<PAGE>
As filed with the Securities and Exchange Commission on April 29, 1998
1933 Act File No. 2-83616
1940 Act File No. 811-3732
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 22
AND
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 26
MFS/SUN LIFE SERIES TRUST
(Exact Name of Registrant as Specified in Charter)
500 Boylston, Street, Boston, Massachusetts 02116
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (617) 954-5000
Stephen E. Cavan, Massachusetts Financial Services Company
500 Boylston Street, Boston, Massachusetts 02116
(Name and Address of Agent for Service)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
It is proposed that this filing will become effective (check appropriate box)
|X| immediately upon filing pursuant to paragraph (b)
|_| on [date] pursuant to paragraph (b)
|_| 60 days after filing pursuant to paragraph (a)(i)
|_| on [date] pursuant to paragraph (a)(i)
|_| 75 days after filing pursuant to paragraph (a)(ii)
|_| on [date] pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
|_| this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
===============================================================================
<PAGE>
MFS/SUN LIFE SERIES TRUST
CROSS REFERENCE SHEET
(Pursuant to Rule 404 showing location in Prospectus and/or Statement
of Additional Information of the responses to the Items in Parts A and B of Form
N-1A)
<TABLE>
<CAPTION>
ITEM NUMBER STATEMENT OF ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>
1 Front Cover Pages *
2 * *
3 Condensed Financial Information *
4 The Series Fund; Investment Objectives *
and Policies; Appendices
5 The Series Fund; Management of the *
Series Fund; Investment Objectives and
Policies; Back Cover Page; Appendices
5(A) Information included in Registrant's *
Annual Report to Shareholders for
the year ended December 31, 1997
6 Additional Information with Respect to *
Shares of each Series
7 Additional Information with Respect to *
Shares of each Series
8 Additional Information with Respect to *
Shares of each Series
9 * *
<PAGE>
<CAPTION>
ITEM NUMBER STATEMENT OF ADDITIONAL
FORM N-1A, PART B PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>
10 * Front Cover Page
11 * Table of Contents
12 * *
13 * Investment Objectives, Policies
and Restrictions; Appendix
14 * Management of the Series Fund
15 * *
16 * Management of the Series Fund
(also, see same caption in the
Prospectus); Independent
Accountants and Financial
Statements; Back Cover Page
17 * Portfolio Transactions and
Brokerage Commissions
18 * Additional Information with
Respect to Shares of each
Series
19 * Additional Information with
Respect to Shares of each
Series
20 * Additional Information with
Respect to Shares of each
Series
21 * *
22 * *
23 * Independent Accountants and
Financial Statements
- ---------------------
* Not Applicable
</TABLE>
<PAGE>
MFS/SUN LIFE PROSPECTUS
SERIES TRUST May 1, 1998
- --------------------------------------------------------------------------------
Page
----
1. The Series Fund .................................................... 3
2. Condensed Financial Information .................................... 3
3. Investment Objectives and Policies ................................. 20
4. Management of the Series Fund ...................................... 41
5. Additional Information with Respect to Shares of Each Series ....... 46
Purchases ....................................................... 46
Net Asset Value, Dividends and Distributions .................... 46
Tax Status ...................................................... 47
Redemptions ..................................................... 47
Exchange Privilege .............................................. 47
Description of Shares, Voting Rights and Liabilities ............ 47
Contents of SAI ................................................. 48
Appendix A ............................................................ A-1
Appendix B ............................................................ B-1
Appendix C ............................................................ C-1
Appendix D ............................................................ D-1
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MFS/Sun Life Series Trust (the "Series Fund"), 500 Boylston Street, Boston,
Massachusetts 02116, is a no-load, open-end management investment company
which offers a choice of twenty-six separate series of shares. The shares of
each series will be sold only to variable accounts (collectively, the
"Variable Accounts") established by Sun Life Assurance Company of Canada
(U.S.) ("Sun Life of Canada (U.S.)"), Sun Life Insurance and Annuity Company
of New York ("Sun Life (N.Y.)") and their affiliated companies to fund
benefits under variable contracts issued by such companies. The Variable
Accounts will purchase shares of each series in accordance with the allocation
instructions received from owners of the Contracts.
The twenty-six series and their investment objectives are as follows:
BOND SERIES will primarily seek as high a level of current income as is
believed to be consistent with prudent investment risk; its secondary
objective is to seek to protect shareholders capital (see page 20).
CAPITAL APPRECIATION SERIES will seek capital appreciation by investing in
securities of all types, with major emphasis on common stocks (see page 20).
CAPITAL OPPORTUNITIES SERIES will seek capital appreciation (see page 21).
CONSERVATIVE GROWTH SERIES will seek long-term growth of capital and future
income while providing more current dividend income than is normally
obtainable from a portfolio of only growth stocks by investing a substantial
proportion of its assets in the common stocks or securities convertible into
common stocks of companies believed to possess better than average prospects
for long-term growth and a smaller proportion of its assets in securities
whose principal characteristic is income production (see page 22).
EMERGING GROWTH SERIES will seek long-term growth of capital by investing
primarily (i.e., at least 80% of its assets under normal circumstances) in
common stocks of emerging growth companies. Emerging growth companies include
companies that the series' investment adviser believes are early in their life
cycle but which have the potential to become major enterprises. Dividend and
interest income from portfolio securities, if any, is incidental to its
objective of long-term growth of capital (see page 22).
EQUITY INCOME SERIES will primarily seek reasonable income by investing mainly
in income producing securities; its secondary objective is to seek capital
appreciation (see page 23).
GOVERNMENT SECURITIES SERIES will seek current income and preservation of
capital by investing in U.S. Government and U.S. Government-related Securities
(see page 24).
HIGH YIELD SERIES will seek high current income and capital appreciation by
investing primarily in fixed income securities of United States and foreign
issuers which may be in the lower rated categories or unrated (commonly known
as "junk bonds") and may include equity features (see page 24). The series may
invest up to 100% of its net assets in lower-rated bonds, commonly known as
"junk bonds," that entail greater risks, including default risks, than those
found in higher rated securities. Investors should carefully consider these
risks before investing.
INTERNATIONAL GROWTH SERIES will seek capital appreciation by investing, under
normal market conditions, at least 65% of its total assets in equity
securities of companies whose principal activities are outside the U.S. and
which are growing at rates expected to be well above the growth rate of the
overall U.S. economy (see page 25).
(Continued on next page)
INVESTORS SHOULD READ AND RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE.
<PAGE>
INTERNATIONAL GROWTH AND INCOME SERIES will seek capital appreciation and
current income by investing, under normal market conditions, at least 65% of
its total assets in equity securities of issuers whose principal activities
are outside the U.S. (see page 26).
MANAGED SECTORS SERIES will seek capital appreciation by varying the weighting
of its portfolio of common stocks among certain industry sectors. Dividend
income, if any, is incidental to its objective of capital appreciation (see
page 27).
MASSACHUSETTS INVESTORS GROWTH STOCK SERIES will seek to provide long-term
growth of capital and future income rather than current income (see page 28).
MFS/FOREIGN & COLONIAL EMERGING MARKETS EQUITY SERIES will seek capital
appreciation by investing, under normal market conditions, at least 65% of its
total assets in equity securities of issuers whose principal activities are
located in emerging market countries (see page 28).
MONEY MARKET SERIES will seek maximum current income to the extent consistent
with stability of principal by investing exclusively in money market
instruments maturing in less than 13 months (see page 29). An investment in
this series is neither insured nor guaranteed by the U.S. Government. There
can be no assurance that the series will be able to maintain a stable net
asset value of $1.00 per share.
NEW DISCOVERY SERIES will seek capital appreciation by investing in equity
securities of companies of any size which the series' investment adviser
believes offer superior prospects for growth, and in particular, emphasizes
companies in the developing stages of their life cycle that offer the
potential for accelerated earnings or revenue growth (see page 29).
RESEARCH SERIES will seek to provide long-term growth of capital and future
income (see page 30).
RESEARCH GROWTH AND INCOME SERIES will seek to provide long-term growth of
capital, current income and growth of income (see page 31).
RESEARCH INTERNATIONAL SERIES will seek capital appreciation by investing in
equity securities of companies whose principal activities are located outside
the United States as well as other securities offering an opportunity for
capital appreciation (see page 31).
STRATEGIC INCOME SERIES will seek to provide high current income by investing
in fixed income securities and will seek to take advantage of opportunities to
realize significant capital appreciation while maintaining a high level of
current income (see page 32). The series may invest up to 100% of its net
assets in lower rated bonds, commonly known as "junk bonds," that entail
greater risks, including default risks, than those found in higher rated
securities. These bonds may be issued by domestic and foreign corporate
issuers, as well as by foreign governments and their political subdivisions.
Investors should carefully consider these risks before investing.
TOTAL RETURN SERIES will seek primarily to obtain above-average income
(compared to a portfolio entirely invested in equity securities) consistent
with prudent employment of capital; its secondary objective is to take
advantage of opportunities for growth of capital and income. Assets will be
allocated and reallocated from time to time between money market, fixed income
and equity securities. Under normal market conditions, at least 25% of the
series' assets will be invested in fixed income securities and at least 40%
and no more than 75% of its assets will be invested in equity securities (see
page 33).
UTILITIES SERIES will seek capital growth and current income (income above
that available from a portfolio invested entirely in equity securities) by
investing at least 65% of its assets under normal market conditions in equity
and debt securities issued by domestic and foreign utility companies (see page
33).
WORLD ASSET ALLOCATION SERIES will seek total return over the long term
through investments in equity and fixed income securities and will also seek
to have low volatility of share price (i.e., net asset value per share) and
reduced risk (compared to an aggressive equity/fixed income portfolio) (see
page 35). The series may invest up to 70% of its net assets (and expects to
invest not more than 50% of its net assets) in lower rated bonds, commonly
known as "junk bonds," that entail greater risks, including default risks,
than those found in higher rated securities. These bonds may be issued by
domestic and foreign corporate issuers, as well as by foreign governments and
their political subdivisions and by issuers of municipal obligations.
Investors should carefully consider these risks before investing.
WORLD GOVERNMENTS SERIES will seek moderate current income and preservation
and growth of capital by investing in a portfolio of U.S. and Foreign
Government Securities (see page 36).
WORLD GROWTH SERIES will seek capital appreciation by investing in securities
of companies worldwide growing at rates expected to be well above the growth
rate of the overall U.S. economy (see page 37).
WORLD TOTAL RETURN SERIES will seek total return by investing in securities
which will provide above average current income (compared to a portfolio
invested entirely in equity securities) and opportunities for long-term growth
of capital and income. The series will invest primarily in global equity and
fixed income securities (i.e., those of U.S. and non-U.S. issuers) (see page
38).
ZERO COUPON SERIES, PORTFOLIO 2000 will seek the highest predictable
compounded investment return for a specific period of time, consistent with
the safety of invested capital, by investing primarily in debt obligations of
the United States Treasury that have been issued without interest coupons or
stripped of their unmatured interest coupons, interest coupons that have been
stripped from such debt obligations, and receipts and certificates for such
stripped debt obligations and stripped coupons. The liquidation date for the
Portfolio is November 15, 2000 (see page 40.) This series is currently
available only in connection with the purchase of variable life insurance
contracts issued by Sun Life of Canada (U.S.).
There can be no assurance that the investment objectives of any series will be
achieved. In addition, an investment in a series may involve certain
additional risks, and may not be appropriate for all purchasers.
The investment adviser of each series is Massachusetts Financial Services
Company ("MFS" or the "Adviser"), 500 Boylston Street, Boston, Massachusetts
02116. MFS has retained, as sub-advisers to each of International Growth
Series, MFS/Foreign & Colonial Emerging Markets Equity Series and the World
Growth Series, Foreign & Colonial Management Limited ("FCM") and its
subsidiary, Foreign & Colonial Emerging Markets Limited ("FCEM"), both located
at Exchange House, Primrose Street, London EC2A 2NY, United Kingdom (together,
with respect to these series, the "Sub-Advisers").
This Prospectus sets forth concisely the information concerning each series
that a prospective investor ought to know before investing. The Series Fund
has filed with the Securities and Exchange Commission (the "SEC") a Statement
of Additional Information dated May 1, 1998, as amended or supplemented from
time to time (the "SAI"), which contains more detailed information about each
series and is incorporated into this Prospectus by reference. See page 48 for
a further description of the information set forth in the SAI. A copy of the
SAI may be obtained without charge by contacting Sun Life Assurance Company of
Canada (U.S.) Retirement Products and Services Division, P.O. Box 1024,
Boston, Massachusetts 02103, telephone (800) 752-7215.
The information contained in this Prospectus should be read together with the
prospectus for the Contracts.
1. THE SERIES FUND
The Series Fund is a no-load, open-end management investment company which was
organized under the laws of The Commonwealth of Massachusetts in 1983. The
Series Fund has twenty-six separate portfolios identified on the cover of this
Prospectus, each of which is represented by a separate series of shares. The
High Yield Series, Managed Sectors Series, Strategic Income Series, Utilities
Series, World Asset Allocation Series, World Governments Series, World Growth
Series and World Total Return Series are non-diversified as that term is
defined in the Investment Company Act of 1940.
The shares of each series will be sold only to Variable Accounts established
by Sun Life of Canada (U.S.), Sun Life (N.Y.) and their affiliated companies
to fund benefits under variable contracts (the "Contracts") issued by such
companies. The Zero Coupon Series will be sold only for the purpose of funding
benefits under variable life insurance contracts issued by Sun Life of Canada
(U.S.). The Variable Accounts will purchase shares of each series in
accordance with the allocation instructions received from owners of the
Contracts. The Series Fund then uses the proceeds to buy securities for the
portfolio for which such shares were sold. The investment adviser manages each
portfolio from day to day in accordance with its investment objectives. The
kinds of investments and the way they are managed depend on the conditions and
trends in the economy and the financial marketplaces. The Series Fund also
offers to redeem shares of each series from the Variable Accounts at any time
at net asset value.
2. CONDENSED FINANCIAL INFORMATION
The following information about each series since its inception should be read
in conjunction with the financial statements included in the Series Fund's
Annual Report to shareholders for the year ended December 31, 1997, which are
incorporated by reference into the SAI. These financial statements have been
audited by Deloitte & Touche LLP, independent certified public accountants. No
financial information is provided for series which commenced their investment
operations after December 31, 1997. Additional information about the
performance of the Series Fund is contained in such Annual Report which may be
obtained without charge from the Sun Life Assurance Company of Canada (U.S.)
Retirement Products and Services Division, P.O. Box 1024, Boston,
Massachusetts 02103, Telephone (800) 752-7215.
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
CAPITAL APPRECIATION SERIES
------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR):
Net asset value - beginning of
year ............................. $ 35.8316 $ 31.9878 $24.4076 $28.1892 $24.8989
---------- ---------- -------- -------- --------
Income from investment operations# -
Net investment income (loss) ..... $ (0.0405) $ (0.0200) $ 0.0933 $ 0.0523 $ 0.1036
Net realized and unrealized
gain (loss) on investments
and foreign currency
transactions ................... 7.8691 6.7422 8.1619 (1.1104) 4.2197
---------- ---------- -------- -------- --------
Total from investment
operations ................. $ 7.8286 $ 6.7222 $ 8.2552 $(1.0581) $ 4.3233
---------- ---------- -------- -------- --------
Less distributions -
From net investment income ....... $ -- $ (0.0322) $(0.0568) $(0.1306) $(0.1095)
From net realized gain on
investments and foreign
currency transactions .......... (3.5210) (2.8462) (0.6182) (2.5929) (0.9235)
---------- ---------- -------- -------- --------
Total distributions .......... $ (3.5210) $ (2.8784) $(0.6750) $(2.7235) $(1.0330)
========== ========== ======== ======== ========
Net asset value - end of year ...... $ 40,1392 $ 35.8316 $31.9878 $24.4076 $28.1892
Total return** ..................... 23.14% 21.48% 34.46% (3.60)% 18.00%
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA:
Expenses## ....................... 0.78% 0.80% 0.83% 0.83% 0.83%
Net investment income (loss) ..... (0.10)% (0.05)% 0.32% 0.24% 0.48%
PORTFOLIO TURNOVER ................. 68% 67% 89% 52% 70%
Average commission rate### ......... $ 0.0523 $ 0.0463 $ -- $ -- $ --
NET ASSETS, END OF YEAR (000 OMITTED $1,326,240 $1,061,631 $797,102 $476,508 $420,552
</TABLE>
CAPITAL OPPORTUNITIES SERIES
----------------------------
YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1997 1996***
-------- --------
PER SHARE DATA (FOR A SHARE OUTSTANDING
THROUGHOUT EACH YEAR):
Net asset value - beginning of year ............ $11.0055 $10.0000****
-------- --------
Income from investment operations# -
Net investment income(S) ..................... $ 0.1466 $ 0.0916
Net realized and unrealized gain on
investments and foreign currency
transactions ............................... 2.8785 0.9139
-------- --------
Total from investment operations ........... $ 3.0251 $ 1.0055
-------- --------
Less distributions -
From net investment income ................... $(0.0221) $ --
From net realized gain on investments and
foreign currency transactions .............. (0.0746) --
-------- --------
Total distributions ........................ $(0.0967) $ --
-------- --------
Net asset value - end of year .................. $13.9339 $11.0055
======== ========
Total return(+) ................................ 27.57% 10.10%++
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL
DATA(S):
Expenses## ................................... 0.77% 0.60%+
Net investment income ........................ 1.15% 1.75%+
PORTFOLIO TURNOVER ............................. 129% 52%
Average commission rate### ..................... $ 0.0372 $ 0.0228
NET ASSETS, END OF YEAR (000 OMITTED) .......... $ 87,744 $ 16,700
- ----------
**The total return information shown above does not reflect expenses that
apply to the separate accounts established by Sun Life of Canada (U.S.) and
Sun Life (N.Y.). Inclusion of these charges would reduce the total return
figures for all periods shown.
***For the period from the commencement of the Series' investment operations,
June 3, 1996, through December 31, 1996.
****Net asset value on date of commencement of operations.
+Annualized.
++Not annualized.
#Per share data are based on average shares outstanding.
##For fiscal years ending after September 1, 1995, expenses are calculated
without reduction for fees paid indirectly.
###Average commission rate is calculated for fiscal years beginning on or after
September 1, 1995.
(S)The investment adviser voluntarily waived all or a portion of its advisory
fee for the Capital Opportunities Series for the per iods indicated. In
addition, the investment adviser voluntarily agreed to maintain the expenses
of the Capital Opportunities Series at not more than 1.00% of average daily
net assets. If the waivers had not been in place and, to the extent actual
expenses were over these limitations, the net investment income per share
and the ratios would have been:
CAPITAL OPPORTUNITIES SERIES
----------------------------
YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1997 1996***
------------ -----------
Net investment income ......................... $0.1296 $0.0537
RATIOS (TO AVERAGE NET ASSETS):
Expenses## .................................. 0.90% 1.35%+
Net investment income ....................... 1.03% 1.02%+
<PAGE>
FINANCIAL HIGHLIGHTS
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
CONSERVATIVE GROWTH SERIES EMERGING GROWTH SERIES
------------------------------------------------------ ------------------------------------
PERIOD
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, ENDED
------------------------------------------------------- ---------------------- DECEMBER 31,
1997 1996 1995 1994 1993 1997 1996 1995*
---------- -------- -------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR):
Net asset value -
beginning of year ............... $ 26.4978 $22.0182 $16.4563 $16.9289 $16.0717 $14.8305 $12.6867 $10.0000**
---------- -------- -------- -------- ------- -------- -------- --------
Income from investment operations# -
Net investment income
(loss)(S) ..................... $ 0.3714 $ 0.4100 $ 0.4318 $ 0.2942 $0.2041 $(0.0551) $ 0.0175 $ 0.0788
Net realized and unrealized gain
(loss) on investments and
foreign currency transactions . 7.8153 5.0415 5.6172 (0.4790) 1.1280 3.2968 2.1506 2.6079
---------- -------- -------- -------- ------- -------- -------- --------
Total from investment
operations ................ $ 8.1867 $ 5.4515 $ 6.0490 $(0.1848) $1.3321 $ 3.2417 $ 2.1681 $ 2.6867
---------- -------- -------- -------- ------- -------- -------- --------
Less distributions -
From net investment income ...... $ (0.2854) $(0.2936) $(0.3037) $(0.1996) $(0.1509) $(0.0098) $(0.0243) $ --
From net realized gain on
investments and foreign
currency transactions ......... (1.2502) (0.6783) (0.1834) (0.0882) (0.3240) (0.0592) -- --
---------- -------- -------- -------- ------- -------- -------- --------
Total distributions ......... $ (1.5356) $(0.9719) $(0.4871) $(0.2878) $(0.4749) $(0.0690) $(0.0243) $ --
---------- -------- -------- -------- ------- -------- -------- --------
Net asset value - end of year ..... $ 33.1489 $26.4978 $22.0182 $16.4563 $16.9289 $18.0032 $14.8305 $12.6867
========== ======== ======== ======== ======== ======== ======== ========
Total return(+) ................... 31.94% 25.41% 37.41% (1.10)% 8.43% 21.93% 17.15% 26.80%++
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL DATA(S):
Expenses## ...................... 0.61% 0.61% 0.64% 0.64% 0.66% 0.81% 0.70% 0.24%+
Net investment income
(loss) ........................ 1.23% 1.71% 2.25% 2.42% 2.05% (0.33)% 0.12% 1.13%+
PORTFOLIO TURNOVER ................ 52% 51% 60% 146% 19% 109% 88% 28%
Average commission
rate### ........................... $ 0.0563 $ 0.0502 $ -- $ -- $ -- $ 0.0593 $ 0.0346 $ --
NET ASSETS, END OF YEAR
(000 OMITTED) ................... $1,158,135 $571,008 $302,024 $150,318 $95,770 $457,351 $250,826 $ 67,255
- ----------
*For the period from the commencement of the Series' investment operations, May 1, 1995, through December 31, 1995.
**Net asset value on date of commencement of operations.
+Annualized.
++Not annualized.
#Per share data are based on average shares outstanding.
##For fiscal years ending after September 1, 1995, expenses are calculated without reduction for fees paid indirectly.
###Average commission rate is calculated for fiscal years beginning on or after September 1, 1995.
(+)The total return information shown above does not reflect expenses that apply to the separate accounts established by Sun Life
of Canada (U.S.) and Sun Life (N.Y.). Inclusion of these charges would reduce the total return figures for all periods shown.
(S)The investment adviser voluntarily waived all or a portion of its advisory fee for the Emerging Growth Series for the periods
indicated. In the waiver had not been in place, the net investment income (loss) per share and the ratios would have been:
EMERGING GROWTH SERIES
------------------------------------
PERIOD
YEAR ENDED DECEMBER 31, ENDED
---------------------- DECEMBER 31,
1996 1995*
------- --------
<S> <C> <C>
Net asset income (loss) .................................................................... $(0.0406) $0.0265
RATIOS (TO AVERAGE NET ASSETS):
Expenses## ............................................................................... 0.84% 1.00%+
Net investment income (loss) ............................................................. (0.02)% 0.38%+
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
GOVERNMENT SECURITIES SERIES
---------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR):
Net asset value - beginning of year ..................... $12.8672 $13.3900 $12.1219 $13.0951 $13.0059
-------- -------- -------- -------- -------
Income from investment operations# -
Net investment income ................................. $0.8109 $0.8445 $0.8311 $0.6366 $0.5742
Net realized and unrealized gain (loss) on investments
and foreign currency transactions ................... 0.2490 (0.6620) 1.2183 (0.9238) 0.5220
------- ------- ------- ------- -------
Total from investment
operations ...................................... $1.0599 $0.1825 $2.0494 $(0.2872) $1.0962
-------- -------- -------- -------- -------
Less distributions declared to shareholders -
From net investment income ............................ $(0.8865) $(0.7053) $(0.7813) $(0.4959) $(0.6603)
From net realized gain on investments and foreign
currency transactions ............................... -- -- -- (0.1901) (0.3467)
-------- -------- -------- -------- -------
Total distributions declared to shareholders ...... $(0.8865) $(0.7053) $(0.7813) $(0.6860) $(1.0070)
======== ======== ======== ======== ========
Net asset value - end of year ........................... $13.0406 $12.8672 $13.3900 $12.1219 $13.0951
======== ======== ======== ======== ========
Total Return(+) ........................................ 8.72% 1.65% 17.66% (2.21)% 8.70%
RATIO (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses## ........................................... 0.63% 0.63% 0.63% 0.62% 0.63%
Net investment income ................................ 6.38% 6.60% 6.59% 6.01% 5.92%
PORTFOLIO TURNOVER ..................................... 182% 57% 80% 90% 96%
NET ASSETS, END OF YEAR (000 OMITTED) .................. $387,731 $383,107 $368,848 $347,150 $310,521
</TABLE>
<TABLE>
<CAPTION>
HIGH YIELD SERIES
-------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR):
Net asset value - beginning of year ..................... $9.2131 $8.9222 $8.1860 $9.1120 $8.3279
------- ------- ------- ------- -------
Income from investment operations# -
Net investment income ................................. $0.8206 $0.8012 $0.7891 $0.8226 $0.5915
Net realized and unrealized gain (loss) on investments
and foreign currency transactions ....... ........... 0.3319 0.2131 0.5494 (1.0387) 0.8242
------- ------- ------- ------- -------
Total from investment operations .................. $1.1525 $1.0143 $1.3385 $(0.2161) $1.4157
------- ------- ------- ------- -------
Less distributions from net investment income ........... $(0.6548) $(0.7234) $(0.6023) $(0.7099) $(0.6316)
======== ======== ======== ======== ========
Net asset value - end of year ........................... $ 9.7108 $ 9.2131 $ 8.9222 $ 8.1860 $ 9.1120
======== ======== ======== ======== ========
Total Return(+) ........................................ 13.24% 12.12% 16.93% (2.16)% 17.68%
RATIO (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses## ........................................... 0.84% 0.84% 0.87% 0.86% 0.88%
Net investment income ................................ 8.70% 9.01% 9.17% 8.94% 8.76%
PORTFOLIO TURNOVER ..................................... 130% 88% 66% 82% 53%
NET ASSETS, END OF YEAR (000 OMITTED) .................. $275,207 $196,498 $153,800 $102,194 $ 97,884
#Per share data are based on average shares outstanding.
##For fiscal years ending after September 1, 1995, expenses are calculated without reduction for fees paid indirectly.
(+)The total return information shown above does not reflect expenses that apply to the separate accounts established by Sun Life
of Canada (U.S.) and Sun Life (N.Y.).
If the charges had been included, the results would have been lower.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
INTERNATIONAL GROWTH SERIES
----------------------------
YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1997 1996*
----------- ------------
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT
EACH YEAR):
Net asset value - beginning of year .............. $ 9.8213 $10.0000**
-------- --------
Income from investment operations# -
Net investment income(S) ....................... $ 0.1201 $ 0.0748
Net realized and unrealized loss on investments
and foreign currency transactions ............ (0.2747) (0.2535)
-------- --------
Total from investment operations ............. $(0.1546) $(0.1787)
Less distributions from net investment income .... $(0.0187) $ --
-------- --------
Net asset value - end of year .................... $ 9.6480 $ 9.8213
======== ========
Total return(+) .................................. (1.64)% (1.70)%++
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL
DATA(S):
Expenses## ..................................... 1.11% 1.50%+
Net investment income .......................... 1.23% 1.47%+
PORTFOLIO TURNOVER ............................... 261% 3%
Average commission rate .......................... $ 0.0218 $ 0.0252
NET ASSETS, END OF YEAR (000 OMITTED) ............ $ 23,401 $ 5,525
--------
*For the period from the commencement of the Series' investment operations,
June 3, 1996, through December 31, 1996.
**Net asset value on date of commencement of operations.
+Annualized.
++Not annualized.
#Per share data are based on average shares outstanding.
##For fiscal years ending after September 1, 1995, expenses are calculated
without reduction for fees paid indirectly.
(+)The total return information shown above does not reflect expenses that apply
to the separate accounts established by Sun Life of Canada (U.S.) and Sun
Life (N.Y.). Inclusion of these charges would reduce the total return
figures for all years shown.
(S)The investment adviser voluntarily agreed to maintain the expenses of the
International Growth Series at not more than 1.50% of average daily net
assets. In addition, the investment adviser voluntarily waived all or a
portion of its advisory fee for the periods indicated. To the extent actual
expenses were over/under these limitations, the net investment income per
share and the ratios would have been:
INTERNATIONAL GROWTH SERIES
--------------------------
YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1997 1996*
------------ ------------
Net investment income .......................... 0.1036 $ 0.0265
RATIOS (TO AVERAGE NET ASSETS):
Expenses## ................................... 1.28% 2.50%+
Net investment income ........................ 1.06% 0.46%+
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
INTERNATIONAL GROWTH AND
INCOME SERIES
---------------------------------------------------------
YEAR ENDED DECEMBER 31, PERIOD ENDED
------------------------------- DECEMBER 31,
1997 1996 1995**
-------- -------- --------
<S> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR):
Net asset value - beginning of year ........................... $10.6247 $10.1282 $10.0000****
-------- -------- --------
Income from investment operations# -
Net investment income(S) .................................. $ 0.1356 $ 0.2326 $0.0295
Net realized and unrealized gain on
investments and foreign currency
transactions ............................................ 0.5497 0.2639 0.0987
-------- -------- --------
Total from investment operations ........................ $ 0.6853 $ 0.4965 $ 0.1282
-------- -------- --------
Less distributions declared to shareholders -
From net investment income .................................. $(0.1124) $ -- $ --
From net realized gain on investments and
foreign currency transactions ............................. (0.0254) -- --
-------- -------- --------
Total distributions declared to
shareholders .......................................... $(0.1378) $ -- $ --
-------- -------- --------
Net asset value - end of year ................................. $11.1722 $10.6247 $10.1282
======== ======== ========
Total return(+) ............................................... 6.53% 4.84% 1.30%++
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA(S):
Expenses## .................................................. 1.22% 0.97% 1.50%+
Net investment income ....................................... 1.24% 2.21% 1.64%+
PORTFOLIO TURNOVER ............................................ 194% 51% --
--------
Average commission rate### .................................... $ 0.0289 $ 0.0173 $ --
NET ASSETS, END OF YEAR (000 OMITTED) ......................... $ 51,368 $ 35,710 $ 7,179
--------
**For the period from the commencement of the Series' investment operations, October 2, 1995, through December 31, 1995.
****Net asset value on the date of commencement of operations.
+Annualized.
++Not annualized.
#Per share data are based on average shares outstanding.
##Expenses are calculated without reduction for fees paid indirectly.
###Average commission rate is calculated for fiscal years beginning on or after September 1, 1995.
(+)The total return information shown above does not reflect expenses that apply to the separate accounts established by Sun Life
of Canada (U.S.) and Sun Life (N.Y.). Inclusion of these charges would reduce the total return figures for all periods shown.
(S)The investment adviser voluntarily waived all or a portion of its advisory fee for the International Growth and Income Series
for the periods indicated. If these fees had been incurred by the Series, the net investment income per share and the ratios
would have been:
</TABLE>
INTERNATIONAL GROWTH AND
INCOME SERIES
----------------------------
YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1996 1995**
------------ ------------
Net investment income ........................ $0.2101 $0.0119
RATIOS (TO AVERAGE NET ASSETS):
Expenses## ............................... 1.16% 2.48%+
Net investment income .................... 2.02% 0.66%+
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<CAPTION>
MANAGED SECTORS SERIES
--------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING
THROUGHOUT EACH YEAR):
Net asset value - beginning of year ............. $26.2503 $25.4468 $19.8823 $23.2419 $22.3342
-------- -------- -------- -------- --------
Income from investment operations# -
Net investment income (loss) .................. $(0.0597) $ 0.0200 $ 0.0979 $ 0.0982 $ 0.0027
Net realized and unrealized gain
(loss) on investments and foreign
currency transactions ....................... 6.2302 4.2817 6.1880 (0.6610) 0.9050
-------- -------- -------- -------- --------
Total from investment
operations .............................. $ 6.1705 $ 4.3017 $ 6.2859 $(0.5628) $ 0.9077
-------- -------- -------- -------- --------
Less distributions -
From net investment income .................... $(0.0201) $(0.0758) $(0.0542) $(0.0239) $ --
From net realized gain on
investments and foreign currency
transactions ................................ (3.2406) (3.4224) (0.6672) (2.7729) --
-------- -------- -------- -------- --------
Total distributions ....................... $(3.2607) $(3.4982) $(0.7214) $(2.7968) $ --
-------- -------- -------- -------- --------
Net asset value - end of year ................... $29.1601 $26.2503 $25.4468 $19.8823 $23.2419
======== ======== ======== ======== ========
Total return(+) ................................. 25.63% 17.58% 32.29% (1.94)% 4.08%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses## .................................... 0.82% 0.82% 0.84% 0.87% 0.84%
Net investment income (loss) .................. (0.21)% 0.09% 0.42% 0.53% 0.01%
PORTFOLIO TURNOVER .............................. 103% 121% 113% 103% 116%
-------- -------- --------
Average commission rate### ...................... $ 0.0561 $ 0.0475 $ -- $ -- $ $ --
NET ASSETS, END OF YEAR (000 OMITTED) ........... $340,627 $266,368 $194,351 $118,987 $104,964
#Per share data are based on average shares outstanding.
##For fiscal years ending after September 1, 1995, expenses are calculated without reduction for fees paid indirectly.
###Average commission rate is calculated for fiscal years beginning on or after September 1, 1995.
(+)The total return information shown above does not reflect expenses that apply to the separate accounts established by Sun Life
of Canada (U.S.) and Sun Life (N.Y.). Inclusion of these charges would reduce the total return figures for all years shown.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
MFS/FOREIGN & COLONIAL
EMERGING MARKETS EQUITY
SERIES
----------------------------
YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1997 1996*
------------- ------------
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR):
Net asset value - beginning of year ............ $10.0013 $10.0000**
-------- --------
Income from investment operations# -
Net investment income(S) ..................... $ 0.1638 $ 0.0706
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions ............................... 0.8773 (0.0693)
-------- --------
Total from investment operations ......... $ 1.0411 $ 0.0013
-------- --------
Less distributions from net investment income .. $(0.0065) $ --
-------- --------
Net asset value - end of year .................. $11.0359 $10.0013
======== ========
Total return(+) ................................ 10.46% 0.00%++
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA(S):
Expenses## ................................... 1.07% 1.50%+
Net investment income ........................ 1.38% 0.77%+
PORTFOLIO TURNOVER ............................. 69% 4%
Average commission rate ........................ $ 0.0014 $ 0.0011
NET ASSETS, END OF YEAR (000 OMITTED) .......... $ 24,181 $ 3,271
- ----------
*For the period from the commencement of the Series' investment operations,
June 5, 1996, through December 31, 1996.
**Net asset value on the date of commencement of operations.
+Annualized.
++Not annualized.
#Per share data are based on average shares outstanding.
##For fiscal years ending after September 1, 1995, expenses are calculated
without reduction for fees paid indirectly.
(+)The total return information shown above does not reflect expenses that
apply to the separate accounts established by Sun Life of Canada (U.S.) and
Sun Life (N.Y.). Inclusion of these charges would reduce the total return
figures for all years shown.
(S)The investment adviser voluntarily agreed to maintain the expenses of the
MFS/Foreign & Colonial Emerging Markets Equity Series at not more than 1.50%
of average daily net assets. In addition, the investment adviser voluntarily
waived all or a portion of its advisory fee for the periods indicated. To
the extent actual expenses were over these limitations, the net investment
income (loss) per share and the ratios would have been:
MFS/FOREIGN & COLONIAL
EMERGING MARKETS EQUITY
SERIES
----------------------------
YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1997 1996*
----------- -----------
Net investment income (loss) ................. $ 0.1552 $(0.0975)
RATIOS (TO AVERAGE NET ASSETS):
Expenses## ................................. 1.55% 3.38%+
Net investment income (loss) ............... 0.90% (1.12)%+
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
MONEY MARKET SERIES
--------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING
THROUGHOUT EACH YEAR):
Net asset value - beginning of year ............. $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
-------- -------- -------- -------- --------
Income from investment operations# .............. $ 0.0495 $ 0.0483 $ 0.0520 $ 0.0363 $ 0.0256
-------- -------- -------- -------- --------
Less distributions from net investment
income ........................................ $(0.0495) $(0.0483) $(0.0520) $(0.0363) $(0.0256)
-------- -------- -------- -------- --------
Net asset value - end of year ................... $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
======== ======== ======== ======== ========
Total return(+) ................................. 5.06% 4.95% 5.44% 3.69% 2.59%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses## .................................... 0.57% 0.56% 0.59% 0.58% 0.58%
Net investment income ......................... 4.94% 4.82% 5.30% 3.74% 2.60%
NET ASSETS, END OF YEAR (000 OMITTED) ........... $340,060 $409,165 $282,754 $252,175 $142,464
- ----------
#Per share data are based on average shares outstanding.
##For fiscal years ending after September 1, 1995, expenses are calculated without reduction for fees paid indirectly.
(+)The total return information shown above does not reflect expenses that apply to the separate accounts established by Sun Life
of Canada (U.S.) and Sun Life (N.Y.). Inclusion of these charges would reduce the total return figures for all years shown.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
RESEARCH GROWTH
AND INCOME
RESEARCH SERIES SERIES
-------------------------------------------------------------- ---------------
YEAR ENDED DECEMBER 31, PERIOD ENDED PERIOD ENDED
------------------------------------------- DECEMBER 31, DECEMBER 31,
1997 1996 1995 1994* 1997***
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING
THROUGHOUT EACH YEAR):
Net asset value -
beginning of year ............................. $16.5735 $13.5777 $ 9.8761 $10.0000** $10.0000**
-------- -------- -------- -------- --------
Income from investment operations# -
Net investment income(S) ...................... $ 0.0678 $ 0.0797 $ 0.1401 $ 0.0131 $ 0.0821
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 3.3159 3.1330 3.5651 (0.1370) 0.9387
-------- -------- -------- -------- --------
Total from investment operations .......... $ 3.3837 $ 3.2127 $ 3.7052 $(0.1239) $ 1.0208
-------- -------- -------- -------- --------
Less distributions -
From net investment income .................... $(0.0387) $(0.0328) $(0.0036) $ -- $ --
From net realized gain on investments and
foreign currency transactions ............... (0.4872) (0.1841) -- -- --
-------- -------- -------- -------- --------
Total distributions ....................... $(0.5259) $(0.2169) $(0.0036) $ -- $ --
-------- -------- -------- -------- --------
Net asset value - end of year ................... $19.4313 $16.5735 $13.5777 $ 9.8761 $11.0208
======== ======== ======== ======== ========
Total return(+) ................................. 20.86% 23.76% 37.50% (1.20)%++ 10.20%++
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL
DATA(S):
Expenses## .................................... 0.79% 0.84% 0.58% 1.50%+ 1.50%+
Net investment income ......................... 0.37% 0.52% 1.16% 1.80%+ 1.19%+
PORTFOLIO TURNOVER .............................. 79% 70% 81% 3% 29%
Average commission rate### ...................... $ 0.0458 $ 0.0280 $ -- $ -- $ 0.0450
NET ASSETS, END OF YEAR (000 OMITTED) ........... $670,302 $325,389 $ 71,828 $ 3,869 $ 6,540
--------
*For the period from the commencement of the Series' investment operations, November 7, 1994, through December 31, 1994.
**Net asset value on the date of commencement of operations.
***For the period from the commencement of the Series' investment operations, May 13, 1997, through December 31, 1997.
+Annualized.
++Not annualized.
#Per share data are based on average shares outstanding.
##For fiscal years ending after September 1, 1995, expenses are calculated without reduction for fees paid indirectly.
###Average commission rate is calculated for fiscal years beginning on or after September 1, 1995.
(+)The total return information shown above does not reflect expenses that apply to the separate accounts established by Sun Life
of Canada (U.S.) and Sun Life (N.Y.). Inclusion of these charges would reduce the total return figures for all periods shown.
(S)The investment adviser voluntarily waived a portion of its advisory fee for the Research Series for the periods indicated. In
addition, the investment adviser voluntarily agreed to maintain the expenses of the Research Growth and Income Series at not
more than 1.50% of average daily net assets. If the waiver had not been in place and, with respect to the Research Growth and
Income Series, to the extent actual expenses were over these limitations, the net investment income (loss) per share and the
ratios would have been:
</TABLE>
<TABLE>
<CAPTION>
RESEARCH GROWTH
RESEARCH SERIES AND INCOME SERIES
-------------------------------------- -----------------
YEAR ENDED PERIOD ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1994* 1997***
------------ ------------ -----------------
<S> <C> <C> <C>
Net investment income (loss) .............. $0.0954 $(0.0145) $0.0614
RATIOS (TO AVERAGE NET ASSETS):
Expenses## .............................. 0.95% 3.49%+ 1.83%+
Net investment income (loss) ............ 0.79% (0.19%+ 0.84%+
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
TOTAL RETURN SERIES
-------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING
THROUGHOUT EACH YEAR):
Net asset value - beginning of year ............. $ 19.4397 $ 18.3848 $ 15.0862 $16.0946 $14.7219
---------- ---------- ---------- -------- --------
Income from investment operations# -
Net investment income ......................... $ 0.7546 $ 0.7677 $ 0.7824 $ 0.5639 $ 0.4319
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 3.2409 1.6795 3.1527 (0.9310) 1.5044
---------- ---------- ---------- -------- --------
Total from investment operations .......... $ 3.9955 $ 2.4472 $ 3.9351 $(0.3671) $ 1.9363
---------- ---------- ---------- -------- --------
Less distributions -
From net investment income .................... $ (0.7234) $ (0.7189) $ (0.6365) $(0.4344) $(0.4798)
From net realized gain on investments and
foreign currency transactions ............... (1.3945) (0.6734) -- (0.2069) (0.0838)
---------- ---------- ---------- -------- --------
Total distributions ....................... $ (2.1179) $ (1.3923) $ (0.6365) $(0.6413) $(0.5636)
---------- ---------- ---------- -------- --------
Net asset value - end of year ................... $ 21.3173 $ 19.4397 $ 18.3848 $15.0862 $16.0946
========== ========== ========== ======== ========
Total return(+) ................................. 21.98% 14.10% 26.71% (2.22)% 13.37%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses## .................................... 0.71% 0.72% 0.76% 0.76% 0.78%
Net investment income ......................... 3.72% 4.15% 4.70% 4.34% 4.06%
PORTFOLIO TURNOVER .............................. 113% 134% 108% 66% 102%
Average commission rate### ...................... $ 0.0590 $ 0.0539 $ -- $ -- $ --
NET ASSETS, END OF YEAR (000 OMITTED) ........... $1,696,108 $1,335,022 $1,099,887 $839,614 $696,496
- ----------
#Per share data are based on average shares outstanding.
##For fiscal years ending after September 1, 1995, expenses are calculated without reduction for fees paid indirectly.
###Average commission rate is calculated for fiscal years beginning on or after September 1, 1995.
(+)The total return information shown above does not reflect expenses that apply to the separate accounts established by Sun Life
of Canada (U.S.) and Sun Life (N.Y.). Inclusion of these charges would reduce the total return figures for all periods shown.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
UTILITIES SERIES
-------------------------------------------------------------------
YEAR ENDED DECEMBER 31, PERIOD ENDED
-------------------------------------------------- DECEMBER 31,
1997 1996 1995 1994 1993*
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR):
Net asset value -beginning of year .......................... $13.9874 $12.2598 $ 9.5209 $10.0164 $10.0000**
-------- -------- -------- -------- --------
Income from investment operations# -
Net investment income(S) .................................. $ 0.4576 $ 0.5322 $ 0.4918 $ 0.2899 $ 0.0128
Net realized and unrealized gain (loss) on investments and
foreign currency transactions ........................... 3.6873 1.8548 2.5197 (0.7817) 0.0036
-------- -------- -------- -------- --------
Total from investment operations ...................... $ 4.1449 $ 2.3870 $ 3.0115 $(0.4918) $ 0.0164
-------- -------- -------- -------- --------
Less distributions -
From net investment income ................................ $(0.4248) $(0.3160) $(0.2726) $(0.0037) $ --
From net realized gain on investments and foreign currency
transactio ns ........................................... (1.2982) (0.3434) -- -- --
-------- -------- -------- -------- --------
Total distributions .................................. $(1.7230) (0.6594) $(0.2726) $(0.0037) $ --
-------- -------- -------- -------- --------
Net asset value - end of year ............................... $16.4093 $13.9874 $12.2598 $ 9.5209 $10.0164
======== ======== ======== ======== ========
Total return(+) ............................................. 32.71% 20.37% 32.36% (4.96)% 1.59%++
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA(S):
Expenses## ................................................ 0.86% 0.88% 0.44% 0.39% 1.50%+
Net investment income ..................................... 3.15% 4.23% 4.62% 4.59% 2.58%+
PORTFOLIO TURNOVER ........... .............................. 144% 131% 119% 103% --
Average commission rate### .................................. $ 0.0324 $ 0.0435 $ -- $ -- $ --
NET ASSETS, END OF YEAR (000 OMITTED) ....................... $123,008 $ 70,680 $ 43,134 $ 21,448 $ 2,798
- ----------
*For the period from the commencement of the Series' investment operations, November 16, 1993, through December 31, 1993.
**Net asset value on date of commencement of operations.
+Annualized.
++Not annualized.
#Per share data are based on average shares outstanding.
##For fiscal years ending after September 1, 1995, expenses are calculated without reduction for fees paid indirectly.
###Average commission rate is calculated for fiscal years beginning on or after September 1, 1995.
(+)The total return information shown above does not reflect expenses that apply to the separate accounts established by Sun Life
of Canada (U.S.) and Sun Life (N.Y.). Inclusion of these charges would reduce the total return figures for all periods shown.
(S)The investment adviser voluntarily waived all or a portion of its advisory fee for the Utilities Series for the periods
indicated. If the waivers had not been in place and, to the extent actual expenses were over these limitations, the net
investment income (lo
(ss)per share and the ratios would have been:
<CAPTION>
UTILITIES SERIES
--------------------------------------------------------
PERIOD ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31,
------------------------------ ------------
1995 1994 1993*
------- ------- --------
<S> <C> <C> <C>
Net investment income (loss) .................................. $0.4375 $0.2412 $(0.0407)
RATIOS (TO AVERAGE NET ASSETS):
Expenses## .................................................. 0.95% 1.14% 9.71%+
Net investment income (loss) ................................ 4.12% 3.84% (5.63)%+
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
WORLD ASSET ALLOCATION SERIES
------------------------------------------------------------------
YEAR ENDED DECEMBER 31, PERIOD ENDED
-------------------------------------------- DECEMBER 31,
1997 1996 1995 1994*
-------- -------- -------- --------
<S> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR):
Net asset value - beginning of year .................... $13.7794 $12.2250 $10.0579 $10.0000****
-------- -------- -------- --------
Income from investment operations# -
Net investment income(S) ............................. $ 0.4412 $ 0.3731 $ 0.4205 $ 0.0220
Net realized and unrealized gain on investments and
foreign currency transactions ...................... 1.0178 1.5563 1.7540 0.0359
-------- -------- -------- --------
Total from investment operations ................. $ 1.4590 $ 1.9294 $ 2.1745 $ 0.0579
-------- -------- -------- --------
Less distributions declared to shareholders -
From net investment income ........................... $(0.2242) $(0.1300) $(0.0074) $ --
From net realized gain on investments and foreign
currency transactions .............................. (0.4765) (0.2450) -- --
-------- -------- -------- --------
Total distributions declared to shareholders ..... $(0.7007) (0.3750) $(0.0074) $ --
-------- -------- -------- --------
Net asset value - end of year .......................... $14.5377 $13.7794 $12.2250 $10.0579
======== ======== ======== ========
Total return(+) ........................................ 10.87% 16.04% 21.56% 0.60%++
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA(S):
Expenses## ........................................... 0.92% 0.94% 0.67% 1.50%+
Net investment income ................................ 3.06% 2.84% 3.70% 3.13%+
PORTFOLIO TURNOVER ..................................... 162% 154% 146% 2%
Average commission rate### ............................. $ 0.0260 $ 0.0233 $ -- $ --
NET ASSETS, END OF YEAR (000
OMITTED) ............................................... $122,912 $ 77,016 $ 25,863 $ 3,003
- ------------
**For the period from the commencement of the Series' investment operations, November 7, 1994, through December 31, 1994.
***Net asset value on date of commencement of operations.
+Annualized.
++Not annualized.
#Per share data are based on average shares outstanding.
##For fiscal years ending after September 1, 1995, expenses are calculated without reduction for fees paid indirectly.
###Average commission rate is calculated for fiscal years beginning on or after September 1, 1995.
(+)The total return information shown above does not reflect expenses that apply to the separate accounts established by Sun Life
of Canada (U.S.) and Sun Life (N.Y.). Inclusion of these charges would reduce the total return figures for all periods shown.
(S)The investment adviser voluntarily waived all or a portion of its advisory fee for the World Asset Allocation Series for the
periods indicated. If these fees had been incurred by the Series, the net investment income per share and the ratios would have
been:
</TABLE>
WORLD ASSET ALLOCATION SERIES
-----------------------------
YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1995 1994**
------------ ------------
Net investment income ............................ $ 0.3716 $ 0.0041
RATIOS (TO AVERAGE NET ASSETS):
Expenses## ................................... 1.11% 4.05%+
Net investment income ........................ 3.27% 0.58%+
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
WORLD GOVERNMENTS SERIES
-----------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR):
Net asset value - beginning of year ......................... $11.2582 $12.4866 $11.3769 $13.0212 $11.7966
-------- -------- -------- -------- --------
Income from investment operations# -
Net investment income ..................................... $ 0.5770 $ 0.6882 $ 0.8031 $ 0.6095 $ 0.5352
Net realized and unrealized gain (loss) on investments and
foreign currency transactions ........................... (0.6754) (0.2081) 0.9511 (1.2295) 1.5819
-------- -------- -------- -------- --------
Total from investment operations ...................... $(0.0984) $ 0.4801 $ 1.7542 $(0.6200) $ 2.1171
-------- -------- -------- -------- --------
Less distributions declared to shareholders -
From net investment income ................................ $(0.3742) $(1.7085) $(0.0058) $(0.8823) $(0.8925)
From net realized gain on investments and foreign currency
transactions ............................................ (0.0548) -- (0.6387) (0.1420) --
In excess of net realized gain on investments and foreign
currency transactions ................................... (0.0061) -- -- -- --
-------- -------- -------- -------- --------
Total distributions declared to shareholders .......... $(0.4351) $(1.7085) $(0.6445) $(1.0243) $(0.8925)
- ----------------
#Per share data are based on average shares outstanding ....
##For fiscal years ending after September 1, 1995, expenses are calculated without reduction for fees paid indirectly.
(+)The total return information shown above does not reflect expenses that apply to the separate accounts established by Sun Life of
Canada )(U.S.) and Sun Life (N.Y.).
Inclusion of these charges would reduce the total return figures for all periods shown.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
WORLD GROWTH SERIES
-------------------------------------------------------------------
YEAR ENDED DECEMBER 31, PERIOD ENDED
-------------------------------------------------- DECEMBER 31,
1997 1996 1995 1994 1993*
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR):
Net asset value - beginning of year ......................... $13.0338 $12.3464 $10.9425 $10.6366 $10.0000***
-------- -------- -------- -------- --------
Income from investment operations#--
Net investment income(S) .................................. $ 0.0446 $ 0.0232 $ 0.0689 $ 0.1506 $ 0.0088
Net realized and unrealized gain on investments and
foreign currency transactions .......................... 1.9245 1.5878 1.6388 0.1590 0.6278
-------- -------- -------- -------- --------
Total from investment operations ...................... $ 1.9691 $ 1.6110 $ 1.7077 $ 0.3096 $ 0.6366
-------- -------- -------- -------- --------
Less distributions --
From net investment income ................................ $(0.0626) $(0.0886) $(0.1361) $(0.0037) $ --
From net realized gain on investments and foreign currency
transactions ............................................ (0.2559) (0.8350) (0.1677) -- --
-------- -------- -------- -------- --------
Total distributions ................................... $(0.3185) (0.9236) $(0.3038) $(0.0037) $ --
-------- -------- -------- -------- --------
Net asset value -- end of year .............................. $14.6844 $13.0338 $12.3464 $10.9425 $10.6366
======== ======== ======== ======== ========
Total return(+) ............................................. 15.32% 13.02% 16.06% 2.86% 50.78%++
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA(S):
Expenses## ................................................ 1.02% 1.04% 1.07% 0.47% 1.02%+
Net investment income ..................................... 0.31% 0.18% 0.60% 2.20% 1.23%+
PORTFOLIO
TURNOVER .................................................... 105% 81% 162% 231% 2%
Average commission rate### .................................. $ 0.0109 $ 0.0142 $ -- $ -- $ --
NET ASSETS, END OF YEAR (000 OMITTED) ....................... $252,402 $203,106 $146,388 $100,045 $ 18,879
- ------------
*For the period from the commencement of the Series' investment operations, November 16, 1993, through December 31, 1993.
***Net asset value on date of commencement of operations.
+Annualized.
++Not annualized.
#Per share data are based on average shares outstanding.
##For fiscal years ending after September 1, 1995, expenses are calculated without reduction for fees paid indirectly.
###Average commission rate is calculated for fiscal years beginning on or after September 1, 1995.
(+)The total return information shown above does not reflect expenses that apply to the separate accounts established by Sun Life
of Canada (U.S.) and Sun Life (N.Y.). Inclusion of these charges would reduce the total return figures for all periods shown.
