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<TABLE>
<S> <C>
MFS-REGISTERED TRADEMARK- WORLD GOVERNMENTS PROSPECTUS
SERIES-SM- May 1, 1995
</TABLE>
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MFS-Registered Trademark- VARIABLE INSURANCE TRUST-SM-
<TABLE>
<CAPTION>
<C> <S>
1. Expense Summary..........................................................................................................
2. Investment Concept of the Trust..........................................................................................
3. Condensed Financial Information..........................................................................................
4. Investment Objectives and Policies.......................................................................................
5. Investment Techniques....................................................................................................
6. Additional Risk Factors..................................................................................................
7. Management of the Series.................................................................................................
8. Information Concerning Shares of the Series..............................................................................
Purchases and Redemptions................................................................................................
Net Asset Value..........................................................................................................
Distributions............................................................................................................
Tax Status...............................................................................................................
Description of Shares, Voting Rights and Liabilities.....................................................................
Performance Information..................................................................................................
Expenses.................................................................................................................
Shareholder Communications...............................................................................................
Appendix A -- Description of Obligations Issued or Guaranteed by U.S. Government Agencies,
Authorities or Instrumentalities.........................................................................................
<CAPTION>
PAGE
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<C> <C>
1. 2
2. 2
3. 3
4. 3
5. 5
6. 9
7. 11
8. 12
12
13
13
13
13
14
14
15
A-1
</TABLE>
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BECAUSE OF ITS INVESTMENT POLICIES PERMITTING INVESTMENT IN FOREIGN SECURITIES,
INVESTMENTS IN THE MFS WORLD GOVERNMENTS SERIES MAY BE SUBJECT TO A GREATER
DEGREE OF RISK THAN INVESTMENTS IN OTHER INVESTMENT COMPANIES WHICH INVEST
ENTIRELY IN DOMESTIC SECURITIES.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------
SHARES OF THE TRUST ARE AVAILABLE AND ARE BEING MARKETED AS A POOLED FUNDING
VEHICLE FOR LIFE INSURANCE COMPANIES WRITING ALL TYPES OF CONTRACTS (THE
"CONTRACTS").
MFS VARIABLE INSURANCE TRUST
500 BOYLSTON STREET, BOSTON, MASSACHUSETTS 02116 (617) 954-5000
MFS WORLD GOVERNMENTS SERIES ("WORLD GOVERNMENTS SERIES" OR THE "SERIES") is a
non-diversified series of MFS Variable Insurance Trust (the "Trust"), an
open-end management investment company offering insurance company separate
accounts a selection of investment vehicles for variable annuity and variable
life insurance contracts (the "Contracts"). The investment objectives of the
World Governments Series are to seek preservation and growth of capital,
together with moderate current income. The Series' investment adviser and
distributor are Massachusetts Financial Services Company and MFS Fund
Distributors, Inc., respectively, both of which are located at 500 Boylston
Street, Boston, Massachusetts 02116.
This Prospectus sets forth concisely the information about the Series that a
prospective investor should know before applying for the Contracts offered by
the separate accounts of certain insurance companies ("Participating Insurance
Companies"). Investors are advised to read this Prospectus and the applicable
Contract prospectus carefully and retain them for future reference. If you
require more detailed information, a Statement of Additional Information dated
May 1, 1995, as supplemented from time to time, is available upon request
without charge and may be obtained by calling or by writing to the Shareholder
Servicing Agent. (See back cover for address and phone number.) The Statement of
Additional Information, which is incorporated by reference into this Prospectus,
has been filed with the Securities and Exchange Commission.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE>
1. EXPENSE SUMMARY
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ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS):
</TABLE>
<TABLE>
<CAPTION>
MFS WORLD
GOVERNMENTS
SERIES
------------
<S> <C>
Management Fee................................................................................................. 0.75%
Other Expenses (after fee reduction)........................................................................... 0.25%(1)
------------
Total Operating Expenses (after fee reduction)................................................................. 1.00%(1)
<FN>
- ------------------------
(1) The Adviser has agreed to bear, subject to reimbursement, until December 31, 2004, expenses of the World Governments
Series such that the Series' aggregate operating expenses do not exceed 1.00%, on an annualized basis, of its average
daily net assets. See "Information Concerning Shares of the Series--Expenses." Absent this expense arrangement, "Other
Expenses" and "Total Operating Expenses" would be 0.63% and 1.38%, respectively.
</TABLE>
The Series' annual operating expenses do not reflect expenses imposed by
separate accounts of Participating Insurance Companies through which an
investment in a Series is made or their related Contracts. A separate account's
expenses are disclosed in the prospectus through which the Contract relating to
that separate account is offered for sale.
2. INVESTMENT CONCEPT OF THE TRUST
The World Governments Series is a non-diversified series of the Trust, an
open-end management investment company with twelve separate series, each of
which is a segregated, separately managed portfolio. The Trust was organized as
a business trust under the laws of The Commonwealth of Massachusetts by a
Declaration of Trust dated February 1, 1994.
The Trust offers shares of its twelve series to insurance company separate
accounts that fund Contracts. Separate accounts may purchase or redeem shares at
net asset value without any sales or redemption charge. Fees and charges imposed
by a separate account, however, will affect the actual return to the holder of a
Contract. A separate account may also impose certain restrictions or limitations
on the allocation of purchase payments or Contract value to the series.
Prospective investors should consult the applicable Contract prospectus for
information regarding fees and expenses of the Contract and separate account and
any applicable restrictions or limitations. The Trust assumes no responsibility
for such prospectuses.
The Trust offers shares of the Series to the separate accounts of Participating
Insurance Companies that are affiliated or unaffiliated ("shared funding"), and
shares of the Series will serve as the underlying investments for both variable
annuity and variable life insurance contracts ("mixed funding"). Due to
differences in tax treatment or other considerations, the interests of various
Contract owners might at some time be in conflict. The Trust currently does not
foresee any such conflict. Nevertheless, the Trust's Trustees intend to monitor
events in order to identify any material irreconcilable conflicts which may
possibly arise and to determine what action, if any, should be taken in response
thereto. If such a conflict were to occur, one or more separate accounts of the
Participating Insurance Companies might be required to withdraw its investments
in the Series. This might force the Series to sell securities at disadvantageous
prices.
Individual Contract holders are not the "shareholders" of the Trust. Rather, the
Participating Insurance Companies and their separate accounts are the
shareholders or investors, although such companies may pass through voting
rights to their Contract holders.
The Trust's Board of Trustees provides broad supervision over the affairs of the
Trust and the Series. Massachusetts Financial Services Company, a Delaware
Corporation ("MFS" or the "Adviser"), is the investment adviser to the Series. A
majority of the Trustees of the Trust are not affiliated with the Adviser. The
Adviser is responsible for the management of the assets of the Series and the
officers of the Trust are responsible for the operations. The Adviser manages
the Series' portfolio from day to day in accordance with the investment
objectives and policies of the Series. The selection of investments and the way
they are managed depend on the conditions and trends in the economy and the
financial marketplaces.
2
<PAGE>
3. CONDENSED FINANCIAL INFORMATION
The following information should be read in conjunction with the World
Governments Series' financial statements included in the Series' Annual Report
to shareholders which are incorporated by reference into the Statement of
Additional Information in reliance upon the report of Deloitte & Touche LLP,
independent certified public accountants, as experts in accounting and auditing.
<TABLE>
<CAPTION>
<S> <C>
Per Share data (for a share outstanding throughout the period):
Net asset value--beginning of period...............................................................................
Income from investment operations++
Net investment income**..........................................................................................
Net realized and unrealized loss on investments..................................................................
Total from investment operations...............................................................................
Less distributions declared to shareholders
From net investment income.......................................................................................
In excess of net investment income...............................................................................
Total distributions declared to shareholders...................................................................
Net asset value--end of period.....................................................................................
Total return.......................................................................................................
Ratios (to average net assets)/Supplemental data**:
Expenses.........................................................................................................
Net investment income............................................................................................
Portfolio turnover.................................................................................................
Net assets at end of period (000 omitted)..........................................................................
<CAPTION>
YEAR ENDED
DECEMBER 31, 19
94*
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Per Share data (for a share outstanding throughout the period):
Net asset value--beginning of period............................................................................... $ 10.00
------
Income from investment operations++
Net investment income**.......................................................................................... $ 0.17
Net realized and unrealized loss on investments.................................................................. (0.09)
------
Total from investment operations............................................................................... $ 0.08
------
Less distributions declared to shareholders
From net investment income....................................................................................... $ (0.17)
In excess of net investment income............................................................................... (0.09)
------
Total distributions declared to shareholders................................................................... $ (0.26)
------
Net asset value--end of period..................................................................................... $ 9.82
------
------
Total return....................................................................................................... 0.79%
Ratios (to average net assets)/Supplemental data**:
Expenses......................................................................................................... 1.00%+
Net investment income............................................................................................ 4.68%+
Portfolio turnover................................................................................................. 62%
Net assets at end of period (000 omitted).......................................................................... $ 2,881
<FN>
- ------------------------
+ Annualized.
++ Per share data is based on average shares outstanding.
* For the period from the commencement of investment operations, June 14, 1994 to December 31, 1994.
** The investment adviser did not impose a portion of its management fee 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 $0.16
investment
income...
Ratios (to average net assets):
Expenses.................................................................................. 1.10%+
Net investment income..................................................................... 4.58%+
</TABLE>
Total return information does not reflect expenses that apply to the separate
accounts of Participating Insurance Companies or their related Contracts. The
inclusion of these charges would reduce the total return figure for the period
shown.
4. INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT OBJECTIVES -- The World Governments Series' investment objective is
to seek not only preservation, but also growth of capital, together with
moderate current income. The investment objectives and policies of the Series
may, unless otherwise specifically stated, be changed by the Trustees of the
Trust without a vote of the shareholders. Any investment involves risk and there
is no assurance that the objectives of the Series will be achieved.
INVESTMENT POLICIES -- The Series seeks to achieve its investment objectives
through a professionally managed, internationally diversified portfolio
consisting primarily of debt securities and to a lesser extent equity
securities. The Series attempts to provide investors with an opportunity to
enhance the value and increase the protection of their investment against
inflation and otherwise by taking advantage of investment opportunities in the
U.S. as well as in other countries where opportunities may be more rewarding. It
is believed that diversification of assets on an international basis decreases
the degree to which events in any
3
<PAGE>
one country, including the U.S., can affect the entire portfolio. Although the
percentage of the Series' assets invested in securities issued abroad and
denominated in foreign currencies will vary depending on the state of the
economies of the principal countries of the world, their financial markets and
the relationship of their currencies to the U.S. dollar, under normal conditions
the Series' portfolio is internationally diversified. However, for defensive
reasons or during times of international political or economic uncertainty or
turmoil, most or all of the Series' investments may be in the U.S.
Under normal economic and market conditions, at least 80% of the Series'
portfolio is invested in debt securities, such as bonds, debentures, mortgage
securities, notes, commercial paper, obligations issued or guaranteed by a
government or any of its political subdivisions, agencies or instrumentalities,
certificates of deposit, as well as debt obligations which may have a call on
common stock by means of a conversion privilege or attached warrants. Debt
securities in which the Series may invest may also include zero coupon bonds,
mortgage pass-through securities, collateralized mortgage obligations,
multiclass pass-through securities and stripped mortgage-backed securities. The
Series also may enter into mortgage "dollar roll" transactions. The Series may
invest in indexed securities whose value is linked to foreign currencies,
interest rates, commodities, indices or other financial indicators. (See
"Investment Techniques" below). The Series may purchase securities that are not
registered under the Securities Act of 1933 (the "1933 Act") but can be offered
and sold to "qualified institutional buyers" under Rule 144A under the 1933 Act.
(See "Additional Risk Factors" below).
The Series may write covered put and call options on securities and purchase put
and call options. The Series may also enter into "yield curve" options. The
Series may enter into futures contracts on fixed income securities, on foreign
currencies and on indices of securities, and may purchase and write options on
such futures contracts. In addition, the Series may enter into forward foreign
currency exchange contracts and options on foreign currencies. The Series also
may enter into interest rate swaps, currency swaps and other types of available
swap agreements. The Series also may purchase and sell caps, floors and collars.
The Series may invest in Brady Bonds. (See "Investment Techniques" below).
The Series may invest in American Depositary Receipts ("ADRs"). The Series may
also invest up to 100% (and expects generally to invest up to 80%) of its total
assets in foreign securities including emerging market securities (not including
ADRs). See "Investment Techniques" and "Additional Risk Factors" below. The
Adviser will determine the amount of the World Governments Series' assets to be
invested in the United States and the amount to be invested abroad. The U.S.
assets will be invested in high quality debt securities and the remainder of the
assets will be diversified among countries where opportunities for total return
are expected to be most attractive. It is currently expected that investments
within foreign countries will be primarily in government securities to minimize
credit risks. The Series will not invest 25% or more of the value of its assets
in the securities of any one foreign government. The portfolio will be managed
actively and the asset allocations modified as the Adviser deems necessary.
