UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF
REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-3561
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CAPITAL APPRECIATION VARIABLE ACCOUNT
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(Exact name of registrant as specified in charter)
500 Boylston Street, Boston, Massachusetts 02116
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(Address of principal executive offices) (Zip code)
Susan S. Newton
Massachusetts Financial Services Company
500 Boylston Street
Boston, Massachusetts 02116
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(Name and address of agents for service)
Registrant's telephone number, including area code: (617) 954-5000
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Date of fiscal year end: December 31
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Date of reporting period: December 31, 2006
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ITEM 1. REPORTS TO STOCKHOLDERS.
COMPASS [Graphic Omitted]
PROFESSIONALLY MANAGED COMBINATION
FIXED/VARIABLE ANNUITIES
FOR PERSONAL INVESTMENTS AND
QUALIFIED RETIREMENT PLANS
ANNUAL REPORT o DECEMBER 31, 2006
Capital Appreciation Variable Account
Global Governments Variable Account
Government Securities Variable Account
High Yield Variable Account
Money Market Variable Account
Total Return Variable Account
Issued by
Sun Life Assurance Company of Canada (U.S.),
A Wholly Owned Subsidiary of
Sun Life of Canada (U.S.) Holdings, Inc.
TABLE OF CONTENTS
Letter from the CEO of MFS ................................................ 1
Management Reviews ........................................................ 1
Performance Summary ....................................................... 4
Portfolio Composition ..................................................... 5
Portfolio of Investments .................................................. 11
Financial Statements ...................................................... 31
Notes to Financial Statements ............................................. 48
Report of Independent Registered Public Accounting Firm ................... 55
Managers and Officers ..................................................... 56
Board Review of Investment Advisory Agreements ............................ 60
MFS(R) PRIVACY NOTICE ..................................................... 63
Proxy Voting Policies and Information ............................. Back Cover
Quarterly Portfolio Disclosure .................................... Back Cover
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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.
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NOT FDIC INSURED MAY LOSE VALUE NO BANK OR CREDIT UNION GUARANTEE
NOT A DEPOSIT NOT INSURED BY ANY FEDEAL GOVERNMENT AGENCY OR NCUA/NCUSIF
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LETTER FROM THE CEO OF MFS
DEAR CONTRACT OWNERS:
The year 2006 proved to be a very good one for many of the world's financial
markets. The U.S. stock market, as one notable example, posted strong gains as
the Dow Jones Industrial Average hit record highs and the Standard & Poor's
500 Stock Index rose to levels not seen since 2000.
While investors were undoubtedly encouraged by these positive developments, we
think it is important to maintain the proper perspective on what appears to be
happening with the world's financial markets. Around the globe, economies seem
to have reached a state of equilibrium. Both stock and bond markets have
simply been less volatile than they were in years past. While there are many
factors behind the low levels of volatility, one of the key reasons is that
the U.S. Federal Reserve Board and other central banks around the world seem
to have found the right formula for simultaneously promoting economic growth
and keeping inflation under control.
This new, calmer state of affairs is no doubt welcomed by many investors, but
with less volatility, the possibilities for earning exceptional returns also
diminish. Investors may have to lower their expectations about what are
reasonable returns from the markets. Those still looking for the types of
returns they had been accustomed to in the past may have to work much harder to
seek out those opportunities and perhaps also accept more risk than they
customarily did. In any market climate, even in a relatively benign one, we
think investors are still best served by spreading their holdings across a
variety of investments that will give them exposure to a range of market
opportunities and varying levels of risk.
Respectfully,
/s/ Robert J. Manning
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management(R)
February 15, 2007
The opinions expressed in this letter are subject to change, may not be relied
upon for investment advice, and no forecasts can be guaranteed.
MANAGEMENT REVIEWS
The following management reviews, for the twelve months ended December 31,
2006, exclude the Money Market Variable Account.
CAPITAL APPRECIATION VARIABLE ACCOUNT
SUMMARY OF RESULTS
For the twelve months ended December 31, 2006, Compass 2 provided a total
return of 4.79%, Compass 3 provided a total return of 4.69%, and Compass 3 -
Level 2 provided a total return of 4.84%. These returns, which include the
reinvestment of any dividends and capital gains distributions, compare with a
return of 9.07% over the same period for the account's benchmark, the Russell
1000 Growth Index.
DETRACTORS FROM PERFORMANCE
Our overweighted position in the technology sector held back performance
relative to the benchmark. Technology stocks that detracted from results
included networking chip maker Marvell Technology Group(c), data storage
systems provider EMC Corp., flash memory products maker SanDisk, and producer
of thin-film transistor liquid crystal displays (TFT-LCDs) LG Philips(c)(g).
The sources of underperformance at Marvell included a dilutive acquisition, a
stock options backdating investigation, and disappointing second and third
quarter results. EMC's stock suffered after the company lowered earnings
guidance.
Stock selection in the retailing and leisure sectors dampened relative results
over the reporting period. In the leisure sector, cruise operator Carnival
Cruise Line(c)(g) hindered relative returns. Within the retailing sector,
specialty apparel retailer Chico's and home products retailer Williams-Sonoma
were among the portfolio's top detractors. Chico's shares came under pressure
following tepid same store sales results and weaker-than-expected financial
guidance.
Our underweighted position in the industrial goods and services sector and
stock selection in the financial services sector also hurt, although no
individual stocks within either of these sectors were among the top
detractors.
Individual securities in the health care sector that had a negative impact on
relative performance included cardiovascular medical devices manufacturer St.
Jude Medical, medical device maker Advanced Medical Optics, and biotechnology
firm Genzyme. Shares of Genzyme declined after the company missed their first
quarter earnings target and reported slightly lower sales of their drugs,
Fabrazyme and Synvisc. Higher operating expenses also held back the stock's
performance.
CONTRIBUTORS TO PERFORMANCE
Stock selection in the basic materials sector aided relative returns, although
no individual stocks within this sector were among the portfolio's top
contributors.
Several names within the leisure and retailing sectors helped overall
relative performance. These included casino resorts operator Las Vegas Sands,
slot machine maker International Game Technology, and discount department
store Kohl's(g). Shares of Kohl's gained from strong results for the second
quarter, with earnings well above guidance. In addition, the company's margins
continued to improve from inventory management initiatives implemented in the
last few years.
Elsewhere, biotechnology firm Gilead Sciences(g), software giant Oracle,
billing software company Amdocs Ltd.(c), biotechnology company Celgene, and
network equipment company Cisco Systems were strong contributors over the
period. Cisco's shares rose as the company reported strong earnings. In the
latter half of the period, the company gave better-than-expected fiscal second
quarter guidance and reiterated their confidence that the company's full year
earnings would be at the high end of their projected range. Our positioning in
wireless communications software company QUALCOMM and underweighted position
in General Electric stock also helped.
GLOBAL GOVERNMENTS VARIABLE ACCOUNT
SUMMARY OF RESULTS
For the twelve months ended December 31, 2006, Compass 2 provided a total
return of 3.49%; Compass 3 provided a total return of 3.34%; and Compass 3 -
Level 2 provided a total return of 3.49%. These returns, which include the
reinvestment of any dividends and capital gains distributions, compare with a
return of 5.94% over the same period for the account's benchmark, the JPMorgan
Global Government Bond Index.
DETRACTORS FROM PERFORMANCE
Although yield was a factor that negatively affected the portfolio's relative
performance, this was more than offset by the benefit from the portfolio's
short bond position in Japan. The portfolio's positioning in bonds from the
United Kingdom and New Zealand also held back results.
CONTRIBUTORS TO PERFORMANCE
The portfolio's short duration(d) stance contributed to performance during the
period. Our underweighted position in U.S. dollars and overweighted position
in the Euro also helped. Sector and security selection in U.S. and EMU
(European Monetary Unit) bonds contributed to results, as did our emerging
markets exposure.
GOVERNMENT SECURITIES VARIABLE ACCOUNT
SUMMARY OF RESULTS
For the twelve months ended December 31, 2006, Compass 2 provided a total
return of 2.50%, Compass 3 provided a total return of 2.40%, and Compass 3 -
Level 2 provided a total return of 2.55%. These returns, which include the
reinvestment of any dividends and capital gains distributions, compare with a
return of 4.35% over the same period for the account's benchmark, the Lehman
Brothers U.S. Government/Mortgage Bond Index.
DETRACTORS FROM PERFORMANCE
Relative to the benchmark, the portfolio's positioning in Israeli government
debt held back performance. Within the agency sector, a Tennessee Valley
Authority (TVA) bond, which underperformed the agency sector as a whole, was
among the top detractors.
CONTRIBUTORS TO PERFORMANCE
The portfolio's overweighted position in agency securities contributed to
relative performance as the sector outperformed the overall benchmark over the
reporting period. Holdings of mortgage-backed securities also helped.
HIGH YIELD VARIABLE ACCOUNT
SUMMARY OF RESULTS
For the twelve months ended December 31, 2006, the Compass 2 provided a total
return of 9.04%, Compass 3 provided a total return of 8.94%, and Compass 3 -
Level 2 provided a total return of 9.10%. These returns, which include the
reinvestment of any dividends and capital gains distributions, compare with a
return of 11.87% over the same period for the account's benchmark, Lehman
Brothers U.S. High-Yield Corporate Bond Index.
DETRACTORS FROM PERFORMANCE
Yield was a negative factor in performance relative to the Lehman Brothers
U.S. High-Yield Corporate Bond Index. The portfolio's relative exposure to
"BB" rated(s) bonds also hurt.
Holdings of hospital operator HCA and gaming company Station Casinos were
among the portfolio's largest detractors.
CONTRIBUTORS TO PERFORMANCE
Our positioning in "B" rated securities helped relative performance over the
reporting period.
Individual contributors that helped relative results included broadband
communications company CCH Holdings, financing company General Motors
Acceptance Corp. (GMAC), and packaging company Smurfit Kappa(g).
TOTAL RETURN VARIABLE ACCOUNT
SUMMARY OF RESULTS
For the twelve months ended December 31, 2006, the Compass 2 provided a total
return of 10.58%, Compass 3 provided a total return of 10.42%, and Compass 3 -
Level 2 provided a total return of 10.58%. These returns, which include the
reinvestment of any dividends and capital gains distributions, compare with a
return of 15.79% over the same period for the account's benchmark, the Standard
& Poor's 500 Stock Index (S&P 500 Index). The account's other benchmark, the
Lehman Brothers U.S. Aggregate Bond Index (Lehman Index), provided a total
return of 4.33%.
DETRACTORS FROM PERFORMANCE
Within the equity portion of the portfolio, stock selection in the basic
materials and energy sectors detracted from performance relative to the S&P
500 Index. In basic materials, packaging manufacturer Owens-Illinois(c) and
newsprint maker Bowater(c) were among the portfolio's top detractors. The
profitability of both companies was negatively affected by higher energy
prices. Additionally, Bowater faced weaker demand for newsprint. In energy,
our underweighted position in integrated oil and gas company Exxon Mobil held
back relative returns.
Elsewhere, telecommunications equipment manufacturer Nortel Networks(c),
wireless service provider Sprint Nextel, insurance company Conseco(c), and
home improvement products maker Masco dampened results. We believe Nortel's
delay in filing the 2005 annual reports and restatement of certain prior
period results, along with weaker-than-expected fundamentals and management's
inability to turn around the business, contributed to the decline of the
company's stock price. Shares of Sprint Nextel struggled after the company
lowered its wireless subscriber guidance for 2006.
Not holding communications service provider BellSouth also detracted from
relative returns as this stock outperformed the S&P 500 Index.
The cash position in the equity portion of the portfolio was also a detractor
from relative performance. The portfolio holds cash to buy new holdings and to
provide liquidity. In a period when equity markets rose, as measured by the
portfolio's benchmark, holding cash hurt performance versus the benchmark, which
has no cash position.
Within the fixed income portion of the portfolio, several Treasury securities
and long-maturity corporate issues held back returns relative to the Lehman
Index.
CONTRIBUTORS TO PERFORMANCE
Within the equity portion of the portfolio, the health care, financial
services, and retailing sectors were the principal contributors to performance
relative to the S&P 500 Index.
Stock selection was the primary factor in the strong relative performance in
the health care sector. This was supported by our decision to underweight this
otherwise weak-performing sector. Pharmaceutical company Merck was among the
portfolio's top contributors. Merck rebounded after struggling with the recall
of its pain medication Vioxx. Shares of Merck also benefited from the company's
cost cutting efforts and solid growth in several key products. Our
underweighting of benchmark constituent UnitedHealth Group also helped as this
stock's performance trailed that of the benchmark.
The strong showing in the financial services and retailing sectors also
resulted from security selection. Within the financial services sector, PNC
Financial Services Group was the top relative contributor. In the retailing
sector, office products retailer OfficeMax was the largest contributor to
relative returns.
In other sectors, defense contractor Lockheed Martin was a strong performer as
shares gained on strong revenue growth, improved margins, and key contract
awards over the period. Other individual stocks that contributed to results
included electric utility company FPL Group, telecommunications services
provider Verizon Communications, and agricultural equipment manufacturer Deere &
Co. Underweighting or avoiding several poor-performing benchmark constituents,
such as semiconductor company Intel and online information portal Yahoo!,
further strengthened relative performance.
Within the fixed income portion of the portfolio, our overweighted positions in
"BBB" rated(s) securities and our limited exposure to "BB" rated bonds added to
performance relative to the Lehman Index (the Lehman Index does not include
bonds rated lower than "BBB"). While we do not generally position the portfolio
for changes in interest rates, the portfolio's short duration(d) stance boosted
results as interest rates rose over the reporting period. The portfolio's yield
advantage and mortgage convexity positioning (exposure to interest rate
volatility) were also positive factors in relative returns.
The views expressed in this report are those of the portfolio managers only
through the end of the period of the report as stated on the cover and do not
necessarily reflect the views of MFS or any other person in the MFS
organization. These views are subject to change at any time based on market
and other conditions, and MFS disclaims any responsibility to update such
views. These views may not be relied upon as investment advice or an
indication of trading intent on behalf of any MFS portfolio. References to
specific securities are not recommendations of such securities, and may not be
representative of any MFS portfolio's current or future investments.
(c) Security is not a benchmark constituent.
(d) Duration is a measure of how much a bond's price is likely to fluctuate with
general changes in interest rates, e.g., if rates rise 1.00%, a bond with a
5-year duration is likely to lose about 5.00% of its value.
(g) Security was not held in the portfolio at period end.
(s) Bonds rated "BBB", "Baa", or higher are considered investment grade; bonds
rated "BB", "Ba", or below are considered non-investment grade. The primary
source for bond quality ratings is Moody's Investors Service. If not
available, ratings by Standard & Poor's are used, else ratings by Fitch,
Inc. For securities which are not rated by any of the three agencies, the
security is considered Not Rated.
INDEX DEFINITIONS
JPMORGAN GLOBAL GOVERNMENT BOND INDEX - measures developed government bond
markets around the world.
LEHMAN BROTHERS U.S. AGGREGATE BOND INDEX - measures the U.S. investment
grade, fixed rate bond market, with index components for government and
corporate securities, mortgage pass-through securities, and asset-backed
securities.
LEHMAN BROTHERS U.S. GOVERNMENT/MORTGAGE BOND INDEX - measures debt issued by
the U.S. Government as well as mortgage-backed pass-through securities of
Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC).
LEHMAN BROTHERS U.S. HIGH-YIELD CORPORATE BOND INDEX - measures the universe of
non-investment grade, fixed rate debt. Eurobonds, and debt issues from countries
designated as emerging markets (e.g., Argentina, Brazil, Venezuela, etc.) are
excluded.
RUSSELL 1000 GROWTH INDEX - constructed to provide a comprehensive barometer
for growth securities in the large-cap segment of the U.S. equity universe.
Companies in this index generally have higher price-to-book ratios and higher
forecasted growth values.
STANDARD & POOR'S 500 STOCK INDEX - a capitalization-weighted index of 500
widely held equity securities, designed to measure broad U.S. equity
performance.
It is not possible to invest directly in an index.
PERFORMANCE SUMMARY
THESE PERFORMANCE RESULTS REFLECT THE MORTALITY AND EXPENSE RISKS CHARGES BUT
DO NOT REFLECT THE DEDUCTION OF SURRENDER CHARGES OR ANY OTHER APPLICABLE
CONTRACT FEES. IF SURRENDER CHARGES AND ALL OTHER CONTRACT FEES WERE INCLUDED,
THE RESULTS WOULD BE LOWER.
YEAR END PERFORMANCE THROUGH DECEMBER 31, 2006
Compass 3 -
Compass 2 Compass 3 Level 2
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Capital Appreciation
Variable Account 4.79% 4.69% 4.84%
Global Governments Variable
Account 3.49% 3.34% 3.49%
Government Securities
Variable Account 2.50% 2.40% 2.55%
High Yield Variable Account 9.04% 8.94% 9.10%
Money Market
Variable Account 3.19% 3.09% 3.24%
Total Return
Variable Account 10.58% 10.42% 10.58%
BEFORE INVESTING, YOU SHOULD CONSIDER CAREFULLY THE INVESTMENT OBJECTIVES,
RISKS, AND CHARGES AND EXPENSES OF EACH INVESTMENT OPTION. ALL OF THIS
INFORMATION IS EXPLAINED IN THE PROSPECTUS FOR EACH OF THE VARIABLE ACCOUNTS.
YOU SHOULD READ THE PROSPECTUS CAREFULLY BEFORE INVESTING. PERFORMANCE DATA
SHOWN REPRESENTS PAST PERFORMANCE AND IS NO GUARANTEE OF FUTURE RESULTS.
INVESTMENT RETURN AND PRINCIPAL VALUE FLUCTUATE SO YOUR UNITS, WHEN SOLD, MAY
BE WORTH MORE OR LESS THAN THE ORIGINAL COST; CURRENT PERFORMANCE MAY BE LOWER
OR HIGHER THAN QUOTED. FOR MOST RECENT MONTH-END PERFORMANCE, PLEASE VISIT
SUNLIFE-USA.COM. THE PERFORMANCE SHOWN DOES NOT REFLECT THE DEDUCTION OF
TAXES, IF ANY, THAT A CONTRACT HOLDER WOULD PAY ON DISTRIBUTIONS OR REDEMPTION
OF CONTRACT UNITS.
Performance results reflect any applicable expense subsidies and waivers in
effect during the periods shown. Without such subsidies and waivers the
accounts' performance results would be less favorable. Please see the
prospectus and financial statements for complete details. All results are
historical and assume the reinvestment of dividends and capital gains.
Money Market Variable Account performance results reflect any applicable
expense subsidies, waivers and adjustments in effect during the periods shown.
Subsidies and fee waivers may be imposed to enhance a portfolio's yield during
periods when the portfolio's operating expenses have a significant impact on
the portfolio's yield due to lower interest rates. Without such subsidies,
waivers and adjustments, the results would have been less favorable. See the
prospectus for details. All results are historical and assume the reinvestment
of dividends and capital gains.
From time to time the variable accounts may receive proceeds from litigation
settlements, without which performance would
be lower.
See notes to financial statements.
PORTFOLIO COMPOSITION -- CAPITAL APPRECIATION VARIABLE ACCOUNT
PORTFOLIO STRUCTURE
Common Stock 98.8%
Cash & Other Net Assets 1.2%
TOP TEN HOLDINGS
Cisco Systems, Inc. 3.8%
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General Electric Co. 3.2%
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Intel Corp. 2.7%
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Johnson & Johnson 2.3%
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Adobe Systems, Inc. 2.2%
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Microsoft Corp. 2.1%
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Proctor & Gamble Co. 2.0%
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Medtronic, Inc. 2.0%
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Google, Inc., "A" 2.0%
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Amdocs Ltd. 1.8%
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COMMON STOCK SECTORS
Technology 23.5%
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Health Care 19.9%
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Industrial Goods & Services 9.5%
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Retailing 9.1%
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Financial Services 8.9%
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Special Products & Services 6.8%
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Consumer Staples 6.0%
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Leisure 5.5%
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Energy 3.8%
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Transportation 2.6%
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Basic Materials 1.5%
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Utilities & Communications 1.0%
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Autos & Housing 0.7%
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Percentages are based on net assets as of 12/31/06.
The portfolio is actively managed and current holdings may be different.
PORTFOLIO COMPOSITION -- GLOBAL GOVERNMENTS VARIABLE ACCOUNT
PORTFOLIO STRUCTURE (i)
Bonds 94.0%
Cash & Other Net Assets 6.0%
FIXED INCOME SECTORS (i)
Non-U.S. Government Bonds 63.7%
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U.S. Treasury Securities 11.0%
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Commercial Mortgage-Backed Securities 8.7%
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U.S. Government Agencies 6.2%
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Emerging Market Bonds 4.1%
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Mortgage-Backed Securities 0.3%
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CREDIT QUALITY OF BONDS (r)
AAA 76.9%
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AA 14.8%
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A 3.9%
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BBB 4.4%
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PORTFOLIO FACTS
Average Duration (d) 6.0
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Average Life (m) 8.9 yrs.
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Average Maturity (m) 11.2 yrs.
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Average Credit Quality of Rated Securities (long-term) (a) AA+
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Average Credit Quality of Rated Securities (short-term) (a) A-1
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COUNTRY WEIGHTINGS (i)
United States 31.9%
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Germany 18.4%
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Japan 13.8%
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Canada 9.1%
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United Kingdom 9.0%
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France 3.4%
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Spain 1.8%
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Finland 1.8%
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Malaysia 1.4%
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Other Countries 9.4%
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(a) The average credit quality of rated securities is based upon a market
weighted average of portfolio holdings that are rated by public rating
agencies.
(d) Duration is a measure of how much a bond's price is likely to fluctuate with
general changes in interest rates, e.g., if rates rise 1.00%, a bond with a
5-year duration is likely to lose about 5.00% of its value.
(i) For purposes of this graphical presentation, the bond component includes
both accrued interest amounts and the equivalent exposure from any
derivative holdings, if applicable.
(m) The average maturity shown is calculated using the final stated maturity on
the portfolio's holdings without taking into account any holdings which have
been pre-refunded or pre-paid to an earlier date or which have a mandatory
put date prior to the stated maturity. The average life shown takes into
account these earlier dates.
(r) Each security is assigned a rating from Moody's Investors Service. If not
rated by Moody's, the rating will be that assigned by Standard & Poor's.
Likewise, if not assigned a rating by Standard & Poor's, it will be based on
the rating assigned by Fitch, Inc. For those portfolios that hold a security
which is not rated by any of the three agencies, the security is considered
Not Rated. Holdings in U.S. Treasuries and government agency mortgage-backed
securities, if any, are included in the "AAA"-rating category. Percentages
are based on the total market value of investments as of 12/31/06.
Percentages are based on net assets as of 12/31/06, unless otherwise noted.
The portfolio is actively managed and current holdings may be different.
PORTFOLIO COMPOSITION -- GOVERNMENT SECURITIES VARIABLE ACCOUNT
PORTFOLIO STRUCTURE (i)
Bonds 96.8%
Cash & Other Net Assets 3.2%
FIXED INCOME SECTORS (i)
Mortgage-Backed Securities 54.6%
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U.S. Government Agencies 39.0%
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U.S. Treasury Securities 3.2%
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CREDIT QUALITY OF BONDS (r)
AAA 100.0%
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PORTFOLIO FACTS
Average Duration (d) 4.2
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Average Life (m) 7.5 yrs.
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Average Maturity (m) 16.1 yrs.
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Average Credit Quality of Rated Securities (long-term) (a) AAA
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Average Credit Quality of Rated Securities (short-term) (a) A-1
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(a) The average credit quality of rated securities is based upon a market
weighted average of portfolio holdings that are rated by public rating
agencies.
(d) Duration is a measure of how much a bond's price is likely to fluctuate with
general changes in interest rates, e.g., if rates rise 1.00%, a bond with a
5-year duration is likely to lose about 5.00% of its value.
(i) For purposes of this graphical presentation, the bond component includes
both accrued interest amounts and the equivalent exposure from any
derivative holdings, if applicable.
(m) The average maturity shown is calculated using the final stated maturity on
the portfolio's holdings without taking into account any holdings which have
been pre-refunded or pre-paid to an earlier date or which have a mandatory
put date prior to the stated maturity. The average life shown takes into
account these earlier dates.
(r) Each security is assigned a rating from Moody's Investors Service. If not
rated by Moody's, the rating will be that assigned by Standard & Poor's.
Likewise, if not assigned a rating by Standard & Poor's, it will be based on
the rating assigned by Fitch, Inc. For those portfolios that hold a security
which is not rated by any of the three agencies, the security is considered
Not Rated. Holdings in U.S. Treasuries and government agency mortgage-backed
securities, if any, are included in the "AAA"-rating category. Percentages
are based on the total market value of investments as of 12/31/06.
Percentages are based on net assets as of 12/31/06, unless otherwise noted.
The portfolio is actively managed and current holdings may be different.
PORTFOLIO COMPOSITION -- HIGH YIELD VARIABLE ACCOUNT
PORTFOLIO STRUCTURE (i)
Bonds 90.7%
Floating Rate Loans 6.6%
Common Stocks 1.3%
Common Bonds 0.4%
Convertible Preferred Stocks 0.1%
Preferred Stocks 0.1%
Cash & Other Net Assets 0.8%
TOP FIVE INDUSTRIES (i)
Medical & Health Technology & Services 7.8%
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Automotive 7.4%
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Gaming & Lodging 7.0%
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Printing & Publishing 5.2%
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Broadcasting 4.9%
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CREDIT QUALITY OF BONDS (r)
AAA 2.1%
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A 0.3%
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BBB 2.7%
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BB 24.9%
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B 52.7%
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CCC 15.9%
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Not Rated 1.4%
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PORTFOLIO FACTS
Average Duration (d) 4.2
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Average Life (m) 7.9 yrs.
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Average Maturity (m) 8.3 yrs.
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Average Credit Quality of Rated Securities (long-term) (a) B+
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Average Credit Quality of Rated Securities (short-term) (a) A-1
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(a) The average credit quality of rated securities is based upon a market
weighted average of portfolio holdings that are rated by public rating
agencies.
(d) Duration is a measure of how much a bond's price is likely to fluctuate with
general changes in interest rates, e.g., if rates rise 1.00%, a bond with a
5-year duration is likely to lose about 5.00% of its value.
(i) For purposes of this graphical presentation, the bond component includes
both accrued interest amounts and the equivalent exposure from any
derivative holdings, if applicable.
(m) The average maturity shown is calculated using the final stated maturity on
the portfolio's holdings without taking into account any holdings which have
been pre-refunded or pre-paid to an earlier date or which have a mandatory
put date prior to the stated maturity. The average life shown takes into
account these earlier dates.
(r) Each security is assigned a rating from Moody's Investors Service. If not
rated by Moody's, the rating will be that assigned by Standard & Poor's.
Likewise, if not assigned a rating by Standard & Poor's, it will be based on
the rating assigned by Fitch, Inc. For those portfolios that hold a security
which is not rated by any of the three agencies, the security is considered
Not Rated. Holdings in U.S. Treasuries and government agency mortgage-backed
securities, if any, are included in the "AAA"-rating category. Percentages
are based on the total market value of investments as of 12/31/06.
Percentages are based on net assets as of 12/31/06, unless otherwise noted.
The portfolio is actively managed and current holdings may be different.
PORTFOLIO COMPOSITION -- MONEY MARKET VARIABLE ACCOUNT
PORTFOLIO STRUCTURE (u)
Commercial Paper 85.7%
Certificates of Deposit 8.9%
Repurchase Agreements 5.9%
Other Assets Less Liabilities (0.5)%
SHORT-TERM CREDIT QUALITY (q)
Average Credit Quality of Short-Term Bonds (a) A-1
- --------------------------------------------------------------------
All holdings are rated A-1
MATURITY BREAKDOWN (u)
0 - 29 59.5%
- --------------------------------------------------------------------
30 - 59 20.0%
- --------------------------------------------------------------------
60 - 89 15.0%
- --------------------------------------------------------------------
90 - 366 6.0%
- --------------------------------------------------------------------
Other Assets Less Liabilities (0.5)%
- --------------------------------------------------------------------
(a) The average credit quality is based upon a market weighted average of
portfolio holdings that are rated by public rating agencies.
(q) Each security is assigned a rating from Moody's Investors Service. If not
rated by Moody's, the rating will be that assigned by Standard & Poor's.
Likewise, if not assigned a rating by Standard & Poor's, it will be based on
the rating assigned by Fitch, Inc. If not rated by any of the three
agencies, the security is considered Not Rated. U.S. Treasuries and U.S.
Agency securities are included in the "A-1"- rating category. Percentages
are based on the total market value of investments as of 12/31/06.
(u) For purposes of this graphical presentation, accrued interest, where
applicable, is included.
From time to time "Other Assets Less Liabilities" may be negative due to
timing of cash receipts.
Percentages are based on net assets as of 12/31/06, unless otherwise noted.
The portfolio is actively managed and current holdings may be different.
PORTFOLIO COMPOSITION -- TOTAL RETURN VARIABLE ACCOUNT
PORTFOLIO STRUCTURE (i)
Common Stocks 60.0%
Bonds 39.3%
Cash & Other Net Assets 0.7%
TOP TEN HOLDINGS (i)
Fannie Mae 5.5%, 30 years 4.2%
- ----------------------------------------------------------------------
Bank of America Corp. 1.9%
- ----------------------------------------------------------------------
Altria Group, Inc. 1.8%
- ----------------------------------------------------------------------
U.S. Treasury Notes, 3.125%, 2009 1.6%
- ----------------------------------------------------------------------
JPMorgan Chase & Co. 1.5%
- ----------------------------------------------------------------------
Citigroup, Inc. 1.5%
- ----------------------------------------------------------------------
Bank of New York Co., Inc. 1.4%
- ----------------------------------------------------------------------
Exxon Mobil Corp. 1.3%
- ----------------------------------------------------------------------
Masco Corp. 1.3%
- ----------------------------------------------------------------------
U.S. Treasury Notes, 3.125%, 2008 1.2%
- ----------------------------------------------------------------------
COMMON STOCK SECTORS
Financial Services 17.8%
- ----------------------------------------------------------------------
Energy 6.7%
- ----------------------------------------------------------------------
Health Care 6.2%
- ----------------------------------------------------------------------
Utilities & Communications 5.9%
- ----------------------------------------------------------------------
Industrial Goods & Services 5.1%
- ----------------------------------------------------------------------
Consumer Staples 4.5%
- ----------------------------------------------------------------------
Technology 3.5%
- ----------------------------------------------------------------------
Basic Materials 3.3%
- ----------------------------------------------------------------------
Leisure 2.6%
- ----------------------------------------------------------------------
Retailing 1.8%
- ----------------------------------------------------------------------
Autos & Housing 1.8%
- ----------------------------------------------------------------------
Transportation 0.6%
- ----------------------------------------------------------------------
Special Products & Services 0.2%
- ----------------------------------------------------------------------
FIXED INCOME SECTORS (i)
Mortgage-Backed Securities 14.2%
- ----------------------------------------------------------------------
High Grade Corporates 9.5%
- ----------------------------------------------------------------------
U.S. Treasury Securities 8.5%
- ----------------------------------------------------------------------
Commercial Mortgage-Backed Securities 3.7%
- ----------------------------------------------------------------------
U.S. Government Agencies 2.0%
- ----------------------------------------------------------------------
Asset-Backed Securities 0.6%
- ----------------------------------------------------------------------
Emerging Market Bonds 0.4%
- ----------------------------------------------------------------------
Non U.S. Government Bonds 0.3%
- ----------------------------------------------------------------------
High Yield Corporates 0.1%
- ----------------------------------------------------------------------
(i) For purposes of this graphical presentation, the bond component includes
both accrued interest amounts and the equivalent exposure from any
derivative holdings, if applicable.
Percentages are based on net assets as of 12/31/06.
The portfolio is actively managed and current holdings may be different.
