<PAGE>
<TABLE>
<S> <C>
MFS-REGISTERED TRADEMARK- EMERGING GROWTH
SERIES-SM-
MFS-REGISTERED TRADEMARK- RESEARCH
SERIES-SM-
MFS-REGISTERED TRADEMARK- TOTAL RETURN
SERIES-SM-
MFS-REGISTERED TRADEMARK- UTILITIES
SERIES-SM-
MFS-REGISTERED TRADEMARK- WORLD GOVERNMENTS
SERIES-SM- PROSPECTUS
MFS-REGISTERED TRADEMARK- BOND SERIES-SM- May 1, 1996
</TABLE>
- --------------------------------------------------------------------------------
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"), six of which are offered pursuant to this
Prospectus:
- -- MFS EMERGING GROWTH SERIES (formerly known as MFS OTC Series) (the "Emerging
Growth Series"), which seeks to provide long-term growth of capital;
- -- MFS RESEARCH SERIES (the "Research Series"), which seeks to provide long-term
growth of capital and future income;
- -- MFS TOTAL RETURN SERIES (the "Total Return Series"), which seeks primarily to
provide above-average income (compared to a portfolio invested entirely 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 WORLD GOVERNMENTS SERIES (the "World Governments Series"), which seeks
not only preservation, but also growth, of capital, together with moderate
current income; and
- -- 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.
-------------------
THE EMERGING GROWTH SERIES AND THE RESEARCH 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 MAY BE SUBJECT TO A GREATER
DEGREE OF RISK THAN INVESTMENTS IN OTHER INVESTMENT COMPANIES WHICH INVEST
ENTIRELY IN DOMESTIC SECURITIES.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------
<PAGE>
-------------------
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 ("SAI")
dated May 1, 1996, as amended or 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
SAI, which is incorporated by reference into this Prospectus, has been filed
with the Securities and Exchange Commission (the "SEC").
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----------
<C> <S> <C>
1. Expense Summary............................................................................................ 4
2. Investment Concept of the Trust............................................................................ 5
3. Condensed Financial Information............................................................................ 6
4. Investment Objectives and Policies......................................................................... 11
MFS Emerging Growth Series................................................................................. 12
MFS Research Series........................................................................................ 12
MFS Total Return Series.................................................................................... 13
MFS Utilities Series....................................................................................... 13
MFS World Governments Series............................................................................... 15
MFS Bond Series............................................................................................ 16
5. Investment Techniques...................................................................................... 17
6. Additional Risk Factors.................................................................................... 23
7. Management of the Series................................................................................... 27
8. Information Concerning Shares of Each Series............................................................... 29
Purchases and Redemptions.................................................................................. 29
Net Asset Value............................................................................................ 30
Distributions.............................................................................................. 30
Tax Status................................................................................................. 30
Description of Shares, Voting Rights and Liabilities....................................................... 30
Performance Information.................................................................................... 31
Expenses................................................................................................... 31
Shareholder Communications................................................................................. 32
Appendix A -- Description of Bond Ratings............................................................................. A-1
Appendix B -- Principal Sectors of the Utilities Industry............................................................. B-1
Appendix C -- Portfolio Composition Chart............................................................................. C-1
</TABLE>
3
<PAGE>
1. EXPENSE SUMMARY
<TABLE>
<S> <C> <C>
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS):
</TABLE>
<TABLE>
<CAPTION>
MFS
EMERGING MFS TOTAL MFS WORLD
GROWTH MFS RESEARCH RETURN MFS UTILITIES GOVERNMENTS MFS BOND
SERIES SERIES SERIES SERIES SERIES SERIES
------------- ------------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Management Fee.................... 0.75% 0.75% 0.75% 0.75% 0.75% 0.60%
Other Expenses (after fee
reduction)(3).................... 0.25%(1) 0.25%(1) 0.25%(1) 0.25%(1) 0.25%(2) 0.40%(1)
--- --- --- --- ----- ---
Total Operating Expenses (after
fee reduction)................... 1.00%(1) 1.00%(1) 1.00%(1) 1.00%(1) 1.00%(2) 1.00%(1)
</TABLE>
- ------------------------
<TABLE>
<S> <C>
(1) The Adviser has agreed to bear, subject to reimbursement, expenses for each of the Emerging Growth Series, Research
Series, Total Return Series, Utilities Series, and Bond 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 31, 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" for the Emerging Growth Series,
Research Series, Total Return Series, Utilities Series and Bond Series would be 2.16%, 3.15%, 2.02%, 2.33% and
43.25%, respectively, and "Total Operating Expenses" would be 2.91%, 3.90%, 2.77%, 3.08% and 43.85%, 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 operating 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 1.24% and 1.99%, respectively.
(3) Each Series has an expense offset arrangement which reduces the Series' custodian fee based upon the amount of cash
maintained by the Series with its custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the effect of reducing the Series'
expenses). Any such fee reductions are not reflected under "Other Expenses."