The Series will purchase non-dollar securities denominated in the currency of
countries where the interest rate environment as well as the general economic
climate provide an opportunity for declining interest rates and currency
appreciation. If interest rates decline, such non-dollar securities will
appreciate in value. If the currency also appreciates against the dollar, the
total investment in such non-dollar securities would be enhanced further.
Conversely, a rise in interest rates or decline in currency exchange rates would
adversely affect the Series' return. Investments in non-dollar denominated
securities are evaluated primarily on the strength of a particular currency
against the dollar and on the interest rate climate of that country. Currency is
judged on the basis of fundamental economic criteria (E.G., relative inflation
levels and trends, growth rate forecasts, balance of payments status, and
economic policies) as well as technical and political data. In addition to the
foregoing, interest rates are evaluated on the basis of differentials or
anomalies that may exist between different countries. The Series may hold
foreign currency received in connection with investments in foreign securities
and in anticipation of purchasing foreign securities. (See "Additional Risk
Factors" below).
The phrase "preservation of capital" when applied to a domestic investment
company is generally understood to imply that the portfolio is invested in very
low risk securities and that the major risk is loss of purchasing power through
the effects of inflation or major changes in interest rates. However, while the
Series invests in securities which are believed to have minimal credit risk, an
error of judgment in selecting a currency or an interest rate environment could
result in a loss of capital.
It is contemplated that the Series' long-term debt investments will consist
primarily of securities which are believed by the Adviser to be of relatively
high quality. If after the Series purchases such a security, the quality of the
security deteriorates significantly, the security will be sold only if the
Adviser believes it is advantageous to do so.
4
<PAGE>
5. INVESTMENT TECHNIQUES
LENDING OF PORTFOLIO SECURITIES: The Series may seek to increase its income by
lending portfolio securities. Such loans will usually be made to member firms
(and subsidiaries thereof) of the New York Stock Exchange (the "Exchange") and
to member banks of the Federal Reserve System, and would be required to be
secured continuously by collateral in cash, cash equivalents or U.S. Treasury
securities maintained on a current basis at an amount at least equal to the
market value of the securities loaned. If the Adviser determines to make
securities loans, it is intended that the value of the securities loaned would
not exceed 25% of the value of the net assets of the Series.
EMERGING MARKETS SECURITIES: The Series may invest in fixed income securities of
issuers (including foreign governments and their subdivisions, agencies or
instrumentalities) located in emerging markets. Emerging markets include any
country: (i) having an "emerging stock market" as defined by the International
Finance Corporation; (ii) with low-to middle-income economies according to the
International Bank for Reconstruction and Development (the World Bank); (iii)
listed in World Bank publications as developing; or (iv) determined by MFS to be
an emerging market as defined above. Each Series may invest in fixed income
securities of: (i) foreign governments or any of their political subdivisions,
agencies or instrumentalities; (ii) companies the principal securities trading
market for which is an emerging market country; (iii) companies organized under
the laws of, and with a principal office in, an emerging market country; (iv)
companies whose principal activities are located in emerging market countries;
or (v) companies whose securities are traded in any market that derive 50% or
more of their total revenue from either goods or services produced in an
emerging market or sold in an emerging market.
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, Ecuador, Mexico, Nigeria, the Philippines, Poland, 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. Brandy
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.
REPURCHASE AGREEMENTS: The Series may enter into repurchase agreements in order
to earn additional income on available cash or as a temporary defensive measure.
Under a repurchase agreement, the Series acquires securities subject to the
seller's agreement to repurchase at a specified time and price. If the seller
becomes subject to a proceeding under the bankruptcy laws or its assets are
otherwise subject to a stay order, the Series' right to liquidate the securities
may be restricted (during which time the value of the securities could decline).
As discussed in the Statement of Additional Information, the Series has adopted
certain procedures intended to minimize any risk.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: The Series may enter into mortgage "dollar
roll" transactions with selected banks and broker-dealers pursuant to which the
Series sells mortgage-backed securities for delivery in the future (generally
within 30 days) and simultaneously contracts to repurchase substantially similar
(same type, coupon and maturity) securities on a specified future date. The
Series will only enter into covered rolls. A "covered roll" is a specific type
of dollar roll for which there is an offsetting cash position or a cash
equivalent security position which matures on or before the forward settlement
date of the dollar roll transaction. In the event that the party with whom the
Series contracts to replace substantially similar securities on a future date
fails to deliver such securities, the Series may not be able to obtain such
securities at the price specified in such contract and thus may not benefit from
the price differential between the current sales price and the repurchase price.
ZERO COUPON BONDS: The Series may invest in zero coupon bonds. Zero coupon bonds
are debt obligations which are issued or purchased at a significant discount
from face value. The discount approximates the total amount of interest the
bonds will accrue and compound over the period until maturity or the first
interest payment date at a rate of interest reflecting the market rate of the
security at the time of issuance. Zero coupon bonds do not require the periodic
payment of interest. Such investments benefit
5
<PAGE>
the issuer by mitigating its need for cash to meet debt service, but also
require a higher rate of return to attract investors who are willing to defer
receipt of such cash. Such investments may experience greater volatility in
market value due to changes in interest rates than debt obligations which make
regular payments of interest. The Series will accrue income on such investments
for tax and accounting purposes, as required, 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.
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. Typically, CMOs are collateralized by
certificates issued by the Government National Mortgage Association ("GNMA"),
the Federal National Mortgage Association ("FNMA"), or the Federal Home Loan
Mortgage Corporation ("FHLMC"), but also may be collateralized by whole loans or
private mortgage pass-through securities (such collateral collectively referred
to as "Mortgage Assets"). The Series may also invest a portion of its assets in
multiclass pass-through securities which are interests in a trust composed of
Mortgage Assets. CMOs (which include multiclass pass-through securities) may be
issued by agencies, authorities or instrumentalities of the U.S. Government or
by private originators of, or investors in, mortgage loans, including savings
and loan associations, mortgage banks, commercial banks, investment banks and
special purpose subsidiaries of the foregoing. Payments of principal of and
interest on the Mortgage Assets, and any reinvestment income thereon, provide
the funds to pay debt service on the CMOs or make scheduled distributions on the
multiclass pass-through securities. In a CMO, a series of bonds or certificates
are usually issued in multiple classes with different maturities. Each class of
CMOs, often referred to as a "tranche", is issued at a specific fixed or
floating coupon rate and has a stated maturity or final distribution date.
Principal prepayments on the Mortgage Assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution dates,
resulting in a loss of all or part of the premium if any has been paid. Certain
classes of CMOs have priority over others with respect to the receipt of
prepayments on the mortgages. Therefore, depending on the type of CMOs in which
the Series invests, the investment may be subject to a greater or lesser risk of
prepayments than other types of mortgage-related securities.
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. PAC Bonds generally
require payments of a specified amount of principal on each payment date. PAC
Bonds are always parallel pay CMOs with the required principal payment on such
securities having the highest priority after interest has been paid to all
classes. For a further description of CMOs, parallel pay CMOs and PAC Bonds and
the risks related to transactions therein, see the Statement of Additional
Information.
STRIPPED MORTGAGE-BACKED SECURITIES: The Series may also invest a portion of its
assets in stripped mortgage-backed securities ("SMBS"), which are derivative
multiclass mortgage securities usually structured with two classes that receive
different proportions of interest and principal distributions from an underlying
pool of mortgage assets. For a further description of SMBS and the risks related
to transactions therein, see the Statement of Additional Information.
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.
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
GNMA); or guaranteed by U.S. Government-sponsored corporations (such as FNMA or
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). See the Statement of
Additional Information for a further discussion of these securities.
INDEXED SECURITIES: The Series may invest in indexed securities whose value is
linked to foreign currencies, interest rates, commodities, indices or other
financial indicators. Most indexed securities are short to intermediate term
fixed-income securities whose values at maturity and/or interest rates rise or
fall according to the change in one or more specified underlying instruments.
Indexed securities may be positively or negatively indexed (I.E., their value
may increase or decrease if the
6
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underlying instrument appreciates), and may have return characteristics similar
to direct investments in the underlying instrument or to one or more options on
the underlying instrument. Indexed securities may be more volatile than the
underlying instrument itself.
SWAPS AND RELATED TRANSACTIONS: As one way of managing its exposure to different
types of investments, the Series may enter into interest rate swaps, currency
swaps and other types of available swap agreements, such as caps, collars and
floors. Swaps involve the exchange by the Series with another party of cash
payments based upon different interest rate indexes, currencies, and other
prices or rates, such as the value of mortgage prepayment rates. For example, in
the typical interest rate swap, the Series might exchange a sequence of cash
payments based on a floating rate index for cash payments based on a fixed rate.
Payments made by both parties to a swap transaction are based on a principal
amount determined by the parties.
The Series may also purchase and sell caps, floors and collars. In a typical cap
or floor agreement, one party agrees to make payments only under specified
circumstances, usually in return for payment of a fee by the counterparty. For
example, the purchase of an interest rate cap entitles the buyer, to the extent
that a specified index exceeds a predetermined interest rate, to receive
payments of interest on a contractually-based principal amount from the
counterparty selling such interest rate cap. The sale of an interest rate floor
obligates the seller to make payments to the extent that a specified interest
rate falls below an agreed-upon level. A collar arrangement combines elements of
buying a cap and selling a floor.
Swap agreements will tend to shift the Series' investment exposure from one type
of investment to another. For example, if the Series agreed to exchange payments
in dollars for payments in foreign currency, in each case based on a fixed rate,
the swap agreement would tend to decrease the Series' exposure to U.S. interest
rates and increase its exposure to foreign currency and interest rates. Caps and
floors have an effect similar to buying or writing options. Depending on how
they are used, swap agreements may increase or decrease the overall volatility
of the Series' investments and its share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on the
Series' performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. The Series may also suffer losses
if it is unable to terminate outstanding swap agreements or reduce its exposure
through offsetting transactions.
Swaps, caps, floors and collars are highly specialized activities which involve
certain risks. See the Statement of Additional Information for further
information on, and the risks involved in, these activities.
OPTIONS ON SECURITIES: The Series may write (sell) covered put and call options
and purchase put and call options on securities. The Series will write options
on securities for the purpose of increasing its return and/or to protect the
value of its portfolio. In particular, where the Series writes an option that
expires unexercised or is closed out by the Series at a profit, it will retain
the premium paid for the option which will increase its gross income and will
offset in part the reduced value of the portfolio security underlying the
option, or the increased cost of portfolio securities to be acquired. In
contrast, however, if the price of the underlying security moves adversely to
the Series' position, the option may be exercised and the Series will be
required to purchase or sell the underlying security at a disadvantageous price,
which may only be partially offset by the amount of the premium. The Series may
also write combinations of put and call options on the same security, known as
"straddles." Such transactions can generate additional premium income but also
present increased risk.
By writing a call option on a security, the Series limits its opportunity to
profit from any increase in the market value of the underlying security, since
the holder will usually exercise the call option when the market value of the
underlying security exceeds the exercise price of the call. However, the Series
retains the risk of depreciation in value of securities on which it has written
call options.
The Series may also purchase put or call options in anticipation of market
fluctuations which may adversely affect the value of its portfolio or the prices
of securities that the Series wants to purchase at a later date. In the event
that the expected market fluctuations occur, the Series may be able to offset
the resulting adverse effect on its portfolio, in whole or in part, through the
options purchased. The premium paid for a put or call option plus any
transaction costs will reduce the benefit, if any, realized by the Series upon
exercise or liquidation of the option, and, unless the price of the underlying
security changes sufficiently, the option may expire without value to the
Series.
"YIELD CURVE" OPTIONS: The Series may enter into options on the yield "spread,"
or yield differential, between two securities, a transaction referred to as a
"yield curve" option, for hedging and non-hedging (an effort to increase current
income) purposes.
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In contrast to other types of options, a yield curve option is based on the
difference between the yields of designated securities rather than the actual
prices of the individual securities, and is settled through cash payments.
Accordingly, a yield curve option is profitable to the holder if this
differential widens (in the case of a call) or narrows (in the case of a put),
regardless of whether the yields of the underlying securities increase or
decrease. Yield curve options written by the Series will be covered as described
in the Statement of Additional Information. The trading of yield curve options
is subject to all the risks associated with trading other types of options, as
discussed below under "Additional Risk Factors" and in the Statement of
Additional Information. In addition, such options present risks of loss even if
the yield on one of the underlying securities remains constant, if the spread
moves in a direction or to an extent which was not anticipated.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS: The Series may 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. The Series may also purchase and write options on such Futures
Contracts ("Options on Futures Contracts"). The Series may purchase and sell
Futures Contracts on foreign currencies or indices of foreign currencies. The
Series may also purchase and write Options on such Futures Contracts.
