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MFS-REGISTERED TRADEMARK- RESEARCH SERIES-SM- PROSPECTUS
MFS-REGISTERED TRADEMARK- UTILITIES SERIES-SM- May 1, 1996
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MFS-Registered Trademark- VARIABLE INSURANCE TRUST-SM-
MFS Variable Insurance Trust (the "Trust") is an open-end management investment
company offering insurance company separate accounts a selection of investment
vehicles for variable annuity and variable life insurance contracts (the
"Contracts"). Currently the Trust offers shares of beneficial interest of 12
separate mutual fund series (individually or collectively hereinafter referred
to as a "Series" or the "Series"), two of which are offered pursuant to this
Prospectus:
- -- MFS RESEARCH SERIES (the "Research Series"), which seeks to provide long-term
growth of capital and future income; and
- -- MFS UTILITIES SERIES (the "Utilities Series"), which seeks capital growth and
current income (income above that available from a portfolio invested
entirely in equity securities).
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THE RESEARCH SERIES IS 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.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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SHARES OF THE TRUST ARE AVAILABLE AND ARE BEING MARKETED AS A POOLED FUNDING
VEHICLE FOR LIFE INSURANCE COMPANIES WRITING ALL TYPES OF CONTRACTS.
This Prospectus sets forth concisely the information about each Series that a
prospective investor should know before applying for the Contracts offered by
the separate accounts of certain insurance companies ("Participating Insurance
Companies"). Investors are advised to read this Prospectus and the applicable
Contract prospectus carefully and retain them for future reference. If you
require more detailed information, a Statement of Additional Information ("SAI")
dated May 1, 1996, as amended or supplemented from time to time, is available
upon request without charge and may be obtained by calling or by writing to the
Shareholder Servicing Agent (see back cover for address and phone number). The
SAI, which is incorporated by reference into this Prospectus, has been filed
with the Securities and Exchange Commission (the "SEC").
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
1. Expense Summary................................................................................ 3
2. Investment Concept of the Trust................................................................ 4
3. Condensed Financial Information................................................................ 5
4. Investment Objectives and Policies............................................................. 7
MFS Research Series............................................................................ 7
MFS Utilities Series........................................................................... 7
5. Investment Techniques.......................................................................... 9
6. Additional Risk Factors........................................................................ 14
7. Management of the Series....................................................................... 17
8. Information Concerning Shares of Each Series................................................... 19
Purchases and Redemptions...................................................................... 19
Net Asset Value................................................................................ 19
Distributions.................................................................................. 19
Tax Status..................................................................................... 20
Description of Shares, Voting Rights and Liabilities........................................... 20
Performance Information........................................................................ 20
Expenses....................................................................................... 21
Shareholder Communications..................................................................... 21
Appendix A -- Description of Bond Ratings.......................................................... A-1
Appendix B -- Principal Sectors of the Utilities Industry.......................................... B-1
</TABLE>
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1. EXPENSE SUMMARY
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS):
<TABLE>
<CAPTION>
MFS MFS
RESEARCH UTILITIES
SERIES SERIES
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<S> <C> <C>
Management Fee.............................................. 0.75% 0.75%
Other Expenses (after fee reduction)(2)..................... 0.25%(1) 0.25%(1)
--- ---
Total Operating Expenses (after fee reduction).............. 1.00%(1) 1.00%(1)
<FN>
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(1) The Adviser has agreed to bear, subject to reimbursement, expenses for each Series such that each Series' aggregate
operating expenses shall not exceed, on an annualized basis, 1.00% of the average daily net assets of the Series
from November 2, 1994 through December 31, 1996, 1.25% of the average daily net assets of the Series from January 1,
1997 through December 31, 1998, and 1.50% of the average daily net assets of the Series from January 1, 1999 through
December 31, 2004; provided however, that this obligation may be terminated or revised at any time. See "Information
Concerning Shares of Each Series--Expenses" below. Absent this expense arrangement, "Other Expenses" for the
Research Series and Utilities Series would be 3.15% and 2.33%, respectively, and "Total Operating Expenses" would be
3.90% and 3.08%, respectively, for these 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.
3
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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 Research Series and Utilities Series are diversified and non-
diversified Series of the Trust, respectively. Additional series may be created
from time to time. The Trust was organized as a business trust under the laws of
The Commonwealth of Massachusetts by a Declaration of Trust dated February 1,
1994.
The Trust currently offers shares of each Series to insurance company
separate accounts that fund Contracts. Separate accounts may purchase or redeem
shares at net asset value without any sales or redemption charge. Fees and
charges imposed by a separate account, however, will affect the actual return to
the holder of a Contract. A separate account may also impose certain
restrictions or limitations on the allocation of purchase payments or Contract
value to one or more Series, and not all Series may be available in connection
with a particular Contract. Prospective investors should consult the applicable
Contract prospectus for information regarding fees and expenses of the Contract
and separate account and any applicable restrictions or limitations. The Trust
assumes no responsibility for such prospectuses.
Shares of the Series are offered to the separate accounts of Participating
Insurance Companies that are affiliated or unaffiliated ("shared funding").
Shares of the Series may serve as the underlying investments for both variable
annuity and variable life insurance contracts ("mixed funding"). Due to
differences in tax treatment or other considerations, the interests of various
Contract owners might at some time be in conflict. The Trust currently does not
foresee any such conflict. Nevertheless, the Trust's Trustees intend to monitor
events in order to identify any material irreconcilable conflicts which may
possibly arise and to determine what action, if any, should be taken in response
thereto. If such a conflict were to occur, one or more separate accounts of the
Participating Insurance Companies might be required to withdraw its investments
in one one or more Series. This might force a Series to sell securities at
disadvantageous prices.
