N-CSR 1 a2152303zn-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 -------------------------------------------------------------------------------- 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) James R. Bordewick, Jr. Massachusetts Financial Services Company 500 Boylston Street Boston, Massachusetts 02116 -------------------------------------------------------------------------------- (Name and address of agents for service) Registrant's telephone number, including area code: (617) 954-5000 -------------------------------------------------------------------------------- Date of fiscal year end: December 31 -------------------------------------------------------------------------------- Date of reporting period: December 31, 2004 -------------------------------------------------------------------------------- ITEM 1. REPORTS TO STOCKHOLDERS. [COMPASS LOGO] PROFESSIONALLY MANAGED COMBINATION FIXED/VARIABLE ANNUITIES FOR PERSONAL INVESTMENTS AND QUALIFIED RETIREMENT PLANS ANNUAL REPORT - DECEMBER 31, 2004 CAPITAL APPRECIATION VARIABLE ACCOUNT GLOBAL GOVERNMENTS VARIABLE ACCOUNT GOVERNMENT SECURITIES VARIABLE ACCOUNT HIGH YIELD VARIABLE ACCOUNT MANAGED SECTORS VARIABLE ACCOUNT MONEY MARKET VARIABLE ACCOUNT TOTAL RETURN VARIABLE ACCOUNT ISSUED BY SUN LIFE ASSURANCE COMPANY OF CANADA (U.S), A WHOLLY OWNED SUBSIDIARY OF SUN LIFE OF CANADA (U.S.) HOLDINGS, INC. TABLE OF CONTENTS Letter from the CEO of MFS 1 Management Reviews 2 Performance Summary 7 Portfolio Composition 8 Portfolio of Investments 15 Financial Statements 30 Notes to Financial Statements 49 Report of Independent Registered Public Accounting Firm 58 Managers and Officers 59 Proxy Voting Policies and Information Back Cover Quarterly Portfolio Disclosure Back Cover
THIS REPORT IS PREPARED FOR THE GENERAL INFORMATION OF CONTRACT OWNERS. IT IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY WHEN PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS. NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE NOT A DEPOSIT NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
LETTER FROM THE CEO OF MFS DEAR CONTRACT OWNERS, For most investors, the main factor in determining long-term success is asset allocation -- how they spread their money among stocks, bonds, and cash. In fact, the total returns of investors may be more influenced by their asset allocation strategy than by their security selection within each asset class. The principle behind asset allocation is simple: by diversifying across a variety of types of securities, investors reduce the overall risk of their portfolio because gains in one area are likely to offset losses in another. One of the dangers of not having an asset allocation plan is the temptation to simply chase performance, by moving money into whichever asset class appears to be outperforming at the moment. The problem with this approach is that by the time a particular area of the market comes into favor, investors may have already missed some of the best performance. We would suggest that one way to benefit from swings in the market is to acquire a diversified portfolio so that investors hold a range of asset classes BEFORE the market swings in their direction. UNDERSTAND YOUR EMOTIONS It usually takes a bear market for people to appreciate the benefits of diversification. At MFS, we believe proper asset allocation is important in all market environments. But we understand that there are emotional components of investment decisions that sometimes keep investors from achieving their long term goals. The three common behaviors that negatively impact investment decisions are overconfidence, looking backwards, and loss aversion. - OVERCONFIDENCE. After experiencing gains in the market, particularly during a bull market, investors have a natural tendency to overestimate their own abilities. During the global bull market of the late 1990s, for example, a large number of investors traded their own stocks and made significant profits. However, most of these same investors later handed back those profits -- and then some -- because they focused more on short-term blips in the market and less on the fundamental factors that affect a company's long-term prospects. - LOOKING BACKWARDS. Although security prices are determined by expectations about the future, many investors make choices based on the recent past. Investors who have achieved momentary success in the market tend to take on too much risk, believing that better-than-average returns can be easily duplicated. On the other hand, those who have had negative experiences tend to become overly cautious and take on too little risk. Recent historical experience tends to dictate an investor's frame of reference and may lead to irrational decisions. - LOSS AVERSION. Simply put, investors would rather avoid the immediate pain of losses than enjoy the future pleasure of gains. As a result, some investors tend to overreact to short-term downturns in the market by seeking to mitigate their losses, rather than remaining invested to benefit from the long-term growth potential of the stock and bond markets. THINK LIKE A PROFESSIONAL INVESTOR Asset allocation helps reduce the emotional factors that tend to affect the long-term returns of investors. Professional investors -- those who manage assets for money management firms, pension funds, and endowments -- have tended to outperform the average retirement investor because they focus on asset allocation. For example, the investment performance of the average 401(k) participant has lagged these professional investors by more than two percentage points a year, on average, over the past 10 years.(1) We think asset allocation is one of the most important decisions for investors. A study of the performance of 91 large U.S. corporate pension plans with assets of more than $100 million over a 10-year period beginning in 1974 concluded that asset allocation policies accounted for 93.6% of their returns, while individual security selection and the timing of their investments accounted for only 6.4% of their overall performance.(2) Professional investors target a realistic level of return based on the amount of risk they are willing to take, then set allocations to meet their goals. On average, U.S. professional investors allocate 35% to 40% of their assets to domestic equity stocks; 20% to 30% to fixed income issues; 10% to international stocks; and between 10% and 20% to other investment classes such as real estate.(3) And within those categories, they hold a broad range of styles and asset classes. In contrast, 401(k) participants who held company stock in their retirement plans at the end of 2002 had roughly 42% of their retirement assets in company stock while the rest was allocated to either growth or value stock funds.(4) These participants virtually ignored the broad range of equity, fixed-income, and international offerings provided by their retirement plans. ALLOCATE, DIVERSIFY, REBALANCE We recommend working with a professional adviser to find an optimal mix of investments based on your individual goals. In our view, a disciplined asset allocation strategy is composed of three simple steps: allocate, diversify and rebalance. - ALLOCATE. Investors should work with their financial adviser to specify their long-term goals and tolerance for risk. Then investors should allocate their assets across the major asset classes -- stocks, bonds, and cash -- to help them pursue an investment return that is consistent with their risk tolerance level. - DIVERSIFY. By diversifying their assets, investors trade some performance in the top performing categories for a more predictable and stable portfolio. At the same time, investors should include different investment styles and market capitalizations of stocks and a range of fixed-income investments, as well as U.S. and non-U.S. securities. Because security subclasses tend to move in and out of favor during various market and economic environments, a broad portfolio increases the benefits of diversification. - REBALANCE. We suggest that investors consult with their professional advisers periodically to rebalance their portfolios to maintain the percentages that they have dedicated to each asset class. Allocations can shift as markets rise and fall, making for a riskier or more conservative portfolio than an investor originally intended. For example, a portfolio of 50% stocks and 50% bonds at the start of 2000 would have shifted to 32% stocks and 68% bonds at the end of 2002 because of the weak stock market.(5) In short, these three simple concepts -- allocate, diversify and rebalance -- help take emotion out of the investment process and help prevent investors from trying to outguess the market. An asset allocation strategy cannot turn a down market cycle into a good one, but it is an invaluable tool to manage risk and keep investors on track toward reaching their long term investment goals. A DISCIPLINED INVESTMENT PROCESS IS PARAMOUNT Disciplined diversification has helped investors pursue long-term, above-average results through the years. Since 1924, when we 1 invented the mutual fund, MFS(R) has strived to give investors the products and tools they need to maintain well-diversified portfolios. MFS provides a variety of products in each asset class as well as a family of asset allocation funds. These asset allocation portfolios cover a range from conservative to moderate, growth, and aggressive growth allocations, each with a strategy based on a distinct level of risk. We recommend developing a comprehensive financial plan with an investment advisor who is familiar with your risk tolerance, your individual goals, and your financial situation. As always, we appreciate your confidence in MFS and welcome any questions or comments you may have. Respectfully, /s/ Robert J. Manning Robert J. Manning Chief Executive Officer and Chief Investment Officer MFS Investment Management Investment Advisor to the MFS/Compass Variable Accounts January 14, 2005 Asset allocation and diversification can not guarantee a profit or protect against a loss. The opinions expressed in this letter are those of MFS, and no forecasts can be guaranteed. (1) Source: Watson Wyatt (2) "Determinants of Portfolio Performance," in Financial Analysts Journal, January/February 1995, by Gary P. Brinson, L. Randolph Hood, and Gilbert L. Beebower (3) Source: Greenwich Associates (4) Source: Hewitt Associates (5) Source: Lipper Inc. STOCK MARKET ENVIRONMENT In 2004, after enduring a somewhat rocky ride, most of the world's major stock markets posted solid gains. In our view, better-than-expected corporate earnings and improved economic indicators encouraged investors and drove equity markets, although, for a time, it seemed that record-high oil prices, rising short-term interest rates in the U.S., a decline in the U.S. dollar against most major currencies, as well as geopolitical uncertainty, tested equity markets. But, oil prices pulled back from their record levels late in the year, and in our view, investors turned their attention to strong corporate profits and economic growth, which were up noticeably, if not dramatically, for the year. BOND MARKET ENVIRONMENT Bond market returns in 2004 turned out to be a pleasant surprise. At about mid-year, we believe improving economic fundamentals prompted the U.S. Federal Reserve Board to raise short-term rates -- marking the first rate increase in four years. While the Fed followed with four more hikes throughout the year, we feel that enough uncertainty about the strength of the economic recovery remained to fuel investor demand in U.S. Treasuries and other high-quality bonds, both of which are seen as a refuge in times of economic concern. (Principal and interest of U.S. Treasury securities are guaranteed by the U.S. government if held to maturity.) Perhaps the biggest surprise of 2004 was that long-term interest rates -- which we believed were expected to rise -- did not. In the high yield market, we believe easy access to capital, a declining default rate, and stronger credit profiles aided returns throughout the year. From our perspective, the improvement in equity markets going into the last quarter of 2004 prevented significant advances in most bond markets. Even so, the slowdown in U.S. gross domestic product (GDP) -- a measure of the value of all goods and services in the U.S. economy -- and job growth, in the second half of the year, curbed expectations about the pace of the economic recovery. We believe that such concerns, combined with geopolitical worries about Iraq and fear of future terrorist attacks, kept investors focused on bond markets. MANAGEMENT REVIEWS CAPITAL APPRECIATION VARIABLE ACCOUNT For the year ended December 31, 2004, the Compass 2 account provided a total return of 9.47%; the Compass 3 account provided a total return of 9.36%; and the Compass 3 -- Level 2 account provided a total return of 9.52%. These returns, which include the reinvestment of any dividends and capital gains distributions, compare with a return of 6.30% over the same period for the account's benchmark, the Russell 1000 Growth Index. The account seeks to maximize capital appreciation by investing in securities of all types with a major emphasis on common stocks. The account invests, under normal market conditions, at least 65% of its net assets in common stocks and related securities, such as preferred stocks, convertible securities and depositary receipts of those securities, of companies which the account's investment advisor, MFS, believes possess above-average growth opportunities. CONTRIBUTORS TO PERFORMANCE Stock selection in the health care and special products and services sectors was a major contributor to relative performance. Within the industrial goods and services sector a combination of stock selection and allocation boosted relative results for the period. In the health care sector, our underweighted position in Pfizer* and our decision not to own Merck* aided relative performance as both stocks underperformed. In the industrial goods and services sector, our holdings in international conglomerate Tyco also aided results. Stocks in other sectors that contributed to the portfolio's relative performance for the period included FedEx Corp., Marvell Technology, and discount retailer Target. Our underweighted position in poor-performing technology giant Intel* and our decision not to hold Coca-Cola* also aided relative results. DETRACTORS FROM PERFORMANCE Stock selection in the leisure sector held back relative performance. Our holdings in Clear Channel Communications* and not holding Starbucks* hurt results during the period. Stock selection in the financial services sector also held back relative returns, although no stocks within the sector were among the portfolio's top individual detractors. Stocks in other sectors that dampened results for the period included poor performing pharmaceutical company AstraZeneca, which is not in the benchmark. Our underweighted position in technology company QUALCOMM* and not owning health care firm 2 UnitedHealth Group also held back results as did our underweighted position in retailer Home Depot.* The portfolio's cash position held back relative performance. As with nearly all portfolios, this account holds some cash to buy new holdings and to provide liquidity. In a period when growth equity markets -- as measured by the Russell 1000 Growth Index -- rose, holding any cash hurt relative performance. The index does not have a cash position. * Stock was not held in the portfolio at the end of the period. GLOBAL GOVERNMENTS VARIABLE ACCOUNT For the year ended December 31, 2004, the Compass 2 account provided a total return of 8.23%, the Compass 3 account provided a total return of 8.07%, and the Compass 3 -- Level 2 account provided a total return of 8.23%. These returns, which include the reinvestment of any dividends and capital gains distributions, compare with the return of 10.35% over the same period for the account's benchmark, the Citigroup World Government Bond Index. The account seeks to provide moderate current income, preservation of capital and growth of capital by investing in debt obligations that are issued or guaranteed as to principal and interest by either (i) the U.S. Government, its agencies, authorities or instrumentalities or (ii) the governments of foreign countries (to the extent that MFS believes that the higher yields available from foreign government securities are sufficient to justify the risks of investing in these securities.) The account invests, under normal market conditions, at least 80% of its net assets in fixed income securities of the U.S. government and foreign government securities of developed countries. The account may also invest in derivative instruments to offset adverse impacts in various markets. DETRACTORS TO PERFORMANCE During the reporting period, the portfolio was adversely affected by our positions in the British pound and the Japanese yen, as well as our country selection in euro-area bonds. CONTRIBUTORS TO PERFORMANCE The portfolio benefited markedly from an overweight in the euro, as well as from currency overweights in the dollar bloc (Canada, Australia, and New Zealand), Sweden, and Eastern Europe (Poland and the Czech Republic). We also added value with bond overweights in Denmark, Sweden, and Australia. Our sector selection in U.S. bonds also added to performance, as did our curve positioning in U.K. bonds. GOVERNMENT SECURITIES VARIABLE ACCOUNT For the year ended December 31, 2004, the Compass 2 account provided a total return of 2.38%, the Compass 3 account provided a total return of 2.28%, and the Compass 3 -- Level 2 account provided a total return of 2.43%. These returns, which include the reinvestment of any dividends and capital gains distributions, compare with a return of 4.08% over the same period for the account's benchmark, the Lehman Brothers Government/Mortgage Index. The account seeks to provide current income and preservation of capital by investing in U.S. Government securities. The account invests, under normal market conditions, at least 80% of its net assets in U.S. Government securities, including bonds or other debt obligations issued by, or whose principal and interest payments are guaranteed by, the U.S. government or one of its agencies or instrumentalities such as the Student Loan Marketing Association ("Sallie Mae"), Federal Home Loan Banks, the Federal Home Loan Mortgage Corporation ("Freddie Mac") and the Federal National Mortgage Association ("Fannie Mae") and obligations fully collateralized or otherwise fully secured by such entities. DETRACTORS FROM PERFORMANCE Holding lower-yielding issues relative to the account's benchmark held back results for the period. We were underweighted in 30-year mortgage-backed securities, which outperformed comparable maturity treasuries. The portfolio was adversely impacted by pre-payments on certain longer-term mortgage-backed securities. CONTRIBUTORS TO PERFORMANCE Over the period, the portfolio benefited from its allocation to government agency securities. Our duration positioning also contributed to relative results. (Duration is a measure of sensitivity to changes in interest rates.) HIGH YIELD VARIABLE ACCOUNT For the year ended December 31, 2004, the Compass 2 account provided a total return of 7.67%; the Compass 3 account provided a total return of 7.57%; and the Compass 3 -- Level 2 account provided a total return 7.73%. These returns, which include the reinvestment of any dividends and capital gains distributions, compare to returns over the same period of 11.13% and 10.33% respectively for the accounts' benchmarks, the Lehman Brothers High Yield Index (the Lehman Index) and the Lipper High Yield Index. The account seeks to provide high current income and capital appreciaton by investing primarily in fixed income securities of U.S. and foreign issuers which may be in the lower rated categories or unrated and may involve equity features. DETRACTORS FROM PERFORMANCE The portfolio's underperformance versus its benchmark was attributable, in part, to our underweighted positions in the more speculative lower-rated sectors of the high yield market which generated above-average returns in 2004. Several specific holdings also detracted from relative performance, including Dobson Communications, a regional wireless services provider, Allied Waste, and poor-performing textile manufacturer Westpoint Stevens.* CONTRIBUTORS TO PERFORMANCE The portfolio's relative performance was helped by several individual holdings that performed well during the period, including Safilo Capital International, a maker of corrective eyewear and sunglasses, chemical company Rhodia, Texas energy company El Paso Corp., and retail energy firm Mirant Americas*. * Asset was not held in the portfolio at the end of the period. MANAGED SECTORS VARIABLE ACCOUNT For the year ended December 31, 2004, the Compass 2 account provided a total return of 5.26%, the Compass 3 account provided a total return of 5.10%, and the Compass 3 -- Level 2 account provided a total return of 5.26%. These returns, which include the reinvestment of any dividends and capital gains distributions, compare with a return of 6.30% over the same period for the account's benchmark, the Russell 1000 Growth Index (the Russell Index). The account seeks capital appreciation by varying the weighting of its portfolio among 13 sectors. The account invests, under normal market conditions, at least 65% of its total assets in common stocks and related securities, such as preferred stock, convertible securities and depositary receipts of companies in 13 sectors. 3 DETRACTORS FROM PERFORMANCE On the negative side, stock selection in the leisure and financial services sectors detracted from relative results. In leisure, continued anemic radio advertising spending weighed on our holdings in Clear Channel Communications*, Viacom Inc. and Westwood One*. Turning to the financial sector, while our overall positioning was detrimental to performance, no one stock within the group was among the portfolio's top detractors. Although the technology sector was overall a net positive, individual stocks from that group proved to be some of our bigger disappointments, including IAC/InterActiveCorp.*, Analog Devices, Cisco Systems, Texas Instruments, and Xilinx*. Stocks in other sectors that detracted from relative returns included our decision not to own strong performing managed care firm UnitedHealth Group and underweighting household products and personal care giant Procter & Gamble Co. CONTRIBUTORS TO PERFORMANCE Stock selection in the health care, retailing, and industrial goods and services sectors boosted the portfolio's performance relative to its benchmark. Underweighting Pfizer* helped results as the company's stock significantly underperformed. Our relative positioning in Gilead Sciences also aided relative results. Stock selection was likewise supportive in the retailing sector. Our position in discount retailer Target was the leading contributor. Elsewhere in retailing, our underweighted position in Wal-Mart* aided results as that stock trailed the index. Our positioning among industrial goods and services providers was also beneficial, although no individual stock within the sector made our top contributors list. Stocks in other sectors that aided relative results included holdings in anti-virus software concern Symantec Corp. and online auctioneer eBay Inc. and an underweighted position in technology giant Intel*. Positions in cruise line operator Carnival Corp. and express delivery firm FedEx Corp. also helped results. Our decision not to hold Coca-Cola was also a benefit as that stock performed poorly during the period. * Stock was not held in the portfolio at the end of the period. MONEY MARKET VARIABLE ACCOUNT For the year ended December 31, 2004, the Compass 2 account provided a total return of -0.57%, the Compass 3 account provided a total return of -0.67%, and the Compass 3 -- Level 2 account provided a total return of -0.52%. These returns include the reinvestment of any distributions. As of December 31, 2004, the account's seven-day yield with and without waivers was 1.55%. The yield quotation is based on the latest seven days ended with dividends annualized, and more closely reflects the account's current earnings than does the total return quotation. The account 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. PORTFOLIO PERFORMANCE We expected interest rates to rise during the period and, as such, we shortened the weighted average maturity for the account significantly, from 51 days at the start of the period to 32 days as the period ended. Essentially, we looked to cut our interest-rate risk anticipating short-term rates would begin to rise and continue to do so throughout the period. On December 31, 2004, approximately 83% of the account's assets were invested in first tier commercial paper with the remainder in U.S. government sponsored agencies and repurchase agreements collateralized by U.S. government sponsored agencies. An investment in the portfolio is 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 at $1.00 per share, it is possible to lose money by investing in the portfolio. TOTAL RETURN VARIABLE ACCOUNT For the year ended December 31, 2004, the Compass 2 account provided a total return of 10.00%, the Compass 3 account provided a total return of 9.84%, and the Compass 3 -- Level 2 account provided a total return of 10.00%. These returns, which include in the reinvestment of any capital gains and dividend distributions, compare with returns of 10.87% and 4.34%, 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 account seeks to provide above-average income (compared to a portfolio invested entirely in equity securities) consistent with the prudent employment of capital. It's secondary objective is to provide reasonable opportunity for growth of capital and income. Under normal market conditions, the account invests at least 40%, but not more than 75%, of its net assets in common stocks and related securities, such as preferred stocks, bonds, warrants or rights convertible into stocks and depository receipts for those securities, and at least 25% of its net assets in non-convertible fixed income securities. CONTRIBUTORS TO PERFORMANCE For the equity portion of the portfolio, utilities and communications, energy, and basic materials were the best performing sectors over the period relative to the S&P 500 Index. In energy our allocation decision -- overweighting a strong performing sector -- aided results. Within this group, drilling contractors, Noble Corp. and GlobalSantaFe, enhanced the account's relative results. In both utilities and communications and basic materials, stock selection contributed to relative results. Among the account's better overall relative performing positions were utilities and communications stocks Sprint and AT&T Wireless*, as well as Texas-based electric power generator TXU. Prices of all three stocks rose significantly over the period. AT&T Wireless* was acquired during the year by Cingular, a joint venture of SBC and BellSouth. In basic materials, packaging company Owens-Illinois and iron ore miner Companhia Vale do Rio Doce aided results as both stocks posted strong absolute and relative returns for the period. Several stocks in the technology and health care sectors contributed to relative results. In technology, avoiding Intel and underweighting Cisco Systems aided results, as prices for both stocks declined over the period. An underweighted position in pharmaceutical firm Pfizer also helped relative returns. For the fixed income portion of the portfolio, the account benefited from our duration positioning and our sector allocation decisions relative to the Lehman Aggregate Index. (Duration is a measure of sensitivity to interest rate changes.) In addition, allocation to industrial and inflation linked bonds aided results. Exposure to "BBB"-rated and crossover corporate bonds also helped results relative to the Lehman Index. 