metals & Mining) 58,400 $ 536,022 ------------- FRANCE -- 0.2% Total Fina S.A., ADR (Energy - Integrated) 4,000 $ 370,040 -------------
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ISSUER SHARES VALUE FOREIGN STOCKS -- continued SWITZERLAND -- 1.0% Novartis AG (Pharmaceuticals) 20,200 $ 916,698 Roche Holdings AG (Pharmaceuticals) 5,900 594,864 Syngenta AG (Chemicals) 7,300 491,465 ------------- $ 2,003,027 ------------- UNITED KINGDOM -- 1.9% BP Amoco PLC, ADR (Energy - Integrated) 31,270 $ 1,543,175 Diageo PLC (Alcoholic Beverages)* 27,000 354,243 Reed Elsevier PLC (Printing & Publishing) 140,900 1,175,198 Vodafone Group PLC, ADR (Telecommunications - Wireless) 37,959 950,493 ------------- $ 4,023,109 ------------- TOTAL FOREIGN STOCKS $ 6,932,198 ------------- TOTAL STOCKS (IDENTIFIED COST, $109,531,588) $ 125,819,582 ------------- PRINCIPAL AMOUNT (000 OMITTED) BONDS 36.2% U.S. BONDS -- 35.1% AEROSPACE -- 0.5% BAE Systems Holding, Inc., 6.4s, 2011 $ 223 $ 239,708 Boeing Capital Corp., 6.5s, 2012 373 407,817 Northrop Grumman Corp., 7.75s, 2031 326 396,415 ------------- $ 1,043,940 ------------- AIRLINES -- 0.3% Continental Airlines Pass-Through Trust, Inc., 6.648s, 2019 $ 606 $ 591,980 Jet Equipment Trust, 11.44s, 2014 ## 300 1,500 ------------- $ 593,480 ------------- AGENC -- OTHER Small Business Administration, 4.35s, 2023 $ 52 $ 50,111 ------------- ALCOHOLIC BEVERAGES -- 0.1% Miller Brewing Company, 5.5s, 2013 $ 108 $ 110,337 ------------- ASSET BACKED & SECURITIZED -- 1.8% Chase Commercial Mortgage Securities Corp., 6.39s, 2030 $ 369 $ 410,010 Chase Commercial Mortgage Securities Corp., 7.543s, 2032 118 130,612 Chase Mortgage Finance Trust, 6s, 2017 43 43,561 Criimi Mae Corp., 6.701s, 2030 190 203,499 Criimi Mae Corp., 7s, 2033 320 346,856 CWMBS, Inc. Pass-Through Trust, 8s, 2030 529 537,300 Deutsche Mortgage and Asset Receiving Corp., 6.538s, 2031 225 246,415 Federal National Mortgage Assn., 4.08s, 2031 273 273,410 First Union Lehman Brothers Bank, 6.56s, 2035 101 112,546 GS Mortgage Securities Corp., 6.06s, 2030 322 336,436 Morgan Stanley Capital I Inc., 0s, 2030 9,471 270,074 Mortgage Capital Funding, Inc., 6.337s, 2031 326 359,623 Multi Family Capital Access One In, 6.65s, 2024 67 74,851 Residential Accredit Loans, Inc., 7s, 2028 138 138,375 Residential Funding Mortgage Securities, Inc., 6s, 2016 234 235,080 ------------- $ 3,718,648 ------------- AUTOMOTIVE -- 0.6% Daimlerchrysler North America Holdings, 6.5s, 2013 $ 163 $ 171,706 Ford Motor Co., 7.45s, 2031 195 197,051 Ford Motor Credit Co., 6.875s, 2006 16 17,077 Ford Motor Credit Co., 7s, 2013 110 116,015 General Motors Acceptance Corp., 6.875s, 2011 277 298,364 General Motors Acceptance Corp., 7.25s, 2011 185 202,965 General Motors Acceptance Corp., 8s, 2031 176 197,642 General Motors Corp., 7.2s, 2011 41 45,079 ------------- $ 1,245,899 ------------- BANKS & CREDIT COMPANIES -- 1.2% Abbey National Capital, 8.963s, 2049 $ 179 $ 237,674 Bank of America Corp., 7.4s, 2011 299 350,676 Credit Suisse First Bank of America, Inc., 6.125s, 2011 67 72,945 Credit Suisse First Bank of America, Inc., 4.625s, 2008 736 765,050 Popular North America, Inc., 4.25s, 2008 211 214,562 RBS Capital Trust, 6.425s, 2049 161 162,719 Socgen Real Estate Co., 7.64s, 2049 ## 361 407,846 Unicredito Italiano Capital Trust, 9.2s, 2049 208 261,298 ------------- $ 2,472,770 ------------- BROADCAST & CABLE TV -- 0.4% Cox Communications, Inc., 7.75s, 2010 $ 237 $ 282,329 TCI Communications Financing III, 9.65s, 2027 425 512,125 ------------- $ 794,454 ------------- BROKERAGE & ASSET MANAGERS -- 0.4% Lehman Brothers Holdings, Inc., 8.25s, 2007 $ 334 $ 389,318 Morgan Stanley Dean Witter & Co., 6.1s, 2006 353 381,988 ------------- $ 771,306 ------------- BUILDING -- 0.1% CRH America, Inc., 6.95s, 2012 $ 208 $ 234,671 ------------- CHEMICALS -- 0.1% Dow Chemical Co., 5.75s, 2008 $ 162 $ 173,693 ------------- CONGLOMERATES -- 0.4% General Electric Capital Corp., 7.5s, 2005 $ 536 $ 577,662 General Electric Capital Corp., 8.75s, 2007 130 154,105 ------------- $ 731,767 ------------- CONSUMER CYCLICAL -- 0.1% Cendant Corp., 6.875s, 2006 $ 147 $ 161,280 Cendant Corp., 6.25s, 2008 90 98,174 ------------- $ 259,454 ------------- CORPORATE ASSET-BACKED -- 1.0% BCF LLC, 7.75s, 2026 ## $ 76 $ 59,928 Bear Stearns Commercial Mortgage Securities, Inc., 6.8s, 2008 354 376,220 Beneficial Home Equity Loan Trust, 1.239s, 2037 360 356,610 Certificates Funding Corp., 6.716s, 2004 289 294,327 Citibank Credit Card Corp., 6.65s, 2008 623 672,898 First Union-Lehman Brothers Commercial Mortgage Corp., 7.38s, 2029 90 100,029
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PRINCIPAL AMOUNT ISSUER (000 OMITTED) VALUE U.S. BONDS -- continued CORPORATE ASSET-BACKED -- continued J.P. Morgan Commercial Mortgage Finance Corp., 6.613s, 2030 $ 175 $ 193,962 Merrill Lynch Mortgage Investors, Inc., 6.39s, 2030 99 108,241 ------------- $ 2,162,215 ------------- DEFENSE ELECTRONICS -- 0.1% Raytheon Co., 6.15s, 2008 $ 217 $ 236,127 ------------- ENERGY -- INDEPENDENT -- 0.2% Devon Financing Corp., ULC, 6.875s, 2011 $ 348 $ 394,606 ------------- ENERGY -- INTEGRATED -- 0.1% Amerada Hess Corp., 7.3s, 2031 $ 62 $ 64,021 Phillips Petroleum Co., 8.5s, 2005 40 43,605 ------------- $ 107,626 ------------- ENTERTAINMENT -- 0.3% AOL Time Warner, Inc., 6.15s, 2007 $ 97 $ 105,539 News America Holdings, Inc., 6.703s, 2004 215 218,432 Time Warner, Inc., 6.875s, 2018 172 189,146 Time Warner, Inc., 10.15s, 2012 1 1,335 Walt Disney Co., 6.75s, 2006 69 75,048 ------------- $ 589,500 ------------- FINANCIAL INSTITUTIONS -- 0.4% SLM Corp., 5.375s, 2013 $ 195 $ 200,096 SLM Corp., Medium Term Note, 4s, 2009 153 154,051 SunAmerica Institutional, 5.75s, 2009 441 475,618 ------------- $ 829,765 ------------- FINANCIAL SERVICES -- 0.1% Countrywide Home Loans, Inc., 6.85s, 2004 $ 232 $ 237,540 ------------- FOOD & NON ALCOHOLIC BEVERAGES -- 0.2% Kellogg Co., 6s, 2006 $ 291 $ 311,818 Kraft Foods, Inc., 6.25s, 2012 122 132,963 ------------- $ 444,781 ------------- FOREST & PAPER PRODUCTS -- 0.2% Meadwestvaco Corp., 6.8s, 2032 $ 104 $ 106,945 Weyerhaeuser Co., 6.75s, 2012 254 277,099 ------------- $ 384,044 ------------- GAMING & LODGING -- 0.2% Harrahs Operating Co., Inc., 7.125s, 2007 $ 193 $ 214,923 MGM Mirage, Inc., 8.5s, 2010 179 205,403 ------------- $ 420,326 ------------- INSURANCE -- 0.4% AIG SunAmerica, 7.6s, 2005 $ 444 $ 482,411 Metlife, Inc., 6.5s, 2032 180 190,866 Prudential Funding Corporation Medium Term Note 144A, 6.6s, 2008 179 199,261 ------------- $ 872,538 ------------- INSURANCE -- PROPERTY & CASUALTY -- 0.1% Allstate Corp., 6.125s, 2032 $ 185 $ 190,236 Safeco Corp., 4.875s, 2010 32 32,991 Travelers Property Casualty Corp., 6.375s, 2033 84 87,592 ------------- $ 310,819 ------------- MACHINERY & TOOLS -- 0.1% Kennametal, Inc., 7.2s, 2012 $ 211 $ 223,799 ------------- MEDICAL & HEALTH TECHNOLOGY & SERVICES -- 0.2% HCA, Inc., 6.95s, 2012 $ 276 $ 295,931 HCA, Inc., 6.25s, 2013 32 32,755 The Healthcare Co., 8.75s, 2010 60 71,444 ------------- $ 400,130 ------------- MORTGAGE BACKED -- 12.5% Federal Home Loan Pc, 5s, 2017 $ 116 $ 118,243 Federal Home Loan Pc, 4.5s, 2018 705 705,666 Federal Home Loan Pc, 5s, 2018 266 270,990 Federal Home Loan Pc, 5s, 2033 1,185 1,170,299 Federal Home Loan Pc, 5.5s, 2033 1,499 1,517,791 Federal National Mortgage Assn., 5.722s, 2009 830 894,642 Federal National Mortgage Assn., 5.5s, 2016 652 676,856 Federal National Mortgage Assn., 6s, 2016 1,214 1,274,441 Federal National Mortgage Assn., 5.5s, 2017 665 689,540 Federal National Mortgage Assn., 6s, 2017 669 702,176 Federal National Mortgage Assn., 4.5s, 2018 880 882,170 Federal National Mortgage Assn., 5s, 2018 2,099 2,143,207 Federal National Mortgage Assn., 6.5s, 2028 443 465,436 Federal National Mortgage Assn., 7.5s, 2030 55 58,549 Federal National Mortgage Assn., 6.5s, 2031 1,302 1,361,482 Federal National Mortgage Assn., 7.5s, 2031 167 178,074 Federal National Mortgage Assn., 6s, 2032 2,105 2,176,334 Federal National Mortgage Assn., 6.5s, 2032 1,810 1,893,199 Federal National Mortgage Assn., 5.5s, 2033 3,929 3,982,532 Federal National Mortgage Assn., 6s, 2033 1,045 1,080,976 Government National Mortgage Assn., 7.5s, 2023 139 149,775 Government National Mortgage Assn., 7.5s, 2024 3 3,330 Government National Mortgage Assn., 6.5s, 2028 515 543,590 Government National Mortgage Assn., 5.5s, 2033 1,951 1,985,831 Government National Mortgage Assn., 6s, 2033 962 1,000,574 ------------- $ 25,925,703 ------------- NATURAL GAS -- PIPELINE -- 0.2% Kinder Morgan Energy Partners, 6.75s, 2011 $ 315 $ 353,585 Kinder Morgan Energy Partners, 7.75s, 2032 117 139,579 ------------- $ 493,164 ------------- PHARMACEUTICALS Wyeth, 6.5s, 2034 $ 31 $ 31,627 ------------- POLLUTION CONTROL -- 0.3% Waste Management, Inc., 7.375s, 2010 $ 508 $ 587,009 -------------
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PRINCIPAL AMOUNT ISSUER (000 OMITTED) VALUE U.S. BONDS -- continued PRINTING & PUBLISHING -- 0.1% BELO Corp., 7.75s, 2027 $ 226 $ 258,220 ------------- REAL ESTATE -- 0.5% Boston Properities Limited Partnership, 5s, 2015 $ 42 $ 40,113 EOP Operating Limited Partnership, 6.8s, 2009 29 32,526 Simon Property Group Inc., New, 6.75s, 2004 578 580,791 Vornado Reality Trust, 5.625s, 2007 383 408,908 ------------- $ 1,062,338 ------------- TELECOMMUNICATIONS -- WIRELESS -- 0.1% AT&T Wireless Services, Inc., 7.35s, 2006 $ 107 $ 117,007 AT&T Wireless Services, Inc., 8.75s, 2031 125 154,229 ------------- $ 271,236 ------------- TELECOMMUNICATIONS -- WIRELINE -- 0.8% Alltel Corporation, 7.875s, 2032 $ 127 $ 154,691 Citizens Communications Co., 8.5s, 2006 125 136,483 Citizens Communications Co., 7.625s, 2008 254 278,117 Sprint Capital Corp., 6.875s, 2028 124 121,003 Sprint Capital Corp., 7.125s, 2006 77 83,304 Telecomunicaciones de Puerto Rico, Inc., 6.65s, 2006 270 292,643 Verizon New York, Inc., 6.875s, 2012 486 537,762 ------------- $ 1,604,003 ------------- U.S. GOVERNMENT AGENCIES -- 4.3% Federal Home Loan Banks, 2.875s, 2006 $ 365 $ 368,877 Federal Home Loan Mortgage Corp., 2.875s, 2006 1,405 1,415,073 Federal Home Loan Mortgage Corp., 6s, 2011 94 104,330 Federal National Mortgage Assn., 5.25s, 2007 1,211 1,303,482 Federal National Mortgage Assn., 6.625s, 2009 1,286 1,470,514 Federal National Mortgage Assn., 6.625s, 2010 3,148 3,616,976 Federal National Mortgage Assn., 5.125s, 2014 285 285,991 Student Loan Marketing Assn., 5s, 2004 250 254,972 ------------- $ 8,820,215 ------------- U.S. TREASURY OBLIGATIONS -- 5.0% U.S. Treasury Bonds, 8s, 2021 $ 703 $ 949,435 U.S. Treasury Bonds, 6.25s, 2023 1,834 2,090,402 U.S. Treasury Bonds, 5.375s, 2031 338 352,484 U.S. Treasury Notes, 1.25s, 2005 387 385,972 U.S. Treasury Notes, 1.625s, 2005 52 52,179 U.S. Treasury Notes, 5.75s, 2005 665 713,992 U.S. Treasury Notes, 6.5s, 2005 978 1,045,237 U.S. Treasury Notes, 4.375s, 2007 146 154,606 U.S. Treasury Notes, 4.25s, 2010 736 855,246 U.S. Treasury Notes, 3s, 2012 1,148 1,251,847 U.S. Treasury Notes, 3.875s, 2013 2,475 2,422,792 ------------- $ 10,274,192 ------------- UTILITIES -- ELECTRIC POWER -- 1.7% Centerpoint