(S)The investment adviser voluntarily waived all or a portion of its advisory fee for the World Growth Series for the periods
indicated. If the waivers had not been in place, the net investment income per share and the ratios would have been:
</TABLE>
WORLD GROWTH SERIES
---------------------------
YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1994 1993*
------------ ------------
Net investment income ............................ $ 0.0989 $ 0.0022
RATIOS (TO AVERAGE NET ASSETS):
Expenses## ................................... 1.20% 1.92%+
Net investment income ........................ 1.47% 0.33%+
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
WORLD TOTAL RETURN SERIES
------------------------------------------------------------------
YEAR ENDED DECEMBER 31, PERIOD ENDED
-------------------------------------------- DECEMBER 31,
1997 1996 1995 1994*
-------- -------- -------- --------
<S> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR):
Net asset value - beginning of year .................... $13.2657 $11.8346 $10.0405 $10.0000**
-------- -------- -------- --------
Income from investment operations# -
Net investment income(S) ............................. $ 0.3979 $ 0.4131 $ 0.4437 $ 0.0247
Net realized and unrealized gain on investments and
foreign currency transactions ...................... 1.3759 1.2480 1.3564 0.0158
-------- -------- -------- --------
Total from investment operations ................. $ 1.7738 $ 1.6611 $ 1.8001 $ 0.0405
-------- -------- -------- --------
Less distributions declared to shareholders -
From net investment income ........................... $(0.1756) $(0.2300) $(0.0060) $ --
From net realized gain on investments and foreign
currency transactions .............................. (0.1668) -- -- --
-------- -------- -------- --------
Total distributions declared to shareholders ..... $(0.3424) (0.2300) $(0.0060) $ --
-------- -------- -------- --------
Net asset value - end of year .......................... $14.6971 $13.2657 $11.8346 $10.0405
======== ======== ======== ========
Total return(+) ........................................ 13.61% 14.33% 17.89% 0.40%++
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA(S):
Expenses## ........................................... 1.04% 0.96% 0.77% 1.50%+
Net investment income ................................ 2.85% 3.33% 4.01% 3.31%+
PORTFOLIO TURNOVER ..................................... 171% 148% 146% 1%
Average commission rate### ............................. $ 0.0250 $ 0.0229 $ -- $ --
NET ASSETS AT END OF YEAR (000 OMITTED) ................ $ 71,823 $ 37,638 $ 13,786 $ 1,384
- ------------
*For the period from the commencement of the Series' investment operations, November 7, 1994, through December 31, 1994.
**Net asset value on date of commencement of operations.
+Annualized.
++Not annualized.
#Per share data are based on average shares outstanding.
##For fiscal years ending after September 1, 1995, expenses are calculated without reduction for fees paid indirectly.
###Average commission rate is calculated for fiscal years beginning on or after September 1, 1995.
(+)The total return information shown above does not reflect expenses that apply to the separate accounts established by Sun Life
of Canada (U.S.) and Sun Life (N.Y.). Inclusion of these charges would reduce the total return figures for all periods shown.
(S)The investment adviser voluntarily waived all or a portion of its advisory fee for the World Total Return Series for the periods
indicated.
If these fees had been incurred by the Series, the net investment income (loss) per share and the ratios would have been:
</TABLE>
WORLD TOTAL RETURN SERIES
----------------------------
YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1995 1994*
------------ ------------
Net investment income (loss) ..................... $ 0.3972 $(0.0405)
RATIOS (TO AVERAGE NET ASSETS):
Expenses## ................................... 1.19% 6.93%+
Net investment income (loss) ................. 3.59% (2.12)%+
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
ZERO COUPON SERIES, 2000 PORTFOLIO
----------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR):
Net asset value - beginning of year ......................... $ 8.8822 $ 9.0619 $ 7.9573 $11.1167 $11.0966
-------- -------- -------- -------- --------
Income from investment operations# -
Net investment income(S) .................................. $ 0.4949 $ 0.2094 $ 0.4340 $ 0.3807 $ 0.6921
Net realized and unrealized gain
(loss) on investments and
foreign currency transactions ........................... 0.0896 (0.0528) 1.1038 (1.1094) 0.8997
-------- -------- -------- -------- --------
Total from investment
operations .......................................... $ 0.5845 $ 0.1566 $ 1.5378 $(0.7287) $ 1.5918
-------- -------- -------- -------- --------
Less distributions -
From net investment income ................................ $(0.5571) $(0.3363) $(0.4332) $(0.6250) $(0.8915)
From net realized gain on
investments and foreign currency
transactions ............................................ -- -- -- (1.8057) (0.6802)
-------- -------- -------- -------- --------
Total distributions ................................... $(0.5571) $(0.3363) $(0.4332) $(2.4307) $(1.5717)
- ----------------
#Per share data are based on average shares outstanding.
##For fiscal years ending after September 1, 1995, expenses are calculated without the reduction for fees paid indirectly.
(+)The total return information shown above does not reflect expenses that apply to the separate accounts established by Sun Life of
Canada)(U.S.) and Sun Life (N.Y.). Inclusion of these charges would reduce the total return figures for all periods shown.
(S)The investment adviser voluntarily waived all or a portion of its advisory fee for the Zero Coupon Series, 2000 Portfolio for the
periods)indicated.
If these fees had been incurred by the Series, the net investment income per share and the ratios would have been:
</TABLE>
ZERO COUPON SERIES, 2000 PORTFOLIO
----------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------- -------------------
Net investment income .............. $ 0.4728 $ 0.2045
RATIOS (TO AVERAGE NET ASSETS):
Expenses## ....................... 0.80% 0.62%
Net investment income ............ 5.38% 5.08%
<PAGE>
3. INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and policies of all series of the Series Fund are
discussed below. Any investment involves risk and there can be no assurance
that the investment objectives of any series will be achieved. Shareholder
approval is not required to change the investment objectives of any series or
the manner in which each series seeks to achieve its objectives.
More than one series may invest in the same instruments and employ the same
investment techniques. For convenient reference and to avoid duplication,
descriptions of most of the instruments and techniques are centralized and
arranged in alphabetical order in Appendix A ("Certain Securities, Investment
Techniques and Risks") to this Prospectus. A description of ratings by
Standard & Poor's Ratings Services ("S&P"), Fitch IBCA ("Fitch"), Duff &
Phelps Credit Rating Co. ("Duff & Phelps") and Moody's Investors Service, Inc.
("Moody's") used to evaluate commercial paper, bonds and debt is provided in
Appendix B. More information concerning instruments and investment techniques
can be found in the Appendix to the SAI (the "SAI Appendix"). THESE APPENDICES
PROVIDE IMPORTANT INFORMATION CONCERNING THE RISKS INVOLVED IN INVESTING IN A
PARTICULAR SERIES. WE URGE YOU TO REVIEW THEM BEFORE MAKING YOUR INVESTMENT
DECISION.
(1) BOND SERIES
The Bond Series will primarily seek to provide as high a level of current
income as is believed to be consistent with prudent investment risk; its
secondary objective is to seek to protect shareholder's capital.
The Bond Series seeks to achieve its investment objective by investing, under
normal market conditions, at least 65% of its total assets in:
(1) convertible and non-convertible debt securities and preferred stocks;
(2) debt securities issued or guaranteed by the United States ("U.S.")
Government or its agencies, authorities or instrumentalities ("U.S.
Government Securities");
(3) commercial paper, repurchase agreements and cash or cash equivalents
(such as certificates of deposit and bankers' acceptances).
U.S. Government Securities also include interests in trusts or other entities
representing interests in obligations that are issued or guaranteed by the
U.S. Government, its agencies, authorities or instrumentalities.
Not more than 20% of the Bond Series' net assets will be invested in
convertible and non-convertible securities rated below the four highest grades
of S&P, Fitch, Duff & Phelps (AAA, AA, A or BBB) or Moody's (Aaa, Aa or Baa)
and comparable unrated securities. For a description of these ratings see
Appendix B to this Prospectus. For a discussion of the risks of investing in
these securities see "Lower Rated Fixed Income Securities" in Appendix A.
Although the Bond Series may purchase Canadian and other foreign securities
including emerging market securities and Brady Bonds, under normal market
conditions, it may not invest more than 10% of its assets in non-dollar
denominated non-Canadian foreign securities. In addition, the Bond Series may
enter into forward foreign currency exchange contracts ("Forward Contracts")
for hedging purposes.
Consistent with its investment objectives and policies as described above, the
Bond Series may also invest in (1) corporate asset-backed securities; (2)
mortgage pass-through securities; (3) stripped mortgage-backed securities; (4)
fixed income securities which include zero coupon bonds, deferred interest
bonds and bonds on which the interest is payable in kind ("PIK bonds"); (5)
collateralized mortgage obligations ("CMOs") and multi-class pass through
securities; (6) mortgage "dollar roll" transactions; (7) repurchase agreements
in order to earn income on available cash or as a temporary defensive measure;
(8) "when issued" securities; (9) indexed securities; and (10) restricted
securities, subject to the series' 15% limitation on investments in illiquid
investments.
The Bond Series may not directly purchase common stocks. However, the Bond
Series may retain up to 10% of its total assets in common stocks which were
acquired either by conversion of fixed income securities or by the exercise of
warrants attached thereto.
The Bond Series intends to write (sell) "covered" put and call options and
purchase put and call options on domestic and foreign fixed income securities
as well as on foreign currencies. In addition, the Series may purchase and
sell futures contracts on foreign and domestic fixed income securities or
indexes of such securities, including municipal bond indexes and any other
indexes of foreign or domestic fixed income securities which may become
available for trading. The Bond Series may also purchase and write options on
such futures contracts. The Bond series may seek to increase its income by
lending portfolio securities and may engage in swaps and related transactions.
See Appendix A for a discussion of foreign securities, emerging market
securities and other instruments set forth above and the risks involved in
these investments. Options, futures contracts, options on futures contracts,
forward contracts and other investment techniques and their attendant risks
are also discussed in Appendix A. Please refer to the SAI Appendix for further
discussion of these techniques.
(2) CAPITAL APPRECIATION SERIES
The Capital Appreciation Series will seek to maximize capital appreciation by
investing in securities of all types with a major emphasis on common stocks.
The Capital Appreciation Series seeks to achieve this objective by maintaining
a flexible approach toward the type of securities and the relative
attractiveness of the various securities markets. Securities are selected
based upon their potential for capital appreciation. Income is not a
significant factor in portfolio selection.
While the Capital Appreciation Series usually will invest primarily in common
stocks, the series will also seek capital appreciation in other types of
securities, including fixed-income securities, convertible bonds, preferred
stocks and warrants when they appear attractive for capital appreciation. The
Capital Appreciation Series may hold part or all of its assets in cash or
short-term obligations or other forms of debt securities for temporary
defensive purposes or as a reserve for future purchases. The Capital
Appreciation Series may enter into futures contracts and options on futures
contracts for hedging purposes, and may write covered call and put options and
purchase call and put options on securities and stock indexes in an effort to
increase current income and for hedging purposes.
The Capital Appreciation Series may invest up to 50% (and generally expects to
invest between 5% and 15%) of its total assets in foreign securities, which
may include emerging market securities, may invest in American Depositary
Receipts ("ADRs") and may enter into forward foreign currency exchange
contracts ("forward contracts") for the purchase or sale of foreign currency
for hedging purposes. The series may invest in restricted securities, subject
to the limitation on investing more than 10% of its net assets in securities
that are not readily marketable.
The Capital Appreciation Series is focused on growth companies and may be
subject to fluctuations in the value of its shares during periods of stock
market volatility. The series involves the assumption of a higher degree of
risk as compared to a conservative equity fund. While it is not the series'
policy generally to invest or trade for short-term profits, portfolio
securities may be disposed of without regard to the length of time held
whenever the Adviser is of the opinion that a security no longer has an
appropriate appreciation potential or has reached its anticipated level of
performance, or when another security appears to offer relatively greater
appreciation potential or a relatively greater anticipated level of
performance. The rate of portfolio turnover is not a limiting factor when
changes are appropriate. Higher levels of portfolio activity result in higher
brokerage commissions.
See Appendix A for a discussion of restricted securities, foreign securities
and emerging market securities and the risks involved in these investments.
Options, futures contracts, options on futures contracts and forward contracts
and their attendant risks are also discussed in Appendix A. Please refer to
the SAI Appendix for further discussion of these techniques.
(3) CAPITAL OPPORTUNITIES SERIES
The Capital Opportunities Series will seek capital appreciation. Dividend
income, if any, is a consideration incidental to the series' objective of
capital appreciation.
While the Capital Opportunities Series' policy is to invest primarily in
common stocks, it may seek appreciation in other types of securities such as
fixed income securities (which may be unrated), convertible bonds, convertible
preferred stocks and warrants when relative values make such purchases appear
attractive either as individual issues or as types of securities in certain
economic environments. The series may invest in income securities rated lower
than "investment grade" (investment grade securities are rated at least Baa by
Moody's or BBB by S&P, Fitch or Duff & Phelps), or in comparable unrated
securities, when, in the opinion of the Adviser, such an investment presents a
greater opportunity for appreciation with comparable risk to an investment in
"investment grade" securities. Under normal market conditions, the series will
invest not more than 25% of its net assets in these securities. Such lower
rated or unrated fixed income securities may have speculative risk
characteristics (see "Lower Rated Securities" in Appendix A). Fixed income
securities that the Capital Opportunities Series may invest in also include
zero coupon bonds, deferred interest bonds and PIK bonds. There is no formula
as to the percentage of assets that may be invested in any one type of
security. Cash, commercial paper, short-term obligations, repurchase
agreements or debt securities are held to provide a reserve for future
purchases of common stock or other securities and may also be held as a
temporary defensive measure when the Adviser determines security markets to be
overvalued.
The Capital Opportunities Series may invest up to 25% (and generally expects
to invest between 10% and 25%) of its total assets in foreign securities,
which may include emerging market securities and Brady Bonds. The series may
also invest a portion of its assets in loans, loan participations or other
direct indebtedness.
In order to achieve its investment objective, the Capital Opportunities Series
may also purchase the securities and employ the investment techniques
described below: (1) entering into repurchase agreements; (2) lending
portfolio securities; (3) purchasing securities on a "when issued" or "forward
delivery" basis; (4) purchasing restricted securities, subject to the
limitation on investing more than 15% of its net assets in securities that are
not readily marketable; (5) purchasing ADRs; (6) writing (selling) covered put
and call options on securities for the purpose of increasing its return and/or
to protect the value of its portfolio, and purchasing put and call options on
securities in anticipation of declines in the value of portfolio securities or
increases in the value of securities to be acquired (the series may also write
combinations of put and call options on the same security, known as
"straddles," which transactions can generate additional income, but also
present increased risks); (7) entering into "yield curve" options for hedging
and nonhedging purposes; (8) entering into stock index and foreign currency
futures contracts for hedging purposes (to protect the series' current or
intended investments from the effects of changes in interest or exchange
rates, or declines in the value of portfolio securities or increases in the
cost of such securities to be acquired) as well as for non-hedging purposes,
to the extent permitted by applicable law (which involves greater risks and
could result in losses which are not offset by gains and other portfolio
assets); (9) purchasing and writing options on futures contracts for the
purpose of protecting against declines in the value of portfolio securities or
against increases in the cost of securities to be acquired and also for non-
hedging purposes, to the extent permitted by applicable law; (10) entering
into forward foreign currency exchange contracts ("forward contracts") for
hedging purposes as well as for the non-hedging purpose of increasing current
income; (11) purchasing and selling options on foreign currencies for the
purpose of protecting against declines in the dollar value of portfolio
securities and against increases in the dollar cost of securities to be
acquired; (12) writing covered call and put options and purchasing call and
put options on stock indexes for the purpose of increasing its current income
and/or for hedging purposes and to attempt to reduce the risk of missing a
market or industry segment advance; and (13) investing in indexed securities
the value of which is linked to foreign currencies, precious metals, interest
rates, commodities, indexes or other financial indicators.
The Capital Opportunities Series is designed for purchasers who understand and
are willing to accept the risks inherent in seeking capital appreciation.
The Capital Opportunities Series' portfolio is aggressively managed. Portfolio
changes are made without regard to the length of time a security has been
held, or whether a sale would result in profit or loss. Therefore, the rate of
portfolio turnover is not a limiting factor when appropriate.
See Appendix A for discussion of foreign securities, emerging market
securities, Brady Bonds, ADRs, zero coupon bonds, deferred interest bonds and
PIK bonds, restricted securities, loans and loan participations, and other
instruments set forth above, and the risks involved in these securities. The
investment techniques set forth above and their attendant risks are also
discussed in Appendix A. Please refer to the SAI Appendix for further
discussion of these instruments and techniques.
(4) CONSERVATIVE GROWTH SERIES
The Conservative Growth Series will seek long-term growth of capital and
future income, while providing more current dividend income than is normally
obtainable from a portfolio of only growth stocks. The Conservative Growth
Series seeks to achieve this objective by investing a substantial proportion
of its assets in the common stocks or securities convertible into common
stocks of companies believed to possess better than average prospects for
long-term growth. A smaller proportion of the assets may be invested in bonds,
short-term obligations, preferred stocks or common stocks whose principle
characteristic is income production rather than growth. Such securities may
also offer opportunities for growth of capital as well as income. In the case
of both growth stocks and income issues, emphasis is placed on the selection
of progressive, well-managed companies. Most of the non-convertible long-term
debt investments of the Conservative Growth Series, if any, will consist of
"investment grade" securities (rated Baa or better by Moody's or BBB or better
by S&P, Fitch or Duff & Phelps). (See Appendix B.) The Conservative Growth
Series may enter into repurchase agreements for U.S. Government Securities,
may seek to increase its income by lending its portfolio securities, to the
extent consistent with present regulatory policies, and may invest up to 35%
(and generally expects to invest between 0% and 15%) of its total assets in
foreign securities, which may include emerging market securities. From time to
time, the Adviser will exercise its judgment with respect to the proportions
invested in growth stocks, income-producing securities or cash and cash
equivalents depending on its view of their relative attractiveness. The series
may invest in restricted securities, subject to the limitation on investing
more than 10% of its net assets in securities that are not readily marketable.
Since shares of the Conservative Growth Series represent an investment in
securities with fluctuating market prices, shareholders should understand that
the value of their shares will vary as the aggregate value of the portfolio
securities of the Conservative Growth Series increases or decreases. Moreover,
any dividend the Conservative Growth Series pays will increase or decrease in
relation to the income received from its investments. The Conservative Growth
Series does not intend to trade in securities for short-term profits. However,
the Conservative Growth Series will trade whenever it believes that changes
are appropriate.
See Appendix A for a discussion of restricted securities, repurchase
agreements, foreign securities and emerging market securities, and the risks
involved in these investments. Securities lending transactions and the
attendant risks are also discussed in Appendix A.
(5) EMERGING GROWTH SERIES
The Emerging Growth Series will seek to provide long-term growth of capital.
Dividend and interest income from portfolio securities, if any, is incidental
to the series' investment objective of long-term growth of capital.
The series' policy is to invest primarily (i.e., at least 80% of its assets
under normal circumstances) in common stocks of companies that the Adviser
believes are early in their life cycle but which have the potential to become
major enterprises ("emerging growth companies"). These companies generally
would be expected to show earnings growth over time that is well above the
growth rate of the overall economy and the rate of inflation, and would have
the products, technologies, management and market and other opportunities
which are usually necessary to become more widely recognized as growth
companies. Emerging growth companies can be of any size, and may include
larger and more established companies whose rates of earnings growth are
expected to accelerate because of special factors, such as rejuvenated
management, new products, changes in consumer demand, or basic changes in the
economic environment. Investments in emerging growth companies may include, to
a limited extent, restricted securities of companies which are believed to
have significant growth potential. These securities may be considered
speculative and may not be readily marketable.
The nature of investing in emerging growth companies involves greater risk
than is customarily associated with investments in more established companies.
Emerging growth companies often have limited product lines, markets or
financial resources, and they may be dependent on one-person management. In
addition, there may be less research available on many promising small and
medium sized emerging growth companies, making it more difficult to find and
analyze these companies. The securities of emerging growth companies may have
limited marketability and may be subject to more abrupt or erratic market
movements than securities of larger, more established growth companies or the
market averages in general. Similarly, many of the securities offering the
capital appreciation sought in making these investments will involve a higher
degree of risk than would established growth stocks. Shares of the series,
therefore, are subject to greater fluctuation in value than shares of a
conservative equity fund or of a growth fund which invests entirely in proven
growth stocks.
While the Emerging Growth Series will invest primarily in common stocks, the
series may, to a limited extent, seek appreciation in other types of
securities such as fixed income securities, convertible securities and
warrants when relative values make such purchases appear attractive either as
individual issues or as types of securities in certain economic environments.
The series may invest in fixed income securities rated BBB by S&P, Fitch or
Duff & Phelps or Baa by Moody's and may invest up to 25% of its net assets in
lower rated fixed income securities or comparable unrated securities (commonly
known as "junk bonds"). (See Appendix B; see also "Lower Rated Securities" in
Appendix A.)
The series may invest up to 25% (and generally expects to invest between 0%
and 10%) of its total assets in foreign securities (including emerging markets
securities), and may invest in ADRs. The series may also invest in corporate
asset-backed securities, loan participations, repurchase agreements and
restricted securities.
The Emerging Growth Series may hold part or all of its assets in cash or
short-term obligations for temporary defensive purposes, as a reserve for
future purchases, or to meet liquidity needs. During periods of unusual market
conditions when the Adviser believes that investing for defensive purposes is
appropriate, or in order to meet anticipated redemption requests, a large
portion or all of the assets of the series may be invested in cash or cash
equivalents including, but not limited to, obligations of banks (including
certificates of deposit, bankers' acceptances and repurchase agreements) with
assets of $1 billion or more, commercial paper, short-term notes, obligations
issued or guaranteed by the U.S. Government or any of its agencies,
authorities or instrumentalities and related repurchase agreements. For these
purposes, U.S. Government securities also include interests in trusts or other
entities representing interests in obligations that are issued or guaranteed
by the U.S. Government, its agencies, authorities or instrumentalities.
In order to achieve its investment objective, the Emerging Growth Series may
employ the investment techniques described below: (1) lending portfolio
securities; (2) purchasing securities on a "when-issued" or on a "forward
delivery" basis; (3) writing (selling) covered put and call options on
securities for the purpose of increasing its return and/or to protect the
value of its portfolio, and purchasing put and call options on securities in
anticipation of declines in the value of portfolio securities or increases in
the value of securities to be acquired (the series may also write combinations
of put and call options on the security, know as "straddles," which
transactions can generate additional income, but also present increased
risks); (4) writing covered call and put options and purchasing call and put
options on domestic and foreign stock indexes for the purpose of increasing
its current income and/or for hedging purposes and to attempt to reduce the
risk of missing a market or industry segment advance; (5) entering into
contracts for the purchase or sale for future delivery of fixed income
securities or foreign currencies or contracts based on indexes of securities
or currencies (including any index of U.S. or foreign securities) as such
instruments become available for trading ("futures contracts"), for hedging
purposes (to protect the series' current or intended investments from the
effects of changes in interest or exchange rates or declines in a securities
market) as well as for non-hedging purposes, to the extent permitted by law
(which involves greater risks and could result in losses which are not offset
by gains and other portfolio assets); (6) entering into forward foreign
currency exchange contracts ("forward contracts") for hedging purposes as well
as non-hedging purposes; and (7) purchasing and selling options on foreign
currencies for the purpose of protecting against declines in the dollar value
of foreign portfolio securities and against increases in the dollar cost of
securities to be acquired.
The portfolio of the series is aggressively managed and, therefore, the value
of its shares is subject to greater fluctuation and investments in its shares
involve the assumption of a higher degree of risk than would be the case with
an investment in a conservative equity fund or a growth fund investing
entirely in proven growth equities.
While it is not generally the series' policy to invest or trade for short-term
profits, the series may dispose of a portfolio security whenever the Adviser
is of the opinion that such security no longer has an appropriate appreciation
potential or when another security appears to offer relatively greater
appreciation potential.
See Appendix A for a discussion of foreign securities, U.S. Government
Securities, corporate asset-backed securities, loan participations, repurchase
agreements and restricted securities and the risks involved in these
investments. The investment techniques set forth above and their attendant
risks are also discussed in Appendix A. Please refer to the SAI Appendix for
further discussion of some of these instruments and techniques.
(6) EQUITY INCOME SERIES
The Equity Income Series will primarily seek reasonable income by investing
mainly in income-producing securities; its secondary objective is to seek
capital appreciation.
Under normal market conditions, the Equity Income Series invests at least 65%
of its total assets in income producing equity securities. The Equity Income
Series seeks to achieve a gross yield that exceeds that of the Standard &
Poor's 500 Stock Index (the "S&P 500"). The Equity Income Series may also
invest up to 35% of its total assets in fixed income securities, including up
to 20% of its net assets in fixed income securities rated BB or lower by S&P,
Fitch, or Duff & Phelps or Ba or lower by Moody's, or, if unrated, determined
to be of equivalent quality by the Advisor (commonly referred to as "junk
bonds"). For a description of these ratings, see Appendix B to this
Prospectus. For a discussion of the risks of investing in these securities,
see "Lower Rated Bonds" in Appendix A.
Consistent with its investment objectives and policies described above, the
Equity Income Series may also invest up to 35% (and generally expects to
invest between 5% and 25%) of its net assets in foreign equity and fixed
income securities, not traded on a U.S. exchange, which may include emerging
market securities and Brady Bonds (not including ADRs).
In order to achieve its investment objectives, the Equity Income Series may
invest in the following securities and employ the following investment
techniques: (1) lending portfolio securities; (2) entering into repurchase
agreements; (3) purchasing "when issued" or "forward delivery" securities; (4)
investing in U.S. government securities, cash (including foreign currency) and
cash equivalents for temporary defensive purposes; (5) investing in securities
of emerging growth companies as well as foreign growth securities; (6)
entering into mortgage "dollar roll" transactions; (7) entering into swaps and
related transactions; (8) investing in indexed securities; (9) CMOs and
multiclass pass-through securities, mortgage pass-through securities as well
as stripped mortgage-backed securities and corporate asset-backed securities;
(10) investing in zero coupon bonds, deferred interest bonds and PIK bonds as
well as investing a portion of its assets in loans and other direct
indebtedness; (11) writing (selling) covered put and call options and
purchasing put and call options on securities, securities indexes and foreign
currencies as well as "yield curve" options; (12) purchasing and selling
futures contracts on stock indexes, foreign currencies or indexes of foreign
currencies and may purchase and write options on such futures contracts; and
(13) entering into forward foreign currency exchange contracts for the
purchase or sale of a fixed quantity of a foreign currency at a future date at
a price set at the time of the contract ("forward contracts").
See Appendix A for a discussion of foreign securities, emerging market
securities and other instruments set forth above and the risks involved in
these investments. Options, futures contracts, options on futures contracts,
forward contracts and other investment techniques and their attendant risks
are also discussed in Appendix A. Please refer to the SAI Appendix for further
discussion of these techniques.
(7) GOVERNMENT SECURITIES SERIES
The Government Securities Series will seek current income and preservation of
capital by investing in debt obligations that are issued or guaranteed as to
principal and interest by the U.S. Government, its agencies, authorities or
instrumentalities ("U.S. Government Securities") and obligations that are
fully collateralized or otherwise fully backed by U.S. Government securities
("U.S. Government-related Securities"), including CMOs and government backed
trust certificates ("GBTs"). The series may invest a significant portion of
its assets in Government National Mortgage Association ("GNMA") certificates
and other mortgage pass-through securities. The series may also engage in
transactions involving options, futures contracts and options on futures
contracts as a hedge against anticipated future changes in interest rates that
otherwise might adversely affect the value of its portfolio of securities and
may enter into mortgage "dollar roll" transactions. The Government Securities
Series may also hold part or all of its assets in cash or in short-term U.S.
Government debt securities and related repurchase agreements for temporary
defensive purposes or as a buying reserve.
GBTs and certain CMOs and other U.S. Government-related Securities are issued
by private entities, are not U.S. Government Securities and are not directly
guaranteed by any government agency. They are secured by the underlying
collateral held by the private issuer. Certain of these securities may have
variable or floating interest rates and others may be stripped (securities
which provide only the principal or interest feature of the underlying
security). The series intends to invest in privately issued CMOs only if they
are rated at the time of purchase in the two highest ratings by nationally
recognized rating agencies (see Appendix B).
Some U.S. Government Securities and U.S. Government-related Securities do not
generally involve the credit risks associated with other types of interest
bearing securities, although, as a result, yields available from these
securities are generally lower than the yields available from corporate
interest bearing securities. Like other interest bearing securities, however,
the values of U.S. Government Securities and U.S. Government-related
Securities change as interest rates fluctuate. Therefore, when interest rates
decline the market value of a portfolio invested at higher yields can be
expected to rise. Conversely, when interest rates rise the market value of a
portfolio invested at lower yields can be expected to decline. Therefore, the
Government Securities Series will engage in portfolio trading to take
advantage of market developments and yield disparities, e.g., shortening the
average maturity of the portfolio in anticipation of a rise in interest rates
so as to minimize depreciation of principal or lengthening the average
maturity of the portfolio in anticipation of a decline in interest rates so as
to maximize the appreciation of principal.
See Appendix A for a discussion of U.S. Government Securities, CMOs, GBTs,
mortgage pass-through securities, repurchase agreements, and other instruments
set forth above, and the risks involved in these investments. Options, futures
contracts, options on futures contracts, and mortgage "dollar roll"
transactions and their attendant risks are also discussed in Appendix A.
Please refer to the SAI Appendix for further discussion of these techniques.
(8) HIGH YIELD SERIES
The High Yield Series will seek high current income and capital appreciation
by investing primarily in certain low-rated or unrated fixed income securities
(possibly with equity features) of U.S. and foreign issuers. These securities
may be denominated in U.S. dollars or foreign currencies. Securities offering
the high current income sought by the High Yield Series are ordinarily in the
lower rated categories of recognized rating agencies (that is, rated BBB or
lower by S&P, Fitch or Duff & Phelps or Baa or lower by Moody's) or are
unrated and may involve greater volatility of price and risk of principal and
income than securities in the higher rated categories (see Appendix B). In
particular, securities rated BBB by S&P, Fitch or Duff & Phelps or Baa by
Moody's (and comparable unrated securities) are considered to have speculative
characteristics while securities rated lower than BBB by S&P, Fitch or Duff &
Phelps or Baa by Moody's (and comparable unrated securities) (commonly known
as "junk bonds") are considered speculative. The series may invest up to 100%
of its net assets in such securities. The series' achievement of its
investment objectives may be more dependent on the Adviser's own credit
analysis than it would be in the case of a fund or series investing primarily
in higher quality bonds. (See "Lower Rated Securities" in Appendix A for a
further description of the risks associated with investing in these
securities; see Appendix C for a chart indicating the composition of the High
Yield Series' portfolio for the fiscal year ended December 31, 1997, with the
debt securities separated into rating categories and comparable unrated
securities.)
Fixed income securities include preferred and preference stocks and all types
of debt obligations of both domestic and foreign corporate and government
issuers, such as bonds, debentures, notes, repurchase agreements, equipment
lease contracts, loan participations, corporate asset-backed securities,
commercial paper, and obligations issued or guaranteed by the U.S. Government,
any foreign government or any of their respective political subdivisions,
agencies or instrumentalities (including obligations secured by such
instruments). The High Yield Series may also enter into mortgage "dollar roll"
transactions.
Corporate debt securities may bear fixed, fixed and contingent, or variable
rates of interest and may involve equity features, such as: conversion or
exchange rights or warrants for the acquisition of stock of the same or a
different issuer; participations based on revenues, sales or profits; or the
purchase of common stock in a unit transaction (where corporate debt
securities and common stock are offered as a unit). Under normal market
conditions, no more than 25% of the value of the High Yield Series' total
assets will be invested in equity securities, including common stock, warrants
and stock subscription rights, but excluding convertible debt securities.
The fixed income securities in which the High Yield Series may invest also
include zero coupon bonds, deferred interest bonds, PIK Bonds and, to the
extent permitted by its investment restrictions (see "Investment Restrictions"
in the SAI) collateralized mortgage obligations, multi-class pass-through
securities, stripped mortgage-backed securities, and interests in trusts or
other entities representing interests in fixed-income securities or holding
fixed income securities in amounts sufficient to cover all payments due from
such entities. The High Yield Series may purchase securities on a "when-
issued" basis. The series may also invest up to 50% (and generally expects to
invest between 5% and 20%) of its total assets in foreign securities, which
may include emerging market securities and Brady Bonds, and may invest in
ADRs. The series may invest in restricted securities, subject to the
limitation on investing more than 10% of its net assets in securities that are
not readily marketable.
In seeking to achieve its objectives and lessen risks, the High Yield Series
will engage in portfolio trading to take advantage of market developments and
yield disparities and will utilize credit analysis of the issues in which it
invests and evaluation of changes and trends in the world economies and
international financial markets. The High Yield Series is aggressively managed
and, thus, is subject to greater fluctuations in the value of its shares and
involves the assumption of a higher degree of risk as compared to a
conservative income fund.
See Appendix A for a discussion of foreign securities, emerging market
securities, Brady Bonds, loan participations, restricted securities and other
instruments set forth above, and the risks involved in these investments.
"When-issued" securities transactions and mortgage "dollar roll" transactions
and their attendant risks are also discussed in Appendix A. Please refer to
the SAI Appendix for a further discussion of some of these instruments and
techniques.
(9) INTERNATIONAL GROWTH SERIES
The International Growth Series will seek capital appreciation. The series
seeks to achieve its objective by investing, under normal market conditions,
at least 65% of its total assets in equity securities of companies whose
principal activities are outside the U.S. and which are growing at rates
expected to be well above the growth rate of the overall U.S. economy. The
foreign growth securities in which the series may invest include securities of
more established companies which represent opportunities for long-term growth.
See "Foreign Growth Securities," in Appendix A. The selection of securities is
made solely on the basis of potential for capital appreciation. Dividend and
interest income from portfolio securities, if any, is incidental to the
series' investment objective of capital appreciation.
The series may invest up to 25% of its net assets in securities of issuers
whose principal activities are located in emerging market countries. See
"Emerging Market Securities" in Appendix A.
While the series intends to invest primarily in equity securities, the series
may also invest up to 35% of its net assets (and generally expects to invest
not more than 20% of its net assets) in fixed income securities of government,
government-related, supranational and corporate issuers whose principal
activities are outside the U.S., including up to 10% of its net assets in
fixed income securities rated Ba or lower by Moody's or BB or lower by S&P,
Fitch or Duff & Phelps and comparable unrated securities. See "Lower Rated
Fixed Income Securities" in Appendix A. The Adviser and Sub-Advisers consider
a variety of factors in selecting fixed income securities to achieve capital
appreciation, including the creditworthiness of issuers, interest rates and
currency exchange rates.
The International Growth Series does not intend to emphasize any particular
country or region in making its investments, but under normal market
conditions, the series will be invested in at least three countries (outside
the U.S.) and will not invest more than 50% of its net assets in issuers whose
principal activities are located in a single country. Currently, the series
does not expect to invest more than 25% of its net assets in issuers whose
principal activities are located in a single country, except that the series
generally expects to invest between 15% and 45% of its assets in issuers whose
principal activities are in Japan. The series will seek to reduce risk by
investing its assets in a number of markets and issuers, performing credit
analyses or potential investments and monitoring current developments and
trends in both the international economy and financial markets.
The International Growth Series may invest in all types of equity securities,
including the following: common stocks, preferred stocks and preference
stocks; securities such as bonds, warrants or rights that are convertible into
stocks; and depository receipts for those securities. These securities may be
listed on securities exchanges, traded in various over-the-counter markets or
have no organized market.
For temporary defensive reasons, such as during times of international
political or economic uncertainty or turmoil, most or all of the International
Growth Series' investments may be in cash (U.S. dollars, foreign currencies or
multinational currency units) and/or securities that are denominated in U.S.
dollars or whose issuers are domiciled in the U.S. The series is not
restricted as to portions of its assets which may be invested in securities
denominated in a particular currency and up to 100% of the series' net assets
may be invested in securities denominated in foreign currencies and
multinational currency units.
The Adviser and the Sub-Advisers determine where an issuer's principal
activities are located by considering such factors as its country of
organization, the principal trading market for its securities and the source
of its revenues and location of its assets. The issuer's principal activities
are generally deemed to be located in a particular country if: (a) the
securities are issued or guaranteed by the government of that country or any
of its agencies, authorities or instrumentalities; (b) the issuer is organized
under the laws of, and maintains a principal office in, that country; (c) the
issuer has its principal securities trading market in that country; (d) the
issuer derives 50% or more of its total revenues from goods sold or services
performed in that country; or (e) the issuer has 50% or more of its assets in
that country.
The series may allocate all or a portion of its investment in emerging market
securities among the emerging markets of Latin America, Asia, Africa, the
Middle East and the developing countries of Europe, primarily in Eastern
Europe. The series will allocate its investments among these emerging markets
in accordance with the Adviser's and Sub-Advisers' determination as to the
allocation most appropriate with respect to the series' investment objective
and policies. The series may invest its assets allocated for investment in
emerging markets without limitation in any particular region, and, in
accordance with the Adviser's and the Sub-Advisers' investment discretion, at
times may invest all of its assets allocated for investment in emerging
markets in securities of emerging market issuers located in a single region
(e.g., Latin America). To the extent that the series' investments are
concentrated in one or a few emerging market regions, the series' investment
performance correspondingly will be more dependent upon the economic,
political and social conditions and changes in those regions. The ability of
the series to allocate its investments among emerging market regions without
restriction may have the effect of increasing the volatility of the series, as
compared to a series which limits such allocations.
The series will seek to reduce risk by investing its assets in a number of
markets and issuers. However, the series may invest up to 50% of its net
assets in issuers located in a single country. To the extent that the series
invests a significant portion of its assets in a single or limited number of
countries, the series' investment performance correspondingly will be more
dependent up on the economic, political and social conditions and changes in
that country or countries, and the risks associated with investments in such
country or countries will be particularly significant. The ability of the
Series to focus its investments in one or a limited number of countries may
have the effect of increasing the volatility of the series.
See Appendix A and the SAI Appendix for a discussion these securities and
investment techniques in which the series may invest and their attendant
risks: (1) foreign growth securities and emerging growth companies; (2)
emerging markets securities; (3) fixed income securities; (4) other investment
companies; (5) privatizations; (6) depository receipts; (7) Brady Bonds; (8)
structured securities; (9) repurchase agreements; (10) zero coupon bonds,
deferred interest bonds, PIK bonds, indexed securities, restricted securities
and loans and other direct indebtedness; (11) lending of portfolio securities;
(12) "when-issued" securities; (13) put and call options on securities and
"straddles"; (14) yield curve options; (15) options on domestic and foreign
stock indexes; (16) futures contracts on indexes of securities as such
instruments become available for trading or fixed income securities or foreign
currencies; (17) options on futures contracts; (18) options on foreign
currencies; (19) forward foreign currency exchange contracts ("forward
contracts"); and (20) interest rate swaps, currency swaps and other types of
available swap agreements.
(10) INTERNATIONAL GROWTH AND INCOME SERIES
The International Growth and Income Series will seek capital appreciation and
current income. The series seeks to achieve its objective by investing
primarily in equity securities of issuers whose principal activities are
outside the U.S.
The series will invest, under normal market conditions, at least 65% of its
total assets (and generally expects to invest a substantial portion of its
total assets) in equity securities of foreign "blue chip" companies and
foreign growth companies. See "Foreign Growth Securities" in Appendix A. The
series considers a security to be "blue chip" if the total equity market
capitalization of the issuer is at least U.S. $5 billion. It is expected that
the series' equity securities will include securities which pay relatively
high current dividends.
The series may invest up to 10% of its net assets in securities of issuers
whose principal activities are located in emerging market countries. See
"Emerging Market Securities" in Appendix A.
The International Growth and Income Series does not intend to emphasize any
particular country or region in making its investments, but under normal
market conditions, the series will be invested in at least three countries
(outside the U.S.) and will not invest more than 50% of its net assets in
issuers whose principal activities are located in a single country. Currently,
the series does not expect to invest more than 25% of its net assets in
issuers whose principal activities are located in a single country, except
that the series generally expects to invest between 15% and 45% of its assets
in issuers whose principal activities are in Japan. The series will seek to
reduce risk by investing its assets in a number of markets and issuers,
performing credit analyses or potential investments and monitoring current
developments and trends in both the international economy and financial
markets.
The International Growth and Income Series may invest in all types of equity
securities, including the following: common stocks, preferred stocks and
preference stocks; securities such as bonds, warrants or rights that are
convertible into stocks; and depository receipts for those securities. These
securities may be listed on securities exchanges, traded in various over-the-
counter markets or have no organized market.
For temporary defensive reasons, such as during times of international
political or economic uncertainty or turmoil, most or all of the International
Growth and Income Series' investments may be in cash (U.S. dollars, foreign
currencies or multinational currency units) and/or securities that are
denominated in U.S. dollars or whose issuers are domiciled in the U.S. The
series is not restricted as to portions of its assets which may be invested in
securities denominated in a particular currency and up to 100% of the series'
net assets may be invested in securities denominated in foreign currencies and
multinational currency units.
The Adviser determines where an issuer's principal activities are located by
considering such factors as its country of organization, the principal trading
market for its securities and the source of its revenues and location of its
assets. The issuer's principal activities are generally deemed to be located
in a particular country if: (a) the securities are issued or guaranteed by the
government of that country or any of its agencies, authorities or
instrumentalities; (b) the issuer is organized under the laws of, and
maintains a principal office in, that country; (c) the issuer has its
principal securities trading market in that country; (d) the issuer derives
50% or more of its total revenues from goods sold or services performed in
that country; or (e) the issuer has 50% or more of its assets in that country.
The series may allocate all or a portion of its investment in emerging market
securities among the emerging markets of Latin America, Asia, Africa, the
Middle East and the developing countries of Europe, primarily in Eastern
Europe. The series will allocate its investments among these emerging markets
in accordance with the Adviser's determination as to the allocation most
appropriate with respect to the series' investment objective and policies. The
series may invest its assets allocated for investment in emerging markets
without limitation in any particular region, and, in accordance with the
Adviser's investment discretion, at times may invest all of its assets
allocated for investment in emerging markets in securities of emerging market
issuers located in a single region (e.g., Latin America). To the extent that
the series' investments are concentrated in one or a few emerging market
regions, the series' investment performance correspondingly will be more
dependent upon the economic, political and social conditions and changes in
those regions. The ability of the series to allocate its investments among
emerging market regions without restriction may have the effect of increasing
the volatility of the series, as compared to a series which limits such
allocations.
The series will seek to reduce risk by investing its assets in a number of
markets and issuers. However, the series may invest up to 50% of its net
assets in issuers located in a single country. To the extent that the series
invests a significant portion of its assets in a single or limited number of
countries, the series' investment performance correspondingly will be more
dependent up on the economic, political and social conditions and changes in
that country or countries, and the risks associated with investments in such
country or countries will be particularly significant. The ability of the
series to focus its investments in one or a limited number of countries may
have the effect of increasing the volatility of the series.
See Appendix A and the SAI Appendix for a discussion these securities and
investment techniques in which the series may invest and their attendant
risks: (1) foreign growth securities and emerging growth companies; (2)
emerging markets securities; (3) fixed income securities; (4) other investment
companies; (5) privatizations; (6) depository receipts; (7) Brady Bonds; (8)
structured securities; (9) repurchase agreements; (10) zero coupon bonds,
deferred interest bonds, PIK bonds, indexed securities, restricted securities
and loans and other direct indebtedness; (11) lending of portfolio securities;
(12) "when-issued"' securities; (13) options on securities and "straddles";
(14) yield curve options; (15) options on domestic and foreign stock indexes;
(16) futures contracts on indexes of securities as such instruments become
available for trading or fixed income securities or foreign currencies; (17)
options on futures contracts; (18) options on foreign currencies; (19) forward
foreign currency exchange contracts ("forward contracts"); and (20) interest
rate swaps, currency swaps and other types of available swap agreements.
(11) MANAGED SECTORS SERIES
The Managed Sectors Series will seek capital appreciation by varying the
weighting of its portfolio among 13 industry sectors. Dividend income, if any,
is incidental to the Managed Sectors Series' objective of capital
appreciation.
The 13 sectors from among which the Managed Sectors Series chooses its
investments are: autos and housing; basic materials and consumer staples;
defense and aerospace; energy; financial services; health care; industrial
goods and services; leisure; retailing; technology; transportation; utilities;
and foreign. (See Appendix D for a description of the scope of and potential
risks associated with each of these industry sectors.) Certain sectors may
overlap; for example, the defense and aerospace sector and the technology
sector both include companies involved in the development of computer-related
products. Therefore, securities of certain companies or industries may
simultaneously be held in more than one industry sector.
In response to changes or anticipated changes in the general economy or within
one or more particular industry sectors, the Managed Sectors Series may
increase, decrease or eliminate entirely a particular sector's representation
in its portfolio; similarly, it may acquire securities of a sector not then
represented in its portfolio. A sector or stock of a particular company will
be added to or eliminated from the portfolio based upon such factors as such
sector's or company's economic cycle and sensitivity to interest rates. For
example, as interest rates rise and the performance of interest-sensitive
stocks declines, the Managed Sectors Series expects to remove such stocks from
its portfolio. Any one sector may comprise up to 50% of the portfolio, as may
cash held as a temporary defensive measure or to meet anticipated redemption
requests. The Managed Sectors Series is "non-diversified" so that more than 5%
of the series' assets may be invested in the securities of each of one or more
issuers. As a result of such non-diversified status, the Managed Sectors
Series may be more susceptible to adverse changes in the value of securities
of a particular company than would be a diversified series. Similarly, due to
the series' ability to concentrate in as few as two industry sectors, the
Managed Sectors Series' assets may be more susceptible to any single economic,
political or regulatory occurrence than would be those of an investment
company without a policy of concentration in particular industry sectors.
While the Managed Sectors Series' policy is to invest primarily in common
stocks, it may seek appreciation in other types of securities, such as non-
convertible and convertible bonds, convertible preferred stocks, and in
warrants to purchase common stock, when relative values make such investments
appear attractive either as individual issues or as types of securities in
certain economic environments. The non-convertible bonds invested in by the
Managed Sectors Series will include (i) obligations issued or guaranteed by
the U.S. Treasury or U.S. Government agencies or instrumentalities, and (ii)
obligations of the U.S. Treasury that have been issued without interest
coupons or stripped of their unmatured interest coupons, interest coupons that
have been stripped from such debt obligations, and receipts and certificates
for such stripped debt obligations and stripped coupons. The Managed Sectors
Series may invest up to 50% of its total assets (and generally expects to
invest between 0% and 25%) in foreign securities, which may include emerging
market securities, may invest in ADRs and may enter into forward foreign
currency exchange contracts ("forward contracts") for the purchase or sale of
foreign currency for hedging purposes. The Managed Sectors Series may write
covered put and call options and purchase put and call options on securities
and stock indexes in an effort to increase current income and for hedging
purposes. The Managed Sectors Series may also purchase and sell stock index
futures contracts and may write and purchase options thereon for hedging
purposes. The Managed Sectors Series may invest in restricted securities,
subject to the limitation on investing more than 10% of its net assets in
securities that are not readily marketable.
The Managed Sectors Series' portfolio is aggressively managed and the series
assumes above average risk of loss. Portfolio changes are made without regard
to the length of time a security has been held, or whether a sale would result
in a profit or loss. Therefore, the rate of portfolio turnover is not a
limiting factor when changes are believed by the Adviser to be appropriate.
See Appendix A for a discussion of foreign securities, emerging market
securities and other instruments set forth above and the risks involved in
these investments. Options, futures contracts, options on futures contracts
and forward contracts and their attendant risks are also discussed in Appendix
A. Please refer to the SAI Appendix for further discussion of these
techniques.
PROSPECTIVE PURCHASERS SHOULD REVIEW THIS SECTION CAREFULLY AND CONSIDER THE
INVESTMENT RISKS INVOLVED BEFORE ALLOCATING PURCHASE PAYMENTS UNDER THE
CONTRACTS TO THE MANAGED SECTORS SERIES.
(12) MASSACHUSETTS INVESTORS GROWTH STOCK SERIES
The Massachusetts Investors Growth Stock Series will seek to provide long-term
growth of capital and future income rather than current income. The
Massachusetts Investors Growth Stock Series' name does not imply any assurance
that an investor's capital will increase.
The Massachusetts Investors Growth Stock Series' policy is to invest
substantially all of its assets in equity securities of companies believed to
possess better than average prospects for long-term growth. Emphasis is placed
on the selection of progressive, well-managed companies. The series may also,
for temporary defensive purposes, invest up to 10% of its assets in U.S.
Government securities.
Since shares of the Massachusetts Investors Growth Stock Series represent an
investment in securities with fluctuating market prices, shareholders should
understand that the value of shares of the Massachusetts Investors Growth
Stock Series will vary as the aggregate value of the series' portfolio
securities increases or decreases. Moreover, any dividends paid by the series
will increase or decrease in relation to the income received by the series
from its investments.
Consistent with its investment objectives and policies as described above, the
Massachusetts Investors Growth Stock Series may enter into repurchase
agreements in order to earn income on available cash or as a temporary
defensive measure and may seek to increase its income by lending portfolio
securities. In addition, in order to help ensure the availability of suitable
securities for its portfolio, the series may purchase securities on a "when
issued" or "forward delivery" basis. The Massachusetts Investers Growth Stock
Series may invest in restricted securities, subject to the series' 15%
limitation of illiquid investments.
The series may also write (sell) covered put and call options on securities
and stock indexes and purchase put and call options on securities and stock
indexes. For hedging and non-hedging purposes (in an effort to increase
current income), the series may also enter into "yield curve" options and
purchase options on foreign currencies. In addition, the series may enter into
futures contracts and options on futures contracts. The series may also enter
into forward foreign currency exchange contracts ("forward contracts") for
hedging purposes as well as non-hedging purposes.
Consistent with its investment objectives and policies as described above, the
series may invest up to 50% (and generally expects to invest between 0% and
30%) of its total assets in foreign securities, not traded on a U.S. exchange,
including emerging market securities, but not including American Depository
Receipts ("ADRs").
See Appendix A for a discussion of foreign securities, emerging market
securities and other instruments set forth above and the risks involved in
these investments. Options, futures contracts, options on futures contracts,
forward contracts and other investment techniques and their attendant risks
are also discussed in Appendix A. Please refer to the SAI Appendix for further
discussion of these techniques.
(13) MFS/FOREIGN & COLONIAL EMERGING MARKETS EQUITY SERIES ("EMERGING MARKETS
EQUITY SERIES")
The Emerging Markets Equity Series will seek capital appreciation. The series
seeks to achieve its objective by investing, under normal market conditions,
at least 65% of its total assets in equity securities of issuers whose
principal activities are located in emerging market countries. The Adviser and
the Sub-Advisers expect to take a global approach to portfolio management by
weighting the series' investments towards countries in Latin America, Asia,
Africa, the Middle East and the developing countries of Europe, primarily in
Eastern Europe. See "Emerging Market Securities" in Appendix A. The selection
of securities is made solely on the basis of potential for capital
appreciation. Dividend and interest income from portfolio securities, if any,
is incidental to the series' investment objective of capital appreciation.
While the series intends to invest primarily in equity securities, the series
may also invest not more than 35% of its net assets in fixed income securities
of government, government-related, supranational and corporate issuers whose
principal activities are outside the U.S., rated Ba or lower by Moody's or BB
or lower by S&P, Fitch or Duff & Phelps and comparable unrated securities. See
"Lower Rated Fixed Income Securities" in Appendix A. The Adviser and the Sub-
Advisers consider a variety of factors in selecting fixed income securities to
achieve capital appreciation, including the creditworthiness of issuers,
interest rates and currency exchange rates.
The Emerging Markets Equity Series does not intend to emphasize any particular
country or region in making its investments, but under normal market
conditions, the series will be invested in at least three countries (outside
the U.S.) and will not invest more than 50% of its net assets in issuers whose
principal activities are located in a single country. Currently, the series
does not expect to invest more than 25% of its net assets in issuers whose
principal activities are located in a single country. The series will seek to
reduce risk by investing its assets in a number of markets and issuers,
performing credit analyses or potential investments and monitoring current
developments and trends in both the international economy and financial
markets.
The Emerging Markets Equity Series may invest in all types of equity
securities, including the following: common stocks, preferred stocks and
preference stocks; securities such as bonds, warrants or rights that are
convertible into stocks; and depository receipts for those securities. These
securities may be listed on securities exchanges, traded in various over-the-
counter markets or have no organized market.
For temporary defensive reasons, such as during times of international
political or economic uncertainty or turmoil, most or all of the Emerging
Markets Equity Series' investments may be in cash (U.S. dollars, foreign
currencies or multinational currency units) and/or securities that are
denominated in U.S. dollars or whose issuers are domiciled in the U.S. The
series is not restricted as to portions of its assets which may be invested in
securities denominated in a particular currency and up to 100% of the series'
net assets may be invested in securities denominated in foreign currencies and
multinational currency units.
The Adviser and the Sub-Advisers determine where an issuer's principal
activities are located by considering such factors as its country of
organization, the principal trading market for its securities and the source
of its revenues and location of its assets. The issuer's principal activities
are generally deemed to be located in a particular country if: (a) the
securities are issued or guaranteed by the government of that country or any
of its agencies, authorities or instrumentalities; (b) the issuer is organized
under the laws of, and maintains a principal office in, that country; (c) the
issuer has its principal securities trading market in that country; (d) the
issuer derives 50% or more of its total revenues from goods sold or services
performed in that country; or (e) the issuer has 50% or more of its assets in
that country.
The series may allocate all or a portion of its investment in emerging market
securities among the emerging markets of Latin America, Asia, Africa, the
Middle East and the developing countries of Europe, primarily in Eastern
Europe. The series will allocate its investments among these emerging markets
in accordance with the Adviser's and Sub-Advisers' determination as to the
allocation most appropriate with respect to the series' investment objective
and policies. The series may invest its assets allocated for investment in
emerging markets without limitation in any particular region, and, in
accordance with the Adviser's and the Sub-Advisers' investment discretion, at
times may invest all of its assets allocated for investment in emerging
markets in securities of emerging market issuers located in a single region
(e.g., Latin America). To the extent that the series' investments are
concentrated in one or a few emerging market regions, the series' investment
performance correspondingly will be more dependent upon the economic,
political and social conditions and changes in those regions. The ability of
the series to allocate its investments among emerging market regions without
restriction may have the effect of increasing the volatility of the series, as
compared to a series which limits such allocations.
The series will seek to reduce risk by investing its assets in a number of
markets and issuers. However, the series may invest up to 50% of its net
assets in issuers located in a single country. To the extent that the series
invests a significant portion of its assets in a single or limited number of
countries, the series' investment performance correspondingly will be more
dependent up on the economic, political and social conditions and changes in
that country or countries, and the risks associated with investments in such
country or countries will be particularly significant. The ability of the
series to focus its investments in one or a limited number of countries may
have the effect of increasing the volatility of the series.