</TABLE>
The purpose of the expense table above is to assist investors in understanding
the various costs and expenses that a shareholder of the Series will bear
directly or indirectly. 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 with twelve
separate series, each of which is a segregated, separately managed portfolio of
securities. All of the Series offered pursuant to this Prospectus, except the
Utilities Series and World Governments 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 financial information has been audited since the commencement of
investment operations of each Series and should be read in conjunction with the
financial statements included in the Series' Annual Reports to shareholders.
These financial statements are incorporated by reference into the SAI in
reliance upon the report of the Series' independent auditors given upon their
authority, as experts in accounting and auditing. The Series' current
independent auditors are Deloitte & Touche LLP.
EMERGING GROWTH SERIES
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1995*
------------------
<S> <C>
Per share data (for a share outstanding throughout the period):
Net asset value--beginning of period............................. $10.00
------
Income from investment operations#--
Net investment incomeSection................................... $ 0.01
Net realized and unrealized gain on investments................ 1.74
------
Total from investment operations............................. $ 1.75
------
Less distributions declared to shareholders--
From net investment income..................................... $(0.01)
From net realized gain on investments.......................... (0.31)
Tax return of capital.......................................... (0.02)
------
Total distributions declared to shareholders................. $(0.34)
------
Net asset value--end of period................................... $11.41
------
------
Total return..................................................... 17.41%++
Ratios (to average net assets)/Supplemental dataSection:
Expenses....................................................... 1.00%+
Net investment income.......................................... 0.10%+
Portfolio turnover............................................... 73%
Net assets at end of period (000 omitted)........................ $3,869
<FN>
- ------------------------
* For the period from the commencement of investment operations, July 24, 1995 to December 31, 1995.
+ Annualized.
++ Not annualized.
# Per share data is based on average shares outstanding.
Section The Adviser voluntarily agreed to maintain the expenses of the Series at not more than 1.00% of average daily net
assets. To the extent actual expenses were over these limitations, the net investment loss per share and the ratios
would have been:
Net investment loss......................................... $(0.18)
Ratios (to average net assets):
Expenses.................................................. 2.91%+
Net investment loss....................................... (1.78)%+
</TABLE>
6
<PAGE>
RESEARCH SERIES
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1995*
------------------
<S> <C>
Per share data (for a share outstanding throughout the period):
Net asset value--beginning of period............................. $10.00
------
Income from investment operations#--
Net investment incomeSection................................... $ 0.05
Net realized and unrealized gain on investments and foreign
currency transactions........................................ 1.01
------
Total from investment operations............................. $ 1.06
------
Less distributions declared to shareholders--
From net investment income..................................... $(0.03)
From net realized gain on investments and foreign currency
transactions................................................. (0.14)
------
Total distributions declared to shareholders................. $(0.17)
------
Net asset value--end of period................................... $10.89
------
------
Total return..................................................... 10.62%++
Ratios (to average net assets)/Supplemental dataSection:
Expenses....................................................... 1.00%+
Net investment income.......................................... 1.15%+
Portfolio turnover............................................... 28%
Net assets at end of period (000 omitted)........................ $2,530
<FN>
- ------------------------
* For the period from the commencement of investment operations, July 26, 1995 to December 31, 1995.
+ Annualized.
++ Not annualized.
# Per share data is based on average shares outstanding.
Section The Adviser voluntarily agreed to maintain the expenses of the Series at not more than 1.00% of average daily net
assets. To the extent actual expenses were over these limitations, the net investment loss per share and the ratios
would have been:
Net investment loss......................................... $(0.08)
Ratios (to average net assets):
Expenses.................................................. 3.90%+
Net investment loss....................................... (1.73)%+
</TABLE>
7
<PAGE>
TOTAL RETURN SERIES
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1995*
------------------
<S> <C>
Per share data (for a share outstanding throughout the period):
Net asset value--beginning of period............................. $10.00
------
Income from investment operations#--
Net investment incomeSection................................... $ 0.41
Net realized and unrealized gain on investments and foreign
currency transactions........................................ 2.32
------
Total from investment operations............................. $ 2.73
------
Less distributions declared to shareholders--
From net investment income..................................... $(0.25)
From net realized gain on investments and foreign currency
transactions................................................. (0.23)
------
Total distributions declared to shareholders................. $(0.48)
------
Net asset value--end of period................................... $12.25
------
------
Total return..................................................... 27.34%++
Ratios (to average net assets)/Supplemental dataSection:
Expenses....................................................... 1.00%+
Net investment income.......................................... 3.83%+
Portfolio turnover............................................... 16%
Net assets at end of period (000 omitted)........................ $2,797
<FN>
- ------------------------
* For the period from the commencement of investment operations, January 3, 1995 to December 31, 1995.
+ Annualized.
++ Not annualized.
