<PAGE>
<TABLE>
<S> <C>
MFS-REGISTERED TRADEMARK- EMERGING GROWTH
SERIES
MFS-REGISTERED TRADEMARK- RESEARCH SERIES
MFS-REGISTERED TRADEMARK- TOTAL RETURN
SERIES
MFS-REGISTERED TRADEMARK- WORLD
GOVERNMENTS SERIES
MFS-REGISTERED TRADEMARK- BOND SERIES
MFS-REGISTERED TRADEMARK- MONEY MARKET PROSPECTUS
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 WORLD GOVERNMENTS SERIES (the "World Governments Series"), which seeks
not only preservation but also growth of capital, together with moderate
current income;
- -- 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; and
- -- MFS MONEY MARKET SERIES (the "Money Market Series"), which seeks as high a
level of current income as is considered consistent with the preservation of
capital and liquidity.
-------------------
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 (EXCEPT FOR THE MONEY MARKET
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.
-------------------
INVESTMENTS IN THE MONEY MARKET SERIES ARE NEITHER INSURED NOR GUARANTEED BY THE
U.S. GOVERNMENT AND THERE IS NO ASSURANCE THAT THE SERIES WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
-------------------
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 World Governments Series................................................................... 12
MFS Bond Series................................................................................ 13
MFS Money Market Series........................................................................ 14
5. Investment Techniques.......................................................................... 15
6. Additional Risk Factors........................................................................ 21
7. Management of the Series....................................................................... 24
8. Information Concerning Shares of Each Series................................................... 26
Purchases and Redemptions...................................................................... 26
Net Asset Value................................................................................ 27
Distributions.................................................................................. 27
Tax Status..................................................................................... 27
Description of Shares, Voting Rights and Liabilities........................................... 27
Performance Information........................................................................ 28
Expenses....................................................................................... 29
Shareholder Communications..................................................................... 29
Appendix A -- Description of Bond Ratings.......................................................... A-1
Appendix B -- Portfolio Composition Charts......................................................... B-1
</TABLE>
2
<PAGE>
1. EXPENSE SUMMARY
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS):
<TABLE>
<CAPTION>
MFS MFS
EMERGING MFS TOTAL
GROWTH RESEARCH RETURN
SERIES SERIES SERIES
-------- -------- --------
<S> <C> <C> <C>
Management Fee.............................................. 0.75% 0.75% 0.75%
Other Expenses (after expense limitation)(1)(2)............. 0.25% 0.25% 0.25%
-------- -------- ---
Total Operating Expenses (after expense limitation)(2)...... 1.00% 1.00% 1.00%
<CAPTION>
MFS MFS
WORLD MONEY
GOVERNMENTS MFS BOND MARKET
SERIES SERIES SERIES
-------- -------- --------
<S> <C> <C> <C>
Management Fee.............................................. 0.75% 0.60% 0.50%
Other Expenses (after expense limitation)(1)(2)............. 0.25% 0.40% 0.10%
-------- -------- ---
Total Operating Expenses (after expense limitation)(2)...... 1.00% 1.00% 0.60%
<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, 0.10% for the Money Market 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%
World Governments........................ 1.28% 2.03%
Bond..................................... 8.85% 9.45%
Money Market............................. 27.24% 27.74%
</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.
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
3
<PAGE>
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>
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>
8
<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>
9
<PAGE>
MONEY MARKET 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............................. $ 1.00 $ 1.00
------ ------
Income from investment operations#--
Net investment incomeSection................................... $ 0.04 $ 0.04
Less distributions declared to shareholders from net investment
income.......................................................... (0.04) (0.04)
------ ------
Net asset value--end of period................................... $ 1.00 $ 1.00
------ ------
------ ------
Total return..................................................... 4.55% 4.37%++
Ratios (to average net assets)/Supplemental dataSection:
Expenses....................................................... 0.60% 0.60%+
Net investment income.......................................... 4.53% 4.54%+
Net assets at end of period (000 omitted)........................ $ 633 $ 180
<FN>
- ------------------------
* For the period from the commencement of investment operations, January 3, 1995 to December 31, 1995.
+ Annualized.
++ Not annualized.
# Per share data is based on average shares outstanding.
Section The Adviser voluntarily agreed to maintain the expenses of the Series at not more than 0.60% 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.............................................. $ (0.21) $ (0.14)
Ratios (to average net assets):
Expenses....................................................... 27.74% 21.54%+
Net investment loss............................................ (22.61)% (16.37)%+
</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 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
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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.
