<PAGE>
<TABLE>
<S> <C>
MFS-REGISTERED TRADEMARK- EMERGING GROWTH
SERIES
MFS-REGISTERED TRADEMARK- RESEARCH SERIES
MFS-REGISTERED TRADEMARK- TOTAL RETURN
SERIES
MFS-REGISTERED TRADEMARK- UTILITIES SERIES
MFS-REGISTERED TRADEMARK- WORLD
GOVERNMENTS SERIES PROSPECTUS
MFS-REGISTERED TRADEMARK- BOND SERIES May 1, 1997
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <S> <C>
MFS-Registered Trademark- VARIABLE INSURANCE TRUST-SM-
</TABLE>
MFS Variable Insurance Trust (the "Trust") is an open-end management investment
company offering insurance company separate accounts a selection of investment
vehicles for variable annuity and variable life insurance contracts (the
"Contracts"). Currently the Trust offers shares of beneficial interest of 12
separate mutual fund series (individually or collectively hereinafter referred
to as a "Series" or the "Series"), six of which are offered pursuant to this
Prospectus:
- -- MFS EMERGING GROWTH SERIES (the "Emerging Growth Series"), which seeks to
provide long-term growth of capital;
- -- MFS RESEARCH SERIES (the "Research Series"), which seeks to provide long-term
growth of capital and future income;
- -- MFS TOTAL RETURN SERIES (the "Total Return Series"), which seeks primarily to
provide above-average income (compared to a portfolio invested entirely in
equity securities) consistent with the prudent employment of capital and
secondarily to provide a reasonable opportunity for growth of capital and
income;
- -- MFS UTILITIES SERIES (the "Utilities Series"), which seeks capital growth and
current income (income above that available from a portfolio invested
entirely in equity securities);
- -- MFS WORLD GOVERNMENTS SERIES (the "World Governments Series"), which seeks
not only preservation but also growth of capital, together with moderate
current income; and
- -- MFS BOND SERIES (the "Bond Series"), which seeks primarily to provide as high
a level of current income as is believed consistent with prudent investment
risk, and secondarily to protect shareholders' capital.
-------------------
THE EMERGING GROWTH SERIES AND THE RESEARCH SERIES ARE INTENDED FOR INVESTORS
WHO UNDERSTAND AND ARE WILLING TO ACCEPT THE RISKS ENTAILED IN SEEKING LONG-TERM
GROWTH OF CAPITAL. BECAUSE OF THEIR INVESTMENT POLICIES PERMITTING INVESTMENT IN
FOREIGN SECURITIES, INVESTMENTS IN EACH SERIES MAY BE SUBJECT TO A GREATER
DEGREE OF RISK THAN INVESTMENTS IN OTHER INVESTMENT COMPANIES WHICH INVEST
ENTIRELY IN DOMESTIC SECURITIES.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------
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.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
1. Expense Summary................................................................................ 3
2. Investment Concept of the Trust................................................................ 3
3. Condensed Financial Information................................................................ 5
4. Investment Objectives and Policies............................................................. 11
MFS Emerging Growth Series..................................................................... 11
MFS Research Series............................................................................ 11
MFS Total Return Series........................................................................ 12
MFS Utilities Series........................................................................... 12
MFS World Governments Series................................................................... 14
MFS Bond Series................................................................................ 15
5. Investment Techniques.......................................................................... 15
6. Additional Risk Factors........................................................................ 21
7. Management of the Series....................................................................... 24
8. Information Concerning Shares of Each Series................................................... 27
Purchases and Redemptions...................................................................... 27
Net Asset Value................................................................................ 27
Distributions.................................................................................. 27
Tax Status..................................................................................... 27
Description of Shares, Voting Rights and Liabilities........................................... 28
Performance Information........................................................................ 28
Expenses....................................................................................... 29
Shareholder Communications..................................................................... 29
Appendix A -- Description of Bond Ratings.......................................................... A-1
Appendix B -- Principal Sectors of the Utilities Industry.......................................... B-1
Appendix C -- Portfolio Composition Charts......................................................... C-1
</TABLE>
2
<PAGE>
1. EXPENSE SUMMARY
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS):
<TABLE>
<CAPTION>
MFS
EMERGING MFS
GROWTH RESEARCH
SERIES SERIES
-------- --------
<S> <C> <C>
Management Fee.............................................. 0.75% 0.75%
Other Expenses (after expense limitation)(1)(2)............. 0.25% 0.25%
-------- --------
Total Operating Expenses (after expense limitation)(2)...... 1.00% 1.00%
<CAPTION>
MFS
TOTAL MFS
RETURN UTILITIES
SERIES SERIES
-------- --------
<S> <C> <C>
Management Fee.............................................. 0.75% 0.75%
Other Expenses (after expense limitation)(1)(2)............. 0.25% 0.25%
-------- --------
Total Operating Expenses (after expense limitation)(2)...... 1.00% 1.00%
<CAPTION>
MFS
WORLD
MFS BOND GOVERNMENTS
SERIES SERIES
-------- --------
<S> <C> <C>
Management Fee.............................................. 0.60% 0.75%
Other Expenses (after expense limitation)(1)(2)............. 0.40% 0.25%
-------- --------
Total Operating Expenses (after expense limitation)(2)...... 1.00% 1.00%
<FN>
- ------------------------
(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: 0.40% for the Bond Series, and 0.25% for each remaining Series. See "Information
Concerning Shares of Each Series--Expenses." Otherwise, "Other Expenses" and "Total Operating Expenses" for each
Series would be:
</TABLE>
<TABLE>
<CAPTION>
"TOTAL OPERATING
"OTHER EXPENSES" EXPENSES"
WITHOUT WITHOUT
SERIES EXPENSE LIMITATION EXPENSE LIMITATION
- ----------------------------------------- --------------------- -------------------------
<S> <C> <C>
Emerging Growth.......................... 0.41% 1.16%
Research................................. 0.73% 1.48%
Total Return............................. 1.35% 2.10%
Utilities................................ 2.00% 2.75%
World Governments........................ 1.28% 2.03%
Bond..................................... 8.85% 9.45%
</TABLE>
The purpose of the expense table above is to assist investors in
understanding the various costs and expenses that a shareholder of the Series
will bear directly or indirectly. The Series' annual operating expenses do not
reflect expenses imposed by separate accounts of Participating Insurance
Companies through which an investment in a Series is made or their related
Contracts. A separate account's expenses are disclosed in the prospectus through
which the Contract relating to that separate account is offered for sale.
2. INVESTMENT CONCEPT OF THE TRUST
The Trust is an open-end, registered management investment company comprised
of 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.
3
<PAGE>
The Trust currently offers shares of each Series to insurance company
separate accounts that fund Contracts. Separate accounts may purchase or redeem
shares at net asset value without any sales or redemption charge. Fees and
charges imposed by a separate account, however, will affect the actual return to
the holder of a Contract. A separate account may also impose certain
restrictions or limitations on the allocation of purchase payments or Contract
value to one or more Series, and not all Series may be available in connection
with a particular Contract. Prospective investors should consult the applicable
Contract prospectus for information regarding fees and expenses of the Contract
and separate account and any applicable restrictions or limitations. The Trust
assumes no responsibility for such prospectuses.
Shares of the Series are offered to the separate accounts of Participating
Insurance Companies that are affiliated or unaffiliated ("shared funding").
Shares of the Series may serve as the underlying investments for both variable
annuity and variable life insurance contracts ("mixed funding"). Due to
differences in tax treatment or other considerations, the interests of various
Contract owners might at some time be in conflict. The Trust currently does not
foresee any such conflict. Nevertheless, the Trust's Trustees intend to monitor
events in order to identify any material irreconcilable conflicts which may
possibly arise and to determine what action, if any, should be taken in response
thereto. If such a conflict were to occur, one or more separate accounts of the
Participating Insurance Companies might be required to withdraw its investments
in one one or more Series. This might force a Series to sell securities at
disadvantageous prices.
Individual Contract holders are not the "shareholders" of the Trust. Rather,
the Participating Insurance Companies and their separate accounts are the
shareholders or investors, although such companies may pass through voting
rights to their Contract holders.
The Trust's Board of Trustees provides broad supervision over the affairs of
the Trust and the Series. Massachusetts Financial Services Company, a Delaware
corporation ("MFS" or the "Adviser"), is the investment adviser to each Series.
A majority of the Trustees of the Trust are not affiliated with the Adviser. The
Adviser is responsible for the management of the assets of each Series and the
officers of the Trust are responsible for the operations. The Adviser manages
the Series' portfolios from day to day in accordance with the investment
objectives and policies of each Series. The selection of investments and the way
they are managed depend on the conditions and trends in the economy and the
financial marketplaces.
4
<PAGE>
3. CONDENSED FINANCIAL INFORMATION
The following financial information 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
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995*
----------------- ------------------
<S> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value--beginning of period............................. $ 11.41 $10.00
-------- ------
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
-------- ------
Total from investment operations............................. $ 1.94 $ 1.75
-------- ------
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)
-------- ------
Total distributions declared to shareholders................. $ (0.11) $(0.34)
-------- ------
Net asset value--end of period................................... $ 13.24 $11.41
-------- ------
-------- ------
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
- ---------
* 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)%+
</TABLE>
5
<PAGE>
RESEARCH SERIES
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995*
------------------- ------------------
<S> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value--beginning of period............................. $ 10.89 $10.00
------- ------
Income from investment operations#--
Net investment incomeSection................................... $ 0.06 $ 0.05
Net realized and unrealized gain on investments and foreign
currency transactions........................................ 2.37 1.01
------- ------
Total from investment operations............................. $ 2.43 $ 1.06
------- ------
Less distributions declared to shareholders--
From net investment income..................................... $ (0.02) $(0.03)
From net realized gain on investments and foreign currency
transactions................................................. (0.16) (0.14)
In excess of net realized gain on investments and foreign
currency transactions........................................ (0.01) --
------- ------
Total distributions declared to shareholders................. $ (0.19) $(0.17)
------- ------
Net asset value--end of period................................... $ 13.13 $10.89
------- ------
------- ------
Total return..................................................... 22.33% 10.62%++
Ratios (to average net assets)/Supplemental dataSection:
Expenses....................................................... 1.00% 1.00%+
Net investment income.......................................... 0.47% 1.15%+
Portfolio turnover............................................... 56% 28%
Average commission rate###....................................... $0.0295 --
Net assets at end of period (000 omitted)........................ $35,710 $2,530
<FN>
- ------------------------
* For the period from the commencement of investment operations, July 26, 1995 to December 31, 1995.