4 DETRACTORS FROM PERFORMANCE For the equity portion of the portfolio, stock selection in leisure and retailing detracted from results relative to the S&P 500. In the leisure sector, media company Viacom was among our top overall detractors. In retailing, holding pharmaceutical chain Rite Aid also held back results. Not owning strong performing technology companies eBay and QUALCOMM held back relative results during the period. Elsewhere in the sector, holding underperformer Nortel Networks detracted from relative results. In the energy sector, an underweighted position in strong performing Exxon Mobil held back results, as we did not fully participate in this stock's run up in price. Stocks in other sectors that detracted from relative results included Mellon Financial, Tenet Healthcare, and power producer Calpine, from the financial services, health care, and the utilities and communication sectors, respectively. For the fixed income portion of the portfolio, our underweighted position in some high quality U.S. Agency debt issues and supranationals held back results relative to the Lehman Index. * Asset was not held in the portfolio at the end of the period. The views expressed in this report are those of the portfolio managers only through the end of the period of the report as stated on the cover and do not necessarily reflect the views of MFS or any other person in the MFS organization. These views are subject to change at any time based on market and other conditions, and MFS disclaims any responsibility to update such views. These views may not be relied upon as investment advice or an indication of trading intent on behalf of any MFS/Compass Variable Accounts. References to specific securities are not recommendations of such securities, and may not be representative of any MFS/Compass Variable Accounts' current or future investments. The portfolios are actively managed, and current holdings may be different. Variable annuities are designed for long-term retirement investing, please see your investment professional for more information. INDEX DEFINITIONS Citigroup World Government Bond Index -- measures the government bond markets around the world. Lehman Brothers Government/Mortgage Index -- measures government and mortgage securities markets. Lehman Brothers High Yield Index -- measures the universe of non-investment grade, fixed-rate debt, Pay-in-kind (PIK) bonds, Eurobonds, and debt issues from countries designated as emerging markets (e.g., Argentina, Brazil, Venezuela, etc.) are excluded. Lehman Brothers Aggregate Index -- measures the U.S. investment grade, fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities. Lipper High Yield Index -- measures the 30 largest retail mutual funds in the Lipper High Yield Category. Russell 1000 Growth Index-- measures large-cap U.S. growth stocks. Standard & Poor's 500 Stock Index is a capitalization weighted index of 500 widely held stocks designed to measure broad U.S. equity performance. It is not possible to invest directly in an index. KEY RISK CONSIDERATIONS CAPITAL APPRECIATION VARIABLE ACCOUNT Prices of growth company securities held by the series may fall to a greater extent than the overall equity markets (e.g. as represented by the S&P 500) due to changing economic, political or market conditions or disappointing growth company earnings results. Over-the-counter (OTC) transactions involve risks in addition to those associated with transactions in securities traded on exchanges. OTC-listed companies may have limited product lines, markets or financial resources. Many OTC stocks trade less frequently and in smaller volume than exchange-listed stocks. The values of these stocks may be more volatile than exchange-listed stocks, and the series may experience difficulty in buying and selling these stocks at prevailing market prices. The portfolio may invest in foreign and/or emerging markets securities, which are more susceptible to interest rate, currency exchange rate, economic, and political risks. GLOBAL GOVERNMENTS VARIABLE ACCOUNT The portfolio may invest in foreign and/or emerging markets securities, which are more susceptible to interest rate, currency exchange rate, economic, and political risks. The portfolio will allocate its investments based upon judgments made by MFS. The portfolio could miss attractive investment opportunities by underweighting markets where there are significant returns, and could lose value by overweighting markets where there are significant declines. The fixed income securities purchased by the portfolio may be traded in the over-the-counter market rather than on an organized exchange and are subject to liquidity risk. This means that they may be harder to purchase or sell at a fair price. The inability to purchase or sell these fixed income securities at a fair price could have a negative impact on performance. The portfolio may invest in mortgage-backed securities, which during times of fluctuation interest rates, may increase or decrease more than other fixed-income securities. The portfolio may invest in derivative securities, which may include futures and options. These types of instruments can increase price fluctuation. The portfolio may invest a relatively high percentage of its assets in a small number of issuers or even in a single issuer. This makes the portfolio's value more sensitive to developments associated with the issuer and the overall market. The portfolio may invest a substantial amount of its assets in issuers located in a limited number of countries and therefore is susceptible to adverse economic, political or regulatory developments affecting those countries. The portfolio has engaged and may engage in active and frequent trading to achieve its principal investment strategies. Frequent trading increases transaction costs, which could detract from the series' performance. 5 GOVERNMENT SECURITIES VARIABLE ACCOUNT The portfolio may invest in mortgage-backed securities, which during times of fluctuation interest rates, may increase or decrease more than other fixed-income securities. The portfolio will invest in government guaranteed securities. These guarantees apply to the underlying securities only and not to the prices and yields of the portfolio. HIGH YIELD VARIABLE ACCOUNT The portfolio will allocate its investments based upon judgments made by MFS. The portfolio could miss attractive investment opportunities by underweighting markets where there are significant returns, and could lose value by overweighting markets where there are significant declines. The fixed income securities purchased by the portfolio may be traded in the over-the-counter market rather than on an organized exchange and are subject to liquidity risk. This means that they may be harder to purchase or sell at a fair price. The inability to purchase or sell these fixed income securities at a fair price could have a negative impact on performance. The portfolio may invest in high yield or lower-rated securities, which may provide greater returns but are subject to greater-than-average risk. The portfolio may invest a relatively high percentage of its assets in a small number of issuers or even in a single issuer. This makes the portfolio's value more sensitive to developments associated with the issuer and the overall market. The portfolio may invest in foreign and/or emerging markets securities, which are more susceptible to interest rate, currency exchange rate, economic, and political risks. The portfolio has engaged and may engage in active and frequent trading to achieve its principal investment strategies. Frequent trading increases transaction costs, which could detract from the portfolios' performance. MANAGED SECTORS VARIABLE ACCOUNT The portfolio will allocate its investments based upon judgments made by MFS. The portfolio could miss attractive investment opportunities by underweighting markets where there are significant returns, and could lose value by overweighting markets where there are significant declines. The portfolio focuses on companies in a limited number of sectors or industries making it more susceptible to adverse economic, political, or regulatory developments affecting those sectors or industries than a portfolio that invests more broadly. Over-the-counter (OTC) transactions involve risks in addition to those associated with transactions in securities traded on exchanges. OTC-listed companies may have limited product lines, markets or financial resources. Many OTC stocks trade less frequently and in smaller volume than exchange-listed stocks. The values of these stocks may be more volatile than exchange-listed stocks, and the portfolio may experience difficulty in buying and selling these stocks at prevailing market prices. The portfolio may invest in foreign and/or emerging markets securities, which are more susceptible to interest rate, currency exchange rate, economic, and political risks. The portfolio utilizes short sales as an investment technique and will suffer a loss if it sells a security short and the value of that security rises. The portfolio may invest a relatively high percentage of its assets in a small number of issuers or even in a single issuer. This makes the portfolio's value more sensitive to developments associated with the issuer and the overall market. The portfolio has engaged and may engage in active and frequent trading to achieve its principal investment strategies. Frequent trading increases transaction costs, which could detract from the portfolios' performance. MONEY MARKET VARIABLE ACCOUNT The portfolio may invest in foreign and/or emerging markets securities, which are more susceptible to interest rate, currency exchange rate, economic, and political risks. The portfolio may invest in municipal securities called revenue obligations, which are subject to a higher degree of credit risk because they are not backed by the full faith and credit of the municipal issuer. If the Internal Revenue Service (IRS) determines an issuer of a municipal security has not complied with applicable tax requirements, interest from the security could also become taxable and the security could decline significantly in value. TOTAL RETURN VARIABLE ACCOUNT The portfolio will allocate its investments based upon judgments made by MFS. The portfolio could miss attractive investment opportunities by underweighting markets where there are significant returns, and could lose value by overweighting markets where there are significant declines. The portfolio may invest in foreign and/or emerging markets securities, which are more susceptible to interest rate, currency exchange rate, economic, and political risks. The fixed income securities purchased by the portfolio may be traded in the over-the-counter market rather than on an organized exchange and are subject to liquidity risk. This means that they may be harder to purchase or sell at a fair price. The inability to purchase or sell these fixed income securities at a fair price could have a negative impact on performance. The portfolio may invest in mortgage-backed securities, which during times of fluctuation interest rates, may increase or decrease more than other fixed-income securities. The portfolio may invest in high yield or lower-rated securities, which may provide greater returns but are subject to greater-than-average risk. Prices of securities react to the economic condition of the company that issued the security. The portfolio's equity investments in an issue may rise and fall based on the issuer's actual and anticipated earnings, changes in management and the potential for takeovers and acquisitions. MFS will invest in securities that are undervalued based on its belief that the market value of these securities will rise due to anticipated events and investor perceptions. If these events do not occur or are delayed, or if investor perceptions about the securities do not improve, the market price of these securities may not rise or may fall. Convertible securities, like fixed income securities, tend to increase in value when interest rates decline and decrease in value when interest rates rise. The market value of a convertible security also tends to increase as the market value of the underlying stock rises and decrease as the market value of the underlying stock declines. The accounts' values will vary daily in response to issuer, market, regulatory, economic, or political developments. Because stocks tend to be more volatile than some other investments, such as bonds, the more assets a portfolio dedicates to stocks, generally 6 PERFORMANCE SUMMARY the more volatile the portfolios' values will be. Bond prices will decline when interest rates rise and will increase when interest rates fall. Many bonds also carry credit risk, which is the risk that issuers may fail to make timely principal or interest payments. In addition, bonds with longer maturity dates will be subject to greater price fluctuations than those with shorter maturity periods. However, stocks historically have outperformed bonds over time. Please see the prospectus for further information regarding these and other risk conditions. THESE PERFORMANCE RESULTS REFLECT ANY APPLICABLE CONTRACT OR SURRENDER CHARGES. YEAR END PERFORMANCE THROUGH DECEMBER 31, 2004
COMPASS 2 COMPASS 3 COMPASS 3 - (U.S.) (U.S.) LEVEL 2 (U.S.) --------- --------- -------------- Capital Appreciation Variable Account+ 9.47% 9.36% 9.52% Global Governments Variable Account 8.23% 8.07% 8.23% Government Securities Variable Account 2.38% 2.28% 2.43% High Yield Variable Account 7.67% 7.57% 7.73% Managed Sectors Variable Account+ 5.26% 5.10% 5.26% Money Market Variable Account (0.57)% (0.67)% (0.52)% Total Return Variable Account+ 10.00% 9.84% 10.00%
VISIT sunlife-usa.com FOR THE MOST RECENT MONTH-END PERFORMANCE RESULTS. MARKET VOLATILITY CAN SIGNIFICANTLY AFFECT SHORT-TERM PERFORMANCE, AND MORE RECENT RETURNS MAY BE DIFFERENT FROM THOSE SHOWN. THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE OF FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND UNITS, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. ANY HIGH SHORT-TERM RETURNS WERE PRIMARILY ACHIEVED DURING FAVORABLE MARKET CONDITIONS, WHICH MAY NOT BE REPEATED. + The performance shown reflects a non-recurring accrual made to the variable accounts on July 28, 2004 relating to MFS' revenue sharing settlement with the Securities and Exchange Commission without which the performance would have been lower. From time to time the variable accounts may receive proceeds from the settlement of a class action lawsuit, without which performance would be lower. See notes to financial statements. 7 PORTFOLIO COMPOSITION -- CAPITAL APPRECIATION VARIABLE ACCOUNT [CHART] PORTFOLIO STRUCTURE Stocks 95.3% Cash & Other Net Assets 4.7%
TOP TEN HOLDINGS Johnson & Johnson 4.3% Cisco Systems, Inc. 3.7% Wyeth 3.0% Microsoft Corp. 3.0% Amgen, Inc. 2.8% IAC/InterActiveCorp. 2.8% PepsiCo, Inc. 2.5% Procter & Gamble Co. 2.2% Dell, Inc. 2.2% Medtronic, Inc. 2.1%
SECTOR WEIGHTINGS Health Care 24.2% Technology 22.2% Retailing 9.2% Leisure 7.8% Industrial Goods & Services 6.5% Consumer Staples 5.7% Financial Services 5.6% Special Products & Services 4.0% Transportation 2.5% Energy 2.3% Utilities & Communications 1.9% Basic Materials 1.9% Autos & Housing 1.5%
Percentages are based on net assets as of 12/31/2004. The portfolio is actively managed and current holdings may be different. 8 PORTFOLIO COMPOSITION -- GLOBAL GOVERNMENTS VARIABLE ACCOUNT [CHART] PORTFOLIO STRUCTURE* Bonds 95.2% Cash & Other Net Assets 4.8%
MARKET SECTORS* International Sovereigns 81.9% Cash & Other Net Assets 4.8% U.S. Treasuries 4.8% Commercial Mortgage Backed 3.4% Emerging Markets Debt 2.9% Mortgage Backed 1.2% Municipal 1.0%
CREDIT QUALITY** AAA 77.8% AA 10.1% A 5.2% BBB 2.1% Other 4.8%
PORTFOLIO FACTS Average Duration 5.7 Average Life 8.2 Average Maturity*** 9.1 Average Quality AA+ Average Quality Short Term Bonds A-1
COUNTRY WEIGHTINGS United States 20.5% Germany 13.7% France 9.3% United Kingdom 7.6% Finland 6.3% Ireland 6.0% Canada 5.4% New Zealand 5.1% Japan 4.7% Other 21.4%
* For purposes of this graphical presentation, the bond component includes both accrued interest on bonds and the equivalent exposure from any derivative holdings, if applicable. ** Credit quality ratings are based on a weighted average of each security's rating from Moody's Investors Service. If not rated by Moody's, the rating will be that assigned by Standard & Poor's. Likewise, if not assigned a rating by Standard & Poor's, it will be based on the rating assigned by Fitch, Inc. U.S. Treasuries and mortgage-backed securities are included in the "AAA"-rating category. *** The average maturity shown is calculated using the final stated maturity on the portfolio's holdings without taking into account any holdings which have been pre-refunded to an earlier date or which have a mandatory put date prior to the stated maturity. The average life shown takes into account these earlier dates. Percentages are based on net assets as of 12/31/2004. The portfolio is actively managed and current holdings may be different. 9 PORTFOLIO COMPOSITION -- GOVERNMENT SECURITIES VARIABLE ACCOUNT [CHART] PORTFOLIO STRUCTURE* Bonds 90.3% Cash & Other Net Assets 9.7%
MARKET SECTORS* Mortgage Backed 55.1% U.S. Government Agencies 30.2% Cash & Other Net Assets 9.7% U.S. Treasuries 4.8% Residential Mortgage Backed 0.2%
CREDIT QUALITY** AAA 98.0% Not Rated 0.8% Other 1.2%
PORTFOLIO FACTS Average Duration 3.8 Average Life 6.3 Average Maturity*** 16.8 Average Quality AAA Average Quality Short Term Bonds A-1
* For purposes of this graphical presentation, the bond component includes both accrued interest on bonds and the equivalent exposure from any derivative holdings, if applicable. ** Credit quality ratings are based on a weighted average of each security's rating from Moody's Investors Service. If not rated by Moody's, the rating will be that assigned by Standard & Poor's. Likewise, if not assigned a rating by Standard & Poor's, it will be based on the rating assigned by Fitch, Inc. If not rated by any of the three agencies, the security is considered not rated, except for U.S. Treasuries and mortgage-backed securities, which are included in the "AAA"-rating category. *** The average maturity shown is calculated using the final stated maturity on the portfolio's holdings without taking into account any holdings which have been pre-refunded to an earlier date or which have a mandatory put date prior to the stated maturity. The average life shown takes into account these earlier dates. Percentages are based on net assets as of 12/31/2004. The portfolio is actively managed and current holdings may be different. 10 PORTFOLIO COMPOSITION -- HIGH YIELD VARIABLE ACCOUNT [CHART] PORTFOLIO STRUCTURE* Bonds 96.7% Cash & Other Net Assets 2.0% Stocks 0.9% Convertible Preferred Stocks 0.3% Preferred Stocks 0.1%
TOP FIVE BOND INDUSTRIES* Utilities - Electric Power 8.8% Telecommunications - Wireline 6.4% Chemicals 5.9% Gaming & Lodging 5.7% Telecommunications - Wireless 5.0%
CREDIT QUALITY** BBB 3.0% BB 28.0% B 47.3% CCC 14.9% CC 2.1% D 0.4% Not Rated 1.1% Equity 1.2% Other 2.0%
PORTFOLIO FACTS Average Duration 4.5 Average Life 7.9 Average Maturity*** 8.3 Average Quality B Average Quality Short Term Bonds A-1
* For purposes of this graphical presentation, the bond component includes both accrued interest on bonds and the equivalent exposure from any derivative holdings, if applicable. ** Credit quality ratings are based on a weighted average of each security's rating from Moody's Investors Service. If not rated by Moody's, the rating will be that assigned by Standard & Poor's. Likewise, if not assigned a rating by Standard & Poor's, it will be based on the rating assigned by Fitch, Inc. If not rated by any of the three agencies, the security is considered not rated. *** The average maturity shown is calculated using the final stated maturity on the portfolio's holdings without taking into account any holdings which have been pre-refunded to an earlier date or which have a mandatory put date prior to the stated maturity. The average life shown takes into account these earlier dates. Percentages are based on net assets as of 12/31/2004. The portfolio is actively managed and current holdings may be different. 11 PORTFOLIO COMPOSITION -- MANAGED SECTORS VARIABLE ACCOUNT [CHART] PORTFOLIO STRUCTURE Stocks 98.1% Cash & Other Net Assets 1.9%
TOP TEN HOLDINGS Johnson & Johnson 4.8% Microsoft Corp. 4.0% Dell, Inc. 3.9% Cisco Systems, Inc. 3.6% Wyeth 3.1% Procter & Gamble Co. 2.9% Abbott Laboratories 2.7% eBay, Inc. 2.6% Yahoo!, Inc. 2.6% VERITAS Software Corp. 2.3%
SECTOR WEIGHTINGS Technology 31.6% Health Care 25.4% Retailing 11.1% Leisure 9.5% Financial Services 6.3% Consumer Staples 4.5% Industrial Goods & Services 3.9% Special products & Services 3.3% Transportation 2.5%
Percentages are based on net assets as of 12/31/2004. The portfolio is actively managed and current holdings may be different. 12 PORTFOLIO COMPOSITION -- MONEY MARKET VARIABLE ACCOUNT MATURITY BREAKDOWN* 0 TO 29 Days 55.0% 30 TO 59 Days 34.2% 60 TO 89 Days 5.0% 90 TO 365 Days 6.0% Fixed Income Other -0.2%
[CHART] PORTFOLIO STRUCTURE* Commercial Paper 83.0% U.S. Government Agencies 14.2% Repurchase Agreements 3.0% Other Assets Less Liabilities** (0.2)%
* For purposes of this graphical presentation, the bond component includes the accrued interest on bonds. ** From time to time, "Other Assets Less Liabilities" may be negative due to timing of cash receipts. Percentages are based on net assets as of 12/31/2004. The portfolio is actively managed and current holdings may be different. 13 PORTFOLIO COMPOSITION -- TOTAL RETURN VARIABLE ACCOUNT [CHART] PORTFOLIO STRUCTURE* Stocks 60.8% Bonds 37.7% Cash & Other Net Assets 1.5%
TOP TEN HOLDINGS Sprint Corp. 2.1% Bank of America Corp. 1.8% Verizon Communications, Inc. 1.8% Fannie Mae 6.625% 11/15/10 1.7% Citigroup, Inc., "B" 1.5% Viacom, Inc 1.5% J.P. Morgan Chase & Co 1.5% Merck & Co., Inc. 1.4% U.S. Treasury Bonds 6.250% 08/15/2023 1.4% U.S. Treasury Notes 7.000% 07/15/2006 1.3%
SECTOR WEIGHTINGS Financial Services 15.5% Utilities & Communications 8.6% Energy 6.3% Health Care 6.2% Leisure 5.2% Basic Materials 5.1% Industrial Goods & Services 4.4% Consumer Staples 3.9% Technology 2.8% Retailing 1.6% Autos & Housing 0.4% Transportation 0.4% Special Products & Services 0.4%
TOP FIVE BOND MARKET SECTORS* Mortgage Backed 13.5% High Grade Corporates 9.3% U.S. Treasuries 6.6% U.S. Government Agencies 5.2% Commercial Mortgage Backed 1.4%
* For purposes of this graphical presentation, the bond component includes both the accrued interest on bonds and the equivalent exposure from any derivative holdings, if applicable. Percentages are based on net assets as of 12/31/2004. The portfolio is actively managed and current holdings may be different. 14 PORTFOLIO OF INVESTMENTS -- December 31, 2004 CAPITAL APPRECIATION VARIABLE ACCOUNT
ISSUER SHARES VALUE STOCKS -- 95.3% AEROSPACE -- 0.9% Lockheed Martin Corp. 50,700 $ 2,816,385 --------------- AIRLINES -- 1.0% Southwest Airlines Co. 193,500 $ 3,150,180 --------------- APPAREL MANUFACTURERS -- 0.9% Nike, Inc., "B" 18,400 $ 1,668,696 Polo Ralph Lauren Corp., "A" 23,500 1,001,100 --------------- $ 2,669,796 --------------- AUTOMOTIVE -- 1.5% Harley-Davidson, Inc. 75,200 $ 4,568,400 --------------- BANKS & CREDIT COMPANIES -- 2.5% American Express Co. 40,340 $ 2,273,966 Citigroup, Inc. 113,296 5,458,601 --------------- $ 7,732,567 --------------- BIOTECHNOLOGY -- 5.2% Amgen, Inc.* 131,540 $ 8,438,291 Cephalon, Inc.* 6,200 315,456 Genzyme Corp.* 66,300 3,850,041 ImClone Systems, Inc.* 68,600 3,161,088 --------------- $ 15,764,876 --------------- BROADCAST & CABLE TV -- 4.6% Citadel Broadcasting Corp.* 157,500 $ 2,548,350 Comcast Corp., "A"* 168,100 5,594,368 EchoStar Communications Corp., "A" 89,585 2,977,805 Time Warner, Inc.* 86,200 1,675,728 Univision Communications, Inc., "A"* 42,400 1,241,048 --------------- $ 14,037,299 --------------- BROKERAGE & ASSET MANAGERS -- 1.4% Merrill Lynch & Co., Inc. 57,850 $ 3,457,695 Morgan Stanley 14,000 777,280 --------------- $ 4,234,975 --------------- BUSINESS SERVICES -- 2.5% Accenture Ltd., "A"* 88,700 $ 2,394,900 Fiserv, Inc.* 38,800 1,559,372 Manpower, Inc. 42,600 2,057,580 SOFTBANK CORP. 32,500 1,577,962 --------------- $ 7,589,814 --------------- CHEMICALS -- 1.3% 3M Co. 28,000 $ 2,297,960 E.I. du Pont de Nemours & Co. 33,400 1,638,270 --------------- $ 3,936,230 --------------- COMPUTER SOFTWARE -- 6.3% Akamai Technologies, Inc.* 22,900 $ 298,387 Amdocs Ltd.* 110,300 2,895,375 Mercury Interactive Corp.* 10,300 469,165 Microsoft Corp. 338,120 9,031,185 Oracle Corp.* 221,200 3,034,864 Red Hat, Inc.* 199,000 2,656,650 Symantec Corp.* 29,600 762,496 --------------- $ 19,148,122 --------------- COMPUTER SOFTWARE -- SYSTEMS -- 2.7% CDW Corp. 23,000 $ 1,526,050 Dell, Inc.* 159,920 6,739,029 --------------- $ 8,265,079 --------------- CONSUMER GOODS & SERVICES -- 3.7% Apollo Group, Inc., "A"* 45,400 $ 3,664,234 Career Education Corp.* 24,400 976,000 Procter & Gamble Co. 122,800 6,763,824 --------------- $ 11,404,058 --------------- ELECTRICAL EQUIPMENT -- 2.4% Emerson Electric Co. 44,600 $ 3,126,460 Hubbell, Inc., "B" 14,300 747,890 Tyco International Ltd. 93,400 3,338,116 --------------- $ 7,212,466 --------------- ELECTRONICS -- 3.4% Amphenol Corp., "A"* 59,300 $ 2,178,682 Analog Devices, Inc. 74,490 2,750,171 Applied Materials, Inc.* 84,000 1,436,400 Marvell Technology Group Ltd.* 52,800 1,872,816 PMC-Sierra, Inc.* 63,500 714,375 Xilinx, Inc. 51,400 1,524,010 --------------- $ 10,476,454 --------------- FOOD & DRUG STORES -- 1.1% CVS Corp. 71,910 $ 3,240,984 --------------- FOOD & NON-ALCOHOLIC BEVERAGES -- 3.5% PepsiCo, Inc. 146,620 $ 7,653,564 SYSCO Corp. 81,500 3,110,855 --------------- $ 10,764,419 --------------- GAMING & LODGING -- 1.3% Carnival Corp. 31,900 $ 1,838,397 Cendant Corp. 76,620 1,791,376 International Game Technology 13,100 450,378 --------------- $ 4,080,151 --------------- GENERAL MERCHANDISE -- 4.2% Family Dollar Stores, Inc. 112,500 $ 3,513,375 Kohl's Corp.* 28,590 1,405,770 Target Corp. 90,060 4,676,816 Wal-Mart Stores, Inc. 57,500 3,037,150 --------------- $ 12,633,111 --------------- INSURANCE -- 1.7% St. Paul Travelers Cos., Inc. 74,000 $ 2,743,180 XL Capital Ltd., "A" 29,500 2,290,675 --------------- $ 5,033,855 --------------- INTERNET -- 5.5% Amazon.com, Inc.* 37,500 $ 1,660,875 eBay, Inc.* 33,500 3,895,380 IAC/InterActiveCorp* 303,100 8,371,622 Yahoo!, Inc.* 71,900 2,709,192 --------------- $ 16,637,069 --------------- LEISURE & TOYS -- 1.4% Electronic Arts, Inc.* 71,200 $ 4,391,616 --------------- MACHINERY & TOOLS -- 2.7% Caterpillar, Inc. 52,600 $ 5,129,026 Illinois Tool Works, Inc. 31,800 2,947,224 --------------- $ 8,076,250 --------------- MEDICAL & HEALTH TECHNOLOGY & SERVICES -- 2.7% Caremark Rx, Inc.* 76,100 $ 3,000,623 Community Health Systems, Inc.* 81,700 2,277,796 HCA, Inc. 76,100 3,040,956 --------------- $ 8,319,375 --------------- MEDICAL EQUIPMENT -- 3.9% Guidant Corp. 21,200 $ 1,528,520 Medtronic, Inc. 130,900 6,501,803 Millipore Corp.* 21,400 1,065,934 Thermo Electron Corp.* 87,700 2,647,663 --------------- $ 11,743,920 --------------- METALS & MINING -- 0.6% Companhia Vale do Rio Doce, ADR 58,500 $ 1,697,085 --------------- OIL SERVICES -- 2.3% BJ Services Co. 39,000 $ 1,815,060 GlobalSantaFe Corp. 50,100 1,658,811 Noble Corp.* 35,500 1,765,770 Smith International, Inc.* 31,400 1,708,474 --------------- $ 6,948,115 --------------- PERSONAL COMPUTERS & PERIPHERALS -- 0.6% Lexmark International, Inc., "A"* 20,300 $ 1,725,500 ---------------
