<PAGE>
As filed with the Securities and Exchange Commission on April 30, 1997
1933 Act File No. 33-74668
1940 Act File No. 811-8326
- ----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 7
AND
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 8
MFS VARIABLE INSURANCE TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
500 Boylston, Street, Boston, Massachusetts 02116
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: 617-954-5000
Stephen E. Cavan, Massachusetts Financial Services Company,
500 Boylston Street, Boston, Massachusetts 02116
(Name and Address of Agent for Service)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
It is proposed that this filing will become effective (check appropriate box)
/x/ immediately upon filing pursuant to paragraph (b)
/ / pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(i)
/ / on [DATE] pursuant to paragraph (a)(i)
/ / 75 days after filing pursuant to paragraph (a)(ii)
/ / on [DATE] pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
/ / this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
Pursuant to Rule 24f-2, the Registrant has registered an indefinite number of
its Shares of Beneficial Interest, without par value, under the Securities
Act of 1933. The Registrant filed a Rule 24f-2 Notice for its fiscal year
ended December 31, 1996 on February 28, 1997.
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- -----------------------------------------------------------------------------
<PAGE>
MFS VARIABLE INSURANCE TRUST
MFS EMERGING GROWTH SERIES
MFS VALUE SERIES
MFS RESEARCH SERIES
MFS GROWTH WITH INCOME SERIES
MFS TOTAL RETURN SERIES
MFS UTILITIES SERIES
MFS HIGH INCOME SERIES
MFS WORLD GOVERNMENTS SERIES
MFS STRATEGIC FIXED INCOME SERIES
MFS BOND SERIES
MFS LIMITED MATURITY SERIES
MFS MONEY MARKET SERIES
CROSS REFERENCE SHEET
(Pursuant to Rule 404 showing location in Prospectus and/or Statement of
Additional Information of the responses to the Items in Parts A and B of
Form N-1A)
<TABLE>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>
1 (a),(b) Front Cover Page *
2 (a) Expense Summary *
(b),(c) * *
3 (a) Condensed Financial Information *
(b) * *
(c) Information Concerning Shares *
of Each Series - Performance
Information
(d) Condensed Financial Information *
<PAGE>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
4 (a) Front Cover Page; Investment *
Concept of the Trust;
Investment Objectives and
Policies; Investment Techniques
(b) Investment Objectives and *
Policies; Investment Techniques
(c) Investment Objectives and *
Policies; Additional Risk Factors
5 (a) Investment Concept of the Trust; *
Management of the Series
(b) Management of the Series - *
Investment Adviser;
Back Cover Page
(c) Management of the Series - *
Investment Adviser
(d) Management of the Series - Management of the Trust -
Administrator Administrator
(e) Management of the Series - *
Shareholder Servicing Agent;
Back Cover Page
(f) Information Concerning Shares *
of Each Series - Expenses;
Condensed Financial
Information; Expense Summary
(g) Additional Risk Factors - Portfolio *
Trading
(h) * *
5A (a),(b),(c) ** **
<PAGE>
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
6 (a) Information Concerning Shares *
of Each Series - Description of
Shares, Voting Rights and
Liabilities; Information
Concerning Shares of Each
Series - Purchases and
Redemptions
(b) Information Concerning Shares *
of Each Series - Description of
Shares, Voting Rights and
Liabilities
(c),(d) * *
(e) Shareholder Communications *
(f) Information Concerning Shares *
of Each Series - Distributions;
(g) Information Concerning Shares *
of Each Series - Tax Status;
Information Concerning Shares
of Each Series - Distributions
(h) * *
7 (a) Management of the Series - *
Distributor; Back Cover Page
(b) Information Concerning Shares *
of Each Series - Purchases and
Redemptions; Information
Concerning Shares of Each
Series - Net Asset Value
(c),(d),(e),(f) * *
(g) * *
<PAGE>
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
8 (a),(b) Information Concerning Shares *
of Each Series - Purchases and
Redemptions
(c) * *
(d) Information Concerning Shares *
of Each Series - Purchases and
Redemptions
9 * *
10 (a),(b) * Front Cover Page
11 * Front Cover Page
12 * General Information and
Definitions
13 (a) * Investment Techniques
(b) * Investment Techniques;
Investment Restrictions
(c) * Investment Restrictions
(d) Additional Risk Factors - *
Portfolio Trading
14 (a),(b) * Management of the Trust -
Trustees and Officers
(c) * Management of the Trust -
Trustee Compensation
Table
15 (a) * *
(b),(c) * Management of the Trust
<PAGE>
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
16 (a) Management of the Series - Management of the Trust -
Investment Adviser Investment Adviser;
Management of the Trust -
Trustees and Officers
(b) Management of the Series - Management of the Trust -
Investment Adviser; Investment Adviser
Expenses
(c) * *
(d) Management of the Series - Management of the Trust -
Administrator Administrator
(e) * Portfolio Transactions and
Brokerage Commissions
(f),(g) * *
(h) * Management of the Trust -
Custodian; Independent
Auditors and Financial
Statements; Back Cover Page
(i) * Management of the Trust -
Shareholder Servicing Agent
17 (a),(b),(c), * Portfolio Transactions and
(d),(e) Brokerage Commissions
18 (a) * Description of Shares, Voting
Rights and Liabilities
(b) * *
19 (a) * *
<PAGE>
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
(b) Information Concerning Shares Management of the Trust -
of Each Series - Net Asset Distributor; Determination
Value; Information Concerning of Net Asset Value;
Shares of Each Series - Performance Information -
Purchases and Redemptions Net Asset Value
(c) * *
20 * Tax Status
21 (a),(b) * Management of the Trust -
Distributor
(c) * *
22 (a),(b) * Determination of Net Asset
Value; Performance
Information
23 * Independent Auditors
and Financial Statements
</TABLE>
_______________________
* Not Applicable
** Contained in Annual Report
<PAGE>
<TABLE>
<S> <C>
MFS-REGISTERED TRADEMARK-
VARIABLE PROSPECTUS
INSURANCE TRUST May 1, 1997
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
MFS-Registered Trademark- VARIABLE
INSURANCE TRUST-SM-
</TABLE>
MFS Variable Insurance Trust (the "Trust") is an open-end management investment
company offering insurance company separate accounts a selection of investment
vehicles for variable annuity and variable life insurance contracts (the
"Contracts"). Currently the Trust offers shares of beneficial interest of 12
separate mutual fund series (individually or collectively hereinafter referred
to as a "Series" or the "Series"):
- -- MFS EMERGING GROWTH SERIES (the "Emerging Growth Series"), which seeks to
provide long-term growth of capital;
- -- MFS VALUE SERIES (the "Value Series"), which seeks capital appreciation;
- -- MFS RESEARCH SERIES (the "Research Series"), which seeks to provide long-term
growth of capital and future income;
- -- MFS GROWTH WITH INCOME SERIES (the "Growth With Income Series"), which seeks
to provide reasonable current income and long-term growth of capital and
income;
- -- MFS TOTAL RETURN SERIES (the "Total Return Series"), which seeks primarily to
provide above-average income (compared to a portfolio invested entirely in
equity securities) consistent with the prudent employment of capital, and
secondarily to provide a reasonable opportunity for growth of capital and
income;
- -- MFS UTILITIES SERIES (the "Utilities Series"), which seeks capital growth and
current income (income above that available from a portfolio invested
entirely in equity securities);
- -- MFS HIGH INCOME SERIES (the "High Income Series"), which seeks high current
income by investing primarily in a professionally managed diversified
portfolio of fixed income securities, some of which may involve equity
features;
- -- MFS WORLD GOVERNMENTS SERIES (the "World Governments Series"), which seeks
not only preservation but also growth of capital, together with moderate
current income;
- -- MFS STRATEGIC FIXED INCOME SERIES (the "Strategic Fixed Income Series"),
which seeks to maximize current income;
- -- MFS BOND SERIES (the "Bond Series"), which seeks primarily to provide as high
a level of current income as is believed consistent with prudent investment
risk and secondarily to protect shareholders' capital;
- -- MFS LIMITED MATURITY SERIES (the "Limited Maturity Series"), which seeks
primarily to provide as high a level of current income as is believed to be
consistent with prudent investment risk, and secondarily to protect
shareholders' capital; and
- -- MFS MONEY MARKET SERIES (the "Money Market Series"), which seeks as high a
level of current income as is considered consistent with the preservation of
capital and liquidity.
-------------------
THE HIGH INCOME SERIES AND THE STRATEGIC FIXED INCOME SERIES MAY EACH INVEST UP
TO 100%, RESPECTIVELY, OF ITS NET ASSETS IN LOWER RATED BONDS, COMMONLY KNOWN AS
"JUNK BONDS," THAT ENTAIL GREATER RISKS, INCLUDING DEFAULT RISKS, THAN THOSE
FOUND IN HIGHER RATED SECURITIES. INVESTORS SHOULD CAREFULLY CONSIDER THESE
RISKS BEFORE INVESTING (SEE "ADDITIONAL RISK FACTORS -- LOWER RATED BONDS"). THE
EMERGING GROWTH SERIES, THE VALUE SERIES, THE RESEARCH SERIES AND THE GROWTH
WITH INCOME SERIES ARE INTENDED FOR INVESTORS WHO UNDERSTAND AND ARE WILLING TO
ACCEPT THE RISKS ENTAILED IN SEEKING LONG-TERM GROWTH OF CAPITAL. BECAUSE OF
THEIR INVESTMENT POLICIES PERMITTING INVESTMENT IN FOREIGN SECURITIES,
INVESTMENTS IN EACH SERIES (EXCEPT FOR THE LIMITED MATURITY SERIES AND THE MONEY
MARKET SERIES) MAY BE SUBJECT TO A GREATER DEGREE OF RISK THAN INVESTMENTS IN
OTHER INVESTMENT COMPANIES WHICH INVEST ENTIRELY IN DOMESTIC SECURITIES.
-------------------
<PAGE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------
INVESTMENTS IN THE MONEY MARKET SERIES ARE NEITHER INSURED NOR GUARANTEED BY THE
U.S. GOVERNMENT AND THERE IS NO ASSURANCE THAT THE SERIES WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
-------------------
SHARES OF THE TRUST ARE AVAILABLE AND ARE BEING MARKETED AS A POOLED FUNDING
VEHICLE FOR LIFE INSURANCE COMPANIES WRITING ALL TYPES OF CONTRACTS.
This Prospectus sets forth concisely the information about each Series that a
prospective investor should know before applying for the Contracts offered by
the separate accounts of certain insurance companies ("Participating Insurance
Companies"). Investors are advised to read this Prospectus and the applicable
Contract prospectus carefully and retain them for future reference. If you
require more detailed information, a Statement of Additional Information dated
May 1, 1997, as amended or supplemented from time to time ("SAI"), is available
upon request without charge and may be obtained by calling or by writing to the
Shareholder Servicing Agent (see back cover for address and phone number). The
SAI, which is incorporated by reference into this Prospectus, has been filed
with the Securities and Exchange Commission (the "SEC"). The SEC maintains an
Internet World Wide Web site that contains the SAI, materials that are
incorporated by reference into this Prospectus and the SAI, and other
information regarding the Series. This Prospectus is available on the Adviser's
Internet World Wide Web site at http://www.mfs.com.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
1. Expense Summary................................................................................ 4
2. Investment Concept of the Trust................................................................ 5
3. Condensed Financial Information................................................................ 6
4. Investment Objectives and Policies............................................................. 17
MFS Emerging Growth Series..................................................................... 17
MFS Value Series............................................................................... 17
MFS Research Series............................................................................ 18
MFS Growth With Income Series.................................................................. 18
MFS Total Return Series........................................................................ 19
MFS Utilities Series........................................................................... 19
MFS High Income Series......................................................................... 21
MFS World Governments Series................................................................... 22
MFS Strategic Fixed Income Series.............................................................. 23
MFS Bond Series................................................................................ 24
MFS Limited Maturity Series.................................................................... 24
MFS Money Market Series........................................................................ 25
5. Investment Techniques.......................................................................... 26
6. Additional Risk Factors........................................................................ 34
7. Management of the Series....................................................................... 37
8. Information Concerning Shares of Each Series................................................... 40
Purchases and Redemptions...................................................................... 40
Net Asset Value................................................................................ 41
Distributions.................................................................................. 41
Tax Status..................................................................................... 41
Description of Shares, Voting Rights and Liabilities........................................... 41
Performance Information........................................................................ 42
Expenses....................................................................................... 43
Shareholder Communications..................................................................... 43
Appendix A -- Description of Bond Ratings.......................................................... A-1
Appendix B -- Principal Sectors of the Utilities Industry.......................................... B-1
Appendix C -- Portfolio Composition Charts......................................................... C-1
</TABLE>
3
<PAGE>
1. EXPENSE SUMMARY
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS):
<TABLE>
<CAPTION>
MFS
EMERGING MFS MFS MFS GROWTH
GROWTH VALUE RESEARCH WITH INCOME
SERIES SERIES SERIES SERIES
-------- -------- -------- -----------
<S> <C> <C> <C> <C>
Management Fee.............................................. 0.75% 0.75% 0.75% 0.75%
Other Expenses (after expense limitation)(1)(2)............. 0.25% 0.25% 0.25% 0.25%
-------- --- -------- -----------
Total Operating Expenses (after expense limitation)(2)...... 1.00% 1.00% 1.00% 1.00%
<CAPTION>
MFS
TOTAL MFS MFS HIGH MFS WORLD
RETURN UTILITIES INCOME GOVERNMENTS
SERIES SERIES SERIES SERIES
-------- -------- -------- -----------
<S> <C> <C> <C> <C>
Management Fee.............................................. 0.75% 0.75% 0.75% 0.75%
Other Expenses (after expense limitation)(1)(2)............. 0.25% 0.25% 0.25% 0.25%
-------- --- -------- -----------
Total Operating Expenses (after expense limitation)(2)...... 1.00% 1.00% 1.00% 1.00%
<CAPTION>
MFS
STRATEGIC MFS
FIXED LIMITED MFS MONEY
INCOME MFS BOND MATURITY MARKET
SERIES SERIES SERIES SERIES
-------- -------- -------- -----------
<S> <C> <C> <C> <C>
Management Fee.............................................. 0.75% 0.60% 0.55% 0.50%
Other Expenses (after expense limitation)(1)(2)............. 0.25% 0.40% 0.45% 0.10%
-------- --- -------- -----------
Total Operating Expenses (after expense limitation)(2)...... 1.00% 1.00% 1.00% 0.60%
<FN>
- ------------------------
(1) Each Series has an expense offset arrangement which reduces the Series' custodian fee based upon the amount of cash
maintained by the Series with its custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the effect of reducing the Series'
expenses). Any such fee reductions are not reflected under "Other Expenses."
(2) The Adviser has agreed to bear expenses for each Series, subject to reimbursement by each Series, such that each
Series' "Other Expenses" shall not exceed the following percentages of the average daily net assets of the Series
during the current fiscal year: 0.40% for the Bond Series, 0.45% for the Limited Maturity Series, 0.10% for the
Money Market Series, and 0.25% for each remaining Series. See "Information Concerning Shares of Each
Series--Expenses." Otherwise, "Other Expenses" and "Total Operating Expenses" for each Series would be:
</TABLE>
<TABLE>
<CAPTION>
"TOTAL OPERATING
"OTHER EXPENSES" EXPENSES"
WITHOUT WITHOUT
SERIES EXPENSE LIMITATION EXPENSE LIMITATION
- ----------------------------------------- --------------------- -------------------------
<S> <C> <C>
Emerging Growth.......................... 0.41% 1.16%
Value.................................... 3.08% 3.83%
Research................................. 0.73% 1.48%
Growth With Income....................... 1.32% 2.07%
Total Return............................. 1.35% 2.10%
Utilities................................ 2.00% 2.75%
High Income.............................. 0.87% 1.62%
World Governments........................ 1.28% 2.03%
Strategic Fixed Income................... 1.00% 1.75%
Bond..................................... 8.85% 9.45%
Limited Maturity......................... 7.00% 7.55%
Money Market............................. 27.24% 27.74%
</TABLE>
The purpose of the expense table above is to assist investors in
understanding the various costs and expenses that a shareholder of the Series
will bear directly or indirectly. The Series' annual operating expenses do not
reflect expenses
4
<PAGE>
imposed by separate accounts of Participating Insurance Companies through which
an investment in a Series is made or their related Contracts. A separate
account's expenses are disclosed in the prospectus through which the Contract
relating to that separate account is offered for sale.
2. INVESTMENT CONCEPT OF THE TRUST
The Trust is an open-end, registered management investment company comprised
of the following twelve series: Emerging Growth Series, Value Series, Research
Series, Growth With Income Series, Total Return Series, Utilities Series, High
Income Series, World Governments Series, Strategic Fixed Income Series, Bond
Series, Limited Maturity Series and Money Market Series. Each Series is a
segregated, separately managed portfolio of securities. All of the Series,
except the Utilities Series, World Governments Series and Strategic Fixed Income
Series, are diversified. Additional series may be created from time to time. The
Trust was organized as a business trust under the laws of The Commonwealth of
Massachusetts by a Declaration of Trust dated February 1, 1994.
The Trust currently offers shares of each Series to insurance company
separate accounts that fund Contracts. Separate accounts may purchase or redeem
shares at net asset value without any sales or redemption charge. Fees and
charges imposed by a separate account, however, will affect the actual return to
the holder of a Contract. A separate account may also impose certain
restrictions or limitations on the allocation of purchase payments or Contract
value to one or more Series, and not all Series may be available in connection
with a particular Contract. Prospective investors should consult the applicable
Contract prospectus for information regarding fees and expenses of the Contract
and separate account and any applicable restrictions or limitations. The Trust
assumes no responsibility for such prospectuses.