Energy Resources Corp., 7.875s, 2013 ## $ 65 $ 73,586 DTE Energy Co., 7.05s, 2011 238 266,879 Entergy Mississippi, Inc., 6.2s, 2004 256 259,569 Exelon Generation Co. LLC, 6.95s, 2011 77 86,471 FirstEnergy Corp., 6.45s, 2011 72 74,624 GGIB Funding Corp., 7.43s, 2011 $ 122 $ 125,179 Gulf States Utilities Co., 8.25s, 2004 128 130,010 Midamerican Energy Holdings Co., 3.5s, 2008 118 116,009 Midamerican Energy Holdings Co., 5.875s, 2012 ## 61 63,960 Midamerican Funding LLC, 6.927s, 2029 454 492,666 Niagara Mohawk Power Corp., 7.75s, 2006 1 1,117 Northeast Utilities, 8.58s, 2006 155 169,494 Oncor Electric Delivery Co., 7s, 2032 312 344,183 Progress Energy, Inc., 7.1s, 2011 69 77,737 Progress Energy, Inc., 6.85s, 2012 195 217,324 PSE&G Power LLC, 6.95s, 2012 124 139,845 PSE&G Power LLC, 8.625s, 2031 91 117,203 Toledo Edison Co., 7.875s, 2004 320 330,393 TXU Energy Company Llc, 7s, 2013 75 82,950 Waterford 3 Funding Entergy Corp., 8.09s, 2017 372 423,313 ------------- $ 3,592,512 ------------- TOTAL U.S. BONDS $ 72,734,565 ------------- FOREIGN BONDS -- 1.1% CANADA -- 0.1% Hydro Quebec, 6.3s, 2011 $ 262 $ 295,485 ------------- FRANCE -- 0.1% France Telecom S.A (Telecommunications - Wireline), 9.75s, 2031 $ 220 $ 292,309 ------------- GERMANY Deutsche Telekom, 8.75s, 2030 $ 70 $ 89,420 ------------- HONG KONG -- 0.1% Pccw-Hktc Capital Ltd (Telecommunications - Wireline), 6s, 2013 $ 150 $ 150,780 ------------- ISRAEL -- 0.1% Israel St, 4.625s, 2013 $ 112 $ 106,813 ------------- ITALY -- 0.3% Republic of Italy, 4.625s, 2005 $ 363 $ 377,309 Telecom Italia Cap (Telecommunications - Wireline), 5.25s, 2013 246 246,490 ------------- $ 623,799 ------------- MEXICO -- 0.3% Pemex Project Funding Master Trust (Oil Services), 9.125s, 2010 $ 282 $ 334,170 Pemex Project Funding Master Trust (Oil Services), 8.625s, 2022 39 43,192 United Mexican States, 8.125s, 2019 85 94,988 United Mexican States, 8s, 2022 55 60,170 ------------- $ 532,520 ------------- SINGAPORE-- 0.1% DBS Capital Funding Corp. (Banks & Credit Companies), 7.657s, 2049 $ 170 $ 195,755 ------------- TOTAL FOREIGN BONDS $ 2,286,881 ------------- TOTAL BONDS (IDENTIFIED COST, $72,563,780) $ 75,021,446 -------------
22
PRINCIPAL AMOUNT ISSUER (000 OMITTED) VALUE CONVERTIBLE PREFERRED STOCK -- 0.2% U.S. STOCKS -- 0.2% INSURANCE -- 0.1% Chubb Corp. $ 6,100 $ 174,216 ------------- TELECOMMUNICATIONS -- WIRELESS -- 0.1% Motorola, Inc., 7.0s 5,200 225,836 ------------- TOTAL CONVERTIBLE PREFERRED STOCK (IDENTIFIED COST, $374,357) $ 400,052 ------------- SHARES PREFERRED STOCK -- 0.1% U.S. STOCKS -- 0.1% INSURANCE -- 0.1% Hartford Financial Services Group Incorporated (Identified Cost, $283,611) 6,000 $ 354,720 ------------- PRINCIPAL AMOUNT (000 OMITTED) SHORT-TERM OBLIGATIONS -- 2.7% New Center Asset Trust, due 1/02/04, at Amortized Cost $ 5,552 $ 5,551,851 ------------- TOTAL INVESTMENTS (IDENTIFIED COST, $188,305,187) $ 207,147,651 ------------- OTHER ASSETS, LESS LIABILITIES -- 0.1% 187,821 ------------- NET ASSETS -- 100.0% $ 207,335,472 =============
PORTFOLIO FOOTNOTES: * Non-income producing security. ** Non-income producing security - in default. # Payment-in-kind security. ## SEC Rule 144A restriction. ### Security segregated as collateral for an open futures contract. Abbreviations have been used throughout this report to indicate amounts shown in currencies other than U.S. Dollar. A list of abbreviations is shown below. AUD=Australian Dollar CAD=Canadian Dollar DKK=Danish Kroner EUR=Euro GBP=British Pounds JPY=Japanese Yen NOK=Norwegian Kroner NZD=New Zealand Dollar SEK=Swedish Kroner See notes to financial statements. 23 STATEMENT OF ASSETS AND LIABILITIES -- December 31, 2003 (000 Omitted)
CAPITAL GLOBAL GOVERNMENT HIGH APPRECIATION GOVERNMENTS SECURITIES YIELD VARIABLE VARIABLE VARIABLE VARIABLE ACCOUNT ACCOUNT ACCOUNT ACCOUNT ------------ ----------- ----------- ----------- Assets: Investments -- Investments cost $ 272,571 $ 11,054 $ 109,031 $ 99,477 Unrealized appreciation 28,530 1,317 4,004 44 Repurchase agreements, at value 12,240 745 3,865 -- ----------- ----------- ----------- ----------- Total investments, at value $ 313,341 $ 13,116 $ 116,900 $ 99,521 Cash 1 0* 0* 27 Receivable for forward foreign currency exchange contracts -- 72 -- -- Receivable for daily variation margin on open future contracts -- 0* -- -- Receivable for investments sold 7,529 -- -- 92 Receivable for units sold 119 1 5 7 Interest and dividends receivable 248 209 1,242 2,013 Receivable from sponsor -- -- 5 1 Other assets 8 0* 1 1 ----------- ----------- ----------- ----------- Total assets $ 321,246 $ 13,398 $ 118,153 $ 101,662 =========== =========== =========== =========== Liabilities: Payable for forward foreign currency exchange contracts $ -- $ 135 $ -- $ 56 Payable for investments purchased 6,710 2 -- 23 Payable for units surrendered 151 22 93 19 Payable to affiliates -- Investment adviser 6 0* 2 2 Sponsor 2 0* -- -- Accrued expenses and other liabilities 51 42 53 61 ----------- ----------- ----------- ----------- Total liabilities $ 6,920 $ 201 $ 148 $ 161 ----------- ----------- ----------- ----------- Net assets $ 314,326 $ 13,197 $ 118,005 $ 101,501 =========== =========== =========== =========== MANAGED MONEY TOTAL SECTORS MARKET RETURN VARIABLE VARIABLE VARIABLE ACCOUNT ACCOUNT ACCOUNT ----------- ----------- ----------- Assets: Investments -- Investments cost $ 57,638 $ 34,011 $ 188,305 Unrealized appreciation 10,029 -- 18,842 Repurchase agreements, at value 261 3,775 -- ----------- ----------- ----------- Total investments, at value $ 67,928 $ 37,786 $ 207,147 Cash 1 0* 10 Receivable for forward foreign currency exchange contracts -- -- -- Receivable for daily variation margin on open future contracts -- -- -- Receivable for investments sold 1,082 -- 659 Receivable for units sold 5 42 8 Interest and dividends receivable 55 0* 1,046 Receivable from sponsor -- 4 2 Other assets 1 13 4 ----------- ----------- ----------- Total assets $ 69,072 $ 37,845 $ 208,876 =========== =========== =========== Liabilities: Payable for forward foreign currency exchange contracts $ -- $ -- $ -- Payable for investments purchased 919 -- 1,425 Payable for units surrendered 57 8 69 Payable to affiliates -- Investment adviser 1 0* 4 Sponsor 0* -- -- Accrued expenses and other liabilities 29 29 43 ----------- ----------- ----------- Total liabilities $ 1,006 $ 37 $ 1,541 ----------- ----------- ----------- Net assets $ 68,066 $ 37,808 $ 207,335 =========== =========== ===========
* Amount less than $500. See notes to financial statements. 24
CAPITAL GLOBAL GOVERNMENT HIGH APPRECIATION GOVERNMENTS SECURITIES YIELD UNIT VARIABLE VARIABLE VARIABLE VARIABLE UNIT VALUE ACCOUNT ACCOUNT ACCOUNT ACCOUNT ------ --------- ------------ ----------- ---------- --------- Net assets applicable to contract owners: Capital Appreciation Variable Account -- Compass 2 4,040 $ 50.814 $ 205,432 Compass 3 621 33.539 20,828 Compass 3 - Level 2 6,086 13.940 84,839 Global Governments Variable Account -- Compass 2 161 $ 25.169 $ 4,058 Compass 3 41 24.578 1,019 Compass 3 - Level 2 559 14.396 8,051 Government Securities Variable Account -- Compass 2 2,447 $ 36.470 $ 89,203 Compass 3 147 25.501 3,752 Compass 3 - Level 2 1,562 14.912 23,293 High Yield Variable Account -- Compass 2 1,827 $ 34.056 $ 62,201 Compass 3 115 25.048 2,865 Compass 3 - Level 2 2,631 13.386 35,229 Managed Sectors Variable Account -- Compass 2 409 $ 41.525 Compass 3 202 40.837 Compass 3 - Level 2 3,228 13.215 Money Market Variable Account -- Compass 2 1,172 $ 20.188 Compass 3 155 16.553 Compass 3 - Level 2 896 12.390 Total Return Variable Account -- Compass 2 1,688 $ 41.571 Compass 3 453 40.597 Compass 3 - Level 2 5,946 19.599 --------- -------- --------- --------- Net assets applicable to owners of deferred contracts 311,099 13,128 116,248 100,295 Reserve for variable annuities -- Compass 2 Contracts 2,907 19 1,675 1,161 Compass 3 Contracts 1 42 -- 2 Compass 3 - Level 2 Contracts 319 8 82 43 --------- -------- --------- --------- Net assets $ 314,326 $ 13,197 $ 118,005 $ 101,501 ========= ======== ========= ========= MANAGED MONEY TOTAL SECTORS MARKET RETURN VARIABLE VARIABLE VARIABLE ACCOUNT ACCOUNT ACCOUNT --------- -------- --------- Net assets applicable to contract owners: Capital Appreciation Variable Account -- Compass 2 Compass 3 Compass 3 - Level 2 Global Governments Variable Account -- Compass 2 Compass 3 Compass 3 - Level 2 Government Securities Variable Account -- Compass 2 Compass 3 Compass 3 - Level 2 High Yield Variable Account -- Compass 2 Compass 3 Compass 3 - Level 2 Managed Sectors Variable Account -- Compass 2 $ 16,959 Compass 3 8,232 Compass 3 - Level 2 42,662 Money Market Variable Account -- Compass 2 $ 23,584 Compass 3 2,543 Compass 3 - Level 2 11,089 Total Return Variable Account -- Compass 2 $ 70,173 Compass 3 18,353 Compass 3 - Level 2 116,540 --------- -------- --------- Net assets applicable to owners of deferred contracts 67,853 37,216 205,066 Reserve for variable annuities -- Compass 2 Contracts 94 469 1,379 Compass 3 Contracts 26 21 201 Compass 3 - Level 2 Contracts 93 102 689 --------- -------- --------- Net assets $ 68,066 $ 37,808 $ 207,335 ========= ======== =========
See notes to financial statements. 25 STATEMENTS OF OPERATIONS -- Year Ended December 31, 2003 (000 Omitted)
CAPITAL GLOBAL GOVERNMENT HIGH APPRECIATION GOVERNMENTS SECURITIES YIELD VARIABLE VARIABLE VARIABLE VARIABLE ACCOUNT ACCOUNT ACCOUNT ACCOUNT ------------ ----------- ----------- ----------- Net investment income (loss): Income -- Interest $ 104 $ 479 $ 5,101 $ 7,883 Dividends 2,462 -- -- 25 ----------- ----------- ----------- ----------- Total investment income $ 2,566 $ 479 $ 5,101 $ 7,908 ----------- ----------- ----------- ----------- Expenses -- Mortality and expense risk charges $ 3,670 $ 160 $ 1,607 $ 1,143 Management fee 2,133 92 689 686 Boards of Managers fees 24 1 11 9 Distribution fee 31 2 7 5 Administrative fee 26 1 13 9 Custodian fee 120 17 50 40 Printing 34 4 19 14 Auditing fees 32 40 34 40 Legal fees 3 3 3 3 Miscellaneous 10 1 9 18 ----------- ----------- ----------- ----------- Total expenses $ 6,083 $ 321 $ 2,442 $ 1,967 Fees paid indirectly (14) -- (1) (2) ----------- ----------- ----------- ----------- Net expenses $ 6,069 $ 321 $ 2,441 $ 1,965 ----------- ----------- ----------- ----------- Net investment income (loss) $ (3,503) $ 158 $ 2,660 $ 5,943 ----------- ----------- ----------- ----------- Realized and unrealized gain (loss) on investments: Realized gain (loss) (identified cost basis) -- Investment transactions** $ (471) $ 803 $ 1,504 $ (1,385) Written option transactions -- 35 -- -- Futures contracts -- (8) -- -- Foreign currency transactions 13 179 -- (14) ----------- ----------- ----------- ----------- Net realized gain (loss) on investments and foreign currency transactions $ (458) $ 1,009 $ 1,504 $ (1,399) ----------- ----------- ----------- ----------- Change in unrealized appreciation (depreciation) -- Investments $ 74,555 $ 600 $ (2,844) $ 11,580 Futures contracts -- (11) -- -- Translation of assets and liabilities in foreign currencies 1 (89) -- (54) ----------- ----------- ----------- ----------- Net unrealized gain (loss) on investments and foreign currency translation $ 74,556 $ 500 $ (2,844) $ 11,526 ----------- ----------- ----------- ----------- Net realized and unrealized gain (loss) on investments and foreign currency $ 74,098 $ 1,509 $ (1,340) $ 10,127 ----------- ----------- ----------- ----------- Increase (decrease) in net assets from operations $ 70,595 $ 1,667 $ 1,320 $ 16,070 =========== =========== =========== =========== MANAGED MONEY TOTAL SECTORS MARKET RETURN VARIABLE VARIABLE VARIABLE ACCOUNT ACCOUNT ACCOUNT ----------- ---------- ----------- Net investment income (loss): Income -- Interest $ 542 $ 635 $ 3,844 Dividends 15 -- 2,482 ----------- ----------- ----------- Total investment income $ 557 $ 635 $ 6,326 ----------- ----------- ----------- Expenses -- Mortality and expense risk charges $ 776 $ 659 $ 2,426 Management fee 465 249 1,502 Boards of Managers fees 5 4 18 Distribution fee 13 4 29 Administrative fee 6 5 19 Custodian fee 29 11 85 Printing 10 7 18 Auditing fees 28 15 40 Legal fees 2 10 3 Miscellaneous 2 -- 0* ----------- ----------- ----------- Total expenses $ 1,336 $ 964 $ 4,140 Fees paid indirectly 0* 0* 0* ----------- ----------- ----------- Net expenses $ 1,336 $ 964 $ 4,140 ----------- ----------- ----------- Net investment income (loss) $ (779) $ (329) $ 2,186 ----------- ----------- ----------- Realized and unrealized gain (loss) on investments: Realized gain (loss) (identified cost basis) -- Investment transactions** $ 2,925 $ -- $ 334 Written option transactions -- -- -- Futures contracts -- -- -- Foreign currency transactions (0)* -- (1) ----------- ----------- ----------- Net realized gain (loss) on investments and foreign currency transactions $ 2,925 $ -- $ 333 ----------- ----------- ----------- Change in unrealized appreciation (depreciation) -- Investments $ 10,825 $ -- $ 26,251 Futures contracts -- -- -- Translation of assets and liabilities in foreign currencies -- -- 3 ----------- ----------- ----------- Net unrealized gain (loss) on investments and foreign currency translation $ 10,825 $ -- $ 26,254 ----------- ----------- ----------- Net realized and unrealized gain (loss) on investments and foreign currency $ 13,750 $ -- $ 26,587 ----------- ----------- ----------- Increase (decrease) in net assets from operations $ 12,971 $ (329) $ 28,773 =========== =========== ===========
* Amount less than $500. ** Includes proceeds received from a non-recurring cash settlement in the amount of $6,006,689 and $140,332 for Capital Appreciation Variable Account and Managed Sectors Variable Account, respectively, from a class-action lawsuit against Cendant Corporation. See notes to financial statements. 26 STATEMENTS OF CHANGES IN NET ASSETS (000 Omitted)
CAPITAL APPRECIATION GLOBAL GOVERNMENTS VARIABLE ACCOUNT VARIABLE ACCOUNT --------------------------- --------------------------- YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, --------------------------- --------------------------- 2003 2002 2003 2002 ------------ ------------ ------------ ------------ Increase (decrease) in net assets: From operations: Net investment income (loss) $ (3,503) $ (4,601) $ 158 $ 198 Net realized gain (loss) on investments and foreign currency transactions (458) (124,529) 1,009 497 Net unrealized gain (loss) on investments and foreign currency translation 74,556 (19,285) 500 1,166 ------------ ------------ ------------ ------------ Increase (decrease) in net assets from operations $ 70,595 $ (148,415) $ 1,667 $ 1,861 ------------ ------------ ------------ ------------ Participant transactions: Accumulation activity: Purchase payments received $ 7,367 $ 10,253 $ 357 $ 436 Net transfers between variable and fixed accumulation accounts (4,305) (13,000) 621 1,365 Withdrawals, surrenders, annuitizations and contract charges (30,559) (47,725) (1,497) (1,490) ------------ ------------ ------------ ------------ Net accumulation activity $ (27,497) $ (50,472) $ (519) $ 311 ------------ ------------ ------------ ------------ Annuitization activity: Annuitizations $ 13 $ 40 $ -- $ 1 Annuity payments and contract charges (469) (623) (6) (5) Net transfers among accounts for annuity reserves (792) (13) (118) 27 Adjustments to annuity reserves 625 465 111 (74) ------------ ------------ ------------ ------------ Net annuitization activity $ (623) $ (131) $ (13) $ (51) ------------ ------------ ------------ ------------ Increase (decrease) in net assets from participant transactions $ (28,120) $ (50,603) $ (532) $ 260 ------------ ------------ ------------ ------------ Total increase (decrease) in net assets $ 42,475 $ (199,018) $ 1,135 $ 2,121 Net assets: At beginning of period 271,851 470,869 12,062 9,941 ------------ ------------ ------------ ------------ At end of period $ 314,326 $ 271,851 $ 13,197 $ 12,062 ============ ============ ============ ============ GOVERNMENT SECURITES VARIABLE ACCOUNT --------------------------- YEAR ENDED DECEMBER 31, --------------------------- 2003 2002 ------------ ------------ Increase (decrease) in net assets: From operations: Net investment income (loss) $ 2,660 $ 4,376 Net realized gain (loss) on investments and foreign currency transactions 1,504 1,007 Net unrealized gain (loss) on investments and foreign currency translation (2,844) 4,771 ------------ ------------ Increase (decrease) in net assets from operations $ 1,320 $ 10,154 ------------ ------------ Participant transactions: Accumulation activity: Purchase payments received $ 2,312 $ 2,179 Net transfers between variable and fixed accumulation accounts (2,752) 4,607 Withdrawals, surrenders, annuitizations and contract charges (14,350) (16,712) ------------ ------------ Net accumulation activity $ (14,790) $ (9,926) ------------ ------------ Annuitization activity: Annuitizations $ 11 $ 39 Annuity payments and contract charges (504) (490) Net transfers among accounts for annuity reserves (388) 62 Adjustments to annuity reserves 480 (41) ------------ ------------ Net annuitization activity $ (401) $ (430) ------------ ------------ Increase (decrease) in net assets from participant transactions $ (15,191) $ (10,356) ------------ ------------ Total increase (decrease) in net assets $ (13,871) $ (202) Net assets: At beginning of period 131,876 132,078 ------------ ------------ At end of period $ 118,005 $ 131,876 ============ ============
See notes to financial statements. 27
HIGH YIELD MANAGED SECTORS VARIABLE ACCOUNT VARIABLE ACCOUNT ------------------------- ------------------------- YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, ------------------------- ------------------------- 2003 2002 2003 2002 ----------- ----------- ----------- ----------- Increase (decrease) in net assets: From operations: Net investment income (loss) $ 5,943 $ 7,007 $ (779) $ (1,083) Net realized gain (loss) on investments and foreign currency transactions (1,399) (17,649) 2,925 (16,573) Net unrealized gain (loss) on investments and foreign currency translation 11,526 10,942 10,825 (6,684) ----------- ----------- ----------- ----------- Increase (decrease) in net assets from operations $ 16,070 $ 300 $ 12,971 $ (24,340) ----------- ----------- ----------- ----------- Participant transactions: Accumulation activity: Purchase payments received $ 1,245 $ 1,286 $ 3,037 $ 3,932 Net transfers between variable and fixed accumulation accounts 1,632 16,395 (169) (5,119) Withdrawals, surrenders, annuitizations and contract charges (11,148) (10,451) (7,142) (11,761) ----------- ----------- ----------- ----------- Net accumulation activity $ (8,271) $ 7,230 $ (4,274) $ (12,948) ----------- ----------- ----------- ----------- Annuitization activity: Annuitizations $ -- $ 106 $ -- $ 13 Annuity payments and contract charges (229) (313) (42) (73) Net transfers among accounts for annuity reserves (363) (4) (53) (21) Adjustments to annuity reserves 106 14 52 10 ----------- ----------- ----------- ----------- Net annuitization activity $ (486) $ (197) $ (43) $ (71) ----------- ----------- ----------- ----------- Increase (decrease) in net assets from participant transactions $ (8,757) $ 7,033 $ (4,317) $ (13,019) ----------- ----------- ----------- ----------- Total increase (decrease) in net assets $ 7,313 $ 7,333 $ 8,654 $ (37,359) Net assets: At beginning of period 94,188 86,855 59,412 96,771 ----------- ----------- ----------- ----------- At end of period $ 101,501 $ 94,188 $ 68,066 $ 59,412 =========== =========== =========== ===========
See notes to financial statements. 28
MONEY MARKET TOTAL RETURN VARIABLE ACCOUNT VARIABLE ACCOUNT --------------------------- --------------------------- YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, --------------------------- --------------------------- 2003 2002 2003 2002 ------------ ------------ ------------ ------------ Increase (decrease) in net assets: From operations: Net investment income (loss) $ (329) $ (31) $ 2,186 $ 3,536 Net realized gain (loss) on investments and foreign currency transactions -- -- 333 (7,793) Net unrealized gain (loss) on investments and foreign currency translation -- -- 26,254 (11,303) ------------ ------------ ------------ ------------ Increase (decrease) in net assets from operations $ (329) $ (31) $ 28,773 $ (15,560) ------------ ------------ ------------ ------------ Participant transactions: Accumulation activity: Purchase payments received $ 2,440 $ 1,789 $ 5,581 $ 6,095 Net transfers between variable and fixed accumulation accounts (1,613) (9,692) 596 1,032 Withdrawals, surrenders, annuitizations and contract charges (13,195) (21,484) (24,545) (27,208) ------------ ------------ ------------ ------------ Net accumulation activity $ (12,368) $ (29,387) $ (18,368) $ (20,081) ------------ ------------ ------------ ------------ Annuitization activity: Annuitizations $ 121 $ 19 $ 259 $ 180 Annuity payments and contract charges (148) (136) (444) (429) Net transfers among accounts for annuity reserves (376) 11 (302) (5) Adjustments to annuity reserves 349 17 61 (209) ------------ ------------ ------------ ------------ Net annuitization activity $ (54) $ (89) $ (426) $ (463) ------------ ------------ ------------ ------------ Decrease in net assets from participant transactions $ (12,422) $ (29,476) $ (18,794) $ (20,544) ------------ ------------ ------------ ------------ Total increase (decrease) in net assets $ (12,751) $ (29,507) $ 9,979 $ (36,104) Net assets: At beginning of period 50,559 80,066 197,356 233,460 ------------ ------------ ------------ ------------ At end of period $ 37,808 $ 50,559 $ 207,335 $ 197,356 ============ ============ ============ ============
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 past 5 years. Certain information reflects financial results for a single unit value. The total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the variable account (assuming reinvestment of all distributions) held for the entire period. This information has been audited by the fund's independent auditors, whose report, together with the variable accounts financial statements, are included in this report.
