As filed with the Securities and Exchange Commission on April 27, 1998
1933 Act File No. 33-74668
1940 Act File No. 811-8326
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 11
AND
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 12
MFS VARIABLE INSURANCE TRUST
(Exact name of registrant as specified in its charter)
500 Boylston, Street, Boston, Massachusetts 02116
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: 617-954-5000
Stephen E. Cavan, Massachusetts Financial Services Company,
500 Boylston Street, Boston, Massachusetts 02116
(Name and Address of Agent for Service)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
It is proposed that this filing will become effective (check appropriate box)
|_| immediately upon filing pursuant to paragraph (b)
|_| on [date] pursuant to paragraph (b)
|X| 60 days after filing pursuant to paragraph (a)(1)
|_| on [date] pursuant to paragraph (a)(1)
|_| 75 days after filing pursuant to paragraph (a)(2)
|_| on [date] pursuant to paragraph (a)(3) of rule 485.
If appropriate, check the following box:
|_| this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
================================================================================
<PAGE>
MFS VARIABLE INSURANCE TRUST
MFS Emerging Growth Series
MFS Value Series
MFS Research Series
MFS Growth With Income Series
MFS Total Return Series
MFS Utilities Series
MFS High Income Series
MFS World Governments Series
MFS/Foreign & Colonial Emerging Markets Equity Series
MFS Bond Series
MFS Limited Maturity Series
MFS Money Market Series
MFS New Discovery Series
Cross Reference Sheet
---------------------
(Pursuant to Rule 404 showing location in Prospectus and/or Statement of
Additional Information of the responses to the Items in Parts A and B of Form
N-1A)
<TABLE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>
1 (a), (b) Front Cover Page *
2 (a) Expense Summary *
(b), (c) * *
3 (a) Condensed Financial Information *
(b) * *
(c) Information Concerning Shares *
of Each Series - Performance
Information
(d) Condensed Financial Information *
<PAGE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>
4 (a) Front Cover Page; Investment *
Concept of the Trust;
Investment Objectives and
Policies; Investment Techniques
(b) Investment Objectives and *
Policies; Investment Techniques
(c) Investment Objectives and *
Policies; Additional Risk Factors
5 (a) Investment Concept of the Trust; *
Management of the Series
(b) Management of the Series - *
Investment Adviser;
Back Cover Page
(c) Management of the Series - *
Investment Adviser
(d) Management of the Series - Management of the Trust -
Administrator Administrator
(e) Management of the Series - *
Shareholder Servicing Agent;
Back Cover Page
(f) Information Concerning Shares *
of Each Series - Expenses;
Condensed Financial
Information; Expense Summary
(g) Additional Risk Factors - Portfolio *
Trading
(h) * *
5A (a), (b), (c) ** **
<PAGE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>
6 (a) Information Concerning Shares *
of Each Series - Description of
Shares, Voting Rights and
Liabilities; Information
Concerning Shares of Each
Series - Purchases and
Redemptions
(b) Information Concerning Shares *
of Each Series - Description of
Shares, Voting Rights and
Liabilities
(c), (d) * *
(e) Shareholder Communications *
(f) Information Concerning Shares *
of Each Series - Distributions;
(g) Information Concerning Shares *
of Each Series - Tax Status;
Information Concerning Shares
of Each Series - Distributions
(h) * *
7 (a) Management of the Series - *
Distributor; Back Cover Page
(b) Information Concerning Shares *
of Each Series - Purchases and
Redemptions; Information
Concerning Shares of Each
Series - Net Asset Value
(c), (d), (e), (f) * *
(g) * *
8 (a), (b) Information Concerning Shares *
of Each Series - Purchases and
Redemptions
(c) * *
(d) Information Concerning Shares *
of Each Series - Purchases and
Redemptions
9 * *
<PAGE>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART B PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>
10 (a), (b) * Front Cover Page
11 * Front Cover Page
12 * General Information and
Definitions
13 (a) * Investment Techniques
(b) * Investment Techniques;
Investment Restrictions
(c) * Investment Restrictions
(d) Additional Risk Factors - *
Portfolio Trading
14 (a), (b) * Management of the Trust -
Trustees and Officers
(c) * Management of the Trust -
Trustee Compensation
Table
15 (a) * *
(b), (c) * Management of the Trust
16 (a) Management of the Series - Management of the Trust -
Investment Adviser Investment Adviser;
Management of the Trust -
Trustees and Officers
(b) Management of the Series - Management of the Trust -
Investment Adviser; Investment Adviser
Expenses
(c) * *
<PAGE>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART B PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>
(d) Management of the Series - Management of the Trust -
Administrator Administrator
(e) * Portfolio Transactions and
Brokerage Commissions
(f), (g) * *
(h) * Management of the Trust -
Custodian; Independent
Auditors and Financial
Statements; Back Cover Page
(i) * Management of the Trust -
Shareholder Servicing Agent
17 (a), (b), (c), * Portfolio Transactions and
(d), (e) Brokerage Commissions
18 (a) * Description of Shares, Voting
Rights and Liabilities
(b) * *
19 (a) * *
(b) Information Concerning Shares Management of the Trust -
of Each Series - Net Asset Distributor; Determination
Value; Information Concerning of Net Asset Value;
Shares of Each Series - Performance Information -
Purchases and Redemptions Net Asset Value
(c) * *
20 * Tax Status
21 (a), (b) * Management of the Trust -
Distributor
(c) * *
<PAGE>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART B PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>
22 (a), (b) * Determination of Net Asset
Value; Performance Information
23 * Independent Auditors and
Financial Statements
</TABLE>
- -----------------------
* Not Applicable
** Contained in Annual Report
<PAGE>
MFS[RegTM] VARIABLE PROSPECTUS
INSURANCE TRUST(SM) May 1, 1998
- --------------------------------------------------------------------------------
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 13
separate mutual fund series (individually or collectively hereinafter referred
to as a "Series" or the "Series"):
- -- MFS Emerging Growth Series (the "Emerging Growth Series"), which seeks to
provide long-term growth of capital;
- -- MFS Value Series (the "Value Series"), which seeks capital appreciation;
- -- MFS Research Series (the "Research Series"), which seeks to provide
long-term growth of capital and future income;
- -- MFS Growth With Income Series (the "Growth With Income Series"), which seeks
to provide reasonable current income and long-term growth of capital and
income;
- -- MFS Total Return Series (the "Total Return Series"), which seeks primarily
to provide above-average income (compared to a portfolio invested entirely
in equity securities) consistent with the prudent employment of capital,
and secondarily to provide a reasonable opportunity for growth of capital
and income;
- -- MFS Utilities Series (the "Utilities Series"), which seeks capital growth
and current income (income above that available from a portfolio invested
entirely in equity securities);
- -- MFS High Income Series (the "High Income Series"), which seeks high current
income by investing primarily in a professionally managed diversified
portfolio of fixed income securities, some of which may involve equity
features;
- -- MFS World Governments Series (the "World Governments Series"),
which seeks not only preservation but also growth of capital, together with
moderate current income;
- -- MFS/Foreign & Colonial Emerging Markets Equity Series (the "Emerging Markets
Equity Series"), which seeks capital appreciation;
- -- 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;
- -- MFS Limited Maturity Series (the "Limited Maturity Series"), which seeks
primarily to provide as high a level of current income as is believed to be
consistent with prudent investment risk, and secondarily to protect
shareholders' capital;
- -- 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; and
- -- MFS New Discovery Series (the "New Discovery Series"), which seeks capital
appreciation.
----------------
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.
(continued on next page)
<PAGE>
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, 1998, as amended or supplemented from time to time ("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 (http://www.sec.gov) 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.
----------------
SHARES OF THE TRUST ARE AVAILABLE AND ARE BEING MARKETED AS A POOLED FUNDING
VEHICLE FOR LIFE INSURANCE COMPANIES WRITING ALL TYPES OF CONTRACTS.
----------------
THE HIGH INCOME SERIES MAY INVEST UP TO 100% OF ITS NET ASSETS IN LOWER RATED
BONDS, COMMONLY KNOWN AS "JUNK BONDS," THAT ENTAIL GREATER RISKS, INCLUDING
DEFAULT RISKS, THAN THOSE FOUND IN HIGHER RATED SECURITIES. INVESTORS SHOULD
CAREFULLY CONSIDER THESE RISKS BEFORE INVESTING (SEE "ADDITIONAL RISK
FACTORS--LOWER RATED BONDS"). THE EMERGING GROWTH SERIES, THE VALUE SERIES, THE
RESEARCH SERIES, THE GROWTH WITH INCOME SERIES, THE EMERGING MARKETS EQUITY
SERIES AND THE NEW DISCOVERY SERIES ARE INTENDED FOR INVESTORS WHO UNDERSTAND
AND ARE WILLING TO ACCEPT THE RISKS ENTAILED IN SEEKING LONG-TERM GROWTH OF
CAPITAL OR CAPITAL APPRECIATION. BECAUSE OF THEIR INVESTMENT POLICIES
PERMITTING INVESTMENT IN FOREIGN SECURITIES, INVESTMENTS IN EACH SERIES (EXCEPT
FOR THE LIMITED MATURITY SERIES AND 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.
Investors should read this Prospectus and retain it for future reference.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
1. Expense Summary ................................................ 4
2. Condensed Financial Information ................................ 6
3. Investment Concept of the Trust ................................ 18
4. Investment Objectives and Policies ............................. 18
MFS Emerging Growth Series ................................... 19
MFS Value Series ............................................. 19
MFS Research Series .......................................... 20
MFS Growth With Income Series ................................ 20
MFS Total Return Series ...................................... 20
MFS Utilities Series ......................................... 21
MFS High Income Series ....................................... 23
MFS World Governments Series ................................. 23
MFS/Foreign & Colonial Emerging Markets Equity Series ........ 25
MFS Bond Series .............................................. 25
MFS Limited Maturity Series .................................. 26
MFS Money Market Series ...................................... 27
MFS New Discovery Series ..................................... 28
5. Certain Securities and Investment Techniques ................... 28
6. Additional Risk Factors ........................................ 37
7. Management of the Series ....................................... 41
8. Information Concerning Shares of Each Series ................... 45
Purchases and Redemptions .................................... 45
Net Asset Value .............................................. 46
Distributions ................................................ 46
Tax Status ................................................... 47
Description of Shares, Voting Rights and Liabilities ......... 47
Performance Information ...................................... 48
Expenses ..................................................... 48
Shareholder Communications ................................... 49
Appendix A--Description of Bond Ratings ............................ A-1
Appendix B--Principal Sectors of the Utilities Industry ............ B-1
Appendix C--Portfolio Composition Charts ........................... C-1
</TABLE>
3
<PAGE>
1. EXPENSE SUMMARY
Annual Operating Expenses (as a percentage of average net assets):
<TABLE>
<CAPTION>
MFS MFS
Emerging MFS MFS Growth
Growth Value Research With Income
Series Series Series Series
---------- --------------- ---------- ---------------
<S> <C> <C> <C> <C>
Management Fee .............................................. 0.75% 0.75% 0.75% 0.75%
Other Expenses (after expense limitation)(1) ................ 0.12% 0.25%(2) 0.13% 0.25%(2)
---- ------- ---- -------
Total Operating Expenses (after expense limitation) ......... 0.87% 1.00%(2) 0.88% 1.00%(2)
</TABLE>
<TABLE>
<CAPTION>
MFS MFS MFS
Total MFS High World
Return Utilities Income Governments
Series Series Series Series
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Management Fee .............................................. 0.75% 0.75% 0.75% 0.75%
Other Expenses (after expense limitation)(1) ................ 0.25%(2) 0.25%(2) 0.25%(2) 0.25%(2)
------- ------- ------- -------
Total Operating Expenses (after expense limitation) ......... 1.00%(2) 1.00%(2) 1.00%(2) 1.00%(2)
</TABLE>
<TABLE>
<CAPTION>
MFS/
Foreign &
Colonial
Emerging MFS
Markets Bond
Equity Series Series
--------------- ---------------
<S> <C> <C>
Management Fee ...................................... 1.25% 0.60%
Other Expenses (after expense limitation)(1) ........ 0.25%(2) 0.40%(2)
------- -------
Total Operating Expenses (after expense
limitation) ........................................ 1.50%(2) 1.00%(2)
<CAPTION>
MFS MFS
Limited MFS New
Maturity Money Market Discovery
Series Series Series
--------------- -------------- ---------------
<S> <C> <C> <C>
Management Fee ...................................... 0.55% 0.50% 0.90%
Other Expenses (after expense limitation)(1) ........ 0.45%(2) 0.10%(2) 0.25%(2)
------- ------- -------
Total Operating Expenses (after expense
limitation) ........................................ 1.00%(2) 0.60%(2) 1.15%(2)
</TABLE>
- --------------------
(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 these Series, subject to
reimbursement by these Series, such that each such 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, 0.45% for the Limited Maturity 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 such Series would be:
<TABLE>
<CAPTION>
"Other Expenses" "Total Operating Expenses"
Without Expense Without Expense
Series Limitation Limitation
- --------------------------------------------------- ------------------ ---------------------------
<S> <C> <C>
Value ...................................... 1.33% 2.08%
Growth With Income ......................... 0.35% 1.10%
Total Return ............................... 0.27% 1.02%
Utilities .................................. 0.45% 1.20%
High Income ................................ 0.40% 1.15%
World Governments .......................... 0.40% 1.15%
Emerging Markets Equity (estimate) ......... 4.67% 5.92%
Bond ....................................... 2.98% 3.58%
Limited Maturity ........................... 5.65% 6.20%
Money Market ............................... 0.86% 1.36%
New Discovery (estimate) ................... 0.47% 1.37%
</TABLE>
4
<PAGE>
Example of Expenses
An investor would pay the following dollar amounts of expenses on a $1,000
investment in each Series, assuming (a) 5% annual return and (b) redemption at
the end of each of the time periods indicated:
<TABLE>
<CAPTION>
Period
--------------------------------------------
Series 1 Year 3 Years 5 Years 10 Years
- ---------------------------------------- -------- --------- --------- ---------
<S> <C> <C> <C> <C>
Emerging Growth ................. $ 9 $29 $ 50 $111
Value ........................... 10 32 55 122
Research ........................ 9 29 51 113
Growth With Income .............. 10 32 55 122
Total Return .................... 10 32 55 122
Utilities ....................... 10 32 55 122
High Income ..................... 10 32 55 122
World Governments ............... 10 32 55 122
Emerging Markets Equity ......... 15 47 82 179
Bond ............................ 10 32 55 122
Limited Maturity ................ 10 32 55 122
Money Market .................... 6 19 33 75
New Discovery ................... 12 37 N/A N/A
</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.
The "Example" set forth above should not be considered a representation of
past or future expenses of any Series; actual expenses may be greater or less
than those shown.
5
<PAGE>
2. CONDENSED FINANCIAL INFORMATION
The following financial information has been audited since the
commencement of investment operations of each Series and should be read in
conjunction with the financial statements included in the Series' Annual
Reports to Shareholders. These financial statements are incorporated by
reference into the SAI in reliance upon the report of the Series' independent
auditors given upon their authority as experts in accounting and auditing. The
Series' current independent auditors are Deloitte & Touche LLP.
Emerging Growth Series
<TABLE>
<CAPTION>
Year Ended Year Ended Period Ended
December 31, 1997 December 31, 1996 December 31, 1995*
------------------- ------------------- -------------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout
each period):
Net asset value--beginning of period .................... $ 13.24 $ 11.41 $ 10.00
------- ------- --------
Income from investment operations#--
Net investment income (loss)[sec] ...................... $ (0.06) $ (0.01) $ 0.01
Net realized and unrealized gain on investments and
foreign currency transactions ........................ 2.95 1.95 1.74
-------- -------- --------
Total from investment operations ..................... $ 2.89 $ 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) --
From capital ........................................... -- -- (0.07)
-------- -------- --------
Total distributions declared to shareholders ......... $ -- $ (0.11) $ (0.34)
-------- -------- --------
Net asset value--end of period .......................... $ 16.13 $ 13.24 $ 11.41
======== ======== ========
Total return ............................................ 21.90% 17.02% 17.41%++
Ratios (to average net assets)/Supplemental data[sec]:
Expenses ............................................... 0.90% 1.00% 1.00%+
Net investment income (loss) ........................... (0.38)% (0.08)% 0.10%+
Portfolio turnover ...................................... 112% 96% 73%
Average commission rate### .............................. $0.0616 $ 0.0401 --
Net assets at end of period (000 omitted) ............... $384,480 $104,956 $ 3,869
</TABLE>
- --------------------
* For the period from the commencement of the Series' investment
operations, July 24, 1995, through December 31, 1995.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Series' expenses are calculated without reduction for fees paid
indirectly.
### Average commission rate is calculated for Series' with fiscal years
beginning on or after September 1, 1995.
[sec] The investment adviser voluntarily agreed to maintain, subject to
reimbursement by the Series, the expenses of the Series at no more than
1.00% of average daily net assets. To the extent actual expenses were
over or under this limitation, the net investment loss per share and the
ratios would have been:
<TABLE>
<S> <C> <C> <C>
Net investment loss ........... $ (0.05) $ (0.03) $ (0.18)
Ratios (to average net assets):
Expenses## ................... 0.87% 1.16% 2.91%+
Net investment loss .......... (0.35)% (0.23)% (1.78)%+
</TABLE>
6
<PAGE>
Value Series
<TABLE>
<CAPTION>
Year Ended Period Ended
December 31, 1997 December 31, 1996*
------------------- -------------------
<S> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value--beginning of period .............................. $ 10.66 $ 10.00
-------
Income from investment operations#--
Net investment income[sec] ....................................... $ 0.12 $ 0.07
Net realized and unrealized gain on investments and foreign
currency transactions .......................................... 2.66 0.88
------- -------
Total from investment operations ............................... $ 2.78 $ 0.95
------- -------
Less distributions declared to shareholders--
From net investment income ....................................... $ (0.09) $ (0.03)
From net realized gain on investments and foreign currency
transactions ................................................... (1.54) (0.21)
In excess of net realized gain on investments and foreign currency
transactions ................................................... -- (0.01)
From capital ..................................................... (0.13) (0.04)
--------- --------
Total distributions declared to shareholders ................... $ (1.76) $ (0.29)
--------- --------
Net asset value--end of period .................................... $ 11.68 $ 10.66
========= ========
Total return ...................................................... 26.47% 8.78%++
Ratios (to average net assets)/Supplemental data[sec]:
Expenses ......................................................... 1.00% 1.00%+
Net investment income ............................................ 0.91% 1.72%+
Portfolio turnover ................................................ 270% 44%
Average commission rate ........................................... $0.0401 $0.0204
Net assets at end of period (000 omitted) ......................... $ 5,660 $ 1,351
</TABLE>
- --------------------
* For the period from the commencement of the Series' investment
operations, August 14, 1996, through December 31, 1996.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## Expenses are calculated without reduction for fees paid indirectly.
[sec] 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 this limitation, the net investment loss per share and
the ratios would have been:
<TABLE>
<S> <C> <C>
Net investment loss ........... $(0.02) $(0.04)
Ratios (to average net assets):
Expenses## ................... 2.08% 3.83%+
Net investment loss .......... (0.18)% (1.11)%+
</TABLE>
7
<PAGE>
Research Series
<TABLE>
<CAPTION>
Year Ended Year Ended Period Ended
December 31, 1997 December 31, 1996 December 31, 1995*
------------------- ------------------- -------------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout
each period):
Net asset value--beginning of period .................... $ 13.13 $ 10.89 $ 10.00
-------- ------- --------
Income from investment operations#--
Net investment income[sec] ............................. $ 0.05 $ 0.06 $ 0.05
Net realized and unrealized gain on investments and
foreign currency transactions ........................ 2.62 2.37 1.01
-------- ------- --------
Total from investment operations ..................... $ 2.67 $ 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 .......................... $ 15.80 $ 13.13 $ 10.89
======== ======= ========
Total return ............................................ 20.26% 22.33% 10.62%++
Ratios (to average net assets)/Supplemental data[sec]:
Expenses ............................................... 0.92% 1.00% 1.00%+
Net investment income .................................. 0.34% 0.47% 1.15%+
Portfolio turnover ...................................... 99% 56% 28%
Average commission rate### .............................. $ 0.0544 $0.0295 --
Net assets at end of period (000 omitted) ............... $285,845 $35,710 $ 2,530
</TABLE>
- --------------------
* For the period from the commencement of the Series' investment
operations, July 26, 1995, through December 31, 1995.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Series' expenses are calculated without reduction for fees paid
indirectly.
### Average commission rate is calculated with fiscal years beginning on or
after September 1, 1995.
[sec] The investment adviser voluntarily agreed to maintain, subject to
reimbursement by the Series, the expenses of the Series at not more than
1.00% of average daily net assets. To the extent actual expenses were over
or under this limitation, the net investment income (loss) per share and
the ratios would have been:
<TABLE>
<S> <C> <C> <C>
Net investment income (loss) .......... $0.06 -- $(0.08)
Ratios (to average net assets):
Expenses## ........................... 0.88% 1.48% 3.90%+
Net investment income (loss) ......... 0.38% -- (1.73)%+
</TABLE>
8
<PAGE>
Growth With Income Series
<TABLE>
<CAPTION>
Year Ended Year Ended Period Ended
December 31, 1997 December 31, 1996 December 31, 1995*
------------------- ------------------- -------------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout
each period):
Net asset value--beginning of period .................... $ 12.98 $ 10.61 $ 10.00
------- ------- --------
Income from investment operations#--
Net investment income[sec] ............................. $ 0.16 $ 0.18 $ 0.05
Net realized and unrealized gain on investments and
foreign currency transactions ........................ 3.70 2.42 0.61
------- ------- --------
Total from investment operations ..................... $ 3.86 $ 2.60 $ 0.66
------- ------- --------
Less distributions declared to shareholders--
From net investment income ............................. $ (0.07) $ (0.09) $ (0.05)
From net realized gain on investments and foreign
currency transactions ................................ (0.29) (0.13) --
In excess of net realized gain on investments and
foreign currency transactions ........................ (0.04) (0.01) --
------- ------- --------
Total distributions declared to shareholders ......... $ (0.40) $ (0.23) $ (0.05)
------- ------- --------
Net asset value--end of period .......................... $ 16.44 $ 12.98 $ 10.61
======= ======= ========
Total return ............................................ 29.78% 24.46% 6.64%++
Ratios (to average net assets)/Supplemental data[sec]:
Expenses ............................................... 1.00% 1.00% 1.00%+
Net investment income .................................. 0.93% 1.52% 2.20%+
Portfolio turnover ...................................... 42% 41% 2%
Average commission rate### .............................. $0.0455 $0.0351 --
Net assets at end of period (000 omitted) ............... $58,045 $ 9,174 $ 365
</TABLE>
- --------------------
* For the period from the commencement of the Series' investment
operations, October 9, 1995, through December 31, 1995.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, expenses are
calculated without reduction for fees paid indirectly.
### Average commission rate is calculated for Series with fiscal years
beginning on or after September 1, 1995.
[sec] 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 this limitation, the net investment income (loss) per
share and the ratios would have been:
<TABLE>
<S> <C> <C> <C>
Net investment income (loss) .......... $0.13 $0.05 $ (0.41)
Ratios (to average net assets):
Expenses## ........................... 1.10% 2.07% 21.44%+
Net investment income (loss) ......... 0.82% 0.46% (18.24)%+
</TABLE>
9
<PAGE>
Total Return Series
<TABLE>
<CAPTION>
Year Ended Year Ended Period Ended
December 31, 1997 December 31, 1996 December 31, 1995*
------------------- ------------------- -------------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout
each period):
Net asset value--beginning of period .................... $ 13.71 $ 12.25 $ 10.00
------- ------- --------
Income from investment operations#--
Net investment income[sec] ............................. $ 0.52 $ 0.46 $ 0.41
Net realized and unrealized gain on investments and
foreign currency transactions ........................ 2.40 1.30 2.32
------- ------- --------
Total from investment operations ..................... $ 2.92 $ 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 .......................... $ 16.63 $ 13.71 $ 12.25
======= ======= ========
Total return ............................................ 21.30% 14.37% 27.34%++
Ratios (to average net assets)/Supplemental data[sec]:
Expenses ............................................... 1.00% 1.00% 1.00%+
Net investment income .................................. 3.25% 3.59% 3.83%+
Portfolio turnover ...................................... 93% 76% 16%
Average commission rate### .............................. $0.0554 $0.0485 --
Net assets at end of period (000 omitted) ............... $75,612 $19,250 $ 2,797
</TABLE>
- --------------------
* For the period from the commencement of the Series' investment
operations, January 3, 1995, through December 31, 1995.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, expenses are
calculated without reduction for fees paid indirectly.
### Average commission rate is calculated for funds with fiscal years
beginning on or after September 1, 1995.
[sec] 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 this limitation, the net investment income per share
and the ratios would have been:
<TABLE>
<S> <C> <C> <C>
Net investment income .......... $0.52 $0.32 $0.22
Ratios (to average net assets):
Expenses## .................... 1.02% 2.10% 2.49%+
Net investment income ......... 3.23% 2.49% 2.09%+
</TABLE>
10
<PAGE>
Utilities Series
<TABLE>
<CAPTION>
Year Ended Year Ended Period Ended
December 31, 1997 December 31, 1996 December 31, 1995*
------------------- ------------------- -------------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout
each period):
Net asset value--beginning of period .................... $ 13.66 $ 12.57 $ 10.00
------- ------- --------
Income from investment operations#--
Net investment income[sec] ............................. $ 0.44 $ 0.55 $ 0.39
Net realized and unrealized gain on investments and
foreign currency transactions ........................ 3.89 1.78 3.00
------- ------- --------
Total from investment operations ..................... $ 4.33 $ 2.33 $ 3.39
------- ------- --------
Less distributions declared to shareholders--
From net investment income ............................. $ -- $ (0.35) $ (0.24)
From net realized gain on investments and foreign
currency transactions ................................ -- (0.88) (0.58)
In excess of realized gain on investments and foreign
currency transactions ................................ -- (0.01) --
------- ------- --------
Total distributions declared to shareholders ......... $ -- $ (1.24) $ (0.82)
------- ------- --------
Net asset value--end of period .......................... $ 17.99 $ 13.66 $ 12.57
======= ======= ========
Total return ............................................ 31.70% 18.51% 33.94%++
Ratios (to average net assets)/Supplemental data[sec]:
Expenses ............................................... 1.00% 1.00% 1.00%+
Net investment income .................................. 2.92% 4.19% 3.66%+
Portfolio turnover ...................................... 69% 121% 94%
Average commission rate### .............................. $0.0306 $0.0416 $ --
Net assets at end of period (000 omitted) ............... $30,147 $ 9,572 $ 2,373
</TABLE>
- --------------------
* For the period from the commencement of the Series' investment
operations, January 3, 1995, through December 31, 1995.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, expenses are
calculated without reduction for fees paid indirectly.
### Average commission rate is calculated for Series with fiscal years
beginning on or after September 1, 1995.
[sec] 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 this limitation, the net investment income per share
and the ratios would have been:
<TABLE>
<S> <C> <C> <C>
Net investment income .......... $0.41 $0.32 $0.17
Ratios (to average net assets):
Expenses## .................... 1.20% 2.75% 3.08%+
Net investment income ......... 2.71% 2.44% 1.62%+
</TABLE>
11
<PAGE>
High Income Series
<TABLE>
<CAPTION>
Year Ended Year Ended Period Ended
December 31, 1997 December 31, 1996 December 31, 1995*
------------------- ------------------- -------------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout
each period):
Net asset value--beginning of period ..................... $ 10.87 $ 10.29 $ 10.00
------- ------- --------
Income from investment operations#--
Net investment income[sec] .............................. $ 0.95 $ 0.89 $ 0.34
Net realized and unrealized gain on investments ......... 0.52 0.32 0.18
------- ------- --------
Total from investment operations ...................... $ 1.47 $ 1.21 $ 0.52
------- ------- --------
Less distributions declared to shareholders--
From net investment income .............................. $ -- $ (0.53) $ (0.23)
------- ------- --------
From net realized gain on investments ................... -- (0.10) --
------- ------- --------
Total distributions declared to shareholders .......... $ -- $ (0.63) $ (0.23)
------- ------- --------
Net asset value--end of period ........................... $ 12.34 $ 10.87 $ 10.29
======= ======= ========
Total return ............................................. 13.52% 11.80% 5.25%++
Ratios (to average net assets)/Supplemental data[sec]:
Expenses ................................................ 1.00% 1.00% 1.00%+
Net investment income ................................... 8.17% 8.18% 8.17%+
Portfolio turnover ....................................... 139% 135% 32%
Net assets at end of period (000 omitted) ................ $30,662 $12,994 $ 1,946
</TABLE>
- --------------------
* For the period from the commencement of the Series' investment
operations, July 26, 1995, through December 31, 1995.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
[sec] Subject to reimbursement by the Series, the investment 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
this limitation, the net investment income per share and the ratios would
have been:
<TABLE>
<S> <C> <C> <C>
Net investment income .......... $0.93 $0.82 $0.20
Ratios (to average net assets):
Expenses ...................... 1.15% 1.62% 4.38%+
Net investment income ......... 8.02% 7.56% 4.82%+
</TABLE>
12
<PAGE>
World Governments Series
<TABLE>
<CAPTION>
Year Ended Year Ended Period Ended Period Ended
December 31, 1997 December 31, 1996 December 31, 1995* December 31, 1994*
------------------- ------------------- -------------------- -------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value--beginning of period .......... $ 10.58 $ 10.17 $ 9.82 $ 10.00
---------- ------- ------- --------
Income from investment operations#--
Net investment income[sec] ................... $ 0.61 $ 0.60 $ 0.63 $ 0.17
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions ............................... (0.73) (0.19) 0.78 (0.09)
---------- ------- ------- --------
Total from investment operations ........... $ (0.12) $ 0.41 $ 1.41 $ 0.08
---------- ------- ------- --------
Less distributions declared to
shareholders--
From net investment income ................... $ (0.17) $ -- $ (0.42) $ (0.17)
From net realized gain on investments
and foreign currency transactions .......... (0.08) -- -- --
In excess of net investment income ........... -- -- (0.54) (0.09)
In excess of net realized gain on
investments and foreign currency
transactions ............................... --[dbldag] -- -- --
From tax return of capital ................... -- -- (0.10) --
---------- ------- -------- --------
Total distributions declared to
shareholders .............................. $ (0.25) $ -- $ (1.06) $ (0.26)
---------- ------- -------- --------
Net asset value--end of period ................ $ 10.21 $ 10.58 $ 10.17 $ 9.82
========== ======= ======== ========
Total return .................................. (1.13)% 4.03% 14.38% 0.79%++
Ratios (to average net assets)/
Supplemental data[sec]:
Expenses . ................................... 1.00% 1.00% 1.00% 1.00%+
Net investment income ........................ 5.96% 5.84% 6.05% 4.68%+
Portfolio turnover ............................ 335% 361% 211% 62%
Net assets at end of period (000 omitted) ..... $ 38,058 $26,023 $ 7,424 $ 2,881
</TABLE>
- --------------------
* For the period from the commencement of the Series' investment
operations, June 14, 1994, through December 31, 1994.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Series' expenses
are calculated without reduction for fees paid indirectly.
[dbldag] Per share amount was less than $0.01 per share.
[sec] The investment 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 this limitation, the net investment
income per share and the ratios would have been:
<TABLE>
<S> <C> <C> <C> <C>
Net investment income ............. $0.59 $0.50 $0.53 $0.16
Ratios (to average net assets):
Expenses## ....................... 1.15% 2.03% 1.99% 1.10%+
Net investment income ............ 5.81% 4.81% 5.09% 4.58%+
</TABLE>
13
<PAGE>
Emerging Markets Equity Series
<TABLE>
<CAPTION>
Year Ended
December 31, 1997*
--------------------
<S> <C>
Per share data (for a share outstanding throughout the period):
Net asset value--beginning of period .......................... $ 10.00
-------
Income from investment operations#--
Net investment income[sec]** ................................. $ --
Net realized and unrealized loss on investments and foreign
currency transactions ...................................... (1.00)
-------
Total from investment operations ........................... $ (1.00)
-------
Net asset value--end of period ................................ $ 9.00
=======
Total return .................................................. (10.00)%++
Ratios (to average net assets)/Supplemental data[sec]:
Expenses ..................................................... 1.50%+
Net investment income ........................................ 0.16%+
Portfolio turnover ............................................ 8%
Average commission rate ....................................... $0.0210
Net assets at end of period (000 omitted) ..................... $ 1,357
</TABLE>
- --------------------
* For the period from the commencement of the Series' investment
operations, October 16, 1997, through December 31, 1997.
** The net investment income per share for the period was $0.004.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Series' expenses are calculated without reduction for fees paid
indirectly.
[sec] The investment adviser voluntarily agreed to maintain, subject to
reimbursement by the Series, the expenses of the Series at not more than
1.50% of average daily net assets. To the extent actual expenses were over
or under this limitation, the net investment loss per share and the ratios
would have been:
<TABLE>
<S> <C>
Net investment loss ........... $(0.15)
Ratios (to average net assets):
Expenses## ................... 5.92%+
Net investment loss .......... (4.26)%+
</TABLE>
14
<PAGE>
Bond Series
<TABLE>
<CAPTION>
Year Ended Year Ended Period Ended
December 31, 1997 December 31, 1996 December 31, 1995*
------------------- ------------------- -------------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout
each period):
Net asset value--beginning of period ..................... $ 10.06 $ 10.19 $ 10.00
------- ------- --------
Income from investment operations#--
Net investment income[sec] .............................. $ 0.64 $ 0.58 $ 0.09
Net realized and unrealized gain (loss) on
investments and foreign currency transactions ......... 0.38 (0.36) 0.21
------- ------- --------
Total from investment operations ...................... $ 1.02 $ 0.22 $ 0.30
------- ------- --------
Less distributions declared to shareholders--
From net investment income .............................. $ -- $ (0.35) $ (0.09)
From net realized gain on investments and foreign
currency transactions ................................. -- -- (0.02)
------- -------- --------
Total distributions declared to shareholders .......... $ 0.00 $ (0.35) $ (0.11)
------- -------- --------
Net asset value--end of period ........................... $ 11.08 $ 10.06 $ 10.19
======= ======== ========
Total return ............................................. 10.14% 2.09% 3.02%++
Ratios (to average net assets)/Supplemental data[sec]:
Expenses ................................................ 1.00% 1.00% 1.00%+
Net investment income ................................... 6.04% 5.84% 4.89%+
Portfolio turnover ....................................... 219% 231% 55%
Net assets at end of period (000 omitted) ................ $ 4,004 $ 853 $ 228
</TABLE>
- --------------------
* For the period from the commencement of investment operations, October
24, 1995, through December 31, 1995.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Series' expenses are calculated without reduction for fees paid
indirectly.
[sec] The investment adviser and/or distributor voluntarily waived a portion
of their management fee and/or distribution fee, respectively, for certain
of the periods indicated. If the fee had been incurred by the Series, the
net investment income per share and the ratios would have been:
<TABLE>
<S> <C> <C> <C>
Net investment income (loss)# ......... $0.37 $(0.26) $(0.70)
Ratios (to average net assets):
Expenses## ........................... 3.58% 9.45% 43.85%+
Net investment income (loss) ......... 3.46% (2.61)% (37.96)%+
</TABLE>
15
<PAGE>
Limited Maturity Series
<TABLE>
<CAPTION>
Year Ended Period Ended
December 31, 1997 December 31, 1996*
------------------- -------------------
<S> <C> <C>
Per share data (for a share outstanding throughout the period):
Net asset value--beginning of period ............................ $ 10.01 $ 10.00
------- --------
Income from investment operations#--
Net investment income[sec] ..................................... $ 0.62 $ 0.25
Net realized and unrealized gain (loss) on investments ......... (0.01) 0.01
------- --------
Total from investment operations ............................. $ 0.61 $ 0.26
------- --------
Less distributions declared to shareholders--
From net investment income ..................................... $ (0.60) $ (0.25)
------- --------
From net realized gain on investments .......................... (0.01) --
Total distributions declared to shareholders ................. $ (0.61) $ (0.25)
Net asset value--end of period .................................. $ 10.01 $ 10.01
======= ========
Total return .................................................... 6.08% 2.61%++
Ratios (to average net assets)/Supplemental data[sec]:
Expenses## ..................................................... 1.00% 1.00%+
Net investment income .......................................... 6.13% 6.61%+
Portfolio turnover .............................................. 167% 109%
Net assets at end of period (000 omitted) ....................... $ 701 $ 523
</TABLE>
- --------------------
* For the period from the commencement of the Series' investment
operations, August 14, 1996, through December 31, 1996.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Series' expenses are calculated without reduction for fees paid
indirectly.
[sec] Subject to the reimbursement by the Series, the investment adviser
voluntarily agreed to maintain the expenses of the Series, exclusive of
management fee, at not more than 1.00% of average daily net assets. To the
extent actual expenses were over this limitation, the net investment
income per share and the ratios would have been:
<TABLE>
<S> <C> <C>
Net investment income .......... $0.10 $0.01
Ratios (to average net assets):
Expenses## .................... 6.20% 7.55%+
Net investment income ......... 0.93% 0.06%+
</TABLE>
16
<PAGE>
Money Market Series
<TABLE>
<CAPTION>
Year Ended Year Ended Period Ended
December 31, 1997 December 31, 1996 December 31, 1995*
------------------- ------------------- -------------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout
each period):
Net asset value--beginning of period ................. $ 1.00 $ 1.00 $ 1.00
------ ------ --------
Income from investment operations#--
Net investment income[sec] .......................... $ 0.05 $ 0.04 $ 0.04
Less distributions declared to shareholders from net
investment income ................................. $(0.05) (0.04) (0.04)
------ ------ -------
Net asset value--end of period ....................... $ 1.00 $ 1.00 $ 1.00
====== ====== ========
Total return ......................................... 4.91% 4.55% 4.37%++
Ratios (to average net assets)/Supplemental data[sec]:
Expenses ............................................ 0.60% 0.60% 0.60%+
Net investment income ............................... 4.91% 4.53% 4.54%+
Net assets at end of period (000 omitted) ............ $8,755 $ 633 $ 180
</TABLE>
- --------------------
* For the period from the commencement of the Series' investment
operations, January 3, 1995, through December 31, 1995.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
[sec] Subject to reimbursement by the Series, the investment adviser
voluntarily agreed to maintain expenses of the Series at not more than
0.60% of average daily net assets. To the extent actual expenses were over
this limitation, the net investment income (loss) per share and the ratios
would have been:
<TABLE>
<S> <C> <C> <C>
Net investment income (loss) .......... $0.04 $ (0.21) $(0.14)
Ratios (to average net assets):
Expenses ............................. 1.36% 27.74% 21.54%+
Net investment income (loss) ......... 4.15% (22.61)% (16.37)%+
</TABLE>
17
<PAGE>
3. INVESTMENT CONCEPT OF THE TRUST
The Trust is an open-end, registered management investment company
comprised of the following thirteen series: Emerging Growth Series, Value
Series, Research Series, Growth With Income Series, Total Return Series,
Utilities Series, High Income Series, World Governments Series, Emerging
Markets Equity Series, Bond Series, Limited Maturity Series, Money Market
Series and New Discovery Series. Each Series is a segregated, separately
managed portfolio of securities. All of the Series, except the Utilities Series
and the World Governments Series, are diversified. Additional series may be
created from time to time. The Trust was organized as a business trust under
the laws of The Commonwealth of Massachusetts by a Declaration of Trust dated
February 1, 1994.
The Trust currently offers shares of each Series to insurance company
separate accounts that fund Contracts. Separate accounts may purchase or redeem
shares at net asset value without any sales or redemption charge. Fees and
charges imposed by a separate account, however, will affect the actual return
to the holder of a Contract. A separate account may also impose certain
restrictions or limitations on the allocation of purchase payments or Contract
value to one or more Series, and not all Series may be available in connection
with a particular Contract. Prospective investors should consult the applicable
Contract prospectus for information regarding fees and expenses of the Contract
and separate account and any applicable restrictions or limitations. The Trust
assumes no responsibility for such prospectuses.
Shares of the Series are offered to the separate accounts of Participating
Insurance Companies that are affiliated or unaffiliated ("shared funding").
Shares of the Series may serve as the underlying investments for both variable
annuity and variable life insurance contracts ("mixed funding"). Due to
differences in tax treatment or other considerations, the interests of various
Contract owners might at some time be in conflict. The Trust currently does not
foresee any such conflict. Nevertheless, the Trust's Trustees intend to monitor
events in order to identify any material irreconcilable conflicts which may
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 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. 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 "Certain Securities and Investment Techniques" below and in the SAI
under the caption "Certain Securities and Investment Techniques." The Series'
investments are subject to certain risks, as
18
<PAGE>
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"), Fitch IBCA ("Fitch") or Duff & Phelps Credit Rating Co.
("Duff & Phelps")) (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 Value Series -- The Value Series' investment objective is to seek capital
appreciation. Dividend income, if any, is a consideration incidental to the
Series' objective of capital appreciation.
While the Series' policy is to invest primarily in common stocks, it may
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 or BB or lower by S&P, Fitch or Duff & Phelps)
(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 25% of its net assets in these securities. For a description of these
ratings, see Appendix A to this Prospectus.
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Consistent with its investment objective and policies described above, the
Series may also invest up to 50% (but generally expects to invest between 10%
and 25%) of its net assets in foreign securities (including emerging market
securities and Brady Bonds) which are not traded on a U.S. exchange. There is
no formula as to the percentage of assets that may be invested in any one type
of security. Cash, commercial paper, short-term obligations, repurchase
agreements or debt securities are held to provide for future purchases of
common stock or other securities and may also be held as a temporary defensive
measure when the Adviser determines security markets to be overvalued.
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. 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, by Fitch or by Duff & Phelps) 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 Growth With Income Series -- The Growth With Income Series' investment
objectives are to provide reasonable current income and long-term growth of
capital and income.
Under normal market conditions, the Growth With Income Series will invest
at least 65% of its assets in equity securities of companies that are believed
to have long-term prospects for growth and income.
Consistent with its investment objective and policies described above, the
Series may also invest up to 75% (and generally expects to invest not more than
15%) of its net assets in foreign securities (including emerging market
securities and Brady Bonds) which are not traded on a U.S. exchange.
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.
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
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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, by Fitch or by Duff & Phelps) (commonly known as "junk
bonds") including up to 20% of its assets in non-convertible fixed income
securities that are in these lower rating categories and comparable unrated
securities (see "Additional Risk Factors" below). Generally, most of the
Series' long-term non-convertible fixed income investments will consist of
"investment grade" securities. See Appendix A to this Prospectus for a
description of these ratings.
The Series may also invest in United States government securities,
including: (1) U.S. Treasury obligations, which differ only in their interest
rates, maturities and times of issuance: U.S. Treasury bills (maturities of one
year or less); U.S. Treasury notes (maturities of one to ten years); and U.S.
