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MFS-REGISTERED TRADEMARK- EMERGING
GROWTH SERIES
MFS-REGISTERED TRADEMARK- LIMITED PROSPECTUS
MATURITY SERIES May 1, 1997
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MFS-Registered Trademark- VARIABLE INSURANCE TRUSTSM
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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 EMERGING GROWTH SERIES (the "Emerging Growth Series"), which seeks to
provide long-term growth of capital; and
- -- MFS LIMITED MATURITY SERIES (the "Limited Maturity Series"), which seeks
primarily to provide as high a level of current income as is believed to be
consistent with prudent investment risk, and secondarily to protect
shareholders' capital.
-------------------
THE EMERGING GROWTH SERIES IS INTENDED FOR INVESTORS WHO UNDERSTAND AND ARE
WILLING TO ACCEPT THE RISKS ENTAILED IN SEEKING LONG-TERM GROWTH OF CAPITAL.
BECAUSE OF ITS INVESTMENT POLICIES PERMITTING INVESTMENT IN FOREIGN SECURITIES,
INVESTMENTS IN THE EMERGING GROWTH SERIES MAY BE SUBJECT TO A GREATER DEGREE OF
RISK THAN INVESTMENTS IN OTHER INVESTMENT COMPANIES WHICH INVEST ENTIRELY IN
DOMESTIC SECURITIES.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------
SHARES OF THE TRUST ARE AVAILABLE AND ARE BEING MARKETED AS A POOLED FUNDING
VEHICLE FOR LIFE INSURANCE COMPANIES WRITING ALL TYPES OF CONTRACTS.
This Prospectus sets forth concisely the information about each Series that a
prospective investor should know before applying for the Contracts offered by
the separate accounts of certain insurance companies ("Participating Insurance
Companies"). Investors are advised to read this Prospectus and the applicable
Contract prospectus carefully and retain them for future reference. If you
require more detailed information, a Statement of Additional Information dated
May 1, 1997, as amended or supplemented from time to time (the "SAI"), 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"). The SEC
maintains an Internet World Wide Web site that contains the SAI, materials that
are incorporated by reference into this Prospectus and the SAI, and other
information regarding the Series. This Prospectus is available on the Adviser's
Internet World Wide Web site at http://www.mfs.com.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
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TABLE OF CONTENTS
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1. Expense Summary................................................................................ 3
2. Investment Concept of the Trust................................................................ 3
3. Condensed Financial Information................................................................ 5
4. Investment Objectives and Policies............................................................. 7
MFS Emerging Growth Series................................................................. 7
MFS Limited Maturity Series................................................................ 7
5. Investment Techniques.......................................................................... 8
6. Additional Risk Factors........................................................................ 15
7. Management of the Series....................................................................... 17
8. Information Concerning Shares of Each Series................................................... 19
Purchases and Redemptions.................................................................. 19
Net Asset Value............................................................................ 20
Distributions.............................................................................. 20
Tax Status................................................................................. 20
Description of Shares, Voting Rights and Liabilities....................................... 21
Performance Information.................................................................... 21
Expenses................................................................................... 22
Shareholder Communications................................................................. 22
Appendix A -- Description of Bond Ratings.......................................................... A-1
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1. EXPENSE SUMMARY
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS):
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MFS MFS
EMERGING LIMITED
GROWTH MATURITY
SERIES SERIES
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Management Fee.............................................. 0.75% 0.55%
Other Expenses (after expense limitation)(1)(2)............. 0.25% 0.45%
-------- ---
Total Operating Expenses (after expense limitation)(2)...... 1.00% 1.00%
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(1) 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."
(2) The Adviser has agreed to bear expenses for each Series, subject to
reimbursement by each Series, such that each Series' "Other Expenses" shall
not exceed the following percentages of the average daily net assets of the
Series during the current fiscal year: 0.25% for the Emerging Growth Series
and 0.45% for the Limited Maturity Series. See "Information Concerning
Shares of Each Series--Expenses." Otherwise, "Other Expenses" for the
Emerging Growth Series and the Limited Maturity Series would be 0.41% and
7.00%, respectively, and "Total Operating Expenses" would be 1.16% and
7.55%, respectively, for these Series.
The purpose of the expense table above is to assist investors in
understanding the various costs and expenses that a shareholder of the Series
will bear directly or indirectly. The Series' annual operating expenses do not
reflect expenses imposed by separate accounts of Participating Insurance
Companies through which an investment in a Series is made or their related
Contracts. A separate account's expenses are disclosed in the prospectus through
which the Contract relating to that separate account is offered for sale.
2. INVESTMENT CONCEPT OF THE TRUST
The Trust is an open-end, registered management investment company comprised
of the following twelve series: Emerging Growth Series, Value Series, Research
Series, Growth With Income Series, Total Return Series, Utilities Series, High
Income Series, World Governments Series, Strategic Fixed Income Series, Bond
Series, Limited Maturity Series and Money Market Series. Each Series is a
segregated, separately managed portfolio of securities. All of the Series,
except the Utilities Series, World Governments Series and Strategic Fixed Income
Series, are diversified. Additional series may be created from time to time. The
Trust was organized as a business trust under the laws of The Commonwealth of
Massachusetts by a Declaration of Trust dated February 1, 1994.
The Trust currently offers shares of each Series to insurance company
separate accounts that fund Contracts. Separate accounts may purchase or redeem
shares at net asset value without any sales or redemption charge. Fees and
charges imposed by a separate account, however, will affect the actual return to
the holder of a Contract. A separate account may also impose certain
restrictions or limitations on the allocation of purchase payments or Contract
value to one or more Series, and not all Series may be available in connection
with a particular Contract. Prospective investors should consult the applicable
Contract prospectus for information regarding fees and expenses of the Contract
and separate account and any applicable restrictions or limitations. The Trust
assumes no responsibility for such prospectuses.
