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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 811-5448
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TOTAL RETURN 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)
James R. Bordewick, Jr.
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: June 30, 2004
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ITEM 1. REPORTS TO STOCKHOLDERS.
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[COMPASS LOGO]
PROFESSIONALLY MANAGED COMBINATION
FIXED/VARIABLE ANNUITIES
FOR PERSONAL INVESTMENTS AND
QUALIFIED RETIREMENT PLANS
SEMIANNUAL REPORT - JUNE 30, 2004
CAPITAL APPRECIATION VARIABLE ACCOUNT
GLOBAL GOVERNMENTS VARIABLE ACCOUNT
GOVERNMENT SECURITIES VARIABLE ACCOUNT
HIGH YIELD VARIABLE ACCOUNT
MANAGED SECTORS VARIABLE ACCOUNT
MONEY MARKET VARIABLE ACCOUNT
TOTAL RETURN VARIABLE ACCOUNT
ISSUED BY
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S),
A WHOLLY OWNED SUBSIDIARY OF
SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.
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TABLE OF CONTENTS
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Letter from the CEO of MFS 1
Management Reviews 2
Performance Summary 6
Portfolio of Investments 7
Financial Statements 24
Notes to Financial Statements 42
Managers and Officers 51
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ANNUITIES ARE DESIGNED FOR LONG-TERM RETIREMENT INVESTING. PROSPECTUSES FOR THE
VARIABLE ANNUITY PRODUCT AND THE VARIABLE INVESTMENT OPTIONS CAN BE OBTAINED
FROM YOUR INVESTMENT PROFESSIONAL. YOU SHOULD READ BOTH PROSPECTUSES CAREFULLY
BEFORE INVESTING AS THEY CONTAIN COMPLETE INFORMATION ON THE INVESTMENT
OBJECTIVES AND RISKS, CHARGES, EXPENSES SUCH AS MORTALITY AND EXPENSE RISK,
OPTIONAL DEATH AND LIVING BENEFIT CHARGES, AND SURRENDER AND INVESTMENT OPTION
CHARGES. THESE ELEMENTS, AS WELL AS OTHER INFORMATION CONTAINED IN THE
PROSPECTUSES, SHOULD BE CONSIDERED CAREFULLY BEFORE INVESTING.
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
NOT A DEPOSIT NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY
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LETTER FROM THE CEO OF MFS
DEAR CONTRACT OWNERS,
Our firm was built on the strength of MFS Original Research(R), our in-depth
analysis of every security we consider for our portfolios. We've been honing
this process since 1932, when we created one of the mutual fund industry's first
research departments. And we continue to fine-tune this process so that we can
provide strong and consistent long-term investment performance to help you
achieve your financial goals.
While we have achieved strong investment performance in many of our portfolios,
our goal is to achieve the same strong results across all asset classes. To
ensure that our portfolio teams are doing the best possible job for our firm's
clients and shareholders, I am focusing the vast majority of my time on the
three key elements that I believe truly differentiate MFS from its competitors:
people, process, and culture.
PEOPLE
Our people have always been our most valuable resource. Our philosophy is to
deliver consistent, repeatable investment results by hiring the most talented
investors in our industry. We recruit from the nation's top business schools and
hire experienced analysts, both domestically and around the globe.
Our analysts are the engine that powers our entire investment team because their
recommendations have a direct impact on the investment performance of our
portfolios. To demonstrate our ongoing commitment in this area, we increased the
number of equity analysts at MFS from less than 40 at the end of 2000 to about
50 in June 2004. During that same period, we doubled the average investment
experience of our domestic equity analysts, in part by recruiting more seasoned
analysts to the firm. Moreover, our international network of investment
personnel now spans key regions of the world with offices in London, Mexico
City, Singapore, and Tokyo, as well as Boston.
One of the major advantages that MFS has over many of its competitors is that
the position of research analyst is a long-term career for many members of our
team, not simply a steppingstone toward becoming a portfolio manager. We have
worked to elevate the stature of the analyst position to be on par with that of
a portfolio manager. In fact, an exceptional research analyst has the
opportunity to earn more at MFS than some portfolio managers.
At the same time, we look within the firm to promote talented analysts who
choose a path toward becoming a portfolio manager. We rarely hire portfolio
managers from our competitors because we believe the best investors are those
steeped in the MFS process and culture. In the past few months, we have
identified three senior research analysts who will assume roles on the
management teams of several of our larger portfolios. MFS is fortunate to have a
deep bench of talented investment personnel, and we welcome the opportunity to
put their skills to work for our clients.
PROCESS
MFS was built on the strength of its bottom-up approach to researching
securities. We have enhanced the mentoring process for our research analysts by
calling on several of our most seasoned portfolio managers to supplement the
work of Director of Global Equity Research David A. Antonelli. These portfolio
managers are taking a special interest in developing the careers of our research
analysts and strengthening our investment process. Kenneth J. Enright of our
value equity group is working with a team of domestic analysts; David E.
Sette-Ducati of our small- and mid-cap equity team is working with analysts
concentrating on small- and mid-cap companies; and Barnaby Wiener of our
international equity team in London heads the European equity research team.
We have combined the bottom-up approach of our research process with a top-down
approach to risk controls on portfolio composition. We have a very strong
quantitative team under the leadership of industry veteran Deborah H. Miller,
who represents the equity management department on the Management Committee of
the firm. Quantitative analysis helps us generate investment ideas and, more
importantly, assess the appropriate level of risk for each portfolio. The risk
assessment is designed to assure that each portfolio operates within its
investment objectives.
Additionally, we have increased the peripheral vision of our investment
personnel across asset classes through the collaboration of our Equity, Fixed
Income, Quantitative Analysis, and Risk Management teams. We recently codified
this key aspect of our culture by forming an Investment Management
Committee,composed of key members of these teams. This committee will work to
ensure that all teams are sharing information, actively debating investment
ideas, and creating a unified investment team.
CULTURE
Teamwork is at the heart of our ability to deliver consistent and competitive
investment performance over time. At MFS, each member of our team is involved in
our success; we have no superstars. The collaborative nature of our process
works to assure a consistent investment approach across all of our products and
provides a high level of continuity in portfolio management because our
investment performance never depends on the contributions of just a single
individual. Our culture is based on an environment of teamwork that allows our
investment personnel to be successful. In turn, we demand superior investment
results from every member of our team.
We have created a meritocracy at our firm based on investment results. We hold
all of our portfolio managers accountable for the performance of their
portfolios and their contributions to the team. We also track the equity and
fixed-income ratings of our analysts so we can evaluate them based on the
performance of their recommendations. We align bonus compensation to investment
performance by weighting rewards to those who have created the greatest
long-term benefit for our shareholders and who contribute most successfully to
the Original ResearchSM process.
The strength of our culture has resulted in a tremendous amount of stability.
Although we have dismissed members of our team whose performance did not meet
MFS' high standards, only one portfolio manager has voluntarily left the firm
over the past six months, based on a decision to retire from the industry.
In short, we can help you achieve your financial goals by hiring talented
people, following a disciplined process, and maintaining our firm's unique
culture. The enhancements described in this letter reflect the collaborative
spirit and the depth of resources in our investment teams.
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As always, we appreciate your confidence in MFS and welcome any questions or
comments you may have.
Respectfully,
/s/ Robert J. Manning
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management(R), investment advisor to the
MFS(R)/Compass Variable Accounts
July 19, 2004
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
The opinions expressed in this letter are those of MFS, and no forecasts can be
guaranteed.
MARKET ENVIRONMENT
By most measures, global economic conditions improved during the first half of
2004. The period, however, was a volatile one for investors as market sentiment
turned somewhat negative in the second quarter of the year.
STOCK MARKET ENVIRONMENT
The turnaround in global stock markets that began in the spring of 2003
continued into the first quarter of 2004. The release of increasingly positive
economic, corporate earnings, and corporate capital spending numbers helped
drive global equity markets.
In the second quarter of 2004, many measures of the global economy -- including
employment, consumer spending, corporate capital expenditures, and earnings --
continued to improve. However, stock prices, which made only modest gains in the
second quarter, generally did not reflect these improvements.
We believe that several factors began to hold back equity markets. One was the
expectation that we were entering a period of rising interest rates,
particularly in the United States. Investors may also have feared that corporate
earnings growth would moderate in the second half of 2004 after showing
exceptional improvement in the past several quarters.
Investor concerns about geopolitical instability seemed, in our view, to hold
back stock prices as well. We believe the March 2004 train bombings in Spain,
continued unrest in Iraq, and terrorism in Saudi Arabia brought international
political concerns to the forefront of investors' minds. Political instability
in the Middle East, which could constrict oil supplies and bring additional oil
price hikes, caused many investors, we think, to worry that the global economic
recovery might slow down.
Finally, in our view, worries that the Chinese economic engine could sputter
acted as a drag on the global economy. Companies around the world supply China
with raw materials and finished goods. As a result, any changes in the
conditions of China's economy can have considerable ripple effects around the
world.
BOND MARKET ENVIRONMENT
The six-month period was a volatile one in global bond markets as well.
Investors, in our view, favored higher-quality debt early in the year but by the
second quarter began to shift into higher-yielding bonds.
When 2004 began, interest rates in many developed nations were at historical
lows. However, the bond market changed dramatically over the next few months,
after the U.S. Department of Labor began releasing a string of strong monthly
jobs reports that indicated that the U.S. economy was in a full recovery.
Inflation concerns appeared to mount. Investors, therefore, began to anticipate
that the U.S. Federal Reserve Board (the Fed) would raise short-term interest
rates from their 46-year lows. The Fed fulfilled these expectations on the last
day of the period, instituting a rate increase of 0.25% on June 30.
We believe that anticipation of this increase is what caused investors to move
from higher-quality debt into lower-quality issues. While bonds across most
asset classes were hurt by rising rates in the final months of the period,
lower-rated debt was less affected than higher-rated issues and tended to show
better performance.
MANAGEMENT REVIEWS
CAPITAL APPRECIATION VARIABLE ACCOUNT
For the 6 months ended June 30, 2004, the Compass 2 account provided a total
return of 2.86%; the Compass 3 account provided a total return of 2.80%; and the
Compass 3 -- Level 2 account provided a total return of 2.88%. These returns,
which include the reinvestment of any dividends and capital gains distributions,
compare with a return of 2.74% over the same period for the account's benchmark,
the Russell 1000 Growth Index. The Russell 1000 Growth Index measures the
performance of large-cap U.S. growth stocks.
CONTRIBUTORS TO PERFORMANCE
Stock selection in the utilities and communications, special products and
services, and industrial goods and services sectors had a strong positive impact
on the account's relative performance against its benchmark, the Russell 1000
Growth Index, during the period. An overweighting in the industrial goods and
services sector also aided results.
Our positions in two of the account's top-performing individual stocks, wireless
carrier company Sprint PCS Group and wireless telecom equipment maker Andrew
Corp., helped drive the account's performance in the utilities and
communications sector. We sold our Sprint PCS holdings during the period.
While no individual special products and services holding was among the
account's largest contributors during the period, stock selection in this sector
helped boost returns. Stockpicking in the industrial goods and services area
proved to be another source of relative strength, led by our position in
manufacturing conglomerate Tyco International.
Several technology holdings also helped relative returns including network
company Netscreen Technologies, electronics company Marvell Technology, and
internet auction site eBay. Also, in the transportation sector, express carrier
FedEx delivered a positive contribution. Underweighting computer chip maker
Intel helped as the stock declined over the period. We sold Netscreen
Technologies before the period ended.
DETRACTORS FROM PERFORMANCE
Stock selection in the leisure and health care sectors detracted significantly
from relative performance. An overweighting in leisure also hurt relative
results.
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In the leisure sector, our positions in radio broadcasting company Clear Channel
and cable operator Comcast held back performance.
Among the account's health care holdings, our position in pharmaceutical company
Wyeth detracted the most from relative returns.
Other holdings that hurt relative performance included automobile dealer CarMax
and online travel vendor InterActiveCorp. In addition, underweighting cellular
communications products firm QUALCOMM and missing most of the stock's
significant rise over the period also detracted from relative results. We sold
QUALCOMM out of the account by period-end.
NOTE TO CONTRACT OWNERS: GREGORY W. LOCRAFT, JR. BECAME PORTFOLIO MANAGER OF THE
ACCOUNT IN NOVEMBER 2003, REPLACING JOHN E. LATHROP. EFFECTIVE JULY 1, 2004,
MARGARET W. ADAMS ALSO BECAME A MANAGER OF THE PORTFOLIO.
GLOBAL GOVERNMENTS VARIABLE ACCOUNT
For the six months ended June 30, 2004, the Compass 2 account provided a total
return of -2.44%, the Compass 3 account provided a total return of -2.51%, and
the Compass 3 -- Level 2 account provided a total return of -2.44%. These
returns, which include the reinvestment of any dividends and capital gains
distributions, compare with the return of -1.53% over the same period for the
account's benchmark, the Citigroup World Government Bond Index. The Citigroup
World Government Bond Index measures developed country government bond markets
around the world.
GLOBAL BOND MARKET ENVIRONMENT
During the first two months of 2004, the global environment was dominated by
disappointing U.S. labor-market data. Despite a global market characterized by
rising inflationary pressures, buoyant economic sentiment, and robust economic
activity, we believe that weak employment conditions in the United States caused
market participants to question the sustainability of the global economic
recovery. In this setting, global bonds performed well through March. However,
U.S. labor markets displayed surprisingly vigorous growth beginning in March
(the data being released in early April). In addition, we feel that rising
commodity prices, particularly in oil and gas, fostered a considerable rise in
global inflationary expectations. These two elements in concert precipitated a
very sharp selloff in global bonds from early April until mid-May, as the global
market prepared for a period of rate tightening by the U.S. Federal Reserve
Board.
Regionally, Japan's economic expansion became significantly more vigorous and
somewhat more balanced in the first half of 2004, and the eurozone witnessed
disappointingly low growth. Australia, New Zealand, and the United Kingdom
demonstrated particularly strong growth during the period, which resulted in
rate-tightening measures in the latter two countries and a tightening bias in
Australia.
In our view, the dollar weakened relative to major currencies during the first
half of the period apparently due to concerns related to the labor market, but
it rebounded in the second half as expectations of Fed rate hikes rose.
KEY DETRACTORS FROM PERFORMANCE
Our overweighted position relative to the benchmark in New Zealand bonds, as
well as the non-TIPS U.S. position, underperformed modestly. Our overweighting
in the Australian dollar also detracted slightly from performance.
KEY CONTRIBUTORS TO PERFORMANCE
Japanese government bonds "JGBs" sold off sharply in June due to increased
confidence that the Japanese recovery was sustainable. The portfolio benefited
from a significantly underweighted position relative to its benchmark in JGBs.
The overweighted position in the euro, as well as the underweighted position in
the Swedish krona, also boosted performance. An overweighting in U.S. TIPS
(Treasury inflation-protected securities) provided additional outperformance as
inflationary expectations rose during the period.
GOVERNMENT SECURITIES VARIABLE ACCOUNT
For the six months ended June 30, 2004, the Compass 2 account provided a total
return of -0.45%, the Compass 3 account provided a total return of -0.50%, and
the Compass 3 -- Level 2 account provided a total return of -0.43%. These
returns, which include the reinvestment of any dividends and capital gains
distributions, compare with a return of 0.31% over the same period for the
account's benchmark, the Lehman Brothers Government/Mortgage Index. The Lehman
Brothers Government/Mortgage Index measures the performance of the government
and mortgage securities markets.
DETRACTORS FROM PERFORMANCE
The most significant detractors from performance during the six-month period
were the portfolio's investments in higher-yielding, 30-year mortgage pools
during the first three months of the period when interest rates were continuing
to trend lower. While many of those pools had interest rates of 6% or higher,
they suffered high rates of prepayments as homeowners refinanced their homes to
take advantage of lower interest rates. Prepayments tend to erode the value of
mortgage pools as well as detract from current income of bondholders.
CONTRIBUTORS TO PERFORMANCE
The portfolio's defensive strategy of lowering exposure to interest-rate risk
helped relative performance as rising interest rates undermined the market price
of Treasuries and other high-quality investments. Duration -- a measure of
sensitivity to interest-rate risk -- was maintained at a lower level than the
duration of the Lehman Brothers Government/Mortgage Index. We believe this
reduced the portfolio's price risk during a time of slipping bond prices.
The portfolio's investments in 15-year maturity mortgage pools also helped
relative performance. Those mortgage pools outperformed comparable Treasuries
and agency paper, largely because the mortgages experienced less price
volatility. Among the portfolio's Treasury holdings, our focus on TIPS, or
Treasury Inflation-Protected Securities, also helped performance as they showed
less price volatility than ordinary Treasuries. (The principal value and
interest of U.S. Treasury securities are guaranteed by the U.S. government if
held to maturity.)
HIGH YIELD VARIABLE ACCOUNT
For the six months ended June 30, 2004, the Compass 2 account provided a total
return of -0.67%; the Compass 3 account provided a total return of -0.72%; and
the Compass 3 -- Level 2 account provided a total return -0.64%. These returns
include the reinvestment of any dividends and capital gains distributions and
compare to returns over the same period of 1.36% and 1.37%,
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respectively, for the accounts' benchmarks, the Lehman Brothers High Yield Index
(the Lehman Index) and the Lipper High Yield Bond Index (the Lipper Index). The
Lehman Index measures the performance of the high-yield bond market. The Lipper
indices measure the performance of funds within their respective
classifications.
DETRACTORS FROM PERFORMANCE
The portfolio's underperformance versus its benchmarks was attributable in part
to our virtual avoidance of several volatile sectors of the high-yield market,
including textiles and finance companies, which rallied strongly during the
period. Several specific holdings also detracted from relative performance,
including Dobson Communications, a regional wireless services provider that was
hampered by slower-than-expected subscriber growth. Another laggard was bankrupt
textile manufacturer WestPoint Stevens, whose financial situation deteriorated
further during the period, sending the price of its bonds lower.
CONTRIBUTORS TO PERFORMANCE
The portfolio's relative performance was helped by an underweighted position in
utilities moderated in part by some negative security selection and by an
overweighting in the securities of media companies. Among the holdings
contributing to performance was IMC Global, a provider of nutrients for the
agricultural industry and ingredients for the animal feed industry. During the
period Cargill Crop Nutrition, whose bonds carried an investment-grade rating,
announced its intention to acquire IMC Global, boosting the price of the
latter's bonds. Also aiding the portfolio's relative performance was newspaper
chain Hollinger International, as proceeds from the ongoing sale of the company
continued to support its bonds amid management turmoil.
NOTE TO CONTRACT OWNERS: BERNARD SCOZZAFAVA IS NO LONGER A MANAGER OF THE
PORTFOLIO. HE WAS REPLACED BY JOHN F. ADDEO ON APRIL 7, 2004. SCOTT B. RICHARDS
WAS ALSO NAMED AS A PORTFOLIO MANAGER ON MAY 24, 2004.
MANAGED SECTORS VARIABLE ACCOUNT
For the six months ended June 30, 2004, the Compass 2 account provided a total
return of 0.94%, the Compass 3 account provided a total return of 0.86%, and the
Compass 3 -- Level 2 account provided a total return of 0.94%. These returns,
which include the reinvestment of any dividends and capital gains distributions,
compare with a return of 2.74% over the same period for the account's benchmark,
the Russell 1000 Growth Index (the Russell Index), which measures the
performance of large-cap U.S. growth stocks.
DETRACTORS FROM PERFORMANCE
Stock selection in leisure, as well as an overweighted position in the sector,
held back relative returns. Several media companies in the account, including
Viacom, Clear Channel Communications, and Westwood One, fell short of our growth
expectations as they failed to enjoy the strong increases in advertising
revenues we had anticipated in an improving economy. By period-end we had sold
our Westwood One position. Elsewhere in the leisure sector, our holding in cable
operator Comcast fell after the firm's unsuccessful bid to acquire Disney. We
believe Comcast and other cable company stocks remained under pressure because
of fears of increasing competition from satellite and DSL (digital subscriber
line) operators.
Although technology holdings as a group detracted only modestly from relative
results, several stocks in the sector were among the portfolio's most
significant individual detractors. These included storage management software
firm VERITAS Software and semiconductor fabrication equipment company Novellus
Systems. VERITAS stock declined as the firm lowered its earnings projections and
moved to restate prior-year results. Despite beating consensus earnings
estimates and raising forward earnings projections, we believe Novellus Systems
languished because investors questioned the sustainability of the semiconductor
business cycle. The account's Novellus Systems stock was sold during the period.
Elsewhere in technology, underweighting cellular communications products firm
QUALCOMM and missing nearly all of the stock's strong rise over the period also
subtracted from relative results. The account did not own QUALCOMM at
period-end.
CONTRIBUTORS TO PERFORMANCE
On a sector basis, stock selection in utilities and communications and retailing
contributed most strongly to relative performance.
In the utilities and communications sector, cellular phone stocks in general
rose during the bidding war for AT&T Wireless that culminated in the firm's
purchase by Cingular, a joint venture of BellSouth and SBC Communications. We
sold our holdings in both AT&T Wireless and rival Sprint PCS during the rally.
The portfolio's underweighted position in Wal-Mart was the largest relative
contributor in the retailing sector. Disappointing sales and a class action
lawsuit exerted pressure on the stock during the period. At period-end the
portfolio did not hold any Wal-Mart shares.
A number of technology stocks were also among the account's largest relative
contributors. Business infrastructure software provider Akamai Technologies,
whose core service essentially allows customers to enhance Web site performance
while lowering costs, was propelled by robust financial results. Online
auctioneer eBay likewise delivered strong relative performance. In our view,
eBay benefited from a growing trend toward online business transactions.
Underweighting semiconductor giant Intel also helped relative results as the
stock declined over the period.
Individual stock contributors elsewhere in the portfolio included cosmetics firm
Avon Products and analytical tool maker Waters Corporation. Avon enjoyed solid
revenue growth across all geographies. Waters experienced improving end-market
demand for its products as a range of companies -- from industrial to
biotechnology concerns -- invested more money in research and development.
MONEY MARKET VARIABLE ACCOUNT
For the six months ended June 30, 2004, the Compass 2 account provided a total
return of -0.45%, the Compass 3 account provided a total return of -0.50%, and
the Compass 3 -- Level 2 account provided a total return of -0.43%. These
returns include the reinvestment of any distributions. As of June 30, 2004 the
account's seven-day yield with and without waivers was 0.48%. The yield
quotation is based on the latest seven days ended with dividends annualized. It
more closely reflects the account's current earnings than does the total return
quotation.
PORTFOLIO PERFORMANCE
With anticipation of rising interest rates so high during the period, we
shortened the weighted average maturity for the account significantly, from 52
days at the start of the period to 15 days as the period concluded on June 30.
Essentially, we looked to cut our
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interest-rate risk, in the anticipation that rates would begin to rise and
continue to rise in the foreseeable future.
In our view, the portfolio was impacted by a continued short supply of
commercial paper in the market. Companies were reluctant during the period to
issue longer-term commercial paper, in an effort to lock in at current low
interest rates. While evidence of U.S. and global economic improvements appeared
to strengthen during the period, we believe this short supply could be
attributed to some mixed economic signals (such as those in the U.S. labor
market) that may have led to cautious corporate spending. On June 30,
approximately 54% of the account was invested in commercial paper and
certificates of deposit, with the balance invested in government paper and
repurchase agreements.
Regardless of market or economic conditions, we intend to maintain a focus on
high quality as we concentrate on the objectives of income, capital
preservation, and liquidity.
TOTAL RETURN VARIABLE ACCOUNT
For the six months ended June 30, 2004, the Compass 2 account provided a total
return of 1.94%, the Compass 3 account provided a total return of 1.86%, and the
Compass 3 -- Level 2 account provided a total return of 1.94%. These returns,
which include in the reinvestment of any capital gains and dividend
distributions, compare with returns of 3.44% and 0.15%, respectively for the
account's benchmarks, the Standard & Poor's 500 Stock Index (S&P 500) and the
Lehman Brothers Aggregate Bond Index (the Lehman Index). The S&P 500 is a
commonly used measure of the broad U.S. stock market. The Lehman Index is an
unmanaged, market-value-weighted index of U.S. Treasuries, government-agency
securities (excluding mortgage-backed securities), and investment-grade domestic
corporate debt.
EQUITY CONTRIBUTORS TO PERFORMANCE
Utilities and communications, energy, and technology were the three sectors that
provided the largest positive relative performance to the account.
In utilities and communications, it was our overweighted position and stock
selection in the sector that were the main sources of positive returns. In fact,
the top two positive contributors to the account's relative performance during
the period were utilities and communication holdings AT&T Wireless and TXU.
An overweighted position in the energy sector added to positive relative
performance. One strong performer in this sector was Schlumberger.
Our underweighted position in technology, coupled with stock selection, helped
the account's performance. Specifically avoiding tech stock Intel, which is in
the S&P 500 Stock Index, helped in this sector.
Other stocks that performed well were Owens-Illinois, Hartford Financial
Services, and Kimberly Clark. Our underweighted position in Pfizer was also a
positive.
FIXED-INCOME CONTRIBUTORS TO PERFORMANCE
During the period, the account was positioned for a rising interest-rate
environment. As a result, we had less interest-rate exposure than the benchmark.
Mortgage-backed securities, including residential and commercial mortgages, also
performed well during the period.
EQUITY DETRACTORS TO PERFORMANCE
The two principal detractors from performance during the period were the leisure
and financial services sectors. In both cases, the main sources of
underperformance were stock selection and overweighted positions.
The primary detractors in leisure were our overweighted positions in Viacom and
Comcast, both of which performed poorly.
In financial services, positions in Mellon Financial and Merrill Lynch were
significant detractors.
While technology was one of our most positive sectors overall, we did miss out
on some technology opportunities by not owning strong tech stocks Yahoo, eBay,
and QUALCOMM, all three of which are in the benchmark and performed well.
Vodafone was another stock that held back the account's performance.
FIXED-INCOME DETRACTORS TO PERFORMANCE
During the period, we were overweighted in investment-grade corporate bonds.
This market, in general, slightly underperformed Treasuries.
The views expressed in this report are those of the portfolio managers only
through the end of the period of the report as stated on the cover and do not
necessarily reflect the views of MFS or any other person in the MFS
organization. These views are subject to change at any time based on market and
other conditions, and MFS disclaims any responsibility to update such views.
These views may not be relied upon as investment advice or as an indication of
trading intent on behalf of any MFS portfolio. References to specific securities
are not recommendations of such securities and may not be representative of any
MFS portfolio's current or future investments.
The portfolios are actively managed, and current holdings may be different.
It is not possible to invest directly in an index.
INVESTMENT OBJECTIVES AND POLICIES
Variable annuities are designed for long-term retirement investing; please see
your investment professional for more information.
The key risks listed may increase unit price volatility. See the prospectus for
further information on these and other risk considerations.
CAPITAL APPRECIATION VARIABLE ACCOUNT (CAVA) seeks to maximize capital
appreciation by investing in securities of all types, with a major emphasis on
common stocks. Investments in foreign and/or emerging markets securities
involves risks relating to interest rates, currency-exchange-rates, economic,
and political conditions.
GLOBAL GOVERNMENTS VARIABLE ACCOUNT (GGVA) seeks moderate current income and
preservation and growth of capital by investing in a portfolio of U.S. and
foreign government and government-related securities. Investments in foreign
and/or emerging market securities involves risks relating to interest rates,
currency-exchange-rates, economic, and political conditions. Because the
portfolio may invest in a limited number of companies, a change in one
security's value may have a more significant effect on the portfolio's value.
The portfolio may invest in mortgage-backed
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<Page>
securities, which during times of fluctuating interest rates may increase or
decrease more than those of other fixed income securities. The portfolio may
invest a substantial amount of its assets in issuers located in a single country
or in a limited number of countries and therefore is more susceptible to adverse
economic, political, or regulatory developments affecting those countries.
GOVERNMENT SECURITIES VARIABLE ACCOUNT (GSVA) seeks current income and
preservation of capital by investing in U.S. government securities. Government
guarantees apply to the underlying securities only and not to the prices and
yields of the portfolio. The portfolio may invest in mortgage-backed securities,
which during times of fluctuating interest rates may increase or decrease more
than those of other fixed income securities.
HIGH YIELD VARIABLE ACCOUNT (HYVA) seeks high current income and capital
appreciation by investing primarily in fixed-income securities of U.S. and
foreign issuers that may be in the lower-rated categories or unrated and may
include equity features. Investments in foreign and/or emerging markets
securities involves risks relating to interest rates, currency-exchange-rates,
economic, and political conditions. Investments in high yield and lower-rated
securities may provide greater returns but may have greater-than-average risk.
Because, the portfolio invests in a limited number of companies, a change in one
security's value may have a more significant effect on the portfolio's value.
MANAGED SECTORS VARIABLE ACCOUNT (MSVA) seeks capital appreciation by varying
the weighting of its portfolio among 13 industry sectors. Investments in foreign
and/or emerging market securities involves risks relating to interest rates,
currency-exchange-rates, economic, and political conditions. The portfolio
focuses on companies in a limited number of sectors, making it more susceptible
to adverse economic, political, or regulatory developments affecting those
sectors than a portfolio that invests more broadly. When concentrating on one
issuer, the portfolio is sensitive to changes in the value of their securities.
MONEY MARKET VARIABLE ACCOUNT (MMVA) seeks maximum current income to the extent
consistent with stability of principal by investing exclusively in money market
instruments maturing in less than 13 months. Government guarantees apply to the
underlying securities only and not to the prices and yields of the portfolio.
Investments in the portfolio are not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency. Although the
portfolio seeks to preserve the value of your investment, it is possible to lose
money by investing in the portfolio. The portfolio's yield will fluctuate with
changes in market conditions.
TOTAL RETURN VARIABLE ACCOUNT (TRVA) seeks to provide above-average income
(compared to a portfolio entirely invested in equity securities), consistent
with prudent employment of capital; its secondary objective is to take advantage
of opportunities for growth of capital and income. Investments in foreign and/or
emerging markets securities involves risks relating to interest rates,
currency-exchange-rates, economic, and political conditions. Investments in high
yield and lower-rated securities may provide greater returns but may have
greater-than-average risk.
VISIT sunlife-usa.com FOR THE MOST RECENT MONTH-END PERFORMANCE RESULTS. MARKET
VOLATILITY CAN SIGNIFICANTLY AFFECT SHORT-TERM PERFORMANCE, AND MORE RECENT
RETURNS MAY BE DIFFERENT FROM THOSE SHOWN.
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE
OF FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND
UNITS, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. ANY
HIGH SHORT-TERM RETURNS WERE PRIMARILY ACHIEVED DURING FAVORABLE MARKET
CONDITIONS, WHICH MAY NOT BE REPEATED.
THESE PERFORMANCE RESULTS REFLECT ANY APPLICABLE CONTRACT OR SURRENDER CHARGES.
SIX MONTH PERFORMANCE THROUGH JUNE 30, 2004
<Table>
<Caption>
COMPASS 2 COMPASS 3 COMPASS 3 -
(U.S.) (U.S.) LEVEL 2 (U.S.)
--------- --------- --------------
Capital Appreciation
Variable Account* 2.86% 2.80% 2.88%
Global Governments
Variable Account (2.44)% (2.51)% (2.44)%
Government Securities
Variable Account (0.45)% (0.50)% (0.43)%
High Yield Variable
Account (0.67)% (0.72)% (0.64)%
Managed Sectors
Variable Account** 0.94% 0.86% 0.94%
Money Market
Variable Account (0.45)% (0.50)% (0.43)%
Total Return
Variable Account 1.94% 1.86% 1.94%
</Table>
* A portion of the returns is attributable to the receipt of non-recurring
payments in settlement of two class action lawsuits.
** A portion of the returns shown is attributable to the receipt of a
non-recurring payment in settlement of a class action lawsuit.
See Notes to Financial Statements.