CAPITAL APPRECIATION VARIABLE ACCOUNT ---------------------------------------------------------------------------- COMPASS 2 ---------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ----------- ----------- ----------- ----------- ----------- Per unit data:* Net asset value -- beginning of period $ 39.859 $ 59.446 $ 80.578 $ 92.242 $ 70.426 ----------- ----------- ----------- ----------- ----------- Investment income $ 0.402 $ 0.369 $ 0.598 $ 0.907 $ 0.401 Expenses (0.951) (1.002) (1.401) (1.920) (1.519) ----------- ----------- ----------- ----------- ----------- Net investment loss $ (0.549) $ (0.633) $ (0.803) $ (1.013) $ (1.118) Net realized and unrealized gain (loss) on investments and foreign currency transactions 11.504 (18.954) (20.329) (10.651) 22.934 ----------- ----------- ----------- ----------- ----------- Net increase (decrease) in unit value $ 10.955 $ (19.587) $ (21.132) $ (11.664) $ 21.816 ----------- ----------- ----------- ----------- ----------- Unit value: Net asset value -- end of period $ 50.814 $ 39.859 $ 59.446 $ 80.578 $ 92.242 =========== =========== =========== =========== =========== Total return 27.48%++^ (32.95)%++ (26.22)%++ -- -- Ratios (to average net assets): Expenses# 2.12% 2.12% 0.79%+ 0.76%+ 0.76%+ Net investment loss (1.20)% (1.36)% (1.19)%+ (1.08)%+ (1.51)%+ Portfolio turnover 104% 80% 123% 140% 85% Number of units outstanding at end of period (000 Omitted) 4,040 4,521 5,340 5,818 6,403 CAPITAL APPRECIATION VARIABLE ACCOUNT ---------------------------------------------------------------------------- COMPASS 3 ---------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ----------- ----------- ----------- ----------- ----------- Per unit data:* Net asset value -- beginning of period $ 26.334 $ 39.314 $ 53.342 $ 61.123 $ 46.713 ----------- ----------- ----------- ----------- ----------- Investment income $ 0.260 $ 0.240 $ 0.417 $ 0.581 $ 0.261 Expenses (0.648) (0.688) (1.025) (1.317) (1.042) ----------- ----------- ----------- ----------- ----------- Net investment loss $ (0.388) $ (0.448) $ (0.608) $ (0.736) $ (0.781) Net realized and unrealized gain (loss) on investments and foreign currency transactions 7.593 (12.532) (13.420) (7.045) 15.191 ----------- ----------- ----------- ----------- ----------- Net increase (decrease) in unit value $ 7.205 $ (12.980) $ (14.028) $ (7.781) $ 14.410 ----------- ----------- ----------- ----------- ----------- Unit value: Net asset value -- end of period $ 33.539 $ 26.334 $ 39.314 $ 53.342 $ 61.123 =========== =========== =========== =========== =========== Total return 27.36%++^ (33.02)%++ (26.30)%++ -- -- Ratios (to average net assets): Expenses# 2.22% 2.22% 0.79%+ 0.76%+ 0.76%+ Net investment loss (1.31)% (1.42)% (1.19)%+ (1.08)%+ (1.51)%+ Portfolio turnover 104% 80% 123% 140% 85% Number of units outstanding at end of period (000 Omitted) 621 812 999 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. ++ The total return does not reflect load fees in conjuction with the redemption of units. # Ratios do not reflect reductions from fees paid indirectly. ^ The fund's total return calculation includes proceeds received on March 26, 2003 from a non-recurring litigation settlement 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 fund's ending net asset value per unit, total return per unit value for the year ended December 31, 2003 would have been 25.24% and 25.12%, for Compass 2 and Compass 3, respectively. See notes to financial statements. 30
CAPITAL APPRECIATION VARIABLE ACCOUNT ---------------------------------------------------------------------------- COMPASS 3 -- LEVEL 2 ---------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ----------- ----------- ----------- ----------- ----------- Per unit data:* Net asset value -- beginning of period $ 10.929 $ 16.292 $ 22.072 $ 25.255 $ 19.272 ----------- ----------- ----------- ----------- ----------- Investment income $ 0.109 $ 0.100 $ 0.154 $ 0.247 $ 0.109 Expenses (0.254) (0.260) (0.357) (0.513) (0.409) ----------- ----------- ----------- ----------- ----------- Net investment loss $ (0.145) $ (0.160) $ (0.203) $ (0.266) $ (0.300) Net realized and unrealized gain (loss) on investments and foreign currency transactions 3.156 (5.203) (5.577) (2.917) 6.283 ----------- ----------- ----------- ----------- ----------- Net increase (decrease) in unit value $ 3.011 $ (5.363) $ (5.780) $ (3.183) $ 5.983 ----------- ----------- ----------- ----------- ----------- Unit value: Net asset value -- end of period $ 13.940 $ 10.929 $ 16.292 $ 22.072 $ 25.255 =========== =========== =========== =========== =========== Total return 27.55%++^ (32.92)%++ (26.19)%++ -- -- Ratios (to average net assets): Expenses# 2.07% 2.07% 0.79%+ 0.76%+ 0.76%+ Net investment loss (1.17)% (1.32)% (1.19)%+ (1.08)%+ (1.51)%+ Portfolio turnover 104% 80% 123% 140% 85% Number of units outstanding at end of period (000 Omitted) 6,086 6,148 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. ++ The total return does not reflect load fees in conjuction with the redemption of units. # Ratios do not reflect reductions from fees paid indirectly. ^ The fund's total return calculation includes proceeds received on March 26, 2003 from a non-recurring litigation settlement 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 fund'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. See notes to financial statements. 31
GLOBAL GOVERNMENTS VARIABLE ACCOUNT ---------------------------------------------------------------------------- COMPASS 2 ---------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ----------- ----------- ----------- ----------- ----------- Per unit data:* Net asset value -- beginning of period $ 22.125 $ 18.653 $ 19.378 $ 19.459 $ 20.830 ----------- ----------- ----------- ----------- ----------- Investment income@@ $ 0.877 $ 0.861 $ 0.946 $ 1.144 $ 1.095 Expenses (0.584) (0.486) (0.500) (0.471) (0.479) ----------- ----------- ----------- ----------- ----------- Net investment income@ $ 0.293 $ 0.375 $ 0.446 $ 0.673 $ 0.616 Net realized and unrealized gain (loss) on investments and foreign currency transactions 2.751 3.097 (1.171) (0.754) (1.987) ----------- ----------- ----------- ----------- ----------- Net increase (decrease) in unit value $ 3.044 $ 3.472 $ (0.725) $ (0.081) $ (1.371) ----------- ----------- ----------- ----------- ----------- Unit value: Net asset value -- end of period $ 25.169 $ 22.125 $ 18.653 $ 19.378 $ 19.459 =========== =========== =========== =========== =========== Total return 13.76%++ 18.61%++ (3.74)%++ -- -- Ratios (to average net assets): Expenses# 2.47% 2.50% 1.28%+ 1.25%+ 1.11%+ Net investment income@@ 1.23% 1.73% 2.23%+ 3.50%+ 3.07%+ Portfolio turnover 130% 126% 72% 130% 172% Number of units outstanding at end of period (000 Omitted) 161 160 134 167 212
@ The investment adviser voluntarily 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 share and the ratios would have been: Net investment income@@ $ -- $ 0.850 $ 0.470 $ -- $ -- Ratios (to average net assets): Expenses# -- 2.44% 1.39%+ -- -- Net investment income@@ -- 1.79% 2.12%+ -- --
GLOBAL GOVERNMENTS VARIABLE ACCOUNT ---------------------------------------------------------------------------- COMPASS 3 ---------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ----------- ----------- ----------- ----------- ----------- Per unit data:* Net asset value -- beginning of period $ 21.638 $ 18.269 $ 19.007 $ 19.115 $ 20.492 ----------- ----------- ----------- ----------- ----------- Investment income@@ $ 0.869 $ 0.846 $ 1.063 $ 1.103 $ 0.986 Expenses (0.600) (0.511) (0.579) (0.480) (0.442) ----------- ----------- ----------- ----------- ----------- Net investment income@ $ 0.269 $ 0.335 $ 0.484 $ 0.623 $ 0.544 Net realized and unrealized gain (loss) on investments and foreign currency transactions 2.671 3.034 (1.222) (0.731) (1.921) ----------- ----------- ----------- ----------- ----------- Net increase (decrease) in unit value $ 2.940 $ 3.369 $ (0.738) $ (0.108) $ (1.377) ----------- ----------- ----------- ----------- ----------- Unit value: Net asset value-- end of period $ 24.578 $ 21.638 $ 18.269 $ 19.007 $ 19.115 =========== =========== =========== =========== =========== Total return 13.59%++ 18.44%++ (3.88)%++ -- -- Ratios (to average net assets): Expenses# 2.62% 2.65% 1.28%+ 1.25%+ 1.11%+ Net investment income@@ 1.15% 1.77% 2.23%+ 3.50%+ 3.07%+ Portfolio turnover 130% 126% 72% 130% 172% Number of units outstanding at end of period (000 Omitted) 41 58 68 108 186
@ The investment adviser voluntarily 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 share and the ratios would have been: Net investment income@@ $ -- $ 0.840 $ 0.500 $ -- $ -- Ratios (to average net assets): Expenses# -- 2.56% 1.39%+ -- -- Net investment income@@ -- 1.87% 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 share by $0.080 and $0.080, respectively, increase net realized and unrealized gains and losses per share 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 share, 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. ++ The total return does not reflect load fees in conjunction with the redemption of units. # Ratios do not reflect reductions from fees paid indirectly. See notes to financial statements. 32
GLOBAL GOVERNMENTS VARIABLE ACCOUNT ---------------------------------------------------------------------------- COMPASS 3 -- LEVEL 2 ---------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ----------- ----------- ----------- ----------- ----------- Per unit data:* Net asset value -- beginning of period $ 12.655 $ 10.669 $ 11.083 $ 11.130 $ 11.914 ----------- ----------- ----------- ----------- ----------- Investment income@@ $ 0.494 $ 0.499 $ 0.520 $ 0.654 $ 1.826 Expenses (0.331) (0.281) (0.274) (0.270) (0.782) ----------- ----------- ----------- ----------- ----------- Net investment income@ $ 0.163 $ 0.218 $ 0.246 $ 0.384 $ 1.044 Net realized and unrealized gain (loss) on investments and foreign currency transactions 1.578 1.768 (0.660) (0.431) (1.828) ----------- ----------- ----------- ----------- ----------- Net increase (decrease) in unit value $ 1.741 $ 1.986 $ (0.414) $ (0.047) $ (0.784) ----------- ----------- ----------- ----------- ----------- Unit value: Net asset value -- end of period $ 14.396 $ 12.655 $ 10.669 $ 11.083 $ 11.130 =========== =========== =========== =========== =========== Total return 13.76%++ 18.61%++ (3.74)%++ -- -- Ratios (to average net assets): Expenses# 2.47% 2.50% 1.28%+ 1.25%+ 1.11%+ Net investment income@@ 1.21% 1.70% 2.23%+ 3.50%+ 3.07%+ Portfolio turnover 130% 126% 72% 130% 172% Number of units outstanding at end of period (000 Omitted) 559 568 574 619 641
@ The investment adviser voluntarily 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 share and the ratios would have been: Net investment income@@ $ -- $ 0.490 $ 0.260 $ -- $ -- Ratios (to average net assets): Expenses# -- 2.42% 1.40%+ -- -- Net investment income@@ -- 1.78% 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 share by $0.040, increase net realized and unrealized gains and losses per share by $0.00, and decrease the ratio of net investment income to average net assets by 0.41%. Per share, 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. ++ The total return does not reflect load fees in conjunction with the redemption of units. # Ratios do not reflect reductions from fees paid indirectly. See notes to financial statements. 33
