As filed with the Securities and Exchange Commission on March 22, 1999
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. 13
AND
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 14
MFS(R) 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)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on [date] pursuant to paragraph (a)(i)
[X] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on [date] pursuant to paragraph (a)(ii) 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 LOGO]
MFS[RegTM] VARIABLE INSURANCE TRUST
MAY 1, 1999
Prospectus
- --------------------------------------------------------------------------------
This Prospectus describes each of the 15 series of the MFS Variable Insurance
Trust (referred to as the trust):
1. MFS Emerging Growth Series seeks to provide long-term growth of capital
(referred to as the Emerging Growth Series);
2. MFS Capital Opportunities Series seeks capital appreciation (referred to as
the Capital Opportunities Series);
3. MFS Research Series seeks to provide long-term growth of capital and future
income (referred to as the Research Series);
4. MFS Growth With Income Series seeks to provide reasonable current income
and long-term growth of capital and income (referred to as the Growth With
Income Series);
5. MFS New Discovery Series seeks capital appreciation (referred to as the New
Discovery Series);
6. MFS Growth Series seeks to provide long-term growth of capital and future
income rather than current income (referred to as the Growth Series);
7. MFS Total Return Series 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 (referred to as the
Total Return Series);
8. MFS Utilities Series seeks capital growth and current income (income above
that available from a portfolio invested entirely in equity securities)
(referred to as the Utilities Series);
9. MFS High Income Series seeks high current income by investing primarily in
a professionally managed diversified portfolio of fixed income securities,
some of which may involve equity features (referred to as the High Income
Series);
10. MFS Global Governments Series seeks income and capital appreciation
(referred to as the Global Governments Series);
11. MFS Global Equity Series seeks capital appreciation (referred to as the
Global Equity Series);
12. MFS/Foreign & Colonial Emerging Markets Equity Series seeks capital
appreciation (referred to as the Emerging Markets Equity Series);
13. MFS Bond Series 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 (referred to as the Bond
Series);
14. MFS Limited Maturity Series 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 (referred to as the
Limited Maturity Series); and
15. MFS Money Market Series seeks as high a level of current income as is
considered consistent with the preservation of capital and liquidity
(referred to as the Money Market Series).
The Securities and Exchange Commission has not approved the series' shares or
determined whether this prospectus is accurate or complete. Anyone who tells
you otherwise is committing a crime.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
Page
I Risk Return Summary ........................................ 1
1. Emerging Growth Series ................................. 1
2. Capital Opportunities Series ........................... 3
3. Research Series ........................................ 6
4. Growth With Income Series .............................. 8
5. New Discovery Series ................................... 10
6. Growth Series .......................................... 12
7. Total Return Series .................................... 14
8. Utilities Series ....................................... 18
9. High Income Series ..................................... 23
10. Global Governments Series .............................. 26
11. Global Equity Series ................................... 31
12. Emerging Markets Equity Series ......................... 33
13. Bond Series ............................................ 36
14. Limited Maturity Series ................................ 39
15. Money Market Series .................................... 42
II Expense Summary ............................................ 44
III Certain Investment Strategies and Risks .................... 45
IV Management of the Series ................................... 45
V Description of Shares ...................................... 46
VI Other Information .......................................... 46
VII Financial Highlights ....................................... 48
Appendix A -- Investment Techniques and Practices .......... A-1
</TABLE>
<PAGE>
The trust offers shares of its 15 series to separate accounts established
by insurance companies in order to serve as investment vehicles for
variable annuity and variable life insurance contracts and to qualified
pension and retirement plans. Each of these series is managed by
Massachusetts Financial Services Company (referred to as MFS or the
adviser) and are described below. Investment strategies which are common to
all series are described under the caption "Certain Investment Strategies."
I RISK RETURN SUMMARY
1: Emerging Growth Series
........................................................................ .
[arrow] Investment Objective
The series' investment objective is long term growth of capital. The
series' objective may be changed without shareholder approval.
[arrow] How the Series Intends to Achieve Its Objective
The series invests, under normal market conditions, at least 65% of its
total assets in common stocks and related securities, such as preferred -
stocks, convertible securities and depositary receipts for those securities, of
emerging growth companies. Emerging growth companies are companies which MFS
believes are either:
o early in their life cycle but which have the potential to become
major enterprises, or
o major enterprises 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.
Emerging growth companies may be of any size, and MFS would expect these
companies to have products, technologies, management, markets and
opportunities which will facilitate earnings growth over time that is
well above the growth rate of the overall economy and the rate of
inflation. The series' investments may include securities listed on a
securities exchange or traded in the over-the-counter markets.
MFS uses a bottom-up, as opposed to a top-down, investment style in
managing the equity-oriented funds (such as the series) it advises. This
means that securities are selected based upon fundamental analysis
performed by the series' portfolio manager and MFS' large group of
equity research analysts.
[arrow] Principal Risks of an Investment
The principal risks of investing in the series and the circumstances
reasonably likely to cause the value of your investment in the series -
to decline are described below. As with any non-money market mutual
fund, the share price of the series will change daily based on market
conditions and other factors. Please note that there are many
circumstances which could cause the value of your investment in the
series to decline, and which could prevent the series from achieving its
objective, that are not described here.
The principal risks of investing in the series are:
o Market Risk: This is the risk that the price of a security held
by the series will fall due to changing economic, political or
market conditions or disappointing earnings results.
o Emerging Growth Risk: Prices of securities react to the economic
condition of the company that issued the security. The series'
equity investments in an issuer may rise and fall based on the
issuer's actual and anticipated earnings, changes in management
and the potential for takeovers and acquisitions. Investments in
emerging growth companies may be subject to more abrupt or
erratic market movements and may involve greater risks than
investments in other companies. Emerging growth companies often:
[arrow] have limited product lines, markets and financial
resources
[arrow] are dependent on management by one or a few key
individuals
[arrow] have shares which suffer steeper than average price
declines after disappointing earnings reports and are
more difficult to sell at satisfactory prices
o Over-the-Counter Risk: Over-the-counter (OTC) transactions
involve risks in addition to those associated with transactions
in securities traded on exchanges. OTC-listed companies may have
limited product lines, markets or financial resources. Many OTC
stocks trade less frequently and in smaller volume than
exchange-listed stocks. The values of these stocks may be more
volatile than exchange-listed stocks, and the series may
experience difficulty in establishing or closing out positions
in these stocks at prevailing market prices.
1
<PAGE>
o As with any mutual fund, you could lose money on your investment
in the series.
[arrow] An investment in the series is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
[arrow] Portfolio Manager
John W. Ballen, President of MFS, has been employed by the Adviser as a
portfolio manager since 1984. Mr. Ballen has been the series' portfolio
manager since its inception. Toni Y. Shimura, a Vice President of MFS,
has been employed by the Adviser as a portfolio manager since 1987. Ms.
Shimura became portfolio manager of the series on November 30, 1995.
[arrow] Bar Chart and Performance Table
The bar chart and performance table below are intended to indicate some
of the risks of investing in the series by showing changes in the
series' performance over time. The performance table also shows how the
series performance over time compares with that of a broad measure of
market performance. The chart and table provide past performance
information. The series' past performance does not necessarily indicate
how the series will perform in the future.
Bar Chart
The bar chart shows changes in the annual total returns of the series'
shares for each calendar year since they were first offered, assuming
the reinvestment of distributions.
[TABULAR REPRESENTATION OF BAR CHART]
1996 1997 1998
17.02% 21.90% 34.16%
During the period shown in the bar chart, the highest quarterly return
was 27.04% (for the calendar quarter ended December 31, 1998) and the
lowest quarterly return was (13.11)% (for the calendar quarter ended
September 30, 1998).
Performance Table
This table shows how the average annual total returns of the series'
shares compares to a broad measure of market performance and various
other market indicators and assumes the reinvestment of distributions.
Average Annual Total Returns as of December 31, 1998
........................................................................
<TABLE>
<CAPTION>
1 Year Life
<S> <C> <C>
Emerging Growth Series* 34.16% +26.55%
Russell 2000 Total Return Index**+ -2.55% +12.03%
Standard & Poor's 500 Composite Index**++ +28.58% +28.16%
</TABLE>
---------
* "Life" refers to the period from the commencement of the series'
investment operations, July 24, 1995, through December 31, 1998.
** Source: CDA/Wiesenberger. "Life" refers to the period from August 1,
1995, through December 31, 1998.
+ The Russell 2000 Total Return Index is a broad based, unmanaged index
comprised of 2,000 of the smallest U.S.-domiciled company common
stocks (on the basis of capitalization) that are traded in the United
States on the New York Stock Exchange, the American Stock Exchange,
and Nasdaq.
++ The Standard & Poor's 500 Composite Index is a popular, unmanaged
index of common stock total return performance.
2
<PAGE>
2: Capital Opportunities Series
........................................................................
[arrow] Investment Objective
The series' investment objective is capital appreciation. The series'
objective may be changed without shareholder approval.
[arrow] How the Series Intends to Achieve Its Objective
The series invests, under normal market conditions, at least 65% of its
total assets in common stocks and related securities, such as preferred
stocks, convertible securities and depositary receipts for those
securities. The series focuses on companies which MFS believes have
favorable growth prospectus and attractive valuations based on current
and expected earnings or cash flow. The series' investments may include
securities listed on a securities exchange or traded in the
over-the-counter markets.
MFS uses a bottom-up, as opposed to a top-down, investment style in
managing the equity-oriented funds (such as the series) it advises. This
means that securities are selected based upon fundamental analysis
performed by the series' portfolio manager and MFS' large group of
equity research analysts.
The series may invest in foreign securities (including emerging market
securities), through which it may have exposure to foreign currencies.
[arrow] Principal Risks of an Investment
The principal risks of investing in the series and the circumstances
reasonably likely to cause the value of your investment in the series to
decline are described below. As with any non-money market mutual fund,
the share price of the series will change daily based on market
conditions and other factors. Please note that there are many
circumstances which could cause the value of your investment in the
series to decline, and which could prevent the series from achieving its
objective, that are not described here.
The principal risks of investing in the series are:
o Market Risk: This is the risk that the price of a security held
by the series will fall due to changing economic, political or
market conditions or disappointing earnings results.
o Company Risk: Prices of securities react to the economic
condition of the company that issued the security. The series'
equity investments in an issuer may rise and fall based on the
issuer's actual and anticipated earnings, changes in management
and the potential for takeovers and acquisitions.
o Over-the-Counter Risk: Over-the-counter (OTC) transactions
involve risks in addition to those associated with transactions
in securities traded on exchanges. OTC-listed companies may have
limited product lines, markets or financial resources. Many OTC
stocks trade less frequently and in smaller volume than
exchange-listed stocks. The values of these stocks may be more
volatile than exchange-listed stocks, and the series may
experience difficulty in establishing or closing out positions
in these stocks at prevailing market prices.
o Foreign Securities Risk: Investments in foreign securities
involve risks relating to political, social and economic
developments abroad, as well as risks resulting from the
differences between the regulations to which U.S. and foreign
issuers and markets are subject:
[arrow] These risks may include the seizure by the government of
company assets, excessive taxation, withholding taxes on
dividends and interest, limitations on the use or
transfer of portfolio assets, and political or social
instability.
[arrow] Enforcing legal rights may be difficult, costly and slow
in foreign countries, and there may be special problems
enforcing claims against foreign governments.
[arrow] Foreign companies may not be subject to accounting
standards or governmental supervision comparable to U.S.
companies, and there may be less public information
about their operations.
[arrow] Foreign markets may be less liquid and more volatile
than U.S. markets.
[arrow] Foreign securities often trade in currencies other than
the U.S. dollar, and the series may directly hold
foreign currencies and purchase and sell foreign
currencies through forward exchange contracts. Changes
in currency exchange rates will affect the series' net
asset value, the value of dividends and interest earned,
and gains and losses realized on the sale of securities.
An increase in the strength of the U.S. dollar relative
to these other currencies may cause the value of the
series to decline. Certain foreign currencies may be
particularly volatile, and foreign governments may
intervene in the currency markets, causing a decline in
value or liquidity in the series' foreign currency
holdings.
3
<PAGE>
By entering into forward foreign currency exchange contracts, the series
may be required to forego the benefits of advantageous changes in
exchange rates and, in the case of forward contracts entered into for
the purpose of increasing return, the series may sustain losses which
will reduce its gross income. Forward foreign currency exchange
contracts involve the risk that the party with which the series enters
the contract may fail to perform its obligations to the series.
o Emerging Markets Risk: Emerging markets are generally defined as
countries in the initial stages of their industrialization
cycles with low per capita income. Investments in emerging
markets securities involve all of the risks of investments in
foreign securities, and also have additional risks:
[arrow] All of the risks of investing in foreign securities are
heightened by investing in emerging markets countries.
[arrow] The markets of emerging markets countries have been more
volatile than the markets of developed countries with
more mature economies. These markets often have provided
significantly higher or lower rates of return than
developed markets, and significantly greater risks, to
investors.
o As with any mutual fund, you could lose money on your investment
in the series.
An investment in the series is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
[arrow] Portfolio Manager
Maura A. Shaughnessy, a Senior Vice President of the Adviser, has been
employed as a portfolio manager by the Adviser since 1991. - Ms.
Shaughnessy has been the series' portfolio manager since February 24,
1999.
[arrow] Bar Chart and Performance Table
The bar chart and performance table below are intended to indicate some
of the risks of investing in the series by showing changes in the
series' performance over time. The performance table also shows how the
series performance over time compares with that of a broad measure of
market performance. The chart and table provide past performance
information. The series' past performance does not necessarily indicate
how the series will perform in the future.
Bar Chart
The bar chart shows changes in the annual total returns of the series'
shares for each calendar year since they were first offered, assuming
the reinvestment of distributions.
[TABULAR REPRESENTATION OF BAR CHART]
1997 1998
26.47% 26.80%
During the period shown in the bar chart, the highest quarterly return
was 24.04% (for the calendar quarter ended December 31, 1998) and the
lowest quarterly return was (13.91)% (for the calendar quarter ended
September 30, 1998).
4
<PAGE>
Performance Table
This table shows how the average annual total returns of the series'
shares compares to a broad measure of market performance and assumes the
reinvestment of distributions.
Average Annual Total Returns as of December 31, 1998
........................................................................
<TABLE>
<CAPTION>
1 Year Life
<S> <C> <C>
Capital Opportunities Series* 26.80% 26.33%
Standard & Poor's 500 Composite Index **++ 28.58% 28.16%
</TABLE>
---------
* "Life" refers to the period from the commencement of the series'
investment operations on August 4, 1996, through December 31, 1998.
++ Source: CDA/Wiesenberger. "Life" refers to the period from September
1, 1996, through December 31, 1998.
** The Standard & Poor's 500 Composite Index is a broad based, popular,
unmanaged index of common stock total return performance.
5
<PAGE>
3: Research Series
...........................................................................
[arrow] Investment Objective
The series' investment objective is long-term growth of capital and
future income. The series' objective may be changed without shareholder
approval.
[arrow] How the Series Intends to Achieve Its Objective
The series invests, under normal market conditions, at least 80% of its
total assets in common stocks and related securities, such as preferred
stocks, convertible securities and depositary receipts. The series
focuses on companies that MFS believes have favorable prospects for
long-term growth, attractive valuations based on current and expected
earnings or cash flow, dominant or growing market share, and superior
management. The series may invest in companies of any size. The series'
investments may include securities traded on securities exchanges or in
the over-the-counter markets.
A committee of investment research analysts selects portfolio securities
for the series. This committee includes investment analysts employed not
only by MFS, but also by MFS International (U.K.) Limited, a wholly
owned subsidiary of MFS. The committee allocates the series' assets
among various industries. Individual analysts then select what they view
as the securities best suited to achieve the series' investment
objective within their assigned industry responsibility.
The series may invest in foreign equity securities through which it may
have exposure to foreign currencies.
[arrow] Principal Risks of an Investment
The principal risks of investing in the series and the circumstances
reasonably likely to cause the value of your investment in the series to
decline are described below. As with any non-money market mutual fund,
the share price of the series will change daily based on market
conditions and other factors. Please note that there are many
circumstances which could cause the value of your investment in the
series to decline, and which could prevent the series from achieving its
objective, that are not described here.
The principal risks of investing in the series are:
o Market Risk: This is the risk that the price of a security held
by the series will fall due to changing economic, political or
market conditions or disappointing earnings results.
o Company Risk: Prices of securities react to the economic
condition of the company that issued the security. The series'
equity investments in an issuer may rise and fall based on the
issuer's actual and anticipated earnings, changes in management
and the potential for takeovers and acquisitions.
o Over-the-Counter Risk: Over-the-counter (OTC) transactions
involve risks in addition to those incurred by transactions in
securities traded on exchanges. OTC listed companies may have
limited product lines, markets or financial resources. Many OTC
stocks trade less frequently and in smaller volume than
exchange-listed stocks. The values of these stocks may be more
volatile than exchange-listed stocks, and the series may
experience difficulty in purchasing or selling these securities
at a fair price.
o Foreign Markets Risk: Investing in foreign securities involves
risks relating to political, social and economic developments
abroad, as well as risks resulting from the differences between
the regulations to which U.S. and foreign issuers and markets
are subject:
[arrow] These risks may include the seizure by the government of
company assets, excessive taxation, withholding taxes on
dividends and interest, limitations on the use or
transfer of portfolio assets, and political or social
instability.
[arrow] Enforcing legal rights may be difficult, costly and slow
in foreign countries, and there may be special problems
enforcing claims against foreign governments.
[arrow] Foreign companies may not be subject to accounting
standards or governmental supervision comparable to U.S.
companies, and there may be less public information
about their operations.
[arrow] Foreign markets may be less liquid and more volatile
than U.S. markets.
[arrow] Foreign securities often trade in currencies other than
the U.S. dollar, and the series may directly hold
foreign currencies and purchase and sell foreign
currencies through forward exchange contracts. Changes
in currency exchange rates will affect the series' net
asset value, the value of dividends and interest earned,
and gains and losses realized on the sale of securities.
An increase in the strength of the U.S. dollar relative
to these other currencies may cause the value of the
series to decline. Certain foreign currencies may
6
<PAGE>
be particularly volatile, and foreign governments may
intervene in the currency markets, causing a decline in
value or liquidity in the series' foreign currency
holdings. By entering into forward foreign currency
exchange contracts, the series may be required to forego
the benefits of advantageous changes in exchange rates
and, in the case of forward contracts entered into for
the purpose of increasing return, the series may sustain
losses which will reduce its gross income. Forward
foreign currency exchange contracts involve the risk
that the party with which the series enters the contract
may fail to perform its obligations to the series.
o As with any mutual fund, you could lose money on your investment
in the series.
An investment in the series is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
[arrow] Portfolio Manager
The series is currently managed by a committee comprised of various
equity research analysts employed by the Adviser. The committee has
managed the series since its inception.
[arrow] Bar Chart and Performance Table
The bar chart and performance table below are intended to indicate some
of the risks of investing in the series by showing changes in the
series' performance over time. The performance table also shows how the
series' performance over time compares with that of a broad measure of
market performance. The chart and table provide past performance
information. The series' past performance does not necessarily indicate
how the series will perform in the future.
Bar Chart
The bar chart shows changes in the annual total returns of the series'
shares for each calendar year since they were first offered, assuming
the reinvestment of distributions.
[TABULAR REPRESENTATION OF BAR CHART]
1996 1997 1998
22.33% 20.26% 23.39%
During the period shown in the bar chart, the highest quarterly return
was 21.65% (for the calendar quarter ended December 31, 1998) and the
lowest quarterly return was (14.66)% (for the calendar quarter ended
September 30, 1998).
Performance Table
This table shows how the average annual total returns of the series'
shares compares to a broad measure of market performance and assumes the
reinvestment of distributions.
Average Annual Total Returns as of December 31, 1998
........................................................................
<TABLE>
<CAPTION>
1 Year Life
<S> <C> <C>
Research Series* +23.39% +22.52%
Standard & Poor's 500 Composite Index**+ +28.58% +28.16%
</TABLE>
---------
* "Life" refers to the period from the commencement of the series'
investment operations, July 26, 1995, through December 31, 1998.
** Source: CDA/Wiesenberger. "Life" refers to the period from August 1,
1995, through December 31, 1998.
+ The Standard & Poor's 500 Composite Index is a broad based, popular
unmanaged index of common stock total return performance.
7
<PAGE>
4: Growth With Income Series
........................................................................
[arrow] Investment Objective
The series' investment objective is to provide reasonable current income
and long-term growth of capital and income. The series' objective may be
changed without shareholder approval.
[arrow] How the Series Intends to Achieve Its Objective
The series invests, under normal market conditions, at least 65% of its
total assets in common stocks and related securities, such as preferred
stocks, convertible securities and depositary receipts for those
securities. These securities may be listed on a securities exchange or
traded in the over-the-counter markets. While the series may invest in
companies of any size, the series generally focuses on companies with
larger market capitalizations that MFS believes have sustainable growth
prospects and attractive valuations based on current and expected
earnings or cash flow.
MFS uses a bottom-up, as opposed to a top-down, investment style in
managing the equity-oriented funds (such as the series) it advises. This
means that securities are selected based upon fundamental analysis
performed by the series' portfolio manager and MFS' large group of
equity research analysts.
The series may invest in foreign securities a broad measure of market
performance and may have exposure to foreign currencies.
[arrow] Principal Risks of an Investment
The principal risks of investing in the series and the circumstances
reasonably likely to cause the value of your investment in the series to
decline are described below. As with any non-money market mutual fund,
the share price of the series will change daily based on market
conditions and other factors. Please note that there are many
circumstances which could cause the value of your investment in the
series to decline, and which could prevent the series from achieving its
objectives, that are not described here.
The principal risks of investing in the series are:
o Market Risk: This is the risk that the price of a security held
by the series will fall due to changing economic, political or
market conditions or disappointing earnings results.
o Company Risk: Prices of securities react to the economic
condition of the company that issued the security. The series'
equity investments in an issuer may rise and fall based on the
issuer's actual and anticipated earnings, changes in management
and the potential for takeovers and acquisitions.
o Large Cap Companies Risk: Large cap companies tend to go in and
out of favor based on market and economic conditions. Large cap
companies tend to be less volatile than companies with smaller
market capitalizations. In exchange for this potentially lower
risk, the series' value may not rise as much as the value of
series that emphasize smaller cap companies.
o Foreign Markets Risk: Investing in foreign securities involves
risks relating to political, social and economic developments
abroad, as well as risks resulting from the differences between
the regulations to which U.S. and foreign issuers and markets
are subject:
[arrow] These risks may include the seizure by the government of
company assets, excessive taxation, withholding taxes on
dividends and interest, limitations on the use or
transfer of portfolio assets, and political or social
instability.
[arrow] Enforcing legal rights may be difficult, costly and slow
in foreign countries, and there may be special problems
enforcing claims against foreign governments.
[arrow] Foreign companies may not be subject to accounting
standards or governmental supervision comparable to U.S.
companies, and there may be less public information
about their operations.
[arrow] Foreign markets may be less liquid and more volatile
than U.S. markets.
[arrow] Foreign securities often trade in currencies other than
the U.S. dollar, and the series may directly hold
foreign currencies and purchase and sell foreign
currencies through forward exchange contracts. Changes
in currency exchange rates will affect the series' net
asset value, the value of dividends and interest earned,
and gains and losses realized on the sale of securities.
An increase in the strength of the U.S. dollar relative
to these other currencies may cause the value of the
series to decline. Certain foreign currencies may be
particularly volatile, and foreign governments may
intervene in the currency markets, causing a decline in
value or liquidity in the series' foreign currency
holdings. By entering into forward foreign currency
exchange contracts, the series may be required to
8
<PAGE>
forego the benefits of advantageous changes in exchange
rates and, in the case of forward contracts entered into
for the purpose of increasing return, the series may
sustain losses which will reduce its gross income.
Forward foreign currency exchange contracts involve the
risk that the party with which the series enters the
contract may fail to perform its obligations to the
series.
o As with any mutual fund, you could lose money on your investment
in the series.
An investment in the series is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
[arrow] Portfolio Manager
John D. Laupheimer, a Senior Vice President of the Adviser, has been
employed by the Adviser as a portfolio manager since 1981. Mr.
Laupheimer has been the series' portfolio manager since its inception.
Mitchell D. Dynan, a Senior Vice President of the Adviser, has been
employed as a portfolio manager since 1986. Mr. Dynan has been the
series' portfolio manager since May 1, 1999.
[arrow] Bar Chart and Performance Table
The bar chart and performance table below are intended to indicate some
of the risks of investing in the series by showing changes in the
series' performance over time. The performance table also shows how the
series performance over time compares with that of a broad measure of
market performance. The chart and table provide past performance
information. The series' past performance does not necessarily indicate
how the series will perform in the future.
Bar Chart
The bar chart shows changes in the annual total returns of the series'
shares for each calendar year since they were first offered, assuming
the reinvestment of distributions.
[TABULAR REPRESENTATION OF BAR CHART]
1996 1997 1998
24.46% 29.78% 22.32%
During the period shown in the bar chart, the highest quarterly return
was 18.29% (for the calendar quarter ended December 31, 1998) and the
lowest quarterly return was (10.95)% (for the calendar quarter ended
September 30, 1998).
Performance Table
This table shows how the average annual total returns of the series'
shares compares to a broad measure of market performance and assumes the
reinvestment of distributions.
Average Annual Total Returns as of December 31, 1998
........................................................................
<TABLE>
<CAPTION>
1 Year Life
<S> <C> <C>
Growth With Income Series* 22.32% 25.98%
Standard & Poor's 500 Composite Index **++ 28.58% 28.16%
</TABLE>
---------
* "Life" refers to the period from the commencement of the series'
investment operations on October 9, 1995, through December 31, 1998.
++ Source: CDA/Wiesenberger. "Life" refers to the period from November
1, 1995, through December 31, 1998.
** The Standard & Poor's 500 Composite Index is a broad based, popular,
unmanaged index of common stock total return performance.
9
<PAGE>
5: New Discovery Series
........................................................................
[arrow] Investment Objective
The series' investment objective is capital appreciation. The series'
objective may be changed without shareholder approval.
[arrow] How the Series Intends to Achieve Its Objective
The series invests, under normal market conditions, at least 65% of its
total assets in equity securities of emerging growth companies. Equity
securities include common stocks and related securities, such as
preferred stocks, convertible securities and depositary receipts for
those securities. Emerging growth companies are companies which MFS
believes offer superior prospects for growth and are either:
o early in their life cycle but which have the potential to become
major enterprises, or
o major enterprises 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 emerging growth companies may be of any size, the series will
generally focus on smaller cap emerging growth companies that are early
in their life cycle. MFS would expect these companies to have products,
technologies, management, markets and opportunities which will
facilitate earnings growth over time that is well above the growth rate
of the overall economy and the rate of inflation. The series'
investments in emerging growth companies may include securities listed
on a securities exchange or traded in the over-the-counter markets.
MFS uses a bottom-up, as opposed to a top-down, investment style in
managing the equity-oriented funds (such as the series) it advises. This
means that securities are selected based upon fundamental analysis
performed by the series' portfolio manager and MFS' large group of
equity research analysts.
[arrow] Principal Risks of an Investment
The principal risks of investing in the series and the circumstances
reasonably likely to cause the value of your investment in the series to
decline are described below. As with any non-money market mutual fund,
the share price of the series will change daily based on market
conditions and other factors. Please note that there are many
circumstances which could cause the value of your investment in the
series to decline, and which could prevent the series from achieving its
objective, that are not described here.
The principal risks of investing in the series are:
o Market Risk: This is the risk that the price of a security held
by the series will fall due to changing economic, political or
market conditions or disappointing earnings results.
o Company Risk: Prices of securities react to the economic
condition of the company that issued the security. The series'
equity investments in an issuer may rise and fall based on the
issuer's actual and anticipated earnings, changes in management
and the potential for takeovers and acquisitions.
o Emerging Growth Companies Risk: Investments in emerging growth
companies may be subject to more abrupt or erratic market
movements and may involve greater risks than investments in
other companies. Emerging growth companies often:
[arrow] have limited product lines, markets and financial
resources
[arrow] are dependent on management by one or a few key
individuals
[arrow] have shares which suffer steeper than average price
declines after disappointing earnings reports and are
more difficult to sell at satisfactory prices
o Small Cap Companies Risk: Investments in small cap companies
tend to involve more risk and be more volatile than investments
in larger companies. Small cap companies may be more susceptible
to market declines because of their limited product lines,
financial and management resources, markets and distribution
channels. Their shares may be more difficult to sell at
satisfactory prices during market declines.
o Over-the-Counter Risk: Over-the-counter (OTC) transactions
involve risks in addition to those associated with transactions
in securities traded on exchanges. OTC listed companies may have
limited product lines, markets or financial resources. Many OTC
stocks trade less frequently and in smaller volume than exchange
listed stocks. The values of these stocks may be more volatile
than exchange listed stocks, and the series may experience
difficulty in purchasing or selling these securities at a fair
price.
o As with any mutual fund, you could lose money on your investment
in the series.
10
<PAGE>
An investment in the series is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
[arrow] Portfolio Manager
Brian E. Stack, a Senior Vice President of the Adviser, has been
employed by the Adviser as a portfolio manager since 1993. Mr. Stack has
been the series' portfolio manager since its inception.
[arrow] Bar Chart and Performance Table
The bar chart and performance table are not included because the series
did not have a full calendar year of operations on December 31, 1998.
11
<PAGE>
6: Growth Series
........................................................................
[arrow] Investment Objective
The series' investment objective is to provide long-term growth of
capital and future income rather than current income. The series'
objective may be changed without shareholder approval.
[arrow] How the Series Intends to Achieve Its Objective
The series invests, under normal market conditions, at least 80% of its
total assets in common stocks and related securities, such as preferred
stocks, convertible securities and depositary receipts for those
securities, of companies which MFS believes offer better than average
prospects for long-term growth.
MFS uses a bottom-up, as opposed to a top-down, investment style in
managing the equity-oriented funds (such as the series) it advises. This
means that securities are selected based upon fundamental analysis
performed by the series' portfolio manager and MFS' large group of
equity research analysts.
In managing the series, MFS seeks to purchase securities of companies
which MFS considers well-run and poised for growth. MFS looks
particularly for companies which demonstrate:
o a strong franchise, strong cash flows and a recurring revenue
stream
o a strong industry position, where there is
[arrow] potential for high profit margins
[arrow] substantial barriers to new entry in the industry
o a strong management with a clearly defined strategy
o new products or services
The series may invest in foreign securities through which it may have
exposure to foreign currencies.
[arrow] Principal Risks of an Investment
The principal risks of investing in the series and the circumstances
reasonably likely to cause the value of your investment in the series -
to decline are described below. As with any non-money market mutual
fund, the share price of the series will change daily based on market
conditions and other factors. Please note that there are many
circumstances which could cause the value of your investment in the
series to decline, and which could prevent the series from achieving its
objective, that are not described here.
The principal risks of investing in the series are:
o Market Risk: This is the risk that the price of a security held
by the series will fall due to changing economic, political or
market conditions or disappointing earnings results.
o Growth Companies Risk: Prices of growth company securities held
by the series may fall to a greater extent than the overall
equity markets (e.g., as represented by the Standard and Poor's
Composite 500 Index) due to changing economic, political or
market conditions or disappointing growth company earnings
results.
o Foreign Securities Risk: Investments in foreign securities
involve risks relating to political, social and economic
developments abroad, as well as risks resulting from the
differences between the regulations to which U.S. and foreign
issuers and markets are subject:
[arrow] These risks may include the seizure by the government of
company assets, excessive taxation, withholding taxes on
dividends and interest, limitations on the use or
transfer of portfolio assets, and political or social
instability.
[arrow] Enforcing legal rights may be difficult, costly and slow
in foreign countries, and there may be special problems
enforcing claims against foreign governments.
[arrow] Foreign companies may not be subject to accounting
standards or governmental supervision comparable to U.S.
companies, and there may be less public information
about their operations.
[arrow] Foreign markets may be less liquid and more volatile
than U.S. markets.
12
<PAGE>
[arrow] Foreign securities often trade in currencies other than
the U.S. dollar, and the series may directly hold
foreign currencies and purchase and sell foreign
currencies through forward exchange contracts. Changes
in currency exchange rates will affect the series' net
asset value, the value of dividends and interest earned,
and gains and losses realized on the sale of securities.
An increase in the strength of the U.S. dollar relative
to these other currencies may cause the value of the
series to decline. Certain foreign currencies may be
particularly volatile, and foreign governments may
intervene in the currency markets, causing a decline in
value or liquidity in the series' foreign currency
holdings. By entering into forward foreign currency
exchange contracts, the series may be required to forego
the benefits of advantageous changes in exchange rates
and, in the case of forward contracts entered into for
the purpose of increasing return, the series may sustain
losses which will reduce its gross income. Forward
foreign currency exchange contracts involve the risk
that the party with which the series enters the contract
may fail to perform its obligations to the series.
o As with any mutual fund, you could lose money on your investment
in the series.
An investment in the series is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
[arrow] Portfolio Manager
Stephen Pesek, a Vice President of the Adviser, has been employed as a
portfolio manager by the Adviser since 1994. Mr. Pesek has been -
the series portfolio manager since its inception.
[arrow] Bar Chart and Performance Table
The bar chart and performance table are not included because the series
had not commenced investment operations as of December 31, 1998.
13
<PAGE>
7: Total Return Series
.........................................................................
[arrow] Investment Objectives
The series' investment objective is primarily to provide above-average
income (compared to a portfolio invested entirely in equity securities)
consistent with the prudent employment of capital. Its secondary
objective is to provide reasonable opportunity for growth of capital and
income. The series' objectives may be changed without shareholder
approval.
[arrow] How the Series Intends to Achieve Its Objectives
The series is a "balanced fund," and invests in a combination of equity
and fixed income securities. Under normal market conditions, the -
series invests:
o at least 40%, but not more than 75%, of its net assets in common
stocks and related securities (referred to as equity
securities), such as preferred stock; bonds, warrants or rights
convertible into stock; and depositary receipts for those
securities, and
o at least 25% of its net assets in non-convertible fixed income
securities.
The series may vary the percentage of its assets invested in any one
type of security (within the limits described above) in accordance with
MFS's interpretation of economic and money market conditions, fiscal and
monetary policy and underlying security values.
Equity Investments. While the series may invest in all types of equity
securities, MFS generally seeks to purchase for the series equity
securities, such as common stocks, preferred stocks, convertible
securities and depositary receipts, of companies that MFS believes are
undervalued in the market relative to their long-term potential. The
equity securities of these companies may be undervalued because:
o they are viewed by MFS as being temporarily out of favor in the
market due to
[arrow] a decline in the market,
[arrow] poor economic conditions,
[arrow] developments that have affected or may affect the issuer
of the securities or the issuer's industry, or
o the market has overlooked them.
Undervalued equity securities generally have low price-to-book,
price-to-sales and/or price-to-earnings ratios. The series focuses on
undervalued equity securities issued by companies with relatively large
market capitalizations (i.e., market capitalizations of $5 billion or
more).
As noted above, the series' investments in equity securities include
convertible securities. A convertible security is a security that may be
converted within a specified period of time into a certain amount of
common stock of the same or a different issuer. A convertible security
generally provides:
o a fixed income stream, and
o the opportunity, through its conversion feature, to participate
in an increase in the market price of the underlying common
stock.
