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<S> <C>
MFS-REGISTERED TRADEMARK-
VARIABLE PROSPECTUS
INSURANCE TRUST May 1, 1995
</TABLE>
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MFS-Registered Trademark- VARIABLE INSURANCE TRUST-SM-
MFS Variable Insurance Trust (the "Trust") is 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"). Currently the Trust offers shares of beneficial interest of 12
separate mutual fund series (individually or collectively hereinafter referred
to as a "Series" or the "Series"):
- -- MFS EMERGING GROWTH SERIES (formerly known as MFS OTC Series) (the "Emerging
Growth Series"), which seeks to provide long-term growth of capital;
- -- MFS GROWTH SERIES (the "Growth Series"), which seeks to provide long-term
growth of capital and future income rather than current income;
- -- MFS RESEARCH SERIES (the "Research Series"), which seeks to provide long-term
growth of capital and future income;
- -- MFS GROWTH WITH INCOME SERIES (the "Growth With Income Series"), which seeks
to provide reasonable current income and long-term growth of capital and
income;
- -- MFS TOTAL RETURN SERIES (the "Total Return Series"), which seeks primarily to
provide above-average income (compared to a portfolio entirely invested in
equity securities) consistent with the prudent employment of capital and
secondarily to provide a reasonable opportunity for growth of capital and
income;
- -- MFS UTILITIES SERIES (the "Utilities Series"), which seeks capital growth and
current income (income above that available from a portfolio invested
entirely in equity securities);
- -- MFS HIGH INCOME SERIES (the "High Income Series"), which seeks high current
income by investing primarily in a professionally managed portfolio of fixed
income securities, some of which may involve equity features;
- -- MFS WORLD GOVERNMENTS SERIES (the "World Governments Series"), which seeks
preservation and growth of capital, together with moderate current income;
- -- MFS STRATEGIC FIXED INCOME SERIES (the "Strategic Fixed Income Series"),
which seeks to maximize current income.
- -- MFS BOND SERIES (the "Bond Series"), which seeks primarily to provide as high
a level of current income as is believed consistent with prudent investment
risk and secondarily to protect shareholders' capital;
- -- MFS LIMITED MATURITY SERIES (the "Limited Maturity Series"), which seeks
primarily to provide as high a level of current income as is believed to be
consistent with prudent investment risk and secondarily to protect
shareholders' capital; and
- -- MFS MONEY MARKET SERIES (the "Money Market Series"), which seeks as high a
level of current income as is considered consistent with the preservation of
capital and liquidity.
-------------------
THE HIGH INCOME SERIES AND THE STRATEGIC FIXED INCOME SERIES MAY INVEST UP TO
80% AND 50%, RESPECTIVELY, OF ITS ASSETS IN LOWER RATED BONDS, COMMONLY KNOWN AS
"JUNK BONDS," THAT ENTAIL GREATER RISKS, INCLUDING DEFAULT RISKS, THAN THOSE
FOUND IN HIGHER RATED SECURITIES. INVESTORS SHOULD CAREFULLY CONSIDER THESE
RISKS BEFORE INVESTING (SEE "ADDITIONAL RISK FACTORS -- LOWER RATED BONDS"). THE
EMERGING GROWTH SERIES, THE GROWTH SERIES, THE RESEARCH SERIES AND THE GROWTH
WITH INCOME SERIES ARE INTENDED FOR INVESTORS WHO UNDERSTAND AND ARE WILLING TO
ACCEPT THE RISKS ENTAILED IN SEEKING LONG-TERM GROWTH OF CAPITAL. BECAUSE OF
THEIR INVESTMENT POLICIES PERMITTING INVESTMENT IN FOREIGN SECURITIES,
INVESTMENTS IN EACH SERIES (EXCEPT FOR THE LIMITED MATURITY SERIES AND THE MONEY
MARKET SERIES) MAY BE SUBJECT TO A GREATER DEGREE OF RISK THAN INVESTMENTS IN
OTHER INVESTMENT COMPANIES WHICH INVEST ENTIRELY IN DOMESTIC SECURITIES.
-------------------
<PAGE>
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.
-------------------
INVESTMENTS IN THE MONEY MARKET SERIES ARE NEITHER INSURED NOR GUARANTEED BY THE
U.S. GOVERNMENT AND THERE IS NO ASSURANCE THAT THE SERIES WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
-------------------
SHARES OF THE TRUST ARE AVAILABLE AND ARE BEING MARKETED AS A POOLED FUNDING
VEHICLE FOR LIFE INSURANCE COMPANIES WRITING ALL TYPES OF CONTRACTS.
This Prospectus sets forth concisely the information about each 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>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<C> <S> <C>
1. Expense Summary............................................................................................ 4
2. Investment Concept of the Trust............................................................................ 5
3. Condensed Financial Information............................................................................ 6
4. Investment Objectives and Policies......................................................................... 6
MFS Emerging Growth Series................................................................................. 7
MFS Growth Series.......................................................................................... 8
MFS Research Series........................................................................................ 8
MFS Growth With Income Series.............................................................................. 9
MFS Total Return Series.................................................................................... 9
MFS Utilities Series....................................................................................... 11
MFS High Income Series..................................................................................... 12
MFS World Governments Series............................................................................... 13
MFS Strategic Fixed Income Series.......................................................................... 15
MFS Bond Series............................................................................................ 16
MFS Limited Maturity Series................................................................................ 17
MFS Money Market Series.................................................................................... 18
5. Investment Techniques...................................................................................... 19
6. Additional Risk Factors.................................................................................... 26
7. Management of the Series................................................................................... 30
8. Information Concerning Shares of Each Series............................................................... 32
Purchases and Redemptions.................................................................................. 32
Net Asset Value............................................................................................ 32
Distributions.............................................................................................. 32
Tax Status................................................................................................. 33
Description of Shares, Voting Rights and Liabilities....................................................... 33
Performance Information.................................................................................... 33
Expenses................................................................................................... 34
Shareholder Communications................................................................................. 35
Appendix A -- Description of Bond Ratings............................................................................. A-1
Appendix B -- Principal Sectors of the Utilities Industry............................................................. B-1
Appendix C -- Description of Obligations Issued or Guaranteed by U.S. Government Agencies,
Authorities or Instrumentalities.................................................................................... C-1
</TABLE>
3
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1. EXPENSE SUMMARY
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ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS):
</TABLE>
<TABLE>
<CAPTION>
MFS
EMERGING MFS GROWTH
GROWTH MFS GROWTH MFS RESEARCH WITH INCOME
SERIES SERIES SERIES SERIES
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Management Fee............................................ 0.75% 0.75% 0.75% 0.75%
Other Expenses (after fee reduction)...................... 0.25%(1) 0.25%(1) 0.25%(1) 0.25%(1)
--- --- --- -----
Total Operating Expense (after fee reduction)............. 1.00%(1) 1.00%(1) 1.00%(1) 1.00%(1)
<CAPTION>
MFS TOTAL MFS HIGH MFS WORLD
RETURN MFS UTILITIES INCOME GOVERNMENTS
SERIES SERIES SERIES SERIES
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Management Fee............................................ 0.75% 0.75% 0.75% 0.75%
Other Expense (after fee reduction)....................... 0.25%(1) 0.25%(1) 0.25%(1) 0.25%(2)
--- --- --- -----
Total Operating Expenses (after fee reduction)............ 1.00%(1) 1.00%(1) 1.00%(1) 1.00%(2)
<CAPTION>
MFS STRATEGIC MFS LIMITED MFS MONEY
FIXED INCOME MFS BOND MATURITY MARKET
SERIES SERIES SERIES SERIES
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Management Fee............................................ 0.75% 0.60% 0.55% 0.50%
Other Expenses (after fee reduction)...................... 0.25%(1) 0.40%(1) 0.45%(1) 0.10%(3)
--- --- --- -----
Total Operating Expense (after fee reduction)............. 1.00%(1) 1.00%(1) 1.00%(1) 0.60%(3)
<FN>
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(1) The Adviser has agreed to bear, subject to reimbursement, expenses for each of the Emerging Growth Series, Growth
Series, Research Series, Growth With Income Series, Total Return Series, Utilities Series, High Income Series,
Strategic Fixed Income Series, Bond Series and Limited Maturity Series such that each 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 Each Series--Expenses" below. Absent this expense arrangement, "Other Expenses" and "Total Operating
Expenses" would be 1.00% and 1.75%, respectively for the Emerging Growth Series, Growth Series, Research Series,
Growth with Income Series, High Income Series and Strategic Fixed Income Series. Absent this expense arrangement,
"Other Expenses" for the Total Return Series, Utilities Series, Bond Series and Limited Maturity Series would be
0.62%, 0.93%, 1.00% and 1.00%, respectively, and "Total Operating Expenses" would be 1.37%, 1.68%, 1.60% and 1.55%,
respectively, for these series.
(2) The Adviser has agreed to bear, subject to reimbursement, until December 31, 2004, expenses of the World Governments
Series such that the Series' aggregate expenses do not exceed 1.00%, on an annualized basis, of its average daily
net assets. See "Information Concerning Shares of Each Series-- Expenses" below. Absent this expense arrangement,
"Other Expenses" and "Total Operating Expenses" would be 0.63% and 1.38%, respectively.
(3) The Adviser has agreed to bear, subject to reimbursement, until December 31, 2004, expenses of the Money Market
Series such that the Series' aggregate operating expenses do not exceed, on an annualized basis, 0.60% of its
average daily net assets. See "Information Concerning Shares of Each Series-- Expenses" below. Absent this expense
arrangement, "Other Expenses" and "Total Operating Expenses" for the Money Market Series would be 2.32% and 2.82%,
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.
4
<PAGE>
2. INVESTMENT CONCEPT OF THE TRUST
The Trust is an open-end, registered management investment company comprised of
the following twelve series: Emerging Growth Series, Growth Series, Research
Series, Growth With Income Series, Total Return Series, Utilities Series, High
Income Series, World Governments Series, Strategic Fixed Income Series, Bond
Series, Limited Maturity Series and Money Market Series. Each Series is a
segregated, separately managed portfolio of securities. All of the Series,
except the Utilities Series, World Governments Series and Strategic Fixed Income
Series, are diversified. Additional series may be created from time to time. 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 each 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 one or more Series,
and not all Series may be available in connection 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.
Shares of the Series are offered to the separate accounts of Participating
Insurance Companies that are affiliated or unaffiliated ("shared funding").
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 one one or more Series. This might force a 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 each 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 each Series and the
officers of the Trust are responsible for the operations. The Adviser manages
the Series' portfolios from day to day in accordance with the investment
objectives and policies of each Series. The selection of investments and the way
they are managed depend on the conditions and trends in the economy and the
financial marketplaces.
5
<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.
The other Series of the Trust had not commenced investment operations as of
December 31, 1994.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1994*
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<S> <C>
WORLD GOVERNMENTS SERIES
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 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
Each Series has different investment objectives which it pursues through
separate investment policies, as described below. The differences in objectives
and policies among the Series can be expected to affect the degree of market and
financial risk to which each Series is subject and the return of each Series.
The investment objectives and policies of each 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 any Series will be achieved.
6
<PAGE>
MFS EMERGING GROWTH SERIES -- The 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 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.
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 Depository 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
7
<PAGE>
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).
MFS GROWTH SERIES -- The Growth Series' investment objective is to provide
long-term growth of capital and future income rather than current income.
The Growth Series' policy is to invest, under normal market conditions, at least
65% of its assets in the common stocks, or securities convertible into common
stocks, of companies believed to possess better than average prospects for
long-term growth. Emphasis is placed on the selection of progressive,
well-managed companies.
The Series currently intends to invest in only those convertible securities that
are considered to be "investment grade," rated Baa or better by Moody's Investor
Service Inc. ("Moody's") or BBB or better by Standard & Poor's Rating Group
("S&P") or by Fitch Investors Service ("Fitch") or securities which the Adviser
believes to be of similar quality to "investment grade" securities. However, the
Series retains the right to invest in convertible bonds that are in the lower
rated categories (rated Ba or lower by Moody's or BB or lower by S&P or by
Fitch) or securities which the Adviser believes to be of similar quality to
these lower rated securities (commonly known as "junk bonds"). For a description
of bond ratings, see Appendix A to this Prospectus.
The Growth Series may invest in ADRs and may invest up to 30% (and expects
generally to invest between 5% and 15%) of its total assets in foreign
securities (not including ADRs). The Series may invest in emerging market
securities (consistent with its foreign securities limitations). (See
"Investment Techniques" and "Additional Risk Factors" below.) The Growth Series
also may purchase portfolio securities on a "when-issued" or on a "forward
delivery" basis. In addition, the Growth Series may write covered call and put
options and purchase call and put options on securities and stock indices as
well as "yield curve" options. The Series may also purchase and sell stock index
and foreign currency futures contracts and may write and purchase options
thereon (see "Investment Techniques" below).
The Growth Series may enter into forward foreign currency exchange contracts and
options on foreign currencies (see "Investment Techniques" below). The Series
may hold foreign currency received in connection with investments in foreign
securities or in anticipation of purchasing foreign securities. (See "Additional
Risk Factors" below).
MFS RESEARCH SERIES -- The Research Series' investment objective is to provide
long-term growth of capital and future income.
The portfolio securities of the Research Series are selected by the investment
research analysts in the Equity Research Group of the Adviser. The Series'
assets are allocated to economic sectors (E.G. health care, technology, consumer
staples), and then to industry groups within these sectors (E.G. within the
health care sector, the managed care, drug and medical supply industries). The
allocation by sector and industry is determined by the analysts acting together
as a group. Individual analysts are then responsible for selecting what they
view as the best securities for capital appreciation and future income within
their assigned industries.
The Research Series' policy is to invest a substantial proportion of its assets
in the common stocks or securities convertible into common stocks of companies
believed to possess better than average prospects for long-term growth. A
smaller proportion of the assets may be invested in bonds, short-term
obligations, preferred stocks or common stocks whose principal characteristic is
income production rather than growth. Such securities may also offer
opportunities for growth of capital as well as income. In the case of both
growth stocks and income issues, emphasis is placed on the selection of
progressive, well-managed companies. The Series' non-convertible debt
investments, if any, may consist of "investment grade" securities (rated Baa or
better by Moody's or BBB or better by S&P or by Fitch), and, with respect to no
more than 10% of the Series' assets, securities in the lower rated categories
(rated Ba or lower by Moody's or BB or lower by S&P or by
8
<PAGE>
Fitch) or securities which the Adviser believes to be of similar quality to
these lower rated securities (commonly known as "junk bonds"). No more than 5%
of the Series' convertible securities, if any, will consist of securities in the
lower rated categories (rated Ba or lower by Moody's or BB or lower by S&P or by
Fitch) or securities which the Adviser believes to be of similar quality to
these lower rated securities. For a description of bond ratings, see Appendix A
to this Prospectus. It is not the Series' policy to rely exclusively on ratings
issued by established credit rating agencies but rather to supplement such
ratings with the Adviser's own independent and ongoing review of credit quality.