GLOBAL GOVERNMENTS VARIABLE ACCOUNT ---------------------------------------------------------------------------- COMPASS 2 ---------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ----------- ----------- ----------- ----------- ----------- Per unit data:* Net asset value -- beginning of period $ 36.124 $ 33.448 $ 31.520 $ 28.523 $ 29.418 ----------- ----------- ----------- ----------- ----------- Investment income@@ $ 1.482 $ 1.862 $ 2.183 $ 2.169 $ 2.053 Expenses (0.711) (0.677) (0.661) (0.572) (0.558) ----------- ----------- ----------- ----------- ----------- Net investment income $ 0.771 $ 1.185 $ 1.522 $ 1.597 $ 1.495 Net realized and unrealized gain (loss) on investments and foreign currency transactions (0.425) 1.491 0.406 1.400 (2.390) ----------- ----------- ----------- ----------- ----------- Net increase (decrease) in unit value $ 0.346 $ 2.676 $ 1.928 $ 2.997 $ (0.895) ----------- ----------- ----------- ----------- ----------- Unit value: Net asset value -- end of period $ 36.470 $ 36.124 $ 33.448 $ 31.520 $ 28.523 =========== =========== =========== =========== =========== Total return 0.96%++ 8.00%++ 6.12%++ -- -- Ratios (to average net assets): Expenses# 1.95% 1.94% 0.66%+ 0.64%+ 0.63%+ Net investment income@@ 2.08% 3.19% 4.42%+ 5.28%+ 5.06%+ Portfolio turnover 138% 139% 89% 51% 75% Number of units outstanding at end of period (000 Omitted) 2,447 2,759 3,043 3,210 4,228 GLOBAL GOVERNMENTS VARIABLE ACCOUNT ---------------------------------------------------------------------------- COMPASS 3 ---------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ----------- ----------- ----------- ----------- ----------- Per unit data:* Net asset value -- beginning of period $ 25.284 $ 23.434 $ 22.105 $ 20.023 $ 20.672 ----------- ----------- ----------- ----------- ----------- Investment income@@ $ 1.045 $ 1.300 $ 1.590 $ 1.476 $ 1.410 Expenses (0.514) (0.495) (0.510) (0.412) (0.407) ----------- ----------- ----------- ----------- ----------- Net investment income $ 0.531 $ 0.805 $ 1.080 $ 1.064 $ 1.003 Net realized and unrealized gain (loss) on investments and foreign currency transactions (0.314) 1.045 0.249 1.018 (1.652) ----------- ----------- ----------- ----------- ----------- Net increase (decrease) in unit value $ 0.217 $ 1.850 $ 1.329 $ 2.082 $ (0.649) ----------- ----------- ----------- ----------- ----------- Unit value: Net asset value -- end of period $ 25.501 $ 25.284 $ 23.434 $ 22.105 $ 20.023 =========== =========== =========== =========== =========== Total return 0.86%++ 7.89%++ 6.01%++ -- -- Ratios (to average net assets): Expenses# 2.05% 2.04% 0.66%+ 0.64%+ 0.63%+ Net investment income@@ 2.08% 3.36% 4.42%+ 5.28%+ 5.06%+ Portfolio turnover 138% 139% 89% 51% 75% Number of units outstanding at end of period (000 Omitted) 147 205 254 398 701 GLOBAL GOVERNMENTS VARIABLE ACCOUNT ---------------------------------------------------------------------------- COMPASS 3 -- LEVEL 2 ---------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ----------- ----------- ----------- ----------- ----------- Per unit data:* Net asset value -- beginning of period $ 14.763 $ 13.663 $ 12.868 $ 11.639 $ 11.998 ----------- ----------- ----------- ----------- ----------- Investment income@@ $ 0.597 $ 0.732 $ 0.826 $ 0.876 $ 0.833 Expenses (0.282) (0.267) (0.248) (0.228) (0.222) ----------- ----------- ----------- ----------- ----------- Net investment income $ 0.315 $ 0.465 $ 0.578 $ 0.648 $ 0.611 Net realized and unrealized gain (loss) on investments and foreign currency transactions (0.166) 0.635 0.217 0.581 (0.970) ----------- ----------- ----------- ----------- ----------- Net increase (decrease) in unit value $ 0.149 $ 1.100 $ 0.795 $ 1.229 $ (0.359) ----------- ----------- ----------- ----------- ----------- Unit value: Net asset value -- end of period $ 14.912 $ 14.763 $ 13.663 $ 12.868 $ 11.639 =========== =========== =========== =========== =========== Total return 1.01%++ 8.05%++ 6.17%++ -- -- Ratios (to average net assets): Expenses# 1.90% 1.89% 0.66%+ 0.64%+ 0.63%+ Net investment income@@ 2.10% 3.17% 4.42%+ 5.28%+ 5.06%+ Portfolio turnover 138% 139% 89% 51% 75% Number of units outstanding at end of period (000 Omitted) 1,562 1,692 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 share by $0.06, $0.04 and $0.03, respectively, increase net realized and unrealized gains and losses per share 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 share, 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. ++ The total return does not reflect load fees in conjuction with redemption of units. # Ratios do not reflect reductions from fees paid indirectly. See notes to financial statements. 34
HIGH YIELD VARIABLE ACCOUNT ---------------------------------------------------------------------------- COMPASS 2 ---------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ----------- ----------- ----------- ----------- ----------- Per unit data:* Net asset value -- beginning of period $ 28.505 $ 28.969 $ 29.882 $ 33.630 $ 31.973 ----------- ----------- ----------- ----------- ----------- Investment income@@ $ 2.769 $ 3.015 $ 3.684 $ 3.786 $ 3.424 Expenses (0.689) (0.617) (0.699) (0.725) (0.728) ----------- ----------- ----------- ----------- ----------- Net investment income $ 2.080 $ 2.398 $ 2.985 $ 3.061 $ 2.696 Net realized and unrealized gain (loss) on investments and foreign currency 3.471 (2.862) (3.898) (6.809) (1.039) ----------- ----------- ----------- ----------- ----------- Net increase (decrease) in unit value $ 5.551 $ (0.464) $ (0.913) $ (3.748) $ 1.657 ----------- ----------- ----------- ----------- ----------- Unit value: Net asset value -- end of period $ 34.056 $ 28.505 $ 28.969 $ 29.882 $ 33.630 =========== =========== =========== =========== =========== Total return 19.47%++ (1.60)%++ (3.05)%++ -- -- Ratios (to average net assets) Expenses# 2.20% 2.18% 0.90%+ 0.89%+ 0.90%+ Net Investment income@@ 6.53% 7.84% 9.16%+ 9.00%+ 7.93%+ Portfolio turnover 164% 172% 103% 109% 153% Number of units outstanding at end of period (000 Omitted) 1,827 2,069 2,328 2,677 3,065 HIGH YIELD VARIABLE ACCOUNT ---------------------------------------------------------------------------- COMPASS 3 ---------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ----------- ----------- ----------- ----------- ----------- Per unit data:* Net asset value -- beginning of period $ 20.986 $ 21.349 $ 22.043 $ 24.832 $ 23.633 ----------- ----------- ----------- ----------- ----------- Investment income@@ $ 1.964 $ 2.141 $ 3.188 $ 2.730 $ 2.451 Expenses (0.514) (0.469) (0.643) (0.557) (0.552) ----------- ----------- ----------- ----------- ----------- Net investment income $ 1.450 $ 1.672 $ 2.545 $ 2.173 $ 1.899 Net realized and unrealized gain (loss) on investments and foreign currency 2.612 (2.035) (3.239) (4.962) (0.700) ----------- ----------- ----------- ----------- ----------- Net increase (decrease) in unit value $ 4.062 $ (0.363) $ (0.694) $ (2.789) $ 1.199 ----------- ----------- ----------- ----------- ----------- Unit value: Net asset value -- end of period $ 25.048 $ 20.986 $ 21.349 $ 22.043 $ 24.832 =========== =========== =========== =========== =========== Total return 19.35%++ (1.70)%++ (3.15)%++ -- -- Ratios (to average net assets) Expenses# 2.30% 2.28% 0.90%+ 0.89%+ 0.90%+ Net Investment income@@ 6.41% 8.45% 9.16%+ 9.00%+ 7.93%+ Portfolio turnover 164% 172% 103% 109% 153% Number of units outstanding at end of period (000 Omitted) 115 178 231 297 427
@@ 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 share by $0.02, and decrease the ratio of net investment income to average net assets by 0.06%. Per share, ratios, and supplemental data for periods prior to Janaury 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. ++ The total return does not reflect load fees in conjunction with the redemption of units. # Ratios do not reflect reductions from fees paid indirectly. See notes to financial statements. 35
HIGH YIELD VARIABLE ACCOUNT ---------------------------------------------------------------------------- COMPASS 3 -- LEVEL 2 ---------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ----------- ----------- ----------- ----------- ----------- Per unit data:* Net asset value -- beginning of period $ 11.199 $ 11.376 $ 11.728 $ 13.193 $ 12.537 ----------- ----------- ----------- ----------- ----------- Investment income@@ $ 1.161 $ 1.220 $ 0.784 $ 1.527 $ 1.414 Expenses (0.286) (0.257) (0.151) (0.290) (0.296) ----------- ----------- ----------- ----------- ----------- Net investment income $ 0.875 $ 0.963 $ 0.633 $ 1.237 $ 1.118 Net realized and unrealized gain (loss) on investments and foreign currency 1.312 (1.140) (0.985) (2.702) (0.462) ----------- ----------- ----------- ----------- ----------- Net increase (decrease) in unit value $ 2.187 $ (0.177) $ (0.352) $ (1.465) $ 0.656 ----------- ----------- ----------- ----------- ----------- Unit value: Net asset value -- end of period $ 13.386 $ 11.199 $ 11.376 $ 11.728 $ 13.193 =========== =========== =========== =========== =========== Total return 19.53%++ (1.55)%++ (3.01)%++ -- -- Ratios (to average net assets) Expenses# 2.15% 2.13% 0.90%+ 0.89%+ 0.90%+ Net Investment income@@ 6.57% 6.08% 9.16%+ 9.00%+ 7.93%+ Portfolio turnover 164% 172% 103% 109% 153% Number of units outstanding at end of period (000 Omitted) 2,631 2,684 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 share and increase net realized and unrealized gains and losses per share. The impact of this change calculates to less than $0.01 per share. In addition, the ratio of net investment income to average net assets decreased by 0.06%. Per share, 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. ++ The total return does not reflect load fees in conjunction with the redemption of units. # Ratios do not reflect reductions from fees paid indirectly. See notes to financial statements. 36
MANAGED SECTORS VARIABLE ACCOUNT ---------------------------------------------------------------------------- COMPASS 2 ---------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ----------- ----------- ----------- ----------- ----------- Per unit data:* Net asset value -- beginning of period $ 33.716 $ 46.116 $ 72.314 $ 92.865 $ 50.488 ----------- ----------- ----------- ----------- ----------- Investment income $ 0.333 $ 0.270 $ 0.465 $ 0.633 $ 0.493 Expenses (0.788) (0.810) (1.179) 1.817 1.236 ----------- ----------- ----------- ----------- ----------- Net investment loss $ (0.455) $ (0.540) $ (0.714) $ (1.184) $ (0.743) Net realized and unrealized gain (loss) on investments and foreign currency transactions 8.264 (11.860) (25.484) (19.367) 43.120 ----------- ----------- ----------- ----------- ----------- Net increase (decrease) in unit value $ 7.809 $ (12.400) $ (26.198) $ (20.551) $ 42.377 ----------- ----------- ----------- ----------- ----------- Unit value: Net asset value -- end of period $ 41.525 $ 33.716 $ 46.116 $ 72.314 $ 92.865 =========== =========== =========== =========== =========== Total return 23.16%++^ (26.89)%++ (36.23)%++ -- -- Ratios (to average net assets): Expenses# 2.12% 2.10% 0.88%+ 0.83%+ 0.84%+ Net investment loss (1.22)% (1.45)% (1.32)%+ (1.39)%+ (1.30)%+ Portfolio turnover 80% 264% 295% 447% 417% Number of units outstanding at end of period (000 Omitted) 409 455 573 697 686 MANAGED SECTORS VARIABLE ACCOUNT ---------------------------------------------------------------------------- COMPASS 3 ---------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ----------- ----------- ----------- ----------- ----------- Per unit data:* Net asset value -- beginning of period $ 33.207 $ 45.487 $ 71.434 $ 91.870 $ 50.021 ----------- ----------- ----------- ----------- ----------- Investment income $ 0.321 $ 0.251 $ 0.487 $ 0.602 $ 0.473 Expenses (0.817) (0.852) (1.297) (1.908) (1.290) ----------- ----------- ----------- ----------- ----------- Net investment loss $ (0.496) $ (0.601) $ (0.810) $ (1.306) $ (0.817) Net realized and unrealized gain (loss) on investments and foreign currency transactions 8.126 (11.679) (25.137) (19.130) 42.666 ----------- ----------- ----------- ----------- ----------- Net increase (decrease) in unit value $ 7.630 $ (12.280) $ (25.947) $ (20.436) $ 41.849 ----------- ----------- ----------- ----------- ----------- Unit value: Net asset value -- end of period $ 40.837 $ 33.207 $ 45.487 $ 71.434 $ 91.870 =========== =========== =========== =========== =========== Total return 22.98%++^ (27.00)%++ (36.32)%++ -- -- Ratios (to average net assets): Expenses# 2.27% 2.25% 0.88%+ 0.83%+ 0.84%+ Net investment loss (1.37)% (1.56)% (1.32)%+ (1.39)%+ (1.30)%+ Portfolio turnover 80% 264% 295% 447% 417% Number of units outstanding at end of period (000 Omitted) 202 296 390 576 785
* 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. ++ The total return does not reflect load fees in conjuction with the redemption of units. # Ratios do not reflect reductions from fees paid indirectly. ^ The fund's total return calculation includes proceeds received on March 26, 2003 from a non-recurring litigation settlement 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 fund'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. See notes to financial statements. 37
MANAGED SECTORS VARIABLE ACCOUNT ---------------------------------------------------------------------------- COMPASS 3 -- LEVEL 2 ---------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ----------- ----------- ----------- ----------- ----------- Per unit data:* Net asset value -- beginning of period $ 10.730 $ 14.676 $ 23.014 $ 29.554 $ 16.068 ----------- ----------- ----------- ----------- ----------- Investment income $ 0.106 $ 0.083 $ 0.136 $ 0.201 $ 0.159 Expenses (0.252) (0.259) (0.350) (0.578) (0.401) ----------- ----------- ----------- ----------- ----------- Net investment loss $ (0.146) $ (0.176) $ (0.214) $ (0.377) $ (0.242) Net realized and unrealized gain (loss) on investments and foreign currency transactions 2.631 (3.770) (8.124) (6.163) 13.728 ----------- ----------- ----------- ----------- ----------- Net increase (decrease) in unit value $ 2.485 $ (3.946) $ (8.338) $ (6.540) $ 13.486 ----------- ----------- ----------- ----------- ----------- Unit value: Net asset value -- end of period $ 13.215 $ 10.730 $ 14.676 $ 23.014 $ 29.554 =========== =========== =========== =========== =========== Total return 23.16%++^ (26.89)%++ (36.23)%++ -- -- Ratios (to average net assets): Expenses# 2.12% 2.10% 0.88%+ 0.83%+ 0.84%+ Net investment loss (1.22)% (1.46)% (1.32)%+ (1.39)%+ (1.30)%+ Portfolio turnover 80% 264% 295% 447% 417% Number of units outstanding at end of period (000 Omitted) 3,228 3,173 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. ++ The total return does not reflect load fees in conjuction with the redemption of units. # Ratios do not reflect reductions from fees paid indirectly. ^ The fund's total return calculation includes proceeds received on March 26, 2003 from a non-recurring litigation settlement 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 fund'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. See notes to financial statements. 38
