<PAGE>
MFS(R)/SUN LIFE SERIES TRUST
MAY 1, 1999
PROSPECTUS
- ------------------------------------------------------------------------------
This Prospectus describes the 26 series of the MFS/Sun Life Series Trust
(referred to as the Series Fund):
1. 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.
2. CAPITAL APPRECIATION SERIES will seek to maximize capital appreciation by
investing in securities of all types, with major emphasis on common
stocks.
3. CAPITAL OPPORTUNITIES SERIES will seek capital appreciation.
4. EMERGING GROWTH SERIES will seek long-term growth of capital.
5. EQUITY INCOME SERIES will primarily seek reasonable income by investing
mainly in income producing securities; its secondary objective is to seek
capital appreciation.
6. GLOBAL 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).
7. GLOBAL GOVERNMENTS SERIES will seek to provide moderate current income,
preservation of capital and growth of capital by investing in debt
obligations that are issued or guaranteed as to principal and interest by
either }i{ the U.S. Government, its agencies, authorities or
instrumentalities or (ii) the governments of foreign countries (to the
extent that the series' adviser believes that the higher yields available
from foreign government securities are sufficient to justify the risks of
investing in these securities).
8. GLOBAL 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.
9. GLOBAL 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.
10. GOVERNMENT SECURITIES SERIES will seek current income and preservation of
capital by investing in U.S. Government and U.S. Government-related
securities.
11. 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.
12. INTERNATIONAL GROWTH SERIES will seek capital appreciation.
13. INTERNATIONAL GROWTH AND INCOME SERIES will seek capital appreciation and
current income.
14. MANAGED SECTORS SERIES will seek capital appreciation by varying the
weighting of its portfolio among 13 industry sectors.
15. MASSACHUSETTS INVESTORS GROWTH STOCK SERIES will seek to provide long-term
growth of capital and future income rather than current income.
16. MASSACHUSETTS INVESTORS TRUST 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.
17. MFS/FOREIGN & COLONIAL EMERGING MARKETS EQUITY SERIES will seek capital
appreciation.
18. 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.
19. NEW DISCOVERY SERIES will seek capital appreciation.
20. RESEARCH SERIES will seek to provide long-term growth of capital and
future income.
21. RESEARCH GROWTH AND INCOME SERIES will seek to provide long-term growth of
capital, current income and growth of income.
22. RESEARCH INTERNATIONAL SERIES will seek capital appreciation.
23. 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.
24. TOTAL RETURN SERIES will primarily seek 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 since
many securities offering a better than average yield may also possess
growth potential.
25. 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% of its assets in
equity and debt securities of both domestic and foreign companies in the
utilities industry.
26. 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 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 SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED THE SERIES' SHARES OR
DETERMINED WHETHER THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANYONE WHO TELLS
YOU OTHERWISE IS COMMITTING A CRIME.
<PAGE>
-----------------
TABLE OF CONTENTS
-----------------
Page
I Expense Summary ................................................ 1
II Risk Return Summary ............................................ 4
1. Bond Series ................................................ 4
2. Capital Appreciation Series ................................ 7
3. Capital Opportunities Series ............................... 10
4. Emerging Growth Series ..................................... 12
5. Equity Income Series ....................................... 14
6. Global Asset Allocation Series ............................. 16
7. Global Governments Series .................................. 21
8. Global Growth Series ....................................... 25
9. Global Total Return Series ................................. 28
10. Government Securities Series ............................... 32
11. High Yield Series .......................................... 34
12. International Growth Series ................................ 37
13. International Growth and Income Series ..................... 40
14. Managed Sectors Series ..................................... 42
15. Massachusetts Investors Growth Stock Series ................ 45
16. Massachusetts Investors Trust Series ....................... 47
17. MFS/Foreign & Colonial Emerging Markets Equity Series ...... 49
18. Money Market Series ........................................ 52
19. New Discovery Series ....................................... 54
20. Research Series ............................................ 56
21. Research Growth and Income Series .......................... 58
22. Research International Series .............................. 60
23. Strategic Income Series .................................... 62
24. Total Return Series ........................................ 66
25. Utilities Series ........................................... 70
26. Zero Coupon Series, Portfolio 2000 ......................... 74
III Certain Investment Strategies and Risks ........................ 76
IV Management of the Series ....................................... 77
V Description of Shares .......................................... 80
VI Other Information .............................................. 80
VII Financial Highlights ........................................... 82
Appendix A -- Investment Techniques and Practices .............. A-1
<PAGE>
THE SERIES FUND OFFERS SHARES OF ITS 26 SERIES EXCLUSIVELY TO SEPARATE
ACCOUNTS ESTABLISHED BY SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) AND ITS
AFFILIATES IN ORDER TO SERVE AS INVESTMENT OPTIONS UNDER VARIABLE ANNUITY AND
LIFE INSURANCE CONTRACTS (THE "VARIABLE CONTRACTS"). EACH OF THESE SERIES IS
MANAGED BY MASSACHUSETTS FINANCIAL SERVICES COMPANY (REFERRED TO AS MFS OR THE
ADVISER) AND IS DESCRIBED BELOW.
------------------
I EXPENSE SUMMARY
------------------
o Expense Table
This table describes the expense that you may pay when you hold shares of
the series. These fees and expenses do not take into account the fees and
expenses imposed under the Variable Contracts through which an investment
in a series is made.
<TABLE>
<CAPTION>
Annual Operating Expenses (expenses that are distributed from a series' assets):
..........................................................................................................
CAPITAL CAPITAL EMERGING
BOND APPREICATION OPPORTUNITIES GROWTH
SERIES SERIES SERIES SERIES
------ ------ ------ ------
<S> <C> <C> <C> <C>
Management Fee ............................... 0.60% 0.73% 0.75% 0.72%
Other Expenses(1) ............................ 0.47% 0.04% 0.11% 0.06%
----- ----- ----- -----
Total Annual Series Operating Expenses(1) .... 1.07% 0.77% 0.86% 0.78%
Fee Waiver and/or Expense Reimbursement(2) (0.04)% N/A N/A N/A
-----
Net Expenses(1) .......................... 1.03%
<CAPTION>
GLOBAL
EQUITY ASSET GLOBAL GLOBAL
INCOME ALLOCATION GOVERNMENTS GROWTH
SERIES SERIES SERIES SERIES
------ ------ ------ ------
<S> <C> <C> <C> <C>
Management Fee ............................... 0.75% 0.75% 0.75% 0.90%
Other Expenses(1) ............................ 0.76% 0.15% 0.13% 0.11%
----- ----- ----- -----
Total Annual Series Operating Expenses(1) .... 1.51% 0.90% 0.88% 1.01%
Fee Waiver and/or Expense Reimbursement(2) (0.48)% N/A N/A N/A
-----
Net Expenses(1) .......................... 1.03%
<CAPTION>
GLOBAL
TOTAL GOVERNMENT HIGH INTERNATIONAL
RETURN SECURITIES YIELD GROWTH
SERIES SERIES SERIES SERIES
------ ------ ------ ------
<S> <C> <C> <C> <C>
Management Fee ............................... 0.75% 0.55% 0.75% 0.975%
Other Expenses(1) ............................ 0.18% 0.07% 0.07% 0.345%
----- ----- ----- ------
Total Annual Series Operating Expenses(1) .... 0.93% 0.62% 0.82% 1.32%
<CAPTION>
INTERNATIONAL MASSACHUSETTS
GROWTH INVESTORS MASSACHUSETTS
AND MANAGED GROWTH INVESTORS
INCOME SECTORS STOCK TRUST
SERIES SERIES SERIES SERIES
------ ------ ------ ------
<S> <C> <C> <C> <C>
Management Fee ............................... 0.975% 0.74% 0.75% 0.55%
Other Expenses(1) ............................ 0.185% 0.06% 0.22% 0.04%
------ ----- ----- -----
Total Annual Series Operating Expenses(1) .... 1.16% 0.80% 0.97% 0.59%
<CAPTION>
MFS/FOREIGN
& COLONIAL
EMERGING
MARKETS MONEY NEW
EQUITY MARKET DISCOVERY RESEARCH
SERIES SERIES SERIES SERIES
------ ------ ------ ------
<S> <C> <C> <C> <C>
Management Fee ........................... 1.25% 0.50% 0.90% 0.70%
Other Expenses(1) ............................ 0.25% 0.06% 0.70% 0.06%
----- ----- ----- -----
Total Annual Series Operating Expenses(1) .... 1.50% 0.56% 1.60% 0.76%
Fee Waiver and/or Expense Reimbursement(2) N/A N/A (0.32)% N/A
-----
Net Expenses(1) .......................... 1.28%
<CAPTION>
RESEARCH
GROWTH
GROWTH AND RESEARCH STRATEGIC TOTAL
INCOME INTERNATIONAL INCOME RETURN
SERIES SERIES SERIES SERIES
------ ------ ------ ------
<S> <C> <C> <C> <C>
Management Fee ............................... 0.75% 1.00% 0.75% 0.65%
Other Expenses(1) ............................ 0.20% 2.86% 0.67% 0.05%
----- ----- ----- -----
Total Annual Series Operating Expenses(1) .... 0.95% 3.86% 1.42% 0.70%
Fee Waiver and/or Expense Reimbursement(2) N/A (2.31)% (0.13)% N/A
----- -----
Net Expenses(1) .......................... 1.55% 1.29%
<CAPTION>
Zero
Coupon
Series
Utilities Portfolio
Series 2000
------ ------
<S> <C> <C>
Management Fee ............................... 0.75% 0.25%
Other Expenses(1) ............................ 0.11% 0.67%
----- -----
Total Annual Series Operating Expenses(1) .... 0.86% 0.92%
Fee Waiver and/or Expense Reimbursement(2) N/A (0.39)%
-----
Net Expenses(1) ............................ 0.53%
------
(1) Each series has an expense offset arrangement which reduces the series' custodian fee based upon the
amount of cash maintained by the series with its custodian and dividend disbursing agent, and may enter
into other such arrangements and directed brokerage arrangements (which would also have the effect of
reducing the series' expenses). Any such fee reductions are not reflected.
(2) MFS has contractually agreed to bear the following series' expenses, excluding management fees, taxes,
extraordinary expenses and brokerage and transaction costs, in excess of the following annual percentage
of such series' average daily net assets:
Bond Series ................................................................................... 0.40%
Equity Income Series .......................................................................... 0.25%
New Discovery Series .......................................................................... 0.35%
Research International Series ................................................................. 0.50%
Strategic Income Series ....................................................................... 0.50%
Sun Life Assurance Company of Canada (U.S.) has contractually agreed to bear the Zero Coupon Series'
"Total Annual Series Operating Expenses," excluding taxes, extraordinary expenses and brokerage and
transaction costs, in excess of 0.50% annually, up to and including 1.25% annually, of the Zero Coupon
Series' average daily net assets.
These contractual fee arrangements will continue until at least May 1, 2000, unless changed with the
consent of the board of trustees which oversees the series.
</TABLE>
o EXAMPLE OF EXPENSES
These examples are intended to help you compare the cost of investing in a
series with the cost of investing in other mutual funds. These examples do
not take into account the fees and expenses imposed under the Variable
Contracts through which an investment in a series is made.
The examples assume that:
o You invest $10,000 in the series for the time periods indicated and you
redeem your shares at the end of the time periods;
o Your investment has a 5% return each year and dividends and other
distributions are reinvested; and
o The series' operating expenses remain the same.
Although your actual costs may be higher or lower, under these assumptions
your costs would be:
Period
------------------------------------
Series 1 Year 3 Years 5 Years 10 Years
----------------------------------------------------------------------------
Bond Series $105 $336 $ 586 $1,302
Capital Appreciation Series 79 246 428 954
Capital Opportunities Series 88 274 477 1,061
Emerging Growth Series 80 249 433 966
Equity Income Series 105 430 778 1,761
Global Asset Allocation Series 92 287 498 1,108
Global Governments Series 90 281 488 1,084
Global Growth Series 103 322 558 1,236
Global Total Return Series 95 296 515 1,143
Government Securities Series 63 199 346 774
High Yield Series 84 262 455 1,014
International Growth Series 134 418 723 1,590
International Growth and Income Series 118 368 638 1,409
Managed Sectors Series 82 255 444 990
Massachusetts Investors Growth Stock Series 99 309 536 1,190
Massachusetts Investors Trust Series 60 189 329 738
MFS/Foreign & Colonial Emerging Markets
Equity Series 153 474 818 1,791
Money Market Series 57 179 313 701
New Discovery Series 130 471 838 1,871
Research Series 78 243 422 942
Research Growth and Income Series 97 303 526 1,166
Research International Series 158 965 1,792 3,941
Strategic Income Series 131 437 764 1,691
Total Return Series 72 224 390 871
Utilities Series 88 274 477 1,061
Zero Coupon Series, Portfolio 2000 51 254 471 1,095
<PAGE>
-----------------------
II RISK RETURN SUMMARY
-----------------------
INVESTMENT STRATEGIES WHICH ARE COMMON TO ALL SERIES ARE DESCRIBED UNDER
THE CAPTION "CERTAIN INVESTMENT STRATEGIES AND RISKS."
1: Bond Series
............................................................................
o INVESTMENT OBJECTIVE
The 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. The series'
objective may be changed without shareholder approval.
o PRINCIPAL INVESTMENT STRATEGIES
The series invests, under normal market conditions, at least 65% of its
total assets in the following fixed income securities:
o Corporate bonds, which are bonds or other debt obligations issued by
domestic or foreign (including emerging market) corporations or other
similar entities.
o U.S. Government securities, which are bonds or other debt obligations
issued by, or whose principal and interest payments are guaranteed or
supported by, the U.S. Government or one of its agencies or
instrumentalities (including mortgage-backed securities).
o Mortgage-backed and asset-backed securities, which represent interests in
a pool of assets such as mortgage loans, car loan receivables or credit
card receivables.
While the series may purchase corporate bonds which have been assigned
lower credit ratings by credit rating agencies (commonly known as junk
bonds), it focuses on investment grade bonds. These bonds are rated in the
higher rating categories by credit rating agencies or are unrated and
considered by MFS to be comparable in quality.
In selecting fixed income investments for the series, MFS considers the
views of its large group of fixed income portfolio managers and research
analysts. This group periodically assesses the three-month total return
outlook for various segments of the fixed income markets. This three-month
"horizon" outlook is used by the portfolio manager}s{ of MFS' fixed income
oriented funds (including the series) as a tool in making or adjusting a
fund's asset allocations to various segments of the fixed income markets.
In assessing the credit quality of fixed income securities, MFS does not
rely solely on the credit ratings assigned by credit rating agencies, but
rather performs its own independent credit analysis.
The series may invest in derivative securities. Derivatives are securities
whose value may be based on other securities, currencies, interest rates,
or indices. Derivatives include:
o Futures and forward contracts.
o Options on futures contracts, foreign currencies, securities and bond
indices.
o Structured notes and indexed securities.
o Swaps, caps, collars and floors.
o PRINCIPAL RISKS OF AN INVESTMENT
The principal risks of investing in the series and the circumstances
reasonably likely to cause the value of your investment in the series to
decline are described below. As with any non-money market mutual fund, the
share price of the series will change daily based on market conditions and
other factors. Please note that there are many circumstances which could
cause the value of your investment in the series to decline, and which
could prevent the series from achieving its objective, that are not
described here.
The principal risks of investing in the series are:
o Allocation Risk: The series will allocate its investments among various
segments of the fixed income markets based upon judgments made by MFS. The
series could miss attractive investment opportunities by underweighting
markets where there are significant returns, or could lose value
overweighting markets where there are significant declines.
o Interest Rate Risk: When interest rates rise, the prices of fixed income
securities in the series' portfolio will generally fall. Conversely, when
interest rates fall, the prices of fixed income securities in the series'
portfolio will generally rise.
o Maturity Risk: Interest rate risk will generally affect the price of a
fixed income security more if the security has a longer maturity. Fixed
income securities with longer maturities will therefore be more volatile
than other fixed income securities with shorter maturities. Conversely,
fixed income securities with shorter maturities will be less volatile but
generally provide lower returns than fixed income securities with longer
maturities. The average maturity of the series' fixed income investments
will affect the volatility of the series' share price.
o Credit Risk: Credit risk is the risk that the issuer of a fixed income
security will not be able to pay principal and interest when due. Rating
agencies assign credit ratings to certain fixed income securities to
indicate their credit risk. The price of a fixed income security will
generally fall if the issuer defaults on its obligation to pay principal
or interest, the rating agencies downgrade the issuer's credit rating or
other news affects the market's perception of the issuer's credit risk.
o Liquidity Risk: The fixed income securities purchased by the series may be
traded in the over-the-counter market rather than on an organized exchange
and are subject to liquidity risk. This means that they may be harder to
purchase or sell at a fair price. The inability to purchase or sell these
fixed income securities at a fair price could have a negative impact on
the series' performance.
o Lower Rated Bonds Risk:
> Higher Credit Risk: Junk bonds are subject to a substantially higher
degree of credit risk than investment grade bonds. During recessions, a
high percentage of issuers of junk bonds may default on payments of
principal and interest. The price of a junk bond may therefore fluctuate
drastically due to bad news about the issuer or the economy in general.
> Higher Liquidity Risk: During recessions and periods of broad market
declines, junk bonds could become less liquid, meaning that they will be
harder to value or sell at a fair price.
o Mortgage-Backed and Asset-Backed Securities Risk
> Maturity Risk:
+ Mortgage-Backed Securities: A mortgage-backed security will mature
when all the mortgages in the pool mature or are prepaid. Therefore,
mortgage-backed securities do not have a fixed maturity, and their
expected maturities may vary when interest rates rise or fall.
* When interest rates fall, homeowners are more likely to prepay their
mortgage loans. An increased rate of prepayments on the series'
mortgage-backed securities will result in an unforeseen loss of
interest income to the series as the series may be required to
reinvest assets at a lower interest rate. Because prepayments
increase when interest rates fall, the prices of mortgage-backed
securities do not increase as much as other fixed income securities
when interest rates fall.
* When interest rates rise, homeowners are less likely to prepay their
mortgage loans. A decreased rate of prepayments lengthens the
expected maturity of a mortgage-backed security. Therefore, the
prices of mortgage-backed securities may decrease more than prices
of other fixed income securities when interest rates rise.
+ Collateralized Mortgage Obligations: The series may invest in
mortgage-backed securities called collateralized mortgage obligations
(CMOs). CMOs are issued in separate classes with different stated
maturities. As the mortgage pool experiences prepayments, the pool
pays off investors in classes with shorter maturities first. By
investing in CMOs, the series may manage the prepayment risk of
mortgage-backed securities. However, prepayments may cause the actual
maturity of a CMO to be substantially shorter than its stated
maturity.
+ Asset-Backed Securities: Asset-backed securities have prepayment
risks similar to mortgage-backed securities.
> Credit Risk: As with any fixed income security, mortgage-backed and
asset-backed securities are subject to the risk that the issuer will
default on principal and interest payments. It may be difficult to
enforce rights against the assets underlying mortgage-backed and
asset-backed securities in the case of default. The U.S. Government or
its agencies may guarantee the payment of principal and interest on some
mortgage-backed securities. Mortgage-backed securities and asset-backed
securities issued by private lending institutions or other financial
intermediaries may be supported by insurance or other forms of
guarantees.
o Derivatives Risk:
> Hedging Risk: When a derivative is used as a hedge against an opposite
position that the series also holds, any loss generated by the
derivative should be substantially offset by gains on the hedged
investment, and vice versa. While hedging can reduce or eliminate
losses, it can also reduce or eliminate gains.
> Correlation Risk: When the series uses derivatives to hedge, it takes
the risk that changes in the value of the derivative will not match
those of the asset being hedged. Incomplete correlation can result in
unanticipated losses.
> Investment Risk: When the series uses derivatives as an investment
vehicle to gain market exposure, rather than for hedging purposes, any
loss on the derivative investment will not be offset by gains on another
hedged investment. The series is therefore directly exposed to the risks
of that derivative. Gains or losses from derivative investments may be
substantially greater than the derivative's original cost.
> Availability Risk: Derivatives may not be available to the series upon
acceptable terms. As a result, the series may be unable to use
derivatives for hedging or other purposes.
> Credit Risk: When the series uses derivatives, it is subject to the risk
that the other party to the agreement will not be able to perform.
o As with any mutual fund, you could lose money on your investment in the
series.
An investment in the series is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table are not included because the series
did not have a full calendar year of operations on December 31, 1998.
<PAGE>
2: CAPITAL APPRECIATION SERIES
..........................................................................
o INVESTMENT OBJECTIVE
The series will seek to maximize capital appreciation by investing in
securities of all types, with major emphasis on common stocks. The series'
objective may be changed without shareholder approval.
o PRINCIPAL INVESTMENT STRATEGIES
The series invests, under normal market conditions, at least 65% of its
total assets in common stocks and related securities, such as preferred
stocks, convertible securities and depositary receipts, of companies which
MFS believes possess above-average growth opportunities. The series also
invests in fixed income securities when relative values or economic
conditions make these securities attractive. The series' investments may
include securities listed on a securities exchange or traded in the over-
the-counter markets.
Growth companies are companies that MFS considers well-run and poised for
growth. MFS looks particularly for companies which demonstrate:
o A strong franchise, strong cash flows and a recurring revenue stream.
o A solid industry position, where there is
> potential for high profit margins
> substantial barriers to new entry in the industry.
o A strong management team with a clearly defined strategy.
o A catalyst that may accelerate growth.
MFS uses a bottom-up, as opposed to a top-down, investment style in
managing the equity-oriented funds (such as the series) it advises. This
means that securities are selected based upon fundamental analysis performed
by the series' portfolio manager and MFS' large group of equity research
analysts.
Consistent with the series' principal investment strategies described
above, the series may invest in foreign securities (including emerging
market securities), and may have exposure to foreign currencies through its
investment in these securities.
o PRINCIPAL RISKS OF AN INVESTMENT
The principal risks of investing in the series and the circumstances
reasonably likely to cause the value of your investment in the series to
decline are described below. As with any non-money market mutual fund, the
share price of the series will change daily based on market conditions and
other factors. Please note that there are many circumstances which could
cause the value of your investment in the series to decline, and which
could prevent the series from achieving its objective, that are not
described here.
The principal risks of investing in the series are:
o Market Risk: This is the risk that the price of a security held by the
series will fall due to changing economic, political or market conditions
or disappointing earnings results.
o Growth Companies Risk: Prices of growth company securities held by the
series may fall to a greater extent than the overall equity markets (e.g.,
as represented by the Standard and Poor's Composite 500 Index) due to
changing economic, political or market conditions or disappointing growth
company earnings results.
o Over-the-Counter Risk: Equity securities and fixed income securities
purchased by the series may be traded in the over- the-counter (OTC)
market rather than on an organized exchange. Many OTC securities trade
less frequently and in smaller volume than exchange-traded securities. OTC
investments are therefore subject to liquidity risk, meaning the
securities are harder to value or sell at a fair price. Companies that
issue OTC securities may have limited product lines, markets or financial
resources compared to companies that issue exchange-traded securities. The
value of OTC securities may be more volatile than exchange- traded
securities. These factors could have a negative impact on the value of an
OTC security and therefore on the series' performance.
o Foreign Securities Risk: Investments in foreign securities involve risks
relating to political, social and economic developments abroad, as well as
risks resulting from the differences between the regulations to which U.S.
and foreign issuers and markets are subject:
> These risks may include the seizure by the government of company assets,
excessive taxation, withholding taxes on dividends and interest,
limitations on the use or transfer of portfolio assets, and political or
social instability.
> Enforcing legal rights may be difficult, costly and slow in foreign
countries, and there may be special problems enforcing claims against
foreign governments.
> Foreign companies may not be subject to accounting standards or
governmental supervision comparable to U.S. companies, and there may be
less public information about their operations.
> Foreign markets may be less liquid and more volatile than U.S. markets.
> Foreign securities often trade in currencies other than the U.S. dollar,
and the series may directly hold foreign currencies and purchase and
sell foreign currencies through forward exchange contracts. Changes in
currency exchange rates will affect the series' net asset value, the
value of dividends and interest earned, and gains and losses realized on
the sale of securities. An increase in the strength of the U.S. dollar
relative to these other currencies may cause the value of the series to
decline. Certain foreign currencies may be particularly volatile, and
foreign governments may intervene in the currency markets, causing a
decline in value or liquidity in the series' foreign currency holdings.
By entering into forward foreign currency exchange contracts, the series
may be required to forego the benefits of advantageous changes in
exchange rates and, in the case of forward contracts entered into for
the purpose of increasing return, the series may sustain losses which
will reduce its gross income. Forward foreign currency exchange
contracts involve the risk that the party with which the series enters
the contract may fail to perform its obligations to the series.
o Interest Rate Risk: When interest rates rise, the prices of fixed income
securities in the series' portfolio will generally fall. Conversely, when
interest rates fall, the prices of fixed income securities in the series'
portfolio will generally rise.
o Maturity Risk: Interest rate risk will generally affect the price of a
fixed income security more if the security has a longer maturity because
changes in interest rates are increasingly difficult to predict over
longer periods of time. Fixed income securities with longer maturities
will therefore be more volatile than other fixed income securities with
shorter maturities. Conversely, fixed income securities with shorter
maturities will be less volatile but generally provide lower returns than
fixed income securities with longer maturities. The average maturity of
the series' fixed income investments will affect the volatility of the
series' share price.
o Credit Risk: Credit risk is the risk that the issuer of a fixed income
security will not be able to pay principal and interest when due. Rating
agencies assign credit ratings to certain fixed income securities to
indicate their credit risk. The price of a fixed income security will
generally fall if the issuer defaults on its obligation to pay principal
or interest, the rating agencies downgrade the issuer's credit rating or
other news affects the market's perception of the issuer's credit risk.
o As with any mutual fund, you could lose money on your investment in the
series.
An investment in the series is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the series by showing changes in the series'
performance over time. The performance table also shows how the series'
performance over time compares with that of one or more broad measures of
market performance. The chart and table provide past performance
information. The series' past performance does not necessarily indicate
how the series will perform in the future. The returns shown do not
reflect fees and charges imposed under the Variable Contracts through
which an investment is made. If these fees and charges were included, they
would reduce these returns.
BAR CHART
The bar chart shows changes in the annual total returns of the series'
shares for each calendar year for the last ten years, assuming the
reinvestment of distributions.
1989 46.91%
1990 (9.69)%
1991 40.95%
1992 13.61%
1993 18.00%
1994 (3.60)%
1995 34.46%
1996 21.48%
1997 23.14%
1998 28.70%
During the period shown in the bar chart the highest quarterly return was
24.14% (for the calendar quarter ended December 31, 1998) and the lowest
quarterly return was (20.03)% (for the calendar quarter ended September
30, 1990).
PERFORMANCE TABLE
This table shows how the average annual total returns of the series'
shares compares to a broad measure of market performance and various other
market indicators and assumes the reinvestment of distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
..........................................................................
1 Year 5 Years 10 Years
Capital Appreciation Series 28.70% 20.07% 20.12%
Standard & Poor's 500 Composite Index+* 28.58% 24.06% 19.21%
Average growth fund++ 22.86% 18.63% 19.22%
------
+ Source: CDA/Wiesenberger, Inc.
++ Source: Lipper Analytical Services, Inc.
* The Standard & Poor's 500 Composite Index is a broad-based, popular,
unmanaged index of common stock total return performance.
<PAGE>
3: CAPITAL OPPORTUNITIES SERIES
...........................................................................
o INVESTMENT OBJECTIVE
The series will seek capital appreciation. The series' objective may be
changed without shareholder approval.
o PRINCIPAL INVESTMENT STRATEGIES
The series invests, under normal market conditions, at least 65% of its
total assets in common stocks and related securities, such as preferred
stocks, convertible securities and depositary receipts for those
securities. The series focuses on companies which MFS believes have
favorable growth prospects and attractive valuations based on current and
expected earnings or cash flow. The series' investments may include
securities listed on a securities exchange or traded in the over-the-
counter markets.
MFS uses a bottom-up, as opposed to a top-down, investment style in
managing the equity-oriented funds (such as the series) it advises. This
means that securities are selected based upon fundamental analysis
performed by the series' portfolio manager and MFS' large group of equity
research analysts.
Consistent with the series' principal investment strategies described
above, the series may invest in foreign securities (including emerging
market securities), and may have exposure to foreign currencies through
its investment in these securities.
o PRINCIPAL RISKS OF AN INVESTMENT
The principal risks of investing in the series and the circumstances
reasonably likely to cause the value of your investment in the series to
decline are described below. As with any non-money market mutual fund, the
share price of the series will change daily based on market conditions and
other factors. Please note that there are many circumstances which could
cause the value of your investment in the series to decline, and which
could prevent the series from achieving its objective, that are not
described here.
The principal risks of investing in the series are:
o Market Risk: This is the risk that the price of a security held by the
series will fall due to changing economic, political or market conditions
or disappointing earnings results.
o Company Risk: Prices of securities react to the economic condition of the
company that issued the security. The series' equity investments in an
issuer may rise and fall based on the issuer's actual and anticipated
earnings, changes in management and the potential for takeovers and
acquisitions.
o Over-the-Counter Risk: Over-the-counter (OTC) transactions involve risks
in addition to those associated with transactions in securities traded on
exchanges. OTC-listed companies may have limited product lines, markets or
financial resources. Many OTC stocks trade less frequently and in smaller
volume than exchange-listed stocks. The values of these stocks may be more
volatile than exchange-listed stocks, and the series may experience
difficulty in establishing or closing out positions in these stocks at
prevailing market prices.
o Foreign Securities Risk: Investments in foreign securities involve risks
relating to political, social and economic developments abroad, as well as
risks resulting from the differences between the regulations to which U.S.
and foreign issuers and markets are subject:
> These risks may include the seizure by the government of company assets,
excessive taxation, withholding taxes on dividends and interest,
limitations on the use or transfer of portfolio assets, and political or
social instability.
> Enforcing legal rights may be difficult, costly and slow in foreign
countries, and there may be special problems enforcing claims against
foreign governments.
> Foreign companies may not be subject to accounting standards or
governmental supervision comparable to U.S. companies, and there may be
less public information about their operations.
> Foreign markets may be less liquid and more volatile than U.S. markets.
> Foreign securities often trade in currencies other than the U.S. dollar,
and the series may directly hold foreign currencies and purchase and
sell foreign currencies through forward exchange contracts. Changes in
currency exchange rates will affect the series' net asset value, the
value of dividends and interest earned, and gains and losses realized on
the sale of securities. An increase in the strength of the U.S. dollar
relative to these other currencies may cause the value of the series to
decline. Certain foreign currencies may be particularly volatile, and
foreign governments may intervene in the currency markets, causing a
decline in value or liquidity in the series' foreign currency holdings.
By entering into forward foreign currency exchange contracts, the series
may be required to forego the benefits of advantageous changes in
exchange rates and, in the case of forward contracts entered into for
the purpose of increasing return, the series may sustain losses which
will reduce its gross income. Forward foreign currency exchange
contracts involve the risk that the party with which the series enters
the contract may fail to perform its obligations to the series.
o Emerging Markets Risk: Emerging markets are generally defined as countries
in the initial stages of their industrialization cycles with low per
capita income. Investments in emerging markets securities involve all of
the risks of investments in foreign securities, and also have additional
risks:
> All of the risks of investing in foreign securities are heightened by
investing in emerging markets countries.
> The markets of emerging markets countries have been more volatile than
the markets of developed countries with more mature economies. These
markets often have provided significantly higher or lower rates of
return than developed markets, and significantly greater risks, to
investors.
o As with any mutual fund, you could lose money on your investment in the
series.
An investment in the series is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the series by showing changes in the series'
performance over time. The performance table also shows how the series'
performance over time compares with that of a broad measure of market
performance. The chart and table provide past performance information. The
series' past performance does not necessarily indicate how the series will
perform in the future. The returns shown do not reflect fees and charges
imposed under the Variable Contracts through which an investment is made.
If these fees and charges were included, they would reduce these returns.
BAR CHART
The bar chart shows changes in the annual total returns of the series
shares for each calendar year since they were first offered, assuming the
reinvestment of distributions.
1997 27.57%
1998 26.97%
During the period shown in the bar chart the highest quarterly return was
24.58% (for the calendar quarter ended December 31, 1998) and the lowest
quarterly return was (14.28)% (for the calendar quarter ended September
30, 1998).
PERFORMANCE TABLE
This table shows how the average annual total returns of the series shares
compares to a broad measure of market performance and assumes the
reinvestment of distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
..........................................................................
1 Year Life
Capital Opportunities Series 26.97% 25.16%*
Standard & Poor's 500 Composite Index+** 28.58% 29.66%
------
* For the period from the commencement of the series' investment
operations on June 3, 1996, through December 31, 1998.
+ Source: CDA/Wiesenberger, Inc. "Life" refers to the period from July 1,
1996 through December 31, 1998.
** The Standard & Poor's 500 Composite Index is a broad-based, popular,
unmanaged index of common stock total return performance.
<PAGE>
4: EMERGING GROWTH SERIES
...........................................................................
o INVESTMENT OBJECTIVE
The series will seek long term growth of capital. The series' objective
may be changed without shareholder approval.
o PRINCIPAL INVESTMENT STRATEGIES
The series invests, under normal market conditions, at least 65% of its
total assets in common stocks and related securities, such as preferred
stocks, convertible securities and depositary receipts for those
securities, of emerging growth companies. Emerging growth companies are
companies which MFS believes are either:
o early in their life cycle but which have the potential to become major
enterprises; or
o major enterprises 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.
Emerging growth companies may be of any size, and MFS would expect these
companies to have products, technologies, management, markets and
opportunities which will facilitate earnings growth over time that is well
above the growth rate of the overall economy and the rate of inflation.
The series' investments may include securities listed on a securities
exchange or traded in the over-the-counter markets.
MFS uses a bottom-up, as opposed to a top-down, investment style in
managing the equity-oriented funds (such as the series) it advises. This
means that securities are selected based upon fundamental analysis
performed by the series' portfolio manager and MFS' large group of equity
research analysts.
o PRINCIPAL RISKS OF AN INVESTMENT
The principal risks of investing in the series and the circumstances
reasonably likely to cause the value of your investment in the series to
decline are described below. As with any non-money market mutual fund, the
share price of the series will change daily based on market conditions and
other factors. Please note that there are many circumstances which could
cause the value of your investment in the series to decline, and which
could prevent the series from achieving its objective, that are not
described here.
The principal risks of investing in the series are:
o Market Risk: This is the risk that the price of a security held by the
series will fall due to changing economic, political or market conditions
or disappointing earnings results.
o Emerging Growth Risk: Prices of securities react to the economic condition
of the company that issued the security. The series' equity investments in
an issuer may rise and fall based on the issuer's actual and anticipated
earnings, changes in management and the potential for takeovers and
acquisitions. Investments in emerging growth companies may be subject to
more abrupt or erratic market movements and may involve greater risks than
investments in other companies. Emerging growth companies often:
> have limited product lines, markets and financial resources,
> are dependent on management by one or a few key individuals,
> have shares which suffer steeper than average price declines after
disappointing earnings reports and are more difficult to sell at
satisfactory prices.
o Over-the-Counter Risk: Over-the-counter (OTC) transactions involve risks
in addition to those associated with transactions in securities traded on
exchanges. OTC-listed companies may have limited product lines, markets or
financial resources. Many OTC stocks trade less frequently and in smaller
volume than exchange-listed stocks. The values of these stocks may be more
volatile than exchange-listed stocks, and the series may experience
difficulty in establishing or closing out positions in these stocks at
prevailing market prices.
o As with any mutual fund, you could lose money on your investment in the
series.
An investment in the series is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the series by showing changes in the series'
performance over time. The performance table also shows how the series'
performance over time compares with that of one or more broad measures of
market performance. The chart and table provide past performance
information. The series' past performance does not necessarily indicate
how the series will perform in the future. The returns shown do not
reflect fees and charges imposed under the Variable Contracts through
which an investment is made. If these fees and charges were included, they
would reduce these returns.
BAR CHART
The bar chart shows changes in the annual total returns of the series
shares for each calendar year since they were first offered, assuming the
reinvestment of distributions.
1996 17.15%
1997 21.93%
1998 33.88%
During the period shown in the bar chart the highest quarterly return was
27.42% (for the calendar quarter ended December 31, 1998) and the lowest
quarterly return was (13.29)% (for the calendar quarter ended September
30, 1998).
PERFORMANCE TABLE
This table shows how the average annual total returns of the series shares
compares to a broad measure of market performance and various other market
indicators and assumes the reinvestment of distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
..........................................................................
1 Year Life*
Emerging Growth Series 33.88% 27.31%
Standard & Poor's 500 Composite Index+** 28.58% 29.29%
Russell 2000 Total Return Index+*** (2.55)% 14.96%
------
* For the period from the commencement of the series' investment
operations on May 1, 1995, through December 31, 1998.
+ Source: CDA/Wiesenberger, Inc.
** The Standard & Poor's 500 Composite Index is a broad-based, popular,
unmanaged index of common stock total return performance.
*** The Russell 2000 Total Return Index is a broad-based, unmanaged index
comprised of 2,000 of the smallest U.S.-domiciled company common
stocks (on the basis of capitalization) that are traded in the United
States on the New York Stock Exchange, the American Stock Exchange and
NASDAQ.
5: EQUITY INCOME SERIES
...........................................................................
o INVESTMENT OBJECTIVE
The series will primarily seek reasonable income by investing mainly in
income producing securities, and its secondary objective is capital
appreciation. The series' objectives may be changed without shareholder
approval.
o PRINCIPAL INVESTMENT STRATEGIES
The series invests, under normal market conditions, at least 65% of its
total assets in income producing common stocks and related securities,
such as preferred stocks, convertible securities and depositary receipts
for those securities. These securities may be listed on a securities
exchange or traded in the over-the-counter markets. While the series may
invest in companies of any size, the series generally focuses on
companies with large market capitalizations that MFS believes have
sustainable growth prospects and attractive valuations based on current
and expected earnings or cash flow.
MFS uses a bottom-up, as opposed to a top-down, investment style in
managing the equity-oriented funds (such as the series) it advises. This
means that securities are selected based upon fundamental analysis
performed by the series' portfolio manager and MFS' large group of equity
research analysts.
Consistent with the series' principal investment strategies described
above, the series may invest in foreign securities (including emerging
market securities), and may have exposure to foreign currencies through
its investment in these securities.
o PRINCIPAL RISKS OF AN INVESTMENT
The principal risks of investing in the series and the circumstances
reasonably likely to cause the value of your investment in the series to
decline are described below. As with any non-money market mutual fund, the
share price of the series will change daily based on market conditions and
other factors. Please note that there are many circumstances which could
cause the value of your investment in the series to decline, and which
could prevent the series from achieving its objectives, that are not
described here.
The principal risks of investing in the series are:
o Market Risk: This is the risk that the price of a security held by the
series will fall due to changing economic, political or market conditions
or disappointing earnings results.
o Company Risk: Prices of securities react to the economic condition of the
company that issued the security. The series' equity investments in an
issuer may rise and fall based on the issuer's actual and anticipated
earnings, changes in management and the potential for takeovers and
acquisitions.
o Large Cap Companies Risk: Large cap companies tend to go in and out of
favor based on market and economic conditions. Large cap companies tend to
be less volatile than companies with smaller market capitalizations. In
exchange for this potentially lower risk, the series' value may not rise
as much as the value of funds that emphasize smaller cap companies.
o Interest Rate Risk: Income producing equity securities may react like
fixed income securities to changes in interest rates. Thus, when interest
rates rise, the prices of income producing equity securities may fall.
Conversely, a decrease in interest rates may cause these securities to
increase in value.
o Foreign Markets Risk: Investing in foreign securities involves risks
relating to political, social and economic developments abroad, as well as
risks resulting from the differences between the regulations to which U.S.
and foreign issuers and markets are subject:
> These risks may include the seizure by the government of company assets,
excessive taxation, withholding taxes on dividends and interest,
limitations on the use or transfer of portfolio assets, and political or
social instability.
> Enforcing legal rights may be difficult, costly and slow in foreign
countries, and there may be special problems enforcing claims against
foreign governments.
> Foreign companies may not be subject to accounting standards or
governmental supervision comparable to U.S. companies, and there may be
less public information about their operations.
> Foreign markets may be less liquid and more volatile than U.S. markets.
> Foreign securities often trade in currencies other than the U.S. dollar,
and the series may directly hold foreign currencies and purchase and
sell foreign currencies through forward exchange contracts. Changes in
currency exchange rates will affect the series' net asset value, the
value of dividends and interest earned, and gains and losses realized on
the sale of securities. An increase in the strength of the U.S. dollar
relative to these other currencies may cause the value of the series to
decline. Certain foreign currencies may be particularly volatile, and
foreign governments may intervene in the currency markets, causing a
decline in value or liquidity in the series' foreign currency holdings.
By entering into forward foreign currency exchange contracts, the series
may be required to forego the benefits of advantageous changes in
exchange rates and, in the case of forward contracts entered into for
the purpose of increasing return, the series may sustain losses which
will reduce its gross income. Forward foreign currency exchange
contracts involve the risk that the party with which the series enters
the contract may fail to perform its obligations to the series.
o As with any mutual fund, you could lose money on your investment in the
series.
An investment in the series is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table are not included because the series
did not have a full calendar year of operations on December 31, 1998.
<PAGE>
6: GLOBAL ASSET ALLOCATION SERIES
..........................................................................
o INVESTMENT OBJECTIVE
The 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). The
series' objectives may be changed without shareholder approval.
Prior to May 1, 1999, this series was known as World Asset Allocation
Series.
o PRINCIPAL INVESTMENT STRATEGIES
The series allocates its assets among some or all or the following five
asset classes of equity and fixed income securities:
o U.S. equity securities, which are common stocks and related securities,
such as preferred stock, convertible securities and depositary receipts of
U.S. issuers.
o Foreign equity securities, which are equity securities of foreign issuers,
including issuers located in emerging markets.
o U.S. investment grade fixed income securities, which are bonds or other
debt obligations of U.S. issuers. These bonds have been assigned higher
credit ratings by credit rating agencies or are unrated and considered by
MFS to be comparable to higher rated bonds. These securities may include:
> U.S. government securities, which are bonds or other debt obligations
issued by, or whose principal and interest payments are guaranteed or
supported by, the U.S. Government or one of its agencies or
instrumentalities (including mortgage-backed securities).
> Corporate bonds, which are bonds or other debt obligations issued by
corporations or similar entities.
> Municipal bonds, which are bonds or other debt obligations of a U.S.
state or political subdivision, such as a county, city, town, village or
authority.
o U.S. high yield fixed income securities, which are bonds or other debt
obligations of U.S. issuers, including corporate bonds and municipal
bonds. These bonds are generally lower rated bonds, commonly known as junk
bonds, which are bonds assigned low credit ratings by credit rating
agencies or which are unrated and considered by MFS to be comparable to
lower rated bonds.
o Foreign fixed income securities, which are fixed income securities of
foreign issuers, including issuers located in emerging markets; these
securities may be investment grade or lower rated bonds.
The series allocates its assets among these asset classes with a view
towards total return. The series will vary the percentage of its assets
invested in any asset class in accordance with MFS' interpretation of the
total return outlook of various segments of the fixed income and equity
markets, through analysis of economic and market conditions, fiscal and
monetary policy and underlying security values. Under normal market
conditions, at least 30% of the series' total assets will be invested in
equity securities and the series' assets will be allocated among at least
three of the asset classes above. Under normal market conditions, the
series invests in at least three different countries, one of which is the
U.S.
The series is a non-diversified mutual fund. This means that the series
may invest a relatively high percentage of its assets in a small number of
issuers.
EQUITY INVESTMENTS. While the series may invest in all types of equity
securities, MFS generally seeks to purchase for the series equity
securities of companies that MFS considers well-run and poised for growth.
MFS looks particularly for companies which demonstrate:
o a strong franchise, strong cash flows and a recurring revenue stream
o a solid industry position, where there is
> potential for high profit margins
> substantial barriers to new entry in the industry
o a strong management team with a clearly defined strategy
o a catalyst that may accelerate growth.
MFS uses a bottom-up, as opposed to a top-down, investment style in
managing the equity-oriented funds (such as the equity asset classes of
the series) it advises. This means that securities are selected based upon
fundamental analysis of individual companies performed by the portfolio
manager of the asset class and MFS' large group of equity research
analysts.
FIXED INCOME INVESTMENTS. In selecting fixed income investments for the
series, MFS considers the views of its large group of fixed income
portfolio managers and research analysts. This group periodically assesses
the three-month total return outlook for various segments of the fixed
income markets. This three-month "horizon" outlook is used by the
portfolio manager}s{ of MFS' fixed income oriented funds (including the
fixed income asset classes of series) as a tool in making or adjusting a
fund's asset allocations to various segments of the fixed income markets.
In assessing the credit quality of fixed income securities, MFS does not
rely solely on the credit ratings assigned by credit rating agencies, but
rather performs its own independent credit analysis.
FOREIGN INVESTMENTS. The series' investments in foreign securities may
include equity and fixed income securities of foreign companies, fixed
income securities issued by foreign governments and Brady Bonds.
OTHER CONSIDERATIONS. The series may invest in derivative securities.
Derivatives are securities whose value may be based on other securities,
currencies, interest rates, or indices. Derivatives include:
o Futures and forward contracts.
o Options on futures contracts, foreign currencies, securities and
securities indices.
o Structured notes and indexed securities.
o Swaps, caps, collars and floors.
o PRINCIPAL RISKS OF AN INVESTMENT
The principal risks of investing in the series and the circumstances
reasonably likely to cause the value of your investment in the series to
decline are described below. As with any non-money market mutual fund, the
share price of the series will change daily based on market conditions and
other factors. Please note that there are many circumstances which could
cause the value of your investment in the series to decline, and which
could prevent the series from achieving its objective, that are not
described here.
The principal risks of investing in the series are:
o Allocation Risk: The series will allocate its investments among the fixed
income and equity security asset classes described above based upon
judgments made by MFS. The series could miss attractive investment
opportunities by underweighting asset classes where there are significant
returns, or could lose value by overweighting asset classes where there
are significant declines.
o Market Risk: The value of the securities in which the series invests may
decline due to changing economic, political or market conditions or
disappointing earnings results.
o Company Risk: Prices of securities react to the economic condition of the
company that issued the security. The series' equity investments in an
issuer may rise and fall based on the issuer's actual and anticipated
earnings, changes in management and the potential for takeovers and
acquisitions.
o Interest Rate Risk: When interest rates rise, the prices of fixed income
securities in the series' portfolio will generally fall. Conversely, when
interest rates fall, the prices of fixed income securities in the series'
portfolio will generally rise.
o Maturity Risk: Interest rate risk will generally affect the price of a
fixed income security more if the security has a longer maturity. Fixed
income securities with longer maturities will therefore be more volatile
than other fixed income securities with shorter maturities because changes
in interest rates are increasingly difficult to predict over longer
periods of time. Conversely, fixed income securities with shorter
maturities will be less volatile but generally provide lower returns than
fixed income securities with longer maturities. The average maturity of
the series' fixed income investments will affect the volatility of the
series' share price.
o Credit Risk: Credit risk is the risk that the issuer of a fixed income
security will not be able to pay principal and interest when due. Rating
agencies assign credit ratings to certain fixed income securities to
indicate their credit risk. The price of a fixed income security will
generally fall if the issuer defaults on its obligation to pay principal
or interest, the rating agencies downgrade the issuer's credit rating or
other news affects the market's perception of the issuer's credit risk.
o Over-the-Counter Risk: Equity and fixed income securities purchased by the
series may be traded in the over-the- counter (OTC) market rather than on
an organized exchange. Many OTC securities trade less frequently and in
smaller volume than exchange-traded securities. OTC investments are
therefore subject to liquidity risk, meaning the securities are harder to
value or sell at a fair price. Companies that issue OTC securities may
have limited product lines, markets or financial resources compared to
companies that issue exchange-traded securities. The value of OTC
securities may be more volatile than exchange-traded securities. These
factors could have a negative impact on the value of an OTC security and
therefore on the series' performance.
o Lower Rated Bonds Risk:
> Higher Credit Risk: Junk bonds are subject to a substantially higher
degree of credit risk than investment grade bonds. During recessions, a
high percentage of issuers of junk bonds may default on payments of
principal and interest. The price of a junk bond may therefore fluctuate
drastically due to bad news about the issuer or the economy in general.