Individual Contract holders are not the "shareholders" of the Trust. Rather,
the Participating Insurance Companies and their separate accounts are the
shareholders or investors, although such companies may pass through voting
rights to their Contract holders.
The Trust's Board of Trustees provides broad supervision over the affairs of
the Trust and the Series. Massachusetts Financial Services Company, a Delaware
corporation ("MFS" or the "Adviser"), is the investment adviser to each Series.
A majority of the Trustees of the Trust are not affiliated with the Adviser. The
Adviser is responsible for the management of the assets of each Series and the
officers of the Trust are responsible for the operations. The Adviser manages
the Series' portfolios from day to day in accordance with the investment
objectives and policies of each Series. The selection of investments and the way
they are managed depend on the conditions and trends in the economy and the
financial marketplaces.
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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.
RESEARCH SERIES
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1995*
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<S> <C>
Per share data (for a share outstanding throughout the period):
Net asset value--beginning of period............................. $10.00
------
Income from investment operations#--
Net investment incomeSection................................... $ 0.05
Net realized and unrealized gain on investments and foreign
currency transactions........................................ 1.01
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Total from investment operations............................. $ 1.06
------
Less distributions declared to shareholders--
From net investment income..................................... $(0.03)
From net realized gain on investments and foreign currency
transactions................................................. (0.14)
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Total distributions declared to shareholders................. $(0.17)
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Net asset value--end of period................................... $10.89
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Total return..................................................... 10.62%++
Ratios (to average net assets)/Supplemental dataSection:
Expenses....................................................... 1.00%+
Net investment income.......................................... 1.15%+
Portfolio turnover............................................... 28%
Net assets at end of period (000 omitted)........................ $2,530
<FN>
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* For the period from the commencement of investment operations, July 26, 1995 to December 31, 1995.
+ Annualized.
++ Not annualized.
# Per share data is based on average shares outstanding.
Section The Adviser voluntarily agreed to maintain the expenses of the Series at not more than 1.00% of average daily net
assets. To the extent actual expenses were over these limitations, the net investment loss per share and the ratios
would have been:
Net investment loss......................................... $(0.08)
Ratios (to average net assets):
Expenses.................................................. 3.90%+
Net investment loss....................................... (1.73)%+
</TABLE>
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UTILITIES SERIES
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1995*
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<S> <C>
Per share data (for a share outstanding throughout the period):
Net asset value--beginning of period............................. $10.00
------
Income from investment operations#--
Net investment incomeSection................................... $ 0.39
Net realized and unrealized gain on investments and foreign
currency transactions........................................ 3.00
------
Total from investment operations............................. $ 3.39
------
Less distributions declared to shareholders--
From net investment income..................................... $(0.24)
From net realized gain on investments and foreign currency
transactions................................................. (0.58)
------
Total distributions declared to shareholders................. $(0.82)
------
Net asset value--end of period................................... $12.57
------
------
Total return..................................................... 33.94%++
Ratios (to average net assets)/Supplemental dataSection:
Expenses....................................................... 1.00%+
Net investment income.......................................... 3.66%+
Portfolio turnover............................................... 94%
Net assets at end of period (000 omitted)........................ $2,373
<FN>
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* For the period from the commencement of investment operations, January 3, 1995 to December 31, 1995.
+ Annualized.
++ Not annualized.
# Per share data is based on average shares outstanding.
Section The Adviser voluntarily agreed to maintain the expenses of the Series at not more than 1.00% of average daily net
assets. To the extent actual expenses were over these limitations, the net investment income per share and the
ratios would have been:
Net investment income....................................... $0.17
Ratios (to average net assets):
Expenses.................................................. 3.08%+
Net investment income..................................... 1.62%+
</TABLE>
6
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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 below under the caption "Additional Risk Factors."
MFS RESEARCH SERIES -- The Research Series' investment objective is to provide
long-term growth of capital and future income.
The portfolio securities of the Research Series are selected by the
investment research analysts in the Equity Research Group of the Adviser. The
Series' assets are allocated to industry groups (E.G., pharmaceuticals, retail
and computer software). The allocation by industry group is determined by the
analysts acting together. Individual analysts are then responsible for selecting
what they view as the securities best suited to meet the Series' investment
objective within their assigned industry group.
The Research Series' policy is to invest a substantial proportion of its
assets in the common stocks or securities convertible into common stocks of
companies believed to possess better than average prospects for long-term
growth. A smaller proportion of the assets may be invested in bonds, short-term
obligations, preferred stocks or common stocks whose principal characteristic is
income production rather than growth. Such securities may also offer
opportunities for growth of capital as well as income. In the case of both
growth stocks and income issues, emphasis is placed on the selection of
progressive, well-managed companies. The Series' non-convertible debt
investments, if any, may consist of "investment grade" securities (rated Baa or
better by Moody's Investors Service, Inc. ("Moody's") or BBB or better by
Standard & Poor's Ratings Services ("S&P") or by Fitch Investors Service, Inc.
("Fitch")), and, with respect to no more than 10% of the Series' net assets,
securities in the lower rated categories (rated Ba or lower by Moody's or BB or
lower by S&P or by Fitch) or securities which the Adviser believes to be of
similar quality to these lower rated securities (commonly known as "junk
bonds"). For a description of bond ratings, see Appendix A to this Prospectus.
Consistent with its investment objective and policies described above, the
Series may also invest up to 20% of its net assets in foreign securities
(including emerging market securities) which are not traded on a U.S. exchange.
MFS UTILITIES SERIES -- The Utilities Series' investment objective is to seek
capital growth and current income (income above that available from a portfolio
invested entirely in equity securities).