See Appendix A and the SAI Appendix for a discussion these securities and
investment techniques in which the series may invest and their attendant
risks: (1) foreign growth securities; (2) emerging markets securities; (3)
fixed income securities; (4) other investment companies; (5) privatizations;
(6) depository receipts; (7) Brady Bonds; (8) structured securities; (9)
repurchase agreements; (10) zero coupon bonds, deferred interest bonds, PIK
bonds, indexed securities, restricted securities and loans and other direct
indebtedness; (11) lending of portfolio securities; (12) "when-issued"
securities; (13) put and call options on securities and "straddles"; (14)
yield curve options; (15) options on domestic and foreign stock indexes; (16)
futures contracts on indexes of securities as such instruments become
available for trading or fixed income securities or foreign currencies; (17)
options on futures contracts; (18) options on foreign currencies; (19) forward
foreign currency exchange contracts ("forward contracts"); and (20) interest
rate swaps, currency swaps and other types of available swap agreements.
(14) MONEY MARKET SERIES
The Money Market Series will seek maximum current income to the extent
consistent with stability of principal by investing exclusively in the
following types of U.S. dollar-denominated money market instruments which
mature in less than 13 months:
(a) Obligations of, or guaranteed by, the U.S. Government, its agencies or
instrumentalities;
(b) Certificates of deposit issued by domestic or foreign branches of any
U.S. or Canadian-chartered bank which has total assets in excess of $1
billion ("Eurodollar CD's") and bankers' acceptances issued by
domestic branches of any such bank (see Appendix A);
(c) Commercial paper which at the date of investment is rated A-1 by S&P
or P-1 by Moody's (see Appendix B);
(d) Repurchase agreements for the purchase of obligations which are
suitable for investment under paragraph (a) above (see Appendix A).
Under regulations currently in effect, the average maturity of the investments
in the Money Market Series may not exceed 90 days. The series will invest only
in corporate obligations which have a maturity when purchased of less than 13
months.
(15) NEW DISCOVERY SERIES
The New Discovery Series will seek capital appreciation. The New Discovery
Series seeks to achieve its objective by investing, under normal market
conditions, at least 65% of its total assets in companies that the Adviser
believes offer superior prospects for growth. Such securities may either be
listed on securities exchanges or traded in the over-the-counter markets and
may be U.S. or foreign companies. While companies in which the New Discovery
Series invests may be of any size, such as companies in a relatively early
stage of development that offer the potential for accelerated earnings or
revenue growth (emerging growth companies), or larger or more established
companies whose rates of earnings growth are expected to accelerate because of
special factors, such as rejuvenated management, new products, or structural
changes in the economy, the New Discovery Series will generally invest in
companies with small market capitalizations relative to companies included in
the S&P 500. Such companies generally would be expected to show earnings
growth over time that is well above the growth rate of the overall economy and
the rate of inflation, and would have the products, management and market
opportunities which are usually necessary to become more widely recognized as
growth companies. The New Discovery Series seeks to maintain a portfolio
weighted median capitalization of $2 billion or less.
The New Discovery Series may invest in short sales. A short sale transaction
involves selling a security which the series does not own with the intent of
purchasing it later at a lower price. The series will realize a gain if the
security price decreases and a loss if the security price increases between
the date of the short sale and the date on which the series must replace the
borrowed security. If the New Discovery Series anticipates that the price of a
security will decline, it may sell the security short and borrow the same type
of security from a broker or other institution to complete the sale. The
series may make a profit or loss depending upon whether the market price of
the security decreases or increases between the date of the short sale and the
date on which the series must replace the borrowed security. Possible losses
from short sales differ from losses that could be incurred from a purchase of
a security, because losses from short sales may be unlimited, whereas losses
from purchases can equal only the total amount invested. The New Discovery
series will segregate liquid assets to cover its short sale obligations. The
New Discovery Series will not sell short securities whose underlying value
(minus any amounts deposited as margin) exceeds 40% of its net assets.
In order to achieve its investment objective, the New Discovery Series may
invest in the following securities and employ the following investment
techniques: (1) lending portfolio securities; (2) entering into repurchase
agreements; (3) purchasing "when issued" or "forward delivery" securities; (4)
investing in U.S. Government securities, cash (including foreign currency) and
cash equivalents for temporary defensive purposes; (5) investing in securities
of emerging growth companies as well as foreign growth securities; (6)
entering into swaps and related transactions; (7) investing in indexed
securities; (8) writing (selling) covered put and call options and purchasing
put and call options on securities, securities indexes and foreign currencies;
(9) entering into "yield curve" options; (10) purchasing and selling futures
contracts ("Futures Contracts") on stock indexes, foreign currencies or
indexes of foreign currencies and may purchase and write options on such
Futures Contracts; (11) entering into forward foreign currency exchange
contracts for the purchase or sale of a fixed quantity of a foreign currency
at a future date at a price set at the time of the contract ("forward
contracts"); and (12) purchasing restricted securities, subject to the series'
15% limitation on investments in illiquid securities.
The New Discovery Series may also invest in fixed income securities offering
an opportunity for capital appreciation, including up to 10% of its net assets
in fixed income securities rated BB or lower by S&P, Fitch or Duff & Phelps or
Ba or lower by Moody's, or if unrated, determined to be of equivalent quality
by the Adviser (commonly referred to as "junk bonds"). For a description of
these ratings, see Appendix C to this Prospectus. For a discussion of the
risks of investing in these securities, see "Additional Risk Factors -- Lower
Rated Bonds" under "High Yield Series" above.
Consistent with its investment objective and policies described above, the New
Discovery Series may also invest up to, but not including, 20% of its net
assets in foreign securities which are not traded on a U.S. exchange and which
may include emerging markets securities (not including American Depository
Receipts).
See Appendix A for a discussion of foreign securities, emerging market
securities and other instruments set forth above and the risks involved in
these investments. Options, futures contracts, options on futures contracts,
forward contracts and other investment techniques and their attendant risks
are also discussed in Appendix A. Please refer to the SAI Appendix for further
discussion of these techniques.
(16) RESEARCH SERIES
The Research Series will seek to provide long-term growth of capital and
future income.
The portfolio securities of the series are selected by a committee of
investment research analysts. This committee includes investment analysts
employed not only by the Adviser but also by MFS International (U.K.) Limited,
a wholly owned subsidiary of MFS. The series' assets are allocated among
industries by the analysts acting together as a group. Individual analysts are
then responsible for selecting what they view as the securities best suited to
meet the series' investment objective within their assigned industry
responsibility.
The series' policy is to invest a substantial proportion of its assets in the
common stocks or securities convertible into common stocks of companies
believed to possess better than average prospects for long-term growth. A
smaller proportion of the assets may be invested in bonds, short-term
obligations, preferred stocks or common stocks whose principal characteristic
is income production rather than growth. Such securities may also offer
opportunities for growth of capital as well as income. In the case of both
growth stocks and income issues, emphasis is placed on the selection of
progressive, well-managed companies. From time to time, the Research Series'
management will exercise its judgment with respect to the proportions invested
in growth stocks, income-producing securities or cash (including foreign
currency) and cash equivalents depending on its view of their relative
attractiveness. The Research Series may hold part or all of its assets in cash
or short-term obligations for temporary defensive purposes or as a reserve for
future purchases.
The Research Series' debt investments, if any, may consist of "investment
grade" securities (rated BBB or better by S&P, Fitch or Duff & Phelps or Baa
or better by Moody's), and, with respect to no more than 10% of its net
assets, securities rated BB or lower by S&P, Fitch or Duff & Phelps or Ba or
lower by Moody's or securities which the Adviser believes to be of similar
quality (commonly known as "junk bonds"). (See Appendix B; see also "Lower
Rated Securities" in Appendix A). It is not the Research Series' policy to
rely exclusively on ratings issued by established credit rating agencies but
rather to supplement such ratings with the Adviser's own independent and
ongoing review of credit quality. The Research Series' achievement of its
investment objective may be more dependent on the Adviser's own credit
analysis than in the case of a series or fund investing in primarily higher
quality bonds.
The Research Series may enter into repurchase agreements for U.S. Government
Securities, lend portfolio securities, and invest in restricted securities.
The series may invest up to 20% of its total assets in foreign securities,
which may include emerging market securities and Brady Bonds, may invest in
ADRs, and may enter into forward foreign currency exchange contracts ("forward
contracts") for hedging purposes. The Research Series may invest in restricted
securities, subject to the limitation on investing more than 15% of its net
assets in securities that are not readily marketable.
The Research Series does not intend to trade in securities for short-term
profits. However, the Research Series will trade whenever it believes that
portfolio changes are appropriate.
See Appendix A for a discussion of foreign securities, emerging market
securities, Brady Bonds, restricted securities and other instruments set forth
above and the risks involved in these investments. Securities lending and
forward contracts and the attendant risks are also discussed in Appendix A.
Please refer to the SAI Appendix for further discussion of forward contracts.
(17) RESEARCH GROWTH AND INCOME SERIES
The Research Growth and Income Series will seek to provide long-term growth of
capital, current income and growth of income.
The portfolio securities of the series are selected by a committee of
investment research analysts. This committee includes investment analysts
employed not only by the Adviser but also by MFS International (U.K.) Limited,
a wholly owned subsidiary of MFS. The series' assets are allocated among
industries by the analysts acting together as a group. Individual analysts are
then responsible for selecting what they view as the securities best suited to
meet the series' investment objective within their assigned industry
responsibility.
Under normal market conditions, the series invests at least 65% of its total
assets in equity securities of companies with a market capitalization of at
least $2 billion which, in the Adviser's judgment, offer earnings growth
potential while paying current dividends. Equity securities include common
stocks, preferred stocks and preference stocks, securities such as bonds,
warrants or rights that are convertible into stocks; and depository receipts
for these securities. Over time, continued growth of earnings tends to lead to
higher dividends and enhancement of capital value. The series may also invest
up to 35% of its total assets in other equity securities which offer prospects
for growth of capital and future income.
The Research Growth and Income Series may enter into repurchase agreements for
U.S. Government Securities, lend portfolio securities, invest in restricted
securities, purchase securities on a "when-issued" basis, purchase indexed
securities and swaps, and purchase and sell options and futures contracts. The
series may invest up to 20% (and generally expects to invest between 5% and
15%) of its net assets in foreign equity securities, which are not traded on a
U.S. exchange, which may include emerging market securities, may invest in
ADRs, and may enter into forward foreign currency exchange contracts ("forward
contracts"). The Research Growth and Income Series may invest in restricted
securities, subject to the limitation on investing more than 15% of its net
assets in securities that are not readily marketable.
The Research Growth and Income Series does not intend to trade in securities
for short-term profits. However, the series will trade whenever it believes
that changes are appropriate.
See Appendix A for a discussion of foreign securities, ADRs, emerging market
securities, indexed securities, restricted securities and other instruments
set forth above and the risks involved in these investments. Securities
lending, options, futures and forward contracts, swaps and "when issued"
securities and the attendant risks are also discussed in Appendix A. Please
refer to the SAI Appendix for further discussion of forward contracts.
(18) RESEARCH INTERNATIONAL SERIES
The Research International Series will seek capital appreciation.
The portfolio securities of the Research International Series are selected by
a committee of investment research analysts. This committee includes
investment analysts employed not only by the Adviser but also by MFS
International (U.K.) Limited, a wholly owned subsidiary of MFS. The Research
International Series' assets are allocated among countries and industries by
the analysts acting together as a group. Individual analysts are then
responsible for selecting what they view as the securities best suited to meet
the series' investment objective within their assigned geographic and industry
responsibilities.
The Research International Series seeks to achieve its objective by investing,
under normal market conditions, at least 65% of its total assets in equity
securities of companies whose principal activities are located outside the
U.S. The equity securities in which the Research International Series may
invest include securities of more established companies which represent
opportunities for long-term growth (see "Appendix A -- Foreign Growth
Securities"). The Research International Series may also invest up to 25% of
its assets in securities of companies located, or primarily conducting their
business, in emerging market countries ("emerging market securities"). The
selection of securities is made solely on the basis of potential for capital
appreciation. The Research International Series does not intend to emphasize
any particular country and, under normal market conditions, will be invested
in at least five countries. In addition, the Research International Series may
hold foreign currency received in connection with investments in foreign
securities or in anticipation of purchasing foreign securities.
In determining where a company's principal activities are located, the Adviser
considers such factors as its country of organization, the principal trading
market for its securities, the source of its revenues and the location of its
assets. The company's principal activities are deemed to be located in a
particular country if: (a) the company is organized under the laws of, and
maintains a principal office in, that country; (b) the company has its
principal securities trading market in that country; (c) the company derives
50% or more of its total revenues from goods sold or services performed in
that country; or (d) the company has 50% or more of its assets in that
country.
Consistent with its investment objective as described above, the Research
International Series may invest in the following securities and employ the
following investment techniques: (1) lending portfolio securities; (2)
entering into repurchase agreements; (3) purchasing "when issued" or "forward
delivery" securities; (4) investing in U.S. Government Securities, cash
(including foreign currency) and cash equivalents for temporary defensive
purposes; (5) investing in securities of emerging growth companies as well as
foreign growth securities; (6) entering into swaps and related transactions;
(7) investing in indexed securities; (8) writing (selling) covered put and
call options and purchasing put and call options on securities and securities
indices; (9) entering into "yield curve" options; (10) purchasing and selling
futures contracts on stock indexes, foreign currencies or indexes of foreign
currencies and may purchase and write options on such futures contracts; and
(11) entering into forward foreign currency exchange contracts ("forward
contracts").
See Appendix A for a discussion of foreign securities, emerging market
securities and other instruments set forth above and the risks involved in
these investments. Options, futures contracts, options on futures contracts,
forward contracts and other investment techniques and their attendant risks
are also discussed in Appendix A. Please refer to the SAI Appendix for further
discussion of these techniques.
(19) STRATEGIC INCOME SERIES
The Strategic Income Series will seek to provide high current income by
investing in fixed income securities. In addition, as part of its investment
objective, the Strategic Income Series will seek to take advantage of
opportunities to realize significant capital appreciation while maintaining a
high level of current income. The Strategic Income Series will attempt to
achieve this objective by allocating portfolio assets among various categories
of fixed income securities as described below. For this purpose, the Fund will
consider preferred stocks and convertible securities to be fixed income
securities. With respect to its fixed income investments, the Stategic Income
Series will seek to earn high current income in comparison to the income
available on U.S. Government Securities. The Strategic Income Series may also
invest up to 25% of its assets in common stocks and depository receipts for
common stocks (but generally does not expect to do so). The Adviser will
monitor the series' portfolio performance on an ongoing basis and reallocate
assets in response to actual and anticipated market and economic changes. Any
investment involves risk and there can be no assurance that the Strategic
Income Series will achieve its investment objective.
The Adviser will determine, based upon current yields and the appreciation
potential of various categories of fixed income and equity securities, the
relative portions of the series' assets which should be invested in particular
securities; however, under normal market conditions, at least 65% of the
series' assets will be invested in fixed income securities. Fixed income
securities can appreciate in value as a result of declines in interest rates,
improvements in credit ratings and other factors. In pursuing its objective,
the Strategic Income Series will consider the preservation of capital by
balancing the yields and appreciation potential of securities which it may
purchase against their attendant risks.
The value of shares of the series will vary as the aggregate value of the
series' portfolio securities increases or decreases. The net asset value of
the series may change as the general levels of interest rates fluctuate. When
interest rates decline, the value of a portfolio of fixed income securities
can be expected to rise. Conversely, when interest rates rise, the value of a
portfolio of fixed income securities can be expected to decline. Moreover, the
value of the lower-rated fixed income securities that the series purchases
will fluctuate more than the value of higher-rated fixed income securities.
These lower-rated fixed income securities generally tend to reflect short-term
corporate and market developments to a greater extent than higher-rated
securities, which react primarily to fluctuations in the general level of
interest rates. See "Lower Rated Bonds" in Appendix A for additional
discussion of the risks of investing in such securities.
Although changes in the value of the series' portfolio securities subsequent
to their acquisition are reflected in the net asset value of shares of the
series, such changes will not affect the income received by the series from
such securities. The dividends paid by the series will increase or decrease in
relation to the income received by the series from its investments, which will
in any case be reduced by the series' expenses before being distributed to the
series' shareholders.
If the Adviser's expectations of changes in interest rates or its evaluation
of the normal yield relationship between two securities proves to be
incorrect, the series' income, net asset value and potential capital gain may
be decreased or its potential capital loss may be increased. The Adviser's
reallocation of series assets in response to actual and anticipated market and
economic changes may result in the series not achieving anticipated benefits,
or experiencing losses, should the Adviser's reallocation decisions be
incorrect.
No minimum rating standard is required for a purchase of corporate debt
securities by the series and up to 100% of the series' net assets may be
invested in convertible and non-convertible fixed-income securities rated
below investment grade. These securities are considered speculative and, while
generally providing greater income than investments in higher rated
securities, will involve greater risk of principal and income (including the
possibility of default or bankruptcy of the issuers of such securities) and
may involve greater volatility of price (especially during periods of economic
uncertainty or change) than securities in the higher rating categories and,
because yields vary over time, no specific level of income can ever be
assured. See "Lower Rated Securities" in Appendix A.
In order to achieve its investment objective, the Strategic Income Series may
invest in the following securities and employ the following investment
techniques: (1) U.S. Government Securities; (2) fixed income securities issued
by foreign governments and their political subdivisions and fixed income and
equity securities of non-U.S. issuers; (3) corporate fixed income securities,
some of which may involve equity features; (4) equity securities of
established companies; (5) equity securities of emerging growth companies; (6)
obligations and equity securities of banks or savings and loan associations
(including certificates of deposit and bankers' acceptances); (7) long- or
short-term municipal securities; (8) restricted securities; (9) corporate
asset-backed securities; (10) collateralized mortgage obligations and
multiclass pass-through securities; (11) swaps and related transactions (12)
stripped mortgage-backed securities; (13) lending of portfolio securities;
(14) mortgage dollar-roll transactions; (15) when-issued or forward delivery
securities; and (16) to the extent available and permissible, options, futures
contracts and options on futures contracts on securities, currencies and
indexes.
The Strategic Income Series may invest in obligations of domestic and foreign
banks which, at the date of investment, have capital, surplus and undivided
profits (as of the date of their most recently published financial statements)
in excess of $100 million. The Strategic Income Series may invest in debt
obligations of other banks or savings and loan associations if such
obligations are insured by the Federal Deposit Insurance Corporation. In
addition, the Strategic Income Series may invest in the equity securities of
banks or savings and loan associations in accordance with its investment
objective and policies with respect to equity investments.
The Strategic Income Series may also invest in municipal obligations issued by
or on behalf of states, territories and possessions of the United States and
the District of Columbia and their political subdivisions, agencies or
instrumentalities when the Adviser determines that they offer the highest
income available, except where differences in yield are not sufficient to
justify investments in higher risk securities. Such municipal obligations may
be unrated or in the medium and lower rating categories of recognized rating
agencies, which securities are speculative, involve high risk and are
questionable as to principal and interest payments.
Each of these securities and techniques are more fully described in Appendix
A. Please refer to the SAI Appendix for a further description of these
securities and techniques.
(20) TOTAL RETURN SERIES
The Total Return Series will primarily seek to obtain above-average income
(compared to a portfolio entirely invested in equity securities) consistent
with the prudent employment of capital. While current income is the primary
objective, this series also will seek a reasonable opportunity for growth of
capital and income, since many securities offering a better than average yield
may also possess growth potential. Assets will be allocated and reallocated
from time to time between money market, fixed income and equity securities.
Under normal market conditions, at least 25% of the series' assets will be
invested in fixed income securities and at least 40% and no more than 75% of
the series' assets will be invested in equity securities, including preferred
stocks.
The Total Return Series' policy is to invest in a broad portfolio of
securities, including short-term obligations. The portfolio may be diversified
not only by companies and industries, but also by type of securities, for
example, equity securities, fixed income securities, and securities
representing cash equivalents. Thus fixed income securities, such as bonds,
may be held as well as common stocks. In addition, some fixed income
securities held by this series may include a right to purchase common stock by
means of a conversion privilege or attached warrants. This series may vary the
percentage of assets invested in any one type of security in accordance with
its interpretation of economic and money market conditions, fiscal and
monetary policy, and underlying security values. Most of the series' long-term
debt investments will consist of "investment grade" securities (rated Baa or
better by Moody's or BBB or better by S&P, Fitch or Duff & Phelps), although
the series may invest up to 20% of its net assets in lower rated securities.
See Appendix B and "Lower Rated Securities" in Appendix A for a description of
these ratings and the risks associated with investing in lower rated bonds.
See Appendix C for a chart indicating the composition of the series' portfolio
for the fiscal year ended December 31, 1997, with the debt securities
separated into rating categories and comparable unrated securities. The series
may enter into repurchase agreements for U.S. Government Securities and may
seek to increase its income by lending its portfolio securities to the extent
consistent with present regulatory policies. The series may enter into
mortgage "dollar roll" transactions and invest in corporate asset-backed
securities. The series may invest up to 20% (and generally expects to invest
between 5% and 20%) of its total assets in foreign securities, including
emerging market securities and Brady Bonds, and may invest in ADRs. The series
may invest in restricted securities, subject to the limitation on investing
more than 10% of its net assets in securities that are not readily marketable.
Securities offering above-average yield may at times involve greater than
average risk. For this reason, and because the value of securities and the
income earned on them may fluctuate according to the earnings of the issuers
and changes in economic and money market conditions, there can be no assurance
that the series' investment objectives will be achieved.
The Total Return Series' portfolio will be managed actively with respect to
fixed income securities, and the asset allocations will be modified as the
Adviser deems necessary. Although the Total Return Series does not intend to
seek short-term profits, fixed income securities in its portfolio will be sold
whenever the Adviser believes it is appropriate to do so, without regard to
the length of time the particular asset may have been held. With respect to
its equity securities, the Total Return Series does not intend to trade in
securities for short-term profits and anticipates that equity securities in
its portfolio will ordinarily be held for one year or longer. However, the
series will trade whenever it believes that changes in the portfolio are
appropriate.
See Appendix A for discussion of foreign securities, emerging market
securities, Brady Bonds, corporate asset-backed securities, restricted
securities and repurchase agreements and the risks involved in these
investments. Mortgage "dollar roll" transactions and lending portfolio
securities and their attendant risks are also discussed in Appendix A.
(21) UTILITIES SERIES
The Utilities Series will seek capital growth and current income (income above
that available from a portfolio invested entirely in equity securities) by
investing, under normal market conditions, at least 65% (but up to 100% at the
discretion of the Adviser) of its assets in equity and debt securities of both
domestic and foreign companies in the utilities industry. Equity securities in
which the Utilities Series may invest include common stocks, preferred stocks,
securities convertible into common stocks or preferred stocks, and warrants to
purchase common or preferred stocks. At least 80% of the debt securities held
by the Utilities Series will be rated at the time of investment at least Baa
by Moody's or BBB by S&P, Fitch or Duff & Phelps (see Appendix B) or will be
of comparable quality as determined by the Adviser (see "Lower Rated
Securities" in Appendix A). The Utilities Series may also invest in debt and
equity securities of issuers in other industries, as discussed below, although
under normal circumstances not more than 35% of the series' assets will be so
invested. In addition, the Utilities Series may hold a portion of its assets
in cash and money market instruments.
Companies in the utilities industry include (i) companies engaged in the
manufacture, production, generation, transmission, sale or distribution of
electric, gas or other types of energy, water or other sanitary services and
(ii) companies engaged in telecommunications, including telephone, cellular
telephones, telegraph, satellite, microwave, cable television and other
communications media (but not companies engaged in public broadcasting). The
Adviser deems a particular company to be in the utilities industry if, at the
time of investment, the Adviser determines that at least 50% of the company's
assets or revenues are derived from one or more of those industries. For a
description of the principal sectors of the utilities industry, see Appendix D.
The portion of the Utilities Series' assets invested in a particular type of
utility and in equity or debt securities will vary in light of changes in
interest rates, market conditions and economic conditions and other factors.
The Utilities Series may invest in foreign securities, including non-dollar
denominated securities and emerging market securities, and in ADRs, although
under normal circumstances it is not expected that more than 35% of the
Utilities Series' assets will be invested in foreign securities.
Since the Utilities Series' investments are concentrated in utility
securities, the value of the shares of the series will be especially affected
by factors peculiar to the utilities industry and may fluctuate more widely
than the value of shares of a series that invests in a broader range of
industries. The rates many utility companies may charge their customers are
controlled by governmental regulatory commissions which may result in a delay
in the utility company passing along increases in costs to its customers.
Furthermore, there is no assurance that regulatory authorities will, in the
future, grant rate increases or that such increases will be adequate to permit
the payment of dividends on common stocks. Many utility companies, especially
electric and gas and other energy related utility companies, are subject to
various uncertainties, including: risks of increases in fuel and other
operating costs; the high cost of borrowing to finance capital construction
during inflationary periods; difficulty obtaining adequate returns on invested
capital, even if frequent rate increases are approved by public service
commissions; restrictions on operations and increased costs and delays as a
result of environmental and nuclear safety regulations; securing financing for
large construction projects during an inflationary period; difficulties of the
capital markets in absorbing utility debt and equity securities; difficulty in
raising capital in adequate amounts on reasonable terms in periods of high
inflation and unsettled capital markets; technological innovations which may
render existing plants, equipment or products obsolete; the potential impact
of natural or man-made disasters; difficulties in obtaining natural gas for
resale or fuel for electric generation at reasonable prices; coping with the
general effects of energy conservation, particularly in light of changing
policies regarding energy; and special risks associated with the construction
and operation of nuclear power generating facilities, including technical
factors and costs, and the possibility that federal, state and municipal
government authorities may from time to time review existing requirements and
impose additional requirements. Certain utility companies, especially gas and
telephone utility companies, have in recent years been affected by increased
competition, which could adversely affect the profitability of such utility
companies. Furthermore, there are uncertainties resulting from certain
telecommunications companies' diversification into new domestic and
international businesses as well as agreements by many such companies linking
future rate increases to inflation or other factors not directly related to
the active operating profits of the enterprise.
Foreign utility companies are also subject to regulation, although such
regulations may or may not be comparable to those in the U.S. Foreign utility
companies may be more heavily regulated by their respective governments than
utilities in the U.S. and, as in the U.S., generally are required to seek
government approval for rate increases. In addition, since many foreign
utilities use fuel that causes more pollution than those used in the U.S.,
such utilities may be required to invest in pollution control equipment to
meet any proposed pollution restrictions. Foreign regulatory systems vary from
country to country and may evolve in ways different from regulation in the
U.S.
The Utilities Series is permitted to invest in securities of issuers that are
outside the utilities industry, although under normal circumstances not more
than 35% of the Utilities Series' assets will be so invested. Such investments
may include common stocks, debt securities (including municipal debt
securities) and preferred stocks and will be selected to meet the Utilities
Series' investment objective of both capital appreciation and current income.
These securities may be issued by either U.S. or non-U.S. companies. Some of
these issuers may be in industries related to the utilities industry and,
therefore, may be subject to similar risks. Investments outside the utilities
industry may also include U.S. Government Securities, including U.S.
Government Securities that are mortgage pass-through securities.
Some U.S. Government Securities do not generally involve the credit risks
associated with other types of interest bearing securities, although, as a
result, the yields available from these securities are generally lower than
the yields available from corporate interest bearing securities. Like other
interest bearing securities, however, the values of U.S. Government Securities
change as interest rates fluctuate.
When unfavorable economic or market conditions exist, the Utilities Series
may, until favorable conditions return, invest up to 75% of its assets in cash
(or foreign currency), cash equivalents (such as certificates of deposit,
bankers' acceptances and time deposits), commercial paper, short-term
obligations, repurchase agreements and obligations issued or guaranteed by the
U.S. or any foreign government or any of their agencies, authorities or
instrumentalities.
In order to achieve its investment objective the Utilities Series may employ
the investment techniques noted below and purchase the securities described
below in accordance with the above-mentioned investment policies: (1) entering
into repurchase agreements for U.S. Government Securities; (2) lending
portfolio securities to the extent consistent with present regulatory policies
for the purpose of increasing the Utilities Series' income; (3) entering into
covered mortgage "dollar roll" transactions; (4) investing in corporate asset-
backed securities; (5) purchasing securities on a "when-issued" or on a
"forward delivery" basis; (6) investing in indexed securities whose value is
linked to foreign currencies, interest rates, commodities, indexes or other
financial indicators; (7) purchasing restricted securities, subject to the
limitation on investing more than 15% of its net assets in securities that are
not readily marketable; (8) writing covered put and call options and
purchasing put and call options on domestic and foreign stock indexes for the
purpose of increasing the Utilities Series' gross income or for hedging
purposes, and to attempt to reduce the risk of missing a market or industry
segment advance; (9) investing in CMOs, multiclass pass-through securities,
parallel pay CMO's and Planned Amortization Class CMO's ("PAC Bonds"); (10)
investing in zero coupon bonds; (11) entering into futures contracts, options
on futures contracts and options on foreign currencies for hedging purposes in
order to protect the Utilities Series' current or intended investments from
the effects of changes in interest or exchange rates or declines in the stock
market and entering into futures contracts and options on futures contracts
for non-hedging purposes to the extent permitted by applicable law; and (12)
entering into forward foreign currency exchange contracts ("forward
contracts") for hedging purposes as well as for non-hedging (i.e.,
speculative) purposes.
The Utilities Series' portfolio will be managed actively and the selection of
securities modified as the Adviser deems necessary. Although the Utilities
Series does not intend to seek short-term profits, securities in its portfolio
will be sold whenever the Adviser believes it is appropriate to do so without
regard to the length of time the particular asset may have been held.
See Appendix A for a discussion of foreign securities, emerging market
securities, U.S. Government Securities, repurchase agreements and other
instruments set forth above and the risks involved in these investments. The
investment techniques set forth above and their attendant risks are also
discussed in Appendix A. Please refer to the SAI Appendix for further
discussion of these techniques.
(22) WORLD ASSET ALLOCATION SERIES
The World Asset Allocation Series will seek total return over the long term
through investments in equity and fixed income securities; the series will
also seek to have low volatility of share price (i.e., net asset value per
share) and reduced risk (compared to an aggressive equity/fixed income
portfolio).
The World Asset Allocation Series will seek to achieve its objective by
allocating portfolio assets among various asset classes of equity and fixed
income securities where the opportunities for total return are expected to be
most attractive. On average, over time, the World Asset Allocation Series
intends to invest approximately 65% of its total assets in equity securities;
however, at any particular point in time, equity securities may constitute
more or less than 65% of the series' total assets. Under normal circumstances,
the series intends to invest at least 30% of its total assets in equity
securities and allocate its assets among at least three asset classes, except
when the Adviser believes that investing for temporary defensive purposes is
appropriate as noted below.
Equity securities include: common and preferred stock; securities such as
bonds, warrants or rights that are convertible into stock; and depository
receipts for those securities. Fixed income securities include: bonds,
debentures and other debt instruments issued by a variety of issuers,
including corporations and other business entities, the U.S. and foreign
governments and their agencies, authorities, instrumentalities and political
subdivisions and supranational entities; mortgage-backed and other asset
backed securities; receipts evidencing separately traded interest and
principal component parts of obligations; and repurchase agreements involving
any of the foregoing types of securities.
The Adviser will allocate assets among some or all of the following five asset
classes of securities.
(i) U.S. Equity Securities--equity securities of U.S. issuers including
securities of emerging growth companies;
(ii) Foreign Equity Securities--equity securities of foreign issuers
including securities of issuers in emerging markets (as described in
Appendix A);
(iii) U.S. Investment Grade Fixed Income Securities--fixed income
securities of U.S. issuers (including U.S. Government Securities,
short-term instruments and municipal obligations) rated Baa or
better by Moody's or BBB or better by S&P, Fitch or Duff & Phelps or
comparable unrated securities;
(iv) U.S. High Yield Fixed Income Securities--high yield fixed income
securities of U.S. issuers, including municipal obligations, rated Ba
or below by Moody's or BB or below by S&P, Fitch or Duff & Phelps or
comparable unrated securities (commonly known as "junk bonds"); and
(v) Foreign Fixed Income Securities--fixed income securities of foreign
issuers including securities of issuers in emerging markets (as
described in Appendix A). Foreign fixed income securities may include
securities in any of the rating categories (and comparable unrated
securities) including securities in lower rating categories.
As of the date of this Prospectus, the target allocations of assets among the
asset classes are in the following approximate proportions of the World Asset
Allocation Series' portfolio: U.S. Equity Securities--15%; Foreign Equity
Securities--45%; U.S. Investment Grade Fixed Income Securities--10%; U.S. High
Yield Fixed Income Securities--10%; and Foreign Fixed Income Securities--20%.
Such allocation will change from time to time, as described below. (See
Appendix C for a chart indicating the composition of the World Asset
Allocation Series' portfolio for the fiscal year ended December 31, 1997, with
the debt securities separated into rating categories and comparable unrated
securities.)
The Adviser will allocate the assets of the World Asset Allocation Series
among some or all of the various asset classes described above where the
opportunities for total return are expected to be the most attractive,
consistent with the objective of seeking low share price volatility and
reduced risk. The judgment of the Adviser concerning the allocation of the
World Asset Allocation Series' assets will be based on the Adviser's
experience in qualitative and fundamental analysis and disciplined
quantitative techniques. The Adviser will make changes in the allocation of
assets of the World Asset Allocation Series when its research and analysis
indicate the likely occurrence of changes in financial markets or economic
conditions affecting the various asset classes that may change the expected
total return from the various asset classes. To the extent World Asset
Allocation Series assets are allocated among most or all of the asset classes,
this will reduce the impact of the poorer performing classes at any point in
time. By following this asset allocation strategy, the World Asset Allocation
Series' performance in part will be dependent on the Adviser's skill in
allocating assets.
Although the percentage of the World Asset Allocation Series' assets invested
in foreign securities will vary, the Series will be invested in at least three
different countries, one of which may be the United States, except when the
Adviser believes that investing for defensive purposes is appropriate as noted
below.
The risks of each asset class vary. For example, the values of equity
securities change in response to general market and economic conditions and
the activities and changing circumstances of individual issuers, and the
values of fixed income securities change in response to changes in economic
conditions, interest rates and the creditworthiness of individual issuers. A
significant portion of the World Asset Allocation Series' assets may be
allocated to equity and fixed income investments in foreign securities which
involve the risks set forth in Appendix A. The World Asset Allocation Series
may also invest up to 70% of its net assets (and expects to invest not more
than 50% of its net assets) in high yield fixed income securities (see "Lower
Rated Securities" in Appendix A).
In order to achieve its investment objective, the World Asset Allocation
Series also may purchase the securities and employ the investment techniques
described below: (1) emerging growth companies; (2) emerging markets
securities; (3) other investment companies; (4) investments for defensive
purposes; (5) foreign securities and foreign currencies; (6) purchasing zero
coupon bonds, deferred interest bonds, PIK bonds, loan participations and
other direct indebtedness, indexed securities, municipal obligations, mortgage
securities, collateralized mortgage obligations and multiclass pass-through
securities, stripped mortgage-backed securities, and restricted securities,
subject to the limitation on investing more than 15% of its net assets in
securities that are not readily marketable; (7) lending portfolio securities;
(8) entering into mortgage "dollar roll" transactions; (9) writing (selling)
covered put and call options on securities for the purpose of increasing its
return and/or to protect the value of its portfolio, and purchasing put and
call options on securities in anticipation of declines in the value of
portfolio securities or increases in the value of securities to be acquired
(the series may also write combinations of put and call options on the same
security, known as "straddles," which transactions can generate additional
income, but also present increased risks); (10) entering into "yield curve"
options for hedging and non-hedging purposes; (11) writing covered call and
put options and purchasing call and put options on domestic and foreign stock
indexes for the purpose of increasing its current income and/or for hedging
purposes and to attempt to reduce the risk of missing a market or industry
segment advance; (12) entering into contracts for the purchase or sale for
future delivery of fixed income securities or foreign currencies or contracts
based on indexes of securities or currencies (including any index of U.S. or
foreign securities) as such instruments become available for trading ("futures
contracts") for hedging purposes (to protect the Series' current or intended
investments from the effects of changes in interest or exchange rates or
declines in a securities market) as well as for non-hedging purposes, to the
extent permitted by law (which involves greater risks and could result in
losses which are not offset by gains and other portfolio assets); (13)
purchasing and writing options on futures contracts for the purpose of
protecting against declines in the value of portfolio securities or against
increases in the cost of securities to be acquired and also for non-hedging
purposes, to the extent permitted by applicable law; (14) entering into
forward foreign currency exchange contracts ("forward contracts") for hedging
purposes as well as non-hedging purposes; (15) purchasing and selling options
on foreign currencies for the purpose of protecting against declines in the
dollar value of foreign portfolio securities and against increases in the
dollar cost of securities to be acquired; and (16) entering into interest rate
swaps, currency swaps, and other types of available swap agreements for the
purpose of shifting the series' investment exposure from one type of
investment to another.
See Appendix A and the SAI Appendix for a discussion of the securities and
investment techniques set forth above and their attendant risks.
(23) WORLD GOVERNMENTS SERIES
The World Governments Series will seek moderate current income and
preservation and growth of capital by investing in debt obligations that are
issued or guaranteed as to principal and interest by (1) the U.S. government,
its agencies, authorities or instrumentalities ("U.S. Government Securities")
or (2) the governments of foreign countries ("Foreign Government Securities")
(to the extent the Adviser believes that the higher yields available from such
Foreign Government Securities are sufficient to justify the risks of investing
in such securities). The World Governments Series may also hold its assets in
cash or short-term obligations. In pursuing its objectives, the World
Governments Series will consider the preservation and growth of capital by
balancing the yields of various fixed income securities against their
attendant risks.
The World Governments Series will seek to provide purchasers with an
opportunity to enhance the value and increase the protection of their
investment against inflation and otherwise by taking advantage of investment
opportunities in the United States as well as in other countries where
opportunities may be more rewarding. It is believed that diversification of
assets on an international basis decreases the degree to which events in any
one country, including the United States, can affect the entire portfolio.
Although the percentage of the series' assets invested in securities issued
abroad and denominated in foreign currencies ("non-dollar securities") will
vary depending on the state of the economies of the principal countries of the
world, their financial markets and the relationships of their currencies to
the U.S. dollar, under normal conditions the series' portfolio will be
internationally diversified. However, for defensive reasons or during times of
international, political, or economic uncertainty or turmoil, most or all of
the series' investments may be in the United States.
The World Governments Series will purchase non-dollar securities denominated
in the currency of countries where the interest rate environment as well as
the general economic climate provide an opportunity for declining interest
rates and currency appreciation. If interest rates decline, such non-dollar
securities will appreciate in value. If the currency also appreciates against
the dollar, the total investment in such non-dollar securities would be
enhanced further. Conversely, a rise in interest rates or decline in currency
exchange rates would adversely affect the series' return. Investments in non-
dollar securities are evaluated primarily on the strength of a particular
currency against the dollar and on the interest rate climate of that country.
Currency is judged on the basis of fundamental economic criteria (e.g.,
relative inflation levels and trends, growth rate forecasts, balance of
payments status, and economic policies) as well as technical and political
data. In addition to the foregoing, interest rates are evaluated on the basis
of differentials or anomalies that may exist between different countries.
The phrase "preservation of capital" is generally understood to imply that the
portfolio is invested in very low risk securities and that the major risk is
loss of purchasing power through the effects of inflation or major changes in
interest rates. However, while the World Governments Series will invest in
securities which are believed by the Adviser to have minimal credit risk, an
error of judgment in selecting a currency or an interest rate environment
could result in loss of capital.
The World Governments Series may invest in Foreign Government Securities of
issuers considered stable by the Adviser. The Adviser does not believe that
the credit risk inherent in the obligations of such stable foreign governments
is significantly greater than that of U.S. Government Securities. The
percentage of the World Governments Series' assets invested in Foreign
Government Securities will vary depending on the relative yields of such
securities, the economies of the countries in which the investments are made
and such countries' financial markets, the interest rate climate of such
countries and the relationship of such countries' currencies to the U.S.
dollar. To the extent that the World Governments Series invests in Foreign
Government Securities, its portfolio, under normal conditions, will include
securities of a number of foreign countries. As a "non-diversified" series,
the World Governments Series will be able to invest more than 5% of its assets
in obligations of one or more foreign governments, to the extent consistent
with federal income tax diversification requirements; the World Governments
Series may also hold foreign currency for hedging purposes.
When the Adviser believes that investing for temporary defensive purposes is
appropriate, such as during periods of unusual market conditions, or when
relative yields are deemed attractive, part or all of the World Governments
Series' assets may be invested in cash (including foreign currency) or cash
equivalent short-term obligations including, but not limited to, certificates
of deposit, commercial paper, notes, U.S. Government Securities, Foreign
Government Securities and repurchase agreements.
Some U.S. Government Securities do not generally involve the credit risks
associated with other types of interest bearing securities, although, as a
result, the yields available from such securities are generally lower than the
yields available from other interest bearing securities. Like other interest
bearing securities, however, the values of U.S. Government Securities change
as interest rates fluctuate. When interest rates decline, the value of a
portfolio invested at higher yields can be expected to rise. Conversely, when
interest rates rise, the value of a portfolio invested at lower yields can be
expected to decline. If the series' expectations of changes in interest rates
or its evaluation of the normal yield relationship between two securities
proves to be incorrect, the series' income and the value of its shares
decreases.
In order to achieve its investment objectives, the World Governments Series
may employ the following investment techniques: (1) writing covered put and
call options and purchasing put and call options on U.S. and Foreign
Government Securities that are traded on United States and foreign securities
exchanges and over the counter in an effort to increase current income and to
reduce fluctuations in the value of its shares; (2) entering into contracts
for the purchase or sale for future delivery of fixed income securities or
foreign currencies, or contracts based on financial indexes, including any
index of U.S. or Foreign Government Securities ("futures contracts") and
purchasing and writing options to buy or sell futures contracts ("options on
futures contracts") but only as a hedge against anticipated further changes in
interest or exchange rates; (3) purchasing and writing put and call options on
foreign currencies traded on U.S. and foreign exchanges or over the counter
for the purpose of protecting against declines in the dollar value of foreign
portfolio securities and against increase in the dollar cost of foreign
securities to be acquired; (4) entering into forward foreign currency exchange
contracts ("forward contracts") to attempt to minimize the risk to the series
from adverse changes in the relationship between the U.S. dollar and foreign
currencies; (5) lending portfolio securities to the extent consistent with
present regulatory policies for the purpose of increasing the World
Governments Series' income; (6) purchasing securities on a "when-issued" or on
a "forward delivery" basis; (7) entering into repurchase agreements for U.S.
Government Securities; (8) entering into mortgage "dollar roll" transactions;
(9) purchasing restricted securities, subject to the limitation on investing
more than 15% of its net assets in securities that are not readily marketable;
and, subject to approval by the Board of Trustees, (10) entering into interest
rate swaps, currency swaps and other types of swap agreements; and (11)
purchasing indexed securities.
The World Governments Series will engage in portfolio trading if it believes
that a transaction, net of costs, will help in achieving its investment
objective. The World Governments Series cannot accurately predict its
portfolio turnover rate, but it is anticipated that the annual turnover rate
generally will not exceed 400% (excluding turnover of securities having a
maturity of one year or less). A high turnover rate (in excess of 100%)
involves greater expenses, including higher brokerage and transaction costs,
to the World Governments Series.
See Appendix A for a discussion of foreign securities, indexed securities,
U.S. Government Securities, and other instruments set forth above, and the
risks involved in such investments. The investment techniques set forth above
and their attendant risks are also discussed in Appendix A. Please refer to
the SAI Appendix for further discussion of these instruments and techniques.
(24) WORLD GROWTH SERIES
The World Growth Series will seek capital appreciation by investing in
securities of companies worldwide growing at rates expected to be well above
the growth rate of the overall U.S. economy. The World Growth Series will seek
to achieve this objective by investing primarily in securities in three market
sectors: U.S. emerging growth companies; foreign growth companies; and
emerging market companies. (The U.S. emerging growth and foreign growth
sectors may include securities of more established companies which represent
opportunities for long-term growth.) Although the percentage of the World
Growth Series' assets invested in securities issued abroad and denominated or
quoted in foreign currencies ("non-dollar securities") will vary depending on
the state of the economies of the various countries of the world, their
financial markets and the relationship of their currencies to the U.S. dollar,
under normal conditions, the series will be invested in at least three
different countries, one of which will be the United States. For defensive
reasons or during times of international political or economic uncertainty or
turmoil, most or all of the series' investments may be in the United States.
The series may invest up to 100% (and expects generally to invest between 25%
and 75%) of its assets in foreign securities which are not traded on a U.S.
exchange (not including ADRs).
While the World Growth Series intends to invest primarily in equity
securities, the series may also invest in fixed income securities as described
below and in Appendix A. Equity securities include: common and preferred
stocks; securities such as bonds, warrants or rights that are convertible into
stock; and depository receipts for those securities. The selection of
securities, except for defensive purposes, is made solely on the basis of
potential for capital appreciation. Dividend and interest income from
portfolio securities, if any, is incidental to the series' investment
objective of capital appreciation.
Debt securities of both domestic and foreign issuers in which the World Growth
Series may invest include all types of long- or short-term debt obligations,
such as bonds, debentures, notes, equipment lease certificates, equipment
trust certificates, conditional sales contracts and commercial paper. The
World Growth Series may also invest in zero coupon bonds, deferred interest
bonds, PIK bonds, and corporate asset-backed securities. Fixed income
securities in which the World Growth Series may invest include securities in
the lower rating categories of recognized rating agencies (and comparable
unrated securities). The series will not invest more than 35% of its net
assets in fixed income securities rated Ba or lower by Moody's or BB or lower
by S&P, Fitch or Duff & Phelps (or comparable unrated securities). (See
Appendix B for a description of these ratings. See also "Lower-Rated
Securities" in Appendix A.) To the extent the World Growth Series invests in
fixed income securities, the net asset value of the series may change as the
general levels of interest rates fluctuate. When interest rates decline, the
value of fixed income securities can be expected to rise. Conversely, when
interest rates rise, the value of fixed income securities can be expected to
decline.
In order to achieve its investment objective, the World Growth Series also may
purchase the securities and employ the investment techniques described below:
(1) emerging growth companies; (2) foreign growth companies; (3) emerging
market companies; (4) fixed income securities; (5) investments in other
companies; (6) investments for defensive purposes; (7) foreign securities; (8)
entering into repurchase agreements; (9) purchasing restricted securities,
subject to the limitation on investing more than 15% of its net assets in
securities that are not readily marketable; (10) writing (selling) covered put
and call options on securities that are traded on U.S. and foreign securities
exchanges and over the counter for the purpose of increasing its current
income and/or to protect the value of the series' portfolio and purchasing put
and call options on securities in anticipation of declines in the value of
portfolio securities or increases in the value of securities to be acquired
(the series may also write combinations of put and call options on the same
security, known as "straddles," which transactions can generate additional
income, but also present increased risk); (11) writing covered call and put
options and purchasing call and put options on domestic and foreign stock
indexes for the purpose of increasing current income and/or for hedging
purposes and to attempt to reduce the risk of missing a market or industry
segment advance; (12) entering into futures contracts and options on futures
contracts to protect the series' current or intended stock investments from
broad fluctuations in stock prices and, to the extent permitted by applicable
law, for non-hedging purposes, which involves greater risks and could result
in losses which are not offset by gains on other portfolio assets; (13)
entering into forward foreign currency exchange contracts ("forward
contracts") for hedging purposes as well as for the non-hedging purpose of
increasing the World Growth Series' current income; (14) entering into options
on foreign currencies for the purpose of protecting against declines in the
dollar value of foreign portfolio securities and against increases in the cost
of securities to be acquired; (15) lending portfolio securities; and (16)
purchasing securities on a "when-issued" or a "forward delivery" basis.
See Appendix A for a discussion of foreign securities, emerging market
securities, PIK bonds, corporate asset-backed securities, restricted
securities, repurchase agreements, and other instruments set forth above, and
the risks involved in these investments. The investment techniques set forth
above and their attendant risks are also discussed in Appendix A. Please refer
to the SAI Appendix for further discussion of these instruments and
techniques.
(25) WORLD TOTAL RETURN SERIES
The World Total Return Series will seek total return by investing in
securities which will provide above-average current income (compared to a
portfolio invested entirely in equity securities) and opportunities for long-
term growth of capital and income. The series will invest primarily in global
equity and fixed income securities (i.e., those of U.S. and non-U.S. issuers).
The World Total Return Series will seek to achieve its investment objective
through a professionally managed, internationally diversified portfolio
consisting of equity and fixed income securities. The World Total Return
Series will attempt to provide investors with an opportunity to enhance the
value and increase the protection of their investment against inflation and
otherwise by taking advantage of investment opportunities in the United States
as well as in other countries where opportunities may be more rewarding. It is
believed that diversification of assets on an international basis decreases
the degree to which events in any one country, including the United States,
can affect the entire portfolio. Although the percentage of the World Total
Return Series' assets invested in securities issued abroad and denominated or
quoted in foreign currencies ("non-dollar securities") will vary depending on
the state of the economies of the various countries of the world, their
financial markets and the relationship of their currencies to the U.S. dollar,
under normal conditions the series will be invested in at least three
different countries, one of which will be the United States. For defensive
reasons or during times of international or political or economic uncertainty
or turmoil, most or all of the series' investments may be in the United
States.
Under normal economic and market conditions, the World Total Return Series
will invest not less than 40% and not more than 75% of its assets in equity
securities. Such securities will include common stocks and equivalents (such
as convertible securities and warrants) and preferred stocks of (i) U.S.
issuers which derive, or have the potential to derive, a meaningful portion
(approximately 25% or more) of their revenues and earnings in foreign markets;
(ii) non-U.S. issuers; and (iii) to a lesser extent, other U.S. issuers. The
Series may invest up to 90% of its total assets in foreign securities (not
including ADRs), which may be traded on foreign exchanges. Consistent with its
investment objective and policies, the series may also invest in emerging
markets securities.
In managing the World Total Return Series conservatively, the Adviser attempts
to exercise prudence, discretion and intelligence in the selection of
securities of high or improving investment quality, with due regard for
probable income and probable safety of capital. The words "high investment
quality" reflect the intention of the World Total Return Series to invest in
securities of well-known, established issuers and to avoid the acquisition of
speculative securities or those of doubtful character even if the immediate
prospect is tempting. The Adviser may determine that a security possesses high
or improving investment quality if, for instance, there has been an increase
in the issuer's sales and earnings or if current trends indicate that an
increase in the issuer's sales and earnings is likely, or if the issuer's
balance sheet is strong or has improved. The opportunity for currency
appreciation generally is not a significant factor in the series' selection of
equity securities.
Under normal economic and market conditions, at least 25% of the World Total
Return Series' assets will be invested in fixed income securities, such as
bonds, debentures, mortgage securities, notes, commercial paper, obligations
issued or guaranteed by a government or any of its political subdivisions,
agencies or instrumentalities, certificates of deposit, as well as debt
obligations which may have a call on common stock by means of attached
warrants. Debt securities in which the series may invest may also include zero
coupon bonds.
The World Total Return Series will purchase non-dollar fixed income securities
denominated in the currency of countries where the interest rate environment
as well as the general economic climate provide an opportunity for declining
interest rates and currency appreciation. If interest rates decline, such non-
dollar fixed income securities will generally appreciate in value. If the
currency also appreciates against the dollar, the total investment in such
non-dollar fixed income securities would be enhanced further.
Conversely, a rise in interest rates or decline in currency exchange rates
would adversely affect the World Total Return Series' return. Investments in
non-dollar fixed income securities are evaluated by the Adviser primarily on
the strength of a particular currency against the dollar and on the interest
rate climate of that country. Currency is judged on the basis of fundamental
economic criteria (e.g., relative inflation levels and trends, growth rate
forecasts, balance of payments status and economic policies) as well as
technical and political data. In addition to the foregoing, interest rates are
evaluated on the basis of differentials or anomalies that may exist between
different countries. The World Total Return Series may hold foreign currency
received in connection with investments in non-dollar fixed income securities
when, in the judgment of the Adviser, it would be beneficial to convert such
currency into U.S. dollars at a later date, based on anticipated changes in
the relevant exchange rate.
The World Total Return Series will invest in investment grade U.S. and non-
U.S. fixed income securities. Such securities will be rated BBB or better by
S&P, Fitch or Duff & Phelps or Baa or better by Moody's or, if unrated, will
be determined by the Adviser to be of comparable quality. If a security
purchased by the World Total Return Series is subsequently downgraded to below
BBB by S&P, Fitch or Duff & Phelps or Baa by Moody's (or comparable standards
for unrated securities), the security will be sold only if the Adviser
believes it is advantageous to do so (see Appendix B and "Lower Rated
Securities" in Appendix A).
Assets invested in fixed income securities of non-U.S. issuers will be
diversified among countries where opportunities for total return are expected
to be most attractive. It is currently expected that fixed income investments
within foreign countries will be primarily in securities issued or guaranteed
by governments, including their political subdivisions, authorities, agencies
and instrumentalities, or supranational authorities (such as the World Bank)
to minimize credit risk. While the World Total Return Series will invest in
fixed income securities which are believed to have minimal credit risk, an
error of judgment in selecting a currency or an interest rate environment
could result in a loss of capital.
Although it may invest anywhere in the world, the World Total Return Series
expects to invest most of its assets in the equity securities of issuers
located in Europe, Japan or the United States and in the debt securities of
issuers located in any of such regions or countries or Australia, New Zealand
or Canada. The series may also invest in emerging market securities and Brady
Bonds. The series may invest more than 25% of its assets in securities of
issuers located in the United States. The Adviser will determine the amount of
the series' assets to be invested in the United States and the amount to be
invested abroad.
When unfavorable economic or market conditions exist, the series may, until
favorable conditions return, invest all or a portion of its assets in cash (or
foreign currency) or cash equivalents (such as certificates of deposit,
bankers acceptances and time deposits), commercial paper, short-term
obligations, repurchase agreements and obligations issued or guaranteed by the
U.S. or any foreign government or any of their agencies, authorities or
instrumentalities.