PORTFOLIO OF INVESTMENTS -- December 31, 2006
CAPITAL APPRECIATION VARIABLE ACCOUNT
ISSUER SHARES/PAR VALUE ($)
COMMON STOCKS - 98.8%
AEROSPACE - 3.2%
Boeing Co. ............................... 27,680 $ 2,459,091
Precision Castparts Corp. ................ 17,400 1,362,072
United Technologies Corp. ................ 51,870 3,242,912
-------------
$ 7,064,075
-------------
APPAREL MANUFACTURERS - 2.0%
Coach, Inc. (a) .......................... 36,000 $ 1,546,560
NIKE, Inc., "B" .......................... 27,700 2,743,131
-------------
$ 4,289,691
-------------
AUTOMOTIVE - 0.7%
Harman International Industries, Inc. .... 15,580 $ 1,556,598
-------------
BIOTECHNOLOGY - 5.4%
Amgen, Inc. (a) .......................... 55,770 $ 3,809,649
Celgene Corp. (a) ........................ 54,300 3,123,879
Genzyme Corp. (a) ........................ 60,830 3,745,911
Millipore Corp. (a) ...................... 16,100 1,072,260
-------------
$ 11,751,699
-------------
BROADCASTING - 1.6%
News Corp., "A" .......................... 109,750 $ 2,357,430
Viacom, Inc., "B" (a) .................... 28,540 1,170,996
-------------
$ 3,528,426
-------------
BROKERAGE & ASSET MANAGERS - 3.8%
Charles Schwab Corp. ..................... 129,220 $ 2,499,115
Chicago Mercantile Exchange Holdings,
Inc., "A" .............................. 4,090 2,084,878
Mellon Financial Corp. ................... 39,470 1,663,661
Merrill Lynch & Co., Inc. ................ 22,730 2,116,163
-------------
$ 8,363,817
-------------
BUSINESS SERVICES - 5.6%
Amdocs Ltd. (a) .......................... 101,020 $ 3,914,525
Automatic Data Processing, Inc. .......... 36,960 1,820,280
CheckFree Corp. (a) ...................... 27,090 1,087,934
First Data Corp. ......................... 147,430 3,762,414
Western Union Co. ........................ 71,540 1,603,927
-------------
$ 12,189,080
-------------
CHEMICALS - 1.3%
Ecolab, Inc. ............................. 19,370 $ 875,524
Monsanto Co. ............................. 36,940 1,940,458
-------------
$ 2,815,982
-------------
COMPUTER SOFTWARE - 5.8%
Adobe Systems, Inc. (a) .................. 115,640 $ 4,755,117
Microsoft Corp. .......................... 152,340 4,548,872
Oracle Corp. (a) ......................... 196,340 3,365,268
-------------
$ 12,669,257
-------------
COMPUTER SOFTWARE - SYSTEMS - 2.9%
Apple Computer, Inc. (a) ................. 30,650 $ 2,600,346
Dell, Inc. (a) ........................... 44,200 1,108,978
Hewlett-Packard Co. ...................... 65,810 2,710,714
-------------
$ 6,420,038
-------------
CONSUMER GOODS & SERVICES - 4.0%
Colgate-Palmolive Co. .................... 26,410 $ 1,722,988
eBay, Inc. (a) ........................... 56,290 1,692,640
Monster Worldwide, Inc. (a) .............. 17,890 834,390
Procter & Gamble Co. ..................... 69,500 4,466,765
-------------
$ 8,716,783
-------------
ELECTRICAL EQUIPMENT - 5.1%
General Electric Co. ..................... 185,500 $ 6,902,455
Rockwell Automation, Inc. ................ 38,160 2,330,813
W.W. Grainger, Inc. ...................... 26,480 1,852,011
-------------
$ 11,085,279
-------------
ELECTRONICS - 5.9%
Applied Materials, Inc. .................. 110,710 $ 2,042,600
Intel Corp. .............................. 295,800 5,989,950
Marvell Technology Group Ltd. (a) ........ 103,760 1,991,154
Samsung Electronics Co. Ltd., GDR ........ 4,665 1,534,785
SanDisk Corp. (a) ........................ 32,630 1,404,069
-------------
$ 12,962,558
-------------
FOOD & BEVERAGES - 2.4%
Nestle S.A ............................... 7,034 $ 2,498,746
PepsiCo, Inc. ............................ 42,480 2,657,124
-------------
$ 5,155,870
-------------
FOOD & DRUG STORES - 0.5%
CVS Corp. ................................ 35,120 $ 1,085,559
-------------
GAMING & LODGING - 2.4%
International Game Technology ............ 72,230 $ 3,337,026
Las Vegas Sands Corp. (a) ................ 7,290 652,309
Starwood Hotels & Resorts, Inc. .......... 18,690 1,168,125
-------------
$ 5,157,460
-------------
GENERAL MERCHANDISE - 2.0%
Family Dollar Stores, Inc. ............... 38,460 $ 1,128,032
Target Corp. ............................. 55,050 3,140,603
-------------
$ 4,268,635
-------------
HEALTH MAINTENANCE ORGANIZATIONS - 0.5%
UnitedHealth Group, Inc. ................. 21,040 $ 1,130,479
-------------
INTERNET - 2.7%
Google, Inc., "A" (a) .................... 9,420 $ 4,337,722
Yahoo!, Inc. (a) ......................... 63,190 1,613,873
-------------
$ 5,951,595
-------------
LEISURE & TOYS - 1.5%
Electronic Arts, Inc. (a) ................ 65,860 $ 3,316,710
-------------
MACHINERY & TOOLS - 1.2%
Deere & Co. .............................. 27,170 $ 2,583,052
-------------
MAJOR BANKS - 1.7%
JPMorgan Chase & Co. ..................... 35,390 $ 1,709,337
State Street Corp. ....................... 29,030 1,957,783
-------------
$ 3,667,120
-------------
MEDICAL & HEALTH TECHNOLOGY & SERVICES - 1.4%
Caremark Rx, Inc. ........................ 53,160 $ 3,035,968
-------------
MEDICAL EQUIPMENT - 5.1%
Advanced Medical Optics, Inc. (a) ........ 58,290 $ 2,051,808
Baxter International, Inc. ............... 43,420 2,014,254
DENTSPLY International, Inc. ............. 36,780 1,097,883
Medtronic, Inc. .......................... 83,070 4,445,076
Respironics, Inc. (a) .................... 14,900 562,475
St. Jude Medical, Inc. (a) ............... 29,670 1,084,735
-------------
$ 11,256,231
-------------
NETWORK & TELECOM - 5.3%
Cisco Systems, Inc. (a) .................. 304,640 $ 8,325,811
Corning, Inc. (a) ........................ 54,810 1,025,495
Juniper Networks, Inc. (a) ............... 27,180 514,789
QUALCOMM, Inc. ........................... 43,420 1,640,842
-------------
$ 11,506,937
-------------
OIL SERVICES - 3.8%
Noble Corp. .............................. 31,660 $ 2,410,909
Schlumberger Ltd. ........................ 36,360 2,296,498
Transocean, Inc. (a) ..................... 30,120 2,436,407
Weatherford International Ltd. (a) ....... 25,820 1,079,018
-------------
$ 8,222,832
-------------
OTHER BANKS & DIVERSIFIED FINANCIALS - 3.4%
American Express Co. ..................... 58,170 $ 3,529,174
SLM Corp. ................................ 58,160 2,836,463
UBS AG ................................... 17,740 1,070,254
-------------
$ 7,435,891
-------------
PERSONAL COMPUTERS & PERIPHERALS - 0.9%
EMC Corp. (a) ............................ 157,180 $ 2,074,776
-------------
PHARMACEUTICALS - 7.5%
Allergan, Inc. ........................... 24,010 $ 2,874,957
Eli Lilly & Co. .......................... 59,420 3,095,782
Johnson & Johnson ........................ 76,570 5,055,151
Roche Holding AG ......................... 16,640 2,982,886
Wyeth .................................... 47,470 2,417,172
-------------
$ 16,425,948
-------------
RAILROAD & SHIPPING - 0.8%
Burlington Northern Santa Fe Corp. ....... 24,010 $ 1,772,178
-------------
SPECIALTY CHEMICALS - 0.2%
Praxair, Inc. ............................ 8,900 $ 528,037
-------------
SPECIALTY STORES - 4.6%
Aeropostale, Inc. (a) .................... 28,260 $ 872,386
Best Buy Co., Inc. ....................... 18,380 904,112
Chico's FAS, Inc. (a) .................... 46,190 955,671
Lowe's Cos., Inc. ........................ 53,570 1,668,706
Staples, Inc. ............................ 110,170 2,941,539
Urban Outfitters, Inc. (a) ............... 45,340 1,044,180
Williams-Sonoma, Inc. .................... 52,340 1,645,570
-------------
$ 10,032,164
-------------
TELEPHONE SERVICES - 1.0%
American Tower Corp., "A" (a) ............ 55,880 $ 2,083,206
-------------
TOBACCO - 0.8%
Altria Group, Inc. ....................... 19,870 $ 1,705,243
-------------
TRUCKING - 1.8%
FedEx Corp. .............................. 14,500 $ 1,574,990
United Parcel Service, Inc., "B" ......... 32,240 2,417,355
-------------
$ 3,992,345
-------------
TOTAL COMMON STOCKS
(IDENTIFIED COST, $198,448,972) ......................... $ 215,801,519
-------------
REPURCHASE AGREEMENTS - 1.0%
Merrill Lynch, 5.32%, dated 12/29/06, due
1/02/07, total to be received $2,141,265
(secured by various U.S. Treasury and
Federal Agency obligations and Mortgage
Backed securities in a jointly traded
account), at Cost ...................... $2,140,000 $ 2,140,000
-------------
TOTAL INVESTMENTS
(IDENTIFIED COST, $200,588,972) ......................... $ 217,941,519
-------------
OTHER ASSETS,
LESS LIABILITIES - 0.2% ................................... 466,332
-------------
NET ASSETS - 100.0% ....................................... $ 218,407,851
-------------
See portfolio footnotes and notes to financial statements.
PORTFOLIO OF INVESTMENTS -- December 31, 2006
GLOBAL GOVERNMENTS VARIABLE ACCOUNT
ISSUER SHARES/PAR VALUE ($)
BONDS - 92.8%
FOREIGN BONDS - 66.8%
AUSTRALIA - 1.2%
Commonwealth of Australia, 6.5%, 2013 .... AUD 66,000 $ 53,552
Commonwealth of Australia, 6%, 2017 ...... AUD 66,000 52,575
-------------
$ 106,127
-------------
AUSTRIA - 1.3%
Republic of Austria, 5%, 2012 ............ EUR 87,000 $ 120,677
-------------
BELGIUM - 0.8%
Kingdom of Belgium, 3.75%, 2009 .......... EUR 29,000 $ 38,141
Kingdom of Belgium, 5%, 2012 ............. EUR 22,000 30,569
-------------
$ 68,710
-------------
CANADA - 8.7%
Canada Housing Trust, 4.6%, 2011 ......... CAD 98,000 $ 85,884
Government of Canada, 5.5%, 2009 ......... CAD 189,000 167,863
Government of Canada, 4.5%, 2015 ......... CAD 80,000 70,696
Government of Canada, 8%, 2023 ........... CAD 72,000 89,746
Government of Canada, 5.75%, 2033 ........ CAD 50,000 53,953
Quebec Province, 1.6%, 2013 .............. JPY 39,000,000 329,936
-------------
$ 798,078
-------------
DENMARK - 1.0%
Kingdom of Denmark, 4%, 2015 ............. DKK 519,000 $ 92,398
-------------
FINLAND - 1.7%
Republic of Finland, 3%, 2008 ............ EUR 105,000 $ 136,828
Republic of Finland, 5.375%, 2013 ........ EUR 15,000 21,387
-------------
$ 158,215
-------------
FRANCE - 3.3%
Republic of France, 6%, 2025 ............. EUR 58,000 $ 95,457
Republic of France, 4.75%, 2035 .......... EUR 144,000 209,594
-------------
$ 305,051
-------------
GERMANY - 17.8%
Federal Republic of Germany, 3.5%, 2008 .. EUR 60,000 $ 78,662
Federal Republic of Germany, 5.25%, 2010 . EUR 70,000 96,299
Federal Republic of Germany, 3.75%, 2015 . EUR 276,000 359,152
Federal Republic of Germany, 6.25%, 2024 . EUR 194,000 323,701
Federal Republic of Germany, 6.25%, 2030 . EUR 250,000 432,977
KfW Bankengruppe, FRN, 3.528%, 2007 ...... EUR 252,000 332,438
-------------
$ 1,623,229
-------------
IRELAND - 1.0%
Republic of Ireland, 4.6%, 2016 .......... EUR 66,000 $ 91,274
-------------
JAPAN - 13.8%
Development Bank of Japan, 1.4%, 2012 .... JPY 53,000,000 $ 447,831
Development Bank of Japan, 1.6%, 2014 .... JPY 40,000,000 338,714
Development Bank of Japan, 1.05%, 2023 ... JPY 54,000,000 389,709
Japan Finance Corp. for Municipal
Enterprises, 2%, 2016 .................. JPY 10,000,000 86,679
-------------
$ 1,262,933
-------------
MALAYSIA - 1.4%
Petronas Capital Ltd., 7.875%, 2022 ...... $ 100,000 $ 123,066
-------------
MEXICO - 1.3%
Pemex Project Funding Master Trust,
8.625%, 2022 ........................... $ 23,000 $ 28,428
United Mexican States, 8.125%, 2019 ...... 54,000 65,610
United Mexican States, 10%, 2024 ......... MXN 220,000 25,237
-------------
$ 119,275
-------------
NETHERLANDS - 1.3%
Kingdom of Netherlands, 5%, 2012 ......... EUR 84,697 $ 117,547
-------------
RUSSIA - 0.6%
Gazprom International S.A., 7.201%, 2020 . $ 54,000 $ 56,970
-------------
SOUTH AFRICA - 0.5%
Republic of South Africa, 7.375%, 2012 ... $ 42,000 $ 45,150
-------------
SPAIN - 1.8%
Kingdom of Spain, 5.35%, 2011 ............ EUR 115,000 $ 160,817
-------------
TUNISIA - 0.3%
Banque Centrale de Tunisie, 7.375%, 2012 . $ 25,000 $ 27,075
-------------
UNITED KINGDOM - 9.0%
Network Rail MTN Finance PLC, FRN, 3.618%,
2007 ................................... EUR 297,000 $ 391,871
United Kingdom Treasury, 5.75%, 2009 ..... GBP 36,000 71,666
United Kingdom Treasury, 8%, 2015 ........ GBP 90,000 217,100
United Kingdom Treasury, 8%, 2021 ........ GBP 27,000 71,285
United Kingdom Treasury, 4.25%, 2036 ..... GBP 34,000 67,085
-------------
$ 819,007
-------------
Total Foreign Bonds ...................... $ 6,095,599
-------------
U.S. BONDS - 26.0%
ASSET BACKED & SECURITIZED - 8.7%
Bayview Commercial Asset Trust,
4.83%, 2023 (n) ........................ CAD 30,000 $ 25,753
Citigroup/Deutsche Bank Commercial Mortgage
Trust, 5.648%, 2048 .................... $ 100,000 101,881
Commercial Mortgage Asset Trust, FRN,
0.8834%, 2032 (i)(n) ................... 1,395,668 54,044
Commercial Mortgage Pass-Through
Certificates, FRN, 5.54%, 2017 (n) ..... 59,000 59,003
Commercial Mortgage Pass-Through
Certificates, FRN, 5.55%, 2017 (n) ..... 100,000 100,034
Credit Suisse Commercial Mortgage Trust,
5.509%, 2039 ........................... 23,010 23,191
Deutsche Mortgage & Asset Receiving Corp.,
6.538%, 2031 ........................... 27,943 28,128
First Union National Bank Commercial
Mortgage Trust, FRN,
0.9457%, 2043 (i)(n) ................... 1,604,142 51,785
IMPAC CMB Trust, FRN, 5.7%, 2036 ......... 96,297 96,701
JPMorgan Chase Commercial Mortgage
Securities Corp., 5.44%, 2045 (z) ...... 19,156 19,219
JPMorgan Chase Commercial Mortgage
Securities Corp., FRN, 5.2115%, 2041 ... 55,952 55,743
Lehman Brothers Floating Rate Commercial
Mortgage Trust, FRN, 5.51%, 2018 (n) ... 100,000 100,001
Merrill Lynch/Countrywide Commercial
Mortgage Trust, FRN, 5.204%, 2049 ...... 50,000 49,215
Wachovia Bank Commercial Mortgage Trust,
FRN, 5.795%, 2045 ...................... 30,000 30,869
-------------
$ 795,567
-------------
MORTGAGE BACKED - 0.3%
Fannie Mae, 5.423%, 2016 ................. $ 24,796 $ 25,192
-------------
U.S. GOVERNMENT AGENCIES - 6.2%
Aid-Egypt, 4.45%, 2015 ................... $ 49,000 $ 47,349
Fannie Mae, 4.25%, 2007 .................. 171,000 169,626
Fannie Mae, 6%, 2011 ..................... 88,000 91,628
Freddie Mac, 4.2%, 2007 .................. 99,000 98,102
Small Business Administration,
4.57%, 2025 ............................ 45,831 44,000
Small Business Administration,
5.21%, 2026 ............................ 117,213 116,909
-------------
$ 567,614
-------------
U.S. TREASURY OBLIGATIONS - 10.8%
U.S. Treasury Bonds, 8%, 2021 ............ $ 65,000 $ 86,166
U.S. Treasury Bonds, 5.25%, 2028 ......... 123,000 128,987
U.S. Treasury Notes, 3.125%, 2008 ........ 1,000 971
U.S. Treasury Notes, 4%, 2010 ............ 314,000 307,254
U.S. Treasury Notes, 4.25%, 2013 ......... 236,000 229,768
U.S. Treasury Notes, 4%, 2015 ............ 249,000 237,202
-------------
$ 990,348
-------------
Total U.S. Bonds ............................................ $ 2,378,721
-------------
TOTAL BONDS
(IDENTIFIED COST, $8,376,368) ........................... $ 8,474,320
-------------
CALL OPTIONS PURCHASED - 0.0%
JPY Currency - January 2007 @ $0.9759
(Premiums Paid, $1,995) ................ JPY 16,259,600 $ 16
-------------
PUT OPTIONS PURCHASED - 0.1%
USD Currency - January 2007 @ EUR 0.96631
(Premiums Paid, $1,947) ................ $ 140,250 $ 4,984
-------------
SHORT-TERM OBLIGATIONS - 4.0%
Federal Home Loan Bank,
4.95%, due 1/02/07, at Amortized
Cost and Value (y) ..................... $ 363,000 $ 362,950
-------------
REPURCHASE AGREEMENTS - 4.5%
Merrill Lynch, 5.32%, dated 12/29/06,
due 1/02/07, total to be received $408,241
(secured by various U.S. Treasury and
Federal Agency obligations and Mortgage
Backed securities in a jointly traded
account), at Cost ...................... $ 408,000 $ 408,000
-------------
TOTAL INVESTMENTS
(IDENTIFIED COST, $9,151,260) (k) ....................... $ 9,250,270
-------------
OTHER ASSETS,
LESS LIABILITIES - (1.4)% ................................. (123,653)
-------------
NET ASSETS - 100.0% ....................................... $ 9,126,617
-------------
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
Sales and Purchases in the table below are reported by currency.
NET UNREALIZED
CONTRACTS TO CONTRACTS APPRECIATION
DELIVER/RECEIVE SETTLEMENT DATE IN EXCHANGE FOR AT VALUE (DEPRECIATION)
- --------------------------------------------------------------------------------------------------------------------------
SALES
AUD 136,989 2/06/07 $ 107,710 $ 108,078 $ (368)
CAD 427,212 1/22/07 - 2/06/07 376,004 367,145 8,859
DKK 1,069,078 1/02/07 - 2/15/07 188,634 189,428 (794)
EUR 359,340 1/10/07 - 2/28/07 467,963 475,073 (7,110)
GBP 12,500 2/26/07 24,156 24,489 (333)
JPY 69,916,470 1/10/07 - 2/20/07 598,094 589,596 8,498
MXN 221,739 1/05/07 20,418 20,524 (106)
NZD 48,139 2/05/07 32,948 33,912 (964)
---------- ---------- --------
$1,815,927 $1,808,245 $ 7,682
========== ========== ========
PURCHASES
BRL 47,475 1/29/07 $ 21,995 $ 22,110 $ 115
DKK 534,539 1/02/07 94,147 94,624 477
EUR 464,254 1/29/07 - 5/17/07 614,281 613,658 (623)
GBP 24,788 2/26/07 47,063 48,563 1,500
JPY 271,359,855 1/18/07 - 2/20/07 2,315,681 2,285,662 (30,019)
MXN 152,961 1/05/07 14,013 14,157 144
MYR 68,471 1/26/07 19,364 19,435 71
NOK 158,144 1/08/07 24,450 25,384 934
NZD 48,139 2/05/07 33,626 33,912 286
PLN 52,816 1/08/07 18,378 18,188 (190)
RUB 363,625 1/22/07 13,821 13,808 (13)
SEK 815,671 2/06/07 121,016 119,431 (1,585)
---------- ---------- --------
$3,337,835 $3,308,932 $(28,903)
========== ========== ========
At December 31, 2006, forward foreign currency purchases and sales under
master netting agreements excluded above amounted to a net receivable of $98
and $12,136 with Goldman Sachs & Co. and Merrill Lynch International Bank,
respectively.
At December 31, 2006, the variable account had sufficient cash and/or
securities to cover any commitments under these derivative contracts.
See portfolio footnotes and notes to financial statements.
PORTFOLIO OF INVESTMENTS -- December 31, 2006
GOVERNMENT SECURITIES VARIABLE ACCOUNT
ISSUER SHARES/PAR VALUE ($)
BONDS - 98.2%
AGENCY - OTHER - 7.3%
Financing Corp., 9.4%, 2018 .............. $ 780,000 $ 1,061,893
Financing Corp., 10.35%, 2018 ............ 1,150,000 1,669,399
Financing Corp., STRIPS, 0%, 2017 ........ 1,220,000 702,217
Resolution Funding Corp., 8.875%, 2020 ... 1,700,000 2,329,439
-------------
$ 5,762,948
-------------
MORTGAGE BACKED - 54.6%
Fannie Mae, 4.73%, 2012 .................. $ 94,241 $ 92,147
Fannie Mae, 4.79%, 2012 .................. 934,169 906,768
Fannie Mae, 4.8%, 2013 ................... 88,846 87,129
Fannie Mae, 4.845%, 2013 ................. 260,281 254,457
Fannie Mae, 5%, 2013 - 2027 .............. 2,793,362 2,757,980
Fannie Mae, 5.06%, 2013 .................. 104,843 103,641
Fannie Mae, 4.45%, 2014 .................. 319,683 306,809
Fannie Mae, 4.519%, 2014 ................. 160,445 154,555
Fannie Mae, 4.6%, 2014 ................... 125,068 120,981
Fannie Mae, 4.666%, 2014 ................. 826,634 802,996
Fannie Mae, 4.77%, 2014 .................. 105,806 102,696
Fannie Mae, 4.848%, 2014 ................. 895,398 878,211
Fannie Mae, 4.871%, 2014 ................. 479,474 471,589
Fannie Mae, 5.1%, 2014 ................... 137,181 136,335
Fannie Mae, 4.56%, 2015 .................. 161,204 155,006
Fannie Mae, 4.62%, 2015 .................. 179,626 173,504
Fannie Mae, 4.665%, 2015 ................. 108,764 105,259
Fannie Mae, 4.69%, 2015 .................. 88,699 85,993
Fannie Mae, 4.7%, 2015 ................... 124,972 121,204
Fannie Mae, 4.74%, 2015 .................. 100,000 96,682
Fannie Mae, 4.815%, 2015 ................. 117,000 113,584
Fannie Mae, 4.82%, 2015 .................. 342,111 332,941
Fannie Mae, 4.85%, 2015 .................. 88,796 86,921
Fannie Mae, 4.89%, 2015 .................. 87,952 86,292
Fannie Mae, 4.925%, 2015 ................. 346,497 341,016
Fannie Mae, 5.471%, 2015 ................. 123,593 125,901
Fannie Mae, 6.5%, 2016 - 2036 ............ 1,755,912 1,794,362
Fannie Mae, 4.996%, 2017 ................. 329,147 325,514
Fannie Mae, 5.5%, 2017 - 2034 ............ 12,930,223 12,815,733
Fannie Mae, 6%, 2017 - 2034 .............. 2,380,115 2,403,866
Fannie Mae, 4.5%, 2019 - 2020 ............ 3,718,466 3,591,528
Fannie Mae, 4.88%, 2020 .................. 91,984 90,741
Fannie Mae, 7.5%, 2022 - 2031 ............ 226,235 236,044
Freddie Mac, 4.5%, 2013 - 2015 ........... 547,955 543,047
Freddie Mac, 4.375%, 2015 ................ 575,104 560,789
Freddie Mac, 5%, 2016 - 2025 ............. 2,569,262 2,554,372
Freddie Mac, 6%, 2021 - 2035 ............. 2,574,814 2,599,709
Freddie Mac, 5.5%, 2025 - 2035 ........... 4,052,778 4,013,751
Freddie Mac, 6.5%, 2032 .................. 721,726 737,941
Ginnie Mae, 5.5%, 2033 ................... 1,619,343 1,613,430
-------------
$ 42,881,424
-------------
U.S. GOVERNMENT AGENCIES - 31.1%
Aid-Egypt, 4.45%, 2015 ................... $ 473,000 $ 457,065
Aid-Israel, 6.6%, 2008 ................... 399,640 400,447
Aid-Israel, 0%, 2021 - 2024 .............. 2,041,000 857,628
Aid-Israel, 5.5%, 2023 ................... 1,097,000 1,141,466
Aid-Peru, 9.98%, 2008 .................... 364,016 372,676
Empresa Energetica Cornito Ltd.,
6.07%, 2010 ............................ 1,765,000 1,789,128
Fannie Mae, 4.25%, 2009 .................. 1,073,000 1,055,821
Fannie Mae, 4.625%, 2013 ................. 213,000 208,676
Farmer Mac, 5.5%, 2011 (n) ............... 690,000 702,666
Federal Home Loan Bank, 4.5%, 2007 ....... 150,000 149,656
Federal Home Loan Bank, 4.625%, 2008 ..... 1,750,000 1,739,413
Freddie Mac, 4.2%, 2007 .................. 705,000 698,605
Freddie Mac, 5.625%, 2011 ................ 2,214,000 2,270,887
Freddie Mac, 5.05%, 2015 ................. 956,000 955,789
Overseas Private Investment Corp.,
0%, 2007 ............................... 161,000 170,258
Small Business Administration,
8.4%, 2007 ............................. 1,104 1,107
Small Business Administration,
8.7%, 2009 ............................. 26,213 27,091
Small Business Administration,
10.05%, 2009 ........................... 3,829 3,947
Small Business Administration,
6.34%, 2021 ............................ 539,812 558,983
Small Business Administration,
6.44%, 2021 ............................ 543,221 563,664
Small Business Administration,
6.625%, 2021 ........................... 632,327 660,584
Small Business Administration,
6.07%, 2022 ............................ 450,738 464,134
Small Business Administration,
4.89%, 2023 ............................ 600,437 590,824
Small Business Administration,
4.98%, 2023 ............................ 243,482 240,816
Small Business Administration,
4.34%, 2024 ............................ 350,137 333,751
Small Business Administration,
4.72%, 2024 ............................ 615,092 599,776
Small Business Administration,
4.77%, 2024 ............................ 577,356 564,007
Small Business Administration,
4.86%, 2024 ............................ 312,294 306,125
Small Business Administration,
4.87%, 2024 ............................ 367,745 360,393
Small Business Administration,
4.88%, 2024 ............................ 279,535 274,217
Small Business Administration,
4.99%, 2024 ............................ 405,005 400,105
Small Business Administration,
5.52%, 2024 ............................ 320,790 325,014
Small Business Administration,
4.76%, 2025 ............................ 537,806 522,276
Small Business Administration,
5.11%, 2025 ............................ 320,300 318,080
Tennessee Valley Authority STRIPS,
0% to 2012, 8.25% to 2042 .............. 2,256,000 1,786,143
U.S. Department of Housing & Urban
Development, 6.36%, 2016 ............... 500,000 516,081
U.S. Department of Housing & Urban
Development, 6.59%, 2016 ............... 2,045,000 2,076,753
-------------
$ 24,464,052
-------------
U.S. TREASURY OBLIGATIONS - 5.2%
U.S. Treasury Bonds, 12%, 2013 ........... $ 19,000 $ 21,103
U.S. Treasury Bonds, 9.25%, 2016 ......... 409,000 544,865
U.S. Treasury Bonds, 6%, 2026 ............ 717,000 813,179
U.S. Treasury Bonds, 5.25%, 2028 ......... 346,000 362,841
U.S. Treasury Bonds, 4.5%, 2036 .......... 517,000 491,635
U.S. Treasury Bonds, TIPS, 3.875%, 2009 .. 675,654 694,235
U.S. Treasury Note, 6.5%, 2010 (f) ....... 1,066,000 1,119,842
-------------
$ 4,047,700
-------------
TOTAL BONDS
(IDENTIFIED COST, $77,285,442) .......................... $ 77,156,124
-------------
REPURCHASE AGREEMENTS - 1.0%
Merrill Lynch & Co., 5.32%, dated 12/29/06,
due 1/02/07, total to be received $773,457
(secured by U.S. Treasury and Federal
Agency obligations and Mortgage Backed
securities in a jointly traded account),
at Cost ................................ $ 773,000 $ 773,000
-------------
TOTAL INVESTMENTS
(IDENTIFIED COST, $78,058,442) (k) ...................... $ 77,929,124
-------------
OTHER ASSETS,
LESS LIABILITIES - 0.8% ................................... 666,176
-------------
NET ASSETS - 100.0% ....................................... $ 78,595,300
-------------
FUTURES CONTRACTS OUTSTANDING AT 12/31/06:
UNREALIZED
EXPIRATION APPRECIATION
DESCRIPTION CONTRACTS VALUE DATE (DEPRECIATION)
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bond (Short) .................................................... 14 $1,560,125 Mar-07 $ 28,170
U.S. Treasury Note 5 yr (Long) ................................................ 26 2,731,625 Mar-07 (19,583)
U.S. Treasury Note 10 yr (Short) .............................................. 26 2,794,188 Mar-07 34,029
--------
$ 42,616
========
At December 31, 2006, the variable account had sufficient cash and/or securities to cover any commitments under these derivative
contracts.
See portfolio footnotes and notes to financial statements.
