<PAGE>
<TABLE>
<S> <C>
MFS-REGISTERED TRADEMARK- EMERGING GROWTH
SERIES-SM-
MFS-REGISTERED TRADEMARK- GROWTH WITH INCOME
SERIES-SM-
MFS-REGISTERED TRADEMARK- HIGH INCOME PROSPECTUS
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"), three 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 GROWTH WITH INCOME SERIES (the "Growth With Income Series"), which seeks
to provide reasonable current income and long-term growth of capital and
income; and
- -- MFS HIGH INCOME SERIES (the "High Income Series"), which seeks high current
income by investing primarily in a professionally managed diversified
portfolio of fixed income securities, some of which may involve equity
features.
-------------------
THE HIGH INCOME SERIES MAY INVEST UP TO 100% OF ITS NET ASSETS IN LOWER RATED
BONDS, COMMONLY KNOWN AS "JUNK BONDS," THAT ENTAIL GREATER RISKS, INCLUDING
DEFAULT RISKS, THAN THOSE FOUND IN HIGHER RATED SECURITIES. INVESTORS SHOULD
CAREFULLY CONSIDER THESE RISKS BEFORE INVESTING (SEE "ADDITIONAL RISK FACTORS --
LOWER RATED BONDS"). THE EMERGING GROWTH SERIES AND THE GROWTH WITH INCOME
SERIES ARE INTENDED FOR INVESTORS WHO UNDERSTAND AND ARE WILLING TO ACCEPT THE
RISKS ENTAILED IN SEEKING LONG-TERM GROWTH OF CAPITAL. BECAUSE OF THEIR
INVESTMENT POLICIES PERMITTING INVESTMENT IN FOREIGN SECURITIES, INVESTMENTS IN
EACH SERIES MAY BE SUBJECT TO A GREATER DEGREE OF RISK THAN INVESTMENTS IN OTHER
INVESTMENT COMPANIES WHICH INVEST ENTIRELY IN DOMESTIC SECURITIES.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------
SHARES OF THE TRUST ARE AVAILABLE AND ARE BEING MARKETED AS A POOLED FUNDING
VEHICLE FOR LIFE INSURANCE COMPANIES WRITING ALL TYPES OF CONTRACTS.
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 ("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............................................................................................ 3
2. Investment Concept of the Trust............................................................................ 3
3. Condensed Financial Information............................................................................ 5
4. Investment Objectives and Policies......................................................................... 8
MFS Emerging Growth Series................................................................................. 8
MFS Growth With Income Series.............................................................................. 8
MFS High Income Series..................................................................................... 9
5. Investment Techniques...................................................................................... 9
6. Additional Risk Factors.................................................................................... 16
7. Management of the Series................................................................................... 19
8. Information Concerning Shares of Each Series............................................................... 21
Purchases and Redemptions.................................................................................. 21
Net Asset Value............................................................................................ 21
Distributions.............................................................................................. 21
Tax Status................................................................................................. 22
Description of Shares, Voting Rights and Liabilities....................................................... 22
Performance Information.................................................................................... 22
Expenses................................................................................................... 23
Shareholder Communications................................................................................. 24
Appendix A -- Description of Bond Ratings............................................................................. A-1
Appendix B -- Portfolio Composition Chart............................................................................. B-1
</TABLE>
2
<PAGE>
1. EXPENSE SUMMARY
<TABLE>
<S> <C> <C>
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS):
</TABLE>
<TABLE>
<CAPTION>
MFS
EMERGING MFS GROWTH MFS HIGH
GROWTH WITH INCOME INCOME
SERIES SERIES SERIES
------------ ------------- ------------
<S> <C> <C> <C>
Management Fee.......................................................... 0.75% 0.75% 0.75%
Other Expenses (after fee reduction)(2)................................. 0.25%(1) 0.25%(1) 0.25%(1)
--- ----- ---
Total Operating Expenses (after fee reduction).......................... 1.00%(1) 1.00%(1) 1.00%(1)
<FN>
- ------------------------
(1) The Adviser has agreed to bear, subject to reimbursement, expenses for each of the 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"
would be 2.16%, 20.69% and 3.63%, respectively, and "Total Operating Expenses" would be 2.91%, 21.44% and 4.38%,
respectively, for the Emerging Growth Series, Growth With Income Series and High Income Series.
