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STATEMENT OF
MFS-REGISTERED TRADEMARK- VARIABLE ADDITIONAL
INSURANCE TRUST-SM- INFORMATION
MAY 1,
1995
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1. General Information and Definitions.................................................. 2
2. Investment Techniques................................................................ 2
3. Investment Restrictions.............................................................. 17
4. Management of the Trust.............................................................. 18
Trustees............................................................................. 18
Officers............................................................................. 18
Investment Adviser................................................................... 19
Investment Advisory Agreement........................................................ 19
Custodian............................................................................ 19
Shareholder Servicing Agent.......................................................... 19
Distributor.......................................................................... 19
5. Portfolio Transactions and Brokerage Commissions..................................... 20
6. Tax Status........................................................................... 21
7. Net Income and Distributions......................................................... 21
8. Determination of Net Asset Value; Performance Information............................ 22
9. Description of Shares, Voting Rights and Liabilities................................. 24
10. Independent Accountants and Financial Statements..................................... 24
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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 Trust's
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 relates to the twelve Series of the
Trust identified on page 2 hereof. Shares of these Series are offered to
separate accounts of certain insurance companies ("Participating Insurance
Companies") that fund variable annuity and variable life insurance contracts
("Contracts"). Participating Insurance Companies may choose to offer as
investment options to their Contract holders less than all of the Trust's
Series, in which case the Trust's Prospectus for those Participating Insurance
Companies will be revised to describe only the Series offered. Therefore, while
certain versions of the Trust's Prospectus will describe only certain of the
Trust's Series, this Statement of Additional Information includes information on
other Series which are not offered pursuant to such Prospectuses; in which case
information concerning these other Series contained herein should be
disregarded.
THIS 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
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1. GENERAL INFORMATION AND DEFINITIONS
MFS Variable Insurance Trust (the "Trust") is a professionally managed open-end
management investment company (a "mutual fund") consisting of twelve separate
series: MFS Emerging Growth Series (the "Emerging Growth Series"), MFS Growth
Series (the "Growth Series"), MFS Research Series (the "Research Series"), MFS
Growth With Income Series (the "Growth With Income Series"), MFS Total Return
Series (the "Total Return Series"), MFS Utilities Series (the "Utilities
Series"), MFS High Income Series (the "High Income Series"), MFS World
Governments Series (the "World Governments Series"), MFS Strategic Fixed Income
Series (the "Strategic Fixed Income Series"), MFS Bond Series (the "Bond
Series"), MFS Limited Maturity Series (the "Limited Maturity Series") and MFS
Money Market Series (the "Money Market Series") (individually or collectively
hereinafter referred to as a "Series" or the "Series").
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: Each of the Series (except the Money Market
Series) may seek to increase its income by lending portfolio securities. Such
loans will usually be made only to member firms of the New York Stock Exchange
(the "Exchange") (and subsidiaries thereof) and member banks of the Federal
Reserve System, and would be required to be secured continuously by collateral
in cash, 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. A Series would have the right to call a loan and obtain
the securities loaned at any time on customary industry settlement notice (which
will not usually exceed five business days). For the duration of a loan, the
Series would continue to receive the equivalent of the interest or dividends
paid by the issuer on the securities loaned 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 a Series' net assets.
REPURCHASE AGREEMENTS: Each of the Series may enter into repurchase agreements
with sellers who are member firms (or a subsidiary thereof) of the Exchange or
members of the Federal Reserve System, recognized primary U.S. Government
securities dealers or institutions which the Adviser has determined to be of
comparable creditworthiness. The securities that a Series purchases and holds
through its agent are U.S. Government securities, the values of which are equal
to or greater than the repurchase price agreed to be paid by the seller. The
repurchase price may be higher than the purchase price, the difference being
income to the Series, or the purchase and repurchase prices may be the same,
with interest at a standard rate due to the Series together with the repurchase
price on repurchase. In either case, the income to the Series is unrelated to
the interest rate on the Government securities.
The repurchase agreement provides that in the event the seller fails to pay the
price agreed upon on the agreed upon delivery date or upon demand, as the case
may be, a Series will have the right to liquidate the securities. If at the time
the Series is contractually entitled to exercise its right to liquidate the
securities, the seller is subject to a proceeding under the bankruptcy laws or
its assets are otherwise subject to a stay order, the Series' exercise of its
right to liquidate the securities may be delayed and result in certain losses
and costs to the Series. Each Series has adopted and follows procedures which
are intended to minimize the risks of repurchase agreements. For example, each
Series only enters into repurchase agreements after the Adviser has determined
that the seller is creditworthy, and the Adviser monitors that seller's
creditworthiness on an ongoing basis. Moreover, under such agreements, the value
of the securities (which are marked to market every business day) is required to
be greater than the repurchase price, and a Series has the right to make margin
calls at any time if the value of the securities falls below the agreed upon
margin.
"WHEN-ISSUED" SECURITIES: Each of the Series (except the Research Series, the
World Governments Series and the Money Market Series) may purchase securities on
a "when-issued" or on a "forward delivery" basis. Although a Series is not
limited as to the amount of these securities for which it may have commitments
to purchase on such bases, it is expected that under normal circumstances the
Series will not commit more than 20% of its total assets to such purchases. When
a Series commits to purchase these securities on a "when-issued" or "forward
delivery" basis, it will set up procedures consistent with the General Statement
of Policy of the Securities and Exchange Commission (the "SEC") concerning such
purchases. Since that policy currently recommends that an amount of the Series'
assets equal to the amount of the purchase be held aside or segregated to be
used to pay for the commitment, the Series will always have cash, short-term
money market instruments or high quality debt securities sufficient to cover any
commitments or to limit any potential risk. Although no Series intends to make
such purchases for speculative purposes and each Series intends to adhere to the
provisions of the SEC policy, purchases of securities on such bases may involve
more risk than other types of purchases. For example, a Series may have to sell
assets which have been set aside in order to meet redemptions. Also, if a Series
determines it is necessary to sell the "when-issued" or "forward delivery"
securities before delivery, the Series may incur a loss because of market
fluctuations since the time the commitment to purchase such securities was made.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: Each of the Total Return Series, the Bond
Series, the Strategic Fixed Income Series, the World Governments Series, the
Limited Maturity Series, the High Income Series and the Utilities Series may
enter into mortgage "dollar roll" transactions pursuant to which it sells
mortgage-
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backed securities for delivery in the future and simultaneously contracts to
repurchase substantially similar securities on a specified future date. During
the roll period, a Series foregoes principal and interest paid on the
mortgage-backed securities. A Series is compensated for the lost interest by the
difference between the current sales price and the lower price for the future
purchase (often referred to as the "drop") as well as by the interest earned on
the cash proceeds of the initial sale. A Series may also be compensated by
receipt of a commitment fee. In the event that the party with whom the Series
contracts to replace substantially similar securities on a future date fails to
deliver such securities, the Series may not be able to obtain such securities at
the price specified in such contract and thus may not benefit from the price
differential between the current sales price and the repurchase price.
CORPORATE ASSET-BACKED SECURITIES: Each of the Emerging Growth Series, the Total
Return Series, the Bond Series, the Limited Maturity Series, the Strategic Fixed
Income Series, the High Income Series and the Utilities Series may invest in
corporate asset-backed securities. These securities, issued by trusts and
special purpose corporations, are backed by a pool of assets, such as credit
card and automobile loan receivables, representing the obligations of a number
of different parties.
Corporate asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there is
the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities. The underlying
assets (E.G., loans) are also subject to prepayments which shorten the
securities weighted average life and may lower their return.
Corporate asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from ultimate default ensures payment through insurance policies or
letters of credit obtained by the issuer or sponsor from third parties. A Series
will not pay any additional or separate fees for credit support. The degree of
credit support provided for each issue is generally based on historical
information respecting the level of credit risk associated with the underlying
assets. Delinquency or loss in excess of that anticipated or failure of the
credit support could adversely affect the return on an investment in such a
security.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES: Each
of the Bond Series, the Strategic Fixed Income Series, the World Governments
Series, the Limited Maturity Series, the High Income Series and the Utilities
Series may invest a portion of its assets in collateralized mortgage obligations
or "CMOs", which are debt obligations collateralized by mortgage loans or
mortgage pass-through securities (such collateral referred to collectively as
"Mortgage Assets"). Unless the context indicates otherwise, all references
herein to CMOs include multiclass pass-through securities.
Interest is paid or accrues on all classes of the CMOs on a monthly, quarterly
or semi-annual basis. The principal of and interest on the Mortgage Assets may
be allocated among the several classes of a series of a CMO in innumerable ways.
In a common structure, payments of principal, including any principal
prepayments, on the Mortgage Assets are applied to the classes of the series of
a CMO in the order of their respective stated maturities or final distribution
dates, so that no payment of principal will be made on any class of CMOs until
all other classes having an earlier stated maturity or final distribution date
have been paid in full. Certain CMOs may be stripped (securities which provide
only the principal or interest factor of the underlying security). See "Stripped
Mortgage-Backed Securities" below for a discussion of the risks of investing in
these stripped securities and of investing in classes consisting of principals
of interest payments or principal payments.
Each of the Bond Series, the World Governments Series, the Limited Maturity
Series, the High Income Series and the Utilities Series may also invest in
parallel pay CMOs and Planned Amortization Class CMOs ("PAC Bonds"). Parallel
pay CMOs are structured to provide payments of principal on each payment date to
more than one class. These simultaneous payments are taken into account in
calculating the stated maturity date or final distribution date of each class,
which, as with other CMO structures, must be retired by its stated maturity date
or final distribution date but may be retired earlier.
STRIPPED MORTGAGE-BACKED SECURITIES: Each of the Bond Series, the Strategic
Fixed Income Series, the World Governments Series and the High Income Series may
invest a portion of its assets in stripped mortgage-backed securities ("SMBS")
which are derivative multiclass mortgage securities issued by agencies of or
instrumentalities of the U.S. Government, or by private originators of, or
investors in mortgage loans, including savings and loan institutions, mortgage
banks, commercial banks and investment banks.
SMBS are usually structured with two classes that receive different proportions
of the interest and principal distributions from a pool of mortgage assets. A
common type of SMBS will have one class receiving some of the interest and most
of the principal from the Mortgage Assets, while the other class will receive
most of the interest and the remainder of the principal. In the most extreme
case, one class will receive all of the interest (the interest-only or
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"IO" class) while the other class will receive all of the principal (the
principal-only or "PO" class). The yield to maturity on an IO is extremely
sensitive to the rate of principal payments, including prepayments on the
related underlying Mortgage Assets, and a rapid rate of principal payments may
have a material adverse effect on such security's yield to maturity. If the
underlying Mortgage Assets experience greater than anticipated prepayments of
principal, a Series may fail to fully recoup its initial investment in these
securities. The market value of the class consisting primarily or entirely of
principal payments generally is unusually volatile in response to changes in
interest rates. Because SMBS were only recently introduced, established trading
markets for these securities have not yet developed, although the securities are
traded among institutional investors and investment banking firms.
LOAN PARTICIPATIONS AND OTHER DIRECT INDEBTEDNESS: Each of the Emerging Growth
Series, the Total Return Series, the Strategic Fixed Income Series and the High
Income Series may purchase loan participations and other direct indebtedness. In
purchasing a loan participation, a Series acquires some or all of the interest
of a bank or other lending institution in a loan to a corporate borrower. Many
such loans are secured, although some may be unsecured. Such loans may be in
default at the time of purchase. Loans and other direct indebtedness that are
fully secured offer a Series more protection than an unsecured loan in the event
of non-payment of scheduled interest or principal. However, there is no
assurance that the liquidation of collateral from a secured loan or other direct
indebtedness would satisfy the corporate borrower's obligation, or that the
collateral can be liquidated.
