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MFS-REGISTERED TRADEMARK- WORLD GOVERNMENTS
SERIES-SM-
MFS-REGISTERED TRADEMARK- MONEY MARKET PROSPECTUS
SERIES-SM- May 1, 1995
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MFS-REGISTERED TRADEMARK- VARIABLE INSURANCE TRUST-SM-
500 BOYLSTON STREET, BOSTON, MASSACHUSETTS 02116 (617) 954-5000
MFS Variable Insurance Trust (the "Trust") is an open-end management investment
company offering insurance company separate accounts a selection of investment
vehicles for variable annuity and variable life insurance contracts (the
"Contracts"). The Trust has twelve separate portfolios or series, two of which
are offered pursuant to this Prospectus:
-- MFS WORLD GOVERNMENTS SERIES (THE "WORLD GOVERNMENTS SERIES") is a
non-diversified series of the Trust. The investment objective of the World
Governments Series is to seek preservation and growth of capital, together
with moderate current income.
-- MFS MONEY MARKET SERIES (THE "MONEY MARKET SERIES") is a diversified
series of the Trust. The investment objective of the Money Market Series
is to seek as high a level of current income as is considered consistent
with the preservation of capital and liquidity.
The investment advisor and distributor of the World Governments Series and the
Money Market Series (collectively hereinafter referred to as the "Series") are
Massachusetts Financial Services Company and MFS Fund Distributors, Inc.,
respectively, both of which are located at 500 Boylston Street, Boston,
Massachusetts 02116.
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BECAUSE OF ITS INVESTMENT POLICIES PERMITTING INVESTMENT IN FOREIGN SECURITIES,
INVESTMENTS IN THE WORLD GOVERNMENTS SERIES MAY BE SUBJECT TO A GREATER DEGREE
OF RISK THAN INVESTMENTS IN OTHER INVESTMENT COMPANIES WHICH INVEST ENTIRELY IN
DOMESTIC SECURITIES.
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INVESTMENTS IN THE MONEY MARKET SERIES ARE NEITHER INSURED NOR GUARANTEED BY THE
U.S. GOVERNMENT AND THERE IS NO ASSURANCE THAT THE SERIES WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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SHARES OF THE TRUST ARE AVAILABLE AND ARE BEING MARKETED AS A POOLED FUNDING
VEHICLE FOR LIFE INSURANCE COMPANIES WRITING ALL TYPES OF CONTRACTS.
This Prospectus sets forth concisely the information about each Series that a
prospective investor should know before applying for the Contracts offered by
the separate accounts of certain insurance companies ("Participating Insurance
Companies"). Investors are advised to read this Prospectus and the applicable
Contract prospectus carefully and retain them for future reference. If you
require more detailed information, a Statement of Additional Information dated
May 1, 1995, as supplemented from time to time, is available upon request
without charge and may be obtained by calling or by writing to the Shareholder
Servicing Agent. (See back cover for address and phone number.) The Statement of
Additional Information, which is incorporated by reference into this Prospectus,
has been filed with the Securities and Exchange Commission.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
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TABLE OF CONTENTS
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1. Expense Summary............................................................................................ 3
2. Investment Concept of the Trust............................................................................ 3
3. Condensed Financial Information............................................................................ 4
4. Investment Objectives and Policies......................................................................... 5
MFS World Governments Series............................................................................... 5
MFS Money Market Series.................................................................................... 6
5. Investment Techniques...................................................................................... 7
6. Additional Risk Factors.................................................................................... 12
7. Management of the Series................................................................................... 15
8. Information Concerning Shares of Each Series............................................................... 16
Purchases and Redemptions.................................................................................. 16
Net Asset Value............................................................................................ 16
Distributions.............................................................................................. 17
Tax Status................................................................................................. 17
Description of Shares, Voting Rights and Liabilities....................................................... 17
Performance Information.................................................................................... 18
Expenses................................................................................................... 19
Shareholder Communications................................................................................. 19
Appendix A -- Description of Bond Ratings............................................................................. A-1
Appendix B -- Description of Obligations Issued or Guaranteed by U.S. Government Agencies,
Authorities or Instrumentalities.................................................................................... B-1
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1. EXPENSE SUMMARY
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WORLD MONEY
GOVERNMENTS MARKET
SERIES SERIES
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ANNUAL OPERATING EXPENSES (AS PERCENTAGE OF AVERAGE NET ASSETS):
Management Fee............................................................................ .75% .50%
Other Expenses (after fee reduction)...................................................... .25%(1) .10%(2)
--
---
Total Operating Expenses (after fee reduction)............................................ 1.00%(1) .60%(2)
<FN>
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(1) The Adviser has agreed to bear, subject to reimbursement, until December 31, 2004, expenses
of the World Governments Series, such that the Series' aggregate expenses do not exceed
1.00%, on an annualized basis, of its average daily net assets. See "Information Concerning
Shares of Each Series -- Expenses" below. Absent this expense arrangement, "Other Expenses"
and "Total Operating Expenses" would be 0.63% and 1.38%, respectively.
(2) The Adviser has agreed to bear, subject to reimbursement, until December 31, 2004, expenses
of the Money Market Series such that the Series' aggregate operating expenses do not exceed,
on an annualized basis, 0.60% of its average daily net assets. Absent this expense
arrangement, "Other Expenses" and "Total Operating Expenses" would be 2.32% and 2.82%,
respectively. See "Information Concerning Shares of Each Series -- Expenses" below.
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The Series' annual operating expenses do not reflect expenses imposed by
separate accounts of Participating Insurance Companies through which an
investment in a Series is made or their related Contracts. A separate account's
expenses are disclosed in the prospectus through which the Contract relating to
that separate account is offered for sale.
2. INVESTMENT CONCEPT OF THE TRUST
The Trust is an open-end, registered management investment company with twelve
separate series, each of which is a segregated, separately managed portfolio.
The World Governments Series and the Money Market Series are non-diversified and
diversified Series of the Trust, respectively. The Trust was organized as a
business trust under the laws of The Commonwealth of Massachusetts by a
Declaration of Trust dated February 1, 1994.
The Trust offers shares of its twelve series to insurance company separate
accounts that fund Contracts. Separate accounts may purchase or redeem shares at
net asset value without any sales or redemption charge. Fees and charges imposed
by a separate account, however, will affect the actual return to the holder of a
Contract. A separate account may also impose certain restrictions or limitations
on the allocation of purchase payments or Contract value to the Series.
Prospective investors should consult the applicable Contract prospectus for
information regarding fees and expenses of the Contract and separate account and
any applicable restrictions or limitations. The Trust assumes no responsibility
for such prospectuses.
The Trust offers shares of the Series to the separate accounts of Participating
Insurance Companies that are affiliated or unaffiliated ("shared funding"), and
shares of the Series will serve as the underlying investments for both variable
annuity and variable life insurance contracts ("mixed funding"). Due to
differences in tax treatment or other considerations, the interests of various
Contract owners might at some time be in conflict. The Trust currently does not
foresee any such conflict. Nevertheless, the Trust's Board of Trustees 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 thereto. If such a conflict were to occur, one or more separate
accounts of the Participating Insurance Companies might be required to withdraw
its investments in either or both Series. This might force a Series to sell
securities at disadvantageous prices.
Individual Contract holders are not the "shareholders" of the Trust. Rather, the
Participating Insurance Companies and their separate accounts are the
shareholders or investors, although such companies may pass through voting
rights to their Contract holders.
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The Trust's Board of Trustees provides broad supervision over the affairs of the
Trust and the Series. Massachusetts Financial Services Company, a Delaware
corporation ("MFS" or the "Adviser"), is the investment adviser to each Series.
A majority of the Trustees of the Trust are not affiliated with the Adviser. The
Adviser is responsible for the management of the assets of each Series and the
officers of the Trust are responsible for the operations. The Adviser manages
the Series' portfolios from day to day in accordance with the investment
objectives and policies of each Series. The selection of investments and the way
they are managed depend on the conditions and trends in the economy and the
financial marketplaces.
3. CONDENSED FINANCIAL INFORMATION
The following information should be read in conjunction with the World
Governments Series' financial statements included in the Series' Annual Report
to shareholders which is incorporated by reference into the Statement of
Additional Information in reliance upon the report of Deloitte & Touche LLP,
independent certified public accountants, as experts in accounting and auditing.
The Money Market Series of the Trust had not commenced investment operations as
of December 31, 1994.
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YEAR ENDED
WORLD GOVERNMENTS SERIES DECEMBER 31, 1994*
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Per share data (for a share outstanding throughout the period):
Net asset value--beginning of period.............................................................. $ 10.00
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Income from investment operations++
Net investment income**......................................................................... $ 0.17
Net realized and unrealized loss on investments................................................. (0.09)
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Total from investment operations.............................................................. $ 0.08
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Less distributions declared to shareholders-
From net investment income...................................................................... $ (0.17)
In excess of net investment income.............................................................. (0.09)
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Total distributions declared to shareholders.................................................. $ (0.26)
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Net asset value--end of period.................................................................... $ 9.82
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Total return...................................................................................... 0.79%
Ratios (to average net assets)/Supplemental data**:
Expenses........................................................................................ 1.00%+
Net investment income........................................................................... 4.68%+
Portfolio turnover................................................................................ 62%
Net assets at end of period (000 omitted)......................................................... $ 2,881
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+ Annualized.
++ Per share data is based on average shares outstanding.
* For the period from the commencement of investment operations, June 14, 1994 to December 31,
1994.
** The Adviser did not impose a portion of its management fee for the period indicated. If this
fee had been incurred by the Series, the net investment income per share and the ratios
would have been:
Net investment income................................................. $0.16
Ratios (to average net assets):
Expenses............................................................ 1.10%+
Net investment income............................................... 4.58%+
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Total return information does not reflect expenses that apply to the separate
accounts of Participating Insurance Companies or their related Contracts. The
inclusion of these charges would reduce the total return figure for the period
shown.
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4. INVESTMENT OBJECTIVES AND POLICIES
Each Series has different investment objectives which it pursues through
separate investment policies, as described below. The differences in objectives
and policies among the Series can be expected to affect the degree of market and
financial risk to which each Series is subject and the return of each Series.
The investment objectives and policies of each Series may, unless otherwise
specifically stated, be changed by the Board of Trustees of the Trust without a
vote of the shareholders. Any investment involves risk and there is no assurance
that the objectives of any Series will be achieved.
MFS WORLD GOVERNMENTS SERIES -- The World Governments Series' investment
objective is to seek not only preservation, but also growth, of capital,
together with moderate current income.
The World Governments Series seeks to achieve its investment objective through a
professionally managed, internationally diversified portfolio consisting
primarily of debt securities and to a lesser extent equity securities. The
Series attempts to provide investors with an opportunity to enhance the value
and increase the protection of their investment against inflation and otherwise
by taking advantage of investment opportunities in the U.S. as well as in other
countries where opportunities may be more rewarding. It is believed that
diversification of assets on an international basis decreases the degree to
which events in any one country, including the U.S., can affect the entire
portfolio. Although the percentage of the Series' assets invested in securities
issued abroad and denominated in foreign currencies will vary depending on the
state of the economies of the principal countries of the world, their financial
markets and the relationship of their currencies to the U.S. dollar, under
normal conditions the Series' portfolio is internationally diversified. However,
for defensive reasons or during times of international political or economic
uncertainty or turmoil, most or all of the Series' investments may be in the
U.S.
Under normal economic and market conditions, at least 80% of the Series'
portfolio is invested in debt securities, such as bonds, debentures, mortgage
securities, notes, commercial paper, obligations issued or guaranteed by a
government or any of its political subdivisions, agencies or instrumentalities,
certificates of deposit, as well as debt obligations which may have a call on
common stock by means of a conversion privilege or attached warrants. Debt
securities in which the Series may invest may also include zero coupon bonds,
mortgage pass-through securities, collateralized mortgage obligations,
multiclass pass-through securities and stripped mortgage-backed securities. The
Series also may enter into mortgage "dollar roll" transactions. The Series may
invest in indexed securities whose value is linked to foreign currencies,
interest rates, commodities or other financial indicators. (See "Investment
Techniques" below.) The Series may purchase securities that are not registered
under the Securities Act of 1933, as amended (the "1933 Act"), but can be
offered and sold to "qualified institutional buyers" under Rule 144A under the
1933 Act. (See "Additional Risk Factors" below.)
The World Governments Series may write covered put and call options on
securities and purchase put and call options. The Series may also enter into
"yield curve" options. The Series may also enter into futures contracts on fixed
income securities, on foreign currencies and on indices of securities, and may
purchase and write options on such futures contracts. In addition, the Series
may enter into forward foreign currency exchange contracts and options on
foreign currencies. The Series also may enter into interest rate swaps, currency
swaps and other types of available swap agreements. The Series also may purchase
and sell caps, floors and collars. The Series may invest in Brady Bonds. (See
"Investment Techniques" below.)
The World Governments Series may invest in American Depository Receipts
("ADRs"). The Series may also invest up to 100% (and expects generally to invest
up to 80%) of its total assets in foreign securities, including emerging market
securities (not including ADRs). See "Investment Techniques" and "Additional
Risk Factors" below. The Adviser will determine the amount of the World
Governments Series' assets to be invested in the United States and the amount to
be invested abroad. The U.S. assets will be invested in high quality debt
securities and the remainder of the assets will be diversified among countries
where opportunities for total return are expected to be most attractive. It is
currently expected that investments within foreign countries will be primarily
in government securities to minimize credit risks. The Series will not invest
25% or more of the value of its assets in the securities of any one foreign
government. The portfolio will be managed actively and the asset allocations
modified as the Adviser deems necessary.
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The World Governments Series will purchase non-dollar securities denominated in
the currency of countries where the interest rate environment as well as the
general economic climate provide an opportunity for declining interest rates and
currency appreciation. If interest rates decline, such non-dollar securities
will appreciate in value. If the currency also appreciates against the dollar,
the total investment in such non-dollar securities would be enhanced further.
Conversely, a rise in interest rates or decline in currency exchange rates would
adversely affect the Series' return. Investments in non-dollar denominated
securities are evaluated primarily on the strength of a particular currency
against the dollar and on the interest rate climate of that country. Currency is
judged on the basis of fundamental economic criteria (E.G., relative inflation
levels and trends, growth rate forecasts, balance of payments status, and
economic policies) as well as technical and political data. In addition to the
foregoing, interest rates are evaluated on the basis of differentials or
anomalies that may exist between different countries. The Series may hold
foreign currency received in connection with investments in foreign securities
and in anticipation of purchasing foreign securities. (See "Additional Risk
Factors" below.)
The phrase "preservation of capital" when applied to a domestic investment
company is generally understood to imply that the portfolio is invested in very
low risk securities and that the major risk is loss of purchasing power through
the effects of inflation or major changes in interest rates. However, while the
World Governments Series invests in securities which are believed to have
minimal credit risk, an error of judgment in selecting a currency or an interest
rate environment could result in a loss of capital.
It is contemplated that the World Governments Series' long-term debt investments
will consist primarily of securities which are believed by the Adviser to be of
relatively high quality. If after the Series purchases such a security, the
quality of the security deteriorates significantly, the security will be sold
only if the Adviser believes it is advantageous to do so.
MFS MONEY MARKET SERIES -- The Money Market Series' investment objective is to
seek as high a level of current income as is considered consistent with the
preservation of capital and liquidity.
The Money Market Series seeks to achieve its investment objective by investing
primarily (I.E., at least 80% of its assets under normal circumstances) in the
following instruments:
(a) United States Government Securities, including: (1) U.S. Treasury
obligations, which differ only in their interest rates, maturities and times
of issuance; U.S. Treasury bills (maturities of one year or less); U.S.