Shares of the Series are offered to the separate accounts of Participating
Insurance Companies that are affiliated or unaffiliated ("shared funding").
Shares of the Series may serve as the underlying investments for both variable
annuity and variable life insurance contracts ("mixed funding"). Due to
differences in tax treatment or other considerations, the interests of various
Contract owners might at some time be in conflict. The Trust currently does not
foresee any such conflict. Nevertheless, the Trust's Trustees intend to monitor
events in order to identify any material irreconcilable conflicts which may
possibly arise and to determine what action, if any, should be taken in response
thereto. If such a conflict were to occur, one or more separate accounts of the
Participating Insurance Companies might be required to withdraw its investments
in one one or more Series. This might force a Series to sell securities at
disadvantageous prices.
Individual Contract holders are not the "shareholders" of the Trust. Rather,
the Participating Insurance Companies and their separate accounts are the
shareholders or investors, although such companies may pass through voting
rights to their Contract holders.
The Trust's Board of Trustees provides broad supervision over the affairs of
the Trust and the Series. Massachusetts Financial Services Company, a Delaware
corporation ("MFS" or the "Adviser"), is the investment adviser to each Series.
A majority of the Trustees of the Trust are not affiliated with the Adviser. The
Adviser is responsible for the management of the assets of each Series and the
officers of the Trust are responsible for the operations. The Adviser manages
the Series' portfolios from day to day in accordance with the investment
objectives and policies of each Series. The selection of investments and the way
they are managed depend on the conditions and trends in the economy and the
financial marketplaces.
5
<PAGE>
3. CONDENSED FINANCIAL INFORMATION
The following financial information (presented for each Series which commenced
investment operations prior to December 31, 1996) has been audited since the
commencement of investment operations of such Series and should be read in
conjunction with the financial statements included in the Series' Annual Reports
to Shareholders. These financial statements are incorporated by reference into
the SAI in reliance upon the report of the Series' independent auditors given
upon their authority as experts in accounting and auditing. The Series' current
independent auditors are Deloitte & Touche LLP. The Strategic Fixed Income
Series had not commenced investment operations prior to December 31, 1996.
EMERGING GROWTH SERIES
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995*
----------------- ------------------
<S> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value--beginning of period............................. $ 11.41 $10.00
-------- ------
Income from investment operations#--
Net investment income (loss)Section............................ $ (0.01) $ 0.01
Net realized and unrealized gain on investments and foreign
currency transactions........................................ 1.95 1.74
-------- ------
Total from investment operations............................. $ 1.94 $ 1.75
-------- ------
Less distributions declared to shareholders--
From net investment income..................................... $ -- $(0.01)
From net realized gain on investments and foreign currency
transactions................................................. (0.06) (0.26)
In excess of net realized gain on investments and foreign
currency transactions........................................ (0.05) --
Tax return of capital.......................................... -- (0.07)
-------- ------
Total distributions declared to shareholders................. $ (0.11) $(0.34)
-------- ------
Net asset value--end of period................................... $ 13.24 $11.41
-------- ------
-------- ------
Total return..................................................... 17.02% 17.41%++
Ratios (to average net assets)/Supplemental dataSection:
Expenses....................................................... 1.00% 1.00%+
Net investment income (loss)................................... (0.08)% 0.10%+
Portfolio turnover............................................... 96% 73%
Average commission rate###....................................... $ 0.0401 --
Net assets at end of period (000 omitted)........................ $104,956 $3,869
- ------------------------
</TABLE>
<TABLE>
<C> <S>
* For the period from the commencement of investment operations, July 24, 1995 to December 31, 1995.
+ Annualized.
++ Not annualized.
# Per share data is based on average shares outstanding.
### Average commission rate is calculated for Series' with fiscal years beginning on or after September 1, 1995.
Section The Adviser voluntarily agreed to maintain the expenses of the Series at not more than 1.00% of average daily
net assets. To the extent actual expenses were over these limitations, the net investment loss per share and the
ratios would have been:
Net investment loss.............................................. $(0.03) $(0.18)
Ratios (to average net assets):
Expenses....................................................... 1.16 % 2.91 %+
Net investment loss............................................ (0.23)% (1.78)%+
</TABLE>
6
<PAGE>
VALUE SERIES
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1996*
-------------------
<S> <C>
Per share data (for a share outstanding throughout the period):
Net asset value--beginning of period............................. $ 10.00
-------
Income from investment operations#--
Net investment incomeSection................................... $ 0.07
Net realized and unrealized gain on investments and foreign
currency transactions........................................ 0.88
-------
Total from investment operations............................. $ 0.95
-------
Less distributions declared to shareholders--
From net investment income..................................... $ (0.03)
From net realized gain on investments and foreign currency
transactions................................................. (0.21)
In excess of net realized gain on investments and foreign
currency transactions........................................ (0.01)
Tax return of capital.......................................... (0.04)
-------
Total distributions declared to shareholders................. $ (0.29)
-------
Net asset value--end of period................................... $ 10.66
-------
-------
Total return..................................................... 8.78%++
Ratios (to average net assets)/Supplemental dataSection:
Expenses....................................................... 1.00%+
Net investment income.......................................... 1.72%+
Portfolio turnover............................................... 44%
Average commission rate.......................................... $0.0204
Net assets at end of period (000 omitted)........................ $ 1,351
<FN>
- ------------------------
* For the period from the commencement of investment operations, August 14, 1996 to December 31, 1996.
+ Annualized.
++ Not annualized.
# Per share data is based on average shares outstanding.
Section The Adviser voluntarily agreed to maintain the expenses of the Series at not more than 1.00% of average daily net
assets. To the extent actual expenses were over these limitations, the net investment loss per share and the ratios
would have been:
Net investment loss.............................................. $(0.04)
Ratios (to average net assets):
Expenses....................................................... 3.83%+
Net investment loss............................................ (1.11)%+
</TABLE>
7
<PAGE>
RESEARCH SERIES
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995*
------------------- ------------------
<S> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value--beginning of period............................. $ 10.89 $10.00
------- ------
Income from investment operations#--
Net investment incomeSection................................... $ 0.06 $ 0.05
Net realized and unrealized gain on investments and foreign
currency transactions........................................ 2.37 1.01
------- ------
Total from investment operations............................. $ 2.43 $ 1.06
------- ------
Less distributions declared to shareholders--
From net investment income..................................... $ (0.02) $(0.03)
From net realized gain on investments and foreign currency
transactions................................................. (0.16) (0.14)
In excess of net realized gain on investments and foreign
currency transactions........................................ (0.01) --
------- ------
Total distributions declared to shareholders................. $ (0.19) $(0.17)
------- ------
Net asset value--end of period................................... $ 13.13 $10.89
------- ------
------- ------
Total return..................................................... 22.33% 10.62%++
Ratios (to average net assets)/Supplemental dataSection:
Expenses....................................................... 1.00% 1.00%+
Net investment income.......................................... 0.47% 1.15%+
Portfolio turnover............................................... 56% 28%
Average commission rate###....................................... $0.0295 --
Net assets at end of period (000 omitted)........................ $35,710 $2,530
<FN>
- ------------------------
* For the period from the commencement of investment operations, July 26, 1995 to December 31, 1995.
+ Annualized.
++ Not annualized.
# Per share data is based on average shares outstanding.
### Average commission rate is calculated for funds with fiscal years beginning on or after September 1, 1995.
Section The Adviser voluntarily agreed to maintain the expenses of the Series at not more than 1.00% of average daily
net assets. To the extent actual expenses were over these limitations, the net investment loss per share and the
ratios would have been:
Net investment loss.............................................. -- $(0.08)
Ratios (to average net assets):
Expenses....................................................... 1.48 % 3.90 %+
Net investment loss............................................ -- (1.73)%+
</TABLE>
8
<PAGE>
GROWTH WITH INCOME SERIES
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995*
------------------- ------------------
<S> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value--beginning of period............................. $ 10.61 $10.00
------- ------
Income from investment operations#--
Net investment incomeSection................................... $ 0.18 $ 0.05
Net realized and unrealized gain on investments and foreign
currency transactions........................................ 2.42 0.61
------- ------
Total from investment operations............................. $ 2.60 $ 0.66
-------
Less distributions declared to shareholders--
From net investment income..................................... $ (0.09) $(0.05)
From net realized gain on investments and foreign currency
transactions................................................. (0.13) --
In excess of net realized gain on investments and foreign
currency transactions........................................ (0.01) --
------- ------
Total distributions declared to shareholders................. $ (0.23) $(0.05)
------- ------
Net asset value--end of period................................... $ 12.98 $10.61
------- ------
------- ------
Total return..................................................... 24.46% 6.64%++
Ratios (to average net assets)/Supplemental dataSection:
Expenses....................................................... 1.00% 1.00%+
Net investment income.......................................... 1.52% 2.20%+
Portfolio turnover............................................... 41% 2%
Average commission rate###....................................... $0.0351 --
Net assets at end of period (000 omitted)........................ $ 9,174 $ 365
<FN>
- ------------------------
* For the period from the commencement of investment operations, October 9, 1995 to December 31, 1995.
+ Annualized.
++ Not annualized.
# Per share data is based on average shares outstanding.
### Average commission rate is calculated for funds with fiscal years beginning on or after September 1, 1995.
Section The Adviser voluntarily agreed to maintain the expenses of the Series at not more than 1.00% of average daily
net assets. To the extent actual expenses were over these limitations, the net investment income (loss) per
share and the ratios would have been:
Net investment income (loss)..................................... $0.05 $ (0.41)
Ratios (to average net assets):
Expenses....................................................... 2.07 % 21.44 %+
Net investment income (loss)................................... 0.46% (18.24)%+
</TABLE>
9
<PAGE>
TOTAL RETURN SERIES
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995*
------------------- ------------------
<S> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value--beginning of period............................. $ 12.25 $10.00
------- ------
Income from investment operations#--
Net investment incomeSection................................... $ 0.46 $ 0.41
Net realized and unrealized gain on investments and foreign
currency transactions........................................ 1.30 2.32
------- ------
Total from investment operations............................. $ 1.76 $ 2.73
------- ------
Less distributions declared to shareholders--
From net investment income..................................... $ (0.21) $(0.25)
From net realized gain on investments and foreign currency
transactions................................................. (0.09) (0.23)
------- ------
Total distributions declared to shareholders................. $ (0.30) $(0.48)
-------
Net asset value--end of period................................... $ 13.71 $12.25
------- ------
------- ------
Total return..................................................... 14.37% 27.34%++
Ratios (to average net assets)/Supplemental dataSection:
Expenses....................................................... 1.00% 1.00%+
Net investment income.......................................... 3.59% 3.83%+
Portfolio turnover............................................... 76% 16%
Average commission rate###....................................... $0.0485 --
Net assets at end of period (000 omitted)........................ $19,250 $2,797
<FN>
- ------------------------
* For the period from the commencement of investment operations, January 3, 1995 to December 31, 1995.
+ Annualized.
++ Not annualized.
# Per share data is based on average shares outstanding.
### Average commission rate is calculated for funds with fiscal years beginning on or after September 1, 1995.
Section The Adviser voluntarily agreed to maintain the expenses of the Series at not more than 1.00% of average daily
net assets. To the extent actual expenses were over these limitations, the net investment income per share and
the ratios would have been:
Net investment income............................................ $0.32 $0.22
Ratios (to average net assets):
Expenses....................................................... 2.10 % 2.49 %+
Net investment income.......................................... 2.49% 2.09%+
</TABLE>
10
<PAGE>
UTILITIES SERIES
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995*
------------------- ------------------
<S> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value--beginning of period............................. $ 12.57 $10.00
------- ------
Income from investment operations#--
Net investment incomeSection................................... $ 0.55 $ 0.39
Net realized and unrealized gain on investments and foreign
currency transactions........................................ 1.78 3.00
------- ------
Total from investment operations............................. $ 2.33 $ 3.39
------- ------
Less distributions declared to shareholders--
From net investment income..................................... $ (0.35) $(0.24)
From net realized gain on investments and foreign currency
transactions................................................. (0.88) (0.58)
In excess of realized gain on investments and foreign currency
transactions................................................. (0.01) --
------- ------
Total distributions declared to shareholders................. $ (1.24) $(0.82)
------- ------
Net asset value--end of period................................... $ 13.66 $12.57
------- ------
------- ------
Total return..................................................... 18.51% 33.94%++
Ratios (to average net assets)/Supplemental dataSection:
Expenses....................................................... 1.00% 1.00%+
Net investment income.......................................... 4.19% 3.66%+
Portfolio turnover............................................... 121% 94%
Average commission rate###....................................... $0.0416 --
Net assets at end of period (000 omitted)........................ $ 9,572 $2,373
<FN>
- ------------------------
* For the period from the commencement of investment operations, January 3, 1995 to December 31, 1995.
+ Annualized.
++ Not annualized.
# Per share data is based on average shares outstanding.
### Average commission rate is calculated for funds with fiscal years beginning on or after September 1, 1995.
Section The Adviser voluntarily agreed to maintain the expenses of the Series at not more than 1.00% of average daily
net assets. To the extent actual expenses were over these limitations, the net investment income per share and
the ratios would have been:
Net investment income............................................ $0.32 $0.17
Ratios (to average net assets):
Expenses....................................................... 2.75 % 3.08 %+
Net investment income.......................................... 2.44% 1.62%+
</TABLE>
11
<PAGE>
HIGH INCOME SERIES
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995*
------------------- ------------------
<S> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value--beginning of period............................. $ 10.29 $10.00
------- ------
Income from investment operations#--
Net investment incomeSection................................... $ 0.89 $ 0.34
Net realized and unrealized gain on investments................ 0.32 0.18
------- ------
Total from investment operations............................. $ 1.21 $ 0.52
------- ------
Less distributions declared to shareholders--
From net investment income..................................... $ (0.53) $(0.23)
From net realized gain on investments.......................... (0.10) --
------- ------
Tota distributions declared to shareholders.................. $ (0.63) $(0.23)
------- ------
Net asset value--end of period................................... $ 10.87 $10.29
------- ------
------- ------
Total return..................................................... 11.80% 5.25%++
Ratios (to average net assets)/Supplemental dataSection:
Expenses....................................................... 1.00% 1.00%+
Net investment income.......................................... 8.18% 8.17%+
Portfolio turnover............................................... 135% 32%
Net assets at end of period (000 omitted)........................ $12,994 $1,946
<FN>
- ------------------------
* For the period from the commencement of investment operations, July 26, 1995 to December 31, 1995.
+ Annualized.
++ Not annualized.
# Per share data is based on average shares outstanding.
Section The Adviser voluntarily agreed to maintain the expenses of the Series at not more than 1.00% of average daily net
assets. To the extent actual expenses were over these limitations, the net investment income per share and the
ratios would have been:
Net investment income............................................ $0.82 $0.20
Ratios (to average net assets):
Expenses....................................................... 1.62 % 4.38 %+
Net investment income.......................................... 7.56% 4.82%+
</TABLE>
12
<PAGE>
WORLD GOVERNMENTS SERIES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994*
------------------- ------------------ ------------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value--beginning of period............................. $ 10.17 $ 9.82 $10.00
------- ------ ------
Income from investment operations#--
Net investment incomeSection................................... $ 0.60 $ 0.63 $ 0.17
Net realized and unrealized gain (loss) on investments and
foreign currency transactions................................ (0.19) 0.78 (0.09)
------- ------ ------
Total from investment operations............................. $ 0.41 $ 1.41 $ 0.08
------- ------ ------
Less distributions declared to shareholders--
From net investment income..................................... $ -- $(0.42) $(0.17)
In excess of net investment income............................. -- (0.54) (0.09)
Tax return of capital.......................................... -- (0.10) --
------- ------ ------
Total distributions declared to shareholders................. $ -- $(1.06) $(0.26)
------- ------ ------
Net asset value--end of period................................... $ 10.58 $10.17 $ 9.82
------- ------ ------
------- ------ ------
Total return..................................................... 4.03% 14.38% 0.79%++
Ratios (to average net assets)/Supplemental dataSection:
Expenses....................................................... 1.00% 1.00% 1.00%+
Net investment income.......................................... 5.84% 6.05% 4.68%+
Portfolio turnover............................................... 361% 211% 62%
Net assets at end of period (000 omitted)........................ $26,023 $7,424 $2,881
</TABLE>
- ------------------------
<TABLE>
<C> <S>
* For the period from the commencement of investment operations, June 14, 1994 to December 31, 1994.
+ Annualized.
++ Not annualized.
# Per share data is based on average shares outstanding.
Section The Adviser voluntarily agreed to maintain the expenses of the Series at not more than 1.00% of average daily net
assets. To the extent actual expenses were over these limitations, the net investment income per share and the
ratios would have been:
</TABLE>
<TABLE>
<S> <C> <C> <C>
Net investment income............................................ $0.50 $0.53 $0.16
Ratios (to average net assets):
Expenses....................................................... 2.03% 1.99% 1.10%+
Net investment income.......................................... 4.81% 5.09% 4.58%+
</TABLE>
13
<PAGE>
BOND SERIES
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995*
------------------ ------------------
<S> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value--beginning of period............................. $10.19 $10.00
------ ------
Income from investment operations#--
Net investment incomeSection................................... $ 0.58 $ 0.09
Net realized and unrealized gain (loss) on investments......... (0.36) 0.21
------ ------
Total from investment operations............................. $ 0.22 $ 0.30
------ ------
Less distributions declared to shareholders--
From net investment income..................................... $(0.35) $(0.09)
From net realized gain on investments.......................... -- (0.02)
------ ------
Total distributions declared to shareholders................. $(0.35) $(0.11)
------ ------
Net asset value--end of period................................... $10.06 $10.19
------ ------
------ ------
Total return..................................................... 2.09% 3.02%++
Ratios (to average net assets)/Supplemental dataSection:
Expenses....................................................... 1.00% 1.00%+
Net investment income.......................................... 5.84% 4.89%+
Portfolio turnover............................................... 231% 55%
Net assets at end of period (000 omitted)........................ $ 853 $ 228
<FN>
- ------------------------
* For the period from the commencement of investment operations, October 24, 1995 to December 31, 1995.