These loans and other direct indebtedness are made generally to finance internal
growth, mergers, acquisitions, stock repurchases, leveraged buy-outs and other
corporate activities. Such loans and other direct indebtedness loans are
typically made by a syndicate of lending institutions, represented by an agent
lending institution which has negotiated and structured the loan and is
responsible for collecting interest, principal and other amounts due on its own
behalf and on behalf of the others in the syndicate, and for enforcing its and
their other rights against the borrower. Alternatively, such loans and other
direct indebtedness may be structured as a novation, pursuant to which a Series
would assume all of the rights of the lending institution in a loan or as an
assignment, pursuant to which the Series would purchase an assignment of a
portion of a lender's interest in a loan or other direct indebtedness either
directly from the lender or through an intermediary. A Series may also purchase
trade or other claims against companies, which generally represent money owned
by the company to a supplier of goods or services. These claims may also be
purchased at a time when the company is in default.
Certain of the loan participations and the other direct indebtedness acquired by
a Series may involve revolving credit facilities or other standby financing
commitments which obligate the Series to pay additional cash on a certain date
or on demand. These commitments may have the effect of requiring a Series to
increase its investment in a company at a time when the Series might not
otherwise decide to do so (including at a time when the company's financial
condition makes it unlikely that such amounts will be repaid). To the extent
that a Series is committed to advance additional funds, it will at all times
hold and maintain in a segregated account cash or other high grade debt
obligations in an amount sufficient to meet such commitments.
A Series' ability to receive payment of principal, interest and other amounts
due in connection with these investments will depend primarily on the financial
condition of the borrower. In selecting the loan participations and other direct
indebtedness which a Series will purchase, the Adviser will rely upon its own
(and not the original lending institution's) credit analysis of the borrower. As
the Series may be required to rely upon another lending institution to collect
and pass onto the Series amounts payable with respect to the loan and to enforce
the Series' rights under the loan and other direct indebtedness, an insolvency,
bankruptcy or reorganization of the lending institution may delay or prevent the
Series from receiving such amounts. In such cases, the Series will evaluate as
well the creditworthiness of the lending institution and will treat both the
borrower and the lending institution as an "issuer" of the loan participation
for purposes of certain investment restrictions pertaining to the
diversification of the Series' portfolio investments. The highly leveraged
nature of many such loans and other direct indebtedness may make such loans and
other direct indebtedness especially vulnerable to adverse changes in economic
or market conditions. Investments in such loans and other direct indebtedness
may involve additional risk to a Series. For example, if a loan or other direct
indebtedness is foreclosed, a Series could become part owner of any collateral,
and would bear the costs and liabilities associated with owning and disposing of
the collateral. In addition, it is conceivable that under emerging legal
theories of lender liability, a Series could be held liable as a co-lender. It
is unclear whether loans and other forms of direct indebtedness offer securities
law protections against fraud and misrepresentation. In the absence of
definitive regulatory guidance, each Series relies on the Adviser's research in
an attempt to avoid situations where fraud and misrepresentation could adversely
affect a Series. In addition, loan participations and other direct investments
may not be in the form of securities or may be subject to restrictions on
transfer, and only limited opportunities may exist to resell such instruments.
As a result, a Series may be unable to sell such investments at an opportune
time or may have to resell them at less than fair market value. To the extent
that the Adviser determines that any such investments are illiquid, a Series
will include them in the investment limitations described below.
MORTGAGE PASS-THROUGH SECURITIES: Each of the Total Return Series, the Bond
Series, the World Governments Series, the Limited Maturity Series and the High
Income Series may invest in mortgage pass-through securities. The Utilities
Series may invest in mortgage pass-through securities that are securities issued
or guaranteed as to principal and interest by the U.S. Government, its agencies,
authorities or instrumentalities. Mortgage pass-through securities are
securities representing interests in "pools" of mortgage loans. Monthly payments
of interest and principal by the individual borrowers on mortgages are passed
through to the holders of the securities (net of fees paid to the issuer or
guarantor of the securities) as the mortgages in the underlying mortgage pools
are paid off. The average lives of mortgage pass-throughs are variable when
issued because their average lives depend on
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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 Fund may be different than
the quoted yield on the securities. Mortgage premiums generally increase with
falling interest rates and decrease with rising interest rates. Like other fixed
income securities, when interest rates rise the value of mortgage pass-through
security generally will decline; however, when interest rates are declining, the
value of mortgage pass-through securities with prepayment features may not
increase as much as that of other fixed-income securities.
Payment of principal and interest on some mortgage pass-through securities (but
not the market value of the securities themselves) may be guaranteed by the full
faith and credit of the U.S. Government (in the case of securities guaranteed by
the Government National Mortgage Association ("GNMA"); or guaranteed by agencies
or instrumentalities of the U.S. Government (such as the Federal National
Mortgage Association ("FNMA") or the Federal Home Loan Mortgage Corporation,
(FHLMC) which are supported only by the discretionary authority of the U.S.
Government to purchase the agency's obligations). Mortgage pass-through
securities may also be issued by non-governmental issuers (such as commercial
banks, savings and loan institutions, private mortgage insurance companies,
mortgage bankers and other secondary market issuers). Some of these mortgage
pass-through securities may be supported by various forms of insurance or
guarantees.
Interests in pools of mortgage-related securities differ from other forms of
debt securities, which normally provide for periodic payment of interest in
fixed amounts with principal payments at maturity or specified call dates.
Instead, these securities provide a monthly payment which consists of both
interest and principal payments. In effect, these payments are a "pass-through"
of the monthly payments made by the individual borrowers on their mortgage
loans, net of any fees paid to the issuer or guarantor of such securities.
Additional payments are caused by prepayments of principal resulting from the
sale, refinancing or foreclosure of the underlying property, net of fees or
costs which may be incurred. Some mortgage pass-through securities (such as
securities issued by the GNMA) are described as "modified pass-through." These
securities entitle the holder to receive all interests and principal payments
owed on the mortgages in the mortgage pool, net of certain fees, at the
scheduled payment dates regardless of whether the mortgagor actually makes the
payment.
The principal governmental guarantor of mortgage pass-through securities is
GNMA. GNMA is a wholly owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the U.S. Government, the timely payment of principal and
interest on securities issued by institutions approved by GNMA (such as savings
and loan institutions, commercial banks and mortgage bankers) and backed by
pools of FHA-insured or VA-guaranteed mortgages. These guarantees, however, do
not apply to the market value or yield of mortgage pass-through securities. GNMA
securities are often purchased at a premium over the maturity value of the
underlying mortgages. This premium is not guaranteed and will be lost if
prepayment occurs.
Government-related guarantors (I.E., whose guarantees are not backed by the full
faith and credit of the U.S. Government) include FNMA and FHLMC. FNMA is a
government-sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases conventional residential mortgages (I.E., mortgages not insured
or guaranteed by any governmental agency) from a list of approved
seller/servicers which include state and federally chartered savings and loan
associations, mutual savings banks, commercial banks, credit unions and mortgage
bankers. Pass-through securities issued by FNMA are guaranteed as to timely
payment by FNMA of principal and interest.
FHLMC is also a government-sponsored corporation owned by private stockholders.
FHLMC issues Participation Certificates ("PCs") which represent interests in
conventional mortgages (I.E., not federally insured or guaranteed) for FHLMC's
national portfolio. FHLMC guarantees timely payment of interest and ultimate
collection of principal regardless of the status of the underlying mortgage
loans.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of mortgage loans. Such issuers may also be the originators
and/or servicers of the underlying mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments in the former pools. However, timely
payment of interest and principal of mortgage loans in these pools may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit. The insurance and
guarantees are issued by governmental entities, private insurers and the
mortgage poolers. There can be no assurance that the private insurers or
guarantors can meet their obligations under the insurance policies or guarantee
arrangements. A Series may also buy mortgage-related securities without
insurance or guarantees.
INDEXED SECURITIES: Each of the Total Return Series, the High Income Series, the
Bond Series, the Utilities Series and 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
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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 other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
government agencies.
SWAPS AND RELATED TRANSACTIONS: Each of the High Income Series, the World
Governments Series, the Strategic Fixed Income Series, the Bond Series and the
Limited Maturity Series may enter into interest rate swaps, currency swaps and
other types of available swap agreements, such as caps, collars and floors.
Swap agreements may be individually negotiated and structured to include
exposure to a variety of different types of investments or market factors.
Depending on their structure, swap agreements may increase or decrease a Series'
exposure to long or short-term interest rates (in the U.S. or abroad), foreign
currency values, mortgage securities, corporate borrowing rates, or other
factors such as securities prices or inflation rates. Swap agreements can take
many different forms and are known by a variety of names. A Series is not
limited to any particular form or variety of swap agreement if MFS determines it
is consistent with the Series' investment objective and policies.
Each of the High Income Series, the World Governments Series, the Strategic
Fixed Income Series, the Bond Series and the Limited Maturity Series will
maintain cash or appropriate liquid assets with its custodian to cover its
current obligations under swap transactions. If a Series enters into a swap
agreement on a net basis (I.E., the two payment streams are netted out, with the
Series receiving or paying, as the case may be, only the net amount of the two
payments), the Series will maintain cash or liquid assets with 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 a Series enters into a swap
agreement on other than a net basis, it will maintain cash or liquid assets with
a value equal to the full amount of the Series' accrued obligations under the
agreement.
The most significant factor in the performance of swaps, caps, floors and
collars is the change in the specific interest rate, currency or other factor
that determines the amount of payments to be made under the arrangement. If the
Adviser is incorrect in its forecasts of such factors, the investment
performance of a Series would be less than what it would have been if these
investment techniques had not been used. If a swap agreement calls for payments
by a Series, the Series must be prepared to make such payments when due. In
addition, if the counterparty's creditworthiness declined, the value of the swap
agreement would be likely to decline, potentially resulting in losses.
If the counterparty defaults, a Series' risk of loss consists of the net amount
of payments that the Series is contractually entitled to receive. Each Series
anticipates that it will be able to eliminate or reduce its exposure under these
arrangements by assignment or other disposition or by entering into an
offsetting agreement with the same or another counterparty.
OPTIONS ON SECURITIES: Each of the Emerging Growth Series, the Growth Series,
the Total Return Series, the Bond Series, the Strategic Fixed Income Series, the
World Governments Series, the Growth With Income Series and the High Income
Series may write (sell) covered put and call options, and purchase put and call
options, on securities. Call and put options written by a Series may be covered
in the manner set forth below.
A call option written by a Series is "covered" if the Series owns the security
underlying the call or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional cash
consideration 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 a Series holds a call on the same security and in the same principal
amount as the call written where the exercise price of the call held (a) is
equal to or less than the exercise price of the call written or (b) is greater
than the exercise price of the call written if 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 a
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 a
Series may also be covered in such other manner as may be in accordance with the
requirements of the exchange on which, or the 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
a Series to write another call option on the underlying security with either a
different exercise price or expiration date or both, or in the case of a written
put option will permit the Series to write another put option to the extent that
the exercise price thereof is secured by deposited cash, short-term money market
instruments or high-quality debt securities. Such transactions permit a Series
to generate additional premium income, which will partially offset declines in
the value of portfolio securities or increases in the cost of securities to be
acquired. Also, effecting a closing transaction will permit the cash or proceeds
from the concurrent sale of
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any securities subject to the option to be used for other investments of a
Series, provided that another option on such security is not written. If a
Series desires to sell a particular security from its portfolio on which it has
written a call option, it will effect a closing transaction in connection with
the option prior to or concurrent with the sale of the security.
A Series will realize a profit from a closing transaction if the premium paid in
connection with the closing of an option written by the Series is less than the
premium received from writing the option, or if the premium received in
connection with the closing of an option purchased by a Series is more than the
premium paid for the original purchase. Conversely, a Series will suffer a loss
if the premium paid or received in connection with a closing transaction is more
or less, respectively, than the premium received or paid in establishing the
option position. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option previously written by a
Series is likely to be offset in whole or in part by appreciation of the
underlying security owned by the Series.