In order to achieve its investment objective, the World Total Return Series
may also purchase the securities and employ the investment techniques
described below: (1) entering into repurchase agreements; (2) lending
portfolio securities; (3) purchasing securities on a "when issued" or "forward
delivery" basis; (4) purchasing restricted securities, subject to the
limitation on investing more than 15% of its net assets in securities that are
not readily marketable, and ADRs; (5) entering into mortgage "dollar roll"
transactions; (6) writing (selling) covered put and call options on fixed
income securities for the purpose of increasing its return and/or to protect
the value of its portfolio, and purchasing put and call options on securities
in anticipation of declines in the value of portfolio securities or increases
in the value of securities to be acquired (the series may also write
combinations of put and call options on the same security, known as
"straddles," which transactions can generate additional income, but also
present increased risks); (7) entering into "yield curve" options for hedging
and non-hedging purposes; (8) entering into contracts for the purchase or sale
for future delivery of fixed income securities or foreign currencies or
contracts based on indexes of fixed income securities as such instruments
become available for trading ("futures contracts") for hedging purposes (to
protect the series' current or intended investments from the effects of
changes in interest or exchange rates, or declines in the value of fixed
income portfolio securities or increases in the cost of such securities to be
acquired) as well as for non-hedging purposes, to the extent permitted by
applicable law (which involves greater risks and could result in losses which
are not offset by gains and other portfolio assets); (9) purchasing and
writing options on futures contracts for the purpose of protecting against
declines in the value of portfolio securities or against increases in the cost
of securities to be acquired and also for non-hedging purposes, to the extent
permitted by applicable law; (10) entering into forward foreign currency
exchange contracts ("forward contracts") for hedging purposes as well as for
the non-hedging purpose of increasing current income; (11) purchasing and
selling options on foreign currencies for the purpose of protecting against
declines in the dollar value of fixed income portfolio securities and against
increases in the dollar cost of fixed income securities to be acquired; and
(12) entering into interest rate swaps, currency swaps and other types of swap
agreements.
The World Total Return Series portfolio will be managed actively and the asset
allocations modified as the Adviser deems necessary. Although the series does
not intend to seek short-term profits, securities in its portfolio will be
sold whenever the Adviser believes it is appropriate to do so without regard
to the length of time the particular asset may have been held.
See Appendix A for discussion of foreign securities, emerging market
securities, Brady Bonds, ADRs, corporate asset-backed securities, zero coupon
bonds, restricted securities and other instruments set forth above, and the
risks involved in these securities. The investment techniques set forth above
and their attendant risks are also discussed in Appendix A. Please refer to
the SAI Appendix for further discussion of these techniques.
(26) ZERO COUPON SERIES, PORTFOLIO 2000
The Zero Coupon Series, Portfolio 2000 will seek the highest predictable
compounded investment return for a specific period of time, consistent with
the safety of invested capital, by investing primarily in debt obligations of
the United States Treasury that have been issued without interest coupons or
stripped of their unmatured interest coupons, interest coupons that have been
stripped from such debt obligations, and receipts and certificates for such
stripped debt obligations and stripped coupons (collectively, "Zero Coupon
Obligations"). This portfolio is a sub-series of the Zero Coupon Series and
has a liquidation date of November 15, 2000. This series is currently
available only in connection with the purchase of variable life insurance
contracts issued by Sun Life of Canada (U.S.).
The Zero Coupon Series invests only in readily marketable debt securities. It
is the policy of the Zero Coupon Series to invest at least 90% of its assets
in Zero Coupon Obligations. Up to 10% of the assets may be invested and held
in stripped securities issued by corporations with a quality rating of Baa or
better (see Appendix B). MFS will evaluate the creditworthiness of potential
investments in corporate securities in order to determine whether such
securities are suitable for purchase by the Zero Coupon Series.
Because it does not make periodic interest payments, a Zero Coupon Obligation
normally trades at a price significantly less than face value, often referred
to as a "deep discount." The size of this discount depends upon the final
maturity of the Zero Coupon Obligation and current market interest rates.
Investment return consists of the difference between the face value of the
Zero Coupon Obligation (which is paid at the time of maturity, or the payment
date in the case of coupons) and the price at which the Zero Coupon Obligation
was acquired. Investment return is normally expressed in terms of a compounded
rate of return, which is calculated as though there were an automatic
reinvestment of current earnings at a rate of return that is "locked in" at
the time of initial investment.
As with any fixed income investment, when interest rates decline, the market
value of an investment made at higher yields can be expected to rise.
Conversely, when interest rates rise, the market value of an investment made
at lower yields can be expected to decline. Because they "automatically
reinvest" current earnings, investments in Zero Coupon Obligations eliminate
the risk of being unable to reinvest current earnings at a rate as high as the
implicit yield on the Zero Coupon Obligations; conversely, they forego the
ability to reinvest at higher rates should market interest rates rise in the
future.
The value of the Zero Coupon Obligations acquired by the Portfolio, and
therefore the value of shares in the Portfolio, may be subject to greater
fluctuations in response to changing market interest rates than the value of
debt obligations that pay interest currently. The degree of fluctuation with
interest rate changes is typically greater when the period to maturity is
longer.
It is the policy of the Zero Coupon Series to invest as great a portion of its
assets as is practicable in Zero Coupon Obligations. Any Zero Coupon
Obligations purchased will mature within one year of the Portfolio liquidation
date. A portion of the Zero Coupon Series may be invested in interest-bearing
debt obligations in order to make effective use of cash reserves pending
investments in the securities described above, pending liquidation and to
permit the payment of current operating expenses of the Zero Coupon Series.
On the liquidation date of the Portfolio, all of the securities held by the
Portfolio will be sold and all outstanding shares of the Portfolio will be
redeemed. As explained in the prospectus for the Contracts, the redemption
proceeds will, except as otherwise directed by Contract owners, be used to
purchase shares of the Money Market Series.
The Zero Coupon Series seeks to realize a higher yield than would be obtained
simply by maintaining the Zero Coupon Series' initial investments. The Zero
Coupon Series is actively managed by the Adviser to take advantage of trading
opportunities that may exist from time to time due to price and yield
distortions resulting from changes in the supply and demand characteristics or
perceived differences in quality or liquidity characteristics of the
securities available for purchase by the Zero Coupon Series. There is a
corresponding risk that, to the extent that this strategy is unsuccessful, the
initial yield objective will not be met.
As described above, Zero Coupon Obligations, if held to maturity, provide a
predictable yield. However, in light of the fluctuation in the market value of
the Zero Coupon Obligations that occurs with changes in market interest rates,
Contract owners who desire to attain the growth rate anticipated at the time
of investment must plan to leave their Account Values invested in Portfolio
shares until the Portfolio matures. Any Contract owner who transfers his or
her Account Values in the Portfolio prior to the Portfolio liquidation date is
likely to achieve quite a different investment return than the return that was
anticipated on the date the investment was made, and may even suffer a loss.
YIELD
The calculation of a Portfolio's anticipated yield assumes that (a) all
dividends and disbursements will be reinvested and (b) the expense ratio and
portfolio composition of a Portfolio remains unchanged for the life of that
Portfolio. Factors such as MFS' investment skills and changes in the economy's
interest rate structure will determine how closely the return actually
realized by a Contract owner matches the anticipated yield if such owner's
Account Value remains invested in a Portfolio's shares and all dividends and
distributions are reinvested until the Portfolio matures.
PORTFOLIO TRANSACTIONS
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain, and maintain the availability of,
execution at the most favorable prices and in the most effective manner
possible. Consistent with the foregoing primary consideration, the Conduct
Rules of the National Association of Securities Dealers, Inc. (the "NASD") and
such other policies as the Trustees may determine, MFS may consider the sale
of Contracts, and thus the sale of Series Fund shares through the allocation
of purchase payments under the Contracts, together with the sale of shares of
funds in the MFS Family of Funds, as a factor in the selection of broker-
dealers to execute the Series Fund's portfolio transactions. The Adviser and
the Sub-Advisers also have the ability to direct portfolio security
transactions to broker-dealers in consideration of the payment of certain
Series Fund expenses. As discussed under "Condensed Financial Information"
above, certain series have had portfolio turnover rates that exceed 100%. A
relatively high level of portfolio activity (i.e., in excess of 100%) involves
greater expenses, including higher transaction and brokerage costs, to the
series. For a further discussion of portfolio trading, see the SAI.
INVESTMENT RESTRICTIONS
The SAI includes a listing of specific investment restrictions and a
discussion of investment policies applicable to each series. The specific
investment restrictions listed in the SAI may be changed without shareholder
approval, unless otherwise indicated. Except for each series' policy on
borrowing and investing in illiquid securities, a percentage restriction or a
rating restriction on investments or utilization of assets is adhered to at
the time an investment is made or assets are so utilized, a later change in
percentage resulting from changes in the value of the Series Fund's portfolio
securities or a change in the rating of a portfolio security will not be
considered a violation of policy.
NON-DIVERSIFIED STATUS
The High Yield Series, Managed Sectors Series, Strategic Income Series,
Utilities Series, World Asset Allocation Series, World Governments Series,
World Growth Series and World Total Return Series are "non-diversified" as
that term is defined in the Investment Company Act of 1940, as amended (the
"1940 Act"), so that the proportion of their assets that may be invested in
the securities of any one issuer is limited only by the series' own investment
restrictions and the diversification requirements of the Internal Revenue Code
of 1986, as amended. Since these series may invest a relatively high
percentage of their assets in a limited number of issuers, they will be more
susceptible to any single economic, political or regulatory occurrence and to
the financial conditions of the issuers in which they invest.
4. MANAGEMENT OF THE SERIES FUND
The Series Fund's Board of Trustees provides broad supervision over the
affairs of the Series Fund. MFS is responsible for the management of each
series' assets (including supervision of the Sub-Advisers), and the officers
of the Series Fund are responsible for the Series Fund's operations.
INVESTMENT ADVISER --MFS, a Delaware corporation, 500 Boylston Street, Boston,
Massachusetts 02116, manages the assets of the series pursuant to Investment
Advisory Agreements as noted below:
<TABLE>
<CAPTION>
DATE OF INVESTMENT
SERIES ADVISORY AGREEMENT
- --------------------------------------------------------------------------------------
<S> <C>
Money Market, High Yield and Capital Appreciation ................ May 24, 1985
Government Securities, Conservative Growth and Zero Coupon ....... July 23, 1986
World Governments, Total Return and Managed Sectors .............. January 26,1988
World Growth and Utilities ....................................... November 1,1993
Research, World Asset Allocation and World Total Return .......... September 16, 1994
Emerging Growth .................................................. May 1, 1995
MFS/Foreign & Colonial Emerging Markets Equity,
International Growth, International Growth and Income .......... September 1, 1995
Capital Opportunities ............................................ May 1, 1996
Research Growth and Income ....................................... May 12, 1997
Bond, Equity Income, Massachusetts Investors Growth Stock,
New Discovery, Research International and Strategic Income ..... May 1, 1998
</TABLE>
Under the Advisory Agreements, the Adviser provides each series of the Series
Fund with overall investment advisory services. The portfolio manager(s) of
each series and his/her position with MFS are shown below.
<TABLE>
<CAPTION>
SERIES PORTFOLIO MANAGERS
------ ------------------
<S> <C>
Bond Geoffrey L. Kurinsky, a Senior Vice President of MFS, has been employed by the Adviser as a
portfolio manager since 1987.
Capital Appreciation Paul M. McMahon, a Senior Vice President of MFS, has been employed by the Adviser as a portfolio
manager since 1981.
Capital Opportunities John F. Brennan, Jr., a Senior Vice President of MFS, has been employed by the Adviser as a
portfolio manager since 1985.
Conservative Growth John D. Laupheimer, Jr., a Senior Vice President of MFS, has been employed by the Adviser as a
portfolio manager since 1981. Kevin R. Parke, an Executive Vice President of MFS, has been
employed by the Adviser as a portfolio manager since 1985. Mitchell D. Dynan, a Vice President of
MFS, has been employed by the Adviser as a portfolio manager since 1986.
Emerging Growth John W. Ballen, an Executive Vice President of MFS, has been employed by the Adviser as a
portfolio manager since 1984. Toni Y. Shimura, a Vice President of MFS, has been employed by the
Adviser as a portfolio manager since 1987.
Equity Income Lisa B. Nurme, a Senior Vice President of MFS, has been employed by the Adviser as a portfolio
manager since 1987.
Government Securities Steven E. Nothern, a Vice President of MFS, has been employed by the Adviser as a portfolio
manager since 1986.
High Yield Bernard Scozzafava, a Vice President of MFS, has been employed by the Adviser as a portfolio
manager since 1989.
International Growth David R. Mannheim, a Senior Vice President of the Adviser, has been employed as a portfolio
manager with the Adviser since 1988. In addition, Dr. Arnab Kumar Banerji, Chief Investment
Officer of FCEM, and Jeffrey Chowdhry, a Director at FCEM, will manage the portion of the
International Growth Series' assets invested in emerging market equity securities. Messrs.
Banerji and Chowdhry have been employed by FCEM as portfolio managers since 1993 and 1994,
respectively. Prior to 1993, Mr. Banerji served as Joint Head of Emerging Markets for Citibank
Global Asset Management. Prior to 1994, Mr. Chowdhry was a portfolio manager at BZW Investment
Management.
International Growth and Income Frederick J. Simmons, a Senior Vice President of the Adviser, has been employed as a Portfolio
Manager with the Adviser since 1971.
Managed Sectors Kenneth J. Enright, a Vice President of MFS, has been employed by the Adviser as a portfolio
manager since 1986.
Massachusetts Investors Growth Christian Felipe, a Senior Vice President of MFS, has been employeed by the Adviser as a
Stock portfolio manager since 1986.
MFS/Foreign & Colonial Dr. Arnab Kumar Banerji, Chief Investment Officer of FCEM, and Jefferey Chowdry, a Director of
Emerging Markets Equity FCEM, are the series' portfolio managers. Dr. Banerji has been employed by FCEM as a portfolio
manager since 1993 before which he served as Joint Head of Emerging Markets for Citibank Global
Asset Management since 1989. Mr. Chowdry has been employed by FCEM as a portfolio manager since
1994, before which he was a portfolio manager at BZW Investment Management.
New Discovery Brian E. Stack, a Vice President of MFS, has been employed by the Adviser as a portfolio manager
since 1993.
Research, Research Growth These series are managed by a committee comprised of various equity research analysts.
and Income and Research
International
Strategic Income James T. Swanson, a Senior Vice President of MFS, has been employed by the Adviser as a portfolio
manager since 1985.
Total Return David M. Calabro, a Senior Vice President of MFS, has been employed by the Adviser as a portfolio
manager since 1992.
Geoffrey L. Kurinsky, a Senior Vice President of MFS, has been employed by the Adviser as a
portfolio manager since 1987.
Utilities Maura A. Shaughnessy, a Senior Vice President of MFS, has been employed by the Adviser as a
portfolio manager since 1991.
World Asset Allocation James T. Swanson, a Senior Vice President of MFS, has been employed by the Adviser as a portfolio
manager since 1985. David R. Mannheim, a Senior Vice President of MFS, has been employed by the
Adviser as a portfolio manager since 1988. Robert J. Manning, a Senior Vice President of MFS, has
been employed by the Adviser as a portfolio manager since 1984. Geoffrey L. Kurinsky, a Senior
Vice President of MFS, has been employed by the Adviser as a portfolio manager since 1987.
Stephen Pesek, a Vice President of MFS, has been employed by the Adviser as a portfolio manager
since 1994. Prior to 1994, Mr. Pesek worked at Fidelity Investments as an analyst. Leslie J.
Nanberg, a Senior Vice President of MFS, has been employed by the Adviser as a portfolio manager
since 1980.
World Governments Stephen C. Bryant, a Senior Vice President of MFS, has been employed by the Adviser as a
portfolio manager since 1987.
World Growth See description immediately below.
World Total Return Frederick J. Simmons, a Senior Vice President of MFS, has been employed by the Adviser as a
portfolio manager since 1971.
Zero Coupon Geoffrey L. Kurinsky, a Senior Vice President of MFS, has been employed by the Adviser as a
portfolio manager since 1987.
</TABLE>
The World Growth Series' assets are allocated by the Adviser among: domestic
(i.e., U.S.) growth companies; foreign developed markets (e.g., Western
European countries) growth companies; and foreign emerging markets (e.g.,
South American and Pacific Rim countries) growth companies.
The World Growth Series' assets allocated to domestic growth companies are
managed by John W. Ballen, Executive Vice President, Toni Y. Shimura, Vice
President, and David R. Mannheim, Senior Vice President of the Adviser, each
of whom has been employed by the Adviser as a portfolio manager since 1984,
1987 and 1988, respectively.
The World Growth Series' assets allocated to foreign developed markets growth
companies are managed by a committee of investment research analysts. This
committee includes investment analysts employed not only by the Adviser but
also by MFS International (U.K.) Limited, a wholly owned subsidiary of MFS.
This portion of the World Growth Series' assets are further allocated among
countries and industries by the analysts acting together as a group.
Individual analysts are then responsible for selecting what they view as the
securities best suited to meet the World Growth Series' investment objective
within their assigned geographic and industry responsibility.
The World Growth Series' assets allocated to foreign emerging markets growth
securities are managed by Dr. Arnab Kumar Banerji, Chief Investment Officer of
FCEM. Dr. Banerji has been employed by FCEM as a portfolio manager since 1993.
Prior to 1993, Dr. Banerji served as Joint Head of Emerging Markets for
Citibank Global Asset Management since 1989.
Subject to such policies as the Trustees may determine, the Adviser makes
investment decisions for each series of the Series Fund. For these services,
the Adviser receives a fee computed and paid monthly at an annual rate equal
to:
<TABLE>
<CAPTION>
MANAGEMENT FEE AS A % OF
SERIES AVERAGE DAILY NET ASSETS ("ADNA")
- ------ ---------------------------------
<S> <C>
Bond .............................................................. 0.60%
Capital Appreciation .............................................. 0.75% of the first $1 billion of ADNA
0.675% of next $500 million of ADNA
0.65% of ADNA in excess of $1.5 billion
Capital Opportunities ............................................. 0.75% of the first $300 million of ADNA
0.675% of ADNA in excess of $300 million
Conservative Growth ............................................... 0.55%
Emerging Growth ................................................... 0.75% of the first $300 million of ADNA
0.675% of ADNA in excess of $300 million
Equity Income ..................................................... 0.75%
Government Securities ............................................. 0.55%
High Yield ........................................................ 0.75%
International Growth .............................................. 0.975% of the first $500 million of ADNA
0.925% of ADNA in excess of $500 million
International Growth and Income ................................... 0.975% of the first $500 million of ADNA
0.925% of ADNA in excess of $500 million
Managed Sectors ................................................... 0.75% of the first $300 million of ADNA
0.675% of ADNA in excess of $300 million
Massachusetts Investors Growth Stock .............................. 0.75%
MFS/Foreign & Colonial Emerging Markets Equity .................... 1.25%
Money Market ...................................................... 0.50%
New Discovery ..................................................... 0.90%
Research .......................................................... 0.75% of the first $300 million of ADNA
0.675% of ADNA in excess of $300 million
Research Growth and Income ........................................ 0.75%
Research International ............................................ 1.00%
Strategic Income .................................................. 0.75%
Total Return ...................................................... 0.75% of the first $300 million of ADNA
0.675% of ADNA in excess of $300 million but less than $1
billion
0.60% of ADNA in excess of $1 billion
Utilities ......................................................... 0.75% of the first $300 million of ADNA
0.675% of ADNA in excess of $300 million
World Asset Allocation ............................................ 0.75% of the first $300 million of ADNA
0.675% of ADNA in excess of $300 million
World Governments ................................................. 0.75% of the first $300 million of ADNA
0.675% of ADNA in excess of $300 million
World Growth ...................................................... 0.90%
World Total Return ................................................ 0.75% of the first $300 million of ADNA
0.675% of ADNA in excess of $300 million
Zero Coupon ....................................................... 0.25%
</TABLE>
For the Series Fund's fiscal year ended December 31, 1997 the Series Fund's
Adviser received fees under the investment advisory agreements as follows:
<TABLE>
<CAPTION>
MANAGEMENT
MANAGEMENT FEES WAIVED
FEES PAID FOR BY ADVISER FOR
FISCAL YEAR FISCAL YEAR
SERIES ENDED 1997 % ADNA ENDED 1997 % ADNA
- ------ ------------- ------ --------------- ------
<S> <C> <C> <C> <C>
Capital Appreciation ..................................................... $8,924,179 0.73% N/A N/A
Capital Opportunities .................................................... 296,136 0.62 $61,335 0.13%
Conservative Growth ...................................................... 4,647,665 0.55 N/A N/A
Emerging Growth .......................................................... 2,590,450 0.73 N/A N/A
Government Securities .................................................... 2,066,478 0.55 N/A N/A
High Yield ............................................................... 1,720,706 0.75 N/A N/A
International Growth ..................................................... 126,735 0.81 26,067 0.17
International Growth and Income .......................................... 427,422 0.97 N/A N/A
Managed Sectors .......................................................... 2,276,250 0.74 N/A N/A
MFS/Foreign & Colonial Emerging Markets Equity ........................... 131,518 0.77 83,132 0.48
Money Market ............................................................. 1,946,081 0.50 N/A N/A
Research ................................................................. 3,593,814 0.72 N/A N/A
Research Growth and Income Series(1) ..................................... 7,542 0.45 5,017 0.30
Total Return ............................................................. 10,008,562 0.66 N/A N/A
Utilities ................................................................ 669,213 0.75 N/A N/A
World Asset Allocation ................................................... 786,866 0.75 N/A N/A
World Governments ........................................................ 916,874 0.75 N/A N/A
World Growth ............................................................. 2,124,944 0.90 N/A N/A
World Total Return ....................................................... 409,708 0.75 N/A N/A
Zero Coupon .............................................................. 9,326 0.25 N/A N/A
</TABLE>
(1)From the commencement of investment operations on May 13, 1997.
MFS also serves as investment adviser to each of the funds in the MFS Family
of Funds and to certain other registered investment companies established by
MFS and/or Sun Life of Canada (U.S.). MFS Institutional Advisors, Inc., a
wholly owned subsidiary of MFS, provides investment advice to substantial
private clients. MFS is America's oldest mutual fund organization. MFS and its
predecessor organizations have a history of money management dating from 1924
and the founding of the first mutual fund in the United States, Massachusetts
Investors Trust. Net assets under the management of the MFS organization were
approximately $82.2 billion on behalf of 3.1 million investor accounts as of
March 31, 1998, consisting of approximately $21.1 billion of assets invested
in fixed income funds or portfolios, approximately $4.3 billion in foreign
securities and approximately $56.9 billion in equity securities. MFS is a
subsidiary of Sun Life of Canada (U.S.), Financial Services Holdings, Inc.,
which, in turn, is an indirect wholly owned subsidiary of Sun Life Assurance
Company of Canada ("Sun Life"). The Directors of MFS are John W. Ballen,
Arnold D. Scott, Donald A. Stewart, John D. McNeil and Jeffrey L. Shames. Mr.
Ballen is an Executive Vice President of MFS, Mr. Shames is the Chairman,
Chief Executive Officer and President of MFS, and Mr. Scott is the Secretary
and a Senior Executive Vice President of MFS, and Messrs. McNeil and Stewart
are the Chairman and President, respectively, of Sun Life. Sun Life, a mutual
life insurance company, is one of the largest international life insurance
companies in the world and has been operating in the United States since 1895.
The executive officers of MFS report directly to the Chairman of Sun Life.
John D. McNeil is the Chairman and a Trustee of the Series Fund and is a
director and/or officer of Sun Life, Sun Life of Canada (U.S.) and Sun Life
(N.Y.). Stephen E. Cavan, James R. Bordewick, Jr., W. Thomas London, Mark E.
Bradley, Ellen Moynihan and James O. Yost are officers of the Series Fund and
of MFS.
In certain instances there may be securities which are suitable for the Series
Fund's portfolio as well as for portfolios of other clients of MFS. Some
simultaneous transactions are inevitable when several clients receive
investment advice from MFS, particularly when the same security is suitable
for more than one client. While in some cases this arrangement could have a
detrimental effect on the price or availability of the security as far as a
series is concerned, in other cases it may produce increased investment
opportunities for a series.
SUB-INVESTMENT ADVISERS
The Advisory Agreements with respect to the International Growth Series,
Emerging Markets Equity Series and the World Growth Series permit the Adviser
from time to time to engage one or more sub-advisers to assist in the
performance of its services.
The Adviser has engaged FCM, a company incorporated under the laws of England
and Wales, located at Exchange House, Primrose Street, London EC2A 2NY, United
Kingdom, as sub-adviser to render advisory services to the International
Growth Series, Emerging Markets Equity Series and World Growth Series. FCM is
a subsidiary of Hypo Foreign & Colonial Management (Holdings) Ltd. ("Hypo
F&C"). Sixty-five percent of the outstanding voting securities of Hypo F&C is
owned by Hypo (U.K.) Holdings Ltd., which is a wholly owned subsidiary of
HYPO-BANK (Bayerische Hypotheken-und Wechsel-Bank AG), the
oldest publicly listed, and fifth largest, commercial bank in Germany, founded
in 1835. The remaining thirty-five percent is owned by four closed-end,
publicly listed investment trusts managed by FCM, including Foreign & Colonial
Investment Trust PLC (which has a 30.5 percent interest). FCM has a history of
money management dating from 1868 and the establishment of the world's oldest
closed-end fund, Foreign & Colonial Investment Trust PLC. As of December 31,
1997, FCM managed approximately U.S. $46.8 billion of assets.
Under separate Sub-Advisory Agreements between the Adviser and FCM, dated
September 1, 1995, September 1, 1995 and May 1, 1996 (the "Sub-Advisory
Agreements"), the Adviser may delegate to FCM the authority to make investment
decisions for each of the International Growth Series, Emerging Markets Equity
Series and World Growth Series, respectively. It is presently intended that
FCM will provide portfolio management services for all of the assets of the
Emerging Markets Equity Series and for the emerging markets portion of the
assets of the International Growth Series and the World Growth Series. Under
the Sub-Advisory Agreements, the Adviser pays FCM a management fee, computed
and paid monthly, in an amount (before waivers, described below) equal to
0.80%, 1.00% and 1.00% of the average daily net assets of the International
Growth Series, the Emerging Markets Equity Series and the World Growth Series,
respectively, on an annualized basis.
Each Sub-Advisory Agreement permits FCM from time to time to engage one or
more sub-advisers to assist in the performance of its services. Pursuant to
each Sub-Advisory Agreement, FCM has engaged FCEM, a company incorporated
under the laws of England and Wales, located at Exchange House, Primrose
Street, London EC2A, 2NY, United Kingdom, as sub-adviser to render advisory
services to the International Growth Series, the Emerging Markets Equity
Series and the World Growth Series. FCEM is a wholly owned subsidiary of FCM.
FCEM serves as the investment adviser to public closed-end and open-end funds
and segregated accounts specializing in emerging markets. As of December 31,
1997, FCEM managed approximately U.S. $4.8 billion of assets invested in
emerging markets. FCEM provides portfolio management services for the portion
of the assets of the series invested in emerging markets securities. Under the
Sub-Advisory Agreements between FCM and FCEM, FCM pays FCEM a management fee,
computed and paid monthly, in an amount (before waivers, described below)
equal to 1.00% of the average daily net assets managed by FCEM of each series
on an annualized basis.
Effective September 8, 1997, FCM agreed to permanently waive a portion of the
sub-investment advisory fees it receives from MFS with respect to the
International Growth Series, Emerging Markets Equity Series and the World
Growth Series; pursuant to this waiver, MFS will pay to FCM a fee of 0.65% per
annum of each such series' average daily net assets managed by FCM (FCEM will,
in turn, waive the sub-investment advisory fee it receives from FCM to the
same extent). This waiver does not affect the amount of advisory fees paid by
these series to MFS.
Effective September 8, 1997, MFS assumed all portfolio management
responsibilities for the International Growth and Income Series, and the sub-
investment advisory agreements pursuant to which FCM and FCEM provided their
services to this series terminated.
ADMINISTRATOR -- MFS provides each series with certain financial, legal,
compliance, shareholder communications and other administrative services
pursuant to a Master Administrative Services Agreement dated March 1, 1997, as
amended. Under this Agreement, each Series pays MFS an administrative fee up
to 0.015% per annum of the series' average daily net assets. This fee
reimburses MFS for a portion of the costs it incurs to provide such services.
EXPENSES
The Series Fund pays the compensation of the four Trustees who are not
affiliated with MFS or Sun Life of Canada (U.S.) as well as certain of its
other expenses and fees, including governmental fees, taxes, brokerage
expenses, fees and expenses of legal counsel, independent auditors, any
shareholder servicing agent, dividend disbursing agent and the custodian and
expenses of preparing, printing and mailing materials to shareholders and
government authorities, in certain cases subject to limited reimbursement by
MFS (see "Management of the Series Fund" in the SAI). Expenses which are not
attributable to a specific series are allocated among the series in a manner
believed to be fair and equitable to each.
MFS has agreed to assume and bear the following Series' "Total Operating
Expenses," excluding taxes, extraordinary expenses and brokerage and
tranactions costs, which exceed the following per annum percentages of their
average daily net assets.
SERIES PERCENTAGE
------ ----------
Capital Appreciation ...................... 1.25%
Conservative Growth ....................... 1.25%
Government Securities ..................... 1.25%
World Governments ......................... 1.25%
High Yield ................................ 1.25%
Managed Sectors ........................... 1.25%
Money Market .............................. 0.60%
Total Return .............................. 1.25%
Zero Coupon Series ........................ 1.25%
Subject to termination or revision at the sole discretion of MFS, MFS has
agreed to bear the following Series' expenses such that such Series' "Other
Expenses," which are defined to include all Series expenses (after taking into
effect any compensation balance and offset arrangements) except for management
fees, taxes, extraordinary expenses, brokerage and transaction costs, do not
exceed the following per annum percentages of their average net
assets (the "Maximum Percentage"). The obligation of MFS to bear these
expenses terminates on the date on which the Series "Other Expenses" are less
than or equal to the Maximum Percentage:
SERIES MAXIMUM PERCENTAGE
------ ------------------
Bond .................................... 0.40%
Equity Income ........................... 0.25%
Massachusetts Investors Growth Stock .... 0.25%
New Discovery ........................... 0.35%
Research International .................. 0.50%
Strategic Income ........................ 0.50%
POTENTIAL CONFLICTS
Shares of the Series Fund may be offered to Variable Accounts established by
Sun Life of Canada (U.S.), Sun Life (N.Y.) and their affiliated companies to
fund benefits under both variable annuity and variable life insurance
products. The Series Fund does not anticipate any disadvantage to contract
owners arising out of its simultaneous funding of both variable annuity and
variable life insurance contracts. Such conflict could occur due to a change
in laws affecting the operation of variable life and/or variable annuity
separate accounts or for some other reason. The management of the Series Fund
intends to monitor events in order to identify any material conflicts among
the interests of variable annuity contract owners and the interests of
variable life insurance contract owners and to determine what action, if any,
should be taken in response. In addition, if Sun Life of Canada (U.S.) and/or
Sun Life (N.Y.) believe the Series Fund's response to any such events or
conflicts is insufficient to protect contract owners, they will take
additional appropriate action. Such action might include withdrawal by one or
more separate accounts of their investment in the Series Fund, which could
force the Series Fund to liquidate portfolio securities at disadvantageous
prices.
5. ADDITIONAL INFORMATION WITH RESPECT TO SHARES OF EACH SERIES
PURCHASES
Sun Life of Canada (U.S.) and Sun Life (N.Y.) buy shares of each series at
their net asset value without a sales charge for their Variable Accounts
through the allocation of purchase payments made under Contracts issued by Sun
Life of Canada (U.S.) and Sun Life (N.Y.) in accordance with the allocation
instructions received from owners of the Contracts.
NET ASSET VALUE, DIVIDENDS AND DISTRIBUTIONS
The Net Asset Value of each series is determined as of the close of regular
trading on the New York Stock Exchange on each day the Exchange is open for
trading.
MONEY MARKET SERIES -- All the Net Income, as defined in the SAI, of the Money
Market Series is declared as a dividend to its shareholders at the time of
such determination. Shares purchased become entitled to dividends declared as
of the first day following the date of investment. Dividends are distributed
on the last business day of each month. If paid in the form of additional
shares, dividends are paid at the rate of one share (and fraction thereof) for
each one dollar (and fraction thereof) of dividend income attributable to the
Money Market Series.
Securities held by the Money Market Series are valued at amortized cost, which
the Trustees have determined in good faith constitutes fair value for the
purposes of complying with the 1940 Act. This valuation method will continue
to be used until such time as the Trustees determine that it does not
constitute fair value for such purposes. Since the Net Income of the Money
Market Series is declared as a dividend each time the Net Income of that
series is determined, the net asset value per share of that series (i.e., the
value of the net assets of that series divided by the number of its shares
outstanding) remains at $1.00 per share immediately after each such
determination and dividend declaration.
It is expected that the Money Market Series will have a positive Net Income at
the time of each determination thereof. If for any reason the Net Income
determined at any time is a negative amount, the Series Fund will first offset
the negative amount against the dividends declared during the month and will
then, to the extent necessary, reduce the number of its outstanding shares by
treating each shareholder of that series as having contributed to the capital
of that series that number of full and fractional shares in the account of
such shareholder which represents his proportion of the negative amount. Each
shareholder of the Money Market Series will be deemed to have agreed to such
contribution in these circumstances by his investment in that series. This
procedure will permit the net asset value per share of the Money Market Series
to be maintained at a constant $1.00 per share. There can be no assurance that
the Money Market Series will be able to maintain a stable net asset value of
$1.00 per share, other than by such offset of dividends or reduction in the
number of shares in a shareholder account.
ZERO COUPON SERIES -- The Net Asset Value of the shares of the Zero Coupon
Series will be determined in accordance with the procedures set forth at page
of this Prospectus. This determination will be made at the close of regular
trading on the New York Stock Exchange on each day the Exchange is open for
trading. MFS also will calculate the compounded annual yield that would result
if all securities in the Portfolio were held until the liquidation date or
until their maturity dates, if earlier (with the proceeds reinvested until the
liquidation date). This is the anticipated yield for the Portfolio on a given
date. It can also be expressed as the amount to which an investment of $10,000
is predicted to grow by the Portfolio liquidation date. To the extent
permitted by regulations of the SEC, MFS will furnish both of these numbers on
request.
ALL SERIES OTHER THAN THE MONEY MARKET SERIES AND ZERO COUPON SERIES -- With
respect to these series, determination of the net asset value per share is
made by deducting the liabilities of that series from the value of its assets
and dividing the difference by the number of its shares outstanding. Equity
securities in the portfolio of a series are normally valued at the last sale
price during regular hours on the exchange on which they are primarily traded
or on the Nasdaq stock market for unlisted national market issues, or at the
last quoted bid price for unlisted securities or listed securities in which
there were no sales during that day. Debt securities of U.S. issuers (other
than short-term obligations) in any of these portfolios are normally valued on
the basis of valuations provided by a pricing service since such valuations
are believed to reflect the fair value of such securities. Valuations provided
by the pricing service may be determined without exclusive reliance on quoted
prices and may 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.
Forward contracts will be valued using a pricing model taking into
consideration market data from an external pricing service. Use of the pricing
services has been approved by the Board of Trustees. Short-term obligations in
any of these portfolios (i.e., obligations maturing in not more than 60 days)
are valued at amortized cost, which constitutes fair value as determined by
the Board of Trustees. Short-term obligations with a remaining maturity in
excess of 60 days will be valued upon dealer supplied valuations. All other
securities, futures contracts and options in the series' portfolio (other than
short-term obligations) for which the principal market is one or more
securities or commodities exchanges (whether domestic or foreign) will be
valued at the last reported sale price or at the settlement price prior to the
determination (or if there has been no current sale, at the closing bid price)
on the primary exchange on which such securities, futures contracts or options
are traded; but if a securities exchange is not the principal market for
securities, such securities will, if market quotations are readily available,
be valued at current bid prices, unless such securities are reported on the
Nasdaq stock market, in which case they are valued at the last sale price or,
if no sales occurred during that day, at the last quoted bid price. Portfolio
securities and other assets for which there are no such quotations or
valuations are valued at fair value as determined in good faith by or at the
direction of the Board of Trustees.
All investments and assets are expressed in U.S. dollars based upon current
currency exchange rates.
Substantially all of the net income of all series (other than the Money Market
Series, which is discussed above) is paid to their shareholders as a dividend
at least annually. Each series will also distribute its net profits from the
sale of securities, if any, on at least an annual basis.
DISTRIBUTIONS -- The Variable Accounts can choose to receive distributions
from the Series Fund in either cash or additional shares. It is expected that
the Variable Accounts will choose to receive distributions in additional
shares. If the Variable Accounts choose to receive distributions in cash, they
will reinvest the cash in the Series Fund to purchase additional shares at
their net asset value.
TAX STATUS
Each series is treated as a separate entity for federal income tax purposes.
In order to minimize the taxes each series would otherwise be required to pay,
each individual series of the Series Fund intends to qualify each year as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended, (the "Code"). Because each series intends to distribute
all of its net investment income and net realized capital gains to its
shareholders in accordance with the timing requirements imposed by the Code,
it is not expected that any series will be required to pay any federal income
or excise taxes, although a series' foreign-source income may be subject to
foreign withholding taxes.
REDEMPTIONS
Sun Life of Canada (U.S.) and Sun Life (N.Y.) will redeem shares of each
series held in their Variable Accounts as they deem necessary to make benefit
or surrender payments under the terms of their Contracts. Redemptions are
processed on any day on which the net asset value of the Series Fund is
calculated and are effected at the net asset value next determined after the
redemption order is received.
The Series Fund may suspend the right of redemption with respect to the shares
of any series only under the following unusual circumstances: when the New
York Stock Exchange is closed or trading is restricted; when an emergency
exists, making disposal of portfolio securities or the valuation of net assets
not reasonably practicable; or during any period when the Securities and
Exchange Commission has by order permitted a suspension of redemptions for the
protection of shareholders.
EXCHANGE PRIVILEGE
Shares of any series of the Series Fund may be exchanged for shares of any
other series of the Series Fund (if shares of that series are available for
purchase) at net asset value so as to facilitate exchanges among Sub-Accounts
of the Variable Accounts as described in the prospectuses for the Variable
Accounts. Such exchanges are treated as a redemption of shares in one series
and a purchase of shares in one or more of the other series. If a substantial
portion of any series' shares should be redeemed within a short period, the
series might have to liquidate portfolio securities it might otherwise hold
and also incur the additional costs related to such transactions.
Neither the Series Fund nor the Variable Accounts are designed for
professional market timing organizations or other entities using programmed
and frequent transfers. The Variable Accounts, in coordination with the Series
Fund, reserve the right to temporarily or permanently refuse exchange requests
if, in the Adviser's judgment, a series would be unable to invest effectively
in accordance with its investment objective and policies, or would otherwise
potentially be adversely affected. In particular, a pattern of exchanges that
coincide with a "market timing" strategy may be disruptive to a series and
therefore may be refused. Investors should consult the appropriate Variable
Account prospectus that accompanies this prospectus for information on other
specific limitations on the transfer privilege.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional Shares of Beneficial Interest (without par value) and to
divide or combine the shares into a greater or lesser number of shares without
thereby changing the proportionate beneficial interests in the Series Fund.
The Series Fund presently has 26 series of shares and has reserved the right
to create additional series of shares. Each share of a series represents an
equal proportionate interest in that series with each other share of that
series. Shares of each series participate equally in the earnings, dividends
and assets of that series or portfolio. Shares when issued are fully paid and
non-assessable. Shareholders are entitled to one vote for each share held.
Shares of each series are entitled to vote separately to approve investment
advisory agreements or changes in investment restrictions, but shares of all
series would vote together in the election of Trustees and selection of
accountants. Upon liquidation of the Series Fund, shareholders of each series
would be entitled to share pro rata in the net assets of their respective
series available for distribution to shareholders.
The Series Fund is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of any series of such a
trust may, under certain circumstances, be held personally liable as partners
for its obligations. However, the Series Fund's Declaration of Trust contains
an express disclaimer of shareholder liability for acts or obligations of the
Series Fund and provides for indemnification and reimbursement of expenses out
of the Series Fund property for any shareholder held personally liable for the
obligations of the Series Fund. The Series Fund's Declaration of Trust also
provides that it shall maintain appropriate insurance (for example, fidelity
bonding and errors and omissions insurance) for the protection of the Series
Fund, its shareholders, Trustees, officers, employees and agents covering
possible tort and other liabilities. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability would be limited to
circumstances in which both inadequate insurance existed and the Series Fund
itself was unable to meet its obligations.
CONTENTS OF SAI
The Series Fund's SAI contains more detailed information about the Series
Fund, including information related to (i) the Series Fund's investment
policies and restrictions, (ii) its Trustees, officers, investment adviser and
sub-investment advisers, (iii) portfolio transactions and brokerage
commissions, (iv) the Series Fund's shares, including rights and liabilities
of shareholders, and (v) various services and privileges provided by the
Series Fund for the benefit of its shareholders. The following audited
financial statements of the Series Fund are incorporated in the SAI by
reference from the Series Fund's Annual Report to shareholders for the year
ended December 31, 1997: Portfolios of Investments at December 31, 1997;
Statements of Assets and Liabilities at December 31, 1997; Statements of
Operations for the year ended December 31, 1997; and Statements of Changes in
Net Assets for the years ended December 31, 1996 and December 31, 1997.
<PAGE>
APPENDIX A
CERTAIN SECURITIES, INVESTMENT TECHNIQUES AND RISKS
AMERICAN DEPOSITARY RECEIPTS -- American Depositary Receipts ("ADRs") are
certificates issued by a U.S. depository (usually a bank) and represent a
specified quantity of shares of an underlying non-U.S. stock on deposit with a
custodian bank as collateral. ADRs may be sponsored or unsponsored. A
sponsored ADR is issued by a depository which has an exclusive relationship
with the issuer of the underlying security. An unsponsored ADR may be issued
by any number of U.S. depositories. Under the terms of most sponsored
arrangements, depositories agree to distribute notices of shareholder meetings
and voting instructions, and to provide shareholder communications and other
information to the ADR holders at the request of the issuer of the deposited
securities. The depository of an unsponsored ADR, on the other hand, is under
no obligation to distribute shareholder communications received from the
issuer of the deposited securities or to pass through voting rights to ADR
holders in respect of the deposited securities. Each series that invests in
foreign securities may invest in either type of ADR. Although the U.S.
investor holds a substitute receipt of ownership rather than direct stock
certificates, the use of the depository receipts in the United States can
reduce costs and delays as well as potential currency exchange and other
difficulties. These series may purchase securities in local markets and direct
delivery of these ordinary shares to the local depository of an ADR agent bank
in the foreign country. Simultaneously, the ADR agents create a certificate
which settles at the series' custodian in five days. Each such series may also
execute trades on the U.S. markets using existing ADRs. Because ADRs trade on
United States securities exchanges, the Adviser does not treat them as foreign
securities. However, they are subject to many of the risks of foreign
securities. A foreign issuer of the security underlying an ADR is generally
not subject to the same reporting requirements in the United States as a
domestic issuer. Accordingly the information available to a U.S. investor will
be limited to the information the foreign issuer is required to disclose in
its own country and the market value of an ADR may not reflect undisclosed
material information concerning the issuer of the underlying security. ADRs
may also be subject to exchange rate risks if the underlying foreign
securities are traded in foreign currency.
BANKERS' ACCEPTANCES -- Bankers' acceptances are short-term credit instruments
used to finance the import, export, transfer or storage of goods. They are
termed "accepted" when a bank guarantees their payment at maturity.
BRADY BONDS -- Brady Bonds are securities created through the exchange of
existing commercial bank loans to public and private entities in certain
emerging markets for new bonds in connection with debt restructurings under a
debt restructuring plan introduced by former U.S. Secretary of the Treasury,
Nicholas F. Brady (the "Brady Plan"). Brady Plan debt restructurings have been
implemented to date in Argentina, Brazil, Bulgaria, Costa Rica, Croatia,
Dominican Republic, Ecuador, Jordan, Mexico, Morocco, Nigeria, Panama, Peru,
the Philippines, Poland, Slovenia, Uruguay, and Venezuela. Brady Bonds have
been issued only recently, and for that reason do not have a long payment
history. Brady Bonds may be collateralized or uncollateralized, are issued in
various currencies (but primarily the U.S. dollar) and are actively traded in
over-the-counter secondary markets. U.S. dollar-denominated, collateralized
Brady Bonds, which may be fixed-rate bonds or floating-rate bonds, are
generally collateralized in full as to principal by U.S. Treasury zero coupon
bonds having the same maturity as the bonds. Brady Bonds are often viewed as
having three or four valuation components: the collateralized repayment of
principal at final maturity; the collateralized interest payments; the
uncollateralized interest payments; and any uncollateralized repayment of
principal at maturity (these uncollateralized amounts constituting the
"residual risk"). In light of the residual risk of Brady Bonds and the history
of defaults of countries issuing Brady Bonds with respect to commercial bank
loans by public and private entities, investments in Brady Bonds may be viewed
as speculative.
CERTIFICATES OF DEPOSIT -- Certificates of deposit are certificates issued
against funds deposited in a bank, are for a definite period of time, earn a
specified rate of return, and are normally negotiable. An investment in
certificates of deposit issued by foreign branches of U.S. or Canadian-
chartered banks ("Eurodollar CD's") may be subject to risks in addition to
those incurred by an investment in debt obligations issued in the United
States. Such risks may include future political and economic developments, the
possible imposition of foreign withholding taxes on interest income payable on
the Eurodollar CD's, the possible seizure or nationalization of foreign
deposits, the possible establishment of exchange controls or the adoption of
other foreign governmental restrictions which might adversely affect the
payment of the principal of and interest on the Eurodollar CD's. Also,
Eurodollar CD's are not insured by the Federal Deposit Insurance Corporation.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS PASS-THROUGH SECURITIES --
Collateralized mortgage obligations ("CMOs") are debt obligations
collateralized by mortgage loans or mortgage pass-through securities.
Typically, CMOs are collateralized by certificates issued by the Government
National Mortgage Association, the Federal National Mortgage Association or
the Federal Home Loan Mortgage Corporation but also may be collateralized by
whole loans or private mortgage pass-through securities (such collateral
collectively hereinafter referred to as "Mortgage Assets"). Multi-class pass-
through securities are equity interests in a trust composed of Mortgage
Assets. Unless the context indicates otherwise, all references herein to CMOs
include multi-class pass-through securities. Payments of principal of and
interest on the Mortgage Assets and any reinvestment income thereon provide
the funds to pay debt service on the CMOs or make scheduled distributions on
the multi-class pass-through securities. CMOs may be issued by agencies or
instrumentalities of the United States government or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose
subsidiaries of the foregoing.
In a CMO, a series of bonds or certificates is usually issued in multiple
classes. Each class of CMOs, often referred to as a "tranche," is issued at a
specific fixed or floating coupon rate and has a stated maturity or final
distribution date. Principal prepayment on a Mortgage Asset may cause the CMOs
to be retired substantially earlier than their stated maturities or final
distribution dates, resulting in a loss of all or part of the premium if any
has been paid. Certain classes of CMOs have priority over others with respect
to the receipt of prepayments on the mortgages. Therefore, depending on the
type of CMOs in which the series invests, the investment may be subject to a
greater or lesser risk of prepayment than other types of mortgage-related
securities. Interest is paid or accrues on all classes of the CMOs on a
monthly, quarterly or semi-annual basis. The principal of and interest on the
Mortgage Assets may be allocated under several classes of a series of a CMO in
innumerable ways. In a common structure, payments of principal, including any
principal prepayment, on the Mortgage Assets are applied to the classes of the
series of a CMO in the order of their respective stated maturities or final
distribution dates, so that no payment of principal will be made on any class
of CMOs until all other classes having an earlier stated maturity or final
distribution date have been paid in full.
Parallel pay CMOs are structured to provide payments of principal on each
payment date to more than one class. These simultaneous payments are taken
into account in calculating the stated maturity date or final distribution
date of each class, which, as with other CMO structures, must be retired by
its stated maturity date or final distribution date but may be retired
earlier. Planned amortization class CMOs ("PAC Bonds") generally require
payments of the specified amount of principal on each payment date. PAC Bonds
are always parallel pay CMOs with the required principal payment of such
securities having the highest priority after interest has been paid to all
classes.
COMMERCIAL PAPER -- Commercial paper refers to promissory notes issued by
corporations in order to finance their short-term credit needs.
CONVERTIBLE BONDS -- Convertible bonds are bonds which, at the option of the
holder, are convertible into other securities of the issuer, usually into
equity securities.
CORPORATE ASSET-BACKED SECURITIES -- Corporate asset-backed securities are
issued by trusts and special purpose corporations and are backed by a pool of
assets, such as credit card and automobile loan receivables, representing the
obligations of a number of different parties.
Corporate asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing
the balance due. Most issuers of automobile receivables permit the servicers
to retain possession of the underlying obligations. If the servicer were to
sell these obligations to another party, there is a risk that the purchaser
would acquire an interest superior to that of the holders of the related
automobile receivables. In addition, because of the large number of vehicles
involved in a typical issuance and technical requirements under state laws,
the trustee for the holders of the automobile receivables may not have a
proper security interest in all of the obligations backing such receivables.
Therefore, there is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on these securities.
The underlying assets (e.g., loans) are also subject to prepayments which
shorten the securities' weighted average life and may lower their return.
As noted above, corporate asset-backed securities are often backed by a pool
of assets representing the obligations of a number of different parties. To
lessen the effect of failures by obligors on underlying assets to make
payments, the securities may contain elements of credit support which fall
into two categories: (i) liquidity protection; and (ii) protection against
losses resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of
payments on the underlying pool occurs in a timely fashion. Protection against
losses resulting from ultimate default ensures payment through insurance
policies or letters of credit obtained by the issuer or sponsor from third
parties. The series will not pay any additional or separate fees for credit
support. The degree of credit support provided for each issue is generally
based on historical information respecting the level of credit risk associated
with the underlying assets. Delinquency or loss in excess of that anticipated
or failure of the credit support could adversely affect the return on an
investment in such a security.
CORPORATE OBLIGATIONS -- Corporate obligations include bonds and notes issued
by corporations in order to finance long-term credit needs.
DEPOSITORY RECEIPTS -- ADRs are certificates issued by a U.S. depository
(usually a bank) and represent a specified quantity of shares of an underlying
non-U.S. stock on deposit with a custodian bank as collateral. See Appendix
A--"American Depositary Receipts" above. Global Depositary Receipts ("GDRs")
and other types of depository receipts are typically issued by foreign banks
or trust companies and evidence ownership of underlying securities issued by
either a foreign or a U.S. company. Generally, ADRs are in registered form and
are designed for use in U.S. securities markets and GDRs are in bearer form
and are designed for use in foreign securities markets. For the purposes of
certain series' policy of investing a certain percentage of their assets in
foreign securities, the investments of a series in ADRs, GDRs and other types
of depository receipts are deemed to be investments in the underlying
securities.
EMERGING GROWTH COMPANIES -- Emerging growth securities are securities of U.S.
and foreign companies of any size that are early in their life cycle but which
have the potential to become major enterprises (emerging growth companies).
Such companies would be expected to show earnings growth over time that is
well above the growth rate of the overall economy and the rate of inflation,
and would have the products, management, and market opportunities which are
usually necessary to become more widely recognized as growth companies.
Investing in emerging growth companies involves greater risk than is
customarily associated with investing in more established companies. Emerging
growth companies often have limited product lines, markets or financial
resources, and they may be dependent on one-person management. The securities
of emerging growth companies may have limited marketability and may be subject
to more abrupt or erratic market movements than securities of larger, more
established companies or the market averages in general. Similarly, many of
the securities offering the capital appreciation sought by the series will
involve a higher degree of risk than would established growth stocks.
EMERGING MARKET SECURITIES -- Emerging market securities are securities of
issuers whose principal activities are located in emerging market countries.
Emerging market countries include any country determined by the Adviser or a
Sub-Adviser to have an emerging market economy, taking into account a number
of factors, including whether the country has a low- to middle-income economy
according to the International Bank for Reconstruction and Development, the
country's foreign currency debt rating, its political and economic stability
and the development of its financial and capital markets. The Adviser or a
Sub-Adviser determines whether an issuer's principal activities are located in
an emerging market country by considering such factors as its country of
organization, the principal trading market for its securities and the source
of its revenues and assets. The issuer's principal activities generally are
deemed to be located in a particular country if: (a) the security is issued or
guaranteed by the government of that country or any of its agencies,
authorities or instrumentalities; (b) the issuer is organized under the laws
of, and maintains a principal office in, that country; (c) the issuer has its
principal securities trading market in that country; (d) the issuer derives
50% or more of its total revenues from goods sold or services performed in
that country; or (e) the issuer has 50% or more of its assets in that country.
The risks of investing in foreign securities may be intensified in the case of
investments in emerging markets. Securities prices in emerging markets can be
significantly more volatile and less liquid than in the more developed nations
of the world, reflecting the greater uncertainties of investing in less
established markets and economies. In particular, countries with emerging
markets may have relatively unstable governments, present the risk of
nationalization of businesses, restrictions on foreign ownership, or
prohibitions of repatriation of assets, and may have less protection of
property rights than more developed countries. The economies of countries with
emerging markets may be predominantly based on only a few industries, may be
highly vulnerable to changes in local or global trade conditions, and may
suffer from extreme and volatile debt burdens or inflation rates. Local
securities markets may trade a small number of securities and may be unable to
respond effectively to increases in trading volume, potentially making prompt
liquidation of substantial holdings difficult or impossible at times.
Securities of issuers located in countries with emerging markets may have
limited marketability and may be subject to more abrupt or erratic price
movements.
These securities may be considered speculative and, while generally offering
higher income and the potential for capital appreciation, may present
significantly greater risk. Emerging markets may have different clearance and
settlement procedures, and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when a portion of the assets of a
series is uninvested and no return is earned thereon. The inability of a
series to make intended security purchases due to settlement problems could
cause the series to miss attractive investment opportunities. Inability to
dispose of portfolio securities due to settlement problems could result in
losses to the series due to subsequent declines in values of the portfolio
securities, a decrease in the level of liquidity in the series' portfolio, or,
if the series has entered into a contract to sell the security, possible
liability to the purchaser. Certain markets may require payment for securities
before delivery, and in such markets the series bears the risk that the
securities will not be delivered and that the series' payments will not be
returned.