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;
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(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.
MFS MONEY MARKET SERIES -- The Money Market Series' investment objective is to
seek as high a level of current income as is considered consistent with the
preservation of capital and liquidity.
The Money Market Series seeks to achieve its investment objective by
investing primarily (I.E., at least 80% of its assets under normal
circumstances) in the following instruments:
(a) U.S. Government Securities, as defined in "Investment Objectives and
Policies--MFS Total Return Series" above (including repurchase agreements
collateralized by such securities);
(b) obligations of banks (including certificates of deposit and bankers'
acceptances) which at the date of investment have capital, surplus, and
undivided profits (as of the date of their most recently published financial
statements) in excess of $100,000,000; and obligations of other banks or
savings and loan associations if such obligations are insured by the Federal
Deposit Insurance Corporation, provided that not more than 10% of the
Series' total assets will be invested in such insured obligations;
(c) commercial paper which at the date of investment is rated A-1 by S&P
or by Fitch or P-1 by Moody's or, if not rated, is issued or guaranteed as
to payment of principal and interest by companies which at the date of
investment have an outstanding debt issue rated AA or better by S&P or by
Fitch or Aa or better by Moody's (for a description of these ratings, see
Appendix A to this Prospectus); and
(d) short-term (maturing in 13 months or less) corporate obligations
which at the date of investment are rated AA or better by S&P or by Fitch or
Aa or better by Moody's.
The Money Market Series may also invest up to 20% of its total assets in
debt instruments not specifically described in (a) through (d) above, provided
that such instruments are deemed by the Trustees of the Trust to be of
comparable high quality and liquidity and provided that such investments are in
accordance with applicable law. The Money Market Series may invest its assets in
the securities of foreign issuers and in the securities of foreign branches of
U.S. banks such as negotiable certificates of deposit (Eurodollars). Since the
portfolio of the Series may contain such securities, an investment in the Series
may involve a greater degree of risk than an investment in a fund which invests
only in debt obligations of U.S. domestic issuers, due to the possibility that
there may be less publicly available information, more volatile markets, less
securities regulation, less favorable tax provisions, war or expropriation. (See
"Additional Risk Factors" below.)
In addition, the Money Market Series may invest up to 75% of its assets in
all finance companies as a group, all banks and bank holding companies as a
group and all utility companies as a group when, in the opinion of management,
yield differentials and money market conditions suggest such investments are
advisable and when cash is available for such investments and instruments are
available for purchase which fulfill the Series' objective in terms of quality
and marketability.
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All the assets of the Money Market Series will be invested in obligations
which mature in 13 months or less and substantially all of these investments
will be held to maturity; however, securities collateralizing repurchase
agreements may have maturities in excess of 13 months. The Money Market Series
will, to the extent feasible, make portfolio investments primarily in
anticipation of or in response to changing economic and money market conditions
and trends. Currently, the dollar-weighted average maturity of the investments
of the Series may not exceed 90 days.
5. INVESTMENT TECHNIQUES
LENDING OF PORTFOLIO SECURITIES: Each Series (except the Money Market
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 (except the Money Market 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 and Money Market
Series) may invest in Brady Bonds, which are securities created through the
exchange of existing commercial bank loans to public and private entities in
certain emerging markets for new bonds in connection with debt restructurings
under a debt restructuring plan introduced by former U.S. Secretary of the
Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt restructurings
have been implemented to date in Argentina, Brazil, Bulgaria, Costa Rica,
Dominican Republic, Ecuador, Jordan, Mexico, Nigeria, Panama, the Philippines,
Poland, Uruguay and Venezuela. Brady Bonds have been issued only recently, and
for that reason do not have a long payment history. Brady Bonds may be
collateralized or uncollateralized, are issued in various currencies (but
primarily the U.S. dollar) and are actively traded in over-the-counter secondary
markets. U.S. dollar-denominated, collateralized Brady Bonds, which may be
fixed-rate bonds or floating-rate bonds, are generally collateralized in full as
to principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Brady Bonds are often viewed as having three or four valuation
components: the collateralized repayment of principal at final maturity; the
collateralized interest payments; the uncollateralized interest payments; and
any uncollateralized repayment of principal at maturity (these uncollateralized
amounts constituting the "residual risk"). In light of the residual risk of
Brady Bonds and the history of defaults of countries issuing Brady Bonds with
respect to commercial bank loans by public and private entities, investments in
Brady Bonds may be viewed as speculative.