The Series may write options in connection with buy-and-write transactions; that
is, a Series may purchase a security and then write a call option against that
security. The exercise price of the call a Series determines to write will
depend upon the expected price movement of the underlying security. The exercise
price of a call option may be below ("in-the-money"), equal to ("at-the-money")
or above ("out-of-the-money") the current value of the underlying security at
the time the option is written. Buy-and-write transactions using in-the-money
call options may be used when it is expected that the price of the underlying
security will decline moderately during the option period. Buy-and-write
transactions using out-of-the-money call options may be used when it is expected
that the premiums received from writing the call option plus the appreciation in
the market price of the underlying security up to the exercise price will be
greater than the appreciation in the price of the underlying security alone. If
the call options are exercised in such transactions, a Series' maximum gain will
be the premium received by it for writing the option, adjusted upwards or
downwards by the difference between the Series' purchase price of the security
and the exercise price, less related transaction costs. If the options are not
exercised and the price of the underlying security declines, the amount of such
decline will be offset in part, or entirely, by the premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and a Series' gain will be limited to the premium
received, less related transaction costs. If the market price of the underlying
security declines or otherwise is below the exercise price, a Series may elect
to close the position or retain the option until it is exercised, at which time
the Series will be required to take delivery of the security at the exercise
price; a Series' return will be the premium received from the put option minus
the amount by which the market price of the security is below the exercise
price, which could result in a loss. Out-of-the-money, at-the-money and
in-the-money put options may be used by a Series in the same market environments
that call options are used in equivalent buy-and-write transactions.
A Series may also write combinations of put and call options on the same
security, known as "straddles," with the same exercise price and expiration
date. By writing a straddle, a Series undertakes a simultaneous obligation to
sell and purchase the same security in the event that one of the options is
exercised. If the price of the security subsequently rises sufficiently above
the exercise price to cover the amount of the premium and transaction costs, the
call will likely be exercised and the Series will be required to sell the
underlying security at a below market price. This loss may be offset, however,
in whole or part, by the premiums received on the writing of the two options.
Conversely, if the price of the security declines by a sufficient amount, the
put will likely be exercised. The writing of straddles will likely be effective,
therefore, only where the price of the security remains stable and neither the
call nor the put is exercised. In those instances where one of the options is
exercised, the loss on the purchase or sale of the underlying security may
exceed the amount of the premiums received.
By writing a call option, a Series limits its opportunity to profit from any
increase in the market value of the underlying security above the exercise price
of the option. By writing a put option, a Series assumes the risk that it may be
required to purchase the underlying security for an exercise price above its
then current market value, resulting in a capital loss unless the security
subsequently appreciates in value. The writing of options on securities will not
be undertaken by a Series solely for hedging purposes, and could involve certain
risks which are not present in the case of hedging transactions. Moreover, even
where options are written for hedging purposes, such transactions constitute
only a partial hedge against declines in the value of portfolio securities or
against increases in the value of securities to be acquired, up to the amount of
the premium.
A Series may purchase options for hedging purposes or to increase its return.
Put options may be purchased to hedge against a decline in the value of
portfolio securities. If such decline occurs, the put options will permit a
Series to sell the securities at the exercise price, or to close out the options
at a profit. By using put options in this way, a Series will reduce any profit
it might otherwise have realized in the underlying security by the amount of the
premium paid for the put option and by transaction costs.
A Series may purchase call options to hedge against an increase in the price of
securities that the Series anticipates purchasing in the future. If such
increase occurs, the call option will permit the Series to purchase the
securities at the exercise price, or to close out the options at a profit. The
premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by a Series upon exercise of the option, and, unless
the price of the underlying security rises sufficiently, the option may expire
worthless to the Series.
In certain instances, the Emerging Growth Series and the Strategic Fixed Income
Series may enter into options on U.S. Treasury securities which provide for
periodic adjustment of the strike price and may also provide for the periodic
adjustment of the premium during the term of each such option. Like other types
of options, these
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transactions, which may be referred to as "reset" options or "adjustable strike
options," grant the purchaser the right to purchase (in the case of a "call") or
sell (in the case of a "put"), a specified type and series of U.S. Treasury
security at any time up to a stated expiration date (or, in certain instances,
on such date). In contrast to other types of options, however, the price at
which the underlying security may be purchased or sold under a "reset" option is
determined at various intervals during the term of the option, and such price
fluctuates from interval to interval based on changes in the market value of the
underlying security. As a result, the strike price of a "reset" option, at the
time of exercise, may be less advantageous to the Emerging Growth Series than if
the strike price had been fixed at the initiation of the option. In addition,
the premium paid for the purchase of the option may be determined at the
termination, rather than the initiation, of the option. If the premium is paid
at termination, the Series assumes the risk that (i) the premium may be less
than the premium which would otherwise have been received at the initiation of
the option because of such factors as the volatility in yield of the underlying
Treasury security over the term of the option and adjustments made to the strike
price of the option, and (ii) the option purchaser may default on its obligation
to pay the premium at the termination of the option.
OPTIONS ON STOCK INDICES: Each of the Emerging Growth Series, the Growth Series,
the Total Return Series, the Growth With Income Series and the Utilities Series
may write (sell) covered call and put options and purchase call and put options
on stock indices. In contrast to an option on a security, an option on a stock
index provides the holder with the right but not the obligation to make or
receive a cash settlement upon exercise of the option, rather than the right to
purchase or sell a security. The amount of this settlement is equal to (i) the
amount, if any, by which the fixed exercise price of the option exceeds (in the
case of a call) or is below (in the case of a put) the closing value of the
underlying index on the date of exercise, multiplied by (ii) a fixed "index
multiplier."
A Series may cover call options on stock indices by owning securities whose
price changes, in the opinion of the Adviser, are expected to be similar to
those of the underlying index, or by having an absolute and immediate right to
acquire such securities without additional cash consideration (or for additional
cash consideration held in a segregated account by its custodian) upon
conversion or exchange of other securities in its portfolio. Where a Series
covers a call option on a stock index through ownership of securities, such
securities may not match the composition of the index and, in that event, the
Series will not be fully covered and could be subject to risk of loss in the
event of adverse changes in the value of the index. A Series may also cover call
options on stock indices by holding a call on the same index and in the same
principal amount as the call written where the exercise price of the call held
(a) is equal to or less than the exercise price of the call written or (b) is
greater than the exercise price of the call written if 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
Series may cover put options on stock indices by maintaining 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 by holding a
put on the same stock index and in the same principal amount as the put written
where the exercise price of the put held is equal to or greater than the
exercise price of the put written or where the exercise price of the put held is
less than the exercise price of the put written if the difference is 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
stock indices may also be covered in such other manner as may be in accordance
with the rules of the exchange on which, or the counterparty with which, the
option is traded and applicable laws and regulations.
A Series will receive a premium from writing a put or call option, which
increases the Series' gross income in the event the option expires unexercised
or is closed out at a profit. If the value of an index on which a Series has
written a call option falls or remains the same, the Series will realize a
profit in the form of the premium received (less transaction costs) that could
offset all or a portion of any decline in the value of the securities it owns.
If the value of the index rises, however, a Series will realize a loss in its
call option position, which will reduce the benefit of any unrealized
appreciation in the Series' stock investments. By writing a put option, a Series
assumes the risk of a decline in the index. To the extent that the price changes
of securities owned by a Series correlate with changes in the value of the
index, writing covered put options on indices will increase a Series' losses in
the event of a market decline, although such losses will be offset in part by
the premium received for writing the option.
A Series may also purchase put options on stock indices to hedge its investments
against a decline in value. By purchasing a put option on a stock index, a
Series will seek to offset a decline in the value of securities it owns through
appreciation of the put option. If the value of a Series' investments does not
decline as anticipated, or if the value of the option does not increase, the
Series' loss will be limited to the premium paid for the option plus related
transaction costs. The success of this strategy will largely depend on the
accuracy of the correlation between the changes in value of the index and the
changes in value of the Series' security holdings.
The purchase of call options on stock indices may be used by a Series to attempt
to reduce the risk of missing a broad market advance, or an advance in an
industry or market segment, at a time when the Series holds uninvested cash or
short-term debt securities awaiting investment. When purchasing call options for
this purpose, a Series will also bear the risk of losing all or a portion of the
premium paid if the value of the index does not rise. The purchase of call
options on stock indices when a Series is substantially fully invested is a form
of leverage, up to the amount of the premium and related transaction costs, and
involves risks of loss and of increased volatility similar to those involved in
purchasing calls on securities the Fund owns.
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The index underlying a stock index option may be a "broad-based" index, such as
the Standard & Poor's 500 Index or the New York
Stock Exchange Composite Index, the changes in value of which ordinarily will
reflect movements in the stock market in general. In contrast, certain options
may be based on narrower market indices, such as the Standard & Poor's 100
Index, or on indices of securities of particular industry groups, such as those
of oil and gas or technology companies. A stock index assigns relative values to
the stocks included in the index and the index fluctuates with changes in the
market values of the stocks so included. The composition of the index is changed
periodically.
YIELD CURVE OPTIONS: Each of the Growth Series, the Total Return Series, the
Bond Series, the Strategic Fixed Income Series, the World Governments Series and
the High Income 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, a Series may purchase or write such options for hedging
purposes. For example, a Series may purchase a call option on the yield spread
between two securities, if it owns one of the securities and anticipates
purchasing the other security and wants to hedge against an adverse change in
the yield spread between the two securities. A Series may also purchase or write
yield curve options for other than hedging purposes (I.E., in an effort to
increase its current income) if, in the judgment of the Adviser, the Series will
be able to profit from movements in the spread between the yields of the
underlying securities. The trading of yield curve options is subject to all of
the risks associated with the trading of other types of options. In addition,
however, such options present risk of loss even if the yield of one of the
underlying securities remains constant, if the spread moves in a direction or to
an extent which was not anticipated. Yield curve options written by a Series
will be "covered". A call (or put) option is covered if the Series holds another
call (or put) option on the spread between the same two securities and maintains
in a segregated account with its custodian cash or cash equivalents sufficient
to cover the Series' net liability under the two options. Therefore, a Series'
liability for such a covered option is generally limited to the difference
between the amount of the Series' liability under the option written by the
Series less the value of the option held by the Series. Yield curve options may
also be covered in such other manner as may be in accordance with the
requirements of the counterparty with which the option is traded and applicable
laws and regulations. Yield curve options are traded over-the-counter and
because they have been only recently introduced, established trading markets for
these securities have not yet developed.
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 each Series'
writing of over-the-counter options in accordance with the following procedure.
Except as provided below, a Series intends to write over-the-counter options
only with primary U.S. Government securities dealers recognized by the Federal
Reserve Bank of New York. Also, the contracts which a Series has in place with
such primary dealers will provide that the Series has the absolute right to
repurchase an option it writes at any time at a price which represents the fair
market value, as determined in good faith through negotiation between the
parties, but which in no event will exceed a price determined pursuant to a
formula in the contract. Although the specific formula may vary between
contracts with different primary dealers, the formula will generally be based on
a multiple of the premium received by a Series for writing the option, plus the
amount, if any, of the option's intrinsic value (I.E., the amount that the
option is in-the-money). The formula may also include a factor to account for
the difference between the price of the security and the strike price of the
option if the option is written out-of-money. A Series will treat all or a part
of the formula price as illiquid for purposes of the SEC illiquidity ceiling. A
Series may also write over-the-counter options with non-primary dealers,
including foreign dealers, and will treat the assets used to cover these options
as illiquid for purposes of such SEC illiquidity ceiling.