(2) 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.
2. INVESTMENT CONCEPT OF THE TRUST
The Trust is an open-end, registered management investment company comprised of
twelve series, each of which is a segregated, separately managed portfolio of
securities. The Emerging Growth Series, Growth With Income Series and High
Income Series are diversified Series of the Trust. 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.
3
<PAGE>
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.
4
<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>
5
<PAGE>
GROWTH WITH INCOME 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................ 0.61
------
Total from investment operations............................. $ 0.66
------
Less distributions declared to shareholders--
From net investment income..................................... $(0.05)
------
Total distributions declared to shareholders................. $(0.05)
------
Net asset value--end of period................................... $10.61
------
------
Total return..................................................... 6.64%++
Ratios (to average net assets)/Supplemental dataSection:
Expenses....................................................... 1.00%+
Net investment income.......................................... 2.20%+
Portfolio turnover............................................... 2%
Net assets at end of period (000 omitted)........................ $ 365
<FN>
- ------------------------
* For the period from the commencement of investment operations, October 9, 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......................................... $ (0.04)
Ratios (to average net assets):
Expenses.................................................. 21.44%+
Net investment loss....................................... (18.24)%+
</TABLE>
6
<PAGE>
HIGH INCOME 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................................... $ 0.34
Net realized and unrealized gain on investments................ 0.18
------
Total from investment operations............................. $ 0.52
------
Less distributions declared to shareholders--
From net investment income..................................... $(0.23)
------
Net asset value--end of period................................... $10.29
------
------
Total return..................................................... 5.25%++
Ratios (to average net assets)/Supplemental dataSection:
Expenses....................................................... 1.00%+
Net investment income.......................................... 8.17%+
Portfolio turnover............................................... 32%
Net assets at end of period (000 omitted)........................ $1,946
<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 income per share and the
ratios would have been:
Net investment income....................................... $0.20
Ratios (to average net assets):
Expenses.................................................. 4.38%+
Net investment income..................................... 4.82%+
</TABLE>
7
<PAGE>
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.
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
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 GROWTH WITH INCOME SERIES -- The Growth With Income Series' investment
objectives are to provide reasonable current income and long-term growth of
capital and income.
Under normal market conditions, the Growth With Income Series will invest at
least 65% of its assets in common stocks or securities convertible into common
stocks that are believed to have long-term prospects for growth and income.
Consistent with its investment objective and policies described above, the
Series may also invest up to 75% (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.
8
<PAGE>
MFS HIGH INCOME SERIES -- The investment objective of the High Income Series is
to seek high current income by investing primarily in a professionally managed
diversified portfolio of fixed income securities, some of which may involve
equity features.
Fixed income securities offering the high current income sought by the High
Income Series normally include those fixed income securities which offer a
current yield above that generally available on debt securities in the three
highest rating categories of the recognized rating agencies (commonly known as
"junk bonds" if rated below the four highest categories of recognized rating
agencies). The Series may invest up to 100% of its net assets in such
securities. For a description of these rating categories, see Appendix A to this
Prospectus and Appendix B 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. (See "Additional Risk Factors" below). However, since
available yields and yield differentials vary over time, no specific level of
income or yield differential can ever be assured. The dividends paid by the
Series will increase or decrease in relation to the income received by the
Series from its investments, which would in any case be reduced by the expenses
of the Series before such income is distributed to its shareholders.
Fixed income securities include preferred and preference stocks and all types of
debt obligations of both domestic and foreign issuers, such as bonds,
debentures, notes, equipment lease certificates, equipment trust certificates
(including interests in trusts or other entities representing such obligations),
conditional sales contracts, commercial paper and obligations issued or
guaranteed by the U.S. Government, any foreign government or any of their
respective political subdivisions, agencies or instrumentalities (including
obligations, such as repurchase agreements, secured by instruments).