The Utilities Series will seek to achieve its objective by investing, under
normal circumstances, at least 65% (but up to 100% at the discretion of the
Adviser) of its assets in equity and debt securities of both domestic and
foreign companies in the utilities industry. Equity securities in which the
Series may invest include common stocks, preferred stocks, securities
convertible into common stocks or preferred stocks, and warrants to purchase
common or preferred stocks. At least 80% of the debt securities held by the
Series will be rated at the time of investment at least Baa by Moody's or BBB by
S&P or by Fitch or will be of comparable quality as determined by the Adviser
(see "Additional Risk Factors" below). See Appendix A to this Prospectus for a
description of these ratings. The Series may also invest in debt and equity
securities of issuers in other industries, as discussed below, although under
normal circumstances not more than 35% of the Series' assets will be so
invested. In addition, the Series may hold a portion of its assets in cash and
money market instruments.
7
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Companies in the utilities industry include (i) companies engaged in the
manufacture, production, generation, transmission, sale or distribution of
electric, gas or other types of energy, water or other sanitary services and
(ii) companies engaged in telecommunications, including telephone, cellular
telephones, telegraph, satellite, microwave, cable television and other
communications media (but not companies engaged in public broadcasting). The
Adviser deems a particular company to be in the utilities industry if, at the
time of investment, the Adviser determines that at least 50% of the company's
assets or revenues are derived from one or more of those industries. The portion
of the Utilities Series' assets invested in a particular type of utility and in
equity or debt securities will vary in light of changes in interest rates,
market conditions and economic conditions and other factors. For further
information on the principal sectors of the utilities industry in which the
Series may invest, see Appendix B.
Consistent with its investment objective and policies described above, the
Series may also invest up to 35% of its net assets in foreign securities
(including emerging market securities and Brady Bonds) which are not traded on a
U.S. exchange.
Since the Utilities Series' investments are concentrated in utility
securities, the value of the Series' shares will be especially affected by
factors peculiar to the utilities industry, and may fluctuate more widely than
the value of shares of a fund that invests in a broader range of industries. The
rates many utility companies may charge their customers are controlled by
governmental regulatory commissions which may result in a delay in the utility
company passing along increases in costs to its customers. Furthermore, there is
no assurance that regulatory authorities will, in the future, grant rate
increases or that such increases will be adequate to permit the payment of
dividends on common stocks. Many utility companies, especially electric and gas
and other energy related utility companies, are subject to various
uncertainties, including: risks of increases in fuel and other operating costs;
the high cost of borrowing to finance capital construction during inflationary
periods; difficulty obtaining adequate returns on invested capital, even if
frequent rate increases are approved by public service commissions; restrictions
on operations and increased costs and delays as a result of environmental and
nuclear safety regulations; securing financing for large construction projects
during an inflationary period; difficulties of the capital markets in absorbing
utility debt and equity securities; difficulty in raising capital in adequate
amounts on reasonable terms in periods of high inflation and unsettled capital
markets; technological innovations which may render existing plants, equipment
or products obsolete; the potential impact of natural or man-made disasters;
difficulties in obtaining natural gas for resale or fuel for electric generation
at reasonable prices; coping with the general effects of energy conservation,
particularly in light of changing policies regarding energy; and special risks
associated with the construction and operation of nuclear power generating
facilities, including technical factors and costs, and the possibility that
federal, state and municipal government authorities may from time to time review
existing requirements and impose additional requirements. Certain utility
companies, especially gas and telephone utility companies, have in recent years
been affected by increased competition, which could adversely affect the
profitability of such utility companies. Furthermore, there are uncertainties
resulting from certain telecommunications companies' diversification into new
domestic and international businesses as well as agreements by many such
companies linking future rate increases to inflation or other factors not
directly related to the active operating profits of the enterprise.
Foreign utility companies are also subject to regulation, although such
regulations may or may not be comparable to those in the U.S. Foreign utility
companies may be more heavily regulated by their respective governments than
utilities in the U.S. and, as in the U.S., generally are required to seek
government approval for rate increases. In addition, since many foreign
utilities use fuel that causes more pollution than those used in the U.S., such
utilities may be required to invest in pollution control equipment to meet any
proposed pollution restrictions. Foreign regulatory systems vary from country to
country and may evolve in ways different from regulation in the U.S.
The Utilities Series is permitted to invest in securities of issuers that
are outside the utilities industry, although under normal circumstances not more
than 35% of the Series' assets will be so invested. Such investments may include
common stocks, debt securities (including municipal debt securities) and
preferred stocks and will be selected to meet the Series'
8
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investment objective of both capital growth and current income. These securities
may be issued by either U.S. or non-U.S. companies. Some of these issuers may be
in industries related to the utilities industry and, therefore, may be subject
to similar risks.
Investments outside the utilities industry may also include United States
Government securities, including: (1) U.S. Treasury obligations, which differ
only in their interest rates, maturities and times of issuance: U.S. Treasury
bills (maturities of one year or less); U.S. Treasury notes (maturities of one
to ten years); and U.S. Treasury bonds (generally maturities of greater than ten
years), all of which are backed by the full faith and credit of the U.S.
Government; and (2) obligations issued or guaranteed by U.S. Government
agencies, authorities or instrumentalities, some of which are backed by the full
faith and credit of the U.S. Treasury, E.G., direct pass-through certificates of
the Government National Mortgage Association ("GNMA"); some of which are
supported by the right of the issuer to borrow from the U.S. Government, E.G.,
obligations of Federal Home Loan Banks; and some of which are backed only by the
credit of the issuer itself, E.G., obligations of the Student Loan Marketing
Association (collectively, "U.S. Government Securities"). The term "U.S.