Such transactions will be entered into for hedging purposes or for non-hedging
purposes to the extent permitted by applicable law. The Series will incur
brokerage fees when it purchases and sells Futures Contracts, and will be
required to maintain margin deposits. In addition, Futures Contracts entail
risks. Although the Adviser believes that use of such contracts will benefit the
Series, if its investment judgment about the general direction of exchange rates
or the stock market is incorrect, the Series' overall performance may be poorer
than if it had not entered into any such contract and the Series may realize a
loss. The Series will not enter into any Futures Contract if immediately
thereafter the value of all open positions in Futures Contracts held by the
Series would exceed 50% of the value of its total assets.
Purchases of Options on Futures Contracts may present less risk in hedging the
Series' portfolio than the purchase or sale of the underlying Futures Contracts
since the potential loss is limited to the amount of the premium plus related
transaction costs, although it may be necessary to exercise the option to
realize any profit, which results in the establishment of a futures position.
The writing of Options on Futures Contracts, however, does not present less risk
than the trading of Futures Contracts and will constitute only a partial hedge,
up to the amount of the premium received. In addition, if an option is
exercised, the Series may suffer a loss on the transaction.
Futures Contracts and Options on Futures Contracts that are entered into by the
Series will be traded on U.S. and foreign exchanges.
FORWARD CONTRACTS: The Series may enter into forward foreign currency exchange
contracts for the purchase or sale of a fixed quantity of a foreign currency at
a future date ("Forward Contracts"). The Series may enter into Forward Contracts
for hedging purposes and for non-hedging purposes (I.E., speculative purposes).
By entering into transactions in Forward Contracts for hedging purposes, 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
non-hedging purposes, the Series may sustain losses which will reduce its gross
income. Such transactions, therefore, could be considered speculative. Forward
Contracts are traded over-the-counter and not on organized commodities or
securities exchanges. As a result, Forward Contracts operate in a manner
distinct from exchange-traded instruments, and their use involves certain risks
beyond those associated with transactions in Futures Contracts or options traded
on exchanges. The Series may choose to, or be required to, receive delivery of
the foreign currencies underlying Forward Contracts it has entered into. 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 Fund may hold such currencies for an indefinite period of time. The Series
may also enter into a Forward Contract on one currency to hedge against risk of
loss arising from fluctuations in the value of a second currency (referred to as
a "cross hedge") if, in the judgment of the Adviser, a reasonable degree of
correlation can be expected between movements in the values of the two
currencies. The Series has established procedures consistent with statements of
the Securities and Exchange Commission (the "SEC") and its staff regarding the
use of Forward Contracts by registered investment companies, which requires use
of segregated assets or "cover" in connection with the purchase and sale of such
contracts.
OPTIONS ON FOREIGN CURRENCIES: The Series may also purchase and write options on
foreign currencies ("Options on Foreign Currencies") for the purpose of
protecting against declines in the dollar value of portfolio securities and
against increases in the dollar cost of securities to be acquired. As in the
case of other types of options, however, the writing of an Option on Foreign
Currency will constitute only a partial hedge, up to the amount of the premium
received, and the Series may be required to
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purchase or sell foreign currencies at disadvantageous exchange rates, thereby
incurring losses. The purchase of an Option on Foreign Currency may constitute
an effective hedge against fluctuations in exchange rates although, in the event
of rate movements adverse to the Series' position, it may forfeit the entire
amount of the premium paid for the option plus related transaction costs. The
Series may also choose to, or be required to, receive delivery of the foreign
currencies underlying Options on Foreign Currencies it has entered into. Under
certain circumstances, such as where the Adviser 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.
6. ADDITIONAL RISK FACTORS
OPTIONS, FUTURES CONTRACTS AND FORWARD CONTRACTS: Although the Series will enter
into transactions in options, Futures Contracts, Options on Futures Contracts,
Forward Contracts and Options on Foreign Currencies for hedging purposes, such
transactions nevertheless involve certain risks. For example, a lack of
correlation between the instrument underlying an option or Futures Contract and
the assets being hedged, or unexpected adverse price movements, could render the
Series' hedging strategy unsuccessful and could result in losses. The Series
also may enter into transactions in options, Futures Contracts, Options on
Futures Contracts and Forward Contracts for other than hedging purposes, which
involves greater risk. In particular, such transactions may result in losses for
the Series which are not offset by gains on other portfolio positions, thereby
reducing gross income. In addition, foreign currency markets may be extremely
volatile from time to time. There also can be no assurance that a liquid
secondary market will exist for any contract purchased or sold, and the Series
may be required to maintain a position until exercise or expiration, which could
result in losses. The Statement of Additional Information contains a description
of the nature and trading mechanics of options, Futures Contracts, Options on
Futures Contracts, Forward Contracts and Options on Foreign Currencies, and
includes a discussion of the risks related to transactions therein.
Transactions in Forward Contracts may be entered into only in the
over-the-counter market. Futures Contracts and Options on Futures Contracts may
be entered into on U.S. exchanges regulated by the Commodity Futures Trading
Commission and on foreign exchanges. In addition, the securities and indexes
underlying options, Futures Contracts and Options on Futures Contracts traded by
the Series will include both domestic and foreign securities.
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, 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. The Series may hold foreign currency received in
connection with investments in foreign securities when, in the judgment of the
Adviser, it would be beneficial to convert such currency into U.S. dollars at a
later date, based on anticipated changes in the relevant exchange rate. The
Series may also hold foreign currency in anticipation of purchasing foreign
securities. See the Statement of Additional Information for further discussion
of foreign securities and the holding of foreign currency, as well as the
associated risks.
AMERICAN DEPOSITARY RECEIPTS: The Series may invest in ADRs which are
certificates issued by a U.S. depository (usually a bank) and represent a
specified quantity of shares of an underlying non-U.S. stock on deposit with a
custodian bank as collateral. Because ADRs trade on United States securities
exchanges, the Adviser does not treat them as foreign securities. However, they
are subject to many of the risks of foreign securities such as changes in
exchange rates and more limited information about foreign issuers.
EMERGING MARKET SECURITIES: The Series may invest in emerging markets. In
addition to the general risks of investing in foreign securities, investments in
emerging markets involve special risks. Securities of many issuers in emerging
markets may be less liquid and more volatile than securities of comparable
domestic issuers. These securities may be considered speculative and, while
generally offering higher income and the potential for capital appreciation, may
present significantly greater risk. Emerging markets may have different
clearance and settlement procedures, and in certain markets there have been
times when settlements have been unable to keep pace with the volume of
securities transactions, making it difficult to conduct such
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transactions. Delays in settlement could result in temporary periods when a
portion of the assets of the Series is uninvested and no return is earned
thereon. The inability of the Series to make intended security purchases due to
settlement problems could cause the Series to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result either in losses to the Series due to subsequent declines
in value of the portfolio securities or, if the Series has entered into a
contract to sell the security, possible liability to the purchaser. Certain
markets may require payment for securities before delivery. Securities prices in
emerging markets can be significantly more volatile than in the more developed
nations of the world, reflecting the greater uncertainties of investing in less
established markets and economies. In particular, countries with emerging
markets may have relatively unstable governments, present the risk of
nationalization of businesses, restrictions on foreign ownership, or
prohibitions of repatriation of assets, and may have less protection of property
rights than more developed countries. The economies of countries with emerging
markets may be predominantly based on only a few industries, may be highly
vulnerable to changes in local or global trade conditions, and may suffer from
extreme and volatile debt burdens or inflation rates. Local securities markets
may trade a small number of securities and may be unable to respond effectively
to increases in trading volume, potentially making prompt liquidation of
substantial holdings difficult or impossible at times. Securities of issuers
located in countries with emerging markets may have limited marketability and
may be subject to more abrupt or erratic movements.
Certain emerging markets may require governmental approval for the repatriation
of investment income, capital or the proceeds of sales of securities by foreign
investors. In addition, if a deterioration occurs in an emerging market's
balance of payments or for other reasons, a country could impose temporary
restrictions on foreign capital remittances. The Series could be adversely
affected by delays in, or a refusal to grant, any required governmental approval
for repatriation of capital, as well as by the application to the Series of any
restrictions on investments.
Investment in certain foreign emerging market debt obligations may be restricted
or controlled to varying degrees. These restrictions or controls may at times
preclude investment in certain foreign emerging market debt obligations and
increase the expenses of the Series.
RESTRICTED SECURITIES: The Series may purchase securities that are not
registered under the 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"). The Trust's Board of Trustees
determines, based upon a continuing review of the trading markets for a specific
Rule 144A security, whether such security is illiquid and thus subject to the
Series' limitation on investing not more than 15% of its net assets in illiquid
investments, or liquid and thus not subject to such limitation. The Board of
Trustees has adopted guidelines and delegated to MFS the daily function of
determining and monitoring the liquidity of Rule 144A securities. The Board,
however, will retain sufficient oversight and be ultimately responsible for the
determinations. The Board will carefully monitor the Series' investments in Rule
144A securities, focusing on such important factors, among others, as valuation,
liquidity and availability of information. This investment practice could have
the effect of increasing the level of illiquidity in the Series to the extent
that qualified institutional buyers become for a time uninterested in purchasing
Rule 144A securities held in the Series' portfolio. Subject to the Series' 15%
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.
NON-DIVERSIFICATION: The Series is "non-diversified," as that term is defined in
the Investment Company Act of 1940 ( the "1940 Act"), but intends to qualify as
a "regulated investment company" ("RIC") for federal income tax purposes. This
means, in general, that although more than 5% of the Series' total assets may be
invested in the securities of one issuer (including a foreign government), at
the close of each quarter of its taxable year the aggregate amount of such
holdings may not exceed 50% of the value of its total assets, and no more than
25% of the value of its total assets may be invested in the securities of a
single issuer. To the extent that a non-diversified Series at times may hold the
securities of a smaller number of issuers than if it were "diversified" (as
defined in the 1940 Act), the Series will at such times be subject to greater
risk with respect to its portfolio securities than a fund that invests in a
broader range of securities, because changes in the financial condition or
market assessment of a single issuer may cause greater fluctuations in the
Series' total return and the net asset value of its shares.
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SHORT-TERM INVESTMENTS FOR DEFENSIVE PURPOSES -- During periods of unusual
market conditions when the Adviser believes that investing for defensive
purposes is appropriate, or in order to meet anticipated redemption requests, a
large portion or all of the assets of the Series may be invested in cash
(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,
obligations issued or guaranteed by the U.S. Government or its agencies,
authorities or instrumentalities and related repurchase agreements. See Appendix
A to this Prospectus for a description of U.S. Government obligations and
certain short-term investments.
PORTFOLIO TRADING -- The Series intends to manage its portfolio by buying and
selling securities, as well as holding securities to maturity, to help attain
its investment objectives and policies.
The Series will engage in portfolio trading if it believes a transaction, net of
costs (including custodian charges), will help in attaining its investment
objectives. In trading portfolio securities, the Series seeks to take advantage
of market developments, yield disparities and variations in the creditworthiness
of issuers. For a description of the strategies which may be used by the Series
in trading portfolio securities, see "Portfolio Transactions and Brokerage
Commissions" in the Statement of Additional Information. Because the Series is
expected to have a portfolio turnover rate of over 100%, transaction costs
incurred by the Series and the realized capital gains and losses of the Series
may be greater than that of a fund with a lesser portfolio turnover rate.
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain, and maintain the availability of,
execution at the most favorable prices and in the most effective manner
possible. Consistent with the foregoing primary consideration, the Rules of Fair
Practice of the National Association of Securities Dealers, Inc. (the "NASD")
and such other policies as the Trustees of the Trust may determine, the Adviser
may consider sales of Contracts for which the Trust is an investment option,
together with sales of shares of other investment company clients of MFS Fund
Distributors, Inc., the distributor of shares of the Trust and of the MFS Family
of Funds, as a factor in the selection of broker-dealers to execute the Series'
portfolio transactions. From time to time the Adviser may direct certain
portfolio transactions to broker-dealer firms which, in turn, have agreed to pay
a portion of the Series' operating expenses (E.G., fees charged by the custodian
of the Series' assets). For a further discussion of portfolio trading, see the
Statement of Additional Information.
-------------------
The Statement of Additional Information includes a discussion of other
investment policies and listing of specific investment restrictions which govern
the investment policies of the Series. The specific investment restrictions
listed in the Statement of Additional Information may be changed without
shareholder approval unless indicated otherwise (see the Statement of Additional
Information). The Series' investment limitations and policies 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.
7. MANAGEMENT OF THE SERIES
The Trust's Board of Trustees, as part of its overall management responsibility,
oversees various organizations responsible for the Series' day-to-day
management.
INVESTMENT ADVISER -- MFS manages the Series pursuant to an Investment Advisory
Agreement with the Trust on behalf of the Series dated April 14, 1994 (the
"Advisory Agreement"). MFS provides the Series with overall investment advisory
and administrative services, as well as general office facilities. Stephen C.