Corporate debt securities may bear fixed, fixed and contingent, or variable
rates of interest and may involve equity features, such as conversion or
exchange rights or warrants for the acquisition of stock of the same or a
different issuer; participations based on revenues, sales or profits; or the
purchase of common stock in a unit transaction (where corporate debt securities
and common stock are offered as a unit). Under normal market conditions, not
more than 25% of the value of the total assets of the High Income Series will be
invested in equity securities, including common stocks, warrants and rights.
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
10%) of its net assets in foreign securities (including emerging market
securities and Brady Bonds) which are not traded on a U.S. exchange. The Series
has authority to invest up to 25% of its total assets in securities issued or
guaranteed by foreign governments or their agencies or instrumentalities. (See
"Additional Risk Factors" below.)
The High Income Series may invest up to 40% of the value of its total assets in
each of the electric utility and telephone industries, but will not invest more
than 25% in either of those industries unless yields available for four
consecutive weeks in the four highest rating categories on new issue bonds in
such industry (issue size of $50 million or more) have averaged in
excess of 105% of yields of new issue long-term industrial bonds similarly rated
(issue size of $50 million or more) and, in the opinion of the Adviser, the
relative return available from the electric utility or telephone industry and
the relative risk, marketability, quality and availability of securities of such
industry justifies such an investment.
When and if available, fixed income securities may be purchased at a discount
from face value. However, the High Income Series does not intend to hold such
securities to maturity for the purpose of achieving potential capital gains,
unless current yields on these securities remain attractive. From time to time
the Series may purchase securities not paying interest at the time acquired if,
in the opinion of the Adviser, such securities have the potential for future
income or capital appreciation.
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.
9
<PAGE>
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 organization,
the principal trading market for its securities and the source of its revenues
and assets. The issuers principal activities generally are deemed to be located
in 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 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 may purchase securities on a "when-issued"
or on a "forward delivery" basis, which means that the securities will be
delivered to the Series at a future date usually beyond customary settlement
time. The commitment to purchase a security for which payment will be made on a
future date may be deemed a separate security. In general, a Series does not pay
for such securities until received, and does not start earning interest on the
securities until the contractual settlement date. While awaiting delivery of
securities purchased on such bases, a Series will normally invest in cash, cash
equivalents and high grade debt securities.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: The High Income Series may enter into
mortgage "dollar roll" transactions with selected banks and broker-dealers
pursuant to which the Series sells mortgage-backed securities for delivery in
the future (generally within 30 days) and simultaneously contracts to repurchase
substantially similar (same type, coupon and maturity) securities on a specified
future date. The Series will only enter into covered rolls. A "covered roll" is
a specific type of dollar roll for which there is an offsetting cash position or
a cash equivalent security position which matures on or before the forward
settlement date of the dollar roll transaction. In the event that the party with
whom the Series contracts to replace
10
<PAGE>
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 of the Emerging Growth Series and the High Income
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 and the
High Income Series may invest in corporate asset-backed securities. These
securities, issued by trusts and special purpose corporations, are backed by a
pool of assets, such as credit card and automobile loan receivables,
representing the obligations of a number of different parties.
Corporate asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there is
the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities. The underlying
assets (E.G., loans) are also subject to prepayments which shorten the
securities' weighted average life and may lower their return.
Corporate asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection; and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from ultimate default ensures payment through insurance policies or
letters of credit obtained by the issuer or sponsor from third parties. A Series
will not pay any additional or separate fees for credit support. The degree of
credit support provided for each issue is generally based on historical
information respecting the level of credit risk associated with the underlying
assets. Delinquency or loss in excess of that anticipated or failure of the
credit support could adversely affect the return on an investment in such a
security.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS: Each of the Growth
With Income Series and the High Income Series may invest in zero coupon bonds.
The High Income Series may also invest in deferred interest bonds and PIK bonds.