+ Annualized.
++ Not annualized.
# Per share data is based on average shares outstanding.
### Average commission rate is calculated for funds 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.............................................. -- $(0.08)
Ratios (to average net assets):
Expenses....................................................... 1.48% 3.90%+
Net investment loss............................................ -- (1.73)%+
</TABLE>
6
<PAGE>
TOTAL RETURN SERIES
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995*
------------------- ------------------
<S> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value--beginning of period............................. $ 12.25 $10.00
------- ------
Income from investment operations#--
Net investment incomeSection................................... $ 0.46 $ 0.41
Net realized and unrealized gain on investments and foreign
currency transactions........................................ 1.30 2.32
------- ------
Total from investment operations............................. $ 1.76 $ 2.73
------- ------
Less distributions declared to shareholders--
From net investment income..................................... $ (0.21) $(0.25)
From net realized gain on investments and foreign currency
transactions................................................. (0.09) (0.23)
------- ------
Total distributions declared to shareholders................. $ (0.30) $(0.48)
-------
Net asset value--end of period................................... $ 13.71 $12.25
------- ------
------- ------
Total return..................................................... 14.37% 27.34%++
Ratios (to average net assets)/Supplemental dataSection:
Expenses....................................................... 1.00% 1.00%+
Net investment income.......................................... 3.59% 3.83%+
Portfolio turnover............................................... 76% 16%
Average commission rate###....................................... $0.0485 --
Net assets at end of period (000 omitted)........................ $19,250 $2,797
<FN>
- ------------------------
* For the period from the commencement of investment operations, January 3, 1995 to December 31, 1995.
+ Annualized.
++ Not annualized.
# Per share data is based on average shares outstanding.
### Average commission rate is calculated for funds 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 income per share and
the ratios would have been:
Net investment income............................................ $0.32 $0.22
Ratios (to average net assets):
Expenses....................................................... 2.10% 2.49%+
Net investment income.......................................... 2.49% 2.09%+
</TABLE>
7
<PAGE>
UTILITIES SERIES
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995*
------------------- ------------------
<S> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value--beginning of period............................. $ 12.57 $10.00
------- ------
Income from investment operations#--
Net investment incomeSection................................... $ 0.55 $ 0.39
Net realized and unrealized gain on investments and foreign
currency transactions........................................ 1.78 3.00
------- ------
Total from investment operations............................. $ 2.33 $ 3.39
------- ------
Less distributions declared to shareholders--
From net investment income..................................... $ (0.35) $(0.24)
From net realized gain on investments and foreign currency
transactions................................................. (0.88) (0.58)
In excess of realized gain on investments and foreign currency
transactions................................................. (0.01) --
------- ------
Total distributions declared to shareholders................. $ (1.24) $(0.82)
------- ------
Net asset value--end of period................................... $ 13.66 $12.57
------- ------
------- ------
Total return..................................................... 18.51% 33.94%++
Ratios (to average net assets)/Supplemental dataSection:
Expenses....................................................... 1.00% 1.00%+
Net investment income.......................................... 4.19% 3.66%+
Portfolio turnover............................................... 121% 94%
Average commission rate###....................................... $0.0416 --
Net assets at end of period (000 omitted)........................ $ 9,572 $2,373
<FN>
- ------------------------
* For the period from the commencement of investment operations, January 3, 1995 to December 31, 1995.
+ Annualized.
++ Not annualized.
# Per share data is based on average shares outstanding.
### Average commission rate is calculated for funds 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 income per share and
the ratios would have been:
Net investment income............................................ $0.32 $0.17
Ratios (to average net assets):
Expenses....................................................... 2.75% 3.08%+
Net investment income.......................................... 2.44% 1.62%+
</TABLE>
8
<PAGE>
WORLD GOVERNMENTS SERIES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994*
------------------- ------------------ ------------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value--beginning of period............................. $ 10.17 $ 9.82 $10.00
------- ------ ------
Income from investment operations#--
Net investment incomeSection................................... $ 0.60 $ 0.63 $ 0.17
Net realized and unrealized gain (loss) on investments and
foreign currency transactions................................ (0.19) 0.78 (0.09)
------- ------ ------
Total from investment operations............................. $ 0.41 $ 1.41 $ 0.08
------- ------ ------
Less distributions declared to shareholders--
From net investment income..................................... $ -- $(0.42) $(0.17)
In excess of net investment income............................. -- (0.54) (0.09)
Tax return of capital.......................................... -- (0.10) --
------- ------ ------
Total distributions declared to shareholders................. $ -- $(1.06) $(0.26)
------- ------ ------
Net asset value--end of period................................... $ 10.58 $10.17 $ 9.82
------- ------ ------
------- ------ ------
Total return..................................................... 4.03% 14.38% 0.79%++
Ratios (to average net assets)/Supplemental dataSection:
Expenses....................................................... 1.00% 1.00% 1.00%+
Net investment income.......................................... 5.84% 6.05% 4.68%+
Portfolio turnover............................................... 361% 211% 62%
Net assets at end of period (000 omitted)........................ $26,023 $7,424 $2,881
</TABLE>
- ------------------------
<TABLE>
<C> <S>
* For the period from the commencement of investment operations, June 14, 1994 to December 31, 1994.
+ Annualized.
++ Not annualized.
# Per share data is based on average shares outstanding.
Section The Adviser voluntarily agreed to maintain the expenses of the Series at not more than 1.00% of average daily net
assets. To the extent actual expenses were over these limitations, the net investment income per share and the
ratios would have been:
</TABLE>
<TABLE>
<S> <C> <C> <C>
Net investment income............................................ $0.50 $0.53 $0.16
Ratios (to average net assets):
Expenses....................................................... 2.03% 1.99% 1.10%+
Net investment income.......................................... 4.81% 5.09% 4.58%+
</TABLE>
9
<PAGE>
BOND SERIES
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995*
------------------ ------------------
<S> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value--beginning of period............................. $10.19 $10.00
------ ------
Income from investment operations#--
Net investment incomeSection................................... $ 0.58 $ 0.09
Net realized and unrealized gain (loss) on investments......... (0.36) 0.21
------ ------
Total from investment operations............................. $ 0.22 $ 0.30
------ ------
Less distributions declared to shareholders--
From net investment income..................................... $(0.35) $(0.09)
From net realized gain on investments.......................... -- (0.02)
------ ------
Total distributions declared to shareholders................. $(0.35) $(0.11)
------ ------
Net asset value--end of period................................... $10.06 $10.19
------ ------
------ ------
Total return..................................................... 2.09% 3.02%++
Ratios (to average net assets)/Supplemental dataSection:
Expenses....................................................... 1.00% 1.00%+
Net investment income.......................................... 5.84% 4.89%+
Portfolio turnover............................................... 231% 55%
Net assets at end of period (000 omitted)........................ $ 853 $ 228
<FN>
- ------------------------
* For the period from the commencement of investment operations, October 24, 1995 to December 31, 1995.
+ Annualized.
++ Not annualized.
# Per share data is based on average shares outstanding.
Section The Adviser voluntarily agreed to maintain the expenses of the Series at not more than 1.00% of average daily net
assets. To the extent actual expenses were over these limitations, the net investment loss per share and the ratios
would have been:
Net investment loss.............................................. $ (0.26) $ (0.70)
Ratios (to average net assets):
Expenses....................................................... 9.45% 43.85%+
Net investment loss............................................ (2.61)% (37.96)%+
</TABLE>
10
<PAGE>
4. INVESTMENT OBJECTIVES AND POLICIES
Each Series has different investment objectives which it pursues through
separate investment policies, as described below. The differences in objectives
and policies among the Series can be expected to affect the degree of market and
financial risk to which each Series is subject and the return of each Series.
The investment objectives and policies of each Series may, unless otherwise
specifically stated, be changed by the Trustees of the Trust without a vote of
the shareholders. Any investment involves risk and there is no assurance that
the objectives of any Series will be achieved.
In addition to the specific investment practices described below, each
Series may also engage in certain investment techniques as described under the
caption "Investment Techniques" below and in the SAI under the caption
"Investment Techniques." The Series' investments are subject to certain risks,
as described in the above-referenced sections of this Prospectus and the SAI and
as described 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 RESEARCH SERIES -- The Research Series' investment objective is to provide
long-term growth of capital and future income.
The portfolio securities of the Research Series are selected by a committee
of investment research analysts. This committee includes investment analysts
employed not only by the Adviser but also by MFS International (U.K.) Limited, a
wholly owned subsidiary of MFS. The Series' assets are allocated among
industries by the analysts acting together as a group. Individual analysts are
then responsible for selecting what they view as the securities best suited to
meet the Series' investment objective within their assigned industry
responsibility.
The Research Series' policy is to invest a substantial proportion of its
assets in equity securities of companies believed to possess better than average
prospects for long-term growth. Equity securities in which the Series may invest
include the
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following: common stocks, preferred stocks and preference stocks; securities
such as bonds, warrants or rights that are convertible into stocks; and
depositary receipts for those securities. These securities may be listed on
securities exchanges, traded in various over-the-counter markets or have no
organized markets. A smaller proportion of the assets may be invested in bonds,
short-term obligations, preferred stocks or common stocks whose principal
characteristic is income production rather than growth. Such securities may also
offer opportunities for growth of capital as well as income. In the case of both
growth stocks and income issues, emphasis is placed on the selection of
progressive, well-managed companies. The Series' non-convertible debt
investments, if any, may consist of "investment grade" securities (rated Baa or
better by Moody's or BBB or better by S&P or by Fitch), and, with respect to no
more than 10% of the Series' net assets, securities in the lower rated
categories (rated Ba or lower by Moody's or BB or lower by S&P or by Fitch) or
securities which the Adviser believes to be of similar quality to these lower
rated securities (commonly known as "junk bonds"). For a description of bond
ratings, see Appendix A to this Prospectus.