> Higher Liquidity Risk: During recessions and periods of broad market
declines, junk bonds could become less liquid, meaning that they will be
harder to value or sell at a fair price.
o Foreign Securities: Investments in foreign securities involve risks
relating to political, social and economic developments abroad, as well as
risks resulting from the differences between the regulations to which U.S.
and foreign issuers and markets are subject:
> These risks may include the seizure by the government of company assets,
excessive taxation, withholding taxes on dividends and interest,
limitations on the use or transfer of portfolio assets, and political or
social instability.
> Enforcing legal rights may be difficult, costly and slow in foreign
countries, and there may be special problems enforcing claims against
foreign governments.
> Foreign companies may not be subject to accounting standards or
governmental supervision comparable to U.S. companies, and there may be
less public information about their operations.
> Foreign markets may be less liquid and more volatile than U.S. markets.
> Foreign securities often trade in currencies other than the U.S. dollar,
and the series may directly hold foreign currencies and purchase and
sell foreign currencies through forward exchange contracts. Changes in
currency exchange rates will affect the series' net asset value, the
value of dividends and interest earned, and gains and losses realized on
the sale of securities. An increase in the strength of the U.S. dollar
relative to these other currencies may cause the value of the series to
decline. Certain foreign currencies may be particularly volatile, and
foreign governments may intervene in the currency markets, causing a
decline in value or liquidity in the series' foreign currency holdings.
By entering into forward foreign currency exchange contracts, the series
may be required to forego the benefits of advantageous changes in
exchange rates and, in the case of forward contracts entered into for
the purpose of increasing return, the series may sustain losses which
will reduce its gross income. Forward foreign currency exchange
contracts involve the risk that the party with which the series enters
the contract may fail to perform its obligations to the series.
o Emerging Markets Risk: Emerging markets are generally defined as countries
in the initial stages of their industrialization cycles with low per
capita income. Investments in emerging markets securities involve all of
the risks of investments in foreign securities, and also have additional
risks:
> All of the risks of investing in foreign securities are heightened by
investing in emerging markets countries.
> The markets of emerging market countries have been more volatile than
the markets of developed countries with more mature economies. These
markets often have provided higher rates of return, and significantly
greater risks, to investors.
o Derivatives Risk:
> Hedging Risk: When a derivative is used as a hedge against an opposite
position that the series also holds, any loss generated by the
derivative should be substantially offset by gains on the hedged
investment, and vice versa. While hedging can reduce or eliminate
losses, it can also reduce or eliminate gains.
> Correlation Risk: When the series uses derivatives to hedge, it takes
the risk that changes in the value of the derivative will not match
those of the asset being hedged. Incomplete correlation can result in
unanticipated losses.
> Investment Risk: When the series uses derivatives as an investment
vehicle to gain market exposure, rather than for hedging purposes, any
loss on the derivative investment will not be offset by gains on another
hedged investment. The series is therefore directly exposed to the risks
of that derivative. Gains or losses from derivative investments may be
substantially greater than the derivative's original cost.
> Availability Risk: Derivatives may not be available to the series upon
acceptable terms. As a result, the series may be unable to use
derivatives for hedging or other purposes.
> Credit Risk: When the series uses derivatives, it is subject to the risk
that the other party to the agreement will not be able to perform.
o Non-Diversified Status Risk: Because the series may invest its assets in a
small number of issuers, the series is more susceptible to any single
economic, political or regulatory event affecting those issuers than is a
diversified fund.
o As with any mutual fund, you could lose money on your investment in the
series.
An investment in the series is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the series by showing changes in the series'
performance over time. The performance table also shows how the series'
performance over time compares with that of one or more broad measures of
market performance. The chart and table provide past performance
information. The series' past performance does not necessarily indicate
how the series will perform in the future. The returns shown do not
reflect fees and charges imposed under the Variable Contracts through
which an investment is made. If these fees and charges were included, they
would reduce these returns.
BAR CHART
The bar chart shows changes in the annual total returns of the series
shares for each calendar year since they were first offered, assuming the
reinvestment of distributions.
1995 21.56%
1996 16.04%
1997 10.87%
1998 6.60%
During the period shown in the bar chart, the highest quarterly return was
10.22% (for the calendar quarter ended December 31, 1998) and the lowest
quarterly return was (11.95)% (for the calendar quarter ended September
30, 1998).
<PAGE>
PERFORMANCE TABLE
This table shows how the average annual total returns of the series shares
compares to a broad measure of market performance and various other market
indicators and assumes the reinvestment of distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
..........................................................................
1 Year Life
Global Asset Allocation Series 6.60% 13.28%*
Standard & Poor's 500 Composite Index+** 28.58% 30.25%
Lehman Brothers Aggregate Bond Index+*** 8.68% 9.95%
J.P. Morgan Non-Dollar Government Bond Index++**** 18.28% 9.56%
MSCI EAFE Index+***** 20.33% 9.83%
------
* For the period from the commencement of the series' investment
operations on November 7, 1994, through December 31, 1998.
+ Source: CDA/Wiesenberger, Inc. "Life" refers to the period December
1, 1994 through December 31, 1998.
++ Source: AIM. "Life" refers to the period December 1, 1994 through
December 31, 1998.
** The Standard & Poor's 500 Composite Index is a broad-based, popular,
unmanaged index of common stock total return performance.
*** The Lehman Brothers Aggregate Bond Index is broad-based and
unmanaged and is composed of all publicly issued obligations of the
U.S. Treasury and government agencies, all corporate debt guaranteed
by the U.S. Government, all fixed-rate nonconvertible investment-
grade domestic corporate debt, and all fixed-rate securities backed
by mortgage pools of the Government National Mortgage Association
(GNMA), the Federal Home Loan Mortgage Corporation (FHLMC), and the
Federal National Mortgage Association (FNMA).
**** The J.P. Morgan Non-Dollar Government Bond Index is a broad-based
and unmanaged aggregate of actively traded government bonds issued
from 12 countries (excluding the United States) with remaining
maturities of at least one year.
***** The Morgan Stanley Capital International (MSCI) EAFE (Europe,
Australia, Far East) Index is a broad-based and unmanaged, market-
capitalization-weighted, total return index which measures the
performance of the same developed-country global stock markets
included in the MSCI World Index, but excluding the United States,
Canada, and the South African mining component.
<PAGE>
7: GLOBAL GOVERNMENTS SERIES
...........................................................................
o INVESTMENT OBJECTIVE
The series will seek to provide moderate current income, preservation of
capital and growth of capital by investing in debt obligations that are
issued or guaranteed as to principal and interest by either }i{ the U.S.
Government, its agencies, authorities or instrumentalities or (ii) the
governments of foreign countries (to the extent that MFS believes that the
higher yields available from foreign government securities are sufficient
to justify the risks of investing in these securities). The series'
objective may be changed without shareholder approval.
Prior to May 1, 1999, this series was known as World Governments Series.
o PRINCIPAL INVESTMENT STRATEGIES
The series invests, under normal market conditions, at least 80% of its
total assets in:
o U.S. Government securities, which are bonds or other debt obligations
issued by, or whose principal and interest payments are guaranteed or
supported by, the U.S. Government or one of its agencies or
instrumentalities (including mortgage-backed securities).
o Foreign government securities of developed countries, which are bonds or
other debt obligations issued by foreign governments of developed
countries. These foreign government securities are either:
> issued, guaranteed or supported as to payment of principal and interest
by foreign governments, foreign government agencies, foreign semi-
governmental entities, or supra- national entities.
> interests issued by entities organized and operated for the purpose of
restructuring the investment characteristics of foreign government
securities.
The series may also invest up to 20% of its total assets in foreign
government securities of emerging market countries. Under normal market
conditions, the series invests in at least three different countries, one
of which is the U.S.
In selecting fixed income investments for the series, MFS considers the
views of its large group of fixed income portfolio managers and research
analysts. This group periodically assesses the three-month total return
outlook for various segments of the fixed income markets. This three-month
"horizon" outlook is used by the portfolio manager}s{ of MFS' fixed income
oriented funds (including the series) as a tool in making or adjusting a
fund's asset allocations to various segments of the fixed income markets.
In assessing the credit quality of fixed income securities, MFS does not
rely solely on the credit ratings assigned by credit rating agencies, but
rather performs its own independent credit analysis.
The series is non-diversified. This means that the series may invest a
relatively high percentage of its assets in a small number of issuers. The
series may invest a substantial amount of its assets (i.e., more than 25%
of its assets) in issuers located in a single country or a limited number
of countries.
The series may invest in derivative securities. Derivatives are securities
whose value may be based on other securities, currencies, interest rates,
or indices. Derivatives include:
o Futures and forward contracts.
o Options on futures contracts, foreign currencies, securities and bond
indices.
o Structured notes and indexed securities.
o Swaps, caps, collars and floors.
o PRINCIPAL RISKS OF AN INVESTMENT
The principal risks of investing in the series and the circumstances
reasonably likely to cause the value of your investment in the series to
decline are described below. As with any non-money market mutual fund, the
share price of the series will change daily based on market conditions and
other factors. Please note that there are many circumstances which could
cause the value of your investment in the series to decline, and which
could prevent the series from achieving its objective, that are not
described here.
The principal risks of investing in the series are:
o Foreign Securities: Investments in foreign securities involve risks
relating to political, social and economic developments abroad, as well as
risks resulting from the differences between the regulations to which U.S.
and foreign issuers and markets are subject:
> These risks may include excessive taxation, withholding taxes on
dividends and interest, limitations on the use or transfer of portfolio
assets, and political or social instability.
> Enforcing legal rights may be difficult, costly and slow in foreign
countries, and there may be special problems enforcing claims against
foreign governments.
> Foreign entities may not be subject to accounting standards or
governmental supervision comparable to U.S. entities, and there may be
less public information about their operations.
> Foreign markets may be less liquid and more volatile than U.S. markets.
> Foreign securities often trade in currencies other than the U.S. dollar,
and the series may directly hold foreign currencies and purchase and
sell foreign currencies through forward exchange contracts. Changes in
currency exchange rates will affect the series' net asset value, the
value of dividends and interest earned, and gains and losses realized on
the sale of securities. An increase in the strength of the U.S. dollar
relative to these other currencies may cause the value of the series to
decline. Certain foreign currencies may be particularly volatile, and
foreign governments may intervene in the currency markets, causing a
decline in value or liquidity in the series' foreign currency holdings.
By entering into forward foreign currency exchange contracts, the series
may be required to forego the benefits of advantageous changes in
exchange rates and, in the case of forward contracts entered into for
the purposes of increasing return, the series may sustain losses which
will reduce its gross income. Forward foreign currency exchange
contracts involve the risk that the party with which the series enters
the contract may fail to perform its obligations to the series.
o Emerging Markets Risk: Emerging markets are generally defined as countries
in the initial stages of their industrialization cycles with low per
capita income. Investments in emerging markets securities involve all of
the risks of investments in foreign securities, and also have additional
risks:
> All of the risks of investing in foreign securities are heightened by
investing in emerging markets countries.
> The markets of emerging markets countries have been more volatile than
the markets of developed countries with more mature economies. These
markets often have provided significantly higher or lower rates of
return than developed markets, and significantly greater risks, to
investors.
o Allocation Risk: The series will allocate its investments among various
government securities based upon judgments made by MFS. The series could
miss attractive investment opportunities by underweighting markets where
there are significant returns, and could lose value by overweighting
markets where there are significant declines.
o Interest Rate Risk: When interest rates rise, the prices of fixed income
securities in the series' portfolio will generally fall. Conversely, when
interest rates fall, the prices of fixed income securities in the series'
portfolio will generally rise.
o Maturity Risk: Interest rate risk will generally affect the price of a
fixed income security more if the security has a longer maturity. Fixed
income securities with longer maturities will therefore be more volatile
than other fixed income securities with shorter maturities. Conversely,
fixed income securities with shorter maturities will be less volatile but
generally provide lower returns than fixed income securities with longer
maturities. The average maturity of the series' fixed income investments
will affect the volatility of the series' share price.
o Credit Risk: Credit risk is the risk that the issuer of a fixed income
security will not be able to pay principal and interest when due. Rating
agencies assign credit ratings to certain fixed income securities to
indicate their credit risk. The price of a fixed income security will
generally fall if the issuer defaults on its obligation to pay principal
or interest, the rating agencies downgrade the issuer's credit rating or
other news affects the market's perception of the issuer's credit risk.
o Liquidity Risk: The fixed income securities purchased by the series may be
traded in the over-the-counter market rather than on an organized exchange
and are subject to liquidity risk. This means that they may be harder to
purchase or sell at a fair price. The inability to purchase or sell these
fixed income securities at a fair price could have a negative impact on
the series' performance.
o Mortgage-Backed Securities:
> Maturity Risk: A mortgage-backed security will mature when all the
mortgages in the pool mature or are prepaid. Therefore, mortgage-backed
securities do not have a fixed maturity, and their expected maturities
may vary when interest rates rise or fall.
+ When interest rates fall, homeowners are more likely to prepay their
mortgage loans. An increased rate of prepayments on the series'
mortgage-backed securities will result in an unforeseen loss of
interest income to the series as the series may be required to
reinvest assets at a lower interest rate. Because prepayments increase
when interest rates fall, the price of mortgage-backed securities does
not increase as much as other fixed income securities when interest
rates fall.
+ When interest rates rise, homeowners are less likely to prepay their
mortgage loans. A decreased rate of prepayments lengthens the expected
maturity of a mortgage-backed security. Therefore, the prices of
mortgage-backed securities may decrease more than prices of other
fixed income securities when interest rates rise.
> Credit Risk: As with any fixed income security, mortgage-backed
securities are subject to the risk that the issuer will default on
principal and interest payments. It may be difficult to enforce rights
against the assets underlying mortgage-backed securities in the case of
default. The U.S. Government or its agencies may guarantee the payment
of principal and interest on mortgage-backed securities.
o Derivatives Risk:
> Hedging Risk: When a derivative is used as a hedge against an opposite
position that the series also holds, any loss generated by the
derivative should be substantially offset by gains on the hedged
investment, and vice versa. While hedging can reduce or eliminate
losses, it can also reduce or eliminate gains.
> Correlation Risk: When the series uses derivatives to hedge, it takes
the risk that changes in the value of the derivative will not match
those of the asset being hedged. Incomplete correlation can result in
unanticipated losses.
> Investment Risk: When the series uses derivatives as an investment
vehicle to gain market exposure, rather than for hedging purposes, any
loss on the derivative investment will not be offset by gains on another
hedged investment. The series is therefore directly exposed to the risks
of that derivative. Gains or losses from derivative investments may be
substantially greater than the derivative's original cost.
> Availability Risk: Derivatives may not be available to the series upon
acceptable terms. As a result, the series may be unable to use
derivatives for hedging or other purposes.
> Credit Risk: When the series uses derivatives, it is subject to the risk
that the other party to the agreement will not be able to perform.
o Non-Diversified Status Risk: Because the series may invest a higher
percentage of its assets in a small number of issuers, the series is more
susceptible to any single economic, political or regulatory event
affecting those issuers than is a diversified fund.
o Investment Focus Risk: Because the series may invest a substantial amount
of its assets in issuers located in a single country or a limited number
of countries, economic, political and social conditions in these countries
will have a significant impact on its investment performance.
o As with any mutual fund, you could lose money on your investment in the
series.
An investment in the series is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the series by showing changes in the series'
performance over time. The performance table also shows how the series'
performance over time compares with that of one or more broad measures of
market performance. The chart and table provide past performance
information. The series' past performance does not necessarily indicate
how the series will perform in the future. The returns shown do not
reflect fees and charges imposed under the Variable Contracts through
which an investment is made. If these fees and charges were included, they
would reduce these returns.
BAR CHART
The bar chart shows changes in the annual total returns of the series
shares for each calendar year for the past ten years, assuming the
reinvestment of distributions.
1989 9.87%
1990 13.37%
1991 14.83%
1992 0.54%
1993 18.84%
1994 (4.46)%
1995 15.69%
1996 4.66%
1997 (0.76)%
1998 15.46%
During the period shown in the bar chart the highest quarterly return was
9.76% (for the calendar quarter ended September 30, 1998) and the lowest
quarterly return was (6.07)% (for the calendar quarter ended March 31,
1994).
PERFORMANCE TABLE
This table shows how the average annual total returns of the series shares
compares to a broad measure of market performance and various other market
indicators and assumes the reinvestment of distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
..........................................................................
1 Year 5 Years 10 Years
Global Governments Series 15.46% 5.80% 8.52%
Salomon Brothers World Government
Bond Index+* 15.29% 7.84% 8.97%
J.P. Morgan Global Government
Bond Index++** 15.31% 8.09% 9.09%
------
+ Source: CDA/Wiesenberger, Inc.
++ Source: AIM.
* The Salomon Brothers World Government Bond Index is broad-based and
unmanaged index consisting of complete universes of government bonds
with remaining maturities of at least five years.
** The J.P. Morgan Global Government Bond Index is a broad-based,
unmanaged aggregate of actively traded government bonds issued from 13
countries (including the United States) with remaining maturities of at
least one year.
<PAGE>
8: Global Growth Series
...........................................................................
o INVESTMENT OBJECTIVE
The 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 series' objective may be changed
without shareholder approval.
Prior to May 1, 1999, this series was known as World Growth Series.
o PRINCIPAL INVESTMENT STRATEGIES
The series invests, under normal market conditions, at least 65% of its
total assets in common stocks and related securities, such as preferred
stock, convertible securities and depositary receipts, of companies in
three distinct market sectors:
o U.S. emerging growth companies, which are domestic companies that MFS
believes are either early in their life cycle but which have the potential
to become major enterprises, or are major enterprises 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.
o Foreign growth companies, which are foreign companies located in more
developed securities markets (such as Australia, Canada, Japan, New
Zealand and Western European countries) that MFS believes have favorable
growth prospects and attractive valuations based on current and expected
earnings and cash flow. The series generally seeks to purchase foreign
growth securities of companies with relatively large capitalizations
relative to the market in which they are traded.
o Emerging market securities, which are securities of issuers whose
principal activities are located in emerging market countries. Emerging
market countries include any country determined 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.
Under normal market conditions, the series invests in at least three
different countries, one of which is the U.S. MFS directly manages the
U.S. emerging growth companies and foreign growth companies sectors. MFS
has engaged the sub-advisers identified below under the capition
"Management of the Series" to manage the emerging markets securities
sector.
MFS uses a bottom-up, as opposed to a top-down, investment style in
managing the equity-oriented funds (such as the series) it advises. This
means that securities are selected based upon fundamental analysis
performed by the series' portfolio manager and MFS' large group of equity
research analysts. The sub-advisers use a top down investment style in
managing the emerging markets securities sector of the series. This means
that securities are selected for this sector based upon a determination of
allocations among various emerging markets.
The series is a non-diversified mutual fund. This means that the series
may invest a relatively high percentage of its assets in a small number of
issuers.
o PRINCIPAL RISKS OF AN INVESTMENT
The principal risks of investing in the series and the circumstances
reasonably likely to cause the value of your investment in the series to
decline are described below. As with any non-money market mutual fund, the
share price of the series will change daily based on market conditions and
other factors. Please note that there are many circumstances which could
cause the value of your investment in the series to decline, and which
could prevent the series from achieving its objective, that are not
described here.
The principal risks of investing in the series are:
o Allocation Risk: The series will allocate its investments among U.S.
emerging growth companies, foreign growth companies and emerging markets
companies, based upon judgments made by MFS. The series could miss
attractive investment opportunities by underweighting markets where there
are significant returns, and could lose value by overweighting markets
where there are significant declines.
o Foreign Markets Risk: Investing in foreign securities involves risks
relating to political, social and economic developments abroad, as well as
risks resulting from the differences between the regulations to which U.S.
and foreign issuers and markets are subject:
> These risks may include the seizure by the government of company assets,
excessive taxation, withholding taxes on dividends and interest,
limitations on the use or transfer of portfolio assets, and political or
social instability.
> Enforcing legal rights may be difficult, costly and slow in foreign
countries, and there may be special problems enforcing claims against
foreign governments.
> Foreign companies may not be subject to accounting standards or
governmental supervision comparable to U.S. companies, and there may be
less public information about their operations.
> Foreign markets may be less liquid and more volatile than U.S. markets.
> Foreign securities often trade in currencies other than the U.S. dollar,
and the series may directly hold foreign currencies and purchase and
sell foreign currencies through forward exchange contracts. Changes in
currency exchange rates will affect the series' net asset value, the
value of dividends and interest earned, and gains and losses realized on
the sale of securities. An increase in the strength of the U.S. dollar
relative to these other currencies may cause the value of the series to
decline. Certain foreign currencies may be particularly volatile, and
foreign governments may intervene in the currency markets, causing a
decline in value or liquidity in the series' foreign currency holdings.
By entering into forward foreign currency exchange contracts, the series
may be required to forego the benefits of advantageous changes in
exchange rates and, in the case of forward contracts entered into for
the purpose of increasing return, the series may sustain losses which
will reduce its gross income. Forward foreign currency exchange
contracts involve the risk that the party with which the series enters
the contract may fail to perform its obligations to the series.
o Emerging Markets Risk: Investments in emerging markets securities involve
all of the risks of investments in foreign securities, and also have
additional risks:
> All of the risks of investing in foreign securities are heightened by
investing in emerging markets countries.
> The markets of emerging markets countries have been more volatile than
the markets of developed countries with more mature economies. These
markets often have provided significantly higher or lower rates of
return than developed markets, and significantly greater risks, to
investors.
o Market Risk: This is the risk that the price of a security held by the
series will fall due to changing economic, political or market conditions
or disappointing earnings results.
o Company Risk: Prices of securities react to the economic condition of the
company that issued the security. The series' equity investments in an
issuer may rise and fall based on the issuer's actual and anticipated
earnings, changes in management and the potential for takeovers and
acquisitions.
o Emerging Growth Companies: Investments in emerging growth companies may be
subject to more abrupt or erratic market movements and may involve greater
risks than investments in other companies. Emerging growth companies
often:
> have limited product lines, markets and financial resources,
> are dependent on management by one or a few key individuals,
> have shares which suffer steeper than average price declines after
disappointing earnings reports and are more difficult to sell at
satisfactory prices.
o Investment Focus: The series may invest a substantial amount of its assets
in issuers located in a single country or a limited number of countries.
If the series focuses its investments in this manner, it assumes the risk
that economic, political and social conditions in those countries will
have a significant impact on its investment performance. The series'
investment performance may also be more volatile if it focuses its
investments in certain countries, especially emerging market countries.
o Over-the-Counter Risk: Over-the-counter (OTC) transactions involve risks
in addition to those associated with transactions in securities traded on
exchanges. OTC-listed companies may have limited product lines, markets or
financial resources. Many OTC stocks trade less frequently and in smaller
volume than exchange-listed stocks. The values of these stocks may be more
volatile than exchange-listed stocks, and the series may experience
difficulty in establishing or closing out positions in these stocks at
prevailing market prices.
o Non-Diversified Status Risk: Because the series may invest its assets in a
small number of issuers, the series is more susceptible to any single
economic, political or regulatory event affecting those issuers than is a
diversified fund.
o As with any mutual fund, you could lose money on your investment in the
series.
An investment in the series is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the series by showing changes in the series
performance over time. The performance table also shows how the series'
performance over time compares with that of one or more broad measures of
market performance. The chart and table provide past performance
information. The series' past performance does not necessarily indicate
how the series will perform in the future. The returns shown do not
reflect fees and charges imposed under the Variable Contracts through
which an investment is made. If these fees and charges were included, they
would reduce these returns.
BAR CHART
The bar chart shows changes in the annual total returns of the series
shares for each calendar year since they were first offered, assuming the
reinvestment of distributions.
1994 2.86%
1995 16.06%
1996 13.02%
1997 15.32%
1998 14.61%
During the period shown in the bar chart the highest quarterly return was
21.77% (for the calendar quarter ended December 31, 1998) and the lowest
quarterly return was (16.71)% (for the calendar quarter ended September
30, 1998).
PERFORMANCE TABLE
This table shows how the average annual total returns of the series shares
compares to a broad measure of market performance and various other market
indicators and assumes the reinvestment of distributions.
Average Annual Total Returns as of December 31, 1998
..........................................................................
1 Year 5 Years Life*
Global Growth Series 14.61% 12.26% 13.32%
Standard & Poor's 500 Composite Index+** 28.58% 24.06% 23.91%
Russell 2000 Total Return Index+*** (2.55)% 11.86% 12.39%
MSCI All Country World Index++**** 21.72% 14.48% 15.52%
Average global flexible fund++ 14.46% 11.98% 13.44%
------
* For the period from the series, commencement of investment operations
on December 1, 1993, through December 31, 1998.
+ Source: CDA/Wiesenberger, Inc.
++ Source: Lipper Analytical Services, Inc.
** The Standard & Poor's 500 Composite Index is a broad-based, popular,
unmanaged index of common stock total return performance.
*** The Russell 2000 Total Return Index is a broad-based, unmanaged index
comprised of 2,000 of the smallest U.S.-domiciled company common
stocks (on the basis of capitalization) that are traded in the United
States on the New York Stock Exchange, the American Stock Exchange
and NASDAQ.
**** The Morgan Stanley Capital International (MSCI) All Country World
Index is a broad, unmanaged index of global equities.
<PAGE>
9: GLOBAL TOTAL RETURN SERIES
...........................................................................
o INVESTMENT OBJECTIVE
The series will seek total return by investing in securities which will
provide above-average income (compared to a portfolio invested entirely in
equity securities) and opportunities for long-term growth of capital and
income. The series' objective may be changed without shareholder approval.
Prior to May 1, 1999, this series was known as World Total Return Series.
o PRINCIPAL INVESTMENT STRATEGIES
The series is a "global balanced fund," and invests in a combination of
global equity and fixed income securities. Under normal market conditions,
the series invests:
o At least 40%, but not more than 75%, of its net assets in equity
securities, which may include common stocks and related securities such as
preferred stock, warrants or rights convertible into stock, and depositary
receipts for those securities.
o At least 25% of its net assets in fixed income securities.
The series may vary the percentage of its assets invested in any one type
of security (within the limits described above) in accordance with MFS'
interpretation of economic and money market conditions, fiscal and
monetary policy and underlying security values. The series may also vary
the percentage of its assets issued abroad and denominated in foreign
currencies in accordance with MFS' view 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 market
conditions, the series invests in at least three different countries, one
of which is the U.S. The series is a non-diversified mutual fund. This
means that the series may invest a relatively high percentage of its
assets in a small number of issuers.
FOREIGN INVESTMENTS. The series invests in foreign securities such as:
o Equity securities of foreign companies.
o Fixed income securities of foreign companies.
o Fixed income securities issued by foreign governments, which are:
> issued, guaranteed or supported as to payment of principal and interest
by foreign governments, foreign government agencies, foreign semi-
governmental entities, or supra- national entities, or
> interests issued by entities organized and operated for the purpose of
restructuring the investment characteristics of foreign government
securities.
o Brady Bonds, which are long-term bonds issued as part of a restructuring
of defaulted commercial loans to emerging market countries.
EQUITY INVESTMENTS. The series' equity investments include securities of
both non-U.S. and U.S. issuers. With respect to U.S. issuers, the series
focuses on those companies that have the potential to derive a meaningful
portion of their revenues and earnings in foreign markets. In managing the
series, MFS seeks to purchase securities of well-known and established
companies. MFS looks particularly for equity securities issued by
companies with relatively large market capitalizations and which have:
o steady earnings with a predictable growth rate, and
o attractive valuations based on current and expected earnings or cash flow.
MFS uses a bottom-up, as opposed to a top-down, investment style in
managing the equity-oriented funds (such as the equity portion of the
series) it advises. This means that securities are selected based upon
fundamental analysis performed by the series' portfolio manager and MFS'
large group of equity research analysts.
FIXED INCOME INVESTMENTS. The series invests in securities which pay a
fixed interest rate, which include:
o Securities issued by foreign governments, as described under "Foreign
Investments," above.
o U.S. Government securities, which are bonds or other debt obligations
issued by, or whose principal and interest payments are guaranteed or
supported by, the U.S. Government or one of its agencies or
instrumentalities.
o Corporate bonds, which are bonds or other debt obligations issued by
corporations or similar entities, including foreign corporations.
o Mortgage-backed and asset-backed securities, which represent interests in
a pool of assets such as mortgage loans, car loan receivables, or credit
card receivables. These investments entitle the series to a share of the
principal and interest payments made on the underlying mortgage, car loan,
or credit card. For example, if the series invests in a pool that includes
your mortgage loan, a share of the principal and interest payments on your
mortgage would pass to the series.
In selecting fixed income investments for the series, MFS considers the
views of its large group of fixed income portfolio managers and research
analysts. This group periodically assesses the three-month total return
outlook for various segments of the fixed income markets. This three-month
"horizon" outlook is used by the portfolio manager}s{ of MFS' fixed income
oriented funds (including the fixed income portion of the series) as a
tool in making or adjusting the series' asset allocations to these various
segments of the fixed income markets. In assessing the credit quality of
fixed income securities, MFS does not rely solely on the credit ratings
assigned by credit rating agencies, but rather performs its own
independent credit analysis.
o PRINCIPAL RISKS OF AN INVESTMENT
The principal risks of investing in the series and the circumstances
reasonably likely to cause the value of your investment in the series to
decline are described below. As with any non-money market mutual fund, the
share price of the series will change daily based on market conditions and
other factors. Please note that there are many circumstances which could
cause the value of your investment in the series to decline, and which
could prevent the series from achieving its objective, that are not
described here.
The principal risks of investing in the series are:
o Allocation Risk: The series will allocate its investments between equity
and fixed income securities, and among various segments of the fixed
income markets, and among different countries based upon judgments made by
MFS. The series could miss attractive investment opportunities by
underweighting markets where there are significant returns, and could lose
value by overweighting markets where there are significant declines.
o Foreign Securities: Investments in foreign securities involve risks
relating to political, social and economic developments abroad, as well as
risks resulting from the differences between the regulations to which U.S.
and foreign issuers and markets are subject:
> These risks may include the seizure by the government of company assets,
excessive taxation, withholding taxes on dividends and interest,
limitations on the use or transfer of portfolio assets, and political or
social instability.
> Enforcing legal rights may be difficult, costly and slow in foreign
countries, and there may be special problems enforcing claims against
foreign governments.
> Foreign companies may not be subject to accounting standards or
governmental supervision comparable to U.S. companies, and there may be
less public information about their operations.
> Foreign markets may be less liquid and more volatile than U.S. markets.
> Foreign securities often trade in currencies other than the U.S. dollar,
and the series may directly hold foreign currencies and purchase and
sell foreign currencies through forward exchange contracts. Changes in
currency exchange rates will affect the series' net asset value, the
value of dividends and interest earned, and gains and losses realized on
the sale of securities. An increase in the strength of the U.S. dollar
relative to these other currencies may cause the value of the series to
decline. Certain foreign currencies may be particularly volatile, and
foreign governments may intervene in the currency markets, causing a
decline in value or liquidity in the series' foreign currency holdings.
By entering into forward foreign currency exchange contracts, the series
may be required to forego the benefits of advantageous changes in
exchange rates and, in the case of forward contracts entered into for
the purpose of increasing return, the series may sustain losses which
will reduce its gross income. Forward foreign currency exchange
contracts involve the risk that the party with which the series enters
the contract may fail to perform its obligations to the series.
o Market Risk: This is the risk that the price of a security held by the
series will fall due to changing economic, political or market conditions
or disappointing earnings results.
o Company Risk: Prices of securities react to the economic condition of the
company that issued the security. The series' equity investments in an
issuer may rise and fall based on the issuer's actual and anticipated
earnings, changes in management and the potential for takeovers and
acquisitions.
o Interest Rate Risk: When interest rates rise, the prices of fixed income
securities in the series' portfolio will generally fall. Conversely, when
interest rates fall, the prices of fixed income securities in the series'
portfolio will generally rise.
o Maturity Risk: Interest rate risk will affect the price of a fixed income
security more if the security has a longer maturity. Fixed income
securities with longer maturities will therefore be more volatile than
other fixed income securities with shorter maturities. Conversely, fixed
income securities with shorter maturities will be less volatile but
generally provide lower returns than fixed income securities with longer
maturities. The average maturity of the series' fixed income investments
will affect the volatility of the series' share price.
o Credit Risk: Credit risk is the risk that the issuer of a fixed income
security will not be able to pay principal and interest when due. Rating
agencies assign credit ratings to certain fixed income securities to
indicate their credit risk. The price of a fixed income security will
generally fall if the issuer defaults on its obligation to pay principal
or interest, the rating agencies downgrade the issuer's credit rating or
other news affects the market's perception of the issuer's credit risk.
o Liquidity Risk: The fixed income securities purchased by the series may be
traded in the over-the-counter market rather than on an organized exchange
and are subject to liquidity risk. This means that they may be harder to
purchase or sell at a fair price. The inability to purchase or sell these
fixed income securities at a fair price could have a negative impact on
the series' performance.
o Mortgage and Asset-Backed Securities:
> Maturity Risk:
+ Mortgage-Backed Securities: A mortgage-backed security will mature
when all the mortgages in the pool mature or are prepaid.
Therefore, mortgage-backed securities do not have a fixed
maturity, and their expected maturities may vary when interest
rates rise or fall.
* When interest rates fall, homeowners are more likely to prepay their
mortgage loans. An increased rate of prepayments on the series'
mortgage-backed securities will result in an unforeseen loss of
interest income to the series as the series may be required to
reinvest assets at a lower interest rate. Because prepayments
increase when interest rates fall, the price of mortgage-backed
securities does not increase as much as other fixed income
securities when interest rates fall.
* When interest rates rise, homeowners are less likely to prepay their
mortgage loans. A decreased rate of prepayments lengthens the
expected maturity of a mortgage-backed security. Therefore, the
prices of mortgage-backed securities may decrease more than prices
of other fixed income securities when interest rates rise.
+ Collateralized Mortgage Obligations: The series may invest in
mortgage-backed securities called collateralized mortgage obligations
(CMOs). CMOs are issued in separate classes with different stated
maturities. As the mortgage pool experiences prepayments, the pool
pays off investors in classes with shorter maturities first. By
investing in CMOs, the series may manage the prepayment risk of
mortgage-backed securities. However, prepayments may cause the actual
maturity of a CMO to be substantially shorter than its stated
maturity.
+ Asset-Backed Securities: Asset-backed securities have prepayment risks
similar to mortgage-backed securities.
> Credit Risk: As with any fixed income security, mortgage-backed and
asset-backed securities are subject to the risk of default on principal
and interest payments. It may be difficult to enforce rights against the
assets underlying mortgage- backed and asset-backed securities in the
case of default. The U.S. Government or its agencies may guarantee the
payment of principal and interest on some mortgage-backed securities.
Mortgage-backed securities and asset-backed securities issued by private
lending institutions or other financial intermediaries may be supported
by insurance or other forms of guarantees.
o Non-Diversified Status Risk: Because the series may invest its assets in a
small number of issuers, the series is more susceptible to any single
economic, political or regulatory event affecting those issuers than is a
diversified fund.
o As with any mutual fund, you could lose money on your investment in the
series.
An investment in the series is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the series by showing changes in the series'
performance over time. The performance table also shows how the series'
performance over time compares with that of one or more broad measures of
market performance. The chart and table provide past performance
information. The series' past performance does not necessarily indicate
how the series will perform in the future. The returns shown do not
reflect fees and charges imposed under the Variable Contracts through
which an investment is made. If these fees and charges were included, they
would reduce these returns.
BAR CHART
The bar chart shows changes in the annual total returns of the series
shares for each calendar year since they were first offered, assuming the
reinvestment of distributions.
1995 17.89%
1996 14.33%
1997 13.61%
1998 18.37%
During the period shown in the bar chart the highest quarterly return was
10.15% (for the calendar quarter ended December 31, 1998) and the lowest
quarterly return was (3.21)% (for the calendar quarter ended September 30,
1998).
PERFORMANCE TABLE
This table shows how the average annual total returns of the series shares
compares to a broad measure of market performance and various other market
indicators and assumes the reinvestment of distributions.
Average Annual Total Returns as of December 31, 1998
..........................................................................
1 Year Life
Global Total Return Series 18.37% 15.53%*
60% MSCI World Index/40% J.P. Morgan
Global Government Bond Index+** 21.00% 15.10%
Lipper Global Flexible Fund Index+*** 8.99% 12.95%
Average global flexible fund+ 10.61% 12.95%
------
* For the period from the series' commencement of investment operations
on November 7, 1994, through December 31, 1998.
+ Source: Lipper Analytical Services, Inc. "Life" refers to the period
from December 1, 1994 through December 31, 1998.
** The Morgan Stanley Capital International (MSCI) World Index is a
broad-based, unmanaged market-capitalization-weighted, total return
index which measures the performance of 23 developed-country global
stock markets including the United States, Canada, Europe, Australia,
New Zealand, and the Far East. The J.P. Morgan Global Government Bond
Index is a broad-based, unmanaged aggregate of actively traded
government bonds issued from 13 countries (including the United
States) with remaining maturities of at least one year.
*** The Lipper Mutual Fund Indices are broad-based, unmanaged, net-asset-
value-weighted indices of the largest qualifying mutual funds within
their respective investment objectives, adjusted for the reinvestment
of capital gain distributions and income dividends.
<PAGE>
10: GOVERNMENT SECURITIES SERIES
..............................................................................
o INVESTMENT OBJECTIVE
The series will seek current income and preservation of capital by
investing in U.S. Government and U.S. Government-related securities. The
series' objective may be changed without shareholder approval.
o PRINCIPAL INVESTMENT STRATEGIES
The series invests, under normal market conditions, at least 80% of its
total assets in U.S. Government securities. These securities include:
o 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 U.S. Government.
o Obligations issued, guaranteed or supported by U.S. Government agencies,
authorities or instrumentalities (including mortgage-backed securities and
collateralized mortgage obligations), some of which are
> backed by the full faith and credit of the U.S. Treasury; for example,
direct pass-through certificates of the Government National Mortgage
Association;
> supported by the right of the issuer to borrow from the U.S.
Government; for example, obligations of Federal Home Loan Banks;
> backed only by the credit of the issuer itself; for example,
obligations of the Student Loan Marketing association; and
> supported by the discretionary authority of the U.S. Government to
purchase the agency's obligations; for example, obligations of the
Federal National Mortgage Association (no assurance can be given that
the U.S. Government will provide financial support to these entities
because it is not obligated by law, in certain instances, to do so).
In selecting fixed income investments for the series, MFS considers the
views of its large group of fixed income portfolio managers and research
analysts. This group periodically assesses the three-month total return
outlook for various segments of the fixed income markets. This three-month
"horizon" outlook is used by the portfolio manager}s{ of MFS' fixed income
oriented funds (including the series) as a tool in making or adjusting a
series' asset allocations to various segments of the fixed income markets.
o PRINCIPAL RISKS OF AN INVESTMENT
The principal risks of investing in the series and the circumstances
reasonably likely to cause the value of your investment in the series to
decline are described below. As with any non-money market mutual fund, the
share price of the series will change daily based on market conditions and
other factors. Please note that there are many circumstances which could
cause the value of your investment in the series to decline, and which
could prevent the series from achieving its objective, that are not
described here.
The principal risks of investing in the series are:
o Interest Rate Risk: When interest rates rise, the prices of fixed income
securities in the series' portfolio will generally fall. Conversely, when
interest rates fall, the prices of fixed income securities in the series'
portfolio will generally rise.
o Maturity Risk: Interest rate risk will generally affect the price of a
fixed income security more if the security has a longer maturity. Fixed
income securities with longer maturities will therefore be more volatile
than other fixed income securities with shorter maturities. Conversely,
fixed income securities with shorter maturities will be less volatile but
generally provide lower returns than fixed income securities with longer
maturities. The average maturity of the series' fixed income investments
will affect the volatility of the series' share price.
o Mortgage-Backed Securities and Collateralized Mortgage Obligations:
> Maturity Risk:
+ Mortgage-Backed Securities: A mortgage-backed security will mature
when all the mortgages in the pool mature or are prepaid.
Therefore, mortgage-backed securities do not have a fixed
maturity, and their expected maturities may vary when interest
rates rise or fall.
o When interest rates fall, homeowners are more likely to prepay
their mortgage loans. An increased rate of prepayments on the
series' mortgage-backed securities will result in an unforeseen
loss of interest income to the series as the series may be
required to reinvest assets at a lower interest rate. Because
prepayments increase when interest rates fall, the price of
mortgage-backed securities does not increase as much as other
fixed income securities when interest rates fall.
o When interest rates rise, homeowners are less likely to prepay
their mortgage loans. A decreased rate of prepayments lengthens
the expected maturity of a mortgage-backed security. Therefore,
the prices of mortgage-backed securities may decrease more than
prices of other fixed income securities when interest rates
rise.
+ Collateralized Mortgage Obligations: The series may invest in
mortgage-backed securities called collateralized mortgage
obligations (CMOs). CMOs are issued in separate classes with
different stated maturities. As the mortgage pool experiences
prepayments, the pool pays off investors in classes with shorter
maturities first. By investing in CMOs, the series may manage the
prepayment risk of mortgage-backed securities. However, prepayments
may cause the actual maturity of a CMO to be substantially shorter
than its stated maturity.
> Credit Risk: As with any fixed income security, mortgage-backed
securities are subject to the risk that the issuer will default on
principal and interest payments. It may be difficult to enforce rights
against the assets underlying mortgage-backed securities in the case
of default. However, the U.S. Government or its agencies will
guarantee the payment of principal and interest on the mortgage-backed
securities purchased by the series.
o As with any mutual fund, you could lose money on your investment in the
series.
An investment in the series is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the series by showing changes in the series'
performance over time. The performance table also shows how the series'
performance over time compares with that of a broad measure of market
performance. The chart and table provide past performance information. The
series' past performance does not necessarily indicate how the series will
perform in the future. The returns shown do not reflect fees and charges
imposed under the Variable Contracts through which an investment is made.
If these fees and charges were included, they would reduce these returns.
BAR CHART
The bar chart shows changes in the annual total returns of the series
shares for each calendar year for the past ten years, assuming the
reinvestment of distributions.
1989 12.83%
1990 8.92%
1991 15.81%
1992 6.81%
1993 8.70%
1994 (2.21)%
1995 17.66%
1996 1.65%
1997 8.72%
1998 8.70%
- ----------
During the period shown in the bar chart the highest quarterly return was
6.78% (for the calendar quarter ended June 30, 1989) and the lowest
quarterly return was (2.60)% (for the calendar quarter ended March 31,
1994).
PERFORMANCE TABLE
This table shows how the average annual total returns of the series shares
compares to a broad measure of market performance and assumes the
reinvestment of distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
............................................................................
1 Year 5 Years 10 Years
Government Securities Series 8.70% 6.69% 8.61%
Lehman Brothers Government/Mortgage Index+* 8.72% 7.18% 9.13%
- ----------
+ Source: Lipper Analytical Services, Inc.
* The Lehman Brothers Government/Mortgage Index is a broad-based, unmanaged
index of U.S. Treasury, government-agency and mortgage-backed securities.
<PAGE>
11: HIGH YIELD SERIES
............................................................................
o INVESTMENT OBJECTIVE
The 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.
The series' objective may be changed without shareholder approval.
o PRINCIPAL INVESTMENT STRATEGIES
The series invests, under normal market conditions, at least 80% of its
total assets in high income fixed income securities. Fixed income
securities offering the high current income sought by the series generally
are lower rated bonds. These bonds, commonly known as junk bonds, are
assigned lower credit ratings by credit rating agencies or are unrated and
considered by MFS to be comparable to lower rated bonds.
While the series focuses its investments on bonds issued by corporations
or similar entities, it may invest in all types of debt securities.
Consistent with the series' principal investment strategies described
above, the series may invest in foreign securities (including emerging
market securities), and may have exposure to foreign currencies through
its investment in these securities.
In selecting fixed income investments for the series, MFS considers the
views of its large group of fixed income portfolio managers and research
analysts. This group periodically assesses the three-month total return
outlook for various segments of the fixed income markets. This three-month
"horizon" outlook is used by the portfolio manager}s{ of MFS' fixed income
oriented funds (including the series) as a tool in making or adjusting a
series' asset allocations to various segments of the fixed income markets.
In assessing the credit quality of fixed income securities, MFS does not
rely solely on the credit ratings assigned by credit rating agencies, but
rather performs its own independent credit analysis.
The series is a non-diversified mutual fund. This means that the series
may invest a relatively high percentage of its assets in a small number of
issuers.
o PRINCIPAL RISKS OF AN INVESTMENT
The principal risks of investing in the series and the circumstances
reasonably likely to cause the value of your investment in the series to
decline are described below. As with any non-money market mutual fund, the
share price of the series will change daily based on market conditions and
other factors. Please note that there are many circumstances which could
cause the value of your investment in the series to decline, and which
could prevent the series from achieving its objective, that are not
described here.
The principal risks of investing in the series are:
o Allocation Risk: The series will allocate its investments among fixed
income markets based upon judgments made by MFS. The series could miss
attractive investment opportunities by underweighting markets where there
are significant returns, and could lose value by overweighting markets
where there are significant declines.
o Interest Rate Risk: When interest rates rise, the prices of fixed income
securities in the series' portfolio will generally fall. Conversely, when
interest rates fall, the prices of fixed income securities in the series'
portfolio will generally rise.
o Maturity Risk: Interest rate risk will generally affect the price of a
fixed income security more if the security has a longer maturity. Fixed
income securities with longer maturities will therefore be more volatile
than other fixed income securities with shorter maturities. Conversely,
fixed income securities with shorter maturities will be less volatile but
generally provide lower returns than fixed income securities with longer
maturities. The average maturity of the series' fixed income investments
will affect the volatility of the series' share price.
o Credit Risk: Credit risk is the risk that the issuer of a fixed income
security will not be able to pay principal and interest when due. Rating
agencies assign credit ratings to certain fixed income securities to
indicate their credit risk. The price of a fixed income security will
generally fall if the issuer defaults on its obligation to pay principal
or interest, the rating agencies downgrade the issuer's credit rating or
other news affects the market's perception of the issuer's credit risk.
o Liquidity Risk: The fixed income securities purchased by the series may be
traded in the over-the-counter market rather than on an organized exchange
and are subject to liquidity risk. This means that they may be harder to
purchase or sell at a fair price. The inability to purchase or sell these
fixed income securities at a fair price could have a negative impact on
the series' performance.
o Junk Bond Risk:
> Higher Credit Risk: Junk bonds are subject to a substantially higher
degree of credit risk than higher rated bonds. During recessions, a high
percentage of issuers of junk bonds may default on payments of principal
and interest. The price of a junk bond may therefore fluctuate
drastically due to bad news about the issuer or the economy in general.