Treasury notes (maturities of one to ten years); and U.S. Treasury bonds
(generally maturities of greater than ten years), all of which are backed by
the full faith and credit of the U.S. Government; and (2) obligations issued
or guaranteed by U.S. Government agencies, authorities or instrumentalities,
some of which are backed by the full faith and credit of the U.S. Treasury,
E.G., direct pass-through certificates of the Government National Mortgage
Association ("GNMA"); some of which are supported by the right of the issuer
to borrow from the U.S. Government, E.G., obligations of Federal Home Loan
Banks; and some of which are backed only by the credit of the issuer itself,
E.G., obligations of the Student Loan Marketing Association (collectively,
"U.S. Government Securities," which term also includes interests in trusts or
other entities representing interests in obligations that are backed by the
full faith and credit of the U.S. Government or are issued or guaranteed by
the U.S. Government, its agencies, authorities or instrumentalities) (for a
description of U.S. Government Securities, see Appendix B to the Prospectus),
and in repurchase agreements collateralized by U.S. Government Securities;
(b) obligations of banks (including certificates of deposit and bankers'
acceptances) which at the date of investment have capital, surplus, and
undivided profits (as of the date of their most recently published financial
statements) in excess of $100,000,000; and obligations of other banks or
savings and loan associations if such obligations are insured by the Federal
Deposit Insurance Corporation, provided that not more than 10% of the Series'
total assets will be invested in such insured obligations;
(c) commercial paper which at the date of investment is rated A-1 by
Standard & Poor's Rating Group ("S&P") or by Fitch Investor Service ("Fitch")
or P-1 by Moody's Investor Service, Inc. ("Moody's"), or, if not rated, is
issued or
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guaranteed as to payment of principal and interest by companies which at the
date of investment have an outstanding debt issue rated AA or better by S&P or
by Fitch or Aa or better by Moody's (for a description of these ratings, see
Appendix A to this Prospectus); and
(d) short-term (maturing in 13 months or less) corporate obligations which
at the date of investment are rated AA or better by S&P or by Fitch or Aa or
better by Moody's.
The Money Market Series may also invest up to 20% of its total assets in debt
instruments not specifically described in (a) through (d) above, provided that
such instruments are deemed by the Trustees of the Trust to be of comparable
high quality and liquidity and provided that such investments are in accordance
with applicable law. The Money Market Series may invest its assets in the
securities of foreign issuers and in the securities of foreign branches of U.S.
banks such as negotiable certificates of deposit (Eurodollars). Since the
portfolio of the Series may contain such securities, an investment in the Series
may involve a greater degree of risk than an investment in a fund which invests
only in debt obligations of U.S. domestic issuers, due to the possibility that
there may be less publicly available information, more volatile markets, less
securities regulation, less favorable tax provisions, war or expropriation. (See
"Additional Risk Factors" below.)
In addition, the Money Market Series may invest up to 75% of its assets in all
finance companies as a group, all banks and bank holding companies as a group
and all utility companies as a group when, in the opinion of management, yield
differentials and money market conditions suggest such investments are advisable
and when cash is available for such investments and instruments are available
for purchase which fulfill the Series' objective in terms of quality and
marketability.
All the assets of the Money Market Series will be invested in obligations which
mature in 13 months or less and substantially all of these investments will be
held to maturity; however, securities collateralizing repurchase agreements may
have maturities in excess of 13 months. The Money Market Series will, to the
extent feasible, make portfolio investments primarily in anticipation of or in
response to changing economic and money market conditions and trends. Currently,
the dollar weighted average maturity of the investments of the Series may not
exceed 90 days.
5. INVESTMENT TECHNIQUES
LENDING OF PORTFOLIO SECURITIES: The World Governments Series may seek to
increase its income by lending portfolio securities. Such loans will usually be
made to member firms (and subsidiaries thereof) of the New York Stock Exchange
(the "Exchange") and to member banks of the Federal Reserve System, and would be
required to be secured continuously by collateral in cash, cash equivalents or
U.S. Treasury securities maintained on a current basis at an amount at least
equal to the market value of the securities loaned. If the Adviser determines to
make securities loans, it is intended that the value of the securities loaned
would not exceed 25% of the value of the net assets of the World Governments
Series.
EMERGING MARKETS SECURITIES: The World Governments Series may invest in fixed
income securities of issuers (including foreign governments and their
subdivisions, agencies or instrumentalities) located in emerging markets.
Emerging markets include any country: (i) having an "emerging stock market" as
defined by the International Finance Corporation; (ii) with low-to middle-income
economies according to the International Bank for Reconstruction and Development
(the World Bank); (iii) listed in World Bank publications as developing; or (iv)
determined by MFS to be an emerging market as defined above. The World
Governments Series may invest in fixed income securities of: (i) foreign
governments or any of their political subdivisions, agencies or
instrumentalities; (ii) companies the principal securities trading market for
which is an emerging market country; (iii) companies organized under the laws
of, and with a principal office in, an emerging market country; (iv) companies
whose principal activities are located in emerging market countries; or (v)
companies whose securities are traded in any market that derive 50% or more of
their total revenue from either goods or services produced in an emerging market
or sold in an emerging market.
BRADY BONDS: The World Governments 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
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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, Ecuador, Mexico, Nigeria, the Philippines, Poland, Uruguay and
Venezuela. Brady Bonds have been issued only recently, and for that reason do
not have a long payment history. Brady Bonds may be collateralized or
uncollateralized, are issued in various currencies (but primarily the U.S.
dollar) and are actively traded in over-the-counter secondary markets. U.S.
dollar-denominated, collateralized Brady Bonds, which may be fixed-rate bonds or
floating-rate bonds, are generally collateralized in full as to principal by
U.S. Treasury zero coupon bonds having the same maturity as the bonds. Brady
Bonds are often viewed as having three or four valuation components: the
collateralized repayment of principal at final maturity; the collateralized
interest payments; the uncollateralized interest payments; and any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constituting the "residual risk"). In light of the residual risk of
Brady Bonds and the history of defaults of countries issuing Brady Bonds with
respect to commercial bank loans by public and private entities, investments in
Brady Bonds may be viewed as speculative.
REPURCHASE AGREEMENTS: Each of the Series may enter into repurchase agreements
in order to earn additional income on available cash or as a temporary defensive
measure. Under a repurchase agreement, a Series acquires securities subject to
the seller's agreement to repurchase at a specified time and price. If the
seller becomes subject to a proceeding under the bankruptcy laws or its assets
are otherwise subject to a stay order, the Series' right to liquidate the
securities may be restricted (during which time the value of the securities
could decline). As discussed in the Statement of Additional Information, each
Series has adopted certain procedures intended to minimize any risk.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: The World Governments Series may enter into
mortgage "dollar roll" transactions with selected banks and broker-dealers
pursuant to which the Series sells mortgage-backed securities for delivery in
the future (generally within 30 days) and simultaneously contracts to repurchase
substantially similar (same type, coupon and maturity) securities on a specified
future date. The Series will only enter into covered rolls. A "covered roll" is
a specific type of dollar roll for which there is an offsetting cash position or
a cash equivalent security position which matures on or before the forward
settlement date of the dollar roll transaction. In the event that the party with
whom the Series contracts to replace substantially similar securities on a
future date fails to deliver such securities, the Series may not be able to
obtain such securities at the price specified in such contract and thus may not
benefit from the price differential between the current sales price and the
repurchase price.
ZERO COUPON BONDS: The World Governments Series may invest in zero coupon bonds.
Zero coupon bonds are debt obligations which are issued or purchased at a
significant discount from face value. The discount approximates the total amount
of interest the bonds will accrue and compound over the period until maturity or
the first interest payment date at a rate of interest reflecting the market rate
of the security at the time of issuance. Zero coupon bonds do not require the
periodic payment of interest. Such investments may experience greater volatility
in market value due to changes in interest rates than debt obligations which
make regular payments of interest. The Series will accrue income on such
investments for tax and accounting purposes, as required, which is distributable
to shareholders and which, because no cash is received at the time of accrual,
may require the liquidation of other portfolio securities to satisfy the Series'
distribution obligations.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES: The
World Governments Series may invest a portion of its assets in collateralized
mortgage obligations or "CMOs," which are debt obligations collateralized by
mortgage loans or mortgage pass-through securities. Typically, CMOs are
collateralized by certificates issued by GNMA, the Federal National Mortgage
Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"),
but also may be collateralized by whole loans or private mortgage pass-through
securities (such collateral collectively referred to as "Mortgage Assets"). The
Series may also invest a portion of its assets in multiclass pass-through
securities which are interests in a trust composed of Mortgage Assets. CMOs
(which include multiclass pass-through securities) may be issued by agencies,
authorities or instrumentalities of the U.S. Government or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, mortgage banks, commercial banks, investment banks and special
purpose
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subsidiaries of the foregoing. Payments of principal of and interest on the
Mortgage Assets, and any reinvestment income thereon, provide the funds to pay
debt service on the CMOs or make scheduled distributions on the multiclass
pass-through securities. In a CMO, the series of bonds or certificates are
usually issued in multiple classes with different maturities. Each class of
CMOs, often referred to as a "tranche", is issued at a specific fixed or
floating coupon rate and has a stated maturity or final distribution date.
Principal prepayments on the Mortgage Assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution dates,
resulting in a loss of all or part of the premium if any has been paid. Certain
classes of CMOs have priority over others with respect to the receipt of
prepayments on the mortgages. Therefore, depending on the type of CMOs in which
the Series invests, the investment may be subject to a greater or lesser risk of
prepayments than other types of mortgage-related securities.
The World Governments Series may also invest in parallel pay CMOs and Planned
Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. PAC
Bonds generally require payments of a specified amount of principal on each
payment date. PAC Bonds are always parallel pay CMOs with the required principal
payment on such securities having the highest priority after interest has been
paid to all classes. For a further description of CMOs, parallel pay CMOs and
PAC Bonds and the risks related to transactions therein, see the Statement of
Additional Information.
STRIPPED MORTGAGE-BACKED SECURITIES: The World Governments Series may also
invest a portion of its assets in stripped mortgage-backed securities ("SMBS"),
which are derivative multiclass mortgage securities usually structured with two
classes that receive different proportions of interest and principal
distributions from an underlying pool of mortgage assets. For a further
description of SMBS and the risks related to transactions therein, see the
Statement of Additional Information.
MORTGAGE PASS-THROUGH SECURITIES: The World Governments Series may invest in
mortgage pass-through securities. Mortgage pass-through securities are
securities representing interests in "pools" of mortgage loans. Monthly payments
of interest and principal by the individual borrowers on mortgages are passed
through to the holders of the securities (net of fees paid to the issuer or
guarantor of the securities) as the mortgages in the underlying mortgage pools
are paid off. Payment of principal and interest on some mortgage pass-through
securities (but not the market value of the securities themselves) may be
guaranteed by the full faith and credit of the U.S. Government (in the case of
securities guaranteed by GNMA); or guaranteed by U.S. Government-sponsored
corporations (such as FNMA or FHLMC, which are supported only by the
discretionary authority of the U.S. Government to purchase the agency's
obligations). Mortgage pass-through securities may also be issued by
non-governmental issuers (such as commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers and other
secondary market issuers). See the Statement of Additional Information for a
further discussion of these securities.
INDEXED SECURITIES: The World Governments Series may invest in indexed
securities whose value is linked to foreign currencies, interest rates
commodities, indices or other financial indicators. Most indexed securities are
short to intermediate fixed-income securities whose values at maturity and/or
interest rates rise or fall according to the change in one or more specified
underlying instruments. Indexed securities may be positively or negatively
indexed (I.E., their value may increase or decrease if the underlying instrument
appreciates), and may have return characteristics similar to direct investments
in the underlying instrument or to one or more options on the underlying
instrument. Indexed securities may be more volatile than the underlying
instrument itself.
SWAPS AND RELATED TRANSACTIONS: As one way of managing its exposure to different
types of investments, the World Governments Series may enter into interest rate
swaps, currency swaps and other types of available swap agreements, such as
caps, collars and floors. Swaps involve the exchange by the Series with another
party of cash payments based upon different interest rate indexes, currencies,
and other prices or rates, such as the value of mortgage prepayment rates. For
example, in the typical interest rate swap, the Series might exchange a sequence
of cash payments based on a floating rate index for cash payments based on a
fixed rate. Payments made by both parties to a swap transaction are based on a
principal amount determined by the parties.
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The World Governments Series may also purchase and sell caps, floors and
collars. In a typical cap or floor agreement, one party agrees to make payments
only under specified circumstances, usually in return for payment of a fee by
the counterparty. For example, the purchase of an interest rate cap entitles the
buyer, to the extent that a specified index exceeds a predetermined interest
rate, to receive payments of interest on a contractually-based principal amount
from the counterparty selling such interest rate cap. The sale of an interest
rate floor obligates the seller to make payments to the extent that a specified
interest rate falls below an agreed-upon level. A collar arrangement combines
elements of buying a cap and selling a floor.
Swap agreements will tend to shift the Series' investment exposure from one type
of investment to another. For example, if the Series agreed to exchange payments
in dollars for payments in foreign currency, in each case based on a fixed rate,
the swap agreement would tend to decrease the Series' exposure to U.S. interest
rates and increase its exposure to foreign currency and interest rates. Caps and
floors have an effect similar to buying or writing options. Depending on how
they are used, swap agreements may increase or decrease the overall volatility
of the Series' investments and its share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on the
Series' performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. The Series may also suffer losses
if it is unable to terminate outstanding swap agreements or reduce its exposure
through offsetting transactions.
Swaps, caps, floors and collars are highly specialized activities which involve
certain risks. See the Statement of Additional Information for further
information on, and the risks involved in, these activities.
OPTIONS ON SECURITIES: The World Governments Series may write (sell) covered put
and call options and purchase put and call options on securities. The Series
will write options on securities for the purpose of increasing its return and/or
to protect the value of its portfolio. In particular, where the Series writes an
option that expires unexercised or is closed out by the Series at a profit, it
will retain the premium paid for the option which will increase its gross income
and will offset in part the reduced value of the portfolio security underlying
the option, or the increased cost of portfolio securities to be acquired. In
contrast, however, if the price of the underlying security moves adversely to
the Series' position, the option may be exercised and the Series will be
required to purchase or sell the underlying security at a disadvantageous price,
which may only be partially offset by the amount of the premium. The Series may
also write combinations of put and call options on the same security, known as
"straddles." Such transactions can generate additional premium income but also
present increased risk.
By writing a call option on a security, the Series limits its opportunity to
profit from any increase in the market value of the underlying security, since
the holder will usually exercise the call option when the market value of the
underlying security exceeds the exercise price of the call. However, the Series
retains the risk of depreciation in value of securities on which it has written
call options.
The Series may also purchase put or call options in anticipation of market
fluctuations which may adversely affect the value of its portfolio or the prices
of securities that the Series wants to purchase at a later date. In the event
that the expected market fluctuations occur, the Series may be able to offset
the resulting adverse effect on its portfolio, in whole or in part, through the
options purchased. The premium paid for a put or call option plus any
transaction costs will reduce the benefit, if any, realized by the Series upon
exercise or liquidation of the option, and, unless the price of the underlying
security changes sufficiently, the option may expire without value to the
Series.
"YIELD CURVE" OPTIONS: The World Governments Series may enter into options on
the yield "spread," or yield differential, between two securities, a transaction
referred to as a "yield curve" option, for hedging and non-hedging (an effort to
increase current income) purposes. In contrast to other types of options, a
yield curve option is based on the difference between the yields of designated
securities rather than the actual prices of the individual securities, and is
settled through cash payments. Accordingly, a yield curve option is profitable
to the holder if this differential widens (in the case of a call) or narrows (in
the
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case of a put), regardless of whether the yields of the underlying securities
increase or decrease. Yield curve options written by the Series will be covered
as described in the Statement of Additional Information. The trading of yield
curve options is subject to all the risks associated with trading other types of
options, as discussed below under "Additional Risk Factors" and in the Statement
of Additional Information. In addition, such options present risks of loss even
if the yield on one of the underlying securities remains constant, if the spread
moves in a direction or to an extent which was not anticipated.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS: The World Governments Series
may purchase and sell Futures Contracts on foreign or domestic fixed income
securities or indices of such securities, including municipal bond indices and
any other indices of foreign or domestic fixed income securities that may become
available for trading. The Series may also purchase and write options on such
Futures Contracts ("Options on Futures Contracts"). The World Governments Series
may purchase and sell Futures Contracts on foreign currencies or indices of
foreign currencies. The Series may also purchase and write Options on such
Futures Contracts.
Such transactions will be entered into for hedging purposes or for non-hedging
purposes to the extent permitted by applicable law. The Series will incur
brokerage fees when it purchases and sells Futures Contracts, and will be
required to maintain margin deposits. In addition, Futures Contracts entail
risks. Although the Adviser believes that use of such contracts will benefit the
Series, if its investment judgment about the general direction of exchange rates
or the stock market is incorrect, the Series' overall performance may be poorer
than if it had not entered into any such contract and the Series may realize a
loss. The Series will not enter into any Futures Contract if immediately
thereafter the value of all open positions in Futures Contracts held by such
Series would exceed 50% of the value of its total assets.