Government Securities" also includes interests in trusts or other entities
representing interests in obligations that are backed by the full faith and
credit of the U.S. Government or are issued or guaranteed by the U.S.
Government, its agencies, authorities or instrumentalities. When and if
available, U.S. Government Securities may be purchased at a discount from face
value. However, the Series does not intend to hold such securities to maturity
for the purpose of achieving potential capital gains, unless current yields on
the securities remain attractive.
5. INVESTMENT TECHNIQUES
LENDING OF PORTFOLIO SECURITIES: Each Series may seek to increase its income
by lending portfolio securities. Such loans will usually be made to member firms
(and subsidiaries thereof) of the New York Stock Exchange (the "Exchange") and
to member banks of the Federal Reserve System, and would be required to be
secured continuously by collateral in cash, U.S. Treasury securities or an
irrevocable letter of credit maintained on a current basis at an amount at least
equal to the market value of the securities loaned. If the Adviser determines to
make securities loans, it is intended that the value of the securities loaned
would not exceed 10% of the value of the net assets of the Series making the
loans.
EMERGING MARKET SECURITIES: Consistent with their respective objectives,
each Series may invest in securities of issuers whose principal activities are
located in emerging market countries. Emerging market countries include any
country determined by the Adviser to have an emerging market economy, taking
into account a number of factors, including whether the country has a low- to
middle- income economy according to the International Bank for Reconstruction
and Development, the country's foreign currency debt rating, its political and
economic stability and the development of its financial and capital markets. The
Adviser determines whether an issuer's principal activities are located in an
emerging market country by considering such factors as its country of
organization, the principal trading market for its securities and the source of
its revenues and assets. The issuer's principal activities generally are deemed
to be located in a particular country if: (a) the security is issued or
guaranteed by the government of that country or any of its agencies, authorities
or instrumentalities; (b) the issuer is organized under the laws of, and
maintains a principal office in that country; (c) the issuer has its principal
securities trading market in that country; (d) the issuer derives 50% or more of
its total revenues from goods sold or services performed in that country; or (e)
the issuer has 50% or more of its assets in that country.
BRADY BONDS: The Utilities 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
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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: The Utilities Series may purchase securities on a
"when-issued" or on a "forward delivery" basis, which means that the securities
will be delivered to the Series at a future date usually beyond customary
settlement time. The commitment to purchase a security for which payment will be
made on a future date may be deemed a separate security. In general, the Series
does not pay for such securities until received, and does not start earning
interest on the securities until the contractual settlement date. While awaiting
delivery of securities purchased on such bases, the Series will normally invest
in cash, cash equivalents and high grade debt securities.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: The Utilities Series may enter into
mortgage "dollar roll" transactions with selected banks and broker-dealers
pursuant to which the Series sells mortgage-backed securities for delivery in
the future (generally within 30 days) and simultaneously contracts to repurchase
substantially similar (same type, coupon and maturity) securities on a specified
future date. The Series will only enter into covered rolls. A "covered roll" is
a specific type of dollar roll for which there is an offsetting cash position or
a cash equivalent security position which matures on or before the forward
settlement date of the dollar roll transaction. In the event that the party with
whom the Series contracts to replace substantially similar securities on a
future date fails to deliver such securities, the Series may not be able to
obtain such securities at the price specified in such contract and thus may not
benefit from the price differential between the current sales price and the
repurchase price.
RESTRICTED SECURITIES: Each Series may purchase securities that are not
registered under the Securities Act of 1933 ("1933 Act") ("restricted
securities"), including those that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the 1933 Act ("Rule 144A
securities"). The Trust's Board of Trustees determines, based upon a continuing
review of the trading markets for a specific Rule 144A security, whether such
security is liquid and thus not subject to the Series' limitation on investing
not more than 15% of its net assets in illiquid investments. The Board of
Trustees has adopted guidelines and delegated to MFS the daily function of
determining and monitoring the liquidity of Rule 144A securities. The Board,
however, will retain sufficient oversight and be ultimately responsible for the
determinations. The Board will carefully monitor each Series' investments in
Rule 144A securities, focusing on such important factors, among others, as
valuation, liquidity and availability of information. This investment practice
could have the effect of decreasing the level of liquidity in a Series to the
extent that qualified institutional buyers become for a time uninterested in
purchasing Rule 144A securities held in the Series' portfolio.
CORPORATE ASSET-BACKED SECURITIES:The Utilities Series may invest in
corporate asset-backed securities. These securities, issued by trusts and
special purpose corporations, are backed by a pool of assets, such as credit
card and automobile loan receivables, representing the obligations of a number
of different parties.
10
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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. The
Series will not pay any additional or separate fees for credit support. The
degree of credit support provided for each issue is generally based on
historical information respecting the level of credit risk associated with the
underlying assets. Delinquency or loss in excess of that anticipated or failure
of the credit support could adversely affect the return on an investment in such
a security.
ZERO COUPON BONDS: The Utilities Series may invest in zero coupon bonds.
Zero coupon bonds are debt obligations which are issued or purchased at a
significant discount from face value. The discount approximates the total amount
of interest the bonds will accrue and compound over the period until maturity or
the first interest payment date at a rate of interest reflecting the market rate
of the security at the time of issuance. Zero coupon bonds do not require the
periodic payment of interest. Such investments benefit the issuer by mitigating
its need for cash to meet debt service, but also require a higher rate of return
to attract investors who are willing to defer receipt of such cash. Such
investments may experience greater volatility in market value due to changes in
interest rates than debt obligations which make regular payments of interest.