REPURCHASE AGREEMENTS: Each Series may enter into repurchase agreements in
order to earn income on available cash or as a temporary defensive measure.
Under a repurchase agreement, a Series acquires securities subject to the
seller's agreement to repurchase at a specified time and price. If the seller
becomes subject to a proceeding under the bankruptcy laws or its assets are
otherwise subject to a stay order, the Series' right to liquidate the securities
may be restricted (during which time the value of the securities could decline).
As discussed in the SAI, each Series has adopted certain procedures intended to
minimize risk.
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"WHEN-ISSUED" SECURITIES: Each of the Emerging Growth Series, the Total
Return Series and the Bond 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 of the Total Return Series, the
Bond Series and the World Governments 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 (not more than 10% of its net assets in the case of the
Money Market Series) in illiquid investments. The Board of Trustees has adopted
guidelines and delegated to MFS the daily function of determining and monitoring
the liquidity of Rule 144A securities. The Board, however, retains oversight,
focusing on factors such as valuation, liquidity and availability of
information. Investing in Rule 144A securities could have the effect of
decreasing the level of liquidity in a Series to the extent that qualified
institutional buyers become for a time uninterested in purchasing Rule 144A
securities held in the Series' portfolio.
CORPORATE ASSET-BACKED SECURITIES: Each of the Emerging Growth Series, the
Total Return Series and the Bond Series may invest in corporate asset-backed
securities. These securities, issued by trusts and special purpose corporations,
are backed by a pool of assets, such as credit card and automobile loan
receivables, representing the obligations of a number of different parties.
Corporate asset-backed securities present certain risks. For instance, in
the case of credit card receivables, these securities may not have the benefit
of any security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there is
the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities. The underlying
assets (E.G., loans) are also subject to prepayments which shorten the
securities' weighted average life and may lower their return.
Corporate asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection; and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from ultimate default ensures payment through insurance policies or
letters of credit obtained by the issuer or sponsor from third parties. A Series
will not pay any additional or separate fees for
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credit support. The degree of credit support provided for each issue is
generally based on historical information respecting the level of credit risk
associated with the underlying assets. Delinquency or loss in excess of that
anticipated or failure of the credit support could adversely affect the return
on an investment in such a security.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS: Each of the Total
Return Series, the Bond Series and the World Governments 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 and the World Governments Series may invest a portion of
its assets in collateralized mortgage obligations or "CMOs," which are debt
obligations collateralized by mortgage loans or mortgage pass-through
securities. Typically, CMOs are collateralized by certificates issued by GNMA,
the Federal National Mortgage Association ("FNMA") or the Federal Home Loan
Mortgage Corporation ("FHLMC"), but also may be collateralized by whole loans or
private mortgage pass-through securities (such collateral collectively referred
to as "Mortgage Assets"). Each of these Series may also invest a portion of its
assets in multiclass pass-through securities which are interests in a trust
composed of Mortgage Assets. CMOs (which include multiclass pass-through
securities) may be issued by agencies, authorities or instrumentalities of the
U.S. Government or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose subsidiaries of the foregoing. Payments of
principal of and interest on the Mortgage Assets, and any reinvestment income
thereon, provide the funds to pay debt service on the CMOs or make scheduled
distributions on the multiclass pass-through securities. In a CMO, a series of
bonds or certificates are usually issued in multiple classes with different
maturities. Each class of CMOs, often referred to as a "tranche," is issued at a
specific fixed or floating coupon rate and has a stated maturity or final
distribution date. Principal prepayments on the Mortgage Assets may cause the
CMOs to be retired substantially earlier than their stated maturities or final
distribution dates, resulting in a loss of all or part of the premium if any has
been paid. Certain classes of CMOs have priority over others with respect to the
receipt of prepayments on the mortgages. Therefore, depending on the type of
CMOs in which a Series invests, the investment may be subject to a greater or
lesser risk of prepayments than other types of mortgage-related securities.
Each of the Bond Series and the World Governments 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 bemet by the borrower.