Purchases of Options on Futures Contracts may present less risk in hedging the
Series' portfolio than the purchase or sale of the underlying Futures Contracts
since the potential loss is limited to the amount of the premium plus related
transaction costs, although it may be necessary to exercise the option to
realize any profit, which results in the establishment of a futures position.
The writing of Options on Futures Contracts, however, does not present less risk
than the trading of Futures Contracts and will constitute only a partial hedge,
up to the amount of the premium received. In addition, if an option is
exercised, the Series may suffer a loss on the transaction.
Futures Contracts and Options on Futures Contracts that are entered into by the
Series will be traded on U.S. and foreign exchanges.
FORWARD CONTRACTS: The World Governments Series may enter into forward foreign
currency exchange contracts for the purchase or sale of a fixed quantity of a
foreign currency at a future date ("Forward Contracts"). The Series may enter
into Forward Contracts for hedging purposes and for non-hedging purposes. By
entering into transactions in Forward Contracts for hedging purposes, the Series
may be required to forego the benefits of advantageous changes in exchange rates
and, in the case of Forward Contracts entered into for non-hedging purposes, the
Series may sustain losses which will reduce its gross income. Such transactions,
therefore, could be considered speculative. Forward Contracts are traded
over-the-counter and not on organized commodities or securities exchanges. As a
result, Forward Contracts operate in a manner distinct from exchange-traded
instruments, and their use involves certain risks beyond those associated with
transactions in Futures Contracts or options traded on exchanges. The Series may
choose to, or be required to, receive delivery of the foreign currencies
underlying Forward Contracts it has entered into. Under certain circumstances,
such as where the Adviser believes that the applicable exchange rate is
unfavorable at the time the currencies are received or the Adviser anticipates,
for any other reason, that the exchange rate will improve, the Fund may hold
such currencies for an indefinite period of time. The Series may also enter into
a Forward Contract on one currency to hedge against risk of loss arising from
fluctuations in the value of a second currency (referred to as a "cross hedge")
if, in the judgment of the Adviser, a reasonable degree of correlation can be
expected between movements in the values of the two currencies. The Series has
established procedures consistent with statements of the Securities and Exchange
Commission (the "SEC") and its staff regarding the use of Forward Contracts by
registered investment companies, which requires use of segregated assets or
"cover" in connection with the purchase and sale of such contracts.
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<PAGE>
OPTIONS ON FOREIGN CURRENCIES: The World Governments Series may also purchase
and write options on foreign currencies ("Options on Foreign Currencies") for
the purpose of protecting against declines in the dollar value of portfolio
securities and against increases in the dollar cost of securities to be
acquired. As in the case of other types of options, however, the writing of an
Option on Foreign Currency will constitute only a partial hedge, up to the
amount of the premium received, and the Series may be required to purchase or
sell foreign currencies at disadvantageous exchange rates, thereby incurring
losses. The purchase of an Option on Foreign Currency may constitute an
effective hedge against fluctuations in exchange rates although, in the event of
rate movements adverse to the Series' position, it may forfeit the entire amount
of the premium paid for the option plus related transaction costs. The Series
may also choose to, or be required to, receive delivery of the foreign
currencies underlying Options on Foreign Currencies it has entered into. Under
certain circumstances, such as where the Adviser believes that the applicable
exchange rate is unfavorable at the time the currencies are received or the
Adviser anticipates, for any other reason, that the exchange rate will improve,
the Series may hold such currencies for an indefinite period of time.
6. ADDITIONAL RISK FACTORS
OPTIONS, FUTURES CONTRACTS AND FORWARD CONTRACTS: Although the World Governments
Series will enter into transactions in options, Futures Contracts, Options on
Futures Contracts, Forward Contracts and Options on Foreign Currencies for
hedging purposes, such transactions nevertheless involve certain risks. For
example, a lack of correlation between the instrument underlying an option or
Futures Contract and the assets being hedged, or unexpected adverse price
movements, could render the Series' hedging strategy unsuccessful and could
result in losses. The Series also may enter into transactions in options,
Futures Contracts, Options on Futures Contracts and Forward Contracts for other
than hedging purposes, which involves greater risk. In particular, such
transactions may result in losses for the Series which are not offset by gains
on other portfolio positions, thereby reducing gross income. In addition,
foreign currency markets may be extremely volatile from time to time. There also
can be no assurance that a liquid secondary market will exist for any contract
purchased or sold, and the Series may be required to maintain a position until
exercise or expiration, which could result in losses. The Statement of
Additional Information contains a description of the nature and trading
mechanics of options, Futures Contracts, Options on Futures Contracts, Forward
Contracts and Options on Foreign Currencies, and includes a discussion of the
risks related to transactions therein.
Transactions in Forward Contracts may be entered into only in the
over-the-counter market. Futures Contracts and Options on Futures Contracts may
be entered into on U.S. exchanges regulated by the Commodity Futures Trading
Commission and on foreign exchanges. In addition, the securities and indexes
underlying options, Futures Contracts and Options on Futures Contracts traded by
the Series will include both domestic and foreign securities.
FOREIGN SECURITIES: The Money Market Series may invest in securities of foreign
issuers and in securities of foreign branches of U.S. banks such as negotiable
certificates of deposit (Eurodollars). The World Governments Series may invest
in dollar-denominated and non-dollar/denominated foreign securities. Investing
in securities of foreign issuers generally involves risks not ordinarily
associated with investing in securities of domestic issuers. These include
changes in currency rates, exchange control regulations, governmental
administration or economic or monetary policy (in the 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 volatile and less
subject to government supervision than in the United States. Investments in
foreign countries could be affected by other factors including expropriation,
confiscatory taxation and potential difficulties in enforcing contractual
obligations and could be subject to extended settlement periods. The World
Governments Series may hold foreign currency received in connection with
investments in foreign securities when, in the judgment of the Adviser, it would
be beneficial to convert such
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currency into U.S. dollars at a later date, based on anticipated changes in the
relevant exchange rate. The World Governments Series may also hold foreign
currency in anticipation of purchasing foreign securities. See the Statement of
Additional Information for further discussion of foreign securities and the
holding of foreign currency, as well as the associated risks.
AMERICAN DEPOSITARY RECEIPTS: The World Governments Series may invest in ADRs
which are certificates issued by a U.S. depository (usually a bank) and
represent a specified quantity of shares of an underlying non-U.S. stock on
deposit with a custodian bank as collateral. Because ADRs trade on United States
securities exchanges, the Adviser does not treat them as foreign securities.
However, they are subject to many of the risks of foreign securities such as
changes in exchange rates and more limited information about foreign issuers.
EMERGING MARKET SECURITIES: The World Governments Series may invest in emerging
markets. In addition to the general risks of investing in foreign securities,
investments in emerging markets involve special risks. Securities of many
issuers in emerging markets may be less liquid and more volatile than securities
of comparable domestic issuers. These securities may be considered speculative
and, while generally offering higher income and the potential for capital
appreciation, may present significantly greater risk. Emerging markets may have
different clearance and settlement procedures, and in certain markets there have
been times when settlements have been unable to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions.
Delays in settlement could result in temporary periods when a portion of the
assets of the Series is uninvested and no return is earned thereon. The
inability of the Series to make intended security purchases due to settlement
problems could cause the Series to miss attractive investment opportunities.
Inability to dispose of portfolio securities due to settlement problems could
result either in losses to the Series due to subsequent declines in value of the
portfolio securities or, if the Series has entered into a contract to sell the
security, possible liability to the purchaser. Certain markets may require
payment for securities before delivery. Securities prices in emerging markets
can be significantly more volatile than in the more developed nations of the
world, reflecting the greater uncertainties of investing in less established
markets and economies. In particular, countries with emerging markets may have
relatively unstable governments, present the risk of nationalization of
businesses, restrictions on foreign ownership, or prohibitions of repatriation
of assets, and may have less protection of property rights than more developed
countries. The economies of countries with emerging markets may be predominantly
based on only a few industries, may be highly vulnerable to changes in local or
global trade conditions, and may suffer from extreme and volatile debt burdens
or inflation rates. Local securities markets may trade a small number of
securities and may be unable to respond effectively to increases in trading
volume, potentially making prompt liquidation of substantial holdings difficult
or impossible at times. Securities of issuers located in countries with emerging
markets may have limited marketability and may be subject to more abrupt or
erratic movements.
Certain emerging markets may require governmental approval for the repatriation
of investment income, capital or the proceeds of sales of securities by foreign
investors. In addition, if a deterioration occurs in an emerging market's
balance of payments or for other reasons, a country could impose temporary
restrictions on foreign capital remittances. The Series could be adversely
affected by delays in, or a refusal to grant, any required governmental approval
for repatriation of capital, as well as by the application to the Series of any
restrictions on investments.
Investment in certain foreign emerging market debt obligations may be restricted
or controlled to varying degrees. These restrictions or controls may at times
preclude investment in certain foreign emerging market debt obligations and
increase the expenses of the Series.
RESTRICTED SECURITIES: The World Governments Series and the Money Market Series
may purchase securities that are not registered under the 1933 Act ("restricted
securities"), including those that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the 1933 Act ("Rule 144A
securities"). The Trust's Board of Trustees determines, based upon a continuing
review of the trading markets for a specific Rule 144A security, whether such
security is illiquid and thus subject to the Series' limitation on investing not
more than 15% of its net assets (not more than 10% of its net assets in the case
of the Money Market Series) in illiquid investments, or liquid and thus not
subject to such limitation. The Board of Trustees has adopted guidelines and
delegated to MFS the daily function of determining and monitoring the liquidity
of Rule
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144A securities. The Board, however, will retain sufficient oversight and be
ultimately responsible for the determinations. The Board will carefully monitor
each Series' investments in Rule 144A securities, focusing on such important
factors, among others, as valuation, liquidity and availability of information.
This investment practice could have the effect of increasing the level of
illiquidity in the Series to the extent that qualified institutional buyers
become for a time uninterested in purchasing Rule 144A securities held in the
Series' portfolio.
NON-DIVERSIFICATION: The World Governments Series is "non-diversified," as that
term is defined in the Investment Company Act of 1940 ( the "1940 Act"), but
intends to qualify as a "regulated investment company" ("RIC") for federal
income tax purposes. This means, in general, that although more than 5% of the
Series' total assets may be invested in the securities of one issuer (including
a foreign government), at the close of each quarter of its taxable year the
aggregate amount of such holdings may not exceed 50% of the value of its total
assets, and no more than 25% of the value of its total assets may be invested in
the securities of a single issuer. To the extent that the World Governments
Series at times may hold the securities of a smaller number of issuers than if
it were "diversified" (as defined in the 1940 Act), the Series will at such
times be subject to greater risk with respect to its portfolio securities than a
Series that invests in a broader range of securities, because changes in the
financial condition or market assessment of a single issuer may cause greater
fluctuations in the Series' total return and the net asset value of its shares.
-------------------
SHORT-TERM INVESTMENTS FOR DEFENSIVE PURPOSES -- During periods of unusual
market conditions when the Adviser believes that investing for defensive
purposes is appropriate, or in order to meet anticipated redemption requests, a
large portion or all of the assets of each Series may be invested in cash
(including, with respect to the World Governments Series only, 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. See Appendix B to this Prospectus
for a description of U.S. Government obligations and certain short-term
investments.
PORTFOLIO TRADING
Each Series intends to manage its portfolio by buying and selling securities, as
well as holding securities to maturity, to help attain its investment objective
and policies.
Each Series will engage in portfolio trading if it believes a transaction, net
of costs (including custodian charges), will help in attaining its investment
objective. In trading portfolio securities, a Series seeks to take advantage of
market developments, yield disparities and variations in the creditworthiness of
issuers. For a description of the strategies which may be used by each Series in
trading portfolio securities, see "Portfolio Transactions and Brokerage
Commissions" in the Statement of Additional Information. Because the World
Governments Series is expected to have a portfolio turnover rate of over 100%,
transaction costs incurred by the Series and the realized capital gains and
losses of such Series may be greater than that of a Series with a lesser
portfolio turnover rate.
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain, and maintain the availability of,
execution at the most favorable prices and in the most effective manner
possible. Consistent with the foregoing primary consideration, the Rules of Fair
Practice of the National Association of Securities Dealers, Inc. (the "NASD")
and such other policies as the Board of Trustees of the Trust may determine, the
Adviser may consider sales of Contracts for which the Trust is an investment
option, together with sales of shares of other investment company clients of MFS
Fund Distributors, Inc., the distributor of shares of the Trust and of the MFS
Family of Funds, as a factor in the selection of broker-dealers to execute each
Series' portfolio transactions. From time to time the Adviser may direct certain
portfolio transactions to broker-dealer firms which, in turn, have agreed to pay
a portion of the Series' operating expenses (e.g. fees charged by the custodian
of the Series' assets). For a further discussion of portfolio trading, see the
Statement of Additional Information.
-------------------
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The Statement of Additional Information includes a discussion of other
investment policies and listing of specific investment restrictions which govern
the investment policies of each Series. The specific investment restrictions
listed in the Statement of Additional Information may be changed without
shareholder approval unless indicated otherwise (see the Statement of Additional
Information). The Series' investment limitations, policies and rating standards
are adhered to at the time of purchase or utilization of assets; a subsequent
change in circumstances will not be considered to result in a violation of
policy.
7. MANAGEMENT OF THE SERIES
The Trust's Board of Trustees, as part of its overall management responsibility,
oversees various organizations responsible for each Series' day-to-day
management.
INVESTMENT ADVISER -- MFS manages each Series pursuant to an Investment Advisory
Agreement with the Trust on behalf of each Series dated April 14, 1994 (the
"Advisory Agreement"). MFS provides each Series with overall investment advisory
and administrative services, as well as general office facilities. Stephen C.
Bryant, a Senior Vice President of the Adviser, is the World Governments Series'
portfolio manager. Mr. Bryant has been employed by the Adviser since 1987.
Geoffrey L. Kurinsky, a Senior Vice President of the Adviser, is the Money
Market Series' portfolio manager. Mr. Kurinsky has been employed by the Adviser
since 1987. Subject to such policies as the Trustees may determine, MFS makes
investment decisions for each Series. For its services and facilities, MFS
receives a management fee, computed and paid monthly, in an amount equal to the
following annual rates of the average daily net assets of each Series:
<TABLE>
<CAPTION>
PERCENTAGE OF THE
AVERAGE DAILY NET
ASSETS
SERIES OF EACH SERIES
- --------------------------------------------------------------------------------------------- ----------------------
<S> <C>
World Governments Series..................................................................... 0.75%
Money Market Series.......................................................................... 0.50%
</TABLE>
For the World Governments Series' fiscal year ended December 31, 1994, MFS
received management fees under the Advisory Agreement of $7,604, and assumed
$36,473 of the Series' expenses. See "Expenses" below.
MFS or its affiliates will pay a fee to Citicorp Life Insurance Company
("Citicorp") equal, on an annualized basis, to 0.05% of the aggregate net assets
of the Series up to $50 million and 0.10% of the aggregate net assets of the
Series over $50 million attributable to Contracts offered by separate accounts
of Citicorp or its affiliates. Such fee will not be paid by the Series, their
shareholders or by the Contract holders.
MFS also serves as investment adviser to each of the other funds in the MFS
Family of Funds (the "MFS Funds") and to MFS-Registered Trademark- Municipal
Income Trust, MFS Multimarket Income Trust, MFS Government Markets Income Trust,
MFS Intermediate Income Trust, MFS Charter Income Trust, MFS Special Value
Trust, MFS Institutional Trust, MFS Union Standard Trust, MFS/Sun Life Series
Trust, Sun Growth Variable Annuity Fund, Inc. and seven variable accounts, each
of which is a registered investment company established by Sun Life Assurance
Company of Canada (U.S.) ("Sun Life of Canada (U.S.)") in connection with the
sale of Compass-2 and Compass-3 combination fixed/variable annuity contracts.
MFS and its wholly owned subsidiary, MFS Asset Management, Inc., provide
investment advice to substantial private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first open-end mutual fund in the United States, Massachusetts
Investors Trust. Net assets under the management of the MFS organization were
approximately $35 billion on behalf of approximately 1.6 million investor
accounts as of March 31, 1995. As of such date, the MFS organization managed
approximately $12 billion of assets invested in equity securities and
approximately $19.2 billion of assets invested in fixed income securities.