Bryant, a Senior Vice President of the Adviser, is the Series' portfolio
manager. Mr. Bryant has been employed by the Adviser since 1987. Subject to such
policies as the Trustees may determine, MFS makes investment decisions for the
Series. For its services and facilities, MFS receives a management fee, computed
and paid monthly, in an amount equal on an annualized basis to 0.75% of the
Series' average daily net assets. For the Series' fiscal year ended December 31,
1994, MFS received management fees under the Series' Advisory Agreement of
$7,604 and assumed $36,473 of the Series' expenses. See "Expenses" below.
MFS also serves as investment adviser to each of the other funds in the MFS
Family of Funds (the "MFS Funds") and to MFS-Registered Trademark- Municipal
Income Trust, MFS Multimarket Income Trust, MFS Government Markets Income Trust,
MFS Intermediate Income Trust, MFS Charter Income Trust, MFS Special Value
Trust, MFS Institutional Trust, MFS Union Standard Trust, MFS/Sun Life Series
Trust, Sun Growth Variable Annuity Fund, Inc. and seven variable accounts, each
of which is a registered investment
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company established by Sun Life Assurance Company of Canada (U.S.) ("Sun Life of
Canada (U.S.)") in connection with the sale of Compass-2 and Compass-3
combination fixed/variable annuity contracts. MFS together with MFS Asset
Management, Inc., a wholly owned subsidiary of MFS, provide investment advice to
substantial private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts Investors
Trust. Net assets under the management of the MFS organization were
approximately $35 billion on behalf of approximately 1.6 million investor
accounts as of March 31, 1995. As of such date, the MFS organization managed
approximately $12 billion of assets invested in equity securities and
approximately $19.2 billion of assets invested in fixed income securities.
Approximately $2.9 billion of the assets managed by MFS are invested in
securities of foreign issuers and non-U.S. dollar-denominated securities of U.S.
issuers. MFS is a subsidiary of Sun Life of Canada (U.S.), which in turn is a
subsidiary of Sun Life Assurance Company of Canada ("Sun Life"). The Directors
of MFS are A. Keith Brodkin, Jeffrey L. Shames, Arnold D. Scott, John D. McNeil
and John R. Gardner. Mr. Brodkin is the Chairman, Mr. Shames is the President
and Mr. Scott is the Secretary and a Senior Executive Vice President of MFS.
Messrs. McNeil and Gardner are the Chairman and President, respectively, of Sun
Life. Sun Life, a mutual life insurance company, is one of the largest
international life insurance companies and has been operating in the United
States since 1895, establishing a headquarters office here in 1973. The
executive officers of MFS report to the Chairman of Sun Life.
A. Keith Brodkin, the Chairman and a Director of MFS, is the Chairman and
President of the Trust. W. Thomas London, Stephen E. Cavan, James R. Bordewick,
Jr., and James O. Yost, all of whom are officers of MFS, are officers of the
Trust.
From time to time, the Adviser may purchase, redeem and exchange shares of the
Series. The purchase by the Adviser of shares of the Series may have the effect
of lowering the Series' expense ratio, while the redemption by the Adviser of
shares of the Series may have the effect of increasing the Series' expense
ratio.
DISTRIBUTOR -- MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary of
MFS, is the distributor of shares of the Series and also serves as distributor
for certain of the other mutual funds managed by MFS.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. (the "Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency,
certain dividend disbursing agency and other services for the Series.
8. INFORMATION CONCERNING SHARES OF THE SERIES
PURCHASES AND REDEMPTIONS
The separate accounts of the Participating Insurance Companies place orders to
purchase and redeem shares of the Series based on, among other things, the
amount of premium payments to be invested and surrender and transfer requests to
be effected on that day pursuant to Contracts. Orders received by the Trust are
effected on days on which the Exchange is open for trading. For orders received
by the Trust before the close of regular trading on the Exchange (normally 4
p.m. eastern time), such purchases and redemptions of the shares of the Series
are effected at the net asset value per share determined as of the close of
regular trading on the Exchange on that same day. Participating Insurance
Companies shall be the designee of the Trust for receipt of purchase and
redemption orders from Contract holders and receipt by such designee shall
constitute receipt by the Trust; provided that the Trust receives notice of such
order by 9:30 a.m. eastern time on the next following day on which the Exchange
is open for trading. Payment for shares shall be by federal funds transmitted by
wire and must be received by 2:00 p.m. eastern time on the next following day on
which the Exchange is open for trading after the purchase order is received.
Redemption proceeds shall be by federal funds transmitted by wire and shall be
sent by 2:00 p.m. eastern time on the next following day on which the Exchange
is open for trading after the redemption order is received. No fee is charged
the shareholders when they redeem Series shares.
The offering of shares of the Series may be suspended for a period of time and
the Series reserves the right to refuse any specific purchase order. Purchase
orders may be refused if, in the Adviser's opinion, they are of a size that
would disrupt the management of the Series. The Trust may suspend the right of
redemption of shares of the Series and may postpone payment for any period: (i)
during which the Exchange is closed other than customary weekend and holiday
closings or during which trading on the Exchange is restricted; (ii) when the
SEC determines that a state of emergency exists which may make payment or
transfer not reasonably practicable; (iii) as the SEC may by order permit for
the protection of the security holders of the Trust; or (iv) at any time when
the Trust may, under applicable laws, rules and regulations, suspend payment on
the redemption of its shares.
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Should any conflict between Contract holders arise which would require that a
substantial amount of net assets be withdrawn from the Series, orderly portfolio
management could be disrupted to the potential detriment of such Contract.
NET ASSET VALUE
The net asset value per share of the Series is determined each day during which
the Exchange is open for trading. This determination is made once during each
such day as of the close of regular trading on the Exchange by deducting the
amount of the Series' liabilities from the value of the Series' assets and
dividing the difference by the number of shares of the Series outstanding.
Values of assets in the Series' portfolio are determined on the basis of their
market or other fair value, as described in the Statement of Additional
Information. All investments, assets and liabilities are expressed in U.S.
dollars based upon current currency exchange rates.
DISTRIBUTIONS
Substantially all of the Series' net investment income for any calendar year is
declared as dividends and paid to its shareholders as dividends on an annual
basis. In addition, the Series may make one or more distributions during the
calendar year to its shareholders from any long-term capital gains, and may also
make one or more distributions to its shareholders from short-term capital
gains. In determining the net investment income available for distribution, the
Series may rely on projections of its anticipated net investment income (which
may include short-term capital gains from the sales of securities or other
assets, and, if allowed by the Series' investment restrictions, premiums from
options written), over a longer term, rather than its actual net investment
income for the period.
Shareholders of any of the Series may elect to receive dividends and capital
gain distributions in either cash or additional shares.
TAX STATUS
The Series of the Trust is treated as a separate entity for federal income tax
purposes. In order to minimize the taxes the Series would otherwise be required
to pay, the Series intends to qualify each year as a "regulated investment
company" under Subchapter M of the Internal Revenue Code of 1986, as amended
("the Code"), and to make distributions to its shareholders in accordance with
the timing requirements imposed by the Code. It is not expected that the Series
will be required to pay entity level federal income or excise taxes.
Shares of the Series are offered only to the Participating Insurance Companies'
separate accounts that fund Contracts. See the applicable Contract prospectus
for a discussion of the federal income tax treatment of (1) the separate
accounts that purchase and hold Series shares and (2) the holders of the
Contracts that are funded through those accounts. In addition to the
diversification requirements of Subchapter M of the Code, the Series also
intends to diversify its assets as required by Code Section 817(h)(1), and the
regulations thereunder. See also "Tax Status" in the Statement of Additional
Information."
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
Each of the twelve series of the Trust currently has one class of shares,
entitled Shares of Beneficial Interest (without par value). The Trust has
reserved the right to create and issue additional classes and series of shares,
in which case each class of shares of the series would participate equally in
the earnings, dividends and assets attributable to that class of that particular
series. Shareholders are entitled to one vote for each share held, and shares of
each such series are entitled to vote separately to approve investment advisory
agreements or changes in investment restrictions with respect to the series, but
shares of the twelve series vote together in the election of Trustees and
selection of accountants. Additionally, the series will vote separately on any
other matter that affects solely the series, but will otherwise vote together
with all other series on all other matters. The Trust does not intend to hold
annual shareholder meetings. The Declaration of Trust provides that a Trustee
may be removed from office in certain instances. See "Description of Shares,
Voting Rights and Liabilities" in the Statement of Additional Information.
The shares of each series represents an equal proportionate interest in the
series with each share, subject to the liabilities of the particular series.
Shares have no pre-emptive or conversion rights. Shares are fully paid and
non-assessable. Should a series be liquidated, shareholders are entitled to
share PRO RATA in the net assets available for distribution to shareholders.
Shares will remain on deposit with the Shareholder Servicing Agent and
certificates will not be issued.
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The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which both inadequate
insurance existed (E.G., fidelity bonding and omission insurance) and the Trust
itself was unable to meet its obligations.
As of December 31, 1994, Century Life of America, on behalf of its Century
Variable Annuity Account, 2000 Heritage Way, Waverly, Iowa 50677-9208 was the
owner of approximately 69% of the outstanding shares of the World Governments
Series. As of December 31, 1994, Massachusetts Financial Services Company Inc.,
500 Bolyston Street, Boston, Massachusetts 02116-3740, was the owner of
approximately 30% of the outstanding shares of the World Governments Series.
PERFORMANCE INFORMATION
The Series' performance may be quoted in advertising in terms of yield and total
return. Performance is based on historical results and is not intended to
indicate future performance. Performance quoted for the Series includes the
effect of deducting the Series' expenses, but may not include charges and
expenses attributable to the particular insurance product. Excluding these
charges from quotations of the Series' performance has the effect of increasing
the performance quoted. Performance for the Series will vary based on, among
other things, changes in market conditions, the level of interest rates and the
level of the Series' expenses. For further information about the World
Governments Series' performance for the fiscal year ended December 31, 1994,
please see the Series' annual report. A copy of this annual report may be
obtained without charge by contacting the Shareholder Servicing Agent (see back
cover for address and phone number).
From time to time, quotations of the Series' total return and yield may be
included in advertisements, sales literature or reports to shareholders or
prospective investors. The total return of the Series refers to return assuming
an investment has been held in the Series for one year and for the life of the
Series (the ending date of which will be stated). The total return quotations
may be expressed in terms of average annual or cumulative rates of return for
all periods quoted. Average annual total return refers to the average annual
compound rate of return of an investment in the Series. Cumulative total return
represents the cumulative change in value of an investment in the Series. Both
will assume that all dividends and capital gains distributions were reinvested.
The yield of the Series refers to net investment income generated by the Series
over a specified 30-day (or one month) period. This income is then "annualized."
That is, the amount of income generated by the Series during that 30-day (or one
month) period is assumed to be generated over a 12-month period and is shown as
a percentage of net asset value.
EXPENSES
The Trust pays the compensation of the Trustees who are not officers of MFS and
all expenses of the Series (other than those assumed by MFS) including but not
limited to: governmental fees; interest charges; taxes; membership dues in the
Investment Company Institute allocable to the Series; fees and expenses of
independent auditors, of legal counsel, and of any transfer agent, registrar or
dividend disbursing agent of the Series; expenses of repurchasing and redeeming
shares and servicing shareholder accounts; expenses of preparing, printing and
mailing prospectuses, periodic reports, notices and proxy statements to
shareholders and to governmental officers and commissions; brokerage and other
expenses connected with the execution, recording and settlement of portfolio
security transactions; insurance premiums; fees and expenses of Investors Bank &
Trust Company, the Trust's Custodian, for all services to the Series, including
safekeeping of funds and securities and maintaining required books and accounts;
expenses of calculating the net asset value of shares of the Series; and
expenses of shareholder meetings. Expenses relating to the issuance,
registration and qualification of shares of the Series and the preparation,
printing and mailing of prospectuses are borne by the Series except that the
Distribution Agreement with MFD requires MFD to pay for prospectuses that are to
be used for sales purposes. Expenses of the Trust which are not attributable to
a specific series of the Trust are allocated between the Trust's twelve series
in a manner believed by management of the Trust to be fair and equitable.
MFS has agreed to pay until December 31, 2004 the expenses of the Series such
that the Series' aggregate operating expenses do not exceed, on an annualized
basis, 1.00% of its average daily net assets; provided, however, that this
obligation may be terminated or revised at any time by MFS without the consent
of the Trust or the Series by notice in writing from MFS to the Trust on behalf
of the Series. Such payments by MFS are subject to reimbursement by the Series,
which will be accomplished by the payment by the Series of an expense
reimbursement fee to MFS computed and paid monthly at a percentage of its
average daily net assets for its then current fiscal year, with a limitation
that immediately after such payment the aggregate operating
14
<PAGE>
expenses of the Series would not exceed, on an annualized basis, 1.00% of its
average daily net assets. The expense reimbursement agreement terminates for the
Series on the earlier of the date on which payments made thereunder by the
Series equal the prior payment of such reimbursable expenses by MFS or December
31, 2004.