The Series' achievement of its investment objective may be more dependent on the
Adviser's own credit analysis than in the case of a fund investing in primarily
higher quality bonds. From time to time, the Series' management will exercise
its judgment with respect to the proportions invested in growth stocks,
income-producing securities or cash (including foreign currency) and cash
equivalents depending on its view of their relative attractiveness.
The Research Series may invest in ADRs and may also invest up to 20% (and
expects generally to invest between 10% and 20%) of its total assets in foreign
securities (not including ADRs). (See "Additional Risk Factors" below). In
addition, the Research Series may enter into forward foreign currency exchange
contracts. (See "Investment Techniques" below). The Series may also hold foreign
currency received in connection with investments in foreign securities or in
anticipation of purchasing foreign securities. (See "Additional Risk Factors"
below).
The Research Series may purchase securities that are not registered under the
Securities Act of 1933 (the "1933 Act"), including those that can be offered and
sold to "qualified institutional buyers" under Rule 144A under the 1933 Act.
MFS GROWTH WITH INCOME SERIES -- The Growth With Income Series' investment
objectives are to provide reasonable current income and long-term growth of
capital and income.
Under normal market conditions, the Growth With Income Series will invest at
least 65% of its assets in common stocks or securities convertible into common
stocks that are believed to have long-term prospects for growth and income. The
Series currently intends to invest in convertible securities only if such
securities are "investment grade" (rated Baa or better by Moody's or BBB or
better by S&P or Fitch) or securities which the Adviser believes to be of
similar quality to "investment grade" securities. The Series retains the right
to invest in convertible securities that are in the lower rated categories
(rated Ba or lower by Moody's or BB or lower by S&P or by Fitch) or securities
which the Adviser believes to be of similar quality to these lower rated
securities (commonly known as "junk bonds"). For a description of bond ratings,
see Appendix A to this Prospectus. However, the Series may hold its assets in
cash or invest in commercial paper, repurchase agreements or other forms of debt
securities either to provide reserves for future purchases of common stock or as
a defensive measure in certain economic environments.
The Growth With Income Series may invest in ADRs and may also invest up to 75%
(and expects generally to invest between 5% and 15%) of its total assets in
foreign securities (not including ADRs). The Series may invest in emerging
market securities and Brady Bonds (consistent with its foreign securities
limitations). The Series may hold foreign currency received in connection with
investments in foreign securities and in anticipation of purchasing foreign
securities. (See "Investment Techniques" and "Additional Risk Factors" below).
The Growth With Income Series may purchase securities on a "when-issued" or on a
"forward delivery" basis. The Series also may invest in zero coupon bonds. (See
"Investment Techniques" below).
The Growth With Income Series may write covered put and call options and
purchase put and call options on securities and on stock indices. The Series
also may enter into stock index and foreign currency futures contracts and
purchase and write options on such futures contracts. In addition, the Series
may enter into forward foreign currency exchange contracts and may purchase and
write options on foreign currencies. (See "Investment Techniques" below).
MFS TOTAL RETURN SERIES -- The Total Return Series' primary investment objective
is to obtain above-average income (compared to a portfolio entirely invested in
equity securities) consistent with the prudent employment of capital, and its
9
<PAGE>
secondary objective is to provide a reasonable opportunity for growth of capital
and income, since many securities offering a better than average yield may also
possess growth potential. Thus, in selecting securities for its portfolio, the
Series considers each of these objectives. Generally, at least 40% of the Total
Return Series' assets are invested in equity securities.
The Series' policy is to invest in a broad list of securities, including
short-term obligations. The list may be diversified not only by companies and
industries, but also by type of security. Fixed income securities and equity
securities (which include: common and preferred stocks; securities such as
bonds, warrants or rights that are convertible into stock; and depositary
receipts for those securities) may be held by the Series. Some fixed income
securities may also have a call on common stock by means of a conversion
privilege or attached warrants. The Total Return Series may vary the percentage
of assets invested in any one type of security in accordance with the Adviser's
interpretation of economic and money market conditions, fiscal and monetary
policy and underlying security values. The Series' debt investments may consist
of both "investment grade" securities (rated Baa or better by Moody's or BBB or
better by S&P or by Fitch) and securities that are unrated or are in the lower
rating categories (rated Ba or lower by Moody's or BB or lower by S&P or by
Fitch) (commonly known as "junk bonds") including up to 20% of its assets in
nonconvertible fixed income securities that are in these lower rating categories
and comparable unrated securities (see "Additional Risk Factors" below).
Generally, most of the Series' long-term debt investments will consist of
"investment grade" securities. See Appendix A to this Prospectus for a
description of these ratings. It is not the Series' policy to rely exclusively
on ratings issued by established credit rating agencies but rather to supplement
such ratings with the Adviser's own independent and ongoing review of credit
quality.
The Series may also invest in United States government securities, including:
(1) U.S. Treasury obligations, which differ only in their interest rates,
maturities and times of issuance: U.S. Treasury bills (maturities of one year or
less); U.S. Treasury notes (maturities of one to ten years); and U.S. Treasury
bonds (generally maturities of greater than ten years), all of which are backed
by the full faith and credit of the U.S. Government; and (2) obligations issued
or guaranteed by U.S. Government agencies, authorities or instrumentalities,
some of which are backed by the full faith and credit of the U.S. Treasury,
E.G., direct pass-through certificates of the Government National Mortgage
Association ("GNMA"); some of which are supported by the right of the issuer to
borrow from the U.S. Government, E.G., obligations of Federal Home Loan Banks;
and some of which are backed only by the credit of the issuer itself, E.G.,
obligations of the Student Loan Marketing Association (collectively, "U.S.
Government Securities"). The term "U.S. Government Securities" also includes
interests in trusts or other entities representing interests in obligations that
are backed by the full faith and credit of the U.S. Government or are issued or
guaranteed by the U.S. Government, its agencies, authorities or
instrumentalities.
The Total Return Series may invest in ADRs and may invest up to 20% (and expects
generally to invest between 10% and 20%) of its total assets in foreign
securities (not including ADRs). The Series may invest in emerging market
securities and Brady Bonds (consistent with its foreign securities
limitations).The Series may also hold foreign currency received in connection
with investments in foreign securities or in anticipation of purchasing foreign
securities. (See "Investment Techniques" and "Additional Risk Factors" below).
The Total Return Series may invest in mortgage pass-through securities, zero
coupon bonds, deferred interest bonds and PIK bonds. The Series also may
purchase securities on a "when-issued" or on a "forward delivery" basis. In
addition, the Series may invest in mortgage "dollar roll" transactions, loan
participations and corporate asset-backed securities. 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 Total Return Series may purchase securities that are not registered
under the 1933 Act, including those that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the 1933 Act. (See "Additional
Risks" below).
The Total Return Series may write covered put and call options on securities and
stock indices and purchase put and call options on securities and stock indices.
The Series may also enter into "yield curve" options and may purchase and write
options on foreign currencies. (See "Investment Techniques" below).
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The Total Return Series may enter into stock index and foreign currency futures
contracts and may purchase and write options on futures contracts. In addition,
the Series may enter into forward foreign currency exchange contracts. (See
"Investment Techniques" below).
MFS UTILITIES SERIES -- The Utilities Series' investment objective is to seek
capital growth and current income (income above that available from a portfolio
invested entirely in equity securities).
The Utilities Series will seek to achieve its objective by investing, under
normal circumstances, at least 65% (but up to 100% at the discretion of the
Adviser) of its assets in equity and debt securities of both domestic and
foreign companies in the utilities industry. Equity securities in which the
Series may invest include common stocks, preferred stocks, securities
convertible into common stocks or preferred stocks, and warrants to purchase
common or preferred stocks. At least 80% of the debt securities held by the
Series will be rated at the time of investment at least Baa by Moody's or BBB by
S&P or by Fitch or will be of comparable quality as determined by the Adviser
(see "Additional Risk Factors" below). See Appendix A to this prospectus for a
description of these ratings. The Series may also invest in debt and equity
securities of issuers in other industries, as discussed below, although under
normal circumstances not more than 35% of the Series' assets will be so
invested. In addition, the Series may hold a portion of its assets in cash and
money market instruments.
Companies in the utilities industry include (i) companies engaged in the
manufacture, production, generation, transmission, sale or distribution of
electric, gas or other types of energy, water or other sanitary services and
(ii) companies engaged in telecommunications, including telephone, cellular
telephones, telegraph, satellite, microwave, cable television and other
communications media (but not companies engaged in public broadcasting). The
Adviser deems a particular company to be in the utilities industry if, at the
time of investment, the Adviser determines that at least 50% of the company's
assets or revenues are derived from one or more of those industries.
The portion of the Utilities Series' assets invested in a particular type of
utility and in equity or debt securities will vary in light of changes in
interest rates, market conditions and economic conditions and other factors. The
Series may invest in foreign securities, including emerging market securities
and Brady Bonds and non-dollar denominated securities, although under normal
circumstances it is not expected that more than 35% of the Series' assets will
be so invested. The Series also may invest in ADRs. The Series may hold foreign
currency received in connection with investments in foreign securities and in
anticipation of purchasing foreign securities. (See "Investment Techniques" and
"Additional Risk Factors" below). For further information on the principal
sectors of the utilities industry in which the Series may invest, see Appendix
B.
Since the Utilities Series' investments are concentrated in utility securities,
the value of the Series' shares will be especially affected by factors peculiar
to the utilities industry, and may fluctuate more widely than the value of
shares of a fund that invests in a broader range of industries. The rates many
utility companies may charge their customers are controlled by governmental
regulatory commissions which may result in a delay in the utility company
passing along increases in costs to its customers. Furthermore, there is no
assurance that regulatory authorities will, in the future, grant rate increases
or that such increases will be adequate to permit the payment of dividends on
common stocks. Many utility companies, especially electric and gas and other
energy related utility companies, are subject to various uncertainties,
including: risks of increases in fuel and other operating costs; the high cost
of borrowing to finance capital construction during inflationary periods;
difficulty obtaining adequate returns on invested capital, even if frequent rate
increases are approved by public service commissions; restrictions on operations
and increased costs and delays as a result of environmental and nuclear safety
regulations; securing financing for large construction projects during an
inflationary period; difficulties of the capital markets in absorbing utility
debt and equity securities; difficulty in raising capital in adequate amounts on
reasonable terms in periods of high inflation and unsettled capital markets;
technological innovations which may render existing plants, equipment or
products obsolete; the potential impact of natural or man-made disasters;
difficulties in obtaining natural gas for resale or fuel for electric generation
at reasonable prices; coping with the general effects of energy conservation,
particularly in light of changing policies regarding energy; and special risks
associated with the construction and operation of nuclear power generating
facilities, including technical factors and costs, and the possibility that
federal, state and municipal government
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authorities may from time to time review existing requirements and impose
additional requirements. Certain utility companies, especially gas and telephone
utility companies, have in recent years been affected by increased competition,
which could adversely affect the profitability of such utility companies.
Furthermore, there are uncertainties resulting from certain telecommunications
companies' diversification into new domestic and international businesses as
well as agreements by many such companies linking future rate increases to
inflation or other factors not directly related to the active operating profits
of the enterprise.
Foreign utility companies are also subject to regulation, although such
regulations may or may not be comparable to those in the U.S. Foreign utility
companies may be more heavily regulated by their respective governments than
utilities in the U.S. and, as in the U.S., generally are required to seek
government approval for rate increases. In addition, since many foreign
utilities use fuel that causes more pollution than those used in the U.S., such
utilities may be required to invest in pollution control equipment to meet any
proposed pollution restrictions. Foreign regulatory systems vary from country to
country and may evolve in ways different from regulation in the U.S.
The Utilities Series is permitted to invest in securities of issuers that are
outside the utilities industry, although under normal circumstances not more
than 35% of the Series' assets will be so invested. Such investments may include
common stocks, debt securities (including municipal debt securities) and
preferred stocks and will be selected to meet the Series' investment objective
of both capital growth and current income. These securities may be issued by
either U.S. or non-U.S. companies. Some of these issuers may be in industries
related to the utilities industry and, therefore, may be subject to similar
risks.
Investments outside the utilities industry may also include U.S. Government
Securities, as that term is defined under "Investment Objectives and
Policies--MFS Total Return Series" above. When and if available, U.S. Government
securities may be purchased at a discount from face value. However, the Series
does not intend to hold such securities to maturity for the purpose of achieving
potential capital gains, unless current yields on the securities remain
attractive.
The Utilities Series may invest in mortgage pass-through securities that are
U.S. Government securities and in zero coupon bonds, collateralized mortgage
obligations, multiclass pass-through securities and corporate asset-backed
securities. The Series may purchase securities on a "when-issued" or on a
"forward delivery" basis. The Series may invest in indexed securities whose
value is linked to foreign currencies, interest rates, commodities, indices or
other financial indicators. In addition, the Series may enter into mortgage
"dollar roll" transactions. (See "Investment Techniques" below). The Series may
purchase securities that are not registered under 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 Utilities Series may write covered call and put options and purchase call
and put options on domestic and foreign stock indices. The Series also may enter
into futures contracts on fixed income securities, foreign currencies, indices
of foreign currencies, and indices of fixed income securities. In addition, the
Series may purchase and write options on such futures contracts. The Series may
enter into forward foreign currency exchange contracts and may purchase and
write options on foreign currencies. The Series also may hold foreign currency
received in connection with investments in foreign securities or in anticipation
of purchasing foreign securities. (See "Investment Techniques" below).
MFS HIGH INCOME SERIES -- The investment objective of the High Income Series is
to seek high current income by investing primarily in a professionally managed
diversified portfolio of fixed income securities, some of which may involve
equity features.
Fixed income securities offering the high current income sought by the High
Income Series normally include those fixed income securities which offer a
current yield above that generally available on debt securities in the three
highest rating categories of the recognized rating agencies (commonly known as
"junk bonds" if rated below the four highest categories of recognized rating
agencies). For a description of these rating categories, see Appendix A to this
Prospectus. (See "Additional Risk Factors" below). However, since available
yields and yield differentials vary over time, no specific level of income or
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yield differential can ever be assured. The dividends paid by the Series will
increase or decrease in relation to the income received by the Series from its
investments, which would in any case be reduced by the expenses of the Series
before such income is distributed to its shareholders.