Approximately $2.9 billion of the assets managed by MFS are invested in
securities of foreign issuers and non-U.S. dollar-denominated securities of U.S.
issuers. MFS is a subsidiary of Sun Life of Canada (U.S.), which in turn is a
subsidiary of Sun Life Assurance Company of Canada ("Sun Life"). The Directors
of MFS are A. Keith Brodkin, Jeffrey L. Shames, Arnold D. Scott, John D. McNeil
and John R. Gardner. Mr. Brodkin is the Chairman, Mr. Shames is the President
and
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<PAGE>
Mr. Scott is the Secretary and a Senior Executive Vice President of MFS. Messrs.
McNeil and Gardner are the Chairman and President, respectively, of Sun Life.
Sun Life, a mutual life insurance company, is one of the largest international
life insurance companies and has been operating in the United States since 1895,
establishing a headquarters office here in 1973. The executive officers of MFS
report to the Chairman of Sun Life.
A. Keith Brodkin, the Chairman and a Director of MFS, is the Chairman and
President and a Trustee of the Trust. W. Thomas London, Stephen E. Cavan, James
R. Bordewick, Jr., and James O. Yost, all of whom are officers of MFS, are
officers of the Trust.
From time to time, the Adviser may purchase, redeem and exchange shares of any
Series. The purchase by the Adviser of shares of a Series may have the effect of
lowering that Series' expense ratio, while the redemption by the Adviser of
shares of a Series may have the effect of increasing that Series' expense ratio.
DISTRIBUTOR -- MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary of
MFS, is the distributor of shares of each Series and also serves as distributor
for certain of the other mutual funds managed by MFS.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. (the "Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency,
certain dividend disbursing agency and other services for each Series.
8. INFORMATION CONCERNING SHARES OF EACH SERIES
PURCHASES AND REDEMPTIONS
The separate accounts of the Participating Insurance Companies place orders to
purchase and redeem shares of each Series based on, among other things, the
amount of premium payments to be invested and surrender and transfer requests to
be effected on that day pursuant to Contracts. Orders received by the Trust are
effected on days on which the Exchange is open for trading. For orders received
by the Trust before the close of regular trading on the Exchange (normally 4
p.m. eastern standard time), such purchases and redemptions of the shares of
each Series are effected at the respective net asset values per share determined
as of the close of regular trading on the Exchange on that same day.
Participating Insurance Companies shall be the designee of the Trust for receipt
of purchase and redemption orders from Contract holders and receipt by such
designee shall constitute receipt by the Trust; provided that the Trust receives
notice of such order by 9:30 a.m. eastern standard time on the next following
day on which the Exchange is open for trading. Payment for shares shall be by
federal funds transmitted by wire and must be received by 2:00 p.m. eastern
standard time on the next following day on which the Exchange is open for
trading after the purchase order is received. Redemption proceeds shall be by
federal funds transmitted by wire and shall be sent by 2:00 p.m. eastern
standard time on the next following day on which the Exchange is open for
trading after the redemption order is received. No fee is charged the
shareholders when they redeem Series shares.
The offering of shares of any Series may be suspended for a period of time and
each Series reserves the right to refuse any specific purchase order. Purchase
orders may be refused if, in the Adviser's opinion, they are of a size that
would disrupt the management of a Series. The Trust may suspend the right of
redemption of shares of each Series and may postpone payment for any period: (i)
during which the Exchange is closed other than customary weekend and holiday
closings or during which trading on the Exchange is restricted; (ii) when the
SEC determines that a state of emergency exists which may make payment or
transfer not reasonably practicable; (iii) as the SEC may by order permit for
the protection of the security holders of the Trust; or (iv) at any time when
the Trust may, under applicable laws, rules and regulations, suspend payment on
the redemption of its shares.
Should any conflict between Contract holders arise which would require that a
substantial amount of net assets be withdrawn from any Series, orderly portfolio
management could be disrupted to the potential detriment of such Contract.
NET ASSET VALUE
The net asset value per share of each Series is determined each day during which
the Exchange is open for trading. This determination is made once during each
such day as of the close of regular trading on the Exchange by deducting the
amount
16
<PAGE>
of the Series' liabilities from the value of the Series' assets and dividing the
difference by the number of shares of the Series outstanding. Values of assets
in each Series' portfolio are determined on the basis of their market or other
fair value (amortized cost value in the case of the Money Market Series), as
described in the Statement of Additional Information. All investments, assets
and liabilities are expressed in U.S. dollars based upon current currency
exchange rates.
DISTRIBUTIONS
Substantially all of the World Governments Series' net investment income for any
calendar year is declared as dividends and paid to its shareholders as dividends
on an annual basis. In addition, the Series may make one or more distributions
during the calendar year to its shareholders from any long-term capital gains,
and may also make one or more distributions to its shareholders from short-term
capital gains. In determining the net investment income available for
distribution, the Series may rely on projections of its anticipated net
investment income (which may include short-term capital gains from the sales of
securities or other assets, and, if allowed by the Series' investment
restrictions, premiums from options written), over a longer term, rather than
its actual net investment income for the period.
Substantially all of the Money Market Series' net investment income for any
calendar year is declared as dividends daily and paid to its shareholders as
dividends on a monthly basis. Generally, those dividends are distributed on the
last business day of the month in the form of additional shares of the Money
Market Series at the rate of one share (and fraction thereof) for each dollar
(and fraction thereof) of dividend income or, at the election of the
shareholder, in cash. Shares purchased become entitled to dividends declared as
of the first day following the date of investment.
Shareholders of either Series may elect to receive dividends and capital gain
distributions in either cash or additional shares.
TAX STATUS
Each Series of the Trust is treated as a separate entity for federal income tax
purposes. In order to minimize the taxes each Series would otherwise be required
to pay, each Series intends to qualify each year as a "regulated investment
company" under Subchapter M of the Internal Revenue Code of 1986, as amended
("the Code"), and to make distributions to its shareholders in accordance with
the timing requirements imposed by the Code. It is not expected that either
Series will be required to pay entity level federal income or excise taxes.
Shares of the Series are offered only to the Participating Insurance Companies'
separate accounts that fund Contracts. See the applicable Contract prospectus
for a discussion of the federal income tax treatment of (1) the separate
accounts that purchase and hold Series shares and (2) the holders of the
Contracts that are funded through those accounts. In addition to the
diversification requirements of Subchapter M of the Code, each Series also
intends to diversify its assets as required by Code Section 817(h)(1), and the
regulations thereunder. See also "Tax Status" in the Statement of Additional
Information.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
Each of the twelve series of the Trust currently has one class of shares,
entitled Shares of Beneficial Interest (without par value). The Trust has
reserved the right to create and issue additional classes and series of shares,
in which case each class of shares of a series would participate equally in the
earnings, dividends and assets attributable to that class of that particular
series. Shareholders are entitled to one vote for each share held, and shares of
each Series are entitled to vote separately to approve investment advisory
agreements or changes in investment restrictions with respect to that Series,
but shares of all Series vote together in the election of Trustees and selection
of accountants. Additionally, each Series will vote separately on any other
matter that affects solely that Series, but will otherwise vote together with
all other Series on all other matters. The Trust does not intend to hold annual
shareholder meetings. The Declaration of Trust provides that a Trustee may be
removed from office in certain instances. See "Description of Shares, Voting
Rights and Liabilities" in the Statement of Additional Information.
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<PAGE>
Each share of a Series represents an equal proportionate interest in the Series
with each other share, subject to the liabilities of the particular Series.
Shares have no pre-emptive or conversion rights. Shares are fully paid and
non-assessable. Should a Series be liquidated, shareholders are entitled to
share PRO RATA in the net assets available for distribution to shareholders.
Shares will remain on deposit with the Shareholder Servicing Agent and
certificates will not be issued.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which both inadequate
insurance existed (E.G., fidelity bonding and omission insurance) and the Trust
itself was unable to meet its obligations.
As of December 31, 1994, Century Life of America, on behalf of its Century
Variable Annuity Account, 2000 Heritage Way, Waverly, Iowa 50677-9208 was the
owner of approximately 69% of the outstanding shares of the World Governments
Series. As of December 31, 1994, Massachusetts Financial Services Company Inc.,
500 Boylston Street, Boston, Massachusetts 02116-3740, was the owner of
approximately 30% of the outstanding shares of the World Governments Series.
PERFORMANCE INFORMATION
Each Series' performance may be quoted in advertising in terms of yield and,
with respect to the World Governments Series only, total return. Performance is
based on historical results and is not intended to indicate future performance.
Performance quoted for a Series includes the effect of deducting that Series'
expenses, but may not include charges and expenses attributable to any
particular insurance product. Excluding these charges from quotations of a
Series' performance has the effect of increasing the performance quoted.
Performance for a Series will vary based on, among other things, changes in
market conditions, the level of interest rates and the level of the Series'
expenses. For further information about the World Governments Series'
performance for the fiscal year ended December 31, 1994, please see the Series'
Annual Report. A copy of this Annual Report may be obtained without charge by
contacting the Shareholder Servicing Agent (see back cover for address and phone
number.)
MONEY MARKET SERIES: From time to time, quotations of the Money Market Series'
"yield" and "effective yield" may be included in advertisements, sales
literature or reports to shareholders or prospective investors. The yield of the
Money Market Series refers to the net investment income generated by the Series
over a specified seven-day period (the ending date of which will be stated).
Included in "net investment income" is the amortization of market premium or
accretion of market and original issue discount. This income is then
"annualized." That is, the amount of income generated by the Series during that
week is assumed to be generated during each week over a 365 day period and is
shown as a percentage. The effective yield is expressed similarly but, when
annualized, the income earned by an investment in the Series is assumed to be
reinvested. The effective yield will be slightly higher than the yield because
of the compounding effect of this assumed reinvestment.
WORLD GOVERNMENTS SERIES: From time to time, quotations of the World Governments
Series' total return and yield may be included in advertisements, sales
literature or reports to shareholders or prospective investors. The total return
of the Series refers to return assuming an investment has been held in the
Series for one year and for the life of the Series (the ending date of which
will be stated). The total return quotations may be expressed in terms of
average annual or cumulative rates of return for all periods quoted. Average
annual total return refers to the average annual compound rate of return of an
investment in the Series. Cumulative total return represents the cumulative
change in value of an investment in the Series. Both will assume that all
dividends and capital gains distributions were reinvested. The yield of the
Series refers to net investment income generated by the Series over a specified
30-day (or one month) period. This income is then "annualized." That is, the
amount of income generated by the Series during that 30-day (or one month)
period is assumed to be generated over a 12-month period and is shown as a
percentage of net asset value.
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EXPENSES
The Trust pays the compensation of the Trustees who are not officers of MFS and
all expenses of each Series (other than those assumed by MFS) including but not
limited to: governmental fees; interest charges; taxes; membership dues in the
Investment Company Institute allocable to each Series; fees and expenses of
independent auditors, of legal counsel, and of any transfer agent, registrar or
dividend disbursing agent of each Series; expenses of repurchasing and redeeming
shares and servicing shareholder accounts; expenses of preparing, printing and
mailing prospectuses, periodic reports, notices and proxy statements to
shareholders and to governmental officers and commissions; brokerage and other
expenses connected with the execution, recording and settlement of portfolio
security transactions; insurance premiums; fees and expenses of Investors Bank &
Trust Company, the Trust's Custodian, for all services to each Series, including
safekeeping of funds and securities and maintaining required books and accounts;
expenses of calculating the net asset value of shares of each Series; and
expenses of shareholder meetings. Expenses relating to the issuance,
registration and qualification of shares of each Series and the preparation,
printing and mailing of prospectuses are borne by each Series except that the
Distribution Agreement with MFD requires MFD to pay for prospectuses that are to
be used for sales purposes. Expenses of the Trust which are not attributable to
a specific Series are allocated between the Series in a manner believed by
management of the Trust to be fair and equitable.
MFS has agreed to pay until December 31, 2004 the expenses of the World
Governments Series and the Money Market Series such that the Series' aggregate
operating expenses do not exceed, on an annualized basis, 1.00% and 0.60% of its
respective average daily net assets; provided, however, that this obligation may
be terminated or revised at any time by MFS without the consent of the Trust or
the Series by notice in writing from MFS to the Trust on behalf of the Series.
Such payments by MFS are subject to reimbursement by the World Governments
Series and the Money Market Series which will be accomplished by the payment by
each Series of an expense reimbursement fee to MFS computed and paid monthly at
a percentage of its average daily net assets for its then current fiscal year,
with a limitation that immediately after such payment the aggregate operating
expenses of the Series would not exceed, on an annualized basis, 1.00% and 0.60%
of its respective average daily net assets. The expense reimbursement agreement
terminates for each Series on the earlier of the date on which payments made
thereunder by the Series equal the prior payment of such reimbursable expenses
by MFS or December 31, 2004.
SHAREHOLDER COMMUNICATIONS
Owners of Contracts issued by Participating Insurance Companies for which shares
of one or more Series are the investment vehicle will receive from the
Participating Insurance Companies semi-annual financial statements and audited
year-end financial statements certified by the Trust's independent certified
public accountants. Each report will show the investments owned by the Trust and
the valuations thereof as determined by the Trustees and will provide other
information about the Trust and its operations.
Participating Insurance Companies with inquiries regarding the Trust may call
the Trust's Shareholder Servicing Agent. (See back cover for address and phone
number.)
-------------------
The Statement of Additional Information for the Trust, dated May 1, 1995,
contains more detailed information about each of the Series, including
information related to: (i) the investment policies and restrictions of each
Series; (ii) the Trustees, officers and investment adviser of the Trust; (iii)
portfolio transactions; (iv) the shares of each Series, including rights and
liabilities of shareholders; (v) the method used to calculate yield and total
rate of return quotations of each Series; (vi) the determination of net asset
value of shares of each Series; and (vii) certain voting rights of shareholders
of each Series.
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APPENDIX A
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the quality
of various debt instruments. It should be emphasized, however, that ratings are
not absolute standards of quality. Consequently, debt instruments with the same
maturity, coupon and rating may have different yields while debt instruments of
the same maturity and coupon with different ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
AAA: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuations of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
STANDARD & POOR'S RATINGS GROUP
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
FITCH INVESTORS SERVICE, INC.
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and prepay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated 'AAA'. Because bonds rated in the 'AAA' and
'AA' categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated 'F-1+'.
A: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
A-1 AND P-1 COMMERCIAL PAPER RATINGS
Description of S&P, Fitch and Moody's highest commercial paper ratings:
The rating "A" is the highest commercial paper rating assigned by S&P and Fitch,
and issues so rated are regarded as having the greatest capacity for timely
payment. Issues in the "A" category are delineated with the numbers 1, 2 and 3
to indicate the relative degree of safety. The A-1 designation indicates that
the degree of safety regarding timely payment is either overwhelming or very
strong. Those A-1 issues determined to possess overwhelming safety
characteristics will be denoted with a plus (+) sign designation.
A-1
<PAGE>
The rating P-1 is the highest commercial paper rating assigned by Moody's.
Issuers rated P-1 have a superior ability for repayment. P-1 repayment capacity
will normally be evidenced by the following characteristics: (1) leading market
positions in well established industries; (2) high rates of return on funds
employed: (3) conservative capitalization structure with moderate reliance on
debt and ample asset protection; (4) broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and (5) well established
access to a range of financial markets and assured sources of alternate
liquidity.
A-2
<PAGE>
APPENDIX B
DESCRIPTION OF OBLIGATIONS ISSUED OR GUARANTEED BY
U.S. GOVERNMENT AGENCIES, AUTHORITIES OR INSTRUMENTALITIES
U.S. GOVERNMENT OBLIGATIONS -- are issued by the U.S. Treasury and include
bills, certificates of indebtedness, notes and bonds. Agencies and
instrumentalities of the U.S. Government are established under the authority of
an act of Congress and include, but are not limited to, the Tennessee Valley
Authority, the Bank for Cooperatives, the Farmers Home Administration, Federal
Home Loan Banks, Federal Intermediate Credit Banks and Federal Land Banks, as
well as those listed below.
FEDERAL FARM CREDIT CONSOLIDATED SYSTEMWIDE NOTES AND BONDS -- are bonds issued
by a cooperatively owned nationwide system of banks and associations supervised
by the Farm Credit Administration. These bonds are not guaranteed by the U.S.
Government.
MARITIME ADMINISTRATION BONDS -- are bonds issued by the Department of
Transportation of the U.S. Government.
FHA DEBENTURES -- are debentures issued by the Federal Housing Administration of
the U.S. Government and are fully and unconditionally guaranteed by the U.S.
Government.