6
<Page>
PORTFOLIO OF INVESTMENTS (Unaudited) -- June 30, 2004
CAPITAL APPRECIATION VARIABLE ACCOUNT
<Table>
<Caption>
ISSUER SHARES VALUE
STOCKS -- 96.4%
U.S. STOCKS -- 91.5%
AEROSPACE -- 1.5%
Lockheed Martin Corp. 86,600 $ 4,510,128
-------------
AIRLINES -- 1.1%
Southwest Airlines Co. 193,500 $ 3,244,995
-------------
APPAREL MANUFACTURERS -- 0.7%
Nike, Inc., "B" 18,400 $ 1,393,800
Polo Ralph Lauren Corp., "A" 23,500 809,575
-------------
$ 2,203,375
-------------
AUTOMOTIVE -- 0.6%
Harley-Davidson, Inc. 30,400 $ 1,882,976
-------------
BANKS & CREDIT COMPANIES -- 3.2%
American Express Co. 75,640 $ 3,886,383
Citigroup, Inc. 127,996 5,951,814
-------------
$ 9,838,197
-------------
BIOTECHNOLOGY -- 5.8%
Amgen, Inc.* 174,540 $ 9,524,648
Genzyme Corp.* 106,600 5,045,378
Gilead Sciences, Inc.* 45,100 3,021,700
-------------
$ 17,591,726
-------------
BROADCAST & CABLE TV -- 3.6%
Citadel Broadcasting Corp.* 121,200 $ 1,765,884
Comcast Corp., "A"* 205,800 5,768,574
EchoStar Communications Corp., "A"* 108,985 3,351,289
-------------
$ 10,885,747
-------------
BROKERAGE & ASSET MANAGERS -- 1.5%
Ameritrade Holding Corp.* 62,800 $ 712,780
Goldman Sachs Group, Inc. 15,980 1,504,677
Merrill Lynch & Co., Inc. 42,350 2,286,053
-------------
$ 4,503,510
-------------
BUSINESS SERVICES -- 2.0%
DST Systems, Inc.* 41,300 $ 1,986,117
Getty Images, Inc.* 29,400 1,764,000
Manpower, Inc. 42,600 2,162,802
-------------
$ 5,912,919
-------------
CHEMICALS -- 0.3%
E.I. du Pont de Nemours & Co. 17,300 $ 768,466
-------------
COMPUTER SOFTWARE -- 5.0%
Ascential Software Corp.* 51,200 $ 818,688
Microsoft Corp. 427,520 12,209,971
VERITAS Software Corp.* 75,700 2,096,890
-------------
$ 15,125,549
-------------
COMPUTER SOFTWARE -- SYSTEMS -- 2.6%
Hewlett-Packard Co. 106,500 $ 2,247,150
International Business Machines Corp. 64,000 5,641,600
-------------
$ 7,888,750
-------------
CONSUMER GOODS & SERVICES -- 3.9%
Career Education Corp.* 24,400 $ 1,111,664
Colgate-Palmolive Co. 56,100 3,279,045
Orbitz, Inc.* 68,200 1,474,484
Procter & Gamble Co. 109,600 5,966,624
-------------
$ 11,831,817
-------------
ELECTRICAL EQUIPMENT -- 5.7%
Emerson Electric Co. 37,400 $ 2,376,770
General Electric Co. 317,400 10,283,760
Tyco International Ltd. 144,200 4,778,788
-------------
$ 17,439,318
-------------
ELECTRONICS -- 5.4%
Amphenol Corp., "A"* 37,800 $ 1,259,496
Analog Devices, Inc. 52,190 2,457,105
Applied Materials, Inc.* 97,100 1,905,102
Intel Corp. 287,200 $ 7,926,720
Texas Instruments, Inc. 119,100 2,879,838
-------------
$ 16,428,261
-------------
ENTERTAINMENT -- 0.9%
Clear Channel Communications, Inc. 72,536 $ 2,680,205
-------------
FOOD & DRUG STORES -- 1.5%
CVS Corp. 71,910 $ 3,021,658
Rite Aid Corp.* 308,200 1,608,804
-------------
$ 4,630,462
-------------
FOOD & NON-ALCOHOLIC BEVERAGES -- 2.2%
PepsiCo, Inc. 101,820 $ 5,486,062
SYSCO Corp. 33,500 1,201,645
-------------
$ 6,687,707
-------------
GAMING & LODGING -- 1.1%
Carnival Corp. 31,900 $ 1,499,300
Cendant Corp. 76,620 1,875,658
-------------
$ 3,374,958
-------------
GENERAL MERCHANDISE -- 2.5%
Kohl's Corp.* 39,990 $ 1,690,777
Target Corp. 135,260 5,744,492
-------------
$ 7,435,269
-------------
INSURANCE -- 2.7%
American International Group, Inc. 84,700 $ 6,037,416
St. Paul Travelers Cos., Inc. 51,700 2,095,918
-------------
$ 8,133,334
-------------
INTERNET -- 3.9%
eBay, Inc.* 38,100 $ 3,503,295
InterActiveCorp* 202,900 6,115,406
Yahoo!, Inc.* 61,500 2,234,295
-------------
$ 11,852,996
-------------
LEISURE & TOYS -- 0.5%
Electronic Arts, Inc.* 29,500 $ 1,609,225
-------------
MACHINERY & TOOLS -- 2.3%
Caterpillar, Inc. 41,100 $ 3,264,984
Eaton Corp. 24,900 1,612,026
Illinois Tool Works, Inc. 22,400 2,147,936
-------------
$ 7,024,946
-------------
MEDICAL & HEALTH TECHNOLOGY & SERVICES -- 1.1%
Caremark Rx, Inc.* 73,300 $ 2,414,502
HCA, Inc. 22,300 927,457
-------------
$ 3,341,959
-------------
MEDICAL EQUIPMENT -- 3.9%
Baxter International, Inc. 46,800 $ 1,615,068
C.R. Bard, Inc. 2,200 124,630
CTI Molecular Imaging, Inc.* 76,000 1,077,680
Guidant Corp. 25,200 1,408,176
Medtronic, Inc. 112,300 5,471,256
Thermo Electron Corp.* 71,900 2,210,206
-------------
$ 11,907,016
-------------
OIL SERVICES -- 2.1%
BJ Services Co.* 24,600 $ 1,127,664
GlobalSantaFe Corp. 60,600 1,605,900
Noble Corp.* 44,500 1,686,105
Smith International, Inc.* 33,600 1,873,536
-------------
$ 6,293,205
-------------
PERSONAL COMPUTERS & PERIPHERALS -- 1.9%
Dell, Inc.* 151,820 $ 5,438,192
Lexmark International, Inc., "A"* 4,900 472,997
-------------
$ 5,911,189
-------------
</Table>
7
<Page>
<Table>
<Caption>
ISSUER SHARES VALUE
STOCKS -- continued
U.S. STOCKS -- continued
PHARMACEUTICALS -- 11.2%
Abbott Laboratories 92,500 $ 3,770,300
Eli Lilly & Co. 32,400 2,265,084
Johnson & Johnson 196,500 10,945,050
Pfizer, Inc. 326,035 11,176,480
Wyeth 163,500 5,912,160
-------------
$ 34,069,074
-------------
POLLUTION CONTROL -- 0.5%
Waste Management, Inc. 52,600 $ 1,612,190
-------------
RESTAURANTS -- 0.8%
ARAMARK Corp., "B" 35,200 $ 1,012,352
Outback Steakhouse, Inc. 36,300 1,501,368
-------------
$ 2,513,720
-------------
SPECIALTY STORES -- 3.0%
Best Buy Co., Inc. 35,900 $ 1,821,566
CarMax, Inc.* 70,800 1,548,396
Lowe's Co., Inc. 48,500 2,548,675
PETsMART, Inc. 48,100 1,560,845
TJX Cos., Inc. 62,900 1,518,406
-------------
$ 8,997,888
-------------
TELECOMMUNICATIONS -- WIRELESS -- 0.5%
Andrew Corp.* 76,900 $ 1,538,769
-------------
TELECOMMUNICATIONS -- WIRELINE -- 3.8%
Cisco Systems, Inc.* 487,700 $ 11,558,490
-------------
TELEPHONE SERVICES -- 0.8%
Sprint FON Group 134,550 $ 2,368,080
-------------
TRUCKING -- 1.4%
FedEx Corp. 50,800 $ 4,149,852
-------------
Total U.S. Stocks $ 277,746,268
-------------
FOREIGN STOCKS -- 4.9%
BERMUDA -- 1.9%
Accenture Ltd., "A"
(Business Services)* 82,900 $ 2,278,092
Marvell Technology Group Ltd.
(Electronics)* 67,600 1,804,920
XL Capital Ltd., "A" (Insurance) 24,100 1,818,586
-------------
$ 5,901,598
-------------
BRAZIL -- 0.3%
Companhia Vale do Rio Doce, ADR
(Metals & Mining) 17,200 $ 817,860
-------------
JAPAN -- 0.2%
SOFTBANK CORP. (Business Services) 15,600 $ 684,805
-------------
SWITZERLAND -- 0.6%
Roche Holding AG (Pharmaceuticals) 17,000 $ 1,683,841
-------------
UNITED KINGDOM -- 1.9%
Amdocs Ltd. (Computer Software)* 101,500 $ 2,378,145
AstraZeneca PLC (Pharmaceuticals) 33,200 1,489,059
Vodafone Group PLC, ADR
(Telecommunications -- Wireless) 80,431 1,777,525
-------------
$ 5,644,729
-------------
Total Foreign Stocks $ 14,732,833
-------------
Total Stocks (Identified Cost, $268,135,850) $ 292,479,101
-------------
<Caption>
PAR AMOUNT
ISSUER (000 OMITTED) VALUE
SHORT-TERM OBLIGATION -- 0.6%
General Electric Capital Corp., 1.48%,
due 7/01/04, at Amortized Cost $ 1,837 $ 1,837,000
-------------
REPURCHASE AGREEMENTS -- 2.5%
Morgan Stanley, 1.50%, dated 6/30/04,
due 7/01/04, total to be received
$7,502,313 (secured by various
U.S. Treasury and Federal Agency
obligations in a jointly traded account),
at Cost $ 7,502 $ 7,502,000
-------------
Total Investments (Identified Cost, $277,474,850) $ 301,818,101
-------------
OTHER ASSETS,
LESS LIABILITIES -- 0.5% 1,611,555
-------------
Net Assets -- 100.0% $ 303,429,656
=============
</Table>
See portfolio footnotes and notes to financial statements.
8
<Page>
PORTFOLIO OF INVESTMENTS (Unaudited) -- June 30, 2004
GLOBAL GOVERNMENTS VARIABLE ACCOUNT
<Table>
<Caption>
PAR AMOUNT
ISSUER (000 OMITTED) VALUE
BONDS -- 95.2%
FOREIGN BONDS -- 68.8%
AUSTRALIA -- 0.7%
Government of Australia, 6.25%, 2015 AUD 115 $ 81,783
-------------
AUSTRIA -- 4.1%
Republic of Austria, 5.5%, 2007 EUR 263 $ 342,971
Republic of Austria, 5%, 2012 70 90,055
Republic of Austria, 4.65%, 2018 39 47,785
-------------
$ 480,811
-------------
BELGIUM -- 3.1%
Kingdom of Belgium, 3.75%, 2009 EUR 157 $ 192,481
Kingdom of Belgium, 5%, 2012 132 169,761
-------------
$ 362,242
-------------
CANADA -- 2.0%
Government of Canada, 5.5%, 2009 CAD 135 $ 105,918
Government of Canada, 5.25%, 2012 139 106,750
Government of Canada, 8%, 2023 25 24,616
-------------
$ 237,284
-------------
DENMARK -- 3.8%
Kingdom of Denmark, 7%, 2007 DKK 955 $ 174,285
Kingdom of Denmark, 6%, 2009 1,147 206,807
Kingdom of Denmark, 5%, 2013 376 63,994
-------------
$ 445,086
-------------
FINLAND -- 6.9%
Republic of Finland, 2.75%, 2006 EUR 267 $ 325,273
Republic of Finland, 3%, 2008 398 477,621
-------------
$ 802,894
-------------
FRANCE -- 8.3%
Republic of France, 4.75%,
2007-2012 EUR 711 $ 904,688
Republic of France, 6%, 2025 46 64,432
-------------
$ 969,120
-------------
GERMANY -- 12.4%
Federal Republic of Germany,
3.5%, 2008 EUR 634 $ 773,214
Federal Republic of Germany,
5.25%, 2010 313 409,971
Kreditanstalt fur Wiederaufbau,
3.25%, 2008 220 266,800
-------------
$ 1,449,985
-------------
IRELAND -- 5.8%
Republic of Ireland, 4.25%, 2007 EUR 505 $ 635,106
Republic of Ireland, 4.6%, 2016 40 49,340
-------------
$ 684,446
-------------
ITALY -- 1.8%
Republic of Italy, 5.25%, 2017 EUR 160 $ 206,180
-------------
JAPAN -- 2.0%
Development Bank of Japan,
1.4%, 2012 JPY 26,000 $ 234,785
-------------
MEXICO -- 1.1%
Pemex Project Funding Master Trust,
8.625%, 2022 $ 117 $ 121,680
United Mexican States, 8%, 2022 10 10,385
-------------
$ 132,065
-------------
NETHERLANDS -- 5.5%
Kingdom of Netherlands, 5.75%, 2007 EUR 465 $ 605,031
Kingdom of Netherlands, 5%, 2012 31 39,485
-------------
$ 644,516
-------------
NEW ZEALAND -- 4.1%
Government of New Zealand, 7%, 2009 NZD 142 $ 92,784
Government of New Zealand,
6.5%, 2013 604 386,055
-------------
$ 478,839
-------------
PORTUGAL -- 0.9%
Republic of Portugal, 5.45%, 2013 EUR 84 $ 110,959
-------------
QATAR -- 0.5%
State of Qatar, 9.75%, 2030 # $ 47 $ 64,390
-------------
SOUTH AFRICA -- 0.5%
Republic of South Africa, 8.5%, 2017 $ 52 $ 58,890
-------------
SPAIN -- 2.7%
Kingdom of Spain, 6%, 2008 EUR 220 $ 292,638
Kingdom of Spain, 5.35%, 2011 20 26,292
-------------
$ 318,930
-------------
UNITED KINGDOM -- 2.6%
United Kingdom Treasury, 5%, 2012 GBP 170 $ 306,036
-------------
Total Foreign Bonds $ 8,069,241
-------------
U.S. BONDS -- 26.4%
ASSET BACKED & SECURITIZED -- 3.6%
Commercial Mortgage Asset Trust,
1.146%, 2032 ## $ 1,650 $ 89,222
Deutsche Mortgage & Asset
Receiving Corp., 6.538%, 2031 59 63,177
First Union National Bank Commercial
Mortgage Trust, 7.39%, 2031 60 67,873
First Union National Bank Commercial
Mortgage Trust, 1.218%, 2043 ## 1,772 90,954
First Union-Lehman Brothers
Bank of America, 6.56%, 2035 29 31,791
GMAC Commercial Mortgage Securities,
Inc., 6.42%, 2035 29 31,752
LB-UBS Commercial Mortgage Trust,
7.95%, 2010 45 52,193
-------------
$ 426,962
-------------
MORTGAGE BACKED -- 1.5%
Fannie Mae, 6%, 2017-2018 $ 170 $ 177,351
-------------
MUNICIPALS -- 1.3%
North Carolina St. Public Improvement, "A",
5.25%, 2015 $ 135 $ 147,435
-------------
SUPRANATIONAL -- 6.5%
Inter-American Development Bank,
1.9%, 2009 JPY 79,000 $ 758,505
-------------
U.S. GOVERNMENT AGENCIES -- 3.3%
Fannie Mae, 1.75%, 2008 JPY 40,000 $ 381,313
-------------
U.S. TREASURY OBLIGATIONS -- 10.2%
U.S. Treasury Bonds, 8%, 2021 $ 56 $ 73,399
U.S. Treasury Bonds, 5.375%, 2031 65 65,556
U.S. Treasury Notes, 2.375%, 2006 343 340,066
U.S. Treasury Notes, 2.625%, 2008 111 107,518
U.S. Treasury Notes, 4.25%, 2013 272 264,743
U.S. Treasury Notes, 2%, 2014 351 348,892
-------------
$ 1,200,174
-------------
Total U.S. Bonds $ 3,091,740
-------------
Total Bonds (Identified Cost, $10,969,640) $ 11,160,981
-------------
</Table>
9
<Page>
<Table>
<Caption>
PAR AMOUNT
ISSUER (000 OMITTED) VALUE
REPURCHASE AGREEMENT -- 3.7%
Morgan Stanley, 1.50%, dated 6/30/04,
due 7/01/04, total to be received
$433,018 (secured by various
U.S. Treasury and Federal Agency
obligations in a jointly traded account),
at Cost $ 433 $ 433,000
-------------
Total Investments (Identified Cost, $11,402,640) $ 11,593,981
-------------
OTHER ASSETS,
LESS LIABILITIES -- 1.1% 124,215
-------------
Net Assets -- 100.0% $ 11,718,196
=============
</Table>
See portfolio footnotes and notes to financial statements.
PORTFOLIO OF INVESTMENTS (Unaudited) -- June 30, 2004
GOVERNMENT SECURITIES VARIABLE ACCOUNT
<Table>
<Caption>
PAR AMOUNT
ISSUER (000 OMITTED) VALUE
BONDS -- 97.3%
AGENCY -- OTHER -- 7.2%
Financing Corp., 10.35%, 2018 $ 1,150 $ 1,698,964
Resolution Funding Corp., 8.875%, 2020 1,700 2,327,186
SLM Corp., 5.25%, 2006 3,520 3,661,877
-------------
$ 7,688,027
-------------
ASSET BACKED & SECURITIZED -- 0.2%
Freddie Mac, 3.108%, 2035 $ 195 $ 194,671
-------------
MORTGAGE BACKED -- 57.4%
Fannie Mae, 4.5%, 2019 $ 2,794 $ 2,735,108
Fannie Mae, 5%, 2018-2019 7,081 7,105,656
Fannie Mae, 5.5%, 2017-2034 23,712 23,942,684
Fannie Mae, 5.989%, 2020 6 6,199
Fannie Mae, 6%, 2016-2034 14,214 14,628,987
Fannie Mae, 6.5%, 2005-2032 6,701 6,977,512
Fannie Mae, 7.5%, 2022-2031 504 541,786
Fannie Mae, 8.5%, 2007 11 11,595
Fannie Mae, 10%, 2018 428 477,510
Freddie Mac, 5.5%, 2034 1,698 1,695,795
Freddie Mac, 6.5%, 2032 1,756 1,831,347
Freddie Mac, 7.5%, 2027-2028 228 246,531
Ginnie Mae, 6.5%, 2028 910 951,610
Ginnie Mae, 7.5%, 2032 126 136,042
Ginnie Mae, 11%, 2010-2019 72 80,554
Ginnie Mae, 12.5%, 2015 19 21,394
-------------
$ 61,390,310
-------------
U.S. GOVERNMENT AGENCIES -- 18.8%
Aid to Israel, 5.5%, 2023 $ 1,097 $ 1,069,740
Aid to Israel, 6.6%, 2008 985 1,044,690
Aid to Peru, 9.98%, 2008 819 924,730
Empresa Energetica Cornito Ltd.,
6.07%, 2010 2,672 2,827,350
Fannie Mae, 5.5%, 2011 1,504 1,573,097
Freddie Mac, 7%, 2010 1,641 1,848,739
Small Business Administration,
4.34%, 2024 405 380,206
Small Business Administration,
4.72%, 2024 749 723,246
Small Business Administration,
4.77%, 2024 697 673,879
Small Business Administration,
4.89%, 2023 730 713,024
Small Business Administration,
4.98%, 2023 283 278,674
Small Business Administration,
5.52%, 2024 383 387,394
Small Business Administration,
6.07%, 2022 622 651,896
Small Business Administration,
6.34%, 2021 808 855,916
Small Business Administration,
6.44%, 2021 785 835,279
Small Business Administration,
6.625%, 2021 848 908,845
Small Business Administration,
8.4%, 2007 24 24,864
Small Business Administration,
8.7%, 2009 116 125,047
Small Business Administration,
10.05%, 2009 20 21,161
Tennessee Valley Authority,
0% to 2012, 8.25% to 2042 2,250 1,526,760
U.S. Department of Housing & Urban
Development, 6.36%, 2016 500 536,883
</Table>
10
<Page>
<Table>
<Caption>
PAR AMOUNT
ISSUER (000 OMITTED) VALUE
BONDS -- continued
U.S. GOVERNMENT AGENCIES -- continued
U.S. Department of Housing &
Urban Development, 6.59%, 2016 $ 2,045 $ 2,166,739
-------------
$ 20,098,159
-------------
U.S. TREASURY OBLIGATIONS -- 13.7%
U.S. Treasury Bonds, 5.25%, 2028 $ 346 $ 338,986
U.S. Treasury Bonds, 5.375%, 2031 353 356,020
U.S. Treasury Bonds, 6.25%, 2030 1,072 1,200,263
U.S. Treasury Bonds, 6.875%, 2025 928 1,103,595
U.S. Treasury Bonds, 12%, 2013 19 25,080
U.S. Treasury Notes, 0%, 2012 1,233 846,800
U.S. Treasury Notes, 3.375%, 2007 4,523 4,844,586
U.S. Treasury Notes, 3.625%, 2008 ### 4,430 4,841,019
U.S. Treasury Notes, 4%, 2014 84 80,056
U.S. Treasury Notes, 5.5%, 2009 1,008 1,085,490
-------------
$ 14,721,895
-------------
Total Bonds (Identified Cost, $103,164,318) $ 104,093,062
-------------
REPURCHASE AGREEMENT -- 1.9%
Goldman Sachs, 1.50%, dated 6/30/04,
due 7/01/04, total to be received
$2,068,086 (secured by various
U.S. Treasury and Federal Agency
obligations in a jointly traded
account), at Cost $ 2,068 $ 2,068,000
-------------
Total Investments
(Identified Cost, $105,232,318) $ 106,161,062
-------------
OTHER ASSETS,
LESS LIABILITIES -- 0.8% 862,390
-------------
NET ASSETS -- 100.0% $ 107,023,452
=============
</Table>
See portfolio footnotes and notes to financial statements.
PORTFOLIO OF INVESTMENTS (Unaudited) -- June 30, 2004
HIGH YIELD VARIABLE ACCOUNT
<Table>
<Caption>
PAR AMOUNT
ISSUER (000 OMITTED) VALUE
BONDS -- 92.5%
U.S. BONDS -- 80.8%
ADVERTISING & BROADCASTING -- 5.5%
Allbritton Communications Co.,
7.75%, 2012 $ 465 $ 458,025
Echostar DBS Corp., 6.375%, 2011 1,000 985,000
Emmis Operating Co., 6.875%, 2012 ## 185 181,300
Granite Broadcasting Corp.,
9.75%, 2010 ## 510 474,300
Lamar Media Corp., 7.25%, 2013 255 259,463
Muzak LLC, 10%, 2009 160 145,600
Paxson Communications Corp.,
0% to 2006, 12.25% to 2009 600 522,000
PRIMEDIA, Inc., 8.875%, 2011 340 336,600
Spanish Broadcasting System, Inc.,
9.625%, 2009 475 501,125
XM Satellite Radio, Inc., 6.65%, 2009 ## 125 125,313
XM Satellite Radio, Inc., 12%, 2010 31 35,534
-------------
$ 4,024,260
-------------
AEROSPACE -- 2.0%
Argo-Tech Corp., 9.25%, 2011 ## $ 215 $ 221,450
BE Aerospace, Inc., 8.875%, 2011 310 288,300
Hexcel Corp., 9.75%, 2009 460 482,425
K & F Industries, Inc., 9.25%, 2007 84 86,520
K & F Industries, Inc., 9.625%, 2010 145 158,956
TransDigm Holding Co., 8.375%, 2011 230 233,450
-------------
$ 1,471,101
-------------
AIRLINES -- 0.7%
Continental Airlines, Inc., 6.748%, 2017 $ 74 $ 56,585
Continental Airlines, Inc., 6.9%, 2017 81 62,264
Continental Airlines, Inc., 6.795%, 2020 180 140,642
Continental Airlines, Inc., 7.566%, 2020 251 196,931
Delta Air Lines, Inc., 7.92%, 2012 70 45,832
-------------
$ 502,254
-------------
APPAREL MANUFACTURERS -- 0%
WestPoint Stevens, Inc., 7.875%,
2005-2008** $ 870 $ 21,750
-------------
ASSET BACKED & SECURITIZED -- 1.9%
Airplane Pass-Through Trust,
10.875%, 2019** $ 741 $ 3,704
Asset Securitization Corp.,
8.2885%, 2026 150 149,649
First Union National Bank Commercial
Mortgage Corp., 6.75%, 2010 165 146,258
GE Capital Commercial
Mortgage Corp., 7.7905%, 2033 ## 145 143,844
GMAC Commercial Mortgage Securities,
Inc., 7.8988%, 2034 ## 192 200,019
Morgan Stanley Capital I, Inc.,
7.7279%, 2010 215 236,130
Mortgage Capital Funding, Inc.,
7.214%, 2007 500 499,251
-------------
$ 1,378,855
-------------
AUTOMOTIVE -- 3.9%
Advanced Accessory Systems LLC,
10.75%, 2011 $ 155 $ 150,350
Dana Corp., 6.5%, 2009 100 104,000
Dana Corp., 10.125%, 2010 110 124,575
Dana Corp., 9%, 2011 95 111,150
Dana Corp., 7%, 2029 180 172,800
Delco Remy International, Inc.,
9.375%, 2012 ## 95 92,388
Dura Operating Corp., 9%, 2009 235 230,300
Eagle-Picher Industries, Inc.,
9.75%, 2013 155 166,625
</Table>
11
<Page>
<Table>
<Caption>
PAR AMOUNT
ISSUER (000 OMITTED) VALUE
BONDS -- continued
U.S. BONDS -- continued
AUTOMOTIVE -- continued
Metaldyne Corp., 11%, 2012 $ 85 $ 72,250
Metaldyne Corp., 10%, 2013 ## 145 142,100
Navistar International Corp., 7.5%, 2011 365 374,125
Oxford Automotive, Inc., 12%, 2010 ## 120 93,600
Tenneco Automotive, Inc.,
10.25%, 2013 ## 470 531,100
TRW Automotive, Inc., 9.375%, 2013 214 241,285
TRW Automotive, Inc., 11%, 2013 179 211,220
-------------
$ 2,817,868
-------------
BASIC INDUSTRY -- 0.5%
Thermadyne Holdings Corp.,
9.25%, 2014 $ 165 $ 162,938
Trimas Corp., 9.875%, 2012 195 206,700
-------------
$ 369,638
-------------
BROADCAST & CABLE TV -- 4.2%
CSC Holdings, Inc., 8.125%, 2009 $ 200 $ 208,000
CSC Holdings, Inc., 6.75%, 2012 ## 215 206,400
Cablevision Systems Corp.,
8%, 2012 ## 355 351,450
Charter Communications Holdings LLC,
8.75%, 2013 ## 150 143,625
Charter Communications, Inc.,
8.625%, 2009 510 406,725
Charter Communications, Inc.,
9.92%, 2011 915 722,850
Charter Communications, Inc.,
8.375%, 2014 ## 120 116,100
DIRECTV Holdings LLC,
8.375%, 2013 155 171,469
Frontiervision Operating Partners LP,
11%, 2006 160 195,200
Insight Midwest LP, 9.75%, 2009 200 211,000
Mediacom Broadband LLC,
11%, 2013 295 314,175
-------------
$ 3,046,994
-------------
BUILDING -- 1.3%
D.R. Horton, Inc., 8%, 2009 $ 225 $ 246,375
Formica Corp., 10.875%, 2009** 310 58,900
Interface, Inc., 10.375%, 2010 204 227,460
Jacuzzi Brands, Inc., 9.625%, 2010 90 96,300
Williams Scotsman, Inc., 9.875%, 2007 250 248,125
Williams Scotsman, Inc., 10%, 2008 50 54,500
-------------
$ 931,660
-------------
BUSINESS SERVICES -- 1.4%
Amkor Technologies, Inc., 7.75%, 2013 $ 230 $ 217,925
Iron Mountain, Inc., 8.625%, 2013 280 296,800
Iron Mountain, Inc., 7.75%, 2015 5 4,963
Lucent Technologies, Inc., 5.5%, 2008 230 217,350
Xerox Corp., 7.625%, 2013 290 296,525
-------------
$ 1,033,563
-------------
CHEMICALS -- 4.6%
Equistar Chemicals LP, 10.625%, 2011 $ 525 $ 582,750
Hercules, Inc., 6.75%, 2029 ## 260 249,600
Huntsman International LLC, 0%, 2009 100 49,000
Huntsman International LLC,
10.125%, 2009 390 397,800
IMC Global, Inc., 10.875%, 2013 280 333,900
JohnsonDiversey Holding, Inc.,
10.67%, 2013 200 154,000
JohnsonDiversey Holding, Inc., "B",
9.625%, 2012 475 517,750
Lyondell Chemical Co., 11.125%, 2012 45 49,838
Nalco Co., 7.75%, 2011 ## 110 115,225
Nalco Co., 8.875%, 2013 ## $ 100 $ 104,750
Resolution Performance Products LLC,
13.5%, 2010 85 79,263
Rockwood Specialties Group, Inc.,
10.625%, 2011 220 234,300
Sovereign Specialty Chemicals, Inc.,
11.875%, 2010 425 437,750
-------------
$ 3,305,926
-------------
CONGLOMERATES -- 0.7%
Rexnord Industries, Inc.,
10.125%, 2012 $ 170 $ 187,000
SPX Corp., 7.5%, 2013 315 322,875
-------------
$ 509,875
-------------
CONSTRUCTION -- 0.3%
Technical Olympic USA, Inc.,
9%, 2010 $ 75 $ 76,875
Technical Olympic USA, Inc.,
7.5%, 2011 50 46,500
WCI Communities, Inc., 7.875%, 2013 75 75,750
-------------
$ 199,125
-------------
CONSUMER GOODS & SERVICES -- 1.8%
K2, Inc., 7.375%, 2014 ## $ 40 $ 40,700
Kindercare Learning Centers, Inc.,
9.5%, 2009 292 296,380
Remington Arms Co., Inc.,
10.5%, 2011 355 344,350
Revlon Consumer Products Corp.,
8.625%, 2008 270 238,950
Samsonite Corp., 8.875%, 2011 ## 125 129,375
Tempur-Pedic International, Inc.,
10.25%, 2010 111 125,153
Werner Holding Co., Inc.,
10%, 2007 135 112,725
-------------
$ 1,287,633
-------------
CONTAINERS -- 1.3%
Graham Packaging Co., Inc.,
8.75%, 2008 $ 285 $ 286,425
Owens-Brockway Glass Container, Inc.,
8.25%, 2013 280 289,100
Plastipak Holdings, Inc.,
10.75%, 2011 175 188,125
Pliant Corp., 13%, 2010 180 161,100
Portola Packaging, Inc., 8.25%, 2012 ## 45 36,675
-------------
$ 961,425
-------------
ELECTRONICS -- 0.1%
ON Semiconductor Corp., 13%, 2008 $ 55 $ 63,113
-------------
ENERGY -- INDEPENDENT -- 2.0%
Chesapeake Energy Corp.,
6.875%, 2016 $ 490 $ 477,750
Encore Acquisition Co., 8.375%, 2012 380 406,600
Magnum Hunter Resources, Inc.,
9.6%, 2012 225 247,500
Pioneer Natural Resources Co.,
7.5%, 2012 10 11,324
Plains E&P Co., 7.125%, 2014 ## 65 66,138
Vintage Petroleum, Inc.,
8.25%, 2012 210 222,600
-------------
$ 1,431,912
-------------
ENTERTAINMENT -- 1.6%
AMC Entertainment, Inc.,
9.5%, 2011 $ 360 $ 374,400
AMF Bowling Worldwide, Inc.,
10%, 2010 ## 130 133,250
</Table>
12
<Page>
<Table>
<Caption>
PAR AMOUNT
ISSUER (000 OMITTED) VALUE
BONDS -- continued
U.S. BONDS -- continued
ENTERTAINMENT -- continued
Six Flags, Inc., 9.75%, 2013 $ 320 $ 321,600
