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MFS-REGISTERED TRADEMARK-
EMERGING PROSPECTUS
GROWTH SERIES-SM- May 1, 1995
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MFS-Registered Trademark- VARIABLE INSURANCE TRUST-SM-
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1. Expense Summary.......................................................................................... 2
2. Investment Concept of the Trust.......................................................................... 3
3. Investment Objective and Policies........................................................................ 3
4. Investment Techniques.................................................................................... 4
5. Additional Risk Factors.................................................................................. 8
6. Management of the Series................................................................................. 11
7. Information Concerning Shares of the Series.............................................................. 12
Purchases and Redemptions................................................................................ 12
Net Asset Value.......................................................................................... 12
Distributions............................................................................................ 12
Tax Status............................................................................................... 13
Description of Shares, Voting Rights and Liabilities..................................................... 13
Performance Information.................................................................................. 13
Expenses................................................................................................. 14
Shareholder Communications............................................................................... 14
Appendix A -- Description of Bond Ratings........................................................................... A-1
Appendix B -- Description of Obligations Issued or Guaranteed by U.S. Government Agencies, Authorities or
Instrumentalities................................................................................................... B-1
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MFS VARIABLE INSURANCE TRUST
500 BOYLSTON STREET, BOSTON, MASSACHUSETTS 02116 (617) 954-5000
MFS EMERGING GROWTH SERIES ("EMERGING GROWTH SERIES" OR THE "SERIES") is a
diversified series of MFS Variable Insurance Trust (the "Trust"), an open-end
management investment company offering insurance companies separate accounts a
selection of investment vehicles for variable annuity and variable life
contracts (the "Contracts"). The investment objective of the Emerging Growth
Series is to provide long-term growth of capital. 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.
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SHARES OF THE TRUST ARE AVAILABLE AND ARE BEING MARKETED AS A POOLED FUNDING
VEHICLE FOR LIFE INSURANCE COMPANIES WRITING ALL TYPES OF CONTRACTS.
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THE EMERGING GROWTH SERIES IS INTENDED FOR INVESTORS WHO UNDERSTAND AND ARE
WILLING TO ACCEPT THE RISKS ENTAILED IN SEEKING LONG-TERM GROWTH OF CAPITAL.
BECAUSE OF THE SERIES' INVESTMENT POLICIES PERMITTING INVESTMENT IN FOREIGN
SECURITIES, INVESTMENTS MAY BE SUBJECT TO A GREATER DEGREE OF RISK THAN
INVESTMENTS IN OTHER INVESTMENT COMPANIES WHICH INVEST ENTIRELY IN DOMESTIC
SECURITIES.
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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.
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1. EXPENSE SUMMARY
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ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS):
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MFS
EMERGING
GROWTH
SERIES
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Management Fee.................................................................................. 0.75%
Other Expenses (after fee reduction)............................................................ 0.25%(1)
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Total Operating Expenses (after fee reduction).................................................. 1.00%(1)
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(1) The Adviser has agreed to bear, subject to reimbursement, expenses for the Emerging Growth Series such that the
Series' aggregate operating expenses shall not exceed, on an annualized basis, 1.00% of the average daily net assets
of the Series from November 2, 1994 through December 31, 1996, 1.25% of the average daily net assets of the Series
from January 1, 1997 through December 31, 1998, and 1.50% of the average daily net assets of the Series from January
1, 1999 through December 21, 2004; provided however, that this obligation may be terminated or revised at any time.
See "Information Concerning Shares of The Series--Expenses" below. Absent this expense arrangement, "Other Expenses"
and "Total Operating Expenses" would be 1.00% and 1.75%, respectively.
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The Series' annual operating expenses do not reflect expenses imposed by
separate accounts of Participating Insurance Companies through which an
investment in the 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.
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2. INVESTMENT CONCEPT OF THE TRUST
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 currently 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, and the Series may not be available with a particular
Contract. 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 may 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
objective 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.
3. INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE -- The Emerging Growth Series seeks to provide long-term
growth of capital. Dividend and interest income from portfolio securities, if
any, is incidental to the Series' investment objective of long-term growth of
capital. The investment objective 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 objective of the Series will be achieved.