PORTFOLIO OF INVESTMENTS -- December 31, 2006
HIGH YIELD VARIABLE ACCOUNT
ISSUER SHARES/PAR VALUE ($)
BONDS - 88.9%
AEROSPACE - 1.5%
Argo-Tech Corp., 9.25%, 2011 ............. $ 225,000 $ 243,000
Bombardier, Inc., 8%, 2014 (n) ........... 176,000 180,400
DRS Technologies, Inc., 7.625%, 2018 ..... 400,000 412,000
Vought Aircraft Industry, Inc., 8%, 2011 . 80,000 77,000
-------------
$ 912,400
-------------
AIRLINES - 0.8%
Continental Airlines, Inc., 6.9%, 2017 ... $ 69,833 $ 69,212
Continental Airlines, Inc., 6.748%, 2017 . 67,219 66,547
Continental Airlines, Inc., 6.795%, 2018 . 111,945 111,385
Continental Airlines, Inc., 7.566%, 2020 . 235,991 238,351
-------------
$ 485,495
-------------
APPAREL MANUFACTURERS - 0.5%
Levi Strauss & Co., 12.25%, 2012 ......... $ 150,000 $ 166,875
Levi Strauss & Co., 9.75%, 2015 .......... 115,000 123,913
-------------
$ 290,788
-------------
ASSET BACKED & SECURITIZED - 1.6%
ARCap REIT, Inc., "H", 6.1%, 2045 (n) .... $ 165,567 $ 147,920
Asset Securitization Corp., FRN,
8.3571%, 2029 (z) ...................... 200,000 216,317
Crest Ltd., 7%, 2040 (n) ................. 154,000 153,754
First Union National Bank Commercial
Mortgage Corp., 6.75%, 2032 ............ 165,000 167,272
Wachovia Credit, CDO, FRN,
6.7156%, 2026 (p)(z) ................... 250,000 250,625
-------------
$ 935,888
-------------
AUTOMOTIVE - 5.0%
Cooper-Standard Automotive, Inc.,
8.375%, 2014 ........................... $ 230,000 $ 181,125
Ford Motor Credit Co., 5.8%, 2009 ........ 460,000 451,648
Ford Motor Credit Co., 9.75%, 2010 (n) ... 700,000 744,667
Ford Motor Credit Co., 8.625%, 2010 ...... 190,000 195,578
Ford Motor Credit Co., 7%, 2013 .......... 228,000 217,736
Ford Motor Credit Co., 8%, 2016 .......... 270,000 266,801
Ford Motor Credit Co., FRN,
8.11%, 2012 ............................ 160,000 158,547
General Motors Corp., 7.2%, 2011 ......... 98,000 95,060
General Motors Corp., 8.375%, 2033 ....... 358,000 331,150
Goodyear Tire & Rubber Co., 9%, 2015 ..... 300,000 314,250
-------------
$ 2,956,562
-------------
BROADCASTING - 4.7%
Allbritton Communications Co.,
7.75%, 2012 ............................ $ 355,000 $ 358,550
Barrington Broadcasting Group,
10.5%, 2014 (n) ........................ 180,000 182,700
Clear Channel Communications,
5.5%, 2014 ............................. 320,000 269,939
EchoStar DBS Corp., 6.375%, 2011 ......... 160,000 159,000
Hughes Network Systems LLC,
9.5%, 2014 ............................. 165,000 172,219
Intelsat Ltd., 9.25%, 2016 (n) ........... 175,000 188,125
Intelsat Ltd., 11.25%, 2016 (n) .......... 405,000 444,488
Intelsat Ltd., 0% to 2010, 9.25% to 2015 . 235,000 178,600
Intelsat Subsidiary Holding Co. Ltd.,
8.625%, 2015 ........................... 150,000 156,000
ION Media Networks, Inc., FRN,
11.6238%, 2013 (n) ..................... 370,000 374,625
XM Satellite Radio, Inc., 9.75%, 2014 .... 155,000 155,000
Young Broadcasting, Inc., 10%, 2011 ...... 140,000 133,000
-------------
$ 2,772,246
-------------
BUILDING - 1.8%
Goodman Global Holdings, Inc.,
7.875%, 2012 ........................... $ 140,000 $ 137,550
Interface, Inc., 10.375%, 2010 ........... 167,000 184,535
Interface, Inc., 9.5%, 2014 .............. 30,000 31,500
Masonite Corp., 11%, 2015 (z) ............ 205,000 189,625
Nortek Holdings, Inc., 8.5%, 2014 ........ 200,000 196,000
Nortek Holdings, Inc., 0% to 2009,
10.75% to 2014 ......................... 503,000 352,100
-------------
$ 1,091,310
-------------
BUSINESS SERVICES - 2.1%
Iron Mountain, Inc., 8.625%, 2013 ........ $ 240,000 $ 247,800
Iron Mountain, Inc., 7.75%, 2015 ......... 5,000 5,100
Nortel Networks Ltd., 10.75%, 2016 (n) ... 140,000 153,125
Northern Telecom Corp., 6.875%, 2023 ..... 115,000 96,600
SunGard Data Systems, Inc.,
10.25%, 2015 ........................... 410,000 437,675
Xerox Corp., 7.625%, 2013 ................ 275,000 288,750
-------------
$ 1,229,050
-------------
CABLE TV - 3.6%
CCH I Holdings LLC, 11%, 2015 ............ $ 520,000 $ 533,650
CCH II Holdings LLC, 10.25%, 2010 ........ 425,000 444,656
CCO Holdings LLC, 8.75%, 2013 ............ 275,000 285,656
CSC Holdings, Inc., 6.75%, 2012 (n) ...... 355,000 346,125
Mediacom LLC, 9.5%, 2013 ................. 275,000 283,250
NTL Cable PLC, 9.125%, 2016 .............. 228,000 240,825
-------------
$ 2,134,162
-------------
CHEMICALS - 4.0%
BCP Crystal Holdings Corp.,
9.625%, 2014 ........................... $ 121,000 $ 133,705
Crystal U.S. Holdings LLC, "B",
0% to 2009, 10.5% to 2014 .............. 437,000 375,820
Equistar Chemicals LP, 10.125%, 2008 ..... 225,000 239,063
Equistar Chemicals LP, 10.625%, 2011 ..... 60,000 63,900
Innophos, Inc., 8.875%, 2014 ............. 195,000 197,925
KI Holdings, Inc., 0% to 2009,
9.875% to 2014 ......................... 348,000 278,400
Lyondell Chemical Co., 11.125%, 2012 ..... 130,000 139,750
Momentive Performance Materials, Inc.,
11.5%, 2016 (n) ........................ 365,000 357,700
Mosaic Co., 7.625%, 2016 (n) ............. 300,000 310,875
Nalco Co., 8.875%, 2013 .................. 285,000 301,744
Rockwood Specialties Group, Inc.,
10.625%, 2011 .......................... 1,000 1,065
-------------
$ 2,399,947
-------------
CONGLOMERATES - 0.1%
Esco Corp., 8.625%, 2013 (z) ............. $ 80,000 $ 82,200
-------------
CONSUMER GOODS & SERVICES - 2.5%
GEO Group, Inc., 8.25%, 2013 ............. $ 280,000 $ 288,400
Jarden Corp., 9.75%, 2012 ................ 145,000 153,338
Playtex Products, Inc., 9.375%, 2011 ..... 180,000 187,650
Service Corp. International, 7.375%, 2014 .. 115,000 120,175
Service Corp. International, 8%, 2017 .... 370,000 374,625
Spectrum Brands, Inc., 7.375%, 2015 ...... 90,000 77,850
Visant Holding Corp., 8.75%, 2013 ........ 280,000 288,400
-------------
$ 1,490,438
-------------
CONTAINERS - 2.0%
Berry Plastics Holding Corp.,
8.875%, 2014 (n) ....................... $ 250,000 $ 253,750
Graham Packaging Co. LP, 9.875%, 2014 .... 315,000 318,150
Owens-Brockway Glass Container, Inc.,
8.25%, 2013 ............................ 580,000 599,575
-------------
$ 1,171,475
-------------
DEFENSE ELECTRONICS - 0.8%
L-3 Communications Corp.,
5.875%, 2015 ........................... $ 255,000 $ 246,075
L-3 Communications Holdings, Inc.,
6.125%, 2014 ........................... 230,000 224,825
-------------
$ 470,900
-------------
ELECTRONICS - 0.7%
NXP B.V./NXP Funding LLC,
7.875%, 2014 (n) ....................... $ 110,000 $ 113,713
Sensata Technologies B.V., 8%, 2014 (n) .. 295,000 283,200
-------------
$ 396,913
-------------
EMERGING MARKET QUASI-SOVEREIGN - 0.2%
Gazprom OAO, 9.625%, 2013 (n) ............ $ 120,000 $ 143,700
-------------
EMERGING MARKET SOVEREIGN - 0.2%
Federative Republic of Brazil,
8.875%, 2019 ........................... $ 51,000 $ 62,220
Russian Ministry of Finance,
12.75%, 2028 ........................... 42,000 75,853
-------------
$ 138,073
-------------
ENERGY - INDEPENDENT - 3.4%
Chesapeake Energy Corp., 7%, 2014 ........ $ 184,000 $ 186,990
Chesapeake Energy Corp., 6.375%, 2015 .... 430,000 425,700
Chesapeake Energy Corp., 6.875%, 2016 .... 285,000 287,494
Hilcorp Energy I, 9%, 2016 (n) ........... 225,000 237,938
Newfield Exploration Co., 6.625%, 2014 ... 365,000 365,000
Quicksilver Resources, Inc.,
7.125%, 2016 ........................... 305,000 298,138
Whiting Petroleum Corp., 7%, 2014 ........ 195,000 194,513
-------------
$ 1,995,773
-------------
ENTERTAINMENT - 1.1%
AMC Entertainment, Inc., 9.5%, 2011 ...... $ 160,000 $ 160,600
AMC Entertainment, Inc., 11%, 2016 ....... 165,000 185,213
Six Flags, Inc., 8.875%, 2010 ............ 175,000 169,313
Six Flags, Inc., 9.75%, 2013 ............. 139,000 130,486
-------------
$ 645,612
-------------
FINANCIAL INSTITUTIONS - 2.6%
General Motors Acceptance Corp.,
6.875%, 2011 ........................... $ 550,000 $ 564,134
General Motors Acceptance Corp.,
6.75%, 2014 ............................ 945,000 970,641
-------------
$ 1,534,775
-------------
FOOD & BEVERAGES - 1.0%
B&G Foods Holding Corp., 8%, 2011 ........ $ 175,000 $ 176,750
Dole Foods Co., Inc., 8.875%, 2011 ....... 155,000 152,675
Michael Foods, Inc., 8%, 2013 ............ 250,000 259,375
-------------
$ 588,800
-------------
FOREST & PAPER PRODUCTS - 2.5%
Buckeye Technologies, Inc., 8%, 2010 ..... $ 65,000 $ 65,000
Buckeye Technologies, Inc., 8.5%, 2013 ... 375,000 395,625
Jefferson Smurfit Corp., 8.25%, 2012 ..... 351,000 342,225
JSG Funding PLC, 7.75%, 2015 ............. 25,000 24,000
MDP Acquisitions PLC, 9.625%, 2012 ....... 205,000 217,300
Millar Western Forest Products Ltd.,
7.75%, 2013 ............................ 140,000 125,650
Verso Paper Holdings LLC,
9.125%, 2014 (n) ....................... 130,000 135,525
Verso Paper Holdings LLC,
11.375%, 2016 (n) ...................... 155,000 162,750
-------------
$ 1,468,075
-------------
GAMING & LODGING - 6.3%
Greektown Holdings, 10.75%, 2013 (n) ..... $ 220,000 $ 229,900
Harrah's Entertainment, Inc., 5.75%, 2017 .. 630,000 527,818
Majestic Star Casino LLC, 9.75%, 2011 .... 250,000 247,500
Mandalay Resort Group, 9.375%, 2010 ...... 175,000 187,250
MGM Mirage, Inc., 8.5%, 2010 ............. 140,000 149,800
MGM Mirage, Inc., 8.375%, 2011 ........... 325,000 337,188
MGM Mirage, Inc., 6.75%, 2013 ............ 200,000 195,500
MGM Mirage, Inc., 5.875%, 2014 ........... 195,000 180,375
MGM Mirage, Inc., 6.875%, 2016 ........... 175,000 168,000
Pinnacle Entertainment, Inc., 8.25%, 2012 .. 185,000 186,850
Pokagon Gaming Authority,
10.375%, 2014 (n) ...................... 130,000 142,350
Station Casinos, Inc., 6.5%, 2014 ........ 590,000 524,363
Trump Entertainment Resorts Holdings,
Inc.,8.5%, 2015 ........................ 185,000 184,075
Wimar Opco LLC, 9.625%, 2014 (z) ......... 165,000 163,350
Wynn Las Vegas LLC, 6.625%, 2014 ......... 310,000 308,063
-------------
$ 3,732,382
-------------
INDUSTRIAL - 2.7%
Amsted Industries, Inc., 10.25%, 2011(z) .. $ 300,000 $ 321,000
Blount, Inc., 8.875%, 2012 ............... 245,000 249,900
Education Management LLC,
8.75%, 2014 (n) ........................ 175,000 181,125
Education Management LLC,
10.25%, 2016 (n) ....................... 135,000 142,763
JohnsonDiversey Holdings, Inc., "B",
9.625%, 2012 ........................... 370,000 387,575
JohnsonDiversey Holdings, Inc.,
0% to 2007, 10.67% to 2013 ............. 56,000 54,040
Knowledge Learning Corp.,
7.75%, 2015 (z) ........................ 125,000 119,688
RBS Global & Rexnord Corp.,
9.5%, 2014 (n) ......................... 120,000 124,800
-------------
$ 1,580,891
-------------
MACHINERY & TOOLS - 1.2%
Case Corp., 7.25%, 2016 .................. $ 125,000 $ 126,563
Case New Holland, Inc., 9.25%, 2011 ...... 100,000 105,875
Case New Holland, Inc., 7.125%, 2014 ..... 460,000 466,900
-------------
$ 699,338
-------------
MEDICAL & HEALTH TECHNOLOGY & SERVICES - 7.1%
CDRV Investors, Inc., 0% to 2010,
9.625% to 2015 ......................... $ 295,000 $ 228,625
DaVita, Inc., 6.625%, 2013 ............... 125,000 125,313
DaVita, Inc., 7.25%, 2015 ................ 445,000 453,900
HCA, Inc., 6.375%, 2015 .................. 710,000 601,725
HCA, Inc., 9.25%, 2016 (n) ............... 810,000 867,713
HealthSouth Corp., 10.75%, 2016 (n) ...... 280,000 301,350
Omnicare, Inc., 6.875%, 2015 ............. 315,000 311,063
Psychiatric Solutions, Inc., 7.75%, 2015 . 165,000 164,588
Select Medical Corp., 7.625%, 2015 ....... 260,000 215,800
Tenet Healthcare Corp., 9.25%, 2015 ...... 260,000 260,000
U.S. Oncology, Inc., 10.75%, 2014 ........ 365,000 403,325
Vanguard Health Holding II, 9%, 2014 ..... 295,000 298,688
-------------
$ 4,232,090
-------------
METALS & MINING - 3.8%
Aleris International, Inc., 10%, 2016 (z) $ 100,000 $ 101,000
Arch Western Finance LLC, 6.75%, 2013 .... 470,000 466,475
Chaparral Steel Co., 10%, 2013 ........... 225,000 251,156
FMG Finance Ltd., 10.625%, 2016 (n) ...... 340,000 364,650
Griffin Coal Mining Co., 9.5%, 2016 (z) .. 143,000 147,290
Massey Energy Co., 6.875%, 2013 .......... 330,000 310,200
Peabody Energy Corp., 5.875%, 2016 ....... 275,000 268,125
Peabody Energy Corp., 7.375%, 2016 ....... 175,000 186,375
PNA Group, Inc., 10.75%, 2016 (n) ........ 155,000 160,231
-------------
$ 2,255,502
-------------
NATURAL GAS - DISTRIBUTION - 0.3%
AmeriGas Partners LP, 7.125%, 2016 ....... $ 175,000 $ 175,000
-------------
NATURAL GAS - PIPELINE - 3.1%
ANR Pipeline Co., 9.625%, 2021 ........... $ 108,000 $ 143,319
Atlas Pipeline Partners LP, 8.125%, 2015 . 185,000 190,088
Colorado Interstate Gas Co.,
5.95%, 2015 ............................ 140,000 138,133
El Paso Energy Corp., 7%, 2011 ........... 335,000 347,563
El Paso Energy Corp., 7.75%, 2013 ........ 260,000 272,025
El Paso Performance-Linked Trust,
7.75%, 2011 (n) ........................ 335,000 354,263
Transcontinental Gas Pipe Line Corp.,
7%, 2011 ............................... 135,000 138,713
Williams Cos., Inc., 7.125%, 2011 ........ 132,000 137,280
Williams Partners LP, 7.25%, 2017 (z) .... 140,000 142,800
-------------
$ 1,864,184
-------------
NETWORK & TELECOM - 3.9%
Cincinnati Bell, Inc., 8.375%, 2014 ...... $ 300,000 $ 308,250
Citizens Communications Co.,
9.25%, 2011 ............................ 225,000 248,906
Hawaiian Telecom Communications, Inc.,
9.75%, 2013 ............................ 165,000 165,413
Nordic Telephone Co. Holdings,
8.875%, 2016 (n) ....................... 255,000 272,850
Qwest Capital Funding, Inc., 7.25%, 2011 . 175,000 178,719
Qwest Corp., 7.875%, 2011 ................ 195,000 207,675
Qwest Corp., 8.875%, 2012 ................ 370,000 412,088
Time Warner Telecom Holdings, Inc.,
9.25%, 2014 ............................ 180,000 192,375
Windstream Corp., 8.625%, 2016 (n) ....... 285,000 312,075
-------------
$ 2,298,351
-------------
OIL SERVICES - 1.2%
Basic Energy Services, Inc.,
7.125%, 2016 ........................... $ 325,000 $ 320,125
GulfMark Offshore, Inc., 7.75%, 2014 ..... 180,000 183,600
Hanover Compressor Co., 9%, 2014 ......... 190,000 205,200
-------------
$ 708,925
-------------
PHARMACEUTICALS - 0.3%
Warner Chilcott Corp., 8.75%, 2015 ....... $ 192,000 $ 196,800
-------------
PRINTING & PUBLISHING - 3.6%
American Media Operations, Inc.,
10.25%, 2009 ........................... $ 110,000 $ 106,563
American Media Operations, Inc.,
8.875%, 2011 ........................... 75,000 68,438
Dex Media, Inc., 0% to 2008,
9% to 2013 ............................. 425,000 379,313
Dex Media, Inc., 0% to 2008,
9% to 2013 ............................. 300,000 267,750
Idearc, Inc., 8%, 2016 (n) ............... 590,000 598,850
MediaNews Group, Inc., 6.875%, 2013 ...... 330,000 298,650
PRIMEDIA, Inc., 8%, 2013 ................. 80,000 77,400
R.H. Donnelley Corp., 8.875%, 2016 ....... 305,000 320,250
-------------
$ 2,117,214
-------------
RAILROAD & SHIPPING - 0.4%
TFM S.A. de C.V., 9.375%, 2012 ........... $ 202,000 $ 215,635
TFM S.A. de C.V., 12.5%, 2012 ............ 26,000 28,080
-------------
$ 243,715
-------------
RESTAURANTS - 0.3%
Denny's Corp. Holdings, Inc., 10%, 2012 .. $ 150,000 $ 158,250
-------------
RETAILERS - 1.5%
Buhrmann U.S., Inc., 7.875%, 2015 ........ $ 195,000 $ 190,125
Couche-Tard, Inc., 7.5%, 2013 ............ 180,000 184,050
Jean Coutu Group (PJC), Inc.,
7.625%, 2012 ........................... 160,000 168,400
Neiman Marcus Group, Inc., 9%, 2015 ...... 185,000 201,881
Neiman Marcus Group, Inc.,
10.375%, 2015 .......................... 115,000 127,938
-------------
$ 872,394
-------------
SPECIALTY STORES - 1.3%
GSC Holdings Corp., 8%, 2012 ............. $ 250,000 $ 261,250
Michaels Stores, Inc., 11.375%, 2016 (n) . 295,000 307,538
Payless ShoeSource, Inc., 8.25%, 2013 .... 210,000 218,400
-------------
$ 787,188
-------------
TELECOMMUNICATIONS - WIRELESS - 1.9%
Centennial Communications Corp.,
10%, 2013 .............................. $ 50,000 $ 53,188
Centennial Communications Corp.,
10.125%, 2013 .......................... 120,000 129,300
Rogers Wireless, Inc., 6.375%, 2014 ...... 250,000 253,125
Rogers Wireless, Inc., 7.5%, 2015 ........ 175,000 189,875
Rural Cellular Corp., 9.875%, 2010 ....... 210,000 223,388
Wind Acquisition Finance S.A.,
10.75%, 2015 (n) ....................... 250,000 284,375
-------------
$ 1,133,251
-------------
TOBACCO - 0.6%
Reynolds American, Inc., 7.25%, 2012 ..... $ 185,000 $ 192,863
Reynolds American, Inc., 7.3%, 2015 ...... 155,000 160,881
-------------
$ 353,744
-------------
TRANSPORTATION - SERVICES - 1.0%
Hertz Corp., 8.875%, 2014 (n) ............ $ 360,000 $ 377,100
Stena AB, 7%, 2016 ....................... 221,000 209,950
-------------
$ 587,050
-------------
U.S. TREASURY OBLIGATIONS - 2.0%
U.S. Treasury Bonds, 4.5%, 2036 .......... $1,244,000 $ 1,182,967
-------------
UTILITIES - ELECTRIC POWER - 3.7%
Edison Mission Energy, 7.75%, 2016 ....... $ 125,000 $ 132,500
Midwest Generation LLC, 8.75%, 2034 ...... 360,000 390,600
Mirant North American LLC,
7.375%, 2013 ........................... 240,000 243,600
Mission Energy Holding Co., 13.5%, 2008 .. 250,000 275,625
NRG Energy, Inc., 7.375%, 2016 ........... 775,000 778,875
NRG Energy, Inc., 7.375%, 2017 ........... 90,000 90,225
Reliant Energy, Inc., 6.75%, 2014 ........ 115,000 112,413
Reliant Resources, Inc., 9.25%, 2010 ..... 140,000 147,000
-------------
$ 2,170,838
-------------
TOTAL BONDS
(IDENTIFIED COST, $51,348,049) .......................... $ 52,684,656
-------------
COMMON STOCKS - 1.3%
CHEMICALS - 0.3%
Huntsman Corp. (a) ....................... 9,100 $ 172,627
-------------
CONTAINERS - 0.3%
Crown Holdings, Inc. (a) ................. 7,700 $ 161,084
-------------
ENERGY - INDEPENDENT - 0.4%
Chesapeake Energy Corp. .................. 2,100 $ 61,005
Foundation Coal Holdings, Inc. ........... 5,760 182,938
-------------
$ 243,943
-------------
MACHINERY & TOOLS - 0.1%
Titan International, Inc. ................ 3,300 $ 66,495
-------------
METALS & MINING - 0.0%
Oxford Automotive, Inc. (a) .............. 53 $ 0
-------------
PRINTING & PUBLISHING - 0.0%
Golden Books Family
Entertainment, Inc. (a) ................ 21,250 $ 0
-------------
TELEPHONE SERVICES - 0.2%
Windstream Corp. ......................... 10,100 $ 143,622
-------------
TOTAL COMMON STOCKS
(IDENTIFIED COST, $764,905) ............................. $ 787,771
-------------
FLOATING RATE LOANS(g)(r) - 6.6%
AUTOMOTIVE - 1.9%
Ford Motor Co., Term Loan B,
8.36%, 2013 ............................ $ 555,887 $ 556,003
General Motors, Term Loan B,
7.745%, 2013 (o) ....................... 397,378 397,461
Mark IV Industries, Inc., Second Lien Term
Loan, 2011 (o) ......................... 169,464 169,605
-------------
$ 1,123,069
-------------
CONTAINERS - 0.4%
Altivity Packaging LLC, Second Lien Term
Loan, 10.35%, 2013 ..................... $ 50,424 $ 50,907
Altivity Packaging LLC, Second Lien Term
Loan, 10.3494%, 2013 ................... 157,576 158,955
-------------
$ 209,862
-------------
ENERGY - INDEPENDENT - 0.2%
MEG Energy Corp., Bridge Term Loan,
10.12%, 2013 ........................... $ 142,720 $ 142,006
-------------
FOOD & BEVERAGES - 0.3%
Dole Food Co., Inc., Letter of Credit,
5.2438%, 2013 (o) ...................... $ 13,949 $ 13,842
Dole Food Co., Inc., Term Loan,
7.5455%, 2013 (o) ...................... 31,149 30,910
Dole Food Co., Inc., Term Loan C,
7.4603%, 2013 (o) ...................... 103,831 103,035
-------------
$ 147,787
-------------
FOREST & PAPER PRODUCTS - 0.5%
Georgia-Pacific Corp., Term Loan,
7.3561%, 2012 .......................... $ 292,261 $ 293,654
Georgia-Pacific Corp., Term Loan
B-2, 2013 (o) .......................... 19,153 19,241
-------------
$ 312,895
-------------
GAMING & LODGING - 0.5%
Gulfside Casino, Term Loan B,
10.3703%, 2012 ......................... $ 318,909 $ 320,504
-------------
MEDICAL & HEALTH TECHNOLOGY & SERVICES - 0.5%
HCA, Inc., Term Loan B, 8.1138%, 2013 .... $ 289,251 $ 292,472
-------------
POLLUTION CONTROL - 0.3%
Allied Waste North America, Inc., Term
Loan, 7.1576%, 2012 .................... $ 93,400 $ 93,497
Allied Waste North America, Inc., Term
Loan A, 7.27%, 2012 .................... 41,418 41,501
-------------
$ 134,998
-------------
PRINTING & PUBLISHING - 1.5%
Idearc, Inc., Term Loan B, 7.35%, 2014 ... $ 655,458 $ 658,736
Nielsen Finance LLC, Term Loan B,
8.1254%, 2013 .......................... 249,077 250,767
-------------
$ 909,503
-------------
SPECIALTY STORES - 0.5%
Michaels Stores, Inc., Term Loan,
8.375%, 2013 ........................... $ 285,715 $ 287,323
-------------
TOTAL FLOATING RATE LOANS
(IDENTIFIED COST, $3,867,689) ........................... $ 3,880,419
-------------
CONVERTIBLE PREFERRED STOCKS - 0.1%
REAL ESTATE - 0.1%
Mills Corp., "F", 6.75%
(Identified Cost, $77,375) ............. 100 $ 89,625
-------------
PREFERRED STOCKS - 0.1%
BROADCASTING - 0.1%
ION Media Networks, Inc. (p) ............. 8 $ 59,200
-------------
REAL ESTATE - 0.0%
HRPT Properties Trust, REIT, "B" ......... 200 $ 5,142
-------------
TOTAL PREFERRED STOCKS
(IDENTIFIED COST, $69,456) .............................. $ 64,342
-------------
STRIKE FIRST
ISSUER PRICE EXERCISE SHARE/PAR VALUE ($)
WARRANTS - 0.0%
BUSINESS SERVICES - 0.0%
Loral Space &
Communications Ltd. (a) . $0.14 1/28/97 1,000 $ 0
Loral Space &
Communications Ltd. (a) . $0.14 1/28/97 1,100 0
-------------
$ 0
-------------
NETWORK & TELECOM - 0.0%
Knology, Inc. (a)(z) ...... $0.10 11/22/97 500 $ 1,249
-------------
TOTAL WARRANTS
(IDENTIFIED COST, $29,924) ............................ $ 1,249
-------------
ISSUER SHARES/PAR VALUE ($)
CONVERTIBLE BONDS - 0.4%
AUTOMOTIVE - 0.4%
Ford Motor Co., 4.25%, 2036
(Identified Cost, $215,000) ............ $ 215,000 $ 229,781
-------------
SHORT-TERM OBLIGATIONS - 1.7%
General Electric Capital Corp., 5.29%,
due 1/02/07, at Amortized Cost
and Value (y) .......................... $ 982,000 $ 981,856
-------------
TOTAL INVESTMENTS
(IDENTIFIED COST, $57,354,254) (k) ...................... $ 58,719,699
-------------
OTHER ASSETS,
LESS LIABILITIES - 0.9% ................................... 553,979
-------------
NET ASSETS - 100.0% ....................................... $ 59,273,678
-------------
See portfolio footnotes and notes to financial statements.
PORTFOLIO OF INVESTMENTS -- December 31, 2006
MONEY MARKET VARIABLE ACCOUNT
ISSUER SHARES/PAR VALUE ($)
CERTIFICATES OF DEPOSIT - 8.8%
OTHER BANKS & DIVERSIFIED FINANCIALS - 8.8%
Barclays Bank PLC, NY, 5.31%, due 1/22/07 $1,207,000 $ 1,207,000
Credit Suisse, NY, 5.31%, due 2/28/07 .... 1,448,000 1,448,000
UBS AG, Stamford CT Branch,
5.355%, due 3/06/07 .................... 1,530,000 $ 1,530,000
-------------
TOTAL CERTIFICATES OF DEPOSIT,
AT AMORTIZED COST AND VALUE ............................. $4,185,000
-------------
COMMERCIAL PAPER(y) - 85.5%
ASSET BACKED & SECURITIZED - 3.1%
Yorktown Capital LLC,
5.26%, due 1/04/07 (t) ................. $1,495,000 $ 1,494,345
-------------
BROKERAGE & ASSET MANAGERS - 6.3%
Merrill Lynch & Co., Inc.,
5.22%, due 2/23/07 ..................... $1,583,000 $ 1,570,835
Morgan Stanley, Inc., 5.25%, due 2/21/07 . 1,450,000 1,439,216
-------------
$ 3,010,051
-------------
FINANCIAL INSTITUTIONS - 54.9%
Alpine Securitization Corp.,
5.23%, due 1/02/07 (t) ................. $1,494,000 $ 1,493,783
American General Finance Corp.,
5.19%, due 5/11/07 ..................... 1,452,000 1,424,787
Barton Capital LLC,
5.26%, due 1/10/07 (t) ................. 1,494,000 1,492,035
Bryant Park Funding LLC,
5.25%, due 1/18/07 (t) ................. 1,540,000 1,536,182
CAFCO LLC, 5.26%, due 1/05/07 (t) ........ 1,416,000 1,415,172
CRC Funding LLC, 5.25%, due 1/11/07 (t) .. 1,494,000 1,491,821
Ciesco LLC, 5.26%,
due 1/04/07 - 2/09/07 (t) .............. 1,450,000 1,446,998
Citibank Credit Card Issuance Trust,
5.27%, due 1/12/07 (t) ................. 1,474,000 1,471,626
Fairway Finance Corp.,
5.265%, due 1/12/07 (t) ................ 1,000,000 998,391
Govco, Inc., 5.25%, due 1/18/07 (t) ...... 1,000,000 997,521
Govco, Inc., 5.26%, due 2/05/07 (t) ...... 496,000 493,464
Jupiter Securitization Co., LLC,
5.25%, due 1/25/07 - 2/01/07 (t) ....... 1,459,000 1,453,557
Kitty Hawk Funding Corp.,
5.25%, due 3/30/07 (t) ................. 1,440,000 1,421,520
Old Line Funding LLC,
5.33%, due 1/02/07 (t) ................. 126,000 125,981
Old Line Funding LLC,
5.28%, due 1/26/07 (t) ................. 1,463,000 1,457,636
Ranger Funding Co. LLC,
5.25%, due 3/12/07 (t) ................. 1,468,000 1,453,014
Regency Markets No. 1, LLC,
5.28%, due 1/08/07 (t) ................. 700,000 699,281
Scaldis Capital LLC,
5.25%, due 1/16/07 (t) ................. 1,541,000 1,537,629
Sheffield Receivables Corp.,
5.25%, due 1/22/07 (t) ................. 722,000 719,789
Thunder Bay Funding LLC,
5.25%, due 1/10/07 (t) ................. 1,542,000 1,539,976
Windmill Funding Corp.,
5.26%, due 2/02/07 (t) ................. 1,458,000 1,451,183
-------------
$ 26,121,346
-------------
FOOD & BEVERAGES - 1.2%
Archer Daniels Midland Co.,
5.27%, due 1/17/07 (t) ................. $ 575,000 $ 573,653
-------------
MAJOR BANKS - 5.7%
HBOS Treasury Services PLC,
5.26%, due 1/30/07 ..................... $ 368,000 $ 366,441
Royal Bank of Canada,
5.27%, due 2/05/07 ..................... 199,000 197,980
Royal Bank of Canada,
5.28%, due 2/05/07 ..................... 750,000 746,150
Societe Generale North America,
5.27%, due 2/09/07 ..................... 200,000 198,858
Societe Generale North America,
5.25%, due 3/08/07 ..................... 1,200,000 1,188,450
-------------
$ 2,697,879
-------------
OTHER BANKS & DIVERSIFIED FINANCIALS - 14.3%
Calyon North America, Inc.,
5.27%, due 2/20/07 ..................... $1,365,000 $ 1,355,075
Citigroup Funding, Inc.,
5.245%, due 1/16/07 .................... 525,000 523,853
Citigroup Funding, Inc.,
5.26%, due 2/15/07 ..................... 933,000 926,866
Depfa Bank PLC, 5.25%, due 1/22/07 (t) ... 1,570,000 1,565,192
Dexia Delaware LLC, 5.26%, due 1/16/07 ... 968,000 965,878
Svenska Handelsbanken, Inc.,
5.23%, due 2/28/07 ..................... 1,467,000 1,454,639
-------------
$ 6,791,503
-------------
TOTAL COMMERCIAL PAPER,
AT AMORTIZED COST AND VALUE ............................. $ 40,688,777
-------------
REPURCHASE AGREEMENTS - 5.9%
Merrill Lynch, 5.32%, dated 12/29/06,
due 1/02/07, total to be received
$2,798,653 (secured by various U.S.
Treasury and Federal Agency obligations
and Mortgage Backed securities in a
jointly traded account), at Cost ....... $2,797,000 $ 2,797,000
-------------
TOTAL INVESTMENTS,
AT AMORTIZED COST AND VALUE ............................. $ 47,670,777
-------------
OTHER ASSETS,
LESS LIABILITIES - (0.2)% ................................. (80,146)
-------------
NET ASSETS - 100.0% ....................................... $ 47,590,631
-------------
See portfolio footnotes and notes to financial statements.