Vail Resorts, Inc., 6.75%, 2014 340 322,150
-------------
$ 1,151,400
-------------
FOOD & NON-ALCOHOLIC BEVERAGES -- 1.0%
Merisant Co., 9.5%, 2013 ## $ 185 $ 197,025
Michael Foods, Inc., 8%, 2013 225 232,313
Pinnacle Foods Corp., 8.25%, 2013 ## 50 48,250
Seminis Vegetable Seeds, Inc.,
10.25%, 2013 250 271,875
-------------
$ 749,463
-------------
FOREST & PAPER PRODUCTS -- 2.6%
Buckeye Technologies, Inc.,
9.25%, 2008 $ 300 $ 294,000
Buckeye Technologies, Inc., 8%, 2010 45 41,288
Buckeye Technologies, Inc., 8.5%, 2013 240 242,400
Graphic Packaging International, Inc.,
8.5%, 2011 70 74,900
Graphic Packaging International, Inc.,
9.5%, 2013 320 347,200
Greif, Inc., 8.875%, 2012 270 290,588
Jefferson Smurfit Corp., 8.25%, 2012 345 358,800
Newark Group, Inc., 9.75%, 2014 ## 275 263,313
-------------
$ 1,912,489
-------------
GAMING & LODGING -- 5.8%
Aztar Corp., 7.875%, 2014 ## $ 130 $ 131,300
Boyd Gaming Corp., 6.75%, 2014 ## 380 358,150
Caesers Entertainment, Inc.,
8.875%, 2008 80 86,800
Caesars Entertainment, Inc.,
8.125%, 2011 375 397,969
Corrections Corp. of America,
9.875%, 2009 205 227,550
Corrections Corp. of America,
7.5%, 2011 150 151,500
GEO Group, Inc., 8.25%, 2013 140 138,600
Hilton Hotels Corp., 7.625%, 2012 320 344,000
Isle Capri Casinos, Inc., 7%, 2014 ## 265 245,788
Mandalay Resort Group, 9.375%, 2010 115 125,350
Meristar Hospitality Corp., 10.5%, 2009 60 63,900
MGM Mirage, Inc., 8.5%, 2010 140 151,200
MGM Mirage, Inc., 8.375%, 2011 410 428,450
Pinnacle Entertainment, Inc.,
9.25%, 2007 19 19,475
Pinnacle Entertainment, Inc.,
8.25%, 2012 ## 200 191,500
Pinnacle Entertainment, Inc.,
8.75%, 2013 170 168,725
Royal Caribbean Cruises Ltd.,
6.875%, 2013 210 207,638
Starwood Hotels & Resorts Worldwide,
Inc., 7.875%, 2012 330 353,100
Station Casinos, Inc., 6.5%, 2014 245 235,813
Venetian Casino Resort LLC,
11%, 2010 170 196,350
-------------
$ 4,223,158
-------------
INDUSTRIAL -- 1.0%
Blount, Inc., 7%, 2005 $ 100 $ 102,000
Blount, Inc., 13%, 2009 215 230,319
Communications & Power Industries,
Inc., 8%, 2012 75 75,000
MSW Energy Holdings,
7.375%, 2010 ## 195 194,025
Valmont Industries, Inc., 6.875%, 2014 115 112,700
-------------
$ 714,044
-------------
MACHINERY & TOOLS -- 3.2%
AGCO Corp., 9.5%, 2008 $ 365 $ 397,850
AGCO Corp., 6.875%, 2014 EUR 150 174,493
Amsted Industries, Inc.,
10.25%, 2011 ## $ 190 206,150
Case New Holland, Inc.,
9.25%, 2011 ## 65 68,250
Columbus McKinnon Corp.,
10%, 2010 110 116,600
JLG Industries, Inc., 8.25%, 2008 115 120,750
Joy Global, Inc., 8.75%, 2012 220 246,400
Manitowoc Co., Inc., 10.375%, 2011 EUR 130 174,980
Manitowoc Co., Inc., 10.5%, 2012 $ 85 97,325
Terex Corp., 10.375%, 2011 340 379,100
United Rentals, Inc., 6.5%, 2012 200 189,000
United Rentals, Inc., 7%, 2014 140 124,600
-------------
$ 2,295,498
-------------
MEDICAL & HEALTH TECHNOLOGY & SERVICES -- 2.7%
Alliance Imaging, Inc., 10.375%, 2011 $ 255 $ 267,113
Beverly Enterprises, Inc.,
7.875%, 2014 ## 150 148,125
Extendicare Health Services, Inc.,
6.875%, 2014 ## 140 131,600
Fisher Scientific International, Inc.,
8.125%, 2012 174 186,180
HCA, Inc., 7.875%, 2011 535 586,774
Mariner Health Care, Inc.,
8.25%, 2013 ## 260 273,000
NDCHealth Corp., 10.5%, 2012 130 143,325
Tenet Healthcare Corp., 6.5%, 2012 200 174,000
Tenet Healthcare Corp.,
9.875%, 2014 ## 70 70,438
-------------
$ 1,980,555
-------------
MEDICAL EQUIPMENT -- 0.4%
Alpharma, Inc., 8.625%, 2011 ## $ 290 $ 300,150
-------------
METALS & MINING -- 2.6%
Arch Western Finance, 6.75%, 2013 ## $ 200 $ 200,000
Commonwealth Aluminum Corp.,
10.75%, 2006 160 161,600
Doe Run Resources Corp., 8.5%, 2008 239 184,072
Earle M. Jorgensen Co., 9.75%, 2012 275 301,125
Ispat Inland PLC, 9.75%, 2014 ## 140 144,200
Kaiser Aluminum & Chemical Corp.,
9.875%, 2002** 210 219,975
Oregon Steel Mills, Inc., 10%, 2009 40 42,400
Peabody Energy Corp., 6.875%, 2013 220 222,750
Steel Dynamics, Inc., 9.5%, 2009 ## 260 287,300
U.S. Steel Corp., 9.75%, 2010 118 130,685
-------------
$ 1,894,107
-------------
NATURAL GAS -- DISTRIBUTION -- 0.7%
AmeriGas Partners LP, 8.875%, 2011 $ 275 $ 292,875
CenterPoint Energy Resources Corp.,
7.875%, 2013 189 211,474
-------------
$ 504,349
-------------
NATURAL GAS -- PIPELINE -- 2.7%
ANR Pipeline Co., 9.625%, 2021 $ 320 $ 358,400
El Paso Energy Corp., 7.625%, 2010 205 210,125
El Paso Energy Corp., 7%, 2011 555 485,625
El Paso Energy Corp., 7.75%, 2013 390 357,825
GulfTerra Energy Partners LP,
8.5%, 2010 173 188,138
Williams Cos., Inc., 7.125%, 2011 388 393,820
-------------
$ 1,993,933
-------------
</Table>
13
<Page>
<Table>
<Caption>
PAR AMOUNT
ISSUER (000 OMITTED) VALUE
BONDS -- continued
U.S. BONDS -- continued
OIL SERVICES -- 1.3%
Dresser, Inc., 9.375%, 2011 $ 200 $ 214,000
GulfMark Offshore, Inc., 8.75%, 2008 125 128,125
Hanover Equipment Trust, 8.75%, 2011 380 406,600
Parker Drilling Co., 9.625%, 2013 70 72,625
Pride International, Inc.,
7.375%, 2014 ## 120 121,200
-------------
$ 942,550
-------------
OILS -- 0.8%
Citgo Petroleum Corp., 11.375%, 2011 $ 220 $ 255,200
Giant Industries, Inc., 8%, 2014 90 90,000
Premcor Refining Group, Inc.,
7.75%, 2012 200 207,500
-------------
$ 552,700
-------------
POLLUTION CONTROL -- 1.5%
Allied Waste North America, Inc.,
6.5%, 2010 ## $ 305 $ 301,188
Allied Waste North America, Inc.,
7.875%, 2013 785 820,325
-------------
$ 1,121,513
-------------
PRINTING & PUBLISHING -- 2.7%
Dex Media East LLC, 12.125%, 2012 $ 225 $ 262,688
Dex Media West LLC, 9.875%, 2013 155 170,113
Dex Media, Inc., 0% to 2008,
9% to 2013 ## 555 357,975
Hollinger International, Inc., 9%, 2010 205 236,775
Houghton Mifflin Co., 9.875%, 2013 150 150,000
Mail-Well Corp., 9.625%, 2012 185 198,875
Mail-Well Corp., 7.875%, 2013 ## 100 91,000
Media News Group, Inc., 6.875%, 2013 305 288,225
R.H. Donnelley Finance Corp.,
10.875%, 2012 160 185,600
-------------
$ 1,941,251
-------------
RAILROADS -- 0.5%
Kansas City Southern Railway Co.,
7.5%, 2009 $ 360 $ 360,000
-------------
REAL ESTATE -- 0.1%
CB Richard Ellis Services, Inc., 9.75%, 2010 $ 36 $ 39,600
-------------
RETAILERS -- 4.1%
Cole National Group, Inc., 8.875%, 2012 $ 200 $ 213,500
Couche-Tard, Inc., 7.5%, 2013 505 505,000
Dollar General Corp., 8.625%, 2010 360 400,050
Finlay Fine Jewelry Corp.,
8.375%, 2012 ## 185 192,400
J. Crew Operating Corp.,
10.375%, 2007 485 492,275
Levi Strauss & Co., 7%, 2006 175 163,406
PCA LLC, 11.875%, 2009 300 322,500
Rite Aid Corp., 9.5%, 2011 25 27,563
Rite Aid Corp., 6.875%, 2013 375 345,000
Rite Aid Corp., 9.25%, 2013 120 126,000
Saks, Inc., 7%, 2013 170 167,875
-------------
$ 2,955,569
-------------
SUPERMARKETS -- 0.4%
Roundy's, Inc., 8.875%, 2012 $ 290 $ 307,400
-------------
TELECOMMUNICATIONS -- WIRELESS -- 4.3%
Alamosa Holdings, Inc., 0% to 2005,
12% to 2009 $ 125 $ 120,625
Alamosa Holdings, Inc., 11%, 2010 175 190,750
American Tower Corp., 9.375%, 2009 200 213,500
Centennial Communications Corp.,
10.125%, 2013 420 433,650
Crown Castle International Corp.,
7.5%, 2013 315 313,425
Dobson Communications Corp.,
8.875%, 2013 $ 315 $ 239,400
Nextel Communications, Inc.,
7.375%, 2015 1,135 1,146,350
Rural Cellular Corp., 9.75%, 2010 149 135,218
Rural Cellular Corp., 9.875%, 2010 205 203,463
Rural Cellular Corp., 8.25%, 2012 ## 60 61,350
U.S. Unwired, Inc., 10%, 2012 ## 75 75,750
-------------
$ 3,133,481
-------------
TELECOMMUNICATIONS -- WIRELINE -- 2.5%
Citizens Communications Co., 9%, 2031 $ 288 $ 277,691
MCI, Inc., 5.908%, 2007 43 41,710
MCI, Inc., 6.688%, 2009 43 39,775
MCI, Inc., 7.735%, 2014 37 33,115
Qwest Capital Funding, Inc., 7.25%, 2011 400 342,000
Qwest Services Corp., 14%, 2010 ## 750 871,875
Time Warner Telecom Holdings, Inc.,
10.125%, 2011 200 182,000
-------------
$ 1,788,166
-------------
UTILITIES -- ELECTRIC POWER -- 6.1%
AES Corp., 8.75%, 2013 ## $ 450 $ 482,063
AES Corp., 9%, 2015 ## 300 321,375
Allegheny Energy Supply Co. LLC,
8.25%, 2012 ## 300 296,625
Calpine Corp., 8.5%, 2011 150 97,875
Calpine Corp., 8.75%, 2013 ## 660 541,200
CMS Energy Corp., 8.5%, 2011 280 285,600
Dynegy Holdings, Inc.,
9.875%, 2010 ## 155 166,625
Dynegy Holdings, Inc., 6.875%, 2011 110 94,738
FirstEnergy Corp., 6.45%, 2011 210 217,719
Illinois Power Co., 11.5%, 2010 180 212,850
Midwest Generation LLC,
8.75%, 2034 ## 320 323,200
Mirant Americas Generation, Inc.,
8.3%, 2011 300 225,000
Nevada Power Co., 6.5%, 2012 ## 50 47,500
NRG Energy, Inc., 8%, 2013 ## 230 232,300
PG&E Corp., 6.875%, 2008 ## 70 73,150
Reliant Resources, Inc., 9.25%, 2010 230 245,525
Reliant Resources, Inc., 9.5%, 2013 210 226,275
Sierra Pacific Power Co.,
6.25%, 2012 ## 90 84,600
Sierra Pacific Resources,
8.625%, 2014 ## 160 156,000
TECO Energy, Inc., 7.5%, 2010 60 60,600
-------------
$ 4,390,820
-------------
Total U.S. Bonds $ 58,609,148
-------------
FOREIGN BONDS -- 11.7%
AUSTRALIA -- 0.9%
Burns, Philp & Co. Ltd., 9.75%, 2012
(Food & Non-Alcoholic Beverages) $ 655 $ 677,925
-------------
BRAZIL -- 0.3%
Federal Republic of Brazil, 8%, 2014
(Emerging Market Sovereign) $ 21 $ 19,263
Federal Republic of Brazil, 11%, 2040
(Emerging Market Sovereign) 177 166,823
-------------
$ 186,086
-------------
CANADA -- 3.0%
Abitibi-Consolidated, Inc., 8.55%, 2010
(Forest & Paper Products) $ 400 $ 421,773
Acetex Corp., 10.875%,
2009 (Chemicals) 195 213,525
</Table>
14
<Page>
<Table>
<Caption>
PAR AMOUNT
ISSUER (000 OMITTED) VALUE
BONDS -- continued
FOREIGN BONDS -- continued
CANADA -- continued
Bombardier, Inc., 8.375%, 2013 (Industrial) $ 250 $ 248,125
CHC Helicopter Corp., 7.375%, 2014
(Transportation -- Services) 155 152,288
Hollinger, Inc., 12.875%, 2011
(Printing & Publishing) 104 121,680
Norske Skog Canada, 8.625%, 2011
(Forest & Paper Products) 185 196,100
Norske Skog Canada, 7.375%, 2014
(Forest & Paper Products) 125 120,938
Nortel Networks Ltd., 6.125%, 2006
(Business Services) 235 236,175
Nova Chemicals Corp., 6.5%, 2012
(Chemicals) 150 147,750
Rogers Wireless, Inc., 6.375%, 2014
(Telecommunications -- Wireless) 135 124,538
Russel Metals, Inc., 6.375%, 2014
(Metals & Mining) 190 178,125
-------------
$ 2,161,017
-------------
CHILE -- 0.4%
Empresa Nacional de Electricidad S.A.,
8.35%, 2013
(Utilities -- Electric Power) $ 250 $ 266,879
-------------
FRANCE -- 1.3%
Crown European Holdings S.A.,
9.5%, 2011 (Containers) $ 425 $ 463,250
Rhodia S.A., 8.875%, 2011 (Chemicals) 535 452,075
-------------
$ 915,325
-------------
GERMANY -- 0%
Kronos International, Inc.,
8.875%, 2009 (Chemicals) EUR 15 $ 19,368
-------------
IRELAND -- 0.6%
Eircom Funding PLC, 8.25%, 2013
(Telecommunications -- Wireline) $ 140 $ 145,600
MDP Acquisitions PLC, 9.625%, 2012
(Forest & Paper Products) 260 284,700
-------------
$ 430,300
-------------
LUXEMBOURG -- 1.4%
BCP Caylux Holdings Luxembourg S.A.,
9.625%, 2014 (Chemicals) $ 245 $ 254,188
Lighthouse International Co. S.A.,
8%, 2014 (Printing & Publishing) EUR 300 352,640
Safilo Capital International S.A.,
9.625%, 2013
(Consumer Goods & Services) 225 256,258
SGL Carbon International S.A.,
8.5%, 2012 (Metals & Mining) 105 123,424
-------------
$ 986,510
-------------
MEXICO -- 0.6%
Corporacion Durango S.A. de C.V.,
13.75%, 2009
(Forest & Paper Products)** $ 360 $ 180,000
Innova S.A. de R.L., 9.375%, 2013
(Telecommunications -- Wireless) 200 209,500
TFM S.A. de C.V., 12.5%, 2012
(Transportation -- Services) 51 54,315
-------------
$ 443,815
-------------
NETHERLANDS -- 0.3%
Kappa Beheer B.V., 10.625%, 2009
(Forest & Paper Products) $ 210 $ 219,450
-------------
NORWAY -- 0.5%
Ocean Rig Norway S.A.,
10.25%, 2008 (Oil Services) $ 190 $ 188,100
Petroleum Geo-Services A.S.A.,
10%, 2010 (Oil Services) $ 200 $ 207,000
-------------
$ 395,100
-------------
PANAMA -- 0.2%
Republic of Panama, 9.375%, 2023
(Emerging Market Sovereign) $ 159 $ 162,180
-------------
RUSSIA -- 0.6%
Gaz Capital S.A., 9.625%, 2013 (Oils) $ 120 $ 123,966
Gaz Capital S.A., 8.625%, 2034 (Oils) 220 214,225
Russian Ministry of Finance,
12.75%, 2028
(Emerging Market Sovereign) 84 122,220
-------------
$ 460,411
-------------
SINGAPORE -- 0.3%
Flextronics International Ltd.,
6.5%, 2013 (Electronics) $ 225 $ 219,375
-------------
SWEDEN -- 0.1%
Stena AB, 9.625%, 2012
(Transportation -- Services) $ 80 $ 88,800
-------------
UNITED KINGDOM -- 1.2%
COLT Telecom Group PLC,
7.625%, 2009
(Telecommunications -- Wireline) EUR 200 $ 243,010
Dunlop Standard Aerospace Holdings
PLC, 11.875%, 2009 (Aerospace) $ 19 20,168
Dunlop Standard Aerospace Holdings
PLC, 11.875%, 2009 (Aerospace) 154 163,625
NTL Cable PLC, 8.75%, 2014
(Broadcast & Cable TV) 20 20,500
Telewest Communications PLC,
11%, 2007 (Broadcast & Cable TV)** 160 94,000
Telewest Communications PLC,
0%, 2009 (Broadcast & Cable TV)** 400 186,000
Telewest Communications PLC,
0% to 2005, 11.375% to 2010
(Broadcast & Cable TV)** 85 37,400
United Biscuits Finance PLC,
10.625%, 2011 (Food & Non-Alcoholic
Beverages) EUR 80 106,706
-------------
$ 871,409
-------------
Total Foreign Bonds $ 8,503,950
-------------
Total Bonds (Identified Cost, $68,242,098) $ 67,113,098
-------------
<Caption>
SHARES
STOCKS -- 1.5%
U.S. STOCKS -- 1.1%
AUTOMOTIVE -- 0.1%
Hayes Lemmerz International, Inc.* 3,536 $ 53,394
Oxford Automotive, Inc.* 53 1
-------------
$ 53,395
-------------
BROADCAST & CABLE TV -- 0.5%
NTL, Inc.* 6,473 $ 372,974
-------------
MACHINERY & TOOLS
Thermadyne Holdings Corp.* 2,586 $ 36,204
-------------
SPECIALTY CHEMICALS
Sterling Chemicals, Inc.* 31 $ 744
-------------
TELEPHONE SERVICES -- 0.2%
MCI, Inc.* 12,022 $ 173,477
XO Communications, Inc.* 198 822
-------------
$ 174,299
-------------
</Table>
15
<Page>
<Table>
<Caption>
ISSUER SHARES VALUE
STOCKS -- continued
U.S. STOCKS -- continued
UTILITIES -- ELECTRIC POWER -- 0.3%
DPL, Inc. 10,070 $ 195,559
-------------
Total U.S. Stocks $ 833,175
-------------
FOREIGN STOCKS -- 0.4%
NETHERLANDS -- 0.1%
Completel Europe N.V
(Telephone Services)* 3,011 $ 84,357
VersaTel Telecom International N.V
(Telephone Services)* 7,740 15,085
-------------
$ 99,442
-------------
SWEDEN -- 0.2%
Song Networks Holding AB
(Telephone Services)* 18,013 $ 126,852
-------------
UNITED KINGDOM -- 0.1%
Jazztel PLC (Telephone Services)* 165,342 $ 52,365
-------------
Total Foreign Stocks $ 278,659
-------------
Total Stocks (Identified Cost, $2,355,381) $ 1,111,834
-------------
CONVERTIBLE PREFERRED STOCKS
FOREIGN STOCK
SWEDEN
Song Networks Holding AB
(Telephone Services) * 5,040 $ 24,778
-------------
U.S. STOCKS
AUTOMOTIVE
HLI Operating Co., Inc., "A" * 11 $ 924
-------------
Total Convertible Preferred Stocks
(Identified Cost, $18,601) $ 25,702
-------------
PREFERRED STOCKS
TELEPHONE SERVICES
PTV, Inc., "A", 10%
(Identified Cost, $--) 11 $ 80
-------------
WARRANTS
AT&T Canada, Inc.
(Broadcast & Cable TV) ##* 600 $ 6
Loral Space & Communications Ltd.
(Business Services)* 1,000 0
Loral Space & Communications Ltd.
(Business Services)* 1,100 0
Sterling Chemicals, Inc.
(Specialty Chemicals)* 51 54
Thermadyne Holdings Corp.
(Basic Industry)* 2,705 947
XO Communications, Inc.
(Telecommunications-Wireline)* 298 313
XO Communications, Inc.
(Telecommunications -- Wireline)* 298 218
XO Communications, Inc.
(Telecommunications -- Wireline)* 397 596
XM Satellite Radio, Inc.
(Broadcast & Cable TV)* 425 23,375
-------------
Total Warrants (Identified Cost, $219,283) $ 25,509
-------------
<Caption>
PAR AMOUNT
ISSUER (000 OMITTED) VALUE
SHORT-TERM OBLIGATION -- 3.9%
General Electric Capital Corp.,
1.48%, due 7/01/04,
at Amortized Cost $ 2,796 $ 2,796,000
-------------
Total Investments (Identified Cost, $73,631,363)~ $ 71,072,223
-------------
OTHER ASSETS,
LESS LIABILITIES -- 2.1% 1,527,039
-------------
Net Assets -- 100.0% $ 72,599,262
=============
</Table>
See portfolio footnotes and notes to financial statements.
16
<Page>
PORTFOLIO OF INVESTMENTS (Unaudited) -- June 30, 2004
MANAGED SECTORS VARIABLE ACCOUNT
<Table>
<Caption>
ISSUER SHARES VALUE
STOCKS -- 97.2%
U.S. STOCKS -- 96.3%
CONSUMER STAPLES -- 1.2%
Avon Products, Inc. 8,700 $ 401,418
Colgate-Palmolive Co. 6,100 356,545
-------------
$ 757,963
-------------
FINANCIAL SERVICES -- 9.4%
American Express Co. 22,800 $ 1,171,464
American International Group, Inc. 20,800 1,482,624
Citigroup, Inc. 34,200 1,590,300
Goldman Sachs Group, Inc. 5,500 517,880
Hartford Financial Services Group, Inc. 8,200 563,668
Merrill Lynch & Co., Inc. 15,000 809,700
-------------
$ 6,135,636
-------------
HEALTHCARE -- 23.2%
Abbott Laboratories 29,500 $ 1,202,420
Amgen, Inc.* 21,200 1,156,884
C.R. Bard, Inc. 12,400 702,460
Celgene Corp.* 5,700 326,382
Eli Lilly & Co. 15,000 1,048,650
Genentech, Inc.* 4,200 236,040
Genzyme Corp.* 22,700 1,074,391
Gilead Sciences, Inc.* 18,100 1,212,700
Guidant Corp. 7,700 430,276
Johnson & Johnson 44,500 2,478,650
Medtronic, Inc. 26,100 1,271,592
Pfizer, Inc. 50,900 1,744,852
Waters Corp.* 27,800 1,328,284
Wyeth 24,600 889,536
-------------
$ 15,103,117
-------------
INDUSTRIAL GOODS & SERVICES -- 8.4%
Caterpillar, Inc. 7,200 $ 571,968
Emerson Electric Co. 9,400 597,370
General Electric Co. 74,700 2,420,280
Illinois Tool Works, Inc. 5,700 546,573
Lockheed Martin Corp. 26,000 1,354,080
-------------
$ 5,490,271
-------------
LEISURE -- 6.8%
Carnival Corp. 22,200 $ 1,043,400
Clear Channel Communications, Inc. 19,400 716,830
Comcast Corp., "A"* 33,400 936,202
Lamar Advertising Co.,"A"* 4,900 212,415
Outback Steakhouse, Inc. 8,900 368,104
Time Warner, Inc.* 22,200 390,276
Viacom, Inc., "B" 21,700 775,124
-------------
$ 4,442,351
-------------
MISCELLANEOUS -- 2.9%
Apollo Group, Inc., "A"* 4,600 $ 406,134
Career Education Corp.* 8,300 378,148
Fiserv, Inc.* 15,300 595,017
Getty Images, Inc.* 8,500 510,000
-------------
$ 1,889,299
-------------
RETAIL -- 10.2%
Best Buy Co., Inc. 14,500 $ 735,730
Coach, Inc.* 5,800 262,102
CVS Corp. 23,500 987,470
Kohl's Corp.* 20,500 866,740
Lowe's Co., Inc. 11,200 588,560
Nike, Inc., "B" 7,600 575,700
Pacific Sunwear of California, Inc.* 19,600 383,572
PETsMART, Inc. 16,000 519,200
Reebok International Ltd. 12,600 453,348
Target Corp. 29,500 1,252,865
-------------
$ 6,625,287
-------------
TECHNOLOGY -- 32.2%
ADTRAN, Inc. 20,600 $ 687,422
Akamai Technologies, Inc.* 67,000 1,202,650
Analog Devices, Inc. 24,900 1,172,292
Cisco Systems, Inc.* 106,700 2,528,790
Corning, Inc.* 38,200 498,892
Dell, Inc.* 41,400 1,482,948
eBay, Inc.* 14,600 1,342,470
Intel Corp. 41,500 1,145,400
InterActiveCorp* 26,100 786,654
International Business Machines Corp. 14,100 1,242,915
Lexmark International, Inc., "A"* 5,700 550,221
Maxim Integrated Products, Inc. 7,400 387,908
Microsoft Corp. 108,300 3,093,048
Network Appliance, Inc.* 6,200 133,486
Oracle Corp.* 26,700 318,531
Symantec Corp.* 21,500 941,270
Texas Instruments, Inc. 48,000 1,160,640
VERITAS Software Corp.* 32,800 908,560
Xilinx, Inc. 16,900 562,939
Yahoo!, Inc.* 22,400 813,792
-------------
$ 20,960,828
-------------
TRANSPORTATION -- 1.1%
FedEx Corp. 8,900 $ 727,041
-------------
UTILITIES & COMMUNICATIONS -- 0.9%
Andrew Corp.* 29,100 $ 582,291
-------------
Total U.S. Stocks $ 62,714,084
-------------
FOREIGN STOCK -- 0.9%
BERMUDA -- 0.9%
Ace Ltd. (Financial Services) 13,800 $ 583,464
-------------
Total Stocks (Identified Cost, $55,410,482) $ 63,297,548
-------------
<Caption>
PAR AMOUNT
(000 OMITTED)
SHORT-TERM OBLIGATION -- 0.3%
General Electric Capital Corp., 1.48%,
due 7/01/04, at Amortized Cost $ 178 $ 178,000
-------------
REPURCHASE AGREEMENT -- 1.8%
Morgan Stanley, 1.50%, dated 6/30/04,
due 7/01/04, total to be received
$1,163,048 (secured by various
U.S. Treasury and Federal Agency
obligations in a jointly traded account),
at Cost $ 1,163 $ 1,163,000
-------------
Total Investments (Identified Cost, $56,751,482) $ 64,638,548
-------------
OTHER ASSETS,
LESS LIABILITIES -- 0.7% 447,150
-------------
Net Assets -- 100.0% $ 65,085,698
=============
</Table>
See portfolio footnotes and notes to financial statements.
17
<Page>
PORTFOLIO OF INVESTMENTS (Unaudited) -- June 30, 2004
MONEY MARKET VARIABLE ACCOUNT
<Table>
<Caption>
PAR AMOUNT
ISSUER (000 OMITTED) VALUE
CERTIFICATES OF DEPOSIT -- 3.0%
Wells Fargo & Co., due 7/13/04,
at Amortized Cost $ 1,709 $ 1,709,000
-------------
COMMERCIAL PAPER -- 51.4%
Abbey National LLC, due 10/01/04 $ 1,000 $ 997,266
Alpine Securitization Corp.,
due 7/01/04 1,682 1,682,000
Archer Daniels Midland Co.,
due 7/13/04-8/03/04 1,300 1,299,176
Barton Capital Corp., due 7/13/04 458 457,838
CRC Funding LLC, due 7/20/04 1,320 1,319,262
Cargill, Inc., due 7/01/04 1,682 1,682,000
Citibank Credit Card Issuance Trust,
due 7/01/04 1,682 1,682,000
Citicorp, Inc., due 7/01/04 420 420,000
Citigroup, Inc., due 7/01/04 1,262 1,262,000
Delaware Funding Corp., due 7/08/04 300 299,936
Dexia Delaware LLC, due 7/02/04 713 712,979
Edison Asset Securitization LLC,
due 9/03/04 400 399,211
Falcon Asset Securitization, due 7/22/04 1,721 1,719,745
General Electric Capital Corp.,
due 9/03/04 - 9/27/04 1,315 1,311,709
Genworth Financial, Inc., due 7/22/04 405 404,705
Goldman Sachs Group, Inc.,
due 10/25/04 1,375 1,369,462
ING North America Insurance Holdings,
Inc., due 8/04/04 140 139,859
J.P. Morgan & Co., Inc., due 7/01/04 1,785 1,785,000
Merrill Lynch & Co., Inc., due 7/01/04 1,682 1,682,000
MetLife Funding, Inc., due 7/21/04 1,035 1,034,385
Morgan Stanley Dean Witter, Inc.,
due 7/02/04 1,677 1,676,951
New Center Asset Trust, due 7/01/04 1,682 1,682,000
Preferred Receivables Funding,
due 7/07/04 937 936,827
Receivables Capital Corp., due 7/16/04 1,700 1,699,200
Royal Bank of Canada, due 10/14/04 1,189 1,185,151
-------------
Total Commercial Paper, at Amortized Cost $ 28,840,662
-------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 27.9%
Fannie Mae, due 8/11/04 $ 1,900 $ 1,897,641
Federal Farm Credit Bank, due 7/28/04 400 399,679
Freddie Mac, due 7/01/04 13,343 13,343,000
-------------
Total U.S. Government Agency
Obligations, at Amortized Cost $ 15,640,320
-------------
FLOATING RATE DEMAND NOTES -- 1.6%
Bay Area Toll Authority, CA, Toll Bridge
Rev. "A", due 7/07/04,
at Identified Cost $ 900 $ 900,000
-------------
REPURCHASE AGREEMENTS -- 16.0%
Goldman Sachs, 1.50%, dated 6/30/04,
due 7/01/04, total to be received
$5,608,234 (secured by various
U.S. Treasury and Federal Agency
obligations in a jointly traded
account) $ 5,608 $ 5,608,000
Morgan Stanley, 1.50%, dated 6/30/04,
due 7/01/04, total to be received
$3,403,142 (secured by various
U.S. Treasury and Federal Agency
obligations in a jointly traded
account) 3,403 3,403,000
-------------
Total Repurchase Agreements, at cost $ 9,011,000
-------------
Total Investments, at Amortized Cost and Value $ 56,100,982
-------------
OTHER ASSETS,
LESS LIABILITIES -- 0.1% 54,397
-------------
Net Assets -- 100.0% $ 56,155,379
=============
</Table>
See portfolio footnotes and notes to financial statements.