INVESTMENT POLICIES -- The Series' policy is to invest primarily (I.E., at least
80% of its assets under normal circumstances) in common stocks of small and
medium-sized companies that are early in their life cycle but which have the
potential to become major enterprises (emerging growth companies). Such
companies generally would be expected to show earnings growth over time that is
well above the growth rate of the overall economy and the rate of inflation, and
would have the products, management and market opportunities which are usually
necessary to become more widely recognized as growth companies.
However, the Series may also invest in more established companies whose rates of
earnings growth are expected to accelerate because of special factors, such as
rejuvenated management, new products, changes in consumer demand, or basic
changes in the economic environment.
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While the Series will invest primarily in common stocks, the Series may, to a
limited extent, seek appreciation in other types of securities such as foreign
or convertible securities and warrants when relative values make such purchases
appear attractive either as individual issues or as types of securities in
certain economic environments (see "Additional Risk Factors"). The Series may
also enter into forward foreign currency exchange contracts for the purchase or
sale of foreign currency for hedging purposes and non-hedging purposes,
including transactions entered into for the purpose of profiting from
anticipated changes in foreign currency exchange rates, as well as options on
foreign currencies (see "Investment Techniques-- Forward Contracts on Foreign
Currency" and "--Options on Foreign Currencies" below). The Series may also hold
foreign currency (see "Additional Risk Factors" below). The Series may invest up
to 25% (and generally expects to invest up to 10%) of its assets in foreign
securities (not including American Depositary Receipts ("ADRs")), which may be
traded on foreign exchanges. The Series may invest in emerging market securities
and Brady Bonds (consistent with its foreign securities limitations). The Series
may hold cash equivalents or other forms of debt securities as a reserve for
future purchases of common stock or to meet liquidity needs.
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. Although ADRs are
issued by a U.S. depository, they are subject to many of the risks of foreign
securities such as exchange rates and more limited information about foreign
issuers. (See "Additional Risk Factors" below).
The Series may invest in corporate asset-backed securities (see "Investment
Techniques--Corporate Asset-Backed Securities" below). The Series may write
covered call and put options and purchase call and put options on securities and
stock indices in an effort to increase current income and for hedging purposes
(see "Investment Techniques--Options" below). The Series may also purchase and
sell stock index futures contracts and may write and purchase options thereon
for hedging purposes and for non-hedging purposes, subject to applicable law
(see "Investment Techniques--Futures Contracts and Options on Futures Contracts"
below). In addition, the Series may purchase portfolio securities on a
"when-issued" or on a "forward delivery" basis (see "Investment
Techniques--When-Issued Securities" below). The Series may also invest a portion
of its assets in "loan participations" (see "Investment Techniques--Loan
Participations" below).
While it is not generally the Series' policy to invest or trade for short-term
profits, the Series may dispose of a portfolio security whenever the Adviser is
of the opinion that such security no longer has an appropriate appreciation
potential or when another security appears to offer relatively greater
appreciation potential. Subject to tax requirements, portfolio changes are made
without regard to the length of time a security has been held, or whether a sale
would result in a profit or loss.
The nature of investing in emerging growth companies involves greater risk than
is customarily associated with investments in more established companies.
Emerging growth companies often have limited product lines, markets or financial
resources, and they may be dependent on one-person management. The securities of
emerging growth companies may have limited marketability and may be subject to
more abrupt or erratic market movements than securities of larger, more
established growth companies or the market averages in general. Shares of the
Series, therefore, are subject to greater fluctuation in value than shares of a
conservative equity fund or of a growth fund which invests entirely in proven
growth stocks.
The Series may invest to a limited extent in lower rated fixed income securities
or comparable unrated securities (commonly known as "junk bonds") (see
"Additional Risk Factors--Lower Rated Bonds" below).
4. 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 making the loans.
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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. Brady
Bonds are often viewed as having three or four valuation components: the
collateralized repayment of principal at final maturity; the collateralized
interest payments; the uncollateralized interest payments; and any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constituting the "residual risk"). In light of the residual risk of
Brady Bonds and the history of defaults of countries issuing Brady Bonds with
respect to commercial bank loans by public and private entities, investments in
Brady Bonds may be viewed as speculative.