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ISSUER SHARES VALUE STOCK -- continued PHARMACEUTICALS -- 12.4% Abbott Laboratories 136,300 $ 6,358,395 Allergan, Inc. 20,100 1,629,507 AstraZeneca PLC 42,800 1,549,557 Eli Lilly & Co. 53,200 3,019,100 Johnson & Johnson 204,200 12,950,364 Roche Holdings AG 26,900 3,085,398 Wyeth 215,400 9,173,886 --------------- $ 37,766,207 --------------- POLLUTION CONTROL -- 0.5% Waste Management, Inc. 52,600 $ 1,574,844 --------------- RESTAURANTS -- 0.5% Outback Steakhouse, Inc. 36,300 $ 1,661,814 --------------- SPECIALTY STORES -- 3.0% Best Buy Co., Inc. 35,900 $ 2,133,178 CarMax, Inc.* 56,400 1,751,220 Lowe's Cos., Inc. 59,600 3,432,364 PETsMART, Inc. 48,100 1,708,993 --------------- $ 9,025,755 --------------- TELECOMMUNICATIONS -- WIRELESS -- 0.9% Vodafone Group PLC, ADR 102,971 $ 2,819,346 --------------- TELECOMMUNICATIONS -- WIRELINE -- 3.7% Cisco Systems, Inc.* 590,500 $ 11,396,650 --------------- TELEPHONE SERVICES -- 1.0% Sprint Corp. 120,950 $ 3,005,608 --------------- TRUCKING -- 1.5% FedEx Corp. 45,800 $ 4,510,839 --------------- Total Stocks (Identified Cost, $249,034,029) $ 290,059,214 --------------- PAR AMOUNT REPURCHASE AGREEMENT -- 5.0% Morgan Stanley, 2.19%, dated 12/31/04, due 1/03/05, total to be received $15,132,761 (secured by various U.S. Treasury and Federal Agency obligations in a jointly traded account), at Cost $ 15,130,000 $ 15,130,000 --------------- Total Investments (Identified Cost, $264,164,029) $ 305,189,214 --------------- OTHER ASSETS, LESS LIABILITIES -- (0.3)% (967,424) --------------- Net Assets -- 100.0% $ 304,221,790 ===============
See portfolio footnotes and notes to financial statements. PORTFOLIO OF INVESTMENTS -- December 31, 2004 GLOBAL GOVERNMENTS VARIABLE ACCOUNT
ISSUER PAR AMOUNT VALUE BONDS -- 93.6% FOREIGN BONDS -- 78.0% AUSTRALIA -- 1.9% Government of Australia, 8.75%, 2008 AUD 143,000 $ 124,785 Government of Australia, 6.25%, 2015 120,000 100,482 --------------- $ 225,267 --------------- AUSTRIA -- 3.4% Republic of Austria, 5.5%, 2007 EUR 160,000 $ 232,763 Republic of Austria, 5%, 2012 70,000 104,618 Republic of Austria, 4.65%, 2018 52,000 75,663 --------------- $ 413,044 --------------- BELGIUM -- 3.2% Kingdom of Belgium, 3.75%, 2009 EUR 157,000 $ 219,338 Kingdom of Belgium, 5%, 2012 111,000 165,966 --------------- $ 385,304 --------------- CANADA -- 5.4% Canada Housing Trust, 4.65%, 2009 CAD 70,000 $ 60,472 Government of Canada, 5.25%, 2012 65,000 58,052 Quebec Province, 1.6%, 2013 JPY 54,000,000 537,116 --------------- $ 655,640 --------------- DENMARK -- 0.6% Kingdom of Denmark, 5%, 2013 DKK 376,000 $ 75,486 --------------- FINLAND -- 6.2% Republic of Finland, 2.75%, 2006 EUR 156,000 $ 212,521 Republic of Finland, 3%, 2008 398,000 542,287 --------------- $ 754,808 --------------- FRANCE -- 9.1% Republic of France, 4.75%, 2007 - 2012 EUR 556,000 $ 801,093 Republic of France, 6%, 2025 179,000 303,858 --------------- $ 1,104,951 --------------- GERMANY -- 13.4% Federal Republic of Germany, 3.5%, 2008 EUR 190,000 $ 263,111 Federal Republic of Germany, 5.25%, 2010 312,000 467,080 Federal Republic of Germany, 6.25%, 2024 - 2030 331,000 580,911 Kreditanstalt fur Wiederaufbau, 3.25%, 2008 220,000 302,564 --------------- $ 1,613,666 --------------- IRELAND -- 5.9% Republic of Ireland, 4.25%, 2007 EUR 368,000 $ 519,393 Republic of Ireland, 4.6%, 2016 135,000 197,126 --------------- $ 716,519 --------------- ITALY -- 2.2% Republic of Italy, 5.25%, 2017 EUR 170,000 $ 260,553 --------------- JAPAN -- 4.7% Development Bank of Japan, 1.4%, 2012 JPY 17,000,000 $ 168,525 Development Bank of Japan, 1.6%, 2014 40,000,000 394,079 --------------- $ 562,604 --------------- MEXICO -- 1.2% Pemex Project Funding Master Trust, 8.625%, 2022 $ 117,000 $ 136,130 United Mexican States, 8%, 2022 10,000 11,535 --------------- $ 147,665 --------------- NETHERLANDS -- 3.9% Kingdom of Netherlands, 5.75%, 2007 EUR 307,000 $ 442,840 Kingdom of Netherlands, 5%, 2012 19,697 29,484 --------------- $ 472,324 --------------- NEW ZEALAND -- 5.0% Government of New Zealand, 7%, 2009 NZD 142,000 $ 105,887 Government of New Zealand, 6.5%, 2013 669,000 496,439 --------------- $ 602,326 --------------- QATAR -- 0.8% State of Qatar, 9.75%, 2030 $ 67,000 $ 97,392 ---------------
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ISSUER PAR AMOUNT VALUE BONDS -- continued FOREIGN BONDS -- continued RUSSIA -- 0.8% Russian Federation, 11%, 2018 $ 70,000 $ 97,874 --------------- SPAIN -- 2.8% Kingdom of Spain, 6%, 2008 EUR 220,000 $ 326,365 Kingdom of Spain, 5.35%, 2011 9,000 13,680 --------------- $ 340,045 --------------- UNITED KINGDOM -- 7.5% United Kingdom Treasury, 5.75%, 2009 GBP 60,000 $ 121,298 United Kingdom Treasury, 5%, 2012 399,000 787,054 --------------- $ 908,352 --------------- Total Foreign Bonds $ 9,433,820 --------------- U.S. BONDS -- 15.6% ASSET BACKED & SECURITIZED -- 3.3% Commercial Mortgage Asset Trust, 0.8711%, 2032## $ 1,594,783 $ 78,901 Deutsche Mortgage & Asset Receiving Corp., 6.538%, 2031 56,558 60,153 First Union National Bank Commercial Mortgage Trust, 7.39%, 2031 60,361 68,409 First Union National Bank Commercial Mortgage Trust, 0.9667%, 2043## 1,743,848 83,105 First Union-Lehman Brothers Bank of America, 6.56%, 2035 29,461 31,675 GMAC Commercial Mortgage Securities, Inc., 6.42%, 2035 29,461 31,663 Lehman Brothers-UBS Commercial Mortgage Trust, 7.95%, 2010 45,271 52,563 --------------- $ 406,469 --------------- MORTGAGE BACKED -- 1.2% Fannie Mae, 6%, 2017 - 2018 $ 136,200 $ 142,804 --------------- MUNICIPALS -- 1.0% New York, NY, City Municipal Water Finance Authority, Water & Sewer Systems Rev., "B", 5%, 2036 $ 115,000 $ 117,254 --------------- SUPRANATIONAL -- 5.3% Inter-American Development Bank, 1.9%, 2009 JPY 62,000,000 $ 640,942 --------------- U.S. TREASURY OBLIGATIONS -- 4.8% U.S. Treasury Bonds, 8%, 2021 $ 42,000 $ 57,653 U.S. Treasury Bonds, 6.25%, 2030 234,000 279,767 U.S. Treasury Notes, 4.25%, 2010 - 2013 121,000 121,761 U.S. Treasury Notes, 2%, 2014 114,661 118,673 --------------- $ 577,854 --------------- Total U.S. Bonds $ 1,885,323 --------------- Total Bonds (Identified Cost, $10,279,194) $ 11,319,143 --------------- SHORT-TERM OBLIGATION~ -- 1.6% Federal Home Loan Bank, 1%, due 1/03/05, at Amortized Cost $ 188,000 $ 187,990 --------------- REPURCHASE AGREEMENT -- 4.5% Morgan Stanley, 2.19%, dated 12/31/04, due 1/03/05, total to be received $547,100 (secured by various U.S. Treasury and Federal Agency obligations in a jointly traded account), at Cost $ 547,000 $ 547,000 --------------- Total Investments (Identified Cost, $11,014,184) $ 12,054,133 --------------- OTHER ASSETS, LESS LIABILITIES -- 0.3% 39,929 --------------- Net Assets -- 100.0% $ 12,094,062 ===============
See portfolio footnotes and notes to financial statements. PORTFOLIO OF INVESTMENTS -- December 31, 2004 GOVERNMENT SECURITIES VARIABLE ACCOUNT
ISSUER PAR AMOUNT VALUE BONDS -- 98.0% AGENCY -- OTHER -- 4.0% Financing Corp., 10.35%, 2018 $ 1,150,000 $ 1,763,430 Resolution Funding Corp., 8.875%, 2020 1,700,000 2,403,106 --------------- $ 4,166,536 --------------- ASSET BACKED & SECURITIZED -- 0.2% Freddie Mac, 3.108%, 2035 $ 195,000 $ 193,890 --------------- MORTGAGE BACKED -- 54.2% Fannie Mae, 4.45%, 2014 $ 329,426 $ 325,737 Fannie Mae, 4.5%, 2019 2,657,322 2,650,532 Fannie Mae, 4.652%, 2014 893,105 896,382 Fannie Mae, 4.79%, 2012 934,169 937,904 Fannie Mae, 4.846%, 2014 935,678 950,882 Fannie Mae, 5%, 2018 - 2019 11,668,373 11,866,291 Fannie Mae, 5.5%, 2017 - 2034 15,979,419 16,294,644 Fannie Mae, 5.9957%, 2020 6,087 6,077 Fannie Mae, 6%, 2016 - 2034 4,814,376 5,034,597 Fannie Mae, 6.5%, 2016 - 2033 4,362,245 4,585,735 Fannie Mae, 7.5%, 2022 - 2031 399,319 428,170 Fannie Mae, 8.5%, 2007 7,316 8,072 Fannie Mae, 10%, 2018 352,991 391,884 Fannie Mae TBA, 6%, 2032~~~ 5,874,000 6,072,247 Freddie Mac, 5.5%, 2034 1,655,010 1,682,840 Freddie Mac, 6%, 2034 1,949,245 2,014,481 Freddie Mac, 6.5%, 2032 1,371,306 1,439,928 Freddie Mac, 7.5%, 2027 168,265 180,929 Ginnie Mae, 6.5%, 2028 688,301 725,459 Ginnie Mae, 11%, 2010 - 2019 58,976 65,547 Ginnie Mae, 12.5%, 2015 17,969 20,384 --------------- $ 56,578,722 --------------- U.S. GOVERNMENT AGENCIES -- 26.4% Aid to Israel, 0%, 2024 $ 1,442,000 $ 507,141 Aid to Israel, 5.5%, 2023 1,097,000 1,146,527 Aid to Israel, 6.6%, 2008 875,404 912,508 Aid to Peru, 9.98%, 2008 727,885 795,753 Empresa Energetica Cornito Ltd., 6.07%, 2010 2,501,000 2,648,134 Fannie Mae, 3.41%, 2007 1,060,000 1,056,424 Fannie Mae, 4.625%, 2014 3,261,000 3,263,449 Fannie Mae, 4.771%, 2014 657,902 667,613 Freddie Mac, 5.625%, 2011 3,664,000 3,960,113 Overseas Private Investment Corp., 0%, 2007 161,000 160,565 Small Business Administration, 4.34%, 2024 397,786 387,901 Small Business Administration, 4.72%, 2024 736,594 736,484 Small Business Administration, 4.77%, 2024 682,000 682,881 Small Business Administration, 4.86%, 2024 350,000 351,261 Small Business Administration, 4.87%, 2024 419,000 420,229 Small Business Administration, 4.88%, 2024 319,000 320,315 Small Business Administration, 4.89%, 2023 717,400 723,897 Small Business Administration, 4.98%, 2023 276,202 280,159 Small Business Administration, 4.99%, 2024 455,000 460,221 Small Business Administration, 5.52%, 2024 376,349 391,659 Small Business Administration, 6.07%, 2022 590,420 629,758 Small Business Administration, 6.34%, 2021 763,316 821,319
17
ISSUER PAR AMOUNT VALUE BONDS -- continued U.S. GOVERNMENT AGENCIES -- continued Small Business Administration, 6.44%, 2021 $ 742,364 $ 801,161 Small Business Administration, 6.625%, 2021 790,001 857,984 Small Business Administration, 8.4%, 2007 7,865 8,090 Small Business Administration, 8.7%, 2009 94,108 100,527 Small Business Administration, 10.05%, 2009 18,035 19,395 Tennessee Valley Authority, STRIPS (Interest Only) 0%, 2042 2,250,000 1,681,560 U.S. Department of Housing & Urban Development, 6.36%, 2016 500,000 549,480 U.S. Department of Housing & Urban Development, 6.59%, 2016 2,045,000 2,191,884 --------------- $ 27,534,392 --------------- U.S. TREASURY OBLIGATIONS -- 13.2% U.S. Treasury Bonds, 5.25%, 2028 $ 346,000 $ 362,651 U.S. Treasury Bonds, 5.375%, 2031 353,000 381,709 U.S. Treasury Bonds, 6%, 2026 123,000 140,897 U.S. Treasury Bonds, 6.25%, 2030 410,000 490,190 U.S. Treasury Bonds, 12%, 2013 19,000 24,488 U.S. Treasury Notes, 2%, 2014 2,006,047 2,076,259 U.S. Treasury Notes, 3.375%, 2007 2,062,446 2,184,341 U.S. Treasury Notes, 3.625%, 2008### 1,943,469 2,116,939 U.S. Treasury Notes, 4%, 2014 84,000 82,842 U.S. Treasury Notes, 5.5%, 2008 - 2009 3,951,000 4,226,119 U.S. Treasury Notes, 6.5%, 2010 917,000 1,038,180 U.S. Treasury STRIPS (Interest Only), 0%, 2016 1,030,000 610,828 --------------- $ 13,735,443 --------------- Total Bonds (Identified Cost, $99,995,933) $ 102,208,983 --------------- REPURCHASE AGREEMENT -- 7.1% Goldman Sachs, 2.23%, dated 12/31/04, due 01/03/05, total to be received $7,434,381 (secured by various U.S. Treasury and Federal Agency obligations in a jointly traded account), at Cost $ 7,433,000 $ 7,433,000 --------------- Total Investments (Identified Cost, $107,428,933) $ 109,641,983 --------------- OTHER ASSETS, LESS LIABILITIES -- (5.1)% (5,282,526) --------------- Net Assets -- 100.0% $ 104,359,457 ===============
See portfolio footnotes and notes to financial statements. PORTFOLIO OF INVESTMENTS -- December 31, 2004 HIGH YIELD VARIABLE ACCOUNT
ISSUER PAR AMOUNT VALUE BONDS -- 94.8% ADVERTISING & BROADCASTING -- 3.4% Allbritton Communications Co., 7.75%, 2012 $ 350,000 $ 362,250 DIRECTV Holdings LLC, 8.375%, 2013 185,000 207,431 Echostar DBS Corp., 6.375%, 2011 350,000 357,875 Emmis Operating Co., 6.875%, 2012 185,000 193,556 Granite Broadcasting Corp., 9.75%, 2010 390,000 372,450 Lamar Media Corp., 7.25%, 2013 135,000 145,800 PRIMEDIA, Inc., 8.875%, 2011 385,000 407,137 Paxson Communications Corp., 0% to 2006, 12.25% to 2009 600,000 561,000 --------------- $ 2,607,499 --------------- AEROSPACE -- 1.7% Argo Tech Corp., 9.25%, 2011 $ 215,000 $ 235,963 BE Aerospace, Inc., 8.875%, 2011 310,000 323,950 Hexcel Corp., 9.75%, 2009 310,000 322,400 K&F Acquisition, Inc., 7.75%, 2014## 65,000 67,112 Standard Aero Holdings, Inc., 8.25%, 2014## 105,000 113,400 TransDigm Holding Co., 8.375%, 2011 230,000 246,675 --------------- $ 1,309,500 --------------- AIRLINES -- 0.7% Continental Airlines, Inc., 6.9%, 2017 $ 80,685 $ 68,369 Continental Airlines, Inc., 6.748%, 2017 74,347 60,704 Continental Airlines, Inc., 6.795%, 2018 176,962 154,642 Continental Airlines, Inc., 7.566%, 2020 250,379 211,422 --------------- $ 495,137 --------------- APPAREL MANUFACTURERS -- 0.3% Levi Strauss & Co., 7%, 2006 $ 235,000 $ 246,750 --------------- ASSET BACKED & SECURITIZED -- 2.0% Airplane Pass-Through Trust, 10.875%, 2012* $ 740,775 $ 3,704 ARCap REIT, Inc., 6.0996%, 2045## 165,567 138,200 Asset Securitization Corp., 8.005%, 2029 150,000 157,469 Crest Ltd., 7%, 2040## 154,000 149,419 First Union National Bank Commercial Mortgage Corp., 6.75%, 2032 165,000 156,275 GE Capital Commercial Mortgage Corp., 7.5117%, 2033## 145,000 161,035 GMAC Commercial Mortgage Securities, Inc., 7.6527%, 2034## 192,000 215,036 Mortgage Capital Funding, Inc., 7.214%, 2007 500,000 526,706 --------------- $ 1,507,844 --------------- AUTOMOTIVE -- 2.3% Affinia Group, Inc., 9%, 2014## $ 220,000 $ 229,350 Dana Corp., 7%, 2029 300,000 299,250 Metaldyne Corp., 11%, 2012 70,000 58,100 Metaldyne Corp., 10%, 2013## 145,000 137,750 Navistar International Corp., 7.5%, 2011 275,000 294,937 Tenneco Automotive, Inc., 10.25%, 2013 110,000 129,800 Tenneco Automotive, Inc., 8.625%, 2014## 70,000 72,800 TRW Automotive, Inc., 9.375%, 2013 105,000 121,800 TRW Automotive, Inc., 11%, 2013 179,000 215,695 Visteon Corp., 7%, 2014 150,000 143,250 --------------- $ 1,702,732 --------------- BASIC INDUSTRY -- 0.2% Thermadyne Holdings Corp., 9.25%, 2014 $ 165,000 $ 160,875 --------------- BROADCAST & CABLE TV -- 4.0% Cablevision Systems Corp., 8%, 2012## $ 355,000 $ 378,075 CCO Holdings LLC, 8.75%, 2013 150,000 154,875 Charter Communications, Inc., 8.625%, 2009 510,000 442,425 Charter Communications, Inc., 9.92%, 2011 915,000 780,038
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ISSUER PAR AMOUNT VALUE BONDS -- continued BROADCAST & CABLE TV -- continued Charter Communications, Inc., 8.375%, 2014## $ 120,000 $ 126,600 CSC Holdings, Inc., 8.125%, 2009 200,000 218,750 CSC Holdings, Inc., 6.75%, 2012## 215,000 221,450 FrontierVision Holdings LP, 11.875%, 2007* 50,000 66,750 FrontierVision Holdings LP, 11.875%, 2007* 80,000 106,800 FrontierVision Operating Partners LP, 11%, 2006* 195,000 255,450 Mediacom Broadband LLC, 9.5%, 2013 150,000 150,562 Mediacom Broadband LLC, 11%, 2013 75,000 80,625 Rogers Cable, Inc., 8.75%, 2032 35,000 38,850 --------------- $ 3,021,250 --------------- BROKERAGE & ASSET MANAGERS -- 0.2% Refco Finance Holdings LLC, 9%, 2012## $ 150,000 $ 164,250 --------------- BUILDING -- 1.2% Building Materials Corp. of America, 7.75%, 2014## $ 340,000 $ 342,975 Interface, Inc., 10.375%, 2010 204,000 234,600 Jacuzzi Brands, Inc., 9.625%, 2010 90,000 99,900 Nortek, Inc., 8.5%, 2014## 210,000 219,450 --------------- $ 896,925 --------------- BUSINESS SERVICES -- 1.5% Iron Mountain, Inc., 8.625%, 2013 $ 280,000 $ 297,500 Iron Mountain, Inc., 7.75%, 2015 5,000 5,075 Lucent Technologies, Inc., 5.5%, 2008 235,000 241,462 Nortel Networks Ltd., 6.125%, 2006 235,000 239,112 Xerox Corp., 7.625%, 2013 350,000 384,125 --------------- $ 1,167,274 --------------- CHEMICALS -- 5.8% Acetex Corp., 10.875%, 2009 $ 195,000 $ 212,063 ARCO Chemical Co., 9.8%, 2020 130,000 148,200 BCP Caylux Holdings Luxembourg S.A., 9.625%, 2014## 125,000 140,938 Crystal U.S. Holdings LLC, 0% to 2009, 10.5% to 2014## 265,000 181,525 Crystal U.S. Holdings LLC, 0% to 2010, 10% to 2014## 95,000 65,788 Equistar Chemicals LP, 10.625%, 2011 340,000 394,400 Hercules, Inc., 6.75%, 2029 260,000 268,450 Huntsman International LLC, 10.125%, 2009 237,000 249,443 Huntsman International LLC, 0%, 2009 100,000 56,000 Huntsman International LLC, 7.375%, 2015## 155,000 155,388 IMC Global, Inc., 10.875%, 2013 280,000 350,000 KI Holdings, Inc., 0% to 2009, 9.875% to 2014## 233,000 149,120 Kronos International, Inc., 8.875%, 2009 EUR 15,000 21,892 Lyondell Chemical Co., 9.5%, 2008 $ 130,000 141,050 Lyondell Chemical Co., 11.125%, 2012 130,000 154,375 Nalco Co., 7.75%, 2011 110,000 118,800 Nalco Co., 8.875%, 2013 70,000 76,825 Nalco Financial Holdings LLC, 0% to 2009, 9% to 2014 139,000 102,860 Nova Chemicals Corp., 6.5%, 2012 225,000 238,500 Resolution Performance Products LLC, 13.5%, 2010 165,000 179,437 Rhodia S.A., 8.875%, 2011 480,000 483,600 Rockwood Specialties Group, Inc., 10.625%, 2011 220,000 253,000 Rockwood Specialties Group, Inc., 7.5%, 2014## 50,000 51,875 Sovereign Specialty Chemicals, Inc., 11.875%, 2010 150,000 160,687 --------------- $ 4,354,216 --------------- CONGLOMERATES -- 0.6% Invensys PLC, 9.875%, 2011## $ 200,000 $ 221,250 SPX Corp., 7.5%, 2013 205,000 222,425 --------------- $ 443,675 --------------- CONSTRUCTION -- 1.1% D.R. Horton, Inc., 8%, 2009 $ 265,000 $ 296,469 Technical Olympic USA, Inc., 9%, 2010 75,000 80,250 Technical Olympic USA, Inc., 7.5%, 2011 50,000 50,375 Technical Olympic USA, Inc., 7.5%, 2015## 150,000 148,875 WCI Communities, Inc., 7.875%, 2013 210,000 221,025 --------------- $ 796,994 --------------- CONSUMER CYCLICAL -- 0.7% Corrections Corp. of America, 9.875%, 2009 $ 30,000 $ 33,300 Corrections Corp. of America, 7.5%, 2011 150,000 160,313 GEO Group, Inc., 8.25%, 2013 140,000 149,800 KinderCare Learning Centers, Inc., 9.5%, 2009 182,000 182,683 --------------- $ 526,096 --------------- CONSUMER GOODS & SERVICES -- 2.4% Bombardier Recreational Products, Inc., 8.375%, 2013 $ 170,000 $ 181,475 Church & Dwight Co., Inc., 6%, 2012## 125,000 127,188 Integrated Electrical Services, Inc., 9.375%, 2009 130,000 122,200 K2, Inc., 7.375%, 2014## 205,000 224,475 Remington Arms Co., Inc., 10.5%, 2011 110,000 106,150 Revlon Consumer Products Corp., 8.625%, 2008 270,000 240,975 Safilo Capital International S.A., 9.625%, 2013## EUR 350,000 482,371 Samsonite Corp., 8.875%, 2011 $ 210,000 227,325 Werner Holding Co., Inc., 10%, 2007 160,000 132,800 --------------- $ 1,844,959 --------------- CONTAINERS -- 2.7% Crown European Holdings S.A., 9.5%, 2011 $ 425,000 $ 484,500 Crown European Holdings S.A., 10.875%, 2013 140,000 165,550 Greif, Inc., 8.875%, 2012 210,000 233,625 Owens-Brockway Glass Container, Inc., 8.25%, 2013 600,000 660,000 Owens-Illinois, Inc., 7.8%, 2018 75,000 78,000 Plastipak Holdings, Inc., 10.75%, 2011 150,000 168,750 Pliant Corp., 13%, 2010 220,000 214,300 --------------- $ 2,004,725 --------------- DEFENSE ELECTRONICS -- 0.5% L-3 Communications Holdings, Inc., 6.125%, 2014 $ 230,000 $ 236,900 L-3 Communications Holdings, Inc., 5.875%, 2015## 165,000 164,587 --------------- $ 401,487 --------------- ELECTRONICS -- 0.3% Flextronics International Ltd., 6.5%, 2013 $ 225,000 $ 230,625 Magnachip Semiconductor S.A., 8%, 2014## 30,000 31,275 --------------- $ 261,900 --------------- EMERGING MARKET QUASI-SOVEREIGN -- 0.5% Gazprom OAO, 9.625%, 2013## $ 120,000 $ 141,900 Gazprom OAO, 8.625%, 2034## 220,000 257,400 --------------- $ 399,300 --------------- EMERGING MARKET SOVEREIGN -- 0.7% Federal Republic of Brazil, 8%, 2014 $ 20,054 $ 20,506 Federal Republic of Brazil, 8.875%, 2019 203,000 214,165
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ISSUER PAR AMOUNT VALUE BONDS -- continued EMERGING MARKET SOVEREIGN -- continued Republic of Panama, 9.375%, 2023 $ 159,000 $ 183,645 Russian Ministry of Finance, 12.75%, 2028 84,000 137,785 --------------- $ 556,101 --------------- ENERGY -- INDEPENDENT -- 1.9% Belden Blake Corp., 8.75%, 2012## $ 200,000 $ 203,000 Chesapeake Energy Corp., 7%, 2014 179,000 190,635 Chesapeake Energy Corp., 6.375%, 2015## 120,000 123,300 Chesapeake Energy Corp., 6.875%, 2016 495,000 518,513 Encore Acquisition Co., 8.375%, 2012 135,000 150,188 Newfield Exploration Co., 6.625%, 2014## 75,000 79,312 Plains Exploration & Production Co., 7.125%, 2014 155,000 168,950 --------------- $ 1,433,898 --------------- ENTERTAINMENT -- 1.6% AMC Entertainment, Inc., 9.5%, 2011 $ 140,000 $ 144,725 AMC Entertainment, Inc., 8.625%, 2012## 275,000 303,875 AMF Bowling Worldwide, Inc., 10%, 2010 130,000 138,775 Intrawest Corp., 7.5%, 2013## 65,000 69,144 Loews Cineplex Entertainment Corp., 9%, 2014## 215,000 232,737 Six Flags, Inc., 9.75%, 2013 320,000 324,800 --------------- $ 1,214,056 --------------- FOOD & NON-ALCOHOLIC BEVERAGES -- 1.7% Burns, Philip & Co. Ltd., 9.75%, 2012 $ 335,000 $ 368,500 Merisant Co., 9.75%, 2013## 90,000 80,100 Michael Foods, Inc., 8%, 2013 225,000 237,375 Seminis Vegetable Seeds, Inc., 10.25%, 2013 210,000 236,250 Smithfield Foods, Inc., 7%, 2011 60,000 64,050 Smithfield Foods, Inc., 7%, 2011## 160,000 170,800 United Biscuits Finance PLC, 10.625%, 2011 EUR 80,000 114,862 --------------- $ 1,271,937 --------------- FOREST & PAPER PRODUCTS -- 4.5% Abitibi-Consolidated, Inc., 8.55%, 2010 $ 340,000 $ 368,475 Buckeye Technologies, Inc., 8.5%, 2013 240,000 260,400 Corporacion Durango S.A. de C.V., 13.75%, 2009##* 360,000 241,200 Georgia Pacific Corp., 9.375%, 2013 630,000 733,950 Graphic Packaging International, Inc., 9.5%, 2013 260,000 295,750 Jefferson Smurfit Corp., 8.25%, 2012 205,000 223,450 Kappa Beheer B.V., 10.625%, 2009 210,000 222,600 MDP Acquisitions PLC, 9.625%, 2012 260,000 289,900 Newark Group, Inc., 9.75%, 2014 185,000 197,025 Norske Skog Canada Ltd., 8.625%, 2011 195,000 209,137 Norske Skog Canada Ltd., 7.375%, 2014 125,000 130,312 Stone Container Corp., 7.375%, 2014 210,000 223,650 --------------- $ 3,395,849 --------------- GAMING & LODGING -- 5.6% Aztar Corp., 7.875%, 2014 $ 210,000 $ 231,525 Boyd Gaming Corp., 6.75%, 2014 360,000 377,100 Caesars Entertainment, Inc., 8.875%, 2008 80,000 90,600 Caesars Entertainment, Inc., 8.125%, 2011 375,000 433,125 Herbst Gaming, Inc., 7%, 2014## 30,000 30,375 Hilton Hotels Corp., 7.625%, 2012 195,000 228,038 Host Marriott LP, 7.125%, 2013 190,000 203,063 Isle Capri Casinos, Inc., 7%, 2014 265,000 270,300 MGM Mirage, Inc., 8.5%, 2010 140,000 159,250 MGM Mirage, Inc., 8.375%, 2011 410,000 462,275 MGM Mirage, Inc., 5.875%, 2014 95,000 93,337 Mandalay Resort Group, 9.375%, 2010 175,000 203,875 Meristar Hospitality Corp., 10.5%, 2009 70,000 76,300 Pinnacle Entertainment, Inc., 8.25%, 2012 $ 200,000 $ 212,500 Pinnacle Entertainment, Inc., 8.75%, 2013 135,000 146,137 Royal Caribbean Cruises Ltd., 6.875%, 2013 210,000 226,800 Scientific Games Corp., 6.25%, 2012## 55,000 55,962 Starwood Hotels & Resorts Worldwide, Inc., 7.875%, 2012 435,000 496,987 Station Casinos, Inc., 6.5%, 2014 245,000 251,737 --------------- $ 4,249,286 --------------- HEALTH MAINTENANCE ORGANIZATIONS -- 0.1% Medcath Holdings Corp., 9.875%, 2012 $ 65,000 $ 70,525 --------------- INDUSTRIAL -- 3.2% Amsted Industries, Inc., 10.25%, 2011## $ 325,000 $ 367,250 Da Lite Screen Co., Inc., 9.5%, 2011 210,000 231,000 JohnsonDiversey Holding, Inc., "B", 9.625%, 2012 255,000 284,963 JohnsonDiversey Holding, Inc., 0% to 2007, 10.67% to 2013 535,000 462,775 Milacron Escrow Corp., 11.5%, 2011 235,000 249,100 Rexnord Industries, Inc., 10.125%, 2012 200,000 226,000 Valmont Industries, Inc., 6.875%, 2014 215,000 223,600 Williams Scotsman, Inc., 9.875%, 2007 305,000 305,000 Williams Scotsman, Inc., 10%, 2008 50,000 55,500 --------------- $ 2,405,188 --------------- MACHINERY & TOOLS -- 2.8% AGCO Corp., 6.875%, 2014 EUR 95,000 $ 136,398 Case Corp., 7.25%, 2016 $ 20,000 19,650 Case New Holland, Inc., 9.25%, 2011## 190,000 211,375 JLG Industries, Inc., 8.25%, 2008 210,000 226,800 Joy Global, Inc., 8.75%, 2012 220,000 246,400 Manitowoc Co., Inc., 10.375%, 2011 EUR 200,000 304,762 Manitowoc Co., Inc., 10.5%, 2012 $ 56,000 64,400 Terex Corp., 10.375%, 2011 340,000 380,800 United Rentals, Inc., 6.5%, 2012 200,000 195,000 United Rentals, Inc., 7.75%, 2013 175,000 171,500 United Rentals, Inc., 7%, 2014 170,000 158,950 --------------- $ 2,116,035 --------------- MEDICAL & HEALTH TECHNOLOGY & SERVICES -- 3.7% AmerisourceBergen Corp., 7.25%, 2012 $ 215,000 $ 240,263 Beverly Enterprises, Inc., 7.875%, 2014## 155,000 166,238 CDRV Investors, Inc., 0% to 2010, 9.625% to 2015## 180,000 111,825 Extendicare Health Services, Inc., 6.875%, 2014 140,000 142,800 Fisher Scientific International, Inc., 8.125%, 2012 174,000 193,140 HCA, Inc., 7.875%, 2011 535,000 589,303 HCA, Inc., 6.375%, 2015 295,000 296,194 InSight Health Services Corp., 9.875%, 2011 380,000 383,800 Tenet Healthcare Corp., 6.5%, 2012 240,000 222,000 Tenet Healthcare Corp., 9.875%, 2014## 210,000 228,900 U.S. Oncology, Inc., 10.75%, 2014## 190,000 219,925 --------------- $ 2,794,388 --------------- METALS & MINING -- 2.7% Century Aluminum Co., 7.5%, 2014## $ 185,000 $ 197,025 Doe Run Resources Corp., 11.75%, 2008# 252,800 214,880 Foundation PA Coal Co., 7.25%, 2014## 200,000 213,000 IMCO Recycling, Inc., 9%, 2014## 45,000 46,800 Ispat Inland ULC, 9.75%, 2014 163,000 201,305 Oregon Steel Mills, Inc., 10%, 2009 175,000 194,687 Peabody Energy Corp., 6.875%, 2013 220,000 238,150 Peabody Energy Corp., 5.875%, 2016 140,000 139,300 Russel Metals, Inc., 6.375%, 2014 250,000 253,750
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ISSUER PAR AMOUNT VALUE BONDS -- continued METALS & MINING -- continued SGL Carbon International S.A., 8.5%, 2012## EUR 105,000 $ 159,289 Steel Dynamics, Inc., 9.5%, 2009 $ 110,000 120,450 U.S. Steel Corp., 9.75%, 2010 73,000 83,220 --------------- $ 2,061,856 --------------- NATURAL GAS -- DISTRIBUTION -- 0.5% AmeriGas Partners LP, 8.875%, 2011 $ 275,000 $ 299,750 Inergy LP, 6.875%, 2014## 75,000 75,375 --------------- $ 375,125 --------------- NATURAL GAS -- PIPELINE -- 3.4% ANR Pipeline Co., 9.625%, 2021 $ 325,000 $ 409,094 El Paso Energy Corp., 7.625%, 2010 205,000 224,475 El Paso Energy Corp., 7%, 2011 555,000 561,244 El Paso Energy Corp., 7.75%, 2013 390,000 408,525 Enterprise Products Partners LP, 6.375%, 2013 105,000 112,542 Enterprise Products Partners LP, 5.6%, 2014## 205,000 206,818 Markwest Energy Partners LP, 6.875%, 2014## 150,000 152,250 Williams Cos., Inc., 7.125%, 2011 482,000 526,585 --------------- $ 2,601,533 --------------- OIL SERVICES -- 1.8% Dresser, Inc., 9.375%, 2011 $ 135,000 $ 147,825 GulfMark Offshore, Inc., 7.75%, 2014## 180,000 189,900 Hanover Compressor Co., 9%, 2014 255,000 283,688 Hornbeck Offshore Services, Inc., 6.125%, 2014## 130,000 130,650 Ocean Rig Norway S.A., 10.25%, 2008 190,000 195,700 Petroleum Geo-Services A.S.A., 10%, 2010 200,000 228,000 Pride International, Inc., 7.375%, 2014 140,000 152,950 --------------- $ 1,328,713 --------------- OILS -- 0.3% Premcor Refining Group, Inc., 7.75%, 2012 $ 200,000 $ 220,500 --------------- POLLUTION CONTROL -- 0.5% Allied Waste North America, Inc., 6.5%, 2010 $ 240,000 $ 235,200 Allied Waste North America, Inc., 7.875%, 2013 170,000 174,250 --------------- $ 409,450 --------------- PRECIOUS METALS & MINERALS -- 0.3% Freeport-McMoRan Copper & Gold, Inc., 6.875%, 2014 $ 229,000 $ 227,569 --------------- PRINTING & PUBLISHING -- 3.0% Cenveo Corp., 7.875%, 2013 $ 100,000 $ 93,000 Dex Media East LLC, 12.125%, 2012 146,000 177,938 Dex Media West LLC, 9.875%, 2013 151,000 174,028 Dex Media, Inc., 0% to 2008, 9% to 2013 725,000 568,219 Hollinger, Inc., 11.875%, 2011## 99,000 116,820 Houghton Mifflin Co., 9.875%, 2013 150,000 164,250 Lighthouse International Co. S.A., 8%, 2014## EUR 170,000 237,173 Mail-Well Corp., 9.625%, 2012 $ 185,000 203,037 MediaNews Group, Inc., 6.875%, 2013 305,000 312,625 WDAC Subsidiary Corp., 8.375%, 2014## 245,000 241,631 --------------- $ 2,288,721 --------------- RAILROAD & SHIPPING -- 0.5% Kansas City Southern Railway Co., 7.5%, 2009 $ 360,000 $ 378,000 --------------- RESTAURANTS -- 0.1% Carrols Holdings Corp., 9%, 2013## $ 60,000 $ 62,100 --------------- RETAILERS -- 2.6% Couche-Tard, Inc., 7.5%, 2013 $ 505,000 $ 541,613 Dollar General Corp., 8.625%, 2010 360,000 418,500 Duane Reade, Inc., 9.75%, 2011## 145,000 131,950 Finlay Fine Jewelry Corp., 8.375%, 2012 205,000 221,400 Rite Aid Corp., 9.5%, 2011 25,000 27,437 Rite Aid Corp., 9.25%, 2013 120,000 121,200 Rite Aid Corp., 6.875%, 2013 375,000 337,500 Saks, Inc., 7%, 2013 200,000 204,250 --------------- $ 2,003,850 --------------- SUPERMARKETS -- 0.5% Roundy's, Inc., 8.875%, 2012 $ 340,000 $ 371,450 --------------- TELECOMMUNICATIONS -- WIRELESS -- 4.9% Alamosa Holdings, Inc., 11%, 2010 $ 175,000 $ 206,063 Alamosa Holdings, Inc., 0% to 2005, 12% to 2009 170,000 184,450 American Tower Corp., 9.375%, 2009 38,000 40,185 American Tower Corp., 7.125%, 2012## 150,000 153,375 Centennial Communications Corp., 10.125%, 2013 270,000 303,075 Crown Castle International Corp., 7.5%, 2013 315,000 338,625 Dobson Cellular Systems, Inc., 8.375%, 2011## 55,000 56,788 Dobson Communications Corp., 8.875%, 2013 105,000 73,763 IWO Escrow Co., 6.32%, 2012## 30,000 30,225 Innova S. de R.L., 9.375%, 2013 200,000 227,500 Nextel Communications, Inc., 7.375%, 2015 935,000 1,028,500 Rogers Wireless, Inc., 8%, 2012## 50,000 52,875 Rogers Wireless, Inc., 6.375%, 2014 135,000 133,650 Rogers Wireless, Inc., 7.5%, 2015## 105,000 110,775 Rural Cellular Corp., 9.875%, 2010 205,000 208,587 Rural Cellular Corp., 8.25%, 2012 60,000 63,450 U.S. Unwired, Inc., 10%, 2012 215,000 242,412 Ubiquitel Operating Co., 9.875%, 2011 210,000 235,725 --------------- $ 3,690,023 --------------- TELECOMMUNICATIONS -- WIRELINE -- 6.2% AT&T Corp., 7.3%, 2011 $ 409,000 $ 470,861 Cincinnati Bell, Inc., 8.375%, 2014 250,000 253,125 Citizens Communications Co., 9.25%, 2011 385,000 450,450 Citizens Communications Co., 6.25%, 2013 110,000 110,825 Eircom Funding PLC, 8.25%, 2013 255,000 281,775 GCI, Inc., 7.25%, 2014 215,000 215,000 MCI, Inc., 6.908%, 2007 168,000 171,990 MCI, Inc., 7.688%, 2009 238,000 246,330 MCI, Inc., 8.735%, 2014 37,000 39,775 Qwest Capital Funding, Inc., 7.25%, 2011 315,000 308,700 Qwest Corp., 7.875%, 2011## 300,000 325,500 Qwest Corp., 8.875%, 2012## 295,000 340,725 Qwest Services Corp., 13.5%, 2010## 905,000 1,088,262 Time Warner Telecom Holdings, Inc., 10.125%, 2011 200,000 196,500 Time Warner Telecom Holdings, Inc., 9.25%, 2014 245,000 249,900 --------------- $ 4,749,718 --------------- TIRE & RUBBER -- 0.0% Cooper-Standard Automotive Group, 8.375%, 2014## $ 30,000 $ 29,925 --------------- TOBACCO -- 0.3% R.J. Reynolds Tobacco Holdings, Inc., 7.25%, 2012 $ 185,000 $ 190,087 ---------------