+ Annualized.
++ Not annualized.
# Per share data is based on average shares outstanding.
Section The Adviser voluntarily agreed to maintain the expenses of the Series at not more than 1.00% of average daily net
assets. To the extent actual expenses were over these limitations, the net investment loss per share and the ratios
would have been:
Net investment loss.............................................. $ (0.26) $ (0.70)
Ratios (to average net assets):
Expenses....................................................... 9.45 % 43.85 %+
Net investment loss............................................ (2.61)% (37.96)%+
</TABLE>
14
<PAGE>
LIMITED MATURITY SERIES
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1996*
------------------
<S> <C>
Per share data (for a share outstanding throughout the period):
Net asset value--beginning of period............................. $10.00
------
Income from investment operations#--
Net investment incomeSection................................... $ 0.25
Net realized and unrealized gain on investments and foreign
currency transactions........................................ 0.01
------
Total from investment operations............................. $ 0.26
------
Less distributions declared to shareholders--
From net investment income..................................... $(0.25)
------
Net asset value--end of period................................... $10.01
------
------
Total return..................................................... 2.61%++
Ratios (to average net assets)/Supplemental dataSection:
Expenses....................................................... 1.00%+
Net investment income.......................................... 6.61%+
Portfolio turnover............................................... 109%
Average commission rate.......................................... --
Net assets at end of period (000 omitted)........................ $ 523
<FN>
- ------------------------
* For the period from the commencement of investment operations, August 14, 1996 to December 31, 1996.
+ Annualized.
++ Not annualized.
# Per share data is based on average shares outstanding.
Section The Adviser voluntarily agreed to maintain the expenses of the Series at not more than 1.00% of average daily net
assets. To the extent actual expenses were over these limitations, the net investment income per share and the
ratios would have been:
Net investment income............................................ $0.01
Ratios (to average net assets):
Expenses....................................................... 7.55%+
Net investment income.......................................... 0.06%+
</TABLE>
15
<PAGE>
MONEY MARKET SERIES
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995*
------------------ ------------------
<S> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value--beginning of period............................. $ 1.00 $ 1.00
------ ------
Income from investment operations#--
Net investment incomeSection................................... $ 0.04 $ 0.04
Less distributions declared to shareholders from net investment
income.......................................................... (0.04) (0.04)
------ ------
Net asset value--end of period................................... $ 1.00 $ 1.00
------ ------
------ ------
Total return..................................................... 4.55% 4.37%++
Ratios (to average net assets)/Supplemental dataSection:
Expenses....................................................... 0.60% 0.60%+
Net investment income.......................................... 4.53% 4.54%+
Net assets at end of period (000 omitted)........................ $ 633 $ 180
<FN>
- ------------------------
* For the period from the commencement of investment operations, January 3, 1995 to December 31, 1995.
+ Annualized.
++ Not annualized.
# Per share data is based on average shares outstanding.
Section The Adviser voluntarily agreed to maintain the expenses of the Series at not more than 0.60% of average daily net
assets. To the extent actual expenses were over these limitations, the net investment loss per share and the ratios
would have been:
Net investment loss.............................................. $ (0.21) $ (0.14)
Ratios (to average net assets):
Expenses....................................................... 27.74 % 21.54 %+
Net investment loss............................................ (22.61)% (16.37)%+
</TABLE>
16
<PAGE>
4. INVESTMENT OBJECTIVES AND POLICIES
Each Series has different investment objectives which it pursues through
separate investment policies, as described below. The differences in objectives
and policies among the Series can be expected to affect the degree of market and
financial risk to which each Series is subject and the return of each Series.
The investment objectives and policies of each Series may, unless otherwise
specifically stated, be changed by the Trustees of the Trust without a vote of
the shareholders. Any investment involves risk and there is no assurance that
the objectives of any Series will be achieved.
In addition to the specific investment practices described below, each
Series may also engage in certain investment techniques as described under the
caption "Investment Techniques" below and in the SAI under the caption
"Investment Techniques." The Series' investments are subject to certain risks,
as described in the above-referenced sections of this Prospectus and the SAI and
as described below under the caption "Additional Risk Factors."
MFS EMERGING GROWTH SERIES -- The Series seeks to provide long-term growth of
capital. Dividend and interest income from portfolio securities, if any, is
incidental to the Series' investment objective of long-term growth of capital.
The Series' policy is to invest primarily (I.E., at least 80% of its assets
under normal circumstances) in common stocks of companies that MFS believes are
early in their life cycle but which have the potential to become major
enterprises (emerging growth companies). Such companies generally would be
expected to show earnings growth over time that is well above the growth rate of
the overall economy and the rate of inflation, and would have the products,
technologies, management and market and other opportunities which are usually
necessary to become more widely recognized as growth companies. Emerging growth
companies can be of any size, and the Series may invest in larger or more
established companies whose rates of earnings growth are expected to accelerate
because of special factors, such as rejuvenated management, new products,
changes in consumer demand, or basic changes in the economic environment. While
the Series will invest primarily in common stocks, the Series may, to a limited
extent, seek appreciation in other types of securities such as fixed income
securities (which may be unrated), convertible securities and warrants when
relative values make such purchases appear attractive either as individual
issues or as types of securities in certain economic environments. The Series
may invest in non-convertible fixed income securities rated lower than
"investment grade" (rated Ba or lower by Moody's Investors Service, Inc.
("Moody's") or BB or lower by Standard & Poor's Ratings Services ("S&P") or
Fitch Investors Service, Inc. ("Fitch")) (commonly known as "junk bonds") or in
comparable unrated securities, when, in the opinion of the Adviser, such an
investment presents a greater opportunity for appreciation with comparable risk
to an investment in "investment grade" securities. Under normal market
conditions, the Series will invest not more than 5% of its net assets in these
securities. For a description of these ratings, see Appendix A to this
Prospectus.
The nature of investing in emerging growth companies involves greater risk
than is customarily associated with investments in more established companies.
Emerging growth companies often have limited product lines, markets or financial
resources, and they may be dependent on one-person management. In addition,
there may be less research available on many promising small and medium sized
emerging growth companies, making it more difficult to find and analyze these
companies. The securities of emerging growth companies may have limited
marketability and may be subject to more abrupt or erratic market movements than
securities of larger, more established growth companies or the market averages
in general. Shares of the Series, therefore, are subject to greater fluctuation
in value than shares of a conservative equity fund or of a growth fund which
invests entirely in proven growth stocks.
Consistent with its investment objective and policies described above, the
Series may also invest up to 25% (and generally expects to invest not more than
15%) of its net assets in foreign securities (including emerging market
securities and Brady Bonds) which are not traded on a U.S. exchange.
MFS VALUE SERIES -- The Value Series' investment objective is to seek capital
appreciation. Dividend income, if any, is a consideration incidental to the
Series' objective of capital appreciation.
While the Series' policy is to invest primarily in common stocks, it may
seek appreciation in other types of securities such as fixed income securities
(which may be unrated), convertible securities and warrants when relative values
make such
17
<PAGE>
purchases appear attractive either as individual issues or as types of
securities in certain economic environments. The Series may invest in
non-convertible fixed income securities rated lower than "investment grade"
(rated Ba or lower by Moody's or BB or lower by S&P or Fitch)(commonly known as
"junk bonds") or in comparable unrated securities, when, in the opinion of the
Adviser, such an investment presents a greater opportunity for appreciation with
comparable risk to an investment in "investment grade" securities. Under normal
market conditions, the Series will invest not more than 25% of its net assets in
these securities. For a description of these ratings, see Appendix A to this
Prospectus.
Consistent with its investment objective and policies described above, the
Series may also invest up to 50% (and generally expects to invest not more than
25%) of its net assets in foreign securities (including emerging market
securities and Brady Bonds) which are not traded on a U.S. exchange. There is no
formula as to the percentage of assets that may be invested in any one type of
security. Cash, commercial paper, short-term obligations, repurchase agreements
or debt securities are held to provide for future purchases of common stock or
other securities and may also be held as a temporary defensive measure when the
Adviser determines security markets to be overvalued.
MFS RESEARCH SERIES -- The Research Series' investment objective is to provide
long-term growth of capital and future income.
The portfolio securities of the Research Series are selected by a committee
of investment research analysts. This committee includes investment analysts
employed not only by the Adviser but also by MFS International (U.K.) Limited, a
wholly owned subsidiary of MFS. The Series' assets are allocated among
industries by the analysts acting together as a group. Individual analysts are
then responsible for selecting what they view as the securities best suited to
meet the Series' investment objective within their assigned industry
responsibility.
The Research Series' policy is to invest a substantial proportion of its
assets in equity securities of companies believed to possess better than average
prospects for long-term growth. Equity securities in which the Series may invest
include the following: common stocks, preferred stocks and preference stocks;
securities such as bonds, warrants or rights that are convertible into stocks;
and depositary receipts for those securities. These securities may be listed on
securities exchanges, traded in various over-the-counter markets or have no
organized markets. A smaller proportion of the assets may be invested in bonds,
short-term obligations, preferred stocks or common stocks whose principal
characteristic is income production rather than growth. Such securities may also
offer opportunities for growth of capital as well as income. In the case of both
growth stocks and income issues, emphasis is placed on the selection of
progressive, well-managed companies. The Series' non-convertible debt
investments, if any, may consist of "investment grade" securities (rated Baa or
better by Moody's or BBB or better by S&P or by Fitch), and, with respect to no
more than 10% of the Series' net assets, securities in the lower rated
categories (rated Ba or lower by Moody's or BB or lower by S&P or by Fitch) or
securities which the Adviser believes to be of similar quality to these lower
rated securities (commonly known as "junk bonds"). For a description of bond
ratings, see Appendix A to this Prospectus.
Consistent with its investment objective and policies described above, the
Series may also invest up to 20% of its net assets in foreign securities
(including emerging market securities) which are not traded on a U.S. exchange.
MFS GROWTH WITH INCOME SERIES -- The Growth With Income Series' investment
objectives are to provide reasonable current income and long-term growth of
capital and income.
Under normal market conditions, the Growth With Income Series will invest at
least 65% of its assets in equity securities of companies that are believed to
have long-term prospects for growth and income. Equity securities in which the
Series may invest include the following: common stocks, preferred stocks and
preference stocks; securities such as bonds, warrants or rights that are
convertible into stocks; and depositary receipts for those securities. These
securities may be listed on securities exchanges, traded in various
over-the-counter markets or have no organized markets.
Consistent with its investment objective and policies described above, the
Series may also invest up to 75% (and generally expects to invest not more than
15%) of its net assets in foreign securities (including emerging market
securities and Brady Bonds) which are not traded on a U.S. exchange.
18
<PAGE>
MFS TOTAL RETURN SERIES -- The Total Return Series' primary investment objective
is to provide above-average income (compared to a portfolio invested entirely in
equity securities) consistent with the prudent employment of capital, and its
secondary objective is to provide a reasonable opportunity for growth of capital
and income, since many securities offering a better than average yield may also
possess growth potential. Thus, in selecting securities for its portfolio, the
Series considers each of these objectives. Under normal market conditions, at
least 25% of the Total Return Series' assets will be invested in non-convertible
fixed income securities, and at least 40% and no more than 75% of the Series'
assets will be invested in equity securities. Equity securities in which the
Series may invest include the following: common stocks, preferred stocks and
preference stocks; securities such as bonds, warrants or rights that are
convertible into stocks; and depositary receipts for those securities. These
securities may be listed on securities exchanges, traded in various
over-the-counter markets or have no organized markets.
The Series' policy is to invest in a broad list of securities, including
short-term obligations. The list may be diversified not only by companies and
industries, but also by type of security. The Total Return Series may vary the
percentage of assets invested in any one type of security in accordance with the
Adviser's interpretation of economic and money market conditions, fiscal and
monetary policy and underlying security values. The Series' non-convertible
fixed income investments may consist of both "investment grade" securities
(rated Baa or better by Moody's or BBB or better by S&P or by Fitch) and
securities that are unrated or are in the lower rating categories (rated Ba or
lower by Moody's or BB or lower by S&P or by Fitch) (commonly known as "junk
bonds") including up to 20% of its assets in non-convertible fixed income
securities that are in these lower rating categories and comparable unrated
securities (see "Additional Risk Factors" below). Generally, most of the Series'
long-term non-convertible fixed income investments will consist of "investment
grade" securities. See Appendix A to this Prospectus for a description of these
ratings.
The Series may also invest in United States government securities,
including: (1) U.S. Treasury obligations, which differ only in their interest
rates, maturities and times of issuance: U.S. Treasury bills (maturities of one
year or less); U.S. Treasury notes (maturities of one to ten years); and U.S.
Treasury bonds (generally maturities of greater than ten years), all of which
are backed by the full faith and credit of the U.S. Government; and (2)
obligations issued or guaranteed by U.S. Government agencies, authorities or
instrumentalities, some of which are backed by the full faith and credit of the
U.S. Treasury, E.G., direct pass-through certificates of the Government National
Mortgage Association ("GNMA"); some of which are supported by the right of the
issuer to borrow from the U.S. Government, E.G., obligations of Federal Home
Loan Banks; and some of which are backed only by the credit of the issuer
itself, E.G., obligations of the Student Loan Marketing Association
(collectively, "U.S. Government Securities"). The term "U.S. Government
Securities" also includes interests in trusts or other entities representing
interests in obligations that are backed by the full faith and credit of the
U.S. Government or are issued or guaranteed by the U.S. Government, its
agencies, authorities or instrumentalities.
Consistent with its investment objective and policies described above, the
Series may also invest up to 20% of its net assets in foreign securities
(including emerging market securities and Brady Bonds) which are not traded on a
U.S. exchange.
MFS UTILITIES SERIES -- The Utilities Series' investment objective is to seek
capital growth and current income (income above that available from a portfolio
invested entirely in equity securities).
The Utilities Series will seek to achieve its objective by investing, under
normal circumstances, at least 65% (but up to 100% at the discretion of the
Adviser) of its assets in equity and debt securities of both domestic and
foreign companies in the utilities industry. Equity securities in which the
Series may invest include the following: common stocks; preferred stocks and
preference stocks; securities such as bonds, warrants or rights that are
convertible into stocks; and depositary receipts for those securities. These
securities may be listed on securities exchanges, traded in various
over-the-counter markets or have no organized markets. At least 80% of the
non-convertible fixed income securities held by the Series will be rated at the
time of investment at least Baa by Moody's or BBB by S&P or by Fitch or will be
of comparable quality as determined by the Adviser (see "Additional Risk
Factors" below). See Appendix A to this Prospectus for a description of these
ratings. The
19
<PAGE>
Series may also invest in debt and equity securities of issuers in other
industries, as discussed below, although under normal circumstances not more
than 35% of the Series' assets will be so invested. In addition, the Series may
hold a portion of its assets in cash and money market instruments.
Companies in the utilities industry include (i) companies engaged in the
manufacture, production, generation, transmission, sale or distribution of
electric, gas or other types of energy, water or other sanitary services and
(ii) companies engaged in telecommunications, including telephone, cellular
telephones, telegraph, satellite, microwave, cable television and other
communications media (but not companies engaged in public broadcasting). The
Adviser deems a particular company to be in the utilities industry if, at the
time of investment, the Adviser determines that at least 50% of the company's
assets or revenues are derived from one or more of those industries. The portion
of the Utilities Series' assets invested in a particular type of utility and in
equity or debt securities will vary in light of changes in interest rates,
market conditions and economic conditions and other factors. For further
information on the principal sectors of the utilities industry in which the
Series may invest, see Appendix B to this Prospectus.
Consistent with its investment objective and policies described above, the
Series may also invest up to 35% of its net assets in foreign securities
(including emerging market securities and Brady Bonds) which are not traded on a
U.S. exchange.
Since the Utilities Series' investments are concentrated in utility
securities, the value of the Series' shares will be especially affected by
factors peculiar to the utilities industry, and may fluctuate more widely than
the value of shares of a fund that invests in a broader range of industries. The
rates many utility companies may charge their customers are controlled by
governmental regulatory commissions which may result in a delay in the utility
company passing along increases in costs to its customers. Furthermore, there is
no assurance that regulatory authorities will, in the future, grant rate
increases or that such increases will be adequate to permit the payment of
dividends on common stocks. Many utility companies, especially electric and gas
and other energy related utility companies, are subject to various
uncertainties, including: risks of increases in fuel and other operating costs;
the high cost of borrowing to finance capital construction during inflationary
periods; difficulty obtaining adequate returns on invested capital, even if
frequent rate increases are approved by public service commissions; restrictions
on operations and increased costs and delays as a result of environmental and
nuclear safety regulations; securing financing for large construction projects
during an inflationary period; difficulties of the capital markets in absorbing
utility debt and equity securities; difficulty in raising capital in adequate
amounts on reasonable terms in periods of high inflation and unsettled capital
markets; technological innovations which may render existing plants, equipment
or products obsolete; the potential impact of natural or man-made disasters;
difficulties in obtaining natural gas for resale or fuel for electric generation
at reasonable prices; coping with the general effects of energy conservation,
particularly in light of changing policies regarding energy; and special risks
associated with the construction and operation of nuclear power generating
facilities, including technical factors and costs, and the possibility that
federal, state and municipal government authorities may from time to time review
existing requirements and impose additional requirements. Certain utility
companies, especially gas and telephone utility companies, have in recent years
been affected by increased competition, which could adversely affect the
profitability of such utility companies. Furthermore, there are uncertainties
resulting from certain telecommunications companies' diversification into new
domestic and international businesses as well as agreements by many such
companies linking future rate increases to inflation or other factors not
directly related to the active operating profits of the enterprise.