# Per share data is based on average shares outstanding.
Section The Adviser voluntarily agreed to maintain the expenses of the Series at not more than 1.00% of average daily net
assets. To the extent actual expenses were over these limitations, the net investment income per share and the
ratios would have been:
Net investment income....................................... $0.22
Ratios (to average net assets):
Expenses.................................................. 2.77%+
Net investment income..................................... 2.09%+
</TABLE>
8
<PAGE>
UTILITIES SERIES
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1995*
------------------
<S> <C>
Per share data (for a share outstanding throughout the period):
Net asset value--beginning of period............................. $10.00
------
Income from investment operations#--
Net investment incomeSection................................... $ 0.39
Net realized and unrealized gain on investments and foreign
currency transactions........................................ 3.00
------
Total from investment operations............................. $ 3.39
------
Less distributions declared to shareholders--
From net investment income..................................... $(0.24)
From net realized gain on investments and foreign currency
transactions................................................. (0.58)
------
Total distributions declared to shareholders................. $(0.82)
------
Net asset value--end of period................................... $12.57
------
------
Total return..................................................... 33.94%++
Ratios (to average net assets)/Supplemental dataSection:
Expenses....................................................... 1.00%+
Net investment income.......................................... 3.66%+
Portfolio turnover............................................... 94%
Net assets at end of period (000 omitted)........................ $2,373
<FN>
- ------------------------
* For the period from the commencement of investment operations, January 3, 1995 to December 31, 1995.
+ Annualized.
++ Not annualized.
# Per share data is based on average shares outstanding.
Section The Adviser voluntarily agreed to maintain the expenses of the Series at not more than 1.00% of average daily net
assets. To the extent actual expenses were over these limitations, the net investment income per share and the
ratios would have been:
Net investment income....................................... $0.17
Ratios (to average net assets):
Expenses.................................................. 3.08%+
Net investment income..................................... 1.62%+
</TABLE>
9
<PAGE>
WORLD GOVERNMENTS SERIES
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994*
------------------ ------------------
<S> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value--beginning of period............................. $ 9.82 $10.00
------ ------
Income from investment operations#--
Net investment incomeSection................................... $ 0.63 $ 0.17
Net realized and unrealized gain (loss) on investments and
foreign currency transactions................................ 0.78 (0.09)
------ ------
Total from investment operations............................. $ 1.41 $ 0.08
------ ------
Less distributions declared to shareholders--
From net investment income..................................... $(0.42) $(0.17)
In excess of net investment income............................. (0.54) (0.09)
Tax return of capital.......................................... (0.10) --
------ ------
Total distributions declared to shareholders................. $(1.06) $(0.26)
------ ------
Net asset value--end of period................................... $10.17 $ 9.82
------ ------
------ ------
Total return..................................................... 14.38% 0.79%++
Ratios (to average net assets)/Supplemental dataSection:
Expenses##..................................................... 1.00% 1.00%+
Net investment income.......................................... 6.05% 4.68%+
Portfolio turnover............................................... 211% 62%
Net assets at end of period (000 omitted)........................ $7,424 $2,881
<FN>
- ------------------------
* For the period from the commencement of investment operations, June 14, 1994 to December 31, 1994.
+ Annualized.
++ Not annualized.
# Per share data is based on average shares outstanding.
## For fiscal years after September 1, 1995, the Series' expenses are calculated without reduction for fees paid
indirectly.
Section The Adviser voluntarily agreed to maintain the expenses of the Series at not more than 1.00% of average daily net
assets. To the extent actual expenses were over these limitations, the net investment income per share and the
ratios would have been:
</TABLE>
<TABLE>
<S> <C> <C>
Net investment income....................................... $0.53 $0.16
Ratios (to average net assets):
Expenses.................................................. 1.99% 1.10%+
Net investment income..................................... 5.09% 4.58%+
</TABLE>
10
<PAGE>
BOND SERIES
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1995*
------------------
<S> <C>
Per share data (for a share outstanding throughout the period):
Net asset value--beginning of period............................. $10.00
------
Income from investment operations#--
Net investment incomeSection................................... $ 0.09
Net realized and unrealized gain on investments................ 0.21
------
Total from investment operations............................. $ 0.30
------
Less distributions declared to shareholders--
From net investment income..................................... $(0.09)
From net realized gain on investments.......................... (0.02)
------
Total distributions declared to shareholders................. $(0.11)
------
Net asset value--end of period................................... $10.19
------
------
Total return..................................................... 3.02%++
Ratios (to average net assets)/Supplemental dataSection:
Expenses....................................................... 1.00%+
Net investment income.......................................... 4.89%+
Portfolio turnover............................................... 55%
Net assets at end of period (000 omitted)........................ $ 228
<FN>
- ------------------------
* For the period from the commencement of investment operations, October 24, 1995 to December 31, 1995.
+ Annualized.
++ Not annualized.
# Per share data is based on average shares outstanding.
Section The Adviser voluntarily agreed to maintain the expenses of the Series at not more than 1.00% of average daily net
assets. To the extent actual expenses were over these limitations, the net investment loss per share and the ratios
would have been:
Net investment loss......................................... $(0.70)
Ratios (to average net assets):
Expenses.................................................. 43.85%+
Net investment loss....................................... (37.96)%+
</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.
11
<PAGE>
In addition to the specific investment practices described below, each Series
may also engage in certain investment techniques as described under the caption
"Investment Techniques" below and in the SAI under the caption "Investment
Techniques." The Series' investments are subject to certain risks, as described
in the above-referenced sections of this Prospectus and the SAI and as described
below under the caption "Additional Risk Factors."