21
ISSUER PAR AMOUNT VALUE BONDS -- continued TRANSPORTATION -- SERVICES -- 0.6% CHC Helicopter Corp., 7.375%, 2014 $ 155,000 $ 163,525 Stena AB, 9.625%, 2012 80,000 90,400 Stena AB, 7%, 2016## 171,000 169,290 TFM S.A. de C.V., 12.5%, 2012 51,000 59,542 --------------- $ 482,757 --------------- UTILITIES -- ELECTRIC POWER -- 8.7% AES Corp., 8.75%, 2013## $ 345,000 $ 392,006 AES Corp., 9%, 2015## 300,000 343,500 Allegheny Energy Supply Co. LLC, 8.25%, 2012## 300,000 335,250 CMS Energy Corp., 8.5%, 2011 195,000 221,569 Calpine Corp., 8.5%, 2008 150,000 123,000 Calpine Corp., 8.75%, 2013## 655,000 540,375 CenterPoint Energy, Inc., 7.25%, 2010 204,000 227,530 DPL, Inc., 6.875%, 2011 220,000 240,269 Dynegy Holdings, Inc., 9.875%, 2010## 195,000 217,913 Dynegy Holdings, Inc., 6.875%, 2011 85,000 81,813 Edison Mission Energy, 7.73%, 2009 200,000 215,000 Empresa Nacional de Electricidad S.A., 8.35%, 2013 250,000 289,691 FirstEnergy Corp., 6.45%, 2011 332,000 360,708 FirstEnergy Corp., 7.375%, 2031 145,000 165,588 MSW Energy Holdings LLC, 7.375%, 2010 195,000 204,750 Midwest Generation LLC, 8.75%, 2034 400,000 454,000 NRG Energy, Inc., 8%, 2013## 230,000 250,700 Nevada Power Co., 6.5%, 2012 50,000 52,875 Nevada Power Co., 5.875%, 2015## 120,000 120,900 NorthWestern Corp., 5.875%, 2014## 175,000 179,020 PSEG Power LLC, 7.75%, 2011 320,000 373,119 Reliant Energy, Inc., 6.75%, 2014 95,000 94,406 Reliant Resources, Inc., 9.25%, 2010 80,000 89,200 Sierra Pacific Power Co., 6.25%, 2012 105,000 109,594 Sierra Pacific Resources, 8.625%, 2014 160,000 180,800 TXU Corp., 5.55%, 2014## 385,000 382,463 Teco Energy, Inc., 7%, 2012 85,000 92,862 Texas Genco LLC, 6.875%, 2014## 205,000 211,919 --------------- $ 6,550,820 --------------- Total Bonds (Identified Cost, $69,125,089) $ 71,842,848 --------------- SHARES STOCKS -- 0.9% AUTOMOTIVE -- 0.3% Magna International, Inc., "A" 3,000 $ 247,650 --------------- BROADCAST & CABLE TV -- 0.5% NTL, Inc.* 2,203 $ 160,731 Telewest Global, Inc.* 10,166 178,718 --------------- $ 339,449 --------------- PHARMACEUTICALS -- 0.1% Merck & Co., Inc. 2,600 $ 83,564 --------------- SPECIALTY CHEMICALS -- 0.0% Sterling Chemicals, Inc.* 31 $ 1,155 --------------- TELEPHONE SERVICES -- 0.0% VersaTel Telecom International N.V.* 7,740 $ 22,331 --------------- Total Stocks (Identified Cost, $861,500) $ 694,149 --------------- CONVERTIBLE PREFERRED STOCKS -- 0.3% AUTOMOTIVE -- 0.3% Ford Motor Co. Capital Trust II, 6.5% 4,365 $ 230,428 Hayes Lemmerz International, Inc., "A", 8%* 11 844 --------------- $ 231,272 --------------- Total Convertible Preferred Stocks (Identified Cost, $230,396) $ 231,272 --------------- PREFERRED STOCKS -- 0.1% PRINTING & PUBLISHING -- 0.1% PRIMEDIA, Inc., 8.625% 500 $ 45,750 --------------- REAL ESTATE -- 0.0% HRPT Properties Trust, 8.75% 200 $ 5,524 --------------- TELEPHONE SERVICES -- 0.0% PTV, Inc., "A", 10% 10 $ 40 --------------- Total Preferred Stocks (Identified Cost, $50,220) $ 51,314 --------------- STRIKE FIRST PRICE EXERCISE WARRANTS -- 0.0% Loral Space & Communications Ltd. (Business Services)* $ 0.14 1/28/97 1,000 $ 2 Loral Space & Communications Ltd. (Business Services)* 0.14 1/28/97 1,100 2 Metronet Communications Corp. (Broadcast & Cable TV)*## 0.01 7/18/97 600 6 Sterling Chemicals, Inc. (Specialty Chemicals)* 52.00 51 94 Thermadyne Holdings Corp. (Machinery & Tools)* 20.78 2,705 1,623 XM Satellite Radio, Inc. (Advertising & Broadcasting)* 45.24 9/16/00 425 36,125 XO Communications, Inc., "A" (Telephone Services)* 6.25 5/27/03 397 286 XO Communications, Inc., "B" (Telephone Services)* 7.50 5/27/03 298 149 XO Communications, Inc., "C" (Telephone Services)* 10.00 5/27/03 298 116 --------------- Total Warrants (Identified Cost, $219,298) $ 38,403 --------------- PAR AMOUNT REPURCHASE AGREEMENT -- 2.2% Morgan Stanley, 2.19%, dated 12/31/04, due 01/03/05, total to be received $1,657,302 (secured by various U.S. Treasury and Federal Agency obligations in a jointly traded account), at Cost $ 1,657,000 $ 1,657,000 --------------- Total Investments (Identified Cost, $72,143,503) $ 74,514,986 --------------- OTHER ASSETS, LESS LIABILITIES -- 1.7% 1,253,327 --------------- Net Assets -- 100.0% $ 75,768,313 ===============
See portfolio footnotes and notes to financial statements. 22 PORTFOLIO OF INVESTMENTS -- December 31, 2004 MANAGED SECTORS VARIABLE ACCOUNT
ISSUER SHARES VALUE STOCKS -- 98.1% APPAREL MANUFACTURERS -- 2.2% Nike, Inc., "B" 9,300 $ 843,417 Reebok International Ltd. 12,600 554,400 --------------- $ 1,397,817 --------------- BANKS & CREDIT COMPANIES -- 4.2% American Express Co. 23,300 $ 1,313,421 Citigroup, Inc. 28,300 1,363,494 --------------- $ 2,676,915 --------------- BIOTECHNOLOGY -- 6.8% Amgen, Inc.* 18,600 $ 1,193,190 Celgene Corp.* 15,300 405,909 Genentech, Inc.* 8,200 446,408 Genzyme Corp.* 22,700 1,318,189 Gilead Sciences, Inc.* 16,400 573,836 ImClone Systems, Inc.* 8,100 373,248 --------------- $ 4,310,780 --------------- BROADCAST & CABLE TV -- 6.5% Comcast Corp., "A"* 33,400 $ 1,111,552 Omnicom Group, Inc. 4,700 396,304 Time Warner, Inc.* 52,600 1,022,544 Univision Communications, Inc., "A"* 14,400 421,488 Viacom, Inc., "B" 10,300 374,817 Walt Disney Co. 28,800 800,640 --------------- $ 4,127,345 --------------- BROKERAGE & ASSET MANAGERS -- 2.1% Goldman Sachs Group, Inc. 9,000 $ 936,360 Merrill Lynch & Co., Inc. 6,300 376,551 --------------- $ 1,312,911 --------------- BUSINESS SERVICES -- 3.3% Fiserv, Inc.* 15,300 $ 614,907 Getty Images, Inc.* 11,900 819,315 Monster Worldwide, Inc.* 19,700 662,708 --------------- $ 2,096,930 --------------- COMPUTER SOFTWARE -- 11.6% Akamai Technologies, Inc.* 33,300 $ 433,899 Mercury Interactive Corp.* 18,300 833,565 Microsoft Corp. 94,600 2,526,766 Oracle Corp.* 105,000 1,440,600 Symantec Corp.* 23,800 613,088 VERITAS Software Corp.* 51,800 1,478,890 --------------- $ 7,326,808 --------------- COMPUTER SOFTWARE -- SYSTEMS -- 3.9% Dell, Inc.* 58,400 $ 2,460,976 --------------- CONSUMER GOODS & SERVICES -- 4.0% Avon Products, Inc. 18,300 $ 708,210 Procter & Gamble Co. 33,600 1,850,688 --------------- $ 2,558,898 --------------- ELECTRICAL EQUIPMENT -- 1.6% Emerson Electric Co. 10,700 $ 750,070 W.W. Grainger, Inc. 3,900 259,818 --------------- $ 1,009,888 --------------- ELECTRONICS -- 4.4% Amphenol Corp., "A"* 14,200 $ 521,708 Analog Devices, Inc. 21,300 786,396 KLA-Tencor Corp.* 8,500 395,930 Maxim Integrated Products, Inc. 7,400 313,686 Texas Instruments, Inc. 30,600 753,372 --------------- $ 2,771,092 --------------- FOOD & DRUG STORES -- 1.5% CVS Corp. 21,400 $ 964,498 --------------- FOOD & NON-ALCOHOLIC BEVERAGES -- 0.5% PepsiCo, Inc. 6,100 $ 318,420 --------------- GAMING & LODGING -- 2.0% Carnival Corp. 22,200 $ 1,279,386 --------------- GENERAL MERCHANDISE -- 2.5% Kohl's Corp.* 11,400 $ 560,538 Target Corp. 19,800 1,028,214 --------------- $ 1,588,752 --------------- HEALTH MAINTENANCE ORGANIZATIONS -- 1.3% WellPoint, Inc.* 6,900 $ 793,500 --------------- INTERNET -- 5.2% eBay, Inc.* 14,200 $ 1,651,176 Yahoo!, Inc.* 43,700 1,646,616 --------------- $ 3,297,792 --------------- MACHINERY & TOOLS -- 2.3% Caterpillar, Inc. 14,700 $ 1,433,397 --------------- MEDICAL EQUIPMENT -- 5.4% Fisher Scientific International, Inc.* 18,100 $ 1,129,078 Medtronic, Inc. 27,500 1,365,925 Waters Corp.* 19,900 931,121 --------------- $ 3,426,124 --------------- PERSONAL COMPUTERS & PERIPHERALS -- 2.1% EMC Corp.* 48,600 $ 722,682 Network Appliance, Inc.* 18,800 624,536 --------------- $ 1,347,218 --------------- PHARMACEUTICALS -- 11.9% Abbott Laboratories 36,600 $ 1,707,390 Eli Lilly & Co. 15,000 851,250 Johnson & Johnson 47,600 3,018,792 Wyeth 45,500 1,937,845 --------------- $ 7,515,277 --------------- RESTAURANTS -- 1.0% YUM! Brands, Inc. 13,300 $ 627,494 --------------- SPECIALTY STORES -- 4.9% Abercrombie & Fitch Co., "A" 8,300 $ 389,685 Best Buy Co., Inc. 16,400 974,488 Lowe's Cos., Inc. 8,500 489,515 PETsMART, Inc. 12,400 440,572 Staples, Inc. 24,400 822,524 --------------- $ 3,116,784 --------------- TELECOMMUNICATIONS -- WIRELINE -- 4.4% ADTRAN, Inc. 9,600 $ 183,744 Cisco Systems, Inc.* 119,600 2,308,280 Research In Motion Ltd.* 3,700 304,954 --------------- $ 2,796,978 --------------- TRUCKING -- 2.5% FedEx Corp. 8,900 $ 876,561 United Parcel Service, Inc., "B" 8,100 692,226 --------------- $ 1,568,787 --------------- Total Stocks (Identified Cost, $52,998,731) $ 62,124,767 --------------- PAR AMOUNT REPURCHASE AGREEMENT -- 1.9% Morgan Stanley, 2.19%, dated 12/31/04, due 01/03/05, total to be received $1,205,220 (secured by various U.S. Treasury and Federal Agency obligations in a jointly traded account), at Cost $ 1,205,000 $ 1,205,000 --------------- Total Investments (Identified Cost, $54,203,731) $ 63,329,767 --------------- OTHER ASSETS, LESS LIABILITIES -- 0% (5,223) --------------- Net Assets -- 100.0% $ 63,324,544 ===============
See portfolio footnotes and notes to financial statements. 23 PORTFOLIO OF INVESTMENTS -- December 31, 2004 MONEY MARKET VARIABLE ACCOUNT
ISSUER PAR AMOUNT VALUE COMMERCIAL PAPER~ -- 83.0% Alpine Securitization Corp., 2.36%, due 2/09/05 $ 1,510,000 $ 1,506,139 American General Finance Corp., 2.32%, due 2/04/05 1,500,000 1,496,713 Blue Ridge Asset Funding, 2.03%, due 1/07/05 1,000,000 999,662 CAFCO LLC, 2.12%, due 2/02/05 1,660,000 1,656,872 Ciesco LLC, 2.04%, due 1/07/05 - 1/10/05 1,657,000 1,656,324 Citibank Credit Card Issuance Trust, 2.09%, due 1/26/05 1,370,000 1,368,012 Citicorp, 2.06%, due 1/24/05 1,659,000 1,656,817 COFCO Capital Corp., 2.2%, due 1/11/05 243,000 242,851 Delaware Funding Co. LLC, 2.35%, due 1/24/05 1,690,000 1,687,463 Dexia Delaware LLC, 2.34%, due 3/02/05 1,536,000 1,530,010 Edison Asset Securitization LLC, 2.27%, due 2/22/05 1,225,000 1,220,983 Falcon Asset Securitization Corp., 2.26%, due 1/27/05 1,533,000 1,530,498 First Data Corp., 2.28%, due 1/19/05 1,500,000 1,498,290 Florida Power & Light Co., 2.29%, due 1/06/05 1,500,000 1,499,523 General Electric Capital Corp., 2.19%, due 2/08/05 800,000 798,151 General Electric Capital Corp., 2.27%, due 2/17/05 763,000 760,739 Goldman Sachs Group, Inc., 2.32%, due 2/22/05 1,500,000 1,494,973 Govco, Inc., 2.15%, due 1/13/05 1,086,000 1,085,222 Govco, Inc., 2.27%, due 2/18/05 470,000 468,577 HBOS Treasury Services PLC, 2.335%, due 2/09/05 1,535,000 1,531,117 ING America Insurance Holdings, Inc., 2.47%, due 4/14/05 1,000,000 992,933 Jupiter Securitization Corp., 2.43%, due 3/15/05 988,000 983,132 Kitty Hawk Funding Corp., 2.24%, due 2/15/05 1,560,000 1,555,632 MetLife, Inc., 2.2%, due 2/08/05 1,500,000 1,496,517 Morgan Stanley, Inc., 2.34%, due 1/28/05 1,530,000 1,527,315 New Center Asset Trust, 2.25%, due 1/03/05 1,506,000 1,505,812 Old Line Funding LLC, 2.17%, due 1/07/05 1,500,000 1,499,457 Ranger Funding Co. LLC, 2.335%, due 1/18/05 1,529,000 1,527,314 SBC Communications, Inc., 2.06%, due 1/18/05 1,658,000 1,656,387 Sheffield Receivables Corp., 2.17%, due 1/06/05 1,100,000 1,099,668 Sheffield Receivables Corp., 2.18%, due 1/20/05 600,000 599,310 Thunder Bay Funding, LLC, 2.08%, due 1/18/05 398,000 397,609 Thunder Bay Funding, LLC, 2.36%, due 2/07/05 1,100,000 1,097,332 --------------- Total Commercial Paper, at Amortized Cost $ 41,627,354 --------------- U.S. GOVERNMENT AGENCY OBLIGATIONS~ -- 14.2% Fannie Mae, 1.97%, due 1/05/05 $ 1,100,000 $ 1,099,759 Fannie Mae, 2.465%, due 4/20/05 2,000,000 1,985,073 Federal Farm Credit Bank, 2.12%, due 2/02/05 2,100,000 2,096,043 Freddie Mac, 1.96%, due 1/11/05 1,930,000 1,928,949 --------------- Total U.S. Government Agency Obligations, at Amortized Cost $ 7,109,824 --------------- REPURCHASE AGREEMENT -- 3.0% Goldman Sachs, 2.23%, dated 12/31/04, due 01/03/05, total to be received $1,534,285 (secured by various U.S. Treasury and Federal Agency obligations in a jointly traded account), at Cost $ 1,534,000 $ 1,534,000 --------------- Total Investments, at Amortized Cost and Value $ 50,271,178 --------------- OTHER ASSETS, LESS LIABILITIES -- (0.2)% (94,641) --------------- NET ASSETS -- 100.0% $ 50,176,537 ===============
See portfolio footnotes and notes to financial statements. 24 PORTFOLIO OF INVESTMENTS -- December 31, 2004 TOTAL RETURN VARIABLE ACCOUNT
ISSUER SHARES VALUE STOCKS -- 60.8% AEROSPACE -- 1.8% Lockheed Martin Corp. 40,840 $ 2,268,662 Northrop Grumman Corp. 10,400 565,344 United Technologies Corp. 8,550 883,643 --------------- $ 3,717,649 --------------- AIRLINES -- 0.1% Southwest Airlines Co. 16,460 $ 267,969 --------------- ALCOHOLIC BEVERAGES -- 0.1% Diageo PLC 12,720 $ 181,137 --------------- AUTOMOTIVE -- 0.1% Toyota Motor Corp. 6,300 $ 255,617 --------------- BANKS & CREDIT COMPANIES -- 9.0% American Express Co. 14,670 $ 826,948 Bank of America Corp. 78,912 3,708,075 Citigroup, Inc. 65,886 3,174,387 Fannie Mae 12,830 913,624 Freddie Mac 23,270 1,714,999 J.P. Morgan Chase & Co. 79,298 3,093,415 MBNA Corp. 23,990 676,278 PNC Financial Services Group, Inc. 36,140 2,075,882 SunTrust Banks, Inc. 21,210 1,566,995 U.S. Bancorp 16,022 501,809 Wells Fargo & Co. 4,560 283,404 --------------- $ 18,535,816 --------------- BIOTECHNOLOGY -- 0.2% MedImmune, Inc.* 17,400 $ 471,714 --------------- BROADCAST & CABLE TV -- 3.9% Comcast Corp., "Special A"* 72,340 $ 2,375,646 Dex Media, Inc. 9,320 232,627 Grupo Televisa S.A., ADR 1,980 119,790 Interpublic Group of Cos., Inc.* 26,300 352,420 News Corp., "A" 22,430 418,544 Time Warner, Inc.* 8,120 157,853 Viacom, Inc., "B" 85,558 3,113,456 Walt Disney Co. 46,620 1,296,036 --------------- $ 8,066,372 --------------- BROKERAGE & ASSET MANAGERS -- 3.2% Franklin Resources, Inc. 5,550 $ 386,558 Goldman Sachs Group, Inc. 9,410 979,016 Lehman Brothers Holdings, Inc. 2,280 199,454 Mellon Financial Corp. 70,480 2,192,633 Merrill Lynch & Co., Inc. 33,650 2,011,261 Morgan Stanley 14,880 826,138 --------------- $ 6,595,060 --------------- BUSINESS SERVICES -- 0.4% Accenture Ltd., "A"* 29,330 $ 791,910 Fiserv, Inc.* 2,970 119,364 --------------- $ 911,274 --------------- CHEMICALS -- 2.2% 3M Co. 2,380 $ 195,327 Dow Chemical Co. 14,080 697,101 E.I. du Pont de Nemours & Co. 30,290 1,485,725 Monsanto Co. 10,180 565,499 Nalco Holding Co.* 18,320 357,606 PPG Industries, Inc. 14,460 985,594 Syngenta AG 3,170 335,541 --------------- $ 4,622,393 --------------- COMPUTER SOFTWARE -- 1.4% Computer Associates International, Inc. 27,240 $ 846,074 Microsoft Corp. 64,210 1,715,049 Oracle Corp.* 23,520 322,694 --------------- $ 2,883,817 --------------- COMPUTER SOFTWARE -- SYSTEMS -- 0.4% Dell, Inc.* 6,940 $ 292,452 Hewlett-Packard Co. 7,630 160,001 International Business Machines Corp. 790 77,878 Xerox Corp.* 12,500 212,625 --------------- $ 742,956 --------------- CONSTRUCTION -- 0.3% Masco Corp. 19,520 $ 713,066 --------------- CONSUMER GOODS & SERVICES -- 0.6% Colgate-Palmolive Co. 4,370 $ 223,569 Kimberly-Clark Corp. 14,350 944,374 --------------- $ 1,167,943 --------------- CONTAINERS -- 1.1% Owens-Illinois, Inc.* 79,660 $ 1,804,299 Smurfit-Stone Container Corp.* 26,090 487,361 --------------- $ 2,291,660 --------------- ELECTRICAL EQUIPMENT -- 1.7% Cooper Industries Ltd., "A" 3,670 $ 249,156 Emerson Electric Co. 6,190 433,919 General Electric Co. 57,870 2,112,255 Hubbell, Inc., "B" 4,100 214,430 Tyco International Ltd. 16,100 575,414 --------------- $ 3,585,174 --------------- ELECTRONICS -- 0.1% Analog Devices, Inc. 3,390 $ 125,159 --------------- ENERGY -- INDEPENDENT -- 1.3% Devon Energy Corp. 34,880 $ 1,357,530 EnCana Corp. 8,930 509,546 EOG Resources, Inc. 2,770 197,667 Unocal Corp. 12,680 548,283 --------------- $ 2,613,026 --------------- ENERGY -- INTEGRATED -- 2.7% BP PLC, ADR 34,580 $ 2,019,472 ConocoPhillips 9,810 851,802 Exxon Mobil Corp. 34,592 1,773,186 TOTAL S.A., ADR 8,230 903,983 --------------- $ 5,548,443 --------------- FOOD & DRUG STORES -- 0.2% Rite Aid Corp.* 132,540 $ 485,096 --------------- FOOD & NON-ALCOHOLIC BEVERAGES -- 2.4% Archer Daniels Midland Co. 29,430 $ 656,583 General Mills, Inc. 26,760 1,330,240 H.J. Heinz Co. 16,800 655,032 Kellogg Co. 13,170 588,172 Nestle S.A 729 190,035 PepsiCo, Inc. 21,010 1,096,722 Sara Lee Corp. 19,310 466,143 --------------- $ 4,982,927 --------------- FOREST & PAPER PRODUCTS -- 1.0% Bowater, Inc. 23,510 $ 1,033,735 International Paper Co. 22,160 930,720 --------------- $ 1,964,455 --------------- GAMING & LODGING -- 0.3% Cendant Corp. 20,040 $ 468,535 Hilton Hotels Corp. 10,610 241,271 --------------- $ 709,806 --------------- GENERAL MERCHANDISE -- 0.1% Family Dollar Stores, Inc. 8,740 $ 272,950 --------------- INSURANCE -- 3.3% AFLAC, Inc. 13,300 $ 529,872 Allstate Corp. 38,050 1,967,946 Chubb Corp. 2,480 190,712 Conseco, Inc.* 55,230 1,101,838
25
ISSUER SHARES VALUE STOCKS -- continued INSURANCE -- continued Hartford Financial Services Group, Inc. 24,240 $ 1,680,074 MetLife, Inc. 31,130 1,261,076 --------------- $ 6,731,518 --------------- LEISURE & TOYS -- 0.4% Hasbro, Inc. 5,640 $ 109,303 Mattel, Inc. 34,190 666,363 --------------- $ 775,666 --------------- MACHINERY & TOOLS -- 0.9% Caterpillar, Inc. 4,860 $ 473,898 Deere & Co. 5,640 419,616 Finning International, Inc.##* 480 13,994 Illinois Tool Works, Inc. 1,000 92,680 Ingersoll-Rand Co. Ltd., "A" 2,580 207,174 Precision Castparts Corp. 4,450 292,276 Sandvik AB 7,630 307,070 --------------- $ 1,806,708 --------------- MEDICAL & HEALTH TECHNOLOGY & SERVICES -- 0.8% Apria Healthcare Group, Inc.* 20,070 $ 661,306 HCA, Inc. 7,050 281,718 Tenet Healthcare Corp.* 71,590 786,058 --------------- $ 1,729,082 --------------- MEDICAL EQUIPMENT -- 0.2% Baxter International, Inc. 5,640 $ 194,805 Boston Scientific Corp.* 5,400 191,970 --------------- $ 386,775 --------------- METALS & MINING -- 0.4% BHP Billiton PLC 28,080 $ 328,560 Companhia Vale do Rio Doce, ADR 19,840 575,558 --------------- $ 904,118 --------------- NATURAL GAS -- DISTRIBUTION -- 0.3% AGL Resources, Inc. 8,610 $ 286,197 KeySpan Corp. 1,880 74,166 NiSource, Inc. 13,211 300,947 --------------- $ 661,310 --------------- OIL SERVICES -- 2.3% BJ Services Co. 10,930 $ 508,682 Cooper Cameron Corp.* 15,070 810,917 GlobalSantaFe Corp. 44,940 1,487,963 Noble Corp.* 35,165 1,749,107 Schlumberger Ltd. 1,480 99,086 --------------- $ 4,655,755 --------------- PHARMACEUTICALS -- 5.0% Abbott Laboratories 39,560 $ 1,845,474 Eli Lilly & Co. 1,690 95,908 Johnson & Johnson 37,050 2,349,711 Merck & Co., Inc. 91,380 2,936,953 Novartis AG 3,760 188,782 Pfizer, Inc. 5,050 135,795 Roche Holdings AG 2,280 261,513 Wyeth 60,180 2,563,066 --------------- $ 10,377,202 --------------- PRINTING & PUBLISHING -- 0.5% Reed Elsevier PLC 76,620 $ 705,614 Tribune Co. 8,620 363,247 --------------- $ 1,068,861 --------------- RAILROAD & SHIPPING -- 0.3% Burlington Northern Santa Fe Corp. 8,820 $ 417,274 Union Pacific Corp. 2,870 193,008 --------------- $ 610,282 --------------- RESTAURANTS -- 0.1% McDonald's Corp. 7,830 $ 251,030 --------------- SPECIALTY CHEMICALS -- 0.4% Air Products & Chemicals, Inc. 12,700 $ 736,219 Praxair, Inc. 1,780 78,587 --------------- $ 814,806 --------------- SPECIALTY STORES -- 1.3% Gap, Inc. 68,690 $ 1,450,733 Home Depot, Inc. 13,410 573,143 TJX Cos., Inc. 25,990 653,129 --------------- $ 2,677,005 --------------- TELECOMMUNICATIONS -- WIRELESS -- 1.9% Nokia Corp., ADR 107,250 $ 1,680,608 Vodafone Group PLC, ADR 81,206 2,223,420 --------------- $ 3,904,028 --------------- TELECOMMUNICATIONS -- WIRELINE -- 0.9% Cisco Systems, Inc.* 9,320 $ 179,876 Nortel Networks Corp.* 489,100 1,706,959 --------------- $ 1,886,835 --------------- TELEPHONE SERVICES -- 4.2% SBC Communications, Inc. 17,594 $ 453,397 Sprint Corp. 174,100 4,326,385 Telus Corp. (Non Voting)* 5,380 155,732 Verizon Communications, Inc. 90,386 3,661,537 --------------- $ 8,597,051 --------------- TOBACCO -- 0.8% Altria Group, Inc. 28,250 $ 1,726,075 --------------- TRUCKING -- 0% CNF, Inc. 300 $ 15,030 --------------- UTILITIES -- ELECTRIC POWER -- 2.2% Calpine Corp.* 226,940 $ 894,143 Cinergy Corp. 10,000 416,300 Dominion Resources, Inc. 12,990 879,943 Energy East Corp. 5,940 158,479 Entergy Corp. 12,100 817,839 Exelon Corp. 9,760 430,123 FirstEnergy Corp. 2,000 79,020 FPL Group, Inc. 700 52,325 PPL Corp. 9,820 523,210 Public Service Enterprise Group, Inc. 1,500 77,655 TXU Corp. 3,810 245,974 --------------- $ 4,575,011 --------------- Total Stocks (Identified Cost, $106,013,967) $ 125,865,627 --------------- PAR AMOUNT BONDS -- 37.3% ADVERTISING & BROADCASTING -- 0.1% News America Holdings, 8.5%, 2025 $ 99,000 $ 125,988 News America, Inc., 6.2%, 2034## 82,000 83,108 --------------- $ 209,096 --------------- AEROSPACE -- 0.5% BAE Systems Holdings, Inc., 6.4%, 2011## $ 223,000 $ 249,938 Boeing Capital Corp., 6.5%, 2012 373,000 417,939 Northrop Grumman Corp., 7.75%, 2031 326,000 417,381 --------------- $ 1,085,258 --------------- AIRLINES -- 0.3% Continental Airlines, Inc., 6.648%, 2019 $ 591,229 $ 574,263 --------------- ALCOHOLIC BEVERAGES -- 0.1% Miller Brewing Co., 5.5%, 2013## $ 276,000 $ 288,488 --------------- ASSET BACKED & SECURITIZED -- 2.1% AmeriCredit Automobile Receivables Trust, 2.18%, 2008 $ 236,000 $ 233,892 Bear Stearns Commercial Mortgage Securities, Inc., 6.8%, 2008 197,240 205,857 Beneficial Home Equity Loan Trust, 2.54%, 2037 275,198 273,205
26
ISSUER PAR AMOUNT VALUE BONDS -- continued ASSET BACKED & SECURITIZED -- continued Blackrock Capital Finance LP, 7.75%, 2026## $ 64,761 $ 64,720 CRIIMI MAE CMBS Corp., 6.7%, 2008## 190,000 198,344 CRIIMI MAE Commercial Mortgage Trust, 7%, 2011## 320,000 343,408 Chase Commercial Mortgage Securities Corp., 7.543%, 2009 109,493 117,802 Chase Commercial Mortgage Securities Corp., 6.39%, 2030 369,000 398,802 Citibank Credit Card Issuance Trust, 6.65%, 2008 623,000 648,194 Credit Suisse First Boston Mortgage, 6.38%, 2035 35,000 38,511 Deutsche Mortgage & Asset Receiving Corp., 6.538%, 2031 215,688 229,396 Falcon Franchise Loan LLC, 7.382%, 2010## 56,927 60,230 First Union-Lehman Brothers Bank of America, 6.56%, 2035 100,897 108,478 First Union-Lehman Brothers Commercial Mortgage Trust, 7.38%, 2029 67,737 72,076 First Union-Lehman Brothers Commercial Mortgage Trust, 6.65%, 2029 32,430 34,510 Goldman Sachs Mortgage Securities Corp., 6.06%, 2030 208,081 211,340 J.P. Morgan Commercial Mortgage Finance Corp., 6.613%, 2030 175,000 186,880 Merrill Lynch Mortgage Investors, Inc., 6.39%, 2030 78,065 82,855 Morgan Stanley Capital I, Inc., 0.6197%, 2030## 8,775,787 201,082 Mortgage Capital Funding, Inc., 6.337%, 2031 325,564 348,076 Multi-Family Capital Access One, Inc., 6.65%, 2024 57,144 62,512 Residential Accredit Loans, Inc., 7%, 2028 52,600 52,503 Residential Asset Mortgage Products, Inc., 3.8%, 2030 100,827 100,557 Residential Asset Mortgage Products, Inc., 4.9708%, 2034 92,000 93,156 --------------- $ 4,366,386 --------------- AUTOMOTIVE -- 0.6% DaimlerChrysler N.A. Holdings Corp., 8%, 2010 $ 69,000 $ 79,751 DaimlerChrysler N.A. Holdings Corp., 6.5%, 2013 163,000 176,792 Ford Motor Co., 7.45%, 2031 225,000 226,291 Ford Motor Credit Co., 6.5%, 2007 80,000 83,188 Ford Motor Credit Co., 7.875%, 2010 180,000 198,317 Ford Motor Credit Co., 7.375%, 2011 116,000 125,019 General Motors Acceptance Corp., 7.25%, 2011 165,000 172,749 General Motors Corp., 7.2%, 2011 72,000 73,846 General Motors Corp., 8.375%, 2033 92,000 95,320 --------------- $ 1,231,273 --------------- BANKS & CREDIT COMPANIES -- 0.9% Abbey National Capital Trust I, 8.963% to 2030, 5.389% to 2049 $ 179,000 $ 249,480 Bank of America Corp., 7.4%, 2011 299,000 346,355 HBOS Capital Funding LP, 6.071% to 2014, 4.464% to 2049## 100,000 107,176 J.P. Morgan Chase & Co., 5.125%, 2014 68,000 68,446 Mizuho Financial Group, Inc., 5.79%, 2014## 103,000 108,191 Popular North America, Inc., 4.25%, 2008 211,000 212,991 RBS Capital Trust II, 6.425% to 2034, 4.507% to 2049 $ 161,000 $ 170,026 Socgen Real Estate LLC, 7.64% to 2007, 5.343% to 2049## 361,000 395,980 UniCredito Italiano Capital Trust II, 9.2% to 2010, 5.914% to 2049## 208,000 255,516 Wachovia Corp., 5.25%, 2014 50,000 51,245 --------------- $ 1,965,406 --------------- BROADCAST & CABLE TV -- 0.3% Cox Communications, Inc., 4.625%, 2013 $ 159,000 $ 152,102 TCI Communications Financing III, 9.65%, 2027 425,000 491,532 Time Warner Entertainment Co. LP, 10.15%, 2012 1,000 1,312 --------------- $ 644,946 --------------- BROKERAGE & ASSET MANAGERS -- 0.7% Credit Suisse First Boston (USA), Inc., 4.625%, 2008 $ 247,000 $ 253,101 Credit Suisse First Boston (USA), Inc., 6.5%, 2012 214,000 238,178 Goldman Sachs Group, Inc., 5.7%, 2012 247,000 261,825 Lehman Brothers Holdings, Inc., 8.25%, 2007 334,000 370,526 Merrill Lynch & Co., Inc., 5.45%, 2014 82,000 84,831 Morgan Stanley Group, Inc., 6.75%, 2011 156,000 174,976 --------------- $ 1,383,437 --------------- BUILDING -- 0.1% CRH North America, Inc., 6.95%, 2012 $ 208,000 $ 237,090 --------------- CHEMICALS -- 0.1% Dow Chemical Co., 5.75%, 2008 $ 162,000 $ 172,505 --------------- CONGLOMERATES -- 0.1% Kennametal, Inc., 7.2%, 2012 $ 211,000 $ 234,471 --------------- CONSUMER CYCLICAL -- 0.1% Cendant Corp., 6.875%, 2006 $ 147,000 $ 154,653 Cendant Corp., 6.25%, 2008 90,000 96,050 --------------- $ 250,703 --------------- DEFENSE ELECTRONICS -- 0.1% Raytheon Co., 6.15%, 2008 $ 114,000 $ 122,565 --------------- EMERGING MARKET QUASI-SOVEREIGN -- 0% Pemex Project Funding Master Trust, 8.625%, 2022 $ 39,000 $ 45,377 --------------- EMERGING MARKET SOVEREIGN -- 0.2% State of Israel, 4.625%, 2013 $ 112,000 $ 108,257 United Mexican States, 6.625%, 2015 213,000 228,762 United Mexican States, 8.125%, 2019 85,000 99,748 United Mexican States, 8%, 2022 55,000 63,443 --------------- $ 500,210 --------------- ENERGY -- INDEPENDENT -- 0.2% Devon Financing Corp. U.L.C., 6.875%, 2011 $ 142,000 $ 160,823 EnCana Holdings Finance Corp., 5.8%, 2014 98,000 104,122 Kerr-McGee Corp., 6.95%, 2024 77,000 85,149 Pioneer Natural Resource Co., 5.875%, 2016 90,000 94,024 --------------- $ 444,118 --------------- ENERGY -- INTEGRATED -- 0% Amerada Hess Corp., 7.3%, 2031 $ 62,000 $ 69,167 --------------- ENTERTAINMENT -- 0.1% Walt Disney Co., 6.75%, 2006 $ 69,000 $ 71,892 Walt Disney Co., 6.375%, 2012 98,000 109,140 --------------- $ 181,032 ---------------