> Higher Liquidity Risk: During recessions and periods of broad market
declines, junk bonds could become less liquid, meaning that they will be
harder to value or sell at a fair price.
o Foreign Securities: Investments in foreign securities involve risks
relating to political, social and economic developments abroad, as well as
risks resulting from the differences between the regulations to which U.S.
and foreign issuers and markets are subject:
> These risks may include the seizure by the government of company
assets, excessive taxation, withholding taxes on dividends and
interest, limitations on the use or transfer of portfolio assets, and
political or social instability.
> Enforcing legal rights may be difficult, costly and slow in foreign
countries, and there may be special problems enforcing claims against
foreign governments.
> Foreign companies may not be subject to accounting standards or
governmental supervision comparable to U.S. companies, and there may
be less public information about their operations.
> Foreign markets may be less liquid and more volatile than U.S.
markets.
> Foreign securities often trade in currencies other than the U.S.
dollar, and the series may directly hold foreign currencies and
purchase and sell foreign currencies through forward exchange
contracts. Changes in currency exchange rates will affect the series'
net asset value, the value of dividends and interest earned, and gains
and losses realized on the sale of securities. An increase in the
strength of the U.S. dollar relative to these other currencies may
cause the value of the series to decline. Certain foreign currencies
may be particularly volatile, and foreign governments may intervene in
the currency markets, causing a decline in value or liquidity in the
series' foreign currency holdings. By entering into forward foreign
currency exchange contracts, the series may be required to forego the
benefits of advantageous changes in exchange rates and, in the case of
forward contracts entered into for the purpose of increasing return,
the series may sustain losses which will reduce its gross income.
Forward foreign currency exchange contracts involve the risk that the
party with which the series enters the contract may fail to perform
its obligations to the series.
o Non-Diversified Status Risk: Because the series may invest a higher
percentage of its assets in a small number of issuers, the series is more
susceptible to any single economic, political or regulatory event
affecting those issuers than is a diversified fund.
o As with any mutual fund, you could lose money on your investment in the
series.
An investment in the series is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the series by showing changes in the series'
performance over time. The performance table also shows how the series'
performance over time compares with that of one or more broad measures of
market performance. The chart and table provide past performance
information. The series' past performance does not necessarily indicate
how the series will perform in the future. The returns shown do not
reflect fees and charges imposed under the Variable Contracts through
which an investment is made. If these fees and charges were included, they
would reduce these returns.
BAR CHART
The bar chart shows changes in the annual total returns of the series
shares for each calendar year for the past ten years, assuming the
reinvestment of distributions.
1989 (1.17)%
1990 (14.16)%
1991 47.47%
1992 14.99%
1993 17.68%
1994 (2.16)%
1995 16.93%
1996 12.12%
1997 13.24%
1998 0.58%
- ----------
During the period shown in the bar chart the highest quarterly return was
7.97% (for the calendar quarter ended September 30, 1991) and the lowest
quarterly return was (9.18)% (for the calendar quarter ended September 30,
1990).
PERFORMANCE TABLE
This table shows how the average annual total returns of the series shares
compares to a broad measure of market performance and various other market
indicators and assumes the reinvestment of distributions.
Average Annual Total Returns as of December 31, 1998
............................................................................
1 Year 5 Years 10 Years
High Yield Series 0.58% 7.88% 9.48%
Lehman Brothers High Yield Bond Index+* 1.60% 8.53% 10.52%
Average high yield fund+ (0.44)% 7.37% 9.34%
- ----------
+ Source: Lipper Analytical Services, Inc.
* The Lehman Brothers High Yield Bond Index is a broad-based, unmanaged index of
noninvestment-grade corporate debt.
<PAGE>
12: INTERNATIONAL GROWTH SERIES
..............................................................................
o INVESTMENT OBJECTIVE
The series will seek capital appreciation. The series' objective may be
changed without shareholder approval.
o PRINCIPAL INVESTMENT STRATEGIES
The series invests, under normal market conditions, at least 65% of its
total assets in common stocks and related securities, such as preferred
stock, convertible securities and depositary receipts, of foreign
(including emerging market) issuers. Under normal market conditions, the
series invests in at least three different countries. The series focuses
on companies that MFS believes have above average growth potential. While
the series may invest in companies of any size, the series generally
focuses on companies with larger market capitalizations. The series'
investments may include securities traded in the over-the-counter markets.
MFS uses a bottom-up, as opposed to a top-down, investment style in
managing the equity-oriented funds (such as the series) it advises. This
means that securities are selected based upon fundamental analysis
performed by the series' portfolio manager and MFS' large group of equity
research analysts.
Growth companies are companies that MFS considers well-run and poised for
growth. MFS looks particularly for companies which demonstrate:
o A strong franchise, strong cash flows and a recurring revenue stream.
o A solid industry position, where there is
> potential for high profit margins and
> substantial barriers to new entry in the industry.
o A strong management team with a clearly defined strategy.
o A catalyst that may accelerate growth.
o PRINCIPAL RISKS OF AN INVESTMENT
The principal risks of investing in the series and the circumstances
reasonably likely to cause the value of your investment in the series to
decline are described below. As with any non-money market mutual fund, the
share price of the series will change daily based on market conditions and
other factors. Please note that there are many circumstances which could
cause the value of your investment in the series to decline, and which
could prevent the series from achieving its objective, that are not
described here.
The principal risks of investing in the series are:
o Foreign Markets Risk: Investing in foreign securities involves risks
relating to political, social and economic developments abroad, as well as
risks resulting from the differences between the regulations to which U.S.
and foreign issuers and markets are subject:
> These risks may include the seizure by the government of company
assets, excessive taxation, withholding taxes on dividends and
interest, limitations on the use or transfer of portfolio assets, and
political or social instability.
> Enforcing legal rights may be difficult, costly and slow in foreign
countries, and there may be special problems enforcing claims against
foreign governments.
> Foreign companies may not be subject to accounting standards or
governmental supervision comparable to U.S. companies, and there may
be less public information about their operations.
> Foreign markets may be less liquid and more volatile than U.S.
markets.
> Foreign securities often trade in currencies other than the U.S.
dollar, and the series may directly hold foreign currencies and
purchase and sell foreign currencies through forward exchange
contracts. Changes in currency exchange rates will affect the series'
net asset value, the value of dividends and interest earned, and gains
and losses realized on the sale of securities. An increase in the
strength of the U.S. dollar relative to these other currencies may
cause the value of the series to decline. Certain foreign currencies
may be particularly volatile, and foreign governments may intervene in
the currency markets, causing a decline in value or liquidity in the
series' foreign currency holdings. By entering into forward foreign
currency exchange contracts, the series may be required to forego the
benefits of advantageous changes in exchange rates and, in the case of
forward contracts entered into for the purpose of increasing return,
the series may sustain losses which will reduce its gross income.
Forward foreign currency exchange contracts involve the risk that the
party with which the series enters the contract may fail to perform
its obligations to the series.
o Emerging Markets Risk: Emerging markets are generally defined as countries
in the initial stages of their industrialization cycles with low per
capita income. Investments in emerging markets securities involve all of
the risks of investments in foreign securities, and also have additional
risks:
> All of the risks of investing in foreign securities are heightened by
investing in emerging markets countries.
> The markets of emerging markets countries have been more volatile than
the markets of developed countries with more mature economies. These
markets often have provided significantly higher or lower rates of
return than developed markets, and significantly greater risks, to
investors.
o Investment Focus: The series may invest a substantial amount of its assets
in issuers located in a single country or a limited number of countries.
If the series focuses its investments in this manner, it assumes the risk
that economic, political and social conditions in those countries will
have a significant impact on its investment performance. The series'
investment performance may also be more volatile if it focuses its
investments in certain countries, especially emerging market countries.
o Market Risk: This is the risk that the price of a security held by the
series will fall due to changing economic, political or market conditions
or disappointing earnings results.
o Company Risk: Prices of securities react to the economic condition of the
company that issued the security. The series' equity investments in an
issuer may rise and fall based on the issuer's actual and anticipated
earnings, changes in management and the potential for takeovers and
acquisitions.
o Growth Companies Risk: This is the risk that the prices of growth company
securities held by the series will fall to a greater extent than the
overall equity markets (e.g., as represented by the Morgan Stanley Capital
International (MSCI) EAFE (Europe, Australia, Far East Index)) due to
changing economic, political or market conditions or disappointing growth
company earnings results.
o Large Cap Companies Risk: Large cap companies tend to go in and out of
favor based on market and economic conditions. Large cap companies tend to
be less volatile than companies with smaller market capitalizations. In
exchange for this potentially lower risk, the series' value may not rise
as much as the value of funds that emphasize smaller cap companies.
o Over-the-Counter Risk: Over-the-counter (OTC) transactions involve risks
in addition to those associated with transactions in securities traded on
exchanges. OTC-listed companies may have limited product lines, markets or
financial resources. Many OTC stocks trade less frequently and in smaller
volume than exchange-listed stocks. The values of these stocks may be more
volatile than exchange-listed stocks, and the series may experience
difficulty in purchasing or selling these securities at a fair price.
o As with any mutual fund, you could lose money on your investment in the
series.
An investment in the series is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the series by showing changes in the series'
performance over time. The performance table also shows how the series'
performance over time compares with that of one or more broad measures of
market performance. The chart and table provide past performance
information. The series' past performance does not necessarily indicate
how the series will perform in the future. The returns shown do not
reflect fees and charges imposed under the Variable Contracts through
which an investment is made. If these fees and charges were included, they
would reduce these returns.
BAR CHART
The bar chart shows changes in the annual total returns of the series
shares for each calendar year since they were first offered, assuming the
reinvestment of distributions.
1997 (1.64)%
1998 1.94%
----------
During the period shown in the bar chart the highest quarterly return was
13.65% (for the calendar quarter ended December 31, 1998) and the lowest
quarterly return was (17.27)% (for the calendar quarter ended September 30,
1998).
PERFORMANCE TABLE
This table shows how the average annual total returns of the series shares
compares to a broad measure of market performance and various other market
indicators and assumes the reinvestment of distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
............................................................................
1 Year Life
International Growth Series 1.94% (0.56)%*
MSCI EAFE Index+** 20.33% 9.26%
Lipper International Funds Index++*** 12.66% 10.11%
- ----------
* For the period from the series' commencement of investment operations on
June 3, 1996, through December 31, 1998.
+ Source: CDA/Wiesenberger, Inc. "Life" refers to the period from July 1, 1996
through December 31, 1998.
++ Source: Lipper Analytical Services, Inc. "Life" refers to the period from
July 1, 1996 through December 31, 1998.
** The Morgan Stanley Capital International (MSCI) EAFE (Europe, Australia, Far
East) Index is a broad-based, unmanaged, market-capitalization-weighted,
total return index which measures the performance of the same
developed-country global stock markets included in the MSCI World Index, but
excluding the United States, Canada, and the South African mining component.
*** The Lipper Mutual Fund Indices are broad-based, unmanaged,
net-asset-value-weighted indices of the largest qualifying mutual funds
within their respective investment objectives, adjusted for the reinvestment
of capital gain distributions and income dividends.
<PAGE>
13: INTERNATIONAL GROWTH AND INCOME SERIES
............................................................................
o INVESTMENT OBJECTIVE
The series will seek capital appreciation and current income. The series'
objectives may be changed without shareholder approval.
o PRINCIPAL INVESTMENT STRATEGIES
The series invests, under normal market conditions, at least 65% of its
total assets in equity securities of foreign companies with market
capitalizations of at least $5 billion. Equity securities include common
stocks and related securities, such as preferred stock, convertible
securities and depositary receipts. Under normal market conditions, the
series invests in at least three different countries. The series focuses
on foreign companies that MFS believes have sustainable growth prospects
and attractive valuations based on current and expected earnings or cash
flow.
MFS uses a bottom-up, as opposed to a top-down, investment style in
managing the equity-oriented funds (such as the series) it advises. This
means that securities are selected based upon fundamental analysis
performed by the portfolio manager and MFS' large group of equity research
analysts.
o PRINCIPAL RISKS OF AN INVESTMENT
The principal risks of investing in the series and the circumstances
reasonably likely to cause the value of your investment in the series to
decline are described below. As with any non-money market mutual fund, the
share price of the series will change daily based on market conditions and
other factors. Please note that there are many circumstances which could
cause the value of your investment in the series to decline, and which
could prevent the series from achieving its objectives, that are not
described here.
The principal risks of investing in the series are:
o Foreign Markets Risk: Investing in foreign securities involves risks
relating to political, social and economic developments abroad, as well as
risks resulting from the differences between the regulations to which U.S.
and foreign issuers and markets are subject:
> These risks may include the seizure by the government of company
assets, excessive taxation, withholding taxes on dividends and
interest, limitations on the use or transfer of portfolio assets, and
political or social instability.
> Enforcing legal rights may be difficult, costly and slow in foreign
countries, and there may be special problems enforcing claims against
foreign governments.
> Foreign companies may not be subject to accounting standards or
governmental supervision comparable to U.S. companies, and there may
be less public information about their operations.
> Foreign markets may be less liquid and more volatile than U.S.
markets.
> Foreign securities often trade in currencies other than the U.S.
dollar, and the series may directly hold foreign currencies and
purchase and sell foreign currencies through forward exchange
contracts. Changes in currency exchange rates will affect the series'
net asset value, the value of dividends and interest earned, and gains
and losses realized on the sale of securities. An increase in the
strength of the U.S. dollar relative to these other currencies may
cause the value of the series to decline. Certain foreign currencies
may be particularly volatile, and foreign governments may intervene in
the currency markets, causing a decline in value or liquidity in the
series' foreign currency holdings. By entering into forward foreign
currency exchange contracts, the series may be required to forego the
benefits of advantageous changes in exchange rates and, in the case of
forward contracts entered into for the purpose of increasing return,
the series may sustain losses which will reduce its gross income.
Forward foreign currency exchange contracts involve the risk that the
party with which the series enters the contract may fail to perform
its obligations to the series.
o Investment Focus: The series may invest a substantial amount of its assets
in issuers located in a single country or a limited number of countries.
If the series focuses its investments in this manner, it assumes the risk
that economic, political and social conditions in those countries will
have a significant impact on its investment performance. The series'
investment performance may also be more volatile if it focuses its
investments in certain countries, especially emerging market countries.
o Market Risk: This is the risk that the price of a security held by the
series will fall due to changing economic, political or market conditions
or disappointing earnings results.
o Company Risk: Prices of securities react to the economic condition of the
company that issued the security. The series' equity investments in an
issuer may rise and fall based on the issuer's actual and anticipated
earnings, changes in management and the potential for takeovers and
acquisitions.
o Large Cap Companies Risk: Large cap companies tend to go in and out of
favor based on market and economic conditions. Large cap companies tend to
be less volatile than companies with smaller market capitalizations. In
exchange for this potentially lower risk, the series' value may not rise
as much as the value of funds that emphasize smaller cap companies.
o As with any mutual fund, you could lose money on your investment in the
series.
An investment in the series is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the series by showing changes in the series'
performance over time. The performance table also shows how the series'
performance over time compares with that of one or more broad measures of
market performance. The chart and table provide past performance
information. The series' past performance does not necessarily indicate
how the series will perform in the future. The returns shown do not
reflect fees and charges imposed under the Variable Contracts through
which an investment is made. If these fees and charges were included, they
would reduce these returns.
o BAR CHART
The bar chart shows changes in the annual total returns of the series
shares for each calendar year since they were first offered, assuming the
reinvestment of distributions.
1996 4.84%
1997 6.53%
1998 21.68%
----------
During the period shown in the bar chart the highest quarterly return was
16.56% (for the calendar quarter ended March 31, 1998) and the lowest
quarterly return was (11.87)% (for the calendar quarter ended September
30, 1998).
PERFORMANCE TABLE
This table shows how the average annual total returns of the series shares
compares to a broad measure of market performance and various other market
indicators and assumes the reinvestment of distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
............................................................................
1 Year Life
International Growth and Income Series 21.68% 10.35%*
MSCI EAFE Index+** 20.33% 11.14%
Lipper International Funds Index++*** 12.66% 12.13%
- ----------
* For the period from the series' commencement of investment operations on
October 2, 1995, through December 31, 1998.
+ Source: CDA/Wiesenberger, Inc. "Life" refers to the period from November 1,
1995 through December 31, 1998.
++ Source: Lipper Analytical Services, Inc. "Life" refers to the period from
November 1, 1995 through December 31, 1998.
** The Morgan Stanley Capital International (MSCI) EAFE (Europe, Australia, Far
East) Index is a broad-based, unmanaged, market- capitalization-weighted,
total return index which measures the performance of the same
developed-country global stock markets included in the MSCI World Index, but
excluding the United States, Canada, and the South African mining component.
*** The Lipper Mutual Fund Indices are broad-based, unmanaged, net-asset-
value-weighted indices of the largest qualifying mutual funds within their
respective investment objectives, adjusted for the reinvestment of capital
gain distributions and income dividends.
<PAGE>
14: MANAGED SECTORS SERIES
............................................................................
o INVESTMENT OBJECTIVE
The series will seek capital appreciation by varying the weighting of its
portfolio among 13 industry sectors. The series' objective may be changed
without shareholder approval.
o PRINCIPAL INVESTMENT STRATEGIES
The series invests, under normal market conditions, at least 65% of its
total assets in common stocks and related securities, such as preferred
stock, convertible securities and depositary receipts of companies in 13
equity sectors. The 13 sectors from among which the 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 securities. The series generally focuses on four or
five sectors at any one time, and may invest a maximum of 50% of its net
assets in any one sector. The series adds or eliminates a sector from its
portfolio based on considerations of the sector's economic cycle and
sensitivity to interest rates. The series' investments may include
securities traded in the over-the-counter markets.
Consistent with the series' principal investment strategies described
above, the series may invest in foreign securities (including emerging
market securities), and may have exposure to foreign currencies through
its investment in these securities.
The series is a non-diversified mutual fund. This means that the series
may invest a relatively high percentage of its assets in a small number of
issuers.
o PRINCIPAL RISKS OF AN INVESTMENT
The principal risks of investing in the series and the circumstances
reasonably likely to cause the value of your investment in the series to
decline are described below. As with any non-money market mutual fund, the
share price of the series will change daily based on market conditions and
other factors. Please note that there are many circumstances which could
cause the value of your investment in the series to decline, and which
could prevent the series from achieving its objective, that are not
described here.
The principal risks of investing in the series are:
o Market Risk: This is the risk that the price of a security held by the
series will fall due to changing economic, political or market conditions
or disappointing earnings results.
o Company Risk: Prices of securities react to the economic condition of the
company that issued the security. The series' equity investments in an
issuer may rise and fall based on the issuer's actual and anticipated
earnings, changes in management and the potential for takeovers and
acquisitions.
o Allocation Risk: The series will allocate its investments among various
equity sectors, based upon judgments made by MFS. The series could miss
attractive investment opportunities by underweighting sectors where there
are significant returns, and could lose value by overweighting sectors
where there are significant declines.
o Investment Focus Risk: Because the series may invest to a significant
degree in securities of companies in a limited number of sectors, the
series' performance is particularly sensitive to changes in the value of
securities in these sectors. A decline in the value of these types of
securities may result in a decline in the series' net asset value and your
investment.
o Over-the-Counter Risk: Over-the-counter (OTC) transactions involve risks
in addition to those associated with transactions in securities traded on
exchanges. OTC-listed companies may have limited product lines, markets or
financial resources. Many OTC stocks trade less frequently and in smaller
volume than exchange-listed stocks. The values of these stocks may be more
volatile than exchange-listed stocks, and the series may experience
difficulty in establishing or closing out positions in these stocks at
prevailing market prices.
o Foreign Securities Risk: Investments in foreign securities involve risks
relating to political, social and economic developments abroad, as well as
risks resulting from the differences between the regulations to which U.S.
and foreign issuers and markets are subject:
> These risks may include the seizure by the government of company
assets, excessive taxation, withholding taxes on dividends and
interest, limitations on the use or transfer of portfolio assets, and
political or social instability.
> Enforcing legal rights may be difficult, costly and slow in foreign
countries, and there may be special problems enforcing claims against
foreign governments.
> Foreign companies may not be subject to accounting standards or
governmental supervision comparable to U.S. companies, and there may
be less public information about their operations.
> Foreign markets may be less liquid and more volatile than U.S.
markets.
> Foreign securities often trade in currencies other than the U.S.
dollar, and the series may directly hold foreign currencies and
purchase and sell foreign currencies through forward exchange
contracts. Changes in currency exchange rates will affect the series'
net asset value, the value of dividends and interest earned, and gains
and losses realized on the sale of securities. An increase in the
strength of the U.S. dollar relative to these other currencies may
cause the value of the series to decline. Certain foreign currencies
may be particularly volatile, and foreign governments may intervene in
the currency markets, causing a decline in value or liquidity in the
series' foreign currency holdings. By entering into forward foreign
currency exchange contracts, the series may be required to forego the
benefits of advantageous changes in exchange rates and, in the case of
forward contracts entered into for the purpose of increasing return,
the series may sustain losses which will reduce its gross income.
Forward foreign currency exchange contracts involve the risk that the
party with which the series enters the contract may fail to perform
its obligations to the series.
o Non-Diversified Status Risk: Because the series may invest its assets in a
small number of issuers, the series is more susceptible to any single
economic, political or regulatory event affecting those issuers than is a
diversified fund.
o As with any mutual fund, you could lose money on your investment in the
series.
An investment in the series is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the series by showing changes in the series'
performance over time. The performance table also shows how the series'
performance over time compares with that of one or more broad measures of
market performance. The chart and table provide past performance
information. The series' past performance does not necessarily indicate
how the series will perform in the future. The returns shown do not
reflect fees and charges imposed under the Variable Contracts through
which an investment is made. If these fees and charges were included, they
would reduce these returns.
BAR CHART
The bar chart shows changes in the annual total returns of the series
shares for each calendar year for the past ten years, assuming the
reinvestment of distributions.
1989 45.30%
1990 (10.50)%
1991 62.15%
1992 6.48%
1993 4.08%
1994 (1.94)%
1995 32.29%
1996 17.58%
1997 25.63%
1998 12.25%
During the period shown in the bar chart the highest quarterly return was
23.59% (for the calendar quarter ended December 31, 1998) and the lowest
quarterly return was (20.15)% (for the calendar quarter ended September
30, 1990).
PERFORMANCE TABLE
This table shows how the average annual total returns of the series shares
compares to a broad measure of market performance and various other market
indicators and assumes the reinvestment of distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
............................................................................
1 Year 5 Years 10 Years
Managed Sectors Series 12.25% 16.56% 17.53%
Standard & Poor's 500 Composite Index+* 28.58% 24.06% 19.21%
Lipper Capital Appreciation Fund Index++** 19.98% 16.26% 15.71%
- ----------
+ Source: CDA/Wiesenberger, Inc.
++ Source: Lipper Analytical Services, Inc.
* The Standard & Poor's 500 Composite Index is a broad-based, popular,
unmanaged index of common stock total return performance.
** The Lipper Mutual Fund Indices are broad-based, unmanaged, net-asset-
value-weighted indices of the largest qualifying mutual funds within their
respective investment objectives, adjusted for the reinvestment of capital
gain distributions and income dividends.
<PAGE>
15: MASSACHUSETTS INVESTORS GROWTH STOCK SERIES
............................................................................
o INVESTMENT OBJECTIVE
The series will seek to provide long-term growth of capital and future
income rather than current income. The series' objective may be changed
without shareholder approval.
o PRINCIPAL INVESTMENT STRATEGIES
The series invests, under normal market conditions, at least 80% of its
total assets in common stocks and related securities, such as preferred
stocks, convertible securities and depositary receipts for those
securities, of companies which MFS believes offer better than average
prospects for long-term growth.
MFS uses a bottom-up, as opposed to a top-down, investment style in
managing the equity-oriented funds (such as the series) it advises. This
means that securities are selected based upon fundamental analysis
performed by the series' portfolio manager and MFS' large group of equity
research analysts.
In managing the series, MFS seeks to purchase securities of companies
which MFS considers well-run and poised for growth. MFS looks particularly
for companies which demonstrate:
o A strong franchise, strong cash flows and a recurring revenue stream.
o A strong industry position, where there is
> potential for high profit margins
> substantial barriers to new entry in the industry.
o A strong management with a clearly defined strategy.
o New products or services.
Consistent with the series' principal investment strategies described
above, the series may invest in foreign securities (including emerging
market securities), and may have exposure to foreign currencies through
its investment in these securities.
o PRINCIPAL RISKS OF AN INVESTMENT
The principal risks of investing in the series and the circumstances
reasonably likely to cause the value of your investment in the series to
decline are described below. As with any non-money market mutual fund, the
share price of the series will change daily based on market conditions and
other factors. Please note that there are many circumstances which could
cause the value of your investment in the series to decline, and which
could prevent the series from achieving its objective, that are not
described here.
The principal risks of investing in the series are:
o Market Risk: This is the risk that the price of a security held by the
series will fall due to changing economic, political or market conditions
or disappointing earnings results.
o Growth Companies Risk: Prices of growth company securities held by the
series may fall to a greater extent than the overall equity markets (e.g.,
as represented by the Standard and Poor's Composite 500 Index) due to
changing economic, political or market conditions or disappointing growth
company earnings results.
o Foreign Securities Risk: Investments in foreign securities involve risks
relating to political, social and economic developments abroad, as well as
risks resulting from the differences between the regulations to which U.S.
and foreign issuers and markets are subject:
> These risks may include the seizure by the government of company
assets, excessive taxation, withholding taxes on dividends and
interest, limitations on the use or transfer of portfolio assets, and
political or social instability.
> Enforcing legal rights may be difficult, costly and slow in foreign
countries, and there may be special problems enforcing claims against
foreign governments.
> Foreign companies may not be subject to accounting standards or
governmental supervision comparable to U.S. companies, and there may
be less public information about their operations.
> Foreign markets may be less liquid and more volatile than U.S.
markets.
> Foreign securities often trade in currencies other than the U.S.
dollar, and the series may directly hold foreign currencies and
purchase and sell foreign currencies through forward exchange
contracts. Changes in currency exchange rates will affect the series'
net asset value, the value of dividends and interest earned, and gains
and losses realized on the sale of securities. An increase in the
strength of the U.S. dollar relative to these other currencies may
cause the value of the series to decline. Certain foreign currencies
may be particularly volatile, and foreign governments may intervene in
the currency markets, causing a decline in value or liquidity in the
series' foreign currency holdings. By entering into forward foreign
currency exchange contracts, the series may be required to forego the
benefits of advantageous changes in exchange rates and, in the case of
forward contracts entered into for the purpose of increasing return,
the series may sustain losses which will reduce its gross income.
Forward foreign currency exchange contracts involve the risk that the
party with which the series enters the contract may fail to perform
its obligations to the series.
o As with any mutual fund, you could lose money on your investment in the
series.
An investment in the series is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table are not included because the series
did not have a full calendar year of operations on December 31, 1998.
<PAGE>
16: MASSACHUSETTS INVESTORS TRUST SERIES
..............................................................................
o INVESTMENT OBJECTIVE
The 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 series' objective may be changed
without shareholder approval.
Prior to May 1, 1999, the series was known as Conservative Growth Series.
o PRINCIPAL INVESTMENT STRATEGIES
The series invests, under normal market conditions, at least 65% of its
total assets in common stocks and related securities, such as preferred
stocks, convertible securities and depositary receipts for those
securities. Equity securities may be listed on a securities exchange or
traded in the over-the-counter markets. While the series may invest in
companies of any size, the series generally focuses on companies with
larger market capitalizations that MFS believes have sustainable growth
prospects and attractive valuations based on current and expected earnings
or cash flow. The series will also seek to provide income equal to
approximately 90% of the dividend yield on the Standard & Poor's 500
Composite Index.
MFS uses a bottom-up, as opposed to a top-down, investment style in
managing the equity-oriented funds (such as the series) it advises. This
means that securities are selected based upon fundamental analysis
performed by the series' portfolio manager and MFS' large group of equity
research analysts.
Consistent with the series' principal investment strategies described
above, the series may invest in foreign securities (including emerging
market securities), and may have exposure to foreign currencies through
its investment in these securities.
o PRINCIPAL RISKS OF AN INVESTMENT
The principal risks of investing in the series and the circumstances
reasonably likely to cause the value of your investment in the series to
decline are described below. As with any non-money market mutual fund, the
share price of the series will change daily based on market conditions and
other factors. Please note that there are many circumstances which could
cause the value of your investment in the series to decline, and which
could prevent the series from achieving its objectives, that are not
described here.
The principal risks of investing in the series are:
o Market Risk: This is the risk that the price of a security held by the
series will fall due to changing economic, political or market conditions
or disappointing earnings results.
o Company Risk: Prices of securities react to the economic condition of the
company that issued the security. The series' equity investments in an
issuer may rise and fall based on the issuer's actual and anticipated
earnings, changes in management and the potential for takeovers and
acquisitions.
o Large Cap Companies Risk: Large cap companies tend to go in and out of
favor based on market and economic conditions. Large cap companies tend to
be less volatile than companies with smaller market capitalizations. In
exchange for this potentially lower risk, the series' value may not rise
as much as the value of funds that emphasize smaller cap companies.
o Foreign Markets Risk: Investing in foreign securities involves risks
relating to political, social and economic developments abroad, as well as
risks resulting from the differences between the regulations to which U.S.
and foreign issuers and markets are subject:
> These risks may include the seizure by the government of company
assets, excessive taxation, withholding taxes on dividends and
interest, limitations on the use or transfer of portfolio assets, and
political or social instability.
> Enforcing legal rights may be difficult, costly and slow in foreign
countries, and there may be special problems enforcing claims against
foreign governments.
> Foreign companies may not be subject to accounting standards or
governmental supervision comparable to U.S. companies, and there may
be less public information about their operations.
> Foreign markets may be less liquid and more volatile than U.S.
markets.
> Foreign securities often trade in currencies other than the U.S.
dollar, and the series may directly hold foreign currencies and
purchase and sell foreign currencies through forward exchange
contracts. Changes in currency exchange rates will affect the series'
net asset value, the value of dividends and interest earned, and gains
and losses realized on the sale of securities. An increase in the
strength of the U.S. dollar relative to these other currencies may
cause the value of the series to decline. Certain foreign currencies
may be particularly volatile, and foreign governments may intervene in
the currency markets, causing a decline in value or liquidity in the
series' foreign currency holdings. By entering into forward foreign
currency exchange contracts, the series may be required to forego the
benefits of advantageous changes in exchange rates and, in the case of
forward contracts entered into for the purpose of increasing return,
the series may sustain losses which will reduce its gross income.
Forward foreign currency exchange contracts involve the risk that the
party with which the series enters the contract may fail to perform
its obligations to the series.
o As with any mutual fund, you could lose money on your investment in the
series.
An investment in the series is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the series by showing changes in the series'
performance over time. The performance table also shows how the series'
performance over time compares with that of a broad measure of market
performance. The chart and table provide past performance information. The
series' past performance does not necessarily indicate how the series will
perform in the future. The returns shown do not reflect fees and charges
imposed under the Variable Contracts through which an investment is made.
If these fees and charges were included, they would reduce these returns.
BAR CHART
The bar chart shows changes in the annual total returns of the series
shares for each calendar year for the last ten years, assuming the
reinvestment of distributions.
1989 35.97%
1990 (3.48)%
1991 36.74%
1992 5.71%
1993 8.43%
1994 (1.10)%
1995 37.41%
1996 25.41%
1997 31.94%
1998 23.85%
- ----------
During the period shown in the bar chart the highest quarterly return was
19.16% (for the calendar quarter ended December 31, 1998) and the lowest
quarterly return was (12.57)% (for the calendar quarter ended September
30, 1990).
PERFORMANCE TABLE
This table shows how the average annual total returns of the series shares
compares to a broad measure of market performance and assumes the
reinvestment of distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
............................................................................
1 Year 5 Years 10 Years
Massachusetts Investors Trust Series 23.85% 22.73% 19.07%
Standard & Poor's 500 Composite Index+* 28.58% 24.06% 19.21%
- ----------
+ Source: CDA/Wiesenberger, Inc.
* The Standard & Poor's 500 Composite Index is a broad-based, popular, unmanaged
index of common stock total return performance.
<PAGE>
17: MFS/FOREIGN & COLONIAL EMERGING MARKETS EQUITY SERIES
..........................................................................
o INVESTMENT OBJECTIVE
The series will seek capital appreciation. The series' objective may be
changed without shareholder approval.
o PRINCIPAL INVESTMENT STRATEGIES
The series invests, under normal market conditions, at least 65% of its
total assets in common stocks and related securities, such as preferred
stock, convertible securities and depositary receipts, of emerging market
issuers. Emerging market issuers are issuers whose principal activities
are located in emerging market countries. Emerging market countries
include any country determined 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. These countries include those located in
Latin America, Asia, Africa, the Middle East and the developing counties
of Europe, primarily Eastern Europe. While the series may invest up to 50%
of its assets in issuers located in a single country, the series generally
expects to have no more than 25% of its assets invested in issuers located
in any one country. The series' investments may include securities traded
in the over-the-counter markets.
o PRINCIPAL RISKS OF AN INVESTMENT
The principal risks of investing in the series and the circumstances
reasonably likely to cause the value of your investment in the series to
decline are described below. As with any non-money market mutual fund, the
share price of the series will change daily based on market conditions and
other factors. Please note that there are many circumstances which could
cause the value of your investment in the series to decline, and which
could prevent the series from achieving its objective, that are not
described here.
The principal risks of investing in the series are:
o Foreign Securities Risk: Investments in foreign securities involve risks
relating to political, social and economic developments abroad, as well as
risks resulting from the differences between the regulations to which U.S.
and foreign issuers and markets are subject:
> These risks may include the seizure by the government of company
assets, excessive taxation, withholding taxes on dividends and
interest, limitations on the use or transfer of portfolio assets, and
political or social instability.
> Enforcing legal rights may be difficult, costly and slow in foreign
countries, and there may be special problems enforcing claims against
foreign governments.
> Foreign companies may not be subject to accounting standards or
governmental supervision comparable to U.S. companies, and there may
be less public information about their operations.
> Foreign markets may be less liquid and more volatile than U.S.
markets.
> Foreign securities often trade in currencies other than the U.S.
dollar, and the series may directly hold foreign currencies and
purchase and sell foreign currencies through forward exchange
contracts. Changes in currency exchange rates will affect the series'
net asset value, the value of dividends and interest earned, and gains
and losses realized on the sale of securities. An increase in the
strength of the U.S. dollar relative to these other currencies may
cause the value of the series to decline. Certain foreign currencies
may be particularly volatile, and foreign governments may intervene in
the currency markets, causing a decline in value or liquidity in the
series' foreign currency holdings. By entering into forward foreign
currency exchange contracts, the series may be required to forego the
benefits of advantageous changes in exchange rates and, in the case of
forward contracts entered into for the purpose of increasing return,
the series may sustain losses which will reduce its gross income.
Forward foreign currency exchange contracts involve the risk that the
party with which the series enters the contract may fail to perform
its obligations to the series.
o Emerging Markets Risk: Emerging markets are generally defined as countries
in the initial stages of their industrialization cycles with low per
capita income. Investments in emerging markets securities involve all of
the risks of investments in foreign securities, and also have additional
risks:
> All of the risks of investing in foreign securities are heightened by
investing in emerging markets countries.
> The markets of emerging markets countries have been more volatile than
the markets of developed countries with more mature economies. These
markets often have provided higher rates of return, and significantly
greater risks, to investors.
o Market Risk: This is the risk that the price of a security held by the
series will fall due to changing economic, political or market conditions
or disappointing earnings results.
o Company Risk: Prices of securities react to the economic condition of the
company that issued the security. The series' equity investments in an
issuer may rise and fall based on the issuer's actual and anticipated
earnings, changes in management and the potential for takeovers and
acquisitions.
o Over-the-Counter Risk: Over-the-counter (OTC) transactions involve risks
in addition to those associated with transactions in securities traded on
exchanges. OTC-listed companies may have limited product lines, markets or
financial resources. Many OTC stocks trade less frequently and in smaller
volume than exchange-listed stocks. The values of these stocks may be more
volatile than exchange-listed stocks, and the series may experience
difficulty in establishing or closing out positions in these stocks at
prevailing market prices.
o As with any mutual fund, you could lose money on your investment in the
series.
An investment in the series is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the series by showing changes in the series'
performance over time. The performance table also shows how the series'
performance over time compares with that of one or more broad measures of
market performance. The chart and table provide past performance
information. The series' past performance does not necessarily indicate
how the series will perform in the future. The returns shown do not
reflect fees and charges imposed under the Variable Contracts through
which an investment is made. If these fees and charges were included, they
would reduce these returns.
Bar Chart
The bar chart shows changes in the annual total returns of the series
shares for each calendar year since they were first offered, assuming the
reinvestment of distributions.
1997 10.46%
1998 (29.98)%
During the period shown in the bar chart the highest quarterly return was
11.49% (for the calendar quarter ended June 30, 1997) and the lowest
quarterly return was (22.68)% (for the calendar quarter ended September
30, 1998).
PERFORMANCE TABLE
This table shows how the average annual total returns of the series shares
compares to a broad measure of market performance and various other market
indicators and assumes the reinvestment of distributions.
Average Annual Total Returns as of December 31, 1998
............................................................................
1 Year Life
MFS/Foreign & Colonial Emerging Markets Equity Series (29.98)% (9.50)%*
MSCI EMF Index+** (23.81)% (16.94)%
Lipper Emerging Markets Funds Index++*** (26.87)% (16.00)%
- ----------
* For the period from the series' commencement of investment operations on
June 5, 1996, through December 31, 1998.
+ Source: CDA/Wiesenberger, Inc. "Life" refers to the period July 1, 1996
through December 31, 1998.
++ Source: Lipper Analytical Services, Inc. "Life" refers to the period July 1,
1996 through December 31, 1998.
** The Morgan Stanley Capital International (MSCI) Emerging Markets Free (EMF)
Index is a broad-based, unmanaged, market-capitalization- weighted index of
equities in emerging markets.
*** The Lipper Mutual Fund Indices are broad-based, unmanaged, net-asset-
value-weighted indices of the largest qualifying mutual funds within their
respective investment objectives, adjusted for the reinvestment of capital
gain distributions and income dividends.
<PAGE>
18: MONEY MARKET SERIES
............................................................................
o INVESTMENT OBJECTIVE
The series will seek maximum current income to the extent consistent with
stability of principal by investing exclusively in money market
instruments (identified below) maturing in less than 13 months. The
series' objective may not be changed without shareholder approval.
o PRINCIPAL INVESTMENT STRATEGIES
The series is a money market fund, meaning it tries to maintain a share
price of $1.00 while paying income to its shareholders. The series will
invest exclusively in the following types of U.S. dollar denominated money
market instruments:
o Obligations of, or guaranteed by, the U.S. Government, its agencies or
instrumentalities.
o 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,
and bankers' acceptances issued by domestic branches of any such bank.
o Commercial paper which at the date of investment is rated A-1 by Standard
& Poor's or P-1 by Moody's.
o Repurchase agreements collateralized by U.S. Government securities.
The average maturity of the investments in the 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.
o PRINCIPAL RISKS OF AN INVESTMENT
The principal risks of investing in the series and the circumstances
reasonably likely to cause the value of your investment in the series to
decline are described below. Please note that there are many circumstances
which could prevent the series from achieving its objective that are not
described here.
o Money Market Instruments Risk: Money market instruments provide
opportunities for income with low credit risk, but may result in a lower
yield than would be available from debt obligations of a lower quality or
longer term. Although the series seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by investing
in the series.
o Foreign Markets Risk: Although the series' investments in foreign issuers
involve relatively low credit risk, an investment in the series may
involve a greater degree of risk than an investment in a fund that invests
only in debt obligations of U.S. domestic issuers. Investing in foreign
securities involves risks relating to political, social and economic
developments abroad, as well as risks resulting from the differences
between the regulations to which U.S. and foreign issuers and markets are
subject:
> These risks may include the seizure by the government of company
assets, excessive taxation, withholding taxes on dividends and
interest, limitations on the use or transfer of portfolio assets, and
political or social instability.
> Enforcing legal rights may be difficult, costly and slow in foreign
countries, and there may be special problems enforcing claims against
foreign governments.
> Foreign companies may not be subject to accounting standards or
governmental supervision comparable to U.S. companies, and there may
be less public information about their operations.
> Foreign markets may be less liquid and more volatile than U.S.
markets.
o As with any mutual fund, you could lose money on your investment in the
series.
An investment in the series is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the series by showing changes in the series'
performance over time. The chart and table provide past performance
information. The series' past performance does not necessarily indicate
how the series will perform in the future. The returns shown do not
reflect fees and charges imposed under the Variable Contracts through
which an investment is made. If these fees and charges were included, they
would reduce these returns.
BAR CHART
The bar chart shows changes in the annual total returns of the series
shares for each calendar year for the past ten years, assuming the
reinvestment of distributions.
1989 8.91%
1990 7.81%
1991 5.79%
1992 3.30%
1993 2.62%
1994 3.69%
1995 5.44%
1996 4.92%
1997 5.06%
1998 5.02%
During the period shown in the bar chart the highest quarterly return was
2.24% (for the calendar quarter ended June 30, 1989) and the lowest
quarterly return was 0.64% (for the calendar quarters ended June 30 and
September 30, 1993).
PERFORMANCE TABLE
This table shows the series' average annual total returns for certain
periods and assumes the reinvestment of distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
............................................................................
1 Year 5 Years 10 Years
Money Market Series 5.02% 4.82% 5.24%
<PAGE>
19: NEW DISCOVERY SERIES
............................................................................
o INVESTMENT OBJECTIVE
The series will seek capital appreciation. The series' objective may be
changed without shareholder approval.
o PRINCIPAL INVESTMENT STRATEGIES
The series invests, under normal market conditions, at least 65% of its
total assets in equity securities of emerging growth companies. Equity
securities include common stocks and related securities, such as preferred
stocks, convertible securities and depositary receipts for those
securities. Emerging growth companies are companies which MFS believes
offer superior prospects for growth and are either:
o early in their life cycle, but which have the potential to become major
enterprises; or
o major enterprises 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.
While emerging growth companies may be of any size, the series will
generally focus on smaller cap emerging growth companies that are early in
their life cycle. MFS would expect these companies to have products,
technologies, management, markets and opportunities which will facilitate
earnings growth over time that is well above the growth rate of the
overall economy and the rate of inflation. The series' investments in
emerging growth companies may include securities listed on a securities
exchange or traded in the over-the-counter markets.
MFS uses a bottom-up, as opposed to a top-down, investment style in
managing the equity-oriented funds (such as the series) it advises. This
means that securities are selected based upon fundamental analysis
performed by the series' portfolio manager and MFS' large group of equity
research analysts.
o PRINCIPAL RISKS OF AN INVESTMENT
The principal risks of investing in the series and the circumstances
reasonably likely to cause the value of your investment in the series to
decline are described below. As with any non-money market mutual fund, the
share price of the series will change daily based on market conditions and
other factors. Please note that there are many circumstances which could
cause the value of your investment in the series to decline, and which
could prevent the series from achieving its objective, that are not
described here.
The principal risks of investing in the series are:
o Market Risk: This is the risk that the price of a security held by the
series will fall due to changing economic, political or market conditions
or disappointing earnings results.
o Company Risk: Prices of securities react to the economic condition of the
company that issued the security. The series' equity investments in an
issuer may rise and fall based on the issuer's actual and anticipated
earnings, changes in management and the potential for takeovers and
acquisitions.
o Emerging Growth Companies Risk: Investments in emerging growth companies
may be subject to more abrupt or erratic market movements and may involve
greater risks than investments in other companies. Emerging growth
companies often:
> have limited product lines, markets and financial resources;
> are dependent on management by one or a few key individuals;
> have shares which suffer steeper than average price declines after
disappointing earnings reports and are more difficult to sell at
satisfactory prices.
o Small Cap Companies Risk: Investments in small cap companies tend to
involve more risk and be more volatile than investments in larger
companies. Small cap companies may be more susceptible to market declines
because of their limited product lines, financial and management
resources, markets and distribution channels. Their shares may be more
difficult to sell at satisfactory prices during market declines.
o Over-the-Counter Risk: Over-the-counter (OTC) transactions involve risks
in addition to those associated with transactions in securities traded on
exchanges. OTC-listed companies may have limited product lines, markets or
financial resources. Many OTC stocks trade less frequently and in smaller
volume than exchange-listed stocks. The values of these stocks may be more
volatile than exchange-listed stocks, and the series may experience
difficulty in purchasing or selling these securities at a fair price.
o As with any mutual fund, you could lose money on your investment in the
series.
An investment in the series is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table are not included because the series
did not have a full calendar year of operations on December 31, 1998.
<PAGE>
20: RESEARCH SERIES
............................................................................
o INVESTMENT OBJECTIVE
The series will seek to provide long-term growth of capital and future
income. The series' objective may be changed without shareholder approval.
o PRINCIPAL INVESTMENT STRATEGIES
The series invests, under normal market conditions, at least 80% of its
total assets in common stocks and related securities, such as preferred
stocks, convertible securities and depositary receipts. The series focuses
on companies that MFS believes have favorable prospects for long-term
growth, attractive valuations based on current and expected earnings or
cash flow, dominant or growing market share and superior management. The
series may invest in companies of any size. The series' investments may
include securities traded on securities exchanges or in the over-the-
counter markets.
A committee of investment research analysts selects portfolio securities
for the series. This committee includes investment analysts employed not
only by MFS, but also by MFS International (U.K.) Limited, a wholly owned
subsidiary of MFS. The committee allocates the series' assets among
various industries. Individual analysts then select what they view as the
securities best suited to achieve the series' investment objective within
their assigned industry responsibility.
Consistent with the series' principal investment strategies described
above, the series may invest in foreign securities (including emerging
market securities), and may have exposure to foreign currencies through
its investment in these securities.
o PRINCIPAL RISKS OF AN INVESTMENT
The principal risks of investing in the series and the circumstances
reasonably likely to cause the value of your investment in the series to
decline are described below. As with any non-money market mutual fund, the
share price of the series will change daily based on market conditions and
other factors. Please note that there are many circumstances which could
cause the value of your investment in the series to decline, and which
could prevent the series from achieving its objective, that are not
described here.
The principal risks of investing in the series are:
o Market Risk: This is the risk that the price of a security held by the
series will fall due to changing economic, political or market conditions
or disappointing earnings results.
o Company Risk: Prices of securities react to the economic condition of the
company that issued the security. The series' equity investments in an
issuer may rise and fall based on the issuer's actual and anticipated
earnings, changes in management and the potential for takeovers and
acquisitions.
o Over-the-Counter Risk: Over-the-counter (OTC) transactions involve risks
in addition to those incurred by transactions in securities traded on
exchanges. OTC-listed companies may have limited product lines, markets or
financial resources. Many OTC stocks trade less frequently and in smaller
volume than exchange-listed stocks. The values of these stocks may be more
volatile than exchange-listed stocks, and the series may experience
difficulty in purchasing or selling these securities at a fair price.
o Foreign Markets Risk: Investing in foreign securities involves risks
relating to political, social and economic developments abroad, as well as
risks resulting from the differences between the regulations to which U.S.
and foreign issuers and markets are subject:
> These risks may include the seizure by the government of company
assets, excessive taxation, withholding taxes on dividends and
interest, limitations on the use or transfer of portfolio assets, and
political or social instability.