18
<Page>
PORTFOLIO OF INVESTMENTS (Unaudited) -- June 30, 2004
TOTAL RETURN VARIABLE ACCOUNT
<Table>
<Caption>
ISSUER SHARES VALUE
STOCKS -- 60.6%
U.S. STOCKS -- 54.3%
AEROSPACE -- 1.8%
Lockheed Martin Corp. 53,100 $ 2,765,448
Northrop Grumman Corp. 9,600 515,520
Raytheon Co. 8,100 289,737
-------------
$ 3,570,705
-------------
AIRLINES -- 0.2%
Southwest Airlines Co. 19,500 $ 327,015
-------------
ALCOHOLIC BEVERAGES -- 0.2%
Anheuser-Busch Cos., Inc. 6,800 $ 367,200
-------------
APPAREL MANUFACTURERS -- 0.1%
Reebok International Ltd. 5,300 $ 190,694
-------------
BANKS & CREDIT COMPANIES -- 10.1%
American Express Co. 15,500 $ 796,390
Bank of America Corp. 55,386 4,686,763
BANK ONE Corp. 26,900 1,371,900
Citigroup, Inc. 89,806 4,175,979
Fannie Mae 17,100 1,220,256
Freddie Mac 19,550 1,237,515
MBNA Corp. 21,400 551,906
Mellon Financial Corp. 80,610 2,364,291
PNC Financial Services Group, Inc. 33,810 1,794,635
SouthTrust Corp. 4,200 163,002
SunTrust Banks, Inc. 21,800 1,416,782
U.S. Bancorp 16,552 456,173
-------------
$ 20,235,592
-------------
BIOTECHNOLOGY -- 0.1%
Genzyme Corp.* 4,800 $ 227,184
-------------
BROADCAST & CABLE TV -- 1.6%
Comcast Corp., "Special A"* 75,730 $ 2,090,905
Cox Communications, Inc., "A"* 5,500 152,845
EchoStar Communications Corp., "A"* 6,400 196,800
Time Warner, Inc.* 38,900 683,862
-------------
$ 3,124,412
-------------
BROKERAGE & ASSET MANAGERS -- 2.0%
Franklin Resources, Inc. 4,700 $ 235,376
Goldman Sachs Group, Inc. 8,300 781,528
Lehman Brothers Holdings, Inc. 5,300 398,825
Merrill Lynch & Co., Inc. 34,070 1,839,099
Morgan Stanley 12,600 664,902
-------------
$ 3,919,730
-------------
CHEMICALS -- 2.6%
Air Products & Chemicals, Inc. 11,720 $ 614,714
Dow Chemical Co. 17,100 695,970
E.I. du Pont de Nemours & Co. 39,390 1,749,704
Lyondell Chemical Co. 28,330 492,659
Monsanto Co. 14,900 573,650
PPG Industries, Inc. 14,000 874,860
Praxair, Inc. 3,100 123,721
-------------
$ 5,125,278
-------------
COMPUTER SOFTWARE -- 1.9%
Cadence Design Systems, Inc.* 12,400 $ 181,412
Computer Associates International, Inc. 27,400 768,844
Microsoft Corp. 88,640 2,531,558
Network Associates, Inc.* 22,560 409,013
-------------
$ 3,890,827
-------------
COMPUTER SOFTWARE -- SYSTEMS -- 0.2%
Hewlett-Packard Co. 4,800 $ 101,280
International Business Machines Corp. 2,800 246,820
Xerox Corp.* 7,900 114,550
-------------
$ 462,650
-------------
CONSTRUCTION -- 0.2%
Masco Corp. 12,700 $ 395,986
-------------
CONSUMER GOODS & SERVICES -- 1.2%
Kimberly-Clark Corp. 18,250 $ 1,202,310
Newell Rubbermaid, Inc. 52,090 1,224,115
-------------
$ 2,426,425
-------------
CONTAINERS -- 0.8%
Owens-Illinois, Inc.* 67,020 $ 1,123,255
Smurfit-Stone Container Corp.* 28,930 577,154
-------------
$ 1,700,409
-------------
ELECTRICAL EQUIPMENT -- 1.7%
Cooper Industries Ltd., "A" 2,300 $ 136,643
Emerson Electric Co. 7,350 467,093
General Electric Co. 33,170 1,074,708
Tyco International Ltd. 50,670 1,679,204
-------------
$ 3,357,648
-------------
ELECTRONICS -- 0.2%
Agere Systems, Inc., "B"* 52,100 $ 112,015
Novellus Systems, Inc.* 9,900 311,256
-------------
$ 423,271
-------------
ENERGY -- INDEPENDENT -- 1.3%
Devon Energy Corp. 20,650 $ 1,362,900
EOG Resources, Inc. 2,900 173,159
Newfield Exploration Co.* 5,290 294,865
Unocal Corp. 18,100 687,800
-------------
$ 2,518,724
-------------
ENERGY -- INTEGRATED -- 1.2%
ChevronTexaco Corp. 1,150 $ 108,226
ConocoPhillips 10,100 770,529
Exxon Mobil Corp. 33,392 1,482,939
-------------
$ 2,361,694
-------------
ENTERTAINMENT -- 2.0%
Viacom, Inc., "B" 69,968 $ 2,499,257
Walt Disney Co. 55,700 1,419,793
-------------
$ 3,919,050
-------------
FOOD & DRUG STORES -- 0.5%
Kroger Co.* 14,920 $ 271,544
Rite Aid Corp.* 139,010 725,632
-------------
$ 997,176
-------------
FOOD & NON-ALCOHOLIC BEVERAGES -- 2.0%
Archer Daniels Midland Co. 44,507 $ 746,827
General Mills, Inc. 27,300 1,297,569
H.J. Heinz Co. 16,900 662,480
Kellogg Co. 14,700 615,195
PepsiCo, Inc. 1,500 80,820
Sara Lee Corp. 28,100 646,019
-------------
$ 4,048,910
-------------
FOREST & PAPER PRODUCTS -- 0.7%
Bowater, Inc. 13,840 $ 575,605
Georgia-Pacific Corp. 5,300 195,994
International Paper Co. 15,450 690,615
-------------
$ 1,462,214
-------------
GAMING & LODGING -- 0.1%
Hilton Hotels Corp. 12,100 $ 225,786
-------------
INSURANCE -- 2.8%
AFLAC, Inc. 3,200 $ 130,592
Allstate Corp. 33,600 1,564,080
Chubb Corp. 2,600 177,268
Conseco, Inc.* 32,600 648,740
Hartford Financial Services Group, Inc. 20,090 1,380,987
Marsh & McLennan Cos., Inc. 1,600 72,608
MetLife, Inc. 28,500 1,021,725
St. Paul Travelers Cos., Inc. 16,426 665,910
-------------
$ 5,661,910
-------------
</Table>
19
<Page>
<Table>
<Caption>
ISSUER SHARES VALUE
STOCKS -- continued
U.S. STOCKS -- continued
LEISURE & TOYS -- 0.2%
Hasbro, Inc. 4,500 $ 85,500
Mattel, Inc. 20,700 377,775
-------------
$ 463,275
-------------
MACHINERY & TOOLS -- 0.7%
Caterpillar, Inc. 5,000 $ 397,200
Deere & Co. 4,300 301,602
Eaton Corp. 6,500 420,810
Precision Castparts Corp. 4,400 240,636
-------------
$ 1,360,248
-------------
MEDICAL & HEALTH TECHNOLOGY & SERVICES -- 1.0%
Apria Healthcare Group, Inc.* 7,770 $ 222,999
Cardinal Health, Inc. 4,700 329,235
HCA, Inc. 6,700 278,653
Lincare Holdings, Inc.* 10,800 354,888
Tenet Healthcare Corp.* 65,500 878,355
-------------
$ 2,064,130
-------------
MEDICAL EQUIPMENT -- 0.1%
Baxter International, Inc. 3,900 $ 134,589
Guidant Corp. 1,100 61,468
-------------
$ 196,057
-------------
NATURAL GAS -- DISTRIBUTION -- 0.4%
AGL Resources, Inc. 6,600 $ 191,730
KeySpan Corp. 4,100 150,470
National Fuel Gas Co. 4,400 110,000
NiSource, Inc. 13,611 280,659
-------------
$ 732,859
-------------
OIL SERVICES -- 3.2%
BJ Services Co.* 15,990 $ 732,982
Cooper Cameron Corp.* 16,790 817,673
GlobalSantaFe Corp. 70,830 1,876,995
Noble Corp.* 54,535 2,066,331
Schlumberger Ltd. 13,100 831,981
-------------
$ 6,325,962
-------------
PHARMACEUTICALS -- 4.5%
Abbott Laboratories 29,500 $ 1,202,420
Eli Lilly & Co. 4,300 300,613
Johnson & Johnson 52,200 2,907,540
Merck & Co., Inc. 44,660 2,121,350
Pfizer, Inc. 10,100 346,228
Wyeth 57,900 2,093,664
-------------
$ 8,971,815
-------------
PRINTING & PUBLISHING -- 0.3%
New York Times Co., "A" 4,200 $ 187,782
Tribune Co. 9,800 446,292
-------------
$ 634,074
-------------
RAILROAD & SHIPPING -- 0.4%
Burlington Northern Santa Fe Corp. 14,860 $ 521,140
Union Pacific Corp. 4,600 273,470
-------------
$ 794,610
-------------
RESTAURANTS -- 0.2%
ARAMARK Corp., "B" 6,400 $ 184,064
McDonald's Corp. 8,100 210,600
-------------
$ 394,664
-------------
SPECIALTY STORES -- 0.5%
Home Depot, Inc. 17,270 $ 607,904
TJX Cos., Inc. 15,700 378,998
-------------
$ 986,902
-------------
TELECOMMUNICATIONS -- WIRELINE -- 0.2%
Cisco Systems, Inc.* 16,700 $ 395,790
-------------
TELEPHONE SERVICES -- 4.0%
SBC Communications, Inc. 41,424 $ 1,004,532
Sprint FON Group 200,480 3,528,448
Verizon Communications, Inc. 97,676 3,534,894
-------------
$ 8,067,874
-------------
TOBACCO -- 0.6%
Altria Group, Inc. 26,300 $ 1,316,315
-------------
UTILITIES -- ELECTRIC POWER -- 2.5%
Ameren Corp. 2,080 $ 89,357
Calpine Corp.* 232,860 1,005,955
Cinergy Corp. 10,200 387,600
Dominion Resources, Inc. 5,300 334,324
Energy East Corp. 8,000 194,000
Entergy Corp. 14,200 795,342
Exelon Corp. 12,240 407,470
FirstEnergy Corp. 2,700 101,007
NSTAR 1,900 90,972
PPL Corp. 11,800 541,620
TXU Corp. 25,610 1,037,461
-------------
$ 4,985,108
-------------
Total U.S. Stocks $ 108,630,173
-------------
FOREIGN STOCKS -- 6.3%
AUSTRALIA -- 0.2%
News Corp. Ltd. Preferred, ADR
(Broadcast & Cable TV) 11,600 $ 381,408
-------------
BERMUDA -- 0.4%
Accenture Ltd., "A"
(Business Services)* 17,650 $ 485,022
Ingersoll-Rand Co. Ltd., "A"
(Machinery & Tools) 3,900 266,409
-------------
$ 751,431
-------------
BRAZIL -- 0.5%
Companhia Vale do Rio Doce, ADR
(Metals & Mining) 18,600 $ 884,430
-------------
CANADA -- 1.2%
EnCana Corp.
(Energy -- Independent) 9,200 $ 397,072
Magna International, Inc., "A" (Automotive) 9,780 832,963
Nortel Networks Corp.
(Telecommunications -- Wireline)* 224,400 1,119,756
-------------
$ 2,349,791
-------------
FINLAND -- 0.6%
Nokia Corp., ADR
(Telecommunications -- Wireless) 85,000 $ 1,235,900
-------------
FRANCE -- 0.5%
Sanofi-Synthelabo (Pharmaceuticals) 3,000 $ 190,389
TOTAL S.A., ADR (Energy -- Integrated) 8,500 816,680
-------------
$ 1,007,069
-------------
SWITZERLAND -- 0.6%
Novartis AG (Pharmaceuticals) 6,400 $ 282,451
Roche Holding AG (Pharmaceuticals) 7,000 693,346
Syngenta AG (Chemicals) 3,300 276,779
-------------
$ 1,252,576
-------------
UNITED KINGDOM -- 2.3%
BHP Billiton PLC (Metals & Mining) 20,400 $ 176,964
BP PLC, ADR (Energy -- Integrated) 36,770 1,969,769
Diageo PLC (Alcoholic Beverages) 13,050 175,900
Reed Elsevier PLC (Printing & Publishing) 78,900 766,683
Vodafone Group PLC, ADR
(Telecommunications -- Wireless) 71,047 1,570,139
-------------
$ 4,659,455
-------------
Total Foreign Stocks $ 12,522,060
-------------
Total Stocks (Identified Cost, $109,165,089) $ 121,152,233
-------------
</Table>
20
<Page>
<Table>
<Caption>
PAR AMOUNT
ISSUER (000 OMITTED) VALUE
BONDS -- 37.6%
U.S. BONDS -- 36.3%
AEROSPACE -- 0.5%
BAE Systems Holdings, Inc.,
6.4%, 2011 ## $ 223 $ 237,394
Boeing Capital Corp., 6.5%, 2012 373 401,957
Northrop Grumman Corp., 7.75%, 2031 326 379,192
-------------
$ 1,018,543
-------------
AIRLINES -- 0.3%
Continental Airlines, Inc., 6.648%, 2019 $ 595 $ 555,680
-------------
ALCOHOLIC BEVERAGES -- 0.1%
Miller Brewing Co., 5.5%, 2013 ## $ 261 $ 261,911
-------------
ASSET BACKED & SECURITIZED -- 2.5%
AmeriCredit Automobile Receivables Trust,
2.18%, 2008 $ 236 $ 232,059
Bear Stearns Commercial Mortgage
Securities, Inc., 6.8%, 2008 227 237,935
Beneficial Home Equity Loan Trust,
1.44%, 2037 321 319,262
Blackrock Capital Finance LP,
7.75%, 2026 ## 71 70,230
CRIIMI MAE CMBS Corp., 6.7%, 2008 ## 190 200,416
CRIIMI MAE Commercial Mortgage Trust,
7%, 2011 ## 320 338,187
Chase Commercial Mortgage Securities
Corp., 6.39%, 2008 369 397,629
Chase Commercial Mortgage Securities
Corp., 7.543%, 2009 114 123,068
Citibank Credit Card Issuance Trust,
6.65%, 2008 623 658,325
Countrywide Alternative Loan Trust,
8%, 2030 332 331,546
Credit Suisse First Boston Mortgage,
6.38%, 2035 35 37,755
Deutsche Mortgage & Asset Receiving
Corp., 6.538%, 2031 225 240,931
First Union-Lehman Brothers
Bank of America, 6.56%, 2035 101 108,875
First Union-Lehman Brothers Commercial
Mortgage Trust, 7.38%, 2029 85 91,685
First Union-Lehman Brothers Commercial
Mortgage Trust, 6.65%, 2029 38 40,389
Goldman Sachs Mortgage Securities
Corp., 6.06%, 2030 273 280,163
J.P. Morgan Commercial Mortgage
Finance Corp., 6.613%, 2030 175 187,842
Merrill Lynch Mortgage Investors, Inc.,
6.39%, 2030 93 98,899
Morgan Stanley Capital I, Inc.,
0.8104%, 2030 ## 9,110 234,305
Mortgage Capital Funding, Inc.,
6.337%, 2031 326 348,598
Multi-Family Capital Access One, Inc.,
6.65%, 2024 66 71,846
Residential Accredit Loans, Inc.,
7%, 2028 89 88,595
Residential Asset Mortgage Products,
Inc., 3.8%, 2030 101 99,070
Residential Funding Mortgage
Securities I, 6%, 2016 150 149,620
-------------
$ 4,987,230
-------------
AUTOMOTIVE -- 0.7%
DaimlerChrysler N.A. Holdings Corp.,
6.5%, 2013 $ 163 $ 167,114
Ford Motor Co., 7.45%, 2031 195 185,878
Ford Motor Credit Co., 6.875%, 2006 16 16,782
Ford Motor Credit Co., 7.875%, 2010 $ 180 $ 195,851
Ford Motor Credit Co., 7%, 2013 110 111,041
General Motors Acceptance Corp.,
7.25%, 2011 185 194,164
General Motors Acceptance Corp.,
6.875%, 2011 277 284,007
General Motors Acceptance Corp.,
8%, 2031 176 180,327
General Motors Corp., 7.2%, 2011 41 42,960
-------------
$ 1,378,124
-------------
BANKS & CREDIT COMPANIES -- 1.2%
Abbey National Capital Trust I,
8.963%, 2049 $ 179 $ 223,227
Bank of America Corp., 7.4%, 2011 299 338,862
Credit Suisse First Boston USA, Inc.,
4.625%, 2008 736 749,710
Credit Suisse First Boston USA, Inc.,
6.125%, 2011 67 70,519
Popular North America, Inc.,
4.25%, 2008 211 210,885
RBS Capital Trust II, 6.425%, 2049 161 154,125
Socgen Real Estate LLC, 7.64%, 2049 ## 361 398,507
UniCredito Italiano Capital Trust II,
9.2%, 2049 208 252,374
-------------
$ 2,398,209
-------------
BROADCAST & CABLE TV -- 0.3%
Cox Communications, Inc., 7.75%, 2010 $ 88 $ 99,754
TCI Communications Financing III,
9.65%, 2027 425 500,017
-------------
$ 599,771
-------------
BROKERAGE & ASSET MANAGERS -- 0.3%
Lehman Brothers Holdings, Inc.,
8.25%, 2007 $ 334 $ 375,578
Morgan Stanley Group, Inc., 6.1%, 2006 93 97,844
Morgan Stanley Group, Inc.,
6.75%, 2011 156 170,956
-------------
$ 644,378
-------------
BUILDING -- 0.1%
CRH North America, Inc.,
6.95%, 2012 $ 208 $ 228,546
-------------
CHEMICALS -- 0.1%
Dow Chemical Co., 5.75%, 2008 $ 162 $ 169,999
-------------
CONGLOMERATES -- 0.4%
General Electric Capital Corp.,
7.5%, 2005 $ 536 $ 559,282
General Electric Capital Corp.,
8.75%, 2007 130 148,689
-------------
$ 707,971
-------------
CONSUMER CYCLICAL -- 0.1%
Cendant Corp., 6.875%, 2006 $ 147 $ 157,070
Cendant Corp., 6.25%, 2008 90 95,977
-------------
$ 253,047
-------------
DEFENSE ELECTRONICS -- 0.1%
Raytheon Co., 6.15%, 2008 $ 192 $ 204,811
-------------
ENERGY -- INDEPENDENT -- 0.1%
Devon Financing Corp. U.L.C.,
6.875%, 2011 $ 142 $ 154,589
-------------
ENERGY -- INTEGRATED -- 0.1%
Amerada Hess Corp., 7.3%, 2031 $ 62 $ 62,951
Phillips Petroleum Co., 8.5%, 2005 40 42,054
-------------
$ 105,005
-------------
</Table>
21
<Page>
<Table>
<Caption>
PAR AMOUNT
ISSUER (000 OMITTED) VALUE
BONDS -- continued
U.S. BONDS -- continued
ENTERTAINMENT -- 0.1%
Time Warner Entertainment Co. LP,
10.15%, 2012 $ 1 $ 1,273
Walt Disney Co., 6.75%, 2006 69 73,091
Walt Disney Co., 6.375%, 2012 98 105,158
-------------
$ 179,522
-------------
FINANCIAL INSTITUTIONS -- 0.2%
SLM Corp., 4%, 2009 $ 153 $ 150,276
SLM Corp., 5.375%, 2013 195 194,895
-------------
$ 345,171
-------------
FOOD & NON-ALCOHOLIC BEVERAGES -- 0.1%
Kraft Foods, Inc., 6.25%, 2012 $ 122 $ 128,465
-------------
FOREST & PAPER PRODUCTS -- 0.2%
MeadWestvaco Corp., 6.8%, 2032 $ 104 $ 102,908
Weyerhaeuser Co., 6.75%, 2012 254 275,070
-------------
$ 377,978
-------------
GAMING & LODGING -- 0.1%
Harrah's Operating Co., Inc.,
7.125%, 2007 $ 193 $ 207,825
-------------
INSURANCE -- 0.7%
AIG SunAmerica Institutional Funding II,
5.75%, 2009 $ 441 $ 463,996
AIG SunAmerica, Inc, 7.6%, 2005 ## 444 464,913
MetLife, Inc., 6.5%, 2032 180 184,359
Prudential Funding Corp., 6.6%, 2008 ## 179 195,201
-------------
$ 1,308,469
-------------
INSURANCE -- PROPERTY & CASUALTY -- 0.2%
Allstate Corp., 6.125%, 2032 $ 185 $ 181,712
Fund American Cos., Inc., 5.875%, 2013 117 116,751
Safeco Corp., 4.875%, 2010 32 32,226
Travelers Property Casualty Corp.,
6.375%, 2033 84 82,740
-------------
$ 413,429
-------------
MACHINERY & TOOLS -- 0.1%
Kennametal, Inc., 7.2%, 2012 $ 211 $ 223,158
-------------
MEDICAL & HEALTH TECHNOLOGY & SERVICES -- 0.2%
HCA, Inc., 8.75%, 2010 $ 60 $ 68,512
HCA, Inc., 6.95%, 2012 276 287,958
HCA, Inc., 6.25%, 2013 32 31,809
-------------
$ 388,279
-------------
MORTGAGE BACKED -- 13.0%
Fannie Mae, 5.722%, 2009 $ 830 $ 876,243
Fannie Mae, 6%, 2012-2033 4,367 4,507,305
Fannie Mae, 5.5%, 2016-2034 6,379 6,404,208
Fannie Mae, 5%, 2018 1,853 1,859,314
Fannie Mae, 4.5%, 2018-2019 1,047 1,025,268
Fannie Mae, 6.5%, 2028-2034 2,966 3,092,267
Fannie Mae, 7.5%, 2030-2031 158 169,749
Federal Home Loan Bank, 4.5%, 2019 324 317,459
Federal Home Loan Bank, 5%, 2019 214 214,646
Federal Home Loan Bank, 6%, 2023 284 293,324
Federal Home Loan Bank, 5.5%, 2033 128 128,107
Freddie Mac, 5%, 2017-2033 1,471 1,436,995
Freddie Mac, 4.5%, 2018 957 937,930
Freddie Mac, 5.5%, 2019-2034 1,338 1,336,461
Freddie Mac, 6%, 2033-2034 304 310,561
Ginnie Mae, 7.5%, 2023-2024 110 119,142
Ginnie Mae, 6.5%, 2028 370 387,351
Ginnie Mae, 6%, 2033-2034 914 937,501
Ginnie Mae, 5.5%, 2033 1,679 1,680,369
-------------
$ 26,034,200
-------------
NATURAL GAS -- DISTRIBUTION -- 0%
CenterPoint Energy Resources Corp.,
7.875%, 2013 $ 65 $ 72,729
-------------
NATURAL GAS -- PIPELINE -- 0.2%
Kinder Morgan Energy Partners LP,
6.75%, 2011 $ 315 $ 339,278
Kinder Morgan Energy Partners LP,
7.75%, 2032 117 129,817
-------------
$ 469,095
-------------
PHARMACEUTICALS -- 0%
Wyeth, 6.5%, 2034 $ 96 $ 90,484
-------------
POLLUTION CONTROL -- 0.3%
Waste Management, Inc., 7.375%, 2010 $ 508 $ 570,754
-------------
PRINTING & PUBLISHING -- 0.1%
Belo Corp., 7.75%, 2027 $ 226 $ 251,571
-------------
REAL ESTATE -- 0.2%
Boston Properties, Inc., 5%, 2015 $ 42 $ 38,946
EOP Operating LP, 6.8%, 2009 29 31,387
Vornado Realty Trust, 5.625%, 2007 383 405,184
-------------
$ 475,517
-------------
TELECOMMUNICATIONS -- WIRELESS -- 0.1%
AT&T Wireless Services, Inc., 7.35%, 2006 $ 107 $ 114,179
-------------
TELECOMMUNICATIONS -- WIRELINE -- 0.6%
ALLTEL Corp., 7.875%, 2032 $ 127 $ 146,931
Citizens Communications Co.,
8.5%, 2006 125 133,177
Citizens Communications Co.,
7.625%, 2008 94 97,038
Sprint Capital Corp., 6.875%, 2028 124 119,195
Telecomunicaciones de Puerto Rico,
Inc., 6.65%, 2006 270 285,238
Verizon New York, Inc., 6.875%, 2012 486 521,047
-------------
$ 1,302,626
-------------
U.S. GOVERNMENT AGENCIES -- 4.8%
Fannie Mae, 2.5%, 2006 $ 360 $ 356,557
Fannie Mae, 5.25%, 2007 1,147 1,199,989
Fannie Mae, 6.625%, 2009-2010 4,434 4,917,819
Fannie Mae, 5.125%, 2014 299 290,976
Federal Home Loan Bank, 2.875%, 2006 365 363,402
Federal Home Loan Bank, 5.25%, 2014 390 392,094
Freddie Mac, 2.875%, 2006 1,405 1,391,308
Freddie Mac, 6%, 2011 94 100,933
Small Business Administration,
4.35%, 2023 51 48,206
Small Business Administration,
4.77%, 2024 123 118,920
Small Business Administration,
5.18%, 2024 200 198,591
Small Business Administration,
5.52%, 2024 283 286,247
-------------
$ 9,665,042
-------------
U.S. TREASURY OBLIGATIONS -- 6.6%
U.S. Treasury Bonds, 4.25%, 2010 $ 747 $ 855,507
U.S. Treasury Bonds, 8%, 2021 703 921,424
U.S. Treasury Bonds, 6.25%, 2023 2,489 2,756,179
U.S. Treasury Bonds, 5.375%, 2031 623 628,330
U.S. Treasury Notes, 1.625%, 2005 52 51,898
U.S. Treasury Notes, 6.5%, 2005 978 1,015,439
U.S. Treasury Notes, 1.25%, 2005 387 384,309
U.S. Treasury Notes, 5.75%, 2005 665 695,315
U.S. Treasury Notes, 7%, 2006 2,545 2,757,449
U.S. Treasury Notes, 4.375%, 2007 146 150,905
U.S. Treasury Notes, 4%, 2009 23 23,197
</Table>
22
<Page>
<Table>
<Caption>
PAR AMOUNT
ISSUER (000 OMITTED) VALUE
BONDS -- continued
U.S. BONDS -- continued
U.S. TREASURY OBLIGATIONS -- continued
U.S. Treasury Notes, 3%, 2012 $ 1,167 $ 1,261,385
U.S. Treasury Notes, 3.875%, 2013 303 289,661
U.S. Treasury Notes, 4.75%, 2014 1,417 1,431,779
-------------
$ 13,222,777
-------------
UTILITIES -- ELECTRIC POWER -- 1.6%
DTE Energy Co., 7.05%, 2011 $ 238 $ 257,983
Exelon Generation Co. LLC, 6.95%, 2011 77 84,310
FirstEnergy Corp., 6.45%, 2011 147 152,404
MidAmerican Energy Holdings Co.,
3.5%, 2008 118 113,822
MidAmerican Energy Holdings Co.,
5.875%, 2012 61 61,940
MidAmerican Funding LLC,
6.927%, 2029 454 479,921
Niagara Mohawk Power Corp.,
7.75%, 2006 1 1,081
Northeast Utilities, 8.58%, 2006 155 163,376
Oncor Electric Delivery Co., 7%, 2022 240 256,802
PSEG Power LLC, 6.95%, 2012 124 134,836
PSEG Power LLC, 8.625%, 2031 91 111,148
Pacific Gas & Electric Co., 4.8%, 2014 125 118,443
Progress Energy, Inc., 7.1%, 2011 69 75,610
Progress Energy, Inc., 6.85%, 2012 195 210,721
System Energy Resources, Inc.,
5.129%, 2014 ## 116 114,026
System Energy Resources, Inc.,
8.09%, 2017 339 373,703
TXU Energy Co., 7%, 2013 75 81,671
Toledo Edison Co., 7.875%, 2004 320 321,300
-------------
$ 3,113,097
-------------
Total U.S. Bonds $ 72,622,181
-------------
FOREIGN BONDS -- 1.3%
CANADA -- 0.2%
EnCana Holdings Finance Corp.,
5.8%, 2014 (Energy -- Independent) $ 98 $ 100,083
Hydro-Quebec, 6.3%, 2011
(International Market Agencies) 262 285,338
TELUS Corp., 8%, 2011
(Telecommunications -- Wireline) 52 59,101
-------------
$ 444,522
-------------
CAYMAN ISLANDS -- 0.1%
DBS Capital Funding Corp., 7.657%, 2049
(Banks & Credit Companies) ## $ 170 $ 189,827
-------------
FRANCE -- 0%
France Telecom S.A., 8.75%, 2011
(Telecommunications -- Wireline) $ 85 $ 98,500
-------------
GERMANY -- 0.1%
Deutsche Telekom International
Finance B.V., 8.75%, 2030
(Telecommunications -- Wireline) $ 152 $ 185,005
-------------
HONG KONG -- 0.1%
PCCW-HKTC Capital II Ltd., 6%, 2013
(Telecommunications -- Wireline) ## $ 150 $ 148,283
-------------
ISRAEL -- 0%
State of Israel, 4.625%, 2013
(International Market Sovereign) $ 112 $ 103,305
-------------
ITALY -- 0.2%
Republic of Italy, 4.625%, 2005
(International Market Sovereign) $ 363 $ 371,909
-------------
LUXEMBOURG -- 0.1%
Telecom Italia S.P.A., 5.25%, 2013
(Telecommunications -- Wireline) $ 246 $ 238,090
-------------
MEXICO -- 0.3%
Pemex Project Funding Master Trust,
7.375%, 2014 (Oil Services) $ 316 $ 322,320
Pemex Project Funding Master Trust,
8.625%, 2022 (Oil Services) 39 40,560
United Mexican States, 8.125%, 2019
(Emerging Market Sovereign) 85 90,950
United Mexican States, 8%, 2022
(Emerging Market Sovereign) 55 57,118
-------------
$ 510,948
-------------
UNITED KINGDOM -- 0.2%
Cadbury Schweppes U.S. Finance,
5.125%, 2013 (Food & Non-Alcoholic
Beverages) ## $ 270 $ 263,674
HBOS Capital Funding LP, 6.071%, 2049
(Banks & Credit Companies) 100 100,399
-------------
$ 364,073
-------------
Total Foreign Bonds $ 2,654,462
-------------
Total Bonds (Identified Cost, $74,850,721) $ 75,276,643
-------------
SHORT-TERM OBLIGATION -- 1.5%
General Electric Capital Corp., 1.48%,
due 7/01/04, at Amortized Cost $ 2,947 $ 2,947,000
-------------
Total Investments
(Identified Cost, $186,962,810) $ 199,375,876
-------------
OTHER ASSETS,
LESS LIABILITIES -- 0.3% 582,822
-------------
Net Assets -- 100.0% $ 199,958,698
=============
</Table>
See notes to financial statements.
PORTFOLIO FOOTNOTES:
* Non-income producing security.
** Non-income producing security - in default.
# Regulation S security.
## SEC Rule 144A restriction.
### Security segregated as collateral for open futures contracts.
~ As of June 30, 2004 the High Yield Variable Account had 1 security
representing $93,600 and 0.13% of net assets that was fair valued in
accordance with the policies adopted by the Board of Trustees.
Abbreviations have been used throughout this report to indicate amounts shown in
currencies other than the U.S. dollar. A list of abbreviations is shown below.
AUD=Australian Dollar JPY=Japanese Yen
CAD=Canadian Dollar KRW=Korean Won
CHF=Swiss Franc NOK=Norwegian Kroner
DKK=Danish Krone NZD=New Zealand Dollar
EUR=Euro PLN=Polish Zloty
GBP=British Pound SEK=Swedish Krona
23
<Page>
STATEMENTS OF ASSETS AND LIABILITIES (Unaudited) -- June 30, 2004
(000 Omitted)
<Table>
<Caption>
CAPITAL GLOBAL GOVERNMENT HIGH MANAGED MONEY TOTAL
APPRECIATION GOVERNMENTS SECURITIES YIELD SECTORS MARKET RETURN
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------------ ----------- ---------- -------- -------- -------- ---------
Assets:
Investments
Investments cost $ 269,973 $ 10,970 $ 103,164 $ 73,631 $ 55,588 $ 47,090 $ 186,963
Unrealized appreciation (depreciation) 24,343 191 929 (2,559) 7,887 -- 12,413
Repurchase agreements, at value 7,502 433 2,068 -- 1,163 9,011 --
------------ ----------- ---------- -------- -------- -------- ---------
Total investments, at value $ 301,818 $ 11,594 $ 106,161 $ 71,072 $ 64,638 $ 56,101 $ 199,376
Cash $ 1 $ 1 $ 0* $ 0* $ 1 $ 0* $ 15
Receivable for forward foreign currency
exchange contracts -- 38 -- 3 -- -- --
Receivable for forward currency exchange
contracts subject to master netting
agreements -- 4 -- -- -- -- --
Receivable for investments sold 3,794 211 -- 881 1,945 -- 630
Receivable for units sold 92 1 5 1 9 4 9
Interest and dividends receivable 175 232 970 1,369 32 2 941
Receivable from sponsor 30 0* -- 4 -- 54 --
Other assets 4 0* 2 1 1 13 2
------------ ----------- ---------- -------- -------- -------- ---------
Total assets $ 305,914 $ 12,081 $ 107,138 $ 73,331 $ 66,626 $ 56,174 $ 200,973
============ =========== ========== ======== ======== ======== =========
Liabilities:
Payable for forward foreign currency
exchange contracts $ -- $ 17 $ -- $ 14 $ -- $ -- $ --
Payable for daily variation margin on
open futures contracts -- -- 2 -- -- -- --
Payable for investments purchased 2,343 324 -- 537 1,496 -- 895
Payable for units surrendered 111 5 53 152 31 5 80
Payable to affiliates --
Investment adviser 6 0* 2 1 1 -- 4
Administrative fee 0* 0* 0* 0* 0* 0* 0*
Sponsor -- -- 30 -- 0* -- 12
Accrued expenses and other liabilities 24 17 28 28 12 14 23
------------ ----------- ---------- -------- -------- -------- ---------
Total liabilities $ 2,484 $ 363 $ 115 $ 732 $ 1,540 $ 19 $ 1,014
------------ ----------- ---------- -------- -------- -------- ---------
Net assets $ 303,430 $ 11,718 $ 107,023 $ 72,599 $ 65,086 $ 56,155 $ 199,959
============ =========== ========== ======== ======== ======== =========
</Table>
* Amount less than $500.
See notes to financial statements.
24
<Page>
(000 Omitted except for unit values)
<Table>
<Caption>
CAPITAL GLOBAL GOVERNMENT HIGH MANAGED MONEY TOTAL
APPRECIATION GOVERNMENTS SECURITIES YIELD SECTORS MARKET RETURN
UNIT VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
UNIT VALUE ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
----- -------- ------------ ----------- ---------- -------- -------- -------- ---------
Net assets applicable to
contract owners:
Capital Appreciation Variable
Account --
Compass 2 3,766 $ 52.265 $ 196,995
Compass 3 514 34.479 17,703
Compass 3 - Level 2 5,964 14.341 85,534
Global Governments Variable
Account --
Compass 2 138 $ 24.556 $ 3,380
Compass 3 34 23.962 831
Compass 3 - Level 2 530 14.045 7,442
Government Securities Variable
Account --
Compass 2 2,230 $ 36.305 $ 80,923
Compass 3 124 25.374 3,135
Compass 3 - Level 2 1,448 14.848 21,500
High Yield Variable Account --
Compass 2 1,672 $ 33.828 $ 56,545
Compass 3 86 24.868 2,137
Compass 3 - Level 2 962 13.300 12,792
Managed Sectors Variable
Account --
Compass 2 378 $ 41.914 $ 15,851
Compass 3 176 41.190 7,239
Compass 3 - Level 2 3,133 13.339 41,802
Money Market Variable
Account --
Compass 2 1,181 $ 20.096 $ 23,669
Compass 3 118 16.470 1,925
Compass 3 - Level 2 2,422 12.337 29,876
Total Return Variable
Account --
Compass 2 1,589 $ 42.377 $ 67,372
Compass 3 387 41.354 15,957
Compass 3 - Level 2 5,733 19.979 114,538
------------ ----------- ---------- -------- -------- -------- ---------
Net assets applicable to
owners of deferred
contracts 300,232 11,653 105,558 71,474 64,892 55,470 197,867
Reserve for variable
annuities --
Compass 2 Contracts 2,888 17 1,409 1,082 87 568 1,315
Compass 3 Contracts 1 40 -- 2 20 16 162
Compass 3 - Level 2
Contracts 309 8 56 41 87 101 615
------------ ----------- ---------- -------- -------- -------- ---------
Net assets $ 303,430 $ 11,718 $ 107,023 $ 72,599 $ 65,086 $ 56,155 $ 199,959
============ =========== ========== ======== ======== ======== =========
</Table>
See notes to financial statements.
