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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 811-4009
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GOVERNMENT SECURITIES 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: December 31, 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
ANNUAL REPORT - DECEMBER 31, 2004
CAPITAL APPRECIATION VARIABLE ACCOUNT
GLOBAL GOVERNMENTS VARIABLE ACCOUNT
GOVERNMENT SECURITIES VARIABLE ACCOUNT
HIGH YIELD VARIABLE ACCOUNT
MANAGED SECTORS VARIABLE ACCOUNT
MONEY MARKET VARIABLE ACCOUNT
TOTAL RETURN VARIABLE ACCOUNT
ISSUED BY
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S),
A WHOLLY OWNED SUBSIDIARY OF
SUN LIFE OF CANADA (U.S.) HOLDINGS, INC.
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TABLE OF CONTENTS
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Letter from the CEO of MFS 1
Management Reviews 2
Performance Summary 7
Portfolio Composition 8
Portfolio of Investments 15
Financial Statements 30
Notes to Financial Statements 49
Report of Independent Registered Public Accounting Firm 58
Managers and Officers 59
Proxy Voting Policies and Information Back Cover
Quarterly Portfolio Disclosure Back Cover
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THIS REPORT IS PREPARED FOR THE GENERAL INFORMATION OF CONTRACT OWNERS. IT IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY WHEN PRECEDED OR
ACCOMPANIED BY A CURRENT PROSPECTUS.
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NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
NOT A DEPOSIT NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
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LETTER FROM THE CEO OF MFS
DEAR CONTRACT OWNERS,
For most investors, the main factor in determining long-term success is asset
allocation -- how they spread their money among stocks, bonds, and cash. In
fact, the total returns of investors may be more influenced by their asset
allocation strategy than by their security selection within each asset class.
The principle behind asset allocation is simple: by diversifying across a
variety of types of securities, investors reduce the overall risk of their
portfolio because gains in one area are likely to offset losses in another.
One of the dangers of not having an asset allocation plan is the temptation to
simply chase performance, by moving money into whichever asset class appears to
be outperforming at the moment. The problem with this approach is that by the
time a particular area of the market comes into favor, investors may have
already missed some of the best performance. We would suggest that one way to
benefit from swings in the market is to acquire a diversified portfolio so that
investors hold a range of asset classes BEFORE the market swings in their
direction.
UNDERSTAND YOUR EMOTIONS
It usually takes a bear market for people to appreciate the benefits of
diversification. At MFS, we believe proper asset allocation is important in all
market environments. But we understand that there are emotional components of
investment decisions that sometimes keep investors from achieving their long
term goals. The three common behaviors that negatively impact investment
decisions are overconfidence, looking backwards, and loss aversion.
- - OVERCONFIDENCE. After experiencing gains in the market, particularly during a
bull market, investors have a natural tendency to overestimate their own
abilities. During the global bull market of the late 1990s, for example, a
large number of investors traded their own stocks and made significant
profits. However, most of these same investors later handed back those
profits -- and then some -- because they focused more on short-term blips in
the market and less on the fundamental factors that affect a company's
long-term prospects.
- - LOOKING BACKWARDS. Although security prices are determined by expectations
about the future, many investors make choices based on the recent past.
Investors who have achieved momentary success in the market tend to take on
too much risk, believing that better-than-average returns can be easily
duplicated. On the other hand, those who have had negative experiences tend
to become overly cautious and take on too little risk. Recent historical
experience tends to dictate an investor's frame of reference and may lead to
irrational decisions.
- - LOSS AVERSION. Simply put, investors would rather avoid the immediate pain of
losses than enjoy the future pleasure of gains. As a result, some investors
tend to overreact to short-term downturns in the market by seeking to
mitigate their losses, rather than remaining invested to benefit from the
long-term growth potential of the stock and bond markets.
THINK LIKE A PROFESSIONAL INVESTOR
Asset allocation helps reduce the emotional factors that tend to affect the
long-term returns of investors. Professional investors -- those who manage
assets for money management firms, pension funds, and endowments -- have tended
to outperform the average retirement investor because they focus on asset
allocation. For example, the investment performance of the average 401(k)
participant has lagged these professional investors by more than two percentage
points a year, on average, over the past 10 years.(1)
We think asset allocation is one of the most important decisions for investors.
A study of the performance of 91 large U.S. corporate pension plans with assets
of more than $100 million over a 10-year period beginning in 1974 concluded that
asset allocation policies accounted for 93.6% of their returns, while individual
security selection and the timing of their investments accounted for only 6.4%
of their overall performance.(2)
Professional investors target a realistic level of return based on the amount of
risk they are willing to take, then set allocations to meet their goals. On
average, U.S. professional investors allocate 35% to 40% of their assets to
domestic equity stocks; 20% to 30% to fixed income issues; 10% to international
stocks; and between 10% and 20% to other investment classes such as real
estate.(3) And within those categories, they hold a broad range of styles and
asset classes.
In contrast, 401(k) participants who held company stock in their retirement
plans at the end of 2002 had roughly 42% of their retirement assets in company
stock while the rest was allocated to either growth or value stock funds.(4)
These participants virtually ignored the broad range of equity, fixed-income,
and international offerings provided by their retirement plans.
ALLOCATE, DIVERSIFY, REBALANCE
We recommend working with a professional adviser to find an optimal mix of
investments based on your individual goals. In our view, a disciplined asset
allocation strategy is composed of three simple steps: allocate, diversify and
rebalance.
- - ALLOCATE. Investors should work with their financial adviser to specify their
long-term goals and tolerance for risk. Then investors should allocate their
assets across the major asset classes -- stocks, bonds, and cash -- to help
them pursue an investment return that is consistent with their risk tolerance
level.
- - DIVERSIFY. By diversifying their assets, investors trade some performance in
the top performing categories for a more predictable and stable portfolio. At
the same time, investors should include different investment styles and
market capitalizations of stocks and a range of fixed-income investments, as
well as U.S. and non-U.S. securities. Because security subclasses tend to
move in and out of favor during various market and economic environments, a
broad portfolio increases the benefits of diversification.
- - REBALANCE. We suggest that investors consult with their professional advisers
periodically to rebalance their portfolios to maintain the percentages that
they have dedicated to each asset class. Allocations can shift as markets
rise and fall, making for a riskier or more conservative portfolio than an
investor originally intended. For example, a portfolio of 50% stocks and 50%
bonds at the start of 2000 would have shifted to 32% stocks and 68% bonds at
the end of 2002 because of the weak stock market.(5)
In short, these three simple concepts -- allocate, diversify and rebalance --
help take emotion out of the investment process and help prevent investors from
trying to outguess the market. An asset allocation strategy cannot turn a down
market cycle into a good one, but it is an invaluable tool to manage risk and
keep investors on track toward reaching their long term investment goals.
A DISCIPLINED INVESTMENT PROCESS IS PARAMOUNT
Disciplined diversification has helped investors pursue long-term, above-average
results through the years. Since 1924, when we
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invented the mutual fund, MFS(R) has strived to give investors the products and
tools they need to maintain well-diversified portfolios. MFS provides a variety
of products in each asset class as well as a family of asset allocation funds.
These asset allocation portfolios cover a range from conservative to moderate,
growth, and aggressive growth allocations, each with a strategy based on a
distinct level of risk. We recommend developing a comprehensive financial plan
with an investment advisor who is familiar with your risk tolerance, your
individual goals, and your financial situation.
As always, we appreciate your confidence in MFS and welcome any questions or
comments you may have.
Respectfully,
/s/ Robert J. Manning
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management
Investment Advisor to the MFS/Compass Variable Accounts
January 14, 2005
Asset allocation and diversification can not guarantee a profit or protect
against a loss. The opinions expressed in this letter are those of MFS, and no
forecasts can be guaranteed.
(1) Source: Watson Wyatt
(2) "Determinants of Portfolio Performance," in Financial Analysts Journal,
January/February 1995, by Gary P. Brinson, L. Randolph Hood, and Gilbert L.
Beebower
(3) Source: Greenwich Associates
(4) Source: Hewitt Associates
(5) Source: Lipper Inc.
STOCK MARKET ENVIRONMENT
In 2004, after enduring a somewhat rocky ride, most of the world's major stock
markets posted solid gains. In our view, better-than-expected corporate earnings
and improved economic indicators encouraged investors and drove equity markets,
although, for a time, it seemed that record-high oil prices, rising short-term
interest rates in the U.S., a decline in the U.S. dollar against most major
currencies, as well as geopolitical uncertainty, tested equity markets. But, oil
prices pulled back from their record levels late in the year, and in our view,
investors turned their attention to strong corporate profits and economic
growth, which were up noticeably, if not dramatically, for the year.
BOND MARKET ENVIRONMENT
Bond market returns in 2004 turned out to be a pleasant surprise. At about
mid-year, we believe improving economic fundamentals prompted the U.S. Federal
Reserve Board to raise short-term rates -- marking the first rate increase in
four years. While the Fed followed with four more hikes throughout the year, we
feel that enough uncertainty about the strength of the economic recovery
remained to fuel investor demand in U.S. Treasuries and other high-quality
bonds, both of which are seen as a refuge in times of economic concern.
(Principal and interest of U.S. Treasury securities are guaranteed by the U.S.
government if held to maturity.) Perhaps the biggest surprise of 2004 was that
long-term interest rates -- which we believed were expected to rise -- did not.
In the high yield market, we believe easy access to capital, a declining default
rate, and stronger credit profiles aided returns throughout the year.
From our perspective, the improvement in equity markets going into the last
quarter of 2004 prevented significant advances in most bond markets. Even so,
the slowdown in U.S. gross domestic product (GDP) -- a measure of the value of
all goods and services in the U.S. economy -- and job growth, in the second half
of the year, curbed expectations about the pace of the economic recovery. We
believe that such concerns, combined with geopolitical worries about Iraq and
fear of future terrorist attacks, kept investors focused on bond markets.
MANAGEMENT REVIEWS
CAPITAL APPRECIATION VARIABLE ACCOUNT
For the year ended December 31, 2004, the Compass 2 account provided a total
return of 9.47%; the Compass 3 account provided a total return of 9.36%; and the
Compass 3 -- Level 2 account provided a total return of 9.52%. These returns,
which include the reinvestment of any dividends and capital gains distributions,
compare with a return of 6.30% over the same period for the account's benchmark,
the Russell 1000 Growth Index. The account seeks to maximize capital
appreciation by investing in securities of all types with a major emphasis on
common stocks. The account invests, under normal market conditions, at least 65%
of its net assets in common stocks and related securities, such as preferred
stocks, convertible securities and depositary receipts of those securities, of
companies which the account's investment advisor, MFS, believes possess
above-average growth opportunities.
CONTRIBUTORS TO PERFORMANCE
Stock selection in the health care and special products and services sectors was
a major contributor to relative performance. Within the industrial goods and
services sector a combination of stock selection and allocation boosted relative
results for the period.
In the health care sector, our underweighted position in Pfizer* and our
decision not to own Merck* aided relative performance as both stocks
underperformed. In the industrial goods and services sector, our holdings in
international conglomerate Tyco also aided results.
Stocks in other sectors that contributed to the portfolio's relative performance
for the period included FedEx Corp., Marvell Technology, and discount retailer
Target. Our underweighted position in poor-performing technology giant Intel*
and our decision not to hold Coca-Cola* also aided relative results.
DETRACTORS FROM PERFORMANCE
Stock selection in the leisure sector held back relative performance. Our
holdings in Clear Channel Communications* and not holding Starbucks* hurt
results during the period. Stock selection in the financial services sector also
held back relative returns, although no stocks within the sector were among the
portfolio's top individual detractors.
Stocks in other sectors that dampened results for the period included poor
performing pharmaceutical company AstraZeneca, which is not in the benchmark.
Our underweighted position in technology company QUALCOMM* and not owning health
care firm
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UnitedHealth Group also held back results as did our underweighted position in
retailer Home Depot.*
The portfolio's cash position held back relative performance. As with nearly all
portfolios, this account holds some cash to buy new holdings and to provide
liquidity. In a period when growth equity markets -- as measured by the Russell
1000 Growth Index -- rose, holding any cash hurt relative performance. The index
does not have a cash position.
* Stock was not held in the portfolio at the end of the period.
GLOBAL GOVERNMENTS VARIABLE ACCOUNT
For the year ended December 31, 2004, the Compass 2 account provided a total
return of 8.23%, the Compass 3 account provided a total return of 8.07%, and the
Compass 3 -- Level 2 account provided a total return of 8.23%. These returns,
which include the reinvestment of any dividends and capital gains distributions,
compare with the return of 10.35% over the same period for the account's
benchmark, the Citigroup World Government Bond Index. The account seeks to
provide moderate current income, preservation of capital and growth of capital
by investing in debt obligations that are issued or guaranteed as to principal
and interest by either (i) the U.S. Government, its agencies, authorities or
instrumentalities or (ii) the governments of foreign countries (to the extent
that MFS believes that the higher yields available from foreign government
securities are sufficient to justify the risks of investing in these
securities.) The account invests, under normal market conditions, at least 80%
of its net assets in fixed income securities of the U.S. government and foreign
government securities of developed countries. The account may also invest in
derivative instruments to offset adverse impacts in various markets.
DETRACTORS TO PERFORMANCE
During the reporting period, the portfolio was adversely affected by our
positions in the British pound and the Japanese yen, as well as our country
selection in euro-area bonds.
CONTRIBUTORS TO PERFORMANCE
The portfolio benefited markedly from an overweight in the euro, as well as from
currency overweights in the dollar bloc (Canada, Australia, and New Zealand),
Sweden, and Eastern Europe (Poland and the Czech Republic). We also added value
with bond overweights in Denmark, Sweden, and Australia. Our sector selection in
U.S. bonds also added to performance, as did our curve positioning in U.K.
bonds.
GOVERNMENT SECURITIES VARIABLE ACCOUNT
For the year ended December 31, 2004, the Compass 2 account provided a total
return of 2.38%, the Compass 3 account provided a total return of 2.28%, and the
Compass 3 -- Level 2 account provided a total return of 2.43%. These returns,
which include the reinvestment of any dividends and capital gains distributions,
compare with a return of 4.08% over the same period for the account's benchmark,
the Lehman Brothers Government/Mortgage Index. The account seeks to provide
current income and preservation of capital by investing in U.S. Government
securities. The account invests, under normal market conditions, at least 80% of
its net assets in U.S. Government securities, including bonds or other debt
obligations issued by, or whose principal and interest payments are guaranteed
by, the U.S. government or one of its agencies or instrumentalities such as the
Student Loan Marketing Association ("Sallie Mae"), Federal Home Loan Banks, the
Federal Home Loan Mortgage Corporation ("Freddie Mac") and the Federal National
Mortgage Association ("Fannie Mae") and obligations fully collateralized or
otherwise fully secured by such entities.
DETRACTORS FROM PERFORMANCE
Holding lower-yielding issues relative to the account's benchmark held back
results for the period. We were underweighted in 30-year mortgage-backed
securities, which outperformed comparable maturity treasuries. The portfolio was
adversely impacted by pre-payments on certain longer-term mortgage-backed
securities.
CONTRIBUTORS TO PERFORMANCE
Over the period, the portfolio benefited from its allocation to government
agency securities. Our duration positioning also contributed to relative
results. (Duration is a measure of sensitivity to changes in interest rates.)
HIGH YIELD VARIABLE ACCOUNT
For the year ended December 31, 2004, the Compass 2 account provided a total
return of 7.67%; the Compass 3 account provided a total return of 7.57%; and the
Compass 3 -- Level 2 account provided a total return 7.73%. These returns, which
include the reinvestment of any dividends and capital gains distributions,
compare to returns over the same period of 11.13% and 10.33% respectively for
the accounts' benchmarks, the Lehman Brothers High Yield Index (the Lehman
Index) and the Lipper High Yield Index. The account seeks to provide high
current income and capital appreciaton by investing primarily in fixed income
securities of U.S. and foreign issuers which may be in the lower rated
categories or unrated and may involve equity features.
DETRACTORS FROM PERFORMANCE
The portfolio's underperformance versus its benchmark was attributable, in part,
to our underweighted positions in the more speculative lower-rated sectors of
the high yield market which generated above-average returns in 2004. Several
specific holdings also detracted from relative performance, including Dobson
Communications, a regional wireless services provider, Allied Waste, and
poor-performing textile manufacturer Westpoint Stevens.*
CONTRIBUTORS TO PERFORMANCE
The portfolio's relative performance was helped by several individual holdings
that performed well during the period, including Safilo Capital International, a
maker of corrective eyewear and sunglasses, chemical company Rhodia, Texas
energy company El Paso Corp., and retail energy firm Mirant Americas*.
* Asset was not held in the portfolio at the end of the period.
MANAGED SECTORS VARIABLE ACCOUNT
For the year ended December 31, 2004, the Compass 2 account provided a total
return of 5.26%, the Compass 3 account provided a total return of 5.10%, and the
Compass 3 -- Level 2 account provided a total return of 5.26%. These returns,
which include the reinvestment of any dividends and capital gains distributions,
compare with a return of 6.30% over the same period for the account's benchmark,
the Russell 1000 Growth Index (the Russell Index). The account seeks capital
appreciation by varying the weighting of its portfolio among 13 sectors. The
account invests, under normal market conditions, at least 65% of its total
assets in common stocks and related securities, such as preferred stock,
convertible securities and depositary receipts of companies in 13 sectors.
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DETRACTORS FROM PERFORMANCE
On the negative side, stock selection in the leisure and financial services
sectors detracted from relative results. In leisure, continued anemic radio
advertising spending weighed on our holdings in Clear Channel Communications*,
Viacom Inc. and Westwood One*. Turning to the financial sector, while our
overall positioning was detrimental to performance, no one stock within the
group was among the portfolio's top detractors.
Although the technology sector was overall a net positive, individual stocks
from that group proved to be some of our bigger disappointments, including
IAC/InterActiveCorp.*, Analog Devices, Cisco Systems, Texas Instruments, and
Xilinx*.
Stocks in other sectors that detracted from relative returns included our
decision not to own strong performing managed care firm UnitedHealth Group and
underweighting household products and personal care giant Procter & Gamble Co.
CONTRIBUTORS TO PERFORMANCE
Stock selection in the health care, retailing, and industrial goods and services
sectors boosted the portfolio's performance relative to its benchmark.
Underweighting Pfizer* helped results as the company's stock significantly
underperformed. Our relative positioning in Gilead Sciences also aided relative
results.
Stock selection was likewise supportive in the retailing sector. Our position in
discount retailer Target was the leading contributor. Elsewhere in retailing,
our underweighted position in Wal-Mart* aided results as that stock trailed the
index.
Our positioning among industrial goods and services providers was also
beneficial, although no individual stock within the sector made our top
contributors list.
Stocks in other sectors that aided relative results included holdings in
anti-virus software concern Symantec Corp. and online auctioneer eBay Inc. and
an underweighted position in technology giant Intel*. Positions in cruise line
operator Carnival Corp. and express delivery firm FedEx Corp. also helped
results. Our decision not to hold Coca-Cola was also a benefit as that stock
performed poorly during the period.
* Stock was not held in the portfolio at the end of the period.
MONEY MARKET VARIABLE ACCOUNT
For the year ended December 31, 2004, the Compass 2 account provided a total
return of -0.57%, the Compass 3 account provided a total return of -0.67%, and
the Compass 3 -- Level 2 account provided a total return of -0.52%. These
returns include the reinvestment of any distributions. As of December 31, 2004,
the account's seven-day yield with and without waivers was 1.55%. The yield
quotation is based on the latest seven days ended with dividends annualized, and
more closely reflects the account's current earnings than does the total return
quotation. The account seeks maximum current income to the extent consistent
with stability of principal by investing exclusively in money market instruments
maturing in less than 13 months.
PORTFOLIO PERFORMANCE
We expected interest rates to rise during the period and, as such, we shortened
the weighted average maturity for the account significantly, from 51 days at the
start of the period to 32 days as the period ended. Essentially, we looked to
cut our interest-rate risk anticipating short-term rates would begin to rise and
continue to do so throughout the period.
On December 31, 2004, approximately 83% of the account's assets were invested in
first tier commercial paper with the remainder in U.S. government sponsored
agencies and repurchase agreements collateralized by U.S. government sponsored
agencies.
An investment in the portfolio is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency. Although the
portfolio seeks to preserve the value of your investment at $1.00 per share, it
is possible to lose money by investing in the portfolio.
TOTAL RETURN VARIABLE ACCOUNT
For the year ended December 31, 2004, the Compass 2 account provided a total
return of 10.00%, the Compass 3 account provided a total return of 9.84%, and
the Compass 3 -- Level 2 account provided a total return of 10.00%. These
returns, which include in the reinvestment of any capital gains and dividend
distributions, compare with returns of 10.87% and 4.34%, respectively for the
account's benchmarks, the Standard & Poor's 500 Stock Index (S&P 500) and the
Lehman Brothers Aggregate Bond Index (the Lehman Index). The account seeks to
provide above-average income (compared to a portfolio invested entirely in
equity securities) consistent with the prudent employment of capital. It's
secondary objective is to provide reasonable opportunity for growth of capital
and income. Under normal market conditions, the account invests at least 40%,
but not more than 75%, of its net assets in common stocks and related
securities, such as preferred stocks, bonds, warrants or rights convertible into
stocks and depository receipts for those securities, and at least 25% of its net
assets in non-convertible fixed income securities.
CONTRIBUTORS TO PERFORMANCE
For the equity portion of the portfolio, utilities and communications, energy,
and basic materials were the best performing sectors over the period relative to
the S&P 500 Index. In energy our allocation decision -- overweighting a strong
performing sector -- aided results. Within this group, drilling contractors,
Noble Corp. and GlobalSantaFe, enhanced the account's relative results. In both
utilities and communications and basic materials, stock selection contributed to
relative results. Among the account's better overall relative performing
positions were utilities and communications stocks Sprint and AT&T Wireless*, as
well as Texas-based electric power generator TXU. Prices of all three stocks
rose significantly over the period. AT&T Wireless* was acquired during the year
by Cingular, a joint venture of SBC and BellSouth. In basic materials, packaging
company Owens-Illinois and iron ore miner Companhia Vale do Rio Doce aided
results as both stocks posted strong absolute and relative returns for the
period.
Several stocks in the technology and health care sectors contributed to relative
results. In technology, avoiding Intel and underweighting Cisco Systems aided
results, as prices for both stocks declined over the period. An underweighted
position in pharmaceutical firm Pfizer also helped relative returns.
For the fixed income portion of the portfolio, the account benefited from our
duration positioning and our sector allocation decisions relative to the Lehman
Aggregate Index. (Duration is a measure of sensitivity to interest rate
changes.) In addition, allocation to industrial and inflation linked bonds aided
results. Exposure to "BBB"-rated and crossover corporate bonds also helped
results relative to the Lehman Index.
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DETRACTORS FROM PERFORMANCE
For the equity portion of the portfolio, stock selection in leisure and
retailing detracted from results relative to the S&P 500. In the leisure sector,
media company Viacom was among our top overall detractors. In retailing, holding
pharmaceutical chain Rite Aid also held back results.
Not owning strong performing technology companies eBay and QUALCOMM held back
relative results during the period. Elsewhere in the sector, holding
underperformer Nortel Networks detracted from relative results. In the energy
sector, an underweighted position in strong performing Exxon Mobil held back
results, as we did not fully participate in this stock's run up in price.
Stocks in other sectors that detracted from relative results included Mellon
Financial, Tenet Healthcare, and power producer Calpine, from the financial
services, health care, and the utilities and communication sectors,
respectively. For the fixed income portion of the portfolio, our underweighted
position in some high quality U.S. Agency debt issues and supranationals held
back results relative to the Lehman Index.
* Asset was not held in the portfolio at the end of the period.
The views expressed in this report are those of the portfolio managers only
through the end of the period of the report as stated on the cover and do not
necessarily reflect the views of MFS or any other person in the MFS
organization. These views are subject to change at any time based on market and
other conditions, and MFS disclaims any responsibility to update such views.
These views may not be relied upon as investment advice or an indication of
trading intent on behalf of any MFS/Compass Variable Accounts. References to
specific securities are not recommendations of such securities, and may not be
representative of any MFS/Compass Variable Accounts' current or future
investments.
The portfolios are actively managed, and current holdings may be different.
Variable annuities are designed for long-term retirement investing, please see
your investment professional for more information.
INDEX DEFINITIONS
Citigroup World Government Bond Index -- measures the government bond markets
around the world.
Lehman Brothers Government/Mortgage Index -- measures government and mortgage
securities markets.
Lehman Brothers High Yield Index -- measures the universe of non-investment
grade, fixed-rate debt, Pay-in-kind (PIK) bonds, Eurobonds, and debt issues from
countries designated as emerging markets (e.g., Argentina, Brazil, Venezuela,
etc.) are excluded.
Lehman Brothers Aggregate Index -- measures the U.S. investment grade, fixed
rate bond market, with index components for government and corporate securities,
mortgage pass-through securities, and asset-backed securities.
Lipper High Yield Index -- measures the 30 largest retail mutual funds in the
Lipper High Yield Category.
Russell 1000 Growth Index-- measures large-cap U.S. growth stocks.
Standard & Poor's 500 Stock Index is a capitalization weighted index of 500
widely held stocks designed to measure broad U.S. equity performance.
It is not possible to invest directly in an index.
KEY RISK CONSIDERATIONS
CAPITAL APPRECIATION VARIABLE ACCOUNT
Prices of growth company securities held by the series may fall to a greater
extent than the overall equity markets (e.g. as represented by the S&P 500) due
to changing economic, political or market conditions or disappointing growth
company earnings results.
Over-the-counter (OTC) transactions involve risks in addition to those
associated with transactions in securities traded on exchanges. OTC-listed
companies may have limited product lines, markets or financial resources. Many
OTC stocks trade less frequently and in smaller volume than exchange-listed
stocks. The values of these stocks may be more volatile than exchange-listed
stocks, and the series may experience difficulty in buying and selling these
stocks at prevailing market prices.
The portfolio may invest in foreign and/or emerging markets securities, which
are more susceptible to interest rate, currency exchange rate, economic, and
political risks.
GLOBAL GOVERNMENTS VARIABLE ACCOUNT
The portfolio may invest in foreign and/or emerging markets securities, which
are more susceptible to interest rate, currency exchange rate, economic, and
political risks.
The portfolio will allocate its investments based upon judgments made by MFS.
The portfolio could miss attractive investment opportunities by underweighting
markets where there are significant returns, and could lose value by
overweighting markets where there are significant declines.
The fixed income securities purchased by the portfolio may be traded in the
over-the-counter market rather than on an organized exchange and are subject to
liquidity risk. This means that they may be harder to purchase or sell at a fair
price. The inability to purchase or sell these fixed income securities at a fair
price could have a negative impact on performance.
The portfolio may invest in mortgage-backed securities, which during times of
fluctuation interest rates, may increase or decrease more than other
fixed-income securities.
The portfolio may invest in derivative securities, which may include futures and
options. These types of instruments can increase price fluctuation.
The portfolio may invest a relatively high percentage of its assets in a small
number of issuers or even in a single issuer. This makes the portfolio's value
more sensitive to developments associated with the issuer and the overall
market.
The portfolio may invest a substantial amount of its assets in issuers located
in a limited number of countries and therefore is susceptible to adverse
economic, political or regulatory developments affecting those countries.
The portfolio has engaged and may engage in active and frequent trading to
achieve its principal investment strategies. Frequent trading increases
transaction costs, which could detract from the series' performance.
5
<Page>
GOVERNMENT SECURITIES VARIABLE ACCOUNT
The portfolio may invest in mortgage-backed securities, which during times of
fluctuation interest rates, may increase or decrease more than other
fixed-income securities.
The portfolio will invest in government guaranteed securities. These guarantees
apply to the underlying securities only and not to the prices and yields of the
portfolio.
HIGH YIELD VARIABLE ACCOUNT
The portfolio will allocate its investments based upon judgments made by MFS.
The portfolio could miss attractive investment opportunities by underweighting
markets where there are significant returns, and could lose value by
overweighting markets where there are significant declines.
The fixed income securities purchased by the portfolio may be traded in the
over-the-counter market rather than on an organized exchange and are subject to
liquidity risk. This means that they may be harder to purchase or sell at a fair
price. The inability to purchase or sell these fixed income securities at a fair
price could have a negative impact on performance.
The portfolio may invest in high yield or lower-rated securities, which may
provide greater returns but are subject to greater-than-average risk.
The portfolio may invest a relatively high percentage of its assets in a small
number of issuers or even in a single issuer. This makes the portfolio's value
more sensitive to developments associated with the issuer and the overall
market.
The portfolio may invest in foreign and/or emerging markets securities, which
are more susceptible to interest rate, currency exchange rate, economic, and
political risks.
The portfolio has engaged and may engage in active and frequent trading to
achieve its principal investment strategies. Frequent trading increases
transaction costs, which could detract from the portfolios' performance.
MANAGED SECTORS VARIABLE ACCOUNT
The portfolio will allocate its investments based upon judgments made by MFS.
The portfolio could miss attractive investment opportunities by underweighting
markets where there are significant returns, and could lose value by
overweighting markets where there are significant declines.
The portfolio focuses on companies in a limited number of sectors or industries
making it more susceptible to adverse economic, political, or regulatory
developments affecting those sectors or industries than a portfolio that invests
more broadly.
Over-the-counter (OTC) transactions involve risks in addition to those
associated with transactions in securities traded on exchanges. OTC-listed
companies may have limited product lines, markets or financial resources. Many
OTC stocks trade less frequently and in smaller volume than exchange-listed
stocks. The values of these stocks may be more volatile than exchange-listed
stocks, and the portfolio may experience difficulty in buying and selling these
stocks at prevailing market prices.
The portfolio may invest in foreign and/or emerging markets securities, which
are more susceptible to interest rate, currency exchange rate, economic, and
political risks.
The portfolio utilizes short sales as an investment technique and will suffer a
loss if it sells a security short and the value of that security rises.
The portfolio may invest a relatively high percentage of its assets in a small
number of issuers or even in a single issuer. This makes the portfolio's value
more sensitive to developments associated with the issuer and the overall
market.
The portfolio has engaged and may engage in active and frequent trading to
achieve its principal investment strategies. Frequent trading increases
transaction costs, which could detract from the portfolios' performance.
MONEY MARKET VARIABLE ACCOUNT
The portfolio may invest in foreign and/or emerging markets securities, which
are more susceptible to interest rate, currency exchange rate, economic, and
political risks.
The portfolio may invest in municipal securities called revenue obligations,
which are subject to a higher degree of credit risk because they are not backed
by the full faith and credit of the municipal issuer. If the Internal Revenue
Service (IRS) determines an issuer of a municipal security has not complied with
applicable tax requirements, interest from the security could also become
taxable and the security could decline significantly in value.
TOTAL RETURN VARIABLE ACCOUNT
The portfolio will allocate its investments based upon judgments made by MFS.
The portfolio could miss attractive investment opportunities by underweighting
markets where there are significant returns, and could lose value by
overweighting markets where there are significant declines.
The portfolio may invest in foreign and/or emerging markets securities, which
are more susceptible to interest rate, currency exchange rate, economic, and
political risks.
The fixed income securities purchased by the portfolio may be traded in the
over-the-counter market rather than on an organized exchange and are subject to
liquidity risk. This means that they may be harder to purchase or sell at a fair
price. The inability to purchase or sell these fixed income securities at a fair
price could have a negative impact on performance.
The portfolio may invest in mortgage-backed securities, which during times of
fluctuation interest rates, may increase or decrease more than other
fixed-income securities.
The portfolio may invest in high yield or lower-rated securities, which may
provide greater returns but are subject to greater-than-average risk.
Prices of securities react to the economic condition of the company that issued
the security. The portfolio's equity investments in an issue may rise and fall
based on the issuer's actual and anticipated earnings, changes in management and
the potential for takeovers and acquisitions. MFS will invest in securities that
are undervalued based on its belief that the market value of these securities
will rise due to anticipated events and investor perceptions. If these events do
not occur or are delayed, or if investor perceptions about the securities do not
improve, the market price of these securities may not rise or may fall.
Convertible securities, like fixed income securities, tend to increase in value
when interest rates decline and decrease in value when interest rates rise. The
market value of a convertible security also tends to increase as the market
value of the underlying stock rises and decrease as the market value of the
underlying stock declines.
The accounts' values will vary daily in response to issuer, market, regulatory,
economic, or political developments. Because stocks tend to be more volatile
than some other investments, such as bonds, the more assets a portfolio
dedicates to stocks, generally
6
<Page>
PERFORMANCE SUMMARY
the more volatile the portfolios' values will be. Bond prices will decline when
interest rates rise and will increase when interest rates fall. Many bonds also
carry credit risk, which is the risk that issuers may fail to make timely
principal or interest payments. In addition, bonds with longer maturity dates
will be subject to greater price fluctuations than those with shorter maturity
periods. However, stocks historically have outperformed bonds over time.
Please see the prospectus for further information regarding these and other risk
conditions.
THESE PERFORMANCE RESULTS REFLECT ANY APPLICABLE CONTRACT OR SURRENDER CHARGES.
YEAR END PERFORMANCE THROUGH DECEMBER 31, 2004
<Table>
<Caption>
COMPASS 2 COMPASS 3 COMPASS 3 -
(U.S.) (U.S.) LEVEL 2 (U.S.)
--------- --------- --------------
Capital Appreciation
Variable Account+ 9.47% 9.36% 9.52%
Global Governments
Variable Account 8.23% 8.07% 8.23%
Government Securities
Variable Account 2.38% 2.28% 2.43%
High Yield Variable
Account 7.67% 7.57% 7.73%
Managed Sectors
Variable Account+ 5.26% 5.10% 5.26%
Money Market
Variable Account (0.57)% (0.67)% (0.52)%
Total Return
Variable Account+ 10.00% 9.84% 10.00%
</Table>
VISIT sunlife-usa.com FOR THE MOST RECENT MONTH-END PERFORMANCE RESULTS. MARKET
VOLATILITY CAN SIGNIFICANTLY AFFECT SHORT-TERM PERFORMANCE, AND MORE RECENT
RETURNS MAY BE DIFFERENT FROM THOSE SHOWN.