> Enforcing legal rights may be difficult, costly and slow in foreign
countries, and there may be special problems enforcing claims against
foreign governments.
> Foreign companies may not be subject to accounting standards or
governmental supervision comparable to U.S. companies, and there may
be less public information about their operations.
> Foreign markets may be less liquid and more volatile than U.S.
markets.
> Foreign securities often trade in currencies other than the U.S.
dollar, and the series may directly hold foreign currencies and
purchase and sell foreign currencies through forward exchange
contracts. Changes in currency exchange rates will affect the series'
net asset value, the value of dividends and interest earned, and gains
and losses realized on the sale of securities. An increase in the
strength of the U.S. dollar relative to these other currencies may
cause the value of the series to decline. Certain foreign currencies
may be particularly volatile, and foreign governments may intervene in
the currency markets, causing a decline in value or liquidity in the
series' foreign currency holdings. By entering into forward foreign
currency exchange contracts, the series may be required to forego the
benefits of advantageous changes in exchange rates and, in the case of
forward contracts entered into for the purpose of increasing return,
the series may sustain losses which will reduce its gross income.
Forward foreign currency exchange contracts involve the risk that the
party with which the series enters the contract may fail to perform
its obligations to the series.
o As with any mutual fund, you could lose money on your investment in the
series.
An investment in the series is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the series by showing changes in the series'
performance over time. The performance table also shows how the series'
performance over time compares with that of a broad measure of market
performance. The chart and table provide past performance information. The
series' past performance does not necessarily indicate how the series will
perform in the future. The returns shown do not reflect fees and charges
imposed under the Variable Contracts through which an investment is made.
If these fees and charges were included, they would reduce these returns.
BAR CHART
The bar chart shows changes in the annual total returns of the series
shares for each calendar year since they were first offered, assuming the
reinvestment of distributions.
1995 37.50%
1996 23.76%
1997 20.86%
1998 23.61%
During the period shown in the bar chart the highest quarterly return was
22.06% (for the calendar quarter ended December 31, 1998) and the lowest
quarterly return was (14.62)% (for the calendar quarter ended September
30, 1998).
PERFORMANCE TABLE
This table shows how the average annual total returns of the series shares
compares to a broad measure of market performance and assumes the
reinvestment of distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
............................................................................
1 Year Life
Research Series 23.61% 24.86%*
Standard & Poor's 500 Composite Index+** 28.58% 30.25%
- ----------
* For the period from the series' commencement of investment operations on
November 7, 1994, through December 31, 1998.
+ Source: CDA/Wiesenberger, Inc. "Life" refers to the period from December 1,
1994 through December 31, 1998.
** The Standard & Poor's 500 Composite Index is a broad-based, popular,
unmanaged index of common stock total return performance.
<PAGE>
21: RESEARCH GROWTH AND INCOME SERIES
..............................................................................
o INVESTMENT OBJECTIVE
The series will seek to provide long-term growth of capital, current
income and growth of income. The series' objective may be changed without
shareholder approval.
o PRINCIPAL INVESTMENT STRATEGIES
The series invests, under normal market conditions, at least 65% of its
total assets in common stocks and related securities, such as preferred
stocks, convertible securities and depositary receipts, of dividend paying
companies with market capitalizations of at least $2 billion and which are
believed by MFS to have sustainable growth prospects and attractive
valuations based on current and expected earnings or cash flow. The series
generally focuses on larger capitalization companies with market
capitalizations well in excess of $2 billion. Securities purchased by the
series may be listed on a securities exchange or traded in the over-the-
counter markets.
A committee of investment research analysts selects portfolio securities
for the series. This committee includes investment analysts employed not
only by MFS, but also by MFS International (U.K.) Limited, a wholly owned
subsidiary of MFS. The committee allocates the series' assets among
various industries. Individual analysts then select what they view as the
securities best suited to achieve the series' investment objectives within
their assigned industry responsibility.
Consistent with the series' principal investment strategies described
above, the series may invest in foreign securities (including emerging
market securities), and may have exposure to foreign currencies through
its investment in these securities.
o PRINCIPAL RISKS OF AN INVESTMENT
The principal risks of investing in the series and the circumstances
reasonably likely to cause the value of your investment in the series to
decline are described below. As with any non-money market mutual fund, the
share price of the series will change daily based on market conditions and
other factors. Please note that there are many circumstances which could
cause the value of your investment in the series to decline, and which
could prevent the series from achieving its objectives, that are not
described here.
The principal risks of investing in the series are:
o Market Risk: This is the risk that the price of a security held by the
series will fall due to changing economic, political or market conditions
or disappointing earnings results.
o Company Risk: Prices of securities react to the economic condition of the
company that issued the security. The series' equity investments in an
issuer may rise and fall based on the issuer's actual and anticipated
earnings, changes in management and the potential for takeovers and
acquisitions.
o Large Cap Companies Risk: Large cap companies tend to go in and out of
favor based on market and economic conditions. Large cap companies tend to
be less volatile than companies with smaller market capitalizations. In
exchange for this potentially lower risk, the series' value may not rise
as much as the value of funds that emphasize smaller cap companies.
o Foreign Markets Risk: Investing in foreign securities involves risks
relating to political, social and economic developments abroad, as well as
risks resulting from the differences between the regulations to which U.S.
and foreign issuers and markets are subject:
> These risks may include the seizure by the government of company
assets, excessive taxation, withholding taxes on dividends and
interest, limitations on the use or transfer of portfolio assets, and
political or social instability.
> Enforcing legal rights may be difficult, costly and slow in foreign
countries, and there may be special problems enforcing claims against
foreign governments.
> Foreign companies may not be subject to accounting standards or
governmental supervision comparable to U.S. companies, and there may
be less public information about their operations.
> Foreign markets may be less liquid and more volatile than U.S.
markets.
> Foreign securities often trade in currencies other than the U.S.
dollar, and the series may directly hold foreign currencies and
purchase and sell foreign currencies through forward exchange
contracts. Changes in currency exchange rates will affect the series'
net asset value, the value of dividends and interest earned, and gains
and losses realized on the sale of securities. An increase in the
strength of the U.S. dollar relative to these other currencies may
cause the value of the series to decline. Certain foreign currencies
may be particularly volatile, and foreign governments may intervene in
the currency markets, causing a decline in value or liquidity in the
series' foreign currency holdings. By entering into forward foreign
currency exchange contracts, the series may be required to forego the
benefits of advantageous changes in exchange rates and, in the case of
forward contracts entered into for the purpose of increasing return,
the series may sustain losses which will reduce its gross income.
Forward foreign currency exchange contracts involve the risk that the
party with which the series enters the contract may fail to perform
its obligations to the series.
o As with any mutual fund, you could lose money on your investment in the
series.
An investment in the series is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the series by showing changes in the series'
performance over time. The performance table also shows how the series'
performance over time compares with that of a broad measure of market
performance. The chart and table provide past performance information. The
series' past performance does not necessarily indicate how the series will
perform in the future. The returns shown do not reflect fees and charges
imposed under the Variable Contracts through which an investment is made.
If these fees and charges were included, they would reduce these returns.
BAR CHART
The bar chart shows changes in the annual total returns of the series
shares for each calendar year since they were first offered, assuming the
reinvestment of distributions.
1998 22.13%
During the period shown in the bar chart the highest quarterly return was
18.92% (for the calendar quarter ended December 31, 1998) and the lowest
quarterly return was (18.55)% (for the calendar quarter ended September
30, 1998).
PERFORMANCE TABLE
This table shows how the average annual total returns of the series shares
compares to a broad measure of market performance and assumes the
reinvestment of distributions.
Average Annual Total Returns as of December 31, 1998
............................................................................
1 Year Life
Research Growth and Income Series 22.13% 19.92%*
Standard & Poor's 500 Composite Index+** 28.58% 28.44%
- ----------
* For the period from the series' commencement of investment operations on May
13, 1997, through December 31, 1998.
+ Source: CDA/Wiesenberger, Inc. "Life" refers to the period from June 1, 1997
through December 31, 1998.
** The Standard & Poor's 500 Composite Index is a broad-based, popular,
unmanaged index of common stock total return performance.
<PAGE>
22: RESEARCH INTERNATIONAL SERIES
............................................................................
o INVESTMENT OBJECTIVE
The series will seek capital appreciation. The series' objective may be
changed without shareholder approval.
o PRINCIPAL INVESTMENT STRATEGIES
The series invests, under normal market conditions, at least 65% of its
total assets in common stocks and related securities, such as preferred
stocks, convertible securities and depositary receipts, of foreign
companies. The series focuses on foreign companies that MFS believes have
favorable growth prospects and attractive valuations based on current and
expected earnings or cash flow. The series does not emphasize any
particular country and, under normal market conditions, will be invested
in at least five countries. Equity securities purchased by the series may
be listed on a securities exchange or traded in the over-the-counter
markets.
A committee of investment research analysts selects portfolio securities
for the series. This committee includes investment analysts employed not
only by MFS, but also by MFS International (U.K.) Limited, a wholly owned
subsidiary of MFS. The committee allocates the series' assets among
various geographic regions and industries. Individual analysts then select
what they view as the securities best suited to achieve the series'
investment objective within their assigned industry responsibility.
o PRINCIPAL RISKS OF AN INVESTMENT
The principal risks of investing in the series and the circumstances
reasonably likely to cause the value of your investment in the series to
decline are described below. As with any non-money market mutual fund, the
share price of the series will change daily based on market conditions and
other factors. Please note that there are many circumstances which could
cause the value of your investment in the series to decline, and which
could prevent the series from achieving its objective, that are not
described here.
The principal risks of investing in the series are:
o Market Risk: This is the risk that the price of a security held by the
series will fall due to changing economic, political or market conditions
or disappointing earnings results.
o Company Risk: Prices of securities react to the economic condition of the
company that issued the security. The series' equity investments in an
issuer may rise and fall based on the issuer's actual and anticipated
earnings, changes in management and the potential for takeovers and
acquisitions.
o Foreign Markets Risk: Investing in foreign securities involves risks
relating to political, social and economic developments abroad, as well as
risks resulting from the differences between the regulations to which U.S.
and foreign issuers and markets are subject:
> These risks may include the seizure by the government of company
assets, excessive taxation, withholding taxes on dividends and
interest, limitations on the use or transfer of portfolio assets, and
political or social instability.
> Enforcing legal rights may be difficult, costly and slow in foreign
countries, and there may be special problems enforcing claims against
foreign governments.
> Foreign companies may not be subject to accounting standards or
governmental supervision comparable to U.S. companies, and there may
be less public information about their operations.
> Foreign markets may be less liquid and more volatile than U.S.
markets.
> Foreign securities often trade in currencies other than the U.S.
dollar, and the series may directly hold foreign currencies and
purchase and sell foreign currencies through forward exchange
contracts. Changes in currency exchange rates will affect the series'
net asset value, the value of dividends and interest earned, and gains
and losses realized on the sale of securities. An increase in the
strength of the U.S. dollar relative to these other currencies may
cause the value of the series to decline. Certain foreign currencies
may be particularly volatile, and foreign governments may intervene in
the currency markets, causing a decline in value or liquidity in the
series' foreign currency holdings. By entering into forward foreign
currency exchange contracts, the series may be required to forego the
benefits of advantageous changes in exchange rates and, in the case of
forward contracts entered into for the purpose of increasing return,
the series may sustain losses which will reduce its gross income.
Forward foreign currency exchange contracts involve the risk that the
party with which the series enters the contract may fail to perform
its obligations to the series.
o Emerging Markets Risk: Emerging markets are generally defined as countries
in the initial stages of their industrialization cycles with low per
capita income. Investments in emerging markets securities involve all of
the risks of investments in foreign securities, and also have additional
risks:
> All of the risks of investing in foreign securities are heightened by
investing in emerging markets countries.
> The markets of emerging markets countries have been more volatile than
the markets of developed countries with more mature economies. These
markets often have provided significantly higher or lower rates of
return than developed markets, and significantly greater risks, to
investors.
o Over-the-Counter Risk: Over-the-counter (OTC) transactions involve risks
in addition to those incurred by transactions in securities traded on
exchanges. OTC-listed companies may have limited product lines, markets or
financial resources. Many OTC stocks trade less frequently and in smaller
volume than exchange-listed stocks. The values of these stocks may be more
volatile than exchange-listed stocks, and the series may experience
difficulty in purchasing or selling these securities at a fair price.
o As with any mutual fund, you could lose money on your investment in the
series.
An investment in the series is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table are not included because the series
did not have a full calendar year of operations on December 31, 1998.
<PAGE>
23: STRATEGIC INCOME SERIES
............................................................................
o Investment Objective
The 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. The series' objectives may be changed without shareholder
approval.
o PRINCIPAL INVESTMENT STRATEGIES
The series invests, under normal market conditions, at least 65% of its
total assets in fixed income securities. These securities include:
o U.S. Government securities, which are bonds or other debt obligations
issued by, or whose principal and interest payments are guaranteed or
supported by, the U.S. Government or one of its agencies or
instrumentalities.
o Foreign government securities, which are bonds or other debt obligations
issued by foreign governments, including emerging market governments.
These foreign government securities are either:
> issued, guaranteed or supported as to payment of principal and
interest by foreign governments, foreign government agencies, foreign
semi- governmental entities, or supra- national entities;
> interests issued by entities organized and operated for the purpose of
restructuring the investment characteristics of foreign government
securities; or
> Brady Bonds, which are long-term bonds issued as part of a
restructuring of commercial loans to emerging market countries.
o Mortgage-backed and asset-backed securities, which represent interests in
a pool of assets such as mortgage loans, car loan receivables, or credit
card receivables.
o Corporate bonds, which are bonds or other debt obligations issued by
domestic or foreign (including emerging markets) corporations or other
similar entities. The series may invest in:
> investment grade bonds, which are bonds assigned higher credit ratings
by credit rating agencies or which are unrated and considered by MFS
to be comparable to higher rated bonds;
> lower rated bonds, commonly known as junk bonds, which are bonds
assigned low credit ratings by credit rating agencies or which are
unrated and considered by MFS to be comparable to lower rated bonds;
and
> crossover bonds, which are junk bonds that MFS expects will appreciate
in value due to an anticipated upgrade in the issuer's credit rating
(thereby crossing over into investment grade bonds).
The series allocates its investments across these categories of fixed
income securities with a view toward broad diversification across these
categories and also within these categories. In selecting fixed income
investments for the series, MFS considers the views of its large group of
fixed income portfolio managers and research analysts. This group
periodically assesses the three-month total return outlook for various
segments of the fixed income markets. This three-month "horizon" outlook
is used by the portfolio manager}s{ of MFS' fixed income oriented funds
(including the series) as a tool in making or adjusting a series' asset
allocations to various segments of the fixed income markets. In assessing
the credit quality of fixed income securities, MFS does not rely solely on
the credit ratings assigned by credit rating agencies, but rather performs
its own independent credit analysis.
The series is a non-diversified mutual fund. This means that the series
may invest a relatively high percentage of its assets in a small number of
issuers.
The series may invest in derivative securities. Derivatives are securities
whose value may be based on other securities, currencies, interest rates,
or indices. Derivatives include:
o Futures and forward contracts.
o Options on futures contracts, foreign currencies, securities and bond
indices.
o Structured notes and indexed securities.
o Swaps, caps, collars and floors.
o PRINCIPAL RISKS OF AN INVESTMENT
The principal risks of investing in the series and the circumstances
reasonably likely to cause the value of your investment in the series to
decline are described below. As with any non-money market mutual fund, the
share price of the series will change daily based on market conditions and
other factors. Please note that there are many circumstances which could
cause the value of your investment in the series to decline, and which
could prevent the series from achieving its objective, that are not
described here.
The principal risks of investing in the series are:
o Allocation Risk: The series will allocate its investments among various
segments of the fixed income markets based upon judgments made by MFS. The
series could miss attractive investment opportunities by underweighting
markets where there are significant returns, and could lose value by
overweighting markets where there are significant declines.
o Interest Rate Risk: When interest rates rise, the prices of fixed income
securities in the series' portfolio will generally fall. Conversely, when
interest rates fall, the prices of fixed income securities in the series'
portfolio will generally rise.
o Maturity Risk: Interest rate risk will generally affect the price of a
fixed income security more if the security has a longer maturity. Fixed
income securities with longer maturities will therefore be more volatile
than other fixed income securities with shorter maturities. Conversely,
fixed income securities with shorter maturities will be less volatile but
generally provide lower returns than fixed income securities with longer
maturities. The average maturity of the series' fixed income investments
will affect the volatility of the series' share price.
o Credit Risk: Credit risk is the risk that the issuer of a fixed income
security will not be able to pay principal and interest when due. Rating
agencies assign credit ratings to certain fixed income securities to
indicate their credit risk. The price of a fixed income security will
generally fall if the issuer defaults on its obligation to pay principal
or interest, the rating agencies downgrade the issuer's credit rating or
other news affects the market's perception of the issuer's credit risk.
o Liquidity Risk: The fixed income securities purchased by the series may be
traded in the over-the-counter market rather than on an organized exchange
and are subject to liquidity risk. This means that they may be harder to
purchase or sell at a fair price. The inability to purchase or sell these
fixed income securities at a fair price could have a negative impact on
the series' performance.
o Junk Bond Risk:
> Higher Credit Risk: Junk bonds (including crossover bonds) are subject
to a substantially higher degree of credit risk than higher rated
bonds. During recessions, a high percentage of issuers of junk bonds
may default on payments of principal and interest. The price of a junk
bond may therefore fluctuate drastically due to bad news about the
issuer or the economy in general.
> Higher Liquidity Risk: During recessions and periods of broad market
declines, junk bonds could become less liquid, meaning that they will
be harder to value or sell at a fair price.
o Mortgage and Asset-Backed Securities:
> Maturity Risk:
+ Mortgage-Backed Securities: A mortgage-backed security will mature
when all the mortgages in the pool mature or are prepaid.
Therefore, mortgage-backed securities do not have a fixed
maturity, and their expected maturities may vary when interest
rates rise or fall.
^ When interest rates fall, homeowners are more likely to prepay
their mortgage loans. An increased rate of prepayments on the
series' mortgage-backed securities will result in an unforeseen
loss of interest income to the series as the series may be
required to reinvest assets at a lower interest rate. Because
prepayments increase when interest rates fall, the price of
mortgage-backed securities does not increase as much as other
fixed income securities when interest rates fall.
^ When interest rates rise, homeowners are less likely to prepay
their mortgage loans. A decreased rate of prepayments lengthens
the expected maturity of a mortgage-backed security. Therefore,
the prices of mortgage-backed securities may decrease more than
prices of other fixed income securities when interest rates
rise.
+ Collateralized Mortgage Obligations: The series may invest in
mortgage-backed securities called collateralized mortgage
obligations (CMOs). CMOs are issued in separate classes with
different stated maturities. As the mortgage pool experiences
prepayments, the pool pays off investors in classes with shorter
maturities first. By investing in CMOs, the series may manage the
prepayment risk of mortgage-backed securities. However,
prepayments may cause the actual maturity of a CMO to be
substantially shorter than its stated maturity.
+ Asset-Backed Securities: Asset-backed securities have prepayment
risks similar to mortgage-backed securities.
> Credit Risk: As with any fixed income security, mortgage-backed and
asset-backed securities are subject to the risk that the issuer will
default on principal and interest payments. It may be difficult to
enforce rights against the assets underlying mortgage-backed and
asset-backed securities in the case of default. The U.S. Government or
its agencies may guarantee the payment of principal and interest on
some mortgage-backed securities. Mortgage-backed securities and
asset-backed securities issued by private lending institutions or
other financial intermediaries may be supported by insurance or other
forms of guarantees.
o Derivatives Risk:
> Hedging Risk: When a derivative is used as a hedge against an opposite
position that the series also holds, any loss generated by the
derivative should be substantially offset by gains on the hedged
investment, and vice versa. While hedging can reduce or eliminate
losses, it can also reduce or eliminate gains.
> Correlation Risk: When the series uses derivatives to hedge, it takes
the risk that changes in the value of the derivative will not match
those of the asset being hedged. Incomplete correlation can result in
unanticipated losses.
> Investment Risk: When the series uses derivatives as an investment
vehicle to gain market exposure, rather than for hedging purposes, any
loss on the derivative investment will not be offset by gains on
another hedged investment. The series is therefore directly exposed to
the risks of that derivative. Gains or losses from derivative
investments may be substantially greater than the derivative's
original cost.
> Availability Risk: Derivatives may not be available to the series upon
acceptable terms. As a result, the series may be unable to use
derivatives for hedging or other purposes.
> Credit Risk: When the series uses derivatives, it is subject to the
risk that the other party to the agreement will not be able to
perform.
o Foreign Securities: Investments in foreign securities involve risks
relating to political, social and economic developments abroad, as well as
risks resulting from the differences between the regulations to which U.S.
and foreign issuers and markets are subject:
> These risks may include the seizure by the government of company
assets, excessive taxation, withholding taxes on dividends and
interest, limitations on the use or transfer of portfolio assets, and
political or social instability.
> Enforcing legal rights may be difficult, costly and slow in foreign
countries, and there may be special problems enforcing claims against
foreign governments.
> Foreign companies may not be subject to accounting standards or
governmental supervision comparable to U.S. companies, and there may
be less public information about their operations.
> Foreign markets may be less liquid and more volatile than U.S.
markets.
> Foreign securities often trade in currencies other than the U.S.
dollar, and the series may directly hold foreign currencies and
purchase and sell foreign currencies through forward exchange
contracts. Changes in currency exchange rates will affect the series'
net asset value, the value of dividends and interest earned, and gains
and losses realized on the sale of securities. An increase in the
strength of the U.S. dollar relative to these other currencies may
cause the value of the series to decline. Certain foreign currencies
may be particularly volatile, and foreign governments may intervene in
the currency markets, causing a decline in value or liquidity in the
series' foreign currency holdings. By entering into forward foreign
currency exchange contracts, the series may be required to forego the
benefits of advantageous changes in exchange rates and, in the case of
forward contracts entered into for the purpose of increasing return,
the series may sustain losses which will reduce its gross income.
Forward foreign currency exchange contracts involve the risk that the
party with which the series enters the contract may fail to perform
its obligations to the series.
o Emerging Markets Risk: Emerging markets are generally defined as countries
in the initial stages of their industrialization cycles with low per
capita income. Investments in emerging markets securities involve all of
the risks of investments in foreign securities, and also have additional
risks:
> All of the risks of investing in foreign securities are heightened by
investing in emerging markets countries.
> The markets of emerging markets countries have been more volatile than
the markets of developed countries with more mature economies. These
markets often have provided significantly higher or lower rates of
return than developed markets, and significantly greater risks, to
investors.
o Non-Diversified Status Risk: Because the series may invest a higher
percentage of its assets in a small number of issuers, the series is more
susceptible to any single economic, political or regulatory event
affecting those issuers than is a diversified fund.
o As with any mutual fund, you could lose money on your investment in the
series.
An investment in the series is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table are not included because the series
did not have a full calendar year of performance on December 31, 1998.
<PAGE>
24: TOTAL RETURN SERIES
............................................................................
o INVESTMENT OBJECTIVE
The series will primarily seek 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 since many
securities offering a better than average yield may also possess growth
potential. The series' objectives may be changed without shareholder
approval.
o PRINCIPAL INVESTMENT STRATEGIES
The series is a "balanced fund," and invests in a combination of equity
and fixed income securities. Under normal market conditions, the series
invests:
o At least 40%, but not more than 75%, of its net assets in common stocks
and related securities (referred to as equity securities), such as
preferred stocks; bonds, warrants or rights convertible into stock; and
depositary receipts for those securities.
o At least 25% of its net assets in non- convertible fixed income
securities.
The series may vary the percentage of its assets invested in any one type
of security (within the limits described above) in accordance with MFS'
interpretation of economic and money market conditions, fiscal and
monetary policy and underlying security values.
EQUITY INVESTMENTS. While the series may invest in all types of equity
securities, MFS generally seeks to purchase for the series equity
securities, such as common stocks, preferred stocks, convertible
securities and depositary receipts, of companies that MFS believes are
undervalued in the market relative to their long-term potential. The
equity securities of these companies may be undervalued because either:
o They are viewed by MFS as being temporarily out of favor in the market due
to
> a decline in the market
> poor economic conditions
> developments that have affected or may affect the issuer of the
securities or the issuer's industry.
o The market has overlooked them.
Undervalued equity securities generally have low price-to-book, price-to-
sales and/or price-to-earnings ratios. The series focuses on undervalued
equity securities issued by companies with relatively large market
capitalizations (i.e., market capitalizations of $5 billion or more).
As noted above, the series' investments in equity securities include
convertible securities. A convertible security is a security that may be
converted within a specified period of time into a certain amount of
common stock of the same or a different issuer. A convertible security
generally provides:
o a fixed income stream, and
o the opportunity, through its conversion feature, to participate in an
increase in the market price of the underlying common stock.
MFS uses a bottom-up, as opposed to a top-down, investment style in
managing the equity-oriented funds (including the equity portion of the
series) it advises. This means that securities are selected based upon
fundamental analysis performed by the series' portfolio manager and MFS'
large group of equity research analysts.
FIXED INCOME INVESTMENTS. The series invests in securities which pay a
fixed interest rate, which include:
o U.S. Government securities, which are bonds or other debt obligations
issued by, or whose principal and interest payments are guaranteed or
supported by, the U.S. Government or one of its agencies or
instrumentalities.
o Mortgage-backed and asset-backed securities, which represent interests in
a pool of assets such as mortgage loans, car loan receivables, or credit
card receivables. These investments entitle the series to a share of the
principal and interest payments made on the underlying mortgage, car loan,
or credit card. For example, if the series invests in a pool that includes
your mortgage loan, a share of the principal and interest payments on your
mortgage would pass to the series.
o Corporate bonds, which are bonds or other debt obligations issued by
corporations or other similar entities.
In selecting fixed income investments for the series, MFS considers the
views of its large group of fixed income portfolio managers and research
analysts. This group periodically assesses the three-month total return
outlook for various segments of the fixed income markets. This three-month
"horizon" outlook is used by the portfolio manager}s{ of MFS' fixed-income
oriented funds (including the fixed-income portion of the series) as a
tool in making or adjusting a series' asset allocations to various
segments of the fixed income markets. In assessing the credit quality of
fixed-income securities, MFS does not rely solely on the credit ratings
assigned by credit rating agencies, but rather performs its own
independent credit analysis.
o PRINCIPAL RISKS OF AN INVESTMENT
The principal risks of investing in the series and the circumstances
reasonably likely to cause the value of your investment in the series to
decline are described below. As with any non-money market mutual fund, the
share price of the series will change daily based on market conditions and
other factors. Please note that there are many circumstances which could
cause the value of your investment in the series to decline, and which
could prevent the series from achieving its objective, that are not
described here.
The principal risks of investing in the series are:
o Allocation Risk: The series will allocate its investments between equity
and fixed income securities, and among various segments of the fixed
income markets, based upon judgments made by MFS. The series could miss
attractive investment opportunities by underweighting markets where there
are significant returns, and could lose value by overweighting markets
where there are significant declines.
o Market Risk: This is the risk that the price of a security held by the
series will fall due to changing economic, political or market conditions
or disappointing earnings results.
o Undervalued Securities Risk: Prices of securities react to the economic
condition of the company that issued the security. The series' equity
investments in an issuer may rise and fall based on the issuer's actual
and anticipated earnings, changes in management and the potential for
takeovers and acquisitions. MFS will invest in securities that are
undervalued based on its belief that the market value of these securities
will rise due to anticipated events and investor perceptions. If these
events do not occur or are delayed, or if investor perceptions about the
securities do not improve, the market price of these securities may not
rise or may fall.
o Interest Rate Risk: When interest rates rise, the prices of fixed income
securities in the series' portfolio will generally fall. Conversely, when
interest rates fall, the prices of fixed income securities in the series'
portfolio will generally rise.
o Convertible Securities Risk: Convertible securities, like fixed income
securities, tend to increase in value when interest rates decline and
decrease in value when interest rates rise. The market value of a
convertible security also tends to increase as the market value of the
underlying stock rises and decrease as the market value of the underlying
stock declines.
o Maturity Risk: Interest rate risk will generally affect the price of a
fixed income security more if the security has a longer maturity. Fixed
income securities with longer maturities will therefore be more volatile
than other fixed income securities with shorter maturities. Conversely,
fixed income securities with shorter maturities will be less volatile but
generally provide lower returns than fixed income securities with longer
maturities. The average maturity of the series' fixed income investments
will affect the volatility of the series' share price.
o Credit Risk: Credit risk is the risk that the issuer of a fixed income
security will not be able to pay principal and interest when due. Rating
agencies assign credit ratings to certain fixed income securities to
indicate their credit risk. The price of a fixed income security will
generally fall if the issuer defaults on its obligation to pay principal
or interest, the rating agencies downgrade the issuer's credit rating or
other news affects the market's perception of the issuer's credit risk.
o Liquidity Risk: The fixed income securities purchased by the series may be
traded in the over-the-counter market rather than on an organized exchange
and are subject to liquidity risk. This means that they may be harder to
purchase or sell at a fair price. The inability to purchase or sell these
fixed income securities at a fair price could have a negative impact on
the series' performance. o Mortgage and Asset-Backed Securities:
> Maturity Risk:
+ Mortgage-Backed Securities: A mortgage-backed security will mature
when all the mortgages in the pool mature or are prepaid.
Therefore, mortgage-backed securities do not have a fixed
maturity, and their expected maturities may vary when interest
rates rise or fall.
^ When interest rates fall, homeowners are more likely to prepay
their mortgage loans. An increased rate of prepayments on the
series' mortgage-backed securities will result in an unforeseen
loss of interest income to the series as the series may be
required to reinvest assets at a lower interest rate. Because
prepayments increase when interest rates fall, the prices of
mortgage-backed securities does not increase as much as other
fixed income securities when interest rates fall.
^ When interest rates rise, homeowners are less likely to prepay
their mortgage loans. A decreased rate of prepayments lengthens
the expected maturity of a mortgage-backed security. Therefore,
the prices of mortgage-backed securities may decrease more than
prices of other fixed income securities when interest rates
rise.
+ Collateralized Mortgage Obligations: The series may invest in
mortgage-backed securities called collateralized mortgage
obligations (CMOs). CMOs are issued in separate classes with
different stated maturities. As the mortgage pool experiences
prepayments, the pool pays off investors in classes with shorter
maturities first. By investing in CMOs, the series may manage the
prepayment risk of mortgage-backed securities. However,
prepayments may cause the actual maturity of a CMO to be
substantially shorter than its stated maturity.
+ Asset-Backed Securities: Asset-backed securities have prepayment
risks similar to mortgage-backed securities.
> Credit Risk: As with any fixed income security, mortgage-backed and
asset-backed securities are subject to the risk that the issuer will
default on principal and interest payments. It may be difficult to
enforce rights against the assets underlying mortgage-backed and
asset-backed securities in the case of default. The U.S. Government or
its agencies may guarantee the payment of principal and interest on
some mortgage-backed securities. Mortgage-backed securities and
asset-backed securities issued by private lending institutions or
other financial intermediaries may be supported by insurance or other
forms of guarantees.
o As with any mutual fund, you could lose money on your investment in the
series.
An investment in the series is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the series by showing changes in the series'
performance over time. The performance table also shows how the series'
performance over time compares with that of one or more broad measures of
market performance. The chart and table provide past performance
information. The series' past performance does not necessarily indicate
how the series will perform in the future. The returns shown do not
reflect fees and charges imposed under the Variable Contracts through
which an investment is made. If these fees and charges were included, they
would reduce these returns.
BAR CHART
The bar chart shows changes in the annual total returns of the series
shares for each calendar year for the past ten years, assuming the
reinvestment of distributions.
1989 17.49%
1990 2.69%
1991 21.60%
1992 8.57%
1993 13.37%
1994 (2.22)%
1995 26.71%
1996 14.10%
1997 21.98%
1998 11.71%
----------
During the period shown in the bar chart the highest quarterly return was
10.21% (for the calendar quarter ended June 30, 1997) and the lowest
quarterly return was (4.78)% (for the calendar quarter ended September 30,
1998).
PERFORMANCE TABLE
This table shows how the average annual total returns of the series shares
compares to a broad measure of market performance and various other market
indicators and assumes the reinvestment of distributions.
Average Annual Total Returns as of December 31, 1998
............................................................................
1 Year 5 Years 10 Years
Total Return Series 11.71% 14.01% 13.28%
Standard & Poor's 500 Composite Index+* 28.58% 24.06% 19.21%
Lehman Brothers Government/Corporate Bond Index+** 9.49% 7.31% 9.34%
- ----------
+ Source: CDA/Wiesenberger, Inc.
* The Standard & Poor's 500 Composite Index is a broad-based, popular,
unmanaged index of common stock total return performance.
** The Lehman Brothers Government/Corporate Bond Index is an unmanaged,
market-value-weighted index of all debt obligations of the U.S. Treasury and
U.S. Government agencies (excluding mortgage-backed securities) and of all
publicly issued fixed-rate, nonconvertible, investment-grade domestic
corporate debt.
<PAGE>
25: UTILITIES SERIES
............................................................................
o INVESTMENT OBJECTIVE
The 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% of its assets in
equity and debt securities of both domestic and foreign companies in the
utilities industry. The series' objective may be changed without
shareholder approval.
o PRINCIPAL INVESTMENT STRATEGIES
The series invests, under normal market conditions, at least 65% of its
total assets in equity and debt securities of domestic and foreign
companies in the utilities industry. MFS considers a company to be in the
utilities industry if, at the time of investment, MFS determines that a
substantial portion of the company's assets or revenues are derived from
one or more utilities. Securities in which the series invests are not
selected based upon what sector of the utilities industry a company is in
(i.e., electric, gas, telecommunications) or upon a company's geographic
region. Companies in the utilities industry include:
o Companies engaged in the manufacture, production, generation,
transmission, sale or distribution of electric, gas or other types of
energy, water or other sanitary services.
o Companies engaged in telecommunications, including telephone, cellular
telephone, telegraph, satellite, microwave, cable television and other
communications media (but not companies engaged in public broadcasting).
The series is a non-diversified mutual fund. This means that the series
may invest a relatively high percentage of its assets in one or a few
issuers.
EQUITY INVESTMENTS. MFS uses a bottom-up, as opposed to a top-down,
investment style in managing the equity-oriented funds (including the
equity portion of the series) it advises. This means that securities are
selected based upon fundamental analysis performed by the series'
portfolio manager and MFS' large group of equity research analysts. In
performing this analysis and selecting securities for the series, MFS
places particular emphasis on each of the following factors:
o the current regulatory environment;
o the strength of the company's management team; and
o the company's growth prospects and valuation relative to its long-term
potential.
Equity securities purchased by the series consist of common stocks,
preferred stocks, convertible securities and depositary receipts. Equity
securities may be listed on a securities exchange or traded in the over-
the-counter markets.
As noted above, the series' investments in equity securities include
convertible securities. A convertible security is a security that may be
converted within a specified period of time into a certain amount of
common stock of the same or a different issuer. A convertible security
generally provides:
o a fixed income stream, and
o the opportunity, through its conversion feature, to participate in an
increase in the market price of the underlying common stock.
FIXED INCOME INVESTMENTS. The series invests in securities which pay a
fixed interest rate. These securities include:
o Corporate bonds, which are bonds or other debt obligations issued by
corporations or similar entities, including lower rated bonds, commonly
known as junk bonds, which are bonds assigned low credit ratings by credit
rating agencies or which are unrated and considered by MFS to be
comparable in quality to lower rated bonds.
o Mortgage-backed securities and asset- backed securities, which are
securities that represent interests in a pool of assets such as mortgage
loans, car loan receivables, or credit card receivables. These investments
entitle the series to a share of the principal and interest payments made
on the underlying mortgage, car loan, or credit card. For example, if the
series invested in a pool that included your mortgage loan, a share of the
principal and interest payments on your mortgage would pass to the series.
o U.S. Government securities, which are bonds or other debt obligations
issued by, or whose principal and interest payments are guaranteed or
supported by, the U.S. Government or one of its agencies or
instrumentalities.
In selecting fixed income investments for the series, MFS considers the
views of its large group of fixed income portfolio managers and research
analysts. This group periodically assesses the three-month total return
outlook for various segments of the fixed income markets. This three-month
"horizon" outlook is used by the portfolio manager}s{ of MFS' fixed-income
oriented funds (including the fixed-income portion of the series) as a
tool in making or adjusting a series' asset allocations to various
segments of the fixed income markets. In assessing the credit quality of
fixed-income securities, MFS does not rely solely on the credit ratings
assigned by credit rating agencies, but rather performs its own
independent credit analysis.
FOREIGN SECURITIES. The series invests in foreign securities such as:
o Equity securities of foreign companies in the utilities industry.
o Fixed income securities of foreign companies in the utilities industry.
o Fixed income securities issued by foreign governments.
o PRINCIPAL RISKS OF AN INVESTMENT
The principal risks of investing in the series and the circumstances
reasonably likely to cause the value of your investment in the series to
decline are described below. As with any non-money market mutual fund, the
share price of the series will change daily based on market conditions and
other factors. Please note that there are many circumstances which could
cause the value of your investment in the series to decline, and which could
prevent the series from achieving its objective, that are not described
here.
The principal risks of investing in the series are:
o Concentration: The series' investment performance will be closely tied to
the performance of utility companies. 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.
> Restrictions on operations and increased costs and delays as a result
of environmental and nuclear safety regulations.
> Coping with the general effects of energy conservation.
> Technological innovations which may render existing plants, equipment
or products obsolete.
> The potential impact of natural or man-made disasters.
> Difficulty obtaining adequate returns on invested capital, even if
frequent rate increases are approved by public service commissions.
> The high cost of obtaining financing during periods of inflation.
> Difficulties of the capital markets in absorbing utility debt and
equity securities.
> Increased competition.
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. Because utility
companies are faced with the same obstacles, issues and regulatory
burdens, their securities may react similarly to and more in unison with
these or other market conditions. These price movements may have a larger
impact on the series than on a fund with a more broadly diversified
portfolio.
o Regulation: The value of utility company securities may decline because
governmental regulation controlling the utilities industry can change.
This regulation may prevent or delay the utility company from passing
along cost increases to its customers. Furthermore, regulatory authorities
may not grant future rate increases. Any increases granted may not be
adequate to permit the payment of dividends on common stocks.
o Market Risk: This is the risk that the price of a security held by the
series will fall due to changing economic, political or market conditions
or disappointing earnings results.
o Company Risk: Prices of securities react to the economic condition of the
company that issued the security. The series' equity investments in an
issuer may rise and fall based on the issuer's actual and anticipated
earnings, changes in management and the potential for takeovers and
acquisitions.
o Interest Rate Risk: When interest rates rise, the prices of fixed income
securities in the series' portfolio will generally fall. Conversely, when
interest rates fall, the prices of fixed income securities in the series'
portfolio will generally rise.
o Convertible Securities Risk: Convertible securities, like fixed income
securities, tend to increase in value when interest rates decline and
decrease in value when interest rates rise. The market value of a
convertible security also tends to increase as the market value of the
underlying stock rises and decrease as the market value of the underlying
stock declines.
o Maturity Risk: Interest rate risk will affect the price of a fixed income
security more if the security has a longer maturity because changes in
interest rates are increasingly difficult to predict over longer periods
of time. Fixed income securities with longer maturities will therefore be
more volatile than other fixed income securities with shorter maturities.
Conversely, fixed income securities with shorter maturities will be less
volatile but generally provide lower returns than fixed income securities
with longer maturities. The average maturity of the series' fixed income
investments will affect the volatility of the series' share price.
o Credit Risk: Credit risk is the risk that the issuer of a fixed income
security will not be able to pay principal and interest when due. Rating
agencies assign credit ratings to certain fixed income securities to
indicate their credit risk. The price of a fixed income security will
generally fall if the issuer defaults on its obligation to pay principal
or interest, the rating agencies downgrade the issuer's credit rating or
other news affects the market's perception of the issuer's credit risk.
o Mortgage-Backed and Asset-Backed Securities Risk:
> Maturity Risk:
+ Mortgage-Backed Securities: A mortgage-backed security will mature
when all the mortgages in the pool mature or are prepaid.
Therefore, mortgage-backed securities do not have a fixed
maturity, and their expected maturities may vary when interest
rates rise or fall.
^ When interest rates fall, homeowners are more likely to prepay
their mortgage loans. An increased rate of prepayments on the
series' mortgage-backed securities will result in an unforeseen
loss of interest income to the series as the series may be
required to reinvest assets at a lower interest rate. Because
prepayments increase when interest rates fall, the prices of
mortgage-backed securities do not increase as much as other
fixed income securities when interest rates fall.
^ When interest rates rise, homeowners are less likely to prepay
their mortgage loans. A decreased rate of prepayments lengthens
the expected maturity of a mortgage-backed security. Therefore,
the prices of mortgage-backed securities may decrease more than
prices of other fixed income securities when interest rates
rise.
+ Collateralized Mortgage Obligations: The series may invest in
mortgage-backed securities called collateralized mortgage
obligations (CMOs). CMOs are issued in separate classes with
different stated maturities. As the mortgage pool experiences
prepayments, the pool pays off investors in classes with shorter
maturities first. By investing in CMOs, the series may manage the
prepayment risk of mortgage-backed securities. However,
prepayments may cause the actual maturity of a CMO to be
substantially shorter than its stated maturity.
+ Asset-Backed Securities: Asset-backed securities have prepayment
risks similar to mortgage-backed securities.
> Credit Risk: As with any fixed income security, mortgage-backed and
asset-backed securities are subject to the risk that the issuer will
default on principal and interest payments. It may be difficult to
enforce rights against the assets underlying mortgage-backed and
asset-backed securities in the case of default. The U.S. Government or
its agencies may guarantee the payment of principal and interest on
some mortgage-backed securities. Mortgage-backed securities and
asset-backed securities issued by private lending institutions or
other financial intermediaries may be supported by insurance or other
forms of guarantees.
o Foreign Markets Risk: Investing in foreign securities involves risks
relating to political, social and economic developments abroad, as well as
risks resulting from the differences between the regulations to which U.S.
and foreign issuers and markets are subject:
> These risks may include the seizure by the government of company
assets, excessive taxation, withholding taxes on dividends and
interest, limitations on the use or transfer of portfolio assets, and
political or social instability.
> Enforcing legal rights may be difficult, costly and slow in foreign
countries, and there may be special problems enforcing claims against
foreign governments.
> Foreign companies may not be subject to accounting standards or
governmental supervision comparable to U.S. companies, and there may
be less public information about their operations.
> Foreign markets may be less liquid and more volatile than U.S.
markets.
> Foreign securities often trade in currencies other than the U.S.
dollar, and the series may directly hold foreign currencies and
purchase and sell foreign currencies through forward exchange
contracts. Changes in currency exchange rates will affect the series'
net asset value, the value of dividends and interest earned, and gains
and losses realized on the sale of securities. An increase in the
strength of the U.S. dollar relative to these other currencies may
cause the value of the series to decline. Certain foreign currencies
may be particularly volatile, and foreign governments may intervene in
the currency markets, causing a decline in value or liquidity in the
series' foreign currency holdings. By entering into forward foreign
currency exchange contracts, the series may be required to forego the
benefits of advantageous changes in exchange rates and, in the case of
forward contracts entered into for the purpose of increasing return,
the series may sustain losses which will reduce its gross income.
Forward foreign currency exchange contracts involve the risk that the
party with which the series enters the contract may fail to perform
its obligations to the series.
o Non-Diversified Status Risk: Because the series may invest a higher
percentage of its assets in a small number of issuers, the series is more
susceptible to any single economic, political or regulatory event
affecting those issuers than is a diversified fund.
o As with any mutual fund, you could lose money on your investment in the
series.
An investment in the series is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the series by showing changes in the series'
performance over time. The performance table also shows how the series'
performance over time compares with that of a broad measure of market
performance. The chart and table provide past performance information. The
series' past performance does not necessarily indicate how the series will
perform in the future. The returns shown do not reflect fees and charges
imposed under the Variable Contracts through which an investment is made.
If these fees and charges were included, they would reduce these returns.
BAR CHART
The bar chart shows changes in the annual total returns of the series
shares for each calendar year since they were first offered, assuming the
reinvestment of distributions.
1994 (4.96)%
1995 32.36%
1996 20.37%
1997 32.71%
1998 17.54%
During the period shown in the bar chart the highest quarterly return was
12.37% (for the calendar quarter ended December 31, 1996) and the lowest
quarterly return was (4.19)% (for the calendar quarters ended March 30,
1994 and September 30, 1998).
PERFORMANCE TABLE
This table shows how the average annual total returns of the series shares
compares to a broad measure of market performance and assumes the
reinvestment of distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
............................................................................
1 Year 5 Years Life*
Utilities Series 17.54% 18.76% 18.32%
Standard & Poor's Utility Index+** 14.77% 13.90% 13.90%
- ----------
* For the period from the series' commencement of investment operations on
December 1, 1993, through December 31, 1998.
+ Source: Lipper Analytical Services, Inc.
** The Standard & Poor's Utilities Index is a broad-based, unmanaged index
representing the capitalization-weighted performance of approximately 43 of
the largest utility companies listed on the New York Stock Exchange.
<PAGE>
26: Zero Coupon Series, Portfolio 2000
............................................................................
o INVESTMENT OBJECTIVE
The series 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 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 (referred to as zero coupon
obligations). The series' investment objective may not be changed without
shareholder approval.
o PRINCIPAL INVESTMENT STRATEGIES
The series invests at least 90% of its total assets in U.S. Treasury zero
coupon obligations. The series will liquidate its assets on November 15,
2000 (referred to as the liquidation date), and is only available for
investment by holders of variable life insurance contracts issued by Sun
Life Assurance Company of Canada (U.S.). On the liquidation date, all of
the securities held by the series will be sold and all outstanding shares
of the series will be redeemed. The redemption proceeds will, except as
otherwise directed by variable life contract owners, be used to purchase
shares of the Money Market Series.
Zero coupon obligations do not pay any current interest. Instead, zero
coupon obligations are issued at a significant discount from the value the
series expects to receive upon maturity. All zero coupon obligations
purchased by the series will mature within one year of the liquidation
date. The series may invest in interest-bearing debt obligations in order
to make effective use of cash reserves pending investment in zero coupon
obligations, pending liquidation and to permit the payment of current
operating expenses of the series.
o PRINCIPAL RISKS OF AN INVESTMENT
Your investment in the series is subject to certain risks:
o Interest Rate Risk: When interest rates rise, the prices of fixed income
securities in the series' portfolio will generally fall. Conversely, when
interest rates fall, the prices of fixed income securities in the series'
portfolio will generally rise. The value of the zero coupon obligations
acquired by the series, and therefore the value of shares of the series,
may be subject to greater fluctuations in response to changing market
interest rates than the value of debt obligations that pay interest
currently.
o Maturity Risk: Interest rate risk will generally affect the price of a
fixed income security more if the security has a longer maturity. Fixed
income securities with longer maturities will therefore be more volatile
than other fixed income securities with shorter maturities. Conversely,
fixed income securities with shorter maturities will be less volatile but
generally provide lower returns than fixed income securities with longer
maturities. The average maturity of the series' fixed income investments
will affect the volatility of the series' share price.
o Early Redemption Risk: Zero coupon obligations, if held to maturity,
provide a predictable yield. However, in light of the fluctuation in the
market value of zero coupon obligations that occurs with changes in market
interest rates, investors who desire to attain the growth rate anticipated
at the time of investment must retain their shares until the liquidation
date. Any investor who redeems his or her investment in the series prior
to the liquidation date is likely to achieve a different investment return
than the return that was anticipated on the date the investment was made,
and may even suffer a loss.
o As with any mutual fund, you could lose money on your investment in the
series.