Consistent with its investment objective and policies described above, the
Series may also invest up to 20% of its net assets in foreign securities
(including emerging market securities) which are not traded on a U.S. exchange.
MFS TOTAL RETURN SERIES -- The Total Return Series' primary investment objective
is to provide above-average income (compared to a portfolio invested entirely in
equity securities) consistent with the prudent employment of capital, and its
secondary objective is to provide a reasonable opportunity for growth of capital
and income, since many securities offering a better than average yield may also
possess growth potential. Thus, in selecting securities for its portfolio, the
Series considers each of these objectives. Under normal market conditions, at
least 25% of the Total Return Series' assets will be invested in non-convertible
fixed income securities, and at least 40% and no more than 75% of the Series'
assets will be invested in equity securities. Equity securities in which the
Series may invest include the following: common stocks, preferred stocks and
preference stocks; securities such as bonds, warrants or rights that are
convertible into stocks; and depositary receipts for those securities. These
securities may be listed on securities exchanges, traded in various
over-the-counter markets or have no organized markets.
The Series' policy is to invest in a broad list of securities, including
short-term obligations. The list may be diversified not only by companies and
industries, but also by type of security. The Total Return Series may vary the
percentage of assets invested in any one type of security in accordance with the
Adviser's interpretation of economic and money market conditions, fiscal and
monetary policy and underlying security values. The Series' non-convertible
fixed income investments may consist of both "investment grade" securities
(rated Baa or better by Moody's or BBB or better by S&P or by Fitch) and
securities that are unrated or are in the lower rating categories (rated Ba or
lower by Moody's or BB or lower by S&P or by Fitch) (commonly known as "junk
bonds") including up to 20% of its assets in non-convertible fixed income
securities that are in these lower rating categories and comparable unrated
securities (see "Additional Risk Factors" below). Generally, most of the Series'
long-term non-convertible fixed income investments will consist of "investment
grade" securities. See Appendix A to this Prospectus for a description of these
ratings.
The Series may also invest in United States government securities,
including: (1) U.S. Treasury obligations, which differ only in their interest
rates, maturities and times of issuance: U.S. Treasury bills (maturities of one
year or less); U.S. Treasury notes (maturities of one to ten years); and U.S.
Treasury bonds (generally maturities of greater than ten years), all of which
are backed by the full faith and credit of the U.S. Government; and (2)
obligations issued or guaranteed by U.S. Government agencies, authorities or
instrumentalities, some of which are backed by the full faith and credit of the
U.S. Treasury, E.G., direct pass-through certificates of the Government National
Mortgage Association ("GNMA"); some of which are supported by the right of the
issuer to borrow from the U.S. Government, E.G., obligations of Federal Home
Loan Banks; and some of which are backed only by the credit of the issuer
itself, E.G., obligations of the Student Loan Marketing Association
(collectively, "U.S. Government Securities"). The term "U.S. Government
Securities" also includes interests in trusts or other entities representing
interests in obligations that are backed by the full faith and credit of the
U.S. Government or are issued or guaranteed by the U.S. Government, its
agencies, authorities or instrumentalities.
Consistent with its investment objective and policies described above, the
Series may also invest up to 20% of its net assets in foreign securities
(including emerging market securities and Brady Bonds) which are not traded on a
U.S. exchange.
MFS UTILITIES SERIES -- The Utilities Series' investment objective is to seek
capital growth and current income (income above that available from a portfolio
invested entirely in equity securities).
The Utilities Series will seek to achieve its objective by investing, under
normal circumstances, at least 65% (but up to 100% at the discretion of the
Adviser) of its assets in equity and debt securities of both domestic and
foreign companies in the utilities industry. Equity securities in which the
Series may invest include the following: common stocks; preferred stocks
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and preference stocks; securities such as bonds, warrants or rights that are
convertible into stocks; and depositary receipts for those securities. These
securities may be listed on securities exchanges, traded in various
over-the-counter markets or have no organized markets. At least 80% of the
non-convertible fixed income securities held by the Series will be rated at the
time of investment at least Baa by Moody's or BBB by S&P or by Fitch or will be
of comparable quality as determined by the Adviser (see "Additional Risk
Factors" below). See Appendix A to this Prospectus for a description of these
ratings. The Series may also invest in debt and equity securities of issuers in
other industries, as discussed below, although under normal circumstances not
more than 35% of the Series' assets will be so invested. In addition, the Series
may hold a portion of its assets in cash and money market instruments.
Companies in the utilities industry include (i) companies engaged in the
manufacture, production, generation, transmission, sale or distribution of
electric, gas or other types of energy, water or other sanitary services and
(ii) companies engaged in telecommunications, including telephone, cellular
telephones, telegraph, satellite, microwave, cable television and other
communications media (but not companies engaged in public broadcasting). The
Adviser deems a particular company to be in the utilities industry if, at the
time of investment, the Adviser determines that at least 50% of the company's
assets or revenues are derived from one or more of those industries. The portion
of the Utilities Series' assets invested in a particular type of utility and in
equity or debt securities will vary in light of changes in interest rates,
market conditions and economic conditions and other factors. For further
information on the principal sectors of the utilities industry in which the
Series may invest, see Appendix B to this Prospectus.
Consistent with its investment objective and policies described above, the
Series may also invest up to 35% of its net assets in foreign securities
(including emerging market securities and Brady Bonds) which are not traded on a
U.S. exchange.
Since the Utilities Series' investments are concentrated in utility
securities, the value of the Series' shares will be especially affected by
factors peculiar to the utilities industry, and may fluctuate more widely than
the value of shares of a fund that invests in a broader range of industries. The
rates many utility companies may charge their customers are controlled by
governmental regulatory commissions which may result in a delay in the utility
company passing along increases in costs to its customers. Furthermore, there is
no assurance that regulatory authorities will, in the future, grant rate
increases or that such increases will be adequate to permit the payment of
dividends on common stocks. Many utility companies, especially electric and gas
and other energy related utility companies, are subject to various
uncertainties, including: risks of increases in fuel and other operating costs;
the high cost of borrowing to finance capital construction during inflationary
periods; difficulty obtaining adequate returns on invested capital, even if
frequent rate increases are approved by public service commissions; restrictions
on operations and increased costs and delays as a result of environmental and
nuclear safety regulations; securing financing for large construction projects
during an inflationary period; difficulties of the capital markets in absorbing
utility debt and equity securities; difficulty in raising capital in adequate
amounts on reasonable terms in periods of high inflation and unsettled capital
markets; technological innovations which may render existing plants, equipment
or products obsolete; the potential impact of natural or man-made disasters;
difficulties in obtaining natural gas for resale or fuel for electric generation
at reasonable prices; coping with the general effects of energy conservation,
particularly in light of changing policies regarding energy; and special risks
associated with the construction and operation of nuclear power generating
facilities, including technical factors and costs, and the possibility that
federal, state and municipal government authorities may from time to time review
existing requirements and impose additional requirements. Certain utility
companies, especially gas and telephone utility companies, have in recent years
been affected by increased competition, which could adversely affect the
profitability of such utility companies. Furthermore, there are uncertainties
resulting from certain telecommunications companies' diversification into new
domestic and international businesses as well as agreements by many such
companies linking future rate increases to inflation or other factors not
directly related to the active operating profits of the enterprise.
Foreign utility companies are also subject to regulation, although such
regulations may or may not be comparable to those in the United States. Foreign
utility companies may be more heavily regulated by their respective governments
than utilities in the U.S. and, as in the U.S., generally are required to seek
government approval for rate increases. In addition, since many foreign
utilities use fuel that causes more pollution than those used in the U.S., such
utilities may be required to invest in pollution control equipment to meet any
proposed pollution restrictions. Foreign regulatory systems vary from country to
country and may evolve in ways different from regulation in the U.S.
The Utilities Series is permitted to invest in securities of issuers that
are outside the utilities industry, although under normal circumstances not more
than 35% of the Series' assets will be so invested. Such investments may include
common stocks, debt securities (including municipal debt securities) and
preferred stocks and will be selected to meet the Series'
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investment objective of both capital growth and current income. These securities
may be issued by either U.S. or non-U.S. companies. Some of these issuers may be
in industries related to the utilities industry and, therefore, may be subject
to similar risks.
Investments outside the utilities industry may also include U.S. Government
Securities, as that term is defined under "Investment Objectives and
Policies--MFS Total Return Series" above. When and if available, U.S. Government
Securities may be purchased at a discount from face value. However, the Series
does not intend to hold such securities to maturity for the purpose of achieving
potential capital gains, unless current yields on the securities remain
attractive.
MFS WORLD GOVERNMENTS SERIES -- The World Governments Series' investment
objective is to seek not only preservation but also growth of capital, together
with moderate current income.
The World Governments Series seeks to achieve its investment objective
through a professionally managed, internationally diversified portfolio
consisting primarily of debt securities and to a lesser extent equity
securities. The Series attempts to provide investors with an opportunity to
enhance the value and increase the protection of their investment against
inflation and otherwise by taking advantage of investment opportunities in the
U.S. as well as in other countries where opportunities may be more rewarding. It
is believed that diversification of assets on an international basis decreases
the degree to which events in any one country, including the U.S., can affect
the entire portfolio. Although the percentage of the Series' assets invested in
securities issued abroad and denominated in foreign currencies will vary
depending on the state of the economies of the principal countries of the world,
their financial markets and the relationship of their currencies to the U.S.
dollar, under normal conditions the Series' portfolio is internationally
diversified. However, for temporary defensive reasons or during times of
international political or economic uncertainty or turmoil, most or all of the
Series' investments may be in the U.S.
Under normal economic and market conditions, at least 80% of the Series'
portfolio is invested in debt securities, such as bonds, debentures, mortgage
securities, notes, commercial paper, obligations issued or guaranteed by a
government or any of its political subdivisions, agencies or instrumentalities,
certificates of deposit, as well as debt obligations which may have a call on
common stock by means of a conversion privilege or attached warrants.