Treasury bonds (generally maturities of greater than ten years), all of which
are backed by the full faith and credit of the U.S. Government; and (2)
obligations issued or guaranteed by U.S. Government agencies, authorities or
instrumentalities, some of which are backed by the full faith and credit of the
U.S. Treasury, e.g., direct pass-through certificates of the Government
National Mortgage Association ("GNMA"); some of which are supported by the
right of the issuer to borrow from the U.S. Government, e.g., obligations of
Federal Home Loan Banks; and some of which are backed only by the credit of the
issuer itself, e.g., obligations of the Student Loan Marketing Association
(collectively, "U.S. Government Securities"). The term "U.S. Government
Securities" also includes interests in trusts or other entities representing
interests in obligations that are backed by the full faith and credit of the
U.S. Government or are issued or guaranteed by the U.S. Government, its
agencies, authorities or instrumentalities.
Consistent with its investment objective and policies described above, the
Series may also invest up to 20% of its net assets in foreign securities
(including emerging market securities and Brady Bonds) which are not traded on
a U.S. exchange.
MFS Utilities Series -- The Utilities Series' investment objective is to seek
capital growth and current income (income above that available from a portfolio
invested entirely in equity securities).
The Utilities Series will seek to achieve its objective by investing,
under normal circumstances, at least 65% (but up to 100% at the discretion of
the Adviser) of its assets in equity and debt securities of both domestic and
foreign companies in the utilities industry. These securities may be listed on
securities exchanges, traded in various over-the-counter markets or have no
organized markets. At least 80% of the non-convertible fixed income securities
held by the Series will be rated at the time of investment at least Baa by
Moody's or BBB by S&P, by Fitch or by Duff & Phelps, or will be of comparable
quality as determined by the Adviser (see "Additional Risk Factors" below). See
Appendix A to this Prospectus for a description of these ratings. The Series
may also invest in debt and equity securities of issuers in other industries,
as discussed below, although under normal circumstances not more than 35% of
the Series' assets will be so invested. In addition, the Series may hold a
portion of its assets in cash and money market instruments.
Companies in the utilities industry include (i) companies engaged in the
manufacture, production, generation, transmission, sale or distribution of
electric, gas or other types of energy, water or other sanitary services and
(ii) companies engaged in telecommunications, including telephone, cellular
telephones, telegraph, satellite, microwave, cable television and other
communications media (but not companies engaged in public broadcasting). The
Adviser deems a particular company to be in the utilities industry if, at the
time of investment, the Adviser determines that at least 50% of the company's
assets or revenues are derived from one or more of those industries. The
portion of the Utilities Series' assets invested in a particular type of
utility and in equity or debt securities will vary in light of changes in
interest rates, market conditions and economic conditions and other factors.
For further information on the principal sectors of the utilities industry in
which the Series may invest, see Appendix B to this Prospectus.
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Consistent with its investment objective and policies described above, the
Series may also invest up to 35% of its net assets in foreign securities
(including emerging market securities and Brady Bonds) which are not traded on
a U.S. exchange.
Since the Utilities Series' investments are concentrated in utility
securities, the value of the Series' shares will be especially affected by
factors peculiar to the utilities industry, and may fluctuate more widely than
the value of shares of a fund that invests in a broader range of industries.
The rates many utility companies may charge their customers are controlled by
governmental regulatory commissions which may result in a delay in the utility
company passing along increases in costs to its customers. Furthermore, there
is no assurance that regulatory authorities will, in the future, grant rate
increases or that such increases will be adequate to permit the payment of
dividends on common stocks. Many utility companies, especially electric and gas
and other energy related utility companies, are subject to various
uncertainties, including: risks of increases in fuel and other operating costs;
the high cost of borrowing to finance capital construction during inflationary
periods; difficulty obtaining adequate returns on invested capital, even if
frequent rate increases are approved by public service commissions;
restrictions on operations and increased costs and delays as a result of
environmental and nuclear safety regulations; securing financing for large
construction projects during an inflationary period; difficulties of the
capital markets in absorbing utility debt and equity securities; difficulty in
raising capital in adequate amounts on reasonable terms in periods of high
inflation and unsettled capital markets; technological innovations which may
render existing plants, equipment or products obsolete; the potential impact of
natural or man-made disasters; difficulties in obtaining natural gas for resale
or fuel for electric generation at reasonable prices; coping with the general
effects of energy conservation, particularly in light of changing policies
regarding energy; and special risks associated with the construction and
operation of nuclear power generating facilities, including technical factors
and costs, and the possibility that federal, state and municipal government
authorities may from time to time review existing requirements and impose
additional requirements. Certain utility companies, especially gas and
telephone utility companies, have in recent years been affected by increased
competition, which could adversely affect the profitability of such utility
companies. Furthermore, there are uncertainties resulting from certain
telecommunications companies' diversification into new domestic and
international businesses as well as agreements by many such companies linking
future rate increases to inflation or other factors not directly related to the
active operating profits of the enterprise.
Foreign utility companies are also subject to regulation, although such
regulations may or may not be comparable to those in the United States. Foreign
utility companies may be more heavily regulated by their respective governments
than utilities in the U.S. and, as in the U.S., generally are required to seek
government approval for rate increases. In addition, since many foreign
utilities use fuel that causes more pollution than those used in the U.S., such
utilities may be required to invest in pollution control equipment to meet any
proposed pollution restrictions. Foreign regulatory systems vary from country
to country and may evolve in ways different from regulation in the U.S.
The Utilities Series is permitted to invest in securities of issuers that
are outside the utilities industry, although under normal circumstances not
more than 35% of the Series' assets will be so invested. Such investments may
include common stocks, debt securities (including municipal debt securities)
and preferred stocks and will be selected to meet the Series' investment
objective of both capital growth and current income. These securities may be
issued by either U.S. or non-U.S. companies. Some of these issuers may be in
industries related to the utilities industry and, therefore, may be subject to
similar risks.
Investments outside the utilities industry may also include U.S.
Government Securities, as that term is defined under "Investment Objectives and
Policies--MFS Total Return Series" above. When and if available, U.S.
Government Securities may be purchased at a discount from face value. However,
the Series does not intend to hold such securities to maturity for the purpose
of achieving potential capital gains, unless current yields on the securities
remain attractive.
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MFS High Income Series -- The investment objective of the High Income Series is
to seek high current income by investing primarily in a professionally managed
diversified portfolio of fixed income securities, some of which may involve
equity features.
Fixed income securities offering the high current income sought by the
High Income Series normally include those fixed income securities which offer a
current yield above that generally available on debt securities in the three
highest rating categories of the recognized rating agencies (commonly known as
"junk bonds" if rated below the four highest categories of recognized rating
agencies). The Series may invest up to 100% of its net assets in such
securities. For a description of these rating categories, see Appendix A to
this Prospectus and Appendix 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. (See "Additional Risk Factors" below.) However, since
available yields and yield differentials vary over time, no specific level of
income or yield differential can ever be assured. The dividends paid by the
Series will increase or decrease in relation to the income received by the
Series from its investments, which would in any case be reduced by the expenses
of the Series before such income is distributed to its shareholders.
Fixed income securities include preferred and preference stocks and all
types of debt obligations of both domestic and foreign issuers, such as bonds,
debentures, notes, equipment lease certificates, equipment trust certificates
(including interests in trusts or other entities representing such
obligations), conditional sales contracts, commercial paper and obligations
issued or guaranteed by the U.S. Government, any foreign government or any of
their respective political subdivisions, agencies or instrumentalities
(including obligations, such as repurchase agreements, secured by instruments).
Corporate debt securities may bear fixed, fixed and contingent, or
variable rates of interest and may involve equity features, such as conversion
or exchange rights or warrants for the acquisition of stock of the same or a
different issuer; participations based on revenues, sales or profits; or the
purchase of common stock in a unit transaction (where corporate debt securities
and common stock are offered as a unit). Under normal market conditions, not
more than 25% of the value of the total assets of the High Income Series will
be invested in equity securities, including common stocks, warrants and rights.
Consistent with its investment objective and policies described above, the
Series may also invest up to 25% (and generally expects to invest not more than
10%) of its net assets in foreign securities (including emerging market
securities and Brady Bonds) which are not traded on a U.S. exchange. The Series
has authority to invest up to 25% of its total assets in securities issued or
guaranteed by foreign governments or their agencies or instrumentalities. (See
"Additional Risk Factors" below.)
The High Income Series may invest up to 40% of the value of its total
assets in each of the electric utility and telephone industries, but will not
invest more than 25% in either of those industries unless yields available for
four consecutive weeks in the four highest rating categories on new issue bonds
in such industry (issue size of $50 million or more) have averaged in excess of
105% of yields of new issue long-term industrial bonds similarly rated (issue
size of $50 million or more) and, in the opinion of the Adviser, the relative
return available from the electric utility or telephone industry and the
relative risk, marketability, quality and availability of securities of such
industry justifies such an investment.
When and if available, fixed income securities may be purchased at a
discount from face value. However, the High Income Series does not intend to
hold such securities to maturity for the purpose of achieving potential capital
gains, unless current yields on these securities remain attractive. From time
to time the Series may purchase securities not paying interest at the time
acquired if, in the opinion of the Adviser, such securities have the potential
for future income or capital appreciation.
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.
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The World Governments Series seeks to achieve its investment objective
through a professionally managed, internationally diversified portfolio
consisting primarily of debt securities and to a lesser extent equity
securities. The Series attempts to provide investors with an opportunity to
enhance the value and increase the protection of their investment against
inflation and otherwise by taking advantage of investment opportunities in the
U.S. as well as in other countries where opportunities may be more rewarding.
It is believed that diversification of assets on an international basis
decreases the degree to which events in any one country, including the U.S.,
can affect the entire portfolio. Although the percentage of the Series' assets
invested in securities issued abroad and denominated in foreign currencies will
vary depending on the state of the economies of the principal countries of the
world, their financial markets and the relationship of their currencies to the
U.S. dollar, under normal conditions the Series' portfolio is internationally
diversified. However, for temporary defensive reasons or during times of
international political or economic uncertainty or turmoil, most or all of the
Series' investments may be in the U.S.
Under normal economic and market conditions, at least 80% of the Series'
portfolio is invested in debt securities, such as bonds, debentures, mortgage
securities, notes, commercial paper, obligations issued or guaranteed by a
government or any of its political subdivisions, agencies or instrumentalities,
certificates of deposit, as well as debt obligations which may have a call on
common stock by means of a conversion privilege or attached warrants.
Consistent with its investment objective and policies described above, the
Series may invest up to 100% (and generally expects to invest not more than
80%) of its net assets in foreign securities (including emerging market
securities and Brady Bonds) which are not traded on a U.S. exchange. Although
the percentage of the Series' assets invested in foreign securities will vary,
at least 65% of the Series' assets will be invested in at least three different
countries, one of which may be the U.S., except when the Adviser believes that
investing for temporary defensive purposes is appropriate. The Adviser will
determine the amount of the World Governments Series' assets to be invested in
the U.S. and the amount to be invested abroad. The U.S. assets will be invested
in high quality debt securities and the remainder of the assets will be
diversified among countries where opportunities for total return are expected
to be most attractive. It is currently expected that investments within foreign
countries will be primarily in government securities to minimize credit risks.
The Series will not invest 25% or more of the value of its assets in the
securities of any one foreign government. The portfolio will be managed
actively and the asset allocations modified as the Adviser deems necessary.
The World Governments Series will purchase non-dollar securities
denominated in the currency of countries where the interest rate environment as
well as the general economic climate provide an opportunity for declining
interest rates and currency appreciation. If interest rates decline, such
non-dollar securities will appreciate in value. If the currency also
appreciates against the dollar, the total investment in such non-dollar
securities would be enhanced further. Conversely, a rise in interest rates or
decline in currency exchange rates would adversely affect the Series' return.
Investments in non-dollar denominated securities are evaluated primarily on the
strength of a particular currency against the dollar and on the interest rate
climate of that country. Currency is judged on the basis of fundamental
economic criteria (e.g., relative inflation levels and trends, growth rate
forecasts, balance of payments status, and economic policies) as well as
technical and political data. In addition to the foregoing, interest rates are
evaluated on the basis of differentials or anomalies that may exist between
different countries. The Series may hold foreign currency received in
connection with investments in foreign securities and in anticipation of
purchasing foreign securities. (See "Additional Risk Factors" below.)
The phrase "preservation of capital" when applied to a domestic investment
company is generally understood to imply that the portfolio is invested in very
low risk securities and that the major risk is loss of purchasing power through
the effects of inflation or major changes in interest rates. However, while the
World Governments Series invests in securities which are believed to have
minimal credit risk, an error of judgment in selecting a currency or an
interest rate environment could result in a loss of capital.
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It is contemplated that the World Governments Series' long-term debt
investments will consist primarily of securities which are believed by the
Adviser to be of relatively high quality. If after the Series purchases such a
security, the quality of the security deteriorates significantly, the security
will be sold only if the Adviser believes it is advantageous to do so.
MFS/Foreign & Colonial Emerging Markets Equity Series -- The Emerging Markets
Equity Series' investment objective is to seek capital appreciation. The
selection of securities is made solely on the basis of potential for capital
appreciation. Dividend and interest income from portfolio securities, if any,
is incidental to the Series' investment objective of capital appreciation.
The Series seeks to achieve its objective by investing, under normal
market conditions, at least 65% of its total assets in equity securities of
issuers whose principal activities are located in emerging market countries.
The Adviser and the Sub-Adviser expect to take a global approach to portfolio
management by weighting the Series' investments towards countries in Latin
America, Asia, Africa, the Middle East and the developing countries of Europe,
primarily in Eastern Europe. See "Certain Securities and Investment
Techniques--Emerging Market Securities" below.
While the Series intends to invest primarily in equity securities, the
Series may also invest less than 35% of its net assets in non-convertible fixed
income securities of government, government-related, supranational and
corporate issuers whose principal activities are outside the U.S., rated Ba or
lower by Moody's or BB or lower by S&P, Fitch or Duff & Phelps and comparable
unrated securities. See "Additional Risk Factors--Lower Rated Bonds" below. The
Adviser and the Sub-Adviser consider a variety of factors in selecting fixed
income securities to achieve capital appreciation, including the
creditworthiness of issuers, interest rates and currency exchange rates.
The Series does not intend to emphasize any particular country or region
in making its investments, but under normal market conditions, the Series will
be invested in at least three countries (outside the U.S.) and will not invest
more than 50% of its net assets in issuers whose principal activities are
located in a single country. See "Risk Factors--Investments in One or a Limited
Number of Countries" below. Currently, the Series does not expect to invest
more than 25% of its net assets in issuers whose principal activities are
located in a single country. The Series will seek to reduce risk by investing
its assets in a number of markets and issuers, performing investment analyses
of potential investments and monitoring current developments and trends in both
the international economy and financial markets.
For temporary defensive reasons, such as during times of international
political or economic uncertainty or turmoil, most or all of the Series'
investments may be in cash (U.S. dollars, foreign currencies or multinational
currency units) and/or securities that are denominated in U.S. dollars or whose
issuers are domiciled in the U.S. The Series is not restricted as to the
portions of its assets which may be invested in securities denominated in a
particular currency and up to 100% of the Series' net assets may be invested in
securities denominated in foreign currencies and multinational currency units.
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 objectives by investing, under
normal market conditions, at least 65% of its total assets in:
(1) convertible and non-convertible debt securities and preferred stocks;
(2) U.S. Government Securities, as defined in "Investment Objectives and
Policies--MFS Total Return Series" above; and
(3) commercial paper, repurchase agreements and cash or cash equivalents
(such as certificates of deposit and bankers' acceptances).
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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 or Duff & Phelps (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 "Certain Securities and
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 Limited Maturity Series -- The Limited Maturity Series' primary investment
objective is to provide as high a level of current income as is believed to be
consistent with prudent investment risk. The Series' secondary objective is to
protect shareholders' capital.
In seeking to achieve its investment objectives, the Limited Maturity
Series invests, under normal market conditions, substantially all its assets in
the following securities:
1. Debt securities (including corporate asset-backed securities and
mortgage pass-through securities discussed below) which have a rating
within the four highest grades as determined by S&P, Fitch or Duff &
Phelps (AAA, AA, A or BBB) or Moody's (Aaa, Aa, A or Baa) and
comparable unrated securities; for a description of these rating
categories, see Appendix A to this Prospectus;
2. U.S. Government Securities, as defined in "Investment Objectives and
Policies--MFS Total Return Series" above; or
3. Commercial paper, repurchase agreements, cash or cash equivalents
(such as certificates of deposit and bankers' acceptances).
The Limited Maturity Series will only invest in securities rated within
the four highest grades, as determined by S&P or Moody's or Fitch, and
comparable unrated securities. In addition, the dollar-weighted average quality
of the Series will be within the three highest grades, as determined by S&P or
Moody's, Fitch or Duff & Phelps (or the Adviser in the case of unrated
securities).
Under normal market conditions, substantially all the securities in the
Series' portfolio will have remaining maturities of five years or less or
estimated remaining average lives of five years or less. In the case of
mortgage-backed and corporate asset-backed securities as well as collateralized
mortgage obligations, the average life is likely to be substantially shorter
than the stated final maturity as a result of unscheduled principal
prepayments.
For purposes of the foregoing investment policy, securities having a
certain maturity will be deemed to include securities with an equivalent
"duration" of such securities. "Duration" is a commonly used measure of the
longevity of a debt instrument that takes into account the full stream of
payments received on a debt instrument, including both interest and principal
payments, based on their present values. A debt instrument's duration is
derived by discounting principal and interest payments to their present value
using the instrument's current yield to maturity and taking the dollar-weighted
average time until those payments will be received. Contractual rights to
dispose of a security will be considered in cal-
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culating duration because such rights limit the period during which the Series
bears a market risk with respect to the security.
The Limited Maturity Series may invest up to 25% of its assets in
dollar-denominated foreign debt securities which may include emerging market
securities and Brady Bonds. (See "Certain Securities and Investment Techniques"
and "Additional Risk Factors" below.)
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, by
Fitch or by Duff & Phelps, 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,
Aa or better by Moody's, or D-1 by Duff & Phelps.
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.
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.
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MFS New Discovery Series -- The New Discovery Series' investment objective is
to seek capital appreciation.
The Series seeks to achieve its objective by investing, under normal
market conditions, at least 65% of its total assets in companies that the
Adviser believes offer superior prospects for growth. Such securities may
either be listed on securities exchanges or traded in the over-the-counter
markets and may be U.S. or foreign companies. While companies in which the
Series invests may be of any size, such as companies in a relatively early
stage of development that offer the potential for accelerated earnings or
revenue growth (emerging growth companies), or larger or more established
companies whose rates of earnings growth are expected to accelerate because of
special factors, such as rejuvenated management, new products, or structural
changes in the economy, the Series will generally invest in companies with
small market capitalizations relative to companies included in the Standard &
Poor's 500 Stock Index. 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, management and
market opportunities which are usually necessary to become more widely
recognized as growth companies. The Series seeks to maintain a portfolio
weighted median capitalization of $2 billion or less.
The Series may also invest in fixed income securities offering an
opportunity for capital appreciation, including up to 10% of its net assets in
fixed income securities rated BB or lower by S&P, Fitch or Duff & Phelps, or Ba
or lower by Moody's, or if unrated, determined to be of equivalent quality by
the Adviser (commonly referred to as "junk bonds"). For a description of these
ratings, see Appendix B to the Prospectus (see also "Additional Risk Factors -
Lower Rated Bonds" in the Prospectus.
The Series may engage in short sales of securities which the Adviser
expects to decline in price (see "Short Sales" below).
Consistent with its investment objective and policies described above, the
Series may also invest up to (but not including) 20% of its net assets in
foreign securities which are not traded on a U.S. exchange (not including
American Depositary Receipts).
5. CERTAIN SECURITIES AND INVESTMENT TECHNIQUES
Equity Securities: Each Series (except the World Governments Series, the
Limited Maturity Series and the Money Market Series) may invest in all types of
equity securities, including the following: common stocks, preferred stocks and
preference stocks; securities such as bonds, warrants or rights that are
convertible into stocks; and depository receipts for those securities. These
securities may be listed on securities exchanges, traded in various
over-the-counter markets or have no organized markets.
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 or Sub-Adviser,
as applicable, 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
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political and economic stability and the development of its financial and
capital markets. The Adviser or Sub-Adviser, as applicable, 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 location of its
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, Croatia,
Dominican Republic, Ecuador, Jordan, Mexico, Morocco, Nigeria, Panama, Peru,
the Philippines, Poland, Slovenia, Uruguay and Venezuela. Brady Bonds have been
issued only recently, and for that reason do not have a long payment history.
Brady Bonds may be collateralized or uncollateralized, are issued in various
currencies (but primarily the U.S. dollar) and are actively traded in
over-the-counter secondary markets. U.S. dollar-denominated, collateralized
Brady Bonds, which may be fixed-rate bonds or floating-rate bonds, are
generally collateralized in full as to principal by U.S. Treasury zero coupon
bonds having the same maturity as the bonds. Brady Bonds are often viewed as
having three or four valuation components: the collateralized repayment of
principal at final maturity; the collateralized interest payments; the
uncollateralized interest payments; and any uncollateralized repayment of
principal at maturity (these uncollateralized amounts constituting the
"residual risk"). In light of the residual risk of Brady Bonds and the history
of defaults of countries issuing Brady Bonds with respect to commercial bank
loans by public and private entities, investments in Brady Bonds may be viewed
as speculative.
Repurchase Agreements: Each Series may enter into repurchase agreements in
order to earn income on available cash or as a temporary defensive measure.
Under a repurchase agreement, a Series acquires securities subject to the
seller's agreement to repurchase at a specified time and price. If the seller
becomes subject to a proceeding under the bankruptcy laws or its assets are
otherwise subject to a stay order, the Series' right to liquidate the
securities may be restricted (during which time the value of the securities
could decline). As discussed in the SAI, each Series has adopted certain
procedures intended to minimize risk.
"When-Issued" Securities: Each Series (except the Research Series, the World
Governments Series and the Money Market 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
segregate liquid assets sufficient to cover its commitments.
Mortgage "Dollar Roll" Transactions: Each of the Total Return Series, the
Bond Series, the World Governments Series, the Limited Maturity Series, the
High Income Series and the Utilities 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
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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 (except the Growth With Income 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 of the liquidity determinations, 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, the Bond Series, the Limited Maturity Series, the High
Income Series and the Utilities Series may invest in corporate asset-backed
securities. These securities, issued by trusts and special purpose
corporations, are backed by a pool of assets, such as credit card and
automobile loan receivables, representing the obligations of a number of
different parties.
Corporate asset-backed securities present certain risks. For instance, in
the case of credit card receivables, these securities may not have the benefit
of any security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there
is the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities. The underlying
assets (e.g., loans) are also subject to prepayments which shorten the
securities' weighted average life and may lower their return.
Corporate asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection; and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from ultimate default ensures payment through insurance policies or
letters of credit obtained by the issuer or sponsor from third parties. A
Series will not pay any additional or separate fees for credit support. The
degree of credit support provided for each issue is generally based on
historical information respecting the level of credit risk associated with the
underlying assets. Delinquency or loss in excess of that anticipated or failure
of the credit support could adversely affect the return on an investment in
such a security.
Zero Coupon Bonds, Deferred Interest Bonds and PIK Bonds: Each of the Value
Series, the Total Return Series, the Bond Series, the Emerging Markets Equity
Series, the World Governments Series, the Growth With Income Series, the
Limited Maturity Series, the High Income Series, the Utilities Series and the
New Discovery Series may invest in zero
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coupon bonds. The Value Series, the Total Return Series, the Bond Series and
the High Income Series may also invest in deferred interest bonds and PIK
bonds. Zero coupon and deferred interest bonds are debt obligations which are
issued or purchased at a significant discount from face value. The discount
approximates the total amount of interest the bonds will accrue and compound
over the period until maturity or the first interest payment date at a rate of
interest reflecting the market rate of the security at the time of issuance.
While zero coupon bonds do not require the periodic payment of interest,
deferred interest bonds provide for a period of delay before the regular
payment of interest begins. PIK bonds are debt obligations which provide that
the issuer thereof may, at its option, pay interest on such bonds in cash or in
the form of additional debt obligations. Such investments benefit the issuer by
mitigating its need for cash to meet debt service, but also require a higher
rate of return to attract investors who are willing to defer receipt of such
cash. Such investments may experience greater volatility in market value due to
changes in interest rates than debt obligations which make regular payments of
interest. Each Series will accrue income on such investments for tax and
accounting purposes, as required, which is distributable to shareholders and
which, because no cash is received at the time of accrual, may require the
liquidation of other portfolio securities to satisfy the Series' distribution
obligations.
Collateralized Mortgage Obligations and Multiclass Pass-Through Securities:
Each of the Bond Series, the World Governments Series, the Limited Maturity
Series, the High Income Series and the Utilities Series may invest a portion of
its assets in collateralized mortgage obligations or "CMOs," which are debt
obligations collateralized by mortgage loans or mortgage pass-through
securities. Typically, CMOs are collateralized by certificates issued by GNMA,
the Federal National Mortgage Association ("FNMA") or the Federal Home Loan
Mortgage Corporation ("FHLMC"), but also may be collateralized by whole loans or
private mortgage pass-through securities (such collateral collectively referred
to as "Mortgage Assets"). Each of these Series may also invest a portion of its
assets in multiclass pass-through securities which are interests in a trust
composed of Mortgage Assets. CMOs (which include multiclass pass-through
securities) may be issued by agencies, authorities or instrumentalities of the
U.S. Government or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose subsidiaries of the foregoing. Payments of
principal of and interest on the Mortgage Assets, and any reinvestment income
thereon, provide the funds to pay debt service on the CMOs or make scheduled
distributions on the multiclass pass-through securities. In a CMO, a series of
bonds or certificates are usually issued in multiple classes with different
maturities. Each class of CMOs, often referred to as a "tranche," is issued at a
specific fixed or floating coupon rate and has a stated maturity or final
distribution date. Principal prepayments on the Mortgage Assets may cause the
CMOs to be retired substantially earlier than their stated maturities or final
distribution dates, resulting in a loss of all or part of the premium if any has
been paid. Certain classes of CMOs have 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, the World Governments Series, the Limited
Maturity Series, the High Income Series and the Utilities Series may also
invest in parallel pay CMOs and Planned Amortization Class CMOs ("PAC Bonds").
Parallel pay CMOs are structured to provide payments of principal on each
payment date to more than one class. PAC Bonds generally require payments of a
specified amount of principal on each payment date. PAC Bonds are always
parallel pay CMOs with the required principal payment on such securities having
the highest priority after interest has been paid to all classes. For a further
description of CMOs, parallel pay CMOs and PAC Bonds and the risks related to
transactions therein, see the SAI.
Stripped Mortgage-Backed Securities: Each of the Bond Series, the World
Governments Series and the High Income Series may invest a portion of its
assets in stripped mortgage-backed securities ("SMBS"), which are derivative
multiclass mortgage securities usually structured with two classes that receive
different proportions of interest and principal distributions from an
underlying pool of mortgage assets. For a further description of SMBS and the
risks related to transactions therein, see the SAI.
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Loan Participations and Other Direct Indebtedness: Each of the Emerging
Growth Series, the Value Series, the Total Return Series, the High Income Series
and the Emerging Markets Equity Series may invest a portion of its assets in
"loan participations" and other direct indebtedness. By purchasing a loan
participation, a Series acquires some or all of the interest of a bank or other
lending institution in a loan to a corporate borrower. Many such loans are
secured, and most impose restrictive covenants which must be met by the
borrower. These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans may be in default at the time of purchase. A Series may
also purchase other direct indebtedness such as trade or other claims against
companies, which generally represent money owed by the company to a supplier of
goods and services. These claims may also be purchased at a time when the
company is in default. Certain of the loan participations and other direct
indebtedness acquired by a Series may involve revolving credit facilities or
other standby financing commitments which obligate a Series to pay additional
cash on a certain date or on demand.
The highly leveraged nature of many such loans and other direct
indebtedness may make such loans especially vulnerable to adverse changes in
economic or market conditions. Loan participations and other direct
indebtedness may not be in the form of securities or may be subject to
restrictions on transfer, and only limited opportunities may exist to resell
such instruments. As a result, a Series may be unable to sell such investments
at an opportune time or may have to resell them at less than fair market value.
For a further discussion of loan participations, other direct indebtedness and
the risks related to transactions therein, see the SAI.
Mortgage Pass-Through Securities: Each of the Total Return Series, the Bond
Series, the World Governments Series, the Limited Maturity Series and the High
Income Series may invest in mortgage pass-through securities. Mortgage pass-
through securities are securities representing interests in "pools" of mortgage
loans. The Utilities Series may invest in mortgage pass-through securities that
are securities issued or guaranteed as to principal and interest by the U.S.
Government, its agencies, authorities or instrumentalities. Monthly payments of
interest and principal by the individual borrowers on mortgages are passed
through to the holders of the securities (net of fees paid to the issuer or
guarantor of the securities) as the mortgages in the underlying mortgage pools
are paid off. Payment of principal and interest on some mortgage pass-through
securities (but not the market value of the securities themselves) may be
guaranteed by the full faith and credit of the U.S. Government (in the case of
securities guaranteed by GNMA); or guaranteed by U.S. Government-sponsored
corporations (such as FNMA or FHLMC, which are supported only by the
discretionary authority of the U.S. Government to purchase the agency's
obligations). Mortgage pass-through securities may also be issued by non-
governmental issuers (such as commercial banks, savings and loan institutions,
private mortgage insurance companies, mortgage bankers and other secondary
market issuers). See the SAI for a further discussion of these securities.
Foreign Growth Securities: The Emerging Markets Equity Series, the Emerging
Growth Series, the Value Series, the Research Series, the Growth With Income
Series, the Total Return Series, the Utilities Series and the New Discovery
Series may invest in securities of foreign growth companies, including
established foreign 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 or which otherwise represent opportunities for long-term growth. See
"Risk Factors" below. It is anticipated that these companies will primarily be
in nations with more developed securities markets, such as Japan, Australia,
Canada, New Zealand and most Western European countries, including Great
Britain.
Fixed Income Securities: Fixed income securities in which the Emerging
Markets Equity Series may invest include all types of long- or short-term debt
obligations, such as bonds, notes, bills, debentures, loans, loan assignments
and commercial paper. The Series may invest in emerging market fixed income
securities, which, in addition to the securities identified above, may take the
form of interests issued by entities organized and operated for the purpose of
restructuring the investment characteristics of instruments issued by emerging
market country issuers. Fixed income securities in which the Series may invest
include securities in the lower rating categories of recognized rating agencies
and comparable unrated securities. See "Additional Risk Factors" below. The
Series will not invest 35% or more of its net assets, in non-convertible
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fixed income securities rated Ba or lower by Moody's or BB or lower by S&P,
Fitch or Duff & Phelps and comparable unrated securities. See "Additional Risk
Factors -- Fixed Income Securities" below. However, because most foreign fixed
income securities are not rated, the Series will invest in foreign fixed income
securities primarily based on the Adviser's or the Sub-Adviser's credit
analysis without relying on published ratings.
Investment in Other Investment Companies: The Emerging Markets Equity
Series may invest in other investment companies to the extent permitted by the
1940 Act (i) as a means by which the Series may invest in securities of certain
countries which do not otherwise permit investment, (ii) as a means to purchase
thinly traded securities of emerging market companies, or (iii) when the Adviser
or the Sub-Adviser believes such investments may be more advantageous to the
Series than a direct market purchase of securities. If the Series invests in
such investment companies, the Series' shareholders will bear not only their
proportionate share of the expenses of the Series (including operating expenses
and the fees of the Adviser) but also will indirectly bear similar expenses of
the underlying investment companies.
Privatizations: The governments in some countries, including emerging
market countries, have been engaged in programs of selling part or all of their
stakes in government owned or controlled enterprises ("privatizations"). The
Emerging Markets Equity Series may invest in privatizations. In certain
countries, the ability of foreign entities to participate in privatizations may
be limited by local law and the terms on which the foreign entities may be
permitted to participate may be less advantageous than those afforded local
investors.
Depositary Receipts: Each of the Series (except the Limited Maturity Series
and the Money Market Series) may invest in American Depositary Receipts
("ADRs"). ADRs 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 generally 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. The Emerging Markets Equity Series may invest in Global Depositary
Receipts ("GDRs") and other types of depositary receipts. GDRs and other types
of depositary receipts are typically issued by foreign banks or trust companies
and evidence ownership of underlying securities issued by either a foreign or a
U.S. company. Generally, ADRs are in registered form and are designed for use in
U.S. securities markets and GDRs are in bearer form and are designed for use in
foreign securities markets. For the purposes of the Emerging Markets Equity
Series' policy to invest a certain percentage of its assets in foreign
securities, the investments of the Series in ADRs, GDRs and other types of
depositary receipts are deemed to be investments in the underlying securities.
Structured Securities: The Emerging Markets Equity Series may invest a
portion of its assets in entities organized and operated solely for the purpose
of restructuring the investment characteristics of sovereign debt obligations.
This type of restructuring involves the deposit with, or purchase by, an entity,
such as a corporation or trust, of specified instruments (such as commercial
bank loans or Brady Bonds) and the issuance by that entity of one or more
classes of securities ("Structured Securities") backed by, or representing
interests in, the underlying instruments. The cash flow on the underlying
instruments may be appointed among the newly issued Structured Securities to
create securities with different investment characteristics, such as varying
maturities, payment priorities and interest rate provisions, and the extent of
the payments made with respect to Structured Securities is dependent on the
extent of the cash flow on the underlying instruments. Because Structured
Securities of the type in which the Series anticipates it will invest typically
involve no credit enhancement, their credit risk generally will be equivalent to
that of underlying instruments. The Series is permitted to invest in a class of
Structured Securities that is either subordinated or unsubordinated to the right
of payment of another class. Subordinated Structured Securities typically have
higher yields and present greater risks than unsubordinated Structured
Securities. Structured Securities are typically sold in private placement
transactions, and there currently is no active trading market for Structured
Securities.
Indexed Securities: Each of the Value Series, the Total Return Series, the
High Income Series, the Bond Series, the Utilities Series, the World Governments
Series, the Emerging Markets Equity Series and the New Discovery Series may
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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 changes in the value of 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 and could involve the loss of all or a portion of
the principal amount of or interest on the instrument.
Swaps and Related Transactions: As one way of managing its exposure to
different types of investments, each of the High Income Series, the World
Governments Series, the Emerging Markets Equity Series, the Bond Series, the
Limited Maturity Series and the New Discovery 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
notional principal amount determined by the parties.
Each of the High Income Series, the World Governments Series, the Emerging
Markets Equity Series, the Bond Series and the Limited Maturity Series may also
purchase and sell caps, floors and collars. In a typical cap or floor agreement,
one party agrees to make payments only under specified circumstances, usually in
return for payment of a fee by the counterparty. For example, the purchase of an
interest rate cap entitles the buyer, to the extent that a specified index
exceeds a predetermined interest rate, to receive payments of interest on a
contractually-based principal amount from the counterparty selling such interest
rate cap. The sale of an interest rate floor obligates the seller to make
payments to the extent that a specified interest rate falls below an agreed-upon
level. A collar arrangement combines elements of buying a cap and selling a
floor.
Swap agreements could be used to shift a Series' investment exposure from
one type of investment to another. For example, if a Series agreed to exchange
payments in dollars for payments in foreign currency, in each case based on a
fixed rate, the swap agreement would tend to decrease a Series' exposure to U.S.
interest rates and increase its exposure to foreign currency and interest rates.
Caps and floors have an effect similar to buying or writing options. Depending
on how they are used, swap agreements may increase or decrease the overall
volatility of a Series' investments and its share price and yield.
Swap agreements are sophisticated hedging instruments that typically
involve a small investment of cash relative to the magnitude of risks assumed,
or no investment of cash. 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 Value
Series, the Total Return Series, the Bond Series, the Emerging Markets Equity
Series, the World Governments Series, the Growth With Income Series, the High
Income Series and the New Discovery 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
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the reduced value of the portfolio security underlying the option, or the
increased cost of portfolio securities to be acquired. However, the writing of
options constitutes only a partial hedge, up to the amount of the premium, less
any transaction costs. In contrast, 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 Markets Equity Series and the Emerging
Growth Series may enter into options on Treasury securities that are "reset"
options or "adjustable strike" options. These options provide for periodic
adjustment of the strike price and may also provide for the periodic adjustment
of the premium during the term of the option. The SAI contains a further
discussion of these investments.
Options on Stock Indices: Each of the Emerging Growth Series, the Value
Series, the Total Return Series, the Growth With Income Series, the Utilities
Series, the Emerging Markets Equity Series and the New Discovery Series may
write (sell) covered call and put options and purchase call and put options on
stock indices. Each of these Series may write options on stock indices for the
purpose of increasing its gross income and to protect its portfolio against
declines in the value of securities it owns or increases in the value of
securities to be acquired. When a Series writes an option on a stock index, and
the value of the index moves adversely to the holder's position, the option will
not be exercised, and the Series will either close out the option at a profit or
allow it to expire unexercised. A Series will thereby retain the amount of the
premium, less related transaction costs, which will increase its gross income
and offset part of the reduced value of portfolio securities or the increased
cost of securities to be acquired. Such transactions, however, will constitute
only partial hedges against adverse price fluctuations, since any such
fluctuations will be offset only to the extent of the premium received by a
Series for the writing of the option, less related transaction costs. In
addition, if the value of an underlying index moves adversely to a Series'
option position, the option may be exercised, and the Series will experience a
loss which may only be partially offset by the amount of the premium received.
Each of these Series may also purchase put or call options on stock
indices in order, respectively, to hedge its investments against a decline in
value or to attempt to reduce the risk of missing a market or industry segment
advance. A Series' possible loss in either case will be limited to the premium
paid for the option, plus related transaction costs.
"Yield Curve" Options: Each of the Value Series, the Total Return Series,
the Bond Series, the World Governments Series, the High Income Series and the
New Discovery 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
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<PAGE>
of a call) or narrows (in the case of a put), regardless of whether the yields
of the underlying securities increase or decrease. Yield curve options written
by a Series will be covered as described in the SAI. The trading of yield curve
options is subject to all the risks associated with trading other types of
options, as discussed below under "Additional Risk Factors" and in the SAI. In
addition, such options present risks of loss even if the yield on one of the
underlying securities remains constant, if the spread moves in a direction or
to an extent which was not anticipated.
Futures Contracts and Options on Futures Contracts: Each of the Total
Return Series, the Bond Series, the Emerging Markets Equity Series, the World
Governments Series, the Limited Maturity Series, the High Income Series, the
Utilities Series and the New Discovery Series may purchase and sell futures
contracts on foreign or domestic fixed income securities or indices of such
securities, including municipal bond indices and any other indices of foreign or
domestic fixed income securities that may become available for trading ("Futures
Contracts"). Each of these Series may also purchase and write options on such
Futures Contracts ("Options on Futures Contracts"). Each of the Emerging Growth
Series, the Value Series, the Total Return Series, the Growth With Income
Series, the Emerging Markets Equity Series and the New Discovery Series may
purchase and sell Futures Contracts on stock indices, while the Emerging Growth
Series, the Value Series, the Total Return Series, the Emerging Markets Equity
Series, the World Governments Series, the Growth With Income Series, the
Utilities Series and the New Discovery 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.
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 Limited Maturity Series and
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 and the High
Income Series) for non-hedging purposes (i.e., speculative purposes). By
entering into transactions in Forward Contracts for hedging purposes, a Series
may be required to forego the benefits of advantageous changes in exchange rates
and, in the case of Forward Contracts entered into for non-hedging purposes, a
Series may sustain losses which will reduce its gross income. Such transactions,
therefore, could be considered speculative. Forward Contracts are traded
over-the-counter and not on organized commodities or securities exchanges. As a
result, Forward Contracts operate in a manner distinct from exchange-traded
instruments, and their use involves certain risks beyond those associated with
transactions in Futures Contracts or options traded on exchanges. A Series may
choose to, or be required to, receive delivery of the foreign currencies
underlying Forward Contracts it has entered into. Under certain circumstances,
such as where the Adviser or Sub-Adviser, as applicable, believes that the
applicable exchange rate is unfavorable at the time the currencies are received
or the Adviser or Sub-Adviser, as applicable, anticipates, for any other reason,
36
<PAGE>
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 or Sub-Adviser, as applicable, a reasonable degree of
correlation can be expected between movements in the values of the two
currencies. Each of these Series has established procedures which require use
of segregated assets or "cover" in connection with the purchase and sale of
such contracts.
Options on Foreign Currencies: Each of the Emerging Growth Series, the
Value Series, the Total Return Series, the Bond Series, the Emerging Markets
Equity Series, the World Governments Series, the Growth With Income Series, the
High Income Series, the Utilities Series and the New Discovery 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.
Short Sales: If the New Discovery Series anticipates that the price of a
security will decline, it may sell the security short and borrow the same type
of security from a broker or other institution to complete the sale. The Series
may make a profit or loss depending upon whether the market price of the
security decreases or increases between the date of the short sale and the date
on which the Series must replace the borrowed security. Possible losses from
short sales differ from losses that could be incurred from a purchase of a
security, because losses from short sales may be unlimited, whereas losses from
purchases of a security can equal only the total amount invested. The Series
will segregate liquid assets to cover its short sale obligations. The Series
will not sell short securities whose underlying value, minus amounts pledged by
the Series as collateral (which does not include the proceeds from the short
sale), exceeds 40% of its net assets.
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 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
Com-
37
<PAGE>
mission and on foreign exchanges. In addition, the securities and indexes
underlying options, Futures Contracts and Options on Futures Contracts traded
by the Series will include both domestic and foreign securities.
Lower Rated Bonds: Each of the Emerging Growth Series, the Value Series,
the Research Series, the Total Return Series, the Bond Series, the Limited
Maturity Series, the Emerging Markets Equity Series, the High Income Series, the
Utilities Series and the New Discovery Series may invest in fixed income
securities rated Baa by Moody's or BBB by S&P, Fitch or Duff & Phelps 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 (except the Limited Maturity Series) may also invest
in securities rated Ba or lower by Moody's or BB or lower by S&P, Fitch or Duff
& Phelps and comparable unrated securities (commonly known as "junk bonds") to
the extent described above. See Appendix A to this Prospectus for a description
of these ratings. These securities are considered speculative and, while
generally providing greater income than investments in higher rated securities,
will involve greater risk of principal and income (including the possibility of
default or bankruptcy of the issuers of such securities) and may involve
greater volatility of price (especially during periods of economic uncertainty
or change) than securities in the higher rating categories. However, since
yields vary over time, no specific level of income can ever be assured. These
lower rated high yielding fixed income securities generally tend to reflect
economic changes and short-term corporate and industry developments to a
greater extent than higher rated securities which react primarily to
fluctuations in the general level of interest rates (although these lower rated
fixed income securities are also affected by changes in interest rates, the
market's perception of their credit quality, and the outlook for economic
growth). In the past, economic downturns or an increase in interest rates have,
under certain circumstances, caused a higher incidence of default by the
issuers of these securities and may do so in the future, especially in the case
of highly leveraged issuers. During certain periods, the higher yields on a
Series' lower rated high yielding fixed income securities are paid primarily
because of the increased risk of loss of principal and income, arising from
such factors as the heightened possibility of default or bankruptcy of the
issuers of such securities. Due to the fixed income payments of these
securities, a Series may continue to earn the same level of interest income
while its net asset value declines due to portfolio losses, which could result
in an increase in the Series' yield despite the actual loss of principal. The
market for these lower rated fixed income securities may be less liquid than
the market for investment grade fixed income securities, and judgment may at
times play a greater role in valuing these securities than in the case of
investment grade fixed income securities. Changes in the value of securities
subsequent to their acquisition will not affect cash income or yield to
maturity to a Series but will be reflected in the net asset value of shares of
the Series. See the SAI for more information on lower rated securities.