MFS uses a bottom-up, as opposed to a top-down, investment style in
managing the equity-oriented funds (including the equity portion of the
series) it advises. This means that securities are selected based upon
fundamental analysis performed by the series' portfolio manager and MFS'
large group of equity research analysts.
Fixed Income Investments. The series invests in securities which pay a
fixed interest rate, which include:
o U.S. government securities, which are bonds or other debt
obligations issued by, or whose principal and interest payments
are guaranteed or supported by, the U.S. government or one of
its agencies or instrumentalities,
o mortgage-backed and asset-backed securities, which represent
interests in a pool of assets such as mortgage loans, car loan
receivables, or credit card receivables. These investments
entitle the series to a share of the principal and interest
payments made on the underlying mortgage, car loan, or credit
card. For example, if the series invests in a pool that includes
your mortgage loan, a share of the principal and interest
payments on your mortgage would pass to the series, and
o corporate bonds, which are bonds or other debt obligations
issued by corporations or other similar entities.
In selecting fixed income investments for the series, MFS considers the
views of its large group of fixed income portfolio managers and research
analysts. This group periodically assesses the three-month total return
outlook for various segments of the fixed income markets.
14
<PAGE>
This three-month "horizon" outlook is used by the portfolio manager(s)
of MFS' fixed-income oriented series (including the fixed-income portion
of the series) as a tool in making or adjusting a series' asset
allocations to various segments of the fixed income markets. In
assessing the credit quality of fixed-income securities, MFS does not
rely solely on the credit ratings assigned by credit rating agencies,
but rather performs its own independent credit analysis.
[arrow] Principal Risks of an Investment
The principal risks of investing in the series and the circumstances
reasonably likely to cause the value of your investment in the series to
decline are described below. As with any non-money market mutual fund,
the share price of the series will change daily based on market
conditions and other factors. Please note that there are many
circumstances which could cause the value of your investment in the
series to decline, and which could prevent the series from achieving its
objective, that are not described here.
The principal risks of investing in the series are:
o Allocation Risk: The series will allocate its investments
between equity and fixed income securities, and among various
segments of the fixed income markets, based upon judgments made
by MFS. The series could miss attractive investment
opportunities by underweighting markets where there are
significant returns, and could lose value by overweighting
markets where there are significant declines.
o Market Risk: This is the risk that the price of a security held
by the series will fall due to changing economic, political or
market conditions or disappointing earnings results.
o Undervalued Securities Risk: Prices of securities react to the
economic condition of the company that issued the security. The
series' equity investments in an issuer may rise and fall based
on the issuer's actual and anticipated earnings, changes in
management and the potential for takeovers and acquisitions. MFS
will invest in securities that are undervalued based on its
belief that the market value of these securities will rise due
to anticipated events and investor perceptions. If these events
do not occur or are delayed, or if investor perceptions about
the securities do not improve, the market price of these
securities may not rise or may fall.
o Interest Rate Risk: When interest rates rise, the prices of
fixed income securities in the series' portfolio will generally
fall. Conversely, when interest rates fall, the prices of fixed
income securities in the series' portfolio will generally rise.
o Convertible Securities Risk: Convertible securities, like fixed
income securities, tend to increase in value when interest rates
decline and decrease in value when interest rates rise. The
market value of a convertible security also tends to increase as
the market value of the underlying stock rises and decrease as
the market value of the underlying stock declines.
o Maturity Risk: Interest rate risk will generally affect the
price of a fixed income security more if the security has a
longer maturity. Fixed income securities with longer maturities
will therefore be more volatile than other fixed income
securities with shorter maturities. Conversely, fixed income
securities with shorter maturities will be less volatile but
generally provide lower returns than fixed income securities
with longer maturities. The average maturity of the series'
fixed income investments will affect the volatility of the
series' share price.
o Credit Risk: Credit risk is the risk that the issuer of a fixed
income security will not be able to pay principal and interest
when due. Rating agencies assign credit ratings to certain fixed
income securities to indicate their credit risk. The price of a
fixed income security will generally fall if the issuer defaults
on its obligation to pay principal or interest, the rating
agencies downgrade the issuer's credit rating or other news
affects the market's perception of the issuer's credit risk.
o Liquidity Risk: The fixed income securities purchased by the
series may be traded in the over-the-counter market rather than
on an organized exchange and are subject to liquidity risk. This
means that they may be harder to purchase or sell at a fair
price. The inability to purchase or sell these fixed income
securities at a fair price could have a negative impact on the
series' performance.
o Mortgage and Asset-Backed Securities:
[arrow] Maturity Risk:
[dagger]Mortgage-Backed Securities: A mortgage-backed
security will mature when all the mortgages in
the pool mature or are prepaid. Therefore,
mortgage-backed securities do not have a fixed
maturity, and their expected maturities may vary
when interest rates rise or fall.
+ When interest rates fall, homeowners are
more likely to prepay their mortgage
loans. An increased rate of prepayments
on the series' mortgage-backed
securities will result in an unforeseen
loss of interest income to the series.
Because prepayments increase when
interest rates fall, the prices of
mortgage-backed securities does not
increase as much as other fixed income
securities when interest rates fall.
15
<PAGE>
+ When interest rates rise, homeowners are
less likely to prepay their mortgage
loans. A decreased rate of prepayments
lengthens the expected maturity of a
mortgage-backed security. Therefore, the
prices of mortgage-backed securities may
decrease more than prices of other fixed
income securities when interest rates
rise.
[dagger]Collateralized Mortgage Obligations: The series
may invest in mortgage-backed securities called
collateralized mortgage obligations (CMOs). CMOs
are issued in separate classes with different
stated maturities. As the mortgage pool
experiences prepayments, the pool pays off
investors in classes with shorter maturities
first. By investing in CMOs, the series may
manage the prepayment risk of mortgage-backed
securities. However, prepayments may cause the
actual maturity of a CMO to be substantially
shorter than its stated maturity.
[dagger]Asset-Backed Securities: Asset-backed
securities have prepayment risks similar to
mortgage-backed securities.
[arrow] Credit Risk: As with any fixed income security,
mortgage-backed and asset-backed securities are subject
to the risk that the issuer will default on principal
and interest payments. It may be difficult to enforce
rights against the assets underlying mortgage-backed and
asset-backed securities in the case of default. The U.S.
government or its agencies may guarantee the payment of
principal and interest on some mortgage-backed
securities. Mortgage-backed securities and asset-backed
securities issued by private lending institutions or
other financial intermediaries may be supported by
insurance or other forms of guarantees.
o As with any mutual fund, you could lose money on your investment
in the series.
An investment in the series is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
[arrow] Portfolio Manager
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 the series' 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 a portfolio manager of the series
since July 19, 1995, and 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. Kenneth J. Enright, a Vice President of MFS,
has been employed by the Adviser as a portfolio manager since 1986 and
has been a portfolio manager of the series since January 15, 1999. Mr.
Enright is a manager of the common stock portion of the series'
portfolio.
[arrow] Bar Chart and Performance Table
The bar chart and performance table below are intended to indicate some
of the risks of investing in the series by showing changes in the
series' performance over time. The performance table also shows how the
series performance over time compares with that of a broad measure of
market performance. The chart and table provide past performance
information. The series' past performance does not necessarily indicate
how the series will perform in the future.
Bar Chart
The bar chart shows changes in the annual total returns of the series'
shares for each calendar year since they were first offered, assuming
the reinvestment of distributions.
[tabular representation of bar chart]
1996 1997 1998
14.37% 21.30% 12.33%
During the period shown in the bar chart, the highest quarterly return
was 9.86% (for the calendar quarter ended June 30, 1997) and the lowest
quarterly return was (4.28)% (for the calendar quarter ended September
30, 1998).
16
<PAGE>
Performance Table
This table shows how the average annual total returns of the series'
shares compares to a broad measure of market performance and various
other market indicators and assumes the reinvestment of distributions.
Average Annual Total Returns as of December 31, 1998
........................................................................
<TABLE>
<CAPTION>
1 Year Life
<S> <C> <C>
Total Return Series* +12.33% +18.73%
S&P 500 Composite Index**+ +28.58% +30.41%
Average balanced fund# +13.48% +17.64%
Lehman Brothers Government/Corporate Bond Index**++ + 9.49% + 8.58%
</TABLE>
---------
* "Life" refers to the period from the commencement of the series'
investment operations, January 3, 1995, through December 31, 1998.
# Source: Lipper Analytical Services, Inc. "Life" refers to the period
from February 1, 1995, through December 31, 1998.
** Source: CDA/Wiesenberger. "Life" refers to the period from February 1,
1995, through December 31, 1998.
+ The Standard & Poor's 500 Composite Index is a broad based, popular,
unmanaged index of common stock total return performance.
++ The Lehman Brothers Government/Corporate Bond Index is an unmanaged,
market-value-weighted index of U.S. Treasury and government-agency
securities (excluding mortgage-backed securities) and investment-grade
domestic corporate debt.
17
<PAGE>
8: Utilities Series
........................................................................
[arrow] Investment Objective
The series' investment objective is to seek capital growth and current
income (income above that available from a portfolio invested entirely
in equity securities). The series' objective may be changed without
shareholder approval.
[arrow] How the Series Intends to Achieve Its Objective
The series invests, under normal market conditions, at least 65% of its
total assets in equity and debt securities of domestic and foreign
companies in the utilities industry. MFS considers a company to be in
the utilities industry if, at the time of investment, MFS determines
that a substantial portion of the company's assets or revenues are
derived from one or more utilities. Securities in which the series
invests are not selected based upon what sector of the utilities
industry a company is in (i.e., electric, gas, telecommunications) or
upon a company's geographic region. Companies in the utilities industry
include:
o 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
o companies engaged in telecommunications, including telephone,
cellular telephone, telegraph, satellite, microwave, cable
television and other communications media (but not companies
engaged in public broadcasting).
Equity Investments. MFS uses a bottom-up, as opposed to a top-down,
investment style in managing the equity-oriented funds (including the
equity portion of the series) it advises. This means that securities are
selected based upon fundamental analysis performed by the series'
portfolio manager and MFS' large group of equity research analysts. In
performing this analysis and selecting securities for the series, MFS
places particular emphasis on each of the following factors:
o the current regulatory environment;
o the strength of the company's management team; and
o the company's growth prospects and valuation relative to its
long-term potential.
Equity securities purchased by the series consist of common stocks,
preferred stocks, convertible securities and depositary receipts. Equity
securities may be listed on a securities exchange or traded in the
over-the-counter markets.
As noted above, the series' investments in equity securities include
convertible securities. A convertible security is a security that may be
converted within a specified period of time into a certain amount of
common stock of the same or a different issuer. A convertible security
generally provides:
o a fixed income stream, and
o the opportunity, through its conversion feature, to participate
in an increase in the market price of the underlying common
stock.
Fixed Income Investments. The series invests in securities which pay a
fixed interest rate. These securities include:
o corporate bonds, which are bonds or other debt obligations
issued by corporations or similar entities, including lower
rated bonds, commonly known as junk bonds, which are bonds
assigned low credit ratings by credit rating agencies or which
are unrated and considered by MFS to be comparable in quality to
lower rated bonds;
o mortgage-backed securities and asset-backed securities, which
are securities that represent interests in a pool of assets such
as mortgage loans, car loan receivables, or credit card
receivables. These investments entitle the series to a share of
the principal and interest payments made on the underlying
mortgage, car loan, or credit card. For example, if the series
invested in a pool that included your mortgage loan, a share of
the principal and interest payments on your mortgage would pass
to the series; and
o U.S. government securities, which are bonds or other debt
obligations issued by, or whose principal and interest payments
are guaranteed or supported by, the U.S. government or one of
its agencies or instrumentalities.
In selecting fixed income investments for the series, MFS considers the
views of its large group of fixed income portfolio managers and research
analysts. This group periodically assesses the three-month total return
outlook for various segments of the fixed income markets. This
three-month "horizon" outlook is used by the portfolio manager(s) of
MFS' fixed-income oriented series (including the fixed-income portion of
the series) as a tool in making or adjusting a series' asset allocations
to various segments of the fixed income markets. In assessing
18
<PAGE>
the credit quality of fixed-income securities, MFS does not rely solely
on the credit ratings assigned by credit rating agencies, but rather
performs its own independent credit analysis.
Foreign Securities. The series invests in foreign securities such as:
o equity securities of foreign companies in the utilities
industry,
o fixed income securities of foreign companies in the utilities
industry, and
o fixed income securities issued by foreign governments.
These investments may expose the series to foreign currencies.
Other Considerations.
The series is a non-diversified mutual fund. This means that the series
may invest a relatively high percentage of its assets in one or a few
issuers.
[arrow] Principal Risks of an Investment
The principal risks of investing in the series and the circumstances
reasonably likely to cause the value of your investment in the series to
decline are described below. As with any non-money market mutual fund,
the share price of the series will change daily based on market
conditions and other factors. Please note that there are many
circumstances which could cause the value of your investment in the
series to decline, and which could prevent the series from achieving its
objective, that are not described here.
The principal risks of investing in the series are:
o Concentration: The series' investment performance will be
closely tied to the performance of utility companies. Many
utility companies, especially electric and gas and other energy
related utility companies, are subject to various uncertainties,
including:
[arrow] risks of increases in fuel and other operating costs;
[arrow] restrictions on operations and increased costs and
delays as a result of environmental and nuclear safety
regulations;
[arrow] coping with the general effects of energy conservation;
[arrow] technological innovations which may render existing
plants, equipment or products obsolete;
[arrow] the potential impact of natural or man-made disasters;
[arrow] difficulty obtaining adequate returns on invested
capital, even if frequent rate increases are approved by
public service commissions;
[arrow] the high cost of obtaining financing during periods of
inflation;
[arrow] difficulties of the capital markets in absorbing utility
debt and equity securities; and
[arrow] increased competition.
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. Because
utility companies are faced with the same obstacles, issues and
regulatory burdens, their securities may react similarly and more in
unison to these or other market conditions. These price movements may
have a larger impact on the series than on a series with a more broadly
diversified portfolio.
o Regulation: The value of utility company securities may decline
because governmental regulation controlling the utilities
industry can change. This regulation may prevent or delay the
utility company from passing along cost increases to its
customers. Furthermore, regulatory authorities may not grant
future rate increases. Any increases granted may not be adequate
to permit the payment of dividends on common stocks.
o Market Risk: This is the risk that the price of a security held
by the series will fall due to changing economic, political or
market conditions or disappointing earnings results.
o Company Risk: Prices of securities react to the economic
condition of the company that issued the security. The series'
equity investments in an issuer may rise and fall based on the
issuer's actual and anticipated earnings, changes in management
and the potential for takeovers and acquisitions.
19
<PAGE>
o Interest Rate Risk: When interest rates rise, the prices of
fixed income securities in the series' portfolio will generally
fall. Conversely, when interest rates fall, the prices of fixed
income securities in the series' portfolio will generally rise.
o Convertible Securities Risk: Convertible securities, like fixed
income securities, tend to increase in value when interest rates
decline and decrease in value when interest rates rise. The
market value of a convertible security also tends to increase as
the market value of the underlying stock rises and decrease as
the market value of the underlying stock declines.
o Maturity Risk: Interest rate risk will affect the price of a
fixed income security more if the security has a longer maturity
because changes in interest rates are increasingly difficult to
predict over longer periods of time. Fixed income securities
with longer maturities will therefore be more volatile than
other fixed income securities with shorter maturities.
Conversely, fixed income securities with shorter maturities will
be less volatile but generally provide lower returns than fixed
income securities with longer maturities. The average maturity
of the series' fixed income investments will affect the
volatility of the series' share price.
o Credit Risk: Credit risk is the risk that the issuer of a fixed
income security will not be able to pay principal and interest
when due. Rating agencies assign credit ratings to certain fixed
income securities to indicate their credit risk. The price of a
fixed income security will generally fall if the issuer defaults
on its obligation to pay principal or interest, the rating
agencies downgrade the issuer's credit rating or other news
affects the market's perception of the issuer's credit risk.
o Mortgage-Backed and Asset-Backed Securities Risk
[arrow] Maturity Risk:
[dagger]Mortgage-Backed Securities: A mortgage-backed
security will mature when all the mortgages in
the pool mature or are prepaid. Therefore,
mortgage-backed securities do not have a fixed
maturity, and their expected maturities may vary
when interest rates rise or fall.
+ When interest rates fall, homeowners are
more likely to prepay their mortgage
loans. An increased rate of prepayments
on the series' mortgage-backed
securities will result in an unforeseen
loss of interest income to the series.
Because prepayments increase when
interest rates fall, the prices of
mortgage-backed securities do not
increase as much as other fixed income
securities when interest rates fall.
+ When interest rates rise, homeowners are
less likely to prepay their mortgage
loans. A decreased rate of prepayments
lengthens the expected maturity of a
mortgage-backed security. Therefore, the
prices of mortgage-backed securities may
decrease more than prices of other fixed
income securities when interest rates
rise.
[dagger]Collateralized Mortgage Obligations: The series
may invest in mortgage-backed securities called
collateralized mortgage obligations (CMOs). CMOs
are issued in separate classes with different
stated maturities. As the mortgage pool
experiences prepayments, the pool pays off
investors in classes with shorter maturities
first. By investing in CMOs, the series may
manage the prepayment risk of mortgage-backed
securities. However, prepayments may cause the
actual maturity of a CMO to be substantially
shorter than its stated maturity.
[dagger]Asset-Backed Securities: Asset-backed
securities have prepayment risks similar to
mortgage-backed securities.
[arrow] Credit Risk: As with any fixed income security,
mortgage-backed and asset-backed securities are subject
to the risk that the issuer will default on principal
and interest payments. It may be difficult to enforce
rights against the assets underlying mortgage-backed and
asset-backed securities in the case of default. The U.S.
government or its agencies may guarantee the payment of
principal and interest on some mortgage-backed
securities. Mortgage-backed securities and asset-backed
securities issued by private lending institutions or
other financial intermediaries may be supported by
insurance or other forms of guarantees.
o Foreign Markets Risk: Investing in foreign securities involves
risks relating to political, social and economic developments
abroad, as well as risks resulting from the differences between
the regulations to which U.S. and foreign issuers and markets
are subject:
[arrow] These risks may include the seizure by the government of
company assets, excessive taxation, withholding taxes on
dividends and interest, limitations on the use or
transfer of portfolio assets, and political or social
instability.
[arrow] Enforcing legal rights may be difficult, costly and slow
in foreign countries, and there may be special problems
enforcing claims against foreign governments.
[arrow] Foreign companies may not be subject to accounting
standards or governmental supervision comparable to U.S.
companies, and there may be less public information
about their operations.
[arrow] Foreign markets may be less liquid and more volatile
than U.S. markets.
20
<PAGE>
[arrow] Foreign securities often trade in currencies other than
the U.S. dollar, and the series may directly hold
foreign currencies and purchase and sell foreign
currencies through forward exchange contracts. Changes
in currency exchange rates will affect the series' net
asset value, the value of dividends and interest earned,
and gains and losses realized on the sale of securities.
An increase in the strength of the U.S. dollar relative
to these other currencies may cause the value of the
series to decline. Certain foreign currencies may be
particularly volatile, and foreign governments may
intervene in the currency markets, causing a decline in
value or liquidity in the series' foreign currency
holdings. By entering into forward foreign currency
exchange contracts, the series may be required to forego
the benefits of advantageous changes in exchange rates
and, in the case of forward contracts entered into for
the purpose of increasing return, the series may sustain
losses which will reduce its gross income. Forward
foreign currency exchange contracts involve the risk
that the party with which the series enters the contract
may fail to perform its obligations to the series.
o Non-Diversified Status Risk: Because the series may invest a
higher percentage of its assets in a small number of issuers,
the series is more susceptible to any single economic, political
or regulatory event affecting those issuers than is a
diversified fund.
o As with any mutual fund, you could lose money on your investment
in the series.
An investment in the series is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
[arrow] Portfolio Manager
Maura A. Shaughnessy, a Senior Vice President of the Adviser, has been
employed by the Adviser as a portfolio manager since 1991. Ms.
Shaughnessy has been the series' portfolio manager since its inception.
[arrow] Bar Chart and Performance Table
The bar chart and performance table below are intended to indicate some
of the risks of investing in the series by showing changes in the
series' performance over time. The performance table also shows how the
series performance over time compares with that of a broad measure of
market performance. The chart and table provide past performance
information. The series' past performance does not necessarily indicate
how the series will perform in the future.
Bar Chart
The bar chart shows changes in the annual total returns of the series'
shares for each calendar year since they were first offered, assuming
the reinvestment of distributions.
[TABULAR REPRESENTATION OF BAR CHART]
1996 1997 1998
18.51% 31.70% 18.06%
During the period shown in the bar chart, the highest quarterly return
was 12.01% (for the calendar quarter ended December 31, 1996) and the
lowest quarterly return was (3.79)% (for the calendar quarter ended
September 30, 1998).
21
<PAGE>
Performance Table
This table shows how the average annual total returns of the series'
shares compares to a broad measure of market performance and assumes the
reinvestment of distributions.
Average Annual Total Returns as of December 31, 1998
........................................................................
<TABLE>
<CAPTION>
1 Year Life
<S> <C> <C>
Utilities Series* 18.06% 25.40%
Standard & Poor's Utility Index+** 14.77% 18.29%
</TABLE>
---------
* "Life" refers to the period from the commencement of the series'
investment operations on January 3, 1995, through December 31, 1998.
+ Source: Lipper Analytical Services, Inc. "Life" refers to the period
from February 1, 1995 through December 31, 1998.
** The Standard & Poor's Utilities Index is a broad based, unmanaged,
market-capitalization-weighted, total return index of all utility
stocks in the Standard & Poor's 500 Composite Index, a popular index
of common stock total return performance.
22
<PAGE>
9: High Income Series
........................................................................
[arrow] Investment Objective
The series' investment objective is to provide high current income by
investing primarily in a professionally managed diversified portfolio of
fixed income securities, some of which may involve equity features. The
series' objective may be changed without shareholder approval.
[arrow] How the Series Intends to Achieve Its Objective
The series invests, under normal market conditions, at least 80% of its
total assets in high yield fixed income securities. Fixed income
securities offering the high current income sought by the series
generally are lower rated bonds. These bonds, commonly known as junk
bonds, are assigned lower credit ratings by credit rating agencies or
are unrated and considered by MFS to be comparable to lower rated bonds.
While the series focuses its investments on bonds issued by corporations
or similar entitles, it may invest in all types of debt securities. The
series may invest in foreign securities (including emerging markets
securities), through which it may have exposure to foreign currencies.
In selecting fixed income investments for the series, MFS considers the
views of its large group of fixed income portfolio managers and research
analysts. This group periodically assesses the three-month total return
outlook for various segments of the fixed income markets. This
three-month "horizon" outlook is used by the portfolio manager(s) of
MFS' fixed income oriented funds (including the series) as a tool in
making or adjusting a series' asset allocations to various segments of
the fixed income markets. In assessing the credit quality of fixed
income securities, MFS does not rely solely on the credit ratings
assigned by credit rating agencies, but rather performs its own
independent credit analysis.
[arrow] Principal Risks of an Investment
The principal risks of investing in the series and the circumstances
reasonably likely to cause the value of your investment in the series to
decline are described below. As with any non-money market mutual fund,
the share price of the series will change daily based on market
conditions and other factors. Please note that there are many
circumstances which could cause the value of your investment in the
series to decline, and which could prevent the series from achieving its
objective, that are not described here.
The principal risks of investing in the series are:
o Allocation Risk: The series will allocate its investments among
fixed income markets based upon judgments made by MFS. The
series could miss attractive investment opportunities by
underweighting markets where there are significant returns, and
could lose value by overweighting markets where there are
significant declines.
o Interest Rate Risk: When interest rates rise, the prices of
fixed income securities in the series' portfolio will generally
fall. Conversely, when interest rates fall, the prices of fixed
income securities in the series' portfolio will generally rise.
o Maturity Risk: Interest rate risk will generally affect the
price of a fixed income security more if the security has a
longer maturity. Fixed income securities with longer maturities
will therefore be more volatile than other fixed income
securities with shorter maturities. Conversely, fixed income
securities with shorter maturities will be less volatile but
generally provide lower returns than fixed income securities
with longer maturities. The average maturity of the series'
fixed income investments will affect the volatility of the
series' share price.
o Credit Risk: Credit risk is the risk that the issuer of a fixed
income security will not be able to pay principal and interest
when due. Rating agencies assign credit ratings to certain fixed
income securities to indicate their credit risk. The price of a
fixed income security will generally fall if the issuer defaults
on its obligation to pay principal or interest, the rating
agencies downgrade the issuer's credit rating or other news
affects the market's perception of the issuer's credit risk.
o Liquidity Risk: The fixed income securities purchased by the
series may be traded in the over-the-counter market rather than
on an organized exchange and are subject to liquidity risk. This
means that they may be harder to purchase or sell at a fair
price. The inability to purchase or sell these fixed income
securities at a fair price could have a negative impact on the
series' performance.
o Junk Bond Risk:
[arrow] Higher Credit Risk: Junk bonds are subject to a
substantially higher degree of credit risk than higher
rated bonds. During recessions, a high percentage of
issuers of junk bonds may default on payments of
principal and interest. The price of a junk bond may
therefore fluctuate drastically due to bad news about
the issuer or the economy in general.
23
<PAGE>
[arrow] Higher Liquidity Risk: During recessions and periods of
broad market declines, junk bonds could become less
liquid, meaning that they will be harder to value or
sell at a fair price.
o Foreign Securities: Investments in foreign securities involve
risks relating to political, social and economic developments
abroad, as well as risks resulting from the differences between
the regulations to which U.S. and foreign issuers and markets
are subject:
[arrow] These risks may include the seizure by the government of
company assets, excessive taxation, withholding taxes on
dividends and interest, limitations on the use or
transfer of portfolio assets, and political or social
instability.
[arrow] Enforcing legal rights may be difficult, costly and slow
in foreign countries, and there may be special problems
enforcing claims against foreign governments.
[arrow] Foreign companies may not be subject to accounting
standards or governmental supervision comparable to U.S.
companies, and there may be less public information
about their operations.
[arrow] Foreign markets may be less liquid and more volatile
than U.S. markets.
[arrow] Foreign securities often trade in currencies other than
the U.S. dollar, and the series may directly hold
foreign currencies and purchase and sell foreign
currencies through forward exchange contracts. Changes
in currency exchange rates will affect the series' net
asset value, the value of dividends and interest earned,
and gains and losses realized on the sale of securities.
An increase in the strength of the U.S. dollar relative
to these other currencies may cause the value of the
series to decline. Certain foreign currencies may be
particularly volatile, and foreign governments may
intervene in the currency markets, causing a decline in
value or liquidity in the series' foreign currency
holdings. By entering into forward foreign currency
exchange contracts, the series may be required to forego
the benefits of advantageous changes in exchange rates
and, in the case of forward contracts entered into for
the purpose of increasing return, the series may sustain
losses which will reduce its gross income. Forward
foreign currency exchange contracts involve the risk
that the party with which the series enters the contract
may fail to perform its obligations to the series.
o As with any mutual fund, you could lose money on your investment
in the series.
An investment in the series is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
[arrow] Portfolio Manager
Bernard Scozzafava, a Vice President of the Adviser, has been employed
by the Adviser as a portfolio manager since 1989. Mr. Scozzafava has
been the series' portfolio manager since its inception.
[arrow] Bar Chart and Performance Table
The bar chart and performance table below are intended to indicate some
of the risks of investing in the series by showing changes in the
series' performance over time. The performance table also shows how the
series performance over time compares with that of a broad measure of
market performance. The chart and table provide past performance
information. The series' past performance does not necessarily indicate
how the series will perform in the future.
Bar Chart
The bar chart shows changes in the annual total returns of the series'
shares for each calendar year since they were first offered, assuming
the reinvestment of distributions.
[TABULAR REPRESENTATION OF BAR CHART]
1996 1997 1998
11.80% 13.62% (0.18%)
During the period shown in the bar chart, the highest quarterly return was
5.57% (for the calendar quarter ended September 30, 1996) and the lowest
quarterly return was (7.28)% (for the calendar quarter ended September 30,
1998).
24
<PAGE>
Performance Table
This table shows how the average annual total returns of the series'
shares compares to a broad measure of market performance and various
other market indicators and assumes the reinvestment of distributions.
Average Annual Total Returns as of December 31, 1998
........................................................................
<TABLE>
<CAPTION>
1 Year Life
<S> <C> <C>
High Income Series* -0.18% +8.77%
Lehman Brothers High Yield Bond Index#++ +1.60% +8.83%
Lipper High Yield Bond Fund Index#+ -0.08% +8.72%
</TABLE>
---------
* "Life" refers to the period from the commencement of the series'
investment operations, July 26, 1995, through December 31, 1998.
** Source: CDA/Wiesenberger. "Life" refers to the period from August 1,
1995, through December 31, 1998.
# Source: Lipper Analytical Services, Inc. "Life" refers to the period
from August 1, 1995, through December 31, 1998.
+ The Lipper High Yield Bond Fund Index is an unmanaged,
net-asset-value-weighted index of the largest qualifying mutual funds
in this Lipper category, adjusted for the reinvestment of capital gain
distributions and income dividends.
++ The Lehman Brothers High Yield Bond Index is a broad based, unmanaged
index of noninvestment-grade corporate debt.
25
<PAGE>
10: Global Governments Series
.........................................................................
[arrow] Investment Objective
The series' investment objective is to provide income and capital
appreciation. The series' objective may be changed without shareholder
approval. Prior to May 1, 1999, the series' investment objective was to
seek not only preservation but also growth of capital, together with
moderate current income.
[arrow] How the Series Intends to Achieve Its Objective
The series invests, under normal market conditions, at least 65% of its
total assets in:
o U.S. government securities, which are bonds or other debt
obligations issued by, or whose principal and interest payments
are guaranteed or supported by, the U.S. government or one of
its agencies or instrumentalities (including mortgage-backed
securities), and
o foreign government securities, which are bonds or other debt
obligations issued by foreign governments, including emerging
market governments; these foreign government securities are
either:
[arrow] issued, guaranteed or supported as to payment of
principal and interest by foreign governments, foreign
government agencies, foreign semi-governmental entities,
or supra-national entities,
[arrow] interests issued by entities organized and operated for
the purpose of restructuring the investment
characteristics of foreign government securities, or
[arrow] Brady Bonds, which are long-term bonds issued as part of
a restructuring of commercial loans to emerging market
countries.
The series may also invest in:
o corporate bonds, which are bonds or other debt obligations
issued by domestic or foreign (including emerging market)
corporations or other similar entities; the series may invest
in:
[arrow] investment grade bonds, which are bonds assigned higher
credit ratings by credit rating agencies or which are
unrated and considered by MFS to be comparable to higher
rated bonds,
[arrow] lower rated bonds, commonly known as junk bonds, which
are bonds assigned lower credit ratings by credit rating
agencies or which are unrated and considered by MFS to
be comparable to lower rated bonds, and
[arrow] crossover bonds, which are junk bonds that MFS expects
will appreciate in value due to an anticipated upgrade
in the issuer's credit rating (thereby crossing over
into investment grade bonds), and
o mortgage-backed and asset-backed securities, which represent
interests in a pool of assets such as mortgage loans, car loan
receivables, or credit card receivables.
In selecting fixed income investments for the series, MFS considers the
views of its large group of fixed income portfolio managers and research
analysts. This group periodically assesses the three-month total return
outlook for various segments of the fixed income markets. This
three-month "horizon" outlook is used by the portfolio manager(s) of
MFS' fixed income oriented funds (including the series) as a tool in
making or adjusting a series' asset allocations to various segments of
the fixed income markets. In assessing the credit quality of fixed
income securities, MFS does not rely solely on the credit ratings
assigned by credit rating agencies, but rather performs its own
independent credit analysis.
The series may invest in derivative securities. Derivatives are
securities whose value may be based on other securities, currencies,
interest rates, or indices. Derivatives include:
o futures and forward contracts,
o options on futures contracts, foreign currencies, securities and
bond indices,
o structured notes and indexed securities, and
o swaps, caps, collars and floors.
26
<PAGE>
The series is a non-diversified mutual series. This means that the
series may invest a relatively high percentage of its assets in a small
number of issuers. The series may invest a substantial amount of its
assets (i.e., more than 25% of its assets) in issuers located in a
single country or a limited number of countries.
[arrow] Principal Risks of an Investment
The principal risks of investing in the series and the circumstances
reasonably likely to cause the value of your investment in the series -
to decline are described below. As with any non-money market mutual
fund, the share price of the series will change daily based on market
conditions and other factors. Please note that there are many
circumstances which could cause the value of your investment in the
series to decline, and which could prevent the series from achieving its
objective, that are not described here.
The principal risks of investing in the series are:
o Foreign Securities: Investments in foreign securities involve
risks relating to political, social and economic developments
abroad, as well as risks resulting from the differences between
the regulations to which U.S. and foreign issuers and markets
are subject:
[arrow] These risks may include the seizure by the government of
company assets, excessive taxation, withholding taxes on
dividends and interest, limitations on the use or
transfer of portfolio assets, and political or social
instability.
[arrow] Enforcing legal rights may be difficult, costly and slow
in foreign countries, and there may be special problems
enforcing claims against foreign governments.
[arrow] Foreign companies may not be subject to accounting
standards or governmental supervision comparable to U.S.
companies, and there may be less public information
about their operations.
[arrow] Foreign markets may be less liquid and more volatile
than U.S. markets.
[arrow] Foreign securities often trade in currencies other than
the U.S. dollar, and the series may directly hold
foreign currencies and purchase and sell foreign
currencies through forward exchange contracts. Changes
in currency exchange rates will affect the series' net
asset value, the value of dividends and interest earned,
and gains and losses realized on the sale of securities.
An increase in the strength of the U.S. dollar relative
to these other currencies may cause the value of the
series to decline. Certain foreign currencies may be
particularly volatile, and foreign governments may
intervene in the currency markets, causing a decline in
value or liquidity in the series' foreign currency
holdings. By entering into forward foreign currency
exchange contracts, the series may be required to forego
the benefits of advantageous changes in exchange rates
and, in the case of forward contracts entered into for
the purposes of increasing return, the series may
sustain losses which will reduce its gross income.
Forward foreign currency exchange contracts involve the
risk that the party with which the series enters the
contract may fail to perform its obligations to the
series.
o Emerging Markets Risk: Emerging markets are generally defined as
countries in the initial stages of their industrialization
cycles with low per capita income. Investments in emerging
markets securities involve all of the risks of investments in
foreign securities, and also have additional risks:
[arrow] All of the risks of investing in foreign securities are
heightened by investing in emerging markets countries.