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE
OF FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND
UNITS, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. ANY
HIGH SHORT-TERM RETURNS WERE PRIMARILY ACHIEVED DURING FAVORABLE MARKET
CONDITIONS, WHICH MAY NOT BE REPEATED.
+ The performance shown reflects a non-recurring accrual made to the variable
accounts on July 28, 2004 relating to MFS' revenue sharing settlement with
the Securities and Exchange Commission without which the performance would
have been lower.
From time to time the variable accounts may receive proceeds from the settlement
of a class action lawsuit, without which performance would be lower.
See notes to financial statements.
7
<Page>
PORTFOLIO COMPOSITION -- CAPITAL APPRECIATION VARIABLE ACCOUNT
[CHART]
PORTFOLIO STRUCTURE
<Table>
Stocks 95.3%
Cash & Other Net Assets 4.7%
</Table>
TOP TEN HOLDINGS
<Table>
Johnson & Johnson 4.3%
Cisco Systems, Inc. 3.7%
Wyeth 3.0%
Microsoft Corp. 3.0%
Amgen, Inc. 2.8%
IAC/InterActiveCorp. 2.8%
PepsiCo, Inc. 2.5%
Procter & Gamble Co. 2.2%
Dell, Inc. 2.2%
Medtronic, Inc. 2.1%
</Table>
SECTOR WEIGHTINGS
<Table>
Health Care 24.2%
Technology 22.2%
Retailing 9.2%
Leisure 7.8%
Industrial Goods & Services 6.5%
Consumer Staples 5.7%
Financial Services 5.6%
Special Products & Services 4.0%
Transportation 2.5%
Energy 2.3%
Utilities & Communications 1.9%
Basic Materials 1.9%
Autos & Housing 1.5%
</Table>
Percentages are based on net assets as of 12/31/2004.
The portfolio is actively managed and current holdings may be different.
8
<Page>
PORTFOLIO COMPOSITION -- GLOBAL GOVERNMENTS VARIABLE ACCOUNT
[CHART]
PORTFOLIO STRUCTURE*
<Table>
Bonds 95.2%
Cash & Other Net Assets 4.8%
</Table>
MARKET SECTORS*
<Table>
International Sovereigns 81.9%
Cash & Other Net Assets 4.8%
U.S. Treasuries 4.8%
Commercial Mortgage Backed 3.4%
Emerging Markets Debt 2.9%
Mortgage Backed 1.2%
Municipal 1.0%
</Table>
CREDIT QUALITY**
<Table>
AAA 77.8%
AA 10.1%
A 5.2%
BBB 2.1%
Other 4.8%
</Table>
PORTFOLIO FACTS
<Table>
Average Duration 5.7
Average Life 8.2
Average Maturity*** 9.1
Average Quality AA+
Average Quality Short Term Bonds A-1
</Table>
COUNTRY WEIGHTINGS
<Table>
United States 20.5%
Germany 13.7%
France 9.3%
United Kingdom 7.6%
Finland 6.3%
Ireland 6.0%
Canada 5.4%
New Zealand 5.1%
Japan 4.7%
Other 21.4%
</Table>
* For purposes of this graphical presentation, the bond component includes
both accrued interest on bonds and the equivalent exposure from any
derivative holdings, if applicable.
** Credit quality ratings are based on a weighted average of each security's
rating from Moody's Investors Service. If not rated by Moody's, the rating
will be that assigned by Standard & Poor's. Likewise, if not assigned a
rating by Standard & Poor's, it will be based on the rating assigned by
Fitch, Inc. U.S. Treasuries and mortgage-backed securities are included in
the "AAA"-rating category.
*** The average maturity shown is calculated using the final stated maturity on
the portfolio's holdings without taking into account any holdings which
have been pre-refunded to an earlier date or which have a mandatory put
date prior to the stated maturity. The average life shown takes into
account these earlier dates.
Percentages are based on net assets as of 12/31/2004.
The portfolio is actively managed and current holdings may be different.
9
<Page>
PORTFOLIO COMPOSITION -- GOVERNMENT SECURITIES VARIABLE ACCOUNT
[CHART]
PORTFOLIO STRUCTURE*
<Table>
Bonds 90.3%
Cash & Other Net Assets 9.7%
</Table>
MARKET SECTORS*
<Table>
Mortgage Backed 55.1%
U.S. Government Agencies 30.2%
Cash & Other Net Assets 9.7%
U.S. Treasuries 4.8%
Residential Mortgage Backed 0.2%
</Table>
CREDIT QUALITY**
<Table>
AAA 98.0%
Not Rated 0.8%
Other 1.2%
</Table>
PORTFOLIO FACTS
<Table>
Average Duration 3.8
Average Life 6.3
Average Maturity*** 16.8
Average Quality AAA
Average Quality Short Term Bonds A-1
</Table>
* For purposes of this graphical presentation, the bond component includes
both accrued interest on bonds and the equivalent exposure from any
derivative holdings, if applicable.
** Credit quality ratings are based on a weighted average of each security's
rating from Moody's Investors Service. If not rated by Moody's, the rating
will be that assigned by Standard & Poor's. Likewise, if not assigned a
rating by Standard & Poor's, it will be based on the rating assigned by
Fitch, Inc. If not rated by any of the three agencies, the security is
considered not rated, except for U.S. Treasuries and mortgage-backed
securities, which are included in the "AAA"-rating category.
*** The average maturity shown is calculated using the final stated maturity on
the portfolio's holdings without taking into account any holdings which
have been pre-refunded to an earlier date or which have a mandatory put
date prior to the stated maturity. The average life shown takes into
account these earlier dates.
Percentages are based on net assets as of 12/31/2004.
The portfolio is actively managed and current holdings may be different.
10
<Page>
PORTFOLIO COMPOSITION -- HIGH YIELD VARIABLE ACCOUNT
[CHART]
PORTFOLIO STRUCTURE*
<Table>
Bonds 96.7%
Cash & Other Net Assets 2.0%
Stocks 0.9%
Convertible Preferred Stocks 0.3%
Preferred Stocks 0.1%
</Table>
TOP FIVE BOND INDUSTRIES*
<Table>
Utilities - Electric Power 8.8%
Telecommunications - Wireline 6.4%
Chemicals 5.9%
Gaming & Lodging 5.7%
Telecommunications - Wireless 5.0%
</Table>
CREDIT QUALITY**
<Table>
BBB 3.0%
BB 28.0%
B 47.3%
CCC 14.9%
CC 2.1%
D 0.4%
Not Rated 1.1%
Equity 1.2%
Other 2.0%
</Table>
PORTFOLIO FACTS
<Table>
Average Duration 4.5
Average Life 7.9
Average Maturity*** 8.3
Average Quality B
Average Quality Short Term Bonds A-1
</Table>
* For purposes of this graphical presentation, the bond component includes
both accrued interest on bonds and the equivalent exposure from any
derivative holdings, if applicable.
** Credit quality ratings are based on a weighted average of each security's
rating from Moody's Investors Service. If not rated by Moody's, the rating
will be that assigned by Standard & Poor's. Likewise, if not assigned a
rating by Standard & Poor's, it will be based on the rating assigned by
Fitch, Inc. If not rated by any of the three agencies, the security is
considered not rated.
*** The average maturity shown is calculated using the final stated maturity on
the portfolio's holdings without taking into account any holdings which
have been pre-refunded to an earlier date or which have a mandatory put
date prior to the stated maturity. The average life shown takes into
account these earlier dates.
Percentages are based on net assets as of 12/31/2004.
The portfolio is actively managed and current holdings may be different.
11
<Page>
PORTFOLIO COMPOSITION -- MANAGED SECTORS VARIABLE ACCOUNT
[CHART]
PORTFOLIO STRUCTURE
<Table>
Stocks 98.1%
Cash & Other Net Assets 1.9%
</Table>
TOP TEN HOLDINGS
<Table>
Johnson & Johnson 4.8%
Microsoft Corp. 4.0%
Dell, Inc. 3.9%
Cisco Systems, Inc. 3.6%
Wyeth 3.1%
Procter & Gamble Co. 2.9%
Abbott Laboratories 2.7%
eBay, Inc. 2.6%
Yahoo!, Inc. 2.6%
VERITAS Software Corp. 2.3%
</Table>
SECTOR WEIGHTINGS
<Table>
Technology 31.6%
Health Care 25.4%
Retailing 11.1%
Leisure 9.5%
Financial Services 6.3%
Consumer Staples 4.5%
Industrial Goods & Services 3.9%
Special products & Services 3.3%
Transportation 2.5%
</Table>
Percentages are based on net assets as of 12/31/2004.
The portfolio is actively managed and current holdings may be different.
12
<Page>
PORTFOLIO COMPOSITION -- MONEY MARKET VARIABLE ACCOUNT
MATURITY BREAKDOWN*
<Table>
0 TO 29 Days 55.0%
30 TO 59 Days 34.2%
60 TO 89 Days 5.0%
90 TO 365 Days 6.0%
Fixed Income Other -0.2%
</Table>
[CHART]
PORTFOLIO STRUCTURE*
<Table>
Commercial Paper 83.0%
U.S. Government Agencies 14.2%
Repurchase Agreements 3.0%
Other Assets Less Liabilities** (0.2)%
</Table>
* For purposes of this graphical presentation, the bond component includes
the accrued interest on bonds.
** From time to time, "Other Assets Less Liabilities" may be negative due to
timing of cash receipts.
Percentages are based on net assets as of 12/31/2004.
The portfolio is actively managed and current holdings may be different.
13
<Page>
PORTFOLIO COMPOSITION -- TOTAL RETURN VARIABLE ACCOUNT
[CHART]
PORTFOLIO STRUCTURE*
<Table>
Stocks 60.8%
Bonds 37.7%
Cash & Other Net Assets 1.5%
</Table>
TOP TEN HOLDINGS
<Table>
Sprint Corp. 2.1%
Bank of America Corp. 1.8%
Verizon Communications, Inc. 1.8%
Fannie Mae 6.625% 11/15/10 1.7%
Citigroup, Inc., "B" 1.5%
Viacom, Inc 1.5%
J.P. Morgan Chase & Co 1.5%
Merck & Co., Inc. 1.4%
U.S. Treasury Bonds 6.250% 08/15/2023 1.4%
U.S. Treasury Notes 7.000% 07/15/2006 1.3%
</Table>
SECTOR WEIGHTINGS
<Table>
Financial Services 15.5%
Utilities & Communications 8.6%
Energy 6.3%
Health Care 6.2%
Leisure 5.2%
Basic Materials 5.1%
Industrial Goods & Services 4.4%
Consumer Staples 3.9%
Technology 2.8%
Retailing 1.6%
Autos & Housing 0.4%
Transportation 0.4%
Special Products & Services 0.4%
</Table>
TOP FIVE BOND MARKET SECTORS*
<Table>
Mortgage Backed 13.5%
High Grade Corporates 9.3%
U.S. Treasuries 6.6%
U.S. Government Agencies 5.2%
Commercial Mortgage Backed 1.4%
</Table>
* For purposes of this graphical presentation, the bond component includes
both the accrued interest on bonds and the equivalent exposure from any
derivative holdings, if applicable.
Percentages are based on net assets as of 12/31/2004.
The portfolio is actively managed and current holdings may be different.
14
<Page>
PORTFOLIO OF INVESTMENTS -- December 31, 2004
CAPITAL APPRECIATION VARIABLE ACCOUNT
<Table>
<Caption>
ISSUER SHARES VALUE
STOCKS -- 95.3%
AEROSPACE -- 0.9%
Lockheed Martin Corp. 50,700 $ 2,816,385
---------------
AIRLINES -- 1.0%
Southwest Airlines Co. 193,500 $ 3,150,180
---------------
APPAREL MANUFACTURERS -- 0.9%
Nike, Inc., "B" 18,400 $ 1,668,696
Polo Ralph Lauren Corp., "A" 23,500 1,001,100
---------------
$ 2,669,796
---------------
AUTOMOTIVE -- 1.5%
Harley-Davidson, Inc. 75,200 $ 4,568,400
---------------
BANKS & CREDIT COMPANIES -- 2.5%
American Express Co. 40,340 $ 2,273,966
Citigroup, Inc. 113,296 5,458,601
---------------
$ 7,732,567
---------------
BIOTECHNOLOGY -- 5.2%
Amgen, Inc.* 131,540 $ 8,438,291
Cephalon, Inc.* 6,200 315,456
Genzyme Corp.* 66,300 3,850,041
ImClone Systems, Inc.* 68,600 3,161,088
---------------
$ 15,764,876
---------------
BROADCAST & CABLE TV -- 4.6%
Citadel Broadcasting Corp.* 157,500 $ 2,548,350
Comcast Corp., "A"* 168,100 5,594,368
EchoStar Communications Corp., "A" 89,585 2,977,805
Time Warner, Inc.* 86,200 1,675,728
Univision Communications, Inc., "A"* 42,400 1,241,048
---------------
$ 14,037,299
---------------
BROKERAGE & ASSET MANAGERS -- 1.4%
Merrill Lynch & Co., Inc. 57,850 $ 3,457,695
Morgan Stanley 14,000 777,280
---------------
$ 4,234,975
---------------
BUSINESS SERVICES -- 2.5%
Accenture Ltd., "A"* 88,700 $ 2,394,900
Fiserv, Inc.* 38,800 1,559,372
Manpower, Inc. 42,600 2,057,580
SOFTBANK CORP. 32,500 1,577,962
---------------
$ 7,589,814
---------------
CHEMICALS -- 1.3%
3M Co. 28,000 $ 2,297,960
E.I. du Pont de Nemours & Co. 33,400 1,638,270
---------------
$ 3,936,230
---------------
COMPUTER SOFTWARE -- 6.3%
Akamai Technologies, Inc.* 22,900 $ 298,387
Amdocs Ltd.* 110,300 2,895,375
Mercury Interactive Corp.* 10,300 469,165
Microsoft Corp. 338,120 9,031,185
Oracle Corp.* 221,200 3,034,864
Red Hat, Inc.* 199,000 2,656,650
Symantec Corp.* 29,600 762,496
---------------
$ 19,148,122
---------------
COMPUTER SOFTWARE -- SYSTEMS -- 2.7%
CDW Corp. 23,000 $ 1,526,050
Dell, Inc.* 159,920 6,739,029
---------------
$ 8,265,079
---------------
CONSUMER GOODS & SERVICES -- 3.7%
Apollo Group, Inc., "A"* 45,400 $ 3,664,234
Career Education Corp.* 24,400 976,000
Procter & Gamble Co. 122,800 6,763,824
---------------
$ 11,404,058
---------------
ELECTRICAL EQUIPMENT -- 2.4%
Emerson Electric Co. 44,600 $ 3,126,460
Hubbell, Inc., "B" 14,300 747,890
Tyco International Ltd. 93,400 3,338,116
---------------
$ 7,212,466
---------------
ELECTRONICS -- 3.4%
Amphenol Corp., "A"* 59,300 $ 2,178,682
Analog Devices, Inc. 74,490 2,750,171
Applied Materials, Inc.* 84,000 1,436,400
Marvell Technology Group Ltd.* 52,800 1,872,816
PMC-Sierra, Inc.* 63,500 714,375
Xilinx, Inc. 51,400 1,524,010
---------------
$ 10,476,454
---------------
FOOD & DRUG STORES -- 1.1%
CVS Corp. 71,910 $ 3,240,984
---------------
FOOD & NON-ALCOHOLIC BEVERAGES -- 3.5%
PepsiCo, Inc. 146,620 $ 7,653,564
SYSCO Corp. 81,500 3,110,855
---------------
$ 10,764,419
---------------
GAMING & LODGING -- 1.3%
Carnival Corp. 31,900 $ 1,838,397
Cendant Corp. 76,620 1,791,376
International Game Technology 13,100 450,378
---------------
$ 4,080,151
---------------
GENERAL MERCHANDISE -- 4.2%
Family Dollar Stores, Inc. 112,500 $ 3,513,375
Kohl's Corp.* 28,590 1,405,770
Target Corp. 90,060 4,676,816
Wal-Mart Stores, Inc. 57,500 3,037,150
---------------
$ 12,633,111
---------------
INSURANCE -- 1.7%
St. Paul Travelers Cos., Inc. 74,000 $ 2,743,180
XL Capital Ltd., "A" 29,500 2,290,675
---------------
$ 5,033,855
---------------
INTERNET -- 5.5%
Amazon.com, Inc.* 37,500 $ 1,660,875
eBay, Inc.* 33,500 3,895,380
IAC/InterActiveCorp* 303,100 8,371,622
Yahoo!, Inc.* 71,900 2,709,192
---------------
$ 16,637,069
---------------
LEISURE & TOYS -- 1.4%
Electronic Arts, Inc.* 71,200 $ 4,391,616
---------------
MACHINERY & TOOLS -- 2.7%
Caterpillar, Inc. 52,600 $ 5,129,026
Illinois Tool Works, Inc. 31,800 2,947,224
---------------
$ 8,076,250
---------------
MEDICAL & HEALTH TECHNOLOGY & SERVICES -- 2.7%
Caremark Rx, Inc.* 76,100 $ 3,000,623
Community Health Systems, Inc.* 81,700 2,277,796
HCA, Inc. 76,100 3,040,956
---------------
$ 8,319,375
---------------
MEDICAL EQUIPMENT -- 3.9%
Guidant Corp. 21,200 $ 1,528,520
Medtronic, Inc. 130,900 6,501,803
Millipore Corp.* 21,400 1,065,934
Thermo Electron Corp.* 87,700 2,647,663
---------------
$ 11,743,920
---------------
METALS & MINING -- 0.6%
Companhia Vale do Rio Doce, ADR 58,500 $ 1,697,085
---------------
OIL SERVICES -- 2.3%
BJ Services Co. 39,000 $ 1,815,060
GlobalSantaFe Corp. 50,100 1,658,811
Noble Corp.* 35,500 1,765,770
Smith International, Inc.* 31,400 1,708,474
---------------
$ 6,948,115
---------------
PERSONAL COMPUTERS & PERIPHERALS -- 0.6%
Lexmark International, Inc., "A"* 20,300 $ 1,725,500
---------------
</Table>
15
<Page>
<Table>
<Caption>
ISSUER SHARES VALUE
STOCK -- continued
PHARMACEUTICALS -- 12.4%
Abbott Laboratories 136,300 $ 6,358,395
Allergan, Inc. 20,100 1,629,507
AstraZeneca PLC 42,800 1,549,557
Eli Lilly & Co. 53,200 3,019,100
Johnson & Johnson 204,200 12,950,364
Roche Holdings AG 26,900 3,085,398
Wyeth 215,400 9,173,886
---------------
$ 37,766,207
---------------
POLLUTION CONTROL -- 0.5%
Waste Management, Inc. 52,600 $ 1,574,844
---------------
RESTAURANTS -- 0.5%
Outback Steakhouse, Inc. 36,300 $ 1,661,814
---------------
SPECIALTY STORES -- 3.0%
Best Buy Co., Inc. 35,900 $ 2,133,178
CarMax, Inc.* 56,400 1,751,220
Lowe's Cos., Inc. 59,600 3,432,364
PETsMART, Inc. 48,100 1,708,993
---------------
$ 9,025,755
---------------
TELECOMMUNICATIONS -- WIRELESS -- 0.9%
Vodafone Group PLC, ADR 102,971 $ 2,819,346
---------------
TELECOMMUNICATIONS -- WIRELINE -- 3.7%
Cisco Systems, Inc.* 590,500 $ 11,396,650
---------------
TELEPHONE SERVICES -- 1.0%
Sprint Corp. 120,950 $ 3,005,608
---------------
TRUCKING -- 1.5%
FedEx Corp. 45,800 $ 4,510,839
---------------
Total Stocks (Identified Cost, $249,034,029) $ 290,059,214
---------------
<Caption>
PAR AMOUNT
REPURCHASE AGREEMENT -- 5.0%
Morgan Stanley, 2.19%, dated 12/31/04, due 1/03/05, total
to be received $15,132,761 (secured by various
U.S. Treasury and Federal Agency obligations in a
jointly traded account), at Cost $ 15,130,000 $ 15,130,000
---------------
Total Investments
(Identified Cost, $264,164,029) $ 305,189,214
---------------
OTHER ASSETS,
LESS LIABILITIES -- (0.3)% (967,424)
---------------
Net Assets -- 100.0% $ 304,221,790
===============
</Table>
See portfolio footnotes and notes to financial statements.
PORTFOLIO OF INVESTMENTS -- December 31, 2004
GLOBAL GOVERNMENTS VARIABLE ACCOUNT
<Table>
<Caption>
ISSUER PAR AMOUNT VALUE
BONDS -- 93.6%
FOREIGN BONDS -- 78.0%
AUSTRALIA -- 1.9%
Government of Australia, 8.75%, 2008 AUD 143,000 $ 124,785
Government of Australia, 6.25%, 2015 120,000 100,482
---------------
$ 225,267
---------------
AUSTRIA -- 3.4%
Republic of Austria, 5.5%, 2007 EUR 160,000 $ 232,763
Republic of Austria, 5%, 2012 70,000 104,618
Republic of Austria, 4.65%, 2018 52,000 75,663
---------------
$ 413,044
---------------
BELGIUM -- 3.2%
Kingdom of Belgium, 3.75%, 2009 EUR 157,000 $ 219,338
Kingdom of Belgium, 5%, 2012 111,000 165,966
---------------
$ 385,304
---------------
CANADA -- 5.4%
Canada Housing Trust, 4.65%, 2009 CAD 70,000 $ 60,472
Government of Canada, 5.25%, 2012 65,000 58,052
Quebec Province, 1.6%, 2013 JPY 54,000,000 537,116
---------------
$ 655,640
---------------
DENMARK -- 0.6%
Kingdom of Denmark, 5%, 2013 DKK 376,000 $ 75,486
---------------
FINLAND -- 6.2%
Republic of Finland, 2.75%, 2006 EUR 156,000 $ 212,521
Republic of Finland, 3%, 2008 398,000 542,287
---------------
$ 754,808
---------------
FRANCE -- 9.1%
Republic of France, 4.75%, 2007 - 2012 EUR 556,000 $ 801,093
Republic of France, 6%, 2025 179,000 303,858
---------------
$ 1,104,951
---------------
GERMANY -- 13.4%
Federal Republic of Germany,
3.5%, 2008 EUR 190,000 $ 263,111
Federal Republic of Germany,
5.25%, 2010 312,000 467,080
Federal Republic of Germany,
6.25%, 2024 - 2030 331,000 580,911
Kreditanstalt fur Wiederaufbau,
3.25%, 2008 220,000 302,564
---------------
$ 1,613,666
---------------
IRELAND -- 5.9%
Republic of Ireland, 4.25%, 2007 EUR 368,000 $ 519,393
Republic of Ireland, 4.6%, 2016 135,000 197,126
---------------
$ 716,519
---------------
ITALY -- 2.2%
Republic of Italy, 5.25%, 2017 EUR 170,000 $ 260,553
---------------
JAPAN -- 4.7%
Development Bank of Japan,
1.4%, 2012 JPY 17,000,000 $ 168,525
Development Bank of Japan, 1.6%, 2014 40,000,000 394,079
---------------
$ 562,604
---------------
MEXICO -- 1.2%
Pemex Project Funding Master Trust,
8.625%, 2022 $ 117,000 $ 136,130
United Mexican States, 8%, 2022 10,000 11,535
---------------
$ 147,665
---------------
NETHERLANDS -- 3.9%
Kingdom of Netherlands, 5.75%, 2007 EUR 307,000 $ 442,840
Kingdom of Netherlands, 5%, 2012 19,697 29,484
---------------
$ 472,324
---------------
NEW ZEALAND -- 5.0%
Government of New Zealand, 7%, 2009 NZD 142,000 $ 105,887
Government of New Zealand, 6.5%, 2013 669,000 496,439
---------------
$ 602,326
---------------
QATAR -- 0.8%
State of Qatar, 9.75%, 2030 $ 67,000 $ 97,392
---------------
</Table>
16
<Page>
<Table>
<Caption>
ISSUER PAR AMOUNT VALUE
BONDS -- continued
FOREIGN BONDS -- continued
RUSSIA -- 0.8%
Russian Federation, 11%, 2018 $ 70,000 $ 97,874
---------------
SPAIN -- 2.8%
Kingdom of Spain, 6%, 2008 EUR 220,000 $ 326,365
Kingdom of Spain, 5.35%, 2011 9,000 13,680
---------------
$ 340,045
---------------
UNITED KINGDOM -- 7.5%
United Kingdom Treasury, 5.75%, 2009 GBP 60,000 $ 121,298
United Kingdom Treasury, 5%, 2012 399,000 787,054
---------------
$ 908,352
---------------
Total Foreign Bonds $ 9,433,820
---------------
U.S. BONDS -- 15.6%
ASSET BACKED & SECURITIZED -- 3.3%
Commercial Mortgage Asset Trust,
0.8711%, 2032## $ 1,594,783 $ 78,901
Deutsche Mortgage & Asset Receiving
Corp., 6.538%, 2031 56,558 60,153
First Union National Bank Commercial
Mortgage Trust, 7.39%, 2031 60,361 68,409
First Union National Bank Commercial
Mortgage Trust, 0.9667%, 2043## 1,743,848 83,105
First Union-Lehman Brothers Bank of
America, 6.56%, 2035 29,461 31,675
GMAC Commercial Mortgage Securities,
Inc., 6.42%, 2035 29,461 31,663
Lehman Brothers-UBS Commercial
Mortgage Trust, 7.95%, 2010 45,271 52,563
---------------
$ 406,469
---------------
MORTGAGE BACKED -- 1.2%
Fannie Mae, 6%, 2017 - 2018 $ 136,200 $ 142,804
---------------
MUNICIPALS -- 1.0%
New York, NY, City Municipal Water
Finance Authority, Water & Sewer
Systems Rev., "B", 5%, 2036 $ 115,000 $ 117,254
---------------
SUPRANATIONAL -- 5.3%
Inter-American Development Bank,
1.9%, 2009 JPY 62,000,000 $ 640,942
---------------
U.S. TREASURY OBLIGATIONS -- 4.8%
U.S. Treasury Bonds, 8%, 2021 $ 42,000 $ 57,653
U.S. Treasury Bonds, 6.25%, 2030 234,000 279,767
U.S. Treasury Notes, 4.25%, 2010 - 2013 121,000 121,761
U.S. Treasury Notes, 2%, 2014 114,661 118,673
---------------
$ 577,854
---------------
Total U.S. Bonds $ 1,885,323
---------------
Total Bonds
(Identified Cost, $10,279,194) $ 11,319,143
---------------
SHORT-TERM OBLIGATION~ -- 1.6%
Federal Home Loan Bank, 1%, due 1/03/05,
at Amortized Cost $ 188,000 $ 187,990
---------------
REPURCHASE AGREEMENT -- 4.5%
Morgan Stanley, 2.19%, dated 12/31/04,
due 1/03/05, total to be received
$547,100 (secured by various U.S.
Treasury and Federal Agency
obligations in a jointly traded account),
at Cost $ 547,000 $ 547,000
---------------
Total Investments
(Identified Cost, $11,014,184) $ 12,054,133
---------------
OTHER ASSETS,
LESS LIABILITIES -- 0.3% 39,929
---------------
Net Assets -- 100.0% $ 12,094,062
===============
</Table>
See portfolio footnotes and notes to financial statements.
PORTFOLIO OF INVESTMENTS -- December 31, 2004
GOVERNMENT SECURITIES VARIABLE ACCOUNT
<Table>
<Caption>
ISSUER PAR AMOUNT VALUE
BONDS -- 98.0%
AGENCY -- OTHER -- 4.0%
Financing Corp., 10.35%, 2018 $ 1,150,000 $ 1,763,430
Resolution Funding Corp., 8.875%, 2020 1,700,000 2,403,106
---------------
$ 4,166,536
---------------
ASSET BACKED & SECURITIZED -- 0.2%
Freddie Mac, 3.108%, 2035 $ 195,000 $ 193,890
---------------
MORTGAGE BACKED -- 54.2%
Fannie Mae, 4.45%, 2014 $ 329,426 $ 325,737
Fannie Mae, 4.5%, 2019 2,657,322 2,650,532
Fannie Mae, 4.652%, 2014 893,105 896,382
Fannie Mae, 4.79%, 2012 934,169 937,904
Fannie Mae, 4.846%, 2014 935,678 950,882
Fannie Mae, 5%, 2018 - 2019 11,668,373 11,866,291
Fannie Mae, 5.5%, 2017 - 2034 15,979,419 16,294,644
Fannie Mae, 5.9957%, 2020 6,087 6,077
Fannie Mae, 6%, 2016 - 2034 4,814,376 5,034,597
Fannie Mae, 6.5%, 2016 - 2033 4,362,245 4,585,735
Fannie Mae, 7.5%, 2022 - 2031 399,319 428,170
Fannie Mae, 8.5%, 2007 7,316 8,072
Fannie Mae, 10%, 2018 352,991 391,884
Fannie Mae TBA, 6%, 2032~~~ 5,874,000 6,072,247
Freddie Mac, 5.5%, 2034 1,655,010 1,682,840
Freddie Mac, 6%, 2034 1,949,245 2,014,481
Freddie Mac, 6.5%, 2032 1,371,306 1,439,928
Freddie Mac, 7.5%, 2027 168,265 180,929
Ginnie Mae, 6.5%, 2028 688,301 725,459
Ginnie Mae, 11%, 2010 - 2019 58,976 65,547
Ginnie Mae, 12.5%, 2015 17,969 20,384
---------------
$ 56,578,722
---------------
U.S. GOVERNMENT AGENCIES -- 26.4%
Aid to Israel, 0%, 2024 $ 1,442,000 $ 507,141
Aid to Israel, 5.5%, 2023 1,097,000 1,146,527
Aid to Israel, 6.6%, 2008 875,404 912,508
Aid to Peru, 9.98%, 2008 727,885 795,753
Empresa Energetica Cornito Ltd.,
6.07%, 2010 2,501,000 2,648,134
Fannie Mae, 3.41%, 2007 1,060,000 1,056,424
Fannie Mae, 4.625%, 2014 3,261,000 3,263,449
Fannie Mae, 4.771%, 2014 657,902 667,613
Freddie Mac, 5.625%, 2011 3,664,000 3,960,113
Overseas Private Investment Corp.,
0%, 2007 161,000 160,565
Small Business Administration,
4.34%, 2024 397,786 387,901
Small Business Administration,
4.72%, 2024 736,594 736,484
Small Business Administration,
4.77%, 2024 682,000 682,881
Small Business Administration,
4.86%, 2024 350,000 351,261
Small Business Administration,
4.87%, 2024 419,000 420,229
Small Business Administration,
4.88%, 2024 319,000 320,315
Small Business Administration,
4.89%, 2023 717,400 723,897
Small Business Administration,
4.98%, 2023 276,202 280,159
Small Business Administration,
4.99%, 2024 455,000 460,221
Small Business Administration,
5.52%, 2024 376,349 391,659
Small Business Administration,
6.07%, 2022 590,420 629,758
Small Business Administration,
6.34%, 2021 763,316 821,319
</Table>
17
<Page>
<Table>
<Caption>
ISSUER PAR AMOUNT VALUE
BONDS -- continued
U.S. GOVERNMENT AGENCIES -- continued
Small Business Administration,
6.44%, 2021 $ 742,364 $ 801,161
Small Business Administration,
6.625%, 2021 790,001 857,984
Small Business Administration,
8.4%, 2007 7,865 8,090
Small Business Administration,
8.7%, 2009 94,108 100,527
Small Business Administration,
10.05%, 2009 18,035 19,395
Tennessee Valley Authority, STRIPS
(Interest Only) 0%, 2042 2,250,000 1,681,560
U.S. Department of Housing & Urban
Development, 6.36%, 2016 500,000 549,480
U.S. Department of Housing & Urban
Development, 6.59%, 2016 2,045,000 2,191,884
---------------
$ 27,534,392
---------------
U.S. TREASURY OBLIGATIONS -- 13.2%
U.S. Treasury Bonds, 5.25%, 2028 $ 346,000 $ 362,651
U.S. Treasury Bonds, 5.375%, 2031 353,000 381,709
U.S. Treasury Bonds, 6%, 2026 123,000 140,897
U.S. Treasury Bonds, 6.25%, 2030 410,000 490,190
U.S. Treasury Bonds, 12%, 2013 19,000 24,488
U.S. Treasury Notes, 2%, 2014 2,006,047 2,076,259
U.S. Treasury Notes, 3.375%, 2007 2,062,446 2,184,341
U.S. Treasury Notes, 3.625%, 2008### 1,943,469 2,116,939
U.S. Treasury Notes, 4%, 2014 84,000 82,842
U.S. Treasury Notes, 5.5%, 2008 - 2009 3,951,000 4,226,119
U.S. Treasury Notes, 6.5%, 2010 917,000 1,038,180
U.S. Treasury STRIPS (Interest Only),
0%, 2016 1,030,000 610,828
---------------
$ 13,735,443
---------------
Total Bonds
(Identified Cost, $99,995,933) $ 102,208,983
---------------
REPURCHASE AGREEMENT -- 7.1%
Goldman Sachs, 2.23%, dated 12/31/04,
due 01/03/05, total to be received
$7,434,381 (secured by various U.S.
Treasury and Federal Agency
obligations in a jointly traded account),
at Cost $ 7,433,000 $ 7,433,000
---------------
Total Investments
(Identified Cost, $107,428,933) $ 109,641,983
---------------
OTHER ASSETS,
LESS LIABILITIES -- (5.1)% (5,282,526)
---------------
Net Assets -- 100.0% $ 104,359,457
===============
</Table>
See portfolio footnotes and notes to financial statements.