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 companies that MFS believes 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,
technologies, management and market and other opportunities which are usually
necessary to become more widely recognized as growth companies. Emerging growth
companies can be of any size, and the Series may invest in larger or 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 convertible
securities and warrants when relative values make such purchases appear
attractive either as individual issues or as types of securities in certain
economic environments.
The nature of investing in emerging growth companies involves greater risk than
is customarily associated with investments in more established companies.
Emerging growth companies often have limited product lines, markets or financial
resources, and they may be dependent on one-person management. In addition,
there may be less research available on many promising small and medium sized
emerging growth companies, making it more difficult to find and analyze these
companies. The securities of emerging growth companies may have limited
marketability and may be subject to more abrupt or erratic market movements than
securities of larger, more established growth companies or the market averages
in general. 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.
Consistent with its investment objective and policies described above, the
Series may also invest up to 25% (and generally expects to invest not more than
15%) of its net assets in foreign securities (including emerging market
securities and Brady Bonds) which are not traded on a U.S. exchange.
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 industry groups (E.G., pharmaceuticals, retail and
computer software). The allocation by industry group is determined by the
analysts acting together. Individual analysts are then responsible for selecting
what they view as the securities best suited to meet the Series' investment
objective within their assigned industry group.
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 Investors Service, Inc. ("Moody's") or BBB or better by
Standard & Poor's Rating Services ("S&P") or by Fitch Investors Service, Inc.
("Fitch")), and, with respect to no more than 10% of the Series'
12
<PAGE>
net assets, 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 (commonly
known as "junk bonds"). For a description of bond ratings, see Appendix A to
this Prospectus.
Consistent with the investment objectives and policies described above, the
Series may also invest up to 20% of its net assets in foreign securities
(including emerging market securities and Brady Bonds) which are not traded on a
U.S. exchange.
MFS TOTAL RETURN SERIES -- The Total Return Series' primary investment objective
is to provide above-average income (compared to a portfolio invested entirely in
equity securities) consistent with the prudent employment of capital, and its
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. Under normal market conditions, at
least 25% of the Total Return Series' assets will be invested in fixed income
securities, and at least 40% and no more than 75% of the Series' assets will be
invested in equity securities.
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.
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.
Consistent with the investment objectives and policies described above, the
Series may also invest up to 20% of its net assets in foreign securities
(including emerging market securities and Brady Bonds) which are not traded on a
U.S. exchange.
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
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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. For further
information on the principal sectors of the utilities industry in which the
Series may invest, see Appendix B.
Consistent with the investment objectives and policies described above, the
Series may also invest up to 35% of its net assets in foreign securities
(including emerging market securities and Brady Bonds) which are not traded on a
U.S. exchange.
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 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
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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.
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 temporary 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.
Consistent with its investment objective and policies described above, the
Series may invest up to 100% (and generally expects to invest not more than 80%)
of its net assets in foreign securities (including emerging market securities
and Brady Bonds) which are not traded on a U.S. exchange. Although the
percentage of the Series' assets invested in foreign securities will vary, at
least 65% of the Series' assets will be invested in at least three different
countries, one of which may be the United States, except when the Adviser
believes that investing for temporary defensive purposes is appropriate. 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 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.
The Series seeks to achieve its investment objective by investing, under normal
market conditions, at least 65% of its total assets in:
(1) convertible and non-convertible debt securities and preferred stocks;
(2) U.S. Government Securities, as defined in "Investment Objectives and
Policies--MFS Total Return Series" above; and
(3) commercial paper, repurchase agreements and cash or cash equivalents
(such as certificates of deposit and bankers' acceptances).
Not more than 20% of the Series' net assets will be invested in securities rated
below the four highest grades of S&P, Fitch (AAA, AA, A or BBB) or Moody's (Aaa,
Aa, A or Baa) and comparable unrated securities. For a description of these
ratings see Appendix A to this Prospectus and Appendix C for a chart showing the
Series' holdings of fixed income securities broken down by rating category as of
the end of its most recent fiscal year. For a discussion of the risks of
investing in these securities see "Additional Risk Factors" 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
market 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.
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5. INVESTMENT TECHNIQUES
LENDING OF PORTFOLIO SECURITIES: Each 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, U.S. Treasury securities or an
irrevocable letter of credit maintained on a current basis at an amount at least
equal to the market value of the securities loaned. If the Adviser determines to
make securities loans, it is intended that the value of the securities loaned
would not exceed 10% of the value of the net assets of the Series making the
loans.
EMERGING MARKET SECURITIES: Consistent with their respective objectives, each
Series may invest in securities of issuers whose principal activities are
located in emerging market countries. Emerging market countries include any
country determined by the Adviser to have an emerging market economy, taking
into account a number of factors, including whether the country has a low- to
middle- income economy according to the International Bank for Reconstruction
and Development, the country's foreign currency debt rating, its political and
economic stability and the development of its financial and capital markets. The
Adviser determines whether an issuer's principal activities are located in an
emerging market country by considering such factors as its country of
organization, the principal trading market for its securities and the source of
its revenues and assets. The issuer's principal activities generally are deemed
to be located in a particular country if: (a) the security is issued or
guaranteed by the government of that country or any of its agencies, authorities
or instrumentalities; (b) the issuer is organized under the laws of, and
maintains a principal office in that country; (c) the issuer has its principal
securities trading market in that country; (d) the issuer derives 50% or more of
its total revenues from goods sold or services performed in that country; or (e)
the issuer has 50% or more of its assets in that country.