Foreign Securities: The Limited Maturity Series may invest in
dollar-denominated foreign debt 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 Limited Maturity Series and 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
38
<PAGE>
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.
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
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.
Allocation Among Emerging Markets: The Emerging Markets Equity Series may
allocate all or a portion of its investments in emerging market securities among
the emerging markets of Latin America, Asia, Africa, the Middle East and the
developing countries of Europe, primarily in Eastern Europe. The Series will
allocate its investments among these emerging markets in accordance with the
Adviser's and the Sub-Adviser's determination as to the allocation most
appropriate with respect to the Series' investment objective and policies. The
Series may invest its assets allocated to investment in emerging markets without
limitation in any particular region, and, in accordance with the Adviser's and
the Sub-Adviser's investment discretion, at times may invest all of its assets
allocated to investment in emerging markets in securities of emerging market
issuers located in a single region (e.g., Latin America). To the extent that the
Series' investments are concentrated in one or a few emerging market regions,
the Series' investment performance correspondingly will be more dependent upon
the economic, political and social conditions and changes in those regions. The
ability of the Series to
39
<PAGE>
allocate its investments among emerging market regions without restriction may
have the effect of increasing the volatility of the Series, as compared to a
series which limits such allocations.
Investments in One or a Limited Number of Countries: The Emerging Markets
Equity Series will seek to reduce risk by investing its assets in a number of
markets and issuers. However, the Series may invest up to 50% of its net assets
in issuers located in a single country. To the extent that the Series invests a
significant portion of its assets in a single or limited number of countries,
the Series' investment performance correspondingly will be more dependent upon
the economic, political and social conditions and changes in that country or
countries, and the risks associated with investments in such country or
countries will be particularly significant. The ability of the Series to focus
its investments in one or a limited number of countries may have the effect of
increasing the volatility of the Series.
Foreign Currencies: Because the Emerging Markets Equity Series may invest
up to 100% of its assets in securities denominated in currencies other than the
U.S. dollar, and because the Series may hold foreign currencies, the value of
the Series' investments, and the value of dividends and interest earned by the
Series, may be significantly affected by changes in currency exchange rates.
Some foreign currency values may be volatile, and there is the possibility of
governmental controls on currency exchange or governmental intervention in
currency markets, which could adversely affect the Series. Although the Adviser
and Sub-Adviser may attempt to manage currency exchange rate risks, there is no
assurance that the Adviser and Sub-Adviser will do so at an appropriate time or
that the Adviser and Sub-Adviser will be able to predict exchange rates
accurately. For example, if the Adviser and Sub-Adviser hedge the Series'
exposure to a foreign currency, and that currency's value rises, the Series will
lose the opportunity to participate in the currency's appreciation. The Series
may hold foreign currency received in connection with investments in foreign
securities, and enter into Forward Contracts, Futures Contracts and Options on
Foreign Currencies when, in the judgment of the Adviser or Sub-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 rates. While the holding of
foreign currencies will permit the Series to take advantage of favorable
movements in the applicable exchange rate, it also exposes the Series to risk of
loss if such rates move in a direction adverse to the Series' position. Such
losses could also adversely affect the Series' hedging strategies. See the SAI
for further discussion of the holding of foreign currencies as well as the
associated risks.
Non-diversification: Each of the World Governments Series and the Utilities
Series is "non-diversified," as that term is defined in the Investment Company
Act of 1940 ( the "1940 Act"), but intends to continue 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 (excluding holdings of U.S. Government Securities) 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 (other than U.S.
Government Securities). 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 or Sub-Adviser, as applicable,
believes that investing for temporary defensive purposes is appropriate, or in
order to meet anticipated redemption requests, a large portion or all of the
assets of each Series may be invested in cash (including foreign currency) or
cash equivalents including, but not limited to, obligations of banks (including
certificates of deposit, bankers' acceptances, time deposits and repurchase
agreements), commercial paper, short-term notes, U.S. Government Securities and
related repurchase agreements.
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<PAGE>
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 Emerging Growth Series, the Value Series, the High
Income Series, the World Governments Series, the Bond Series and the Limited
Maturity Series is expected to have a portfolio turnover rate of over 100%,
transaction costs incurred by the Series and the realized capital gains and
losses of the Series may be greater than that of a fund with a lesser portfolio
turnover rate. Neither the Emerging Markets Equity Series nor the New Discovery
Series is anticipated to have a portfolio turnover rate in excess of 100%.
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 Conduct
Rules of the National Association of Securities Dealers, Inc. (the "NASD") and
such other policies as the Trustees of the Trust may determine, the Adviser may
consider sales of Contracts for which the Trust is an investment option,
together with sales of shares of other investment company clients of MFS Fund
Distributors, Inc., the distributor of shares of the Trust and of the MFS
Family of Funds, as a factor in the selection of broker-dealers to execute each
Series' portfolio transactions. From time to time the Adviser may direct
certain portfolio transactions to broker-dealer firms which, in turn, have
agreed to pay a portion of the Series' operating expenses (e.g., fees charged
by the custodian of the Series' assets). For a further discussion of portfolio
trading, see the SAI.
--------------------
The SAI includes a discussion of other investment policies and listing of
specific investment restrictions which govern the investment policies of each
Series. The specific investment restrictions listed in the SAI may be changed
without shareholder approval unless indicated otherwise (see the SAI). Except
with respect to the Series' policy on borrowing and investing in illiquid
securities, 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 Amended and
Restated Investment Advisory Agreement with the Trust on behalf of each Series
dated April 14, 1994, as amended and restated on April 30, 1998 (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
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<PAGE>
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%
Value Series ........................... 0.75%
Research Series ........................ 0.75%
Growth With Income Series .............. 0.75%
Total Return Series .................... 0.75%
Utilities Series ....................... 0.75%
High Income Series ..................... 0.75%
World Governments Series ............... 0.75%
Emerging Markets Equity Series ......... 1.25%
Bond Series ............................ 0.60%
Limited Maturity Series ................ 0.55%
Money Market Series .................... 0.50%
New Discovery Series ................... 0.90%
</TABLE>
For the fiscal year ended December 31, 1997, 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 ................. $1,887,980 $ 0
Value Series ........................... 32,114 45,870
Research Series ........................ 1,343,324 0
Growth With Income Series .............. 188,365 26,920
Total Return Series .................... 331,670 9,651
Utilities Series ....................... 131,652 35,371
High Income Series ..................... 169,309 30,909
World Governments Series ............... 247,419 50,767
Emerging Markets Equity Series ......... 3,350 11,922
Bond Series ............................ 13,699 59,063
Limited Maturity Series ................ 3,129 29,715
Money Market Series .................... 26,348 40,048
</TABLE>
FCM -- The Emerging Markets Equity Series Advisory Agreement permits the
Adviser from time to time to engage one or more sub-advisers to assist in the
performance of its services. Pursuant to the Advisory Agreement, the Adviser
has engaged Foreign & Colonial Management Ltd., a company incorporated under
the laws of England and Wales ("FCM"), located at Exchange House, Primrose
Street, London EC2A 2NY, United Kingdom, as sub-adviser to render advisory
services to the Series. FCM is a wholly owned subsidiary of Hypo Foreign &
Colonial Management (Holdings) Ltd. ("Hypo F&C"). Sixty-Five percent of the
outstanding voting securities of Hypo F&C is owned by Hypo (U.K.) Holdings
Ltd., which is a wholly owned subsidiary of HYPO-BANK (Bayerische
Hypotheken-und Wechsel-Bank AG), the oldest publicly listed, and fifth largest,
commercial bank in Germany, founded in 1835. The remaining 35% of the
outstanding voting securities of Hypo F&C is owned by 4 closed-end publicly
listed investment trusts managed by FCM, including Foreign & Colonial
Investment Trust PLC. FCM has a history of money management dating from 1868
and the establishment of the world's oldest closed-end fund, Foreign & Colonial
Investment Trust PLC. As of January 31, 1998, FCM managed approximately
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U.S. $42.61 billion of assets, including approximately U.S. $30.68 billion of
assets in equity securities and approximately U.S. $11.93 billion of assets in
fixed income securities.
Under a separate Sub-Advisory Agreement between the Adviser and FCM, dated
October 16, 1997 (the "Sub-Advisory Agreement"), the Adviser may delegate to
FCM the authority to make investment decisions for the Series. It is presently
intended that FCM will provide portfolio management services for the Series.
For its services, the Adviser pays FCM a management fee, computed and paid
monthly, in an amount equal to 0.65% of the average daily net assets managed by
FCM of the Series on an annualized basis. The Adviser and FCM have agreed to
cooperate in distributing, advising and managing investment products throughout
the world. In this arrangement they anticipate that certain expenses and
revenues relating to their cooperative activities, including investment
advisory fees received from the Series and certain expenses incurred by MFS,
FCM and their affiliates attributable to their services to the Series, will be
shared.
FCEM -- The Emerging Markets Equity Series Sub-Advisory Agreement permits FCM
from time to time to engage one or more sub-advisers to assist in the
performance of its services. Pursuant to the Sub-Advisory Agreement, FCM has
engaged Foreign & Colonial Emerging Markets Limited, a company incorporated
under the laws of England and Wales ("FCEM"), located at Exchange House,
Primrose Street, London EC2A 2NY, United Kingdom, as sub-adviser to render
advisory services to the Series. FCEM is a wholly owned subsidiary of FCM. FCEM
serves as the investment adviser to public closed-end and open-end funds and
segregated accounts specializing in emerging markets. As of January 31, 1998,
FCEM managed approximately U.S. $4.21 billion of assets invested in emerging
markets.
Under a separate Sub-Advisory Agreement between FCM and FCEM, dated
October 16, 1997, FCM may delegate to FCEM the authority to make investment
decisions for the Series. It is presently intended that FCEM will provide
management services for the portion of the assets of the Series invested in
emerging markets securities. For its services, FCM pays FCEM a management fee,
computed and paid monthly, in an amount equal to 0.65% of the average daily net
assets managed by FCEM of the Series on an annualized basis.
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, an Executive 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.
Value Series John F. Brennan, Jr., a Senior Vice President of MFS, has been employed by the Adviser
as a portfolio manager since 1985.
Research Series The Series is currently managed by a committee comprised of various equity research
analysts employed by the Adviser.
Growth With Income Series Kevin R. Parke, an Executive Vice President of MFS, has been employed by the Adviser
as a portfolio manager since 1985. John D. Laupheimer, a Senior Vice President of MFS,
has been employed by the Adviser as a portfolio manager since 1981.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Series Portfolio Managers
- -------------------------- -----------------------------------------------------------------------------------------------
<S> <C>
Total Return Series David M. Calabro, a Senior 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. Constantinos G. Mokas,
a Vice President of MFS, has been a portfolio manager of the Series since April 1, 1998, and
has been employed by the Adviser as a portfolio manager since 1990. Mr. Mokas is the
manager of the Series' convertible securities. Lisa B. Nurme, a Senior 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 Senior Vice
President of MFS, has been employed by the Adviser as a portfolio manager since 1991. Ms.
Shaughnessy is a manager of the common stock portion of the Series' portfolio. Each
individual became a portfolio manager of the Series on July 19, 1995.
Utilities Series Maura A. Shaughnessy, a Senior Vice President of the Adviser, has been employed by the
Adviser as a portfolio manager since 1991.
High Income Series Bernard Scozzafava, a Vice President of the Adviser, has been employed by the Adviser
as a portfolio manager since 1989.
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.
Emerging Markets Dr. Arnab Kumar Banerji, Chief Investment Officer of FCEM, has been employed by FCEM
Equity Series as a portfolio manager since 1993. Prior to 1993, Mr. Banerji served as Joint Head of
Emerging Markets for Citibank Global Asset Management. Jeffery Chowdhry, a Director
of FCEM, has been employed by FCEM as a portfolio manager since 1994. Prior to 1994,
Mr. Chowdry was a portfolio manager at BZW Investment Management.
Bond Series Geoffrey L. Kurinsky, a Senior Vice President of the Adviser, has been employed by the
Adviser as a portfolio manager since 1987.
Limited Maturity Series James J. Calmas, a Vice President of the Adviser, has been the Series' portfolio manager
since January 1, 1998, and has been employed by the Adviser as a portfolio manager
since 1988.
New Discovery Series Brian E. Stack, a Vice President of the Adviser, has been employed by the Adviser as a
portfolio manager since 1993.
</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[RegTM] 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/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.), a subsidiary of Sun Life Assurance
Company of Canada ("Sun Life"), in connection with the sale of various
fixed/variable annuity contracts. MFS and its wholly owned subsidiary, MFS
Institutional Advisors, 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
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<PAGE>
Trust. Net assets under the management of the MFS organization were
approximately $72.0 billion on behalf of approximately 2.8 million investor
accounts as of January 30, 1998. As of such date, the MFS organization managed
approximately $47.2 billion of assets invested in equity securities and
approximately $20.8 billion of assets invested in fixed income securities.
Approximately $4.2 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.) Financial
Services Holdings, Inc., which in turn is an indirect wholly owned subsidiary
of Sun Life. The Directors of MFS are Jeffrey L. Shames, Arnold D. Scott, John
W. Ballen, John D. McNeil and Donald A. Stewart. Mr. Shames is the Chairman and
President and Mr. Scott is the Secretary and a Senior Executive Vice President
of MFS. Mr. Ballen is an Executive Vice President and Chief Equity Officer.
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.
W. Thomas London, Stephen E. Cavan, James R. Bordewick, Jr., Ellen
Moynihan, Mark E. Bradley and James O. Yost, all of whom are officers of MFS,
are officers of the Trust.
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 each of the other mutual funds managed by MFS.
Administrator -- MFS provides each Series with certain financial, legal,
compliance, shareholder communications and other administrative services
pursuant to a Master Administrative Services Agreement dated March 1, 1997, as
amended. Under this Agreement, each Series pays MFS an administrative fee of up
to 0.015% per annum of the Series' average daily net assets. This fee
reimburses MFS for a portion of the costs it incurs to provide such services.
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 generally 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.
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<PAGE>
At the sole discretion of the Trust, each Series may pay redemptions
either totally or partially by a distribution in-kind of securities (instead of
cash) from such Series' portfolio. The securities distributed in such a
distribution would be valued at the same amount as that assigned to them in
calculating the net asset value for the shares being sold. Securities
distributed by a Series will be selected by the Adviser in light of the Series'
objective and may not generally represent a pro rata distribution of each
security held in the Series' portfolio. If a shareholder received a
distribution in-kind, the shareholder could incur brokerage or transaction
charges when converting the securities to cash.
Purchases and exchanges should be made for investment purposes only. The
Trust and MFD each reserves the right to reject or restrict any specific
purchase or exchange request. The Trust is not designed for professional market
timing organizations or other entities using programmed or frequent exchanges.
The Trust defines a "market timer" as an individual, or organization acting on
behalf of one or more individuals, if the individual or organization makes six
or more exchange requests out of any Series per calendar year. Accounts under
common ownership or control, including accounts administered by market timers,
will be aggregated for purposes of this definition.
As noted above, the Trust and MFD each reserves the right to reject or
restrict any specific purchase and exchange request and, in addition, may
impose specific limitations with respect to market timers, including delaying
for up to seven days the purchase side of an exchange request by market timers
or specifically rejecting or otherwise restricting purchase and exchange
requests by market timers. In the event that any individual or entity is
determined either by the Trust or MFD, in its sole discretion, to be a market
timer with respect to any calendar year, the Trust and/or MFD may reject all
exchange requests into the Series during the remainder of that year.
The Trust may suspend the right of redemption of shares of any Series and
may postpone payment for any period: (i) during which the Exchange is closed
other than customary weekend and holiday closings or during which trading on
the Exchange is restricted; (ii) when the SEC determines that a state of
emergency exists which may make payment or transfer not reasonably practicable;
(iii) as the SEC may by order permit for the protection of the security holders
of the Trust; or (iv) at any time when the Trust may, under applicable laws,
rules and regulations, suspend payment on the redemption of its shares.
Should any conflict between Contract holders arise which would require
that a substantial amount of net assets be withdrawn from any Series, orderly
portfolio management could be disrupted to the potential detriment of such
Contract.
Net Asset Value
The net asset value per share of each Series is determined each day during
which the Exchange is open for trading. This determination is made once during
each such day as of the close of regular trading on the Exchange by deducting
the amount of the Series' liabilities from the value of the Series' assets and
dividing the difference by the number of shares of the Series outstanding.
Values of assets in a Series' portfolio are determined on the basis of their
market or other fair value (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
All of each Series' (except the Money Market Series') net investment
income for any calendar year is declared and paid to its shareholders as
dividends on an annual basis. In addition, each Series will make one or more
distributions during the calendar year to its shareholders from any net
realized long-term and short-term capital gains.
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 each 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.
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<PAGE>
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 RIC 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 realized 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 any 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 continue to diversify its assets as required by Code Section
817(h)(1) and the regulations thereunder. See also "Tax Status" in the SAI.
Description of Shares, Voting Rights and Liabilities
Each Series currently has one class of shares, entitled Shares of
Beneficial Interest (without par value). The Trust has reserved the right to
create and issue additional classes and series of shares, in which case each
class of shares of a series would participate equally in the earnings,
dividends and assets attributable to that class of that particular series.
Shareholders are entitled to one vote for each share held, and shares of each
Series are entitled to vote separately to approve investment advisory
agreements or changes in investment restrictions with respect to that Series,
but shares of all Series vote together in the election of Trustees and
selection of accountants. Additionally, each Series will vote separately on any
other matter that affects solely that Series, but will otherwise vote together
with all other Series on all other matters. The Trust does not intend to hold
annual shareholder meetings. The Declaration of Trust provides that a Trustee
may be removed from office in certain instances. See "Description of Shares,
Voting Rights and Liabilities" in the SAI.
Each share of a Series represents an equal proportionate interest in the
Series with each share, subject to the liabilities of the particular Series.
Shares have no pre-emptive or conversion rights. Shares are fully paid and
non-assessable. Should a Series be liquidated, shareholders are entitled to
share pro rata in the net assets available for distribution to shareholders.
Shares will remain on deposit with the Shareholder Servicing Agent and
certificates will not be issued.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a trust may,
under certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed (e.g., fidelity bonding and omission insurance)
and the Trust itself was unable to meet its obligations.
As of February 27, 1998, MFS Fund Distributors, Inc., Boston, MA, owns of
record 95.14% of the Emerging Markets Equity Series' shares and 79.77% of the
Limited Maturity Series' shares, and, therefore, is a controlling entity of
such Series; United of Omaha Life Insurance Company, Omaha, NE, owns of record
66.32% of the Value Series' shares, 69.95% of the High Income Series' shares
and 36.04% of the World Governments Series' shares, and, therefore, is a
controlling entity of such Series; Merrill Lynch Life Insurance Company,
Jacksonville, FL, owns of record 25.58% of the Emerging Growth Series' shares
and 42.18% of the Research Series' shares, and, therefore, is a controlling
entity of such Series. Ameritas Life Insurance Company--Separate Account VA-2
(Annuity), Lincoln, NE, owns of record 47.61% of the Utilities Series' shares,
and, therefore, is a controlling entity of the Series; Cuna Mutual Life
Variable Annuity Account, Waverly, IA, owns of record 35.60% of the World
Governments Series' shares, and, therefore, is a controlling entity of the
Series; Citicorp Life Insurance Company owns of record 44.83% of the Money
Market Series shares, and, therefore, is a controlling
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<PAGE>
entity of the Series; and First Citicorp Life Insurance Company, Dover, DE,
owns of record 42.62% of the Bond Series' Shares and 53.76% of the Money Market
Series' shares, and, therefore, is a controlling entity of such 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, 1997, 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 investment income generated by the Series over
a specified seven-day period (the ending date of which will be stated). Included
in "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: advisory and administrative services; governmental fees;
interest charges; taxes; membership dues in the Investment Company Institute
allocable to each Series; fees and expenses of independent auditors, of legal
counsel, and of any transfer agent, registrar or dividend disbursing agent of
each Series; expenses of repurchasing and redeeming shares and servicing
shareholder accounts; expenses of preparing, printing and mailing prospectuses,
periodic reports, notices and proxy statements to shareholders and to
governmental officers and commissions; brokerage and other expenses connected
with the execution, recording and settlement of portfolio security
transactions; insurance premiums; fees and expenses of State Street Bank and
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
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<PAGE>
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
(after taking into effect any compensating balance and offset arrangements)
except for management fees, taxes, extraordinary expenses, and brokerage and
transaction costs, do not exceed the following percentages of the average daily
net assets of the Series (the "Maximum Percentage"): 0.40% for the Bond Series,
0.45% for the Limited Maturity Series, 0.10% for the Money Market Series, and
0.25% for each remaining Series. 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. The obligation of MFS to bear a Series' Other
Expenses pursuant to this arrangement, and the Series' obligation to pay the
reimbursement fee 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 (May 1, 2001, in the case of the New
Discovery Series).
The expense reimbursement arrangement has terminated for the Emerging
Growth Series and Research Series.
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, 1998, 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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<PAGE>
APPENDIX A
Description of Bond Ratings
The ratings of Moody's, S&P, Fitch and Duff & Phelps 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.
A-1
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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.
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: An obligation rated 'AAA' has the highest rating assigned by Standard
& Poor's. The obligor's capacity to meet its financial commitment on the
obligation is EXTREMELY STRONG.
AA: An obligation rated 'AA' differs from the highest rated obligations
only in small degree. The obligor's capacity to meet its financial commitment on
the obligation is VERY STRONG.
A: An obligation rated 'A' is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still STRONG.
BBB: An obligation rated 'BBB' exhibits ADEQUATE protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
Obligations rated 'BB', 'B', 'CCC', 'CC', and 'C' are regarded as having
significant speculative characteristics. 'BB' indicates the least degree of
speculation and 'C' the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB: An obligation rated 'BB' is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B: An obligation rated 'B' is MORE VULNERABLE to nonpayment than
obligations rated 'BB', but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC: An obligation rated 'CCC' is CURRENTLY VULNERABLE to nonpayment, and
is dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC: An obligation rated 'CC' is CURRENTLY HIGHLY VULNERABLE to nonpayment.
C: The 'C' rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on this
obligation are being continued.
A-2
<PAGE>
D: An obligation rated 'D' is in payment default. The 'D' rating category
is used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's 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 or the taking of a similar action
if payments on an obligation 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.
r: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk--such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
A-1 and P-1 Commercial Paper Ratings
Description of S&P, Fitch and Moody's highest commercial paper ratings:
The rating "A" is the highest commercial paper rating assigned by S&P and
Fitch, and issues so rated are regarded as having the greatest capacity for
timely payment. Issues in the "A" category are delineated with the numbers 1, 2
and 3 to indicate the relative degree of safety. The A-1 designation indicates
that the degree of safety regarding timely payment is either overwhelming or
very strong. Those A-1 issues determined to possess overwhelming safety
characteristics will be denoted with a plus (+) sign designation.
The rating P-1 is the highest commercial paper rating assigned by Moody's.
Issuers rated P-1 have a superior ability for repayment. P-1 repayment capacity
will normally be evidenced by the following characteristics: (1) leading market
positions in well established industries; (2) high rates of return on funds
employed; (3) conservative capitalization structure with moderate reliance on
debt and ample asset protection; (4) broad margins in earnings coverage of
fixed financial charges and high internal cash generation; and (5) well
established access to a range of financial markets and assured sources of
alternate liquidity.
Fitch IBCA
AAA: Highest credit quality. 'AAA' ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity for
timely payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
AA: Very high credit quality. 'AA' ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
A: High credit quality. 'A' ratings denote a low expectation of credit
risk. The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher ratings.
BBB: Good credit quality. 'BBB' ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.
Speculative Grade
BB: Speculative. 'BB' ratings indicate that there is a possibility of
credit risk developing, particularly as the result of adverse economic change
over time; however, business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this category are not
investment grade.
A-3
<PAGE>
B: Highly speculative. 'B' ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent upon
a sustained, favorable business and economic environment.
CCC, CC, C: High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A 'CC' rating indicates that default of some
kind appears probable. 'C' ratings signal imminent default.
DDD, DD, and D: Default. Securities are not meeting current obligations and
are extremely speculative. 'DDD' designates the highest potential for recovery
of amounts outstanding on any securities involved. For U.S. corporates, for
example, 'DD' indicates expected recovery of 50%-90% of such outstandings, and
'D' the lowest recovery potential, i.e. below 50%.
Duff & Phelps Credit Rating Co.
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic conditions.
A+, A, A-: Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
BBB+, BBB, BBB-: Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may move
up or down frequently within this category.
B+, B, B-: Below investment grade and possession risk that obligations will
not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or into
a higher or lower rating grade.
CCC: Well below investment-grade securities. Considerable uncertainty
exists as to timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with unfavorable
economic/ industry conditions, and/or with unfavorable company developments.
DD: Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP: Preferred stock with dividend arrearages.
A-4
<PAGE>
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-5
<PAGE>
APPENDIX B
Principal Sectors of the Utilities Industry
The principal sectors of the utility industry in which the Utilities
Series may invest are discussed below.
Electric -- The electric utility industry consists of companies that are
engaged principally in the generation, transmission and sale of electric
energy, although many also provide other energy-related services. Domestic
electric utility companies, in general, recently have been favorably affected
by lower fuel and financing costs and the full or near completion of major
construction programs. In addition, many of these companies recently have
generated cash flows in excess of current operating expenses and construction
expenditures, permitting some degree of diversification into unregulated
businesses. Some electric utilities have also taken advantage of the right to
sell power outside of their traditional geographic areas. Electric utility
companies historically have been subject to the risks associated with increases
in fuel and other operating costs, high interest costs on borrowings needed for
capital construction programs, costs associated with compliance with
environmental and safety regulations and changes in the regulatory climate.
In the U.S., the construction and operation of nuclear power facilities is
subject to increased scrutiny by, and evolving regulations of, the Nuclear
Regulatory Commission and state agencies having comparable jurisdiction.
Increased scrutiny might result in higher operating costs and higher capital
expenditures, with the risk that the regulators may disallow inclusion of these
costs in rate authorizations or the risk that a company may not be permitted to
operate or complete construction of a facility. In addition, operators of
nuclear power plants may be subject to significant costs for disposal of
nuclear fuel and for the de-commissioning of such plants.
Telecommunications -- The telephone industry is large and highly concentrated.
Companies that distribute telephone services and provide access to the
telephone networks comprise the greatest portion of this segment. Telephone
companies in the U.S. are still experiencing the effects of the breakup of
American Telephone & Telegraph Company, which occurred in 1984. Since 1984,
companies engaged in telephone communication services have expanded their
non-regulated activities into other businesses, including cellular telephone
services, data processing, equipment retailing, computer software and hardware
services, and financial services. This expansion has provided significant
opportunities for certain telephone companies to increase their earnings and
dividends at faster rates than had been allowed in traditionally regulated
businesses. Increasing competition, technological innovations and other
structural changes, however, could adversely affect the profitability of such
utilities.
Gas -- Gas transmission companies and gas distribution companies are also
undergoing significant changes. In the U.S., interstate transmission companies
are regulated by the Federal Energy Regulatory Commission, which is reducing
its regulation of the industry. Many companies have diversified into oil and
gas exploration and development, making returns more sensitive to energy
prices. In the recent decade, gas utility companies have been adversely
affected by disruptions in the oil industry and have also been affected by
increased concentration and competition. In the opinion of the Adviser,
however, environmental considerations could improve the gas industry outlook in
the future. For example, natural gas is the cleanest of the hydrocarbon fuels,
and this may result in incremental shifts in fuel consumption toward natural
gas and away from oil and coal.
Water -- Water supply utilities are companies that collect, purify, distribute
and sell water. In the U.S. and around the world, the industry is highly
fragmented because most of the supplies are owned by local authorities.
Companies in this industry are generally mature and are experiencing little or
no per capita volume growth.
--------------------
There can be no assurance that the positive developments noted above,
including those relating to changing regulation, will occur or that risk
factors other than those noted above will not develop in the future.
B-1
<PAGE>
APPENDIX C
MFS TOTAL RETURN SERIES
PORTFOLIO COMPOSITION CHART
For Fiscal Year Ended December 31, 1997
The table below shows the percentages of the Series' assets at December
31, 1997 invested in bonds assigned to the various rating categories by
Moody's, S&P, Fitch IBCA and Duff & Phelps and in unrated bonds determined by
MFS to be of comparable quality. The highest of the four rating services is
used with respect to each rating.
<TABLE>
<CAPTION>
Compiled Unrated Bonds
Rating Ratings of Comparable Quality Total
- ----------- ---------- ----------------------- ----------
<S> <C> <C> <C>
AAA/Aaa 22.81 22.81
AA/Aa
A/A 1.00 1.00
BBB/Baa 5.90 0.08 5.98
BB/Ba 2.62 0.40 3.02
B/B
CCC/Caa
CC/Ca
C/C
Default
----- ---- -----
Total 32.33 0.48 32.81
</TABLE>
The chart does not necessarily indicate what the composition of the
Series' portfolio will be in subsequent years. Rather, the Series' investment
objective, policies and restrictions indicate the extent to which the Series
may purchase securities in the various categories.
C-1
<PAGE>
MFS HIGH INCOME SERIES
PORTFOLIO COMPOSITION CHART
For Fiscal Year Ended December 31, 1997
The table below shows the percentages of the Series' assets at December
31, 1997 invested in bonds assigned to the various rating categories by
Moody's, S&P, Fitch IBCA and Duff & Phelps and in unrated bonds determined by
MFS to be of comparable quality. The highest of the four rating services is
used with respect to each rating.
<TABLE>
<CAPTION>
Compiled Unrated Bonds
Rating Ratings of Comparable Quality Total
- ----------- ---------- ----------------------- ---------
<S> <C> <C> <C>
AAA/Aaa
AA/Aa
A/A
BBB/Baa 0.57 0.32 0.89
BB/Ba 12.65 12.65
B/B 75.11 1.53 76.64
CCC/Caa 3.46 2.15 5.61
CC/Ca
C/C 0.02 0.02
Default
----- ---- -----
Total 91.81 4.00 95.81
</TABLE>
The chart does not necessarily indicate what the composition of the
Series' portfolio will be in subsequent years. Rather, the Series' investment
objective, policies and restrictions indicate the extent to which the Series
may purchase securities in the various categories.
C-2
<PAGE>
MFS BOND SERIES
PORTFOLIO COMPOSITION CHART
For Fiscal Year Ended December 31, 1997
The table below shows the percentages of the Series' assets at December
31, 1997 invested in bonds assigned to the various rating categories by
Moody's, S&P, Fitch IBCA and Duff & Phelps and in unrated bonds determined by
MFS to be of comparable quality. The highest of the four rating services is
used with respect to each rating.
<TABLE>
<CAPTION>
Compiled Unrated Bonds
Rating Ratings of Comparable Quality Total
- ----------- ---------- ----------------------- ----------
<S> <C> <C> <C>
AAA/Aaa 47.50 47.50
AA/Aa
A/A 6.50 6.50
BBB/Baa 20.53 0.13 20.66
BB/Ba 8.64 1.02 9.66
B/B
CCC/Caa
CC/Ca
C/C
Default
----- ---- -----
Total 83.17 1.15 84.32
</TABLE>
The chart does not necessarily indicate what the composition of the
Series' portfolio will be in subsequent years. Rather, the Series' investment
objective, policies and restrictions indicate the extent to which the Series
may purchase securities in the various categories.
C-3
<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
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
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
[MFS LOGO]
We invented the mutual fund(SM)
MFS[RegTM] VARIABLE INSURANCE TRUST
500 Boylston Street, Boston, MA 02116
-------------------------------------------------------
MFS[RegTM]
VARIABLE
INSURANCE
TRUST
[MAN AND WOMAN IN OFFICE GRAPHIC]
PROSPECTUS
May 1, 1998
-------------------------------------------------------
<PAGE>
MFS[RegTM] VARIABLE STATEMENT OF
INSURANCE TRUST- ADDITIONAL INFORMATION
MAY 1, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
-----
<S> <C>
1. General Information and Definitions ................................ 2
2. Certain Securities and Investment Techniques ....................... 2
3. Investment Restrictions ............................................ 19
4. Management of the Trust ............................................ 20
Trustees ......................................................... 20
Officers ......................................................... 20
Trustee Compensation Table ....................................... 22
Investment Adviser ............................................... 22
Investment Advisory Agreement .................................... 23
Administrator .................................................... 24
Custodian ........................................................ 24
Shareholder Servicing Agent ...................................... 24
Distributor ...................................................... 25
5. Portfolio Transactions and Brokerage Commissions ................... 25
6. Tax Status ......................................................... 26
7. Net Income and Distributions ....................................... 27
8. Determination of Net Asset Value; Performance Information .......... 27
9. Description of Shares, Voting Rights and Liabilities ............... 29
10. Independent Auditors and Financial Statements ...................... 30
11. Appendix A--Performance Quotations ................................. A-1
</TABLE>
MFS[RegTM] VARIABLE INSURANCE TRUST-
500 Boylston Street, Boston, Massachusetts 02116
(617) 954-5000
This Statement of Additional Information, as amended or supplemented from time
to time (the "SAI"), sets forth information which may be of interest to
investors but which is not necessarily included in the Trust's Prospectus,
dated May 1, 1998, as supplemented from time to time. This SAI should be read
in conjunction with the Prospectus, a copy of which may be obtained without
charge by contacting the Shareholder Servicing Agent (see back cover for
address and phone number).
This SAI relates to the thirteen Series of the Trust identified on page two
hereof. Shares of these Series are offered to separate accounts of certain
insurance companies ("Participating Insurance Companies") that fund variable
annuity and variable life insurance contracts ("Contracts"). Participating
Insurance Companies may choose to offer as investment options to their Contract
holders less than all of the Trust's Series, in which case the Trust's
Prospectus for those Participating Insurance Companies will be revised to
describe only the Series offered. Therefore, while certain versions of the
Trust's Prospectus will describe only certain of the Trust's Series, this SAI
includes information on other Series which are not offered pursuant to such
Prospectuses; in which case information concerning these other Series contained
herein should be disregarded.
This SAI is NOT a prospectus and is authorized for distribution to prospective
investors only if preceded or accompanied by a current prospectus.
<PAGE>
1. GENERAL INFORMATION AND DEFINITIONS
MFS Variable Insurance Trust (the "Trust") is a professionally managed open-end
management investment company (a "mutual fund") consisting of thirteen separate
series: MFS Emerging Growth Series (the "Emerging Growth Series"), MFS Value
Series (the "Value Series"), MFS Research Series (the "Research Series"), MFS
Growth With Income Series (the "Growth With Income Series"), MFS Total Return
Series (the "Total Return Series"), MFS Utilities Series (the "Utilities
Series"), MFS High Income Series (the "High Income Series"), MFS World
Governments Series (the "World Governments Series"), MFS/ Foreign & Colonial
Emerging Markets Equity Series (the "Emerging Markets Equity Series"), MFS Bond
Series (the "Bond Series"), MFS Limited Maturity Series (the "Limited Maturity
Series"), MFS Money Market Series (the "Money Market Series") and MFS New
Discovery Series (the "New Discovery Series") (individually or collectively
hereinafter referred to as a "Series" or the "Series"). The Emerging Growth
Series was previously known as the "OTC Series" until its name was changed on
June 1, 1995. The Value Series was previously known as the "Growth Series"
until its name was changed on April 25, 1996. The Emerging Markets Equity
Series was previously known as the "Strategic Fixed Income Series" until its
name was changed on July 31, 1997.
Each Series' investment adviser and distributor is, respectively, Massachusetts
Financial Services Company ("MFS" or the "Adviser") and MFS Fund Distributors,
Inc. ("MFD" or the "Distributor"), each a Delaware corporation.
The Emerging Markets Equity Series has retained as its sub-advisers Foreign &
Colonial Management Ltd. ("FCM") and Foreign & Colonial Emerging Markets
Limited ("FCEM") (collectively, the "Sub-Adviser"), both of which are located
at Exchange House, Primrose Street, London EC2A 2NY, United Kingdom.
2. CERTAIN SECURITIES AND INVESTMENT TECHNIQUES
Emerging Markets: The Emerging Markets Equity Series may invest up to 100% of
its assets in securities of government, government-related, supranational and
corporate issuers located in emerging markets. Each other Series may invest in
emerging market securities to the extent that they can invest in foreign
securities. Such investments entail significant risks as described in the
Prospectus under the caption "Additional Risk Factors" and as more fully
described below.
Company Debt -- Governments of many emerging market countries have exercised
and continue to exercise substantial influence over many aspects of the private
sector through the ownership or control of many companies, including some of
the largest in any given country. As a result, government actions in the future
could have a significant effect on economic conditions in emerging markets,
which in turn, may adversely affect companies in the private sector, general
market conditions and prices and yields of certain of the securities in the
Series' portfolio. Expropriation, confiscatory taxation, nationalization,
political, economic or social instability or other similar developments have
occurred frequently over the history of certain emerging markets and could
adversely affect the Series' assets should these conditions recur.
Sovereign Debt -- Investment in sovereign debt can involve a high degree of
risk. The governmental entity that controls the repayment of sovereign debt may
not be able or willing to repay the principal and/or interest when due in
accordance with the terms of such debt. A governmental entity's willingness or
ability to repay principal and interest due in a timely manner may be affected
by, among other factors, its cash flow situation, the extent of its foreign
reserves, the availability of sufficient foreign exchange on the date a payment
is due, the relative size of the debt service burden to the economy as a whole,
the governmental entity's policy towards the International Monetary Fund and
the political constraints to which a governmental entity may be subject.
Governmental entities may also be dependent on expected disbursements from
foreign governments, multilateral agencies and others abroad to reduce
principal and interest on their debt. The commitment on the part of these
governments, agencies and others to make such disbursements may be conditioned
on a governmental entity's implementation of economic reforms and/or economic
performance and the timely service of such debtor's obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may result in the cancellation of such third
parties' commitments to lend funds to the governmental entity, which may
further impair such debtor's ability or willingness to service its debts in a
timely manner. Consequently, governmental entities may default on their
sovereign debt. Holders of sovereign debt (including the Series) may be
requested to participate in the rescheduling of such debt and to extend further
loans to governmental entities. There is no bankruptcy proceeding by which
sovereign debt on which governmental entities have defaulted may be collected
in whole or in part.
Emerging market governmental issuers are among the largest debtors to
commercial banks, foreign governments, international financial organizations
and other financial institutions. Certain emerging market governmental issuers
have not been able to make payments of interest on or principal of debt
obligations as those payments have come due. Obligations arising from past
restructuring agreements may affect the economic performance and political and
social stability of those issuers.
The ability of emerging market governmental issuers to make timely payments on
their obligations is likely to be influenced strongly by the issuer's balance
of payments, including export performance, and its access to international
credits and investments. An emerging market whose exports are concentrated in a
few commodities could be vulnerable to a decline in the international prices of
one or more of those commodities. Increased protectionism on the part of an
emerging market's trading partners could also adversely affect the country's
exports and tarnish its trade account surplus, if any. To the extent that
emerging markets receive payment for their exports in currencies other than
dollars or non-emerging market currencies, its ability to make debt payments
denominated in dollars or non-emerging market currencies could be affected.
To the extent that an emerging market country cannot generate a trade surplus,
it must depend on continuing loans from foreign governments, multilateral
organizations or private commercial banks,
2
<PAGE>
aid payments from foreign governments and on inflows of foreign investment. The
access of emerging markets to these forms of external funding may not be
certain, and a withdrawal of external funding could adversely affect the
capacity of emerging market country governmental issuers to make payments on
their obligations. In addition, the cost of servicing emerging market debt
obligations can be affected by a change in international interest rates since
the majority of these obligations carry interest rates that are adjusted
periodically based upon international rates.
Another factor bearing on the ability of emerging market countries to repay
debt obligations is the level of international reserves of the country.
Fluctuations in the level of these reserves affect the amount of foreign
exchange readily available for external debt payments and thus could have a
bearing on the capacity of emerging market countries to make payments on these
debt obligations.
Liquidity; Trading Volume; Regulatory Oversight -- The securities markets of
emerging market countries are substantially smaller, less developed, less
liquid and more volatile than the major securities markets in the U.S.
Disclosure and regulatory standards are in many respects less stringent than
U.S standards. Furthermore, there is a lower level of monitoring and regulation
of the markets and the activities of investors in such markets.
The limited size of many emerging market securities markets and limited trading
volume in the securities of emerging market issuers compared to volume of
trading in the securities of U.S. issuers could cause prices to be erratic for
reasons apart from factors that affect the soundness and competitiveness of the
securities issuers. For example, limited market size may cause prices to be
unduly influenced by traders who control large positions. Adverse publicity and
investors' perceptions, whether or not based on in-depth fundamental analysis,
may decrease the value and liquidity of portfolio securities.
The risk also exists that an emergency situation may arise in one or more
emerging markets, as a result of which trading of securities may cease or may
be substantially curtailed and prices for the Series' securities in such
markets may not be readily available. The Trust may suspend redemption of its
shares for any period during which an emergency exists, as determined by the
Securities and Exchange Commission (the "SEC"). Accordingly, if the Series
believes that appropriate circumstances exist, it will promptly apply to the
SEC for a determination that an emergency is present. During the period
commencing from the Series' identification of such condition until the date of
the SEC action, the Series' securities in the affected markets will be valued
at fair value determined in good faith by or under the direction of the Board
of Trustees.
Default; Legal Recourse -- The Series may have limited legal recourse in the
event of a default with respect to certain debt obligations it may hold. If the
issuer of a fixed-income security owned by the Series defaults, the Series may
incur additional expenses to seek recovery. Debt obligations issued by emerging
market governments differ from debt obligations of private entities, remedies
from defaults on debt obligations issued by emerging market governments, unlike
those on private debt, must be pursued in the courts of the defaulting party
itself. The Series' ability to enforce its rights against private issuers may
be limited. The ability to attach assets to enforce a judgment may be limited.
Legal recourse is therefore somewhat diminished. Bankruptcy, moratorium and
other similar laws applicable to private issuers of debt obligations may be
substantially different from those of other countries. The political context,
expressed as an emerging market governmental issuer's willingness to meet the
terms of the debt obligation, for example, is of considerable importance. In
addition, no assurance can be given that the holders of commercial bank debt
may not contest payments to the holders of debt obligations in the event of
default under commercial bank loan agreements.
Inflation -- Many emerging markets have experienced substantial, and in some
periods extremely high, rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have adverse
effects on the economies and securities markets of certain emerging market
countries. In an attempt to control inflation, wage and price controls have
been imposed in certain countries. Of these countries, some, in recent years,
have begun to control inflation through prudent economic policies.
Withholding -- Income from securities held by the Series could be reduced by a
withholding tax on the source or other taxes imposed by the emerging market
countries in which the Series makes its investments. The Series' net asset
value may also be affected by changes in the rates or methods of taxation
applicable to the Series or to entities in which the Series has invested. The
Adviser and the Sub-Adviser will consider the cost of any taxes in determining
whether to acquire any particular investments, but can provide no assurance
that the taxes will not be subject to change.