PORTFOLIO OF INVESTMENTS -- December 31, 2004
HIGH YIELD VARIABLE ACCOUNT
<Table>
<Caption>
ISSUER PAR AMOUNT VALUE
BONDS -- 94.8%
ADVERTISING & BROADCASTING -- 3.4%
Allbritton Communications Co.,
7.75%, 2012 $ 350,000 $ 362,250
DIRECTV Holdings LLC, 8.375%, 2013 185,000 207,431
Echostar DBS Corp., 6.375%, 2011 350,000 357,875
Emmis Operating Co., 6.875%, 2012 185,000 193,556
Granite Broadcasting Corp., 9.75%, 2010 390,000 372,450
Lamar Media Corp., 7.25%, 2013 135,000 145,800
PRIMEDIA, Inc., 8.875%, 2011 385,000 407,137
Paxson Communications Corp., 0% to 2006,
12.25% to 2009 600,000 561,000
---------------
$ 2,607,499
---------------
AEROSPACE -- 1.7%
Argo Tech Corp., 9.25%, 2011 $ 215,000 $ 235,963
BE Aerospace, Inc., 8.875%, 2011 310,000 323,950
Hexcel Corp., 9.75%, 2009 310,000 322,400
K&F Acquisition, Inc., 7.75%, 2014## 65,000 67,112
Standard Aero Holdings, Inc.,
8.25%, 2014## 105,000 113,400
TransDigm Holding Co., 8.375%, 2011 230,000 246,675
---------------
$ 1,309,500
---------------
AIRLINES -- 0.7%
Continental Airlines, Inc., 6.9%, 2017 $ 80,685 $ 68,369
Continental Airlines, Inc., 6.748%, 2017 74,347 60,704
Continental Airlines, Inc., 6.795%, 2018 176,962 154,642
Continental Airlines, Inc., 7.566%, 2020 250,379 211,422
---------------
$ 495,137
---------------
APPAREL MANUFACTURERS -- 0.3%
Levi Strauss & Co., 7%, 2006 $ 235,000 $ 246,750
---------------
ASSET BACKED & SECURITIZED -- 2.0%
Airplane Pass-Through Trust,
10.875%, 2012* $ 740,775 $ 3,704
ARCap REIT, Inc., 6.0996%, 2045## 165,567 138,200
Asset Securitization Corp., 8.005%, 2029 150,000 157,469
Crest Ltd., 7%, 2040## 154,000 149,419
First Union National Bank Commercial
Mortgage Corp., 6.75%, 2032 165,000 156,275
GE Capital Commercial Mortgage Corp.,
7.5117%, 2033## 145,000 161,035
GMAC Commercial Mortgage Securities,
Inc., 7.6527%, 2034## 192,000 215,036
Mortgage Capital Funding, Inc.,
7.214%, 2007 500,000 526,706
---------------
$ 1,507,844
---------------
AUTOMOTIVE -- 2.3%
Affinia Group, Inc., 9%, 2014## $ 220,000 $ 229,350
Dana Corp., 7%, 2029 300,000 299,250
Metaldyne Corp., 11%, 2012 70,000 58,100
Metaldyne Corp., 10%, 2013## 145,000 137,750
Navistar International Corp., 7.5%, 2011 275,000 294,937
Tenneco Automotive, Inc., 10.25%, 2013 110,000 129,800
Tenneco Automotive, Inc., 8.625%, 2014## 70,000 72,800
TRW Automotive, Inc., 9.375%, 2013 105,000 121,800
TRW Automotive, Inc., 11%, 2013 179,000 215,695
Visteon Corp., 7%, 2014 150,000 143,250
---------------
$ 1,702,732
---------------
BASIC INDUSTRY -- 0.2%
Thermadyne Holdings Corp., 9.25%, 2014 $ 165,000 $ 160,875
---------------
BROADCAST & CABLE TV -- 4.0%
Cablevision Systems Corp., 8%, 2012## $ 355,000 $ 378,075
CCO Holdings LLC, 8.75%, 2013 150,000 154,875
Charter Communications, Inc.,
8.625%, 2009 510,000 442,425
Charter Communications, Inc.,
9.92%, 2011 915,000 780,038
</Table>
18
<Page>
<Table>
<Caption>
ISSUER PAR AMOUNT VALUE
BONDS -- continued
BROADCAST & CABLE TV -- continued
Charter Communications, Inc.,
8.375%, 2014## $ 120,000 $ 126,600
CSC Holdings, Inc., 8.125%, 2009 200,000 218,750
CSC Holdings, Inc., 6.75%, 2012## 215,000 221,450
FrontierVision Holdings LP, 11.875%, 2007* 50,000 66,750
FrontierVision Holdings LP,
11.875%, 2007* 80,000 106,800
FrontierVision Operating Partners LP,
11%, 2006* 195,000 255,450
Mediacom Broadband LLC, 9.5%, 2013 150,000 150,562
Mediacom Broadband LLC, 11%, 2013 75,000 80,625
Rogers Cable, Inc., 8.75%, 2032 35,000 38,850
---------------
$ 3,021,250
---------------
BROKERAGE & ASSET MANAGERS -- 0.2%
Refco Finance Holdings LLC, 9%, 2012## $ 150,000 $ 164,250
---------------
BUILDING -- 1.2%
Building Materials Corp. of America,
7.75%, 2014## $ 340,000 $ 342,975
Interface, Inc., 10.375%, 2010 204,000 234,600
Jacuzzi Brands, Inc., 9.625%, 2010 90,000 99,900
Nortek, Inc., 8.5%, 2014## 210,000 219,450
---------------
$ 896,925
---------------
BUSINESS SERVICES -- 1.5%
Iron Mountain, Inc., 8.625%, 2013 $ 280,000 $ 297,500
Iron Mountain, Inc., 7.75%, 2015 5,000 5,075
Lucent Technologies, Inc., 5.5%, 2008 235,000 241,462
Nortel Networks Ltd., 6.125%, 2006 235,000 239,112
Xerox Corp., 7.625%, 2013 350,000 384,125
---------------
$ 1,167,274
---------------
CHEMICALS -- 5.8%
Acetex Corp., 10.875%, 2009 $ 195,000 $ 212,063
ARCO Chemical Co., 9.8%, 2020 130,000 148,200
BCP Caylux Holdings Luxembourg S.A.,
9.625%, 2014## 125,000 140,938
Crystal U.S. Holdings LLC, 0% to 2009,
10.5% to 2014## 265,000 181,525
Crystal U.S. Holdings LLC, 0% to 2010,
10% to 2014## 95,000 65,788
Equistar Chemicals LP, 10.625%, 2011 340,000 394,400
Hercules, Inc., 6.75%, 2029 260,000 268,450
Huntsman International LLC,
10.125%, 2009 237,000 249,443
Huntsman International LLC, 0%, 2009 100,000 56,000
Huntsman International LLC,
7.375%, 2015## 155,000 155,388
IMC Global, Inc., 10.875%, 2013 280,000 350,000
KI Holdings, Inc., 0% to 2009,
9.875% to 2014## 233,000 149,120
Kronos International, Inc., 8.875%, 2009 EUR 15,000 21,892
Lyondell Chemical Co., 9.5%, 2008 $ 130,000 141,050
Lyondell Chemical Co., 11.125%, 2012 130,000 154,375
Nalco Co., 7.75%, 2011 110,000 118,800
Nalco Co., 8.875%, 2013 70,000 76,825
Nalco Financial Holdings LLC, 0% to 2009,
9% to 2014 139,000 102,860
Nova Chemicals Corp., 6.5%, 2012 225,000 238,500
Resolution Performance Products LLC,
13.5%, 2010 165,000 179,437
Rhodia S.A., 8.875%, 2011 480,000 483,600
Rockwood Specialties Group, Inc.,
10.625%, 2011 220,000 253,000
Rockwood Specialties Group, Inc.,
7.5%, 2014## 50,000 51,875
Sovereign Specialty Chemicals, Inc.,
11.875%, 2010 150,000 160,687
---------------
$ 4,354,216
---------------
CONGLOMERATES -- 0.6%
Invensys PLC, 9.875%, 2011## $ 200,000 $ 221,250
SPX Corp., 7.5%, 2013 205,000 222,425
---------------
$ 443,675
---------------
CONSTRUCTION -- 1.1%
D.R. Horton, Inc., 8%, 2009 $ 265,000 $ 296,469
Technical Olympic USA, Inc., 9%, 2010 75,000 80,250
Technical Olympic USA, Inc., 7.5%, 2011 50,000 50,375
Technical Olympic USA, Inc., 7.5%, 2015## 150,000 148,875
WCI Communities, Inc., 7.875%, 2013 210,000 221,025
---------------
$ 796,994
---------------
CONSUMER CYCLICAL -- 0.7%
Corrections Corp. of America,
9.875%, 2009 $ 30,000 $ 33,300
Corrections Corp. of America, 7.5%, 2011 150,000 160,313
GEO Group, Inc., 8.25%, 2013 140,000 149,800
KinderCare Learning Centers, Inc.,
9.5%, 2009 182,000 182,683
---------------
$ 526,096
---------------
CONSUMER GOODS & SERVICES -- 2.4%
Bombardier Recreational Products, Inc.,
8.375%, 2013 $ 170,000 $ 181,475
Church & Dwight Co., Inc., 6%, 2012## 125,000 127,188
Integrated Electrical Services, Inc.,
9.375%, 2009 130,000 122,200
K2, Inc., 7.375%, 2014## 205,000 224,475
Remington Arms Co., Inc., 10.5%, 2011 110,000 106,150
Revlon Consumer Products Corp.,
8.625%, 2008 270,000 240,975
Safilo Capital International S.A.,
9.625%, 2013## EUR 350,000 482,371
Samsonite Corp., 8.875%, 2011 $ 210,000 227,325
Werner Holding Co., Inc., 10%, 2007 160,000 132,800
---------------
$ 1,844,959
---------------
CONTAINERS -- 2.7%
Crown European Holdings S.A.,
9.5%, 2011 $ 425,000 $ 484,500
Crown European Holdings S.A.,
10.875%, 2013 140,000 165,550
Greif, Inc., 8.875%, 2012 210,000 233,625
Owens-Brockway Glass Container, Inc.,
8.25%, 2013 600,000 660,000
Owens-Illinois, Inc., 7.8%, 2018 75,000 78,000
Plastipak Holdings, Inc., 10.75%, 2011 150,000 168,750
Pliant Corp., 13%, 2010 220,000 214,300
---------------
$ 2,004,725
---------------
DEFENSE ELECTRONICS -- 0.5%
L-3 Communications Holdings, Inc.,
6.125%, 2014 $ 230,000 $ 236,900
L-3 Communications Holdings, Inc.,
5.875%, 2015## 165,000 164,587
---------------
$ 401,487
---------------
ELECTRONICS -- 0.3%
Flextronics International Ltd., 6.5%, 2013 $ 225,000 $ 230,625
Magnachip Semiconductor S.A.,
8%, 2014## 30,000 31,275
---------------
$ 261,900
---------------
EMERGING MARKET QUASI-SOVEREIGN -- 0.5%
Gazprom OAO, 9.625%, 2013## $ 120,000 $ 141,900
Gazprom OAO, 8.625%, 2034## 220,000 257,400
---------------
$ 399,300
---------------
EMERGING MARKET SOVEREIGN -- 0.7%
Federal Republic of Brazil, 8%, 2014 $ 20,054 $ 20,506
Federal Republic of Brazil, 8.875%, 2019 203,000 214,165
</Table>
19
<Page>
<Table>
<Caption>
ISSUER PAR AMOUNT VALUE
BONDS -- continued
EMERGING MARKET SOVEREIGN -- continued
Republic of Panama, 9.375%, 2023 $ 159,000 $ 183,645
Russian Ministry of Finance, 12.75%, 2028 84,000 137,785
---------------
$ 556,101
---------------
ENERGY -- INDEPENDENT -- 1.9%
Belden Blake Corp., 8.75%, 2012## $ 200,000 $ 203,000
Chesapeake Energy Corp., 7%, 2014 179,000 190,635
Chesapeake Energy Corp.,
6.375%, 2015## 120,000 123,300
Chesapeake Energy Corp., 6.875%, 2016 495,000 518,513
Encore Acquisition Co., 8.375%, 2012 135,000 150,188
Newfield Exploration Co., 6.625%, 2014## 75,000 79,312
Plains Exploration & Production Co.,
7.125%, 2014 155,000 168,950
---------------
$ 1,433,898
---------------
ENTERTAINMENT -- 1.6%
AMC Entertainment, Inc., 9.5%, 2011 $ 140,000 $ 144,725
AMC Entertainment, Inc., 8.625%, 2012## 275,000 303,875
AMF Bowling Worldwide, Inc., 10%, 2010 130,000 138,775
Intrawest Corp., 7.5%, 2013## 65,000 69,144
Loews Cineplex Entertainment Corp.,
9%, 2014## 215,000 232,737
Six Flags, Inc., 9.75%, 2013 320,000 324,800
---------------
$ 1,214,056
---------------
FOOD & NON-ALCOHOLIC BEVERAGES -- 1.7%
Burns, Philip & Co. Ltd., 9.75%, 2012 $ 335,000 $ 368,500
Merisant Co., 9.75%, 2013## 90,000 80,100
Michael Foods, Inc., 8%, 2013 225,000 237,375
Seminis Vegetable Seeds, Inc.,
10.25%, 2013 210,000 236,250
Smithfield Foods, Inc., 7%, 2011 60,000 64,050
Smithfield Foods, Inc., 7%, 2011## 160,000 170,800
United Biscuits Finance PLC,
10.625%, 2011 EUR 80,000 114,862
---------------
$ 1,271,937
---------------
FOREST & PAPER PRODUCTS -- 4.5%
Abitibi-Consolidated, Inc., 8.55%, 2010 $ 340,000 $ 368,475
Buckeye Technologies, Inc., 8.5%, 2013 240,000 260,400
Corporacion Durango S.A. de C.V.,
13.75%, 2009##* 360,000 241,200
Georgia Pacific Corp., 9.375%, 2013 630,000 733,950
Graphic Packaging International, Inc.,
9.5%, 2013 260,000 295,750
Jefferson Smurfit Corp., 8.25%, 2012 205,000 223,450
Kappa Beheer B.V., 10.625%, 2009 210,000 222,600
MDP Acquisitions PLC, 9.625%, 2012 260,000 289,900
Newark Group, Inc., 9.75%, 2014 185,000 197,025
Norske Skog Canada Ltd., 8.625%, 2011 195,000 209,137
Norske Skog Canada Ltd., 7.375%, 2014 125,000 130,312
Stone Container Corp., 7.375%, 2014 210,000 223,650
---------------
$ 3,395,849
---------------
GAMING & LODGING -- 5.6%
Aztar Corp., 7.875%, 2014 $ 210,000 $ 231,525
Boyd Gaming Corp., 6.75%, 2014 360,000 377,100
Caesars Entertainment, Inc., 8.875%, 2008 80,000 90,600
Caesars Entertainment, Inc., 8.125%, 2011 375,000 433,125
Herbst Gaming, Inc., 7%, 2014## 30,000 30,375
Hilton Hotels Corp., 7.625%, 2012 195,000 228,038
Host Marriott LP, 7.125%, 2013 190,000 203,063
Isle Capri Casinos, Inc., 7%, 2014 265,000 270,300
MGM Mirage, Inc., 8.5%, 2010 140,000 159,250
MGM Mirage, Inc., 8.375%, 2011 410,000 462,275
MGM Mirage, Inc., 5.875%, 2014 95,000 93,337
Mandalay Resort Group, 9.375%, 2010 175,000 203,875
Meristar Hospitality Corp., 10.5%, 2009 70,000 76,300
Pinnacle Entertainment, Inc., 8.25%, 2012 $ 200,000 $ 212,500
Pinnacle Entertainment, Inc., 8.75%, 2013 135,000 146,137
Royal Caribbean Cruises Ltd.,
6.875%, 2013 210,000 226,800
Scientific Games Corp., 6.25%, 2012## 55,000 55,962
Starwood Hotels & Resorts Worldwide, Inc.,
7.875%, 2012 435,000 496,987
Station Casinos, Inc., 6.5%, 2014 245,000 251,737
---------------
$ 4,249,286
---------------
HEALTH MAINTENANCE ORGANIZATIONS -- 0.1%
Medcath Holdings Corp., 9.875%, 2012 $ 65,000 $ 70,525
---------------
INDUSTRIAL -- 3.2%
Amsted Industries, Inc., 10.25%, 2011## $ 325,000 $ 367,250
Da Lite Screen Co., Inc., 9.5%, 2011 210,000 231,000
JohnsonDiversey Holding, Inc., "B",
9.625%, 2012 255,000 284,963
JohnsonDiversey Holding, Inc., 0% to 2007,
10.67% to 2013 535,000 462,775
Milacron Escrow Corp., 11.5%, 2011 235,000 249,100
Rexnord Industries, Inc., 10.125%, 2012 200,000 226,000
Valmont Industries, Inc., 6.875%, 2014 215,000 223,600
Williams Scotsman, Inc., 9.875%, 2007 305,000 305,000
Williams Scotsman, Inc., 10%, 2008 50,000 55,500
---------------
$ 2,405,188
---------------
MACHINERY & TOOLS -- 2.8%
AGCO Corp., 6.875%, 2014 EUR 95,000 $ 136,398
Case Corp., 7.25%, 2016 $ 20,000 19,650
Case New Holland, Inc., 9.25%, 2011## 190,000 211,375
JLG Industries, Inc., 8.25%, 2008 210,000 226,800
Joy Global, Inc., 8.75%, 2012 220,000 246,400
Manitowoc Co., Inc., 10.375%, 2011 EUR 200,000 304,762
Manitowoc Co., Inc., 10.5%, 2012 $ 56,000 64,400
Terex Corp., 10.375%, 2011 340,000 380,800
United Rentals, Inc., 6.5%, 2012 200,000 195,000
United Rentals, Inc., 7.75%, 2013 175,000 171,500
United Rentals, Inc., 7%, 2014 170,000 158,950
---------------
$ 2,116,035
---------------
MEDICAL & HEALTH TECHNOLOGY & SERVICES -- 3.7%
AmerisourceBergen Corp., 7.25%, 2012 $ 215,000 $ 240,263
Beverly Enterprises, Inc., 7.875%, 2014## 155,000 166,238
CDRV Investors, Inc., 0% to 2010,
9.625% to 2015## 180,000 111,825
Extendicare Health Services, Inc.,
6.875%, 2014 140,000 142,800
Fisher Scientific International, Inc.,
8.125%, 2012 174,000 193,140
HCA, Inc., 7.875%, 2011 535,000 589,303
HCA, Inc., 6.375%, 2015 295,000 296,194
InSight Health Services Corp.,
9.875%, 2011 380,000 383,800
Tenet Healthcare Corp., 6.5%, 2012 240,000 222,000
Tenet Healthcare Corp., 9.875%, 2014## 210,000 228,900
U.S. Oncology, Inc., 10.75%, 2014## 190,000 219,925
---------------
$ 2,794,388
---------------
METALS & MINING -- 2.7%
Century Aluminum Co., 7.5%, 2014## $ 185,000 $ 197,025
Doe Run Resources Corp., 11.75%, 2008# 252,800 214,880
Foundation PA Coal Co., 7.25%, 2014## 200,000 213,000
IMCO Recycling, Inc., 9%, 2014## 45,000 46,800
Ispat Inland ULC, 9.75%, 2014 163,000 201,305
Oregon Steel Mills, Inc., 10%, 2009 175,000 194,687
Peabody Energy Corp., 6.875%, 2013 220,000 238,150
Peabody Energy Corp., 5.875%, 2016 140,000 139,300
Russel Metals, Inc., 6.375%, 2014 250,000 253,750
</Table>
20
<Page>
<Table>
<Caption>
ISSUER PAR AMOUNT VALUE
BONDS -- continued
METALS & MINING -- continued
SGL Carbon International S.A.,
8.5%, 2012## EUR 105,000 $ 159,289
Steel Dynamics, Inc., 9.5%, 2009 $ 110,000 120,450
U.S. Steel Corp., 9.75%, 2010 73,000 83,220
---------------
$ 2,061,856
---------------
NATURAL GAS -- DISTRIBUTION -- 0.5%
AmeriGas Partners LP, 8.875%, 2011 $ 275,000 $ 299,750
Inergy LP, 6.875%, 2014## 75,000 75,375
---------------
$ 375,125
---------------
NATURAL GAS -- PIPELINE -- 3.4%
ANR Pipeline Co., 9.625%, 2021 $ 325,000 $ 409,094
El Paso Energy Corp., 7.625%, 2010 205,000 224,475
El Paso Energy Corp., 7%, 2011 555,000 561,244
El Paso Energy Corp., 7.75%, 2013 390,000 408,525
Enterprise Products Partners LP,
6.375%, 2013 105,000 112,542
Enterprise Products Partners LP,
5.6%, 2014## 205,000 206,818
Markwest Energy Partners LP,
6.875%, 2014## 150,000 152,250
Williams Cos., Inc., 7.125%, 2011 482,000 526,585
---------------
$ 2,601,533
---------------
OIL SERVICES -- 1.8%
Dresser, Inc., 9.375%, 2011 $ 135,000 $ 147,825
GulfMark Offshore, Inc., 7.75%, 2014## 180,000 189,900
Hanover Compressor Co., 9%, 2014 255,000 283,688
Hornbeck Offshore Services, Inc.,
6.125%, 2014## 130,000 130,650
Ocean Rig Norway S.A., 10.25%, 2008 190,000 195,700
Petroleum Geo-Services A.S.A., 10%, 2010 200,000 228,000
Pride International, Inc., 7.375%, 2014 140,000 152,950
---------------
$ 1,328,713
---------------
OILS -- 0.3%
Premcor Refining Group, Inc.,
7.75%, 2012 $ 200,000 $ 220,500
---------------
POLLUTION CONTROL -- 0.5%
Allied Waste North America, Inc.,
6.5%, 2010 $ 240,000 $ 235,200
Allied Waste North America, Inc.,
7.875%, 2013 170,000 174,250
---------------
$ 409,450
---------------
PRECIOUS METALS & MINERALS -- 0.3%
Freeport-McMoRan Copper & Gold, Inc.,
6.875%, 2014 $ 229,000 $ 227,569
---------------
PRINTING & PUBLISHING -- 3.0%
Cenveo Corp., 7.875%, 2013 $ 100,000 $ 93,000
Dex Media East LLC, 12.125%, 2012 146,000 177,938
Dex Media West LLC, 9.875%, 2013 151,000 174,028
Dex Media, Inc., 0% to 2008, 9% to 2013 725,000 568,219
Hollinger, Inc., 11.875%, 2011## 99,000 116,820
Houghton Mifflin Co., 9.875%, 2013 150,000 164,250
Lighthouse International Co. S.A.,
8%, 2014## EUR 170,000 237,173
Mail-Well Corp., 9.625%, 2012 $ 185,000 203,037
MediaNews Group, Inc., 6.875%, 2013 305,000 312,625
WDAC Subsidiary Corp., 8.375%, 2014## 245,000 241,631
---------------
$ 2,288,721
---------------
RAILROAD & SHIPPING -- 0.5%
Kansas City Southern Railway Co.,
7.5%, 2009 $ 360,000 $ 378,000
---------------
RESTAURANTS -- 0.1%
Carrols Holdings Corp., 9%, 2013## $ 60,000 $ 62,100
---------------
RETAILERS -- 2.6%
Couche-Tard, Inc., 7.5%, 2013 $ 505,000 $ 541,613
Dollar General Corp., 8.625%, 2010 360,000 418,500
Duane Reade, Inc., 9.75%, 2011## 145,000 131,950
Finlay Fine Jewelry Corp., 8.375%, 2012 205,000 221,400
Rite Aid Corp., 9.5%, 2011 25,000 27,437
Rite Aid Corp., 9.25%, 2013 120,000 121,200
Rite Aid Corp., 6.875%, 2013 375,000 337,500
Saks, Inc., 7%, 2013 200,000 204,250
---------------
$ 2,003,850
---------------
SUPERMARKETS -- 0.5%
Roundy's, Inc., 8.875%, 2012 $ 340,000 $ 371,450
---------------
TELECOMMUNICATIONS -- WIRELESS -- 4.9%
Alamosa Holdings, Inc., 11%, 2010 $ 175,000 $ 206,063
Alamosa Holdings, Inc., 0% to 2005,
12% to 2009 170,000 184,450
American Tower Corp., 9.375%, 2009 38,000 40,185
American Tower Corp., 7.125%, 2012## 150,000 153,375
Centennial Communications Corp.,
10.125%, 2013 270,000 303,075
Crown Castle International Corp.,
7.5%, 2013 315,000 338,625
Dobson Cellular Systems, Inc.,
8.375%, 2011## 55,000 56,788
Dobson Communications Corp.,
8.875%, 2013 105,000 73,763
IWO Escrow Co., 6.32%, 2012## 30,000 30,225
Innova S. de R.L., 9.375%, 2013 200,000 227,500
Nextel Communications, Inc.,
7.375%, 2015 935,000 1,028,500
Rogers Wireless, Inc., 8%, 2012## 50,000 52,875
Rogers Wireless, Inc., 6.375%, 2014 135,000 133,650
Rogers Wireless, Inc., 7.5%, 2015## 105,000 110,775
Rural Cellular Corp., 9.875%, 2010 205,000 208,587
Rural Cellular Corp., 8.25%, 2012 60,000 63,450
U.S. Unwired, Inc., 10%, 2012 215,000 242,412
Ubiquitel Operating Co., 9.875%, 2011 210,000 235,725
---------------
$ 3,690,023
---------------
TELECOMMUNICATIONS -- WIRELINE -- 6.2%
AT&T Corp., 7.3%, 2011 $ 409,000 $ 470,861
Cincinnati Bell, Inc., 8.375%, 2014 250,000 253,125
Citizens Communications Co., 9.25%, 2011 385,000 450,450
Citizens Communications Co., 6.25%, 2013 110,000 110,825
Eircom Funding PLC, 8.25%, 2013 255,000 281,775
GCI, Inc., 7.25%, 2014 215,000 215,000
MCI, Inc., 6.908%, 2007 168,000 171,990
MCI, Inc., 7.688%, 2009 238,000 246,330
MCI, Inc., 8.735%, 2014 37,000 39,775
Qwest Capital Funding, Inc., 7.25%, 2011 315,000 308,700
Qwest Corp., 7.875%, 2011## 300,000 325,500
Qwest Corp., 8.875%, 2012## 295,000 340,725
Qwest Services Corp., 13.5%, 2010## 905,000 1,088,262
Time Warner Telecom Holdings, Inc.,
10.125%, 2011 200,000 196,500
Time Warner Telecom Holdings, Inc.,
9.25%, 2014 245,000 249,900
---------------
$ 4,749,718
---------------
TIRE & RUBBER -- 0.0%
Cooper-Standard Automotive Group,
8.375%, 2014## $ 30,000 $ 29,925
---------------
TOBACCO -- 0.3%
R.J. Reynolds Tobacco Holdings, Inc.,
7.25%, 2012 $ 185,000 $ 190,087
---------------
</Table>
21
<Page>
<Table>
<Caption>
ISSUER PAR AMOUNT VALUE
BONDS -- continued
TRANSPORTATION -- SERVICES -- 0.6%
CHC Helicopter Corp., 7.375%, 2014 $ 155,000 $ 163,525
Stena AB, 9.625%, 2012 80,000 90,400
Stena AB, 7%, 2016## 171,000 169,290
TFM S.A. de C.V., 12.5%, 2012 51,000 59,542
---------------
$ 482,757
---------------
UTILITIES -- ELECTRIC POWER -- 8.7%
AES Corp., 8.75%, 2013## $ 345,000 $ 392,006
AES Corp., 9%, 2015## 300,000 343,500
Allegheny Energy Supply Co. LLC,
8.25%, 2012## 300,000 335,250
CMS Energy Corp., 8.5%, 2011 195,000 221,569
Calpine Corp., 8.5%, 2008 150,000 123,000
Calpine Corp., 8.75%, 2013## 655,000 540,375
CenterPoint Energy, Inc., 7.25%, 2010 204,000 227,530
DPL, Inc., 6.875%, 2011 220,000 240,269
Dynegy Holdings, Inc., 9.875%, 2010## 195,000 217,913
Dynegy Holdings, Inc., 6.875%, 2011 85,000 81,813
Edison Mission Energy, 7.73%, 2009 200,000 215,000
Empresa Nacional de Electricidad S.A.,
8.35%, 2013 250,000 289,691
FirstEnergy Corp., 6.45%, 2011 332,000 360,708
FirstEnergy Corp., 7.375%, 2031 145,000 165,588
MSW Energy Holdings LLC, 7.375%, 2010 195,000 204,750
Midwest Generation LLC, 8.75%, 2034 400,000 454,000
NRG Energy, Inc., 8%, 2013## 230,000 250,700
Nevada Power Co., 6.5%, 2012 50,000 52,875
Nevada Power Co., 5.875%, 2015## 120,000 120,900
NorthWestern Corp., 5.875%, 2014## 175,000 179,020
PSEG Power LLC, 7.75%, 2011 320,000 373,119
Reliant Energy, Inc., 6.75%, 2014 95,000 94,406
Reliant Resources, Inc., 9.25%, 2010 80,000 89,200
Sierra Pacific Power Co., 6.25%, 2012 105,000 109,594
Sierra Pacific Resources, 8.625%, 2014 160,000 180,800
TXU Corp., 5.55%, 2014## 385,000 382,463
Teco Energy, Inc., 7%, 2012 85,000 92,862
Texas Genco LLC, 6.875%, 2014## 205,000 211,919
---------------
$ 6,550,820
---------------
Total Bonds
(Identified Cost, $69,125,089) $ 71,842,848
---------------
<Caption>
SHARES
STOCKS -- 0.9%
AUTOMOTIVE -- 0.3%
Magna International, Inc., "A" 3,000 $ 247,650
---------------
BROADCAST & CABLE TV -- 0.5%
NTL, Inc.* 2,203 $ 160,731
Telewest Global, Inc.* 10,166 178,718
---------------
$ 339,449
---------------
PHARMACEUTICALS -- 0.1%
Merck & Co., Inc. 2,600 $ 83,564
---------------
SPECIALTY CHEMICALS -- 0.0%
Sterling Chemicals, Inc.* 31 $ 1,155
---------------
TELEPHONE SERVICES -- 0.0%
VersaTel Telecom International N.V.* 7,740 $ 22,331
---------------
Total Stocks (Identified Cost, $861,500) $ 694,149
---------------
CONVERTIBLE PREFERRED STOCKS -- 0.3%
AUTOMOTIVE -- 0.3%
Ford Motor Co. Capital Trust II, 6.5% 4,365 $ 230,428
Hayes Lemmerz International, Inc., "A", 8%* 11 844
---------------
$ 231,272
---------------
Total Convertible Preferred Stocks
(Identified Cost, $230,396) $ 231,272
---------------
PREFERRED STOCKS -- 0.1%
PRINTING & PUBLISHING -- 0.1%
PRIMEDIA, Inc., 8.625% 500 $ 45,750
---------------
REAL ESTATE -- 0.0%
HRPT Properties Trust, 8.75% 200 $ 5,524
---------------
TELEPHONE SERVICES -- 0.0%
PTV, Inc., "A", 10% 10 $ 40
---------------
Total Preferred Stocks
(Identified Cost, $50,220) $ 51,314
---------------
<Caption>
STRIKE FIRST
PRICE EXERCISE
WARRANTS -- 0.0%
Loral Space & Communications
Ltd. (Business Services)* $ 0.14 1/28/97 1,000 $ 2
Loral Space & Communications
Ltd. (Business Services)* 0.14 1/28/97 1,100 2
Metronet Communications Corp.
(Broadcast & Cable TV)*## 0.01 7/18/97 600 6
Sterling Chemicals, Inc.
(Specialty Chemicals)* 52.00 51 94
Thermadyne Holdings Corp.
(Machinery & Tools)* 20.78 2,705 1,623
XM Satellite Radio, Inc.
(Advertising & Broadcasting)* 45.24 9/16/00 425 36,125
XO Communications, Inc., "A"
(Telephone Services)* 6.25 5/27/03 397 286
XO Communications, Inc., "B"
(Telephone Services)* 7.50 5/27/03 298 149
XO Communications, Inc., "C"
(Telephone Services)* 10.00 5/27/03 298 116
---------------
Total Warrants
(Identified Cost, $219,298) $ 38,403
---------------
<Caption>
PAR AMOUNT
REPURCHASE AGREEMENT -- 2.2%
Morgan Stanley, 2.19%, dated 12/31/04, due
01/03/05, total to be received
$1,657,302 (secured by various
U.S. Treasury and Federal Agency
obligations in a jointly traded account),
at Cost $ 1,657,000 $ 1,657,000
---------------
Total Investments
(Identified Cost, $72,143,503) $ 74,514,986
---------------
OTHER ASSETS,
LESS LIABILITIES -- 1.7% 1,253,327
---------------
Net Assets -- 100.0% $ 75,768,313
===============
</Table>
See portfolio footnotes and notes to financial statements.