BRADY BONDS: Each Series (except the Research 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, Dominican Republic, Ecuador, Jordan,
Mexico, Nigeria, Panama, 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 Series may enter into repurchase agreements in order
to earn 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 SAI, each Series has adopted certain procedures intended to
minimize risk.
"WHEN-ISSUED" SECURITIES: Each Series (except the Research Series and the World
Governments 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
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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 World Governments 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
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.
RESTRICTED SECURITIES: Each Series may purchase securities that are not
registered under the Securities Act of 1933 ("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 liquid and thus not subject to the Series' limitation on investing
not more than 15% of its net assets in illiquid investments. The Board of
Trustees has adopted guidelines and delegated to MFS the daily function of
determining and monitoring the liquidity of Rule 144A securities. 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 decreasing the level of liquidity in a Series to the
extent that qualified institutional buyers become for a time uninterested in
purchasing Rule 144A securities held in the Series' portfolio.
CORPORATE ASSET-BACKED SECURITIES: Each of the Emerging Growth Series, the Total
Return Series, the Bond 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
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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 World Governments Series and the Utilities
Series may invest in zero coupon bonds. The Total Return Series and the Bond
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.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES: Each
of the Bond Series, the World Governments 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 World Governments 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 SAI.
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STRIPPED MORTGAGE-BACKED SECURITIES: The Bond Series and the World Governments
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 SAI.
LOAN PARTICIPATIONS AND OTHER DIRECT INDEBTEDNESS: The Emerging Growth Series
and the Total Return 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. Each 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 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 SAI.
MORTGAGE PASS-THROUGH SECURITIES: Each of the Total Return Series, the Bond
Series and the World Governments 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 SAI for a further discussion of these
securities.
INDEXED SECURITIES: Each of the Total Return 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, the World Governments Series and the Bond 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
20
<PAGE>
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 World Governments Series and the Bond Series may also purchase and
sell caps, floors and collars. In a typical cap or floor agreement, one party
agrees to make payments only under specified circumstances, usually in return
for payment of a fee by the counterparty. For example, the purchase of an
interest rate cap entitles the buyer, to the extent that a specified index
exceeds a predetermined interest rate, to receive payments of interest on a
contractually-based principal amount from the counterparty selling such interest
rate cap. The sale of an interest rate floor obligates the seller to make
payments to the extent that a specified interest rate falls below an agreed-upon
level. A collar arrangement combines elements of buying a cap and selling a
floor.
Swap agreements will tend to shift a Series' investment exposure from one type
of investment to another. For example, if a Series agreed to exchange payments
in dollars for payments in foreign currency, in each case based on a fixed rate,
the swap agreement would tend to decrease a Series' exposure to U.S. interest
rates and increase its exposure to foreign currency and interest rates. Caps and
floors have an effect similar to buying or writing options. Depending on how
they are used, swap agreements may increase or decrease the overall volatility
of a Series' investments and its share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on a
Series' performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. A Series may also suffer losses if
it is unable to terminate outstanding swap agreements or reduce its exposure
through offsetting transactions.
Swaps, caps, floors and collars are highly specialized activities which involve
certain risks. See the SAI for further information on, and the risks involved
in, these activities.
OPTIONS ON SECURITIES: Each of the Emerging Growth Series, the Total Return
Series, the Bond Series and the World Governments 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. The Series may also write combinations of put and call
options on the same security, known as "straddles." Such transactions can
generate additional premium income but also present increased risk.
By writing a call option on a security, a Series limits its opportunity to
profit from any increase in the market value of the underlying security, since
the holder will usually exercise the call option when the market value of the
underlying security exceeds the exercise price of the call. However, the Series
retains the risk of depreciation in value of securities on which it has written
call options.
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 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 SAI contains a further discussion of these investments.
21
<PAGE>
OPTIONS ON STOCK INDICES: Each of the Emerging Growth Series, the Total Return
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.
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 Total Return Series, the Bond Series and the
World Governments 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 SAI. 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 SAI. 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 World Governments 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 and the Total Return Series may purchase and sell Futures
Contracts on stock indices, while the Emerging Growth Series, the Total Return
Series, the World Governments 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 securities and other obligations underlying all such
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
22
<PAGE>
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 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
Contracts for hedging purposes and (except for the Bond 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 Series 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 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 Total
Return Series, the Bond Series, the World Governments 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
23
<PAGE>
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 SAI contains a
description of the nature and trading mechanics of options, Futures Contracts,
Options on Futures Contracts, Forward Contracts and Options on Foreign
Currencies, and includes a discussion of the risks related to transactions
therein.
Transactions in Forward Contracts may be entered into only in the
over-the-counter market. Futures Contracts and Options on Futures Contracts may
be entered into on U.S. exchanges regulated by the Commodity Futures Trading
Commission and on foreign exchanges. In addition, the securities and indexes
underlying options, Futures Contracts and Options on Futures Contracts traded by
the Series will include both domestic and foreign securities.