SHAREHOLDER COMMUNICATIONS
Owners of Contracts issued by Participating Insurance Companies for which shares
of the Series are the investment vehicle will receive from the Participating
Insurance Companies semi-annual financial statements and audited year-end
financial statements certified by the Trust's independent certified public
accountants. Each report will show the investments owned by the Trust and the
valuations thereof as determined by the Trustees and will provide other
information about the Trust and its operations.
Participating Insurance Companies with inquiries regarding the Trust may call
the Trust's Shareholder Servicing Agent. (See back cover for address and phone
number.)
-------------------
The Statement of Additional Information for the Trust, dated May 1, 1995,
contains more detailed information about the Series, including information
related to: (i) the investment policies and restrictions of the Series; (ii) the
Trustees, officers and investment adviser of the Trust; (iii) portfolio
transactions; (iv) the shares of the Series, including rights and liabilities of
shareholders; (v) the method used to calculate yield and total rate of return
quotations of the Series; (vi) the determination of net asset value of shares of
the Series; and (vii) certain voting rights of shareholders of the Series.
15
<PAGE>
APPENDIX A
DESCRIPTION OF OBLIGATIONS ISSUED OR GUARANTEED BY
U.S. GOVERNMENT AGENCIES, AUTHORITIES OR INSTRUMENTALITIES
U.S. GOVERNMENT OBLIGATIONS -- are issued by the U.S. Treasury and include
bills, certificates of indebtedness, notes and bonds. Agencies and
instrumentalities of the U.S. Government are established under the authority of
an act of Congress and include, but are not limited to, the Tennessee Valley
Authority, the Bank for Cooperatives, the Farmers Home Administration, Federal
Home Loan Banks, Federal Intermediate Credit Banks and Federal Land Banks, as
well as those listed below.
FEDERAL FARM CREDIT CONSOLIDATED SYSTEMWIDE NOTES AND BONDS -- are bonds issued
by a cooperatively owned nationwide system of banks and associations supervised
by the Farm Credit Administration. These bonds are not guaranteed by the U.S.
Government.
MARITIME ADMINISTRATION BONDS -- are bonds issued by the Department of
Transportation of the U.S. Government.
FHA DEBENTURES -- are debentures issued by the Federal Housing Administration of
the U.S. Government and are fully and unconditionally guaranteed by the U.S.
Government.
GNMA CERTIFICATES -- are mortgage-backed securities, with timely payment
guaranteed by the full faith and credit of the U.S. Government, which represent
a partial ownership interest in a pool of mortgage loans issued by lenders such
as mortgage bankers, commercial banks and savings and loan associations. Each
mortgage loan included in the pool is also insured or guaranteed by the Federal
Housing Administration, the Veterans Administration or the Farmers Home
Administration.
FEDERAL HOME LOAN MORTGAGE CORPORATION ("FHLMC") BONDS -- are bonds issued and
guaranteed by the Federal Home Loan Mortgage Corporation and are not guaranteed
by the U.S. Government.
FEDERAL HOME LOAN BANK BONDS -- are bonds issued by the Federal Home Loan Bank
System and are not guaranteed by the U.S. Government.
FINANCING CORPORATION BONDS AND NOTES -- are bonds and notes issued and
guaranteed by the Financing Corporation.
FEDERAL NATIONAL MORTGAGE ASSOCIATION BONDS -- are bonds issued and guaranteed
by the Federal National Mortgage Association and are not guaranteed by the U.S.
Government.
RESOLUTION FUNDING CORPORATION BONDS AND NOTES -- are bonds and notes issued and
guaranteed by the Resolution Funding Corporation.
STUDENT LOAN MARKETING ASSOCIATION ("SLMA") DEBENTURES -- are debentures backed
by the Student Loan Marketing Association and are not guaranteed by the U.S.
Government.
TENNESSEE VALLEY AUTHORITY BONDS AND NOTES -- are bonds and notes issued and
guaranteed by the Tennessee Valley Authority.
Some of the foregoing obligations, such as Treasury bills and GNMA pass-through
certificates, are supported by the full faith and credit of the U.S. Government;
others, such as securities of FNMA, by the right of the issuer to borrow from
the U.S. Treasury; still others, such as bonds issued by SLMA, are supported
only by the credit of the instrumentality. No assurance can be given that the
U.S. Government will provide financial support to instrumentalities sponsored by
the U.S. Government as it is not obligated by law, in certain instances, to do
so.
Although this list includes a description of the primary types of U.S.
Government agency, authorities or instrumentality obligations in which the
Series may invest, the Series may invest in obligations of U.S. Government
agencies or instrumentalities other than those listed above.
DESCRIPTION OF SHORT-TERM INVESTMENTS OTHER THAN U.S. GOVERNMENT OBLIGATIONS
CERTIFICATES OF DEPOSIT -- are certificates issued against funds deposited in a
bank (including eligible foreign branches of U.S. banks), are for a definite
period of time, earn a specified rate of return and are normally negotiable.
BANKERS' ACCEPTANCES -- are marketable short-term credit instruments used to
finance the import, export, transfer or storage of goods. They are termed
"accepted" when a bank guarantees their payment at maturity.
COMMERCIAL PAPER -- refers to promissory notes issued by corporations in order
to finance their short-term credit needs.
CORPORATE OBLIGATIONS -- include bonds and notes issued by corporations in order
to finance long-term credit needs.
A-1
<PAGE>
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
(800) 637-8730
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN
Investors Bank & Trust Company
89 South Street, Boston, MA 02111
DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 637-8730
MAILING ADDRESS:
P.O. Box 1400, Boston, MA 02104-9985
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
------------------------------------
MFS-REGISTERED TRADEMARK-
WORLD
GOVERNMENTS
SERIES-SM-
PROSPECTUS
MAY 1, 1995
MFS-REGISTERED TRADEMARK- WORLD GOVERNMENTS SERIES-SM-
500 Boylston Street, Boston, MA 02116
------------------------
<PAGE>
<TABLE>
<S> <C>
MFS-REGISTERED TRADEMARK- WORLD
GOVERNMENTS STATEMENT OF
SERIES-SM- ADDITIONAL INFORMATION
MAY 1, 1995
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
-----
<C> <S> <C>
1. General Information and Definitions.............................................................. 2
2. Investment Techniques............................................................................ 2
3. Investment Restrictions.......................................................................... 16
4. Management of the Trust.......................................................................... 17
Trustees......................................................................................... 17
Officers......................................................................................... 17
Investment Adviser............................................................................... 18
Investment Advisory Agreement.................................................................... 18
Custodian........................................................................................ 19
Shareholder Servicing Agent...................................................................... 19
Distributor...................................................................................... 19
5. Portfolio Transactions and Brokerage Commissions................................................. 19
6. Tax Status....................................................................................... 21
7. Net Income and Distributions..................................................................... 22
8. Determination of Net Asset Value; Performance Information........................................ 22
9. Description of Shares, Voting Rights and Liabilities............................................. 24
10. Independent Accountants and Financial Statements................................................. 24
</TABLE>
MFS-Registered Trademark- WORLD GOVERNMENTS SERIES-SM-
A Series of MFS-Registered Trademark- Variable Insurance Trust-SM-
500 Boylston Street, Boston, Massachusetts 02116
(617) 954-5000
This Statement of Additional Information sets forth information which may be of
interest to investors but which is not necessarily included in the Series'
Prospectus, dated May 1, 1995 as supplemented from time to time. This Statement
of Additional Information should be read in conjunction with the Prospectus, a
copy of which may be obtained without charge by contacting the Shareholder
Servicing Agent (see back cover for address and phone number).
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A
CURRENT PROSPECTUS.
UST-13 12/93 785
<PAGE>
1. GENERAL INFORMATION AND DEFINITIONS
MFS World Governments Series (the "World Governments Series" or the "Series") is
a non-diversified series of MFS Variable Insurance Trust (the "Trust"), an
open-end management investment company with twelve separate series, each of
which is a segregated, separately managed portfolio. Additional series may be
created by the Trustees from time to time. Shares of the Series will be offered
to the separate accounts of certain insurance companies (individually, a
"Participating Insurance Company" and collectively, the "Participating Insurance
Companies") that fund certain variable annuity and variable life insurance
contracts (the "Contracts"). The Series offers its shares using a prospectus
dated May 1, 1995, as supplemented or amended from time to time (the
"Prospectus").
The Series' investment adviser and distributor is, respectively, Massachusetts
Financial Services Company ("MFS" or the "Adviser") and MFS Fund Distributors,
Inc. ("MFD" or the "Distributor"), each a Delaware corporation.
2. INVESTMENT TECHNIQUES
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, cash equivalents 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 and
would also receive compensation from the investment of the collateral. 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. If the Adviser determines to make
securities loans, it is intended that the value of the securities loaned would
not exceed 25% of the value of the Series' net assets.
REPURCHASE AGREEMENTS: The Series may enter into repurchase agreements with
sellers who are member firms (or a subsidiary thereof) of the 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
price agreed upon on the agreed upon delivery date or upon demand, as the case
may be, the Series will have the right to liquidate the securities. If at the
time the Series is contractually entitled to exercise its right to liquidate the
securities, the seller is subject to a proceeding under the bankruptcy laws or
its assets are otherwise subject to a stay order, the Series' exercise of its
right to liquidate the securities may be delayed and result in certain losses
and costs to the Series. The Series 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
margin.
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
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<PAGE>
the future purchase (often referred to as the "drop") as well as by the interest
earned on the cash proceeds of the initial sale. The Series may also be
compensated by receipt of a commitment fee. In the event that the party with
whom the Series contracts to replace substantially similar securities on a
future date fails to deliver such securities, the Series may not be able to
obtain such securities at the price specified in such contract and thus may not
benefit from the price differential between the current sales price and the
repurchase price.
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 series 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 the series of
a CMO in the order of their respective stated maturities or final distribution
dates, so that no payment of principal will be made on any class of CMOs until
all other classes having an earlier stated maturity or final distribution date
have been paid in full. 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 principals
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.
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 of 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 "IO"
class) while the other class will receive all of the principal (the
principal-only or "PO" class). The yield to maturity on an IO is extremely
sensitive to the rate of principal payments, including prepayments on the
related underlying Mortgage Assets, and a rapid rate of principal payments may
have a material adverse effect on such 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.
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
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.
3
<PAGE>
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 FHA-insured or 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.
INDEXED SECURITIES: The Series may purchase securities 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. 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-
4
<PAGE>
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.
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 agencies.
SWAPS AND RELATED TRANSACTIONS: The Series may enter into interest rate swaps,
currency swaps and other types of available swap agreements, such as caps,
collars and floors.
Swap agreements may be individually negotiated and structured to include
exposure to a variety of different types of investments or market factors.
Depending on their structure, swap agreements may increase or decrease the
Series' exposure to long or short-term interest rates (in the U.S. or abroad),
foreign currency values, mortgage securities, corporate borrowing rates, or
other factors such as securities prices or inflation rates. Swap agreements can
take many different forms and are known by a variety of names. The Series is not
limited to any particular form or variety of swap agreement if MFS determines it
is consistent with the Series' investment objectives and policies.
The Series will maintain cash or appropriate liquid assets with its custodian to
cover its current obligations under swap transactions. If the Series enters into
a swap agreement on a net basis (I.E., the two payment streams are netted out,
with the Series receiving or paying, as the case may be, only the net amount of
the two payments), the Series will maintain cash or liquid assets with its
Custodian with a daily value at least equal to the excess, if any, of the
Series' accrued obligations under the swap agreement over the accrued amount the
Series is entitled to receive under the agreement. If the Series enters into a
swap agreement on other than a net basis, it will maintain cash or liquid assets
with a value equal to the full amount of the Series' accrued obligations under
the agreement.
The most significant factor in the performance of swaps, caps, floors and
collars is the change in the specific interest rate, currency or other factor
that determines the amount of payments to be made under the arrangement. If the
Adviser is incorrect in its forecasts of such factors, the investment
performance of the Series would be less than what it would have been if these
investment techniques had not been used. If a swap agreement calls for payments
by the Series, the Series must be prepared to make such payments when due. In
addition, if the counterparty's creditworthiness declined, the value of the swap
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.
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 held in a segregated account by its custodian) 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 difference is
maintained by the Series in cash, short-term money market instruments or high
quality debt securities in a segregated account with its custodian. A put option
written by the Series is "covered" if the Series maintains cash, short-term
money market instruments or high-quality debt securities with a value equal to
the exercise price in a segregated account with its custodian, 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
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<PAGE>
held is less than the exercise price of the put written if the difference is
maintained by the Series in cash, short-term money market instruments or
high-quality debt securities in a segregated account with its custodian. 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
counter party 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 exercise price thereof is secured by deposited cash, short-term money market
instruments or high-quality debt securities. 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 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
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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 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 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.