These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
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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. 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 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 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
18
<PAGE>
currency and interest rates. Caps and floors have an effect similar to buying or
writing options. Depending on how they are used, swap agreements may increase or
decrease the overall volatility of a Series' investments and its share price and
yield.
Swap agreements are sophisticated hedging instruments that typically involve
a small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on a
Series' performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. A Series may also suffer losses if
it is unable to terminate outstanding swap agreements or reduce its exposure
through offsetting transactions.
Swaps, caps, floors and collars are highly specialized activities which
involve certain risks. See the SAI for further information on, and the risks
involved in, these activities.
OPTIONS ON SECURITIES: Each of the Emerging Growth Series, the Total Return
Series, the Bond Series and the World Governments Series may write (sell)
covered put and call options and purchase put and call options on securities.
Each of these Series will write options on securities for the purpose of
increasing its return and/or to protect the value of its portfolio. In
particular, where a Series writes an option that expires unexercised or is
closed out by the Series at a profit, it will retain the premium paid for the
option which will increase its gross income and will offset in part the reduced
value of the portfolio security underlying the option, or the increased cost of
portfolio securities to be acquired. In contrast, however, if the price of the
underlying security moves adversely to the Series' position, the option may be
exercised and the Series will be required to purchase or sell the underlying
security at a disadvantageous price, which may only be partially offset by the
amount of the premium. The Series may also write combinations of put and call
options on the same security, known as "straddles." Such transactions can
generate additional premium income but also present increased risk.
By writing a call option on a security, a Series limits its opportunity to
profit from any increase in the market value of the underlying security, since
the holder will usually exercise the call option when the market value of the
underlying security exceeds the exercise price of the call. However, the Series
retains the risk of depreciation in value of securities on which it has written
call options.
Each of these Series may also purchase put or call options in anticipation
of market fluctuations which may adversely affect the value of its portfolio or
the prices of securities that a Series wants to purchase at a later date. In the
event that the expected market fluctuations occur, the Series may be able to
offset the resulting adverse effect on its portfolio, in whole or in part,
through the options purchased. The premium paid for a put or call option plus
any transaction costs will reduce the benefit, if any, realized by the Series
upon exercise or liquidation of the option, and, unless the price of the
underlying security changes sufficiently, the option may expire without value to
the Series.
In certain instances, the Emerging Growth Series may enter into options on
Treasury securities that are "reset" options or "adjustable strike" options.
These options provide for periodic adjustment of the strike price and may also
provide for the periodic adjustment of the premium during the term of the
option. The SAI contains a further discussion of these investments.
OPTIONS ON STOCK INDICES: The Emerging Growth Series and the Total Return
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.
19
<PAGE>
"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 and the World Governments 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"). 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 and the World Governments Series may purchase and sell Futures Contracts
on foreign currencies or indices of foreign currencies. Each of these Series may
also purchase and write Options on such Futures Contracts.
Such transactions will be entered into for hedging purposes or for
non-hedging purposes to the extent permitted by applicable law. Each Series will
incur brokerage fees when it purchases and sells Futures Contracts, and will be
required to maintain margin deposits. In addition, Futures Contracts entail
risks. Although the Adviser believes that use of such Contracts will benefit a
Series, if its investment judgment about the general direction of exchange rates
or the stock market is incorrect, the Series' overall performance may be poorer
than if it had not entered into any such contract and the Series may realize a
loss. A Series will not enter into any Futures Contract if immediately
thereafter the value of securities and other obligations underlying all such
Futures Contracts held by such Series would exceed 50% of the value of its total
assets.
Purchases of Options on Futures Contracts may present less risk in hedging a
Series' portfolio than the purchase or sale of the underlying Futures Contracts
since the potential loss is limited to the amount of the premium plus related
transaction costs, although it may be necessary to exercise the option to
realize any profit, which results in the establishment of a futures 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 (except the Money Market 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
20
<PAGE>
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 and
the Money Market 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.
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 and the
Money Market 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,
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<PAGE>
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: The Money Market Series may invest in dollar-denominated
securities of foreign issuers and in dollar-denominated securities of foreign
branches of U.S. banks such as negotiable certificates of deposit (Eurodollars).
The remaining 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. All of the
Series (except the Money Market 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 (except the Money Market
Series) may invest in ADRs which are certificates issued by a U.S. depository
(usually a bank) and represent a specified quantity of shares of an underlying
non-U.S. stock on deposit with a custodian bank as collateral. Because ADRs
trade on U.S. securities exchanges, the Adviser does not treat them as foreign
securities. However, they are subject to many of the risks of foreign securities
such as changes in exchange rates and more limited information about foreign
issuers.