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ISSUER PAR AMOUNT VALUE BONDS -- continued FINANCIAL INSTITUTIONS -- 0.6% DBS Capital Funding Corp., 7.657%, 2049## $ 170,000 $ 196,581 General Electric Capital Corp., 7.5%, 2005 536,000 545,232 General Electric Capital Corp., 8.75%, 2007 130,000 145,642 SLM Corp., 4%, 2009 153,000 152,926 SLM Corp., 5.375%, 2013 195,000 201,714 --------------- $ 1,242,095 --------------- FOOD & NON-ALCOHOLIC BEVERAGES -- 0.2% Cadbury Schweppes U.S. Finance, 5.125%, 2013## $ 270,000 $ 274,831 Kraft Foods, Inc., 6.25%, 2012 122,000 133,927 --------------- $ 408,758 --------------- FOREST & PAPER PRODUCTS -- 0.2% MeadWestvaco Corp., 6.8%, 2032 $ 104,000 $ 113,686 Weyerhaeuser Co., 6.75%, 2012 254,000 286,215 --------------- $ 399,901 --------------- INSURANCE -- 0.7% AIG SunAmerica Institutional Funding II, 5.75%, 2009 $ 441,000 $ 467,424 AIG SunAmerica, Inc, 7.6%, 2005## 444,000 453,153 MetLife, Inc., 6.5%, 2032 180,000 196,296 Prudential Financial, Inc., 5.1%, 2014 80,000 80,383 Prudential Funding Corp., 6.6%, 2008## 179,000 193,723 --------------- $ 1,390,979 --------------- INSURANCE -- PROPERTY & CASUALTY -- 0.2% Allstate Corp., 6.125%, 2032 $ 185,000 $ 195,149 Fund American Cos., Inc., 5.875%, 2013 117,000 119,077 Safeco Corp., 4.875%, 2010 32,000 32,765 Travelers Property Casualty Corp., 6.375%, 2033 84,000 86,278 --------------- $ 433,269 --------------- INTERNATIONAL MARKET QUASI-SOVEREIGN -- 0.1% Hydro-Quebec, 6.3%, 2011 $ 262,000 $ 292,109 --------------- INTERNATIONAL MARKET SOVEREIGN -- 0.2% Republic of Italy, 4.625%, 2005 $ 363,000 $ 366,631 --------------- MEDICAL & HEALTH TECHNOLOGY & SERVICES -- 0.1% HCA, Inc., 8.75%, 2010 $ 40,000 $ 45,723 HCA, Inc., 6.95%, 2012 139,000 146,354 --------------- $ 192,077 --------------- MORTGAGE BACKED -- 13.4% Fannie Mae, 5.722%, 2009 $ 830,000 $ 875,550 Fannie Mae, 4.01%, 2013 19,666 18,976 Fannie Mae, 4.63%, 2014 48,543 48,530 Fannie Mae, 4.518%, 2014 179,351 178,366 Fannie Mae, 4.846%, 2014 74,896 76,113 Fannie Mae, 6%, 2016 - 2034 4,031,298 4,192,082 Fannie Mae, 5.5%, 2016 - 2034 7,896,411 8,048,680 Fannie Mae, 5%, 2018 - 2034 1,766,920 1,795,338 Fannie Mae, 4.5%, 2018 - 2019 970,201 968,925 Fannie Mae, 6.5%, 2028 - 2034 1,943,613 2,041,556 Fannie Mae, 7.5%, 2031 63,874 68,437 Freddic Mac, 5.5%, 2019 17,430 18,014 Freddie Mac, 5%, 2017 - 2033 1,572,832 1,575,911 Freddie Mac, 4.5%, 2018 - 2019 1,184,342 1,183,207 Freddie Mac, 5.5%, 2019 - 2034 1,532,822 1,559,013 Freddie Mac, 6%, 2019 - 2034 1,771,083 1,832,977 Freddie Mac, 6.5%, 2034 419,885 440,697 Ginnie Mae, 7.5%, 2023 - 2024 83,602 90,242 Ginnie Mae, 6.5%, 2028 - 2028 300,680 316,912 Ginnie Mae, 6%, 2033 - 2034 898,931 932,278 Ginnie Mae, 5.5%, 2033 1,426,438 1,458,256 Ginnie Mae, 5%, 2099 100,000 99,969 --------------- $ 27,820,029 --------------- NATURAL GAS -- PIPELINE -- 0.3% CenterPoint Energy Resources Corp., 7.875%, 2013 $ 82,000 $ 97,464 Kinder Morgan Energy Partners LP, 6.75%, 2011 315,000 351,675 Kinder Morgan Energy Partners LP, 7.75%, 2032 117,000 141,204 --------------- $ 590,343 --------------- PHARMACEUTICALS -- 0.1% Wyeth, 5.5%, 2013 $ 123,000 $ 127,837 --------------- POLLUTION CONTROL -- 0.1% Waste Management, Inc., 7.375%, 2010 $ 134,000 $ 153,598 --------------- PRINTING & PUBLISHING -- 0.1% Belo Corp., 7.75%, 2027 $ 226,000 $ 268,091 --------------- RAILROAD & SHIPPING -- 0.1% Union Pacific Corp., 6.125%, 2012 $ 50,000 $ 54,994 Union Pacific Corp., 5.375%, 2014 49,000 50,758 --------------- $ 105,752 --------------- REAL ESTATE -- 0.3% Boston Properties, Inc., 5%, 2015 $ 42,000 $ 40,957 EOP Operating LP, 6.8%, 2009 29,000 31,787 HRPT Properties Trust, 6.25%, 2016 115,000 121,302 Vornado Realty Trust, 5.625%, 2007 383,000 397,642 --------------- $ 591,688 --------------- TELECOMMUNICATIONS -- WIRELESS -- 0.1% AT&T Wireless Services, Inc., 7.35%, 2006 $ 107,000 $ 111,937 Sprint Capital Corp., 6.875%, 2028 106,000 116,047 --------------- $ 227,984 --------------- TELECOMMUNICATIONS -- WIRELINE -- 0.9% BellSouth Corp., 6.55%, 2034 $ 146,000 $ 159,088 Deutsche Telekom International Finance B.V., 8.75%, 2030 152,000 200,710 France Telecom S.A., 8.5%, 2011 85,000 101,397 PCCW-HKTC Capital II Ltd., 6%, 2013## 150,000 157,683 SBC Communications, Inc., 5.1%, 2014 126,000 127,171 Telecom Italia Capital, 5.25%, 2013 150,000 151,610 Telecom Italia Capital, 6%, 2034## 81,000 79,190 Telecomunicaciones de Puerto Rico, Inc., 6.65%, 2006 270,000 280,010 Verizon New York, Inc., 6.875%, 2012 486,000 545,524 --------------- $ 1,802,383 --------------- U.S. GOVERNMENT AGENCIES -- 5.2% Fannie Mae, 2.5%, 2006 $ 360,000 $ 356,822 Fannie Mae, 5.25%, 2007 1,147,000 1,195,101 Fannie Mae, 6.625%, 2009 - 2010 4,434,000 4,993,507 Fannie Mae, 6%, 2011 94,000 103,419 Fannie Mae, 4.125%, 2014 320,000 310,147 Fannie Mae, 4.625%, 2014 250,000 250,188 Federal Home Loan Bank, 2.875%, 2006 365,000 363,706 Freddie Mac, 2.75%, 2006 967,000 959,350 Freddie Mac, 2.875%, 2006 1,405,000 1,395,143 Small Business Administration, 4.35%, 2023 49,663 48,731 Small Business Administration, 4.77%, 2024 120,353 120,508 Small Business Administration, 5.18%, 2024 196,161 200,672 Small Business Administration, 5.52%, 2024 278,085 289,398 Small Business Administration, 4.99%, 2024 156,000 157,790 --------------- $ 10,744,482 ---------------
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ISSUER PAR AMOUNT VALUE BONDS -- continued U.S. TREASURY OBLIGATIONS -- 6.5% U.S. Treasury Bonds, 8%, 2021 $ 703,000 $ 965,005 U.S. Treasury Bonds, 6.25%, 2023 2,489,000 2,913,977 U.S. Treasury Bonds, 5.375%, 2031 623,000 673,667 U.S. Treasury Notes, 1.625%, 2005 52,000 51,919 U.S. Treasury Notes, 6.5%, 2005 978,000 992,288 U.S. Treasury Notes, 1.25%, 2005 387,000 385,156 U.S. Treasury Notes, 5.75%, 2005 665,000 682,041 U.S. Treasury Notes, 7%, 2006 2,545,000 2,698,296 U.S. Treasury Notes, 4.375%, 2007 146,000 150,055 U.S. Treasury Notes, 4%, 2009 23,000 23,438 U.S. Treasury Notes, 4.25%, 2010 - 2014 2,172,954 2,298,057 U.S. Treasury Notes, 3%, 2012 1,184,701 1,322,005 U.S. Treasury Notes, 3.875%, 2013 303,000 298,952 U.S. Treasury Notes, 4.75%, 2014 1,000 1,042 --------------- $ 13,455,898 --------------- UTILITIES -- ELECTRIC POWER -- 1.3% DTE Energy Co., 7.05%, 2011 $ 238,000 $ 269,499 Duke Capital Corp., 8%, 2019 99,000 120,814 Exelon Generation Co. LLC, 6.95%, 2011 77,000 86,913 FirstEnergy Corp., 6.45%, 2011 147,000 159,711 MidAmerican Energy Holdings Co., 3.5%, 2008 118,000 115,587 MidAmerican Energy Holdings Co., 5.875%, 2012 61,000 64,638 MidAmerican Funding LLC, 6.927%, 2029 454,000 509,151 Niagara Mohawk Power Corp., 7.75%, 2006 1,000 1,059 Northeast Utilities, 8.58%, 2006 105,897 110,880 Oncor Electric Delivery Co., 7%, 2022 202,000 230,383 PSEG Power LLC, 6.95%, 2012 71,000 80,006 PSEG Power LLC, 8.625%, 2031 91,000 120,828 Pacific Gas & Electric Co., 4.8%, 2014 125,000 124,562 System Energy Resources, Inc., 5.129%, 2014## 116,000 116,095 TXU Energy Co., 7%, 2013 102,000 113,919 W3A Funding Corp., 8.09%, 2017 338,966 375,038 --------------- $ 2,599,083 --------------- Total Bonds (Identified Cost, $75,266,495) $ 77,218,778 --------------- REPURCHASE AGREEMENT -- 1.9% Morgan Stanley, 2.19%, dated 12/31/04, due 01/03/05, total to be received $3,911,714 (secured by various U.S. Treasury and Federal Agency obligations in a jointly traded account), at Cost $ 3,911,000 $ 3,911,000 --------------- Total Investments (Identified Cost, $185,191,462) $ 206,995,405 --------------- OTHER ASSETS, LESS LIABILITIES -- 0.0% 82,563 --------------- Net Assets -- 100.0% $ 207,077,968 ===============
See portfolio footnotes and notes to financial statements. PORTFOLIO FOOTNOTES: * Non-income producing security. # Payment-in-kind security. ## SEC Rule 144A restriction. ### Security segregated as collateral for open futures contracts. ~ The rate shown represents an annualized yield at time of purchase. ~~~ All or a portion of this security is subject to dollar roll transactions. ADR = American Depository Receipt STRIPS = Separate trading of Registered Interest and Principal of Securities. TBA = To Be Announced Abbreviations have been used throughout this report to indicate amounts shown in currencies other than the U.S. dollar. A list of abbreviations is shown below AUD = Australian Dollar GBP = British Pound CAD = Canadian Dollar JPY = Japanese Yen CHF = Swiss Franc NOK = Norwegian Kroner CZK = Czech Republic Koruna NZD = New Zealand Dollar DKK = Danish Krones PLN = Polish Zloty EUR = Euro SEK = Swedish Krona 29 STATEMENTS OF ASSETS AND LIABILITIES -- December 31, 2004 (000 Omitted)
CAPITAL GLOBAL GOVERNMENT HIGH APPRECIATION GOVERNMENTS SECURITIES YIELD VARIABLE VARIABLE VARIABLE VARIABLE ACCOUNT ACCOUNT ACCOUNT ACCOUNT ------------ ----------- ----------- ---------- Assets: Investments -- Investments, cost $ 264,164 $ 11,014 $ 107,429 $ 72,144 Unrealized appreciation (depreciation) 41,025 1,040 2,213 2,371 ------------ ----------- ----------- ---------- Total investments, at value $ 305,189 $ 12,054 $ 109,642 $ 74,515 Cash $ 0* $ 0* $ 0* $ 15 Receivable for forward foreign currency exchange contracts -- 155 -- 28 Receivable for forward currency exchange contracts subject to master netting agreements -- 4 -- -- Receivable for investments sold 91 -- -- 81 Receivable for units sold 13 5 14 1 Interest and dividends receivable 150 196 904 1,321 Receivable from administrative proceeding settlement 227 -- -- -- Receivable from Investment Adviser -- -- -- -- Receivable from sponsor -- -- -- 78 Other assets 4 -- 2 1 ------------ ----------- ----------- ---------- Total assets $ 305,674 $ 12,414 $ 110,562 $ 76,040 ============ =========== =========== ========== Liabilities: Payable for forward foreign currency exchange contracts $ -- $ 169 $ -- $ 98 Payable for daily variation on open futures contracts -- -- 5 -- Payable for investments purchased 1,121 69 -- 111 Payable for dollar roll transactions -- -- 6,074 -- Payable for units surrendered 226 38 64 10 Deferred mortgage dollar roll income -- -- 5 -- Payable to affiliates -- Investment Adviser 6 0* 2 2 Sponsor 46 0* 8 -- Accrued expenses and other liabilities 53 44 45 51 ------------ ----------- ----------- ---------- Total liabilities $ 1,452 $ 320 $ 6,203 $ 272 ------------ ----------- ----------- ---------- Net assets $ 304,222 $ 12,094 $ 104,359 $ 75,768 ============ =========== =========== ========== MANAGED MONEY TOTAL SECTORS MARKET RETURN VARIABLE VARIABLE VARIABLE ACCOUNT ACCOUNT ACCOUNT ---------- ---------- ---------- Assets: Investments -- Investments, cost $ 54,204 $ 50,271 $ 185,191 Unrealized appreciation (depreciation) 9,126 -- 21,804 ---------- ---------- ---------- Total investments, at value $ 63,330 $ 50,271 $ 206,995 Cash $ 1 $ 1 $ 2 Receivable for forward foreign currency exchange contracts -- -- -- Receivable for forward currency exchange contracts subject to master netting agreements -- -- -- Receivable for investments sold 0* -- 99 Receivable for units sold 13 1 149 Interest and dividends receivable 19 0* 1,023 Receivable from administrative proceeding settlement 63 -- 20 Receivable from Investment Adviser -- 12 -- Receivable from sponsor -- -- 50 Other assets 1 1 2 ---------- ---------- ---------- Total assets $ 63,427 $ 50,286 $ 208,340 ========== ========== ========== Liabilities: Payable for forward foreign currency exchange contracts $ -- $ -- $ -- Payable for daily variation on open futures contracts -- -- -- Payable for investments purchased -- -- 1,019 Payable for dollar roll transactions -- -- -- Payable for units surrendered 60 73 184 Deferred mortgage dollar roll income -- -- -- Payable to affiliates -- Investment Adviser 1 1 4 Sponsor 2 15 -- Accrued expenses and other liabilities 39 20 55 ---------- ---------- ---------- Total liabilities $ 102 $ 109 $ 1,262 ---------- ---------- ---------- Net assets $ 63,325 $ 50,177 $ 207,078 ========== ========== ==========
* Amount less than $500 See notes to financial statements. 30 (000 Omitted except for unit values)
CAPITAL GLOBAL APPRECIATION GOVERNMENTS UNIT VARIABLE VARIABLE UNIT VALUE ACCOUNT ACCOUNT ----- -------- ------------ ----------- Net assets applicable to contract owners: Capital Appreciation Variable Account -- Compass 2 3,544 $ 55.625 $ 197,298 Compass 3 413 36.678 15,149 Compass 3 - Level 2 5,798 15.267 88,515 Global Governments Variable Account -- Compass 2 128 $ 27.240 $ 3,492 Compass 3 28 26.561 750 Compass 3 - Level 2 500 15.580 7,783 Government Securities Variable Account -- Compass 2 2,125 $ 37.338 Compass 3 100 26.082 Compass 3 - Level 2 1,377 15.274 High Yield Variable Account -- Compass 2 1,601 $ 36.669 Compass 3 67 26.943 Compass 3 - Level 2 971 14.421 Managed Sectors Variable Account -- Compass 2 345 $ 43.708 Compass 3 141 42.920 Compass 3 - Level 2 3,020 13.910 Money Market Variable Account -- Compass 2 1,009 $ 20.073 Compass 3 97 16.443 Compass 3 - Level 2 2,259 12.326 Total Return Variable Account -- Compass 2 1,511 $ 45.729 Compass 3 315 44.592 Compass 3 - Level 2 5,646 21.559 ------------ ----------- Net assets applicable to owners of deferred contracts 300,962 12,025 Reserve for variable annuities Compass 2 Contracts 2,951 18 Compass 3 Contracts 1 43 Compass 3 - Level 2 Contracts 308 8 ------------ ----------- Net assets $ 304,222 $ 12,094 ============ =========== GOVERNMENT HIGH MANAGED MONEY TOTAL SECURITIES YIELD SECTORS MARKET RETURN VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE ACCOUNT ACCOUNT 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 $ 79,344 Compass 3 2,591 Compass 3 - Level 2 21,026 High Yield Variable Account -- Compass 2 $ 58,689 Compass 3 1,799 Compass 3 - Level 2 14,004 Managed Sectors Variable Account -- Compass 2 $ 15,084 Compass 3 6,036 Compass 3 - Level 2 42,019 Money Market Variable Account -- Compass 2 $ 20,187 Compass 3 1,577 Compass 3 - Level 2 27,836 Total Return Variable Account -- Compass 2 $ 69,105 Compass 3 14,021 Compass 3 - Level 2 121,735 ---------- -------- -------- -------- --------- Net assets applicable to owners of deferred contracts 102,961 74,492 63,139 49,600 204,861 Reserve for variable annuities Compass 2 Contracts 1,345 1,216 80 486 1,389 Compass 3 Contracts -- 2 21 11 128 Compass 3 - Level 2 Contracts 53 58 85 80 700 ---------- -------- -------- -------- --------- Net assets $ 104,359 $ 75,768 $ 63,325 $ 50,177 $ 207,078 ========== ======== ======== ======== =========
See notes to financial statements. 31 STATEMENTS OF OPERATIONS -- Year Ended December 31, 2004 (000 Omitted)
CAPITAL GLOBAL GOVERNMENT HIGH APPRECIATION GOVERNMENTS SECURITIES YIELD VARIABLE VARIABLE VARIABLE VARIABLE ACCOUNT ACCOUNT ACCOUNT ACCOUNT ------------ ----------- ----------- ---------- Net Investment income (loss): Income -- Interest $ 164 $ 418 $ 5,379 $ 6,356 Dividends 3,876 -- -- 20 Other# 227 -- -- -- ------------ ----------- ----------- ---------- Total investment income $ 4,267 $ 418 $ 5,379 $ 6,376 ------------ ----------- ----------- ---------- Expenses -- Mortality and expense risk charges $ 3,796 $ 151 $ 1,390 $ 1,000 Management fee 2,252 91 604 594 Boards of Managers fees 34 1 13 10 Distribution fee 26 1 5 3 Administrative fee 28 1 10 8 Custodian fee 109 16 36 30 Printing 38 6 13 14 Auditing fees 25 38 32 39 Legal fees 9 10 9 9 Miscellaneous 33 10 16 17 ------------ ----------- ----------- ---------- Total expenses $ 6,350 $ 325 $ 2,128 $ 1,724 Fees paid indirectly (5) (0)* (1) (2) Reduction of expenses by investment adviser -- (20) -- -- ------------ ----------- ----------- ---------- Net expenses $ 6,345 $ 305 $ 2,127 $ 1,722 ------------ ----------- ----------- ---------- Net investment income (loss) $ (2,078) $ 113 $ 3,252 $ 4,654 ------------ ----------- ----------- ---------- Realized and unrealized gain (loss) on investments: Realized gain (loss) (identified cost basis) -- Investment transactions $ 16,600** $ 1,073 $ 1,107 $ (1,588) Written option transactions -- 3 -- -- Futures contracts -- 11 80 -- Foreign currency transactions (12) (64) -- (128) ------------ ----------- ----------- ---------- Net realized gain (loss) on investments and foreign currency transactions $ 16,588 $ 1,023 $ 1,187 $ (1,716) ------------ ----------- ----------- ---------- Change in unrealized appreciation (depreciation) -- Investments $ 12,495 $ (277) $ (1,791) $ 2,327 Futures contracts -- 1 (55) -- Translation of assets and liabilities in foreign currencies 1 49 -- (14) ------------ ----------- ----------- ---------- Net unrealized gain (loss) on investments and foreign currency translation $ 12,496 $ (227) $ (1,846) $ 2,313 ------------ ----------- ----------- ---------- Net realized and unrealized gain (loss) on investments and foreign currency $ 29,084 $ 796 $ (659) $ 597 ------------ ----------- ----------- ---------- Change in net assets from operations $ 27,006 $ 909 $ 2,593 $ 5,251 ============ =========== =========== ========== MANAGED MONEY TOTAL SECTORS MARKET RETURN VARIABLE VARIABLE VARIABLE ACCOUNT ACCOUNT ACCOUNT ---------- ---------- ---------- Net Investment income (loss): Income -- Interest $ 12 $ 719 $ 3,987 Dividends 775 -- 2,723 Other# 63 -- 20 ---------- ---------- ---------- Total investment income $ 850 $ 719 $ 6,730 ---------- ---------- ---------- Expenses -- Mortality and expense risk charges $ 793 $ 646 $ 2,489 Management fee 479 257 1,515 Boards of Managers fees 8 4 23 Distribution fee 10 3 24 Administrative fee 6 5 19 Custodian fee 26 18 73 Printing 18 17 22 Auditing fees 33 19 43 Legal fees 9 9 9 Miscellaneous 11 10 29 ---------- ---------- ---------- Total expenses $ 1,393 $ 988 $ 4,246 Fees paid indirectly (1) (0)* (1) Reduction of expenses by investment adviser -- -- -- ---------- ---------- ---------- Net expenses $ 1,392 $ 988 $ 4,245 ---------- ---------- ---------- Net investment income (loss) $ (542) $ (269) $ 2,485 ---------- ---------- ---------- Realized and unrealized gain (loss) on investments: Realized gain (loss) (identified cost basis) -- Investment transactions $ 4,523 $ -- $ 13,823 Written option transactions -- -- -- Futures contracts -- -- -- Foreign currency transactions -- -- 0* ---------- ---------- ---------- Net realized gain (loss) on investments and foreign currency transactions $ 4,523 $ -- $ 13,823 ---------- ---------- ---------- Change in unrealized appreciation (depreciation) -- Investments $ (902) $ -- $ 2,961 Futures contracts -- -- -- Translation of assets and liabilities in foreign currencies -- -- 4 ---------- ---------- ---------- Net unrealized gain (loss) on investments and foreign currency translation $ (902) $ -- $ 2,965 ---------- ---------- ---------- Net realized and unrealized gain (loss) on investments and foreign currency $ 3,621 $ -- $ 16,788 ---------- ---------- ---------- Change in net assets from operations $ 3,079 $ (269) $ 19,273 ========== ========== ==========
* Amount less than $500. ** Includes proceeds received from a non-recurring cash settlement in the amount of $622,626 from a class action lawsuit against Cendant Corp. # A non-recurring accrual recorded as a result of an administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund sales, as described in the Legal Proceedings and Transactions with Affiliates footnotes. See notes to financial statements. 32 STATEMENTS OF CHANGES IN NET ASSETS (000 Omitted)
CAPITAL APPRECIATION GLOBAL GOVERNMENTS VARIABLE ACCOUNT VARIABLE ACCOUNT ------------------------ ------------------------- YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, ------------------------ ------------------------- 2004 2003 2004 2003 ---------- ---------- ---------- ---------- Change in net assets: From operations: Net investment income (loss) $ (2,078) $ (3,503) $ 113 $ 158 Net realized gain (loss) on investments and foreign currency transactions 16,588 (458) 1,023 1,009 Net unrealized gain (loss) on investments and foreign currency translation 12,496 74,556 (227) 500 ---------- ---------- ---------- ---------- Change in net assets from operations $ 27,006 $ 70,595 $ 909 $ 1,667 ---------- ---------- ---------- ---------- Participant transactions: Accumulation activity: Purchase payments received $ 7,120 $ 7,367 $ 375 $ 357 Net transfers between variable and fixed accumulation accounts (2,841) (4,305) (604) 621 Withdrawals, surrenders, annuitizations, and contract charges (41,093) (30,559) (1,777) (1,497) ---------- ---------- ---------- ---------- Net accumulation activity $ (36,814) $ (27,497) $ (2,006) $ (519) ---------- ---------- ---------- ---------- Annuitization activity: Annuitizations $ 261 $ 13 $ 0* $ -- Annuity payments and contract charges (513) (469) (6) (6) Net transfers among accounts for annuity reserves -- (792) -- (118) Adjustments to annuity reserves (44) 625 0* 111 ---------- ---------- ---------- ---------- Net annuitization activity $ (296) $ (623) $ (6) $ (13) ---------- ---------- ---------- ---------- Change in net assets from participations transactions $ (37,110) $ (28,120) $ (2,012) $ (532) ---------- ---------- ---------- ---------- Total change in net assets $ (10,104) $ 42,475 $ (1,103) $ 1,135 Net assets: At beginning of period 314,326 271,851 13,197 12,062 ---------- ---------- ---------- ---------- At end of period $ 304,222 $ 314,326 $ 12,094 $ 13,197 ========== ========== ========== ========== GOVERNMENT SECURITIES VARIABLE ACCOUNT ------------------------ YEAR ENDED DECEMBER 31, ------------------------ 2004 2003 ---------- ---------- Change in net assets: From operations: Net investment income (loss) $ 3,252 $ 2,660 Net realized gain (loss) on investments and foreign currency transactions 1,187 1,504 Net unrealized gain (loss) on investments and foreign currency translation (1,846) (2,844) ---------- ---------- Change in net assets from operations $ 2,593 $ 1,320 ---------- ---------- Participant transactions: Accumulation activity: Purchase payments received $ 1,762 $ 2,312 Net transfers between variable and fixed accumulation accounts (4,683) (2,752) Withdrawals, surrenders, annuitizations, and contract charges (12,905) (14,350) ---------- ---------- Net accumulation activity $ (15,826) $ (14,790) ---------- ---------- Annuitization activity: Annuitizations $ (5) $ 11 Annuity payments and contract charges (308) (504) Net transfers among accounts for annuity reserves (87) (388) Adjustments to annuity reserves (13) 480 ---------- ---------- Net annuitization activity $ (413) $ (401) ---------- ---------- Change in net assets from participations transactions $ (16,239) $ (15,191) ---------- ---------- Total change in net assets $ (13,646) $ (13,871) Net assets: At beginning of period 118,005 131,876 ---------- ---------- At end of period $ 104,359 $ 118,005 ========== ==========
* Amount less than $500. See notes to financial statements. 33
HIGH YIELD MANAGED SECTORS VARIABLE ACCOUNT VARIABLE ACCOUNT ---------------------- ---------------------- YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, ---------------------- ---------------------- 2004 2003 2004 2003 --------- --------- -------- ---------- Change in net assets: From operations: Net investment income (loss) $ 4,654 $ 5,943 $ (542) $ (779) Net realized gain (loss) on investments and foreign currency transactions (1,716) (1,399) 4,523 2,925 Net unrealized gain (loss) on investments and foreign currency translation 2,313 11,526 (902) 10,825 --------- --------- -------- ---------- Change in net assets from operations $ 5,251 $ 16,070 $ 3,079 $ 12,971 --------- --------- -------- ---------- Participant transactions: Accumulation activity: Purchase payments received $ 999 $ 1,245 $ 2,607 $ 3,037 Net transfers between variable and fixed accumulation accounts (22,124) 1,632 (653) (169) Withdrawals, surrenders, annuitizations, and contract charges (9,829) (11,148) (9,735) (7,142) --------- --------- -------- ---------- Net accumulation activity $ (30,954) $ (8,271) $ (7,781) $ (4,274) --------- --------- -------- ---------- Annuitization activity: Annuitizations $ 100 $ -- $ (1) $ -- Annuity payments and contract charges (207) (229) (36) (42) Net transfers among accounts for annuity reserves -- (363) -- (53) Adjustments to annuity reserves 77 106 (2) 52 --------- --------- -------- ---------- Net annuitization activity $ (30) $ (486) $ (39) $ (43) --------- --------- -------- ---------- Change in net assets from participations transactions $ (30,984) $ (8,757) $ (7,820) $ (4,317) --------- --------- -------- ---------- Total change in net assets $ (25,733) $ 7,313 $ (4,741) $ 8,654 Net assets: At beginning of period 101,501 94,188 68,066 59,412 --------- --------- -------- ---------- At end of period $ 75,768 $ 101,501 $ 63,325 $ 68,066 ========= ========= ======== ==========
See notes to financial statements. 34
MONEY MARKET TOTAL RETURN VARIABLE ACCOUNT VARIABLE ACCOUNT ---------------------- ---------------------- YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, ---------------------- ---------------------- 2004 2003 2004 2003 --------- --------- -------- ---------- Change in net assets: From operations: Net investment income (loss) $ (269) $ (329) $ 2,485 $ 2,186 Net realized gain (loss) on investments and foreign currency transactions -- -- 13,823 333 Net unrealized gain (loss) on investments and foreign currency translation -- -- 2,965 26,254 --------- --------- -------- ---------- Change in net assets from operations $ (269) $ (329) $ 19,273 $ 28,773 --------- --------- -------- ---------- Participant transactions: Accumulation activity: Purchase payments received $ 1,576 $ 2,440 $ 5,581 $ 5,581 Net transfers between variable and fixed accumulation accounts 22,089 (1,613) 4,317 596 Withdrawals, surrenders, annuitizations, and contract charges (11,007) (13,195) (29,151) (24,545) --------- --------- -------- ---------- Net accumulation activity $ 12,658 $ (12,368) $(19,253) $ (18,368) --------- --------- -------- ---------- Annuitization activity: Annuitizations $ 96 $ 121 $ 102 $ 259 Annuity payments and contract charges (179) (148) (432) (444) Net transfers among accounts for annuity reserves 82 (376) 4 (302) Adjustments to annuity reserves (19) 349 49 61 --------- --------- -------- ---------- Net annuitization activity $ (20) $ (54) $ (277) $ (426) --------- --------- -------- ---------- Change in net assets from participations transactions $ 12,638 $ (12,422) $(19,530) $ (18,794) --------- --------- -------- ---------- Total change in net assets $ 12,369 $ (12,751) $ (257) $ 9,979 Net assets: At beginning of period 37,808 50,559 207,335 197,356 --------- --------- -------- ---------- At end of period $ 50,177 $ 37,808 $207,078 $ 207,335 ========= ========= ======== ==========
See notes to financial statements. 35 FINANCIAL HIGHLIGHTS These financial highlights tables are intended to help you understand the variable accounts' financial performance for the past 5 fiscal years (or, if shorter, the period of the variable accounts' operation). Certain information reflects financial results for a single unit value. The total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the variable account held for the entire period. This information has been audited by the variable accounts' independent registered public accounting firm, whose report, together with the variable accounts' financial statements, are included in this report.