PORTFOLIO OF INVESTMENTS -- December 31, 2006
TOTAL RETURN VARIABLE ACCOUNT
ISSUER SHARES/PAR VALUE ($)
COMMON STOCKS - 60.0%
AEROSPACE - 2.0%
Lockheed Martin Corp. .................... 20,970 $ 1,930,708
Northrop Grumman Corp. ................... 10,650 721,005
United Technologies Corp. ................ 15,590 974,687
-------------
$ 3,626,400
-------------
ALCOHOLIC BEVERAGES - 0.5%
Diageo PLC ............................... 33,416 $ 656,122
Molson Coors Brewing Co. ................. 3,580 273,655
-------------
$ 929,777
-------------
APPAREL MANUFACTURERS - 0.4%
Hanesbrands, Inc. (a) .................... 1,172 $ 27,683
NIKE, Inc., "B" .......................... 7,520 744,706
-------------
$ 772,389
-------------
AUTOMOTIVE - 0.3%
Johnson Controls, Inc. ................... 6,250 $ 537,000
-------------
BIOTECHNOLOGY - 1.0%
Amgen, Inc. (a) .......................... 22,710 $ 1,551,320
Millipore Corp. (a) ...................... 3,970 264,402
-------------
$ 1,815,722
-------------
BROADCASTING - 1.4%
CBS Corp., "B" ........................... 26,684 $ 832,007
E.W. Scripps Co., "A" .................... 8,450 421,993
Idearc, Inc. (a) ......................... 2,601 74,519
Time Warner, Inc. ........................ 8,260 179,903
Viacom, Inc., "B" (a) .................... 11,475 470,819
Walt Disney Co. .......................... 4,210 144,277
WPP Group PLC ............................ 24,400 329,989
-------------
$ 2,453,507
-------------
BROKERAGE & ASSET MANAGERS - 2.5%
Franklin Resources, Inc. ................. 5,300 $ 583,901
Goldman Sachs Group, Inc. ................ 4,930 982,795
KKR Private Equity Investments LP, IEU ... 6,600 150,810
Lehman Brothers Holdings, Inc. ........... 9,840 768,701
Mellon Financial Corp. ................... 20,200 851,430
Merrill Lynch & Co., Inc. ................ 7,650 712,215
Morgan Stanley ........................... 6,360 517,895
-------------
$ 4,567,747
-------------
BUSINESS SERVICES - 0.2%
Accenture Ltd., "A" ...................... 11,290 $ 416,940
-------------
CHEMICALS - 1.1%
3M Co. ................................... 3,480 $ 271,196
Dow Chemical Co. ......................... 6,330 252,820
Nalco Holding Co. (a) .................... 12,180 249,203
PPG Industries, Inc. ..................... 11,010 706,952
Syngenta AG .............................. 2,460 457,529
-------------
$ 1,937,700
-------------
COMPUTER SOFTWARE - 1.4%
Compuware Corp. (a) ...................... 163,480 $ 1,361,788
Oracle Corp. (a) ......................... 29,610 507,515
Symantec Corp. (a) ....................... 34,830 726,205
-------------
$ 2,595,508
-------------
COMPUTER SOFTWARE - SYSTEMS - 0.3%
Hewlett-Packard Co. ...................... 14,480 $ 596,431
-------------
CONSTRUCTION - 1.5%
D.R. Horton, Inc. ........................ 7,700 $ 203,973
Masco Corp. .............................. 77,310 2,309,250
Sherwin-Williams Co. ..................... 2,850 181,203
Toll Brothers, Inc. (a) .................. 2,760 88,955
-------------
$ 2,783,381
-------------
CONSUMER GOODS & SERVICES - 0.7%
Alberto Culver Co. ....................... 20,510 $ 439,940
Estee Lauder Cos., Inc., "A" ............. 19,030 776,805
-------------
$ 1,216,745
-------------
CONTAINERS - 1.0%
Owens-Illinois, Inc. (a) ................. 99,460 $ 1,835,037
Smurfit-Stone Container Corp. (a) ........ 6,080 64,205
-------------
$ 1,899,242
-------------
ELECTRICAL EQUIPMENT - 2.4%
Cooper Industries Ltd., "A" .............. 750 $ 67,822
General Electric Co. ..................... 30,920 1,150,533
Rockwell Automation, Inc. ................ 7,760 473,981
Tyco International Ltd. .................. 70,130 2,131,952
W.W. Grainger, Inc. ...................... 6,620 463,003
-------------
$ 4,287,291
-------------
ELECTRONICS - 0.4%
Analog Devices, Inc. ..................... 1,590 $ 52,263
Applied Materials, Inc. .................. 3,720 68,634
Intel Corp. .............................. 29,970 606,892
-------------
$ 727,789
-------------
ENERGY - INDEPENDENT - 2.1%
Apache Corp. ............................. 22,790 $ 1,515,763
Devon Energy Corp. ....................... 28,190 1,890,985
EOG Resources, Inc. ...................... 3,310 206,709
Sunoco, Inc. ............................. 3,500 218,260
-------------
$ 3,831,717
-------------
ENERGY - INTEGRATED - 3.7%
Chevron Corp. ............................ 8,935 $ 656,991
ConocoPhillips ........................... 10,170 731,731
Exxon Mobil Corp. ........................ 31,742 2,432,389
Hess Corp. ............................... 28,550 1,415,224
Royal Dutch Shell PLC, ADR ............... 2,560 181,222
TOTAL S.A., ADR .......................... 18,870 1,357,130
-------------
$ 6,774,687
-------------
FOOD & BEVERAGES - 1.5%
Coca-Cola Co. ............................ 6,970 $ 336,302
General Mills, Inc. ...................... 3,170 182,592
Kellogg Co. .............................. 13,550 678,313
Nestle S.A ............................... 1,694 601,774
PepsiCo, Inc. ............................ 7,660 479,133
Tyson Foods, Inc., "A" ................... 22,190 365,025
-------------
$ 2,643,139
-------------
FOOD & DRUG STORES - 0.4%
CVS Corp. ................................ 14,430 $ 446,031
Kroger Co. ............................... 6,930 159,875
Sally Beauty Holdings, Inc. (a) .......... 22,810 177,918
-------------
$ 783,824
-------------
FOREST & PAPER PRODUCTS - 0.7%
Bowater, Inc. ............................ 35,930 $ 808,425
International Paper Co. .................. 5,100 173,910
MeadWestvaco Corp. ....................... 7,940 238,676
-------------
$ 1,221,011
-------------
GENERAL MERCHANDISE - 0.6%
Federated Department Stores, Inc. ........ 26,010 $ 991,761
Wal-Mart Stores, Inc. .................... 3,490 161,168
-------------
$ 1,152,929
-------------
HEALTH MAINTENANCE ORGANIZATIONS - 0.5%
UnitedHealth Group, Inc. ................. 1,880 $ 101,012
WellPoint, Inc. (a) ...................... 9,120 717,653
-------------
$ 818,665
-------------
INSURANCE - 5.2%
Aflac, Inc. .............................. 9,930 $ 456,780
Allstate Corp. ........................... 33,570 2,185,743
Chubb Corp. .............................. 4,120 217,989
Conseco, Inc. (a) ........................ 60,200 1,202,796
Genworth Financial, Inc., "A" ............ 66,020 2,258,544
Hartford Financial Services Group, Inc. .. 9,380 875,248
MetLife, Inc. ............................ 17,370 1,025,004
St. Paul Travelers Cos., Inc. ............ 21,920 1,176,885
-------------
$ 9,398,989
-------------
LEISURE & TOYS - 0.3%
Hasbro, Inc. ............................. 3,910 $ 106,548
Mattel, Inc. ............................. 22,260 504,412
-------------
$ 610,960
-------------
MACHINERY & TOOLS - 0.7%
Deere & Co. .............................. 13,210 $ 1,255,875
Finning International, Inc. (n) .......... 440 18,051
Illinois Tool Works, Inc. ................ 1,450 66,975
-------------
$ 1,340,901
-------------
MAJOR BANKS - 6.3%
Bank of America Corp. .................... 66,418 $ 3,546,057
Bank of New York Co., Inc. ............... 66,530 2,619,286
JPMorgan Chase & Co. ..................... 58,342 2,817,919
PNC Financial Services Group, Inc. ....... 17,060 1,263,122
SunTrust Banks, Inc. ..................... 14,640 1,236,348
-------------
$ 11,482,732
-------------
MEDICAL & HEALTH TECHNOLOGY & SERVICES - 0.4%
Caremark Rx, Inc. ........................ 5,550 $ 316,960
Tenet Healthcare Corp. (a) ............... 65,340 455,420
-------------
$ 772,380
-------------
MEDICAL EQUIPMENT - 1.1%
Boston Scientific Corp. (a) .............. 44,010 $ 756,092
Pall Corp. ............................... 33,540 1,158,807
-------------
$ 1,914,899
-------------
METALS & MINING - 0.1%
BHP Billiton PLC ......................... 11,240 $ 205,727
-------------
NATURAL GAS - DISTRIBUTION - 0.1%
Questar Corp. ............................ 2,150 $ 178,557
-------------
NATURAL GAS - PIPELINE - 0.6%
Williams Cos., Inc. ...................... 38,800 $ 1,013,456
-------------
NETWORK & TELECOM - 1.4%
Cisco Systems, Inc. (a) .................. 17,510 $ 478,548
Nortel Networks Corp. (a) ................ 75,337 2,013,758
-------------
$ 2,492,306
-------------
OIL SERVICES - 0.9%
GlobalSantaFe Corp. ...................... 13,480 $ 792,354
Noble Corp. .............................. 10,985 836,508
-------------
$ 1,628,862
-------------
OTHER BANKS & DIVERSIFIED FINANCIALS - 3.8%
American Express Co. ..................... 10,460 $ 634,608
Capital One Financial Corp. .............. 2,630 202,037
Citigroup, Inc. .......................... 48,576 2,705,683
Countrywide Financial Corp. .............. 8,100 343,845
Fannie Mae ............................... 19,130 1,136,131
Freddie Mac .............................. 2,490 169,071
New York Community Bancorp, Inc. ......... 41,110 661,871
SLM Corp. ................................ 4,740 231,170
UBS AG ................................... 7,572 460,010
UBS AG ................................... 6,330 381,889
-------------
$ 6,926,315
-------------
PHARMACEUTICALS - 3.2%
Abbott Laboratories ...................... 4,050 $ 197,275
Eli Lilly & Co. .......................... 14,350 747,635
Johnson & Johnson ........................ 29,380 1,939,668
Merck & Co., Inc. ........................ 8,730 380,628
Warner Chilcott Ltd., "A" (a) ............ 23,360 322,835
Wyeth .................................... 43,390 2,209,419
-------------
$ 5,797,460
-------------
PRINTING & PUBLISHING - 0.9%
New York Times Co., "A" .................. 65,610 $ 1,598,260
-------------
RAILROAD & SHIPPING - 0.6%
Burlington Northern Santa Fe Corp. ....... 7,600 $ 560,956
Norfolk Southern Corp. ................... 10,960 551,178
-------------
$ 1,112,134
-------------
SPECIALTY CHEMICALS - 0.4%
Air Products & Chemicals, Inc. ........... 7,610 $ 534,831
Praxair, Inc. ............................ 3,630 215,368
-------------
$ 750,199
-------------
SPECIALTY STORES - 0.4%
OfficeMax, Inc. .......................... 16,060 $ 797,379
-------------
TELECOMMUNICATIONS - WIRELESS - 0.2%
Vodafone Group PLC, ADR .................. 12,869 $ 357,501
-------------
TELEPHONE SERVICES - 2.2%
AT&T, Inc. ............................... 15,604 $ 557,843
Embarq Corp. ............................. 8,700 457,272
Qwest Communications International,
Inc. (a) ............................... 27,000 225,990
Sprint Nextel Corp. ...................... 26,600 502,474
TELUS Corp. .............................. 4,130 189,748
TELUS Corp. (non-voting shares) .......... 1,300 58,064
Verizon Communications, Inc. ............. 56,390 2,099,964
-------------
$ 4,091,355
-------------
TOBACCO - 1.8%
Altria Group, Inc. ....................... 37,460 $ 3,214,817
-------------
TRUCKING - 0.0%
Con-way, Inc. ............................ 610 $ 26,864
-------------
UTILITIES - ELECTRIC POWER - 2.8%
Dominion Resources, Inc. ................. 11,640 $ 975,898
Edison International ..................... 5,890 267,877
Entergy Corp. ............................ 2,560 236,339
FirstEnergy Corp. ........................ 4,500 271,350
FPL Group, Inc. .......................... 41,150 2,239,383
NRG Energy, Inc. (a) ..................... 6,230 348,942
PPL Corp. ................................ 2,480 88,883
Public Service Enterprise Group, Inc. .... 6,640 440,763
TXU Corp. ................................ 4,550 246,655
-------------
$ 5,116,090
-------------
TOTAL COMMON STOCKS
(IDENTIFIED COST, $91,766,887) .......................... $ 109,217,684
-------------
BONDS - 39.1%
AEROSPACE - 0.1%
Boeing Capital Corp., 6.5%, 2012 ......... $ 263,000 $ 277,302
-------------
AGENCY - OTHER - 0.0%
Financing Corp., 9.65%, 2018 ............. $ 45,000 $ 62,859
-------------
ASSET BACKED & SECURITIZED - 4.4%
Banc of America Commercial Mortgage, Inc.,
FRN, 4.857%, 2043 ...................... $ 200,000 $ 193,736
Banc of America Commercial Mortgage, Inc.,
FRN, 5.1814%, 2047 ..................... 102,153 101,415
Banc of America Commercial Mortgage, Inc.,
FRN, 5.1814%, 2047 ..................... 100,000 99,366
Bayview Financial Revolving Mortgage Loan
Trust, FRN, 6.15%, 2040 (z) ............ 250,000 250,335
Bear Stearns Commercial Mortgage
Securities, Inc., FRN, 5.116%, 2041 .... 82,288 81,191
Blackrock Capital Finance LP,
7.75%, 2026 (n) ........................ 41,414 41,000
Chase Commercial Mortgage Securities
Corp., 7.543%, 2032 .................... 54,894 56,026
Citigroup Commercial Mortgage Trust,
5.462%, 2049 ........................... 219,581 220,459
Citigroup/Deutsche Bank Commercial
Mortgage Trust, 5.648%, 2048 ........... 200,000 203,762
Citigroup/Deutsche Bank Commercial
Mortgage Trust, FRN, 5.2255%, 2044 ..... 200,000 199,637
Countrywide Asset-Backed Certificates,
FRN, 4.823%, 2035 ...................... 66,606 66,133
Countrywide Asset-Backed Certificates,
FRN, 5.689%, 2036 ...................... 90,000 90,218
Credit Suisse Commercial Mortgage Trust,
5.509%, 2039 ........................... 128,277 129,288
Credit Suisse Mortgage Capital
Certificate, 5.343%, 2039 .............. 220,000 218,724
CRIIMI MAE CMBS Corp., 6.7%, 2030 (n) .... 71,367 71,237
CRIIMI MAE Commercial Mortgage Trust,
7%, 2033 (n) ........................... 161,348 159,621
Deutsche Mortgage & Asset Receiving Corp.,
6.538%, 2031 ........................... 106,563 107,267
Falcon Franchise Loan LLC,
7.382%, 2010 (n) ....................... 39,740 40,746
GE Commercial Mortgage Corp., FRN,
5.3394%, 2044 .......................... 130,000 130,180
GMAC Mortgage Corp. Loan Trust, FRN,
5.805%, 2036 ........................... 115,000 115,058
Greenwich Capital Commercial Funding
Corp., 4.305%, 2042 .................... 107,385 104,540
Greenwich Capital Commercial Funding
Corp., FRN, 5.317%, 2036 ............... 60,728 60,667
Greenwich Capital Commercial Funding
Corp., FRN, 5.9123%, 2038 .............. 100,000 104,486
JPMorgan Chase Commercial Mortgage
Securities Corp., 4.78%, 2042 .......... 152,000 145,936
JPMorgan Chase Commercial Mortgage
Securities Corp., 5.552%, 2045 ......... 210,000 213,016
JPMorgan Chase Commercial Mortgage
Securities Corp., 5.44%, 2045 (z) ...... 106,496 106,845
JPMorgan Chase Commercial Mortgage
Securities Corp., 5.372%, 2047 ......... 170,000 169,815
JPMorgan Chase Commercial Mortgage
Securities Corp., FRN, 5.2115%, 2041 ... 39,903 39,754
JPMorgan Chase Commercial Mortgage
Securities Corp., FRN, 5.2943%, 2043 ... 200,000 200,181
JPMorgan Chase Commercial Mortgage
Securities Corp., FRN, 5.475%, 2043 .... 210,000 211,851
JPMorgan Chase Commercial Mortgage
Securities Corp., FRN, 5.855%, 2043 .... 200,000 207,358
JPMorgan Chase Commercial Mortgage
Securities Corp., FRN, 5.8755%, 2045 ... 210,000 219,391
JPMorgan Chase Commercial Mortgage
Securities Corp., FRN, 5.038%, 2046 .... 197,476 193,618
LB-UBS Commercial Mortgage Trust, FRN,
5.413%, 2039 ........................... 56,518 56,651
Merrill Lynch Mortgage Trust, FRN,
5.6601%, 2039 .......................... 197,000 202,212
Merrill Lynch Mortgage Trust, FRN,
5.2643%, 2044 .......................... 88,000 87,829
Merrill Lynch/Countrywide Commercial
Mortgage Trust, FRN, 5.204%, 2049 ...... 220,000 216,545
Morgan Stanley Capital I, Inc.,
5.168%, 2042 ........................... 48,533 47,978
Morgan Stanley Capital I, Inc., FRN,
0.5376%, 2030 (i)(n) ................... 7,288,683 91,575
Multi-Family Capital Access One, Inc.,
6.65%, 2024 ............................ 43,344 44,006
Residential Asset Mortgage Products, Inc.,
4.109%, 2035 ........................... 112,691 111,174
Residential Asset Mortgage Products,Inc.,
FRN, 4.9708%, 2034 ..................... 92,000 89,923
Residential Funding Mortgage Securities,
Inc., FRN, 5.32%, 2035 ................. 129,000 128,080
Spirit Master Funding LLC, 5.05%, 2023 (z) 187,677 180,672
Structured Asset Securities Corp., FRN,
4.67%, 2035 ............................ 298,098 294,792
Wachovia Bank Commercial Mortgage Trust,
4.935%, 2042 ........................... 240,000 233,583
Wachovia Bank Commercial Mortgage Trust,
5.339%, 2048 ........................... 220,000 218,876
Wachovia Bank Commercial Mortgage Trust,
FRN, 4.847%, 2041 ...................... 50,000 48,429
Wachovia Bank Commercial Mortgage Trust,
FRN, 5.083%, 2042 ...................... 185,000 181,676
Wachovia Bank Commercial Mortgage Trust,
FRN, 5.118%, 2042 ...................... 200,000 196,780
Wachovia Bank Commercial Mortgage Trust,
FRN, 5.1959%, 2044 ..................... 130,000 129,150
Wachovia Bank Commercial Mortgage Trust,
FRN, 5.3161%, 2044 ..................... 149,000 148,882
Wachovia Bank Commercial Mortgage Trust,
FRN, 5.466%, 2045 ...................... 189,000 189,966
Wachovia Bank Commercial Mortgage Trust,
FRN, 5.962%, 2045 (n) .................. 140,000 146,564
Wachovia Bank Commercial Mortgage Trust,
FRN, 5.795%, 2045 ...................... 150,000 154,343
Wachovia Bank Commercial Mortgage Trust,
FRN, 5.603%, 2048 ...................... 200,000 202,782
-------------
$ 7,955,325
-------------
AUTOMOTIVE - 0.1%
Johnson Controls, Inc., 5.5%, 2016 ....... $ 136,000 $ 133,347
-------------
BROADCASTING - 0.2%
CBS Corp., 6.625%, 2011 .................. $ 137,000 $ 141,503
News America Holdings, 8.5%, 2025 ........ 99,000 117,168
News America, Inc., 6.2%, 2034 ........... 42,000 40,539
-------------
$ 299,210
-------------
BROKERAGE & ASSET MANAGERS - 0.6%
Goldman Sachs Group, Inc.,
5.7%, 2012 ............................. $ 137,000 $ 139,526
Lehman Brothers Holdings, Inc.,
8.25%, 2007 ............................ 334,000 338,315
Merrill Lynch & Co., Inc., 5.45%, 2014 ... 127,000 127,678
Merrill Lynch & Co., Inc., 6.05%, 2016 ... 200,000 207,008
Morgan Stanley Group, Inc.,
6.75%, 2011 ............................ 156,000 164,888
Morgan Stanley Group, Inc.,
4.75%, 2014 ............................ 78,000 74,578
-------------
$ 1,051,993
-------------
BUILDING - 0.2%
CRH America, Inc., 6.95%, 2012 ........... $ 208,000 $ 219,857
Lafarge S.A., 6.5%, 2016 ................. 74,000 77,265
-------------
$ 297,122
-------------
BUSINESS SERVICES - 0.1%
Cisco Systems, Inc., 5.5%, 2016 .......... $ 135,000 $ 135,086
-------------
CABLE TV - 0.3%
Cox Communications, Inc., 4.625%, 2013 ... $ 159,000 $ 149,610
TCI Communications Financing III,
9.65%, 2027 ............................ 425,000 448,415
-------------
$ 598,025
-------------
CONGLOMERATES - 0.1%
Kennametal, Inc., 7.2%, 2012 ............. $ 211,000 $ 222,201
-------------
CONSUMER GOODS & SERVICES - 0.2%
Fortune Brands, Inc., 5.125%, 2011 ....... $ 158,000 $ 155,044
Western Union Co., 5.4%, 2011 (n) ........ 210,000 207,076
-------------
$ 362,120
-------------
DEFENSE ELECTRONICS - 0.1%
BAE Systems Holdings, Inc., 5.2%, 2015 (n) $ 103,000 $ 98,112
Raytheon Co., 6.15%, 2008 ................ 114,000 115,459
-------------
$ 213,571
-------------
EMERGING MARKET QUASI-SOVEREIGN - 0.0%
Pemex Project Funding Master Trust,
8.625%, 2022 ........................... $ 39,000 $ 48,204
-------------
EMERGING MARKET SOVEREIGN - 0.2%
State of Israel, 4.625%, 2013 ............ $ 112,000 $ 106,576
United Mexican States, 6.375%, 2013 ...... 111,000 116,716
United Mexican States, 6.625%, 2015 ...... 10,000 10,735
United Mexican States, 5.625%, 2017 ...... 100,000 100,100
-------------
$ 334,127
-------------
ENERGY - INDEPENDENT - 0.3%
Anadarko Petroleum Corp., 5.95%, 2016 .... $ 80,000 $ 80,167
Nexen, Inc., 5.875%, 2035 ................ 100,000 93,608
Ocean Energy, Inc., 7.25%, 2011 .......... 165,000 176,039
XTO Energy, Inc., 5.65%, 2016 ............ 190,000 187,830
-------------
$ 537,644
-------------
ENTERTAINMENT - 0.2%
Walt Disney Co., 6.375%, 2012 ............ $ 156,000 $ 163,493
Walt Disney Co., 5.625%, 2016 ............ 137,000 137,953
-------------
$ 301,446
-------------
FINANCIAL INSTITUTIONS - 0.5%
American Express Co., 5.5%, 2016 ......... $ 200,000 $ 201,591
Capital One Financial Co., 6.15%, 2016 ... 130,000 134,448
Countrywide Financial Corp.,
6.25%, 2016 ............................ 171,000 174,289
General Electric Capital Corp.,
8.75%, 2007 ............................ 130,000 131,643
HSBC Finance Corp., 5.25%, 2011 .......... 145,000 145,004
ORIX Corp., 5.48%, 2011 .................. 210,000 209,595
-------------
$ 996,570
-------------
FOOD & BEVERAGES - 0.3%
Diageo Finance B.V., 5.5%, 2013 .......... $ 190,000 $ 189,632
Miller Brewing Co., 5.5%, 2013 (n) ....... 276,000 272,936
-------------
$ 462,568
-------------
FOOD & DRUG STORES - 0.1%
CVS Corp., 5.75%, 2011 ................... $ 70,000 $ 70,842
CVS Corp., 6.125%, 2016 .................. 110,000 113,498
-------------
$ 184,340
-------------
FOREST & PAPER PRODUCTS - 0.0%
MeadWestvaco Corp., 6.8%, 2032 ........... $ 69,000 $ 65,619
-------------
GAMING & LODGING - 0.1%
Marriott International, Inc., 6.2%, 2016 .. $ 164,000 $ 165,392
Wyndham Worldwide Corp., 6%, 2016 (n) .... 100,000 98,241
-------------
$ 263,633
-------------
INSURANCE - 0.5%
AIG SunAmerica Institutional Funding II,
5.75%, 2009 ............................ $ 441,000 $ 445,406
American International Group,
5.05%, 2015 ............................ 150,000 145,856
ING Groep N.V., 5.775% to 2015,
FRN to 2049 ............................ 223,000 220,664
MetLife, Inc., 6.5%, 2032 ................ 48,000 52,009
-------------
$ 863,935
-------------
INSURANCE - PROPERTY & CASUALTY - 0.2%
Allstate Corp., 6.125%, 2032 ............. $ 185,000 $ 192,781
Fund American Cos., Inc.,
5.875%, 2013 ........................... 117,000 116,301
-------------
$ 309,082
-------------
INTERNATIONAL MARKET QUASI-SOVEREIGN - 0.3%
Hydro-Quebec, 6.3%, 2011 ................. $ 262,000 $ 273,857
Providence of Ontario, 5%, 2011 .......... 200,000 199,699
-------------
$ 473,556
-------------
MAJOR BANKS - 1.2%
Bank of America Corp., 5.375%, 2014 ...... $ 110,000 $ 109,962
Bank of America Corp., 5.49%, 2019 (n) ... 100,000 98,523
DBS Capital Funding Corp.,
7.657% to 2011, FRN to 2049 (n) ........ 170,000 182,825
HBOS Capital Funding LP,
6.071% to 2014, FRN to 2049 (n) ........ 100,000 101,396
MUFG Capital Finance 1 Ltd.,
6.346% to 2016, FRN to 2049 ............ 200,000 202,978
Socgen Real Estate LLC, 7.64% to 2007,
FRN to 2049 (n) ........................ 361,000 366,580
UniCredito Italiano Capital Trust II,
9.2% to 2010, FRN to 2049 (n) .......... 208,000 233,399
Wachovia Corp., 5.25%, 2014 .............. 343,000 338,822
Wells Fargo National Bank, 4.75%, 2015 ... 315,000 301,583
Wells Fargo National Bank, 5.75%, 2016 ... 250,000 256,042
-------------
$ 2,192,110
-------------
MEDICAL & HEALTH TECHNOLOGY & SERVICES - 0.3%
Baxter International, Inc., 5.9%, 2016 ... $ 136,000 $ 139,710
Cardinal Health, Inc., 5.85%, 2017 ....... 175,000 174,016
HCA, Inc., 8.75%, 2010 ................... 40,000 41,700
HCA, Inc., 6.95%, 2012 ................... 139,000 131,702
-------------
$ 487,128
-------------
METALS & MINING - 0.1%
Vale Overseas Ltd., 6.25%, 2017 .......... $ 150,000 $ 150,682
-------------
MORTGAGE BACKED - 14.2%
Fannie Mae, 5.722%, 2009 ................. $ 415,000 $ 415,754
Fannie Mae, 4.01%, 2013 .................. 19,027 17,892
Fannie Mae, 4.519%, 2014 ................. 173,592 167,219
Fannie Mae, 4.63%, 2014 .................. 47,074 45,377
Fannie Mae, 4.848%, 2014 ................. 71,672 70,296
Fannie Mae, 4.925%, 2015 ................. 265,111 260,918
Fannie Mae, 5.5%, 2016 - 2036 ............ 9,014,854 8,933,739
Fannie Mae, 6%, 2017 - 2036 .............. 3,008,676 3,038,068
Fannie Mae, 4.5%, 2018 - 2035 ............ 1,046,861 1,003,268
Fannie Mae, 5%, 2018 - 2035 .............. 2,819,792 2,749,624
Fannie Mae, 6.5%, 2031 - 2036 ............ 876,399 896,110
Fannie Mae, 7.5%, 2031 ................... 31,057 32,313
Freddie Mac, 6%, 2016 - 2036 ............. 1,543,637 1,559,733
Freddie Mac, 5%, 2017 - 2035 ............. 2,311,029 2,239,844
Freddie Mac, 4.5%, 2018 - 2035 ........... 853,985 820,417
Freddie Mac, 5.5%, 2020 - 2035 ........... 1,723,339 1,709,779
Freddie Mac, 6.5%, 2034 .................. 219,014 223,288
Ginnie Mae, 4.5%, 2033 - 2034 ............ 155,668 146,643
Ginnie Mae, 5%, 2033 - 2034 .............. 170,607 165,886
Ginnie Mae, 5.5%, 2033 - 2035 ............ 763,166 760,278
Ginnie Mae, 6%, 2033 - 2034 .............. 454,636 461,362
Ginnie Mae, 6.5%, 2035 - 2036 ............ 95,928 98,066
-------------
$ 25,815,874
-------------
NATURAL GAS - PIPELINE - 0.2%
CenterPoint Energy Resources Corp.,
7.875%, 2013 ........................... $ 82,000 $ 90,980
Kinder Morgan Energy Partners LP,
6.75%, 2011 ............................ 165,000 171,680
Kinder Morgan Energy Partners LP,
5.125%, 2014 ........................... 46,000 43,810
Kinder Morgan Energy Partners LP,
7.75%, 2032 ............................ 71,000 80,856
-------------
$ 387,326
-------------
NETWORK & TELECOM - 0.4%
AT&T, Inc., 6.15%, 2034 .................. $ 139,000 $ 136,716
BellSouth Corp., 6.55%, 2034 ............. 146,000 149,668
Telecom Italia Capital, 5.25%, 2013 ...... 60,000 57,209
Telefonica Europe B.V., 7.75%, 2010 ...... 50,000 53,702
Verizon New York, Inc., 6.875%, 2012 ..... 286,000 296,501
-------------
$ 693,796
-------------
OIL SERVICES - 0.0%
Halliburton Co., 5.5%, 2010 .............. $ 50,000 $ 49,911
-------------
OILS - 0.1%
Valero Energy Corp., 6.875%, 2012 ........ $ 111,000 $ 117,361
-------------
OTHER BANKS & DIVERSIFIED FINANCIALS - 0.8%
Citigroup, Inc., 5%, 2014 ................ $ 250,000 $ 244,099
Credit Suisse (USA), Inc., 4.125%, 2010 .. 171,000 165,900
Credit Suisse (USA), Inc., 4.875%, 2010 .. 121,000 119,684
Mizuho Capital Investment 1 Ltd.,
6.686% to 2016, FRN to 2049 (n) ........ 190,000 191,695
Nordea Bank AB, 5.424% to 2015,
FRN to 2049 (n) ........................ 100,000 95,920
UBS AG, 5.875%, 2016 ..................... 140,000 144,700
UBS Preferred Funding Trust V,
6.243% to 2016, FRN to 2049 ............ 190,000 196,743
UFJ Finance Aruba AEC, 6.75%, 2013 ....... 145,000 154,739
Woori Bank, 6.125% to 2011,
FRN to 2016 (n) ........................ 220,000 224,396
-------------
$ 1,537,876
-------------
PHARMACEUTICALS - 0.2%
Allergan, Inc., 5.75%, 2016 .............. $ 160,000 $ 161,812
Wyeth, 5.5%, 2013 ........................ 123,000 123,796
-------------
$ 285,608
-------------
POLLUTION CONTROL - 0.1%
Waste Management, Inc., 7.375%, 2010 ..... $ 134,000 $ 142,537
-------------
RAILROAD & SHIPPING - 0.0%
CSX Corp., 6.75%, 2011 ................... $ 35,000 $ 36,750
Union Pacific Corp., 6.125%, 2012 ........ 50,000 51,510
-------------
$ 88,260
-------------
REAL ESTATE - 0.6%
Boston Properties, Inc., REIT, 5%, 2015 .. $ 42,000 $ 40,375
EOP Operating LP, 6.8%, 2009 ............. 29,000 29,967
HRPT Properties Trust, REIT,
6.25%, 2016 ............................ 180,000 185,535
Kimco Realty Corp., REIT, 5.783%, 2016 ... 100,000 101,275
ProLogis, REIT, 5.75%, 2016 .............. 179,000 180,093
Simon Property Group LP, REIT,
5.1%, 2015 ............................. 193,000 187,706
Vornado Realty Trust, REIT,
5.625%, 2007 ........................... 383,000 382,746
-------------
$ 1,107,697
-------------
RETAILERS - 0.3%
Federated Retail Holdings, Inc.,
5.9%, 2016 ............................. $ 160,000 $ 159,751
Home Depot, Inc., 5.4%, 2016 ............. 122,000 119,322
Limited Brands, Inc., 5.25%, 2014 ........ 165,000 156,770
Wal-Mart Stores, Inc., 5.25%, 2035 ....... 194,000 178,150
-------------
$ 613,993
-------------
TELECOMMUNICATIONS - WIRELESS - 0.0%
Cingular Wireless LLC, 6.5%, 2011 ........ $ 35,000 $ 36,674
-------------
U.S. GOVERNMENT AGENCIES - 1.9%
Aid-Egypt, 4.45%, 2015 ................... $ 152,000 $ 146,879
Fannie Mae, 3%, 2007 ..................... 244,000 243,125
Fannie Mae, 5.25%, 2007 .................. 397,000 397,081
Fannie Mae, 6.625%, 2009 - 2010 .......... 1,428,000 1,507,351
Fannie Mae, 6%, 2011 ..................... 165,000 171,803
Federal Home Loan Bank, 3.9%, 2008 ....... 40,000 39,432
Small Business Administration, 4.35%, 2023 40,577 38,853
Small Business Administration, 4.77%, 2024 101,886 99,531
Small Business Administration, 4.99%, 2024 138,859 137,179
Small Business Administration, 5.18%, 2024 164,267 164,042
Small Business Administration, 5.52%, 2024 237,033 240,154
Small Business Administration, 4.95%, 2025 106,793 104,502
Small Business Administration, 5.09%, 2025 130,227 129,004
Small Business Administration, 5.39%, 2025 101,146 101,828
-------------
$ 3,520,764
-------------
U.S. TREASURY OBLIGATIONS - 8.4%
U.S. Treasury Bonds, 6.5%, 2010 .......... $ 128,000 $ 134,465
U.S. Treasury Bonds, 10.375%, 2012 ....... 140,000 146,223
U.S. Treasury Bonds, 8%, 2021 ............ 37,000 49,048
U.S. Treasury Bonds, 6.25%, 2023 ......... 511,000 588,169
U.S. Treasury Bonds, 6%, 2026 ............ 393,000 445,717
U.S. Treasury Bonds, 5.375%, 2031 ........ 1,912,000 2,048,081
U.S. Treasury Bonds, 4.5%, 2036 .......... 175,000 166,414
U.S. Treasury Notes, 4.375%, 2007 ........ 146,000 145,635
U.S. Treasury Notes, 5.625%, 2008 ........ 1,855,000 1,871,957
U.S. Treasury Notes, 3.125%, 2008 ........ 2,315,000 2,248,173
U.S. Treasury Notes, 4.75%, 2008 ......... 942,000 940,786
U.S. Treasury Notes, 3.125%, 2009 ........ 3,000,000 2,893,827
U.S. Treasury Notes, 4%, 2009 ............ 23,000 22,604
U.S. Treasury Notes, 5.125%, 2011 ........ 1,400,000 1,423,625
U.S. Treasury Notes, 3.875%, 2013 ........ 199,000 190,457
U.S. Treasury Notes, 4.25%, 2013 ......... 250,000 243,398
U.S. Treasury Notes, 4.75%, 2014 ......... 150,000 150,387
U.S. Treasury Notes, TIPS, 4.25%, 2010 ... 802,566 844,701
U.S. Treasury Notes, TIPS, 2%, 2014 ...... 713,298 692,902
-------------
$ 15,246,569
-------------
UTILITIES - ELECTRIC POWER - 1.2%
Dominion Resources, Inc., 5.15%, 2015 .... $ 141,000 $ 136,574
Duke Capital Corp., 8%, 2019 ............. 53,000 61,615
Exelon Generation Co. LLC, 6.95%, 2011 ... 74,000 77,957
FirstEnergy Corp., 6.45%, 2011 ........... 209,000 217,947
MidAmerican Energy Holdings Co.,
3.5%, 2008 ............................. 118,000 115,054
MidAmerican Energy Holdings Co.,
5.875%, 2012 ........................... 61,000 62,095
MidAmerican Funding LLC, 6.927%, 2029 .... 454,000 503,973
Oncor Electric Delivery Co., 7%, 2022 .... 152,000 163,500
Pacific Gas & Electric Co., 4.8%, 2014 ... 45,000 43,134
Progress Energy, Inc., 7.1%, 2011 ........ 96,000 102,235
PSEG Power LLC, 6.95%, 2012 .............. 71,000 75,061
PSEG Power LLC, 5.5%, 2015 ............... 90,000 88,088
System Energy Resources, Inc.,
5.129%, 2014 (n) ....................... 94,907 92,671
TXU Energy Co., 7%, 2013 ................. 132,000 138,119
Waterford 3 Funding Corp., 8.09%, 2017 ... 332,449 334,906
-------------
$ 2,212,929
-------------
TOTAL BONDS
(IDENTIFIED COST, $71,534,952) .......................... $ 71,135,980
-------------
SHORT-TERM OBLIGATIONS - 0.8%
General Electric Capital Corp.,
5.29%, due 1/02/07, at Amortized Cost
and Value (y) .......................... $1,450,000 $ 1,449,787
-------------
TOTAL INVESTMENTS
(IDENTIFIED COST, $164,751,626) (k) ..................... $ 181,803,451
-------------
OTHER ASSETS,
LESS LIABILITIES - 0.1% ................................... 230,012
-------------
NET ASSETS - 100.0% ....................................... $ 182,033,463
-------------
See portfolio footnotes and notes to financial statements.