25
<Page>
STATEMENTS OF OPERATIONS (Unaudited) -- Six Months Ended June 30, 2004
(000 Omitted)
<Table>
<Caption>
CAPITAL GLOBAL GOVERNMENT HIGH MANAGED MONEY TOTAL
APPRECIATION GOVERNMENTS SECURITIES YIELD SECTORS MARKET RETURN
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------------ ----------- ---------- -------- -------- -------- ---------
Net investment income (loss):
Income
Interest $ 40 $ 215 $ 2,658 $ 3,399 $ 1 $ 257 $ 2,030
Dividends 1,301 -- -- 4 250 -- 1,215
------------ ----------- ---------- -------- -------- -------- ---------
Total investment income $ 1,341 $ 215 $ 2,658 $ 3,403 $ 251 $ 257 $ 3,245
------------ ----------- ---------- -------- -------- -------- ---------
Expenses
Mortality and expense risk charges $ 1,960 $ 78 $ 709 $ 529 $ 412 $ 305 $ 1,252
Management fee 1,158 47 308 315 249 121 762
Boards of Managers fees 24 1 10 7 5 3 16
Distribution fee 14 1 2 2 6 2 13
Administrative fee 22 1 8 6 5 3 15
Custodian fee 50 7 14 14 13 6 34
Printing 27 3 11 12 11 9 15
Auditing fees 15 18 16 20 15 8 22
Legal fees 5 4 5 4 4 5 4
Miscellaneous 4 0* 6 0* 1 7 7
------------ ----------- ---------- -------- -------- -------- ---------
Total expenses $ 3,279 $ 160 $ 1,089 $ 909 $ 721 $ 469 $ 2,140
Fees paid indirectly (2) (0)* (1) (2) (1) -- (0)*
Reduction of expenses by investment
adviser -- (3) -- -- -- -- --
------------ ----------- ---------- -------- -------- -------- ---------
Net expenses $ 3,277 $ 157 $ 1,088 $ 907 $ 720 $ 469 $ 2,140
------------ ----------- ---------- -------- -------- -------- ---------
Net investment income (loss) $ (1,936) $ 58 $ 1,570 $ 2,496 $ (469) $ (212) $ 1,105
------------ ----------- ---------- -------- -------- -------- ---------
Realized and unrealized gain (loss) on
investments:
Realized gain (loss) (identified cost
basis)--
Investment transactions** $ 14,982 $ 693 $ 1,060 $ (638) $ 3,221 $ -- $ 9,282
Written option transactions -- 3 -- -- -- -- --
Futures contracts -- 11 -- -- -- -- --
Foreign currency transactions 2 (26) -- (21) -- -- 0*
------------ ----------- ---------- -------- -------- -------- ---------
Net realized gain (loss) on
investments and foreign currency
transactions $ 14,984 $ 681 $ 1,060 $ (659) $ 3,221 $ -- $ 9,282
------------ ----------- ---------- -------- -------- -------- ---------
Change in unrealized appreciation
(depreciation)--
Investments $ (4,187) $ (1,126) $ (3,075) $ (2,603) $ (2,142) $ -- $ (6,429)
Futures contracts -- 1 3 -- -- -- --
Translation of assets and liabilities
in foreign currencies (1) 75 -- 45 -- -- --
------------ ----------- ---------- -------- -------- -------- ---------
Net unrealized loss on investments
and foreign currency translation $ (4,188) $ (1,050) $ (3,072) $ (2,558) $ (2,142) $ -- $ (6,429)
------------ ----------- ---------- -------- -------- -------- ---------
Net realized and unrealized gain
(loss) on investments and foreign
currency $ 10,796 $ (369) $ (2,012) $ (3,217) $ 1,079 $ -- $ 2,853
------------ ----------- ---------- -------- -------- -------- ---------
Increase (decrease) in net assets
from operations $ 8,860 $ (311) $ (442) $ (721) $ 610 $ (212) $ 3,958
============ =========== ========== ======== ======== ======== =========
</Table>
* Amount less than $500.
** Includes proceeds received from a non-recurring cash settlement in the amount
of $33,833 from a class-action lawsuit against Rite Aid Corporation for the
Capital Appreciation Variable Account and the remaining proceeds received
from a non-recurring cash settlement in the amount of $622,626 and $14,555
from a class-action lawsuit against Cendant Corporation for the Capital
Appreciation Variable Account and Managed Sectors Variable Account,
respectively.
See notes to financial statements.
26
<Page>
STATEMENTS OF CHANGES IN NET ASSETS
(000 Omitted)
<Table>
<Caption>
CAPITAL APPRECIATION GLOBAL GOVERNMENTS
VARIABLE ACCOUNT VARIABLE ACCOUNT
----------------------------- -----------------------------
SIX MONTHS SIX MONTHS
ENDED YEAR ENDED ENDED YEAR ENDED
JUNE 30, 2004 DECEMBER 31, JUNE 30, 2004 DECEMBER 31,
(UNAUDITED) 2003 (UNAUDITED) 2003
------------- ------------ ------------- ------------
Increase (decrease) in net assets:
From operations:
Net investment income (loss) $ (1,936) $ (3,503) $ 58 $ 158
Net realized gain (loss) on investments
and foreign currency transactions 14,984 (458) 681 1,009
Net unrealized gain (loss) on investments
and foreign currency translation (4,188) 74,556 (1,050) 500
------------- ------------ ------------- ------------
Increase (decrease) in net assets from operations $ 8,860 $ 70,595 $ (311) $ 1,667
------------- ------------ ------------- ------------
Participant transactions:
Accumulation activity:
Purchase payments received $ 3,853 $ 7,367 $ 205 $ 357
Net transfers between variable and fixed
accumulation accounts (693) (4,305) (351) 621
Withdrawals, surrenders, annuitizations and
contract charges (22,775) (30,559) (1,019) (1,497)
------------- ------------ ------------- ------------
Net accumulation activity $ (19,615) $ (27,497) $ (1,165) $ (519)
------------- ------------ ------------- ------------
Annuitization activity:
Annuitizations $ -- $ 13 $ -- $ --
Annuity payments and contract charges (172) (469) (3) (6)
Net transfers among accounts for annuity reserves (1) (792) 0* (118)
Adjustments to annuity reserves 32 625 0* 111
------------- ------------ ------------- ------------
Net annuitization activity $ (141) $ (623) $ (3) $ (13)
------------- ------------ ------------- ------------
Decrease in net assets from participant
transactions $ (19,756) $ (28,120) $ (1,168) $ (532)
------------- ------------ ------------- ------------
Total increase (decrease) in net assets $ (10,896) $ 42,475 $ (1,479) $ 1,135
Net assets:
At beginning of period 314,326 271,851 13,197 12,062
------------- ------------ ------------- ------------
At end of period $ 303,430 $ 314,326 $ 11,718 $ 13,197
============= ============ ============= ============
<Caption>
GOVERNMENT SECURITES
VARIABLE ACCOUNT
-----------------------------
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, 2004 DECEMBER 31,
(UNAUDITED) 2003
------------- ------------
Increase (decrease) in net assets:
From operations:
Net investment income (loss) $ 1,570 $ 2,660
Net realized gain (loss) on investments
and foreign currency transactions 1,060 1,504
Net unrealized gain (loss) on investments
and foreign currency translation (3,072) (2,844)
------------- ------------
Increase (decrease) in net assets from operations $ (442) $ 1,320
------------- ------------
Participant transactions:
Accumulation activity:
Purchase payments received $ 878 $ 2,312
Net transfers between variable and fixed
accumulation accounts (3,680) (2,752)
Withdrawals, surrenders, annuitizations and
contract charges (7,442) (14,350)
------------- ------------
Net accumulation activity $ (10,244) $ (14,790)
------------- ------------
Annuitization activity:
Annuitizations $ -- $ 11
Annuity payments and contract charges (180) (504)
Net transfers among accounts for annuity reserves (81) (388)
Adjustments to annuity reserves (35) 480
------------- ------------
Net annuitization activity $ (296) $ (401)
------------- ------------
Decrease in net assets from participant
transactions $ (10,540) $ (15,191)
------------- ------------
Total increase (decrease) in net assets $ (10,982) $ (13,871)
Net assets:
At beginning of period 118,005 131,876
------------- ------------
At end of period $ 107,023 $ 118,005
============= ============
</Table>
* Amount less than $500.
See notes to financial statements.
27
<Page>
<Table>
<Caption>
HIGH YIELD MANAGED SECTORS
VARIABLE ACCOUNT VARIABLE ACCOUNT
----------------------------- ------------------------------
SIX MONTHS SIX MONTHS
ENDED YEAR ENDED ENDED YEAR ENDED
JUNE 30, 2004 DECEMBER 31, JUNE 30, 2004 DECEMBER 31,
(UNAUDITED) 2003 (UNAUDITED) 2003
------------- ------------ ------------- ------------
Increase (decrease) in net assets:
From operations:
Net investment income (loss) $ 2,496 $ 5,943 $ (469) $ (779)
Net realized gain (loss) on investments and foreign
currency transactions (659) (1,399) 3,221 2,925
Net unrealized gain (loss) on investments and foreign
currency translation (2,558) 11,526 (2,142) 10,825
------------- ------------ ------------- ------------
Increase (decrease) in net assets from operations $ (721) $ 16,070 $ 610 $ 12,971
------------- ------------ ------------- ------------
Participant transactions:
Accumulation activity:
Purchase payments received $ 545 $ 1,245 $ 1,388 $ 3,037
Net transfers between variable and fixed accumulation accounts (23,517) 1,632 194 (169)
Withdrawals, surrenders, annuitizations and contract charges (5,126) (11,148) (5,150) (7,142)
------------- ------------ ------------- ------------
Net accumulation activity $ (28,098) $ (8,271) $ (3,568) $ (4,274)
------------- ------------ ------------- ------------
Annuitization activity:
Annuitizations $ -- $ -- $ -- $ --
Annuity payments and contract charges (88) (229) (22) (42)
Net transfers among accounts for annuity reserves 2 (363) 0* (53)
Adjustments to annuity reserves 3 106 0* 52
------------- ------------ ------------- ------------
Net annuitization activity $ (83) $ (486) $ (22) $ (43)
------------- ------------ ------------- ------------
Decrease in net assets from participant transactions $ (28,181) $ (8,757) $ (3,590) $ (4,317)
------------- ------------ ------------- ------------
Total increase (decrease) in net assets $ (28,902) $ 7,313 $ (2,980) $ 8,654
Net assets:
At beginning of period 101,501 94,188 68,066 59,412
------------- ------------ ------------- ------------
At end of period $ 72,599 $ 101,501 $ 65,086 $ 68,066
============= ============ ============= ============
</Table>
* Amount less than $500.
See notes to financial statements.
28
<Page>
<Table>
<Caption>
MONEY MARKET TOTAL RETURN
VARIABLE ACCOUNT VARIABLE ACCOUNT
----------------------------- ------------------------------
SIX MONTHS SIX MONTHS
ENDED YEAR ENDED ENDED YEAR ENDED
JUNE 30, 2004 DECEMBER 31, JUNE 30, 2004 DECEMBER 31,
(UNAUDITED) 2003 (UNAUDITED) 2003
------------- ------------ ------------- ------------
Increase (decrease) in net assets:
From operations:
Net investment income (loss) $ (212) $ (329) $ 1,105 $ 2,186
Net realized gain on investments and foreign
currency transactions -- -- 9,282 333
Net unrealized gain (loss) on investments and foreign
currency translation -- -- (6,429) 26,254
------------- ------------ ------------- ------------
Increase (decrease) in net assets from operations $ (212) $ (329) $ 3,958 $ 28,773
------------- ------------ ------------- ------------
Participant transactions:
Accumulation activity:
Purchase payments received $ 971 $ 2,440 $ 2,858 $ 5,581
Net transfers between variable and fixed accumulation accounts 23,600 (1,613) 2,314 596
Withdrawals, surrenders, annuitizations and contract charges (6,103) (13,195) (16,271) (24,545)
------------- ------------ ------------- ------------
Net accumulation activity $ 18,468 $ (12,368) $ (11,099) $ (18,368)
------------- ------------ ------------- ------------
Annuitization activity:
Annuitizations $ -- $ 121 $ -- $ 259
Annuity payments and contract charges (47) (148) (229) (444)
Net transfers among accounts for annuity reserves 88 (376) 8 (302)
Adjustments to annuity reserves 50 349 (14) 61
------------- ------------ ------------- ------------
Net annuitization activity $ 91 $ (54) $ (235) $ (426)
------------- ------------ ------------- ------------
Increase (decrease) in net assets from participant transactions $ 18,559 $ (12,422) $ (11,334) $ (18,794)
------------- ------------ ------------- ------------
Total increase (decrease) in net assets $ 18,347 $ (12,751) $ (7,376) $ 9,979
Net assets:
At beginning of period 37,808 50,559 207,335 197,356
------------- ------------ ------------- ------------
At end of period $ 56,155 $ 37,808 $ 199,959 $ 207,335
============= ============ ============= ============
</Table>
See notes to financial statements.
29
<Page>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the variable
accounts' financial performance for the semiannual period and the past 5 fiscsal
years (or, if shorter, the period of the variable accounts' operation). Certain
information reflects financial results for a single unit value. The total
returns in the table represent the rate by which an investor would have earned
(or lost) on an investment in the variable account (assuming reinvestment of all
distributions) held for the entire period.
<Table>
<Caption>
CAPITAL APPRECIATION VARIABLE ACCOUNT
--------------------------------------------------------
COMPASS 2
--------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 2004 -------------------------------
(UNAUDITED) 2003 2002
---------------- ------------ ------------
Per unit data:*
Net asset value -- beginning of period $ 50.814 $ 39.859 $ 59.446
---------------- ------------ ------------
Investment income $ 0.226 $ 0.402 $ 0.369
Expenses (0.554) (0.951) (1.002)
---------------- ------------ ------------
Net investment loss $ (0.328) $ (0.549) $ (0.633)
Net realized and unrealized gain (loss) on investments
and foreign currency transactions 1.779 11.504 (18.954)
---------------- ------------ ------------
Net increase (decrease) in unit value $ 1.451 $ 10.955 $ (19.587)
---------------- ------------ ------------
Unit value:
Net asset value -- end of period $ 52.265 $ 50.814 $ 39.859
================ ============ ============
Total Return 2.86%#+++^^ 27.48%+++^ (32.95)%+++
Ratios (to average net assets):
Expenses## 2.14%++ 2.12% 2.12%
Net investment loss (1.25)%++ (1.20)% (1.36)%
Portfolio turnover 31% 104% 80%
Number of units outstanding at end of period (000 Omitted) 3,766 4,040 4,521
<Caption>
CAPITAL APPRECIATION VARIABLE ACCOUNT
--------------------------------------------------------
COMPASS 2
--------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2001 2000 1999
---------------- ------------ ------------
Per unit data:*
Net asset value -- beginning of period $ 80.578 $ 92.242 $ 70.426
---------------- ------------ ------------
Investment income $ 0.598 $ 0.907 $ 0.401
Expenses (1.401) (1.920) (1.519)
---------------- ------------ ------------
Net investment loss $ (0.803) $ (1.013) $ (1.118)
Net realized and unrealized gain (loss) on investments
and foreign currency transactions (20.329) (10.651) 22.934
---------------- ------------ ------------
Net increase (decrease) in unit value $ (21.132) $ (11.664) $ 21.816
---------------- ------------ ------------
Unit value:
Net asset value -- end of period $ 59.446 $ 80.578 $ 92.242
================ ============ ============
Total Return (26.22)%+++ -- --
Ratios (to average net assets):
Expenses## 0.79%+ 0.76%+ 0.76%+
Net investment loss (1.19)%+ (1.08)%+ (1.51)%+
Portfolio turnover 123% 140% 85%
Number of units outstanding at end of period (000 Omitted) 5,340 5,818 6,403
</Table>
<Table>
<Caption>
CAPITAL APPRECIATION VARIABLE ACCOUNT
--------------------------------------------------------
COMPASS 3
--------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 2004 -------------------------------
(UNAUDITED) 2003 2002
---------------- ------------ ------------
Per unit data:*
Net asset value -- beginning of period $ 33.539 $ 26.334 $ 39.314
---------------- ------------ ------------
Investment income $ 0.146 $ 0.260 $ 0.240
Expenses (0.379) (0.648) (0.688)
---------------- ------------ ------------
Net investment loss $ (0.233) $ (0.388) $ (0.448)
Net realized and unrealized gain (loss) on investments
and foreign currency transactions 1.173 7.593 (12.532)
---------------- ------------ ------------
Net increase (decrease) in unit value $ 0.940 $ 7.205 $ (12.980)
---------------- ------------ ------------
Unit value:
Net asset value -- end of period $ 34.479 $ 33.539 $ 26.334
================ ============ ============
Total Return 2.80%#+++^^ 27.36%+++^ (33.02)%+++
Ratios (to average net assets):
Expenses## 2.24%++ 2.22% 2.22%
Net investment loss (1.37)%++ (1.31)% (1.42)%
Portfolio turnover 31% 104% 80%
Number of units outstanding at end of period (000 Omitted) 514 621 812
<Caption>
CAPITAL APPRECIATION VARIABLE ACCOUNT
--------------------------------------------------------
COMPASS 3
--------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2001 2000 1999
---------------- ------------ ------------
Per unit data:*
Net asset value -- beginning of period $ 53.342 $ 61.123 $ 46.713
---------------- ------------ ------------
Investment income $ 0.417 $ 0.581 $ 0.261
Expenses (1.025) (1.317) (1.042)
---------------- ------------ ------------
Net investment loss $ (0.608) $ (0.736) $ (0.781)
Net realized and unrealized gain (loss) on investments
and foreign currency transactions (13.420) (7.045) 15.191
---------------- ------------ ------------
Net increase (decrease) in unit value $ (14.028) $ (7.781) $ 14.410
---------------- ------------ ------------
Unit value:
Net asset value -- end of period $ 39.314 $ 53.342 $ 61.123
================ ============ ============
Total Return (26.30)%+++ -- --
Ratios (to average net assets):
Expenses## 0.79%+ 0.76%+ 0.76%+
Net investment loss (1.19)%+ (1.08)%+ (1.51)%+
Portfolio turnover 123% 140% 85%
Number of units outstanding at end of period (000 Omitted) 999 1,327 1,824
</Table>
* Per unit data are based on the average number of units outstanding during
each year.
+ Excluding mortality and expense risk charges and distribution expense
charges.
++ Annualized
+++ The total return does not reflect load fees in conjuction with the
redemption of units.
# Not Annualized.
## Ratios do not reflect reductions from fees paid indirectly.
^ The account's total return calculation includes proceeds received on March
26, 2003 for the partial payment of a non-recurring litigation settlement
from Cendant Corporation, recorded as a realized gain on investment
transactions. The proceeds resulted in an increase in the net asset value of
$0.900 and $0.594 per unit for Compass 2 and Compass 3, respectively, based
on units outstanding on the day the proceeds were received. Excluding the
effect of this payment from the account's ending net asset value per unit,
total return per unit value for the year ended Decemeber 31, 2003 would have
been 25.24% and 25.12%, for Compass 2 and Compass 3, respectively.
^^ The account's total return calculation includes proceeds received on
February 18, 2004 from a non-recurring litigation settlement from Rite Aid
Corporation and on March 19, 2004 for the remaining payment of a
non-recurring litigation settlement from Cendant Corporation, recorded as a
realized gain on investment transactions. The proceeds resulted in an
increase in the net asset value of $0.108 and $0.071 per unit for Compass 2
and Compass 3, respectively, based on units outstanding on the days the
proceeds were received. Excluding the effect of these payments from the
account's ending net asset value per unit, total return for the six months
ended June 30, 2004 would have been 2.64% and 2.59%, for Compass 2 and
Compass 3, respectively.
See notes to financial statements.
30
<Page>
<Table>
<Caption>
CAPITAL APPRECIATION VARIABLE ACCOUNT
--------------------------------------------------------
COMPASS 3 - LEVEL 2
--------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 2004 -------------------------------
(UNAUDITED) 2003 2002
---------------- ------------ ------------
Per unit data:*
Net asset value -- beginning of period $ 13.940 $ 10.929 $ 16.292
---------------- ------------ ------------
Investment income $ 0.062 $ 0.109 $ 0.100
Expenses (0.149) (0.254) (0.260)
---------------- ------------ ------------
Net investment loss $ (0.087) $ (0.145) $ (0.160)
Net realized and unrealized gain (loss) on investments
and foreign currency transactions 0.488 3.156 (5.203)
---------------- ------------ ------------
Net increase (decrease) in unit value $ 0.401 $ 3.011 $ (5.363)
---------------- ------------ ------------
Unit value:
Net asset value -- end of period $ 14.341 $ 13.940 $ 10.929
================ ============ ============
Total Return 2.88%#+++^^ 27.55%+++^ (32.92)%+++
Ratios (to average net assets):
Expenses## 2.09%++ 2.07% 2.07%
Net investment loss (1.22)%++ (1.17)% (1.32)%
Portfolio turnover 31% 104% 80%
Number of units outstanding at end of period (000 Omitted) 5,964 6,086 6,148
<Caption>
CAPITAL APPRECIATION VARIABLE ACCOUNT
--------------------------------------------------------
COMPASS 3 - LEVEL 2
--------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2001 2000 1999
---------------- ------------ ------------
Per unit data:*
Net asset value -- beginning of period $ 22.072 $ 25.255 $ 19.272
---------------- ------------ ------------
Investment income $ 0.154 $ 0.247 $ 0.109
Expenses (0.357) (0.513) (0.409)
---------------- ------------ ------------
Net investment loss $ (0.203) $ (0.266) $ (0.300)
Net realized and unrealized gain (loss) on investments
and foreign currency transactions (5.577) (2.917) 6.283
---------------- ------------ ------------
Net increase (decrease) in unit value $ (5.780) $ (3.183) $ 5.983
---------------- ------------ ------------
Unit value:
Net asset value -- end of period $ 16.292 $ 22.072 $ 25.255
================ ============ ============
Total Return (26.19)%+++ -- --
Ratios (to average net assets):
Expenses## 0.79%+ 0.76%+ 0.76%+
Net investment loss (1.19)%+ (1.08)%+ (1.51)%+
Portfolio turnover 123% 140% 85%
Number of units outstanding at end of period (000 Omitted) 6,705 6,283 5,632
</Table>
* Per unit data are based on the average number of units outstanding during
each year.
+ Excluding mortality and expense risk charges and distribution expense
charges.
++ Annualized
+++ The total return does not reflect load fees in conjuction with the
redemption of units.
# Not Annualized.
## Ratios do not reflect reductions from fees paid indirectly.
^ The account's total return calculation includes proceeds received on March
26, 2003 for the partial payment of a non-recurring litigation settlement
from Cendant Corporation, recorded as a realized gain on investment
transactions. The proceeds resulted in an increase in the net asset value of
$0.247 per unit based on units outstanding on the day the proceeds were
received. Excluding the effect of this payment from the account's ending net
asset value per unit, total return per unit value for the year ended
December 31, 2003 would have been 25.30% for Compass 3 -- Level 2.
^^ The account's total return calculation includes proceeds received on
February 18, 2004 from a non-recurring litigation settlement from Rite Aid
Corporation and on March 19, 2004 for the remaining payment of a
non-recurring litigation settlement from Cendant Corporation, recorded as a
realized gain on investment transactions. The proceeds resulted in an
increase in the net asset value of $0.029 per unit based on units
outstanding on the days the proceeds were received. Excluding the effect of
these payments from the account's ending net asset value per unit, total
return for the six months ended June 30, 2004 would have been 2.67% for
Compass 3 -- Level 2.
See notes to financial statements.
31
<Page>
<Table>
<Caption>
GLOBAL GOVERNMENTS VARIABLE ACCOUNT
--------------------------------------------------------
COMPASS 2
--------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 2004 -------------------------------
(UNAUDITED) 2003 2002
---------------- ------------ ------------
Per unit data:*
Net asset value -- beginning of period $ 25.169 $ 22.125 $ 18.653
---------------- ------------ ------------
Investment income@@ $ 0.372 $ 0.877 $ 0.861
Expenses (0.275) (0.584) (0.486)
---------------- ------------ ------------
Net investment income@ $ 0.097 $ 0.293 $ 0.375
Net realized and unrealized gain (loss) on investments
and foreign currency transactions (0.710) 2.751 3.097
---------------- ------------ ------------
Net increase (decrease) in unit value $ (0.613) $ 3.044 $ 3.472
---------------- ------------ ------------
Unit value:
Net asset value -- end of period $ 24.556 $ 25.169 $ 22.125
================ ============ ============
Total Return (2.44)%#+++ 13.76%+++ 18.61%+++
Ratios (to average net assets):
Expenses## 2.50%++ 2.47% 2.50%
Net investment income@@ 0.89%++ 1.23% 1.73%
Portfolio turnover 80% 130% 126%
Number of units outstanding at end of period (000 Omitted) 138 161 160
<Caption>
GLOBAL GOVERNMENTS VARIABLE ACCOUNT
--------------------------------------------------------
COMPASS 2
--------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2001 2000 1999
---------------- ------------ ------------
Per unit data:*
Net asset value -- beginning of period $ 19.378 $ 19.459 $ 20.830
---------------- ------------ ------------
Investment income@@ $ 0.946 $ 1.144 $ 1.095
Expenses (0.500) (0.471) (0.479)
---------------- ------------ ------------
Net investment income@ $ 0.446 $ 0.673 $ 0.616
Net realized and unrealized gain (loss) on investments
and foreign currency transactions (1.171) (0.754) (1.987)
---------------- ------------ ------------
Net increase (decrease) in unit value $ (0.725) $ (0.081) $ (1.371)
---------------- ------------ ------------
Unit value:
Net asset value -- end of period $ 18.653 $ 19.378 $ 19.459
================ ============ ============
Total Return (3.74)%+++ -- --
Ratios (to average net assets):
Expenses## 1.28%+ 1.25%+ 1.11%+
Net investment income@@ 2.23%+ 3.50%+ 3.07%+
Portfolio turnover 72% 130% 172%
Number of units outstanding at end of period (000 Omitted) 134 167 212
</Table>
@ The investment adviser contractually agreed under a temporary expense
agreement to pay all of the account's operating expenses, exclusive of
mortality and expense risk fees; in excess of 1.25% of average daily net
assets. To the extent actual expenses were over this limitation net
investment income per unit and the ratios would have been:
<Table>
<Caption>
GLOBAL GOVERNMENTS VARIABLE ACCOUNT
--------------------------------------------------------
COMPASS 2
--------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 2004 -------------------------------
(UNAUDITED) 2003 2002
---------------- ------------ ------------
Net investment income@@ $ 0.092 $ -- $ 0.850
Ratios (to average net assets):
Expenses## 2.54%++ -- 2.44%
Net investment income@@ 0.85%++ -- 1.79%
<Caption>
GLOBAL GOVERNMENTS VARIABLE ACCOUNT
--------------------------------------------------------
COMPASS 2
--------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2001 2000 1999
---------------- ------------ ------------
Net investment income@@ $ 0.470 $ -- $ --
Ratios (to average net assets):
Expenses## 1.39%+ -- --
Net investment income@@ 2.12%+ -- --
</Table>
<Table>
<Caption>
GLOBAL GOVERNMENTS VARIABLE ACCOUNT
--------------------------------------------------------
COMPASS 3
--------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 2004 -------------------------------
(UNAUDITED) 2003 2002
---------------- ------------ ------------
Per unit data:*
Net asset value -- beginning of period $ 24.578 $ 21.638 $ 18.269
---------------- ------------ ------------
Investment income@@ $ 0.450 $ 0.869 $ 0.846
Expenses (0.344) (0.600) (0.511)
---------------- ------------ ------------
Net investment income@ $ 0.106 $ 0.269 $ 0.335
Net realized and unrealized gain (loss) on investments
and foreign currency transactions (0.722) 2.671 3.034
---------------- ------------ ------------
Net increase (decrease) in unit value $ (0.616) $ 2.940 $ 3.369
---------------- ------------ ------------
Unit value:
Net asset value -- end of period $ 23.962 $ 24.578 $ 21.638
================ ============ ============
Total Return (2.51)%#+++ 13.59%+++ 18.44%+++
Ratios (to average net assets):
Expenses## 2.65%++ 2.62% 2.65%
Net investment income@@ 0.80%++ 1.15% 1.77%
Portfolio turnover 80% 130% 126%
Number of units outstanding at end of period (000 Omitted) 34 41 58
<Caption>
GLOBAL GOVERNMENTS VARIABLE ACCOUNT
--------------------------------------------------------
COMPASS 3
--------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2001 2000 1999
---------------- ------------ ------------
Per unit data:*
Net asset value -- beginning of period $ 19.007 $ 19.115 $ 20.492
---------------- ------------ ------------
Investment income@@ $ 1.063 $ 1.103 $ 0.986
Expenses (0.579) (0.480) (0.442)
---------------- ------------ ------------
Net investment income@ $ 0.484 $ 0.623 $ 0.544
Net realized and unrealized gain (loss) on investments
and foreign currency transactions (1.222) (0.731) (1.921)
---------------- ------------ ------------
Net increase (decrease) in unit value $ (0.738) $ (0.108) $ (1.377)
---------------- ------------ ------------
Unit value:
Net asset value -- end of period $ 18.269 $ 19.007 $ 19.115
================ ============ ============
Total Return (3.88)%+++ -- --
Ratios (to average net assets):
Expenses## 1.28%+ 1.25%+ 1.11%+
Net investment income@@ 2.23%+ 3.50%+ 3.07%+
Portfolio turnover 72% 130% 172%
Number of units outstanding at end of period (000 Omitted) 68 108 186
</Table>
@ The investment adviser contractually agreed under a temporary expense
agreement to pay all of the account's operating expenses, exclusive of
mortality and expense risk fees; in excess of 1.25% of average daily net
assets. To the extent actual expenses were over this limitation net
investment income per unit and the ratios would have been:
<Table>
<Caption>
GLOBAL GOVERNMENTS VARIABLE ACCOUNT
--------------------------------------------------------
COMPASS 3
--------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 2004 -------------------------------
(UNAUDITED) 2003 2002
---------------- ------------ ------------
Net investment income@@ $ 0.101 $ -- $ 0.840
Ratios (to average net assets):
Expenses## 2.69%++ -- 2.56%
Net investment income@@ 0.76%++ -- 1.87%
<Caption>
GLOBAL GOVERNMENTS VARIABLE ACCOUNT
--------------------------------------------------------
COMPASS 3
--------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2001 2000 1999
---------------- ------------ ------------
Net investment income@@ $ 0.500 $ -- $ --
Ratios (to average net assets):
Expenses## 1.39%+ -- --
Net investment income@@ 2.12%+ -- --
</Table>
@@ As required, effective January 1, 2001 the account has adopted the
provisions of the AICPA Audit and Accounting Guide for Investment Companies
and began amortizing premium on debt securities. The effect of this change
for the year ended December 31, 2001 was to decrease net investment income
per unit by $0.080 and $0.080, respectively, increase net realized and
unrealized gains and losses per unit by $0.080 and $0.080, respectively, and
decrease the ratio of net investment income to average net assets by 0.41%
and 0.41%, respectively. Per unit, ratios, and supplemental data for periods
prior to January 1, 2001 have not been restated to reflect this change in
presentation.
* Per unit data are based on the average number of units outstanding during
each year.
+ Excluding mortality and expense risk charges and distribution expense
charges.
++ Annualized.
+++ The total return does not reflect load fees in conjunction with the
redemption of units.
# Not annualized.
## Ratios do not reflect reductions from fees paid indirectly.
See notes to financial statements.
32
<Page>
<Table>
<Caption>
GLOBAL GOVERNMENTS VARIABLE ACCOUNT
--------------------------------------------------------
COMPASS 3 - LEVEL 2
--------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 2004 -------------------------------
(UNAUDITED) 2003 2002
---------------- ------------ ------------
Per unit data:*
Net asset value -- beginning of period $ 14.396 $ 12.655 $ 10.669
---------------- ------------ ------------
Investment income@@ $ 0.235 $ 0.494 $ 0.499
Expenses (0.174) (0.331) (0.281)
---------------- ------------ ------------
Net investment income@ $ 0.061 $ 0.163 $ 0.218
Net realized and unrealized gain (loss) on investments
and foreign currency transactions (0.412) 1.578 1.768
---------------- ------------ ------------
Net increase (decrease) in unit value $ (0.351) $ 1.741 $ 1.986
---------------- ------------ ------------
Unit value:
Net asset value -- end of period $ 14.045 $ 14.396 $ 12.655
================ ============ ============
Total Return (2.44)%#+++ 13.76%+++ 18.61%+++
Ratios (to average net assets):
Expenses## 2.50%++ 2.47% 2.50%
Net investment income@@ 0.89%++ 1.21% 1.70%
Portfolio turnover 80% 130% 126%
Number of units outstanding at end of period (000 Omitted) 530 559 568
<Caption>
GLOBAL GOVERNMENTS VARIABLE ACCOUNT
--------------------------------------------------------
COMPASS 3 - LEVEL 2
--------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2001 2000 1999
---------------- ------------ ------------
Per unit data:*
Net asset value -- beginning of period $ 11.083 $ 11.130 $ 11.914
---------------- ------------ ------------
Investment income@@ $ 0.520 $ 0.654 $ 1.826
Expenses (0.274) (0.270) (0.782)
---------------- ------------ ------------
Net investment income@ $ 0.246 $ 0.384 $ 1.044
Net realized and unrealized gain (loss) on investments
and foreign currency transactions (0.660) (0.431) (1.828)
---------------- ------------ ------------
Net increase (decrease) in unit value $ (0.414) $ (0.047) $ (0.784)
---------------- ------------ ------------
Unit value:
Net asset value -- end of period $ 10.669 $ 11.083 $ 11.130
================ ============ ============
Total Return (3.74)%+++ -- --
Ratios (to average net assets):
Expenses## 1.28%+ 1.25%+ 1.11%+
Net investment income@@ 2.23%+ 3.50%+ 3.07%+
Portfolio turnover 72% 130% 172%
Number of units outstanding at end of period (000 Omitted) 574 619 641
</Table>
@ The investment adviser contractually agreed under a temporary expense
agreement to pay all of the account's operating expenses, exclusive of
mortality and expense risk fees; in excess of 1.25% of average daily net
assets. To the extent actual expenses were over this limitation net
investment income per unit and the ratios would have been:
<Table>
<Caption>
GLOBAL GOVERNMENTS VARIABLE ACCOUNT
--------------------------------------------------------
COMPASS 3 - LEVEL 2
--------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 2004 -------------------------------
(UNAUDITED) 2003 2002
---------------- ------------ ------------
Net investment income@@ $ 0.058 $ -- $ 0.490
Ratios (to average net assets):
Expenses## 2.54%++ -- 2.42%
Net investment income@@ 0.85%++ -- 1.78%
<Caption>
GLOBAL GOVERNMENTS VARIABLE ACCOUNT
--------------------------------------------------------
COMPASS 3 - LEVEL 2
--------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2001 2000 1999
---------------- ------------ ------------
Net investment income@@ $ 0.260 $ -- $ --
Ratios (to average net assets):
Expenses## 1.40%+ -- --
Net investment income@@ 2.12%+ -- --
</Table>
@@ As required, effective January 1, 2001 the account has adopted the
provisions of the AICPA Audit and Accounting Guide for Investment Companies
and began amortizing premium on debt securities. The effect of this change
for the year ended December 31, 2001 was to decrease net investment income
per unit by $0.040, increase net realized and unrealized gains and losses
per unit by $0.040, and decrease the ratio of net investment income to
average net assets by 0.41%. Per unit, ratios, and supplemental data for
periods prior to January 1, 2001 have not been restated to reflect this
change in presentation.