Certain emerging markets may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in an
emerging market's balance of payments or for other reasons, a country could
impose temporary restrictions on foreign capital remittances. A series could
be adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by the
application to a series of any restrictions on investments.
Investment in certain foreign emerging market debt obligations may be
restricted or controlled to varying degrees. These restrictions or controls
may at times preclude investment in certain foreign emerging market debt
obligations and increase the expenses of a series.
FIXED INCOME SECURITIES -- Fixed income securities include all types of long-
or short-term debt obligations, such as bonds, notes, bills, debentures,
loans, loan assignments, commercial paper and emerging market fixed income
securities, which, in addition to the securities identified above, may take
the form of interests issued by entities organized and operated for the
purpose of restructuring the investment characteristics of instruments issued
by emerging market country issuers. Fixed income securities include securities
in the lower rating categories of recognized rating agencies and comparable
unrated securities. See "Lower Rated Fixed Income Securities" below. However,
because most foreign fixed income securities are not rated, a series will
invest in foreign fixed income securities primarily based on the Adviser's or
the Sub-Advisers' credit analysis without relying on published ratings.
To the extent a series invests in fixed income securities, the net asset value
of the series may change as the general levels of interest rates fluctuate.
When interest rates decline, the value of fixed income securities can be
expected to rise. Conversely, when interest rates rise, the value of fixed
income securities can be expected to decline. No series (except the Money
Market Series) is subject to restrictions on the maturities of the fixed
income securities it holds. A series' investments in fixed income securities
with longer terms to maturity are subject to greater volatility than the
series' shorter-term obligations.
FOREIGN GROWTH SECURITIES: Foreign growth securities are securities issued by
foreign companies, whose rates of earnings growth are expected to accelerate
because of special factors, such as rejuvenated management, new products,
changes in consumer demand, or basic changes in the economic environment or
which otherwise represent opportunities for long-term growth. It is
anticipated that these companies will primarily be in nations with more
developed securities markets, such as Japan, Australia, Canada, New Zealand
and most Western European countries, including Great Britain.
FOREIGN SECURITIES -- Investing in foreign securities involves considerations
and risks not typically associated with investing in U.S. markets. Such
investments may be favorably or unfavorably affected by changes in interest
rates, currency exchange rates and exchange control regulations, application
of foreign tax laws, including withholding taxes, changes in governmental
administration or economic or monetary policy (in the U.S. or abroad) or
changed circumstances between nations. There may be less publicly-available
information about a foreign company than about a domestic company, and foreign
companies may not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those of U.S. companies. Foreign
securities markets, while growing in volume, have substantially less volume
than U.S. markets, and securities of many foreign companies are less liquid
and their prices more volatile than securities of comparable domestic
companies. Fixed brokerage commissions and other transaction costs are
generally higher than in the United States. There is generally less government
supervision and regulation of exchanges, brokers and issuers in foreign
countries than there is in the United States. In addition, investments in
foreign countries could be affected by other factors generally not thought to
be present in the United States, including the possibility of heavy taxation,
political or social instability, limitations on the removal of funds or other
assets of the series, expropriation of assets, diplomatic developments adverse
to U.S. investors and difficulties in enforcing contractual obligations, and
could be subjected to extended settlement periods.
As a result of its investments in foreign securities, a series may receive
interest or dividend payments, or the proceeds of the sale or redemption of
such securities, in the foreign currencies in which such securities are
denominated. In that event, the series may promptly convert such currencies
into dollars at the current exchange rate. Under certain circumstances,
however, such as where the Adviser believes that the applicable exchange rate
is unfavorable at the time the currencies are received or the Adviser
anticipates, for any other reason, that the exchange rate will improve, the
series may hold such currencies for an indefinite period of time. The series
may also hold foreign currency in anticipation of purchasing foreign
securities.
While the holding of currencies will permit a series to take advantage of
favorable movements in the applicable exchange rate, it also exposes the
series to risk of loss if such rates move in a direction adverse to the
series' position. Such losses could reduce any profits or increase any losses
sustained by the series from the sale or redemption of securities, and could
reduce the dollar value of interest or dividend payments received. Costs may
also be incurred in connection with conversions between various currencies.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS ("FORWARD CONTRACTS") -- Forward
Contracts are contracts for the purchase or sale of a specific currency at a
future date at a price set at the time of the contract (a "forward contract").
Forward contracts may be entered into for hedging and non-hedging purposes.
Hedging purposes include seeking to minimize the risk to the series from
adverse changes in the relationship between the U.S. dollar and foreign
currencies. Transactions in forward contracts entered into for hedging
purposes may include forward purchases or sales of foreign currencies for the
purpose of protecting the dollar value of securities denominated in a foreign
currency or protecting the dollar equivalent of interest or dividends to be
paid on such securities. The series may also enter into forward contracts for
"cross hedging" purposes, e.g., the purchase or sale of a forward contract on
one type of currency as a hedge against adverse fluctuations in the value of a
second type of currency. By entering into such transactions, however, the
series may be required to forgo the benefits of advantageous changes in
exchange rates. Certain series may also enter into transactions in forward
contracts for other than hedging purposes. For example, if the Adviser
believes that the value of a particular foreign currency will increase or
decrease relative to the value of the U.S. dollar, a series may purchase or
sell such currency, respectively, through a forward contract. If the expected
changes in the value of the currency occur, the series will realize profits
which will increase its gross income. If exchange rates do not move in the
direction or to the extent anticipated, such series may sustain losses which
will reduce its gross income. Such transactions may be considered speculative
and could involve significant risk of loss, as set forth below. Forward
contracts are traded over-the-counter, and not on organized commodities or
securities exchanges; as a result, such contracts operate in a manner distinct
from exchange-traded instruments, and their use involves certain risks beyond
those associated with transactions in future contracts or options traded on
exchanges. The series have established procedures consistent with statements
of the Securities and Exchange Commission (the "SEC") and its staff regarding
the use of forward contracts by registered investment companies, which
requires use of segregated assets or "cover" in connection with the purchase
and sale of such contracts.
Forward contracts are traded over-the-counter, and not on organized
commodities or securities exchanges. As a result, such contracts operate in a
manner distinct from exchange-traded instruments, and their use involves
certain risks beyond those associated with transactions in the futures and
options contracts described above.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS -- Futures Contracts are
contracts for the purchase or sale for future delivery of securities,
securities indexes or currency. These instruments may be used for hedging
purposes, in order to protect the series' current or intended investments from
a decline in value due to changes in exchange rates or interest rates or
declines in the stock market, and for non-hedging purposes subject to
applicable law. With respect to hedging purposes, if an anticipated decrease
in the value of portfolio securities or currency occurs as a result of market
movements, the adverse effects of such changes may be offset, in whole or in
part, by gains on the sale of futures contracts. Conversely, the increased
cost of portfolio securities to be acquired may be offset, in whole or in
part, by gains on futures contracts purchased. The series will incur brokerage
fees when it purchases and sells futures contracts, and will be required to
maintain margin deposits. In addition, futures contracts entail risks.
Although the Adviser believes that use of such contracts will benefit the
series, if its investment judgment about the general direction of exchange
rates, interest rates or the stock market is incorrect, the series' overall
performance may be poorer than if it had not entered into any such contract
and the series may realize a loss.
Purchases of options on futures contracts may present less risk in hedging the
series' portfolio than the purchase or sale of the underlying futures
contracts since the potential loss is limited to the amount of the premium
plus related transaction costs, although it may be necessary to exercise the
option to realize any profit, which results in the establishment of a futures
position. The writing of options on futures contracts, however, does not
present less risk than the trading of futures contracts and will constitute
only a partial hedge, up to the amount of the premium received. In addition,
if an option is exercised, the series may suffer a loss on the transaction.
These transactions may also be used for non-hedging purposes, to the extent
permitted by applicable law.
In order to assure that the series will not be deemed to be a "commodity pool"
for purposes of the Commodity Exchange Act, regulations of the Commodity
Futures Trading Commission (the "CFTC") require that the series enter into
transactions in futures contracts, options on futures contracts and options on
foreign currencies traded on a CFTC-regulated exchange only (i) for bona fide
hedging purposes (as defined in CFTC regulations), or (ii) for non-bona fide
hedging purposes, provided that the aggregate initial margin and premiums to
establish such non-bona fide hedging positions does not exceed 5% of the
liquidation value of the series' assets, after taking into account unrealized
profits and unrealized losses on any such contracts the series had entered
into, and excluding, in computing such 5%, the in-the-money amount with
respect to an option that is in-the-money at the time of purchase.
GOVERNMENT BACKED TRUST CERTIFICATES -- Government backed trust certificates
("GBTs") are obligations of certain private trusts formed for the purpose of
refinancing certain foreign government loans. The assets of the trust
typically include (a) a foreign government loan (the "Note"), 90% of principal
and interest payments on which are backed by a full faith and credit guaranty
of the United States government and (b) a beneficial interest in a trust
holding direct obligations of the United States government, calculated to
provide amounts equal to at least 10% of all principal and interest payments
on the Note. Funds scheduled to be received from these assets are calculated
to cover all scheduled distributions on the GBTs.
INDEXED SECURITIES -- The value of indexed securities is linked to foreign
currencies, interest rates, commodities, indices, or other financial
indicators. Most indexed securities are short to intermediate term fixed-
income securities whose values at maturity (i.e., principal value) or interest
rates rise or fall according to the change in one or more specified underlying
instruments. Indexed securities may be positively or negatively indexed (i.e.,
their principal value or interest rates may increase or decrease if the
underlying instrument appreciates), and may have return characteristics
similar to direct investments in the underlying instrument or to one or more
options on the underlying instrument. Indexed securities may be more volatile
than the underlying instrument itself.
The performance of indexed securities depends to a great extent on the
performance of the securities, currencies, or other instruments to which they
are indexed, and may also be influenced by interest rate changes in the U.S.
and abroad. At the same time, indexed securities are subject to the credit
risks associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
government agencies.
INVESTMENT IN OTHER INVESTMENT COMPANIES -- A series may invest in other
investment companies to the extent permitted by the 1940 Act and any
applicable state securities laws (i) as a means by which the series may invest
in securities of certain countries which do not otherwise permit investment,
(ii) as a means to purchase thinly traded securities of emerging market
companies, or (iii) when the Adviser or the Sub-Advisers believe such
investments may be more advantageous to the series than a direct market
purchase of securities. If a series invests in such investment companies, the
series' shareholders will bear not only their proportionate share of the
expenses of the series (including operating expenses and the fees of the
Adviser) but also will indirectly bear similar expenses of the underlying
investment companies.
INVESTMENTS FOR TEMPORARY DEFENSIVE PURPOSES -- Each series may, during
periods of unusual market conditions when the Adviser believes that investing
for temporary defensive purposes is appropriate, or in order to meet
anticipated redemption requests, invest a large portion or all of the assets
of a series in cash (including foreign currency) or cash equivalents
including, but not limited to, obligations of banks (including certificates of
deposit, bankers' acceptances, time deposits and repurchase agreements),
commercial paper, short-term notes, U.S. Government securities and related
repurchase agreements.
LENDING OF PORTFOLIO SECURITIES -- The lending of portfolio securities may
increase a series' income and may be used to the extent consistent with
present regulatory policies, including those of the Board of Governors of the
Federal Reserve System and the SEC. Such loans may be made to member banks of
the Federal Reserve System and to member firms (and subsidiaries thereof) of
the New York Stock Exchange (unless otherwise indicated) and would be required
to be secured continuously by collateral, including cash, U.S. Government
Securities, or an irrevocable letter of credit maintained on a current basis
at an amount at least equal to the market value of the securities loaned. A
series would have the right to call a loan and obtain the securities loaned at
any time on customary industry settlement notice (which will usually not
exceed five days). For the duration of a loan, the series would continue to
receive the equivalent of the interest or dividends paid by the issuer on the
securities loaned and would also receive compensation from the investment of
the collateral. A series would not, however, have the right to vote any
securities having voting rights during the existence of the loan, but would
call the loan in anticipation of an important vote to be taken among holders
of the securities or of the giving or withholding of their consent on a
material matter affecting the investment. As with other extensions of credit,
there are risks of delay in recovery or even loss of rights in the collateral
should the borrower of the securities fail financially. However, the loans
would be made only to firms deemed by the investment adviser to be of good
standing, and when, in the judgment of the Adviser, the consideration which
could be earned currently from securities loans of this type justified the
attendant risk. If the Adviser determines to make securities loans, it is
intended that the value of the securities loaned would not exceed 30% of the
value of a series' total assets.
LOANS, LOAN PARTICIPATIONS AND OTHER DIRECT INDEBTEDNESS -- By purchasing a
loan or loan participation, a series acquires some or all of the interest of a
bank or other lending institution in a loan to a corporate, government, or
other borrower. Many such loans are secured, and most impose restrictive
covenants which must be met by the borrower. These loans are made generally to
finance internal growth, mergers, acquisitions, stock repurchases, leveraged
buy-outs and other corporate activities. Such loans may be in default at the
time of purchase. The series may also purchase trade or other claims against
companies, which generally represent money owed by the company to a supplier
of goods or services. These claims may also be purchased at a time when the
company is in default. Certain of the loan participations acquired by a series
may involve revolving credit facilities or other standby financing commitments
which obligate the series to pay additional cash on a certain date or on
demand.
The highly leveraged nature of many such loans may make such loans especially
vulnerable to adverse changes in economic or market conditions. Loan
participations and other direct indebtedness may not be in the form of
securities or may be subject to restrictions on transfer, and only limited
opportunities may exist to resell such instruments. As a result, the series
may be unable to sell such investments at an opportune time or may have to
resell them at less than fair market value. For a further discussion of loan
participations and the risks related to transactions therein, see the SAI
Appendix.
LOWER RATED SECURITIES -- Investments in lower rated fixed income securities,
while generally providing greater income and opportunity for gain than
investments in higher rated securities, usually entail greater risk of
principal and income (including the possibility of default or bankruptcy of
the issuers of such securities), and may involve greater volatility of price
(especially during periods of economic uncertainty or change) than investments
in higher rated securities. In addition, since yields may vary over time, no
specific level of income or yield differential can ever be assured.
Securities rated lower than Baa by Moody's or BBB by S&P or Fitch (or
comparable unrated securities) (commonly known as "junk bonds") are considered
speculative. These high yielding fixed income securities generally tend to
reflect economic changes and short-term corporate and industry developments to
a greater extent than higher rated securities which react primarily to
fluctuations in the general level of interest rates (although these lower
rated securities are also affected by changes in interest rates, as described
below). These fixed income securities will also be affected by the market's
perception of their credit quality (especially during times of adverse
publicity) and the outlook for economic growth. In the past, economic
downturns or a rise in interest rates have under certain circumstances caused
a higher incidence of default by the issuers of these securities and may do so
in the future, especially in the case of highly leveraged issuers. During
certain periods, the higher yields on a series' lower rated high yielding
fixed income securities are paid primarily because of the increased risk of
loss of principal and income, arising from such factors as the heightened
possibility of default or bankruptcy of the issuers of such securities. Due to
the fixed income payments of these securities, the series may continue to earn
the same level of interest income while its net asset value declines due to
portfolio losses, which could result in an increase in the series' yield
despite the actual loss of principal. The prices for these securities may be
affected by legislative and regulatory developments. Change in the value of
securities subsequent to their acquisition will not affect cash income or
yield to maturity to a series but will be reflected in the net asset value of
shares of the series. The market for these lower rated fixed income securities
may be less liquid than the market for investment grade fixed income
securities. Furthermore, the liquidity of these lower rated securities may be
affected by the market's perception of their credit quality. Therefore, credit
judgment may at times play a greater role in valuing these securities than in
the case of investment grade fixed income securities, and it also may be more
difficult during certain adverse market conditions to sell these lower rated
securities at their fair value to meet redemption requests or to respond to
changes in the market.
Securities rated Baa by Moody's or BBB by S&P, Fitch or Duff & Phelps (and
comparable unrated securities), while normally exhibiting adequate protection
parameters, have speculative characteristics and changes in economic
conditions and other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than in the case of higher
grade fixed income securities.
While the Adviser may refer to ratings issued by established credit rating
agencies, it is not the policy of the series to rely exclusively on ratings
issued by these credit rating agencies, but rather to supplement such ratings
with the Adviser's own independent and ongoing review of credit quality.
The net asset value of shares of the series changes as the general levels of
interest rates fluctuate; when interest rates decline, the value of a
portfolio invested at higher yields can be expected to rise, and conversely
when interest rates rise, the value of a portfolio invested at lower yields
can be expected to decline.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS -- Mortgage "dollar roll" transactions are
transactions with selected banks and broker-dealers pursuant to which the
series sells mortgage-backed securities for delivery in the future (generally
within 30 days) and simultaneously contracts to repurchase substantially
similar (same type, coupon and maturity) securities on a specified future
date. The series will only enter into covered rolls. A "covered roll" is a
specific type of dollar roll for which there is an offsetting cash position or
a cash equivalent security position which matures on or before the forward
settlement date of the dollar roll transaction. During the roll period, the
series foregoes principal and interest paid on the mortgage-backed securities.
The series is compensated for the lost interest by the difference between the
current sales price and the lower price for the futures purchase (often
referred to as the "drop") as well as by the interest earned on the cash
proceeds of the initial sale. The series may also be compensated by receipt of
a commitment fee.
In the event that the party with whom a series contracts to repurchase
substantially similar securities on a future date fails to deliver such
securities, the series may not be able to obtain such securities at the price
specified in such contract and thus may not benefit from the price
differential between the current sales price and the repurchase price. The
market value of securities purchased by the series may decline below the price
of securities that the series has sold but is obligated to repurchase under
the agreement. Under the terms of these transactions, the securities purchased
may have different prepayment characteristics and both the series and the
dealer may be permitted to over or underdeliver the aggregate principal amount
of the securities by 2%.
MORTGAGE PASS-THROUGH SECURITIES -- Mortgage pass-through securities are
securities representing interests in "pools" of mortgage loans. Monthly
payments of interest and principal by the individual borrowers on mortgages
are passed through to the holders of the securities (net of fees paid to the
issuer or guarantor of the securities) as the mortgages in the underlying
mortgage pools are paid off. The average life of mortgage pass-throughs are
variable when issued because their average lives depend on prepayment rates.
The average life of these securities is likely to be substantially shorter
than their stated final maturity as a result of unscheduled principal
prepayment. Prepayments on underlying mortgages result in a loss of
anticipated interest, and all or part of a premium if any has been paid, and
the actual yield (or total return) to the series may be different than the
quoted yield on the securities. Mortgage prepayments generally increase with
falling interest rates and decrease with rising interest rates. Like other
fixed income securities, when interest rates rise the value of a mortgage
pass-through security generally will decline; however, when interest rates are
declining, the value of mortgage pass-through securities with prepayment
features may not increase as much as that of other fixed-income securities.
Payment of principal and interest on some mortgage pass-through securities
(but not the market value of the securities themselves) will be guaranteed by
either the full faith and credit of the U.S. Government (in the case of
securities guaranteed by GNMA); or guaranteed by agencies or instrumentalities
of the U.S. Government but not guaranteed by the U.S. Government (such as the
Federal National Mortgage Association ("FNMA") or the Federal Home Loan
Mortgage Corporation ("FHLMC"). Mortgage pass-through securities may also be
issued by nongovernmental issuers (such as commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers and other
secondary market issuers). Some of these mortgage pass-through securities may
be supported by various forms of insurance or guarantees.
OPTIONS, FUTURES AND FORWARD CONTRACTS -- Transactions in options, futures and
forward contracts on a variety of instruments and indexes, are used to protect
against declines in the value of portfolio securities or increases in the cost
of securities or other assets to be acquired and, subject to applicable law,
to increase a series' gross income. The types of instruments that may be
purchased and sold by each series and the permissible purposes of these
transactions are described in the series' statement of investment objectives
and policies. Among other risks, the trading of options, futures contracts and
forward contracts entails the risk that, if the Adviser's judgment as to the
general direction of interest or exchange rates is incorrect, the series'
overall performance may be poorer than if it had not entered into any such
contract. For example, if the series has hedged against the possibility of an
increase in interest rates, and rates instead decline, the series will lose
part or all of the benefit of the increased value of the securities being
hedged, and may be required to meet ongoing daily variation margin payments.
The SAI Appendix, which should be read in conjunction with the following
section, contains a further discussion of the nature of the transactions which
may be entered into and the risks associated therewith.
OPTIONS ON FOREIGN CURRENCIES -- Purchased and written options on foreign
currencies may be used by a series for the purpose of protecting against
declines in the dollar value of foreign portfolio securities and against
increases in the dollar cost of foreign securities to be acquired. As in the
case of other types of options, however, the writing of an option on foreign
currency will constitute only a partial hedge, up to the amount of the premium
received, and the series may be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on foreign currency may constitute an effective hedge
against fluctuations in exchange rates although, in the event of rate
movements adverse to the series' position, it may forfeit the entire amount of
the premium paid for the option plus related transaction costs. The series may
also choose to, or be required to, receive delivery of the foreign currencies
underlying options on foreign currencies it has entered into. Under certain
circumstances, such as where the Adviser or a Sub-Adviser believes that the
applicable exchange rate is unfavorable at the time the currencies are
received, or the Adviser or Sub-Adviser anticipates for any other reason that
the exchange rate will improve, a series may hold such currencies for an
indefinite period of time. (See "Appendix A--Foreign Securities" for
information on the risks associated with holding foreign currency.)
RISKS OF TRANSACTIONS IN OPTIONS, FUTURES CONTRACTS AND FORWARD CONTRACTS:
Even where a series enters into transactions in futures contracts, options on
futures contracts, forward contracts and options for hedging purposes, such
transactions do involve certain risks. For example, a lack of correlation
between the index or instrument underlying an option, futures contract or
forward contract and the assets being hedged, or unexpected adverse price
movements, could render the series' hedging strategy unsuccessful and could
result in losses. "Cross hedging" transactions may involve greater correlation
risks. In addition, there can be no assurance that a liquid secondary market
will exist for any contract purchased or sold, and the series may be required
to maintain a position until exercise or expiration, which could result in the
series being unable to control losses. As noted, certain series may also enter
into transactions in such instruments (except for options on foreign
currencies) for other than hedging purposes (subject to applicable law),
including speculative transactions, which involve greater risk. In particular,
in entering into such transactions, a series may experience losses which are
not offset by gains on other portfolio positions, thereby lowering the series'
return and the loss from investing in certain futures transactions is
potentially unlimited. In addition, the markets for such instruments may be
extremely volatile from time to time, as discussed in the SAI Appendix, which
could increase the risks incurred by the series in entering into such
transactions. Gains and losses on investments in such instruments depend on
the ability of the Adviser or Sub-Adviser to predict correctly the direction
of stock prices, interest rates or other economic factors affecting market
conditions and incorrect decisions by the Adviser or Sub-Adviser may cause a
series to experience losses or otherwise reduce its return.
Transactions in options may be entered into on U.S. exchanges regulated by the
SEC, in the over-the-counter market and on foreign exchanges, while forward
contracts may be entered into only in the over-the-counter market. Futures
contracts and options on futures contracts may be entered into on U.S.
exchanges regulated by the CFTC and on foreign exchanges. The securities
underlying options and futures contracts traded by a series may include
domestic as well as foreign securities. Investors should recognize that
transactions involving foreign securities or foreign currencies, and
transactions entered into in foreign countries, may involve considerations and
risks not typically associated with investing in U.S. markets.
OPTIONS ON SECURITIES AND SECURITIES INDICES -- Written (sold) "covered" call
and put options and purchased call and put options on securities or securities
indexes may be used by a series. These transactions may be designed for the
purpose of increasing a series' return on such securities and/or to protect
the value of its portfolio. In particular, where the series writes an option
which expires unexercised or is closed out by the series at a profit, it will
retain the premium paid for the option (less related transaction costs) which
will increase its gross income and will offset in part the reduced value of
the portfolio security underlying the option, or the increased cost of
portfolio securities to be acquired. In contrast, however, if the price of the
underlying security or index moves adversely to the series' position, the
option may be exercised and the series will be required to purchase or sell
the underlying security or index at a disadvantageous price, which may only be
partially offset by the amount of the premium. The series may also write
combinations of put and call options on the same security, known as
"straddles." Such transactions can generate additional premium income but also
present increased risk.
By writing a call option on a security, a series limits its opportunity to
profit from any increase in the market value of the underlying security, since
the holder will usually exercise the call option when the market value of the
underlying security exceeds the exercise price of the call. However, the
series retains the risk of depreciation in value of securities on which it has
written call options.
A series may also purchase put or call options in anticipation of market
fluctuations which may adversely affect the value of its portfolio or the
prices of securities that the series wants to purchase at a later date, or, in
the case of an option on a stock index, to attempt to reduce the risk of
missing a market or industry segment advance. In the event that the expected
market fluctuations occur, the series may be able to offset the resulting
adverse effect on its portfolio, in whole or in part, through the options
purchased. The premium paid for a put or call option plus any transaction
costs will reduce the benefit, if any, realized by the series upon exercise or
liquidation of the option, and, unless the price of the underlying security
changes sufficiently, the option may expire without value to the series.
"Yield curve" options are options on the yield "spread," or yield differential
between two securities. In contrast to other types of options a yield curve
option is based on the difference between the yields of designated securities
rather than the actual prices of the individual securities, and is settled
through cash payments. Accordingly, a yield curve option is profitable to the
holder if this differential widens (in the case of a call) or narrows (in the
case of a put), regardless of whether the yields of the underlying securities
increase or decrease. Yield curve options will be "covered" but could involve
additional risks, as discussed in the SAI Appendix.
PRIVATIZATIONS -- The governments in some countries, including emerging market
countries, have been engaged in programs of selling part or all of their
stakes in government owned or controlled enterprises ("privatizations"). Each
series may invest in privatizations. In certain countries, the ability of
foreign entities to participate in privatizations may be limited by local law
and the terms on which the foreign entities may be permitted to participate
may be less advantageous than those afforded local investors.
REPURCHASE AGREEMENTS -- Repurchase agreements are agreements by which a
person purchases a security and simultaneously commits to resell that security
to the seller (such as a member bank of the Federal Reserve System or
recognized securities dealer) at an agreed upon price on an agreed upon date.
The repurchase price may be higher than the purchase price, the difference
being income to the series, or the purchase and repurchase price may be the
same, with interest at a standard rate due to the Series together with the
repurchase price on repurchase. In either case, the income to the Series is
unrelated to the coupon rate or maturity of the purchased security. Such
transactions afford an opportunity for a series to earn a return on available
cash. However the series may be subject to various delays and risks of loss
(including risk of decline in market value of the underlying securities) if
the seller is unable to meet its obligation to repurchase. In evaluating
whether to enter into a repurchase agreement the Adviser will carefully
consider the creditworthiness of the seller and will follow guidelines
regarding the determination of creditworthiness established by the Board of
Trustees of the Series Fund. A series may enter into repurchase agreements
only with member banks of the Federal Reserve System, member firms (or
subsidiaries thereof) of the New York Stock Exchange, recognized primary U.S.
Government Securities dealers or other institutions that the Adviser has
determined to be of comparable credit-worthiness, unless otherwise indicated.
The repurchase agreement provides that in the event the seller fails to pay
the price agreed upon on the agreed upon delivery date or upon demand, as the
case may be, the series will have the right to liquidate the securities. If at
the time the series is contractually entitled to exercise its right to
liquidate the securities, the seller is subject to a proceeding under the
bankruptcy laws or its assets are otherwise subject to a stay order, the
series' exercise of its right to liquidate the securities may be delayed and
result in certain losses and costs to the Series. The Series Fund has adopted
and follows procedures which are intended to minimize the risks of repurchase
agreements. For example, a series only enters into repurchase agreements after
the Adviser has determined that the seller is creditworthy, and the Adviser
monitors that seller's creditworthiness on an ongoing basis. Moreover, under
such agreements, the value of the securities (which are marked to market every
business day) is required to be greater than the repurchase price, and the
series has the right to make margin calls at any time if the value of the
securities falls below the agreed upon margin.
RESTRICTED SECURITIES -- Restricted securities are securities that are subject
to legal or contractual restrictions on resale, including securities which
cannot be sold to the public without registration under the Securities Act of
1933 (the "Securities Act"). Unless registered for sale, such securities can
only be sold in privately negotiated transactions or pursuant to an exemption
from registration, such as pursuant to Rule 144A under the Securities Act for
offers and sales to "qualified institutional buyers". Consequently, there may
be a more limited trading market for these securities and market quotations
may be less readily available. However, as to certain restricted securities, a
substantial market of qualified institutional buyers may develop pursuant to
Rule 144A ("Rule 144A Securities"). A determination is made based upon a
continuing review of the trading markets for the specific Rule 144A Security
that such securities are readily marketable. The Board of Trustees has adopted
guidelines and delegated to the Adviser the daily function of determining and
monitoring liquidity of Rule 144A Securities. The Board, however, retains
oversight of the liquidity determinations, focusing on factors such as
valuation, liquidity and availability of information. Investing in Rule 144A
Securities could have the effect of decreasing the level of liquidity in a
series to the extent that qualified institutional buyers become for a time
uninterested in purchasing Rule 144A Securities held in the series' portfolio.
As a result, the series might not be able to sell these securities when the
Adviser wishes to do so, or might have to sell them at less than fair value.
In addition, market quotations are less readily available. Therefore, judgment
may at times play a greater role in valuing these securities than in the case
of unrestricted securities. A series may invest in restricted securities as to
which the Board has made such a determination of ready marketability, to the
extent consistent with its investment objectives. Where the Board has not made
such a determination, investments in restricted securities are subject to the
series' investment restrictions on investments in securities that are not
readily marketable.
STRIPPED MORTGAGE-BACKED SECURITIES -- Stripped mortgage-backed securities
("SMBS") are derivative multi-class mortgage securities issued by agencies or
instrumentalities of the United States Government or by private originators
of, or investors in, mortgage loans including savings and loan associations,
mortgage banks, commercial banks and investment banks. SMBS are usually
structured with two classes that receive different proportions of the interest
and principal distributions from a pool of Mortgage Assets. A common type of
SMBS will have one class receiving some of the interest and most of the
principal from the Mortgage Assets while the other class will receive most of
the interest and the remainder of the principal. In the most extreme case, one
class will receive all of the interest (the interest only or "IO" class) while
the other class will receive all of the principal (the principal only or "PO"
class). The yield to maturity on an IO is extremely sensitive to the rate of
principal payments (including prepayments) on the related underlying Mortgage
Assets, and a rapid rate of principal payments may have a material adverse
effect on such securities' yield to maturity. If the underlying Mortgage
Assets experience more than anticipated prepayments of principal, a series may
fail to fully recoup its initial investment in these securities. The market
value of the class consisting primarily or entirely of principal payments
generally is unusually volatile in response to changes in interest rates.
STRUCTURED SECURITIES -- Structured securities are issued by entities
organized and operated solely for the purpose of restructuring the investment
characteristics of sovereign debt obligations. This type of restructuring
involves the deposit with, or purchase by, an entity, such as a corporation or
trust, of specified instruments (such as commercial bank loans or Brady Bonds)
and the issuance by that entity of one or more classes of securities
("Structured Securities") backed by, or representing interests in, the
underlying instruments. The cash flow on the underlying instruments may be
apportioned among the newly issued Structured Securities to create securities
with different investment characteristics, such as varying maturities, payment
priorities and interest rate provisions, and the extent of the payments made
with respect to Structured Securities is dependent on the extent of the cash
flow on the underlying instruments. Because Structured Securities of the type
in which each series anticipates it will invest typically involve no credit
enhancement, their credit risk generally will be equivalent to that of the
underlying instruments. Each series is permitted to invest in a class of
Structured Securities that is either subordinated or unsubordinated to the
right of payment of another class. Subordinated Structured Securities
typically have higher yields and present greater risks than unsubordinated
Structured Securities. Structured Securities are typically sold in private
placement transactions, and there currently is no active trading market for
Structured Securities.
SWAPS AND RELATED TRANSACTIONS -- Interest rate swaps, currency swaps and
other types of available swap agreements (such as caps, collars and floors)
are used, as one way of managing a series' exposure to different types of
investments. These transactions involve the exchange by a series with another
party of cash payments based upon different interest rate indexes, currencies,
and other prices or rates, such as the value of mortgage prepayment rates. For
example, in the typical interest rate swap, a series might exchange a sequence
of cash payments based on a floating rate index for cash payments based on a
fixed rate. Payments made by both parties to a swap transaction are based on a
principal amount determined by the parties.
These series may also purchase and sell caps, floors and collars. In a typical
cap or floor agreement, one party agrees to make payments only under specified
circumstances, usually in return for payment of a fee by the counterparty. For
example, the purchase of an interest rate cap entitles the buyer, to the
extent that a specified index exceeds a predetermined interest rate, to
receive payments of interest on a contractually-based principal amount from
the counterparty selling such interest rate cap. The sale of an interest rate
floor obligates the seller to make payments to the extent that a specified
interest rate falls below an agreed-upon level. A collar arrangement combines
elements of buying a cap and selling a floor.
Swap agreements will tend to shift a series' investment exposure from one type
of investment to another. For example, if a series agreed to exchange payments
in dollars for payments in foreign currency, in each case based on a fixed
rate, the swap agreement would tend to decrease a series' exposure to U.S.
interest rates and increase its exposure to foreign currency and interest
rates. Caps and floors have an effect similar to buying or writing options.
Depending on how they are used, swap agreements may increase or decrease the
overall volatility of a series' investments and its share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on a
series' performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. A series may also suffer losses
if it is unable to terminate outstanding swap agreements or reduce its
exposure through offsetting transactions.
Swaps, caps, floors and collars are highly specialized activities which
involve certain risks different from those associated with ordinary portfolio
transactions. See the SAI Appendix for further information on, and the risks
involved in, these activities.
U.S. GOVERNMENT SECURITIES -- U.S. Government Securities include: (1) U.S.
Treasury obligations, which differ only in their interest rates, maturities
and times of issuance: U.S. Treasury bills (maturity of one year or less),
U.S. Treasury notes (maturities of one to 10 years), and U.S. Treasury bonds
(generally maturities of greater than 10 years), all of which are backed by
the full faith and credit of the United States; and (2) obligations issued or
guaranteed by U.S. Government agencies or instrumentalities, some of which are
backed by the full faith and credit of the U.S. Treasury, e.g., direct pass-
through certificates of the Government National Mortgage Association ("GNMA");
some of which are supported by the right of the issuer to borrow from the U.S.
government, e.g., obligations of Federal Home Loan Banks; some of which are
backed only by the credit of the issuer itself, e.g., obligations of the
Student Loan Marketing Association; and some of which are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations, e.g., obligations of the Federal National Mortgage Association
("FNMA"). Agencies and instrumentalities of the U.S. Government are
established under the authority of an act of Congress and include, but are not
limited to, in addition to those mentioned above, the Tennessee Valley
Authority, the Bank for Cooperatives, the Farmers Home Administration, Federal
Intermediate Credit Banks, Federal Land Banks, the Federal Home Loan Mortgage
Corporation, the Small Business Administration, the Resolution Funding
Corporation, the Financing Corporation, and the Federal Agricultural Mortgage
Corporation.
No assurance can be given that the U.S. Government will provide financial
support to instrumentalities sponsored by the U.S. Government as it is not
obligated by law, in certain instances, to do so.
WARRANTS -- Warrants are certificates giving the holder the right, either for
a specified period of time or indefinitely, to purchase a security at a
stipulated price.
"WHEN-ISSUED" SECURITIES -- "When-issued" securilties or securities delivered
on a "forward delivery" basis are securities which are delivered to the series
at a future date, often beyond customary settlement time. The commitment to
purchase a security for which payment will be made on a future date may be
deemed a separate security. Although a series is not limited to the amount of
securities for which it may have commitments to purchase on such basis, it is
expected that under normal circumstances, a series will not commit more than
30% of its assets to such purchase. A series does not pay for the securities
until received and does not start earning interest on them until the
contractual settlement date. While awaiting delivery of securities purchased
on such bases, a series will segregate liquid assets sufficient to cover its
commitments. While the series do not intend to make such purchases for
speculative purposes, purchases of securities on such bases may involve more
risk than other types of purchases. For example, if a series determines it is
necessary to sell the "when issued" or "forward delivery" securities before
delivery, it may incur a gain or a loss because of market fluctuations since
the time the commitment to purchase such securities was made.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS -- Zero coupon and
deferred interest bonds are debt obligations which are issued or purchased at
a significant discount from face value. The discount approximates the total
amount of interest the bonds will accrue and compound over the period until
maturity or the first interest payment date at a rate of interest reflecting
the market rate of the security at the time of issuance. Zero coupon bonds do
not require the periodic payment of interest and deferred interest bonds
provide for a period of delay before the regular payment of interest begins.
PIK bonds are debt obligations which provide that the issuer thereof may, at
its option, pay interest on such bonds in cash or in the form of additional
debt obligations. Such investments benefit the issuer by mitigating its need
for cash to meet debt service, but also require a higher rate of return to
attract investors who are willing to defer receipt of such cash. Such
investments may experience greater volatility in market value due to changes
in interest rates and/or credit quality than debt obligations which make
regular payments of interest. A series will accrue income on such investments
for tax and accounting purposes, which is distributable to shareholders and
which, because no cash is received at the time of accrual, may require the
liquidation of other portfolio securities to satisfy the series' distribution
obligations.
<PAGE>
APPENDIX B
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P, Fitch and Duff & Phelps represent their opinions
as to the quality of various debt instruments. It should be emphasized,
however, that ratings are not absolute standards of quality. Consequently,
debt instruments with the same maturity, coupon and rating may have different
yields while debt instruments of the same maturity and coupon with different
ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment some time in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has
been suspended or withdrawn, it may be for reasons unrelated to the quality of
the issue.
Should no rating be assigned, the reason may be one of the following:
1. an application for rating was not received or accepted;
2. the issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy;
3. there is a lack of essential data pertaining to the issue or issuer;
and
4. the issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
STANDARD & POOR'S RATINGS SERVICES
AAA: An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is EXTREMELY STRONG.
AA: An obligation rated AA differs from the highest rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on the
obligation is VERY STRONG.
A: An obligation rated A is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in higher
rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still STRONG.
BBB: An obligation rated BBB exhibits ADEQUATE protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity of the obligor to meet its financial commitment on the
obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation and
C the highest. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties or
major exposures to adverse conditions.
BB: An obligation rated BB is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B: An obligation rated B is MORE VULNERABLE to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet
its financial commitment on the obligation.
CCC: An obligation rated CCC is CURRENTLY VULNERABLE to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC: An obligation rated CC is CURRENTLY HIGHLY VULNERABLE to nonpayment.
C: The C rating may be used to cover a situation where a bankruptcy petition
has been filed or similar action has been taken, but payments on this
obligation are being continued.
D: An obligation rated D is in payment default. The D rating category is used
when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes
that such payments will be made during such grace period. The D rating also
will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
R: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk -- such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
FITCH IBCA
AAA: Highest credit quality. AAA ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity
for timely payment of financial commitments. This capacity is highly unlikely
to be adversely affected by foreseeable events.
AA: Very high credit quality. AA ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A: High credit quality. A ratings denote a low expectation of credit risk. The
capacity for timely payment of financial commitments is considered strong.
This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher ratings.
BBB: Good credit quality. BBB ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and
in economic conditions are more likely to impair this capacity. This is the
lowest investment-grade category.
Speculative Grade
BB: Speculative. BB ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change over
time; however, business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this category are not
investment grade.
B: Highly speculative. B ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent
upon a sustained, favorable business and economic environment.
CCC, CC, C: High default risk. Default is a real possibility, Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A CC rating indicates that default of some
kind appears probable. C ratings signal imminent default.
DDD, DD, D Default. Securities are not meeting current obligations and are
extremely speculative. DDD designates the highest potential for recovery of
amounts outstanding on any securities involved. For U.S. corporates, for
example, DD indicates expected recovery of 50% -- 90% of such outstandings,
and D the lowest recovery potential, i.e. below 50%.
DUFF & PHELPS CREDIT RATING CO.
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic conditions.
A+, A, A-: Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
BBB+, BBB, BBB-: Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may move
up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations will
not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or
into a higher or lower rating grade.
CCC: Well below investment-grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable economic/
industry conditions, and/or with unfavorable company developments.
DD: Defaulted debt obligations. Issuer failed to meet scheduled principal and/
or interest payments.
DP: Preferred stock with dividend arrearages.
DUFF & PHELPS SHORT-TERM RATINGS
D-1+: Highest certainty of timely payment. Short-term liquidity, including
internal operation factors and/or access to alternative sources of funds, is
outstanding and safety is just below risk-free U.S. Treasury short-term
obligations.
D-1: Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
D-1-: High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
D-2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
D-3: Satisfactory liquidity and other protection factors qualify issues as to
investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
D-4: Speculative investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors and market access
may be subject to a high degree of variation.
D-5: Issuer failed to meet scheduled principal and/or interest payments.
<PAGE>
APPENDIX C
PORTFOLIO COMPOSITION CHARTS
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
The charts below show the percentages of the Series' assets at December 31,
1997 invested in bonds assigned to the various rating categories by Moody's,
S&P, Fitch and Duff & Phelps and in unrated bonds determined by the Adviser to
be of comparable quality. The highest of the four rating services is used with
respect to each rating.
HIGH YIELD SERIES
UNRATED
BONDS OF
COMPARABLE
RATING COMPILED RATINGS QUALITY TOTAL
- ------ ---------------- ------- -----
AAA/Aaa ............... -- -- --
AA/Aa ................. -- -- --
A/A ................... -- -- --
BBB/Baa ............... 0.94% 0.70% 1.64%
BB/Ba ................. 16.12% 0.06% 16.16%
B/B ................... 65.15% 3.20% 68.35%
CCC/Caa ............... 3.32% 1.12% 4.44%
CC/Ca ................. -- -- --
C/C ................... 0.02% -- 0.02%
Default ............... -- 0.04% 0.04%
---- --- ----
Total ................. 85.53% 2.74% 90.65%
TOTAL RETURN SERIES
UNRATED
BONDS OF
COMPARABLE
RATING COMPILED RATINGS QUALITY TOTAL
- ------ ---------------- ------- -----
AAA/Aaa ............... 15.60% -- 15.60%
AA/Aa ................. 0.03% -- 0.03%
A/A ................... 3.20% -- 3.20%
BBB/Baa ............... 9.27% -- 9.27%
BB/Ba ................. 4.45% 0.35% 4.79%
B/B ................... 0.10% -- 0.10%
CCC/Caa ............... -- -- --
CC/Ca ................. -- -- --
C/C ................... -- 0.01% 0.01%
Default ............... -- -- --
---- --- ----
Total ................. 32.64% 0.36% 33.00%
WORLD ASSET ALLOCATION SERIES
UNRATED
BONDS OF
COMPARABLE
RATING COMPILED RATINGS QUALITY TOTAL
- ------ ---------------- ------- -----
AAA/Aaa ............... -- -- --
AA/Aa ................. -- -- --
A/A ................... -- -- --
BBB/Baa ............... -- 0.24% 0.24%
BB/Ba ................. 5.43% -- 5.43%
B/B ................... 6.96% -- 6.96%
CCC/Caa ............... 0.23% -- 0.23%
CC/Ca ................. -- -- --
C/C ................... -- -- --
Default ............... -- -- --
---- --- ----
Total ................. 12.62% -- 12.85%
The charts do not necessarily indicate what the composition of the Series'
portfolios will be in subsequent years. Rather, the Series' investment
objectives, policies and restrictions indicate the extent to which the Series
may purchase securities in the various categories.
APPENDIX D
INDUSTRY SECTORS
The Managed Sectors Series seeks to achieve its investment objective by
varying the weighting of its portfolio among the following thirteen industry
sectors (i.e., industry groupings):
(1) AUTOS AND HOUSING SECTOR: companies engaged in the design,
production and sale of automobiles, automobile parts, mobile homes and
related products, and in the design, construction, renovation and
refurbishing of residential dwellings. The value of automobile industry
securities is affected by foreign competition, consumer confidence,
consumer debt and installment loan rates. The housing construction
industry is affected by the level of consumer confidence, consumer debt,
mortgage rates and the inflation outlook.
(2) BASIC MATERIALS AND CONSUMER STAPLES SECTOR: companies engaged in
providing consumer goods and services such as: the design, processing,
production and storage of packaged, canned, bottled and frozen foods and
beverages; and the design, production and sale of home furnishings,
appliances, clothing, accessories, cosmetics and perfumes. Certain such
companies are subject to government regulation affecting the
permissibility of using various food additives and production methods,
which regulations could affect company profitability. Also, the success of
food- and fashion-related products may be strongly affected by fads,
marketing campaigns and other factors affecting supply and demand.
(3) DEFENSE AND AEROSPACE SECTOR: companies engaged in the research,
manufacture, or sale of products or services related to the defense and
aerospace industries, such as: air transport; data processing or computer-
related services; communications systems; military weapons and
transportation; general aviation equipment, missiles, space launch
vehicles and spacecraft; units for guidance, propulsion and control of
flight vehicles; and airborne and ground-based equipment essential to the
test, operation and maintenance of flight vehicles. Since such companies
rely largely on U.S. (and other) governmental demand for their products
and services, their financial conditions are heavily influenced by federal
(and other governmental) defense spending policies.
(4) ENERGY SECTOR: companies in the energy field, including oil, gas,
electricity and coal as well as nuclear, geothermal, oil shale and solar
sources of energy. The business activities of companies comprising this
sector may include: production, generation, transmission, marketing,
control or measurement of energy or energy fuels; provision of component
parts or services to companies engaged in such activities; energy research
or experimentation; environmental activities related to the solution of
energy problems; and activities resulting from technological advances or
research discoveries in the energy field. The value of such companies'
securities varies based on the price and supply of energy fuels and may be
affected by events relating to international politics, energy
conservation, the success of exploration projects, and the tax and other
regulatory policies of various governments.
(5) FINANCIAL SERVICES SECTOR: companies providing financial services
to consumers and industry, such as: commercial banks and savings and loan
associations; consumer and industrial finance companies; securities
brokerage companies; leasing companies; and firms in all segments of the
insurance field (such as multiline, property and casualty, and life
insurance). These kinds of companies are subject to extensive governmental
regulations, some of which regulations are currently being studied by
Congress. The profitability of these groups may fluctuate significantly as
a result of volatile interest rates and general economic conditions.
(6) HEALTH CARE SECTOR: companies engaged in the design, manufacture
or sale of products or services used in connection with health care or
medicine, such as: pharmaceutical companies; firms that design,
manufacture, sell or supply medical, dental and optical products, hardware
or services; companies involved in biotechnology, medical diagnostic and
biochemical research and development; and companies involved in the
operation of health care facilities. Many of these companies are subject
to government regulation, which could affect the price and availability of
their products and services. Also, products and services in this sector
could quickly become obsolete.
(7) INDUSTRIAL GOODS AND SERVICES SECTOR: companies engaged in the
research, development, manufacture or marketing of products, processes or
services related to the agriculture, chemicals, containers, forest
products, non-ferrous metals, steel and pollution control industries, such
as: synthetic and natural materials, for example, chemicals, plastics,
fertilizers, gases, fibers, flavorings and fragrances; paper; wood
products; steel and cement. Certain companies in this sector are subject
to regulation by state and federal authorities, which could require
alteration or cessation of production of a product, payment of fines or
cleaning of a disposal site. In addition, since some of the materials and
processes used by these companies involve hazardous components, there are
risks associated with their production, handling and disposal. The risk of
product obsolescence is also present.
(8) LEISURE SECTOR: companies engaged in the design, production or
distribution of goods or services in the leisure industry, such as:
television and radio broadcast or manufacture; motion pictures and
photography; recordings and musical instruments; publishing; sporting
goods, camping and recreational equipment; sports arenas; toys and games;
amusement and theme parks; travel-related services and airlines; hotels
and motels; fast food and other restaurants; and gaming casinos. Many
products produced by companies in this sector--for example, video and
electronic games--may quickly become obsolete.
(9) RETAILING SECTOR: companies engaged in the retail distribution of
home furnishings, food products, clothing, pharmaceuticals, leisure
products and other consumer goods, such as: department stores;
supermarkets; and retail chains specializing in particular items such as
shoes, toys or pharmaceuticals. The value of securities in this sector
will fluctuate based on consumer spending patterns, which depend on
inflation and interest rates, level of consumer debt and seasonal shopping
habits. The success or failure of a particular company in this highly
competitive sector will depend on such company's ability to predict
rapidly changing consumer tastes.
(10) TECHNOLOGY SECTOR: companies which are expected to have or
develop products, processes or services which will provide or will benefit
significantly from technological advances and improvements or future
automation trends in the office and factory, such as: semiconductors:
computers and peripheral equipment; scientific instruments; computer
software; telecommunications; and electronic components, instruments and
systems. Such companies are sensitive to foreign competition and import
tariffs. Also, many products produced by companies in this sector may
quickly become obsolete.
(11) TRANSPORTATION SECTOR: companies involved in the provision of
transportation of people and products, such as: airlines, railroads and
trucking firms. Revenues of companies in this sector will be affected by
fluctuations in fuel prices resulting from domestic and international
events, and government regulation of fares.
(12) UTILITIES SECTOR: companies in the public utilities industry and
companies deriving a substantial majority of their revenues through
supplying public utilities such as: companies engaged in the manufacture,
production, generation, transmission and sale of gas and electric energy;
and companies engaged in the communications field, including telephone,
telegraph, satellite, microwave and the provision of other communication
facilities to the public. The gas and electric public utilities industries
are subject to various uncertainties, including the outcome of political
issues concerning the environment, prices of fuel for electric generation,
availability of natural gas, and risks associated with the construction
and operation of nuclear power facilities.
(13) FOREIGN SECTOR: companies whose primary business activity takes
place outside of the United States. The securities of foreign companies
would be heavily influenced by the strength of national economies,
inflation levels and the value of the U.S. dollar versus foreign
currencies. Foreign investments will be subject to certain risks not
generally associated with domestic investments. Such investments may be
favorably or unfavorably affected by changes in interest rates, currency
exchange rates and exchange control regulations, and costs may be incurred
in connection with conversions between currencies. In addition,
investments in foreign countries could be affected by less favorable tax
provisions, less publicly available information, less securities
regulation, political or social instability, limitations on the removal of
funds or other assets of the Managed Sectors Series, expropriation of
assets, diplomatic developments adverse to U.S. investments and
difficulties in enforcing contractual obligations.
Diversified companies will generally be included in the sector of their
predominant industry activity, as determined by the Adviser.
PRINCIPAL SECTORS OF THE UTILITIES INDUSTRY
The principal sectors of the utilities industry in which the Utilities Series
may invest are discussed below.
ELECTRIC -- The electric utility industry consists of companies that are
engaged principally in the generation, transmission and sale of electric
energy, although many also provide other energy-related services. Domestic
electric utility companies, in general, recently have been favorably affected
by lower fuel and financing costs and the full or near completion of major
construction programs. In addition, many of these companies recently have
generated cash flows in excess of current operating expenses and construction
expenditures, permitting some degree of diversification into unregulated
businesses. Some electric utilities have also taken advantage of the right to
sell power outside of their traditional geographic areas. Electric utility
companies historically have been subject to the risks associated with
increases in fuel and other operating costs, high interest costs on borrowings
needed for capital construction programs, costs associated with compliance
with environmental and safety regulations and changes in the regulatory
climate.
In the U.S., the construction and operation of nuclear power facilities is
subject to increased scrutiny by, and evolving regulations of, the Nuclear
Regulatory Commission and state agencies having comparable jurisdiction.
Increased scrutiny might result in higher operating costs and higher capital
expenditures, with the risk that the regulators may disallow inclusion of
these costs in rate authorizations or the risk that a company may not be
permitted to operate or complete construction of a facility. In addition,
operators of nuclear power plants may be subject to significant costs for
disposal of nuclear fuel and for the de-commissioning of such plants.
TELECOMMUNICATIONS -- The telephone industry is large and highly concentrated.
Companies that distribute telephone services and provide access to the
telephone networks comprise the greatest portion of this segment. Telephone
companies in the U.S. are still experiencing the effects of the breakup of
American Telephone & Telegraph Company, which occurred in 1984. Since 1984,
companies engaged in telephone communication services have expanded their non-
regulated activities into other businesses, including cellular telephone
services, data processing, equipment retailing, computer software and hardware
services, and financial services. This expansion has provided significant
opportunities for certain telephone companies to increase their earnings and
dividends at faster rates than had been allowed in traditionally regulated
businesses. Increasing competition, technological innovations and other
structural changes, however, could adversely affect the profitability of such
utilities.
GAS -- Gas transmission companies and gas distribution companies are also
undergoing significant changes. In the U.S., interstate transmission companies
are regulated by the Federal Energy Regulatory Commission, which is reducing
its regulation of the industry. Many companies have diversified into oil and
gas exploration and development, making returns more sensitive to energy
prices. In the recent decade, gas utility companies have been adversely
affected by disruptions in the oil industry and have also been affected by
increased concentration and competition. In the opinion of the Adviser,
however, environmental considerations could improve the gas industry outlook
in the future. For example, natural gas is the cleanest of the hydrocarbon
fuels, and this may result in incremental shifts in fuel consumption toward
natural gas and away from oil and coal.
WATER -- Water supply utilities are companies that collect, purify, distribute
and sell water. In the U.S. and around the world, the industry is highly
fragmented because most of the supplies are owned by local authorities.
Companies in this industry are generally mature and are experiencing little or
no per capita volume growth.