22
<Page>
PORTFOLIO OF INVESTMENTS -- December 31, 2004
MANAGED SECTORS VARIABLE ACCOUNT
<Table>
<Caption>
ISSUER SHARES VALUE
STOCKS -- 98.1%
APPAREL MANUFACTURERS -- 2.2%
Nike, Inc., "B" 9,300 $ 843,417
Reebok International Ltd. 12,600 554,400
---------------
$ 1,397,817
---------------
BANKS & CREDIT COMPANIES -- 4.2%
American Express Co. 23,300 $ 1,313,421
Citigroup, Inc. 28,300 1,363,494
---------------
$ 2,676,915
---------------
BIOTECHNOLOGY -- 6.8%
Amgen, Inc.* 18,600 $ 1,193,190
Celgene Corp.* 15,300 405,909
Genentech, Inc.* 8,200 446,408
Genzyme Corp.* 22,700 1,318,189
Gilead Sciences, Inc.* 16,400 573,836
ImClone Systems, Inc.* 8,100 373,248
---------------
$ 4,310,780
---------------
BROADCAST & CABLE TV -- 6.5%
Comcast Corp., "A"* 33,400 $ 1,111,552
Omnicom Group, Inc. 4,700 396,304
Time Warner, Inc.* 52,600 1,022,544
Univision Communications, Inc., "A"* 14,400 421,488
Viacom, Inc., "B" 10,300 374,817
Walt Disney Co. 28,800 800,640
---------------
$ 4,127,345
---------------
BROKERAGE & ASSET MANAGERS -- 2.1%
Goldman Sachs Group, Inc. 9,000 $ 936,360
Merrill Lynch & Co., Inc. 6,300 376,551
---------------
$ 1,312,911
---------------
BUSINESS SERVICES -- 3.3%
Fiserv, Inc.* 15,300 $ 614,907
Getty Images, Inc.* 11,900 819,315
Monster Worldwide, Inc.* 19,700 662,708
---------------
$ 2,096,930
---------------
COMPUTER SOFTWARE -- 11.6%
Akamai Technologies, Inc.* 33,300 $ 433,899
Mercury Interactive Corp.* 18,300 833,565
Microsoft Corp. 94,600 2,526,766
Oracle Corp.* 105,000 1,440,600
Symantec Corp.* 23,800 613,088
VERITAS Software Corp.* 51,800 1,478,890
---------------
$ 7,326,808
---------------
COMPUTER SOFTWARE -- SYSTEMS -- 3.9%
Dell, Inc.* 58,400 $ 2,460,976
---------------
CONSUMER GOODS & SERVICES -- 4.0%
Avon Products, Inc. 18,300 $ 708,210
Procter & Gamble Co. 33,600 1,850,688
---------------
$ 2,558,898
---------------
ELECTRICAL EQUIPMENT -- 1.6%
Emerson Electric Co. 10,700 $ 750,070
W.W. Grainger, Inc. 3,900 259,818
---------------
$ 1,009,888
---------------
ELECTRONICS -- 4.4%
Amphenol Corp., "A"* 14,200 $ 521,708
Analog Devices, Inc. 21,300 786,396
KLA-Tencor Corp.* 8,500 395,930
Maxim Integrated Products, Inc. 7,400 313,686
Texas Instruments, Inc. 30,600 753,372
---------------
$ 2,771,092
---------------
FOOD & DRUG STORES -- 1.5%
CVS Corp. 21,400 $ 964,498
---------------
FOOD & NON-ALCOHOLIC BEVERAGES -- 0.5%
PepsiCo, Inc. 6,100 $ 318,420
---------------
GAMING & LODGING -- 2.0%
Carnival Corp. 22,200 $ 1,279,386
---------------
GENERAL MERCHANDISE -- 2.5%
Kohl's Corp.* 11,400 $ 560,538
Target Corp. 19,800 1,028,214
---------------
$ 1,588,752
---------------
HEALTH MAINTENANCE ORGANIZATIONS -- 1.3%
WellPoint, Inc.* 6,900 $ 793,500
---------------
INTERNET -- 5.2%
eBay, Inc.* 14,200 $ 1,651,176
Yahoo!, Inc.* 43,700 1,646,616
---------------
$ 3,297,792
---------------
MACHINERY & TOOLS -- 2.3%
Caterpillar, Inc. 14,700 $ 1,433,397
---------------
MEDICAL EQUIPMENT -- 5.4%
Fisher Scientific International, Inc.* 18,100 $ 1,129,078
Medtronic, Inc. 27,500 1,365,925
Waters Corp.* 19,900 931,121
---------------
$ 3,426,124
---------------
PERSONAL COMPUTERS & PERIPHERALS -- 2.1%
EMC Corp.* 48,600 $ 722,682
Network Appliance, Inc.* 18,800 624,536
---------------
$ 1,347,218
---------------
PHARMACEUTICALS -- 11.9%
Abbott Laboratories 36,600 $ 1,707,390
Eli Lilly & Co. 15,000 851,250
Johnson & Johnson 47,600 3,018,792
Wyeth 45,500 1,937,845
---------------
$ 7,515,277
---------------
RESTAURANTS -- 1.0%
YUM! Brands, Inc. 13,300 $ 627,494
---------------
SPECIALTY STORES -- 4.9%
Abercrombie & Fitch Co., "A" 8,300 $ 389,685
Best Buy Co., Inc. 16,400 974,488
Lowe's Cos., Inc. 8,500 489,515
PETsMART, Inc. 12,400 440,572
Staples, Inc. 24,400 822,524
---------------
$ 3,116,784
---------------
TELECOMMUNICATIONS -- WIRELINE -- 4.4%
ADTRAN, Inc. 9,600 $ 183,744
Cisco Systems, Inc.* 119,600 2,308,280
Research In Motion Ltd.* 3,700 304,954
---------------
$ 2,796,978
---------------
TRUCKING -- 2.5%
FedEx Corp. 8,900 $ 876,561
United Parcel Service, Inc., "B" 8,100 692,226
---------------
$ 1,568,787
---------------
Total Stocks (Identified Cost, $52,998,731) $ 62,124,767
---------------
<Caption>
PAR AMOUNT
REPURCHASE AGREEMENT -- 1.9%
Morgan Stanley, 2.19%, dated 12/31/04,
due 01/03/05, total to be received
$1,205,220 (secured by various U.S.
Treasury and Federal Agency
obligations in a jointly traded account),
at Cost $ 1,205,000 $ 1,205,000
---------------
Total Investments
(Identified Cost, $54,203,731) $ 63,329,767
---------------
OTHER ASSETS,
LESS LIABILITIES -- 0% (5,223)
---------------
Net Assets -- 100.0% $ 63,324,544
===============
</Table>
See portfolio footnotes and notes to financial statements.
23
<Page>
PORTFOLIO OF INVESTMENTS -- December 31, 2004
MONEY MARKET VARIABLE ACCOUNT
<Table>
<Caption>
ISSUER PAR AMOUNT VALUE
COMMERCIAL PAPER~ -- 83.0%
Alpine Securitization Corp.,
2.36%, due 2/09/05 $ 1,510,000 $ 1,506,139
American General Finance Corp.,
2.32%, due 2/04/05 1,500,000 1,496,713
Blue Ridge Asset Funding,
2.03%, due 1/07/05 1,000,000 999,662
CAFCO LLC, 2.12%, due 2/02/05 1,660,000 1,656,872
Ciesco LLC, 2.04%, due 1/07/05 - 1/10/05 1,657,000 1,656,324
Citibank Credit Card Issuance Trust,
2.09%, due 1/26/05 1,370,000 1,368,012
Citicorp, 2.06%, due 1/24/05 1,659,000 1,656,817
COFCO Capital Corp., 2.2%, due 1/11/05 243,000 242,851
Delaware Funding Co. LLC,
2.35%, due 1/24/05 1,690,000 1,687,463
Dexia Delaware LLC, 2.34%, due 3/02/05 1,536,000 1,530,010
Edison Asset Securitization LLC,
2.27%, due 2/22/05 1,225,000 1,220,983
Falcon Asset Securitization Corp.,
2.26%, due 1/27/05 1,533,000 1,530,498
First Data Corp., 2.28%, due 1/19/05 1,500,000 1,498,290
Florida Power & Light Co.,
2.29%, due 1/06/05 1,500,000 1,499,523
General Electric Capital Corp.,
2.19%, due 2/08/05 800,000 798,151
General Electric Capital Corp.,
2.27%, due 2/17/05 763,000 760,739
Goldman Sachs Group, Inc.,
2.32%, due 2/22/05 1,500,000 1,494,973
Govco, Inc., 2.15%, due 1/13/05 1,086,000 1,085,222
Govco, Inc., 2.27%, due 2/18/05 470,000 468,577
HBOS Treasury Services PLC,
2.335%, due 2/09/05 1,535,000 1,531,117
ING America Insurance Holdings, Inc.,
2.47%, due 4/14/05 1,000,000 992,933
Jupiter Securitization Corp.,
2.43%, due 3/15/05 988,000 983,132
Kitty Hawk Funding Corp.,
2.24%, due 2/15/05 1,560,000 1,555,632
MetLife, Inc., 2.2%, due 2/08/05 1,500,000 1,496,517
Morgan Stanley, Inc., 2.34%, due 1/28/05 1,530,000 1,527,315
New Center Asset Trust,
2.25%, due 1/03/05 1,506,000 1,505,812
Old Line Funding LLC, 2.17%, due 1/07/05 1,500,000 1,499,457
Ranger Funding Co. LLC,
2.335%, due 1/18/05 1,529,000 1,527,314
SBC Communications, Inc.,
2.06%, due 1/18/05 1,658,000 1,656,387
Sheffield Receivables Corp.,
2.17%, due 1/06/05 1,100,000 1,099,668
Sheffield Receivables Corp.,
2.18%, due 1/20/05 600,000 599,310
Thunder Bay Funding, LLC,
2.08%, due 1/18/05 398,000 397,609
Thunder Bay Funding, LLC,
2.36%, due 2/07/05 1,100,000 1,097,332
---------------
Total Commercial Paper,
at Amortized Cost $ 41,627,354
---------------
U.S. GOVERNMENT AGENCY OBLIGATIONS~ -- 14.2%
Fannie Mae, 1.97%, due 1/05/05 $ 1,100,000 $ 1,099,759
Fannie Mae, 2.465%, due 4/20/05 2,000,000 1,985,073
Federal Farm Credit Bank,
2.12%, due 2/02/05 2,100,000 2,096,043
Freddie Mac, 1.96%, due 1/11/05 1,930,000 1,928,949
---------------
Total U.S. Government Agency Obligations,
at Amortized Cost $ 7,109,824
---------------
REPURCHASE AGREEMENT -- 3.0%
Goldman Sachs, 2.23%, dated 12/31/04,
due 01/03/05, total to be received
$1,534,285 (secured by various U.S.
Treasury and Federal Agency
obligations in a jointly traded account),
at Cost $ 1,534,000 $ 1,534,000
---------------
Total Investments,
at Amortized Cost and Value $ 50,271,178
---------------
OTHER ASSETS,
LESS LIABILITIES -- (0.2)% (94,641)
---------------
NET ASSETS -- 100.0% $ 50,176,537
===============
</Table>
See portfolio footnotes and notes to financial statements.
24
<Page>
PORTFOLIO OF INVESTMENTS -- December 31, 2004
TOTAL RETURN VARIABLE ACCOUNT
<Table>
<Caption>
ISSUER SHARES VALUE
STOCKS -- 60.8%
AEROSPACE -- 1.8%
Lockheed Martin Corp. 40,840 $ 2,268,662
Northrop Grumman Corp. 10,400 565,344
United Technologies Corp. 8,550 883,643
---------------
$ 3,717,649
---------------
AIRLINES -- 0.1%
Southwest Airlines Co. 16,460 $ 267,969
---------------
ALCOHOLIC BEVERAGES -- 0.1%
Diageo PLC 12,720 $ 181,137
---------------
AUTOMOTIVE -- 0.1%
Toyota Motor Corp. 6,300 $ 255,617
---------------
BANKS & CREDIT COMPANIES -- 9.0%
American Express Co. 14,670 $ 826,948
Bank of America Corp. 78,912 3,708,075
Citigroup, Inc. 65,886 3,174,387
Fannie Mae 12,830 913,624
Freddie Mac 23,270 1,714,999
J.P. Morgan Chase & Co. 79,298 3,093,415
MBNA Corp. 23,990 676,278
PNC Financial Services Group, Inc. 36,140 2,075,882
SunTrust Banks, Inc. 21,210 1,566,995
U.S. Bancorp 16,022 501,809
Wells Fargo & Co. 4,560 283,404
---------------
$ 18,535,816
---------------
BIOTECHNOLOGY -- 0.2%
MedImmune, Inc.* 17,400 $ 471,714
---------------
BROADCAST & CABLE TV -- 3.9%
Comcast Corp., "Special A"* 72,340 $ 2,375,646
Dex Media, Inc. 9,320 232,627
Grupo Televisa S.A., ADR 1,980 119,790
Interpublic Group of Cos., Inc.* 26,300 352,420
News Corp., "A" 22,430 418,544
Time Warner, Inc.* 8,120 157,853
Viacom, Inc., "B" 85,558 3,113,456
Walt Disney Co. 46,620 1,296,036
---------------
$ 8,066,372
---------------
BROKERAGE & ASSET MANAGERS -- 3.2%
Franklin Resources, Inc. 5,550 $ 386,558
Goldman Sachs Group, Inc. 9,410 979,016
Lehman Brothers Holdings, Inc. 2,280 199,454
Mellon Financial Corp. 70,480 2,192,633
Merrill Lynch & Co., Inc. 33,650 2,011,261
Morgan Stanley 14,880 826,138
---------------
$ 6,595,060
---------------
BUSINESS SERVICES -- 0.4%
Accenture Ltd., "A"* 29,330 $ 791,910
Fiserv, Inc.* 2,970 119,364
---------------
$ 911,274
---------------
CHEMICALS -- 2.2%
3M Co. 2,380 $ 195,327
Dow Chemical Co. 14,080 697,101
E.I. du Pont de Nemours & Co. 30,290 1,485,725
Monsanto Co. 10,180 565,499
Nalco Holding Co.* 18,320 357,606
PPG Industries, Inc. 14,460 985,594
Syngenta AG 3,170 335,541
---------------
$ 4,622,393
---------------
COMPUTER SOFTWARE -- 1.4%
Computer Associates International, Inc. 27,240 $ 846,074
Microsoft Corp. 64,210 1,715,049
Oracle Corp.* 23,520 322,694
---------------
$ 2,883,817
---------------
COMPUTER SOFTWARE -- SYSTEMS -- 0.4%
Dell, Inc.* 6,940 $ 292,452
Hewlett-Packard Co. 7,630 160,001
International Business Machines Corp. 790 77,878
Xerox Corp.* 12,500 212,625
---------------
$ 742,956
---------------
CONSTRUCTION -- 0.3%
Masco Corp. 19,520 $ 713,066
---------------
CONSUMER GOODS & SERVICES -- 0.6%
Colgate-Palmolive Co. 4,370 $ 223,569
Kimberly-Clark Corp. 14,350 944,374
---------------
$ 1,167,943
---------------
CONTAINERS -- 1.1%
Owens-Illinois, Inc.* 79,660 $ 1,804,299
Smurfit-Stone Container Corp.* 26,090 487,361
---------------
$ 2,291,660
---------------
ELECTRICAL EQUIPMENT -- 1.7%
Cooper Industries Ltd., "A" 3,670 $ 249,156
Emerson Electric Co. 6,190 433,919
General Electric Co. 57,870 2,112,255
Hubbell, Inc., "B" 4,100 214,430
Tyco International Ltd. 16,100 575,414
---------------
$ 3,585,174
---------------
ELECTRONICS -- 0.1%
Analog Devices, Inc. 3,390 $ 125,159
---------------
ENERGY -- INDEPENDENT -- 1.3%
Devon Energy Corp. 34,880 $ 1,357,530
EnCana Corp. 8,930 509,546
EOG Resources, Inc. 2,770 197,667
Unocal Corp. 12,680 548,283
---------------
$ 2,613,026
---------------
ENERGY -- INTEGRATED -- 2.7%
BP PLC, ADR 34,580 $ 2,019,472
ConocoPhillips 9,810 851,802
Exxon Mobil Corp. 34,592 1,773,186
TOTAL S.A., ADR 8,230 903,983
---------------
$ 5,548,443
---------------
FOOD & DRUG STORES -- 0.2%
Rite Aid Corp.* 132,540 $ 485,096
---------------
FOOD & NON-ALCOHOLIC BEVERAGES -- 2.4%
Archer Daniels Midland Co. 29,430 $ 656,583
General Mills, Inc. 26,760 1,330,240
H.J. Heinz Co. 16,800 655,032
Kellogg Co. 13,170 588,172
Nestle S.A 729 190,035
PepsiCo, Inc. 21,010 1,096,722
Sara Lee Corp. 19,310 466,143
---------------
$ 4,982,927
---------------
FOREST & PAPER PRODUCTS -- 1.0%
Bowater, Inc. 23,510 $ 1,033,735
International Paper Co. 22,160 930,720
---------------
$ 1,964,455
---------------
GAMING & LODGING -- 0.3%
Cendant Corp. 20,040 $ 468,535
Hilton Hotels Corp. 10,610 241,271
---------------
$ 709,806
---------------
GENERAL MERCHANDISE -- 0.1%
Family Dollar Stores, Inc. 8,740 $ 272,950
---------------
INSURANCE -- 3.3%
AFLAC, Inc. 13,300 $ 529,872
Allstate Corp. 38,050 1,967,946
Chubb Corp. 2,480 190,712
Conseco, Inc.* 55,230 1,101,838
</Table>
25
<Page>
<Table>
<Caption>
ISSUER SHARES VALUE
STOCKS -- continued
INSURANCE -- continued
Hartford Financial Services Group, Inc. 24,240 $ 1,680,074
MetLife, Inc. 31,130 1,261,076
---------------
$ 6,731,518
---------------
LEISURE & TOYS -- 0.4%
Hasbro, Inc. 5,640 $ 109,303
Mattel, Inc. 34,190 666,363
---------------
$ 775,666
---------------
MACHINERY & TOOLS -- 0.9%
Caterpillar, Inc. 4,860 $ 473,898
Deere & Co. 5,640 419,616
Finning International, Inc.##* 480 13,994
Illinois Tool Works, Inc. 1,000 92,680
Ingersoll-Rand Co. Ltd., "A" 2,580 207,174
Precision Castparts Corp. 4,450 292,276
Sandvik AB 7,630 307,070
---------------
$ 1,806,708
---------------
MEDICAL & HEALTH TECHNOLOGY & SERVICES -- 0.8%
Apria Healthcare Group, Inc.* 20,070 $ 661,306
HCA, Inc. 7,050 281,718
Tenet Healthcare Corp.* 71,590 786,058
---------------
$ 1,729,082
---------------
MEDICAL EQUIPMENT -- 0.2%
Baxter International, Inc. 5,640 $ 194,805
Boston Scientific Corp.* 5,400 191,970
---------------
$ 386,775
---------------
METALS & MINING -- 0.4%
BHP Billiton PLC 28,080 $ 328,560
Companhia Vale do Rio Doce, ADR 19,840 575,558
---------------
$ 904,118
---------------
NATURAL GAS -- DISTRIBUTION -- 0.3%
AGL Resources, Inc. 8,610 $ 286,197
KeySpan Corp. 1,880 74,166
NiSource, Inc. 13,211 300,947
---------------
$ 661,310
---------------
OIL SERVICES -- 2.3%
BJ Services Co. 10,930 $ 508,682
Cooper Cameron Corp.* 15,070 810,917
GlobalSantaFe Corp. 44,940 1,487,963
Noble Corp.* 35,165 1,749,107
Schlumberger Ltd. 1,480 99,086
---------------
$ 4,655,755
---------------
PHARMACEUTICALS -- 5.0%
Abbott Laboratories 39,560 $ 1,845,474
Eli Lilly & Co. 1,690 95,908
Johnson & Johnson 37,050 2,349,711
Merck & Co., Inc. 91,380 2,936,953
Novartis AG 3,760 188,782
Pfizer, Inc. 5,050 135,795
Roche Holdings AG 2,280 261,513
Wyeth 60,180 2,563,066
---------------
$ 10,377,202
---------------
PRINTING & PUBLISHING -- 0.5%
Reed Elsevier PLC 76,620 $ 705,614
Tribune Co. 8,620 363,247
---------------
$ 1,068,861
---------------
RAILROAD & SHIPPING -- 0.3%
Burlington Northern Santa Fe Corp. 8,820 $ 417,274
Union Pacific Corp. 2,870 193,008
---------------
$ 610,282
---------------
RESTAURANTS -- 0.1%
McDonald's Corp. 7,830 $ 251,030
---------------
SPECIALTY CHEMICALS -- 0.4%
Air Products & Chemicals, Inc. 12,700 $ 736,219
Praxair, Inc. 1,780 78,587
---------------
$ 814,806
---------------
SPECIALTY STORES -- 1.3%
Gap, Inc. 68,690 $ 1,450,733
Home Depot, Inc. 13,410 573,143
TJX Cos., Inc. 25,990 653,129
---------------
$ 2,677,005
---------------
TELECOMMUNICATIONS -- WIRELESS -- 1.9%
Nokia Corp., ADR 107,250 $ 1,680,608
Vodafone Group PLC, ADR 81,206 2,223,420
---------------
$ 3,904,028
---------------
TELECOMMUNICATIONS -- WIRELINE -- 0.9%
Cisco Systems, Inc.* 9,320 $ 179,876
Nortel Networks Corp.* 489,100 1,706,959
---------------
$ 1,886,835
---------------
TELEPHONE SERVICES -- 4.2%
SBC Communications, Inc. 17,594 $ 453,397
Sprint Corp. 174,100 4,326,385
Telus Corp. (Non Voting)* 5,380 155,732
Verizon Communications, Inc. 90,386 3,661,537
---------------
$ 8,597,051
---------------
TOBACCO -- 0.8%
Altria Group, Inc. 28,250 $ 1,726,075
---------------
TRUCKING -- 0%
CNF, Inc. 300 $ 15,030
---------------
UTILITIES -- ELECTRIC POWER -- 2.2%
Calpine Corp.* 226,940 $ 894,143
Cinergy Corp. 10,000 416,300
Dominion Resources, Inc. 12,990 879,943
Energy East Corp. 5,940 158,479
Entergy Corp. 12,100 817,839
Exelon Corp. 9,760 430,123
FirstEnergy Corp. 2,000 79,020
FPL Group, Inc. 700 52,325
PPL Corp. 9,820 523,210
Public Service Enterprise Group, Inc. 1,500 77,655
TXU Corp. 3,810 245,974
---------------
$ 4,575,011
---------------
Total Stocks (Identified Cost, $106,013,967) $ 125,865,627
---------------
<Caption>
PAR AMOUNT
BONDS -- 37.3%
ADVERTISING & BROADCASTING -- 0.1%
News America Holdings, 8.5%, 2025 $ 99,000 $ 125,988
News America, Inc., 6.2%, 2034## 82,000 83,108
---------------
$ 209,096
---------------
AEROSPACE -- 0.5%
BAE Systems Holdings, Inc., 6.4%, 2011## $ 223,000 $ 249,938
Boeing Capital Corp., 6.5%, 2012 373,000 417,939
Northrop Grumman Corp., 7.75%, 2031 326,000 417,381
---------------
$ 1,085,258
---------------
AIRLINES -- 0.3%
Continental Airlines, Inc., 6.648%, 2019 $ 591,229 $ 574,263
---------------
ALCOHOLIC BEVERAGES -- 0.1%
Miller Brewing Co., 5.5%, 2013## $ 276,000 $ 288,488
---------------
ASSET BACKED & SECURITIZED -- 2.1%
AmeriCredit Automobile Receivables Trust,
2.18%, 2008 $ 236,000 $ 233,892
Bear Stearns Commercial Mortgage
Securities, Inc., 6.8%, 2008 197,240 205,857
Beneficial Home Equity Loan Trust,
2.54%, 2037 275,198 273,205
</Table>
26
<Page>
<Table>
<Caption>
ISSUER PAR AMOUNT VALUE
BONDS -- continued
ASSET BACKED & SECURITIZED -- continued
Blackrock Capital Finance LP,
7.75%, 2026## $ 64,761 $ 64,720
CRIIMI MAE CMBS Corp., 6.7%, 2008## 190,000 198,344
CRIIMI MAE Commercial Mortgage Trust,
7%, 2011## 320,000 343,408
Chase Commercial Mortgage Securities
Corp., 7.543%, 2009 109,493 117,802
Chase Commercial Mortgage Securities
Corp., 6.39%, 2030 369,000 398,802
Citibank Credit Card Issuance Trust,
6.65%, 2008 623,000 648,194
Credit Suisse First Boston Mortgage,
6.38%, 2035 35,000 38,511
Deutsche Mortgage & Asset Receiving
Corp., 6.538%, 2031 215,688 229,396
Falcon Franchise Loan LLC,
7.382%, 2010## 56,927 60,230
First Union-Lehman Brothers Bank of
America, 6.56%, 2035 100,897 108,478
First Union-Lehman Brothers Commercial
Mortgage Trust, 7.38%, 2029 67,737 72,076
First Union-Lehman Brothers Commercial
Mortgage Trust, 6.65%, 2029 32,430 34,510
Goldman Sachs Mortgage Securities Corp.,
6.06%, 2030 208,081 211,340
J.P. Morgan Commercial Mortgage Finance
Corp., 6.613%, 2030 175,000 186,880
Merrill Lynch Mortgage Investors, Inc.,
6.39%, 2030 78,065 82,855
Morgan Stanley Capital I, Inc.,
0.6197%, 2030## 8,775,787 201,082
Mortgage Capital Funding, Inc.,
6.337%, 2031 325,564 348,076
Multi-Family Capital Access One, Inc.,
6.65%, 2024 57,144 62,512
Residential Accredit Loans, Inc., 7%, 2028 52,600 52,503
Residential Asset Mortgage Products, Inc.,
3.8%, 2030 100,827 100,557
Residential Asset Mortgage Products, Inc.,
4.9708%, 2034 92,000 93,156
---------------
$ 4,366,386
---------------
AUTOMOTIVE -- 0.6%
DaimlerChrysler N.A. Holdings Corp.,
8%, 2010 $ 69,000 $ 79,751
DaimlerChrysler N.A. Holdings Corp.,
6.5%, 2013 163,000 176,792
Ford Motor Co., 7.45%, 2031 225,000 226,291
Ford Motor Credit Co., 6.5%, 2007 80,000 83,188
Ford Motor Credit Co., 7.875%, 2010 180,000 198,317
Ford Motor Credit Co., 7.375%, 2011 116,000 125,019
General Motors Acceptance Corp.,
7.25%, 2011 165,000 172,749
General Motors Corp., 7.2%, 2011 72,000 73,846
General Motors Corp., 8.375%, 2033 92,000 95,320
---------------
$ 1,231,273
---------------
BANKS & CREDIT COMPANIES -- 0.9%
Abbey National Capital Trust I,
8.963% to 2030, 5.389% to 2049 $ 179,000 $ 249,480
Bank of America Corp., 7.4%, 2011 299,000 346,355
HBOS Capital Funding LP,
6.071% to 2014, 4.464% to 2049## 100,000 107,176
J.P. Morgan Chase & Co., 5.125%, 2014 68,000 68,446
Mizuho Financial Group, Inc.,
5.79%, 2014## 103,000 108,191
Popular North America, Inc., 4.25%, 2008 211,000 212,991
RBS Capital Trust II, 6.425% to 2034,
4.507% to 2049 $ 161,000 $ 170,026
Socgen Real Estate LLC, 7.64% to 2007,
5.343% to 2049## 361,000 395,980
UniCredito Italiano Capital Trust II,
9.2% to 2010, 5.914% to 2049## 208,000 255,516
Wachovia Corp., 5.25%, 2014 50,000 51,245
---------------
$ 1,965,406
---------------
BROADCAST & CABLE TV -- 0.3%
Cox Communications, Inc., 4.625%, 2013 $ 159,000 $ 152,102
TCI Communications Financing III,
9.65%, 2027 425,000 491,532
Time Warner Entertainment Co. LP,
10.15%, 2012 1,000 1,312
---------------
$ 644,946
---------------
BROKERAGE & ASSET MANAGERS -- 0.7%
Credit Suisse First Boston (USA), Inc.,
4.625%, 2008 $ 247,000 $ 253,101
Credit Suisse First Boston (USA), Inc.,
6.5%, 2012 214,000 238,178
Goldman Sachs Group, Inc., 5.7%, 2012 247,000 261,825
Lehman Brothers Holdings, Inc.,
8.25%, 2007 334,000 370,526
Merrill Lynch & Co., Inc., 5.45%, 2014 82,000 84,831
Morgan Stanley Group, Inc., 6.75%, 2011 156,000 174,976
---------------
$ 1,383,437
---------------
BUILDING -- 0.1%
CRH North America, Inc., 6.95%, 2012 $ 208,000 $ 237,090
---------------
CHEMICALS -- 0.1%
Dow Chemical Co., 5.75%, 2008 $ 162,000 $ 172,505
---------------
CONGLOMERATES -- 0.1%
Kennametal, Inc., 7.2%, 2012 $ 211,000 $ 234,471
---------------
CONSUMER CYCLICAL -- 0.1%
Cendant Corp., 6.875%, 2006 $ 147,000 $ 154,653
Cendant Corp., 6.25%, 2008 90,000 96,050
---------------
$ 250,703
---------------
DEFENSE ELECTRONICS -- 0.1%
Raytheon Co., 6.15%, 2008 $ 114,000 $ 122,565
---------------
EMERGING MARKET QUASI-SOVEREIGN -- 0%
Pemex Project Funding Master Trust,
8.625%, 2022 $ 39,000 $ 45,377
---------------
EMERGING MARKET SOVEREIGN -- 0.2%
State of Israel, 4.625%, 2013 $ 112,000 $ 108,257
United Mexican States, 6.625%, 2015 213,000 228,762
United Mexican States, 8.125%, 2019 85,000 99,748
United Mexican States, 8%, 2022 55,000 63,443
---------------
$ 500,210
---------------
ENERGY -- INDEPENDENT -- 0.2%
Devon Financing Corp. U.L.C.,
6.875%, 2011 $ 142,000 $ 160,823
EnCana Holdings Finance Corp.,
5.8%, 2014 98,000 104,122
Kerr-McGee Corp., 6.95%, 2024 77,000 85,149
Pioneer Natural Resource Co.,
5.875%, 2016 90,000 94,024
---------------
$ 444,118
---------------
ENERGY -- INTEGRATED -- 0%
Amerada Hess Corp., 7.3%, 2031 $ 62,000 $ 69,167
---------------
ENTERTAINMENT -- 0.1%
Walt Disney Co., 6.75%, 2006 $ 69,000 $ 71,892
Walt Disney Co., 6.375%, 2012 98,000 109,140
---------------
$ 181,032
---------------
</Table>
27
<Page>
<Table>
<Caption>
ISSUER PAR AMOUNT VALUE
BONDS -- continued
FINANCIAL INSTITUTIONS -- 0.6%
DBS Capital Funding Corp.,
7.657%, 2049## $ 170,000 $ 196,581
General Electric Capital Corp., 7.5%, 2005 536,000 545,232
General Electric Capital Corp.,
8.75%, 2007 130,000 145,642
SLM Corp., 4%, 2009 153,000 152,926
SLM Corp., 5.375%, 2013 195,000 201,714
---------------
$ 1,242,095
---------------
FOOD & NON-ALCOHOLIC BEVERAGES -- 0.2%
Cadbury Schweppes U.S. Finance,
5.125%, 2013## $ 270,000 $ 274,831
Kraft Foods, Inc., 6.25%, 2012 122,000 133,927
---------------
$ 408,758
---------------
FOREST & PAPER PRODUCTS -- 0.2%
MeadWestvaco Corp., 6.8%, 2032 $ 104,000 $ 113,686
Weyerhaeuser Co., 6.75%, 2012 254,000 286,215
---------------
$ 399,901
---------------
INSURANCE -- 0.7%
AIG SunAmerica Institutional Funding II,
5.75%, 2009 $ 441,000 $ 467,424
AIG SunAmerica, Inc, 7.6%, 2005## 444,000 453,153
MetLife, Inc., 6.5%, 2032 180,000 196,296
Prudential Financial, Inc., 5.1%, 2014 80,000 80,383
Prudential Funding Corp., 6.6%, 2008## 179,000 193,723
---------------
$ 1,390,979
---------------
INSURANCE -- PROPERTY & CASUALTY -- 0.2%
Allstate Corp., 6.125%, 2032 $ 185,000 $ 195,149
Fund American Cos., Inc., 5.875%, 2013 117,000 119,077
Safeco Corp., 4.875%, 2010 32,000 32,765
Travelers Property Casualty Corp.,
6.375%, 2033 84,000 86,278
---------------
$ 433,269
---------------
INTERNATIONAL MARKET QUASI-SOVEREIGN -- 0.1%
Hydro-Quebec, 6.3%, 2011 $ 262,000 $ 292,109
---------------
INTERNATIONAL MARKET SOVEREIGN -- 0.2%
Republic of Italy, 4.625%, 2005 $ 363,000 $ 366,631
---------------
MEDICAL & HEALTH TECHNOLOGY &
SERVICES -- 0.1%
HCA, Inc., 8.75%, 2010 $ 40,000 $ 45,723
HCA, Inc., 6.95%, 2012 139,000 146,354
---------------
$ 192,077
---------------
MORTGAGE BACKED -- 13.4%
Fannie Mae, 5.722%, 2009 $ 830,000 $ 875,550
Fannie Mae, 4.01%, 2013 19,666 18,976
Fannie Mae, 4.63%, 2014 48,543 48,530
Fannie Mae, 4.518%, 2014 179,351 178,366
Fannie Mae, 4.846%, 2014 74,896 76,113
Fannie Mae, 6%, 2016 - 2034 4,031,298 4,192,082
Fannie Mae, 5.5%, 2016 - 2034 7,896,411 8,048,680
Fannie Mae, 5%, 2018 - 2034 1,766,920 1,795,338
Fannie Mae, 4.5%, 2018 - 2019 970,201 968,925
Fannie Mae, 6.5%, 2028 - 2034 1,943,613 2,041,556
Fannie Mae, 7.5%, 2031 63,874 68,437
Freddic Mac, 5.5%, 2019 17,430 18,014
Freddie Mac, 5%, 2017 - 2033 1,572,832 1,575,911
Freddie Mac, 4.5%, 2018 - 2019 1,184,342 1,183,207
Freddie Mac, 5.5%, 2019 - 2034 1,532,822 1,559,013
Freddie Mac, 6%, 2019 - 2034 1,771,083 1,832,977
Freddie Mac, 6.5%, 2034 419,885 440,697
Ginnie Mae, 7.5%, 2023 - 2024 83,602 90,242
Ginnie Mae, 6.5%, 2028 - 2028 300,680 316,912
Ginnie Mae, 6%, 2033 - 2034 898,931 932,278
Ginnie Mae, 5.5%, 2033 1,426,438 1,458,256
Ginnie Mae, 5%, 2099 100,000 99,969
---------------
$ 27,820,029
---------------
NATURAL GAS -- PIPELINE -- 0.3%
CenterPoint Energy Resources Corp.,
7.875%, 2013 $ 82,000 $ 97,464
Kinder Morgan Energy Partners LP,
6.75%, 2011 315,000 351,675
Kinder Morgan Energy Partners LP,
7.75%, 2032 117,000 141,204
---------------
$ 590,343
---------------
PHARMACEUTICALS -- 0.1%
Wyeth, 5.5%, 2013 $ 123,000 $ 127,837
---------------
POLLUTION CONTROL -- 0.1%
Waste Management, Inc., 7.375%, 2010 $ 134,000 $ 153,598
---------------
PRINTING & PUBLISHING -- 0.1%
Belo Corp., 7.75%, 2027 $ 226,000 $ 268,091
---------------
RAILROAD & SHIPPING -- 0.1%
Union Pacific Corp., 6.125%, 2012 $ 50,000 $ 54,994
Union Pacific Corp., 5.375%, 2014 49,000 50,758
---------------
$ 105,752
---------------
REAL ESTATE -- 0.3%
Boston Properties, Inc., 5%, 2015 $ 42,000 $ 40,957
EOP Operating LP, 6.8%, 2009 29,000 31,787
HRPT Properties Trust, 6.25%, 2016 115,000 121,302
Vornado Realty Trust, 5.625%, 2007 383,000 397,642
---------------
$ 591,688
---------------
TELECOMMUNICATIONS -- WIRELESS -- 0.1%
AT&T Wireless Services, Inc., 7.35%, 2006 $ 107,000 $ 111,937
Sprint Capital Corp., 6.875%, 2028 106,000 116,047
---------------
$ 227,984
---------------
TELECOMMUNICATIONS -- WIRELINE -- 0.9%
BellSouth Corp., 6.55%, 2034 $ 146,000 $ 159,088
Deutsche Telekom International Finance B.V.,
8.75%, 2030 152,000 200,710
France Telecom S.A., 8.5%, 2011 85,000 101,397
PCCW-HKTC Capital II Ltd., 6%, 2013## 150,000 157,683
SBC Communications, Inc., 5.1%, 2014 126,000 127,171
Telecom Italia Capital, 5.25%, 2013 150,000 151,610
Telecom Italia Capital, 6%, 2034## 81,000 79,190
Telecomunicaciones de Puerto Rico, Inc.,
6.65%, 2006 270,000 280,010
Verizon New York, Inc., 6.875%, 2012 486,000 545,524
---------------
$ 1,802,383
---------------
U.S. GOVERNMENT AGENCIES -- 5.2%
Fannie Mae, 2.5%, 2006 $ 360,000 $ 356,822
Fannie Mae, 5.25%, 2007 1,147,000 1,195,101
Fannie Mae, 6.625%, 2009 - 2010 4,434,000 4,993,507
Fannie Mae, 6%, 2011 94,000 103,419
Fannie Mae, 4.125%, 2014 320,000 310,147
Fannie Mae, 4.625%, 2014 250,000 250,188
Federal Home Loan Bank, 2.875%, 2006 365,000 363,706
Freddie Mac, 2.75%, 2006 967,000 959,350
Freddie Mac, 2.875%, 2006 1,405,000 1,395,143
Small Business Administration,
4.35%, 2023 49,663 48,731
Small Business Administration,
4.77%, 2024 120,353 120,508
Small Business Administration,
5.18%, 2024 196,161 200,672
Small Business Administration,
5.52%, 2024 278,085 289,398
Small Business Administration,
4.99%, 2024 156,000 157,790
---------------
$ 10,744,482
---------------
</Table>
28
<Page>
<Table>
<Caption>
ISSUER PAR AMOUNT VALUE
BONDS -- continued
U.S. TREASURY OBLIGATIONS -- 6.5%
U.S. Treasury Bonds, 8%, 2021 $ 703,000 $ 965,005
U.S. Treasury Bonds, 6.25%, 2023 2,489,000 2,913,977
U.S. Treasury Bonds, 5.375%, 2031 623,000 673,667
U.S. Treasury Notes, 1.625%, 2005 52,000 51,919
U.S. Treasury Notes, 6.5%, 2005 978,000 992,288
U.S. Treasury Notes, 1.25%, 2005 387,000 385,156
U.S. Treasury Notes, 5.75%, 2005 665,000 682,041
U.S. Treasury Notes, 7%, 2006 2,545,000 2,698,296
U.S. Treasury Notes, 4.375%, 2007 146,000 150,055
U.S. Treasury Notes, 4%, 2009 23,000 23,438
U.S. Treasury Notes, 4.25%, 2010 - 2014 2,172,954 2,298,057
U.S. Treasury Notes, 3%, 2012 1,184,701 1,322,005
U.S. Treasury Notes, 3.875%, 2013 303,000 298,952
U.S. Treasury Notes, 4.75%, 2014 1,000 1,042
---------------
$ 13,455,898
---------------
UTILITIES -- ELECTRIC POWER -- 1.3%
DTE Energy Co., 7.05%, 2011 $ 238,000 $ 269,499
Duke Capital Corp., 8%, 2019 99,000 120,814
Exelon Generation Co. LLC, 6.95%, 2011 77,000 86,913
FirstEnergy Corp., 6.45%, 2011 147,000 159,711
MidAmerican Energy Holdings Co.,
3.5%, 2008 118,000 115,587
MidAmerican Energy Holdings Co.,
5.875%, 2012 61,000 64,638
MidAmerican Funding LLC, 6.927%, 2029 454,000 509,151
Niagara Mohawk Power Corp.,
7.75%, 2006 1,000 1,059
Northeast Utilities, 8.58%, 2006 105,897 110,880
Oncor Electric Delivery Co., 7%, 2022 202,000 230,383
PSEG Power LLC, 6.95%, 2012 71,000 80,006
PSEG Power LLC, 8.625%, 2031 91,000 120,828
Pacific Gas & Electric Co., 4.8%, 2014 125,000 124,562
System Energy Resources, Inc.,
5.129%, 2014## 116,000 116,095
TXU Energy Co., 7%, 2013 102,000 113,919
W3A Funding Corp., 8.09%, 2017 338,966 375,038
---------------
$ 2,599,083
---------------
Total Bonds
(Identified Cost, $75,266,495) $ 77,218,778
---------------
REPURCHASE AGREEMENT -- 1.9%
Morgan Stanley, 2.19%, dated 12/31/04,
due 01/03/05, total to be received
$3,911,714 (secured by various U.S.