Foreign utility companies are also subject to regulation, although such
regulations may or may not be comparable to those in the United States. Foreign
utility companies may be more heavily regulated by their respective governments
than utilities in the U.S. and, as in the U.S., generally are required to seek
government approval for rate increases. In addition, since many foreign
utilities use fuel that causes more pollution than those used in the U.S., such
utilities may be required to invest in pollution control equipment to meet any
proposed pollution restrictions. Foreign regulatory systems vary from country to
country and may evolve in ways different from regulation in the U.S.
The Utilities Series is permitted to invest in securities of issuers that
are outside the utilities industry, although under normal circumstances not more
than 35% of the Series' assets will be so invested. Such investments may include
common
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stocks, debt securities (including municipal debt securities) and preferred
stocks and will be selected to meet the Series' investment objective of both
capital growth and current income. These securities may be issued by either U.S.
or non-U.S. companies. Some of these issuers may be in industries related to the
utilities industry and, therefore, may be subject to similar risks.
Investments outside the utilities industry may also include U.S. Government
Securities, as that term is defined under "Investment Objectives and
Policies--MFS Total Return Series" above. When and if available, U.S. Government
Securities may be purchased at a discount from face value. However, the Series
does not intend to hold such securities to maturity for the purpose of achieving
potential capital gains, unless current yields on the securities remain
attractive.
MFS HIGH INCOME SERIES -- The investment objective of the High Income Series is
to seek high current income by investing primarily in a professionally managed
diversified portfolio of fixed income securities, some of which may involve
equity features.
Fixed income securities offering the high current income sought by the High
Income Series normally include those fixed income securities which offer a
current yield above that generally available on debt securities in the three
highest rating categories of the recognized rating agencies (commonly known as
"junk bonds" if rated below the four highest categories of recognized rating
agencies). The Series may invest up to 100% of its net assets in such
securities. For a description of these rating categories, see Appendix A to this
Prospectus and Appendix C for a chart showing the Series' holdings of fixed
income securities broken down by rating category as of the end of its most
recent fiscal year. (See "Additional Risk Factors" below.) However, since
available yields and yield differentials vary over time, no specific level of
income or yield differential can ever be assured. The dividends paid by the
Series will increase or decrease in relation to the income received by the
Series from its investments, which would in any case be reduced by the expenses
of the Series before such income is distributed to its shareholders.
Fixed income securities include preferred and preference stocks and all
types of debt obligations of both domestic and foreign issuers, such as bonds,
debentures, notes, equipment lease certificates, equipment trust certificates
(including interests in trusts or other entities representing such obligations),
conditional sales contracts, commercial paper and obligations issued or
guaranteed by the U.S. Government, any foreign government or any of their
respective political subdivisions, agencies or instrumentalities (including
obligations, such as repurchase agreements, secured by instruments).
Corporate debt securities may bear fixed, fixed and contingent, or variable
rates of interest and may involve equity features, such as conversion or
exchange rights or warrants for the acquisition of stock of the same or a
different issuer; participations based on revenues, sales or profits; or the
purchase of common stock in a unit transaction (where corporate debt securities
and common stock are offered as a unit). Under normal market conditions, not
more than 25% of the value of the total assets of the High Income Series will be
invested in equity securities, including common stocks, warrants and rights.
Consistent with its investment objective and policies described above, the
Series may also invest up to 25% (and generally expects to invest not more than
10%) of its net assets in foreign securities (including emerging market
securities and Brady Bonds) which are not traded on a U.S. exchange. The Series
has authority to invest up to 25% of its total assets in securities issued or
guaranteed by foreign governments or their agencies or instrumentalities. (See
"Additional Risk Factors" below.)
The High Income Series may invest up to 40% of the value of its total assets
in each of the electric utility and telephone industries, but will not invest
more than 25% in either of those industries unless yields available for four
consecutive weeks in the four highest rating categories on new issue bonds in
such industry (issue size of $50 million or more) have averaged in excess of
105% of yields of new issue long-term industrial bonds similarly rated (issue
size of $50 million or more) and, in the opinion of the Adviser, the relative
return available from the electric utility or telephone industry and the
relative risk, marketability, quality and availability of securities of such
industry justifies such an investment.
When and if available, fixed income securities may be purchased at a
discount from face value. However, the High Income Series does not intend to
hold such securities to maturity for the purpose of achieving potential capital
gains, unless
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current yields on these securities remain attractive. From time to time the
Series may purchase securities not paying interest at the time acquired if, in
the opinion of the Adviser, such securities have the potential for future income
or capital appreciation.
MFS WORLD GOVERNMENTS SERIES -- The World Governments Series' investment
objective is to seek not only preservation but also growth of capital, together
with moderate current income.
The World Governments Series seeks to achieve its investment objective
through a professionally managed, internationally diversified portfolio
consisting primarily of debt securities and to a lesser extent equity
securities. The Series attempts to provide investors with an opportunity to
enhance the value and increase the protection of their investment against
inflation and otherwise by taking advantage of investment opportunities in the
U.S. as well as in other countries where opportunities may be more rewarding. It
is believed that diversification of assets on an international basis decreases
the degree to which events in any one country, including the U.S., can affect
the entire portfolio. Although the percentage of the Series' assets invested in
securities issued abroad and denominated in foreign currencies will vary
depending on the state of the economies of the principal countries of the world,
their financial markets and the relationship of their currencies to the U.S.
dollar, under normal conditions the Series' portfolio is internationally
diversified. However, for temporary defensive reasons or during times of
international political or economic uncertainty or turmoil, most or all of the
Series' investments may be in the U.S.
Under normal economic and market conditions, at least 80% of the Series'
portfolio is invested in debt securities, such as bonds, debentures, mortgage
securities, notes, commercial paper, obligations issued or guaranteed by a
government or any of its political subdivisions, agencies or instrumentalities,
certificates of deposit, as well as debt obligations which may have a call on
common stock by means of a conversion privilege or attached warrants.
Consistent with its investment objective and policies described above, the
Series may invest up to 100% (and generally expects to invest not more than 80%)
of its net assets in foreign securities (including emerging market securities
and Brady Bonds) which are not traded on a U.S. exchange. Although the
percentage of the Series' assets invested in foreign securities will vary, at
least 65% of the Series' assets will be invested in at least three different
countries, one of which may be the U.S., except when the Adviser believes that
investing for temporary defensive purposes is appropriate. The Adviser will
determine the amount of the World Governments Series' assets to be invested in
the U.S. and the amount to be invested abroad. The U.S. assets will be invested
in high quality debt securities and the remainder of the assets will be
diversified among countries where opportunities for total return are expected to
be most attractive. It is currently expected that investments within foreign
countries will be primarily in government securities to minimize credit risks.
The Series will not invest 25% or more of the value of its assets in the
securities of any one foreign government. The portfolio will be managed actively
and the asset allocations modified as the Adviser deems necessary.
The World Governments Series will purchase non-dollar securities denominated
in the currency of countries where the interest rate environment as well as the
general economic climate provide an opportunity for declining interest rates and
currency appreciation. If interest rates decline, such non-dollar securities
will appreciate in value. If the currency also appreciates against the dollar,
the total investment in such non-dollar securities would be enhanced further.
Conversely, a rise in interest rates or decline in currency exchange rates would
adversely affect the Series' return. Investments in non-dollar denominated
securities are evaluated primarily on the strength of a particular currency
against the dollar and on the interest rate climate of that country. Currency is
judged on the basis of fundamental economic criteria (E.G., relative inflation
levels and trends, growth rate forecasts, balance of payments status, and
economic policies) as well as technical and political data. In addition to the
foregoing, interest rates are evaluated on the basis of differentials or
anomalies that may exist between different countries. The Series may hold
foreign currency received in connection with investments in foreign securities
and in anticipation of purchasing foreign securities. (See "Additional Risk
Factors" below.)
The phrase "preservation of capital" when applied to a domestic investment
company is generally understood to imply that the portfolio is invested in very
low risk securities and that the major risk is loss of purchasing power through
the effects
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of inflation or major changes in interest rates. However, while the World
Governments Series invests in securities which are believed to have minimal
credit risk, an error of judgment in selecting a currency or an interest rate
environment could result in a loss of capital.
It is contemplated that the World Governments Series' long-term debt
investments will consist primarily of securities which are believed by the
Adviser to be of relatively high quality. If after the Series purchases such a
security, the quality of the security deteriorates significantly, the security
will be sold only if the Adviser believes it is advantageous to do so.
MFS STRATEGIC FIXED INCOME SERIES -- The Strategic Fixed Income Series'
investment objective is to maximize current income.
The Strategic Fixed Income Series seeks to achieve its objective by
investing approximately one-third of its assets in each of the following sectors
of the fixed income securities markets: (i) U.S. Government Securities, as that
term is defined in "Investment Objectives and Policies--MFS Total Return Series"
above and related options; (ii) debt securities issued by foreign governments,
their political subdivisions and other foreign issuers; and (iii) high yielding
corporate fixed income securities, some of which may involve equity features. By
following this investment strategy, the Series' net asset value is likely to be
more stable than that of a fund which invests in only one of these three fixed
income sectors. The Adviser believes that greater stability would occur because,
in general, each sector historically has produced results which are different
from each other sector, so that significant changes in one sector have tended to
offset changes in other sectors. During periods of unusual market or economic
conditions (such as a collapse of the high yield corporate fixed income market
or a general contraction in yields on foreign obligations), the Series may
invest up to 50% of its assets in any one sector and may choose not to invest in
a sector in order to achieve its investment objective. The Series expects that,
under normal market conditions, the maturity of its portfolio securities will
not exceed 30 years in the U.S. Government sector and 25 years in the corporate
fixed income sector. At least 80% of the Series' assets under normal
circumstances will be invested in fixed income securities. The Series may invest
up to 100% of its net assets in debt securities rated below the four highest
categories of recognized rating agencies (commonly known as "junk bonds").
Consistent with its investment objective and policies described above, the
Series does not intend to invest over 50%, but reserves the right to invest up
to 67%, of its net assets in foreign securities (including emerging market
securities and Brady Bonds) which are not traded on a U.S. exchange. These
foreign securities shall include securities issued by foreign governments
considered stable by the Adviser and fixed income securities of foreign
corporations. The foreign government securities in which the Series intends to
invest will generally consist of obligations supported though their authority to
levy taxes by national, state or provincial governments or similar political
subdivisions. While one-third of the Series' assets normally will be invested in
securities issued abroad and denominated in foreign currencies ("non-dollar
securities"), that amount may vary depending on the relative yield of such
securities, the economies of the countries in which the investments are made and
such countries' financial markets, the interest rate climate of such countries
and the relationship of such countries' currencies to the U.S. dollar.
Investments in non-dollar securities and currency will be evaluated on the basis
of fundamental economic criteria (E.G., relative inflation levels and trends,
growth rate forecasts, balance of payments status, and economic policies) as
well as technical and political data. In addition to the foregoing, interest
rates are evaluated on the basis of differentials or anomalies that may exist
between different countries. The Series may hold foreign currency for hedging
purposes to protect against declines in the U.S. dollar value of foreign
securities held by the Series and against increases in the U.S. dollar value of
the foreign securities which the Series might purchase. The Series may speculate
in foreign currency when, in the judgment of the Adviser, it would be beneficial
to convert such currency into U.S. dollars at a later date, based on anticipated
changes in the relevant exchange rate. (See "Investment Techniques" and
"Additional Risk Factors" below.)
High yield corporate fixed income securities of both domestic and foreign
issuers (denominated either in U.S. dollars or foreign currency) in which the
Strategic Fixed Income Series may invest include preferred and preference stock
and all types of long- or short-term debt obligations, such as bonds,
debentures, notes, equipment lease certificates, equipment trust certificates,
conditional sales contracts and commercial paper (including obligations, such as
repurchase agreements,
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secured by such instruments). High yield corporate fixed income securities held
by the Series are ordinarily unrated or in the lower rating categories of
recognized rating agencies. (See "Additional Risk Factors" below.) Corporate
fixed income securities may involve equity features, such as conversion or
exchange rights or warrants for the acquisition of stock of the same or a
different issuer; participations based on revenues, sales or profits; or the
purchase of common stock in a unit transaction (where corporate debt securities
and common stock are offered as a unit).
The Strategic Fixed Income Series may invest up to 40% of the value of its
total assets in each of the electric utility and telephone industries, but will
not invest more than 25% in either of those industries unless yields available
for four consecutive weeks in the four highest rating categories on new issue
bonds in such industry (issue size of $50 million or more) have averaged in
excess of 105% of yields of new issue long-term industrial bonds similarly rated
(issue size of $50 million or more).
MFS BOND SERIES -- The Bond Series' primary investment objective is to provide
as high a level of current income as is believed to be consistent with prudent
investment risk. The Series' secondary objective is to protect shareholders'
capital.
The Series seeks to achieve its investment objective by investing, under
normal market conditions, at least 65% of its total assets in:
(1) convertible and non-convertible debt securities and preferred stocks;
(2) U.S. Government Securities, as defined in "Investment Objectives and
Policies--MFS Total Return Series" above; and
(3) commercial paper, repurchase agreements and cash or cash equivalents
(such as certificates of deposit and bankers' acceptances).
Not more than 20% of the Series' net assets will be invested in convertible
and non-convertible securities rated below the four highest grades of S&P, Fitch
(AAA, AA, A or BBB) or Moody's (Aaa, Aa, A or Baa) and comparable unrated
securities. For a description of these ratings see Appendix A to this Prospectus
and Appendix C for a chart showing the Series' holdings of fixed income
securities broken down by rating category as of the end of its most recent
fiscal year. For a discussion of the risks of investing in these securities see
"Additional Risk Factors" below.
Although the Bond Series may purchase Canadian and other foreign securities,
under normal market conditions, it may not invest more than 10% of its assets in
non-dollar denominated non-Canadian foreign securities, including emerging
market securities and Brady Bonds. The Series may hold foreign currency received
in connection with investments in foreign securities or in anticipation of
purchasing foreign securities. (See "Investment Techniques" and "Additional Risk
Factors" below.)
The Bond Series may not directly purchase common stocks. However, the Series
may retain up to 10% of its total assets in common stocks which were acquired
either by conversion of fixed income securities or by the exercise of warrants
attached thereto.
MFS LIMITED MATURITY SERIES -- The Limited Maturity Series' primary investment
objective is to provide as high a level of current income as is believed to be
consistent with prudent investment risk. The Series' secondary objective is to
protect shareholders' capital.
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In seeking to achieve its investment objectives, the Limited Maturity Series
invests, under normal market conditions, substantially all its assets in the
following securities:
1. Debt securities (including corporate asset-backed securities and
mortgage pass-through securities discussed below) which have a rating
within the four highest grades as determined by S&P or Fitch (AAA, AA, A
or BBB) or Moody's (Aaa, Aa, A or Baa) and comparable unrated securities;
for a description of these rating categories, see Appendix A to this
Prospectus;
2. U.S. Government Securities, as defined in "Investment Objectives and
Policies--MFS Total Return Series" above; or
3. Commercial paper, repurchase agreements, cash or cash equivalents (such
as certificates of deposit and bankers' acceptances).
The Limited Maturity Series will only invest in securities rated within the
four highest grades, as determined by S&P or Moody's or Fitch, and comparable
unrated securities. In addition, the dollar-weighted average quality of the
Series will be within the three highest grades, as determined by S&P or Moody's
or Fitch (or the Adviser in the case of unrated securities).
Under normal market conditions, substantially all the securities in the
Series' portfolio will have remaining maturities of five years or less or
estimated remaining average lives of five years or less. In the case of
mortgage-backed and corporate asset-backed securities as well as collateralized
mortgage obligations, the average life is likely to be substantially shorter
than the stated final maturity as a result of unscheduled principal prepayments.
For purposes of the foregoing investment policy, securities having a certain
maturity will be deemed to include securities with an equivalent "duration" of
such securities. "Duration" is a commonly used measure of the longevity of a
debt instrument that takes into account the full stream of payments received on
a debt instrument, including both interest and principal payments, based on
their present values. A debt instrument's duration is derived by discounting
principal and interest payments to their present value using the instrument's
current yield to maturity and taking the dollar-weighted average time until
those payments will be received. Contractual rights to dispose of a security
will be considered in calculating duration because such rights limit the period
during which the Series bears a market risk with respect to the security.
The Limited Maturity Series may invest up to 25% of its assets in
dollar-denominated foreign debt securities which may include emerging market
securities and Brady Bonds. (See "Investment Techniques" and "Additional Risk
Factors" below.)
MFS MONEY MARKET SERIES -- The Money Market Series' investment objective is to
seek as high a level of current income as is considered consistent with the
preservation of capital and liquidity.
The Money Market Series seeks to achieve its investment objective by
investing primarily (I.E., at least 80% of its assets under normal
circumstances) in the following instruments:
(a) U.S. Government Securities, as defined in "Investment Objectives and
Policies--MFS Total Return Series" above (including repurchase agreements
collateralized by such securities);
(b) obligations of banks (including certificates of deposit and bankers'
acceptances) which at the date of investment have capital, surplus, and
undivided profits (as of the date of their most recently published financial
statements) in excess of $100,000,000; and obligations of other banks or
savings and loan associations if such obligations are insured by the Federal
Deposit Insurance Corporation, provided that not more than 10% of the
Series' total assets will be invested in such insured obligations;
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(c) commercial paper which at the date of investment is rated A-1 by S&P
or by Fitch or P-1 by Moody's or, if not rated, is issued or guaranteed as
to payment of principal and interest by companies which at the date of
investment have an outstanding debt issue rated AA or better by S&P or by
Fitch or Aa or better by Moody's (for a description of these ratings, see
Appendix A to this Prospectus); and
(d) short-term (maturing in 13 months or less) corporate obligations
which at the date of investment are rated AA or better by S&P or by Fitch or
Aa or better by Moody's.