An investment in the series is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the series by showing changes in the series'
performance over time. The chart and table provide past performance
information. The series' past performance does not necessarily indicate
how the series will perform in the future. The returns shown do not
reflect fees and charges imposed under the Variable Contracts through
which an investment is made. If these fees and charges were included, they
would reduce these returns.
BAR CHART
The bar chart shows changes in the annual total returns of the series
shares for each calendar year for the past ten years, assuming the
reinvestment of distributions.
1989 20.98%
1990 5.92%
1991 20.54%
1992 8.18%
1993 15.03%
1994 (6.99)%
1995 19.88%
1996 1.91%
1997 6.98%
1998 7.28%
During the period shown in the bar chart the highest quarterly return was
14.72% (for the calendar quarter ended June 30, 1989) and the lowest
quarterly return was (15.17)% (for the calendar quarter ended March 31,
1992).
PERFORMANCE TABLE
This table shows the series' average annual total returns for certain
periods and assumes the reinvestment of distributions.
Average Annual Total Returns as of December 31, 1998
............................................................................
1 Year 5 Years 10 Years
Zero Coupon Series, Portfolio 2000 7.28% 5.45% 9.62%
<PAGE>
- ------------------------------------------------
III CERTAIN INVESTMENT STRATEGIES AND RISKS
- ------------------------------------------------
Each series may invest in various types of securities and engage in
various investment techniques and practices which are not the principal
focus of the series and therefore are not described in this Prospectus.
The types of securities and investment techniques and practices in which a
series may engage, including the principal investment techniques and
practices described above, are identified in Appendix A to this
Prospectus, and are discussed, together with their risks, in the Series
Fund's Statement of Additional Information (referred to as the SAI), which
you may obtain by contacting Sun Life Assurance Company of Canada (U.S.),
Retirement Products and Services Division (see back cover for address and
phone number).
In addition, each series may depart from its principal investment
strategies by temporarily investing for defensive purposes when adverse
market, economic or political conditions exist. While a series invests
defensively, it may not be able to pursue its investment objective.
Each series, except for the Money Market Series and the Zero Coupon
Series, may engage in active and frequent trading to achieve its principal
investment strategies. This may result in the realization and distribution
to shareholders of higher capital gains, which could increase your tax
liability. Frequent trading also increases transaction costs, which could
detract from the series' performance.
<PAGE>
- --------------------------------
IV MANAGEMENT OF THE SERIES
- --------------------------------
o INVESTMENT ADVISER
Massachusetts Financial Services Company (referred to as MFS or the
adviser) is the series' investment adviser. 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, Massachusetts Investors Trust. Net assets under the management of
the MFS organization were approximately $100.8 billion on behalf of
approximately 3.9 million investor accounts as of February 28, 1999. As of
such date, the MFS organization managed approximately $79.8 billion of net
assets in equity funds and equity portfolios and $21.0 billion of net
assets in fixed income funds and fixed income portfolios. Approximately
$4.0 billion of the assets managed by MFS are invested in securities of
foreign issuers and foreign denominated securities of U.S. issuers. MFS is
located at 500 Boylston Street, Boston, Massachusetts 02116.
MFS provides investment management and administrative services and
facilities to the series, including portfolio management and trade
execution. For these services, the series pays MFS an annual management
fee. The effective rate of the management fee paid by the series to MFS is
reflected in the "Expense Table."
o SUB-INVESTMENT ADVISERS
The Adviser has engaged two sub-advisers for each of the MFS/Foreign &
Colonial Emerging Markets Equity Series and the Global Growth Series:
Foreign & Colonial Management Limited ("FCM") and Foreign & Colonial
Emerging Markets Limited ("FCEM"). The sub-advisers manage the MFS/Foreign
& Colonial Emerging Markets Equity Series and the assets of the Global
Growth Series allocated to foreign emerging markets.
FCM and FCEM are each companies incorporated under the laws of England and
Wales and are located at Exchange House, Primrose Street, London EC2A,
2NY, United Kingdom. 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. FCEM is a wholly owned subsidiary of FCM.
For its services, the Adviser pays FCM a management fee in an amount equal
to 0.65% annually of the average daily net asset value of each such
series' assets managed by FCM.
FCEM manages emerging market investments for FCM and FCEM serves as the
investment adviser to public closed-end and open-end funds and segregated
accounts specializing in emerging markets. For its service, FCM pays FCEM
a management fee in an amount equal to 0.65% annually of the average daily
net asset value of each such series' assets managed by FCEM.
o PORTFOLIO MANAGERS
<TABLE>
<CAPTION>
Series Portfolio Managers
------ ------------------
<S> <C>
Bond Series Geoffrey L. Kurinsky, a Senior Vice President of MFS, has been the portfolio
manager of the series since May 1, 1998, and has been employed by the Adviser
as a portfolio manager since 1987.
Capital Appreciation Series Paul M. McMahon, a Senior Vice President of MFS, has been the portfolio
manager of the series since July 19, 1985, and has been employed by the
Adviser as a portfolio manager since 1981.
Capital Opportunities Series Maura A. Shaughnessy, a Senior Vice President of MFS, has been the portfolio
manager of the series since February 24, 1999, and has been employed by the
Adviser as a portfolio manager since 1991.
Emerging Growth Series John W. Ballen, President of MFS, has been a portfolio manager of the series
since May 1, 1995, and has been employed by the Adviser as a portfolio
manager since 1984. Toni Y. Shimura, a Vice President of MFS, has been a
portfolio manager of the series since November 30, 1995, and has been
employed by the Adviser as a portfolio manager since 1987.
Equity Income Series Lisa B. Nurme, a Senior Vice President of MFS, has been the portfolio manager
of the series since May 1, 1998, and has been employed by the Adviser as a
portfolio manager since 1987.
Global Asset Allocation Series Effective February 15, 1999, Joseph C. Flaherty, Jr., a Vice President of
MFS, determines the allocation of assets among the following five asset
classes: }i{ U.S. equity securities; (ii) foreign equity securities; (iii)
U.S. investment grade fixed income securities; (iv) U.S. high yield fixed
income securities; and }v{ foreign fixed income securities. Mr. Flaherty has
been employed as a portfolio manager by the adviser since 1993. A team of
portfolio managers selects specific portfolio securities within each of these
asset classes.
Global Governments Series Stephen C. Bryant, a Senior Vice President of MFS, has been the portfolio
manager of the series since June 14, 1994, and has been employed by the
Adviser as a portfolio manager since 1987.
Global Growth Series Asset allocation decisions are made by David A. Antonelli, Senior Vice
President of MFS. Mr. Antonelli is the Director of the MFS International
Equity Research Department. Mr. Antonelli has been employed as a portfolio
manager by MFS since 1991. Each sector has its own portfolio management team:
o Domestic Growth Companies. Assets allocated to domestic growth companies are
managed by John W. Ballen and Toni Y. Shimura. John W. Ballen, President of
MFS, has been a portfolio manager of the series since November 16, 1993, and
has been employed by the Adviser as a portfolio manager since 1984. Toni Y.
Shimura, a Vice President of MFS, has been a portfolio manager of the series
since March 1, 1995, and has been employed by the Adviser as a portfolio
manager since 1987.
o Foreign Developed Markets Growth Companies. 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 MFS but also by MFS International (U.K.) Limited, a wholly owned
subsidiary of MFS. This portion of the 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 series' investment objective within their
assigned geographic and industry responsibility.
o Foreign Emerging Markets Growth Companies. Assets allocated to foreign
emerging markets growth companies are managed by Dr. Arnab Kumar Banerji and
Jefferey Chowdhry. Dr. Arnab Kumar Banerji is Chief Investment Officer of FCEM,
and Jefferey Chowdhry is a Director of FCEM. Dr. Banerji has been a portfolio
manager of the series since October 24, 1995, and 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. Chowdhry
has been the portfolio manager of the series since February 1, 1997, and has
been employed by FCEM as a portfolio manager since 1994, before which he was a
portfolio manager at BZW Investment Management.
Global Total Return Series Frederick J. Simmons, a Senior Vice President of MFS, has been the portfolio
manager of the series since November 7, 1994, and has been employed by the
Adviser as a portfolio manager since 1971.
Government Securities Series Steven E. Nothern, a Vice President of MFS, has been the portfolio manager of
the series since January 1, 1998, and has been employed by the Adviser as a
portfolio manager since 1986.
High Yield Series Bernard Scozzafava, a Vice President of MFS, has been the portfolio manager
of the series since June 30, 1994, and has been employed by the Adviser as a
portfolio manager since 1989.
International Growth Series David R. Mannheim, a Senior Vice President of the Adviser, has been the
portfolio manager of the series since September 8, 1997, and has been
employed by the Adviser as a portfolio manager since 1988.
International Growth and Income Frederick J. Simmons, a Senior Vice President of the Adviser, has been the
Series portfolio manager of the series since September 8, 1997, and has been
employed by the Adviser as a portfolio manager since 1971.
Managed Sectors Series Toni Y. Shimura, a Vice President of MFS, has been the portfolio manager of
the series since December 9, 1998, and has been employed by the Adviser as a
portfolio manager since 1987.
Massachusetts Investors Growth Stephen Pesek, a Vice President of MFS, has been the portfolio manager of the
Stock Series series since February 24, 1999, and has been employed by the Adviser as a
portfolio manager since 1994.
Massachusetts Investors Trust John D. Laupheimer, Jr., a Senior Vice President of MFS, has been a portfolio
Series manager of the series since January 1, 1993, and has been employed by the
Adviser as a portfolio manager since 1981. Mitchell D. Dynan, a Senior Vice
President of MFS, has been a portfolio manager of the series since January 1,
1995, and has been employed by the Adviser as a portfolio manager since 1986.
MFS/Foreign & Colonial Dr. Arnab Kumar Banerji, Chief Investment Officer of FCEM, and Jefferey
Emerging Markets Equity Series Chowdhry, a Director of FCEM, are the series' portfolio managers. Dr. Banerji
has been a portfolio manager of the series since May 1, 1995, and 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. Mr.
Chowdhry has been a portfolio manager of the series since February 1, 1997,
and has been employed by FCEM as a portfolio manager since 1994, before which
he was a portfolio manager at BZW Investment Management.
New Discovery Series Brian E. Stack, a Senior Vice President of MFS, has been the portfolio
manager of the series since May 1, 1998, and has been employed by the Adviser
as a portfolio manager since 1993.
Research, Research Growth and These series are managed by a committee comprised of various equity research
Income and Research analysts.
International Series
Strategic Income Series James T. Swanson, a Senior Vice President of MFS, has been the portfolio
manager of the series since May 1, 1998, and has been employed by the Adviser
as a portfolio manager since 1985.
Total Return Series David M. Calabro, a Senior Vice President of MFS, has been a portfolio
manager of the series since July 19, 1995, and has been employed by the
Adviser as a portfolio manager since 1992. Mr. Calabro is the head of this
portfolio management team and a manager of the common stock portion of the
series' portfolio. Geoffrey L. Kurinsky, a Senior Vice President of MFS, has
been a portfolio manager of the series since July 19, 1995, and employed by
the Adviser as a portfolio manager since 1987. Mr. Kurinsky is the manager of
the series' fixed income securities. Constantinos G. Mokas, a Vice President
of MFS, has been a portfolio manager of the series since April 1, 1998, and
has been employed by the Adviser as a portfolio manager since 1990. Mr. Mokas
is the manager of the series' convertible securities. Lisa B. Nurme, a Senior
Vice President of MFS, has been employed by the Adviser as a portfolio
manager since 1987. Ms. Nurme is a manager of the common stock portion of the
series' portfolio and has been a portfolio manager of the series since July
19, 1995. Kenneth J. Enright, a Vice President of MFS, has been employed by
the Adviser as a portfolio manager since 1986, and has been a portfolio
manager of the series since January 15, 1999. Mr. Enright is a manager of the
common stock portion of the series' portfolio.
Utilities Series Maura A. Shaughnessy, a Senior Vice President of MFS, has been the portfolio
manager of the series since November 17, 1993, and has been employed by the
Adviser as a portfolio manager since 1991.
Zero Coupon Series Geoffrey L. Kurinsky, a Senior Vice President of MFS, has been the portfolio
manager of the series since 1991, and has been employed by the Adviser as a
portfolio manager since 1987.
</TABLE>
o ADMINISTRATOR
MFS provides the series with certain financial, legal, compliance,
shareholder communications and other administrative services. MFS is
reimbursed by the series for a portion of the costs it incurs in providing
these services.
o SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (referred to as MFSC), a wholly owned subsidiary
of MFS, performs transfer agency and certain other services for the
series, for which it is entitled to receive compensation from the series.
<PAGE>
- ----------------------------
V DESCRIPTION OF SHARES
- ----------------------------
The Series Fund offers shares of each of its series to separate accounts
established by Sun Life Assurance Company of Canada (U.S.) and its
affiliates in order to serve as investment vehicles for variable annuity
and variable life insurance contracts. All purchases, redemptions and
exchanges of shares are made through these insurance company separate
accounts, which are the record owner of the shares. Contract holders
seeking to purchase, redeem or exchange interests in a series' shares
should consult with the insurance company which issued their contract.
- -------------------------
VI OTHER INFORMATION
- -------------------------
o PRICING OF SERIES SHARES
The price of each series' shares is based on its net asset value. The net
asset value of each series' shares is determined at the close of regular
trading each day that the New York Stock Exchange is open for trading
(generally, 4:00 p.m., Eastern time) (referred to as the valuation time).
To determine net asset value, each series except the Money Market Series
values its assets at current market values, or, if current market values
are unavailable, at fair value as determined by the Adviser under the
direction of the Board of Trustees that oversees the series. Fair value
pricing may be used by a series when current market values are unavailable
or when an event occurs after the close of the exchange on which the
series' portfolio securities are principally traded that is likely to have
changed the value of the securities. The use of fair value pricing by a
series may cause the net asset value of its shares to differ significantly
from the net asset value that would be calculated using current market
values. The Money Market Series values its assets using the amortized cost
method.
Sun Life Assurance Company of Canada (U.S.) and its affiliates are the
designees of the Series Fund for receipt of purchase, exchange and
redemption orders from contractholders. An order submitted to the Series
Fund's designee by the valuation time will receive the net asset value
next calculated, provided that the Series Fund receives notice of the
order generally by 9:30 a.m. Eastern time on the next day on which the New
York Stock Exchange is open for trading.
Certain of the series invest in securities which are primarily listed on
foreign exchanges that trade on weekends and other days when the series
does not price its shares. Therefore, the value of the series' shares may
change on days when you will not be able to purchase or redeem the series'
shares.
It is expected that the Money Market Series will have a positive net
income at the time of each determination of net income. If for any reason
net income is a negative amount, the Money Market Series 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 as having contributed to the capital
of the Money Market Series that number of full and fractional shares in
the account of such shareholder which represents his or her 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
or her investment in the Money Market 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.
o DISTRIBUTIONS
Each series (except the Money Market Series) intends to pay substantially
all of its net income (including net short-term capital gain) to
shareholders as dividends at least annually. Any realized net capital
gains are also distributed at least annually.
All of the Money Market Series' net investment income for any calendar
year is declared as dividends daily and paid to its shareholders as
dividends on a monthly basis. Generally, those dividends are distributed
on the last business day of each month in the form of additional shares of
the Money Market Series at the rate of one share (and fraction thereof)
for each dollar (and fraction thereof) of dividend income or, at the
election of the shareholder, in cash. Shares purchased become entitled to
dividends declared as of the first day following the date of investment.
o TAX CONSIDERATIONS
The following discussion is very general. You are urged to consult your
tax adviser regarding the effect that an investment in a series may have
on your tax situation. Each series of the Series Fund is treated as a
separate entity for federal income tax purposes. As long as a series
qualifies for treatment as a regulated investment company (which it has
done in the past and intends to do in the future), it pays no federal
income tax on the earnings it distributes to shareholders. In addition,
each series also intends to continue to diversify its assets to satisfy
the federal diversification tax rules applicable to separate accounts that
fund variable insurance and annuity contracts.
Shares of the series are offered to insurance company separate accounts.
You should consult with the insurance company which issued your contract
to understand the federal tax treatment of your investment.
o RIGHT TO REJECT OR RESTRICT PURCHASE AND EXCHANGE ORDERS
Purchases and exchanges should be made for investment purposes only. Each
series reserves the right to reject or restrict any specific purchase or
exchange request. Because an exchange request involves both a request to
redeem shares of one series and to purchase shares of another series, the
series consider the underlying redemption and purchase requests
conditioned upon the acceptance of each of these underlying requests.
Therefore, in the event that a series rejects an exchange request, neither
the redemption nor the purchase side of the exchange will be processed.
When a series determines that the level of exchanges is detrimental to its
remaining shareholders, the series may delay the payment of exchange
proceeds for up to seven days to permit cash to be raised through the
orderly liquidation of its portfolio securities to pay the redemption
proceeds. In this case, the purchase side of the exchange will be delayed
until the exchange proceeds are paid by the redeeming series.
o MARKET TIMING POLICIES
The series are not designed for professional market timing organizations
or other entities using programmed and frequent exchanges. The series
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. You should consult
your insurance contract prospectus that accompanies this Prospectus for
information on other specific limitations on the transfer/exchange
privilege.
o IN-KIND DISTRIBUTIONS
The series have reserved the right to pay redemption proceeds by a
distribution in-kind of portfolio securities (rather than cash). In the
event that the series makes an in-kind distribution, you could incur the
brokerage and transaction charges when converting the securities to cash.
The series do not expect to make in-kind distributions.
o UNIQUE NATURE OF SERIES
MFS may serve as the investment adviser to other funds which have similar
investment goals and principal investment policies and risks as the
series, and which may be managed by a series' portfolio manager}s{. While
a series may have many similarities to these other funds, its investment
performance will differ from their investment performance. This is due to
a number of differences between a series and these similar products,
including differences in sales charges, expense ratios and cash flows.
o YEAR 2000 READINESS DISCLOSURE
The series could be adversely affected if the computer systems used by
MFS, the series' other service providers or the companies in which the
series invests do not properly process date-related information from and
after January 1, 2000 (the "Year 2000 Issue"). MFS recognizes the
importance of the Year 2000 Issue and, to address Year 2000 readiness,
created a separately funded Year 2000 Program Management Office in 1996
comprised of a specialized staff reporting directly to MFS senior
management. The Office, with the help of external consultants, is
responsible for overall coordination, strategy formulation, communications
and issue resolution with respect to Year 2000 Issues. While MFS systems
will be tested for Year 2000 readiness before the turn of the century,
there are significant systems interdependencies in the domestic and
foreign markets for securities, the business environments in which
companies held by the series operate and in MFS' own business environment.
MFS has been working with the series' other service providers to identify
and respond to potential problems with respect to Year 2000 readiness and
to develop contingency plans. Year 2000 readiness is also one of the
factors considered by MFS in its ongoing assessment of companies in which
the series invests. There can be no assurance, however, that these steps
will be sufficient to avoid any adverse impact on the series.
o POTENTIAL CONFLICTS
Shares of the series may be offered to separate accounts established by
Sun Life Assurance Company of Canada (U.S.) and its affiliates to fund
benefits under both variable annuity and variable life insurance
contracts. The series do not anticipate any disadvantage to contract
owners arising out of its simultaneous funding of both variable annuity
and variable life insurance contracts. A 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 Board of Trustees
of the series 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
Assurance Company of Canada (U.S.) and/or its affiliates believe that a
series 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 a series which could force the series to liquidate portfolio
securities at disadvantageous prices.
<PAGE>
- -----------------------------
VII FINANCIAL HIGHLIGHTS
- -----------------------------
The financial highlights table is intended to help you understand a
series' financial performance for the past five years, or, if a series has
not been in operation that long, since the time it commenced investment
operations. Certain information reflects financial results for a single
series share. The total returns in the table represent the rate by which
an investor would have earned (or lost) on an investment in a series
(assuming reinvestment of all distributions). The returns shown do not
reflect fees and charges imposed under the Variable Contracts through
which an investment is made. If these fees and charges were included, they
would reduce these returns. This information has been audited by the
Series Fund's independent auditors, whose report, together with the Series
Fund's financial statements, are included in the Series Fund's annual
report to shareholders. A series' annual report is available upon request
by contacting Sun Life Assurance Company of Canada (U.S.), Retirement
Products and Services Division (see back cover for address and phone
number). These financial statements are incorporated by reference into the
SAI. The Series Fund's independent auditors are Deloitte & Touche LLP.
<TABLE>
BOND SERIES
..........................................................................................
<CAPTION>
Period Ended
December 31,1998*
-----------------
<S> <C>
Per share data (for a share outstanding throughout the period):
Net asset value -- beginning of period ............................... $10.0000
--------
Income from investment operations# --
Net investment income(S) ........................................... $ 0.3306
Net realized and unrealized gain on investments and foreign
currency ......................................................... 0.3591
--------
Total from investment operations ................................. $ 0.6897
--------
Net asset value -- end of period ..................................... $10.6897
========
Total return(+) ...................................................... 6.90%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## ......................................................... 1.03%+
Net investment income .............................................. 4.88%+
Portfolio turnover ................................................... 161%
Net assets at end of period (000 omitted) ............................ $ 19,595
- ----------
+ Annualized.
++ Not annualized.
* For the period from the commencement of the Series' investment operations, May 6,
1998, through December 31, 1998.
# Per share data are based on average shares outstanding.
## The Series has an expense offset arrangement which reduces the Series' custodian
fee based upon the amount of cash maintained by the Series with its custodian and
dividend disbursing agent. The Series' expenses are calculated without reduction
for this expense offset arrangement.
(+) 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 Bond Series for the period indicated. If these fees had been incurred by the
Series, the net investment income per share and the ratios would have been:
Net investment income ................................................ $ 0.3282
Ratios (to average net assets):
Expenses## ......................................................... 1.07%+
Net investment income .............................................. 4.84%+
</TABLE>
<PAGE>
<TABLE>
CAPITAL APPRECIATION SERIES
...................................................................................................................................
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each year):
Net asset value -- beginning of year ................... $ 40.1392 $ 35.8316 $ 31.9878 $24.4076 $28.1892
---------- ---------- ---------- -------- --------
Income from investment operations# --
Net investment income (loss) .......................... $ (0.0962) $ (0.0405) $ (0.0200) $ 0.0933 $ 0.0523
Net realized and unrealized gain (loss) on investments
and foreign currency ................................ 11.0414 7.8691 6.7422 8.1619 (1.1104)
---------- ---------- ---------- -------- --------
Total from investment operations .................... $ 10.9452 $ 7.8286 $ 6.7222 $ 8.2552 $(1.0581)
---------- ---------- ---------- -------- --------
Less distributions declared to shareholders --
From net investment income ............................ $ -- $ -- $ (0.0322) $(0.0568) $(0.1306)
From net realized gain on investments and foreign
currency transactions ............................... (5.1496) (3.5210) (2.8462) (0.6182) (2.5929)
---------- ---------- ---------- -------- --------
Total distributions declared to shareholders ........ $ (5.1496) $ (3.5210) $ (2.8784) $(0.6750) $(2.7235)
---------- ---------- ---------- -------- --------
Net asset value -- end of year .......................... $ 45.9348 $ 40.1392 $ 35.8316 $31.9878 $24.4076
========== ========== ========== ======== ========
Total return(+) ......................................... 28.70% 23.14% 21.48% 34.46% (3.60)%
Ratios (to average net assets)/
Supplemental data:
Expenses## ............................................ 0.77% 0.78% 0.80% 0.83% 0.83%
Net investment income (loss) .......................... (0.23)% (0.10)% (0.05)% 0.32% 0.24%
Portfolio turnover ...................................... 79% 68% 67% 89% 52%
Net assets at end of year (000 omitted) ................. $1,725,155 $1,326,240 $1,061,631 $797,102 $476,508
- ----------
# Per share data are based on average shares outstanding.
## The Series has an expense offset arrangement which reduces the Series' custodian fee based upon the amount of cash maintained by
the Series with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995, the Series'
expenses are calculated without reduction for this expense offset arrangement.
(+) 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>
<TABLE>
CAPITAL OPPORTUNITIES SERIES
......................................................................................................
<CAPTION>
Year Ended December 31, Period Ended
------------------------ December 31,
1998 1997 1996*
-------- -------- --------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period ................ $13.9339 $11.0055 $10.0000
-------- -------- --------
Income from investment operations# --
Net investment income(S) ............................ $ 0.0477 $ 0.1466 $ 0.0916
Net realized and unrealized gain on investments and
foreign currency .................................. 3.6598 2.8785 0.9139
-------- -------- --------
Total from investment operations .................. $ 3.7075 $ 3.0251 $ 1.0055
-------- -------- --------
Less distributions declared to shareholders --
From net investment income .......................... $(0.0620) $(0.0221) $ --
From net realized gain on investments and foreign
currency transactions ............................. (0.5969) (0.0746) --
-------- -------- --------
Total distributions declared to shareholders ...... $(0.6589) $(0.0967) $ --
-------- -------- --------
Net asset value -- end of period ...................... $16.9825 $13.9339 $11.0055
======== ======== ========
Total return(+) ....................................... 26.97% 27.57% 10.10%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## .......................................... 0.86% 0.77% 0.63%+
Net investment income ............................... 0.31% 1.15% 1.75%+
Portfolio turnover .................................... 135% 129% 52%
Net assets at end of period (000 omitted) ............. $190,712 $ 87,744 $ 16,700
- ----------
* For the period from the commencement of the Series' investment operations, June 3, 1996, through December 31, 1996.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Series has an expense offset arrangement which reduces the Series' custodian fee based upon
the amount of cash maintained by the Series with its custodian and dividend disbursing agent.
The Series' expenses are calculated without reduction for this expense offset arrangement.
(+) 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 Capital
Opportunities Series for certain of the periods indicated. In addition, the investment adviser
agreed to maintain the expenses of the Series at not more than 1.00% of average daily net assets
for certain of the periods indicated. If these fees had been incurred and/or to the extent
actual expenses were over/under these limitations, the net investment income per share and the
ratios would have been:
Net investment income ............................................. $ 0.1296 $ 0.0537
Ratios (to average net assets):
Expenses## ........................................................ 0.90% 1.35%+
Net investment income ............................................. 1.03% 1.02%+
</TABLE>
<PAGE>
<TABLE>
EMERGING GROWTH SERIES
............................................................................................................
Year Ended December 31, Period Ended
-------------------------------------- December 31,
1998 1997 1996 1995*
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period ........ $18.0032 $14.8305 $12.6867 $10.0000
-------- -------- -------- --------
Income from investment operations# --
Net investment income (loss)(S) ............. $(0.0530) $(0.0551) $ 0.0175 $ 0.0788
Net realized and unrealized gain (loss) on
investments and foreign currency .......... 6.0356 3.2968 2.1506 2.6079
-------- -------- -------- --------
Total from investment operations .......... $ 5.9825 $ 3.2417 $ 2.1681 $ 2.6867
-------- -------- -------- --------
Less distributions declared to shareholders --
From net investment income .................. $ -- $(0.0098) $(0.0243) $ --
From net realized gain on investments and
foreign currency transactions ............. (0.7101) (0.0592) -- --
-------- -------- -------- --------
Total distributions declared to
shareholders ............................ $(0.7100) $(0.0690) $(0.0243) $ --
-------- -------- -------- --------
Net asset value -- end of period .............. $23.2757 $18.0032 $14.8305 $12.6867
======== ======== ======== ========
Total return(+) ............................... 33.88% 21.93% 17.15% 26.80%++
Ratios (to average net assets)/Supplemental
data(S):
Expenses## .................................. 0.78% 0.81% 0.70% 0.24%+
Net investment income (loss) ................ (0.27)% (0.33)% 0.12% 1.13%+
Portfolio turnover ............................ 80% 109% 88% 28%
Net assets at end of period (000 omitted) ..... $736,251 $457,351 $250,826 $ 67,255
- ------------
* For the period from the commencement of the Series' investment operations, May 1, 1995, through December 31, 1995.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Series has an expense offset arrangement which reduces the Series' custodian fee based upon the
amount of cash maintained by the Series with its custodian and dividend disbursing agent. For fiscal
years ending after September 1, 1995, the Series' expenses are calculated without reduction for this
expense offset arrangement.
(+) 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. If this fee had been incurred by the Series, the net investment
income (loss) per share and the ratios would have been:
Net investment 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>
<TABLE>
EQUITY INCOME SERIES
..............................................................................................
Period Ended
December 31, 1998*
------------------
<S> <C>
Per share data (for a share outstanding throughout the period):
Net asset value -- beginning of period ................................... $10.0000
--------
Income from investment operations# --
Net investment income(S) ............................................... $ 0.1379
Net realized and unrealized gain on investments and foreign
currency ............................................................. 0.3659
--------
Total from investment operations ..................................... $ 0.5038
--------
Net asset value -- end of period ......................................... $10.5038
========
Total return(+) .......................................................... 5.00%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## ............................................................. 1.03%+
Net investment income .................................................. 2.16%+
Portfolio turnover ....................................................... 101%
Net assets at end of period (000 omitted) ................................ $ 8,493
- -------------
* For the period from the commencement of the Series' investment operations, May 6, 1998, through December 31, 1998.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Series has an expense offset arrangement which reduces the Series' custodian fee
based upon the amount of cash maintained by the Series with its custodian and
dividend disbursing agent. The Series' expenses are calculated without reduction for
this expense offset arrangement.
(+) 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 agreed to maintain the expenses of the Equity
Income Series, exclusive of investment advisory fees, at not more than 0.25% of
average daily net assets for the period indicated. If these fees had been incurred
and/or to the extent actual expenses were over/under this limitation, the net
investment income per share and the ratios would have been:
Net investment income .............................................. $ 0.1070
Ratios (to average net assets):
Expenses## ....................................................... 1.51%+
Net investment income ............................................ 1.68%+
</TABLE>
<PAGE>
<TABLE>
GLOBAL ASSET ALLOCATION SERIES
....................................................................................................................................
<CAPTION>
Year Ended December 31, Period Ended
-------------------------------------------------------- December 31,
1998 1997 1996 1995 1994*
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period .................. $14.5377 $13.7794 $12.2250 $10.0579 $10.0000
-------- -------- -------- -------- --------
Income from investment operations# --
Net investment income(S) .............................. $ 0.4686 $ 0.4412 $ 0.3731 $ 0.4205 $ 0.0220
Net realized and unrealized gain on investments and
foreign currency .................................... 0.5338 1.0178 1.5563 1.7540 0.0359
-------- -------- -------- -------- --------
Total from investment operations .................... $ 1.0024 $ 1.4590 $ 1.9294 $ 2.1745 $ 0.0579
-------- -------- -------- -------- --------
Less distributions declared to shareholders --
From net investment income ............................ $(0.4975) $(0.2242) $(0.1300) $(0.0074) $ --
From net realized gain on investments and foreign
currency transactions ............................... (0.5977) (0.4765) (0.2450) -- --
-------- -------- -------- -------- --------
Total distributions declared to shareholders ........ $(1.0952) $(0.7007) $(0.3750) $(0.0074) $ --
-------- -------- -------- -------- --------
Net asset value -- end of period ........................ $14.4449 $14.5377 $13.7794 $12.2250 $10.0579
======== ======== ======== ======== ========
Total return(+) ......................................... 6.60% 10.87% 16.04% 21.56% 0.60%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## ............................................ 0.90% 0.92% 0.94% 0.67% 1.50%+
Net investment income ................................. 3.21% 3.06% 2.84% 3.70% 3.13%+
Portfolio turnover ...................................... 163% 162% 154% 146% 2%
Net assets at end of period (000
omitted) .............................................. $126,641 $122,912 $ 77,016 $ 25,863 $ 3,003
- ----------
+ Annualized.
++ Not annualized.
* For the period from the commencement of the Series' investment operations, November 7, 1994, through December 31, 1994.
# Per share data are based on average shares outstanding.
## The Series has an expense offset arrangement which reduces the Series' custodian fee based upon the amount of cash maintained by
the Series with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995, the Series'
expenses are calculated without reduction for this expense offset arrangement.
(+) 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 Global 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:
- ----------------
Net investment income ............................................................................... $ 0.3716 $ 0.0041
Ratios (to average net assets):
Expenses## ........................................................................................ 1.11% 4.05%+
Net investment income ............................................................................. 3.27% 0.58%+
</TABLE>
<PAGE>
<TABLE>
GLOBAL GOVERNMENTS SERIES
.................................................................................................................................
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each year):
Net asset value -- beginning of year .................... $10.7247 $11.2582 $12.4866 $11.3769 $13.0212
-------- -------- -------- -------- --------
Income from investment operations# --
Net investment income ................................. $ 0.5302 $ 0.5770 $ 0.6882 $ 0.8031 $ 0.6095
Net realized and unrealized gain (loss) on investments
and foreign currency ................................ 1.1118 (0.6754) (0.2081) 0.9511 (1.2295)
-------- -------- -------- -------- --------
Total from investment operations .................... $ 1.6420 $(0.0984) $ 0.4801 $ 1.7542 $(0.6200)
-------- -------- -------- -------- --------
Less distributions declared to shareholders --
From net investment income ............................ $(0.1396) $(0.3742) $(1.7085) $(0.0058) $(0.8823)
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 ........ $(0.1396) $(0.4351) $(1.7085) $(0.6445) $(1.0243)
-------- -------- -------- -------- --------
Net asset value -- end of year .......................... $12.2271 $10.7247 $11.2582 $12.4866 $11.3769
======== ======== ======== ======== ========
Total return(+) ......................................... 15.46% (0.76)% 4.66% 15.69% (4.46)%
Ratios (to average net assets)/Supplemental data:
Expenses## ............................................ 0.88% 0.91% 0.90% 0.89% 0.90%
Net investment income ................................. 4.75% 5.43% 6.00% 6.67% 6.06%
Portfolio turnover ...................................... 315% 344% 390% 329% 269%
Net assets at end of year (000 omitted) ................. $ 99,220 $110,386 $141,764 $152,487 $139,155
- ----------------
# Per share data are based on average shares outstanding.
## The Series has an expense offset arrangement which reduces the Series' custodian fee based upon the amount of cash maintained by
the Series with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995, the Series'
expenses are calculated without reduction for this expense offset arrangement.
(+) 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>
<TABLE>
GLOBAL GROWTH SERIES
.................................................................................................................................
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each year):
Net asset value -- beginning of year .................... $14.6844 $13.0338 $12.3464 $10.9425 $10.6366
-------- -------- -------- -------- --------
Income from investment operations# --
Net investment income(S) .............................. $ 0.0466 $ 0.0446 $ 0.0232 $ 0.0689 $ 0.1506
Net realized and unrealized gain on
investments and foreign currency .................... 2.0973 1.9245 1.5878 1.6388 0.1590
-------- -------- -------- -------- --------
Total from investment operations .................... $ 2.1439 $ 1.9691 $ 1.6110 $ 1.7077 $ 0.3096
-------- -------- -------- -------- --------
Less distributions declared to shareholders --
From net investment income ............................ $(0.0565) $(0.0626) $(0.0886) $(0.1361) $(0.0037)
From net realized gain on
investments and foreign currency
transactions ........................................ (1.1163) (0.2559) (0.8350) (0.1677) --
-------- -------- -------- -------- --------
Total distributions declared to
shareholders ...................................... $(1.1728) $(0.3185) $(0.9236) $(0.3038) $(0.0037)
-------- -------- -------- -------- --------
Net asset value -- end of year .......................... $15.6555 $14.6844 $13.0338 $12.3464 $10.9425
======== ======== ======== ======== ========
Total return(+) ......................................... 14.61% 15.32% 13.02% 16.06% 2.86%
Ratios (to average net assets)/Supplemental data:(S)
Expenses## ............................................ 1.01% 1.02% 1.04% 1.07% 0.47%
Net investment income ................................. 0.31% 0.31% 0.18% 0.60% 2.20%
Portfolio turnover ...................................... 92% 105% 810% 162% 231%
Net assets at end of year (000 omitted) ................. $277,516 $252,402 $203,106 $146,388 $100,045
- ----------------
# Per share data are based on average shares outstanding.
## The Series has an expense offset arrangement which reduces the Series' custodian fee based upon the amount of cash maintained by
the Series with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995, the Series'
expenses are calculated without reduction for this expense offset arrangement.
(+) 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 Global Growth Series for the period
indicated. If this fee had been incurred by the Series, the net investment income per share and the ratios would have been:
Net asset income ............................................................................................. $ 0.0989
Ratios (to average net assets):
Expenses## ................................................................................................. 1.20%
Net investment income ...................................................................................... 1.47%
</TABLE>
<PAGE>
<TABLE>
GLOBAL TOTAL RETURN SERIES
....................................................................................................................................
<CAPTION>
Year Ended December 31, Period Ended
-------------------------------------------------------- December 31,
1998 1997 1996 1995 1994*
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period .................. $14.6971 $13.2657 $11.8346 $10.0405 $10.0000
-------- -------- -------- -------- --------
Income from investment operations# --
Net investment income(S) .............................. $ 0.3813 $ 0.3979 $ 0.4131 $ 0.4437 $ 0.0247
Net realized and unrealized gain on investments and
foreign currency .................................... 2.2629 1.3759 1.2480 1.3564 0.0158
-------- -------- -------- -------- --------
Total from investment operations .................... $ 2.6442 $ 1.7738 $ 1.6611 $ 1.8001 $ 0.0405
-------- -------- -------- -------- --------
Less distributions declared to shareholders --
From net investment income ............................ $(0.3201) $(0.1756) $(0.2300) $(0.0060) $ --
From net realized gain on investments and foreign
currency transactions ............................... (0.4152) (0.1668) -- -- --
-------- -------- -------- -------- --------
Total distributions declared to shareholders ........ $(0.7353) $(0.3424) $(0.2300) $(0.0060) $ --
-------- -------- -------- -------- --------
Net asset value -- end of period ........................ $16.6060 $14.6971 $13.2657 $11.8346 $10.0405
======== ======== ======== ======== ========
Total return(+) ......................................... 18.37% 13.61% 14.33% 17.89% 0.40%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## ............................................ 0.93% 1.04% 0.96% 0.77% 1.50%+
Net investment income ................................. 2.44% 2.85% 3.33% 4.01% 3.31%+
Portfolio turnover ...................................... 141% 171% 148% 146% 1%
Net assets at end of period (000 omitted) ............... $ 99,955 $ 71,823 $ 37,638 $ 13,786 $ 1,384
- ----------
+ Annualized.
++ Not annualized.
* For the period from the commencement of the Series' investment operations, November 7, 1994, through December 31, 1994.
# Per share data are based on average shares outstanding.
## The Series has an expense offset arrangement which reduces the Series' custodian fee based upon the amount of cash maintained by
the Series with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995, the Series'
expenses are calculated without reduction for this expense offset arrangement.
(+) 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 Global 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:
Net investment income (loss) ................................................................ $ 0.3972 $(0.0405)
Ratios (to average net assets):
Expenses## ................................................................................ 1.19% 6.93%+
Net investment income ..................................................................... 3.59% (2.12)%+
</TABLE>
<PAGE>
<TABLE>
GOVERNMENT SECURITIES SERIES
.................................................................................................................................
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each year):
Net asset value -- beginning of year .................... $13.0406 $12.8672 $13.3900 $12.1219 $13.0951
-------- -------- -------- -------- --------
Income from investment operations# --
Net investment income ................................. $ 0.7663 $ 0.8109 $ 0.8445 $0.08311 $ 0.6366
Net realized and unrealized gain(loss) on investments
and foreign currency .................................. 0.3211 0.2490 (0.6620) 1.2183 (0.9238)
-------- -------- -------- -------- --------
Total from investment operations .................... $ 1.0874 $ 1.0599 $ 0.1825 $ 2.0494 $(0.2872)
-------- -------- -------- -------- --------
Less distributions declared to shareholders --
From net investment income ............................ $(0.7334) $(0.8865) $(0.7053) $(0.7813) $(0.4959)
From net realized gain on investments and foreign
currency transactions ............................... -- -- -- -- (0.1901)
-------- -------- -------- -------- --------
Total distributions declared to shareholders ........ $(0.7334) $(0.8865) $(0.7053) $(0.7813) $(0.6860)
-------- -------- -------- -------- --------
Net asset value -- end of year .......................... $13.3946 $13.0406 $12.8672 $13.3900 $12.1219
======== ======== ======== ======== ========
Total return(+) ......................................... 8.70% 8.72% 1.65% 17.66% (2.21)%
Ratios (to average net assets)/Supplemental data:
Expenses## ............................................ 0.62% 0.64% 0.63% 0.63% 0.62%
Net investment income ................................. 5.82% 6.38% 6.60% 6.59% 6.01%
Portfolio turnover ...................................... 107% 182% 57% 80% 90%
Net assets at end of year (000 omitted) ................. $457,474 $387,732 $383,107 $368,848 $347,150
- ----------------
# Per share data are based on average shares outstanding.
## The Series has an expense offset arrangement which reduces the Series' custodian fee based upon the amount of cash maintained by
the Series with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995, the Series'
expenses are calculated without reduction for this expense offset arrangement.
(+) 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>
<TABLE>
HIGH YIELD SERIES
.................................................................................................................................
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each year):
Net asset value -- beginning of year .................... $ 9.7108 $ 9.2131 $ 8.9222 $ 8.1860 $ 9.1120
-------- -------- -------- -------- --------
Income from investment operations# --
Net investment income ................................. $ 0.8380 $ 0.8206 $ 0.8012 $ 0.7891 $ 0.8226
Net realized and unrealized gain (loss) on investments
and foreign currency ................................ (0.7526) 0.3319 0.2131 0.5494 (1.0387)
-------- -------- -------- -------- --------
Total from investment operations .................... $ 0.0854 $ 1.1525 $ 1.0143 $ 1.3385 $(0.2161)
-------- -------- -------- -------- --------
Less distributions from net investment income ........... $(0.6327) $(0.6548) $(0.7234) $(0.6023) $(0.7099)
-------- -------- -------- -------- --------
Net asset value -- end of year .......................... $ 9.1635 $ 9.7108 $ 9.2131 $ 8.9222 $ 8.1860
======== ======== ======== ======== ========
Total return(+) ......................................... 0.58% 13.24% 12.12% 16.93% (2.16)%
Ratios (to average net assets)/Supplemental data:
Expenses## ............................................ 0.82% 0.84% 0.84% 0.87% 0.86%
Net investment income ................................. 8.78% 8.70% 9.01% 9.17% 8.94%
Portfolio turnover ...................................... 135% 130% 88% 66% 82%
Net assets at end of year (000 omitted) ................. $326,232 $275,207 $196,498 $153,800 $102,109
- ----------------
# Per share data are based on average shares outstanding.
## The Series has an expense offset arrangement which reduces the Series' custodian fee based upon the amount of cash maintained by
the Series with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995, the Series'
expenses are calculated without reduction for this expense offset arrangement.
(+) 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>
<TABLE>
<CAPTION>
INTERNATIONAL GROWTH SERIES
...................................................................................................
Year Ended December 31, Period Ended
----------------------- December 31,
1998 1997 1996*
--------- --------- ---------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period ............... $ 9.6480 $ 9.8213 $ 10.0000
--------- --------- ---------
Income from investment operations# --
Net investment income(S) ........................... $ 0.0843 $ 0.1201 $ 0.0748
Net realized and unrealized gain (loss) on
investments and foreign currency ................. 0.1060 (0.2747) (0.2535)
--------- --------- ---------
Total from investment operations ................. $ 0.1903 $ (0.1546) $ 0.1787)
--------- --------- ---------
Less distributions declared to shareholders --
From net investment income ......................... $ (0.1077) $ (0.0187) $ --
From net realized gain on investments and foreign
currency transactions ............................ -- -- --
--------- --------- ---------
Total distributions declared to shareholders ..... $ (0.1077) $ (0.0187) $ --
--------- --------- ---------
Net asset value -- end of period ..................... $ 9.7306 $ 9.6480 $ 9.8213
========= ========= =========
Total return(+) ...................................... 1.94% (1.64)% (1.70)%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## ......................................... 1.32% 1.11% 1.56%+
Net investment income .............................. 0.86% 1.23% 1.47%+
Portfolio turnover ................................... 77% 261% 3%
Net assets at end of period (000 omitted) ............ $35,681 $23,401 $5,525
- ----------
* For the period from the commencement of the Series' investment operations, June 3, 1996, through December 31, 1996.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Series has an expense offset arrangement which reduces the Series' custodian fee based upon
the amount of cash maintained by the Series with its custodian and dividend disbursing agent.
The Series' expenses are calculated without reduction for this expense offset arrangement.
(+) 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 Series for certain of the periods indicated. In addition, the investment
adviser agreed to maintain the expenses of the International Growth Series at not more than
1.50% of average daily net assets for certain of the periods indicated. If these fees had been
incurred and/or to the extent actual expenses were over/under these limitations, the net
investment income per share and the ratios would have been:
Net investment income ........................................... $ 0.1036 $ 0.0265
Ratios (to average net assets):
Expenses## .................................................... 1.28% 2.50%+
Net investment income ......................................... 1.06% 0.46%+
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INTERNATIONAL GROWTH AND INCOME SERIES
...........................................................................................................
Year Ended December 31, Period Ended
-------------------------------------- December 31,
1998 1997 1996 1995*
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period ...... $11.1722 $10.6247 $10.1282 $10.0000
-------- -------- -------- --------
Income from investment operations# --
Net investment income(S) .................. $ 0.0983 $ 0.1356 $ 0.2326 $ 0.0295
Net realized and unrealized gain on
investments and foreign currency ........ 2.3104 0.5497 0.2639 0.0987
-------- -------- -------- --------
Total from investment operations ........ $ 2.4087 $ 0.6853 $ 0.4965 $ 0.1282
-------- -------- -------- --------
Less distributions declared to shareholders --
From net investment income ................ $(0.1160) $(0.1124) $ -- $ --
From net realized gain on investments and
foreign currency transactions ........... (0.2795) (0.0254) -- $ --
-------- -------- -------- --------
Total distributions declared to
shareholders .......................... $(0.3955) $(0.1378) $ -- $ --
-------- -------- -------- --------
Net asset value -- end of period ............ $13.1854 $11.1722 $10.6247 $10.1282
======== ======== ======== ========
Total return(+) ............................. 21.68% 6.53% 4.84% 1.30%++
Ratios (to average net assets)/Supplemental
data(S):
Expenses## ................................ 1.16% 1.22% 0.97% 1.50%+
Net investment income ..................... 0.79% 1.24% 2.21% 1.64%+
Portfolio turnover .......................... 54% 194% 51% --
Net assets at end of period (000 omitted) ... $75,410 $ 51,368 $ 35,710 $ 7,179
- ----------
+ Annualized.
++ Not annualized.
* For the period from the commencement of the Series' investment operations, October 2, 1995, through December 31, 1995.