Shares of the Series are offered to the separate accounts of Participating
Insurance Companies that are affiliated or unaffiliated ("shared funding").
Shares of the Series may serve as the underlying investments for both variable
annuity and variable life insurance contracts ("mixed funding"). Due to
differences in tax treatment or other considerations, the interests of various
Contract owners might at some time be in conflict. The Trust currently does not
foresee any such conflict. Nevertheless, the Trust's Trustees intend to monitor
events in order to identify any material irreconcilable conflicts which may
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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 (presented for each Series which commenced
investment operations prior to December 31, 1996) has been audited since the
commencement of investment operations of such Series and should be read in
conjunction with the financial statements included in the Series' Annual Reports
to Shareholders. These financial statements are incorporated by reference into
the SAI in reliance upon the report of the Series' independent auditors given
upon their authority as experts in accounting and auditing. The Series' current
independent auditors are Deloitte & Touche LLP.
EMERGING GROWTH SERIES
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YEAR ENDED PERIOD ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995*
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Per share data (for a share outstanding throughout each period):
Net asset value--beginning of period............................. $ 11.41 $10.00
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Income from investment operations#--
Net investment income (loss)Section............................ $ (0.01) $ 0.01
Net realized and unrealized gain on investments and foreign
currency transactions........................................ 1.95 1.74
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Total from investment operations............................. $ 1.94 $ 1.75
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Less distributions declared to shareholders--
From net investment income..................................... $ -- $(0.01)
From net realized gain on investments and foreign currency
transactions................................................. (0.06) (0.26)
In excess of net realized gain on investments and foreign
currency transactions........................................ (0.05) --
Tax return of capital.......................................... -- (0.07)
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Total distributions declared to shareholders................. $ (0.11) $(0.34)
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Net asset value--end of period................................... $ 13.24 $11.41
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Total return..................................................... 17.02% 17.41%++
Ratios (to average net assets)/Supplemental dataSection:
Expenses....................................................... 1.00% 1.00%+
Net investment income (loss)................................... (0.08)% 0.10%+
Portfolio turnover............................................... 96% 73%
Average commission rate###....................................... $ 0.0401 --
Net assets at end of period (000 omitted)........................ $104,956 $3,869
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* For the period from the commencement of investment operations, July 24, 1995 to December 31, 1995.
+ Annualized.
++ Not annualized.
# Per share data is based on average shares outstanding.
### Average commission rate is calculated for Series' with fiscal years beginning on or after September 1, 1995.
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.............................................. $(0.03) $(0.18)
Ratios (to average net assets):
Expenses....................................................... 1.16% 2.91%+
Net investment loss............................................ (0.23)% (1.78)%+
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LIMITED MATURITY SERIES
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PERIOD ENDED
DECEMBER 31, 1996*
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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................................... $ 0.25
Net realized and unrealized gain on investments and foreign
currency transactions........................................ 0.01
------
Total from investment operations............................. $ 0.26
------
Less distributions declared to shareholders--
From net investment income..................................... $(0.25)
------
Net asset value--end of period................................... $10.01
------
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Total return..................................................... 2.61%++
Ratios (to average net assets)/Supplemental dataSection:
Expenses....................................................... 1.00%+
Net investment income.......................................... 6.61%+
Portfolio turnover............................................... 109%
Average commission rate.......................................... --
Net assets at end of period (000 omitted)........................ $ 523
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* For the period from the commencement of investment operations, August 14, 1996 to December 31, 1996.
+ 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............................................ $0.01
Ratios (to average net assets):
Expenses....................................................... 7.55%+
Net investment income.......................................... 0.06%+
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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 EMERGING GROWTH SERIES -- The Series seeks to provide long-term growth of
capital. Dividend and interest income from portfolio securities, if any, is
incidental to the Series' investment objective of long-term growth of capital.
The Series' policy is to invest primarily (I.E., at least 80% of its assets
under normal circumstances) in common stocks of companies that MFS believes are
early in their life cycle but which have the potential to become major
enterprises (emerging growth companies). Such companies generally would be
expected to show earnings growth over time that is well above the growth rate of
the overall economy and the rate of inflation, and would have the products,
technologies, management and market and other opportunities which are usually
necessary to become more widely recognized as growth companies. Emerging growth
companies can be of any size, and the Series may invest in larger or more
established companies whose rates of earnings growth are expected to accelerate
because of special factors, such as rejuvenated management, new products,
changes in consumer demand, or basic changes in the economic environment. While
the Series will invest primarily in common stocks, the Series may, to a limited
extent, seek appreciation in other types of securities such as fixed income
securities (which may be unrated), convertible securities and warrants when
relative values make such purchases appear attractive either as individual
issues or as types of securities in certain economic environments. The Series
may invest in non-convertible fixed income securities rated lower than
"investment grade" (rated Ba or lower by Moody's Investors Service, Inc.
("Moody's") or BB or lower by Standard & Poor's Ratings Services ("S&P") or
Fitch Investors Service, Inc. ("Fitch")) (commonly known as "junk bonds") or in
comparable unrated securities, when, in the opinion of the Adviser, such an
investment presents a greater opportunity for appreciation with comparable risk
to an investment in "investment grade" securities. Under normal market
conditions, the Series will invest not more than 5% of its net assets in these
securities. For a description of these ratings, see Appendix A to this
Prospectus.
The nature of investing in emerging growth companies involves greater risk
than is customarily associated with investments in more established companies.
Emerging growth companies often have limited product lines, markets or financial
resources, and they may be dependent on one-person management. In addition,
there may be less research available on many promising small and medium sized
emerging growth companies, making it more difficult to find and analyze these
companies. The securities of emerging growth companies may have limited
marketability and may be subject to more abrupt or erratic market movements than
securities of larger, more established growth companies or the market averages
in general. Shares of the Series, therefore, are subject to greater fluctuation
in value than shares of a conservative equity fund or of a growth fund which
invests entirely in proven growth stocks.