MONEY MARKET VARIABLE ACCOUNT ---------------------------------------------------------------------------- COMPASS 2 ---------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ----------- ----------- ----------- ----------- ----------- Per unit data:* Net asset value -- beginning of period $ 20.322 $ 20.341 $ 19.862 $ 18.997 $ 18.391 ----------- ----------- ----------- ----------- ----------- Investment income $ 0.247 $ 0.382 $ 0.950 $ 1.232 $ 0.960 Expenses (0.381) (0.401) (0.471) (0.367) (0.354) ----------- ----------- ----------- ----------- ----------- Net Increase (decrease) in unit value $ (0.134) $ (0.019) $ 0.479 $ 0.865 $ 0.606 ----------- ----------- ----------- ----------- ----------- Unit value: Net asset value -- end of period $ 20.188 $ 20.322 $ 20.341 $ 19.862 $ 18.997 =========== =========== =========== =========== =========== Total return (0.66)%++ (0.09)%++ 2.41%++ -- -- Ratios (to average net assets): Expenses## 1.87% 1.96% 0.65%+ 0.60%+ 0.58%+ Net investment income (0.63)% (0.12)% 2.51%+ 4.45%+ 3.25%+ Number of units outstanding at end of period (000 Omitted) 1,172 1,626 1,986 3,304 3,749 MONEY MARKET VARIABLE ACCOUNT ---------------------------------------------------------------------------- COMPASS 2 ---------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ----------- ----------- ----------- ----------- ----------- Per unit data:* Net asset value -- beginning of period $ 16.680 $ 16.712 $ 16.334 $ 15.638 $ 15.154 ----------- ----------- ----------- ----------- ----------- Investment income $ 0.198 $ 0.318 $ 0.784 $ 1.002 $ 0.781 Expenses (0.325) (0.350) (0.406) (0.306) (0.297) ----------- ----------- ----------- ----------- ----------- Net increase (decrease) in unit value $ (0.127) $ (0.032) $ 0.378 $ 0.696 $ 0.484 ----------- ----------- ----------- ----------- ----------- Unit value: Net asset value -- end of period $ 16.553 $ 16.680 $ 16.712 $ 16.334 $ 15.638 =========== =========== =========== =========== =========== Total return (0.76)%++ (0.19)%++ 2.31%++ -- -- Ratios (to average net assets): Expenses## 1.97% 2.06% 0.65%+ 0.60%+ 0.58%+ Net investment income (0.74)% (0.14)% 2.51%+ 4.45%+ 3.25%+ Number of units outstanding at end of period (000 Omitted) 155 186 222 468 863 MONEY MARKET VARIABLE ACCOUNT ---------------------------------------------------------------------------- COMPASS 3 -- LEVEL 2 ---------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ----------- ----------- ----------- ----------- ----------- Per unit data:* Net asset value -- beginning of period $ 12.466 $ 12.472 $ 12.172 $ 11.636 $ 11.259 ----------- ----------- ----------- ----------- ----------- Investment income $ 0.131 $ 0.223 $ 0.710 $ 0.747 $ 0.579 Expenses (0.207) (0.229) (0.410) (0.211) (0.202) ----------- ----------- ----------- ----------- ----------- Net increase (decrease) in unit value $ (0.076) $ (0.006) $ 0.300 $ 0.536 $ 0.377 ----------- ----------- ----------- ----------- ----------- Unit value: Net asset value -- end of period $ 12.390 $ 12.466 $ 12.472 $ 12.172 $ 11.636 =========== =========== =========== =========== =========== Total return (0.61)%++ (0.04)%++ 2.46%++ -- -- Ratios (to average net assets): Expenses# 1.82% 1.91% 0.65%+ 0.60%+ 0.58%+ Net investment income (0.61)% (0.01)% 2.51%+ 4.45%+ 3.25%+ Number of units outstanding at end of period (000 Omitted) 896 1,113 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. ++ The total return does not reflect load fees in conjunction with the redemption of units. # Ratios do not reflect reductions from fees paid indirectly. See notes to financial statements. 39
TOTAL RETURN VARIABLE ACCOUNT ---------------------------------------------------------------------------- COMPASS 2 ---------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ----------- ----------- ----------- ----------- ----------- Per unit data:* Net asset value -- beginning of period $ 35.950 $ 38.562 $ 39.126 $ 33.729 $ 33.250 ----------- ----------- ----------- ----------- ----------- Investment income $ 1.237 $ 1.407 $ 1.513 $ 1.464 $ 1.374 Expenses (0.800) (0.777) (0.830) (0.727) (0.701) ----------- ----------- ----------- ----------- ----------- Net investment income $ 0.437 $ 0.630 $ 0.683 $ 0.737 $ 0.673 Net realized and unrealized gain (loss) on investments and foreign currency transactions 5.184 (3.242) (1.247) 4.660 (0.194) ----------- ----------- ----------- ----------- ----------- Net increase (decrease) in unit value $ 5.621 $ (2.612) $ (0.564) $ 5.397 $ 0.479 ----------- ----------- ----------- ----------- ----------- Unit value: Net asset value -- end of period $ 41.571 $ 35.950 $ 38.562 $ 39.126 $ 33.729 =========== =========== =========== =========== =========== Total return 15.64%++ (6.77)%++ (1.44)%++ -- -- Ratios (to average net assets): Expenses# 2.10% 2.08% 0.85%+ 0.83%+ 0.83%+ Net investment income 1.13% 1.43% 1.67%+ 2.02%+ 1.90%+ Portfolio turnover 62% 76% 104% 105% 106% Number of units outstanding at end of period (000 Omitted) 1,688 1,871 2,080 2,240 2,925 TOTAL RETURN VARIABLE ACCOUNT ---------------------------------------------------------------------------- COMPASS 3 ---------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ----------- ----------- ----------- ----------- ----------- Per unit data:* Net asset value -- beginning of period $ 35.160 $ 37.771 $ 38.379 $ 33.134 $ 32.713 ----------- ----------- ----------- ----------- ----------- Investment income $ 1.200 $ 1.360 $ 1.599 $ 1.395 $ 1.315 Expenses (0.823) (0.804) (0.939) (0.749) (0.727) ----------- ----------- ----------- ----------- ----------- Net investment income $ 0.377 $ 0.556 $ 0.660 $ 0.646 $ 0.588 Net realized and unrealized gain (loss) on investments and foreign currency transactions 5.060 (3.167) (1.268) 4.599 (0.167) ----------- ----------- ----------- ----------- ----------- Net increase (decrease) in unit value $ 5.437 $ (2.611) $ (0.608) $ 5.245 $ 0.421 ----------- ----------- ----------- ----------- ----------- Unit value: Net asset value -- end of period $ 40.597 $ 35.160 $ 37.771 $ 38.379 $ 33.134 =========== =========== =========== =========== =========== Total return 15.46%++ (6.91)%++ (1.59.)%++ -- -- Ratios (to average net assets): Expenses# 2.25% 2.23% 0.85%+ 0.83%+ 0.83%+ Net investment income 1.01% 1.61% 1.67+ 2.02%+ 1.90%+ Portfolio turnover 62% 76% 104% 105% 106% Number of units outstanding at end of period (000 Omitted) 453 634 838 1,253 2,125 TOTAL RETURN VARIABLE ACCOUNT ---------------------------------------------------------------------------- COMPASS 3 -- LEVEL 2 ---------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ----------- ----------- ----------- ----------- ----------- Per unit data:* Net asset value -- beginning of period $ 16.949 $ 18.180 $ 18.445 $ 15.901 $ 15.676 ----------- ----------- ----------- ----------- ----------- Investment income $ 0.575 $ 0.658 $ 0.687 $ 0.683 $ 0.642 Expenses (0.376) (0.367) (0.382) (0.343) (0.331) ----------- ----------- ----------- ----------- ----------- Net investment income $ 0.199 $ 0.291 $ 0.305 $ 0.340 $ 0.311 Net realized and unrealized gain (loss) on investments and foreign currency transactions 2.451 (1.522) (0.570) 2.204 (0.086) ----------- ----------- ----------- ----------- ----------- Net increase (decrease) in unit value $ 2.650 $ (1.231) $ (0.265) $ 2.544 $ 0.225 ----------- ----------- ----------- ----------- ----------- Unit value: Net asset value -- end of period $ 19.599 $ 16.949 $ 18.180 $ 18.445 $ 15.901 =========== =========== =========== =========== =========== Total return 15.64%++ (6.77)%++ (1.44)%++ -- -- Ratios (to average net assets): Expenses# 2.10% 2.08% 0.85%+ 0.83%+ 0.83%+ Net investment income 1.11% 1.55% 1.67%+ 2.02%+ 1.90%+ Portfolio turnover 62% 76% 104% 105% 106% Number of units outstanding at end of period (000 Omitted) 5,946 6,236 6,537 6,382 6,729
* 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. ++ The total return does not reflect load fees in conjuction with the redemption of units. # Ratios do not reflect reductions from fees paid indirectly. See notes to financial statements. 40 NOTES TO FINANCIAL STATEMENTS (1) 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 -- The variable accounts use independent pricing services approved by the Board of Trustees wherever possible to value their portfolio securities. Portfolio securities are valued at current market prices where current market prices are readily available, or the variable account may fair value portfolio securities under the direction of the Board of Trustees when a determination is made that current market prices are not readily available. 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. Equity securities for which it is determined that current market prices are not readily available will be fair valued under the direction of the Board of Trustees. The variable accounts may also fair value foreign equity securities in cases where closing market prices are not readily available or are deemed not reflective of readily available market prices. 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 account calculates 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 account may utilize information from an external vendor or other sources to adjust closing market prices 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. 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. Bonds and other fixed income securities for which it is determined that current market prices are not readily available will be fair valued under the direction of the Board of Trustees. Foreign currency options are valued using an internal pricing model approved by the Board of Trustees that uses market data from an independent pricing service. 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 service. 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 variable accounts' use of amortized cost is subject to the variable accounts' compliance with certain conditions as specified under Rule 2a-7 of the Investment Company Act of 1940. Repurchase Agreements -- Certain variable accounts may enter into repurchase agreements with institutions that the 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 densure 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 -- 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. 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 41 rate movements on income and expenses are recorded for financial statement purposes as foreign currency transaction gains and losses. That portion of both realized and unrealized gains and losses on investments that results from fluctuations in foreign currency exchange rates is not separately disclosed. 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 account. The variable accounts' investment in futures contracts is designed to hedge against anticipated future changes in interest or exchange 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 currency futures for purposes other than hedging may be made to change the variable accounts' relative position in one or more currencies without buying and selling portfolio assets. 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 or exchange 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 account may enter into contracts to deliver or receive foreign currency it will receive from or require for its normal investment activities. The variable account 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. 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 and tax reporting purposes in accordance with generally accepted accounting principles and federal tax regulations, respectively. All discount is accreted for tax reporting purposes as required by federal income tax regulations. Dividends received in cash are recorded on the ex-dividend date. 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 accounts 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. The following variable accounts were a participant in a class-action lawsuit against Cendant Corporation. On March 26, 2003 the variable account received a cash settlement recorded as a realized gain on investment transaction. The 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
42 Excluding 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%
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 year ended December 31, 2003, each variable account's custodian fees were reduced under this arrangement. The Capital Appreciation Variable Account, Managed Sectors Variable Account, and Total Return Variable Account have entered into a directed brokerage agreement, under which the broker will credit the variable account a portion of the commissions generated, to offset certain expenses of the variable account. For the year ended December 31, 2003, each variable accounts' custodian fees were 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 $ (77) $ -- $ (1,467) $ (1,777) $ -- $ (60) $ (303) Directed brokerage credits (14,233) -- -- -- (10) -- (51)
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. 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. 43 (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 accrued daily and paid monthly.