FUTURES CONTRACTS: Each of the Bond Series, the Strategic Fixed Income Series,
the World Governments Series, the Limited Maturity Series, the High Income
Series and the Utilities Series may purchase and sell futures contracts
("Futures Contracts") on foreign or domestic fixed income securities or indices
of such securities. Each of the Emerging Growth Series, the Growth Series, the
Total Return Series and the Growth With Income Series may purchase and sell
Futures Contracts on stock indexes, while the Emerging Growth Series, the Growth
Series, the Total Return Series, the World Governments Series, the Growth With
Income Series, the Strategic Fixed Income Series and the Utilities 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.
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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, a Series may sell stock index futures contracts in
anticipation of or during a market decline to attempt to offset the decrease in
market value of the Series' securities portfolio that might otherwise result. If
such decline occurs, the loss in value of portfolio securities may be offset, in
whole or part, by gains on the futures position. When a Series is not fully
invested in the securities market and anticipates a significant market advance,
it may purchase stock index futures contracts in order to gain rapid market
exposure that may, in part or entirely, offset increases in the cost of
securities that the Series intends to purchase. As such purchases are made, the
corresponding positions in stock index futures contracts will be closed out. In
a substantial majority of these transactions, the Series will purchase such
securities upon termination of the futures position, but under unusual market
conditions, a long futures position may be terminated without a related purchase
of securities.
Interest rate Futures Contracts may be purchased or sold to attempt to protect
against the effects of interest rate changes on a Series' current or intended
investments in fixed income securities. For example, if a Series owned long-term
bonds and interest rates were expected to increase, that Series might enter into
interest rate futures contracts for the sale of debt securities. Such a sale
would have much the same effect as selling some of the long-term bonds in that
Series' portfolio. If interest rates did increase, the value of the debt
securities in the portfolio would decline, but the value of that Series'
interest rate futures contracts would increase at approximately the same rate,
thereby keeping the net asset value of that Series from declining as much as it
otherwise would have.
Similarly, if interest rates were expected to decline, interest rate futures
contracts may be purchased to hedge in anticipation of subsequent purchases of
long-term bonds at higher prices. Since the fluctuations in the value of the
interest rate futures contracts should be similar to that of long-term bonds, a
Series could protect itself against the effects of the anticipated rise in the
value of long-term bonds without actually buying them until the necessary cash
became available or the market had stabilized. At that time, the interest rate
futures contracts could be liquidated and that Series' cash reserves could then
be used to buy long-term bonds on the cash market. A Series could accomplish
similar results by selling bonds with long maturities and investing in bonds
with short maturities when interest rates are expected to increase. However,
since the futures market is more liquid than the cash market, the use of
interest rate futures contracts as a hedging technique allows a Series to hedge
its interest rate risk without having to sell its portfolio securities.
As noted in the Prospectus, a Series may purchase and sell foreign currency
futures contracts for hedging purposes, to attempt to protect its current or
intended investments from fluctuations in currency exchange rates. Such
fluctuations could reduce the dollar value of portfolio securities denominated
in foreign currencies, or increase the cost of foreign-denominated securities to
be acquired, even if the value of such securities in the currencies in which
they are denominated remains constant. A Series may sell futures contracts on a
foreign currency, for example, where it holds securities denominated in such
currency and it anticipates a decline in the value of such currency relative to
the dollar. In the event such decline occurs, the resulting adverse effect on
the value of foreign-denominated securities may be offset, in whole or in part,
by gains on the futures contracts.
Conversely, a Series could protect against a rise in the dollar cost of
foreign-denominated securities to be acquired by purchasing futures contracts on
the relevant currency, which could offset, in whole or in part, the increased
cost of such securities resulting from a rise in the dollar value of the
underlying currencies. Where a Series purchases futures contracts under such
circumstances, however, and the prices of securities to be acquired instead
decline, the Series will sustain losses on its futures position which could
reduce or eliminate the benefits of the reduced cost of portfolio securities to
be acquired.
OPTIONS ON FUTURES CONTRACTS: Each Series that may buy or sell Futures Contracts
(see "Futures Contracts" above) also may purchase and write options to buy or
sell those Futures Contracts in which it may invest ("Options on Futures
Contracts"). Such investment strategies will be used for hedging purposes and
for non-hedging purposes, subject to applicable law.
An Option on a Futures Contract provides the holder with the right to enter into
a "long" position in the underlying Futures Contract, in the case of a call
option, or a "short" position in the underlying Futures Contract, in the case of
a put option, at a fixed exercise price up to a stated expiration date or, in
the case of certain options, on such date. Upon exercise of the option by the
holder, the contract market clearinghouse establishes a corresponding short
position for the writer of the option, in the case of a call option, or a
corresponding long position in the case of a put option. In the event that an
option is exercised, the parties will be subject to all the risks associated
with the trading of Futures Contracts, such as payment of initial and variation
margin deposits. In addition, the writer of an Option on a Futures Contract,
unlike the holder, is subject to initial and variation margin requirements on
the option position.
A position in an Option on a Futures Contract may be terminated by the purchaser
or seller prior to expiration by effecting a closing purchase or sale
transaction, subject to the availability of a liquid secondary market, which is
the purchase or sale of an option of the same series (I.E., the same exercise
price and expiration date) as the option previously purchased or sold. The
difference between the premiums paid and received represents the trader's profit
or loss on the transaction.
Options on Futures Contracts that are written or purchased by a Series on U.S.
exchanges are traded on the same contract market as the underlying Futures
Contract, and, like Futures Contracts, are
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subject to regulation by the Commodities Futures Trading Commission (the "CFTC")
and the performance guarantee of the exchange clearinghouse. In addition,
Options on Futures Contracts may be traded on foreign exchanges.
A Series may cover the writing of call Options on Futures Contracts (a) through
purchases of the underlying Futures Contract, (b) through ownership of the
instrument, or instruments included in the index, underlying the Futures
Contract, or (c) through the 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. A 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 a Series, the
Series will be required to sell the underlying Futures Contract which, if the
Series has covered its obligation through the purchase of such Contract, will
serve to liquidate its futures position. Similarly, where a put Option on a
Futures Contract written by a Series is exercised, the Series will be required
to purchase the underlying Futures Contract which, if the Series has covered its
obligation through the sale of such Contract, will close out its futures
position.
The writing of a call option on a Futures Contract for hedging purposes
constitutes a partial hedge against declining prices of the securities or other
instruments required to be delivered under the terms of the Futures Contract. If
the futures price at expiration of the option is below the exercise price, a
Series will retain the full amount of the option premium, less related
transaction costs, which provides a partial hedge against any decline that may
have occurred in the Series' portfolio holdings. The writing of a put option on
a Futures Contract constitutes a partial hedge against increasing prices of the
securities or other instruments required to be delivered under the terms of the
Futures Contract. If the futures price at expiration of the option is higher
than the exercise price, a Series will retain the full amount of the option
premium which provides a partial hedge against any increase in the price of
securities which the Series intends to purchase. If a put or call option a
Series has written is exercised, the Series will incur a loss which will be
reduced by the amount of the premium it receives. Depending on the degree of
correlation between changes in the value of its portfolio securities and the
changes in the value of its futures positions, a Series' losses from existing
Options on Futures Contracts may to some extent be reduced or increased by
changes in the value of portfolio securities.
The Series may purchase Options on Futures Contracts for hedging purposes
instead of purchasing or selling the underlying Futures Contracts. For example,
where a decrease in the value of portfolio securities is anticipated as a result
of a projected market-wide decline or changes in interest or exchange rates, a
Series could, in lieu of selling Futures Contracts, purchase put options
thereon. In the event that such decrease occurs, it may be offset, in whole or
in part, by a profit on the option. Conversely, where it is projected that the
value of securities to be acquired by a Series will increase prior to
acquisition, due to a market advance or changes in interest or exchange rates, a
Series could purchase call Options on Futures Contracts, rather than purchasing
the underlying Futures Contracts.
FORWARD CONTRACTS ON FOREIGN CURRENCY: Each of the Emerging Growth Series, the
Growth Series, the Research Series, the Total Return Series, the Bond Series,
the Strategic Fixed Income Series, the World Governments Series, the Growth With
Income Series, the High Income Series and the Utilities 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 Fund from adverse changes in the
relationship between the U.S. dollar and foreign currencies. The Series intend
to enter into Forward Contracts for hedging purposes similar to those described
above in connection with foreign currency futures contracts. In particular, a
Forward Contract to sell a currency may be entered into in lieu of the sale of a
foreign currency futures contract where a Series seeks to protect against an
anticipated increase in the exchange rate for a specific currency which could
reduce the dollar value of portfolio securities denominated in such currency.
Conversely, a Series may enter into a Forward Contract to purchase a given
currency to protect against a projected increase in the dollar value of
securities denominated in such currency which the Series intends to acquire. A
Series also may enter into a Forward Contract in order to assure itself of a
predetermined exchange rate in connection with a fixed income security
denominated in a foreign currency. In addition, the Series may enter into
Forward Contracts for "cross hedging" purposes (E.G., the purchase or sale of a
Forward Contract on one type of currency, as a hedge against adverse
fluctuations in the value of a second type of currency).
If a hedging transaction in Forward Contracts is successful, the decline in the
value of portfolio securities or other assets or the increase in the cost of
securities or other assets to be acquired may be offset, at least in part, by
profits on the Forward Contract. Nevertheless, by entering into such Forward
Contracts, a Series may be required to forego all or a portion of the benefits
which otherwise could have been obtained from favorable movements in exchange
rates or natural resources prices. The Series do not intend, in most instances,
to hold Forward Contracts entered into until 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 a Series' profit or loss based
upon the value of the contracts at the time the offsetting transaction is
executed.
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The Series may also enter into transactions in Forward Contracts for other than
hedging purposes, which presents greater profit potential but also involves
increased risk. For example, a Series may purchase a given foreign currency
through a Forward Contract if, in the judgment of the Adviser, the value of such
currency is expected to rise relative to the U.S. dollar. Conversely, the Series
may sell the currency through a Forward Contract if the Adviser believes that
its value will decline relative to the dollar.
A Series entering into such transactions will profit if the anticipated
movements in foreign currency exchange rates occurs, which will increase its
gross income. Where exchange rates do not move in the direction or to the extent
anticipated, however, the Series may sustain losses, which will reduce its gross
income. Such transactions, therefore, could be considered speculative and could
involve significant risk of loss.
Each Series has established procedures 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: Each of the Emerging Growth Series, the Growth
Series, the Total Return Series, the Bond Series, the Strategic Fixed Income
Series, the World Governments Series, the Growth With Income Series, the High
Income Series and the Utilities Series may purchase and write options on foreign
currencies for hedging purposes in a manner similar to that in which futures
contracts on foreign currencies, or Forward Contracts, will be utilized. For
example, a decline in the dollar value of a foreign currency in which portfolio
securities are denominated will reduce the dollar value of such securities, even
if their value in the foreign currency remains constant. In order to protect
against such diminutions in the value of portfolio securities, a Series may
purchase put options on the foreign currency. If the value of the currency does
decline, the Series will have the right to sell such currency for a fixed amount
in dollars and will thereby offset, in whole in part, the adverse effect on its
portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of such
securities, the Series may purchase call options thereon. The purchase of such
options could offset, at least partially, the effects of the adverse movements
in exchange rates. As in the case of other types of options, however, the
benefit to a Series deriving from purchases of foreign currency options will be
reduced by the amount of the premium and related transaction costs. In addition,
where currency exchange rates do not move in the direction or to the extent
anticipated, a Series could sustain losses on transactions in foreign currency
options which would require it to forego a portion or all of the benefits of
advantageous changes in such rates.