LOWER RATED BONDS: Each of the Emerging Growth Series, the Research Series, the
Total Return Series, the Bond Series and the Utilities Series may invest in
fixed income 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.
Each of these 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. See Appendix A to this
Prospectus for a description of these ratings. 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 SAI for more
information on lower rated securities.
FOREIGN SECURITIES: Each 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. Each Series may hold foreign currency received in
connection with investments in foreign securities when, in the judgment of the
Adviser, it would
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<PAGE>
be beneficial to convert such currency into U.S. dollars at a later date, based
on anticipated changes in the relevant exchange rate. The Series may also hold
foreign currency in anticipation of purchasing foreign securities. See the SAI
for further discussion of foreign securities and the holding of foreign
currency, as well as the associated risks.
AMERICAN DEPOSITARY RECEIPTS: Each 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 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 in losses to the Series due to subsequent declines in value of the
portfolio securities, a decrease in the level of liquidity in a Series'
portfolio, or if the Series has entered into a contract to sell the security,
possible liability to the purchaser. Certain markets may require payment for
securities before delivery, and in such markets the Series bear the risk that
the securities will not be delivered and that the Series' payments will not be
returned. 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.
NON-DIVERSIFICATION: Each of the World Governments 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
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<PAGE>
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 TEMPORARY DEFENSIVE PURPOSES -- During periods of
unusual market conditions when the Adviser believes that investing for temporary
defensive purposes is appropriate, or in order to meet anticipated redemption
requests, a large portion or all of the assets of 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.
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 SAI. The Total Return Series' portfolio will be managed
actively with respect to the Series' fixed income securities and the asset
allocations modified as the Adviser deems necessary. Although the Series does
not intend to seek short-term profits, fixed income securities in its portfolio
will be sold whenever the Adviser believes it is appropriate to do so without
regard to the length of time the particular asset may have been held. With
respect to its equity securities, the Total Return Series does not intend to
trade in securities for short-term profits and anticipates that portfolio
securities ordinarily will be held for one year or longer. However, the Series
will effect trades whenever it believes that changes in its portfolio securities
are appropriate.
Because the World Governments Series is expected to have a portfolio turnover
rate of over 100%, transaction costs incurred by the Series and the realized
capital gains and losses of the Series may be greater than that of a fund with a
lesser portfolio turnover rate.
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain, and maintain the availability of,
execution at the most favorable prices and in the most effective manner
possible. Consistent with the foregoing primary consideration, the Rules of Fair
Practice of the National Association of Securities Dealers, Inc. (the "NASD")
and such other policies as the Trustees of the Trust may determine, the Adviser
may consider sales of Contracts for which the Trust is an investment option,
together with sales of shares of other investment company clients of MFS Fund
Distributors, Inc., the distributor of shares of the Trust and of the MFS Family
of Funds, as a factor in the selection of broker-dealers to execute 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
SAI.
-------------------
The SAI 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 SAI may be changed
without shareholder approval unless indicated otherwise (see the SAI). The
Series' investment limitations, policies and rating standards are adhered to at
the time of purchase or utilization of assets; a subsequent change in
circumstances will not be considered to result in a violation of policy.
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<PAGE>
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%
Research Series.............................................................................. 0.75%
Total Return Series.......................................................................... 0.75%
Utilities Series............................................................................. 0.75%
World Governments Series..................................................................... 0.75%
Bond Series.................................................................................. 0.60%
</TABLE>
MFS or its affiliates will pay a fee to Kansas City Life Insurance Company
equal, on an annualized basis, to 0.15% of the aggregate net assets of the
Series attributable to contracts offered by separate accounts of Kansas City
Life Insurance Company or its affiliates. Such fee will not be paid by the
Series, their shareholders or by the Contract holders.
For the fiscal year ended December 31, 1995, MFS received the following
management fees from the Series under the Advisory Agreement and assumed the
following amounts of the Series' expenses (see "Expenses" below);
<TABLE>
<CAPTION>
MANAGEMENT FEE EXPENSES ASSUMED
SERIES PAID TO MFS BY MFS
- ---------------------------------------------------------------------------------- -------------- ----------------
<S> <C> <C>
Emerging Growth Series............................................................ $ 6,262 $ 15,659
Research Series................................................................... 4,424 16,913
Total Return Series............................................................... 10,826 25,092
Utilities Series.................................................................. 9,376 25,513
World Governments Series.......................................................... 33,869 43,311
Bond Series....................................................................... 247 17,623
</TABLE>
The identity and background of the portfolio managers for each Series is set
forth below. Unless indicated otherwise, each portfolio manager has acted in
that capacity since the commencement of investment operations of each Series.
<TABLE>
<CAPTION>
SERIES PORTFOLIO MANAGERS
- ----------------------------- --------------------------------------------------------------------------------------
<S> <C>
Emerging Growth Series John W. Ballen, a Senior Vice President of MFS, has been employed by the Adviser as a
portfolio manager since 1984. Toni Y. Shimura, a Vice President of MFS, has been
employed by the Adviser as a portfolio manager since 1987. Ms. Shimura became a
portfolio manager of the Series on November 30, 1995.