* Per unit data are based on the average number of units outstanding during
each year.
+ Excluding mortality and expense risk charges and distribution expense
charges.
++ Annualized.
+++ The total return does not reflect load fees in conjunction with the
redemption of units.
# Not annualized.
## Ratios do not reflect reductions from fees paid indirectly.
See notes to financial statements.
33
<Page>
<Table>
<Caption>
GOVERNMENT SECURITIES VARIABLE ACCOUNT
--------------------------------------------------------
COMPASS 2
--------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 2004 -------------------------------
(UNAUDITED) 2003 2002
---------------- ------------ ------------
Per unit data:*
Net asset value -- beginning of period $ 36.470 $ 36.124 $ 33.448
---------------- ------------ ------------
Investment income@@ $ 0.853 $ 1.482 $ 1.862
Expenses (0.350) (0.711) (0.677)
---------------- ------------ ------------
Net investment income $ 0.503 $ 0.771 $ 1.185
Net realized and unrealized gain (loss) on investments (0.668) (0.425) 1.491
---------------- ------------ ------------
Net increase (decrease) in unit value $ (0.165) $ 0.346 $ 2.676
---------------- ------------ ------------
Unit value:
Net asset value -- end of period $ 36.305 $ 36.470 $ 36.124
================ ============ ============
Total Return (0.45)%#+++ 0.96%+++ 8.00%+++
Ratios (to average net assets):
Expenses## 1.97%++ 1.95% 1.94%
Net investment income@@ 2.79%++ 2.08% 3.19%
Portfolio turnover 70% 138% 139%
Number of units outstanding at end of period (000 Omitted) 2,230 2,447 2,759
<Caption>
GOVERNMENT SECURITIES VARIABLE ACCOUNT
--------------------------------------------------------
COMPASS 2
--------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2001 2000 1999
---------------- ------------ ------------
Per unit data:*
Net asset value -- beginning of period $ 31.521 $ 28.523 $ 29.418
---------------- ------------ ------------
Investment income@@ $ 2.183 $ 2.169 $ 2.053
Expenses (0.661) (0.572) (0.558)
---------------- ------------ ------------
Net investment income $ 1.522 $ 1.597 $ 1.495
Net realized and unrealized gain (loss) on investments 0.405 1.401 (2.390)
---------------- ------------ ------------
Net increase (decrease) in unit value $ 1.927 $ 2.998 $ (0.895)
---------------- ------------ ------------
Unit value:
Net asset value -- end of period $ 33.448 $ 31.521** $ 28.523
================ ============ ============
Total Return 6.12%+++ -- --
Ratios (to average net assets):
Expenses## 0.66%+ 0.64%+ 0.63%+
Net investment income@@ 4.42%+ 5.28%+ 5.06%+
Portfolio turnover 89% 51% 75%
Number of units outstanding at end of period (000 Omitted) 3,043 3,210 4,228
</Table>
<Table>
<Caption>
GOVERNMENT SECURITIES VARIABLE ACCOUNT
--------------------------------------------------------
COMPASS 3
--------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 2004 -------------------------------
(UNAUDITED) 2003 2002
---------------- ------------ ------------
Per unit data:*
Net asset value -- beginning of period $ 25.501 $ 25.284 $ 23.434
---------------- ------------ ------------
Investment income@@ $ 0.607 $ 1.045 $ 1.300
Expenses (0.266) (0.514) (0.495)
---------------- ------------ ------------
Net investment income $ 0.341 $ 0.531 $ 0.805
Net realized and unrealized gain (loss) on investments (0.468) (0.314) 1.045
---------------- ------------ ------------
Net increase (decrease) in unit value $ (0.127) $ 0.217 $ 1.850
---------------- ------------ ------------
Unit value:
Net asset value -- end of period $ 25.374 $ 25.501 $ 25.284
================ ============ ============
Total Return (0.50)%#+++ 0.86%+++ 7.89%+++
Ratios (to average net assets):
Expenses## 2.07%++ 2.05% 2.04%
Net investment income@@ 2.65%++ 2.08% 3.36%
Portfolio turnover 70% 138% 139%
Number of units outstanding at end of period (000 Omitted) 124 147 205
<Caption>
GOVERNMENT SECURITIES VARIABLE ACCOUNT
--------------------------------------------------------
COMPASS 3
--------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2001 2000 1999
---------------- ------------ ------------
Per unit data:*
Net asset value -- beginning of period $ 22.106 $ 20.023 $ 20.672
---------------- ------------ ------------
Investment income@@ $ 1.590 $ 1.476 $ 1.410
Expenses (0.510) (0.412) (0.407)
---------------- ------------ ------------
Net investment income $ 1.080 $ 1.064 $ 1.003
Net realized and unrealized gain (loss) on investments 0.248 1.019 (1.652)
---------------- ------------ ------------
Net increase (decrease) in unit value $ 1.328 $ 2.083 $ (0.649)
---------------- ------------ ------------
Unit value:
Net asset value -- end of period $ 23.434 $ 22.106** $ 20.023
================ ============ ============
Total Return 6.01%+++ -- --
Ratios (to average net assets):
Expenses## 0.66%+ 0.64%+ 0.63%+
Net investment income@@ 4.42%+ 5.28%+ 5.06%+
Portfolio turnover 89% 51% 75%
Number of units outstanding at end of period (000 Omitted) 254 398 701
</Table>
@@ As required, effective January 1, 2001, the account adopted the provisions
of the AICPA Audit and Accounting Guide for Investment Companies and began
amortizing premium on debt securities. The effect of this change for the
year ended December 31, 2001 was to decrease net investment income per unit
by $0.06, $0.04 and $0.03, respectively, increase net realized and
unrealized gains and losses per unit by $0.06, $0.04 and $0.03,
respectively, and decrease the ratio of net investment income to average net
assets by 0.19%, 0.19% and 0.19%, respectively. Per unit, ratios, and
supplemental data for periods prior to January 1, 2001 have not been
restated to reflect this change in presentation.
* Per unit data are based on the average number of units outstanding during
each year.
** The per unit net asset value has been restated to a rounded third decimal
place where previously the amount was truncated.
+ Excluding mortality and expense risk charges and distribution expense
charges.
++ Annualized.
+++ The total return does not reflect load fees in conjuction with redemption of
units.
# Not annualized.
## Ratios do not reflect reductions from fees paid indirectly.
See notes to financial statements.
34
<Page>
<Table>
<Caption>
GOVERNMENT SECURITIES VARIABLE ACCOUNT
--------------------------------------------------------
COMPASS 3 - LEVEL 2
--------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 2004 -------------------------------
(UNAUDITED) 2003 2002
---------------- ------------ ------------
Per unit data:*
Net asset value -- beginning of period $ 14.912 $ 14.763 $ 13.663
---------------- ------------ ------------
Investment income@@ $ 0.327 $ 0.597 $ 0.732
Expenses (0.132) (0.282) (0.267)
---------------- ------------ ------------
Net investment income $ 0.195 $ 0.315 $ 0.465
Net realized and unrealized gain (loss) on investments (0.259) (0.166) 0.635
---------------- ------------ ------------
Net increase (decrease) in unit value $ (0.064) $ 0.149 $ 1.100
---------------- ------------ ------------
Unit value:
Net asset value -- end of period $ 14.848 $ 14.912 $ 14.763
================ ============ ============
Total Return (0.43)%#+++ 1.01%+++ 8.05%+++
Ratios (to average net assets):
Expenses## 1.92%++ 1.90% 1.89%
Net investment income@@ 2.83%++ 2.10% 3.17%
Portfolio turnover 70% 138% 139%
Number of units outstanding at end of period (000 Omitted) 1,448 1,562 1,692
<Caption>
GOVERNMENT SECURITIES VARIABLE ACCOUNT
--------------------------------------------------------
COMPASS 3 - LEVEL 2
--------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2001 2000 1999
---------------- ------------ ------------
Per unit data:*
Net asset value -- beginning of period $ 12.869 $ 11.639 $ 11.998
---------------- ------------ ------------
Investment income@@ $ 0.826 $ 0.876 $ 0.833
Expenses (0.248) (0.228) (0.222)
---------------- ------------ ------------
Net investment income $ 0.578 $ 0.648 $ 0.611
Net realized and unrealized gain (loss) on investments 0.216 0.582 (0.970)
---------------- ------------ ------------
Net increase (decrease) in unit value $ 0.794 $ 1.230 $ (0.359)
---------------- ------------ ------------
Unit value:
Net asset value -- end of period $ 13.663 $ 12.869** $ 11.639
================ ============ ============
Total Return 6.17%+++ -- --
Ratios (to average net assets):
Expenses## 0.66%+ 0.64%+ 0.63%+
Net investment income@@ 4.42%+ 5.28%+ 5.06%+
Portfolio turnover 89% 51% 75%
Number of units outstanding at end of period (000 Omitted) 1,617 1,542 1,641
</Table>
@@ As required, effective January 1, 2001, the account adopted the provisions
of the AICPA Audit and Accounting Guide for Investment Companies and began
amortizing premium on debt securities. The effect of this change for the
year ended December 31, 2001 was to decrease net investment income per unit
by $0.06, $0.04 and $0.03, respectively, increase net realized and
unrealized gains and losses per unit by $0.06, $0.04 and $0.03,
respectively, and decrease the ratio of net investment income to average net
assets by 0.19%, 0.19% and 0.19%, respectively. Per unit, ratios, and
supplemental data for periods prior to January 1, 2001 have not been
restated to reflect this change in presentation.
* Per unit data are based on the average number of units outstanding during
each year.
** The per unit net asset value has been restated to a rounded third decimal
place where previously the amount was truncated.
+ Excluding mortality and expense risk charges and distribution expense
charges.
++ Annualized.
+++ The total return does not reflect load fees in conjuction with redemption of
units.
# Not annualized.
## Ratios do not reflect reductions from fees paid indirectly.
See notes to financial statements.
35
<Page>
<Table>
<Caption>
HIGH YIELD VARIABLE ACCOUNT
--------------------------------------------------------
COMPASS 2
--------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 2004 -------------------------------
(UNAUDITED) 2003 2002
---------------- ------------ ------------
Per unit data:*
Net asset value -- beginning of period $ 34.056 $ 28.505 $ 28.969
---------------- ------------ ------------
Investment income@@ $ 1.401 $ 2.769 $ 3.015
Expenses (0.374) (0.689) (0.617)
---------------- ------------ ------------
Net investment income $ 1.027 $ 2.080 $ 2.398
Net realized and unrealized gain (loss) on investments
and foreign currency (1.255) 3.471 (2.862)
---------------- ------------ ------------
Net increase (decrease) in unit value $ (0.228) $ 5.551 $ (0.464)
---------------- ------------ ------------
Unit value:
Net asset value -- end of period $ 33.828 $ 34.056 $ 28.505
================ ============ ============
Total return (0.67)%#+++ 19.47%+++ (1.60)%+++
Ratios (to average net assets)
Expenses## 2.20%++ 2.20% 2.18%
Investment income@@ 6.01%++ 6.53% 7.84%
Portfolio turnover 45% 164% 172%
Number of units outstanding at end of period (000 Omitted) 1,672 1,827 2,069
<Caption>
HIGH YIELD VARIABLE ACCOUNT
--------------------------------------------------------
COMPASS 2
--------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2001 2000 1999
---------------- ------------ ------------
Per unit data:*
Net asset value -- beginning of period $ 29.882 $ 33.630 $ 31.973
---------------- ------------ ------------
Investment income@@ $ 3.684 $ 3.786 $ 3.424
Expenses (0.699) (0.725) (0.728)
---------------- ------------ ------------
Net investment income $ 2.985 $ 3.061 $ 2.696
Net realized and unrealized gain (loss) on investments
and foreign currency (3.898) (6.809) (1.039)
---------------- ------------ ------------
Net increase (decrease) in unit value $ (0.913) $ (3.748) $ 1.657
---------------- ------------ ------------
Unit value:
Net asset value -- end of period $ 28.969 $ 29.882 $ 33.630
================ ============ ============
Total return (3.05)%+++ -- --
Ratios (to average net assets)
Expenses## 0.90%+ 0.89%+ 0.90%+
Investment income@@ 9.16%+ 9.00%+ 7.93%+
Portfolio turnover 103% 109% 153%
Number of units outstanding at end of period (000 Omitted) 2,328 2,677 3,065
</Table>
<Table>
<Caption>
HIGH YIELD VARIABLE ACCOUNT
--------------------------------------------------------
COMPASS 3
--------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 2004 -------------------------------
(UNAUDITED) 2003 2002
---------------- ------------ ------------
Per unit data:*
Net asset value -- beginning of period $ 25.048 $ 20.986 $ 21.349
---------------- ------------ ------------
Investment income@@ $ 1.022 $ 1.964 $ 2.141
Expenses (0.288) (0.514) (0.469)
---------------- ------------ ------------
Net investment income $ 0.734 $ 1.450 $ 1.672
Net realized and unrealized gain (loss) on investments
and foreign currency (0.914) 2.612 (2.035)
---------------- ------------ ------------
Net increase (decrease) in unit value $ (0.180) $ 4.062 $ (0.363)
---------------- ------------ ------------
Unit value:
Net asset value -- end of period $ 24.868 $ 25.048 $ 20.986
================ ============ ============
Total return (0.72)%#+++ 19.35%+++ (1.70)%+++
Ratios (to average net assets)
Expenses## 2.30%++ 2.30% 2.28%
Investment income@@ 5.83%++ 6.41% 8.45%
Portfolio turnover 45% 164% 172%
Number of units outstanding at end of period (000 Omitted) 86 115 178
<Caption>
HIGH YIELD VARIABLE ACCOUNT
--------------------------------------------------------
COMPASS 3
--------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2001 2000 1999
---------------- ------------ ------------
Per unit data:*
Net asset value -- beginning of period $ 22.043 $ 24.832 $ 23.633
---------------- ------------ ------------
Investment income@@ $ 3.188 $ 2.730 $ 2.451
Expenses (0.643) (0.557) (0.552)
---------------- ------------ ------------
Net investment income $ 2.545 $ 2.173 $ 1.899
Net realized and unrealized gain (loss) on investments
and foreign currency (3.239) (4.962) (0.700)
---------------- ------------ ------------
Net increase (decrease) in unit value $ (0.694) $ (2.789) $ 1.199
---------------- ------------ ------------
Unit value:
Net asset value -- end of period $ 21.349 $ 22.043 $ 24.832
================ ============ ============
Total return (3.15)%+++ -- --
Ratios (to average net assets)
Expenses## 0.90%+ 0.89%+ 0.90%+
Investment income@@ 9.16%+ 9.00%+ 7.93%+
Portfolio turnover 103% 109% 153%
Number of units outstanding at end of period (000 Omitted) 231 297 427
</Table>
@@ As required, effective January 1, 2001, the account adopted the provisions
of the AICPA Audit and Accounting Guide for Investment Companies and began
amortizing premium on debt securities. The effect of this change for the
year ended December 31, 2001 was to decrease net investment income by $0.02,
increase net realized and unrealized gains and losses per unit by $0.02, and
decrease the ratio of net investment income to average net assets by 0.06%.
Per unit, ratios, and supplemental data for periods prior to January 1,
2001, have not been restated to reflect this change in presentation.
* Per unit data are based on the average number of units outstanding during
each year.
+ Excluding mortality and expense risk charges and distribution expense
charges.
++ Annualized.
+++ The total return does not reflect load fees in conjunction with the
redemption of units.
# Not annualized.
## Ratios do not reflect reductions from fees paid indirectly.
See notes to financial statements.
36
<Page>
<Table>
<Caption>
HIGH YIELD VARIABLE ACCOUNT
--------------------------------------------------------
COMPASS 3 - LEVEL 2
--------------------------------------------------------
SIX MONTHS, ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 2004 -------------------------------
(UNAUDITED) 2003 2002
---------------- ------------ ------------
Per unit data:*
Net asset value -- beginning of period $ 13.386 $ 11.199 $ 11.376
---------------- ------------ ------------
Investment income@@ $ 0.431 $ 1.161 $ 1.220
Expenses (0.116) (0.286) (0.257)
---------------- ------------ ------------
Net investment income $ 0.315 $ 0.875 $ 0.963
Net realized and unrealized gain (loss) on investments
and foreign currency (0.401) 1.312 (1.140)
---------------- ------------ ------------
Net increase (decrease) in unit value $ (0.086) $ 2.187 $ (0.177)
---------------- ------------ ------------
Unit value:
Net asset value -- end of period $ 13.300 $ 13.386 $ 11.199
================ ============ ============
Total return (0.64)%#+++ 19.53%+++ (1.55)%+++
Ratios (to average net assets)
Expenses## 2.15%++ 2.15% 2.13%
Investment income@@ 5.72%++ 6.57% 6.08%
Portfolio turnover 45% 164% 172%
Number of units outstanding at end of period (000 Omitted) 962 2,631 2,684
<Caption>
HIGH YIELD VARIABLE ACCOUNT
--------------------------------------------------------
COMPASS 3 - LEVEL 2
--------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2001 2000 1999
---------------- ------------ ------------
Per unit data:*
Net asset value -- beginning of period $ 11.728 $ 13.193 $ 12.537
---------------- ------------ ------------
Investment income@@ $ 0.784 $ 1.527 $ 1.414
Expenses (0.151) (0.290) (0.296)
---------------- ------------ ------------
Net investment income $ 0.633 $ 1.237 $ 1.118
Net realized and unrealized gain (loss) on investments
and foreign currency (0.985) (2.702) (0.462)
---------------- ------------ ------------
Net increase (decrease) in unit value $ (0.352) $ (1.465) $ 0.656
---------------- ------------ ------------
Unit value:
Net asset value -- end of period $ 11.376 $ 11.728 $ 13.193
================ ============ ============
Total return (3.01)%+++ -- --
Ratios (to average net assets)
Expenses## 0.90%+ 0.89%+ 0.90%+
Investment income@@ 9.16%+ 9.00%+ 7.93%+
Portfolio turnover 103% 109% 153%
Number of units outstanding at end of period (000 Omitted) 1,131 2,619 1,001
</Table>
@@ As required, effective January 1, 2001, the account adopted the provisions
of the AICPA Audit and Accounting Guide for Investment Companies and began
amortizing premium on debt securities. The effect of this change for the
year ended December 31, 2001 was to decrease net investment income per unit
and increase net realized and unrealized gains and losses per unit. The
impact of this change calculates to less than $0.01 per unit. In addition,
the ratio of net investment income to average net assets decreased by 0.06%.
Per unit, ratios, and supplemental data for periods prior to January 1, 2001
have not been restated to reflect this change in presentation.
* Per unit data are based on the average number of units outstanding during
each year.
+ Excluding mortality and expense risk charges and distribution expense
charges.
++ Annualized.
+++ The total return does not reflect load fees in conjunction with the
redemption of units.
# Not annualized.
## Ratios do not reflect reductions from fees paid indirectly.
See notes to financial statements.
37
<Page>
<Table>
<Caption>
MANAGED SECTORS VARIABLE ACCOUNT
--------------------------------------------------------
COMPASS 2
--------------------------------------------------------
SIX MONTH ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 2004 -------------------------------
(UNAUDITED) 2003 2002
---------------- ------------ ------------
Per unit data:*
Net asset value -- beginning of period $ 41.525 $ 33.716 $ 46.116
---------------- ------------ ------------
Investment income $ 0.161 $ 0.333 $ 0.270
Expenses (0.458) (0.788) (0.810)
---------------- ------------ ------------
Net investment loss $ (0.297) $ (0.455) $ (0.540)
Net realized and unrealized gain (loss) on investments
and foreign currency transactions 0.686 8.264 (11.860)
---------------- ------------ ------------
Net increase (decrease) in unit value $ 0.389 $ 7.809 $ (12.400)
---------------- ------------ ------------
Unit value:
Net asset value -- end of period $ 41.914 $ 41.525 $ 33.716
================ ============ ============
Total Return 0.94%#+++^^ 23.16%+++^ (26.89)%+++
Ratios (to average net assets):
Expenses## 2.16%++ 2.12% 2.10%
Net investment loss (1.39)%++ (1.22)% (1.45)%
Portfolio turnover 45% 80% 264%
Number of units outstanding at end of period (000 Omitted) 378 409 455
<Caption>
MANAGED SECTORS VARIABLE ACCOUNT
--------------------------------------------------------
COMPASS 2
--------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2001 2000 1999
---------------- ------------ ------------
Per unit data:*
Net asset value -- beginning of period $ 72.313 $ 92.865 $ 50.488
---------------- ------------ ------------
Investment income $ 0.465 $ 0.633 $ 0.493
Expenses (1.179) (1.817) (1.236)
---------------- ------------ ------------
Net investment loss $ (0.714) $ (1.184) $ (0.743)
Net realized and unrealized gain (loss) on investments
and foreign currency transactions (25.483) (19.368) 43.120
---------------- ------------ ------------
Net increase (decrease) in unit value $ (26.197) $ (20.552) $ 42.377
---------------- ------------ ------------
Unit value:
Net asset value -- end of period $ 46.116 $ 72.313** $ 92.865
================ ============ ============
Total Return (36.23)%+++ -- --
Ratios (to average net assets):
Expenses## 0.88%+ 0.83%+ 0.84%+
Net investment loss (1.32)%+ (1.39)%+ (1.30)%+
Portfolio turnover 295% 447% 417%
Number of units outstanding at end of period (000 Omitted) 573 697 686
</Table>
<Table>
<Caption>
MANAGED SECTORS VARIABLE ACCOUNT
--------------------------------------------------------
COMPASS 3
--------------------------------------------------------
SIX MONTH ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 2004 -------------------------------
(UNAUDITED) 2003 2002
---------------- ------------ ------------
Per unit data:*
Net asset value -- beginning of period $ 40.837 $ 33.207 $ 45.487
---------------- ------------ ------------
Investment income $ 0.165 $ 0.321 $ 0.251
Expenses (0.502) (0.817) (0.852)
---------------- ------------ ------------
Net investment loss $ (0.337) $ (0.496) $ (0.601)
Net realized and unrealized gain (loss) on investments
and foreign currency transactions 0.690 8.126 (11.679)
---------------- ------------ ------------
Net increase (decrease) in unit value $ 0.353 $ 7.630 $ (12.280)
---------------- ------------ ------------
Unit value:
Net asset value -- end of period $ 41.190 $ 40.837 $ 33.207
================ ============ ============
Total Return 0.86%#+++^^ 22.98%+++^ (27.00)%+++
Ratios (to average net assets):
Expenses## 2.31%++ 2.27% 2.25%
Net investment loss (1.54)%++ (1.37)% (1.56)%
Portfolio turnover 45% 80% 264%
Number of units outstanding at end of period (000 Omitted) 176 202 296
<Caption>
MANAGED SECTORS VARIABLE ACCOUNT
--------------------------------------------------------
COMPASS 3
--------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2001 2000 1999
---------------- ------------ ------------
Per unit data:*
Net asset value -- beginning of period $ 71.434 $ 91.870 $ 50.021
---------------- ------------ ------------
Investment income $ 0.487 $ 0.602 $ 0.473
Expenses (1.297) (1.908) (1.290)
---------------- ------------ ------------
Net investment loss $ (0.810) $ (1.306) $ (0.817)
Net realized and unrealized gain (loss) on investments
and foreign currency transactions (25.137) (19.130) 42.666
---------------- ------------ ------------
Net increase (decrease) in unit value $ (25.947) $ (20.436) $ 41.849
---------------- ------------ ------------
Unit value:
Net asset value -- end of period $ 45.487 $ 71.434 $ 91.870
================ ============ ============
Total Return (36.32)%+++ -- --
Ratios (to average net assets):
Expenses## 0.88%+ 0.83%+ 0.84%+
Net investment loss (1.32)%+ (1.39)%+ (1.30)%+
Portfolio turnover 295% 447% 417%
Number of units outstanding at end of period (000 Omitted) 390 576 785
</Table>
* Per unit data are based on the average number of units outstanding during
each year.
** The per unit net asset value has been restated to a rounded third decimal
place where previously the amount was truncated.
+ Excluding mortality and expense risk charges and distribution expense
charges.
++ Annualized.
+++ The total return does not reflect load fees in conjuction with the
redemption of units.
# Not annualized.
## Ratios do not reflect reductions from fees paid indirectly.
^ The account's total return calculation includes proceeds received on March
26, 2003 for the partial payment of a non-recurring litigation settlement
from Cendant Corporation, recorded as a realized gain on investment
transactions. The proceeds resulted in an increase in the net asset value of
$0.083 and $0.081 per unit for Compass 2 and Compass 3, respectively, based
on units outstanding on the day the proceeds were received. Excluding the
effect of this payment from the account's ending net asset value per unit,
total return per unit value for the year ended December 31, 2003 would have
been 22.92% and 22.73% for Compass 2 and Compass 3, respectively.
^^ The account's total return calculation includes proceeds received on March
19, 2004 for the remaining payment of a non-recurring litigation settlement
from Cendant Corporation, recorded as a realized gain on investment
transactions. The proceeds resulted in an increase in the net asset value of
$0.008 and $0.008 per unit for Compass 2 and Compass 3, respectively, based
on units outstanding on the day the proceeds were received. Excluding the
effect of this payment from the account's ending net asset value per unit,
total return for the six months ended June 30, 2004 would have been 0.92%
and 0.84% for Compass 2 and Compass 3, respectively.
See notes to financial statements.
38
<Page>
<Table>
<Caption>
MANAGED SECTORS VARIABLE ACCOUNT
--------------------------------------------------------
COMPASS 3 - LEVEL 2
--------------------------------------------------------
SIX MONTH ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 2004 -------------------------------
(UNAUDITED) 2003 2002
---------------- ------------ ------------
Per unit data:*
Net asset value -- beginning of period $ 13.215 $ 10.730 $ 14.676
---------------- ------------ ------------
Investment income $ 0.050 $ 0.106 $ 0.083
Expenses (0.142) (0.252) (0.259)
---------------- ------------ ------------
Net investment loss $ (0.092) $ (0.146) $ (0.176)
Net realized and unrealized gain (loss) on investments
and foreign currency transactions 0.216 2.631 (3.770)
---------------- ------------ ------------
Net increase (decrease) in unit value $ 0.124 $ 2.485 $ (3.946)
---------------- ------------ ------------
Unit value:
Net asset value -- end of period $ 13.339 $ 13.215 $ 10.730
================ ============ ============
Total Return 0.94%#+++^^ 23.16%+++^ (26.89)%+++
Ratios (to average net assets):
Expenses## 2.16%++ 2.12% 2.10%
Net investment loss (1.40)%++ (1.22)% (1.46)%
Portfolio turnover 45% 80% 264%
Number of units outstanding at end of period (000 Omitted) 3,133 3,228 3,173
<Caption>
MANAGED SECTORS VARIABLE ACCOUNT
--------------------------------------------------------
COMPASS 3 - LEVEL 2
--------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2001 2000 1999
---------------- ------------ ------------
Per unit data:*
Net asset value -- beginning of period $ 23.014 $ 29.554 $ 16.068
---------------- ------------ ------------
Investment income $ 0.136 $ 0.201 $ 0.159
Expenses (0.350) (0.578) (0.401)
---------------- ------------ ------------
Net investment loss $ (0.214) $ (0.377) $ (0.242)
Net realized and unrealized gain (loss) on investments
and foreign currency transactions (8.124) (6.163) 13.728
---------------- ------------ ------------
Net increase (decrease) in unit value $ (8.338) $ (6.540) $ 13.486
---------------- ------------ ------------
Unit value:
Net asset value -- end of period $ 14.676 $ 23.014 $ 29.554
================ ============ ============
Total Return (36.23)%+++ -- --
Ratios (to average net assets):
Expenses## 0.88%+ 0.83%+ 0.84%+
Net investment loss (1.32)%+ (1.39)%+ (1.30)%+
Portfolio turnover 295% 447% 417%
Number of units outstanding at end of period (000 Omitted) 3,559 3,548 3,115
</Table>
* Per unit data are based on the average number of units outstanding during
each year.
+ Excluding mortality and expense risk charges and distribution expense
charges.
++ Annualized.
+++ The total return does not reflect load fees in conjuction with the
redemption of units.
# Not annualized.
## Ratios do not reflect reductions from fees paid indirectly.
^ The account's total return calculation includes proceeds received on March
26, 2003 for the partial payment of a non-recurring litigation settlement
from Cendant Corporation, recorded as a realized gain on investment
transactions. The proceeds resulted in an increase in the net asset value of
$0.026 per unit based on units outstanding on the day the proceeds were
received. Excluding the effect of this payment from the account's ending net
asset value per unit, total return per unit value for the year ended
December 31, 2003 would have been 22.92% for Compass 3 -- Level 2.
^^ The account's total return calculation includes proceeds received on March
19, 2004 for the remaining payment of a non-recurring litigation settlement
from Cendant Corporation, recorded as a realized gain on investment
transactions. The proceeds resulted in an increase in the net asset value of
$0.003 per unit based on units outstanding on the day the proceeds were
received. Excluding the effect of this payment from the account's ending net
asset value per unit, total return for the six months ended June 30, 2004
would have been 0.92% for Compass 3 -- Level 2.
See notes to financial statements.