EMERGING MARKET SECURITIES: Each of the Series (except the Money Market
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
22
<PAGE>
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: The World Governments Series is "non-diversified," as
that term is defined in the Investment Company Act of 1940 ( the "1940 Act"),
but intends to qualify as a "regulated investment company" ("RIC") for federal
income tax purposes. This means, in general, that although more than 5% of the
Series' total assets may be invested in the securities of one issuer (including
a foreign government), at the close of each quarter of its taxable year the
aggregate amount of such holdings may not exceed 50% of the value of its total
assets, and no more than 25% of the value of its total assets may be invested in
the securities of a single issuer. To the extent that a non-diversified Series
at times may hold the securities of a smaller number of issuers than if it were
"diversified" (as defined in the 1940 Act), the Series will at such times be
subject to greater risk with respect to its portfolio securities than a fund
that invests in a broader range of securities, because changes in the financial
condition or market assessment of a single issuer may cause greater fluctuations
in the Series' total return and the net asset value of its shares.
-------------------
SHORT-TERM INVESTMENTS FOR TEMPORARY DEFENSIVE PURPOSES -- During periods of
unusual market conditions when the Adviser believes that investing for temporary
defensive purposes is appropriate, or in order to meet anticipated redemption
requests, a large portion or all of the assets of each Series may be invested in
cash (including foreign currency) or cash equivalents including, but not limited
to, obligations of banks (including certificates of deposit, bankers'
acceptances, time deposits and repurchase agreements), commercial paper,
short-term notes, U.S. Government Securities and related repurchase agreements.
PORTFOLIO TRADING
Each Series intends to manage its portfolio by buying and selling
securities, as well as holding securities to maturity, to help attain its
investment objectives and policies.
Each Series will engage in portfolio trading if it believes a transaction,
net of costs (including custodian charges), will help in attaining its
investment objectives. In trading portfolio securities, a Series seeks to take
advantage of market developments, yield disparities and variations in the
creditworthiness of issuers. For a description of the strategies which may be
used by the Series in trading portfolio securities, see "Portfolio Transactions
and Brokerage Commissions" in the SAI. The 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 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
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<PAGE>
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%
World Governments Series..................................................................... 0.75%
Bond Series.................................................................................. 0.60%
Money Market Series.......................................................................... 0.50%
</TABLE>
MFS or its affiliates will pay a fee to Citicorp Life Insurance Company and
First Citicorp 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 Citicorp Life Insurance Company and First Citicorp 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
World Governments Series.......................................................... 126,898 172,556
Bond Series....................................................................... 2,924 40,829
Money Market Series............................................................... 858 46,831
</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.
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
SERIES PORTFOLIO MANAGERS
- ----------------------------- --------------------------------------------------------------------------------------
<S> <C>
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.
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
Money Market Series Adviser as a portfolio manager since 1987.
</TABLE>
MFS also serves as investment adviser to each of the other funds in the MFS
Family of Funds (the "MFS Funds") and to MFS-Registered Trademark- Municipal
Income Trust, MFS Multimarket Income Trust, MFS Government Markets Income Trust,
MFS Intermediate Income Trust, MFS Charter Income Trust, MFS Special Value
Trust, MFS Institutional Trust, MFS Union Standard Trust, MFS/ Sun Life Series
Trust, and seven variable accounts, each of which is a registered investment
company established by Sun Life Assurance Company of Canada (U.S.) ("Sun Life of
Canada (U.S.)") in connection with the sale of various fixed/variable annuity
contracts. MFS and its wholly owned subsidiary, MFS Institutional Advisers,
Inc., provide investment advice to substantial private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts Investors
Trust. Net assets under the management of the MFS organization were
approximately $52.8 billion on behalf of approximately 2.3 million investor
accounts as of February 28, 1997. As of such date, the MFS organization managed
approximately $28.9 billion of assets invested in equity securities and
approximately $19.9 billion of assets invested in fixed income securities.
Approximately $4.0 billion of the assets managed by MFS are invested in
securities of foreign issuers and non-U.S. dollar-denominated securities of U.S.
issuers. MFS is a subsidiary of Sun Life of Canada (U.S.), which in turn is a
wholly owned subsidiary of Sun Life Assurance Company of Canada ("Sun Life").