Fixed income securities include preferred and preference stocks and all types of
debt obligations of both domestic and foreign issuers, such as bonds,
debentures, notes, equipment lease certificates, equipment trust certificates
(including interests in trusts or other entities representing such obligations),
conditional sales contracts, commercial paper and obligations issued or
guaranteed by the U.S. Government, any foreign government or any of their
respective political subdivisions, agencies or instrumentalities (including
obligations, such as repurchase agreements, secured by instruments).
Corporate debt securities may bear fixed, fixed and contingent, or variable
rates of interest and may involve equity features, such as conversion or
exchange rights or warrants for the acquisition of stock of the same or a
different issuer; participations based on revenues, sales or profits; or the
purchase of common stock in a unit transaction (where corporate debt securities
and common stock are offered as a unit). Under normal market conditions, not
more than 25% of the value of the total assets of the High Income Series will be
invested in equity securities, including common stocks, warrants and rights.
Fixed income securities that the High Income Series may invest in also include
zero coupon bonds, deferred interest bonds, PIK bonds, collateralized mortgage
obligations, multiclass pass-through securities, stripped mortgage-backed
securities, mortgage pass-through securities, corporate asset-backed securities,
loan participations and other direct indebtedness. The Series may enter into
mortgage "dollar roll" transactions. In addition, the Series may purchase
securities on a "when-issued" or on a "forward delivery" basis. (See "Investment
Techniques" below). The Series also may purchase securities that are not
registered under 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 High Income Series may invest in ADRs and may invest up to 35% (and expects
generally to invest up to 10%) of its total assets in foreign securities (not
including ADRs). The Series may invest in emerging market securities and Brady
Bonds (consistent with its foreign securities limitations). The Series may hold
foreign currency received in connection with investments in foreign securities
and in anticipation of purchasing foreign securities. The Series has authority
to invest up to 25% of its total assets in securities issued or guaranteed by
foreign governments or their agencies or instrumentalities. (See "Additional
Risk Factors" below).
The High Income Series may invest up to 40% of the value of its total assets in
each of the electric utility and telephone industries, but will not invest more
than 25% in either of those industries unless yields available for four
consecutive weeks in the four highest rating categories on new issue bonds in
such industry (issue size of $50 million or more) have averaged in excess of
105% of yields of new issue long-term industrial bonds similarly rated (issue
size of $50 million or more) and, in the opinion of the Adviser, the relative
return available from the electric utility or telephone industry and the
relative risk, marketability, quality and availability of securities of such
industry justifies such an investment.
When and if available, fixed income securities may be purchased at a discount
from face value. However, the High Income Series does not intend to hold such
securities to maturity for the purpose of achieving potential capital gains,
unless current yields on these securities remain attractive. From time to time
the Series may purchase securities not paying interest at the time acquired if,
in the opinion of the Adviser, such securities have the potential for future
income or capital appreciation.
The High Income Series may write covered put and call options and purchase put
and call options on domestic and foreign fixed income securities. The Series may
also enter into "yield curve" options. The Series may purchase and sell futures
contracts on fixed income securities or indices of such securities and may write
or purchase options on such futures contracts. The Series may invest in indexed
securities whose value is linked to foreign currencies, interest rates,
commodities, indices or other financial indicators. In addition, the Series may
enter into forward foreign currency exchange contracts
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and may purchase and write put and call options on foreign currencies. The
Series 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. (See "Investment Techniques" below).
MFS WORLD GOVERNMENTS SERIES -- The World Governments Series' investment
objective is to seek not only preservation, but also growth of capital, together
with moderate current income.
The World Governments Series seeks to achieve its investment objective 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 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 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 World Governments Series may write covered put and call options on
securities and purchase put and call options. The Series may enter into "yield
curve" options. The Series may also 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. (See "Investment Techniques" below).
The World Governments Series may invest in ADRs. The Series may also invest up
to 100% (and expects generally to invest up to 80%) of its total assets in
foreign securities (not including ADRs). The Series may invest in emerging
market securities and Brady Bonds (consistent with its foreign securities
limitations). 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 World Governments Series will purchase non-dollar securities denominated in
the currency of countries where the interest rate environment as well as the
general economic climate provide an opportunity for declining interest rates and
currency appreciation. If interest rates decline, such non-dollar securities
will appreciate in value. If the currency also appreciates against the dollar,
the total investment in such non-dollar securities would be enhanced further.
Conversely, a rise
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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
World Governments 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 World Governments 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.
MFS STRATEGIC FIXED INCOME SERIES -- The Strategic Fixed Income Series'
investment objective is to maximize current income.
The Strategic Fixed Income Series seeks to achieve its objective by investing
approximately one-third of its assets in each of the following sectors of the
fixed income securities markets: (i) U.S. Government securities, as that term is
defined in "Investment Objectives and Policies--MFS Total Return Series" above
and related options; (ii) debt securities issued by foreign governments, their
political subdivisions and other foreign issuers; and (iii) high yielding
corporate fixed income securities, some of which may involve equity features. By
following this investment strategy, the Series' net asset value is likely to be
more stable than that of a fund which invests in only one of these three fixed
income sectors. The Adviser believes that greater stability would occur because,
in general, each sector historically has produced results which are different
from each other sector, so that significant changes in one sector have tended to
offset changes in other sectors. During periods of unusual market or economic
conditions (such as a collapse of the high yield corporate fixed income market
or a general contraction in yields on foreign obligations), the Series may
invest up to 50% of its assets in any one sector and may choose not to invest in
a sector in order to achieve its investment objective. The Series expects that,
under normal market conditions, the maturity of its portfolio securities will
not exceed 30 years in the U.S. Government sector and 25 years in the corporate
fixed income sector. At least 80% of the Series' assets under normal
circumstances will be invested in fixed income securities.
The Strategic Fixed Income Series may invest in ADRs. The Series does not
currently intend to invest over 50% of its assets in foreign securities (not
including ADRs), but reserves the right to invest up to 67% of its assets in
foreign securities, (not including ADRs), depending on market conditions. The
Series may also invest in emerging market securities and Brady Bonds consistent
with its foreign securities limitations. These foreign securities shall include
securities issued by foreign governments considered stable by the Investment
Adviser and fixed income securities of foreign corporations. The foreign
government securities in which the Series intends to invest will generally
consist of obligations supported though their authority to levy taxes by
national, state or provincial governments or similar political subdivisions.
While one-third of the Series' assets normally will be invested in securities
issued abroad and denominated in foreign currencies ("non-dollar securities"),
that amount may vary depending on the relative yield of such securities, the
economies of the countries in which the investments are made and such countries'
financial markets, the interest rate climate of such countries and the
relationship of such countries' currencies to the U.S. dollar. Investments in
non-dollar securities and currency will be evaluated 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,
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interest rates are evaluated on the basis of differentials or anomalies that may
exist between different countries. The Series may hold foreign currency for
hedging purposes to protect against declines in the U.S. dollar value of foreign
securities held by the Series and against increases in the U.S. dollar value of
the foreign securities which the Series might purchase. The Series may speculate
in foreign currency 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. (See "Investment Techniques" and
"Additional Risk Factors" below.)
High yield corporate fixed income securities of both domestic and foreign
issuers (denominated either in U.S. dollars or foreign currency) in which the
Strategic Fixed Income Series may invest include preferred and preference stock
and all types of long- or short-term debt obligations, such as bonds,
debentures, notes, equipment lease certificates, equipment trust certificates,
conditional sales contracts and commercial paper (including obligations, such as
repurchase agreements, secured by such instruments). High yield corporate fixed
income securities held by the Series are ordinarily unrated or in the lower
rating categories of recognized rating agencies. (See "Additional Risk Factors"
below.) Corporate fixed income securities may also include zero coupon bonds,
deferred interest bonds and PIK bonds. Corporate fixed income securities may
involve equity features, such as conversion or exchange rights or warrants for
the acquisition of stock of the same or a different issuer; participations based
on revenues, sales or profits; or the purchase of common stock in a unit
transaction (where corporate debt securities and common stock are offered as a
unit).
The Strategic Fixed Income Series may invest in "when-issued" securities,
collateralized mortgage obligations, multiclass pass-through securities,
stripped mortgage-backed securities, corporate asset-backed securities, zero
coupon bonds, loan participations and other indebtedness and may enter into
mortgage "dollar roll" transactions. (See "Investment Techniques" below.) The
Series may purchase securities that are not registered under 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 Strategic Fixed Income Series may write covered put and call options on
securities and purchase put and call options on securities. 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 or
foreign currencies, 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 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. (See
"Investment Techniques" below.)
The Strategic Fixed Income Series may invest up to 40% of the value of its total
assets in each of the electric utility and telephone industries, but will not
invest more than 25% in either of those industries unless yields available for
four consecutive weeks in the four highest rating categories on new issue bonds
in such industry (issue size of $50 million or more) have averaged in excess of
105% of yields of new issue long-term industrial bonds similarly rated (issue
size of $50 million or more).
When the Investment Adviser believes that investing for defensive purposes is
appropriate, such as during periods of unusual market conditions, part or all of
the Strategic Fixed Income Series' assets may be temporarily invested in the
instruments set forth under "Short Term Investments for Defensive Purposes"
below as well as in foreign government securities of at least investment grade
level.
MFS BOND SERIES -- The Bond Series' primary investment objective is to provide
as high a level of current income as is believed to be consistent with prudent
investment risk. The Series' secondary objective is to protect shareholders'
capital.
Under normal market conditions, all of the Bond Series' investments will be made
in accordance with the following policies:
1. Approximately 80% of the Series' net assets will be invested in:
(a) non-convertible debt securities which have a rating within the four
highest grades as determined by S&P (AAA, AA, A or BBB) or Fitch or
Moody's (Aaa, Aa, A or Baa) and comparable unrated securities; for a
description of these rating categories, see Appendix A to this
Prospectus;
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(b) U.S. Government Securities, as defined in "Investment Objectives and
Policies--MFS Total Return Series" above;
(c) non-convertible debt securities issued or guaranteed by national or
state banks or bank holding companies (as defined in the Federal Bank
Holding Company Act) which, although not rated as a matter of policy
by S&P or Moody's, are considered by the Adviser to have an
investment quality equivalent to securities which may be purchased
under item (a) above; or
(d) commercial paper, repurchase agreements, cash or cash equivalents
(such as certificates of deposit and bankers' acceptances).
2. Up to 20% of the Series' total assets may be invested in non-convertible
debt securities which are not rated within the four highest grades of S&P
or Moody's or Fitch as described above and comparable unrated securities
(commonly known as "junk bonds") and in convertible debt securities and
preferred stocks. These convertible debt securities and preferred stocks
may be unrated or rated below the four highest grades of S&P and Moody's
or Fitch described above. For a description of these ratings see Appendix
A to this Prospectus. For a discussion of the risks of investing in these
securities, see "Additional Risks" below.
Although the Bond Series may purchase Canadian and other foreign securities,
under normal market conditions, it may not invest more than 10% of its assets in
non-dollar denominated non-Canadian foreign securities, including emerging
markets securities and Brady Bonds.. The Series may hold foreign currency
received in connection with investments in foreign securities or in anticipation
of purchasing foreign securities. (See "Investment Techniques" and "Additional
Risk Factors" below).
The Bond Series may not directly purchase common stocks. However, the Series may
retain up to 10% of its total assets in common stocks which were acquired either
by conversion of fixed income securities or by the exercise of warrants attached
thereto.
U.S. Government Securities also include interests in trusts or other entities
representing interests in obligations that are issued or guaranteed by the U.S.
Government, its agencies, authorities or instrumentalities.
The Bond Series may invest in corporate asset-backed securities, mortgage
pass-through securities, zero coupon bonds, deferred interest bonds, PIK bonds,
collateralized mortgage obligations, multiclass pass-through securities,
stripped mortgage-backed securities, "when-issued" securities and mortgage
"dollar roll" transactions. (See "Investment Techniques" below). 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 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 Bond Series may write covered put and call options and purchase put and call
options on domestic and foreign fixed income securities. The Series may also
enter into "yield curve" options. The Bond Series may purchase and sell futures
contracts on domestic or foreign fixed income securities or indices of such
securities as well as options on such futures contracts. The Series may also
enter into forward foreign currency exchange contracts and options on foreign
currency. In addition, the Series may enter into interest rate swaps, currency
swaps and other types of available swap agreements. The Series also may purchase
caps, floors and collars. (See "Investment Techniques" below).
MFS LIMITED MATURITY SERIES -- The Limited Maturity Series' primary investment
objective is to provide as high a level of current income as is believed to be
consistent with prudent investment risk. The Series' secondary objective is to
protect shareholders' capital.
In seeking to achieve its investment objectives, the Limited Maturity Series
invests, under normal market conditions, substantially all its assets in the
following securities:
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1. Debt securities (including corporate asset-backed securities and
mortgage pass-through securities discussed below) which have a rating
within the four highest grades as determined by S&P or Fitch (AAA, AA, A
or BBB) or Moody's (Aaa, Aa, A or Baa) and comparable unrated securities;
for a description of these rating categories, see Appendix A to this
Prospectus;
2. U.S. Government Securities, as defined in "Investment Objectives and
Policies--MFS Total Return Series" above; or
3. Commercial paper, repurchase agreements, cash or cash equivalents (such
as certificates of deposit and bankers' acceptances).
The Limited Maturity Series will only invest in securities rated within the four
highest grades, as determined by S&P or Moody's or Fitch, and comparable unrated
securities. In addition, the dollar weighted average quality of the Series will
be within the three highest grades, as determined by S&P or Moody's or Fitch (or
the Adviser in the case of unrated securities).
Under normal market conditions, substantially all the securities in the Series'
portfolio will have remaining maturities of five years or less or estimated
remaining average lives of five years or less. In the case of mortgage-backed
and corporate asset-backed securities as well as collateralized mortgage
obligations, the average life is likely to be substantially shorter than the
stated final maturity as a result of unscheduled principal prepayments.
For purposes of the foregoing investment policy, securities having a certain
maturity will be deemed to include securities with an equivalent "duration" of
such securities. "Duration" is a commonly used measure of the longevity of a
debt instrument that takes into account the full stream of payments received on
a debt instrument, including both interest and principal payments, based on
their present values. A debt instrument's duration is derived by discounting
principal and interest payments to their present value using the instrument's
current yield to maturity and taking the dollar-weighted average time until
those payments will be received. Contractual rights to dispose of a security
will be considered in calculating duration because such rights limit the period
during which the Series bears a market risk with respect to the security.
The Limited Maturity Series may invest in U.S. Government Securities as defined
under "Investment Objectives and Policies--MFS Total Return Series" above.