A Series may write options on foreign currencies for the same types of hedging
purposes. For example, where the Series anticipates a decline in the dollar
value of foreign-denominated securities due to adverse fluctuations in exchange
rates it could, instead of purchasing a put option, write a call option on the
relevant currency. If the expected decline occurs, the option will most likely
not be exercised, and the diminution in value of portfolio securities will be
offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, a Series could write a
put option on the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow the Series to hedge such increased
cost up to the amount of the premium. Foreign currency options written by a
Series will generally be covered in a manner similar to the covering of other
types of options. As in the case of other types of options, however, the writing
of a foreign currency option will constitute only a partial hedge up to the
amount of the premium, and only if rates move in the expected direction. If this
does not occur, the option may be exercised and a Series would be required to
purchase or sell the underlying currency at a loss which may not be offset by
the amount of the premium. Through the writing of options on foreign currencies,
a Series also may be required to forego all or a portion of the benefits which
might otherwise have been obtained from favorable movements in exchange rates.
ADDITIONAL RISK FACTORS:
OPTIONS, FUTURES AND FORWARD TRANSACTIONS
RISK OF IMPERFECT CORRELATION OF HEDGING INSTRUMENTS WITH A SERIES' PORTFOLIO.
The Series' ability effectively to hedge all or a portion of their portfolios
through transactions in options, Futures Contracts, Options on Futures
Contracts, Forward Contracts and options on foreign currencies depend on the
degree to which price movements in the underlying index or instrument correlate
with price movements in the relevant portion of the Series' portfolios. In the
case of futures and options based on an index, the portfolio will not duplicate
the components of the index, and in the case of futures and options on fixed
income securities, the portfolio securities which are being hedged may not be
the same type of obligation underlying such contract. The use of Forward
Contracts for "cross hedging" purposes may involve greater correlation risks. As
a result, the correlation probably will not be exact. Consequently, the Series
bear the risk that the price of the portfolio securities being hedged will not
move in the same amount or direction as the underlying index or obligation.
For example, if a Series purchases a put option on an index and the index
decreases less than the value of the hedged securities, the
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Series would experience a loss which is not completely offset by the put option.
It is also possible that there may be a negative correlation between the index
or obligation underlying an option or Futures Contract in which the Series has a
position and the portfolio securities the Series is attempting to hedge, which
could result in a loss on both the portfolio and the hedging instrument. In
addition, a Series may enter into transactions in Forward Contracts or options
on foreign currencies in order to hedge against exposure arising from the
currencies underlying such instruments. In such instances, the Series will be
subject to the additional risk of imperfect correlation between changes in the
value of the currencies underlying such forwards or options and changes in the
value of the currencies being hedged.
It should be noted that stock index futures contracts or options based upon a
narrower index of securities, such as those of a particular industry group, may
present greater risk than options or futures based on a broad market index. This
is due to the fact that a narrower index is more susceptible to rapid and
extreme fluctuations as a result of changes in the value of a small number of
securities. Nevertheless, where a Series enters into transactions in options, or
futures on narrowly-based indexes for hedging purposes, movements in the value
of the index should, if the hedge is successful, correlate closely with the
portion of the Series' portfolio or the intended acquisitions being hedged.
The trading of Futures Contracts, options and Forward Contracts for hedging
purposes entails the additional risk of imperfect correlation between movements
in the futures or option price and the price of the underlying index or
obligation. The anticipated spread between the prices may be distorted due to
the differences in the nature of the markets such as differences in margin
requirements, the liquidity of such markets and the participation of speculators
in the options, futures and forward markets. In this regard, trading by
speculators in options, futures and Forward Contracts has in the past
occasionally resulted in market distortions, which may be difficult or
impossible to predict, particularly near the expiration of such contracts.
The trading of Options on Futures Contracts also entails the risk that changes
in the value of the underlying Futures Contracts will not be fully reflected in
the value of the option. The risk of imperfect correlation, however, generally
tends to diminish as the maturity date of the Futures Contract or expiration
date of the option approaches.
Further, with respect to options on securities, options on stock indexes,
options on currencies and Options on Futures Contracts, the Series are subject
to the risk of market movements between the time that the option is exercised
and the time of performance thereunder. This could increase the extent of any
loss suffered by a Series in connection with such transactions.
In writing a covered call option on a security, index or futures contract, a
Series also incurs the risk that changes in the value of the instruments used to
cover the position will not correlate closely with changes in the value of the
option or underlying index or instrument. For example, where a Series covers a
call option written on a stock index through segregation of securities, such
securities may not match the composition of the index, and the Series may not be
fully covered. As a result, the Series could be subject to risk of loss in the
event of adverse market movements.
The writing of options on securities, options on stock indexes or Options on
Futures Contracts constitutes only a partial hedge against fluctuations in the
value of a Series' portfolio. When a Series writes an option, it will receive
premium income in return for the holder's purchase of the right to acquire or
dispose of the underlying obligation. In the event that the price of such
obligation does not rise sufficiently above the exercise price of the option, in
the case of a call, or fall below the exercise price, in the case of a put, the
option will not be exercised and the Series will retain the amount of the
premium, less related transaction costs, which will constitute a partial hedge
against any decline that may have occurred in the Series' portfolio holdings or
any increase in the cost of the instruments to be acquired.
Where the price of the underlying obligation moves sufficiently in favor of the
holder to warrant exercise of the option, however, and the option is exercised,
the Series will incur a loss which may only be partially offset by the amount of
the premium it received. Moreover, by writing an option, a Series may be
required to forego the benefits which might otherwise have been obtained from an
increase in the value of portfolio securities or other assets or a decline in
the value of securities or assets to be acquired.
In the event of the occurrence of any of the foregoing adverse market events, a
Series' overall return may be lower than if it had not engaged in the hedging
transactions.
Those Series that may enter transactions in options (except for Options on
Foreign Currencies), Futures Contracts, Options on Futures Contracts and Forward
Contracts for hedging purposes may also enter into such transactions for
non-hedging purposes. Non-hedging transactions in such investments involve
greater risks and may result in losses which may not be offset by increases in
the value of portfolio securities or declines in the cost of securities to be
acquired. The Series will only write covered options, such that cash or
securities necessary to satisfy an option exercise will be segregated at all
times, unless the option is covered in such other manner as may be in accordance
with the rules of the exchange on which the option is traded and applicable laws
and regulations. Nevertheless, the method of covering an option employed by a
Series may not fully protect it against risk of loss and, in any event, the
Series could suffer losses on the option position which might not be offset by
corresponding portfolio gains. Entering into transactions in Futures Contracts,
Options on Futures Contracts and Forward Contracts for other than hedging
purposes could expose the Series to significant risk of loss if foreign currency
exchange rates do not move in the direction or to the extent anticipated.
With respect to the writing of straddles on securities, a Series incurs the risk
that the price of the underlying security will not remain stable, that one of
the options written will be exercised and that the resulting loss will not be
offset by the amount of the premiums received. Such transactions, therefore,
create an opportunity for increased return by providing a Series with two
simultaneous premiums on the same security, but involve additional risk, since
the Series may have an option exercised against it regardless of whether the
price of the security increases or decreases.
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RISK OF A POTENTIAL LACK OF A LIQUID SECONDARY MARKET. Prior to exercise or
expiration, a futures or option position can only be terminated by entering into
a closing purchase or sale transaction. This requires a secondary market for
such instruments on the exchange on which the initial transaction was entered
into. While the Series will enter into options or futures positions only if
there appears to be a liquid secondary market therefor, there can be no
assurance that such a market will exist for any particular contracts at any
specific time. In that event, it may not be possible to close out a position
held by a Series, and the Series could be required to purchase or sell the
instrument underlying an option, make or receive a cash settlement or meet
ongoing variation margin requirements. Under such circumstances, if the Series
has insufficient cash available to meet margin requirements, it will be
necessary to liquidate portfolio securities or other assets at a time when it is
disadvantageous to do so. The inability to close out options and futures
positions, therefore, could have an adverse impact on the Series' ability
effectively to hedge their portfolios, and could result in trading losses.
The liquidity of a secondary market in a Futures Contract or option thereon may
be adversely affected by "daily price fluctuation limits," established by
exchanges, which limit the amount of fluctuation in the price of a contract
during a single trading day. Once the daily limit has been reached in the
contract, no trades may be entered into at a price beyond the limit, thus
preventing the liquidation of open futures or option positions and requiring
traders to make additional margin deposits. Prices have in the past moved the
daily limit on a number of consecutive trading days.
The trading of Futures Contracts and options is also subject to the risk of
trading halts, suspensions, exchange or clearinghouse equipment failures,
government intervention, insolvency of a brokerage firm or clearinghouse or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
MARGIN. Because of low initial margin deposits made upon the opening of a
futures or forward position and the writing of an option, such transactions
involve substantial leverage. As a result, relatively small movements in the
price of the contract can result in substantial unrealized gains or losses.
Where a Series enters into such transactions for hedging purposes, any losses
incurred in connection therewith should, if the hedging strategy is successful,
be offset, in whole or in part, by increases in the value of securities or other
assets held by the Series or decreases in the prices of securities or other
assets the Series intends to acquire. Where a Series enters into such
transactions for other than hedging purposes, the margin requirements associated
with such transactions could expose the Series to greater risk.
TRADING AND POSITION LIMITS. The exchange on which futures and options are
traded may impose limitations governing the maximum number of positions on the
same side of the market and involving the same underlying instrument which may
be held by a single investor, whether acting alone or in concert with others
(regardless of whether such contracts are held on the same or different
exchanges or held or written in one or more accounts or through one or more
brokers). Further, the CFTC and the various contract markets have established
limits referred to as "speculative position limits" on the maximum net long or
net short position which any person may hold or control in a particular futures
or option contract. An exchange may order the liquidation of positions found to
be in violation of these limits and it may impose other sanctions or
restrictions. The Adviser does not believe that these trading and position
limits will have any adverse impact on the strategies for hedging the portfolios
of the Series.
RISKS OF OPTIONS ON FUTURES CONTRACTS. The amount of risk a Series assumes when
it purchases an Option on a Futures Contract is the premium paid for the option,
plus related transaction costs. In order to profit from an option purchased,
however, it may be necessary to exercise the option and to liquidate the
underlying Futures Contract, subject to the risks of the availability of a
liquid offset market described herein. The writer of an Option on a Futures
Contract is subject to the risks of commodity futures trading, including the
requirement of initial and variation margin payments, as well as the additional
risk that movements in the price of the option may not correlate with movements
in the price of the underlying security, index, currency or Futures Contract.
RISKS OF TRANSACTIONS RELATED TO FOREIGN CURRENCIES AND TRANSACTIONS NOT
CONDUCTED ON U.S. EXCHANGES. Transactions in Forward Contracts on foreign
currencies, as well as futures and options on foreign currencies and
transactions executed on foreign exchanges, are subject to all of the
correlation, liquidity and other risks outlined above. In addition, however,
such transactions are subject to the risk of governmental actions affecting
trading in or the prices of currencies underlying such contracts, which could
restrict or eliminate trading and could have a substantial adverse effect on the
value of positions held by a Series. Further, the value of such positions could
be adversely affected by a number of other complex political and economic
factors applicable to the countries issuing the underlying currencies.
Further, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying contracts thereon. As a result, the available information
on which trading systems will be based may not be as complete as the comparable
data on which a Series makes investment and trading decisions in connection with
other transactions. Moreover, because the foreign currency market is a global,
24-hour market, events could occur in that market which will not be reflected in
the forward, futures or options market until the following day, thereby making
it more difficult for the Series to respond to such events in a timely manner.
Settlements of exercises of over-the-counter Forward Contracts or foreign
currency options generally must occur within the country issuing the underlying
currency, which in turn requires traders to accept or make delivery of such
currencies in conformity with any U.S. or foreign restrictions and regulations
regarding the maintenance of foreign banking relationships, fees, taxes or other
charges.
Unlike transactions entered into by the Series in Futures Contracts and
exchange-traded options, options on foreign currencies, Forward Contracts and
over-the-counter options on securities are not traded on contract markets
regulated by the CFTC or (with the exception of certain foreign currency
options) the SEC. To the
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contrary, such instruments are traded through financial institutions acting as
market-makers, although foreign currency options are also traded on certain
national securities exchanges, such as the Philadelphia Stock Exchange and the
Chicago Board Options Exchange, subject to SEC regulation. In an
over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Although the purchaser of an
option cannot lose more than the amount of the premium plus related transaction
costs, this entire amount could be lost. Moreover, the option writer and a
trader of Forward Contracts could lose amounts substantially in excess of their
initial investments, due to the margin and collateral requirements associated
with such positions.