39
<Page>
<Table>
<Caption>
MONEY MARKET VARIABLE ACCOUNT
--------------------------------------------------------
COMPASS 2
--------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 2004 -------------------------------
(UNAUDITED) 2003 2002
---------------- ------------ ------------
Per unit data:*
Net asset value -- beginning of period $ 20.188 $ 20.322 $ 20.341
---------------- ------------ ------------
Investment income $ 0.110 $ 0.247 $ 0.382
Expenses (0.202) (0.381) (0.401)
---------------- ------------ ------------
Net Increase (decrease) in unit value $ (0.092) $ (0.134) $ (0.019)
---------------- ------------ ------------
Unit value:
Net asset value -- end of period $ 20.096 $ 20.188 $ 20.322
================ ============ ============
Total Return (0.45)%#+++ (0.66)%+++ (0.09)%+++
Ratios (to average net assets):
Expenses## 1.97%++ 1.87% 1.96%
Net investment income (0.89)%++ (0.63)% (0.12)%
Number of units outstanding at end of period (000 Omitted) 1,181 1,172 1,626
<Caption>
MONEY MARKET VARIABLE ACCOUNT
--------------------------------------------------------
COMPASS 2
--------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2001 2000 1999
---------------- ------------ ------------
Per unit data:*
Net asset value -- beginning of period $ 19.862 $ 18.997 $ 18.391
---------------- ------------ ------------
Investment income $ 0.950 $ 1.232 $ 0.960
Expenses (0.471) (0.367) (0.354)
---------------- ------------ ------------
Net Increase (decrease) in unit value $ 0.479 $ 0.865 $ 0.606
---------------- ------------ ------------
Unit value:
Net asset value -- end of period $ 20.341 $ 19.862 $ 18.997
================ ============ ============
Total Return 2.41%+++ -- --
Ratios (to average net assets):
Expenses## 0.65%+ 0.60%+ 0.58%+
Net investment income 2.51%+ 4.45%+ 3.25%+
Number of units outstanding at end of period (000 Omitted) 1,986 3,304 3,749
</Table>
<Table>
<Caption>
MONEY MARKET VARIABLE ACCOUNT
--------------------------------------------------------
COMPASS 3
--------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 2004 -------------------------------
(UNAUDITED) 2003 2002
---------------- ------------ ------------
Per unit data:*
Net asset value -- beginning of period $ 16.553 $ 16.680 $ 16.712
---------------- ------------ ------------
Investment income $ 0.074 $ 0.198 $ 0.318
Expenses (0.157) (0.325) (0.350)
---------------- ------------ ------------
Net increase (decrease) in unit value $ (0.083) $ (0.127) $ (0.032)
---------------- ------------ ------------
Unit value:
Net asset value -- end of period $ 16.470 $ 16.553 $ 16.680
================ ============ ============
Total Return (0.50)%#+++ (0.76)%+++ (0.19)%+++
Ratios (to average net assets):
Expenses## 2.07%++ 1.97% 2.06%
Net investment income (1.01)%++ (0.74)% (0.14)%
Number of units outstanding at end of period (000 Omitted) 118 155 186
<Caption>
MONEY MARKET VARIABLE ACCOUNT
--------------------------------------------------------
COMPASS 3
--------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2001 2000 1999
---------------- ------------ ------------
Per unit data:*
Net asset value -- beginning of period $ 16.334 $ 15.638 $ 15.154
---------------- ------------ ------------
Investment income $ 0.784 $ 1.002 $ 0.781
Expenses (0.406) (0.306) (0.297)
---------------- ------------ ------------
Net increase (decrease) in unit value $ 0.378 $ 0.696 $ 0.484
---------------- ------------ ------------
Unit value:
Net asset value -- end of period $ 16.712 $ 16.334 $ 15.638
================ ============ ============
Total Return 2.31%+++ -- --
Ratios (to average net assets):
Expenses## 0.65%+ 0.60%+ 0.58%+
Net investment income 2.51%+ 4.45%+ 3.25%+
Number of units outstanding at end of period (000 Omitted) 222 468 863
</Table>
<Table>
<Caption>
MONEY MARKET VARIABLE ACCOUNT
--------------------------------------------------------
COMPASS 3 - LEVEL 2
--------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 2004 -------------------------------
(UNAUDITED) 2003 2002
---------------- ------------ ------------
Per unit data:*
Net asset value -- beginning of period $ 12.390 $ 12.466 $ 12.472
---------------- ------------ ------------
Investment income $ 0.090 $ 0.131 $ 0.223
Expenses (0.143) (0.207) (0.229)
---------------- ------------ ------------
Net increase (decrease) in unit value $ (0.053) $ (0.076) $ (0.006)
---------------- ------------ ------------
Unit value:
Net asset value -- end of period $ 12.337 $ 12.390 $ 12.466
================ ============ ============
Total Return (0.43)%#+++ (0.61)%+++ (0.04)%+++
Ratios (to average net assets):
Expenses## 1.92%++ 1.82% 1.91%
Net investment income (0.85)%++ (0.61)% (0.01)%
Number of units outstanding at end of period (000 Omitted) 2,422 896 1,113
<Caption>
MONEY MARKET VARIABLE ACCOUNT
--------------------------------------------------------
COMPASS 3 - LEVEL 2
--------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2001 2000 1999
---------------- ------------ ------------
Per unit data:*
Net asset value -- beginning of period $ 12.172 $ 11.636 $ 11.259
---------------- ------------ ------------
Investment income $ 0.710 $ 0.747 $ 0.579
Expenses (0.410) (0.211) (0.202)
---------------- ------------ ------------
Net increase (decrease) in unit value $ 0.300 $ 0.536 $ 0.377
---------------- ------------ ------------
Unit value:
Net asset value -- end of period $ 12.472 $ 12.172 $ 11.636
================ ============ ============
Total Return 2.46%+++ -- --
Ratios (to average net assets):
Expenses## 0.65%+ 0.60%+ 0.58%+
Net investment income 2.51%+ 4.45%+ 3.25%+
Number of units outstanding at end of period (000 Omitted) 2,835 1,562 3,875
</Table>
* Per unit data are based on the average number of units outstanding during
each year.
+ Excluding mortality and expense risk charges and distribution expense
charges.
++ Annualized.
+++ The total return does not reflect load fees in conjunction with the
redemption of units.
# Not annualized.
## Ratios do not reflect reductions from fees paid indirectly.
See notes to financial statements.
40
<Page>
<Table>
<Caption>
TOTAL RETURN VARIABLE ACCOUNT
--------------------------------------------------------
COMPASS 2
--------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 2004 -------------------------------
(UNAUDITED) 2003 2002
---------------- ------------ ------------
Per unit data:*
Net asset value -- beginning of period $ 41.571 $ 35.950 $ 38.562
---------------- ------------ ------------
Investment income@@ $ 0.692 $ 1.237 $ 1.407
Expenses (0.451) (0.800) (0.777)
---------------- ------------ ------------
Net investment income $ 0.241 $ 0.437 $ 0.630
Net realized and unrealized gain (loss) on investments
and foreign currency transactions 0.565 5.184 (3.242)
---------------- ------------ ------------
Net increase (decrease) in unit value $ 0.806 $ 5.621 $ (2.612)
---------------- ------------ ------------
Unit value:
Net asset value -- end of period $ 42.377 $ 41.571 $ 35.950
================ ============ ============
Total Return 1.94%#+++ 15.64%+++ (6.77)%+++
Ratios (to average net assets):
Expenses## 2.11%++ 2.10% 2.08%
Net investment income@@ 1.11%++ 1.13% 1.43%
Portfolio turnover 40% 62% 76%
Number of units outstanding at end of period (000 Omitted) 1,589 1,688 1,871
<Caption>
TOTAL RETURN VARIABLE ACCOUNT
--------------------------------------------------------
COMPASS 2
--------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2001 2000 1999
---------------- ------------ ------------
Per unit data:*
Net asset value -- beginning of period $ 39.126 $ 33.728 $ 33.250
---------------- ------------ ------------
Investment income@@ $ 1.513 $ 1.464 $ 1.374
Expenses (0.830) (0.727) (0.701)
---------------- ------------ ------------
Net investment income $ 0.683 $ 0.737 $ 0.673
Net realized and unrealized gain (loss) on investments
and foreign currency transactions (1.247) 4.661 (0.195)
---------------- ------------ ------------
Net increase (decrease) in unit value $ (0.564) $ 5.398 $ 0.478
---------------- ------------ ------------
Unit value:
Net asset value -- end of period $ 38.562 $ 39.126 $ 33.728**
================ ============ ============
Total Return (1.44)%+++ -- --
Ratios (to average net assets):
Expenses## 0.85%+ 0.83%+ 0.83%+
Net investment income@@ 1.67%+ 2.02%+ 1.90%+
Portfolio turnover 104% 105% 106%
Number of units outstanding at end of period (000 Omitted) 2,080 2,240 2,925
</Table>
<Table>
<Caption>
TOTAL RETURN VARIABLE ACCOUNT
--------------------------------------------------------
COMPASS 3
--------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 2004 -------------------------------
(UNAUDITED) 2003 2002
---------------- ------------ ------------
Per unit data:*
Net asset value -- beginning of period $ 40.597 $ 35.160 $ 37.771
---------------- ------------ ------------
Investment income@@ $ 0.694 $ 1.200 $ 1.360
Expenses (0.488) (0.823) (0.804)
---------------- ------------ ------------
Net investment income $ 0.206 $ 0.377 $ 0.556
Net realized and unrealized gain (loss) on investments
and foreign currency transactions 0.551 5.060 (3.167)
---------------- ------------ ------------
Net increase (decrease) in unit value $ 0.757 $ 5.437 $ (2.611)
---------------- ------------ ------------
Unit value:
Net asset value -- end of period $ 41.354 $ 40.597 $ 35.160
================ ============ ============
Total Return 1.86%#+++ 15.46%+++ (6.91)%+++
Ratios (to average net assets):
Expenses## 2.26%++ 2.25% 2.23%
Net investment income@@ 0.94%++ 1.01% 1.61%
Portfolio turnover 40% 62% 76%
Number of units outstanding at end of period (000 Omitted) 387 453 634
<Caption>
TOTAL RETURN VARIABLE ACCOUNT
--------------------------------------------------------
COMPASS 3
--------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2001 2000 1999
---------------- ------------ ------------
Per unit data:*
Net asset value -- beginning of period $ 38.380 $ 33.134 $ 32.713
---------------- ------------ ------------
Investment income@@ $ 1.599 $ 1.395 $ 1.315
Expenses (0.939) (0.749) (0.727)
---------------- ------------ ------------
Net investment income $ 0.660 $ 0.646 $ 0.588
Net realized and unrealized gain (loss) on investments
and foreign currency transactions (1.269) 4.600 (0.167)
---------------- ------------ ------------
Net increase (decrease) in unit value $ (0.609) $ 5.246 $ 0.421
---------------- ------------ ------------
Unit value:
Net asset value -- end of period $ 37.771 $ 38.380** $ 33.134
================ ============ ============
Total Return (1.59)%+++ -- --
Ratios (to average net assets):
Expenses## 0.85%+ 0.83%+ 0.83%+
Net investment income@@ 1.67+ 2.02%+ 1.90%+
Portfolio turnover 104% 105% 106%
Number of units outstanding at end of period (000 Omitted) 838 1,253 2,125
</Table>
<Table>
<Caption>
TOTAL RETURN VARIABLE ACCOUNT
--------------------------------------------------------
COMPASS 3 - LEVEL 2
--------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 2004 -------------------------------
(UNAUDITED) 2003 2002
---------------- ------------ ------------
Per unit data:*
Net asset value -- beginning of period $ 19.599 $ 16.949 $ 18.180
---------------- ------------ ------------
Investment income@@ $ 0.315 $ 0.575 $ 0.658
Expenses (0.207) (0.376) (0.367)
---------------- ------------ ------------
Net investment income $ 0.108 $ 0.199 $ 0.291
Net realized and unrealized gain (loss) on investments
and foreign currency transactions 0.272 2.451 (1.522)
---------------- ------------ ------------
Net increase (decrease) in unit value $ 0.380 $ 2.650 $ (1.231)
---------------- ------------ ------------
Unit value:
Net asset value -- end of period $ 19.979 $ 19.599 $ 16.949
================ ============ ============
Total Return 1.94%#+++ 15.64%+++ (6.77)%+++
Ratios (to average net assets):
Expenses## 2.11%++ 2.10% 2.08%
Net investment income@@ 1.09%++ 1.11% 1.55%
Portfolio turnover 40% 62% 76%
Number of units outstanding at end of period (000 Omitted) 5,733 5,946 6,236
<Caption>
TOTAL RETURN VARIABLE ACCOUNT
--------------------------------------------------------
COMPASS 3 - LEVEL 2
--------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2001 2000 1999
---------------- ------------ ------------
Per unit data:*
Net asset value -- beginning of period $ 18.446 $ 15.901 $ 15.676
---------------- ------------ ------------
Investment income@@ $ 0.687 $ 0.683 $ 0.642
Expenses (0.382) (0.343) (0.331)
---------------- ------------ ------------
Net investment income $ 0.305 $ 0.340 $ 0.311
Net realized and unrealized gain (loss) on investments
and foreign currency transactions (0.571) 2.205 (0.086)
---------------- ------------ ------------
Net increase (decrease) in unit value $ (0.266) $ 2.545 $ 0.225
---------------- ------------ ------------
Unit value:
Net asset value -- end of period $ 18.180 $ 18.446** $ 15.901
================ ============ ============
Total Return (1.44)%+++ -- --
Ratios (to average net assets):
Expenses## 0.85%+ 0.83%+ 0.83%+
Net investment income@@ 1.67%+ 2.02%+ 1.90%+
Portfolio turnover 104% 105% 106%
Number of units outstanding at end of period (000 Omitted) 6,537 6,382 6,729
</Table>
@@ As required, effective January 1, 2001 the account has adopted the
provisions of the AICPA Audit and Accounting Guide for Investment Companies
and began amortizing premium on debt securities. The effect of this change
for the year ended December 31, 2001 was to decrease net investment income
per unit by $0.020, $0.020, and $0.010 respectively, increase net realized
and unrealized gains and losses per unit by $0.020, $0.020, and $0.010
respectively, and decrease the ratio of net investment income to average net
assets by 0.05%, 0.05%, and 0.05% respectively. Per unit, ratios, and
supplemental data for periods prior to January 1, 2001 have not been
restated to reflect this change in presentation.
* Per unit data are based on the average number of units outstanding during
each year.
** The per unit net asset value has been restated to a rounded third decimal
place where previously the amount was truncated.
+ Excluding mortality and expense risk charges and distribution expense
charges.
++ Annualized
+++ The total return does not reflect load fees in conjuction with the
redemption of units.
# Not annualized
## Ratios do not reflect reductions from fees paid indirectly.
41
<Page>
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(1) BUSINESS AND ORGANIZATION
Capital Appreciation Variable Account, Global Governments Variable Account,
Government Securities Variable Account, High Yield Variable Account, Managed
Sectors Variable Account, Money Market Variable Account, and Total Return
Variable Account (the variable account(s)) are separate accounts established by
Sun Life Assurance Company of Canada (U.S.), the Sponsor, in connection with the
issuance of Compass 2 and Compass 3 combination fixed/variable annuity
contracts. Capital Appreciation Variable Account, Government Securities Variable
Account, Money Market Variable Account, and Total Return Variable Account
operate as open-end, diversified management investment companies, and Global
Governments Variable Account, High Yield Variable Account, and Managed Sectors
Variable Account operate as open-end, non-diversified management investment
companies as those terms are defined in the Investment Company Act of 1940, as
amended.
(2) SIGNIFICANT ACCOUNTING POLICIES
General - The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The Capital Appreciation Variable Account, Global Governments
Variable Account, High Yield Variable Account, Managed Sectors Variable Account,
and Total Return Variable Account can invest in foreign securities. Investments
in foreign securities are vulnerable to the effects of changes in the relative
values of the local currency and the U.S. dollar and to the effects of changes
in each country's legal, political, and economic environment. The High Yield
Variable Account can invest up to 100% of its portfolio in high-yield securities
rated below investment grade. Investments in high-yield securities involve
greater degrees of credit and market risk than investments in higher-rated
securities and tend to be more sensitive to economic conditions.
Investment Valuations - Equity securities in the variable accounts' portfolios
for which market quotations are available are valued at the last sale or
official closing price as reported by an independent pricing service on the
primary market or exchange on which they are primarily traded, or at the last
quoted bid price for securities in which there were no sales during the day.
Equity securities traded over the counter are valued at the last sales price
traded each day as reported by an independent pricing service, or to the extent
there are no sales reported, such securities are valued on the basis of
quotations obtained from brokers and dealers. Bonds and other fixed income
securities (other than short-term obligations) in the variable accounts'
portfolios are valued at an evaluated bid price as reported by an independent
pricing service, or to the extent a valuation is not reported by a pricing
service, such securities are valued on the basis of quotes from brokers and
dealers. Prices obtained from pricing services utilize both dealer-supplied
valuations and electronic data processing techniques which take into account
appropriate factors such as institutional-size trading in similar groups of
securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics, and other market data without exclusive reliance upon quoted
prices or exchange or over-the-counter prices, since such valuations are
believed to reflect more accurately the fair value of such securities. Foreign
currency options are valued by MFS using an external pricing model approved by
the Board of Trustees that uses market data from an independent pricing source.
Futures contracts are valued at the settlement price as reported by an
independent pricing service on the primary exchange on which they are traded.
Forward foreign currency contracts are valued using spot rates and forward
points as reported by an independent pricing source. Short-term obligations with
a remaining maturity in excess of 60 days will be valued upon dealer-supplied
valuations. All other short-term obligations in the variable accounts'
portfolios are valued at amortized cost, which constitutes market value as
determined by the Board of Trustees. Money market instruments are valued at
amortized cost, which the Trustees have determined in good faith approximates
market value. The Money Market Variable Account use of amortized cost is subject
to the variable account's compliance with certain conditions as specified under
Rule 2a-7 of the Investment Company Act of 1940. Investment valuations, other
assets, and liabilities initially expressed in foreign currencies are converted
each business day into U.S. dollars based upon current exchange rates. When
pricing service information or market quotations are not readily available,
securities are priced at fair value as determined under the direction of the
Board of Trustees. For example, significant events (such as movement in the U.S.
securities market, or other regional and local developments) may occur between
the time that foreign markets close (where the security is principally traded)
and the time that the variable accounts calculate its net asset value
(generally, the close of the NYSE) that may impact the value of securities
traded in these foreign markets. In these cases, the variable accounts may
utilize information from an external vendor or other sources to adjust closing
market quotations of foreign equity securities to reflect what it believes to be
the fair value of the securities as of the variable accounts' valuation time.
Because the frequency of significant events is not predictable, fair valuation
of foreign equity securities may occur on a frequent basis.
Repurchase Agreements - Certain variable accounts may enter into repurchase
agreements with institutions that the variable accounts' investment adviser has
determined are creditworthy. Each repurchase agreement is recorded at cost. The
variable accounts require that the securities collateral in a repurchase
transaction be transferred to the custodian in a manner sufficient to enable the
variable accounts to obtain those securities in the event of a default under the
repurchase agreement. The variable accounts monitor, on a daily basis, the value
of the collateral to ensure that its value, including accrued interest, is
greater than amounts owed to the variable accounts under each such repurchase
agreement. The variable accounts, along with other affiliated entities of
Massachusetts Financial Services Company (MFS), may utilize a joint trading
account for the purpose of entering into one or more repurchase agreements.
Foreign Currency Translation - Purchases and sales of foreign investments,
income, and expenses are converted into U.S. dollars based upon currency
exchange rates prevailing on the respective dates of such transactions. Gains
and losses attributable to foreign currency exchange rates on sales of
securities are recorded for financial statement purposes as net realized gains
and losses on investments. Gains and losses attributable to foreign exchange
rate movements on income and expenses are recorded for financial statement
purposes as foreign currency transaction gains and losses. That portion of both
realized and unrealized gains and losses on investments that result from
fluctuations in foreign currency exchange rates are not separately disclosed.
Futures Contracts - Certain variable accounts may enter into futures contracts
for the delayed delivery of securities or currency, or contracts based on
financial indices at a fixed price on a future date. In entering such contracts,
the variable account is required to deposit with the broker either in cash or
securities an amount equal to a certain percentage of the contract amount.
Subsequent payments are made or received by the variable account each day,
depending on the daily fluctuations in the value of the contract, and are
recorded for financial statement purposes as unrealized gains or losses by the
variable
42
<Page>
account. The variable account's investment in futures contracts is designed to
hedge against anticipated future changes in interest rates or securities prices.
Investments in interest rate futures for purposes other than hedging may be made
to modify the duration of the portfolio without incurring the additional
transaction costs involved in buying and selling the underlying securities.
Investments in equity index contracts or contracts on related options for
purposes other than hedging, may be made when the variable account has cash on
hand and wishes to participate in anticipated market appreciation while the cash
is being invested. Should interest rates or securities prices move unexpectedly,
the variable account may not achieve the anticipated benefits of the futures
contracts and may realize a loss.
Forward Foreign Currency Exchange Contracts - Certain variable accounts may
enter into forward foreign currency exchange contracts for the purchase or sale
of a specific foreign currency at a fixed price on a future date. Risks may
arise upon entering into these contracts from the potential inability of
counterparties to meet the terms of their contracts and from unanticipated
movements in the value of a foreign currency relative to the U.S. dollar. The
variable accounts may enter into forward foreign currency exchange contracts for
hedging purposes as well as for non-hedging purposes. For hedging purposes, the
variable accounts may enter into contracts to deliver or receive foreign
currency it will receive from or require for its normal investment activities.
The variable accounts may also use contracts in a manner intended to protect
foreign currency-denominated securities from declines in value due to
unfavorable exchange rate movements. For non-hedging purposes, the variable
accounts may enter into contracts with the intent of changing the relative
exposure of the variable accounts' portfolio of securities to different
currencies to take advantage of anticipated changes. The forward foreign
currency exchange contracts are adjusted by the daily exchange rate of the
underlying currency and any gains or losses are recorded as unrealized until the
contract settlement date. On contract settlement date, the gains or losses are
recorded as realized gains or losses on foreign currency transactions.
Dollar Roll Transactions - The Government Securities Variable account enters
into dollar roll transactions, with respect to mortgage backed securities issued
by GNMA, FNMA, and FHLMC, in which the variable account sells mortgage backed
securities to financial institutions and simultaneously agrees to accept
substantially similar (same type, coupon, and maturity) securities at a later
date at an agreed-upon price. The variable accounts' total return is enhanced
through either a reduced purchase price on the buy, or receipt of an income fee
from the broker.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
discount is amortized or accreted for financial statement purposes in accordance
with accounting principles generally accepted in the United States of America.
For the Money Market Variable Account, all premium and discount is amortized and
accreted for financial statement purposes in accordance with generally accepted
accounting principles and federal tax regulations, respectively. Dividends
received in cash are recorded on the ex-dividend date.
The following variable accounts were participants in a class-action lawsuit
against Cendant Corporation. On March 26, 2003 these variable accounts received
a partial cash settlement recorded as a realized gain on investment
transactions. The partial proceeds from the non-recurring litigation settlement
resulted in an increase in net asset value per unit based on the units
outstanding on the day proceeds were received.
<Table>
<Caption>
CAPITAL MANAGED
APPRECIATION SECTORS
VARIABLE VARIABLE
ACCOUNT ACCOUNT
- --------------------------------------------------------------------------------------------
Cash Settlement $ 6,006,689 $ 140,332
Increase in net asset value per unit
Compass 2 Contracts $ 0.900 $ 0.083
Compass 3 Contracts $ 0.594 $ 0.081
Compass 3 -- Level 2 Contracts $ 0.247 $ 0.026
</Table>
Exluding the effect of these payments from the variable accounts' ending net
asset value per unit, total return for the year ended December 31, 2003 would
have been lower by:
<Table>
<Caption>
CAPITAL MANAGED
APPRECIATION SECTORS
VARIABLE VARIABLE
ACCOUNT ACCOUNT
- --------------------------------------------------------------------------------------------
Compass 2 Contracts 2.24% 0.24%
Compass 3 Contracts 2.24% 0.25%
Compass 3 -- Level 2 Contracts 2.25% 0.24%
</Table>
The following variable accounts were participants in a class-action lawsuit
against Cendant Corporation. On March 19, 2004 these variable accounts received
the remaining cash settlement recorded as a realized gain on investment
transactions. The remaining proceeds from the non-recurring litigation
settlement resulted in an increase in net asset value per unit based on the
units outstanding on the day proceeds were received.
<Table>
<Caption>
CAPITAL MANAGED
APPRECIATION SECTORS
VARIABLE VARIABLE
ACCOUNT ACCOUNT
- --------------------------------------------------------------------------------------------
Cash Settlement $ 622,626 $ 14,555
Increase in net asset value per unit
Compass 2 Contracts $ 0.108 $ 0.008
Compass 3 Contracts $ 0.071 $ 0.008
Compass 3 -- Level 2 Contracts $ 0.029 $ 0.003
</Table>
43
<Page>
Exluding the effect of these payments from the variable accounts' ending net
asset value per unit, total return for the six months ended June 30, 2004 would
have been lower by:
<Table>
<Caption>
CAPITAL MANAGED
APPRECIATION SECTORS
VARIABLE VARIABLE
ACCOUNT ACCOUNT
- --------------------------------------------------------------------------------------------
Compass 2 Contracts 0.22% 0.02%
Compass 3 Contracts 0.21% 0.02%
Compass 3 -- Level 2 Contracts 0.21% 0.02%
</Table>
The Capital Appreciation Variable Account was a participant in a class-action
lawsuit against Rite Aid Corporation. On February 18, 2004 the variable account
received a cash settlement in the amount of $33,833, recorded as a realized gain
on investment transactions. The proceeds from the non-recurring litigation
settlement resulted in an increase in net asset value of $0.108, $0.071, and
$0.029 per unit based on the shares outstanding on the day the proceeds were
received for Compass 2, Compass 3, and Compass 3 -- Level 2, respectively.
Excluding the effect of this payment from the variable accounts' ending net
asset value per unit, total return for the six months ended June 30, 2004, would
have been lower by 0.22%, 0.21%, and 0.22% for Compass 2, Compass 3, and Compass
3 -- Level 2, respectively.
Some securities may be purchased on a "when-issued" or "forward delivery" basis,
which means that the securities will be delivered to the variable account at a
future date, usually beyond customary settlement time. Certain variable accounts
may enter in "TBA" (to be announced) purchase commitments to purchase securities
for a fixed unit price at a future date. Although the unit price has been
established, the principal value has not been finalized. However, the principal
amount of the commitments will not fluctuate more than 0.01%. Each variable
account holds, and maintains until settlement date, cash or high-grade debt
obligations in an amount sufficient to meet the purchase price, or the variable
account may enter into offsetting contracts for the forward sale of other
securities it owns. Income on the securities will not be earned until settlement
date. TBA purchase commitments may be considered securities in themselves, and
involve a risk of loss if the value of the security to be purchased declines
prior to settlement date, which is in addition to the risk of decline in the
value of the variable accounts other assets. Unsettled TBA purchase commitments
are valued at the current market value of the underlying securities, according
to the procedures described under "Investment Valuations" above. Certain
variable accounts may enter into "TBA" (to be announced) sale commitments to
hedge its portfolio positions or to sell mortgage-backed securities it owns
under delayed delivery arrangements. Proceeds of TBA sale commitments are not
received until the contractual settlement date. During the time a TBA sale
commitment is outstanding, equivalent deliverable securities, or an offsetting
TBA purchase commitment deliverable on or before the sale commitment date, are
held as "cover" for the transaction.
Legal fees and other related expenses incurred to preserve and protect the value
of a security owned are added to the cost of the security; other legal fees are
expensed. Capital infusions made directly to the security issuer, which are
generally non-recurring, incurred to protect or enhance the value of high-yield
debt securities, are reported as additions to the cost basis of the security.
Costs that are incurred to negotiate the terms or conditions of capital
infusions or that are expected to result in a plan of reorganization are
reported as realized losses. Ongoing costs incurred to protect or enhance an
investment, or costs incurred to pursue other claims or legal actions, are
expensed.
Fees Paid Indirectly - The variable accounts' custody fees are reduced according
to an arrangement that measures the value of cash deposited with the custodian
by the variable accounts. During the six months ended June 30, 2004, each
variable account's custodian fee was reduced by the amount listed below under
this arrangement. Each variable account has entered into a commission recapture
agreement, under which certain brokers will credit each variable account a
portion of the commissions generated, to offset certain expenses of the variable
account. For six months ended June 30, 2004, each variable account's
miscellaneous expense was reduced under this agreement. These amounts are shown
as a reduction of total expenses on the Statement of Operations.
<Table>
<Caption>
CAPITAL GLOBAL GOVERNMENT HIGH MANAGED MONEY TOTAL
APPRECIATION GOVERNMENTS SECURITIES YIELD SECTORS MARKET RETURN
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
--------------------------------------------------------------------------------------------------------------------------
Balance credits $ -- $ -- $ (586) $ (1,623) $ -- $ -- $ (177)
Directed brokerage credits (2,246) (45) -- -- (488) -- --
============ =========== ========== ======== ======== ======== ========
</Table>
Federal Income Taxes - The variable accounts are funding vehicles for individual
variable annuities. The operations of the variable accounts are part of the
operations of Sun Life Assurance Company of Canada (U.S.), the Sponsor, and are
not taxed separately; the variable accounts are not taxed as regulated
investment companies. The Sponsor qualifies for the federal income tax treatment
granted to life insurance companies under Subchapter L of the Internal Revenue
Code. Accordingly, no provision for federal income or excise tax is necessary.
Foreign taxes have been provided for on interest and dividend income earned on
foreign investments in accordance with the applicable country's tax rates and to
the extent unrecoverable are recorded as a reduction of investment income.
(3) CONTRACT CHARGES
The Sponsor makes a deduction from the variable accounts at the end of each
valuation period, during both the accumulation period and after annuity payments
begin, for assuming the mortality and expense risks under the contracts. The
rate of the deduction may be changed annually but in no event may it exceed
1.25% of the average net assets of each variable account attributable to Compass
3 contracts, or, with respect to Compass 2 contracts, 1.30% of the assets of
Capital Appreciation Variable Account, Government Securities Variable Account,
High Yield Variable Account, and Money Market Variable Account, or 1.25% of the
assets of Global Governments Variable Account, Managed Sectors Variable Account,
and Total Return Variable Account attributable to such contracts.
44
<Page>
For assuming the distribution expense risk under Compass 3 contracts, the
Sponsor makes a deduction from the variable accounts at the end of each
valuation period for the first seven contract years at an effective annual rate
of 0.15% of the net assets of the variable accounts attributable to such
contracts. Contracts are transferred from Compass 3 to Compass 3 Level 2 in the
month following the seventh contract anniversary. No deduction is made after the
seventh contract anniversary. No deduction is made with respect to assets
attributable to Compass 2 contracts.
Each year, on the contract anniversary, a contract maintenance charge of $25
with respect to Compass 2 contracts and $30 with respect to Compass 3 contracts
is deducted from each contract's accumulation account and paid the Sponsor to
cover administrative expenses relating to the contract. After the annuity
commencement date, the annual contract maintenance charge is deducted pro rata
from each annuity payment made during the year.
The Sponsor does not deduct a sales charge from purchase payments. However, a
withdrawal charge (contingent deferred sales charge) may be deducted to cover
certain expenses relating to the sale of the contract. In no event shall the
aggregate withdrawal charges (including the distribution expense charge
described above applicable to Compass 3 contracts) exceed 5% of the purchase
payments made under a Compass 2 contract or 9% of the purchase payments made
under a Compass 3 contract.
(4) ANNUITY RESERVES
Annuity reserves for contracts with annuity commencement dates prior to February
1, 1987 have been calculated using the 1971 Individual Annuitant Mortality
Table. Annuity reserves for contracts with annuity commencement dates between
February 1, 1987 and December 31, 1998 have been calculated using the 1983
Individual Annuitant Mortality Table. Annuity reserves for contracts with
annuity commencement dates on or after January 1, 1999 have been calculated
using the Annuity Mortality 2000 table. Annuity reserves for contracts in
payment period are calculated using an assumed interest rate of 4%. Required
adjustments are accomplished by transfers to or from the Sponsor.
(5) TRANSACTIONS WITH AFFILIATES
Investment Adviser - Each variable account has an investment advisory agreement
with Massachusetts Financial Services Company (MFS), an affiliate of the
Sponsor, to provide overall investment advisory and administrative services, and
general office facilities. The management fee is computed daily and paid monthly
at an effective annual rate based on a percentage of each variable account's
average daily net assets as follows:
<Table>
<Caption>
ANNUAL RATE OF MANAGEMENT FEE ANNUAL RATE OF MANAGEMENT FEE
BASED ON AVERAGE BASED ON AVERAGE
DAILY NET ASSETS DAILY NET ASSETS
NOT EXCEEDING $300 MILLION IN EXCESS OF $300 MILLION
- --------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation Variable Account 0.75% 0.675%
Global Governments Variable Account 0.75% 0.675%
Government Securities Variable Account 0.55% 0.495%
High Yield Variable Account 0.75% 0.675%
Managed Sectors Variable Account 0.75% 0.675%
Money Market Variable Account 0.50% 0.500%
Total Return Variable Account 0.75% 0.675%
</Table>
The agreement also provides that the Investment Adviser will pay certain
variable account expenses in excess of 1.25% of the average daily net assets of
each variable account for any calendar year. The variable accounts pay no
compensation directly to their officers or members of the Board of Managers who
are affiliated with the Investment Adviser or the Sponsor.
Administrator - MFS provides certain financial, legal, shareholder
communications, compliance, and other administrative services to certain funds
for which MFS acts as investment adviser. Under an administrative services
agreement between the variable accounts and MFS, MFS is entitled to partial
reimbursement of the costs MFS incurs to provide these services, subject to
review and approval by the Board of Trustees. Each variable account is allocated
a portion of these administrative costs based on its size and relative average
net assets. Prior to April 1, 2004, each variable account paid MFS an
administrative fee up to the following annual percentage rates of the variable
accounts' average daily net assets:
<Table>
First $2 billion 0.0175%
Next $2.5 billion 0.0130%
Next $2.5 billion 0.0005%
In excess of $7 billion 0.0000%
</Table>
Effective April 1, 2004, each variable account paid MFS an administrative fee up
to the following annual percentage rates of the variable accounts' average daily
net assets:
<Table>
First $2 billion 0.01120%
Next $2.5 billion 0.00832%
Next $2.5 billion 0.00032%
In excess of $7 billion 0.00000%
</Table>
45
<Page>
For the six months ended June 30, 2004, the variable accounts paid MFS the
following to partially reimburse MFS for the costs of providing administrative
services:
<Table>
<Caption>
CAPITAL GLOBAL GOVERNMENT HIGH MANAGED MONEY TOTAL
APPRECIATION GOVERNMENTS SECURITIES YIELD SECTORS MARKET RETURN
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
---------------------------------------------------------------------------------------------------------------------------
Administrative fees $ 22,342 $ 910 $ 8,106 $ 6,113 $ 4,786 $ 3,427 $ 14,647
Percent of average daily net assets 0.01441% 0.01449% 0.01445% 0.01458% 0.01442% 0.01417% 0.01441%
============ =========== ========== ========= ========= ========== ==========
</Table>
(6) PORTFOLIO SECURITIES
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions, and short-term obligations were as follows:
<Table>
<Caption>
PURCHASES SALES
- --------------------------------------------------------------------------------------------------------------
Capital Appreciation Variable Account $ 92,086,783 $ 110,846,681
Global Governments Variable Account 6,677,053 6,508,179
Government Securities Variable Account -- 2,051,680
High Yield Variable Account 36,355,396 61,454,706
Managed Sectors Variable Account 29,821,974 35,249,434
Total Return Variable Account 65,127,024 77,621,012
</Table>
Purchases and sales of U.S. government securities, other than purchased option
transactions and short-term obligations, were as follows:
<Table>
<Caption>
PURCHASES SALES
- ---------------------------------------------------------------------------------------------------------------
Global Governments Variable Account $ 2,657,243 $ 2,586,704
Government Securities Variable Account 76,659,129 81,572,742
Total Return Variable Account 14,889,762 10,245,274
</Table>
Purchases and sales of investments for Money Market Variable Account, which
consist solely of short-term obligations, amounted to $974,195,568 and
$974,657,568, respectively, excluding repurchase agreements.