<PAGE>
MFS/SUN LIFE SERIES TRUST
An Open-End Management
Investment Company
INVESTMENT ADVISER
Massachusetts Financial
Services Company
500 Boylston Street, Boston,
MA 02116
(617) 954-5000
CUSTODIAN
State Street Bank and Trust
Company
225 Franklin Street, Boston,
MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
MAILING ADDRESS:
P.O. Box 1024, Boston, MA
02103
BUSINESS ADDRESS:
500 Boylston Street, Boston,
MA 02116
AUDITORS
Deloitte & Touche LLP
125 Summer Street, Boston,
MA 02110
SUN-1-5/98/217M
<PAGE>
MFS/SUN LIFE SERIES TRUST
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1998
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Page
1. Definitions ....................................................... 2
2. Investment Objectives, Policies and Restrictions .................. 2
3. Management of the Series Fund ..................................... 10
Trustees ....................................................... 10
Officers ....................................................... 10
Investment Adviser ............................................. 11
Administrator .................................................. 14
Custodian ...................................................... 15
Shareholder Servicing Agent .................................... 15
4. Independent Accountants and Financial Statements .................. 15
5. Additional Information with Respect to Shares of Each Series ...... 15
Purchases ...................................................... 15
Exchange Privilege ............................................. 15
Net Asset Value, Dividends and Distributions ................... 15
Tax Status ..................................................... 16
Description of Shares, Voting Rights and Liabilities ........... 16
6. Portfolio Transactions and Brokerage Commissions .................. 17
Appendix .......................................................... 21
This Statement of Additional Information, as amended or supplemented from time
to time (the "SAI"), sets forth information which may be of interest to
investors but which is not necessarily included in the Series Fund's
Prospectus dated May 1, 1998. This SAI should be read in conjunction with the
Prospectus, a copy of which may be obtained without charge by contacting the
Sun Life Assurance Company of Canada (U.S.) Retirement Products and Services
Division, P.O. Box 1024, Boston, Massachusetts 02103, telephone (800)
752-7215.
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
<PAGE>
1. DEFINITIONS
"Series Fund" -- MFS/Sun Life Series Trust, a Massachusetts
business trust. The Series Fund changed its
name from "Compass Series Trust" in January,
1985. The shares of each series will be used
to fund benefits under variable annuity
contracts and variable life insurance
contracts. The names of MFS/Foreign & Colonial
International Growth Series and MFS/Foreign &
Colonial International Growth and Income
Series were changed to International Growth
Series and International Growth and Income
Series on September 8, 1997. The name of the
Value Series was changed to Capital
Opportunities Series on March 29, 1998.
"Sun Life of Canada (U.S.)" -- Sun Life Assurance Company of Canada (U.S.),
a Delaware corporation.
"Sun Life (N.Y.)" -- Sun Life Insurance and Annuity Company of New
York, a New York corporation.
"Contracts" -- Variable annuity and variable life insurance
contracts issued by Sun Life of Canada (U.S.),
Sun Life (N.Y.) or any of their affiliated
companies.
"Variable Accounts" -- Variable accounts established by Sun Life of
Canada (U.S.), Sun Life (N.Y.) and their
affiliated companies to fund Contracts.
"MFS" or the "Adviser" -- Massachusetts Financial Services Company, a
Delaware corporation.
"Prospectus" -- The Prospectus of the Series Fund, dated May
1, 1998, as amended or supplemented from time
to time.
2. INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and policies of the twenty-six series of the Series
Fund are described in the Prospectus. More information about some of the
series' investment instruments and techniques can be found in the Appendix to
this SAI. There can be no assurance that the investment objectives of any
series will be achieved. Shareholder approval is not required to change the
investment objectives of any series or the manner in which each series seeks
to achieve its objectives.
INVESTMENT RESTRICTIONS
The Series Fund has adopted the following policies which apply to the various
series and, except where specifically indicated, cannot be changed with
respect to any series without the approval of the holders of a majority of the
shares of that series (which, as used in this SAI, means the lesser of (i) 67%
or more of the outstanding shares present at a meeting at which holders of
more than 50% of the outstanding shares are represented in person or by proxy,
or (ii) more than 50% of the outstanding shares):
(1) INVESTMENT RESTRICTIONS THAT APPLY TO THE CAPITAL APPRECIATION SERIES,
CONSERVATIVE GROWTH SERIES, GOVERNMENT SECURITIES SERIES, HIGH YIELD
SERIES, MANAGED SECTORS SERIES, MONEY MARKET SERIES, TOTAL RETURN SERIES,
WORLD GOVERNMENTS SERIES AND ZERO COUPON SERIES.
None of these series may, except as indicated:
(1) Enter into repurchase agreements if, as a result of such agreement,
more than 10% of the series' total assets valued at the time of the
transaction would be subject to repurchase agreements maturing in more
than seven days.
(2) Lend money or securities, provided that the making of time or demand
deposits with banks and the purchase of debt securities such as bonds,
debentures, commercial paper, repurchase agreements and short-term
obligations in accordance with its investment objectives and policies are
not prohibited; and provided that the Conservative Growth Series, Total
Return Series, World Governments Series and Managed Sectors Series may
purchase a portion of an issue of debt securities of types commonly
distributed privately to financial institutions, and provided that this
shall not prohibit the World Governments Series, Total Return Series or
Conservative Growth Series from lending securities in accordance with
their investment objectives or the Managed Sectors Series from purchasing
convertible debt instruments consistent with its investment objectives.
For the purposes of this restriction, the purchase of short-term
commercial paper or a portion of an issue of debt securities which are
part of an issue to the public shall not be considered the making of a
loan.
(3) Borrow money except as a temporary measure for extraordinary or
emergency purposes and then only in an amount up to 1/3 of the value of
its total assets, in order to meet redemption requests without immediately
selling any portfolio securities (any such borrowings under this section
will not be collateralized). If, for any reason, the current value of the
total assets of any series falls below an amount equal to three times the
amount of its indebtedness for money borrowed, that series will, within
three business days, reduce its indebtedness to the extent necessary. No
series will borrow for leverage purposes. No series will purchase any
investments while borrowings are outstanding. For this purpose a borrowing
shall not be deemed the issuance of a senior security.
(4) Write, purchase or sell puts, calls or combinations thereof, provided
however that warrants and convertible securities may be purchased and sold
by a series, and provided further that this shall not prevent the Capital
Appreciation Series, the Government Securities Series, the World
Governments Series or the Managed Sectors Series from writing, purchasing
and selling puts, calls or combinations thereof or from purchasing,
owning, holding or selling contracts for the future delivery of securities
or currencies in accordance with their objectives and policies.
(5) Purchase or retain the securities of any issuer if any of the members
of the Board of Trustees or the Directors and Officers of Sun Life of
Canada (U.S.), Sun Life (N.Y.) or MFS own beneficially more than 1/2 of
1% of the securities of such issuer and together own more than 5% of the
securities of such issuer.
(6) Invest for the purpose of exercising control or management of another
issuer.
(7) Invest in oil, gas or other mineral exploration or development
programs.
(8) Purchase securities of other investment companies, except that the
Government Securities Series may purchase U.S. Government-related
Securities in accordance with its investment objectives and policies; and
except, as regards the Total Return Series, the World Governments Series
and the Managed Sectors Series, by purchase in the open market where no
commission or profit to a sponsor or dealer results from such purchase
other than the customary broker's commission, or except when such
purchase, though not made in the open market, is part of a plan of merger
or consolidation; and provided, however that the Managed Sectors Series
shall not purchase the securities of any investment company if such
purchase at the time thereof would cause more than 10% of the series'
total assets (taken at market value) to be invested in the securities of
such issuers; and provided, further, that these series shall not purchase
securities issued by any registered open-end investment company.
(9) Underwrite securities issued by others except to the extent the series
may be deemed to be an underwriter, under the federal securities laws, in
connection with the disposition of portfolio securities.
(10) Make short sales of securities or purchase any securities on margin
except to obtain such short term credits as may be necessary for the
clearance of transactions; provided that this shall not prevent the
Capital Appreciation Series, Government Securities Series, World
Governments Series or Managed Sectors Series from making margin deposits
in connection with options, Futures Contracts, Options on Futures
Contracts, Forward Contracts or options on foreign currencies; and
provided that this shall not prevent the Total Return Series, Managed
Sectors Series or Conservative Growth Series from making any short sales
of securities or selling a security which it does not own if, by virtue of
its ownership of other securities, the series has, at the time of sale, a
right to obtain securities without payment of further consideration
equivalent in kind and amount to the securities sold and provided that if
such right is conditional, the sale is made upon the same conditions.
(11) Invest in commodities or commodity futures contracts or in real
estate; except that this restriction shall not prevent the Capital
Appreciation Series, Government Securities Series, World Governments
Series or Managed Sectors Series from writing, selling or purchasing
Futures Contracts, Options on Futures Contracts, Forward Contracts or
options on foreign currencies or from holding or selling real estate or
mineral leases, commodities or commodity contracts acquired as a result of
the ownership of securities in accordance with their investment objectives
and policies and provided that this restriction shall not apply to the
Conservative Growth Series;
(2) INVESTMENT RESTRICTIONS THAT APPLY ONLY TO THE CAPITAL APPRECIATION SERIES
The Capital Appreciation Series will operate under the general investment
restrictions described above. In addition, the Capital Appreciation Series
will not:
(1) Purchase securities of any issuer (other than obligations of, or
guaranteed by the U.S. Government, its agencies or instrumentalities) if,
as a result of such purchase, more than 5% of the value of its assets
would be invested in the securities of that issuer.
(2) Purchase more than 10% of any class of securities of any issuer. All
debt securities and all preferred stocks shall each be considered one
class.
(3) Concentrate more than 25% of the value of its assets in any one
industry. Water, communications, electric, and gas utilities shall each be
considered a separate industry.
(4) Invest more than 10% of its total assets in securities of issuers
which are not readily marketable (including repurchase agreements maturing
in more than seven days).
(3) INVESTMENT RESTRICTIONS THAT APPLY ONLY TO THE CONSERVATIVE GROWTH SERIES
The Conservative Growth Series will operate under the general investment
restrictions described above. In addition, the Conservative Growth Series will
not:
(1) Pledge, mortgage or hypothecate an amount of assets which (taken at
market value) exceeds 15% of its gross assets (taken at the lower of cost
or market value).
(2) Concentrate more than 25% of the value of its assets in any one
industry.
(3) Purchase securities of any issuer (other than obligations of or
guaranteed by the U.S. Government, its agencies or instrumentalities) if,
as a result of such purchase, more than 5% of the value of its assets
would be invested in the securities of that issuer.
(4) Purchase voting securities of any issuer if such purchase, at the time
thereof, would cause more than 10% of the outstanding voting securities of
such issuer to be held by the Conservative Growth Series; or purchase
securities of any issuer if such purchase at the time thereof would cause
the Conservative Growth Series to hold more than 10% of any class of
securities of such issuer. For this purpose all indebtedness of an issuer
shall be deemed a single class and all preferred stock of an issuer shall
be deemed a single class.
(5) Invest more than 10% of its total assets, taken at market value, in
securities of issuers which are not readily marketable (including
repurchase agreements maturing in more than seven days).
(6) Purchase or sell real estate (including limited partnership interests
but excluding securities of companies, such as real estate investment
trusts, which deal in real estate or interests therein) or mineral leases,
commodities or commodity contracts in the ordinary course of its business.
The Conservative Growth Series reserves the freedom of action to hold and
to sell real estate or mineral leases, commodities or commodity contracts
acquired as a result of the ownership of securities, but will not purchase
securities for the purpose of acquiring real estate or mineral leases,
commodities or commodity contracts.
(4) INVESTMENT RESTRICTIONS THAT APPLY ONLY TO THE GOVERNMENT SECURITIES
SERIES
The Government Securities Series will operate under the general investment
restrictions described above. In addition, the Government Securities Series
will not:
(1) Purchase securities of any issuer (other than obligations of or
guaranteed by the U.S. Government, its agencies or instrumentalities that
are backed by the full faith and credit of the United States Government)
if, as a result of such purchase, more than 10% of the value of its assets
would be invested in securities of that issuer (for this purpose,
investments in certificates representing individual interests in pools of
U.S. Treasury securities will be treated as direct investments in U.S.
Treasury obligations).
(2) Purchase more than 10% of any class of securities of any issuer (for
this purpose all indebtedness of an issuer shall be deemed a single
class).
(3) Purchase equity securities or voting securities.
(4) Purchase interests in pools of mortgages evidenced by direct pass
through mortgage certificates if, as a result of such purchase, more than
90% of the value of its assets would be evidenced by direct pass through
mortgage certificates.
(5) Invest in securities of issuers which are not readily marketable
(except for repurchase agreements maturing in more than seven days).
(5) INVESTMENT RESTRICTIONS THAT APPLY ONLY TO THE HIGH YIELD SERIES
The High Yield Series will operate under the general investment restrictions
described above. In addition, the High Yield Series will not:
(1) Purchase securities of any issuer (other than obligations of or
guaranteed by the U.S. Government, its agencies or instrumentalities) if,
as a result of such purchase, more than 10% of the value of its assets
would be invested in the securities of that issuer.
(2) Concentrate more than 25% of the value of its assets in any one
industry. Water, communications, electric, and gas utilities shall each be
considered a separate industry.
(3) Invest more than 10% of its total assets, taken at market value, in
securities of issuers which are not readily marketable (including
repurchase agreements maturing in more than seven days).
(6) INVESTMENT RESTRICTIONS THAT APPLY ONLY TO THE MANAGED SECTORS SERIES:
The Managed Sectors Series will operate under the general investment
restrictions described above. In addition, the Managed Sectors Series will
not:
(1) Purchase the securities of any issuer (other than obligations of, or
guaranteed by the United States government, its agencies or
instrumentalities) if, as to 50% of the series' total assets, such
purchase, at the time thereof, would cause more than 5% of its total
assets, taken at market value, to be invested in the securities of such
issuer.
(2) Purchase voting securities of any issuer if, as to 50% of the value of
the series' assets, such purchase, at the time thereof, would cause more
than 10% of the outstanding voting securities of such issuer to be held by
the series.
(3) Invest more than 10% of its total assets, taken at market value, in
securities of issuers which are not readily marketable (including
repurchase agreements maturing in more than seven days).
The Managed Sectors Series has also adopted the following nonfundamental
investment policy, which may be changed by the series without approval of its
shareholders. The series' purchase of warrants will not exceed 5% of its
assets. Included within that amount, but not exceeding 2% of assets, may be
warrants for which there is no public market. Any such warrants will be valued
at their market value, except that warrants which are attached to securities
at the time such securities are acquired by the Managed Sectors Series will be
deemed to be without value for the purpose of this restriction.
(7) INVESTMENT RESTRICTIONS THAT APPLY ONLY TO THE MONEY MARKET SERIES
The Money Market Series will operate under the general investment restrictions
described above. In addition, the Money Market Series will not:
(1) Purchase securities of any issuer (other than obligations of or
guaranteed by the U.S. Government, its agencies or instrumentalities) if,
as a result of such purchase, more than 5% of the value of its assets
would be invested in securities of that issuer.
(2) Purchase more than 10% of any class of securities of any issuer (for
this purpose all indebtedness of an issuer shall be deemed a single
class).
(3) Concentrate more than 25% of the value of its assets in any one
industry, provided that this restriction shall not apply to obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, or certificates of deposit or securities issued or
guaranteed by domestic banks.
(4) Purchase equity securities, voting securities or local or state
government securities.
(5) Invest in securities of issuers which are not readily marketable
(except for repurchase agreements maturing in more than seven days).
(8) INVESTMENT RESTRICTIONS THAT APPLY ONLY TO THE TOTAL RETURN SERIES:
The Total Return Series will operate under the general investment restrictions
described above. In addition, the Total Return Series will not:
(1) Concentrate its investments in any particular industry, but if it is
deemed appropriate for the attainment of its investment objectives, up to
25% of its assets, taken at market value at the time of each investment,
may be invested in any one industry.
(2) Purchase the securities of any issuer (other than obligations of, or
guaranteed by the United States government, its agencies or
instrumentalities) if such purchase, at the time thereof, would cause more
than 5% of its total assets, taken at market value, to be invested in the
securities of such issuer.
(3) Purchase voting securities of any issuer if such purchase, at the time
thereof, would cause more than 10% of the outstanding voting securities of
such issuer to be held by the series, or purchase securities of any issuer
if such purchase at the time thereof, would cause the series to hold more
than 10% of any class of securities of such issuer. For this purpose, all
indebtedness of an issuer shall be deemed a single class and all preferred
stock of an issuer shall be deemed a single class.
(4) Invest more than 10% of its total assets, taken at market value, in
securities of issuers which are not readily marketable (including
repurchase agreements maturing in more than seven days).
(9) INVESTMENT RESTRICTIONS THAT APPLY ONLY TO THE WORLD GOVERNMENTS SERIES:
The World Governments Series will operate under the general investment
restrictions described above. In addition the World Governments Series will
not:
(1) Purchase the securities of any issuer (other than obligations of, or
guaranteed by the United States government, its agencies or
instrumentalities) if such purchase at the time thereof would cause more
than 10% of the voting securities of such issuer to be held by the series.
(2) Invest more than 10% of its total assets, taken at market value, in
securities of issuers which are not readily marketable (including
repurchase agreements maturing in more than seven days).
(10) INVESTMENT RESTRICTIONS THAT APPLY ONLY TO THE ZERO COUPON SERIES
The Zero Coupon Series will operate under the general investment restrictions
described above. In addition, the Zero Coupon Series will not:
(1) Purchase securities of any issuer (other than the U.S. Treasury) if,
as a result of such purchase, more than 10% of the value of its assets
would be invested in securities of that issuer (for this purpose,
investments in certificates representing individual interests in pools of
U.S. Treasury securities will be treated as direct investments in U.S.
Treasury obligations).
(2) Purchase more than 10% of any class of securities of any issuer (for
this purpose all indebtedness of an issuer shall be deemed a single
class).
(3) Purchase equity securities, voting securities, securities of agencies
or instrumentalities of the United States Government which are not backed
by the full faith and credit of the United States Treasury.
(4) Invest in securities of issuers which are not readily marketable
(except for repurchase agreements maturing in more than seven days).
PERCENTAGE RESTRICTIONS: With respect to the above restrictions (1) through
(10) applicable to all series except the Emerging Growth Series, Research
Series, World Asset Allocation Series, World Growth Series, World Total Return
Series and the Utilities Series, if a percentage restriction is adhered to at
the time of investment, a later increase or decrease in percentage beyond the
specified limit resulting from a change in values or assets will not be
considered a violation of policy.
(11) INVESTMENT RESTRICTIONS THAT APPLY ONLY TO THE UTILITIES SERIES
The Utilities Series will not:
(1) Borrow amounts in excess of 33 1/3% of its gross assets, and then only
as a temporary measure for extraordinary or emergency purposes, or pledge,
mortgage or hypothecate its assets (taken at market value) to an extent
greater than 33 1/3% of its gross assets, in each case taken at the lower
of cost or market value and subject to a 300% asset coverage requirement
(for the purpose of this restriction, collateral arrangements with respect
to options, Futures Contracts, Options on Futures Contracts, Forward
Contracts and Options on Foreign Currencies and payments of initial and
variation margin in connection therewith are not considered a pledge of
assets); while such borrowings exceed 5% of the series' gross assets, no
securities may be purchased; however, the series' may complete the
purchase of securities already contracted for;
(2) Underwrite securities issued by other persons except insofar as the
series may technically be deemed an underwriter under the Securities Act
of 1933 in selling a portfolio security;
(3) Invest 25% or more of the market value of its total assets in
securities of issuers in any one industry (excluding obligations of the
U.S. Government and repurchase agreements collateralized by obligations of
the U.S. Government), except that the series will invest at least 25% of
its total assets in the utilities industry; (4) Purchase or sell real
estate (including limited partnership interests but excluding securities
secured by real estate or interests therein), interests in oil, gas or
mineral leases, commodities or commodity contracts (except foreign
currencies, Forward Contracts, Futures Contracts, options, Options on
Futures Contracts and Options on Foreign Currencies) in the ordinary
course of its business. The series reserves the freedom of action to hold
and to sell real estate and commodities acquired as a result of the
ownership of securities;
(5) Make loans to other persons except through the lending of its
portfolio securities and except through repurchase agreements. For these
purposes the purchase of commercial paper or all or a portion of an issue
of debt securities shall not be considered the making of a loan;
(6) Invest for the purpose of exercising control or management;
(7) Purchase any securities or evidences of interest therein on margin,
except that the series may obtain such short-term credit as may be
necessary for the clearance of any transactions and except that the series
may make margin deposits in connection with Futures Contracts, Options on
Futures Contracts, Forward Contracts, options and Options on Foreign
Currencies;
(8) Sell any security which the series does not own unless by virtue of
its ownership of other securities the series has at the time of sale a
right to obtain securities without payment of further consideration
equivalent in kind and amount to the securities sold and provided that if
such right is conditional the sale is made upon the same conditions;
(9) Invest in illiquid investments, including securities which are subject
to legal or contractual restrictions on resale, or for which there is no
readily available market (e.g., trading in the security is suspended or,
in the case of unlisted securities, market makers do not exist or will not
entertain bids or offers), unless the Board of Trustees of the Series Fund
has determined that such securities are liquid based upon trading markets
for the specific security, if more than 15% of the series' assets (taken
at market value) would be invested in such securities.
Except with respect to Investment Restriction (1), these investment
restrictions applicable to the Utilities Series are adhered to at the time of
purchase or utilization of assets; a subsequent change in circumstances will
not be considered to result in a violation of policy.
OTHER INVESTMENT POLICIES THAT APPLY ONLY TO THE UTILITIES SERIES
The Utilities Series has also adopted the following additional nonfundamental
investment policies that may be required by various laws and administrative
positions. These investment policies are not fundamental and may be changed by
the series without approval of its shareholders.
(a) Repurchase agreements maturing in more than seven days will be deemed to
be illiquid for purposes of the series' limitation on investment in illiquid
securities; (b) during the coming year, (i) less than 5% of the series' assets
will be used to engage in short sales permitted by Investment Restriction (8)
above and (ii) purchases of warrants will not exceed 5% of the series' net
assets (included within that amount, but not exceeding 2% of the series' net
assets, may be warrants not listed on the New York or American Stock
Exchange); (c) the series will not invest more than 5% of its total assets in
companies which, including their respective predecessors, have a record of
less than three years' continuous operation; (d) the series will not purchase
or retain in its portfolio any securities issued by an issuer any of whose
officers, directors, trustees or security holders is an officer or Trustee of
the Series Fund, or is a partner, officer or a director of the Adviser, if
after the purchase of the securities of such issuer by the series one or more
of such persons owns beneficially more than 1/2 of 1% of the shares or
securities, or both, of such issuer, and such persons owning more than 1/2 of
1% of such shares or securities together own beneficially more than 5% of such
shares or securities, or both; (e) the series will not write, purchase or sell
any put or call option or any combination thereof, provided that this shall
not prevent the series from writing, purchasing and selling puts, calls or
combinations thereof with respect to securities (including yields on
securities), indexes of securities, foreign currencies and futures contracts;
(f) the series may not purchase voting securities of any issuer if such
purchase, at the time thereof, would cause more than 10% of the outstanding
voting securities of such issuer to be held by the series (for this purpose,
all indebtedness of an issuer shall be deemed a single class and all preferred
stock of an issuer shall be deemed a single class); (g) the series will not
purchase securities issued by any closed-end investment company except by
purchase in the open market where no commission or profit to a sponsor or
dealer results from such purchase other than the customary broker's
commission, or except when such purchase, though not made in the open market,
is part of a plan of merger or consolidation; provided, however, that the
series shall not purchase such securities if such purchase at the time thereof
would cause more than 10% of its total assets (taken at market value) to be
invested in the securities of such issuers, or more than 3% of the total
outstanding voting securities of any closed-end investment company to be held
by the series. The series shall not purchase securities issued by any open-end
investment company; (h) the series will only borrow amounts from banks and
then only as permitted by Investment Restriction (1); and (i) the Board of
Trustees of the Series Fund will determine a security is liquid based upon
trading markets for the specific security as stated in Investment Restriction
(9) only if the security is a Rule 144A restricted security.
(12) INVESTMENT RESTRICTIONS THAT APPLY ONLY TO THE BOND SERIES, EMERGING
GROWTH SERIES, EQUITY INCOME SERIES, MASSACHUSETTS INVESTORS GROWTH STOCK
SERIES, NEW DISCOVERY SERIES, RESEARCH GROWTH AND INCOME SERIES, RESEARCH
INTERNATIONAL SERIES, RESEARCH SERIES, STRATEGIC INCOME SERIES, VALUE
SERIES, WORLD ASSET ALLOCATION SERIES, WORLD GROWTH SERIES AND WORLD
TOTAL RETURN SERIES (SEE (13) BELOW FOR TWO ADDITIONAL RESTRICTIONS
APPLICABLE ONLY TO THE EMERGING GROWTH SERIES AND RESEARCH SERIES)
None of these series may, except as indicated:
(1) borrow amounts in excess of 33 1/3% of its assets including amounts
borrowed, and then only as a temporary measure for extraordinary or
emergency purposes;
(2) underwrite securities issued by other persons except insofar as a
series may technically be deemed an underwriter under the Securities Act
of 1933 in selling a portfolio security;
(3) purchase or sell real estate (including limited partnership interests
but excluding securities secured by real estate or interests therein and
securities of companies, such as real estate investment trusts, which deal
in real estate or interests therein), interests in oil, gas or mineral
leases, commodities or commodity contracts (excluding currencies, any type
of option, any type of futures contract, and Forward Contracts) in the
ordinary course of its business. The series reserve the freedom of action
to hold and to sell real estate, mineral leases, commodities or commodity
contracts (including currencies, any type of option, any type of futures
contract, and Forward Contracts) acquired as a result of the ownership of
securities;
(4) issue any senior securities except as permitted by the 1940 Act. (For
purposes of this restriction, collateral arrangements with respect to any
type of option, any type of swap agreement, Forward Contracts and any type
of futures contract and collateral arrangements with respect to initial
and variation margin are not deemed to be the issuance of a senior
security);
(5) make loans to other persons. For these purposes the purchase of short-
term commercial paper, the purchase of a portion or all of an issue of
debt securities, the purchase of loan participations and other direct
indebtedness in accordance with its investment objectives, the lending of
portfolio securities, and the investment of a series' assets in repurchase
agreements shall not be considered the making of a loan; or
(6) purchase any securities of an issuer of a particular industry, if as a
result 25% or more of its gross assets would be invested in securities of
issuers whose principal business activities are in the same industry
(except for obligations issued or guaranteed by the U.S. Government or its
agencies, authorities or instrumentalities and repurchase agreements
collateralized by such obligations).
Except with respect to Investment Restriction (1), these investment
restrictions and the investment restrictions below are adhered to at the time
of purchase or utilization of assets; a subsequent change in circumstances
will not be considered to result in a violation of policy;
OTHER INVESTMENT POLICIES THAT APPLY TO THE BOND SERIES, EMERGING GROWTH
SERIES, EQUITY INCOME SERIES, MASSACHUSETTS INVESTORS GROWTH STOCK SERIES, NEW
DISCOVERY SERIES, RESEARCH GROWTH AND INCOME SERIES, RESEARCH INTERNATIONAL
SERIES, RESEARCH SERIES, STRATEGIC INCOME SERIES, VALUE SERIES, WORLD ASSET
ALLOCATION SERIES, WORLD GROWTH SERIES AND WORLD TOTAL RETURN SERIES
The Bond Series Emerging Growth Series, Equity Income Series, Massachusetts
Investors Growth Stock Series, New Discovery Series, Research Growth and
Income Series, Research International Series, Research Series, Strategy Income
Series, Value Series, World Asset Allocation Series, World Growth Series and
World Total Return Series have the following additional nonfundamental
policies which may be changed without shareholder approval. Each of these
Series will not:
(1) invest in illiquid investments, including securities subject to legal
or contractual restrictions on resale or for which there is no readily
available market (e.g., trading in the security is suspended, or, in the
case of unlisted securities, where no market exists) if more than 15% of
the series' net assets (taken at market value) would be invested in such
securities. Repurchase agreements maturing in more than seven days will be
deemed to be illiquid for purposes of this limitation. Securities that are
not registered under the 1933 Act and sold in reliance on Rule 144A
thereunder, but are determined to be liquid by the Series Fund's Board of
Trustees (or its delegee), will not be subject to this 15% limitation;
(2) invest for the purpose of exercising control or management.
(3) pledge, mortgage or hypothecate in excess of 33 1/3% of its gross
assets. For purposes of this restriction, collateral arrangements with
respect to any type of option, any type of futures contracts, any type of
swap agreement, Forward Contracts, short sales and payments of initial and
variation margin in connection therewith, in each case in accordance with
the Series' investment objectives and policies, are not considered a
pledge of assets;
OTHER INVESTMENT POLICIES THAT APPLY TO THE EMERGING GROWTH SERIES, RESEARCH
GROWTH AND INCOME SERIES, RESEARCH SERIES, VALUE SERIES, WORLD ASSET
ALLOCATION SERIES, WORLD GROWTH SERIES, AND WORLD TOTAL RETURN SERIES
The Emerging Growth Series, Research Growth and Income Series, Research
Series, Value Series, World Asset Allocation Series, World Growth Series, and
World Total Return Series have the following additional nonfundamental
policies which may be changed without shareholder approval. Each of these
Series will not:
(1) invest more than 5% of the value of the series' net assets, valued at
the lower of cost or market, in warrants. Included within such amount, but
not to exceed 2% of the value of the series' net assets, may be warrants
which are not listed on the New York or American Stock Exchange. Warrants
acquired by a series in units or attached to securities may be deemed to
be without value;
(2) purchase securities issued by any other investment company in excess
of the amount permitted by the 1940 Act, except when such purchase is part
of a plan of merger or consolidation;
(3) purchase or retain securities of an issuer any of whose officers,
directors, trustees or security holders is an officer or trustee of the
Series Fund, or is an officer or a director of the Adviser, or any Sub-
Adviser to the series, if one or more of such persons also owns
beneficially more than 1/2 of 1% of the securities of such issuer, and
such persons owning more than 1/2 of 1% of such securities together own
beneficially more than 5% of such securities;
(4) purchase any securities or evidences of interest therein on margin,
except that a Series may obtain such short-term credit as may be necessary
for the clearance of any transaction and except that a series may make
margin deposits in connection with any type of option, any type of futures
contract, any type of swap agreement and Forward Contracts entered into in
accordance with its investment objectives and policies;
(5) sell any security which the series does not own unless by virtue of
its ownership of other securities the series has at the time of sale a
right to obtain securities without payment of further consideration
equivalent in kind and amount to the securities sold and provided that if
such right is conditional, the sale is made upon the same conditions;
(6) invest more than 5% of its gross assets in companies which, including
predecessors, controlling persons, sponsoring entities, general partners
and guarantors, have a record of less than three years' continuous
operation or relevant business experience;
(7) purchase or sell any put or call option or any combination thereof,
provided that this shall not prevent (a) the purchase, ownership, holding
or sale of (i) warrants where the grantor of the warrants is the issuer of
the underlying securities or (ii) put or call options or combinations
thereof with respect to securities, indexes of securities, foreign
currency, any type of swap agreement or any type of futures contracts or
(b) the purchase, ownership, holding or sale of contracts for the future
delivery of securities or currencies, in each case in accordance with the
series' investment objectives and policies;
(8) purchase securities while borrowings pursuant to fundamental
investment restriction (1) exceed 5% of the series' total assets; however,
a series may complete the purchase of securities already contracted for;
or
(13) INVESTMENT RESTRICTIONS THAT APPLY ONLY TO THE EMERGING GROWTH SERIES AND
THE RESEARCH SERIES.
Neither the Emerging Growth Series nor the Research Series may:
(1) purchase the securities of any issuer if such purchase, at the time
thereof, would cause more than 5% of its total assets (taken at market
value) to be invested in the securities of such issuer, other than U.S.
Government securities;
(2) purchase voting securities of any issuer if such purchase, at the time
thereof, would cause more than 10% of the outstanding voting securities of
such issuer to be held by the series; or purchase securities of any issuer
if such purchase at the time thereof would cause the series to hold more
than 10% of any class of securities of such issuer. For this purpose all
indebtedness of an issuer shall be deemed a single class and all preferred
stock of an issuer shall be deemed a single class.
(14) INVESTMENT RESTRICTIONS THAT APPLY ONLY TO THE MFS/FOREIGN & COLONIAL
EMERGING MARKETS EQUITY SERIES, INTERNATIONAL GROWTH SERIES AND
INTERNATIONAL GROWTH AND INCOME SERIES.
None of these series may, except as indicated:
(1) borrow amounts in excess of 33 1/3% of its assets including amounts
borrowed;
(2) underwrite securities issued by other persons except insofar as a
series may technically be deemed an underwriter under the Securities Act
of 1933 in selling a portfolio security;
(3) purchase or sell real estate (including limited partnership interests
but excluding securities secured by real estate or interests therein and
securities of companies, such as real estate investment trusts, which deal
in real estate or interests therein), interests in oil, gas or mineral
leases, commodities or commodity contracts (excluding currencies, any type
of option, any type of futures contract, and Forward Contracts) in the
ordinary course of its business. The series reserve the freedom of action
to hold and to sell real estate, mineral leases, commodities or commodity
contracts (including currencies, any type of option, any type of futures
contract, and Forward Contracts) acquired as a result of the ownership of
securities;
(4) issue any senior securities except as permitted by the 1940 Act. (For
purposes of this restriction, collateral arrangements with respect to any
type of option, any type of swap agreement, Forward Contracts and any type
of futures contract and collateral arrangements with respect to initial
and variation margin are not deemed to be the issuance of a senior
security);
(5) make loans to other persons. For these purposes the purchase of short-
term commercial paper, the purchase of a portion or all of an issue of
debt securities, the purchase of loan participations and other direct
indebtedness in accordance with its investment objectives, the lending of
portfolio securities, and the investment of a series' assets in repurchase
agreements shall not be considered the making of a loan; or
(6) purchase any securities of an issuer of a particular industry, if as a
result 25% or more of its gross assets would be invested in securities of
issuers whose principal business activities are in the same industry
(except for obligations issued or guaranteed by the U.S. Government or its
agencies, authorities or instrumentalities and repurchase agreements
collateralized by such obligations).
Except with respect to Investment Restriction (1), these investment
restrictions and the investment restrictions below are adhered to at the time
of purchase or utilization of assets; a subsequent change in circumstances
will not be considered to result in a violation of policy;
OTHER INVESTMENT POLICIES THAT APPLY TO THE MFS/FOREIGN COLONIAL EMERGING
MARKETS EQUITY SERIES, INTERNATIONAL GROWTH SERIES AND INTERNATIONAL GROWTH
AND INCOME SERIES.
The following additional nonfundamental policies may be changed without
shareholder approval. Each of these series will not:
(1) invest in illiquid investments, including securities subject to legal
or contractual restrictions on resale or for which there is no readily
available market (e.g., trading in the security is suspended, or, in the
case of unlisted securities, where no market exists) if more than 15% of
the series' net assets (taken at market value) would be invested in such
securities. Repurchase agreements maturing in more than seven days will be
deemed to be illiquid for purposes of this limitation. Securities that are
not registered under the 1933 Act and sold in reliance on Rule 144A
thereunder, but are determined to be liquid by the Series Fund's Board of
Trustees (or its delegee), will not be subject to this 15% limitation;
(2) invest more than 10% of the value of the series' net assets, valued at
the lower of cost or market, in warrants. Included within such amount may
be warrants which are not listed on the New York or American Stock
Exchange. Warrants acquired by a series in units or attached to securities
may be deemed to be without value;
(3) purchase securities issued by any other investment company in excess
of the amount permitted by the 1940 Act, except when such purchase is part
of a plan of merger or consolidation;
(4) purchase or retain securities of an issuer any of whose officers,
directors, trustees or security holders is an officer or trustee of the
Series Fund, or is an officer or a director of the Adviser, or any Sub-
Adviser to the series, if one or more of such persons also owns
beneficially more than 1/2 of 1% of the securities of such issuer, and
such persons owning more than 1/2 of 1% of such securities together own
beneficially more than 5% of such securities;
(5) purchase any securities or evidences of interest therein on margin,
except that a series may obtain such short-term credit as may be necessary
for the clearance of any transaction and except that a series may make
margin deposits in connection with any type of option, any type of futures
contract, any type of swap agreement and Forward Contracts;
(6) sell any security which the series does not own unless by virtue of
its ownership of other securities the series has at the time of sale a
right to obtain securities without payment of further consideration
equivalent in kind and amount to the securities sold and provided that if
such right is conditional, the sale is made upon the same conditions;
(7) invest more than 5% of its gross assets in companies which, including
predecessors, controlling persons, sponsoring entities, general partners
and guarantors, have a record of less than three years' continuous
operation or relevant business experience;
(8) pledge, mortgage or hypothecate in excess of 33 1/3% of its gross
assets. For purposes of this restriction, collateral arrangements with
respect to any type of option, any type of futures contracts, any type of
swap agreement, Forward Contracts and payments of initial and variation
margin in connection therewith are not considered a pledge of assets;
(9) borrow, except as a temporary measure for extraordinary or emergency
purposes;
(10) purchase or sell any put or call option or any combination thereof,
provided that this shall not prevent (a) the purchase, ownership, holding
or sale of (i) warrants where the grantor of the warrants is the issuer of
the underlying securities or (ii) put or call options or combinations
thereof with respect to securities, indexes of securities, or foreign
currency, or (iii) any type of swap agreement or any type of futures
contracts or (b) the purchase, ownership, holding or sale of contracts for
the future delivery of securities or currencies; or
(11) invest for the purpose of exercising control or management.
------------------------
INSURANCE LAW RESTRICTIONS: In connection with the Series Fund's agreement to
sell shares to the Variable Accounts, MFS and Sun Life of Canada (U.S.), Sun
Life (N.Y.) or any of their affiliated companies may enter into agreements,
required by certain state insurance departments, under which MFS may agree to
use its best efforts to ensure that the Series Fund complies with the
investment restrictions and limitations prescribed by state insurance laws,
and the regulations promulgated thereunder, insofar as such investment
restrictions and limitations are applicable to the investment of assets of the
Variable Accounts in shares of the Series Fund, and to permit Sun Life of
Canada (U.S.), Sun Life (N.Y.) or any of their affiliated companies to monitor
investments made by the Series Fund to ensure compliance with those
restrictions and limitations. If the Series Fund fails to comply with such
restrictions or limitations, the Variable Accounts will take appropriate
action which might include ceasing to make investments in the Series Fund or
ceasing to issue Contracts in the state imposing the limitation. It is not
expected that such restrictions and limitations will have a significant impact
on the operations of the Series Fund.
3. MANAGEMENT OF THE SERIES FUND
The Series Fund's Board of Trustees provides broad supervision over the
affairs of the Series Fund. MFS is responsible for the investment management
of each series, and the officers of the Series Fund are responsible for the
Series Fund's operations. The Trustees and officers are listed below, together
with their principal occupations during the past five years. (Their titles may
have varied during that period.)
TRUSTEES
SAMUEL ADAMS (born 10/19/25)
Partner, Warner & Stackpole (Attorneys)
Address: 75 State Street, Boston, Massachusetts
J. KERMIT BIRCHFIELD (born 1/8/40)
Consultant; Display Tech, Inc. (manufacturer of liquid crystal display
technology), Chairman; Century Partners, Inc. (investments), Managing
Director; HPSC, Inc. (medical financing), Director; Dairy Mart Convenience
Stores, Inc. (convenience stores), Director; Intermountain Gas Company, Inc.
(public utility gas distribution), Director; and M/A-Com, Inc. (manufacturer
of microwave communications equipment), Senior Vice President and General
Counsel (May 1990 to December 1995).
Address: 33 Way Road, Gloucester, Massachusetts
WILLIAM R. GUTOW (born 9/27/41
Private Investor; Real Estate Consultant; Capitol Entertainment (Blockbuster
Video Franchise), Vice Chairman
Address: 3102 Maple Avenue, #100, Dallas, Texas
DAVID D. HORN** (born 6/7/41)
Retired. Former Senior Vice President and General Manager, Sun Life Assurance
Company of Canada
Address: 56 Pickney Street, Boston, Massachusetts
GARTH MARSTON (born 4/28/26)
Retired. Former Chairman, Provident Institution for Savings
Address: 90 Beacon Street, Boston, Massachusetts
JOHN D. McNEIL**, Chairman (born 2/17/34)
Chairman and Director, Sun Life Assurance Company of Canada
Address: 150 King Street West, Toronto, Ontario, Canada
DERWYN F. PHILLIPS (born 8/31/30)
Retired. Former Vice Chairman, The Gillette Company
Address: One Cliff Street, Marblehead, Massachusetts
OFFICERS
W. THOMAS LONDON*, Treasurer (born 3/1/44)
Senior Vice President and Assistant Treasurer, Massachusetts Financial
Services Company
Address: 500 Boylston Street, Boston, Massachusetts
JAMES O. YOST*, Assistant Treasurer (born (6/12/60)
Vice President, Massachusetts Financial Services Company
Address: 500 Boylston Street, Boston, Massachusetts
MARK E. BRADLEY*, Assistant Treasurer (born 11/23/59)
Massachusetts Financial Services Company, Vice President (since March 1997);
Putnam Investments, Vice President (from September 1994 until March 1997);
Ernst & Young, Senior Tax Manager (prior to September 1994).
ELLEN MOYNIHAN,* Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September
1996); Deloitte & Touche, LLP, Senior Manager (prior to September 1996).
STEPHEN E. CAVAN,* Secretary and Clerk (born 11/6/53)
Senior Vice President, General Counsel and Assistant Secretary, Massachusetts
Financial Services Company
Address: 500 Boylston Street, Boston, Massachuetts
JAMES R. BORDEWICK, JR.,* Assistant Secretary (born 3/6/59)
Senior Vice President and Associate General Counsel, Massachusetts Financial
Services Company
Address: 500 Boylston Street, Boston, Massachusetts
- ------------
*" Interested person" (as defined in the 1940 Act) of MFS whose address is 500
Boylston Street, Boston, Massachusetts.
**" Interested person" (as defined in the 1940 Act) of Sun Life Canada (U.S.),
whose address is One Sun Life Executive Park, Wellesley Hills,
Massachusetts.
All of the Trustees are also Members of the Boards of Managers of Money Market
Variable Account, High Yield Variable Account, Capital Appreciation Variable
Account, Government Securities Variable Account, World Governments Variable
Account, Total Return Variable Account and Managed Sectors Variable Account,
which were established by Sun Life of Canada (U.S.) in connection with the
sale of Compass combination fixed/variable annuity contracts. The officers of
the Series Fund hold similar offices for these variable accounts. Mr. McNeil
is a Director of MFS, the Series Fund's investment adviser and Chairman of the
Boards of Managers of the aforementioned variable accounts.
No Trustee or Officer owned shares of the Series Fund on the date of this SAI.
The Series Fund's Declaration of Trust provides that the Series Fund will
indemnify its Trustees and officers against liabilities and expenses incurred
in connection with litigation in which they may be involved because of their
offices with the Series Fund, unless it is finally adjudicated or, in case of
a settlement, it has been determined by fair and reasonable means, that they
have not acted in good faith in the reasonable belief that their actions were
in the best interests of the Series Fund. However, no indemnification will be
paid to any Trustee or Officer for any liability to the Series Fund or its
shareholders which arose by reason of his wilful misfeasance, bad faith, gross
negligence or reckless disregard of his duties.
TRUSTEE COMPENSATION TABLE
TOTAL TRUSTEE FEES
TRUSTEE FEES FROM SERIES FUND
TRUSTEE FROM EACH SERIES(1) AND FUND COMPLEX(2)
- -------------------------------------------------------------------------------
Samuel Adams .................... $1,350 $36,000
J. Kermit Birchfield ............ 975 26,000
William Gutow ................... 975 54,683
David D. Horn ................... 0 0*
John D. McNeil .................. 0 0*
Garth Marston ................... 1,350 36,000
Derwyn F. Phillips .............. 1,238 33,000
- ----------
(1) For the year ended December 31, 1997.
(2) Information provided for calendar year 1997. All Trustees receiving
compensation from the Series Fund served as Trustees of 27 funds within
the MFS Fund complex having aggregate net assets at December 31, 1997 of
$9.12 billion, except Mr. Gutow, who served as Trustee of 46 funds within
the MFS complex (having aggregate net assets at December 31, 1997, of
approximately $10.7 billion).
* Messrs. Horn and McNeil were affiliated with Sun Life of Canada (U.S.) and
received no compensation from the Series Fund. Beginning in the Series
Fund's current fiscal year, Mr. Horn receives compensation from the Series
Fund for his services as a Trustee.
INVESTMENT ADVISER
MFS is the investment adviser of the Series Fund and in such capacity manages
the portfolio of each series. MFS also serves as investment adviser to the
funds in the MFS Family of Funds, and to certain other registered investment
companies established by MFS and/or Sun Life of Canada (U.S.). MFS
Institutional Advisors, Inc., a wholly owned subsidiary of MFS, provides
investment advice to substantial private clients. For information concerning
the allocation by MFS of simultaneous securities transactions for different
clients, see "Portfolio Transactions and Brokerage Commissions."
MFS and its predecessor organizations have a history of money management
dating from 1924. MFS is a subsidiary of Sun Life of Canada (U.S.) Financial
Services Holdings, Inc., which in turn is an indirect wholly owned subsidiary
of Sun Life Assurance Company of Canada ("Sun Life"). The Prospectus contains
information with respect to the management of the Adviser and other investment
companies for which MFS serves as investment adviser.
INVESTMENT ADVISORY AGREEMENTS -- MFS provides each series of the Series Fund
with overall investment advisory services. Subject to such policies as the
Trustees may determine, MFS makes investment decisions for each series of the
Series Fund. For these services, MFS receives an annual management fee,
computed and paid monthly, as disclosed in the Prospectus under the heading
"Management of the Series Fund."
For the fiscal years ended December 31, 1997, 1996 and 1995, the Series paid
the following management fees ("average daily net assets" below has been
abbreviated as "ADNA"):
<TABLE>
<CAPTION>
MANAGEMENT FEES
MANAGEMENT FEES PAID WAIVED BY ADVISER
FOR FISCAL YEAR ENDED FOR FISCAL YEAR
SERIES 1997 % ADNA ENDED 1997 % ADNA
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Capital Appreciation ...... $ 8,924,179 0.73% N/A N/A
Capital Opportunites ...... 296,136 0.62 $61,335 0.13%
Conservative Growth ....... 4,647,665 0.55 N/A N/A
Emerging Growth ........... 2,590,450 0.73 N/A N/A
Government Securities ..... 2,066,478 0.55 N/A N/A
High Yield ................ 1,720,706 0.75 N/A N/A
International Growth ...... 126,735 0.81 26,067 0.17
International Growth and
Income .................... 427,422 0.97 N/A N/A
Managed Sectors ........... 2,276,250 0.74 N/A N/A
MFS/F&C Emerging Markets
Equity .................... 131,518 0.77 83,132 0.48
Money Market .............. 1,946,081 0.50 N/A N/A
Research .................. 3,593,814 0.72 N/A N/A
Research Growth and Income
(1) ....................... 7,542 0.45 5,017 0.30
Total Return .............. 10,008,562 0.66 N/A N/A
Utilities ................. 669,213 0.75 N/A N/A
World Asset Allocation .... 786,866 0.75 N/A N/A
World Governments ......... 916,874 0.75 N/A N/A
World Growth .............. 2,124,944 0.90 N/A N/A
World Total Return ........ 409,708 0.75 N/A N/A
Zero Coupon ............... 9,326 0.25 N/A N/A
- ----------
(1) From the commencement of investment operations on May 13, 1997.
<CAPTION>
MANAGEMENT FEES
MANAGEMENT FEES PAID WAIVED BY ADVISER
FOR FISCAL YEAR ENDED FOR FISCAL YEAR
SERIES 1996 % ADNA ENDED 1996 % ADNA
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Capital Appreciation ...... $7,006,502 0.75% N/A N/A
Capital Opportunities(1) .. N/A N/A $ 27,382 0.75%
Conservative Growth ....... 2,320,310 0.55 N/A N/A
Emerging Growth ........... 956,932 0.61 225,349 0.14
Government Securities ..... 2,121,808 0.55 N/A N/A
High Yield ................ 1,252,812 0.75 N/A N/A
International Growth(1) ... N/A N/A 14,479 0.975
International Growth and
Income .................... 185,572 0.78 44,482 0.19
Managed Sectors ........... 1,729,822 0.75 N/A N/A
MFS/F&C Emerging Markets
Equity(2) ................. N/A N/A 11,151 1.25
Money Market .............. 1,658,426 0.50 N/A N/A
Research .................. 1,401,185 0.75 N/A N/A
Total Return .............. 8,228,127 0.68 N/A N/A
Utilities ................. 418,966 0.75 N/A N/A
World Asset Allocation .... 390,024 0.75 N/A N/A
World Governments ......... 1,091,953 0.75 N/A N/A
World Growth .............. 1,633,811 0.90 N/A N/A
World Total Return ........ 194,413 0.75 N/A N/A
Zero Coupon ............... 11,094 0.25 N/A N/A
- ----------
(1) From the commencement of investment operations on June 3, 1996.
(2) From the commencement of investment operations on June 5, 1996.
<CAPTION>
MANAGEMENT FEES
MANAGEMENT FEES PAID WAIVED BY ADVISER
FOR FISCAL YEAR ENDED FOR FISCAL YEAR
SERIES 1995 % ADNA ENDED 1995 % ADNA
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Capital Appreciation ...... $4,876,631 0.75% N/A N/A
Conservative Growth ....... 1,160,504 0.55 N/A N/A
Emerging Growth(1) ........ N/A N/A $149,156 0.75%
Government Securities ..... 1,877,922 0.55 N/A N/A
High Yield ................ 990,965 0.75 N/A N/A
International Growth and
Income(2) ................. N/A N/A 7,653 0.98
Managed Sectors ........... 1,202,378 0.75 N/A N/A
Money Market .............. 1,204,609 0.50 N/A N/A
Research .................. 106,482 0.38 105,489 0.37
Total Return .............. 6,671,672 0.70 N/A N/A
Utilities ................. 70,277 0.24 148,727 0.51
World Asset Allocation .... 41,031 0.31 57,610 0.44
World Governments ......... 1,136,612 0.75 N/A N/A
World Growth .............. 1,090,977 0.90 N/A N/A
World Total Return ........ 21,382 0.33 27,327 0.42
Zero Coupon ............... 8,185 0.25 N/A N/A
- ----------
(1) From the commencement of investment operations on May 1, 1995.
(2) From the commencement of investment operations on October 2, 1995.
</TABLE>
The Series Fund pays the compensation of the four Trustees who are not
affiliated with MFS or Sun Life of Canada (U.S.) (who will each receive from
the Series Fund $1,500 to $3,300 annually, depending on attendance at
meetings) and all expenses (other than those assumed by MFS), including
governmental fees, interest charges, taxes, membership dues in the Investment
Company Institute allocable to the Series Fund, fees and expenses of
independent auditors, of legal counsel and of any transfer agent or registrar
of the Series Fund, expenses of repurchasing and redeeming shares, expenses of
preparing, printing and mailing shareholder reports, notices, proxy statements
and reports to governmental officers and commissions, brokerage and other
expenses connected with the execution, recording and settlement of portfolio
security transactions including currency conversion costs, insurance premiums,
fees and expenses of State Street Bank and Trust Company, the Series Fund's
Custodian, for all services to the Series Fund, including safekeeping of funds
and securities and maintaining required books and accounts, expenses of
calculating the net asset value of the shares of each series, and expenses of
shareholder meetings. Payment by the Series Fund of brokerage commissions for
brokerage and research services of value to MFS in serving its clients is
discussed under the caption "Portfolio Transactions and Brokerage
Commissions." Expenses of the Series Fund which are not attributable to a
specific series are allocated among the series in a manner believed to be fair
and equitable to each.
The Investment Advisory Agreements will remain in effect until November 1,
1998 (except for the Investment Advisory Agreement for the Research Growth and
Income Series, which will remain in effect until May 12, 1999) and will
continue in effect thereafter only if such continuance is specifically
approved at least annually by the Series Fund's Board of Trustees or by the
vote of a majority of the outstanding voting securities of each series and, in
either case, by a majority of the Trustees who are not parties to the Advisory
Agreements or interested persons of any such party. The Advisory Agreements
terminate automatically if assigned and, since they are severable with respect
to each series, may be terminated with respect to any series without penalty
by vote of a majority of the outstanding voting securities of that series or
by either party on not more than 60 days' nor less than 30 days' written
notice. The Advisory Agreements provide that MFS may render services to others
and that neither MFS nor its personnel shall be liable for any error of
judgment or mistake of law or for any loss arising out of any investment or
for any act or omission in the execution and management of the Series Fund,
except for wilful misfeasance, bad faith or gross negligence in the
performance of its duties or by reason of reckless disregard of its
obligations and duties under the Advisory Agreements.
SUB-ADVISERS
As discussed in the Prospectus, FCM and FCEM serve as sub-advisers to the
International Growth Series, Emerging Markets Equity Series and World Growth
Series pursuant to separate Sub-Advisory Agreements and, prior to September 8,
1997, served as sub-advisers to the International Growth and Income Series.
Each Sub-Advisory Agreement will remain in effect until November 1, 1998, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by the Series Fund's Board of Trustees or by the
vote of a majority of the relevant series' outstanding voting securities, and,
in either case, by a majority of the Trustees who are not parties to the Sub-
Advisory Agreement or interested persons of any such party. Each FCM Sub-
Advisory Agreement terminates automatically if it is assigned or if the
Advisory Agreement has terminated for any reason, and may be terminated
without penalty by the Trustees, by vote of a majority of the relevant series'
outstanding voting securities, by the Adviser on not less than 30 days' nor
more than 60 days' written notice or by FCM on not less than 60 days' nor more
than 90 days' written notice. Each FCEM Sub-Advisory Agreement terminates
automatically if it is assigned or in the event that the FCM Sub-Advisory
Agreement or the Advisory Agreement shall have terminated for any reason, and
may be terminated without penalty by the Trustees, by vote of a majority of
the relevant series' outstanding voting securities, by the Adviser or by FCM
on not less than 30 days' nor more than 60 days' written notice or by FCEM on
not less than 60 days' nor more than 90 days' written notice.