Portfolio Footnotes:
(a) Non-income producing security.
(f) All or portion of the security has been segregated as collateral for an open
futures contract.
(g) The rate shown represents a weighted average coupon rate on settled
positions at period end.
(i) Interest only security for which the variable account receives interest on
notional principal (Par amount). Par amount shown is the notional principal
and does not reflect the cost of the security.
(k) As of December 31, 2006, the Variable Accounts held securities fair valued
in accordance with the policies adopted by the Board of Managers. An
independent pricing service provided an evaluated bid for a percent of the
market value.
% OF EVALUATED
VARIABLE ACCOUNT MARKET VALUE MARKET VALUE BID %
- -----------------------------------------------------------------------------------------------------------------------------
Global Governments Variable Account ................................... $ 8,399,358 90.80% 89.47%
Government Securities Variable Account ................................ 76,985,867 98.79 98.31
High Yield Variable Account ........................................... 52,069,423 88.66 88.66(1)
Total Return Variable Account ......................................... 69,920,545 38.44 38.35
(1) Non evaluated bid percentage less than 0.01%.
(n) Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be sold in the
ordinary course of business in transactions exempt from registration, normally to qualified institutional buyers. At period
end, the aggregate valu e of these securities was:
% OF
VARIABLE ACCOUNT MARKET VALUE NET ASSETS
----------------------------------------------------------------------------------------------------------------------
Global Governments Variable Account .............................................. $ 390,620 4.3%
Government Securities Variable Account ........................................... 702,666 0.9
High Yield Variable Account ...................................................... 9,937,013 16.8
Total Return Variable Account .................................................... 2,920,249 1.6
(o) All or portion of this position has not settled. Upon settlement date, interest rates will be determined.
(p) Payment-in-kind security.
(r) Remaining maturities of floating rate loans may be less than stated maturities shown as a result of contractual or optional
prep ayments by the borrower. Such prepayments cannot be predicted with certainty. These loans may be subject to
restrictions on resale. Floating ra te loans generally have rates of interest which are determined periodically by
reference to a base lending rate plus a premium.
(t) Security exempt from registration with the U.S. Securities and Exchange Commission under Section 4(2) of the Securities Act
of 1 933.
(y) The rate shown represents an annualized yield at time of purchase.
(z) Restricted securities are not registered under the Securities Act of 1933 and are subject to legal restrictions on resale.
These securities generally may be resold in transactions exempt from registration or to the public if the securities are
subsequently registered. Disposal of these securities may involve time-consuming negotiations and prompt sale at an
acceptable price may be difficult. The variable a ccounts hold the following restricted securities:
ACQUISITION ACQUISITION CURRENT TOTAL % OF
VARIABLE ACCOUNT RESTRICTED SECURITIES DATE COST MARKET VALUE NET ASSETS
- --------------------------------------------------------------------------------------------------------------------------------
GLOBAL GOVERNMENTS JPMorgan Chase Commercial Mortgage
VARIABLE ACCOUNT Securities Corp., 5.44%, 2045 ......... 9/22/06 $ 19,252 $ 19,219 0.2%
========== ====
HIGH YIELD Aleris International, Inc., 10%, 2016 ... 12/13/06 $100,000 $ 101,000
VARIABLE ACCOUNT Amsted Industries, Inc., 10.25%, 2011 ... 8/08/03 - 4/25/06 319,950 321,000
Asset Securitization Corp.,
FRN, 8.3571%, 2029 .................... 1/25/05 172,565 216,317
Esco Corp., 8.625%, 2013 ................ 12/12/06 80,000 82,200
Griffin Coal Mining Co., 9.5%, 2016 ..... 11/10/06 143,000 147,290
Knology, Inc. ........................... 10/16/97 0 1,249
Knowledge Learning Corp., 7.75%, 2015 ... 1/28/05 125,000 119,688
Masonite Corp., 11%, 2015 ............... 11/07/06 - 12/05/06 188,606 189,625
Wachovia Credit, CDO, FRN,
6.7156%, 2026 ......................... 6/08/06 250,000 250,625
Williams Partners LP, 7.25%, 2017 ....... 12/06/06 140,000 142,800
Wimar Opco LLC, 9.625%, 2014 ............ 12/14/06 165,000 163,350
- -----------------------------------------------------------------------------------------------------------------------------
Total Restricted Securities ............. $1,735,144 2.9%
========== ====
TOTAL RETURN Bayview Financial Revolving Mortgage
VARIABLE ACCOUNT Loan Trust, FRN, 6.15%, 2040 .......... 3/01/06 $250,000 $ 250,335
JPMorgan Chase Commercial Mortgage
Securities Corp., 5.44%, 2045 ......... 9/22/06 107,027 106,845
Spirit Master Funding LLC, 5.05%, 2023 .. 10/04/05 195,344 180,672
- -----------------------------------------------------------------------------------------------------------------------------
Total Restricted Securities ............. $ 537,852 0.3%
========== ====
The following abbreviations are used in this report and are defined:
ADR American Depository Receipt
CDO Collateralized Debt Obligation
GDR Global Depository Receipt
FRN Floating Rate Note. Interest rate resets periodically and may not be the
rate reported at period end.
IEU International Equity Unit
REIT Real Estate Investment Trust
STRIPS Separate Trading of Registered Interest and Principal of Securities
TIPS Treasury Inflation Protected Security
Abbreviations indicate amounts shown in currencies other than the U.S. dollar.
All amounts are stated in U.S. dollars unless otherwise indicated. A list of
abbreviations is shown below:
AUD Australian Dollar MXN Mexican Peso
BRL Brazilian Real MYR Malaysian Ringgit
CAD Canadian Dollar NOK Norwegian Krone
DKK Danish Krone NZD New Zealand Dollar
EUR Euro PLN Polish Zloty
GBP British Pound RUB Russian Ruble
JPY Japanese Yen SEK Swedish Krona
See notes to financial statements.
STATEMENTS OF ASSETS AND LIABILITIES -- December 31, 2006
(000 Omitted)
Capital Global Government High Money Total
Appreciation Governments Securities Yield Market Return
Variable Variable Variable Variable Variable Variable
Account Account Account Account Account Account
-------- -------- -------- -------- -------- --------
Assets:
Investments --
Investments, cost .................. $200,589 $ 9,151 $ 78,058 $ 57,354 $ 47,671 $164,752
Unrealized appreciation
(depreciation) ................... 17,353 99 (129) 1,366 -- 17,051
-------- -------- -------- -------- -------- --------
Total investments, at value ...... $217,942 $ 9,250 $ 77,929 $ 58,720 $ 47,671 $181,803
Cash ................................. 0* 1 0* 29 1 6
Receivable for forward foreign
currency exchange contracts ........ -- 21 -- -- -- --
Receivable for forward currency
exchange contracts subject
to master netting agreements ....... -- 12 -- -- -- --
Receivable for daily variation
margin on open futures contracts ... -- -- 3 -- -- --
Receivable for investments sold ...... 589 1 -- 198 -- 186
Receivable for units sold ............ 7 0* 7 0* 8 14
Interest and dividends receivable .... 223 112 766 1,089 45 832
Receivable from Investment Adviser ... -- 30 -- 12 -- --
Receivable from Sponsor .............. -- 5 -- 34 -- 13
Other assets ......................... 9 1 3 3 2 8
-------- -------- -------- -------- -------- --------
Total assets ..................... $218,770 $ 9,433 $ 78,708 $ 60,085 $ 47,727 $182,862
======== ======== ======== ======== ======== ========
Liabilities:
Payable for forward foreign
currency exchange contracts ......... $ -- $ 42 $ -- $ -- $ -- $ --
Payable for investments purchased .... -- 184 -- 679 -- 406
Payable for units surrendered ........ 249 3 37 55 27 318
Payable to affiliates --
Investment Adviser ................. 18 1 5 5 3 15
Administrative services fee ........ 1 0* 0* 0* 0* 1
Sponsor ............................ 33 -- 17 -- 78 --
Accrued expenses and other liabilities 61 76 54 72 28 89
-------- -------- -------- -------- -------- --------
Total liabilities ................ $ 362 $ 306 $ 113 $ 811 $ 136 $ 829
-------- -------- -------- -------- -------- --------
Net assets ..................... $218,408 $ 9,127 $ 78,595 $ 59,274 $ 47,591 $182,033
======== ======== ======== ======== ======== ========
* Amount was less than $500.
See notes to financial statements.
STATEMENTS OF ASSETS AND LIABILITIES -- December 31, 2006 -- continued
(000 Omitted except for unit values)
Capital Global Government High Money Total
Appreciation Governments Securities Yield Market Return
Unit Variable Variable Variable Variable Variable Variable
Unit Value Account Account Account Account Account Account
------ -------- ----------- ------------ ------------ -------- ------- --------
Net assets applicable to contract owners:
Capital Appreciation Variable Account --
Compass 2 ............................... 2,419 $58.101 $140,559
Compass 3 ............................... 128 38.235 4,908
Compass 3 - Level 2 ..................... 4,378 15.963 69,891
Global Governments Variable Account --
Compass 2 ............................... 104 $25.732 $2,671
Compass 3 ............................... 18 25.017 457
Compass 3 - Level 2 ..................... 403 14.718 5,937
Government Securities Variable Account --
Compass 2 ............................... 1,538 $38.619 $59,382
Compass 3 ............................... 40 26.924 1,085
Compass 3 - Level 2 ..................... 1,054 15.814 16,670
High Yield Variable Account --
Compass 2 ............................... 1,119 $40.172 $44,946
Compass 3 ............................... 34 29.459 986
Compass 3 - Level 2 ..................... 774 15.814 12,239
Money Market Variable Account --
Compass 2 ............................... 928 $20.979 $19,483
Compass 3 ............................... 131 17.152 2,251
Compass 3 - Level 2 ..................... 1,969 12.895 25,389
Total Return Variable Account --
Compass 2 ............................... 1,156 $51.373 $59,376
Compass 3 ............................... 142 49.947 7,108
Compass 3 - Level 2 ..................... 4,695 24.220 113,714
-------- ------ ------- ------- ------- --------
Net assets applicable to owners of deferred contracts ....... 215,358 9,065 77,137 58,171 47,123 180,198
Reserve for variable annuities --
Compass 2 Contracts ..................................... 2,755 20 1,413 1,054 350 1,233
Compass 3 Contracts ..................................... 1 8 -- 2 7 9
Compass 3 - Level 2 Contracts ........................... 294 34 45 47 111 593
-------- ------ ------- ------- ------- --------
Net assets ............................................ $218,408 $9,127 $78,595 $59,274 $47,591 $182,033
======== ====== ======= ======= ======= ========
See notes to financial statements.
STATEMENTS OF OPERATIONS -- Year Ended December 31, 2006
(000 Omitted)
Capital Global Government High Money Total
Appreciation Governments Securities Yield Market Return
Variable Variable Variable Variable Variable Variable
Account Account Account Account Account Account
-------- -------- -------- -------- -------- --------
Net investment income (loss):
Income --
Interest ........................... $ 262 $ 377 $ 4,457 $ 4,856 $ 2,652 $ 3,894
Dividends .......................... 2,047 -- -- 52 -- 2,696
-------- -------- -------- -------- -------- --------
Total investment income .......... $ 2,309 $ 377 $ 4,457 $ 4,908 $ 2,652 $ 6,590
-------- -------- -------- -------- -------- --------
Expenses --
Mortality and expense risk charges . $ 2,936 $ 117 $ 1,068 $ 768 $ 654 $ 2,270
Management fee ..................... 1,756 72 468 459 262 1,388
Boards of Managers fees ............ 24 1 9 6 5 18
Distribution fee ................... 9 1 2 2 4 12
Administrative fee ................. 57 7 21 15 13 46
Custodian fee ...................... 62 72 43 79 17 119
Printing ........................... 13 1 5 6 9 8
Auditing fees ...................... 33 43 39 44 21 46
Legal fees ......................... 4 5 5 5 3 5
Miscellaneous ...................... 36 3 12 12 10 22
-------- -------- -------- -------- -------- --------
Total expenses ................... $ 4,930 $ 322 $ 1,672 $ 1,396 $ 998 $ 3,934
Fees paid indirectly ............... (5) (0)* (7) (4) (1) (4)
Reduction of expenses by Investment
Adviser ........................... -- (85) -- (61) -- --
-------- -------- -------- -------- -------- --------
Net expenses ..................... $ 4,925 $ 237 $ 1,665 $ 1,331 $ 997 $ 3,930
-------- -------- -------- -------- -------- --------
Net investment income (loss) ..... $ (2,616) $ 140 $ 2,792 $ 3,577 $ 1,655 $ 2,660
-------- -------- -------- -------- -------- --------
Realized and unrealized gain (loss)
on investments:
Realized gain (loss) (identified
cost basis) --
Investment transactions ............ $ 3,542 $ (117) $ (438) $ (1,009) $ -- $ 10,963
Futures contracts .................. -- 5 5 -- -- --
Foreign currency transactions ...... (3) 12 -- (37) -- (1)
-------- -------- -------- -------- -------- --------
Net realized gain (loss) on
investments and foreign
currency transactions .......... $ 3,539 $ (100) $ (433) $ (1,046) $ -- $ 10,962
-------- -------- -------- -------- -------- --------
Change in unrealized appreciation
(depreciation) --
Investments ........................ $ 9,410 $ 326 $ (423) $ 2,720 $ -- $ 4,841
Translation of assets and
liabilities in foreign currencies .. -- (44) 31 10 -- --
-------- -------- -------- -------- -------- --------
Net unrealized gain (loss) on
investments and foreign
currency translation ........... $ 9,410 $ 282 $ (392) $ 2,730 $ -- $ 4,841
-------- -------- -------- -------- -------- --------
Net realized and unrealized
gain (loss) on investments
and foreign currency ........... $ 12,949 $ 182 $ (825) $ 1,684 $ -- $ 15,803
-------- -------- -------- -------- -------- --------
Change in net assets from operations . $ 10,333 $ 322 $ 1,967 $ 5,261 $ 1,655 $ 18,463
======== ======== ======== ======== ======== ========
* Amount less than $500.
See notes to financial statements.
STATEMENTS OF CHANGES IN NET ASSETS
(000 Omitted)
Capital Appreciation Global Governments Government Securities
Variable Account Variable Account Variable Account
---------------------- ---------------------- ----------------------
Years Ended 12/31 Years Ended 12/31 Years Ended 12/31
---------------------- ---------------------- ----------------------
2006 2005 2006 2005 2006 2005
--------- --------- --------- --------- --------- ---------
Change in net assets:
From operations:
Net investment income (loss) ................... $ (2,616) $ (2,976) $ 140 $ 117 $ 2,792 $ 3,067
Net realized gain (loss) on investments
and foreign currency transactions ............ 3,539 34,399 (100) 72 (433) (283)
Net unrealized gain (loss) on investments
and foreign currency translation ............. 9,410 (33,087) 282 (1,228) (392) (1,853)
--------- --------- --------- --------- --------- ---------
Change in net assets from operations ......... $ 10,333 $ (1,664) $ 322 $ (1,039) $ 1,967 $ 931
--------- --------- --------- --------- --------- ---------
Participant transactions:
Accumulation activity:
Purchase payments received ..................... $ 4,393 $ 5,857 $ 279 $ 366 $ 1,459 $ 2,303
Net transfers between variable and fixed
accumulation accounts ........................ (6,547) (294) (22) 977 (1,158) 821
Withdrawals, surrenders, annuitizations, and
contract charges ............................. (48,533) (48,945) (1,676) (2,169) (16,396) (15,664)
--------- --------- --------- --------- --------- ---------
Net accumulation activity .................... $ (50,687) $ (43,382) $ (1,419) $ (826) $ (16,095) $ (12,540)
--------- --------- --------- --------- --------- ---------
Annuitization activity:
Annuitizations ................................... $ 293 $ 167 $ -- $ 3 $ 309 $ 151
Annuity payments and contract charges ............ (449) (425) (7) (6) (234) (249)
Net transfers among accounts for annuity reserves -- (14) -- -- -- 5
Adjustments to annuity reserves .................. (39) 53 5 0* (24) 15
--------- --------- --------- --------- --------- ---------
Net annuitization activity ..................... $ (195) $ (219) $ (2) $ (3) $ 51 $ (78)
--------- --------- --------- --------- --------- ---------
Change in net assets from participant transactions $ (50,882) $ (43,601) $ (1,421) $ (829) $ (16,044) $ (12,618)
--------- --------- --------- --------- --------- ---------
Total change in net assets ..................... $ (40,549) $ (45,265) $ (1,099) $ (1,868) $ (14,077) $ (11,687)
Net assets:
At beginning of period ........................... 258,957 304,222 10,226 12,094 92,672 104,359
--------- --------- --------- --------- --------- ---------
At end of period ................................. $ 218,408 $ 258,957 $ 9,127 $ 10,226 $ 78,595 $ 92,672
========= ========= ========= ========= ========= =========
* Amount less than $500.
See notes to financial statements.
STATEMENTS OF CHANGES IN NET ASSETS -- continued
(000 Omitted)
High Yield Money Market Total Return
Variable Account Variable Account Variable Account
---------------------- ---------------------- ----------------------
Years Ended 12/31 Years Ended 12/31 Years Ended 12/31
---------------------- ---------------------- ----------------------
2006 2005 2006 2005 2006 2005
--------- --------- --------- --------- --------- ---------
Change in net assets:
From operations:
Net investment income .......................... $ 3,577 $ 3,901 $ 1,655 $ 797 $ 2,660 $ 2,320
Net realized gain (loss) on investments
and foreign currency transactions ............ (1,046) 139 -- 0* 10,962 10,302
Net unrealized gain (loss) on investments
and foreign currency translation ............. 2,730 (3,665) -- -- 4,841 (9,613)
--------- --------- --------- --------- --------- ---------
Change in net assets from operations ......... $ 5,261 $ 375 $ 1,655 $ 797 $ 18,463 $ 3,009
--------- --------- --------- --------- --------- ---------
Participant transactions:
Accumulation activity:
Purchase payments received ..................... $ 761 $ 1,227 $ 1,321 $ 1,798 $ 4,300 $ 5,339
Net transfers between variable and fixed
accumulation accounts ........................ (749) (42) (342) 35,078 2,227 14,789
Withdrawals, surrenders, annuitizations, and
contract charges ............................. (10,582) (12,450) (11,845) (30,896) (36,753) (35,779)
--------- --------- --------- --------- --------- ---------
Net accumulation activity .................... $ (10,570) $ (11,265) $ (10,866) $ 5,980 $ (30,226) $ (15,651)
--------- --------- --------- --------- --------- ---------
Annuitization activity:
Annuitizations ................................... $ 69 $ 21 $ 15 $ 57 $ 35 $ 125
Annuity payments and contract charges ............ (172) (169) (161) (156) (341) (426)
Net transfers among accounts for annuity reserves -- -- -- 156 -- 5
Adjustments to annuity reserves .................. 30 (74) (75) 12 6 (44)
--------- --------- --------- --------- --------- ---------
Net annuitization activity ..................... $ (73) $ (222) $ (221) $ 69 $ (300) $ (340)
--------- --------- --------- --------- --------- ---------
Change in net assets from participant transactions $ (10,643) $ (11,487) $ (11,087) $ 6,049 $ (30,526) $ (15,991)
--------- --------- --------- --------- --------- ---------
Total change in net assets ..................... $ (5,382) $ (11,112) $ (9,432) $ 6,846 $ (12,063) $ (12,982)
Net assets:
At beginning of period ........................... 64,656 75,768 57,023 50,177 194,096 207,078
--------- --------- --------- --------- --------- ---------
At end of period ................................. $ 59,274 $ 64,656 $ 47,591 $ 57,023 $ 182,033 $ 194,096
========= ========= ========= ========= ========= =========
* Amount less than $500.
See notes to financial statements.
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the variable accounts' financial performance for the past 5
years. Certain information reflects financial results for a single unit value. The total returns in the table represent the rate
by which an investor would have earned (or lost) on an investment in the variable account held for the entire period. This
information has been audited by the variable accounts' independent registered public accounting firm, whose report, together with
the variable accounts' financial statements, are included in this report.
Capital Appreciation Variable Account
--------------------------------------------------------------------------
Compass 2
--------------------------------------------------------------------------
Years Ended 12/31
--------------------------------------------------------------------------
2006 2005 2004 2003 2002
----------- ----------- ----------- ----------- -----------
Per unit data: (d)
Net asset value -- beginning of period .. $ 55.446 $ 55.625 $ 50.814 $ 39.859 $ 59.446
----------- ----------- ----------- ----------- -----------
Investment income ....................... $ 0.560 $ 0.580 $ 0.744 $ 0.402 $ 0.369
Expenses ................................ (1.198) (1.179) (1.109) (0.951) (1.002)
----------- ----------- ----------- ----------- -----------
Net investment loss ................. $ (0.638) $ (0.599) $ (0.365) $ (0.549) $ (0.633)
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions .......................... 3.293 0.420 5.176 11.504 (18.954)
----------- ----------- ----------- ----------- -----------
Change in unit value .................... $ 2.655 $ (0.179) $ 4.811 $ 10.955 $ (19.587)
----------- ----------- ----------- ----------- -----------
Unit value:
Net asset value -- end of period ........ $ 58.101 $ 55.446 $ 55.625 $ 50.814 $ 39.859
=========== =========== =========== =========== ===========
Total Return (%) (k)(s) ................. 4.79 (0.32) 9.47(b) 27.48(j) (32.95)
Ratios (%) (to average net assets):
Expenses (f) ............................ 2.15 2.16 2.14 2.12 2.12
Net investment loss ..................... (1.11) (1.08) (0.70) (1.20) (1.36)
Portfolio turnover (%) .................... 61 130 65 104 80
Number of units outstanding at end of
period (000 Omitted) .................... 2,419 3,018 3,544 4,040 4,521
Capital Appreciation Variable Account
--------------------------------------------------------------------------
Compass 3
--------------------------------------------------------------------------
Years Ended 12/31
--------------------------------------------------------------------------
2006 2005 2004 2003 2002
----------- ----------- ----------- ----------- -----------
Per unit data: (d)
Net asset value -- beginning of period .. $ 36.524 $ 36.678 $ 33.539 $ 26.334 $ 39.314
----------- ----------- ----------- ----------- -----------
Investment income ....................... $ 0.355 $ 0.370 $ 0.458 $ 0.260 $ 0.240
Expenses ................................ (0.807) (0.795) (0.753) (0.648) (0.688)
----------- ----------- ----------- ----------- -----------
Net investment loss ................. $ (0.452) $ (0.425) $ (0.295) $ (0.388) $ (0.448)
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions .......................... 2.163 0.271 3.434 7.593 (12.532)
----------- ----------- ----------- ----------- -----------
Change in unit value .................... $ 1.711 $ (0.154) $ 3.139 $ 7.205 $ (12.980)
----------- ----------- ----------- ----------- -----------
Unit value:
Net asset value -- end of period ........ $ 38.235 $ 36.524 $ 36.678 $ 33.539 $ 26.334
=========== =========== =========== =========== ===========
Total Return (%) (k)(s) ................. 4.69 (0.42) 9.36(b) 27.36(j) (33.02)
Ratios (%) (to average net assets):
Expenses (f) ............................ 2.25 2.26 2.24 2.22 2.22
Net investment loss ..................... (1.30) (1.20) (0.87) (1.31) (1.42)
Portfolio turnover ........................ 61 130 65 104 80
Number of units outstanding at end of
period (000 Omitted) .................... 128 237 413 621 812
FINANCIAL HIGHLIGHTS -- continued
Capital Appreciation Variable Account
--------------------------------------------------------------------------
Compass 3 - Level 2
--------------------------------------------------------------------------
Years Ended 12/31
--------------------------------------------------------------------------
2006 2005 2004 2003 2002
----------- ----------- ----------- ----------- -----------
Per unit data: (d)
Net asset value -- beginning of period .. $ 15.226 $ 15.267 $ 13.940 $ 10.929 $ 16.292
----------- ----------- ----------- ----------- -----------
Investment income ....................... $ 0.152 $ 0.158 $ 0.205 $ 0.109 $ 0.100
Expenses ................................ (0.320) (0.316) (0.297) (0.254) (0.260)
----------- ----------- ----------- ----------- -----------
Net investment loss ................. $ (0.168) $ (0.158) $ (0.092) $ (0.145) $ (0.160)
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions .......................... 0.905 0.117 1.419 3.156 (5.203)
----------- ----------- ----------- ----------- -----------
Change in unit value .................... $ 0.737 $ (0.041) $ 1.327 $ 3.011 $ (5.363)
----------- ----------- ----------- ----------- -----------
Unit value:
Net asset value -- end of period ........ $ 15.963 $ 15.226 $ 15.267 $ 13.940 $ 10.929
=========== =========== =========== =========== ===========
Total Return (%) (k)(s) ................. 4.84 (0.27) 9.52(b) 27.55(j) (32.92)
Ratios (%) (to average net assets):
Expenses (f) ............................ 2.10 2.11 2.09 2.07 2.07
Net investment loss ..................... (1.13) (1.05) (0.65) (1.17) (1.32)
Portfolio turnover(%) ..................... 61 130 65 104 80
Number of units outstanding at end of
period (000 Omitted) .................... 4,378 5,248 5,798 6,086 6,148
(b) The accounts' net asset value and total return calculation include a non-recurring accrual recorded as a result of an
administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund sales. The
non-recurring accrual resulted in an increase in the net asset value of $0.039, $0.026, and $0.010 per unit for Compass 2,
Compass 3, and Compass 3 - Level 2, respectively, based on units outstanding on the day the proceeds were recorded.
(d) Per unit data are based on the average number of units outstanding during each year.
(f) Ratios do not reflect reductions from fees paid indirectly.
(j) The accounts' net asset value and total return calculation include proceeds received on March 26, 2003 for the partial payment
of a non-recurring litigation settlement from Cendant Corporation, recorded as a realized gain on investment transactions.
The proceeds resulted in an increase in the net asset value of $0.900, $0.594, and $0.247 per unit for Compass 2, Compass 3,
and Compass 3 - Level 2, respectively, based on units outstanding on the day the proceeds were received. Excluding the effect
of this payment from the ending net asset value per unit, the Compass 2, Compass 3, and Compass 3 - Level 2 total return per
unit value for the year ended December 31, 2003 would have been lower by approximately 2.24%, 2.24%, and 2.25%, respectively.
(k) The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the
total return figures for all periods shown.
(s) From time to time the variable account may receive proceeds from litigation settlements, without which performance would be
lower.