# Per share data are based on average shares outstanding.
## The Series has an expense offset arrangement which reduces the Series' custodian fee based upon the
amount of cash maintained by the Series' with its custodian and dividend disbursing agent. The
Series' expenses are calculated without reduction for this expense offset arrangement.
(+) 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:
Net investment income ................................................. $ 0.2101 $ 0.0119
Ratios (to average net assets):
Expenses## .......................................................... 1.16% 2.48%+
Net investment income ............................................... 2.02% 0.66%+
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MANAGED SECTORS SERIES
...............................................................................................................
Year Ended December 31,
------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each year):
Net asset value -- beginning of year $29.1601 $26.2503 $25.4468 $19.8823 $23.2419
-------- -------- -------- -------- --------
Income (loss) from investment operations# --
Net investment income (loss) ...... $(0.0544) $(0.0597) $ 0.0200 $ 0.0979 $ 0.0982
Net realized and unrealized gain
(loss) on investments and foreign
currency ........................ 3.7082 6.2302 4.2817 6.1880 (0.6610)
-------- -------- -------- -------- --------
Total from investment operations $ 3.6538 $ 6.1705 $ 4.3017 $ 6.2859 $(0.5628)
-------- -------- -------- -------- --------
Less distributions declared to shareholders --
From net investment income ........ $ -- $(0.0201) $(0.0758) $(0.0542) $(0.0239)
From net realized gain on
investments and foreign currency
transactions .................... (4.5668) (3.2406) (3.4224) (0.6672) (2.7729)
In excess of net realized gain on
investments and foreign currency
transactions ...................... (0.0023) -- -- -- --
-------- -------- -------- -------- --------
Total distributions declared to
shareholders .................. $(4.5691) $(3.2607) $(3.4982) $(0.7214) $(2.7968)
-------- -------- -------- -------- --------
Net asset value -- end of year ...... $28.2448 $29.1601 $26.2503 $25.4468 $19.8823
======== ======== ======== ======== ========
Total return(+) ................. 12.25% 25.63% 17.58% 32.29% (1.94)%
Ratios (to average net assets)/
Supplemental data:
Expenses## .................... 0.80% 0.82% 0.82% 0.84% 0.87%
Net investment income (loss) .. (0.20)% (0.21)% 0.09% 0.42% 0.53%
Portfolio turnover .............. 161% 103% 121% 113% 103%
Net assets at end of year
(000 omitted) ................. $364,791 $340,627 $266,368 $194,351 $118,987
# Per share data are based on average shares outstanding.
## The Series has an expense offset arrangement which reduces the Series's custodian fee based upon the amount of
cash maintained by the Series with its custodian. For fiscal years ending after September 1, 1995, the
Series' expenses are calculated without reduction for this expense offset arrangement.
(+) 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>
<TABLE>
<CAPTION>
MASSACHUSETTS INVESTORS TRUST SERIES
.............................................................................................................
Year Ended December 31,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each year):
Net asset value -- beginning of
year .......................... $33.1489 $26.4978 $22.0182 $16.4563 $16.9289
-------- -------- -------- -------- --------
Income from investment operations# --
Net investment income ......... $ 0.3382 $ 0.3714 $ 0.4100 $ 0.4318 $ 0.2942
Net realized and unrealized
gain (loss) on investments
and foreign currency ........ 7.3482 7.8153 5.0415 5.6172 (0.4790)
-------- -------- -------- -------- --------
Total from investment
operations ................ $ 7.6864 $ 8.1867 $ 5.4515 $ 6.0490 $(0.1848)
-------- -------- -------- -------- --------
Less distributions declared to
shareholders --
From net investment income .... $(0.2646) $(0.2854) $(0.2936) $(0.3037) $(0.1996)
From net realized gain on
investments and foreign
currency transactions ....... (2.3231) (1.2502) (0.6783) (0.1834) (0.0882)
-------- -------- -------- -------- --------
Total distributions declared
to shareholders ........... $(2.5877) $(1.5356) $(0.9719) $(0.4871) $(0.2878)
-------- -------- -------- -------- --------
Net asset value -- end of year .. $38.2476 $33.1489 $26.4978 $22.0182 $16.4563
======== ======== ======== ======== ========
Total return(+) ................. 23.85% 31.94% 25.41% 37.41% (1.10)%
Ratios (to average net assets)/
Supplemental data:
Expenses## .................... 0.59% 0.61% 0.61% 0.64% 0.64%
Net investment income ......... 0.96% 1.23% 1.71% 2.25% 2.42%
Portfolio turnover .............. 61% 52% 51% 60% 146%
Net assets at end of year
(000 omitted) ................. $1,852,728 $1,158,135 $571,008 $302,024 $150,318
# Per share data are based on average shares outstanding.
## The Series has an expense offset arrangement which reduces the Series' custodian fee based upon the amount
of cash maintained by the Series with its custodian and dividend disbursing agent. For fiscal years ending
after September 1, 1995, the Series' expenses are calculated without reduction for this expense offset
arrangement.
(+) 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>
MASSACHUSETTS INVESTORS GROWTH STOCK SERIES
..............................................................................
Period Ended
December 31,
1998*
--------
Per share data (for a share outstanding throughout the period):
Net asset value -- beginning of period ......................... $10.0000
--------
Income from investment operations# --
Net investment loss .......................................... $(0.0001)
Net realized and unrealized gain on investments and foreign
currency ................................................... 2.0805
--------
Total from investment operations ........................... $ 2.0804
--------
Net asset value -- end of period ............................... $12.0804
========
Total return(+) ................................................ 20.70%++
Ratios (to average net assets)/Supplemental data:
Expenses## ................................................... 0.97%+
Net investment income (loss) ................................. --
Portfolio turnover ............................................. 66%
Net assets at end of period (000 omitted) ...................... $81,237
- ----------
* For the period from the commencement of the Series' investment operations,
May 6, 1998, through December 31, 1998.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Series has an expense offset arrangement which reduces the Series'
custodian fee based upon the amount of cash maintained by the Series with
its custodian and dividend disbursing agent. The Series' expenses are
calculated without reduction for this expense offset arrangement.
(+) 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.
<PAGE>
<TABLE>
<CAPTION>
MFS(R)/FOREIGN & COLONIAL EMERGING MARKETS EQUITY SERIES
....................................................................................................
Year Ended December 31, Period Ended
----------------------- December 31,
1998 1997 1996*
-------- -------- --------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period ............... $11.0359 $10.0013 $10.0000
-------- -------- --------
Income from investment operations# --
Net investment income(S) ........................... $ .0934 $ 0.1638 $ 0.0706
Net realized and unrealized gain (loss) on
investments and foreign currency transactions .... (3.2974) 0.8773 (0.0693)
-------- -------- --------
Total from investment operations ................. $(3.2040) $ 1.0411 $ 0.0013
-------- -------- --------
Less distributions declared to shareholders --
From net investment income ......................... $(0.1362) $(0.0065) $ --
From net realized gain on investments and foreign
currency ......................................... (0.0967) -- --
In excess of net realized gain on investments and
foreign currency transactions .................... (0.0517) -- --
From paid-in capital ............................... (0.0571) -- --
-------- -------- --------
Total distributions declared to shareholders ..... $(0.3417) $(0.0065) $ --
-------- -------- --------
Net asset value -- end of period ..................... $ 7.4902 $11.0359 $10.0013
======== ======== ========
Total return(+) ...................................... (29.98)% 10.46% 0.00%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## ......................................... 1.59% 1.07% 1.55%+
Net investment income .............................. 1.03% 1.38% 0.77%+
Portfolio turnover ................................... 92% 69% 4%
Net assets at end of period (000 omitted) ............ $17,119 $24,181 $3,271
- ----------
+ Annualized.
++ Not annualized.
* For the period from the commencement of the Series' investment operations, June 5, 1996, through
December 31, 1996.
# Per share data are based on average shares outstanding.
## The Series has an expense offset arrangement which reduces the Series custodian fee based upon
the amount of cash maintained by the Series with its custodian and dividend disbursing agent.
The Series' expenses are calculated without reduction for this expense offset arrangement.
(+) 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
MFS(R)/Foreign & Colonial Emerging Markets Equity Series for the periods indicated. If these
fees had not been incurred by the Series, the net investment income (loss) per share and the
ratios would have been:
Net investment income (loss) .................................... $ 0.1552 $(0.0975)
Ratios (to average net assets):
Expenses## .................................................... 1.55% 3.38%+
Net investment income ......................................... 0.90% (1.12)%+
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MONEY MARKET SERIES
...............................................................................................................
Year Ended December 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<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# -- $ 0.0494 $ 0.0495 $ 0.0483 $ 0.0520 $ 0.0363
-------- -------- -------- -------- --------
Less distributions from net
investment income ................. $(0.0494) $(0.0495) $(0.0483) $(0.0520) $(0.0363)
-------- -------- -------- -------- --------
Net asset value -- end of year ...... $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
======== ======== ======== ======== ========
Total return (+) .................... 5.02% 5.06% 4.95% 5.44% 3.69%
Ratios (to average net assets)/
Supplemental data:
Expenses## ........................ 0.56% 0.57% 0.56% 0.59% 0.58%
Net investment income ............. 4.94% 4.94% 4.82% 5.30% 3.74%
Net assets at end of year
(000 omitted) ..................... $465,545 $340,060 $409,165 $282,754 $252,175
# Per share data are based on average shares outstanding.
## Each of the Series' has an expense offset arrangement which reduces the Series' custodian fee based upon
the amount of cash maintained by the Series with its custodian and dividend disbursing agent. For fiscal
years ending September 1, 1995, the Series' expenses are calculated without reduction for this expense
offset arrangement.
(+) 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>
NEW DISCOVERY SERIES
..............................................................................
Period Ended
December 31,
1998*
--------
Per share data (for a share outstanding throughout the period):
Net asset value -- beginning of period ......................... $10.0000
--------
Income from investment operations# --
Net investment loss(S) ....................................... $(0.0273)
Net realized and unrealized gain on investments and foreign
currency ................................................... 0.6505
--------
Total from investment operations ........................... $ 0.6232
--------
Net asset value -- end of period ............................... $10.6232
========
Total return(+) ................................................ 6.20%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## ................................................... 1.28%+
Net investment loss .......................................... (0.44)%+
Portfolio turnover ............................................. 69%
Net assets at end of period (000 omitted) ...................... $ 13,280
- ----------
* For the period from the commencement of the Series' investment operations,
May 6, 1998, through December 31, 1998.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Series has an expense offset arrangement which reduces the Series'
custodian fee based upon the amount of cash maintained by the Series with
its Custodian and dividend disbursing agent. The Series' expenses are
calculated without reduction for this expense offset arrangement.
(+) 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 agreed to maintain the expenses of the
New Discovery Series, exclusive of investment advisory fees, at not more
than 0.35% of average daily net assets. To the extent actual expenses were
over these limitations, the net investment loss per share would have been:
Net investment loss ........................................ $ (0.0470)
Ratios (to average net assets):
Expenses## ............................................... 1.60%+
Net investment loss ...................................... (0.76)%+
<PAGE>
<TABLE>
<CAPTION>
RESEARCH SERIES
...............................................................................................................
Year Ended December 31, Period Ended
---------------------------------------------------------- December 31,
1998 1997 1996 1995 1994*
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of
period ............................ $19.4313 $16.5735 $13.5777 $ 9.8761 $10.0000
-------- -------- -------- -------- --------
Income (loss) from investment operations# --
Net investment income(S) .......... $ 0.0780 $ 0.0678 $ 0.0797 $ 0.1401 $ 0.0131
Net realized and unrealized gain
(loss) on investments and foreign
currency ........................ 4.4449 3.3159 3.1330 3.5651 (0.1370)
-------- -------- -------- -------- --------
Total from investment operations $ 4.5229 $ 3.3837 $ 3.2127 $ 3.7052 $(0.1239)
-------- -------- -------- -------- --------
Less distributions declared to
shareholders --
From net investment income ........ $(0.0477) $(0.0387) $(0.0328) $(0.0036) $ --
From net realized gain on
investments and foreign currency
transactions .................... (0.8834) (0.4872) (0.1841) -- --
-------- -------- -------- -------- --------
Total distributions declared to
shareholders .................. $(0.9311) $(0.5259) $(0.2169) $(0.0036) $ --
-------- -------- -------- -------- --------
Net asset value -- end of period .... $23.0231 $19.4313 $16.5735 $13.5777 $ 9.8761
======== ======== ======== ======== ========
Total return(+) ..................... 23.61% 20.86% 23.76% 37.50% (1.20)%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## ........................ 0.76% 0.79% 0.84% 0.58% 1.50%+
Net investment income ............. 0.37% 0.37% 0.52% 1.16% 1.80%+
Portfolio turnover .................. 81% 79% 70% 81% 3%
Net assets at end of period (000
omitted) .......................... $988,280 $670,302 $325,389 $ 71,828 $ 3,869
- ----------
* For ther period from the commencement of the Series' investment operations, November 7, 1994, through
December 31, 1994.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Series has an expense offset arrangement which reduces the Series' custodian fee based upon the amount
of cash maintained by the Series with its custodian. For fiscal years ending after September 1, 1995, the
Series' expenses are calculated without reduction for this expense offset arrangement.
(+) 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) For the period ended December 31, 1994, the investment adviser agreed to maintain the expenses of the
Series, exclusive of investment advisory fees, at not more than 1.50% of average daily net assets. In
addition, for both periods indicated below, the investment adviser voluntarily waived all or a portion of
its advisory fee for the Research Series. To the extent actual expenses were over this limitation and/or the
waiver had not been in place, the net investment income (loss) per share and the ratios would have been:
Net investment income (loss) ................................................. $ 0.0954 $ (0.0145)
Ratios (to average net assets):
Expenses## ................................................................. 0.95% 3.49%+
Net investment income (loss) ............................................... 0.79% (0.19)%+
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
RESEARCH GROWTH AND INCOME SERIES
...............................................................................................
Year Ended Period Ended
December 31, December 31,
1998 1997*
-------- --------
<S> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period .................. $11.0208 $10.0000
Income from investment operations# --
Net investment income(S) .............................. $ 0.1170 $ 0.0821
Net realized and unrealized gain on investments and
foreign currency .................................... 2.3163 0.9387
-------- --------
Total from investment operations .................... $ 2.4333 $ 1.0208
-------- --------
Less distributions declared to shareholders --
From net investment income ............................ $(0.0150) $ --
From net realized gain on investments and foreign
currency transactions ............................... (0.0493) --
-------- --------
Total distributions declared to shareholders ........ $(0.0643) $ --
-------- --------
Net asset value -- end of period ........................ $13.3898 $11.0208
======== ========
Total return(+) ......................................... 22.13% 10.20%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## ............................................ 0.95% 1.54%+
Net investment income ................................. 0.96% 1.19%+
Portfolio turnover ...................................... 122% 29%
Net assets at end of period (000 omitted) ............... $39,152 $6,540
- ----------
* 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.
## The Series has an expense offset arrangement which reduces the Series' custodian fee based
upon the amount of cash maintained by the Series with its custodian and dividend disbursing
agent. The Series' expenses are calculated without reduction for this expense offset
arrangement.
(+) 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) For the period ended December 31, 1997, the investment adviser agreed to maintain the
expenses of the Research Growth and Income Series at not more than 1.50% of average daily
net assets. To the extent actual expenses were over this limitation, the net investment
income per share and the ratios would have been:
Net investment income ........................................................ $0.0614
Ratios (to average net assets):
Expenses## ............................................................... 1.83%+
Net investment income .................................................... 0.84%+
</TABLE>
<PAGE>
RESEARCH INTERNATIONAL SERIES
..............................................................................
Period Ended
December 31,
1998*
--------
Per share data (for a share outstanding throughout the
period):
Net asset value -- beginning of period ....................... $10.0000
--------
Income from investment operations# --
Net investment income(S) ................................... $ 0.0043
Net realized and unrealized loss on investments and foreign
currency ................................................. (0.5852)
--------
Total from investment operations ......................... $(0.5809)
--------
Net asset value -- end of period ............................. $ 9.4191
========
Total return(+) .............................................. (5.80)%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## ................................................. 1.55%+
Net investment income ...................................... 0.07%+
Portfolio turnover ........................................... 59%
Net assets at end of period (000 omitted) .................... $3,519
- ----------
* For the period from the commencement of the Series' investment operations,
May 6, 1998, through December 31, 1998.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Series has an expense offset arrangement which reduces the Series'
custodian fee based upon the amount of cash maintained by the Series with
its custodian and dividend disbursing agent. The Series' expenses are
calculated without reduction for this expense offset arrangement.
(+) 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 agreed to maintain the expenses of the
Research International Series, exclusive of investment advisory fees, at not
more 0.50% of average daily net assets. To the extent actual expenses were
over these limitations, the net investment income per share would have been:
Net investment loss ...................................... $(0.1301)
Ratios (to average net assets):
Expenses## ............................................. 3.86%+
Net investment loss .................................... (2.24)%+
<PAGE>
STRATEGIC INCOME SERIES
..............................................................................
Period Ended
December 31,
1998*
--------
Per share data (for a share outstanding throughout the
period):
Net asset value -- beginning of period ....................... $10.0000
--------
Income from investment operations# --
Net investment income(S) ................................... $ 0.4206
Net realized and unrealized loss on investments and foreign
currency ................................................. (0.3767)
--------
Total from investment operations ......................... $ 0.0439
--------
Net asset value -- end of period ............................. $10.0439
========
Total return(+) .............................................. 0.40%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## ................................................. 1.29%+
Net investment income ...................................... 6.52%+
Portfolio turnover ........................................... 182%
Net assets at end of period (000 omitted) .................... $ 7,780
- ----------
+ Annualized.
++ Not annualized.
* For the period from the commencement of the Series' investment operations,
May 6, 1998, through December 31, 1998.
# Per share data are based on average shares outstanding.
## The Series has an expense offset arrangement which reduces the Series'
custodian fee based upon the amount of cash maintained by the Series with
its custodian and dividend disbursing agent. The Series' expenses are
calculated without reduction for this expense offset arrangement.
(+) 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 Strategic 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:
Net investment income .................................... $ 0.4122
Ratios (to average net assets):
Expenses## ............................................. 1.42%+
Net investment income .................................. 6.41%+
<PAGE>
<TABLE>
<CAPTION>
TOTAL RETURN SERIES
...............................................................................................................
Year Ended December 31,
--------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each year):
Net asset value -- beginning
of year ................... $ 21.3173 $ 19.4397 $ 18.3848 $ 15.0862 $16.0946
---------- ---------- ---------- ---------- --------
Income (loss) from investment operations# --
Net investment income ..... $ 0.7305 $ 0.7546 $ 0.7677 $ 0.7824 $ 0.5639
Net realized and unrealized
gain (loss) on
investments and foreign
currency ................ 1.6718 3.2409 1.6795 3.1527 (0.9310)
---------- ---------- ---------- ---------- --------
Total from investment
operations ............ $ 2.4023 $ 3.9955 $ 2.4472 $ 3.9351 $(0.3671)
---------- ---------- ---------- ---------- --------
Less distributions declared
to shareholders --
From net investment income $ (0.6858) $ (0.7234) $ (0.7189) $ (0.6365) $(0.4344)
From net realized gain on
investments and foreign
currency transactions ... (1.7703) (1.3945) (0.6734) -- (0.2069)
---------- ---------- ---------- ---------- --------
Total distributions
declared to
shareholders .......... $ (2.4561) $ (2.1179) $ (1.3923) $ (0.6365) $(0.6413)
---------- ---------- ---------- ---------- --------
Net asset value -- end of
year ...................... $ 21.2635 $ 21.3173 $ 19.4397 $ 18.3848 $15.0862
========== ========== ========== ========== ========
Total return(+) ............. 11.71% 21.98% 14.10% 26.71% (2.22)%
Ratios (to average net
assets)/Supplemental data:
Expenses## ................ 0.70% 0.71% 0.72% 0.76% 0.76%
Net investment income ..... 3.47% 3.72% 4.15% 4.70% 4.34%
Portfolio turnover .......... 116% 113% 134% 108% 66%
Net assets at end of year
(000 omitted) ............. $1,942,111 $1,696,108 $1,335,022 $1,099,887 $839,614
- -------------
# Per share data are based on average shares outstanding.
## The Series has an expense offset arrangement which reduces the Series' custodian fee based upon the amount
of cash maintained by the Series with its custodian. For fiscal years ending after September 1, 1995, the
Series' expenses are calculated without reduction for this expense offset arrangement.
(+) The total return information shown above does not reflect expenses 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>
<TABLE>
<CAPTION>
UTILITIES SERIES
...............................................................................................................
Year Ended December 31,
------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each year):
Net asset value -- beginning of
year ........................ $16.4093 $13.9874 $12.2598 $ 9.5209 $10.0164
-------- -------- -------- -------- --------
Income (loss) from investment operations# --
Net investment income(S) .... $ 0.4394 $ 0.4576 $ 0.5322 $ 0.4918 $ 0.2899
Net realized and unrealized
gain (loss) on investments
and foreign currency ...... 2.3048 3.6873 1.8548 2.5197 (0.7817)
-------- -------- -------- -------- --------
Total from investment
operations .............. $ 2.7442 $ 4.1449 $ 2.3870 $ 3.0115 $(0.4918)
-------- -------- -------- -------- --------
Less distributions declared to
shareholders --
From net investment income .. $(0.3070) $(0.4248) $(0.3160) $(0.2726) $(0.0037)
From net realized gain on
investments and foreign
currency transactions ..... (1.7637) (1.2982) (0.3434) -- --
-------- -------- -------- -------- --------
Total distributions ....... $(2.0707) $(1.7230) $(0.6594) $(0.2726) $(0.0037)
-------- -------- -------- -------- --------
Net asset value -- end of year $17.0828 $16.4093 $13.9874 $12.2598 $ 9.5209
======== ======== ======== ======== ========
Total return(+) ............... 17.54% 32.71% 20.37% 32.36% (4.96)%
Ratios (to average net assets)/
Supplemental data(S):
Expenses## .................. 0.86% 0.86% 0.88% 0.44% 0.39%
Net investment income ....... 2.68% 3.15% 4.23% 4.62% 4.59%
Portfolio turnover ............ 148% 144% 131% 119% 103%
Net assets at end of year
(000 omitted) ............... $226,292 $123,008 $ 70,680 $ 43,134 $ 21,448
- ------------
# Per share data are based on average shares outstanding.
## The Series has an expense offset arrangement which reduces the Series' custodian fee based upon the amount
of cash maintained by the Series with its custodian. For fiscal years ending after September 1, 1995, the
Series' expenses are calculated without reduction for this expense offset arrangement.
(+) The total return information shown above does not reflect expenses that apply to the separate accoun
stablished 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
certain of the periods indicated. If this fee had been incurred by the Series, the net investment income per
share and the ratios would have been:
Net investment income ........................................................ $ 0.4375 $ 0.2412
Ratios (to average net assets):
Expenses## ................................................................. 0.95% 1.14%
Net investment income ...................................................... 4.12% 3.84%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ZERO COUPON SERIES, PORTFOLIO 2000
..............................................................................................................
Year Ended December 31,
------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each year):
Net asset value -- beginning of year $ 8.9096 $ 8.8822 $ 9.0619 $ 7.9573 $11.1167
-------- -------- -------- -------- --------
Income from investment operations# --
Net investment income(S) .......... $ 0.5225 $ 0.4949 $ 0.2094 $ 0.4340 $ 0.3807
Net realized and unrealized gain
(loss) on investments ........... 0.0960 0.0896 (0.0528) 1.1038 (1.1094)
-------- -------- -------- -------- --------
Total from investment operations $ 0.6185 $ 0.5845 $ 0.1566 $ 1.5378 $(0.7287)
-------- -------- -------- -------- --------
Less distributions --
From net investment income ........ $(0.5589) $(0.5571) $(0.3363) $(0.4332) $(0.6250)
From net realized gain on
investments ..................... -- -- -- -- (1.8057)
-------- -------- -------- -------- --------
Total distributions ............. $(0.5589) $(0.5571) $(0.3363) $(0.4332) $(2.4307)
-------- -------- -------- -------- --------
Net asset value -- end of year ...... $ 8.9692 $ 8.9096 $ 8.8822 $ 9.0619 $ 7.9573
======== ======== ======== ======== ========
Total return(+) ..................... 7.28% 6.98% 1.91% 19.88% (6.99)%
Ratios (to average net assets)/
Supplemental data(S):
Expenses## ........................ 0.53% 0.54% 0.53% 0.52% 0.53%
Net investment income ............. 5.88% 5.71% 5.23% 5.18% 4.95%
Portfolio turnover .................. 0% 0% 2% 27% 12%
Net assets at end of year
(000 omitted) ..................... $ 3,473 $ 3,614 $ 4,337 $ 4,616 $ 3,280
- ------------
# Per share data are based on average shares outstanding.
## The Series has an expense offset arrangement which reduces the Series' custodian fee based upon the amount
of cash maintained by the Series with its custodian and dividend disbursing agent. For fiscal years ending
after September 1, 1995, the Series' expenses are calculated without reduction for this expense offset
arrangement.
(+) 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 d reduce the total
return figures for all periods shown.
(S) The investment adviser voluntarily agreed to maintain expenses of the Zero Coupon Series, Portfolio 2000 at
not more than 0.50% of average daily net assets for the periods indicated. To the extent actual expenses
were over/under this limitation, the net investment income per share and the ratios would have been:
Net investment income ........... $ 0.4879 $ 0.4728 $ 0.2045
Ratios (to average net assets):
Expenses## .................... 0.92% 0.80% 0.62%
Net investment income ......... 5.49% 5.38% 5.08%
</TABLE>
<PAGE>
----------
APPENDIX A
----------
o INVESTMENT TECHNIQUES AND PRACTICES
In pursuing its investment objective, the series may engage in the
following investment techniques and practices, which are described,
together with their risks, in the SAI. Investment techniques and practices
which are the principal focus of the series are also described in the Risk
Return Summary of the Prospectus.
INVESTMENT TECHNIQUES/PRACTICES
...............................................................................
SYMBOLS x permitted -- not permitted
- -------------------------------------------------------------------------------
CAPITAL CAPITAL EMERGING
BOND APPRECIATION OPPORTUNITIES GROWTH
SERIES SERIES SERIES SERIES
------ ------ ------ ------
Debt Securities
Asset-Backed Securities
Collateralized Mortgage
Obligations and Multiclass
Pass-Through Securities x -- -- --
Corporate Asset-Backed Securities x -- -- --
Mortgage Pass-Through Securities x -- -- --
Stripped Mortgage-Backed
Securities x -- -- --
Corporate Securities x x x x
Loans and Other Direct Indebtedness x -- -- --
Lower Rated Bonds x x x x
Municipal Bonds x -- -- --
Speculative Bonds x x x x
U.S. Government Securities x x x x
Variable and Floating Rate
Obligations x x x x
Zero Coupon Bonds, Deferred
Interest Bonds and PIK Bonds x x x x
Equity Securities -- x x x
Foreign Securities Exposure
Brady Bonds x x x --
Depositary Receipts -- x x x
Dollar-Denominated Foreign Debt
Securities x x -- --
Emerging Markets x x x x
Foreign Securities x x x x
Forward Contracts x x x x
Futures Contracts x x x x
Indexed Securities/Structured
Products -- x -- --
Inverse Floating Rate Obligations -- -- -- --
Investment in Other Investment
Companies
Open-End Funds x --* x x
Closed-End Funds x --* x x
Lending of Portfolio Securities x --* x x
Leveraging Transactions
Bank Borrowings --* --* --* --*
Mortgage "Dollar-Roll" Transactions --* --* --* --*
Reverse Repurchase Agreements --* --* --* --*
Options
Options on Foreign Currencies x x x x
Options on Futures Contracts x x x x
Options on Securities x x x x
Options on Stock Indices -- x x x
Reset Options -- -- -- --
"Yield Curve" Options x -- -- --
Repurchase Agreements x x x x
Restricted Securities x x x x
Short Sales -- --* -- --
Short Sales Against the Box -- --* x --
Short Term Instruments x x x x
Swaps and Related Derivative
Instruments x -- -- --
Temporary Borrowings x x x x
Temporary Defensive Positions x x x x
Warrants -- x x x
"When-Issued" Securities x x x x
- ----------
*May only be changed with shareholder approval.
<PAGE>
INVESTMENT TECHNIQUES/PRACTICES
...............................................................................
SYMBOLS x permitted -- not permitted
- -------------------------------------------------------------------------------
GLOBAL
EQUITY ASSET GLOBAL GLOBAL
INCOME ALLOCATION GOVERNMENTS GROWTH
SERIES SERIES SERIES SERIES
------ ------ ------ ------
Debt Securities
Asset-Backed Securities
Collateralized Mortgage
Obligations and Multiclass
Pass-Through Securities x x -- --
Corporate Asset-Backed Securities x x -- --
Mortgage Pass-Through Securities x x x --
Stripped Mortgage-Backed
Securities x x x --
Corporate Securities x x -- x
Loans and Other Direct Indebtedness x x -- --
Lower Rated Bonds x x -- x
Municipal Bonds x x -- --
Speculative Bonds x x -- x
U.S. Government Securities x x x x
Variable and Floating Rate
Obligations x x x x
Zero Coupon Bonds, Deferred
Interest Bonds and PIK Bonds x x x x
Equity Securities x x -- x
Foreign Securities Exposure
Brady Bonds x x x --
Depositary Receipts x x x x
Dollar-Denominated Foreign Debt
Securities -- x x --
Emerging Markets x x x x
Foreign Securities x x x x
Forward Contracts x x x x
Futures Contracts x x x x
Indexed Securities/Structured
Products x x x --
Inverse Floating Rate Obligations -- x x --
Investment in Other Investment
Companies
Open-End Funds x x --* x
Closed-End Funds x x x x
Lending of Portfolio Securities x x x x
Leveraging Transactions
Bank Borrowings --* --* --* --*
Mortgage "Dollar-Roll" Transactions --* --* --* --*
Reverse Repurchase Agreements --* --* --* --*
Options
Options on Foreign Currencies x x x x
Options on Futures Contracts x x x x
Options on Securities x x x x
Options on Stock Indices x x x x
Reset Options x x x --
"Yield Curve" Options x x x --
Repurchase Agreements x x x x
Restricted Securities x x x x
Short Sales -- -- --* x
Short Sales Against the Box -- -- --* x
Short Term Instruments x x x x
Swaps and Related Derivative
Instruments x x x --
Temporary Borrowings x x x x
Temporary Defensive Positions x x x x
Warrants x -- x x
"When-Issued" Securities x x x x
- ----------
*May only be changed with shareholder approval.
<PAGE>
INVESTMENT TECHNIQUES/PRACTICES
...............................................................................
SYMBOLS x permitted -- not permitted
- -------------------------------------------------------------------------------
GLOBAL
TOTAL GOVERNMENT HIGH INTERNATIONAL
RETURN SECURITIES YIELD GROWTH
SERIES SERIES SERIES SERIES
------ ------ ------ ------
Debt Securities
Asset-Backed Securities
Collateralized Mortgage
Obligations and Multiclass
Pass-Through Securities x x x --
Corporate Asset-Backed Securities x -- x --
Mortgage Pass-Through Securities x x x --
Stripped Mortgage-Backed
Securities -- -- -- --
Corporate Securities x -- x x
Loans and Other Direct Indebtedness -- -- x x
Lower Rated Bonds x -- x x
Municipal Bonds x -- -- --
Speculative Bonds x -- x x
U.S. Government Securities x x x x
Variable and Floating Rate
Obligations x x x x
Zero Coupon Bonds, Deferred
Interest Bonds and PIK Bonds x x x x
Equity Securities x --* x x
Foreign Securities Exposure
Brady Bonds x -- x x
Depositary Receipts x -- -- x
Dollar-Denominated Foreign Debt
Securities x -- x --
Emerging Markets x -- x x
Foreign Securities x -- x x
Forward Contracts x -- x x
Futures Contracts x -- --* x
Indexed Securities/Structured
Products x -- x x
Inverse Floating Rate Obligations x -- -- --
Investment in Other Investment Companies
Open-End Funds x --* --* x
Closed-End Funds x --* --* x
Lending of Portfolio Securities x --* --* x
Leveraging Transactions
Bank Borrowings --* --* --* --
Mortgage "Dollar-Roll" Transactions --* --* --* --
Reverse Repurchase Agreements --* --* --* --
Options
Options on Foreign Currencies x -- --* x
Options on Futures Contracts x -- --* x
Options on Securities x -- --* x
Options on Stock Indices x -- --* x
Reset Options x -- --* --
"Yield Curve" Options x -- --* x
Repurchase Agreements x x x x
Restricted Securities x x x x
Short Sales -- --* --* --
Short Sales Against the Box -- --* --* --
Short Term Instruments x x x x
Swaps and Related Derivative
Instruments x -- x x
Temporary Borrowings x x x x
Temporary Defensive Positions x x x x
Warrants x -- x x
"When-Issued" Securities x x x x
- ----------
*May only be changed with shareholder approval.
<PAGE>
INVESTMENT TECHNIQUES/PRACTICES
...............................................................................
SYMBOLS x permitted -- not permitted
- -------------------------------------------------------------------------------
MASSACHUSETTS
INTERNATIONAL INVESTORS MASSACHUSETTS
GROWTH MANAGED GROWTH INVESTORS
AND INCOME SECTORS STOCK TRUST
SERIES SERIES SERIES SERIES
------ ------ ------ ------
Debt Securities
Asset-Backed Securities
Collateralized Mortgage
Obligations and Multiclass
Pass-Through Securities x -- -- --
Corporate Asset-Backed
Securities -- -- -- --
Mortgage Pass-Through
Securities x -- -- --
Stripped Mortgage-Backed
Securities -- -- -- --
Corporate Securities x -- -- x
Loans and Other Direct
Indebtedness x -- -- --
Lower Rated Bonds x -- -- --
Municipal Bonds -- -- -- --
Speculative Bonds x -- -- --
U.S. Government Securities x x -- --
Variable and Floating Rate
Obligations x x x x
Zero Coupon Bonds, Deferred
Interest Bonds and PIK Bonds x x -- x
Equity Securities x x x x
Foreign Securities Exposure
Brady Bonds x -- -- --
Depositary Receipts x x x x
Dollar-Denominated Foreign
Debt Securities x -- -- --
Emerging Markets x x x x
Foreign Securities x x x x
Forward Contracts x x x x
Futures Contracts x x x x
Indexed Securities/Structured
Products x -- -- --
Inverse Floating Rate Obligations -- -- -- --
Investment in Other Investment
Companies
Open-End Funds x --* x --*
Closed-End Funds x x x --*
Lending of Portfolio Securities x --* x x
Leveraging Transactions
Bank Borrowings -- --* --* --*
Mortgage "Dollar-Roll"
Transactions x --* --* --*
Reverse Repurchase Agreements x --* --* --*
Options
Options on Foreign Currencies x x x --*
Options on Futures Contracts x x x --*
Options on Securities x x x --*
Options on Stock Indices x x x --*
Reset Options -- -- -- --*
"Yield Curve" Options x -- -- --*
Repurchase Agreements x x x x
Restricted Securities x x x x
Short Sales -- --* -- --*
Short Sales Against the Box x x -- x
Short Term Instruments x x x x
Swaps and Related Derivative
Instruments x -- -- --
Temporary Borrowings x x x x
Temporary Defensive Positions x x x x
Warrants x x -- x
"When-Issued" Securities x x x x
- ----------
*May only be changed with shareholder approval.
<PAGE>
INVESTMENT TECHNIQUES/PRACTICES
...............................................................................
SYMBOLS x permitted -- not permitted
- -------------------------------------------------------------------------------
MFS/FOREIGN
& COLONIAL
EMERGING
MARKETS MONEY NEW
EQUITY MARKET DISCOVERY RESEARCH
SERIES SERIES SERIES SERIES
------ ------ ------ ------
Debt Securities
Asset-Backed Securities
Collateralized Mortgage
Obligations and Multiclass
Pass-Through Securities -- -- -- --
Corporate Asset-Backed Securities -- x -- --
Mortgage Pass-Through Securities -- -- -- --
Stripped Mortgage-Backed
Securities -- -- -- --
Corporate Securities x x x x
Loans and Other Direct Indebtedness -- -- -- --
Lower Rated Bonds x -- x x
Municipal Bonds -- --* -- --
Speculative Bonds x -- x x
U.S. Government Securities x x x x
Variable and Floating Rate
Obligations x x x x
Zero Coupon Bonds, Deferred
Interest Bonds and PIK Bonds x x x --
Equity Securities x --* x x
Foreign Securities Exposure
Brady Bonds x -- -- x
Depositary Receipts x -- x x
Dollar-Denominated Foreign Debt
Securities x x x x
Emerging Markets x -- x x
Foreign Securities x -- x x
Forward Contracts x -- x x
Futures Contracts x --* x --
Indexed Securities/Structured
Products x -- x x
Inverse Floating Rate Obligations -- -- -- --
Investment in Other Investment
Companies
Open-End Funds x --* x x
Closed-End Funds x --* x x
Lending of Portfolio Securities x --* x x
Leveraging Transactions
Bank Borrowings -- --* --* --*
Mortgage "Dollar-Roll" Transactions -- --* --* --*
Reverse Repurchase Agreements -- --* --* --*
Options
Options on Foreign Currencies x --* x --
Options on Futures Contracts x --* x --
Options on Securities x --* x --
Options on Stock Indices x --* x --
Reset Options -- --* x --
"Yield Curve" Options -- --* x --
Repurchase Agreements x x x x
Restricted Securities x -- x x
Short Sales -- --* x --
Short Sales Against the Box -- --* x --
Short Term Instruments x x x x
Swaps and Related Derivative
Instruments -- -- x --
Temporary Borrowings x x x x
Temporary Defensive Positions x x x x
Warrants x -- x x
"When-Issued" Securities x -- x --
- ----------
*May only be changed with shareholder approval.
<PAGE>
INVESTMENT TECHNIQUES/PRACTICES
...............................................................................
SYMBOLS x permitted -- not permitted
- -------------------------------------------------------------------------------
RESEARCH
GROWTH RESEARCH
AND STRATEGIC TOTAL
INCOME INTERNATIONAL INCOME RETURN
SERIES SERIES SERIES SERIES
------ ------ ------ ------
Debt Securities
Asset-Backed Securities
Collateralized Mortgage
Obligations and Multiclass
Pass-Through Securities -- -- x x
Corporate Asset-Backed Securities -- -- x x
Mortgage Pass-Through Securities -- x x x
Stripped Mortgage-Backed
Securities -- -- x x
Corporate Securities -- x x x
Loans and Other Direct Indebtedness -- -- x x
Lower Rated Bonds -- -- x x
Municipal Bonds -- -- x x
Speculative Bonds -- -- x x
U.S. Government Securities x x x x
Variable and Floating Rate
Obligations x -- x x
Zero Coupon Bonds, Deferred
Interest Bonds and PIK Bonds -- -- x x
Equity Securities x x x x
Foreign Securities Exposure
Brady Bonds -- -- x x
Depositary Receipts x x -- x
Dollar-Denominated Foreign Debt
Securities x x x x
Emerging Markets x x x x
Foreign Securities x x x x
Forward Contracts x x x x
Futures Contracts x x x --*
Indexed Securities/Structured
Products x x x x
Inverse Floating Rate Obligations -- -- x x
Investment in Other Investment
Companies
Open-End Funds x x x --*
Closed-End Funds x x x x
Lending of Portfolio Securities x x x x
Leveraging Transactions
Bank Borrowings --* --* --* --*
Mortgage "Dollar-Roll" Transactions --* --* --* --*
Reverse Repurchase Agreements --* --* --* --*
Options
Options on Foreign Currencies x x x --*
Options on Futures Contracts x x x --*
Options on Securities x x x --*
Options on Stock Indices x x x --*
Reset Options x x x --*
"Yield Curve" Options x x x --*
Repurchase Agreements x x x x
Restricted Securities x x x x
Short Sales -- -- -- --*
Short Sales Against the Box -- -- -- --
Short Term Instruments x x x x
Swaps and Related Derivative
Instruments x x x x
Temporary Borrowings x x x x
Temporary Defensive Positions x x x x
Warrants x x x x
"When-Issued" Securities x x x x
- ----------
*May only be changed with shareholder approval.
<PAGE>
INVESTMENT TECHNIQUES/PRACTICES
...............................................................................
SYMBOLS x permitted -- not permitted
- -------------------------------------------------------------------------------
ZERO
COUPON
SERIES,
UTILITIES PORTFOLIO
SERIES 2000
------ ------
Debt Securities
Asset-Backed Securities
Collateralized Mortgage
Obligations and Multiclass
Pass-Through Securities x --
Corporate Asset-Backed
Securities x --
Mortgage Pass-Through
Securities x --
Stripped Mortgage-Backed
Securities -- --
Corporate Securities x --
Loans and Other Direct
Indebtedness -- --
Lower Rated Bonds x --
Municipal Bonds x --
Speculative Bonds x --
U.S. Government Securities x x
Variable and Floating Rate
Obligations x x
Zero Coupon Bonds, Deferred
Interest Bonds and PIK Bonds x x
Equity Securities x --*
Foreign Securities Exposure
Brady Bonds x --
Depositary Receipts x --
Dollar-Denominated Foreign Debt
Securities x --
Emerging Markets x --
Foreign Securities x --
Forward Contracts x --
Futures Contracts x --*
Indexed Securities/Structured
Products x --
Inverse Floating Rate Obligations -- --
Investment in Other Investment Companies
Open-End Funds x --*
Closed-End Funds x --*
Lending of Portfolio Securities x --*
Leveraging Transactions
Bank Borrowings --* --*
Mortgage "Dollar-Roll"
Transactions --* --*
Reverse Repurchase Agreements --* --*
Options
Options on Foreign Currencies x --*
Options on Futures Contracts x --*
Options on Securities x --*
Options on Stock Indices x --*
Reset Options -- --*
"Yield Curve" Options -- --*
Repurchase Agreements x x
Restricted Securities x --
Short Sales --* --*
Short Sales Against the Box -- --*
Short Term Instruments x x
Swaps and Related Derivative
Instruments -- --
Temporary Borrowings x x
Temporary Defensive Positions x --
Warrants x --
"When-Issued" Securities x --
- ----------
*May only be changed with shareholder approval.
<PAGE>
MFS(R)/SUN LIFE SERIES TRUST
If you want more information about the Series Fund and its series, the following
documents are available free upon request:
ANNUAL/SEMIANNUAL REPORTS. These reports contain information about the series'
actual investments. Annual reports discuss the effect of recent market
conditions and the series' investment strategy on the series' performance during
its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI). The SAI, dated May 1, 1999, provides
more detailed information about the Series Fund and its series and is
incorporated into this Prospectus by reference.
YOU CAN GET FREE COPIES OF THE ANNUAL/SEMIANNUAL REPORTS, THE SAI AND OTHER
INFORMATION ABOUT THE SERIES FUND AND ITS SERIES, AND MAKE INQUIRIES ABOUT THE
SERIES FUND AND ITS SERIES, BY CONTACTING:
Sun Life Assurance Company of Canada (U.S.)
Retirement Products and Services Division
P.O. Box 1024
Boston, MA 02103
Telephone: 1-800-752-7215
Information about the series (including its prospectus, SAI and shareholder
reports) can be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C., 20549-6009
Information on the operation of the Public Reference Room may be obtained by
calling the Commission at 1-800-SEC-0330. Reports and other information about
the series are available on the Commission's Internet website at
HTTP://WWW.SEC.GOV, and copies of this information may be obtained, upon payment
of a duplicating fee, by writing the Public Reference Section at the above
address.
The Series Fund's Investment Company Act file number is 811-3732.
SUN-1 4/99 56M
<PAGE>
- -------------------------
MFS/SUN LIFE SERIES TRUST
- -------------------------
MAY 1, 1999
[logo] M F S (R)
INVESTMENT MANAGEMENT Statement of Additional
75 YEARS Information
WE INVENTED THE MUTUAL FUND(R)
MFS/Sun Life Series Trust
500 Boylston Street, Boston, MA 02116
(617) 954-5000
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, 1999, as supplemented from time to time. This SAI should be read in
conjunction with the Prospectus, a copy of which may be obtained without charge
by contacting Sun Life Assurance Company of Canada (U.S.) (see back cover for
address and phone number).
This SAI relates to the 26 Series of the Series Fund identified on page two
hereof. Shares of these Series are offered to separate accounts of Sun Life
Assurance Company of Canada (U.S.) and its affiliates that fund variable annuity
and variable life insurance contracts.
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
<PAGE>
TABLE OF CONTENTS
Page
1. Definitions ..................................................... 3
2. Investment Techniques, Practices and Risks ...................... 3
3. Investment Restrictions ......................................... 5
4. Management of the Series Fund ................................... 12
Trustees ..................................................... 12
Officers ..................................................... 12
Investment Adviser ........................................... 13
Administrator ................................................ 17
Custodian .................................................... 18
Shareholder Servicing Agent .................................. 18
5. Independent Accountants and Financial Statements ................ 19
6. Additional Information with Respect to Shares of Each Series .... 19
Purchases .................................................... 19
Exchange Privilege ........................................... 19
Net Asset Value, Dividends and Distributions ................. 19
Tax Status ................................................... 20
Description of Shares, Voting Rights and Liabilities ......... 21
7. Portfolio Transactions and Brokerage Commissions ................ 21
Appendix A - Investment Techniques, Practices and Risks ......... A-1
Appendix B - Description of Bond Ratings ........................ B-1
<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
Series Fund has 26 series as follows:
1. Bond Series
2. Capital Appreciation Series
3. Capital Opportunities Series
4. Emerging Growth Series
5. Equity Income Series
6. Global Asset Allocation Series
7. Global Governments Series
8. Global Growth Series
9. Global Total Return Series
10. Government Securities Series
11. High Yield Series
12. International Growth Series
13. International Growth and Income Series
14. Managed Sectors Series
15. Massachusetts Investors Growth Stock
Series
16. Massachusetts Investors Trust Series
17. MFS/Foreign & Colonial Emerging Markets
Equity Series
18. Money Market Series
19. New Discovery Series
20. Research Series
21. Research Growth and Income Series
22. Research International Series
23. Strategic Income Series
24. Total Return Series
25. Utilities Series
26. Zero Coupon Series, Portfolio 2000
The International Growth Series and
International Growth and Income Series were
previously known as the MFS/Foreign & Colonial
International Growth Series and MFS/Foreign &
Colonial International Growth and Income Series
until their names were changed on September 8,
1997. The Capital Opportunities Series was
previously known as the Value Series until its
name was changed on March 29, 1998. The
Massachusetts Investors Trust Series, Global
Asset Allocation Series, Global Governments
Series, Global Growth Series and Global Total
Return Series were previously known as the
Conservative Growth Series, World Asset
Allocation Series, World Governments Series,
World Growth Series and World Total Return
Series, respectively, until their names were
changed on April 30, 1999.
"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, 1999, as amended or supplemented from
time to time.