The Money Market Series may also invest up to 20% of its total assets in
debt instruments not specifically described in (a) through (d) above, provided
that such instruments are deemed by the Trustees of the Trust to be of
comparable high quality and liquidity and provided that such investments are in
accordance with applicable law. The Money Market Series may invest its assets in
the securities of foreign issuers and in the securities of foreign branches of
U.S. banks such as negotiable certificates of deposit (Eurodollars). Since the
portfolio of the Series may contain such securities, an investment in the Series
may involve a greater degree of risk than an investment in a fund which invests
only in debt obligations of U.S. domestic issuers, due to the possibility that
there may be less publicly available information, more volatile markets, less
securities regulation, less favorable tax provisions, war or expropriation. (See
"Additional Risk Factors" below.)
In addition, the Money Market Series may invest up to 75% of its assets in
all finance companies as a group, all banks and bank holding companies as a
group and all utility companies as a group when, in the opinion of management,
yield differentials and money market conditions suggest such investments are
advisable and when cash is available for such investments and instruments are
available for purchase which fulfill the Series' objective in terms of quality
and marketability.
All the assets of the Money Market Series will be invested in obligations
which mature in 13 months or less and substantially all of these investments
will be held to maturity; however, securities collateralizing repurchase
agreements may have maturities in excess of 13 months. The Money Market Series
will, to the extent feasible, make portfolio investments primarily in
anticipation of or in response to changing economic and money market conditions
and trends. Currently, the dollar-weighted average maturity of the investments
of the Series may not exceed 90 days.
5. INVESTMENT TECHNIQUES
LENDING OF PORTFOLIO SECURITIES: Each Series (except the Money Market
Series) may seek to increase its income by lending portfolio securities. Such
loans will usually be made to member firms (and subsidiaries thereof) of the New
York Stock Exchange (the "Exchange") and to member banks of the Federal Reserve
System, and would be required to be secured continuously by collateral in cash,
U.S. Treasury securities or an irrevocable letter of credit maintained on a
current basis at an amount at least equal to the market value of the securities
loaned. If the Adviser determines to make securities loans, it is intended that
the value of the securities loaned would not exceed 10% of the value of the net
assets of the Series making the loans.
EMERGING MARKET SECURITIES: Consistent with their respective objectives,
each Series (except the Money Market Series) may invest in securities of issuers
whose principal activities are located in emerging market countries. Emerging
market countries include any country determined by the Adviser to have an
emerging market economy, taking into account a number of factors, including
whether the country has a low- to middle-income economy according to the
International Bank for Reconstruction and Development, the country's foreign
currency debt rating, its political and economic stability and the development
of its financial and capital markets. The Adviser determines whether an issuer's
principal activities are located in an emerging market country by considering
such factors as its country of organization, the principal trading market for
its securities and the source of its revenues and assets. The issuer's principal
activities generally are deemed to be located in a particular country if: (a)
the security is issued or guaranteed by the government of that country or any of
its agencies, authorities or instrumentalities; (b) the issuer is organized
under the laws of, and maintains a principal office in that country;
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(c) the issuer has its principal securities trading market in that country; (d)
the issuer derives 50% or more of its total revenues from goods sold or services
performed in that country; or (e) the issuer has 50% or more of its assets in
that country.
BRADY BONDS: Each Series (except the Research Series and Money Market
Series) may invest in Brady Bonds, which are securities created through the
exchange of existing commercial bank loans to public and private entities in
certain emerging markets for new bonds in connection with debt restructurings
under a debt restructuring plan introduced by former U.S. Secretary of the
Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt restructurings
have been implemented to date in Argentina, Brazil, Bulgaria, Costa Rica,
Dominican Republic, Ecuador, Jordan, Mexico, Nigeria, Panama, the Philippines,
Poland, Uruguay and Venezuela. Brady Bonds have been issued only recently, and
for that reason do not have a long payment history. Brady Bonds may be
collateralized or uncollateralized, are issued in various currencies (but
primarily the U.S. dollar) and are actively traded in over-the-counter secondary
markets. U.S. dollar-denominated, collateralized Brady Bonds, which may be
fixed-rate bonds or floating-rate bonds, are generally collateralized in full as
to principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Brady Bonds are often viewed as having three or four valuation
components: the collateralized repayment of principal at final maturity; the
collateralized interest payments; the uncollateralized interest payments; and
any uncollateralized repayment of principal at maturity (these uncollateralized
amounts constituting the "residual risk"). In light of the residual risk of
Brady Bonds and the history of defaults of countries issuing Brady Bonds with
respect to commercial bank loans by public and private entities, investments in
Brady Bonds may be viewed as speculative.
REPURCHASE AGREEMENTS: Each Series may enter into repurchase agreements in
order to earn income on available cash or as a temporary defensive measure.
Under a repurchase agreement, a Series acquires securities subject to the
seller's agreement to repurchase at a specified time and price. If the seller
becomes subject to a proceeding under the bankruptcy laws or its assets are
otherwise subject to a stay order, the Series' right to liquidate the securities
may be restricted (during which time the value of the securities could decline).
As discussed in the SAI, each Series has adopted certain procedures intended to
minimize risk.
"WHEN-ISSUED" SECURITIES: Each Series (except the Research Series, the World
Governments Series and the Money Market Series) may purchase securities on a
"when-issued" or on a "forward delivery" basis, which means that the securities
will be delivered to the Series at a future date usually beyond customary
settlement time. The commitment to purchase a security for which payment will be
made on a future date may be deemed a separate security. In general, a Series
does not pay for such securities until received, and does not start earning
interest on the securities until the contractual settlement date. While awaiting
delivery of securities purchased on such bases, a Series will normally invest in
liquid assets.
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 with selected banks and
broker-dealers pursuant to which a Series sells mortgage-backed securities for
delivery in the future (generally within 30 days) and simultaneously contracts
to repurchase substantially similar (same type, coupon and maturity) securities
on a specified future date. The Series record these transactions as sale and
purchase transactions, rather than as borrowing transactions. A Series will only
enter into covered rolls. A "covered roll" is a specific type of dollar roll for
which there is an offsetting cash position or a cash equivalent security
position which matures on or before the forward settlement date of the dollar
roll transaction. In the event that the party with whom the Series contracts to
replace substantially similar securities on a future date fails to deliver such
securities, the Series may not be able to obtain such securities at the price
specified in such contract and thus may not benefit from the price differential
between the current sales price and the repurchase price.
RESTRICTED SECURITIES: Each Series (except the Growth With Income Series)
may purchase securities that are not registered under the Securities Act of 1933
(the "1933 Act") ("restricted securities"), including those that can be offered
and
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sold to "qualified institutional buyers" under Rule 144A under the 1933 Act
("Rule 144A securities"). A determination is made based upon a continuing review
of the trading markets for a specific Rule 144A security, whether such security
is liquid and thus not subject to the Series' limitation on investing not more
than 15% of its net assets (not more than 10% of its net assets in the case of
the Money Market Series) in illiquid investments. The Board of Trustees has
adopted guidelines and delegated to MFS the daily function of determining and
monitoring the liquidity of Rule 144A securities. The Board, however, retains
oversight, focusing on factors such as valuation, liquidity and availability of
information. Investing in Rule 144A securities could have the effect of
decreasing the level of liquidity in a Series to the extent that qualified
institutional buyers become for a time uninterested in purchasing Rule 144A
securities held in the Series' portfolio.
CORPORATE ASSET-BACKED SECURITIES: Each of the Emerging Growth Series, the
Total Return Series, the Bond Series, the Limited Maturity Series, the High
Income Series, the Strategic Fixed Income Series and the Utilities Series may
invest in corporate asset-backed securities. These securities, issued by trusts
and special purpose corporations, are backed by a pool of assets, such as credit
card and automobile loan receivables, representing the obligations of a number
of different parties.
Corporate asset-backed securities present certain risks. For instance, in
the case of credit card receivables, these securities may not have the benefit
of any security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there is
the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities. The underlying
assets (E.G., loans) are also subject to prepayments which shorten the
securities' weighted average life and may lower their return.
Corporate asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection; and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from ultimate default ensures payment through insurance policies or
letters of credit obtained by the issuer or sponsor from third parties. A Series
will not pay any additional or separate fees for credit support. The degree of
credit support provided for each issue is generally based on historical
information respecting the level of credit risk associated with the underlying
assets. Delinquency or loss in excess of that anticipated or failure of the
credit support could adversely affect the return on an investment in such a
security.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS: Each of the Value
Series, the Total Return Series, the Bond Series, the Strategic Fixed Income
Series, the World Governments Series, the Growth With Income Series, the Limited
Maturity Series, the High Income Series and the Utilities Series may invest in
zero coupon bonds. The Value Series, the Total Return Series, the Bond Series
and the High Income Series may also invest in deferred interest bonds and PIK
bonds. Zero coupon and deferred interest bonds are debt obligations which are
issued or purchased at a significant discount from face value. The discount
approximates the total amount of interest the bonds will accrue and compound
over the period until maturity or the first interest payment date at a rate of
interest reflecting the market rate of the security at the time of issuance.
While zero coupon bonds do not require the periodic payment of interest,
deferred interest bonds provide for a period of delay before the regular payment
of interest begins. PIK bonds are debt obligations which provide that the issuer
thereof may, at its option, pay interest on such bonds in cash or in the form of
additional debt obligations. Such investments benefit the issuer by
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mitigating its need for cash to meet debt service, but also require a higher
rate of return to attract investors who are willing to defer receipt of such
cash. Such investments may experience greater volatility in market value due to
changes in interest rates than debt obligations which make regular payments of
interest. Each Series will accrue income on such investments for tax and
accounting purposes, as required, which is distributable to shareholders and
which, because no cash is received at the time of accrual, may require the
liquidation of other portfolio securities to satisfy the Series' distribution
obligations.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES:
Each of the Bond Series, the 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. Typically, CMOs are collateralized by
certificates issued by GNMA, the Federal National Mortgage Association ("FNMA")
or the Federal Home Loan Mortgage Corporation ("FHLMC"), but also may be
collateralized by whole loans or private mortgage pass-through securities (such
collateral collectively referred to as "Mortgage Assets"). Each of these Series
may also invest a portion of its assets in multiclass pass-through securities
which are interests in a trust composed of Mortgage Assets. CMOs (which include
multiclass pass-through securities) may be issued by agencies, authorities or
instrumentalities of the U.S. Government or by private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage
banks, commercial banks, investment banks and special purpose subsidiaries of
the foregoing. Payments of principal of and interest on the Mortgage Assets, and
any reinvestment income thereon, provide the funds to pay debt service on the
CMOs or make scheduled distributions on the multiclass pass-through securities.
In a CMO, a series of bonds or certificates are usually issued in multiple
classes with different maturities. Each class of CMOs, often referred to as a
"tranche," is issued at a specific fixed or floating coupon rate and has a
stated maturity or final distribution date. Principal prepayments on the
Mortgage Assets may cause the CMOs to be retired substantially earlier than
their stated maturities or final distribution dates, resulting in a loss of all
or part of the premium if any has been paid. Certain classes of CMOs have
priority over others with respect to the receipt of prepayments on the
mortgages. Therefore, depending on the type of CMOs in which a Series invests,
the investment may be subject to a greater or lesser risk of prepayments than
other types of mortgage-related securities.
Each of the Bond Series, the Strategic Fixed Income Series, the World
Governments Series, the Limited Maturity Series, the High Income Series and the
Utilities Series may also invest in parallel pay CMOs and Planned Amortization
Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide payments
of principal on each payment date to more than one class. PAC Bonds generally
require payments of a specified amount of principal on each payment date. PAC
Bonds are always parallel pay CMOs with the required principal payment on such
securities having the highest priority after interest has been paid to all
classes. For a further description of CMOs, parallel pay CMOs and PAC Bonds and
the risks related to transactions therein, see the SAI.
STRIPPED MORTGAGE-BACKED SECURITIES: Each of the Bond Series, the 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 usually structured with two
classes that receive different proportions of interest and principal
distributions from an underlying pool of mortgage assets. For a further
description of SMBS and the risks related to transactions therein, see the SAI.
LOAN PARTICIPATIONS AND OTHER DIRECT INDEBTEDNESS: Each of the Emerging
Growth Series, the Value Series, the Total Return Series, the High Income Series
and the Strategic Fixed Income Series may invest a portion of its assets in
"loan participations" and other direct indebtedness. By purchasing a loan
participation, a Series acquires some or all of the interest of a bank or other
lending institution in a loan to a corporate borrower. Many such loans are
secured, and most impose restrictive covenants which
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must be met by the borrower. These loans are made generally to finance internal
growth, mergers, acquisitions, stock repurchases, leveraged buy-outs and other
corporate activities. Such loans may be in default at the time of purchase. A
Series may also purchase other direct indebtedness such as trade or other claims
against companies, which generally represent money owed by the company to a
supplier of goods and services. These claims may also be purchased at a time
when the company is in default. Certain of the loan participations and other
direct indebtedness acquired by a Series may involve revolving credit facilities
or other standby financing commitments which obligate a Series to pay additional
cash on a certain date or on demand.
The highly leveraged nature of many such loans and other direct indebtedness
may make such loans especially vulnerable to adverse changes in economic or
market conditions. Loan participations and other direct indebtedness may not be
in the form of securities or may be subject to restrictions on transfer, and
only limited opportunities may exist to resell such instruments. As a result, a
Series may be unable to sell such investments at an opportune time or may have
to resell them at less than fair market value. For a further discussion of loan
participations, other direct indebtedness and the risks related to transactions
therein, see the SAI.
MORTGAGE PASS-THROUGH SECURITIES: Each of the Total Return Series, the Bond
Series, the World Governments Series, the Limited Maturity Series and the High
Income Series may invest in mortgage pass-through securities. Mortgage pass-
through securities are securities representing interests in "pools" of mortgage
loans. The Utilities Series may invest in mortgage pass-through securities that
are securities issued or guaranteed as to principal and interest by the U.S.
Government, its agencies, authorities or instrumentalities. Monthly payments of
interest and principal by the individual borrowers on mortgages are passed
through to the holders of the securities (net of fees paid to the issuer or
guarantor of the securities) as the mortgages in the underlying mortgage pools
are paid off. Payment of principal and interest on some mortgage pass-through
securities (but not the market value of the securities themselves) may be
guaranteed by the full faith and credit of the U.S. Government (in the case of
securities guaranteed by GNMA); or guaranteed by U.S. Government-sponsored
corporations (such as FNMA or FHLMC, which are supported only by the
discretionary authority of the U.S. Government to purchase the agency's
obligations). Mortgage pass-through securities may also be issued by non-
governmental issuers (such as commercial banks, savings and loan institutions,
private mortgage insurance companies, mortgage bankers and other secondary
market issuers). See the SAI for a further discussion of these securities.
INDEXED SECURITIES: Each of the Value Series, the Total Return Series, the
High Income Series, the Bond Series, the Utilities Series and the World
Governments Series may invest in indexed securities whose value is linked to
foreign currencies, interest rates, commodities, indices or other financial
indicators. Most indexed securities are short to intermediate term fixed income
securities whose values at maturity (I.E., principal value) and/or interest
rates rise or fall according to the change in one or more specified underlying
instruments. Indexed securities may be positively or negatively indexed (I.E.,
their principal value or interest rates may increase or decrease if the
underlying instrument appreciates), and may have return characteristics similar
to direct investments in the underlying instrument or to one or more options on
the underlying instrument. Indexed securities may be more volatile than the
underlying instrument itself.
SWAPS AND RELATED TRANSACTIONS: As one way of managing its exposure to
different types of investments, each of the 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.
Swaps involve the exchange by a Series with another party of cash payments based
upon different interest rate indexes, currencies, and other prices or rates,
such as the value of mortgage prepayment rates. For example, in the typical
interest rate swap, a Series might exchange a sequence of cash payments based on
a floating rate index for cash payments based on a fixed rate. Payments made by
both parties to a swap transaction are based on a principal amount determined by
the parties.
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Each of the High Income Series, the World Governments Series, the Strategic
Fixed Income Series, the Bond Series and the Limited Maturity Series may also
purchase and sell caps, floors and collars. In a typical cap or floor agreement,
one party agrees to make payments only under specified circumstances, usually in
return for payment of a fee by the counterparty. For example, the purchase of an
interest rate cap entitles the buyer, to the extent that a specified index
exceeds a predetermined interest rate, to receive payments of interest on a
contractually-based principal amount from the counterparty selling such interest
rate cap. The sale of an interest rate floor obligates the seller to make
payments to the extent that a specified interest rate falls below an agreed-upon
level. A collar arrangement combines elements of buying a cap and selling a
floor.
Swap agreements will tend to shift a Series' investment exposure from one
type of investment to another. For example, if a Series agreed to exchange
payments in dollars for payments in foreign currency, in each case based on a
fixed rate, the swap agreement would tend to decrease a Series' exposure to U.S.
interest rates and increase its exposure to foreign currency and interest rates.
Caps and floors have an effect similar to buying or writing options. Depending
on how they are used, swap agreements may increase or decrease the overall
volatility of a Series' investments and its share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve
a small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on a
Series' performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. A Series may also suffer losses if
it is unable to terminate outstanding swap agreements or reduce its exposure
through offsetting transactions.