The Series will accrue income on such investments for tax and accounting
purposes, as required, which is distributable to shareholders and which, because
no cash is received at the time of accrual, may require the liquidation of other
portfolio securities to satisfy the Series' distribution obligations.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES:
The Utilities Series may invest a portion of its assets in collateralized
mortgage obligations or "CMOs," which are debt obligations collateralized by
mortgage loans or mortgage pass-through securities. Typically, CMOs are
collateralized by certificates issued by GNMA, the Federal National Mortgage
Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"),
but also may be collateralized by whole loans or private mortgage pass-through
securities (such collateral collectively referred to as "Mortgage Assets"). 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
11
<PAGE>
or final distribution date. Principal prepayments on the Mortgage Assets may
cause the CMOs to be retired substantially earlier than their stated maturities
or final distribution dates, resulting in a loss of all or part of the premium
if any has been paid. Certain classes of CMOs have priority over others with
respect to the receipt of prepayments on the mortgages. Therefore, depending on
the type of CMOs in which a Series invests, the investment may be subject to a
greater or lesser risk of prepayments than other types of mortgage-related
securities.
The Utilities Series may also invest in parallel pay CMOs and Planned
Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. PAC
Bonds generally require payments of a specified amount of principal on each
payment date. PAC Bonds are always parallel pay CMOs with the required principal
payment on such securities having the highest priority after interest has been
paid to all classes. For a further description of CMOs, parallel pay CMOs and
PAC Bonds and the risks related to transactions therein, see the SAI.
MORTGAGE PASS-THROUGH SECURITIES: The Utilities Series may invest in
mortgage pass-through securities that are securities issued or guaranteed as to
principal and interest by the U.S. Government, its agencies, authorities or
instrumentalities. Monthly payments of interest and principal by the individual
borrowers on mortgages are passed through to the holders of the securities (net
of fees paid to the issuer or guarantor of the securities) as the mortgages in
the underlying mortgage pools are paid off. Payment of principal and interest on
some mortgage pass-through securities (but not the market value of the
securities themselves) may be guaranteed by the full faith and credit of the
U.S. Government (in the case of securities guaranteed by GNMA); or guaranteed by
U.S. Government-sponsored corporations (such as FNMA or FHLMC, which are
supported only by the discretionary authority of the U.S. Government to purchase
the agency's obligations). Mortgage pass-through securities may also be issued
by non-governmental issuers (such as commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers and other
secondary market issuers). See the SAI for a further discussion of these
securities.
INDEXED SECURITIES: The Utilities 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.
OPTIONS ON STOCK INDICES: The Utilities Series may write (sell) covered call
and put options and purchase call and put options on stock indices. The Series
may write options on stock indices for the purpose of increasing its gross
income and to protect its portfolio against declines in the value of securities
it owns or increases in the value of securities to be acquired. When the Series
writes an option on a stock index, and the value of the index moves adversely to
the holder's position, the option will not be exercised, and the Series will
either close out the option at a profit or allow it to expire unexercised. The
Series will thereby retain the amount of the premium, less related transaction
costs, which will increase its gross income and offset part of the reduced value
of portfolio securities or the increased cost of securities to be acquired. Such
transactions, however, will constitute only partial hedges against adverse price
fluctuations, since any such fluctuations will be offset only to the extent of
the premium received by the Series for the writing of the option, less related
transaction costs. In addition, if the value of an underlying index moves
adversely to the Series' option position, the option may be exercised, and the
Series will experience a loss which may only be partially offset by the amount
of the premium received.
The Series may also purchase put or call options on stock indices in order,
respectively, to hedge its investments against a decline in value or to attempt
to reduce the risk of missing a market or industry segment advance. The Series'
possible loss in either case will be limited to the premium paid for the option,
plus related transaction costs.
12
<PAGE>
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS: The Utilities Series may
purchase and sell Futures Contracts on foreign or domestic fixed income
securities or indices of such securities, including municipal bond indices and
any other indices of foreign or domestic fixed income securities that may become
available for trading. The Series may also purchase and write options on such
Futures Contracts ("Options on Futures Contracts"). The Utilities Series may
purchase and sell Futures Contracts on foreign currencies or indices of foreign
currencies and may also purchase and write Options on such Futures Contracts.
Such transactions will be entered into for hedging purposes or for
non-hedging purposes to the extent permitted by applicable law. The Series will
incur brokerage fees when it purchases and sells Futures Contracts, and will be
required to maintain margin deposits. In addition, Futures Contracts entail
risks. Although the Adviser believes that use of such contracts will benefit the
Series, if its investment judgment about the general direction of exchange rates
or the stock market is incorrect, the Series' overall performance may be poorer
than if it had not entered into any such contract and the Series may realize a
loss. The Series will not enter into any Futures Contract if immediately
thereafter the value of 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
the Series' portfolio than the purchase or sale of the underlying Futures
Contracts since the potential loss is limited to the amount of the premium plus
related transaction costs, although it may be necessary to exercise the option
to realize any profit, which results in the establishment of a futures position.
The writing of Options on Futures Contracts, however, does not present less risk
than the trading of Futures Contracts and will constitute only a partial hedge,
up to the amount of the premium received. In addition, if an option is
exercised, a Series may suffer a loss on the transaction.
Futures Contracts and Options on Futures Contracts that are entered into by
the Series will be traded on U.S. and foreign exchanges.
FORWARD CONTRACTS: 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 for non-hedging purposes (I.E.,
speculative purposes). By entering into transactions in Forward Contracts for
hedging purposes, a Series may be required to forego the benefits of
advantageous changes in exchange rates and, in the case of Forward Contracts
entered into for non-hedging purposes, a Series may sustain losses which will
reduce its gross income. Such transactions, therefore, could be considered
speculative. Forward Contracts are traded over-the-counter and not on organized
commodities or securities exchanges. As a result, Forward Contracts operate in a
manner distinct from exchange-traded instruments, and their use involves certain
risks beyond those associated with transactions in Futures Contracts or options
traded on exchanges. A Series may choose to, or be required to, receive delivery
of the foreign currencies underlying Forward Contracts it has entered into.