Treasury and Federal Agency
obligations in a jointly traded account),
at Cost $ 3,911,000 $ 3,911,000
---------------
Total Investments
(Identified Cost, $185,191,462) $ 206,995,405
---------------
OTHER ASSETS,
LESS LIABILITIES -- 0.0% 82,563
---------------
Net Assets -- 100.0% $ 207,077,968
===============
</Table>
See portfolio footnotes and notes to financial statements.
PORTFOLIO FOOTNOTES:
* Non-income producing security.
# Payment-in-kind security.
## SEC Rule 144A restriction.
### Security segregated as collateral for open futures contracts.
~ The rate shown represents an annualized yield at time of purchase.
~~~ All or a portion of this security is subject to dollar roll transactions.
ADR = American Depository Receipt
STRIPS = Separate trading of Registered Interest and Principal of Securities.
TBA = To Be Announced
Abbreviations have been used throughout this report to indicate amounts shown in
currencies other than the U.S. dollar. A list of abbreviations is shown below
AUD = Australian Dollar GBP = British Pound
CAD = Canadian Dollar JPY = Japanese Yen
CHF = Swiss Franc NOK = Norwegian Kroner
CZK = Czech Republic Koruna NZD = New Zealand Dollar
DKK = Danish Krones PLN = Polish Zloty
EUR = Euro SEK = Swedish Krona
29
<Page>
STATEMENTS OF ASSETS AND LIABILITIES -- December 31, 2004
(000 Omitted)
<Table>
<Caption>
CAPITAL GLOBAL GOVERNMENT HIGH
APPRECIATION GOVERNMENTS SECURITIES YIELD
VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------------ ----------- ----------- ----------
Assets:
Investments --
Investments, cost $ 264,164 $ 11,014 $ 107,429 $ 72,144
Unrealized appreciation (depreciation) 41,025 1,040 2,213 2,371
------------ ----------- ----------- ----------
Total investments, at value $ 305,189 $ 12,054 $ 109,642 $ 74,515
Cash $ 0* $ 0* $ 0* $ 15
Receivable for forward foreign currency exchange contracts -- 155 -- 28
Receivable for forward currency exchange contracts subject
to master netting agreements -- 4 -- --
Receivable for investments sold 91 -- -- 81
Receivable for units sold 13 5 14 1
Interest and dividends receivable 150 196 904 1,321
Receivable from administrative proceeding settlement 227 -- -- --
Receivable from Investment Adviser -- -- -- --
Receivable from sponsor -- -- -- 78
Other assets 4 -- 2 1
------------ ----------- ----------- ----------
Total assets $ 305,674 $ 12,414 $ 110,562 $ 76,040
============ =========== =========== ==========
Liabilities:
Payable for forward foreign currency exchange contracts $ -- $ 169 $ -- $ 98
Payable for daily variation on open futures contracts -- -- 5 --
Payable for investments purchased 1,121 69 -- 111
Payable for dollar roll transactions -- -- 6,074 --
Payable for units surrendered 226 38 64 10
Deferred mortgage dollar roll income -- -- 5 --
Payable to affiliates --
Investment Adviser 6 0* 2 2
Sponsor 46 0* 8 --
Accrued expenses and other liabilities 53 44 45 51
------------ ----------- ----------- ----------
Total liabilities $ 1,452 $ 320 $ 6,203 $ 272
------------ ----------- ----------- ----------
Net assets $ 304,222 $ 12,094 $ 104,359 $ 75,768
============ =========== =========== ==========
<Caption>
MANAGED MONEY TOTAL
SECTORS MARKET RETURN
VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT
---------- ---------- ----------
Assets:
Investments --
Investments, cost $ 54,204 $ 50,271 $ 185,191
Unrealized appreciation (depreciation) 9,126 -- 21,804
---------- ---------- ----------
Total investments, at value $ 63,330 $ 50,271 $ 206,995
Cash $ 1 $ 1 $ 2
Receivable for forward foreign currency exchange contracts -- -- --
Receivable for forward currency exchange contracts subject
to master netting agreements -- -- --
Receivable for investments sold 0* -- 99
Receivable for units sold 13 1 149
Interest and dividends receivable 19 0* 1,023
Receivable from administrative proceeding settlement 63 -- 20
Receivable from Investment Adviser -- 12 --
Receivable from sponsor -- -- 50
Other assets 1 1 2
---------- ---------- ----------
Total assets $ 63,427 $ 50,286 $ 208,340
========== ========== ==========
Liabilities:
Payable for forward foreign currency exchange contracts $ -- $ -- $ --
Payable for daily variation on open futures contracts -- -- --
Payable for investments purchased -- -- 1,019
Payable for dollar roll transactions -- -- --
Payable for units surrendered 60 73 184
Deferred mortgage dollar roll income -- -- --
Payable to affiliates --
Investment Adviser 1 1 4
Sponsor 2 15 --
Accrued expenses and other liabilities 39 20 55
---------- ---------- ----------
Total liabilities $ 102 $ 109 $ 1,262
---------- ---------- ----------
Net assets $ 63,325 $ 50,177 $ 207,078
========== ========== ==========
</Table>
* Amount less than $500
See notes to financial statements.
30
<Page>
(000 Omitted except for unit values)
<Table>
<Caption>
CAPITAL GLOBAL
APPRECIATION GOVERNMENTS
UNIT VARIABLE VARIABLE
UNIT VALUE ACCOUNT ACCOUNT
----- -------- ------------ -----------
Net assets applicable to contract owners:
Capital Appreciation Variable Account --
Compass 2 3,544 $ 55.625 $ 197,298
Compass 3 413 36.678 15,149
Compass 3 - Level 2 5,798 15.267 88,515
Global Governments Variable Account --
Compass 2 128 $ 27.240 $ 3,492
Compass 3 28 26.561 750
Compass 3 - Level 2 500 15.580 7,783
Government Securities Variable Account --
Compass 2 2,125 $ 37.338
Compass 3 100 26.082
Compass 3 - Level 2 1,377 15.274
High Yield Variable Account --
Compass 2 1,601 $ 36.669
Compass 3 67 26.943
Compass 3 - Level 2 971 14.421
Managed Sectors Variable Account --
Compass 2 345 $ 43.708
Compass 3 141 42.920
Compass 3 - Level 2 3,020 13.910
Money Market Variable Account --
Compass 2 1,009 $ 20.073
Compass 3 97 16.443
Compass 3 - Level 2 2,259 12.326
Total Return Variable Account --
Compass 2 1,511 $ 45.729
Compass 3 315 44.592
Compass 3 - Level 2 5,646 21.559
------------ -----------
Net assets applicable to owners of deferred contracts 300,962 12,025
Reserve for variable annuities
Compass 2 Contracts 2,951 18
Compass 3 Contracts 1 43
Compass 3 - Level 2 Contracts 308 8
------------ -----------
Net assets $ 304,222 $ 12,094
============ ===========
<Caption>
GOVERNMENT HIGH MANAGED MONEY TOTAL
SECURITIES YIELD SECTORS MARKET RETURN
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
---------- -------- -------- -------- ---------
Net assets applicable to contract owners:
Capital Appreciation Variable Account --
Compass 2
Compass 3
Compass 3 - Level 2
Global Governments Variable Account --
Compass 2
Compass 3
Compass 3 - Level 2
Government Securities Variable Account --
Compass 2 $ 79,344
Compass 3 2,591
Compass 3 - Level 2 21,026
High Yield Variable Account --
Compass 2 $ 58,689
Compass 3 1,799
Compass 3 - Level 2 14,004
Managed Sectors Variable Account --
Compass 2 $ 15,084
Compass 3 6,036
Compass 3 - Level 2 42,019
Money Market Variable Account --
Compass 2 $ 20,187
Compass 3 1,577
Compass 3 - Level 2 27,836
Total Return Variable Account --
Compass 2 $ 69,105
Compass 3 14,021
Compass 3 - Level 2 121,735
---------- -------- -------- -------- ---------
Net assets applicable to owners of deferred contracts 102,961 74,492 63,139 49,600 204,861
Reserve for variable annuities
Compass 2 Contracts 1,345 1,216 80 486 1,389
Compass 3 Contracts -- 2 21 11 128
Compass 3 - Level 2 Contracts 53 58 85 80 700
---------- -------- -------- -------- ---------
Net assets $ 104,359 $ 75,768 $ 63,325 $ 50,177 $ 207,078
========== ======== ======== ======== =========
</Table>
See notes to financial statements.
31
<Page>
STATEMENTS OF OPERATIONS -- Year Ended December 31, 2004
(000 Omitted)
<Table>
<Caption>
CAPITAL GLOBAL GOVERNMENT HIGH
APPRECIATION GOVERNMENTS SECURITIES YIELD
VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------------ ----------- ----------- ----------
Net Investment income (loss):
Income --
Interest $ 164 $ 418 $ 5,379 $ 6,356
Dividends 3,876 -- -- 20
Other# 227 -- -- --
------------ ----------- ----------- ----------
Total investment income $ 4,267 $ 418 $ 5,379 $ 6,376
------------ ----------- ----------- ----------
Expenses --
Mortality and expense risk charges $ 3,796 $ 151 $ 1,390 $ 1,000
Management fee 2,252 91 604 594
Boards of Managers fees 34 1 13 10
Distribution fee 26 1 5 3
Administrative fee 28 1 10 8
Custodian fee 109 16 36 30
Printing 38 6 13 14
Auditing fees 25 38 32 39
Legal fees 9 10 9 9
Miscellaneous 33 10 16 17
------------ ----------- ----------- ----------
Total expenses $ 6,350 $ 325 $ 2,128 $ 1,724
Fees paid indirectly (5) (0)* (1) (2)
Reduction of expenses by investment adviser -- (20) -- --
------------ ----------- ----------- ----------
Net expenses $ 6,345 $ 305 $ 2,127 $ 1,722
------------ ----------- ----------- ----------
Net investment income (loss) $ (2,078) $ 113 $ 3,252 $ 4,654
------------ ----------- ----------- ----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) --
Investment transactions $ 16,600** $ 1,073 $ 1,107 $ (1,588)
Written option transactions -- 3 -- --
Futures contracts -- 11 80 --
Foreign currency transactions (12) (64) -- (128)
------------ ----------- ----------- ----------
Net realized gain (loss) on investments and foreign
currency transactions $ 16,588 $ 1,023 $ 1,187 $ (1,716)
------------ ----------- ----------- ----------
Change in unrealized appreciation (depreciation) --
Investments $ 12,495 $ (277) $ (1,791) $ 2,327
Futures contracts -- 1 (55) --
Translation of assets and liabilities in foreign currencies 1 49 -- (14)
------------ ----------- ----------- ----------
Net unrealized gain (loss) on investments
and foreign currency translation $ 12,496 $ (227) $ (1,846) $ 2,313
------------ ----------- ----------- ----------
Net realized and unrealized gain (loss) on investments
and foreign currency $ 29,084 $ 796 $ (659) $ 597
------------ ----------- ----------- ----------
Change in net assets from operations $ 27,006 $ 909 $ 2,593 $ 5,251
============ =========== =========== ==========
<Caption>
MANAGED MONEY TOTAL
SECTORS MARKET RETURN
VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT
---------- ---------- ----------
Net Investment income (loss):
Income --
Interest $ 12 $ 719 $ 3,987
Dividends 775 -- 2,723
Other# 63 -- 20
---------- ---------- ----------
Total investment income $ 850 $ 719 $ 6,730
---------- ---------- ----------
Expenses --
Mortality and expense risk charges $ 793 $ 646 $ 2,489
Management fee 479 257 1,515
Boards of Managers fees 8 4 23
Distribution fee 10 3 24
Administrative fee 6 5 19
Custodian fee 26 18 73
Printing 18 17 22
Auditing fees 33 19 43
Legal fees 9 9 9
Miscellaneous 11 10 29
---------- ---------- ----------
Total expenses $ 1,393 $ 988 $ 4,246
Fees paid indirectly (1) (0)* (1)
Reduction of expenses by investment adviser -- -- --
---------- ---------- ----------
Net expenses $ 1,392 $ 988 $ 4,245
---------- ---------- ----------
Net investment income (loss) $ (542) $ (269) $ 2,485
---------- ---------- ----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) --
Investment transactions $ 4,523 $ -- $ 13,823
Written option transactions -- -- --
Futures contracts -- -- --
Foreign currency transactions -- -- 0*
---------- ---------- ----------
Net realized gain (loss) on investments and foreign
currency transactions $ 4,523 $ -- $ 13,823
---------- ---------- ----------
Change in unrealized appreciation (depreciation) --
Investments $ (902) $ -- $ 2,961
Futures contracts -- -- --
Translation of assets and liabilities in foreign currencies -- -- 4
---------- ---------- ----------
Net unrealized gain (loss) on investments
and foreign currency translation $ (902) $ -- $ 2,965
---------- ---------- ----------
Net realized and unrealized gain (loss) on investments
and foreign currency $ 3,621 $ -- $ 16,788
---------- ---------- ----------
Change in net assets from operations $ 3,079 $ (269) $ 19,273
========== ========== ==========
</Table>
* Amount less than $500.
** Includes proceeds received from a non-recurring cash settlement in the
amount of $622,626 from a class action lawsuit against Cendant Corp.
# A non-recurring accrual recorded as a result of an administrative
proceeding regarding disclosure of brokerage allocation practices in
connection with fund sales, as described in the Legal Proceedings and
Transactions with Affiliates footnotes.
See notes to financial statements.
32
<Page>
STATEMENTS OF CHANGES IN NET ASSETS
(000 Omitted)
<Table>
<Caption>
CAPITAL APPRECIATION GLOBAL GOVERNMENTS
VARIABLE ACCOUNT VARIABLE ACCOUNT
------------------------ -------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------------ -------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Change in net assets:
From operations:
Net investment income (loss) $ (2,078) $ (3,503) $ 113 $ 158
Net realized gain (loss) on investments and foreign
currency transactions 16,588 (458) 1,023 1,009
Net unrealized gain (loss) on investments and foreign
currency translation 12,496 74,556 (227) 500
---------- ---------- ---------- ----------
Change in net assets from operations $ 27,006 $ 70,595 $ 909 $ 1,667
---------- ---------- ---------- ----------
Participant transactions:
Accumulation activity:
Purchase payments received $ 7,120 $ 7,367 $ 375 $ 357
Net transfers between variable and fixed accumulation accounts (2,841) (4,305) (604) 621
Withdrawals, surrenders, annuitizations, and contract charges (41,093) (30,559) (1,777) (1,497)
---------- ---------- ---------- ----------
Net accumulation activity $ (36,814) $ (27,497) $ (2,006) $ (519)
---------- ---------- ---------- ----------
Annuitization activity:
Annuitizations $ 261 $ 13 $ 0* $ --
Annuity payments and contract charges (513) (469) (6) (6)
Net transfers among accounts for annuity reserves -- (792) -- (118)
Adjustments to annuity reserves (44) 625 0* 111
---------- ---------- ---------- ----------
Net annuitization activity $ (296) $ (623) $ (6) $ (13)
---------- ---------- ---------- ----------
Change in net assets from participations transactions $ (37,110) $ (28,120) $ (2,012) $ (532)
---------- ---------- ---------- ----------
Total change in net assets $ (10,104) $ 42,475 $ (1,103) $ 1,135
Net assets:
At beginning of period 314,326 271,851 13,197 12,062
---------- ---------- ---------- ----------
At end of period $ 304,222 $ 314,326 $ 12,094 $ 13,197
========== ========== ========== ==========
<Caption>
GOVERNMENT SECURITIES
VARIABLE ACCOUNT
------------------------
YEAR ENDED DECEMBER 31,
------------------------
2004 2003
---------- ----------
Change in net assets:
From operations:
Net investment income (loss) $ 3,252 $ 2,660
Net realized gain (loss) on investments and foreign
currency transactions 1,187 1,504
Net unrealized gain (loss) on investments and foreign
currency translation (1,846) (2,844)
---------- ----------
Change in net assets from operations $ 2,593 $ 1,320
---------- ----------
Participant transactions:
Accumulation activity:
Purchase payments received $ 1,762 $ 2,312
Net transfers between variable and fixed accumulation accounts (4,683) (2,752)
Withdrawals, surrenders, annuitizations, and contract charges (12,905) (14,350)
---------- ----------
Net accumulation activity $ (15,826) $ (14,790)
---------- ----------
Annuitization activity:
Annuitizations $ (5) $ 11
Annuity payments and contract charges (308) (504)
Net transfers among accounts for annuity reserves (87) (388)
Adjustments to annuity reserves (13) 480
---------- ----------
Net annuitization activity $ (413) $ (401)
---------- ----------
Change in net assets from participations transactions $ (16,239) $ (15,191)
---------- ----------
Total change in net assets $ (13,646) $ (13,871)
Net assets:
At beginning of period 118,005 131,876
---------- ----------
At end of period $ 104,359 $ 118,005
========== ==========
</Table>
* Amount less than $500.
See notes to financial statements.
33
<Page>
<Table>
<Caption>
HIGH YIELD MANAGED SECTORS
VARIABLE ACCOUNT VARIABLE ACCOUNT
---------------------- ----------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
---------------------- ----------------------
2004 2003 2004 2003
--------- --------- -------- ----------
Change in net assets:
From operations:
Net investment income (loss) $ 4,654 $ 5,943 $ (542) $ (779)
Net realized gain (loss) on investments and foreign currency transactions (1,716) (1,399) 4,523 2,925
Net unrealized gain (loss) on investments and foreign currency translation 2,313 11,526 (902) 10,825
--------- --------- -------- ----------
Change in net assets from operations $ 5,251 $ 16,070 $ 3,079 $ 12,971
--------- --------- -------- ----------
Participant transactions:
Accumulation activity:
Purchase payments received $ 999 $ 1,245 $ 2,607 $ 3,037
Net transfers between variable and fixed accumulation accounts (22,124) 1,632 (653) (169)
Withdrawals, surrenders, annuitizations, and contract charges (9,829) (11,148) (9,735) (7,142)
--------- --------- -------- ----------
Net accumulation activity $ (30,954) $ (8,271) $ (7,781) $ (4,274)
--------- --------- -------- ----------
Annuitization activity:
Annuitizations $ 100 $ -- $ (1) $ --
Annuity payments and contract charges (207) (229) (36) (42)
Net transfers among accounts for annuity reserves -- (363) -- (53)
Adjustments to annuity reserves 77 106 (2) 52
--------- --------- -------- ----------
Net annuitization activity $ (30) $ (486) $ (39) $ (43)
--------- --------- -------- ----------
Change in net assets from participations transactions $ (30,984) $ (8,757) $ (7,820) $ (4,317)
--------- --------- -------- ----------
Total change in net assets $ (25,733) $ 7,313 $ (4,741) $ 8,654
Net assets:
At beginning of period 101,501 94,188 68,066 59,412
--------- --------- -------- ----------
At end of period $ 75,768 $ 101,501 $ 63,325 $ 68,066
========= ========= ======== ==========
</Table>
See notes to financial statements.
34
<Page>
<Table>
<Caption>
MONEY MARKET TOTAL RETURN
VARIABLE ACCOUNT VARIABLE ACCOUNT
---------------------- ----------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
---------------------- ----------------------
2004 2003 2004 2003
--------- --------- -------- ----------
Change in net assets:
From operations:
Net investment income (loss) $ (269) $ (329) $ 2,485 $ 2,186
Net realized gain (loss) on investments and foreign currency transactions -- -- 13,823 333
Net unrealized gain (loss) on investments and foreign currency translation -- -- 2,965 26,254
--------- --------- -------- ----------
Change in net assets from operations $ (269) $ (329) $ 19,273 $ 28,773
--------- --------- -------- ----------
Participant transactions:
Accumulation activity:
Purchase payments received $ 1,576 $ 2,440 $ 5,581 $ 5,581
Net transfers between variable and fixed accumulation accounts 22,089 (1,613) 4,317 596
Withdrawals, surrenders, annuitizations, and contract charges (11,007) (13,195) (29,151) (24,545)
--------- --------- -------- ----------
Net accumulation activity $ 12,658 $ (12,368) $(19,253) $ (18,368)
--------- --------- -------- ----------
Annuitization activity:
Annuitizations $ 96 $ 121 $ 102 $ 259
Annuity payments and contract charges (179) (148) (432) (444)
Net transfers among accounts for annuity reserves 82 (376) 4 (302)
Adjustments to annuity reserves (19) 349 49 61
--------- --------- -------- ----------
Net annuitization activity $ (20) $ (54) $ (277) $ (426)
--------- --------- -------- ----------
Change in net assets from participations transactions $ 12,638 $ (12,422) $(19,530) $ (18,794)
--------- --------- -------- ----------
Total change in net assets $ 12,369 $ (12,751) $ (257) $ 9,979
Net assets:
At beginning of period 37,808 50,559 207,335 197,356
--------- --------- -------- ----------
At end of period $ 50,177 $ 37,808 $207,078 $ 207,335
========= ========= ======== ==========
</Table>
See notes to financial statements.
35
<Page>
FINANCIAL HIGHLIGHTS
These financial highlights tables are intended to help you understand the
variable accounts' financial performance for the past 5 fiscal years (or, if
shorter, the period of the variable accounts' operation). Certain information
reflects financial results for a single unit value. The total returns in the
table represent the rate by which an investor would have earned (or lost) on an
investment in the variable account held for the entire period. This information
has been audited by the variable accounts' independent registered public
accounting firm, whose report, together with the variable accounts' financial
statements, are included in this report.
<Table>
<Caption>
CAPITAL APPRECIATION VARIABLE ACCOUNT
---------------------------------------------------------------------
COMPASS 2
---------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Per unit data:*
Net asset value -- beginning of period $ 50.814 $ 39.859 $ 59.446 $ 80.578 $ 92.242
---------- ---------- ---------- ---------- ----------
Investment income $ 0.744 $ 0.402 $ 0.369 $ 0.598 $ 0.907
Expenses (1.109) (0.951) (1.002) (1.401) (1.920)
---------- ---------- ---------- ---------- ----------
Net investment loss $ (0.365) $ (0.549) $ (0.633) $ (0.803) $ (1.013)
Net realized and unrealized gain (loss) on investments
and foreign currency transactions 5.176 11.504 (18.954) (20.329) (10.651)
---------- ---------- ---------- ---------- ----------
Change in unit value $ 4.811 $ 10.955 $ (19.587) $ (21.132) $ (11.664)
---------- ---------- ---------- ---------- ----------
Unit value:
Net asset value -- end of period 55.625 $ 50.814 $ 39.859 $ 59.446 $ 80.578
========== ========== ========== ========== ==========
Total Return++& 9.47%^^ 27.48%^ (32.95)% (26.22)% --
Ratios (to average net assets):
Expenses# 2.14% 2.12% 2.12% 0.79%+ 0.76%+
Net investment loss (0.70%) (1.20)% (1.36)% (1.19)%+ (1.08)%+
Portfolio turnover 65% 104% 80% 123% 140%
Number of units outstanding at end of period (000 Omitted) 3,544 4,040 4,521 5,340 5,818
<Caption>
CAPITAL APPRECIATION VARIABLE ACCOUNT
---------------------------------------------------------------------
COMPASS 3
---------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Per unit data:*
Net asset value -- beginning of period $ 33.539 $ 26.334 $ 39.314 $ 53.342 $ 61.123
---------- ---------- ---------- ---------- ----------
Investment income $ 0.458 $ 0.260 $ 0.240 $ 0.417 $ 0.581
Expenses (0.753) (0.648) (0.688) (1.025) (1.317)
---------- ---------- ---------- ---------- ----------
Net investment loss $ (0.295) $ (0.388) $ (0.448) $ (0.608) $ (0.736)
Net realized and unrealized gain (loss) on investments
and foreign currency transactions 3.434 7.593 (12.532) (13.420) (7.045)
---------- ---------- ---------- ---------- ----------
Change in unit value $ 3.139 $ 7.205 $ (12.980) $ (14.028) $ (7.781)
---------- ---------- ---------- ---------- ----------
Unit value:
Net asset value -- end of period $ 36.678 $ 33.539 $ 26.334 $ 39.314 $ 53.342
========== ========== ========== ========== ==========
Total Return++& 9.36%^^ 27.36%^ (33.02)% (26.30)% --
Ratios (to average net assets):
Expenses# 2.24% 2.22% 2.22% 0.79%+ 0.76%+
Net investment loss (0.87)% (1.31)% (1.42)% (1.19)%+ (1.08)%+
Portfolio turnover 65% 104% 80% 123% 140%
Number of units outstanding at end of period (000 Omitted) 413 621 812 999 1,327
</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.
++ The total return does not reflect load fees in conjuction with the
redemption of units.
# Ratios do not reflect reductions from fees paid indirectly.
^ The account's net asset value and total return calculation includes
proceeds received on March 26, 2003 for the partial payment of a
non-recurring litigation settlement from Cendant Corporation, recorded as a
realized gain on investment transactions. The proceeds resulted in an
increase in the net asset value of $0.900 and $0.594 per unit for Compass 2
and Compass 3, respectively, based on units outstanding on the day the
proceeds were received. Excluding the effect of this payment from the
ending net asset value per unit, total return per unit value for the year
ended December 31, 2003 would have been 2.24% and 2.24% lower, for Compass
2 and Compass 3, respectively.
^^ The account's net asset value and total return calculation include a
non-recurring accrual recorded as a result of an administrative proceeding
regarding disclosure of brokerage allocation practices in connection with
fund sales, as described in the Legal Proceedings and Transactions with
Affiliates footnotes. The non-recurring accrual resulted in an increase in
the net asset value of $0.039 and $0.026 and per unit for Compass 2 and
Compass 3, respectively, based on units outstanding on the day the proceeds
were recorded.
& From time to time the variable account may receive proceeds from the
settlement of a class action lawsuit, without which performance would be
lower.
See notes to financial statements.
36
<Page>
<Table>
<Caption>
CAPITAL APPRECIATION VARIABLE ACCOUNT
---------------------------------------------------------------------
COMPASS 3 - LEVEL 2
---------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Per unit data:*
Net asset value -- beginning of period $ 13.940 $ 10.929 $ 16.292 $ 22.072 $ 25.255
---------- ---------- ---------- ---------- ----------
Investment income $ 0.205 $ 0.109 $ 0.100 $ 0.154 $ 0.247
Expenses (0.297) (0.254) (0.260) (0.357) (0.513)
---------- ---------- ---------- ---------- ----------
Net investment loss $ (0.092) $ (0.145) $ (0.160) $ (0.203) $ (0.266)
Net realized and unrealized gain (loss) on investments
and foreign currency transactions 1.419 3.156 (5.203) (5.577) (2.917)
---------- ---------- ---------- ---------- ----------
Change in unit value $ 1.327 $ 3.011 $ (5.363) $ (5.780) $ (3.183)
---------- ---------- ---------- ---------- ----------
Unit value:
Net asset value -- end of period $ 15.267 $ 13.940 $ 10.929 $ 16.292 $ 22.072
========== ========== ========== ========== ==========
Total Return++& 9.52%^^ 27.55%^ (32.92)% (26.19)% --
Ratios (to average net assets):
Expenses# 2.09% 2.07% 2.07% 0.79%+ 0.76%+
Net investment loss (0.65)% (1.17)% (1.32)% (1.19)%+ (1.08)%+
Portfolio turnover 65% 104% 80% 123% 140%
Number of units outstanding at end of period (000 Omitted) 5,798 6,086 6,148 6,705 6,283
</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.
++ The total return does not reflect load fees in conjuction with the
redemption of units.
# Ratios do not reflect reductions from fees paid indirectly.
^ The account's net asset value and total return calculation includes
proceeds received on March 26, 2003 for the partial payment of a
non-recurring litigation settlement from Cendant Corporation, recorded as a
realized gain on investment transactions. The proceeds resulted in an
increase in the net asset value of $0.247 per unit based on units
outstanding on the day the proceeds were received. Excluding the effect of
this payment from the ending net asset value per unit, total return per
unit value for the year ended December 31, 2003 would have been 2.25% lower
for Compass 3 - Level 2.