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 maintains in a segregated account with its custodian cash or cash
equivalents 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.
The staff of the SEC has taken the position that purchased over-the-counter
options and assets used to cover written over-the-counter options are illiquid
and, therefore, together with other illiquid securities, cannot exceed a certain
percentage of the Series' assets (the "SEC illiquidity ceiling"). Although the
Adviser disagrees with this position, the Adviser intends to limit the Series'
writing of over-the-counter options in accordance with the following procedure.
Except as provided below, the Series intends to write over-the-counter options
only with primary U.S. Government securities dealers recognized by the Federal
Reserve Bank of New York. Also, the contracts which the Series has in place with
such primary dealers will provide that the Series has the absolute right to
repurchase an option it writes at any time at a price which represents the fair
market value, as determined in good faith through negotiation between the
parties, but which in no event will exceed a price determined pursuant to a
formula in the contract. Although the specific formula may vary between
contracts with different primary dealers, the
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formula will generally be based on a multiple of the premium received by the
Series for writing the option, plus the amount, if any, of the option's
intrinsic value (I.E., the amount that the option is in-the-money). The formula
may also include a factor to account for the difference between the price of the
security and the strike price of the option if the option is written out-of-
money. The Series will treat all or a part of the formula price as illiquid for
purposes of the SEC illiquidity ceiling. The Series may also write
over-the-counter options with non-primary dealers, including foreign dealers,
and will treat the assets used to cover these options as illiquid for purposes
of such SEC illiquidity ceiling.
FUTURES CONTRACTS: The Series may purchase and sell futures contracts ("Futures
Contracts") on foreign or domestic fixed income securities or indices of such
securities. The Series may purchase and sell Futures Contracts on foreign
currencies or indices of foreign currencies. 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 or foreign currency, 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 date on which, in the case of the majority of interest rate
and foreign currency futures contracts, the fixed income securities or currency
are delivered by the seller and paid for by the purchaser, or on which, in the
case of stock 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."
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, 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 is more liquid than the cash market, the use
of interest rate futures contracts as a hedging technique allows the Series to
hedge its interest rate risk without having to sell its portfolio securities.
As noted in the Prospectus, 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 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.
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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.
OPTIONS ON FUTURES CONTRACTS: The Series may purchase and write options to buy
or sell those Futures Contracts in which it may invest ("Options on 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 series (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 trader's 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
Commodities 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 difference is
maintained by the Series in cash or securities in a segregated account with its
custodian. The Series may cover the writing of put Options on Futures Contracts
(a) through sales of the underlying Futures Contract, (b) through segregation of
cash, short-term money market instruments or high quality debt securities in an
amount 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 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 difference is maintained by the Series in cash, short-term
money market instruments or high quality debt securities in a segregated account
with its custodian. 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
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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.
FORWARD CONTRACTS ON FOREIGN CURRENCY: The Series may enter into forward foreign
currency exchange contracts for hedging and non-hedging purposes (collectively,
"Forward Contracts"). Forward Contracts may be used for hedging to attempt to
minimize the risk to the Fund from adverse changes in the relationship between
the U.S. dollar and foreign currencies. The Series intend to enter into Forward
Contracts for hedging purposes similar to those described above in connection
with foreign currency futures contracts. In particular, a Forward Contract to
sell a currency may be entered into in lieu of the sale of a foreign currency
futures contract 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. The Series
also may enter into a Forward Contract in order to assure itself of a
predetermined exchange rate in connection with a fixed income security
denominated in a foreign currency. In addition, the Series may enter into
Forward Contracts for "cross hedging" purposes (E.G., the purchase or sale of a
Forward Contract on one type of currency, as a hedge against adverse
fluctuations in the value of a second type of currency).
If a hedging transaction in Forward Contracts is successful, the decline in the
value of portfolio securities or other assets or the increase in the cost of
securities or other assets 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 intend, in most instances, to hold Forward Contracts
entered into until maturity, at which time it would be required to deliver or
accept delivery of the underlying currency, but will usually seek 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 may 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 entering into such transactions will profit if the anticipated
movements in foreign currency exchange rates occurs, 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 Series has established procedures consistent with statements by the SEC and
its staff regarding the use of Forward Contracts by registered investment
companies, which require the use of segregated assets or "cover " in connection
with the purchase and sale of such contracts. In those instances in which the
Series satisfies this requirement through segregation of assets, it will
maintain, in a segregated account, cash, cash equivalents or high-quality debt
securities, which will be marked to market on a daily basis, in an amount equal
to the value of its commitments under Forward Contracts. While these contracts
are not presently regulated by the CFTC, the CFTC may in the future assert
authority to regulate Forward Contracts. In such event, the Series' ability to
utilize Forward Contracts in the manner set forth above may be restricted.
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OPTIONS ON FOREIGN CURRENCIES: The Series may purchase and write options on
foreign currencies for hedging purposes in a manner similar to that in which
futures contracts on foreign currencies, or Forward Contracts, will be utilized.
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 effects 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.
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.
ADDITIONAL RISK FACTORS:
OPTIONS, FUTURES AND FORWARD 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 options, Futures Contracts, Options on Futures
Contracts, Forward Contracts and options on foreign currencies depend 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 futures and options based on an index, the portfolio will not duplicate
the components of the index, and in the case of futures and options on fixed
income securities, the portfolio securities which are being hedged may not be
the same type of obligation underlying such contract. The use of Forward
Contracts for "cross hedging" purposes may involve greater correlation risks. As
a result, the correlation probably will not be exact. 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.
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. In
addition, the Series may enter into transactions in Forward Contracts or options
on foreign currencies in order to hedge against exposure arising from the
currencies underlying such instruments. In such instances, the Series will be
subject to the additional risk of imperfect correlation between changes in the
value of the currencies underlying such forwards or options and changes in the
value of the currencies being hedged.
It should be noted that futures contracts based upon a narrow index of
securities may present greater risk than 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
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of changes in the value of a small number of securities. Nevertheless, where the
Series enters into transactions in futures on narrowly-based indexes 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 Futures Contracts, options and Forward Contracts for hedging
purposes entails the additional risk of imperfect correlation between movements
in the futures or option price and the price of the underlying index or
obligation. The anticipated spread between the prices may be distorted due to
the differences in the nature of the markets such as differences in margin
requirements, the liquidity of such markets and the participation of speculators
in the options, futures and forward markets. In this regard, trading by
speculators in options, futures and Forward Contracts has in the past
occasionally resulted in market distortions, which may be difficult or
impossible to predict, particularly near the expiration of such contracts.
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 currencies and
Options on Futures Contracts, the Series are 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 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 instrument. 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 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.
While the Series may enter into transactions in options (except for Options on
Foreign Currencies), Futures Contracts, Options on Futures Contracts and Forward
Contracts for hedging purposes, it may also enter into such transactions for
non-hedging purposes. Non-hedging transactions in such investments 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 cash or
securities necessary to satisfy an option exercise will be segregated at all
times, unless the option is 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. 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. Entering into transactions in Futures Contracts,
Options on Futures Contracts and Forward Contracts for other than hedging
purposes could expose the Series to significant risk of loss if foreign currency
exchange rates 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.
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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 contracts 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 their portfolios, 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 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 opening of a
futures or forward position and the writing of an option, such transactions
involve substantial leverage. As a result, relatively small movements in the
price of the contract can result in substantial unrealized gains or losses.
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.
TRADING AND POSITION LIMITS. The exchange 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 RELATED TO FOREIGN CURRENCIES AND 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.
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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 and
over-the-counter options on securities 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 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, 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
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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 and Options on Futures Contracts
only (i) for BONA FIDE hedging purposes (as defined in CFTC regulations), or
(ii) for non-hedging purposes, provided that the aggregate initial margin and
premiums on such non-hedging positions does not exceed 5% of the liquidation
value of the Series' assets. In addition, the Series must comply with the
requirements of various state securities laws in connection with such
transactions.
The Series has adopted the additional restriction that it will not enter into a
Futures Contract if, immediately thereafter, the value of securities and other
obligations underlying all such Futures Contracts would exceed 50% of the value
of the Series' total assets. Moreover, the Series will not purchase put and call
options if as a result more than 5% of its total assets would be invested in
such options.
When the Series purchases a Futures Contract, an amount of cash or securities
will be deposited in a segregated account with the Series custodian so that the
amount so segregated will at all times equal the value of the Futures Contract,
thereby insuring that the use of such futures is unleveraged.
FOREIGN SECURITIES: The Series may invest in dollar-denominated and non
dollar-denominated foreign securities. As discussed in the Prospectus, investing
in foreign securities generally represents a greater degree of risk than
investing in domestic securities due to possible exchange rate fluctuations,
less publicly available information, more volatile markets, less securities
regulation, less favorable tax provisions, war or expropriation. 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.
AMERICAN DEPOSITARY RECEIPTS: The Series may invest in American Depositary
Receipts ("ADRs") which are certificates issued 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. ADRs may be sponsored or
unsponsored. A sponsored ADR is issued by a depository which has an exclusive
relationship with the issuer of the underlying security. An unsponsored ADR may
be issued by any number of U.S. depositories. 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 depository of an ADR agent
bank in the foreign country. Simultaneously, the ADR agents create a certificate
which settles at the Series' custodian in five days. 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 the information available to
a U.S. investor will be limited to the information the foreign issuer is
required to disclose in its own country and the market value of an ADR may not
reflect undisclosed material information concerning the issuer of the underlying
security. ADRs may also be subject to exchange rate risks if the underlying
foreign securities are denominated in foreign currency.
PORTFOLIO TRADING: The World Government Series had a portfolio turnover rate of
62% for the fiscal year ended December 31, 1994.
-------------------
The Series' limitations, policies and ratings restrictions 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.
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3. INVESTMENT RESTRICTIONS
The Series has adopted the following restrictions which cannot be changed
without the approval of the holders of a majority of the Series' shares (which,
as used in this Statement of Additional Information, means the lesser of (i)
more than 50% of the outstanding shares of the Trust or the Series, as
applicable, or (ii) 67% or more of the outstanding shares of the Trust or the
Series, as applicable, present at a meeting if holders of more than 50% of the
outstanding shares of the Trust or the Series, as applicable, are represented in
person or by proxy). Except for Investment Restriction (1), these investment
restrictions and policies 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 any of the restrictions.
The Trust, on behalf of the Series, may not:
(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 the
Series may technically be deemed an underwriter under the Securities Act of
1933, as amended (the "1933 Act") 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 and
any type of option, Futures Contracts and Forward Contracts) in the ordinary
course of its business. The Series reserves the freedom of action to hold
and to sell real estate, mineral leases, commodities or commodity contracts
(including currencies and any type option, Futures Contracts 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 swap, option, Forward Contracts and Futures Contracts 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
commercial paper, the purchase of a portion or all of an issue of debt
securities, the lending of portfolio securities, or the investment of the
Series' assets in repurchase agreements, shall not be considered the making
of a loan; or
(6) purchase any securities of an issuer of a particular industry, if as
a result, more than 25% of its gross assets would be invested in securities
of issuers whose principal business activities are in the same industry
(except there is no limitation with respect to obligations issued or
guaranteed by the U.S. Government or its agencies and instrumentalities and
repurchase agreements collateralized by such obligations).
In addition, the Series has adopted the following nonfundamental policies which
may be changed by the vote of the Trust's Board of Trustees without shareholder
approval. The Trust, on behalf of the 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' 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 the Series' limitation on investment in illiquid
securities. 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
Trust's Board of Trustees (or its delegee), will not be subject to this 15%
limitation;
(2) purchase securities issued by any other investment company in excess
of the amount permitted by the 1940 Act, except when such purchase is part
of a plan of merger or consolidation;
(3) purchase 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 transaction and except that the Series may make
margin deposits in connection with any type of swap, option, Futures
Contracts and Forward Contracts;
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(4) 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;
(5) 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 swap, option, Futures Contracts and Forward Contracts
and payments of initial and variation margin in connection therewith, are
not considered a pledge of assets;
(6) purchase or sell any put or call option or any combination thereof,
provided that this shall not prevent the purchase, ownership, holding or
sale of (i) warrants where the grantor of the warrants is the issuer of the
underlying securities or (ii) put or call options or combinations thereof
with respect to securities, indices of securities, swaps, foreign currencies
and Futures Contracts;
(7) invest for the purpose of exercising control or management;
(8) hold obligations issued or guaranteed by any one U.S. Governmental
agency or instrumentality, at the end of any calendar quarter (or within 30
days thereafter), to the extent such holdings would cause the Series to fail
to comply with the diversification requirements imposed by Section 817(h) of
the Internal Revenue Code of 1986, as amended (the "Code"), and the Treasury
regulations issued thereunder on segregated asset accounts that fund
variable contracts.