See notes to financial statements.
FINANCIAL HIGHLIGHTS -- continued
The financial highlights table is intended to help you understand the variable accounts' financial performance for the past 5
years. Certain information reflects financial results for a single unit value. The total returns in the table represent the rate
by which an investor would have earned (or lost) on an investment in the variable account held for the entire period. This
information has been audited by the variable accounts' independent registered public accounting firm, whose report, together with
the variable accounts' financial statements, are included in this report.
Global Governments Variable Account
--------------------------------------------------------------------------
Compass 2
--------------------------------------------------------------------------
Years Ended 12/31
--------------------------------------------------------------------------
2006 2005 2004 2003 2002
----------- ----------- ----------- ----------- -----------
Per unit data: (d)
Net asset value -- beginning of period .. $ 24.865 $ 27.240 $ 25.169 $ 22.125 $ 18.653
----------- ----------- ----------- ----------- -----------
Investment income ....................... $ 1.003 $ 0.925 $ 0.872 $ 0.877 $ 0.861
Expenses ................................ (0.629) (0.651) (0.633) (0.584) (0.486)
----------- ----------- ----------- ----------- -----------
Net investment income ............... $ 0.374 $ 0.274 $ 0.239 $ 0.293 $ 0.375
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions ........................... 0.493 (2.649) 1.832 2.751 3.097
----------- ----------- ----------- ----------- -----------
Change in unit value .................... $ 0.867 $ (2.375) $ 2.071 $ 3.044 $ 3.472
----------- ----------- ----------- ----------- -----------
Unit value:
Net asset value -- end of period ........ $ 25.732 $ 24.865 $ 27.240 $ 25.169 $ 22.125
=========== =========== =========== =========== ===========
Total Return (%) (k)(r) ................. 3.49 (8.72) 8.23 13.76 18.61
Ratios (%) (to average net assets):
Expenses before expense reductions (f) .. 3.39 2.95 2.67 2.47 2.44
Expenses after expense reductions (f) ... 2.50 2.50 2.50 N/A 2.50(e)
Net investment income ................... 1.48 1.04 0.94 1.23 1.73
Portfolio turnover (%) .................... 118 144 128 130 126
Number of units outstanding at end of
period (000 Omitted) .................... 104 116 128 161 160
Global Governments Variable Account
--------------------------------------------------------------------------
Compass 3
--------------------------------------------------------------------------
Years Ended 12/31
--------------------------------------------------------------------------
2006 2005 2004 2003 2002
----------- ----------- ----------- ----------- -----------
Per unit data: (d)
Net asset value -- beginning of period .. $ 24.209 $ 26.561 $ 24.578 $ 21.638 $ 18.269
----------- ----------- ----------- ----------- -----------
Investment income ....................... $ 1.025 $ 0.949 $ 0.883 $ 0.869 $ 0.846
Expenses ................................ (0.659) (0.688) (0.662) (0.600) (0.511)
----------- ----------- ----------- ----------- -----------
Net investment income ............... $ 0.366 $ 0.261 $ 0.221 $ 0.269 $ 0.335
Net realized and unrealized gain
(loss) on investments and foreign currency
transactions ............................ 0.442 (2.613) 1.762 2.671 3.034
----------- ----------- ----------- ----------- -----------
Change in unit value .................... $ 0.808 $ (2.352) $ 1.983 $ 2.940 $ 3.369
----------- ----------- ----------- ----------- -----------
Unit value:
Net asset value -- end of period ........ $ 25.017 $ 24.209 $ 26.561 $ 24.578 $ 21.638
=========== =========== =========== =========== ===========
Total Return (%) (k)(r) ................. 3.34 (8.85) 8.07 13.59 18.44
Ratios (%) (to average net assets):
Expenses before expense reductions (f) .. 3.54 3.10 2.82 2.62 2.56
Expenses after expense reductions (f) ... 2.65 2.65 2.65 N/A 2.65(e)
Net investment income ................... 1.41 0.97 0.85 1.15 1.77
Portfolio turnover ........................ 118 144 128 130 126
Number of units outstanding at end of
period (000 Omitted) .................... 18 26 28 41 58
Global Governments Variable Account
--------------------------------------------------------------------------
Compass 3 - Level 2
--------------------------------------------------------------------------
Years Ended 12/31
--------------------------------------------------------------------------
2006 2005 2004 2003 2002
----------- ----------- ----------- ----------- -----------
Per unit data: (d)
Net asset value -- beginning of period .. $ 14.221 $ 15.580 $ 14.396 $ 12.655 $ 10.669
----------- ----------- ----------- ----------- -----------
Investment income ....................... $ 0.574 $ 0.526 $ 0.497 $ 0.494 $ 0.499
Expenses ................................ (0.361) (0.371) (0.361) (0.331) (0.281)
----------- ----------- ----------- ----------- -----------
Net investment income ............... $ 0.213 $ 0.155 $ 0.136 $ 0.163 $ 0.218
Net realized and unrealized gain
(loss) on investments and foreign
currency transactions ................. 0.284 (1.514) 1.048 1.578 1.768
----------- ----------- ----------- ----------- -----------
Change in unit value .................... $ 0.497 $ (1.359) $ 1.184 $ 1.741 $ 1.986
----------- ----------- ----------- ----------- -----------
Unit value:
Net asset value -- end of period ........ $ 14.718 $ 14.221 $ 15.580 $ 14.396 $ 12.655
=========== =========== =========== =========== ===========
Total Return (%) (k)(r) ................. 3.49 (8.72) 8.23 13.76 18.61
Ratios (%) (to average net assets):
Expenses before expense reductions (f) .. 3.39 2.95 2.67 2.47 2.42
Expenses after expense reductions (f) ... 2.50 2.50 2.50 N/A 2.50(e)
Net investment income ................... 1.47 1.04 0.94 1.21 1.70
Portfolio turnover (%) .................... 118 144 128 130 126
Number of units outstanding at end
of period (000 Omitted) ................ 403 468 500 559 568
(d) Per unit data are based on the average number of units outstanding during each year.
(e) Ratio includes a reimbursement fee for expenses borne by MFS in prior years under the then existing expense reimbursement
agreement.
(f) Ratios do not reflect reductions from fees paid indirectly.
(k) The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total
return figures for all periods shown.
(r) Certain expenses have been reduced without which performance would have been lower.
See notes to financial statements.
FINANCIAL HIGHLIGHTS -- continued
The financial highlights table is intended to help you understand the variable accounts' financial performance for the past 5
years. Certain information reflects financial results for a single unit value. The total returns in the table represent the rate
by which an investor would have earned (or lost) on an investment in the variable account held for the entire period. This
information has been audited by the variable accounts' independent registered public accounting firm, whose report, together with
the variable accounts' financial statements, are included in this report.
Government Securities Variable Account
--------------------------------------------------------------------------
Compass 2
--------------------------------------------------------------------------
Years Ended 12/31
--------------------------------------------------------------------------
2006 2005 2004 2003 2002
----------- ----------- ----------- ----------- -----------
Per unit data: (d)
Net asset value -- beginning of period .. $ 37.679 $ 37.338 $ 36.470 $ 36.124 $ 33.448
----------- ----------- ----------- ----------- -----------
Investment income ....................... $ 2.024 $ 1.936 $ 1.834 $ 1.482 $ 1.862
Expenses ................................ (0.757) (0.752) (0.726) (0.711) (0.677)
----------- ----------- ----------- ----------- -----------
Net investment income ............... $ 1.267 $ 1.184 $ 1.108 $ 0.771 $ 1.185
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions ........................... (0.327) (0.843) (0.240) (0.425) 1.491
----------- ----------- ----------- ----------- -----------
Change in unit value .................... $ 0.940 $ 0.341 $ 0.868 $ 0.346 $ 2.676
----------- ----------- ----------- ----------- -----------
Unit value:
Net asset value -- end of period ........ $ 38.619 $ 37.679 $ 37.338 $ 36.470 $ 36.124
=========== =========== =========== =========== ===========
Total Return (%) (k) .................... 2.50 0.91 2.38 0.96 8.00
Ratios (%) (to average net assets):
Expenses (f) ............................ 2.01 2.01 1.97 1.95 1.94
Net investment income ................... 3.28 3.09 2.96 2.08 3.19
Portfolio turnover (%) .................... 17 69 89 138 139
Number of units outstanding at end
of period (000 Omitted) ................. 1,538 1,852 2,125 2,447 2,759
Government Securities Variable Account
--------------------------------------------------------------------------
Compass 3
--------------------------------------------------------------------------
Years Ended 12/31
--------------------------------------------------------------------------
2006 2005 2004 2003 2002
----------- ----------- ----------- ----------- -----------
Per unit data: (d)
Net asset value -- beginning of period .. $ 26.295 $ 26.082 $ 25.501 $ 25.284 $ 23.434
----------- ----------- ----------- ----------- -----------
Investment income ....................... $ 1.352 $ 1.316 $ 1.244 $ 1.045 $ 1.300
Expenses ................................ (0.538) (0.543) (0.525) (0.514) (0.495)
----------- ----------- ----------- ----------- -----------
Net investment income ............... $ 0.814 $ 0.773 $ 0.719 $ 0.531 $ 0.805
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions ........................... (0.185) (0.560) (0.138) (0.314) 1.045
----------- ----------- ----------- ----------- -----------
Change in unit value .................... $ 0.629 $ 0.213 $ 0.581 $ 0.217 $ 1.850
----------- ----------- ----------- ----------- -----------
Unit value:
Net asset value -- end of period ........ $ 26.924 $ 26.295 $ 26.082 $ 25.501 $ 25.284
=========== =========== =========== =========== ===========
Total Return (%) (k) .................... 2.40 0.82 2.28 0.86 7.89
Ratios (%) (to average net assets):
Expenses (f) ............................ 2.11 2.11 2.07 2.05 2.04
Net investment income ................... 3.15 2.96 2.82 2.08 3.36
Portfolio turnover ........................ 17 69 89 138 139
Number of units outstanding at end of
period (000 Omitted) .................... 40 69 100 147 205
Government Securities Variable Account
--------------------------------------------------------------------------
Compass 3 - Level 2
--------------------------------------------------------------------------
Years Ended 12/31
--------------------------------------------------------------------------
2006 2005 2004 2003 2002
----------- ----------- ----------- ----------- -----------
Per unit data: (d)
Net asset value -- beginning of period .. $ 15.421 $ 15.274 $ 14.912 $ 14.763 $ 13.663
----------- ----------- ----------- ----------- -----------
Investment income ....................... $ 0.813 $ 0.781 $ 0.742 $ 0.597 $ 0.732
Expenses ................................ (0.300) (0.299) (0.289) (0.282) (0.267)
----------- ----------- ----------- ----------- -----------
Net investment income ............... $ 0.513 $ 0.482 $ 0.453 $ 0.315 $ 0.465
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions ........................... (0.120) (0.335) (0.091) (0.166) 0.635
----------- ----------- ----------- ----------- -----------
Change in unit value .................... $ 0.393 $ 0.147 $ 0.362 $ 0.149 $ 1.100
----------- ----------- ----------- ----------- -----------
Unit value:
Net asset value -- end of period ........ $ 15.814 $ 15.421 $ 15.274 $ 14.912 $ 14.763
=========== =========== =========== =========== ===========
Total Return (%) (k) .................... 2.55 0.96 2.43 1.01 8.05
Ratios (%) (to average net assets):
Expenses (f) ............................ 1.96 1.96 1.92 1.90 1.89
Net investment income ................... 3.30 3.12 2.99 2.10 3.17
Portfolio turnover (%) .................... 17 69 89 138 139
Number of units outstanding at end of
period (000 Omitted) .................... 1,054 1,280 1,377 1,562 1,692
(d) Per unit data are based on the average number of units outstanding during each year.
(f) Ratios do not reflect reductions from fees paid indirectly.
(k) The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total
return figures for all periods shown.
See notes to financial statements.
FINANCIAL HIGHLIGHTS -- continued
The financial highlights table is intended to help you understand the variable accounts' financial performance for the past 5
years. Certain information reflects financial results for a single unit value. The total returns in the table represent the rate
by which an investor would have earned (or lost) on an investment in the variable account held for the entire period. This
information has been audited by the variable accounts' independent registered public accounting firm, whose report, together with
the variable accounts' financial statements, are included in this report.
High Yield Variable Account
--------------------------------------------------------------------------
Compass 2
--------------------------------------------------------------------------
Years Ended 12/31
--------------------------------------------------------------------------
2006 2005 2004 2003 2002
----------- ----------- ----------- ----------- -----------
Per unit data: (d)
Net asset value -- beginning of period .. $ 36.840 $ 36.669 $ 34.056 $ 28.505 $ 28.969
----------- ----------- ----------- ----------- -----------
Investment income ....................... $ 3.121 $ 2.959 $ 2.857 $ 2.769 $ 3.015
Expenses ................................ (0.847) (0.820) (0.770) (0.689) (0.617)
----------- ----------- ----------- ----------- -----------
Net investment income ............... $ 2.274 $ 2.139 $ 2.087 $ 2.080 $ 2.398
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions ........................... 1.058 (1.968) 0.526 3.471 (2.862)
----------- ----------- ----------- ----------- -----------
Change in unit value .................... $ 3.332 $ 0.171 $ 2.613 $ 5.551 $ (0.464)
----------- ----------- ----------- ----------- -----------
Unit value:
Net asset value -- end of period ........ $ 40.172 $ 36.840 $ 36.669 $ 34.056 $ 28.505
=========== =========== =========== =========== ===========
Total Return (%) (k)(r)(s) .............. 9.04 0.47 7.67 19.47 (1.60)
Ratios (%) (to average net assets):
Expenses before expense reduction (f) ... 2.32 2.28(o) 2.21 2.20 2.18
Expenses after expense reductions (f) ... 2.22 2.25 N/A N/A N/A
Net investment income ................... 5.84 5.76 5.91 6.53 7.84
Portfolio turnover (%) .................... 88 53 81 164 172
Number of units outstanding at end
of period (000 Omitted) ................. 1,119 1,323 1,601 1,827 2,069
High Yield Variable Account
--------------------------------------------------------------------------
Compass 3
--------------------------------------------------------------------------
Years Ended 12/31
--------------------------------------------------------------------------
2006 2005 2004 2003 2002
----------- ----------- ----------- ----------- -----------
Per unit data: (d)
Net asset value -- beginning of period .. $ 27.043 $ 26.943 $ 25.048 $ 20.986 $ 21.349
----------- ----------- ----------- ----------- -----------
Investment income ....................... $ 2.212 $ 2.118 $ 2.021 $ 1.964 $ 2.141
Expenses ................................ (0.635) (0.620) (0.576) (0.514) (0.469)
----------- ----------- ----------- ----------- -----------
Net investment income ............... $ 1.577 $ 1.498 $ 1.445 $ 1.450 $ 1.672
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions ........................... 0.839 (1.398) 0.450 2.612 (2.035)
----------- ----------- ----------- ----------- -----------
Change in unit value .................... $ 2.416 $ 0.100 $ 1.895 $ 4.062 $ (0.363)
----------- ----------- ----------- ----------- -----------
Unit value:
Net asset value -- end of period ........ $ 29.459 $ 27.043 $ 26.943 $ 25.048 $ 20.986
=========== =========== =========== =========== ===========
Total Return (%) (k)(r)(s) .............. 8.94 0.37 7.57 19.35 (1.70)
Ratios (%) (to average net assets):
Expenses before expense reductions (f) .. 2.42 2.38(o) 2.31 2.30 2.28
Expenses after expense reductions (f) ... 2.32 2.35 N/A N/A N/A
Net investment income ................... 5.71 5.64 5.75 6.41 8.45
Portfolio turnover ........................ 88 53 81 164 172
Number of units outstanding at end of
period (000 Omitted) ................... 34 47 67 115 178
High Yield Variable Account
--------------------------------------------------------------------------
Compass 3 - Level 2
--------------------------------------------------------------------------
Years Ended 12/31
--------------------------------------------------------------------------
2006 2005 2004 2003 2002
----------- ----------- ----------- ----------- -----------
Per unit data: (d)
Net asset value -- beginning of period .. $ 14.495 $ 14.421 $ 13.386 $ 11.199 $ 11.376
----------- ----------- ----------- ----------- -----------
Investment income ....................... $ 1.202 $ 1.142 $ 1.019 $ 1.161 $ 1.220
Expenses ................................ (0.323) (0.312) (0.275) (0.286) (0.257)
----------- ----------- ----------- ----------- -----------
Net investment income ............... $ 0.879 $ 0.830 $ 0.744 $ 0.875 $ 0.963
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions ........................... 0.440 (0.756) 0.291 1.312 (1.140)
----------- ----------- ----------- ----------- -----------
Change in unit value .................... $ 1.319 $ 0.074 $ 1.035 $ 2.187 $ (0.177)
----------- ----------- ----------- ----------- -----------
Unit value:
Net asset value -- end of period ........ $ 15.814 $ 14.495 $ 14.421 $ 13.386 $ 11.199
=========== =========== =========== =========== ===========
Total Return (%) (k)(r)(s) .............. 9.10 0.52 7.73 19.53 $ (1.55)
Ratios (%) (to average net assets):
Expenses before expense reductions (f) .. 2.27 2.23(o) 2.16 2.15 2.13
Expenses after expense reductions (f) ... 2.17 2.20 N/A N/A N/A
Net investment income ................... 5.86 5.81 5.77 6.57 6.08
Portfolio turnover (%) .................... 88 53 81 164 172
Number of units outstanding at end of
period (000 Omitted) ................... 774 937 971 2,631 2,684
(d) Per share data are based on average number of units outstanding during each year.
(f) Ratios do not reflect reductions from fees paid indirectly.
(k) The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total
return figures for all periods shown.
(o) Due to a revision, the ratios of expenses before expense reductions for the year ended December 31, 2005 not previously
reported, were 2.28%, 2.38% and 2.23% for Compass 2, Compass 3, and Compass 3 - Level 2, respectively. There was no impact
to net assets or the expenses charged to the shareholder.
(r) Certain expenses have been reduced without which performance would have been lower.
(s) From time to time the variable account may receive proceeds from litigation settlements, without which performance would
be lower.
See notes to financial statements.
FINANCIAL HIGHLIGHTS -- continued
The financial highlights table is intended to help you understand the variable accounts' financial performance for the past 5
years. Certain information reflects financial results for a single unit value. The total returns in the table represent the rate
by which an investor would have earned (or lost) on an investment in the variable account held for the entire period. This
information has been audited by the variable accounts' independent registered public accounting firm, whose report, together with
the variable accounts' financial statements, are included in this report.
Money Market Variable Account
--------------------------------------------------------------------------
Compass 2
--------------------------------------------------------------------------
Years Ended 12/31
--------------------------------------------------------------------------
2006 2005 2004 2003 2002
----------- ----------- ----------- ----------- -----------
Per unit data: (d)
Net asset value -- beginning of period .. $ 20.331 $ 20.073 $ 20.188 $ 20.322 $ 20.341
----------- ----------- ----------- ----------- -----------
Investment income ....................... $ 1.051 $ 0.661 $ 0.281 $ 0.247 $ 0.382
Expenses ................................ (0.403) (0.403) (0.396) (0.381) (0.401)
----------- ----------- ----------- ----------- -----------
Net investment income (loss) ........ $ 0.648 $ 0.258 $ (0.115) $ (0.134) $ (0.019)
Net realized and unrealized gain (loss)
on investments ......................... -- (0.000)(w) -- -- --
----------- ----------- ----------- ----------- -----------
Change in unit value .................... $ 0.648 $ 0.258 $ (0.115) $ (0.134) $ (0.019)
----------- ----------- ----------- ----------- -----------
Unit value:
Net asset value -- end of period ........ $ 20.979 $ 20.331 $ 20.073 $ 20.188 $ 20.322
=========== =========== =========== =========== ===========
Total Return (%) (k) .................... 3.19 1.29 (0.57) (0.66) (0.09)
Ratios (%) (to average net assets):
Expenses (f) ............................ 1.95 1.99 1.96 1.87 1.96
Net investment income (loss) ............ 3.15 1.38 (0.56) (0.63) (0.12)
Number of units outstanding at end of
period (000 Omitted) .................... 928 1,128 1,009 1,172 1,626
Money Market Variable Account
--------------------------------------------------------------------------
Compass 3
--------------------------------------------------------------------------
Years Ended 12/31
--------------------------------------------------------------------------
2006 2005 2004 2003 2002
----------- ----------- ----------- ----------- -----------
Per unit data: (d)
Net asset value -- beginning of period .. $ 16.638 $ 16.443 $ 16.553 $ 16.680 $ 16.712
----------- ----------- ----------- ----------- -----------
Investment income ....................... $ 0.852 $ 0.539 $ 0.229 $ 0.198 $ 0.318
Expenses ................................ (0.338) (0.344) (0.339) (0.325) (0.350)
----------- ----------- ----------- ----------- -----------
Net investment income (loss) ........ $ 0.514 $ 0.195 $ (0.110) $ (0.127) $ (0.032)
Net realized and unrealized gain (loss)
on investments ........................ -- (0.000)(w) -- -- --
----------- ----------- ----------- ----------- -----------
Change in unit value .................... $ 0.514 $ 0.195 $ (0.110) $ (0.127) $ (0.032)
----------- ----------- ----------- ----------- -----------
Unit value:
Net asset value -- end of period ........ $ 17.152 $ 16.638 $ 16.443 $ 16.553 $ 16.680
=========== =========== =========== =========== ===========
Total Return (%) (k) .................... 3.09 1.19 (0.67) (0.76) (0.19)
Ratios (%) (to average net assets):
Expenses (f) ............................ 2.05 2.09 2.06 1.97 2.06
Net investment income (loss) ............ 3.00 1.42 (0.71) (0.74) (0.14)
Number of units outstanding at end of
period (000 Omitted) .................. 131 218 97 155 186
Money Market Variable Account
--------------------------------------------------------------------------
Compass 3 - Level 2
--------------------------------------------------------------------------
Years Ended 12/31
--------------------------------------------------------------------------
2006 2005 2004 2003 2002
----------- ----------- ----------- ----------- -----------
Per unit data: (d)
Net asset value -- beginning of period .. $ 12.491 $ 12.326 $ 12.390 $ 12.466 $ 12.472
----------- ----------- ----------- ----------- -----------
Investment income ....................... $ 0.644 $ 0.405 $ 0.181 $ 0.131 $ 0.223
Expenses ................................ (0.240) (0.240) (0.245) (0.207) (0.229)
----------- ----------- ----------- ----------- -----------
Net investment income (loss) ........ $ 0.404 $ 0.165 $ (0.064) $ (0.076) $ (0.006)
Net realized and unrealized gain (loss)
on investments ......................... -- (0.000)(w) -- -- --
----------- ----------- ----------- ----------- -----------
Change in unit value .................... $ 0.404 $ 0.165 $ (0.064) $ (0.076) $ (0.006)
----------- ----------- ----------- ----------- -----------
Unit value:
Net asset value -- end of period ........ $ 12.895 $ 12.491 $ 12.326 $ 12.390 $ 12.466
=========== =========== =========== =========== ===========
Total Return (%) (k) .................... 3.24 1.34 (0.52) (0.61) (0.04)
Ratios (%) (to average net assets):
Expenses (f) ............................ 1.90 1.94 1.91 1.82 1.91
Net investment income (loss) ............ 3.18 1.39 (0.48) (0.61) (0.01)
Number of units outstanding at end of
period (000 Omitted) ................... 1,969 2,384 2,259 896 1,113
(d) Per unit data are based on the average number of units outstanding during each year.
(f) Ratios do not reflect reductions from fees paid indirectly.
(k) The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total
return figures for all periods shown.
(w) Per unit amount was less than $0.001.
See notes to financial statements.
FINANCIAL HIGHLIGHTS -- continued
The financial highlights table is intended to help you understand the variable accounts' financial performance for the past 5
years. Certain information reflects financial results for a single unit value. The total returns in the table represent the rate
by which an investor would have earned (or lost) on an investment in the variable account held for the entire period. This
information has been audited by the variable accounts' independent registered public accounting firm, whose report, together with
the variable accounts' financial statements, are included in this report.
Total Return Variable Account
--------------------------------------------------------------------------
Compass 2
--------------------------------------------------------------------------
Years Ended 12/31
--------------------------------------------------------------------------
2006 2005 2004 2003 2002
----------- ----------- ----------- ----------- -----------
Per unit data: (d)
Net asset value -- beginning of period .. $ 46.459 $ 45.729 $ 41.571 $ 35.950 $ 38.562
----------- ----------- ----------- ----------- -----------
Investment income ....................... $ 1.749 $ 1.521 $ 1.450 $ 1.237 $ 1.407
Expenses ................................ (1.033) (0.970) (0.905) (0.800) (0.777)
----------- ----------- ----------- ----------- -----------
Net investment income ............... $ 0.716 $ 0.551 $ 0.545 $ 0.437 $ 0.630
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions ........................... 4.198 0.179 3.613 5.184 (3.242)
----------- ----------- ----------- ----------- -----------
Change in unit value .................... $ 4.914 $ 0.730 $ 4.158 $ 5.621 $ (2.612)
----------- ----------- ----------- ----------- -----------
Unit value:
Net asset value -- end of period ........ $ 51.373 $ 46.459 $ 45.729 $ 41.571 $ 35.950
=========== =========== =========== =========== ===========
Total Return (%) (k)(s) ................. 10.58 1.60 10.00(b) 15.64 (6.77)
Ratios (%) (to average net assets):
Expenses (f) ............................ 2.14 2.12 2.11 2.10 2.08
Net investment income ................... 1.46 1.18 1.25 1.13 1.43
Portfolio turnover (%) .................... 45 49 64 62 76
Number of units outstanding at end of
period (000 Omitted) ................... 1,156 1,349 1,511 1,688 1,871
Total Return Variable Account
--------------------------------------------------------------------------
Compass 3
--------------------------------------------------------------------------
Years Ended 12/31
--------------------------------------------------------------------------
2006 2005 2004 2003 2002
----------- ----------- ----------- ----------- -----------
Per unit data: (d)
Net asset value -- beginning of period .. $ 45.236 $ 44.592 $ 40.597 $ 35.160 $ 37.771
----------- ----------- ----------- ----------- -----------
Investment income ....................... $ 1.645 $ 1.450 $ 1.375 $ 1.200 $ 1.360
Expenses ................................ (1.051) (1.019) (0.929) (0.823) (0.804)
----------- ----------- ----------- ----------- -----------
Net investment income ............... $ 0.594 $ 0.431 $ 0.446 $ 0.377 $ 0.556
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions ........................... 4.117 0.213 3.549 5.060 (3.167)
----------- ----------- ----------- ----------- -----------
Change in unit value .................... $ 4.711 $ 0.644 $ 3.995 $ 5.437 $ (2.611)
----------- ----------- ----------- ----------- -----------
Unit value:
Net asset value -- end of period ........ $ 49.947 $ 45.236 $ 44.592 $ 40.597 $ 35.160
=========== =========== =========== =========== ===========
Total Return (%) (k)(s) ................. 10.42 1.45 9.84(b) 15.46 (6.91)
Ratios (%) (to average net assets):
Expenses (f) ............................ 2.29 2.27 2.26 2.25 2.23
Net investment income ................... 1.28 0.97 1.07 1.01 1.61
Portfolio turnover ........................ 45 49 64 62 76
Number of units outstanding at end of
period (000 Omitted) ................... 142 217 315 453 634
Total Return Variable Account
--------------------------------------------------------------------------
Compass 3 - Level 2
--------------------------------------------------------------------------
Years Ended 12/31
--------------------------------------------------------------------------
2006 2005 2004 2003 2002
----------- ----------- ----------- ----------- -----------
Per unit data: (d)
Net asset value -- beginning of period .. $ 21.903 $ 21.559 $ 19.599 $ 16.949 $ 18.180
----------- ----------- ----------- ----------- -----------
Investment income ....................... $ 0.812 $ 0.710 $ 0.676 $ 0.575 $ 0.658
Expenses ................................ (0.484) (0.457) (0.425) (0.376) (0.367)
----------- ----------- ----------- ----------- -----------
Net investment income ............... $ 0.328 $ 0.253 $ 0.251 $ 0.199 $ 0.291
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions ........................... 1.989 0.091 1.709 2.451 (1.522)
----------- ----------- ----------- ----------- -----------
Change in unit value .................... $ 2.317 $ 0.344 $ 1.960 $ 2.650 $ (1.231)
----------- ----------- ----------- ----------- -----------
Unit value:
Net asset value -- end of period ........ $ 24.220 $ 21.903 $ 21.559 $ 19.599 $ 16.949
=========== =========== =========== =========== ===========
Total Return (%) (k)(s) ................. 10.58 1.60 10.00(b) 15.64 (6.77)
Ratios (%) (to average net assets):
Expenses (f) ............................ 2.14 2.12 2.11 2.10 2.08
Net investment income ................... 1.44 1.17 1.24 1.11 1.55
Portfolio turnover (%) .................... 45 49 64 62 76
Number of units outstanding at end of
period (000 Omitted) ................... 4,695 5,462 5,646 5,946 6,236
(b) The account's net asset value and total return calculation include a non-recurring accrual recorded as a result of an
administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund sales. The
non-recurring accrual did not have a material impact on the net asset value per unit based on the units outstanding on the day
the proceeds were recorded.
(d) Per unit data are based on the average number of units outstanding during each year.
(f) Ratios do not reflect reductions from fees paid indirectly.
(k) The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total
return figures for all periods shown.
(s) From time to time the variable account may receive proceeds from litigation settlements, without which performance would be
lower.
See notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
(1) BUSINESS AND ORGANIZATION
Capital Appreciation Variable Account, Global Governments Variable Account,
Government Securities Variable Account, High Yield Variable Account, Money
Market Variable Account, and Total Return Variable Account (the variable
account(s)) are separate accounts established by Sun Life Assurance Company of
Canada (U.S.), the Sponsor, in connection with the issuance of Compass 2 and
Compass 3 combination fixed/variable annuity contracts. The variable accounts
operate as open-end management investment companies as those terms are defined
in the Investment Company Act of 1940, as amended.
(2) SIGNIFICANT ACCOUNTING POLICIES
General - The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. The
High Yield Variable Account can invest up to 100% of its portfolio in high-
yield securities rated below investment grade. Investments in high-yield
securities involve greater degrees of credit and market risk than investments
in higher-rated securities and tend to be more sensitive to economic
conditions. The Capital Appreciation Variable Account, Global Governments
Variable Account, High Yield Variable Account and Total Return Variable
Account can invest in foreign securities, including securities of emerging
market issuers. Investments in foreign securities are vulnerable to the
effects of changes in the relative values of the local currency and the U.S.
dollar and to the effects of changes in each country's legal, political, and
economic environment. The markets of emerging markets countries are generally
more volatile than the markets of developed countries with more mature
economies. All of the risks of investing in foreign securities previously
described are heightened when investing in emerging markets countries.
Investment Valuations - Money market instruments are valued at amortized cost,
which approximates market value. Amortized cost involves valuing an instrument
at its cost as adjusted for amortization of premium or accretion of discount
rather than its current market value. Each money market fund's use of
amortized cost is subject to the fund's compliance with Rule 2a-7 under the
Investment Company Act of 1940. The amortized cost value of an instrument can
be different from the market value of an instrument. Equity securities,
including restricted equity securities, are generally valued at the last sale
or official closing price as reported by an independent pricing service on the
market or exchange on which they are primarily traded. For securities for
which there were no sales reported that day, equity securities are generally
valued at the last quoted daily bid quotation as reported by an independent
pricing service on the market or exchange on which they are primarily traded.
Debt instruments (other than short-term instruments), including restricted
debt instruments, are generally valued at an evaluated or composite bid as
reported by an independent pricing service. Values of debt instruments
obtained from pricing services can utilize both dealer-supplied valuations and
electronic data processing techniques, which take into account factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics, and other
market data. Short-term instruments with a maturity at issuance of 60 days or
less may be valued at amortized cost, which approximates market value.