Each FCM Sub-Advisory Agreement provides that if FCM ceases to serve as the
sub-adviser to the series, the series will change its name so as to delete the
words "Foreign & Colonial" and that FCM may render services to others and may
permit other fund clients to use the words "Foreign & Colonial" in their
names. Each Sub-Advisory Agreement specifically provides that neither FCM or
FCEM, as the case may be, nor its personnel shall be liable for any error of
judgment or mistake of law or for any loss arising out of any investment or
for any act or omission in the execution and management of the relevant
series, except for wilful misfeasance, bad faith or gross negligence in the
performance of its or their duties or by reason of reckless disregard of its
or their obligations and duties under the Sub-Advisory Agreement.
For the periods ended December 31, 1997, 1996 and 1995, FCM received from MFS
and/or waived the following fees:
<TABLE>
<CAPTION>
RECEIVED WAIVED RECEIVED WAIVED RECEIVED WAIVED
SERIES 1997 1997 1996 1996 1995 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
International Growth ....................... $ 10,334 N/A N/A $11,880 N/A N/A
International Growth and Income ............ 185,089 N/A $113,776 25,053 N/A $721
Emerging Markets Equity .................... 111,188 N/A N/A 8,964 N/A N/A
</TABLE>
Prior to May 1, 1996 and November 1, 1996, MFS had retained Batterymarch
Financial Management, Inc. ("Batterymarch") and Oechsle International
Advisers, Inc. ("Oechsle"), respectively, as sub-advisers to the World Growth
Series. Under this arrangement, the World Growth Series paid an investment
advisory fee to MFS and MFS paid sub-advisory fees to Batterymarch and
Oechsle.
On April 29, 1996, shareholders of the World Growth Series approved the
replacement of Batterymarch as a sub-adviser to the World Growth Series with
FCM and its subsidiary, FCEM. Effective November 1, 1996, MFS terminated
Oechsle as a sub-adviser to the World Growth Series. On November 1, 1996, MFS
began managing the assets of the World Growth Series previously managed by
Oechsle. These assets are managed by MFS using a committee of investment
research analysts as described in the Prospectus under the caption "Management
of the Series Fund-Investment Adviser." A further description of FCM and FCEM
is contained in the Prospectus under the caption "Management of the Series
Fund-Sub-Investment Advisers."
For the periods ended December 31, 1997, 1996 and 1995, Batterymarch, Oechsle
and FCM received from MFS the following fees with respect to their services as
sub-advisers to the World Growth Series:
SUB-ADVISER 1997 1996 1995
-----------------------------------------------------------------
Batterymarch ........ N/A $110,377 $206,294
Oechsle ............. N/A 223,505 180,863
FCM ................. $296,814 268,449 N/A
ADMINISTRATOR
MFS provides each series with certain financial, legal, compliance,
shareholder communications and other administrative services pursuant to a
Master Administrative Services Agreement dated March 1, 1997, as amended.
Under this Agreement, each series' pays MFS an administrative fee up to 0.015%
per annum of each series' average daily net assets. This fee reimburses MFS
for a portion of the costs it incurs to provide such services. For the period
March 1, 1997 to December 31, 1997, MFS received fees under this Agreement as
follows:
Capital Appreciation ........................................... $139,933
Capital Opportunities .......................................... 5,923
Conservative Growth ............................................ 102,188
Emerging Growth ................................................ 42,251
Government Securities .......................................... 43,905
High Yield ..................................................... 27,158
International Growth ........................................... 1,997
International Growth and Income ................................ 5,264
Managed Sectors ................................................ 36,252
Emerging Markets Equity ........................................ 2,262
Money Market ................................................... 46,028
Research ....................................................... 60,939
Research Growth and Income ..................................... 198
Total Return ................................................... 168,648
Utilities ...................................................... 10,639
World Asset Allocation ......................................... 12,740
World Governments .............................................. 14,128
World Growth ................................................... 28,218
World Total Return ............................................. 6,646
Zero Coupon .................................................... 430
CUSTODIAN
State Street Bank and Trust Company (the "Custodian") is the custodian of the
Series Fund's assets. The Custodian's responsibilities include safekeeping and
controlling the Series Fund's cash and securities, handling the receipt and
delivery of securities, determining income and collecting interest and
dividends on the Series Fund's investments, maintaining books of original
entry for portfolio and fund accounting and other required books and accounts,
and calculating the daily net asset value, public offering price and
redemption price of shares of the Series Fund. The Custodian has contracted
with the Adviser for the Adviser to perform certain accounting functions
related to options transactions for which the Adviser receives remuneration on
a cost basis. The Custodian does not determine the investment policies of the
Series Fund or decide which securities the Series Fund will buy or sell. The
Series Fund may, however, invest in securities of the Custodian and may deal
with the Custodian as principal in securities transactions. Portfolio
securities may be deposited into the Federal Reserve-Treasury Department Book
Entry System, the Depository Trust Company, or the Mortgage Backed Securities
Clearing Corporation.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (the "Shareholder Servicing Agent"), a wholly owned
subsidiary of MFS, is the Series Fund's shareholder servicing agent, pursuant
to a Shareholder Servicing Agreement effective August 1, 1985 (the "Agency
Agreement"). The Shareholder Servicing Agent's responsibilities under the
Agency Agreement include administering and performing transfer agent functions
and the keeping of records in connection with the issuance, transfer and
redemption of the shares of the Series Fund. In addition, State Street Bank
and Trust Company, the dividend and distribution disbursing agent for the
Series Fund, has contracted with the Shareholder Servicing Agent to administer
and perform certain dividend and distribution disbursing functions for the
Series Fund. For these services, the Shareholder Servicing Agent will receive
a fee based on the number of accounts in the Series Fund, computed and paid
monthly. In addition, the Shareholder Servicing Agent will be reimbursed by
the Series Fund for certain expenses incurred by the Shareholder Servicing
Agent on behalf of the Series Fund.
4. INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS
The financial statements incorporated in this SAI by reference from the Series
Fund's Annual Report to shareholders for the year ended December 31, 1997 have
been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report, which is incorporated herein by reference, and have been so
incorporated in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing. A copy of the Annual Report
accompanies this SAI.
5. ADDITIONAL INFORMATION WITH RESPECT TO SHARES OF EACH SERIES
PURCHASES
Sun Life of Canada (U.S.) and Sun Life (N.Y.) buy shares of each series for
their Variable Accounts without a sales charge at their net asset value
through the allocation of purchase payments made under Contracts issued by Sun
Life of Canada (U.S.) and Sun Life (N.Y.) in accordance with the allocation
instructions received from owners of the Contracts.
EXCHANGE PRIVILEGE
Shares of any series of the Series Fund may be exchanged for shares of any
other series of the Series Fund (if shares of that series are available for
purchase) at net asset value so as to facilitate exchanges among Sub-Accounts
of the Variable Accounts, as described in the prospectuses for the Variable
Accounts. See the Prospectus for a further discussion of the exchange
privilege.
NET ASSET VALUE, DIVIDENDS AND DISTRIBUTIONS
The Net Asset Value of each series is determined once daily as of the close of
regular trading on the New York Stock Exchange on each day the Exchange is
open for trading. As of the date of this SAI, the Exchange is open for trading
every weekday except for the following holidays (or the days on which they are
observed): New Year's Day, Martin Luther King Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
MONEY MARKET SERIES -- All the Net Income, as defined below, of the Money
Market Series determined at the times stated above is declared as a dividend
to its shareholders at the time of such determination. (Shares purchased
become entitled to dividends declared as of the first day following the date
of investment.) Dividends are distributed on the last business day of each
month. If paid in the form of additonal shares, dividends are paid at the rate
of one share (and fraction thereof) for each one dollar (and fraction thereof)
of dividend income attributable to the Money Market Series.
For this purpose the Net Income of the Money Market Series (from the time of
the immediately preceding determination thereof) shall consist of (i) all
interest income accrued on the portfolio assets of the series, (ii) less all
actual and accrued expenses of the series determined in accordance with
generally accepted accounting principles, and (iii) plus or minus net realized
or net unrealized gains and losses on the assets of the series. Interest
income shall include discount earned (including both original issue and market
discount) on discount paper accrued ratably to the date of maturity.
Securities are valued at amortized cost, which the Trustees have determined in
good faith constitutes fair value for the purposes of complying with the 1940
Act. This valuation method will continue to be used until such time as the
Trustees determine that it does not constitute fair value for such purposes.
Since the Net Income of the Money Market Series is declared as a dividend each
time the Net Income of that series is determined, the net asset value per
share of that series (i.e., the value of the net assets of that series divided
by the number of its shares outstanding) remains at $1.00 per share
immediately after each such determination and dividend declaration.
It is expected that the Money Market Series will have a positive Net Income at
the time of each determination thereof. If for any reason the Net Income
determined at any time is a negative amount, which could occur, for instance,
upon default by an issuer of a portfolio security, the Series Fund will first
offset the negative amount with respect to each shareholder account against
the dividends declared during the month with respect to each such account. If
and to the extent that such negative amount exceeds such declared dividends at
the end of the month, the Series Fund will reduce the number of outstanding
shares of the Money Market Series by treating each shareholder of that series
as having contributed to the capital of that series that number of full and
fractional shares in the account of such shareholder which represents his
proportion of the negative amount. Each shareholder of the Money Market Series
will be deemed to have agreed to such contribution in these circumstances by
his investment in that series. This procedure will permit the net asset value
per share of the Money Market Series to be maintained at a constant $1.00 per
share. There can be no assurance that the Money Market Series will be able to
maintain a stable net asset value of $1.00 per share other than by such offset
of dividends or reduction in the number of shares in a shareholder account.
ALL SERIES OTHER THAN THE MONEY MARKET SERIES -- With respect to these series,
the determination of net asset value per share is made by deducting the
liabilities of each series from the value of its assets and dividing the
difference by the number of its shares outstanding. Equity securities in the
portfolio of a series are normally valued at the last sale price during
regular hours on the exchange on which they are primarily traded or on the
NASDAQ system for unlisted national market issues, or at the last quoted bid
price for unlisted securities or listed securities in which there were no
sales during that day. Debt securities of U.S. issuers (other than short-term
obligations) in the portfolio of any of these series are normally valued on
the basis of valuations provided by a pricing service since such prices are
believed to reflect the fair value of such securities. Prices provided by the
pricing service may be determined without exclusive reliance on quoted prices
and may 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.
Forward Contracts will be valued using a pricing model taking into
consideration market data from an external pricing source. Use of the pricing
services has been approved by the Board of Trustees. Short-term obligations in
the portfolios of any of these series (i.e., obligations maturing in not more
than sixty days) are valued at amortized cost, which constitutes fair value as
determined by the Board of Trustees. Short-term obligations with a remaining
maturity in excess of 60 days will be valued upon dealer supplied valuations.
All other securities, futures contracts and options in the series' portfolio
(other than short-term obligations) for which the principal market is one or
more securities or commodities exchanges (whether domestic or foreign) will be
valued at the last reported sale price or at the settlement price prior to the
determination (or if there has been no current sale, at the closing bid price)
on the primary exchange on which such securities, futures contracts or options
are traded; but if a securities exchange is not the principal market for
securities, such securities will, if market quotations are readily available,
be valued at current bid prices, unless such securities are reported on the
Nasdaq stock market, in which case they are valued at the last sale price or,
if no sales occurred during the day, at the last quoted bid price. Portfolio
securities for which there are no such quotations or valuations are valued at
fair value as determined in good faith by or at the direction of the Board of
Trustees.
All investments and assets are expressed in U.S. dollars based upon current
currency exchange rates.
Generally, trading in foreign securities is substantially completed each day
at various times prior to the close of regular trading on the exchange.
Occasionally, events affecting the values of such securities may occur between
the times at which they are determined and the close of regular trading on the
exchange which will not be reflected in the computation of the series' net
asset value unless the Trustees deem that such event would materially affect
the net asset value in which case an adjustment would be made.
Substantially all of the net income of all series (other than the Money Market
Series, which is discussed above) is paid to their shareholders as a dividend
at least annually. Each series will also distribute its net profits from the
sale of securities, if any, on at least an annual basis.
DISTRIBUTIONS -- The Variable Accounts can choose to receive distributions
from the Series Fund in either cash or additional shares. It is expected that
the Variable Accounts will choose to receive distributions in additional
shares. If the Variable Accounts choose to receive distributions in cash, they
will reinvest the cash in the Series Fund to purchase additional shares at
their net asset value.
TAX STATUS
Each series is treated as a separate entity for federal income tax purposes
under the Internal Revenue Code of 1986, as amended (the "Code"). Each
individual series of the Series Fund has elected to be treated and intends to
qualify each year as a "regulated investment company" under Subchapter M of
the Code by meeting all applicable requirements of subchapter M, including
requirements as to the nature of a series' gross income, the amount of its
distributions, and the composition of its portfolio assets. Because each
series intends to distribute all of its net investment income and realized
capital gains to shareholders in accordance with the timing requirements
imposed by the Code, it is not expected that any series will be required to
pay any federal income or excise taxes, although a series' foreign-source
income may be subject to foreign withholding taxes. Distributions by the
Series Fund, to the extent applied to increase reserves under the Contracts,
are not taxable to Sun Life of Canada (U.S.) or Sun Life (N.Y.). If any series
should fail to qualify as a "regulated investment company" in any year, that
series or portfolio would incur a regular corporate federal income tax upon
its taxable income, and its distributions would generally be taxable as
ordinary dividend income to its shareholders.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional Shares of Beneficial Interest (without par value) and to
divide or combine the shares into a greater or lesser number of shares without
thereby changing the proportionate beneficial interests in the Series Fund.
The Series Fund presently has twenty-six series of shares and has reserved the
right to create additional series of shares. Each share of a series represents
an equal proportionate interest in that series with each other share of that
series. Shares of each series participate equally in the earnings, dividends
and assets of that series. Shares when issued are fully paid and non-
assessable. Shares of each series are entitled to vote separately to approve
investment advisory agreements or changes in investment restrictions, but
shares of all series would vote together in the election or selection of
Trustees and accountants. Upon liquidation of the Series Fund, shareholders of
each series would be entitled to share pro rata in the net assets of their
respective series available for distribution to shareholders.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of
shareholders. Although Trustees are not elected annually by the shareholders,
shareholders have under certain circumstances the right to remove one or more
Trustees. No material amendment may be made to the Declaration of Trust
without the affirmative vote of a majority of the outstanding shares of the
Series Fund. For a discussion of the manner in which the Variable Account will
vote its shares, see the prospectuses for the Contracts. No shares of any
series have pre-emptive or conversion rights. The Series Fund may be
terminated (i) upon the sale of its assets to another open-end management
investment company, if approved by the vote of the holders of a majority (as
defined in the 1940 Act) of the outstanding shares of the Series Fund, or (ii)
upon liquidation and distribution of the assets of the Series Fund, if
approved by the vote of the holders of a majority (as defined in the
Investment Company Act of 1940) of the outstanding shares of the Series Fund,
or (iii) by the Trustees by written notice to the shareholders of the Series
Fund. If not so terminated, the Series Fund will continue indefinitely.
The Series Fund is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of any series of such a
trust may, under certain circumstances, be held personally liable as partners
for the obligations of the Series Fund. However, the Declaration of Trust
contains an express disclaimer of shareholder liability for acts or
obligations of the Series Fund and provides for indemnification and
reimbursement of expenses out of the Series Fund property for any shareholder
held personally liable for the obligations of the Series Fund. The Declaration
of Trust also provides that the Series Fund shall maintain appropriate
insurance (for example, fidelity bonding or errors and omissions insurance)
for the protection of the Series Fund, shareholders of each of its series,
Trustees, officers, employees and agents covering possible tort and other
liabilities. Thus, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the Series Fund itself was unable to meet its
obligations.
The Declaration of Trust further provides that obligations of the Series Fund
are not binding upon the Trustees individually but only upon the property of
the Series Fund and that the Trustees will not be liable for errors of
judgment or mistakes of fact or law, but nothing in the Declaration of Trust
protects a Trustee against any liability to which he would otherwise be
subject by reason of wilful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his office.
6. PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for each series or sub-
series of the Series Fund are made by a portfolio manager for that series or
sub-series each of whom is an employee of MFS appointed and supervised by its
senior officers or by persons affiliated with a Sub-Adviser. Any such person
may serve other clients of the Adviser or a Sub-Adviser or any subsidiary of
the Adviser or a Sub-Adviser in a similar capacity. Changes in the investments
of each series are reviewed by the Board of Trustees.
The primary consideration in placing portfolio security transactions for each
series is "best execution," i.e., execution at the most favorable prices and
in the most effective manner possible. In certain instances there may be
securities which are suitable for the portfolio of one or more series of the
Series Fund as well as for that of one or more of the Adviser's or a Sub-
Adviser's other clients. Investment decisions for each series of the Series
Fund and for such other clients are made with a view to achieving their
respective investment objectives. It may develop that a particular security is
bought or sold for only one client even though it might be held by, or bought
or sold for, other clients.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment advice
from the same investment adviser, particularly when the same security is
suitable for the investment objectives of more than one client. When two or
more clients are simultaneously engaged in the purchase or sale of the same
security, the securities are allocated among clients in a manner believed to
be equitable to each. It is recognized that in some cases this system could
have a detrimental effect on the price or volume of the security as far as any
series of the Series Fund is concerned. In other cases, however, the Series
Fund believes that the ability of the series to participate in volume
transactions will produce better executions for the series.
Consistent with the foregoing primary consideration, the Conduct Rules of the
National Association of Securities Dealers, Inc. and such other policies as
the Trustees may determine, the Adviser or a Sub-Adviser may consider the sale
of Contracts, and thus the sale of Series Fund shares through the allocation
of purchase payments from the Contracts, as a factor in the selection of
broker-dealers to execute the Series Fund's portfolio transactions.
MONEY MARKET SERIES -- MFS has complete freedom as to the markets in and the
broker-dealers through which it seeks to achieve "best execution." It is
expected that most transactions will be with the issuer or with major dealers
acting for their own account and not as brokers. Subject to the requirement of
seeking "best execution," securities may be bought from or sold to broker-
dealers who have furnished research and investment services to MFS. Such
research and investment services are those which brokerage houses customarily
provide to institutional investors and include statistical and economic data
and research reports on particular companies and industries. In placing orders
with such broker-dealers MFS will, where possible, take into account the
comparative usefulness of such research and investment services. Such research
and investment services are useful to MFS even though their dollar value may
be indeterminable and their receipt or availability generally does not reduce
the normal research activities or expenses of MFS.
ALL SERIES OTHER THAN THE MONEY MARKET SERIES -- MFS has complete freedom as
to the markets in and the broker-dealers through which it seeks to achieve
"best execution." The Equity Trading Department of MFS or a Sub-Adviser, which
also serves other clients of MFS or a Sub-Adviser, attempts to achieve "best
execution" by selecting broker-dealers to execute portfolio transactions on
behalf of the Series Fund and other clients of MFS or a Sub-Adviser on the
basis of their professional capability, the value and quality of their
brokerage services and the level of their brokerage commissions. In the United
States and some other countries debt securities are traded principally in the
over-the-counter market on a net basis through dealers acting for their own
account and not as brokers. In other countries, both debt and equity
securities are traded on exchanges at fixed commission rates. The cost of
securities purchased from underwriters includes an underwriter's commission or
concession, and the prices at which securities are purchased and sold from and
to dealers include a dealer's mark-up or mark-down. MFS normally seeks to deal
directly with the primary market makers or on major exchanges unless, in its
opinion, better prices are available elsewhere. Subject to the requirement of
seeking execution at the best available price, securities may, as authorized
by the respective Advisory Agreements, be bought from or sold to dealers who
have furnished statistical, research and other information or services to MFS.
From time to time soliciting dealer fees are available to MFS or a Sub-Adviser
on the tender of securities from the portfolio of these series in so-called
tender or exchange offers. Such soliciting dealer fees are in effect
recaptured for these series by the Adviser or a Sub-Adviser. At present no
other recapture arrangements are in effect.
Under the Investment Advisory Agreements and Sub-Advisory Agreements and as
permitted by Section 28(e) of the Securities Exchange Act of 1934, MFS or a
Sub-Adviser may cause these series to pay a broker-dealer which provides
brokerage and research services to such series and MFS or a Sub-Adviser an
amount of commission for effecting a securities transaction for such series in
excess of the amount other broker-dealers would have charged for the
transaction if MFS or a Sub-Adviser determines in good faith that the greater
commission is reasonable in relation to the value of the brokerage and
research services provided by the executing broker-dealer viewed in terms of
either a particular transaction or their overall responsibilities to such
series and to accounts as to which they exercise investment discretion.
The term "brokerage and research services" includes advice as to the value of
securities, the advisability of investing in, purchasing, or selling
securities, and the availability of securities or of purchasers or sellers of
securities; furnishing analyses and reports concerning issues, industries,
securities, economic factors and trends, portfolio strategy and the
performance of accounts; and effecting securities transactions and performing
functions incidental thereto (such as clearance and settlement).
Although commissions paid on every transaction will, in the judgment of MFS or
a Sub-Adviser, be reasonable in relation to the value of the brokerage
services provided, commissions exceeding those which another broker might
charge may be paid to broker-dealers who were selected to execute transactions
on behalf of the series and other clients of MFS or a Sub-Adviser in part for
providing advice as to the availability of securities or of purchasers or
sellers of securities and services in effecting securities transactions and
performing functions incidental thereto such as clearance and settlement.
Broker-dealers may be willing to furnish statistical, research and other
factual information or services ("Research") to MFS or a Sub-Adviser for no
consideration other than brokerage or underwriting commissions. Securities may
be bought or sold from time to time through such broker-dealers on behalf of
the Series Fund.
The investment management personnel of MFS attempt to evaluate the quality of
Research provided by brokers. Results of this effort are sometimes used by the
Adviser as a consideration in the selection of brokers to execute portfolio
transactions. However, MFS is unable to quantify the amount of commissions
which are paid as a result of such Research because a substantial number of
transactions are effected through brokers which provide Research but which are
selected principally because of their execution capabilities.
The management fee paid by the Series Fund to MFS or by MFS to a Sub-Adviser
will not be reduced as a consequence of the receipt of brokerage and research
services. To the extent portfolio transactions of a series are used to obtain
such services, the brokerage commissions paid by such series will exceed those
that might otherwise be paid, for such portfolio transactions, or for such
portfolio transactions and research, by an amount which cannot be presently
determined. Such services would be useful and of value to MFS or a Sub-Adviser
in serving the series and other clients and conversely, such services obtained
by the placement of brokerage business of other clients would be useful to MFS
or a Sub-Adviser in carrying out its obligations to the series. While such
services are not expected to reduce the expenses of MFS or a Sub-Adviser, MFS
or a Sub-Adviser would, through use of the services, avoid the additional
expenses which would be incurred if they should attempt to develop comparable
information through their own staff.
The portfolio turnover rates of any series cannot be accurately predicted.
However, it is anticipated that the annual turnover rate for certain series
will exceed 100% (excluding short-term obligations). For example, a 100%
annual portfolio turnover rate would occur if all the securities in a series'
portfolio were replaced once in a period of one year.
For the years ended December 31, 1995, 1996 and 1997, brokerage commissions
paid by the Series were as follows:
TOTAL COMMISSIONS PAID DURING
----------------------------------
SERIES 1995 1996 1997
- --------------------------------------------------------------------------------
Capital Appreciation ..................... $1,644,280 $1,286,630 $1,628,226
Capital Opportunities(1) ................. N/A 19,750 192,957
Conservative Growth ...................... 453,519 599,469 1,354,260
Emerging Growth(3) ....................... 119,816 306,542 789,149
Government Securities .................... 0 0 0
High Yield ............................... 0 0 0
International Growth(1) .................. N/A 14,450 138,906
International Growth and Income(4) ....... 1,404 29,935 350,594
Managed Sectors .......................... 691,688 683,756 644,018
MFS/Foreign & Colonial Emerging Markets
Equity(2) .............................. N/A 7,951 123,167
Money Market ............................. 0 0 0
Research(5) .............................. 223,769 577,244 1,203,288
Research Growth and Income(6) ............ N/A N/A 6,461
TOTAL COMMISSIONS PAID DURING
----------------------------------
SERIES 1995 1996 1997
- --------------------------------------------------------------------------------
Total Return ............................. $745,342 $1,053,060 $1,026,724
Utilities ................................ 154,286 198,070 359,930
World Asset Allocation(5) ................ 114,957 175,327 284,863
World Governments ........................ 0 0 0
World Growth ............................. 0 840,289 874,004
World Total Return(5) .................... 76,890 53,646 77,568
Zero Coupon .............................. 0 0 0
- ------------
(1) From the commencement of investment operations on June 3, 1996.
(2) From the commencement of investment operations on June 5, 1996.
(3) From the commencement of investment operations on May 1, 1995.
(4) From the commencement of investment operations on October 2, 1995.
(5) From the commencement of investment operations on November 7, 1994.
(6) From the commencement of investment operations on May 13, 1997.
During the year ended December 31, 1997 each of the following Series purchased
and retained securities issued by regular broker-dealers and affiliates
thereof, as follows:
<TABLE>
<CAPTION>
VALUE OF SECURITY AT
SERIES BROKER-DEALER DECEMBER 31, 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Capital Appreciation General Electric Co. $16,421,325
Associates Corp. of N.A. 5,078,325
Merrill Lynch, Pierce, Fenner & Smith Inc. 3,325,950
Conservative Growth General Electric Co. 13,126,787
Chase Securities 2,635,446
Ford Motor Credit 2,317,525
Ford Motor Co. 7,898,519
Emerging Growth Ford Motor Credit 4,599,138
Donaldson, Lufkin and Jenrette 914,250
Lehman Brothers 642,600
Morgan Stanley 1,685,062
Government Securities Goldman Sachs 13,914,000
High Yield Merrill Lynch, Pierce, Fenner & Smith Inc. 477,578
Money Market General Electric Co. 13,260,557
Ford Motor Credit 9,988,897
Nationsbank 11,548,961
Goldman Sachs 12,929,845
Merrill Lynch, Pierce, Fenner & Smith Inc. 9,923,778
Research Chase Securities 6,998,364
Merrill Lynch, Pierce, Fenner & Smith Inc. 3,996,975
Morgan Stanley 3,015,375
Ford Motor Credit 4,199,213
Research Growth and Income Chase Securities 58,035
Merrill Lynch, Pierce, Fenner & Smith Inc. 23,340
Total Return General Electric Co. 16,729,500
Lehman Bros. 10,018,007
Merrill Lynch, Pierce, Fenner & Smith Inc. 14,074,501
Ford Motor Co. 25,565,791
Morgan Stanley 6,645,650
Chase Securities 5,566,104
World Asset Allocation Ford Motor Credit 4,899,081
General Electric Co. 117,400
Merrill Lynch, Pierce, Fenner & Smith Inc. 65,644
World Growth Lehman Brothers 163,200
Morgan Stanley 431,612
Donaldson, Lufkin & Jenrette 238,500
During the year ended December 31, 1997, each of the following series
purchased and sold securities issued by regular broker-dealers and affiliates
thereof, as follows:
<CAPTION>
SERIES BROKER-DEALER
-----------------------------------------------------------------------------------
<S> <C>
Capital Appreciation Charles Schwab Corp.
Goldman Sachs
Managed Sectors Associates Corp. of N.A.
General Electric Co.
Merrill Lynch, Pierce, Fenner & Smith Inc.
</TABLE>
<PAGE>
APPENDIX A
ADDITIONAL INFORMATION CONCERNING INVESTMENT INSTRUMENTS AND TECHNIQUES
OPTIONS AND FUTURES
A discussion of options, Futures Contracts, Options on Futures Contracts,
Forward Foreign Currency Contracts and options on foreign currencies follows.
OPTIONS ON SECURITIES -- A call option written by a series will be covered (i)
through ownership of the security underlying the option or through ownership
of an absolute and immediate right to acquire such security upon conversion or
exchange of other securities held in its portfolio; or (ii) in such other
manner as may be in accordance with the rules of the exchange on which the
option is traded and applicable laws and regulations. A put option will be
covered through (i) segregation in a segregated account held by the custodian
of liquid assets in an amount equal to the exercise price of the option; or
(ii) in such other manner as may be in accordance with the requirements of the
exchange on which the option is traded and applicable laws and regulations.
Effecting a closing transaction in the case of a written call option will
permit a series to write another call option on the underlying security with
either a different exercise price or expiration date or both, or in the case
of a written put option will permit a series to write another put option to
the extent that the exercise price thereof is secured by liquid assets. Such
transactions permit a series to generate additional premium income, which will
partially offset declines in the value of portfolio securities or increases in
the cost of securities to be acquired. Also, effecting a closing transaction
will permit the cash or proceeds from the concurrent sale of any securities
subject to the option to be used for other investments, provided that another
option on such security is not written. If a series desires to sell a
particular security from its portfolio on which it has written a call option,
it will effect a closing transaction in connection with the option prior to or
concurrent with the sale of the security.
A series will realize a profit from a closing transaction if the premium paid
in connection with the closing of an option written by it is less than the
premium received from writing the option, or if the premium received in
connection with the closing of an option purchased by it is more than the
premium paid for the original purchase. Conversely, a series will suffer a
loss if the premium paid or received in connection with a closing transaction
is more or less, respectively, than the premium received or paid in
establishing the option position. Because increases in the market price of a
call option will generally reflect increases in the market price of the
underlying security, any loss resulting from the repurchase of a call option
previously written by a series is likely to be offset in whole or in part by
appreciation of the underlying security owned by a series.
A series may write options in connection with buy-and-write transactions; that
is, a series may purchase a security and then write a call option against that
security. The exercise price of the call option will depend upon the expected
price movement of the underlying security. The exercise price of a call option
may be below ("in-the-money"), equal to ("at-the-money") or above ("out-of-
the-money") the current value of the underlying security at the time the
option is written. If the call options are exercised in such transactions, the
series' maximum gain will be the premium received by it for writing the
option, adjusted upwards or downwards by the difference between the series'
purchase price of the security and the exercise price. If the options are not
exercised and the price of the underlying security declines, the amount of
such decline will be offset in part, or entirely, by the premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. Put options could be used by a
series in the same market environments that call options would be used in
equivalent buy-and-write transactions.
A series may write combinations of put and call options on the same security,
a practice known as a "straddle." By writing a straddle, a series undertakes a
simultaneous obligation to sell and purchase the same security in the event
that one of the options is exercised. If the price of the security
subsequently rises sufficiently above the exercise price to cover the amount
of the premium and transaction costs, the call will likely be exercised and
the series will be required to sell the underlying security at a below market
price. This loss may be offset, however, in whole or in part, by the premiums
received on the writing of the two options. Conversely, if the price of the
security declines by a sufficient amount, the put will likely be exercised.
The writing of straddles will likely be effective, therefore, only where the
price of a security remains stable and neither the call nor the put is
exercised. In an instance where one of the options is exercised, the loss on
the purchase or sale of the underlying security may exceed the amount of the
premiums received.
By writing a call option, a series limits its opportunity to profit from any
increase in the market value of the underlying security above the exercise
price of the option. By writing a put option, a series assumes the risk that
it may be required to purchase the underlying security for an exercise price
above its then current market value, resulting in a loss unless the security
subsequently appreciated in value. The writing of options on securities by the
Capital Appreciation Series, Government Markets Series, Managed Sectors
Series, Research Growth and Income Series, Utilities Series, Value Series,
World Asset Allocation Series, World Growth Series and World Total Return
Series and the MFS/Foreign & Colonial Series will not be undertaken solely for
hedging purposes, and could involve certain risks which are not present in the
case of hedging transactions. Moreover, even where options are written for
hedging purposes, such transactions will constitute only a partial hedge
against declines in the value of portfolio securities or against increases in
the value of securities to be acquired, up to the amount of the premium.
A series also may purchase put and call options on securities. Put options
would be purchased to hedge against a decline in the value of the securities
held in its portfolio. If such a decline occurs, the put options will permit a
series to sell the securities at the exercise price, or to close out the
options at a profit. By using put options in this way, the series will reduce
any profit it might otherwise have realized in the underlying security by the
amount of the premium paid for the put option and related transaction costs. A
series may purchase call options to hedge against an increase in the price of
securities that the series anticipates purchasing in the future. If such an
increase occurs, the call option will permit the series to purchase the
securities at the exercise price or to close out the option at a profit. The
premium paid for a call or put option plus any transaction costs will reduce
the benefit, if any, realized by the series upon exercise of the option, and,
unless the price of the underlying security rose or declined sufficiently, the
option may expire worthless to the series.
Yield curve options may be used for the same purposes as other options on
securities. Specifically, a series may purchase or write such options for
hedging purposes. For example, a series may purchase a call option on the
yield spread between two securities, if it owns one of the securities and
anticipates purchasing the other security and wants to hedge against an
adverse change in the yield spread between the two securities. The series may
also purchase or write yield curve options for other than hedging purposes
(i.e., in an effort to increase its current income) if, in the judgment of the
Adviser or Sub Adviser, the series will be able to profit from movements in
the spread between the yields of the underlying securities. The trading of
yield curve options is subject to all of the risks associated with the trading
of other types of options. In addition, however, such options present risk of
loss even if the yield of one of the underlying securities remains constant,
if the spread moves in a direction or to an extent which was not anticipated.
Yield curve options written by the series will be "covered." A call (or put)
option is covered if the series holds another call (or put) option on the
spread between the same two securities and maintains in a segregated account
with its custodian liquid assets sufficient to cover the series' net liability
under the two options. Therefore, the series' liability for such a covered
option is generally limited to the difference between the amount of the
series' liability under the option written by the series less the value of the
option held by the series. Yield curve options may also be covered in such
other manner as may be in accordance with the requirements of the counter
party with which the option is traded and applicable laws and regulations.
Yield curve options are traded over-the-counter and because they have been
only recently introduced, established trading markets for these securities
have not yet developed.
OPTIONS ON INDICES -- A series will cover call options on indices by owning
securities whose price changes, in the opinion of MFS, are expected to be
similar to those of the index, or in such other manner as may be in accordance
with the rules of the exchange on which the option is traded and applicable
laws and regulations. Nevertheless, where a series covers a call option on an
index through ownership of securities, such securities may not match the
composition of the index. In that event, the series will not be fully covered
and could be subject to risk of loss in the event of adverse changes in the
value of the index. A series will cover put options on indices by segregating
assets equal to the option's exercise price, or in such other manner as may be
in accordance with the rules of the exchange on which the option is traded and
applicable laws and regulations.
A series will receive a premium from writing a put or call option, which
increases its gross income in the event the option expires unexercised or is
closed out at a profit. If the value of an index on which a series has written
a call option falls or remains the same, the series will realize a profit in
the form of the premium received (less transaction costs) that could offset
all or a portion of any decline in the value of the securities it owns. If the
value of the index rises, however, the series will realize a loss in its call
option position, which will reduce the benefit of any unrealized appreciation
in the series' investments. By writing a put option, a series assumes the risk
of a decline in the index. To the extent that the price changes of securities
owned by the series correlate with changes in the value of the index, writing
covered put options on indices will increase the series' loss in the event of
a market decline, although such losses will be offset in part by the premium
received for writing the option.
The purchase of call options on indices may be used by a series to attempt to
reduce the risk of missing a broad market advance, or an advance in an
industry or market segment, at a time when a series holds uninvested cash or
short-term debt securities awaiting investment. When purchasing call options
for this purpose, the series will also bear the risk of losing all or a
portion of the premium paid, and related transaction costs, if the value of
the index does not rise. The purchase of call options on indices when the
series is substantially fully invested is a form of leverage, up to the amount
of the premium and related transaction costs, and involves risks of loss and
of increased volatility similar to those involved in purchasing calls on
securities the series owns.
A series also may purchase put options on indices to hedge its investments
against a decline in value. By purchasing a put option on an index, a series
will seek to offset a decline in the value of securities it owns through
appreciation of the put option. If the value of the series' investments does
not decline as anticipated, or if the value of the option does not increase,
the series' loss will be limited to the premium paid for the option, plus
related transaction costs. The success of this strategy will largely depend on
the accuracy of the correlation between the changes in value of the index and
the changes in value of the series' security holdings.
FUTURES CONTRACTS -- A series may enter into interest rate or stock index
futures contracts ("Futures Contracts") in order to protect the series'
current or intended investments from broad fluctuations in interest rates or
stock prices. The Emerging Growth Series, Utilities Series, Research Growth
and Income Series, Value Series, World Asset Allocation Series, World Growth
Series and World Total Return Series and the MFS/Foreign & Colonial Series may
also enter into Futures Contracts for non-hedging purposes, which involves
greater risk and could result in losses which are not offset by gains on other
portfolio assets. The Emerging Growth Series, Utilities Series, Research
Growth and Income Series, Value Series, World Asset Allocation Series, World
Governments Series, World Growth Series and World Total Return Series and the
MFS/Foreign & Colonial Series may also enter into foreign currency futures
contracts.
For example, a series may sell Futures Contracts in anticipation of or during
a market decline to attempt to offset the decrease in market value of the
series' securities portfolio that might otherwise result. If such decline
occurs, the loss in value of portfolio securities may be offset, in whole or
in part, by gains on the futures position. When a series is not fully invested
in the securities market and anticipates a significant market advance, it may
purchase Futures Contracts in order to gain rapid market exposure that may, in
part or in whole, offset increase in the cost of securities that the series
intends to purchase. As such acquisitions are made, the corresponding
positions in Futures Contracts will be closed out. In a substantial majority
of these transactions, a series will purchase such securities upon the
termination of the futures position, but under unusual market conditions, a
long futures position may be terminated without a related purchase of
securities.
OPTIONS ON FUTURES CONTRACTS -- The writing of a call Option on a Futures
Contract constitutes a partial hedge against declining prices of the
securities underlying the Futures Contract or of the securities comprising the
index underlying the Futures Contact. If the futures price at expiration of
the option is below the exercise price, the series will retain the full amount
of the option premium which provides a partial hedge against any decline that
may have occurred in the series' portfolio holdings. The writing of a put
Option on a Futures Contract constitutes a partial hedge against increasing
prices of the securities underlying the Futures Contract or of the securities
comprising the index underlying the Futures Contract. If the futures price at
expiration of the option is higher than the exercise price, a series will
retain the full amount of the option premium which provides a partial hedge
against any increase in the price of securities which a series intends to
purchase. If a put or call option a series has written is exercised, it will
incur a loss which will be reduced by the amount of the premium it receives.
Depending on the degree of correlation between changes in the value of its
portfolio securities and changes in the value of its futures positions, the
series' losses from existing Options of Futures Contracts may to some extent
be reduced or increased by changes in the value of portfolio securities.
A series will cover the writing of call Options on Futures Contracts through
purchases of the underlying Futures Contract, and will cover the writing of
put Options on Futures Contracts through sales of the underlying Futures
Contract. Upon the exercise of a call Option on a Futures Contract written by
a series, the series will be required to sell the underlying Futures Contract
which, if the series has covered its obligation through the purchase of such
Contract, will serve to liquidate its futures position. Similarly, where a put
Option on a Futures Contract written by a series is exercised, the series will
be required to purchase the underlying Futures Contract which, if the series
has covered its obligation through the sale of such Contract, will close out
its futures position. Put and call Options on Futures Contracts may also be
covered in such other manner as may be in accordance with the rules of the
exchange on which the option is traded and applicable laws and regulations.
A series may purchase Options on Futures Contracts for hedging purposes as an
alternative to purchasing or selling the underlying Futures Contracts. For
example, where a decrease in the value of portfolio securities is anticipated
as a result of a projected market-wide decline, a series could, in lieu of
selling Futures Contracts, purchase put options thereon. In the event that
such decrease occurs, it may be offset, in whole or part, by a profit on the
option. Conversely, where it is projected that the value of securities to be
acquired by a series will increase prior to acquisition, due to a market
advance, the series could purchase call Options on Futures Contracts, rather
than purchasing the underlying Futures Contracts.
FORWARD CONTRACTS -- A series may enter into contracts for the purchase or
sale of a specific currency at a future date at a price set at the time the
contract is entered into (a "Forward Contract") for hedging purposes only. The
Emerging Growth Series, Utilities Series, Research Growth and Income Series,
Value Series, World Asset Allocation Series, World Growth Series and World
Total Return Series and the MFS/Foreign & Colonial Series may enter into
Forward Contracts for hedging purposes and non-hedging purposes. A series will
enter into Forward Contracts for the purpose of protecting its current or
intended investments from fluctuations in currency exchange rates. A Forward
Contract to sell a currency may be entered into, for example, in lieu of the
sale of a foreign currency futures contract where a series seeks to protect
against an anticipated increase in the exchange rate for a specific currency
which could reduce the dollar value of portfolio securities denominated in
such currency. Conversely, a series may enter into a Forward Contract to
purchase a given currency to protect against a projected increase in the
dollar value of securities denominated in such currency which a series intends
to acquire.
If a hedging transaction in Forward Contracts is successful, the decline in
the value of portfolio securities or the increase in the cost of securities to
be acquired may be offset, at least in part, by profits on the Forward
Contract. Nevertheless, by entering into such Forward Contracts, a series may
be required to forego all or a portion of the benefits which otherwise could
have been obtained from favorable movements in exchange rates. The series do
not presently intend to hold Forward Contracts entered into until maturity, at
which time they would be required to deliver or accept delivery of the
underlying currency, but will seek in most instances to close out positions in
such Contracts by entering into offsetting transactions, which will serve to
fix the series' profit or loss based upon the value of the Contracts at the
time the offsetting transaction is executed.
Each of the series has established procedures consistent with Securities and
Exchange Commission policies concerning the use of "cover" or the
establishment of segregated accounts in connection with purchases of foreign
currency through Forward Contracts. Since those policies currently require the
use of "cover" or that liquid assets of the series equal to the amount of the
purchase be held aside or segregated in an account maintained by the custodian
to be used to pay for the commitment, each series will always use "cover" or
have liquid assets available sufficient to cover any commitments under these
contracts or to limit any potential risk.
OPTIONS ON FOREIGN CURRENCIES -- A series may purchase and write options on
foreign currencies for hedging purposes in a manner similar to that in which
Futures Contracts on foreign currencies, or Forward Contracts, will be
utilized. All call options written on foreign currencies will be covered. A
call option written on a foreign currency is "covered" if the series owns the
underlying foreign currency covered by the call or has an absolute and
immediate right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration held in a segregated
account by the series' custodian) upon conversion or exchange of other foreign
currency held in its portfolio. A call option is also covered if the series
has a call on the same foreign currency and in the same principal amount as
the call written where the exercise price of the call held (a) is equal to or
less than the exercise price of the call written or (b) is greater than the
exercise price of the call written if the difference is maintained by the
series in liquid assets in a segregated account with its custodian. Options on
foreign currencies may also be covered in such other manner as may be in
accordance with the requirements of the exchange on which they are traded and
applicable laws and regulations.
RISK FACTORS: IMPERFECT CORRELATION OF HEDGING INSTRUMENTS WITH A SERIES'
PORTFOLIO -- A series' ability effectively to hedge all or a portion of its
portfolio through transactions in options, Futures Contracts, options on
foreign currencies, Options on Futures Contracts, and Forward Contracts will
depend on the degree to which price movements in the underlying index or
instrument correlate with price movements in the relevant portion of the
portfolio. Because the securities in the portfolio will most likely not be the
same as those securities underlying an index, the correlation between
movements in the portfolio and in the securities underlying the index will not
be perfect. The trading of Futures Contracts and options entails the
additional risk of imperfect correlation between movements in the futures or
option price and the price of the underlying index or obligation. The
anticipated spread between the prices may be distorted due to the differences
in the nature of the markets, such as differences in margin requirements, the
liquidity of such markets and the participation of speculators in the futures
and options market. In this regard, trading by speculators in such instruments
has in the past occasionally resulted in market distortions, which may be
difficult or impossible to predict particularly near the expiration of such
contracts. It should be noted that Futures Contracts or options based upon a
narrower index of securities, such as those of a particular industry group,
may present greater risk than options or Futures Contracts based on a broad
market index, because a narrower index is more susceptible to rapid and
extreme fluctuations as a result of changes in the value of a small number of
securities. The trading of Options on Futures Contracts also entails the risk
that changes in the value of the underlying Futures Contracts will not be
fully reflected in the value of the option. Further, with respect to options
on securities, options on indices and Options on Futures Contracts, a series
is subject to the risk of market movements between the time that the option is
exercised and the time of performance thereunder. In writing a covered call
option on a security, index or Futures Contract, a series also incurs the risk
that changes in the value of the instruments used to cover the position will
not correlate closely with changes in the value of the option or underlying
index or instrument. Transactions in Forward Contracts or options on foreign
currencies designed to hedge against exposure arising from currency
fluctuations will subject a series to the risk of imperfect correlation
between changes in the value of the currencies underlying the forwards or
options and changes in the value of the currencies being hedged.
A series will invest in a hedging instrument only if, in the judgment of MFS,
there would be expected to be a sufficient degree of correlation between
movements in the value of the instrument and movements in the value of the
relevant portion of the series' portfolio for such hedge to be effective.
There can be no assurance that MFS' judgment will be accurate.
It should also be noted that the Capital Appreciation Series, Managed Sectors
Series, Research Growth and Income Series, Utilities Series, World Governments
Series, World Asset Allocation Series, World Growth Series and World Total
Return Series and the MFS/Foreign & Colonial Series would be able to purchase
and write options on securities and indices not only for hedging purposes, but
also for the purpose of increasing their return on portfolio securities. The
Utilities Series, World Asset Allocation Series, World Growth Series and the
World Total Return Series and the MFS/Foreign & Colonial Series may also
purchase and write Futures Contracts, Options on Futures Contracts and Forward
Contracts for non-hedging purposes. As a result, in the event of adverse
market movements, such series might be required to forfeit the entire amount
of the premium paid for an option purchased, which might not be offset by
increases in the value of portfolio securities or declines in the cost of
securities to be acquired. In addition, the method of covering an option
employed by a series may not fully protect it against risk of loss and, in any
event, a series could suffer losses on the option position which might not be
offset by corresponding portfolio gains.
With respect to the writing of straddles on securities, a series would incur
the risk that the price of the underlying security will not remain stable,
that one of the options written will be exercised and that the resulting loss
will not be offset by the amount of the premiums received.
POTENTIAL LACK OF A LIQUID SECONDARY MARKET -- Prior to exercise or
expiration, a futures or option position can only be terminated by entering
into a closing purchase or sale transaction. This requires a secondary market
for such instruments on the exchange on which the initial transaction was
entered into. While a series will enter into options or futures positions only
if there appears to be a liquid secondary market therefor, there can be no
assurance that such a market will exist for any particular contracts at any
specific time. In that event, it may not be possible to close out a position
held by a series and the series could be required to purchase or sell the
instrument underlying an option, make or receive a cash settlement or meet
ongoing variation margin requirements. Under such circumstances, if the series
had insufficient cash available to meet margin requirements, it might be
necessary to liquidate portfolio securities at a time when it would be
disadvantageous to do so. The inability to close out options and futures
positions, therefore, could have an adverse impact on a series' ability
effectively to hedge its portfolio, and could result in trading losses. The
liquidity of a secondary market in a Futures Contract or options thereon may
also be adversely affected by "daily price fluctuation limits", established by
exchanges, which limit the amount of fluctuation in the price of a contract
during a single trading day. The trading of Futures Contracts and options is
also subject to the risk of trading halts, suspensions, exchange or clearing
house equipment failures government intervention, insolvency of a brokerage
firm of clearing house or other disruptions of normal trading activity, which
could at times make if difficult or impossible to liquidate existing positions
or to recover excess variation margin payments.
MARGIN -- Because of low initial margin deposits made upon the opening of a
futures position and the writing of an option, such transactions involve
substantial leverage. As a result, relatively small movements in the price of
the contract can result in substantial unrealized gains or losses. To the
extent a series engages in the purchase or sale of Futures Contracts and the
writing of Options on Futures Contracts solely for hedging purposes, however,
and to the extent that the series purchases and writes options on securities
and indices for hedging purposes, any losses incurred in connection therewith
should, if the hedging strategy is successful, be offset, in whole or in part,
by increases in the value of securities held by the series or decreases in the
prices of securities the series intends to acquire. If a series writes options
on securities or options on indices for other than hedging purposes, the
margin requirements associated with such transactions could expose the series
to greater risk.
TRADING AND POSITION LIMITS -- The exchanges on which Futures Contracts and
options are traded may impose limitations governing the maximum number of
positions on the same side of the market and involving the same underlying
instrument which may be held by a single investor, whether acting alone or in
concert with others (regardless of whether such contracts are held on the same
or different exchanges or held or written in one or more accounts or through
one or more brokers). In addition, the Commodity Futures Trading Commission
("CFTC") and the various contract markets have established limits referred to
as "speculative position limits" on the maximum net long or net short position
which any person may hold or control in a particular futures or option
contract. An exchange may order the liquidation of positions found to be in
violation of these limits and it may impose other sanctions or restrictions.
MFS does not believe that these trading and position limits will have any
adverse impact on the strategies for hedging the portfolio of a series.
RISK OF OPTIONS ON FUTURES CONTRACTS -- The amount of risk a series assumes
when it purchases an Option on a Futures Contract is the premium paid for the
option, plus related transaction costs. In order to profit from an option
purchased, however, it may be necessary to exercise the option and to
liquidate the underlying Futures Contract, subject to the risks of the
availability of a liquid offset market described herein. The writer of an
Option on a Futures Contract is subject to the risks of commodity futures
trading, including the requirement of initial and variation margin payments,
as well as the additional risk that movements in the price of the option may
not correlate with movements in the price of the underlying index or Futures
Contract.
ADDITIONAL RISKS OF TRANSACTIONS RELATED TO FOREIGN CURRENCIES AND
TRANSACTIONS NOT CONDUCTED ON U.S. EXCHANGES -- Transactions in Forward
Contracts are subject to all of the correlation, liquidity and other risks
outlined above. In addition, however, such transactions are subject to the
risk of governmental actions affecting trading in or the prices of currencies
underlying such contracts, which could restrict or eliminate trading and could
have a substantial adverse effect on the value of positions held by a series.
In addition, the value of such positions could be adversely affected by a
number of other complex political and economic factors applicable to the
countries issuing the underlying currencies. Further, unlike trading in most
other types of instruments, there is no systematic reporting of last sale
information with respect to the foreign currencies underlying contracts
thereon. As a result, the available information on which trading systems will
be based may not be as complete as the comparable data on which a series makes
investment and trading decisions in connection with other transactions.
Moreover, because the foreign currency market is a global, twenty-four hour
market, events could occur on that market which would not be reflected in the
forward markets until the following day, thereby preventing a series from
responding to such events in a timely manner. Settlements of exercises of
Forward Contracts generally must occur within the country issuing the
underlying currency, which in turn requires traders to accept or make delivery
of such currencies in conformity with any United States or foreign
restrictions and regulations regarding the maintenance of foreign banking
relationships, fees, taxes or other charges.
Forward Contracts, over-the-counter options on securities, and options on
foreign exchanges are not traded on contract markets regulated by the CFTC or
the Securities and Exchange Commission, but through financial institutions
acting as market-makers. In an over-the-counter trading environment, many of
the protections afforded to exchange participants will not be available. In
addition, over-the-counter transactions can only be entered into with a
financial institution willing to take the opposite side, as principal, of the
series' position unless the institution acts as broker and is able to find
another counterparty willing to enter into the transaction with the series.
Where no such counterparty is available, it will not be possible to enter into
a desired transaction. There also may be no liquid secondary market in the
trading of over-the-counter contracts, and a series could be required to
retain options purchased or written, or Forward Contracts entered into, until
exercise, expiration or maturity. This in turn could limit a series' ability
to profit from open positions or to reduce losses experienced, and could
result in greater losses. Further, over-the-counter transactions are not
subject to the performance guarantee of an exchange clearing house, and a
series will therefore be subject to the risk of default by, or the bankruptcy
of, the financial institution serving as its counterparty.
While Forward Contracts are not presently subject to regulation by the CFTC,
the CFTC may in the future assert or be granted authority to regulate such
instruments. In such event, a series' ability to utilize Forward Contracts in
the manner set forth above could be restricted.
Options on securities, options on indices, Futures Contracts, Options on
Futures Contracts and options on foreign currencies may be traded on exchanges
located in foreign countries. Such transactions may not be conducted in the
same manner as those entered into on United States exchanges, and may be
subject to different margin, exercise, settlement or expiration procedures. As
a result, many of the risks of over-the-counter trading may be present in
connection with such transactions.
RESTRICTIONS ON THE USE OF OPTIONS AND FUTURES -- In order to assure that the
series will not be deemed to be a "commodity pool" for purposes of the
Commodity Exchange Act, regulations of the CFTC require that the series enter
into transactions in futures contracts, options on futures contracts and
options on foreign currencies traded on a CFTC-regulated exchange only (i) for
bona fide hedging purposes (as defined in CFTC regulations), or (ii) for non-
bona fide hedging purposes, provided that the aggregate initial margin and
premiums to establish such non-bona fide hedging positions does not exceed 5%
of the liquidation value of the series' assets, after taking into account
unrealized profits and unrealized losses on any such contracts the series had
entered into, and excluding, in computing such 5%, the in-the-money amount
with respect to an option that is in-the-money at the time of purchase.
The staff of the Securities and Exchange Commission ("SEC") has taken the
position that purchased over-the-counter options and assets used to cover
written over-the-counter options are illiquid and, therefore, together with
other illiquid securities held by a series, cannot exceed 15% of such series'
assets, or such lower ceiling on illiquid securities imposed by a series'
investment restrictions (the "SEC Illiquidity Ceiling"). Although the
investment adviser disagrees with this position, the investment adviser
intends to limit a series' writing of over-the-counter options in accordance
with the following procedure. Except as provided below, each series which may
write options intends to write over-the-counter options only with primary U.S.
Government securities dealers recognized as such by the Federal Reserve Bank
of New York. Also, the contracts these series have in place with such primary
dealers provide that the series has the absolute right to repurchase an option
it writes at any time at a price which represents the fair market value, as
determined in good faith through negotiation between the parties, but which in
no event will exceed a price determined pursuant to a formula in the contract.
Although the specific formula may vary between contracts with different
primary dealers, the formula generally is based on a multiple of the premium
received by the series for writing the option, plus the amount, if any, of the
option's intrinsic value (i.e., the amount that the option is in-the-money).
The formula may also include a factor to account for the difference between
the price of the security and the strike price of the option if the option is
written out-of-the-money. A series will treat all or a portion of the formula
as illiquid for purposes of the SEC Illiquidity Ceiling. Each series which may
write options may also write over-the-counter options with non-primary
dealers, including foreign dealers (where applicable), and will treat the
assets used to cover these options as illiquid for purposes of such SEC
Illiquidity Ceiling.