GNMA CERTIFICATES -- are mortgage-backed securities, with timely payment
guaranteed by the full faith and credit of the U.S. Government, which represent
a partial ownership interest in a pool of mortgage loans issued by lenders such
as mortgage bankers, commercial banks and savings and loan associations. Each
mortgage loan included in the pool is also insured or guaranteed by the Federal
Housing Administration, the Veterans Administration or the Farmers Home
Administration.
FEDERAL HOME LOAN MORTGAGE CORPORATION ("FHLMC") BONDS -- are bonds issued and
guaranteed by the Federal Home Loan Mortgage Corporation and are not guaranteed
by the U.S. Government.
FEDERAL HOME LOAN BANK BONDS -- are bonds issued by the Federal Home Loan Bank
System and are not guaranteed by the U.S. Government.
FINANCING CORPORATION BONDS AND NOTES -- are bonds and notes issued and
guaranteed by the Financing Corporation.
FEDERAL NATIONAL MORTGAGE ASSOCIATION BONDS -- are bonds issued and guaranteed
by the Federal National Mortgage Association and are not guaranteed by the U.S.
Government.
RESOLUTION FUNDING CORPORATION BONDS AND NOTES -- are bonds and notes issued and
guaranteed by the Resolution Funding Corporation.
STUDENT LOAN MARKETING ASSOCIATION ("SLMA") DEBENTURES -- are debentures backed
by the Student Loan Marketing Association and are not guaranteed by the U.S.
Government.
TENNESSEE VALLEY AUTHORITY BONDS AND NOTES -- are bonds and notes issued and
guaranteed by the Tennessee Valley Authority.
Some of the foregoing obligations, such as Treasury bills and GNMA pass-through
certificates, are supported by the full faith and credit of the U.S. Government;
others, such as securities of FNMA, by the right of the issuer to borrow from
the U.S. Treasury; still others, such as bonds issued by SLMA, are supported
only by the credit of the instrumentality. No assurance can be given that the
U.S. Government will provide financial support to instrumentalities sponsored by
the U.S. Government as it is not obligated by law, in certain instances, to do
so.
Although this list includes a description of the primary types of U.S.
Government agency, authorities or instrumentality obligations in which the
Series may invest, the Series may invest in obligations of U.S. Government
agencies or instrumentalities other than those listed above.
B-1
<PAGE>
DESCRIPTION OF SHORT-TERM INVESTMENTS OTHER THAN U.S. GOVERNMENT OBLIGATIONS
CERTIFICATES OF DEPOSIT -- are certificates issued against funds deposited in a
bank (including eligible foreign branches of U.S. banks), are for a definite
period of time, earn a specified rate of return and are normally negotiable.
BANKERS' ACCEPTANCES -- are marketable short-term credit instruments used to
finance the import, export, transfer or storage of goods. They are termed
"accepted" when a bank guarantees their payment at maturity.
COMMERCIAL PAPER -- refers to promissory notes issued by corporations in order
to finance their short-term credit needs.
CORPORATE OBLIGATIONS -- include bonds and notes issued by corporations in order
to finance long-term credit needs.
B-2
<PAGE>
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(800) 637-8730
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
CUSTODIAN
Investors Bank & Trust Company
89 South Street, Boston, MA 02111
DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 637-8730
MAILING ADDRESS:
P.O. Box 1400, Boston, MA 02104-9985
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
------------------------------------
MFS-REGISTERED TRADEMARK- WORLD
GOVERNMENTS SERIES-SM-
MFS-REGISTERED TRADEMARK- MONEY
MARKET SERIES-SM-
PROSPECTUS
MAY 1, 1995
MFS-REGISTERED TRADEMARK- WORLD GOVERNMENTS SERIES-SM-
MFS-REGISTERED TRADEMARK- MONEY MARKET SERIES-SM-
500 Boylston Street, Boston, MA 02116
------------------------
<PAGE>
<TABLE>
<S> <C>
MFS-REGISTERED TRADEMARK- WORLD GOVERNMENTS
SERIES-SM- STATEMENT OF
MFS-REGISTERED TRADEMARK- MONEY MARKET ADDITIONAL
SERIES-SM- INFORMATION
MAY 1, 1995
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
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<C> <S> <C>
1. General Information and Definitions.................................................. 2
2. Investment Techniques................................................................ 2
3. Investment Restrictions.............................................................. 13
4. Management of the Trust.............................................................. 14
Trustees............................................................................. 14
Officers............................................................................. 15
Investment Adviser................................................................... 15
Investment Advisory Agreement........................................................ 15
Custodian............................................................................ 16
Shareholder Servicing Agent.......................................................... 16
Distributor.......................................................................... 16
5. Portfolio Transactions and Brokerage Commissions..................................... 16
6. Tax Status........................................................................... 17
7. Net Income and Distributions......................................................... 18
8. Determination of Net Asset Value; Performance Information............................ 19
9. Description of Shares, Voting Rights and Liabilities................................. 20
10. Independent Accountants and Financial Statements..................................... 21
</TABLE>
MFS-Registered Trademark- WORLD GOVERNMENTS SERIES-SM-
MFS-Registered Trademark- MONEY MARKET SERIES-SM-
Series of MFS-Registered Trademark- Variable Insurance Trust-SM-
500 Boylston Street, Boston, Massachusetts 02116
(617) 954-5000
This Statement of Additional Information sets forth information which may be of
interest to investors but which is not necessarily included in the Series'
Prospectus, dated May 1, 1995, as supplemented from time to time. This Statement
of Additional Information 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 STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A
CURRENT PROSPECTUS.
UST-13 12/93 785
<PAGE>
1. GENERAL INFORMATION AND DEFINITIONS:
MFS World Governments Series (the "World Governments Series") and MFS Money
Market Series (the "Money Market Series") (collectively, the "Series") are
non-diversified and diversified series of the MFS Variable Insurance Trust (the
"Trust"), respectively. The Trust is an open-end management investment company
with twelve separate series, each of which is a segregated, separately managed
portfolio. Additional series may be created by the Trustees from time to time.
Shares of each Series will be offered to the separate accounts of certain
insurance companies (individually, a "Participating Insurance Company" and
collectively, the "Participating Insurance Companies") that fund certain
variable annuity and variable life insurance contracts ("Contracts"). Each
Series offers its shares using a joint prospectus dated May 1, 1995, as
supplemented or amended from time to time (the "Prospectus").
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.
2. INVESTMENT TECHNIQUES
LENDING OF PORTFOLIO SECURITIES: The World Governments 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, cash equivalents
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 and would also receive compensation from the investment of the
collateral. The Series would not, however, have the right to vote any securities
having voting rights during the existence of the loan, but the Series would call
the loan in anticipation of an important vote to be taken among holders of the
securities or of the giving or withholding of their consent on a material matter
affecting the investment. As with other extensions of credit there are risks of
delay in recovery or even loss of rights in the collateral should the borrower
of the securities fail financially. However, the loans would be made only to
firms deemed by the Adviser to be of good standing, and when, in the judgment of
the Adviser, the consideration which can be earned currently from securities
loans of this type justifies the attendant risk. If the Adviser determines to
make securities loans, it is intended that the value of the securities loaned
would not exceed 25% of the value of the Series' net assets.
REPURCHASE AGREEMENTS: Each of the Series may enter into repurchase agreements
with sellers who are member firms (or a subsidiary thereof) of the Exchange or
members of the Federal Reserve System or recognized primary U.S. Government
securities dealers or institutions which the Adviser has determined to be of
comparable creditworthiness. The securities that a Series purchases and holds
through its agent are U.S. Government securities, the values of which are equal
to or greater than the repurchase price agreed to be paid by the seller. The
repurchase price may be higher than the purchase price, the difference being
income to the Series, or the purchase and repurchase prices may be the same,
with interest at a standard rate due to the Series together with the repurchase
price on repurchase. In either case, the income to the Series is unrelated to
the interest rate on the Government securities.
The repurchase agreement provides that in the event the seller fails to pay the
price agreed upon 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. Each Series has adopted and follows procedures which
are intended to minimize the risks of repurchase agreements. For example, each
Series only enters into repurchase agreements after the Adviser has determined
that the seller is creditworthy, and the Adviser monitors that seller's
creditworthiness on an ongoing basis. Moreover, under such agreements, the value
of the securities (which are marked to market every business day) is required to
be greater than the repurchase price, and a Series has the right to make margin
calls at any time if the value of the securities falls below the agreed upon
margin.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: The World Governments 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 the cash
proceeds of the initial sale. The Series may also be compensated by receipt of a
commitment fee. In the event that the party with whom the Series contracts to
replace substantially similar securities on a future date fails to deliver such
securities, the Series may not be able to obtain such securities at the price
specified in such contract and thus may not benefit from the price differential
between the current sales price and the repurchase price.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES: The
World Governments Series may invest a portion of its assets in collateralized
mortgage obligations or "CMOs", which are debt obligations collateralized by
mortgage loans or mortgage pass-through securities (such collateral referred to
collectively as "Mortgage Assets"). Unless the context indicates otherwise, all
references herein to CMOs include multiclass pass-through securities.
Interest is paid or accrues on all classes of the CMOs on a monthly, quarterly
or semi-annual basis. The principal of and interest on the Mortgage Assets may
be allocated among the several classes of a series of a CMO in innumerable ways.
In a common structure, payments of principal, including any principal
prepayments, on the
2
<PAGE>
Mortgage Assets are applied to the classes of the series of a CMO in the order
of their respective stated maturities or final distribution dates, so that no
payment of principal will be made on any class of CMOs until all other classes
having an earlier stated maturity or final distribution date have been paid in
full. Certain CMOs may be stripped (securities which provide only the principal
or interest factor of the underlying security). See "Stripped Mortgage-Backed
Securities" below for a discussion of the risks of investing in these stripped
securities and of investing in classes consisting of interest payments or
principal payments.
The World Governments Series may also invest in parallel pay CMOs and Planned
Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated maturity
date or final distribution date of each class, which, as with other CMO
structures, must be retired by its stated maturity date or final distribution
date but may be retired earlier.
STRIPPED MORTGAGE-BACKED SECURITIES: The World Governments Series may invest a
portion of its assets in stripped mortgage-backed securities ("SMBS") which are
derivative multiclass mortgage securities issued by agencies of or
instrumentalities of the U.S. Government, or by private originators of, or
investors in mortgage loans, including savings and loan institutions, mortgage
banks, commercial banks and investment banks.
SMBS are usually structured with two classes that receive different proportions
of the interest and principal distributions from a pool of mortgage assets. A
common type of SMBS will have one class receiving some of the interest and most
of the principal from the Mortgage Assets, while the other class will receive
most of the interest and the remainder of the principal. In the most extreme
case, one class will receive all of the interest (the interest-only or "IO"
class) while the other class will receive all of the principal (the
principal-only or "PO" class). The yield to maturity on an IO is extremely
sensitive to the rate of principal payments, including prepayments on the
related underlying Mortgage Assets, and a rapid rate of principal payments may
have a material adverse effect on such security's yield to maturity. If the
underlying Mortgage Assets experience greater than anticipated prepayments of
principal, 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.
MORTGAGE PASS-THROUGH SECURITIES: The World Governments Series may invest in
mortgage pass-through securities. Mortgage pass-through securities are
securities representing interests in "pools" of mortgage loans. Monthly payments
of interest and principal by the individual borrowers on mortgages are passed
through to the holders of the securities (net of fees paid to the issuer or
guarantor of the securities) as the mortgages in the underlying mortgage pools
are paid off. 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 securities 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.
Payment of principal and interest on some mortgage pass-through securities (but
not the market value of the securities themselves) may be guaranteed by the full
faith and credit of the U.S. Government (in the case of securities guaranteed by
the Government National Mortgage Association ("GNMA"); or guaranteed by agencies
or instrumentalities of the U.S. Government (such as the Federal National
Mortgage Association ("FNMA") or the Federal Home Loan Mortgage Corporation,
(FHLMC)) which are supported only by the discretionary authority of the U.S.
Government to purchase the agency's obligations). Mortgage pass-through
securities may also be issued by non-governmental issuers (such as commercial
banks, savings and loan institutions, private mortgage insurance companies,
mortgage bankers and other secondary market issuers). Some of these mortgage
pass-through securities may be supported by various forms of insurance or
guarantees.
Interests in pools of mortgage-related securities differ from other forms of
debt securities, which normally provide for periodic payment of interest in
fixed amounts with principal payments at maturity or specified call dates.
Instead, these securities provide a monthly payment which consists of both
interest and principal payments. In effect, these payments are a "pass-through"
of the monthly payments made by the individual borrowers on their mortgage
loans, net of any fees paid to the issuer or guarantor of such securities.
Additional payments are caused by prepayments of principal resulting from the
sale, refinancing or foreclosure of the underlying property, net of fees or
costs which may be incurred. Some mortgage pass-through securities (such as
securities issued by the GNMA) are described as "modified pass-through." These
securities entitle the holder to receive all interests and principal payments
owed on the mortgages in the mortgage pool, net of certain fees, at the
scheduled payment dates regardless of whether the mortgagor actually makes the
payment.
The principal governmental guarantor of mortgage pass-through securities is
GNMA. GNMA is a wholly owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the U.S. Government, the timely payment of principal and
interest on securities issued by institutions approved by GNMA (such as savings
and loan institutions, commercial banks and mortgage bankers) and backed by
pools of FHA-insured or VA-guaranteed mortgages. These guarantees, however, do
not apply to the market value or yield of mortgage pass-through securities. GNMA
securities are often purchased at a premium over the maturity value of the
underlying mortgages. This premium is not guaranteed and will be lost if
prepayment occurs.
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Government-related guarantors (I.E., whose guarantees are not backed by the full
faith and credit of the U.S. Government) include FNMA and FHLMC. FNMA is a
government-sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases conventional residential mortgages (I.E., mortgages not insured
or guaranteed by any governmental agency) from a list of approved
seller/servicers which include state and federally chartered savings and loan
associations, mutual savings banks, commercial banks, credit unions and mortgage
bankers. Pass-through securities issued by FNMA are guaranteed as to timely
payment by FNMA of principal and interest.
FHLMC is also a government-sponsored corporation owned by private stockholders.
FHLMC issues Participation Certificates ("PCs") which represent interests in
conventional mortgages (I.E., not federally insured or guaranteed) for FHLMC's
national portfolio. FHLMC guarantees timely payment of interest and ultimate
collection of principal regardless of the status of the underlying mortgage
loans.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of mortgage loans. Such issuers may also be the originators
and/or servicers of the underlying mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments in the former pools. However, timely
payment of interest and principal of mortgage loans in these pools may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit. The insurance and
guarantees are issued by governmental entities, private insurers and the
mortgage poolers. There can be no assurance that the private insurers or
guarantors can meet their obligations under the insurance policies or guarantee
arrangements. The Series may also buy mortgage-related securities without
insurance or guarantees.
INDEXED SECURITIES: The World Governments Series may purchase securities whose
prices are indexed to the prices of other securities, securities indices,
currencies, precious metals or other commodities, or other financial indicators.
Indexed securities typically, but not always, are debt securities or deposits
whose value at maturity or coupon rate is determined by reference to a specific
instrument or statistic. Gold-indexed securities, for example, typically provide
for a maturity value that depends on the price of gold, resulting in a security
whose price tends to rise and fall together with gold prices. Currency-indexed
securities typically are short-term to intermediate-term debt securities whose
maturity values or interest rates are determined by reference to the values of
one or more specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed securities
may be positively or negatively indexed; that is, their maturity value may
increase when the specified currency value increases, resulting in a security
that performs similarly to a foreign-denominated instrument, or their maturity
value may decline when foreign currencies increase, resulting in a security
whose price characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or instrument to which they are indexed,
and may also be influenced by interest rate changes in the U.S. and abroad. At
the same time, indexed securities are subject to the credit risks associated
with the issuer of the security, and their values may decline substantially if
the issuer's creditworthiness deteriorates. Recent issuers of indexed securities
have included banks, corporations, and certain U.S. government agencies.
SWAPS AND RELATED TRANSACTIONS: The World Governments Series may enter into
interest rate swaps, currency swaps and other types of available swap
agreements, such as caps, collars and floors.
Swap agreements may be individually negotiated and structured to include
exposure to a variety of different types of investments or market factors.
Depending on their structure, swap agreements may increase or decrease the
Series' exposure to long or short-term interest rates (in the U.S. or abroad),
foreign currency values, mortgage securities, corporate borrowing rates, or
other factors such as securities prices or inflation rates. Swap agreements can
take many different forms and are known by a variety of names. The Series is not
limited to any particular form or variety of swap agreement if MFS determines it
is consistent with the Series' investment objective and policies.