The Limited Maturity Series may invest up to 25% of its assets in dollar
denominated foreign debt securities which may include emerging markets
securities and Brady Bonds.(See "Investment Techniques" and "Additional Risk
Factors" below). The Series may invest in mortgage pass-through securities, zero
coupon bonds, collateralized mortgage obligations, corporate asset-backed
securities and multiclass pass-through securities. In addition, the Series may
enter into mortgage "dollar roll" transactions and may purchase securities on a
"when-issued" or on a "forward delivery" basis. (See "Investment Techniques"
below). The Series also may purchase securities that are not registered under
the 1933 Act but can be offered and sold to "qualified institutional buyers"
under Rule 144A under the 1933 Act.
The Limited Maturity Series may purchase and sell futures contracts on fixed
income securities or indices of such securities. In addition, the Series may
enter into interest rate swaps, currency swaps and other available swap
agreements. The Series also may purchase and sell caps, floors and collars. (See
"Investment Techniques" below).
MFS MONEY MARKET SERIES -- The Money Market Series' investment objective is to
seek as high a level of current income as is considered consistent with the
preservation of capital and liquidity.
The Money Market Series seeks to achieve its investment objective by investing
primarily (I.E., at least 80% of its assets under normal circumstances) in the
following instruments:
(a) U.S. Government Securities, as defined in "Investment Objectives and
Policies--MFS Total Return Series" above (including repurchase agreements
collateralized by such securities);
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(b) obligations of banks (including certificates of deposit and bankers'
acceptances) which at the date of investment have capital, surplus, and
undivided profits (as of the date of their most recently published financial
statements) in excess of $100,000,000; and obligations of other banks or
savings and loan associations if such obligations are insured by the Federal
Deposit Insurance Corporation, provided that not more than 10% of the
Series' total assets will be invested in such insured obligations;
(c) commercial paper which at the date of investment is rated A-1 by S&P
or by Fitch or P-1 by Moody's or, if not rated, is issued or guaranteed as
to payment of principal and interest by companies which at the date of
investment have an outstanding debt issue rated AA or better by S&P or by
Fitch or Aa or better by Moody's (for a description of these ratings, see
Appendix A to this Prospectus); and
(d) short-term (maturing in 13 months or less) corporate obligations
which at the date of investment are rated AA or better by S&P or by Fitch or
Aa or better by Moody's.
The Money Market Series may also invest up to 20% of its total assets in debt
instruments not specifically described in (a) through (d) above, provided that
such instruments are deemed by the Trustees of the Trust to be of comparable
high quality and liquidity and provided that such investments are in accordance
with applicable law. The Money Market Series may invest its assets in the
securities of foreign issuers and in the securities of foreign branches of U.S.
banks such as negotiable certificates of deposit (Eurodollars). Since the
portfolio of the Series may contain such securities, an investment in the Series
may involve a greater degree of risk than an investment in a fund which invests
only in debt obligations of U.S. domestic issuers, due to the possibility that
there may be less publicly available information, more volatile markets, less
securities regulation, less favorable tax provisions, war or expropriation. (See
"Additional Risk Factors" below).
In addition, the Money Market Series may invest up to 75% of its assets in all
finance companies as a group, all banks and bank holding companies as a group
and all utility companies as a group when, in the opinion of management, yield
differentials and money market conditions suggest such investments are advisable
and when cash is available for such investments and instruments are available
for purchase which fulfill the Series' objective in terms of quality and
marketability.
All the assets of the Money Market Series will be invested in obligations which
mature in 13 months or less and substantially all of these investments will be
held to maturity; however, securities collateralizing repurchase agreements may
have maturities in excess of 13 months. The Money Market Series will, to the
extent feasible, make portfolio investments primarily in anticipation of or in
response to changing economic and money market conditions and trends. Currently,
the dollar weighted average maturity of the investments of the Series may not
exceed 90 days.
5. INVESTMENT TECHNIQUES
LENDING OF PORTFOLIO SECURITIES: Each of the Series (except the Money Market
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.
EMERGING MARKETS SECURITIES: Consistent with each of the Growth Series, Growth
With Income Series, Total Return Series, Utilities Series, High Income Series,
World Governments Series, Strategic Fixed Income Series, Bond Series and Limited
Maturity Series respective objectives, each fund may invest in securities of
issuers (which may include foreign governments and their subdivisions, agencies
or instrumentalities) located in emerging markets. For the purposes of each
Series, 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
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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: Each of the Utilities Series, the High Income Series, the Emerging
Growth Series, the Growth with Income Series, the Total Return Series, the
Strategic Fixed Income Series, the Bond Series, the Limited Maturity Series, and
the World Governments 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: Each of 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, a 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, each
Series has adopted certain procedures intended to minimize any risk.
"WHEN-ISSUED" SECURITIES: Each of the Series (except the Research Series, the
World Governments Series and the Money Market 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, a Series does not pay for such securities until received, and does not
start earning interest on the securities until the contractual settlement date.
While awaiting delivery of securities purchased on such bases, a Series will
normally invest in cash, cash equivalents and high grade debt securities.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: Each of the Total Return Series, the Bond
Series, the Strategic Fixed Income Series, the World Governments Series, the
Limited Maturity Series, the High Income Series and the Utilities Series may
enter into mortgage "dollar roll" transactions with selected banks and
broker-dealers pursuant to which a 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. A 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
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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.
CORPORATE ASSET-BACKED SECURITIES: Each of the Emerging Growth Series, the Total
Return Series, the Bond Series, the Limited Maturity Series, the High Income
Series, the Strategic Fixed Income Series and the Utilities 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 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. A 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.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS: Each of the Total
Return Series, the Bond Series, the Strategic Fixed Income Series, the World
Governments Series, the Growth With Income Series, the Limited Maturity Series,
the High Income Series and the Utilities Series may invest in zero coupon bonds.
The Total Return Series, the Bond Series and the High Income Series may also
invest in deferred interest bonds and PIK bonds. Zero coupon and deferred
interest bonds are debt obligations which are issued or purchased at a
significant discount from face value. The discount approximates the total amount
of interest the bonds will accrue and compound over the period until maturity or
the first interest payment date at a rate of interest reflecting the market rate
of the security at the time of issuance. While zero coupon bonds do not require
the periodic payment of interest, deferred interest bonds provide for a period
of delay before the regular payment of interest begins. PIK bonds are debt
obligations which provide that the issuer thereof may, at its option, pay
interest on such bonds in cash or in the form of additional debt obligations.
Such investments benefit the issuer by mitigating its need for cash to meet debt
service, but also require a higher rate of return to attract investors who are
willing to defer receipt of such cash. Such investments may experience greater
volatility in market value due to changes in interest rates than debt
obligations which make regular payments of interest. Each 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.
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COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES: Each
of the Bond Series, the Strategic Fixed Income Series, the World Governments
Series, the Limited Maturity Series, the High Income Series and the Utilities
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 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"). Each of these 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 a Series invests,
the investment may be subject to a greater or lesser risk of prepayments than
other types of mortgage-related securities.
Each of the Bond Series, the Strategic Fixed Income Series, the World
Governments Series, the Limited Maturity Series, the High Income Series and the
Utilities 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: Each of the Bond Series, the Strategic
Fixed Income Series, the World Governments Series and the High Income 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.
LOAN PARTICIPATIONS AND OTHER DIRECT INDEBTEDNESS: The Emerging Growth Series,
the Total Return Series, the High Income Series and the Strategic Income Series
may invest a portion of its assets in "loan participations" and other direct
indebtedness. By purchasing a loan participation, a 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. A 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 a Series may involve revolving credit
facilities or other standby financing commitments which obligate a 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
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result, a 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.
MORTGAGE PASS-THROUGH SECURITIES: Each of the Total Return Series, the Bond
Series, the World Governments Series, the Limited Maturity Series and the High
Income Series may invest in mortgage pass-through securities. Mortgage
pass-through securities are securities representing interests in "pools" of
mortgage loans. The Utilities Series may invest in mortgage pass-through
securities that are securities issued or guaranteed as to principal and interest
by the U.S. Government, its agencies, authorities or instrumentalities. 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: Each of the Total Return Series, the High Income Series, the
Bond Series, the Utilities Series and the World Governments 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 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, each of the High Income Series, the World Governments
Series, the Strategic Fixed Income Series, the Bond Series and the Limited
Maturity 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 a Series with another party of cash payments based upon
different interest rate indexes, currencies, and other prices or rates, such as
the value of mortgage prepayment rates. For example, in the typical interest
rate swap, a Series might exchange a sequence of cash payments based on a
floating rate index for cash payments based on a fixed rate. Payments made by
both parties to a swap transaction are based on a principal amount determined by
the parties.
Each of the High Income Series, the World Governments Series, the Strategic
Fixed Income Series, the Bond Series and the Limited Maturity Series may also
purchase and sell caps, floors and collars. In a typical cap or floor agreement,
one party agrees to make payments only under specified circumstances, usually in
return for payment of a fee by the counterparty. For example, the purchase of an
interest rate cap entitles the buyer, to the extent that a specified index
exceeds a predetermined interest rate, to receive payments of interest on a
contractually-based principal amount from the counterparty selling such interest
rate cap. The sale of an interest rate floor obligates the seller to make
payments to the extent that a specified interest rate falls below an agreed-upon
level. A collar arrangement combines elements of buying a cap and selling a
floor.
Swap agreements will tend to shift a Series' investment exposure from one type
of investment to another. For example, if a Series agreed to exchange payments
in dollars for payments in foreign currency, in each case based on a fixed rate,
the swap agreement would tend to decrease a Series' exposure to U.S. interest
rates and increase its exposure to foreign currency and interest rates. Caps and
floors have an effect similar to buying or writing options. Depending on how
they are used, swap agreements may increase or decrease the overall volatility
of a Series' investments and its share price and yield.
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Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on a
Series' performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. A Series may also suffer losses if
it is unable to terminate outstanding swap agreements or reduce its exposure
through offsetting transactions.
Swaps, caps, floors and collars are highly specialized activities which involve
certain risks. See the Statement of Additional Information for further
information on, and the risks involved in, these activities.
OPTIONS ON SECURITIES: Each of the Emerging Growth Series, the Growth Series,
the Total Return Series, the Bond Series, the Strategic Fixed Income Series, the
World Governments Series, the Growth With Income Series and the High Income
Series may write (sell) covered put and call options and purchase put and call
options on securities. Each of these 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 a 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. Series may also write combinations of put
and call options on the same security, known as "straddles." Such transactions
can generate additional premium income but also present increased risk.
By writing a call option on a security, a Series limits its opportunity to
profit from any increase in the market value of the underlying security, since
the holder will usually exercise the call option when the market value of the
underlying security exceeds the exercise price of the call. However, the Series
retains the risk of depreciation in value of securities on which it has written
call options.
Each of these 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 a 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.
In certain instances, the Strategic Fixed Income Series and the Emerging Growth
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: Each of the Emerging Growth Series, the Growth Series,
the Total Return Series, the Growth With Income Series and the Utilities Series
may write (sell) covered call and put options and purchase call and put options
on stock indices. Each of these 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 a 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. A 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 a
Series for the writing of the option, less related transaction costs. In
addition, if the value of an underlying index moves adversely to a 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.
24
<PAGE>
Each of these 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. A
Series' possible loss in either case will be limited to the premium paid for the
option, plus related transaction costs.
"YIELD CURVE" OPTIONS: Each of the Growth Series, the Total Return Series, the
Bond Series, the Strategic Fixed Income Series, the World Governments Series and
the High Income 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. 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 a 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: Each of the Total Return
Series, the Bond Series, the Strategic Fixed Income Series, the World
Governments Series, the Limited Maturity Series, the High Income Series and the
Utilities 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. Each of these Series may also purchase
and write options on such Futures Contracts ("Options on Futures Contracts").
Each of the Emerging Growth Series, the Growth Series, the Total Return Series
and the Growth With Income Series may purchase and sell Futures Contracts on
stock indices, while the Emerging Growth Series, the Growth Series, the Total
Return Series, the Strategic Fixed Income Series, the World Governments Series,
the Growth With Income Series and the Utilities Series may purchase and sell
Futures Contracts on foreign currencies or indices of foreign currencies. Each
of these 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. Each 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 a
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. A Series will not enter into any Futures Contract if immediately
thereafter the value of all open positions in Futures Contracts held by such
Series would exceed 50% of the value of its total assets.
Purchases of Options on Futures Contracts may present less risk in hedging a
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, a Series may suffer a loss on the transaction.
Futures Contracts and Options on Futures Contracts that are entered into by a
Series will be traded on U.S. and foreign exchanges.
FORWARD CONTRACTS: Each of the Emerging Growth Series, the Growth Series, the
Research Series, the Total Return Series, the Bond Series, the Strategic Fixed
Income Series, the World Governments Series, the Growth With Income Series, the
High Income Series and the Utilities 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"). Each of these Series
may enter into Forward
25
<PAGE>
Contracts for hedging purposes and (except for the Bond Series and the High
Income Series) for non-hedging purposes (I.E., speculative purposes). By
entering into transactions in Forward Contracts for hedging purposes, a 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, a
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. A 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. A 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. Each of these
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: Each of the Emerging Growth Series, the Growth
Series, the Total Return Series, the Bond Series, the Strategic Fixed Income
Series, the World Governments Series, the Growth With Income Series, the High
Income Series and the Utilities 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 a 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 a Series' position, it may forfeit the entire amount of the premium paid for
the option plus related transaction costs. A 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, a Series may hold such currencies
for an indefinite period of time.
6. ADDITIONAL RISK FACTORS
OPTIONS, FUTURES CONTRACTS AND FORWARD CONTRACTS: Although certain 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 a Series' hedging strategy unsuccessful and could result in losses.
Certain 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 a 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 a
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.
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<PAGE>
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.
LOWER RATED BONDS: Each of the Emerging Growth Series, the Research Series, the
Total Return Series, the Bond Series, the Limited Maturity Series, the Strategic
Fixed Income Series, the High Income Series and the Utilities Series may invest
in fixed income securities and, in the case of the Growth Series and the Growth
with Income Series, convertible securities rated Baa by Moody's or BBB by S&P or
Fitch and comparable unrated securities. 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.
Each of these Series (except the Limited Maturity Series) may also invest in
securities rated Ba or lower by Moody's or BB or lower by S&P or 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 a Series' lower
rated high yielding fixed income securities are paid primarily because of the
increased risk of loss of principal and income, arising from such factors as the
heightened possibility of default or bankruptcy of the issuers of such
securities. Due to the fixed income payments of these securities, a 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 a 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 Limited Maturity Series may invest in dollar-denominated
foreign debt securities. The Money Market Series may invest in securities of
foreign issuers and in securities of foreign branches of U.S. banks such as
negotiable certificates of deposit (Eurodollars). The remaining 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. All of the
Series except the Limited Maturity Series and the Money Market 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
27
<PAGE>
rate. Such 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: Each of the Series except the Limited Maturity
Series and the Money Market 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: Each of the Growth Series, Growth With Income
Series, Total Return Series, Utilities Series, World Governments Series,
Strategic Fixed Income Series, Bond Series and Limited Maturity 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 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: Each of the Series (except the Growth Series and the
Growth With Income 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 (not more than 10% of its net
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<PAGE>
assets in the case of the Money Market Series) 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 each 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 a Series to the
extent that qualified institutional buyers become for a time uninterested in
purchasing Rule 144A securities held in the Fund's portfolio.