Under certain circumstances, such as where the Adviser believes that the
applicable exchange rate is unfavorable at the time the currencies are received
or the Adviser anticipates, for any other reason, that the exchange rate will
improve, the Series may hold such currencies for an indefinite period of time. A
Series may also enter into a Forward Contract on one currency to hedge against
risk of loss arising from fluctuations in the value of a second currency
(referred to as a "cross hedge") if, in the judgment of the Adviser, a
reasonable degree of correlation can be expected between movements in the values
of the two currencies. Each 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: The Utilities Series may purchase and write
options on foreign currencies ("Options on Foreign Currencies") for the purpose
of protecting against declines in the dollar value of portfolio securities and
against increases in the dollar cost of securities to be acquired. As in the
case of other types of options, however, the writing of an Option on Foreign
Currency will constitute only a partial hedge, up to the amount of the premium
received, and the Series may be required to purchase or sell foreign currencies
at disadvantageous exchange rates, thereby incurring losses. The purchase
13
<PAGE>
of an Option on Foreign Currency may constitute an effective hedge against
fluctuations in exchange rates although, in the event of rate movements adverse
to the Series' position, it may forfeit the entire amount of the premium paid
for the option plus related transaction costs. The Series may also choose to, or
be required to, receive delivery of the foreign currencies underlying Options on
Foreign Currencies it has entered into. Under certain circumstances, such as
where the Adviser believes that the applicable exchange rate is unfavorable at
the time the currencies are received or the Adviser anticipates, for any other
reason, that the exchange rate will improve, the Series may hold such currencies
for an indefinite period of time.
6. ADDITIONAL RISK FACTORS
OPTIONS, FUTURES CONTRACTS AND FORWARD CONTRACTS: Although the Utilities
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. The Utilities Series also may enter into transactions in options,
Futures Contracts, Options on Futures Contracts and Forward Contracts for other
than hedging purposes, which involves greater risk. In particular, such
transactions may result in losses for the Series which are not offset by gains
on other portfolio positions, thereby reducing gross income. In addition,
foreign currency markets may be extremely volatile from time to time. There also
can be no assurance that a liquid secondary market will exist for any contract
purchased or sold, and the Series may be required to maintain a position until
exercise or expiration, which could result in losses. The 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 Series may invest in fixed income securities rated
Baa by Moody's or BBB by S&P or Fitch and comparable unrated securities. These
securities, while normally exhibiting adequate protection parameters, have
speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than in the case of higher grade securities.
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. For a description of these ratings,
see Appendix A to this Prospectus. 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
14
<PAGE>
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 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
15
<PAGE>
respond effectively to increases in trading volume, potentially making prompt
liquidation of substantial holdings difficult or impossible at times. Securities
of issuers located in countries with emerging markets may have limited
marketability and may be subject to more abrupt or erratic movements.
Certain emerging markets may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in an
emerging market's balance of payments or for other reasons, a country could
impose temporary restrictions on foreign capital remittances. The Series could
be adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by the application
to the Series of any restrictions on investments.
Investment in certain foreign emerging market debt obligations may be
restricted or controlled to varying degrees. These restrictions or controls may
at times preclude investment in certain foreign emerging market debt obligations
and increase the expenses of the Series.
NON-DIVERSIFICATION:The Utilities Series is "non-diversified," as that term
is defined in the Investment Company Act of 1940 ( the "1940 Act"), but intends
to qualify as a "regulated investment company" ("RIC") for federal income tax
purposes. This means, in general, that although more than 5% of the Series'
total assets may be invested in the securities of one issuer (including a
foreign government), at the close of each quarter of its taxable year the
aggregate amount of such holdings may not exceed 50% of the value of its total
assets, and no more than 25% of the value of its total assets may be invested in
the securities of a single issuer. To the extent that a non-diversified Series
at times may hold the securities of a smaller number of issuers than if it were
"diversified" (as defined in the 1940 Act), the Series will at such times be
subject to greater risk with respect to its portfolio securities than a fund
that invests in a broader range of securities, because changes in the financial
condition or market assessment of a single issuer may cause greater fluctuations
in the Series' total return and the net asset value of its shares.
-------------------
SHORT-TERM INVESTMENTS FOR 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
Distributors, Inc., the distributor of shares of the Trust and of the MFS Family
of Funds, as a factor in the selection of broker-
16
<PAGE>
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>
Research Series.............................................................................. 0.75%
Utilities 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>
Research Series................................................................... $ 4,424 $ 16,913
Utilities Series.................................................................. 9,376 25,513
</TABLE>
MFS or its affiliates will pay a fee to Jefferson-Pilot Life Insurance
Company equal, on an annualized basis, to 0.15% of the aggregate net assets of
each Series attributable to Contracts offered by separate accounts of
Jefferson-Pilot 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>
Research Series The Series is currently managed by a committee comprised of various equity research
analysts employed by the Adviser.
Utilities Series Maura A. Shaughnessy, a Vice President of the Adviser, has been employed by the
Adviser as a portfolio manager since 1991.
</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
17
<PAGE>
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 $20.0 billion of assets invested in equity securities and
approximately $20.0 billion of assets invested in fixed income securities.