CAPITAL APPRECIATION VARIABLE ACCOUNT --------------------------------------------------------------------- COMPASS 2 --------------------------------------------------------------------- YEARS ENDED DECEMBER 31, --------------------------------------------------------------------- 2004 2003 2002 2001 2000 ---------- ---------- ---------- ---------- ---------- Per unit data:* Net asset value -- beginning of period $ 50.814 $ 39.859 $ 59.446 $ 80.578 $ 92.242 ---------- ---------- ---------- ---------- ---------- Investment income $ 0.744 $ 0.402 $ 0.369 $ 0.598 $ 0.907 Expenses (1.109) (0.951) (1.002) (1.401) (1.920) ---------- ---------- ---------- ---------- ---------- Net investment loss $ (0.365) $ (0.549) $ (0.633) $ (0.803) $ (1.013) Net realized and unrealized gain (loss) on investments and foreign currency transactions 5.176 11.504 (18.954) (20.329) (10.651) ---------- ---------- ---------- ---------- ---------- Change in unit value $ 4.811 $ 10.955 $ (19.587) $ (21.132) $ (11.664) ---------- ---------- ---------- ---------- ---------- Unit value: Net asset value -- end of period 55.625 $ 50.814 $ 39.859 $ 59.446 $ 80.578 ========== ========== ========== ========== ========== Total Return++& 9.47%^^ 27.48%^ (32.95)% (26.22)% -- Ratios (to average net assets): Expenses# 2.14% 2.12% 2.12% 0.79%+ 0.76%+ Net investment loss (0.70%) (1.20)% (1.36)% (1.19)%+ (1.08)%+ Portfolio turnover 65% 104% 80% 123% 140% Number of units outstanding at end of period (000 Omitted) 3,544 4,040 4,521 5,340 5,818 CAPITAL APPRECIATION VARIABLE ACCOUNT --------------------------------------------------------------------- COMPASS 3 --------------------------------------------------------------------- YEARS ENDED DECEMBER 31, --------------------------------------------------------------------- 2004 2003 2002 2001 2000 ---------- ---------- ---------- ---------- ---------- Per unit data:* Net asset value -- beginning of period $ 33.539 $ 26.334 $ 39.314 $ 53.342 $ 61.123 ---------- ---------- ---------- ---------- ---------- Investment income $ 0.458 $ 0.260 $ 0.240 $ 0.417 $ 0.581 Expenses (0.753) (0.648) (0.688) (1.025) (1.317) ---------- ---------- ---------- ---------- ---------- Net investment loss $ (0.295) $ (0.388) $ (0.448) $ (0.608) $ (0.736) Net realized and unrealized gain (loss) on investments and foreign currency transactions 3.434 7.593 (12.532) (13.420) (7.045) ---------- ---------- ---------- ---------- ---------- Change in unit value $ 3.139 $ 7.205 $ (12.980) $ (14.028) $ (7.781) ---------- ---------- ---------- ---------- ---------- Unit value: Net asset value -- end of period $ 36.678 $ 33.539 $ 26.334 $ 39.314 $ 53.342 ========== ========== ========== ========== ========== Total Return++& 9.36%^^ 27.36%^ (33.02)% (26.30)% -- Ratios (to average net assets): Expenses# 2.24% 2.22% 2.22% 0.79%+ 0.76%+ Net investment loss (0.87)% (1.31)% (1.42)% (1.19)%+ (1.08)%+ Portfolio turnover 65% 104% 80% 123% 140% Number of units outstanding at end of period (000 Omitted) 413 621 812 999 1,327
* 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 account's net asset value and total return calculation includes proceeds received on March 26, 2003 for the partial payment of a non-recurring litigation settlement from Cendant Corporation, recorded as a realized gain on investment transactions. The proceeds resulted in an increase in the net asset value of $0.900 and $0.594 per unit for Compass 2 and Compass 3, respectively, based on units outstanding on the day the proceeds were received. Excluding the effect of this payment from the ending net asset value per unit, total return per unit value for the year ended December 31, 2003 would have been 2.24% and 2.24% lower, for Compass 2 and Compass 3, respectively. ^^ The account's net asset value and total return calculation include a non-recurring accrual recorded as a result of an administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund sales, as described in the Legal Proceedings and Transactions with Affiliates footnotes. The non-recurring accrual resulted in an increase in the net asset value of $0.039 and $0.026 and per unit for Compass 2 and Compass 3, respectively, based on units outstanding on the day the proceeds were recorded. & From time to time the variable account may receive proceeds from the settlement of a class action lawsuit, without which performance would be lower. See notes to financial statements. 36
CAPITAL APPRECIATION VARIABLE ACCOUNT --------------------------------------------------------------------- COMPASS 3 - LEVEL 2 --------------------------------------------------------------------- YEARS ENDED DECEMBER 31, --------------------------------------------------------------------- 2004 2003 2002 2001 2000 ---------- ---------- ---------- ---------- ---------- Per unit data:* Net asset value -- beginning of period $ 13.940 $ 10.929 $ 16.292 $ 22.072 $ 25.255 ---------- ---------- ---------- ---------- ---------- Investment income $ 0.205 $ 0.109 $ 0.100 $ 0.154 $ 0.247 Expenses (0.297) (0.254) (0.260) (0.357) (0.513) ---------- ---------- ---------- ---------- ---------- Net investment loss $ (0.092) $ (0.145) $ (0.160) $ (0.203) $ (0.266) Net realized and unrealized gain (loss) on investments and foreign currency transactions 1.419 3.156 (5.203) (5.577) (2.917) ---------- ---------- ---------- ---------- ---------- Change in unit value $ 1.327 $ 3.011 $ (5.363) $ (5.780) $ (3.183) ---------- ---------- ---------- ---------- ---------- Unit value: Net asset value -- end of period $ 15.267 $ 13.940 $ 10.929 $ 16.292 $ 22.072 ========== ========== ========== ========== ========== Total Return++& 9.52%^^ 27.55%^ (32.92)% (26.19)% -- Ratios (to average net assets): Expenses# 2.09% 2.07% 2.07% 0.79%+ 0.76%+ Net investment loss (0.65)% (1.17)% (1.32)% (1.19)%+ (1.08)%+ Portfolio turnover 65% 104% 80% 123% 140% Number of units outstanding at end of period (000 Omitted) 5,798 6,086 6,148 6,705 6,283
* 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 account's net asset value and total return calculation includes proceeds received on March 26, 2003 for the partial payment of a non-recurring litigation settlement from Cendant Corporation, recorded as a realized gain on investment transactions. The proceeds resulted in an increase in the net asset value of $0.247 per unit based on units outstanding on the day the proceeds were received. Excluding the effect of this payment from the ending net asset value per unit, total return per unit value for the year ended December 31, 2003 would have been 2.25% lower for Compass 3 - Level 2. ^^ The account's net asset value and total return calculation include a non-recurring accrual recorded as a result of an administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund sales, as described in the Legal Proceedings and Transactions with Affiliates footnotes. The non-recurring accrual resulted in an increase in the net asset value of $0.010 per unit based on units outstanding on the day the proceeds were recorded. & From time to time the variable account may receive proceeds from the settlement of a class action lawsuit, without which performance would be lower. See notes to financial statements. 37
GLOBAL GOVERNMENTS VARIABLE ACCOUNT ----------------------------------------------------------------------- COMPASS 2 ----------------------------------------------------------------------- YEARS ENDED DECEMBER 31, ----------------------------------------------------------------------- 2004 2003 2002 2001 2000 ---------- ---------- ---------- ---------- ---------- Per unit data:* Net asset value -- beginning of period $ 25.169 $ 22.125 $ 18.653 $ 19.378 $ 19.459 ---------- ---------- ---------- ---------- ---------- Investment income~~~ $ 0.872 $ 0.877 $ 0.861 $ 0.946 $ 1.144 Expenses (0.633) (0.584) (0.486) (0.500) (0.471) ---------- ---------- ---------- ---------- ---------- Net investment income~~ $ 0.239 $ 0.293 $ 0.375 $ 0.446 $ 0.673 Net realized and unrealized gain (loss) on investments and foreign currency transactions 1.832 2.751 3.097 (1.171) (0.754) ---------- ---------- ---------- ---------- ---------- Change in unit value $ 2.071 $ 3.044 $ 3.472 $ (0.725) $ (0.081) ---------- ---------- ---------- ---------- ---------- Unit value: Net asset value -- end of period $ 27.240 $ 25.169 $ 22.125 $ 18.653 $ 19.378 ========== ========== ========== ========== ========== Total Return++& 8.23% 13.76% 18.61% (3.74)% Ratios (to average net assets)~~: Expenses# 2.50% 2.47% 2.50% 1.28%+ 1.25%+ Net investment income~~~ 0.94% 1.23% 1.73% 2.23%+ 3.50%+ Portfolio turnover 128% 130% 126% 72% 130% Number of units outstanding at end of period (000 Omitted) 128 161 160 134 167 ~~ 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 unit and the ratios would have been: Net investment income~~~ $ 0.196 $ -- $ 0.364** $ 0.470 $ -- Ratios (to average net assets) Expenses# 2.67% -- 2.44% 1.39%+ -- Net investment income~~~ 0.77% -- 1.79% 2.12%+ --
GLOBAL GOVERNMENTS VARIABLE ACCOUNT ----------------------------------------------------------------------- COMPASS 3 ----------------------------------------------------------------------- YEARS ENDED DECEMBER 31, ----------------------------------------------------------------------- 2004 2003 2002 2001 2000 ---------- ---------- ---------- ---------- ---------- Per unit data:* Net asset value -- beginning of period $ 24.578 $ 21.638 $ 18.269 $ 19.007 $ 19.115 ---------- ---------- ---------- ---------- ---------- Investment income~~~ $ 0.883 $ 0.869 $ 0.846 $ 1.063 $ 1.103 Expenses (0.662) (0.600) (0.511) (0.579) (0.480) ---------- ---------- ---------- ---------- ---------- Net investment income~~ $ 0.221 $ 0.269 $ 0.335 $ 0.484 $ 0.623 Net realized and unrealized gain (loss) on investments and foreign currency transactions 1.762 2.671 3.034 (1.222) (0.731) ---------- ---------- ---------- ---------- ---------- Change in unit value $ 1.983 $ 2.940 $ 3.369 $ (0.738) $ (0.108) ---------- ---------- ---------- ---------- ---------- Unit value: Net asset value -- end of period $ 26.561 $ 24.578 $ 21.638 $ 18.269 $ 19.007 ========== ========== ========== ========== ========== Total Return++& 8.07% 13.59% 18.44% (3.88)% -- Ratios (to average net assets)~~: Expenses# 2.65% 2.62% 2.65% 1.28%+ 1.25%+ Net investment income~~~ 0.85% 1.15% 1.77% 2.23%+ 3.50%+ Portfolio turnover 128% 130% 126% 72% 130% Number of units outstanding at end of period (000 Omitted) 28 41 58 68 108 ~~ 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 unit and the ratios would have been: Net investment income~~~ $ 0.177 $ -- $ 0.329** $ 0.500 $ -- Ratios (to average net assets) Expenses# 2.82% -- 2.56% 1.39%+ -- Net investment income~~~ 0.68% -- 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 unit by $0.080 and $0.080, respectively, increase net realized and unrealized gains and losses per unit by $0.080 and $0.080, respectively, and decrease the ratio of net investment income to average net assets by 0.41% and 0.41%, respectively. Per unit, ratios, and supplemental data for periods prior to January 1, 2001 have not been restated to reflect this change in presentation. * Per unit data are based on the average number of units outstanding during each year. ** The 2002 net investment income amounts previously reported as $0.850 and $0.840 for Compass 2 and Compass 3, respectively, have been revised to reflect net investment income rather than investment income. + 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. & From time to time the variable account may receive proceeds from the settlement of a class action lawsuit, without which performance would be lower. See notes to financial statements. 38
GLOBAL GOVERNMENTS VARIABLE ACCOUNT ----------------------------------------------------------------------- COMPASS 3 - LEVEL 2 ----------------------------------------------------------------------- YEARS ENDED DECEMBER 31, ----------------------------------------------------------------------- 2004 2003 2002 2001 2000 ---------- ---------- ---------- ---------- ---------- Per unit data:* Net asset value -- beginning of period $ 14.396 $ 12.655 $ 10.669 $ 11.083 $ 11.130 ---------- ---------- ---------- ---------- ---------- Investment income~~~ $ 0.497 $ 0.494 $ 0.499 $ 0.520 $ 0.654 Expenses (0.361) (0.331) (0.281) (0.274) (0.270) ---------- ---------- ---------- ---------- ---------- Net investment income~~ $ 0.136 $ 0.163 $ 0.218 $ 0.246 $ 0.384 Net realized and unrealized gain (loss) on investments and foreign currency transactions 1.048 1.578 1.768 (0.660) (0.431) ---------- ---------- ---------- ---------- ---------- Change in unit value $ 1.184 $ 1.741 $ 1.986 $ (0.414) $ (0.047) ---------- ---------- ---------- ---------- ---------- Unit value: Net asset value -- end of period $ 15.580 $ 14.396 $ 12.655 $ 10.669 $ 11.083 ========== ========== ========== ========== ========== Total Return++& 8.23% 13.76% 18.61% (3.74)% Ratios (to average net assets)~~: Expenses# 2.50% 2.47% 2.50% 1.28%+ 1.25%+ Net investment income~~~ 0.94% 1.21% 1.70% 2.23%+ 3.50%+ Portfolio turnover 128% 130% 126% 72% 130% Number of units outstanding at end of period (000 Omitted) 500 559 568 574 619 ~~ 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 unit and the ratios would have been: Net investment income~~~ $ 0.111 $ -- $ 0.209** $ 0.260 $ -- Ratios (to average net assets): Expenses# 2.67% -- 2.42% 1.40%+ -- Net investment income~~~ 0.77% -- 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 unit by $0.040, increase net realized and unrealized gains and losses per unit by $0.040, and decrease the ratio of net investment income to average net assets by 0.41%. Per unit, ratios, and supplemental data for periods prior to January 1, 2001 have not been restated to reflect this change in presentation. * Per unit data are based on the average number of units outstanding during each year. ** The 2002 net investment income amount previously reported as $0.490 has been revised to reflect net investment income rather than investment income. + 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. & From time to time the variable account may receive proceeds from the settlement of a class action lawsuit, without which performance would be lower. See notes to financial statements. 39
GOVERNMENT SECURITIES VARIABLE ACCOUNT ----------------------------------------------------------------------- COMPASS 2 ----------------------------------------------------------------------- YEARS ENDED DECEMBER 31, ----------------------------------------------------------------------- 2004 2003 2002 2001 2000 ---------- ---------- ---------- ---------- ---------- Per unit data:* Net asset value -- beginning of period $ 36.470 $ 36.124 $ 33.448 $ 31.520 $ 28.523 ---------- ---------- ---------- ---------- ---------- Investment income~~~ $ 1.834 $ 1.482 $ 1.862 $ 2.183 $ 2.169 Expenses (0.726) (0.711) (0.677) (0.661) (0.572) ---------- ---------- ---------- ---------- ---------- Net investment income $ 1.108 $ 0.771 $ 1.185 $ 1.522 $ 1.597 Net realized and unrealized gain (loss) on investments (0.240) (0.425) 1.491 0.406 1.400 ---------- ---------- ---------- ---------- ---------- Change in unit value $ 0.868 $ 0.346 $ 2.676 $ 1.928 $ 2.997 ---------- ---------- ---------- ---------- ---------- Unit value: Net asset value -- end of period $ 37.338 $ 36.470 $ 36.124 $ 33.448 $ 31.520 ========== ========== ========== ========== ========== Total Return++& 2.38% 0.96% 8.00% 6.12% -- Ratios (to average net assets): Expenses# 1.97% 1.95% 1.94% 0.66%+ 0.64%+ Net investment income~~~ 2.96% 2.08% 3.19% 4.42%+ 5.28%+ Portfolio turnover 89% 138% 139% 89% 51% Number of units outstanding at end of period (000 Omitted) 2,125 2,447 2,759 3,043 3,210 GOVERNMENT SECURITIES VARIABLE ACCOUNT ----------------------------------------------------------------------- COMPASS 3 ----------------------------------------------------------------------- YEARS ENDED DECEMBER 31, ----------------------------------------------------------------------- 2004 2003 2002 2001 2000 ---------- ---------- ---------- ---------- ---------- Per unit data:* Net asset value -- beginning of period $ 25.501 $ 25.284 $ 23.434 $ 22.105 $ 20.023 ---------- ---------- ---------- ---------- ---------- Investment income~~~ $ 1.244 $ 1.045 $ 1.300 $ 1.590 $ 1.476 Expenses (0.525) (0.514) (0.495) (0.510) (0.412) ---------- ---------- ---------- ---------- ---------- Net investment income $ 0.719 $ 0.531 $ 0.805 $ 1.080 $ 1.064 Net realized and unrealized gain (loss) on investments (0.138) (0.314) 1.045 0.249 1.018 ---------- ---------- ---------- ---------- ---------- Change in unit value $ 0.581 $ 0.217 $ 1.850 $ 1.329 $ 2.082 ---------- ---------- ---------- ---------- ---------- Unit value: Net asset value -- end of period $ 26.082 $ 25.501 $ 25.284 $ 23.434 $ 22.105 ========== ========== ========== ========== ========== Total Return++& 2.28% 0.86% 7.89% 6.01% -- Ratios (to average net assets): Expenses# 2.07% 2.05% 2.04% 0.66%+ 0.64%+ Net investment income~~~ 2.82% 2.08% 3.36% 4.42%+ 5.28%+ Portfolio turnover 89% 138% 139% 89% 51% Number of units outstanding at end of period (000 Omitted) 100 147 205 254 398
~~~ As required, effective January 1, 2001, the account adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium on debt securities. The effect of this change for the year ended December 31, 2001 was to decrease net investment income per unit by $0.06, $0.04 and $0.03, respectively, increase net realized and unrealized gains and losses per unit by $0.06, $0.04 and $0.03, respectively, and decrease the ratio of net investment income to average net assets by 0.19%, 0.19% and 0.19%, respectively. Per unit, ratios, and supplemental data for periods prior to January 1, 2001 have not been restated to reflect this change in presentation. * Per unit data are based on the average number of units outstanding during each year. + 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. & From time to time the variable account may receive proceeds from the settlement of a class action lawsuit, without which performance would be lower. See notes to financial statements. 40
GOVERNMENT SECURITIES VARIABLE ACCOUNT ----------------------------------------------------------------------- COMPASS 3 - LEVEL 2 ----------------------------------------------------------------------- YEARS ENDED DECEMBER 31, ----------------------------------------------------------------------- 2004 2003 2002 2001 2000 ---------- ---------- ---------- ---------- ---------- Per unit data:* Net asset value -- beginning of period $ 14.912 $ 14.763 $ 13.663 $ 12.868 $ 11.639 ---------- ---------- ---------- ---------- ---------- Investment income~~~ $ 0.742 $ 0.597 $ 0.732 $ 0.826 $ 0.876 Expenses (0.289) (0.282) (0.267) (0.248) (0.228) ---------- ---------- ---------- ---------- ---------- Net investment income $ 0.453 $ 0.315 $ 0.465 $ 0.578 $ 0.648 Net realized and unrealized gain (loss) on investments (0.091) (0.166) 0.635 0.217 0.581 ---------- ---------- ---------- ---------- ---------- Change in unit value $ 0.362 $ 0.149 $ 1.100 $ 0.795 $ 1.229 ---------- ---------- ---------- ---------- ---------- Unit value: Net asset value -- end of period $ 15.274 $ 14.912 $ 14.763 $ 13.663 $ 12.868 ========== ========== ========== ========== ========== Total Return++& 2.43% 1.01% 8.05% 6.17% -- Ratios (to average net assets): Expenses# 1.92% 1.90% 1.89% 0.66%+ 0.64%+ Net investment income~~~ 2.99% 2.10% 3.17% 4.42%+ 5.28%+ Portfolio turnover 89% 138% 139% 89% 51% Number of units outstanding at end of period (000 Omitted) 1,377 1,562 1,692 1,617 1,542
~~~ As required, effective January 1, 2001, the account adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium on debt securities. The effect of this change for the year ended December 31, 2001 was to decrease net investment income per unit by $0.06, $0.04 and $0.03, respectively, increase net realized and unrealized gains and losses per unit by $0.06, $0.04 and $0.03, respectively, and decrease the ratio of net investment income to average net assets by 0.19%, 0.19% and 0.19%, respectively. Per unit, ratios, and supplemental data for periods prior to January 1, 2001 have not been restated to reflect this change in presentation. * Per unit data are based on the average number of units outstanding during each year. + 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. & From time to time the variable account may receive proceeds from the settlement of a class action lawsuit, without which performance would be lower. See notes to financial statements. 41
HIGH YIELD VARIABLE ACCOUNT ----------------------------------------------------------------------- COMPASS 2 ----------------------------------------------------------------------- YEARS ENDED DECEMBER 31, ----------------------------------------------------------------------- 2004 2003 2002 2001 2000 ---------- ---------- ---------- ---------- ---------- Per unit data:* Net asset value -- beginning of period $ 34.056 $ 28.505 $ 28.969 $ 29.882 $ 33.630 ---------- ---------- ---------- ---------- ---------- Investment income~~~ $ 2.857 $ 2.769 $ 3.015 $ 3.684 $ 3.786 Expenses (0.770) (0.689) (0.617) (0.699) (0.725) ---------- ---------- ---------- ---------- ---------- Net investment income $ 2.087 $ 2.080 $ 2.398 $ 2.985 $ 3.061 Net realized and unrealized gain (loss) on investments and foreign currency 0.526 3.471 (2.862) (3.898) (6.809) ---------- ---------- ---------- ---------- ---------- Change in unit value $ 2.613 $ 5.551 $ (0.464) $ (0.913) $ (3.748) ---------- ---------- ---------- ---------- ---------- Unit value: Net asset value -- end of period $ 36.669 $ 34.056 $ 28.505 $ 28.969 $ 29.882 ========== ========== ========== ========== ========== Total return++& 7.67% 19.47% (1.60)% (3.05)% -- Ratios (to average net assets) Expenses# 2.21% 2.20% 2.18% 0.90%+ 0.89%+ Net investment income~~~ 5.91% 6.53% 7.84% 9.16%+ 9.00%+ Portfolio turnover 81% 164% 172% 103% 109% Number of units outstanding at end of period (000 Omitted) 1,601 1,827 2,069 2,328 2,677 HIGH YIELD VARIABLE ACCOUNT ----------------------------------------------------------------------- COMPASS 3 ----------------------------------------------------------------------- YEARS ENDED DECEMBER 31, ----------------------------------------------------------------------- 2004 2003 2002 2001 2000 ---------- ---------- ---------- ---------- ---------- Per unit data:* Net asset value -- beginning of period $ 25.048 $ 20.986 $ 21.349 $ 22.043 $ 24.832 ---------- ---------- ---------- ---------- ---------- Investment income~~~ $ 2.021 $ 1.964 $ 2.141 $ 3.188 $ 2.730 Expenses (0.576) (0.514) (0.469) (0.643) (0.557) ---------- ---------- ---------- ---------- ---------- Net investment income $ 1.445 $ 1.450 $ 1.672 $ 2.545 $ 2.173 Net realized and unrealized gain (loss) on investments and foreign currency 0.450 2.612 (2.035) (3.239) (4.962) ---------- ---------- ---------- ---------- ---------- Change in unit value $ 1.895 $ 4.062 $ (0.363) $ (0.694) $ (2.789) Unit value: ---------- ---------- ---------- ---------- ---------- Net asset value -- end of period $ 26.943 $ 25.048 $ 20.986 $ 21.349 $ 22.043 ========== ========== ========== ========== ========== Total return++& 7.57% 19.35% (1.70)% (3.15)% -- Ratios (to average net assets) Expenses# 2.31% 2.30% 2.28% 0.90%+ 0.89%+ Net investment income~~~ 5.75% 6.41% 8.45% 9.16%+ 9.00%+ Portfolio turnover 81% 164% 172% 103% 109% Number of units outstanding at end of period (000 Omitted) 67 115 178 231 297
~~~ As required, effective January 1, 2001, the account adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium on debt securities. The effect of this change for the year ended December 31, 2001 was to decrease net investment income by $0.02, increase net realized and unrealized gains and losses per unit by $0.02, and decrease the ratio of net investment income to average net assets by 0.06%. Per unit, ratios, and supplemental data for periods prior to January 1, 2001, have not been restated to reflect this change in presentation. * Per unit data are based on the average number of units outstanding during each year. + Excluding mortality and expense risk charges and distribution expense charges. ++ The total return does not reflect load fees in conjunction with the redemption of units. # Ratios do not reflect reductions from fees paid indirectly. & From time to time the variable account may receive proceeds from the settlement of a class action lawsuit, without which performance would be lower. See notes to financial statements. 42
HIGH YIELD VARIABLE ACCOUNT ----------------------------------------------------------------------- COMPASS 3 - LEVEL 2 ----------------------------------------------------------------------- YEARS ENDED DECEMBER 31, ----------------------------------------------------------------------- 2004 2003 2002 2001 2000 ---------- ---------- ---------- ---------- ---------- Per unit data:* Net asset value -- beginning of period $ 13.386 $ 11.199 $ 11.376 $ 11.728 $ 13.193 ---------- ---------- ---------- ---------- ---------- Investment income~~~ $ 1.019 $ 1.161 $ 1.220 $ 0.784 $ 1.527 Expenses (0.275) (0.286) (0.257) (0.151) (0.290) ---------- ---------- ---------- ---------- ---------- Net investment income $ 0.744 $ 0.875 $ 0.963 $ 0.633 $ 1.237 Net realized and unrealized gain (loss) on investments and foreign currency 0.291 1.312 (1.140) (0.985) (2.702) ---------- ---------- ---------- ---------- ---------- Change in unit value $ 1.035 $ 2.187 $ (0.177) $ (0.352) $ (1.465) ---------- ---------- ---------- ---------- ---------- Unit value: Net asset value -- end of period $ 14.421 $ 13.386 $ 11.199 $ 11.376 $ 11.728 ========== ========== ========== ========== ========== Total return++& 7.73% 19.53% (1.55)% (3.01)% -- Ratios (to average net assets) Expenses# 2.16% 2.15% 2.13% 0.90%+ 0.89%+ Net investment income~~~ 5.77% 6.57% 6.08% 9.16%+ 9.00%+ Portfolio turnover 81% 164% 172% 103% 109% Number of units outstanding at end of period (000 Omitted) 971 2,631 2,684 1,131 2,619
~~~ As required, effective January 1, 2001, the account adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium on debt securities. The effect of this change for the year ended December 31, 2001 was to decrease net investment income per unit and increase net realized and unrealized gains and losses per unit. The impact of this change calculates to less than $0.01 per unit. In addition, the ratio of net investment income to average net assets decreased by 0.06%. Per unit, ratios, and supplemental data for periods prior to January 1, 2001 have not been restated to reflect this change in presentation. * Per unit data are based on the average number of units outstanding during each year. + Excluding mortality and expense risk charges and distribution expense charges. ++ The total return does not reflect load fees in conjunction with the redemption of units. # Ratios do not reflect reductions from fees paid indirectly. & From time to time the variable account may receive proceeds from the settlement of a class action lawsuit, without which performance would be lower. See notes to financial statements. 43
MANAGED SECTORS VARIABLE ACCOUNT ----------------------------------------------------------------------- COMPASS 2 ----------------------------------------------------------------------- YEARS ENDED DECEMBER 31, ----------------------------------------------------------------------- 2004 2003 2002 2001 2000 ---------- ---------- ---------- ---------- ---------- Per unit data:* Net asset value -- beginning of period $ 41.525 $ 33.716 $ 46.116 $ 72.313** $ 92.865 ---------- ---------- ---------- ---------- ---------- Investment income $ 0.549 $ 0.333 $ 0.270 $ 0.465 $ 0.633 Expenses (0.894) (0.788) (0.810) (1.179) (1.817) ---------- ---------- ---------- ---------- ---------- Net investment loss $ (0.345) $ (0.455) $ (0.540) $ (0.714) $ (1.184) Net realized and unrealized gain (loss) on investments and foreign currency transactions 2.528 8.264 (11.860) (25.483) (19.368) ---------- ---------- ---------- ---------- ---------- Change in unit value $ 2.183 $ 7.809 $ (12.400) $ (26.197) $ (20.552) ---------- ---------- ---------- ---------- ---------- Unit value: Net asset value -- end of period $ 43.708 $ 41.525 $ 33.716 $ 46.116 $ 72.313** ========== ========== ========== ========== ========== Total Return++& 5.26%^^ 23.16%^ (26.89)% (36.23)% -- Ratios (to average net assets): Expenses# 2.17% 2.12% 2.10% 0.88%+ 0.83%+ Net investment loss (0.83)% (1.22)% (1.45)% (1.32)%+ (1.39)%+ Portfolio turnover 93% 80% 264% 295% 447% Number of units outstanding at end of period (000 Omitted) 345 409 455 573 697 MANAGED SECTORS VARIABLE ACCOUNT ----------------------------------------------------------------------- COMPASS 3 ----------------------------------------------------------------------- YEARS ENDED DECEMBER 31, ----------------------------------------------------------------------- 2004 2003 2002 2001 2000 ---------- ---------- ---------- ---------- ---------- Per unit data:* Net asset value -- beginning of period $ 40.837 $ 33.207 $ 45.487 $ 71.434 $ 91.870 ---------- ---------- ---------- ---------- ---------- Investment income $ 0.515 $ 0.321 $ 0.251 $ 0.487 $ 0.602 Expenses (0.933) (0.817) (0.852) (1.297) (1.908) ---------- ---------- ---------- ---------- ---------- Net investment loss $ (0.418) $ (0.496) $ (0.601) $ (0.810) $ (1.306) Net realized and unrealized gain (loss) on investments and foreign currency transactions 2.501 8.126 (11.679) (25.137) (19.130) ---------- ---------- ---------- ---------- ---------- Change in unit value $ 2.083 $ 7.630 $ (12.280) $ (25.947) $ (20.436) ---------- ---------- ---------- ---------- ---------- Unit value: Net asset value -- end of period $ 42.920 $ 40.837 $ 33.207 $ 45.487 $ 71.434 ========== ========== ========== ========== ========== Total Return++& 5.10%^^ 22.98%^ (27.00)% (36.32)% -- Ratios (to average net assets): Expenses# 2.32% 2.27% 2.25% 0.88%+ 0.83%+ Net investment loss (1.03)% (1.37)% (1.56)% (1.32)%+ (1.39)%+ Portfolio turnover 93% 80% 264% 295% 447% Number of units outstanding at end of period (000 Omitted) 141 202 296 390 576
* Per unit data are based on the average number of units outstanding during each year. ** The per unit net asset value has been restated to a rounded third decimal place where previously the amount was truncated. + Excluding mortality and expense risk charges and distribution expense charges. ++ 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 account's net asset value and total return calculation include proceeds received on March 26, 2003 for the partial payment of a non-recurring litigation settlement from Cendant Corporation, recorded as a realized gain on investment transactions. The proceeds resulted in an increase in the net asset value of $0.083 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 variable accounts' ending net asset value per unit, total return per unit value for the year ended December 31, 2003 would have been 0.24% and 0.25% lower for Compass 2 and Compass 3, respectively. ^^ The account's net asset value and total return calculation include a non-recurring accrual recorded as a result of an administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund sales, as described in the Legal Proceedings and Transactions with Affiliates footnotes. The non-recurring accrual resulted in an increase in the net asset value of $0.041 and $0.040 and per unit for Compass 2 and Compass 3, respectively, based on units outstanding on the day the proceeds were recorded. & From time to time the variable account may receive proceeds from the settlement of a class action lawsuit, without which performance would be lower. See notes to financial statements. 44
MANAGED SECTORS VARIABLE ACCOUNT ----------------------------------------------------------------------- COMPASS 3 - LEVEL 2 ----------------------------------------------------------------------- YEARS ENDED DECEMBER 31, ----------------------------------------------------------------------- 2004 2003 2002 2001 2000 ---------- ---------- ---------- ---------- ---------- Per unit data:* Net asset value -- beginning of period $ 13.215 $ 10.730 $ 14.676 $ 23.014 $ 29.554 ---------- ---------- ---------- ---------- ---------- Investment income $ 0.177 $ 0.106 $ 0.083 $ 0.136 $ 0.201 Expenses (0.285) (0.252) (0.259) (0.350) (0.578) ---------- ---------- ---------- ---------- ---------- Net investment loss $ (0.108) $ (0.146) $ (0.176) $ (0.214) $ (0.377) Net realized and unrealized gain (loss) on investments and foreign currency transactions 0.803 2.631 (3.770) (8.124) (6.163) ---------- ---------- ---------- ---------- ---------- Change in unit value $ 0.695 $ 2.485 $ (3.946) $ (8.338) $ (6.540) ---------- ---------- ---------- ---------- ---------- Unit value: Net asset value -- end of period $ 13.910 $ 13.215 $ 10.730 $ 14.676 $ 23.014 ========== ========== ========== ========== ========== Total Return ++& 5.26%^^ 23.16%^ (26.89)% (36.23)% -- Ratios (to average net assets): Expenses# 2.17% 2.12% 2.10% 0.88%+ 0.83%+ Net investment loss (0.82)% (1.22)% (1.46)% (1.32)%+ (1.39)%+ Portfolio turnover 93% 80% 264% 295% 447% Number of units outstanding at end of period (000 Omitted) 3,020 3,228 3,173 3,559 3,548