Swaps, caps, floors and collars are highly specialized activities which
involve certain risks. See the SAI for further information on, and the risks
involved in, these activities.
OPTIONS ON SECURITIES: Each of the Emerging Growth Series, the Value 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. Each of these Series will write options on securities for
the purpose of increasing its return and/or to protect the value of its
portfolio. In particular, where a Series writes an option that expires
unexercised or is closed out by the Series at a profit, it will retain the
premium paid for the option which will increase its gross income and will offset
in part the reduced value of the portfolio security underlying the option, or
the increased cost of portfolio securities to be acquired. In contrast, however,
if the price of the underlying security moves adversely to the Series' position,
the option may be exercised and the Series will be required to purchase or sell
the underlying security at a disadvantageous price, which may only be partially
offset by the amount of the premium. The Series may also write combinations of
put and call options on the same security, known as "straddles." Such
transactions can generate additional premium income but also present increased
risk.
By writing a call option on a security, a Series limits its opportunity to
profit from any increase in the market value of the underlying security, since
the holder will usually exercise the call option when the market value of the
underlying security exceeds the exercise price of the call. However, the Series
retains the risk of depreciation in value of securities on which it has written
call options.
Each of these Series may also purchase put or call options in anticipation
of market fluctuations which may adversely affect the value of its portfolio or
the prices of securities that a Series wants to purchase at a later date. In the
event that the expected market fluctuations occur, the Series may be able to
offset the resulting adverse effect on its portfolio, in whole or in part,
through the options purchased. The premium paid for a put or call option plus
any transaction costs will reduce the benefit, if any, realized by the Series
upon exercise or liquidation of the option, and, unless the price of the
underlying security changes sufficiently, the option may expire without value to
the Series.
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In certain instances, the Strategic Fixed Income Series and the Emerging
Growth Series may enter into options on Treasury securities that are "reset"
options or "adjustable strike" options. These options provide for periodic
adjustment of the strike price and may also provide for the periodic adjustment
of the premium during the term of the option. The SAI contains a further
discussion of these investments.
OPTIONS ON STOCK INDICES: Each of the Emerging Growth Series, the Value
Series, the Total Return Series, the Growth With Income Series and the Utilities
Series may write (sell) covered call and put options and purchase call and put
options on stock indices. Each of these Series may write options on stock
indices for the purpose of increasing its gross income and to protect its
portfolio against declines in the value of securities it owns or increases in
the value of securities to be acquired. When a Series writes an option on a
stock index, and the value of the index moves adversely to the holder's
position, the option will not be exercised, and the Series will either close out
the option at a profit or allow it to expire unexercised. A Series will thereby
retain the amount of the premium, less related transaction costs, which will
increase its gross income and offset part of the reduced value of portfolio
securities or the increased cost of securities to be acquired. Such
transactions, however, will constitute only partial hedges against adverse price
fluctuations, since any such fluctuations will be offset only to the extent of
the premium received by a Series for the writing of the option, less related
transaction costs. In addition, if the value of an underlying index moves
adversely to a Series' option position, the option may be exercised, and the
Series will experience a loss which may only be partially offset by the amount
of the premium received.
Each of these Series may also purchase put or call options on stock indices
in order, respectively, to hedge its investments against a decline in value or
to attempt to reduce the risk of missing a market or industry segment advance. A
Series' possible loss in either case will be limited to the premium paid for the
option, plus related transaction costs.
"YIELD CURVE" OPTIONS: Each of the Value Series, the Total Return Series,
the Bond Series, the Strategic Fixed Income Series, the World Governments Series
and the High Income Series may enter into options on the yield "spread," or
yield differential, between two securities, a transaction referred to as a
"yield curve" option, for hedging and non-hedging (an effort to increase current
income) purposes. In contrast to other types of options, a yield curve option is
based on the difference between the yields of designated securities rather than
the actual prices of the individual securities, and is settled through cash
payments. Accordingly, a yield curve option is profitable to the holder if this
differential widens (in the case of a call) or narrows (in the case of a put),
regardless of whether the yields of the underlying securities increase or
decrease. Yield curve options written by a Series will be covered as described
in the SAI. The trading of yield curve options is subject to all the risks
associated with trading other types of options, as discussed below under
"Additional Risk Factors" and in the SAI. In addition, such options present
risks of loss even if the yield on one of the underlying securities remains
constant, if the spread moves in a direction or to an extent which was not
anticipated.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS: Each of the Total Return
Series, the Bond Series, 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 on foreign or domestic
fixed income securities or indices of such securities, including municipal bond
indices and any other indices of foreign or domestic fixed income securities
that may become available for trading ("Futures Contracts"). Each of these
Series may also purchase and write options on such Futures Contracts ("Options
on Futures Contracts"). Each of the Emerging Growth Series, the Value Series,
the Total Return Series and the Growth With Income Series may purchase and sell
Futures Contracts on stock indices, while the Emerging Growth Series, the Value
Series, the Total Return Series, the Strategic Fixed Income Series, the World
Governments Series, the Growth With Income Series and the Utilities Series may
purchase and sell Futures Contracts on foreign currencies or indices of foreign
currencies. Each of these Series may also purchase and write Options on such
Futures Contracts.
Such transactions will be entered into for hedging purposes or for
non-hedging purposes to the extent permitted by applicable law. Each Series will
incur brokerage fees when it purchases and sells Futures Contracts, and will be
required to maintain margin deposits. In addition, Futures Contracts entail
risks. Although the Adviser believes that use of such Contracts
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will benefit a Series, if its investment judgment about the general direction of
exchange rates or the stock market is incorrect, the Series' overall performance
may be poorer than if it had not entered into any such contract and the Series
may realize a loss. A Series will not enter into any Futures Contract if
immediately thereafter the value of securities and other obligations underlying
all such Futures Contracts held by such Series would exceed 50% of the value of
its total assets.
Purchases of Options on Futures Contracts may present less risk in hedging a
Series' portfolio than the purchase or sale of the underlying Futures Contracts
since the potential loss is limited to the amount of the premium plus related
transaction costs, although it may be necessary to exercise the option to
realize any profit, which results in the establishment of a futures position.
The writing of Options on Futures Contracts, however, does not present less risk
than the trading of Futures Contracts and will constitute only a partial hedge,
up to the amount of the premium received. In addition, if an option is
exercised, a Series may suffer a loss on the transaction.
Futures Contracts and Options on Futures Contracts that are entered into by
a Series will be traded on U.S. and foreign exchanges.
FORWARD CONTRACTS: Each Series (except the Limited Maturity Series and Money
Market Series) may enter into forward foreign currency exchange contracts for
the purchase or sale of a fixed quantity of a foreign currency at a future date
("Forward Contracts"). Each of these Series may enter into Forward Contracts for
hedging purposes and (except for the Bond Series and the High Income Series) for
non-hedging purposes (I.E., speculative purposes). By entering into transactions
in Forward Contracts for hedging purposes, a Series may be required to forego
the benefits of advantageous changes in exchange rates and, in the case of
Forward Contracts entered into for non-hedging purposes, a Series may sustain
losses which will reduce its gross income. Such transactions, therefore, could
be considered speculative. Forward Contracts are traded over-the-counter and not
on organized commodities or securities exchanges. As a result, Forward Contracts
operate in a manner distinct from exchange-traded instruments, and their use
involves certain risks beyond those associated with transactions in Futures
Contracts or options traded on exchanges. A Series may choose to, or be required
to, receive delivery of the foreign currencies underlying Forward Contracts it
has entered into. Under certain circumstances, such as where the Adviser
believes that the applicable exchange rate is unfavorable at the time the
currencies are received or the Adviser anticipates, for any other reason, that
the exchange rate will improve, the Series may hold such currencies for an
indefinite period of time. A Series may also enter into a Forward Contract on
one currency to hedge against risk of loss arising from fluctuations in the
value of a second currency (referred to as a "cross hedge") if, in the judgment
of the Adviser, a reasonable degree of correlation can be expected between
movements in the values of the two currencies. Each of these Series has
established procedures consistent with statements of the SEC and its staff
regarding the use of Forward Contracts by registered investment companies, which
requires use of segregated assets or "cover" in connection with the purchase and
sale of such contracts.
OPTIONS ON FOREIGN CURRENCIES: Each of the Emerging Growth Series, the Value
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 ("Options on Foreign Currencies") for the purpose of protecting
against declines in the dollar value of portfolio securities and against
increases in the dollar cost of securities to be acquired. As in the case of
other types of options, however, the writing of an Option on Foreign Currency
will constitute only a partial hedge, up to the amount of the premium received,
and a Series may be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
Option on Foreign Currency may constitute an effective hedge against
fluctuations in exchange rates although, in the event of rate movements adverse
to a Series' position, it may forfeit the entire amount of the premium paid for
the option plus related transaction costs. A Series may also choose to, or be
required to, receive delivery of the foreign currencies underlying Options on
Foreign Currencies it has entered into. Under certain circumstances, such as
where the Adviser believes that the applicable exchange rate is unfavorable at
the time the currencies are received or the Adviser anticipates, for any other
reason, that the exchange rate will improve, a Series may hold such currencies
for an indefinite period of time.
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6. ADDITIONAL RISK FACTORS
OPTIONS, FUTURES CONTRACTS AND FORWARD CONTRACTS: Although certain Series
will enter into transactions in options, Futures Contracts, Options on Futures
Contracts, Forward Contracts and Options on Foreign Currencies for hedging
purposes, such transactions nevertheless involve certain risks. For example, a
lack of correlation between the instrument underlying an option or Futures
Contract and the assets being hedged, or unexpected adverse price movements,
could render a Series' hedging strategy unsuccessful and could result in losses.
Certain Series also may enter into transactions in options, Futures Contracts,
Options on Futures Contracts and Forward Contracts for other than hedging
purposes, which involves greater risk. In particular, such transactions may
result in losses for a Series which are not offset by gains on other portfolio
positions, thereby reducing gross income. In addition, foreign currency markets
may be extremely volatile from time to time. There also can be no assurance that
a liquid secondary market will exist for any contract purchased or sold, and a
Series may be required to maintain a position until exercise or expiration,
which could result in losses. The SAI contains a description of the nature and
trading mechanics of options, Futures Contracts, Options on Futures Contracts,
Forward Contracts and Options on Foreign Currencies, and includes a discussion
of the risks related to transactions therein.
Transactions in Forward Contracts may be entered into only in the
over-the-counter market. Futures Contracts and Options on Futures Contracts may
be entered into on U.S. exchanges regulated by the Commodity Futures Trading
Commission and on foreign exchanges. In addition, the securities and indexes
underlying options, Futures Contracts and Options on Futures Contracts traded by
the Series will include both domestic and foreign securities.
LOWER RATED BONDS: Each of the Emerging Growth Series, the Value 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 or
BBB by S&P or Fitch and comparable unrated securities. These securities, while
normally exhibiting adequate protection parameters, have speculative
characteristics and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than in the case of higher grade securities.
Each of these Series (except the Limited Maturity Series) may also invest in
securities rated Ba or lower by Moody's or BB or lower by S&P or Fitch and
comparable unrated securities (commonly known as "junk bonds") to the extent
described above. See Appendix A to this Prospectus for a description of these
ratings. These securities are considered speculative and, while generally
providing greater income than investments in higher rated securities, will
involve greater risk of principal and income (including the possibility of
default or bankruptcy of the issuers of such securities) and may involve greater
volatility of price (especially during periods of economic uncertainty or
change) than securities in the higher rating categories. However, since yields
vary over time, no specific level of income can ever be assured. These lower
rated high yielding fixed income securities generally tend to reflect economic
changes and short-term corporate and industry developments to a greater extent
than higher rated securities which react primarily to fluctuations in the
general level of interest rates (although these lower rated fixed income
securities are also affected by changes in interest rates, the market's
perception of their credit quality, and the outlook for economic growth). In the
past, economic downturns or an increase in interest rates have, under certain
circumstances, caused a higher incidence of default by the issuers of these
securities and may do so in the future, especially in the case of highly
leveraged issuers. During certain periods, the higher yields on a Series' lower
rated high yielding fixed income securities are paid primarily because of the
increased risk of loss of principal and income, arising from such factors as the
heightened possibility of default or bankruptcy of the issuers of such
securities. Due to the fixed income payments of these securities, a Series may
continue to earn the same level of interest income while its net asset value
declines due to portfolio losses, which could result in an increase in the
Series' yield despite the actual loss of principal. The market for these lower
rated fixed income securities may be less liquid than the market for investment
grade fixed income securities, and judgment may at times play a greater role in
valuing these securities than in the case of investment grade fixed
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income securities. Changes in the value of securities subsequent to their
acquisition will not affect cash income or yield to maturity to a Series but
will be reflected in the net asset value of shares of the Series. See the SAI
for more information on lower rated securities.
FOREIGN SECURITIES: The Limited Maturity Series may invest in
dollar-denominated foreign debt securities. The Money Market Series may invest
in dollar-denominated securities of foreign issuers and in dollar-denominated
securities of foreign branches of U.S. banks such as negotiable certificates of
deposit (Eurodollars). The remaining Series may invest in dollar-denominated and
non-dollar-denominated foreign securities. Investing in securities of foreign
issuers generally involves risks not ordinarily associated with investing in
securities of domestic issuers. These include changes in currency rates,
exchange control regulations, governmental administration or economic or
monetary policy (in the U.S. or abroad) or circumstances in dealings between
nations. Costs may be incurred in connection with conversions between various
currencies. Special considerations may also include more limited information
about foreign issuers, higher brokerage costs, different accounting standards
and thinner trading markets. Foreign securities markets may also be less liquid,
more volatile and less subject to government supervision than in the United
States. Investments in foreign countries could be affected by other factors
including expropriation, confiscatory taxation and potential difficulties in
enforcing contractual obligations and could be subject to extended settlement
periods. All of the Series (except the Limited Maturity Series and the Money
Market Series) may hold foreign currency received in connection with investments
in foreign securities when, in the judgment of the Adviser, it would be
beneficial to convert such currency into U.S. dollars at a later date, based on
anticipated changes in the relevant exchange rate. Such Series may also hold
foreign currency in anticipation of purchasing foreign securities. See the SAI
for further discussion of foreign securities and the holding of foreign
currency, as well as the associated risks.
AMERICAN DEPOSITARY RECEIPTS: Each of the Series (except the Limited
Maturity Series and the Money Market Series) may invest in ADRs which are
certificates issued by a U.S. depository (usually a bank) and represent a
specified quantity of shares of an underlying non-U.S. stock on deposit with a
custodian bank as collateral. Because ADRs trade on U.S. securities exchanges,
the Adviser does not treat them as foreign securities. However, they are subject
to many of the risks of foreign securities such as changes in exchange rates and
more limited information about foreign issuers.
EMERGING MARKET SECURITIES: Each of the Series (except the Money Market
Series) may invest in emerging markets. In addition to the general risks of
investing in foreign securities, investments in emerging markets involve special
risks. Securities of many issuers in emerging markets may be less liquid and
more volatile than securities of comparable domestic issuers. These securities
may be considered speculative and, while generally offering higher income and
the potential for capital appreciation, may present significantly greater risk.
Emerging markets may have different clearance and settlement procedures, and in
certain markets there have been times when settlements have been unable to keep
pace with the volume of securities transactions, making it difficult to conduct
such transactions. Delays in settlement could result in temporary periods when a
portion of the assets of a Series is uninvested and no return is earned thereon.
The inability of a Series to make intended security purchases due to settlement
problems could cause a Series to miss attractive investment opportunities.
Inability to dispose of portfolio securities due to settlement problems could
result in losses to a Series due to subsequent declines in value of the
portfolio securities, a decrease in the level of liquidity in a Series'
portfolio, or if a Series has entered into a contract to sell the security,
possible liability to the purchaser. Certain markets may require payment for
securities before delivery, and in such markets a Series bears the risk that the
securities will not be delivered and that the Series' payments will not be
returned. Securities prices in emerging markets can be significantly more
volatile than in the more developed nations of the world, reflecting the greater
uncertainties of investing in less established markets and economies. In
particular, countries with emerging markets may have relatively unstable
governments, present the risk of nationalization of businesses, restrictions on
foreign ownership, or prohibitions of repatriation of assets, and may have less
protection of property rights than more developed countries. The economies of
countries with emerging markets may be predominantly based on only a few
industries, may be highly vulnerable to changes in local or global trade
conditions, and may suffer from extreme and volatile debt burdens or inflation
rates. Local securities markets may trade a small number of securities and may
35
<PAGE>
be unable to respond effectively to increases in trading volume, potentially
making prompt liquidation of substantial holdings difficult or impossible at
times. Securities of issuers located in countries with emerging markets may have
limited marketability and may be subject to more abrupt or erratic movements.
Certain emerging markets may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in an
emerging market's balance of payments or for other reasons, a country could
impose temporary restrictions on foreign capital remittances. A Series could be
adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by the application
to the Series of any restrictions on investments.
Investment in certain foreign emerging market debt obligations may be
restricted or controlled to varying degrees. These restrictions or controls may
at times preclude investment in certain foreign emerging market debt obligations
and increase the expenses of a Series.
NON-DIVERSIFICATION: Each of the World Governments Series, the Strategic
Fixed Income Series and the Utilities Series is "non-diversified," as that term
is defined in the Investment Company Act of 1940 ( the "1940 Act"), but intends
to qualify as a "regulated investment company" ("RIC") for federal income tax
purposes. This means, in general, that although more than 5% of the Series'
total assets may be invested in the securities of one issuer (including a
foreign government), at the close of each quarter of its taxable year the
aggregate amount of such holdings may not exceed 50% of the value of its total
assets, and no more than 25% of the value of its total assets may be invested in
the securities of a single issuer. To the extent that a non-diversified Series
at times may hold the securities of a smaller number of issuers than if it were
"diversified" (as defined in the 1940 Act), the Series will at such times be
subject to greater risk with respect to its portfolio securities than a fund
that invests in a broader range of securities, because changes in the financial
condition or market assessment of a single issuer may cause greater fluctuations
in the Series' total return and the net asset value of its shares.