In addition, over-the-counter transactions can only be entered into with a
financial institution willing to take the opposite side, as principal, of a
Series' position unless the institution acts as broker and is able to find
another counterparty willing to enter into the transaction with the Series.
Where no such counterparty is available, it will not be possible to enter into a
desired transaction. There also may be no liquid secondary market in the trading
of over-the-counter contracts, and a Series could be required to retain options
purchased or written, or Forward Contracts entered into, until exercise,
expiration or maturity. This in turn could limit the Series' ability to profit
from open positions or to reduce losses experienced, and could result in greater
losses.
Further, over-the-counter transactions are not subject to the guarantee of an
exchange clearinghouse, and a Series will therefore be subject to the risk of
default by, or the bankruptcy of, the financial institution serving as its
counterparty. One or more of such institutions also may decide to discontinue
their role as market-makers in a particular currency or security, thereby
restricting the Series' ability to enter into desired hedging transactions. A
Series will enter into an over-the-counter transaction only with parties whose
creditworthiness has been reviewed and found satisfactory by the Adviser.
Options on securities, options on stock indexes, Futures Contracts, Options on
Futures Contracts and options on foreign currencies may be traded on exchanges
located in foreign countries. Such transactions may not be conducted in the same
manner as those entered into on U.S. exchanges, and may be subject to different
margin, exercise, settlement or expiration procedures. As a result, many of the
risks of over-the-counter trading may be present in connection with such
transactions.
Options on foreign currencies traded on national securities exchanges are within
the jurisdiction of the SEC, as are other securities traded on such exchanges.
As a result, many of the protections provided to traders on organized exchanges
will be available with respect to such transactions. In particular, all foreign
currency option positions entered into on a national securities exchange are
cleared and guaranteed by the Options Clearing Corporation (the "OCC"), thereby
reducing the risk of counterparty default. Further, a liquid secondary market in
options traded on a national securities exchange may be more readily available
than in the over-the-counter market, potentially permitting a Series to
liquidate open positions at a profit prior to exercise or expiration, or to
limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however, is
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effects of other political and
economic events. In addition, exchange-traded options on foreign currencies
involve certain risks not presented by the over-the-counter market. For example,
exercise and settlement of such options must be made exclusively through the
OCC, which has established banking relationships in applicable foreign countries
for this purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on the OCC
or its clearing member, impose special procedures on exercise and settlement,
such as technical changes in the mechanics of delivery of currency, the fixing
of dollar settlement prices or prohibitions on exercise.
POLICIES ON THE USE OF FUTURES AND OPTIONS ON FUTURES CONTRACTS. In order to
assure that the Series will not be deemed to be a "commodity pool" for purposes
of the Commodity Exchange Act, regulations of the CFTC require that a Series
enter into transactions in Futures Contracts 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.
Each 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, a 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 a Series purchases a Futures Contract, an amount of cash or securities will
be deposited in a segregated account with the 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.
RISKS OF INVESTING IN LOWER RATED BONDS
Each of the Emerging Growth Series, the Growth Series, the Growth With Income
Series, the Research Series, the Total Return Series, the Bond Series, the
Limited Maturity Series, the Strategic Fixed Income Series, the High Income
Series and the Utilities Series may invest in fixed income securities rated Baa
by Moody's Investors Service, Inc. ("Moody's") or BBB by Standard & Poor's
Ratings Group ("S&P") or Fitch Investors Service, Inc. ("Fitch") and comparable
unrated securities. These securities, while normally exhibiting adequate
protection parameters, have speculative
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characteristics and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than in the case of higher grade fixed income securities.
Each of these Series (except the Limited Maturity Series) may also invest in
fixed income securities rated Ba or lower by Moody's or BB or lower by S&P or
Fitch and comparable unrated securities (commonly known as "junk bonds") to the
extent described in the Prospectus. No minimum rating standard is required by
the Series. These securities are considered speculative and, while generally
providing greater income than investments in higher rated securities, will
involve greater risk of principal and income (including the possibility of
default or bankruptcy of the issuers of such securities) and may involve greater
volatility of price (especially during periods of economic uncertainty or
change) than securities in the higher rating categories and because yields vary
over time, no specific level of income can ever be assured. These lower rated
high yielding fixed income securities generally tend to reflect economic changes
(and the outlook for economic growth), short-term corporate and industry
developments and the market's perception of their credit quality (especially
during times of adverse publicity) to a greater extent than higher rated
securities which react primarily to fluctuations in the general level of
interest rates (although these lower rated fixed income securities are also
affected by changes in interest rates). In the past, economic downturns or an
increase in interest rates have, under certain circumstances, caused a higher
incidence of default by the issuers of these securities and may do so in the
future, especially in the case of highly leveraged issuers. The prices for these
securities may be affected by legislative and regulatory developments. The
market for these lower rated fixed income securities may be less liquid than the
market for investment grade fixed income securities. Furthermore, the liquidity
of these lower rated securities may be affected by the market's perception of
their credit quality. Therefore, the Adviser's judgment may at times play a
greater role in valuing these securities than in the case of investment grade
fixed income securities, and it also may be more difficult during times of
certain adverse market conditions to sell these lower rated securities to meet
redemption requests or to respond to changes in the market.
While the Adviser may refer to ratings issued by established credit rating
agencies, it is not the Series' policy to rely exclusively on ratings issued by
these rating agencies, but rather to supplement such ratings with the Adviser's
own independent and ongoing review of credit quality. To the extent the Series
invests in these lower rated securities, the achievement of its investment
objectives may be more dependent on the Adviser's own credit analysis than in
the case of a fund investing in higher quality fixed income securities. These
lower rated securities may also include zero coupon bonds, deferred interest
bonds and PIK bonds.
FOREIGN SECURITIES:
The Limited Maturity Series may invest in dollar-denominated foreign debt
securities. The Money Market Series may invest in the securities of foreign
issuers and in the securities of foreign branches of U.S. banks, such as
negotiable certificates of deposit (Eurodollars). The remaining Series may
invest in dollar-denominated and non dollar-denominated foreign securities. As
discussed in the Prospectus, investing in foreign securities generally
represents a greater degree of risk than investing in domestic securities due to
possible exchange rate fluctuations, less publicly available information, more
volatile markets, less securities regulation, less favorable tax provisions, war
or expropriation. As a result of its investments in foreign securities, a Series
may receive interest or dividend payments, or the proceeds of the sale or
redemption of such securities,in the foreign currencies in which such securities
are denominated. Under certain circumstances, such as where the Adviser believes
that the applicable exchange rate is unfavorable at the time the currencies are
received or the Adviser anticipates, for any other reason, that the exchange
rate will improve, a Series may hold such currencies for an indefinite period of
time. While the holding of currencies will permit a Series to take advantage of
favorable movements in the applicable exchange rate, such strategy also exposes
the Series to risk of loss if exchange rates move in a direction adverse to the
Series' position. Such losses could reduce any profits or increase any losses
sustained by the Series from the sale or redemption of securities and could
reduce the dollar value of interest or dividend payments received.
AMERICAN DEPOSITARY RECEIPTS
Each of the Series except the Limited Maturity Series and the Money Market
Series may invest in American Depositary Receipts ("ADRs") which are
certificates issued by a U.S. depositary (usually a bank) and represent a
specified quantity of shares of an underlying non-U.S. stock on deposit with a
custodian bank as collateral. ADRs may be sponsored or unsponsored. A sponsored
ADR is issued by a depository which has an exclusive relationship with the
issuer of the underlying security. An unsponsored ADR may be issued by any
number of U.S. depositories. A Series may invest in either type of ADR. Although
the U.S. investor holds a substitute receipt of ownership rather than direct
stock certificates, the use of the depositary receipts in the United States can
reduce costs and delays as well as potential currency exchange and other
difficulties. A Series may purchase securities in local markets and direct
delivery of these ordinary shares to the local depository of an ADR agent bank
in the foreign country. Simultaneously, the ADR agents create a certificate
which settles at the Series' custodian in five days. A Series may also execute
trades on the U.S. markets using existing ADRs. A foreign issuer of the security
underlying an ADR is generally not subject to the same reporting requirements in
the United States as a domestic issuer. Accordingly the information available to
a U.S. investor will be limited to the information the foreign issuer is
required to disclose in its own country and the market value of an ADR may not
reflect undisclosed material information concerning the issuer of the underlying
security. ADRs may also be subject to exchange rate risks if the underlying
foreign securities are denominated in foreign currency.
PORTFOLIO TRADING
The Emerging Growth Series, the Growth Series, the Research Series, the Total
Return Series, the Bond Series, the Strategic Fixed Income Series, the Growth
With Income Series, the Limited Maturity Series, the High Income Series and the
Utilities Series expect to have a portfolio turnover rate of up to 82%, 50%,
79%, 66%, 144%,
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153%, 78%, 262%, 59%, and 115% respectively, during the current fiscal year. The
World Governments Series had a portfolio turnover rate of 62% for the fiscal
year ended December 31, 1994.
-------------------
A Series' limitations, policies and ratings restrictions are adhered to at the
time of purchase or utilization of assets; a subsequent change in circumstances
will not be considered to result in a violation of policy.
3. INVESTMENT RESTRICTIONS
Each Series has adopted the following restrictions which cannot be changed
without the approval of the holders of a majority of the Series' shares (which,
as used in this Statement of Additional Information, means the lesser of (i)
more than 50% of the outstanding shares of the Trust or a Series, as applicable,
or (ii) 67% or more of the outstanding shares of the Trust or a Series, as
applicable, present at a meeting if holders of more than 50% of the outstanding
shares of the Trust or a Series, as applicable, are represented in person or by
proxy). Except for Investment Restriction (1), these investment restrictions and
policies are adhered to at the time of purchase or utilization of assets; a
subsequent change in circumstances will not be considered to result in a
violation of any of the restrictions.
The Trust, on behalf of any Series, may not:
(1)
borrow amounts in excess of 33 1/3% of its assets
including amounts borrowed and then only as a temporary measure for
extraordinary or emergency purposes;
(2)
underwrite securities issued by other persons except
insofar as the Series may technically be deemed an underwriter under the
Securities Act of 1933, as amended (the "1933 Act") in selling a portfolio
security;
purchase or sell real(3)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
1940 Act. For purposes of this restriction, collateral arrangements with
respect to any type of swap, option, Forward Contracts and Futures Contracts
and collateral arrangements with respect to initial and variation margin are
not deemed to be the issuance of a senior security;
(5)
make loans to other persons. For these purposes, the
purchase of commercial paper, the purchase of a portion or all of an issue of
debt securities, the lending of portfolio securities, or the investment of the
Series' assets in repurchase agreements, shall not be considered the making of
a loan; or
(6)
purchase any securities of an issuer of a particular
industry, if as a result, more than 25% of its gross assets would be invested
in securities of issuers whose principal business activities are in the same
industry (except (i) there is no limitation with respect to obligations issued
or guaranteed by the U.S. Government or its agencies and instrumentalities and
repurchase agreements collateralized by such obligations, (ii) the High Income
Series may invest up to 40% of its gross assets in each of the electric
utility and telephone industries, (iii) the Money Market Series may invest up
to 75% of its assets in all finance companies as a group, all banks and bank
holding companies as a group and all utility companies as a group when in the
opinion of management yield differentials and money market conditions suggest
and when cash is available for such investment and instruments are available
for purchase which fulfill that Series' objective in terms of quality and
marketability, (iv) the Strategic Fixed Income Series may invest up to 40% of
its assets in each of the electric utility and telephone industries and (v)
the Utilities Series will invest at least 25% of its gross assets in the
utilities industry).