2. INVESTMENT TECHNIQUES, PRACTICES AND RISKS
The investment objective and principal investment policies of each Series are
described in the Prospectus. In pursuing its investment objective and principal
investment policies, a Series may engage in a number of investment techniques
and practices, which involve certain risks. These investment techniques and
practices, which may be changed without shareholder approval unless indicated
otherwise, are identified in Appendix A to the Prospectus, and are more fully
described, together with their associated risks, in Appendix A to this SAI. The
following percentage limitations (as a percentage of net assets) apply to these
investment techniques and practices:
<TABLE>
<CAPTION>
PERCENTAGE LIMITATION
INVESTMENT POLICY (BASED ON NET ASSETS)
----------------- ----------------------
<S> <C>
1. BOND SERIES
Non-Dollar Denominated Non-Canadian
Foreign Securities: ........................................ 10%
Lower Rated Bonds: ......................................... up to (but not including) 20%
Securities Lending: ........................................ 30%
2. CAPITAL APPRECIATION SERIES
Foreign Securities: ........................................ 25%
Lower Rated Bonds: ......................................... 5%
3. CAPITAL OPPORTUNITIES SERIES
Foreign Securities: ........................................ 35%
Lower Rated Bonds: ......................................... 15%
Securities Lending: ........................................ 30%
4. EMERGING GROWTH SERIES
Foreign Securities: ........................................ 15%
Lower Rated Bonds: ......................................... 5%
Securities Lending: ........................................ 30%
5. EQUITY INCOME SERIES
Foreign Securities: ........................................ up to 35%
Lower Rated Bonds: ......................................... up to (but not including) 20%
Securities Lending: ........................................ 30%
6. GLOBAL ASSET ALLOCATION SERIES
Lower Rated Bonds: ......................................... 70%
Securities Lending: ........................................ 30%
7. GLOBAL GOVERNMENTS SERIES
Foreign Securities: ........................................ 100%
Emerging Market Securities: ................................ up to (but not including) 20%
Lower Rated Bonds: ......................................... 0%
Securities Lending: ........................................ 30%
8. GLOBAL GROWTH SERIES
Foreign Securities: ........................................ 100%
Lower Rated Bonds: ......................................... 5%
Securities Lending: ........................................ 30%
9. GLOBAL TOTAL RETURN SERIES
Foreign Securities: ........................................ 90%
Lower Rated Bonds: ......................................... 5%
Securities Lending: ........................................ 30%
10. HIGH YIELD SERIES
Foreign Securities: ........................................ 25%
Emerging Market Securities: ................................ 5%
Lower Rated Bonds: ......................................... 100%
11. INTERNATIONAL GROWTH SERIES
Emerging Market Securities: ................................ 25%
Lower Rated Bonds: ......................................... 10%
Securities Lending: ........................................ 30%
12. INTERNATIONAL GROWTH AND INCOME SERIES
Emerging Market Securities: ................................ 10%
Lower Rated Bonds: ......................................... up to (but not including) 20%
Securities Lending: ........................................ 30%
13. MANAGED SECTORS SERIES
Foreign Securities: ........................................ up to (but not including) 20%
14. MASSACHUSETTS INVESTORS GROWTH STOCK SERIES
Foreign Securities: ........................................ 30%
Securities Lending: ........................................ 30%
15. MASSACHUSETTS INVESTORS TRUST SERIES
Foreign Securities: ........................................ up to (but not including) 20%
Securities Lending: ........................................ 30%
16. MFS/FOREIGN & COLONIAL EMERGING MARKETS EQUITY SERIES
Emerging Market Securities: ................................ 100%
Lower Rated and Brady Bonds: ............................... 15%
Securities Lending: ........................................ 30%
17. MONEY MARKET SERIES
Finance Companies, Banks, Bank Holding Companies and
Utilities Companies: ..................................... up to 75%
Bank Obligations Where the Issuing Bank Has Capital, Surplus
and Undivided Profit Less Than or Equal to $100 million:.. up to 10%
18. NEW DISCOVERY SERIES
Foreign Securities: ........................................ up to (but not including) 20%
Lower Rated Bonds: ......................................... 10%
Securities Lending: ........................................ 30%
Short Sales: ............................................... 40% (value of underlying securities)
19. RESEARCH SERIES
Foreign Securities: ........................................ up to (but not including) 20%
Lower Rated Bonds: ......................................... 10%
Securities Lending: ........................................ 30%
20. RESEARCH GROWTH AND INCOME SERIES
Foreign Securities: ........................................ up to (but not including) 20%
Securities Lending: ........................................ 30%
21. RESEARCH INTERNATIONAL SERIES
Emerging Market Securities: ................................ 25%
Securities Lending: ........................................ 30%
22. STRATEGIC INCOME SERIES
Foreign Securities: ........................................ 50%
Lower Rated Bonds: ......................................... 100%
Securities Lending: ........................................ 30%
23. TOTAL RETURN SERIES
Foreign Securities: ........................................ up to (but not including) 20%
Lower Rated Bonds: ......................................... up to (but not including) 20%
Securities Lending: ........................................ 30%
24. UTILITIES SERIES
Foreign Securities: ........................................ 35%
Lower Rated Bonds: ......................................... up to (but not including) 20%
Securities Lending: ........................................ 30%
</TABLE>
3. 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,
GOVERNMENT SECURITIES SERIES, HIGH YIELD SERIES, MANAGED SECTORS SERIES,
MASSACHUSETTS INVESTORS TRUST SERIES, MONEY MARKET SERIES, TOTAL RETURN
SERIES, GLOBAL 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 Massachusetts Investors Trust
Series, Total Return Series, Global 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 Global Governments Series, Total Return
Series or Massachusetts Investors Trust 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 Global
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 Series Fund's 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 Global 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, Global
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 Massachusetts Investors Trust 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, Global 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
Massachusetts Investors Trust 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 MASSACHUSETTS INVESTORS
TRUST SERIES
The Massachusetts Investors Trust Series will operate under the general
investment restrictions described above. In addition, the Massachusetts
Investors Trust 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 Massachusetts Investors Trust Series; or
purchase securities of any issuer if such purchase at the time thereof
would cause the Massachusetts Investors Trust 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 Massachusetts Investors Trust 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 U.S. 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 U.S. 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).
(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 U.S. 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 GLOBAL GOVERNMENTS SERIES:
The Global Governments Series will operate under the general investment
restrictions described above. In addition, the Global Governments Series will
not:
(1) Purchase the securities of any issuer (other than obligations of, or
guaranteed by the U.S. 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 U.S. Government which are not backed by the
full faith and credit of the U.S. 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, Global Asset Allocation Series, Global Growth Series, Global 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) Less than 5% of the Series' assets will be used to engage in short sales
permitted by Investment Restriction (8) above.
(c) 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).
(d) The Series will only borrow amounts from banks and then only as permitted
by Investment Restriction (1).
(12) INVESTMENT RESTRICTIONS THAT APPLY ONLY TO THE BOND SERIES, CAPITAL
OPPORTUNITIES 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, GLOBAL ASSET ALLOCATION SERIES,
GLOBAL GROWTH SERIES AND GLOBAL 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.
(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, CAPITAL OPPORTUNITIES
SERIES, GLOBAL ASSET ALLOCATION SERIES, GLOBAL GROWTH SERIES AND GLOBAL 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, Strategic
Income Series, Capital Opportunities Series, Global Asset Allocation Series,
Global Growth Series and Global 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; or
(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, CAPITAL OPPORTUNITIES SERIES,
GLOBAL ASSET ALLOCATION SERIES, GLOBAL GROWTH SERIES, AND GLOBAL TOTAL RETURN
SERIES
The Emerging Growth Series, Research Growth and Income Series, Research
Series, Capital Opportunities Series, Global Asset Allocation Series, Global
Growth Series, and Global Total Return Series have the following additional
nonfundamental policy which may be changed without shareholder approval. Each
of these Series will not:
(1) 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.
(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.
(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) 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.
(3) 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.
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 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 for the United
States, Sun Life Assurance Company of Canada
Address: Strong Road, New Vineyard, Maine
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)
Senior 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, the address of
which is 500 Boylston Street, Boston, Massachusetts.
** "Interested person" (as defined in the 1940 Act) of Sun Life of Canada
(U.S.), the address of which 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, Global 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 as of 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 THE SERIES(1) AND FUND COMPLEX(2)
- --------------------------------------------------------------------------------
Samuel Adams ........................ $ 27,000 $ 36,000
J. Kermit Birchfield ................ 27,000 36,000
William Gutow ....................... 27,000 71,200
David D. Horn ....................... 24,000 32,000
John D. McNeil ...................... 0 0
Garth Marston ....................... 21,000 28,000
Derwyn F. Phillips .................. 27,000 36,000
- ----------
(1) For the year ended December 31, 1998.
(2) Information provided for calendar year 1998. All Trustees receiving
compensation from the Series Fund served as Trustees of 33 funds within
the MFS Fund complex having aggregate net assets at December 31, 1998 of
$11.8 billion, except Mr. Gutow, who served as Trustee of 58 funds within
the MFS complex (having aggregate net assets at December 31, 1998, of
approximately $14.8 billion).
* Mr. McNeil is affiliated with Sun Life of Canada (U.S.) and received no
compensation from the Series Fund.
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."
<PAGE>
For the fiscal years ended December 31, 1998, 1997 and 1996, 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 1998 % ADNA ENDED 1998 % ADNA
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Bond Series (1) .......................................... $ 35,258 0.60% N/A N/A
Capital Appreciation Series .............................. 10,821,120 0.73 N/A N/A
Capital Opportunities Series ............................. 1,066,925 0.75 N/A N/A
Emerging Growth Series ................................... 4,127,054 0.72 N/A N/A
Equity Income Series (1) ................................. 16,916 0.75 N/A N/A
Global Asset Allocation Series ........................... 979,428 0.75 N/A N/A
Global Governments Series ................................ 760,995 0.75 N/A N/A
Global Growth Series ..................................... 2,410,105 0.90 N/A N/A
Global Total Return Series ............................... 653,391 0.75 N/A N/A
Government Securities Series ............................. 2,338,710 0.55 N/A N/A
High Yield Series ........................................ 2,382,137 0.75 N/A N/A
International Growth Series .............................. 298,571 0.975 N/A N/A
International Growth and Income Series ................... 636,309 0.975 N/A N/A
Managed Sectors Series ................................... 2,604,753 0.74 N/A N/A
Massachusetts Investors Growth Stock Series (1) .......... 148,264 0.75 N/A N/A
Massachusetts Investors Trust Series ..................... 8,273,315 0.55 N/A N/A
MFS/Foreign & Colonial Emerging Markets Equity Series .... 257,540 1.25 N/A N/A
Money Market Series ...................................... 1,980,067 0.50 N/A N/A
New Discovery Series (1) ................................. 35,936 0.90 N/A N/A
Research Series .......................................... 5,864,116 0.70 N/A N/A
Research Growth and Income Series ........................ 159,161 0.75 N/A N/A
Research International Series (1) ........................ 10,888 1.00 N/A N/A
Strategic Income Series (1) .............................. 16,355 0.62 $ 3,495 0.13%
Total Return Series ...................................... 12,047,998 0.65 N/A N/A
Utilities Series ......................................... 1,273,825 0.75 N/A N/A
Zero Coupon Series, Portfolio 2000 ....................... 8,778 0.25 N/A N/A
(1) From the commencement of investment operations on May 6, 1998.
</TABLE>
<PAGE>
<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 Series .............................. $ 8,924,179 0.73% N/A N/A
Capital Opportunities Series ............................. 296,136 0.62 $ 61,335 0.13%
Emerging Growth Series ................................... 2,590,450 0.73 N/A N/A
Global Asset Allocation Series ........................... 786,866 0.75 N/A N/A
Global Governments Series ................................ 916,874 0.75 N/A N/A
Global Growth Series ..................................... 2,124,944 0.90 N/A N/A
Global Total Return Series ............................... 409,708 0.75 N/A N/A
Government Securities Series ............................. 2,066,478 0.55 N/A N/A
High Yield Series ........................................ 1,720,706 0.75 N/A N/A
International Growth Series .............................. 126,735 0.81 26,067 0.17
International Growth and Income Series ................... 427,422 0.97 N/A N/A
Managed Sectors Series ................................... 2,276,250 0.74 N/A N/A
Massachusetts Investors Trust Series ..................... 4,647,665 0.55 N/A N/A
MFS/F&C Emerging Markets Equity Series ................... 131,518 0.77 83,132 0.48
Money Market Series ...................................... 1,946,081 0.50 N/A N/A
Research Series .......................................... 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 Series ...................................... 10,008,562 0.66 N/A N/A
Utilities Series ......................................... 669,213 0.75 N/A N/A
Zero Coupon Series ....................................... 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 Series .............................. $ 7,006,502 0.75% N/A N/A
Capital Opportunities Series(1) .......................... N/A N/A $ 27,382 0.75%
Emerging Growth Series ................................... 956,932 0.61 225,349 0.14
Global Asset Allocation Series ........................... 390,024 0.75 N/A N/A
Global Governments Series ................................ 1,091,953 0.75 N/A N/A
Global Growth Series ..................................... 1,633,811 0.90 N/A N/A
Global Total Return Series ............................... 194,413 0.75 N/A N/A
Government Securities Series ............................. 2,121,808 0.55 N/A N/A
High Yield Series ........................................ 1,252,812 0.75 N/A N/A
International Growth Series (1) .......................... N/A N/A 14,479 0.975
International Growth and Income Series ................... 185,572 0.78 44,482 0.19
Managed Sectors Series ................................... 1,729,822 0.75 N/A N/A
Massachusetts Investors Trust Series ..................... 2,320,310 0.55 N/A N/A
MFS/F&C Emerging Markets Equity Series(2) ................ N/A N/A 11,151 1.25
Money Market Series ...................................... 1,658,426 0.50 N/A N/A
Research Series .......................................... 1,401,185 0.75 N/A N/A
Total Return Series ...................................... 8,228,127 0.68 N/A N/A
Utilities Series ......................................... 418,966 0.75 N/A N/A
Zero Coupon Series ....................................... 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.
</TABLE>
<PAGE>
MFS has agreed to bear all of the following Series' expenses, excluding taxes,
extraordinary expenses and brokerage and transaction costs, in excess of the
following annual percentage of such Series' average daily net assets:
Capital Appreciation Series ........................ 1.25%
Global Governments Series .......................... 1.25%
Government Securities Series ....................... 1.25%
High Yield Series .................................. 1.25%
Managed Sectors Series ............................. 1.25%
Massachusetts Investors Trust Series ............... 1.25%
Money Market Series ................................ 0.60%
Total Return Series ................................ 1.25%
Zero Coupon Series ................................. 1.25%
MFS has agreed to bear the following Series' expenses, excluding management
fees, taxes, extraordinary expenses and brokerage and transaction costs, in
excess of the following annual percentage of such Series' average daily net
assets:
Bond Series ........................................ 0.40%
Equity Income Series ............................... 0.25%
Massachusetts Investors Growth Stock Series ........ 0.25%
New Discovery Series ............................... 0.35%
Research International Series ...................... 0.50%
Strategic Income Series ............................ 0.50%
Sun Life Assurance Company of Canada (U.S.) has agreed to bear the Zero Coupon
Series' "Total Annual Series Operating Expenses," excluding taxes, extraordinary
expenses and brokerage and transaction costs, in excess of 0.50% annually, up to
and including 1.25% annually, of the Zero Coupon Series' average daily net
assets.
These arrangements will remain in effect until at least May 1, 2000, absent an
earlier modification approved by the Board of Trustees which oversees the
Series. In the case of the Capital Appreciation Series, Massachusetts Investors
Trust Series, Global Governments Series, Government Securities Series, High
Yield Series, Managed Sectors Series, Money Market Series, Total Return Series
and Zero Coupon Series, these arrangements with MFS may not be modified without
approval by the shareholders of these Series.
The Series Fund pays the compensation of the five Trustees who are not
affiliated with MFS or Sun Life of Canada (U.S.) (who will each receive from the
Series Fund $25,770 to $31,354 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 all of the
Series in a manner believed to be fair and equitable to each.
The Investment Advisory Agreements will remain in effect until November 1,
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
Emerging Markets Equity Series and Global Growth Series pursuant to separate
Sub-Advisory Agreements, and, prior to December 1, 1998 and September 8, 1997,
served as sub-advisers to the International Growth Series and International
Growth and Income Series, respectively.
FCM and FCEM are each companies incorporated under the laws of England and Wales
and are located at Exchange House, Primrose Street, London EC2A 2NY, United
Kingdom. FCM is a wholly owned subsidiary of Hypo Foreign & Colonial Management
(Holdings) Limited ("Hypo F&C"). Ninety percent of the outstanding voting shares
of Hypo F&C is owned by Hypo (UK) Holdings Ltd., which is a wholly owned
subsidiary of Hypo Vereinsbank (Bayerische Hypo-und Vereinsbank AG) the second
largest commercial bank in Germany. Hypo Vereinsbank was created in 1998 by the
merger of HypoBank which had been the oldest publicly listed bank in Germany
founded in 1835 and Bayerische Vereinsbank, another publicly listed German bank.
The remaining 10% of the outstanding voting securities of Hypo F&C is owned by
Foreign & Colonial Investment Trust PLC, a UK closed-ended publicly listed
investment trust. FCEM is a wholly owned subsidiary of FCM.
Each Sub-Advisory Agreement will remain in effect until November 1, 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 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 a 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, 1998, 1997 and 1996, FCM received from MFS
and/or waived the following fees:
<TABLE>
<CAPTION>
RECEIVED WAIVED RECEIVED WAIVED RECEIVED WAIVED
SERIES 1998 1998 1997 1997 1996 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
International Growth Series ................ N/A N/A $ 10,334 N/A N/A $11,880
International Growth and Income Series ..... N/A N/A 185,089 N/A $113,776 25,053
MFS/Foreign & Colonial Emerging Markets
Equity Series ............................ $124,240 N/A 111,188 N/A N/A 8,964
</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 Global Growth
Series. Under this arrangement, the Global 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 Global Growth Series approved the
replacement of Batterymarch as a sub-adviser to the Global Growth Series with
FCM and its subsidiary, FCEM. Effective November 1, 1996, MFS terminated
Oechsle as a sub-adviser to the Global Growth Series. On November 1, 1996, MFS
began managing the assets of the Global 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, 1998, 1997 and 1996, Batterymarch, Oechsle
and FCM received from MFS the following fees with respect to their services as
sub-advisers to the Global Growth Series:
SUB-ADVISER 1998 1997 1996
- ----------------------------------------------------------------------------
Batterymarch ................... N/A N/A $110,377
Oechsle ........................ N/A N/A 223,505
FCM ............................ $229,204 $296,814 268,449
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, and the year ended December 31, 1998, MFS
received fees under this Agreement as follows:
1998 1997
-------- --------
Bond Series(1) ............................................ $ 453 N/A
Capital Appreciation Series................................ 174,654 $139,133
Capital Opportunities Series .............................. 16,994 5,923
Emerging Growth Series .................................... 70,356 42,251
Equity Income Series(1) ................................... 173 N/A
Global Asset Allocation Series ............................ 16,529 12,740
Global Governments Series ................................. 12,758 14,128
Global Growth Series ...................................... 33,728 28,218
Global Total Return Series ................................ 10,680 6,646
Government Securities Series .............................. 52,457 43,905
High Yield Series ......................................... 39,527 27,158
International Growth Series ............................... 3,765 1,997
International Growth and Income Series .................... 8,045 5,264
Managed Sectors Series .................................... 44,335 36,252
Massachusetts Investors Growth Stock Series(1) ............ 1,419 N/A
Massachusetts Investors Trust Series ...................... 173,048 102,188
MFS/Foreign & Colonial Emerging Markets Equity Series ..... 2,670 2,262
Money Market Series ....................................... 48,752 46,028
New Discovery Series ...................................... 327 N/A
Research Series ........................................... 102,617 60,939
Research Growth and Income Series ......................... 2,321 198
Research International Series(1) .......................... 88 N/A
Strategic Income Series(1) ................................ 217 N/A
Total Return Series ....................................... 212,371 168,648
Utilities Series .......................................... 20,222 10,639
Zero Coupon Series ........................................ 440 430
(1) From the commencement of investment operations on May 6, 1998.
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" or "MFSC"), 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.
During the fiscal years ended December 31, 1998, 1997 and 1996, each Series
paid no compensation to the Shareholder Servicing Agent.
5. 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, 1998 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 Series Fund's
Annual Report accompanies this SAI.
6. 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, then that Series would incur
corporate federal income tax upon its taxable income for that year (with no
deduction for distributions to shareholders), and its distributions would
generally be taxable as ordinary dividend income to its shareholders, and each
insurance company separate account invested therein would fail to satisfy the
diversification requirements of section 817(h) (see below), with the result that
the variable life insurance and variable annuity contracts supported by that
account would no longer be eligible for tax deferral.
Each Series intends to continue to diversify its assets as required by section
817(h) of the Code and the regulations thereunder. These requirements, which are
in addition to the diversification requirements of Subchapter M, place certain
limitations on the proportion of each Series' assets that may be represented by
any single investment and securities from the same issuer. If a Series failed to
comply with these requirements, Contracts that invest in the Series would not be
treated as annuity, endowment or life insurance contracts under the Code.
Any investment by a Series in zero coupon bonds, deferred interest bonds, PIK
bonds (as defined in Appendix A), certain stripped securities and certain
securities purchased at a market discount will cause the Series to recognize
income prior to the receipt of cash payments with respect to those securities.
In order to distribute this income and avoid a tax on the Series, the Series
may be required to liquidate portfolio securities that it might otherwise have
continued to hold, potentially resulting in additional taxable gain or loss to
the Series.
A Series' transactions in options, Futures Contracts, Forward Contracts, short
sales "against the box" and swaps and related transactions will be subject to
special tax rules that my affect the amount, timing and character of Series
income and distributions to shareholders. For example, certain positions held by
a Series on the last business day of each taxable year will be marked to market
(i.e., treated as if closed out) on that day, and any resulting gain or loss, in
addition to gains and losses from actual dispositions of those positions, will
be treated as 60% long-term and 40% short-term capital gain or loss. Certain
positions held by a Series that substantially diminish its risk of loss with
respect to other positions in its portfolio may constitute "straddles" and may
be subject to special tax rules that would cause deferral of Series losses,
adjustments in the holding periods of Series securities and conversion of
short-term into long-term capital losses. Certain tax elections exist for
straddles that may alter the effects of these rules. Each Series will limit its
activities in options, Futures Contracts, Forward Contracts, "short sales
against the box" and swaps and related transactions to the extent necessary to
meet the requirements of Subchapter M of the Code.
Special tax considerations apply with respect to foreign investments of a
Series. Foreign exchange gains and losses realized by the Series will generally
be treated as ordinary income and losses. Use of foreign currencies for
non-hedging purposes and investment by a Series in "passive foreign investment
companies" may be limited in order to avoid a tax on the Series. Investment
income received by a Series from foreign securities may be subject to foreign
income taxes withheld at the source. The United States has entered into tax
treaties with many foreign countries that may entitle a Series to a reduced rate
of tax or an exemption from tax on such income; the Series intend to qualify for
treaty reduced rates where available. It is impossible, however, to determine a
Series' effective rate of foreign tax in advance, since the amount of the
Series' assets to be invested within various countries is not known.
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. 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.
7. 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 Trustees (together with the Trustees of certain other MFS
funds) have directed MFS to allocate a total of $72,150 of commission business
from certain MFS funds (including the Series) to the Pershing Division of
Donaldson, Lufkin & Jenrette as consideration for the annual renewal of certain
publications provided by Lipper Analytical Securities Corporation (which
provides information useful to the Trustees in reviewing the relationship
between each Series and MFS).
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.
<PAGE>
For the years ended December 31, 1996, 1997 and 1998, brokerage commissions
paid by the Series were as follows:
<TABLE>
<CAPTION>
TOTAL COMMISSIONS PAID DURING
-------------------------------------------------------
SERIES 1996 1997 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bond Series(7) ........................................... N/A N/A $ --
Capital Appreciation Series .............................. $ 1,286,630 $ 1,628,226 2,460,985
Capital Opportunities Series(1) .......................... 19,750 192,957 550,116
Emerging Growth Series(3) ................................ 306,542 789,149 897,232
Equity Income Series(7) .................................. N/A N/A 14,884
Global Asset Allocation Series(5) ........................ 175,327 284,863 317,484
Global Governments Series ................................ -- -- --
Global Growth Series ..................................... 840,289 874,004 826,959
Global Total Return Series(5) ............................ 53,646 77,568 105,181
Government Securities Series ............................. -- -- 3
High Yield Series ........................................ -- -- 1,112
International Growth Series(1) ........................... 14,450 138,906 143,772
International Growth and Income Series(4) ................ 29,935 350,594 162,433
Managed Sectors Series ................................... 683,756 644,018 1,286,305
Massachusetts Investors Growth Stock Series(7) ........... N/A N/A 38,750
Massachusetts Investors Trust Series ..................... 599,469 1,354,260 2,420,378
MFS/Foreign & Colonial Emerging Markets Equity Series(2) . 7,951 123,167 110,711
Money Market Series ...................................... -- -- --
New Discovery Series(7) .................................. N/A N/A 13,002
Research Series(5) ....................................... 577,244 1,203,288 1,723,949
Research Growth and Income Series(6) ..................... N/A 6,461 78,060
Research International Series(7) ......................... N/A N/A 11,184
Strategic Income Series(7) ............................... N/A N/A --
Total Return Series ...................................... 1,053,060 1,026,724 2,064,789
Utilities Series ......................................... 198,070 359,930 791,646
Zero Coupon Series ....................................... -- -- --
</TABLE>
- ----------
(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.
(7) From the commencement of investment operations on May 6, 1998.
During the year ended December 31, 1998 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
DECEMBER 31, 1998
SERIES BROKER-DEALER (000 OMITTED)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Bond Series ............................ Associates Corp. $ 504
Goldman Sachs & Co. $ 91
- -----------------------------------------------------------------------------------------------------------------------
Capital Appreciation Series ............ General Electric Co. $36,974
Morgan Stanley Dean Witter $ 7,888
Associates Corp. $29,658
- -----------------------------------------------------------------------------------------------------------------------
Capital Opportunities Series ........... Donaldson, Lufkin & Jenrette $ 959
Associates Corp. $ 3,009
Paine Webber $ 877
- -----------------------------------------------------------------------------------------------------------------------
Emerging Growth Series ................. Associates Corp. $ 3,085
Bear Stearns Cos. $ 1,764
Morgan Stanley Dean Witter $ 3,081
Paine Webber $ 39
- -----------------------------------------------------------------------------------------------------------------------
Global Asset Allocation Series ......... Associates Corp. $ 530
Morgan Stanley Dean Witter $ 270
General Electric Co. $ 4,998
- -----------------------------------------------------------------------------------------------------------------------
Global Government Series ............... Ford Motor Credit Corp. ............................ $ 2,384
- -----------------------------------------------------------------------------------------------------------------------
Global Growth Series ................... Associates Corp. $ 355
Bear Sterns Cos. $ 314
Morgan Stanley Dean Witter $ 483
Paine Webber $ 8
- -----------------------------------------------------------------------------------------------------------------------
Global Total Return Series ............. General Electric Co. $ 1,010
Associates Corp. $ 661
- -----------------------------------------------------------------------------------------------------------------------
Government Securities Series ........... Goldman Sachs $ 1,181
- -----------------------------------------------------------------------------------------------------------------------
High Yield Series ...................... Merrill Lynch Pierce Fenner & Smith, Inc. $ 473
- -----------------------------------------------------------------------------------------------------------------------
International Growth & Income Series ... Associates Corp. $ 805
- -----------------------------------------------------------------------------------------------------------------------
Managed Sectors Series ................. Associates Corp. $ 839
Ford Motor Credit Corp. $ 5,258
- -----------------------------------------------------------------------------------------------------------------------
Massachusetts Investors Growth Stock Merrill Lynch Pierce Fenner & Smith, Inc. $ 60
Series ............................... Morgan Stanley Dean Witter $ 1,413
Associates Corp. $ 3,261
- -----------------------------------------------------------------------------------------------------------------------
Massachusetts Investors Trust Series ... General Electric Co. $30,956
Associates Corp. $20,041
- -----------------------------------------------------------------------------------------------------------------------
Money Market Series .................... General Electric Co. $13,824
Goldman Sachs $ 6,987
Merrill Lynch Pierce Fenner & Smith, Inc. $ 6,980
Associates Corp. $ 6,961
Salomon Smith Barney $13,943
Ford Motor Credit Corp. $ 6,951
- -----------------------------------------------------------------------------------------------------------------------
Research Series ........................ General Electric Co. $17,693
Associates Corp. $10,352
Bear Sterns Cos. $ 5,027
Morgan Stanley Dean Witter $ 5,346
- -----------------------------------------------------------------------------------------------------------------------
Research Growth and Income Series ..... Associates Corp. $ 737
- -----------------------------------------------------------------------------------------------------------------------
Total Return Series .................... General Electric Co. $ 3,889
Associates Corp. $20,893
Ford Motor Credit Corp. $ 5,216
Donaldson, Lufkin, & Jenrette $ 833
General Electric Co. $ 2,899
Merrill Lynch Pierce Fenner & Smith, Inc. $ 9,271
</TABLE>
<PAGE>
APPENDIX A
INVESTMENT TECHNIQUES, PRACTICES AND RISKS
Set forth below is a description of investment techniques and practices which
the Series may generally use in pursuing their investment objectives and
principal investment policies, and the risks associated with these investment
techniques and practices. The Series will engage only in certain of these
investment techniques and practices, as identified in Appendix A of the Series'
Prospectus. Investment practices and techniques that are not identified in
Appendix A of the Series' Prospectus do not apply to the Series.
INVESTMENT TECHNIQUES AND PRACTICES
DEBT SECURITIES
To the extent the Series invests in the following types of debt securities, its
net asset value may change as the general levels of interest rates fluctuate.
When interest rates decline, the value of debt securities can be expected to
rise. Conversely, when interest rates rise, the value of debt securities can be
expected to decline. The Series' investment in debt securities with longer terms
to maturity are subject to greater volatility than the Series' shorter-term
obligations. Debt securities may have all types of interest rate payment and
reset terms, including fixed rate, adjustable rate, zero coupon, contingent,
deferred, payment in kind and auction rate features.
ASSET-BACKED SECURITIES: The Series may purchase the following types of
asset-backed securities:
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES:
The Series may invest a portion of its assets in collateralized mortgage
obligations or "CMOs," which are debt obligations collateralized by mortgage
loans or mortgage pass-through securities (such collateral referred to
collectively as "Mortgage Assets"). Unless the context indicates otherwise, all
references herein to CMOs include multiclass pass-through 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 among the several classes of a CMO in innumerable ways. In a common
structure, payments of principal, including any principal prepayments, on the
Mortgage Assets are applied to the classes 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.
Certain CMOs may be stripped (securities which provide only the principal or
interest factor of the underlying security). See "Stripped Mortgage-Backed
Securities" below for a discussion of the risks of investing in these stripped
securities and of investing in classes consisting of interest payments or
principal payments.
The Series may also invest in parallel pay CMOs and Planned Amortization Class
CMOs ("PAC Bonds"). 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.
CORPORATE ASSET-BACKED SECURITIES: The Series may invest in corporate asset-
backed securities. These securities, issued by trusts and special purpose
corporations, are backed by a pool of assets, such as credit card and automobile
loan receivables, representing the obligations of a number of different parties.
These 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.
Corporate asset-backed securities are 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.
MORTGAGE PASS-THROUGH SECURITIES: The Series may invest in 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 lives 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 premiums 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. In the event of an increase in interest rates which results in a
decline in mortgage prepayments, the anticipated maturity of mortgage
pass-through securities held by the Series may increase, effectively changing a
security which was considered short or intermediate-term at the time of purchase
into a long-term security. Long-term securities generally fluctuate more widely
in response to changes in interest rates than short or intermediate-term
securities.
Payment of principal and interest on some mortgage pass-through securities (but
not the market value of the securities themselves) may be guaranteed by the full
faith and credit of the U.S. Government (in the case of securities guaranteed by
the Government National Mortgage Association ("GNMA")); or guaranteed by
agencies or instrumentalities of the U.S. Government (such as the Federal
National Mortgage Association "FNMA") or the Federal Home Loan Mortgage
Corporation, ("FHLMC") which are supported only by the discretionary authority
of the U.S. Government to purchase the agency's obligations). Mortgage
pass-through securities may also be issued by non-governmental 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.
Interests in pools of mortgage-related securities differ from other forms of
debt securities, which normally provide for periodic payment of interest in
fixed amounts with principal payments at maturity or specified call dates.
Instead, these securities provide a monthly payment which consists of both
interest and principal payments. In effect, these payments are a "pass- through"
of the monthly payments made by the individual borrowers on their mortgage
loans, net of any fees paid to the issuer or guarantor of such securities.
Additional payments are caused by prepayments of principal resulting from the
sale, refinancing or foreclosure of the underlying property, net of fees or
costs which may be incurred. Some mortgage pass- through securities (such as
securities issued by the GNMA) are described as "modified pass-through." These
securities entitle the holder to receive all interests and principal payments
owed on the mortgages in the mortgage pool, net of certain fees, at the
scheduled payment dates regardless of whether the mortgagor actually makes the
payment.
The principal governmental guarantor of mortgage pass-through securities is
GNMA. GNMA is a wholly owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the U.S. Government, the timely payment of principal and
interest on securities issued by institutions approved by GNMA (such as savings
and loan institutions, commercial banks and mortgage bankers) and backed by
pools of Federal Housing Administration ("FHA") insured or Veterans
Administration ("VA") guaranteed mortgages. These guarantees, however, do not
apply to the market value or yield of mortgage pass-through securities. GNMA
securities are often purchased at a premium over the maturity value of the
underlying mortgages. This premium is not guaranteed and will be lost if
prepayment occurs.
Government-related guarantors (i.e., whose guarantees are not backed by the full
faith and credit of the U.S. Government) include FNMA and FHLMC. FNMA is a
government-sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases conventional residential mortgages (i.e., mortgages not insured
or guaranteed by any governmental agency) from a list of approved
seller/servicers which include state and federally chartered savings and loan
associations, mutual savings banks, commercial banks, credit unions and mortgage
bankers. Pass-through securities issued by FNMA are guaranteed as to timely
payment by FNMA of principal and interest.
FHLMC is also a government-sponsored corporation owned by private stockholders.
FHLMC issues Participation Certificates ("PCs") which represent interests in
conventional mortgages (i.e., not federally insured or guaranteed) for FHLMC's
national portfolio. FHLMC guarantees timely payment of interest and ultimate
collection of principal regardless of the status of the underlying mortgage
loans.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create pass
through pools of mortgage loans. Such issuers may also be the originators and/or
servicers of the underlying mortgage-related securities. Pools created by such
non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments in the former pools. However, timely
payment of interest and principal of mortgage loans in these pools may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit. The insurance and
guarantees are issued by governmental entities, private insurers and the
mortgage poolers. There can be no assurance that the private insurers or
guarantors can meet their obligations under the insurance policies or guarantee
arrangements. The Series may also buy mortgage-related securities without
insurance or guarantees.
STRIPPED MORTGAGE-BACKED SECURITIES: The Series may invest a portion of its
assets in stripped mortgage-backed securities ("SMBS") which are derivative
multiclass mortgage securities issued by agencies or instrumentalities of the
U.S. Government, or by private originators of, or investors in, mortgage loans,
including savings and loan institutions, 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 "I0"
class) while the other class will receive all of the principal (the
principal-only or "P0" class). The yield to maturity on an I0 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 security's yield to maturity. If the
underlying Mortgage Assets experience greater than anticipated prepayments of
principal, the 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. Because SMBS were only recently introduced, established trading
markets for these securities have not yet developed, although the securities are
traded among institutional investors and investment banking firms.
CORPORATE SECURITIES: The Series may invest in debt securities, such as
convertible and non-convertible bonds, notes and debentures, issued by
corporations, limited partnerships and other similar entities.
LOANS AND OTHER DIRECT INDEBTEDNESS: The Series may purchase loans and other
direct indebtedness. In purchasing a loan, the 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 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 borrowers 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 lenders 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 owned 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 loans and the other direct indebtedness 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 payment 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 loans and other direct indebtedness
which the Series will purchase, the Adviser will rely upon its own (and not the
original lending institution's) credit analysis of the borrower. As the Series
may be required to rely upon another lending institution to collect and pass
onto the Series amounts payable with respect to the loan and to enforce the
Series' rights under the loan and other direct indebtedness, 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 and other
direct indebtedness may make such loans and other direct indebtedness especially
vulnerable to adverse changes in economic or market conditions. Investments in
such loans and other direct indebtedness may involve additional risk to the
Series.
LOWER RATED BONDS: The Series may invest 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 (commonly known as "junk bonds"). See Appendix D for a
description of bond ratings. No minimum rating standard is required by the
Series. 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. These lower rated
high yielding fixed income securities generally tend to reflect economic changes
(and the outlook for economic growth), short-term corporate and industry
developments and the market's perception of their credit quality (especially
during times of adverse publicity) to a greater extent than higher rated
securities which react primarily to fluctuations in the general level of
interest rates (although these lower rated fixed income securities are also
affected by changes in interest rates). In the past, economic downturns or an
increase 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. The prices for these
securities may be affected by legislative and regulatory developments. 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, the Adviser's 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 times of
certain adverse market conditions to sell these lower rated securities to meet
redemption requests or to respond to changes in the market.
While the Adviser may refer to ratings issued by established credit rating
agencies, it is not the Series' policy to rely exclusively on ratings issued by
these rating agencies, but rather to supplement such ratings with the Adviser's
own independent and ongoing review of credit quality. To the extent a Series
invests in these lower rated securities, the achievement of its investment
objectives may be a more dependent on the Adviser's own credit analysis than in
the case of a fund investing in higher quality fixed income securities. These
lower rated securities may also include zero coupon bonds, deferred interest
bonds and PIK bonds.
MUNICIPAL BONDS: The Series may invest in debt securities 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, the interest on which is exempt from federal income tax
("Municipal Bonds"). Municipal Bonds include debt securities which pay interest
income that is subject to the alternative minimum tax. The Series may invest in
Municipal Bonds whose issuers pay interest on the Bonds from revenues from
projects such as multifamily housing, nursing homes, electric utility systems,
hospitals or life care facilities.
If a revenue bond is secured by payments generated from a project, and the
revenue bond is also secured by a lien on the real estate comprising the
project, foreclosure by the indenture trustee on the lien for the benefit of the
bondholders creates additional risks associated with owning real estate,
including environmental risks.
Housing revenue bonds typically are issued by a state, county or local housing
authority and are secured only by the revenues of mortgages originated by the
authority using the proceeds of the bond issue. Because of the impossibility of
precisely predicting demand for mortgages from the proceeds of such an issue,
there is a risk that the proceeds of the issue will be in excess of demand,
which would result in early retirement of the bonds by the issuer. Moreover,
such housing revenue bonds depend for their repayment upon the cash flow from
the underlying mortgages, which cannot be precisely predicted when the bonds are
issued. Any difference in the actual cash flow from such mortgages from the
assumed cash flow could have an adverse impact upon the ability of the issuer to
make scheduled payments of principal and interest on the bonds, or could result
in early retirement of the bonds. Additionally, such bonds depend in part for
scheduled payments of principal and interest upon reserve funds established from
the proceeds of the bonds, assuming certain rates of return on investment of
such reserve funds. If the assumed rates of return are not realized because of
changes in interest rate levels or for other reasons, the actual cash flow for
scheduled payments of principal and interest on the bonds may be inadequate. The
financing of multi-family housing projects is affected by a variety of factors,
including satisfactory completion of construction within cost constraints, the
achievement and maintenance of a sufficient level of occupancy, sound management
of the developments, timely and adequate increases in rents to cover increases
in operating expenses, including taxes, utility rates and maintenance costs,
changes in applicable laws and governmental regulations and social and economic
trends.
Electric utilities face problems in financing large construction programs in
inflationary periods, cost increases and delay occasioned by environmental
considerations (particularly with respect to nuclear facilities), difficulty in
obtaining fuel at reasonable prices, the cost of competing fuel sources,
difficulty in obtaining sufficient rate increases and other regulatory problems,
the effect of energy conservation and difficulty of the capital market to absorb
utility debt.
Health care facilities include life care facilities, nursing homes and
hospitals. Life care facilities are alternative forms of long-term housing for
the elderly which offer residents the independence of condominium life style
and, if needed, the comprehensive care of nursing home services. Bonds to
finance these facilities have been issued by various state industrial
development authorities. Since the bonds are secured only by the revenues of
each facility and not by state or local government tax payments, they are
subject to a wide variety of risks. Primarily, the projects must maintain
adequate occupancy levels to be able to provide revenues adequate to maintain
debt service payments. Moreover, in the case of life care facilities, since a
portion of housing, medical care and other services may be financed by an
initial deposit, there may be risk if the facility does not maintain adequate
financial reserves to secure estimated actuarial liabilities. The ability of
management to accurately forecast inflationary cost pressures weighs importantly
in this process. The facilities may also be affected by regulatory cost
restrictions applied to health care delivery in general, particularly state
regulations or changes in Medicare and Medicaid payments or qualifications, or
restrictions imposed by medical insurance companies. They may also face
competition from alternative health care or conventional housing facilities in
the private or public sector. Hospital bond ratings are often based on
feasibility studies which contain projections of expenses, revenues and
occupancy levels. A hospital's gross receipts and net income available to
service its debt are influenced by demand for hospital services, the ability of
the hospital to provide the services required, management capabilities, economic
developments in the service area, efforts by insurers and government agencies to
limit rates and expenses, confidence in the hospital, service area economic
developments, competition, availability and expense of malpractice insurance,
Medicaid and Medicare funding, and possible federal legislation limiting the
rates of increase of hospital charges.
The Series may invest in municipal lease securities. These are undivided
interests in a portion of an obligation in the from of a lease or installment
purchase which is issued by state and local governments to acquire equipment and
facilities. Municipal leases frequently have special risks not normally
associated with general obligation or revenue bonds. Leases and installment
purchase or conditional sale contracts (which normally provide for title to the
leased asset to pass eventually to the governmental issuer) have evolved as a
means for governmental issuers to acquire property and equipment without meeting
the constitutional and statutory requirements for the issuance of debt. The
debt-issuance limitations are deemed to be inapplicable because of the inclusion
in many leases or contracts of "non-appropriation" clauses that provide that the
governmental issuer has no obligation to make future payments under the lease or
contract unless money is appropriated for such purpose by the appropriate
legislative body on a yearly or other periodic basis. Although the obligations
will be secured by the leased equipment or facilities, the disposition of the
property in the event of non-appropriation or foreclosure might, in some cases,
prove difficult. There are, of course, variations in the security of municipal
lease securities, both within a particular classification and between
classifications, depending on numerous factors.
The Series may also invest in bonds for industrial and other projects, such as
sewage or solid waste disposal or hazardous waste treatment facilities.
Financing for such projects will be subject to inflation and other general
economic factors as well as construction risks including labor problems,
difficulties with construction sites and the ability of contractors to meet
specifications in a timely manner. Because some of the materials, processes and
wastes involved in these projects may include hazardous components, there are
risks associated with their production, handling and disposal.
SPECULATIVE BONDS: The Series may invest in fixed income and convertible
securities rated Baa by Moody's or BBB by S&P, Fitch or Duff & Phelps and
comparable unrated securities. See Appendix D for a description of bond ratings.
These securities, while normally exhibiting adequate protection parameters, have
speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than in the case of higher grade securities.
U.S. GOVERNMENT SECURITIES: The Series may invest in U.S. Government
Securities including (i) U.S. Treasury obligations, all of which are backed by
the full faith and credit of the U.S. Government and (ii) U.S. Government
Securities, some of which are backed by the full faith and credit of the U.S.
Treasury, e.g., direct pass-through certificates of the GNMA; 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 FNMA.
U.S. Government Securities also include interests in trust or other entities
representing interests in obligations that are issued or guaranteed by the U.S.
Government, its agencies, authorities or instrumentalities.
VARIABLE AND FLOATING RATE OBLIGATIONS: The Series may invest in floating or
variable rate securities. Investments in floating or variable rate securities
normally will involve industrial development or revenue bonds which provide that
the rate of interest is set as a specific percentage of a designated base rate,
such as rates on Treasury Bonds or Bills or the prime rate at a major commercial
bank, and that a bondholder can demand payment of the obligations on behalf of
the Series on short notice at par plus accrued interest, which amount may be
more or less than the amount the bondholder paid for them. The maturity of
floating or variable rate obligations (including participation interests
therein) is deemed to be the longer of (i) the notice period required before the
Series is entitled to receive payment of the obligation upon demand or (ii) the
period remaining until the obligation's next interest rate adjustment. If not
redeemed by the Series through the demand feature, the obligations mature on a
specified date which may range up to thirty years from the date of issuance.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS: The Series may
invest in zero coupon bonds, deferred interest bonds and bonds on which the
interest is payable in kind ("PIK bonds"). Zero coupon and deferred interest
bonds are debt obligations which are issued 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. While zero coupon bonds do not require the periodic payment of
interest, 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 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 than
debt obligations which make regular payments of interest. The 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.
EQUITY SECURITIES
The 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
depositary receipts for those securities. These securities may be listed on
securities exchanges, traded in various over-the-counter markets or have no
organized market.
FOREIGN SECURITIES EXPOSURE
The Series may invest in various types of foreign securities, or securities
which provide the Series with exposure to foreign securities or foreign
currencies, as discussed below:
BRADY BONDS: The Series may invest in Brady Bonds, which 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.
DEPOSITARY RECEIPTS: The Series may invest in American Depositary Receipts
("ADRs"), Global Depositary Receipts ("GDRs") and other types of depositary
receipts. ADRs are certificates by a U.S. depositary (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. GDRs and other types of depositary
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 the Series' policy to invest a
certain percentage of its assets in foreign securities, the investments of the
Series in ADRs, GDRs and other types of depositary receipts are deemed to be
investments in the underlying securities.
ADRs may be sponsored or unsponsored. A sponsored ADR is issued by a depositary
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. The Series 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
depositary receipts in the United States can reduce costs and delays as well as
potential currency exchange and other difficulties. The Series may purchase
securities in local markets and direct delivery of these ordinary shares to the
local depositary of an ADR agent bank in foreign country. Simultaneously, the
ADR agents create a certificate which settles at the Series' custodian in five
days. The Series may also execute trades on the U.S. markets using existing
ADRs. 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, information available to a U.S. investor will be limited to
the information the foreign issuer is required to disclose in its 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 denominated in a
foreign currency.
DOLLAR-DENOMINATED FOREIGN DEBT SECURITIES: The Series may invest in dollar-
denominated foreign debt securities. Investing in dollar-denominated foreign
debt represents a greater degree of risk than investing in domestic securities,
due to less publicly available information, less securities regulation, war or
expropriation. Special considerations may include higher brokerage costs and
thinner trading markets. Investments in foreign countries could be affected by
other factors including extended settlement periods.
EMERGING MARKETS: The 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.
o 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 the 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 the Series' assets
should these conditions recur.
o Default; Legal Recourse -- The 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 the 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. The 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.
o Foreign Currencies -- The securities in which the Series invests may be
denominated in foreign currencies and international currency units and the
Series may invest a portion of its assets directly in foreign currencies.
Accordingly, the weakening of these currencies and units against the U.S.
dollar may result in a decline in the Series' asset value.