Consistent with its investment objective and policies described above, the
Series may also invest up to 25% (and generally expects to invest not more than
15%) of its net assets in foreign securities (including emerging market
securities and Brady Bonds) which are not traded on a U.S. exchange.
MFS LIMITED MATURITY SERIES -- The Limited Maturity Series' primary investment
objective is to provide as high a level of current income as is believed to be
consistent with prudent investment risk. The Series' secondary objective is to
protect shareholders' capital.
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In seeking to achieve its investment objectives, the Limited Maturity Series
invests, under normal market conditions, substantially all its assets in the
following securities:
1. Debt securities (including corporate asset-backed securities and mortgage
pass-through securities discussed below) which have a rating within the
four highest grades as determined by S&P or Fitch (AAA, AA, A or BBB) or
Moody's (Aaa, Aa, A or Baa) and comparable unrated securities; for a
description of these rating categories, see Appendix A to this
Prospectus;
2. U.S. Government Securities, as defined in "Investment Objectives and
Policies--MFS Total Return Series" above; or
3. Commercial paper, repurchase agreements, cash or cash equivalents (such
as certificates of deposit and bankers' acceptances).
The Limited Maturity Series will only invest in securities rated within the
four highest grades, as determined by S&P or Moody's or Fitch, and comparable
unrated securities. In addition, the dollar-weighted average quality of the
Series will be within the three highest grades, as determined by S&P or Moody's
or Fitch (or the Adviser in the case of unrated securities).
Under normal market conditions, substantially all the securities in the
Series' portfolio will have remaining maturities of five years or less or
estimated remaining average lives of five years or less. In the case of
mortgage-backed and corporate asset-backed securities as well as collateralized
mortgage obligations, the average life is likely to be substantially shorter
than the stated final maturity as a result of unscheduled principal prepayments.
For purposes of the foregoing investment policy, securities having a certain
maturity will be deemed to include securities with an equivalent "duration" of
such securities. "Duration" is a commonly used measure of the longevity of a
debt instrument that takes into account the full stream of payments received on
a debt instrument, including both interest and principal payments, based on
their present values. A debt instrument's duration is derived by discounting
principal and interest payments to their present value using the instrument's
current yield to maturity and taking the dollar-weighted average time until
those payments will be received. Contractual rights to dispose of a security
will be considered in calculating duration because such rights limit the period
during which the Series bears a market risk with respect to the security.
The Limited Maturity Series may invest up to 25% of its assets in dollar
denominated foreign debt securities which may include emerging market securities
and Brady Bonds.(See "Investment Techniques" and "Additional Risk Factors"
below.)
5. INVESTMENT TECHNIQUES
LENDING OF PORTFOLIO SECURITIES: Each of the Series may seek to increase its
income by lending portfolio securities. Such loans will usually be made 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
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revenues and assets. The issuer's principal activities generally are deemed to
be located in a particular country if: (a) the security is issued or guaranteed
by the government of that country or any of its agencies, authorities or
instrumentalities; (b) the issuer is organized under the laws of, and maintains
a principal office in that country; (c) the issuer has its principal securities
trading market in that country; (d) the issuer derives 50% or more of its total
revenues from goods sold or services performed in that country; or (e) the
issuer has 50% or more of its assets in that country.
BRADY BONDS: Each of the Series may invest in Brady Bonds, which are
securities created through the exchange of existing commercial bank loans to
public and private entities in certain emerging markets for new bonds in
connection with debt restructurings under a debt restructuring plan introduced
by former U.S. Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan").
Brady Plan debt restructurings have been implemented to date in Argentina,
Brazil, Bulgaria, Costa Rica, Dominican Republic, Ecuador, Jordan, Mexico,
Nigeria, Panama, the Philippines, Poland, Uruguay and Venezuela. Brady Bonds
have been issued only recently, and for that reason do not have a long payment
history. Brady Bonds may be collateralized or uncollateralized, are issued in
various currencies (but primarily the U.S. dollar) and are actively traded in
over-the-counter secondary markets. U.S. dollar-denominated, collateralized
Brady Bonds, which may be fixed-rate bonds or floating-rate bonds, are generally
collateralized in full as to principal by U.S. Treasury zero coupon bonds having
the same maturity as the bonds. Brady Bonds are often viewed as having three or
four valuation components: the collateralized repayment of principal at final
maturity; the collateralized interest payments; the uncollateralized interest
payments; and any uncollateralized repayment of principal at maturity (these
uncollateralized amounts constituting the "residual risk"). In light of the
residual risk of Brady Bonds and the history of defaults of countries issuing
Brady Bonds with respect to commercial bank loans by public and private
entities, investments in Brady Bonds may be viewed as speculative.
REPURCHASE AGREEMENTS: Each of the Series may enter into repurchase
agreements in order to earn income on available cash or as a temporary defensive
measure. Under a repurchase agreement, a Series acquires securities subject to
the seller's agreement to repurchase at a specified time and price. If the
seller becomes subject to a proceeding under the bankruptcy laws or its assets
are otherwise subject to a stay order, the Series' right to liquidate the
securities may be restricted (during which time the value of the securities
could decline). As discussed in the SAI, each Series has adopted certain
procedures intended to minimize risk.