NON-DIVERSIFICATION: Each of the World Governments Series, the Strategic Fixed
Income Series and the Utilities 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.
-------------------
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 each 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 C to
this Prospectus for a description of U.S. Government obligations and certain
short-term investments.
PORTFOLIO TRADING
Each 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.
Each 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, a 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 each Series
(except the Money Market Series) is expected to have a portfolio turnover rate
of over 100%, transaction costs incurred by each such Series and the realized
capital gains and losses of each such 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 each 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.
-------------------
29
<PAGE>
The Statement of Additional Information includes a discussion of other
investment policies and listing of specific investment restrictions which govern
the investment policies of each 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.
7. MANAGEMENT OF THE SERIES
The Trust's Board of Trustees, as part of its overall management responsibility,
oversees various organizations responsible for each Series' day-to-day
management.
INVESTMENT ADVISER -- MFS manages each Series pursuant to an Investment Advisory
Agreement with the Trust on behalf of each 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. Subject to
such policies as the Trustees may determine, MFS makes investment decisions for
each Series. For its services and facilities, MFS receives a management fee,
computed and paid monthly, in an amount equal to the following annual rates of
the average daily net assets of each Series:
<TABLE>
<CAPTION>
PERCENTAGE OF THE
AVERAGE DAILY NET
ASSETS
SERIES OF EACH SERIES
- --------------------------------------------------------------------------------------------- ----------------------
<S> <C>
Emerging Growth Series....................................................................... 0.75%
Growth Series................................................................................ 0.75%
Research Series.............................................................................. 0.75%
Growth With Income Series.................................................................... 0.75%
Total Return Series.......................................................................... 0.75%
Utilities Series............................................................................. 0.75%
High Income Series........................................................................... 0.75%
World Governments Series..................................................................... 0.75%
Strategic Fixed Income Series................................................................ 0.75%
Bond Series.................................................................................. 0.60%
Limited Maturity Series...................................................................... 0.55%
Money Market Series.......................................................................... 0.50%
</TABLE>
For the World Governments 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.
The identity and background of the portfolio manager for each Series is set
forth below. Each portfolio manager has acted in that capacity since the
commencement of investment operations of each Series.
1. John W. Ballen, a Senior Vice President of the Adviser, is the Emerging
Growth Series' portfolio manager. Mr. Ballen has been employed by the
Adviser since 1984.
2. George F. Bennett, Jr., a Senior Vice President of the Adviser, is the
Growth Series' portfolio manager. Mr. Bennett has been employed by the
Adviser since 1969.
3. The Research Series is currently managed by a committee comprised of various
equity research analysts employed by the Adviser.
4. Kevin R. Parke and John D. Laupheimer, Jr., a Senior Vice President and a
Vice President of the Adviser, respectively, is the Growth With Income
Series' portfolio managers. Mr. Parke has been employed by the Adviser since
1985, and Mr.
Laupheimer has been employed by the Adviser since 1981.
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<PAGE>
5. Richard E. Dahlberg, a Senior Vice President of the Adviser, is the Total
Return Series' portfolio manager. Mr. Dahlberg has been employed by the
Adviser since 1968.
6. Maura A. Shaughnessy, a Vice President of the Adviser, is the Utilities
Series' portfolio manager. Ms. Shaughnessy has been employed by the Adviser
since 1991. Prior to 1991, Ms. Shaughnessy served as Equity Analyst at
Harvard Management Company.
7. Joan S. Batchelder, a Senior Vice President of the Adviser, is the High
Income Series' portfolio manager. Ms. Batchelder has been employed by the
Adviser since 1984.
8. Stephen C. Bryant, a Senior Vice President of the Adviser, is the World
Governments Series' portfolio manager.
Mr. Bryant has been employed by the Adviser since 1987.
9. James Swanson, a Senior Vice President of the Adviser, is the Strategic
Fixed Income Series' portfolio manager.
Mr. Swanson has been employed by the Adviser since 1985.
10. Geoffrey L. Kurinsky, a Senior Vice President of the Adviser, is the Bond
Series', Limited Maturity Series' and the Money Market Series' portfolio
manager. Mr. Kurinsky has been employed by the Adviser since 1987.
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 any
Series. The purchase by the Adviser of shares of a Series may have the effect of
lowering that Series' expense ratio, while the redemption by the Adviser of
shares of a Series may have the effect of increasing that Series' expense ratio.
DISTRIBUTOR -- MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary of
MFS, is the distributor of shares of each Series and also serves as distributor
for certain of the other mutual funds managed by MFS.
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<PAGE>
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 each Series.
8. INFORMATION CONCERNING SHARES OF EACH SERIES
PURCHASES AND REDEMPTIONS
The separate accounts of the Participating Insurance Companies place orders to
purchase and redeem shares of each 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 each 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 Series shares.
The offering of shares of any Series may be suspended for a period of time and
each 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 a Series. The Trust may suspend the right of
redemption of shares of any 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 any Series, orderly portfolio
management could be disrupted to the potential detriment of such Contract.
NET ASSET VALUE
The net asset value per share of each 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 a Series' portfolio are determined on the basis of their
market or other fair value (amortized cost value in the case of the Money Market
Series), 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 each Series' (except the Money Market 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, each 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, a 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 a Series'
investment restrictions, premiums from options written), over a longer term,
rather than its actual net investment income for the period.
32
<PAGE>
Substantially all of the Money Market Series' net investment income for any
calendar year is declared as dividends daily and paid to its shareholders as
dividends on a monthly basis. Generally, those dividends are distributed on the
last business day of the month in the form of additional shares of the Money
Market Series at the rate of one share (and fraction thereof) for each dollar
(and fraction thereof) of dividend income or, at the election of the
shareholder, in cash. Shares purchased become entitled to dividends declared as
of the first day following the date of investment.
Shareholders of any of the Series may elect to receive dividends and capital
gain distributions in either cash or additional shares.
TAX STATUS
Each Series of the Trust is treated as a separate entity for federal income tax
purposes. In order to minimize the taxes each Series would otherwise be required
to pay, each 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 any of 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, each 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 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 each Series are entitled
to vote separately to approve investment advisory agreements or changes in
investment restrictions with respect to that Series, but shares of all Series
vote together in the election of Trustees and selection of accountants.
Additionally, each Series will vote separately on any other matter that affects
solely that 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.
Each share of a 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.
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 Boylston Street, Boston, Massachusetts 02116-3740, was the owner of
approximately 30% of the outstanding shares of the World Governments Series.
33
<PAGE>
PERFORMANCE INFORMATION
Each Series' performance may be quoted in advertising in terms of yield and,
except for the Money Market Series, total return. Performance is based on
historical results and is not intended to indicate future performance.
Performance quoted for a Series includes the effect of deducting that Series'
expenses, but may not include charges and expenses attributable to any
particular insurance product. Excluding these charges from quotations of a
Series' performance has the effect of increasing the performance quoted.
Performance for a 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.)
MONEY MARKET SERIES: From time to time, quotations of the Money Market Series'
"yield" and "effective yield" may be included in advertisements, sales
literature or reports to shareholders or prospective investors. The yield of the
Money Market Series refers to the net investment income generated by the Series
over a specified seven-day period (the ending date of which will be stated).
Included in "net investment income" is the amortization of market premium or
accretion of market and original issue discount. This income is then
"annualized." That is, the amount of income generated by the Series during that
week is assumed to be generated during each week over a 365 day period and is
shown as a percentage. The effective yield is expressed similarly but, when
annualized, the income earned by an investment in the Series is assumed to be
reinvested. The effective yield will be slightly higher than the yield because
of the compounding effect of this assumed reinvestment.
OTHER SERIES: From time to time, quotations of a Series' total return and yield
may be included in advertisements, sales literature or reports to shareholders
or prospective investors. The total return of a 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 a Series. Cumulative total return
represents the cumulative change in value of an investment in a Series. Both
will assume that all dividends and capital gains distributions were reinvested.
The yield of a Series refers to net investment income generated by a 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 each 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 each Series; fees and expenses of
independent auditors, of legal counsel, and of any transfer agent, registrar or
dividend disbursing agent of each 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 each Series, including
safekeeping of funds and securities and maintaining required books and accounts;
expenses of calculating the net asset value of shares of each Series; and
expenses of shareholder meetings. Expenses relating to the issuance,
registration and qualification of shares of each Series and the preparation,
printing and mailing of prospectuses are borne by each 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.
34
<PAGE>
MFS has agreed to pay until December 31, 2004 the expenses of the World
Governments 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 World Governments 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 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 World Governments 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.
MFS has agreed to pay expenses of each of the Series (except the World
Governments Series and the Money Market Series) such that the respective Series'
aggregate operating expenses shall not exceed, on an annualized basis, 1.00% of
the average daily net assets of the respective Series from November 2, 1994
through December 31, 1996, 1.25% of the average daily net assets of the
respective Series from January 1, 1997 through December 31, 1998, and 1.50% of
the average daily net assets of the respective 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 each 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 respective 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
respective Series would not exceed, on an annualized basis, 1.00% of the average
daily net assets of the respective Series through December 31, 1996, 1.25% of
the average daily net assets of the respective Series from January 1, 1997
through December 31, 1998, and 1.50% of the average daily net assets of the
respective Series from January 1, 1999 through December 31, 2004. This expense
reimbursement agreement terminates for each such Series on the earlier of the
date on which payments made thereafter by the respective Series equal the prior
payment of such reimbursable expenses by MFS or December 31, 2004.
MFS has agreed to pay until December 31, 2004, expenses of the Money Market
Series (the "Series") such that the Series' aggregate operating expenses shall
not exceed, on an annualized basis, 0.60% of the average daily net assets of the
Series; 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 the average daily net assets of the Series 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, 0.60% of its average daily net assets. This expense
reimbursement terminates for the Series on the earlier of the date on which
payments made thereunder by such Series equal the prior payments of such
reimbursable expenses by MFS or December 31, 2004.
SHAREHOLDER COMMUNICATIONS
Owners of Contracts issued by Participating Insurance Companies for which shares
of one or more 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.
35
<PAGE>
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 each of the Series, including
information related to: (i) the investment policies and restrictions of each
Series; (ii) the Trustees, officers and investment adviser of the Trust; (iii)
portfolio transactions; (iv) the shares of each Series, including rights and
liabilities of shareholders; (v) the method used to calculate yield and total
rate of return quotations of each Series; (vi) the determination of net asset
value of shares of each Series; and (vii) certain voting rights of shareholders
of each Series.
36
<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-
VARIABLE
INSURANCE
TRUST
PROSPECTUS
MAY 1, 1995
MFS-REGISTERED TRADEMARK- VARIABLE INSURANCE TRUST
500 Boylston Street, Boston, MA 02116
------------------------
<PAGE>
<TABLE>
<S> <C>
STATEMENT OF
MFS-REGISTERED TRADEMARK- VARIABLE ADDITIONAL
INSURANCE TRUST-SM- INFORMATION
MAY 1,
1995
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
-----
<C> <S> <C>
1. General Information and Definitions.................................................. 2
2. Investment Techniques................................................................ 2
3. Investment Restrictions.............................................................. 17
4. Management of the Trust.............................................................. 18
Trustees............................................................................. 18
Officers............................................................................. 18
Investment Adviser................................................................... 19
Investment Advisory Agreement........................................................ 19
Custodian............................................................................ 19
Shareholder Servicing Agent.......................................................... 19
Distributor.......................................................................... 19
5. Portfolio Transactions and Brokerage Commissions..................................... 20
6. Tax Status........................................................................... 21
7. Net Income and Distributions......................................................... 21
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- 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 Trust's
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 Variable Insurance Trust (the "Trust") is a professionally managed open-end
management investment company consisting of twelve separate series, each of
which is a segregated, separately managed portfolio. The MFS Emerging Growth
Series (the "Emerging Growth Series"), the MFS research Series (the "Research
Series"), and the MFS High Income Series (the "High Income Series") and
diversified series of the Trust. The MFS World Governments Series (the "World
Governments Series") is a non-diversified series of the Trust. Additional series
may be created by the Trustees from time to time. Shares of each 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 ("Contracts"). Each Series offers its shares using a joint prospectus
dated May 1, 1995, as supplemented or amended from time to time (the
"Prospectus").
Each 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: Each of 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. A Series would have
the right to call a loan and obtain the securities loaned at any time on
customary industry settlement notice (which will 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 a Series' net assets.
REPURCHASE AGREEMENTS: Each of 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 a 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, a Series will have the right to liquidate the securities. If at the time
the Series is contractually entitled to exercise its right to liquidate the
securities, the seller is subject to a proceeding under the bankruptcy laws or
its assets are otherwise subject to a stay order, the Series' exercise of its
right to liquidate the securities may be delayed and result in certain losses
and costs to the Series. Each Series has adopted and follows procedures which
are intended to minimize the risks of repurchase agreements. For example, each
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 a Series has the right to make margin
calls at any time if the value of the securities falls below the agreed upon
margin.
"WHEN-ISSUED" SECURITIES: Each of the Emerging Growth Series and High Income
Series may purchase securities on a "when-issued" or on a "forward delivery"
basis. Although a Series is not limited as to the amount of these securities for
which it may have commitments to purchase on such bases, it is expected that
under normal circumstances the Series will not commit more than 20% of its total
assets to such purchases. When a Series commits to purchase these securities on
a "when-issued" or "forward delivery" basis, it will set up procedures
consistent with the General Statement of Policy of the Securities and Exchange
Commission (the "SEC") concerning such purchases. Since that policy currently
recommends that an amount of the Series' assets equal to the amount of the
purchase be held aside or segregated to be used to pay for the commitment, the
Series will always have cash, short-term money market instruments or high
quality debt securities sufficient to cover any commitments or to limit any
potential risk. Although no Series intends to make such purchases for
speculative purposes and each Series intends to adhere to the provisions of the
SEC policy, purchases of securities on such bases may involve more risk than
other types of purchases. For example, a Series may have to sell assets which
have been set aside in order to meet redemptions. Also, if a Series determines
it is necessary to sell the "when-issued" or "forward delivery" securities
before delivery, the Series may incur a loss because of market fluctuations
since the time the commitment to purchase such securities was made.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: Each of the World Governments Series and
the High Income Series may enter into mortgage "dollar roll" transactions
pursuant to which it sells mortgage-backed securities for delivery in the future
and simultaneously
2
<PAGE>
contracts to repurchase substantially similar securities on a specified future
date. During the roll period, a Series foregoes principal and interest paid on
the mortgage-backed securities. A Series is compensated for the lost interest by
the difference between the current sales price and the lower price for the
future purchase (often referred to as the "drop") as well as by the interest
earned on the cash proceeds of the initial sale. A 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.