Consistent with its investment objective and policies described above, the
Series may invest up to 100% (and generally expects to invest not more than 80%)
of its net assets in foreign securities (including emerging market securities
and Brady Bonds) which are not traded on a U.S. exchange. Although the
percentage of the Series' assets invested in foreign securities will vary, at
least 65% of the Series' assets will be invested in at least three different
countries, one of which may be the U.S., except when the Adviser believes that
investing for temporary defensive purposes is appropriate. The Adviser will
determine the amount of the World Governments Series' assets to be invested in
the U.S. and the amount to be invested abroad. The U.S. assets will be invested
in high quality debt securities and the remainder of the assets will be
diversified among countries where opportunities for total return are expected to
be most attractive. It is currently expected that investments within foreign
countries will be primarily in government securities to minimize credit risks.
The Series will not invest 25% or more of the value of its assets in the
securities of any one foreign government. The portfolio will be managed actively
and the asset allocations modified as the Adviser deems necessary.
The World Governments Series will purchase non-dollar securities denominated
in the currency of countries where the interest rate environment as well as the
general economic climate provide an opportunity for declining interest rates and
currency appreciation. If interest rates decline, such non-dollar securities
will appreciate in value. If the currency also appreciates against the dollar,
the total investment in such non-dollar securities would be enhanced further.
Conversely, a rise in interest rates or decline in currency exchange rates would
adversely affect the Series' return. Investments in non-dollar denominated
securities are evaluated primarily on the strength of a particular currency
against the dollar and on the interest rate climate of that country. Currency is
judged on the basis of fundamental economic criteria (E.G., relative inflation
levels and trends, growth rate forecasts, balance of payments status, and
economic policies) as well as technical and political data. In addition to the
foregoing, interest rates are evaluated on the basis of differentials or
anomalies that may exist between different countries. The Series may hold
foreign currency received in connection with investments in foreign securities
and in anticipation of purchasing foreign securities. (See "Additional Risk
Factors" below.)
The phrase "preservation of capital" when applied to a domestic investment
company is generally understood to imply that the portfolio is invested in very
low risk securities and that the major risk is loss of purchasing power through
the effects of inflation or major changes in interest rates. However, while the
World Governments Series invests in securities which are believed to have
minimal credit risk, an error of judgment in selecting a currency or an interest
rate environment could result in a loss of capital.
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It is contemplated that the World Governments Series' long-term debt
investments will consist primarily of securities which are believed by the
Adviser to be of relatively high quality. If after the Series purchases such a
security, the quality of the security deteriorates significantly, the security
will be sold only if the Adviser believes it is advantageous to do so.
MFS BOND SERIES -- The Bond Series' primary investment objective is to provide
as high a level of current income as is believed to be consistent with prudent
investment risk. The Series' secondary objective is to protect shareholders'
capital.
The Series seeks to achieve its investment objective by investing, under
normal market conditions, at least 65% of its total assets in:
(1) convertible and non-convertible debt securities and preferred stocks;
(2) U.S. Government Securities, as defined in "Investment Objectives and
Policies--MFS Total Return Series" above; and
(3) commercial paper, repurchase agreements and cash or cash equivalents
(such as certificates of deposit and bankers' acceptances).
Not more than 20% of the Series' net assets will be invested in convertible
and non-convertible securities rated below the four highest grades of S&P, Fitch
(AAA, AA, A or BBB) or Moody's (Aaa, Aa, A or Baa) and comparable unrated
securities. For a description of these ratings see Appendix A to this Prospectus
and Appendix C for a chart showing the Series' holdings of fixed income
securities broken down by rating category as of the end of its most recent
fiscal year. For a discussion of the risks of investing in these securities see
"Additional Risk Factors" below.
Although the Bond Series may purchase Canadian and other foreign securities,
under normal market conditions, it may not invest more than 10% of its assets in
non-dollar denominated non-Canadian foreign securities, including emerging
market securities and Brady Bonds. The Series may hold foreign currency received
in connection with investments in foreign securities or in anticipation of
purchasing foreign securities. (See "Investment Techniques" and "Additional Risk
Factors" below.)
The Bond Series may not directly purchase common stocks. However, the Series
may retain up to 10% of its total assets in common stocks which were acquired
either by conversion of fixed income securities or by the exercise of warrants
attached thereto.
5. INVESTMENT TECHNIQUES
LENDING OF PORTFOLIO SECURITIES: Each Series may seek to increase its income
by lending portfolio securities. Such loans will usually be made to member firms
(and subsidiaries thereof) of the New York Stock Exchange (the "Exchange") and
to member banks of the Federal Reserve System, and would be required to be
secured continuously by collateral in cash, U.S. Treasury securities or an
irrevocable letter of credit maintained on a current basis at an amount at least
equal to the market value of the securities loaned. If the Adviser determines to
make securities loans, it is intended that the value of the securities loaned
would not exceed 10% of the value of the net assets of the Series making the
loans.
EMERGING MARKET SECURITIES: Consistent with their respective objectives,
each Series may invest in securities of issuers whose principal activities are
located in emerging market countries. Emerging market countries include any
country determined by the Adviser to have an emerging market economy, taking
into account a number of factors, including whether the country has a low- to
middle- income economy according to the International Bank for Reconstruction
and Development, the country's foreign currency debt rating, its political and
economic stability and the development of its financial and capital markets. The
Adviser determines whether an issuer's principal activities are located in an
emerging market country by considering such factors as its country of
organization, the principal trading market for its securities and the source of
its revenues and assets. The issuer's principal activities generally are deemed
to be located in a particular country if: (a) the security is issued or
guaranteed by the government of that country or any of its agencies, authorities
or instrumentalities; (b) the issuer is organized under the laws of, and
maintains a principal office in that country; (c) the issuer has its principal
securities trading market in that country; (d) the issuer derives 50% or more of
its total revenues from goods sold or services performed in that country; or (e)
the issuer has 50% or more of its assets in that country.
BRADY BONDS: Each Series (except the Research Series) may invest in Brady
Bonds, which are securities created through the exchange of existing commercial
bank loans to public and private entities in certain emerging markets for new
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bonds in connection with debt restructurings under a debt restructuring plan
introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady (the
"Brady Plan"). Brady Plan debt restructurings have been implemented to date in
Argentina, Brazil, Bulgaria, Costa Rica, Dominican Republic, Ecuador, Jordan,
Mexico, Nigeria, Panama, the Philippines, Poland, Uruguay and Venezuela. Brady
Bonds have been issued only recently, and for that reason do not have a long
payment history. Brady Bonds may be collateralized or uncollateralized, are
issued in various currencies (but primarily the U.S. dollar) and are actively
traded in over-the-counter secondary markets. U.S. dollar-denominated,
collateralized Brady Bonds, which may be fixed-rate bonds or floating-rate
bonds, are generally collateralized in full as to principal by U.S. Treasury
zero coupon bonds having the same maturity as the bonds. Brady Bonds are often
viewed as having three or four valuation components: the collateralized
repayment of principal at final maturity; the collateralized interest payments;
the uncollateralized interest payments; and any uncollateralized repayment of
principal at maturity (these uncollateralized amounts constituting the "residual
risk"). In light of the residual risk of Brady Bonds and the history of defaults
of countries issuing Brady Bonds with respect to commercial bank loans by public
and private entities, investments in Brady Bonds may be viewed as speculative.
REPURCHASE AGREEMENTS: Each Series may enter into repurchase agreements in
order to earn income on available cash or as a temporary defensive measure.
Under a repurchase agreement, a Series acquires securities subject to the
seller's agreement to repurchase at a specified time and price. If the seller
becomes subject to a proceeding under the bankruptcy laws or its assets are
otherwise subject to a stay order, the Series' right to liquidate the securities
may be restricted (during which time the value of the securities could decline).
As discussed in the SAI, each Series has adopted certain procedures intended to
minimize risk.
"WHEN-ISSUED" SECURITIES: Each Series (except the Research Series and the
World Governments Series) may purchase securities on a "when-issued" or on a
"forward delivery" basis, which means that the securities will be delivered to
the Series at a future date usually beyond customary settlement time. The
commitment to purchase a security for which payment 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 liquid
assets.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: Each Series (except the Emerging Growth
Series and the Research 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
record these transactions as sale and purchase transactions, rather than as
borrowing transactions. A Series will only enter into covered rolls. A "covered
roll" is a specific type of dollar roll for which there is an offsetting cash
position or a cash equivalent security position which matures on or before the
forward settlement date of the dollar roll transaction. In the event that the
party with whom the Series contracts to replace substantially similar securities
on a future date fails to deliver such securities, the Series may not be able to
obtain such securities at the price specified in such contract and thus may not
benefit from the price differential between the current sales price and the
repurchase price.
RESTRICTED SECURITIES: Each Series may purchase securities that are not
registered under the Securities Act of 1933 (the "1933 Act") ("restricted
securities"), including those that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the 1933 Act ("Rule 144A
securities"). 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 Series (except the Research Series
and the World Governments 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
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unsecured and the debtors are entitled to the protection of a number of state
and federal consumer credit laws, many of which give such debtors the right to
set off certain amounts owed on the credit cards, thereby reducing the balance
due. Most issuers of automobile receivables permit the servicers to retain
possession of the underlying obligations. If the servicer were to sell these
obligations to another party, there is a risk that the purchaser would acquire
an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there is
the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities. The underlying
assets (E.G., loans) are also subject to prepayments which shorten the
securities' weighted average life and may lower their return.
Corporate asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection; and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from ultimate default ensures payment through insurance policies or
letters of credit obtained by the issuer or sponsor from third parties. A Series
will not pay any additional or separate fees for credit support. The degree of
credit support provided for each issue is generally based on historical
information respecting the level of credit risk associated with the underlying
assets. Delinquency or loss in excess of that anticipated or failure of the
credit support could adversely affect the return on an investment in such a
security.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS: Each Series
(except the Emerging Growth Series and the Research Series) may invest in zero
coupon bonds. The Total Return Series and the Bond Series may also invest in
deferred interest bonds and PIK bonds. Zero coupon and deferred interest bonds
are debt obligations which are issued or purchased at a significant discount
from face value. The discount approximates the total amount of interest the
bonds will accrue and compound over the period until maturity or the first
interest payment date at a rate of interest reflecting the market rate of the
security at the time of issuance. While zero coupon bonds do not require the
periodic payment of interest, deferred interest bonds provide for a period of
delay before the regular payment of interest begins. PIK bonds are debt
obligations which provide that the issuer thereof may, at its option, pay
interest on such bonds in cash or in the form of additional debt obligations.