Foreign Currencies -- The Series may invest in securities denominated in
foreign currencies. Accordingly, changes in the value of these currencies
against the U.S. dollar may result in corresponding changes in the U.S. dollar
value of the Series' assets denominated in those currencies. The Series may
attempt to minimize the impact of these changes to the U.S. dollar value of the
Series' portfolio by engaging in certain hedging practices, such as entering
into Futures Contracts and Options on Foreign Securities as described below.
Some emerging market countries also may have managed currencies, which are not
free floating against the U.S. dollar. In addition, there is risk that certain
emerging market countries may restrict the free conversion of their currencies
into other currencies. Further, certain emerging market currencies may not be
internationally traded. Certain of these currencies have experienced a steep
devaluation relative to the U.S. dollar. Any devaluations in the currencies in
which the Series' portfolio securities are denominated may have a detrimental
impact on the Series' net asset value.
Investment in Other Investment Companies: The Emerging Markets Equity Series'
investment in other investment companies, as described in the Prospectus, is
limited in amount by the Investment Company Act of 1940, as amended (the "1940
Act"), and applicable state securities laws. Such investment may involve the
payment of substantial premiums above the value of such invest-
3
<PAGE>
'
ment companies' portfolio securities, and the total return on such investment
will be reduced by the operating expenses and fees of such other investment
companies, including advisory fees.
Lending of Portfolio Securities: Each of the Series (except the Money Market
Series) may seek to increase its income by lending portfolio securities. Such
loans will usually be made only to member firms of the New York Stock Exchange
(the "Exchange") (and subsidiaries thereof) and member banks of the Federal
Reserve System, and would be required to be secured continuously by collateral
in cash, United States ("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. A Series would have the right to call a loan
and obtain the securities loaned at any time on customary industry settlement
notice (which will not usually exceed five business days). For the duration of
a loan, the Series would continue to receive the equivalent of the interest or
dividends paid by the issuer on the securities loaned. The Series would also
receive a fee from the borrower or compensation from the investment of cash
collateral, less a fee paid to the borrower. The Series would not, however,
have the right to vote any securities having voting rights during the existence
of the loan, but the Series would call the loan in anticipation of an important
vote to be taken among holders of the securities or of the giving or
withholding of their consent on a material matter affecting the investment. As
with other extensions of credit there are risks of delay in recovery or even
loss of rights in the collateral should the borrower of the securities fail
financially. However, the loans would be made only to firms deemed by the
Adviser to be of good standing, and when, in the judgment of the Adviser, the
consideration which can be earned currently from securities loans of this type
justifies the attendant risk. 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 a Series' net assets.
Repurchase Agreements: Each of the Series may enter into repurchase agreements
with sellers who are member firms (or a subsidiary thereof) of the Exchange or
members of the Federal Reserve System, recognized primary U.S. Government
securities dealers or institutions which the Adviser has determined to be of
comparable creditworthiness. The securities that a Series purchases and holds
through its agent are U.S. Government securities, the values of which are equal
to or greater than the repurchase price agreed to be paid by the seller. The
repurchase price may be higher than the purchase price, the difference being
income to the Series, or the purchase and repurchase prices may be the same,
with interest at a standard rate due to the Series together with the repurchase
price on repurchase. In either case, the income to the Series is unrelated to
the interest rate on the Government securities.
The repurchase agreement provides that in the event the seller fails to pay the
amount agreed upon on the agreed upon delivery date or upon demand, as the case
may be, a Series will have the right to liquidate the securities. If at the
time the Series is contractually entitled to exercise its right to liquidate
the securities, the seller is subject to a proceeding under the bankruptcy laws
or its assets are otherwise subject to a stay order, the Series' exercise of
its right to liquidate the securities may be delayed and result in certain
losses and costs to the Series. Each Series has adopted and follows procedures
which are intended to minimize the risks of repurchase agreements. For example,
each Series only enters into repurchase agreements after the Adviser has
determined that the seller is creditworthy, and the Adviser monitors that
seller's creditworthiness on an ongoing basis. Moreover, under such agreements,
the value of the securities (which are marked to market every business day) is
required to be greater than the repurchase price, and a Series has the right to
make margin calls at any time if the value of the securities falls below the
agreed upon collateral.
"When-Issued" Securities: Each of the Series (except the Research Series, the
World Governments Series and the Money Market Series) may purchase securities
on a "when-issued" or on a "forward delivery" basis. Although a Series is not
limited as to the amount of these securities for which it may have commitments
to purchase on such bases, it is expected that under normal circumstances the
Series will not commit more than 20% of its total assets to such purchases.
When a Series commits to purchase these securities on a "when-issued" or
"forward delivery" basis, it will set up procedures consistent with the General
Statement of Policy of the Securities and Exchange Commission (the "SEC")
concerning such purchases. Since that policy currently recommends that an
amount of the Series' assets equal to the amount of the purchase be held aside
or segregated to be used to pay for the commitment, the Series will always have
liquid assets sufficient to cover any commitments or to limit any potential
risk. Although no Series intends to make such purchases for speculative
purposes and each Series intends to adhere to the provisions of the SEC policy,
purchases of securities on such bases may involve more risk than other types of
purchases. For example, a Series may have to sell assets which have been set
aside in order to meet redemptions. Also, if a Series determines it is
necessary to sell the "when-issued" or "forward delivery" securities before
delivery, the Series may incur a loss because of market fluctuations since the
time the commitment to purchase such securities was made.
Mortgage "Dollar Roll" Transactions: Each of the Total Return Series, the Bond
Series, the World Governments Series, the Limited Maturity Series, the High
Income Series and the Utilities Series may enter into mortgage "dollar roll"
transactions pursuant to which it sells mortgage-backed securities for delivery
in the future and simultaneously contracts to repurchase substantially similar
securities on a specified future date. The Series record these transactions as
sale and purchase transactions, rather than as borrowing transactions. During
the roll period, a Series foregoes principal and interest paid on the
mortgage-backed securities. A Series is compensated for the lost interest by
the difference between the current sales price and the lower price for the
future purchase (often referred to as the "drop") as well as by the interest
earned on the cash proceeds of the initial sale. A Series may also be
compensated by receipt of a commitment fee. 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.
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Corporate Asset-Backed Securities: Each of the Emerging Growth Series, the
Total Return Series, the Bond Series, the Limited Maturity Series, the High
Income Series and the Utilities Series may invest in corporate asset-backed
securities. These securities, issued by trusts and special purpose
corporations, are backed by a pool of assets, such as credit card and
automobile loan receivables, representing the obligations of a number of
different parties.
Corporate asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there
is the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities. The underlying
assets (e.g., loans) are also subject to prepayments which shorten the
securities weighted average life and may lower their return.
Corporate asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from ultimate default ensures payment through insurance policies or
letters of credit obtained by the issuer or sponsor from third parties. A
Series will not pay any additional or separate fees for credit support. The
degree of credit support provided for each issue is generally based on
historical information respecting the level of credit risk associated with the
underlying assets. Delinquency or loss in excess of that anticipated or failure
of the credit support could adversely affect the return on an investment in
such a security.
Collateralized Mortgage Obligations and Multiclass Pass-Through
Securities: Each of the Bond Series, the World Governments Series, the Limited
Maturity Series, the High Income Series and the Utilities Series may invest a
portion of its assets in collateralized mortgage obligations or "CMOs", which
are debt obligations collateralized by mortgage loans or mortgage pass-through
securities (such collateral referred to collectively as "Mortgage Assets").
Unless the context indicates otherwise, all references herein to CMOs include
multiclass pass-through securities.
Interest is paid or accrues on all classes of the CMOs on a monthly, quarterly
or semi-annual basis. The principal of and interest on the Mortgage Assets may
be allocated among the several classes of a series of a CMO in innumerable
ways. In a common structure, payments of principal, including any principal
prepayments, on the Mortgage Assets are applied to the classes of the series of
a CMO in the order of their respective stated maturities or final distribution
dates, so that no payment of principal will be made on any class of CMOs until
all other classes having an earlier stated maturity or final distribution date
have been paid in full. Certain CMOs may be stripped (securities which provide
only the principal or interest factor of the underlying security). See
"Stripped Mortgage-Backed Securities" below for a discussion of the risks of
investing in these stripped securities and of investing in classes consisting
of principals of interest payments or principal payments.
Each of the Bond Series, the World Governments Series, the Limited Maturity
Series, the High Income Series and the Utilities Series may also invest in
parallel pay CMOs and Planned Amortization Class CMOs ("'PAC Bonds"). Parallel
pay CMOs are structured to provide payments of principal on each payment date
to more than one class. These simultaneous payments are taken into account in
calculating the stated maturity date or final distribution date of each class,
which, as with other CMO structures, must be retired by its stated maturity
date or final distribution date but may be retired earlier.
Stripped Mortgage-Backed Securities: Each of the Bond Series, the World
Governments Series and the High Income Series may invest a portion of its
assets in stripped mortgage-backed securities ("SMBS") which are derivative
multiclass mortgage securities issued by agencies of or instrumentalities of
the U.S. Government, or by private originators of, or investors in mortgage
loans, including savings and loan institutions, mortgage banks, commercial
banks and investment banks.
SMBS are usually structured with two classes that receive different proportions
of the interest and principal distributions from a pool of mortgage assets. A
common type of SMBS will have one class receiving some of the interest and most
of the principal from the Mortgage Assets, while the other class will receive
most of the interest and the remainder of the principal. In the most extreme
case, one class will receive all of the interest (the interest-only or "IO"
class) while the other class will receive all of the principal (the
principal-only or "PO" class). The yield to maturity on an IO is extremely
sensitive to the rate of principal payments, including prepayments on the
related underlying Mortgage Assets, and a rapid rate of principal payments may
have a material adverse effect on such security's yield to maturity. If the
underlying Mortgage Assets experience greater than anticipated prepayments of
principal, a Series may fail to fully recoup its initial investment in these
securities. The market value of the class consisting primarily or entirely of
principal payments generally is unusually volatile in response to changes in
interest rates. Because SMBS were only recently introduced, established trading
markets for these securities have not yet developed,
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although the securities are traded among institutional investors and investment
banking firms.
Loan Participations and Other Direct Indebtedness: Each of the Emerging Growth
Series, the Value Series, the Total Return Series, the Emerging Markets Equity
Series and the High Income Series may purchase loan participations and other
direct indebtedness. In 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, although some may be
unsecured. Such loans may be in default at the time of purchase. Loans and
other direct indebtedness that are fully secured offer a Series more protection
than an unsecured loan in the event of non-payment of scheduled interest or
principal. However, there is no assurance that the liquidation of collateral
from a secured loan or other direct indebtedness would satisfy the corporate
borrower's obligation, or that the collateral can be liquidated.
These loans and other direct indebtedness are made generally to finance
internal growth, mergers, acquisitions, stock repurchases, leveraged buy-outs
and other corporate activities. Such loans and other direct indebtedness loans
are typically made by a syndicate of lending institutions, represented by an
agent lending institution which has negotiated and structured the loan and is
responsible for collecting interest, principal and other amounts due on its own
behalf and on behalf of the others in the syndicate, and for enforcing its and
their other rights against the borrower. Alternatively, such loans and other
direct indebtedness may be structured as a novation, pursuant to which a Series
would assume all of the rights of the lending institution in a loan or as an
assignment, pursuant to which the Series would purchase an assignment of a
portion of a lender's interest in a loan or other direct indebtedness either
directly from the lender or through an intermediary. A Series may also purchase
trade or other claims against companies, which generally represent money owed
by the company to a supplier of goods or services. These claims may also be
purchased at a time when the company is in default.
Certain of the loan participations and the other direct indebtedness acquired
by a Series may involve revolving credit facilities or other standby financing
commitments which obligate the Series to pay additional cash on a certain date
or on demand. These commitments may have the effect of requiring a Series to
increase its investment in a company at a time when the Series might not
otherwise decide to do so (including at a time when the company's financial
condition makes it unlikely that such amounts will be repaid). To the extent
that a Series is committed to advance additional funds, it will at all times
hold and maintain in a segregated account liquid assets in an amount sufficient
to meet such commitments.
A Series' ability to receive payment of principal, interest and other amounts
due in connection with these investments will depend primarily on the financial
condition of the borrower. In selecting the loan participations and other
direct indebtedness which a Series will purchase, the Adviser will rely upon
its own (and not the original lending institution's) credit analysis of the
borrower. As the Series may be required to rely upon another lending
institution to collect and pass onto the Series amounts payable with respect to
the loan and to enforce the Series' rights under the loan and other direct
indebtedness, an insolvency, bankruptcy or reorganization of the lending
institution may delay or prevent the Series from receiving such amounts. In
such cases, the Series will evaluate as well the creditworthiness of the
lending institution and will treat both the borrower and the lending
institution as an "issuer" of the loan participation for purposes of certain
investment restrictions pertaining to the diversification of the Series'
portfolio investments. The highly leveraged nature of many such loans and other
direct indebtedness may make such loans and other direct indebtedness
especially vulnerable to adverse changes in economic or market conditions.
Investments in such loans and other direct indebtedness may involve additional
risk to a Series. For example, if a loan or other direct indebtedness is
foreclosed, a Series could become part owner of any collateral, and would bear
the costs and liabilities associated with owning and disposing of the
collateral. In addition, it is conceivable that under emerging legal theories
of lender liability, a Series could be held liable as a co-lender. It is
unclear whether loans and other forms of direct indebtedness offer securities
law protections against fraud and misrepresentation. In the absence of
definitive regulatory guidance, each Series relies on the Adviser's research in
an attempt to avoid situations where fraud and misrepresentation could
adversely affect a Series. In addition, loan participations and other direct
investments 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.
To the extent that the Adviser determines that any such investments are
illiquid, a Series will include them in the investment limitations described
below.
Mortgage Pass-Through Securities: Each of the Total Return Series, the Bond
Series, the World Governments Series, the Limited Maturity Series and the High
Income Series may invest in mortgage pass-through securities. The Utilities
Series may invest in mortgage pass-through securities that are securities
issued or guaranteed as to principal and interest by the U.S. Government, its
agencies, authorities or instrumentalities. 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. The average lives of mortgage pass-throughs are variable
when issued because their average lives depend on prepayment rates. The average
life of these securities is likely to be substantially shorter than their
stated final maturity as a result of unscheduled principal prepayment.
Prepayments on underlying mortgages result in a loss of anticipated interest,
and all or part of a premium if any has been paid, and the actual yield (or
total return) to the Series may be different than the quoted yield on the
securities. Mortgage premiums generally increase with falling interest rates
and decrease with rising interest rates. Like other fixed income securities,
when interest rates rise the value of mortgage pass-through security generally
will decline; however, when interest rates are declining, the value of mortgage
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pass-through securities with prepayment features may not increase as much as
that of other fixed-income securities.
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 the Government National Mortgage Association ("GNMA"); or
guaranteed by agencies or instrumentalities of the U.S. Government (such as the
Federal National Mortgage Association ("FNMA") or the Federal Home Loan
Mortgage Corporation, ("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). Some
of these mortgage pass-through securities may be supported by various forms of
insurance or guarantees.
Interests in pools of mortgage-related securities differ from other forms of
debt securities, which normally provide for periodic payment of interest in
fixed amounts with principal payments at maturity or specified call dates.
Instead, these securities provide a monthly payment which consists of both
interest and principal payments. In effect, these payments are a "pass-through"
of the monthly payments made by the individual borrowers on their mortgage
loans, net of any fees paid to the issuer or guarantor of such securities.
Additional payments are caused by prepayments of principal resulting from the
sale, refinancing or foreclosure of the underlying property, net of fees or
costs which may be incurred. Some mortgage pass-through securities (such as
securities issued by the GNMA) are described as "modified pass-through." These
securities entitle the holder to receive all interests and principal payments
owed on the mortgages in the mortgage pool, net of certain fees, at the
scheduled payment dates regardless of whether the mortgagor actually makes the
payment.
The principal governmental guarantor of mortgage pass-through securities is
GNMA. GNMA is a wholly owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA is authorized to guarantee, with the
full faith and credit of the U.S. Government, the timely payment of principal
and interest on securities issued by institutions approved by GNMA (such as
savings and loan institutions, commercial banks and mortgage bankers) and
backed by pools of FHA-insured or VA-guaranteed mortgages. These guarantees,
however, do not apply to the market value or yield of mortgage pass-through
securities. GNMA securities are often purchased at a premium over the maturity
value of the underlying mortgages. This premium is not guaranteed and will be
lost if prepayment occurs.
Government-related guarantors (i.e., whose guarantees are not backed by the
full faith and credit of the U.S. Government) include FNMA and FHLMC. FNMA is a
government-sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban
Development. FNMA purchases conventional residential mortgages (i.e., mortgages
not insured or guaranteed by any governmental agency) from a list of approved
seller/servicers which include state and federally chartered savings and loan
associations, mutual savings banks, commercial banks, credit unions and
mortgage bankers. Pass-through securities issued by FNMA are guaranteed as to
timely payment by FNMA of principal and interest.
FHLMC is also a government-sponsored corporation owned by private stockholders.
FHLMC issues Participation Certificates ("PCs") which represent interests in
conventional mortgages (i.e., not federally insured or guaranteed) for FHLMC's
national portfolio. FHLMC guarantees timely payment of interest and ultimate
collection of principal regardless of the status of the underlying mortgage
loans.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of mortgage loans. Such issuers may also be the originators
and/or servicers of the underlying mortgage-related securities. Pools created
by such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments in the former pools. However,
timely payment of interest and principal of mortgage loans in these pools may
be supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit. The insurance and
guarantees are issued by governmental entities, private insurers and the
mortgage poolers. There can be no assurance that the private insurers or
guarantors can meet their obligations under the insurance policies or guarantee
arrangements. A Series may also buy mortgage-related securities without
insurance or guarantees.
Indexed Securities: Each of the Value Series, the Total Return Series, the High
Income Series, the Bond Series, the Utilities Series, the World Governments
Series, the Emerging Markets Equity Series and the New Discovery Series may
purchase securities whose prices are indexed to the prices of other securities,
securities indices, currencies, precious metals or other commodities, or other
financial indicators. Indexed securities typically, but not always, are debt
securities or deposits whose value at maturity (i.e., principal value) or
coupon rate is determined by reference to a specific instrument or statistic.
Gold-indexed securities, for example, typically provide for a maturity value
that depends on the price of gold, resulting in a security whose price tends to
rise and fall together with gold prices. Currency-indexed securities typically
are short-term to intermediate-term debt securities whose maturity values or
interest rates are determined by reference to the values of one or more
specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed
securities may be positively or negatively indexed; that is, their maturity
value may increase when the specified currency value increases, resulting in a
security that performs similarly to a foreign-denominated instrument, or their
maturity value may decline when foreign currencies increase, resulting in a
security whose price characteristics are similar to a put on the underlying
currency. Currency-
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indexed securities may also have prices that depend on the values of a number
of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
government agencies.
Swaps and Related Transactions: Each of the High Income Series, the World
Governments Series, the Emerging Markets Equity Series, the Bond Series, the
Limited Maturity Series and the New Discovery Series may enter into interest
rate swaps, currency swaps and other types of available swap agreements, such
as caps, collars and floors.
Swap agreements may be individually negotiated and structured to include
exposure to a variety of different types of investments or market factors.
Depending on their structure, swap agreements may increase or decrease a
Series' exposure to long or short-term interest rates (in the U.S. or abroad),
foreign currency values, mortgage securities, corporate borrowing rates, or
other factors such as securities prices or inflation rates. Swap agreements can
take many different forms and are known by a variety of names. A Series is not
limited to any particular form or variety of swap agreement if MFS determines
it is consistent with the Series' investment objective and policies.
Each of the High Income Series, the World Governments Series, the Emerging
Markets Equity Series, the Bond Series and the Limited Maturity Series will
maintain cash or appropriate liquid assets to cover its current obligations
under swap transactions. If a Series enters into a swap agreement on a net
basis (i.e., the two payment streams are netted out, with the Series receiving
or paying, as the case may be, only the net amount of the two payments), the
Series will maintain cash or liquid assets with a daily value at least equal to
the excess, if any, of the Series' accrued obligations under the swap agreement
over the accrued amount the Series is entitled to receive under the agreement.
If a Series enters into a swap agreement on other than a net basis, it will
maintain cash or liquid assets with a value equal to the full amount of the
Series' accrued obligations under the agreement.
The most significant factor in the performance of swaps, caps, floors and
collars is the change in the specific interest rate, currency or other factor
that determines the amount of payments to be made under the arrangement. If the
Adviser or Sub-Adviser, as applicable, is incorrect in its forecasts of such
factors, the investment performance of a Series would be less than what it
would have been if these investment techniques had not been used. If a swap
agreement calls for payments by a Series, the Series must be prepared to make
such payments when due. In addition, if the counterparty's creditworthiness
declined, the value of the swap agreement would be likely to decline,
potentially resulting in losses.
If the counterparty defaults, a Series' risk of loss consists of the net amount
of payments that the Series is contractually entitled to receive. Each Series
anticipates that it will be able to eliminate or reduce its exposure under
these arrangements by assignment or other disposition or by entering into an
offsetting agreement with the same or another counterparty.
Options on Securities: Each of the Emerging Growth Series, the Value Series,
the Total Return Series, the Bond Series, the Emerging Markets Equity Series,
the World Governments Series, the Growth With Income Series, the High Income
Series and the New Discovery Series may write (sell) covered put and call
options, and purchase put and call options, on securities. Call and put options
written by a Series may be covered in the manner set forth below.
A call option written by a Series is "covered" if the Series owns the security
underlying the call or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional cash
consideration segregated by the Series) upon conversion or exchange of other
securities held in its portfolio. A call option is also covered if a Series
holds a call on the same security and in the same principal amount as the call
written where the exercise price of the call held (a) is equal to or less than
the exercise price of the call written or (b) is greater than the exercise
price of the call written if liquid assets representing the difference are
segregated by the Series. A put option written by a Series is "covered" if the
Series segregates liquid assets with a value equal to the exercise price, or
else holds a put on the same security and in the same principal amount as the
put written where the exercise price of the put held is equal to or greater
than the exercise price of the put written or where the exercise price of the
put held is less than the exercise price of the put written if the difference
is segregated by the Series in liquid assets. Put and call options written by a
Series may also be covered in such other manner as may be in accordance with
the requirements of the exchange on which, or the counterparty with which, the
option is traded, and applicable laws and regulations. If the writer's
obligation is not so covered, it is subject to the risk of the full change in
value of the underlying security from the time the option is written until
exercise.
Effecting a closing transaction in the case of a written call option will
permit a Series to write another call option on the underlying security with
either a different exercise price or expiration date or both, or in the case of
a written put option will permit the Series to write another put option to the
extent that the exercise price thereof is secured by liquid assets. Such
transactions permit a Series to generate additional premium income, which will
partially offset declines in the value of portfolio securities or increases in
the cost of securities to be acquired. Also, effecting a closing transaction
will permit the cash or proceeds from the concurrent sale of any securities
subject to the option to be used for other investments of a Series, provided
that another option on such security is not written. If a Series desires to
sell a particular security from its portfolio on which it has written a call
option, it will effect a closing transaction in connection with the option
prior to or concurrent with the sale of the security.
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A Series will realize a profit from a closing transaction if the premium paid
in connection with the closing of an option written by the Series is less than
the premium received from writing the option, or if the premium received in
connection with the closing of an option purchased by a Series is more than the
premium paid for the original purchase. Conversely, a Series will suffer a loss
if the premium paid or received in connection with a closing transaction is
more or less, respectively, than the premium received or paid in establishing
the option position. Because increases in the market price of a call option
will generally reflect increases in the market price of the underlying
security, any loss resulting from the repurchase of a call option previously
written by a Series is likely to be offset in whole or in part by appreciation
of the underlying security owned by the Series.
The Series may write options in connection with buy-and-write transactions;
that is, a Series may purchase a security and then write a call option against
that security. The exercise price of the call a Series determines to write will
depend upon the expected price movement of the underlying security. The
exercise price of a call option may be below ("in-the-money"), equal to
("at-the-money") or above ("out-of-the-money") the current value of the
underlying security at the time the option is written. Buy-and-write
transactions using in-the-money call options may be used when it is expected
that the price of the underlying security will decline moderately during the
option period. Buy-and-write transactions using out-of-the-money call options
may be used when it is expected that the premiums received from writing the
call option plus the appreciation in the market price of the underlying
security up to the exercise price will be greater than the appreciation in the
price of the underlying security alone. If the call options are exercised in
such transactions, a Series' maximum gain will be the premium received by it
for writing the option, adjusted upwards or downwards by the difference between
the Series' purchase price of the security and the exercise price, less related
transaction costs. If the options are not exercised and the price of the
underlying security declines, the amount of such decline will be offset in
part, or entirely, by the premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and a Series' gain will be limited to the premium
received, less related transaction costs. If the market price of the underlying
security declines or otherwise is below the exercise price, a Series may elect
to close the position or retain the option until it is exercised, at which time
the Series will be required to take delivery of the security at the exercise
price; a Series' return will be the premium received from the put option minus
the amount by which the market price of the security is below the exercise
price, which could result in a loss. Out-of-the-money, at-the-money and in-
the-money put options may be used by a Series in the same market environments
that call options are used in equivalent buy-and-write transactions.
A Series may also write combinations of put and call options on the same
security, known as "straddles," with the same exercise price and expiration
date. By writing a straddle, a Series undertakes a simultaneous obligation to
sell and purchase the same security in the event that one of the options is
exercised. If the price of the security subsequently rises sufficiently above
the exercise price to cover the amount of the premium and transaction costs,
the call will likely be exercised and the Series will be required to sell the
underlying security at a below market price. This loss may be offset, however,
in whole or part, by the premiums received on the writing of the two options.
Conversely, if the price of the security declines by a sufficient amount, the
put will likely be exercised. The writing of straddles will likely be
effective, therefore, only where the price of the security remains stable and
neither the call nor the put is exercised. In those instances where one of the
options is exercised, the loss on the purchase or sale of the underlying
security may exceed the amount of the premiums received.
By writing a call option, a Series limits its opportunity to profit from any
increase in the market value of the underlying security above the exercise
price of the option. By writing a put option, a Series assumes the risk that it
may be required to purchase the underlying security for an exercise price above
its then current market value, resulting in a capital loss unless the security
subsequently appreciates in value. The writing of options on securities will
not be undertaken by a Series solely for hedging purposes, and could involve
certain risks which are not present in the case of hedging transactions.
Moreover, even where options are written for hedging purposes, such
transactions constitute only a partial hedge against declines in the value of
portfolio securities or against increases in the value of securities to be
acquired, up to the amount of the premium.
A Series may purchase options for hedging purposes or to increase its return.
Put options may be purchased to hedge against a decline in the value of
portfolio securities. If such decline occurs, the put options will permit a
Series to sell the securities at the exercise price, or to close out the
options at a profit. By using put options in this way, a Series will reduce any
profit it might otherwise have realized in the underlying security by the
amount of the premium paid for the put option and by transaction costs.
A Series may purchase call options to hedge against an increase in the price of
securities that the Series anticipates purchasing in the future. If such
increase occurs, the call option will permit the Series to purchase the
securities at the exercise price, or to close out the options at a profit. The
premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by a Series upon exercise of the option, and, unless
the price of the underlying security rises sufficiently, the option may expire
worthless to the Series.
In certain instances, the Emerging Growth Series may enter into options on U.S.
Treasury securities which provide for periodic adjustment of the strike price
and may also provide for the periodic adjustment of the premium during the term
of each such option. Like other types of options, these transactions, which may
be referred to as "reset" options or "adjustable strike" options, grant the
purchaser the right to purchase (in the case of a "call") or sell (in the case
of a "put"), a specified type and series of U.S. Treasury security at any
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time up to a stated expiration date (or, in certain instances, on such date).
In contrast to other types of options, however, the price at which the
underlying security may be purchased or sold under a "reset" option is
determined at various intervals during the term of the option, and such price
fluctuates from interval to interval based on changes in the market value of
the underlying security. As a result, the strike price of a "reset" option, at
the time of exercise, may be less advantageous to the Series than if the strike
price had been fixed at the initiation of the option. In addition, the premium
paid for the purchase of the option may be determined at the termination,
rather than the initiation, of the option. If the premium is paid at
termination, the Series assumes the risk that (i) the premium may be less than
the premium which would otherwise have been received at the initiation of the
option because of such factors as the volatility in yield of the underlying
Treasury security over the term of the option and adjustments made to the
strike price of the option, and (ii) the option purchaser may default on its
obligation to pay the premium at the termination of the option.
Options on Stock Indices: Each of the Emerging Growth Series, the Value Series,
the Total Return Series, the Growth With Income Series, the Utilities Series,
the Emerging Markets Equity Series and the New Discovery Series may write
(sell) covered call and put options and purchase call and put options on stock
indices. In contrast to an option on a security, an option on a stock index
provides the holder with the right but not the obligation to make or receive a
cash settlement upon exercise of the option, rather than the right to purchase
or sell a security. The amount of this settlement is equal to (i) the amount,
if any, by which the fixed exercise price of the option exceeds (in the case of
a call) or is below (in the case of a put) the closing value of the underlying
index on the date of exercise, multiplied by (ii) a fixed "index multiplier."
A Series may cover call options on stock indices by owning securities whose
price changes, in the opinion of the Adviser, are expected to be similar to
those of the underlying index, or by having an absolute and immediate right to
acquire such securities without additional cash consideration (or for
additional cash consideration segregated by the Series) upon conversion or
exchange of other securities in its portfolio. Where a Series covers a call
option on a stock index through ownership of securities, such securities may
not match the composition of the index and, in that event, the Series will not
be fully covered and could be subject to risk of loss in the event of adverse
changes in the value of the index. A Series may also cover call options on
stock indices by holding a call on the same index and in the same principal
amount as the call written where the exercise price of the call held (a) is
equal to or less than the exercise price of the call written or (b) is greater
than the exercise price of the call written if liquid assets representing the
difference are segregated by the Series. A Series may cover put options on
stock indices by maintaining liquid assets with a value equal to the exercise
price in a segregated account, or by holding a put on the same stock index and
in the same principal amount as the put written where the exercise price of the
put held is equal to or greater than the exercise price of the put written or
where the exercise price of the put held is less than the exercise price of the
put written if the difference is segregated by the Series in assets. Put and
call options on stock indices may also be covered in such other manner as may
be in accordance with the rules of the exchange on which, or the counterparty
with which, the option is traded and applicable laws and regulations.
A Series will receive a premium from writing a put or call option, which
increases the Series' gross income in the event the option expires unexercised
or is closed out at a profit. If the value of an index on which a Series has
written a call option falls or remains the same, the Series will realize a
profit in the form of the premium received (less transaction costs) that could
offset all or a portion of any decline in the value of the securities it owns.
If the value of the index rises, however, a Series will realize a loss in its
call option position, which will reduce the benefit of any unrealized
appreciation in the Series' stock investments. By writing a put option, a
Series assumes the risk of a decline in the index. To the extent that the price
changes of securities owned by a Series correlate with changes in the value of
the index, writing covered put options on indices will increase a Series'
losses in the event of a market decline, although such losses will be offset in
part by the premium received for writing the option.
A Series may also purchase put options on stock indices to hedge its
investments against a decline in value. By purchasing a put option on a stock
index, a Series will seek to offset a decline in the value of securities it
owns through appreciation of the put option. If the value of a Series'
investments does not decline as anticipated, or if the value of the option does
not increase, the Series' loss will be limited to the premium paid for the
option plus related transaction costs. The success of this strategy will
largely depend on the accuracy of the correlation between the changes in value
of the index and the changes in value of the Series' security holdings.
The purchase of call options on stock indices may be used by a Series to
attempt to reduce the risk of missing a broad market advance, or an advance in
an industry or market segment, at a time when the Series holds uninvested cash
or short-term debt securities awaiting investment. When purchasing call options
for this purpose, a Series will also bear the risk of losing all or a portion
of the premium paid if the value of the index does not rise. The purchase of
call options on stock indices when a Series is substantially fully invested is
a form of leverage, up to the amount of the premium and related transaction
costs, and involves risks of loss and of increased volatility similar to those
involved in purchasing calls on securities the Fund owns.
The index underlying a stock index option may be a "broad-based" index, such as
the Standard & Poor's 500 Index or the New York Stock Exchange Composite Index,
the changes in value of which ordinarily will reflect movements in the stock
market in general. In contrast, certain options may be based on narrower market
indices, such as the Standard & Poor's 100 Index, or on indices of securities
of particular industry groups, such as those of oil and gas or technology
companies. A stock index assigns relative values to the stocks included in the
index and the index fluctuates with changes in the market values of the stocks
so included. The composition of the index is changed periodically.
Yield Curve Options: Each of the Value Series, the Total Return Series, the
Bond Series, the World Governments Series, the High Income Series and the New
Discovery Series may also enter into options on the "spread," or yield
differential, between two fixed
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income securities, in transactions referred to as "yield curve" options. 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 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 may be used for the same purposes as other options on
securities. Specifically, a Series may purchase or write such options for
hedging purposes. For example, a Series may purchase a call option on the yield
spread between two securities, if it owns one of the securities and anticipates
purchasing the other security and wants to hedge against an adverse change in
the yield spread between the two securities. A Series may also purchase or
write yield curve options for other than hedging purposes (i.e., in an effort
to increase its current income) if, in the judgment of the Adviser, the Series
will be able to profit from movements in the spread between the yields of the
underlying securities. The trading of yield curve options is subject to all of
the risks associated with the trading of other types of options. In addition,
however, such options present risk of loss even if the yield of one of the
underlying securities remains constant, if the spread moves in a direction or
to an extent which was not anticipated. Yield curve options written by a Series
will be "covered." A call (or put) option is covered if the Series holds
another call (or put) option on the spread between the same two securities and
segregates liquid assets sufficient to cover the Series' net liability under
the two options. Therefore, a Series' liability for such a covered option is
generally limited to the difference between the amount of the Series' liability
under the option written by the Series less the value of the option held by the
Series. Yield curve options may also be covered in such other manner as may be
in accordance with the requirements of the counterparty with which the option
is traded and applicable laws and regulations. Yield curve options are traded
over-the-counter and because they have been only recently introduced,
established trading markets for these securities have not yet developed.
Because these securities are over-the-counter, the SEC has taken the position
that yield curve options are illiquid and, therefore, together with other
illiquid securities, cannot exceed a certain percentage of a Series' assets
(the "SEC illiquidity ceiling").
The staff of the SEC has taken the position that purchased over-the-counter
options and assets used to cover written over-the-counter options are illiquid
and, therefore, cannot exceed the SEC illiquidity ceiling. Although the Adviser
disagrees with this position, the Adviser intends to limit each Series' writing
of over-the-counter options in accordance with the following procedure. Except
as provided below, a Series intends to write over-the-counter options only with
primary U.S. Government securities dealers recognized by the Federal Reserve
Bank of New York. Also, the contracts which a Series has in place with such
primary dealers will provide that the Series has the absolute right to
repurchase an option it writes at any time at a price which represents the fair
market value, as determined in good faith through negotiation between the
parties, but which in no event will exceed a price determined pursuant to a
formula in the contract. Although the specific formula may vary between
contracts with different primary dealers, the formula will generally be based
on a multiple of the premium received by a Series for writing the option, plus
the amount, if any, of the option's intrinsic value (i.e., the amount that the
option is in-the-money). The formula may also include a factor to account for
the difference between the price of the security and the strike price of the
option if the option is written out-of-money. A Series will treat all or a part
of the formula price as illiquid for purposes of the SEC illiquidity ceiling. A
Series may also write over-the-counter options with non-primary dealers,
including foreign dealers, and will treat the assets used to cover these
options as illiquid for purposes of such SEC illiquidity ceiling.
Futures Contracts: Each of the Total Return Series, the Bond Series, the
Emerging Markets Equity Series, the World Governments Series, the Limited
Maturity Series, the High Income Series, the Utilities Series and the New
Discovery Series may purchase and sell futures contracts ("Futures Contracts")
on foreign or domestic fixed income securities or indices of such securities.
Each of the Emerging Growth Series, the Value Series, the Total Return Series,
the Growth With Income Series, the Emerging Markets Equity Series and the New
Discovery Series may purchase and sell Futures Contracts on stock indexes,
while the Emerging Growth Series, the Value Series, the Total Return Series,
the World Governments Series, the Growth With Income Series, the Emerging
Markets Equity Series, the Utilities Series and the New Discovery Series may
purchase and sell Futures Contracts on foreign currencies or indices of foreign
currencies. Such investment strategies will be used for hedging purposes and
for non-hedging purposes, subject to applicable law.
A Futures Contract is a bilateral agreement providing for the purchase and sale
of a specified type and amount of a financial instrument or foreign currency,
or for the making and acceptance of a cash settlement, at a stated time in the
future for a fixed price. By its terms, a Futures Contract provides for a
specified settlement date on which, in the case of the majority of interest
rate and foreign currency futures contracts, the fixed income securities or
currency are delivered by the seller and paid for by the purchaser, or on
which, in the case of stock index futures contracts and certain interest rate
and foreign currency futures contracts, the difference between the price at
which the contract was entered into and the contract's closing value is settled
between the purchaser and seller in cash. Futures Contracts differ from options
in that they are bilateral agreements, with both the purchaser and the seller
equally obligated to complete the transaction. Futures Contracts call for
settlement only on the expiration date and cannot be "exercised" at any other
time during their term.
The purchase or sale of a Futures Contract differs from the purchase or sale of
a security or the purchase of an option in that no purchase price is paid or
received. Instead, an amount of cash or cash equivalents, which varies but may
be as low as 5% or less of the value of the contract, must be deposited with
the broker as "initial margin." Subsequent payments to and from the broker,
referred to as "variation margin," are made on a daily basis as the value of
the index or instrument underlying the Futures Contract fluctuates, making
positions in the Futures Contract more or less valuable--a process known as
"mark-to-market."
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Purchases or sales of stock index futures contracts are used to attempt to
protect a Series' current or intended stock investments from broad fluctuations
in stock prices. For example, a Series may sell stock index futures contracts
in anticipation of or during a market decline to attempt to offset the decrease
in market value of the Series' securities portfolio that might otherwise
result. If such decline occurs, the loss in value of portfolio securities may
be offset, in whole or part, by gains on the futures position. When a Series is
not fully invested in the securities market and anticipates a significant
market advance, it may purchase stock index futures contracts in order to gain
rapid market exposure that may, in part or entirely, offset increases in the
cost of securities that the Series intends to purchase. As such purchases are
made, the corresponding positions in stock index futures contracts will be
closed out. In a substantial majority of these transactions, the Series will
purchase such securities upon termination of the futures position, but under
unusual market conditions, a long futures position may be terminated without a
related purchase of securities.
Interest rate Futures Contracts may be purchased or sold to attempt to protect
against the effects of interest rate changes on a Series' current or intended
investments in fixed income securities. For example, if a Series owned
long-term bonds and interest rates were expected to increase, that Series might
enter into interest rate futures contracts for the sale of debt securities.
Such a sale would have much the same effect as selling some of the long-term
bonds in that Series' portfolio. If interest rates did increase, the value of
the debt securities in the portfolio would decline, but the value of that
Series' interest rate futures contracts would increase at approximately the
same rate, thereby keeping the net asset value of that Series from declining as
much as it otherwise would have.
Similarly, if interest rates were expected to decline, interest rate futures
contracts may be purchased to hedge in anticipation of subsequent purchases of
long-term bonds at higher prices. Since the fluctuations in the value of the
interest rate futures contracts should be similar to that of long-term bonds, a
Series could protect itself against the effects of the anticipated rise in the
value of long-term bonds without actually buying them until the necessary cash
became available or the market had stabilized. At that time, the interest rate
futures contracts could be liquidated and that Series' cash reserves could then
be used to buy long-term bonds on the cash market. A Series could accomplish
similar results by selling bonds with long maturities and investing in bonds
with short maturities when interest rates are expected to increase. However,
since the futures market is more liquid than the cash market, the use of
interest rate futures contracts as a hedging technique allows a Series to hedge
its interest rate risk without having to sell its portfolio securities.
As noted in the Prospectus, a Series may purchase and sell foreign currency
futures contracts for hedging purposes, to attempt to protect its current or
intended investments from fluctuations in currency exchange rates. Such
fluctuations could reduce the dollar value of portfolio securities denominated
in foreign currencies, or increase the cost of foreign-denominated securities
to be acquired, even if the value of such securities in the currencies in which
they are denominated remains constant. A Series may sell futures contracts on a
foreign currency, for example, where it holds securities denominated in such
currency and it anticipates a decline in the value of such currency relative to
the dollar. In the event such decline occurs, the resulting adverse effect on
the value of foreign-denominated securities may be offset, in whole or in part,
by gains on the futures contracts.
Conversely, a Series could protect against a rise in the dollar cost of
foreign-denominated securities to be acquired by purchasing futures contracts
on the relevant currency, which could offset, in whole or in part, the
increased cost of such securities resulting from a rise in the dollar value of
the underlying currencies. Where a Series purchases futures contracts under
such circumstances, however, and the prices of securities to be acquired
instead decline, the Series will sustain losses on its futures position which
could reduce or eliminate the benefits of the reduced cost of portfolio
securities to be acquired.
Options on Futures Contracts: Each Series that may buy or sell Futures
Contracts (see "Futures Contracts" above) also may purchase and write options
to buy or sell those Futures Contracts in which it may invest ("Options on
Futures Contracts"). Such investment strategies will be used for hedging
purposes and for non-hedging purposes, subject to applicable law.
An Option on a Futures Contract provides the holder with the right to enter
into a "long" position in the underlying Futures Contract, in the case of a
call option, or a "short" position in the underlying Futures Contract, in the
case of a put option, at a fixed exercise price up to a stated expiration date
or, in the case of certain options, on such date. Upon exercise of the option
by the holder, the contract market clearinghouse establishes a corresponding
short position for the writer of the option, in the case of a call option, or a
corresponding long position in the case of a put option. In the event that an
option is exercised, the parties will be subject to all the risks associated
with the trading of Futures Contracts, such as payment of initial and variation
margin deposits. In addition, the writer of an Option on a Futures Contract,
unlike the holder, is subject to initial and variation margin requirements on
the option position.
A position in an Option on a Futures Contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or sale
transaction, subject to the availability of a liquid secondary market, which is
the purchase or sale of an option of the same series (i.e., the same exercise
price and expiration date) as the option previously purchased or sold. The
difference between the premiums paid and received represents the Series' profit
or loss on the transaction.
Options on Futures Contracts that are written or purchased by a Series on U.S.
exchanges are traded on the same contract market as the underlying Futures
Contract, and, like Futures Contracts, are subject to regulation by the
Commodities Futures Trading Commission (the "CFTC") and the performance
guarantee of the exchange clearinghouse. In addition, Options on Futures
Contracts may be traded on foreign exchanges.