Approximately $3.8 billion of the assets managed by MFS are invested in
securities of foreign issuers and non-U.S. dollar-denominated securities of U.S.
issuers. MFS is a subsidiary of Sun Life of Canada (U.S.), which in turn is a
wholly owned subsidiary of Sun Life Assurance Company of Canada ("Sun Life").
The Directors of MFS are A. Keith Brodkin, Jeffrey L. Shames, Arnold D. Scott,
John D. McNeil and John R. Gardner. Mr. Brodkin is the Chairman, Mr. Shames is
the President and Mr. Scott is the Secretary and a Senior Executive Vice
President of MFS. Messrs. McNeil and Gardner are the Chairman and President,
respectively, of Sun Life. Sun Life, a mutual life insurance company, is one of
the largest international life insurance companies and has been operating in the
United States since 1895, establishing a headquarters office here in 1973. The
executive officers of MFS report to the Chairman of Sun Life.
A. Keith Brodkin, the Chairman and a Director of MFS, is the Chairman and
President and a Trustee of the Trust. W. Thomas London, Stephen E. Cavan, James
R. Bordewick, Jr., and James O. Yost, all of whom are officers of MFS, are
officers of the Trust.
MFS has established a strategic alliance with Foreign & Colonial Management
Ltd. ("Foreign & Colonial"). Foreign & Colonial is a subsidiary of two of the
world's oldest financial services institutions, the London-based Foreign &
Colonial Investment Trust PLC, which pioneered the idea of investment management
in 1868, and HYPO-BANK (Bayerische Hypotheken-und Weschsel-Bank AG), the oldest
publicly listed bank in Germany, founded in 1835. As part of this alliance, the
portfolio managers and investment analysts of MFS and Foreign & Colonial will
share their views on a variety of investment related issues, such as the
economy, securities markets, portfolio securities and their issuers, investment
recommendations, strategies and techniques, risk analysis, trading strategies
and other portfolio management matters. MFS will have access to the extensive
international equity investment expertise of Foreign & Colonial, and Foreign &
Colonial will have access to the extensive U.S. equity investment expertise of
MFS. One or more MFS investment analysts are expected to work for an extended
period with Foreign & Colonial's portfolio managers and investment analysts at
their offices in London. In return, one or more Foreign & Colonial employees are
expected to work in a similar manner at MFS' Boston offices.
In certain instances there may be securities which are suitable for a
Series' portfolio as well as for portfolios of other clients of MFS or clients
of Foreign & Colonial. Some simultaneous transactions are inevitable when
several clients receive investment advice from MFS and Foreign & Colonial,
particularly when the same security is suitable for more than one client. While
in some cases this arrangement could have a detrimental effect on the price or
availability of the security as far as a Series is concerned, in other cases,
however, it may produce increased investment opportunities for the Series.
From time to time, the Adviser may purchase, redeem and exchange shares of
any Series. The purchase by the Adviser of shares of a Series may have the
effect of lowering that Series' expense ratio, while the redemption by the
Adviser of shares of a Series may have the effect of increasing that Series'
expense ratio.
DISTRIBUTOR -- MFS Fund Distributors, Inc. ("MFD"), a wholly owned
subsidiary of MFS, is the distributor of shares of each Series and also serves
as distributor for certain of the other mutual funds managed by MFS.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. (the "Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency,
certain dividend disbursing agency and other services for each Series.
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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 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 each of the Series may elect to receive dividends and
capital gain distributions in either cash or additional shares.
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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 these charges from
quotations of a Series' performance has the effect of increasing the performance
quoted. Performance for a Series will vary based on, among other things, changes
in market conditions, the level of interest rates and the level of the Series'
expenses. For further information about the Research and Utilities 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 by contacting
your Participating Insurance Company.
From time to time, quotations of a Series' total return and yield may be
included in advertisements, sales literature or reports to shareholders or
prospective investors. The total return of a Series refers to return assuming an
investment has been held in the Series for one year and for the life of the
Series (the ending date of which will be stated). The total return
20
<PAGE>
quotations may be expressed in terms of average annual or cumulative rates of
return for all periods quoted. Average annual total return refers to the average
annual compound rate of return of an investment in a Series. Cumulative total
return represents the cumulative change in value of an investment in a Series.
Both will assume that all dividends and capital gains distributions were
reinvested. The yield of a Series refers to net investment income generated by a
Series over a specified 30-day (or one month) period. This income is then
"annualized." That is, the amount of income generated by the Series during that
30-day (or one month) period is assumed to be generated over a 12-month period
and is shown as a percentage of net asset value.
EXPENSES
The Trust pays the compensation of the Trustees who are not officers of MFS
and all expenses of each Series (other than those assumed by MFS) including but
not limited to: governmental fees; interest charges; taxes; membership dues in
the Investment Company Institute allocable to each Series; fees and expenses of
independent auditors, of legal counsel, and of any transfer agent, registrar or
dividend disbursing agent of each Series; expenses of repurchasing and redeeming
shares and servicing shareholder accounts; expenses of preparing, printing and
mailing prospectuses, periodic reports, notices and proxy statements to
shareholders and to governmental officers and commissions; brokerage and other
expenses connected with the execution, recording and settlement of portfolio
security transactions; insurance premiums; fees and expenses of Investors Bank &
Trust Company, the Trust's Custodian, for all services to each Series, including
safekeeping of funds and securities and maintaining required books and accounts;
expenses of calculating the net asset value of shares of each Series; and
expenses of shareholder meetings. Expenses relating to the issuance,
registration and qualification of shares of each Series and the preparation,
printing and mailing of prospectuses are borne by each Series except that the
Distribution Agreement with MFD requires MFD to pay for prospectuses that are to
be used for sales purposes. Expenses of the Trust which are not attributable to
a specific Series are allocated between the Series in a manner believed by
management of the Trust to be fair and equitable.