The World Governments Series will maintain cash or appropriate liquid assets
with its custodian to cover its current obligations under swap 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 cash or
liquid assets with its Custodian 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
cash or liquid assets with a value equal to the full amount of the Series'
accrued obligations under the agreement.
The most significant factor in the performance of swaps, caps, floors and
collars is the change in the specific interest rate, currency or other factor
that determines the amount of payments to be made under the arrangement. If the
Adviser 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 declined, 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. Each
Series anticipates that it will be able to eliminate or reduce its exposure
under these arrangements by assignment or other disposition or by entering into
an offsetting agreement with the same or another counterparty.
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OPTIONS ON SECURITIES: -- The World Governments 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 held in a segregated account by its custodian) 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 difference is
maintained by the Series in cash, short-term money market instruments or high
quality debt securities in a segregated account with its custodian. A put option
written by the Series is "covered" if the Series maintains cash, short-term
money market instruments or high-quality debt securities with a value equal to
the exercise price in a segregated account with its custodian, or else holds a
put on the same security and in the same principal amount as the put written
where the exercise price of the put held is equal to or greater than the
exercise price of the put written or where the exercise price of the put held is
less than the exercise price of the put written if the difference is maintained
by the Series in cash, short-term money market instruments or high-quality debt
securities in a segregated account with its custodian. 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 counter party
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 exercise price thereof is secured by deposited cash, short-term money market
instruments or high-quality debt securities. 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 a 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 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 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
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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 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 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.
YIELD CURVE OPTIONS: The World Governments 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. Specially, 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 maintains
in a segregated account with its custodian cash or cash equivalents 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.
The staff of the SEC has taken the position that purchased over-the-counter
options and assets used to cover written over-the-counter options are illiquid
and, therefore, together with other illiquid securities, cannot exceed a certain
percentage of a Series' assets (the "SEC illiquidity ceiling"). Although the
Adviser disagrees with this position, the Adviser intends to limit the Series'
writing of over-the-counter options in accordance with the following procedure.
Except as provided below, the Series intends to write over-the-counter options
only with primary U.S. Government securities dealers recognized by the Federal
Reserve Bank of New York. Also, the contracts which the Series has in place with
such primary dealers will provide that the Series has the absolute right to
repurchase an option it writes at any time at a price which represents the fair
market value, as determined in good faith through negotiation between the
parties, but which in no event will exceed a price determined pursuant to a
formula in the contract. Although the specific formula may vary between
contracts with different primary dealers, the formula will generally be based on
a multiple of the premium received by the Series for writing the option, plus
the amount, if any, of the option's intrinsic value (I.E., the amount that the
option is in-the-money). The formula may also include a factor to account for
the difference between the price of the security and the strike price of the
option if the option is written out-of-money. The Series will treat all or a
part of the formula price as illiquid for purposes of the SEC illiquidity
ceiling. The Series may also write over-the-counter options with non-primary
dealers, including foreign dealers, and will treat the assets used to cover
these options as illiquid for purposes of such SEC illiquidity ceiling.
FUTURES CONTRACTS: The World Governments Series may purchase and sell futures
contracts ("Futures Contracts") on foreign or domestic fixed income securities
or indices of such securities. The
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World Governments Series may purchase and sell Futures Contracts on foreign
currencies or indices of foreign currencies. Such investment strategies will be
used for hedging purposes and for non-hedging purposes, subject to applicable
law.
A Futures Contract is a bilateral agreement providing for the purchase and sale
of a specified type and amount of a financial instrument or foreign currency, or
for the making and acceptance of a cash settlement, at a stated time in the
future for a fixed price. By its terms, a Futures Contract provides for a
specified settlement date on which, in the case of the majority of interest rate
and foreign currency futures contracts, the fixed income securities or currency
are delivered by the seller and paid for by the purchaser, or on which, in the
case of stock index futures contracts and certain interest rate and foreign
currency futures contracts, the difference between the price at which the
contract was entered into and the contract's closing value is settled between
the purchaser and seller in cash. Futures Contracts differ from options in that
they are bilateral agreements, with both the purchaser and the seller equally
obligated to complete the transaction. Futures Contracts call for settlement
only on the expiration date and cannot be "exercised" at any other time during
their term.
The purchase or sale of a Futures Contract differs from the purchase or sale of
a security or the purchase of an option in that no purchase price is paid or
received. Instead, an amount of cash or cash equivalents, which varies but may
be as low as 5% or less of the value of the contract, must be deposited with the
broker as "initial margin." Subsequent payments to and from the broker, referred
to as "variation margin," are made on a daily basis as the value of the index or
instrument underlying the Futures Contract fluctuates, making positions in the
Futures Contract more or less valuable - a process known as "mark-to-market."
Purchases or sales of stock index futures contracts are used to attempt to
protect a Series' current or intended stock investments from broad fluctuations
in stock prices. For example, 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, that Series might
enter into interest rate futures contracts for the sale of debt securities. Such
a sale would have much the same effect as selling some of the long-term bonds in
that Series' portfolio. If interest rates did increase, the value of the debt
securities in the portfolio would decline, but the value of that Series'
interest rate futures contracts would increase at approximately the same rate,
thereby keeping the net asset value of that Series from declining as much as it
otherwise would have.
Similarly, if interest rates were expected to decline, interest rate futures
contracts may be purchased to hedge in anticipation of subsequent purchases of
long-term bonds at higher prices. Since the fluctuations in the value of the
interest rate futures contracts should be similar to that of long-term bonds,
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 that 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 is more liquid than the cash market, the use
of interest rate futures contracts as a hedging technique allows the Series to
hedge its interest rate risk without having to sell its portfolio securities.
As noted in the Prospectus, 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 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.
OPTIONS ON FUTURES CONTRACTS: The World Governments Series also may purchase and
write options to buy or sell those Futures Contracts in which it may invest
("Options on Futures Contracts"). Such investment strategies will be used for
hedging purposes and for non-hedging purposes, subject to applicable law.
An Option on a Futures Contract provides the holder with the right to enter into
a "long" position in the underlying Futures Contract, in the case of a call
option, or a "short" position in the underlying Futures Contract, in the case of
a put option, at a fixed exercise price up to a stated expiration date or, in
the case of certain options,
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on such date. Upon exercise of the option by the holder, the contract market
clearinghouse establishes a corresponding short position for the writer of the
option, in the case of a call option, or a corresponding long position in the
case of a put option. In the event that an option is exercised, the parties will
be subject to all the risks associated with the trading of Futures Contracts,
such as payment of initial and variation margin deposits. In addition, the
writer of an Option on a Futures Contract, unlike the holder, is subject to
initial and variation margin requirements on the option position.
A position in an Option on a Futures Contract may be terminated by the purchaser
or seller prior to expiration by effecting a closing purchase or sale
transaction, subject to the availability of a liquid secondary market, which is
the purchase or sale of an option of the same series (I.E., the same exercise
price and expiration date) as the option previously purchased or sold. The
difference between the premiums paid and received represents the trader's 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
Commodities Futures Trading Commission (the "CFTC") and the performance
guarantee of the exchange clearinghouse. In addition, Options on Futures
Contracts may be traded on foreign exchanges.
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 difference is
maintained by the Series in cash or securities in a segregated account with its
custodian. The Series may cover the writing of put Options on Futures Contracts
(a) through sales of the underlying Futures Contract, (b) through segregation of
cash, short-term money market instruments or high quality debt securities in an
amount equal to the value of the security or index underlying the Futures
Contract, or (c) through the holding of a put on the same Futures Contract and
in the same principal amount as the put written where the exercise price of the
put held is equal to or greater than the exercise price of the put written or
where the exercise price of the put held is less than the exercise price of the
put written if the difference is maintained by the Series in cash, short-term
money market instruments or high quality debt securities in a segregated account
with its custodian. 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 a
Series has written is exercised, the Series will incur a loss which will be
reduced by the amount of the premium it receives. Depending on the degree of
correlation between changes in the value of its portfolio securities and the
changes in the value of its futures positions, 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, rather than
purchasing the underlying Futures Contracts.
FORWARD CONTRACTS ON FOREIGN CURRENCY: The World Governments Series may enter
into forward foreign currency exchange contracts for hedging and non-hedging
purposes (collectively, "Forward Contracts"). Forward Contracts may be used for
hedging to attempt to minimize the risk to the Series from adverse changes in
the relationship between the U.S. dollar and foreign currencies. The Series
intends to enter into Forward Contracts for hedging purposes similar to those
described above in connection with foreign currency futures contracts. In
particular, a Forward Contract to sell a currency may be entered into in lieu of
the sale of a foreign currency futures contract where 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. The Series also may enter into a Forward Contract in order to assure
itself of a predetermined exchange rate in connection with a fixed income
security denominated in a foreign currency. In addition, the Series may enter
into Forward Contracts for "cross hedging" purposes
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(E.G., the purchase or sale of a Forward Contract on one type of currency, as a
hedge against adverse fluctuations in the value of a second type of currency).
If a hedging transaction in Forward Contracts is successful, the decline in the
value of portfolio securities or other assets or the increase in the cost of
securities or other assets to be acquired may be offset, at least in part, by
profits on the Forward Contract. Nevertheless, by entering into such Forward
Contracts, 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 or natural resources prices. The Series do not intend, in most instances,
to hold Forward Contracts entered into until maturity, at which time they would
be required to deliver or accept delivery of the underlying currency, but will
usually seek to close out positions in such contracts by entering into
offsetting transactions, which will serve to fix the Series' profit or loss
based upon the value of the contracts at the time the offsetting transaction is
executed.
The Series may also enter into transactions in Forward Contracts for other than
hedging purposes, which presents greater profit potential but also involves
increased risk. For example, 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 entering into such transactions will profit if the anticipated
movements in foreign currency exchange rates occurs, which will increase its
gross income. Where exchange rates do not move in the direction or to the extent
anticipated, however, 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 World Governments Series has established procedures consistent with
statements by the SEC and its staff regarding the use of Forward Contracts by
registered investment companies, which require the use of segregated assets or
"cover " in connection with the purchase and sale of such contracts. In those
instances in which the Series satisfies this requirement through segregation of
assets, it will maintain, in a segregated account, cash, cash equivalents or
high-quality debt securities, which will be marked to market on a daily basis,
in an amount equal to the value of its commitments under Forward Contracts.
While these contracts are not presently regulated by the CFTC, the CFTC may in
the future assert authority to regulate Forward Contracts. In such event, the
Series' ability to utilize Forward Contracts in the manner set forth above may
be restricted.
OPTIONS ON FOREIGN CURRENCIES: The World Governments Series may purchase and
write options on foreign currencies for hedging purposes in a manner similar to
that in which futures contracts on foreign currencies, or Forward Contracts,
will be utilized. For example, a decline in the dollar value of a foreign
currency in which portfolio securities are denominated will reduce the dollar
value of such securities, even if their value in the foreign currency remains
constant. In order to protect against such diminutions in the value of portfolio
securities, 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 or in
part, the adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of such
securities, the Series may purchase call options thereon. The purchase of such
options could offset, at least partially, the effects of the adverse movements
in exchange rates. As in the case of other types of options, however, the
benefit to 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.
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.
ADDITIONAL RISK FACTORS:
OPTIONS, FUTURES AND FORWARD TRANSACTIONS
RISK OF IMPERFECT CORRELATION OF HEDGING INSTRUMENTS WITH THE SERIES' PORTFOLIO.
The World Governments Series' ability effectively to hedge all or a portion of
its portfolio through transactions in options, Futures Contracts, Options on
Futures Contracts, Forward Contracts and options on foreign currencies depend on
the degree to which price movements in the underlying index or instrument
correlate with price movements in the relevant portion of the Series' portfolio.
In the case of futures and options based on an index, the portfolio will not
duplicate the components of the index, and in the case of futures and options on
fixed income securities, the portfolio
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securities which are being hedged may not be the same type of obligation
underlying such contract. The use of Forward Contracts for "cross hedging"
purposes may involve greater correlation risks. As a result, the correlation
probably will not be exact. Consequently, the Series 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.
For example, 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. In
addition, the Series may enter into transactions in Forward Contracts or options
on foreign currencies in order to hedge against exposure arising from the
currencies underlying such instruments. In such instances, the Series will be
subject to the additional risk of imperfect correlation between changes in the
value of the currencies underlying such forwards or options and changes in the
value of the currencies being hedged.
It should be noted that stock index futures contracts or options based upon a
narrower index of securities, such as those of a particular industry group, may
present greater risk than options or futures based on a broad market index. This
is due to the fact that a narrower index is more susceptible to rapid and
extreme fluctuations as a result of changes in the value of a small number of
securities. Nevertheless, where the Series enters into transactions in options,
or futures on narrowly-based indexes for hedging purposes, movements in the
value of the index should, if the hedge is successful, correlate closely with
the portion of the Series' portfolio or the intended acquisitions being hedged.
The trading of Futures Contracts, options and Forward Contracts for hedging
purposes entails the additional risk of imperfect correlation between movements
in the futures or option price and the price of the underlying index or
obligation. The anticipated spread between the prices may be distorted due to
the differences in the nature of the markets such as differences in margin
requirements, the liquidity of such markets and the participation of speculators
in the options, futures and forward markets. In this regard, trading by
speculators in options, futures and Forward Contracts has in the past
occasionally resulted in market distortions, which may be difficult or
impossible to predict, particularly near the expiration of such contracts.
The trading of Options on Futures Contracts also entails the risk that changes
in the value of the underlying Futures Contracts will not be fully reflected in
the value of the option. The risk of imperfect correlation, however, generally
tends to diminish as the maturity date of the Futures Contract or expiration
date of the option approaches.
Further, with respect to options on securities, options on stock indexes,
options on currencies and Options on Futures Contracts, the Series are subject
to the risk of market movements between the time that the option is exercised
and the time of performance thereunder. This could increase the extent of any
loss suffered by a Series in connection with such transactions.
In writing a covered call option on a security, index or Futures Contract, 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 indexes 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.
While the World Governments Series may enter transactions in options (except for
Options on Foreign Currencies), Futures Contracts, Options on Futures Contracts
and Forward Contracts for hedging purposes, it may also enter into such
transactions for non-hedging purposes. Non-hedging transactions in such
investments involve greater risks and may result in losses which may not be
offset by increases in the value of portfolio securities or declines in the cost
of securities to be acquired. The Series will only write covered options, such
that cash or securities necessary to satisfy an option exercise will be
segregated at all times, unless the option is covered in such other manner as
may be in accordance with the rules of the exchange on which the option is
traded and applicable laws and regulations. Nevertheless, the method of covering
an option employed by a Series may not fully protect it against risk of loss
and, in any event, the Series could suffer losses on the option position which
might not be offset by corresponding portfolio gains. Entering into transactions
in Futures Contracts, Options on Futures Contracts and Forward Contracts for
other than hedging
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purposes could expose the Series to significant risk of loss if foreign currency
exchange rates do not move in the direction or to the extent anticipated.
With respect to the writing of straddles on securities, 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 World Governments Series will enter into options or futures
positions only if there appears to be a liquid secondary market therefor, there
can be no assurance that such a market will exist for any particular contracts
at any specific time. In that event, it may not be possible to close out a
position held by 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 in the past moved the
daily limit on a number of consecutive trading days.
The trading of Futures Contracts and options is also subject to the risk of
trading halts, suspensions, exchange or clearinghouse equipment failures,
government intervention, insolvency of a brokerage firm or clearinghouse or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
MARGIN. Because of low initial margin deposits made upon the opening of a
futures or forward position and the writing of an option, such transactions
involve substantial leverage. As a result, relatively small movements in the
price of the contract can result in substantial unrealized gains or losses.
Where the World Governments 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.
TRADING AND POSITION LIMITS. The exchange on which futures and options are
traded may impose limitations governing the maximum number of positions on the
same side of the market and involving the same underlying instrument which may
be held by a single investor, whether acting alone or in concert with others
(regardless of whether such contracts are held on the same or different
exchanges or held or written in one or more accounts or through one or more
brokers). Further, the CFTC and the various contract markets have established
limits referred to as "speculative position limits" on the maximum net long or
net short position which any person may hold or control in a particular futures
or option contract. An exchange may order the liquidation of positions found to
be in violation of these limits and it may impose other sanctions or
restrictions. The Adviser does not believe that these trading and position
limits will have any adverse impact on the strategies for hedging the portfolio
of the World Governments Series.