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%
Administrator -- The variable accounts have an administrative services agreement with MFS to provide the variable accounts with certain financial, legal, shareholder communications, compliance, and other administrative services. As a partial reimbursement for the cost of providing these services, the variable accounts pay 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%
(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 $ 289,655,334 $ 315,649,941 Global Governments Variable Account 10,996,458 9,971,564 Government Securities Variable -- 9,306,503 High Yield Variable Account 138,207,798 143,106,464 Managed Sectors Variable Account 49,007,312 52,262,883 Money Market Variable Account* 1,460,788,160 1,478,217,338 Total Return Variable Account 68,406,520 79,915,425
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 $ 4,323,435 $ 4,599,853 Government Securities Variable Account 170,773,394 174,065,629 Total Return Variable Account 48,368,328 47,924,417
*Purchases and sales of investments for Money Market Variable Account consist solely of short-term obligations. 44 (7) PARTICIPANT TRANSACTIONS The changes in net assets from changes in numbers of outstanding units were as follows:
YEAR ENDED DECEMBER 31, 2003 (OOO OMITTED) ------------------------------------------------------------------------------------- TRANSFERS BETWEEN WITHDRAWALS, VARIABLE ACCOUNTS SURRENDERS, PURCHASE AND FIXED ANNUITIZATIONS, PAYMENTS ACCUMULATION AND CONTRACT RECEIVED ACCOUNT CHARGES -------------------------- --------------------------- --------------------------- UNITS DOLLARS UNITS DOLLARS UNITS DOLLARS ------------ ------------ ------------ ------------ ------------ ------------ Capital Appreciation Variable Account Compass 2 Contracts 52 $ 2,088 (57) $ (1,996) (476) $ (21,416) Compass 3 Contracts 104 3,003 (236) (6,888) (59) (1,700) Compass 3 Level 2 Contracts 205 2,276 338 4,579 (605) (7,443) ------------ ------------ ------------ $ 7,367 $ (4,305) $ (30,559) ============ ============ ============ Global Government Variable Account Compass 2 Contracts 1 $ 22 15 $ 346 (15) $ (365) Compass 3 Contracts 9 195 (19) (422) (7) (165) Compass 3 Level 2 Contracts 12 140 52 697 (73) (967) ------------ ------------ ------------ $ 357 $ 621 $ (1,497) ============ ============ ============ Government Securities Variable Account Compass 2 Contracts 25 $ 845 (39) $ (1,440) (298) $ (10,778) Compass 3 Contracts 33 816 (71) (1,792) (20) (512) Compass 3 Level 2 Contracts 47 651 29 480 (206) (3,060) ------------ ------------ ------------ $ 2,312 $ (2,752) $ (14,350) ============ ============ ============ High Yield Variable Account Compass 2 Contracts 17 $ 475 30 $ 1,123 (289) $ (9,021) Compass 3 Contracts 19 413 (65) (1,440) (17) (392) Compass 3 Level 2 Contracts 33 357 53 1,949 (139) (1,735) ------------ ------------ ------------ $ 1,245 $ 1,632 $ (11,148) ============ ============ ============ Managed Sectors Variable Account Compass 2 Contracts 10 $ 340 2 $ 215 (58) $ (2,163) Compass 3 Contracts 42 1,477 (114) (4,104) (22) (789) Compass 3 Level 2 Contracts 114 1,220 294 3,720 (353) (4,190) ------------ ------------ ------------ $ 3,037 $ (169) $ (7,142) ============ ============ ============ Money Market Variable Account Compass 2 Contracts 27 $ 498 (138) $ (2,740) (343) $ (6,957) Compass 3 Contracts 71 1,160 (63) (1,035) (39) (635) Compass 3 Level 2 Contracts 65 782 168 2,162 (450) (5,603) ------------ ------------ ------------ $ 2,440 $ (1,613) $ (13,195) ============ ============ ============ Total Return Variable Account Compass 2 Contracts 21 $ 727 14 $ 822 (218) $ (8,126) Compass 3 Contracts 71 2,577 (208) (7,554) (44) (1,622) Compass 3 Level 2 Contracts 140 2,277 396 7,328 (826) (14,797) ------------ ------------ ------------ $ 5,581 $ 596 $ (24,545) ============ ============ ============ YEAR ENDED DECEMBER 31, 2003 (OOO OMITTED) --------------------------------------------------------- NET NET NET ACCUMULATION ANNUITIZATION INCREASES ACTIVITY ACTIVITY (DECREASE) --------------------------- ------------- ------------ UNITS DOLLARS DOLLARS DOLLARS ------------ ------------ ------------- ------------ Capital Appreciation Variable Account Compass 2 Contracts (481) $ (21,324) $ (565) $ (21,889) Compass 3 Contracts (191) (5,585) (34) (5,619) Compass 3 Level 2 Contracts (62) (588) (24) (612) ------------ ------------ ------------ $ (27,497) $ (623) $ (28,120) ============ ============ ============ Global Government Variable Account Compass 2 Contracts 1 $ 3 $ (6) $ (3) Compass 3 Contracts (17) (392) (2) (394) Compass 3 Level 2 Contracts 9 (130) (5) (135) ------------ ------------ ------------ $ (519) $ (13) $ (532) ============ ============ ============ Government Securities Variable Account Compass 2 Contracts (312) $ (11,373) $ (377) $ (11,750) Compass 3 Contracts (58) (1,488) 0 (1,488) Compass 3 Level 2 Contracts (130) (1,929) (24) (1,953) ------------ ------------ ------------ $ (14,790) $ (401) $ (15,191) ============ ============ ============ High Yield Variable Account Compass 2 Contracts (242) $ (7,423) $ (480) $ (7,903) Compass 3 Contracts (63) (1,419) 0 (1,419) Compass 3 Level 2 Contracts (53) 571 (6) 565 ------------ ------------ ------------ $ (8,271) $ (486) $ (8,757) ============ ============ ============ Managed Sectors Variable Account Compass 2 Contracts (46) $ (1,608) $ (23) $ (1,631) Compass 3 Contracts (94) (3,416) (8) (3,424) Compass 3 Level 2 Contracts 55 750 (12) 738 ------------ ------------ ------------ $ (4,274) $ (43) $ (4,317) ============ ============ ============ Money Market Variable Account Compass 2 Contracts (454) $ (9,199) $ (128) $ (9,327) Compass 3 Contracts (31) (510) (11) (521) Compass 3 Level 2 Contracts (217) (2,659) 85 (2,574) ------------ ------------ ------------ $ (12,368) $ (54) $ (12,422) ============ ============ ============ Total Return Variable Account Compass 2 Contracts (183) $ (6,577) $ (462) $ (7,039) Compass 3 Contracts (181) (6,599) (107) (6,706) Compass 3 Level 2 Contracts (290) (5,192) 143 (5,049) ------------ ------------ ------------ $ (18,368) $ (426) $ (18,794) ============ ============ ============
45
YEAR ENDED DECEMBER 31, 2002 (OOO OMITTED) ------------------------------------------------------------------------------------- TRANSFERS BETWEEN WITHDRAWALS, VARIABLE ACCOUNTS SURRENDERS, PURCHASE AND FIXED ANNUITIZATIONS, PAYMENTS ACCUMULATION AND CONTRACT RECEIVED ACCOUNT CHARGES -------------------------- --------------------------- ---------------------------- UNITS DOLLARS UNITS DOLLARS UNITS DOLLARS ------------ ------------ ------------ ------------ ------------- ------------ Capital Appreciation Variable Account Compass 2 Contracts 77 $ 3,095 (189) $ (7,743) (707) $ (33,229) Compass 3 Contracts 146 4,484 (240) (7,371) (93) (2,975) Compass 3 Level 2 Contracts 232 2,674 111 2,114 (900) (11,521) ------------ ------------ ------------ $ 10,253 $ (13,000) $ (47,725) ============ ============ ============ Global Government Variable Account Compass 2 Contracts 4 $ 48 40 $ 851 (18) $ (359) Compass 3 Contracts 12 236 (16) (299) (6) (122) Compass 3 Level 2 Contracts 16 152 62 813 (84) (1,009) ------------ ------------ ------------ $ 436 $ 1,365 $ (1,490) ============ ============ ============ Government Securities Variable Account Compass 2 Contracts 29 $ 913 59 $ 2,125 (372) $ (12,895) Compass 3 Contracts 32 770 (61) (1,468) (20) (474) Compass 3 Level 2 Contracts 43 496 269 3,950 (237) (3,343) ------------ ------------ ------------ $ 2,179 $ 4,607 $ (16,712) ============ ============ ============ High Yield Variable Account Compass 2 Contracts 22 $ 541 (15) $ (535) (266) $ (7,535) Compass 3 Contracts 24 468 (48) (1,016) (29) (606) Compass 3 Level 2 Contracts 28 277 1,731 17,946 (206) (2,310) ------------ ------------ ------------ $ 1,286 $ 16,395 $ (10,451) ============ ============ ============ Managed Sectors Variable Account Compass 2 Contracts 11 $ 409 (44) $ (1,614) (85) $ (3,392) Compass 3 Contracts 61 2,215 (112) (4,168) (43) (1,733) Compass 3 Level 2 Contracts 120 1,308 26 663 (532) (6,636) ------------ ------------ ------------ $ 3,932 $ (5,119) $ (11,761) ============ ============ ============ Money Market Variable Account Compass 2 Contracts 30 $ 558 109 $ 2,267 (499) $ (10,128) Compass 3 Contracts 54 903 (25) (418) (65) (1,088) Compass 3 Level 2 Contracts 29 328 (928) (11,541) (823) (10,268) ------------ ------------ ------------ $ 1,789 $ (9,692) $ (21,484) ============ ============ ============ Total Return Variable Account Compass 2 Contracts 24 $ 801 33 $ 1,514 (266) $ (9,926) Compass 3 Contracts 82 2,899 (206) (7,443) (80) (2,930) Compass 3 Level 2 Contracts 153 2,395 363 6,961 (817) (14,352) ------------ ------------ ------------ $ 6,095 $ 1,032 $ (27,208) ============ ============ ============ YEAR ENDED DECEMBER 31, 2002 (OOO OMITTED) --------------------------------------------------------- NET NET NET ACCUMULATION ANNUITIZATION INCREASES ACTIVITY ACTIVITY (DECREASE) --------------------------- ------------- ------------ UNITS DOLLARS DOLLARS DOLLARS ------------ ------------ ------------- ------------ Capital Appreciation Variable Account Compass 2 Contracts (819) $ (37,877) $ (79) $ (37,956) Compass 3 Contracts (187) (5,862) 47 (5,815) Compass 3 Level 2 Contracts (557) (6,733) (99) (6,832) ------------ ------------ ------------ $ (50,472) $ (131) $ (50,603) ============ ============ ============ Global Government Variable Account Compass 2 Contracts 26 $ 540 $ (40) $ 500 Compass 3 Contracts (10) (185) 0 (185) Compass 3 Level 2 Contracts (6) (44) (11) (55) ------------ ------------ ------------ $ 311 $ (51) $ 260 ============ ============ ============ Government Securities Variable Account Compass 2 Contracts (284) $ (9,857) $ (382) $ (10,239) Compass 3 Contracts (49) (1,172) (8) (1,180) Compass 3 Level 2 Contracts 75 1,103 (40) 1,063 ------------ ------------ ------------ $ (9,926) $ (430) $ (10,356) ============ ============ ============ High Yield Variable Account Compass 2 Contracts (259) $ (7,529) $ (185) $ (7,714) Compass 3 Contracts (53) (1,154) 0 (1,154) Compass 3 Level 2 Contracts 1,553 15,913 (12) 15,901 ------------ ------------ ------------ $ 7,230 $ (197) $ 7,033 ============ ============ ============ Managed Sectors Variable Account Compass 2 Contracts (118) $ (4,597) $ (40) $ (4,637) Compass 3 Contracts (94) (3,686) (3) (3,689) Compass 3 Level 2 Contracts (386) (4,665) (28) (4,693) ------------ ------------ ------------ $ (12,948) $ (71) $ (13,019) ============ ============ ============ Money Market Variable Account Compass 2 Contracts (360) $ (7,303) $ (60) $ (7,363) Compass 3 Contracts (36) (603) (11) (614) Compass 3 Level 2 Contracts (1,722) (21,481) (18) (21,499) ------------ ------------ ------------ $ (29,387) $ (89) $ (29,476) ============ ============ ============ Total Return Variable Account Compass 2 Contracts (209) $ (7,611) $ (376) $ (7,987) Compass 3 Contracts (204) (7,474) (96) (7,570) Compass 3 Level 2 Contracts (301) (4,996) 9 (4,987) ------------ ------------ ------------ $ (20,081) $ (463) $ (20,544) ============ ============ ============
46 (8) LINE OF CREDIT The variable accounts 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. In addition, a commitment fee, based on the average daily unused portion of the line of credit, is allocated among the participating funds at the end of each quarter. The commitment fee allocated to the variable accounts for the year ended December 31, 2003, ranged from $58 to $1,995. The variable accounts had no borrowings during the year. (9) FINANCIAL INSTRUMENTS Certain variable accounts trade 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 accounts have 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. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
CONTRACTS TO CURRENCY SETTLEMENT DATE DELIVER/RECEIVE ABBREVIATIONS IN EXCHANGE FOR ------------------------------------------------------------------------------------------------------------------- Global Governments Variable Account Sales 1/13/04 88,839 AUD $ 64,998 1/13/04 49,110 CAD 37,214 2/9/04 1,261,381 DKK 207,772 1/13/04-1/26/04 1,867,145 EUR 2,242,739 1/13/04 428,178 NOK 63,750 3/15/04 328,840 NZD 210,757 1/13/04-2/9/04 3,107,521 SEK 415,947 ----------- $ 3,243,177 =========== Purchases 1/13/04 171,677 AUD $ 120,069 1/13/04 102,310 CAD 77,925 1/13/04 311,766 EUR 383,650 1/13/04 407,886 GBP 692,649 3/15/04 377,523,594 JPY 3,516,779 1/13/04 856,181 NOK 128,294 1/13/04-2/9/04 637,517 SEK 85,891 ----------- $ 5,005,257 =========== High Yield Variable Account Sales 1/13/04 561,935 EUR $ 655,779 1/13/04 200,000 EUR 247,920 ----------- $ 903,699 =========== NET UNREALIZED CONTRACTS APPRECIATION AT VALUE (DEPRECIATION) ---------------------------------------------------------------------- Global Governments Variable Account $ 66,788 $ (1,790) 37,978 (764) 213,176 (5,404) 2,351,247 (108,508) 64,204 (454) 213,595 (2,838) 431,300 (15,353) ------------- -------------- $ 3,378,288 $ (135,111) ============= ============== $ 129,065 $ 8,996 79,119 1,194 392,668 9,018 727,377 34,728 3,532,166 15,387 128,382 88 88,483 2,592 ------------- -------------- $ 5,077,260 $ 72,003 ============= ============== High Yield Variable Account $ 707,756 $ (51,977) 251,899 (3,979) ------------- -------------- $ 959,655 $ (55,956) ============= ==============
See page 23 for an explanation of abbreviations used to indicate amounts shown in currencies other than U.S. Dollar. At December 31, 2003, the variable accounts had sufficient cash and/or securities to cover any commitments under these contracts. FUTURES CONTRACTS
UNREALIZED DESCRIPTION EXPIRATION CONTRACTS POSITION DEPRECIATION ---------------------------------------------------------------------------------------------------------------- Global Governments Variable Account Japan Govt Bond 10yr March 2004 1 Long $ (1,777)