^^ The account's net asset value and total return calculation include a
non-recurring accrual recorded as a result of an administrative proceeding
regarding disclosure of brokerage allocation practices in connection with
fund sales, as described in the Legal Proceedings and Transactions with
Affiliates footnotes. The non-recurring accrual resulted in an increase in
the net asset value of $0.010 per unit based on units outstanding on the
day the proceeds were recorded.
& From time to time the variable account may receive proceeds from the
settlement of a class action lawsuit, without which performance would be
lower.
See notes to financial statements.
37
<Page>
<Table>
<Caption>
GLOBAL GOVERNMENTS VARIABLE ACCOUNT
-----------------------------------------------------------------------
COMPASS 2
-----------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Per unit data:*
Net asset value -- beginning of period $ 25.169 $ 22.125 $ 18.653 $ 19.378 $ 19.459
---------- ---------- ---------- ---------- ----------
Investment income~~~ $ 0.872 $ 0.877 $ 0.861 $ 0.946 $ 1.144
Expenses (0.633) (0.584) (0.486) (0.500) (0.471)
---------- ---------- ---------- ---------- ----------
Net investment income~~ $ 0.239 $ 0.293 $ 0.375 $ 0.446 $ 0.673
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 1.832 2.751 3.097 (1.171) (0.754)
---------- ---------- ---------- ---------- ----------
Change in unit value $ 2.071 $ 3.044 $ 3.472 $ (0.725) $ (0.081)
---------- ---------- ---------- ---------- ----------
Unit value:
Net asset value -- end of period $ 27.240 $ 25.169 $ 22.125 $ 18.653 $ 19.378
========== ========== ========== ========== ==========
Total Return++& 8.23% 13.76% 18.61% (3.74)%
Ratios (to average net assets)~~:
Expenses# 2.50% 2.47% 2.50% 1.28%+ 1.25%+
Net investment income~~~ 0.94% 1.23% 1.73% 2.23%+ 3.50%+
Portfolio turnover 128% 130% 126% 72% 130%
Number of units outstanding at end of period
(000 Omitted) 128 161 160 134 167
~~ The investment adviser voluntarily agreed
under a temporary expense agreement to pay
all of the account's operating expenses,
exclusive of mortality and expense risk fees;
in excess of 1.25% of average daily net
assets. To the extent actual expenses were
over this limitation net investment income
per unit and the ratios would have been:
Net investment income~~~ $ 0.196 $ -- $ 0.364** $ 0.470 $ --
Ratios (to average net assets)
Expenses# 2.67% -- 2.44% 1.39%+ --
Net investment income~~~ 0.77% -- 1.79% 2.12%+ --
</Table>
<Table>
<Caption>
GLOBAL GOVERNMENTS VARIABLE ACCOUNT
-----------------------------------------------------------------------
COMPASS 3
-----------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Per unit data:*
Net asset value -- beginning of period $ 24.578 $ 21.638 $ 18.269 $ 19.007 $ 19.115
---------- ---------- ---------- ---------- ----------
Investment income~~~ $ 0.883 $ 0.869 $ 0.846 $ 1.063 $ 1.103
Expenses (0.662) (0.600) (0.511) (0.579) (0.480)
---------- ---------- ---------- ---------- ----------
Net investment income~~ $ 0.221 $ 0.269 $ 0.335 $ 0.484 $ 0.623
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 1.762 2.671 3.034 (1.222) (0.731)
---------- ---------- ---------- ---------- ----------
Change in unit value $ 1.983 $ 2.940 $ 3.369 $ (0.738) $ (0.108)
---------- ---------- ---------- ---------- ----------
Unit value:
Net asset value -- end of period $ 26.561 $ 24.578 $ 21.638 $ 18.269 $ 19.007
========== ========== ========== ========== ==========
Total Return++& 8.07% 13.59% 18.44% (3.88)% --
Ratios (to average net assets)~~:
Expenses# 2.65% 2.62% 2.65% 1.28%+ 1.25%+
Net investment income~~~ 0.85% 1.15% 1.77% 2.23%+ 3.50%+
Portfolio turnover 128% 130% 126% 72% 130%
Number of units outstanding at end of period
(000 Omitted) 28 41 58 68 108
~~ The investment adviser voluntarily agreed
under a temporary expense agreement to pay
all of the account's operating expenses,
exclusive of mortality and expense risk fees;
in excess of 1.25% of average daily net
assets. To the extent actual expenses were
over this limitation net investment income
per unit and the ratios would have been:
Net investment income~~~ $ 0.177 $ -- $ 0.329** $ 0.500 $ --
Ratios (to average net assets)
Expenses# 2.82% -- 2.56% 1.39%+ --
Net investment income~~~ 0.68% -- 1.87% 2.12%+ --
</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.
** The 2002 net investment income amounts previously reported as $0.850 and
$0.840 for Compass 2 and Compass 3, respectively, have been revised to
reflect net investment income rather than investment income.
+ Excluding mortality and expense risk charges and distribution expense
charges.
++ The total return does not reflect load fees in conjunction with the
redemption of units.
# Ratios do not reflect reductions from fees paid indirectly.
& From time to time the variable account may receive proceeds from the
settlement of a class action lawsuit, without which performance would be
lower.
See notes to financial statements.
38
<Page>
<Table>
<Caption>
GLOBAL GOVERNMENTS VARIABLE ACCOUNT
-----------------------------------------------------------------------
COMPASS 3 - LEVEL 2
-----------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Per unit data:*
Net asset value -- beginning of period $ 14.396 $ 12.655 $ 10.669 $ 11.083 $ 11.130
---------- ---------- ---------- ---------- ----------
Investment income~~~ $ 0.497 $ 0.494 $ 0.499 $ 0.520 $ 0.654
Expenses (0.361) (0.331) (0.281) (0.274) (0.270)
---------- ---------- ---------- ---------- ----------
Net investment income~~ $ 0.136 $ 0.163 $ 0.218 $ 0.246 $ 0.384
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 1.048 1.578 1.768 (0.660) (0.431)
---------- ---------- ---------- ---------- ----------
Change in unit value $ 1.184 $ 1.741 $ 1.986 $ (0.414) $ (0.047)
---------- ---------- ---------- ---------- ----------
Unit value:
Net asset value -- end of period $ 15.580 $ 14.396 $ 12.655 $ 10.669 $ 11.083
========== ========== ========== ========== ==========
Total Return++& 8.23% 13.76% 18.61% (3.74)%
Ratios (to average net assets)~~:
Expenses# 2.50% 2.47% 2.50% 1.28%+ 1.25%+
Net investment income~~~ 0.94% 1.21% 1.70% 2.23%+ 3.50%+
Portfolio turnover 128% 130% 126% 72% 130%
Number of units outstanding at end of period
(000 Omitted) 500 559 568 574 619
~~ The investment adviser voluntarily agreed
under a temporary expense agreement to pay
all of the account's operating expenses,
exclusive of mortality and expense risk fees;
in excess of 1.25% of average daily net
assets. To the extent actual expenses were
over this limitation net investment income
per unit and the ratios would have been:
Net investment income~~~ $ 0.111 $ -- $ 0.209** $ 0.260 $ --
Ratios (to average net assets):
Expenses# 2.67% -- 2.42% 1.40%+ --
Net investment income~~~ 0.77% -- 1.78% 2.12%+ --
</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.
** The 2002 net investment income amount previously reported as $0.490 has
been revised to reflect net investment income rather than investment
income.
+ Excluding mortality and expense risk charges and distribution expense
charges.
++ The total return does not reflect load fees in conjunction with the
redemption of units.
# Ratios do not reflect reductions from fees paid indirectly.
& From time to time the variable account may receive proceeds from the
settlement of a class action lawsuit, without which performance would be
lower.
See notes to financial statements.
39
<Page>
<Table>
<Caption>
GOVERNMENT SECURITIES VARIABLE ACCOUNT
-----------------------------------------------------------------------
COMPASS 2
-----------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Per unit data:*
Net asset value -- beginning of period $ 36.470 $ 36.124 $ 33.448 $ 31.520 $ 28.523
---------- ---------- ---------- ---------- ----------
Investment income~~~ $ 1.834 $ 1.482 $ 1.862 $ 2.183 $ 2.169
Expenses (0.726) (0.711) (0.677) (0.661) (0.572)
---------- ---------- ---------- ---------- ----------
Net investment income $ 1.108 $ 0.771 $ 1.185 $ 1.522 $ 1.597
Net realized and unrealized gain (loss)
on investments (0.240) (0.425) 1.491 0.406 1.400
---------- ---------- ---------- ---------- ----------
Change in unit value $ 0.868 $ 0.346 $ 2.676 $ 1.928 $ 2.997
---------- ---------- ---------- ---------- ----------
Unit value:
Net asset value -- end of period $ 37.338 $ 36.470 $ 36.124 $ 33.448 $ 31.520
========== ========== ========== ========== ==========
Total Return++& 2.38% 0.96% 8.00% 6.12% --
Ratios (to average net assets):
Expenses# 1.97% 1.95% 1.94% 0.66%+ 0.64%+
Net investment income~~~ 2.96% 2.08% 3.19% 4.42%+ 5.28%+
Portfolio turnover 89% 138% 139% 89% 51%
Number of units outstanding at end of period
(000 Omitted) 2,125 2,447 2,759 3,043 3,210
<Caption>
GOVERNMENT SECURITIES VARIABLE ACCOUNT
-----------------------------------------------------------------------
COMPASS 3
-----------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Per unit data:*
Net asset value -- beginning of period $ 25.501 $ 25.284 $ 23.434 $ 22.105 $ 20.023
---------- ---------- ---------- ---------- ----------
Investment income~~~ $ 1.244 $ 1.045 $ 1.300 $ 1.590 $ 1.476
Expenses (0.525) (0.514) (0.495) (0.510) (0.412)
---------- ---------- ---------- ---------- ----------
Net investment income $ 0.719 $ 0.531 $ 0.805 $ 1.080 $ 1.064
Net realized and unrealized gain (loss)
on investments (0.138) (0.314) 1.045 0.249 1.018
---------- ---------- ---------- ---------- ----------
Change in unit value $ 0.581 $ 0.217 $ 1.850 $ 1.329 $ 2.082
---------- ---------- ---------- ---------- ----------
Unit value:
Net asset value -- end of period $ 26.082 $ 25.501 $ 25.284 $ 23.434 $ 22.105
========== ========== ========== ========== ==========
Total Return++& 2.28% 0.86% 7.89% 6.01% --
Ratios (to average net assets):
Expenses# 2.07% 2.05% 2.04% 0.66%+ 0.64%+
Net investment income~~~ 2.82% 2.08% 3.36% 4.42%+ 5.28%+
Portfolio turnover 89% 138% 139% 89% 51%
Number of units outstanding at end of period
(000 Omitted) 100 147 205 254 398
</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.
+ Excluding mortality and expense risk charges and distribution expense
charges.
++ The total return does not reflect load fees in conjunction with the
redemption of units
# Ratios do not reflect reductions from fees paid indirectly.
& From time to time the variable account may receive proceeds from the
settlement of a class action lawsuit, without which performance would be
lower.
See notes to financial statements.
40
<Page>
<Table>
<Caption>
GOVERNMENT SECURITIES VARIABLE ACCOUNT
-----------------------------------------------------------------------
COMPASS 3 - LEVEL 2
-----------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Per unit data:*
Net asset value -- beginning of period $ 14.912 $ 14.763 $ 13.663 $ 12.868 $ 11.639
---------- ---------- ---------- ---------- ----------
Investment income~~~ $ 0.742 $ 0.597 $ 0.732 $ 0.826 $ 0.876
Expenses (0.289) (0.282) (0.267) (0.248) (0.228)
---------- ---------- ---------- ---------- ----------
Net investment income $ 0.453 $ 0.315 $ 0.465 $ 0.578 $ 0.648
Net realized and unrealized gain (loss)
on investments (0.091) (0.166) 0.635 0.217 0.581
---------- ---------- ---------- ---------- ----------
Change in unit value $ 0.362 $ 0.149 $ 1.100 $ 0.795 $ 1.229
---------- ---------- ---------- ---------- ----------
Unit value:
Net asset value -- end of period $ 15.274 $ 14.912 $ 14.763 $ 13.663 $ 12.868
========== ========== ========== ========== ==========
Total Return++& 2.43% 1.01% 8.05% 6.17% --
Ratios (to average net assets):
Expenses# 1.92% 1.90% 1.89% 0.66%+ 0.64%+
Net investment income~~~ 2.99% 2.10% 3.17% 4.42%+ 5.28%+
Portfolio turnover 89% 138% 139% 89% 51%
Number of units outstanding at end of period
(000 Omitted) 1,377 1,562 1,692 1,617 1,542
</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.
+ Excluding mortality and expense risk charges and distribution expense
charges.
++ The total return does not reflect load fees in conjunction with the
redemption of units
# Ratios do not reflect reductions from fees paid indirectly.
& From time to time the variable account may receive proceeds from the
settlement of a class action lawsuit, without which performance would be
lower.
See notes to financial statements.
41
<Page>
<Table>
<Caption>
HIGH YIELD VARIABLE ACCOUNT
-----------------------------------------------------------------------
COMPASS 2
-----------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Per unit data:*
Net asset value -- beginning of period $ 34.056 $ 28.505 $ 28.969 $ 29.882 $ 33.630
---------- ---------- ---------- ---------- ----------
Investment income~~~ $ 2.857 $ 2.769 $ 3.015 $ 3.684 $ 3.786
Expenses (0.770) (0.689) (0.617) (0.699) (0.725)
---------- ---------- ---------- ---------- ----------
Net investment income $ 2.087 $ 2.080 $ 2.398 $ 2.985 $ 3.061
Net realized and unrealized gain (loss) on
investments and foreign currency 0.526 3.471 (2.862) (3.898) (6.809)
---------- ---------- ---------- ---------- ----------
Change in unit value $ 2.613 $ 5.551 $ (0.464) $ (0.913) $ (3.748)
---------- ---------- ---------- ---------- ----------
Unit value:
Net asset value -- end of period $ 36.669 $ 34.056 $ 28.505 $ 28.969 $ 29.882
========== ========== ========== ========== ==========
Total return++& 7.67% 19.47% (1.60)% (3.05)% --
Ratios (to average net assets)
Expenses# 2.21% 2.20% 2.18% 0.90%+ 0.89%+
Net investment income~~~ 5.91% 6.53% 7.84% 9.16%+ 9.00%+
Portfolio turnover 81% 164% 172% 103% 109%
Number of units outstanding at end of period
(000 Omitted) 1,601 1,827 2,069 2,328 2,677
<Caption>
HIGH YIELD VARIABLE ACCOUNT
-----------------------------------------------------------------------
COMPASS 3
-----------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Per unit data:*
Net asset value -- beginning of period $ 25.048 $ 20.986 $ 21.349 $ 22.043 $ 24.832
---------- ---------- ---------- ---------- ----------
Investment income~~~ $ 2.021 $ 1.964 $ 2.141 $ 3.188 $ 2.730
Expenses (0.576) (0.514) (0.469) (0.643) (0.557)
---------- ---------- ---------- ---------- ----------
Net investment income $ 1.445 $ 1.450 $ 1.672 $ 2.545 $ 2.173
Net realized and unrealized gain (loss)
on investments and foreign currency 0.450 2.612 (2.035) (3.239) (4.962)
---------- ---------- ---------- ---------- ----------
Change in unit value $ 1.895 $ 4.062 $ (0.363) $ (0.694) $ (2.789)
Unit value:
---------- ---------- ---------- ---------- ----------
Net asset value -- end of period $ 26.943 $ 25.048 $ 20.986 $ 21.349 $ 22.043
========== ========== ========== ========== ==========
Total return++& 7.57% 19.35% (1.70)% (3.15)% --
Ratios (to average net assets)
Expenses# 2.31% 2.30% 2.28% 0.90%+ 0.89%+
Net investment income~~~ 5.75% 6.41% 8.45% 9.16%+ 9.00%+
Portfolio turnover 81% 164% 172% 103% 109%
Number of units outstanding at end of period
(000 Omitted) 67 115 178 231 297
</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.
++ The total return does not reflect load fees in conjunction with the
redemption of units.
# Ratios do not reflect reductions from fees paid indirectly.
& From time to time the variable account may receive proceeds from the
settlement of a class action lawsuit, without which performance would be
lower.
See notes to financial statements.
42
<Page>
<Table>
<Caption>
HIGH YIELD VARIABLE ACCOUNT
-----------------------------------------------------------------------
COMPASS 3 - LEVEL 2
-----------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Per unit data:*
Net asset value -- beginning of period $ 13.386 $ 11.199 $ 11.376 $ 11.728 $ 13.193
---------- ---------- ---------- ---------- ----------
Investment income~~~ $ 1.019 $ 1.161 $ 1.220 $ 0.784 $ 1.527
Expenses (0.275) (0.286) (0.257) (0.151) (0.290)
---------- ---------- ---------- ---------- ----------
Net investment income $ 0.744 $ 0.875 $ 0.963 $ 0.633 $ 1.237
Net realized and unrealized gain (loss)
on investments and foreign currency 0.291 1.312 (1.140) (0.985) (2.702)
---------- ---------- ---------- ---------- ----------
Change in unit value $ 1.035 $ 2.187 $ (0.177) $ (0.352) $ (1.465)
---------- ---------- ---------- ---------- ----------
Unit value:
Net asset value -- end of period $ 14.421 $ 13.386 $ 11.199 $ 11.376 $ 11.728
========== ========== ========== ========== ==========
Total return++& 7.73% 19.53% (1.55)% (3.01)% --
Ratios (to average net assets)
Expenses# 2.16% 2.15% 2.13% 0.90%+ 0.89%+
Net investment income~~~ 5.77% 6.57% 6.08% 9.16%+ 9.00%+
Portfolio turnover 81% 164% 172% 103% 109%
Number of units outstanding at end of period
(000 Omitted) 971 2,631 2,684 1,131 2,619
</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.
++ The total return does not reflect load fees in conjunction with the
redemption of units.
# Ratios do not reflect reductions from fees paid indirectly.
& From time to time the variable account may receive proceeds from the
settlement of a class action lawsuit, without which performance would be
lower.
See notes to financial statements.
43
<Page>
<Table>
<Caption>
MANAGED SECTORS VARIABLE ACCOUNT
-----------------------------------------------------------------------
COMPASS 2
-----------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Per unit data:*
Net asset value -- beginning of period $ 41.525 $ 33.716 $ 46.116 $ 72.313** $ 92.865
---------- ---------- ---------- ---------- ----------
Investment income $ 0.549 $ 0.333 $ 0.270 $ 0.465 $ 0.633
Expenses (0.894) (0.788) (0.810) (1.179) (1.817)
---------- ---------- ---------- ---------- ----------
Net investment loss $ (0.345) $ (0.455) $ (0.540) $ (0.714) $ (1.184)
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 2.528 8.264 (11.860) (25.483) (19.368)
---------- ---------- ---------- ---------- ----------
Change in unit value $ 2.183 $ 7.809 $ (12.400) $ (26.197) $ (20.552)
---------- ---------- ---------- ---------- ----------
Unit value:
Net asset value -- end of period $ 43.708 $ 41.525 $ 33.716 $ 46.116 $ 72.313**
========== ========== ========== ========== ==========
Total Return++& 5.26%^^ 23.16%^ (26.89)% (36.23)% --
Ratios (to average net assets):
Expenses# 2.17% 2.12% 2.10% 0.88%+ 0.83%+
Net investment loss (0.83)% (1.22)% (1.45)% (1.32)%+ (1.39)%+
Portfolio turnover 93% 80% 264% 295% 447%
Number of units outstanding at end of period
(000 Omitted) 345 409 455 573 697
<Caption>
MANAGED SECTORS VARIABLE ACCOUNT
-----------------------------------------------------------------------
COMPASS 3
-----------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Per unit data:*
Net asset value -- beginning of period $ 40.837 $ 33.207 $ 45.487 $ 71.434 $ 91.870
---------- ---------- ---------- ---------- ----------
Investment income $ 0.515 $ 0.321 $ 0.251 $ 0.487 $ 0.602
Expenses (0.933) (0.817) (0.852) (1.297) (1.908)
---------- ---------- ---------- ---------- ----------
Net investment loss $ (0.418) $ (0.496) $ (0.601) $ (0.810) $ (1.306)
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 2.501 8.126 (11.679) (25.137) (19.130)
---------- ---------- ---------- ---------- ----------
Change in unit value $ 2.083 $ 7.630 $ (12.280) $ (25.947) $ (20.436)
---------- ---------- ---------- ---------- ----------
Unit value:
Net asset value -- end of period $ 42.920 $ 40.837 $ 33.207 $ 45.487 $ 71.434
========== ========== ========== ========== ==========
Total Return++& 5.10%^^ 22.98%^ (27.00)% (36.32)% --
Ratios (to average net assets):
Expenses# 2.32% 2.27% 2.25% 0.88%+ 0.83%+
Net investment loss (1.03)% (1.37)% (1.56)% (1.32)%+ (1.39)%+
Portfolio turnover 93% 80% 264% 295% 447%
Number of units outstanding at end of period
(000 Omitted) 141 202 296 390 576
</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.
++ The total return does not reflect load fees in conjuction with the
redemption of units.
# Ratios do not reflect reductions from fees paid indirectly.
^ The account's net asset value and total return calculation include proceeds
received on March 26, 2003 for the partial payment of a non-recurring
litigation settlement from Cendant Corporation, recorded as a realized gain
on investment transactions. The proceeds resulted in an increase in the net
asset value of $0.083 and $0.081 per unit for Compass 2 and Compass 3,
respectively, based on units outstanding on the day the proceeds were
received. Excluding the effect of this payment from the variable accounts'
ending net asset value per unit, total return per unit value for the year
ended December 31, 2003 would have been 0.24% and 0.25% lower for Compass 2
and Compass 3, respectively.
^^ The account's net asset value and total return calculation include a
non-recurring accrual recorded as a result of an administrative proceeding
regarding disclosure of brokerage allocation practices in connection with
fund sales, as described in the Legal Proceedings and Transactions with
Affiliates footnotes. The non-recurring accrual resulted in an increase in
the net asset value of $0.041 and $0.040 and per unit for Compass 2 and
Compass 3, respectively, based on units outstanding on the day the proceeds
were recorded.
& From time to time the variable account may receive proceeds from the
settlement of a class action lawsuit, without which performance would be
lower.
See notes to financial statements.
44
<Page>
<Table>
<Caption>
MANAGED SECTORS VARIABLE ACCOUNT
-----------------------------------------------------------------------
COMPASS 3 - LEVEL 2
-----------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Per unit data:*
Net asset value -- beginning of period $ 13.215 $ 10.730 $ 14.676 $ 23.014 $ 29.554
---------- ---------- ---------- ---------- ----------
Investment income $ 0.177 $ 0.106 $ 0.083 $ 0.136 $ 0.201
Expenses (0.285) (0.252) (0.259) (0.350) (0.578)
---------- ---------- ---------- ---------- ----------
Net investment loss $ (0.108) $ (0.146) $ (0.176) $ (0.214) $ (0.377)
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 0.803 2.631 (3.770) (8.124) (6.163)
---------- ---------- ---------- ---------- ----------
Change in unit value $ 0.695 $ 2.485 $ (3.946) $ (8.338) $ (6.540)
---------- ---------- ---------- ---------- ----------
Unit value:
Net asset value -- end of period $ 13.910 $ 13.215 $ 10.730 $ 14.676 $ 23.014
========== ========== ========== ========== ==========
Total Return ++& 5.26%^^ 23.16%^ (26.89)% (36.23)% --
Ratios (to average net assets):
Expenses# 2.17% 2.12% 2.10% 0.88%+ 0.83%+
Net investment loss (0.82)% (1.22)% (1.46)% (1.32)%+ (1.39)%+
Portfolio turnover 93% 80% 264% 295% 447%
Number of units outstanding at end of period
(000 Omitted) 3,020 3,228 3,173 3,559 3,548
</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.
++ The total return does not reflect load fees in conjuction with the
redemption of units.
# Ratios do not reflect reductions from fees paid indirectly.
^ The account's net asset value and total return calculation includes
proceeds received on March 26, 2003 for the partial payment of a
non-recurring litigation settlement from Cendant Corporation, recorded as a
realized gain on investment transactions. The proceeds resulted in an
increase in the net asset value of $0.026 per unit based on units
outstanding on the day the proceeds were received. Excluding the effect of
this payment from the variable accounts' ending net asset value per unit,
total return per unit value for the year ended December 31, 2003 would have
been 0.24% lower for Compass 3 -- Level 2.
^^ The account's net asset value and total return calculation include a
non-recurring accrual recorded as a result of an administrative proceeding
regarding disclosure of brokerage allocation practices in connection with
fund sales, as described in the Legal Proceedings and Transactions with
Affiliates footnotes. The non-recurring accrual resulted in an increase in
the net asset value of $0.013 per unit based on units outstanding on the
day the proceeds were recorded.
& From time to time the variable account may receive proceeds from the
settlement of a class action lawsuit, without which performance would be
lower.
See notes to financial statements.
45
<Page>
<Table>
<Caption>
MONEY MARKET VARIABLE ACCOUNT
-----------------------------------------------------------------------
COMPASS 2
-----------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Per unit data:*
Net asset value -- beginning of period $ 20.188 $ 20.322 $ 20.341 $ 19.862 $ 18.997
---------- ---------- ---------- ---------- ----------
Investment income $ 0.281 $ 0.247 $ 0.382 $ 0.950 $ 1.232
Expenses (0.396) (0.381) (0.401) (0.471) (0.367)
---------- ---------- ---------- ---------- ----------
Change in unit value $ (0.115) $ (0.134) $ (0.019) $ 0.479 $ 0.865
---------- ---------- ---------- ---------- ----------
Unit value:
Net asset value -- end of period $ 20.073 $ 20.188 $ 20.322 $ 20.341 $ 19.862
========== ========== ========== ========== ==========
Total Return++ (0.57)% (0.66)% (0.09)% 2.41% --
Ratios (to average net assets):
Expenses# 1.96% 1.87% 1.96% 0.65%+ 0.60%+
Net investment income (loss) (0.56)% (0.63)% (0.12)% 2.51%+ 4.45%+
Number of units outstanding at end of period
(000 Omitted) 1,009 1,172 1,626 1,986 3,304
<Caption>
MONEY MARKET VARIABLE ACCOUNT
-----------------------------------------------------------------------
COMPASS 3
-----------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Per unit data:*
Net asset value -- beginning of period $ 16.553 $ 16.680 $ 16.712 $ 16.334 $ 15.638
---------- ---------- ---------- ---------- ----------
Investment income $ 0.229 $ 0.198 $ 0.318 $ 0.784 $ 1.002
Expenses $ (0.339) (0.325) (0.350) (0.406) (0.306)
---------- ---------- ---------- ---------- ----------
Change in unit value $ (0.110) $ (0.127) $ (0.032) $ 0.378 $ 0.696
---------- ---------- ---------- ---------- ----------
Unit value:
Net asset value -- end of period $ 16.443 $ 16.553 $ 16.680 $ 16.712 $ 16.334
========== ========== ========== ========== ==========
Total Return++ (0.67)% (0.76)% (0.19)% 2.31% --
Ratios (to average net assets):
Expenses# 2.06% 1.97% 2.06% 0.65%+ 0.60%+
Net investment income (loss) (0.71)% (0.74)% (0.14)% 2.51%+ 4.45%+
Number of units outstanding at end of period
(000 Omitted) 97 155 186 222 468
<Caption>
MONEY MARKET VARIABLE ACCOUNT
-----------------------------------------------------------------------
COMPASS 3 - LEVEL 2
-----------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Per unit data:*
Net asset value -- beginning of period $ 12.390 $ 12.466 $ 12.472 $ 12.172 $ 11.636
---------- ---------- ---------- ---------- ----------
Investment income $ 0.181 $ 0.131 $ 0.223 $ 0.710 $ 0.747
Expenses (0.245) (0.207) (0.229) (0.410) (0.211)
---------- ---------- ---------- ---------- ----------
Change in unit value $ (0.064) $ (0.076) $ (0.006) $ 0.300 $ 0.536
---------- ---------- ---------- ---------- ----------
Unit value:
Net asset value -- end of period $ 12.326 $ 12.390 $ 12.466 $ 12.472 $ 12.172
========== ========== ========== ========== ==========
Total Return++ (0.52)% (0.61)% (0.04)% 2.46% --
Ratios (to average net assets):
Expenses# 1.91% 1.82% 1.91% 0.65%+ 0.60%+
Net investment income (loss) (0.48)% (0.61)% (0.01)% 2.51%+ 4.45%+
Number of units outstanding at end of period
(000 Omitted) 2,259 896 1,113 2,835 1,562
</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.
++ The total return does not reflect load fees in conjunction with the
redemption of units.
# Ratios do not reflect reductions from fees paid indirectly.
See notes to financial statements.
46
<Page>
<Table>
<Caption>
TOTAL RETURN VARIABLE ACCOUNT
-----------------------------------------------------------------------
COMPASS 2
-----------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Per unit data:*
Net asset value -- beginning of period $ 41.571 $ 35.950 $ 38.562 $ 39.126 $ 33.728
---------- ---------- ---------- ---------- ----------
Investment income~~~ $ 1.450 $ 1.237 $ 1.407 $ 1.513 $ 1.464
Expenses (0.905) (0.800) (0.777) (0.830) (0.727)
---------- ---------- ---------- ---------- ----------
Net investment income $ 0.545 $ 0.437 $ 0.630 $ 0.683 $ 0.737
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 3.613 5.184 (3.242) (1.247) 4.661
---------- ---------- ---------- ---------- ----------
Change in unit value $ 4.158 $ 5.621 $ (2.612) $ (0.564) $ 5.398
---------- ---------- ---------- ---------- ----------
Unit value:
Net asset value -- end of period $ 45.729 $ 41.571 $ 35.950 $ 38.562 $ 39.126
========== ========== ========== ========== ==========
Total Return++& 10.00%^^ 15.64% (6.77)% (1.44)% --
Ratios (to average net assets):
Expenses# 2.11% 2.10% 2.08% 0.85%+ 0.83%+
Net investment income ~~~ 1.25% 1.13% 1.43% 1.67%+ 2.02%+
Portfolio turnover 64% 62% 76% 104% 105%
Number of units outstanding at end of period
(000 Omitted) 1,511 1,688 1,871 2,080 2,240
</Table>
<Table>
<Caption>
TOTAL RETURN VARIABLE ACCOUNT
-----------------------------------------------------------------------
COMPASS 3
-----------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Per unit data:*
Net asset value -- beginning of period $ 40.597 $ 35.160 $ 37.771 $ 38.380** $ 33.134
---------- ---------- ---------- ---------- ----------
Investment income~~~ $ 1.375 $ 1.200 $ 1.360 $ 1.599 $ 1.395
Expenses (0.929) (0.823) (0.804) (0.939) (0.749)
---------- ---------- ---------- ---------- ----------
Net investment income $ 0.446 $ 0.377 $ 0.556 $ 0.660 $ 0.646
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 3.549 5.060 (3.167) (1.269) 4.600
---------- ---------- ---------- ---------- ----------
Change in unit value $ 3.995 $ 5.437 $ (2.611) $ (0.609) $ 5.246
---------- ---------- ---------- ---------- ----------
Unit value:
Net asset value -- end of period $ 44.592 $ 40.597 $ 35.160 $ 37.771 $ 38.380**
========== ========== ========== ========== ==========
Total Return++& 9.84%^^ 15.46% (6.91)% (1.59)% --
Ratios (to average net assets):
Expenses# 2.26% 2.25% 2.23% 0.85%+ 0.83%+
Net investment income ~~~ 1.07% 1.01% 1.61% 1.67+ 2.02%+
Portfolio turnover 64% 62% 76% 104% 105%
Number of units outstanding at end of period
(000 Omitted) 315 453 634 838 1,253
</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 and $0.020, increase net realized and unrealized gains
and losses per unit by $0.020 and $0.020, respectively, and decrease the
ratio of net investment income to average net assets by 0.05% and 0.05%
respectively. Per unit, ratios, and supplemental data for periods prior to
January 1, 2001 have not been restated to reflect this change in
presentation.
* Per unit data are based on the average number of units outstanding during
each year.
** The per unit net asset value has been restated to a rounded third decimal
place where previously the amount was truncated.
+ Excluding mortality and expense risk charges and distribution expense
charges.
++ The total return does not reflect load fees in conjuction with the
redemption of units.
# Ratios do not reflect reductions from fees paid indirectly.
^^ The account's net asset value and total return calculation include a
non-recurring accrual recorded as a result of an administrative proceeding
regarding disclosure of brokerage allocation practices in connection with
fund sales, as described in the Legal Proceedings and Transactions with
Affiliates footnotes. The non-recurring accrual did not have a material
impact on the net asset value per share based on the shares outstanding on
the day the proceeds were recorded.
& From time to time the variable account may receive proceeds from the
settlement of a class action lawsuit, without which performance would be
lower.
See notes to financial statements.
47
<Page>
<Table>
<Caption>
TOTAL RETURN VARIABLE ACCOUNT
-----------------------------------------------------------------------
COMPASS 3 - LEVEL 2
-----------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Per unit data:*
Net asset value -- beginning of period $ 19.599 $ 16.949 $ 18.180 $ 18.446** $ 15.901
---------- ---------- ---------- ---------- ----------
Investment income~~~ $ 0.676 $ 0.575 $ 0.658 $ 0.687 $ 0.683
Expenses (0.425) (0.376) (0.367) (0.382) (0.343)
---------- ---------- ---------- ---------- ----------
Net investment income $ 0.251 $ 0.199 $ 0.291 $ 0.305 $ 0.340
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 1.709 2.451 (1.522) (0.571) 2.205
---------- ---------- ---------- ---------- ----------
Change in unit value $ 1.960 $ 2.650 $ (1.231) $ (0.266) $ 2.545
---------- ---------- ---------- ---------- ----------
Unit value:
Net asset value -- end of period $ 21.559 $ 19.599 $ 16.949 $ 18.180 $ 18.446**
========== ========== ========== ========== ==========
Total Return++& 10.00%^^ 15.64% (6.77)% (1.44)% --
Ratios (to average net assets):
Expenses# 2.11% 2.10% 2.08% 0.85%+ 0.83%+
Net investment income ~~~ 1.24% 1.11% 1.55% 1.67%+ 2.02%+
Portfolio turnover 64% 62% 76% 104% 105%
Number of units outstanding at end of period 5,646 5,946 6,236 6,537 6,382
(000 Omitted)
</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 $0.010, increase net realized and unrealized gains and losses
per unit by $0.010 and decrease the ratio of net investment income to
average net assets by 0.05% Per unit, ratios, and supplemental data for
periods prior to January 1, 2001 have not been restated to reflect this
change in presentation.