[arrow] The markets of emerging markets countries have been more
volatile than the markets of developed countries with
more mature economies. These markets often have provided
significantly higher or lower rates of return than
developed markets, and significantly greater risks, to
investors.
o Allocation Risk: The series will allocate its investments among
various segments of the fixed income markets based upon
judgments made by MFS. The series could miss attractive
investment opportunities by underweighting markets where there
are significant returns, and could lose value by overweighting
markets where there are significant declines.
o Interest Rate Risk: When interest rates rise, the prices of
fixed income securities in the series' portfolio will generally
fall. Conversely, when interest rates fall, the prices of fixed
income securities in the series' portfolio will generally rise.
o Maturity Risk: Interest rate risk will generally affect the
price of a fixed income security more if the security has a
longer maturity. Fixed income securities with longer maturities
will therefore be more volatile than other fixed income
securities with shorter maturities. Conversely, fixed income
securities with shorter maturities will be less volatile but
generally provide lower returns than fixed income securities
with longer maturities. The average maturity of the series'
fixed income investments will affect the volatility of the
series' share price.
o Credit Risk: Credit risk is the risk that the issuer of a fixed
income security will not be able to pay principal and interest
when due. Rating agencies assign credit ratings to certain fixed
income securities to indicate their credit risk. The price of a
fixed income security will generally
27
<PAGE>
fall if the issuer defaults on its obligation to pay principal
or interest, the rating agencies downgrade the issuer's credit
rating or other news affects the market's perception of the
issuer's credit risk.
o Liquidity Risk: The fixed income securities purchased by the
series may be traded in the over-the-counter market rather than
on an organized exchange and are subject to liquidity risk. This
means that they may be harder to purchase or sell at a fair
price. The inability to purchase or sell these fixed income
securities at a fair price could have a negative impact on the
series' performance.
o Junk Bond Risk:
[arrow] Higher Credit Risk: Junk bonds (including crossover
bonds) are subject to a substantially higher degree of
credit risk than higher rated bonds. During recessions,
a high percentage of issuers of junk bonds may default
on payments of principal and interest. The price of a
junk bond may therefore fluctuate drastically due to bad
news about the issuer or the economy in general.
[arrow] Higher Liquidity Risk: During recessions and periods of
broad market declines, junk bonds could become less
liquid, meaning that they will be harder to value or
sell at a fair price.
o Mortgage and Asset-Backed Securities:
[arrow] Maturity Risk:
[dagger] Mortgage-Backed Securities: A mortgage-backed
security will mature when all the mortgages in
the pool mature or are prepaid. Therefore,
mortgage-backed securities do not have a fixed
maturity, and their expected maturities may vary
when interest rates rise or fall.
+ When interest rates fall, homeowners are
more likely to prepay their mortgage
loans. An increased rate of prepayments
on the series' mortgage-backed
securities will result in an unforeseen
loss of interest income to the series.
Because prepayments increase when
interest rates fall, the price of
mortgage-backed securities does not
increase as much as other fixed income
securities when interest rates fall.
+ When interest rates rise, homeowners are
less likely to prepay their mortgage
loans. A decreased rate of prepayments
lengthens the expected maturity of a
mortgage-backed security. Therefore, the
prices of mortgage-backed securities may
decrease more than prices of other fixed
income securities when interest rates
rise.
[dagger]Collateralized Mortgage Obligations: The series
may invest in mortgage-backed securities called
collateralized mortgage obligations (CMOs). CMOs
are issued in separate classes with different
stated maturities. As the mortgage pool
experiences prepayments, the pool pays off
investors in classes with shorter maturities
first. By investing in CMOs, the series may
manage the prepayment risk of mortgage-backed
securities. However, prepayments may cause the
actual maturity of a CMO to be substantially
shorter than its stated maturity.
[dagger]Asset-Backed Securities: Asset-backed
securities have prepayment risks similar to
mortgage-backed securities.
[arrow] Credit Risk: As with any fixed income security,
mortgage-backed and asset-backed securities are subject
to the risk that the issuer will default on principal
and interest payments. It may be difficult to enforce
rights against the assets underlying mortgage-backed and
asset-backed securities in the case of default. The U.S.
government or its agencies may guarantee the payment of
principal and interest on some mortgage-backed
securities. Mortgage-backed securities and asset-backed
securities issued by private lending institutions or
other financial intermediaries may be supported by
insurance or other forms of guarantees.
o Derivatives Risk:
[arrow] Hedging Risk: When a derivative is used as a hedge
against an opposite position that the series also holds,
any loss generated by the derivative should be
substantially offset by gains on the hedged investment,
and vice versa. While hedging can reduce or eliminate
losses, it can also reduce or eliminate gains.
[arrow] Correlation Risk: When the series uses derivatives to
hedge, it takes the risk that changes in the value of
the derivative will not match those of the asset being
hedged. Incomplete correlation can result in
unanticipated losses.
[arrow] Investment Risk: When the series uses derivatives as an
investment vehicle to gain market exposure, rather than
for hedging purposes, any loss on the derivative
investment will not be offset by gains on another hedged
investment. The series is therefore directly exposed to
the risks of that derivative. Gains or losses from
derivative investments may be substantially greater than
the derivative's original cost.
[arrow] Availability Risk: Derivatives may not be available to
the series upon acceptable terms. As a result, the
series may be unable to use derivatives for hedging or
other purposes.
28
<PAGE>
[arrow] Credit Risk: When the series uses derivatives, it is
subject to the risk that the other party to the
agreement will not be able to perform.
o Non-Diversified Status Risk: Because the series may invest a
higher percentage of its assets in a small number of issuers,
the series is more susceptible to any single economic, political
or regulatory event affecting those issuers than is a
diversified fund.
o Investment Focus Risk: Because the series may invest a
substantial amount of its assets in issuers located in a single
country or a limited number of countries, economic, political
and social conditions in these countries will have a significant
impact on its investment performance.
o As with any mutual fund, you could lose money on your investment
in the series.
An investment in the series is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
[arrow] Portfolio Manager
James T. Swanson is the portfolio manager of the series. Mr. Swanson, a
Senior Vice President of the Adviser, has been employed as a portfolio
manager with the Adviser since 1985 and has been the series' portfolio
manager since August 1, 1998.
[arrow] Bar Chart and Performance Table
The bar chart and performance table below are intended to indicate some
of the risks of investing in the series by showing changes in the
series' performance over time. The performance table also shows how the
series performance over time compares with that of a broad measure of
market performance. The chart and table provide past performance
information. The series' past performance does not necessarily indicate
how the series will perform in the future.
Bar Chart
The bar chart shows changes in the annual total returns of the series'
shares for each calendar year since they were first offered, assuming
the reinvestment of distributions.
[TABULAR REPRESENTATION OF BAR CHART]
1995 1996 1997 1998
14.38% 4.03% (1.13)% 7.90%
During the period shown in the bar chart, the highest quarterly return
was 8.35% (for the calendar quarter ended March 31, 1995) and the lowest
quarterly return was (3.21)% (for the calendar quarter ended March 31,
1997).
29
<PAGE>
Performance Table
This table shows how the average annual total returns of the series'
shares compares to a broad measure of market performance and assumes the
reinvestment of distributions.
Average Annual Total Returns as of December 31, 1998
........................................................................
<TABLE>
<CAPTION>
1 Year Life
<S> <C> <C>
Global Governments Series* + 7.90% +5.57%
J.P. Morgan Global Government Bond Index#** +15.31% +9.11%
</TABLE>
---------
* "Life" refers to the period from the commencement of the series'
investment operations, June 14, 1994, through December 31, 1998.
# Source: AIM. "Life" refers to the period from July 1, 1994, through
December 31, 1998.
** The J.P. Morgan Global Government Bond Index is a broad based, aggregate
index of actively traded government bonds issued by 13 countries,
including the United States, with remaining maturities of at least one
year.
30
<PAGE>
11: Global Equity Series
........................................................................
[arrow] Investment Objective
The series' investment objective is capital appreciation. The series'
objective may be changed without shareholder approval.
[arrow] How the Series Intends to Achieve Its Objective
The series invests, under normal market conditions, at least 65% of its
total assets in common stocks and related securities, such as preferred
stock, convertible securities and depositary receipts, of U.S. and
foreign (including emerging market) issuers. The series spreads its
investments across these markets and focuses on companies which MFS
believes have favorable growth prospects and attractive valuations based
on current and expected earnings or cash flow. The series generally
seeks to purchase securities of companies with relatively large market
capitalizations relative to the market in which they are traded. The
series' investments may include securities traded in the
over-the-counter markets.
MFS uses a bottom-up, as opposed to a top-down, investment style in
managing the equity-oriented funds (such as the series) it advises. This
means that securities are selected based upon fundamental analysis
performed by the series' portfolio manager and MFS' large group of
equity research analysts.
[arrow] Principal Risks of an Investment
The principal risks of investing in the series and the circumstances
reasonably likely to cause the value of your investment in the series to
decline are described below. As with any non-money market mutual fund,
the share price of the series will change daily based on market
conditions and other factors. Please note that there are many
circumstances which could cause the value of your investment in the
series to decline, and which could prevent the series from achieving its
objective, that are not described here.
The principal risks of investing in the series are:
o Market Risk: This is the risk that the price of a security held
by the series will fall due to changing economic, political or
market conditions or disappointing earnings results.
o Company Risk: Prices of securities react to the economic
condition of the company that issued the security. The series'
equity investments in an issuer may rise and fall based on the
issuer's actual and anticipated earnings, changes in management
and the potential for takeovers and acquisitions.
o Over-the-Counter Risk: Over-the-counter (OTC) transactions
involve risks in addition to those associated with transactions
in securities traded on exchanges. OTC-listed companies may have
limited product lines, markets or financial resources. Many OTC
stocks trade less frequently and in smaller volume than
exchange-listed stocks. The values of these stocks may be more
volatile than exchange-listed stocks, and the series may
experience difficulty in establishing or closing out positions
in these stocks at prevailing market prices.
o Foreign Securities Risk: Investments in foreign securities
involve risks relating to political, social and economic
developments abroad, as well as risks resulting from the
differences between the regulations to which U.S. and foreign
issuers and markets are subject:
[arrow] These risks may include the seizure by the government of
company assets, excessive taxation, withholding taxes on
dividends and interest, limitations on the use or
transfer of portfolio assets, and political or social
instability.
[arrow] Enforcing legal rights may be difficult, costly and slow
in foreign countries, and there may be special problems
enforcing claims against foreign governments.
[arrow] Foreign companies may not be subject to accounting
standards or governmental supervision comparable to U.S.
companies, and there may be less public information
about their operations.
[arrow] Foreign markets may be less liquid and more volatile
than U.S. markets.
[arrow] Foreign securities often trade in currencies other than
the U.S. dollar, and the series may directly hold
foreign currencies and purchase and sell foreign
currencies through forward exchange contracts. Changes
in currency exchange rates will affect the series' net
asset value, the value of dividends and interest earned,
and gains and losses realized on the sale of securities.
An increase in the strength of the U.S. dollar relative
to these other currencies may cause the value of the
series to decline. Certain foreign currencies may be
particularly volatile, and foreign governments may
intervene in the currency markets, causing a decline in
value or liquidity in
31
<PAGE>
the series' foreign currency holdings. Forward foreign
currency exchange contracts involve the risk that the
party with which the series enters the contract may fail
to perform its obligations to the series.
o Emerging Markets Risk: Emerging markets are generally defined as
countries in the initial stages of their industrialization
cycles with low per capita income. Investments in emerging
markets securities involve all of the risks of investments in
foreign securities, and also have additional risks:
[arrow] All of the risks of investing in foreign securities are
heightened by investing in emerging markets countries.
[arrow] The markets of emerging markets countries have been more
volatile than the markets of developed countries with
more mature economies. These markets often have provided
higher rates of return, and significantly greater risks,
to investors.
o As with any mutual fund, you could lose money on your investment
in the series.
An investment in the series is not a bank deposit and is not
insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
[arrow] Portfolio Manager
The series' portfolio manager is David R. Mannheim, a Senior Vice
President of MFS. Mr. Mannheim has been the portfolio manager of the
series since its inception and has been employed as a portfolio manager
by MFS since 1988.
Bar Chart and Performance Table
The bar chart and performance table are not included because the series
had not commenced investment operations as of December 31, 1998.
32
<PAGE>
12: Emerging Markets Equity Series
........................................................................
[arrow] Investment Objective
The series' investment objective is capital appreciation. The series'
objective may be changed without shareholder approval.
[arrow] How the Series Intends to Achieve Its Objective
The series invests, under normal market conditions, at least 65% of its
total assets in common stocks and related securities, such as preferred
stock, convertible securities and depositary receipts, of emerging
market issuers. Emerging market issuers are issuers whose principal
activities are located in emerging market countries. Emerging market
countries include any country determined to have an emerging market
economy, taking into account a number of factors, including whether the
country has a low-to-middle-income economy according to the
International Bank for Reconstruction and Development, the country's
foreign currency debt rating, its political and economic stability and
the development of its financial and capital markets. These countries
include those located in Latin America, Asia, Africa, the Middle East
and the developing counties of Europe, primarily Eastern Europe. While
the series may invest up to 50% of its assets in issuers located in a
single country, the series generally expects to have no more than 25% of
its assets invested in issuers located in any one country. The series'
investments may include securities traded in the over-the-counter
markets.
The series may have exposure to foreign currencies through its
investment in foreign securities.
[arrow] Principal Risks of an Investment
The principal risks of investing in the series and the circumstances
reasonably likely to cause the value of your investment in the series to
decline are described below. As with any non-money market mutual fund,
the share price of the series will change daily based on market
conditions and other factors. Please note that there are many
circumstances which could cause the value of your investment in the
series to decline, and which could prevent the series from achieving its
objective, that are not described here.
The principal risks of investing in the series are:
o Foreign Securities Risk: Investments in foreign securities
involve risks relating to political, social and economic
developments abroad, as well as risks resulting from the
differences between the regulations to which U.S. and foreign
issuers and markets are subject:
[arrow] These risks may include the seizure by the government of
company assets, excessive taxation, withholding taxes on
dividends and interest, limitations on the use or
transfer of portfolio assets, and political or social
instability.
[arrow] Enforcing legal rights may be difficult, costly and slow
in foreign countries, and there may be special problems
enforcing claims against foreign governments.
[arrow] Foreign companies may not be subject to accounting
standards or governmental supervision comparable to U.S.
companies, and there may be less public information
about their operations.
[arrow] Foreign markets may be less liquid and more volatile
than U.S. markets.
[arrow] Foreign securities often trade in currencies other than
the U.S. dollar, and the series may directly hold
foreign currencies and purchase and sell foreign
currencies through forward exchange contracts. Changes
in currency exchange rates will affect the series' net
asset value, the value of dividends and interest earned,
and gains and losses realized on the sale of securities.
An increase in the strength of the U.S. dollar relative
to these other currencies may cause the value of the
series to decline. Certain foreign currencies may be
particularly volatile, and foreign governments may
intervene in the currency markets, causing a decline in
value or liquidity in the series' foreign currency
holdings. By entering into forward foreign currency
exchange contracts, the fund may be required to forego
the benefits of advantageous changes in exchange rates
and, in the case of forward contracts entered into for
the purpose of increasing return, the fund may sustain
losses which will reduce its gross income. Forward
foreign currency exchange contracts involve the risk
that the party with which the series enters the contract
may fail to perform its obligations to the series.
o Emerging Markets Risk: Emerging markets are generally defined as
countries in the initial stages of their industrialization
cycles with low per capita income. Investments in emerging
markets securities involve all of the risks of investments in
foreign securities, and also have additional risks:
[arrow] All of the risks of investing in foreign securities are
heightened by investing in emerging markets countries.
33
<PAGE>
[arrow] The markets of emerging markets countries have been more
volatile than the markets of developed countries with
more mature economies. These markets often have provided
higher rates of return, and significantly greater risks,
to investors.
o Market Risk: This is the risk that the price of a security held
by the series will fall due to changing economic, political or
market conditions or disappointing earnings results.
o Company Risk: Prices of securities react to the economic
condition of the company that issued the security. The series'
equity investments in an issuer may rise and fall based on the
issuer's actual and anticipated earnings, changes in management
and the potential for takeovers and acquisitions.
o Over-the-Counter Risk: Over-the-counter (OTC) transactions
involve risks in addition to those associated with transactions
in securities traded on exchanges. OTC-listed companies may have
limited product lines, markets or financial resources. Many OTC
stocks trade less frequently and in smaller volume than
exchange-listed stocks. The values of these stocks may be more
volatile than exchange-listed stocks, and the series may
experience difficulty in establishing or closing out positions
in these stocks at prevailing market prices.
o As with any mutual fund, you could lose money on your investment
in the series.
An investment in the series is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
[arrow] Portfolio Manager
Dr. Arnab Kumar Banerji, Chief Investment Officer of Foreign & Colonial
Emerging Markets Limited (referred to as FCEM), has been employed by
FCEM as a portfolio manager since 1993. Jeffrey Chowdhry, a Director of
FCEM, has been employed by FCEM as a portfolio manager since 1994. FCEM
serves as sub-adviser to MFS in managing the series. Messrs. Banerji and
Chowdhry have been the series' portfolio managers since its inception.
[arrow] Bar Chart and Performance Table
The bar chart and performance table below are intended to indicate some
of the risks of investing in the series by showing changes in the
series' performance over time. The performance table also shows how the
series performance over time compares with that of a broad measure of
market performance. The chart and table provide past performance
information. The series' past performance does not necessarily indicate
how the series will perform in the future.
Bar Chart
The bar chart shows changes in the annual total returns of the series'
shares for each calendar year since they were first offered, assuming
the reinvestment of distributions.
[TABULAR REPRESENTATION OF BAR CHART]
1998
(33.37)%
During the period shown in the bar chart, the highest quarterly return
was 5.67% (for the calendar quarter ended March 31, 1998) and the lowest
quarterly return was (27.48)% (for the calendar quarter ended September
30, 1998).
34
<PAGE>
Performance Table
This table shows how the average annual total returns of the series'
shares compares to a broad measure of market performance and assumes the
reinvestment of distributions.
Average Annual Total Returns as of December 31, 1998
........................................................................
<TABLE>
<CAPTION>
1 Year Life
<S> <C> <C>
Emerging Markets Equity Series* -33.37% -34.51%
MSCI EMF Index**+ -23.81% -21.87%
Lipper Emerging Markets Fund Index#++ -26.87% -25.90%
</TABLE>
---------
* "Life" refers to the period from the commencement of the series'
investment operations, October 16, 1997, through December 31, 1998.
** Source: CDA/Wiesenberg. "Life" refers to the period from November 1,
1997, through December 31, 1998.
# Source: Lipper Analytical Services, Inc. "Life" refers to the period
from November 1, 1997, through December 31, 1998.
+ The Morgan Stanley Capital International (MSCI) Emerging Markets Free
(EMF) Index is a broad based, unmanaged, market-capitalization-weighted
index of equities in emerging markets.
++ The Lipper Emerging Markets Funds Index is an unmanaged index of the
largest qualifying mutual funds within this Lipper category, adjusted for
the reinvestment of capital gain distributions and income dividends.
35
<PAGE>
13: Bond Series
........................................................................
[arrow] Investment Objectives
The series' investment objective is primarily to provide as high a level
of current income as is believed to be consistent with prudent risk. Its
secondary objective is to protect shareholders' capital. The series'
objectives may be changed without shareholder approval.
[arrow] How the Series Intends to Achieve Its Objectives
The series invests, under normal market conditions, at least 65% of its
total assets in the following fixed income securities:
o corporate bonds, which are bonds or other debt obligations
issued by domestic or foreign (including emerging market)
corporations or other similar entities.
o U.S. government securities, which are bonds or other debt
obligations issued by, or whose principal and interest payments
are guaranteed or supported by, the U.S. government or one of
its agencies or instrumentalities (including mortgage-backed
securities), and
o mortgage-backed and asset-backed securities, which represent
interests in a pool of assets such as mortgage loans, car loan
receivables or credit card receivables.
While the series may purchase corporate bonds which have been assigned
lower credit ratings by credit rating agencies (commonly known as junk
bonds), it focuses on investment grade bonds. These bonds are rated in
the higher rating categories by credit rating agencies or are unrated
and considered by MFS to be comparable in quality.
In selecting fixed income investments for the series, MFS considers the
views of its large group of fixed income portfolio managers and research
analysts. This group periodically assesses the three-month total return
outlook for various segments of the fixed income markets. This
three-month "horizon" outlook is used by the portfolio manager(s) of
MFS' fixed income oriented funds (including the series) as a tool in
making or adjusting a series' asset allocations to various segments of
the fixed income markets. In assessing the credit quality of fixed
income securities, MFS does not rely solely on the credit ratings
assigned by credit rating agencies, but rather performs its own
independent credit analysis.
The series may invest in derivative securities. Derivatives are
securities whose value may be based on other securities, currencies,
interest rates, or indices. Derivatives include:
o futures and forward contracts,
o options on futures contracts, foreign currencies, securities and
bond indices,
o structured notes and indexed securities, and
o swaps, caps, collars and floors.
[arrow] Principal Risks of an Investment
The principal risks of investing in the series and the circumstances
reasonably likely to cause the value of your investment in the series to
decline are described below. As with any non-money market mutual fund,
the share price of the series will change daily based on market
conditions and other factors. Please note that there are many
circumstances which could cause the value of your investment in the
series to decline, and which could prevent the series from achieving its
objective, that are not described here.
The principal risks of investing in the series are:
o Allocation Risk: The series will allocate its investments among
various segments of the fixed income markets based upon
judgments made by MFS. The series could miss attractive
investment opportunities by underweighting markets where there
are significant returns, or could lose value overweighting
markets where there are significant declines.
o Interest Rate Risk: When interest rates rise, the prices of
fixed income securities in the series' portfolio will generally
fall. Conversely, when interest rates fall, the prices of fixed
income securities in the series' portfolio will generally rise.
o Maturity Risk: Interest rate risk will generally affect the
price of a fixed income security more if the security has a
longer maturity. Fixed income securities with longer maturities
will therefore be more volatile than other fixed income
securities with shorter maturities. Conversely, fixed income
securities with shorter maturities will be less volatile but
generally provide lower returns than fixed income securities
with longer maturities. The average maturity of the series'
fixed income investments will affect the volatility of the
series' share price.
36
<PAGE>
o Credit Risk: Credit risk is the risk that the issuer of a fixed
income security will not be able to pay principal and interest
when due. Rating agencies assign credit ratings to certain fixed
income securities to indicate their credit risk. The price of a
fixed income security will generally fall if the issuer defaults
on its obligation to pay principal or interest, the rating
agencies downgrade the issuer's credit rating or other news
affects the market's perception of the issuer's credit risk.
o Liquidity Risk: The fixed income securities purchased by the
series may be traded in the over-the-counter market rather than
on an organized exchange and are subject to liquidity risk. This
means that they may be harder to purchase or sell at a fair
price. The inability to purchase or sell these fixed income
securities at a fair price could have a negative impact on the
series' performance.
o Lower Rated Bonds Risk:
[arrow] Higher Credit Risk: Junk bonds are subject to a
substantially higher degree of credit risk than
investment grade bonds. During recessions, a high
percentage of issuers of junk bonds may default on
payments of principal and interest. The price of a junk
bond may therefore fluctuate drastically due to bad news
about the issuer or the economy in general.
[arrow] Higher Liquidity Risk: During recessions and periods of
broad market declines, junk bonds could become less
liquid, meaning that they will be harder to value or
sell at a fair price.
o Mortgage-Backed and Asset-Backed Securities Risk
[arrow] Maturity Risk:
[dagger]Mortgage-Backed Securities: A mortgage-backed
security will mature when all the mortgages in
the pool mature or are prepaid. Therefore,
mortgage-backed securities do not have a fixed
maturity, and their expected maturities may vary
when interest rates rise or fall.
+ When interest rates fall, homeowners are
more likely to prepay their mortgage
loans. An increased rate of prepayments
on the series' mortgage-backed
securities will result in an unforeseen
loss of interest income to the series.
Because prepayments increase when
interest rates fall, the prices of
mortgage-backed securities do not
increase as much as other fixed income
securities when interest rates fall.
+ When interest rates rise, homeowners are
less likely to prepay their mortgage
loans. A decreased rate of prepayments
lengthens the expected maturity of a
mortgage-backed security. Therefore, the
prices of mortgage-backed securities may
decrease more than prices of other fixed
income securities when interest rates
rise.
[dagger]Collateralized Mortgage Obligations: The series
may invest in mortgage-backed securities called
collateralized mortgage obligations (CMOs). CMOs
are issued in separate classes with different
stated maturities. As the mortgage pool
experiences prepayments, the pool pays off
investors in classes with shorter maturities
first. By investing in CMOs, the series may
manage the prepayment risk of mortgage-backed
securities. However, prepayments may cause the
actual maturity of a CMO to be substantially
shorter than its stated maturity.
[dagger]Asset-Backed Securities: Asset-backed
securities have prepayment risks similar to
mortgage-backed securities.
[arrow] Credit Risk: As with any fixed income security,
mortgage-backed and asset-backed securities are subject
to the risk that the issuer will default on principal
and interest payments. It may be difficult to enforce
rights against the assets underlying mortgage-backed and
asset-backed securities in the case of default. The U.S.
government or its agencies may guarantee the payment of
principal and interest on some mortgage-backed
securities. Mortgage-backed securities and asset-backed
securities issued by private lending institutions or
other financial intermediaries may be supported by
insurance or other forms of guarantees.
o Derivatives Risk:
[arrow] Hedging Risk: When a derivative is used as a hedge
against an opposite position that the series also holds,
any loss generated by the derivative should be
substantially offset by gains on the hedged investment,
and vice versa. While hedging can reduce or eliminate
losses, it can also reduce or eliminate gains.
[arrow] Correlation Risk: When the series uses derivatives to
hedge, it takes the risk that changes in the value of
the derivative will not match those of the asset being
hedged. Incomplete correlation can result in
unanticipated losses.
[arrow] Investment Risk: When the series uses derivatives as an
investment vehicle to gain market exposure, rather than
for hedging purposes, any loss on the derivative
investment will not be offset by gains on another hedged
investment. The series is therefore directly exposed to
the risks of that derivative. Gains or losses from
derivative investments may be substantially greater than
the derivative's original cost.
37
<PAGE>
[arrow] Availability Risk: Derivatives may not be available to
the series upon acceptable terms. As a result, the
series may be unable to use derivatives for hedging or
other purposes.
[arrow] Credit Risk: When the series uses derivatives, it is
subject to the risk that the other party to the
agreement will not be able to perform.
o As with any mutual fund, you could lose money on your investment
in the series.
An investment in the series is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
[arrow] Portfolio Manager
Geoffrey L. Kurinsky, a Senior Vice President of the Adviser, has been
employed by the Adviser as a portfolio manager since 1987. Mr. Kurinsky
has been the series' portfolio manager since its inception.
[arrow] Bar Chart and Performance Table
The bar chart and performance table below are intended to indicate some
of the risks of investing in the series by showing changes in the
series' performance over time. The performance table also shows how the
series performance over time compares with that of a broad measure of
market performance. The chart and table provide past performance
information. The series' past performance does not necessarily indicate
how the series will perform in the future.
Bar Chart
The bar chart shows changes in the annual total returns of the series'
shares for each calendar year since they were first offered, assuming
the reinvestment of distributions.
[TABULAR REPRESENTATION OF BAR CHART]
1996 1997 1998
2.09% 10.14% 6.79%
During the period shown in the bar chart, the highest quarterly return
was 3.96% (for the calendar quarter ended September 30, 1997) and the
lowest quarterly return was (2.65)% (for the calendar quarter ended
March 31, 1996).
Performance Table
This table shows how the average annual total returns of the series'
shares compares to a broad measure of market performance and various
other market indicators and assumes the reinvestment of distributions.
Average Annual Total Returns as of December 31, 1998
........................................................................
<TABLE>
<CAPTION>
1 Year Life
<S> <C> <C>
Bond Series* +6.79% +6.90%
Lehman Brothers Government/Corporate Bond Index**+ +9.49% +7.99%
</TABLE>
---------
* "Life" refers to the period from the commencement of the series'
investment operations, October 24, 1995, through December 31, 1998.
** Source: CDA/Wiesenberger. "Life" refers to the period from November 1,
1995, through December 31, 1998.
+ The Lehman Brothers Government/Corporate Bond Index is a broad based,
unmanaged, market-value-weighted index of U.S. Treasury and
government-agency securities (excluding mortgage-backed securities) and
investment-grade debt obligations of domestic corporations.
38
<PAGE>
14: Limited Maturity Series
........................................................................
[arrow] Investment Objectives
The series' investment objective is primarily to provide as high a level
of current income as is believed to be consistent with prudent
investment risk. Its secondary objective is to protect shareholders'
capital. The series' objectives may be changed without shareholder
approval.
[arrow] How the Series Intends to Achieve Its Objectives
The series invests, under normal market conditions, at least 65% of its
total assets in fixed income securities with "limited" maturities
(generally securities with remaining maturities of 5 years or less).
These securities may include:
o corporate bonds, which are bonds or other debt obligations
issued by domestic or foreign (including emerging market)
corporations or similar entities,
o mortgage-backed and asset-backed securities, which represent
interests in a pool of assets such as mortgage loans, car loan
receivables, or credit card receivables, and
o U.S. government securities, which are bonds or other debt
obligations issued by, or whose principal and interest payments
are guaranteed or supported by, the U.S. government or one of
its agencies or instrumentalities (including mortgage-backed
securities).
Fixed income securities with limited maturities may include:
o securities with remaining maturities of 5 years or less,
o securities with estimated remaining average lives of 5 years or
less, and
o securities with a "duration" of 5 years or less (the series
determines the duration of a fixed income security by taking the
present value of all its future principal and interest payments
and calculating the dollar-weighted average time until those
payments will be received).
The series only purchases investment grade bonds, which are bonds rated
in the higher rating categories by credit rating agencies or are unrated
and considered by MFS to be comparable in quality. The series'
investments in securities of foreign issuers are U.S. dollar
denominated.
In selecting fixed income investments for the series, MFS considers the
views of its large group of fixed income portfolio managers and research
analysts. This group periodically assesses the three-month total return
outlook for various segments of the fixed income markets. This
three-month "horizon" outlook is used by the portfolio manager(s) of
MFS' fixed income oriented funds (including the series) as a tool in
making or adjusting a series' asset allocations to various segments of
the fixed income markets. In assessing the credit quality of fixed
income securities, MFS does not rely solely on the credit ratings
assigned by credit rating agencies, but rather performs its own
independent credit analysis.
[arrow] Principal Risks of an Investment
The principal risks of investing in the series and the circumstances
reasonably likely to cause the value of your investment in the series to
decline are described below. As with any non-money market mutual fund,
the share price of the series will change daily based on market
conditions and other factors. Please note that there are many
circumstances which could cause the value of your investment in the
series to decline, and which could prevent the series from achieving its
objective, that are not described here.
The principal risks of investing in the series are:
o Interest Rate Risk: When interest rates rise, the prices of
fixed income securities in the series' portfolio will generally
fall. Conversely, when interest rates fall, the prices of fixed
income securities in the series' portfolio will generally rise.
o Maturity Risk: Fixed income securities with shorter maturities
will be less volatile but generally provide lower returns than
fixed income securities with longer maturities. The average
maturity of the series' fixed income investments will affect the
volatility of the series' share price.
o Allocation Risk: The series will allocate its investments among
various segments of the fixed income markets based upon
judgments made by MFS. The series could miss attractive
investment opportunities by underweighting markets where there
are significant returns, and could lose value by overweighting
markets where there are significant declines.
o Credit Risk: Credit risk is the risk that the issuer of a fixed
income security will not be able to pay principal and interest
when due. Rating agencies assign credit ratings to certain fixed
income securities to indicate their credit risk. The price of a
fixed income security will generally
39
<PAGE>
fall if the issuer defaults on its obligation to pay principal
or interest, the rating agencies downgrade the issuer's credit
rating or other news affects the market's perception of the
issuer's credit risk.
o Foreign Markets Risk: Investing in securities of foreign issuers
involve risks relating to political, social and economic
developments abroad, as well as risks resulting from the
differences between the regulations to which U.S. and foreign
issuers and markets are subject:
[arrow] These risks may include the seizure by the government of
company assets, excessive taxation, withholding taxes on
dividends and interest, limitations on the use or
transfer of portfolio assets, and political or social
instability.
[arrow] Enforcing legal rights may be difficult, costly and slow
in foreign countries, and there may be special problems
enforcing claims against foreign governments.
[arrow] Foreign companies may not be subject to accounting
standards or governmental supervision comparable to U.S.
companies, and there may be less public information
about their operations.
[arrow] Foreign markets may be less liquid and more volatile
than U.S. markets.
o Liquidity Risk: The fixed income securities purchased by the
series may be traded in the over-the-counter market rather than
on an organized exchange and are subject to liquidity risk. This
means that they may be harder to purchase or sell at a fair
price. The inability to purchase or sell these fixed income
securities at a fair price could have a negative impact on the
series' performance.
o Mortgage and Asset-Backed Securities:
[arrow] Maturity Risk:
[dagger]Mortgage-Backed Securities: A mortgage-backed
security will mature when all the mortgages in
the pool mature or are prepaid. Therefore,
mortgage-backed securities do not have a fixed
maturity, and their expected maturities may vary
when interest rates rise or fall.
+ When interest rates fall, homeowners are
more likely to prepay their mortgage
loans. An increased rate of prepayments
on the series' mortgage-backed
securities will result in an unforeseen
loss of interest income to the series.
Because prepayments increase when
interest rates fall, the price of
mortgage-backed securities does not
increase as much as other fixed income
securities when interest rates fall.
+ When interest rates rise, homeowners are
less likely to prepay their mortgage
loans. A decreased rate of prepayments
lengthens the expected maturity of a
mortgage-backed security. Therefore, the
prices of mortgage-backed securities may
decrease more than prices of other fixed
income securities when interest rates
rise.
[dagger]Collateralized Mortgage Obligations: The series
may invest in mortgage-backed securities called
collateralized mortgage obligations (CMOs). CMOs
are issued in separate classes with different
stated maturities. As the mortgage pool
experiences prepayments, the pool pays off
investors in classes with shorter maturities
first. By investing in CMOs, the series may
manage the prepayment risk of mortgage-backed
securities. However, prepayments may cause the
actual maturity of a CMO to be substantially
shorter than its stated maturity.
[dagger]Asset-Backed Securities: Asset-backed
securities have prepayment risks similar to
mortgage-backed securities.
[arrow] Credit Risk: As with any fixed income security,
mortgage-backed and asset-backed securities are subject
to the risk that the issuer will default on principal
and interest payments. It may be difficult to enforce
rights against the assets underlying mortgage-backed and
asset-backed securities in the case of default. The U.S.
government or its agencies may guarantee the payment of
principal and interest on some mortgage-backed
securities. Mortgage-backed securities and asset-backed
securities issued by private lending institutions or
other financial intermediaries may be supported by
insurance or other forms of guarantees.
o As with any mutual fund, you could lose money on your investment
in the series.
An investment in the series is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
[arrow] Portfolio Manager
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.
40
<PAGE>
[arrow] Bar Chart and Performance Table
The bar chart and performance table below are intended to indicate some
of the risks of investing in the series by showing changes in the
series' performance over time. The performance table also shows how the
series performance over time compares with that of a broad measure of
market performance. The chart and table provide past performance
information. The series' past performance does not necessarily indicate
how the series will perform in the future.
Bar Chart
The bar chart shows changes in the annual total returns of the series'
shares for each calendar year since they were first offered, assuming
the reinvestment of distributions.
[TABULAR REPRESENTATION OF BAR CHART]
1997 1998
6.08% 5.42%
During the period shown in the bar chart, the highest quarterly return
was 2.39% (for the calendar quarter ended June 30, 1997) and the lowest
quarterly return was 0.20% (for the calendar quarter ended March 31,
1997).
Performance Table
This table shows how the average annual total returns of the series'
shares compares to a broad measure of market performance and assumes the
reinvestment of distributions.