Such investments benefit the issuer by mitigating its need for cash to meet debt
service, but also require a higher rate of return to attract investors who are
willing to defer receipt of such cash. Such investments may experience greater
volatility in market value due to changes in interest rates than debt
obligations which make regular payments of interest. Each Series will accrue
income on such investments for tax and accounting purposes, as required, which
is distributable to shareholders and which, because no cash is received at the
time of accrual, may require the liquidation of other portfolio securities to
satisfy the Series' distribution obligations.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES:
Each of the Bond Series, the World Governments Series and the Utilities Series
may invest a portion of its assets in collateralized mortgage obligations or
"CMOs," which are debt obligations collateralized by mortgage loans or mortgage
pass-through securities. Typically, CMOs are collateralized by certificates
issued by GNMA, the Federal National Mortgage Association ("FNMA") or the
Federal Home Loan Mortgage Corporation ("FHLMC"), but also may be collateralized
by whole loans or private mortgage pass-through securities (such collateral
collectively referred to as "Mortgage Assets"). Each of these Series may also
invest a portion of its assets in multiclass pass-through securities which are
interests in a trust composed of Mortgage Assets. CMOs (which include multiclass
pass-through securities) may be issued by agencies, authorities or
instrumentalities of the U.S. Government or by private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage
banks, commercial banks, investment banks and special purpose subsidiaries of
the foregoing. Payments of principal of and interest on the Mortgage Assets, and
any reinvestment income thereon, provide the funds to pay debt service on the
CMOs or make scheduled distributions on the multiclass pass-through securities.
In a CMO, a series of bonds or certificates are usually issued in multiple
classes with different maturities. Each class of CMOs, often referred to as a
"tranche," is issued at a specific fixed or floating coupon rate and has a
stated maturity or final distribution date. Principal prepayments on the
Mortgage Assets may cause the CMOs to be retired substantially earlier than
their stated maturities or final distribution dates, resulting in a loss of all
or part of the premium if any has been paid. Certain classes of CMOs have
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priority over others with respect to the receipt of prepayments on the
mortgages. Therefore, depending on the type of CMOs in which a Series invests,
the investment may be subject to a greater or lesser risk of prepayments than
other types of mortgage-related securities.
Each of these Series may also invest in parallel pay CMOs and Planned
Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. PAC
Bonds generally require payments of a specified amount of principal on each
payment date. PAC Bonds are always parallel pay CMOs with the required principal
payment on such securities having the highest priority after interest has been
paid to all classes. For a further description of CMOs, parallel pay CMOs and
PAC Bonds and the risks related to transactions therein, see the SAI.
STRIPPED MORTGAGE-BACKED SECURITIES: Each of the Bond Series and the World
Governments Series may invest a portion of its assets in stripped
mortgage-backed securities ("SMBS"), which are derivative multiclass mortgage
securities usually structured with two classes that receive different
proportions of interest and principal distributions from an underlying pool of
mortgage assets. For a further description of SMBS and the risks related to
transactions therein, see the SAI.
LOAN PARTICIPATIONS AND OTHER DIRECT INDEBTEDNESS: Each of the Emerging
Growth Series and the Total Return Series may invest a portion of its assets in
"loan participations" and other direct indebtedness. By purchasing a loan
participation, a Series acquires some or all of the interest of a bank or other
lending institution in a loan to a corporate borrower. Many such loans are
secured, and most impose restrictive covenants which must be met by the
borrower. These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans may be in default at the time of purchase. A Series may
also purchase other direct indebtedness such as trade or other claims against
companies, which generally represent money owed by the company to a supplier of
goods and services. These claims may also be purchased at a time when the
company is in default. Certain of the loan participations and other direct
indebtedness acquired by a Series may involve revolving credit facilities or
other standby financing commitments which obligate a Series to pay additional
cash on a certain date or on demand.
The highly leveraged nature of many such loans and other direct indebtedness
may make such loans especially vulnerable to adverse changes in economic or
market conditions. Loan participations and other direct indebtedness may not be
in the form of securities or may be subject to restrictions on transfer, and
only limited opportunities may exist to resell such instruments. As a result, a
Series may be unable to sell such investments at an opportune time or may have
to resell them at less than fair market value. For a further discussion of loan
participations, other direct indebtedness and the risks related to transactions
therein, see the SAI.
MORTGAGE PASS-THROUGH SECURITIES: Each of the Total Return Series, the Bond
Series and the World Governments Series may invest in mortgage pass-through
securities. Mortgage pass-through securities are securities representing
interests in "pools" of mortgage loans. The Utilities Series may invest in
mortgage pass-through securities that are securities issued or guaranteed as to
principal and interest by the U.S. Government, its agencies, authorities or
instrumentalities. Monthly payments of interest and principal by the individual
borrowers on mortgages are passed through to the holders of the securities (net
of fees paid to the issuer or guarantor of the securities) as the mortgages in
the underlying mortgage pools are paid off. Payment of principal and interest on
some mortgage pass-through securities (but not the market value of the
securities themselves) may be guaranteed by the full faith and credit of the
U.S. Government (in the case of securities guaranteed by GNMA); or guaranteed by
U.S. Government-sponsored corporations (such as FNMA or FHLMC, which are
supported only by the discretionary authority of the U.S. Government to purchase
the agency's obligations). Mortgage pass-through securities may also be issued
by non-governmental issuers (such as commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers and other
secondary market issuers). See the SAI for a further discussion of these
securities.
INDEXED SECURITIES: Each of the Total Return Series, the Bond Series, the
Utilities Series and the World Governments Series may invest in indexed
securities whose value is linked to foreign currencies, interest rates,
commodities, indices or other financial indicators. Most indexed securities are
short to intermediate term fixed income securities whose values at maturity
(I.E., principal value) and/or interest rates rise or fall according to the
change in one or more specified underlying instruments. Indexed securities may
be positively or negatively indexed (I.E., their principal value or interest
rates may
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increase or decrease if the underlying instrument appreciates), and may have
return characteristics similar to direct investments in the underlying
instrument or to one or more options on the underlying instrument. Indexed
securities may be more volatile than the underlying instrument itself.
SWAPS AND RELATED TRANSACTIONS: As one way of managing its exposure to
different types of investments, each of the World Governments Series and the
Bond Series may enter into interest rate swaps, currency swaps and other types
of available swap agreements, such as caps, collars and floors. Swaps involve
the exchange by a Series with another party of cash payments based upon
different interest rate indexes, currencies, and other prices or rates, such as
the value of mortgage prepayment rates. For example, in the typical interest
rate swap, a Series might exchange a sequence of cash payments based on a
floating rate index for cash payments based on a fixed rate. Payments made by
both parties to a swap transaction are based on a principal amount determined by
the parties.
The World Governments Series and the Bond Series may also purchase and sell
caps, floors and collars. In a typical cap or floor agreement, one party agrees
to make payments only under specified circumstances, usually in return for
payment of a fee by the counterparty. For example, the purchase of an interest
rate cap entitles the buyer, to the extent that a specified index exceeds a
predetermined interest rate, to receive payments of interest on a
contractually-based principal amount from the counterparty selling such interest
rate cap. The sale of an interest rate floor obligates the seller to make
payments to the extent that a specified interest rate falls below an agreed-upon
level. A collar arrangement combines elements of buying a cap and selling a
floor.
Swap agreements will tend to shift a Series' investment exposure from one
type of investment to another. For example, if a Series agreed to exchange
payments in dollars for payments in foreign currency, in each case based on a
fixed rate, the swap agreement would tend to decrease a Series' exposure to U.S.
interest rates and increase its exposure to foreign currency and interest rates.
Caps and floors have an effect similar to buying or writing options. Depending
on how they are used, swap agreements may increase or decrease the overall
volatility of a Series' investments and its share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve
a small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on a
Series' performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. A Series may also suffer losses if
it is unable to terminate outstanding swap agreements or reduce its exposure
through offsetting transactions.
Swaps, caps, floors and collars are highly specialized activities which
involve certain risks. See the SAI for further information on, and the risks
involved in, these activities.
OPTIONS ON SECURITIES: Each Series (except the Research Series and the
Utilities Series) may write (sell) covered put and call options and purchase put
and call options on securities. Each of these Series will write options on
securities for the purpose of increasing its return and/or to protect the value
of its portfolio. In particular, where a Series writes an option that expires
unexercised or is closed out by the Series at a profit, it will retain the
premium paid for the option which will increase its gross income and will offset
in part the reduced value of the portfolio security underlying the option, or
the increased cost of portfolio securities to be acquired. In contrast, however,
if the price of the underlying security moves adversely to the Series' position,
the option may be exercised and the Series will be required to purchase or sell
the underlying security at a disadvantageous price, which may only be partially
offset by the amount of the premium. The Series may also write combinations of
put and call options on the same security, known as "straddles." Such
transactions can generate additional premium income but also present increased
risk.
By writing a call option on a security, a Series limits its opportunity to
profit from any increase in the market value of the underlying security, since
the holder will usually exercise the call option when the market value of the
underlying security exceeds the exercise price of the call. However, the Series
retains the risk of depreciation in value of securities on which it has written
call options.
Each of these Series may also purchase put or call options in anticipation
of market fluctuations which may adversely affect the value of its portfolio or
the prices of securities that a Series wants to purchase at a later date. In the
event that the expected market fluctuations occur, the Series may be able to
offset the resulting adverse effect on its portfolio, in whole or in
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<PAGE>
part, through the options purchased. The premium paid for a put or call option
plus any transaction costs will reduce the benefit, if any, realized by the
Series upon exercise or liquidation of the option, and, unless the price of the
underlying security changes sufficiently, the option may expire without value to
the Series.
In certain instances the Emerging Growth Series may enter into options on
Treasury securities that are "reset" options or "adjustable strike" options.
These options provide for periodic adjustment of the strike price and may also
provide for the periodic adjustment of the premium during the term of the
option. The SAI contains a further discussion of these investments.