CORPORATE ASSET-BACKED SECURITIES: Each of the Emerging Growth Series and the
High Income 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 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. A 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.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES: Each
of the World Governments Series and the High Income 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.
Each of the the World Governments Series and the High Income 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: Each of the World Governments Series and
the High Income 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
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Assets experience greater than anticipated prepayments of principal, a Series
may fail to fully recoup its initial investment in these securities. The market
value of the class consisting primarily or entirely of principal payments
generally is unusually volatile in response to changes in interest rates.
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.
LOAN PARTICIPATIONS AND OTHER DIRECT INDEBTEDNESS: Each of the Emerging Growth
Series and the High Income Series may purchase loan participations and other
direct indebtedness. In purchasing a loan participation, a Series acquires some
or all of the interest of a bank or other lending institution in a loan to a
corporate borrower. Many such loans are secured, although some may be unsecured.
Such loans may be in default at the time of purchase. Loans and other direct
indebtedness that are fully secured offer a Series more protection than an
unsecured loan in the event of non-payment of scheduled interest or principal.
However, there is no assurance that the liquidation of collateral from a secured
loan or other direct indebtedness would satisfy the corporate borrower's
obligation, or that the collateral can be liquidated.
These loans and other direct indebtedness are made generally to finance internal
growth, mergers, acquisitions, stock repurchases, leveraged buy-outs and other
corporate activities. Such loans and other direct indebtedness loans are
typically made by a syndicate of lending institutions, represented by an agent
lending institution which has negotiated and structured the loan and is
responsible for collecting interest, principal and other amounts due on its own
behalf and on behalf of the others in the syndicate, and for enforcing its and
their other rights against the borrower. Alternatively, such loans and other
direct indebtedness may be structured as a novation, pursuant to which a Series
would assume all of the rights of the lending institution in a loan or as an
assignment, pursuant to which the Series would purchase an assignment of a
portion of a lender's interest in a loan or other direct indebtedness either
directly from the lender or through an intermediary. A Series may also purchase
trade or other claims against companies, which generally represent money owned
by the company to a supplier of goods or services. These claims may also be
purchased at a time when the company is in default.
Certain of the loan participations and the other direct indebtedness acquired by
a Series may involve revolving credit facilities or other standby financing
commitments which obligate the Series to pay additional cash on a certain date
or on demand. These commitments may have the effect of requiring a Series to
increase its investment in a company at a time when the Series might not
otherwise decide to do so (including at a time when the company's financial
condition makes it unlikely that such amounts will be repaid). To the extent
that a Series is committed to advance additional funds, it will at all times
hold and maintain in a segregated account cash or other high grade debt
obligations in an amount sufficient to meet such commitments.
A Series' ability to receive payment of principal, interest and other amounts
due in connection with these investments will depend primarily on the financial
condition of the borrower. In selecting the loan participations and other direct
indebtedness which a Series will purchase, the Adviser will rely upon its own
(and not the original lending institution's) credit analysis of the borrower. As
the Series may be required to rely upon another lending institution to collect
and pass onto the Series amounts payable with respect to the loan and to enforce
the Series' rights under the loan and other direct indebtedness, an insolvency,
bankruptcy or reorganization of the lending institution may delay or prevent the
Series from receiving such amounts. In such cases, the Series will evaluate as
well the creditworthiness of the lending institution and will treat both the
borrower and the lending institution as an "issuer" of the loan participation
for purposes of certain investment restrictions pertaining to the
diversification of the Series' portfolio investments. The highly leveraged
nature of many such loans and other direct indebtedness may make such loans and
other direct indebtedness especially vulnerable to adverse changes in economic
or market conditions. Investments in such loans and other direct indebtedness
may involve additional risk to a Series. For example, if a loan or other direct
indebtedness is foreclosed, a Series could become part owner of any collateral,
and would bear the costs and liabilities associated with owning and disposing of
the collateral. In addition, it is conceivable that under emerging legal
theories of lender liability, a Series could be held liable as a co-lender. It
is unclear whether loans and other forms of direct indebtedness offer securities
law protections against fraud and misrepresentation. In the absence of
definitive regulatory guidance, each Series relies on the Adviser's research in
an attempt to avoid situations where fraud and misrepresentation could adversely
affect a Series. In addition, loan participations and other direct investments
may not be in the form of securities or may be subject to restrictions on
transfer, and only limited opportunities may exist to resell such instruments.
As a result, a Series may be unable to sell such investments at an opportune
time or may have to resell them at less than fair market value. To the extent
that the Adviser determines that any such investments are illiquid, a Series
will include them in the investment limitations described below.
MORTGAGE PASS-THROUGH SECURITIES: Each of the World Governments Series, and the
High Income 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 Fund 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
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declining, the value of mortgage pass-through securities with prepayment
features may not increase as much as that of other fixed-income securities.
Payment of principal and interest on some mortgage pass-through securities (but
not the market value of the securities themselves) 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. A Series may also buy mortgage-related securities without
insurance or guarantees.
INDEXED SECURITIES: Each of the the High Income Series, and the World
Governments 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-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
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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: Each of the High Income Series and the World
Governments Series may enter into interest rate swaps, currency swaps and other
types of available swap agreements, such as caps, collars and floors.
Swap agreements may be individually negotiated and structured to include
exposure to a variety of different types of investments or market factors.
Depending on their structure, swap agreements may increase or decrease a Series'
exposure to long or short-term interest rates (in the U.S. or abroad), foreign
currency values, mortgage securities, corporate borrowing rates, or other
factors such as securities prices or inflation rates. Swap agreements can take
many different forms and are known by a variety of names. A Series is not
limited to any particular form or variety of swap agreement if MFS determines it
is consistent with the Series' investment objective and policies.
Each of the High Income Series and the World Governments Series will maintain
cash or appropriate liquid assets with its custodian to cover its current
obligations under swap transactions. If a 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 a 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 a 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 a 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, a Series' risk of loss consists of the net amount
of payments that the Series is contractually entitled to receive. Each 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: Each of the Emerging Growth Series and the World
Governments Series and the High Income Series may write (sell) covered put and
call options, and purchase put and call options, on securities. Call and put
options written by a Series may be covered in the manner set forth below.
A call option written by a 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 a 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 a
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 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 a
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
a Series to write another call option on the underlying security with either a
different exercise price or expiration date or both, or in the case of a written
put option will permit 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 a Series
to generate additional premium income, which will partially offset declines in
the value of portfolio securities or increases in the cost of securities to be
acquired. Also, effecting a closing transaction will permit the cash or proceeds
from the concurrent sale of any securities subject to the option to be used for
other investments of a Series, provided that another option on such security is
not written. If a Series desires to sell a particular security from its
portfolio on which it has written a call option, it will effect a closing
transaction in connection with the option prior to or concurrent with the sale
of the security.
A Series will realize a profit from a closing transaction if the premium paid in
connection with the closing of an option written by 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 a Series is more than the
premium paid for the original purchase. Conversely, a Series will suffer a loss
if the premium paid or received in connection with a closing transaction is more
or less, respectively, than the premium received or paid in establishing the
option position. Because increases in the market price of a call option will
generally reflect increases in the market
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price of the underlying security, any loss resulting from the repurchase of a
call option previously written by a Series is likely to be offset in whole or in
part by appreciation of the underlying security owned by the Series.
The Series may write options in connection with buy-and-write transactions; that
is, a Series may purchase a security and then write a call option against that
security. The exercise price of the call a 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, a 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 a 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, a 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; a 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 a Series in the same market environments
that call options are used in equivalent buy-and-write transactions.
A 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, a Series undertakes a simultaneous obligation to
sell and purchase the same security in the event that one of the options is
exercised. If the price of the security subsequently rises sufficiently above
the exercise price to cover the amount of the premium and transaction costs, the
call will likely be exercised and the Series will be required to sell the
underlying security at a below market price. This loss may be offset, however,
in whole or part, by the premiums received on the writing of the two options.
Conversely, if the price of the security declines by a sufficient amount, the
put will likely be exercised. The writing of straddles will likely be effective,
therefore, only where the price of the security remains stable and neither the
call nor the put is exercised. In those instances where one of the options is
exercised, the loss on the purchase or sale of the underlying security may
exceed the amount of the premiums received.
By writing a call option, a Series limits its opportunity to profit from any
increase in the market value of the underlying security above the exercise price
of the option. By writing a put option, a Series assumes the risk that it may be
required to purchase the underlying security for an exercise price above its
then current market value, resulting in a capital loss unless the security
subsequently appreciates in value. The writing of options on securities will not
be undertaken by a 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.
A 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 a
Series to sell the securities at the exercise price, or to close out the options
at a profit. By using put options in this way, a 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.
A Series may purchase call options to hedge against an increase in the price of
securities that the Series anticipates purchasing in the future. If such
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 a Series upon exercise of the option, and, unless
the price of the underlying security rises sufficiently, the option may expire
worthless to the Series.
In certain instances, the Emerging Growth Series may enter into options on U.S.
Treasury securities which provide for periodic adjustment of the strike price
and may also provide for the periodic adjustment of the premium during the term
of each such option. Like other types of options, these transactions, which may
be referred to as "reset" options or "adjustable strike options," grant the
purchaser the right to purchase (in the case of a "call") or sell (in the case
of a "put"), a specified type and series of U.S. Treasury security at any time
up to a stated expiration date (or, in certain instances, on such date). In
contrast to other types of options, however, the price at which the underlying
security may be purchased or sold under a "reset" option is determined at
various intervals during the term of the option, and such price fluctuates from
interval to interval based on changes in the market value of the underlying
security. As a result, the strike price of a "reset" option, at the time of
exercise, may be less advantageous to the Emerging Growth Series than if the
strike price had been fixed at the initiation of the option. In addition, the
premium paid for the purchase of the option may be determined at the
termination, rather than the initiation, of the option. If the premium is paid
at termination, the Series assumes the risk that (i) the premium may be less
than the premium which would otherwise have been received at the initiation of
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the option because of such factors as the volatility in yield of the underlying
Treasury security over the term of the option and adjustments made to the strike
price of the option, and (ii) the option purchaser may default on its obligation
to pay the premium at the termination of the option.
OPTIONS ON STOCK INDICES: The Emerging Growth Series may write (sell) covered
call and put options and purchase call and put options on stock indices. In
contrast to an option on a security, an option on a stock index provides the
holder with the right but not the obligation to make or receive a cash
settlement upon exercise of the option, rather than the right to purchase or
sell a security. The amount of this settlement is equal to (i) the amount, if
any, by which the fixed exercise price of the option exceeds (in the case of a
call) or is below (in the case of a put) the closing value of the underlying
index on the date of exercise, multiplied by (ii) a fixed "index multiplier."
The Series may cover call options on stock indices by owning securities whose
price changes, in the opinion of the Adviser, are expected to be similar to
those of the underlying index, or by having an absolute and immediate right to
acquire such securities without additional cash consideration (or for additional
cash consideration held in a segregated account by its custodian) upon
conversion or exchange of other securities in its portfolio. Where the Series
covers a call option on a stock index through ownership of securities, such
securities may not match the composition of the index and, in that event, the
Series will not be fully covered and could be subject to risk of loss in the
event of adverse changes in the value of the index. The Series may also cover
call options on stock indices by holding a call on the same index and in the
same principal amount as the call written where the exercise price of the call
held (a) is equal to or less than the exercise price of the call written or (b)
is greater than the exercise price of the call written if the 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. The
Series may cover put options on stock indices by maintaining 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 by holding a
put on the same stock index and in the same principal amount as the put written
where the exercise price of the put held 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
stock indices may also be covered in such other manner as may be in accordance
with the rules of the exchange on which, or the counterparty with which, the
option is traded and applicable laws and regulations.
The Series will receive a premium from writing a put or call option, which
increases the Series' gross income in the event the option expires unexercised
or is closed out at a profit. If the value of an index on which the Series has
written a call option falls or remains the same, the Series will realize a
profit in the form of the premium received (less transaction costs) that could
offset all or a portion of any decline in the value of the securities it owns.
If the value of the index rises, however, the Series will realize a loss in its
call option position, which will reduce the benefit of any unrealized
appreciation in the Series' stock investments. By writing a put option, the
Series assumes the risk of a decline in the index. To the extent that the price
changes of securities owned by the Series correlate with changes in the value of
the index, writing covered put options on indices will increase the Series'
losses in the event of a market decline, although such losses will be offset in
part by the premium received for writing the option.
The Series may also purchase put options on stock indices to hedge its
investments against a decline in value. By purchasing a put option on a stock
index, the Series will seek to offset a decline in the value of securities it
owns through appreciation of the put option. If the value of the Series'
investments does not decline as anticipated, or if the value of the option does
not increase, the Series' loss will be limited to the premium paid for the
option plus related transaction costs. The success of this strategy will largely
depend on the accuracy of the correlation between the changes in value of the
index and the changes in value of the Series' security holdings.
The purchase of call options on stock indices may be used by the Series to
attempt to reduce the risk of missing a broad market advance, or an advance in
an industry or market segment, at a time when the Series holds uninvested cash
or short-term debt securities awaiting investment. When purchasing call options
for this purpose, the Series will also bear the risk of losing all or a portion
of the premium paid if the value of the index does not rise. The purchase of
call options on stock indices when the Series is substantially fully invested is
a form of leverage, up to the amount of the premium and related transaction
costs, and involves risks of loss and of increased volatility similar to those
involved in purchasing calls on securities the Series owns.
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The index underlying a stock index option may be a "broad-based" index, such as
the Standard & Poor's 500 Index or the New York
Stock Exchange Composite Index, the changes in value of which ordinarily will
reflect movements in the stock market in general. In contrast, certain options
may be based on narrower market indices, such as the Standard & Poor's 100
Index, or on indices of securities of particular industry groups, such as those
of oil and gas or technology companies. A stock index assigns relative values to
the stocks included in the index and the index fluctuates with changes in the
market values of the stocks so included. The composition of the index is changed
periodically.
YIELD CURVE OPTIONS: Each of the World Governments Series and the High Income
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. Specially, a Series may purchase or write such options for hedging
purposes. For example, a Series may purchase a call option on the yield spread
between two securities, if it owns one of the securities and anticipates
purchasing the other security and wants to hedge against an adverse change in
the yield spread between the two securities. A 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 a 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, a 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 a Series' assets (the "SEC illiquidity ceiling"). Although the
Adviser disagrees with this position, the Adviser intends to limit each Series'
writing of over-the-counter options in accordance with the following procedure.