"WHEN-ISSUED" SECURITIES: Each of the Series may purchase securities on a
"when-issued" or on a "forward delivery" basis, which means that the securities
will be delivered to the Series at a future date usually beyond customary
settlement time. The commitment to purchase a security for which payment will be
made on a future date may be deemed a separate security. In general, a Series
does not pay for such securities until received, and does not start earning
interest on the securities until the contractual settlement date. While awaiting
delivery of securities purchased on such bases, a Series will normally invest in
cash, cash equivalents and high grade debt securities.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: The Limited Maturity Series may enter
into mortgage "dollar roll" transactions with selected banks and broker-dealers
pursuant to which a Series sells mortgage-backed securities for delivery in the
future (generally within 30 days) and simultaneously contracts to repurchase
substantially similar (same type, coupon and maturity) securities on a specified
future date. The Series records these transactions as sale and purchase
transactions, rather than as borrowing transactions. 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 of the Series may purchase securities that are
not registered under the Securities Act of 1933 (the "1933 Act") ("restricted
securities"), including those that can be offered and sold to "qualified
institutional
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buyers" under Rule 144A under the 1933 Act ("Rule 144A securities"). A
determination is made 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, retains oversight, focusing on
factors such as valuation, liquidity and availability of information. Investing
in Rule 144A securities could have the effect of decreasing the level of
liquidity in a Series to the extent that qualified institutional buyers become
for a time uninterested in purchasing Rule 144A securities held in the Series'
portfolio.
CORPORATE ASSET-BACKED SECURITIES: Each of the Series may invest in
corporate asset-backed securities. These securities, issued by trusts and
special purpose corporations, are backed by a pool of assets, such as credit
card and automobile loan receivables, representing the obligations of a number
of different parties.
Corporate asset-backed securities present certain risks. For instance, in
the case of credit card receivables, these securities may not have the benefit
of any security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there is
the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities. The underlying
assets (E.G., loans) are also subject to prepayments which shorten the
securities' weighted average life and may lower their return.
Corporate asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection; and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from ultimate default ensures payment through insurance policies or
letters of credit obtained by the issuer or sponsor from third parties. A Series
will not pay any additional or separate fees for credit support. The degree of
credit support provided for each issue is generally based on historical
information respecting the level of credit risk associated with the underlying
assets. Delinquency or loss in excess of that anticipated or failure of the
credit support could adversely affect the return on an investment in such a
security.
ZERO COUPON BONDS: The Limited Maturity Series may invest in zero coupon
bonds. Zero coupon and deferred interest bonds are debt obligations which are
issued or purchased at a significant discount from face value. The discount
approximates the total amount of interest the bonds will accrue and compound
over the period until maturity or the first interest payment date at a rate of
interest reflecting the market rate of the security at the time of issuance.
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.
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COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES:
The Limited Maturity 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 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 Limited Maturity 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.
LOAN PARTICIPATIONS AND OTHER DIRECT INDEBTEDNESS: The Emerging Growth
Series may invest a portion of its assets in "loan participations" and other
direct indebtedness. By purchasing a loan participation, the Series acquires
some or all of the interest of a bank or other lending institution in a loan to
a corporate borrower. Many such loans are secured, and most impose restrictive
covenants which must be met by the borrower. These loans are made generally to
finance internal growth, mergers, acquisitions, stock repurchases, leveraged
buy-outs and other corporate activities. Such loans may be in default at the
time of purchase. The Series may also purchase other direct indebtedness such as
trade or other claims against companies, which generally represent money owed by
the company to a supplier of goods and services. These claims may also be
purchased at a time when the company is in default. Certain of the loan
participations and other direct indebtedness acquired by a Series may involve
revolving credit facilities or other standby financing commitments which
obligate a Series to pay additional cash on a certain date or on demand.
The highly leveraged nature of many such loans and other direct indebtedness
may make such loans especially vulnerable to adverse changes in economic or
market conditions. Loan participations and other direct indebtedness may not be
in the form of securities or may be subject to restrictions on transfer, and
only limited opportunities may exist to resell such instruments. As a result,
the Series may be unable to sell such investments at an opportune time or may
have to resell them at less than fair market value. For a further discussion of
loan participations, other direct indebtedness and the risks related to
transactions therein, see the SAI.
MORTGAGE PASS-THROUGH SECURITIES: The Limited Maturity Series may invest in
mortgage pass-through securities. Mortgage pass-through securities are
securities representing interests in "pools" of mortgage loans. Monthly payments
of interest and principal by the individual borrowers on mortgages are passed
through to the holders of the securities (net of fees
11
<PAGE>
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.
SWAPS AND RELATED TRANSACTIONS: As one way of managing its exposure to
different types of investments the Limited Maturity Series may enter into
interest rate swaps, currency swaps and other types of available swap
agreements, such as caps, collars and floors. Swaps involve the exchange by the
Series with another party of cash payments based upon different interest rate
indexes, currencies, and other prices or rates, such as the value of mortgage
prepayment rates. For example, in the typical interest rate swap, the Series
might exchange a sequence of cash payments based on a floating rate index for
cash payments based on a fixed rate. Payments made by both parties to a swap
transaction are based on a principal amount determined by the parties.
The Limited Maturity Series may also purchase and sell caps, floors and
collars. In a typical cap or floor agreement, one party agrees to make payments
only under specified circumstances, usually in return for payment of a fee by
the counterparty. For example, the purchase of an interest rate cap entitles the
buyer, to the extent that a specified index exceeds a predetermined interest
rate, to receive payments of interest on a contractually-based principal amount
from the counterparty selling such interest rate cap. The sale of an interest
rate floor obligates the seller to make payments to the extent that a specified
interest rate falls below an agreed-upon level. A collar arrangement combines
elements of buying a cap and selling a floor.
Swap agreements will tend to shift the Series' investment exposure from one
type of investment to another. For example, if the Series agreed to exchange
payments in dollars for payments in foreign currency, in each case based on a
fixed rate, the swap agreement would tend to decrease the Series' exposure to
U.S. interest rates and increase its exposure to foreign currency and interest
rates. Caps and floors have an effect similar to buying or writing options.
Depending on how they are used, swap agreements may increase or decrease the
overall volatility of the Series' investments and its share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve
a small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on a
Series' performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. A Series may also suffer losses if
it is unable to terminate outstanding swap agreements or reduce its exposure
through offsetting transactions.
Swaps, caps, floors and collars are highly specialized activities which
involve certain risks. See the SAI for further information on, and the risks
involved in, these activities.