OPTIONS ON STOCK INDICES: Each of the Emerging Growth Series, the Total
Return Series and the Utilities Series may write (sell) covered call and put
options and purchase call and put options on stock indices. Each of these Series
may write options on stock indices for the purpose of increasing its gross
income and to protect its portfolio against declines in the value of securities
it owns or increases in the value of securities to be acquired. When a Series
writes an option on a stock index, and the value of the index moves adversely to
the holder's position, the option will not be exercised, and the Series will
either close out the option at a profit or allow it to expire unexercised. A
Series will thereby retain the amount of the premium, less related transaction
costs, which will increase its gross income and offset part of the reduced value
of portfolio securities or the increased cost of securities to be acquired. Such
transactions, however, will constitute only partial hedges against adverse price
fluctuations, since any such fluctuations will be offset only to the extent of
the premium received by a Series for the writing of the option, less related
transaction costs. In addition, if the value of an underlying index moves
adversely to a Series' option position, the option may be exercised, and the
Series will experience a loss which may only be partially offset by the amount
of the premium received.
Each of these Series may also purchase put or call options on stock indices
in order, respectively, to hedge its investments against a decline in value or
to attempt to reduce the risk of missing a market or industry segment advance. A
Series' possible loss in either case will be limited to the premium paid for the
option, plus related transaction costs.
"YIELD CURVE" OPTIONS: Each of the Total Return Series, the Bond Series and
the World Governments Series may enter into options on the yield "spread," or
yield differential, between two securities, a transaction referred to as a
"yield curve" option, for hedging and non-hedging (an effort to increase current
income) purposes. In contrast to other types of options, a yield curve option is
based on the difference between the yields of designated securities rather than
the actual prices of the individual securities, and is settled through cash
payments. Accordingly, a yield curve option is profitable to the holder if this
differential widens (in the case of a call) or narrows (in the case of a put),
regardless of whether the yields of the underlying securities increase or
decrease. Yield curve options written by a Series will be covered as described
in the SAI. The trading of yield curve options is subject to all the risks
associated with trading other types of options, as discussed below under
"Additional Risk Factors" and in the SAI. In addition, such options present
risks of loss even if the yield on one of the underlying securities remains
constant, if the spread moves in a direction or to an extent which was not
anticipated.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS: Each of the Total Return
Series, the Bond Series, the World Governments Series and the Utilities Series
may purchase and sell futures contracts on foreign or domestic fixed income
securities or indices of such securities, including municipal bond indices and
any other indices of foreign or domestic fixed income securities that may become
available for trading ("Futures Contracts"). Each of these Series may also
purchase and write options on such Futures Contracts ("Options on Futures
Contracts"). Each of the Emerging Growth Series and the Total Return Series may
purchase and sell Futures Contracts on stock indices, while the Emerging Growth
Series, the Total Return Series, the World Governments Series and the Utilities
Series may purchase and sell Futures Contracts on foreign currencies or indices
of foreign currencies. Each of these Series may also purchase and write Options
on such Futures Contracts.
Such transactions will be entered into for hedging purposes or for
non-hedging purposes to the extent permitted by applicable law. Each Series will
incur brokerage fees when it purchases and sells Futures Contracts, and will be
required to maintain margin deposits. In addition, Futures Contracts entail
risks. Although the Adviser believes that use of such Contracts will benefit a
Series, if its investment judgment about the general direction of exchange rates
or the stock market is incorrect, the Series' overall performance may be poorer
than if it had not entered into any such contract and the Series may realize a
loss. A Series will not enter into any Futures Contract if immediately
thereafter the value of securities and other obligations underlying all such
Futures Contracts held by such Series would exceed 50% of the value of its total
assets.
Purchases of Options on Futures Contracts may present less risk in hedging a
Series' portfolio than the purchase or sale of the underlying Futures Contracts
since the potential loss is limited to the amount of the premium plus related
transaction
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<PAGE>
costs, although it may be necessary to exercise the option to realize any
profit, which results in the establishment of a futures position. The writing of
Options on Futures Contracts, however, does not present less risk than the
trading of Futures Contracts and will constitute only a partial hedge, up to the
amount of the premium received. In addition, if an option is exercised, a Series
may suffer a loss on the transaction.
Futures Contracts and Options on Futures Contracts that are entered into by
a Series will be traded on U.S. and foreign exchanges.
FORWARD CONTRACTS: Each Series may enter into forward foreign currency
exchange contracts for the purchase or sale of a fixed quantity of a foreign
currency at a future date ("Forward Contracts"). Each of these Series may enter
into Forward Contracts for hedging purposes and (except for the Bond Series) for
non-hedging purposes (I.E., speculative purposes). By entering into transactions
in Forward Contracts for hedging purposes, a Series may be required to forego
the benefits of advantageous changes in exchange rates and, in the case of
Forward Contracts entered into for non-hedging purposes, a Series may sustain
losses which will reduce its gross income. Such transactions, therefore, could
be considered speculative. Forward Contracts are traded over-the-counter and not
on organized commodities or securities exchanges. As a result, Forward Contracts
operate in a manner distinct from exchange-traded instruments, and their use
involves certain risks beyond those associated with transactions in Futures
Contracts or options traded on exchanges. A Series may choose to, or be required
to, receive delivery of the foreign currencies underlying Forward Contracts it
has entered into. Under certain circumstances, such as where the Adviser
believes that the applicable exchange rate is unfavorable at the time the
currencies are received or the Adviser anticipates, for any other reason, that
the exchange rate will improve, the Series may hold such currencies for an
indefinite period of time. A Series may also enter into a Forward Contract on
one currency to hedge against risk of loss arising from fluctuations in the
value of a second currency (referred to as a "cross hedge") if, in the judgment
of the Adviser, a reasonable degree of correlation can be expected between
movements in the values of the two currencies. Each of these Series has
established procedures consistent with statements of the SEC and its staff
regarding the use of Forward Contracts by registered investment companies, which
requires use of segregated assets or "cover" in connection with the purchase and
sale of such contracts.
OPTIONS ON FOREIGN CURRENCIES: Each Series (except the Research 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 a Series may be required to purchase or sell
foreign currencies at disadvantageous exchange rates, thereby incurring losses.
The purchase of an Option on Foreign Currency may constitute an effective hedge
against fluctuations in exchange rates although, in the event of rate movements
adverse to a Series' position, it may forfeit the entire amount of the premium
paid for the option plus related transaction costs. A Series may also choose to,
or be required to, receive delivery of the foreign currencies underlying Options
on Foreign Currencies it has entered into. Under certain circumstances, such as
where the Adviser believes that the applicable exchange rate is unfavorable at
the time the currencies are received or the Adviser anticipates, for any other
reason, that the exchange rate will improve, a Series may hold such currencies
for an indefinite period of time.
6. ADDITIONAL RISK FACTORS
OPTIONS, FUTURES CONTRACTS AND FORWARD CONTRACTS: Although certain Series
will enter into transactions in options, Futures Contracts, Options on Futures
Contracts, Forward Contracts and Options on Foreign Currencies for hedging
purposes, such transactions nevertheless involve certain risks. For example, a
lack of correlation between the instrument underlying an option or Futures
Contract and the assets being hedged, or unexpected adverse price movements,
could render a Series' hedging strategy unsuccessful and could result in losses.
Certain Series also may enter into transactions in options, Futures Contracts,
Options on Futures Contracts and Forward Contracts for other than hedging
purposes, which involves greater risk. In particular, such transactions may
result in losses for a Series which are not offset by gains on other portfolio
positions, thereby reducing gross income. In addition, foreign currency markets
may be extremely volatile from time to time. There also can be no assurance that
a liquid secondary market will exist for any contract purchased or sold, and a
Series may be required to maintain a position until exercise or expiration,
which could result in losses. The SAI contains a description of the nature and
trading mechanics of options, Futures Contracts, Options on Futures Contracts,
Forward Contracts and Options on Foreign Currencies, and includes a discussion
of the risks related to transactions therein.
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Transactions in Forward Contracts may be entered into only in the
over-the-counter market. Futures Contracts and Options on Futures Contracts may
be entered into on U.S. exchanges regulated by the Commodity Futures Trading
Commission and on foreign exchanges. In addition, the securities and indexes
underlying options, Futures Contracts and Options on Futures Contracts traded by
the Series will include both domestic and foreign securities.
LOWER RATED BONDS: Each Series (except the World Governments Series) may
invest in fixed income securities rated Baa by Moody's or BBB by S&P or Fitch
and comparable unrated securities. These securities, while normally exhibiting
adequate protection parameters, have speculative characteristics and changes in
economic conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than in the case of higher
grade securities.
Each of these Series may also invest in securities rated Ba or lower by
Moody's or BB or lower by S&P or Fitch and comparable unrated securities
(commonly known as "junk bonds") to the extent described above. See Appendix A
to this Prospectus for a description of these ratings. These securities are
considered speculative and, while generally providing greater income than
investments in higher rated securities, will involve greater risk of principal
and income (including the possibility of default or bankruptcy of the issuers of
such securities) and may involve greater volatility of price (especially during
periods of economic uncertainty or change) than securities in the higher rating
categories. However, since yields vary over time, no specific level of income
can ever be assured. These lower rated high yielding fixed income securities
generally tend to reflect economic changes and short-term corporate and industry
developments to a greater extent than higher rated securities which react
primarily to fluctuations in the general level of interest rates (although these
lower rated fixed income securities are also affected by changes in interest
rates, the market's perception of their credit quality, and the outlook for
economic growth). In the past, economic downturns or an increase in interest
rates have, under certain circumstances, caused a higher incidence of default by
the issuers of these securities and may do so in the future, especially in the
case of highly leveraged issuers. During certain periods, the higher yields on a
Series' lower rated high yielding fixed income securities are paid primarily
because of the increased risk of loss of principal and income, arising from such
factors as the heightened possibility of default or bankruptcy of the issuers of
such securities. Due to the fixed income payments of these securities, a Series
may continue to earn the same level of interest income while its net asset value
declines due to portfolio losses, which could result in an increase in the
Series' yield despite the actual loss of principal. The market for these lower
rated fixed income securities may be less liquid than the market for investment
grade fixed income securities, and judgment may at times play a greater role in
valuing these securities than in the case of investment grade fixed income
securities. Changes in the value of securities subsequent to their acquisition
will not affect cash income or yield to maturity to a Series but will be
reflected in the net asset value of shares of the Series. See the SAI for more
information on lower rated securities.