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.
"WHEN-ISSUED" SECURITIES: The Series may purchase securities on a "when-issued"
or on a "forward delivery" basis, which means that the securities will be
delivered to the Series at a future date usually beyond customary settlement
time. The commitment to purchase a security for which payment will be made on a
future date may be deemed a separate security. In general, the Series does not
pay for such securities until received, and does not start earning interest on
the securities until the contractual settlement date. While awaiting delivery of
securities purchased on such bases, the Series will normally invest in cash,
cash equivalents and high grade debt securities.
CORPORATE ASSET-BACKED SECURITIES: The Series may invest in corporate
asset-backed securities. These securities, issued by trusts and special purpose
corporations, are backed by a pool of assets, such as credit card and automobile
loan receivables, representing the obligations of a number of different parties.
Corporate asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there is
the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities. The underlying
assets (E.G., loans) are also subject to prepayments which shorten the
securities' weighted average life and may lower their return.
Corporate asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection; and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally
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by the entity administering the pool of assets, to ensure that the receipt of
payments on the underlying pool occurs in a timely fashion. Protection against
losses resulting from ultimate default ensures payment through insurance
policies or letters of credit obtained by the issuer or sponsor from third
parties. The Series will not pay any additional or separate fees for credit
support. The degree of credit support provided for each issue is generally based
on historical information respecting the level of credit risk associated with
the underlying assets. Delinquency or loss in excess of that anticipated or
failure of the credit support could adversely affect the return on an investment
in such a security.
LOAN PARTICIPATIONS AND OTHER DIRECT INDEBTEDNESS: The Series may invest a
portion of its assets in "loan participations" and other direct indebtedness. By
purchasing a loan participation, the Series acquires some or all of the interest
of a bank or other lending institution in a loan to a corporate borrower. Many
such loans are secured, and most impose restrictive covenants which must be met
by the borrower. These loans are made generally to finance internal growth,
mergers, acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans may be in default at the time of purchase. The Series may
also purchase other direct indebtedness such as trade or other claims against
companies, which generally represent money owed by the company to a supplier of
goods and services. These claims may also be purchased at a time when the
company is in default. Certain of the loan participations and other direct
indebtedness acquired by the Series may involve revolving credit facilities or
other standby financing commitments which obligate the Series to pay additional
cash on a certain date or on demand.
The highly leveraged nature of many such loans and other direct indebtedness may
make such loans especially vulnerable to adverse changes in economic or market
conditions. Loan participations and other direct indebtedness may not be in the
form of securities or may be subject to restrictions on transfer, and only
limited opportunities may exist to resell such instruments. As a result, the
Series may be unable to sell such investments at an opportune time or may have
to resell them at less than fair market value. For a further discussion of loan
participations, other direct indebtedness and the risks related to transactions
therein, see the Statement of Additional Information.
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
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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.
In certain instances, the Series may enter into options on Treasury securities
that are "reset" options or "adjustable strike" options. These options provide
for periodic adjustment of the strike price and may also provide for the
periodic adjustment of the premium during the term of the option. The Statement
of Additional Information contains a further discussion of these investments.
OPTIONS ON STOCK INDICES: The Series may write (sell) covered call and put
options and purchase call and put options on stock indices. The Series may write
options on stock indices for the purpose of increasing its gross income and to
protect its portfolio against declines in the value of securities it owns or
increases in the value of securities to be acquired. When the Series writes an
option on a stock index, and the value of the index moves adversely to the
holder's position, the option will not be exercised, and the Series will either
close out the option at a profit or allow it to expire unexercised. The Series
will thereby retain the amount of the premium, less related transaction costs,
which will increase its gross income and offset part of the reduced value of
portfolio securities or the increased cost of securities to be acquired. Such
transactions, however, will constitute only partial hedges against adverse price
fluctuations, since any such fluctuations will be offset only to the extent of
the premium received by the Series for the writing of the option, less related
transaction costs. In addition, if the value of an underlying index moves
adversely to the Series' option position, the option may be exercised, and the
Series will experience a loss which may only be partially offset by the amount
of the premium received.