Average Annual Total Returns as of December 31, 1998
........................................................................
<TABLE>
<CAPTION>
1 Year Life
<S> <C> <C>
Limited Maturity Series* +5.42% +5.95%
Lehman Brothers 1-3 Year Government/Corporate Bond Index#** +6.96% +7.10%
Average short-term investment grade debt# +5.78% +7.21%
</TABLE>
---------
* "Life" refers to the period from the commencement of the series'
investment operations, August 14, 1996, through December 31, 1998.
# Source: Lipper Analytical Services, Inc. "Life" refers to the period
from September 1, 1996, through December 31, 1998.
** The Lehman Brothers One- to Three-Year Government/Corporate Bond Index
is a broad based total return index consisting of all U.S. government
agency, Treasury, and investment-grade corporate debt securities with
maturities of one to three years.
41
<PAGE>
15: Money Market Series
........................................................................
[arrow] Investment Objective
The 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 series' objective may be changed without shareholder
approval.
[arrow] How the Series Intends to Achieve Its Objective
The series is a money market fund, meaning it tries to maintain a share
price of $1.00 while paying income to its shareholders. The series
invests in money market instruments, which are short-term notes or other
debt securities issued by banks or other corporations, or the U.S.
government or other governmental entities. Under normal market
conditions, the series invests at least 80% of its total assets in the
following money market investments:
o U.S. government securities, which are bonds or other debt
obligations issued by, or whose principal and interest payments
are guaranteed by, the U.S. government or one of its agencies or
instrumentalities
o Repurchase agreements collateralized by U.S. government
securities
o Certificates of deposit, bankers' acceptances and other bank
obligations, provided that the bank obligations are insured by
the Federal Deposit Insurance Corporation or the issuing bank
has capital, surplus, and undivided profits in excess of $100
million
o Commercial paper which is rated within the highest credit rating
by one or more rating agencies or which is unrated and
considered by MFS to be of comparable quality
o Short-term corporate obligations which are rated within the two
highest credit ratings by one or more rating agencies
The series may invest up to 20% of its total assets in short-term notes
or other debt securities not specifically described in the list above
that are of comparable high quality and liquidity. These securities may
include U.S. dollar-denominated securities of foreign issuers, including
foreign companies, foreign governments and sovereign entities (such as
government agencies), foreign banks and U.S. branches of foreign banks.
These securities will be rated in the two highest credit ratings by
rating agencies or unrated and considered by MFS to be of comparable
quality.
A money market fund must follow strict rules as to the investment
quality, maturity, diversification and other features of the securities
it purchases. Money market instruments purchased by the series have
maturities of 13 months or less, and the average remaining maturity of
the securities cannot be greater than 90 days.
[arrow] Principal Risks of an Investment
The principal risks of investing in the series and the circumstances
reasonably likely to cause the value of your investment in the series to
decline are described below. Please note that there are many
circumstances which could prevent the series from achieving its
objective, that are not described here.
o Money Market Instruments Risk: Money market instruments provide
opportunities for income with low credit risk, but may result in
a lower yield than would be available from debt obligations of a
lower quality or longer term. Although the series seeks to
preserve the value of your investment at $1.00 per share, it is
possible to lose money by investing in the series.
o Foreign Markets Risk: Although the series' investments in
foreign issuers involve relatively low credit risk, an
investment in the series may involve a greater degree of risk
than an investment in a series that invests only in debt
obligations of U.S. domestic issuers. Investing in foreign
securities involves risks relating to political, social and
economic developments abroad, as well as risks resulting from
the differences between the regulations to which U.S. and
foreign issuers and markets are subject:
[arrow] These risks may include the seizure by the government of
company assets, excessive taxation, withholding taxes on
dividends and interest, limitations on the use or
transfer of portfolio assets, and political or social
instability.
[arrow] Enforcing legal rights may be difficult, costly and slow
in foreign countries, and there may be special problems
enforcing claims against foreign governments.
[arrow] Foreign companies may not be subject to accounting
standards or governmental supervision comparable to U.S.
companies, and there may be less public information
about their operations.
[arrow] Foreign markets may be less liquid and more volatile
than U.S. markets.
42
<PAGE>
An investment in the series is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. Although the series seeks to preserve the value of
your investment at $1.00 per share, it is possible to lose money by
investing in the series.
[arrow] Bar Chart and Performance Table
The bar chart and performance table below are intended to indicate some
of the risks of investing in the series by showing changes in the
series' performance over time. The chart and table provide past
performance information. The series' past performance does not
necessarily indicate how the series will perform in the future.
Bar Chart
The bar chart shows changes in the annual total returns of the series'
shares for each calendar year since they were first offered, assuming
the reinvestment of distributions.
[TABULAR REPRESENTATION OF BAR CHART]
1996 1997 1998
4.55% 4.91% 4.91%
During the period shown in the bar chart, the highest quarterly return
was 1.25% (for the calendar quarter ended December 31, 1997) and the
lowest quarterly return was 1.06% (for the calendar quarter ended March
31, 1996).
Performance Table
Average Annual Total Returns as of December 31, 1998
........................................................................
<TABLE>
<CAPTION>
1 Year Life*
<S> <C> <C>
Money Market Series 4.91% 4.69%
</TABLE>
---------
* For the period from the commencement of the series' investment
operations, January 3, 1995, through December 31, 1998.
43
<PAGE>
II EXPENSE SUMMARY
[arrow] Expense Table
This table describes the expense that you may pay when you hold shares
of the series. These fees and expenses do not take into account the fees
and expenses imposed by insurance companies through which your
investment in a series may be made.
Annual Series Operating Expenses (expenses that are deducted from a
series' assets):
<TABLE>
<CAPTION>
Growth
Emerging Capital With New
Growth Opportunities Research Income Discovery
Series Series Series Series Series
---------- ------------------ ---------- ---------- ------------------
<S> <C> <C> <C> <C> <C>
Management Fee .................................... 0.75% 0.75% 0.75% 0.75% 0.90%
Other Expenses(1) ................................. 0.10% 0.36% 0.11% 0.13% 4.32%
---- ----- ---- ---- -----
Total Annual Series Operating Expenses(1) ......... 0.85% 1.11% 0.86% 0.88% 5.22%
Expense Reimbursement ............................ -- (0.09)%(2) -- -- (4.05)%(2)
---- ----- ---- ---- -----
Net Expenses(1) .................................. 0.85% 1.02% 0.86% 0.88% 1.17%
</TABLE>
<TABLE>
<CAPTION>
Total High Global
Growth Return Utilities Income Governments
Series Series Series Series Series
------------------ ---------- ----------- ---------- ------------------
<S> <C> <C> <C> <C> <C>
Management Fee .................................... 0.75% 0.75% 0.75% 0.75% 0.75%
Other Expenses(1) ................................. 3.28% 0.16% 0.26% 0.28% 0.36%
----- ---- ---- ---- -----
Total Annual Series Operating Expenses(1) ......... 4.03% 0.91% 1.01% 1.03% 1.11%
Expense Reimbursement ............................ (3.03)%(2) -- -- -- (0.10)%(2)
----- ---- ---- ---- -----
Net Expenses(1) .................................. 1.00% 0.91% 1.01% 1.03% 1.01%
</TABLE>
<TABLE>
<CAPTION>
Emerging
Global Markets Limited Money
Equity Equity Bond Maturity Market
Series Series Series Series Series
------------- ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Management Fee .................................. 1.00% 1.25% 0.60% 0.55% 0.50%
Other Expenses (1) .............................. 3.28% 2.01% 0.63% 2.09% 0.46%
----- ----- ----- ----- -----
Total Annual Series Operating Expenses(1) ....... 4.28% 3.26% 1.23% 2.64% 0.96%
Expense Reimbursement .......................... (3.03)%(2) (1.73)%(2) (0.21)%(2) (1.61)%(2) (0.34)%(2)
----- ----- ----- ----- -----
Net Expenses(1) ................................ 1.25% 1.53% 1.02% 1.03% 0.62%
</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. Each series may enter
into other such arrangements and directed brokerage arrangements, which
would also have the effect of reducing the series' expenses. Expenses do
not take into account these expense reductions, and are therefore higher
than the actual expenses of the series.
(2) MFS 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. 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
percentage set forth above for that series. 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 and May 1, 2002 in
the case of the Growth Series and the Global Equity Series). MFS may, in
its discretion, terminate this arrangement at an earlier date, provided
that the arrangement will continue for each series until at least May 1,
2000, unless terminated with the consent of the board of trustees which
oversees the series.
[arrow] Example of Expenses
These examples are intended to help you compare the cost of investing in
the series with the cost of investing in other mutual funds. These
examples do not take into account the fees and expenses imposed by
insurance companies through which your investment in a series may be
made.
44
<PAGE>
The examples assume that:
o You invest $10,000 in the series for the time periods indicated
and you redeem your shares at the end of the time periods;
o Your investment has a 5% return each year and dividends and
other distributions are reinvested; and
o The series' operating expenses remain the same.
Although your actual costs may be higher or lower, under these
assumptions your costs would be:
<TABLE>
<CAPTION>
Period
----------------------------------------
Series 1 Year 3 Years 5 Years 10 Years
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Emerging Growth Series $ 87 $271 $471 $1,049
Capital Opportunities Series 104 325 563 1,248
Research Series 88 274 477 1,061
Growth With Income Series 90 281 488 1,084
New Discovery Series 119 372 644 1,420
Growth Series 102 318 -- --
Total Return Series 93 290 504 1,120
Utilities Series 103 322 558 1,236
High Income Series 105 328 569 1,259
Global Governments Series 103 322 558 1,236
Global Equity Series 127 397 -- --
Emerging Markets Equity Series 156 483 834 1,824
Bond Series 104 325 563 1,248
Limited Maturity Series 105 328 569 1,259
Money Market Series 63 199 346 774
</TABLE>
III CERTAIN INVESTMENT STRATEGIES AND RISKS
Each series may depart from its principal investment strategies by
temporarily investing for defensive purposes when adverse market,
economic or political conditions exist. While a series invests
defensively, it may not be able to pursue its investment objective. A
series defensive investment policy may not be effective in protecting
its value.
Each series, except for the Money Market Series, may engage in active
and frequent trading to achieve its principal investment strategies.
This may result in the realization and distribution to shareholders of
higher capital gains. Frequent trading also increases transaction costs,
which could detract from the series' performance.
Each series may invest in various types of securities and engage in
various investment techniques and practices which are not the principal
focus of the series and therefore are not described in this Prospectus.
The types of securities and investment techniques and practices in which
a series may engage are identified in Appendix A to this Prospectus, and
are discussed, together with their risks, in the trust's Statement of
Additional Information (referred to as the SAI), which you may obtain by
contacting MFS Service Center, Inc. (see back cover for address and
phone number).
IV MANAGEMENT OF THE SERIES
[arrow] Investment Adviser
Massachusetts Financial Services Company (referred to as MFS or the
adviser) is the investment adviser to each series. 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, Massachusetts Investors Trust. Net assets under
the management of the MFS organization were approximately $102.9 billion
on behalf of approximately 3.8 million investor accounts as of January
31, 1999. As of such date, the MFS organization managed approximately
$73.6 billion of net assets in equity fund and equity portfolios.
Approximately $4.7 billion of the assets managed by MFS are invested in
securities of foreign issuers and foreign denominated securities of U.S.
issuers. MFS is located at 500 Boylston Street, Boston, Massachusetts
02116.
MFS provides investment management and related administrative services
and facilities to each series, for which each series pays MFS an annual
management fee as set forth in the Expense Summary.
45
<PAGE>
MFS or its affiliates generally pay an administrative service fee to
insurance companies which use the series as underlying investment
vehicles for their variable annuity and variable life insurance
contracts based upon the aggregate net assets of the series attributable
to these contracts. These fees are not paid by the series, their
shareholders, or by the contract holders.
[arrow] Sub-Investment Advisers
The Adviser has engaged two sub-advisers to manage the Emerging Markets
Equity Series: Foreign & Colonial Management Limited ("FCM") and Foreign
& Colonial Emerging Markets Limited ("FCEM"). FCM and FCEM are each
companies incorporated under the laws of England and Wales and are
located at Exchange House, Primrose Street, London EC2A 2NY, United
Kingdom. 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. For its services, the Adviser pays FCM a
management fee in an amount equal to 0.65% annually of the average daily
net asset value of the series' assets managed by FCM.
FCEM manages emerging market investments for FCM. FCEM serves as the
investment adviser to public closed-end and open-end series and
segregated accounts specializing in emerging markets. For its service,
FCM pays FCEM a management fee in an amount equal to 0.65% annually of
the average daily net asset value of the series' assets managed by FCEM.
[arrow] Administrator
MFS provides each series with certain financial, legal, compliance,
shareholder communications and other administrative services. MFS is
reimbursed by each series for a portion of the costs it incurs in
providing these services.
[arrow] Distributor
MFS Fund Distributors, Inc. (referred to as MFD), a wholly owned
subsidiary of MFS, is the distributor of shares of the series.
[arrow] Shareholder Servicing Agent
MFS Service Center, Inc. (referred to as MFSC), a wholly owned
subsidiary of MFS, performs transfer agency and certain other services
for each series, for which it receives compensation from each series.
V DESCRIPTION OF SHARES
The trust offers shares of each of its series to separate accounts
established by insurance companies in order to serve as investment
vehicles for variable annuity and variable life insurance contracts. The
trust also offers shares of each of its series to qualified pension and
retirement plans. All purchases, redemptions and exchanges of shares are
made through these insurance company separate accounts and plans, which
are the record owner of the shares. Contract holders and plan
beneficiaries seeking to purchase, redeem or exchange interests in the
trust's shares should consult with the insurance company which issued
their contracts or their plan sponsor.
VI OTHER INFORMATION
[arrow] Pricing of Series' Shares
The price of each series' shares is based on its net asset value. The
net asset value of each series' shares is determined at the close of
regular trading each day that the New York Stock Exchange is open for
trading (generally, 4:00 p.m., Eastern time) (referred to as the
valuation time). To determine net asset value, each series, except for
the Money Market Series, values its assets at current market values, or
at fair value as determined by the Adviser under the direction of the
Board of Trustees that oversees the series if current market values are
unavailable. Fair value pricing may be used by a series when current
market values are unavailable or when an event occurs after the close of
the exchange on which the series' portfolio securities are principally
traded that is likely to have changed the value of the securities. The
use of fair value pricing by a series may cause the net asset value of
its shares to differ significantly from the net asset value that would
be calculated using current market values. The Money Market Series
values its assets using the amortized cost method.
46
<PAGE>
Insurance companies and plan sponsors are the designees of the trust for
receipt of purchase, exchange and redemption orders from contractholders
and plan beneficiaries. An order submitted to the trust's designee by
the valuation time will receive the net asset value next calculated;
provided that the trust receives notice of the order generally by 9:30
a.m. eastern time on the next day on which the New York Stock Exchange
is open for trading.
Certain series invest in securities which are primarily listed on
foreign exchanges that trade on weekends and other days when the series
does not price its shares. Therefore, the value of these series' shares
may change on days when you will not be able to purchase or redeem their
shares.
[arrow] Distributions
Each series (except the Money Market Series) intends to pay
substantially all of its net income (including net short-term capital
gain) to shareholders as dividends at least annually. Any realized net
capital gains are also distributed at least annually.
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.
[arrow] Tax Considerations
Each series of the trust is treated as a separate entity for federal
income tax purposes. As long as a series qualifies for treatment as a
regulated investment company (which it has in the past and intends to do
so in the future), it pays no federal income tax on the earnings it
distributes to shareholders. In addition, each series also intends to
continue to diversify its assets to satisfy the federal diversification
tax rules applicable to separate accounts that fund variable insurance
and annuity contracts.
Shares of the series are offered to insurance company separate accounts
and qualified pension and retirement plan sponsors. Consult with the
insurance company which issued your contract or your plan sponsor or
financial advisor to understand the federal tax treatment of your
investment.
[arrow] Right to Reject Purchase and Exchange Orders
Purchases and exchanges should be made for investment purposes only.
Each series reserves the right to reject or restrict any specific
purchase or exchange request. Because an exchange request involves both
a request to redeem shares of one series and to purchase shares of
another series, the series consider the underlying redemption and
purchase requests conditioned upon the acceptance of each of these
underlying requests. Therefore, in the event that the series reject an
exchange request, neither the redemption nor the purchase side of the
exchange will be processed.
[arrow] Market Timing Policies
The series are not designed for professional market timing organizations
or other entities using programmed or frequent exchanges. The series
define a "market timer" as an individual, or organization acting on
behalf of one or more individuals, if the individual or organization
makes during the calendar year six or more exchange requests among the
series.
Accounts under common ownership or control, including accounts
administered by market timers, will be aggregated for purposes of this
definition.
The series may impose specific limitations on market timers, including:
o delaying for up to seven days the purchase side of an exchange
request by market timers;
o rejecting or otherwise restricting purchase or exchange requests
by market timers; and
o permitting exchanges by market timers only into certain series.
47
<PAGE>
[arrow] In-kind distributions
The series have reserved the right to pay redemption proceeds by a
distribution in-kind of portfolio securities (rather than cash). In the
event that the series makes an in-kind distribution, you could incur the
brokerage and transaction charges when converting the securities to
cash. The series do not expect to make in-kind distributions.
[arrow] Unique Nature of Series
MFS may serve as the investment adviser to other funds which have
similar investment goals and principal investment policies and risks to
the series, and which may be managed by the series' portfolio
manager(s). While a series may have many similarities to these other
funds, its investment performance will differ from their investment
performance. This is due to a number of differences between a series and
these similar products, including differences in sales charges, expense
ratios and cash flows.
[arrow] Year 2000 Readiness Disclosure
The series could be adversely affected if the computer systems used by
MFS, the series' other service providers or the companies in which the
series invests do not properly process date-related information from and
after January 1, 2000 (the "Year 2000 Issue"). MFS recognizes the
importance of the Year 2000 Issue and, to address Year 2000 compliance,
created a separately funded Year 2000 Program Management Office in 1996
comprised of a specialized staff reporting directly to MFS senior
management. The Office, with the help of external consultants, is
responsible for overall coordination, strategy formulation,
communications and issue resolution with respect to Year 2000 issues.
While MFS systems will be tested for Year 2000 readiness before the turn
of the century, there are significant systems interdependencies in the
domestic and foreign markets for securities, the business environments
in which companies held by the series operate and in MFS' own business
environment. MFS has been working with the series' other service
providers to identify and respond to potential problems with respect to
Year 2000 readiness and to develop contingency plans. Year 2000
readiness is also one of the factors considered by MFS in its ongoing
assessment of companies in which the series invests. There can be no
assurance, however, that these steps will be sufficient to avoid any
adverse impact on the series.
[arrow] Potential Conflicts
Shares of the series are offered to the separate accounts of insurance
companies that may be affiliated or unaffiliated with MFS and each other
("shared funding") and 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 board of trustees which oversees the series intends 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. If such a conflict were to occur, one or
more separate accounts of the 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.
VII FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the
series' financial performance for the past 5 years, or, if a series has
not been in operation that long, since the time it commenced investment
operations. Certain information reflects financial results for a single
series' share. The total returns in the table represent the rate by
which an investor would have earned (or lost) on an investment in a
series (assuming reinvestment of all distributions). This information
has been audited by the trust's independent auditors, whose report,
together with the trust's financial statements, are included in the
trust's Annual Report to shareholders. The series' Annual Report is
available upon request by contacting MFSC (see back cover for address
and telephone number). These financial statements are incorporated by
reference into the SAI. The trust's independent auditors are Deloitte &
Touche LLP.
48
<PAGE>
1. Emerging Growth Series
........................................................................
<TABLE>
<CAPTION>
Period Ended
Year Ended December 31, December 31,
1998 1997 1996 1995*
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout
each period):
Net asset value -- beginning of period ................... $ 16.13 $ 13.24 $ 11.41 $ 10.00
-------- -------- -------- --------
Income from investment operations# --
Net investment income (loss)[sec] ....................... $ (0.05) $ (0.06) $ (0.01) $ 0.01
Net realized and unrealized gain on investments and
foreign currency ....................................... 5.55 2.95 1.95 1.74
-------- -------- -------- --------
Total from investment operations ...................... $ 5.50 $ 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 .................................. (0.05) -- (0.06) (0.26)
In excess of net realized gain on investments and
foreign currency transactions .......................... (0.11) -- (0.05) --
From paid-in capital .................................... -- -- -- (0.07)
-------- -------- -------- --------
Total distributions declared to shareholders .......... $ (0.16) $ -- $ (0.11) $ (0.34)
-------- -------- -------- --------
Net asset value -- end of period ......................... $ 21.47 $ 16.13 $ 13.24 $ 11.41
-------- -------- -------- --------
Total return ............................................. 34.16% 21.90% 17.02% 17.41%++
Ratios (to average net assets)/Supplemental data[sec]:
Expenses## .............................................. 0.85% 0.90% 1.00% 1.00%+
Net investment income (loss) ............................ (0.29)% (0.38)% (0.08)% 0.10%+
Portfolio turnover ....................................... 71% 112% 96% 73%
Net assets at end of period (000 omitted) ................ $908,987 $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 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. The series' expenses are
calculated without reduction for this expense offset arrangement.
[sec] Prior to January 1, 1998, 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
loss per share and the ratios would have been:
<TABLE>
<S> <C> <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>
49
<PAGE>
2. Capital Opportunities Series
........................................................................
<TABLE>
<CAPTION>
Period Ended
Year Ended December 31, December 31,
1998 1997 1996*
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout
each period):
Net asset value -- beginning of period ................... $ 11.68 $ 10.66 $ 10.00
------- ------- --------
Income from investment operations# --
Net investment income[sec] .............................. $ 0.03 $ 0.12 $ 0.07
Net realized and unrealized gain on investments and
foreign currency ....................................... 3.11 2.66 0.88
------- ------- --------
Total from investment operations ...................... $ 3.14 $ 2.78 $ 0.95
------- ------- --------
Less distributions declared to shareholders --
From net investment income .............................. $ (0.02) $ (0.09) $ (0.03)
From net realized gain on investments and foreign
currency transactions .................................. (0.01) (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 .......... $ (0.03) $ (1.76) $ (0.29)
-------- -------- --------
Net asset value -- end of period ......................... $ 14.79 $ 11.68 $ 10.66
-------- -------- --------
Total return ............................................. 26.80% 26.47% 8.78%++
Ratios (to average net assets)/Supplemental data[sec]:
Expenses## .............................................. 1.02% 1.02% 1.02%+
Net investment income ................................... 0.21% 0.91% 1.72%+
Portfolio turnover ....................................... 144% 270% 44%
Net assets at end of period (000 omitted) ................ $ 23,908 $ 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.
## The 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. The series' expenses are
calculated without reduction for this expense.
[sec]Subject to reimbursement by the series, the investment adviser agreed
to maintain the expenses of the series, exclusive of management fees, at
not more than 0.25% of average daily net assets. To the extent actual
expenses were over this limitation, the net investment income (loss) per
share and ratios would have been:
<TABLE>
<S> <C> <C> <C>
Net investment income (loss) .......... $0.02 $ (0.02) $ (0.04)
Ratios (to average net assets):
Expenses## ........................... 1.11% 2.08% 3.83%+
Net investment income (loss) ......... 0.12% (0.18)% (1.09)%+
</TABLE>
50
<PAGE>
3. Research Series
........................................................................
<TABLE>
<CAPTION>
Period Ended
Year Ended December 31, December 31,
1998 1997 1996 1995*
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout
each period):
Net asset value -- beginning of period ................... $ 15.80 $ 13.13 $ 10.89 $ 10.00
-------- -------- ------- -------
Income from investment operations# --
Net investment income[sec] .............................. $ 0.06 $ 0.05 $ 0.06 $ 0.05
Net realized and unrealized gain on investments and
foreign currency ....................................... 3.59 2.62 2.37 1.01
-------- -------- ------- -------
Total from investment operations ...................... $ 3.65 $ 2.67 $ 2.43 $ 1.06
-------- -------- ------- -------
Less distributions declared to shareholders --
From net investment income .............................. $ (0.03) $ -- $ (0.02) $ (0.03)
From net realized gain on investments and foreign
currency transactions .................................. (0.37) -- (0.16) (0.14)
In excess of net realized gain on investments and
foreign currency transactions .......................... -- -- (0.01) --
-------- -------- ------- -------
Total distributions declared to shareholders .......... $ (0.40) $ -- $ (0.19) $ (0.17)
-------- -------- ------- -------
Net asset value -- end of period ......................... $ 19.05 $ 15.80 $ 13.13 $ 10.89
-------- -------- ------- -------
Total return ............................................. 23.39% 20.26% 22.33% 10.62%++
Ratios (to average net assets)/Supplemental data[sec]:
Expenses## .............................................. 0.86% 0.92% 1.01% 1.02%+
Net investment income ................................... 0.33% 0.34% 0.47% 1.15%+
Portfolio turnover ....................................... 83% 99% 56% 28%
Net assets at end of period (000 omitted) ................ $567,778 $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 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. The series' expenses are
calculated without reduction for this expense offset arrangement.
[sec]Prior to January 1, 1998, subject to reimbursement by the series, the
investment adviser agreed to maintain expenses of the series, exclusive of
management fees, at not more than 0.25% 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> <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>
51
<PAGE>
4. Growth With Income Series
........................................................................
<TABLE>
<CAPTION>
Period Ended
Year Ended December 31, December 31,
1998 1997 1996 1995*
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout
each period):
Net asset value -- beginning of period ................... $ 16.44 $ 12.98 $ 10.61 $ 10.00
-------- ------- ------- -------
Income from investment operations# --
Net investment income[sec] .............................. $ 0.13 $ 0.16 $ 0.18 $ 0.05
Net realized and unrealized gain on investments and
foreign currency ....................................... 3.54 3.70 2.42 0.61
-------- -------- ------- -------
Total from investment operations ...................... $ 3.67 $ 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 ......................... $ 20.11 $ 16.44 $ 12.98 $ 10.61
-------- -------- ------- -------
Total return ............................................. 22.32% 29.78% 24.46% 6.64%++
Ratios (to average net assets)/Supplemental data[sec]:
Expenses## .............................................. 0.95% 1.00% 1.01% 1.00%+
Net investment income ................................... 0.73% 0.93% 1.52% 2.20%+
Portfolio turnover ....................................... 57% 42% 41% 2%
Net assets at end of period (000 omitted) ................ $244,310 $ 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.
## The 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. The series' expenses are calculated without reduction for this
expense offset arrangement.
[sec]Prior to October 2, 1998, subject to reimbursement by the series, the
investment adviser voluntarily agreed to maintain the expenses of the
series, exclusive of management fees, at not more than 0.25% of average
daily net assets. To the extent actual expenses were over/under this
limitation, the net investment income (loss) per share and ratios would
have been:
<TABLE>
<S> <C> <C> <C> <C>
Net investment income (loss) .......... $0.14 $(0.13) $(0.05) $ (0.41)
Ratios (to average net assets):
Expenses## ........................... 0.88% 1.10% 2.07% 21.44%+
Net investment income (loss) ......... 0.80% 0.82% 0.46% (18.24)%+
</TABLE>
52
<PAGE>
5. New Discovery Series
........................................................................
<TABLE>
<CAPTION>
Period Ended
December 31,
1998*
------------------------------------------------------------------------------------
<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 loss[sec] ............................................ $ (0.04)
Net realized and unrealized gain on investments and foreign currency 0.26
--------
Total from investment operations .................................. $ 0.22
--------
Net asset value -- end of period ..................................... $ 10.22
--------
Total return ......................................................... 2.20%++
Ratios (to average net assets)/Supplemental data[sec]:
Expenses## .......................................................... 1.17%+
Net investment loss ................................................. (0.74)%+
Portfolio turnover ................................................... 130%
Net assets at end of period (000 omitted) ............................ $ 1,138
</TABLE>
---------
* For the period from the commencement of the series' investment
operations, May 1, 1998, through December 31, 1998.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The 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. The series' expenses are
calculated without reduction for this expense offset arrangement.
[sec]Subject to reimbursement by the series, the investment adviser agreed
to maintain the expenses of the series, exclusive of management fees, at
not more than 0.25% of average daily net assets. To the extent actual
expenses were over this limitation, the net investment loss per share and
ratios would have been:
<TABLE>
<S> <C>
Net investment loss ........... $(0.28)
Ratios (to average net assets):
Expenses## ................... 5.22%+
Net investment loss .......... (4.79)%+
</TABLE>
53
<PAGE>
6. Total Return Series
........................................................................
<TABLE>
<CAPTION>
Period Ended
Year Ended December 31, December 31,
1998 1997 1996 1995*
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout
each period):
Net asset value -- beginning of period ................... $ 16.63 $ 13.71 $ 12.25 $ 10.00
-------- ------- -------- --------
Income from investment operations# --
Net investment income[sec] .............................. $ 0.53 $ 0.52 $ 0.46 $ 0.41
Net realized and unrealized gain on investments and
foreign currency ....................................... 1.49 2.40 1.30 2.32
-------- ------- -------- --------
Total from investment operations ...................... $ 2.02 $ 2.92 $ 1.76 $ 2.73
-------- ------- -------- --------
Less distributions declared to shareholders --
From net investment income .............................. $ (0.24) $ -- $ (0.21) $ (0.25)
From net realized gain on investments and foreign
currency transactions .................................. (0.29) -- (0.09) (0.23)
-------- ------- -------- --------
Total distributions declared to shareholders .......... $ (0.53) $ -- $ (0.30) $ (0.48)
-------- ------- -------- --------
Net asset value -- end of period ......................... $ 18.12 $ 16.63 $ 13.71 $ 12.25
-------- ------- -------- --------
Total return ............................................. 12.33% 21.30% 14.37% 27.34%++
Ratios (to average net assets)/Supplemental data[sec]:
Expenses## .............................................. 1.00% 1.00% 1.00% 1.00%+
Net investment income ................................... 3.05% 3.25% 3.59% 3.83%+
Portfolio turnover ....................................... 100% 93% 76% 16%
Net assets at end of period (000 omitted) ................ $171,182 $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.
## The 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. The series' expenses are
calculated without reduction for this expense.
[sec]Subject to reimbursement by the series, the investment adviser
voluntarily agreed to maintain the expenses of the series, exclusive of
management fees, at not more than 0.25% of average daily net assets. To
the extent actual expenses were over/under this limitation, the net
investment income per share and the ratios would have been:
<TABLE>
<S> <C> <C> <C> <C>
Net investment income .......... $0.54 $0.52 $0.32 $0.22
Ratios (to average net assets):
Expenses## .................... 0.91% 1.02% 2.10% 2.49%+
Net investment income ......... 3.14% 3.23% 2.49% 2.09%+
</TABLE>
54
<PAGE>
7. Utilities Series
........................................................................
<TABLE>
<CAPTION>
Period Ended
Year Ended December 31, December 31,
1998 1997 1996 1995*
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each
period):
Net asset value -- beginning of period ................. $ 17.99 $ 13.66 $ 12.57 $ 10.00
------- ------- ------- --------
Income from investment operations# --
Net investment income[sec] ............................ $ 0.46 $ 0.44 $ 0.55 $ 0.39
Net realized and unrealized gain on investments and
foreign currency ..................................... 2.68 3.89 1.78 3.00
------- ------- ------- --------
Total from investment operations .................... $ 3.14 $ 4.33 $ 2.33 $ 3.39
------- ------- ------- --------
Less distributions declared to shareholders --
From net investment income ............................ $ (0.24) $ -- $ (0.35) $ (0.24)
From net realized gain on investments and foreign
currency transactions ................................ (1.07) -- (0.88) (0.58)
In excess of net realized gain on investments and
foreign currency transactions ........................ -- -- (0.01) --
-------- ------- ------- --------
Total distributions declared to shareholders ........ $ (1.31) $ -- $ (1.24) $ (0.82)
-------- ------- ------- --------
Net asset value -- end of period ....................... $ 19.82 $ 17.99 $ 13.66 $ 12.57
-------- ------- ------- --------
Total return ........................................... 18.06% 31.70% 18.51% 33.94%++
Ratios (to average net assets)/
Supplemental data[sec]:
Expenses## ............................................ 1.01% 1.00% 1.00% 1.00%+
Net investment income ................................. 2.48% 2.92% 4.19% 3.66%+
Portfolio turnover ..................................... 133% 69% 121% 94%
Net assets at end of period (000 omitted) .............. $ 81,726 $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.
## The 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. For fiscal years ending after
September 1, 1995, the series' expenses are calculated without reduction
for this expense offset arrangement.
[sec]Subject to reimbursement by the series, the investment adviser agreed
to maintain expenses of the series, exclusive of management fees, at not
more than 0.25% of average daily net assets. To the extent actual expenses
were over/under this limitation, the net investment income per share and
the ratios would have been:
<TABLE>
<S> <C> <C> <C> <C>
Net investment income .......... $0.47 $0.41 $0.32 $0.17
Ratios (to average net assets):
Expenses## .................... 0.98% 1.20% 2.75% 3.08%+
Net investment income ......... 2.51% 2.71% 2.44% 1.62%+
</TABLE>
55
<PAGE>
8. High Income Series
........................................................................
<TABLE>
<CAPTION>
Period Ended
Year Ended December 31, December 31,
1998 1997 1996 1995*
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each
period):
Net asset value -- beginning of period .................... $ 12.34 $ 10.87 $ 10.29 $ 10.00
-------- ------- ------- --------
Income from investment operations# --
Net investment income[sec] ............................... $ 1.04 $ 0.95 $ 0.89 $ 0.34
Net realized and unrealized gain (loss) on investments
and foreign currency .................................... (1.02) 0.52 0.32 0.18
-------- ------- ------- --------
Total from investment operations ....................... $ 0.02 $ 1.47 $ 1.21 $ 0.52
-------- ------- ------- --------
Less distributions declared to shareholders --
From net investment income ............................... $ (0.62) $ -- $ (0.53) $ (0.23)
From net realized gain on investments and foreign
currency transactions ................................... (0.21) -- (0.10) --
In excess of net realized gain on investments and
foreign currency transactions ........................... (0.00)+++ -- -- --
-------- ------- -------- --------
Total distributions declared to shareholders ........... $ (0.83) $ -- $ (0.63) $ (0.23)
-------- ------- -------- --------
Net asset value -- end of period .......................... $ 11.53 $ 12.34 $ 10.87 $ 10.29
-------- ------- -------- --------
Total return .............................................. (0.18)% 13.52% 11.80% 5.25%++
Ratios (to average net assets)/Supplemental data[sec]:
Expenses## ............................................... 1.03% 1.01% 1.01% 1.03%+
Net investment income .................................... 8.67% 8.17% 8.18% 8.17%+
Portfolio turnover ........................................ 146% 139% 135% 32%
Net assets at end of period (000 omitted) ................. $ 42,890 $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 amount was less than $0.01.
# Per share data are based on average shares outstanding.
## The 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. The series' expenses are
calculated without reduction for this expense offset arrangement.
sec] Subject to reimbursement by the series, the investment adviser agreed
to maintain the expenses of the series, exclusive of management fees, at
not more than 0.25% of average daily net assets. To the extent actual
expenses were over/under this limitation, the net investment income per
share and ratios would have been:
<TABLE>
<S> <C> <C> <C> <C>
Net investment income .......... $1.05 $0.93 $0.82 $0.20
Ratios (to average net assets):
Expenses## .................... 0.96% 1.15% 1.62% 4.38%+
Net investment income ......... 8.74% 8.03% 7.57% 4.82%+
</TABLE>
56
<PAGE>
9. Global Governments Series
........................................................................