Zero coupon and deferred interest bonds are debt obligations which are issued or
purchased at a significant discount from face value. The discount approximates
the total amount of interest the bonds will accrue and compound over the period
until maturity or the first interest payment date at a rate of interest
reflecting the market rate of the security at the time of issuance. While zero
coupon bonds do not require the periodic payment of interest, deferred interest
bonds provide for a period of delay
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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: The
High Income Series may invest a portion of its assets in collateralized mortgage
obligations or "CMOs," which are debt obligations collateralized by mortgage
loans or mortgage pass-through securities. Typically, CMOs are collateralized by
certificates issued by the Government National Mortgage Association ("GNMA"),
the Federal National Mortgage Association ("FNMA") or the Federal Home Loan
Mortgage Corporation ("FHLMC"), but also may be collateralized by whole loans or
private mortgage pass-through securities (such collateral collectively referred
to as "Mortgage Assets"). The Series may also invest a portion of its assets in
multiclass pass-through securities which are interests in a trust composed of
Mortgage Assets. CMOs (which include multiclass pass-through securities) may be
issued by agencies, authorities or instrumentalities of the U.S. Government or
by private originators of, or investors in, mortgage loans, including savings
and loan associations, mortgage banks, commercial banks, investment banks and
special purpose subsidiaries of the foregoing. Payments of principal of and
interest on the Mortgage Assets, and any reinvestment income thereon, provide
the funds to pay debt service on the CMOs or make scheduled distributions on the
multiclass pass-through securities. In a CMO, a series of bonds or certificates
are usually issued in multiple classes with different maturities. Each class of
CMOs, often referred to as a "tranche," is issued at a specific fixed or
floating coupon rate and has a stated maturity or final distribution date.
Principal prepayments on the Mortgage Assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution dates,
resulting in a loss of all or part of the premium if any has been paid. Certain
classes of CMOs have priority over others with respect to the receipt of
prepayments on the mortgages. Therefore, depending on the type of CMOs in which
the Series invests, the investment may be subject to a greater or lesser risk of
prepayments than other types of mortgage-related securities.
The High Income Series may also invest in parallel pay CMOs and Planned
Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. 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.
STRIPPED MORTGAGE-BACKED SECURITIES: The High Income Series may 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: Each of the Emerging Growth
Series and the High Income Series may each invest a portion of its assets in
"loan participations" and other direct indebtedness. By purchasing a loan
participation, a Series acquires some or all of the interest of a bank or other
lending institution in a loan to a corporate borrower. Many such loans are
secured, and most impose restrictive covenants which must be met by the
borrower. These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans may be in default at the time of purchase. A Series may
also purchase other direct indebtedness such as trade or other claims against
companies, which generally represent money owed by the company to a supplier of
goods
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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: The High Income Series may invest in mortgage
pass-through securities. Mortgage pass-through securities are securities
representing interests in "pools" of mortgage loans. Monthly payments of
interest and principal by the individual borrowers on mortgages are passed
through to the holders of the securities (net of fees paid to the issuer or
guarantor of the securities) as the mortgages in the underlying mortgage pools
are paid off. 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: The High Income 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 High Income Series may enter into interest rate swaps,
currency swaps and other types of available swap agreements, such as caps,
collars and floors. Swaps involve the exchange by the Series with another party
of cash payments based upon different interest rate indexes, currencies, and
other prices or rates, such as the value of mortgage prepayment rates. For
example, in the typical interest rate swap, the Series might exchange a sequence
of cash payments based on a floating rate index for cash payments based on a
fixed rate. Payments made by both parties to a swap transaction are based on a
principal amount determined by the parties.
The High Income Series may also purchase and sell caps, floors and collars. In a
typical cap or floor agreement, one party agrees to make payments only under
specified circumstances, usually in return for payment of a fee by the
counterparty. For example, the purchase of an interest rate cap entitles the
buyer, to the extent that a specified index exceeds a predetermined interest
rate, to receive payments of interest on a contractually-based principal amount
from the counterparty selling such interest rate cap. The sale of an interest
rate floor obligates the seller to make payments to the extent that a specified
interest rate falls below an agreed-upon level. A collar arrangement combines
elements of buying a cap and selling a floor.