* Per unit data are based on the average number of units outstanding during
each year.
** The per unit net asset value has been restated to a rounded third decimal
place where previously the amount was truncated.
+ Excluding mortality and expense risk charges and distribution expense
charges.
++ The total return does not reflect load fees in conjuction with the
redemption of units.
# Ratios do not reflect reductions from fees paid indirectly.
^^ The account's net asset value and total return calculation include a
non-recurring accrual recorded as a result of an administrative proceeding
regarding disclosure of brokerage allocation practices in connection with
fund sales, as described in the Legal Proceedings and Transactions with
Affiliates footnotes. The non-recurring accrual did not have a material
impact on the net asset value per share based on the shares outstanding on
the day the proceeds were recorded.
& From time to time the variable account may receive proceeds from the
settlement of a class action lawsuit, without which performance would be
lower.
See notes to financial statements.
48
<Page>
NOTES TO FINANCIAL STATEMENTS
(1) BUSINESS AND ORGANIZATION
Capital Appreciation Variable Account, Global Governments Variable Account,
Government Securities Variable Account, High Yield Variable Account, Managed
Sectors Variable Account, Money Market Variable Account, and Total Return
Variable Account (the variable account(s)) are separate accounts established by
Sun Life Assurance Company of Canada (U.S.), the Sponsor, in connection with the
issuance of Compass 2 and Compass 3 combination fixed/variable annuity
contracts. Capital Appreciation Variable Account, Government Securities Variable
Account, Money Market Variable Account, and Total Return Variable Account
operate as open-end, diversified management investment companies, and Global
Governments Variable Account, High Yield Variable Account, and Managed Sectors
Variable Account operate as open-end, non-diversified management investment
companies as those terms are defined in the Investment Company Act of 1940, as
amended.
(2) SIGNIFICANT ACCOUNTING POLICIES
General - The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The High
Yield Variable Account can invest up to 100% of its portfolio in high-yield
securities rated below investment grade. Investments in high-yield securities
involve greater degrees of credit and market risk than investments in
higher-rated securities and tend to be more sensitive to economic conditions.
The Capital Appreciation Variable Account, Global Governments Variable Account,
High Yield Variable Account, Managed Sectors Variable Account, and Total Return
Variable Account can invest in foreign securities. Investments in foreign
securities are vulnerable to the effects of changes in the relative values of
the local currency and the U.S. dollar and to the effects of changes in each
country's legal, political, and economic environment.
Investment Valuations - Equity securities in the variable accounts' portfolio
for which market quotations are available are valued at the last sale or
official closing price as reported by an independent pricing service on the
primary market or exchange on which they are primarily traded, or at the last
quoted bid price for securities in which there were no sales during the day.
Equity securities traded over the counter are valued at the last sales price
traded each day as reported by an independent pricing service, or to the extent
there are no sales reported, such securities are valued on the basis of
quotations obtained from brokers and dealers. Bonds and other fixed income
securities (other than short-term obligations) in the variable accounts'
portfolios are valued at an evaluated bid price as reported by an independent
pricing service, or to the extent a valuation is not reported by a pricing
service, such securities are valued on the basis of quotes from brokers and
dealers. Prices obtained from pricing services utilize both dealer-supplied
valuations and electronic data processing techniques which take into account
appropriate factors such as institutional-size trading in similar groups of
securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics and other market data without exclusive reliance upon quoted
prices or exchange or over-the-counter prices, since such valuations are
believed to reflect more accurately the fair value of such securities. Foreign
currency options are valued by Massachusetts Financial Services Company (MFS)
using an external pricing model approved by the Board of Managers that uses
market data from an independent pricing source. Futures contracts are valued at
the settlement price as reported by an independent pricing service on the
primary exchange on which they are traded. Forward foreign currency contracts
are valued using spot rates and forward points as reported by an independent
pricing source. Short-term obligations with a remaining maturity in excess of 60
days will be valued upon dealer-supplied valuations. All other short-term
obligations in the variable accounts' portfolios are valued at amortized cost,
which constitutes market value as determined by the Board of Managers. Money
market instruments are valued at amortized cost, which the Board of Managers
have determined in good faith approximates market value. The variable accounts'
use of amortized cost is subject to the variable accounts' compliance with
certain conditions as specified under Rule 2a-7 of the Investment Company Act of
1940. Investment valuations, other assets, and liabilities initially expressed
in foreign currencies are converted each business day into U.S. dollars based
upon current exchange rates. When pricing service information or market
quotations are not readily available, securities are priced at fair value as
determined under the direction of the Board of Managers. For example,
significant events (such as movement in the U.S. securities market, or other
regional and local developments) may occur between the time that foreign markets
close (where the security is principally traded) and the time that the variable
accounts calculates its net asset value (generally, the close of the NYSE) that
may impact the value of securities traded in these foreign markets. In these
cases, the variable accounts may utilize information from an external vendor or
other sources to adjust closing market quotations of foreign equity securities
to reflect what it believes to be the fair value of the securities as of the
variable accounts' valuation time. Because the frequency of significant events
is not predictable, fair valuation of foreign equity securities may occur on a
frequent basis.
Repurchase Agreements - Certain variable accounts may enter into repurchase
agreements with institutions that the variable accounts' investment adviser has
determined are creditworthy. Each repurchase agreement is recorded at cost. The
variable accounts require that the securities collateral in a repurchase
transaction be transferred to the custodian in a manner sufficient to enable the
variable accounts to obtain those securities in the event of a default under the
repurchase agreement. The variable accounts monitor, on a daily basis, the value
of the collateral to ensure that its value, including accrued interest, is
greater than amounts owed to the variable accounts under each such repurchase
agreement. The variable accounts, along with other affiliated entities of MFS,
may utilize a joint trading account for the purpose of entering into one or more
repurchase agreements.
Foreign Currency Translation - Purchases and sales of foreign investments,
income, and expenses are converted into U.S. dollars based continuedupon
currency exchange rates prevailing on the respective dates of such transactions.
Gains and losses attributable to foreign currency exchange rates on sales of
securities are recorded for financial statement purposes as net realized gains
and losses on investments. Gains and losses attributable to foreign exchange
rate movements on income and expenses are recorded for financial statement
purposes as foreign currency transaction gains and losses. That portion of both
realized and unrealized gains and losses on investments that results from
fluctuations in foreign currency exchange rates is not separately disclosed.
Written Options - Certain variable accounts may write call or put options in
exchange for a premium. The premium is initially recorded as a liability, which
is subsequently adjusted to the current value of the option contract. When a
written option expires, the variable accounts realize a gain equal to the amount
of the premium received. When a written call option is exercised or closed, the
premium received is offset against the proceeds to determine the realized gain
or loss.
49
<Page>
When a written put option is exercised, the premium reduces the cost basis of
the security purchased by the variable account. The variable accounts, as
writers of an option, may have no control over whether the underlying securities
may be sold (call) or purchased (put) and, as a result, bears the market risk of
an unfavorable change in the price of the securities underlying the written
option. In general, written call options may serve as a partial hedge against
decreases in value in the underlying securities to the extent of the premium
received. Written options may also be used as part of an income producing
strategy reflecting the view of the variable accounts' management on the
direction of interest rates.
Futures Contracts - Certain variable accounts may enter into futures contracts
for the delayed delivery of securities or currency, or contracts based on
financial indices at a fixed price on a future date. In entering such contracts,
the variable account is required to deposit with the broker, either in cash or
securities, an amount equal to a certain percentage of the contract amount.
Subsequent payments are made or received by the variable account each day,
depending on the daily fluctuations in the value of the contract, and are
recorded for financial statement purposes as unrealized gains or losses by the
variable account. The variable accounts' investment in futures contracts is
designed to hedge against anticipated future changes in interest rates or
securities prices. Investments in interest rate futures for purposes other than
hedging may be made to modify the duration of the portfolio without incurring
the additional transaction costs involved in buying and selling the underlying
securities. Investments in equity index contracts or contracts on related
options for purposes other than hedging, may be made when the variable account
has cash on hand and wishes to participate in anticipated market appreciation
while the cash is being invested. Should interest rates or securities prices
move unexpectedly, the variable account may not achieve the anticipated benefits
of the futures contracts and may realize a loss.
Forward Foreign Currency Exchange Contracts - Certain variable accounts may
enter into forward foreign currency exchange contracts for the purchase or sale
of a specific foreign currency at a fixed price on a future date. Risks may
arise upon entering into these contracts from the potential inability of
counterparties to meet the terms of their contracts and from unanticipated
movements in the value of a foreign currency relative to the U.S. dollar. The
variable accounts may enter into forward foreign currency exchange contracts for
hedging purposes as well as for non-hedging purposes. For hedging purposes, the
variable accounts may enter into contracts to deliver or receive foreign
currency it will receive from or require for its normal investment activities.
The variable accounts may also use contracts in a manner intended to protect
foreign currency-denominated securities from declines in value due to
unfavorable exchange rate movements. For non-hedging purposes, the variable
accounts may enter into contracts with the intent of changing the relative
exposure of the variable accounts' portfolio of securities to different
currencies to take advantage of anticipated changes. The forward foreign
currency exchange contracts are adjusted by the daily exchange rate of the
underlying currency and any gains or losses are recorded as unrealized until the
contract settlement date. On contract settlement date, the gains or losses are
recorded as realized gains or losses on foreign currency transactions.
Dollar Roll Transactions - The Government Securities Variable Account may enter
into dollar roll transactions, with respect to mortgage backed securities issued
by Ginnie Mae, Fannie Mae, and Freddie Mac, in which the variable account sells
mortgage backed securities to financial institutions and simultaneously agrees
to repurchase substantially similar (same type, coupon, and maturity) securities
at a later date at an agreed-upon price. During the period between the sale and
repurchase in a dollar roll transaction the variable account will not be
entitled to receive interest and principal payments on the securities sold but
is compensated by interest earned on the proceeds of the initial sale and by a
lower purchase price on the securities to be repurchased which enhances the
variable accounts' total return. The variable account accounts for dollar roll
transactions as purchases and sales. If certain criteria are met these dollar
roll transactions may be considered a financing transaction whereby the
difference in the sales price and the future purchase price is recorded as an
adjustment to interest income.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
discount is amortized or accreted for financial statement purposes in accordance
with U.S. generally accepted accounting principles. For the Money Market
Variable Account, all premium and discount is amortized and accreted for
financial statement purposes in accordance with generally accepted accounting
principles and federal tax regulations, respectively. Dividends received in cash
are recorded on the ex-dividend date. Dividend and interest payments received in
additional securities are recorded on the ex-dividend or ex-interest date in an
amount equal to the value of the security on such date.
The following variable accounts were participants in a class-action lawsuit
against Cendant Corporation. On March 26, 2003 these variable accounts received
a partial cash settlement recorded as a realized gain on investment
transactions. The partial proceeds from the non-recurring litigation settlement
resulted in an increase in net asset value per unit based on the units
outstanding on the day proceeds were received.
<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>
Excluding the effect of these payments from the variable accounts' ending net
asset value per unit, total return for the year ended December 31, 2003 would
have been lower by:
<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>
50
<Page>
The variable accounts may receive proceeds from the settlement of class action
lawsuits involving its portfolio holdings. Any proceeds received are reflected
in realized gain/loss in the statement of operations, or in unrealized gain/loss
if the security is still held by the variable accounts. The Capital Appreciation
Variable Account was a participant in a class action lawsuit against Cendant
Corporation. On March 19, 2004, the variable account received a cash settlement
in the amount of $622,626.
Certain variable accounts may enter into "TBA" (to be announced) purchase
commitments to purchase securities for a fixed unit price at a future date.
Although the unit price has been established, the principal value has not been
finalized. However, the principal amount of the commitments will not fluctuate
more than 0.01%. The variable accounts hold, and maintain until settlement date,
cash or high-grade debt obligations in an amount sufficient to meet the purchase
price, or the variable accounts may enter into offsetting contracts for the
forward sale of other securities it owns. Income on the securities will not be
earned until settlement date. TBA purchase commitments may be considered
securities in themselves, and involve a risk of loss if the value of the
security to be purchased declines prior to settlement date, which is in addition
to the risk of decline in the value of the variable accounts' other assets.
Unsettled TBA purchase commitments are valued at the current market value of the
underlying securities.
Certain variable accounts may enter into "TBA" (to be announced) sale
commitments to hedge its portfolio positions or to sell mortgage-backed
securities it owns under delayed delivery arrangements. Proceeds of TBA sale
commitments are not received until the contractual settlement date. During the
time a TBA sale commitment is outstanding, equivalent deliverable securities, or
an offsetting TBA purchase commitment deliverable on or before the sale
commitment date, are held as "cover" for the transaction.
Legal fees and other related expenses incurred to preserve and protect the value
of a security owned are added to the cost of the security; other legal fees are
expensed. Capital infusions made directly to the security issuer, which are
generally non-recurring, incurred to protect or enhance the value of high-yield
debt securities, are reported as additions to the cost basis of the security.
Costs that are incurred to negotiate the terms or conditions of capital
infusions or that are expected to result in a plan of reorganization are
reported as realized losses. Ongoing costs incurred to protect or enhance an
investment, or costs incurred to pursue other claims or legal actions, are
expensed.
Fees Paid Indirectly - The variable accounts' custody fees are reduced
according to an arrangement that measures the value of cash deposited with the
custodian by the variable accounts. During the year ended December 31, 2004,
each variable accounts' custodian fee was reduced under this arrangement. The
variable accounts have entered into a commission recapture agreement, under
which certain brokers will credit the variable accounts a portion of the
commissions generated, to offset certain expenses of the variable accounts. For
the year ended December 31, 2004, the variable accounts' miscellaneous expenses
were reduced under this agreement. These amounts are shown as a reduction of
total expenses on the Statement of Operations.
<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 $ (77) $ (127) $ (849) $ (1,946) $ -- $ (67) $ (353)
Commission recapture credits (4,905) -- -- (14) (1,239) -- (1,065)
---------- ---------- ---------- ---------- --------- ---------- ----------
</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.
For assuming the distribution expense risk under Compass 3 contracts, the
Sponsor makes a deduction from the variable accounts at the end of each
valuation period for the first seven contract years at an effective annual rate
of 0.15% of the net assets of the variable accounts attributable to such
contracts. Contracts are transferred from Compass 3 to Compass 3 Level 2 in the
month following the seventh contract anniversary. No deduction is made after the
seventh contract anniversary. No deduction is made with respect to assets
attributable to Compass 2 contracts.
Each year, on the contract anniversary, a contract maintenance charge of $25
with respect to Compass 2 contracts and $30 with respect to Compass 3 contracts
is deducted from each contract's accumulation account and paid the Sponsor to
cover administrative expenses relating to the contract. After the annuity
commencement date, the annual contract maintenance charge is deducted pro rata
from each annuity payment made during the year.
The Sponsor does not deduct a sales charge from purchase payments. However, a
withdrawal charge (contingent deferred sales charge) may be deducted to cover
certain expenses relating to the sale of the contract. In no event shall the
aggregate withdrawal charges (including the distribution expense charge
51
<Page>
described above applicable to Compass 3 contracts) exceed 5% of the purchase
payments made under a Compass 2 contract or 9% of the purchase payments made
under a Compass 3 contract.
(4) ANNUITY RESERVES
Annuity reserves for contracts with annuity commencement dates prior to February
1, 1987 have been calculated using the 1971 Individual Annuitant Mortality
Table. Annuity reserves for contracts with annuity commencement dates between
February 1, 1987 and December 31, 1998 have been calculated using the 1983
Individual Annuitant Mortality Table. Annuity reserves for contracts with
annuity commencement dates on or after January 1, 1999 have been calculated
using the Annuity Mortality 2000 table. Annuity reserves for contracts in
payment period are calculated using an assumed interest rate of 4%. Required
adjustments are accomplished by transfers to or from the Sponsor.
(5) TRANSACTIONS WITH AFFILIATES
Investment Adviser - Each variable account has an investment advisory agreement
with MFS to provide overall investment advisory and administrative services, and
general office facilities. The management fee is computed daily and paid monthly
at the following annual rate based on a percentage of each variable account's
average daily net assets as follows:
<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%
Total Return Variable Account 0.75% 0.675%
</Table>
The management fee for the Money Market Variable Account is 0.50% of the first
$500 million of average daily net assets. The management fee is reduced to 0.45%
of the average daily net assets in excess of $500 million.
The agreement also provides that the Investment Adviser will pay certain
variable account expenses in excess of 1.25% of the average daily net assets of
each variable account for any calendar year. Each variable account pays
compensation to its Independent Managers in the form of a retainer, attendance
fees, and additional compensation to the Board chairperson and pays no
compensation directly to its officers or members of the Board of Managers who
are affiliated with the Investment Advisor or the Sponsor. Certain officers and
Managers of the variable accounts are officers or directors of MFS, MFS Fund
Distributors, Inc. (MFD), and MFS Service Center, Inc. (MFSC).
These variable accounts and certain other MFS funds (the "funds") have entered
into a services agreement (the "Agreement") which provides for payment of fees
by the funds to Tarantino LLC in return for the provision of services of an
Independent Chief Compliance Officer (ICCO) for the funds. The ICCO is an
officer of the funds and the sole member of Tarantino LLC. MFS has agreed to
provide office space and other administrative support and supplies to the ICCO.
The funds can terminate the Agreement with Tarantino LLC at any time under the
terms of the Agreement.
The variable accounts' investment adviser, MFS, has been the subject of an
administrative proceeding regarding disclosure of brokerage allocation practices
in connection with fund sales, as described in the Legal Proceedings Footnote.
On July 28, 2004, certain variable accounts accrued an estimate of the amount to
be received pursuant to this matter, which resulted in an increase in net asset
value per unit based on the units outstanding on the day the proceeds were
recorded.
<Table>
<Caption>
CAPITAL MANAGED
APPRECIATION SECTORS
VARIABLE VARIABLE
ACCOUNT ACCOUNT
- ----------------------------------------------------------------------------------------------
Cash Settlement $ 227,161 $ 63,230
Increase in net asset value per unit
Compass 2 Contracts $ 0.039 $ 0.041
Compass 3 Contracts $ 0.026 $ 0.040
Compass 3 -- Level 2 Contracts $ 0.010 $ 0.013
</Table>
Administrator - MFS provides certain financial, legal, shareholder
communications, compliance, and other administrative services to certain funds
for which MFS acts as investment adviser. Under an administrative services
agreement between the variable accounts and MFS, MFS is entitled to partial
reimbursement of the costs MFS incurs to provide these services, subject to
review and approval by the Board of Managers. Each variable account is allocated
a portion of these administrative costs based on its size and relative average
net assets. Prior to April 1, 2004, the variable accounts paid MFS an
administrative fee up to the following annual percentage rates of the variable
accounts' average daily net assets:
<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>
52
<Page>
Effective April 1, 2004, the variable accounts paid MFS an administrative fee up
to the following annual percentage rates of the variable accounts' average daily
net assets:
<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>
For the year ended December 31, 2004, the variable accounts paid MFS the
following to partially reimburse MFS for the costs of providing administrative
services.
<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 $ 27,905 $ 1,194 $ 10,203 $ 7,542 $ 5,968 $ 4,508 $ 18,507
Percent of average daily
net assets 0.00929% 0.00979% 0.00929% 0.00952% 0.00934% 0.00877% 0.00916%
---------- ---------- ---------- ---------- ---------- ---------- ----------
</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 $ 187,564,845 $ 226,745,034
Global Governments Variable Account 10,715,223 10,465,762
Government Securities Variable 1,763,346 628,531
High Yield Variable Account 62,283,305 86,841,079
Managed Sectors Variable Account 58,656,932 67,792,188
Total Return Variable Account 98,350,543 120,356,487
</Table>
Purchases and sales of investments, other than purchased option transactions and
short-term obligations, were as follows:
<Table>
<Caption>
PURCHASES SALES
- ------------------------------------------------------------------------------------
Global Governments Variable Account $ 3,653,228 $ 4,679,787
Government Securities Variable Account 92,739,539 103,947,731
Total Return Variable Account 29,140,047 22,053,123
</Table>
Purchases and sales of investments for Money Market Variable Account, which
consist solely of short-term obligations, amounted to $2,027,279,409 and
$2,009,234,000, respectively, excluding repurchase agreements.
53
<Page>
(7) PARTICIPANT TRANSACTIONS
The changes in net assets from changes in numbers of outstanding units were as
follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 2004 (OOO OMITTED)
------------------------------------------------------------------------------------------
TRANSFERS BETWEEN WITHDRAWALS,
VARIABLE ACCOUNTS SURRENDERS,
PURCHASE AND FIXED ANNUITIZATIONS,
PAYMENTS ACCUMULATION AND CONTRACT
RECEIVED ACCOUNT CHARGES
--------------------------- ---------------------------- ----------------------------
UNITS DOLLARS UNITS DOLLARS UNITS DOLLARS
------------ ------------ ------------ ------------ ------------ ------------
Capital Appreciation Variable Account
Compass 2 Contracts 38 $ 1,960 (30) $ (1,561) (504) $ (26,042)
Compass 3 Contracts 72 2,460 (201) (6,881) (79) (2,675)
Compass 3 -- Level 2 Contracts 190 2,700 393 5,601 (871) (12,376)
------------ ------------ ------------
$ 7,120 $ (2,841) $ (41,093)
============ ============ ============
Global Government Variable Account
Compass 2 Contracts 2 $ 45 (16) $ (379) (19) $ (487)
Compass 3 Contracts 5 130 (15) (380) (3) (78)
Compass 3 -- Level 2 Contracts 14 200 11 155 (84) (1,212)
------------ ------------ ------------
$ 375 $ (604) $ (1,777)
============ ============ ============
Government Securities Variable Account
Compass 2 Contracts 21 $ 777 (100) $ (3,640) (243) $ (8,929)
Compass 3 Contracts 18 461 (44) (1,132) (21) (559)
Compass 3 -- Level 2 Contracts 35 524 6 89 (226) (3,417)
------------ ------------ ------------
$ 1,762 $ (4,683) $ (12,905)
============ ============ ============
High Yield Variable Account
Compass 2 Contracts 11 $ 378 (31) $ (1,003) (206) $ (7,129)
Compass 3 Contracts 12 301 (48) (1,217) (12) (289)
Compass 3 -- Level 2 Contracts 24 320 (1,507) (19,904) (177) (2,411)
------------ ------------ ------------
$ 999 $ (22,124) $ (9,829)
============ ============ ============
Managed Sectors Variable Account
Compass 2 Contracts 5 $ 237 (5) $ (186) (64) $ (2,652)
Compass 3 Contracts 24 982 (64) (2,603) (21) (848)
Compass 3 -- Level 2 Contracts 105 1,388 160 2,136 (473) (6,235)
------------ ------------ ------------
$ 2,607 $ (653) $ (9,735)
============ ============ ============
Money Market Variable Account
Compass 2 Contracts 13 $ 262 125 $ 2,531 (301) $ (6,058)
Compass 3 Contracts 54 896 (78) (1,291) (34) (556)
Compass 3 -- Level 2 Contracts 34 418 1,685 20,849 (356) (4,393)
------------ ------------ ------------
$ 1,576 $ 22,089 $ (11,007)
============ ============ ============
Total Return Variable Account
Compass 2 Contracts 14 $ 590 54 $ 2,308 (245) $ (10,438)
Compass 3 Contracts 52 2,180 (136) (5,641) (54) (2,231)
Compass 3 -- Level 2 Contracts 139 2,811 379 7,650 (818) (16,482)
------------ ------------ ------------
$ 5,581 $ 4,317 $ (29,151)
============ ============ ============
<Caption>
YEAR ENDED DECEMBER 31, 2004 (000 OMITTED)
--------------------------------------------------------------
NET NET NET
ACCUMULATION ANNUITIZATION INCREASES
ACTIVITY ACTIVITY (DECREASE)
--------------------------- -------------- --------------
UNITS DOLLARS DOLLARS DOLLARS
------------ ------------ -------------- --------------
Capital Appreciation Variable Account
Compass 2 Contracts (496) $ (25,643) $ (264) $ (25,907)
Compass 3 Contracts (208) (7,096) 1 (7,095)
Compass 3 -- Level 2 Contracts (288) (4,075) (33) (4,108)
------------ -------------- --------------
$ (36,814) $ (296) $ (37,110)
============ ============== ==============
Global Government Variable Account
Compass 2 Contracts (33) $ (821) $ (2) $ (823)
Compass 3 Contracts (13) (328) (3) (331)
Compass 3 -- Level 2 Contracts (59) (857) (1) (858)
------------ -------------- --------------
$ (2,006) $ (6) $ (2,012)
============ ============== ==============
Government Securities Variable Account
Compass 2 Contracts (322) $ (11,792) $ (382) $ (12,174)
Compass 3 Contracts (47) (1,230) -- (1,230)
Compass 3 -- Level 2 Contracts (185) (2,804) (31) (2,835)
------------ -------------- --------------
$ (15,826) $ (413) $ (16,239)
============ ============== ==============
High Yield Variable Account
Compass 2 Contracts (226) $ (7,754) $ (49) $ (7,803)
Compass 3 Contracts (48) (1,205) (0)* (1,205)
Compass 3 -- Level 2 Contracts (1,660) (21,995) 19 (21,976)
------------ -------------- --------------
$ (30,954) $ (30) $ (30,984)
============ ============== ==============
Managed Sectors Variable Account
Compass 2 Contracts (64) $ (2,601) $ (19) $ (2,620)
Compass 3 Contracts (61) (2,469) (7) (2,476)
Compass 3 -- Level 2 Contracts (208) (2,711) (13) (2,724)
------------ -------------- --------------
$ (7,781) $ (39) $ (7,820)
============ ============== ==============
Money Market Variable Account
Compass 2 Contracts (163) $ (3,265) $ 13 $ (3,252)
Compass 3 Contracts (58) (951) (10) (961)
Compass 3 -- Level 2 Contracts 1,363 16,874 (23) 16,851
------------ -------------- --------------
$ 12,658 $ (20) $ 12,638
============ ============== ==============
Total Return Variable Account
Compass 2 Contracts (177) $ (7,540) $ (149) $ (7,689)
Compass 3 Contracts (138) (5,692) (88) (5,780)
Compass 3 -- Level 2 Contracts (300) (6,021) (40) (6,061)
------------ -------------- --------------
$ (19,253) $ (277) $ (19,530)
============ ============== ==============
</Table>
*Amount less than $500.
54
<Page>
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 2003 (OOO OMITTED)
------------------------------------------------------------------------------------------
TRANSFERS BETWEEN WITHDRAWALS,
VARIABLE ACCOUNTS SURRENDERS,
PURCHASE AND FIXED ANNUITIZATIONS,
PAYMENTS ACCUMULATION AND CONTRACT
RECEIVED ACCOUNT CHARGES
--------------------------- ---------------------------- ----------------------------
UNITS DOLLARS UNITS DOLLARS UNITS DOLLARS
------------ ------------ ------------ ------------ ------------ ------------
Capital Appreciation Variable Account
Compass 2 Contracts 52 $ 2,088 (57) $ (1,996) (476) $ (21,416)
Compass 3 Contracts 104 3,003 (236) (6,888) (59) (1,700)
Compass 3 -- Level 2 Contracts 205 2,276 338 4,579 (605) (7,443)
------------ ------------ ------------
$ 7,367 $ (4,305) $ (30,559)
============ ============ ============
Global Government Variable Account
Compass 2 Contracts 1 $ 22 15 $ 346 (15) $ (365)
Compass 3 Contracts 9 195 (19) (422) (7) (165)
Compass 3 -- Level 2 Contracts 12 140 52 697 (73) (967)
------------ ------------ ------------
$ 357 $ 621 $ (1,497)
============ ============ ============
Government Securities Variable Account
Compass 2 Contracts 25 $ 845 (39) $ (1,440) (298) $ (10,778)
Compass 3 Contracts 33 816 (71) (1,792) (20) (512)
Compass 3 -- Level 2 Contracts 47 651 29 480 (206) (3,060)
------------ ------------ ------------
$ 2,312 $ (2,752) $ (14,350)
============ ============ ============
High Yield Variable Account
Compass 2 Contracts 17 $ 475 30 $ 1,123 (289) $ (9,021)
Compass 3 Contracts 19 413 (65) (1,440) (17) (392)
Compass 3 -- Level 2 Contracts 33 357 53 1,949 (139) (1,735)
------------ ------------ ------------
$ 1,245 $ 1,632 $ (11,148)
============ ============ ============
Managed Sectors Variable Account
Compass 2 Contracts 10 $ 340 2 $ 215 (58) $ (2,163)
Compass 3 Contracts 42 1,477 (114) (4,104) (22) (789)
Compass 3 -- Level 2 Contracts 114 1,220 294 3,720 (353) (4,190)
------------ ------------ ------------
$ 3,037 $ (169) $ (7,142)
============ ============ ============
Money Market Variable Account
Compass 2 Contracts 27 $ 498 (138) $ (2,740) (343) $ (6,957)
Compass 3 Contracts 71 1,160 (63) (1,035) (39) (635)
Compass 3 -- Level 2 Contracts 65 782 168 2,162 (450) (5,603)
------------ ------------ ------------
$ 2,440 $ (1,613) $ (13,195)
============ ============ ============
Total Return Variable Account
Compass 2 Contracts 21 $ 727 14 $ 822 (218) $ (8,126)
Compass 3 Contracts 71 2,577 (208) (7,554) (44) (1,622)
Compass 3 -- Level 2 Contracts 140 2,277 396 7,328 (826) (14,797)
------------ ------------ ------------
$ 5,581 $ 596 $ (24,545)
============ ============ ============
<Caption>
YEAR ENDED DECEMBER 31, 2003 (OOO OMITTED)
--------------------------------------------------------------
NET NET NET
ACCUMULATION ANNUITIZATION INCREASES
ACTIVITY ACTIVITY (DECREASE)
--------------------------- --------------- --------------
UNITS DOLLARS DOLLARS DOLLARS
------------ ------------ --------------- --------------
Compass 2 Contracts (481) $ (21,324) $ (565) $ (21,889)
Compass 3 Contracts (191) (5,585) (34) (5,619)
Compass 3 -- Level 2 Contracts (62) (588) (24) (612)
------------ -------------- --------------
$ (27,497) $ (623) $ (28,120)
============ ============== ==============
Global Government Variable Account
Compass 2 Contracts 1 $ 3 $ (6) $ (3)
Compass 3 Contracts (17) (392) (2) (394)
Compass 3 -- Level 2 Contracts 9 (130) (5) (135)
------------ -------------- --------------
$ (519) $ (13) $ (532)
============ ============== ==============
Government Securities Variable Account
Compass 2 Contracts (312) $ (11,373) $ (377) $ (11,750)
Compass 3 Contracts (58) (1,488) -- (1,488)
Compass 3 -- Level 2 Contracts (130) (1,929) (24) (1,953)
------------ -------------- --------------
$ (14,790) $ (401) $ (15,191)
============ ============== ==============
High Yield Variable Account
Compass 2 Contracts (242) $ (7,423) $ (480) $ (7,903)
Compass 3 Contracts (63) (1,419) 0* (1,419)
Compass 3 -- Level 2 Contracts (53) 571 (6) 565
------------ -------------- --------------
$ (8,271) $ (486) $ (8,757)
============ ============== ==============
Managed Sectors Variable Account
Compass 2 Contracts (46) $ (1,608) $ (23) $ (1,631)
Compass 3 Contracts (94) (3,416) (8) (3,424)
Compass 3 -- Level 2 Contracts 55 750 (12) 738
------------ -------------- --------------
$ (4,274) $ (43) $ (4,317)
============ ============== ==============
Money Market Variable Account
Compass 2 Contracts (454) $ (9,199) $ (128) $ (9,327)
Compass 3 Contracts (31) (510) (11) (521)
Compass 3 -- Level 2 Contracts (217) (2,659) 85 (2,574)
------------ -------------- --------------
$ (12,368) $ (54) $ (12,422)
============ ============== ==============
Total Return Variable Account
Compass 2 Contracts (183) $ (6,577) $ (462) $ (7,039)
Compass 3 Contracts (181) (6,599) (107) (6,706)
Compass 3 -- Level 2 Contracts (290) (5,192) 143 (5,049)
------------ -------------- --------------
$ (18,368) $ (426) $ (18,794)
============ ============== ==============
</Table>
*Amount less than $500.
(8) LINE OF CREDIT
Each variable account and other affiliated funds participate in an $800 million
unsecured line of credit provided by a syndication of banks under a line of
credit agreement. Borrowings may be made for temporary financing needs. Interest
is charged to each variable account, based on its borrowings, at a rate equal to
the Federal Reserve funds rate plus 0.50%. In addition, a commitment fee, based
on the average daily, unused portion of the line of credit, is allocated among
the participating variable accounts at the end of each calendar quarter. The
commitment fee allocated to each variable account for the year ended December
31, 2004 ranged from $102 and $2,390, and is included in miscellaneous expense.
None of the variable accounts had significant borrowings during the year ended
December 31, 2004.
(9) FINANCIAL INSTRUMENTS
Certain variable accounts trade financial instruments with off-balance-sheet
risk in the normal course of its investing activities in order to manage
exposure to market risks such as interest rates and foreign currency exchange
rates. These financial instruments include forward foreign currency exchange
contracts and futures contracts. The notional or contractual amounts of these
instruments represent the investment the variable accounts have in particular
classes of financial instruments and does not necessarily represent the amounts
potentially subject to risk. The measurement of the risks associated with these
instruments is meaningful only when all related and offsetting transactions are
considered.