Exchange-traded options are generally valued at the last sale or official
closing price as reported by an independent pricing service on the exchange on
which they are primarily traded. Exchange-traded options for which there were
no sales reported that day are generally valued at the last daily bid
quotation as reported by an independent pricing service on the exchange on
which they are primarily traded. Options not traded on an exchange are
generally valued at a broker-dealer bid quotation. Foreign currency options
are generally valued using an external pricing model that uses market data
from an independent source. Futures contracts are generally valued at last
posted settlement price as reported by an independent pricing service on the
market on which they are primarily traded. Futures contracts for which there
were no trades that day for a particular position are generally valued at the
closing bid quotation as reported by an independent pricing service on the
market on which they are primarily traded. Forward foreign currency contracts
are generally valued at the mean of bid and asked prices for the time period
interpolated from rates reported by an independent pricing service for
proximate time periods. Securities and other assets generally valued on the
basis of information from an independent pricing service may also be valued at
a broker-dealer bid quotation. The values of foreign securities and other
assets and liabilities expressed in foreign currencies are converted to U.S.
dollars using the mean of bid and asked prices for rates reported by an
independent pricing service.
The Board of Managers has delegated primary responsibility for determining or
causing to be determined the value of the variable accounts' investments
(including any fair valuation) to the adviser pursuant to valuation policies
and procedures approved by the Board. If the adviser determines that reliable
market quotations are not readily available, investments are valued at fair
value as determined in good faith by the adviser in accordance with such
procedures under the oversight of the Board of Managers. Under the variable
accounts' valuation policies and procedures, market quotations are not
considered to be readily available for many types of debt instruments. These
investments are generally valued at fair value based on information from
independent pricing services. In addition, investments may be valued at fair
value if the adviser determines that an investment's value has been materially
affected by events occurring after the close of the exchange or market on
which the investment is principally traded (such as foreign exchange or
market) and prior to the determination of the variable accounts' net asset
value, or after the halting of trading of a specific security where trading
does not resume prior to the close of the exchange or market on which the
security is principally traded. Events that occur on a frequent basis after
foreign markets close (such as developments in foreign markets and significant
movements in the U.S. markets) and prior to the determination of the variable
accounts' net asset value may be deemed to have a material affect on the value
of securities traded in foreign markets. Accordingly, the variable accounts'
foreign equity securities may often be valued at fair value. The adviser may
rely on independent pricing services or other information (such as the
correlation with price movements of similar securities in the same or other
markets; the type, cost and investment characteristics of the security; the
business and financial condition of the issuer; and trading and other market
data) to assist in determining whether to fair value and at what value to fair
value an investment. The value of an investment for purposes of calculating
the variable accounts' net asset value can differ depending on the source and
method used to determine value. When fair valuation is used, the value of
investments used to determine the variable accounts' net asset value may
differ from quoted or published prices for the same investments.
In September 2006, FASB Statement No. 157, Fair Value Measurements (the
"Statement") was issued, and is effective for fiscal years beginning after
November 15, 2007 and for all interim periods within those fiscal years. This
Statement provides a single definition of fair value, a hierarchy for
measuring fair value and expanded disclosures about fair value measurements.
Management is evaluating the application of the Statement to the variable
accounts, and believes the impact will be limited to expanded disclosures
resulting from the adoption of this Statement in the variable accounts'
financial statements.
Repurchase Agreements - Each variable account may enter into repurchase
agreements with institutions that the variable accounts' investment adviser
has determined are creditworthy. Each repurchase agreement is recorded at
cost. The variable accounts require that the securities collateral in a
repurchase transaction be transferred to the custodian in a manner sufficient
to enable the variable account to obtain those securities in the event of a
default under the repurchase agreement. The variable accounts monitor, on a
daily basis, the value of the collateral to ensure that its value, including
accrued interest, is greater than amounts owed to the variable accounts under
each such repurchase agreement. The variable accounts, along with other
affiliated entities of Massachusetts Financial Services Company (MFS), may
utilize a joint trading account for the purpose of entering into one or more
repurchase agreements.
Inflation-Adjusted Debt Securities - Certain variable accounts invest in
inflation-adjusted debt securities issued by the U.S. Treasury. The variable
accounts may also invest in inflation-adjusted debt securities issued by U.S.
Government agencies and instrumentalities other than the U.S. Treasury and by
other entities such as U.S. and foreign corporations and foreign governments.
The principal value of these debt securities is adjusted by references to
changes in the Consumer Price Index or another general price or wage index.
These debt securities typically pay a fixed rate of interest, but this fixed
rate is applied to the inflation-adjusted principal amount. The principal paid
at maturity of the debt security is typically equal to the inflation-adjusted
principal amount, or the security's original par value, whichever is greater.
Other types of inflation-adjusted securities may use other methods to adjust
for other measures of inflation.
Foreign Currency Translation - Purchases and sales of foreign investments,
income, and expenses are converted into U.S. dollars based upon currency
exchange rates prevailing on the respective dates of such transactions. Gains
and losses attributable to foreign currency exchange rates on sales of
securities are recorded for financial statement purposes as net realized gains
and losses on investments. Gains and losses attributable to foreign exchange
rate movements on income and expenses are recorded for financial statement
purposes as foreign currency transaction gains and losses. That portion of
both realized and unrealized gains and losses on investments that results from
fluctuations in foreign currency exchange rates is not separately disclosed.
Derivative Risk - Certain variable accounts may invest in derivatives for
hedging or non-hedging purposes. While hedging can reduce or eliminate losses,
it can also reduce or eliminate gains. When the variable accounts use
derivatives as an investment to gain market exposure, or for hedging purposes,
gains and losses from derivative instruments may be substantially greater than
the derivative's original cost. Derivative instruments include purchased
options, futures contracts, and forward currency exchange contracts for the
Global Governments Variable Account and futures contracts for the Government
Securities Variable Account.
Purchased Options - Certain variable accounts may purchase call or put options
for a premium. Purchasing call options may be a hedge against an anticipated
increase in the dollar cost of securities to be acquired or to increase the
variable account's exposure to the underlying instrument. Purchasing put
options may hedge against a decline in the value of portfolio securities. The
premium paid is included as an investment in the Statements of Assets and
Liabilities and is subsequently adjusted to the current value of the option.
Premiums paid for purchased options which have expired are treated as realized
losses on investments in the Statements of Operations. Premiums paid for
purchased options which are exercised or closed are added to the amount paid
or offset against the proceeds on the underlying security or financial
instrument to determine the realized gain or loss. The risk of loss associated
with purchased options is limited to the premium paid.
Futures Contracts - Certain variable accounts may enter into futures contracts
for the delayed delivery of securities or currency, or contracts based on
financial indices at a fixed price on a future date. In entering such
contracts, the variable accounts are required to deposit with the broker
either in cash or securities an amount equal to a certain percentage of the
contract amount. Subsequent payments are made or received by the variable
account each day, depending on the daily fluctuations in the value of the
contract, and are recorded for financial statement purposes as unrealized
gains or losses by the variable accounts. Upon entering into such contracts,
the variable accounts bears the risk of interest or exchange rates or
securities prices moving unexpectedly, in which case, the variable accounts
may not achieve the anticipated benefits of the futures contracts and may
realize a loss.
Forward Foreign Currency Exchange Contracts - Certain variable accounts may
enter into forward foreign currency exchange contracts for the purchase or sale
of a specific foreign currency at a fixed price on a future date. Risks may
arise upon entering into these contracts from the potential inability of
counterparties to meet the terms of their contracts and from unanticipated
movements in the value of the contract. The variable accounts may enter into
forward foreign currency exchange contracts for hedging purposes as well as for
non-hedging purposes. For hedging purposes, the variable accounts may enter
into contracts to deliver or receive foreign currency it will receive from or
require for its normal investment activities. The variable accounts may also
use contracts in a manner intended to protect foreign currency denominated
securities from declines in value due to unfavorable exchange rate movements.
For non-hedging purposes, the variable accounts may enter into contracts with
the intent of changing the relative exposure of the variable accounts'
portfolio of securities to different currencies to take advantage of
anticipated changes. The forward foreign currency exchange contracts are
adjusted by the daily exchange rate of the underlying currency and any gains or
losses are recorded as unrealized until the contract settlement date. On
contract settlement date, the gains or losses are recorded as realized gains or
losses on foreign currency transactions.
Loans and Other Direct Debt Instruments - Certain variable accounts may invest
in loans and loan participations or other receivables. These investments may
include standby financing commitments, including revolving credit facilities,
which obligate the variable account to supply additional cash to the borrower
on demand. Loan participations involve a risk of insolvency of the lending
bank or other financial intermediary.
Indemnifications - Under the variable account's organizational documents, its
officers and trustees may be indemnified against certain liabilities and
expenses arising out of the performance of their duties to the variable
account. Additionally, in the normal course of business, each variable account
enters into agreements with service providers that may contain indemnification
clauses. The variable account's maximum exposure under these agreements is
unknown as this would involve future claims that may be made against the
variable account that have not yet occurred.
Investment Transactions and Income - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. For the
Money Market Variable Account all premium and discount is amortized and
accreted for financial statement purposes and tax reporting purposes in
accordance with generally accepted accounting principles and federal tax
regulations, respectively. For all other variable accounts, all premium and
discount is amortized or accreted for financial statement purposes in
accordance with U.S. generally accepted accounting principles; and all
discount is accreted for tax reporting purposes as required by federal income
tax regulations. Certain variable accounts earn certain fees in connection
with its floating rate loan purchasing activities. These fees are in addition
to interest payments earned and may include amendment fees, commitment fees,
consent fees, and prepayment fees. These fees are recorded on an accrual basis
as income in the accompanying financial statements. Dividends received in cash
are recorded on the ex-dividend date. Certain dividends from foreign
securities will be recorded when the variable account is informed of the
dividend if such information is obtained subsequent to the ex-dividend date.
Dividend and interest payments received in additional securities are recorded
on the ex-dividend or ex-interest date in an amount equal to the value of the
security on such date.
The variable accounts may receive proceeds from litigation settlements
involving its portfolio holdings. Any proceeds received are reflected in
realized gain/loss in the Statements of Operations, or in unrealized gain/loss
if the security is still held by the variable accounts.
Fees Paid Indirectly - The variable accounts' custody fee is reduced according
to an arrangement that measures the value of cash deposited with the custodian
by the variable accounts. This amount, for the year ended December 31, 2006 is
shown as a reduction of total expenses on the Statements of Operations.
Federal Income Taxes - The variable accounts are funding vehicles for
individual variable annuities. The operations of the variable accounts are
part of the operations of Sun Life Assurance Company of Canada (U.S.), the
Sponsor, and are not taxed separately; the variable accounts are not taxed as
regulated investment companies. The Sponsor qualifies for the federal income
tax treatment granted to life insurance companies under Subchapter L of the
Internal Revenue Code. Accordingly, no provision for federal income or excise
tax is necessary. Foreign taxes have been provided for on interest and
dividend income earned on foreign investments in accordance with the
applicable country's tax rates and to the extent unrecoverable are recorded as
a reduction of investment income.
(3) CONTRACT CHARGES
The Sponsor makes a deduction from the variable accounts at the end of each
valuation period, during both the accumulation period and after annuity
payments begin, for assuming the mortality and expense risks under the
contracts. The rate of the deduction may be changed annually but in no event
may it exceed 1.25% of the average net assets of each variable account
attributable to Compass 3 contracts, or, with respect to Compass 2 contracts,
1.30% of the assets of Capital Appreciation Variable Account, Government
Securities Variable Account, High Yield Variable Account, and Money Market
Variable Account, or 1.25% of the assets of Global Governments Variable
Account, and Total Return Variable Account attributable to such contracts.
For assuming the distribution expense risk under Compass 3 contracts, the
Sponsor makes a deduction from the variable accounts at the end of each
valuation period for the first seven contract years at an effective annual
rate of 0.15% of the net assets of the variable accounts attributable to such
contracts. Contracts are transferred from Compass 3 to Compass 3 -- Level 2 in
the month following the seventh contract anniversary. No deduction is made
after the seventh contract anniversary. No deduction is made with respect to
assets attributable to Compass 2 contracts.
Each year, on the contract anniversary, a contract maintenance charge of $25
with respect to Compass 2 contracts and $30 with respect to Compass 3 contracts
is deducted from each contract's accumulation account and paid to the Sponsor to
cover administrative expenses relating to the contract. After the annuity
commencement date, the annual contract maintenance charge is deducted pro rata
from each annuity payment made during the year.
The Sponsor does not deduct a sales charge from purchase payments. However, a
withdrawal charge (contingent deferred sales charge) may be deducted to cover
certain expenses relating to the sale of the contract. In no event shall the
aggregate withdrawal charges (including the distribution expense charge
described above applicable to Compass 3 contracts) exceed 5% of the purchase
payments made under a Compass 2 contract or 9% of the purchase payments made
under a Compass 3 contract.
(4) ANNUITY RESERVES
Annuity reserves for contracts with annuity commencement dates prior to February
1, 1987 have been calculated using the 1971 Individual Annuitant Mortality
Table. Annuity reserves for contracts with annuity commencement dates between
February 1, 1987 and December 31, 1998 have been calculated using the 1983
Individual Annuitant Mortality Table. Annuity reserves for contracts with
annuity commencement dates on or after January 1, 1999 have been calculated
using the Annuity Mortality 2000 table. Annuity reserves for contracts in the
current payment period are calculated using an assumed interest rate of 4%.
Required adjustments are accomplished by transfers to or from the Sponsor.
(5) TRANSACTIONS WITH AFFILIATES
Investment Adviser - Each variable account has an investment advisory agreement
with MFS to provide overall investment management and related administrative
services and facilities to the variable accounts. The management fee is computed
daily and paid monthly at the following annual rates based on a percentage of
each variable account's average daily net assets:
Annual Rate of Management Annual Rate of Management
Fee Fee Annual
Based on Average Based on Average Effective
Daily Net Assets Daily Net Assets Management
Up to $300 Million In Excess of $300 Million Fee Rate
- ----------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation Variable Account ...................... 0.75% 0.675% 0.75%
Global Governments Variable Account ........................ 0.75% 0.675% 0.75%
Government Securities Variable Account ..................... 0.55% 0.495% 0.55%
High Yield Variable Account ................................ 0.75%(a) 0.675% 0.68%
Money Market Variable Account .............................. 0.50%(b) 0.50%(b) 0.50%
Total Return Variable Account .............................. 0.75% 0.675% 0.75%
(a) At the commencement of the period, the investment adviser had agreed to reduce its management fee to 0.675% of average
daily net assets. Effective September 1, 2006, the investment adviser has agreed in writing to reduce its management fee to
0.70% for the first $300 million of average daily net assets. This written agreement will continue through August 31, 2007,
unless changed or rescinded by the variable accounts' Board of Managers. This management fee reduction amounted to $40,938,
which is shown as a reduction of total expenses in the Statements of Operations.
(b) The investment adviser has agreed in writing to reduce its management fee to 0.45% of average daily net assets in excess of
$500 million. This written agreement may be rescinded only upon consent of the variable accounts' Board of Managers. For
the year ended December 31, 2006, the Money Market Variable Account's average daily net assets did not exceed $500 million
and therefore, the management fee was not reduced.
At the commencement of the period, the investment adviser had agreed to pay
each variable accounts' operating expenses, exclusive of taxes, extraordinary
expenses, brokerage and transaction costs, mortality and expense risk charges,
distribution expense risk charges, and contract maintenance charges, such that
operating expenses did not exceed 1.25% annually of the average daily net
assets of each variable account. This agreement is contained in the investment
advisory agreement between MFS and the variable accounts and may not be
rescinded without shareholder approval. Effective September 1, 2006, the
investment adviser has agreed in writing to pay the High Yield Variable
Account's operating expenses, exclusive of taxes, extraordinary expenses,
brokerage and transaction costs, mortality and expense risk charges,
distribution expense risk charges, and contract maintenance charges, such that
operating expenses do not exceed 0.90% annually of the average daily net assets
of the High Yield Variable Account. This written agreement will continue
through August 31, 2007 unless changed or rescinded by the variable account's
Board of Managers. For the year ended December 31, 2006, this reduction
amounted to $84,512 and $20,169 for the Global Governments Variable Account and
High Yield Variable Account, respectively, and is reflected as a reduction of
total expenses in the Statements of Operations. For the year ended December 31,
2006, the actual operating expenses for the Capital Appreciation Variable
Account, Government Securities Variable Account, Money Market Variable Account,
and Total Return Variable Account did not exceed the limit and therefore, the
investment adviser did not pay any portion of these variable accounts'
expenses.
Administrator - MFS provides certain financial, legal, shareholder
communications, compliance, and other administrative services to each variable
account. Under an administrative services agreement, each variable account
partially reimburses MFS the costs incurred to provide these services. Prior to
June 1, 2006, each variable account was allocated a portion of these
administrative costs based on its size and relative average net assets.
Effective June 1, 2006, each variable account is charged an annual fixed amount
of $10,000 plus a fee based on calendar year average net assets.
The administrative services fee incurred for the year ended December 31, 2006
was equivalent to the following annual effective rate of the variable
accounts' average daily net assets:
Capital Global Government High Money Total
Appreciation Governments Securities Yield Market Return
Variable Variable Variable Variable Variable Variable
Account Account Account Account Account Account
- --------------------------------------------------------------------------------------------------------------------------------
Percent of average daily net assets ...................... 0.0245% 0.0692% 0.0245% 0.0243% 0.0243% 0.0247%
====== ====== ====== ====== ====== ======
Managers' and Officers' Compensation - Each variable account pays compensation
to Independent Managers in the form of a retainer, attendance fees, and
additional compensation to the Board chairperson. Each variable account does
not pay compensation directly to officers or members of the Board of Managers
who are affiliated with the Investment Adviser or the Sponsor. Certain
officers and managers of the variable accounts are officers or directors of
MFS, MFD, and MFSC.
Other - These variable accounts and certain other MFS funds (the funds) have
entered into a services agreement (the Agreement) which provides for payment
of fees by the funds to Tarantino LLC in return for the provision of services
of an Independent Chief Compliance Officer (ICCO) for the funds. The ICCO is
an officer of the funds and the sole member of Tarantino LLC. The funds can
terminate the Agreement with Tarantino LLC at any time under the terms of the
Agreement. MFS has agreed to bear all expenses associated with office space,
other administrative support, and supplies provided to the ICCO. For the year
ended December 31, 2006, the fees paid to Tarantino LLC were as follows:
Capital Appreciation Variable Account .... $1,197
Global Governments Variable Account ...... 49
Government Securities Variable Account ... 438
High Yield Variable Account .............. 314
Money Market Variable Account ............ 271
Total Return Variable Account ............ 949
(6) PORTFOLIO SECURITIES
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions, and short-term obligations were as follows:
Purchases Sales
- --------------------------------------------------------------------------
Capital Appreciation Variable Account ........ $139,981,685 $187,252,271
Global Governments Variable Account .......... 5,533,581 6,930,975
Government Securities Variable Account ....... 1,385,157 806,537
High Yield Variable Account .................. 51,630,690 56,781,385
Total Return Variable Account ................ 63,051,273 81,352,650
Purchases and sales of investments for the Money Market Variable Account,
exclusive of securities subject to repurchase agreements, aggregated
$656,414,713 and $667,087,700, respectively.
Purchases and sales of U.S. government securities, other than purchased option
transactions and short-term obligations, were as follows:
Purchases Sales
- --------------------------------------------------------------------------
Global Governments Variable Account .......... $ 3,968,496 $ 3,349,384
Government Securities Variable Account ....... 12,499,717 26,469,320
Total Return Variable Account ................ 18,728,895 28,186,798
(7) PARTICIPANT TRANSACTIONS
The changes in net assets from changes in numbers of outstanding units were as follows:
Year Ended 12/31/06 (000 Omitted)
------------------------------------------------------------------------
Transfers Between Withdrawals,
Variable Accounts Surrenders,
Purchase and Fixed Annuitizations,
Payments Accumulation and Contract
Received Account Charges
-------------------- -------------------- --------------------
Units Dollar Units Dollars Units Dollars
-------- -------- -------- -------- -------- --------
Capital Appreciation Variable Account
Compass 2 Contracts .................. 28 $ 1,602 (78) $ (4,354) (549) $(30,610)
Compass 3 Contracts .................. 20 756 (99) (3,657) (30) (1,105)
Compass 3 - Level 2 Contracts ........ 133 2,035 93 1,464 (1,096) (16,818)
-------- -------- --------
$ 4,393 $ (6,547) $(48,533)
======== ======== ========
Global Governments Variable Account
Compass 2 Contracts .................. 2 $ 41 9 $ 229 (23) $ (568)
Compass 3 Contracts .................. 4 109 (7) (177) (5) (127)
Compass 3 - Level 2 Contracts ........ 8 129 (5) (74) (68) (981)
-------- -------- --------
$ 279 $ (22) $ (1,676)
======== ======== ========
Government Securities Variable Account
Compass 2 Contracts .................. 22 $ 834 (21) $ (771) (315) $(11,902)
Compass 3 Contracts .................. 8 204 (29) (763) (8) (205)
Compass 3 - Level 2 Contracts ........ 27 421 25 376 (278) (4,289)
-------- -------- --------
$ 1,459 $ (1,158) $(16,396)
======== ======== ========
High Yield Variable Account
Compass 2 Contracts .................. 9 $ 332 (13) $ (465) (200) $ (7,644)
Compass 3 Contracts .................. 6 163 (13) (374) (6) (158)
Compass 3 - Level 2 Contracts ........ 18 266 3 90 (184) (2,780)
-------- -------- --------
$ 761 $ (749) $(10,582)
======== ======== ========
Money Market Variable Account
Compass 2 Contracts .................. 9 $ 188 2 $ 41 (211) $ (4,359)
Compass 3 Contracts .................. 21 356 (80) (1,346) (28) (473)
Compass 3 - Level 2 Contracts ........ 62 777 77 963 (554) (7,013)
-------- -------- --------
$ 1,321 $ (342) $(11,845)
======== ======== ========
Total Return Variable Account
Compass 2 Contracts .................. 11 $ 492 27 $ 1,266 (231) $(11,129)
Compass 3 Contracts .................. 24 1,119 (74) (3,480) (25) (1,142)
Compass 3 - Level 2 Contracts ........ 119 2,689 193 4,441 (1,079) (24,482)
-------- -------- --------
$ 4,300 $ 2,227 $(36,753)
======== ======== ========
Year Ended 12/31/06 (000 Omitted)
-----------------------------------------------
Net Net Net
Accumulation Annuitization Increase
Activity Activity (Decrease)
--------------------- -------- --------
Units Dollars Dollars Dollars
--------- -------- -------- --------
Capital Appreciation Variable Account
Compass 2 Contracts .................. (599) $(33,362) $ (159) $(33,521)
Compass 3 Contracts .................. (109) (4,006) 0* (4,006)
Compass 3 - Level 2 Contracts ........ (870) (13,319) (36) (13,355)
-------- -------- --------
$(50,687) $ (195) $(50,882)
======== ======== ========
Global Governments Variable Account
Compass 2 Contracts .................. (12) $ (298) $ 1 $ (297)
Compass 3 Contracts .................. (8) (195) (38) (233)
Compass 3 - Level 2 Contracts ........ (65) (926) 35 (891)
-------- -------- --------
$ (1,419) $ (2) $ (1,421)
Government Securities Variable Account
Compass 2 Contracts .................. (314) $(11,839) $ 51 $(11,788)
Compass 3 Contracts .................. (29) (764) -- (764)
Compass 3 - Level 2 Contracts ........ (226) (3,492) 0* (3,492)
-------- -------- --------
$(16,095) $ 51 $(16,044)
======== ======== ========
High Yield Variable Account
Compass 2 Contracts .................. (204) $ (7,777) $ (72) $ (7,849)
Compass 3 Contracts .................. (13) (369) 0* (369)
Compass 3 - Level 2 Contracts ........ (163) (2,424) (1) (2,425)
-------- -------- --------
$(10,570) $ (73) $(10,643)
======== ======== ========
Money Market Variable Account
Compass 2 Contracts .................. (200) $ (4,130) $ (178) $ (4,308)
Compass 3 Contracts .................. (87) (1,463) (9) (1,472)
Compass 3 - Level 2 Contracts ........ (415) (5,273) (34) (5,307)
-------- -------- --------
$(10,866) $ (221) $(11,087)
======== ======== ========
Total Return Variable Account
Compass 2 Contracts .................. (193) $ (9,371) $ (174) $ (9,545)
Compass 3 Contracts .................. (75) (3,503) (48) (3,551)
Compass 3 - Level 2 Contracts ........ (767) (17,352) (78) (17,430)
-------- -------- --------
$(30,226) $ (300) $(30,526)
======== ======== ========
* Amount less than 500.
Year Ended 12/31/05 (000 Omitted)
-------------------------------------------------------------------
Transfers Between Withdrawals,
Variable Accounts Surrenders,
Purchase and Fixed Annuitizations,
Payments Accumulation and Contract
Received Account Charges
-------------------- -------------------- --------------------
Units Dollar Units Dollars Units Dollars
-------- -------- -------- -------- -------- --------
Capital Appreciation Variable Account
Compass 2 Contracts .................. 35 $ 1,936 (21) $ (1,091) (540) $(29,700)
Compass 3 Contracts .................. 38 1,358 (152) (5,445) (62) (2,250)
Compass 3 - Level 2 Contracts ........ 171 2,563 412 6,242 (1,133) (16,995)
-------- -------- --------
$ 5,857 $ (294) $(48,945)
======== ======== ========
Global Governments Variable Account
Compass 2 Contracts .................. 1 $ 29 12 $ 324 (25) $ (653)
Compass 3 Contracts .................. 4 103 0* 7 (6) (157)
Compass 3 - Level 2 Contracts ........ 16 234 43 646 (91) (1,359)
-------- -------- --------
$ 366 $ 977 $ (2,169)
======== ======== ========
Government Securities Variable Account
Compass 2 Contracts .................. 31 $ 1,174 7 $ 275 (311) $(11,710)
Compass 3 Contracts .................. 13 341 (29) (746) (15) (383)
Compass 3 - Level 2 Contracts ........ 51 788 84 1,292 (232) (3,571)
-------- -------- --------
$ 2,303 $ 821 $(15,664)
======== ======== ========
High Yield Variable Account
Compass 2 Contracts .................. 18 $ 671 (27) $ (1,007) (269) $ (9,848)
Compass 3 Contracts .................. 9 250 (15) (416) (14) (371)
Compass 3 - Level 2 Contracts ........ 21 306 100 1,381 (155) (2,231)
-------- -------- --------
$ 1,227 $ (42) $(12,450)
======== ======== ========
Money Market Variable Account
Compass 2 Contracts .................. 12 $ 326 349 $ 7,007 (242) $ (4,879)
Compass 3 Contracts .................. 33 568 142 2,330 (54) (884)
Compass 3 - Level 2 Contracts ........ 71 904 2,082 25,741 (2,028) (25,133)
-------- -------- --------
$ 1,798 $ 35,078 $(30,896)
======== ======== ========
Total Return Variable Account
Compass 2 Contracts .................. 11 $ 557 104 $ 4,770 (277) $(12,683)
Compass 3 Contracts .................. 31 1,416 (84) (3,724) (45) (2,024)
Compass 3 - Level 2 Contracts ........ 156 3,366 635 13,743 (975) (21,072)
-------- -------- --------
$ 5,339 $ 14,789 $(35,779)
======== ======== ========
Year Ended 12/31/05 (000 Omitted)
-----------------------------------------------
Net Net Net
Accumulation Annuitization Increase
Activity Activity (Decrease)
--------------------- -------- --------
Units Dollars Dollars Dollars
--------- -------- -------- --------
Capital Appreciation Variable Account
Compass 2 Contracts .................. (526) $(28,855) $ (212) $(29,067)
Compass 3 Contracts .................. (176) (6,337) 0* (6,337)
Compass 3 - Level 2 Contracts ........ (550) (8,190) (7) (8,197)
-------- -------- --------
$(43,382) $ (219) $(43,601)
======== ======== ========
Global Governments Variable Account
Compass 2 Contracts .................. (12) $ (300) $ 1 $ (299)
Compass 3 Contracts .................. (2) (47) (3) (50)
Compass 3 - Level 2 Contracts ........ (32) (479) (1) (480)
-------- -------- --------
$ (826) $ (3) $ (829)
======== ======== ========
Government Securities Variable Account
Compass 2 Contracts .................. (273) $(10,261) $ (68) $(10,329)
Compass 3 Contracts .................. (31) (788) -- (788)
Compass 3 - Level 2 Contracts ........ (97) (1,491) (10) (1,501)
-------- -------- --------
$(12,540) $ (78) $(12,618)
======== ======== ========
High Yield Variable Account
Compass 2 Contracts .................. (278) $(10,184) $ (200) $(10,384)
Compass 3 Contracts .................. (20) (537) (8) (545)
Compass 3 - Level 2 Contracts ........ (34) (544) (14) (558)
-------- -------- --------
$(11,265) $ (222) $(11,487)
======== ======== ========
Money Market Variable Account
Compass 2 Contracts .................. 119 $ 2,454 $ 9 $ 2,463
Compass 3 Contracts .................. 121 2,014 4 2,018
Compass 3 - Level 2 Contracts ........ 125 1,512 56 1,568
-------- -------- --------
$ 5,980 $ 69 $ 6,049
======== ======== ========
Total Return Variable Account
Compass 2 Contracts .................. (162) $ (7,356) $ (135) $ (7,491)
Compass 3 Contracts .................. (98) (4,332) (86) (4,418)
Compass 3 - Level 2 Contracts ........ (184) (3,963) (119) (4,082)
-------- -------- --------
$(15,651) $ (340) $(15,991)
======== ======== ========
* Amount less than 500.
On July 18, 2005, $41,059,121 was transferred to the Money Market Variable
Account from the Managed Sectors Variable Account as a result of
its termination.
(8) LINE OF CREDIT
The variable accounts and other funds managed by MFS participate in a $1
billion unsecured committed line of credit provided by a syndication of banks
under a credit agreement. In addition, the variable accounts and other funds
managed by MFS have established uncommitted borrowing arrangements with
certain banks. Borrowings may be made for temporary financing needs. Interest
is charged to each fund, based on its borrowings, generally at a rate equal to
the Federal Reserve funds rate plus 0.35%. In addition, a commitment fee,
based on the average daily unused portion of the committed line of credit, is
allocated among the participating funds at the end of each calendar quarter.
For the year ended December 31, 2006, the variable accounts' commitment fee
and interest expense are included in miscellaneous expense on the Statements
of Operations and were as follows:
Commitment fee Interest expense
- ------------------------------------------------------------------------------
Capital Appreciation Variable Account .... $2,008 $--
Global Governments Variable Account ...... 83 --
Government Securities Variable Account ... 737 --
High Yield Variable Account .............. 510 --
Money Market Variable Account ............ 671 221
Total Return Variable Account ............ 1,573 --
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Participants in and the Board of Managers of Capital Appreciation
Variable Account, Global Governments Variable Account, Government Securities
Variable Account, High Yield Variable Account, Money Market Variable Account and
Total Return Variable Account and the Board of Directors of Sun Life Insurance
Company of Canada:
We have audited the accompanying statements of assets and liabilities, including
the portfolios of investments, of Capital Appreciation Variable Account, Global
Governments Variable Account, Government Securities Variable Account, High Yield
Variable Account, Money Market Variable Account and Total Return Variable
Account (the "Variable Accounts") as of December 31, 2006, and the related
statements of operations for the year then ended, the statements of changes in
net assets for each of the two years in the period then ended, and the financial
highlights for each of the five years in the period then ended. These financial
statements and financial highlights are the responsibility of the Variable
Accounts' management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The
Variable Accounts are not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Variable
Accounts' internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. Our procedures
included confirmation of securities owned as of December 31, 2006, by
correspondence with the custodian and brokers; where replies were not received
from brokers, we performed other auditing procedures. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial positions of Capital
Appreciation Variable Account, Global Governments Variable Account, Government
Securities Variable Account, High Yield Variable Account, Money Market Variable
Account and Total Return Variable Account as of December 31, 2006, the results
of their operations for the year then ended, the changes in their net assets for
each of the two years in the period then ended, and their financial highlights
for each of the five years in the period then ended, in conformity with
accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 20, 2007
COMPASS VARIABLE ACCOUNTS
MEMBERS OF BOARDS OF MANAGERS AND OFFICERS -- IDENTIFICATION AND BACKGROUND
The members of the Boards of Managers ("Managers") and the officers of each Account, as of February 1, 2007, are listed below,
together with their principal occupations during the past five years. (Their titles may have varied during that period.)
The address of each Manager and officer is 500 Boylston Street, Boston, Massachusetts 02116.