In addition, as nonfundamental policies which may be changed by vote of the
Trust's Board of Trustees: (i) the Series, to the extent that it invests in
foreign securities (excluding ADRs), will be invested in a minimum of five
different foreign countries at all times, provided that this minimum is reduced
to four when foreign country investments comprise less than 80% of the Series'
net assets, to three when less than 60% of such value, to two when less than 40%
of such value, and to one when less than 20% of such value; (ii) the Series will
not have more than 20% of its net assets invested in securities of issuers
located in any one foreign country, provided that the Series may have up to 35%
of its net assets invested in securities of issuers located in Australia,
Canada, France, Japan, the United Kingdom or West Germany; and (iii) the Series
may not borrow amounts in excess of 10% of its net assets when borrowing for any
general purpose or in excess of 25% of net assets when borrowing as a temporary
measure to facilitate redemptions.
4. MANAGEMENT OF THE TRUST
The Board of Trustees of the Trust provides broad supervision over the affairs
of the Series. MFS is responsible for the investment management of the Series'
assets and the officers of the Trust are responsible for its operations. The
Trustees and officers of the Trust are listed below, together with their
principal occupations during the past five years. (Their titles may have varied
during that period.)
TRUSTEES
A. KEITH BRODKIN* -- Chairman; Massachusetts Financial Services Company,
Chairman.
NELSON J. DARLING, JR. -- Director or Trustee of several corporations or trusts,
including: Eastern Enterprises (diversified holding company), Trustee.
Address: 18 Tremont Street, Boston, Massachusetts
WILLIAM R. GUTOW -- Private Investor; Real Estate Consultant; Capitol
Entertainment (Blockbuster Video Franchise), Senior Vice President (since
1989).
Address: 3102 Maple Avenue, #100, Dallas, Texas
OFFICERS
W. THOMAS LONDON* -- Treasurer; Massachusetts Financial Services Company, Senior
Vice President and Assistant Treasurer.
STEPHEN E. CAVAN* -- Secretary and Clerk; Massachusetts Financial Services
Company, Senior Vice President, General Counsel and Assistant Secretary.
JAMES R. BORDEWICK, JR.* -- Assistant Secretary; Massachusetts Financial
Services Company, Vice President and Associate General Counsel (since September
1990); Associated with a major law firm (prior to August 1990).
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JAMES O. YOST* -- Assistant Treasurer; Massachusetts Financial Services Company,
Vice President.
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*"Interested persons" (as defined in the Investment Company Act of 1940, as
amended (the "1940 Act")) of the Adviser, whose address is 500 Boylston Street,
Boston, Massachusetts 02116.
Mr. Brodkin and each officer hold comparable positions with certain affiliates
of MFS or with certain other funds of which MFS or a subsidiary is the
investment adviser or distributor. Messrs. Brodkin and Cavan are the Chairman
and the Secretary, respectively, of MFD and hold similar positions with certain
other MFS affiliates.
As of December 31, 1994, Massachusetts Financial Service Company Inc., 500
Boylston Street, Boston, Massachusetts 02116-3740 was the owner of approximately
30% of the outstanding shares of the World Governments Series.
As of December 31, 1994, Century Life of America, on behalf of its Century
Variable Annuity Account, 2000 Heritage Way, Waverly, Iowa 50677-9208 was the
owner of approximately 69% of the outstanding shares of the World Governments
Series.
The Trust pays the compensation of non-interested Trustees (who will receive a
fee of $217 per year, per series plus $100 per meeting and committee meeting
attended for each series, together with such trustees out-of-pocket expenses.)
Set forth in Exhibit A hereto is certain information concerning the cash
compensation paid to non-interested Trustees.
The Declaration of Trust provides that the Trust 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 Trust, unless,
as to liabilities of the Trust or its shareholders, it is finally adjudicated
that they engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in their offices, or with respect to
any matter, unless it is adjudicated that they did not act in good faith in the
reasonable belief that their actions were in the best interest of the Trust. In
the case of settlement, such indemnification will not be provided unless it has
been determined pursuant to the Declaration of Trust, that such officers or
Trustees have not engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of their duties.
INVESTMENT ADVISER
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.), which in turn is a
subsidiary of Sun Life Assurance Company of Canada ("Sun Life").
INVESTMENT ADVISORY AGREEMENT
MFS manages the assets of the Series pursuant to an Investment Advisory
Agreement with the Trust on behalf of the Series dated as of April 14, 1994 (the
"Advisory Agreement"). MFS provides the Series with overall investment advisory
and administrative services, as well as general office facilities. Subject to
such policies as the Trustees may determine, MFS makes investment decisions for
the Series. For these services and facilities, the Adviser receives an annual
management fee, computed and paid monthly, as disclosed in the Prospectus under
the heading "Management of the Series."
For the Series' fiscal year ended December 31, 1994, MFS received management
fees under the Advisory Agreement of $7,604 and assumed $36,473 of the Series'
expenses. See "Expenses" in the Prospectus.
In order to comply with the expense limitations of certain state securities
commissions, MFS will reduce its management fee or otherwise reimburse the
Series for any expenses, exclusive of interest, taxes and brokerage commissions,
incurred by the Series in any fiscal year to the extent such expenses exceed the
most restrictive of such state expense limitations. MFS will make appropriate
adjustments to such reductions and reimbursements in response to any amendment
or rescission of the various state requirements.
MFS pays the compensation of the Trust's officers and of any Trustee who is an
officer of MFS. MFS also furnishes at its own expense all necessary
administrative services, including office space, equipment, clerical personnel,
investment advisory facilities, and all executive and supervisory personnel
necessary for managing the Series' investments, effecting its portfolio
transactions and, in general, administering its affairs.
The Advisory Agreement with the Trust will remain in effect until August 1,
1995, and will continue in effect thereafter with respect to the Series only if
such continuance is specifically approved at least annually by the Board of
Trustees or by vote of a majority of the Series' shares (as defined in
"Investment Restrictions") and, in either case, by a majority of the Trustees
who are not parties to the Advisory Agreement or interested persons of any such
party. The Advisory Agreement terminates automatically if it is assigned and may
be terminated with respect to the Series without penalty by vote of a majority
of the Series' shares
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(as defined in "Investment Restrictions") or by either party on not more than 60
days' nor less than 30 days' written notice. The Advisory Agreement with respect
to the Series provides that if MFS ceases to serve as the investment adviser to
the Series, the Series will change its name so as to delete the term "MFS" and
that MFS may render services to others and may permit other fund clients to use
the term "MFS" in their names. The Advisory Agreement also provides 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, except for willful 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 Advisory
Agreement.
CUSTODIAN
Investors Bank & Trust Company (the "Custodian") is the custodian of the Trust's
assets. The Custodian's responsibilities include safekeeping and controlling the
Series' cash and securities, handling the receipt and delivery of securities,
determining income and collecting interest and dividends on the Series'
investments, maintaining books of original entry for portfolio and fund
accounting and other required books and accounts, and calculating the daily net
asset value of shares of the Series. The Custodian does not determine the
investment policies of the Series or decide which securities the Series will buy
or sell. The Series may, however, invest in securities of the Custodian and may
deal with the Custodian as principal in securities transactions. The Custodian
has contracted with MFS for MFS to perform certain accounting functions related
to certain transactions for which the Adviser receives remuneration on a cost
basis. State Street Bank and Trust Company serves as the dividend and
distribution disbursing agent of the Series.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (the "Shareholder Servicing Agent"), a wholly owned
subsidiary of MFS and a registered transfer agent, is the Series' shareholder
servicing agent, pursuant to a Shareholder Servicing Agent Agreement with the
Trust on behalf of the Series, dated as of April 14, 1994 (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
shares of the Series. For these services, the Shareholder Servicing Agent will
receive a fee based on the net assets of the Series, computed and paid monthly.
In addition, the Shareholder Servicing Agent will be reimbursed by the Series
for certain expenses incurred by the Shareholder Servicing Agent on behalf of
the Series. For the fiscal year ended December 31, 1994, the World Government
Series incurred fees of $992 under the Agency Agreement. State Street Bank and
Trust Company, the dividend and distribution disbursing agent for the Series,
has contracted with the Shareholder Servicing Agent to administer and perform
certain dividend and distribution disbursing functions for the Series.
DISTRIBUTOR
MFD, a wholly owned subsidiary of MFS, serves as the distributor for the
continuous offering of shares of the Trust pursuant to a Distribution Agreement
dated as of April 14, 1994 (the "Distribution Agreement").
As agent, MFD currently offers shares of the Series on a continuous basis to the
separate accounts of Participating Insurance Companies in all states in which
the Series or the Trust may from time to time be registered or where permitted
by applicable law. The Distribution Agreement provides that MFD accepts orders
for shares at net asset value as no sales commission or load is charged. MFD has
made no firm commitment to acquire shares of the Series.
The Distribution Agreement will remain in effect until August 1, 1995 and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Trust's shares (as defined in "Investment Restrictions") and in either case, by
a majority of the Trustees who are not parties to such Distribution Agreement or
interested persons of any such party. The Distribution Agreement terminates
automatically if it is assigned and may be terminated without penalty by either
party on not more than 60 days' nor less than 30 days' notice.
5. PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Series are made by
employees of MFS, who are appointed and supervised by its senior officers.
Changes in the Series' investments are reviewed by the Trust's Board of
Trustees. The Series' portfolio manager may serve other clients of MFS or any
subsidiary of MFS in a similar capacity.
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain and maintain the availability of
execution at the most favorable prices and in the most effective manner
possible. MFS has complete freedom
19
<PAGE>
as to the markets in and the broker-dealers through which it seeks this result.
MFS attempts to achieve this result by selecting broker-dealers to execute
portfolio transactions on behalf of the Series and other clients of MFS on the
basis of their professional capability, the value and quality of their brokerage
services, and the level of their brokerage commissions. In the case of
securities, such as fixed income securities, which are principally traded in the
over-the-counter market on a net basis through dealers acting for their own
account and not as brokers (where no stated commissions are paid but the prices
include a dealer's markup or markdown), MFS normally seeks to deal directly with
the primary market makers, unless in its opinion, better prices are available
elsewhere. In the case of securities purchased from underwriters, the cost of
such securities generally includes a fixed underwriting commission or
concession. Securities firms or futures commission merchants may receive
brokerage commissions on transactions involving options, Futures Contracts and
Options on Futures Contracts and the purchase and sale of underlying securities
upon exercise of options. The brokerage commissions associated with buying and
selling options may be proportionately higher than those associated with general
securities transactions. From time to time, soliciting dealer fees are available
to MFS on the tender of the Series' portfolio securities in so-called tender or
exchange offers. Such soliciting dealer fees are in effect recaptured for the
Series by MFS. At present no other recapture arrangements are in effect.
Under the Advisory Agreement and as permitted by Section 28(e) of the Securities
Exchange Act of 1934, as amended, MFS may cause the Series to pay a
broker-dealer which provides brokerage and research services to MFS an amount of
commission for effecting a securities transaction for the Series in excess of
the amount other broker-dealers would have charged for the transaction if MFS
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 MFS's
overall responsibilities to the Series or to its other clients. Not all of such
services are useful or of value in advising the Series.
The term "brokerage and research services" includes advice as to the value of
securities, the advisability of purchasing or selling securities, and the
availability 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, 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 MFS's other clients in part for providing advice as to the
availability 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 for no consideration other than
brokerage or underwriting commissions. Securities may be bought or sold through
such broker-dealers, but at present, unless otherwise directed by the Series, a
commission higher than one charged elsewhere will not be paid to such a firm
solely because it provided Research to MFS. The Trustees (together with the
Trustees of the other MFS Funds) have directed MFS to allocate a total of
$20,000 of commission business from the various MFS Funds to the Pershing
Division of Donaldson, Lufkin & Jenrette as consideration for the annual renewal
of the Lipper Directors' Analytical Data Service and Lipper Variable
Insurance--Related Analysis (which provides information useful to the Trustees
in reviewing the relationship between each MFS Fund 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 MFS
as a consideration in the selection of brokers to execute portfolio
transactions. However, MFS is unable to quantify the amount of commissions which
will be paid as a result of such Research because a substantial number of
transactions will be effected through brokers which provide Research but which
were selected principally because of their execution capabilities.
The management fee that the Series pays to MFS will not be reduced as a
consequence of the receipt of brokerage and research services by MFS. To the
extent the Series' portfolio transactions are used to obtain such services, the
brokerage commissions paid by the Series will exceed those that might otherwise
be paid, by an amount which cannot be presently determined. Such services would
be useful and of value to MFS in serving both the Series and other clients and,
conversely, such services obtained by the placement of brokerage business of
other clients would be useful to MFS in carrying out its obligations to the
Series. While such services are not expected to reduce the expenses of MFS, MFS
would, through use of the services, avoid the additional expenses which would be
incurred if it should attempt to develop comparable information through its own
staff.