Research Series The Series is currently managed by a committee comprised of various equity research
analysts employed by the Adviser.
Total Return Series David M. Calabro, a Vice President of MFS, has been employed by the Adviser as a
portfolio manager since 1992. Mr. Calabro is the head of this portfolio management
team and a manager of the common stock portion of the Series' portfolio. Geoffrey L.
Kurinsky, a Senior Vice President of MFS, has been employed by the Adviser as a
portfolio manager since 1987. Mr. Kurinsky is the manager of the Series' fixed income
securities. Judith N.
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
SERIES PORTFOLIO MANAGERS
- ----------------------------- --------------------------------------------------------------------------------------
Lamb, a Vice President of MFS, has been employed by the Adviser as a portfolio manager
since 1992. Ms. Lamb is the manager of the Series' convertible securities. Lisa B.
Nurme, a Vice President of MFS, has been employed by the Adviser as a portfolio
manager since 1987. Ms. Nurme is a manager of the common stock portion of the Series'
portfolio. Maura A. Shaughnessy, a Vice President of MFS, has been employed by the
Adviser as a portfolio manager since 1991. Ms. Shaughnessy is a manager of the common
stock portion of the Series' portfolio. Each individual became a portfolio manager of
the Series on July 19, 1995.
Utilities Series Maura A. Shaughnessy, a Vice President of the Adviser, has been employed by the
Adviser as a portfolio manager since 1991.
<S> <C>
World Governments Series Stephen C. Bryant, a Senior Vice President of the Adviser, has been employed by the
Adviser as a portfolio manager since 1987.
Bond Series Geoffrey L. Kurinsky, a Senior Vice President of the Adviser, has been employed by the
Adviser as a portfolio manager since 1987.
</TABLE>
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 various 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 $43.9 billion on behalf of approximately 1.9 million investor
accounts as of February 29, 1996. As of such date, the MFS organization managed
approximately $20 billion of assets invested in equity securities and
approximately $20 billion of assets invested in fixed income securities.
Approximately $3.8 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
wholly owned 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.
MFS has established a strategic alliance with Foreign & Colonial Management Ltd.
("Foreign & Colonial"). Foreign & Colonial is a subsidiary of two of the world's
oldest financial services institutions, the London-based Foreign & Colonial
Investment Trust PLC, which pioneered the idea of investment management in 1868,
and HYPO-BANK (Bayerische Hypotheken-und Weschsel-Bank AG), the oldest publicly
listed bank in Germany, founded in 1835. As part of this alliance, the portfolio
managers and investment analysts of MFS and Foreign & Colonial will share their
views on a variety of investment related
28
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issues, such as the economy, securities markets, portfolio securities and their
issuers, investment recommendations, strategies and techniques, risk analysis,
trading strategies and other portfolio management matters. MFS will have access
to the extensive international equity investment expertise of Foreign &
Colonial, and Foreign & Colonial will have access to the extensive U.S. equity
investment expertise of MFS. One or more MFS investment analysts are expected to
work for an extended period with Foreign & Colonial's portfolio managers and
investment analysts at their offices in London. In return, one or more Foreign &
Colonial employees are expected to work in a similar manner at MFS' Boston
offices.
In certain instances there may be securities which are suitable for a Series'
portfolio as well as for portfolios of other clients of MFS or clients of
Foreign & Colonial. Some simultaneous transactions are inevitable when several
clients receive investment advice from MFS and Foreign & Colonial, particularly
when the same security is suitable for more than one client. While in some cases
this arrangement could have a detrimental effect on the price or availability of
the security as far as a Series is concerned, in other cases, however, it may
produce increased investment opportunities for the Series.
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.
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.
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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, as described in the SAI. All investments, assets and
liabilities are expressed in U.S. dollars based upon current currency exchange
rates.
DISTRIBUTIONS
Substantially all of each 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.
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 SAI.
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 SAI.
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<PAGE>
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.
PERFORMANCE INFORMATION
Each Series' performance may be quoted in advertising in terms of yield and
total return. Performance is based on historical results and is not intended to
indicate future performance. Performance quoted for 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 Emerging Growth, Research, Total
Return, Utilities, Bond and World Governments Series' performance for the fiscal
year ended December 31, 1995, please see the Series' Annual Reports. A copy of
these Annual Reports may be obtained without charge by contacting your
Participating Insurance Company.
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.
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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) 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.
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.
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 SAI for the Trust, dated May 1, 1996, 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.
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APPENDIX A
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the quality
of various debt instruments. It should be emphasized, however, that ratings are
not absolute standards of quality. Consequently, debt instruments with the same
maturity, coupon and rating may have different yields while debt instruments of
the same maturity and coupon with different ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
AAA: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuations of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
BAA: Bonds which are rated Baa are considered as medium-grade obligations (I.E.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. an application for rating was not received or accepted;
2. the issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy;
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3. there is a lack of essential data pertaining to the issue or issuer; or
4. the issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
STANDARD & POOR'S RATINGS SERVICES
AAA: Debt rated AAA has the highest rating assigned by S&P. 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 highest 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.