RISKS OF OPTIONS ON FUTURES CONTRACTS. The amount of risk the World Governments
Series assumes when it purchases an Option on a Futures Contract is the premium
paid for the option, plus related transaction costs. In order to profit from an
option purchased, however, it may be necessary to exercise the option and to
liquidate the underlying Futures Contract, subject to the risks of the
availability of a liquid offset market described herein. The writer of an Option
on a Futures Contract is subject to the risks of commodity futures trading,
including the requirement of initial and variation margin payments, as well as
the additional risk that movements in the price of the option may not correlate
with movements in the price of the underlying security, index, currency or
Futures Contract.
RISKS OF TRANSACTIONS RELATED TO FOREIGN CURRENCIES AND TRANSACTIONS NOT
CONDUCTED ON U.S. EXCHANGES. Transactions in Forward Contracts on foreign
currencies, as well as futures and options on foreign currencies and
transactions executed on foreign exchanges, are subject to all of the
correlation, liquidity and other risks outlined above. In addition, however,
such transactions are subject to the risk of governmental actions affecting
trading in or the prices of currencies underlying such contracts, which could
restrict or eliminate trading and could have a substantial adverse effect on the
value of positions held by the World Governments 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
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will not be reflected in the forward, futures or options market until the
following day, thereby making it more difficult for the Series to respond to
such events in a timely manner.
Settlements of exercises of over-the-counter Forward Contracts or foreign
currency options generally must occur within the country issuing the underlying
currency, which in turn requires traders to accept or make delivery of such
currencies in conformity with any U.S. or foreign restrictions and regulations
regarding the maintenance of foreign banking relationships, fees, taxes or other
charges.
Unlike transactions entered into by the Series in Futures Contracts and
exchange-traded options, options on foreign currencies, Forward Contracts and
over-the-counter options on securities are not traded on contract markets
regulated by the CFTC or (with the exception of certain foreign currency
options) the SEC. To the contrary, such instruments are traded through financial
institutions acting as market-makers, although foreign currency options are also
traded on certain national securities exchanges, such as the Philadelphia Stock
Exchange and the Chicago Board Options Exchange, subject to SEC regulation. In
an over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Although the purchaser of an
option cannot lose more than the amount of the premium plus related transaction
costs, this entire amount could be lost. Moreover, the option writer and a
trader of Forward Contracts could lose amounts substantially in excess of their
initial investments, due to the margin and collateral requirements associated
with such positions.
In addition, over-the-counter transactions can only be entered into with a
financial institution willing to take the opposite side, as principal, of 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 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 indexes, Futures Contracts, Options on
Futures Contracts and options on foreign currencies may be traded on exchanges
located in foreign countries. Such transactions may not be conducted in the same
manner as those entered into on U.S. exchanges, and may be subject to different
margin, exercise, settlement or expiration procedures. As a result, many of the
risks of over-the-counter trading may be present in connection with such
transactions.
Options on foreign currencies traded on national securities exchanges are within
the jurisdiction of the SEC, as are other securities traded on such exchanges.
As a result, many of the protections provided to traders on organized exchanges
will be available with respect to such transactions. In particular, all foreign
currency option positions entered into on a national securities exchange are
cleared and guaranteed by the Options Clearing Corporation (the "OCC"), thereby
reducing the risk of counterparty default. Further, a liquid secondary market in
options traded on a national securities exchange may be more readily available
than in the over-the-counter market, potentially permitting 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 World Governments Series will not be deemed to be a "commodity
pool" for purposes of the Commodity Exchange Act, regulations of the CFTC
require that a Series enter into transactions in Futures Contracts and Options
on Futures Contracts only (i) for BONA FIDE hedging purposes (as defined in CFTC
regulations), or (ii) for non-hedging purposes, provided that the aggregate
initial margin and premiums on such non-hedging positions does not exceed 5% of
the liquidation value of the Series' assets. In addition, the Series must comply
with the requirements of various state securities laws in connection with such
transactions.
The World Governments Series has adopted the additional restriction that it will
not enter into a Futures Contract if, immediately thereafter, the value of
securities and other obligations underlying all such Futures Contracts would
exceed 50% of the value of such Series' total assets. Moreover, The Series will
not purchase put and call options if as a result more than 5% of its total
assets would be invested in such options.
When the Series purchases a Futures Contract, an amount of cash or securities
will be deposited in a segregated account with the
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Series custodian so that the amount so segregated will at all times equal the
value of the Futures Contract, thereby insuring that the use of such futures is
unleveraged.
FOREIGN SECURITIES
The Money Market Series may invest in the securities of foreign issuers and in
the securities of foreign branches of U.S. banks, such as negotiable
certificates of deposit (Eurodollars). The World Governments Series may invest
in dollar-denominated and non-dollar denominated foreign securities. As
discussed in the Prospectus, investing in foreign securities generally
represents a greater degree of risk than investing in domestic securities due to
possible exchange rate fluctuations, less publicly available information, more
volatile markets, less securities regulation, less favorable tax provisions, war
or expropriation. As a result of its investments in foreign securities, the
World Governments 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 World Governments 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.
AMERICAN DEPOSITARY RECEIPTS
The World Governments Series may invest in American Depositary Receipts ("ADRs")
which are certificates issued by a U.S. depositary (usually a bank) and
represent a specified quantity of shares of an underlying non-U.S. stock on
deposit with a custodian bank as collateral. ADRs may be sponsored or
unsponsored. A sponsored ADR is issued by a depository which has an exclusive
relationship with the issuer of the underlying security. An unsponsored ADR may
be issued by any number of U.S. depositories. 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 depository of an ADR agent
bank in the foreign country. Simultaneously, the ADR agents create a certificate
which settles at the Series' custodian in five days. 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. Accordingly the information available to
a U.S. investor will be limited to the information the foreign issuer is
required to disclose in its own country and the market value of an ADR may not
reflect undisclosed material information concerning the issuer of the underlying
security. ADRs may also be subject to exchange rate risks if the underlying
foreign securities are denominated in foreign currency.
PORTFOLIO TRADING
The World Governments Series had a portfolio turnover rate of 62% for the fiscal
year ended December 31, 1994.
-------------------
Each Series' limitations, policies and ratings restrictions are adhered to at
the time of purchase or utilization of assets; a subsequent change in
circumstances will not be considered to result in a violation of policy.
3. INVESTMENT RESTRICTIONS
Each Series has adopted the following restrictions which cannot be changed
without the approval of the holders of a majority of the Series' shares (which,
as used in this Statement of Additional Information, means the lesser of (i)
more than 50% of the outstanding shares of the Trust or the Series, as
applicable, or (ii) 67% or more of the outstanding shares of the Trust or the
Series, as applicable, present at a meeting if holders of more than 50% of the
outstanding shares of the Trust or the Series, as applicable, are represented in
person or by proxy). Except for Investment Restriction (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 either Series, may not:
(1) borrow amounts in excess of 33 1/3% of its assets including amounts
borrowed and then only as a temporary measure for extraordinary or emergency
purposes;
(2) underwrite securities issued by other persons except insofar as the
Series may technically be deemed an underwriter under the Securities Act of
1933, as amended (the "1933 Act") in selling a portfolio security;
(3) purchase or sell real estate (including limited partnership 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 Investment
Company Act of 1940, as amended (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
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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 and (ii) 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).
In addition, each Series has adopted the following nonfundamental policies which
may be changed by the vote of the Trust's Board of Trustees without shareholder
approval. The Trust, on behalf of any Series, will not:
(1) invest in illiquid investments, including securities subject to legal or
contractual restrictions on resale or for which there is no readily available
market (e.g., trading in the security is suspended, or, in the case of
unlisted securities, where no market exists) if more than 15% of the Series'
assets (taken at market value) (10% of assets in the case of the Money Market
Series) would be invested in such securities. Repurchase agreements maturing
in more than seven days will be deemed to be illiquid for purposes of the
Series' limitation on investment in illiquid securities. Securities that are
not registered under the 1933 Act and sold in reliance on Rule 144A
thereunder, but are determined to be liquid by the Trust's Board of Trustees
(or its delegee), will not be subject to this 15% (10% in the case of the
Money Market Series) limitation;
(2) purchase securities issued by any other investment company in excess of
the amount permitted by the 1940 Act, except when such purchase is part of a
plan of merger or consolidation;
(3) purchase any securities or evidences of interest therein on margin,
except that the Series may obtain such short-term credit as may be necessary
for the clearance of any transaction and except that the Series may make
margin deposits in connection with any type of swap, option, Futures Contracts
and Forward Contracts;
(4) sell any security which the Series does not own unless by virtue of its
ownership of other securities the Series has at the time of sale a right to
obtain securities without payment of further consideration equivalent in kind
and amount to the securities sold and provided that if such right is
conditional, the sale is made upon the same conditions;
(5) pledge, mortgage or hypothecate in excess of 33 1/3% of its gross
assets. For purposes of this restriction, collateral arrangements with respect
to any type of swap, option, Futures Contracts and Forward Contracts and
payments of initial and variation margin in connection therewith, are not
considered a pledge of assets;
(6) purchase or sell any put or call option or any combination thereof,
provided that this shall not prevent the purchase, ownership, holding or sale
of (i) warrants where the grantor of the warrants is the issuer of the
underlying securities or (ii) put or call options or combinations thereof with
respect to securities, indices of securities, swaps, foreign currencies and
Futures Contracts;
(7) invest for the purpose of exercising control or management;
(8) hold obligations issued or guaranteed by any one U.S. Governmental
agency or instrumentality, at the end of any calendar quarter (or within 30
days thereafter), to the extent such holdings would cause the Series to fail
to comply with the diversification requirements imposed by Section 817(h) of
the Internal Revenue Code of 1986, as amended (the "Code"), and the Treasury
regulations issued thereunder on segregated asset accounts that fund variable
contracts.
In addition, as nonfundamental policies which may be changed by vote of the
Trust's Board of Trustees: (i) each Series, to the extent that it invests in
foreign securities (excluding ADRs), will be invested in a minimum of five
different foreign countries at all times, provided that this minimum is reduced
to four when foreign country investments comprise less than 80% of the Series'
net assets, to three when less than 60% of such value, to two when less than 40%
of such value, and to one when less than 20% of such value; (ii) no Series will
have more than 20% of its net assets invested in securities of issuers located
in any one foreign country, provided that a Series may have up to 35% of its net
assets invested in securities of issuers located in Australia, Canada, France,
Japan, the United Kingdom or West Germany; and (iii) no Series may borrow
amounts in excess of 10% of its net assets when borrowing for any general
purpose or in excess of 25% of net assets when borrowing as a temporary measure
to facilitate redemptions.
4. MANAGEMENT OF THE TRUST
The Board of Trustees of the Trust provides broad supervision over the affairs
of each Series. MFS is responsible for the investment management of each Series'
assets and the officers of the Trust are responsible for its operations. The
Trustees and officers of the Trust are listed below, together with their
principal occupations during the past five years. (Their titles may have varied
during that period.)
TRUSTEES
A. KEITH BRODKIN* -- Chairman; Massachusetts Financial Services Company,
Chairman.
NELSON J. DARLING, JR. -- Director or Trustee of several corporations or trusts,
including: Eastern Enterprises (diversified holding company), Trustee.
Address: 18 Tremont Street, Boston, Massachusetts
WILLIAM R. GUTOW -- Private Investor; Real Estate Consultant; Capitol
Entertainment (Blockbuster Video Franchise), Senior Vice President (since
1989).
Address: 3102 Maple Avenue, #100, Dallas, Texas
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OFFICERS
W. THOMAS LONDON* -- Treasurer; Massachusetts Financial Services Company, Senior
Vice President and Assistant Treasurer.
STEPHEN E. CAVAN* -- Secretary and Clerk; Massachusetts Financial Services
Company, Senior Vice President, General Counsel and Assistant Secretary.
JAMES R. BORDEWICK, JR.* -- Assistant Secretary; Massachusetts Financial
Services Company, Vice President and Associate General Counsel (since September
1990); associated with a major law firm (prior to August 1990).
JAMES O. YOST* -- Assistant Treasurer; Massachusetts Financial Services Company,
Vice President.
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*"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.
Mr. Brodkin and each officer hold comparable positions with certain affiliates
of MFS or with certain other funds of which MFS or a subsidiary is the
investment adviser or distributor. Messrs. Brodkin and Cavan are the Chairman
and the Secretary, respectively, of MFD and hold similar positions with certain
other MFS affiliates.
As of December 31, 1994, Massachusetts Financial Service Company Inc., 500
Boylston Street, Boston, Massachusetts 02116-3740 was the owner of approximately
30% of the outstanding shares of the World Governments Series.
As of December 31, 1994, Century Life of America, on behalf of its Variable
Annuity Account, 2000 Heritage Way, Waverly, Iowa 50677-9208 was the owner of
approximately 69% of the outstanding shares of the World Governments Series.
The Trust pays the compensation of non-interested Trustees (who will receive a
fee of $217 per year plus $100 per meeting and committee meeting attended for
each series, together with such trustee's out-of-pocket expenses).
Set forth in Exhibit A hereto is certain information concerning the cash
compensation paid to non-interested Trustees.
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 Assurance Company of Canada (U.S.),
which in turn is a subsidiary of Sun Life Assurance Company of Canada ("Sun
Life").
INVESTMENT ADVISORY AGREEMENT
MFS manages the assets of each Series pursuant to an Investment Advisory
Agreement with the Trust on behalf of each Series dated as of April 14, 1994
(the "Advisory Agreement"). MFS provides the Series with overall investment
advisory and administrative services, as well as general office facilities.
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 World Governments Series' fiscal year ended December 31, 1994, MFS
received management fees under the Advisory Agreement of $7,604 and assumed
$36,473 of the Series' expenses. See "Expenses" in the Prospectus.
In order to comply with the expense limitations of certain state securities
commissions, MFS will reduce its management fee or otherwise reimburse each
Series for any expenses, exclusive of interest, taxes and brokerage commissions,
incurred by the Series in any fiscal year to the extent such expenses exceed the
most restrictive of such state expense limitations. MFS will make appropriate
adjustments to such reductions and reimbursements in response to any amendment
or rescission of the various state requirements.
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 and, in general, administering its affairs.
The Advisory Agreement with the Trust will remain in effect until August 1,
1995, 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
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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.
CUSTODIAN
Investors Bank & 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 each
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. The Custodian
has contracted with MFS for MFS to perform certain accounting functions related
to certain transactions for which the Adviser receives remuneration on a cost
basis. State Street Bank and Trust Company serves as the dividend and
distribution disbursing agent of the Series.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (the "Shareholder Servicing Agent"), a wholly owned
subsidiary of MFS and a registered transfer agent, is each Series' Shareholder
Servicing Agent, pursuant to a Shareholder Servicing Agent Agreement with the
Trust on behalf of the Series, dated as of April 14, 1994 (the "Agency
Agreement"). The Shareholder Servicing Agent's responsibilities under the Agency
Agreement include administering and performing transfer agent functions and the
keeping of records in connection with the issuance, transfer and redemption of
shares of the Series. For these services, the Shareholder Servicing Agent will
receive a fee based on the net assets of each Series, computed and paid monthly.
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. For the fiscal year ended December 31, 1994, the World Government Series
incurred fees of $992 under the Agency Agreement. 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 and distribution disbursing functions for the Series.
DISTRIBUTOR
MFD, a wholly owned subsidiary of MFS, serves as the distributor for the
continuous offering of shares of the Trust pursuant to a Distribution Agreement
dated as of April 14, 1994 (the "Distribution Agreement").
As agent, MFD currently offers shares of each Series on a continuous basis to
the separate accounts of Participating Insurance Companies in all states in
which the Series or the Trust may from time to time be registered or where
permitted by applicable law. The Distribution Agreement provides that MFD
accepts orders for shares at net asset value as no sales commission or load is
charged. MFD has made no firm commitment to acquire shares of any Series.
The Distribution Agreement will remain in effect until August 1, 1995 and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Trust's shares (as defined in "Investment Restrictions") and in either case, by
a majority of the Trustees who are not parties to such Distribution Agreement or
interested persons of any such party. The Distribution Agreement terminates
automatically if it is assigned and may be terminated without penalty by either
party on not more than 60 days' nor less than 30 days' notice.
5. PORTFOLIO TRANSACTIONS AND BROKERAGE
COMMISSIONS
Specific decisions to purchase or sell securities for each 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.
Each 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 Agreement 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 each 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
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particular transaction or MFS's overall responsibilities to the Series or to its
other clients. Not all of such services are useful or of value in advising a
Series.