OPTIONS ON SECURITIES: The Emerging Growth Series may write (sell) covered
put and call options and purchase put and call options on securities. The Series
will write options on securities for the purpose of increasing its return and/or
to protect the value of its portfolio. In particular, where the Series writes an
option that expires unexercised or is closed out by the Series at a profit, it
will retain the premium paid for the option which will increase its gross income
and will offset in part the reduced value of the portfolio security underlying
the option, or the increased cost of portfolio securities to be acquired. In
contrast, however, if the price of the underlying security moves adversely to
the Series' position, the option may be exercised and the
12
<PAGE>
Series will be required to purchase or sell the underlying security at a
disadvantageous price, which may only be partially offset by the amount of the
premium. The Series may also write combinations of put and call options on the
same security, known as "straddles." Such transactions can generate additional
premium income but also present increased risk.
By writing a call option on a security, the Series limits its opportunity to
profit from any increase in the market value of the underlying security, since
the holder will usually exercise the call option when the market value of the
underlying security exceeds the exercise price of the call. However, the Series
retains the risk of depreciation in value of securities on which it has written
call options.
The Series may also purchase put or call options in anticipation of market
fluctuations which may adversely affect the value of its portfolio or the prices
of securities that the Series wants to purchase at a later date. In the event
that the expected market fluctuations occur, the Series may be able to offset
the resulting adverse effect on its portfolio, in whole or in part, through the
options purchased. The premium paid for a put or call option plus any
transaction costs will reduce the benefit, if any, realized by the Series upon
exercise or liquidation of the option, and, unless the price of the underlying
security changes sufficiently, the option may expire without value to the
Series.
In certain instances, the Emerging Growth Series may enter into options on
Treasury securities that are "reset" options or "adjustable strike" options.
These options provide for periodic adjustment of the strike price and may also
provide for the periodic adjustment of the premium during the term of the
option. The SAI contains a further discussion of these investments.
OPTIONS ON STOCK INDICES: The Emerging Growth Series may write (sell)
covered call and put options and purchase call and put options on stock indices.
The Series may write options on stock indices for the purpose of increasing its
gross income and to protect its portfolio against declines in the value of
securities it owns or increases in the value of securities to be acquired. When
the Series writes an option on a stock index, and the value of the index moves
adversely to the holder's position, the option will not be exercised, and the
Series will either close out the option at a profit or allow it to expire
unexercised. The Series will thereby retain the amount of the premium, less
related transaction costs, which will increase its gross income and offset part
of the reduced value of portfolio securities or the increased cost of securities
to be acquired. Such transactions, however, will constitute only partial hedges
against adverse price fluctuations, since any such fluctuations will be offset
only to the extent of the premium received by the Series for the writing of the
option, less related transaction costs. In addition, if the value of an
underlying index moves adversely to the Series' option position, the option may
be exercised, and the Series will experience a loss which may only be partially
offset by the amount of the premium received.
The Series may also purchase put or call options on stock indices in order,
respectively, to hedge its investments against a decline in value or to attempt
to reduce the risk of missing a market or industry segment advance. The Series'
possible loss in either case will be limited to the premium paid for the option,
plus related transaction costs.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS: The Limited Maturity
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 ("Futures Contracts"). The Series may also
purchase and write options on such Futures Contracts ("Options on Futures
Contracts"). The Emerging Growth Series may purchase and sell Futures Contracts
on stock indices and foreign currencies or indices of foreign currencies. The
Series may also purchase and write Options on such Futures Contracts.
Such transactions will be entered into for hedging purposes or for
non-hedging purposes to the extent permitted by applicable law. Each Series will
incur brokerage fees when it purchases and sells Futures Contracts, and will be
required to maintain margin deposits. In addition, Futures Contracts entail
risks. Although the Adviser believes that use of such Contracts will benefit a
Series, if its investment judgment about the general direction of exchange rates
or the stock market is incorrect,
13
<PAGE>
the Series' overall performance may be poorer than if it had not entered into
any such contract and the Series may realize a loss. A Series will not enter
into any Futures Contract if immediately thereafter the value of securities and
other obligations underlying all such Futures Contracts held by such Series
would exceed 50% of the value of its total assets.
Purchases of Options on Futures Contracts may present less risk in hedging a
Series' portfolio than the purchase or sale of the underlying Futures Contracts
since the potential loss is limited to the amount of the premium plus related
transaction costs, although it may be necessary to exercise the option to
realize any profit, which results in the establishment of a futures position.
The writing of Options on Futures Contracts, however, does not present less risk
than the trading of Futures Contracts and will constitute only a partial hedge,
up to the amount of the premium received. In addition, if an option is
exercised, a Series may suffer a loss on the transaction.
Futures Contracts and Options on Futures Contracts that are entered into by
a Series will be traded on U.S. and foreign exchanges.
FORWARD CONTRACTS: The Emerging Growth Series may enter into forward foreign
currency exchange contracts for the purchase or sale of a fixed quantity of a
foreign currency at a future date ("Forward Contracts"). The Series may enter
into Forward Contracts for hedging purposes and for non-hedging purposes (I.E.,
speculative purposes). By entering into transactions in Forward Contracts for
hedging purposes, the Series may be required to forego the benefits of
advantageous changes in exchange rates and, in the case of Forward Contracts
entered into for non-hedging purposes, the Series may sustain losses which will
reduce its gross income. Such transactions, therefore, could be considered
speculative. Forward Contracts are traded over-the-counter and not on organized
commodities or securities exchanges. As a result, Forward Contracts operate in a
manner distinct from exchange-traded instruments, and their use involves certain
risks beyond those associated with transactions in Futures Contracts or options
traded on exchanges. The Series may choose to, or be required to, receive
delivery of the foreign currencies underlying Forward Contracts it has entered
into. Under certain circumstances, such as where the Adviser believes that the
applicable exchange rate is unfavorable at the time the currencies are received
or the Adviser anticipates, for any other reason, that the exchange rate will
improve, the Series may hold such currencies for an indefinite period of time.