46
<Page>
(7) PARTICIPANT TRANSACTIONS
The changes in net assets from changes in numbers of outstanding units were as
follows:
<Table>
<Caption>
SIX MONTHS ENDED JUNE 30, 2004 (000 OMITTED)
--------------------------------------------------------------------------------------------------
TRANSFERS BETWEEN WITHDRAWALS,
VARIABLE ACCOUNTS SURRENDERS,
PURCHASE AND FIXED ANNUITIZATIONS, NET NET NET
PAYMENTS ACCUMULATION AND CONTRACT ACCUMULATION ANNUITIZATION INCREASES
RECEIVED ACCOUNT CHARGES ACTIVITY ACTIVITY (DECREASE)
-------------- ----------------- ---------------- ----------------- ------------- ----------
UNITS DOLLARS UNITS DOLLARS UNITS DOLLARS UNITS DOLLARS DOLLARS DOLLARS
----- ------- ------ --------- ----- --------- ------ --------- ------------- ----------
Capital Appreciation
Variable Account
Compass 2 Contracts 20 $ 962 (15) $ (643) (279) $ (14,520) (274) $ (14,201) $ (120) $ (14,321)
Compass 3 Contracts 45 1,505 (106) (3,613) (46) (1,583) (107) (3,691) (0)* (3,691)
Compass 3 -- Level 2 Contracts 103 1,386 243 3,563 (468) (6,672) (122) (1,723) (21) (1,744)
------- --------- --------- --------- ------------- ----------
$ 3,853 $ (693) $ (22,775) $ (19,615) $ (141) $ (19,756)
======= ========= ========= ========= ============= ==========
Global Governments
Variable Account
Compass 2 Contracts 2 $ 38 (15) $ (377) (10) $ (245) (23) $ (584) $ (2) $ (586)
Compass 3 Contracts 3 76 (8) (202) (2) (39) (7) (165) (1) (166)
Compass 3 -- Level 2 Contracts 7 91 16 228 (52) (735) (29) (416) (0)* (416)
------- --------- --------- --------- ------------- ----------
$ 205 $ (351) $ (1,019) $ (1,165) $ (3) $ (1,168)
======= ========= ========= ========= ============= ==========
Government Securities
Variable Account
Compass 2 Contracts 11 $ 351 (84) $ (3,029) (144) $ (5,250) (217) $ (7,928) $ (270) $ (8,198)
Compass 3 Contracts 12 283 (22) (557) (13) (329) (23) (603) 6 (597)
Compass 3 -- Level 2 Contracts 17 244 (8) (94) (123) (1,863) (114) (1,713) (32) (1,745)
------- --------- --------- --------- ------------- ----------
$ 878 $ (3,680) $ (7,442) $ (10,244) $ (296) $ (10,540)
======= ========= ========= ========= ============= ==========
High Yield Variable Account
Compass 2 Contracts 6 $ 209 (52) $ (1,739) (109) $ (3,725) (155) $ (5,255) $ (80) $ (5,335)
Compass 3 Contracts 7 171 (30) (738) (6) (141) (29) (708) 0* (708)
Compass 3 -- Level 2 Contracts 14 165 (1,589) (21,040) (94) (1,260) (1,669) (22,135) (3) (22,138)
------- --------- --------- --------- ------------- ----------
$ 545 $ (23,517) $ (5,126) $ (28,098) $ (83) $ (28,181)
======= ========= ========= ========= ============= ==========
Managed Sectors
Variable Account
Compass 2 Contracts 4 $ 103 0* $ 80 (35) $ (1,438) (31) $ (1,255) $ (8) $ (1,263)
Compass 3 Contracts 14 564 (30) (1,233) (10) (395) (26) (1,064) (7) (1,071)
Compass 3 -- Level 2 Contracts 58 721 97 1,347 (250) (3,317) (95) (1,249) (7) (1,256)
------- --------- --------- --------- ------------- ----------
$ 1,388 $ 194 $ (5,150) $ (3,568) $ (22) $ (3,590)
======= ========= ========= ========= ============= ==========
Money Market Variable Account
Compass 2 Contracts 6 $ 113 173 $ 3,504 (170) $ (3,428) 9 $ 189 $ 98 $ 287
Compass 3 Contracts 45 735 (56) (914) (26) (428) (37) (607) (11) (618)
Compass 3 -- Level 2 Contracts 12 123 1,697 21,010 (183) (2,247) 1,526 18,886 4 18,890
------- --------- --------- --------- ------------- ----------
$ 971 $ 23,600 $ (6,103) $ 18,468 $ 91 $ 18,559
======= ========= ========= ========= ============= ==========
Total Return Variable Account
Compass 2 Contracts 8 $ 300 35 $ 1,529 (142) $ (5,968) (99) $ (4,139) $ (97) $ (4,236)
Compass 3 Contracts 30 1,234 (67) (2,747) (29) (1,202) (66) (2,715) (44) (2,759)
Compass 3 -- Level 2 Contracts 71 1,324 174 3,532 (458) (9,101) (213) (4,245) (94) (4,339)
------- --------- --------- --------- ------------- ----------
$ 2,858 $ 2,314 $ (16,271) $ (11,099) $ (235) $ (11,334)
======= ========= ========= ========= ============= ==========
</Table>
*Amount less than $500
47
<Page>
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 2003 (OOO OMITTED)
------------------------------------------------------------------------------------------------
TRANSFERS BETWEEN WITHDRAWALS,
VARIABLE ACCOUNTS SURRENDERS,
PURCHASE AND FIXED ANNUITIZATIONS, NET NET NET
PAYMENTS ACCUMULATION AND CONTRACT ACCUMULATION ANNUITIZATION INCREASES
RECEIVED ACCOUNT CHARGES ACTIVITY ACTIVITY (DECREASE)
-------------- ----------------- ---------------- ---------------- ------------- ----------
UNITS DOLLARS UNITS DOLLARS UNITS DOLLARS UNITS DOLLARS DOLLARS DOLLARS
----- ------- ----- --------- ----- --------- ----- --------- ------------- ----------
Capital Appreciation
Variable Account
Compass 2 Contracts 52 $ 2,088 (57) $ (1,996) (476) $ (21,416) (481) $ (21,324) $ (565) $ (21,889)
Compass 3 Contracts 104 3,003 (26) (6,888) (59) (1,700) (191) (5,585) (34) (5,619)
Compass -- 3 Level 2 Contracts 205 2,276 338 4,579 (605) (7,443) (62) (588) (24) (612)
------- --------- --------- --------- ------------- ----------
$ 7,367 $ (4,305) $ (30,559) $ (27,497) $ (623) $ (28,120)
======= ========= ========= ========= ============= ==========
Global Governments
Variable Account
Compass 2 Contracts 1 $ 22 15 $ 346 (15) $ (365) 1 $ 3 $ (6) $ (3)
Compass 3 Contracts 9 195 (19) (422) (7) (165) (17) (392) (2) (394)
Compass -- 3 Level 2 Contracts 12 140 52 697 (73) (967) 9 (130) (5) (135)
------- --------- --------- --------- ------------- ----------
$ 357 $ 621 $ (1,497) $ (519) $ (13) $ (532)
======= ========= ========= ========= ============= ==========
Government Securities
Variable Account
Compass 2 Contracts 25 $ 845 (39) $ (1,440) (298) $ (10,778) (312) $ (11,373) $ (377) $ (11,750)
Compass 3 Contracts 33 816 (71) (1,792) (20) (512) (58) (1,488) 0 (1,488)
Compass 3 -- Level 2 Contracts 47 651 29 480 (206) (3,060) (130) (1,929) (24) (1,953)
------- --------- --------- --------- ------------- ----------
$ 2,312 $ (2,752) $ (14,350) $ (14,790) $ (401) $ (15,191)
======= ========= ========= ========= ============= ==========
High Yield
Variable Account
Compass 2 Contracts 17 $ 475 30 $ 1,123 (289) $ (9,021) (242) $ (7,423) $ (480) $ (7,903)
Compass 3 Contracts 19 413 (65) (1,440) (17) (392) (63) (1,419) 0 (1,419)
Compass 3 -- Level 2 Contracts 33 357 53 1,949 (139) (1,735) (53) 571 (6) 565
------- --------- --------- --------- ------------- ----------
$ 1,245 $ 1,632 $ (11,148) $ (8,271) $ (486) $ (8,757)
======= ========= ========= ========= ============= ==========
Managed Sectors
Variable Account
Compass 2 Contracts 10 $ 340 2 $ 215 (58) $ (2,163) (46) $ (1,608) $ (23) $ (1,631)
Compass 3 Contracts 42 1,477 (114) (4,104) (22) (789) (94) (3,416) (8) (3,424)
Compass 3 -- Level 2 Contracts 114 1,220 294 3,720 (353) (4,190) 55 750 (12) 738
------- --------- --------- --------- ------------- ----------
$ 3,037 $ (169) $ (7,142) $ (4,274) $ (43) $ (4,317)
======= ========= ========= ========= ============= ==========
Money Market
Variable Account
Compass 2 Contracts 27 $ 498 (138) $ (2,740) (343) $ (6,957) (454) $ (9,199) $ (128) $ (9,327)
Compass 3 Contracts 71 1,160 (63) (1,035) (39) (635) (31) (510) (11) (521)
Compass 3 -- Level 2 Contracts 65 782 168 2,162 (450) (5,603) (217) (2,659) 85 (2,574)
------- --------- --------- --------- ------------- ----------
$ 2,440 $ (1,613) $ (13,195) $ (12,368) $ (54) $ (12,422)
======= ========= ========= ========= ============= ==========
Total Return
Variable Account
Compass 2 Contracts 21 $ 727 14 $ 822 (218) $ (8,126) (183) $ (6,577) $ (462) $ (7,039)
Compass 3 Contracts 71 2,577 (208) (7,554) (44) (1,622) (181) (6,599) (107) (6,706)
Compass 3 -- Level 2 Contracts 140 2,277 396 7,328 (826) (14,797) (290) (5,192) 143 (5,049)
------- --------- --------- --------- ------------- ----------
$ 5,581 $ 596 $ (24,545) $ (18,368) $ (426) $ (18,794)
======= ========= ========= ========= ============= ==========
</Table>
(8) LINE OF CREDIT
Each variable account and other affiliated funds participate in an $800 million
unsecured line of credit provided by a syndication of banks under a line of
credit agreement. Borrowings may be made for temporary financing needs. Interest
is charged to each variable account, based on its borrowings, at a rate equal to
the bank's base rate plus 0.50%. In addition, a commitment fee, based on the
average daily, unused portion of the line of credit, is allocated among the
participating variable accounts at the end of each calendar quarter. The
commitment fee allocated to each variable account for the six months ended June
30, 2004, ranged from $71 and $1,526 and is included in miscellaneous expense.
None of the variable accounts had significant borrowings during the six months
ended June 30, 2004.
(9) FINANCIAL INSTRUMENTS
Certain variable accounts trades financial instruments with off-balance-sheet
risk in the normal course of its investing activities in order to manage
exposure to market risks such as interest rates and foreign currency exchange
rates. These financial instruments include written options, forward foreign
currency exchange contracts, and futures contracts. The notional or contractual
amounts of these instruments represent the investment the variable account has
in particular classes of financial instruments and does not necessarily
represent the amounts potentially subject to risk. The measurement of the risks
associated with these instruments is meaningful only when all related and
offsetting transactions are considered.
48
<Page>
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
<Table>
<Caption>
NET UNREALIZED
CONTRACTS TO CURRENCY CONTRACTS APPRECIATON
SETTLEMENT DATE DELIVER/RECEIVE ABBREVIATIONS IN EXCHANGE FOR AT VALUE (DEPRECIATION)
- -----------------------------------------------------------------------------------------------------------------------------------
Global Governments Sales 8/16/04 49,522 AUD $ 34,412 $ 34,242 $ 170
Variable Account 8/16/04 1,999,452 DKK 324,727 327,370 (2,643)
8/4/04-8/16/04 1,656,614 EUR 2,004,030 2,016,405 (12,375)
8/17/04 64,000 GBP 115,971 115,542 429
8/11/04 19,917,892 JPY 181,997 182,468 (471)
7/6/04 113,308,228 KRW 97,755 98,014 (259)
8/9/04 773,698 NZD 484,770 486,906 (2,136)
8/16/04 3,723 SEK 489 494 (5)
--------------- ----------- --------------
$ 3,244,151 $ 3,261,441 $ (17,290)
=============== =========== ==============
Purchases 8/16/04 16,681 AUD $ 11,376 $ 11,534 $ 158
8/16/04 149,565 CHF 120,325 119,631 (694)
8/4/04-8/16/04 375,540 EUR 453,159 457,096 3,937
8/17/04 199,763 GBP 360,173 360,643 470
8/4/04-8/11/04 397,171,686 JPY 3,606,074 3,638,469 32,395
7/6/04 113,308,228 KRW 97,335 98,015 680
8/16/04 157,275 NOK 22,767 22,680 (87)
7/28/04 231,369 PLN 61,689 62,275 586
8/16/04 924,858 SEK 121,866 122,778 912
--------------- ----------- --------------
$ 4,854,764 $ 4,893,121 $ 38,357
=============== =========== ==============
High Yield Sales 8/14/04 1,674,925 EUR $ 2,025,206 $ 2,038,545 $ (13,339)
Variable Account 8/16/04 469,274 SEK 61,626 62,298 (672)
--------------- ----------- --------------
$ 2,086,832 $ 2,100,843 $ (14,011)
=============== =========== ==============
Purchases 8/4/04 408,198 EUR $ 493,793 $ 496,885 $ 3,092
=============== =========== ==============
</Table>
At June 30, 2004, forward currency purchases and sales under master netting
agreements excluded above amounted to a net receivable of $4,380 with Merrill
Lynch International for the Global Governments Variable Account.
See page 23 for an explanation of abbreviations used to indicate amounts show in
currencies other than U.S. Dollar.
At June 30, 2004 the variable accounts had sufficient cash and/or securities to
cover any commitments under these contracts.
FUTURES CONTRACTS
<Table>
<Caption>
UNREALIZED
APPRECIATION
DESCRIPTION EXPIRATION CONTRACTS POSITION (DEPRECIATION)
- -----------------------------------------------------------------------------------------------------------------------------------
Government Securities Variable Account U.S. Treasury Notes-10 Year Futures September 2004 30 Long $ 10,304
U.S. Treasury Notes-2 Year Futures September 2004 47 Short (6,805)
---------
$ 3,499
</Table>
At June 30, 2004 the variable accounts had sufficient cash and/or securities to
cover any margin requirements under these contracts.
(10) LEGAL PROCEEDINGS
On March 31, 2004, MFS settled an administrative proceeding regarding disclosure
of brokerage allocation practices in connection with the sale of funds sponsored
by MFS (including the Variable Accounts). Under the terms of the settlement, in
which MFS neither admitted nor denied any wrongdoing, MFS agreed to pay (one
dollar) $1.00 in disgorgement and $50 million in penalty to certain MFS funds,
pursuant to a plan administered by an independent distribution consultant. The
agreement with the SEC is reflected in an order of the SEC. The settlement order
states that MFS failed to adequately disclose to the Boards of Trustees and to
shareholders of the MFS funds the specifics of its preferred arrangements with
certain brokerage firms selling MFS fund shares. The settlement order states
that MFS had in place policies designed to obtain best execution of all fund
trades.
As part of the settlement, MFS also agreed to retain an independent compliance
consultant to review the completeness of its disclosure to fund trustees and to
fund shareholders of strategic alliances between MFS or its affiliates and
broker-dealers and other financial advisers who support the sale of fund shares.
The brokerage allocation practices which were the subject of this proceeding
were discontinued by MFS in November 2003.
In addition, in February, 2004, MFS reached agreement with the Securities and
Exchange Commission ("SEC"), the New York Attorney General ("NYAG") and the
Bureau of Securities Regulation of the State of New Hampshire ("NH") to settle
administrative proceedings alleging false and misleading information in certain
retail fund prospectuses regarding market timing and related matters (the
"February Settlements"). These regulators alleged that prospectus language for
certain MFS funds was false and misleading because, although the prospectuses
for those funds in the regulators' view indicated that the funds prohibited
market timing, MFS did not limit trading activity in 11 domestic large cap
stock, high grade
49
<Page>
bond and money market funds. The complaints by these regulatory authorities did
not involve the Variable Accounts, but rather involved MFS' retail funds. MFS'
former Chief Executive Officer, John W. Ballen, and former President, Kevin R.
Parke, have also reached agreement with the SEC. Under the terms of the February
Settlements, MFS and the executives neither admit nor deny wrongdoing.
Under the terms of the February Settlements, a $225 million pool has been
established and funded by MFS for distribution to retail fund shareholders. MFS
has further agreed with the NYAG to reduce its management fees by approximately
$25 million annually over the next five years, and not to increase certain
management fees during this period. MFS has also paid an administrative fine to
NH in the amount of $1 million. In addition, MFS and the retail funds will adopt
certain governance changes.
Messrs. Ballen and Parke have agreed to temporary suspensions from association
with any registered investment company or investment adviser, will pay
approximately $315,000 each to the SEC, and resigned their positions as trustees
of all MFS funds, and Mr. Ballen resigned his position as President of all MFS
funds. Messrs. Ballen and Parke will not be returning to MFS or the MFS funds
after their suspensions.
MFS and certain MFS funds and their trustees and affiliates have been named as
defendants in class action and other lawsuits alleging similar claims concerning
market timing and use of fund assets in recognition of fund sales and seeking
damages of unspecified amounts.
Although MFS does not believe that these regulatory developments will have a
material adverse effect on the Variable Accounts, there can be no assurance that
these developments and/or the ongoing adverse publicity resulting from these
developments will not result in increased redemptions, reduced sales or other
adverse consequences.
(11) SUBSEQUENT EVENT
The following variable accounts' investment adviser, MFS, has been the subject
of an administrative proceeding regarding disclosure of brokerage allocation
practices in connection with fund sales, as described in the Legal Proceedings
Footnote. Pursuant to the SEC Order, MFS, on July 28, 2004 transferred $1.00 in
disgorgement and $50 million in penalty to the SEC (the "Payments"). A plan for
distribution of these Payments has been submitted to the SEC. Contemporaneous
with the transfer, certain variable accounts accrued an estimate of the amount
to be received upon final approval of the plan of distribution as follows:
<Table>
<Caption>
CAPITAL MANAGED TOTAL
APPRECIATION SECTORS RETURN
VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT
- --------------------------------------------------------------------------------------------
Cash Settlement $ 227,161 $ 63,230 $ 20,000
Increase in net asset value per unit
Compass 2 Contracts $ 0.040 $ 0.041 $ 0.008
Compass 3 Contracts $ 0.026 $ 0.040 $ 0.008
Compass 3 -- Level 2 Contracts $ 0.011 $ 0.013 $ 0.004
</Table>
50
<Page>
COMPASS VARIABLE ACCOUNTS
MEMBERS OF BOARDS OF MANAGERS AND OFFICERS -- IDENTIFICATION AND BACKGROUND
The Board of Managers of the Variable Accounts provides broad supervision over
the affairs of each Account. MFS is responsible for the investment management of
each Account's assets and the officers of the Variable Accounts are responsible
for its operations.
<Table>
<Caption>
POSITION(S) HELD MANAGER/OFFICER PRINCIPAL OCCUPATION AND OTHER
NAME, DATE OF BIRTH WITH FUND SINCE(1) DIRECTORSHIPS(2) DURING THE PAST FIVE YEARS
- -----------------------------------------------------------------------------------------------------------------------------
INTERESTED MEMBERS
C. James Prieur(3) Member July 1999 Sun Life Assurance Company of Canada, President and
(born 04/21/51) Chief Operating Officer (since April 1999), General
Manager, U.S. (until April 1999)
David D. Horn(3) Member April 1986 Private investor; Retired; Sun Life Assurance Company of
(born 06/07/41) Canada, Former Senior Vice President and General
Manager for the United States (until 1997)
INDEPENDENT MEMBERS
J. Kermit Birchfield Chairman May 1997 Consultant; Century Partners, Inc. (investments),
(born 01/08/40) Managing Director; Displaytech, Inc. (manufacturer of
liquid crystal display technology), Director
Robert C. Bishop Member May 2001 AutoImmune Inc. (pharmaceutical product development),
(born 01/13/43) Chairman, President and Chief Executive Officer; Caliper
Life Sciences Corp. (laboratory analytical instruments),
Director; Millipore Corporation (purification/filtration
products), Director; Quintiles Transnational Corp.
(contract services to the medical industry), Director
Frederick H. Dulles Member May 2001 Ten State Street LLP (law firm), Partner; McFadden,
(born 03/12/42) Pilkington & Ward LLP (solicitors and registered foreign
lawyers), Partner (until June 2003); Jackson & Nash, LLP
(law firm), Of Counsel (January 2000 to November 2000)
Derwyn F. Phillips Member April 1986 Retired
(born 08/31/30)
</Table>
- ----------
(1) Date first appointed to serve as Trustee/Officer of an MFS/Sun Life
Product. Each Member has served continuously since appointment.
(2) Directorships or trusteeships of companies required to report to the
Securities and Exchange Commission (i.e., "public companies").
(3) "Interested person" of Sun Life of Canada (U.S.), within the meaning of the
Investment Company Act of 1940 (referred to as the 1940 Act), which is the
principal federal law governing investment companies like the Series. The
address of Sun Life of Canada (U.S.) is One Sun Life Executive Park,
Wellesley Hills, Massachusetts 02481.
(4) "Interested person" of MFS within the meaning of the 1940 Act. The address
of MFS is 500 Boylston Street, Boston, Massachusetts 02116.
51
<Page>
<Table>
<Caption>
POSITION(S) HELD MANAGER/OFFICER PRINCIPAL OCCUPATION AND OTHER
NAME, DATE OF BIRTH WITH FUND SINCE(1) DIRECTORSHIPS(2) DURING THE PAST FIVE YEARS
- -----------------------------------------------------------------------------------------------------------------------------
Ronald G. Steinhart Member May 2001 Private investor; Bank One, Texas N.A., Vice Chairman
(born 06/15/40) and Director (January 2000 to January 2001); Bank One
Corporation, Officer (until January 2000); Carreker
Corporation (consultant and technology provider to
financial institutions), Director; Prentiss Properties
Trust (real estate investment trust), Director; United
Auto Group, Inc. (automotive retailer), Director
Haviland Wright Member May 2001 Hawaii Small Business Development Center, Kaua'i
(born 07/21/48) Center, Center Director (since March 2002); Displaytech,
Inc. (manufacturer of liquid crystal display technology),
Chairman and Chief Executive Officer (until March 2002)
MEMBERS EMERITUS
Garth Marston Member Emeritus Retired
(born 04/28/26)
Samuel Adams Member Emeritus Retired
(born 10/19/25)
OFFICERS
Robert J. Manning(4) President February 2004 Massachusetts Financial Services Company, Chief
(born 10/20/63) Executive Officer, President, Chief Investment Officer and
Director
John W. Ballen(4) President and August 2001 Massachusetts Financial Services Company, Chief
(born 09/12/59) Member until Executive Officer and Director (until February 2004)
February 2004
James R. Bordewick, Jr.(4) Assistant February 1997 Massachusetts Financial Services Company, Senior Vice
(born 03/06/59) Secretary President and Associate General Counsel
and Assistant
Clerk
Stephen E. Cavan(4) Secretary and December 1989 Massachusetts Financial Services Company, Senior Vice
(born 11/06/53) Clerk until President, General Counsel and Secretary (until March
March 2004 2004)
</Table>
- ----------
(1) Date first appointed to serve as Trustee/Officer of an MFS/Sun Life
Product. Each Trustee has served continuously since appointment.
(2) Directorships or trusteeships of companies required to report to the
Securities and Exchange Commission (i.e., "public companies").
(3) "Interested person" of Sun Life of Canada (U.S.), within the meaning of the
Investment Company Act of 1940 (referred to as the 1940 Act), which is the
principal federal law governing investment companies like the Series. The
address of Sun Life of Canada (U.S.) is One Sun Life Executive Park,
Wellesley Hills, Massachusetts 02481.
(4) "Interested person" of MFS within the meaning of the 1940 Act. The address
of MFS is 500 Boylston Street, Boston, Massachusetts 02116.
52
<Page>
<Table>
<Caption>
POSITION(S) HELD MANAGER/OFFICER PRINCIPAL OCCUPATION AND OTHER
NAME, DATE OF BIRTH WITH FUND SINCE(1) DIRECTORSHIPS(2) DURING THE PAST FIVE YEARS
- -----------------------------------------------------------------------------------------------------------------------------
Stephanie A. DeSisto(4) Assistant May 2003 Massachusetts Financial Services Company, Vice
(born 10/01/53) Treasurer President (since April 2003); Brown Brothers Harriman &
Co., Senior Vice President (November 2002 to April 2003);
ING Groep N.V./Aeltus Investment Management, Senior Vice
President (prior to November 2002)
Robert R. Flaherty(4) Assistant May 2001 Massachusetts Financial Services Company, Vice
(born 09/18/63) Treasurer President (since August 2000); UAM Fund Services,
Senior Vice President (prior to August 2000)
Richard M. Hisey(4) Treasurer August 2002 Massachusetts Financial Services Company, Senior Vice
(born 08/29/58) President (since July 2002); The Bank of New York,
Senior Vice President (September 2000 to July 2002);
Lexington Global Asset Managers, Inc., Executive Vice
President and Chief Financial Officer (prior to
September 2000); Lexington Funds, Chief Financial
Officer (prior to September 2000)
Ellen Moynihan(4) Assistant May 2001 Massachusetts Financial Services Company, Vice President
(born 11/13/57) Treasurer
Frank L. Tarantino Independent Chief September 2004 Tarantino LLC (provider of compliance services),
(born 03/07/44) Compliance Officer Principal (since June 2004); CRA Business Strategies
Group (consulting services), Executive Vice President
(April 2003 to June 2004); David L. Babson & Co.
(investment adviser), Managing Director, Chief
Administrative Officer and Director (February 1997 to
March 2003)
James O. Yost(4) Assistant May 2001 Massachusetts Financial Services Company, Senior Vice
(born 06/12/60) Treasurer President
</Table>
- ----------
(1) Date first appointed to serve as Trustee/Officer of an MFS/Sun Life
Product. Each Member has served continuously since appointment.
(2) Directorships or trusteeships of companies required to report to the
Securities and Exchange Commission (i.e., "public companies").
(3) "Interested person" of Sun Life of Canada (U.S.), within the meaning of the
Investment Company Act of 1940 (referred to as the 1940 Act), which is the
principal federal law governing investment companies like the Series. The
address of Sun Life of Canada (U.S.) is One Sun Life Executive Park,
Wellesley Hills, Massachusetts 02481.
(4) "Interested person" of MFS within the meaning of the 1940 Act. The address
of MFS is 500 Boylston Street, Boston, Massachusetts 02116.
The Accounts do not hold annual meetings for the purpose of electing Members of
the Board of Managers ("Managers"), and Managers are not elected for fixed
terms. The Accounts will hold a shareholders' meeting in 2005 and at least once
every five years thereafter to elect Managers. Each Manager and officer holds
office until his or her successor is chosen and qualified, or until his or her
earlier death, resignation, retirement or removal.
All Managers currently serve as Manager of each Account and have served in that
capacity since originally elected or appointed. All of the Managers are also
Trustees of the MFS Sun/Life Series Trust. The executive officers of the Compass
Variable Accounts hold similar offices for the MFS Sun/Life Series Trust and
other funds in the MFS fund complex. Each Manager serves as a Trustee or Manager
of 36 Accounts/Series.
The Statement of Additional Information contains further information about the
Trustees and is available without charge upon request by calling
1-800-752-7215.
53
<Page>
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116-3741
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110-2875
A general description of the MFS Funds proxy voting policies is available
without charge, upon request, by calling 1-800-225-2606, by visiting the About
MFS section of mfs.com or by visiting the SEC's website at http://www.sec.gov.
Information regarding how the variable accounts voted proxies relating to
portfolio securities during the most recent twelve month period ended June 30 is
available without charge by visiting the proxy voting section of mfs.com or by
visiting the SEC's website at http://www.sec.gov.
PORTFOLIO MANAGERS++
Margaret Adams
William J. Adams
John F. Addeo
David A. Antonelli
David M. Calabro
James J. Calmas
Kenneth J. Enright
Steven R. Gorham
Alan Langsner
John D. Laupheimer, Jr.
Gregory Locraft
Kate Mead
Constantinos Mokas
Edward L. O'Dette
Stephen Pesek
Scott B.Richards
Michael W. Roberge
Matthew W. Ryan
James T. Swanson
Brooks Taylor
Peter C. Vaream
Terri A. Vitozzi
(C) 2004 MFS/Sun Life Financial Distributors Inc.
++MFS Investment Management(R)
COUS-SEM 8/04 45M
<Page>
ITEM 2. CODE OF ETHICS.
Applicable for semi-annual reports if the registrant has amended the code of
ethics during the period covered by the report or has granted a waiver,
including an implicit waiver, from a provision of the code of ethics.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not Applicable for semi-annual reports.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not Applicable for semi-annual reports.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable to the Registrant.
ITEM 6. SCHEDULE OF INVESTMENTS
Not applicable at this time. [Applicable for periods ending on or after July 9,
2004 (beginning with Form N-CSRs filed at the end of September, 2004 for July
31, 2004 reporting period.)]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable to the Registrant.
ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable to the Registrant.
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Board of Trustees of the Registrant has adopted procedures by which
shareholders may send communications, including recommendations for nominees to
the Registrant's Board, to the Board. Shareholders may mail written
communications to the Board to the attention of the Board of Trustees, [name of
series of the Registrant], Massachusetts Financial Services Company, 500
Boylston Street, Boston, MA 02116, c/o Frank Tarantino, Independent Chief
Compliance Officer of the Fund. Shareholder communications must (i) be in
writing and be signed by the shareholder, (ii) identify the
<Page>
series of the Registrant to which it relates, and (iii) identify the class and
number of shares held by the shareholder.
ITEM 10. CONTROLS AND PROCEDURES.
(a) Based upon their evaluation of the registrant's disclosure controls and
procedures as conducted within 90 days of the filing date of this Form
N-CSR, the registrant's principal financial officer and principal executive
officer have concluded that those disclosure controls and procedures
provide reasonable assurance that the material information required to be
disclosed by the registrant on this report is recorded, processed,
summarized and reported within the time periods specified in the Securities
and Exchange Commission's rules and forms.
(b) There were no changes in the registrant's internal controls over financial
reporting (as defined in Rule 30a-3(d) under the Act) that occurred during
the registrant's last fiscal half-year (the registrant's second fiscal
half-year in the case of an annual report) that has materially affected, or
is reasonably likely to materially affect, the registrant's internal
control over financial reporting.
ITEM 11. EXHIBITS.
(a) File the exhibits listed below as part of this Form. Letter or number the
exhibits in the sequence indicated.
(1) [**An amendment to the code of ethics, that is the subject of the
disclosure required by Item 2, to the extent that the registrant
intends to satisfy the Item 2 requirements through filing of an
exhibit: The amendment is attached hereto.**][**APPLICABLE IF THE
REGISTRANT HAS AMENDED ITS CODE OF ETHICS DURING THE PERIOD COVERED BY
REPORT**]
(2) A separate certification for each principal executive officer and
principal financial officer of the registrant as required by Rule 30a-2
under the Act (17 CFR 270.30a-2): Attached hereto.
(b) If the report is filed under Section 13(a) or 15(d) of the Exchange Act,
provide the certifications required by Rule 30a-2(b) under the Act (17 CFR
270.30a-2(b)), Rule 13a-14(b) or Rule 15d-14(b) under the Exchange Act (17
CFR 240.13a-14(b) or 240.15d-14(b)) and Section 1350 of Chapter 63 of Title
18 of the United States Code (18 U.S.C. 1350) as an exhibit. A
certification furnished pursuant to this paragraph will not be deemed
"filed" for the purposes of Section 18 of the Exchange Act (15 U.S.C. 78r),
or otherwise subject to the liability of that section. Such certification
will not be deemed to be incorporated by reference into any filing under
the Securities Act of 1933 or the Exchange Act, except to the extent that
the registrant specifically incorporates it by reference: Attached hereto.
<Page>
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) TOTAL RETURN VARIABLE ACCOUNT
--------------------------------------------------------------------
By (Signature and Title)* ROBERT J. MANNING
------------------------------------------------------
Robert J. Manning, President
Date: August 23, 2004
---------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* ROBERT J. MANNING
------------------------------------------------------
Robert J. Manning, President (Principal Executive
Officer)
Date: August 23, 2004
---------------
By (Signature and Title)* RICHARD M. HISEY
-----------------------------------------------------
Richard M. Hisey, Treasurer (Principal Financial
Officer and Accounting Officer)
Date: August 23, 2004
---------------
* Print name and title of each signing officer under his or her signature.