-------------------
SHORT-TERM INVESTMENTS FOR TEMPORARY DEFENSIVE PURPOSES -- During periods of
unusual market conditions when the Adviser believes that investing for temporary
defensive purposes is appropriate, or in order to meet anticipated redemption
requests, a large portion or all of the assets of each Series may be invested in
cash (including foreign currency) or cash equivalents including, but not limited
to, obligations of banks (including certificates of deposit, bankers'
acceptances, time deposits and repurchase agreements), commercial paper,
short-term notes, U.S. Government Securities and related repurchase agreements.
PORTFOLIO TRADING
Each Series intends to manage its portfolio by buying and selling
securities, as well as holding securities to maturity, to help attain its
investment objectives and policies.
Each Series will engage in portfolio trading if it believes a transaction,
net of costs (including custodian charges), will help in attaining its
investment objectives. In trading portfolio securities, a Series seeks to take
advantage of market developments, yield disparities and variations in the
creditworthiness of issuers. For a description of the strategies which may be
used by the Series in trading portfolio securities, see "Portfolio Transactions
and Brokerage Commissions" in the SAI. The Total Return Series' portfolio will
be managed actively with respect to the Series' fixed income securities and the
asset allocations modified as the Adviser deems necessary. Although the Series
does not intend to seek short-term profits, fixed income securities in its
portfolio will be sold whenever the Adviser believes it is appropriate to do so
without regard to the length of time the particular asset may have been held.
With respect to its equity securities, the Total Return Series does not intend
to trade in securities for short-term profits and anticipates that portfolio
securities ordinarily will be held for one year or longer. However, the Series
will effect trades whenever it believes that changes in its portfolio securities
are appropriate.
36
<PAGE>
Because each of the Utilities Series, the High Income Series, the World
Governments Series, the Bond Series and the Limited Maturity Series is expected
to have a portfolio turnover rate of over 100%, transaction costs incurred by
the Series and the realized capital gains and losses of the Series may be
greater than that of a fund with a lesser portfolio turnover rate.
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain, and maintain the availability of,
execution at the most favorable prices and in the most effective manner
possible. Consistent with the foregoing primary consideration, the Rules of Fair
Practice of the National Association of Securities Dealers, Inc. (the "NASD")
and such other policies as the Trustees of the Trust may determine, the Adviser
may consider sales of Contracts for which the Trust is an investment option,
together with sales of shares of other investment company clients of MFS Fund
Distributors, Inc., the distributor of shares of the Trust and of the MFS Family
of Funds, as a factor in the selection of broker-dealers to execute each Series'
portfolio transactions. From time to time the Adviser may direct certain
portfolio transactions to broker-dealer firms which, in turn, have agreed to pay
a portion of the Series' operating expenses (e.g., fees charged by the custodian
of the Series' assets). For a further discussion of portfolio trading, see the
SAI.
-------------------
The SAI includes a discussion of other investment policies and listing of
specific investment restrictions which govern the investment policies of each
Series. The specific investment restrictions listed in the SAI may be changed
without shareholder approval unless indicated otherwise (see the SAI). The
Series' investment limitations, policies and rating standards are adhered to at
the time of purchase or utilization of assets; a subsequent change in
circumstances will not be considered to result in a violation of policy.
7. MANAGEMENT OF THE SERIES
The Trust's Board of Trustees, as part of its overall management
responsibility, oversees various organizations responsible for each Series'
day-to-day management.
INVESTMENT ADVISER -- MFS manages each Series pursuant to an Investment Advisory
Agreement with the Trust on behalf of each Series dated April 14, 1994 (the
"Advisory Agreement"). Under the Advisory Agreement, MFS provides the Series
with overall investment advisory services. Subject to such policies as the
Trustees may determine, MFS makes investment decisions for each Series. For its
services and facilities, MFS receives a management fee, computed and paid
monthly, in an amount equal to the following annual rates of the average daily
net assets of each Series:
<TABLE>
<CAPTION>
PERCENTAGE OF THE
AVERAGE DAILY NET
ASSETS
SERIES OF EACH SERIES
- --------------------------------------------------------------------------------------------- ----------------------
<S> <C>
Emerging Growth Series....................................................................... 0.75%
Value Series................................................................................. 0.75%
Research Series.............................................................................. 0.75%
Growth With Income Series.................................................................... 0.75%
Total Return Series.......................................................................... 0.75%
Utilities Series............................................................................. 0.75%
High Income Series........................................................................... 0.75%
World Governments Series..................................................................... 0.75%
Strategic Fixed Income Series................................................................ 0.75%
Bond Series.................................................................................. 0.60%
Limited Maturity Series...................................................................... 0.55%
Money Market Series.......................................................................... 0.50%
</TABLE>
37
<PAGE>
For the fiscal year ended December 31, 1995, MFS received the following
management fees from the Series under the Advisory Agreement and assumed the
following amounts of the Series' expenses (see "Expenses" below);
<TABLE>
<CAPTION>
MANAGEMENT FEE EXPENSES ASSUMED
SERIES PAID TO MFS BY MFS
- ---------------------------------------------------------------------------------- -------------- ----------------
<S> <C> <C>
Emerging Growth Series............................................................ $ 314,262 $ 62,962
Value Series...................................................................... 3,196 12,079
Research Series................................................................... 92,348 56,859
Growth With Income Series......................................................... 30,792 42,658
Total Return Series............................................................... 60,979 87,721
Utilities Series.................................................................. 39,863 91,877
High Income Series................................................................ 56,169 45,293
World Governments Series.......................................................... 126,898 172,556
Bond Series....................................................................... 2,924 40,829
Limited Maturity Series........................................................... 1,064 12,705
Money Market Series............................................................... 858 46,831
</TABLE>
The identity and background of the portfolio managers for each Series is set
forth below. Unless indicated otherwise, each portfolio manager has acted in
that capacity since the commencement of investment operations of each Series.
<TABLE>
<CAPTION>
SERIES PORTFOLIO MANAGERS
- ----------------------------- --------------------------------------------------------------------------------------
<S> <C>
Emerging Growth Series John W. Ballen, a Senior Vice President of MFS, has been employed by the Adviser as a
portfolio manager since 1984. Toni Y. Shimura, a Vice President of MFS, has been
employed by the Adviser as a portfolio manager since 1987. Ms. Shimura became a
portfolio manager of the Series on November 30, 1995.
Value Series John F. Brennan, Jr., a Senior Vice President of MFS, has been employed by the Adviser
as a portfolio manager since 1985.
Research Series The Series is currently managed by a committee comprised of various equity research
analysts employed by the Adviser.
Growth With Income Series Kevin R. Parke, a Senior Vice President of MFS, has been employed by the Adviser as a
portfolio manager since 1985. John D. Laupheimer, a Senior Vice President of MFS, has
been employed by the Adviser as a portfolio manager since 1981.
Total Return Series David M. Calabro, a Vice President of MFS, has been employed by the Adviser as a
portfolio manager since 1992. Mr. Calabro is the head of this portfolio management
team and a manager of the common stock portion of the Series' portfolio. Geoffrey L.
Kurinsky, a Senior Vice President of MFS, has been employed by the Adviser as a
portfolio manager since 1987. Mr. Kurinsky is the manager of the Series' fixed income
securities. Judith N. Lamb, a Vice President of MFS, has been employed by the Adviser
as a portfolio manager since 1992. Ms. Lamb is the manager of the Series' convertible
securities. Lisa B. Nurme, a Vice President of MFS, has been employed by the Adviser
as a portfolio manager since 1987. Ms. Nurme is a manager of the common stock portion
of the Series' portfolio. Maura A. Shaughnessy, a Vice President of MFS, has been
employed by the Adviser as a portfolio manager since 1991. Ms. Shaughnessy is a
manager of the common stock portion of the Series' portfolio. Each individual became a
portfolio manager of the Series on July 19, 1995.
Utilities Series Maura A. Shaughnessy, a Vice President of the Adviser, has been employed by the
Adviser as a portfolio manager since 1991.
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
SERIES PORTFOLIO MANAGERS
- ----------------------------- --------------------------------------------------------------------------------------
High Income Series Joan S. Batchelder, a Senior Vice President of the Adviser, has been employed by the
Adviser as a portfolio manager since 1984.
<S> <C>
World Governments Series Stephen C. Bryant, a Senior Vice President of the Adviser, has been employed by the
Adviser as a portfolio manager since 1987.
Strategic Fixed Income Series James Swanson, a Senior Vice President of the Adviser, has been employed by the
Adviser as a portfolio manager since 1985.
Bond Series Geoffrey L. Kurinsky, a Senior Vice President of the Adviser, has been employed by the
Limited Maturity Series Adviser as a portfolio manager since 1987.
Money Market Series
</TABLE>
MFS also serves as investment adviser to each of the other funds in the MFS
Family of Funds (the "MFS Funds") and to MFS-Registered Trademark- Municipal
Income Trust, MFS Multimarket Income Trust, MFS Government Markets Income Trust,
MFS Intermediate Income Trust, MFS Charter Income Trust, MFS Special Value
Trust, MFS Institutional Trust, MFS Union Standard Trust, MFS/ Sun Life Series
Trust, and seven variable accounts, each of which is a registered investment
company established by Sun Life Assurance Company of Canada (U.S.) ("Sun Life of
Canada (U.S.)") in connection with the sale of various fixed/variable annuity
contracts. MFS and its wholly owned subsidiary, MFS Asset Management, Inc.,
provide investment advice to substantial private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts Investors
Trust. Net assets under the management of the MFS organization were
approximately $52.8 billion on behalf of approximately 2.3 million investor
accounts as of February 28, 1997. As of such date, the MFS organization managed
approximately $28.9 billion of assets invested in equity securities and
approximately $19.4 billion of assets invested in fixed income securities.
Approximately $4.0 billion of the assets managed by MFS are invested in
securities of foreign issuers and non-U.S. dollar-denominated securities of U.S.
issuers. MFS is a subsidiary of Sun Life of Canada (U.S.), which in turn is a
wholly owned subsidiary of Sun Life Assurance Company of Canada ("Sun Life").
The Directors of MFS are A. Keith Brodkin, Jeffrey L. Shames, Arnold D. Scott,
John D. McNeil and Donald A. Stewart. Mr. Brodkin is the Chairman, Mr. Shames is
the President and Mr. Scott is the Secretary and a Senior Executive Vice
President of MFS. Messrs. McNeil and Stewart are the Chairman and President,
respectively, of Sun Life. Sun Life, a mutual life insurance company, is one of
the largest international life insurance companies and has been operating in the
United States since 1895, establishing a headquarters office here in 1973. The
executive officers of MFS report to the Chairman of Sun Life.
A. Keith Brodkin, the Chairman and a Director of MFS, is the Chairman and
President and a Trustee of the Trust. W. Thomas London, Stephen E. Cavan, James
R. Bordewick, Jr., and James O. Yost, all of whom are officers of MFS, are
officers of the Trust.
MFS has established a strategic alliance with Foreign & Colonial Management
Ltd. ("Foreign & Colonial"). Foreign & Colonial is a subsidiary of two of the
world's oldest financial services institutions, the London-based Foreign &
Colonial Investment Trust PLC, which pioneered the idea of investment management
in 1868, and HYPO-BANK (Bayerische Hypotheken-und Weschsel-Bank AG), the oldest
publicly listed bank in Germany, founded in 1835. As part of this alliance, the
portfolio managers and investment analysts of MFS and Foreign & Colonial share
their views on a variety of investment related issues, such as the economy,
securities markets, portfolio securities and their issuers, investment
recommendations, strategies and techniques, risk analysis, trading strategies
and other portfolio management matters. MFS has access to the extensive
international equity investment expertise of Foreign & Colonial, and Foreign &
Colonial has access to the extensive U.S. equity investment expertise of MFS.
MFS and Foreign Colonial each have investment personnel working in each other's
offices in Boston and London, respectively.
39
<PAGE>
In certain instances there may be securities which are suitable for a
Series' portfolio as well as for portfolios of other clients of MFS or clients
of Foreign & Colonial. Some simultaneous transactions are inevitable when
several clients receive investment advice from MFS and Foreign & Colonial,
particularly when the same security is suitable for more than one client. While
in some cases this arrangement could have a detrimental effect on the price or
availability of the security as far as a Series is concerned, in other cases,
however, it may produce increased investment opportunities for the Series.
From time to time, the Adviser may purchase, redeem and exchange shares of
any Series. The purchase by the Adviser of shares of a Series may have the
effect of lowering that Series' expense ratio, while the redemption by the
Adviser of shares of a Series may have the effect of increasing that Series'
expense ratio.
DISTRIBUTOR -- MFS Fund Distributors, Inc. ("MFD"), a wholly owned
subsidiary of MFS, is the distributor of shares of each Series and also serves
as distributor for certain of the other mutual funds managed by MFS.
ADMINISTRATOR -- MFS provides the Series with certain administrative
services pursuant to a Master Administrative Services Agreement dated March 1,
1997. Under this Agreement, MFS provides the Series with certain financial,
legal, compliance, shareholder communications and other administrative services.
As a partial reimbursement for the cost of providing these services, the Series
pays MFS an administrative fee up to 0.015% per annum of the Series' average
daily net assets, provided that the administrative fee is not assessed on a
Series' assets that exceed $3 billion.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. (the "Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency,
certain dividend disbursing agency and other services for each Series.
8. INFORMATION CONCERNING SHARES OF EACH SERIES
PURCHASES AND REDEMPTIONS
The separate accounts of the Participating Insurance Companies place orders
to purchase and redeem shares of each Series based on, among other things, the
amount of premium payments to be invested and surrender and transfer requests to
be effected on that day pursuant to Contracts. Orders received by the Trust are
effected on days on which the Exchange is open for trading. For orders received
by the Trust before the close of regular trading on the Exchange (normally 4
p.m. eastern time), such purchases and redemptions of the shares of each Series
are effected at the respective net asset values per share determined as of the
close of regular trading on the Exchange on that same day. Participating
Insurance Companies shall be the designee of the Trust for receipt of purchase
and redemption orders from Contract holders and receipt by such designee shall
constitute receipt by the Trust; provided that the Trust receives notice of such
order by 9:30 a.m. eastern time on the next following day on which the Exchange
is open for trading. Payment for shares shall be by federal funds transmitted by
wire and must be received by 2:00 p.m. eastern time on the next following day on
which the Exchange is open for trading after the purchase order is received.
Redemption proceeds shall be by federal funds transmitted by wire and shall be
sent by 2:00 p.m. eastern time on the next following day on which the Exchange
is open for trading after the redemption order is received. No fee is charged
the shareholders when they redeem Series shares.
The offering of shares of any Series may be suspended for a period of time
and each Series reserves the right to refuse any specific purchase order.
Purchase orders may be refused if, in the Adviser's opinion, they are of a size
that would disrupt the management of a Series. The Trust may suspend the right
of redemption of shares of any Series and may postpone payment for any period:
(i) during which the Exchange is closed other than customary weekend and holiday
closings or during which trading on the Exchange is restricted; (ii) when the
SEC determines that a state of emergency exists which may make payment or
transfer not reasonably practicable; (iii) as the SEC may by order permit for
the protection of the security holders of the Trust; or (iv) at any time when
the Trust may, under applicable laws, rules and regulations, suspend payment on
the redemption of its shares.
40
<PAGE>
Should any conflict between Contract holders arise which would require that
a substantial amount of net assets be withdrawn from any Series, orderly
portfolio management could be disrupted to the potential detriment of such
Contract.
NET ASSET VALUE
The net asset value per share of each Series is determined each day during
which the Exchange is open for trading. This determination is made once during
each such day as of the close of regular trading on the Exchange by deducting
the amount of the Series' liabilities from the value of the Series' assets and
dividing the difference by the number of shares of the Series outstanding.
Values of assets in a Series' portfolio are determined on the basis of their
market or other fair value (amortized cost value in the case of the Money Market
Series), as described in the SAI. All investments, assets and liabilities are
expressed in U.S. dollars based upon current currency exchange rates.
DISTRIBUTIONS
Substantially all of each Series' (except the Money Market Series') net
investment income for any calendar year is declared as dividends and paid to its
shareholders as dividends on an annual basis. In addition, each Series may make
one or more distributions during the calendar year to its shareholders from any
long-term capital gains, and may also make one or more distributions to its
shareholders from short-term capital gains. In determining the net investment
income available for distribution, a Series may rely on projections of its
anticipated net investment income (which may include short-term capital gains
from the sales of securities or other assets, and, if allowed by a Series'
investment restrictions, premiums from options written), over a longer term,
rather than its actual net investment income for the period.
Substantially all of the Money Market Series' net investment income for any
calendar year is declared as dividends daily and paid to its shareholders as
dividends on a monthly basis. Generally, those dividends are distributed on the
last business day of the month in the form of additional shares of the Money
Market Series at the rate of one share (and fraction thereof) for each dollar
(and fraction thereof) of dividend income or, at the election of the
shareholder, in cash. Shares purchased become entitled to dividends declared as
of the first day following the date of investment.
Shareholders of any of the Series may elect to receive dividends and capital
gain distributions in either cash or additional shares.