The Series may also purchase put or call options on stock indices in order,
respectively, to hedge its investments against a decline in value or to attempt
to reduce the risk of missing a market or industry segment advance. The Series'
possible loss in either case will be limited to the premium paid for the option,
plus related transaction costs.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS: The Series may purchase and
sell Futures Contracts on stock indices and 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
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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 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.
5. 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.
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LOWER RATED BONDS: The Series may invest in fixed income securities rated Baa by
Moody's Investors Services, Inc. ("Moody's") or BBB by Standard & Poor's Ratings
Group ("S&P") or by Fitch Investors Services, Inc. ("Fitch") and comparable
unrated securities (see Appendix A to this prospectus). These securities, while
normally exhibiting adequate protection parameters, have speculative
characteristics and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than in the case of higher grade securities.
The Series may also invest in securities rated Ba or lower by Moody's or BB or
lower by S&P or by Fitch and comparable unrated securities (commonly known as
"junk bonds") to the extent described above. These securities are considered
speculative and, while generally providing greater income than investments in
higher rated securities, will involve greater risk of principal and income
(including the possibility of default or bankruptcy of the issuers of such
securities) and may involve greater volatility of price (especially during
periods of economic uncertainty or change) than securities in the higher rating
categories. However, since yields vary over time, no specific level of income
can ever be assured. These lower rated high yielding fixed income securities
generally tend to reflect economic changes and short-term corporate and industry
developments to a greater extent than higher rated securities which react
primarily to fluctuations in the general level of interest rates (although these
lower rated fixed income securities are also affected by changes in interest
rates, the market's perception of their credit quality, and the outlook for
economic growth). In the past, economic downturns or an increase in interest
rates have, under certain circumstances, caused a higher incidence of default by
the issuers of these securities and may do so in the future, especially in the
case of highly leveraged issuers. During certain periods, the higher yields on
the Series' lower rated high yielding fixed income securities are paid primarily
because of the increased risk of loss of principal and income, arising from such
factors as the heightened possibility of default or bankruptcy of the issuers of
such securities. Due to the fixed income payments of these securities, the
Series may continue to earn the same level of interest income while its net
asset value declines due to portfolio losses, which could result in an increase
in the Series' yield despite the actual loss of principal. The market for these
lower rated fixed income securities may be less liquid than the market for
investment grade fixed income securities, and judgment may at times play a
greater role in valuing these securities than in the case of investment grade
fixed income securities. Changes in the value of securities subsequent to their
acquisition will not affect cash income or yield to maturity to the Series but
will be reflected in the net asset value of shares of the Series. See the
Statement of Additional Information for more information on lower rated
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.
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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.
-------------------
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,
U.S. Government Securities and related repurchase agreements. See Appendix B 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 objective
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
objective. 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.
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. ("MFD"), 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, policies and rating standards
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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6. 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"). John W. Ballen, A Senior Vice President of the Adviser,
is the Series' portfolio manager. Mr. Ballen has been employed by the Adviser
since 1984. 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 its services and facilities, MFS receives a management fee, computed
and paid monthly, in an amount equal 0.75% per annum of the average daily net
assets of the Series.
MFS or its affiliates will pay an assistance fee to Seabury & Smith, Inc. equal,
on an annualized basis, to 0.15% of the net assets of the Series attributable to
Contracts offered by Paul Revere Variable Annuity Insurance Company or its
affiliates. Such fee will not be paid by the Series, their shareholders or by
contract holders.
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 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 and its wholly owned subsidiary, MFS Asset Management, Inc., 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 and a Trustee 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., 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.
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7. 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 respective net asset values 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 any 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.
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 the Series may elect to receive dividends and capital gain
distributions in either cash or additional shares.
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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
The Series 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 a 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 the 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 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 of the
Trust 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.
Each share of the 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 the 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.
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.
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 any 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.
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
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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 are allocated between the Series in a manner believed by
management of the Trust to be fair and equitable.