<TABLE>
<CAPTION>
Period Ended
Year Ended December 31, December 31,
1998 1997 1996 1995 1994*
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout
each period):
Net asset value -- beginning of year ...................... $ 10.21 $ 10.58 $ 10.17 $ 9.82 $ 10.00
------- ------- ------- ------- --------
Income from investment operations# --
Net investment income[sec] ............................... $ 0.53 $ 0.61 $ 0.60 $ 0.63 $ 0.17
Net realized and unrealized gain (loss) on investments
and foreign currency .................................... 0.27 (0.73) (0.19) 0.78 (0.09)
------- ------- ------- ------- --------
Total from investment operations ....................... $ 0.80 $ (0.12) $ 0.41 $ 1.41 $ 0.08
------- ------- ------- ------- --------
Less distributions declared to shareholders --
From net investment income ............................... $ (0.13) $ (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 ........................... -- --++ -- -- --
Tax return of capital .................................... -- -- -- (0.10) --
-------- ------- ------- -------- --------
Total distributions declared to shareholders ........... $ (0.13) $ (0.25) $ -- $ (1.06) $ (0.26)
-------- ------- ------- -------- --------
Net asset value -- end of period .......................... $ 10.88 $ 10.21 $ 10.58 $ 10.17 $ 9.82
-------- ------- ------- -------- --------
Total return .............................................. 7.90% (1.13)% 4.03% 14.38% 0.79%++
Ratios (to average net assets)/Supplemental data[sec]:
Expenses## ............................................... 1.01% 1.00% 1.00% 1.00% 1.00%+
Net investment income .................................... 5.11% 5.96% 5.84% 6.05% 4.68%+
Portfolio turnover ........................................ 270% 335% 361% 211% 62%
Net assets at end of year (000 omitted) ................... $ 45,966 $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 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. The series' expenses are calculated without
reduction for this expense offset arrangement.
++ 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 these limitations, the net investment
income per share and the ratios would have been:
<TABLE>
<S> <C> <C> <C> <C> <C>
Net investment income .......... $0.52 $0.59 $0.50 $0.53 $0.16
Ratios (to average net assets):
Expenses## .................... 1.11% 1.15% 2.03% 1.99% 1.10%+
Net investment income ......... 5.01% 5.81% 4.81% 5.09% 4.58%+
</TABLE>
57
<PAGE>
10. Emerging Markets Equity Series
........................................................................
<TABLE>
<CAPTION>
Year Ended Period Ended
December 31, December 31,
1998 1997*
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period ............................... $ 9.00 $ 10.00
-------- ---------
Income from investment operations# --
Net investment income (loss)[sec] ................................... $ 0.11 $ 0.00++
Net realized and unrealized gain on investments and foreign currency (3.11) (1.00)
-------- ---------
Total from investment operations .................................. $ (3.00) $ (1.00)
-------- ---------
Less distributions declared to shareholders --
From net investment income .......................................... $ (0.10) $ --
-------- ---------
From paid-in capital ................................................ (--)++ --
-------- ---------
Total distributions declared to shareholders ...................... $ (0.10) $ --
-------- ---------
Net asset value -- end of period ..................................... $ 5.90 $ 9.00
-------- ---------
Total return ......................................................... (33.37)% (10.00)%++
Ratios (to average net assets)/Supplemental data[sec]:
Expenses## .......................................................... 1.53% 1.50%+
Net investment income ............................................... 1.49% 0.16%+
Portfolio turnover ................................................... 73% 8%
Net assets at end of period (000 omitted) ............................ $ 1,416 $ 1,357
</TABLE>
---------
* For the period from the commencement of the series' investment
operations, October 16, 1997, through December 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The 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. The series' expenses are
calculated without reduction for this expense offset arrangement.
++ Per share amount was less than $0.01 per share.
[sec]The investment adviser voluntarily agreed to maintain, subject to
reimbursement by the series, the expenses of the series at no more than
1.50% of average daily net assets. To the extent actual expenses were over
or under these limitations, the net investment loss per share and the
ratios would have been:
<TABLE>
<S> <C> <C>
Net investment loss ........... $(0.02) $(0.15)
Ratios (to average net assets):
Expenses## ................... 3.26% 5.92%+
Net investment loss .......... (0.24)% (4.26)%+
</TABLE>
58
<PAGE>
11. Bond Series
........................................................................
<TABLE>
<CAPTION>
Period Ended
Year Ended December 31, December 31,
1998 1997 1996 1995*
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each
period):
Net asset value -- beginning of period .................... $ 11.08 $ 10.06 $ 10.19 $ 10.00
------- -------- -------- --------
Income from investment operations# --
Net investment income[sec] ............................... $ 0.64 $ 0.64 $ 0.58 $ 0.09
Net realized and unrealized gain (loss) on investments
and foreign currency .................................... 0.09 0.38 (0.36) 0.21
------- -------- -------- --------
Total from investment operations ....................... $ 0.73 $ 1.02 $ 0.22 $ 0.30
------- -------- -------- --------
Less distributions declared to shareholders --
From net investment income ............................... $ (0.29) $ -- $ (0.35) $ (0.09)
From net realized gain on investments and foreign
currency transactions ................................... (0.14) -- -- (0.02)
-------- -------- -------- --------
Total distributions declared to shareholders ........... $ (0.43) $ -- $ (0.35) $ (0.11)
-------- -------- -------- --------
Net asset value -- end of period .......................... $ 11.38 $ 11.08 $ 10.06 $ 10.19
-------- -------- -------- --------
Total return .............................................. 6.79% 10.14% 2.09% 3.02%++
Ratios (to average net assets)/Supplemental data[sec]:
Expenses## ............................................... 1.02% 1.01% 1.03% 1.00%+
Net investment income .................................... 5.76% 6.04% 5.84% 4.89%+
Portfolio turnover ........................................ 244% 219% 231% 55%
Net assets at end of period (000 omitted) ................. $ 12,165 $ 4,004 $ 853 $ 228
</TABLE>
-----------
* For the period from the commencement of the series' investment
operations, October 24, 1995, through December 31, 1995.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The 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. The series' expenses are calculated without reduction for
this expense offset arrangement.
[sec]Subject to reimbursement by the series, the investment adviser agreed
to maintain the expenses of the series, exclusive of management fee, at
not more than 0.40% of average daily net assets. To the extent actual
expenses were over this limitation, the net investment income (loss) per
share and ratios would have been:
<TABLE>
<S> <C> <C> <C> <C>
Net investment income (loss)# ......... $0.61 $0.37 $(0.26) $ (0.70)
Ratios (to average net assets):
Expenses## ........................... 1.23% 3.58% 9.45% 43.85%+
Net investment income (loss) ......... 5.55% 3.46% (2.61)% (37.96)%+
</TABLE>
59
<PAGE>
12. Limited Maturity Series
........................................................................
<TABLE>
<CAPTION>
Period Ended
Year Ended December 31, December 31,
1998 1997 1996*
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period .......................... $ 10.01 $ 10.01 $ 10.00
-------- -------- --------
Income from investment operations# --
Net investment income[sec] ..................................... $ 0.55 $ 0.62 $ 0.25
Net realized and unrealized gain (loss) on investments ......... (0.01) (0.01) 0.01
-------- -------- --------
Total from investment operations ............................. $ 0.54 $ 0.61 $ 0.26
-------- -------- --------
Less distributions declared to shareholders --
From net investment income ..................................... $ (0.38) $ (0.60) $ (0.25)
From net realized gain on investments .......................... (0.01) (0.01) --
In excess of net investment income ............................. (0.00)+++ -- --
-------- -------- --------
Total distributions declared to shareholders ................. $ (0.39) $ (0.61) $ (0.25)
-------- -------- --------
Net asset value -- end of period ................................ $ 10.16 $ 10.01 $ 10.01
-------- -------- --------
Total return .................................................... 5.42% 6.08% 2.61%++
Ratios (to average net assets)/Supplemental data[sec]:
Expenses## ..................................................... 1.03% 1.02% 1.03%+
Net investment income .......................................... 5.34% 6.13% 6.61%+
Portfolio turnover .............................................. 94% 167% 109%
Net assets at end of period (000 omitted) ....................... $ 1,826 $ 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 amount is less than $0.01.
# Per share data are based on average shares outstanding.
## The 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. The series' expenses are
calculated without reduction for this expense.
[sec]Subject to reimbursement by the series, the investment adviser agreed
to maintain expenses of the series, exclusive of management fees, at not
more than 0.45% of average daily net assets. To the extent actual expenses
were over this limitation, the net investment income per share and ratios
would have been:
<TABLE>
<S> <C> <C> <C>
Net investment income .......... $0.38 $0.10 $0.01
Ratios (to average net assets):
Expenses## .................... 2.64% 6.20% 7.55%+
Net investment income ......... 3.73% 0.95% 0.09%+
</TABLE>
60
<PAGE>
13. Money Market Series
........................................................................
<TABLE>
<CAPTION>
Period Ended
Year Ended December 31, December 31,
1998 1997 1996 1995*
------------------------------------------------------------------------------------------------------
<S> <C> <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 $ 1.00
------- ------ ------ --------
Income from investment operations# --
Net investment income[sec] ........................... $ 0.05 $ 0.05 $ 0.04 $ 0.04
Less distributions declared to shareholders from net
investment income .................................... $ (0.05) $(0.05) $(0.04) $ (0.04)
Net asset value -- end of period ...................... $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------ ------ -------
Total return .......................................... 4.91% 4.91% 4.55% 4.37%++
Ratios (to average net assets)/Supplemental data[sec]:
Expenses## ........................................... 0.62% 0.61% 0.63% 0.63%+
Net investment income ................................ 4.76% 4.91% 4.53% 4.54%+
Net assets at end of period (000 omitted) ............. $11,569 $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.
## The 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. The series' expenses are
calculated without reduction for this expense offset arrangement.
[sec]Subject to reimbursement by the series, the investment adviser agreed
to maintain the expenses of the series, exclusive of management fees, at
not more than 0.10% of average daily net assets. To the extent actual
expenses were over/under this limitation, the net investment income (loss)
per share and the ratios would have been:
<TABLE>
<S> <C> <C> <C> <C>
Net investment income (loss) .......... $0.05 $0.04 $ (0.21) $ (0.14)
Ratios (to average net assets):
Expenses## ........................... 0.96% 1.36% 27.74% 21.54%+
Net investment income (loss) ......... 4.42% 4.16% (22.58)% (16.37)%+
</TABLE>
61
<PAGE>
Appendix A Emerging Growth Series
[arrow] Investment Techniques and Practices
In pursuing its investment objective and investment policies, the
Emerging Growth Series may engage in the following investment techniques
and practices, which are described, together with their risks, in the
SAI.
Symbols [check] permitted -- not permitted
- --------------------------------------------------------
<TABLE>
<S> <C>
Debt Securities
Asset-Backed Securities
Collateralized Mortgage Obligations and Multiclass
Pass-Through Securities --
Corporate Asset-Backed Securities --
Mortgage Pass-Through Securities --
Stripped Mortgage-Backed Securities --
Corporate Securities [check]
Loans and Other Direct Indebtedness --
Lower Rated Bonds [check]
Municipal Bonds --
Speculative Bonds [check]
U.S. Government Securities [check]
Variable and Floating Rate Obligations [check]
Zero Coupon Bonds, Deferred Interest Bonds
and PIK Bonds [check]
Equity Securities [check]
Foreign Securities Exposure
Brady Bonds --
Depositary Receipts [check]
Dollar-Denominated Foreign Debt Securities --
Emerging Markets [check]
Foreign Securities [check]
Forward Contracts [check]
Futures Contracts [check]
Indexed Securities/Structured Products --
Inverse Floating Rate Obligations --
</TABLE>
<TABLE>
<S> <C>
Investment in Other Investment Companies
Open-End Funds [check]
Closed-End Funds [check]
Lending of Portfolio Securities [check]
Leveraging Transactions
Bank Borrowings --*
Mortgage "Dollar-Roll" Transactions --*
Reverse Repurchase Agreements --*
Options
Options on Foreign Currencies [check]
Options on Futures Contracts [check]
Options on Securities [check]
Options on Stock Indices [check]
Reset Options --
"Yield Curve" Options --
Repurchase Agreements [check]
Restricted Securities [check]
Short Sales --
Short Sales Against the Box --
Short Term Instruments [check]
Swaps and Related Derivative Instruments --
Temporary Borrowings [check]
Temporary Defensive Positions [check]
Warrants [check]
"When-Issued" Securities [check]
</TABLE>
*May be changed only with shareholder approval.
A-1
<PAGE>
Appendix A Capital Opportunities Series
[arrow] Investment Techniques and Practices
In pursuing its investment objective and investment policies, the
Capital Opportunities Series may engage in the following investment
techniques and practices, which are described, together with their
risks, in the SAI.
Symbols [check] permitted -- not permitted
- --------------------------------------------------------
<TABLE>
<S> <C>
Debt Securities
Asset-Backed Securities
Collateralized Mortgage Obligations and Multiclass
Pass-Through Securities --
Corporate Asset-Backed Securities --
Mortgage Pass-Through Securities --
Stripped Mortgage-Backed Securities --
Corporate Securities [check]
Loans and Other Direct Indebtedness --
Lower Rated Bonds [check]
Municipal Bonds --
Speculative Bonds [check]
U.S. Government Securities [check]
Variable and Floating Rate Obligations [check]
Zero Coupon Bonds, Deferred Interest Bonds and PIK
Bonds [check]
Equity Securities [check]
Foreign Securities Exposure
Brady Bonds [check]
Depositary Receipts [check]
Dollar-Denominated Foreign Debt Securities --
Emerging Markets [check]
Foreign Securities [check]
Forward Contracts [check]
Futures Contracts [check]
Indexed Securities/Structured Products --
Inverse Floating Rate Obligations --
</TABLE>
<TABLE>
<S> <C>
Investment in Other Investment Companies
Open-End Funds [check]
Closed-End Funds [check]
Lending of Portfolio Securities [check]
Leveraging Transactions
Bank Borrowings --*
Mortgage "Dollar-Roll" Transactions --*
Reverse Repurchase Agreements --*
Options
Options on Foreign Currencies [check]
Options on Futures Contracts [check]
Options on Securities [check]
Options on Stock Indices [check]
Reset Options --
"Yield Curve" Options --
Repurchase Agreements [check]
Restricted Securities [check]
Short Sales --
Short Sales Against the Box [check]
Short Term Instruments [check]
Swaps and Related Derivative Instruments --
Temporary Borrowings [check]
Temporary Defensive Positions [check]
Warrants [check]
"When-Issued" Securities [check]
</TABLE>
*May be changed only with shareholder approval.
A-2
<PAGE>
Appendix A Research Series
[arrow] Investment Techniques and Practices
In pursuing its investment objective and investment policies, the
Research Series may engage in the following investment techniques and
practices, which are described, together with their risks, in the SAI.
Symbols [check] permitted -- not permitted
- --------------------------------------------------------
<TABLE>
<S> <C>
Debt Securities
Asset-Backed Securities
Collateralized Mortgage Obligations and Multiclass
Pass-Through Securities --
Corporate Asset-Backed Securities --
Mortgage Pass-Through Securities --
Stripped Mortgage-Backed Securities --
Corporate Securities [check]
Loans and Other Direct Indebtedness --
Lower Rated Bonds [check]
Municipal Bonds --
Speculative Bonds [check]
U.S. Government Securities [check]
Variable and Floating Rate Obligations [check]
Zero Coupon Bonds, Deferred Interest Bonds and PIK
Bonds --
Equity Securities [check]
Foreign Securities Exposure
Brady Bonds --
Depositary Receipts [check]
Dollar-Denominated Foreign Debt Securities [check]
Emerging Markets [check]
Foreign Securities [check]
Forward Contracts [check]
Futures Contracts --
Indexed Securities/Structured Products [check]
Inverse Floating Rate Obligations --
</TABLE>
<TABLE>
<S> <C>
Investment in Other Investment Companies
Open-End Funds [check]
Closed-End Funds [check]
Lending of Portfolio Securities [check]
Leveraging Transactions
Bank Borrowings --*
Mortgage "Dollar-Roll" Transactions --*
Reverse Repurchase Agreements --*
Options
Options on Foreign Currencies --
Options on Futures Contracts --
Options on Securities --
Options on Stock Indices --
Reset Options --
"Yield Curve" Options --
Repurchase Agreements [check]
Restricted Securities [check]
Short Sales --
Short Sales Against the Box --
Short Term Instruments [check]
Swaps and Related Derivative Instruments --
Temporary Borrowings [check]
Temporary Defensive Positions [check]
Warrants [check]
"When-Issued" Securities --
</TABLE>
*May be changed only with shareholder approval.
A-3
<PAGE>
Appendix A Growth With Income Series
[arrow] Investment Techniques and Practices
In pursuing its investment objectives and investment policies, the
Growth With Income Series may engage in the following investment
techniques and practices, which are described, together with their
risks, in the SAI.
Symbols [check] permitted -- not permitted
- --------------------------------------------------------
<TABLE>
<S> <C>
Debt Securities
Asset-Backed Securities
Collateralized Mortgage Obligations and Multiclass
Pass-Through Securities --
Corporate Asset-Backed Securities --
Mortgage Pass-Through Securities --
Stripped Mortgage-Backed Securities --
Corporate Securities [check]
Loans and Other Direct Indebtedness --
Lower Rated Bonds --
Municipal Bonds --
Speculative Bonds --
U.S. Government Securities --
Variable and Floating Rate Obligations [check]
Zero Coupon Bonds, Deferred Interest Bonds and PIK
Bonds [check]
Equity Securities [check]
Foreign Securities Exposure
Brady Bonds --
Depositary Receipts [check]
Dollar-Denominated Foreign Debt Securities --
Emerging Markets [check]
Foreign Securities [check]
Forward Contracts [check]
Futures Contracts [check]
Indexed Securities/Structured Products --
Inverse Floating Rate Obligations --
</TABLE>
<TABLE>
<S> <C>
Investment in Other Investment Companies
Open-End [check]
Closed-End [check]
Lending of Portfolio Securities [check]
Leveraging Transactions
Bank Borrowings --*
Mortgage "Dollar-Roll" Transactions --*
Reverse Repurchase Agreements --*
Options
Options on Foreign Currencies [check]
Options on Futures Contracts [check]
Options on Securities [check]
Options on Stock Indices [check]
Reset Options --
"Yield Curve" Options --
Repurchase Agreements [check]
Restricted Securities [check]
Short Sales --
Short Sales Against the Box [check]
Short Term Instruments [check]
Swaps and Related Derivative Instruments --
Temporary Borrowings [check]
Temporary Defensive Positions [check]
Warrants [check]
"When-Issued" Securities [check]
</TABLE>
*May be changed only with shareholder approval.
A-4
<PAGE>
Appendix A New Discovery Series
[arrow] Investment Techniques and Practices
In pursuing its investment objective and investment policies, the New
Discovery Series engage in the following investment techniques and
practices, which are described, together with their risks, in the SAI.
Symbols [check] permitted -- not permitted
- --------------------------------------------------------
<TABLE>
<S> <C>
Debt Securities
Asset-Backed Securities
Collateralized Mortgage Obligations and Multiclass
Pass-Through Securities --
Corporate Asset-Backed Securities --
Mortgage Pass-Through Securities --
Stripped Mortgage-Backed Securities --
Corporate Securities [check]
Loans and Other Direct Indebtedness --
Lower Rated Bonds [check]
Municipal Bonds --
Speculative Bonds [check]
U.S. Government Securities [check]
Variable and Floating Rate Obligations [check]
Zero Coupon Bonds, Deferred Interest Bonds and PIK
Bonds [check]
Equity Securities [check]
Foreign Securities Exposure
Brady Bonds --
Depositary Receipts [check]
Dollar-Denominated Foreign Debt Securities [check]
Emerging Markets [check]
Foreign Securities [check]
Forward Contracts [check]
Futures Contracts [check]
Indexed Securities/Structured Products [check]
Inverse Floating Rate Obligations --
</TABLE>
<TABLE>
<S> <C>
Investment in Other Investment Companies
Open-End [check]
Closed-End [check]
Lending of Portfolio Securities [check]
Leveraging Transactions
Bank Borrowings *
Mortgage "Dollar-Roll" Transactions --*
Reverse Repurchase Agreements --*
Options
Options on Foreign Currencies [check]
Options on Futures Contracts [check]
Options on Securities [check]
Options on Stock Indices [check]
Reset Options [check]
"Yield Curve" Options [check]
Repurchase Agreements [check]
Restricted Securities [check]
Short Sales [check]
Short Sales Against the Box [check]
Short Term Instruments [check]
Swaps and Related Derivative Instruments [check]
Temporary Borrowings [check]
Temporary Defensive Positions [check]
Warrants [check]
"When-Issued" Securities [check]
</TABLE>
*May be changed only with shareholder approval.
A-5
<PAGE>
Appendix A Growth Series
[arrow] Investment Techniques and Practices
In pursuing its investment objective and investment policies, the Growth
Series may engage in the following investment techniques and practices,
which are described, together with their risks, in the SAI.
Symbols [check] permitted -- not permitted
- --------------------------------------------------------
<TABLE>
<S> <C>
Debt Securities
Asset-Backed Securities
Collateralized Mortgage Obligations and Multiclass
Pass-Through Securities --
Corporate Asset-Backed Securities --
Mortgage Pass-Through Securities --
Stripped Mortgage-Backed Securities --
Corporate Securities --
Loans and Other Direct Indebtedness
Lower Rated Bonds --
Municipal Bonds --
Speculative Bonds --
U.S. Government Securities --
Variable and Floating Rate Obligations [check]
Zero Coupon Bonds, Deferred Interest Bonds and PIK
Bonds --
Equity Securities [check]
Foreign Securities Exposure
Brady Bonds --
Depositary Receipts [check]
Dollar-Denominated Foreign Debt Securities --
Emerging Markets [check]
Foreign Securities [check]
Forward Contracts [check]
Futures Contracts [check]
Indexed Securities/Structured Products --
Inverse Floating Rate Obligations --
</TABLE>
<TABLE>
<S> <C>
Investment in Other Investment Companies
Open-End Funds [check]
Closed-End Funds [check]
Lending of Portfolio Securities [check]
Leveraging Transactions
Bank Borrowings --*
Mortgage "Dollar-Roll" Transactions --*
Reverse Repurchase Agreements --*
Options
Options on Foreign Currencies [check]
Options on Futures Contracts [check]
Options on Securities [check]
Options on Stock Indices [check]
Reset Options --
"Yield Curve" Options --
Repurchase Agreements [check]
Restricted Securities [check]
Short Sales --
Short Sales Against the Box --
Short Term Instruments [check]
Swaps and Related Derivative Instruments --
Temporary Borrowing [check]
Temporary Defensive Positions [check]
Warrants --
"When-Issued" Securities [check]
</TABLE>
*May be changed only with shareholder approval.
A-6
<PAGE>
Appendix A Total Return Series
[arrow] Investment Techniques and Practices
In pursuing its investment objectives and investment policies, the
Total Return Series may engage in the following investment techniques
and practices, which are described, together with their risks, in the
SAI.
Symbols [check] permitted -- not permitted
- ---------------------------------------------------------
<TABLE>
<S> <C>
Debt Securities
Asset-Backed Securities
Collateralized Mortgage Obligations and Multiclass
Pass-Through Securities [check]
Corporate Asset-Backed Securities [check]
Mortgage Pass-Through Securities [check]
Stripped Mortgage-Backed Securities [check]
Corporate Securities [check]
Loans and Other Direct Indebtedness [check]
Lower Rated Bonds [check]
Municipal Bonds [check]
Speculative Bonds [check]
U.S. Government Securities [check]
Variable and Floating Rate Obligations [check]
Zero Coupon Bonds, Deferred Interest Bonds and PIK
Bonds [check]
Equity Securities [check]
Foreign Securities Exposure
Brady Bonds [check]
Depositary Receipts [check]
Dollar-Denominated Foreign Debt Securities [check]
Emerging Markets [check]
Foreign Securities [check]
Forward Contracts [check]
Futures Contracts [check]
Indexed Securities/Structured Products [check]
Inverse Floating Rate Obligations [check]
</TABLE>
<TABLE>
<S> <C>
Investment in Other Investment Companies
Open-End Funds [check]
Closed-End Funds [check]
Lending of Portfolio Securities [check]
Leveraging Transactions
Bank Borrowings --*
Mortgage "Dollar-Roll" Transactions *
Reverse Repurchase Agreements *
Options
Options on Foreign Currencies [check]
Options on Futures Contracts [check]
Options on Securities [check]
Options on Stock Indices [check]
Reset Options [check]
"Yield Curve" Options [check]
Repurchase Agreements [check]
Restricted Securities [check]
Short Sales --
Short Sales Against the Box --
Short Term Instruments [check]
Swaps and Related Derivative Instruments [check]
Temporary Borrowings [check]
Temporary Defensive Positions [check]
Warrants [check]
"When-Issued" Securities [check]
</TABLE>
*May be changed only with shareholder approval.
A-7
<PAGE>
Appendix A Utilities Series
[arrow] Investment Techniques and Practices
In pursuing its investment objective and investment policies, the
Utilities Series may engage in the following investment techniques and
practices, which are described, together with their risks, in the SAI.
Symbols [check] permitted -- not permitted
- --------------------------------------------------------
<TABLE>
<S> <C>
Debt Securities
Asset-Backed Securities [check]
Collateralized Mortgage Obligations and Multiclass
Pass-Through Securities [check]
Corporate Asset-Backed Securities [check]
Mortgage Pass-Through Securities [check]
Stripped Mortgage-Backed Securities --
Corporate Securities [check]
Loans and Other Direct Indebtedness --
Lower Rated Bonds [check]
Municipal Bonds [check]
Speculative Bonds [check]
U.S. Government Securities [check]
Variable and Floating Rate Obligations [check]
Zero Coupon Bonds, Deferred Interest Bonds and PIK
Bonds [check]
Equity Securities [check]
Foreign Securities Exposure
Brady Bonds [check]
Depositary Receipts [check]
Dollar-Denominated Foreign Debt Securities [check]
Emerging Markets [check]
Foreign Securities [check]
Forward Contracts [check]
Futures Contracts [check]
Indexed Securities/Structured Products [check]
Inverse Floating Rate Obligations --
</TABLE>
<TABLE>
<S> <C>
Investment in Other Investment Companies
Open-End [check]
Closed-End [check]
Lending of Portfolio Securities [check]
Leveraging Transactions
Bank Borrowings --*
Mortgage "Dollar-Roll" Transactions *
Reverse Repurchase Agreements --*
Options
Options on Foreign Currencies [check]
Options on Futures Contracts [check]
Options on Securities [check]
Options on Stock Indices [check]
Reset Options --
"Yield Curve" Options --
Repurchase Agreements [check]
Restricted Securities [check]
Short Sales --
Short Sales Against the Box --
Short Term Instruments [check]
Swaps and Related Derivative Instruments --
Temporary Borrowings [check]
Temporary Defensive Positions [check]
Warrants [check]
"When-Issued" Securities [check]
</TABLE>
*May be changed only with shareholder approval.
A-8
<PAGE>
Appendix A High Income Series
[arrow] Investment Techniques and Practices
In pursuing its investment objective and investment policies, the High
Income Series may engage in the following investment techniques and
practices, which are described, together with their risks, in the SAI.
Symbols [check] permitted -- not permitted
- -------------------------------------------------------
<TABLE>
<S> <C>
Debt Securities
Asset-Backed Securities
Collateralized Mortgage Obligations and Multiclass
Pass-Through Securities [check]
Corporate Asset-Backed Securities [check]
Mortgage Pass-Through Securities [check]
Stripped Mortgage-Backed Securities --
Corporate Securities [check]
Loans and Other Direct Indebtedness [check]
Lower Rated Bonds [check]
Municipal Bonds --
Speculative Bonds [check]
U.S. Government Securities [check]
Variable and Floating Rate Obligations [check]
Zero Coupon Bonds, Deferred Interest Bonds and PIK
Bonds [check]
Equity Securities [check]
Foreign Securities Exposure
Brady Bonds [check]
Depositary Receipts --
Dollar-Denominated Foreign Debt Securities [check]
Emerging Markets [check]
Foreign Securities [check]
Forward Contracts [check]
Futures Contracts [check]
Indexed Securities/Structured Products [check]
Inverse Floating Rate Obligations --
</TABLE>
<TABLE>
<S> <C>
Investment in Other Investment Companies
Open-End Funds [check]
Closed-End Funds [check]
Lending of Portfolio Securities [check]
Leveraging Transactions
Bank Borrowings --*
Mortgage "Dollar-Roll" Transactions --*
Reverse Repurchase Agreements *
Options
Options on Foreign Currencies --
Options on Futures Contracts --
Options on Securities [check]
Options on Stock Indices [check]
Reset Options --
"Yield Curve" Options --
Repurchase Agreements [check]
Restricted Securities [check]
Short Sales [check]
Short Sales Against the Box [check]
Short Term Instruments [check]
Swaps and Related Derivative Instruments [check]
Temporary Borrowings [check]
Temporary Defensive Positions [check]
Warrants [check]
"When-Issued" Securities [check]
</TABLE>
*May be changed only with shareholder approval.
A-9
<PAGE>
Appendix A Global Governments Series
[arrow] Investment Techniques and Practices
In pursuing its investment objective and investment policies, the Global
Governments Series may engage in the following investment techniques and
practices, which are described, together with their risks, in the SAI.
Symbols [check] permitted -- not permitted
- --------------------------------------------------------
<TABLE>
<S> <C>
Debt Securities
Asset-Backed Securities
Collateralized Mortgage Obligations and Multiclass
Pass-Through Securities [check]
Corporate Asset-Backed Securities [check]
Mortgage Pass-Through Securities [check]
Stripped Mortgage-Backed Securities [check]
Corporate Securities [check]
Loans and Other Direct Indebtedness [check]
Lower Rated Bonds [check]
Municipal Bonds [check]
Speculative Bonds [check]
U.S. Government Securities [check]
Variable and Floating Rate Obligations [check]
Zero Coupon Bonds, Deferred Interest Bonds and PIK
Bonds [check]
Equity Securities --
Foreign Securities Exposure
Brady Bonds [check]
Depositary Receipts [check]
Dollar-Denominated Foreign Debt Securities [check]
Emerging Markets [check]
Foreign Securities [check]
Forward Contracts [check]
Futures Contracts [check]
Indexed Securities/Structured Products [check]
Inverse Floating Rate Obligations [check]
</TABLE>
<TABLE>
<S> <C>
Investment in Other Investment Companies
Open-End Funds [check]
Closed-End Funds [check]
Lending of Portfolio Securities [check]
Leveraging Transactions
Bank Borrowings --*
Mortgage "Dollar-Roll" Transactions *
Reverse Repurchase Agreements *
Options
Options on Foreign Currencies [check]
Options on Futures Contracts [check]
Options on Securities [check]
Options on Stock Indices [check]
Reset Options [check]
"Yield Curve" Options [check]
Repurchase Agreements [check]
Restricted Securities [check]
Short Sales --
Short Sales Against the Box --
Short Term Instruments [check]
Swaps and Related Derivative Instruments [check]
Temporary Borrowings [check]
Temporary Defensive Positions [check]
Warrants [check]
"When-Issued" Securities [check]
</TABLE>
*May be changed only with shareholder approval.
A-10
<PAGE>
Appendix A Global Equity Series
[arrow] Investment Techniques and Practices
In pursuing its investment objective, the Global Equity Series may
engage in the following investment techniques and practices, which are
described, together with their risks, in the SAI.
Symbols [check] permitted -- not permitted
- --------------------------------------------------------
<TABLE>
<S> <C>
Debt Securities
Asset-Backed Securities
Collateralized Mortgage Obligations and Multiclass
Pass-Through Securities --
Corporate Asset-Backed Securities --
Mortgage Pass-Through Securities --
Stripped Mortgage-Backed Securities --
Corporate Securities --
Loans and Other Direct Indebtedness --
Lower Rated Bonds --
Municipal Bonds --
Speculative Bonds --
U.S. Government Securities [check]
Variable and Floating Rate Obligations --
Zero Coupon Bonds, Deferred Interest Bonds
and PIK Bonds --
Equity Securities [check]
Foreign Securities Exposure
Brady Bonds --
Depositary Receipts [check]
Dollar-Denominated Foreign Debt Securities --
Emerging Markets [check]
Foreign Securities [check]
Forward Contracts [check]
Futures Contracts [check]
Indexed Securities/Structured Products --
Inverse Floating Rate Obligations --
</TABLE>
<TABLE>
<S> <C>
Investment in Other Investment Companies
Open-End Funds [check]
Closed-End Funds [check]
Lending of Portfolio Securities [check]
Leveraging Transactions
Bank Borrowings --*
Mortgage "Dollar-Roll" Transactions --*
Reverse Repurchase Agreements --*
Options
Options on Foreign Currencies [check]
Options on Futures Contracts [check]
Options on Securities [check]
Options on Stock Indices [check]
Reset Options --
"Yield Curve" Options --
Repurchase Agreements [check]
Restricted Securities [check]
Short Sales --
Short Sales Against the Box --
Short Term Instruments [check]
Swaps and Related Derivative Instruments --
Temporary Borrowings [check]
Temporary Defensive Positions [check]
Warrants [check]
"When-Issued" Securities [check]
</TABLE>
*May be changed only with shareholder approval.
A-11
<PAGE>
Appendix A Emerging Markets Equity Series
[arrow] Investment Techniques and Practices
In pursuing its investment objective and investment policies, the
Emerging Markets Equity Series may engage in the following investment
techniques and practices, which are described, together with their
risks, in the SAI.
Symbols [check] permitted -- not permitted
- --------------------------------------------------------
<TABLE>
<S> <C>
Debt Securities
Asset-Backed Securities
Collateralized Mortgage Obligations and Multiclass
Pass-Through Securities --
Corporate Asset-Backed Securities --
Mortgage Pass-Through Securities --
Stripped Mortgage-Backed Securities --
Corporate Securities [check]
Loans and Other Direct Indebtedness --
Lower Rated Bonds [check]
Municipal Bonds --
Speculative Bonds [check]
U.S. Government Securities [check]
Variable and Floating Rate Obligations [check]
Zero Coupon Bonds, Deferred Interest Bonds and PIK
Bonds [check]
Equity Securities [check]
Foreign Securities Exposure
Brady Bonds [check]
Depositary Receipts [check]
Dollar-Denominated Foreign Debt Securities [check]
Emerging Markets [check]
Foreign Securities [check]
Forward Contracts [check]
Futures Contracts [check]
Indexed Securities/Structured Products [check]
Inverse Floating Rate Obligations --
</TABLE>
<TABLE>
<S> <C>
Investment in Other Investment Companies
Open-End Funds [check]
Closed-End Funds [check]
Lending of Portfolio Securities [check]
Leveraging Transactions
Bank Borrowings --*
Mortgage "Dollar-Roll" Transactions --*
Reverse Repurchase Agreements --*
Options
Options on Foreign Currencies [check]
Options on Futures Contracts [check]
Options on Securities [check]
Options on Stock Indices [check]
Reset Options --
"Yield Curve" Options --
Repurchase Agreements [check]
Restricted Securities [check]
Short Sales --
Short Sales Against the Box --
Short Term Instruments [check]
Swaps and Related Derivative Instruments --
Temporary Borrowings [check]
Temporary Defensive Positions [check]
Warrants [check]
"When-Issued" Securities [check]
</TABLE>
*May be modified only with shareholder approval.