FOREIGN SECURITIES: Each Series may invest in dollar-denominated and
non-dollar-denominated foreign securities. Investing in securities of foreign
issuers generally involves risks not ordinarily associated with investing in
securities of domestic issuers. These include changes in currency rates,
exchange control regulations, governmental administration or economic or
monetary policy (in the 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. Each Series may hold foreign currency received in connection with
investments in foreign securities when, in the judgment of the Adviser, it would
be beneficial to convert such currency into U.S. dollars at a later date, based
on anticipated changes in the relevant exchange rate. Such Series may also hold
foreign currency in anticipation of purchasing foreign securities. See the SAI
for further discussion of foreign securities and the holding of foreign
currency, as well as the associated risks.
AMERICAN DEPOSITARY RECEIPTS: Each of the Series may invest in ADRs which
are certificates issued by a U.S. depository (usually a bank) and represent a
specified quantity of shares of an underlying non-U.S. stock on deposit with a
custodian bank as collateral. 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.
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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 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.
NON-DIVERSIFICATION: Each of the World Governments Series and the Utilities
Series is "non-diversified," as that term is defined in the Investment Company
Act of 1940 ( the "1940 Act"), but intends to qualify as a "regulated investment
company" ("RIC") for federal income tax purposes. This means, in general, that
although more than 5% of the Series' total assets may be invested in the
securities of one issuer (including a foreign government), at the close of each
quarter of its taxable year the aggregate amount of such holdings may not exceed
50% of the value of its total assets, and no more than 25% of the value of its
total assets may be invested in the securities of a single issuer. To the extent
that a non-diversified Series at times may hold the securities of a smaller
number of issuers than if it were "diversified" (as defined in the 1940 Act),
the Series will at such times be subject to greater risk with respect to its
portfolio securities than a fund that invests in a broader range of securities,
because changes in the financial condition or market assessment of a single
issuer may cause greater fluctuations in the Series' total return and the net
asset value of its shares.
-------------------
SHORT-TERM INVESTMENTS FOR TEMPORARY DEFENSIVE PURPOSES -- During periods of
unusual market conditions when the Adviser believes that investing for temporary
defensive purposes is appropriate, or in order to meet anticipated redemption
requests, a large portion or all of the assets of each Series may be invested in
cash (including foreign currency) or cash equivalents including, but not limited
to, obligations of banks (including certificates of deposit, bankers'
acceptances, time deposits and repurchase agreements), commercial paper,
short-term notes, U.S. Government Securities and related repurchase agreements.
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PORTFOLIO TRADING
Each Series intends to manage its portfolio by buying and selling
securities, as well as holding securities to maturity, to help attain its
investment objectives and policies.
Each Series will engage in portfolio trading if it believes a transaction,
net of costs (including custodian charges), will help in attaining its
investment objectives. In trading portfolio securities, a Series seeks to take
advantage of market developments, yield disparities and variations in the
creditworthiness of issuers. For a description of the strategies which may be
used by the Series in trading portfolio securities, see "Portfolio Transactions
and Brokerage Commissions" in the SAI. The Total Return Series' portfolio will
be managed actively with respect to the Series' fixed income securities and the
asset allocations modified as the Adviser deems necessary. Although the Series
does not intend to seek short-term profits, fixed income securities in its
portfolio will be sold whenever the Adviser believes it is appropriate to do so
without regard to the length of time the particular asset may have been held.
With respect to its equity securities, the Total Return Series does not intend
to trade in securities for short-term profits and anticipates that portfolio
securities ordinarily will be held for one year or longer. However, the Series
will effect trades whenever it believes that changes in its portfolio securities
are appropriate.
Because each of the Utilities Series, the World Governments Series and the
Bond 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.
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%
Research Series.............................................................................. 0.75%
Total Return Series.......................................................................... 0.75%
Utilities Series............................................................................. 0.75%
World Governments Series..................................................................... 0.75%
Bond Series.................................................................................. 0.60%
</TABLE>
24
<PAGE>
MFS or its affiliates will pay a fee to Kansas City Life Insurance Company
equal, on an annualized basis, to 0.15% of the aggregate net assets of each
Series, attributable to Contracts offered by separate accounts of Kansas City
Life Insurance Company or their affiliates. Such fees will not be paid by the
Series, their shareholders, or by the Contract holders.
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
Research Series................................................................... 92,348 56,859
Total Return Series............................................................... 60,979 87,721
Utilities Series.................................................................. 39,863 91,877
World Governments Series.......................................................... 126,898 172,556
Bond Series....................................................................... 2,924 40,829
</TABLE>
The identity and background of the portfolio managers for each Series is set
forth below. Unless indicated otherwise, each portfolio manager has acted in
that capacity since the commencement of investment operations of each Series.
<TABLE>
<CAPTION>
SERIES PORTFOLIO MANAGERS
- ----------------------------- --------------------------------------------------------------------------------------
<S> <C>
Emerging Growth Series John W. Ballen, a Senior Vice President of MFS, has been employed by the Adviser as a
portfolio manager since 1984. Toni Y. Shimura, a Vice President of MFS, has been
employed by the Adviser as a portfolio manager since 1987. Ms. Shimura became a
portfolio manager of the Series on November 30, 1995.
Research Series The Series is currently managed by a committee comprised of various investment
research analysts.
Total Return Series David M. Calabro, a Vice President of MFS, has been employed by the Adviser as a
portfolio manager since 1992. Mr. Calabro is the head of this portfolio management
team and a manager of the common stock portion of the Series' portfolio. Geoffrey L.
Kurinsky, a Senior Vice President of MFS, has been employed by the Adviser as a
portfolio manager since 1987. Mr. Kurinsky is the manager of the Series' fixed income
securities. Judith N. Lamb, a Vice President of MFS, has been employed by the Adviser
as a portfolio manager since 1992. Ms. Lamb is the manager of the Series' convertible
securities. Lisa B. Nurme, a Vice President of MFS, has been employed by the Adviser
as a portfolio manager since 1987. Ms. Nurme is a manager of the common stock portion
of the Series' portfolio. Maura A. Shaughnessy, a Vice President of MFS, has been
employed by the Adviser as a portfolio manager since 1991. Ms. Shaughnessy is a
manager of the common stock portion of the Series' portfolio. Each individual became a
portfolio manager of the Series on July 19, 1995.
Utilities Series Maura A. Shaughnessy, a Vice President of the Adviser, has been employed by the
Adviser as a portfolio manager since 1991.
World Governments Series Stephen C. Bryant, a Senior Vice President of the Adviser, has been employed by the
Adviser as a portfolio manager since 1987.
Bond Series Geoffrey L. Kurinsky, a Senior Vice President of the Adviser, has been employed by the
Adviser as a portfolio manager since 1987.
</TABLE>
MFS also serves as investment adviser to each of the other funds in the MFS
Family of Funds (the "MFS Funds") and to MFS-Registered Trademark- Municipal
Income Trust, MFS Multimarket Income Trust, MFS Government Markets Income Trust,
MFS Intermediate Income Trust, MFS Charter Income Trust, MFS Special Value
Trust, MFS Institutional Trust, MFS Union Standard Trust, MFS/ Sun Life Series
Trust, 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.
25
<PAGE>
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 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.
26
<PAGE>
8. INFORMATION CONCERNING SHARES OF EACH SERIES
PURCHASES AND REDEMPTIONS
The separate accounts of the Participating Insurance Companies place orders
to purchase and redeem shares of each Series based on, among other things, the
amount of premium payments to be invested and surrender and transfer requests to
be effected on that day pursuant to Contracts. Orders received by the Trust are
effected on days on which the Exchange is open for trading. For orders received
by the Trust before the close of regular trading on the Exchange (normally 4
p.m. eastern time), such purchases and redemptions of the shares of each Series
are effected at the respective net asset values per share determined as of the
close of regular trading on the Exchange on that same day. Participating
Insurance Companies shall be the designee of the Trust for receipt of purchase
and redemption orders from Contract holders and receipt by such designee shall
constitute receipt by the Trust; provided that the Trust receives notice of such
order by 9:30 a.m. eastern time on the next following day on which the Exchange
is open for trading. Payment for shares shall be by federal funds transmitted by
wire and must be received by 2:00 p.m. eastern time on the next following day on
which the Exchange is open for trading after the purchase order is received.
Redemption proceeds shall be by federal funds transmitted by wire and shall be
sent by 2:00 p.m. eastern time on the next following day on which the Exchange
is open for trading after the redemption order is received. No fee is charged
the shareholders when they redeem Series shares.
The offering of shares of any Series may be suspended for a period of time
and each Series reserves the right to refuse any specific purchase order.
Purchase orders may be refused if, in the Adviser's opinion, they are of a size
that would disrupt the management of a Series. The Trust may suspend the right
of redemption of shares of any Series and may postpone payment for any period:
(i) during which the Exchange is closed other than customary weekend and holiday
closings or during which trading on the Exchange is restricted; (ii) when the
SEC determines that a state of emergency exists which may make payment or
transfer not reasonably practicable; (iii) as the SEC may by order permit for
the protection of the security holders of the Trust; or (iv) at any time when
the Trust may, under applicable laws, rules and regulations, suspend payment on
the redemption of its shares.
Should any conflict between Contract holders arise which would require that
a substantial amount of net assets be withdrawn from any Series, orderly
portfolio management could be disrupted to the potential detriment of such
Contract.
NET ASSET VALUE
The net asset value per share of each Series is determined each day during
which the Exchange is open for trading. This determination is made once during
each such day as of the close of regular trading on the Exchange by deducting
the amount of the Series' liabilities from the value of the Series' assets and
dividing the difference by the number of shares of the Series outstanding.
Values of assets in a Series' portfolio are determined on the basis of their
market or other fair value, as described in the SAI. All investments, assets and
liabilities are expressed in U.S. dollars based upon current currency exchange
rates.
DISTRIBUTIONS
Substantially all of each Series' net investment income for any calendar
year is declared as dividends and paid to its shareholders as dividends on an
annual basis. In addition, each Series may make one or more distributions during
the calendar year to its shareholders from any long-term capital gains, and may
also make one or more distributions to its shareholders from short-term capital
gains. In determining the net investment income available for distribution, a
Series may rely on projections of its anticipated net investment income (which
may include short-term capital gains from the sales of securities or other
assets, and, if allowed by a Series' investment restrictions, premiums from
options written), over a longer term, rather than its actual net investment
income for the period.