MFS has agreed to pay expenses of the Series such that the Series' aggregate
operating expenses shall not exceed, on an annualized basis, 1.00% of the
average daily net assets of the Series from November 2, 1994 through December
31, 1996, 1.25% of the average daily net assets of the Series from January 1,
1997 through December 31, 1998, and 1.50% of the average daily net assets of the
Series from January 1, 1999 through December 31, 2004; 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 of the Series of an expense
reimbursement fee to MFS computed and paid monthly at a percentage of the
Series' average daily net assets for its then current fiscal year, with a
limitation that immediately after such payment the aggregate operating expenses
of the Series would not exceed, on an annualized basis, 1.00% of the average
daily net assets of the Series through December 31, 1996, 1.25% of the average
daily net assets of the Series from January 1, 1997 through December 31, 1998,
and 1.50% of the average daily net assets of the Series from January 1, 1999
through December 31, 2004. This expense reimbursement agreement terminates for
the Series on the earlier of the date on which payments made thereafter 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. The 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.
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Participating Insurance Companies with inquiries regarding the Trust may call
the Trust's Shareholder Servicing Agent. (See back cover for address and phone
number.)
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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.
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APPENDIX A
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the quality
of various debt instruments. It should be emphasized, however, that ratings are
not absolute standards of quality. Consequently, debt instruments with the same
maturity, coupon and rating may have different yields while debt instruments of
the same maturity and coupon with different ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuations of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations, I.E.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. an application for rating was not received or accepted;
2. the issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy;
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3. there is a lack of essential data pertaining to the issue or issuer; and
4. the issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
STANDARD & POOR'S RATINGS GROUP
AAA: Debt rated AAA has the highest rating assigned by S&P's. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior debt that
is assigned an actual or implied CCC rating.
C: The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
C1: The rating C1 is reserved for income bonds on which no interest is being
paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR: Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
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A-1 AND P-1 COMMERCIAL PAPER RATINGS
Description of S&P, Fitch and Moody's highest commercial paper ratings:
The rating "A" is the highest commercial paper rating assigned by S&P and Fitch,
and issues so rated are regarded as having the greatest capacity for timely
payment. Issues in the "A" category are delineated with the numbers 1, 2 and 3
to indicate the relative degree of safety. The A-1 designation indicates that
the degree of safety regarding timely payment is either overwhelming or very
strong. Those A-1 issues determined to possess overwhelming safety
characteristics will be denoted with a plus (+) sign designation.
The rating P-1 is the highest commercial paper rating assigned by Moody's.
Issuers rated P-1 have a superior ability for repayment. P-1 repayment capacity
will normally be evidenced by the following characteristics: (1) leading market
positions in well established industries; (2) high rates of return on funds
employed; (3) conservative capitalization structure with moderate reliance on
debt and ample asset protection; (4) broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and (5) well established
access to a range of financial markets and assured sources of alternate
liquidity.
FITCH INVESTORS SERVICE, INC.
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and prepay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated 'AAA'. Because bonds rated in the 'AAA' and
'AA' categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated 'F-1+'.
A: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest of principal.
PLUS(+) MINUS(-): Plus and minus signs are used with a rating symbol to indicate
the relative position of a credit within the rated category. Plus and minus
signs, however, are not used in the 'AAA' category.
NR indicates that Fitch does not rate the specific issue.
A-3
<PAGE>
CONDITIONAL A conditional rating is premised on the successful completion of a
project or the occurrence of a specific event.
SUSPENDED A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
WITHDRAWN A rating will be withdrawn when an issue matures or is called or
refinanced, and, at Fitch's discretion, when an issuer fails to furnish proper
and timely information.
FITCHALERT Ratings are placed on FitchAlert to notify investors of an occurrence
that is likely to result in a rating change and the likely direction of such
change. These are designated a "Positive", indicating a potential upgrade,
"Negative", for potential downgrade, or "Evolving", where ratings may be
lowered, FitchAlert is relatively short-term, and should be resolved within 12
months.
A-4
<PAGE>
APPENDIX B
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.
B-1
<PAGE>
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.
B-2
<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
[LOGO]
MFS-REGISTERED TRADEMARK- EMERGING GROWTH SERIES
500 Boylston Street, Boston, MA 02116
------------------------------------
MFS-REGISTERED TRADEMARK-
EMERGING
GROWTH
SERIES-SM-
[LOGO]
PROSPECTUS
MAY 1, 1995
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