POSITION(s) HELD MANAGER/OFFICER PRINCIPAL OCCUPATIONS DURING THE PAST
NAME, DATE OF BIRTH WITH FUND SINCE(1) FIVE YEARS AND OTHER DIRECTORSHIPS(2)
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INTERESTED MANAGER
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David D. Horn(3) Manager April 1986 Private investor; Retired; Sun Life Assurance Company
(born 06/07/41) of Canada, Former Senior Vice President and General Manager
for the United States (until 1997)
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INDEPENDENT MANAGERS
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J. Kermit Birchfield Chairman May 1997 Consultant; Century Partners, Inc. (investments),
(born 01/08/40) Managing Director; Displaytech, Inc. (manufacturer of liquid
crystal display technology), Director; Dessin Fournir LLC
(furniture manufacturer), Director (October 2005 to present)
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Robert C. Bishop Manager May 2001 AutoImmune Inc. (pharmaceutical product development),
(born 01/13/43) Chairman, President and Chief Executive Officer; Caliper
Life Sciences Corp. (laboratory analytical instruments),
Director; Millipore Corporation (purification/ filtration
products), Director; Quintiles Transnational Corp. (contract
services to the medical industry), Director
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Frederick H. Dulles Manager May 2001 Attorney; Ten State Street LLP (law firm),
(born 03/12/42) Partner (July 2003 to May 2005); McFadden, Pilkington & Ward
LLP (solicitors and registered foreign lawyers), Partner
(until June 2003); Jackson & Nash, LLP (law firm), Of
Counsel (January 2000 to November 2000)
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Marcia A. Kean Manager April 2005 Feinstein Kean Healthcare (consulting), Chief Executive
(born 06/30/48) Officer (since December 2002), Managing Director (prior to
May 2001); Ardais Corporation (biotech products), Senior
Vice President - Commercialization (February 2002 until
November 2002)
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Ronald G. Steinhart Manager May 2001 Private investor; Bank One, Texas N.A., Vice Chairman and
(born 06/15/40) Director (January 2000 to January 2001); Bank One
Corporation, Officer (until January 2000); Carreker
Corporation (consultant and technology provider to financial
institutions), Director; Prentiss Properties Trust (real
estate investment trust), Director; United Auto Group, Inc.
(automotive retailer), Director
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Haviland Wright Manager May 2001 Hawaii Small Business Development Center, Kaua'l
(born 07/21/48) Center, Center Director (since March 2002); Displaytech,
Inc. (manufacturer of liquid crystal display technology),
Chairman and Chief Executive Officer (until March 2002)
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MANAGER EMERITUS
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Samuel Adams Manager Emeritus Retired
(born 10/19/25)
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OFFICERS
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Maria F. Dwyer(4) President November 2005 Massachusetts Financial Services Company, Executive
(born 12/01/58) Vice President and Chief Regulatory Officer (since March
2004); Fidelity Management & Research Company, Vice
President (prior to March 2004); Fidelity Group of Funds,
President and Treasurer (prior to March 2004)
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Tracy Atkinson(4) Treasurer September 2005 Massachusetts Financial Services Company, Senior
(born 12/30/64) Vice President (since September 2004); PricewaterhouseCoo
pers LLP, Partner (prior to September 2004)
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Christopher R. Bohane(4) Assistant Secretary July 2005 Massachusetts Financial Services Company, Vice
(born 01/18/74) and Assistant Clerk President and Senior Counsel (since April 2003); Kirkpatrick
& Lockhart LLP (law firm), Associate (prior to April 2003)
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Ethan D. Corey(4) Assistant Secretary July 2005 Massachusetts Financial Services Company, Special
(born 11/21/63) and Assistant Clerk Counsel (since December 2004); Dechert LLP (law firm),
Counsel (prior to December 2004)
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David L. DiLorenzo(4) Assistant Treasurer July 2005 Massachusetts Financial Services Company, Vice
(born 08/10/68) President (since June 2005); JP Morgan Investor Services,
Vice President (January 2001 to June 2005)
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Timothy M. Fagan(4) Assistant Secretary September 2005 Massachusetts Financial Services Company, Vice
(born 07/10/68) and Assistant Clerk President and Senior Counsel (since September 2005); John
Hancock Advisers, LLC, Vice President and Chief Compliance
Officer (September 2004 to August 2005) Senior Attorney
(prior to September 2004); John Hancock Group of Funds, Vice
President and Chief Compliance Officer (September 2004 to
December 2004)
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Mark D. Fischer(4) Assistant Treasurer July 2005 Massachusetts Financial Services Company, Vice
(born 10/27/70) President (since May 2005); JP Morgan Investment Management
Company, Vice President (prior to May 2005)
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Brian E. Langenfeld(4) Assistant Secretary May 2006 Massachusetts Financial Services Company, Assistant
(born 03/07/73) and Assistant Clerk Vice President and Counsel (since May 2006); John Hancock
Advisers, LLC, Assistant Vice President and Counsel (May
2005 to April 2006); John Hancock Advisers, LLC, Attorney
and Assistant Secretary (prior to May 2005)
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Ellen Moynihan(4) Assistant Treasurer May 1997 Massachusetts Financial Services Company, Vice President
(born 11/13/57)
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Susan S. Newton(4) Assistant Secretary May 2005 Massachusetts Financial Services Company, Senior
(born 03/07/50) and Assistant Clerk Vice President and Assistant General Counsel (since April
2005); John Hancock Advisers, LLC, Senior Vice President,
Secretary and Chief Legal Officer (prior to April 2005);
John Hancock Group of Funds, Senior Vice President,
Secretary and Chief Legal Officer (prior to April 2005)
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Susan A. Pereira(4) Assistant Secretary July 2005 Massachusetts Financial Services Company, Vice
(born 11/05/70) and Assistant Clerk President and Senior Counsel (since June 2004); Bingham
McCutchen LLP (law firm), Associate (January 2001 to June
2004)
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Mark N. Polebaum(4) Secretary and February 2006 Massachusetts Financial Services Company, Executive
(born 05/01/52) Assistant Clerk Vice President, General Counsel and Secretary (since January
2006); Wilmer Cutler Pickering Hale and Dorr LLP (law firm),
Partner (prior to January 2006)
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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)
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James O. Yost(4) Assistant Treasurer April 1992 Massachusetts Financial Services Company, Senior
(born 06/12/60) Vice President
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(1) Date first appointed to serve as Manager/Trustee/Officer of an MFS/Sun Life Product. Each Manager has served continuously
since appointment.
(2) Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., "public
companies").
(3) "Interested person" of the Sun Life of Canada (U.S.), within the meaning of the Investment Company Act of 1940 (referred to as
the 1940 Act), which is the principal federal law governing investment companies like the Series. The address of Sun Life of
Canada (U.S.) is One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481.
(4) "Interested person" of MFS within the meaning of the 1940 Act. The address of MFS is 500 Boylston Street, Boston,
Massachusetts 02116.
The Accounts do not hold annual meetings for the purpose of electing Managers,
and Managers are not elected for fixed terms. Each Manager and officer holds
office until his or her successor is chosen and qualified, or until his or her
earlier death, resignation, retirement or removal.
All Managers currently serve as Managers of each Account and have served in
that capacity since originally elected or appointed. All of the Managers are
also Trustees of the MFS Sun/Life Series Trust. The executive officers of the
Compass Variable Accounts hold similar offices for the MFS Sun/Life Series
Trust and other funds in the MFS fund complex. Each Manager serves as a
Trustee or Manager of 34 Accounts/Series.
The Statement of Additional Information contains further information about the
Managers and is available without charge upon request by calling
1-800-752-7215.
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENTS
The Investment Company Act of 1940 requires that both the full Board of Managers
and a majority of the non-interested ("independent") Managers, voting
separately, annually approve the continuation of each Variable Account's
investment advisory agreement with Massachusetts Financial Services Company
(MFS) on behalf of the Variable Accounts. The Managers consider matters bearing
on the Variable Accounts and their advisory arrangements at their meetings
throughout the year, including a review of performance data at each regular
meeting. In addition, the independent Managers met several times over the course
of three months beginning in May and ending in July 2006 ("contract review
meetings") for the specific purpose of considering whether to approve the
continuation of the investment advisory agreements for the Variable Accounts.
The independent Managers were assisted in their evaluation of the investment
advisory agreements by independent legal counsel, from whom they received
separate legal advice and with whom they met separately from MFS management
during various contract review meetings. The independent Managers were also
assisted in this process by the Variable Accounts" Independent Chief Compliance
Officer, a full-time senior officer appointed by and reporting to the
independent Managers.
In connection with their deliberations, the Managers, including the independent
Managers, considered such information and factors as they believed, in light of
the legal advice furnished to them and their own business judgment, to be
relevant. Each investment advisory agreement was considered separately for each
Variable Account, although the Managers also took into account the common
interests of all Variable Accounts in their review. As described below, the
Managers considered the nature, quality, and extent of the various investment
advisory, administrative, and shareholder services performed by MFS under the
existing investment advisory agreements and other arrangements with the Variable
Accounts.
In connection with their contract review meetings, the Managers received and
relied upon materials which included, among other items: (i) information
provided by Lipper Inc. on the investment performance of each Variable Account
for various time periods ended December 31, 2005, compared to the investment
performance of a group of funds with substantially similar investment
classifications/objectives (the "Lipper performance universe"), as well as the
investment performance of a group of funds identified by objective criteria
suggested by MFS ("peer funds"), (ii) information provided by Lipper Inc. on
each Variable Account's advisory fees and other expenses compared to the
advisory fees and other expenses of comparable funds identified by Lipper (the
"Lipper expense group"), as well as the advisory fees and other expenses of peer
funds identified by objective criteria suggested by MFS, (iii) information
provided by MFS on the advisory fees of comparable portfolios of its other
clients, including institutional separate account and other clients, (iv)
information as to whether, and to what extent applicable, expense waivers,
reimbursements or fee "breakpoints" are observed for a Variable Account, (v)
information regarding MFS" financial results and financial condition, including
MFS' and certain of its affiliates' estimated profitability from services
performed for the Variable Accounts, (vi) MFS' views regarding the outlook for
the mutual fund industry and its strategic business plans, (vii) descriptions of
various functions performed by MFS for the Variable Accounts, such as compliance
monitoring and portfolio trading practices, and (viii) information regarding the
overall organization of MFS, including information about MFS' senior management
and other personnel providing investment advisory, administrative and other
services to the Variable Accounts. The comparative performance, fee and expense
information prepared and provided by Lipper Inc. was not independently verified,
and the independent Managers did not independently verify any information
provided to them by MFS.
The Managers' conclusions as to the continuation of the investment advisory
agreements were based on comprehensive consideration of all information provided
to the Managers and not the result of any single factor. Some of the factors
that figured particularly in the Managers' deliberations are described below for
each Variable Account, while individual Managers may have given different weight
to various factors and evaluated the information presented as a whole
differently than another Manager. The Managers recognized that the fee
arrangements for the Variable Accounts reflect years of review and discussion
between the independent Managers and MFS, that certain aspects of such
arrangements may receive greater scrutiny in some years than others, and that
the Managers' conclusions may be based, in part, on their consideration of these
same arrangements during the course of the year and in prior years.
Based on information provided by Lipper Inc. and MFS, the Managers compared
each Variable Account's total return investment performance to the performance
of peer groups of funds and its Lipper performance universe over the one-,
three- and five-year periods. The Managers did not rely on performance results
for more recent periods, including those shown elsewhere in this report.
In the course of their deliberations, the Managers took into account information
provided by MFS during contract review meetings, as well as during investment
review meetings conducted with portfolio management personnel during the course
of the year. For Variable Accounts whose performance lagged their peer groups,
they discussed the factors that contributed thereto and MFS' efforts to improve
such Variable Account's performance. After reviewing this information, the
Managers concluded, within the context of their overall conclusions regarding
the investment advisory agreements, that they were satisfied with MFS' responses
and efforts relating to investment performance.
In assessing the reasonableness of each Variable Account's advisory fee, the
Managers considered, among other information, each Variable Account's advisory
fee and the total expense ratio as a percentage of average net assets, compared
to the advisory fees and total expense ratios of peer groups of funds based on
information provided by Lipper Inc. and MFS. The Managers also considered the
advisory fees charged by MFS to institutional accounts. In comparing these fees,
the Managers considered the generally broader scope of services provided by MFS
to the Variable Accounts than those provided to institutional accounts. The
Managers also considered the higher demands placed on MFS' investment personnel
and trading infrastructure as a result of the daily cash in-flows and out-flows
of the Variable Accounts, and the impact on MFS and related expenses due to the
more extensive regulatory regime to which the Variable Accounts are subject,
compared to institutional accounts.
The Managers also considered whether a Variable Account is likely to benefit
from any economies of scale due to future asset growth. In this regard, the
Managers reviewed the adequacy of breakpoints and discussed with MFS any
adjustments necessary for the shareholders' benefits.
The Managers also considered information prepared by MFS relating to its costs
and profits with respect to each Variable Account and other investment companies
and accounts advised by MFS, as well as MFS' methodologies used to determine and
allocate its costs to the Variable Accounts and other accounts and products for
purposes of estimating profitability.
After reviewing these and other factors described below, the Managers concluded
that the advisory fees charged to the Variable Accounts represent reasonable
compensation in light of the nature and quality of the services being provided
by MFS.
In addition, the Managers considered MFS' resources and related efforts to
continue to retain, attract and motivate capable personnel to serve the Variable
Accounts. The Managers also considered the financial resources of MFS and its
parent, Sun Life Financial Inc. The Managers further considered any advantages
and possible disadvantages of having an adviser which also serves other
investment companies as well as institutional accounts.
The Managers also considered the nature, quality, cost, and extent of
administrative, transfer agency, and distribution services provided to the
Variable Accounts by MFS and its affiliates under agreements and plans other
than the investment advisory agreements. The Managers also considered the
nature, extent and quality of certain other services MFS performs or arranges on
the Variable Accounts' behalf, including directed expense payment programs,
class action recovery programs, and MFS' interaction with third-party service
providers, principally custodians and sub-custodians. The Managers concluded
that the various non-advisory services provided by MFS and its affiliates on
behalf of the Variable Accounts were satisfactory. The Managers also considered
the benefits to MFS from the use of the Variable Accounts' portfolio brokerage
commissions to pay for research and other similar services (including MFS'
policy not to use "soft dollars" generated by Variable Account portfolio
transactions to pay for third-party research), and various other factors.
Additionally, the Managers considered so-called "fall-out benefits" to MFS such
as reputational value derived from serving as investment manager to the Variable
Accounts, and determined that any such benefits derived by MFS were reasonable
and fair.
Based on their evaluation of factors that they deemed to be material, including
those factors described above, the Board of Managers, including a majority of
the independent Managers, concluded that the investment advisory agreements
should be continued for an additional one-year period, commencing September 1,
2006.
CAPITAL APPRECIATION VARIABLE ACCOUNT
The Managers noted the Variable Account's performance was in the 5th quintile
relative to the other funds in the Lipper performance universe for the one-
year period (the 1st quintile being the best performers and the 5th quintile
being the worst performers). The total return performance of the Variable
Account was in the 4th quintile for the three-year period and the 5th quintile
for the five-year period ended December 31, 2005, relative to the Lipper
performance universe. Based on the nature and quality of services provided by
MFS and MFS' explanation of recent steps taken to improve performance, the
Board of Managers concluded that the Variable Account's performance was
adequate.
In considering the fees, the Managers noted from the Lipper data that the
Variable Account's effective advisory fee rate and total expense ratio were
each approximately at the median of such fees and expenses of funds in the
Lipper expense group. The Managers further concluded that the existing
breakpoints were sufficient to allow the Variable Account to benefit from
economies of scale as its assets grow. In addition, the Managers considered
that MFS observes a total expense limitation for the Account. The Managers
concluded that the fees were reasonable in light of the nature and quality of
services provided.
GLOBAL GOVERNMENTS VARIABLE ACCOUNT
The Managers noted the Variable Account's performance was in the 5th quintile
relative to the other funds in the Lipper performance universe for the one- year
period (the 1st quintile being the best performers and the 5th quintile being
the worst performers). The total return performance of the Variable Account was
in the 4th quintile for the three-year period and the 4th quintile for the
five-year period ended December 31, 2005, relative to the Lipper performance
universe. Based on the nature and quality of services provided by MFS and MFS'
explanation of recent steps taken to improve performance, the Board of Managers
concluded that the Variable Account's performance was adequate.
In considering the fees, the Managers noted from the Lipper data that the
Variable Account's effective advisory fee rate was below the median and total
expense ratio was above the median of such fees and expenses of funds in the
Lipper expense group. The Managers further concluded that the existing
breakpoints were sufficient to allow the Variable Account to benefit from
economies of scale as its assets grow. In addition, the Managers considered that
MFS observes a total expense limitation for the Account. The Managers concluded
that the fees were reasonable in light of the nature and quality of services
provided.
GOVERNMENT SECURITIES VARIABLE ACCOUNT
The Managers noted the Variable Account's performance was in the 3rd quintile
relative to the other funds in the Lipper performance universe for the one- year
period (the 1st quintile being the best performers and the 5th quintile being
the worst performers). The total return performance of the Variable Account was
in the 3rd quintile for the three-year period and the 3rd quintile for the
five-year period ended December 31, 2005, relative to the Lipper performance
universe. Based on the nature and quality of services provided by MFS and MFS'
explanation of recent steps taken to improve performance, the Board of Managers
concluded that the Variable Account's performance was satisfactory.
In considering the fees, the Managers noted from the Lipper data that the
Variable Account's effective advisory fee rate and total expense ratio were
each approximately at the median of such fees and expenses of funds in the
Lipper expense group. The Managers further concluded that the existing
breakpoints were sufficient to allow the Variable Account to benefit from
economies of scale as its assets grow. In addition, the Managers considered
that MFS observes a total expense limitation for the Account. The Managers
concluded that the fees were reasonable in light of the nature and quality of
services provided.
HIGH YIELD VARIABLE ACCOUNT
The Managers noted the Variable Account's performance was in the 4th quintile
relative to the other funds in the Lipper performance universe for the one- year
period (the 1st quintile being the best performers and the 5th quintile being
the worst performers). The total return performance of the Variable Account was
in the 4th quintile for the three-year period and the 5th quintile for the
five-year period ended December 31, 2005, relative to the Lipper performance
universe. Based on the nature and quality of services provided by MFS and MFS'
explanation of recent steps taken to improve performance, the Board of Managers
concluded that the Variable Account's performance was adequate.
In considering the fees, the Managers noted from the Lipper data that the
Variable Account's effective advisory fee rate and total expense ratio were each
above the median of such fees and expenses of funds in the Lipper expense group.
The Managers noted that MFS agreed to reduce its advisory fee to an annual rate
of 0.70% on the first $300 million of assets. In addition, the Managers
considered that MFS observes a total expense limitation for the Account. The
Managers concluded that the reduced fees were reasonable in light of the nature
and quality of services provided.
MONEY MARKET VARIABLE ACCOUNT
The Managers noted the Variable Account's performance was in the 4th quintile
relative to the other funds in the Lipper performance universe for the one- year
period (the 1st quintile being the best performers and the 5th quintile being
the worst performers). The total return performance of the Variable Account was
in the 4th quintile for the three-year period and the 4th quintile for the
five-year period ended December 31, 2005, relative to the Lipper performance
universe. Based on the nature and quality of services provided by MFS and MFS'
explanation of recent steps taken to improve performance, the Board of Managers
concluded that the Variable Account's performance was adequate.
In considering the fees, the Managers noted from the Lipper data that the
Variable Account's effective advisory fee rate and total expense ratio were
each above the median of such fees and expenses of funds in the Lipper expense
group. The Managers further concluded that the existing breakpoints were
sufficient to allow the Variable Account to benefit from economies of scale as
its assets grow. In addition, the Managers considered that MFS observes a
total expense limitation for the Account. The Managers concluded that the fees
were reasonable in light of the nature and quality of services provided.
TOTAL RETURN VARIABLE ACCOUNT
The Managers noted the Variable Account's performance was in the 5th quintile
relative to the other funds in the Lipper performance universe for the one- year
period (the 1st quintile being the best performers and the 5th quintile being
the worst performers). The total return performance of the Variable Account was
in the 3rd quintile for the three-year period and the 2nd quintile for the
five-year period ended December 31, 2005, relative to the Lipper performance
universe. Based on the nature and quality of services provided by MFS and MFS'
explanation of recent steps taken to improve performance, the Board of Managers
concluded that the Variable Account's performance was satisfactory.
In considering the fees, the Managers noted from the Lipper data that the
Variable Account's effective advisory fee rate and total expense ratio were each
above the median of such fees and expenses of funds in the Lipper expense group.
The Managers further concluded that the existing breakpoints were sufficient to
allow the Variable Account to benefit from economies of scale as its assets
grow. In addition, the Managers considered that MFS observes a total expense
limitation for the Account. The Managers concluded that the fees were reasonable
in light of the nature and quality of services provided.
A discussion regarding the Board's most recent review and renewal of the series'
Investment Advisory Agreement with MFS is available by clicking on "Sun Life
Annuities" in the "Products and Performance" section of the MFS Web site
(mfs.com).
MFS(R) PRIVACY NOTICE
Privacy is a concern for every investor today. At MFS Investment Management(R)
and the MFS funds, we take this concern very seriously. We want you to
understand our policies about the investment products and services that we
offer, and how we protect the nonpublic personal information of investors who
have a direct relationship with us and our wholly owned subsidiaries.
Throughout our business relationship, you provide us with personal
information. We maintain information and records about you, your investments,
and the services you use. Examples of the nonpublic personal information we
maintain include
o data from investment applications and other forms
o share balances and transactional history with us, our affiliates,
or others
o facts from a consumer reporting agency
We do not disclose any nonpublic personal information about our customers or
former customers to anyone, except as permitted by law. We may share nonpublic
personal information with third parties or certain of our affiliates in
connection with servicing your account or processing your transactions. We may
share information with companies or financial institutions that perform
marketing services on our behalf or with other financial institutions with
which we have joint marketing arrangements, subject to any legal requirements.
Authorization to access your nonpublic personal information is limited to
appropriate personnel who provide products, services, or information to you.
We maintain physical, electronic, and procedural safeguards to help protect
the personal information we collect about you.
If you have any questions about the MFS privacy policy, please call
1-800-225-2606 any business day between 8 a.m. and 8 p.m. Eastern time.
Note: If you own MFS products or receive MFS services in the name of a third
party such as a bank or broker-dealer, their privacy policy may apply to you
instead of ours.
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116-3741
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110-2875
PROXY VOTING POLICIES AND INFORMATION
A general description of the accounts' proxy voting policies and procedures is
available without charge, upon request, by calling 1-800-225-2606, by visiting
the Proxy Voting section of mfs.com or by visiting the SEC's website at http:/
/www.sec.gov.
Information regarding how the accounts voted proxies relating to portfolio
securities during the most recent twelve month period ended June 30 is
available without charge by visiting the Proxy Voting section of mfs.com or by
visiting the SEC's website at http://www.sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The accounts will file a complete schedule of portfolio holdings with the
Securities and Exchange Commission (the Commission) for the first and third
quarters of each fiscal year on Form N-Q. The accounts' Form N-Q may be
reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C. 20549 0102
Information on the operation of the Public Reference Room may be obtained by
calling the Commission at 1-800-SEC-0330. The accounts' Form N-Q is available
on the EDGAR database on the Commission's Internet website at http://
www.sec.gov, and copies of this information may be obtained, upon payment of a
duplicating fee, by electronic request at the following e-mail address:
publicinfor@sec.gov or by writing the Public Reference Section at the above
address.
Sun Life Financial Distributors Inc.
COUS-ANN-12/06
ITEM 2. CODE OF ETHICS.
The Registrant has adopted a Code of Ethics pursuant to Section 406 of the
Sarbanes-Oxley Act and as defined in Form N-CSR that applies to the
Registrant's principal executive officer and principal financial and accounting
officer. The Registrant has not amended any provision in its Code of Ethics
(the "Code") that relates to an element of the Code's definitions enumerated in
paragraph (b) of Item 2 of this Form N-CSR.
A copy of the Code of Ethics is filed as an exhibit to this Form N-CSR.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Messrs. J. Kermit Birchfield, Robert C. Bishop, Ronald G. Steinhart and
Haviland Wright, members of the Audit Committee, have been determined by the
Board of Trustees in their reasonable business judgment to meet the definition
of "audit committee financial expert" as such term is defined in Form N-CSR. In
addition, Messrs. J. Kermit Birchfield, Robert C. Bishop, Ronald G. Steinhart
and Haviland Wright are "independent" members of the Audit Committee as defined
in Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
ITEMS 4(a) THROUGH 4(d) AND 4(g):
The Board of Trustees has appointed Deloitte & Touche LLP ("Deloitte") to serve
as independent accountants to the Registrant (referred to as the "Account").
The tables below set forth the audit fees billed to the Account as well as fees
for non-audit services provided to the Account and/or to the Account's
investment adviser, Massachusetts Financial Services Company ("MFS"), and to
various entities either controlling, controlled by, or under common control
with MFS that provide ongoing services to the Account ("MFS Related Entities").
For the fiscal years ended December 31, 2006 and 2005, audit fees billed to the
Account by Deloitte were as follows:
Audit Fees
FEES BILLED BY DELOITTE: 2006 2005
---- ----
Capital Appreciation Variable Account $33,440 $33,085
For the fiscal years ended December 31, 2006 and 2005, fees billed by Deloitte
for audit-related, tax and other services provided to the Account and for
audit-related, tax and other services provided to MFS and MFS Related Entities
were as follows:
Audit-Related Fees(1) Tax Fees(2) All Other Fees(3)
FEES BILLED BY DELOITTE: 2006 2005 2006 2005 2006 2005
---- ---- ---- ---- ---- ----
To Capital Appreciation $0 $0 $0 $0 $379 $0
Variable Account
To MFS and MFS Related $981,825 $841,371 $0 $0 $418,092 $403,825
Entities of Capital
Appreciation
Variable Account*
AGGREGATE FEES FOR NON-AUDIT
SERVICES:
2006 2005
---- ----
To Capital Appreciation $1,903,431 $1,680,652
Variable Account, MFS and
MFS Related Entities#
* This amount reflects the fees billed to MFS and MFS Related Entities for non-audit services relating directly to the
operations and financial reporting of the Account (portions of which services also related to the operations and
financial reporting of other funds within the MFS Funds complex).
# This amount reflects the aggregate fees billed by Deloitte, for non-audit services rendered to the Account and for
non-audit services rendered to MFS and the MFS Related Entities.
(1) The fees included under "Audit-Related Fees" are fees related to assurance and related services that are reasonably
related to the performance of the audit or review of financial statements, but not reported under "Audit Fees," including
accounting consultations, agreed-upon procedure reports, attestation reports, comfort letters and internal control
reviews.
(2) The fees included under "Tax Fees" are fees associated with tax compliance, tax advice and tax planning, including
services relating to the filing or amendment of federal, state or local income tax returns, regulated investment company
qualification reviews and tax distribution and analysis.
(3) The fees included under "All Other Fees" are fees for products and services provided by Deloitte other than those
reported under "Audit Fees," "Audit-Related Fees" and "Tax Fees," including fees for services related to sales tax
refunds, consultation on internal cost allocations, consultation on allocation of monies pursuant to an administrative
proceeding regarding disclosure of brokerage allocation practices in connection with fund sales, analysis of certain
portfolio holdings versus investment styles, review of internal controls and review of Rule 38a-1 compliance program.
ITEM 4(e)(1):
Set forth below are the policies and procedures established by the Audit
Committee of the Board of Trustees relating to the pre-approval of audit and
non-audit related services: To the extent required by applicable law,
pre-approval by the Audit Committee of the Board is needed for all audit and
permissible non-audit services rendered to the Funds and all permissible
non-audit services rendered to MFS or MFS Related Entities if the services
relate directly to the operations and financial reporting of the Registrant.
Pre-approval is currently on an engagement-by-engagement basis. In the event
pre-approval of such services is necessary between regular meetings of the
Audit Committee and it is not practical to wait to seek pre-approval at the
next regular meeting of the Audit Committee, pre-approval of such services may
be referred to the Chair of the Audit Committee for approval; provided that the
Chair may not pre-approve any individual engagement for such services exceeding
$50,000 or multiple engagements for such services in the aggregate exceeding
$100,000 in each period between regular meetings of the Audit Committee. Any
engagement pre-approved by the Chair between regular meetings of the Audit
Committee shall be presented for ratification by the entire Audit Committee at
its next regularly scheduled meeting.
ITEM 4(e)(2):
None, or 0%, of the services relating to the Audit-Related Fees, Tax Fees and
All Other Fees paid by the Fund and MFS and MFS Related Entities relating
directly to the operations and financial reporting of the Registrant disclosed
above were approved by the audit committee pursuant to paragraphs (c)(7)(i)(C)
of Rule 2-01 of Regulation S-X (which permits audit committee approval after
the start of the engagement with respect to services other than audit, review
or attest services, if certain conditions are satisfied).
ITEM 4(f): Not applicable.
ITEM 4(h): The Registrant's Audit Committee has considered whether the
provision by a Registrant's independent registered public accounting firm of
non-audit services to MFS and MFS Related Entities that were not pre-approved
by the Committee (because such services did not relate directly to the
operations and financial reporting of the Registrant) was compatible with
maintaining the independence of the independent registered public accounting
firm as the Registrant's principal auditors.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable to the Registrant.
ITEM 6. SCHEDULE OF INVESTMENTS
A schedule of investments of the Registrant is included as part of the report
to shareholders of such series under Item 1 of this Form N-CSR.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable to the Registrant.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable to the Registrant.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable to the Registrant.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no material changes to the procedures by which shareholders may send
recommendations to the Board for nominees to the Registrant's Board since the
Registrant last provided disclosure as to such procedures in response to the
requirements of Item 407(c)(2)(iv) of Regulation S-K (as required by Item
22(b)(15) of Schedule 14A), or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) Based upon their evaluation of the effectiveness of the registrant's
disclosure controls and procedures (as defined in Rule 30a-3(c) under the
Investment Company Act of 1940 (the "Act")) as conducted within 90 days of
the filing date of this report on Form N-CSR, the registrant's principal
financial officer and principal executive officer have concluded that those
disclosure controls and procedures provide reasonable assurance that the
material information required to be disclosed by the registrant on this
report is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and
forms.
(b) There were no changes in the registrant's internal controls over financial
reporting (as defined in Rule 30a-3(d) under the Act) that occurred during
the second fiscal quarter of the period covered by the report that have
materially affected, or are reasonably likely to materially affect, the
registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a) File the exhibits listed below as part of this Form. Letter or number the
exhibits in the sequence indicated.
(1) Any code of ethics, or amendment thereto, that is the subject of the
disclosure required by Item 2, to the extent that the registrant
intends to satisfy the Item 2 requirements through filing of an
exhibit: Code of Ethics attached hereto.
(2) A separate certification for each principal executive officer and
principal financial officer of the registrant as required by Rule 30a-2
under the Act (17 CFR 270.30a-2): Attached hereto.
(b) If the report is filed under Section 13(a) or 15(d) of the Exchange Act,
provide the certifications required by Rule 30a-2(b) under the Act (17 CFR
270.30a-2(b)), Rule 13a-14(b) or Rule 15d-14(b) under the Exchange Act (17
CFR 240.13a-14(b) or 240.15d-14(b)) and Section 1350 of Chapter 63 of Title
18 of the United States Code (18 U.S.C. 1350) as an exhibit. A
certification furnished pursuant to this paragraph will not be deemed
"filed" for the purposes of Section 18 of the Exchange Act (15 U.S.C. 78r),
or otherwise subject to the liability of that section. Such certification
will not be deemed to be incorporated by reference into any filing under
the Securities Act of 1933 or the Exchange Act, except to the extent that
the registrant specifically incorporates it by reference: Attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) CAPITAL APPRECIATION VARIABLE ACCOUNT
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By (Signature and Title)* MARIA F. DWYER
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Maria F. Dwyer, President
Date: February 20, 2007
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Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* MARIA F. DWYER
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Maria F. Dwyer, President (Principal Executive
Officer)
Date: February 20, 2007
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By (Signature and Title)* TRACY ATKINSON
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Tracy Atkinson, Treasurer (Principal Financial Officer
and Accounting Officer)
Date: February 20, 2007
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* Print name and title of each signing officer under his or her signature.