A-12
<PAGE>
Appendix A Bond Series
[arrow] Investment Techniques and Practices
In pursuing its investment objectives and investment policies, the Bond
Series may engage in the following investment techniques and practices,
which are described, together with their risks, in the SAI.
Symbols [check] permitted -- not permitted
- --------------------------------------------------------
<TABLE>
<S> <C>
Debt Securities
Asset-Backed Securities
Collateralized Mortgage Obligations and Multiclass
Pass-Through Securities [check]
Corporate Asset-Backed Securities [check]
Mortgage Pass-Through Securities [check]
Stripped Mortgage-Backed Securities [check]
Corporate Securities [check]
Loans and Other Direct Indebtedness [check]
Lower Rated Bonds [check]
Municipal Bonds [check]
Speculative Bonds [check]
U.S. Government Securities [check]
Variable and Floating Rate Obligations [check]
Zero Coupon Bonds, Deferred Interest Bonds and PIK
Bonds [check]
Equity Securities --
Foreign Securities Exposure
Brady Bonds [check]
Depositary Receipts --
Dollar-Denominated Foreign Debt Securities [check]
Emerging Markets [check]
Foreign Securities [check]
Forward Contracts [check]
Futures Contracts [check]
Indexed Securities/Structured Products [check]
Inverse Floating Rate Obligations --
</TABLE>
<TABLE>
<S> <C>
Investment in Other Investment Companies
Open-End [check]
Closed-End [check]
Lending of Portfolio Securities [check]
Leveraging Transactions
Bank Borrowings --*
Mortgage "Dollar-Roll" Transactions *
Reverse Repurchase Agreements --*
Options
Options on Foreign Currencies [check]
Options on Futures Contracts [check]
Options on Securities [check]
Options on Stock Indices --
Reset Options --
"Yield Curve" Options [check]
Repurchase Agreements [check]
Restricted Securities [check]
Short Sales --
Short Sales Against the Box --
Short Term Instruments [check]
Swaps and Related Derivative Instruments [check]
Temporary Borrowings [check]
Temporary Defensive Positions [check]
Warrants --
"When-Issued" Securities [check]
</TABLE>
*May be changed only with shareholder approval.
A-13
<PAGE>
Appendix A Limited Maturity Series
[arrow] Investment Techniques and Practices
In pursuing its investment objective and investment policies, the
Limited Maturity Series may engage in the following investment
techniques and practices, which are described, together with their
risks, in the SAI.
Symbols [check] permitted -- not permitted
- --------------------------------------------------------
<TABLE>
<S> <C>
Debt Securities
Asset-Backed Securities
Collateralized Mortgage Obligations and Multiclass
Pass-Through Securities [check]
Corporate Asset-Backed Securities [check]
Mortgage Pass-Through Securities [check]
Stripped Mortgage-Backed Securities [check]
Corporate Securities [check]
Loans and Other Direct Indebtedness --
Lower Rated Bonds --
Municipal Bonds --
Speculative Bonds [check]
U.S. Government Securities [check]
Variable and Floating Rate Obligations [check]
Zero Coupon Bonds, Deferred Interest Bonds and PIK
Bonds [check]
Equity Securities --
Foreign Securities Exposure
Brady Bonds [check]
Depositary Receipts --
Dollar-Denominated Foreign Debt Securities [check]
Emerging Markets [check]
Foreign Securities --
Forward Contracts --
Futures Contracts [check]
Indexed Securities/Structured Products [check]
Inverse Floating Rate Obligations --
</TABLE>
<TABLE>
<S> <C>
Investment in Other Investment Companies
Open-End Funds [check]
Closed-End Funds [check]
Lending of Portfolio Securities [check]
Leveraging Transactions
Bank Borrowings --*
Mortgage "Dollar-Roll" Transactions *
Reverse Repurchase Agreements --*
Options
Options on Foreign Currencies --
Options on Futures Contracts [check]
Options on Securities [check]
Options on Stock Indices --
Reset Options --
"Yield Curve" Options --
Repurchase Agreements [check]
Restricted Securities [check]
Short Sales --
Short Sales Against the Box --
Short Term Instruments [check]
Swaps and Related Derivative Instruments [check]
Temporary Borrowings [check]
Temporary Defensive Positions [check]
Warrants --
"When-Issued" Securities [check]
</TABLE>
*May be changed only with shareholder approval.
A-14
<PAGE>
Appendix A Money Market Series
[arrow] Investment Techniques and Practices
In pursuing its investment objective and investment policies, the Money
Market Series may engage in the following investment techniques and
practices, which are described, together with their risks, in the SAI.
Symbols [check] permitted -- not permitted
- --------------------------------------------------------
<TABLE>
<S> <C>
Debt Securities
Asset-Backed Securities
Collateralized Mortgage Obligations and Multiclass
Pass-Through Securities --
Corporate Asset-Backed Securities [check]
Mortgage Pass-Through Securities --
Stripped Mortgage-Backed Securities --
Corporate Securities [check]
Loans and Other Direct Indebtedness --
Lower Rated Bonds --
Municipal Bonds --
Speculative Bonds --
U.S. Government Securities [check]
Variable and Floating Rate Obligations [check]
Zero Coupon Bonds, Deferred Interest Bonds and PIK
Bonds [check]
Equity Securities --
Foreign Securities Exposure
Brady Bonds --
Depositary Receipts --
Dollar-Denominated Foreign Debt Securities [check]
Emerging Markets --
Foreign Securities --
Forward Contracts --
Futures Contracts --
Indexed Securities/Structured Products --
Inverse Floating Rate Obligations --
</TABLE>
<TABLE>
<S> <C>
Investment in Other Investment Companies
Open-End Funds [check]
Closed-End Funds --
Lending of Portfolio Securities --
Leveraging Transactions
Bank Borrowings --*
Mortgage "Dollar-Roll" Transactions --*
Reverse Repurchase Agreements --*
Options
Options on Foreign Currencies --
Options on Futures Contracts --
Options on Securities --
Options on Stock Indices --
Reset Options --
"Yield Curve" Options --
Repurchase Agreements [check]
Restricted Securities --
Short Sales --
Short Sales Against the Box --
Short Term Instruments [check]
Swaps and Related Derivative Instruments --
Temporary Borrowings [check]
Temporary Defensive Positions [check]
Warrants --
"When-Issued" Securities --
</TABLE>
*May be modified only with shareholder approval.
A-15
<PAGE>
MFS[RegTM] VARIABLE INSURANCE TRUST
If you want more information about the trust and its series, the following
documents are available free upon request:
Annual/Semiannual Reports. These reports contain information about the series'
actual investments. Annual reports discuss the effect of recent market
conditions and the series' investment strategy on the series' performance during
its last fiscal year.
Statement of Additional Information (SAI). The SAI, dated May 1, 1999, provides
more detailed information about the trust and its series and is incorporated
into this prospectus by reference.
You can get free copies of the annual/semiannual reports, the SAI and other
information about the trust and its series, and make inquiries about the trust
and its series, by contacting:
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116-3741
Telephone: 1-800-343-2829, ext. 3500
Internet: http://www.mfs.com
Information about the trust and its series (including its prospectus, SAI and
shareholder reports) can be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C., 20549-6009
Information on the operation of the Public Reference Room may be obtained by
calling the Commission at 1-800-SEC-0330. Reports and other information about
the trust and its series are available on the Commission's Internet website at
http://www.sec.gov, and copies of this information may be obtained, upon payment
of a duplicating fee, by writing the Public Reference Section at the above
address.
The trust's Investment Company Act file number is 811-8326
MSG 11/98 224M 90/290/390/890
<PAGE>
MFS[RegTM] VARIABLE INSURANCE TRUST
MAY 1, 1999
[MFS LOGO] Statement of Additional
Information
MFS[RegTM] Variable Insurance Trust
500 Boylston Street, Boston, MA 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, 1999, 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 fifteen Series of the Trust identified on pages three
and four 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") and to
qualified retirement and pension plans ("Plans"). Participating Insurance
Companies and sponsors of Plans ("Plan Sponsors") 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 and Plans will be revised to describe only those 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>
Statement of Additional Information
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
I General Information and Definitions ................................ 3
II Investment Techniques, Practices and Risks ......................... 3
III Investment Restrictions ............................................ 4
IV Management of the Trust ............................................ 5
Trustees ........................................................... 5
Officers ........................................................... 5
Trustee Compensation Table ......................................... 7
Investment Adviser ................................................. 7
Investment Advisory Agreement ...................................... 8
Administrator ...................................................... 9
Custodian .......................................................... 9
Shareholder Servicing Agent ........................................ 10
Distributor ........................................................ 10
V Portfolio Transactions and Brokerage Commissions ................... 10
VI Tax Status ......................................................... 12
VII Net Income and Distributions ....................................... 12
VIII Determination of Net Asset Value; Performance Information .......... 13
IX Description of Shares, Voting Rights and Liabilities ............... 15
X Independent Auditors and Financial Statements ...................... 16
XI Appendix A--Investment Techniques, Practices and Risks ............. A-1
XII Appendix B--Description of Bond Ratings ............................ B-1
XIII Appendix C--Performance Quotations ................................. C-1
</TABLE>
<PAGE>
I GENERAL INFORMATION AND DEFINITIONS
MFS Variable Insurance Trust (the "Trust") is a professionally managed
open-end management investment company (a "mutual fund") consisting of
fifteen separate series: MFS Emerging Growth Series (the "Emerging Growth
Series"), MFS Capital Opportunities Series (the "Capital Opportunities
Series"), MFS Research Series (the "Research Series"), MFS Growth With
Income Series (the "Growth With Income Series"), MFS New Discovery Series
(the "New Discovery Series") and MFS Growth Series (the "Growth Series")
MFS Total Return Series (the "Total Return Series"), MFS Utilities Series
(the "Utilities Series"), MFS High Income Series (the "High Income
Series"), MFS Global Governments Series (the "Global Governments
Series"), MFS Global Equity Series (the "Global Equity 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") (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 Capital Opportunities Series was previously known as
the "Value Series" until its name was changed on May 1, 1999. The Value
Series was previously known as the "Growth Series" until its name was
changed on April 25, 1996. The Global Governments Series was previously
known as the "World Governments Series" until its name was changed on May
1, 1999. 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.
II INVESTMENT TECHNIQUES, PRACTICES AND RISKS
The investment objective and principal investment policies of each Series
are described in the Prospectus. In pursuing its investment objective and
principal investment policies, a Series may engage in a number of
investment techniques and practices, which involve certain risks. These
investment techniques and practices, which may be changed without
shareholder approval unless indicated otherwise, are identified in
Appendix A to the Prospectus, and are more fully described, together with
their associated risks, in Appendix A to this SAI. The following
percentage limitations apply to these investment techniques and
practices:
<TABLE>
<CAPTION>
Investment Percentage Limitation
Limitation (based on net assets)
---------------------------------------- -------------------------------
<S> <C> <C>
1. Emerging Growth Series:
Foreign Securities: .................... 15%
Lower Rated Bonds: ..................... 5%
Securities Lending: .................... 30%
2. Capital Opportunities Series:
Foreign Securities: .................... 35%
Lower Rated Bonds: ..................... 15%
Securities Lending: .................... 30%
3. Research Series:
Foreign Securities: .................... up to (but not including) 20%
Lower Rated Bonds: ..................... 10%
Securities Lending: .................... 30%
4. Growth With Income Series:
Foreign Securities: .................... up to (but not including) 20%
Securities Lending: .................... 30%
5. New Discovery Series:
Foreign Securities: .................... up to (but not including) 20%
Lower Rated Bonds: ..................... 10%
Short Sales: ........................... value of underlying securities
not to exceed 40%
Securities Lending: .................... 30%
6. Growth Series:
Foreign Securities: .................... 30%
Securities Lending: .................... 30%
7. Total Return Series:
Foreign Securities: .................... up to (but not including) 20%
Lower Rated Bonds: ..................... up to (but not including) 20%
Securities Lending: .................... 30%
8. Utilities Series:
Foreign Securities: .................... 35%
Lower Rated Bonds: ..................... up to (but not including) 20%
Securities Lending: .................... 30%
9. High Income Series:
Foreign Securities: .................... 25%
Emerging Markets: ...................... 5%
Lower Rated Bonds: ..................... 100%
Securities Lending: .................... 30%
10. Global Government Series:
Foreign Securities
(including Emerging
Market Securities): .................... 100%
Lower Rated Bonds: ..................... 25%
Securities Lending: .................... 30%
11. Global Equity Series:
Foreign Securities: .................... 100%
U.S. and/or Canadian issuers: .......... 50%
Securities Lending: .................... 30%
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Investment Percentage Limitation
Limitation (based on net assets)
--------------------------------------- ------------------------------
<S> <C> <C>
12. Emerging Markets Equity Series:
Emerging Markets: ..................... 100%
Lower Rated and Brady Bonds: .......... 15%
Securities Lending: ................... 30%
13. Bond Series:
Non-Dollar Denominated
Non-Canadian Foreign
Securities: ........................... 10%
Lower Rated Bonds: .................... up to (but not including) 20%
Securities Lending: ................... 30%
14. Limited Maturity Series:
Securities Lending: ................... 30%
15. Money Market Series:
Bank obligations where the
issuing bank has capital,
surplus and undivided profits
less than or equal to $100
million: .............................. 10%
</TABLE>
III INVESTMENT RESTRICTIONS
o
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 331/3% 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
4
<PAGE>
subject to this 15% (10% in the case of the Money Market Series)
limitation;
(2) pledge, mortgage or hypothecate in excess of 331/3% 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;
(3) invest for the purpose of exercising control or management;
(4) 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; and
(5) 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).
IV 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*, President and Chairman (born 6/2/55)
Massachusetts Financial Services Company,
Chairman and Chief Executive Officer
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,
Senior 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).
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 February 28, 1999, 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 February 28, 1999.
<TABLE>
<CAPTION>
% of
Outstanding
Series Owner & Address Shares
- ---------------------- ------------------------------------------ ------------
<S> <C> <C>
Emerging Growth Ameritas Life Insurance Company 5.91%
Series Separate Account VA-2 (Annuity)
5900 O Street
Lincoln, NE 68510-2234
United of Omaha Life Insurance Company 6.86%
Mutual of Omaha Plaza
Omaha, NE 68175-0001
Union Central Life Insurance Company 6.27%
Group Annuity
Mutual Funds--Station 3
1876 Waycross Road
Cincinnati, OH 45240-2899
Merrill Lynch Life Insurance Company 23.00%
4804 Deer Lake Drive East
Building 3, Floor 4
Jacksonville, FL 32246-6484
Pruco Life of Arizona 16.80%
Flexible Premium Variable Annuity Account
213 Washington Street
Floor 7
Newark, NJ 07102-2917
CUNA Mutual Life Insurance Company 8.68%
Variable Annuity Account
2000 Heritage Way
Waverly, IA 50677-9202
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
% of
Outstanding
Series Owner & Address Shares
- ----------------------- ---------------------------------------------- ----------------
<S> <C> <C>
Capital The American Franklin Life Insurance Company 20.48%
Opportunities c/o American General Life Insurance Company
Series P.O. Box 1591
Houston, TX 77251-1591
United of Omaha Life Insurance Company 71.27%
United of Omaha
Omaha, NE 68175-0001
Research Series United of Omaha Life Insurance Company 8.71%
Mutual of Omaha Plaza
Omaha, NE 68175-0001
Merrill Lynch Life Insurance Company 36.67%
4804 Deer Lake Drive East
Building 3, Floor 4
Jacksonville, FL 32246-6484
Pruco Life of Arizona 12.83%
Flexible Premium Variable Annuity Account
213 Washington Street
Floor 7
Newark, NJ 07102-2917
Keyport Life Insurance Co. 5.42%
125 High Street
Boston, MA 02110-2704
Protective Variable Annuity 5.10%
P.O. Box 2606
Birmingham, AL 35202-2606
Growth Ameritas Life Insurance Company 9.43%
With Income Separate Account VA-2 (Annuity)
Series 5900 O Street
Lincoln, NE 68510-2252
Guardian Insurance & Annuity Co., Inc. 14.86%
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 11.08%
Group Annuity
Mutual Funds--Station 3
1876 Waycross Road
Cincinnati, OH 45240-2899
Union Central Life Insurance Company 14.40%
Individual Annuity
Mutual Funds--Station 3
1876 Waycross Road
Cincinnati, OH 45240-2899
Protective Variable Annuity 9.82%
P.O. Box 2606
Birmingham, AL 35202-2606
Guardian Insurance & Annuity Co., Inc. 8.46%
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. 6.70%
A/C Guardian SEP A/C D-VA 81-Q
c/o Equity Accounting 3S-18
3900 Burgess Place
Bethlehem, PA 18017-9097
</TABLE>
<TABLE>
<CAPTION>
% of
Outstanding
Series Owner & Address Shares
- ----------------------- ---------------------------------------------- ----------------
<S> <C> <C>
New Discovery MFS Fund Distributors Inc. 36.31%
Series c/o Thomas B. Hastings
500 Boylston Street
Boston, MA 02116-3740
Paragon Life Insurance Company 52.71%
100 South Brentwood Boulevard
Saint Louis, MO 63105-1635
Total CG Variable Annuity 15.81%
Return Series Separate Account II
c/o Lincoln National Life Insurance Company
1300 South Clinton Street
Fort Wayne, IN 46802-3506
United Life & Annuity Insurance Company 7.80%
Separate Account One
8545 United Plaza Blvd.
Baton Rouge, LA 70809-2264
The American Franklin Life Insurance Company 8.77%
c/o American General Life Insurance Company
P.O. Box 1591
Houston, TX 77251-1591
Aetna Life Insurance & Annuity Company 21.85%
151 Farmington Avenue
Hartford, CT 06156-0001
Aetna Investment Company of America 8.52%
151 Farmington Avenue
Hartford, CT 06156-0001
First Citicorp Life Insurance Company 12.52%
Citicorp Plaza
P.O. Box 7031
Dover, DE 19903-7031
Protective Variable Annuity 8.74%
P.O. Box 2606
Birmingham, AL 35202-2606
Utilities Series Ameritas Life Insurance Company 39.52%
Separate Account VA-2 (Annuity)
5900 O Street
Lincoln, NE 68510-2252
CG Variable Annuity Separate Account II 15.56%
c/o Lincoln National Life Insurance Company
1300 South Clinton Street
Fort Wayne, IN 46802-3506
Kansas City Life Insurance Company 10.72%
Variable Annuity
P.O. Box 419139
Kansas City, MO 64141-6139
The American Franklin Life Insurance Co. 8.08%
c/o American General Life Insurance Co.
Attn: Debbie Kerai
P.O. Box 1591
Houston, TX 77251-1591
AHL Separate Account A 5.08%
1 Granite Place
Concord, NH 03301-3258
High Income United of Omaha Life Insurance Company 55.16%
Series Mutual of Omaha Plaza
Omaha, NE 68175-0001
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
% of
Outstanding
Series Owner & Address Shares
- ----------------------- ------------------------------------------------ ----------------
<S> <C> <C>
High Income Union Central Life Insurance Company 10.88%
Series (cont.) Group Annuity
Mutual Funds--Station 3
1876 Waycross Road
Cincinnati, OH 45240-2899
Union Central Life Insurance Company 14.45%
Individual Annuity
Mutual Funds--Station 3
1876 Waycross Road
Cincinnati, OH 45240-2899
Fortis Benefits Insurance Company 9.92%
Attn: Brian Perkins
500 Bielenberg Drive
Woodbury, MN 55125-1416
COVA Financial Services Life Insurance Co. 5.61%
d/b/a COVA Variable Annuity A/C One
Attn: Stacie Gannon
4700 Westown Parkway, Suite 200
W. Des Moines, IA 50266-6718
Global CUNA Mutual Life Insurance Company 28.47%
Governments Variable Annuity Account
Series 2000 Heritage Way
Waverly, IA 50677-9202
Ameritas Life Insurance Company 8.03%
Separate Account VA-2 (Annuity)
5900 O Street
Lincoln, NE 68510-2252
Global United of Omaha Life Insurance Company 34.79%
Governments Mutual of Omaha Plaza
Series (cont.) Omaha, NE 68175-0001
CUNA Mutual Life Group Variable 8.08%
Annuity Account
CUNA Mutual Life Insurance Co.
Attn: Vicki Foelske
2000 Heritage Way
Waverly, IA 50677-9208
Emerging Markets MFS Fund Distributors, Inc. 66.38%
Equity Series 500 Boylston Street
Boston, MA 02116-3740
COVA Financial Services Life Insurance Company 30.86%
d.b.a. COVA Variable Annuity Account One
P.O. Box 295
Des Moines, IA 50301-0295
Bond Series Kansas City Life Insurance Company 19.28%
Variable Annuity
P.O. Box 419139
Kansas City, MO 64141-6139
First Citicorp Life Insurance Company 41.53%
Citicorp Plaza
P.O. Box 7031
Dover, DE 19903-7031
Citicorp Life Insurance Company 19.65%
Citicorp Plaza
P.O. Box 7031
Dover, DE 19903-7031
Keyport Life Insurance Company 11.85%
125 High Street
Boston, MA 02110-2704
Limited Maturity MFS Fund Distributors, Inc. 28.41%
Series 500 Boylston Street
Boston, MA 02116-3740
</TABLE>
<TABLE>
<CAPTION>
% of
Outstanding
Series Owner & Address Shares
- ----------------------- ------------------------------------------------ ----------------
<S> <C> <C>
Valley Forge Life Insurance Company 62.26%
Variable Annuity Separate Account
Financial Administration Services, Inc.
1290 Silas Deane Highway
Wethersfield, CT 06109-4303
Glenbrook Life and Annuity Company 5.62%
3100 Sanders Road, Suite N4A
Northbrook, IL 60062-7155
Money Market Citicorp Life Insurance Company 26.10%
Series Citicorp Plaza
P.O. Box 7031
Dover, DE 19903-7031
First Citicorp Life Insurance Company 70.84%
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 $200 per year per Series plus $92 per meeting and $92
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 ......... $985 $35,200
William R. Gutow .......... 985 71,200
</TABLE>
------------------------------
(1) For the fiscal year ended December 31, 1998.
(2) For calendar year ended December 31, 1998. Mr. Darling served as
Trustee of 25 funds advised by MFS (having aggregate net assets at
December 31, 1998 of approximately $2.9 billion). Mr. Gutow served
as Trustee of 58 funds within the MFS complex (having aggregate net
assets at December 31, 1998 of approximately $14.7 billion).
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").
7
<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 (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, 1998, 1997 and 1996,
respectively, MFS received the following aggregate fees and MFS assumed
the following fees, in whole or in part, for the same periods:
For the fiscal year ended December 31, 1998:
<TABLE>
<CAPTION>
Expenses
Management Fee Assumed
Series Paid to MFS(1) by MFS
- --------------------------------------------- ---------------- ---------
<S> <C> <C>
Emerging Growth Series ................. $4,606,555 $ 0
Capital Opportunities Series ........... 101,832 11,429
Research Series ........................ 3,066,232 0
Growth With Income Series .............. 1,040,559 0
New Discovery Series ................... 4,893 21,983
Total Return Series .................... 904,819 0
Utilities Series ....................... 387,425 0
High Income Series ..................... 282,421 0
Global Governments Series .............. 312,521 42,378
Emerging Markets Equity Series ......... 19,157 26,485
Bond Series ............................ 44,154 15,747
Limited Maturity Series ................ 6,630 19,448
Money Market Series .................... 45,200 30,822
</TABLE>
------------------------------
(1) After any applicable fee reduction.
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
Capital Opportunities 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
Global 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
Capital Opportunities 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
Global 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.
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, 1999, 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 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 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
8
<PAGE>
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.
FCM is a wholly owned subsidiary of Hypo Foreign & Colonial Management
(Holdings) Limited ("Hypo F&C"). Ninety percent of the outstanding voting
shares of Hypo F&C is owned by Hypo (UK) Holdings Ltd. which is a wholly
owned subsidiary of Hypo Vereinsbank (Bayerische Hypo-und Vereinsbank AG)
the second largest commercial bank in Germany. Hypo Vereinsbank was
created in 1998 by the merger of HypoBank which had been the oldest
publicly listed bank in Germany founded in 1835 and Bayerische
Vereinsbank another publicly listed German bank. The remaining 10% of the
outstanding voting securities of Hypo F&C is owned by Foreign & Colonial
Investment Trust PLC a UK closed-ended publicly listed investment trust.
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. FCEM is a wholly
owned subsidiary of FCM.
Sub-Advisory Agreements -- Each Sub-Advisory Agreement will remain in
effect until August 1, 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 December 1, 1997, and
the year ended December 31, 1998, MFS received fees under the
Administrative Services Agreement, from each Series, as follows:
<TABLE>
<CAPTION>
Administrative Fee
Paid to MFS
--------------------------------
Year Ended Period Ended
December 31, December 31,
Series 1998 1997
------ ---- ----
<S> <C> <C>
Emerging Growth Series ................. $72,642 $31,542
Capital Opportunities Series ........... 1,501 561
Research Series ........................ 48,598 23,446
Growth With Income Series .............. 15,383 3,085
New Discovery Series ................... 57 N/A
Total Return Series .................... 14,176 5,461
Utilities Series ....................... 5,888 2,176
High Income Series ..................... 4,644 2,774
Global Governments Series .............. 4,678 4,447
Emerging Markets Equity Series ......... 194 28
Bond Series ............................ 823 287
Limited Maturity Series ................ 139 67
Money Market Series .................... 1,057 699
</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.
9
<PAGE>
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 0.035%. In addition, the Shareholder Servicing
Agent will be reimbursed by a Series for certain expenses 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.
<TABLE>
<CAPTION>
Shareholder Servicing Agent Fees
--------------------------------
Year Ended
Series 12/31/98 12/31/97 12/31/96
------
<S> <C> <C> <C>
Emerging Growth Series ............... $214,950 $88,426 $14,380
Capital Opportunities Series ......... 4,728 1,504 145
Research Series ...................... 143,089 62,790 4,217
Growth With Income Series ............ 48,381 8,762 1,412
New Discovery Series ................. 190 0 0
Total Return Series .................. 42,230 15,656 2,799
Utilities Series ..................... 18,080 6,165 1,841
High Income Series ................... 13,138 7,938 2,591
Global Governments Series ............ 13,681 12,525 5,869
Emerging Markets Equity Series 536 459 0
Bond Series .......................... 2,575 801 169
Limited Maturity Series .............. 421 200 0
Money Market Series .................. 3,162 1,838 59
</TABLE>
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. 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, 1999
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.
V PORTFOLIO TRANSACTIONS AND BROKERAGE o
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 over-
10
<PAGE>
all 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 certain other MFS funds) have directed MFS to allocate a total of
$72,150 of commission business from certain MFS funds (including the
Series) 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 Series
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 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, 1998, the Emerging Growth Series,
Capital Opportunities Series, Research Series, Growth With Income Series,
New Discovery Series, Total Return Series, Utilities Series, and High
Income Series paid brokerage commissions of $1,081,028, $60,354,
$950,823, $282,366, $1,892, $166,443, $211,237, and $315, respectively.
For fiscal year ended December 31, 1997, the Emerging Growth Series,
Capital Opportunities Series, Research Series, Growth With Income Series,
Total Return Series, Utilities Series, High Income Series, Global
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. For the period from October 16, 1997, through December 31,
1997, the Emerging Markets Equity Series paid brokerage commissions of
$2,929. For fiscal year ended December 31, 1996, the Emerging Growth
Series, Capital Opportunities 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. Not all of the Series' transactions are equity security
transactions which involve the payment of brokerage commissions. During
the fiscal year ended December 31, 1998, the Emerging Growth Series owned
securities issued separately by Morgan Stanley, Dean Witter & Co. and
Paine Webber Group, Inc., which had a value of $3,983,100 and $46,350,
respectively, at fiscal year end; Capital Opportunities Series owned
securities issued separately by Donaldson Lufkin & Jenrette and Paine
Webber, which had a value of $118,900 and $108,150, respectively, at
fiscal year end; Research Series owned securities issued separately by
Chase Manhattan and Morgan Stanley, which had a value of $4,850,406 and
$2,840,000, respectively, at fiscal year end; Total Return Series owned
securities issued separately by Donaldson Lufkin & Jenrette and Goldman
Sachs Group LP, which had a value of $35,989 and $1,314,638,
respectively, at fiscal year end; Utilities Series owned securities
issued separately by Goldman Sachs Group LP, which had a value of
$151,689, respectively, at fiscal year end; Money Market Series owned
securities issued separately by Bank of America and General Electric,
which had a value of $199,443 and $139,941, respectively, at fiscal year
end; Bond Series owned securities issued separately by Donaldson, Lufkin
& Jenrette and Goldman Sachs Group LP, which had a value of $5,141 and
$222,712, respectively, at fiscal year end; and Limited Maturity Series
owned securities issued by Merrill Lynch, which had a value of $60,664 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 par-
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ticular 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.
VI TAX STATUS
Shares of the Series are offered only to the separate accounts of the
Participating Insurance Companies that fund Contracts and Plans. 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 is treated as a separate entity for federal income tax
purposes under the Internal Revenue Code of 1986, as amended (the
"Code"). Each individual Series of the Series Fund has elected to be
treated and intends to qualify each year as a "regulated investment
company" under Subchapter M of the Code by meeting all applicable
requirements of subchapter M, including requirements as to the nature of
its gross income, the amount of its distributions and the composition of
its portfolio assets. Because each Series intends to distribute all of
its net investment income and realized capital gains to shareholders in
accordance with the timing requirements imposed by the Code, it is not
expected that any Series will be required to pay any federal income or
excise taxes, although a Series' that has foreign-source income may be
subject to foreign withholding taxes. If any Series should fail to
qualify as a "regulated investment" in any year, then that Series would
incur corporate federal income tax upon its taxable income for that year
(with no deduction for distributions to shareholders), and its
distributions would generally be taxable as ordinary dividend income to
its shareholders, and each insurance company separate account invested
therein would fail to satisfy the diversification requirements of section
817(h) (see below), with the result that the variable life insurance and
variable annuity contracts supported by that account would no longer be
eligible for tax deferral.
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 failed to comply with these
requirements, Contracts that 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 (as defined in Appendix A), 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 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.
VII 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
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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 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.
VIII DETERMINATION OF NET ASSET VALUE; o
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 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,
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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 C
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 C 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, 1998 (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 C attached hereto.
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.
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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, including
issues concerning social security; 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; the history of the mutual fund
industry; investor behavior; and similar or related matters.
MFS Firsts
MFS has a long history of innovations.
o 1924 -- Massachusetts Investors Trust is established as the first
open-end mutual fund in America.
o 1924 -- Massachusetts Investors Trust is the first mutual fund to
make full public disclosure of its operations in shareholder
reports.
o 1932 -- One of the first internal research departments is
established to provide in-house analytical capability for an
investment management firm.
o 1933 -- Massachusetts Investors Trust is the first mutual fund to
register under the 1933 Act ("Truth in Securities Act" or "Full
Disclosure Act").
o 1936 -- Massachusetts Investors Trust is the first mutual fund to
allow shareholders take capital gain distributions either in
additional shares or in cash.
o 1976 -- MFS[RegTM] Municipal Bond Fund is among the first municipal
bond funds established.
o 1979 -- Spectrum becomes the first combination fixed/ variable
annuity with no initial sales charge.
o 1981 -- MFS[RegTM] Global Governments Fund is established as
America's first globally diversified fixed income mutual fund.
o 1984 -- MFS[RegTM] Municipal High Income Fund is the first mutual
fund to seek high tax-free income from lower-rated municipal
securities.
o 1986 -- MFS[RegTM] Managed Sectors Fund becomes the first mutual
fund to target and shift investments among industry sectors for
shareholders.
o 1986 -- MFS[RegTM] Municipal Income Trust is the first closed-end,
high-yield municipal bond fund traded on the New York Stock
Exchange.
o 1987 -- MFS[RegTM] Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock Exchange.
o 1989 -- MFS Regatta becomes America's first non-qualified market
value adjusted fixed/variable annuity.
o 1990 -- MFS[RegTM] Global Total Return Fund is the first global
balanced fund.
o 1993 -- MFS[RegTM] Global Growth Fund is the first global emerging
markets fund to offer the expertise of two sub-advisers.
o 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.
IX DESCRIPTION OF SHARES, VOTING RIGHTS o
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 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
fourteen 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
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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.
X INDEPENDENT AUDITORS AND FINANCIAL o
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, 1998, the Statement of Assets and Liabilities
at December 31, 1998, the Statement of Operations for the year ended
December 31, 1998, the Statement of Changes in Net Assets for the years
ended December 31, 1998, and 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.
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APPENDIX A
INVESTMENT TECHNIQUES, PRACTICES
AND RISKS
Set forth below is a description of investment techniques and practices
which the Series may generally use in pursuing their investment
objectives and principal investment policies, and the associated risks
associated with these investment techniques and practices. A Series will
engage only in certain of these investment techniques and practices, as
identified in Appendix A of the Trust's Prospectus. Investment practices
and techniques that are not identified in Appendix A of the Trust's
Prospectus do not apply to a Series.
INVESTMENT TECHNIQUES AND PRACTICES
Debt Securities
To the extent the Series invests in the following types of debt
securities, its net asset value may change as the general levels of
interest rates fluctuate. When interest rates decline, the value of debt
securities can be expected to rise. Conversely, when interest rates rise,
the value of debt securities can be expected to decline. The Series'
investment in debt securities with longer terms to maturity are subject
to greater volatility than the Series' shorter-term obligations. Debt
securities may have all types of interest rate payment and reset terms,
including fixed rate, adjustable rate, zero coupon, contingent, deferred,
payment in kind and auction rate features.
Asset-Backed Securities: The Series may purchase the following types of
asset-backed securities:
Collateralized Mortgage Obligations and Multiclass Pass-Through
Securities: The 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 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 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 interest
payments or principal payments.
The 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.
Corporate Asset-Backed Securities: The Series may invest in corporate
asset-backed securities. These securities, issued by trusts and special
purpose corporations, are backed by a pool of assets, such as credit card
and automobile loan receivables, representing the obligations of a number
of different parties. These 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 backed by a pool of assets
representing the obligations of a number of different parties. To lessen
the effect of failures by obligors on underlying assets to make payments,
the securities may contain elements of credit support which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by
the entity administering the pool of assets, to ensure that the receipt
of payments on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default ensures payment through
insurance policies or letters of credit obtained by the issuer or sponsor
from third parties. The Series will not pay any additional or separate
fees for credit support. The degree of credit support provided for each
issue is generally based on historical information respecting the level
of credit risk associ-
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ated 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.
Mortgage Pass-Through Securities: The Series may invest in mortgage
pass-through securities. Mortgage pass-through securities are securities
representing interests in "pools" of mortgage loans. Monthly payments of
interest and principal by the individual borrowers on mortgages are
passed through to the holders of the securities (net of fees paid to the
issuer or guarantor of the securities) as the mortgages in the underlying
mortgage pools are paid off. 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
pass-through securities with prepayment features may not increase as much
as that of other fixed-income securities. In the event of an increase in
interest rates which results in a decline in mortgage prepayments, the
anticipated maturity of mortgage pass-through securities held by the
Series may increase, effectively changing a security which was considered
short or intermediate-term at the time of purchase into a long-term
security. Long-term securities generally fluctuate more widely in
response to changes in interest rates than short or intermediate-term
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 Federal
Housing Administration ("FHA")-insured or Veterans Administration
("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
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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. The
Series may also buy mortgage-related securities without insurance or
guarantees.