Shareholders of 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.
27
<PAGE>
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.
United of Omaha Life Insurance Company, Omaha, NE, owns 50.75% of the
Research Series' shares and 33.02% of the World Governments Series' shares, and,
therefore, controls such Series; CG Variable Annuity--Separate Account II,
Hartford, CT, owns 44.85% of the Total Return Series and 29.08% of the Utilities
Series' shares, and, therefore, controls such Series; Ameritas Life Insurance
Company--Separate Account VA-2 (Annuity), Lincoln, NE, owns 56.16% of the
Utilities Series' shares, and, therefore, controls the Series; Century Life of
America--Century Variable Annuity Account, Waverly, IA, owns 45.82% of the World
Governments Series' shares, and, therefore, controls the Series; and Kansas City
Life Insurance Company--Variable Annuity, Kansas City, MO, owns 70.43% of the
Bond 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 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.
28
<PAGE>
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"): 0.40% for the Bond
Series and 0.25% for each remaining 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.
29
<PAGE>
APPENDIX A
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the quality
of various debt instruments. It should be emphasized, however, that ratings are
not absolute standards of quality. Consequently, debt instruments with the same
maturity, coupon and rating may have different yields while debt instruments of
the same maturity and coupon with different ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
AAA: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
BAA: Bonds which are rated Baa are considered as medium-grade obligations
(I.E., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA: Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has
been suspended or withdrawn, it may be for reasons unrelated to the quality of
the issue.
Should no rating be assigned, the reason may be one of the following:
1. an application for rating was not received or accepted;
2. the issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy;
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.
A-1
<PAGE>
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
STANDARD & POOR'S RATINGS SERVICES
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The CCC rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior debt
that is assigned an actual or implied CCC rating.
C: The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI: The rating CI is reserved for income bonds on which no interest is being
paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
PLUS (+) OR MINUS (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR: Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
A-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
A-2
<PAGE>
indicate the relative degree of safety. The A-1 designation indicates that the
degree of safety regarding timely payment is either overwhelming or very strong.
Those A-1 issues determined to possess overwhelming safety characteristics will
be denoted with a plus (+) sign designation.
The rating P-1 is the highest commercial paper rating assigned by Moody's.
Issuers rated P-1 have a superior ability for repayment. P-1 repayment capacity
will normally be evidenced by the following characteristics: (1) leading market
positions in well established industries; (2) high rates of return on funds
employed; (3) conservative capitalization structure with moderate reliance on
debt and ample asset protection; (4) broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and (5) well established
access to a range of financial markets and assured sources of alternate
liquidity.
FITCH INVESTORS SERVICE, INC.
AAA: Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
prepay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA: Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated 'AAA'. Because bonds rated in the
'AAA' and 'AA' categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated 'F-1+'.
A: Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds and, therefore,
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified which could
assist the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest of principal.
PLUS(+) MINUS(-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rated category. Plus and
minus signs, however, are not used in the 'AAA' category.
NR: indicates that Fitch does not rate the specific issue.
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.
A-3
<PAGE>
FITCHALERT: Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the likely direction
of such change. These are designated a "Positive," indicating a potential
upgrade, "Negative," for potential downgrade, or "Evolving," where ratings may
be lowered. FitchAlert is relatively short-term and should be resolved within 12
months.
DUFF & PHELPS CREDIT RATING CO.
AAA: Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA: Bonds considered to be investment grade and or very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated 'AAA'. Because bonds rated in the
'AAA' and 'AA' categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated 'D-1+'.
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business, and financial alternatives can be identified which could
assist the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
PLUS (+) OR MINUS (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within a rating category. Plus and
minus signs, however, are not used in the 'AAA' category.
NR: Indicates that Duff & Phelps does not rate the specific issue.
DUFF & PHELPS SHORT-TERM RATINGS
D-1+: Highest certainty of timely payment. Short-term liquidity, including
internal operation factors and/or access to alternative sources of funds, is
outstanding and safety is just below risk-free U.S. Treasury short-term
obligations.
D-1: Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
D-1-: High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
D-2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
D-3: Satisfactory liquidity and other protection factors qualify issues as
to investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
D-4: Speculative investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors and market access
may be subject to a high degree of variation.
D-5: Issuer failed to meet scheduled principal and/or interest payments.
A-4
<PAGE>
APPENDIX B
PRINCIPAL SECTORS OF THE UTILITIES INDUSTRY
The principal sectors of the utility industry in which the Utilities Series may
invest are discussed below.
ELECTRIC -- The electric utility industry consists of companies that are engaged
principally in the generation, transmission and sale of electric energy,
although many also provide other energy-related services. Domestic electric
utility companies, in general, recently have been favorably affected by lower
fuel and financing costs and the full or near completion of major construction
programs. In addition, many of these companies recently have generated cash
flows in excess of current operating expenses and construction expenditures,
permitting some degree of diversification into unregulated businesses. Some
electric utilities have also taken advantage of the right to sell power outside
of their traditional geographic areas. Electric utility companies historically
have been subject to the risks associated with increases in fuel and other
operating costs, high interest costs on borrowings needed for capital
construction programs, costs associated with compliance with environmental and
safety regulations and changes in the regulatory climate.
In the U.S., the construction and operation of nuclear power facilities is
subject to increased scrutiny by, and evolving regulations of, the Nuclear
Regulatory Commission and state agencies having comparable jurisdiction.
Increased scrutiny might result in higher operating costs and higher capital
expenditures, with the risk that the regulators may disallow inclusion of these
costs in rate authorizations or the risk that a company may not be permitted to
operate or complete construction of a facility. In addition, operators of
nuclear power plants may be subject to significant costs for disposal of nuclear
fuel and for the de-commissioning of such plants.
TELECOMMUNICATIONS -- The telephone industry is large and highly concentrated.
Companies that distribute telephone services and provide access to the telephone
networks comprise the greatest portion of this segment. Telephone companies in
the U.S. are still experiencing the effects of the breakup of American Telephone
& Telegraph Company, which occurred in 1984. Since 1984, companies engaged in
telephone communication services have expanded their non-regulated activities
into other businesses, including cellular telephone services, data processing,
equipment retailing, computer software and hardware services, and financial
services. This expansion has provided significant opportunities for certain
telephone companies to increase their earnings and dividends at faster rates
than had been allowed in traditionally regulated businesses. Increasing
competition, technological innovations and other structural changes, however,
could adversely affect the profitability of such utilities.
GAS -- Gas transmission companies and gas distribution companies are also
undergoing significant changes. In the U.S., interstate transmission companies
are regulated by the Federal Energy Regulatory Commission, which is reducing its
regulation of the industry. Many companies have diversified into oil and gas
exploration and development, making returns more sensitive to energy prices. In
the recent decade, gas utility companies have been adversely affected by
disruptions in the oil industry and have also been affected by increased
concentration and competition. In the opinion of the Adviser, however,
environmental considerations could improve the gas industry outlook in the
future. For example, natural gas is the cleanest of the hydrocarbon fuels, and
this may result in incremental shifts in fuel consumption toward natural gas and
away from oil and coal.
WATER -- Water supply utilities are companies that collect, purify, distribute
and sell water. In the U.S. and around the world, the industry is highly
fragmented because most of the supplies are owned by local authorities.
Companies in this industry are generally mature and are experiencing little or
no per capita volume growth.
-------------------
There can be no assurance that the positive developments noted above,
including those relating to changing regulation, will occur or that risk factors
other than those noted above will not develop in the future.
B-1
<PAGE>
APPENDIX C
MFS BOND SERIES
PORTFOLIO COMPOSITION CHART
FOR FISCAL YEAR ENDED DECEMBER 31, 1996
The table below shows the percentages of the Series' assets at December 31, 1996
invested in bonds assigned to the various rating categories by S&P, Moody's
(provided only for bonds not rated by S&P), Fitch (provided only for bonds not
rated by S&P or Moody's) and Duff & Phelps (provided only for bonds not rated by
S&P, Moody's or Fitch) and in unrated bonds determined by MFS to be of
comparable quality. For split rated bonds, the higher of the S&P or Moody's
rating is used. When neither an S&P or Moody's rating is available, secondary
sources are selected in the following order: Fitch and Duff & Phelps.
<TABLE>
<CAPTION>
COMPILED
RATING RATINGS TOTAL
- ----------- ----------- ----------
<S> <C> <C> <C>
AAA/Aaa 31.50 31.50
AA/Aa 1.69 1.69
A/A 7.61 7.61
BBB/Baa 28.46 28.46
BB/Ba 14.35 14.35
B/B 1.28 1.28
CCC/Caa
CC/Ca
C/C
Default
----- -----
TOTAL 84.89 84.89
</TABLE>
The chart does not necessarily indicate what the composition of the Series'
portfolio will be in subsequent years. Rather, the Series' investment objective,
policies and restrictions indicate the extent to which the Series may purchase
securities in the various categories.
C-1
<PAGE>
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
(800) 637-8730
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN
Investors Bank & Trust Company
89 South Street, Boston, MA 02111
DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 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
[LOGO]
MFS-REGISTERED TRADEMARK- EMERGING GROWTH SERIES
MFS-REGISTERED TRADEMARK- RESEARCH SERIES
MFS-REGISTERED TRADEMARK- TOTAL RETURN SERIES
MFS-REGISTERED TRADEMARK- UTILITIES SERIES
MFS-REGISTERED TRADEMARK- WORLD GOVERNMENTS SERIES
MFS-REGISTERED TRADEMARK- BOND SERIES
500 Boylston Street, Boston, MA 02116
------------------------------------
MFS-REGISTERED TRADEMARK- EMERGING GROWTH SERIES
MFS-REGISTERED TRADEMARK- RESEARCH SERIES
MFS-REGISTERED TRADEMARK- TOTAL
RETURN SERIES
MFS-REGISTERED TRADEMARK- UTILITIES SERIES
MFS-REGISTERED TRADEMARK- WORLD
GOVERNMENTS SERIES
MFS-REGISTERED TRADEMARK- BOND SERIES
[LOGO]
PROSPECTUS
MAY 1, 1997
------------------------