Except as provided below, a 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 a 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 formula will generally be based on
a multiple of the premium received by a 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. A Series will treat all or a part
of the formula price as illiquid for purposes of the SEC illiquidity ceiling. A
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: Each of the World Governments Series and the High Income
Series may purchase and sell futures contracts ("Futures Contracts") on foreign
or domestic fixed income securities or indices of such securities. The Emerging
Growth Series may purchase and sell Futures Contracts on stock indexes, while
the Emerging Growth Series, the Growth Series and the World Governments 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
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value of the index or instrument underlying the Futures Contract fluctuates,
making positions in the Futures Contract more or less valuable - a process known
as "mark-to-market."
Purchases or sales of stock index futures contracts are used to attempt to
protect a Series' current or intended stock investments from broad fluctuations
in stock prices. For example, a Series may sell stock index futures contracts in
anticipation of or during a market decline to attempt to offset the decrease in
market value of the Series' securities portfolio that might otherwise result. If
such decline occurs, the loss in value of portfolio securities may be offset, in
whole or part, by gains on the futures position. When a Series is not fully
invested in the securities market and anticipates a significant market advance,
it may purchase stock index futures contracts in order to gain rapid market
exposure that may, in part or entirely, offset increases in the cost of
securities that the Series intends to purchase. As such purchases are made, the
corresponding positions in stock index futures contracts will be closed out. In
a substantial majority of these transactions, the Series will purchase such
securities upon termination of the futures position, but under unusual market
conditions, a long futures position may be terminated without a related purchase
of securities.
Interest rate Futures Contracts may be purchased or sold to attempt to protect
against the effects of interest rate changes on a Series' current or intended
investments in fixed income securities. For example, if a Series owned long-term
bonds and interest rates were expected to increase, that 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 that
Series' portfolio. If interest rates did increase, the value of the debt
securities in the portfolio would decline, but the value of that Series'
interest rate futures contracts would increase at approximately the same rate,
thereby keeping the net asset value of that 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, a
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 that Series' cash reserves could then
be used to buy long-term bonds on the cash market. A 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 a Series to hedge
its interest rate risk without having to sell its portfolio securities.
As noted in the Prospectus, a 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. A Series may sell futures contracts on a
foreign currency, for example, where it holds securities denominated in such
currency and it anticipates a decline in the value of such currency relative to
the dollar. In the event such decline occurs, the resulting adverse effect on
the value of foreign-denominated securities may be offset, in whole or in part,
by gains on the futures contracts.
Conversely, a 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 a 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: Each Series that may buy or sell Futures Contracts
(see "Futures Contracts" above) also 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 a 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.
A 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
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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. A 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 a Series, the Series will be
required to sell the underlying Futures Contract which, if the Series has
covered its obligation through the purchase of such Contract, will serve to
liquidate its futures position. Similarly, where a put Option on a Futures
Contract written by a Series is exercised, the Series will be required to
purchase the underlying Futures Contract which, if the Series has covered its
obligation through the sale of such Contract, will close out its futures
position.
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, a
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, a Series will retain the full amount of the option
premium which provides a partial hedge against any increase in the price of
securities which the Series intends to purchase. If a put or call option a
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, a 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, a
Series could, in lieu of selling Futures Contracts, purchase put options
thereon. In the event that such decrease occurs, it may be offset, in whole or
in part, by a profit on the option. Conversely, where it is projected that the
value of securities to be acquired by a Series will increase prior to
acquisition, due to a market advance or changes in interest or exchange rates, a
Series could purchase call Options on Futures Contracts, rather than purchasing
the underlying Futures Contracts.
FORWARD CONTRACTS ON FOREIGN CURRENCY: Each of 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 a Series seeks to protect against an
anticipated increase in the exchange rate for a specific currency which could
reduce the dollar value of portfolio securities denominated in such currency.
Conversely, a Series may enter into a Forward Contract to purchase a given
currency to protect against a projected increase in the dollar value of
securities denominated in such currency which the Series intends to acquire. A
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, a Series may be required to forego all or a portion of the benefits
which otherwise could have been obtained from favorable movements in exchange
rates or natural resources prices. The Series do not intend, in most instances,
to hold Forward Contracts entered into until maturity, at which time they would
be required to deliver or accept delivery of the underlying currency, but will
usually seek to close out positions in such contracts by entering into
offsetting transactions, which will serve to fix a 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, a 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.
A 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
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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.
Each 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.
OPTIONS ON FOREIGN CURRENCIES: Each of the Emerging Growth Series, the World
Governments Series and the High Income 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,
a 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 a 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, a 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.
A 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, a 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 a
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 a 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,
a 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 A SERIES' PORTFOLIO.
The Series' ability effectively to hedge all or a portion of their portfolios
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' portfolios. 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
bear 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.
For example, if a Series purchases a put option on an index and the index
decreases less than the value of the hedged securities, the
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Series would experience a loss which is not completely offset by the put option.
It is also possible that there may be a negative correlation between the index
or obligation underlying an option or Futures Contract in which the Series has a
position and the portfolio securities the Series is attempting to hedge, which
could result in a loss on both the portfolio and the hedging instrument. In
addition, a 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 stock index futures contracts or options based upon a
narrower index of securities, such as those of a particular industry group, may
present greater risk than options or futures based on a broad market index. This
is due to the fact that a narrower index is more susceptible to rapid and
extreme fluctuations as a result of changes in the value of a small number of
securities. Nevertheless, where a Series enters into transactions in options, or
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 stock indexes,
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 a Series in connection with such transactions.
In writing a covered call option on a security, index or futures contract, a
Series also incurs the risk that changes in the value of the instruments used to
cover the position will not correlate closely with changes in the value of the
option or underlying index or instrument. For example, where a Series covers a
call option written on a stock index through segregation of securities, such
securities may not match the composition of the index, and the Series may not be
fully covered. As a result, the Series could be subject to risk of loss in the
event of adverse market movements.
The writing of options on securities, options on stock indexes or Options on
Futures Contracts constitutes only a partial hedge against fluctuations in the
value of a Series' portfolio. When a 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, a 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, a
Series' overall return may be lower than if it had not engaged in the hedging
transactions.
Those Series that may enter transactions in options (except for Options on
Foreign Currencies), Futures Contracts, Options on Futures Contracts and Forward
Contracts for hedging purposes 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 a
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, a 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 a 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 a Series, and the Series could be required to purchase or sell the
instrument underlying an option, make or receive a cash settlement or meet
ongoing variation margin requirements. Under such circumstances, if the Series
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 a 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 a 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 a Series assumes when
it purchases an Option on a Futures Contract is the premium paid for the option,
plus related transaction costs. In order to profit from an option purchased,
however, it may be necessary to exercise the option and to liquidate the
underlying Futures Contract, subject to the risks of the availability of a
liquid offset market described herein. The writer of an Option on a Futures
Contract is subject to the risks of commodity futures trading, including the
requirement of initial and variation margin payments, as well as the additional
risk that movements in the price of the option may not correlate with movements
in the price of the underlying 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 a Series. Further, the value of such positions could
be adversely affected by a number of other complex political and economic
factors applicable to the countries issuing the underlying currencies.
Further, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying contracts thereon. As a result, the available information
on which trading systems will be based may not be as complete as the comparable
data on which a 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
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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 a
Series' position unless the institution acts as broker and is able to find
another counterparty willing to enter into the transaction with the Series.
Where no such counterparty is available, it will not be possible to enter into a
desired transaction. There also may be no liquid secondary market in the trading
of over-the-counter contracts, and a Series could be required to retain options
purchased or written, or Forward Contracts entered into, until exercise,
expiration or maturity. This in turn could limit 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 a 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. A
Series will enter into an over-the-counter transaction only with parties whose
creditworthiness has been reviewed and found satisfactory by the Adviser.
Options on securities, options on stock indexes, 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 a Series to
liquidate open positions at a profit prior to exercise or expiration, or to
limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however, is
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effects of other political and
economic events. In addition, exchange-traded options on foreign currencies
involve certain risks not presented by the over-the-counter market. For example,
exercise and settlement of such options must be made exclusively through the
OCC, which has established banking relationships in applicable foreign countries
for this purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on the OCC
or its clearing member, impose special procedures on exercise and settlement,
such as technical changes in the mechanics of delivery of currency, the fixing
of dollar settlement prices or prohibitions on exercise.
POLICIES ON THE USE OF FUTURES AND OPTIONS ON FUTURES CONTRACTS. In order to
assure that the Series will not be deemed to be a "commodity pool" for purposes
of the Commodity Exchange Act, regulations of the CFTC require that a 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.
Each 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 such Series' total assets. Moreover, a 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 a 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.
RISKS OF INVESTING IN LOWER RATED BONDS
Each of the Emerging Growth Series, the Growth Series, the Growth With Income
Series, the Research Series, the Total Return Series, the Bond Series, the
Limited Maturity Series, the Strategic Fixed Income Series, the High Income
Series and the Utilities Series may invest in fixed income securities rated Baa
by Moody's Investors Service, Inc. ("Moody's") or BBB by Standard & Poor's
Ratings Group ("S&P") or Fitch Investors Service, Inc. ("Fitch") and comparable
unrated securities. These securities, while normally exhibiting adequate
protection parameters, have speculative
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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 fixed income securities.
Each of these Series (except the Limited Maturity Series) may also invest in
fixed income securities rated Ba or lower by Moody's or BB or lower by S&P or
Fitch and comparable unrated securities (commonly known as "junk bonds") to the
extent described in the Prospectus. No minimum rating standard is required by
the Series. These securities are considered speculative and, while generally
providing greater income than investments in higher rated securities, will
involve greater risk of principal and income (including the possibility of
default or bankruptcy of the issuers of such securities) and may involve greater
volatility of price (especially during periods of economic uncertainty or
change) than securities in the higher rating categories and because yields vary
over time, no specific level of income can ever be assured. These lower rated
high yielding fixed income securities generally tend to reflect economic changes
(and the outlook for economic growth), short-term corporate and industry
developments and the market's perception of their credit quality (especially
during times of adverse publicity) to a greater extent than higher rated
securities which react primarily to fluctuations in the general level of
interest rates (although these lower rated fixed income securities are also
affected by changes in interest rates). In the past, economic downturns or an
increase in interest rates have, under certain circumstances, caused a higher
incidence of default by the issuers of these securities and may do so in the
future, especially in the case of highly leveraged issuers. The prices for these
securities may be affected by legislative and regulatory developments. The
market for these lower rated fixed income securities may be less liquid than the
market for investment grade fixed income securities. Furthermore, the liquidity
of these lower rated securities may be affected by the market's perception of
their credit quality. Therefore, the Adviser's judgment may at times play a
greater role in valuing these securities than in the case of investment grade
fixed income securities, and it also may be more difficult during times of
certain adverse market conditions to sell these lower rated securities to meet
redemption requests or to respond to changes in the market.
While the Adviser may refer to ratings issued by established credit rating
agencies, it is not the Series' policy to rely exclusively on ratings issued by
these rating agencies, but rather to supplement such ratings with the Adviser's
own independent and ongoing review of credit quality. To the extent the Series
invests in these lower rated securities, the achievement of its investment
objectives may be more dependent on the Adviser's own credit analysis than in
the case of a fund investing in higher quality fixed income securities. These
lower rated securities may also include zero coupon bonds, deferred interest
bonds and PIK bonds.
FOREIGN SECURITIES:
The Limited Maturity Series may invest in dollar-denominated foreign debt
securities. The Money Market Series may invest in the securities of foreign
issuers and in the securities of foreign branches of U.S. banks, such as
negotiable certificates of deposit (Eurodollars). The remaining 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, a Series
may receive interest or dividend payments, or the proceeds of the sale or
redemption of such securities,in the foreign currencies in which such securities
are denominated. 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, a Series may hold such currencies for an indefinite period of
time. While the holding of currencies will permit a 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
Each of the Series except the Limited Maturity Series and the Money Market
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. A 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. A 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. A 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 Emerging Growth Series, the Growth Series, the Research Series, the Total
Return Series, the Bond Series, the Strategic Fixed Income Series, the Growth
With Income Series, the Limited Maturity Series, the High Income Series and the
Utilities Series expect to have a portfolio turnover rate of up to 82%, 50%,
79%, 66%, 144%,
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153%, 78%, 262%, 59%, and 115% respectively, during the current fiscal year. The
World Governments Series had a portfolio turnover rate of 62% for the fiscal
year ended December 31, 1994.
-------------------
A 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.
3. INVESTMENT RESTRICTIONS
Each 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 a Series, as applicable,
or (ii) 67% or more of the outstanding shares of the Trust or a Series, as
applicable, present at a meeting if holders of more than 50% of the outstanding
shares of the Trust or a 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 any 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;
purchase or sell real(3)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 of 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 (i) 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, (ii) the High Income
Series may invest up to 40% of its gross assets in each of the electric
utility and telephone industries, (iii) the Money Market Series may invest up
to 75% of its assets in all finance companies as a group, all banks and bank
holding companies as a group and all utility companies as a group when in the
opinion of management yield differentials and money market conditions suggest
and when cash is available for such investment and instruments are available
for purchase which fulfill that Series' objective in terms of quality and
marketability, (iv) the Strategic Fixed Income Series may invest up to 40% of
its assets in each of the electric utility and telephone industries and (v)
the Utilities Series will invest at least 25% of its gross assets in the
utilities industry).
In addition, each 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 any 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) (10% of assets in the case of the
Money Market Series) 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% (10% in the case of
the Money Market Series) 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;
(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;
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(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) each 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) no Series will
have more than 20% of its net assets invested in securities of issuers located
in any one foreign country, provided that a 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) no Series may 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 each Series. MFS is responsible for the investment management of each 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).
JAMES O. YOST*, Assistant Treasurer
Massachusetts Financial Services Company.
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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 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 per Series, together with such trustee's 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.
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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 each Series pursuant to an Investment Advisory
Agreement with the Trust on behalf of each 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 Fund's fiscal year ended December 31, 1994, MFS received management fees
for the World Governments Series under the Advisory Agreement of $7,604 and
assumed $36,473 of the World Governments 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 a 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 each 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 any 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 any Series without penalty by vote of a majority
of the Series' shares (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 each 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
each Series' cash and securities, handling the receipt and delivery of
securities, determining income and collecting interest and dividends on a
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. Each 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 each 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 each Series, computed and paid monthly.
In addition, the Shareholder Servicing Agent will be reimbursed by a 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 Governments Fund
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 each 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 any Series.