CI: The rating CI is reserved for income bonds on which no interest is being
paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR: Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
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A-1 AND P-1 COMMERCIAL PAPER RATINGS
Description of S&P, Fitch and Moody's highest commercial paper ratings:
The rating "A" is the highest commercial paper rating assigned by S&P and Fitch,
and issues so rated are regarded as having the greatest capacity for timely
payment. Issues in the "A" category are delineated with the numbers 1, 2 and 3
to indicate the relative degree of safety. The A-1 designation indicates that
the degree of safety regarding timely payment is either overwhelming or very
strong. Those A-1 issues determined to possess overwhelming safety
characteristics will be denoted with a plus (+) sign designation.
The rating P-1 is the highest commercial paper rating assigned by Moody's.
Issuers rated P-1 have a superior ability for repayment. P-1 repayment capacity
will normally be evidenced by the following characteristics: (1) leading market
positions in well established industries; (2) high rates of return on funds
employed; (3) conservative capitalization structure with moderate reliance on
debt and ample asset protection; (4) broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and (5) well established
access to a range of financial markets and assured sources of alternate
liquidity.
FITCH INVESTORS SERVICE, INC.
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and prepay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated 'AAA'. Because bonds rated in the 'AAA' and
'AA' categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated 'F-1+'.
A: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds and, therefore, impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest of principal.
PLUS(+) MINUS(-): Plus and minus signs are used with a rating symbol to indicate
the relative position of a credit within the rated category. Plus and minus
signs, however, are not used in the 'AAA' category.
NR: indicates that Fitch does not rate the specific issue.
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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.
DUFF & PHELPS CREDIT RATING CO.
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and or 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 'D-1+'.
A: Bonds considered to be investment grade and of 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.
PLUS (+) OR MINUS (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within a rating category. Plus and
minus signs, however, are not used in the 'AAA' category.
NR: Indicates that Duff & Phelps does not rate the specific issue.
DUFF & PHELPS SHORT-TERM RATINGS
D-1+: Highest certainty of timely payment. Short-term liquidity, including
internal operation factors and/or access to alternative sources of funds, is
outstanding and safety is just below risk-free U.S. Treasury short-term
obligations.
D-1: Very high certainty of timely payment. Liquidity factors are excellent and
supported by good fundamental protection factors. Risk factors are minor.
A-4
<PAGE>
D-1-: High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
D-2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
D-3: Satisfactory liquidity and other protection factors qualify issues as to
investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
D-4: Speculative investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors and market access
may be subject to a high degree of variation.
D-5: Issuer failed to meet scheduled principal and/or interest payments.
A-5
<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
MFS BOND SERIES
PORTFOLIO COMPOSITION CHART
FOR FISCAL YEAR ENDED DECEMBER 31, 1995
The table below shows the percentages of the Series' assets at December 31, 1995
invested in bonds assigned to the various rating categories by S&P, Moody's
(provided only for bonds not rated by S&P), Fitch (provided only for bonds not
rated by S&P or Moody's) and Duff & Phelps (provided only for bonds not rated by
S&P, Moody's or Fitch) and in unrated bonds determined by MFS to be of
comparable quality. For split rated bonds, the higher of S&P or Moody's rating
is used. When neither an S&P or Moody's rating is available, secondary sources
are selected in the following order: Fitch and Duff & Phelps.
<TABLE>
<CAPTION>
COMPILED
RATING RATINGS TOTAL
- ----------- ----------- ----------
<S> <C> <C> <C>
AAA/Aaa 44.15% 44.15%
AA/Aa 4.49 4.49
A/A 7.05 7.05
BBB/Baa 25.72 25.72
BB/Ba 7.26 7.26
B/B -- --
CCC/Caa -- --
CC/Ca -- --
C/C -- --
Default -- --
----- -----
TOTAL 88.67% 88.67%
</TABLE>
The chart does not necessarily indicate what the composition of the Series'
portfolio will be in subsequent years. Rather, the Series' investment objective,
policies and restrictions indicate the extent to which the Series may purchase
securities in the various categories.
C-1
<PAGE>
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
(800) 637-8730
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN
Investors Bank & Trust Company
89 South Street, Boston, MA 02111
DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 637-8730
MAILING ADDRESS:
P.O. Box 1400, Boston, MA 02104-9985
For more information, contact your financial adviser.
INDEPENDENT AUDITORS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
[LOGO]
MFS-REGISTERED TRADEMARK- VARIABLE INSURANCE TRUST
500 Boylston Street, Boston, MA 02116
------------------------------------
MFS-REGISTERED TRADEMARK- EMERGING GROWTH SERIES-SM-
MFS-REGISTERED TRADEMARK- RESEARCH SERIES-SM-
MFS-REGISTERED TRADEMARK- TOTAL RETURN SERIES-SM-
MFS-REGISTERED TRADEMARK- UTILITIES SERIES-SM-
MFS-REGISTERED TRADEMARK- WORLD
GOVERNMENTS SERIES-SM-
MFS-REGISTERED TRADEMARK- BOND SERIES-SM-
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PROSPECTUS
MAY 1, 1996
------------------------