Stripped Mortgage-Backed Securities: The Series may invest a portion
of its assets in stripped mortgage-backed securities ("SMBS") which are
derivative multiclass mortgage securities issued by agencies 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 "I0" class) while the other class will
receive all of the principal (the principal-only or "P0" class). The
yield to maturity on an I0 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, the 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, although the securities are traded among
institutional investors and investment banking firms.
Corporate Securities: The Series may invest in debt securities, such
as convertible and non-convertible bonds, notes and debentures, issued by
corporations, limited partnerships and other similar entities.
Loans and Other Direct Indebtedness: The Series may purchase loans and
other direct indebtedness. In purchasing a loan, the Series acquires some
or all of the interest of a bank or other lending institution in a loan
to a corporate, governmental or other borrower. Many such loans are
secured, although some may be unsecured. Such loans may be in default at
the time of purchase. Loans that are fully secured offer the 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 would satisfy the corporate
borrowers obligation, or that the collateral can be liquidated.
These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such 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 may be structured
as a novation, pursuant to which the 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
lenders interest in a loan either directly from the lender or through an
intermediary. The Series may also purchase trade or other claims against
companies, which generally represent money owned 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 loans and the other direct indebtedness acquired by the
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 the
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 the Series is committed to advance additional
funds, it will at all times hold and maintain in a segregated account
cash or other high grade debt obligations in an amount sufficient to meet
such commitments.
The 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
loans and other direct indebtedness which the 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 for purposes of certain investment
restrictions pertaining to the diversification of the Series' portfolio
investments. The highly leveraged nature of many such
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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 the Series.
Lower Rated Bonds: The Series may invest in 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 (commonly known as "junk
bonds"). See Appendix B for a description of bond ratings. 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 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 a Series invests in these lower rated securities,
the achievement of its investment objectives may be a 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.
Municipal Bonds: The Series may invest in debt securities issued by or
on behalf of states, territories and possessions of the United States and
the District of Columbia and their political subdivisions, agencies or
instrumentalities, the interest on which is exempt from federal income
tax ("Municipal Bonds"). Municipal Bonds include debt securities which
pay interest income that is subject to the alternative minimum tax. The
Series may invest in Municipal Bonds whose issuers pay interest on the
Bonds from revenues from projects such as multifamily housing, nursing
homes, electric utility systems, hospitals or life care facilities.
If a revenue bond is secured by payments generated from a project, and
the revenue bond is also secured by a lien on the real estate comprising
the project, foreclosure by the indenture trustee on the lien for the
benefit of the bondholders creates additional risks associated with
owning real estate, including environmental risks.
Housing revenue bonds typically are issued by a state, county or local
housing authority and are secured only by the revenues of mortgages
originated by the authority using the proceeds of the bond issue. Because
of the impossibility of precisely predicting demand for mortgages from
the proceeds of such an issue, there is a risk that the proceeds of the
issue will be in excess of demand, which would result in early retirement
of the bonds by the issuer. Moreover, such housing revenue bonds depend
for their repayment upon the cash flow from the underlying mortgages,
which cannot be precisely predicted when the bonds are issued. Any
difference in the actual cash flow from such mortgages from the assumed
cash flow could have an adverse impact upon the ability of the issuer to
make scheduled payments of principal and interest on the bonds, or could
result in early retirement of the bonds. Additionally, such bonds depend
in part for scheduled payments of principal and interest upon reserve
funds established from the proceeds of the bonds, assuming certain rates
of return on investment of such reserve funds. If the assumed rates of
return are not realized because of changes in interest rate levels or for
other reasons, the actual cash flow for scheduled payments of principal
and interest on the bonds may be inadequate. The financing of
multi-family housing projects is affected by a variety of factors,
including satisfactory completion of construction within cost
constraints, the achievement and maintenance of a sufficient level of
occupancy, sound management of the developments, timely and adequate
increases in rents to cover increases in operating expenses, including
taxes, utility rates and maintenance costs, changes in applicable laws
and governmental regulations and social and economic trends.
Electric utilities face problems in financing large construction
programs in inflationary periods, cost increases and delay occasioned by
environmental considerations (particularly with respect to nuclear
facilities), difficulty in obtaining fuel at reasonable prices, the cost
of competing fuel sources, difficulty in obtaining sufficient rate
increases and other regulatory problems, the effect of energy
conservation and difficulty of the capital market to absorb utility debt.
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Health care facilities include life care facilities, nursing homes and
hospitals. Life care facilities are alternative forms of long-term
housing for the elderly which offer residents the independence of
condominium life style and, if needed, the comprehensive care of nursing
home services. Bonds to finance these facilities have been issued by
various state industrial development authorities. Since the bonds are
secured only by the revenues of each facility and not by state or local
government tax payments, they are subject to a wide variety of risks.
Primarily, the projects must maintain adequate occupancy levels to be
able to provide revenues adequate to maintain debt service payments.
Moreover, in the case of life care facilities, since a portion of
housing, medical care and other services may be financed by an initial
deposit, there may be risk if the facility does not maintain adequate
financial reserves to secure estimated actuarial liabilities. The ability
of management to accurately forecast inflationary cost pressures weighs
importantly in this process. The facilities may also be affected by
regulatory cost restrictions applied to health care delivery in general,
particularly state regulations or changes in Medicare and Medicaid
payments or qualifications, or restrictions imposed by medical insurance
companies. They may also face competition from alternative health care or
conventional housing facilities in the private or public sector. Hospital
bond ratings are often based on feasibility studies which contain
projections of expenses, revenues and occupancy levels. A hospital's
gross receipts and net income available to service its debt are
influenced by demand for hospital services, the ability of the hospital
to provide the services required, management capabilities, economic
developments in the service area, efforts by insurers and government
agencies to limit rates and expenses, confidence in the hospital, service
area economic developments, competition, availability and expense of
malpractice insurance, Medicaid and Medicare funding, and possible
federal legislation limiting the rates of increase of hospital charges.
The Series may invest in municipal lease securities. These are
undivided interests in a portion of an obligation in the from of a lease
or installment purchase which is issued by state and local governments to
acquire equipment and facilities. Municipal leases frequently have
special risks not normally associated with general obligation or revenue
bonds. Leases and installment purchase or conditional sale contracts
(which normally provide for title to the leased asset to pass eventually
to the governmental issuer) have evolved as a means for governmental
issuers to acquire property and equipment without meeting the
constitutional and statutory requirements for the issuance of debt. The
debt-issuance limitations are deemed to be inapplicable because of the
inclusion in many leases or contracts of "non-appropriation" clauses that
provide that the governmental issuer has no obligation to make future
payments under the lease or contract unless money is appropriated for
such purpose by the appropriate legislative body on a yearly or other
periodic basis. Although the obligations will be secured by the leased
equipment or facilities, the disposition of the property in the event of
non-appropriation or foreclosure might, in some cases, prove difficult.
There are, of course, variations in the security of municipal lease
securities, both within a particular classification and between
classifications, depending on numerous factors.
The Series may also invest in bonds for industrial and other projects,
such as sewage or solid waste disposal or hazardous waste treatment
facilities. Financing for such projects will be subject to inflation and
other general economic factors as well as construction risks including
labor problems, difficulties with construction sites and the ability of
contractors to meet specifications in a timely manner. Because some of
the materials, processes and wastes involved in these projects may
include hazardous components, there are risks associated with their
production, handling and disposal.
Speculative Bonds: The Series may invest in fixed income and
convertible securities rated Baa by Moody's or BBB by S&P, Fitch or Duff
& Phelps and comparable unrated securities. See Appendix B for a
description of bond ratings. 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.
U.S. Government Securities: The Series may invest in U.S. Government
Securities including (i) U.S. Treasury obligations, all of which are
backed by the full faith and credit of the U.S. Government and (ii) U.S.
Government Securities, 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
backed only by the credit of the issuer itself, e.g., obligations of the
Student Loan Marketing Association; and some of which are supported by
the discretionary authority of the U.S. Government to purchase the
agency's obligations, e.g., obligations of the Federal National Mortgage
Association ("FNMA").
U.S. Government Securities also include interest in trust or other
entities representing interests in obligations that are issued or
guaranteed by the U.S. Government, its agencies, authorities or
instrumentalities.
Variable and Floating Rate Obligations: The Series may invest in
floating or variable rate securities. Investments in floating or variable
rate securities normally will involve industrial development or revenue
bonds which provide that the rate of interest is set as a specific
percentage of a designated base rate, such as rates on Treasury Bonds or
Bills or the prime rate at a major commercial bank, and that a bondholder
can demand payment of the obligations on behalf of the Series on short
notice at par plus accrued interest, which amount may be more or less
than the amount the bondholder paid for them. The maturity of floating or
variable rate obligations (including participation interests therein) is
deemed to be the longer of (i) the notice period required before the
Series is entitled to receive payment of the obligation upon demand or
(ii) the period remaining until the obli-
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gation's next interest rate adjustment. If not redeemed by the Series
through the demand feature, the obligations mature on a specified date
which may range up to thirty years from the date of issuance.
Zero Coupon Bonds, Deferred Interest Bonds and PIK Bonds: The Series
may invest in zero coupon bonds, deferred interest bonds and bonds on
which the interest is payable in kind ("PIK bonds"). Zero coupon and
deferred interest bonds are debt obligations which are issued 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 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 than debt obligations which make regular
payments of interest. The Series will accrue income on such investments
for tax and accounting purposes, 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.
Equity Securities
The 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 depositary receipts for those securities. These securities
may be listed on securities exchanges, traded in various over-the-counter
markets or have no organized market.
Foreign Securities Exposure
The Series may invest in various types of foreign securities, or
securities which provide the Series with exposure to foreign securities
or foreign currencies, as discussed below:
Brady Bonds: The Series may invest in Brady Bonds, which are securities
created through the exchange of existing commercial bank loans to public
and private entities in certain emerging markets for new bonds in
connection with debt restructurings under a debt restructuring plan
introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady
(the "Brady Plan"). Brady Plan debt restructurings have been implemented
to date in Argentina, Brazil, Bulgaria, Costa Rica, 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.
Depositary Receipts: The Series may invest in American Depositary
Receipts ("ADRs"), Global Depositary Receipts ("GDRs") and other types of
depositary receipts. ADRs are certificates 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. 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 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.
ADRs may be sponsored or unsponsored. A sponsored ADR is issued by a
depositary 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. Under the terms of most sponsored arrangements,
depositories 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 depository 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. The
Series may invest in either type of ADR. 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.
The Series may purchase securities in local markets and direct delivery
of these ordinary shares to the local depositary of an ADR agent bank in
foreign country. Simultaneously, the ADR agents create a certificate
which settles at the Series' custodian in five days. The 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. Accord-
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ingly, information available to a U.S. investor will be limited to the
information the foreign issuer is required to disclose in its 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 a foreign currency.
Dollar-Denominated Foreign Debt Securities: The Series may invest in
dollar-denominated foreign debt securities. Investing in
dollar-denominated foreign debt represents a greater degree of risk than
investing in domestic securities, due to less publicly available
information, less securities regulation, war or expropriation. Special
considerations may include higher brokerage costs and thinner trading
markets. Investments in foreign countries could be affected by other
factors including extended settlement periods.
Emerging Markets: The Series may invest in securities of government,
government-related, supranational and corporate issuers located in
emerging markets. Such investments entail significant risks as described
below.
o 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.
o 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.
o Foreign Currencies -- The securities in which the Series invests may be
denominated in foreign currencies and international currency units and
the Series may invest a portion of its assets directly in foreign
currencies. Accordingly, the weakening of these currencies and units
against the U.S. dollar may result in a decline in the Series' asset
value.
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 a Series'
portfolio securities are denominated may have a detrimental impact on
the Series' net asset value.
o 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.
o 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 Series
may suspend redemption of its shares for any period during which an
emergency exists, as
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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.
o 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 Series 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 proceedings 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, 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.
o 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 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 Securities: The 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, securities settlement practices,
governmental administration or economic or monetary policy (in the United
States or abroad) or circumstances in dealings between nations. Costs may
be incurred in connection with conversions between various currencies.
Special considerations may also include more limited information about
foreign issuers, higher brokerage costs, different accounting standards
and thinner trading markets. Foreign securities markets may also be less
liquid, more
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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. As a result of its investments in foreign
securities, the 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, the Series may hold such currencies for an indefinite
period of time. While the holding of currencies will permit the 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.
Forward Contracts
The Series may enter into contracts for the purchase or sale of a
specific currency at a future date at a price set at the time the
contract is entered into (a "Forward Contract"), for hedging purposes
(e.g., to protect its current or intended investments from fluctuations
in currency exchange rates) as well as for non-hedging purposes.
A Forward Contract to sell a currency may be entered into where the
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, the 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.
If a hedging transaction in Forward Contracts is successful, the
decline in the dollar value of portfolio securities or the increase in
the dollar cost of securities to be acquired may be offset, at least in
part, by profits on the Forward Contract. Nevertheless, by entering into
such Forward Contracts, the 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. The Series does not presently
intend to hold Forward Contracts entered into until maturity, at which
time it would be required to deliver or accept delivery of the underlying
currency, but will seek in most instances to close out positions in such
Contracts by entering into offsetting transactions, which will serve to
fix the Series' profit or loss based upon the value of the Contracts at
the time the offsetting transaction is executed.
The Series will also enter into transactions in Forward Contracts for
other than hedging purposes, which presents greater profit potential but
also involves increased risk. For example, the 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.
The Series will profit if the anticipated movements in foreign
currency exchange rates occur, which will increase its gross income.
Where exchange rates do not move in the direction or to the extent
anticipated, however, 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.
The use by the Series of Forward Contracts also involves the risks
described under the caption "Special Risk Factors -- Options, Futures,
Forwards, Swaps and Other Derivative Transactions" in this Appendix.
Futures Contracts
The Series may purchase and sell futures contracts ("Futures Contracts")
on stock indices, foreign currencies, interest rates or interest-rate
related instruments, indices of foreign currencies or commodities. The
Series may also 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. 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,
foreign currency or commodity, 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 month in
which, in the case of the majority of commodities, interest rate and
foreign currency futures contracts, the underlying commodities, fixed
income securities or currency are delivered by the seller and paid for by
the purchaser, or on which, in the case of 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
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"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."
Purchases or sales of stock index futures contracts are used to
attempt to protect the Series' current or intended stock investments from
broad fluctuations in stock prices. For example, the 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 the 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 the Series'
current or intended investments in fixed income securities. For example,
if the Series owned long-term bonds and interest rates were expected to
increase, the 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 the Series' portfolio. If
interest rates did increase, the value of the debt securities in the
portfolio would decline, but the value of the Series' interest rate
futures contracts would increase at approximately the same rate, subject
to the correlation risks described below, thereby keeping the net asset
value of the 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, the 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 the Series' cash reserves could then be used to
buy long-term bonds on the cash market. The 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 may be more liquid than the cash market
in certain cases or at certain times, the use of interest rate futures
contracts as a hedging technique may allow the Series to hedge its
interest rate risk without having to sell its portfolio securities.
The 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 dollar 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. The 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, the 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 the 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.
The use by the Series of Futures Contracts also involves the risks
described under the caption "Special Risk Factors -- Options, Futures,
Forwards, Swaps and Other Derivative Transactions" in this Appendix.
Indexed Securities
The Series may purchase securities with principal and/or interest
payments 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 or coupon rate is
determined by reference to a specific instrument or statistic. The Series
may also purchase indexed deposits with similar characteristics.
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
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price characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the
values of a number of different foreign currencies relative to each
other. Certain indexed securities may expose the Series to the risk of
loss of all or a portion of the principal amount of its investment and/or
the interest that might otherwise have been earned on the amount
invested.
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-sponsored entities.
Inverse Floating Rate Obligations
The Series may invest in so-called "inverse floating rate obligations" or
"residual interest bonds" or other obligations or certificates relating
thereto structured to have similar features. In creating such an
obligation, a municipality issues a certain amount of debt and pays a
fixed interest rate. Half of the debt is issued as variable rate short
term obligations, the interest rate of which is reset at short intervals,
typically 35 days. The other half of the debt is issued as inverse
floating rate obligations, the interest rate of which is calculated based
on the difference between a multiple of (approximately two times) the
interest paid by the issuer and the interest paid on the short-term
obligation. Under usual circumstances, the holder of the inverse floating
rate obligation can generally purchase an equal principal amount of the
short term obligation and link the two obligations in order to create
long-term fixed rate bonds. Because the interest rate on the inverse
floating rate obligation is determined by subtracting the short-term rate
from a fixed amount, the interest rate will decrease as the short-term
rate increases and will increase as the short-term rate decreases. The
magnitude of increases and decreases in the market value of inverse
floating rate obligations may be approximately twice as large as the
comparable change in the market value of an equal principal amount of
long-term bonds which bear interest at the rate paid by the issuer and
have similar credit quality, redemption and maturity provisions.
Investment In Other Investment Companies
The Series may invest in other investment companies. The total return on
such investment will be reduced by the operating expenses and fees of
such other investment companies, including advisory fees.
Open-End Funds. The Series may invest in open-end investment
companies.
Closed-End Funds. The Series may invest in closed-end investment
companies. Such investment may involve the payment of substantial
premiums above the value of such investment companies' portfolio
securities.
Lending of Portfolio Securities
The 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, an irrevocable letter of
credit or United States ("U.S.") Treasury securities maintained on a
current basis at an amount at least equal to the market value of the
securities loaned. The 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 the collateral, less a fee paid to the borrower
(if the collateral is in the form of cash). 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.
Leveraging Transactions
The Series may engage in the types of transactions described below, which
involve "leverage" because in each case the Series receives cash which it
can invest in portfolio securities and has a future obligation to make a
payment. The use of these transactions by the Series will generally cause
its net asset value to increase or decrease at a greater rate than would
otherwise be the case. Any investment income or gains earned from the
portfolio securities purchased with the proceeds from these transactions
which is in excess of the expenses associated from these transactions can
be expected to cause the value of the Series' shares and distributions on
the Series' shares to rise more quickly than would otherwise be the case.
Conversely, if the investment income or gains earned from the portfolio
securities purchased with proceeds from these transactions fail to cover
the expenses associated with these transactions, the value of the Series'
shares is likely to decrease more quickly than otherwise would be the
case and distributions thereon will be reduced or eliminated. Hence,
these transactions are speculative, involve leverage and increase the
risk of owning or investing in the shares of the Series. These
transactions also increase the Series' expenses because of interest and
similar payments and administrative expenses associated with them. Unless
the appreciation and income on assets purchased with proceeds from these
transactions exceed the costs associated with them,
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the use of these transactions by a Series would diminish the investment
performance of the Series compared with what it would have been without
using these transactions.
Bank Borrowings: The Series may borrow money for investment purposes from
banks and invest the proceeds in accordance with its investment
objectives and policies.
Mortgage "Dollar Roll" Transactions: The 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.
During the roll period, the Series foregoes principal and interest paid
on the mortgage-backed securities. The 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, and gains from, the investment of the cash
proceeds of the initial sale. The Series may also be compensated by
receipt of a commitment fee.
If the income and capital gains from the Series' investment of the
cash from the initial sale do not exceed the income, capital appreciation
and gain or loss that would have been realized on the securities sold as
part of the dollar roll, the use of this technique will diminish the
investment performance of the Series compared with what the performance
would have been without the use of the dollar rolls. Dollar roll
transactions involve the risk that the market value of the securities the
Series is required to purchase may decline below the agreed upon
repurchase price of those securities. If the broker/dealer to whom the
Series sells securities becomes insolvent, the Series' right to purchase
or repurchase securities may be restricted. Successful use of mortgage
dollar rolls may depend upon the Adviser's ability to correctly predict
interest rates and prepayments. There is no assurance that dollar rolls
can be successfully employed.
Reverse Repurchase Agreements: The Series may enter into reverse
repurchase agreements. In a reverse repurchase agreement, the Series will
sell securities and receive cash proceeds, subject to its agreement to
repurchase the securities at a later date for a fixed price reflecting a
market rate of interest. There is a risk that the counter party to a
reverse repurchase agreement will be unable or unwilling to complete the
transaction as scheduled, which may result in losses to the Series. The
Series will invest the proceeds received under a reverse repurchase
agreement in accordance with its investment objective and policies.
Options
The Series may invest in the following types of options, which involves
the risks described under the caption "Special Risk Factors -- Option,
Futures, Forwards, Swaps and Other Derivative Transactions" in this
Appendix:
Options on Foreign Currencies: The Series may purchase and write options
on foreign currencies for hedging and non-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, the 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 effect of the adverse movements in exchange rates. As in
the case of other types of options, however, the benefit to the 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, the 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. The 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 less related transaction costs. As in the case of
other types of options, therefore, the writing of Options on Foreign
Currencies will constitute only a partial hedge.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the
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 the 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 the 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, the 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. The use of foreign currency
options for non-hedging purposes, like the use of other types of
derivatives
A -- 12
<PAGE>
for such purposes, presents greater profit potential but also significant
risk of loss and could be considered speculative.
Options on Futures Contracts: The Series also may purchase and write
options to buy or sell those Futures Contracts in which it may invest
("Options on Futures Contracts") as described above under "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 type
(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 the
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 Commodity 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. The
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 holding 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 the Series owns liquid and
unencumbered assets equal to the difference. The Series may cover the
writing of put Options on Futures Contracts (a) through sales of the
underlying Futures Contract, (b) through the ownership of liquid and
unencumbered assets 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 (i) is equal to or
greater than the exercise price of the put written or where the exercise
price of the put held (ii) is less than the exercise price of the put
written if the Series owns liquid and unencumbered assets equal to the
difference. 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 the 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
the 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, the 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, the 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 the 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, the 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, the 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 the Series will increase prior to
acquisition, due to a market advance or changes in interest or exchange
rates, the Series could purchase call Options on Futures Contracts than
purchasing the underlying Futures Contracts.
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<PAGE>
Options on Securities: The Series may write (sell) covered put and call
options, and purchase put and call options, on securities. Call and put
options written by the Series may be covered in the manner set forth
below.
A call option written by the 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 if the Series owns liquid and unencumbered
assets equal to the amount of cash consideration) upon conversion or
exchange of other securities held in its portfolio. A call option is also
covered if the 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 the
Series owns liquid and unencumbered assets equal to the difference. A put
option written by the Series is "covered" if the Series owns liquid and
unencumbered 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 Series owns liquid and unencumbered assets equal to the
difference. Put and call options written by the 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 the 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 Series owns liquid and
unencumbered assets. Such transactions permit the 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 the Series, provided that
another option on such security is not written. If the 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.
The 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 the Series is more than the premium paid for the original
purchase. Conversely, the 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 the 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, the Series may purchase a security and then write
a call option against that security. The exercise price of the call
option the 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, the 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 the 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, the 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; the
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 the Series in the same market
environments that call options are used in equivalent buy-and-write
transactions.
The 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, the Series
A -- 14
<PAGE>
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, the 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, the 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
the 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.
The Series may also 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 the 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, the 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.
The Series may also 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 the Series
upon exercise of the option, and, unless the price of the underlying
security rises sufficiently, the option may expire worthless to the
Series.
Options on Stock Indices: The 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 generally
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." The Series may cover
written 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 if the Series owns liquid and
unencumbered assets equal to the amount of cash consideration) upon
conversion or exchange of other securities in its portfolio. Where the
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. The 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 the Series owns liquid and
unencumbered assets equal to the difference. The Series may cover put
options on stock indices by owning liquid and unencumbered assets with a
value equal to the exercise price, 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 (a) is equal to or greater than the
exercise price of the put written or (b) is less than the exercise price
of the put written if the Series owns liquid and unencumbered assets
equal to the difference. 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.
The 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 the 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, the 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, the Series assumes
the risk of a decline in the index. To the extent that the price changes
of securities owned by the Series correlate with changes in the value of
the index, writing covered put options on indices will increase the
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.
The 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, the Series will seek to offset a
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<PAGE>
decline in the value of securities it owns through appreciation of the
put option. If the value of the 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 the
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, the Series will also bear
the risk of losing all or a portion of the premium paid it the value of
the index does not rise. The purchase of call options on stock indices
when the 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 Series 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.
Reset Options: In certain instances, the Series may purchase or write
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
of U.S. Treasury security at any 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 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
for a reset option written by the Series 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.
Conversely, where the Series purchases a reset option, it could be
required to pay a higher premium than would have been the case at the
initiation of the option.
"Yield Curve" Options: The Series may also enter into options on the
"spread," or yield differential, between two fixed 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, the Series may purchase or write such
options for hedging purposes. For example, the 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. The 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 the 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 owns liquid and unencumbered assets
sufficient to cover the Series' net liability under the two options.
Therefore, the 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.
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Repurchase Agreements
The Series may enter into repurchase agreements with sellers who are
member firms (or a subsidiary thereof) of the New York Stock 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 the 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, the 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. The Series has adopted and follows procedures which are
intended to minimize the risks of repurchase agreements. For example, the
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
the Series has the right to make margin calls at any time if the value of
the securities falls below the agreed upon collateral.
Restricted Securities
The Series may purchase securities that are not registered under the
Securities Act of 1933, as amended ("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") and commercial paper issued under Section 4(2) of the 1933
Act ("4(2) Paper"). A determination is made, based upon a continuing
review of the trading markets for the Rule 144A security or 4(2) Paper,
whether such security is liquid and thus not subject to the Series'
limitation on investing 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 and 4(2)
Paper. 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 the Series to the
extent that qualified institutional buyers become for a time uninterested
in purchasing these Rule 144A securities held in the Series' portfolio.
Subject to the Series' limitation on investments in illiquid investments,
the Series may also invest in restricted securities that may not be sold
under Rule 144A, which presents certain risks. As a result, the Series
might not be able to sell these securities when the Adviser wishes to do
so, or might have to sell them at less than fair value. In addition,
market quotations are less readily available. Therefore, judgment may at
times play a greater role in valuing these securities than in the case of
unrestricted securities.
Short Sales
The Series may seek to hedge investments or realize additional gains
through short sales. The Series may make short sales, which are
transactions in which the 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.
The 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 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.
Whenever the Series engages in short sales, it identifies liquid and
unencumbered assets in an amount that, when combined with the amount of
collateral deposited with the broker connection with the short sale,
equals the current market value of the security sold short.
Short Sales Against The Box
The Series may make short sales "against the box," i.e., when a security
identical to one owned by the Series is borrowed and sold short. If the
Series enters into a short sale against the box, it is required to
segregate securities equivalent in kind and amount to the securities sold
short (or securities convertible or exchangeable into such securities)
and is required to hold such securities while the short sale is
outstanding. The Series will incur transaction costs, including interest,
in connection with opening, maintaining, and closing short sales against
the box.
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Short Term Instruments
The Series may hold cash and invest in cash equivalents, such as
short-term U.S. Government Securities, commercial paper and bank
instruments.
Swaps and Related Derivative Instruments
The Series may enter into interest rate swaps, currency swaps and other
types of available swap agreements, including swaps on securities,
commodities and indices, and related types of derivatives, such as caps,
collars and floors. A swap is an agreement between two parties pursuant
to which each party agrees to make one or more payments to the other on
regularly scheduled dates over a stated term, based on different interest
rates, currency exchange rates, security or commodity prices, the prices
or rates of other types of financial instruments or assets or the levels
of specified indices. Under a typical swap, one party may agree to pay a
fixed rate or a floating rate determined by reference to a specified
instrument, rate or index, multiplied in each case by a specified amount
(the "notional amount"), while the other party agrees to pay an amount
equal to a different floating rate multiplied by the same notional
amount. On each payment date, the obligations of parties are netted, with
only the net amount paid by one party to the other. All swap agreements
entered into by the Series with the same counterparty are generally
governed by a single master agreement, which provides for the netting of
all amounts owed by the parties under the agreement upon the occurrence
of an event of default, thereby reducing the credit risk to which such
party is exposed.
Swap agreements are typically individually negotiated and structured
to provide exposure to a variety of different types of investments or
market factors. Swap agreements may be entered into for hedging or
non-hedging purposes and therefore may increase or decrease the Series'
exposure to the underlying instrument, rate, asset or index. Swap
agreements can take many different forms and are known by a variety of
names. The Series is not limited to any particular form or variety of
swap agreement if the Adviser determines it is consistent with the
Series' investment objective and policies.
For example, the Series may enter into an interest rate swap in order
to protect against declines in the value of fixed income securities held
by the Series. In such an instance, the Series would agree with a
counterparty to pay a fixed rate (multiplied by a notional amount) and
the counterparty would agree to pay a floating rate multiplied by the
same notional amount. If interest rates rise, resulting in a diminution
in the value of the Series' portfolio, the Series would receive payments
under the swap that would offset, in whole or part, such diminution in
value. The Series may also enter into swaps to modify its exposure to
particular markets or instruments, such as a currency swap between the
dollar and another currency which would have the effect of increasing or
decreasing the Series' exposure to each such currency. The Series might
also enter into a swap on a particular security, or a basket or index of
securities, in order to gain exposure to the underlying security or
securities, as an alternative to purchasing such securities. Such
transactions could be more efficient or less costly in certain instances
than an actual purchase or sale of the securities.
The Series may enter into other related types of over-the-counter
derivatives, such as "caps", "floors", "collars" and options on swaps, or
"swaptions", for the same types of hedging or non-hedging purposes. Caps
and floors are similar to swaps, except that one party pays a fee at the
time the transaction is entered into and has no further payment
obligations, while the other party is obligated to pay an amount equal to
the amount by which a specified fixed or floating rate exceeds or is
below another rate (multiplied by a notional amount). Caps and floors,
therefore, are also similar to options. A collar is in effect a
combination of a cap and a floor, with payments made only within or
outside a specified range of prices or rates. A swaption is an option to
enter into a swap agreement. Like other types of options, the buyer of a
swaption pays a non-refundable premium for the option and obtains the
right, but not the obligation, to enter into the underlying swap on the
agreed-upon terms.
The Series will maintain liquid and unencumbered assets to cover its
current obligations under swap and other over-the-counter derivative
transactions. If the 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 liquid and unencumbered 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 the Series enters into a
swap agreement on other than a net basis, it will maintain liquid and
unencumbered 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 underlying price, rate or index level
that determines the amount of payments to be made under the arrangement.
If the Adviser is incorrect in its forecasts of such factors, the
investment performance of the 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 the Series, the Series must be prepared
to make such payments when due. In addition, if the counterparty's
creditworthiness would decline, the value of the swap agreement would be
likely to decline, potentially resulting in losses.
If the counterparty defaults, the Series' risk of loss consists of the
net amount of payments that the Series is contractually entitled to
receive. The 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, but there can be no assurance that it will be able
to do so.
The uses by the Series of Swaps and related derivative instruments
also involves the risks described under the caption "Spe-
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cial Risk Factors -- Options, Futures, Forwards, Swaps and Other
Derivative Transactions" in this Appendix.
Temporary Borrowings
The Series may borrow money for temporary purposes (e.g., to meet
redemption requests or settle outstanding purchases of portfolio
securities).
Temporary Defensive Positions
During periods of unusual market conditions when the Adviser believes
that investing for temporary defensive purposes is appropriate, or in
order to meet anticipated redemption requests, a large portion or all of
the assets of the 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.
Warrants
The Series may invest in warrants. Warrants are securities that give the
Series the right to purchase equity securities from the issuer at a
specific price (the "strike price") for a limited period of time. The
strike price of warrants typically is much lower than the current market
price of the underlying securities, yet they are subject to similar price
fluctuations. As a result, warrants may be more volatile investments than
the underlying securities and may offer greater potential for capital
appreciation as well as capital loss. Warrants do not entitle a holder to
dividends or voting rights with respect to the underlying securities and
do not represent any rights in the assets of the issuing company. Also,
the value of the warrant does not necessarily change with the value of
the underlying securities and a warrant ceases to have value if it is not
exercised prior to the expiration date. These factors can make warrants
more speculative than other types of investments.
"When-issued" Securities
The Series may purchase securities on a "when-issued" or on a "forward
delivery" basis which means that the securities will be delivered to the
Series at a future date usually beyond customary settlement time. The
commitment to purchase a security for which payment will be made on a
future date may be deemed a separate security. In general, the Series
does not pay for such securities until received, and does not start
earning interest on the securities until the contractual settlement date.
While awaiting delivery of securities purchased on such bases, a Series
will identify liquid and unencumbered assets equal to its forward
delivery commitment.
Special Risk Factors -- Options, Futures, Forwards, Swaps and Other
Derivative Transactions
Risk of Imperfect Correlation of Hedging Instruments with the Series's
Portfolio: The Series' ability effectively to hedge all or a portion of
its portfolio through transactions in derivatives, including options,
Futures Contracts, Options on Futures Contracts, Forward Contracts, swaps
and other types of derivatives depends on the degree to which price
movements in the underlying index or instrument correlate with price
movements in the relevant portion of the Series' portfolio. In the case
of derivative instruments based on an index, the portfolio will not
duplicate the components of the index, and in the case of derivative
instruments on fixed income securities, the portfolio securities which
are being hedged may not be the same type of obligation underlying such
derivatives. The use of derivatives for "cross hedging" purposes (such as
a transaction in a Forward Contract on one currency to hedge exposure to
a different currency) may involve greater correlation risks.
Consequently, the Series bears 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.
If the 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. 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 the Series enters into transactions in
options or futures on narrowly-based indices 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 derivatives for hedging purposes entails the additional
risk of imperfect correlation between movements in the price of the
derivative 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 derivatives markets. In this regard, trading by
speculators in derivatives has in the past occasionally resulted in
market distortions, which may be difficult or impossible to predict,
particularly near the expiration of such instruments.
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
indices, options on currencies and Options on Futures Contracts, the
Series is subject to the risk of market movements between
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the time that the option is exercised and the time of performance
thereunder. This could increase the extent of any loss suffered by the
Series in connection with such transactions.
In writing a covered call option on a security, index or futures
contract, the 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 the 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 indices or
Options on Futures Contracts constitutes only a partial hedge against
fluctuations in the value of the Series' portfolio. When the 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, the 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, the Series' overall return
may be lower than if it had not engaged in the hedging transactions.
Furthermore, the cost of using these techniques may make it economically
infeasible for the Series to engage in such transactions.
Risks of Non-Hedging Transactions: The Series may enter transactions in
derivatives for non-hedging purposes as well as hedging purposes.
Non-hedging transactions in such instruments 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 liquid
and unencumbered assets necessary to satisfy an option exercise will be
identified, unless the option is 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. Nevertheless, the method of covering an option employed by
the 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. The Series may also enter
into futures, Forward Contracts or swaps for non-hedging purposes. For
example, the Series may enter into such a transaction as an alternative
to purchasing or selling the underlying instrument or to obtain desired
exposure to an index or market. In such instances, the Series will be
exposed to the same economic risks incurred in purchasing or selling the
underlying instrument or instruments. However, transactions in futures,
Forward Contracts or swaps may be leveraged, which could expose the
Series to greater risk of loss than such purchases or sales. Entering
into transactions in derivatives for other than hedging purposes,
therefore, could expose the Series to significant risk of loss if the
prices, rates or values of the underlying instruments or indices do not
move in the direction or to the extent anticipated.