Swap agreements will tend to shift the Series' investment exposure from one type
of investment to another. For example, if the Series agreed to exchange payments
in dollars for payments in foreign currency, in each case based on a fixed rate,
the swap agreement would tend to decrease the Series' exposure to U.S. interest
rates and increase its exposure to foreign currency and interest rates. Caps and
floors have an effect similar to buying or writing options. Depending on how
they are used, swap agreements may increase or decrease the overall volatility
of the Series' investments and its share price and yield.
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Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on the
Series' performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. The Series may also suffer losses
if it is unable to terminate outstanding swap agreements or reduce its exposure
through offsetting transactions.
Swaps, caps, floors and collars are highly specialized activities which involve
certain risks. See the SAI for further information on, and the risks involved
in, these activities.
OPTIONS ON SECURITIES: Each Series may write (sell) covered put and call options
and purchase put and call options on securities. Each 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 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.
OPTIONS ON STOCK INDICES: Each of the Emerging Growth Series and the Growth With
Income 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.
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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: The High Income Series may enter into options on the
yield "spread," or yield differential, between two securities, a transaction
referred to as a "yield curve" option, for hedging and non-hedging (an effort to
increase current income) purposes. In contrast to other types of options, a
yield curve option is based on the difference between the yields of designated
securities rather than the actual prices of the individual securities, and is
settled through cash payments. Accordingly, a yield curve option is profitable
to the holder if this differential widens (in the case of a call) or narrows (in
the case of a put), regardless of whether the yields of the underlying
securities increase or decrease. Yield curve options written by the 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: The High Income Series may
purchase and sell Futures Contracts on foreign or domestic fixed income
securities or indices of such securities, including municipal bond indices and
any other indices of foreign or domestic fixed income securities that may become
available for trading. The Series may also purchase and write options on such
Futures Contracts ("Options on Futures Contracts"). The Emerging Growth Series
and the Growth With Income Series may purchase and sell Futures Contracts on
stock indices and may also 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 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 Series may enter into Forward
Contracts for hedging purposes and (except for the High Income Series) for
non-hedging purposes (I.E., speculative purposes). By entering into transactions
in Forward Contracts for hedging purposes, a Series may be required to forego
the benefits of advantageous changes in exchange rates and, in the case of
Forward Contracts entered into for non-hedging purposes, a Series may sustain
losses which will reduce its gross income. Such transactions, therefore, could
be considered speculative. Forward Contracts are traded over-the-counter and not
on organized commodities or securities exchanges. As a result, Forward Contracts
operate in a manner distinct from exchange-traded instruments, and their use
involves certain risks beyond those associated with transactions in Futures
Contracts or options traded on exchanges. A Series may choose to, or be required
to,
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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 Series may also purchase and write options
on foreign currencies ("Options on Foreign Currencies") for the purpose of
protecting against declines in the dollar value of portfolio securities and
against increases in the dollar cost of securities to be acquired. As in the
case of other types of options, however, the writing of an Option on Foreign
Currency will constitute only a partial hedge, up to the amount of the premium
received, and a Series may be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
Option on Foreign Currency may constitute an effective hedge against
fluctuations in exchange rates although, in the event of rate movements adverse
to a Series' position, it may forfeit the entire amount of the premium paid for
the option plus related transaction costs. A Series may also choose to, or be
required to, receive delivery of the foreign currencies underlying Options on
Foreign Currencies it has entered into. Under certain circumstances, such as
where the Adviser believes that the applicable exchange rate is unfavorable at
the time the currencies are received or the Adviser anticipates, for any other
reason, that the exchange rate will improve, a Series may hold such currencies
for an indefinite period of time.