A Series may cover the writing of call Options on Futures Contracts (a) through
purchases of the underlying Futures Contract, (b) through ownership of the
instrument, or instruments included in the index, underlying the Futures
Contract, or (c) through the hold-
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ing of a call on the same Futures Contract and in the same principal amount as
the call written where the exercise price of the call held (i) is equal to or
less than the exercise price of the call written or (ii) is greater than the
exercise price of the call written if liquid assets representing the difference
are segregated by the Series. A Series may cover the writing of put Options on
Futures Contracts (a) through sales of the underlying Futures Contract, (b)
through segregation of liquid assets in an amount equal to the value of the
security or index underlying the Futures Contract, or (c) through the holding
of a put on the same Futures Contract and in the same principal amount as the
put written where the exercise price of the put held is equal to or greater
than the exercise price of the put written or where the exercise price of the
put held is less than the exercise price of the put written if the difference
is segregated by the Series in assets. Put and call Options on Futures
Contracts may also be covered in such other manner as may be in accordance with
the rules of the exchange on which the option is traded and applicable laws and
regulations. Upon the exercise of a call Option on a Futures Contract written
by a Series, the Series will be required to sell the underlying Futures
Contract which, if the Series has covered its obligation through the purchase
of such Contract, will serve to liquidate its futures position. Similarly,
where a put Option on a Futures Contract written by a Series is exercised, the
Series will be required to purchase the underlying Futures Contract which, if
the Series has covered its obligation through the sale of such Contract, will
close out its futures position.
The writing of a call option on a Futures Contract for hedging purposes
constitutes a partial hedge against declining prices of the securities or other
instruments required to be delivered under the terms of the Futures Contract.
If the futures price at expiration of the option is below the exercise price, a
Series will retain the full amount of the option premium, less related
transaction costs, which provides a partial hedge against any decline that may
have occurred in the Series' portfolio holdings. The writing of a put option on
a Futures Contract constitutes a partial hedge against increasing prices of the
securities or other instruments required to be delivered under the terms of the
Futures Contract. If the futures price at expiration of the option is higher
than the exercise price, a Series will retain the full amount of the option
premium which provides a partial hedge against any increase in the price of
securities which the Series intends to purchase. If a put or call option a
Series has written is exercised, the Series will incur a loss which will be
reduced by the amount of the premium it receives. Depending on the degree of
correlation between changes in the value of its portfolio securities and the
changes in the value of its futures positions, a Series' losses from existing
Options on Futures Contracts may to some extent be reduced or increased by
changes in the value of portfolio securities.
The Series may purchase Options on Futures Contracts for hedging purposes
instead of purchasing or selling the underlying Futures Contracts. For example,
where a decrease in the value of portfolio securities is anticipated as a
result of a projected market-wide decline or changes in interest or exchange
rates, a Series could, in lieu of selling Futures Contracts, purchase put
options thereon. In the event that such decrease occurs, it may be offset, in
whole or in part, by a profit on the option. Conversely, where it is projected
that the value of securities to be acquired by a Series will increase prior to
acquisition, due to a market advance or changes in interest or exchange rates,
a Series could purchase call Options on Futures Contracts, rather than
purchasing the underlying Futures Contracts.
Forward Contracts on Foreign Currency: Each of the Emerging Growth Series, the
Value Series, the Research Series, the Total Return Series, the Bond Series,
the Emerging Markets Equity Series, the World Governments Series, the Growth
With Income Series, the High Income Series, the Utilities Series and the New
Discovery Series may enter into forward foreign currency exchange contracts for
hedging and, in certain Series, non-hedging purposes (collectively, "Forward
Contracts"). Forward Contracts may be used for hedging to attempt to minimize
the risk to the Series from adverse changes in the relationship between the
U.S. dollar and foreign currencies. The Series intend to enter into Forward
Contracts for hedging purposes similar to those described above in connection
with foreign currency futures contracts. In particular, a Forward Contract to
sell a currency may be entered into in lieu of the sale of a foreign currency
futures contract where a Series seeks to protect against an anticipated
increase in the exchange rate for a specific currency which could reduce the
dollar value of portfolio securities denominated in such currency. Conversely,
a Series may enter into a Forward Contract to purchase a given currency to
protect against a projected increase in the dollar value of securities
denominated in such currency which the Series intends to acquire. A Series also
may enter into a Forward Contract in order to assure itself of a predetermined
exchange rate in connection with a fixed income security denominated in a
foreign currency. In addition, the Series may enter into Forward Contracts for
"cross hedging" purposes (e.g., the purchase or sale of a Forward Contract on
one type of currency, as a hedge against adverse fluctuations in the value of a
second type of currency).
If a hedging transaction in Forward Contracts is successful, the decline in the
value of portfolio securities or other assets or the increase in the cost of
securities or other assets to be acquired may be offset, at least in part, by
profits on the Forward Contract. Nevertheless, by entering into such Forward
Contracts, a Series may be required to forego all or a portion of the benefits
which otherwise could have been obtained from favorable movements in exchange
rates or natural resources prices. The Series do not intend, in most instances,
to hold Forward Contracts entered into until the value date, at which time they
would be required to deliver or accept delivery of the underlying currency, but
will usually seek to close out positions in such contracts by entering into
offsetting transactions, which will serve to fix a Series' profit or loss based
upon the value of the contracts at the time the offsetting transaction is
executed.
The Series may also enter into transactions in Forward Contracts for other than
hedging purposes, which presents greater profit potential but also involves
increased risk. For example, a Series may purchase a given foreign currency
through a Forward Contract if, in the judgment of the Adviser, the value of
such currency is expected to rise relative to the U.S. dollar. Conversely, the
Series may sell the currency through a Forward Contract if the Adviser believes
that its value will decline relative to the dollar.
A Series entering into such transactions will profit if the anticipated
movements in foreign currency exchange rates occurs, which will increase its
gross income. Where exchange rates do not move in the direction or to the
extent anticipated, however,
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the Series may sustain losses, which will reduce its gross income. Such
transactions, therefore, could be considered speculative and could involve
significant risk of loss.
Each Series has established procedures which require the use of segregated
assets or "cover " in connection with the purchase and sale of such contracts.
In those instances in which the Series satisfies this requirement through
segregation of assets, it will maintain, in a segregated account, liquid
assets, which will be marked to market on a daily basis, in an amount equal to
the value of its commitments under Forward Contracts. While these contracts are
not presently regulated by the CFTC, the CFTC may in the future assert
authority to regulate Forward Contracts. In such event, the Series' ability to
utilize Forward Contracts in the manner set forth above may be restricted.
Options on Foreign Currencies: Each of the Emerging Growth Series, the Value
Series, the Total Return Series, the Bond Series, the Emerging Markets Equity
Series, the World Governments Series, the Growth With Income Series, the High
Income Series, the Utilities Series and the New Discovery Series may purchase
and write options on foreign currencies for hedging purposes in a manner
similar to that in which futures contracts on foreign currencies, or Forward
Contracts, will be utilized. For example, a decline in the dollar value of a
foreign currency in which portfolio securities are denominated will reduce the
dollar value of such securities, even if their value in the foreign currency
remains constant. In order to protect against such diminutions in the value of
portfolio securities, a Series may purchase put options on the foreign
currency. If the value of the currency does decline, the Series will have the
right to sell such currency for a fixed amount in dollars and will thereby
offset, in whole in part, the adverse effect on its portfolio which otherwise
would have resulted.
Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of
such securities, the Series may purchase call options thereon. The purchase of
such options could offset, at least partially, the effects of the adverse
movements in exchange rates. As in the case of other types of options, however,
the benefit to a Series deriving from purchases of foreign currency options
will be reduced by the amount of the premium and related transaction costs. In
addition, where currency exchange rates do not move in the direction or to the
extent anticipated, a Series could sustain losses on transactions in foreign
currency options which would require it to forego a portion or all of the
benefits of advantageous changes in such rates.
A Series may write options on foreign currencies for the same types of hedging
purposes. For example, where the Series anticipates a decline in the dollar
value of foreign-denominated securities due to adverse fluctuations in exchange
rates it could, instead of purchasing a put option, write a call option on the
relevant currency. If the expected decline occurs, the option will most likely
not be exercised, and the diminution in value of portfolio securities will be
offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, a Series could write
a put option on the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow the Series to hedge such increased
cost up to the amount of the premium. Foreign currency options written by a
Series will generally be covered in a manner similar to the covering of other
types of options. As in the case of other types of options, however, the
writing of a foreign currency option will constitute only a partial hedge up to
the amount of the premium, and only if rates move in the expected direction. If
this does not occur, the option may be exercised and a Series would be required
to purchase or sell the underlying currency at a loss which may not be offset
by the amount of the premium. Through the writing of options on foreign
currencies, a Series also may be required to forego all or a portion of the
benefits which might otherwise have been obtained from favorable movements in
exchange rates.
Additional Risk Factors:
Options, Futures and Forward Transactions
Risk of imperfect correlation of hedging instruments with a Series'
portfolio. The Series' ability effectively to hedge all or a portion of their
portfolios through transactions in options, Futures Contracts, Options on
Futures Contracts, Forward Contracts and options on foreign currencies depend
on the degree to which price movements in the underlying index or instrument
correlate with price movements in the relevant portion of the Series'
portfolios. In the case of futures and options based on an index, the portfolio
will not duplicate the components of the index, and in the case of futures and
options on fixed income securities, the portfolio securities which are being
hedged may not be the same type of obligation underlying such contract. The use
of Forward Contracts for "cross hedging" purposes may involve greater
correlation risks. As a result, the correlation probably will not be exact.
Consequently, the Series bear the risk that the price of the portfolio
securities being hedged will not move in the same amount or direction as the
underlying index or obligation.
For example, if a Series purchases a put option on an index and the index
decreases less than the value of the hedged securities, the Series would
experience a loss which is not completely offset by the put option. It is also
possible that there may be a negative correlation between the index or
obligation underlying an option or Futures Contract in which the Series has a
position and the portfolio securities the Series is attempting to hedge, which
could result in a loss on both the portfolio and the hedging instrument. In
addition, a Series may enter into transactions in Forward Contracts or options
on foreign currencies in order to hedge against exposure arising from the
currencies underlying such instruments. In such instances, the Series will be
subject to the additional risk of imperfect correlation between changes in the
value of the currencies underlying such forwards or options and changes in the
value of the currencies being hedged.
It should be noted that stock index futures contracts or options based upon a
narrower index of securities, such as those of a particular industry group, may
present greater risk than options or futures based on a broad market index.
This is due to the fact that a narrower index is more susceptible to rapid and
extreme fluctuations as a result of changes in the value of a small number of
securities. Nevertheless, where a Series enters into transactions
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in options, or futures on narrowly-based indexes for hedging purposes,
movements in the value of the index should, if the hedge is successful,
correlate closely with the portion of the Series' portfolio or the intended
acquisitions being hedged.
The trading of Futures Contracts, options and Forward Contracts for hedging
purposes entails the additional risk of imperfect correlation between movements
in the futures or option price and the price of the underlying index or
obligation. The anticipated spread between the prices may be distorted due to
the differences in the nature of the markets such as differences in margin
requirements, the liquidity of such markets and the participation of
speculators in the options, futures and forward markets. In this regard,
trading by speculators in options, futures and Forward Contracts has in the
past occasionally resulted in market distortions, which may be difficult or
impossible to predict, particularly near the expiration of such contracts.
The trading of Options on Futures Contracts also entails the risk that changes
in the value of the underlying Futures Contracts will not be fully reflected in
the value of the option. The risk of imperfect correlation, however, generally
tends to diminish as the maturity date of the Futures Contract or expiration
date of the option approaches.
Further, with respect to options on securities, options on stock indexes,
options on currencies and Options on Futures Contracts, the Series are subject
to the risk of market movements between the time that the option is exercised
and the time of performance thereunder. This could increase the extent of any
loss suffered by a Series in connection with such transactions.
In writing a covered call option on a security, index or futures contract, a
Series also incurs the risk that changes in the value of the instruments used
to cover the position will not correlate closely with changes in the value of
the option or underlying index or instrument. For example, where a Series
covers a call option written on a stock index through segregation of
securities, such securities may not match the composition of the index, and the
Series may not be fully covered. As a result, the Series could be subject to
risk of loss in the event of adverse market movements.
The writing of options on securities, options on stock indexes or Options on
Futures Contracts constitutes only a partial hedge against fluctuations in the
value of a Series' portfolio. When a Series writes an option, it will receive
premium income in return for the holder's purchase of the right to acquire or
dispose of the underlying obligation. In the event that the price of such
obligation does not rise sufficiently above the exercise price of the option,
in the case of a call, or fall below the exercise price, in the case of a put,
the option will not be exercised and the Series will retain the amount of the
premium, less related transaction costs, which will constitute a partial hedge
against any decline that may have occurred in the Series' portfolio holdings or
any increase in the cost of the instruments to be acquired.
Where the price of the underlying obligation moves sufficiently in favor of the
holder to warrant exercise of the option, however, and the option is exercised,
the Series will incur a loss which may only be partially offset by the amount
of the premium it received. Moreover, by writing an option, a Series may be
required to forego the benefits which might otherwise have been obtained from
an increase in the value of portfolio securities or other assets or a decline
in the value of securities or assets to be acquired.
In the event of the occurrence of any of the foregoing adverse market events, a
Series' overall return may be lower than if it had not engaged in the hedging
transactions.
Those Series that may enter transactions in options (except for Options on
Foreign Currencies), Futures Contracts, Options on Futures Contracts and
Forward Contracts for hedging purposes may also enter into such transactions
for non-hedging purposes. Non-hedging transactions in such investments involve
greater risks and may result in losses which may not be offset by increases in
the value of portfolio securities or declines in the cost of securities to be
acquired. The Series will only write covered options, such that cash or
securities necessary to satisfy an option exercise will be segregated at all
times, unless the option is covered in such other manner as may be in
accordance with the rules of the exchange on which the option is traded and
applicable laws and regulations. Nevertheless, the method of covering an option
employed by a Series may not fully protect it against risk of loss and, in any
event, the Series could suffer losses on the option position which might not be
offset by corresponding portfolio gains. Entering into transactions in Futures
Contracts, Options on Futures Contracts and Forward Contracts for other than
hedging purposes could expose the Series to significant risk of loss if foreign
currency exchange rates do not move in the direction or to the extent
anticipated.
With respect to the writing of straddles on securities, a Series incurs the
risk that the price of the underlying security will not remain stable, that one
of the options written will be exercised and that the resulting loss will not
be offset by the amount of the premiums received. Such transactions, therefore,
create an opportunity for increased return by providing a Series with two
simultaneous premiums on the same security, but involve additional risk, since
the Series may have an option exercised against it regardless of whether the
price of the security increases or decreases.
Risk of a potential lack of a liquid secondary market. Prior to exercise or
expiration, a futures or option position can only be terminated by entering
into a closing purchase or sale transaction. This requires a secondary market
for such instruments on the exchange on which the initial transaction was
entered into. While the Series will enter into options or futures positions
only if there appears to be a liquid secondary market therefor, there can be no
assurance that such a market will exist for any particular contracts at any
specific time. In that event, it may not be possible to close out a position
held by a Series, and the Series could be required to purchase or sell the
instrument underlying an option, make or receive a cash settlement or meet
ongoing variation margin requirements. Under such circumstances, if the Series
has insufficient cash available to meet margin requirements, it will be
necessary to liquidate portfolio securities or other assets at a time when it
is disadvantageous to do so. The inability to close out options and futures
positions, therefore, could have an adverse impact on the Series' ability
effectively to hedge their portfolios, and could result in trading losses.
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The liquidity of a secondary market in a Futures Contract or option thereon may
be adversely affected by "daily price fluctuation limits," established by
exchanges, which limit the amount of fluctuation in the price of a contract
during a single trading day. Once the daily limit has been reached in the
contract, no trades may be entered into at a price beyond the limit, thus
preventing the liquidation of open futures or option positions and requiring
traders to make additional margin deposits. Prices have in the past moved the
daily limit on a number of consecutive trading days.
The trading of Futures Contracts and options is also subject to the risk of
trading halts, suspensions, exchange or clearinghouse equipment failures,
government intervention, insolvency of a brokerage firm or clearinghouse or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
Margin. Because of low initial margin deposits made upon the opening of a
futures or forward position and the writing of an option, such transactions
involve substantial leverage. As a result, relatively small movements in the
price of the contract can result in substantial unrealized gains or losses.
Where a Series enters into such transactions for hedging purposes, any losses
incurred in connection therewith should, if the hedging strategy is successful,
be offset, in whole or in part, by increases in the value of securities or
other assets held by the Series or decreases in the prices of securities or
other assets the Series intends to acquire. Where a Series enters into such
transactions for other than hedging purposes, the margin requirements
associated with such transactions could expose the Series to greater risk.
Trading and position limits. The exchange on which futures and options are
traded may impose limitations governing the maximum number of positions on the
same side of the market and involving the same underlying instrument which may
be held by a single investor, whether acting alone or in concert with others
(regardless of whether such contracts are held on the same or different
exchanges or held or written in one or more accounts or through one or more
brokers). Further, the CFTC and the various contract markets have established
limits referred to as "speculative position limits" on the maximum net long or
net short position which any person may hold or control in a particular futures
or option contract. An exchange may order the liquidation of positions found to
be in violation of these limits and it may impose other sanctions or
restrictions. The Adviser does not believe that these trading and position
limits will have any adverse impact on the strategies for hedging the
portfolios of the Series.
Risks of Options on Futures Contracts. The amount of risk a Series assumes when
it purchases an Option on a Futures Contract is the premium paid for the
option, plus related transaction costs. In order to profit from an option
purchased, however, it may be necessary to exercise the option and to liquidate
the underlying Futures Contract, subject to the risks of the availability of a
liquid offset market described herein. The writer of an Option on a Futures
Contract is subject to the risks of commodity futures trading, including the
requirement of initial and variation margin payments, as well as the additional
risk that movements in the price of the option may not correlate with movements
in the price of the underlying security, index, currency or Futures Contract.
Risks of transactions related to foreign currencies and transactions not
conducted on U.S. exchanges. Transactions in Forward Contracts on foreign
currencies, as well as futures and options on foreign currencies and
transactions executed on foreign exchanges, are subject to all of the
correlation, liquidity and other risks outlined above. In addition, however,
such transactions are subject to the risk of governmental actions affecting
trading in or the prices of currencies underlying such contracts, which could
restrict or eliminate trading and could have a substantial adverse effect on
the value of positions held by a Series. Further, the value of such positions
could be adversely affected by a number of other complex political and economic
factors applicable to the countries issuing the underlying currencies.
Further, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying contracts thereon. As a result, the available information
on which trading systems will be based may not be as complete as the comparable
data on which a Series makes investment and trading decisions in connection
with other transactions. Moreover, because the foreign currency market is a
global, 24-hour market, events could occur in that market which will not be
reflected in the forward, futures or options market until the following day,
thereby making it more difficult for the Series to respond to such events in a
timely manner.
Settlements of exercises of over-the-counter Forward Contracts or foreign
currency options generally must occur within the country issuing the underlying
currency, which in turn requires traders to accept or make delivery of such
currencies in conformity with any U.S. or foreign restrictions and regulations
regarding the maintenance of foreign banking relationships, fees, taxes or
other charges.
Unlike transactions entered into by the Series in Futures Contracts and
exchange-traded options, options on foreign currencies, Forward Contracts and
over-the-counter options on securities are not traded on contract markets
regulated by the CFTC or (with the exception of certain foreign currency
options) the SEC. To the contrary, such instruments are traded through
financial institutions acting as market-makers, although foreign currency
options are also traded on certain national securities exchanges, such as the
Philadelphia Stock Exchange and the Chicago Board Options Exchange, subject to
SEC regulation. In an over-the-counter trading environment, many of the
protections afforded to exchange participants will not be available. For
example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of
time. Although the purchaser of an option cannot lose more than the amount of
the premium plus related transaction costs, this entire amount could be lost.
Moreover, the option writer and a trader of Forward Contracts could lose
amounts substantially in excess of their initial investments, due to the margin
and collateral requirements associated with such positions.
In addition, over-the-counter transactions can only be entered into with a
financial institution willing to take the opposite side, as principal, of a
Series' position unless the institution acts as broker and is able to find
another counterparty willing to enter into the transaction with the Series.
Where no such counterparty is available, it will not be possible to enter into
a desired trans-
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action. There also may be no liquid secondary market in the trading of
over-the-counter contracts, and a Series could be required to retain options
purchased or written, or Forward Contracts entered into, until exercise,
expiration or maturity. This in turn could limit the Series' ability to profit
from open positions or to reduce losses experienced, and could result in
greater losses.
Further, over-the-counter transactions are not subject to the guarantee of an
exchange clearinghouse, and a Series will therefore be subject to the risk of
default by, or the bankruptcy of, the financial institution serving as its
counterparty. One or more of such institutions also may decide to discontinue
their role as market-makers in a particular currency or security, thereby
restricting the Series' ability to enter into desired hedging transactions. A
Series will enter into an over-the-counter transaction only with parties whose
creditworthiness has been reviewed and found satisfactory by the Adviser.
Options on securities, options on stock indexes, Futures Contracts, Options on
Futures Contracts and options on foreign currencies may be traded on exchanges
located in foreign countries. Such transactions may not be conducted in the
same manner as those entered into on U.S. exchanges, and may be subject to
different margin, exercise, settlement or expiration procedures. As a result,
many of the risks of over-the-counter trading may be present in connection with
such transactions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the Options Clearing
Corporation (the "OCC"), thereby reducing the risk of counterparty default.
Further, a liquid secondary market in options traded on a national securities
exchange may be more readily available than in the over-the-counter market,
potentially permitting a Series to liquidate open positions at a profit prior
to exercise or expiration, or to limit losses in the event of adverse market
movements.
The purchase and sale of exchange-traded foreign currency options, however, is
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effects of other political and
economic events. In addition, exchange-traded options on foreign currencies
involve certain risks not presented by the over-the-counter market. For
example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures on
exercise and settlement, such as technical changes in the mechanics of delivery
of currency, the fixing of dollar settlement prices or prohibitions on
exercise.
Policies on the use of futures and options on futures contracts. In order to
assure that the Series will not be deemed to be a "commodity pool" for purposes
of the Commodity Exchange Act, regulations of the CFTC require that a Series
enter into transactions in Futures Contracts, Options on Futures Contracts and
Options on Foreign Currencies traded on a CFTC-regulated exchange only (i) for
bona fide hedging purposes (as defined in CFTC regulations), or (ii) for
non-bona fide hedging purposes, provided that the aggregate initial margin and
premiums required to establish such non-bona fide hedging positions does not
exceed 5% of the liquidation value of the Series' assets after taking into
account unrealized profits and unrealized losses on any such contracts the
Series has entered into, and excluding, in computing such 5%, the in-the-money
amount with respect to an option that is in-the-money at the time of purchase.
Risks of investing in Lower Rated Bonds
Each of the Emerging Growth Series, the Value Series, the Research Series, the
Total Return Series, the Bond Series, the Limited Maturity Series, the Emerging
Markets Equity Series, the High Income Series, the Utilities Series and the New
Discovery Series may invest in fixed income securities rated Baa by Moody's
Investors Service, Inc. ("Moody's") or BBB by Standard & Poor's Ratings
Services ("S&P"), Fitch Investors Service, Inc. ("Fitch") or Duff & Phelps
Credit Rating Co. ("Duff & Phelps"), 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 fixed income securities.
Each of these Series (except the Limited Maturity Series) may also invest in
fixed income 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 in the Prospectus. No minimum rating standard is required by
the Series. 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 and because 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 the outlook for economic growth), short-term corporate and
industry developments and the market's perception of their credit quality
(especially during times of adverse publicity) 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). In the past, economic downturns or an
increase in interest rates have, under certain circumstances, caused a higher
incidence of default by the issuers of these securities and may do so in the
future, especially in the case of highly leveraged issuers. The prices for
these securities may be affected by legislative and regulatory developments.
The market for these lower rated fixed income securities may be less liquid
than the market for investment grade fixed income
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securities. Furthermore, the liquidity of these lower rated securities may be
affected by the market's perception of their credit quality. Therefore, the
Adviser's judgment may at times play a greater role in valuing these securities
than in the case of investment grade fixed income securities, and it also may
be more difficult during times of certain adverse market conditions to sell
these lower rated securities to meet redemption requests or to respond to
changes in the market.
While the Adviser may refer to ratings issued by established credit rating
agencies, it is not the Series' policy to rely exclusively on ratings issued by
these rating agencies, but rather to supplement such ratings with the Adviser's
own independent and ongoing review of credit quality. To the extent the Series
invests in these lower rated securities, the achievement of its investment
objectives may be more dependent on the Adviser's own credit analysis than in
the case of a fund investing in higher quality fixed income securities. These
lower rated securities may also include zero coupon bonds, deferred interest
bonds and PIK bonds.
Foreign Securities
The Limited Maturity Series may invest in dollar-denominated foreign debt
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. As discussed in the Prospectus, investing in foreign
securities generally represents a greater degree of risk than investing in
domestic securities due to possible exchange rate fluctuations, less publicly
available information, more volatile markets, less securities regulation, less
favorable tax provisions, war or expropriation. As a result of its investments
in foreign securities, a Series may receive interest or dividend payments, or
the proceeds of the sale or redemption of such securities, in the foreign
currencies in which such securities are denominated. 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. While the
holding of currencies will permit a Series to take advantage of favorable
movements in the applicable exchange rate, such strategy also exposes the
Series to risk of loss if exchange rates move in a direction adverse to the
Series' position. Such losses could reduce any profits or increase any losses
sustained by the Series from the sale or redemption of securities and could
reduce the dollar value of interest or dividend payments received.
American Depositary Receipts
Each of the Series (except the Limited Maturity Series and the Money Market
Series) may invest in American Depositary Receipts ("ADRs"), which are
certificates issued by a U.S. depositary (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. ADRs may be sponsored or unsponsored. A sponsored
ADR is issued by a depository which has an exclusive relationship with the
issuer of the underlying security. An unsponsored ADR may be issued by any
number of U.S. depositories. A Series may invest in either type of ADR. Under
the terms of most sponsored arrangements, depositaries agree to distribute
notices of shareholder meetings and voting instructions, and to provide
shareholder communications and other information to the ADR holders at the
request of the issuer of the deposited securities. The depositary of an
unsponsored ADR, on the other hand, is under no obligation to distribute
shareholder communications received from the issuer of the deposited securities
or to pass through voting rights to ADR holders in respect of the deposited
securities. Although the U.S. investor holds a substitute receipt of ownership
rather than direct stock certificates, the use of the depositary receipts in
the United States can reduce costs and delays as well as potential currency
exchange and other difficulties. A Series may purchase securities in local
markets and direct delivery of these ordinary shares to the local depository of
an ADR agent bank in the foreign country. Simultaneously, the ADR agents create
a certificate which settles at the Series' custodian in five days. A Series may
also execute trades on the U.S. markets using existing ADRs. A foreign issuer
of the security underlying an ADR is generally not subject to the same
reporting requirements in the United States as a domestic issuer. Accordingly,
the information available to a U.S. investor will be limited to the information
the foreign issuer is required to disclose in its own country, and the market
value of an ADR may not reflect undisclosed material information concerning the
issuer of the underlying security. ADRs may also be subject to exchange rate
risks if the underlying foreign securities are denominated in foreign currency.
Investments in Global Depository Receipts ("GDRs") by the Emerging Markets
Equity Series involve substantially the same risks as investments in ADRs.
Short Sales: Each Series may seek to hedge investments or realize additional
gains through short sales.
Short sales are transactions in which a Series sells a security it does not
own, in anticipation of a decline in the market value of that security. To
complete such a transaction, the Series must borrow the security to make
delivery to the buyer. The Series then is obligated to replace the security
borrowed by purchasing it at the market price at the time of replacement. The
price at such time may be more or less than the price at which the security was
sold by the Series. Until the security is replaced, the Series is required to
repay the lender any dividends or interest which accrue during the period of
the loan. To borrow the security, the Series also may be required to pay a
premium, which would increase the cost of the security sold. The net proceeds
of the short sale will be retained by the broker, to the extent necessary to
meet margin requirements, until the short position is closed out. The Series
also will incur transaction costs in effecting short sales.
A Series will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which the
Series replaces the borrowed security. The Series will realize a gain if the
price of the security declines in price between those dates. The amount of any
gain will be decreased, and the amount of any loss increased, by the amount of
the premium, dividends or interest the Series may be required to pay in
connection with a short sale.
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Each Series may make short sales "against the box," i.e., when a security
identical to or convertible or exchangeable into one owned by the Series is
borrowed and sold short. The Series may also enter into so called "naked" short
sales, i.e., when a security identical to or exchangeable into the security
borrowed and sold short is not owned by the Series.
A Series will not sell short securities whose underlying value, minus any
amounts pledged by the Series as collateral (which does not include the
proceeds from the short sale), exceeds 40% of its net assets.
Whenever the Series engages in short sales, it segregates liquid securities in
an amount that, when combined with the amount of collateral deposited with the
broker in connection with the short sale, equals the current market value of
the security sold short. The segregated assets are marked to market daily.
------------------------------
A Series' limitations, policies and ratings restrictions 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.
3. INVESTMENT RESTRICTIONS
Each Series has adopted the following restrictions which cannot be changed
without the approval of the holders of a majority of the Series' shares (which,
as used in this SAI, means the lesser of (i) more than 50% of the outstanding
shares of the Trust or a Series, as applicable, or (ii) 67% or more of the
outstanding shares of the Trust or a Series, as applicable, present at a
meeting if holders of more than 50% of the outstanding shares of the Trust or a
Series, as applicable, are represented in person or by proxy). Except for
Investment Restriction (1) and nonfundamental investment policy (1), these
investment restrictions and policies 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 any of the restrictions.
The Trust, on behalf of any Series, may not:
(1) borrow amounts in excess of 33-1/3% of its assets including amounts
borrowed and then only as a temporary measure for extraordinary or emergency
purposes;
(2) underwrite securities issued by other persons except insofar as the
Series may technically be deemed an underwriter under the Securities Act of
1933, as amended (the "1933 Act") in selling a portfolio security;
(3) purchase or sell real estate (including limited partner ship
interests but excluding securities secured by real estate or interests therein
and securities of companies, such as real estate investment trusts, which deal
in real estate or interests therein), interests in oil, gas or mineral leases,
commodities or commodity contracts (excluding currencies and any type of option,
Futures Contracts and Forward Contracts) in the ordinary course of its business.
The Series reserves the freedom of action to hold and to sell real estate,
mineral leases, commodities or commodity contracts (including currencies and any
type of option, Futures Contracts and Forward Contracts) acquired as a result of
the ownership of securities;
(4) issue any senior securities except as permitted by the 1940 Act. For
purposes of this restriction, collateral arrangements with respect to any type
of swap, option, Forward Contracts and Futures Contracts and collateral
arrangements with respect to initial and variation margin are not deemed to be
the issuance of a senior security;
(5) make loans to other persons. For these purposes, the purchase of
commercial paper, the purchase of a portion or all of an issue of debt
securities, the lending of portfolio securities, or the investment of the
Series' assets in repurchase agreements, shall not be considered the making of a
loan; or
(6) purchase any securities of an issuer of a particular industry, if as
a result, more than 25% of its gross assets would be invested in securities of
issuers whose principal business activities are in the same industry (except (i)
there is no limitation with respect to obligations issued or guaranteed by the
U.S. Government or its agencies and instrumentalities and repurchase agreements
collateralized by such obligations, (ii) the High Income Series may invest up to
40% of its gross assets in each of the electric utility and telephone
industries, (iii) 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 and when cash is
available for such investment and instruments are available for purchase which
fulfill that Series' objective in terms of quality and marketability, (iv) the
Emerging Markets Equity Series may invest up to 40% of its assets in each of the
electric utility and telephone industries and (v) the Utilities Series will
invest at least 25% of its gross assets in the utilities industry).
In addition, each Series has adopted the following nonfundamental policies
which may be changed by the vote of the Trust's Board of Trustees without
shareholder approval. The Trust, on behalf of any Series, will not:
(1) invest in illiquid investments, including securities subject to
legal or contractual restrictions on resale or for which there is no readily
available market (e.g., trading in the security is suspended, or, in the case of
unlisted securities, where no market exists) if more than 15% of the Series'
assets (taken at market value) (10% of assets in the case of the Money Market
Series) would be invested in such securities. Repurchase agreements maturing in
more than seven days will be deemed to be illiquid for purposes of the Series'
limitation on investment in illiquid securities. Securities that are not
registered under the 1933 Act and sold in reliance on Rule 144A thereunder, but
are determined to be liquid by the Trust's Board of Trustees (or its delegee),
will not be subject to this 15% (10% in the case of the Money Market Series)
limitation;
19
<PAGE>
(2) purchase securities issued by any other investment company in excess
of the amount permitted by the 1940 Act, except when such purchase is part of a
plan of merger or consolidation;
(3) purchase any securities or evidences of interest therein on margin,
except that the Series may obtain such short-term credit as may be necessary for
the clearance of any transaction and except that the Series may make margin
deposits in connection with any type of swap, option, Futures Contracts and
Forward Contracts;
(4) sell any security which the Series does not own unless by virtue of
its ownership of other securities the Series has at the time of sale a right to
obtain securities without payment of further consideration equivalent in kind
and amount to the securities sold and provided that if such right is
conditional, the sale is made upon the same conditions;
(5) pledge, mortgage or hypothecate in excess of 33-1/3% of its gross
assets. For purposes of this restriction, collateral arrangements with respect
to any type of swap, option, Futures Contracts and Forward Contracts and
payments of initial and variation margin in connection therewith, are not
considered a pledge of assets;
(6) purchase or sell any put or call option or any combination thereof,
provided that this shall not prevent the purchase, ownership, holding or sale of
(i) warrants where the grantor of the warrants is the issuer of the underlying
securities or (ii) put or call options or combinations thereof with respect to
securities, indices of securities, swaps, foreign currencies and Futures
Contracts;
(7) invest for the purpose of exercising control or management;
(8) hold obligations issued or guaranteed by any one U.S. Governmental
agency or instrumentality, at the end of any calendar quarter (or within 30 days
thereafter), to the extent such holdings would cause the Series to fail to
comply with the diversification requirements imposed by Section 817(h) of the
Internal Revenue Code of 1986, as amended (the "Code"), and the Treasury
regulations issued thereunder on segregated asset accounts that fund variable
contracts.
(9) Invest 25% or more of the market value of its total assets in
securities of issuers in any one industry (provided that this restriction does
not limit the exceptions set forth in fundamental policy no. (6).
In addition, as nonfundamental policies which may be changed by vote of the
Trust's Board of Trustees: (i) each Series, to the extent that it invests in
foreign securities, will be invested in a minimum of five different foreign
countries at all times, provided that this minimum is reduced to four when
foreign country investments comprise less than 80% of the Series' net assets,
to three when less than 60% of such value, to two when less than 40% of such
value, and to one when less than 20% of such value; (ii) no Series will have
more than 20% of its net assets invested in secu-rities of issuers located in
any one foreign country, provided that a Series may have up to 35% of its net
assets invested in securities of issuers located in Australia, Canada, France,
Japan, the United Kingdom or West Germany; (iii) no Series may borrow amounts
in excess of 10% of its net assets when borrowing for any general purpose or in
excess of 25% of net assets when borrowing as a temporary measure to facilitate
redemptions; and (iv) no Series may enter into hedging transactions by
purchasing put and call options, futures contracts or other derivative
instruments on securities, in an aggregate market value equivalent to more than
10% of its total assets. For purposes of clauses (i) and (ii) above, ADRs and
European Depositary Receipts shall be deemed to be foreign securities.
4. MANAGEMENT OF THE TRUST
The Board of Trustees of the Trust provides broad supervision over the affairs
of each Series. MFS is responsible for the investment management of each Series'
assets and the officers of the Trust are responsible for its operations. The
Trustees and officers of the Trust are listed below, together with their
principal occupations during the past five years. (Their titles may have varied
during that period.)
Trustees
NELSON J. DARLING, JR. (born 12/27/20)
Private Investor and Trustee
Address: 27 School Street, Boston, Massachusetts
WILLIAM R. GUTOW (born 9/27/41)
Private Investor; Real Estate Consultant; Capitol Entertainment
(Blockbuster Video Franchise), Vice Chairman.
Address: 3102 Maple Avenue, #100, Dallas, Texas
JEFFREY L. SHAMES*, (born 6/2/55)
Massachusetts Financial Services Company,
Chairman, Chief Executive
Officer and President
Officers
W. THOMAS LONDON*, Treasurer (born 3/1/44)
Massachusetts Financial Services Company,
Senior Vice President.
STEPHEN E. CAVAN*, Secretary and Clerk (born 11/6/53)
Massachusetts Financial Services Company, Senior Vice President, General
Counsel and Assistant Secretary.
JAMES R. BORDEWICK, JR.*, Assistant Secretary (born 3/6/59)
Massachusetts Financial Services Company, Senior Vice President and Associate
General Counsel.
JAMES O. YOST*, Assistant Treasurer (born 6/12/60)
Massachusetts Financial Services Company, Vice President.
MARK E. BRADLEY*, Assistant Treasurer (born 11/23/59)
Massachusetts Financial Services Company, Vice President (since March 1997);
Putnam Investments, Vice President (from September 1994 until March 1997);
Ernst & Young, Senior Tax Manager (until September 1994).
20
<PAGE>
ELLEN MOYNIHAN*, Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September
1996); Deloitte & Touche LLP, Senior Manager (until September 1996).
- --------------------------------------
*"Interested persons" (as defined in the Investment Company Act of 1940, as
amended (the "1940 Act")) of the Adviser, whose address is 500 Boylston Street,
Boston, Massachusetts 02116.
Each officer holds a comparable position with certain affiliates of MFS or with
certain other funds of which MFS or a subsidiary is the investment adviser or
distributor. Mr. Cavan is the Secretary of MFD and holds a similar position
with certain other MFS affiliates.
As of March 31, 1998, all Trustees and officers as a group owned less than 1%
of each Series.
Listed in the chart below are the name, address and percentage of ownership of
each person of record or known by the Trust to own of record or beneficially
five percent or more of any Series' outstanding securities as of March 31,
1998.
<TABLE>
<CAPTION>
% of
Outstanding
Series Owner & Address Shares
- --------------- ---------------------------------------------- ----------------
<S> <C> <C>
MFS Emerging Ameritas Life Insurance Company 8.42%
Growth Series Separate Account VA-2 (Annuity)
5900 O Street
Lincoln, NE 68510-2234
United of Omaha Life Insurance Company 10.63%
Mutual of Omaha Plaza
Omaha, NE 68175-0001
Union Central Life Insurance Company 6.58%
Group Annuity
Mutual Funds--Station 3
1876 Waycross Road
Cincinnati, OH 45240-2899
Merrill Lynch Life Insurance Company 25.39%
4804 Deer Lake Drive East
Building 3, Floor 4
Jacksonville, FL 32246-6484
Pruco Life of Arizona 14.47%
Flexible Premium Variable Annuity Account
213 Washington Street
Floor 7
Newark, NJ 07102-2917
CUNA Mutual Life Insurance Company 10.48%
Variable Annuity Account
2000 Heritage Way
Waverly, IA 50677-9202
MFS Value The American Franklin Life Insurance Company 15.88%
Series c/o American General Life Insurance Company
P.O. Box 1591
Houston,TX 77251-1591
MFS Fund Distributors, Inc. 15.04%
500 Boylston Street
Boston, MA 02116-3740
United of Omaha Life Insurance Company 67.87%
United of Omaha
Omaha, NE 68175-0001
MFS Research United of Omaha Life Insurance Company 13.60%
Series Mutual of Omaha Plaza
Omaha, NE 68175-0001
</TABLE>
<TABLE>
<CAPTION>
% of
Outstanding
Series Owner & Address Shares
- --------------- ---------------------------------------------- ----------------
<S> <C> <C>
Merrill Lynch Life Insurance Company 41.71%
4804 Deer Lake Drive East
Building 3, Floor 4
Jacksonville, FL 32246-6484
Pruco Life of Arizona 14.16%
Flexible Premium Variable Annuity Account
213 Washington Street
Floor 7
Newark, NJ 07102-2917
MFS Growth Ameritas Life Insurance Company 18.88%
With Income Separate Account VA-2 (Annuity)
Series 5900 O Street
Lincoln, NE 68510-2252
Guardian Insurance & Annuity Co., Inc. 8.07%
A/C Guardian SEP A/C E-VA 75
c/o Equity Accounting 3S-18
3900 Burgess Place
Bethlehem, PA 18017-9097
Union Central Life Insurance Company 18.58%
Group Annuity
Mutual Funds--Station 3
1876 Waycross Road
Cincinnati, OH 45240-2899
Union Central Life Insurance Company 19.75%
Individual Annuity
Mutual Funds--Station 3
1876 Waycross Road
Cincinnati, OH 45240-2899
Protective Variable Annuity 5.37%
P.O. Box 2606
Birmingham, AL 35202-2606
Guardian Insurance & Annuity Co., Inc. 7.12%
A/C Guardian SEP A/C D-VA 82-NQ
c/o Equity Accounting 3S-18
3900 Burgess Place
Bethlehem, PA 18017-9097
Guardian Insurance & Annuity Co., Inc. 6.52%
A/C Guardian SEP A/C D-VA 81-Q
c/o Equity Accounting 3S-18
3900 Burgess Place
Bethlehem, PA 18017-9097
MFS Total CG Variable Annuity 22.49%
Return Series Separate Account II
c/o Lincoln National Life Insurance Company
1300 South Clinton Street
Fort Wayne, IN 46802-3506
Kansas City Life Insurance Company 5.50%
Variable Annuity
P.O. Box 419139
Kansas City, MO 64141-6139
United Life & Annuity Insurance Company 9.32%
Separate Account One
8545 United Plaza Blvd.
Baton Rouge, LA 70809-2264
The American Franklin Life Insurance Company 5.83%
c/o American General Life Insurance Company
P.O. Box 1591
Houston, TX 77251-1591
Aetna Life Insurance & Annuity Company 24.40%
151 Farmington Avenue
Hartford, CT 06156-0001
Aetna Investment Company of America 9.36%
151 Farmington Avenue
Hartford, CT 06156-0001
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
% of
Outstanding
Series Owner & Address Shares
- ------------------- ------------------------------------------------ ----------------
<S> <C> <C>
MFS Total First Citicorp Life Insurance Company 10.76%
Return Series Citicorp Plaza
(cont.) P.O. Box 7031
Dover, DE 19903-7031
MFS Utilities Ameritas Life Insurance Company 47.39%
Series Separate Account VA-2 (Annuity)
5900 O Street
Lincoln, NE 68510-2252
CG Variable Annuity 19.50%
Separate Account II
c/o Lincoln National Life Insurance Company
1300 South Clinton Street
Fort Wayne, IN 46802-3506
Kansas City Life Insurance Company 12.14%
Variable Annuity
P.O. Box 419139
Kansas City, MO 64141-6139
Jefferson-Pilot 6.00%
Separate Account A
P.O. Box 21008
Greensboro, NC 27420-1008
MFS High United of Omaha Life Insurance Company 70.14%
Income Series Mutual of Omaha Plaza
Omaha, NE 68175-0001
Union Central Life Insurance Company 11.75%
Group Annuity
Mutual Funds--Station 3
1876 Waycross Road
Cincinnati, OH 45240-2899
Union Central Life Insurance Company 11.34%
Individual Annuity
Mutual Funds--Station 3
1876 Waycross Road
Cincinnati, OH 45240-2899
MFS World CUNA Mutual Life Insurance Company 34.91%
Governments Variable Annuity Account
Series 2000 Heritage Way
Waverly, IA 50677-9202
Ameritas Life Insurance Company 5.99%
Separate Account VA-2 (Annuity)
5900 O Street
Lincoln, NE 68510-2252
United of Omaha Life Insurance Company 36.16%
Mutual of Omaha Plaza
Omaha, NE 68175-0001
First Citicorp Life Insurance Company 5.05%
Citicorp Plaza
P.O. Box 7031
Dover, DE 19903-7031
MFS/Foreign & MFS Fund Distributors, Inc. 88.62%
Colonial Emerging 500 Boylston Street
Markets Equity Boston, MA 02116-3740
Series
COVA Financial Services Life Insurance Company 10.75%
d.b.a. COVA Variable Annuity Account One
P.O. Box 295
Des Moines, IA 50301-0295
MFS Bond Kansas City Life Insurance Company 24.20%
Series Variable Annuity
P.O. Box 419139
Kansas City, MO 64141-6139
First Citicorp Life Insurance Company 43.82%
Citicorp Plaza
P.O. Box 7031
Dover, DE 19903-7031
</TABLE>
<TABLE>
<CAPTION>
% of
Outstanding
Series Owner & Address Shares
- ------------------- ------------------------------------------------ ----------------
<S> <C> <C>
Citicorp Life Insurance Company 23.25%
Citicorp Plaza
P.O. Box 7031
Dover, DE 19903-7031
MFS Limited MFS Fund Distributors, Inc. 69.22%
Maturity Series 500 Boylston Street
Boston, MA 02116-3740
Valley Forge Life Insurance Company 25.42%
Variable Annuity Separate Account
Financial Administration Services, Inc.