* 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 account's net asset value and total return calculation includes proceeds received on March 26, 2003 for the partial payment of a non-recurring litigation settlement from Cendant Corporation, recorded as a realized gain on investment transactions. The proceeds resulted in an increase in the net asset value of $0.026 per unit based on units outstanding on the day the proceeds were received. Excluding the effect of this payment from the variable accounts' ending net asset value per unit, total return per unit value for the year ended December 31, 2003 would have been 0.24% lower for Compass 3 -- Level 2. ^^ The account's net asset value and total return calculation include a non-recurring accrual recorded as a result of an administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund sales, as described in the Legal Proceedings and Transactions with Affiliates footnotes. The non-recurring accrual resulted in an increase in the net asset value of $0.013 per unit based on units outstanding on the day the proceeds were recorded. & From time to time the variable account may receive proceeds from the settlement of a class action lawsuit, without which performance would be lower. See notes to financial statements. 45
MONEY MARKET VARIABLE ACCOUNT ----------------------------------------------------------------------- COMPASS 2 ----------------------------------------------------------------------- YEARS ENDED DECEMBER 31, ----------------------------------------------------------------------- 2004 2003 2002 2001 2000 ---------- ---------- ---------- ---------- ---------- Per unit data:* Net asset value -- beginning of period $ 20.188 $ 20.322 $ 20.341 $ 19.862 $ 18.997 ---------- ---------- ---------- ---------- ---------- Investment income $ 0.281 $ 0.247 $ 0.382 $ 0.950 $ 1.232 Expenses (0.396) (0.381) (0.401) (0.471) (0.367) ---------- ---------- ---------- ---------- ---------- Change in unit value $ (0.115) $ (0.134) $ (0.019) $ 0.479 $ 0.865 ---------- ---------- ---------- ---------- ---------- Unit value: Net asset value -- end of period $ 20.073 $ 20.188 $ 20.322 $ 20.341 $ 19.862 ========== ========== ========== ========== ========== Total Return++ (0.57)% (0.66)% (0.09)% 2.41% -- Ratios (to average net assets): Expenses# 1.96% 1.87% 1.96% 0.65%+ 0.60%+ Net investment income (loss) (0.56)% (0.63)% (0.12)% 2.51%+ 4.45%+ Number of units outstanding at end of period (000 Omitted) 1,009 1,172 1,626 1,986 3,304 MONEY MARKET VARIABLE ACCOUNT ----------------------------------------------------------------------- COMPASS 3 ----------------------------------------------------------------------- YEARS ENDED DECEMBER 31, ----------------------------------------------------------------------- 2004 2003 2002 2001 2000 ---------- ---------- ---------- ---------- ---------- Per unit data:* Net asset value -- beginning of period $ 16.553 $ 16.680 $ 16.712 $ 16.334 $ 15.638 ---------- ---------- ---------- ---------- ---------- Investment income $ 0.229 $ 0.198 $ 0.318 $ 0.784 $ 1.002 Expenses $ (0.339) (0.325) (0.350) (0.406) (0.306) ---------- ---------- ---------- ---------- ---------- Change in unit value $ (0.110) $ (0.127) $ (0.032) $ 0.378 $ 0.696 ---------- ---------- ---------- ---------- ---------- Unit value: Net asset value -- end of period $ 16.443 $ 16.553 $ 16.680 $ 16.712 $ 16.334 ========== ========== ========== ========== ========== Total Return++ (0.67)% (0.76)% (0.19)% 2.31% -- Ratios (to average net assets): Expenses# 2.06% 1.97% 2.06% 0.65%+ 0.60%+ Net investment income (loss) (0.71)% (0.74)% (0.14)% 2.51%+ 4.45%+ Number of units outstanding at end of period (000 Omitted) 97 155 186 222 468 MONEY MARKET VARIABLE ACCOUNT ----------------------------------------------------------------------- COMPASS 3 - LEVEL 2 ----------------------------------------------------------------------- YEARS ENDED DECEMBER 31, ----------------------------------------------------------------------- 2004 2003 2002 2001 2000 ---------- ---------- ---------- ---------- ---------- Per unit data:* Net asset value -- beginning of period $ 12.390 $ 12.466 $ 12.472 $ 12.172 $ 11.636 ---------- ---------- ---------- ---------- ---------- Investment income $ 0.181 $ 0.131 $ 0.223 $ 0.710 $ 0.747 Expenses (0.245) (0.207) (0.229) (0.410) (0.211) ---------- ---------- ---------- ---------- ---------- Change in unit value $ (0.064) $ (0.076) $ (0.006) $ 0.300 $ 0.536 ---------- ---------- ---------- ---------- ---------- Unit value: Net asset value -- end of period $ 12.326 $ 12.390 $ 12.466 $ 12.472 $ 12.172 ========== ========== ========== ========== ========== Total Return++ (0.52)% (0.61)% (0.04)% 2.46% -- Ratios (to average net assets): Expenses# 1.91% 1.82% 1.91% 0.65%+ 0.60%+ Net investment income (loss) (0.48)% (0.61)% (0.01)% 2.51%+ 4.45%+ Number of units outstanding at end of period (000 Omitted) 2,259 896 1,113 2,835 1,562
* 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. 46
TOTAL RETURN VARIABLE ACCOUNT ----------------------------------------------------------------------- COMPASS 2 ----------------------------------------------------------------------- YEARS ENDED DECEMBER 31, ----------------------------------------------------------------------- 2004 2003 2002 2001 2000 ---------- ---------- ---------- ---------- ---------- Per unit data:* Net asset value -- beginning of period $ 41.571 $ 35.950 $ 38.562 $ 39.126 $ 33.728 ---------- ---------- ---------- ---------- ---------- Investment income~~~ $ 1.450 $ 1.237 $ 1.407 $ 1.513 $ 1.464 Expenses (0.905) (0.800) (0.777) (0.830) (0.727) ---------- ---------- ---------- ---------- ---------- Net investment income $ 0.545 $ 0.437 $ 0.630 $ 0.683 $ 0.737 Net realized and unrealized gain (loss) on investments and foreign currency transactions 3.613 5.184 (3.242) (1.247) 4.661 ---------- ---------- ---------- ---------- ---------- Change in unit value $ 4.158 $ 5.621 $ (2.612) $ (0.564) $ 5.398 ---------- ---------- ---------- ---------- ---------- Unit value: Net asset value -- end of period $ 45.729 $ 41.571 $ 35.950 $ 38.562 $ 39.126 ========== ========== ========== ========== ========== Total Return++& 10.00%^^ 15.64% (6.77)% (1.44)% -- Ratios (to average net assets): Expenses# 2.11% 2.10% 2.08% 0.85%+ 0.83%+ Net investment income ~~~ 1.25% 1.13% 1.43% 1.67%+ 2.02%+ Portfolio turnover 64% 62% 76% 104% 105% Number of units outstanding at end of period (000 Omitted) 1,511 1,688 1,871 2,080 2,240
TOTAL RETURN VARIABLE ACCOUNT ----------------------------------------------------------------------- COMPASS 3 ----------------------------------------------------------------------- YEARS ENDED DECEMBER 31, ----------------------------------------------------------------------- 2004 2003 2002 2001 2000 ---------- ---------- ---------- ---------- ---------- Per unit data:* Net asset value -- beginning of period $ 40.597 $ 35.160 $ 37.771 $ 38.380** $ 33.134 ---------- ---------- ---------- ---------- ---------- Investment income~~~ $ 1.375 $ 1.200 $ 1.360 $ 1.599 $ 1.395 Expenses (0.929) (0.823) (0.804) (0.939) (0.749) ---------- ---------- ---------- ---------- ---------- Net investment income $ 0.446 $ 0.377 $ 0.556 $ 0.660 $ 0.646 Net realized and unrealized gain (loss) on investments and foreign currency transactions 3.549 5.060 (3.167) (1.269) 4.600 ---------- ---------- ---------- ---------- ---------- Change in unit value $ 3.995 $ 5.437 $ (2.611) $ (0.609) $ 5.246 ---------- ---------- ---------- ---------- ---------- Unit value: Net asset value -- end of period $ 44.592 $ 40.597 $ 35.160 $ 37.771 $ 38.380** ========== ========== ========== ========== ========== Total Return++& 9.84%^^ 15.46% (6.91)% (1.59)% -- Ratios (to average net assets): Expenses# 2.26% 2.25% 2.23% 0.85%+ 0.83%+ Net investment income ~~~ 1.07% 1.01% 1.61% 1.67+ 2.02%+ Portfolio turnover 64% 62% 76% 104% 105% Number of units outstanding at end of period (000 Omitted) 315 453 634 838 1,253
~~~ As required, effective January 1, 2001 the account has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium on debt securities. The effect of this change for the year ended December 31, 2001 was to decrease net investment income per unit by $0.020 and $0.020, increase net realized and unrealized gains and losses per unit by $0.020 and $0.020, respectively, and decrease the ratio of net investment income to average net assets by 0.05% and 0.05% respectively. Per unit, ratios, and supplemental data for periods prior to January 1, 2001 have not been restated to reflect this change in presentation. * Per unit data are based on the average number of units outstanding during each year. ** The per unit net asset value has been restated to a rounded third decimal place where previously the amount was truncated. + Excluding mortality and expense risk charges and distribution expense charges. ++ 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 account's net asset value and total return calculation include a non-recurring accrual recorded as a result of an administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund sales, as described in the Legal Proceedings and Transactions with Affiliates footnotes. The non-recurring accrual did not have a material impact on the net asset value per share based on the shares outstanding on the day the proceeds were recorded. & From time to time the variable account may receive proceeds from the settlement of a class action lawsuit, without which performance would be lower. See notes to financial statements. 47
TOTAL RETURN VARIABLE ACCOUNT ----------------------------------------------------------------------- COMPASS 3 - LEVEL 2 ----------------------------------------------------------------------- YEARS ENDED DECEMBER 31, ----------------------------------------------------------------------- 2004 2003 2002 2001 2000 ---------- ---------- ---------- ---------- ---------- Per unit data:* Net asset value -- beginning of period $ 19.599 $ 16.949 $ 18.180 $ 18.446** $ 15.901 ---------- ---------- ---------- ---------- ---------- Investment income~~~ $ 0.676 $ 0.575 $ 0.658 $ 0.687 $ 0.683 Expenses (0.425) (0.376) (0.367) (0.382) (0.343) ---------- ---------- ---------- ---------- ---------- Net investment income $ 0.251 $ 0.199 $ 0.291 $ 0.305 $ 0.340 Net realized and unrealized gain (loss) on investments and foreign currency transactions 1.709 2.451 (1.522) (0.571) 2.205 ---------- ---------- ---------- ---------- ---------- Change in unit value $ 1.960 $ 2.650 $ (1.231) $ (0.266) $ 2.545 ---------- ---------- ---------- ---------- ---------- Unit value: Net asset value -- end of period $ 21.559 $ 19.599 $ 16.949 $ 18.180 $ 18.446** ========== ========== ========== ========== ========== Total Return++& 10.00%^^ 15.64% (6.77)% (1.44)% -- Ratios (to average net assets): Expenses# 2.11% 2.10% 2.08% 0.85%+ 0.83%+ Net investment income ~~~ 1.24% 1.11% 1.55% 1.67%+ 2.02%+ Portfolio turnover 64% 62% 76% 104% 105% Number of units outstanding at end of period 5,646 5,946 6,236 6,537 6,382 (000 Omitted)
~~~ As required, effective January 1, 2001 the account has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium on debt securities. The effect of this change for the year ended December 31, 2001 was to decrease net investment income per unit by $0.010, increase net realized and unrealized gains and losses per unit by $0.010 and decrease the ratio of net investment income to average net assets by 0.05% Per unit, ratios, and supplemental data for periods prior to January 1, 2001 have not been restated to reflect this change in presentation. * Per unit data are based on the average number of units outstanding during each year. ** The per unit net asset value has been restated to a rounded third decimal place where previously the amount was truncated. + Excluding mortality and expense risk charges and distribution expense charges. ++ 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 account's net asset value and total return calculation include a non-recurring accrual recorded as a result of an administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund sales, as described in the Legal Proceedings and Transactions with Affiliates footnotes. The non-recurring accrual did not have a material impact on the net asset value per share based on the shares outstanding on the day the proceeds were recorded. & From time to time the variable account may receive proceeds from the settlement of a class action lawsuit, without which performance would be lower. See notes to financial statements. 48 NOTES TO FINANCIAL STATEMENTS (1) BUSINESS AND ORGANIZATION Capital Appreciation Variable Account, Global Governments Variable Account, Government Securities Variable Account, High Yield Variable Account, Managed Sectors Variable Account, Money Market Variable Account, and Total Return Variable Account (the variable account(s)) are separate accounts established by Sun Life Assurance Company of Canada (U.S.), the Sponsor, in connection with the issuance of Compass 2 and Compass 3 combination fixed/variable annuity contracts. Capital Appreciation Variable Account, Government Securities Variable Account, Money Market Variable Account, and Total Return Variable Account operate as open-end, diversified management investment companies, and Global Governments Variable Account, High Yield Variable Account, and Managed Sectors Variable Account operate as open-end, non-diversified management investment companies as those terms are defined in the Investment Company Act of 1940, as amended. (2) SIGNIFICANT ACCOUNTING POLICIES General - The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The High Yield Variable Account can invest up to 100% of its portfolio in high-yield securities rated below investment grade. Investments in high-yield securities involve greater degrees of credit and market risk than investments in higher-rated securities and tend to be more sensitive to economic conditions. The Capital Appreciation Variable Account, Global Governments Variable Account, High Yield Variable Account, 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. Investment Valuations - Equity securities in the variable accounts' portfolio for which market quotations are available are valued at the last sale or official closing price as reported by an independent pricing service on the primary market or exchange on which they are primarily traded, or at the last quoted bid price for securities in which there were no sales during the day. Equity securities traded over the counter are valued at the last sales price traded each day as reported by an independent pricing service, or to the extent there are no sales reported, such securities are valued on the basis of quotations obtained from brokers and dealers. Bonds and other fixed income securities (other than short-term obligations) in the variable accounts' portfolios are valued at an evaluated bid price as reported by an independent pricing service, or to the extent a valuation is not reported by a pricing service, such securities are valued on the basis of quotes from brokers and dealers. Prices obtained from pricing services utilize both dealer-supplied valuations and electronic data processing techniques which take into account appropriate factors such as institutional-size trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics and other market data without exclusive reliance upon quoted prices or exchange or over-the-counter prices, since such valuations are believed to reflect more accurately the fair value of such securities. Foreign currency options are valued by Massachusetts Financial Services Company (MFS) using an external pricing model approved by the Board of Managers that uses market data from an independent pricing source. Futures contracts are valued at the settlement price as reported by an independent pricing service on the primary exchange on which they are traded. Forward foreign currency contracts are valued using spot rates and forward points as reported by an independent pricing source. Short-term obligations with a remaining maturity in excess of 60 days will be valued upon dealer-supplied valuations. All other short-term obligations in the variable accounts' portfolios are valued at amortized cost, which constitutes market value as determined by the Board of Managers. Money market instruments are valued at amortized cost, which the Board of Managers 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. Investment valuations, other assets, and liabilities initially expressed in foreign currencies are converted each business day into U.S. dollars based upon current exchange rates. When pricing service information or market quotations are not readily available, securities are priced at fair value as determined under the direction of the Board of Managers. For example, significant events (such as movement in the U.S. securities market, or other regional and local developments) may occur between the time that foreign markets close (where the security is principally traded) and the time that the variable accounts 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 accounts may utilize information from an external vendor or other sources to adjust closing market quotations of foreign equity securities to reflect what it believes to be the fair value of the securities as of the variable accounts' valuation time. Because the frequency of significant events is not predictable, fair valuation of foreign equity securities may occur on a frequent basis. Repurchase Agreements - Certain variable accounts may enter into repurchase agreements with institutions that the variable accounts' investment adviser has determined are creditworthy. Each repurchase agreement is recorded at cost. The variable accounts require that the securities collateral in a repurchase transaction be transferred to the custodian in a manner sufficient to enable the variable accounts to obtain those securities in the event of a default under the repurchase agreement. The variable accounts monitor, on a daily basis, the value of the collateral to ensure that its value, including accrued interest, is greater than amounts owed to the variable accounts under each such repurchase agreement. The variable accounts, along with other affiliated entities of MFS, may utilize a joint trading account for the purpose of entering into one or more repurchase agreements. Foreign Currency Translation - Purchases and sales of foreign investments, income, and expenses are converted into U.S. dollars based continuedupon currency exchange rates prevailing on the respective dates of such transactions. Gains and losses attributable to foreign currency exchange rates on sales of securities are recorded for financial statement purposes as net realized gains and losses on investments. Gains and losses attributable to foreign exchange rate movements on income and expenses are recorded for financial statement purposes as foreign currency transaction gains and losses. That portion of both realized and unrealized gains and losses on investments that results from fluctuations in foreign currency exchange rates is not separately disclosed. Written Options - Certain variable accounts may write call or put options in exchange for a premium. The premium is initially recorded as a liability, which is subsequently adjusted to the current value of the option contract. When a written option expires, the variable accounts realize a gain equal to the amount of the premium received. When a written call option is exercised or closed, the premium received is offset against the proceeds to determine the realized gain or loss. 49 When a written put option is exercised, the premium reduces the cost basis of the security purchased by the variable account. The variable accounts, as writers of an option, may have no control over whether the underlying securities may be sold (call) or purchased (put) and, as a result, bears the market risk of an unfavorable change in the price of the securities underlying the written option. In general, written call options may serve as a partial hedge against decreases in value in the underlying securities to the extent of the premium received. Written options may also be used as part of an income producing strategy reflecting the view of the variable accounts' management on the direction of interest rates. 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 rates or securities prices. Investments in interest rate futures for purposes other than hedging may be made to modify the duration of the portfolio without incurring the additional transaction costs involved in buying and selling the underlying securities. Investments in equity index contracts or contracts on related options for purposes other than hedging, may be made when the variable account has cash on hand and wishes to participate in anticipated market appreciation while the cash is being invested. Should interest rates or securities prices move unexpectedly, the variable account may not achieve the anticipated benefits of the futures contracts and may realize a loss. Forward Foreign Currency Exchange Contracts - Certain variable accounts may enter into forward foreign currency exchange contracts for the purchase or sale of a specific foreign currency at a fixed price on a future date. Risks may arise upon entering into these contracts from the potential inability of counterparties to meet the terms of their contracts and from unanticipated movements in the value of a foreign currency relative to the U.S. dollar. The variable accounts may enter into forward foreign currency exchange contracts for hedging purposes as well as for non-hedging purposes. For hedging purposes, the variable accounts may enter into contracts to deliver or receive foreign currency it will receive from or require for its normal investment activities. The variable accounts may also use contracts in a manner intended to protect foreign currency-denominated securities from declines in value due to unfavorable exchange rate movements. For non-hedging purposes, the variable accounts may enter into contracts with the intent of changing the relative exposure of the variable accounts' portfolio of securities to different currencies to take advantage of anticipated changes. The forward foreign currency exchange contracts are adjusted by the daily exchange rate of the underlying currency and any gains or losses are recorded as unrealized until the contract settlement date. On contract settlement date, the gains or losses are recorded as realized gains or losses on foreign currency transactions. Dollar Roll Transactions - The Government Securities Variable Account may enter into dollar roll transactions, with respect to mortgage backed securities issued by Ginnie Mae, Fannie Mae, and Freddie Mac, in which the variable account sells mortgage backed securities to financial institutions and simultaneously agrees to repurchase substantially similar (same type, coupon, and maturity) securities at a later date at an agreed-upon price. During the period between the sale and repurchase in a dollar roll transaction the variable account will not be entitled to receive interest and principal payments on the securities sold but is compensated by interest earned on the proceeds of the initial sale and by a lower purchase price on the securities to be repurchased which enhances the variable accounts' total return. The variable account accounts for dollar roll transactions as purchases and sales. If certain criteria are met these dollar roll transactions may be considered a financing transaction whereby the difference in the sales price and the future purchase price is recorded as an adjustment to interest income. 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 U.S. generally accepted accounting principles. For the Money Market Variable Account, all premium and discount is amortized and accreted for financial statement purposes in accordance with generally accepted accounting principles and federal tax regulations, respectively. Dividends received in cash are recorded on the ex-dividend date. Dividend and interest payments received in additional securities are recorded on the ex-dividend or ex-interest date in an amount equal to the value of the security on such date. The following variable accounts were participants in a class-action lawsuit against Cendant Corporation. On March 26, 2003 these variable accounts received a partial cash settlement recorded as a realized gain on investment transactions. The partial proceeds from the non-recurring litigation settlement resulted in an increase in net asset value per unit based on the units outstanding on the day proceeds were received.
CAPITAL MANAGED APPRECIATION SECTORS VARIABLE VARIABLE ACCOUNT ACCOUNT ---------------------------------------------------------------------------------------------- Cash Settlement $ 6,006,689 $ 140,332 Increase in net asset value per unit Compass 2 Contracts $ 0.900 $ 0.083 Compass 3 Contracts $ 0.594 $ 0.081 Compass 3 -- Level 2 Contracts $ 0.247 $ 0.026
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%
50 The variable accounts may receive proceeds from the settlement of class action lawsuits involving its portfolio holdings. Any proceeds received are reflected in realized gain/loss in the statement of operations, or in unrealized gain/loss if the security is still held by the variable accounts. The Capital Appreciation Variable Account was a participant in a class action lawsuit against Cendant Corporation. On March 19, 2004, the variable account received a cash settlement in the amount of $622,626. Certain variable accounts may enter into "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%. The variable accounts hold, and maintain 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. Certain variable accounts may enter into "TBA" (to be announced) sale commitments to hedge its portfolio positions or to sell mortgage-backed securities it owns under delayed delivery arrangements. Proceeds of TBA sale commitments are not received until the contractual settlement date. During the time a TBA sale commitment is outstanding, equivalent deliverable securities, or an offsetting TBA purchase commitment deliverable on or before the sale commitment date, are held as "cover" for the transaction. Legal fees and other related expenses incurred to preserve and protect the value of a security owned are added to the cost of the security; other legal fees are expensed. Capital infusions made directly to the security issuer, which are generally non-recurring, incurred to protect or enhance the value of high-yield debt securities, are reported as additions to the cost basis of the security. Costs that are incurred to negotiate the terms or conditions of capital infusions or that are expected to result in a plan of reorganization are reported as realized losses. Ongoing costs incurred to protect or enhance an investment, or costs incurred to pursue other claims or legal actions, are expensed. Fees Paid Indirectly - The variable accounts' custody fees are reduced according to an arrangement that measures the value of cash deposited with the custodian by the variable accounts. During the year ended December 31, 2004, each variable accounts' custodian fee was reduced under this arrangement. The variable accounts have entered into a commission recapture agreement, under which certain brokers will credit the variable accounts a portion of the commissions generated, to offset certain expenses of the variable accounts. For the year ended December 31, 2004, the variable accounts' miscellaneous expenses 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) $ (127) $ (849) $ (1,946) $ -- $ (67) $ (353) Commission recapture credits (4,905) -- -- (14) (1,239) -- (1,065) ---------- ---------- ---------- ---------- --------- ---------- ----------
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 51 described above applicable to Compass 3 contracts) exceed 5% of the purchase payments made under a Compass 2 contract or 9% of the purchase payments made under a Compass 3 contract. (4) ANNUITY RESERVES Annuity reserves for contracts with annuity commencement dates prior to February 1, 1987 have been calculated using the 1971 Individual Annuitant Mortality Table. Annuity reserves for contracts with annuity commencement dates between February 1, 1987 and December 31, 1998 have been calculated using the 1983 Individual Annuitant Mortality Table. Annuity reserves for contracts with annuity commencement dates on or after January 1, 1999 have been calculated using the Annuity Mortality 2000 table. Annuity reserves for contracts in payment period are calculated using an assumed interest rate of 4%. Required adjustments are accomplished by transfers to or from the Sponsor. (5) TRANSACTIONS WITH AFFILIATES Investment Adviser - Each variable account has an investment advisory agreement with MFS to provide overall investment advisory and administrative services, and general office facilities. The management fee is computed daily and paid monthly at the following annual rate based on a percentage of each variable account's average daily net assets as follows:
ANNUAL RATE OF MANAGEMENT FEE ANNUAL RATE OF MANAGEMENT FEE BASED ON AVERAGE BASED ON AVERAGE DAILY NET ASSETS DAILY NET ASSETS NOT EXCEEDING $300 MILLION IN EXCESS OF $300 MILLION --------------------------------------------------------------------------------------------------------------------- Capital Appreciation Variable Account 0.75% 0.675% Global Governments Variable Account 0.75% 0.675% Government Securities Variable Account 0.55% 0.495% High Yield Variable Account 0.75% 0.675% Managed Sectors Variable Account 0.75% 0.675% Total Return Variable Account 0.75% 0.675%
The management fee for the Money Market Variable Account is 0.50% of the first $500 million of average daily net assets. The management fee is reduced to 0.45% of the average daily net assets in excess of $500 million. The agreement also provides that the Investment Adviser will pay certain variable account expenses in excess of 1.25% of the average daily net assets of each variable account for any calendar year. Each variable account pays compensation to its Independent Managers in the form of a retainer, attendance fees, and additional compensation to the Board chairperson and pays no compensation directly to its officers or members of the Board of Managers who are affiliated with the Investment Advisor or the Sponsor. Certain officers and Managers of the variable accounts are officers or directors of MFS, MFS Fund Distributors, Inc. (MFD), and MFS Service Center, Inc. (MFSC). These variable accounts and certain other MFS funds (the "funds") have entered into a services agreement (the "Agreement") which provides for payment of fees by the funds to Tarantino LLC in return for the provision of services of an Independent Chief Compliance Officer (ICCO) for the funds. The ICCO is an officer of the funds and the sole member of Tarantino LLC. MFS has agreed to provide office space and other administrative support and supplies to the ICCO. The funds can terminate the Agreement with Tarantino LLC at any time under the terms of the Agreement. The variable accounts' investment adviser, MFS, has been the subject of an administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund sales, as described in the Legal Proceedings Footnote. On July 28, 2004, certain variable accounts accrued an estimate of the amount to be received pursuant to this matter, which resulted in an increase in net asset value per unit based on the units outstanding on the day the proceeds were recorded.
CAPITAL MANAGED APPRECIATION SECTORS VARIABLE VARIABLE ACCOUNT ACCOUNT ---------------------------------------------------------------------------------------------- Cash Settlement $ 227,161 $ 63,230 Increase in net asset value per unit Compass 2 Contracts $ 0.039 $ 0.041 Compass 3 Contracts $ 0.026 $ 0.040 Compass 3 -- Level 2 Contracts $ 0.010 $ 0.013
Administrator - MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to certain funds for which MFS acts as investment adviser. Under an administrative services agreement between the variable accounts and MFS, MFS is entitled to partial reimbursement of the costs MFS incurs to provide these services, subject to review and approval by the Board of Managers. Each variable account is allocated a portion of these administrative costs based on its size and relative average net assets. Prior to April 1, 2004, the variable accounts paid MFS an administrative fee up to the following annual percentage rates of the variable accounts' average daily net assets: First $2 billion 0.0175% Next $2.5 billion 0.0130% Next $2.5 billion 0.0005% In excess of $7 billion 0.0000%
52 Effective April 1, 2004, the variable accounts paid MFS an administrative fee up to the following annual percentage rates of the variable accounts' average daily net assets: First $2 billion 0.01120% Next $2.5 billion 0.00832% Next $2.5 billion 0.00032% In excess of $7 billion 0.00000%
For the year ended December 31, 2004, the variable accounts paid MFS the following to partially reimburse MFS for the costs of providing administrative services.