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.
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.
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Participating Insurance Companies with inquiries regarding the Trust may
call the Trust's Shareholder Servicing Agent. (See back cover for address and
phone number.)
-------------------
The SAI for the Trust, dated May 1, 1996, contains more detailed information
about each of the Series, including information related to: (i) the investment
policies and restrictions of each Series; (ii) the Trustees, officers and
investment adviser of the Trust; (iii) portfolio transactions; (iv) the shares
of each Series, including rights and liabilities of shareholders; (v) the method
used to calculate yield and total rate of return quotations of each Series; (vi)
the determination of net asset value of shares of each Series; and (vii) certain
voting rights of shareholders of each Series.
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INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
(800) 637-8730
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN
Investors Bank & Trust Company
89 South Street, Boston, MA 02111
DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 637-8730
MAILING ADDRESS:
P.O. Box 1400, Boston, MA 02104-9985
For more information,
contact your financial adviser.
INDEPENDENT AUDITORS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
[LOGO]
MFS-REGISTERED TRADEMARK- RESEARCH SERIES-SM-
MFS-REGISTERED TRADEMARK- UTILITIES SERIES-SM-
500 Boylston Street, Boston, MA 02116
------------------------------------
MFS-REGISTERED TRADEMARK- RESEARCH SERIES-SM-
MFS-REGISTERED TRADEMARK- UTILITIES SERIES-SM-
[LOGO]
PROSPECTUS
MAY 1, 1996
------------------------
<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
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3. there is a lack of essential data pertaining to the issue or issuer; or
4. the issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
STANDARD & POOR'S RATINGS SERVICES
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The CCC rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior debt
that is assigned an actual or implied CCC rating.
C: The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI: The rating CI is reserved for income bonds on which no interest is being
paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
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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-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.
A-3
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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.
CONDITIONAL: A conditional rating is premised on the successful completion
of a project or the occurrence of a specific event.
SUSPENDED: A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
WITHDRAWN: A rating will be withdrawn when an issue matures or is called or
refinanced, and, at Fitch's discretion, when an issuer fails to furnish proper
and timely information.
FITCHALERT: Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the likely direction
of such change. These are designated a "Positive," indicating a potential
upgrade, "Negative," for potential downgrade, or "Evolving," where ratings may
be lowered. FitchAlert is relatively short-term and should be resolved within 12
months.
A-4
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APPENDIX B
PRINCIPAL SECTORS OF THE UTILITIES INDUSTRY
The principal sectors of the utility industry in which the Utilities Series may
invest are discussed below.
ELECTRIC -- The electric utility industry consists of companies that are engaged
principally in the generation, transmission and sale of electric energy,
although many also provide other energy-related services. Domestic electric
utility companies, in general, recently have been favorably affected by lower
fuel and financing costs and the full or near completion of major construction
programs. In addition, many of these companies recently have generated cash
flows in excess of current operating expenses and construction expenditures,
permitting some degree of diversification into unregulated businesses. Some
electric utilities have also taken advantage of the right to sell power outside
of their traditional geographic areas. Electric utility companies historically
have been subject to the risks associated with increases in fuel and other
operating costs, high interest costs on borrowings needed for capital
construction programs, costs associated with compliance with environmental and
safety regulations and changes in the regulatory climate.
In the U.S., the construction and operation of nuclear power facilities is
subject to increased scrutiny by, and evolving regulations of, the Nuclear
Regulatory Commission and state agencies having comparable jurisdiction.
Increased scrutiny might result in higher operating costs and higher capital
expenditures, with the risk that the regulators may disallow inclusion of these
costs in rate authorizations or the risk that a company may not be permitted to
operate or complete construction of a facility. In addition, operators of
nuclear power plants may be subject to significant costs for disposal of nuclear
fuel and for the de-commissioning of such plants.
TELECOMMUNICATIONS -- The telephone industry is large and highly concentrated.
Companies that distribute telephone services and provide access to the telephone
networks comprise the greatest portion of this segment. Telephone companies in
the U.S. are still experiencing the effects of the breakup of American Telephone
& Telegraph Company, which occurred in 1984. Since 1984, companies engaged in
telephone communication services have expanded their non-regulated activities
into other businesses, including cellular telephone services, data processing,
equipment retailing, computer software and hardware services, and financial
services. This expansion has provided significant opportunities for certain
telephone companies to increase their earnings and dividends at faster rates
than had been allowed in traditionally regulated businesses. Increasing
competition, technological innovations and other structural changes, however,
could adversely affect the profitability of such utilities.
GAS -- Gas transmission companies and gas distribution companies are also
undergoing significant changes. In the U.S., interstate transmission companies
are regulated by the Federal Energy Regulatory Commission, which is reducing its
regulation of the industry. Many companies have diversified into oil and gas
exploration and development, making returns more sensitive to energy prices. In
the recent decade, gas utility companies have been adversely affected by
disruptions in the oil industry and have also been affected by increased
concentration and competition. In the opinion of the Adviser, however,
environmental considerations could improve the gas industry outlook in the
future. For example, natural gas is the cleanest of the hydrocarbon fuels, and
this may result in incremental shifts in fuel consumption toward natural gas and
away from oil and coal.
WATER -- Water supply utilities are companies that collect, purify, distribute
and sell water. In the U.S. and around the world, the industry is highly
fragmented because most of the supplies are owned by local authorities.
Companies in this industry are generally mature and are experiencing little or
no per capita volume growth.
-------------------
There can be no assurance that the positive developments noted above,
including those relating to changing regulation, will occur or that risk factors
other than those noted above will not develop in the future.
B-1