The Series may also enter into a Forward Contract on one currency to hedge
against risk of loss arising from fluctuations in the value of a second currency
(referred to as a "cross hedge") if, in the judgment of the Adviser, a
reasonable degree of correlation can be expected between movements in the values
of the two currencies. The Series has established procedures consistent with
statements of the 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 Emerging Growth 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 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.
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<PAGE>
6. ADDITIONAL RISK FACTORS
OPTIONS, FUTURES CONTRACTS AND FORWARD CONTRACTS: Although certain Series
will enter into transactions in options, Futures Contracts, Options on Futures
Contracts, Forward Contracts and Options on Foreign Currencies for hedging
purposes, such transactions nevertheless involve certain risks. For example, a
lack of correlation between the instrument underlying an option or Futures
Contract and the assets being hedged, or unexpected adverse price movements,
could render a Series' hedging strategy unsuccessful and could result in losses.
Certain Series also may enter into transactions in options, Futures Contracts,
Options on Futures Contracts and Forward Contracts for other than hedging
purposes, which involves greater risk. In particular, such transactions may
result in losses for a Series which are not offset by gains on other portfolio
positions, thereby reducing gross income. In addition, foreign currency markets
may be extremely volatile from time to time. There also can be no assurance that
a liquid secondary market will exist for any contract purchased or sold, and a
Series may be required to maintain a position until exercise or expiration,
which could result in losses. The SAI contains a description of the nature and
trading mechanics of options, Futures Contracts, Options on Futures Contracts,
Forward Contracts and Options on Foreign Currencies, and includes a discussion
of the risks related to transactions therein.
Transactions in Forward Contracts may be entered into only in the
over-the-counter market. Futures Contracts and Options on Futures Contracts may
be entered into on U.S. exchanges regulated by the Commodity Futures Trading
Commission and on foreign exchanges. In addition, the securities and indexes
underlying options, Futures Contracts and Options on Futures Contracts traded by
the Series will include both domestic and foreign securities.
LOWER RATED BONDS: The Emerging Growth Series and the Limited Maturity
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.
The Emerging Growth Series may also invest in securities rated Ba or lower
by Moody's or BB or lower by S&P or Fitch and comparable unrated securities
(commonly known as "junk bonds") to the extent described above. See Appendix A
to this Prospectus for a description of these ratings. These securities are
considered speculative and, while generally providing greater income than
investments in higher rated securities, will involve greater risk of principal
and income (including the possibility of default or bankruptcy of the issuers of
such securities) and may involve greater volatility of price (especially during
periods of economic uncertainty or change) than securities in the higher rating
categories. However, since yields vary over time, no specific level of income
can ever be assured. These lower rated high yielding fixed income securities
generally tend to reflect economic changes and short-term corporate and industry
developments to a greater extent than higher rated securities which react
primarily to fluctuations in the general level of interest rates (although these
lower rated fixed income securities are also affected by changes in interest
rates, the market's perception of their credit quality, and the outlook for
economic growth). In the past, economic downturns or an increase in interest
rates have, under certain circumstances, caused a higher incidence of default by
the issuers of these securities and may do so in the future, especially in the
case of highly leveraged issuers. During certain periods, the higher yields on
the Series' lower rated high yielding fixed income securities are paid primarily
because of the increased risk of loss of principal and income, arising from such
factors as the heightened possibility of default or bankruptcy of the issuers of
such securities. Due to the fixed income payments of these securities, the
Series may continue to earn the same level of interest income while its net
asset value declines due to portfolio losses, which could result in an increase
in the Series' yield despite the actual loss of principal. The market for these
lower rated fixed income securities may be less liquid than the market for
investment grade fixed income securities, and judgment may at times play a
greater role in valuing these securities than in the case of investment grade
fixed income securities. Changes in the value of securities subsequent to their
acquisition will not affect cash income or yield to maturity to the Series but
will be reflected in the net asset value of shares of the Series. See the SAI
for more information on lower rated securities.
15
<PAGE>
FOREIGN SECURITIES: The Limited Maturity Series may invest in
dollar-denominated foreign debt securities. The Emerging Growth 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 U.S. or abroad) or
circumstances in dealings between nations. Costs may be incurred in connection
with conversions between various currencies. Special considerations may also
include more limited information about foreign issuers, higher brokerage costs,
different accounting standards and thinner trading markets. Foreign securities
markets may also be less liquid, more volatile and less subject to government
supervision than in the United States. Investments in foreign countries could be
affected by other factors including expropriation, confiscatory taxation and
potential difficulties in enforcing contractual obligations and could be subject
to extended settlement periods. The Emerging Growth Series may hold foreign
currency received in connection with investments in foreign securities when, in
the judgment of the Adviser, it would be beneficial to convert such currency
into U.S. dollars at a later date, based on anticipated changes in the relevant
exchange rate. The Series may also hold foreign currency in anticipation of
purchasing foreign securities. See the SAI for further discussion of foreign
securities and the holding of foreign currency, as well as the associated risks.
AMERICAN DEPOSITARY RECEIPTS: The Emerging Growth 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 U.S.
securities exchanges, the Adviser does not treat them as foreign securities.
However, they are subject to many of the risks of foreign securities such as
changes in exchange rates and more limited information about foreign issuers.