CAPITAL GLOBAL GOVERNMENT HIGH MANAGED MONEY TOTAL APPRECIATION GOVERNMENTS SECURITIES YIELD SECTORS MARKET RETURN VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ------------------------------------------------------------------------------------------------------------------------------- Administrative fees $ 27,905 $ 1,194 $ 10,203 $ 7,542 $ 5,968 $ 4,508 $ 18,507 Percent of average daily net assets 0.00929% 0.00979% 0.00929% 0.00952% 0.00934% 0.00877% 0.00916% ---------- ---------- ---------- ---------- ---------- ---------- ----------
(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 $ 187,564,845 $ 226,745,034 Global Governments Variable Account 10,715,223 10,465,762 Government Securities Variable 1,763,346 628,531 High Yield Variable Account 62,283,305 86,841,079 Managed Sectors Variable Account 58,656,932 67,792,188 Total Return Variable Account 98,350,543 120,356,487
Purchases and sales of investments, other than purchased option transactions and short-term obligations, were as follows:
PURCHASES SALES ------------------------------------------------------------------------------------ Global Governments Variable Account $ 3,653,228 $ 4,679,787 Government Securities Variable Account 92,739,539 103,947,731 Total Return Variable Account 29,140,047 22,053,123
Purchases and sales of investments for Money Market Variable Account, which consist solely of short-term obligations, amounted to $2,027,279,409 and $2,009,234,000, respectively, excluding repurchase agreements. 53 (7) PARTICIPANT TRANSACTIONS The changes in net assets from changes in numbers of outstanding units were as follows:
YEAR ENDED DECEMBER 31, 2004 (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 38 $ 1,960 (30) $ (1,561) (504) $ (26,042) Compass 3 Contracts 72 2,460 (201) (6,881) (79) (2,675) Compass 3 -- Level 2 Contracts 190 2,700 393 5,601 (871) (12,376) ------------ ------------ ------------ $ 7,120 $ (2,841) $ (41,093) ============ ============ ============ Global Government Variable Account Compass 2 Contracts 2 $ 45 (16) $ (379) (19) $ (487) Compass 3 Contracts 5 130 (15) (380) (3) (78) Compass 3 -- Level 2 Contracts 14 200 11 155 (84) (1,212) ------------ ------------ ------------ $ 375 $ (604) $ (1,777) ============ ============ ============ Government Securities Variable Account Compass 2 Contracts 21 $ 777 (100) $ (3,640) (243) $ (8,929) Compass 3 Contracts 18 461 (44) (1,132) (21) (559) Compass 3 -- Level 2 Contracts 35 524 6 89 (226) (3,417) ------------ ------------ ------------ $ 1,762 $ (4,683) $ (12,905) ============ ============ ============ High Yield Variable Account Compass 2 Contracts 11 $ 378 (31) $ (1,003) (206) $ (7,129) Compass 3 Contracts 12 301 (48) (1,217) (12) (289) Compass 3 -- Level 2 Contracts 24 320 (1,507) (19,904) (177) (2,411) ------------ ------------ ------------ $ 999 $ (22,124) $ (9,829) ============ ============ ============ Managed Sectors Variable Account Compass 2 Contracts 5 $ 237 (5) $ (186) (64) $ (2,652) Compass 3 Contracts 24 982 (64) (2,603) (21) (848) Compass 3 -- Level 2 Contracts 105 1,388 160 2,136 (473) (6,235) ------------ ------------ ------------ $ 2,607 $ (653) $ (9,735) ============ ============ ============ Money Market Variable Account Compass 2 Contracts 13 $ 262 125 $ 2,531 (301) $ (6,058) Compass 3 Contracts 54 896 (78) (1,291) (34) (556) Compass 3 -- Level 2 Contracts 34 418 1,685 20,849 (356) (4,393) ------------ ------------ ------------ $ 1,576 $ 22,089 $ (11,007) ============ ============ ============ Total Return Variable Account Compass 2 Contracts 14 $ 590 54 $ 2,308 (245) $ (10,438) Compass 3 Contracts 52 2,180 (136) (5,641) (54) (2,231) Compass 3 -- Level 2 Contracts 139 2,811 379 7,650 (818) (16,482) ------------ ------------ ------------ $ 5,581 $ 4,317 $ (29,151) ============ ============ ============ YEAR ENDED DECEMBER 31, 2004 (000 OMITTED) -------------------------------------------------------------- NET NET NET ACCUMULATION ANNUITIZATION INCREASES ACTIVITY ACTIVITY (DECREASE) --------------------------- -------------- -------------- UNITS DOLLARS DOLLARS DOLLARS ------------ ------------ -------------- -------------- Capital Appreciation Variable Account Compass 2 Contracts (496) $ (25,643) $ (264) $ (25,907) Compass 3 Contracts (208) (7,096) 1 (7,095) Compass 3 -- Level 2 Contracts (288) (4,075) (33) (4,108) ------------ -------------- -------------- $ (36,814) $ (296) $ (37,110) ============ ============== ============== Global Government Variable Account Compass 2 Contracts (33) $ (821) $ (2) $ (823) Compass 3 Contracts (13) (328) (3) (331) Compass 3 -- Level 2 Contracts (59) (857) (1) (858) ------------ -------------- -------------- $ (2,006) $ (6) $ (2,012) ============ ============== ============== Government Securities Variable Account Compass 2 Contracts (322) $ (11,792) $ (382) $ (12,174) Compass 3 Contracts (47) (1,230) -- (1,230) Compass 3 -- Level 2 Contracts (185) (2,804) (31) (2,835) ------------ -------------- -------------- $ (15,826) $ (413) $ (16,239) ============ ============== ============== High Yield Variable Account Compass 2 Contracts (226) $ (7,754) $ (49) $ (7,803) Compass 3 Contracts (48) (1,205) (0)* (1,205) Compass 3 -- Level 2 Contracts (1,660) (21,995) 19 (21,976) ------------ -------------- -------------- $ (30,954) $ (30) $ (30,984) ============ ============== ============== Managed Sectors Variable Account Compass 2 Contracts (64) $ (2,601) $ (19) $ (2,620) Compass 3 Contracts (61) (2,469) (7) (2,476) Compass 3 -- Level 2 Contracts (208) (2,711) (13) (2,724) ------------ -------------- -------------- $ (7,781) $ (39) $ (7,820) ============ ============== ============== Money Market Variable Account Compass 2 Contracts (163) $ (3,265) $ 13 $ (3,252) Compass 3 Contracts (58) (951) (10) (961) Compass 3 -- Level 2 Contracts 1,363 16,874 (23) 16,851 ------------ -------------- -------------- $ 12,658 $ (20) $ 12,638 ============ ============== ============== Total Return Variable Account Compass 2 Contracts (177) $ (7,540) $ (149) $ (7,689) Compass 3 Contracts (138) (5,692) (88) (5,780) Compass 3 -- Level 2 Contracts (300) (6,021) (40) (6,061) ------------ -------------- -------------- $ (19,253) $ (277) $ (19,530) ============ ============== ==============
*Amount less than $500. 54
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 ------------ ------------ --------------- -------------- 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) -- (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) ============ ============== ==============
*Amount less than $500. (8) LINE OF CREDIT Each variable account and other affiliated funds participate in an $800 million unsecured line of credit provided by a syndication of banks under a line of credit agreement. Borrowings may be made for temporary financing needs. Interest is charged to each variable account, based on its borrowings, at a rate equal to the Federal Reserve funds rate plus 0.50%. In addition, a commitment fee, based on the average daily, unused portion of the line of credit, is allocated among the participating variable accounts at the end of each calendar quarter. The commitment fee allocated to each variable account for the year ended December 31, 2004 ranged from $102 and $2,390, and is included in miscellaneous expense. None of the variable accounts had significant borrowings during the year ended December 31, 2004. (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 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. 55 FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
NET UNREALIZED CONTRACTS TO CURRENCY CONTRACTS APPRECIATON SETTLEMENT DATE DELIVER/RECEIVE ABBREVIATIONS IN EXCHANGE FOR AT VALUE (DEPRECIATION) ----------------------------------------------------------------------------------------------------------------------------------- Global Governments Variable Account Sales 2/10/05 250,588 AUD $ 188,207 $ 195,149 $ (6,942) 1/12/05 301,352 CAD 251,271 251,078 193 2/14/05 1,916,862 DKK 333,078 349,198 (16,120) 1/19/05-2/14/05 1,918,930 EUR 2,508,531 2,599,821 (91,290) 1/12/05 254,547 GBP 468,367 487,456 (19,089) 1/5/05 285,296,384 JPY 2,753,603 2,776,895 (23,292) 1/3/05 357,117 NOK 58,778 58,686 92 2/10/05 842,247 NZD 590,811 602,006 (11,195) 2/14/05 242,007 SEK 35,012 36,359 (1,347) ----------- ----------- -------------- $ 7,187,658 $ 7,356,648 $ (168,990) =========== =========== ============== Purchases 2/10/05 110,808 AUD $ 84,403 $ 86,294 $ 1,891 1/12/05 71,779 CAD 60,000 59,804 (196) 2/15/05 75,031 CHF 65,380 65,893 513 1/26/05 1,490,431 CZK 63,157 66,489 3,332 2/14/05 2,287,430 DKK 403,295 416,705 13,410 1/19/05-2/14/05 960,086 EUR 1,265,818 1,300,869 35,051 1/12/05 42,000 GBP 80,037 80,430 393 1/5/05-3/4/05 536,077,411 JPY 5,132,391 5,228,519 96,128 1/3/05-2/14/05 714,234 NOK 117,052 117,413 361 1/26/05 169,120 PLN 52,558 55,834 3,276 2/14/05 1,367,911 SEK 204,586 205,515 929 ----------- ----------- -------------- $ 7,528,677 $ 7,683,765 $ 155,088 =========== =========== ============== High Yield Variable Account Sales 1/19/05-2/14/05 1,634,796 EUR $ 2,117,280 $ 2,215,072 $ (97,792) =========== =========== ============== Purchases 1/19/05-2/14/05 543,050 EUR $ 708,727 $ 735,699 $ 26,972 2/14/05 76,260 SEK 10,930 11,457 527 ----------- ----------- -------------- $ 719,657 $ 747,156 $ 27,499 =========== =========== ==============
At December 31, 2004, forward foreign currency purchases and sales under master netting agreements excluded above amounted to a net payable/receivable of $3,656 with Merrill Lynch International for the Global Governments Variable Account. See page 29 for an explanation of abbreviations used to indicate amounts show in currencies other than U.S. Dollar. At December 31, 2004, the variable accounts had sufficient cash and/or securities to cover any commitments under these contracts. FUTURES CONTRACTS
UNREALIZED APPRECIATION DESCRIPTION EXPIRATION CONTRACTS POSITION (DEPRECIATION) ---------------------------------------------------------------------------------------------------------------------------------- Government Securities Variable Account Eurodollar June 2005 8 Long $ (1,534) Eurodollar June 2006 8 Short 1,103 U.S. Treasury Notes -- 10 Year March 2005 33 Short (31,608) U.S. Treasury Notes -- 2 Year March 2005 24 Short (6,099) U.S. Treasury Notes -- 5 Year March 2005 14 Short (2,592) U.S. Treasury Bonds March 2005 12 Long (13,941) -------------- $ (54,671) ==============
At December 31, 2004, the variable account had sufficient cash and/or securities to cover any commitments under these contracts. (10) LEGAL PROCEEDINGS On March 31, 2004, MFS settled an administrative proceeding with the Securities and Exchange Commission ("SEC") regarding disclosure of brokerage allocation practices in connection with MFS fund sales (the term "MFS funds" means the open-end registered management investment companies sponsored by MFS). Under the terms of the settlement, in which MFS neither admitted nor denied any wrongdoing, MFS agreed to pay (one dollar) $1.00 in disgorgement and $50 million in penalty to certain MFS funds, pursuant to a plan developed by an independent distribution consultant. The brokerage allocation practices which were the subject of this proceeding were discontinued by MFS in November 2003. The agreement with the SEC is reflected in an order of the SEC. The SEC settlement order states that MFS failed to adequately disclose to the Boards of Trustees and to shareholders of the MFS funds the specifics of its preferred arrangements with certain brokerage firms selling MFS fund shares. The SEC settlement order states that MFS had in place policies designed to obtain best execution of all MFS fund trades. As part of the settlement, MFS retained an independent compliance consultant to review the completeness of its current policies and practices regarding disclosure to MFS fund trustees and to MFS fund shareholders of strategic alliances between MFS or its affiliates and broker-dealers and other financial intermediaries who support the sale of MFS fund shares. Pursuant to the SEC order, on July 28, 2004, MFS transferred these settlement amounts to the SEC, and those MFS funds entitled to these settlement amounts accrued an estimate of their pro rata portion of these amounts. The 56 final distribution plan was approved by the SEC on January 21, 2005. It is expected that this distribution will be made by the SEC to the affected MFS funds on or around February 14, 2005. In addition, in February, 2004, MFS reached agreement with the 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 MFS open-end retail fund ("MFS retail funds") prospectuses regarding market timing and related matters (the "February Settlements"). These regulators alleged that prospectus language for certain MFS retail funds was false and misleading because, although the prospectuses for those funds in the regulators' view indicated that they prohibited market timing, MFS did not limit trading activity in 11 domestic large cap stock, high grade bond and money market retail funds. MFS' former Chief Executive Officer and former President also reached agreement with the SEC in which they agreed to, among other terms, monetary fines and temporary suspensions from association with any investment adviser or registered investment company. These individuals have resigned their positions with, and will not be returning to, MFS and the MFS funds. Under the terms of the February Settlements, MFS and the executives neither admit nor deny wrongdoing. Under the terms of the February Settlements, a $225 million pool has been established for distribution to shareholders in certain MFS retail funds, which has been funded by MFS and of which $50 million is characterized as a penalty. This pool will be distributed in accordance with a methodology developed by an independent distribution consultant in consultation with MFS and the Board of Trustees of the MFS retail funds, and acceptable to the SEC. MFS has further agreed with NYAG to reduce its management fees in the aggregate amount of approximately $25 million annually over the next five years, and not to increase certain management fees during this period. MFS has also paid an administrative fine to NH in the amount of $1 million, which will be used for investor education purposes (NH retained $250,000 and $750,000 was contributed to the North American Securities Administrators Association's Investor Protection Trust). In addition, under the terms of the February Settlements, MFS is in the process of adopting certain governance changes and reviewing its policies and procedures. Since December 2003, MFS, MFS Fund Distributors, Inc., MFS Service Center, Inc., MFS Corporation Retirement Committee, Sun Life Financial Inc., various MFS funds, certain current and/or former Trustees of these MFS funds, and certain officers of MFS have been named as defendants in multiple lawsuits filed in federal and state courts. The lawsuits variously have been commenced as class actions or individual actions on behalf of investors who purchased, held or redeemed shares of the MFS funds during specified periods, as ERISA actions by participants in certain retirement plan accounts on behalf of those accounts, or as derivative actions on behalf of the MFS funds. The lawsuits relating to market timing and related matters have been transferred to, and consolidated before, the United States District Court for the District of Maryland, as part of a multi-district litigation of market timing and related claims involving several other fund complexes (IN RE MUTUAL FUNDS INVESTMENT LITIGATION (ALGER, COLUMBIA, JANUS, MFS, ONE GROUP, PUTNAM, ALLIANZ DRESDNER), No. 1:04-md-15863 (transfer began March 19, 2004)). The market timing cases related to the MFS complex are RIGGS V. MFS ET AL., CASE NO. 04-CV-01162-JFM (direct), HAMMERSLOUGH V. MFS ET AL., CASE NO. 04-MD-01620 (derivative) AND ANITA WALKER V. MFS ET AL., CASE NO. 1:04-CV-01758 (ERISA). The plaintiffs in these consolidated lawsuits generally seek injunctive relief including removal of the named Trustees, adviser and distributor, rescission of contracts and 12b-1 Plans, disgorgement of fees and profits, monetary damages, punitive damages, attorney's fees and costs and other equitable and declaratory relief. Four lawsuits alleging improper brokerage allocation practices and excessive compensation are pending in the United States District Court for the District of Massachusetts (FORSYTHE V. SUN LIFE FINANCIAL INC., ET AL., No. 04cv10584 (GAO) (March 25, 2004); EDDINGS V. SUN LIFE FINANCIAL INC., ET AL., No. 04cv10764 (GAO) (April 15, 2004); MARCUS DUMOND, ET AL. V. MASSACHUSETTS FINANCIAL SERVS. CO., ET AL., No. 04cv11458 (GAO) (May 4, 2004); and KOSLOW V. SUN LIFE FINANCIAL INC., ET AL., No. 04cv11019 (GAO) (May 20, 2004)). The plaintiffs in these lawsuits generally seek compensatory damages, punitive damages, recovery of fees, rescission of contracts, an accounting, restitution, declaratory relief, equitable and/or injunctive relief and attorney's fees and costs. The various lawsuits generally allege that some or all of the defendants (i) permitted or acquiesced in market timing and/or late trading in some of the MFS funds, inadequately disclosed MFS' internal policies concerning market timing and such matters, (ii) received excessive compensation as fiduciaries to the MFS funds, or (iii) permitted or acquiesced in the improper use of fund assets by MFS to support the distribution of MFS fund shares and inadequately disclosed MFS' use of fund assets in this manner. The actions assert that some or all of the defendants violated the federal securities laws, including the Securities Act of 1933 and the Securities Exchange Act of 1934, the Investment Company Act of 1940 and the Investment Advisers Act of 1940, the Employee Retirement Income Security Act of 1974, as well as fiduciary duties and other violations of common law. Insofar as any of the actions is appropriately brought derivatively on behalf of any of the MFS funds, any recovery will inure to the benefit of the MFS funds. The defendants are reviewing the allegations of the multiple complaints and will respond appropriately. Additional lawsuits based on similar allegations may be filed in the future. Any potential resolution of these matters may include, but not be limited to, judgments or settlements for damages against MFS, the MFS funds, or any other named defendant. As noted above, as part of the regulatory settlements, MFS has established a restitution pool in the amount of $225 million to compensate certain shareholders of certain MFS retail funds for damages that they allegedly sustained as a result of market timing or late trading in certain of the MFS retail funds, and transferred $50 million for distribution (which has been accrued to the affected funds and is expected to be distributed on or around February 14, 2005) to affected MFS funds to compensate those funds based upon the amount of brokerage commissions allocated in recognition of MFS fund sales. It is not clear whether these amounts will be sufficient to compensate shareholders for all of the damage they allegedly sustained, whether certain shareholders or putative class members may have additional claims to compensation, or whether the damages that may be awarded in any of the actions will exceed these amounts. In the event the MFS funds incur any losses, costs or expenses in connection with such lawsuits, the Boards of Trustees of the affected MFS funds may pursue claims on behalf of such funds against any party that may have liability to the funds in respect thereof. Review of these matters by the independent Trustees of the MFS funds and their counsel is continuing. There can be no assurance that these regulatory actions and lawsuits, or the adverse publicity associated with these developments, will not result in increased fund redemptions, reduced sales of fund shares, or other adverse consequences to the MFS FUNDS. 57 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE PARTICIPANTS IN AND THE BOARD OF MANAGERS OF CAPITAL APPRECIATION VARIABLE ACCOUNT, GLOBAL GOVERNMENTS VARIABLE ACCOUNT, GOVERNMENT SECURITIES VARIABLE ACCOUNT, HIGH YIELD VARIABLE ACCOUNT, 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: We have audited the accompanying statements of assets and liabilities, including the portfolios of investments of Capital Appreciation Variable Account, Global Governments Variable Account, Government Securities Variable Account, High Yield Variable Account, Managed Sectors Variable Account, Money Market Variable Account and Total Return Variable Account (the "Variable Accounts") as of December 31, 2004, and related statements of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Variable Accounts' management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Variable Accounts' internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2004, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Variable Accounts as of December 31, 2004, 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 24, 2005 58 COMPASS VARIABLE ACCOUNTS MEMBERS OF BOARDS OF MANAGERS AND OFFICERS -- IDENTIFICATION AND BACKGROUND The Members of the Boards of Managers ("Members") and the officers of each Account, as of February 1, 2005, are listed below, together with their principal occupations during the past five years. (Their titles may have varied during that period.) The address of each Member and officer is 500 Boylston Street, Boston, Massachusetts 02116.
POSITION(S) HELD MEMBER/OFFICER PRINCIPAL OCCUPATION DURING THE PAST NAME, DATE OF BIRTH WITH FUND SINCE(1) FIVE YEARS AND OTHER DIRECTORSHIPS(2) ---------------------------- -------------------- ----------------- ------------------------------------------------ INTERESTED MEMBERS C. James Prieur(3) Member July 1999 Sun Life Assurance Company of Canada, President (born 04/21/51) and Chief Operating Officer David D. Horn(3) Member April 1986 Private investor; Retired; Sun Life Assurance (born 06/07/41) Company of Canada, Former Senior Vice President and General Manager for the United States (until 1997) INDEPENDENT MEMBERS J. Kermit Birchfield Chairman May 1997 Consultant; Century Partners, Inc. (born 01/08/40) (investments), Managing Director; Displaytech, Inc. (manufacturer of liquid crystal display technology), Director Robert C. Bishop Member May 2001 AutoImmune Inc. (pharmaceutical product (born 01/13/43) development), Chairman, President and Chief Executive Officer; Caliper Life Sciences Corp. (laboratory analytical instruments), Director; Millipore Corporation (purification/filtration products), Director; Quintiles Transnational Corp. (contract services to the medical industry), Director Frederick H. Dulles Member May 2001 Ten State Street LLP (law firm), Partner; (born 03/12/42) McFadden, Pilkington & Ward LLP (solicitors and registered foreign lawyers), Partner (until June 2003); Jackson & Nash, LLP (law firm), Of Counsel (January 2000 to November 2000) Derwyn F. Phillips Member April 1986 Retired (born 08/31/30)
---------- (1) Date first appointed to serve as Member/Trustee/Officer of an MFS/Sun Life Product. Each Member has served continuously since appointment. (2) Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., "public companies"). (3) "Interested person" of Sun Life of Canada (U.S.), within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the Series. The address of Sun Life of Canada (U.S.) is One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481. (4) "Interested person" of MFS within the meaning of the 1940 Act. The address of MFS is 500 Boylston Street, Boston, Massachusetts 02116. 59
POSITION(S) HELD MEMBER/OFFICER PRINCIPAL OCCUPATION DURING THE PAST NAME, DATE OF BIRTH WITH FUND SINCE(1) FIVE YEARS AND OTHER DIRECTORSHIPS(2) ---------------------------- -------------------- ----------------- ------------------------------------------------ Ronald G. Steinhart Member May 2001 Private investor; Bank One, Texas N.A., Vice (born 06/15/40) 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 May 2001 Hawaii Small Business Development Center, Kaua'i (born 07/21/48) Center, Center Director (since March 2002); Displaytech, Inc. (manufacturer of liquid crystal display technology), Chairman and Chief Executive Officer (until March 2002) MEMBERS EMERITUS Garth Marston Member Emeritus Retired (born 04/28/26) Samuel Adams Member Emeritus Retired (born 10/19/25) OFFICERS Robert J. Manning(4) President February 2004 Massachusetts Financial Services Company, Chief (born 10/20/63) Executive Officer, President, Chief Investment Officer and Director James R. Bordewick, Jr.(4) Assistant February 1997 Massachusetts Financial Services Company, (born 03/06/59) Secretary and Senior Vice President and Associate General Assistant Clerk Counsel
---------- (1) Date first appointed to serve as Member/Trustee/Officer of an MFS/Sun Life Product. Each Trustee has served continuously since appointment. (2) Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., "public companies"). (3) "Interested person" of Sun Life of Canada (U.S.), within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the Series. The address of Sun Life of Canada (U.S.) is One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481. (4) "Interested person" of MFS within the meaning of the 1940 Act. The address of MFS is 500 Boylston Street, Boston, Massachusetts 02116. 60
POSITION(S) HELD MEMBER/OFFICER PRINCIPAL OCCUPATION DURING THE PAST NAME, DATE OF BIRTH WITH FUND SINCE(1) FIVE YEARS AND OTHER DIRECTORSHIPS(2) ---------------------------- -------------------- ----------------- ------------------------------------------------ Jeffrey N. Carp(4) Secretary and September 2004 Massachusetts Financial Services Company, (born 12/1/56) Clerk Executive Vice President, General Counsel and Secretary (since April 2004); Hale and Dorr LLP, Partner (law firm) (prior to April 2004) Stephanie A. DeSisto(4) Assistant May 2003 Massachusetts Financial Services Company, Vice (born 10/01/53) Treasurer President (since April 2003); Brown Brothers Harriman & Co., Senior Vice President (November 2002 to April 2003); ING Groep N.V./Aeltus Investment Management, Senior Vice President (prior to November 2002) James F. DesMarais(4) Assistant September 2004 Massachusetts Financial Services Company, (born 03/09/61) Secretary and Assistant General Counsel Assistant Clerk Richard M. Hisey(4) Treasurer August 2002 Massachusetts Financial Services Company, Senior (born 08/29/58) 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, Chief Financial Officer (prior to September 2000) Brian T. Hourihan(4) Assistant September 2004 Massachusetts Financial Services Company, Vice (born 11/11/64) Secretary and President, Senior Counsel and Assistant Assistant Clerk Secretary (since June 2004); Affiliated Managers Group, Inc., Chief Legal Officer/Centralized Compliance Program (January to April 2004); Fidelity Research & Management Company, Assistant General Counsel (prior to January 2004) Ellen Moynihan(4) Assistant May 2001 Massachusetts Financial Services Company, Vice (born 11/13/57) Treasurer President
---------- (1) Date first appointed to serve as Member/Trustee/Officer of an MFS/Sun Life Product. Each Member has served continuously since appointment. (2) Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., "public companies"). (3) "Interested person" of Sun Life of Canada (U.S.), within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the Series. The address of Sun Life of Canada (U.S.) is One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481. (4) "Interested person" of MFS within the meaning of the 1940 Act. The address of MFS is 500 Boylston Street, Boston, Massachusetts 02116. 61
POSITION(S) HELD MEMBER/OFFICER PRINCIPAL OCCUPATION DURING THE PAST NAME, DATE OF BIRTH WITH FUND SINCE(1) FIVE YEARS AND OTHER DIRECTORSHIPS(2) ---------------------------- -------------------- ----------------- ------------------------------------------------ Frank L. Tarantino Independent Chief September 2004 Tarantino LLC (provider of compliance services), (born 03/07/44) Compliance Officer Principal (since June 2004); CRA Business Strategies Group (consulting services), Executive Vice President (April 2003 to June 2004); David L. Babson & Co. (investment adviser), Managing Director, Chief Administrative Officer and Director (February 1997 to March 2003) James O. Yost(4) Assistant May 2001 Massachusetts Financial Services Company, Senior (born 06/12/60) Treasurer Vice President
---------- (1) Date first appointed to serve as Member/Trustee/Officer of an MFS/Sun Life Product. Each Member has served continuously since appointment. (2) Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., "public companies"). (3) "Interested person" of Sun Life of Canada (U.S.), within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the Series. The address of Sun Life of Canada (U.S.) is One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481. (4) "Interested person" of MFS within the meaning of the 1940 Act. The address of MFS is 500 Boylston Street, Boston, Massachusetts 02116. The Accounts do not hold annual meetings for the purpose of electing Members, and Members are not elected for fixed terms. Each Member and officer holds office until his or her successor is chosen and qualified, or until his or her earlier death, resignation, retirement or removal. All Members currently serve as Members of each Account and have served in that capacity since originally elected or appointed. All of the Members are also Trustees of the MFS/Sun Life Series Trust. The executive officers of the Compass Variable Accounts hold similar offices for the MFS/Sun Life Series Trust and other funds in the MFS fund complex. Each Member serves as a Trustee or Member of 36 Accounts/Series. The Statement of Additional Information contains further information about the Members and is available without charge upon request by calling 1-800-752-7215. 62 INVESTMENT ADVISER Massachusetts Financial Services Company 500 Boylston Street, Boston, MA 02116-3741 CUSTODIAN AND DIVIDEND DISBURSING AGENT State Street Bank and Trust Company 225 Franklin Street, Boston, MA 02110-2875 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Deloitte & Touche LLP 200 Berkeley Street, Boston, MA 02116 PROXY VOTING POLICIES AND INFORMATION A general description of the accounts' proxy voting policies and procedures is available without charge, upon request, by calling 1-800-225-2606, by visiting the About MFS section of mfs.com or by visiting the SEC's Web site at http://www.sec.gov. Information regarding how the accounts voted proxies relating to portfolio securities during the most recent twelve month period ended June 30 is available without charge by visiting the Proxy Voting section of mfs.com or by visiting the SEC's Web site at http://www.sec.gov. QUARTERLY PORTFOLIO DISCLOSURE The accounts will file a complete schedule of portfolio holdings with the Securities and Exchange Commission (the Commission) for the first and third quarters of each fiscal year on Form N-Q. The accounts' Form N-Q may be reviewed and copied at the: Public Reference Room Securities and Exchange Commission Washington, D.C. 20549-0102 Information on the operation of the Public Reference Room may be obtained by calling the Commission at 1 800 SEC-0330. The accounts' Form N-Q is available on the EDGAR database on the Commission's Internet website at http://www.sec.gov, and copies of this information may be obtained, upon payment of a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov or by writing the Public Reference Section at the above address. PORTFOLIO MANAGERS Margaret Adams William J. Adams John F. Addeo David A. Antonelli David M. Calabro James J. Calmas Kenneth J. Enright Steven R. Gorham Alan Langsner John D. Laupheimer, Jr. Gregory Locraft Kate Mead Constantinos Mokas Edward L. O'Dette Stephen Pesek Scott B. Richards Michael W. Roberge Matthew W. Ryan James T. Swanson Brooks Taylor Peter C. Vaream Terri A. Vittozzi (C) 2005 Sun Life Financial Distributors Inc. COUS-ANN-2/05 30M ITEM 2. CODE OF ETHICS. The Registrant has adopted a Code of Ethics pursuant to Section 406 of the Sarbanes-Oxley Act and as defined in Form N-CSR that applies to the Registrant's principal executive officer and principal financial and accounting officer. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. Messrs. J. Kermit Birchfield, Robert C. Bishop, Ronald G. Steinhart and Haviland Wright, members of the Audit Committee, have been determined by the Board of Managers in their reasonable business judgment to meet the definition of "audit committee financial expert" as such term is defined in Form N-CSR. In addition, Messrs. J. Kermit Birchfield, Robert C. Bishop, Ronald G. Steinhart and Haviland Wright are "independent" members of the Audit Committee as defined in Form N-CSR. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. ITEMS 4(a) THROUGH 4(d) AND 4(g): The Board of Managers has appointed Deloitte & Touche LLP ("Deloitte") to serve as independent accountants to the Registrant (the "Account"). The tables below set forth the audit fees billed to the Account as well as fees for non-audit services provided to the Account and/or to the Account's investment adviser, Massachusetts Financial Services Company ("MFS") and to various entities either controlling, controlled by, or under common control with MFS that provide ongoing services to the Account ("MFS Related Entities"). For the fiscal years ended December 31, 2004 and 2003, audit fees billed to the Account by Deloitte were as follows:
AUDIT FEES FEES BILLED BY DELOITTE: 2004 2003 --------- -------- Government Securities Variable $ 34,750 $ 37,100 Account TOTAL $ 34,750 $ 37,100
For the fiscal years ended December 31, 2004 and 2003, fees billed by Deloitte for audit-related, tax and other services provided to the Account and for audit-related, tax and other services provided to MFS and MFS Related Entities that relate directly to the operations and financial reporting of the Account were as follows:
AUDIT-RELATED FEES(1) TAX FEES(2) ALL OTHER FEES(3) FEES BILLED BY DELOITTE: 2004 2003 2004 2003 2004 2003 ------------ ------------ ------------ ------------ ------------ ------------ To Government Securities $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Variable Account To MFS and MFS Related 1,046,170 356,150 67,000 50,000 32,500 0 Entities of Government Securities Variable Account*
AGGREGATE FEES FOR NON-AUDIT SERVICES:
2004 2003 ------------ ------------ To Government Securities $ 1,539,720 $ 837,705 Variable Account, MFS and MFS Related Entities#
* This amount reflects the fees billed to MFS and MFS Related Entities for non-audit services relating directly to the operations and financial reporting of the Account (portions of which services also related to the operations and financial reporting of other variable accounts and funds within the MFS Funds complex). # This amount reflects the aggregate fees billed by Deloitte for non-audit services rendered to the Account and for non-audit services rendered to MFS and the MFS Related Entities. (1) The fees included under "Audit-Related Fees" are fees related to assurance and related services that are reasonably related to the performance of the audit or review of financial statements, but not reported under "Audit Fees," including accounting consultations, agreed-upon procedure reports, attestation reports, comfort letters and internal control reviews. (2) The fees included under "Tax Fees" are fees associated with tax compliance, tax advice and tax planning, including services relating to the filing or amendment of federal, state or local income tax returns, regulated investment company qualification reviews and tax distribution and analysis. (3) The fees included under "All Other Fees" are fees for products and services provided by Deloitte other than those reported under "Audit Fees," "Audit-Related Fees" and "Tax Fees." For periods prior to May 6, 2003, the amounts shown above under "Audit-Related Fees," "Tax Fees" and "All Other Fees" relate to permitted non-audit services that would have been subject to pre-approval if the Securities and Exchange Commission's rules relating to pre-approval of non-audit services had been in effect. 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: To the extent required by applicable law, pre-approval by the Audit Committee of the Board is needed for all audit and permissible non-audit services rendered to the Accounts and all permissible non-audit services rendered to MFS or MFS Related Entities if the services relate directly to the operations and financial reporting of the Registrant. Pre-approval is currently on an engagement-by-engagement basis. In the event pre-approval of such services is necessary between regular meetings of the Audit Committee and it is not practical to wait to seek pre-approval at the next regular meeting of the Audit Committee, pre-approval of such services may be referred to the Chair of the Audit Committee for approval; provided that the Chair may not pre-approve any individual engagement for such services exceeding $50,000 or multiple engagements for such services in the aggregate exceeding $100,000 between such regular meetings of the Audit Committee. Any engagement pre-approved by the Chair between regular meetings of the Audit Committee shall be presented for ratification by the entire Audit Committee at its next regularly scheduled meeting. ITEM 4(e)(2): None, or 0%, of the services relating to the Audit-Related Fees, Tax Fees and All Other Fees paid by the Account and MFS and MFS Related Entities relating directly to the operations and financial reporting of the Registrant disclosed above were approved by the audit committee pursuant to paragraphs (c)(7)(i)(C) of Rule 2-01 of Regulation S-X (which permits audit committee approval after the start of the engagement with respect to services other than audit review or attest services, if certain conditions are satisfied). ITEM 4(f): Not applicable. ITEM 4(h): The Registrant's Audit Committee has considered whether the provision by a Registrant's independent registered public accounting firm of non-audit services to MFS and MFS Related Entities that were not pre-approved by the Committee (because such services were provided prior to the effectiveness of SEC rules requiring pre-approval or because such services did not relate directly to the operations and financial reporting of the Registrant) was compatible with maintaining the independence of the independent registered public accounting firm as the Registrant's principal auditors. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable to the Registrant. ITEM 6. SCHEDULE OF INVESTMENTS A schedule of investments of the Registrant is included as part of the report to shareholders of such series under Item 1 of this Form N-CSR. ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable to the Registrant. ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable to the Registrant. ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. Not applicable to the Registrant. ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There were no material changes to the procedures by which shareholders may send recommendations to the Board for nominees to the Registrant's Board since the Registrant last provided disclosure as to such procedures in response to the requirements of Item 7(d)(2)(ii)(G) of Schedule 14A or this Item. ITEM 11. CONTROLS AND PROCEDURES. (a) Based upon their evaluation of the registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Act) 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 second fiscal quarter covered by the report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. ITEM 12. EXHIBITS. (a) File the exhibits listed below as part of this Form. Letter or number the exhibits in the sequence indicated. (1) Any code of ethics, or amendment thereto, that is the subject of the disclosure required by Item 2, to the extent that the registrant intends to satisfy the Item 2 requirements through filing of an exhibit: Code of Ethics attached hereto. (2) A separate certification for each principal executive officer and principal financial officer of the registrant as required by Rule 30a-2 under the Act (17 CFR 270.30a-2): Attached hereto. (b) If the report is filed under Section 13(a) or 15(d) of the Exchange Act, provide the certifications required by Rule 30a-2(b) under the Act (17 CFR 270.30a-2(b)), Rule 13a-14(b) or Rule 15d-14(b) under the Exchange Act (17 CFR 240.13a-14(b) or 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350) as an exhibit. A certification furnished pursuant to this paragraph will not be deemed "filed" for the purposes of Section 18 of the Exchange Act (15 U.S.C. 78r), or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference: Attached hereto. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) GOVERNMENT SECURITIES VARIABLE ACCOUNT ---------------------------------------------------- By (Signature and Title)* /s/ ROBERT J. MANNING --------------------------------------------------------------- Robert J. Manning, President Date: February 24, 2005 -----------------
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)* /s/ ROBERT J. MANNING --------------------------------------------------------------- Robert J. Manning, President (Principal Executive Officer) Date: February 24, 2005 ----------------- By (Signature and Title)* /s/ RICHARD M. HISEY --------------------------------------------------------------- Richard M. Hisey, Treasurer (Principal Financial Officer and Accounting Officer) Date: February 24, 2005 -----------------
* Print name and title of each signing officer under his or her signature.