6. ADDITIONAL RISK FACTORS
OPTIONS, FUTURES CONTRACTS AND FORWARD CONTRACTS: Although certain Series will
enter into transactions in options, Futures Contracts, Options on Futures
Contracts, Forward Contracts and Options on Foreign Currencies for hedging
purposes, such transactions nevertheless involve certain risks. For example, a
lack of correlation between the instrument underlying an option or Futures
Contract and the assets being hedged, or unexpected adverse price movements,
could render a Series' hedging strategy unsuccessful and could result in losses.
Certain Series also may enter into transactions in options, Futures Contracts,
Options on Futures Contracts and Forward Contracts for other than hedging
purposes, which involves greater risk. In particular, such transactions may
result in losses for a Series which are not offset by gains on other portfolio
positions, thereby reducing gross income. In addition, foreign currency markets
may be extremely volatile from time to time. There also can be no assurance that
a liquid secondary market will exist for any contract purchased or sold, and a
Series may be required to maintain a position until exercise or expiration,
which could result in losses. The 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 and the High Income Series
may invest in fixed income securities rated Baa by Moody's Investors Services,
Inc. ("Moody's") or BBB by Standard and Poor's Ratings Services ("S&P") or by
Fitch Investors Service, Inc. ("Fitch") and comparable unrated securities. These
securities, while normally exhibiting adequate protection parameters, have
speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than in the case of higher grade securities.
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Each 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 be beneficial to convert such currency into U.S. dollars at a
later date, based on anticipated changes in the relevant exchange rate. Each
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
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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.
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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 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
18
<PAGE>
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.
7. MANAGEMENT OF THE SERIES
The Trust's Board of Trustees, as part of its overall management responsibility,
oversees various organizations responsible for each Series' day-to-day
management.
INVESTMENT ADVISER -- MFS manages each Series pursuant to an Investment Advisory
Agreement with the Trust on behalf of each Series dated April 14, 1994 (the
"Advisory Agreement"). MFS provides the Series with overall investment advisory
and administrative services, as well as general office facilities. Subject to
such policies as the Trustees may determine, MFS makes investment decisions for
each Series. For its services and facilities, MFS receives a management fee,
computed and paid monthly, in an amount equal to the following annual rates of
the average daily net assets of each Series:
<TABLE>
<CAPTION>
PERCENTAGE OF THE
AVERAGE DAILY NET
ASSETS
SERIES OF EACH SERIES
- --------------------------------------------------------------------------------------------- ----------------------
<S> <C>
Emerging Growth Series....................................................................... 0.75%
Growth With Income Series.................................................................... 0.75%
High Income Series........................................................................... 0.75%
</TABLE>
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
Growth With Income Series......................................................... 597 16,226
High Income Series................................................................ 3,996 17,847
</TABLE>
MFS or its affiliates will pay a fee to The Union Central Life Insurance Company
equal, on an annualized basis, to 0.10% of the aggregate net assets of each
Series attributable to Contracts offered by separate accounts of The Union
Central Life Insurance Company or its affiliates. Such fee will not be paid by
the Series, their shareholders, or by the Contract holders.
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> <C>
1. 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.
2. Growth With Income Kevin R. Parke, a Senior Vice President of MFS, has been employed
Series by the Adviser as a portfolio manager since 1985. John D.
Laupheimer, a Senior Vice President of MFS, has been employed by
the Adviser as a portfolio manager since 1981.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
SERIES PORTFOLIO MANAGERS
------------------------ -----------------------------------------------------------------
<S> <C> <C>
3. High Income Series Joan S. Batchelder, a Senior Vice President of the Adviser, has
been employed by the Adviser as a portfolio manager since 1984.
</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 Hypohteken-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 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.
20
<PAGE>
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.
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
21
<PAGE>
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.
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
22
<PAGE>
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.
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. For further information about the 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 from your
Participating Insurance Company.
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.
MFS has agreed to pay expenses of each 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.
23
<PAGE>
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.