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<PAGE>
In certain instances there may be securities which are suitable for the Series'
portfolio as well as for that of one or more of the other clients of MFS.
Investment decisions for the Series 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 the Series is concerned. In other cases, however, it is
believed that the Series' ability to participate in volume transactions will
produce better executions for the Series.
6. TAX STATUS
Shares of the Series are offered only to the separate accounts of the
Participating Insurance Companies that fund Contracts. See the applicable
Contract prospectus for a discussion of the special taxation of those companies
with respect to those accounts and of the Contract holders.
The Series intends to elect and qualify each year for treatment as a "regulated
investment company" under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code") by meeting all applicable requirements of Subchapter M,
including requirements as to the nature of the Series' gross income, the amount
of the Series' distributions, and the composition and holding period of the
Series' portfolio assets. Because the Series intends to distribute all of its
net investment income and net realized capital and foreign currency gains to
shareholders in accordance with the timing and certain other requirements
imposed by the Code, it is not expected that the Series will be required to pay
any federal income or excise taxes, although the Series which has foreign-source
income may be subject to foreign withholding taxes. If the Series should fail to
qualify as a "regulated investment company" in any year, that Series would incur
a regular corporate federal income tax upon its taxable income.
The Series intends 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 the Series' assets that may be represented by any single
investment and securities from the same issuer. If the Series should fail to
comply with these requirements, variable annuity and variable life insurance
contracts that invest in the Series would not be treated as annuity, endowment
or life insurance contracts under the Code.
Distributions of net capital gains, whether made in cash or in additional
shares, are taxable to shareholders as long-term capital gains without regard to
the length of time the shareholders have held their shares. Certain
distributions of the Series which are declared in October, November, or
December, to shareholders of record in such month and paid the following
January, will be taxable to shareholders as if received on December 31 of the
year in which they are declared.
Any investment by the Series in zero coupon bonds, 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.
The Series' transactions in options, Futures Contracts, Forward Contracts,
foreign currencies, swaps and related transactions, to the exent allowed by its
investment objectives, will be subject to special tax rules that may affect the
amount, timing, and character of Series income and distributions to
shareholders. For example, certain positions held by the 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 gain or loss associated with the positions will
be treated as 60% long-term and 40% short-term capital gain or loss. Certain
positions held by the 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 which may alter the effects of these rules. The Series will limit its
activities in options, Futures Contracts, Forward Contracts and foreign
currencies to the extent necessary to meet the requirements of Subchapter M of
the Code.
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<PAGE>
Special tax considerations apply with respect to foreign investments of the
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 may be limited in order to avoid a tax on the Series.
Investment by the Series in certain "passive foreign investment companies" may
also be limited in order to avoid a tax on the Series.
Investment income received by the Series from sources within foreign countries
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 the
Series to a reduced rate of tax or an exemption from tax on such income; the
Series intends to qualify for treaty reduced rates where available. It is
impossible to determine the Series effective rate of foreign tax in advance
since the amount of the Series' assets to be invested within various countries
is not known.
7. NET INCOME AND DISTRIBUTIONS
The Series intends to distribute to its shareholders annually dividends
substantially equal to all of its net investment income. The Series' net
investment income consists of non-capital gain income less expenses. The Series'
intends to distribute net realized short- and long-term capital gains, if any,
at least annually. Shareholders will be informed of the tax consequences of such
distributions, including whether any portion represents a return of capital,
after the end of each calendar year. (For additional taxation information, see
"Tax Status" above.)
8. DETERMINATION OF NET ASSET VALUE; PERFORMANCE INFORMATION
NET ASSET VALUE
The net asset value per share of the Series is determined each day during which
the Exchange is open for trading. This determination is made once during each
such day as of the close of regular trading on the Exchange by deducting the
amount of the Series' liabilities from the value of its assets and dividing the
difference by the number of shares of the Series outstanding.
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 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 system, 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. Debt securities (other than short-term obligations but
including listed issues) in the Series' portfolio are valued on the basis of
valuations furnished by a pricing service which utilizes both dealer-supplied
valuations and electronic data processing techniques which take into account
appropriate factors such as institutional-sized trading in similar groups of
securities, yields, quality, coupon rate, maturity, type of issue, trading
characteristics and other market data, without exclusive reliance upon quoted
prices or exchange or over-the-counter prices, since such valuations are
believed to reflect more accurately the fair value of such securities.
Short-term obligations, if any, in the Series' portfolio are valued at amortized
cost, which constitutes fair value as determined by the Board of Trustees.
Short-term securities with a remaining maturity in excess of 60 days will be
valued based upon dealer supplied valuations. Portfolio securities and
over-the-counter options, for which there are no quotations or valuations are
valued at fair value as determined in good faith by or at the direction of the
Board of Trustees.
PERFORMANCE INFORMATION
TOTAL RATE OF RETURN -- The Series will calculate its total rate of return of
its shares for certain periods by determining the average annual compounded
rates of return over those periods that would cause an investment of $1,000
(made with all distributions reinvested) to reach the value of that investment
at the end of the periods. The Series may also calculate total rates
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<PAGE>
of return which represent aggregate performance over a period or year-by-year
performance. The aggregate total rate of return for shares of the World
Governments Series for the period from June 14, 1994 (commencement of investment
operations) to December 31, 1994 was 0.79%. The aggregate total rate of return
would have been lower had fee waivers not been in effect.
YIELD -- Any yield quotation for the Series is based on the annualized net
investment income per share of the Series for the 30-day period. The yield for
such the Series is calculated by dividing its net investment income earned
during the period by the offering price per share of the Series on the last day
of the period. The resulting figure is then annualized. Net investment income
per share is determined by dividing (i) the dividends and interest of the Series
during the period, minus accrued expenses of the Series for the period by (ii)
the average number of shares of the Series entitled to receive dividends during
the period multiplied by the offering price per share on the last day of the
period. The yield calculation for shares of the World Governments Series for the
30-day period ended December 31, 1994 was 7.46% without any fee waivers.
MFS FIRSTS: MFS has a long history of innovations.
- -- 1924 -- Massachusetts Investors Trust is established as the first mutual fund
in America.
- -- 1924 -- Massachusetts Investors Trust is the first mutual fund to make full
public disclosure of its operations in shareholder reports.
- -- 1932 -- One of the first internal research departments is established to
provide in-house analytical capability for an investment management firm.
- -- 1933 -- Massachusetts Investors Trust is the first mutual fund to register
under the 1933 Act.
- -- 1936 -- Massachusetts Investors Trust is the first mutual fund to let
shareholders take capital gain distributions either in additional shares or
in cash.
- -- 1976 -- MFS-Registered Trademark- Municipal Bond Fund is among the first
municipal bond funds established.
- -- 1979 -- Spectrum becomes the first combination fixed/variable annuity with no
initial sales charge.
- -- 1981 -- MFS-Registered Trademark- World Governments Fund is established as
America's first globally diversified fixed-income mutual fund.
- -- 1984 -- MFS-Registered Trademark- Municipal High Income Fund is the first
mutual fund to seek high tax-free income from lower-rated municipal
securities.
- -- 1986 -- MFS-Registered Trademark- Managed Sectors Fund becomes the first
mutual fund to target and shift investments among industry sectors for
shareholders.
- -- 1986 -- MFS-Registered Trademark- Municipal Income Trust is the first
closed-end, high-yield municipal bond fund traded on the New York Stock
Exchange.
- -- 1987 -- MFS-Registered Trademark- Multimarket Income Trust is the first
closed-end, multimarket high income fund listed on the New York Stock
Exchange.
- -- 1989 -- MFS-Registered Trademark- Regatta becomes America's first
non-qualified market-value-adjusted fixed/variable annuity.
- -- 1990 -- MFS-Registered Trademark- World Total Return Fund is the first global
balanced fund.
- -- 1993 -- MFS-Registered Trademark- World Growth Fund is the first global
emerging markets fund to offer the expertise of two sub-advisers.
- -- 1993 -- MFS-Registered Trademark- becomes money manger of
MFS-Registered Trademark- Union Standard Trust, the first trust to invest
solely in companies deemed to be union-friendly by an Advisory Board of
senior labor officials, senior managers of companies with significant labor
contracts, academics and other national labor leaders or experts.
23
<PAGE>
9. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Trust's Declaration of Trust permits the Trustees of the Trust to issue an
unlimited number of full and fractional Shares of Beneficial Interest (without
par value) of one or more separate series and to divide or combine the shares of
any series into a greater or lesser number of shares without thereby changing
the proportionate beneficial interests in that series. The Trustees have
currently authorized shares of the twelve series. The Declaration of Trust
further authorizes the Trustees to classify or reclassify any series of shares
into one or more classes. The Trustees have no current intention to classify
more than one class of shares. Each share of a series represents an equal
proportionate interest in the assets of that series. Upon liquidation of a
series, shareholders of the series are entitled to share PRO RATA in the net
assets of the series available for distribution to shareholders. The Trust
reserves the right to create and issue additional series or classes of shares,
in which case the shares of each class would participate equally in the
earnings, dividends and assets allocable to that class of the particular series.
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 in
accordance with the provisions of Section 16(c) of the 1940 Act. No material
amendment may be made to the Declaration of Trust without the affirmative vote
of a majority of the Trust's shares. Shares have no pre-emptive or conversion
rights. Shares are fully paid and non-assessable. The Trust may enter into a
merger or consolidation, or sell all or substantially all of its assets (or all
or substantially all of the assets belonging to any series of the Trust), if
approved by the vote of the holders of two-thirds of the Trust's outstanding
shares voting as a single class, or of the affected series of the Trust, as the
case may be, except that if the Trustees of the Trust recommend such merger,
consolidation or sale, the approval by vote of the holders of a majority of the
Trust's or the affected series' outstanding shares (as defined in "Investment
Restrictions") will be sufficient. The Trust or any series of the Trust may also
be terminated (i) upon liquidation and distribution of its assets, if approved
by the vote of the holders of two-thirds of its outstanding shares, or (ii) by
the Trustees by written notice to the shareholders of the Trust of the affected
series. If not so terminated, the Trust will continue indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Trust and provides for indemnification
and reimbursement of expenses out of Trust property for any shareholder held
personally liable for the obligations of the Trust. The Declaration of Trust
also provides that it shall maintain appropriate insurance (for example,
fidelity bonding and errors and omissions insurance) for the protection of the
Trust, its shareholders, Trustees, officers, employees and agents covering
possible tort or 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 Trust itself was unable to
meet its obligations.
The Declaration of Trust further provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust
and that the Trustees will not be liable for any action or failure to act, but
nothing in the Declaration of Trust protects a Trustee against any liability to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
his office.
10. INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS
Deloitte & Touche LLP are the Trust's independent certified public accountants.
The World Governments Series' Portfolio of Investments at December 31, 1994,
Statement of Assets and Liabilities at December 31, 1994, Statement of
Operations for the period ended December 31, 1994, Statement of Changes in Net
Assets for the period ended December 31, 1994, the Notes to Financial Statements
and the Independent Auditor's Report dated February 3, 1995, each of which is
included in the Annual Report to shareholders of the World Governments Series,
are incorporated by reference into this Statement of Additional Information and
have been so incorporated in reliance upon the report of Deloitte & Touche LLP,
independent certified public accountant, as experts in accounting and auditing.
A copy of the World Governments Series' Annual Report accompanies the Statement
of Additional Information.
24
<PAGE>
EXHIBIT A
TRUSTEE COMPENSATION TABLE
<TABLE>
<CAPTION>
TRUSTEE FEES FROM
WORLD GOVERNMENTS
NAME OF TRUSTEE SERIES (1)
- ------------------------------------------------------------------------------------------------ -------------------
<S> <C>
William R. Gutow................................................................................ $ 517
Nelson J. Darling............................................................................... $ 517
<CAPTION>
TOTAL TRUSTEE
FEES FROM THE
NAME OF TRUSTEE FUND COMPLEX (2)
- ------------------------------------------------------------------------------------------------ -----------------
<S> <C>
William R. Gutow................................................................................ $ 10,618
Nelson J. Darling............................................................................... $ 10,618
<FN>
NOTES:
(1) For fiscal year ended December 31, 1994.
(2) Information provided is for calendar year ended December 31, 1994. All
Trustees served as Trustees of 16 funds advised by MFS (having aggregate net
assets at December 31, 1994, of approximately $143 million).
</TABLE>
<PAGE>
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
(800) 637-8730
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN
Investors Bank & Trust Company
89 South Street, Boston, MA 02116
DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 637-8730
MAILING ADDRESS
P.O. Box 1400, Boston, MA 02104-9985
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
MFS-REGISTERED TRADEMARK- WORLD
GOVERNMENTS SERIES-TM-
500 Boylston Street
Boston, MA 02116
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