1290 Silas Deane Highway
Wethersfield, CT 06109-4303
MFS Money Citicorp Life Insurance Company 51.11%
Market Series Citicorp Plaza
P.O. Box 7031
Dover, DE 19903-7031
First Citicorp Life Insurance Company 48.06%
Citicorp Plaza
P.O. Box 7031
Dover, DE 19903-7031
</TABLE>
The Trust pays the compensation of non-interested Trustees (who will receive a
fee of $217 per year per Series plus $100 per meeting and $100 per committee
meeting attended per Series, together with such Trustee's out-of-pocket
expenses).
Trustee Compensation Table(1)
<TABLE>
<CAPTION>
Total Trustee
Fees from
Trustee Fees the Fund
Name of Trustee from each Series(1) Complex(2)
- --------------------------- --------------------- --------------
<S> <C> <C>
Nelson J. Darling ......... $1,017 $28,684
William R. Gutow .......... 1,017 28,684
</TABLE>
Notes:
(1) For the year ended December 31, 1997.
(2) For calendar year ended December 31, 1997. All Trustees receiving
compensation served as Trustees of 19 funds advised by MFS (having
aggregate net assets at December 31, 1997 of approximately $1,554.1
million).
The Declaration of Trust provides that the Trust will indemnify its Trustees
and officers against liabilities and expenses incurred in connection with
litigation in which they may be involved because of their offices with the
Trust, unless, as to liabilities of the Trust or its shareholders, it is
finally adjudicated that they engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in their offices, or
with respect to any matter, unless it is adjudicated that they did not act in
good faith in the reasonable belief that their actions were in the best
interest of the Trust. In the case of settlement, such indemnification will not
be provided unless it has been determined pursuant to the Declaration of Trust,
that such officers or Trustees have not engaged in willful misfeasance, bad
faith, gross negligence or reckless disregard of their duties.
Investment Adviser
MFS and its predecessor organizations have a history of money management dating
from 1924. MFS is a subsidiary of Sun Life of Canada (U.S.) Financial Services
Holdings, Inc., which in turn is an indirect wholly owned subsidiary of Sun
Life Assurance Company of Canada ("Sun Life").
22
<PAGE>
Investment Advisory Agreement
MFS manages the assets of each Series pursuant to an Investment Advisory
Agreement with the Trust on behalf of each Series dated as of April 14, 1994,
as amended and restated on April 30, 1998 (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 the Series. For these services and facilities, the
Adviser receives an annual management fee, computed and paid monthly, as
disclosed in the Prospectus under the heading "Management of the Series."
For the Trust's fiscal years ended December 31, 1997, 1996 and 1995,
respectively, MFS received the following aggregate fees and MFS waived the
following fees, in whole or in part, for the same periods:
For the fiscal year ended December 31, 1997:
<TABLE>
<CAPTION>
Expenses
Management Fee Assumed
Series Paid to MFS(1) by MFS
- ----------------------------------- ---------------- ---------
<S> <C> <C>
Emerging Growth Series ............ $1,887,980 $ 0
Value Series ...................... 32,114 45,870
Research Series ................... 1,343,324 0
Growth With Income Series ......... 188,365 26,920
Total Return Series ............... 331,670 9,651
Utilities Series .................. 131,652 35,371
High Income Series ................ 169,309 30,909
World Governments Series .......... 247,419 50,767
Emerging Markets Equity
Series(2) ...................... 3,350 11,922
Bond Series ....................... 13,699 59,063
Limited Maturity Series ........... 3,129 29,715
Money Market Series ............... 26,348 40,048
</TABLE>
(1) After any applicable fee reduction.
(2) For the period from the commencement of investment operations on October
16, 1997, to December 31, 1997.
For the fiscal year ended December 31, 1996:
<TABLE>
<CAPTION>
Expenses
Management Fee Assumed
Series(1) Paid to MFS(2) by MFS
- ------------------------------------ ---------------- ----------
<S> <C> <C>
Emerging Growth Series ............. $314,262 $62,962
Value Series(3) .................... 3,196 12,079
Research Series .................... 92,348 56,859
Growth With Income Series. ......... 30,792 42,658
Total Return Series ................ 60,979 87,721
Utilities Series ................... 39,863 91,877
High Income Series ................. 56,169 45,293
World Governments Series. .......... 126,898 172,556
Bond Series ........................ 2,924 40,829
Limited Maturity Series(3) ......... 1,064 12,705
Money Market Series ................ 858 46,831
</TABLE>
- --------------------------------------
(1) The Emerging Markets Equity Series had not commenced investment operations
prior to December 31, 1996.
(2) After any applicable fee reduction.
(3) For the period from the commencement of investment operations on August 14,
1996 to December 31, 1996.
For the fiscal year ended December 31, 1995:
<TABLE>
<CAPTION>
Expenses
Management Fee Assumed
Series(1) Paid to MFS(2) by MFS
- -------------------------------------- ---------------- ---------
<S> <C> <C>
Emerging Growth Series(3) ............ $6,262 $15,659
Research Series(4) ................... 4,424 16,913
Growth With Income Series(5) ......... 597 16,226
Total Return Series(6) ............... 10,826 25,092
Utilities Series(6) .................. 9,376 25,513
High Income Series(4) ................ 3,996 17,847
World Governments Series ............. 33,869 43,311
Bond Series(7) ....................... 247 17,623
Money Market Series(6) ............... 594 24,976
</TABLE>
- --------------------------------------
(1) The Value Series, the Emerging Markets Equity Series and the Limited
Maturity Series had not commenced investment operations prior to December
31, 1995.
(2) After any applicable fee reduction.
(3) For the period from the commencement of investment operations on July 24,
1995 to December 31, 1995.
(4) For the period from the commencement of investment operations on July 26,
1995 to December 31, 1995.
(5) For the period from the commencement of investment operations on October 9,
1995 to December 31, 1995.
(6) For the period from the commencement of investment operations on January 3,
1995 to December 31, 1995.
(7) For the period from the commencement of investment operations on October
24, 1995 to December 31, 1995.
MFS pays the compensation of the Trust's officers and of any Trustee who is an
officer of MFS. MFS also furnishes at its own expense all necessary
administrative services, including office space, equipment, clerical personnel,
investment advisory facilities, and all executive and supervisory personnel
necessary for managing each Series' investments, effecting its portfolio
transactions.
The Advisory Agreement with the Trust will remain in effect until August 1,
1998, and will continue in effect thereafter with respect to any Series only if
such continuance is specifically approved at least annually by the Board of
Trustees or by vote of a majority of the Series' shares (as defined in
"Investment Restrictions") and, in either case, by a majority of the Trustees
who are not parties to the Advisory Agreement or interested persons of any such
party. The Advisory Agreement terminates automatically if it is assigned and
may be terminated with respect to any Series without penalty by vote of a
majority of the Series' shares (as defined in "Investment Restrictions") or by
either party on not more than 60 days' nor less than 30 days' written notice.
The Advisory Agreement with respect to each Series provides that if MFS ceases
to serve as the investment adviser to the Series, the Series will change its
name so as to delete the term "MFS" and that MFS may render services to others
and may permit other fund clients to use the term "MFS" in their names. The
Advisory Agreement also provides that neither MFS nor its personnel shall be
liable for any error of judgment or mistake of law or for any loss arising out
of any investment or for any act or omission in the execution and management of
the Series, except for willful mis-
23
<PAGE>
feasance, bad faith or gross negligence in the performance of its or their
duties or by reason of reckless disregard of its or their obligations and
duties under the Advisory Agreement.
FCM -- FCM serves as the Emerging Markets Equity Series' sub-adviser pursuant
to a Sub-Advisory Agreement, dated October 16, 1997 between the Adviser and FCM
(the "FCM Sub-Advisory Agreements"). The FCM Sub-Advisory Agreement provides
that the Adviser may delegate to FCM the authority to make investment decisions
for the Series. It is presently intended that FCM will provide portfolio
management services for the Series. For these services, the Adviser pays FCM an
annual fee computed and paid monthly in an amount equal to 0.65% of the average
daily net assets managed by FCM of the Series.
FCEM -- FCEM serves as the Foreign & Colonial Emerging Markets Equity Series'
sub-adviser pursuant to a Sub-Advisory Agreement, dated October 16, 1997
between FCM and FCEM (the "FCEM Sub-Advisory Agreement" and together with the
FCM Sub-Advisory Agreement, the "Sub-Advisory Agreement"). The FCEM Sub-Advisory
Agreement provides that FCM may delegate to FCEM the authority to make
investment decisions for the Series. It is presently intended that FCEM will
provide portfolio management services for the portion of the assets of the
Series invested in emerging markets securities. For these services, FCM pays
FCEM an annual fee computed and paid monthly in an amount equal to 0.65% of the
average daily net assets managed by FCEM of the Series.
Sub-Advisory Agreements -- Each Sub-Advisory Agreement will remain in effect
until October 16, 1999, and will continue in effect thereafter only if such
continuance is specifically approved at least annually by the Board of Trustees
or by the vote of a majority of the Series' outstanding shares, and, in either
case, by a majority of the Trustees who are not parties to the Sub-Advisory
Agreement or interested persons of any such party. Each FCM Sub-Advisory
Agreement terminates automatically if it is assigned and may be terminated
without penalty by the Trustees, by vote of a majority of the Series'
outstanding shares, by the Adviser on not less than 30 days' nor more than 60
days' written notice or by FCM, on not less than 60 days' nor more than 90
days' written notice. The FCEM Sub-Advisory Agreement terminates automatically
if it is assigned and may be terminated without penalty by the Trustees, by
vote of a majority of the Series' on not less than 60 days' nor more than 90
days' written notice.
The FCM Sub-Advisory Agreement provides that if FCM ceases to serve as the
sub-adviser to the Series, the Series will change its name so as to delete the
words "Foreign & Colonial" and that FCM may render services to others and may
permit other fund clients to use the words "Foreign & Colonial" in their names.
Each Sub-Advisory Agreement specifically provides that neither FCM or FCEM, as
the case may be, nor its personnel shall be liable for any error of judgment or
mistake of law or for any loss arising out of any investment or for any act or
omission in the execution and management of the Series, except for willful
misfeasance, bad faith or gross negligence in the performance of its or their
duties or by reason of reckless disregard of its or their obligations and
duties under the Sub-Advisory Agreement.
Administrator
MFS provides each Series with certain financial, legal, compliance, shareholder
communications and other administrative services pursuant to a Master
Administrative Services Amendment dated March 1, 1997, as amended. Under this
Agreement, each Series pays MFS an administrative fee up to 0.015% per annum of
the Series' average daily net assets. This fee reimburses MFS for a portion of
the costs it incurs to provide such services.
For the period commencing March 1, 1997, through the period ended December 31,
1997, MFS received fees under the Administrative Services Agreement, from each
Series, as follows:
<TABLE>
<CAPTION>
Administrative Fee
Series Paid to MFS
- --------------------------------- -------------------
<S> <C>
Emerging Growth ................. $31,542
Value ........................... 561
Research ........................ 23,446
Growth With Income .............. 3,085
Total Return .................... 5,461
Utilities ....................... 2,176
High Income ..................... 2,774
World Governments ............... 4,447
Emerging Markets Equity ......... 28
Bond ............................ 287
Limited Maturity ................ 67
Money Market .................... 699
</TABLE>
Custodian
State Street Bank and Trust Company (the "Custodian") is the custodian of the
Trust's assets. The Custodian's responsibilities include safekeeping and
controlling each Series' cash and securities, handling the receipt and delivery
of securities, determining income and collecting interest and dividends on a
Series' investments, maintaining books of original entry for portfolio and fund
accounting and other required books and accounts, and calculating the daily net
asset value of shares of the Series. The Custodian does not determine the
investment policies of the Series or decide which securities the Series will
buy or sell. Each Series may, however, invest in securities of the Custodian
and may deal with the Custodian as principal in securities transactions. State
Street Bank and Trust Company serves as the dividend and distribution
disbursing agent of the Series.
Shareholder Servicing Agent
MFS Service Center, Inc. (the "Shareholder Servicing Agent"), a wholly owned
subsidiary of MFS and a registered transfer agent, is each Series' shareholder
servicing agent, pursuant to a Shareholder Servicing Agent Agreement with the
Trust on behalf of the Series, dated as of April 14, 1994 (the "Agency
Agreement"). The Shareholder Servicing Agent's responsibilities under the
Agency Agreement include administering and performing transfer agent functions
and the keeping of records in connection with the issuance, transfer and
redemption of shares of the Series. For these services, the Shareholder
Servicing Agent will receive a fee calculated as a percentage of the average
daily net assets at an effective annual rate of 0.1125%. In addition, the
Shareholder Servicing Agent will be reimbursed by a Series for certain expenses
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incurred by the Shareholder Servicing Agent on behalf of the Series. State
Street Bank and Trust Company, the dividend and distribution disbursing agent
for the Series, has contracted with the Shareholder Servicing Agent to
administer and perform certain dividend disbursing agent functions for the
Series.
Distributor
MFD, a wholly owned subsidiary of MFS, serves as the distributor for the
continuous offering of shares of the Trust pursuant to a Distribution Agreement
dated as of April 14, 1994 (the "Distribution Agreement").
As agent, MFD currently offers shares of each Series on a continuous basis to
the separate accounts of Participating Insurance Companies in all states in
which the Series or the Trust may from time to time be registered or where
permitted by applicable law. The Distribution Agreement provides that MFD
accepts orders for shares at net asset value as no sales commission or load is
charged. MFD has made no firm commitment to acquire shares of any Series.
The Distribution Agreement will remain in effect until August 1, 1998 and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Trust's shares (as defined in "Investment Restrictions") and in either case, by
a majority of the Trustees who are not parties to such Distribution Agreement
or interested persons of any such party. The Distribution Agreement terminates
automatically if it is assigned and may be terminated without penalty by either
party on not more than 60 days' nor less than 30 days' notice.
5. PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for a Series are made by
employees of MFS, who are appointed and supervised by its senior officers.
Changes in a Series' investments are reviewed by the Trust's Board of Trustees.
A Series' portfolio manager may serve other clients of MFS or any subsidiary of
MFS in a similar capacity.
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. MFS has complete freedom as to the markets in and the broker-dealers
through which it seeks this result. MFS attempts to achieve this result by
selecting broker-dealers to execute portfolio transactions on behalf of the
Series and other clients of MFS on the basis of their professional capability,
the value and quality of their brokerage services, and the level of their
brokerage commissions. In the case of securities, such as fixed income
securities, which are principally traded in the over-the-counter market on a
net basis through dealers acting for their own account and not as brokers
(where no stated commissions are paid but the prices include a dealer's markup
or markdown), MFS normally seeks to deal directly with the primary market
makers, unless in its opinion, better prices are available elsewhere. In the
case of securities purchased from underwriters, the cost of such securities
generally includes a fixed underwriting commission or concession. Securities
firms or futures commission merchants may receive brokerage commissions on
transactions involving options, Futures Contracts and Options on Futures
Contracts and the purchase and sale of underlying securities upon exercise of
options. The brokerage commissions associated with buying and selling options
may be proportionately higher than those associated with general securities
transactions. From time to time, soliciting dealer fees are available to MFS on
the tender of a Series' portfolio securities in so-called tender or exchange
offers. Such soliciting dealer fees are in effect recaptured for the Series by
MFS. At present no other recapture arrangements are in effect.
Under the Advisory Agreements and as permitted by Section 28(e) of the
Securities Exchange Act of 1934, as amended, MFS may cause a Series to pay a
broker-dealer which provides brokerage and research services to MFS an amount
of commission for effecting a securities transaction for a Series in excess of
the amount other broker-dealers would have charged for the transaction if MFS
determines in good faith that the greater commission is reasonable in relation
to the value of the brokerage and research services provided by the executing
broker-dealer viewed in terms of either a particular transaction or MFS's
overall responsibilities to the Series or to its other clients. Not all of such
services are useful or of value in advising a Series.
The term "brokerage and research services" includes advice as to the value of
securities, the advisability of purchasing or selling securities, and the
availability of purchasers or sellers of securities; furnishing analyses and
reports concerning issues, industries, securities, economic factors and trends,
portfolio strategy and the performance of accounts; and effecting securities
transactions and performing functions incidental thereto such as clearance and
settlement.
Although commissions paid on every transaction will, in the judgment of MFS, be
reasonable in relation to the value of the brokerage services provided,
commissions exceeding those which another broker might charge may be paid to
broker-dealers who were selected to execute transactions on behalf of the
Series' and MFS's other clients, in part for providing advice as to the
availability of purchasers or sellers of securities and services in effecting
securities transactions and performing functions incidental thereto, such as
clearance and settlement.
Broker-dealers may be willing to furnish statistical, research and other
factual information or services ("Research") to MFS for no consideration other
than brokerage or underwriting commissions. Securities may be bought or sold
from time to time through such broker-dealers on behalf of a Series. The
Trustees (together with the Trustees of the other MFS Funds) have directed MFS
to allocate a total of $39,355 of commission business from the various MFS
Funds to the Pershing Division of Donaldson, Lufkin & Jenrette as consideration
for the annual renewal of certain publications provided by Lipper Analytical
Securities Corporation (which provides information useful to the Trustees in
reviewing the relationship between each Fund and MFS).
The investment management personnel of MFS attempt to evaluate the quality of
Research provided by brokers. Results of this effort are sometimes used by MFS
as a consideration in the selection of brokers to execute portfolio
transactions. However, MFS
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is unable to quantify the amount of commissions which will be paid as a result
of such Research because a substantial number of transactions will be effected
through brokers which provide Research but which were selected principally
because of their execution capabilities.
The management fee that each Series pays to MFS will not be reduced as a
consequence of the receipt of brokerage and research services by MFS. To the
extent a Series' portfolio transactions are used to obtain such services, the
brokerage commissions paid by the Series will exceed those that might otherwise
be paid, by an amount which cannot be presently determined. Such services would
be useful and of value to MFS in serving both a Series and other clients and,
conversely, such services obtained by the placement of brokerage business of
other clients would be useful to MFS in carrying out its obligations to the
Series. While such services are not expected to reduce the expenses of MFS, MFS
would, through use of the services, avoid the additional expenses which would
be incurred if it should attempt to develop comparable information through its
own staff.
For fiscal year ended December 31, 1997, the Emerging Growth Series, Value
Series, Research Series, Growth With Income Series, Total Return Series,
Utilities Series, High Income Series, World Governments Series and Limited
Maturity Series paid brokerage commissions of $558,527, $21,178, $551,920,
$48,902, $41,930, $72,725 and $55, respectively, on total transactions of
$361,445,006, $13,529,479, $417,835,632, $54,766,004, $37,761,104, $37,336,000
and $9,651, respectively. For the period from October 16, 1997, through
December 31, 1997, the Emerging Markets Equity Series paid brokerage
commissions of $2,929 on total transactions of $892,279. For fiscal year ended
December 31, 1996, the Emerging Growth Series, Value Series, Research Series,
Growth With Income Series, Total Return Series and Utilities Series paid
brokerage commissions of $110,808, $2,473, $49,208, $7,661, $10,035 and
$20,924, respectively, on total transactions of $73,634,924, $1,578,092,
$31,609,275, $9,321,266, $9,329,814, and $11,241,156, respectively. For fiscal
year ended December 31, 1995, the Emerging Growth Series, Utilities Series,
Total Return Series, Growth With Income Series and Research Series paid
brokerage commissions of $9,408, $8,281, $2,571, $191 and $6,332, respectively,
on total transactions of $6,057,384, $4,450,825, $2,161,403, $346,170 and
$4,278,466, respectively. Not all of the Series' transactions are equity
security transactions which involve the payment of brokerage commissions.
During the fiscal year ended December 31, 1997, the Emerging Growth Series
owned securities issued separately by Lehman Brothers and Morgan Stanley, which
had a value of $499,800 and $1,466,300, respectively, at fiscal year end;
Research Series owned securities issued separately by Chase Manhattan, Merrill
Lynch and Morgan Stanley, which had a value of $3,266,604, $1,706,737 and
$1,158,850, respectively, at fiscal year end; Growth With Income Series owned
securities issued separately by Chase Manhattan and Merrill Lynch, which had a
value of $120,450 and $262,575, respectively, at fiscal year end; Total Return
Series owned securities issued separately by Chase Manhattan, Merrill Lynch,
Morgan Stanley and Nationsbank, which had a value of $247,689, $138,581,
$289,712 and $442,715, respectively, at fiscal year end; Bond Series owned
securities issued separately by Lehman Brothers and Bear Sterns, which had a
value of $10,584 and $100,786, respectively, at fiscal year end; and Limited
Maturity Series owned securities issued by Bear Stearns, which had a value of
$30,236 at fiscal year end. Each of these entities are regular broker dealers
of such Series.
In certain instances there may be securities which are suitable for a Series'
portfolio as well as for that of one or more of the other clients of MFS.
Investment decisions for a Series and for such other clients are made with a
view to achieving their respective investment objectives. It may develop that a
particular security is bought or sold for only one client even though it might
be held by, or bought or sold for, other clients. Likewise, a particular
security may be bought for one or more clients when one or more other clients
are selling that same security. Some simultaneous transactions are inevitable
when several clients receive investment advice from the same investment
adviser, particularly when the same security is suitable for the investment
objectives of more than one client. When two or more clients are simultaneously
engaged in the purchase or sale of the same security, the securities are
allocated among clients in a manner believed by the Adviser to be equitable to
each. It is recognized that in some cases this system could have a detrimental
effect on the price or volume of the security as far as a Series is concerned.
In other cases, however, it is believed that a Series' ability to participate
in volume transactions will produce better executions for the Series.
6. TAX STATUS
Shares of the Series are offered only to the separate accounts of the
Participating Insurance Companies that fund Contracts. See the applicable
Contract prospectus for a discussion of the special taxation of those companies
with respect to those accounts and of the Contract holders.
Each Series of the Trust has elected (and, in the case of the New Discovery
Series, intends to elect) to be, and to qualify each year for treatment as, a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"), by meeting all applicable requirements of
Subchapter M, including requirements as to the nature of each Series' gross
income, the amount of each Series' distributions and the composition of each
Series' portfolio assets. Because each Series intends to distribute all of its
net investment income and net realized capital gains to 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 any federal income or excise
taxes, although a Series which has foreign-source income may be subject to
foreign withholding taxes. If any of the Series should fail to qualify as a
"regulated investment company" in any year, that Series would incur regular
corporate federal income tax upon its taxable income.
Each Series intends to continue to diversify its assets as required by section
817(h) of the Code and the regulations thereunder. These requirements, which
are in addition to the diversification requirements of Subchapter M, place
certain limitations on the proportion of each Series' assets that may be
represented by any single investment and securities from the same issuer. If a
Series should fail to comply with these requirements, Contracts that
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invest in the Series would not be treated as annuity, endowment or life
insurance contracts under the Code.
Any investment by a Series in zero coupon bonds, deferred interest bonds, PIK
bonds, certain stripped securities and certain securities purchased at a market
discount will cause the Series to recognize income prior to the receipt of cash
payments with respect to those securities. In order to distribute this income
and avoid a tax on the Series, the Series may be required to liquidate
portfolio securities that it might otherwise have continued to hold,
potentially resulting in additional taxable gain or loss to the Series.
A Series' transactions in options, Futures Contracts, Forward Contracts, short
sales "against the box" and swaps and related transactions will be subject to
special tax rules that may affect the amount, timing and character of Series
income and distributions to shareholders. For example, certain positions held
by a Series on the last business day of each taxable year will be marked to
market (i.e., treated as if closed out) on that day, and any resulting gain or
loss, in addition to gains and losses from actual dispositions of those
positions, will be treated as 60% long-term and 40% short-term capital gain or
loss. Certain positions held by a Series that substantially diminish its risk
of loss with respect to other positions in its portfolio may constitute
"straddles," and may be subject to special tax rules that would cause deferral
of Series losses, adjustments in the holding periods of Series securities and
conversion of short-term into long-term capital losses. Certain tax elections
exist for straddles that may alter the effects of these rules. Each Series will
limit its activities in options, Futures Contracts, Forward Contracts, "short
sales against the box" and swaps and related transactions to the extent
necessary to meet the requirements of Subchapter M of the Code.
Special tax considerations apply with respect to foreign investments of a
Series. Foreign exchange gains and losses realized by the Series will generally
be treated as ordinary income and losses. Use of foreign currencies for
non-hedging purposes and investment by a Series in "passive foreign investment
companies" may be limited in order to avoid a tax on the Series. Investment
income received by a Series from foreign securities may be subject to foreign
income taxes withheld at the source. The United States has entered into tax
treaties with many foreign countries that may entitle a Series to a reduced
rate of tax or an exemption from tax on such income; the Series' intend to
qualify for treaty reduced rates where available. It is impossible, however, to
determine a Series' effective rate of foreign tax in advance, since the amount
of the Series' assets to be invested within various countries is not known.
7. NET INCOME AND DISTRIBUTIONS
Money Market Series: The net income attributable to the Money Market Series is
determined each day during which the Exchange is open for trading. As of the
date of this SAI, the Exchange is open for trading every weekday except for the
following holidays (or the days on which they are observed): New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, Christmas Day. (For taxation information on distributions,
see "Information Concerning Shares of Each Series--Distributions" in the
Prospectus.)
For this purpose, the net income attributable to shares of the Money Market
Series (from the time of the immediately preceding determination thereof) shall
consist of (i) all interest income accrued on the portfolio assets of the Money
Market Series, (ii) less all actual and accrued expenses of the Money Market
Series determined in accordance with generally accepted accounting principles,
and (iii) plus or minus net realized gains and losses and net unrealized
appreciation or depreciation on the assets of the Money Market Series, if any.
Interest income shall include discount earned (including both original issue
and market discount) on discount paper accrued ratably to the date of maturity.
Since the net income is declared as a dividend each time the net income is
determined, the net asset value per share (i.e., the value of the net assets of
the Money Market Series divided by the number of shares outstanding) remains at
$1.00 per share immediately after each such determination and dividend
declaration. Any increase in the value of a shareholder's investment,
representing the reinvestment of dividend income, is reflected by an increase
in the number of shares in its account.
It is expected that the shares of the Money Market Series will have a positive
net income at the time of each determination thereof. If for any reason the net
income determined at any time is a negative amount, which could occur, for
instance, upon default by an issuer of a portfolio security, the Money Market
Series would first offset the negative amount with respect to each shareholder
account from the dividends declared during the month with respect to each such
account. If and to the extent that such negative amount exceeds such declared
dividends at the end of the month (or during the month in the case of an
account liquidated in its entirety), the Money Market Series could reduce the
number of its outstanding shares by treating each shareholder of the Money
Market Series as having contributed to its capital that number of full and
fractional shares of the Money Market Series in the account of such shareholder
which represents its proportion of such excess. Each shareholder of the Money
Market Series will be deemed to have agreed to such contribution in these
circumstances by its investment in the Money Market Series. This procedure
would permit the net asset value per share of the Money Market Series to be
maintained at a constant $1.00 per share.
All Other Series: Each Series other than the Money Market Series intends to
distribute to its shareholders annually dividends equal to all of its net
investment income. Such Series' net investment income consists of non-capital
gain income less expenses. Such Series intend to distribute net realized short-
and long-term capital gains, if any, at least annually. Shareholders will be
informed of the tax consequences of such distributions, including whether any
portion represents a return of capital, after the end of each calendar year.
(For additional taxation information, see "Tax Status" above.)
8. DETERMINATION OF NET ASSET VALUE; PERFORMANCE INFORMATION
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
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regular trading on the Exchange by deducting the amount of a Series'
liabilities from the value of its assets and dividing the difference by the
number of shares of the Series outstanding.
Money Market Series: Portfolio securities of the Money Market Series are valued
at amortized cost, which the Trustees have determined in good faith constitutes
fair value for the purposes of complying with the 1940 Act. This valuation
method will continue to be used until such time as the Trustees determine that
it does not constitute fair value for such purposes. The Money Market Series
will limit its portfolio to those investments in U.S. dollar-denominated
instruments which the Board of Trustees determines present minimal credit
risks, and which are of high quality as determined by any major rating service
or, in the case of any instrument that is not so rated, of comparable quality
as determined by the Board of Trustees. The Money Market Series has also agreed
to maintain a dollar-weighted average maturity of 90 days or less and to invest
only in securities maturing in 13 months or less. The Board of Trustees has
established procedures designed to stabilize the net asset value per share of
the Money Market Series, as computed for the purposes of sales and redemptions,
at $1.00 per share. If the Trustees determine that a deviation from the $1.00
per share price may exist which may result in a material dilution or other
unfair result to investors or existing shareholders, they will take corrective
action they regard as necessary and appropriate, which action could include the
sale of instruments prior to maturity (to realize capital gains or losses);
shortening average portfolio maturity; withholding dividends; or using market
quotations for valuation purposes.
All Other Series: Securities, futures contracts and options in a Series'
portfolio (other than short-term obligations) for which the principal market is
one or more securities or commodities exchanges will be valued at the last
reported sale price or at the settlement price prior to the determination (or
if there has been no current sale, at the closing bid price) on the primary
exchange on which such securities, futures contracts or options are traded; but
if a securities exchange is not the principal market for securities, such
securities will, if market quotations are readily available, be valued at
current bid prices, unless such securities are reported on the Nasdaq stock
market, in which case they are valued at the last sale price or, if no sales
occurred during the day, at the last quoted bid price. Debt securities (other
than short-term obligations but including listed issues) in a Series' portfolio
are valued on the basis of valuations furnished by a pricing service which
utilizes both dealer-supplied valuations and electronic data processing
techniques which take into account appropriate factors such as
institutional-sized trading in similar groups of securities, yields, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data, without exclusive reliance upon quoted prices or exchange or
over-the-counter prices, since such valuations are believed to reflect more
accurately the fair value of such securities. Short-term obligations, if any,
in a Series' portfolio are valued at amortized cost, which constitutes fair
value as determined by the Board of Trustees. Short-term securities with a
remaining maturity in excess of 60 days will be valued based upon dealer
supplied valuations. Portfolio securities and over-the-counter options, for
which there are no quotations or valuations are valued at fair value as
determined in good faith by or at the direction of the Board of Trustees.
Performance Information
Money Market Series: The Money Market Series will provide current annualized
and effective annualized yield quotations based on the daily dividends of
shares of the Money Market Series. These quotations may from time to time be
used in advertisements, shareholder reports or other communications to
shareholders.
Any current yield quotation of the Money Market Series which is used in such a
manner as to be subject to the provisions of Rule 482(d) under the 1933 Act
shall consist of an annualized historical yield, carried at least to the
nearest hundredth of one percent, based on a specific seven calendar day period
and shall be calculated by dividing the net change in the value of an account
having a balance of one share of that class at the beginning of the period by
the value of the account at the beginning of the period and multiplying the
quotient by 365/7. For this purpose the net change in account value would
reflect the value of additional shares purchased with dividends declared on the
original share and dividends declared on both the original share and any such
additional shares, but would not reflect any realized gains or losses from the
sale of securities or any unrealized appreciation or depreciation on portfolio
securities. In addition, any effective yield quotation of the Money Market
Series so used shall be calculated by compounding the current yield quotation
for such period by multiplying such quotation by 7/365, adding 1 to the
product, raising the sum to a power equal to 365/7, and subtracting 1 from the
result. These yield quotations should not be considered as representative of
the yield of the Money Market Series in the future since the yield will vary
based on the type, quality and maturities of the securities held in its
portfolio, fluctuations in short-term interest rates and changes in the Money
Market Series expenses. Yield quotations for the Series are presented in
Appendix A attached hereto.
All Other Series:
Total Rate of Return -- Each Series, other than the Money Market Series, will
calculate its total rate of return of its shares for certain periods by
determining the average annual compounded rates of return over those periods
that would cause an investment of $1,000 (made with all distributions
reinvested) to reach the value of that investment at the end of the periods.
Each Series may also calculate total rates of return which represent aggregate
performance over a period or year-by-year performance. Total rate of return
quotations for each Series are presented in Appendix A attached hereto.
Yield -- Any yield quotation for a Series, other than the Money Market Series,
is based on the annualized net investment income per share of that Series for
the 30-day period ended December 31, 1997 (the end of the Trust's fiscal year).
The yield for such a Series is calculated by dividing its net investment income
earned during the period by the offering price per share of that Series on the
last day of the period. The resulting figure is then annualized. Net investment
income per share is determined by dividing (i) the dividends and interest of
that Series during the period, minus accrued expenses of that Series for the
period by (ii) the average number of shares of that Series entitled to receive
dividends during the period multiplied by the offering price per share on the
last day of the period. Yield quotations for each Series are presented in
Appendix A attached hereto.
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From time to time each Series may, as appropriate, quote fund rankings or
reprint all or a portion of evaluations of fund performance and operations
appearing in various independent publications, including but not limited to the
following: Money, Fortune, U.S. News and World Report, Kiplinger's Personal
Finance, The Wall Street Journal, Barron's, Investors Business Daily, Newsweek,
Financial World, Financial Planning, Investment Advisor, USA Today, Pensions
and Investments, SmartMoney, Forbes, Global Finance, Registered Representative,
Institutional Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical Services, Inc., Variable Annuity Research Data
Service, CDA Wiesenberger, Shearson Lehman and Salomon Bros. Indices, Ibbotson,
Business Week, Lowry Associates, Media General, Investment Company Data, The
New York Times, Your Money, Strangers Investment Advisor, Financial Planning on
Wall Street, Standard and Poor's, Individual Investor, The 100 Best Mutual
Funds You Can Buy, by Gordon K. Williamson, Consumer Price Index, and Sanford
C. Bernstein & Co. Series' performance may also be compared to the performance
of other mutual funds tracked by financial or business publications or
periodicals.
From time to time a Series may discuss or quote its current portfolio manager
as well as other investment personnel, including such persons' views on: the
economy; securities markets; portfolio securities and their issuers; investment
philosophies, strategies, techniques and criteria used in the selection of
securities to be purchased or sold for the Series; the Series' portfolio
holdings; the investment research and analysis process; the formulation and
evaluation of investment recommendations; and the assessment and evaluation of
credit, interest rate, market and economic risks and similar or related
matters.
The Series may also quote evaluations mentioned in independent radio or
television broadcasts.
From time to time the Series may use charts and graphs to illustrate the past
performance of various indices such as those mentioned above.
From time to time the Fund may also discuss or quote the views of its
distributor, its investment adviser and other financial planning, legal, tax,
accounting, insurance, estate planning and other professionals, or from
surveys, regarding individual and family financial planning. Such views may
include information regarding: retirement planning; tax management strategies;
estate planning; general investment techniques (e.g., asset allocation and
disciplined saving and investing); business succession; ideas and information
provided through the MFS Heritage Planning[TM] program, an intergenerational
financial planning assistance program; issues with respect to insurance (e.g.,
disability and life insurance and Medicare supplemental insurance); issues
regarding financial and health care management for elderly family members; and
similar or related matters.
MFS Firsts: MFS has a long history of innovations.
- -- 1924 -- Massachusetts Investors Trust is established as the first open-end
mutual fund in America.
- -- 1924 -- Massachusetts Investors Trust is the first mutual fund to make full
public disclosure of its operations in shareholder reports.
- -- 1932 -- One of the first internal research departments is established to
provide in-house analytical capability for an investment management
firm.
- -- 1933 -- Massachusetts Investors Trust is the first mutual fund to register
under the 1933 Act ("Truth in Securities Act" or "Full Disclosure
Act").
- -- 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders take capital gain distributions either in additional
shares or in cash.
- -- 1976 -- MFS[RegTM] Municipal Bond Fund is among the first municipal bond
funds established.
- -- 1979 -- Spectrum becomes the first combination fixed/ variable annuity with
no initial sales charge.
- -- 1981 -- MFS[RegTM] World Governments Fund is established as America's first
globally diversified fixed income mutual fund.
- -- 1984 -- MFS[RegTM] Municipal High Income Fund is the first mutual fund to
seek high tax-free income from lower-rated municipal securities.
- -- 1986 -- MFS[RegTM] Managed Sectors Fund becomes the first mutual fund to
target and shift investments among industry sectors for
shareholders.
- -- 1986 -- MFS[RegTM] Municipal Income Trust is the first closed-end,
high-yield municipal bond fund traded on the New York Stock
Exchange.
- -- 1987 -- MFS[RegTM] Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock Exchange.
- -- 1989 -- MFS Regatta becomes America's first non-qualified market value
adjusted fixed/variable annuity.
- -- 1990 -- MFS[RegTM] World Total Return Fund is the first global balanced
fund.
- -- 1993 -- MFS[RegTM] World Growth Fund is the first global emerging markets
fund to offer the expertise of two sub-advisers.
- -- 1993 -- MFS becomes money manager of MFS[RegTM] Union Standard[RegTM] Equity
Fund, the first fund to invest solely in companies deemed to be
union-friendly by an Advisory Board of senior labor officials,
senior managers of companies with significant labor contracts,
academics and other national labor leaders or experts.
9. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Trust's Declaration of Trust permits the Trustees of the Trust to issue an
unlimited number of full and fractional Shares of Beneficial Interest (without
par value) of one or more separate series and to
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divide or combine the shares of any series into a greater or lesser number of
shares without thereby changing the proportionate beneficial interests in that
series. The Trustees have currently authorized shares of the thirteen series
identified on page 2 hereof. The Declaration of Trust further authorizes the
Trustees to classify or reclassify any series of shares into one or more
classes. The Trustees have no current intention to classify more than one class
of shares. Each share of a Series represents an equal proportionate interest in
the assets of the Series. Upon liquidation of a Series, shareholders of the
Series are entitled to share pro rata in the net assets of the Series available
for distribution to shareholders. The Trust reserves the right to create and
issue additional series or classes of shares, in which case the shares of each
class would participate equally in the earnings, dividends and assets allocable
to that class of the particular series.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of
shareholders. To the extent any Series' shareholder owns a controlling
percentage of the Series' shares, such shareholder may affect the outcome of
such matters to a greater extent than other Series shareholders (see
"Description of Shares, Voting Rights and Liabilities" in the Prospectus).
Although Trustees are not elected annually by the shareholders, shareholders
have under certain circumstances the right to remove one or more Trustees in
accordance with the provisions of Section 16(c) of the 1940 Act. No material
amendment may be made to the Declaration of Trust without the affirmative vote
of a majority of the Trust's shares. Shares have no pre-emptive or conversion
rights. Shares are fully paid and non-assessable. The Trust may enter into a
merger or consolidation, or sell all or substantially all of its assets (or all
or substantially all of the assets belonging to any series of the Trust), if
approved by the vote of the holders of two-thirds of the Trust's outstanding
shares voting as a single class, or of the affected series of the Trust, as the
case may be, except that if the Trustees of the Trust recommend such merger,
consolidation or sale, the approval by vote of the holders of a majority of the
Trust's or the affected series' outstanding shares (as defined in "Investment
Restrictions") will be sufficient. The Trust or any series of the Trust may
also be terminated (i) upon liquidation and distribution of its assets, if
approved by the vote of the holders of two-thirds of its outstanding shares, or
(ii) by the Trustees by written notice to the shareholders of the Trust of the
affected series. If not so terminated, the Trust will continue indefinitely.
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 Declaration of Trust contains an express disclaimer
of shareholder liability for acts or obligations of the Trust and provides for
indemnification and reimbursement of expenses out of Trust property for any
shareholder held personally liable for the obligations of the Trust. The
Declaration of Trust also provides that it shall maintain appropriate insurance
(for example, fidelity bonding and errors and omissions insurance) for the
protection of the Trust, its shareholders, Trustees, officers, employees and
agents covering possible tort or other liabilities. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which both inadequate insurance existed and the
Trust itself was unable to meet its obligations.
The Declaration of Trust further provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust
and that the Trustees will not be liable for any action or failure to act, but
nothing in the Declaration of Trust protects a Trustee against any liability to
which he would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties involved in the
conduct of his office.
10. INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS
Deloitte & Touche LLP are the Trust's independent auditors, providing audit
services, tax return preparation, and assistance and consultation with respect
to the preparation of filings with the SEC. The Portfolio of Investments at
December 31, 1997, the Statement of Assets and Liabilities at December 31,
1997, the Statement of Operations for the period ended December 31, 1997, the
Statement of Changes in Net Assets for the period ended December 31, 1997, the
Notes to Financial Statements and the Independent Auditors' Report, each of
which is included in the Annual Reports to Shareholders of the Series, are
incorporated by reference into this SAI and have been so incorporated in
reliance upon the report of Deloitte & Touche LLP, independent certified public
accountants, as experts in accounting and auditing. Copies of these Annual
Reports accompany this SAI.
30
<PAGE>
APPENDIX A
PERFORMANCE QUOTATIONS
All performance quotations are as of December 31, 1997.
<TABLE>
<CAPTION>
Average Annual
Total Returns Actual 30-Day
------------------------------ Yield (including 30-Day Yield
Series 1 Year Life of Series Waivers) (Without Waivers)
- --------------------------------- ----------- ---------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Emerging Growth ................. 21.90% 23.53%(1) -- --
Value ........................... 26.47% 25.99%(2) -- --
Research ........................ 20.26% 22.13%(3) -- --
Growth with Income .............. 29.78% 27.61%(4) -- --
Total Return .................... 21.30% 20.93%(5) -- --
Utilities ....................... 31.70% 27.92%(5) -- --
High Income ..................... 13.52% 12.66%(3) 9.95% 9.31%
World Governments ............... -1.13% 4.92%(6) 4.14% 3.09%
Emerging Markets Equity ......... -- -10.00%(8) -- --
Bond ............................ 10.14% 6.94%(7) 4.87% -3.85%
Limited Maturity ................ 6.08% 6.33%(2) 4.74% -2.20%
Money Market .................... 4.91% 4.62%(5) N/A N/A
</TABLE>
- ----------------
(1) From the commencement of investment operations on July 24, 1995.