55
<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
Variable Account Sales 2/10/05 250,588 AUD $ 188,207 $ 195,149 $ (6,942)
1/12/05 301,352 CAD 251,271 251,078 193
2/14/05 1,916,862 DKK 333,078 349,198 (16,120)
1/19/05-2/14/05 1,918,930 EUR 2,508,531 2,599,821 (91,290)
1/12/05 254,547 GBP 468,367 487,456 (19,089)
1/5/05 285,296,384 JPY 2,753,603 2,776,895 (23,292)
1/3/05 357,117 NOK 58,778 58,686 92
2/10/05 842,247 NZD 590,811 602,006 (11,195)
2/14/05 242,007 SEK 35,012 36,359 (1,347)
----------- ----------- --------------
$ 7,187,658 $ 7,356,648 $ (168,990)
=========== =========== ==============
Purchases 2/10/05 110,808 AUD $ 84,403 $ 86,294 $ 1,891
1/12/05 71,779 CAD 60,000 59,804 (196)
2/15/05 75,031 CHF 65,380 65,893 513
1/26/05 1,490,431 CZK 63,157 66,489 3,332
2/14/05 2,287,430 DKK 403,295 416,705 13,410
1/19/05-2/14/05 960,086 EUR 1,265,818 1,300,869 35,051
1/12/05 42,000 GBP 80,037 80,430 393
1/5/05-3/4/05 536,077,411 JPY 5,132,391 5,228,519 96,128
1/3/05-2/14/05 714,234 NOK 117,052 117,413 361
1/26/05 169,120 PLN 52,558 55,834 3,276
2/14/05 1,367,911 SEK 204,586 205,515 929
----------- ----------- --------------
$ 7,528,677 $ 7,683,765 $ 155,088
=========== =========== ==============
High Yield
Variable Account Sales 1/19/05-2/14/05 1,634,796 EUR $ 2,117,280 $ 2,215,072 $ (97,792)
=========== =========== ==============
Purchases 1/19/05-2/14/05 543,050 EUR $ 708,727 $ 735,699 $ 26,972
2/14/05 76,260 SEK 10,930 11,457 527
----------- ----------- --------------
$ 719,657 $ 747,156 $ 27,499
=========== =========== ==============
</Table>
At December 31, 2004, forward foreign currency purchases and sales under master
netting agreements excluded above amounted to a net payable/receivable of $3,656
with Merrill Lynch International for the Global Governments Variable Account.
See page 29 for an explanation of abbreviations used to indicate amounts show in
currencies other than U.S. Dollar.
At December 31, 2004, the variable accounts had sufficient cash and/or
securities to cover any commitments under these contracts.
FUTURES CONTRACTS
<Table>
<Caption>
UNREALIZED
APPRECIATION
DESCRIPTION EXPIRATION CONTRACTS POSITION (DEPRECIATION)
- ----------------------------------------------------------------------------------------------------------------------------------
Government Securities Variable Account Eurodollar June 2005 8 Long $ (1,534)
Eurodollar June 2006 8 Short 1,103
U.S. Treasury Notes -- 10 Year March 2005 33 Short (31,608)
U.S. Treasury Notes -- 2 Year March 2005 24 Short (6,099)
U.S. Treasury Notes -- 5 Year March 2005 14 Short (2,592)
U.S. Treasury Bonds March 2005 12 Long (13,941)
--------------
$ (54,671)
==============
</Table>
At December 31, 2004, the variable account had sufficient cash and/or securities
to cover any commitments under these contracts.
(10) LEGAL PROCEEDINGS
On March 31, 2004, MFS settled an administrative proceeding with the Securities
and Exchange Commission ("SEC") regarding disclosure of brokerage allocation
practices in connection with MFS fund sales (the term "MFS funds" means the
open-end registered management investment companies sponsored by MFS). Under the
terms of the settlement, in which MFS neither admitted nor denied any
wrongdoing, MFS agreed to pay (one dollar) $1.00 in disgorgement and $50 million
in penalty to certain MFS funds, pursuant to a plan developed by an independent
distribution consultant. The brokerage allocation practices which were the
subject of this proceeding were discontinued by MFS in November 2003. The
agreement with the SEC is reflected in an order of the SEC. The SEC settlement
order states that MFS failed to adequately disclose to the Boards of Trustees
and to shareholders of the MFS funds the specifics of its preferred arrangements
with certain brokerage firms selling MFS fund shares. The SEC settlement order
states that MFS had in place policies designed to obtain best execution of all
MFS fund trades. As part of the settlement, MFS retained an independent
compliance consultant to review the completeness of its current policies and
practices regarding disclosure to MFS fund trustees and to MFS fund shareholders
of strategic alliances between MFS or its affiliates and broker-dealers and
other financial intermediaries who support the sale of MFS fund shares. Pursuant
to the SEC order, on July 28, 2004, MFS transferred these settlement amounts to
the SEC, and those MFS funds entitled to these settlement amounts accrued an
estimate of their pro rata portion of these amounts. The
56
<Page>
final distribution plan was approved by the SEC on January 21, 2005. It is
expected that this distribution will be made by the SEC to the affected MFS
funds on or around February 14, 2005.
In addition, in February, 2004, MFS reached agreement with the SEC, the New York
Attorney General ("NYAG") and the Bureau of Securities Regulation of the State
of New Hampshire ("NH") to settle administrative proceedings alleging false and
misleading information in certain MFS open-end retail fund ("MFS retail funds")
prospectuses regarding market timing and related matters (the "February
Settlements"). These regulators alleged that prospectus language for certain MFS
retail funds was false and misleading because, although the prospectuses for
those funds in the regulators' view indicated that they prohibited market
timing, MFS did not limit trading activity in 11 domestic large cap stock, high
grade bond and money market retail funds. MFS' former Chief Executive Officer
and former President also reached agreement with the SEC in which they agreed
to, among other terms, monetary fines and temporary suspensions from association
with any investment adviser or registered investment company. These individuals
have resigned their positions with, and will not be returning to, MFS and the
MFS funds. Under the terms of the February Settlements, MFS and the executives
neither admit nor deny wrongdoing.
Under the terms of the February Settlements, a $225 million pool has been
established for distribution to shareholders in certain MFS retail funds, which
has been funded by MFS and of which $50 million is characterized as a penalty.
This pool will be distributed in accordance with a methodology developed by an
independent distribution consultant in consultation with MFS and the Board of
Trustees of the MFS retail funds, and acceptable to the SEC. MFS has further
agreed with NYAG to reduce its management fees in the aggregate amount of
approximately $25 million annually over the next five years, and not to increase
certain management fees during this period. MFS has also paid an administrative
fine to NH in the amount of $1 million, which will be used for investor
education purposes (NH retained $250,000 and $750,000 was contributed to the
North American Securities Administrators Association's Investor Protection
Trust). In addition, under the terms of the February Settlements, MFS is in the
process of adopting certain governance changes and reviewing its policies and
procedures.
Since December 2003, MFS, MFS Fund Distributors, Inc., MFS Service Center, Inc.,
MFS Corporation Retirement Committee, Sun Life Financial Inc., various MFS
funds, certain current and/or former Trustees of these MFS funds, and certain
officers of MFS have been named as defendants in multiple lawsuits filed in
federal and state courts. The lawsuits variously have been commenced as class
actions or individual actions on behalf of investors who purchased, held or
redeemed shares of the MFS funds during specified periods, as ERISA actions by
participants in certain retirement plan accounts on behalf of those accounts, or
as derivative actions on behalf of the MFS funds. The lawsuits relating to
market timing and related matters have been transferred to, and consolidated
before, the United States District Court for the District of Maryland, as part
of a multi-district litigation of market timing and related claims involving
several other fund complexes (IN RE MUTUAL FUNDS INVESTMENT LITIGATION (ALGER,
COLUMBIA, JANUS, MFS, ONE GROUP, PUTNAM, ALLIANZ DRESDNER), No. 1:04-md-15863
(transfer began March 19, 2004)). The market timing cases related to the MFS
complex are RIGGS V. MFS ET AL., CASE NO. 04-CV-01162-JFM (direct), HAMMERSLOUGH
V. MFS ET AL., CASE NO. 04-MD-01620 (derivative) AND ANITA WALKER V. MFS ET AL.,
CASE NO. 1:04-CV-01758 (ERISA). The plaintiffs in these consolidated lawsuits
generally seek injunctive relief including removal of the named Trustees,
adviser and distributor, rescission of contracts and 12b-1 Plans, disgorgement
of fees and profits, monetary damages, punitive damages, attorney's fees and
costs and other equitable and declaratory relief. Four lawsuits alleging
improper brokerage allocation practices and excessive compensation are pending
in the United States District Court for the District of Massachusetts (FORSYTHE
V. SUN LIFE FINANCIAL INC., ET AL., No. 04cv10584 (GAO) (March 25, 2004);
EDDINGS V. SUN LIFE FINANCIAL INC., ET AL., No. 04cv10764 (GAO) (April 15,
2004); MARCUS DUMOND, ET AL. V. MASSACHUSETTS FINANCIAL SERVS. CO., ET AL., No.
04cv11458 (GAO) (May 4, 2004); and KOSLOW V. SUN LIFE FINANCIAL INC., ET AL.,
No. 04cv11019 (GAO) (May 20, 2004)). The plaintiffs in these lawsuits generally
seek compensatory damages, punitive damages, recovery of fees, rescission of
contracts, an accounting, restitution, declaratory relief, equitable and/or
injunctive relief and attorney's fees and costs. The various lawsuits generally
allege that some or all of the defendants (i) permitted or acquiesced in market
timing and/or late trading in some of the MFS funds, inadequately disclosed MFS'
internal policies concerning market timing and such matters, (ii) received
excessive compensation as fiduciaries to the MFS funds, or (iii) permitted or
acquiesced in the improper use of fund assets by MFS to support the distribution
of MFS fund shares and inadequately disclosed MFS' use of fund assets in this
manner. The actions assert that some or all of the defendants violated the
federal securities laws, including the Securities Act of 1933 and the Securities
Exchange Act of 1934, the Investment Company Act of 1940 and the Investment
Advisers Act of 1940, the Employee Retirement Income Security Act of 1974, as
well as fiduciary duties and other violations of common law. Insofar as any of
the actions is appropriately brought derivatively on behalf of any of the MFS
funds, any recovery will inure to the benefit of the MFS funds. The defendants
are reviewing the allegations of the multiple complaints and will respond
appropriately. Additional lawsuits based on similar allegations may be filed in
the future.
Any potential resolution of these matters may include, but not be limited to,
judgments or settlements for damages against MFS, the MFS funds, or any other
named defendant. As noted above, as part of the regulatory settlements, MFS has
established a restitution pool in the amount of $225 million to compensate
certain shareholders of certain MFS retail funds for damages that they allegedly
sustained as a result of market timing or late trading in certain of the MFS
retail funds, and transferred $50 million for distribution (which has been
accrued to the affected funds and is expected to be distributed on or around
February 14, 2005) to affected MFS funds to compensate those funds based upon
the amount of brokerage commissions allocated in recognition of MFS fund sales.
It is not clear whether these amounts will be sufficient to compensate
shareholders for all of the damage they allegedly sustained, whether certain
shareholders or putative class members may have additional claims to
compensation, or whether the damages that may be awarded in any of the actions
will exceed these amounts. In the event the MFS funds incur any losses, costs or
expenses in connection with such lawsuits, the Boards of Trustees of the
affected MFS funds may pursue claims on behalf of such funds against any party
that may have liability to the funds in respect thereof.
Review of these matters by the independent Trustees of the MFS funds and their
counsel is continuing. There can be no assurance that these regulatory actions
and lawsuits, or the adverse publicity associated with these developments, will
not result in increased fund redemptions, reduced sales of fund shares, or other
adverse consequences to the MFS FUNDS.
57
<Page>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE PARTICIPANTS IN AND THE BOARD OF MANAGERS OF CAPITAL APPRECIATION
VARIABLE ACCOUNT, GLOBAL GOVERNMENTS VARIABLE ACCOUNT, GOVERNMENT SECURITIES
VARIABLE ACCOUNT, HIGH YIELD VARIABLE ACCOUNT, MANAGED SECTORS VARIABLE ACCOUNT,
MONEY MARKET VARIABLE ACCOUNT AND TOTAL RETURN VARIABLE ACCOUNT AND THE BOARD OF
DIRECTORS OF SUN LIFE INSURANCE COMPANY OF CANADA:
We have audited the accompanying statements of assets and liabilities, including
the portfolios of investments of Capital Appreciation Variable Account, Global
Governments Variable Account, Government Securities Variable Account, High Yield
Variable Account, Managed Sectors Variable Account, Money Market Variable
Account and Total Return Variable Account (the "Variable Accounts") as of
December 31, 2004, and related statements of operations for the year then ended,
the statements of changes in net assets for each of the two years in the period
then ended, and the financial highlights for each of the five years in the
period then ended. These financial statements and financial highlights are the
responsibility of the Variable Accounts' management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Variable Accounts' internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
Our procedures included confirmation of securities owned as of December 31,
2004, by correspondence with the custodian and brokers; where replies were not
received from brokers, we performed other auditing procedures. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Variable Accounts as of December 31, 2004, the results of their operations for
the year then ended, the changes in their net assets for each of the two years
in the period then ended, and the financial highlights for each of the five
years in the period then ended, in conformity with accounting principles
generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 24, 2005
58
<Page>
COMPASS VARIABLE ACCOUNTS
MEMBERS OF BOARDS OF MANAGERS AND OFFICERS -- IDENTIFICATION AND BACKGROUND
The Members of the Boards of Managers ("Members") and the officers of each
Account, as of February 1, 2005, are listed below, together with their principal
occupations during the past five years. (Their titles may have varied during
that period.) The address of each Member and officer is 500 Boylston Street,
Boston, Massachusetts 02116.
<Table>
<Caption>
POSITION(S) HELD MEMBER/OFFICER PRINCIPAL OCCUPATION DURING THE PAST
NAME, DATE OF BIRTH WITH FUND SINCE(1) FIVE YEARS AND OTHER DIRECTORSHIPS(2)
- ---------------------------- -------------------- ----------------- ------------------------------------------------
INTERESTED MEMBERS
C. James Prieur(3) Member July 1999 Sun Life Assurance Company of Canada, President
(born 04/21/51) and Chief Operating Officer
David D. Horn(3) Member April 1986 Private investor; Retired; Sun Life Assurance
(born 06/07/41) Company of Canada, Former Senior Vice President
and General Manager for the United States
(until 1997)
INDEPENDENT MEMBERS
J. Kermit Birchfield Chairman May 1997 Consultant; Century Partners, Inc.
(born 01/08/40) (investments), Managing Director; Displaytech,
Inc. (manufacturer of liquid crystal display
technology), Director
Robert C. Bishop Member May 2001 AutoImmune Inc. (pharmaceutical product
(born 01/13/43) development), Chairman, President and Chief
Executive Officer; Caliper Life Sciences Corp.
(laboratory analytical instruments), Director;
Millipore Corporation (purification/filtration
products), Director; Quintiles Transnational
Corp. (contract services to the medical
industry), Director
Frederick H. Dulles Member May 2001 Ten State Street LLP (law firm), Partner;
(born 03/12/42) McFadden, Pilkington & Ward LLP (solicitors and
registered foreign lawyers), Partner (until June
2003); Jackson & Nash, LLP (law firm), Of
Counsel (January 2000 to November 2000)
Derwyn F. Phillips Member April 1986 Retired
(born 08/31/30)
</Table>
- ----------
(1) Date first appointed to serve as Member/Trustee/Officer of an MFS/Sun Life
Product. Each Member has served continuously since appointment.
(2) Directorships or trusteeships of companies required to report to the
Securities and Exchange Commission (i.e., "public companies").
(3) "Interested person" of Sun Life of Canada (U.S.), within the meaning of the
Investment Company Act of 1940 (referred to as the 1940 Act), which is the
principal federal law governing investment companies like the Series. The
address of Sun Life of Canada (U.S.) is One Sun Life Executive Park,
Wellesley Hills, Massachusetts 02481.
(4) "Interested person" of MFS within the meaning of the 1940 Act. The address
of MFS is 500 Boylston Street, Boston, Massachusetts 02116.
59
<Page>
<Table>
<Caption>
POSITION(S) HELD MEMBER/OFFICER PRINCIPAL OCCUPATION DURING THE PAST
NAME, DATE OF BIRTH WITH FUND SINCE(1) FIVE YEARS AND OTHER DIRECTORSHIPS(2)
- ---------------------------- -------------------- ----------------- ------------------------------------------------
Ronald G. Steinhart Member May 2001 Private investor; Bank One, Texas N.A., Vice
(born 06/15/40) Chairman and Director (January 2000 to January
2001); Bank One Corporation, Officer (until
January 2000); Carreker Corporation (consultant
and technology provider to financial
institutions), Director; Prentiss Properties
Trust (real estate investment trust), Director;
United Auto Group, Inc. (automotive retailer),
Director
Haviland Wright Member May 2001 Hawaii Small Business Development Center, Kaua'i
(born 07/21/48) Center, Center Director (since March 2002);
Displaytech, Inc. (manufacturer of liquid
crystal display technology), Chairman and Chief
Executive Officer (until March 2002)
MEMBERS EMERITUS
Garth Marston Member Emeritus Retired
(born 04/28/26)
Samuel Adams Member Emeritus Retired
(born 10/19/25)
OFFICERS
Robert J. Manning(4) President February 2004 Massachusetts Financial Services Company, Chief
(born 10/20/63) Executive Officer, President, Chief Investment
Officer and Director
James R. Bordewick, Jr.(4) Assistant February 1997 Massachusetts Financial Services Company,
(born 03/06/59) Secretary and Senior Vice President and Associate General
Assistant Clerk Counsel
</Table>
- ----------
(1) Date first appointed to serve as Member/Trustee/Officer of an MFS/Sun Life
Product. Each Trustee has served continuously since appointment.
(2) Directorships or trusteeships of companies required to report to the
Securities and Exchange Commission (i.e., "public companies").
(3) "Interested person" of Sun Life of Canada (U.S.), within the meaning of the
Investment Company Act of 1940 (referred to as the 1940 Act), which is the
principal federal law governing investment companies like the Series. The
address of Sun Life of Canada (U.S.) is One Sun Life Executive Park,
Wellesley Hills, Massachusetts 02481.
(4) "Interested person" of MFS within the meaning of the 1940 Act. The address
of MFS is 500 Boylston Street, Boston, Massachusetts 02116.
60
<Page>
<Table>
<Caption>
POSITION(S) HELD MEMBER/OFFICER PRINCIPAL OCCUPATION DURING THE PAST
NAME, DATE OF BIRTH WITH FUND SINCE(1) FIVE YEARS AND OTHER DIRECTORSHIPS(2)
- ---------------------------- -------------------- ----------------- ------------------------------------------------
Jeffrey N. Carp(4) Secretary and September 2004 Massachusetts Financial Services Company,
(born 12/1/56) Clerk Executive Vice President, General Counsel and
Secretary (since April 2004); Hale and Dorr LLP,
Partner (law firm) (prior to April 2004)
Stephanie A. DeSisto(4) Assistant May 2003 Massachusetts Financial Services Company, Vice
(born 10/01/53) Treasurer President (since April 2003); Brown Brothers
Harriman & Co., Senior Vice President (November
2002 to April 2003); ING Groep N.V./Aeltus
Investment Management, Senior Vice President
(prior to November 2002)
James F. DesMarais(4) Assistant September 2004 Massachusetts Financial Services Company,
(born 03/09/61) Secretary and Assistant General Counsel
Assistant Clerk
Richard M. Hisey(4) Treasurer August 2002 Massachusetts Financial Services Company, Senior
(born 08/29/58) Vice President (since July 2002); The Bank of
New York, Senior Vice President (September 2000
to July 2002); Lexington Global Asset Managers,
Inc., Executive Vice President and Chief
Financial Officer (prior to September 2000);
Lexington Funds, Chief Financial Officer (prior
to September 2000)
Brian T. Hourihan(4) Assistant September 2004 Massachusetts Financial Services Company, Vice
(born 11/11/64) Secretary and President, Senior Counsel and Assistant
Assistant Clerk Secretary (since June 2004); Affiliated Managers
Group, Inc., Chief Legal Officer/Centralized
Compliance Program (January to April 2004);
Fidelity Research & Management Company,
Assistant General Counsel (prior to January
2004)
Ellen Moynihan(4) Assistant May 2001 Massachusetts Financial Services Company, Vice
(born 11/13/57) Treasurer President
</Table>
- ----------
(1) Date first appointed to serve as Member/Trustee/Officer of an MFS/Sun Life
Product. Each Member has served continuously since appointment.
(2) Directorships or trusteeships of companies required to report to the
Securities and Exchange Commission (i.e., "public companies").
(3) "Interested person" of Sun Life of Canada (U.S.), within the meaning of the
Investment Company Act of 1940 (referred to as the 1940 Act), which is the
principal federal law governing investment companies like the Series. The
address of Sun Life of Canada (U.S.) is One Sun Life Executive Park,
Wellesley Hills, Massachusetts 02481.
(4) "Interested person" of MFS within the meaning of the 1940 Act. The address
of MFS is 500 Boylston Street, Boston, Massachusetts 02116.
61
<Page>
<Table>
<Caption>
POSITION(S) HELD MEMBER/OFFICER PRINCIPAL OCCUPATION DURING THE PAST
NAME, DATE OF BIRTH WITH FUND SINCE(1) FIVE YEARS AND OTHER DIRECTORSHIPS(2)
- ---------------------------- -------------------- ----------------- ------------------------------------------------
Frank L. Tarantino Independent Chief September 2004 Tarantino LLC (provider of compliance services),
(born 03/07/44) Compliance Officer Principal (since June 2004); CRA Business
Strategies Group (consulting services),
Executive Vice President (April 2003 to June
2004); David L. Babson & Co. (investment
adviser), Managing Director, Chief
Administrative Officer and Director (February
1997 to March 2003)
James O. Yost(4) Assistant May 2001 Massachusetts Financial Services Company, Senior
(born 06/12/60) Treasurer Vice President
</Table>
- ----------
(1) Date first appointed to serve as Member/Trustee/Officer of an MFS/Sun Life
Product. Each Member has served continuously since appointment.
(2) Directorships or trusteeships of companies required to report to the
Securities and Exchange Commission (i.e., "public companies").
(3) "Interested person" of Sun Life of Canada (U.S.), within the meaning of the
Investment Company Act of 1940 (referred to as the 1940 Act), which is the
principal federal law governing investment companies like the Series. The
address of Sun Life of Canada (U.S.) is One Sun Life Executive Park,
Wellesley Hills, Massachusetts 02481.
(4) "Interested person" of MFS within the meaning of the 1940 Act. The address
of MFS is 500 Boylston Street, Boston, Massachusetts 02116.
The Accounts do not hold annual meetings for the purpose of electing Members,
and Members are not elected for fixed terms. Each Member and officer holds
office until his or her successor is chosen and qualified, or until his or her
earlier death, resignation, retirement or removal.
All Members currently serve as Members of each Account and have served in that
capacity since originally elected or appointed. All of the Members are also
Trustees of the MFS/Sun Life Series Trust. The executive officers of the Compass
Variable Accounts hold similar offices for the MFS/Sun Life Series Trust and
other funds in the MFS fund complex. Each Member serves as a Trustee or Member
of 36 Accounts/Series.
The Statement of Additional Information contains further information about the
Members and is available without charge upon request by calling 1-800-752-7215.
62
<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
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
200 Berkeley Street, Boston, MA 02116
PROXY VOTING POLICIES AND INFORMATION
A general description of the accounts' proxy voting policies and procedures is
available without charge, upon request, by calling 1-800-225-2606, by visiting
the About MFS section of mfs.com or by visiting the SEC's Web site at
http://www.sec.gov.
Information regarding how the accounts voted proxies relating to portfolio
securities during the most recent twelve month period ended June 30 is available
without charge by visiting the Proxy Voting section of mfs.com or by visiting
the SEC's Web site at http://www.sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The accounts will file a complete schedule of portfolio holdings with the
Securities and Exchange Commission (the Commission) for the first and third
quarters of each fiscal year on Form N-Q. The accounts' Form N-Q may be reviewed
and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C. 20549-0102
Information on the operation of the Public Reference Room may be obtained by
calling the Commission at 1 800 SEC-0330. The accounts' Form N-Q is available on
the EDGAR database on the Commission's Internet website at http://www.sec.gov,
and copies of this information may be obtained, upon payment of a duplicating
fee, by electronic request at the following e-mail address: publicinfo@sec.gov
or by writing the Public Reference Section at the above address.
PORTFOLIO MANAGERS
Margaret Adams
William J. Adams
John F. Addeo
David A. Antonelli
David M. Calabro
James J. Calmas
Kenneth J. Enright
Steven R. Gorham
Alan Langsner
John D. Laupheimer, Jr.
Gregory Locraft
Kate Mead
Constantinos Mokas
Edward L. O'Dette
Stephen Pesek
Scott B. Richards
Michael W. Roberge
Matthew W. Ryan
James T. Swanson
Brooks Taylor
Peter C. Vaream
Terri A. Vittozzi
(C) 2005 Sun Life Financial Distributors Inc. COUS-ANN-2/05 30M
<Page>
ITEM 2. CODE OF ETHICS.
The Registrant has adopted a Code of Ethics pursuant to Section 406 of the
Sarbanes-Oxley Act and as defined in Form N-CSR that applies to the Registrant's
principal executive officer and principal financial and accounting officer.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Messrs. J. Kermit Birchfield, Robert C. Bishop, Ronald G. Steinhart and Haviland
Wright, members of the Audit Committee, have been determined by the Board of
Managers in their reasonable business judgment to meet the definition of "audit
committee financial expert" as such term is defined in Form N-CSR. In addition,
Messrs. J. Kermit Birchfield, Robert C. Bishop, Ronald G. Steinhart and Haviland
Wright are "independent" members of the Audit Committee as defined in Form
N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
ITEMS 4(a) THROUGH 4(d) AND 4(g):
The Board of Managers has appointed Deloitte & Touche LLP ("Deloitte") to serve
as independent accountants to the Registrant (the "Account"). The tables below
set forth the audit fees billed to the Account as well as fees for non-audit
services provided to the Account and/or to the Account's investment adviser,
Massachusetts Financial Services Company ("MFS") and to various entities either
controlling, controlled by, or under common control with MFS that provide
ongoing services to the Account ("MFS Related Entities").
For the fiscal years ended December 31, 2004 and 2003, audit fees billed to the
Account by Deloitte were as follows:
<Table>
<Caption>
AUDIT FEES
FEES BILLED BY DELOITTE: 2004 2003
--------- --------
Government Securities Variable $ 34,750 $ 37,100
Account
TOTAL $ 34,750 $ 37,100
</Table>
For the fiscal years ended December 31, 2004 and 2003, fees billed by Deloitte
for audit-related, tax and other services provided to the Account and for
audit-related, tax and other services provided to MFS and MFS Related Entities
that relate directly to the operations and financial reporting of the Account
were as follows:
<Page>
<Table>
<Caption>
AUDIT-RELATED FEES(1) TAX FEES(2) ALL OTHER FEES(3)
FEES BILLED BY DELOITTE: 2004 2003 2004 2003 2004 2003
------------ ------------ ------------ ------------ ------------ ------------
To Government Securities $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Variable Account
To MFS and MFS Related 1,046,170 356,150 67,000 50,000 32,500 0
Entities of Government
Securities Variable
Account*
</Table>
AGGREGATE FEES FOR NON-AUDIT
SERVICES:
<Table>
<Caption>
2004 2003
------------ ------------
To Government Securities $ 1,539,720 $ 837,705
Variable Account, MFS and
MFS Related Entities#
</Table>
* This amount reflects the fees billed to MFS and MFS Related Entities for
non-audit services relating directly to the operations and financial reporting
of the Account (portions of which services also related to the operations and
financial reporting of other variable accounts and funds within the MFS Funds
complex).
# This amount reflects the aggregate fees billed by Deloitte for non-audit
services rendered to the Account and for non-audit services rendered to MFS and
the MFS Related Entities.
(1) The fees included under "Audit-Related Fees" are fees related to assurance
and related services that are reasonably related to the performance of the audit
or review of financial statements, but not reported under "Audit Fees,"
including accounting consultations, agreed-upon procedure reports, attestation
reports, comfort letters and internal control reviews.
(2) The fees included under "Tax Fees" are fees associated with tax compliance,
tax advice and tax planning, including services relating to the filing or
amendment of federal, state or local income tax returns, regulated investment
company qualification reviews and tax distribution and analysis.
(3) The fees included under "All Other Fees" are fees for products and services
provided by Deloitte other than those reported under "Audit Fees,"
"Audit-Related Fees" and "Tax Fees."
For periods prior to May 6, 2003, the amounts shown above under "Audit-Related
Fees," "Tax Fees" and "All Other Fees" relate to permitted non-audit services
that would have been subject to pre-approval if the Securities and Exchange
Commission's rules relating to pre-approval of non-audit services had been in
effect.
ITEM 4(e)(1):
Set forth below are the policies and procedures established by the Audit
Committee of the Board of Managers relating to the pre-approval of audit and
non-audit related services: To the extent required by applicable law,
pre-approval by the Audit Committee of the Board is needed for all audit and
permissible non-audit services rendered to the Accounts and all permissible
non-audit services rendered to MFS or MFS Related Entities if the services
relate directly to the operations and financial reporting of the Registrant.
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Pre-approval is currently on an engagement-by-engagement basis. In the event
pre-approval of such services is necessary between regular meetings of the Audit
Committee and it is not practical to wait to seek pre-approval at the next
regular meeting of the Audit Committee, pre-approval of such services may be
referred to the Chair of the Audit Committee for approval; provided that the
Chair may not pre-approve any individual engagement for such services exceeding
$50,000 or multiple engagements for such services in the aggregate exceeding
$100,000 between such regular meetings of the Audit Committee. Any engagement
pre-approved by the Chair between regular meetings of the Audit Committee shall
be presented for ratification by the entire Audit Committee at its next
regularly scheduled meeting.
ITEM 4(e)(2):
None, or 0%, of the services relating to the Audit-Related Fees, Tax Fees and
All Other Fees paid by the Account and MFS and MFS Related Entities relating
directly to the operations and financial reporting of the Registrant disclosed
above were approved by the audit committee pursuant to paragraphs (c)(7)(i)(C)
of Rule 2-01 of Regulation S-X (which permits audit committee approval after the
start of the engagement with respect to services other than audit review or
attest services, if certain conditions are satisfied).
ITEM 4(f): Not applicable.
ITEM 4(h): The Registrant's Audit Committee has considered whether the provision
by a Registrant's independent registered public accounting firm of non-audit
services to MFS and MFS Related Entities that were not pre-approved by the
Committee (because such services were provided prior to the effectiveness of SEC
rules requiring pre-approval or because such services did not relate directly to
the operations and financial reporting of the Registrant) was compatible with
maintaining the independence of the independent registered public accounting
firm as the Registrant's principal auditors.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable to the Registrant.
ITEM 6. SCHEDULE OF INVESTMENTS
A schedule of investments of the Registrant is included as part of the report to
shareholders of such series under Item 1 of this Form N-CSR.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable to the Registrant.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
<Page>
Not applicable to the Registrant.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable to the Registrant.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no material changes to the procedures by which shareholders may send
recommendations to the Board for nominees to the Registrant's Board since the
Registrant last provided disclosure as to such procedures in response to the
requirements of Item 7(d)(2)(ii)(G) of Schedule 14A or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) Based upon their evaluation of the registrant's disclosure controls and
procedures (as defined in Rule 30a-3(c) under the Act) as conducted within
90 days of the filing date of this Form N-CSR, the registrant's principal
financial officer and principal executive officer have concluded that those
disclosure controls and procedures provide reasonable assurance that the
material information required to be disclosed by the registrant on this
report is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and
forms.
(b) There were no changes in the registrant's internal controls over financial
reporting (as defined in Rule 30a-3(d) under the Act) that occurred during
the second fiscal quarter covered by the report that has materially
affected, or is reasonably likely to materially affect, the registrant's
internal control over financial reporting.
ITEM 12. EXHIBITS.
(a) File the exhibits listed below as part of this Form. Letter or number the
exhibits in the sequence indicated.
(1) Any code of ethics, or amendment thereto, that is the subject of the
disclosure required by Item 2, to the extent that the registrant
intends to satisfy the Item 2 requirements through filing of an
exhibit: Code of Ethics attached hereto.
(2) A separate certification for each principal executive officer and
principal financial officer of the registrant as required by Rule
30a-2 under the Act (17 CFR 270.30a-2): Attached hereto.
(b) If the report is filed under Section 13(a) or 15(d) of the Exchange Act,
provide the certifications required by Rule 30a-2(b) under the Act (17 CFR
270.30a-2(b)), Rule 13a-14(b) or Rule 15d-14(b) under the Exchange Act (17
CFR 240.13a-14(b) or 240.15d-14(b)) and Section 1350 of Chapter 63 of Title
18 of the United States Code (18 U.S.C. 1350) as an exhibit. A
certification furnished pursuant to this paragraph
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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) GOVERNMENT SECURITIES VARIABLE ACCOUNT
----------------------------------------------------
<Table>
By (Signature and Title)* /s/ ROBERT J. MANNING
---------------------------------------------------------------
Robert J. Manning, President
Date: February 24, 2005
-----------------
</Table>
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.
<Table>
By (Signature and Title)* /s/ ROBERT J. MANNING
---------------------------------------------------------------
Robert J. Manning, President (Principal Executive Officer)
Date: February 24, 2005
-----------------
By (Signature and Title)* /s/ RICHARD M. HISEY
---------------------------------------------------------------
Richard M. Hisey, Treasurer (Principal Financial Officer and
Accounting Officer)
Date: February 24, 2005
-----------------
</Table>
* Print name and title of each signing officer under his or her signature.