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.
o 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.
o 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 the Series' securities in such
markets may not be readily available. The Series may suspend redemption of
its shares for any period during which an emergency exists, as determined by
the Securities and Exchange Commission (the "SEC"). Accordingly, if the
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.
o 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 cancellation 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 the Series) may be requested to
participate in the rescheduling of such debt and to extend further loans to
governmental entities. There is no bankruptcy proceedings 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.
o Withholding -- Income from securities held by the 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. The 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 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 SECURITIES: The Series may invest in dollar-denominated and non
dollar-denominated foreign securities. Investing in securities of foreign
issuers generally involves risks not ordinarily associated with investing in
securities of domestic issuers. These include changes in currency rates,
exchange control regulations, securities settlement practices, governmental
administration or economic or monetary policy (in the United States or abroad)
or circumstances in dealings between nations. Costs may be incurred in
connection with conversions between various currencies. Special considerations
may also include more limited information about foreign issuers, higher
brokerage costs, different accounting standards and thinner trading markets.
Foreign securities markets may also be less liquid, more volatile and less
subject to government supervision than in the United States. Investments in
foreign countries could be affected by other factors including expropriation,
confiscatory taxation and potential difficulties in enforcing contractual
obligations and could be subject to extended settlement periods. As a result of
its investments in foreign securities, the 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. Under
certain circumstances, 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. While the
holding of currencies will permit the Series to take advantage of favorable
movements in the applicable exchange rate, such strategy also exposes the Series
to risk of loss if exchange 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.
FORWARD CONTRACTS
The 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 (e.g., to protect its current
or intended investments from fluctuations in currency exchange rates) as well as
for non-hedging purposes.
A Forward Contract to sell a currency may be entered into where the 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, the 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 the Series intends to
acquire.
If a hedging transaction in Forward Contracts is successful, the decline in the
dollar value of portfolio securities or the increase in the dollar 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, the
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 does not presently intend to hold Forward Contracts entered into
until the value date, at which time it 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.
The Series will also enter into transactions in Forward Contracts for other than
hedging purposes, which presents greater profit potential but also involves
increased risk. For example, the Series may purchase a given foreign currency
through a Forward Contract if, in the judgment of the Adviser, the value of such
currency is expected to rise relative to the U.S. dollar. Conversely, the Series
may sell the currency through a Forward Contract if the Adviser believes that
its value will decline relative to the dollar.
The Series will profit if the anticipated movements in foreign currency exchange
rates occur, which will increase its gross income. Where exchange rates do not
move in the direction or to the extent anticipated, however, the Series may
sustain losses which will reduce its gross income. Such transactions, therefore,
could be considered speculative and could involve significant risk of loss.
The use by the Series of Forward Contracts also involves the risks described
under the caption "Special Risk Factors -- Options, Futures, Forwards, Swaps and
Other Derivative Transactions" in this Appendix.
FUTURES CONTRACTS
The Series may purchase and sell futures contracts ("Futures Contracts") on
stock indices, foreign currencies, interest rates or interest-rate related
instruments, indices of foreign currencies or commodities. The Series may also
purchase and sell Futures Contracts on foreign or domestic fixed income
securities or indices of such securities including municipal bond indices and
any other indices of foreign or domestic fixed income securities that may become
available for trading. Such investment strategies will be used for hedging
purposes and for non-hedging purposes, subject to applicable law.
A Futures Contract is a bilateral agreement providing for the purchase and sale
of a specified type and amount of a financial instrument, foreign currency or
commodity, or for the making and acceptance of a cash settlement, at a stated
time in the future for a fixed price. By its terms, a Futures Contract provides
for a specified settlement month in which, in the case of the majority of
commodities, interest rate and foreign currency futures contracts, the
underlying commodities, fixed income securities or currency are delivered by the
seller and paid for by the purchaser, or on which, in the case of index futures
contracts and certain interest rate and foreign currency futures contracts, the
difference between the price at which the contract was entered into and the
contract's closing value is settled between the purchaser and seller in cash.
Futures Contracts differ from options in that they are bilateral agreements,
with both the purchaser and the seller equally obligated to complete the
transaction. Futures Contracts call for settlement only on the expiration date
and cannot be "exercised" at any other time during their term.
The purchase or sale of a Futures Contract differs from the purchase or sale of
a security or the purchase of an option in that no purchase price is paid or
received. Instead, an amount of cash or cash equivalents, which varies but may
be as low as 5% or less of the value of the contract, must be deposited with the
broker as "initial margin." Subsequent payments to and from the broker, referred
to as "variation margin," are made on a daily basis as the value of the index or
instrument underlying the Futures Contract fluctuates, making positions in the
Futures Contract more or less valuable -- a process known as "mark-to-market."
Purchases or sales of stock index futures contracts are used to attempt to
protect the Series' current or intended stock investments from broad
fluctuations in stock prices. For example, the Series may sell stock index
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 part, by gains on the futures position.
When the Series is not fully invested in the securities market and anticipates a
significant market advance, it may purchase stock index futures contracts in
order to gain rapid market exposure that may, in part or entirely, offset
increases in the cost of securities that the Series intends to purchase. As such
purchases are made, the corresponding positions in stock index futures contracts
will be closed out. In a substantial majority of these transactions, the Series
will purchase such securities upon termination of the futures position, but
under unusual market conditions, a long futures position may be terminated
without a related purchase of securities.
Interest rate Futures Contracts may be purchased or sold to attempt to protect
against the effects of interest rate changes on the Series' current or intended
investments in fixed income securities. For example, if the Series owned
long-term bonds and interest rates were expected to increase, the Series might
enter into interest rate futures contracts for the sale of debt securities. Such
a sale would have much the same effect as selling some of the long-term bonds in
the Series' portfolio. If interest rates did increase, the value of the debt
securities in the portfolio would decline, but the value of the Series' interest
rate futures contracts would increase at approximately the same rate, subject to
the correlation risks described below, thereby keeping the net asset value of
the Series from declining as much as it otherwise would have.
Similarly, if interest rates were expected to decline, interest rate futures
contracts may be purchased to hedge in anticipation of subsequent purchases of
long-term bonds at higher prices. Since the fluctuations in the value of the
interest rate futures contracts should be similar to that of long-term bonds,
the Series could protect itself against the effects of the anticipated rise in
the value of long-term bonds without actually buying them until the necessary
cash became available or the market had stabilized. At that time, the interest
rate futures contracts could be liquidated and the Series' cash reserves could
then be used to buy long-term bonds on the cash market. The Series could
accomplish similar results by selling bonds with long maturities and investing
in bonds with short maturities when interest rates are expected to increase.
However, since the futures market may be more liquid than the cash market in
certain cases or at certain times, the use of interest rate futures contracts as
a hedging technique may allow the Series to hedge its interest rate risk without
having to sell its portfolio securities.
The Series may purchase and sell foreign currency futures contracts for hedging
purposes, to attempt to protect its current or intended investments from
fluctuations in currency exchange rates. Such fluctuations could reduce the
dollar value of portfolio securities denominated in foreign currencies, or
increase the dollar cost of foreign-denominated securities to be acquired, even
if the value of such securities in the currencies in which they are denominated
remains constant. The Series may sell futures contracts on a foreign currency,
for example, where it holds securities denominated in such currency and it
anticipates a decline in the value of such currency relative to the dollar. In
the event such decline occurs, the resulting adverse effect on the value of
foreign-denominated securities may be offset, in whole or in part, by gains on
the futures contracts.
Conversely, the Series could protect against a rise in the dollar cost of
foreign-denominated securities to be acquired by purchasing futures contracts on
the relevant currency, which could offset, in whole or in part, the increased
cost of such securities resulting from a rise in the dollar value of the
underlying currencies. Where the Series purchases futures contracts under such
circumstances, however, and the prices of securities to be acquired instead
decline, the Series will sustain losses on its futures position which could
reduce or eliminate the benefits of the reduced cost of portfolio securities to
be acquired.
The use by the Series of Futures Contracts also involves the risks described
under the caption "Special Risk Factors -- Options, Futures, Forwards, Swaps and
Other Derivative Transactions" in this Appendix.
INDEXED SECURITIES
The Series may purchase securities with principal and/or interest payments whose
prices are indexed to the prices of other securities, securities indices,
currencies, precious metals or other commodities, or other financial indicators.
Indexed securities typically, but not always, are debt securities or deposits
whose value at maturity or coupon rate is determined by reference to a specific
instrument or statistic. The Series may also purchase indexed deposits with
similar characteristics. Gold-indexed securities, for example, typically provide
for a maturity value that depends on the price of gold, resulting in a security
whose price tends to rise and fall together with gold prices. Currency-indexed
securities typically are short-term to intermediate- term debt securities whose
maturity values or interest rates are determined by reference to the values of
one or more specified foreign currencies, and may offer higher yields than U.S.
dollar denominated securities of equivalent issuers. Currency-indexed securities
may be positively or negatively indexed; that is, their maturity value may
increase when the specified currency value increases, resulting in a security
that performs similarly to a foreign- denominated instrument, or their maturity
value may decline when foreign currencies increase, resulting in a security
whose price characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other. Certain indexed
securities may expose the Series to the risk of loss of all or a portion of the
principal amount of its investment and/or the interest that might otherwise have
been earned on the amount invested.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument 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-sponsored entities.
INVERSE FLOATING RATE OBLIGATIONS
The Series may invest in so-called "inverse floating rate obligations" or
"residual interest bonds" or other obligations or certificates relating thereto
structured to have similar features. In creating such an obligation, a
municipality issues a certain amount of debt and pays a fixed interest rate.
Half of the debt is issued as variable rate short term obligations, the interest
rate of which is reset at short intervals, typically 35 days. The other half of
the debt is issued as inverse floating rate obligations, the interest rate of
which is calculated based on the difference between a multiple of (approximately
two times) the interest paid by the issuer and the interest paid on the
short-term obligation. Under usual circumstances, the holder of the inverse
floating rate obligation can generally purchase an equal principal amount of the
short term obligation and link the two obligations in order to create long-term
fixed rate bonds. Because the interest rate on the inverse floating rate
obligation is determined by subtracting the short-term rate from a fixed amount,
the interest rate will decrease as the short-term rate increases and will
increase as the short-term rate decreases. The magnitude of increases and
decreases in the market value of inverse floating rate obligations may be
approximately twice as large as the comparable change in the market value of an
equal principal amount of long-term bonds which bear interest at the rate paid
by the issuer and have similar credit quality, redemption and maturity
provisions.
INVESTMENT IN OTHER INVESTMENT COMPANIES
The Series may invest in other investment companies. The total return on such
investment will be reduced by the operating expenses and fees of such other
investment companies, including advisory fees.
OPEN-END FUNDS. The Series may invest in open-end investment companies.
CLOSED-END FUNDS. The Series may invest in closed-end investment companies. Such
investment may involve the payment of substantial premiums above the value of
such investment companies' portfolio securities.
LENDING OF PORTFOLIO SECURITIES
The Series may seek to increase its income by lending portfolio securities. Such
loans will usually be made only to member firms of the New York Stock Exchange
(the "Exchange") (and subsidiaries thereof) and member banks of the Federal
Reserve System, and would be required to be secured continuously by collateral
in cash, an irrevocable letter of credit or United States ("U.S.") Treasury
securities maintained on a current basis at an amount at least equal to the
market value of the securities loaned. The Series would have the right to call a
loan and obtain the securities loaned at any time on customary industry
settlement notice (which will not usually exceed five business 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. The Series
would also receive a fee from the borrower or compensation from the investment
of the collateral, less a fee paid to the borrower (if the collateral is in the
form of cash). The Series would not, however, have the right to vote any
securities having voting rights during the existence of the loan, but the Series
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 Adviser to be of good standing, and when, in
the judgment of the Adviser, the consideration which can be earned currently
from securities loans of this type justifies the attendant risk.
LEVERAGING TRANSACTIONS
The Series may engage in the types of transactions described below, which
involve "leverage" because in each case the Series receives cash which it can
invest in portfolio securities and has a future obligation to make a payment.
The use of these transactions by the Series will generally cause its net asset
value to increase or decrease at a greater rate than would otherwise be the
case. Any investment income or gains earned from the portfolio securities
purchased with the proceeds from these transactions which is in excess of the
expenses associated from these transactions can be expected to cause the value
of the Series' shares and distributions on the Series' shares to rise more
quickly than would otherwise be the case. Conversely, if the investment income
or gains earned from the portfolio securities purchased with proceeds from these
transactions fail to cover the expenses associated with these transactions, the
value of the Series' shares is likely to decrease more quickly than otherwise
would be the case and distributions thereon will be reduced or eliminated.
Hence, these transactions are speculative, involve leverage and increase the
risk of owning or investing in the shares of the Series. These transactions also
increase the Series' expenses because of interest and similar payments and
administrative expenses associated with them. Unless the appreciation and income
on assets purchased with proceeds from these transactions exceed the costs
associated with them, the use of these transactions by a Series would diminish
the investment performance of the Series compared with what it would have been
without using these transactions.
BANK BORROWINGS: The Series may borrow money for investment purposes from banks
and invest the proceeds in accordance with its investment objectives and
policies.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: The Series may enter into mortgage "dollar
roll" transactions pursuant to which it sells mortgage-backed securities for
delivery in the future and simultaneously contracts to repurchase substantially
similar securities on a specified future date. 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 future purchase (often referred
to as the "drop") as well as by the interest earned on, and gains from, the
investment of the cash proceeds of the initial sale. The Series may also be
compensated by receipt of a commitment fee.
If the income and capital gains from the Series' investment of the cash from the
initial sale do not exceed the income, capital appreciation and gain or loss
that would have been realized on the securities sold as part of the dollar roll,
the use of this technique will diminish the investment performance of the Series
compared with what the performance would have been without the use of the dollar
rolls. Dollar roll transactions involve the risk that the market value of the
securities the Series is required to purchase may decline below the agreed upon
repurchase price of those securities. If the broker/dealer to whom the Series
sells securities becomes insolvent, the Series' right to purchase or repurchase
securities may be restricted. Successful use of mortgage dollar rolls may depend
upon the Adviser's ability to correctly predict interest rates and prepayments.
There is no assurance that dollar rolls can be successfully employed.
REVERSE REPURCHASE AGREEMENTS: The Series may enter into reverse repurchase
agreements. In a reverse repurchase agreement, the Series will sell securities
and receive cash proceeds, subject to its agreement to repurchase the securities
at a later date for a fixed price reflecting a market rate of interest. There is
a risk that the counterparty to a reverse repurchase agreement will be unable or
unwilling to complete the transaction as scheduled, which may result in losses
to the Series. The Series will invest the proceeds received under a reverse
repurchase agreement in accordance with its investment objective and policies.
OPTIONS
The Series may invest in the following types of options, which involve the risks
described under the caption "Special Risk Factors -- Options, Futures, Forwards,
Swaps and Other Derivative Transactions" in this Appendix:
OPTIONS ON FOREIGN CURRENCIES: The Series may purchase and write options on
foreign currencies for hedging and non-hedging purposes in a manner similar to
that in which Futures Contracts on foreign currencies, or Forward Contracts,
will be utilized. For example, a decline in the dollar value of a foreign
currency in which portfolio securities are denominated will reduce the dollar
value of such securities, even if their value in the foreign currency remains
constant. In order to protect against such diminutions in the value of portfolio
securities, the Series may purchase put options on the foreign currency. If the
value of the currency does decline, the Series will have the right to sell such
currency for a fixed amount in dollars and will thereby offset, in whole in
part, the adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of such
securities, the Series may purchase call options thereon. The purchase of such
options could offset, at least partially, the effect of the adverse movements in
exchange rates. As in the case of other types of options, however, the benefit
to the Series deriving from purchases of foreign currency options will be
reduced by the amount of the premium and related transaction costs. In addition,
where currency exchange rates do not move in the direction or to the extent
anticipated, the Series could sustain losses on transactions in foreign currency
options which would require it to forego a portion or all of the benefits of
advantageous changes in such rates. The Series may write options on foreign
currencies for the same types of hedging purposes. For example, where the Series
anticipates a decline in the dollar value of foreign-denominated securities due
to adverse fluctuations in exchange rates it could, instead of purchasing a put
option, write a call option on the relevant currency. If the expected decline
occurs, the option will most likely not be exercised, and the diminution in
value of portfolio securities will be offset by the amount of the premium
received less related transaction costs. As in the case of other types of
options, therefore, the writing of Options on Foreign Currencies will constitute
only a partial hedge.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, the Series could write
a put option on the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow the Series to hedge such increased
cost up to the amount of the premium. Foreign currency options written by the
Series will generally be covered in a manner similar to the covering of other
types of options. As in the case of other types of options, however, the writing
of a foreign currency option will constitute only a partial hedge up to the
amount of the premium, and only if rates move in the expected direction. If this
does not occur, the option may be exercised and the Series would be required to
purchase or sell the underlying currency at a loss which may not be offset by
the amount of the premium. Through the writing of options on foreign currencies,
the Series also may be required to forego all or a portion of the benefits which
might otherwise have been obtained from favorable movements in exchange rates.
The use of foreign currency options for non-hedging purposes, like the use of
other types of derivatives for such purposes, presents greater profit potential
but also significant risk of loss and could be considered speculative.
OPTIONS ON FUTURES CONTRACTS: The Series also may purchase and write options to
buy or sell those Futures Contracts in which it may invest ("Options on Futures
Contracts") as described above under "Futures Contracts." Such investment
strategies will be used for hedging purposes and for non-hedging purposes,
subject to applicable law.
An Option on a Futures Contract provides the holder with the right to enter into
a "long" position in the underlying Futures Contract, in the case of a call
option, or a "short" position in the underlying Futures Contract, in the case of
a put option, at a fixed exercise price up to a stated expiration date or, in
the case of certain options, on such date. Upon exercise of the option by the
holder, the contract market clearinghouse establishes a corresponding short
position for the writer of the option, in the case of a call option, or a
corresponding long position in the case of a put option. In the event that an
option is exercised, the parties will be subject to all the risks associated
with the trading of Futures Contracts, such as payment of initial and variation
margin deposits. In addition, the writer of an Option on a Futures Contract,
unlike the holder, is subject to initial and variation margin requirements on
the option position.
A position in an Option on a Futures Contract may be terminated by the purchaser
or seller prior to expiration by effecting a closing purchase or sale
transaction, subject to the availability of a liquid secondary market, which is
the purchase or sale of an option of the same type (i.e., the same exercise
price and expiration date) as the option previously purchased or sold. The
difference between the premiums paid and received represents the Series' profit
or loss on the transaction.
Options on Futures Contracts that are written or purchased by the Series on U.S.
exchanges are traded on the same contract market as the underlying Futures
Contract, and, like Futures Contracts, are subject to regulation by the
Commodity Futures Trading Commission (the "CFTC") and the performance guarantee
of the exchange clearinghouse. In addition, Options on Futures Contracts may be
traded on foreign exchanges. The Series may cover the writing of call Options on
Futures Contracts (a) through purchases of the underlying Futures Contract, (b)
through ownership of the instrument, or instruments included in the index,
underlying the Futures Contract, or (c) through the holding of a call on the
same Futures Contract and in the same principal amount as the call written where
the exercise price of the call held (i) is equal to or less than the exercise
price of the call written or (ii) is greater than the exercise price of the call
written if the Series owns liquid and unencumbered assets equal to the
difference. The Series may cover the writing of put Options on Futures Contracts
(a) through sales of the underlying Futures Contract, (b) through the ownership
of liquid and unencumbered assets equal to the value of the security or index
underlying the Futures Contract, or (c) through the holding of a put on the same
Futures Contract and in the same principal amount as the put written where the
exercise price of the put held (i) is equal to or greater than the exercise
price of the put written or where the exercise price of the put held (ii) is
less than the exercise price of the put written if the Series owns liquid and
unencumbered assets equal to the difference. 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. Upon the exercise of a call Option on a Futures Contract written by
the 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 the 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.
The writing of a call option on a Futures Contract for hedging purposes
constitutes a partial hedge against declining prices of the securities or other
instruments required to be delivered under the terms of the Futures Contract. 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, less related
transaction costs, 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 or other instruments required to be delivered under the terms of the
Futures Contract. If the futures price at expiration of the option is higher
than the exercise price, the Series will retain the full amount of the option
premium which provides a partial hedge against any increase in the price of
securities which the Series intends to purchase. If a put or call option the
Series has written is exercised, the Series 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 the
changes in the value of its futures positions, the Series' losses from existing
Options on Futures Contracts may to some extent be reduced or increased by
changes in the value of portfolio securities.
The Series may purchase Options on Futures Contracts for hedging purposes
instead of 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 or changes in interest or exchange rates, the
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
in part, by a profit on the option. Conversely, where it is projected that the
value of securities to be acquired by the Series will increase prior to
acquisition, due to a market advance or changes in interest or exchange rates,
the Series could purchase call Options on Futures Contracts rather than
purchasing the underlying Futures Contracts.
OPTIONS ON SECURITIES: The Series may write (sell) covered put and call options,
and purchase put and call options, on securities. Call and put options written
by the Series may be covered in the manner set forth below.
A call option written by the Series is "covered" if the Series owns the security
underlying the call or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional cash
consideration if the Series owns liquid and unencumbered assets equal to the
amount of cash consideration) upon conversion or exchange of other securities
held in its portfolio. A call option is also covered if the Series holds a call
on the same security 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 Series owns liquid and unencumbered assets equal to the
difference. A put option written by the Series is "covered" if the Series owns
liquid and unencumbered assets with a value equal to the exercise price, or else
holds a put on the same security and in the same principal amount as the put
written where the exercise price of the put held is equal to or greater than the
exercise price of the put written or where the exercise price of the put held is
less than the exercise price of the put written if the Series owns liquid and
unencumbered assets equal to the difference. Put and call options written by the
Series may also be covered in such other manner as may be in accordance with the
requirements of the exchange on which, or the counterparty with which, the
option is traded, and applicable laws and regulations. If the writer's
obligation is not so covered, it is subject to the risk of the full change in
value of the underlying security from the time the option is written until
exercise.
Effecting a closing transaction in the case of a written call option will permit
the 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 the Series to write another put option to the extent that
the Series owns liquid and unencumbered assets. Such transactions permit the
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 of the Series, provided that another
option on such security is not written. If the 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.
The Series will realize a profit from a closing transaction if the premium paid
in connection with the closing of an option written by the Series 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 the Series is more than
the premium paid for the original purchase. Conversely, the 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 the
Series is likely to be offset in whole or in part by appreciation of the
underlying security owned by the Series.
The Series may write options in connection with buy-and-write transactions; that
is, the Series may purchase a security and then write a call option against that
security. The exercise price of the call option the Series determines to write
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. Buy-and-write
transactions using in-the-money call options may be used when it is expected
that the price of the underlying security will decline moderately during the
option period. Buy-and-write transactions using out-of-the-money call options
may be used when it is expected that the premiums received from writing the call
option plus the appreciation in the market price of the underlying security up
to the exercise price will be greater than the appreciation in the price of the
underlying security alone. 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, less related
transaction costs. 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. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Series' gain will be limited to the premium
received, less related transaction costs. If the market price of the underlying
security declines or otherwise is below the exercise price, the Series may elect
to close the position or retain the option until it is exercised, at which time
the Series will be required to take delivery of the security at the exercise
price; the Series' return will be the premium received from the put option minus
the amount by which the market price of the security is below the exercise
price, which could result in a loss. Out-of- the-money, at-the-money and
in-the-money put options may be used by the Series in the same market
environments that call options are used in equivalent buy- and-write
transactions.
The Series may also write combinations of put and call options on the same
security, known as "straddles" with the same exercise price and expiration
date. By writing a straddle, the 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 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 the security remains stable and
neither the call nor the put is exercised. In those instances 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, the 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, the 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 capital loss unless the security
subsequently appreciates in value. The writing of options on securities will not
be undertaken by the Series 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
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.
The Series may also purchase options for hedging purposes or to increase its
return. Put options may be purchased to hedge against a decline in the value of
portfolio securities. If such decline occurs, the put options will permit the
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 by transaction costs.
The Series may also purchase call options to hedge against an increase in the
price of securities that the Series anticipates purchasing in the future. If
such increase occurs, the call option will permit the Series to purchase the
securities at the exercise price, or to close out the options at a profit. The
premium paid for the call 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 rises sufficiently, the option may expire
worthless to the Series.
OPTIONS ON STOCK INDICES: The Series may write (sell) covered call and put
options and purchase call and put options on stock indices. In contrast to an
option on a security, an option on a stock index provides the holder with the
right but not the obligation to make or receive a cash settlement upon exercise
of the option, rather than the right to purchase or sell a security. The amount
of this settlement is generally equal to (i) the amount, if any, by which the
fixed exercise price of the option exceeds (in the case of a call) or is below
(in the case of a put) the closing value of the underlying index on the date of
exercise, multiplied by (ii) a fixed "index multiplier." The Series may cover
written call options on stock indices by owning securities whose price changes,
in the opinion of the Adviser, are expected to be similar to those of the
underlying index, or by having an absolute and immediate right to acquire such
securities without additional cash consideration (or for additional cash
consideration if the Series owns liquid and unencumbered assets equal to the
amount of cash consideration) upon conversion or exchange of other securities in
its portfolio. Where the Series covers a call option on a stock index through
ownership of securities, such securities may not match the composition of the
index and, 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. The Series may also cover call options on stock indices by holding a call
on the same index 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 Series owns liquid and unencumbered assets equal to the
difference. The Series may cover put options on stock indices by owning liquid
and unencumbered assets with a value equal to the exercise price, or by holding
a put on the same stock index and in the same principal amount as the put
written where the exercise price of the put held (a) is equal to or greater than
the exercise price of the put written or (b) is less than the exercise price of
the put written if the Series owns liquid and unencumbered assets equal to the
difference. Put and call options on stock indices may also be covered in such
other manner as may be in accordance with the rules of the exchange on which, or
the counterparty with which, the option is traded and applicable laws and
regulations.
The Series will receive a premium from writing a put or call option, which
increases the Series' gross income in the event the option expires unexercised
or is closed out at a profit. If the value of an index on which the 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' stock investments. By writing a put option, the
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'
losses in the event of a market decline, although such losses will be offset in
part by the premium received for writing the option.
The Series may also purchase put options on stock indices to hedge its
investments against a decline in value. By purchasing a put option on a stock
index, the 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.
The purchase of call options on stock indices may be used by the 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 the 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 if the value of the index does not rise. The purchase of
call options on stock 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.
The index underlying a stock index option may be a "broad-based" index, such as
the Standard & Poor's 500 Index or the New York Stock Exchange Composite Index,
the changes in value of which ordinarily will reflect movements in the stock
market in general. In contrast, certain options may be based on narrower market
indices, such as the Standard & Poor's 100 Index, or on indices of securities of
particular industry groups, such as those of oil and gas or technology
companies. A stock index assigns relative values to the stocks included in the
index and the index fluctuates with changes in the market values of the stocks
so included. The composition of the index is changed periodically.
RESET OPTIONS:
In certain instances, the Series may purchase or write options on U.S. Treasury
securities which provide for periodic adjustment of the strike price and may
also provide for the periodic adjustment of the premium during the term of each
such option. Like other types of options, these transactions, which may be
referred to as "reset" options or "adjustable strike" options grant the
purchaser the right to purchase (in the case of a call) or sell (in the case of
a put), a specified type of U.S. Treasury security at any time up to a stated
expiration date (or, in certain instances, on such date). In contrast to other
types of options, however, the price at which the underlying security may be
purchased or sold under a "reset" option is determined at various intervals
during the term of the option, and such price fluctuates from interval to
interval based on changes in the market value of the underlying security. As a
result, the strike price of a "reset" option, at the time of exercise, may be
less advantageous than if the strike price had been fixed at the initiation of
the option. In addition, the premium paid for the purchase of the option may be
determined at the termination, rather than the initiation, of the option. If the
premium for a reset option written by the Series is paid at termination, the
Series assumes the risk that (i) the premium may be less than the premium which
would otherwise have been received at the initiation of the option because of
such factors as the volatility in yield of the underlying Treasury security over
the term of the option and adjustments made to the strike price of the option,
and (ii) the option purchaser may default on its obligation to pay the premium
at the termination of the option. Conversely, where the Series purchases a reset
option, it could be required to pay a higher premium than would have been the
case at the initiation of the option.
"YIELD CURVE" OPTIONS: The Series may also enter into options on the "spread,"
or yield differential, between two fixed income securities, in transactions
referred to as "yield curve" options. 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 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 may be used for the same purposes as other options on
securities. Specifically, the Series may purchase or write such options for
hedging purposes. For example, the 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,
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 owns liquid and unencumbered 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
counterparty 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.
REPURCHASE AGREEMENTS
The Series may enter into repurchase agreements with sellers who are member
firms (or a subsidiary thereof) of the New York Stock Exchange or members of the
Federal Reserve System, recognized primary U.S. Government securities dealers or
institutions which the Adviser has determined to be of comparable
creditworthiness. The securities that the Series purchases and holds through its
agent are U.S. Government securities, the values of 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. In either case, the income to the Series is unrelated to
the interest rate on the Government securities.
The repurchase agreement provides that in the event the seller fails to pay the
amount 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 has adopted and follows procedures which are
intended to minimize the risks of repurchase agreements. For example, the 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
collateral.
RESTRICTED SECURITIES
The Series may purchase securities that are not registered under the Securities
Act of 1933, as amended ("1933 Act") ("restricted securities"), including those
that can be offered and sold to "qualified institutional buyers" under Rule 144A
under the 1933 Act ("Rule 144A securities") and commercial paper issued under
Section 4(2) of the 1933 Act ("4(2) Paper"). A determination is made, based upon
a continuing review of the trading markets for the Rule 144A security or 4(2)
Paper, whether such security is liquid and thus not subject to the Series'
limitation on investing in illiquid investments. The Board of Trustees has
adopted guidelines and delegated to MFS the daily function of determining and
monitoring the liquidity of Rule 144A securities and 4(2) Paper. 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
the Series to the extent that qualified institutional buyers become for a time
uninterested in purchasing these Rule 144A securities held in the Series'
portfolio. Subject to the Series' limitation on investments in illiquid
investments, the Series may also invest in restricted securities that may not be
sold under Rule 144A, which presents certain risks. 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.
SHORT SALES
The Series may seek to hedge investments or realize additional gains through
short sales. The Series may make short sales, which are transactions in which
the Series sells a security it does not own, in anticipation of a decline in the
market value of that security. To complete such a transaction, the Series must
borrow the security to make delivery to the buyer. The Series then is obligated
to replace the security borrowed by purchasing it at the market price at the
time of replacement. The price at such time may be more or less than the price
at which the security was sold by the Series. Until the security is replaced,
the Series is required to repay the lender any dividends or interest which
accrue during the period of the loan. To borrow the security, the Series also
may be required to pay a premium, which would increase the cost of the security
sold. The net proceeds of the short sale will be retained by the broker, to the
extent necessary to meet margin requirements, until the short position is closed
out. The Series also will incur transaction costs in effecting short sales.
The Series will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which the
Series replaces the borrowed security. The Series will realize a gain if the
price of the security declines between those dates. The amount of any gain will
be decreased, and the amount of any loss increased, by the amount of the
premium, dividends or interest the Series may be required to pay in connection
with a short sale.
Whenever the Series engages in short sales, it identifies liquid and
unencumbered assets in an amount that, when combined with the amount of
collateral deposited with the broker connection with the short sale, equals the
current market value of the security sold short.
SHORT SALES AGAINST THE BOX
The Series may make short sales "against the box," i.e., when a security
identical to one owned by the Series is borrowed and sold short. If the Series
enters into a short sale against the box, it is required to segregate
securities equivalent in kind and amount to the securities sold short (or
securities convertible or exchangeable into such securities) and is required
to hold such securities while the short sale is outstanding. The Series will
incur transaction costs, including interest, in connection with opening,
maintaining, and closing short sales against the box.
SHORT TERM INSTRUMENTS
The Series may hold cash and invest in cash equivalents, such as short-term
U.S. Government Securities, commercial paper and bank instruments.
SWAPS AND RELATED DERIVATIVE INSTRUMENTS
The Series may enter into interest rate swaps, currency swaps and other types
of available swap agreements, including swaps on securities, commodities and
indices, and related types of derivatives, such as caps, collars and floors. A
swap is an agreement between two parties pursuant to which each party agrees
to make one or more payments to the other on regularly scheduled dates over a
stated term, based on different interest rates, currency exchange rates,
security or commodity prices, the prices or rates of other types of financial
instruments or assets or the levels of specified indices. Under a typical
swap, one party may agree to pay a fixed rate or a floating rate determined by
reference to a specified instrument, rate or index, multiplied in each case by
a specified amount (the "notional amount"), while the other party agrees to
pay an amount equal to a different floating rate multiplied by the same
notional amount. On each payment date, the obligations of parties are netted,
with only the net amount paid by one party to the other. All swap agreements
entered into by the Series with the same counterparty are generally governed
by a single master agreement, which provides for the netting of all amounts
owed by the parties under the agreement upon the occurrence of an event of
default, thereby reducing the credit risk to which such party is exposed.
Swap agreements are typically individually negotiated and structured to
provide exposure to a variety of different types of investments or market
factors. Swap agreements may be entered into for hedging or non-hedging
purposes and therefore may increase or decrease the Series' exposure to the
underlying instrument, rate, asset or index. Swap agreements can take many
different forms and are known by a variety of names. The 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.
For example, the Series may enter into an interest rate swap in order to protect
against declines in the value of fixed income securities held by the Series. In
such an instance, the Series would agree with a counterparty to pay a fixed rate
(multiplied by a notional amount) and the counterparty would agree to pay a
floating rate multiplied by the same notional amount. If interest rates rise,
resulting in a diminution in the value of the Series' portfolio, the Series
would receive payments under the swap that would offset, in whole or part, such
diminution in value. The Series may also enter into swaps to modify its exposure
to particular markets or instruments, such as a currency swap between the U.S.
dollar and another currency which would have the effect of increasing or
decreasing the Series' exposure to each such currency. The Series might also
enter into a swap on a particular security, or a basket or index of securities,
in order to gain exposure to the underlying security or securities, as an
alternative to purchasing such securities. Such transactions could be more
efficient or less costly in certain instances than an actual purchase or sale of
the securities.
The Series may enter into other related types of over-the-counter derivatives,
such as "caps", "floors", "collars" and options on swaps, or "swaptions", for
the same types of hedging or non-hedging purposes. Caps and floors are similar
to swaps, except that one party pays a fee at the time the transaction is
entered into and has no further payment obligations, while the other party is
obligated to pay an amount equal to the amount by which a specified fixed or
floating rate exceeds or is below another rate (multiplied by a notional
amount). Caps and floors, therefore, are also similar to options. A collar is in
effect a combination of a cap and a floor, with payments made only within or
outside a specified range of prices or rates. A swaption is an option to enter
into a swap agreement. Like other types of options, the buyer of a swaption pays
a non-refundable premium for the option and obtains the right, but not the
obligation, to enter into the underlying swap on the agreed-upon terms.
The Series will maintain liquid and unencumbered assets to cover its current
obligations under swap and other over-the-counter derivative 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 and
unencumbered assets 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 liquid and
unencumbered 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 underlying price, rate or index level 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 would decline, the value of the
swap agreement 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, but there can be
no assurance that it will be able to do so.
The uses by the Series of swaps and related derivative instruments also involves
the risks described under the caption "Special Risk Factors -- Options, Futures,
Forwards, Swaps and Other Derivative Transactions" in this Appendix.
TEMPORARY BORROWINGS
The Series may borrow money for temporary purposes (e.g., to meet redemption
requests or settle outstanding purchases of portfolio securities).
TEMPORARY DEFENSIVE POSITIONS
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, a large portion or all of the assets of the
Series may be invested 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.
WARRANTS
The Series may invest in warrants. Warrants are securities that give the 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 investments 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.
"WHEN-ISSUED" SECURITIES
The Series may purchase securities on a "when-issued" or on a "forward delivery"
basis which means that the securities will be delivered to the Series at a
future date usually 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. In general, the Series does not pay for such securities until
received, and does not start earning interest on the securities until the
contractual settlement date. While awaiting delivery of securities purchased on
such bases, a Series will identify liquid and unencumbered assets equal to its
forward delivery commitment.
SPECIAL RISK FACTORS -- OPTIONS, FUTURES, FORWARDS, SWAPS AND OTHER DERIVATIVE
TRANSACTIONS
RISK OF IMPERFECT CORRELATION OF HEDGING INSTRUMENTS WITH THE SERIES' PORTFOLIO:
The Series' ability effectively to hedge all or a portion of its portfolio
through transactions in derivatives, including options, Futures Contracts,
Options on Futures Contracts, Forward Contracts, swaps and other types of
derivatives depends on the degree to which price movements in the underlying
index or instrument correlate with price movements in the relevant portion of
the Series' portfolio. In the case of derivative instruments based on an index,
the portfolio will not duplicate the components of the index, and in the case of
derivative instruments on fixed income securities, the portfolio securities
which are being hedged may not be the same type of obligation underlying such
derivatives. The use of derivatives for "cross hedging" purposes (such as a
transaction in a Forward Contract on one currency to hedge exposure to a
different currency) may involve greater correlation risks. Consequently, the
Series bears the risk that the price of the portfolio securities being hedged
will not move in the same amount or direction as the underlying index or
obligation.
If the Series purchases a put option on an index and the index decreases less
than the value of the hedged securities, the Series would experience a loss
which is not completely offset by the put option. It is also possible that there
may be a negative correlation between the index or obligation underlying an
option or Futures Contract in which the Series has a position and the portfolio
securities the Series is attempting to hedge, which could result in a loss on
both the portfolio and the hedging instrument. It should be noted that stock
index 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 based on a broad market index. This is due to the fact that 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. Nevertheless, where the
Series enters into transactions in options or futures on narrowly-based indices
for hedging purposes, movements in the value of the index should, if the hedge
is successful, correlate closely with the portion of the Series' portfolio or
the intended acquisitions being hedged.
The trading of derivatives for hedging purposes entails the additional risk of
imperfect correlation between movements in the price of the derivative 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 derivatives markets. In this regard, trading
by speculators in derivatives has in the past occasionally resulted in market
distortions, which may be difficult or impossible to predict, particularly near
the expiration of such instruments.
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. The risk of imperfect correlation, however, generally
tends to diminish as the maturity date of the Futures Contract or expiration
date of the option approaches.
Further, with respect to options on securities, options on stock indices,
options on currencies and Options on Futures Contracts, the Series is subject
to the risk of market movements between the time that the option is exercised
and the time of performance thereunder. This could increase the extent of any
loss suffered by the Series in connection with such transactions.
In writing a covered call option on a security, index or futures contract, the
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. For example, where the Series covers a
call option written on a stock index through segregation of securities, such
securities may not match the composition of the index, and the Series may not be
fully covered. As a result, the Series could be subject to risk of loss in the
event of adverse market movements.
The writing of options on securities, options on stock indices or Options on
Futures Contracts constitutes only a partial hedge against fluctuations in the
value of the Series' portfolio. When the Series writes an option, it will
receive premium income in return for the holder's purchase of the right to
acquire or dispose of the underlying obligation. In the event that the price of
such obligation does not rise sufficiently above the exercise price of the
option, in the case of a call, or fall below the exercise price, in the case of
a put, the option will not be exercised and the Series will retain the amount of
the premium, less related transaction costs, which will constitute a partial
hedge against any decline that may have occurred in the Series' portfolio
holdings or any increase in the cost of the instruments to be acquired.
Where the price of the underlying obligation moves sufficiently in favor of the
holder to warrant exercise of the option, however, and the option is exercised,
the Series will incur a loss which may only be partially offset by the amount of
the premium it received. Moreover, by writing an option, the Series may be
required to forego the benefits which might otherwise have been obtained from an
increase in the value of portfolio securities or other assets or a decline in
the value of securities or assets to be acquired. In the event of the occurrence
of any of the foregoing adverse market events, the Series' overall return may be
lower than if it had not engaged in the hedging transactions. Furthermore, the
cost of using these techniques may make it economically infeasible for the
Series to engage in such transactions.
RISKS OF NON-HEDGING TRANSACTIONS: The Series may enter transactions in
derivatives for non-hedging purposes as well as hedging purposes. Non-hedging
transactions in such instruments involve greater risks and may result in losses
which may not be offset by increases in the value of portfolio securities or
declines in the cost of securities to be acquired. The Series will only write
covered options, such that liquid and unencumbered assets necessary to satisfy
an option exercise will be identified, unless the option is covered in such
other manner as may be in accordance with the rules of the exchange on which, or
the counterparty with which, the option is traded and applicable laws and
regulations. Nevertheless, the method of covering an option employed by the
Series may not fully protect it against risk of loss and, in any event, the
Series could suffer losses on the option position which might not be offset by
corresponding portfolio gains. The Series may also enter into futures, Forward
Contracts or swaps for non-hedging purposes. For example, the Series may enter
into such a transaction as an alternative to purchasing or selling the
underlying instrument or to obtain desired exposure to an index or market. In
such instances, the Series will be exposed to the same economic risks incurred
in purchasing or selling the underlying instrument or instruments. However,
transactions in futures, Forward Contracts or swaps may be leveraged, which
could expose the Series to greater risk of loss than such purchases or sales.
Entering into transactions in derivatives for other than hedging purposes,
therefore, could expose the Series to significant risk of loss if the prices,
rates or values of the underlying instruments or indices do not move in the
direction or to the extent anticipated.
With respect to the writing of straddles on securities, the Series incurs 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. Such transactions, therefore,
create an opportunity for increased return by providing the Series with two
simultaneous premiums on the same security, but involve additional risk, since
the Series may have an option exercised against it regardless of whether the
price of the security increases or decreases.
RISK OF A 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 the 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 contract at any
specific time. In that event, it may not be possible to close out a position
held by the 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
has insufficient cash available to meet margin requirements, it will be
necessary to liquidate portfolio securities or other assets at a time when it is
disadvantageous to do so. The inability to close out options and futures
positions, therefore, could have an adverse impact on the Series' ability
effectively to hedge its portfolio, and could result in trading losses.
The liquidity of a secondary market in a Futures Contract or option thereon may
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. Once the daily limit has been reached in the
contract, no trades may be entered into at a price beyond the limit, thus
preventing the liquidation of open futures or option positions and requiring
traders to make additional margin deposits. Prices have in the past moved to the
daily limit on a number of consecutive trading days.
The trading of Futures Contracts and options is also subject to the risk of
trading halts, suspensions, exchange or clearinghouse equipment failures,
government intervention, insolvency of a brokerage firm or clearinghouse or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
MARGIN: Because of low initial margin deposits made upon the establishment of a
futures, forward or swap position (certain of which may require no initial
margin deposits) 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. Where the
Series enters into such transactions 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 or other
assets held by the Series or decreases in the prices of securities or other
assets the Series intends to acquire. Where the Series enters into such
transactions for other than hedging purposes, the margin requirements associated
with such transactions could expose the Series to greater risk.
POTENTIAL BANKRUPTCY OF A CLEARINGHOUSE OR BROKER: When the Series enters into
transactions in exchange-traded futures or options, it is exposed to the risk of
the potential bankruptcy of the relevant exchange clearinghouse or the broker
through which the Series has effected the transaction. In that event, the Series
might not be able to recover amounts deposited as margin, or amounts owed to the
Series in connection with its transactions, for an indefinite period of time,
and could sustain losses of a portion or all of such amounts. Moreover, the
performance guarantee of an exchange clearinghouse generally extends only to its
members and the Series could sustain losses, notwithstanding such guarantee, in
the event of the bankruptcy of its broker.
TRADING AND POSITION LIMITS: The exchanges on which futures 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). Further, the 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. The Adviser does not believe that these trading and position
limits will have any adverse impact on the strategies for hedging the portfolios
of the Series.
RISKS OF OPTIONS ON FUTURES CONTRACTS: The amount of risk the 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 security, index, currency or Futures Contract.
RISKS OF TRANSACTIONS IN FOREIGN CURRENCIES AND OVER-THE-COUNTER DERIVATIVES AND
OTHER TRANSACTIONS NOT CONDUCTED ON U.S. EXCHANGES: Transactions in Forward
Contracts on foreign currencies, as well as futures and options on foreign
currencies and transactions executed on foreign exchanges, 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 the Series. Further, 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 the Series makes investment and trading decisions in connection
with other transactions. Moreover, because the foreign currency market is a
global, 24-hour market, events could occur in that market which will not be
reflected in the forward, futures or options market until the following day,
thereby making it more difficult for the Series to respond to such events in a
timely manner.
Settlements of exercises of over-the-counter Forward Contracts or foreign
currency options 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 U.S. or foreign restrictions and regulations
regarding the maintenance of foreign banking relationships, fees, taxes or other
charges.
Unlike transactions entered into by the Series in Futures Contracts and
exchange-traded options, options on foreign currencies, Forward Contracts,
over-the-counter options on securities, swaps and other over-the-counter
derivatives are not traded on contract markets regulated by the CFTC or (with
the exception of certain foreign currency options) the SEC. To the contrary,
such instruments are traded through financial institutions acting as market-
makers, although foreign currency options are also traded on certain national
securities exchanges, such as the Philadelphia Stock Exchange and the Chicago
Board Options Exchange, subject to SEC regulation. In an over-the-counter
trading environment, many of the protections afforded to exchange participants
will not be available. For example, there are no daily price fluctuation limits,
and adverse market movements could therefore continue to an unlimited extent
over a period of time. Although the purchaser of an option cannot lose more than
the amount of the premium plus related transaction costs, this entire amount
could be lost. Moreover, the option writer and a trader of Forward Contracts
could lose amounts substantially in excess of their initial investments, due to
the margin and collateral requirements associated with such positions.
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 the Series could be required to retain
options purchased or written, or Forward Contracts or swaps entered into, until
exercise, expiration or maturity. This in turn could limit the 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 guarantee of an
exchange clearinghouse, and the Series will therefore be subject to the risk of
default by, or the bankruptcy of, the financial institution serving as its
counterparty. One or more of such institutions also may decide to discontinue
their role as market-makers in a particular currency or security, thereby
restricting the Series' ability to enter into desired hedging transactions. The
Series will enter into an over-the-counter transaction only with parties whose
creditworthiness has been reviewed and found satisfactory by the Adviser.
Options on securities, options on stock 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 U.S. 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.
Options on foreign currencies traded on national securities exchanges are within
the jurisdiction of the SEC, as are other securities traded on such exchanges.
As a result, many of the protections provided to traders on organized exchanges
will be available with respect to such transactions. In particular, all foreign
currency option positions entered into on a national securities exchange are
cleared and guaranteed by the Options Clearing Corporation (the "OCC"), thereby
reducing the risk of counterparty default. Further, a liquid secondary market in
options traded on a national securities exchange may be more readily available
than in the over-the-counter market, potentially permitting the Series to
liquidate open positions at a profit prior to exercise or expiration, or to
limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however, is
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effects of other political and
economic events. In addition, exchange-traded options on foreign currencies
involve certain risks not presented by the over-the-counter market. For example,
exercise and settlement of such options must be made exclusively through the
OCC, which has established banking relationships in applicable foreign countries
for this purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on the OCC
or its clearing member, impose special procedures on exercise and settlement,
such as technical changes in the mechanics of delivery of currency, the fixing
of dollar settlement prices or prohibitions on exercise.
POLICIES ON THE USE OF FUTURES AND OPTIONS ON FUTURES CONTRACTS: 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 required 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 has 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.
<PAGE>
APPENDIX B
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch 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 fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than the 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.
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 S&P. 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.
<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 LIFE ASSURANCE COMPANY OF CANADA (U.S.)
Retirement Products and Services Division
P.O. Box 1024, Boston, MA 02103
Toll Free Telephone: (800) 752-7215
SUN-13 4/99 1M