(2) From the commencement of investment operations on August 14, 1996.
(3) From the commencement of investment operations on July 26, 1995.
(4) From the commencement of investment operations on October 9, 1995.
(5) From the commencement of investment operations on January 3, 1995.
(6) From the commencement of investment operations on June 14, 1994.
(7) From the commencement of investment operations on October 24, 1995.
(8) From the commencement of investment operations on October 16, 1997.
The current annualized yield of the Money Market Series for the seven-day
period ended December 31, 1997 was 4.70%, and the effective annualized yield of
the Money Market Series for such period was 4.81%.
A-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
State Street Bank and Trust Company
225 Franklin Street, Boston, Massachusetts 02110
Dividend Disbursing Agent
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
Shareholder Servicing Agent
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 637-8730
Mailing Address
P.O. Box 1400, Boston, MA 02104-9985
Independent Auditors
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
MFS[RegTM] Variable
Insurance Trust(SM)
500 Boylston Street
Boston, MA 02116
[MFS LOGO]
We invented the mutual fund(SM)
<PAGE>
PART C
Item 24. (a) Financial Statements and Exhibits
All Series (except MFS New Discovery Series)
Financial Statements Included in Parts A and B:
Included in Part A of this Registration Statement:
Financial Highlights for:
the MFS Emerging Growth Series for the period from commencement
of investment operations on July 24, 1995 to December 31, 1997;
the MFS Value Series and the MFS Limited Maturity Series for the
period from commencement of investment operations on August 14,
1996 to December 31, 1997;
the MFS Research Series and the MFS High Income Series for the
period from commencement of investment operations on July 26,
1995 to December 31, 1997;
the MFS Total Return Series, the MFS Utilities Series and the
MFS Money Market Series for the period from commencement of
investment operations on January 3, 1995 to December 31, 1997;
the MFS Growth With Income Series for the period from
commencement of investment operations on October 9, 1995 to
December 31, 1997;
the MFS World Governments Series for the period from
commencement of investment operations on June 14, 1994 to
December 31, 1997; the MFS Bond Series for the period from
commencement of investment operations on October 24, 1995 to
December 31, 1997; and
the MFS/Foreign & Colonial Emerging Markets Equity Series for
the period from commencement of operations on October 16, 1997
to December 31, 1997.
Included in Part B of this Registration Statement:
At December 31, 1997:
Portfolio of Investments*
Statement of Assets and Liabilities*
<PAGE>
For the year or the period ended December 31, 1997:
Statement of Operations*
For the two years in the period ended December 31, 1997:
Statement of Changes in Net Assets*
Statement of Operations* and Statement of Changes in Net
Assets* for the MFS Value Series and the MFS Limited Maturity
Series are for the period from commencement of investment
operations on August 14, 1996 to December 31, 1997, and for
the MFS/Foreign & Colonial Emerging Markets Equity Series are
for the period from commencement of operations on October 16,
1997 to December 31, 1997.
- ------------------------
* Incorporated by reference to the Annual Reports to Shareholders of the
Series, each dated December 31, 1997, filed with the SEC via EDGAR on March
5, 1998 (for MFS Emerging Growth Series and MFS Research Series), and March
6, 1998 (for all other operational Series of the Trust).
(b) Exhibits
1 (a) Declaration of Trust, dated January 28, 1994. (3)
(b) Amendment to Declaration of Trust - Designation of Series
of Shares dated January 31, 1994. (3)
(c) Amendment to Declaration of Trust - Redesignation of
Series, dated June 1, 1995. (3)
(d) Amendment to Declaration of Trust - Redesignation of
Series, dated April 25, 1996. (4)
(e) Amendment to Declaration of Trust - Redesignation of
Series, dated September 9, 1997. (8)
(f) Amendment to Declaration of Trust - Designation of MFS New
Discovery Series, dated February 26, 1998. (6)
2 By-Laws, dated January 28, 1994. (3)
3 Not Applicable.
4 Not Applicable.
5 (a) Investment Advisory Agreement by and between Registrant and
Massachusetts Financial Services Company, dated April 14,
1994 as amended and restated on October 1, 1997. (6)
(b) Sub-Advisory Agreement by and between Massachusetts
Financial Services Company and Foreign & Colonial
Management Ltd., dated October 16, 1997. (6)
(c) Sub-Advisory Agreement by and between Foreign & Colonial
Management Ltd. and Foreign & Colonial Emerging Markets
Limited, dated October 16, 1997. (6)
(d) Form of Investment Advisory Agreement between the
Registrant and Massachusetts Financial Services Company on
behalf of MFS New Discovery Series. (6)
6 Distribution Agreement between Registrant and Massachusetts
Investors Services, Inc., dated April 14, 1994. (3)
7 Not Applicable.
8 Form of Custodian Agreement between Registrant and State
Street Bank & Trust Company; filed herewith.
9
(a) Shareholder Servicing Agent Agreement between Registrant
and MFS Service Center, dated April 14, 1994. (3)
(b) Dividend Disbursing Agency Agreement between Registrant and
State Street Bank and Trust, dated April 14, 1994. (3)
(c) Loan Agreement among MFS Borrowers and The First National
Bank of Boston, dated as of February 21, 1995 (2)
(d) Third Amendment dated February 14, 1997 to Loan Agreement
dated February 21, 1995 by and among the Banks named
therein and The First National Bank of Boston. (5)
(e) Master Administrative Services Agreement, dated March 1,
1997, as amended. (7)
10 Opinion and Consent of Counsel, dated April 29, 1998; filed
herewith.
11 Consent of Deloitte & Touche LLP; filed herewith.
<PAGE>
12 Not Applicable.
13 Investment Representation Letter. (3)
14 Not Applicable.
15 Not Applicable.
16 Schedule of Computation for Performance Quotations -
Average Annual Total Rate of Return, Aggregate Total Rate
of Return and Standardized Yield. (1)
17 Financial Data Schedules for each operational Series of the
Trust for the year ended December 31, 1997; filed herewith.
18 Not Applicable.
Power of Attorney dated August 12, 1994. (3)
Power of Attorney dated February 19, 1998. (6)
- ----------------------------
(1) Incorporated by reference to MFS Municipal Series Trust (File Nos. 2-92915
and 811-4096) Post-Effective Amendment No. 26 filed with the SEC via EDGAR
on February 22, 1995.
(2) Incorporated by reference to Amendment No. 8 on Form N-2 for MFS Municipal
Income Trust (File No. 811-4841) filed with the SEC via EDGAR on February
28, 1995.
(3) Incorporated by reference to Registrant's Post-Effective Amendment No. 4
filed with the SEC via EDGAR on October 26, 1995.
(4) Incorporated by reference to Registrant's Post-Effective Amendment No. 6
filed with the SEC via EDGAR on May 30, 1996.
(5) Incorporated by reference to MFS Series Trust I (File Nos. 33-7638 and
811-4777) Post-Effective Amendment No. 28 filed with the SEC via EDGAR on
June 26, 1997.
(6) Incorporated by reference to Registrant's Post-Effective Amendment No. 10
filed with the SEC via EDGAR on February 27, 1998.
(7) Incorporated by reference to Massachusetts Investors Growth Stock Fund (File
Nos. 2-14677 and 811-859) Post-Effective Amendment No. 65 filed with the SEC
via EDGAR on March 30, 1998.
(8) Incorporated by reference to Registrant's Post-Effective Amendment No. 9
filed with the SEC via EDGAR on October 1, 1997.
Item 25. Persons Controlled by or under Common Control with Registrant
Not applicable.
Item 26. Number of Holders of Securities
MFS Emerging Growth Series
(1) (2)
Title of Class Number of Record Holders
Shares of Beneficial Interest 56
(without par value) (as of March 31, 1998)
<PAGE>
MFS Value Series
(1) (2)
Title of Class Number of Record Holders
Shares of Beneficial Interest 8
(without par value) (as of March 31, 1998)
MFS Research Series
(1) (2)
Title of Class Number of Record Holders
Shares of Beneficial Interest 40
(without par value) (as of March 31, 1998)
MFS Growth With Income Series
(1) (2)
Title of Class Number of Record Holders
Shares of Beneficial Interest 27
(without par value) (as of March 31, 1998)
MFS Total Return Series
(1) (2)
Title of Class Number of Record Holders
Shares of Beneficial Interest 26
(without par value) (as of March 31, 1998)
MFS Utilities Series
(1) (2)
Title of Class Number of Record Holders
Shares of Beneficial Interest 19
(without par value) (as of March 31, 1998)
<PAGE>
MFS High Income Series
(1) (2)
Title of Class Number of Record Holders
Shares of Beneficial Interest 13
(without par value) (as of March 31, 1998)
MFS World Governments Series
(1) (2)
Title of Class Number of Record Holders
Shares of Beneficial Interest 26
(without par value) (as of March 31, 1998)
MFS/Foreign & Colonial Emerging Markets Equity Series
(1) (2)
Title of Class Number of Record Holders
Shares of Beneficial Interest 7
(without par value) (as of March 31, 1998)
MFS Bond Series
(1) (2)
Title of Class Number of Record Holders
Shares of Beneficial Interest 12
(without par value) (as of March 31, 1998)
MFS Limited Maturity Series
(1) (2)
Title of Class Number of Record Holders
Shares of Beneficial Interest 8
(without par value) (as of March 31, 1998)
<PAGE>
MFS Money Market Series
(1) (2)
Title of Class Number of Record Holders
Shares of Beneficial Interest 8
(without par value) (as of March 31, 1998)
Item 27. Indemnification
Reference is hereby made to (a) Section 5.3 of the Registrant's
Declaration of Trust; and (b) Section 9 of the Shareholder Servicing Agent
Agreement between the Registrant and MFS Service Center, Inc.
The Trustees and officers of the Registrant and the personnel of the
Registrant's investment adviser and distributor will be insured as of the
effective date of this Registration Statement under an errors and omissions
liability insurance policy. The Registrant and its officers are also insured
under the fidelity bond required by Rule 17g-1 under the Investment Company Act
of 1940, as amended.
Item 28. Business and Other Connections of Investment Adviser
MFS serves as investment adviser to the following open-end Funds
comprising the MFS Family of Funds (except the Vertex Funds mentioned below):
Massachusetts Investors Trust, Massachusetts Investors Growth Stock Fund, MFS
Growth Opportunities Fund, MFS Government Securities Fund, MFS Government
Limited Maturity Fund, MFS Series Trust I (which has thirteen series: MFS
Managed Sectors Fund, MFS Cash Reserve Fund, MFS World Asset Allocation Fund,
MFS Strategic Growth Fund, MFS Research Growth and Income Fund, MFS Core Growth
Fund, MFS Equity Income Fund, MFS Special Opportunities Fund, MFS Convertible
Securities Fund, MFS Blue Chip Fund, MFS New Discovery Fund, MFS Science and
Technology Fund and MFS Research International Fund), MFS Series Trust II (which
has three series: MFS Emerging Growth Fund, MFS Large Cap Growth Fund and MFS
Intermediate Income Fund), MFS Series Trust III (which has two series: MFS High
Income Fund and MFS Municipal High Income Fund), MFS Series Trust IV (which has
four series: MFS Money Market Fund, MFS Government Money Market Fund, MFS
Municipal Bond Fund and MFS Mid Cap Growth Fund), MFS Series Trust V (which has
six series: MFS Total Return Fund, MFS Research Fund, MFS International
Opportunities Fund, MFS International Strategic Growth Fund, MFS International
Value Fund and MFS Asia Pacific Fund), MFS Series Trust VI (which has three
series: MFS World Total Return Fund, MFS Utilities Fund and MFS World Equity
Fund), MFS Series Trust VII (which has two series: MFS World Governments Fund
and MFS Value Fund), MFS Series Trust VIII (which has two series: MFS Strategic
Income Fund and MFS World Growth Fund), MFS Series Trust IX (which has three
series: MFS Bond Fund, MFS Limited Maturity Fund and MFS Municipal Limited
Maturity Fund), MFS Series Trust X (which has eight series: MFS Government
Mortgage Fund, MFS/Foreign & Colonial Emerging Markets Equity Fund, MFS
International Growth Fund, MFS International Growth and Income Fund,
<PAGE>
MFS Real Estate Investment Fund, MFS Strategic Value Fund, MFS Small Cap Value
Fund and MFS Emerging Markets Debt Fund), MFS Series Trust XI (which has six
series: MFS Union Standard Equity Fund, Vertex All Cap Fund, Vertex Research All
Cap Fund, Vertex Growth Fund, Vertex Discovery Fund and Vertex Contrarian Fund
(the Vertex Funds are expected to be declared effective April 28, 1998)), and
MFS Municipal Series Trust (which has 16 series: MFS Alabama Municipal Bond
Fund, MFS Arkansas Municipal Bond Fund, MFS California Municipal Bond Fund, MFS
Florida Municipal Bond Fund, MFS Georgia Municipal Bond Fund, MFS Maryland
Municipal Bond Fund, MFS Massachusetts Municipal Bond Fund, MFS Mississippi
Municipal Bond Fund, MFS New York Municipal Bond Fund, MFS North Carolina
Municipal Bond Fund, MFS Pennsylvania Municipal Bond Fund, MFS South Carolina
Municipal Bond Fund, MFS Tennessee Municipal Bond Fund, MFS Virginia Municipal
Bond Fund, MFS West Virginia Municipal Bond Fund and MFS Municipal Income Fund)
(the "MFS Funds"). The principal business address of each of the MFS Funds is
500 Boylston Street, Boston, Massachusetts 02116.
MFS also serves as investment adviser of the following open-end Funds:
MFS Institutional Trust ("MFSIT") (which has seven series) and MFS Variable
Insurance Trust ("MVI") (which has twelve series). The principal business
address of each of the aforementioned funds is 500 Boylston Street, Boston,
Massachusetts 02116.
In addition, MFS serves as investment adviser to the following
closed-end funds: MFS Municipal Income Trust, MFS Multimarket Income Trust, MFS
Government Markets Income Trust, MFS Intermediate Income Trust, MFS Charter
Income Trust and MFS Special Value Trust (the "MFS Closed-End Funds"). The
principal business address of each of the MFS Closed-End Funds is 500 Boylston
Street, Boston, Massachusetts 02116.
Lastly, MFS serves as investment adviser to MFS/Sun Life Series Trust
("MFS/SL") (which has 26 series), Money Market Variable Account, High Yield
Variable Account, Capital Appreciation Variable Account, Government Securities
Variable Account, World Governments Variable Account, Total Return Variable
Account and Managed Sectors Variable Account (collectively, the "Accounts"). The
principal business address of MFS/SL is 500 Boylston Street, Boston,
Massachusetts 02116. The principal business address of each of the
aforementioned Accounts is One Sun Life Executive Park, Wellesley Hills,
Massachusetts 02181.
Vertex Investment Management, Inc., a Delaware corporation and a wholly
owned subsidiary of MFS, whose principal business address is 500 Boylston
Street, Boston, Massachusetts 02116 ("Vertex"), serves as investment adviser to
Vertex All Cap Fund, Vertex Research All Cap Fund, Vertex Growth Fund, Vertex
Discovery Fund and Vertex Contrarian Fund, each a series of MFS Series Trust XI.
The principal business address of the aforementioned Funds is 500 Boylston
Street, Boston, Massachusetts 02116.
MFS International Ltd. ("MIL"), a limited liability company organized
under the laws of Bermuda and a subsidiary of MFS, whose principal business
address is Cedar House, 41 Cedar Avenue, Hamilton HM12 Bermuda, serves as
investment adviser to and distributor for
<PAGE>
MFS American Funds (which has six portfolios: MFS American Funds-U.S. Equity
Fund, MFS American Funds-U.S. Emerging Growth Fund, MFS American Funds-U.S. High
Yield Bond Fund, MFS American Funds - U.S. Dollar Reserve Fund, MFS American
Funds-Charter Income Fund and MFS American Funds-U.S. Research Fund) (the "MIL
Funds"). The MIL Funds are organized in Luxembourg and qualify as an undertaking
for collective investments in transferable securities (UCITS). The principal
business address of the MIL Funds is 47, Boulevard Royal, L-2449 Luxembourg.
MIL also serves as investment adviser to and distributor for MFS
Meridian U.S. Government Bond Fund, MFS Meridian Charter Income Fund, MFS
Meridian Global Governments Fund, MFS Meridian U.S. Emerging Growth Fund, MFS
Meridian Global Equity Fund, MFS Meridian Limited Maturity Fund, MFS Meridian
World Growth Fund, MFS Meridian Money Market Fund, MFS Meridian World Total
Return Fund, MFS Meridian U.S. Equity Fund, MFS Meridian Research Fund, MFS
Meridian U.S. High Yield Fund and MFS Meridian Emerging Markets Debt Fund
(collectively the "MFS Meridian Funds"). Each of the MFS Meridian Funds is
organized as an exempt company under the laws of the Cayman Islands. The
principal business address of each of the MFS Meridian Funds is P.O. Box 309,
Grand Cayman, Cayman Islands, British West Indies.
MFS International (U.K.) Ltd. ("MIL-UK"), a private limited company
registered with the Registrar of Companies for England and Wales whose current
address is 4 John Carpenter Street, London, England ED4Y 0NH, is involved
primarily in marketing and investment research activities with respect to
private clients and the MIL Funds and the MFS Meridian Funds.
MFS Institutional Advisors (Australia) Ltd. ("MFSI-Australia"), a
private limited company organized under the Corporations Law of New South Wales,
Australia whose current address is Level 37, Governor Phillip Tower, One Farrer
Place, Sydney, N5W2000, Australia, is involved primarily in investment
management and distribution of Australian superannuation unit trusts and acts as
an investment adviser to institutional accounts.
MFS Holdings Australia Pty Ltd. ("MFS Holdings Australia"), a private
limited company organized pursuant to the Corporations Law of New South Wales,
Australia whose current address is Level 37, Governor Phillip Tower, One Farrer
Place, Sydney, NSW2000 Australia, and whose function is to serve primarily as a
holding company.
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary of MFS,
serves as distributor for the MFS Funds, MVI and MFSIT.
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS,
serves as shareholder servicing agent to the MFS Funds, the MFS Closed-End
Funds, MFSIT and MVI.
MFS Institutional Advisors, Inc. ("MFSI"), a wholly owned subsidiary of
MFS, provides investment advice to substantial private clients.
<PAGE>
MFS Retirement Services, Inc. ("RSI"), a wholly owned subsidiary of
MFS, markets MFS products to retirement plans and provides administrative and
record keeping services for retirement plans.
MFS
The Directors of MFS are Jeffrey L. Shames, Arnold D. Scott, John W.
Ballen, Donald A. Stewart and John D. McNeil. Mr. Shames is the Chairman, Chief
Executive Officer and President, Mr. Scott is a Senior Executive Vice President
and Secretary, William W. Scott, Jr., Patricia A. Zlotin, John W. Ballen, Thomas
J. Cashman, Jr., Joseph W. Dello Russo and Kevin R. Parke are Executive Vice
Presidents, Stephen E. Cavan is a Senior Vice President, General Counsel and an
Assistant Secretary, Robert T. Burns is a Senior Vice President, Associate
General Counsel and an Assistant Secretary of MFS, and Thomas B. Hastings is a
Vice President and Treasurer of MFS.
Massachusetts Investors Trust
Massachusetts Investors Growth Stock Fund
MFS Growth Opportunities Fund
MFS Government Securities Fund
MFS Series Trust I
MFS Series Trust V
MFS Series Trust VI
MFS Series Trust X
MFS Government Limited Maturity Fund
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer,
James O. Yost, Ellen M. Moynihan and Mark E. Bradley, Vice Presidents of MFS,
are the Assistant Treasurers, James R. Bordewick, Jr., Senior Vice President and
Associate General Counsel of MFS, is the Assistant Secretary.
MFS Series Trust II
Leslie J. Nanberg, Senior Vice President of MFS, is a Vice President,
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O.
Yost, Ellen M. Moynihan and Mark E. Bradley are the Assistant Treasurers, and
James R. Bordewick, Jr. is the Assistant Secretary.
MFS Government Markets Income Trust
MFS Intermediate Income Trust
Leslie J. Nanberg, Senior Vice President of MFS, is a Vice President,
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O.
Yost, Ellen M. Moynihan and Mark E. Bradley are the Assistant Treasurers, and
James R. Bordewick, Jr. is the Assistant Secretary.
<PAGE>
MFS Series Trust III
James T. Swanson, Robert J. Manning and Joan S. Batchelder, Senior Vice
Presidents of MFS, and Bernard Scozzafava, Vice President of MFS, are Vice
Presidents, Sheila Burns-Magnan, Assistant Vice President of MFS, and Daniel E.
McManus, Vice President of MFS, are Assistant Vice Presidents, Stephen E. Cavan
is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M.
Moynihan and Mark E. Bradley are the Assistant Treasurers, and James R.
Bordewick, Jr. is the Assistant Secretary.
MFS Series Trust IV MFS Series Trust IX
Robert A. Dennis and Geoffrey L. Kurinsky, Senior Vice Presidents of
MFS, are Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is
the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers and James R. Bordewick, Jr. is the Assistant Secretary.
MFS Series Trust VII
Leslie J. Nanberg and Stephen C. Bryant, Senior Vice Presidents of MFS,
are Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is the
Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers and James R. Bordewick, Jr. is the Assistant Secretary.
MFS Series Trust VIII
Jeffrey L. Shames, Leslie J. Nanberg and James T. Swanson and John D.
Laupheimer, Jr., a Senior Vice President of MFS, are Vice Presidents, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen
M. Moynihan and Mark E. Bradley are the Assistant Treasurers and James R.
Bordewick, Jr. is the Assistant Secretary.
MFS Municipal Series Trust
Robert A. Dennis is Vice President, David B. Smith and Geoffrey L.
Schechter, Vice Presidents of MFS, are Vice Presidents, Daniel E. McManus, Vice
President of MFS, is an Assistant Vice President, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan
and Mark E. Bradley are the Assistant Treasurers and James R. Bordewick, Jr. is
the Assistant Secretary.
<PAGE>
MFS Variable Insurance Trust
MFS Series Trust XI
MFS Institutional Trust
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer,
James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the Assistant
Treasurers and James R. Bordewick, Jr. is the Assistant Secretary.
MFS Municipal Income Trust
Robert J. Manning is Vice President, Stephen E. Cavan is the Secretary,
W. Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E.
Bradley are the Assistant Treasurers and James R. Bordewick, Jr. is the
Assistant Secretary.
MFS Multimarket Income Trust MFS Charter Income Trust
Leslie J. Nanberg and James T. Swanson are Vice Presidents, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen
M. Moynihan and Mark E. Bradley are the Assistant Treasurers and James R.
Bordewick, Jr. is the Assistant Secretary.
MFS Special Value Trust
Robert J. Manning is Vice President, Stephen E. Cavan is the Secretary,
W. Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E.
Bradley are the Assistant Treasurers and James R. Bordewick, Jr. is the
Assistant Secretary.
MFS/Sun Life Series Trust
John D. McNeil, Chairman and Director of Sun Life Assurance Company of
Canada, is the Chairman, Stephen E. Cavan is the Secretary, W. Thomas London is
the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers and James R. Bordewick, Jr. is the Assistant Secretary.
Money Market Variable Account
High Yield Variable Account
Capital Appreciation Variable Account
Government Securities Variable Account
Total Return Variable Account
World Governments Variable Account
Managed Sectors Variable Account
John D. McNeil is the Chairman, Stephen E. Cavan is the Secretary, and
James R. Bordewick, Jr. is the Assistant Secretary.
<PAGE>
Vertex
Jeffrey L. Shames and Arnold D. Scott are the Directors, Jeffrey L.
Shames is the President, Kevin R. Parke and John W. Ballen are Executive Vice
Presidents, John F. Brennan, Jr., and John D. Laupheimer are Senior Vice
Presidents, Brian E. Stack is a Vice President, Joseph W. Dello Russo is the
Treasurer, Thomas B. Hastings is the Assistant Treasurer, Stephen E. Cavan is
the Secretary and Robert T. Burns is the Assistant Secretary.
MIL
Arnold D. Scott, Jeffrey L. Shames and Thomas J. Cashman, Jr. are
Directors, Stephen E. Cavan is a Director, Senior Vice President and the Clerk,
Robert T. Burns is an Assistant Clerk, Joseph W. Dello Russo, Executive Vice
President and Chief Financial Officer of MFS, is the Treasurer and Thomas B.
Hastings is the Assistant Treasurer.
MIL-UK
Thomas J. Cashman, Jr. is President and a Director, Arnold D. Scott and
Jeffrey L. Shames are Directors, Stephen E. Cavan is a Director and the
Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer and Robert T. Burns is the Assistant Secretary.
MFSI - Australia
Thomas J. Cashman, Jr. is President and a Director, Graham E. Lenzer,
John A. Gee and David Adiseshan are Directors, Stephen E. Cavan is the
Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer, and Robert T. Burns is the Assistant Secretary.
MFS Holdings - Australia
Jeffrey L. Shames is the President and a Director, Arnold D. Scott,
Thomas J. Cashman, Jr., and Graham E. Lenzer are Directors, Stephen E. Cavan is
the Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer, and Robert T. Burns is the Assistant Secretary.
MIL Funds
Richard B. Bailey, John A. Brindle, Richard W. S. Baker, Arnold D.
Scott, Jeffrey L. Shames and William F. Waters are Directors, Stephen E. Cavan
is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M.
Moynihan and Mark E. Bradley are the Assistant Treasurers and James R.
Bordewick, Jr. is the Assistant Secretary.
<PAGE>
MFS Meridian Funds
Richard B. Bailey, John A. Brindle, Richard W. S. Baker, Arnold D.
Scott, Jeffrey L. Shames and William F. Waters are Directors, Stephen E. Cavan
is the Secretary, W. Thomas London is the Treasurer, James R. Bordewick, Jr. is
the Assistant Secretary and James O. Yost, Ellen M. Moynihan and Mark E. Bradley
are the Assistant Treasurers.
MFD
Arnold D. Scott and Jeffrey L. Shames are Directors, William W. Scott,
Jr., an Executive Vice President of MFS, is the President, Stephen E. Cavan is
the Secretary, Robert T. Burns is the Assistant Secretary, Joseph W. Dello Russo
is the Treasurer, and Thomas B. Hastings is the Assistant Treasurer.
MFSC
Arnold D. Scott and Jeffrey L. Shames are Directors, Joseph A.
Recomendes, a Senior Vice President and Chief Information Officer of MFS, is
Vice Chairman and a Director, Janet A. Clifford is the President, Joseph W.
Dello Russo is the Treasurer, Thomas B. Hastings is the Assistant Treasurer,
Stephen E. Cavan is the Secretary, and Robert T. Burns is the Assistant
Secretary.
MFSI
Jeffrey L. Shames, and Arnold D. Scott are Directors, Thomas J.
Cashman, Jr., is the President and a Director, Leslie J. Nanberg is a Senior
Vice President, a Managing Director and a Director, Kevin R. Parke is the
Executive Vice President and a Managing Director, George F. Bennett, Jr., John
A. Gee, Brianne Grady, Joseph A. Kosciuszek and Joseph J. Trainor are Senior
Vice Presidents and Managing Directors, Joseph W. Dello Russo is the Treasurer,
Thomas B. Hastings is the Assistant Treasurer and Robert T. Burns is the
Secretary.
RSI
Arnold D. Scott is the Chairman and a Director, Martin E. Beaulieu is
the President, William W. Scott, Jr. is a Director, Joseph W. Dello Russo is the
Treasurer, Thomas B. Hastings is the Assistant Treasurer, Stephen E. Cavan is
the Secretary and Robert T. Burns is the Assistant Secretary.
In addition, the following persons, Directors or officers of MFS, have
the affiliations indicated:
Donald A. Stewart President and a Director, Sun Life
Assurance Company of Canada, Sun Life
Centre, 150 King Street West, Toronto,
Ontario, Canada (Mr. Stewart is also an
officer and/or Director
<PAGE>
of various subsidiaries and affiliates of
Sun Life)
John D. McNeil Chairman, Sun Life Assurance Company of
Canada, Sun Life Centre, 150 King Street
West, Toronto, Ontario, Canada (Mr. McNeil
is also an officer and/or Director of
various subsidiaries and affiliates of Sun
Life)
Joseph W. Dello Russo Director of Mutual Fund Operations, The
Boston Company, Exchange Place, Boston,
Massachusetts (until August, 1994)
Item 29. Distributors
(a) Reference is hereby made to Item 28 above.
(b) Reference is hereby made to Item 28 above; the principal business
address of each of these persons is 500 Boylston Street, Boston, Massachusetts
02116.
(c) Not applicable.
Item 30. Location of Accounts and Records
The accounts and records of the Registrant are located, in whole or in
part, at the office of the Registrant and the following locations:
NAME ADDRESS
Massachusetts Financial Services 500 Boylston Street
Company (investment adviser) Boston, MA 02116
MFS Fund Distributors, Inc. 500 Boylston Street
(distributor) Boston, MA 02116
Investors Bank & Trust 89 South Street
Company (custodian) Boston, MA 02111
MFS Service Center, Inc. 500 Boylston Street
(transfer agent) Boston, MA 02116
The Registrant's corporate documents are kept by the Registrant at its
offices. Portfolio brokerage orders, other purchase orders, reasons for
brokerage allocation and lists of persons authorized to transact business for
the Registrant are kept by Massachusetts Financial Services Company at 500
Boylston Street, Boston, Massachusetts 02116. Shareholder account
<PAGE>
records are kept by MFS Service Center, Inc. at 500 Boylston Street, Boston,
Massachusetts 02116. Transaction journals, receipts for the acceptance and
delivery of securities and cash, ledgers and trial balances are kept by
Investors Bank & Trust Company, 89 South Street, Boston, MA 02111.
Item 31. Management Services
Not applicable.
Item 32. Undertakings
(a) Not applicable.
(b) Not Applicable.
(c) Registrant undertakes to furnish each person to whom a prospectus
is delivered with a copy of its latest annual report to shareholders upon
request and without charge.
(d) Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the provisions set forth in Item 27 of
this Part C, or otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a trustee, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the Securities being Registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO.
8 Form of Custodian Agreement between Registrant
and State Street Bank & Trust Company
10 Opinion and Consent of Counsel, dated
April 29, 1998.
11 Consent of Deloitte & Touche LLP
17 Financial Data Schedules for each
operational Series of the Trust for the
year ended December 31, 1997
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of Boston and
The Commonwealth of Massachusetts on the 27th day of April, 1998.
MFS VARIABLE INSURANCE TRUST
By: JAMES R. BORDEWICK, JR.
Name: James R. Bordewick, Jr.
Title: Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to its Registration Statement has been signed below by
the following persons in the capacities indicated on April 27, 1998.
SIGNATURE TITLE
STEPHEN E. CAVAN* Principal Executive Officer
- -----------------
Stephen E. Cavan
W. THOMAS LONDON* Treasurer (Principal Financial Officer
- ----------------- and Principal Accounting Officer)
W. Thomas London
WILLIAM R. GUTOW* Trustee
- -----------------
William R. Gutow
NELSON J. DARLING, JR.* Trustee
- -----------------------
Nelson J. Darling, Jr.
*By: JAMES R. BORDEWICK, JR.
Name: James R. Bordewick, Jr.
as Attorney-in-fact
Executed by James R. Bordewick, Jr. on
behalf of those indicated pursuant to
(i) a Power of Attorney dated August 12,
1994, incorporated by reference to the
Registrant's Post-Effective Amendment
No. 4 filed electronically with the
Securities and Exchange Commission on
October 26, 1995; and (ii) a Power of
Attorney dated February 19, 1998,
incorporated by reference to the
Registrant's Post-Effective Amendment
No. 10 filed electronically with the
Securities and Exchange Commission on
February 27, 1998.
EXHIBIT NO. 99.B8
FORM OF
CUSTODIAN CONTRACT
This Custodian Contract between MFS Variable Insurance Trust, a
business trust organized and existing under the laws of The Commonwealth of
Massachusetts, having its principal place of business at 500 Boylston Street,
Boston, Massachusetts 02116, hereinafter called the "Trust", and State Street
Bank and Trust Company, a Massachusetts trust company, having its principal
place of business at 225 Franklin Street, Boston, Massachusetts, 02110,
hereinafter called the "Custodian",
WITNESSETH:
WHEREAS, the Trust is authorized to issue shares in separate series,
with each such series representing interests in a separate portfolio of
securities and other assets; and
WHEREAS, the Trust currently offers shares in five series, MFS Bond
Series, MFS Growth With Income Series, MFS High Income Series, MFS Limited
Maturity Series and MFS Value Series (the "Current Series") (the Current Series
together with all other series subsequently established by the Trust and made
subject to this Contract in accordance with paragraph 16, being herein referred
to as the "Portfolios");
NOW THEREFORE, in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It.
The Trust hereby employs the Custodian as the custodian of the assets
of the Portfolios of the Trust pursuant to the provisions of the Declaration of
Trust. The Trust agrees, on behalf of the Portfolios, agrees to deliver to the
Custodian all securities and cash of the Portfolios, and all payments of income,
payments of principal or capital distributions received by it with respect to
all securities owned by the Portfolios from time to time, and the cash
consideration received by it for such new or treasury shares of beneficial
interest of the Trust representing interests in the Portfolios ("Shares") as may
be issued or sold from time to time. The Custodian shall not be responsible for
any property of a Portfolio held or received by the Portfolio and not delivered
to the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Section
2.17), the Custodian shall on behalf of the applicable Portfolio(s) from time to
time employ one or more sub-custodians, but only in accordance with an
applicable vote by the Board of Trustees of the Trust on behalf of the
applicable Portfolio(s), and provided that the Custodian shall have no more or
less responsibility or liability to the Trust on account of any actions or
omissions of any subcustodian so employed than any such subcustodian has to the
Custodian.
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<PAGE>
2. Duties of the Custodian with Respect to Property of the Trust Held By the
Custodian.
2.1 Holding Securities. The Custodian shall hold and physically segregate for
the account of each Portfolio all non-cash property, including all securities
owned by such Portfolio, other than (a) securities which are maintained pursuant
to Section 2.12 in a clearing agency which acts as a securities depository or in
a book-entry system authorized by the U.S. Department of the Treasury (each, a
"U.S. Securities System") and (b) commercial paper of an issuer for which State
Street Bank and Trust Company acts as issuing and paying agent ("Direct Paper")
which is deposited and/or maintained in the Direct Paper System of the Custodian
pursuant to Section 2.12A.
2.2 Delivery of Securities. The Custodian shall release and deliver securities
owned by a Portfolio held by the Custodian or in a U.S. Securities System
account of the Custodian or in the Custodian's Direct Paper book entry system
account ("Direct Paper System Account") only upon receipt of Proper Instructions
from the Trust on behalf of the applicable Portfolio, which may be continuing
instructions when deemed appropriate by the parties, and only in the following
cases:
1) Upon sale of such securities for the account of the Portfolio and
receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Portfolio;
3) In the case of a sale effected through a U.S. Securities System,
in accordance with the provisions of Section 2.12 hereof;
4) To the depository agent in connection with tender or other
similar offers for securities of the Portfolio;
5) To the issuer thereof or its agent when such securities are
called, redeemed, retired or otherwise become payable; provided that, in any
such case, the cash or other consideration is to be delivered to the Custodian;
6) To the issuer thereof, or its agent, for transfer into the name
of the Portfolio or into the name of any nominee or nominees of the Custodian or
into the name or nominee name of any agent appointed pursuant to Section 2.11 or
into the name or nominee name of any sub-custodian appointed pursuant to Article
1; or for exchange for a different number of bonds, certificates or other
evidence representing the same aggregate face amount or number of units;
provided that, in any such case, the new securities are to be delivered to the
Custodian;
7) Upon the sale of such securities for the account of the
Portfolio, to the broker or its clearing agent, against a receipt, for
examination in accordance with "street delivery" custom; provided that in any
such case, the Custodian shall have no responsibility or liability for any loss
arising from the delivery of such securities prior to receiving payment for such
securities except as may arise from the Custodian's own negligence or willful
misconduct;
2
<PAGE>
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of the
securities of the issuer of such securities, or pursuant to provisions for
conversion contained in such securities, or pursuant to any deposit agreement;
provided that, in any such case, the new securities and cash, if any, are to be
delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the
surrender thereof in the exercise of such warrants, rights or similar securities
or the surrender of interim receipts or temporary securities for definitive
securities; provided that, in any such case, the new securities and cash, if
any, are to be delivered to the Custodian;
10) For delivery in connection with any loans of securities made by
the Portfolio, but only against receipt of adequate collateral as agreed upon
from time to time by the Custodian and the Trust on behalf of the Portfolio,
which may be in the form of cash or obligations issued by the United States
government, its agencies or instrumentalities, except that in connection with
any loans for which collateral is to be credited to the Custodian's account in
the book-entry system authorized by the U.S. Department of the Treasury, the
Custodian will not be held liable or responsible for the delivery of securities
owned by the Portfolio prior to the receipt of such collateral;
11) For delivery as security in connection with any borrowings by
the Trust on behalf of the Portfolio requiring a pledge of assets by the Trust
on behalf of the Portfolio, but only against receipt of amounts borrowed;
12) For delivery in accordance with the provisions of any agreement
among the Trust on behalf of the Portfolio, the Custodian and a broker-dealer
registered under the Securities Exchange Act of 1934 (the "Exchange Act") and a
member of The National Association of Securities Dealers, Inc. ("NASD"),
relating to compliance with the rules of The Options Clearing Corporation and of
any registered national securities exchange, or of any similar organization or
organizations, regarding escrow or other arrangements in connection with
transactions by the Portfolio of the Trust;
13) For delivery in accordance with the provisions of any agreement
among the Trust on behalf of the Portfolio, the Custodian, and a Futures
Commission Merchant registered under the Commodity Exchange Act, relating to
compliance with the rules of the Commodity Futures Trading Commission and/or any
Contract Market, or any similar organization or organizations, regarding account
deposits in connection with transactions by the Portfolio of the Trust;
14) Upon receipt of instructions from the transfer agent ("Transfer
Agent") for the Trust, for delivery to such Transfer Agent or to the holders of
shares in connection with distributions in kind, as may be described from time
to time in the currently effective prospectus
3
<PAGE>
and statement of additional information of the Trust related to the Portfolio
("Prospectus"), in satisfaction of requests by holders of Shares for repurchase
or redemption; and
15) For any other proper corporate purpose, but only upon receipt
of, in addition to Proper Instructions from the Trust on behalf of the
applicable Portfolio, a certified copy of a resolution of the Board of Trustees
or of the Executive Committee signed by an officer of the Trust and certified by
the Secretary or an Assistant Secretary, setting forth the purpose for which
such delivery is to be made, declaring such purpose to be a proper corporate
purpose, and naming the person or persons to whom delivery of such securities
shall be made.
2.3 Registration of Securities. Securities held by the Custodian (other than
bearer securities) shall be registered in the name of the Portfolio or in the
name of any nominee of the Trust on behalf of the Portfolio or of any nominee of
the Custodian which nominee shall be assigned exclusively to the Portfolio,
unless the Trust has authorized in writing the appointment of a nominee to be
used in common with other registered investment companies having the same
investment adviser as the Portfolio, or in the name or nominee name of any agent
appointed pursuant to Section 2.11 or in the name or nominee name of any
sub-custodian appointed pursuant to Article 1. All securities accepted by the
Custodian on behalf of the Portfolio under the terms of this Contract shall be
in "street name" or other good delivery form.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank account
or accounts (the "Portfolio's Account or Accounts") in the name of each
Portfolio of the Trust, subject only to draft or order by the Custodian acting
pursuant to the terms of this Contract, and shall hold in such account or
accounts, subject to the provisions hereof, all cash received by it from or for
the account of the Portfolio, other than cash maintained by the Portfolio in a
bank account established and used in accordance with Rule 17f-3 under the
Investment Company Act of 1940. Funds held by the Custodian for a Portfolio may
be deposited by it to its credit as Custodian in the Banking Department of the
Custodian or in such other banks or trust companies as it may in its discretion
deem necessary or desirable; provided, however, that every such bank or trust
company shall be qualified to act as a custodian under the Investment Company
Act of 1940 and that each such bank or trust company and the funds to be
deposited with each such bank or trust company shall on behalf of each
applicable Portfolio be approved by vote of a majority of the Board of Trustees
of the Trust. Such funds shall be deposited by the Custodian in its capacity as
Custodian and shall be withdrawable by the Custodian only in that capacity.
2.5 Payments for Shares. The Custodian shall receive from the distributor for
the Shares or from the Transfer Agent of the Trust and deposit into the
Portfolio's Account such payments as are received for Shares of that Portfolio
issued or sold from time to time by the Trust. The Custodian will provide timely
notification to the Trust on behalf of each such Portfolio and the Transfer
Agent of any receipt by it of payments for Shares of such Portfolio.
2.6 Investment and Availability of Federal Funds. Upon mutual agreement between
the Trust on behalf of each applicable Portfolio and the Custodian, the
Custodian shall, upon the receipt of Proper Instructions from the Trust on
behalf of a Portfolio, 1) invest in such instruments as may be
4
<PAGE>
set forth in such instruments as may be set forth in such instructions on the
same day as received all federal funds received after a time agreed upon the
Custodian and the Trust; and 2) make federal funds available to such Portfolio
as of specified times agreed upon from time to time by the Trust and the
Custodian in the amount of checks received in payment for Shares of such
Portfolio which are deposited into the Portfolio's account.
2.7 Collection of Income. The Custodian shall collect on a timely basis all
income and other payments with respect to registered securities held hereunder
to which each Portfolio shall be entitled either by law or pursuant to custom in
the securities business, and shall collect on a timely basis all income and
other payments with respect to bearer securities if, on the date of payment by
the issuer, such securities are held by the Custodian or its agent thereof and
shall credit such income, as collected, to such Portfolio's custodian account.
Without limiting the generality of the foregoing, the Custodian shall detach and
present for payment all coupons and other income items requiring presentation as
and when they become due and shall collect interest when due on securities held
hereunder. Income due each Portfolio on securities loaned pursuant to the
provisions of Section 2.2 (10) shall be the responsibility of the Trust. The
Custodian will have no duty or responsibility in connection therewith, other
than to provide the Trust with such information or data as may be necessary to
assist the Trust in arranging for the timely delivery to the Custodian of the
income to which the Portfolio is properly entitled.