24
<PAGE>
APPENDIX A
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the quality
of various debt instruments. It should be emphasized, however, that ratings are
not absolute standards of quality. Consequently, debt instruments with the same
maturity, coupon and rating may have different yields while debt instruments of
the same maturity and coupon with different ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
AAA: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuations of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
BAA: Bonds which are rated Baa are considered as medium grade obligations, I.E.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. an application for rating was not received or accepted;
2. the issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy;
A-1
<PAGE>
3. there is a lack of essential data pertaining to the issue or issuer; and
4. the issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
STANDARD & POOR'S RATINGS 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.
A-2
<PAGE>
A-1 AND P-1 COMMERCIAL PAPER RATINGS
Description of S&P, Fitch and Moody's highest commercial paper ratings:
The rating "A" is the highest commercial paper rating assigned by S&P and Fitch,
and issues so rated are regarded as having the greatest capacity for timely
payment. Issues in the "A" category are delineated with the numbers 1, 2 and 3
to indicate the relative degree of safety. The A-1 designation indicates that
the degree of safety regarding timely payment is either overwhelming or very
strong. Those A-1 issues determined to possess overwhelming safety
characteristics will be denoted with a plus (+) sign designation.
The rating P-1 is the highest commercial paper rating assigned by Moody's.
Issuers rated P-1 have a superior ability for repayment. P-1 repayment capacity
will normally be evidenced by the following characteristics: (1) leading market
positions in well established industries; (2) high rates of return on funds
employed; (3) conservative capitalization structure with moderate reliance on
debt and ample asset protection; (4) broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and (5) well established
access to a range of financial markets and assured sources of alternate
liquidity.
FITCH INVESTORS SERVICE, INC.
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and prepay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated 'AAA'. Because bonds rated in the 'AAA' and
'AA' categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated 'F-1+'.
A: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds and, therefore, impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest of principal.
PLUS(+) MINUS(-): Plus and minus signs are used with a rating symbol to indicate
the relative position of a credit within the rated category. Plus and minus
signs, however, are not used in the 'AAA' category.
NR: indicates that Fitch does not rate the specific issue.
A-3
<PAGE>
CONDITIONAL: A conditional rating is premised on the successful completion of a
project or the occurrence of a specific event.
SUSPENDED: A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
WITHDRAWN: A rating will be withdrawn when an issue matures or is called or
refinanced, and, at Fitch's discretion, when an issuer fails to furnish proper
and timely information.
FITCHALERT: Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the likely direction
of such change. These are designated a "Positive," indicating a potential
upgrade, "Negative," for potential downgrade, or "Evolving," where ratings may
be lowered, FitchAlert is relatively short-term, and should be resolved within
12 months.
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
MFS HIGH INCOME 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 S&P rating is used and when an
S&P rating is unavailable, secondary sources are selected in the following
order: Moody's, Duff & Phelps and Fitch.
<TABLE>
<CAPTION>
COMPILED
RATING RATINGS TOTAL
- ----------- ----------- ----------
<S> <C> <C> <C>
AAA/Aaa -- --
AA/Aa -- --
A/A -- --
BBB/Baa -- --
BB/Ba 33.30% 33.30%
B/B 55.40 55.40
CCC/Caa 5.10 5.10
CC/Ca -- --
C/C -- --
Default -- --
----- -----
TOTAL 93.80% 93.80%
</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.
B-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 additional information, contact
your financial adviser.
INDEPENDENT AUDITORS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
------------------------------------
MFS-REGISTERED TRADEMARK- EMERGING GROWTH SERIES-SM-
MFS-REGISTERED TRADEMARK- GROWTH WITH INCOME SERIES-SM-
MFS-REGISTERED TRADEMARK- HIGH INCOME SERIES-SM-
[LOGO]
PROSPECTUS
MAY 1, 1996
[LOGO]
MFS-REGISTERED TRADEMARK- EMERGING GROWTH SERIES-SM-
MFS-REGISTERED TRADEMARK- GROWTH WITH INCOME SERIES-SM-
MFS-REGISTERED TRADEMARK- HIGH INCOME SERIES-SM-
500 Boylston Street, Boston, MA 02116
------------------------