The Directors of MFS are A. Keith Brodkin, Jeffrey L. Shames, Arnold D. Scott,
John D. McNeil and Donald A. Stewart. Mr. Brodkin is the Chairman, Mr. Shames is
the 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
25
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extensive international equity investment expertise of Foreign & Colonial, and
Foreign & Colonial has access to the extensive U.S. equity investment expertise
of MFS. MFS and Foreign Colonial each have investment personnel working in each
other's offices in Boston and London, respectively.
In certain instances there may be securities which are suitable for a
Series' portfolio as well as for portfolios of other clients of MFS or clients
of Foreign & Colonial. Some simultaneous transactions are inevitable when
several clients receive investment advice from MFS and Foreign & Colonial,
particularly when the same security is suitable for more than one client. While
in some cases this arrangement could have a detrimental effect on the price or
availability of the security as far as a Series is concerned, in other cases,
however, it may produce increased investment opportunities for the Series.
From time to time, the Adviser may purchase, redeem and exchange shares of
any Series. The purchase by the Adviser of shares of a Series may have the
effect of lowering that Series' expense ratio, while the redemption by the
Adviser of shares of a Series may have the effect of increasing that Series'
expense ratio.
DISTRIBUTOR -- MFS Fund Distributors, Inc. ("MFD"), a wholly owned
subsidiary of MFS, is the distributor of shares of each Series and also serves
as distributor for certain of the other mutual funds managed by MFS.
ADMINISTRATOR -- MFS provides the Series with certain administrative
services pursuant to a Master Administrative Services Agreement dated March 1,
1997. Under this Agreement, MFS provides the Series with certain financial,
legal, compliance, shareholder communications and other administrative services.
As a partial reimbursement for the cost of providing these services, the Series
pays MFS an administrative fee up to 0.015% per annum of the Series' average
daily net assets, provided that the administrative fee is not assessed on a
Series' assets that exceed $3 billion.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. (the "Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency,
certain dividend disbursing agency and other services for each Series.
8. INFORMATION CONCERNING SHARES OF EACH SERIES
PURCHASES AND REDEMPTIONS
The separate accounts of the Participating Insurance Companies place orders
to purchase and redeem shares of each Series based on, among other things, the
amount of premium payments to be invested and surrender and transfer requests to
be effected on that day pursuant to Contracts. Orders received by the Trust are
effected on days on which the Exchange is open for trading. For orders received
by the Trust before the close of regular trading on the Exchange (normally 4
p.m. eastern 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.
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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 (amortized cost value in the case of the Money Market
Series), 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' (except the Money Market 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.
Substantially all of the Money Market Series' net investment income for any
calendar year is declared as dividends daily and paid to its shareholders as
dividends on a monthly basis. Generally, those dividends are distributed on the
last business day of the month in the form of additional shares of the Money
Market Series at the rate of one share (and fraction thereof) for each dollar
(and fraction thereof) of dividend income or, at the election of the
shareholder, in cash. Shares purchased become entitled to dividends declared as
of the first day following the date of investment.
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.
Shares of the Series are offered only to the Participating Insurance
Companies' separate accounts that fund Contracts. See the applicable Contract
prospectus for a discussion of the federal income tax treatment of (1) the
separate accounts that purchase and hold Series shares and (2) the holders of
the Contracts that are funded through those accounts. In addition to the
diversification requirements of Subchapter M of the Code, each Series also
intends to diversify its assets as required by Code Section 817(h)(1), and the
regulations thereunder. See also "Tax Status" in the SAI.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
Each Series currently has one class of shares, entitled Shares of Beneficial
Interest (without par value). The Trust has reserved the right to create and
issue additional classes and series of shares, in which case each class of
shares of a series would participate equally in the earnings, dividends and
assets attributable to that class of that particular series. Shareholders are
entitled to one vote for each share held, and shares of each Series are entitled
to vote separately to approve investment advisory agreements or changes in
investment restrictions with respect to that Series, but shares of all Series
vote together in the election of Trustees and selection of accountants.
Additionally, each Series will vote separately on any other matter that affects
solely that Series, but will otherwise vote together with all other Series on
all other matters. The Trust does not intend to hold annual shareholder
meetings. The Declaration of Trust provides that a Trustee may be removed from
office in certain instances. See "Description of Shares, Voting Rights and
Liabilities" in the SAI.