2.8 Payment of Trust Monies. Upon receipt of Proper Instructions from the Trust
on behalf of the applicable Portfolio, which may be continuing instructions when
deemed appropriate by the parties, the Custodian shall pay out monies of a
Portfolio in the following cases only:
1) Upon the purchase of securities for the account of the Portfolio
but only (a) against the delivery of such securities to the Custodian (or any
bank, banking firm or trust company doing business in the United States or
abroad which is qualified under the Investment Company Act of 1940, as amended,
to act as a custodian and has been designated by the Custodian as its agent for
this purpose) registered in the name of the Portfolio or in the name of a
nominee of the Custodian referred to in Section 2.3 hereof or in proper form for
transfer; (b) in the case of a purchase effected through a U.S. Securities
System, in accordance with the conditions set forth in Section 2.12 hereof; or
(c) in the case of a purchase involving the Direct Paper System, in accordance
with the conditions set forth in Section 2.12A; or (d) in the case of repurchase
agreements entered into between the Trust on behalf of the Portfolio and the
Custodian, or another bank, or a broker-dealer which is a member of NASD, (i)
against delivery of the securities either in certificate form or through an
entry crediting the Custodian's account at the Federal Reserve Bank with such
securities or (ii) against delivery of the receipt evidencing purchase by the
Portfolio of securities owned by the Custodian along with written evidence of
the agreement by the Custodian to repurchase such securities from the Portfolio;
2) In connection with conversion, exchange or surrender of
securities owned by the Portfolio as set forth in Section 2.2 hereof;
5
<PAGE>
3) For the redemption or repurchase of Shares issued by the
Portfolio as set forth in Section 2.10 hereof;
4) For the payment of any expense or liability incurred by the
Portfolio, including but not limited to the following payments for the account
of the Portfolio: interest, taxes, management, accounting, transfer agent and
legal fees, and operating expenses of the Trust whether or not such expenses are
to be in whole or part capitalized or treated as deferred expenses;
5) For the payment of any dividends on Shares of the Portfolio
declared pursuant to the governing documents of the Trust;
6) For payment of the amount of dividends received in respect of
securities sold short;
7) For any other proper purpose, but only upon receipt of, in
addition to Proper Instructions from the Trust on behalf of the Portfolio, a
certified copy of a resolution of the Board of Trustees or of the Executive
Committee of the Trust signed by an officer of the Trust and certified by its
Secretary or an Assistant Secretary, setting forth the purpose for which such
payment is to be made, declaring such purpose to be a proper purpose, and naming
the person or persons to whom such payment is to be made.
2.9 Liability for Payment in Advance of Receipt of Securities Purchased. In any
and every case where payment for purchase of securities for the account of a
Portfolio is made by the Custodian in advance of receipt of the securities
purchased in the absence of specific written instructions from the Trust on
behalf of such Portfolio to so pay in advance, the Custodian shall be absolutely
liable to the Trust for such securities to the same extent as if the securities
had been received by the Custodian except that in the case of repurchase
agreements entered into by the Trust on behalf of a Portfolio with a bank which
is a member of the Federal Reserve System, the Custodian may transfer funds to
the account of such bank prior to the receipt of written evidence that the
securities subject to such repurchase agreement have been transferred by
book-entry into a segregated non-proprietary account of the Custodian maintained
with the Federal Reserve Bank of Boston or of the safekeeping receipt, provided
that such securities have in fact been so transferred by book-entry.
2.10 Payments for Repurchases or Redemptions of Shares of the Trust. From such
funds as may be available for the purpose but subject to the limitations of the
Declaration of Trust and any applicable votes of the Board of Trustees of the
Trust pursuant thereto, the Custodian shall, upon receipt of instructions from
the Transfer Agent, make funds available for payment to holders of Shares who
have delivered to the Transfer Agent a request for redemption or repurchase of
their Shares. In connection with the redemption or repurchase of Shares of a
Portfolio, the Custodian is authorized upon receipt of instructions from the
Transfer Agent to wire funds to or through a commercial bank designated by the
redeeming shareholders. In connection with the redemption or repurchase of
Shares of a Portfolio, the Custodian shall honor checks drawn on the Custodian
by a holder of Shares, which checks have been furnished by the Trust to the
holder of Shares, when
6
<PAGE>
presented to the Custodian in accordance with such procedures and controls as
are mutually agreed upon from time to time between the Trust and the Custodian.
2.11 Appointment of Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or trust company
which is itself qualified under the Investment Company Act of 1940, as amended,
to act as a custodian, as its agent to carry out such of the provisions of this
Article 2 as the Custodian may from time to time direct; provided, however, that
the appointment of any agent shall not relieve the Custodian of its
responsibilities or liabilities hereunder.
2.12 Deposit of Trust Assets in U.S. Securities Systems. The Custodian may
deposit and/or maintain securities owned by a Portfolio in a U.S. Securities
System in accordance with applicable Federal Reserve Board and Securities and
Exchange Commission rules and regulations, if any, and subject to the following
provisions:
1) The Custodian may keep securities of the Portfolio in a U.S.
Securities System provided that such securities are represented in an account
("Custodian's Account") of the Custodian in the U.S. Securities System which
shall not include any assets of the Custodian other than assets held as a
fiduciary, custodian or otherwise for customers;
2) The records of the Custodian with respect to securities of the
Portfolio which are maintained in a U.S. Securities System shall identify by
book-entry those securities belonging to the Portfolio;
3) The Custodian shall pay for securities purchased for the account
of the Portfolio upon (i) receipt of advice from the U.S. Securities System that
such securities have been transferred to the Custodian's Account, and (ii) the
making of an entry on the records of the Custodian to reflect such payment and
transfer for the account of the Portfolio. The Custodian shall transfer
securities sold for the account of the Portfolio upon (i) receipt of advice from
the U.S. Securities System that payment for such securities has been transferred
to the Custodian's Account, and (ii) the making of an entry on the records of
the Custodian to reflect such transfer and payment for the account of the
Portfolio. Copies of all advices from the U.S. Securities System of transfers of
securities for the account of the Portfolio shall identify the Portfolio, be
maintained for the Portfolio by the Custodian and be provided to the Trust at
its request. Upon request, the Custodian shall furnish the Trust on behalf of
the Portfolio confirmation of each transfer to or from the account of the
Portfolio in the form of a written advice or notice and shall furnish to the
Portfolio copies of daily transaction sheets reflecting each day's transactions
in the U.S. Securities System for the account of the Portfolio.
4) The Custodian shall provide the Trust for the Portfolio with any
report obtained by the Custodian on the U.S. Securities System's accounting
system, internal accounting control and procedures for safeguarding securities
deposited in the U.S. Securities System;
7
<PAGE>
5) The Custodian shall have received from the Trust on behalf of the
Portfolio the initial or annual certificate, as the case may be, required by
Article 9 hereof;
6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Trust for the benefit of the Portfolio for any
loss or damage to the Portfolio resulting from use of a U.S. Securities System
by reason of any negligence, misfeasance or misconduct of the Custodian or any
of its agents or of any of its or their employees or from failure of the
Custodian or any such agent to enforce effectively such rights as it may have
against such U.S. Securities System; at the election of the Trust, it shall be
entitled to be subrogated to the rights of the Custodian with respect to any
claim against the U.S. Securities System or any other person which the Custodian
may have as a consequence of any such loss or damage if and to the extent that
the Trust has not been made whole for any such loss or damage.
2.12A Trust Assets Held in the Custodian's Direct Paper System.
The Custodian may deposit and/or maintain securities owned by a Portfolio in the
Direct Paper System of the Custodian subject to the following provisions:
1) No transaction relating to securities in the Direct Paper System
will be effected in the absence of Proper Instructions from the Trust on behalf
of the Portfolio;
2) The Custodian may keep securities of the Portfolio in the Direct
Paper System only if such securities are represented in an account ("Account")
of the Custodian in the Direct Paper System which shall not include any assets
of the Custodian other than assets held as a fiduciary, custodian or otherwise
for customers;
3) The records of the Custodian with respect to securities of the
Portfolio which are maintained in the Direct Paper System shall identify by
book-entry those securities belonging to the Portfolio;
4) The Custodian shall pay for securities purchased for the account
of the Portfolio upon the making of an entry on the records of the Custodian to
reflect such payment and transfer of securities to the account of the Portfolio.
The Custodian shall transfer securities sold for the account of the Portfolio
upon the making of an entry on the records of the Custodian to reflect such
transfer and receipt of payment for the account of the Portfolio;
5) The Custodian shall furnish the Trust on behalf of the Portfolio
confirmation of each transfer to or from the account of the Portfolio, in the
form of a written advice or notice, of Direct Paper on the next business day
following such transfer and shall furnish to the Trust on behalf of the
Portfolio copies of daily transaction sheets reflecting each day's transaction
in the Securities System for the account of the Portfolio;
6) The Custodian shall provide the Trust on behalf of the Portfolio
with any report on its system of internal accounting control as the Trust may
reasonably request from time to time.
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2.13 Segregated Account. The Custodian shall upon receipt of Proper Instructions
from the Trust on behalf of each applicable Portfolio establish and maintain a
segregated account or accounts for and on behalf of each such Portfolio, into
which account or accounts may be transferred cash and/or securities, including
securities maintained in an account by the Custodian pursuant to Section 2.12
hereof, (i) in accordance with the provisions of any agreement among the Trust
on behalf of the Portfolio, the Custodian and a broker-dealer registered under
the Exchange Act and a member of the NASD (or any futures commission merchant
registered under the Commodity Exchange Act), relating to compliance with the
rules of The Options Clearing Corporation and of any registered national
securities exchange (or the Commodity Futures Trading Commission or any
registered contract market), or of any similar organization or organizations,
regarding escrow or other arrangements in connection with transactions by the
Trust, (ii) for purposes of segregating cash or government securities in
connection with options purchased, sold or written by the Portfolio or commodity
futures contracts or options thereon purchased or sold by the Portfolio, (iii)
for the purposes of compliance by the Portfolio with the procedures required by
Investment Company Act Release No. 10666, or any subsequent release or releases
of the Securities and Exchange Commission relating to the maintenance of
segregated accounts by registered investment companies and (iv) for other proper
corporate purposes, but only, in the case of clause (iv), upon receipt of, in
addition to Proper Instructions from the Trust on behalf of the applicable
Portfolio, a certified copy of a resolution of the Board of Trustees or of the
Executive Committee signed by an officer of the Trust and certified by the
Secretary or an Assistant Secretary, setting forth the purpose or purposes of
such segregated account and declaring such purposes to be proper corporate
purposes.
2.14 Ownership Certificates for Tax Purposes. The Custodian shall execute
ownership and other certificates and affidavits for all federal and state tax
purposes in connection with receipt of income or other payments with respect to
securities of each Portfolio held by it and in connection with transfers of
securities.
2.15 Proxies. The Custodian shall, with respect to the securities held
hereunder, cause to be promptly executed by the registered holder of such
securities, if the securities are registered otherwise than in the name of the
Portfolio or a nominee of the Portfolio, all proxies, without indication of the
manner in which such proxies are to be voted, and shall promptly deliver to the
Portfolio such proxies, all proxy soliciting materials and all notices relating
to such securities.
2.16 Communications Relating to Trust Portfolio Securities.
The Custodian shall transmit promptly to the Trust for each Portfolio all
written information (including, without limitation, pendency of calls and
maturities of securities and expirations of rights in connection therewith and
notices of exercise of call and put options written by the Trust on behalf of
the Portfolio and the maturity of futures contracts purchased or sold by the
Portfolio) received by the Custodian from issuers of the securities being held
for the Portfolio. With respect to tender or exchange offers, the Custodian
shall transmit promptly to the Portfolio all written information received by the
Custodian from issuers of the securities whose tender or exchange is sought and
from the party (or his agents) making the tender or exchange offer. If the
Portfolio
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desires to take action with respect to any tender offer, exchange offer or any
other similar transaction, the Portfolio shall notify the Custodian at least
three business days prior to the date on which the Custodian is to take such
action.
3. Duties of the Custodian with Respect to Property of the Portfolios Held
Outside of the United States.
3A. Duties of Custodian with Respect to the State Street Portfolios.
The provisions of this Article 3A shall apply to the duties of the
Custodian as they relate to the foreign securities of any Portfolio employing
the State Street Global Custody Network pursuant to Section 16 of this Agreement
(a "State Street Portfolio").
3A.1 Appointment of Foreign Sub-Custodians. The State Street Portfolios hereby
authorize and instruct the Custodian to employ as sub-custodians for the
Portfolios' securities and other assets maintained outside the United States the
foreign banking institutions and foreign securities depositories designated in
resolutions approved by the Board of Trustees of the Trust and delivered to
State Street ("foreign sub-custodians"). Subject to receipt of "Proper
Instructions", as defined in Section 5 of this Contract, together with a
certified resolution of the Portfolio's Board of Trustees, the Custodian and a
State Street Portfolio may from time to time agree to designate additional
foreign banking institutions and foreign securities depositories to act as
sub-custodian. Upon receipt of Proper Instructions, a State Street Portfolio may
instruct the Custodian to cease the employment of any one or more such
sub-custodians for maintaining custody of the Portfolio's assets.
3A.2 Assets to be Held. The Custodian shall limit the securities and other
assets maintained in the custody of the foreign sub-custodians to: (a) "foreign
securities", as defined in paragraph (c)(1) of Rule 17f-5 under the Investment
Company Act of 1940, and (b) cash and cash equivalents in such amounts as the
Custodian or the State Street Portfolio may determine to be reasonably necessary
to effect the Portfolio's foreign securities transactions. The Custodian shall
identify on its books as belonging to each State Street Portfolio, the foreign
securities of the State Street Portfolio held by each foreign sub-custodian.
3A.3 Foreign Securities Depositories. Except as may otherwise be agreed upon in
writing by the Custodian and a State Street Portfolio, assets of the State
Street Portfolios shall be maintained in a clearing agency which acts as a
securities depository or in a book-entry system for the central handling of
securities located outside of the United States (each a "Foreign Securities
System") only through arrangements implemented by the foreign banking
institutions serving as sub-custodians pursuant to the terms hereof. (Foreign
Securities Systems and U.S. Securities Systems are collectively referred to
herein as "Securities Systems"). Where possible, such arrangements shall include
entry into agreements containing the provisions set forth in Section 3A.5
hereof.
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3A.4 Holding Securities. The Custodian may hold securities and other non-cash
property for all of its customers, including the State Street Portfolios, with a
Foreign Sub-custodian in a single account that is identified as belonging to the
Custodian for the benefit of its customers, provided however, that (i) the
records of the Custodian with respect to securities and other non-cash property
of the State Street Portfolios which are maintained in such account shall
identify by book-entry those securities and other non-cash property belonging to
each State Street Portfolio and (ii) the Custodian shall require that securities
and other non-cash property so held by the Foreign Sub-custodian be held
separately from any assets of the Foreign Sub-custodian or of others.
3A.5 Agreements with Foreign Banking Institutions. Each agreement with a foreign
banking institution shall provide that: (a) the assets of the State Street
Portfolios will not be subject to any right, charge, security interest, lien or
claim of any kind in favor of the foreign banking institution or its creditors
or agent, except a claim of payment for their safe custody or administration;
(b) beneficial ownership of the assets of each State Street Portfolio will be
freely transferable without the payment of money or value other than for custody
or administration; (c) adequate records will be maintained identifying the
assets as belonging to each applicable State Street Portfolio; (d) officers of
or auditors employed by, or other representatives of the Custodian, including to
the extent permitted under applicable law the independent public accountants for
the State Street Portfolios, will be given access to the books and records of
the foreign banking institution relating to its actions under its agreement with
the Custodian; and (e) assets of the State Street Portfolios held by the foreign
sub-custodian will be subject only to the instructions of the Custodian or its
agents.
3A.6 Access of Independent Accountants of the State Street Portfolios. Upon
request of the State Street Portfolios, the Custodian will use its best efforts
to arrange for the independent accountants of the State Street Portfolios to be
afforded access to the books and records of any foreign banking institution
employed as a foreign sub-custodian insofar as such books and records relate to
the performance of such foreign banking institution under its agreement with the
Custodian.
3A.7 Reports by Custodian. The Custodian will supply to the State Street
Portfolios from time to time, as mutually agreed upon, statements in respect of
the securities and other assets of the State Street Portfolios held by foreign
sub-custodians, including but not limited to an identification of entities
having possession of the State Street Portfolios securities and other assets and
advices or notifications of any transfers of securities to or from each
custodial account maintained by a foreign banking institution for the Custodian
on behalf of each applicable State Street State Street Portfolio indicating, as
to securities acquired for a State Street Portfolio, the identity of the entity
having physical possession of such securities.
3A.8 Transactions in Foreign Custody Account. (a) Except as otherwise provided
in paragraph (b) of this Section 3A.8, the provision of Sections 2.2 and 2.7 of
this Contract shall apply, mutatis mutandis to the foreign securities of the
State Street Portfolios held outside the United States by foreign
sub-custodians.
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(b) Notwithstanding any provision of this Contract to the contrary,
settlement and payment for securities received for the account of each
applicable State Street Portfolio and delivery of securities maintained for the
account of each applicable State Street Portfolio may be effected in accordance
with the customary established securities trading or securities processing
practices and procedures in the jurisdiction or market in which the transaction
occurs, including, without limitation, delivering securities to the purchaser
thereof or to a dealer therefor (or an agent for such purchaser or dealer)
against a receipt with the expectation of receiving later payment for such
securities from such purchaser or dealer.
(c) Securities maintained in the custody of a foreign sub-custodian
may be maintained in the name of such entity's nominee to the same extent as set
forth in Section 2.3 of this Contract, and the State Street Portfolios agree to
hold any such nominee harmless from any liability as a holder of record of such
securities.
3A.9 Liability of Foreign Sub-Custodians. Each agreement pursuant to which the
Custodian employs a foreign banking institution as a foreign sub-custodian shall
require the institution to exercise reasonable care in the performance of its
duties and to indemnify, and hold harmless, the Custodian and the State Street
Portfolios from and against any loss, damage, cost, expense, liability or claim
arising out of or in connection with the institution's performance of such
obligations. At the election of a State Street Portfolio, it shall be entitled
to be subrogated to the rights of the Custodian with respect to any claims
against a foreign banking institution as a consequence of any such loss, damage,
cost, expense, liability or claim if and to the extent that the State Street
Portfolio has not been made whole for any such loss, damage, cost, expense,
liability or claim.
3A.10 Liability of Custodian. The Custodian shall be liable for the acts or
omissions of a foreign banking institution to the same extent as set forth with
respect to sub-custodians generally in this Contract and, regardless of whether
assets are maintained in the custody of a foreign banking institution, a foreign
securities depository or a branch of a U.S. bank as contemplated by paragraph
3A.13 hereof, the Custodian shall not be liable for any loss, damage, cost,
expense, liability or claim resulting from nationalization, expropriation,
currency restrictions, or acts of war or terrorism or any loss where the
sub-custodian has otherwise exercised reasonable care. Notwithstanding the
foregoing provisions of this paragraph 3A.10, in delegating custody duties to
State Street London Ltd., the Custodian shall not be relieved of any
responsibility to a State Street Portfolio for any loss due to such delegation,
except such loss as may result from (a) political risk (including, but not
limited to, exchange control restrictions, confiscation, expropriation,
nationalization, insurrection, civil strife or armed hostilities) or (b) other
losses (excluding a bankruptcy or insolvency of State Street London Ltd. not
caused by political risk) due to Acts of God, nuclear incident or other losses
under circumstances where the Custodian and State Street London Ltd. have
exercised reasonable care.
3A.11 Reimbursement for Advances. If a State Street Portfolio requires the
Custodian to advance cash or securities for any purpose for the benefit of such
State Street Portfolio including the purchase or sale of foreign exchange or of
contracts for foreign exchange, or in the event that the Custodian or its
nominee shall incur or be assessed any taxes, charges, expenses, assessments,
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claims or liabilities in connection with the performance of this Contract,
except such as may arise from its or its nominee's own negligent action,
negligent failure to act or willful misconduct, any property at any time held
for the account of the applicable State Street Portfolio shall be security
therefor and should the State Street Portfolio fail to repay the Custodian
promptly, the Custodian shall be entitled to utilize available cash and to
dispose of such State Street Portfolio's assets to the extent necessary to
obtain reimbursement.
3A.12 Monitoring Responsibilities. The Custodian shall furnish annually to the
State Street Portfolios, during the month of June, information concerning the
foreign sub-custodians employed by the Custodian. Such information shall be
similar in kind and scope to that furnished to the State Street Portfolios in
connection with the initial approval of this Contract. In addition, the
Custodian will promptly inform the State Street Portfolios in the event that the
Custodian learns of a material adverse change in the financial condition of a
foreign sub-custodian or any material loss of the assets of the State Street
Portfolios or in the case of any foreign sub-custodian not the subject of an
exemptive order from the Securities and Exchange Commission is notified by such
foreign sub-custodian that there appears to be a substantial likelihood that its
shareholders' equity will decline below $200 million (U.S. dollars or the
equivalent thereof) or that its shareholders' equity has declined below $200
million (in each case computed in accordance with generally accepted U.S.
accounting principles).
3A.13 Branches of U.S. Banks. (a) Except as otherwise set forth in this
Contract, the provisions hereof shall not apply where the custody of the State
Street Portfolio's assets are maintained in a foreign branch of a banking
institution which is a "bank" as defined by Section 2(a)(5) of the Investment
Company Act of 1940 meeting the qualification set forth in Section 26(a) of said
Act. The appointment of any such branch as a sub-custodian shall be governed by
paragraph 1 of this Contract.
(b) Cash held for each State Street Portfolio in the United Kingdom
shall be maintained in an interest bearing account established for the State
Street Portfolio with the Custodian's London branch, which account shall be
subject to the direction of the Custodian, State Street London Ltd. or both.
3A.14 Tax Law. The Custodian shall have no responsibility or liability for any
obligations now or hereafter imposed on the State Street Portfolios or the
Custodian as custodian of the State Street Portfolios by the tax law of the
United States of America or any state or political subdivision thereof. It shall
be the responsibility of the State Street Portfolios to notify the Custodian of
the obligations imposed on the State Street Portfolios or the Custodian as
custodian of the State Street Portfolio by the tax law of jurisdictions other
than those mentioned in the above sentence, including responsibility for
withholding and other taxes, assessments or other governmental charges,
certifications and governmental reporting. The sole responsibility of the
Custodian with regard to such tax law shall be to use reasonable efforts to
assist the State Street Portfolios with respect to any claim for exemption or
refund under the tax law of jurisdictions for which the State Street Portfolios
have provided such information.
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3B. Duties of the Custodian with respect to the Chase Portfolios.
The provisions of this Article 3B shall apply to the duties of the
Custodian as they relate to the foreign securities of each Current Series and
any other Portfolio employing the Chase Global Custody Network pursuant to
Section 16 of this Agreement (a "Chase Portfolio").
3B.1 Appointment of Chase as Subcustodian. The Custodian is authorized and
instructed by the Chase Portfolios to employ Chase Manhattan Bank N.A. ("Chase")
as subcustodian for the Chase Portfolios' foreign securities including cash
incidental to transactions in such securities) on the terms and conditions set
forth in the Subcustody Contract between the Custodian and Chase which is
attached hereto as Exhibit A (the "Subcustody Contract"). The Custodian
acknowledges that it has entered into the Subcustody Contract and hereby agrees
to provide such services to the Chase Portfolios and in accordance with such
Subcustody Contract as necessary for foreign custody services to be provided
pursuant thereto.
3B.2 Standard of Care; Liability. Notwithstanding anything to the contrary in
this Contract, the Custodian shall not be liable to the Chase Portfolios for any
loss, damage, cost, expense, liability or claim arising out of or in connection
with the maintenance or custody of the Chase Portfolios' foreign securities by
Chase or by any other banking institution or securities depository employed
pursuant to the terms of the Subcustody Contract, except that the Custodian
shall be liable for any such loss, damage, expense, liability or claim directly
resulting from the failure of the Custodian to exercise reasonable care in the
performance of tits duties hereunder. At the election of a Chase Portfolio, such
Chase Portfolio shall be entitled to be subrogated to the rights of the
Custodian under the Subcustody Contract with respect to any claim arising
hereunder against Chase or any other banking institution or securities
depository employed by Chase if and to the extent that such Chase Portfolio has
not been made whole therefor.
3B.3 Portfolio's Responsibility for Rules and Regulations. As between the
Custodian and the Chase Portfolios, the Chase Portfolios shall be solely
responsible to assure that the maintenance of foreign securities and cash
pursuant to the terms of the Subcustody Contract comply with all applicable
rules, regulations, interpretations and orders of the Securities and Exchange
Commission, and the Custodian assumes no responsibility and makes no
representations as to such compliance.
4. Proper Instructions. Proper Instructions as used throughout this Contract
means a writing signed or initialed by one or more person or persons as the
Board of Trustees shall have from time to time authorized. Each such writing
shall set forth the specific transaction or type of transaction involved,
including a specific statement of the purpose for which such action is
requested. Oral instructions will be considered Proper Instructions if the
Custodian reasonably believes them to have been given by a person authorized to
give such instructions with respect to the transaction involved. The Trust shall
cause all oral instructions to be confirmed in writing. Upon receipt of a
certificate of the Secretary or an Assistant Secretary as to the authorization
by the Board of Trustees of the Trust accompanied by a detailed description of
procedures approved by the Board of Trustees, Proper Instructions may include
communications effected directly between
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electro-mechanical or electronic devices provided that the Board of Trustees and
the Custodian are satisfied that such procedures afford adequate safeguards for
the Portfolios' assets.
5. Actions Permitted without Express Authority. The Custodian may in its
discretion, without express authority from the Trust on behalf of each
applicable Portfolio:
1) make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under this Contract,
provided that all such payments shall be accounted for to the Trust on behalf of
the Portfolio;
2) surrender securities in temporary form for securities in
definitive form;
3) endorse for collection, in the name of the Portfolio, checks,
drafts and other negotiable instruments; and
4) in general, attend to all non-discretionary details in connection
with the sale, exchange, substitution, purchase, transfer and other dealings
with the securities and property of the Portfolio except as otherwise directed
by the Board of Trustees of the Trust.
6. Evidence of Authority. The Custodian shall be protected in acting upon any
instructions, notice, request, consent, certificate or other instrument or paper
believed by it to be genuine and to have been properly executed by or on behalf
of the Trust. The Custodian may receive and accept a certified copy of a vote of
the Board of Trustees of the Trust as conclusive evidence (a) of the authority
of any person to act in accordance with such vote or (b) of any determination or
of any action by the Board of Trustees pursuant to the Declaration of Trust as
described in such vote, and such vote may be considered as in full force and
effect until receipt by the Custodian of written notice to the contrary.
7. Duties of Custodian with Respect to the Books of Account and Calculation of
Net Asset Value and Net Income.
The Custodian shall cooperate with and supply necessary information to
the entity or entities appointed by the Board of Trustees of the Trust to keep
the books of account of each Portfolio and/or compute the net asset value per
share of the outstanding shares of each Portfolio or, if directed in writing to
do so by the Trust on behalf of the Portfolio, shall itself keep such books of
account and/or compute such net asset value per share. If so directed, the
Custodian shall also calculate daily the net income of the Portfolio as
described in the Trust's currently effective prospectus related to such
Portfolio and shall advise the Trust and the Transfer Agent daily of the total
amounts of such net income and, if instructed in writing by an officer of the
Trust to do so, shall advise the Transfer Agent periodically of the division of
such net income among its various components. The calculations of the net asset
value per share and the daily income of each Portfolio shall be made at the time
or times described from time to time in the Trust's currently effective
prospectus related to such Portfolio.
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8. Records.
The Custodian shall with respect to each Portfolio create and maintain
all records relating to its activities and obligations under this Contract in
such manner as will meet the obligations of the Trust under the Investment
Company Act of 1940, with particular attention to Section 31 thereof and Rules
31a-1 and 31a-2 thereunder, applicable federal and state tax laws and any other
law or administrative rules or procedures which may be applicable to the Trust.
All such records shall be the property of the Trust and shall at all times
during the regular business hours of the Custodian be open for inspection by
duly authorized officers, employees or agents of the Trust and employees and
agents of the Securities and Exchange Commission. The Custodian shall, at the
Trust's request, supply the Trust with a tabulation of securities owned by the
Trust and held by the Custodian and shall, when requested to do so by the Trust
and for such compensation as shall be agreed upon between the Trust and the
Custodian, include certificate numbers in such tabulations.
9. Opinion of Trust's Independent Accountant.
The Custodian shall take all reasonable action, as the Trust on behalf
of each applicable Portfolio may from time to time request, to obtain from year
to year favorable opinions from the Trust's independent accountants with respect
to its activities hereunder in connection with the preparation of the Trust's
Form N-1A, and Form N-SAR or other annual reports to the Securities and Exchange
Commission and with respect to any other requirements of such Commission.
10. Reports to Trust by Independent Public Accountants.
The Custodian shall provide the Trust, on behalf of each of the
Portfolios at such times as the Trust may reasonably require, with reports by
independent public accountants on the accounting system, internal accounting
control and procedures for safeguarding securities, futures contracts and
options on futures contracts, including securities deposited and/or maintained
in a Securities System, relating to the services provided by the Custodian under
this Contract; such reports, shall be of sufficient scope and in sufficient
detail, as may reasonably be required by the Trust to provide reasonable
assurance that any material inadequacies would be disclosed by such examination,
and, if there are no such inadequacies, the reports shall so state.
11. Compensation of Custodian.
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between the
Trust on behalf of each applicable Portfolio and the Custodian.
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12. Responsibility of Custodian.
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Contract and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party or parties.
The Custodian shall be held to the exercise of reasonable care in carrying out
the provisions of this Contract and shall be indemnified by the Trust for any
action taken or omitted by it in the proper execution of instructions from the
Trust. It shall be entitled to rely on and may act upon advice of counsel for
the Trust on all matters and shall be without liability for any action
reasonably taken or omitted pursuant to such advice. Notwithstanding the
foregoing, the responsibility of the Custodian with respect to redemptions
effected by check shall be in accordance with a separate Agreement entered into
between the Custodian and the Trust.
Except as may arise from the Custodian's own negligence or willful
misconduct, the Custodian shall be without liability to the Portfolio for any
loss, liability, claim or expense resulting from or caused by; (i) events or
circumstances beyond the reasonable control of the Custodian or any
sub-custodian or Securities System or any agent or nominee of any of the
foregoing, including, without limitation, nationalization or expropriation,
imposition of currency controls or restrictions, the interruption, suspension or
restriction of trading on or the closure of any securities market, power or
other mechanical or technological failures or interruptions, computer viruses or
communications disruptions, acts of war or terrorism, riots, revolutions, work
stoppages, natural disasters or other similar events or acts; (ii) errors by the
Portfolio or the Investment Advisor in their instructions to the Custodian;
(iii) the insolvency of or acts or omissions by a Securities System; (iv) any
delay or failure of any broker, agent or intermediary, central bank or other
commercially prevalent payment or clearing system to deliver to the Custodian's
sub-custodian or agent securities purchased or in the remittance or payment made
in connection with securities sold; (v) any delay or failure of any company,
corporation, or other body in charge or registering or transferring securities
in the name of the Custodian, the Portfolio, the Custodian's sub-custodians,
nominees or agents or agents or any consequential losses arising out of such
delay or failure to transfer such securities including non-receipt of bonus,
dividends and rights and other accretions or benefits; (vi) delays or inability
to perform its duties due to any disorder in market infrastructure with respect
to any particular security or Securities System; and (vii) any provision of any
present or future law or regulation or order of the United States of America, or
any state thereof, or any other country, or political subdivision thereof or of
any court of competent jurisdiction. In no event shall the Custodian be liable
for indirect, special or consequential damages.
The Custodian shall be liable for the acts or omissions of a foreign
banking institution to the same extent as set forth with respect to
sub-custodians generally in this Contract.
The Trust on behalf of a Portfolio agrees to indemnify and hold
harmless the Custodian and its nominee from and against all taxes, charges,
expenses, assessments, claims and liabilities (including counsel fees) incurred
or assessed against it or its nominee in connection with the
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performance of this Contract, except such as may arise from its or its nominee's
own negligent action, negligent failure to act or willful misconduct.
The Custodian is authorized to charge any account of the applicable
Portfolio for such item and its fees. To secure any such authorized charges and
any advances of cash or securities made by the Custodian to or for the benefit
of a Portfolio for any purpose which results in the Portfolio incurring an
overdraft at the end of any business day or for extraordinary or emergency
purposes during any business day, the Trust on behalf of the Portfolio hereby
grants to the Custodian a security interest in and pledges to the Custodian
securities held for it by the Custodian, in an amount not to exceed five percent
of the applicable Portfolio's gross assets, the specific securities to be
designated in writing from time to time by the Trust on behalf of the Portfolio
or its investment adviser (the "Pledged Securities"). Should the Trust on behalf
of the Portfolio fail to repay promptly any advances of cash or securities, the
Custodian shall be entitled to use available cash and to dispose of the Pledged
Securities as is necessary to repay any such advances.
13. Effective Period, Termination and Amendment.
This Contract shall become effective as of its execution, shall
continue in full force and effect until terminated as hereinafter provided, may
be amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than thirty (30) days after the date of such delivery or mailing; provided,
however that the Custodian shall not with respect to a Portfolio act under
Section 2.12 hereof in the absence of receipt of an initial certificate of the
Secretary or an Assistant Secretary that the Board of Trustees of the Trust have
approved the initial use of a particular Securities System by such Portfolio and
the receipt of an annual certificate of the Secretary or an Assistant Secretary
that the Board of Trustees has reviewed the use by such Portfolio of such
Securities System, as required in each case by Rule 17f-4 under the Investment
Company Act of 1940, as amended and that the Custodian shall not with respect to
a Portfolio act under Section 2.12A hereof in the absence of receipt of an
initial certificate of the Secretary or an Assistant Secretary that the Board of
Trustees has approved the initial use of the Direct Paper System by such
Portfolio and the receipt of an annual certificate of the Secretary or an
Assistant Secretary that the Board of Trustees has reviewed the use by such
Portfolio of the Direct Paper System; provided further, however, (a) that the
Trust shall not amend or terminate this Contract in contravention of any
applicable federal or state regulations, or any provision of the Declaration of
Trust, and (b) that the Trust on behalf of one or more of the Portfolios may at
any time by action of its Board of Trustees (i) substitute another bank or trust
company for the Custodian by giving notice as described above to the Custodian,
or (ii) immediately terminate this Contract in the event of the appointment of a
conservator or receiver for the Custodian or upon the happening of a like event
at the direction of an appropriate regulatory agency or court of competent
jurisdiction.
Upon termination of the Contract, the Trust on behalf of each
applicable Portfolio shall pay to the Custodian such compensation as may be due
as of the date of such termination and shall likewise reimburse the Custodian
for its costs, expenses and disbursements.
18
<PAGE>
14. Successor Custodian.
If a successor custodian for the assets, of one or more of the
Portfolios shall be appointed by the Board of Trustees of the Trust, the
Custodian shall, upon termination, deliver to such successor custodian at the
office of the Custodian, duly endorsed and in the form for transfer, all
securities of each applicable Portfolio then held by it hereunder and shall
transfer to an account of the successor custodian all of the securities of each
such Portfolio held in a Securities System.
If no such successor custodian shall be appointed, the Custodian shall,
in like manner, upon receipt of a certified copy of a vote of the Board of
Trustees of the Trust, deliver at the office of the Custodian and transfer such
securities, funds and other properties in accordance with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Trustees shall have been delivered to
the Custodian on or before the date when such termination shall become
effective, then the Custodian shall have the right to deliver to a bank or trust
company, which is a "bank" as defined in the Investment Company Act of 1940, of
its own selection, having an aggregate capital, surplus, and undivided profits,
as shown by its last published report, of not less than $25,000,000, all
securities, funds and other properties held by the Custodian on behalf of each
applicable Portfolio and all instruments held by the Custodian relative thereto
and all other property held by it under this Contract on behalf of each
applicable Portfolio and to transfer to an account of such successor custodian
all of the securities of each such Portfolio held in any Securities System.
Thereafter, such bank or trust company shall be the successor of the Custodian
under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Trust to procure the certified copy of the vote referred to or of
the Board of Trustees to appoint a successor custodian, the Custodian shall be
entitled to fair compensation for its services during such period as the
Custodian retains possession of such securities, funds and other properties and
the provisions of this Contract relating to the duties and obligations of the
Custodian shall remain in full force and effect.
15. Interpretive and Additional Provisions.
In connection with the operation of this Contract, the Custodian and
the Trust on behalf of each of the Portfolios, may from time to time agree on
such provisions interpretive of or in addition to the provisions of this
Contract as may in their joint opinion be consistent with the general tenor of
this Contract. Any such interpretive or additional provisions shall be in a
writing signed by both parties and shall be annexed hereto, provided that no
such interpretive or additional provisions shall contravene any applicable
federal or state regulations or any provision of the Declaration of Trust of the
Trust. No interpretive or additional provisions made as provided in the
preceding sentence shall be deemed to be an amendment of this Contract.
19
<PAGE>
16. Additional Portfolios.
In the event that the Trust establishes one or more series of Shares in
addition to the initial series with respect to which it desires to have the
Custodian render services as custodian under the terms hereof, it shall so
notify the Custodian in writing, specifying whether such additional Portfolio
will employ the State Street Global Custody Network (thereby becoming a State
Street Portfolio subject to Article 3A hereunder) or the Chase Global Custody
Network (thereby becoming a "Chase Portfolio" subject to Article 3B hereunder)
or any other global custody network agreed upon by the parties (in which event
the Portfolio will be subject to Article 3B hereunder) and if the Custodian
agrees in writing to provide such services, such series of Shares shall become a
Portfolio hereunder.
17. Massachusetts Law to Apply.
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of The Commonwealth of Massachusetts.
18. Trust Disclaimer.
A copy of the Declaration of Trust of the Trust is on file with the
Secretary of State of The Commonwealth of Massachusetts. Custodian acknowledges
that the obligations of or arising out of this instrument are not binding upon
any of the Trust's trustees, officers, employees, agents or shareholders
individually, but are binding solely upon the assets and property of the Trust
in accordance with its proportionate interest hereunder. If this instrument is
executed by the Trust on behalf of one or more series of the Trust, Custodian
further acknowledges that the assets and liabilities of each series of the Trust
are separate and distinct and that the obligations of or arising out of this
instrument are binding solely upon the assets or property of the series on whose
behalf the Trust has executed this instrument. If the Trust has executed this
instrument on behalf of more than one series of the Trust, Custodian also agrees
that the obligations of each series hereunder shall be several and not joint, in
accordance with its proportionate interest hereunder, and Custodian agrees not
to proceed against any series for the obligations of another series.
19. Prior Contracts.
This Contract supersedes and terminates, as of the date hereof, the
existing custodian contract between the Trust on behalf of each of the
Portfolios and the Custodian. Any reference to the custodian contract between
the Trust and the Custodian in documents executed prior to the date hereof shall
be deemed to refer to this Contract.
20. Shareholder Communications.
Securities and Exchange Commission Rule 14b-2 requires banks which hold
securities for the account of customers to respond to requests by issuers of
securities for the names, addresses and holdings of beneficial owners of
securities of that issuer held by the bank unless the beneficial
20
<PAGE>
owner has expressly objected to disclosure of this information. In order to
comply with the rule, the Custodian needs for the Trust to indicate whether the
Trust, on behalf of the Portfolios, authorizes the Custodian to provide the
Trust's name, address, and share position to requesting companies whose stock
the Trust owns. If the Trust tells the Custodian "no", the Custodian will not
provide this information to requesting companies. If the Trust tells the
Custodian "yes" or does not check either "yes" or "no" below, the Custodian is
required by the rule to treat the Trust as consenting to disclosure of this
information for all securities owned by any Portfolios of the Trust. For the
Trust's protection, the Rule prohibits the requesting company from using the
Trust's name and address for any purpose other than corporate communications.
Please indicate below whether the Trust consents or objects by checking one of
the alternatives below.
YES [ ] The Custodian is authorized to release the Trust's name,
address, and share positions.
NO [ ] The Custodian is not authorized to release the Trust's name,
address, and share positions.
21
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the 15th day of July , 1997.
Attest: MFS VARIABLE INSURANCE TRUST
_________________________________ By _________________________________
Name: Name:
Title: Title:
Attest: STATE STREET BANK AND TRUST COMPANY
_________________________________ By _________________________________
Name: Ronald E. Logue
Title: Executive Vice President
EXHIBIT NO. 99.B10
MASSACHUSETTS FINANCIAL SERVICES COMPANY
500 Boylston Street, Boston, Massachusetts 02116-3741
(617) 954-5182/Facsimile (617) 954-7760 [email protected]
JAMES R. BORDEWICK, JR.
Senior Vice President and
Associate General Counsel
April 29, 1998
MFS Variable Insurance Trust
500 Boylston Street
Boston, MA 02116
Gentlemen:
I am a Senior Vice President and Associate General Counsel of
Massachusetts Financial Services Company, which serves as investment adviser to
MFS Variable Insurance Trust (the "Trust"), and the Assistant Secretary of the
Trust. I am admitted to practice law in The Commonwealth of Massachusetts. The
Trust was created under a written Declaration of Trust dated January 28, 1994,
executed and delivered in Boston, Massachusetts, as amended and restated January
24, 1996 (the "Declaration of Trust"). The beneficial interest thereunder is
represented by transferable shares without par value. The Trustees have the
powers set forth in the Declaration of Trust, subject to the terms, provisions
and conditions therein provided.
I am of the opinion that the legal requirements have been complied with
in the creation of the Trust, and that said Declaration of Trust is legal and
valid.
Under Article III, Section 3.4 of the Declaration of Trust, the
Trustees are empowered, in their discretion, from time to time to issue shares
of the Trust for such amount and type of consideration, at such time or times
and on such terms as the Trustees may deem best. Under Article VI, Section 6.1,
it is provided that the number of shares of beneficial interest authorized to be
issued under the Declaration of Trust is unlimited.
By vote adopted on January 28, 1994, the Trustees of the Trust
determined to sell to the public the authorized but unissued shares of
beneficial interest of the Trust for cash at a price which will net the Trust
(before taxes) not less than the net asset value thereof, as defined in the
Trust's By-Laws, determined next after the sale is made or at some later time
after such sale.
<PAGE>
MFS Variable Insurance Trust
April 29, 1998
Page 2
The Trust has registered an indefinite number of shares of beneficial
interest under the Securities Act of 1933 (the "Shares").
I am of the opinion that all necessary Trust action precedent to the
issue of all the authorized but unissued Shares of the Trust has been duly
taken, and that all the Shares were legally and validly issued, and when sold,
will be fully paid and non-assessable, assuming the receipt by the Trust of the
cash consideration therefor in accordance with the terms of the January 28, 1994
vote of the Trustees described above, except as described below. I express no
opinion as to compliance with the Securities Act of 1933, the Investment Company
Act of 1940, or applicable state "Blue Sky" or securities laws in connection
with the sale of the Shares.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the Trust
or the Trustees. The Declaration of Trust provides for indemnification out of
the Trust property for all loss and expense of any shareholder held personally
liable for the obligations of the Trust. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Trust itself would be unable to meet its obligations.
I consent to your filing this opinion with the Securities and Exchange
Commission.
Very truly yours,
JAMES R. BORDEWICK, JR.
James R. Bordewick, Jr.
JRB/bjn
EXHIBIT 99.B11
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Post-Effective
Amendment No. 11 to the Registration Statement (File No. 33-74668) of MFS
Variable Insurance Trust of our reports, each dated February 6, 1998, appearing
in the annual reports to shareholders of MFS Emerging Growth Series, MFS Value
Series, MFS Research Series, MFS Growth With Income Series, MFS Total Return
Series, MFS Utilities Series, MFS High Income Series, MFS World Governments
Series, MFS/Foreign & Colonial Emerging Markets Equity Series, MFS Bond Series,
MFS Limited Maturity Series and MFS Money Market Series, for the year ended
December 31, 1997. We also consent to the references to us under the headings
"Condensed Financial Information" in the Prospectus and "Independent Auditors
and Financial Statements" in the Statement of Additional Information, both of
which are part of such Registration Statement.
DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Boston, Massachusetts
April 27, 1998
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