The term "brokerage and research services" includes advice as to the value of
securities, the advisability of purchasing or selling securities, and the
availability of purchasers or sellers of securities; furnishing analyses and
reports concerning issues, industries, securities, economic factors and trends,
portfolio strategy and the performance of accounts; and effecting securities
transactions and performing functions incidental thereto such as clearance and
settlement.
Although commissions paid on every transaction will, in the judgment of MFS, be
reasonable in relation to the value of the brokerage services provided,
commissions exceeding those which another broker might charge may be paid to
broker-dealers who were selected to execute transactions on behalf of the
Series' and MFS's other clients in part for providing advice as to the
availability of purchasers or sellers of securities and services in effecting
securities transactions and performing functions incidental thereto such as
clearance and settlement.
Broker-dealers may be willing to furnish statistical, research and other factual
information or services ("Research") to MFS for no consideration other than
brokerage or underwriting commissions. Securities may be bought or sold through
such broker-dealers, but at present, unless otherwise directed by each Series, a
commission higher than one charged elsewhere will not be paid to such a firm
solely because it provided Research to MFS. The Trustees (together with the
Trustees of the other MFS Funds) have directed MFS to allocate a total of
$20,000 of commission business from the various MFS Funds to the Pershing
Division of Donaldson, Lufkin & Jenrette as consideration for the annual renewal
of the Lipper Directors' Analytical Data Service (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 each 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 each 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.
In certain instances there may be securities which are suitable for each Series'
portfolio as well as for that of one or more of the other clients of MFS.
Investment decisions for each Series and for such other clients are made with a
view to achieving their respective investment objectives. It may develop that a
particular security is bought or sold for only one client even though it might
be held by, or bought or sold for, other clients. Likewise, a particular
security may be bought for one or more clients when one or more other clients
are selling that same security. Some simultaneous transactions are inevitable
when several clients receive investment advice from the same investment adviser,
particularly when the same security is suitable for the investment objectives of
more than one client. When two or more clients are simultaneously engaged in the
purchase or sale of the same security, the securities are allocated among
clients in a manner believed 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 each Series is concerned. In other cases, however, it is
believed that a Series' ability to participate in volume transactions will
produce better executions for the Series.
6. TAX STATUS
Shares of each Series are offered only to the separate accounts of the
Participating Insurance Companies that fund Contracts. See the applicable
Contract prospectus for a discussion of the special taxation of those companies
with respect to those accounts and of the Contract holders.
Each Series of the Trust intends to elect and qualify each year for treatment as
a "regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code") by meeting all applicable requirements of
Subchapter M, including requirements as to the nature of each Series' gross
income, the amount of each Series' distributions, and the composition and
holding period of each Series' portfolio assets. Because each Series intends to
distribute all of its net investment income and net realized capital and foreign
currency gains to shareholders in accordance with the timing and certain other
requirements imposed by the Code, it is not expected that either of the Series
will be required to pay any federal income or excise taxes, although the Series
which has foreign-source income may be subject to foreign withholding taxes. If
any of the Series should fail to qualify as a "regulated investment company" in
any year, that Series would incur a regular corporate federal income tax upon
its taxable income.
Each Series intends to comply with the diversification requirements imposed by
section 817(h) of the Code and the regulations thereunder. These requirements,
which are in addition to the diversification requirements of Subchapter M, place
certain limitations on the proportion of each Series' assets that may be
represented by any single investment and securities from the same issuer. If a
Series should fail to comply with these requirements, variable annuity and
variable life insurance contracts that invest in the Series would not be treated
as annuity, endowment or life insurance contracts under the Code.
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Distributions of net capital gains, whether made in cash or in additional
shares, are taxable to shareholders as long-term capital gains without regard to
the length of time the shareholders have held their shares. Certain
distributions of the Series which are declared in October, November, or
December, to shareholders of record in such month and paid the following
January, will be taxable to shareholders as if received on December 31 of the
year in which they are declared.
Any investment by the World Governments Series in zero coupon bonds, certain
stripped securities, and certain securities purchased at a market discount will
cause the Series to realize 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.
The World Governments Series' transactions in options, Futures Contracts,
Forward Contracts, foreign currencies, 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 the Series on the last business day of each taxable year will
be marked to market (I.E., treated as if closed out) on such day, and any gain
or loss associated with the positions, will be treated as 60% long-term and 40%
short-term capital gain or loss. Certain positions held by each 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 which may alter the effects of
these rules. The World Governments Series will limit its activities in options,
Futures Contracts, Forward Contracts and foreign currencies 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 World Governments
Series will generally be treated as ordinary income and losses. Use of foreign
currencies for non-hedging purposes may be limited in order to avoid a tax on
the Series. Investments by the World Governments Series in certain "passive
foreign investment companies" may also be limited in order to avoid a tax on the
Series.
Investment income received by each Series from sources within foreign countries
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 each
Series to a reduced rate of tax or an exemption from tax on such income; each
Series' intends to qualify for treaty reduced rates where available. It is
impossible, however, to determine each Series effective rate of foreign tax in
advance since the amount of each Series' assets to be invested within various
countries is not known.
7. NET INCOME AND DISTRIBUTIONS
MONEY MARKET SERIES: The net income attributable to the Money Market Series is
determined each day during which the Exchange is open for trading. (As of the
date of this Statement of Additional Information, the Exchange is open for
trading every weekday except for the following holidays (or the days on which
they are observed): New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, Christmas Day.) (For taxation
information on distributions, see "Tax Status" above.)
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 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. 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 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.
WORLD GOVERNMENTS SERIES: The World Governments Series intends to distribute to
its shareholders annually dividends substantially equal to all of its net
investment income. This Series' net investment income consists of non-capital
gain income less expenses and it intends to distribute net realized short- and
long-term capital gains, if any, at least annually. Shareholders will be
informed of the tax consequences of such distributions, including whether any
portion represents a return of capital, after the end of each calendar year.
(For additional taxation information, see "Tax Status" above.)
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8. DETERMINATION OF NET ASSET VALUE;
PERFORMANCE INFORMATION
NET ASSET VALUE
The net asset value per share of each Series is determined each day during which
the Exchange is open for trading. This determination is made once during each
such day as of the close of regular trading on the Exchange by deducting the
amount of each 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 as 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.
WORLD GOVERNMENTS SERIES: Securities, Futures Contracts and options in the World
Governments 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
system, 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 the Series'
portfolio are valued on the basis of valuations furnished by a pricing service
which utilizes both dealer-supplied valuations and electronic data processing
techniques which take into account appropriate factors such as
institutional-sized trading in similar groups of securities, yields, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data, without exclusive reliance upon quoted prices or exchange or
over-the-counter prices, since such valuations are believed to reflect more
accurately the fair value of such securities. Short-term obligations, if any, in
the 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.
WORLD GOVERNMENTS SERIES:
TOTAL RATE OF RETURN -- The World Governments 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. The Series may also calculate
total rates of return which represent aggregate performance over a period or
year-by-year performance. The aggregate total rate of return for shares of the
World Governments Series for the period June 14, 1994 (commencement of
investment operations) to December 31, 1994 was 0.79%. The aggregate total rate
of return would have been lower had fee waivers not been in effect.
YIELD -- Any yield quotation for the World Governments Series is based on the
annualized net investment income per share for the 30-day period. The yield for
such a Series is calculated by dividing
19
<PAGE>
its net investment income earned during the period by the offering price per
share of the 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 the Series during the period, minus accrued expenses
of the Series for the period by (ii) the average number of shares of the Series
entitled to receive dividends during the period multiplied by the offering price
per share on the last day of the period. The yield calculation for shares of the
World Governments Series for the 30-day period ended December 31, 1994 was 5.23%
taking into account all fee waivers and 4.85% without any fee waivers.
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.
The Series may also quote evaluations mentioned in independent radio or
television broadcasts.
From time to time each Series may use charts and graphs to illustrate the past
performance of various indices such as those mentioned above.
MFS FIRSTS: MFS has a long history of innovations.
- -- 1924 -- Massachusetts Investors Trust is established as the first open-end
mutual fund in America.
- -- 1924 -- Massachusetts Investors Trust is the first mutual fund to make full
public disclosure of its operations in shareholder reports.
- -- 1932 -- One of the first internal research departments is established to
provide in-house analytical capability for an investment management firm.
- -- 1933 -- Massachusetts Investors Trust is the first mutual fund to register
under the Securities Act of 1933 ("Trust in Securities Act" or "Full
Disclosure Act").
- -- 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders take capital gain distributions either in additional shares or
in cash.
- -- 1976 -- MFS-Registered Trademark- Municipal Bond Fund is among the first
municipal bond funds established.
- -- 1979 -- Spectrum becomes the first combination fixed/variable annuity with no
initial sales charge.
- -- 1981 -- MFS-Registered Trademark- World Governments Fund is established as
America's first globally diversified fixed-income mutual fund.
- -- 1984 -- MFS-Registered Trademark- Municipal High Income Fund is the first
mutual fund to seek high tax-free income from lower-rated municipal
securities.
- -- 1986 -- MFS-Registered Trademark- Managed Sectors Fund becomes the first
mutual fund to target and shift investments among industry sectors for
shareholders.
- -- 1986 -- MFS-Registered Trademark- Municipal Income Trust is the first
closed-end, high-yield municipal bond fund traded on the New York Stock
Exchange.
- -- 1987 -- MFS-Registered Trademark- Multimarket Income Trust is the first
closed-end, multimarket high income fund listed on the New York Stock
Exchange.
- -- 1989 -- MFS-Registered Trademark- Regatta becomes America's first
non-qualified market-value-adjusted fixed/variable annuity.
- -- 1990 -- MFS-Registered Trademark- World Total Return Fund is the first global
balanced fund.
- -- 1993 -- MFS-Registered Trademark- World Growth Fund is the first global
emerging markets fund to offer the expertise of two sub-advisers.
- -- 1993 -- MFS becomes money manager of MFS-Registered Trademark- Union Standard
Trust, the first trust to invest solely in companies deemed to be
union-friendly by an advisory board of senior labor officials, senior
managers of companies with significant labor contracts, academics, and other
national labor leaders or experts.
9. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Trust's Declaration of Trust permits the Trustees of the Trust to issue an
unlimited number of full and fractional Shares of Beneficial Interest (without
par value) of one or more separate series and to 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 twelve series. The Declaration of Trust
further authorizes the Trustees to classify or reclassify each 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.
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
20
<PAGE>
amendment may be made to the Declaration of Trust without the affirmative vote
of a majority of the Trust's shares. Shares have no pre-emptive or conversion
rights. Shares are fully paid and non-assessable. The Trust may enter into a
merger or consolidation, or sell all or substantially all of its assets (or all
or substantially all of the assets belonging to any series of the Trust), if
approved by the vote of the holders of two-thirds of the Trust's outstanding
shares voting as a single class, or of the affected series of the Trust, as the
case may be, except that if the Trustees of the Trust recommend such merger,
consolidation or sale, the approval by vote of the holders of a majority of the
Trust's or the affected series' outstanding shares (as defined in "Investment
Restrictions") will be sufficient. The Trust or any series of the Trust may also
be terminated (i) upon liquidation and distribution of its assets, if approved
by the vote of the holders of two-thirds of its outstanding shares, or (ii) by
the Trustees by written notice to the shareholders of the Trust of the affected
series. If not so terminated, the Trust will continue indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Trust and provides for indemnification
and reimbursement of expenses out of Trust property for any shareholder held
personally liable for the obligations of the Trust. The Declaration of Trust
also provides that it shall maintain appropriate insurance (for example,
fidelity bonding and errors and omissions insurance) for the protection of the
Trust, its shareholders, Trustees, officers, employees and agents covering
possible tort or other liabilities. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which both inadequate insurance existed and the Trust itself was unable to
meet its obligations.
The Declaration of Trust further provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust
and that the Trustees will not be liable for any action or failure to act, but
nothing in the Declaration of Trust protects a Trustee against any liability to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
his office.
10. INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS
Deloitte & Touche LLP are the Trust's independent certified public accountants.
The Statement of Assets and Liabilities for the MFS Money Market Series at
December 31, 1994, the notes thereto and the Independent Auditors' Report dated
February 3, 1995, have been included in this Statement of Additional Information
in reliance upon the report of Deloitte and Touche, LLP, independent certified
public accountants, as experts in accounting and auditing. The World Governments
Series' Portfolio of Investments at December 31, 1994, Statement of Assets and
Liabilities at December 31, 1994, Statement of Operations for the period ended
December 31, 1994, Statement of Changes in Net Assets for the period ended
December 31, 1994, the Notes to Financial Statements and the Independent
Auditors' Report dated February 3, 1995, each of which is included in the Annual
Report to shareholders of the World Governments Series, are incorporated by
reference into this Statement of Additional Information and have been so
incorporated in reliance upon the report of Deloitte & Touche LLP, independent
certified public accountants, as experts in accounting and auditing. A copy of
the World Governments Series' Annual Report accompanies this Statement of
Additional Information.
21
<PAGE>
MFS MONEY MARKET SERIES
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1994
<TABLE>
<CAPTION>
MFS MONEY
MARKET
SERIES
---------
<S> <C>
Assets:
Cash......................................................................................................... $ 2,796
Deferred organization expenses............................................................................... 5,985
---------
Total assets............................................................................................... $ 8,781
---------
Liabilities:
Accrued expenses............................................................................................. 181
---------
Net assets................................................................................................. $ 8,600
---------
Net Asset Value, Redemption Price and Offering Price Per Share of Beneficial Interest
(8,600 shares outstanding).................................................................................... $ 1.00
---------
---------
</TABLE>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
(1) The MFS Money Market Series is part of the MFS Variable Insurance Trust (the
"Trust") which was organized on February 1, 1994 as a business trust under
the laws of The Commonwealth of Massachusetts. The Trust currently consists
of twelve series of shares or funds (the "Series"). The MFS Money Market
Series has been inactive since that date except for matters relating to its
organization and the Trust's registration as an investment company under the
Investment Company Act of 1940 and the sale of 8,600 shares of beneficial
interest (the "initial shares") to Massachusetts Financial Services Company.
(2) Organization expenses are being deferred and will be amortized over five
years beginning with the commencement of investment operations. The amount
paid by the MFS Money Market Series on any redemption by Massachusetts
Financial Services Company, or any current holder of the initial shares,
will be reduced by the pro rata portion of any unamortized organization
expenses of that Series which the number of initial shares redeemed bears to
the total number of initial shares outstanding of that Series immediately
prior to such redemption.
22
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees of MFS Variable Insurance Trust and
Shareholders of MFS Money Market Series:
We have audited the accompanying statement of assets and liabilities of the MFS
Money Market Series (the "Series") (a series of the MFS Variable Trust (the
"Trust")) as of December 31, 1994. This financial statement is the
responsibility of the Trust's management. Our responsibility is to express an
opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement of assets and liabilities is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statement of assets and
liabilities. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit of the statement of
assets and liabilities provide a reasonable basis for our opinion.
In our opinion, such statement of assets and liabilities present fairly, in all
material respects, the financial position of the Series at December 31, 1994 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Boston, Massachusetts
February 3, 1995
23
<PAGE>
EXHIBIT A
TRUSTEE COMPENSATION TABLE
<TABLE>
<CAPTION>
TRUSTEE FEES
FROM
WORLD TRUSTEE FEES FROM TOTAL TRUSTEE FEES
GOVERNMENTS MONEY MARKET FROM THE FUND
NAME OF TRUSTEE SERIES (1) SERIES (1) COMPLEX (2)
- -------------------------------------------------- ---------------- ------------------ -------------------
<S> <C> <C> <C>
William R. Gutow.................................. $517 $417 $10,618
Nelson J. Darling................................. $517 $417 $10,618
<FN>
NOTES:
(1) For fiscal year ended December 31, 1994.
(2) Information provided is for calendar year ended December 31, 1994. All Trustees served as
Trustees of 16 funds advised by MFS (having aggregate net assets at December 31, 1994, of
approximately $143 million).
</TABLE>
<PAGE>
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(800) 637-8730
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
CUSTODIAN
Investors Bank & Trust Company
89 South Street, Boston, Massachusetts 02110
DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 637-8730
MAILING ADDRESS
P.O. Box 1400, Boston, MA 02104-9985
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
MFS-REGISTERED TRADEMARK- WORLD GOVERNMENTS SERIES-SM-
MFS-REGISTERED TRADEMARK- MONEY MARKET SERIES-SM-
500 Boylston Street
Boston, MA 02116
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