EMERGING MARKET SECURITIES: Each of the 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 a Series is uninvested and no return is earned thereon. The inability
of a Series to make intended security purchases due to settlement problems could
cause a Series to miss attractive investment opportunities. Inability to dispose
of portfolio securities due to settlement problems could result in losses to a
Series due to subsequent declines in value of the portfolio securities, a
decrease in the level of liquidity in a Series' portfolio, or if a 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 a Series bears the risk that the securities will not be
delivered and that the Series' payments will not be returned. Securities prices
in emerging markets can be significantly more volatile than in the more
developed nations of the world, reflecting the greater uncertainties of
investing in less established markets and economies. In particular, countries
with emerging markets may have relatively unstable governments, present the risk
of nationalization of businesses, restrictions on foreign ownership, or
prohibitions of repatriation of assets, and may have less protection of property
rights than more developed countries. The economies of countries with emerging
markets may be predominantly based on only a few industries, may be highly
vulnerable to changes in local or global trade conditions, and may suffer from
extreme and volatile debt burdens or inflation rates. Local securities markets
may trade a small number of securities and may be unable to respond effectively
to increases in trading volume, potentially making prompt liquidation of
substantial holdings difficult or impossible at times. Securities of issuers
located in countries with emerging markets may have limited marketability and
may be subject to more abrupt or erratic movements.
Certain emerging markets may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in an
emerging market's balance of
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<PAGE>
payments or for other reasons, a country could impose temporary restrictions on
foreign capital remittances. A 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 a Series.
-------------------
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.
Because the Limited Maturity Series is expected to have a portfolio turnover
rate of over 100%, transaction costs incurred by the Series and the realized
capital gains and losses of the Series may be greater than that of a fund with a
lesser portfolio turnover rate.
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain, and maintain the availability of,
execution at the most favorable prices and in the most effective manner
possible. Consistent with the foregoing primary consideration, the Rules of Fair
Practice of the National Association of Securities Dealers, Inc. (the "NASD")
and such other policies as the Trustees of the Trust may determine, the Adviser
may consider sales of Contracts for which the Trust is an investment option,
together with sales of shares of other investment company clients of MFS Fund
Distributors, Inc., the distributor of shares of the Trust and of the MFS Family
of Funds, as a factor in the selection of broker-dealers to execute each Series'
portfolio transactions. From time to time the Adviser may direct certain
portfolio transactions to broker-dealer firms which, in turn, have agreed to pay
a portion of the Series' operating expenses (e.g., fees charged by the custodian
of the Series' assets). For a further discussion of portfolio trading, see the
SAI.
-------------------
The SAI includes a discussion of other investment policies and listing of
specific investment restrictions which govern the investment policies of each
Series. The specific investment restrictions listed in the SAI may be changed
without shareholder approval unless indicated otherwise (see the SAI). The
Series' investment limitations, policies and rating standards are adhered to at
the time of purchase or utilization of assets; a subsequent change in
circumstances will not be considered to result in a violation of policy.
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.
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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"). Under the Advisory Agreement, MFS provides the Series
with overall investment advisory services. Subject to such policies as the
Trustees may determine, MFS makes investment decisions for each Series. For its
services and facilities, MFS receives a management fee, computed and paid
monthly, in an amount equal to the following annual rates of the average daily
net assets of each Series:
<TABLE>
<CAPTION>
PERCENTAGE OF THE
AVERAGE DAILY NET
ASSETS
SERIES OF EACH SERIES
- --------------------------------------------------------------------------------------------- ----------------------
<S> <C>
Emerging Growth Series....................................................................... 0.75%
Limited Maturity Series...................................................................... 0.55%
</TABLE>
For the fiscal year ended December 31, 1996, MFS received the following
management fees from the Series under the Advisory Agreement and assumed the
following amounts of the Series' expenses (see "Expenses" below);
<TABLE>
<CAPTION>
MANAGEMENT FEE EXPENSES ASSUMED
SERIES PAID TO MFS BY MFS
- ---------------------------------------------------------------------------------- -------------- ----------------
<S> <C> <C>
Emerging Growth Series............................................................ $ 314,262 $ 62,962
Limited Maturity Series........................................................... 1,064 12,705
</TABLE>
MFS or its affiliates will pay a fee to Glenbrook Life Insurance Company
("Glenbrook") equal, on an annualized basis, to 0.15% of the aggregate net
assets of each Series attributable to Contracts offered by separate accounts of
Glenbrook or their affiliates. Such fees 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>
Emerging Growth Series John W. Ballen, a Senior Vice President of MFS, has been employed by the Adviser as a
portfolio manager since 1984. Toni Y. Shimura, a Vice President of MFS, has been
employed by the Adviser as a portfolio manager since 1987. Ms. Shimura became a
portfolio manager of the Series on November 30, 1995.
Limited Maturity Series Geoffrey L. Kurinsky, a Senior Vice President of the Adviser, has been employed by the
Adviser as a portfolio manager since 1987.
</TABLE>
MFS also serves as investment adviser to each of the other funds in the MFS
Family of Funds (the "MFS Funds") and to MFS-Registered Trademark- Municipal
Income Trust, MFS Multimarket Income Trust, MFS Government Markets Income Trust,
MFS Intermediate Income Trust, MFS Charter Income Trust, MFS Special Value
Trust, MFS Institutional Trust, MFS Union Standard Trust, MFS/ Sun Life Series
Trust, and seven variable accounts, each of which is a registered investment
company established by Sun Life Assurance Company of Canada (U.S.) ("Sun Life of
Canada (U.S.)") in connection with the sale of various fixed/variable annuity
contracts. MFS and its wholly owned subsidiary, MFS Institutional Advisers,
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 $52.8 billion on behalf of approximately 2.3 million investor
accounts as of February 28, 1997. As of such date, the MFS organization managed
approximately $28.9 billion of assets invested in equity securities and
approximately $19.9 billion of assets invested in fixed income securities.
Approximately $4.0 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 Donald A. Stewart. Mr. Brodkin is the Chairman, Mr. Shames is
the
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President and Mr. Scott is the Secretary and a Senior Executive Vice President
of MFS. Messrs. McNeil and Stewart 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 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 has access to the extensive
international equity investment expertise of Foreign & Colonial, and Foreign &
Colonial has access to the extensive U.S. equity investment expertise of MFS.
MFS and Foreign Colonial each have investment personnel working in each other's
offices in Boston and London, respectively.
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.