LOANS, LOAN PARTICIPATIONS AND OTHER DIRECT INDEBTEDNESS
Certain series may purchase loans, loan participations and other direct claims
against a borrower. In purchasing a loan or loan participation, the series
acquires some or all of the interest of a bank or other lending institution in
a loan to a corporate borrower. Many such loans are secured, although some may
be unsecured. Such loans may be in default at the time of purchase. Loans that
are fully secured offer the series more protection than an unsecured loan in
the event of non-payment of scheduled interest or principal. However, there is
no assurance that the liquidation of collateral from a secured loan would
satisfy the corporate borrower's obligation, or that the collateral can be
liquidated.
These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans are typically made by a syndicate of lending
institutions, represented by an agent lending institution which has negotiated
and structured the loan and is responsible for collecting interest, principal
and other amounts due on its own behalf and on behalf of the others in the
syndicate, and for enforcing its and their other rights against the borrower.
Alternatively, such loans may be structured as a novation, pursuant to which
the series would assume all of the rights of the lending institution in a
loan, or as an assignment, pursuant to which the series would purchase an
assignment of a portion of a lender's interest in a loan either directly from
the lender or through an intermediary. The series may also purchase trade or
other claims against companies, which generally represent money owed by the
company to a supplier of goods or services. These claims may also be purchased
at a time when the company is in default.
Certain of the loan participations acquired by the series may involve
revolving credit facilities or other standby financing commitments which
obligate the series to pay additional cash on a certain date or on demand.
These commitments may have the effect of requiring the series to increase its
investment in a company at a time when the series might not otherwise decide
to do so (including at a time when the company's financial condition makes it
unlikely that such amounts will be repaid). To the extent that the series is
committed to advance additional funds, it will at all times hold and maintain
in a segregated account cash or other high grade debt obligations in an amount
sufficient to meet such commitments.
The series' ability to receive payments of principal, interest and other
amounts due in connection with these investments will depend primarily on the
financial condition of the borrower. In selecting the loan participations and
other direct investments which the series will purchase, the Adviser will rely
upon its (and not that of the original lending institution's) own credit
analysis of the borrower. As the series may be required to rely upon another
lending institution to collect and pass on to the series amounts payable with
respect to the loan and to enforce the series' rights under the loan, an
involvency, bankruptcy or reorganization of the lending institution may delay
or prevent the series from receiving such amounts. In such cases, the series
will evaluate as well the creditworthiness of the lending institution and will
treat both the borrower and the lending institution as an "issuer" of the loan
participation for purposes of certain investment restrictions pertaining to
the diversification of the series' portfolio investments. The highly leveraged
nature of many such loans may make such loans especially vulnerable to adverse
changes in economic or market conditions. Investments in such loans may
involve additional risks to the series. For example, if a loan is foreclosed,
the series could become part owner of any collateral, and would bear the costs
and liabilities associated with owning and disposing of the collateral. In
addition, it is conceivable that under emerging legal theories of lender
liability, the series could be held liable as a co-lender. It is unclear
whether loans and other forms of direct indebtedness offer securities law
protections against fraud and misrepresentation. In the absence of definitive
regulatory guidance, the series relies on the Adviser's or Sub-Adviser's
research in an attempt to avoid situations where fraud or misrepresentation
could adversely affect the series. In addition, loan participations and other
direct investments may not be in the form of securities or may be subject to
restrictions on transfer, and only limited opportunities may exist to resell
such instruments. As a result, the series may be unable to sell such
instruments at an opportune time or may have to resell them at less than fair
market value. To the extent that the Adviser or a Sub-Adviser determines that
any such investments are illiquid, the series will include them in the
investment limitations applicable to the series.
SWAPS AND RELATED TRANSACTIONS
Certain series may enter into interest rate swaps, currency swaps and other
types of available swap agreements, such as caps, collars and floors. Swap
agreements may be individually negotiated and structured to include exposure
to a variety of different types of investments or market factors. Depending on
their structure, swap agreements may increase or decrease a series' exposure
to long or short-term interest rates (in the U.S. or abroad), foreign currency
values, mortgage securities, corporate borrowing rates, or other factors such
as securities prices or inflation rates. Swap agreements can take many
different forms and are known by a variety of names. A series is not limited
to any particular form or variety of swap agreement if the Adviser determines
it is consistent with the series' investment objective and policies.
The series will maintain cash or appropriate liquid assets with its custodian
to cover its current obligations under swap transactions. If the series enters
into a swap agreement on a net basis (i.e., the two payment streams are netted
out, with the series receiving or paying, as the case may be, only the net
amount of the two payments), the series will maintain liquid assets with its
custodian with a daily value at least equal to the excess, if any, of the
series' accrued obligations under the swap agreement over the accrued amount
the series is entitled to receive under the agreement. If the series enters
into a swap agreement on other than a net basis, it will maintain cash or
liquid assets with a value equal to the full amount of the series' accrued
obligations under the agreement.
The most significant factor in the performance of swaps, caps, floors and
collars is the change in the specific interest rate, currency or other factor
that determines the amount of payments to be made under the arrangement. If
the Adviser is incorrect in its forecasts of such factors, the investment
performance of the series would be less than what it would have been if these
investment techniques had not been used. If a swap agreement calls for
payments by the series, the series must be prepared to make such payments when
due. In addition, if the counterparty's creditworthiness declined, the value
of the swap arrangement would be likely to decline, potentially resulting in
losses. If the counterparty defaults, the series' risk of loss consists of the
net amount of payments that the series is contractually entitled to receive.
The series anticipates that it will be able to eliminate or reduce its
exposure under these arrangements by assignment or other disposition or by
entering into an offsetting agreement with the same or another counterparty.
EMERGING MARKETS: Certain series may invest in securities of government,
government-related, supranational and corporate issuers located in emerging
markets. Such investments entail significant risks as described below.
COMPANY DEBT -- Governments of many emerging market countries have exercised
and continue to exercise substantial influence over many aspects of the
private sector through the ownership or control of many companies, including
some of the largest in any given country. As a result, government actions in
the future could have a significant effect on economic conditions in emerging
markets, which in turn, may adversely affect companies in the private sector,
general market conditions and prices and yields of certain of the securities
in a series' portfolio. Expropriation, confiscatory taxation, nationalization,
political, economic or social instability or other similar developments have
occurred frequently over the history of certain emerging markets and could
adversely affect a series' assets should these conditions recur.
SOVEREIGN DEBT -- Investment in sovereign debt can involve a high degree of
risk. The governmental entity that controls the repayment of sovereign debt
may not be able or willing to repay the principal and/or interest when due in
accordance with the terms of such debt. A governmental entity's willingness or
ability to repay principal and interest due in a timely manner may be affected
by, among other factors, its cash flow situation, the extent of its foreign
reserves, the availability of sufficient foreign exchange on the date a
payment is due, the relative size of the debt service burden to the economy as
a whole, the governmental entity's policy towards the International Monetary
Fund and the political constraints to which a governmental entity may be
subject. Governmental entities may also be dependent on expected disbursements
from foreign governments, multilateral agencies and others abroad to reduce
principal and interest on their debt. The commitment on the part of these
governments, agencies and others to make such disbursements may be conditioned
on a governmental entity's implementation of economic reforms and/or economic
performance and the timely service of such debtor's obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may result in the cancelation of such third
parties' commitments to lend funds to the governmental entity, which may
further impair such debtor's ability or willingness to service its debts in a
timely manner. Consequently, governmental entities may default on their
sovereign debt. Holders of sovereign debt (including a series) may be
requested to participate in the rescheduling of such debt and to extend
further loans to governmental entities. There is no bankruptcy proceeding by
which sovereign debt on which governmental entities have defaulted may be
collected in whole or in part.
Emerging market governmental issuers are among the largest debtors to
commercial banks, foreign governments, international financial organizations
and other financial institutions. Certain emerging market governmental issuers
have not been able to make payments of interest on or principal of debt
obligations as those payments have come due. Obligations arising from past
restructuring agreements may affect the economic performance and political and
social stability of those issuers.
The ability of emerging market governmental issuers to make timely payments on
their obligations is likely to be influenced strongly by the issuer's balance
of payments, including export performance, and its access to international
credits and investments. An emerging market whose exports are concentrated in
a few commodities could be vulnerable to a decline in the international prices
of one or more of those commodities. Increased protectionism on the part of an
emerging market's trading partners could also adversely affect the country's
exports and tarnish its trade account surplus, if any. To the extent that
emerging markets receive payment for their exports in currencies other than
dollars or non-emerging market currencies, its ability to make debt payments
denominated in dollars or non-emerging market currencies could be affected.
To the extent that an emerging market country cannot generate a trade surplus,
it must depend on continuing loans from foreign governments, multilateral
organizations or private commercial banks, aid payments from foreign
governments and on inflows of foreign investment. The access of emerging
markets to these forms of external funding may not be certain, and a
withdrawal of external funding could adversely affect the capacity of emerging
market country governmental issuers to make payments on their obligations. In
addition, the cost of servicing emerging market debt obligations can be
affected by a change in international interest rates since the majority of
these obligations carry interest rates that are adjusted periodically based
upon international rates.
Another factor bearing on the ability of emerging market countries to repay
debt obligations is the level of international reserves of the country.
Fluctuations in the level of these reserves affect the amount of foreign
exchange readily available for external debt payments and thus could have a
bearing on the capacity of emerging market countries to make payments on these
debt obligations.
LIQUIDITY; TRADING VOLUME; REGULATORY OVERSIGHT -- The securities markets of
emerging market countries are substantially smaller, less developed, less
liquid and more volatile than the major securities markets in the U.S.
Disclosure and regulatory standards are in many respects less stringent than
U.S. standards. Furthermore, there is a lower level of monitoring and
regulation of the markets and the activities of investors in such markets.
The limited size of many emerging market securities markets and limited
trading volume in the securities of emerging market issuers compared to volume
of trading in the securities of U.S. issuers could cause prices to be erratic
for reasons apart from factors that affect the soundness and competitiveness
of the securities issuers. For example, limited market size may cause prices
to be unduly influenced by traders who control large positions. Adverse
publicity and investors' perceptions, whether or not based on in-depth
fundamental analysis, may decrease the value and liquidity of portfolio
securities.
The risk also exists that an emergency situation may arise in one or more
emerging markets, as a result of which trading of securities may cease or may
be substantially curtailed and prices for a series' securities in such markets
may not be readily available. The Series Fund may suspend redemption of its
shares for any period during which an emergency exists, as determined by the
SEC. Accordingly, if a series believes that appropriate circumstances exist,
it will promptly apply to the SEC for a determination that an emergency is
present. During the period commencing from the series' identification of such
condition until the date of the SEC action, the series' securities in the
affected markets will be valued at fair value determined in good faith by or
under the direction of the Board of Trustees.
DEFAULT; LEGAL RECOURSE -- A series may have limited legal recourse in the
event of a default with respect to certain debt obligations it may hold. If
the issuer of a fixed-income security owned by a series defaults, the series
may incur additional expenses to seek recovery. Debt obligations issued by
emerging market governments differ from debt obligations of private entities;
remedies from defaults on debt obligations issued by emerging market
governments, unlike those on private debt, must be pursued in the courts of
the defaulting party itself. A series' ability to enforce its rights against
private issuers may be limited. The ability to attach assets to enforce a
judgment may be limited. Legal recourse is therefore somewhat diminished.
Bankruptcy, moratorium and other similar laws applicable to private issuers of
debt obligations may be substantially different from those of other countries.
The political context, expressed as an emerging market governmental issuer's
willingness to meet the terms of the debt obligation, for example, is of
considerable importance. In addition, no assurance can be given that the
holders of commercial bank debt may not contest payments to the holders of
debt obligations in the event of default under commercial bank loan
agreements.
INFLATION -- Many emerging markets have experienced substantial, and in some
periods extremely high, rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have adverse
effects on the economies and securities markets of certain emerging market
countries. In an attempt to control inflation, wage and price controls have
been imposed in certain countries. Of these countries, some, in recent years,
have begun to control inflation through prudent economic policies.
WITHHOLDING -- Income from securities held by a series could be reduced by a
withholding tax on the source or other taxes imposed by the emerging market
countries in which the series makes its investments. A series' net asset value
may also be affected by changes in the rates or methods of taxation applicable
to the series or to entities in which the series has invested. The Adviser and
the Sub-Adviser will consider the cost of any taxes in determining whether to
acquire any particular investments, but can provide no assurance that the
taxes will not be subject to change.
FOREIGN CURRENCIES -- Each series may invest up to 100% of its assets in
securities denominated in foreign currencies. Accordingly, changes in the
value of these currencies against the U.S. dollar may result in corresponding
changes in the U.S. dollar value of a series' asset denominated in those
currencies. Each Series may attempt to minimize the impact of these changes to
the U.S. dollar value of the series' portfolio by engaging in certain hedging
practices, such as entering into Futures Contracts and Options on Foreign
Securities as described below.
Some emerging market countries also may have managed currencies, which are not
free floating against the U.S. dollar. In addition, there is risk that certain
emerging market countries may restrict the free conversion of their currencies
into other currencies. Further, certain emerging market currencies may not be
internationally traded. Certain of these currencies have experienced a steep
devaluation relative to the U.S. dollar. Any devaluations in the currencies in
which a Series' portfolio securities are denominated may have a detrimental
impact on the series' net asset value.
INVESTMENT IN OTHER INVESTMENT COMPANIES: A series' investment in other
investment companies, as described in the Prospectus is limited in amount by
the 1940 Act, and any applicable state securities laws. Such investment may
also involve the payment of substantial premiums above the value of such
investment companies' portfolio securities, and the total return on such
investment will be reduced by the operating expenses and fees of such other
investment companies, including advisory fees.
REPURCHASE AGREEMENTS: Each series may enter into repurchase agreements with
sellers who are member firms (or a subsidiary thereof) of the New York Stock
Exchange, members of the Federal Reserve System, recognized domestic or
foreign securities dealers or institutions which the Adviser or the Sub-
Adviser has determined to be of comparable creditworthiness. The securities
that a series purchases and holds have values which are equal to or greater
than the repurchase price agreed to be paid by the seller. The repurchase
price may be higher than the purchase price, the difference being income to
the series, or the purchase and repurchase prices may be the same, with
interest at a standard rate due to the series together with the repurchase
price on repurchase.
The repurchase agreement provides that in the event the seller fails to pay
the price agreed upon on the agreed upon delivery date or upon demand, as the
case may be, a series will have the right to liquidate the securities. If at
the time the series is contractually entitled to exercise its right to
liquidate the securities, the seller is subject to a proceeding under the
bankruptcy laws or its assets are otherwise subject to a stay order, the
series' exercise of its right to liquidate the securities may be delayed and
result in certain losses and costs to the series. Each series has adopted and
follows procedures which are intended to minimize the risk of repurchase
agreements. For example, a series only enters into repurchase agreements after
the Adviser or the Sub-Adviser has determined that the seller is creditworthy,
and the Adviser or the Sub-Adviser monitors that seller's creditworthiness on
an ongoing basis. Moreover, under such agreements, the value of the securities
(which are marked to market every business day) is required to be greater than
the repurchase price, and the series has the right to make margin calls at any
time if the value of the securities falls below the agreed upon margin.
LOANS AND OTHER DIRECT INDEBTEDNESS: Each series may purchase loans and other
direct claims against an issuer of emerging market debt instruments (a
"borrower"). In purchasing a loan, a series acquires some or all of the
interest of a bank or other lending institution in a loan to a corporate,
governmental or other borrower. Many such loans are secured, although some may
be unsecured. Such loans may be in default at the time of purchase. Loans that
are fully secured offer a series more protection than an unsecured loan in the
event of non-payment of scheduled interest or principal. However, there is no
assurance that the liquidation of collateral from a secured loan would satisfy
the corporate borrower's obligation, or that the collateral can be liquidated.
Certain of the loans acquired by a series may involve revolving credit
facilities or other standby financing commitments which obligate the series to
pay additional cash on a certain date or on demand. These commitments may have
the effect of requiring a series to increase its investment in a company at a
time when the series might not otherwise decide to do so (including at a time
when the company's financial condition makes it unlikely that such amounts
will be repaid). To the extent that a series is committed to advance
additional funds, it will at all times hold and maintain in a segregated
account liquid assets in an amount sufficient to meet such commitments.
A series' ability to receive payments of principal, interest and other amounts
due in connection with these investments will depend primarily on the
financial condition of the borrower. Direct indebtedness of developing
countries involves the risk that the governmental entities responsible for the
repayment of the note may be unable, or unwilling, to pay interest and repay
principal where due. In selecting the loans and other direct indebtedness
which a series will purchase, the Adviser or Sub-Advisor will rely upon their
(and not that of the original lending institution's) own credit analysis of
the borrower. As a series may be required to rely upon another lending
institution to collect and pass on to the series amounts payable with respect
to the loan and to enforce the series' rights under the loan, an insolvency,
bankruptcy or reorganization of the lending institution may delay or prevent
the Series from receiving such amounts. In such cases, the series will
evaluate as well the creditworthiness of the lending institution and will
treat both the borrower and the lending institution as an "Issuer" of the loan
for purposes of certain investment restrictions pertaining to the
diversification of the series' portfolio investments. The highly leveraged
nature of many such loans may make such loans especially vulnerable to adverse
changes in economic or market conditions. Investments in such loans may
involve additional risks to a series.
WARRANTS: Each series will not invest more than 10% of its net assets, taken
at market value, in warrants not acquired in a unit transaction. Warrants are
securities that give a series the right to purchase equity securities from the
issuer at a specific price (the "strike price") for a limited period of time.
The strike price of warrants typically is much lower than the current market
price of the underlying securities, yet they are subject to similar price
fluctuations. As a result, warrants may be more volatile investment than the
underlying securities and may offer greater potential for capital appreciation
as well as capital loss.
Warrants do not entitle a holder to dividends or voting rights with respect to
the underlying securities and do not represent any rights in the assets of the
issuing company. Also, the value of the warrant does not necessarily change
with the value of the underlying securities and a warrant ceases to have value
if it is not exercised prior to the expiration date. These factors can make
warrants more speculative than other types of investments.
DEPOSITORY RECEIPTS: Each series may purchase depository receipts, including
unsponsored depository receipts. Under the terms of most sponsored
arrangements, depositories agree to distribute notices of shareholder meetings
and voting instructions, and to provide shareholder communications and other
information to the ADR holders at the request of the issuer of the deposited
securities. The depository of an unsponsored ADR, on the other hand, is under
no obligation to distribute shareholder communications received from the
issuer of the deposited securities or to pass through voting rights to ADR
holders in respect of the deposited securities. For further discussion of
depository receipts see the Prospectus and Appendix A to the Prospectus --
"American Depositary Receipts."
<PAGE>
MFS/SUN LIFE SERIES TRUST
An Open-end Management Investment Company
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
Mailing Address:
P.O. Box 2281, Boston, MA 02107
Business Address:
500 Boylston Street, Boston, MA 02116
Telephone:
Toll free: (800) 225-2606;
in Massachusetts and Alaska, collect: (617) 954-5000
AUDITORS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
SUN-13-5/98/.8M
<PAGE>
PART C
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS INCLUDED IN PART A:
For the years or periods, as applicable to each
series, ended December 31, 1988 through December 31,
1997*:
Financial Highlights
FINANCIAL STATEMENTS INCLUDED IN PART B:
Portfolios of Investments, December 31, 1997*
Statement of Assets and Liabilities, December 31,
1997* Statements of Operations, year ended December
31, 1997* Statements of Changes in Net Assets, years
ended December 31, 1996 and 1997.*
- -----------------------
* Incorporated herein by reference to the Registrant's Annual Reports to
shareholders, dated December 31, 1997, filed with the SEC via EDGAR on March
9, 1998.
(B) EXHIBITS:
1 Amended and Restated Declaration of Trust of
Registrant dated December 29, 1997. (3)
2 By-Laws of Registrant dated February 6, 1998. (3)
3 Not Applicable.
4 Not Applicable.
5 (a) Investment Advisory Agreement between Registrant
and Massachusetts Financial Services Company dated
May 24, 1985.(3)
(b) Investment Advisory Agreement between Registrant and
Massachusetts Financial Services Company dated July
23, 1986. (3)
(c) Investment Advisory Agreement between Registrant and
Massachusetts Financial Services Company dated
January 26, 1988. (3)
(d) Investment Advisory Agreement between Registrant and
Massachusetts Financial Services Company relating to
the World Growth Series dated November 1, 1993. (3)
(e) Investment Advisory Agreement between Registrant and
Massachusetts Financial Services Company relating to
the Utilities Series dated November 1, 1993. (3)
(f) Investment Advisory Agreement between Registrant and
Massachusetts Financial Services Company relating to
the Research Series dated September 16, 1994. (3)
(g) Investment Advisory Agreement between Registrant and
Massachusetts Financial Services Company relating to
the World Asset Allocation Series dated September 16,
1994. (3)
(h) Investment Advisory Agreement between Registrant and
Massachusetts Financial Services Company relating to
the World Total Return Series dated September 16,
1994. (3)
(i) Investment Advisory Agreement between Registrant and
Massachusetts Financial Services Company relating to
the Emerging Growth Series dated May 1, 1995. (3)
(j) Investment Advisory Agreement between Registrant and
Massachusetts Financial Services Company relating to
the MFS/Foreign & Colonial International Growth
Series dated September 1, 1995. (3)
(k) Investment Advisory Agreement between Registrant and
Massachusetts Financial Services Company relating to
the MFS/Foreign & Colonial International Growth and
Income Series dated September 1, 1995. (3)
(l) Investment Advisory Agreement between Registrant and
Massachusetts Financial Services Company relating to
the MFS/Foreign & Colonial Emerging Markets Equity
Series dated September 1, 1995. (3)
(m) Sub-Advisory Agreement by and between Massachusetts
Financial Services Company and Foreign & Colonial
Management Ltd. relating to the MFS/Foreign &
Colonial International Growth Series dated September
1, 1995. (3)
(n) Sub-Advisory Agreement by and between Massachusetts
Financial Services Company and Foreign & Colonial
Management Ltd. relating to the MFS/Foreign &
Colonial Emerging Markets Equity Series dated
September 1, 1995. (3)
(o) Sub-Advisory Agreement between Foreign & Colonial
Management Ltd. and Foreign & Colonial Emerging
Markets Limited relating to the MFS/Foreign &
Colonial International Growth Series dated September
1, 1995. (3)
(p) Sub-Advisory Agreement between Foreign & Colonial
Management Ltd. and Foreign & Colonial Emerging
Markets Limited relating to the MFS/Foreign &
Colonial Emerging Markets Equity Series dated
September 1, 1995. (3)
(q) Sub-Advisory Agreement by and between Massachusetts
Financial Services Company and Foreign & Colonial
Management Limited relating to the World Growth
Series dated May 1, 1996. (3)
(r) Sub-Advisory Agreement between Foreign & Colonial
Management Limited and Foreign & Colonial Emerging
Markets Limited relating to the World Growth Series
dated May 1, 1996. (3)
(s) Investment Advisory Agreement between Registrant and
Massachusetts Financial Services Company relating to
the Capital Opportunities Series, formerly the Value
Series dated May 1, 1996. (3)
(t) Investment Advisory Agreement between Registrant, on
behalf of the Research Growth and Income Series, and
Massachusetts Financial Services Company dated May
12, 1997. (3)
(u) Amendment to the Investment Advisory Agreement by and
between Massachusetts Financial Services Company and
the Registrant relating to the Capital Appreciation
Series dated January 1, 1997. (1)
(v) Form of Investment Advisory Agreement between
Registrant, on behalf of the Bond Series, and
Massachusetts Financial Services Company dated May 1,
1998. (3)
(w) Form of Investment Advisory Agreement between
Registrant, on behalf of the Equity Income Series,
and Massachusetts Financial Services Company dated
May 1, 1998. (3)
(x) Form of Investment Advisory Agreement between
Registrant, on behalf of the Massachusetts Investors
Growth Stock Series, and Massachusetts Financial
Services Company dated May 1, 1998. (3)
(y) Form of Investment Advisory Agreement between
Registrant, on behalf of the New Discovery Series,
and Massachusetts Financial Services Company dated
May 1, 1998. (3)
(z) Form of Investment Advisory Agreement between
Registrant, on behalf of the Research International
Series, and Massachusetts Financial Services Company
dated May 1, 1998. (3)
(aa)Form of Investment Advisory Agreement between
Registrant, on behalf of the Strategic Income Series,
and Massachusetts Financial Services Company dated
May 1, 1998. (3)
6 Not Applicable.
7 Not Applicable.
8 (a) Custodian Agreement between Registrant and State
Street Bank and Trust Company dated May 24,
1985. (3)
(b) Amendment dated July 23, 1986 to Custodian
Agreement. (3)
9 (a) Shareholder Servicing Agent Agreement between
Registrant and Massachusetts Financial Services
Center, Inc., dated August 1, 1985. (3)
(b) Master Administrative Services Agreement, dated March
1, 1997, as amended. (2)
10 Consent and Opinion of Counsel dated April 24, 1998;
filed herewith.
11 Consent of Deloitte & Touche LLP; filed herewith.
12 Not Applicable.
13 Investment representation letter from initial
shareholder. (3)
14 Not Applicable.
15 Not Applicable.
16 Not Applicable.
17 Financial Data Schedules; filed herewith.
Power of Attorney dated July 24, 1997; filed herewith.
- ----------
(1) Incorporated by reference to Post-Effective Amendment No. 20 to the
Registrant's Registration Statement filed via EDGAR on April 29, 1997.
(2) Incorporated by reference to Post-Effective Amendment No. 65 to the
Registration Statement of Massachusetts Investors Growth Stock Fund (File
Nos. 2-14677 and 811-859), filed via EDGAR on March 30, 1998.
(3) Incorporated by reference to Post-Effective Amendment No. 21 to the
Registrant's Registration Statement filed via EDGAR on February 13, 1998.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Shares of Beneficial Interest 2
(without par value) (as of March 31, 1998)
ITEM 27. INDEMNIFICATION
Reference is hereby made to (a) Article V of the Registrant's Amended
and Restated Declaration of Trust, filed as an Exhibit to the Registrant's
Post-Effective Amendment No. 21 and (b) the undertaking of the Registrant
regarding indemnification set forth in Registrant's Post-Effective Amendment No.
21.
The Trustees and officers of the Registrant and the personnel of the
Registrant's investment adviser are insured under an errors and omissions
liability insurance policy. The Registrant and its officers are also insured
under the fidelity bond required by Rule 17g-1 under the Investment Company Act
of 1940.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
MFS serves as investment adviser to the following open-end Funds
comprising the MFS Family of Funds (except the Vertex Funds mentioned below):
Massachusetts Investors Trust, Massachusetts Investors Growth Stock Fund, MFS
Growth Opportunities Fund, MFS Government Securities Fund, MFS Government
Limited Maturity Fund, MFS Series Trust I (which has thirteen series: MFS
Managed Sectors Fund, MFS Cash Reserve Fund, MFS World Asset Allocation Fund,
MFS Strategic Growth Fund, MFS Research Growth and Income Fund, MFS Core Growth
Fund, MFS Equity Income Fund, MFS Special Opportunities Fund, MFS Convertible
Securities Fund, MFS Blue Chip Fund, MFS New Discovery Fund, MFS Science and
Technology Fund and MFS Research International Fund), MFS Series Trust II (which
has three series: MFS Emerging Growth Fund, MFS Large Cap Growth Fund and MFS
Intermediate Income Fund), MFS Series Trust III (which has two series: MFS High
Income Fund and MFS Municipal High Income Fund), MFS Series Trust IV (which has
four series: MFS Money Market Fund, MFS Government Money Market Fund, MFS
Municipal Bond Fund and MFS Mid Cap Growth Fund), MFS Series Trust V (which has
six series: MFS Total Return Fund, MFS Research Fund, MFS International
Opportunities Fund, MFS International Strategic Growth Fund, MFS International
Value Fund and MFS Asia Pacific Fund), MFS Series Trust VI (which has three
series: MFS World Total Return Fund, MFS Utilities Fund and MFS World Equity
Fund), MFS Series Trust VII (which has two series: MFS World Governments Fund
and MFS Value Fund), MFS Series Trust VIII (which has two series: MFS Strategic
Income Fund and MFS World Growth Fund), MFS Series Trust IX (which has three
series: MFS Bond Fund, MFS Limited Maturity Fund and MFS Municipal Limited
Maturity Fund), MFS Series Trust X (which has eight series: MFS Government
Mortgage Fund, MFS/Foreign & Colonial Emerging Markets Equity Fund, MFS
International Growth Fund, MFS International Growth and Income Fund, MFS Real
Estate Investment Fund, MFS Strategic Value Fund, MFS Small Cap Value Fund and
MFS Emerging Markets Debt Fund), MFS Series Trust XI (which has six series: MFS
Union Standard Equity Fund, Vertex All Cap Fund, Vertex Research All Cap Fund,
Vertex Growth Fund, Vertex Discovery Fund and Vertex Contrarian Fund (the Vertex
Funds are expected to be declared effective April 28, 1998)), and MFS Municipal
Series Trust (which has 16 series: MFS Alabama Municipal Bond Fund, MFS Arkansas
Municipal Bond Fund, MFS California Municipal Bond Fund, MFS Florida Municipal
Bond Fund, MFS Georgia Municipal Bond Fund, MFS Maryland Municipal Bond Fund,
MFS Massachusetts Municipal Bond Fund, MFS Mississippi Municipal Bond Fund, MFS
New York Municipal Bond Fund, MFS North Carolina Municipal Bond Fund, MFS
Pennsylvania Municipal Bond Fund, MFS South Carolina Municipal Bond Fund, MFS
Tennessee Municipal Bond Fund, MFS Virginia Municipal Bond Fund, MFS West
Virginia Municipal Bond Fund and MFS Municipal Income Fund) (the "MFS Funds").
The principal business address of each of the MFS Funds is 500 Boylston Street,
Boston, Massachusetts 02116.
MFS also serves as investment adviser of the following open-end Funds:
MFS Institutional Trust ("MFSIT") (which has seven series) and MFS Variable
Insurance Trust ("MVI") (which has twelve series). The principal business
address of each of the aforementioned funds is 500 Boylston Street, Boston,
Massachusetts 02116.
In addition, MFS serves as investment adviser to the following
closed-end funds: MFS Municipal Income Trust, MFS Multimarket Income Trust, MFS
Government Markets Income Trust, MFS Intermediate Income Trust, MFS Charter
Income Trust and MFS Special Value Trust (the "MFS Closed-End Funds"). The
principal business address of each of the MFS Closed-End Funds is 500 Boylston
Street, Boston, Massachusetts 02116.
Lastly, MFS serves as investment adviser to MFS/Sun Life Series Trust
("MFS/SL") (which has 26 series), Money Market Variable Account, High Yield
Variable Account, Capital Appreciation Variable Account, Government Securities
Variable Account, World Governments Variable Account, Total Return Variable
Account and Managed Sectors Variable Account (collectively, the "Accounts"). The
principal business address of MFS/SL is 500 Boylston Street, Boston,
Massachusetts 02116. The principal business address of each of the
aforementioned Accounts is One Sun Life Executive Park, Wellesley Hills,
Massachusetts 02181.
Vertex Investment Management, Inc., a Delaware corporation and a wholly
owned subsidiary of MFS, whose principal business address is 500 Boylston
Street, Boston, Massachusetts 02116 ("Vertex"), serves as investment adviser to
Vertex All Cap Fund, Vertex Research All Cap Fund, Vertex Growth Fund, Vertex
Discovery Fund and Vertex Contrarian Fund, each a series of MFS Series Trust XI.
The principal business address of the aforementioned Funds is 500 Boylston
Street, Boston, Massachusetts 02116.
MFS International Ltd. ("MIL"), a limited liability company organized
under the laws of Bermuda and a subsidiary of MFS, whose principal business
address is Cedar House, 41 Cedar Avenue, Hamilton HM12 Bermuda, serves as
investment adviser to and distributor for MFS American Funds (which has six
portfolios: MFS American Funds-U.S. Equity Fund, MFS American Funds-U.S.
Emerging Growth Fund, MFS American Funds-U.S. High Yield Bond Fund, MFS American
Funds - U.S. Dollar Reserve Fund, MFS American Funds-Charter Income Fund and MFS
American Funds-U.S. Research Fund) (the "MIL Funds"). The MIL Funds are
organized in Luxembourg and qualify as an undertaking for collective investments
in transferable securities (UCITS). The principal business address of the MIL
Funds is 47, Boulevard Royal, L-2449 Luxembourg.
MIL also serves as investment adviser to and distributor for MFS
Meridian U.S. Government Bond Fund, MFS Meridian Charter Income Fund, MFS
Meridian Global Governments Fund, MFS Meridian U.S. Emerging Growth Fund, MFS
Meridian Global Equity Fund, MFS Meridian Limited Maturity Fund, MFS Meridian
World Growth Fund, MFS Meridian Money Market Fund, MFS Meridian World Total
Return Fund, MFS Meridian U.S. Equity Fund, MFS Meridian Research Fund, MFS
Meridian U.S. High Yield Fund and MFS Meridian Emerging Markets Debt Fund
(collectively the "MFS Meridian Funds"). Each of the MFS Meridian Funds is
organized as an exempt company under the laws of the Cayman Islands. The
principal business address of each of the MFS Meridian Funds is P.O. Box 309,
Grand Cayman, Cayman Islands, British West Indies.
MFS International (U.K.) Ltd. ("MIL-UK"), a private limited company
registered with the Registrar of Companies for England and Wales whose current
address is 4 John Carpenter Street, London, England ED4Y 0NH, is involved
primarily in marketing and investment research activities with respect to
private clients and the MIL Funds and the MFS Meridian Funds.
MFS Institutional Advisors (Australia) Ltd. ("MFSI-Australia"), a
private limited company organized under the Corporations Law of New South Wales,
Australia whose current address is Level 37, Governor Phillip Tower, One Farrer
Place, Sydney, N5W2000, Australia, is involved primarily in investment
management and distribution of Australian superannuation unit trusts and acts as
an investment adviser to institutional accounts.
MFS Holdings Australia Pty Ltd. ("MFS Holdings Australia"), a private
limited company organized pursuant to the Corporations Law of New South Wales,
Australia whose current address is Level 37, Governor Phillip Tower, One Farrer
Place, Sydney, NSW2000 Australia, and whose function is to serve primarily as a
holding company.
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary of MFS,
serves as distributor for the MFS Funds, MVI and MFSIT.
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS,
serves as shareholder servicing agent to the MFS Funds, the MFS Closed-End
Funds, MFSIT and MVI.
MFS Institutional Advisors, Inc. ("MFSI"), a wholly owned subsidiary of
MFS, provides investment advice to substantial private clients.
MFS Retirement Services, Inc. ("RSI"), a wholly owned subsidiary of
MFS, markets MFS products to retirement plans and provides administrative and
record keeping services for retirement plans.
MFS
The Directors of MFS are Jeffrey L. Shames, Arnold D. Scott, John W.
Ballen, Donald A. Stewart and John D. McNeil. Mr. Shames is the Chairman, Chief
Executive Officer and President, Mr. Scott is a Senior Executive Vice President
and Secretary, William W. Scott, Jr., Patricia A. Zlotin, John W. Ballen, Thomas
J. Cashman, Jr., Joseph W. Dello Russo and Kevin R. Parke are Executive Vice
Presidents, Stephen E. Cavan is a Senior Vice President, General Counsel and an
Assistant Secretary, Robert T. Burns is a Senior Vice President, Associate
General Counsel and an Assistant Secretary of MFS, and Thomas B. Hastings is a
Vice President and Treasurer of MFS.
MASSACHUSETTS INVESTORS TRUST
MASSACHUSETTS INVESTORS GROWTH STOCK FUND
MFS GROWTH OPPORTUNITIES FUND
MFS GOVERNMENT SECURITIES FUND
MFS SERIES TRUST I
MFS SERIES TRUST V
MFS SERIES TRUST VI
MFS SERIES TRUST X
MFS GOVERNMENT LIMITED MATURITY FUND
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer,
James O. Yost, Ellen M. Moynihan and Mark E. Bradley, Vice Presidents of MFS,
are the Assistant Treasurers, James R. Bordewick, Jr., Senior Vice President and
Associate General Counsel of MFS, is the Assistant Secretary.
MFS SERIES TRUST II
Leslie J. Nanberg, Senior Vice President of MFS, is a Vice President,
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O.
Yost, Ellen M. Moynihan and Mark E. Bradley are the Assistant Treasurers, and
James R. Bordewick, Jr. is the Assistant Secretary.
MFS GOVERNMENT MARKETS INCOME TRUST
MFS INTERMEDIATE INCOME TRUST
Leslie J. Nanberg, Senior Vice President of MFS, is a Vice President,
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O.
Yost, Ellen M. Moynihan and Mark E. Bradley are the Assistant Treasurers, and
James R. Bordewick, Jr. is the Assistant Secretary.
MFS SERIES TRUST III
James T. Swanson, Robert J. Manning and Joan S. Batchelder, Senior Vice
Presidents of MFS, and Bernard Scozzafava, Vice President of MFS, are Vice
Presidents, Sheila Burns-Magnan, Assistant Vice President of MFS, and Daniel E.
McManus, Vice President of MFS, are Assistant Vice Presidents, Stephen E. Cavan
is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M.
Moynihan and Mark E. Bradley are the Assistant Treasurers, and James R.
Bordewick, Jr. is the Assistant Secretary.
MFS SERIES TRUST IV
MFS SERIES TRUST IX
Robert A. Dennis and Geoffrey L. Kurinsky, Senior Vice Presidents of
MFS, are Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is
the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers and James R. Bordewick, Jr. is the Assistant Secretary.
MFS SERIES TRUST VII
Leslie J. Nanberg and Stephen C. Bryant, Senior Vice Presidents of MFS,
are Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is the
Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers and James R. Bordewick, Jr. is the Assistant Secretary.
MFS SERIES TRUST VIII
Jeffrey L. Shames, Leslie J. Nanberg and James T. Swanson and John D.
Laupheimer, Jr., a Senior Vice President of MFS, are Vice Presidents, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen
M. Moynihan and Mark E. Bradley are the Assistant Treasurers and James R.
Bordewick, Jr. is the Assistant Secretary.
MFS MUNICIPAL SERIES TRUST
Robert A. Dennis is Vice President, David B. Smith and Geoffrey L.
Schechter, Vice Presidents of MFS, are Vice Presidents, Daniel E. McManus, Vice
President of MFS, is an Assistant Vice President, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan
and Mark E. Bradley are the Assistant Treasurers and James R. Bordewick, Jr. is
the Assistant Secretary.
MFS VARIABLE INSURANCE TRUST
MFS SERIES TRUST XI
MFS INSTITUTIONAL TRUST
Jeffrey L. Shames is the President and Chairman, Stephen E. Cavan is
the Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M.
Moynihan and Mark E. Bradley are the Assistant Treasurers and James R.
Bordewick, Jr. is the Assistant Secretary.
MFS MUNICIPAL INCOME TRUST
Robert J. Manning is Vice President, Stephen E. Cavan is the Secretary,
W. Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E.
Bradley are the Assistant Treasurers and James R. Bordewick, Jr. is the
Assistant Secretary.
MFS MULTIMARKET INCOME TRUST
MFS CHARTER INCOME TRUST
Leslie J. Nanberg and James T. Swanson are Vice Presidents, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen
M. Moynihan and Mark E. Bradley are the Assistant Treasurers and James R.
Bordewick, Jr. is the Assistant Secretary.
MFS SPECIAL VALUE TRUST
Robert J. Manning is Vice President, Stephen E. Cavan is the Secretary,
W. Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E.
Bradley are the Assistant Treasurers and James R. Bordewick, Jr. is the
Assistant Secretary.
MFS/SUN LIFE SERIES TRUST
John D. McNeil, Chairman and Director of Sun Life Assurance Company of
Canada, is the Chairman, Stephen E. Cavan is the Secretary, W. Thomas London is
the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers and James R. Bordewick, Jr. is the Assistant Secretary.
MONEY MARKET VARIABLE ACCOUNT
HIGH YIELD VARIABLE ACCOUNT
CAPITAL APPRECIATION VARIABLE ACCOUNT
GOVERNMENT SECURITIES VARIABLE ACCOUNT
TOTAL RETURN VARIABLE ACCOUNT
WORLD GOVERNMENTS VARIABLE ACCOUNT
MANAGED SECTORS VARIABLE ACCOUNT
John D. McNeil is the Chairman, Stephen E. Cavan is the Secretary, and
James R. Bordewick, Jr. is
the Assistant Secretary.
VERTEX
Jeffrey L. Shames and Arnold D. Scott are the Directors, Jeffrey L.
Shames is the President, Kevin R. Parke and John W. Ballen are Executive Vice
Presidents, John F. Brennan, Jr., and John D. Laupheimer are Senior Vice
Presidents, Brian E. Stack is a Vice President, Joseph W. Dello Russo is the
Treasurer, Thomas B. Hastings is the Assistant Treasurer, Stephen E. Cavan is
the Secretary and Robert T. Burns is the Assistant Secretary.
MIL
Arnold D. Scott, Jeffrey L. Shames and Thomas J. Cashman, Jr. are
Directors, Stephen E. Cavan is a Director, Senior Vice President and the Clerk,
Robert T. Burns is an Assistant Clerk, Joseph W. Dello Russo, Executive Vice
President and Chief Financial Officer of MFS, is the Treasurer and Thomas B.
Hastings is the Assistant Treasurer.
MIL-UK
Thomas J. Cashman, Jr. is President and a Director, Arnold D. Scott and
Jeffrey L. Shames are Directors, Stephen E. Cavan is a Director and the
Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer and Robert T. Burns is the Assistant Secretary.
MFSI - AUSTRALIA
Thomas J. Cashman, Jr. is President and a Director, Graham E. Lenzer,
John A. Gee and David Adiseshan are Directors, Stephen E. Cavan is the
Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer, and Robert T. Burns is the Assistant Secretary.
MFS HOLDINGS - AUSTRALIA
Jeffrey L. Shames is the President and a Director, Arnold D. Scott,
Thomas J. Cashman, Jr., and Graham E. Lenzer are Directors, Stephen E. Cavan is
the Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer, and Robert T. Burns is the Assistant Secretary.
MIL FUNDS
Richard B. Bailey, John A. Brindle, Richard W. S. Baker, Arnold D.
Scott, Jeffrey L. Shames and William F. Waters are Directors, Stephen E. Cavan
is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M.
Moynihan and Mark E. Bradley are the Assistant Treasurers and James R.
Bordewick, Jr. is the Assistant Secretary.
MFS MERIDIAN FUNDS
Richard B. Bailey, John A. Brindle, Richard W. S. Baker, Arnold D.
Scott, Jeffrey L. Shames and William F. Waters are Directors, Stephen E. Cavan
is the Secretary, W. Thomas London is the Treasurer, James R. Bordewick, Jr. is
the Assistant Secretary and James O. Yost, Ellen M. Moynihan and Mark E. Bradley
are the Assistant Treasurers.
MFD
Arnold D. Scott and Jeffrey L. Shames are Directors, William W. Scott,
Jr., an Executive Vice President of MFS, is the President, Stephen E. Cavan is
the Secretary, Robert T. Burns is the Assistant Secretary, Joseph W. Dello Russo
is the Treasurer, and Thomas B. Hastings is the Assistant Treasurer.
MFSC
Arnold D. Scott and Jeffrey L. Shames are Directors, Joseph A.
Recomendes, a Senior Vice President and Chief Information Officer of MFS, is
Vice Chairman and a Director, Janet A. Clifford is the President, Joseph W.
Dello Russo is the Treasurer, Thomas B. Hastings is the Assistant Treasurer,
Stephen E. Cavan is the Secretary, and Robert T. Burns is the Assistant
Secretary.
MFSI
Jeffrey L. Shames, and Arnold D. Scott are Directors, Thomas J.
Cashman, Jr., is the President and a Director, Leslie J. Nanberg is a Senior
Vice President, a Managing Director and a Director, Kevin R. Parke is the
Executive Vice President and a Managing Director, George F. Bennett, Jr., John
A. Gee, Brianne Grady, Joseph A. Kosciuszek and Joseph J. Trainor are Senior
Vice Presidents and Managing Directors, Joseph W. Dello Russo is the Treasurer,
Thomas B. Hastings is the Assistant Treasurer and Robert T. Burns is the
Secretary.
RSI
Arnold D. Scott is the Chairman and a Director, Martin E. Beaulieu is
the President, William W. Scott, Jr. is a Director, Joseph W. Dello Russo is the
Treasurer, Thomas B. Hastings is the Assistant Treasurer, Stephen E. Cavan is
the Secretary and Robert T. Burns is the Assistant Secretary.
In addition, the following persons, Directors or officers of MFS, have
the affiliations indicated:
Donald A. Stewart President and a Director, Sun Life Assurance
Company of Canada, Sun Life Centre, 150 King
Street West, Toronto, Ontario, Canada (Mr.
Stewart is also an officer and/or Director of
various subsidiaries and affiliates of Sun
Life)
John D. McNeil Chairman, Sun Life Assurance Company of
Canada, Sun Life Centre, 150 King Street
West, Toronto, Ontario, Canada (Mr. McNeil is
also an officer and/or Director of various
subsidiaries and affiliates of Sun Life)
Joseph W. Dello Russo Director of Mutual Fund Operations, The
Boston Company, Exchange Place, Boston,
Massachusetts (until August, 1994)
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Clarendon Insurance Agency, Inc., which is a wholly owned
subsidiary of Sun Life Assurance Company of Canada (U.S.), acts as general
distributor for the Registrant, Sun Life of Canada (U.S.) Variable Accounts C,
D, E and F and Sun Life (N.Y.) Variable Accounts A, B and C.
(b)
NAME AND PRINCIPAL POSITIONS AND OFFICES
BUSINESS ADDRESS* WITH UNDERWRITER
Jane M. Mancini President and Director
S. Caesar Raboy Director**
C. James Prieur Director**
Robert P. Vrolyk Director
L. Brock Thomson Vice President and Treasurer
Roy P. Creedon Secretary
Margaret Sears Mead Assistant Secretary
Donald E. Kaufman Vice President
Cynthia M. Orcutt Vice President
Laurie Lennox Vice President
Peter A. Marion Tax Officer
- -----------------
* The principal business address of all directors and officers of the
principal underwriter except Ms. Mancini is One Sun Life Executive Park,
Wellesley Hills, Massachusetts 02181. The principal business address of Ms.
Mancini is One Copley Place, Boston, Massachusetts 02116.
** Messrs. Raboy and Prieur are Directors of Sun Life Assurance Company of
Canada (U.S.) and Sun Life Insurance and Annuity Company of New York.
(c) Inapplicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The accounts and records of the Registrant are located, in whole or in
part, at the office of the Registrant and the following locations:
NAME ADDRESS
Massachusetts Financial Services 500 Boylston Street
Company (investment adviser) Boston, MA 02116
MFS Service Center, Inc. 500 Boylston Street
Boston, MA 02116
State Street Bank and Trust Company State Street South
5-North
North Quincy, MA 02171
Sun Life Assurance Company of Canada One Copley Place
Retirement Products and Services 50 Milk Street
Boston, MA 02116
ITEM 31. MANAGEMENT SERVICES
Not applicable.
ITEM 32. UNDERTAKINGS
(a) Not applicable.
(b) Not applicable.
(c) The Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest annual report to
shareholders upon request and without charge.
(d) Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the provisions set forth in Item 27 of
this Part C, or otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a trustee, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the Securities being Registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of Boston and
The Commonwealth of Massachusetts on the 29th day of April, 1998.
MFS/SUN LIFE SERIES TRUST
By: JAMES R. BORDEWICK, JR.
Name: James R. Bordewick, Jr.
Title: Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to its Registration Statement has been signed below by
the following persons in the capacities indicated on April 29, 1998.
SIGNATURE TITLE
--------- -----
JOHN D. MCNEIL* Chairman, Principal Executive Officer
- ------------------------- and Trustee
John D. McNeil
W. THOMAS LONDON* Treasurer (Principal Financial Officer
- ------------------------- and Principal Accounting Officer)
W. Thomas London
SAMUEL ADAMS* Trustee
- -------------------------
Samuel Adams
J. KERMIT BIRCHFIELD* Trustee
- -------------------------
J. Kermit Birchfield
WILLIAM R. GUTOW* Trustee
- -------------------------
William R. Gutow
GARTH MARSTON* Trustee
- -------------------------
Garth Marston
DAVID D. HORN* Trustee
- -------------------------
David D. Horn
DERWYN F. PHILLIPS* Trustee
- -------------------------
Derwyn F. Phillips
*By: JAMES R. BORDEWICK, JR.
Name: James R. Bordewick, Jr.
as Attorney-in-fact
Executed by James R. Bordewick, Jr.
on behalf of those indicated pursuant
to a Power of Attorney dated
July 24, 1997; filed herewith.
<PAGE>
POWER OF ATTORNEY
MFS/SUN LIFE SERIES TRUST
The undersigned, Trustees and officers of MFS/Sun Life Series Trust
(the "Registrant"), hereby severally constitute and appoint James R. Bordewick,
Jr., Stephen E. Cavan, David D. Horn, W. Thomas London and John D. McNeil, and
each of them singly, as true and lawful attorneys, with full power to them and
each of them to sign for each of the undersigned, in the names of, and in the
capacities indicated below, any Registration Statement and any and all
amendments thereto and to file the same with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission
for the purpose of registering the Registrant as a management investment company
under the Investment Company Act of 1940 and/or the shares issued by the
Registrant under the Securities Act of 1933 granting, unto our said attorneys,
and each of them, acting alone, full power and authority to do and perform each
and every act and thing requisite or necessary or desirable to be done in the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys or any of them
may lawfully do or cause to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned have hereunto set their hand on
this 24th day of July, 1997.
Signatures Title(s)
- ----------- --------
SAMUEL ADAMS
- -------------------------
Samuel Adams Trustee
J. KERMIT BIRCHFIELD
- -------------------------
J. Kermit Birchfield Trustee
WILLIAM R. GUTOW
- -------------------------
William R. Gutow Trustee
DAVID D. HORN
- -------------------------
David D. Horn Trustee
GARTH MARSTON
- -------------------------
Garth Marston Trustee
JOHN D. MCNEIL
- -------------------------
John D. McNeil Chairman of the Board; Trustee; and
Principal Executive Officer
DERWYN PHILLIPS
- -------------------------
Derwyn Phillips Trustee
W. THOMAS LONDON
- -------------------------
W. Thomas London Principal Financial and Accounting
Officer
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO.
10 Consent and Opinion of Counsel dated April 24, 1998.
11 Consent of Deloitte & Touche LLP.
17 Financial Data Schedules.
<PAGE>
EXHIBIT NO. 99.10
MASSACHUSETTS FINANCIAL SERVICES COMPANY
500 BOYLSTON STREET, BOSTON, MASSACHUSETTS 02116-3741
(617) 954-5182/FACSIMILE (617) 954-7760 [email protected]
JAMES R. BORDEWICK, JR.
Senior Vice President and
Associate General Counsel
April 24, 1998
MFS/Sun Life Series Trust
500 Boylston Street
Boston, MA 02116
Gentlemen:
I am a Senior Vice President and Associate General Counsel of
Massachusetts Financial Services Company, which serves as investment adviser to
MFS/Sun Life Series Trust (the "Trust"), and the Assistant Secretary of the
Trust. I am admitted to practice law in The Commonwealth of Massachusetts. The
Trust was created under a written Declaration of Trust dated May 9, 1983, and
executed and delivered in Boston, Massachusetts, as amended and restated
February 15, 1985, as amended. The beneficial interest thereunder is represented
by transferable shares without par value. The Trustees have the powers set forth
in the Declaration of Trust, subject to the terms, provisions and conditions
therein provided.
I am of the opinion that the legal requirements have been complied with
in the creation of the Trust, and that said Declaration of Trust is legal and
valid.
Under Article III, Section 3.4 and Article VI, Section 6.4 of the
Declaration of Trust, the Trustees are empowered, in their discretion, from time
to time to issue shares of the Trust for such amount and type of consideration,
at such time or times and on such terms as the Trustees may deem best. Under
Article VI, Section 6.1, it is provided that the number of shares of beneficial
interest authorized to be issued under the Declaration of Trust is unlimited.
By a resolution adopted by the Trustees, the Trustees of the Trust
determined to sell to the public the authorized but unissued shares of
beneficial interest of the Trust for cash at a price which will net the Trust
(before taxes) not less than the net asset value thereof, as defined in the
Trust's By-Laws, determined next after the sale is made or at some later time
after such sale.
The Trust has registered an indefinite number of shares of beneficial
interest under the Securities Act of 1933 (the "Shares").
I am of the opinion that all necessary Trust action precedent to the
issue of all the authorized but unissued Shares of the Trust has been duly
taken, and that all the Shares were legally and validly issued, and when sold,
will be fully paid and non-assessable, assuming the receipt by the Trust of the
cash consideration therefor in accordance with the terms of the resolution of
the Trustees described above, except as described below. I express no opinion as
to compliance with the Securities Act of 1933, the Investment Company Act of
1940, or applicable state "Blue Sky" or securities laws in connection with the
sale of the Shares.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given
in each agreement, obligation, or instrument entered into or executed by the
Trust or the Trustees. The Declaration of Trust provides for indemnification
out of the Trust property for all loss and expense of any shareholder held
personally liable for the obligations of the Trust. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust itself would be unable to meet its
obligations.
I consent to your filing this opinion with the Securities and Exchange
Commission.
Very truly yours,
JAMES R. BORDEWICK, JR.
James R. Bordewick, Jr.
JRB/bjn
<PAGE>
EXHIBIT 99.11
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in this Post-Effective Amendment
No. 22 to Registration Statement No. 2-83616 of MFS/Sun Life Series Trust, of
our reports dated February 6, 1998, appearing in the annual reports to
shareholders for the year ended December 31, 1997, and to the references to us
under the headings "Condensed Financial Information" in the Prospectus and
"Independent Accountants and Financial Statements" in the Statement of
Additional Information, both of which are part of such Registration Statement.
DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Boston, Massachusetts
April 24, 1998
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<EXPENSE-RATIO> 1.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