With respect to the writing of straddles on securities, the 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 the 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 contract at any specific time. In that
event, it may not be possible to close out a position held by the 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 its portfolio, and could result in
trading losses.
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
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in the past moved to 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
establishment of a futures, forward or swap position (certain of which
may require no initial margin deposits) 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 the 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 the Series enters into such
transactions for other than hedging purposes, the margin requirements
associated with such transactions could expose the Series to greater
risk.
Potential Bankruptcy of a Clearinghouse or Broker: When the Series enters
into transactions in exchange-traded futures or options, it is exposed to
the risk of the potential bankruptcy of the relevant exchange
clearinghouse or the broker through which the Series has effected the
transaction. In that event, the Series might not be able to recover
amounts deposited as margin, or amounts owed to the Series in connection
with its transactions, for an indefinite period of time, and could
sustain losses of a portion or all of such amounts, Moreover, the
performance guarantee of an exchange clearinghouse generally extends only
to its members and the Series could sustain losses, notwithstanding such
guarantee, in the event of the bankruptcy of its broker.
Trading and Position Limits: The exchanges 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 the 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 in Foreign Currencies and Over-the-Counter
Derivatives and Other 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 the 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 the 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, over-the-counter options on securities, swaps and other
over-the-counter derivatives 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
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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 the 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 transaction. There also may
be no liquid secondary market in the trading of over-the-counter
contracts, and the Series could be required to retain options purchased
or written, or Forward Contracts or swaps 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 the 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. The 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 indices, 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 the
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 the 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.
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APPENDIX B
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the
quality of various debt instruments. It should be emphasized, however, that
ratings are not absolute standards of quality. Consequently, debt
instruments with the same maturity, coupon and rating may have different
yields while debt instruments of the same maturity and coupon with
different ratings may have the same yield.
Moody's Investors Service, Inc.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risk appear somewhat
larger than the 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 some time in
the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Absence of Rating: Where no rating has been assigned or where a rating has
been suspended or withdrawn, it may be for reasons unrelated to the quality
of the issue. Should no rating be assigned, the reason may be one of the
following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
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 S&P. The
obligor's capacity to meet its financial commitment on the obligation is
EXTREMELY STRONG.
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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.
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.
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.
B -- 2
<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, 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 possessing 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.
B -- 3
<PAGE>
APPENDIX C
PERFORMANCE QUOTATIONS
All performance quotations are as of December 31, 1998.
<TABLE>
<CAPTION>
Average Annual
Total Returns Actual 30-Day
------------------------------------------ Yield (including 30-Day Yield
Series 1 Year 3 Year Life of Series Waivers) (Without Waivers)
- ------------------------------------------- ------------- ----------- ---------------- ------------------ ------------------
<S> <C> <C> <C> <C> <C>
Emerging Growth Series ................. 34.16% 24.16% 26.55%(1) N/A N/A
Capital Opportunities Series ........... 26.80% N/A 26.33%(2) N/A N/A
Research Series ........................ 23.39% 21.99% 22.52%(3) N/A N/A
Growth With Income Series .............. 22.32% 25.48% 25.98%(4) N/A N/A
New Discovery Series ................... N/A N/A 2.20%(5) N/A N/A
Total Return Series .................... 12.33% 15.94% 18.73%(6) N/A N/A
Utilities Series ....................... 18.06% 22.60% 25.40%(6) N/A N/A
High Income Series ..................... (0.18)% 8.24% 8.77%(3) 9.40% 9.09%
Global Governments Series .............. 7.90% 3.53% 5.57%(7) 4.64% 4.33%
Emerging Markets Equity Series ......... (33.37)% N/A (34.51)%(8) N/A N/A
Bond Series ............................ 6.79% 6.29% 6.90%(9) 4.84% 2.23%
Limited Maturity Series ................ 5.42% N/A 5.95%(2) 4.58% (0.63)%
Money Market Series .................... 4.91% 4.79% 4.69%(6) N/A N/A
</TABLE>
--------------
The current annualized yield of the Money Market Series for the seven-day
period ended December 31, 1998 was 4.49%, and the effective annualized
yield of the Money Market Series for such period was 4.59%.
(1) The Series commenced investment operations on July 24, 1995.
(2) The Series commenced investment operations on August 14, 1996.
(3) The Series commenced investment operations on July 26, 1995.
(4) The Series commenced investment operations on October 9, 1995.
(5) The Series commenced investment operations on May 1, 1998.
(6) The Series commenced investment operations on January 3, 1995.
(7) The Series commenced investment operations on June 14, 1994.
(8) The Series commenced investment operations on October 16, 1997.
(9) The Series commenced investment operations on October 24, 1995.
C -- 1
<PAGE>
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN AND 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) 225-2606
MAILING ADDRESS:
P.O. Box 2281, Boston, MA 02107-9906
INDEPENDENT AUDITORS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
MFS[RegTM] Variable Insurance Trust
[MFS LOGO]
500 Boylston Street, Boston, MA 02116 MSG-16-11/98
<PAGE>
MFS(R) VARIABLE INSURANCE TRUST
MFS(R) Emerging Growth Series
MFS(R) Capital Opportunities Series
MFS(R) Research Series
MFS(R) Growth With Income Series
MFS(R) New Discovery Series
MFS(R) Growth Series
MFS(R) Total Return Series
MFS(R) Utilities Series
MFS(R) High Income Series
MFS(R) Global Governments Series
MFS(R) Global Equity Series
MFS/Foreign & Colonial Emerging Markets Equity Series
MFS(R) Bond Series
MFS(R) Limited Maturity Series
MFS(R) Money Market Series
PART C
Item 23. Financial Statements and Exhibits
All Series (except MFS Growth Series and MFS Global Equity
Series)
(a) 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, 1998;
the MFS Capital Opportunities Series and the MFS
Limited Maturity Series for the period from
commencement of investment operations on August
14, 1996 to December 31, 1998;
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, 1998;
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,
1998;
<PAGE>
the MFS Growth With Income Series for the period
from commencement of investment operations on
October 9, 1995 to December 31, 1998;
the MFS Global Governments Series for the period
from commencement of investment operations on
June 14, 1994 to December 31, 1998;
the MFS Bond Series for the period from
commencement of investment operations on October
24, 1995 to December 31, 1998;
the MFS/Foreign & Colonial Emerging Markets
Equity Series for the period from commencement
of operations on October 16, 1997 to December
31, 1998; and
the MFS New Discovery Series for the period from
commencement of operations on May 1, 1998 to
December 31, 1998.
Included in Part B of this Registration Statement:
At December 31, 1998:
Portfolio of Investments*
Statement of Assets and Liabilities*
For the year ended December 31, 1998:
Statement of Operations*
For the two years in the period ended December
31, 1998:
Statement of Changes in Net Assets*
Statement of Operations* and Statement of
Changes in Net Assets* for the MFS New
Discovery Series are for the period ended
December 31, 1998 and Statement of Changes
in Net Assets for MFS/Foreign & Colonial
Emerging Markets Equity Series is for the
period from commencement of operations on
October 16, 1997 to December 31, 1998.
- ------------------------
* Incorporated by reference to the Annual Reports to Shareholders of the
Series, each dated December 31, 1998, filed with the SEC via EDGAR on or
before March 1, 1999.
<PAGE>
(b) Exhibits
1 (a) Declaration of Trust, dated January 28,
1994. (2)
(b) Amendment to Declaration of Trust -
Designation of Series of Shares dated
January 31, 1994. (2)
(c) Amendment to Declaration of Trust -
Redesignation of Series, dated June 1, 1995.
(2)
(d) Amendment to Declaration of Trust -
Redesignation of Series, dated April 25,
1996. (3)
(e) Certificate of Amendment to Declaration of
Trust - Redesignation of Series, dated
September 9, 1997. (7)
(f) Amendment to Declaration of Trust -
Designation of MFS New Discovery Series
dated February 26, 1998. (5)
(g) Amendment to Declaration of Trust -
Designation of MFS Growth Series; filed
herewith.
(h) Form of Amendment to Declaration of Trust -
Designation of MFS Global Equity Series;
filed herewith.
2 By-Laws, dated January 28, 1994. (2)
3 Not Applicable.
4 (a) Investment Advisory Agreement by and
between Registrant and Massachusetts
Financial Services Company, dated April 14,
1994 as amended and restated on October 15,
1997. (5)
(b) Sub-Advisory Agreement by and between
Massachusetts Financial Services Company
and Foreign & Colonial Management Ltd.,
dated October 16, 1997. (5)
(c) Sub-Advisory Agreement by and between
Foreign & Colonial Management Ltd. and
Foreign & Colonial Emerging Markets Limited,
dated October 16, 1997. (5)
(d) Form of Investment Advisory Agreement
between the Registrant and Massachusetts
Financial Services Company on behalf of MFS
New Discovery Series. (5)
<PAGE>
(e) Form of Investment Advisory Agreement
between the Registrant and Massachusetts
Financial Services Company on behalf of MFS
Growth Series. (9)
(f) Form of Investment Advisory Agreement
between the Registrant and Massachusetts
Financial Services Company on behalf of MFS
Global Equity Series; filed herewith.
5 Distribution Agreement between Registrant
and Massachusetts Investors Services,
Inc., dated April 14, 1994. (2)
6 Not Applicable.
7 Form of Custodian Agreement between
Registrant and Investors Bank & Trust
Company. (8)
8 (a) Shareholder Servicing Agent Agreement
between Registrant and MFS Service Center,
dated April 14, 1994. (2)
(b) Dividend Disbursing Agency Agreement between
Registrant and State Street Bank and Trust,
dated April 14, 1994. (2)
(c) Loan Agreement among MFS Borrowers and The
First National Bank of Boston, dated as of
February 21, 1995 (1)
(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. (4)
(e) Master Administrative Services Agreement,
dated March 1, 1997, as amended. (6).
9 (a) Opinion and Consent of Counsel, dated
April 29, 1998. (8)
(b) Legal Opinion Consent, dated March 15, 1999;
filed herewith.
10 Consent of Deloitte & Touche LLP;
filed herewith.
11 Not Applicable.
<PAGE>
12 Investment Representation Letter. (2)
13 Not Applicable.
14 Financial Data Schedules for each
operational Series of the Trust for the year
ended December 31, 1998; filed herewith.
15 Not Applicable.
Power of Attorney dated August 12, 1994. (2)
Power of Attorney dated February 19, 1998. (5)
- ----------------------------
(1) 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.
(2) Incorporated by reference to Registrant's Post-Effective Amendment No. 4
filed with the SEC via EDGAR on October 26, 1995.
(3) Incorporated by reference to Registrant's Post-Effective Amendment No. 6
filed with the SEC via EDGAR on May 30, 1996.
(4) 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.
(5) Incorporated by reference to Registrant's Post-Effective Amendment No. 10
filed with the SEC via EDGAR on February 27, 1998.
(6) 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.
(7) Incorporated by reference to Registrant's Post-Effective Amendment No. 9
filed with the SEC via EDGAR on October 1, 1997.
(8) Incorporated by reference to Registrant's Post-Effective Amendment No. 11
filed with the SEC via EDGAR on April 27, 1998.
(9) Incorporated by reference to Registrant's Post-Effective Amendment No. 12
filed with the SEC via EDGAR on February 12, 1999.
Item 24. Persons Controlled by or under Common Control with Registrant
Not applicable.
Item 25. 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 26. Business and Other Connections of Investment Adviser
<PAGE>
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 Global 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 four series: MFS Emerging Growth Fund, MFS Large Cap Growth Fund, MFS
Intermediate Income Fund and MFS Charter Income Fund), MFS Series Trust III
(which has three series: MFS High Income Fund, MFS Municipal High Income Fund
and MFS High Yield Opportunities 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 five
series: MFS Total Return Fund, MFS Research Fund, MFS International
Opportunities Fund, MFS International Strategic Growth Fund and MFS
International Value Fund), MFS Series Trust VI (which has three series: MFS
Global Total Return Fund, MFS Utilities Fund and MFS Global Equity Fund), MFS
Series Trust VII (which has two series: MFS Global Governments Fund and MFS
Capital Opportunities Fund), MFS Series Trust VIII (which has two series: MFS
Strategic Income Fund and MFS Global Growth Fund), MFS Series Trust IX (which
has five series: MFS Bond Fund, MFS Limited Maturity Fund, MFS Municipal Limited
Maturity Fund, MFS Research Bond Fund and MFS Intermediate Investment Grade Bond
Fund), MFS Series Trust X (which has seven series: MFS Government Mortgage Fund,
MFS/Foreign & Colonial Emerging Markets Equity Fund, MFS International Growth
Fund, MFS International Growth and Income Fund, MFS Strategic Value Fund, MFS
Small Cap Value Fund and MFS Emerging Markets Debt Fund), MFS Series Trust XI
(which has four series: MFS Union Standard Equity Fund, Vertex All Cap Fund,
Vertex U.S. All Cap Fund and Vertex Contrarian Fund), 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 ten series) and MFS Variable
Insurance Trust ("MVI") (which has thirteen series). The principal business
<PAGE>
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 U.S. All Cap 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 MFS American Funds known as the MFS
Funds after January 1999 (which will have 11 portfolios as of January 1999):
U.S. Equity Fund, U.S. Emerging Growth Fund, U.S. High Yield Bond Fund, U.S.
Dollar Reserve Fund, Charter Income Fund, U.S. Research Fund, U.S. Strategic
Growth Fund, Global Equity Fund, European Equity Fund and European Corporate
Bond 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
Global Growth Fund, MFS Meridian Money Market Fund, MFS Meridian Global Balanced
Fund, MFS Meridian U.S. Equity Fund, MFS Meridian Research Fund, MFS Meridian
U.S. High Yield Fund, MFS Meridian Emerging Markets Debt Fund, MFS Meridian
Strategic Growth Fund and MFS Meridian Global Asset
<PAGE>
Allocation Fund and the MFS Meridian Research International 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 Eversheds, Senator House, 85 Queen Victoria Street, London, England
EC4V 4JL, 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 27, Australia Square, 264 George
Street, Sydney, NSW2000, 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 27, Australia Square, 264 George
Street, 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.
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.
Massachusetts Investment Management Co., Ltd. (MIMCO), a wholly owned
subsidiary of MFS, is a corporation incorporated in Japan. MIMCO, whose address
is Kamiyacho-Mori Building, 3-20, Tranomon 4-chome, Minato-ku, Tokyo, Japan, is
involved in investment management activities.
MIMCO
Jeffrey L. Shames, Arnold D. Scott and Mamoru Ogata are Directors,
Shaun Moran is the Representative Director, Joseph W. Dello Russo is the
Statutory Auditor, Robert DiBella is the President and Thomas B. Hastings is the
Assistant Statutory Auditor.
<PAGE>
MFS
The Directors of MFS are Jeffrey L. Shames, Arnold D. Scott, John W.
Ballen, Kevin R. Parke, Thomas J. Cashman, Jr., Joseph W. Dello Russo, William
W. Scott, Donald A. Stewart and John D. McNeil. Mr. Shames is the Chairman and
Chief Executive Officer, Mr. Ballen is President and Chief Investment Officer,
Mr. Arnold Scott is a Senior Executive Vice President and Secretary, Mr. William
Scott, Mr. Cashman, Mr. Dello Russo and Mr. Parke are Executive Vice Presidents
(Mr. Joseph W. Dello Russo is also Chief Financial Officer and Chief
Administrative Officer), (Mr. Parke is also Chief Equity Officer), 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, 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, Geoffrey L. Schechter, Vice
President of MFS, 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 Variable Insurance Trust
MFS Series Trust XI
MFS Institutional Trust
Jeffrey L. Shames is the President and 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.
<PAGE>
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.
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.
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 D. Laupheimer is a Senior Vice President, 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
Peter D. Laird is President and a Director, 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
Peter D. Laird is President and a Director, Thomas J. Cashman, 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.
<PAGE>
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
Thomas J. Cashman, Jr., Jeffrey L. Shames, and Arnold D. Scott are
Directors, Joseph J. Trainor 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:
<TABLE>
<S> <C>
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 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
<PAGE>
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)
</TABLE>
Item 27. Distributors
(a) Reference is hereby made to Item 26 above.
(b) Reference is hereby made to Item 26 above; the principal business
address of each of these persons is 500 Boylston Street, Boston, Massachusetts
02116.
(c) Not applicable.
Item 28. 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:
<TABLE>
<CAPTION>
NAME ADDRESS
---- -------
<S> <C>
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
</TABLE>
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 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 29. Management Services
Not applicable.
Item 30. Undertakings
Not applicable.
<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 15th day of March, 1999.
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 March 15, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
JEFREY L. SHAMES* Chairman, President (Principal
Jeffrey L. Shames Executive Officer) and Trustee
W. THOMAS LONDON* Treasurer (Principal Financial Officer
W. Thomas London and Principal Accounting Officer)
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.
</TABLE>
<PAGE>
INDEX TO EXHIBITS
-----------------
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO.
- ----------- ---------------------- --------
<S> <C> <C>
1 (g) Amendment to Declaration of Trust - Designation of MFS Growth
Series.
(h) Form of Amendment to Declaration of Trust - Designation of
MFS Global Equity Series.
4 (f) Form of Investment Advisory Agreement between the Registrant
and Massachusetts Financial Services Company on behalf of
MFS Global Equity Series.
9 (b) Legal Opinion Consent, dated March 15, 1999.
10 Consent of Deloitte & Touche LLP.
14 Financial Data Schedules for each operational
Series of the Trust for the year ended December 31,
1998.
</TABLE>
EXHIBIT 99.1 (g)
MFS VARIABLE INSURANCE TRUST
CERTIFICATION OF AMENDMENT
TO THE DECLARATION OF TRUST
ESTABLISHMENT AND DESIGNATION
OF SERIES
Pursuant to Section 6.9 of the Amended and Restated Declaration of
Trust dated January 24, 1996, as amended (the "Declaration"), of MFS Variable
Insurance Trust (the "Trust"), the undersigned Trustees of the Trust, being a
majority of the Trustees of the Trust, hereby establish and designate a new
series of Shares (as defined in the Declaration), such series to have the
following special and relative rights:
1. The new series shall be designated:
- MFS Growth Series
2. The series shall be authorized to invest in cash, securities,
instruments and other property as from time to time described
in the Trust's then currently effective registration statement
under the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended, to the extent
pertaining to the offering of Shares of such series. Each
Share of the series shall be redeemable, shall be entitled to
one vote or fraction thereof in respect of a fractional share
on matters on which Shares of the series shall be entitled to
vote, shall represent a pro rata beneficial interest in the
assets allocated or belonging to the series, and shall be
entitled to receive its pro rata share of the net assets of
the series upon liquidation of the series, all as provided in
Section 6.9 of the Declaration.
3. Shareholders of each series shall vote separately as a class on
any matter to the extent required by, and any matter shall be
deemed to have been effectively acted upon with respect to the
series as provided in Rule 18f-2, as from time to time in
effect, under the Investment Company Act of 1940, as amended, or
any successor rule, and by the Declaration.
4. The assets and liabilities of the Trust shall be allocated among
the previously established and existing series of the Trust and
such new series as set forth in Section 6.9 of the Declaration.
<PAGE>
5. Subject to the provisions of Section 6.9 and Article IX of the
Declaration, the Trustees (including any successor Trustees)
shall have the right at any time and from time to time to
reallocate assets and expenses or to change the designation of
any series now or hereafter created, or to otherwise change the
special and relative rights of any such establishment and
designation of series of Shares.
Pursuant to Section 6.9(h) of the Declaration, this instrument shall be
effective upon the execution by a majority of the Trustees of the Trust.
IN WITNESS WHEREOF, a majority of the Trustees of the Trust have
executed this amendment, in one or more counterparts, all constituting a single
instrument, as an instrument under seal in The Commonwealth of Massachusetts, as
of this 11th day of February, 1999 and further certify, as provided by the
provisions of Section 9.3(d) of the Declaration, that this amendment was duly
adopted by the undersigned in accordance with the second sentence of Section
9.3(a) of the Declaration.
JEFFREY L. SHAMES
- ----------------------
Jeffrey L. Shames
38 Lake Avenue
Newton MA 02159
NELSON J. DARLING, JR.
- ----------------------
Nelson J. Darling, Jr.
74 Beach Bluff Avenue
Swampscott, MA 01907
WILLIAM R. GUTOW
- ----------------------
William R. Gutow
3 Rue Dulac
Dallas, TX 75230
EXHIBIT 99.1 (h)
MFS VARIABLE INSURANCE TRUST
FORM OF CERTIFICATION OF AMENDMENT
TO THE DECLARATION OF TRUST
ESTABLISHMENT AND DESIGNATION
OF SERIES
Pursuant to Section 6.9 of the Amended and Restated Declaration of Trust
dated January 24, 1996, as amended (the "Declaration"), of MFS Variable
Insurance Trust (the "Trust"), the undersigned Trustees of the Trust, being a
majority of the Trustees of the Trust, hereby establish and designate a new
series of Shares (as defined in the Declaration), such series to have the
following special and relative rights:
1. The new series shall be designated:
- MFS Global Equity Series
2. The series shall be authorized to invest in cash, securities,
instruments and other property as from time to time described in the
Trust's then currently effective registration statement under the
Securities Act of 1933, as amended, and the Investment Company Act of
1940, as amended, to the extent pertaining to the offering of Shares
of such series. Each Share of the series shall be redeemable, shall
be entitled to one vote or fraction thereof in respect of a
fractional share on matters on which Shares of the series shall be
entitled to vote, shall represent a pro rata beneficial interest in
the assets allocated or belonging to the series, and shall be
entitled to receive its pro rata share of the net assets of the
series upon liquidation of the series, all as provided in Section 6.9
of the Declaration.
3. Shareholders of each series shall vote separately as a class on any
matter to the extent required by, and any matter shall be deemed to
have been effectively acted upon with respect to the series as
provided in Rule 18f-2, as from time to time in effect, under the
Investment Company Act of 1940, as amended, or any successor rule,
and by the Declaration.
4. The assets and liabilities of the Trust shall be allocated among the
previously established and existing series of the Trust and such new
series as set forth in Section 6.9 of the Declaration.
5. Subject to the provisions of Section 6.9 and Article IX of the
Declaration, the Trustees (including any successor Trustees) shall
have the right at any time and from time to time to reallocate assets
and expenses or to change the designation of any series now or
hereafter created, or to otherwise change the special and relative
rights of any such establishment and designation of series of Shares.
Pursuant to Section 6.9(h) of the Declaration, this instrument shall be
effective upon the execution by a majority of the Trustees of the Trust.
IN WITNESS WHEREOF, a majority of the Trustees of the Trust have executed
this amendment, in one or more counterparts, all constituting a single
instrument, as an instrument under seal in The Commonwealth of Massachusetts, as
of this ___ day of _________ 1999 and further certify, as provided by the
provisions of Section 9.3(d) of the Declaration, that this amendment was duly
adopted by the undersigned in accordance with the second sentence of Section
9.3(a) of the Declaration.
- -----------------------
Jeffrey L. Shames
38 Lake Avenue
Newton MA 02159
- -----------------------
Nelson J. Darling, Jr.
74 Beach Bluff Avenue
Swampscott, MA 01907
- -----------------------
William R. Gutow
3 Rue Dulac
Dallas, TX 75230
EXHIBIT 99.4(f)
FORM OF INVESTMENT ADVISORY AGREEMENT
INVESTMENT ADVISORY AGREEMENT, dated this 30th day of April, 1999, by and
between MFS VARIABLE INSURANCE TRUST, a Massachusetts business trust (the
"Trust"), on behalf of MFS GLOBAL EQUITY SERIES, a series of the Trust (the
"Fund"), and MASSACHUSETTS FINANCIAL SERVICES COMPANY, a Delaware corporation
(the "Adviser").
WITNESSETH:
WHEREAS, the Trust is engaged in business as an open-end investment
company registered under the Investment Company Act of 1940; and
WHEREAS, the Adviser is willing to provide business services to
the Fund on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and agreements of
the parties hereto as herein set forth, the parties covenant and agree as
follows:
Article 1. Duties of the Adviser. The Adviser shall provide the Fund with
such investment advice and supervision as the latter may from time to time
consider necessary for the proper supervision of its funds. The Adviser shall
act as Adviser to the Fund and as such shall furnish continuously an investment
program and shall determine from time to time what securities shall be
purchased, sold or exchanged and what portion of the assets of the Fund shall be
held uninvested, subject always to the restrictions of the Trust's Amended and
Restated Declaration of Trust, dated January 24, 1996, and By-Laws, each as
amended from time to time (respectively, the "Declaration" and the "By-Laws"),
to the provisions of the Investment Company Act of 1940 and the Rules,
Regulations and orders thereunder and to the Fund's then-current Prospectus and
Statement of Additional Information. The Adviser shall also make recommendations
as to the manner in which voting rights, rights to consent to corporate action
and any other rights pertaining to the Fund's portfolio securities shall be
exercised. Should the Trustees at any time, however, make any definite
determination as to the investment policy and notify the Adviser thereof in
writing, the Adviser shall be bound by such determination for the period, if
any, specified in such notice or until similarly notified that such
determination shall be revoked. The Adviser shall take, on behalf of the Fund,
all actions which it deems necessary to implement the investment policies
determined as provided above, and in particular to place all orders for the
purchase or sale of portfolio securities for the Fund's account with brokers or
dealers selected by it, and to that end, the Adviser is authorized as the agent
of the Fund to give instructions to the Custodian of the Fund as to the
deliveries of securities and payments of cash for the account of the Fund. In
connection with the selection of such brokers or dealers and the placing of such
orders, the Adviser is directed to seek for the Fund execution at the most
reasonable price by responsible brokerage firms at reasonably competitive
commission rates. In fulfilling this requirement, the Adviser shall not be
deemed to have acted unlawfully or to have breached any
1
<PAGE>
duty, created by this Agreement or otherwise, solely by reason of its having
caused the Fund to pay a broker or dealer an amount of commission for effecting
a securities transaction in excess of the amount of commission another broker or
dealer would have charged for effecting that transaction, if the Adviser
determined in good faith that such amount of commission was reasonable in
relation to the value of the brokerage and research services provided by such
broker or dealer, viewed in terms of either that particular transaction or the
Adviser's overall responsibilities with respect to the Fund and to other clients
of the Adviser as to which the Adviser exercises investment discretion.
The Adviser may from time to time enter into sub-investment advisory agreements
with one or more investment advisers with such terms and conditions as the
Adviser may determine, provided that such sub-investment advisory agreements
have been approved in accordance with applicable provisions of the Investment
Company Act of 1940. Subject to the provisions of Article 6, the Adviser shall
not be liable for any error of judgment or mistake of law by any sub-adviser or
for any loss arising out of any investment made by any sub-adviser or for any
act or omission in the execution and management of the Fund by any sub-adviser.
Article 2. Allocation of Charges and Expenses. The Adviser shall furnish
at its own expense investment advisory and administrative services, office
space, equipment and clerical personnel necessary for servicing the investments
of the Fund and maintaining its organization and investment advisory facilities
and executive and supervisory personnel for managing the investments and
effecting the portfolio transactions of the Fund. The Adviser shall arrange, if
desired by the Trust, for Directors, officers and employees of the Adviser to
serve as Trustees, officers or agents of the Trust if duly elected or appointed
to such positions and subject to their individual consent and to any limitations
imposed by law. It is understood that the Fund will pay all of its own expenses
including, without limitation, compensation of Trustees "not affiliated" with
the Adviser; governmental fees; interest charges; taxes; membership dues in the
Investment Company Institute allocable to the Fund; fees and expenses of
independent auditors, of legal counsel, and of any transfer agent, registrar or
dividend disbursing agent of the Fund; expenses of repurchasing and redeeming
shares and servicing shareholder accounts; expenses of preparing, printing and
mailing stock certificates, shareholder reports, notices, proxy statements and
reports 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 the custodian for all
services to the Fund, including safekeeping of funds and securities and
maintaining required books and accounts; expenses of calculating the net asset
value of shares of the Fund; expenses of shareholders' meetings; and expenses
relating to the issuance, registration and qualification of shares of the Fund
and the preparation, printing and mailing of prospectuses for such purposes
(except to the extent that any Distribution Agreement to which the Trust is a
party provides that another party is to pay some or all of such expenses).
Article 3. Compensation of the Adviser. For the services to be rendered
and the facilities provided, the Fund shall pay to the Adviser an investment
advisory fee computed and paid annually at a rate equal 1.00% of the Fund's
average daily net assets. If the Adviser shall serve for less than the whole of
any period specified in this Article 3, the compensation to the Adviser will be
prorated.
2
<PAGE>
Article 4. Special Services. Should the Trust have occasion to request the
Adviser to perform services not herein contemplated or to request the Adviser to
arrange for the services of others, the Adviser will act for the Trust on behalf
of the Fund upon request to the best of its ability, with compensation for the
Adviser's services to be agreed upon with respect to each such occasion as it
arises.
Article 5. Covenants of the Adviser. The Adviser agrees that it will not
deal with itself, or with the Trustees of the Trust or the Trust's distributor,
if any, as principals in making purchases or sales of securities or other
property for the account of the Fund, except as permitted by the Investment
Company Act of 1940 and the Rules, Regulations or orders thereunder, will not
take a long or short position in the shares of the Fund except as permitted by
the Declaration, and will comply with all other provisions of the Declaration
and the By-Laws and the then-current Prospectus and Statement of Additional
Information of the Fund relative to the Adviser and its Directors and officers.
Article 6. Limitation of Liability of the Adviser. The Adviser shall not
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 Fund, except for willful misfeasance, bad faith or gross negligence in
the performance of its duties and obligations hereunder. As used in this Article
6, the term "Adviser" shall include Directors, officers and employees of the
Adviser as well as that corporation itself.
Article 7. Activities of the Adviser. The services of the Adviser to the
Fund are not deemed to be exclusive, the Adviser being free to render investment
advisory and/or other services to others. The Adviser may permit other fund
clients to use the initials "MFS" in their names. The Fund agrees that if the
Adviser shall for any reason no longer serve as the Adviser to the Fund, the
Fund will change its name so as to delete the initials "MFS." It is understood
that the Trustees, officers and shareholders of the Trust are or may be or
become interested in the Adviser, as Directors, officers, employees, or
otherwise and that Directors, officers and employees of the Adviser are or may
become similarly interested in the Trust, and that the Adviser may be or become
interested in the Fund as a shareholder or otherwise.
Article 8. Duration, Termination and Amendment of this Agreement. This
Agreement shall become effective on the date first above written and shall
govern the relations between the parties hereto thereafter, and shall remain in
force until April 30, 2001 on which date it will terminate unless its
continuance after April 30, 2001 is "specifically approved at least annually"
(i) by the vote of a majority of the Trustees of the Trust who are not
"interested persons" of the Trust or of the Adviser at a meeting specifically
called for the purpose of voting on such approval, and (ii) by the Board of
Trustees of the Trust, or by "vote of a majority of the outstanding voting
securities" of the Fund.
This Agreement may be terminated at any time without the payment of any
penalty by the Trustees or by "vote of a majority of the outstanding voting
securities" of the Fund, or by the
3
<PAGE>
Adviser, in each case on not more than sixty days' nor less than thirty days'
written notice to the other party. This Agreement shall automatically terminate
in the event of its "assignment".
This Agreement may be amended only if such amendment is approved by "vote
of a majority of the outstanding voting securities" of the Fund.
Article 9. Scope of Trust's Obligations. A copy of the Trust's Declaration
of Trust is on file with the Secretary of State of The Commonwealth of
Massachusetts. The Adviser acknowledges that the obligations of or arising out
of this Agreement 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. If this Agreement is executed by the Trust on
behalf of one or more series of the Trust, the Adviser 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 Agreement are binding solely
upon the assets or property of the series on whose behalf the Trust has executed
this Agreement.
Article 10. Definitions. The terms "specifically approved at least
annually," "vote of a majority of the outstanding voting securities,"
"assignment," "affiliated person," and "interested person," when used in this
Agreement, shall have the respective meanings specified, and shall be construed
in a manner consistent with, the Investment Company Act of 1940 and the Rules
and Regulations promulgated thereunder, subject, however, to such exemptions as
may be granted by the Securities and Exchange Commission under said Act.
Article 11. Record Keeping. The Adviser will maintain records in a form
acceptable to the Trust and in compliance with the rules and regulations of the
Securities and Exchange Commission, including but not limited to records
required to be maintained by Section 31(a) of the Investment Company Act of 1940
and the rules thereunder, which at all times will be the property of the Trust
and will be available for inspection and use by the Trust.
4
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
and delivered in their names and on their behalf by the undersigned, thereunto
duly authorized, and their respective seals to be hereto affixed, all as of the
day and year first written above. The undersigned Trustee of the Trust has
executed this Agreement not individually, but as Trustee under the Declaration.
MFS VARIABLE INSURANCE
TRUST, on behalf of
MFS GLOBAL EQUITY SERIES,
one of its series
By:_______________________________
James R. Bordewick, Jr.
Assistant Secretary
MASSACHUSETTS FINANCIAL
SERVICES COMPANY
By:_______________________________
Arnold D. Scott
Senior Executive Vice President
5
EXHIBIT 99.9 (b)
LEGAL OPINION CONSENT
I consent to the incorporation by reference in this Post-Effective Amendment No.
13 to the Registration Statement (File Nos. 33-74668 and 811-8326) (the
"Registration Statement") of MFS Variable Insurance Trust (the "Trust"), of my
opinion dated April 29, 1998, appearing in Post-Effective Amendment No. 11 to
the Trust's Registration Statement.
JAMES R. BORDEWICK, JR.
-----------------------
James R. Bordewick, Jr.
Assistant Secretary
Boston, Massachusetts
March 15, 1999
EXHIBIT 99.10
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Post-Effective
Amendment No. 13 to the Registration Statement (File No. 33-74668) of MFS
Variable Insurance Trust of our reports, each dated February 4, 1999, appearing
in the annual reports to shareholders of MFS Emerging Growth Series, MFS Capital
Opportunity Series, MFS Research Series, MFS Growth With Income Series, MFS New
Discovery Series, MFS Total Return Series, MFS Utilities Series, MFS High Income
Series, MFS Global 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, 1998. We also consent to the references
to us under the headings "Financial Highlights" 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
Boston, Massachusetts
March 22, 1999
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000918571
<NAME> MFS VARIABLE INSURANCE TRUST
<SERIES>
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<NAME> VIT EMERGING GROWTH
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<NAME> MFS VARIABLE INSURANCE TRUST
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<NAME> MFS VALUE SERIES
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<CIK> 0000918571
<NAME> MFS VARIABLE INSURANCE TRUST
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<NAME> MFS RESEARCH SERIES
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<CIK> 0000918571
<NAME> MFS VARIABLE INSURANCE TRUST
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<NAME> MFS GROWTH WITH INCOME SERIES
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<CIK> 0000918571
<NAME> MFS VARIABLE INSURANCE TRUST
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<NAME> MFS NEW DISCOVERY SERIES
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<CIK> 0000918571
<NAME> MFS VARIABLE INSURANCE TRUST
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<NAME> MFS TOTAL RETURN SERIES
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<CIK> 0000918571
<NAME> MFS VARIABLE INSURANCE TRUST
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<CIK> 0000918571
<NAME> MFS VARIABLE INSURANCE TRUST
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<CIK> 0000918571
<NAME> MFS VARIABLE INSURANCE TRUST
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