ADMINISTRATOR -- MFS provides the Series with certain administrative
services pursuant to a Master Administrative Services Agreement dated March 1,
1997. Under this Agreement, MFS provides the Series with certain financial,
legal, compliance, shareholder communications and other administrative services.
As a partial reimbursement for the cost of providing these services, the Series
pays MFS an administrative fee up to 0.015% per annum of the Series' average
daily net assets, provided that the administrative fee is not assessed on a
Series' assets that exceed $3 billion.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. (the "Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency,
certain dividend disbursing agency and other services for each Series.
8. INFORMATION CONCERNING SHARES OF EACH SERIES
PURCHASES AND REDEMPTIONS
The separate accounts of the Participating Insurance Companies place orders
to purchase and redeem shares of each Series based on, among other things, the
amount of premium payments to be invested and surrender and transfer requests to
be effected on that day pursuant to Contracts. Orders received by the Trust are
effected on days on which the Exchange is open for trading. For orders received
by the Trust before the close of regular trading on the Exchange (normally 4
p.m. eastern
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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 any of the Series may elect to receive dividends and capital
gain distributions in either cash or additional shares.
TAX STATUS
Each Series of the Trust is treated as a separate entity for federal income
tax purposes. In order to minimize the taxes each Series would otherwise be
required to pay, each Series intends to qualify each year as a "regulated
investment company" under Subchapter M of the Internal Revenue Code of 1986, as
amended ("the Code"). Because each Series intends to distribute all of its net
investment income and net capital gains 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.
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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.
MFS Fund Distributors, Inc., Boston, MA, owns 98.31% of the Limited Maturity
Series' shares, and, therefore, controls the Series.
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 Series' performance for the fiscal
year ended December 31, 1996, please see the Series' Annual Reports. A copy of
these Annual Reports may be obtained without charge by contacting the
Shareholder Servicing Agent (see back cover for address and phone number).
From time to time, quotations of a Series' total return and yield may be
included in advertisements, sales literature or reports to shareholders or
prospective investors. The total return of a Series refers to return assuming an
investment has been held in the Series for one year and for the life of the
Series (the ending date of which will be stated). The total return quotations
may be expressed in terms of average annual or cumulative rates of return for
all periods quoted. Average annual total return refers to the average annual
compound rate of return of an investment in a Series. Cumulative total return
represents the cumulative change in value of an investment in a Series. Both
will assume that all dividends and capital gains distributions were reinvested.
The yield of a Series refers to net investment income generated by a Series over
a specified
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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.
Subject to termination or revision at the sole discretion of MFS, MFS has
agreed to bear expenses of each of the Series such that the respective Series'
"Other Expenses," which are defined to include all expenses of the Series except
for management fees, do not exceed the following percentages of the average
daily net assets of the Series (the "Maximum Percentage"): 0.25% for the
Emerging Growth Series and 0.45% for the Limited Maturity Series. The obligation
of MFS to bear these expenses for a Series terminates on the last day of the
Series' fiscal year in which its "Other Expenses" are less than or equal to the
Maximum Percentage. The payments made by MFS on behalf of each Series under this
arrangement are subject to reimbursement by the Series to MFS, which will be
accomplished by the payment of an expense reimbursement fee by the Series to MFS
computed and paid monthly at a percentage of the Series' average daily net
assets for its then current fiscal year, with a limitation that immediately
after such payment the Series' "Other Expenses" will not exceed the Maximum
Percentage. This expense reimbursement by each Series to MFS terminates on the
earlier of the date on which payments made by the Series equal the prior payment
of such reimbursable expenses by MFS or December 31, 2004.
SHAREHOLDER COMMUNICATIONS
Owners of Contracts issued by Participating Insurance Companies for which
shares of one or more Series are the investment vehicle will receive from the
Participating Insurance Companies semi-annual financial statements and audited
year-end financial statements certified by the Trust's independent certified
public accountants. Each report will show the investments owned by the Trust and
the valuations thereof as determined by the Trustees and will provide other
information about the Trust and its operations.
Participating Insurance Companies with inquiries regarding the Trust may
call the Trust's Shareholder Servicing Agent. (See back cover for address and
phone number.)
-------------------
The SAI for the Trust, dated May 1, 1997, as amended or supplemented from
time to time, contains more detailed information about each of the Series,
including information related to: (i) the investment policies and restrictions
of each Series; (ii) the Trustees, officers and investment adviser of the Trust;
(iii) portfolio transactions; (iv) the shares of each Series,
including rights and liabilities of shareholders; (v) the method used to
calculate yield and total rate of return quotations of each Series; (vi) the
determination of net asset value of shares of each Series; and (vii) certain
voting rights of shareholders of each Series.
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APPENDIX A
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the quality
of various debt instruments. It should be emphasized, however, that ratings are
not absolute standards of quality. Consequently, debt instruments with the same
maturity, coupon and rating may have different yields while debt instruments of
the same maturity and coupon with different ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
AAA: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
BAA: Bonds which are rated Baa are considered as medium-grade obligations
(I.E., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA: Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has
been suspended or withdrawn, it may be for reasons unrelated to the quality of
the issue.
Should no rating be assigned, the reason may be one of the following:
1. an application for rating was not received or accepted;
2. the issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy;
A-1
<PAGE>
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.
A-2
<PAGE>
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
<PAGE>
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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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) 343-2829, ext. 3500
MAILING ADDRESS:
P.O. Box 1400, Boston, MA 02104-9985
INDEPENDENT AUDITORS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
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MFS-REGISTERED TRADEMARK- EMERGING GROWTH SERIES
MFS-REGISTERED TRADEMARK- LIMITED MATURITY SERIES
[LOGO]
PROSPECTUS
MAY 1, 1997
[LOGO]
MFS-REGISTERED TRADEMARK- EMERGING GROWTH SERIES
MFS-REGISTERED TRADEMARK- LIMITED MATURITY SERIES
500 Boylston Street, Boston, MA 02116
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