In addition, each Series has adopted the following nonfundamental policies which
may be changed by the vote of the Trust's Board of Trustees without shareholder
approval. The Trust, on behalf of any Series, will not:
(1)
invest in illiquid investments, including securities subject
to legal or contractual restrictions on resale or for which there is no
readily available market (e.g., trading in the security is suspended, or, in
the case of unlisted securities, where no market exists) if more than 15% of
the Series' assets (taken at market value) (10% of assets in the case of the
Money Market Series) would be invested in such securities. Repurchase
agreements maturing in more than seven days will be deemed to be illiquid for
purposes of the Series' limitation on investment in illiquid securities.
Securities that are not registered under the 1933 Act and sold in reliance on
Rule 144A thereunder, but are determined to be liquid by the Trust's Board of
Trustees (or its delegee), will not be subject to this 15% (10% in the case of
the Money Market Series) limitation;
(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;
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(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
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.
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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 Century
Variable Annuity Account, 2000 Heritage Way, Waverly, Iowa 50677-9208 was the
owner of 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 per Series plus $100 per meeting and committee meeting
attended per 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.
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INVESTMENT ADVISER
MFS and its predecessor organizations have a history of money management dating
from 1924. MFS is a subsidiary of Sun Life of Canada (U.S.), 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 Fund's fiscal year ended December 31, 1994, MFS received management fees
for the World Governments Series under the Advisory Agreement of $7,604 and
assumed $36,473 of the World Governments 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 a 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 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 a
Series' investments, maintaining books of original entry for portfolio and fund
accounting and other required books and accounts, and calculating the daily net
asset value of shares of the Series. The Custodian does not determine the
investment policies of the Series or decide which securities the Series will buy
or sell. Each Series may, however, invest in securities of the Custodian and may
deal with the Custodian as principal in securities transactions. 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 Governments Fund
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.
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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 a Series are made by
employees of MFS, who are appointed and supervised by its senior officers.
Changes in a Series' investments are reviewed by the Trust's Board of Trustees.
A Series' portfolio manager may serve other clients of MFS or any subsidiary of
MFS in a similar capacity.
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain and maintain the availability of
execution at the most favorable prices and in the most effective manner
possible. MFS has complete freedom as to the markets in and the broker-dealers
through which it seeks this result. MFS attempts to achieve this result by
selecting broker-dealers to execute portfolio transactions on behalf of the
Series and other clients of MFS on the basis of their professional capability,
the value and quality of their brokerage services, and the level of their
brokerage commissions. In the case of securities, such as fixed income
securities, which are principally traded in the over-the-counter market on a net
basis through dealers acting for their own account and not as brokers (where no
stated commissions are paid but the prices include a dealer's markup or
markdown), MFS normally seeks to deal directly with the primary market makers,
unless in its opinion, better prices are available elsewhere. In the case of
securities purchased from underwriters, the cost of such securities generally
includes a fixed underwriting commission or concession. Securities firms or
futures commission merchants may receive brokerage commissions on transactions
involving options, Futures Contracts and Options on Futures Contracts and the
purchase and sale of underlying securities upon exercise of options. The
brokerage commissions associated with buying and selling options may be
proportionately higher than those associated with general securities
transactions. From time to time, soliciting dealer fees are available to MFS on
the tender of a Series' portfolio securities in so-called tender or exchange
offers. Such soliciting dealer fees are in effect recaptured for the Series by
MFS. At present no other recapture arrangements are in effect.
Under the Advisory Agreements and as permitted by Section 28(e) of the
Securities Exchange Act of 1934, as amended, MFS may cause a Series to pay a
broker-dealer which provides brokerage and research services to MFS an amount of
commission for effecting a securities transaction for a Series in excess of the
amount other broker-dealers would have charged for the transaction if MFS
determines in good faith that the greater commission is reasonable in relation
to the value of the brokerage and research services provided by the executing
broker-dealer viewed in terms of either a particular transaction or MFS's
overall responsibilities to the Series or to its other clients. Not all of such
services are useful or of value in advising a Series.
The term "brokerage and research services" includes advice as to the value of
securities, the advisability of purchasing or selling securities, and the
availability of purchasers or sellers of securities; furnishing analyses and
reports concerning issues, industries, securities, economic factors and trends,
portfolio strategy and the performance of accounts; and effecting securities
transactions and performing functions incidental thereto such as clearance and
settlement.
Although commissions paid on every transaction will, in the judgment of MFS, be
reasonable in relation to the value of the brokerage services provided,
commissions exceeding those which another broker might charge may be paid to
broker-dealers who were selected to execute transactions on behalf of the
Series' and MFS's other clients in part for providing advice as to the
availability of purchasers or sellers of securities and services in effecting
securities transactions and performing functions incidental thereto such as
clearance and settlement.
Broker-dealers may be willing to furnish statistical, research and other factual
information or services ("Research") to MFS for no consideration other than
brokerage or underwriting commissions. Securities may be bought or sold through
such broker-dealers, but at present, unless otherwise directed by a 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 Fund and MFS).
The investment management personnel of MFS attempt to evaluate the quality of
Research provided by brokers. Results of this effort are sometimes used by MFS
as a consideration in the selection of brokers to execute portfolio
transactions. However, MFS is unable to quantify the amount of commissions which
will be paid as a result of such Research because a substantial number of
transactions will be effected through brokers which provide Research but which
were selected principally because of their execution capabilities.
The management fee that each Series pays to MFS will not be reduced as a
consequence of the receipt of brokerage and research services by MFS. To the
extent a Series' portfolio transactions are used to obtain such services, the
brokerage commissions paid by the Series will exceed those that might otherwise
be paid, by an amount which cannot be presently determined. Such services would
be useful and of value to MFS in serving both a Series and other clients and,
conversely, such services obtained by the placement of brokerage business of
other clients would be useful to MFS in carrying out its obligations to the
Series. While such services are not expected to reduce the expenses of MFS, MFS
would, through
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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 a Series'
portfolio as well as for that of one or more of the other clients of MFS.
Investment decisions for a Series and for such other clients are made with a
view to achieving their respective investment objectives. It may develop that a
particular security is bought or sold for only one client even though it might
be held by, or bought or sold for, other clients. Likewise, a particular
security may be bought for one or more clients when one or more other clients
are selling that same security. Some simultaneous transactions are inevitable
when several clients receive investment advice from the same investment adviser,
particularly when the same security is suitable for the investment objectives of
more than one client. When two or more clients are simultaneously engaged in the
purchase or sale of the same security, the securities are allocated among
clients in a manner believed to be equitable to each. It is recognized that in
some cases this system could have a detrimental effect on the price or volume of
the security as far as a Series is concerned. In other cases, however, it is
believed that a Series' ability to participate in volume transactions will
produce better executions for the Series.
6. TAX STATUS
Shares of the Series are offered only to the separate accounts of the
Participating Insurance Companies that fund Contracts. See the applicable
Contract prospectus for a discussion of the special taxation of those companies
with respect to those accounts and of the Contract holders.
Each Series of the Trust 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 any of the Series will
be required to pay any federal income or excise taxes, although a Series which
has foreign-source income may be subject to foreign withholding taxes. If any of
the Series should fail to qualify as a "regulated investment company" in any
year, that Series would incur a regular corporate federal income tax upon its
taxable income.
Each Series intends to diversify its assets as required by section 817(h) of the
Code and the regulations thereunder. These requirements, which are in addition
to the diversification requirements of Subchapter M, place certain limitations
on the proportion of each Series' assets that may be represented by any single
investment and securities from the same issuer. If a Series should fail to
comply with these requirements, 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.
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 a 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 a Series in zero coupon bonds, deferred interest bonds,
payment-in-kind bonds, certain stripped securities, and certain securities
purchased at a market discount will cause the Series to recognize income prior
to the receipt of cash payments with respect to those securities. In order to
distribute this income and avoid a tax on the Series, the Series may be required
to liquidate portfolio securities that it might otherwise have continued to
hold, potentially resulting in additional taxable gain or loss to the Series.
A Series' transactions in options, Futures Contracts, Forward Contracts, foreign
currencies, swaps and related transactions, to the extent allowed by its
investment objectives, will be subject to special tax rules that may affect the
amount, timing, and character of Series income and distributions to
shareholders. For example, certain positions held by a Series on the last
business day of each taxable year will be marked to market (I.E., treated as if
closed out) on that day, and any 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 a Series that substantially diminish its risk of loss
with respect to other positions in its portfolio may constitute "straddles," and
may be subject to special tax rules that would cause deferral of Series losses,
adjustments in the holding periods of Series securities, and conversion of
short-term into long-term capital losses. Certain tax elections exist for
straddles which may alter the effects of these rules. Each 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 a Series that invests in
foreign securities. Foreign exchange gains and losses realized by the Series
will generally be treated as ordinary income and losses. Use of foreign
currencies for non-hedging purposes may be limited in order to avoid a tax on a
Series. Investment by a Series in certain "passive foreign investment companies"
may also be limited in order to avoid a tax on the Series.
Investment income received by a 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 a Series
to a reduced rate of tax or an exemption from tax on such income; the Series'
intend to qualify for treaty reduced rates where available. It is impossible,
however, to determine a Series effective rate of foreign tax in advance since
the amount of the Series' assets to be invested within various countries is not
known.
7. NET INCOME AND DISTRIBUTIONS
MONEY MARKET SERIES: The net income attributable to the Money Market Series is
determined each day during which the Exchange is
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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 the Money Market Series will be
deemed to have agreed to such contribution in these circumstances by its
investment in the Money Market Series. This procedure would permit the net asset
value per share of the Money Market Series to be maintained at a constant $1.00
per share.
ALL OTHER SERIES: Each Series other than the Money Market Series intends to
distribute to its shareholders annually dividends substantially equal to all of
its net investment income. Such Series' net investment income consists of
non-capital gain income less expenses. Such Series' intend to distribute net
realized short- and long-term capital gains, if any, at least annually.
Shareholders will be informed of the tax consequences of such distributions,
including whether any portion represents a return of capital, after the end of
each calendar year. (For additional taxation information, see "Tax Status"
above.)
8. DETERMINATION OF NET ASSET VALUE;
PERFORMANCE INFORMATION
NET ASSET VALUE
The net asset value per share of each Series is determined each day during which
the Exchange is open for trading. This determination is made once during each
such day as of the close of regular trading on the Exchange by deducting the
amount of a Series' liabilities from the value of its assets and dividing the
difference by the number of shares of the Series outstanding.
MONEY MARKET SERIES: Portfolio securities of the Money Market Series are valued
at amortized cost, which the Trustees have determined in good faith constitutes
fair value for the purposes of complying with the 1940 Act. This valuation
method will continue to be used until such time as the Trustees determine that
it does not constitute fair value for such purposes. The Money Market Series
will limit its portfolio to those investments in U.S. dollar-denominated
instruments which the Board of Trustees determines present minimal credit risks,
and which are of high qualify 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.
ALL OTHER SERIES: Securities, futures contracts and options in a Series'
portfolio (other than short-term obligations) for which the principal market is
one or more securities or commodities exchanges will be valued at the last
reported sale price or at the settlement price prior to the determination (or if
there has been no current sale, at the closing bid price) on the primary
exchange on which such securities, futures contracts or options are traded; but
if a securities exchange is not the principal market for securities, such
securities will, if market quotations are readily available, be valued at
current bid prices, unless such securities are reported on the NASDAQ 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 a Series' portfolio are
valued on the basis of valuations furnished by a pricing service which utilizes
both dealer-supplied valuations and electronic data processing techniques which
take into account appropriate factors such as institutional-sized trading in
similar groups of securities, yields, quality, coupon rate, maturity, type of
issue, trading characteristics and other market data, without exclusive reliance
upon quoted prices or exchange or over-the-counter prices, since such valuations
are believed to reflect more accurately the fair value of such securities.