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<PAGE>
Each share of a Series represents an equal proportionate interest in the
Series with each share, subject to the liabilities of the particular Series.
Shares have no pre-emptive or conversion rights. Shares are fully paid and
non-assessable. Should a Series be liquidated, shareholders are entitled to
share PRO RATA in the net assets available for distribution to shareholders.
Shares will remain on deposit with the Shareholder Servicing Agent and
certificates will not be issued.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a trust may,
under certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed (E.G., fidelity bonding and omission insurance) and
the Trust itself was unable to meet its obligations.
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 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; Kansas City Life Insurance Company--Variable
Annuity, Kansas City, MO, owns 70.43% of the Bond Series' shares, and,
therefore, controls the Series; and First Citicorp Life Insurance Company,
Dover, DE, owns 81.98% of the Money Market Series' shares, and, therefore,
controls the Series.
PERFORMANCE INFORMATION
Each Series' performance may be quoted in advertising in terms of yield and,
except for the Money Market Series, 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).
MONEY MARKET SERIES: From time to time, quotations of the Money Market
Series' "yield" and "effective yield" may be included in advertisements, sales
literature or reports to shareholders or prospective investors. The yield of the
Money Market Series refers to the net investment income generated by the Series
over a specified seven-day period (the ending date of which will be stated).
Included in "net investment income" is the amortization of market premium or
accretion of market and original issue discount. This income is then
"annualized." That is, the amount of income generated by the Series during that
week is assumed to be generated during each week over a 365 day period and is
shown as a percentage. The effective yield is expressed similarly but, when
annualized, the income earned by an investment in the Series is assumed to be
reinvested. The effective yield will be slightly higher than the yield because
of the compounding effect of this assumed reinvestment.
OTHER SERIES: From time to time, quotations of a Series' total return and
yield may be included in advertisements, sales literature or reports to
shareholders or prospective investors. The total return of a Series refers to
return assuming an investment has been held in the Series for one year and for
the life of the Series (the ending date of which will be stated). The total
return quotations may be expressed in terms of average annual or cumulative
rates of return for all periods quoted. Average annual total return refers to
the average annual compound rate of return of an investment in a Series.
Cumulative total return represents the cumulative change in value of an
investment in a Series. Both will assume that all dividends and capital gains
distributions were reinvested. The yield of a Series refers to net investment
income generated by a Series over a specified 30-day (or one month) period. This
income is then "annualized." That is, the amount of income generated by the
Series during that 30-day (or one month) period is assumed to be generated over
a 12-month period and is shown as a percentage of net asset value.
EXPENSES
The Trust pays the compensation of the Trustees who are not officers of MFS
and all expenses of each Series (other than those assumed by MFS) including but
not limited to: governmental fees; interest charges; taxes; membership dues in
the Investment Company Institute allocable to each Series; fees and expenses of
independent auditors, of legal counsel, and of any transfer agent, registrar or
dividend disbursing agent of each Series; expenses of repurchasing and redeeming
shares and
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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, 0.10% for the Money Market 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.
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APPENDIX A
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the quality
of various debt instruments. It should be emphasized, however, that ratings are
not absolute standards of quality. Consequently, debt instruments with the same
maturity, coupon and rating may have different yields while debt instruments of
the same maturity and coupon with different ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
AAA: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
BAA: Bonds which are rated Baa are considered as medium-grade obligations
(I.E., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA: Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has
been suspended or withdrawn, it may be for reasons unrelated to the quality of
the issue.
Should no rating be assigned, the reason may be one of the following:
1. an application for rating was not received or accepted;
2. the issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy;
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
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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
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.
B-1
<PAGE>
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
(800) 637-8730
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN
Investors Bank & Trust Company
89 South Street, Boston, MA 02111
DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 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- WORLD GOVERNMENTS SERIES
MFS-REGISTERED TRADEMARK- BOND SERIES
MFS-REGISTERED TRADEMARK- MONEY MARKET 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- WORLD GOVERNMENTS SERIES
MFS-REGISTERED TRADEMARK- BOND SERIES
MFS-REGISTERED TRADEMARK- MONEY MARKET SERIES
[LOGO]
PROSPECTUS
MAY 1, 1997
------------------------