At December 31, 2003, the variable accounts had sufficient cash and/or securities to cover any margin requirements under these contracts. On December 31, 2003, the Global Government Variable Account recorded a Receivable for daily variation margin on open future contracts of $0. This balance was due to the fact that December 31, 2003, January 1, 2004, and January 2, 2004 were holidays for all Japanese futures exchanges and banks. Therefore, all trading activity and issuance of settlement prices with respect to Japanese exchanges on these dates was halted. (10) LEGAL PROCEEDINGS Massachusetts Financial Services Company ("MFS"), the Variable Account's investment adviser, has 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. 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 bond and money market funds. The complaints by these regulatory authorities did not involve the Variable Account, 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 settlements, MFS and the executives neither admit nor deny wrongdoing. 47 Under the terms of the settlements, a $225 million pool will be 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 will also pay 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. 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 seeking damages of unspecified amounts. In November 2003, the SEC and Morgan Stanley DW, Inc. (Morgan Stanley) settled an enforcement action against Morgan Stanley relating to the undisclosed receipt of fees from certain mutual fund companies in return for preferred marketing of their funds. MFS was one of the 14 fund companies reported to be on Morgan Stanley's preferred list. As a result, MFS has been under investigation by the SEC relating to its directed brokerage and revenue-sharing arrangements with various distributors of its products, including Morgan Stanley. MFS is cooperating with the SEC's investigation, which is ongoing. The outcome of this investigation is not yet determinable and may result in sanctions, compensation payments or other financial penalties. Although MFS does not believe that these regulatory developments will have a material adverse effect on the Variable Account, 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. This report is prepared for the general information of contract owners. It is authorized for distribution to prospective investors only when preceded or accompanied by a current prospectus. 48 INDEPENDENT AUDITOR'S REPORT TO THE PARTICIPANTS IN AND THE BOARD OF MANAGERS OF CAPITAL APPRECIATION VARIABLE ACCOUNT, GLOBAL GOVERNMENTS VARIABLE ACCOUNT, GOVERNMENT SECURITIES VARIABLE ACCOUNT, HIGH YIELD VARIABLE ACCOUNT, MANAGED SECTORS VARIABLE ACCOUNT, MONEY MARKET VARIABLE ACCOUNT AND TOTAL RETURN VARIABLE ACCOUNT AND THE BOARD OF DIRECTORS OF SUN LIFE INSURANCE COMPANY OF CANADA (U.S.): We have audited the accompanying statements of assets and liabilities of 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 Accounts"), including the portfolios of investments, as of December 31, 2003, and the related statements of operations for the year then ended, statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Variable Accounts' management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2003, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial positions of the Variable Accounts as of December 31, 2003, the results of their operations for the year then ended, the changes in their net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP Boston, Massachusetts February 17, 2004 49 MEMBERS OF BOARDS OF MANAGERS AND OFFICERS The following table presents certain information regarding the Managers and executive officers of the Compass Variable Accounts (the "Account"), including their principal occupations, which, unless specific dates are shown, are of more than five years duration, although the titles may not have been the same throughout. NAME, POSITION WITH TRUST, LENGTH OF TIME SERVED, AGE, PRINCIPAL OCCUPATION AND OTHER DIRECTORSHIPS(1): INTERESTED MANAGERS C. JAMES PRIEUR* Member of Board of Managers (since July 1999) (born 4/21/51) Sun Life Assurance Company of Canada, President and Chief Operating Officer (since April 1999), General Manager, U.S. (until April 1999). DAVID D. HORN* Member of Board of Managers (since April 1986) (born 6/7/41) Private Investor; Retired; Sun Life Assurance Company of Canada, Former Senior Vice President and General Manager for the United States (until 1997). INDEPENDENT MANAGERS J. KERMIT BIRCHFIELD Member of Board of Managers and Chairman (since May 1997) (born 1/8/40) Consultant; Century Partners, Inc. (investments), Managing Director; Dairy Mart Convenience Stores, Inc. (convenience stores), Chairman; Displaytech, Inc. (manufacturer of liquid crystal display technology), Director; HPSC, Inc. (medical financing), Director; Intermountain Gas Company, Inc. (public utility gas distribution), Director. ROBERT C. BISHOP Member of Board of Managers (since May 2001) (born 1/13/43) AutoImmune, Inc. (pharmaceutical product development), Chairman, President and Chief Executive Officer; Caliper Technologies, Inc. (laboratory analytical instruments), Director; Millipore Corporation (purification/filtration products), Director; Quintiles Transnational Corp. (contract services to the medical industry), Director. FREDERICK H. DULLES Member of Board of Managers (since May 2001) (born 3/12/42) McFadden, Pilkington & Ward LLP (solicitors and registered foreign lawyers), Partner; Jackson & Nash, LLP (law firm), Of Counsel (January 2000 to November 2000). DERWYN F. PHILLIPS Member of Board of Managers (since April 1986) (born 8/31/30) Retired. ROBERT G. STEINHART Member of Board of Managers (since May 2001) (born 6/15/40) Private Investor; Bank One, Texas N.A., Vice Chairman 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 of Board of Managers (since May 2001) (born 7/21/48) Hawaii Small Business Development Center, Kaua'i Center, Center Director (since May 2002); Displaytech, Inc. (manufacturer of liquid crystal display technology), Chairman and Chief Executive Officer (until March 2002). MANAGERS EMERITUS GARTH MARSTON Member of Board of Managers Emeritus (born 4/28/26) Retired. SAMUEL ADAMS(2)** Member of Board of Managers Emeritus (born 10/19/25) Retired. OFFICERS JOHN W. BALLEN(3)++ President (born 9/12/59) Massachusetts Financial Services Company, Chief Executive Officer and Director. JAMES R. BORDEWICK, JR.++ Assistant Secretary and Assistant Clerk (born 3/6/59) Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel. STEPHEN E. CAVAN++ Secretary and Clerk (born 11/6/53) Massachusetts Financial Services Company, Senior Vice President, General Counsel and Secretary. STEPHANIE A. DESISTO++ Assistant Treasurer (born 10/1/53) Massachusetts Financial Services Company, Vice President (since April 2003); Brown Brothers Harriman & Company, 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++ Assistant Treasurer (born 9/18/63) Massachusetts Financial Services Company, Vice President (since August 2000); UAM Fund Services, Senior Vice President (prior to August 2000). RICHARD M. HISEY++ Treasurer (born 8/29/58) Massachusetts Financial Services Company, Senior Vice 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, Treasurer (prior to September 2000). ROBERT J. MANNING(4)++ President (born 10/20/63) Massachusetts Financial Services Company, Chief Executive Officer, President, Chief Investment Officer and Director. ELLEN MOYNIHAN++ Assistant Treasurer (born 11/13/57) Massachusetts Financial Services Company, Vice President. JAMES O. YOST++ Assistant Treasurer (born 6/12/60) Massachusetts Financial Services Company, Senior Vice President. 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. This means that each Manager is elected to hold office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal. Each officer holds office until his or her successor is chosen and qualified, or until he or she retires, resigns or is removed from office. All Managers currently serve as Managers of each Account and have served in that capacity continuously since originally elected or appointed. All of the Managers are also Trustees of 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. SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) ANNUITY SERVICE MAILING ADDRESS c/o Sun Life Retirement Products and Services P.O. Box 1024, Boston, MA 02103-9986 INVESTMENT ADVISER Massachusetts Financial Services Company 500 Boylston Street, Boston, MA 02116-3741 DISTRIBUTOR Clarendon Insurance Agency, Inc. One Sun Life Executive Park, Wellesley Hills, MA 02481 CUSTODIAN State Street Bank and Trust Company 225 Franklin Street, Boston, MA 02110-2875 ACCOUNT INFORMATION For account information, please call toll free: 1-800-752-7218 anytime from a touch-tone telephone. To speak with a customer service representative, please call toll free: 1-800-752-7215 any business day from 8 a.m. to 6 p.m. Eastern time. (1) Directorships of companies required to report to the Securities and Exchange Commission (the "SEC") (i.e. "public companies"). (2) Retired December 31, 2003 and became a Manager Emeritus. (3) Resigned February 6, 2004. (4) Appointed on February 6, 2004. * "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 Trust. The address of Sun Life of Canada (U.S.) is One Sun Life Executive Park, Wellesley Hills, Massachusetts. ** "Interested person" of Massachusetts Financial Services Company ("MFS"), within the meaning of the 1940 Act. The address of MFS is 500 Boylston Street, Boston, Massachusetts. Samuel Adams was an "interested person" of MFS because the law firm of Kirkpatrick & Lockhart, LLP, where Mr. Adams was Of Counsel, has served as counsel to some investment companies managed by MFS, and to MFS and its affiliates within the past two fiscal years of the Accounts. ++ MFS Investment Management(R) (C) 2004 MFS Investment Management(R) MFS(R)investment products are offered through MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA. CO-ANN 02/04 45M ITEM 2. CODE OF ETHICS. The Registrant has adopted a Code of Ethics pursuant to Section 406 of the Sarbanes-Oxley Act and as defined in the instructions to Form N-CSR that applies to the Registrant's principal executive officer and principal financial and accounting officer. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. Messrs. Birchfield, Bishop, Steinhart and Wright, members of the Audit Committee, have been determined by the Board of Managers in their reasonable business judgment to meet the definition of "audit committee financial expert" as such term is defined in the instructions to Form N-CSR. In addition, Messrs. Birchfield, Bishop, Steinhart and Wright are each "independent" members of the Audit Committee as defined in the instructions to Form N-CSR. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERICES. ITEMS 4(a) THROUGH 4(d) AND 4(g): The Board of Managers has appointed Deloitte & Touche LLP ("Deloitte") to serve as independent accountants to the Registrant. In addition, Deloitte may provide non-audit related services to the Registrant and/or to the Registrants' investment adviser, Massachusetts Financial Services Company ("MFS") and to various entities either controlling, controlled by, or under common control with MFS that provide ongoing services to the Funds ("MFS Related Entities"). For the fiscal years ended December 31, 2003 and 2002, audit fees billed to the Registrant by Deloitte were as follows:
REGISTRANT'S AUDIT FEES ----------------------- Fees billed by Deloitte: 2003 2002 -------- ------- Government Securities Variable Account $24,900 $24,900
For the fiscal years ended December 31, 2003 and 2002, fees for audit-related, tax and other services provided to the Registrants, MFS and MFS Related Entities were as follows:
TOTAL AUDIT-RELATED FEES(1) TAX FEES(2) ALL OTHER FEES(3) NON-AUDIT FEES ------------------- ------------------- ------------------ ------------------- Fees billed by Deloitte: 2003 2002 2003 2002 2003 2002 2003 2002 -------- -------- -------- -------- ------- -------- -------- -------- To Government Securities Variable Account $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 To MFS and MFS Related Entities 365,360 227,650 222,195 227,513 94,000 350,771 491,555 805,934 -------- -------- -------- -------- ------- -------- -------- -------- TOTAL FEES BILLED $365,360 $227,650 $222,195 $227,513 $94,000 $350,771 $491,555 $805,934
(1) There were no Audit-Related services provided to the Registrant by Deloitte for the fiscal years ended December 31, 2003 and 2002. Audit-Related Fees for MFS and MFS Related entities includes fees for internal control reviews, due diligence related to acquisitions, attestation services not required by statue or regulation and quarterly reviews of investment diversification status related to insurance company separate accounts. (2) Fees included in the Tax Fees category comprise all services performed by professional staff in the independent accountant's tax division except those services related to the audit. This category includes fees for tax compliance, tax planning, and tax advice. Tax compliance, tax advice, and tax planning services include preparation of original and amended tax returns, tax advice related to income recognition and distribution policies, tax advice on the tax implication of acquisitions and dispositions of assets and advice regarding application of certain Internal Revenue Code sections. (3) All Other Fees includes fees for services related to financial information system implementation, consultation on internal cost allocations, and in 2002, staff assistance in preparing certain information required for tax disclosures in financial reports. ITEM 4(e)(1): Set forth below are the policies and procedures established by the Audit Committee of the Board of Managers relating to the pre-approval of audit and non-audit related services: Pre-approval is needed for all planned and anticipated audit and permissible non-audit services rendered to the Registrant and all permissible non-audit services rendered to MFS or MFS Related Entities if the services relate directly to the operations and/or financial reporting of the Registrant. In the event such services arise between regular meetings of the Audit Committee and it is not practical to seek pre-approval at the next regular meeting of the Audit Committee, such services may be referred to the Chair of the Audit Committee for approval; provided that, the Chair may not approve any individual engagement for such services exceeding $50,000 or multiple engagements for such services in the aggregate exceeding $100,000 between such regular meetings of the Audit Committee. Any engagement approved by the Chair between regular meetings of the Audit Committee shall be presented for ratification by the entire Audit Committee at its next regularly scheduled meeting. ITEM 4(e)(2): None, or 0%, of the services relating to the Audit-Related Fees, Tax Fees and All Other Fees paid by the Registrant and MFS and MFS Related Entities disclosed above were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X (which permits audit committee approval after the start of the engagement with respect to services other than audit review or attest services, if certain conditions are satisfied. ITEM 4(f): Not applicable. ITEM 4(h): Not applicable. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable to the Registrant. ITEM 6. [RESERVED] 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. Not required at this time. [Required for reporting periods ending after January 1, 2004 (beginning with N-CSR's filed at the end of March 2004, for January 31, 2004 reporting period).] 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) Any code of ethics, or amendment thereto, that is the subject of the disclosure required by Item 2, to the extent that the registrant intends to satisfy the Item 2 requirements through filing of an exhibit: Code of Ethics attached hereto. (2) A separate certification for each principal executive officer and principal financial officer of the registrant as required by Rule 30a-2 under the Act (17 CFR 270.30a-2): Attached hereto. (b) If the report is filed under Section 13(a) or 15(d) of the Exchange Act, provide the certifications required by Rule 30a-2(b) under the Act (17 CFR 270.30a-2(b)), Rule 13a-14(b) or Rule 15d-14(b) under the Exchange Act (17 CFR 240.13a-14(b) or 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350) as an exhibit. A certification furnished pursuant to this paragraph will not be deemed "filed" for the purposes of Section 18 of the Exchange Act (15 U.S.C. 78r), or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference: Attached hereto. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) COMPASS GOVERNMENT SECURITIES VARIABLE ACCOUNT By (Signature and Title)* ROBERT J. MANNING ------------------------------------------------------ Robert J. Manning, President Date: February 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: February 23, 2004 --------------------- By (Signature and Title)* RICHARD M. HISEY ------------------------------------------------------ Richard M. Hisey, Treasurer (Principal Financial Officer and Accounting Officer) Date: February 23, 2004 ------------------ * Print name and title of each signing officer under his or her signature.