Short-term
22
<PAGE>
obligations, if any, in a Series' portfolio are valued at amortized cost, which
constitutes fair value as determined by the Board of Trustees. Short-term
securities with a remaining maturity in excess of 60 days will be valued based
upon dealer supplied valuations. Portfolio securities and over-the-counter
options, for which there are no quotations or valuations are valued at fair
value as determined in good faith by or at the direction of the Board of
Trustees.
PERFORMANCE INFORMATION
MONEY MARKET SERIES: The Money Market Series will provide current annualized and
effective annualized yield quotations based on the daily dividends of shares of
the Money Market Series. These quotations may from time to time be used in
advertisements, shareholder reports or other communications to shareholders.
Any current yield quotation of the Money Market Series which is used in such a
manner as to be subject to the provisions of Rule 482(d) under the 1933 Act
shall consist of an annualized historical yield, carried at least to the nearest
hundredth of one percent, based on a specific seven calendar day period and
shall be calculated by dividing the net change in the value of an account having
a balance of one share of that class at the beginning of the period by the value
of the account at the beginning of the period and multiplying the quotient by
365/7. For this purpose the net change in account value would reflect the value
of additional shares purchased with dividends declared on the original share and
dividends declared on both the original share and any such additional shares,
but would not reflect any realized gains or losses from the sale of securities
or any unrealized appreciation or depreciation on portfolio securities. In
addition, any effective yield quotation of the Money Market Series so used shall
be calculated by compounding the current yield quotation for such period by
multiplying such quotation by 7/365, adding 1 to the product, raising the sum to
a power equal to 365/7, and subtracting 1 from the result. These yield
quotations should not be considered as representative of the yield of the Money
Market Series in the future since the yield will vary based on the type, quality
and maturities of the securities held in its portfolio, fluctuations in
short-term interest rates and changes in the Money Market Series expenses.
ALL OTHER SERIES:
TOTAL RATE OF RETURN -- Each Series, other than the Money Market Series, will
calculate its total rate of return of its shares for certain periods by
determining the average annual compounded rates of return over those periods
that would cause an investment of $1,000 (made with all distributions
reinvested) to reach the value of that investment at the end of the periods.
Each Series may also calculate total rates of return which represent aggregate
performance over a period or year-by-year performance. The aggregate total rate
of return for shares of the World Governments Series for the period from 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 a Series, other than the Money Market Series,
is based on the annualized net investment income per share of that Series for
the 30-day period. The yield for such a Series is calculated by dividing its net
investment income earned during the period by the offering price per share of
that Series on the last day of the period. The resulting figure is then
annualized. Net investment income per share is determined by dividing (i) the
dividends and interest of that Series during the period, minus accrued expenses
of that Series for the period by (ii) the average number of shares of that
Series entitled to receive dividends during the period multiplied by the
offering price per share on the last day of the period. 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 the 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 mutual fund
in America.
- -- 1924 -- Massachusetts Investors Trust is the first mutual fund to make full
public disclosure of its operations in shareholder reports.
- -- 1932 -- One of the first internal research departments is established to
provide in-house analytical capability for an investment management firm.
- -- 1933 -- Massachusetts Investors Trust is the first mutual fund to register
under the 1933 Act.
- -- 1936 -- Massachusetts Investors Trust is the first mutual fund to let
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.
23
<PAGE>
- -- 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 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 identified on page 2 hereof.
The Declaration of Trust further authorizes the Trustees to classify or
reclassify any series of shares into one or more classes. The Trustees have no
current intention to classify more than one class of shares. Each share of a
Series represents an equal proportionate interest in the assets of the Series.
Upon liquidation of a Series, shareholders of the Series are entitled to share
PRO RATA in the net assets of the Series available for distribution to
shareholders. The Trust reserves the right to create and issue additional series
or classes of shares, in which case the shares of each class would participate
equally in the earnings, dividends and assets allocable to that class of the
particular series.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of shareholders.
Although Trustees are not elected annually by the shareholders, shareholders
have under certain circumstances the right to remove one or more Trustees in
accordance with the provisions of Section 16(c) of the 1940 Act. No material
amendment may be made to the Declaration of Trust without the affirmative vote
of a majority of the Trust's shares. Shares have no pre-emptive or conversion
rights. Shares are fully paid and non-assessable. The Trust may enter into a
merger or consolidation, or sell all or substantially all of its assets (or all
or substantially all of the assets belonging to any series of the Trust), if
approved by the vote of the holders of two-thirds of the Trust's outstanding
shares voting as a single class, or of the affected series of the Trust, as the
case may be, except that if the Trustees of the Trust recommend such merger,
consolidation or sale, the approval by vote of the holders of a majority of the
Trust's or the affected series' outstanding shares (as defined in "Investment
Restrictions") will be sufficient. The Trust or any series of the Trust may also
be terminated (i) upon liquidation and distribution of its assets, if approved
by the vote of the holders of two-thirds of its outstanding shares, or (ii) by
the Trustees by written notice to the shareholders of the Trust of the affected
series. If not so terminated, the Trust will continue indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Trust and provides for indemnification
and reimbursement of expenses out of Trust property for any shareholder held
personally liable for the obligations of the Trust. The Declaration of Trust
also provides that it shall maintain appropriate insurance (for example,
fidelity bonding and errors and omissions insurance) for the protection of the
Trust, its shareholders, Trustees, officers, employees and agents covering
possible tort or other liabilities. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which both inadequate insurance existed and the Trust itself was unable to
meet its obligations.
The Declaration of Trust further provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust
and that the Trustees will not be liable for any action or failure to act, but
nothing in the Declaration of Trust protects a Trustee against any liability to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
his office.
10. INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS
Deloitte & Touche LLP are the Trust's independent certified public accountants.
The Statements of Assets and Liabilities for the MFS OTC Series (currently known
as the MFS Emerging Growth Series), MFS Growth Series, MFS Research Series, MFS
Growth With Income Series, MFS Total Return Series, MFS Utilities Series, MFS
High Income Series, MFS Strategic Fixed Income Series, MFS Bond Series, MFS
Limited Maturity Series, and 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. With respect to the MFS World Governments
Series, the Portfolio of Investments at December 31, 1994, the Statement of
Assets and Liabilities at
24
<PAGE>
December 31, 1994, the Statement of Operations for the period ended December 31,
1994, the Statement of Changes in Net Assets for the period ended December 31,
1994, the Notes to Financial Statements and the Independent Auditors' Report,
each of which is included in the Annual Report to shareholders of the MFS 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.
25
<PAGE>
MFS VARIABLE INSURANCE TRUST
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1994
<TABLE>
<CAPTION>
MFS MFS
GROWTH MFS MFS STRATEGIC
MFS MFS WITH TOTAL MFS HIGH FIXED
MFS* OTC GROWTH RESEARCH INCOME RETURN UTILITIES INCOME INCOME
SERIES SERIES SERIES SERIES SERIES SERIES SERIES SERIES
--------- --------- ----------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Cash............................... $ 2,796 $ 2,796 $ 2,796 $ 2,796 $ 2,796 $ 2,796 $ 2,796 $ 2,796
Deferred organization expenses..... 5,985 5,985 5,985 5,985 5,985 5,985 5,985 5,985
--------- --------- ----------- --------- --------- --------- --------- -----------
Total assets..................... $ 8,781 $ 8,781 $ 8,781 $ 8,781 $ 8,781 $ 8,781 $ 8,781 $ 8,781
Liabilities:
Accrued expenses................... 181 181 181 181 181 181 181 181
--------- --------- ----------- --------- --------- --------- --------- -----------
Net assets....................... $ 8,600 $ 8,600 $ 8,600 $ 8,600 $ 8,600 $ 8,600 $ 8,600 $ 8,600
--------- --------- ----------- --------- --------- --------- --------- -----------
--------- --------- ----------- --------- --------- --------- --------- -----------
Net Asset Value, Redemption Price and
Offering Price Per Share of
Beneficial Interest
(860 shares outstanding for each
Series, except the MFS Money Market
Series, 8,600 shares outstanding
for the MFS Money Market Series)... $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
--------- --------- ----------- --------- --------- --------- --------- -----------
--------- --------- ----------- --------- --------- --------- --------- -----------
<CAPTION>
MFS MFS
MFS LIMITED MONEY
BOND MATURITY MARKET
SERIES SERIES SERIES
--------- ----------- ---------
<S> <C> <C> <C>
Assets:
Cash............................... $ 2,796 $ 2,796 $ 2,796
Deferred organization expenses..... 5,985 5,985 5,985
--------- ----------- ---------
Total assets..................... $ 8,781 $ 8,781 $ 8,781
Liabilities:
Accrued expenses................... 181 181 181
--------- ----------- ---------
Net assets....................... $ 8,600 $ 8,600 $ 8,600
--------- ----------- ---------
--------- ----------- ---------
Net Asset Value, Redemption Price and
Offering Price Per Share of
Beneficial Interest
(860 shares outstanding for each
Series, except the MFS Money Market
Series, 8,600 shares outstanding
for the MFS Money Market Series)... $ 10.00 $ 10.00 $ 1.00
--------- ----------- ---------
--------- ----------- ---------
<FN>
NOTES:
(1) The MFS Variable Insurance Trust (the "Trust") 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"): MFS OTC Series, MFS Growth Series, MFS Research
Series, MFS Growth with Income Series, MFS Total Return Series, MFS
Utilities Series, MFS High Income Series, MFS World Governments Series, MFS
Strategic Fixed Income Series, MFS Bond Series, MFS Limited Maturity Series
and MFS Money Market Series. Each Series, except for the World Governments
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 860 shares of beneficial
interest (except the MFS Money Market Series) and of 8,600 shares of
beneficial interest of the MFS Money Market Series (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 any Series on any redemption by Massachusetts Financial Services
Company, or any current holder of any Series' initial shares, will be
reduced by the pro rata portion of any unamortized organization expenses
which the number of initial shares redeemed bears to the total number of
initial shares outstanding immediately prior to such redemption.
* (Currently known as the MFS Emerging Growth Series)
</TABLE>
26
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees of MFS Variable Insurance Trust and Shareholders of MFS
OTC Series, MFS Growth Series, MFS Research Series, MFS Growth with Income
Series, MFS Total Return Series, MFS Utilities Series, MFS High Income Series,
MFS Strategic Fixed Income Series, MFS Bond Series, MFS Limited Maturity Series
and MFS Money Market Series:
We have audited the accompanying statements of assets and liabilities of MFS OTC
Series, MFS Growth Series, MFS Research Series, MFS Growth with Income Series,
MFS Total Return Series, MFS Utilities Series, MFS High Income Series, MFS
Strategic Fixed Income Series, MFS Bond Series, MFS Limited Maturity Series and
MFS Money Market Series (the "Series") (each a series of the MFS Variable
Insurance Trust (the "Trust")) as of December 31, 1994. These financial
statements are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements of assets and liabilities are
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 audits of the statements
of assets and liabilities provide a reasonable basis for our opinion.
In our opinion, such statements of assets and liabilities present fairly, in all
material respects, the financial position of each of the Series at December 31,
1994 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Boston, Massachusetts
February 3, 1995
27
<PAGE>
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
(800) 637-8730
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN
Investors Bank & Trust Company
89 South Street, Boston, 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- VARIABLE
INSURANCE TRUST-SM-
500 Boylston Street
Boston, MA 02116
[LOGO]
<PAGE>
EXHIBIT A
TRUSTEE COMPENSATION TABLE
<TABLE>
<CAPTION>
TRUSTEE FEES FROM
EACH SERIES
TRUSTEE FEES FROM OTHER THAN TOTAL TRUSTEE
WORLD GOVERNMENTS WORLD GOVERNMENTS FEES FROM THE
NAME OF TRUSTEE SERIES (1) SERIES (1) FUND 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>