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<PAGE>
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 a Series are made by
employees of MFS, who are appointed and supervised by its senior officers.
Changes in a Series' investments are reviewed by the Trust's Board of Trustees.
A 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 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 a 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 Agreements and as permitted by Section 28(e) of the
Securities Exchange Act of 1934, as amended, MFS may cause a Series to pay a
broker-dealer which provides brokerage and research services to MFS an amount of
commission for effecting a securities transaction for a 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 a 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 a 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 (which provides information
useful to the Trustees in reviewing the relationship between each 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 each Series pays to MFS will not be reduced as a
consequence of the receipt of brokerage and research services by MFS. To the
extent a 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 a 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
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<PAGE>
use of the services, avoid the additional expenses which would be incurred if it
should attempt to develop comparable information through its own staff.
In certain instances there may be securities which are suitable for a Series'
portfolio as well as for that of one or more of the other clients of MFS.
Investment decisions for a 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 a Series is concerned. In other cases, however, it is
believed that a 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.
Each Series of the Trust 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 each Series' gross
income, the amount of each Series' distributions, and the composition and
holding period of each Series' portfolio assets. Because each 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 any of the Series will
be required to pay any federal income or excise taxes, although a Series which
has foreign-source income may be subject to foreign withholding taxes. If any of
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.
Each 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 each Series' assets that may be represented by any single
investment and securities from the same issuer. If a 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 a 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 a Series in zero coupon bonds, deferred interest bonds,
payment-in-kind 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.
A Series' transactions in options, Futures Contracts, Forward Contracts, foreign
currencies, swaps and related transactions, to the extent 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 a Series on the last
business day of each taxable year will be marked to market (I.E., treated as if
closed out) on that day, and any 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 a Series that substantially diminish its risk of loss
with respect to other positions in its portfolio may constitute "straddles," and
may be subject to special tax rules that would cause deferral of Series losses,
adjustments in the holding periods of Series securities, and conversion of
short-term into long-term capital losses. Certain tax elections exist for
straddles which may alter the effects of these rules. Each 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.
Special tax considerations apply with respect to a Series that invests in
foreign securities. 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 a
Series. Investment by a Series in certain "passive foreign investment companies"
may also be limited in order to avoid a tax on the Series.
Investment income received by a 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 a Series
to a reduced rate of tax or an exemption from tax on such income; the Series'
intend to qualify for treaty reduced rates where available. It is impossible,
however, to determine a Series effective rate of foreign tax in advance since
the amount of the Series' assets to be invested within various countries is not
known.
7. NET INCOME AND DISTRIBUTIONS
Each Series intends to distribute to its shareholders annually dividends
substantially equal to all of its net investment income. Such
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<PAGE>
Series' net investment income consists of non-capital gain income less expenses.
Such Series' intend 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 each 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 a 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 a 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 a 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 a 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 -- Each 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. Each Series may also calculate total rates 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 a Series is based on the annualized net
investment income per share of that Series for the 30-day period. The yield for
such a Series is calculated by dividing its net investment income earned during
the period by the offering price per share of that 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 that Series during
the period, minus accrued expenses of that Series for the period by (ii) the
average number of shares of that 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 5.23% taking into account all fee waivers and
4.85% without any fee waivers.
From time to time each Series may, as appropriate, quote fund rankings or
reprint all or a portion of evaluations of fund performance and operations
appearing in various independent publications, including but not limited to the
following: Money, Fortune, U.S. News and World Report, Kiplinger's Personal
Finance, The Wall Street Journal, Barron's, Investors Business Daily, Newsweek,
Financial World, Financial Planning, Investment Advisor, USA Today, Pensions and
Investments, SmartMoney, Forbes, Global Finance, Registered Representative,
Institutional Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical Services, Inc., Variable Annuity Research Data
Service, CDA Wiesenberger, Shearson Lehman and Salomon Bros. Indices, Ibbotson,
Business Week, Lowry Associates, Media General, Investment Company Data, The New
York Times, Your Money, Strangers Investment Advisor, Financial Planning on Wall
Street, Standard and Poor's, Individual Investor, THE 100 BEST MUTUAL FUNDS YOU
CAN BUY, by Gordon K. Williamson, Consumer Price Index, and Sanford C. Bernstein
& Co. Series' performance may also be compared to the performance of other
mutual funds tracked by financial or business publications or periodicals.
The Series may also quote evaluations mentioned in independent radio or
television broadcasts.
From time to time the Series may use charts and graphs to illustrate the past
performance of various indices such as those mentioned above.
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.
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- -- 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 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 becomes money manager 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.
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 identified on page 2 hereof.
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 the 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 Statements of Assets and Liabilities for the MFS OTC Series (currently known
as the MFS Emerging Growth Series), MFS Research Series, MFS High Income Series,
at December 31, 1994, the Notes thereto and the Independent Auditors' Report
dated February 3, 1995, have been included in this Statement of
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<PAGE>
Additional Information in reliance upon the report of Deloitte and Touche LLP,
independent certified public accountants, as experts in accounting and auditing.
With respect to the MFS World Governments Series, the Portfolio of Investments
at December 31, 1994, the Statement of Assets and Liabilities at December 31,
1994, the Statement of Operations for the period ended December 31, 1994, the
Statement of Changes in Net Assets for the period ended December 31, 1994, the
Notes to Financial Statements and the Independent Auditors' Report, each of
which is included in the Annual Report to shareholders of the MFS 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 accountants, as experts
in accounting and auditing. A copy of the World Governments Series' Annual
Report accompanies this Statement of Additional Information.
24
<PAGE>
MFS VARIABLE INSURANCE TRUST
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1994
<TABLE>
<CAPTION>
MFS MFS
GROWTH MFS MFS STRATEGIC
MFS MFS WITH TOTAL MFS HIGH FIXED
MFS* OTC GROWTH RESEARCH INCOME RETURN UTILITIES INCOME INCOME
SERIES SERIES SERIES SERIES SERIES SERIES SERIES SERIES
--------- --------- ----------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Cash............................... $ 2,796 $ 2,796 $ 2,796 $ 2,796 $ 2,796 $ 2,796 $ 2,796 $ 2,796
Deferred organization expenses..... 5,985 5,985 5,985 5,985 5,985 5,985 5,985 5,985
--------- --------- ----------- --------- --------- --------- --------- -----------
Total assets..................... $ 8,781 $ 8,781 $ 8,781 $ 8,781 $ 8,781 $ 8,781 $ 8,781 $ 8,781
Liabilities:
Accrued expenses................... 181 181 181 181 181 181 181 181
--------- --------- ----------- --------- --------- --------- --------- -----------
Net assets....................... $ 8,600 $ 8,600 $ 8,600 $ 8,600 $ 8,600 $ 8,600 $ 8,600 $ 8,600
--------- --------- ----------- --------- --------- --------- --------- -----------
--------- --------- ----------- --------- --------- --------- --------- -----------
Net Asset Value, Redemption Price and
Offering Price Per Share of
Beneficial Interest
(860 shares outstanding for each
Series, except the MFS Money Market
Series, 8,600 shares outstanding
for the MFS Money Market Series)... $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
--------- --------- ----------- --------- --------- --------- --------- -----------
--------- --------- ----------- --------- --------- --------- --------- -----------
<CAPTION>
MFS MFS
MFS LIMITED MONEY
BOND MATURITY MARKET
SERIES SERIES SERIES
--------- ----------- ---------
<S> <C> <C> <C>
Assets:
Cash............................... $ 2,796 $ 2,796 $ 2,796
Deferred organization expenses..... 5,985 5,985 5,985
--------- ----------- ---------
Total assets..................... $ 8,781 $ 8,781 $ 8,781
Liabilities:
Accrued expenses................... 181 181 181
--------- ----------- ---------
Net assets....................... $ 8,600 $ 8,600 $ 8,600
--------- ----------- ---------
--------- ----------- ---------
Net Asset Value, Redemption Price and
Offering Price Per Share of
Beneficial Interest
(860 shares outstanding for each
Series, except the MFS Money Market
Series, 8,600 shares outstanding
for the MFS Money Market Series)... $ 10.00 $ 10.00 $ 1.00
--------- ----------- ---------
--------- ----------- ---------
<FN>
NOTES:
(1) The MFS Variable Insurance Trust (the "Trust") was organized on February 1,
1994 as a business trust under the laws of The Commonwealth of
Massachusetts. The Trust currently consists of twelve series of shares or
funds (the "Series"): MFS OTC Series, MFS Growth Series, MFS Research
Series, MFS Growth with Income Series, MFS Total Return Series, MFS
Utilities Series, MFS High Income Series, MFS World Governments Series, MFS
Strategic Fixed Income Series, MFS Bond Series, MFS Limited Maturity Series
and MFS Money Market Series. Each Series, except for the World Governments
Series, has been inactive since that date except for matters relating to its
organization and the Trust's registration as an investment company under the
Investment Company Act of 1940 and the sale of 860 shares of beneficial
interest (except the MFS Money Market Series) and of 8,600 shares of
beneficial interest of the MFS Money Market Series (the "initial shares") to
Massachusetts Financial Services Company.
(2) Organization expenses are being deferred and will be amortized over five
years beginning with the commencement of investment operations. The amount
paid by any Series on any redemption by Massachusetts Financial Services
Company, or any current holder of any Series' initial shares, will be
reduced by the pro rata portion of any unamortized organization expenses
which the number of initial shares redeemed bears to the total number of
initial shares outstanding immediately prior to such redemption.
*(Currently known as the MFS Emerging Growth Series)
</TABLE>
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<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees of MFS Variable Insurance Trust and Shareholders of MFS
OTC Series, MFS Growth Series, MFS Research Series, MFS Growth with Income
Series, MFS Total Return Series, MFS Utilities Series, MFS High Income Series,
MFS Strategic Fixed Income Series, MFS Bond Series, MFS Limited Maturity Series
and MFS Money Market Series:
We have audited the accompanying statements of assets and liabilities of MFS OTC
Series, MFS Growth Series, MFS Research Series, MFS Growth with Income Series,
MFS Total Return Series, MFS Utilities Series, MFS High Income Series, MFS
Strategic Fixed Income Series, MFS Bond Series, MFS Limited Maturity Series and
MFS Money Market Series (the "Series") (each a series of the MFS Variable
Insurance Trust (the "Trust")) as of December 31, 1994. These financial
statements are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements of assets and liabilities are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statement of assets and
liabilities. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits of the statements
of assets and liabilities provide a reasonable basis for our opinion.
In our opinion, such statements of assets and liabilities present fairly, in all
material respects, the financial position of each of the Series at December 31,
1994 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Boston, Massachusetts
February 3, 1995
27
<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, Massachusetts 02110
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- VARIABLE
INSURANCE TRUST-SM-_
500 Boylston Street
Boston, MA 02116
LOGO
<PAGE>
EXHIBIT A
TRUSTEE COMPENSATION TABLE
<TABLE>
<CAPTION>
TRUSTEE FEES FROM
EACH SERIES
TRUSTEE FEES FROM OTHER THAN TOTAL TRUSTEE
WORLD GOVERNMENTS WORLD GOVERNMENTS FEES FROM THE
NAME OF TRUSTEE SERIES (1) SERIES (1) FUND COMPLEX (2)
- ----------------------------------------------------------------- ----------------- ------------------- ----------------
<S> <C> <C> <C>
William R. Gutow................................................. $ 517 $ 417 $ 10,618
Nelson J. Darling................................................ $ 517 $ 417 $ 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>
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;
A-1
<PAGE>
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.
A-2
<PAGE>
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
PRINCIPAL SECTORS OF THE UTILITIES INDUSTRY
The principal sectors of the utility industry in which the Utilities Series may
invest are discussed below.
ELECTRIC -- The electric utility industry consists of companies that are engaged
principally in the generation, transmission and sale of electric energy,
although many also provide other energy-related services. Domestic electric
utility companies, in general, recently have been favorably affected by lower
fuel and financing costs and the full or near completion of major construction
programs. In addition, many of these companies recently have generated cash
flows in excess of current operating expenses and construction expenditures,
permitting some degree of diversification into unregulated businesses. Some
electric utilities have also taken advantage of the right to sell power outside
of their traditional geographic areas. Electric utility companies historically
have been subject to the risks associated with increases in fuel and other
operating costs, high interest costs on borrowings needed for capital
construction programs, costs associated with compliance with environmental and
safety regulations and changes in the regulatory climate.
In the U.S., the construction and operation of nuclear power facilities is
subject to increased scrutiny by, and evolving regulations of, the Nuclear
Regulatory Commission and state agencies having comparable jurisdiction.
Increased scrutiny might result in higher operating costs and higher capital
expenditures, with the risk that the regulators may disallow inclusion of these
costs in rate authorizations or the risk that a company may not be permitted to
operate or complete construction of a facility. In addition, operators of
nuclear power plants may be subject to significant costs for disposal of nuclear
fuel and for the de-commissioning of such plants.
TELECOMMUNICATIONS -- The telephone industry is large and highly concentrated.
Companies that distribute telephone services and provide access to the telephone
networks comprise the greatest portion of this segment. Telephone companies in
the U.S. are still experiencing the effects of the breakup of American Telephone
& Telegraph Company, which occurred in 1984. Since 1984, companies engaged in
telephone communication services have expanded their non-regulated activities
into other businesses, including cellular telephone services, data processing,
equipment retailing, computer software and hardware services, and financial
services. This expansion has provided significant opportunities for certain
telephone companies to increase their earnings and dividends at faster rates
than had been allowed in traditionally regulated businesses. Increasing
competition, technological innovations and other structural changes, however,
could adversely affect the profitability of such utilities.
GAS -- Gas transmission companies and gas distribution companies are also
undergoing significant changes. In the U.S., interstate transmission companies
are regulated by the Federal Energy Regulatory Commission, which is reducing its
regulation of the industry. Many companies have diversified into oil and gas
exploration and development, making returns more sensitive to energy prices. In
the recent decade, gas utility companies have been adversely affected by
disruptions in the oil industry and have also been affected by increased
concentration and competition. In the opinion of the Adviser, however,
environmental considerations could improve the gas industry outlook in the
future. For example, natural gas is the cleanest of the hydrocarbon fuels, and
this may result in incremental shifts in fuel consumption toward natural gas and
away from oil and coal.
WATER -- Water supply utilities are companies that collect, purify, distribute
and sell water. In the U.S. and around the world, the industry is highly
fragmented because most of the supplies are owned by local authorities.
Companies in this industry are generally mature and are experiencing little or
no per capita volume growth.
-------------------
There can be no assurance that the positive developments noted above, including
those relating to changing regulation, will occur or that risk factors other
than those noted above will not develop in the future.
B-1
<PAGE>
APPENDIX C
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.
C-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.
C-2