TAX STATUS
Each Series of the Trust is treated as a separate entity for federal income
tax purposes. In order to minimize the taxes each Series would otherwise be
required to pay, each Series intends to qualify each year as a "regulated
investment company" under Subchapter M of the Internal Revenue Code of 1986, as
amended ("the Code"). Because each Series intends to distribute all of its net
investment income and net capital gains to its shareholders in accordance with
the timing requirements imposed by the Code, it is not expected that any of the
Series will be required to pay entity level federal income or excise taxes.
Shares of the Series are offered only to the Participating Insurance
Companies' separate accounts that fund Contracts. See the applicable Contract
prospectus for a discussion of the federal income tax treatment of (1) the
separate accounts that purchase and hold Series shares and (2) the holders of
the Contracts that are funded through those accounts. In addition to the
diversification requirements of Subchapter M of the Code, each Series also
intends to diversify its assets as required by Code Section 817(h)(1), and the
regulations thereunder. See also "Tax Status" in the SAI.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
Each Series currently has one class of shares, entitled Shares of Beneficial
Interest (without par value). The Trust has reserved the right to create and
issue additional classes and series of shares, in which case each class of
shares of a series would participate equally in the earnings, dividends and
assets attributable to that class of that particular series. Shareholders are
entitled to one vote for each share held, and shares of each Series are entitled
to vote separately to approve investment advisory agreements or changes in
investment restrictions with respect to that Series, but shares of all Series
vote together in the election of Trustees and selection of accountants.
Additionally, each Series will vote separately on any other matter that
41
<PAGE>
affects solely that Series, but will otherwise vote together with all other
Series on all other matters. The Trust does not intend to hold annual
shareholder meetings. The Declaration of Trust provides that a Trustee may be
removed from office in certain instances. See "Description of Shares, Voting
Rights and Liabilities" in the SAI.
Each share of a Series represents an equal proportionate interest in the
Series with each share, subject to the liabilities of the particular Series.
Shares have no pre-emptive or conversion rights. Shares are fully paid and
non-assessable. Should a Series be liquidated, shareholders are entitled to
share PRO RATA in the net assets available for distribution to shareholders.
Shares will remain on deposit with the Shareholder Servicing Agent and
certificates will not be issued.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a trust may,
under certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed (E.G., fidelity bonding and omission insurance) and
the Trust itself was unable to meet its obligations.
MFS Fund Distributors, Inc., Boston, MA, owns 80.53% of the Value Series'
shares and 98.31% of the Limited Maturity Series' shares, and, therefore,
controls such Series; United of Omaha Life Insurance Company, Omaha, NE, owns
50.75% of the Research Series' shares, 75.63% of the High Income Series' shares
and 33.02% of the World Governments Series' shares, and, therefore, controls
such Series; Union Central Life Insurance Company-- Group Annuity and Union
Central Life Insurance Company--Individual Annuity, Cincinnati, OH, own 28.17%
and 52.03%, respectively, of the Growth With Income Series' shares, and,
therefore, each controls the Series; CG Variable Annuity--Separate Account II,
Hartford, CT, owns 44.85% of the Total Return Series and 29.08% of the Utilities
Series' shares, and, therefore, controls such Series; Ameritas Life Insurance
Company-- Separate Account VA-2 (Annuity), Lincoln, NE, owns 56.16% of the
Utilities Series' shares, and, therefore, controls the Series; Century Life of
America--Century Variable Annuity Account, Waverly, IA, owns 45.82% of the World
Governments Series' shares, and, therefore, controls the Series; Massachusetts
Financial Services Company, Boston, MA, owns 98.84% of the Strategic Fixed
Income Series' shares, and, therefore, controls the Series; Kansas City Life
Insurance Company--Variable Annuity, Kansas City, MO, owns 70.43% of the Bond
Series' shares, and, therefore, controls the Series; and First Citicorp Life
Insurance Company, Dover, DE, owns 81.98% of the Money Market Series' shares,
and, therefore, controls the Series.
PERFORMANCE INFORMATION
Each Series' performance may be quoted in advertising in terms of yield and,
except for the Money Market Series, total return. Performance is based on
historical results and is not intended to indicate future performance.
Performance quoted for a Series includes the effect of deducting that Series'
expenses, but may not include charges and expenses attributable to any
particular insurance product. Excluding these charges from quotations of a
Series' performance has the effect of increasing the performance quoted.
Performance for a Series will vary based on, among other things, changes in
market conditions, the level of interest rates and the level of the Series'
expenses. For further information about the Series' performance for the fiscal
year ended December 31, 1996, please see the Series' Annual Reports. A copy of
these Annual Reports may be obtained without charge by contacting the
Shareholder Servicing Agent (see back cover for address and phone number).
MONEY MARKET SERIES: From time to time, quotations of the Money Market
Series' "yield" and "effective yield" may be included in advertisements, sales
literature or reports to shareholders or prospective investors. The yield of the
Money Market Series refers to the net investment income generated by the Series
over a specified seven-day period (the ending date of which will be stated).
Included in "net investment income" is the amortization of market premium or
accretion of market and original issue discount. This income is then
"annualized." That is, the amount of income generated by the Series during that
week is assumed to be generated during each week over a 365 day period and is
shown as a percentage. The effective yield is expressed similarly but, when
annualized, the income earned by an investment in the Series is assumed to be
reinvested. The effective yield will be slightly higher than the yield because
of the compounding effect of this assumed reinvestment.
42
<PAGE>
OTHER SERIES: From time to time, quotations of a Series' total return and
yield may be included in advertisements, sales literature or reports to
shareholders or prospective investors. The total return of a Series refers to
return assuming an investment has been held in the Series for one year and for
the life of the Series (the ending date of which will be stated). The total
return quotations may be expressed in terms of average annual or cumulative
rates of return for all periods quoted. Average annual total return refers to
the average annual compound rate of return of an investment in a Series.
Cumulative total return represents the cumulative change in value of an
investment in a Series. Both will assume that all dividends and capital gains
distributions were reinvested. The yield of a Series refers to net investment
income generated by a Series over a specified 30-day (or one month) period. This
income is then "annualized." That is, the amount of income generated by the
Series during that 30-day (or one month) period is assumed to be generated over
a 12-month period and is shown as a percentage of net asset value.
EXPENSES
The Trust pays the compensation of the Trustees who are not officers of MFS
and all expenses of each Series (other than those assumed by MFS) including but
not limited to: governmental fees; interest charges; taxes; membership dues in
the Investment Company Institute allocable to each Series; fees and expenses of
independent auditors, of legal counsel, and of any transfer agent, registrar or
dividend disbursing agent of each Series; expenses of repurchasing and redeeming
shares and servicing shareholder accounts; expenses of preparing, printing and
mailing prospectuses, periodic reports, notices and proxy statements to
shareholders and to governmental officers and commissions; brokerage and other
expenses connected with the execution, recording and settlement of portfolio
security transactions; insurance premiums; fees and expenses of Investors Bank &
Trust Company, the Trust's Custodian, for all services to each Series, including
safekeeping of funds and securities and maintaining required books and accounts;
expenses of calculating the net asset value of shares of each Series; and
expenses of shareholder meetings. Expenses relating to the issuance,
registration and qualification of shares of each Series and the preparation,
printing and mailing of prospectuses are borne by each Series except that the
Distribution Agreement with MFD requires MFD to pay for prospectuses that are to
be used for sales purposes. Expenses of the Trust which are not attributable to
a specific Series are allocated between the Series in a manner believed by
management of the Trust to be fair and equitable.
Subject to termination or revision at the sole discretion of MFS, MFS has
agreed to bear expenses of each of the Series such that the respective Series'
"Other Expenses," which are defined to include all expenses of the Series except
for management fees, do not exceed the following percentages of the average
daily net assets of the Series (the "Maximum Percentage"): 0.40% for the Bond
Series, 0.45% for the Limited Maturity Series, 0.10% for the Money Market
Series, and 0.25% for each remaining Series. The obligation of MFS to bear these
expenses for a Series terminates on the last day of the Series' fiscal year in
which its "Other Expenses" are less than or equal to the Maximum Percentage. The
payments made by MFS on behalf of each Series under this arrangement are subject
to reimbursement by the Series to MFS, which will be accomplished by the payment
of an expense reimbursement fee by the Series to MFS computed and paid monthly
at a percentage of the Series' average daily net assets for its then current
fiscal year, with a limitation that immediately after such payment the Series'
"Other Expenses" will not exceed the Maximum Percentage. This expense
reimbursement by each Series to MFS terminates on the earlier of the date on
which payments made by the Series equal the prior payment of such reimbursable
expenses by MFS or December 31, 2004.
SHAREHOLDER COMMUNICATIONS
Owners of Contracts issued by Participating Insurance Companies for which
shares of one or more Series are the investment vehicle will receive from the
Participating Insurance Companies semi-annual financial statements and audited
year-end financial statements certified by the Trust's independent certified
public accountants. Each report will show the investments owned by the Trust and
the valuations thereof as determined by the Trustees and will provide other
information about the Trust and its operations.
43
<PAGE>
Participating Insurance Companies with inquiries regarding the Trust may
call the Trust's Shareholder Servicing Agent. (See back cover for address and
phone number.)
-------------------
The SAI for the Trust, dated May 1, 1996, as revised August 1, 1996, as
amended or supplemented from time to time, contains more detailed information
about each of the Series, including information related to: (i) the investment
policies and restrictions of each Series; (ii) the Trustees, officers and
investment adviser of the Trust; (iii) portfolio transactions; (iv) the shares
of each Series, including rights and liabilities of shareholders; (v) the method
used to calculate yield and total rate of return quotations of each Series; (vi)
the determination of net asset value of shares of each Series; and (vii) certain
voting rights of shareholders of each Series.
44
<PAGE>
APPENDIX A
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the quality
of various debt instruments. It should be emphasized, however, that ratings are
not absolute standards of quality. Consequently, debt instruments with the same
maturity, coupon and rating may have different yields while debt instruments of
the same maturity and coupon with different ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
AAA: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
BAA: Bonds which are rated Baa are considered as medium-grade obligations
(I.E., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA: Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has
been suspended or withdrawn, it may be for reasons unrelated to the quality of
the issue.
Should no rating be assigned, the reason may be one of the following:
1. an application for rating was not received or accepted;
2. the issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy;
A-1
<PAGE>
3. there is a lack of essential data pertaining to the issue or issuer; or
4. the issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
STANDARD & POOR'S RATINGS SERVICES
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The CCC rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior debt
that is assigned an actual or implied CCC rating.
C: The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI: The rating CI is reserved for income bonds on which no interest is being
paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
A-2
<PAGE>
PLUS (+) OR MINUS (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR: Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
A-1 AND P-1 COMMERCIAL PAPER RATINGS
Description of S&P, Fitch and Moody's highest commercial paper ratings:
The rating "A" is the highest commercial paper rating assigned by S&P and
Fitch, and issues so rated are regarded as having the greatest capacity for
timely payment. Issues in the "A" category are delineated with the numbers 1, 2
and 3 to indicate the relative degree of safety. The A-1 designation indicates
that the degree of safety regarding timely payment is either overwhelming or
very strong. Those A-1 issues determined to possess overwhelming safety
characteristics will be denoted with a plus (+) sign designation.
The rating P-1 is the highest commercial paper rating assigned by Moody's.
Issuers rated P-1 have a superior ability for repayment. P-1 repayment capacity
will normally be evidenced by the following characteristics: (1) leading market
positions in well established industries; (2) high rates of return on funds
employed; (3) conservative capitalization structure with moderate reliance on
debt and ample asset protection; (4) broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and (5) well established
access to a range of financial markets and assured sources of alternate
liquidity.
FITCH INVESTORS SERVICE, INC.
AAA: Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
prepay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA: Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated 'AAA'. Because bonds rated in the
'AAA' and 'AA' categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated 'F-1+'.
A: Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds and, therefore,
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified which could
assist the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
A-3
<PAGE>
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest of principal.
PLUS(+) MINUS(-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rated category. Plus and
minus signs, however, are not used in the 'AAA' category.
NR: indicates that Fitch does not rate the specific issue.
CONDITIONAL: A conditional rating is premised on the successful completion
of a project or the occurrence of a specific event.
SUSPENDED: A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
WITHDRAWN: A rating will be withdrawn when an issue matures or is called or
refinanced, and, at Fitch's discretion, when an issuer fails to furnish proper
and timely information.
FITCHALERT: Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the likely direction
of such change. These are designated a "Positive," indicating a potential
upgrade, "Negative," for potential downgrade, or "Evolving," where ratings may
be lowered. FitchAlert is relatively short-term and should be resolved within 12
months.
DUFF & PHELPS CREDIT RATING CO.
AAA: Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA: Bonds considered to be investment grade and or very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated 'AAA'. Because bonds rated in the
'AAA' and 'AA' categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated 'D-1+'.
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business, and financial alternatives can be identified which could
assist the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
A-4
<PAGE>
PLUS (+) OR MINUS (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within a rating category. Plus and
minus signs, however, are not used in the 'AAA' category.
NR: Indicates that Duff & Phelps does not rate the specific issue.
DUFF & PHELPS SHORT-TERM RATINGS
D-1+: Highest certainty of timely payment. Short-term liquidity, including
internal operation factors and/or access to alternative sources of funds, is
outstanding and safety is just below risk-free U.S. Treasury short-term
obligations.
D-1: Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
D-1-: High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
D-2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
D-3: Satisfactory liquidity and other protection factors qualify issues as
to investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
D-4: Speculative investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors and market access
may be subject to a high degree of variation.
D-5: Issuer failed to meet scheduled principal and/or interest payments.
A-5
<PAGE>
APPENDIX B
PRINCIPAL SECTORS OF THE UTILITIES INDUSTRY
The principal sectors of the utility industry in which the Utilities Series may
invest are discussed below.
ELECTRIC -- The electric utility industry consists of companies that are engaged
principally in the generation, transmission and sale of electric energy,
although many also provide other energy-related services. Domestic electric
utility companies, in general, recently have been favorably affected by lower
fuel and financing costs and the full or near completion of major construction
programs. In addition, many of these companies recently have generated cash
flows in excess of current operating expenses and construction expenditures,
permitting some degree of diversification into unregulated businesses. Some
electric utilities have also taken advantage of the right to sell power outside
of their traditional geographic areas. Electric utility companies historically
have been subject to the risks associated with increases in fuel and other
operating costs, high interest costs on borrowings needed for capital
construction programs, costs associated with compliance with environmental and
safety regulations and changes in the regulatory climate.
In the U.S., the construction and operation of nuclear power facilities is
subject to increased scrutiny by, and evolving regulations of, the Nuclear
Regulatory Commission and state agencies having comparable jurisdiction.
Increased scrutiny might result in higher operating costs and higher capital
expenditures, with the risk that the regulators may disallow inclusion of these
costs in rate authorizations or the risk that a company may not be permitted to
operate or complete construction of a facility. In addition, operators of
nuclear power plants may be subject to significant costs for disposal of nuclear
fuel and for the de-commissioning of such plants.
TELECOMMUNICATIONS -- The telephone industry is large and highly concentrated.
Companies that distribute telephone services and provide access to the telephone
networks comprise the greatest portion of this segment. Telephone companies in
the U.S. are still experiencing the effects of the breakup of American Telephone
& Telegraph Company, which occurred in 1984. Since 1984, companies engaged in
telephone communication services have expanded their non-regulated activities
into other businesses, including cellular telephone services, data processing,
equipment retailing, computer software and hardware services, and financial
services. This expansion has provided significant opportunities for certain
telephone companies to increase their earnings and dividends at faster rates
than had been allowed in traditionally regulated businesses. Increasing
competition, technological innovations and other structural changes, however,
could adversely affect the profitability of such utilities.
GAS -- Gas transmission companies and gas distribution companies are also
undergoing significant changes. In the U.S., interstate transmission companies
are regulated by the Federal Energy Regulatory Commission, which is reducing its
regulation of the industry. Many companies have diversified into oil and gas
exploration and development, making returns more sensitive to energy prices. In
the recent decade, gas utility companies have been adversely affected by
disruptions in the oil industry and have also been affected by increased
concentration and competition. In the opinion of the Adviser, however,
environmental considerations could improve the gas industry outlook in the
future. For example, natural gas is the cleanest of the hydrocarbon fuels, and
this may result in incremental shifts in fuel consumption toward natural gas and
away from oil and coal.
WATER -- Water supply utilities are companies that collect, purify, distribute
and sell water. In the U.S. and around the world, the industry is highly
fragmented because most of the supplies are owned by local authorities.
Companies in this industry are generally mature and are experiencing little or
no per capita volume growth.
-------------------
There can be no assurance that the positive developments noted above,
including those relating to changing regulation, will occur or that risk factors
other than those noted above will not develop in the future.
B-1
<PAGE>
APPENDIX C
MFS HIGH INCOME SERIES
PORTFOLIO COMPOSITION CHART
FOR FISCAL YEAR ENDED DECEMBER 31, 1996
The table below shows the percentages of the Series' assets at December 31, 1996
invested in bonds assigned to the various rating categories by S&P, Moody's
(provided only for bonds not rated by S&P), Fitch (provided only for bonds not
rated by S&P or Moody's) and Duff & Phelps (provided only for bonds not rated by
S&P, Moody's or Fitch) and in unrated bonds determined by MFS to be of
comparable quality. For split rated bonds, the S&P rating is used. When an S&P
rating is unavailable, secondary sources are selected in the following order:
Moody's, Fitch and Duff & Phelps.
<TABLE>
<CAPTION>
UNRATED BONDS
COMPILED OF COMPARABLE
RATING RATINGS QUALITY TOTAL
- ------------- ----------- -------------- ----------
<S> <C> <C> <C>
AAA/Aaa
AA/Aa
A/A
BBB/Baa
BB/Ba 12.02 12.02
B/B 69.41 3.93 73.34
CCC/Caa 4.49 4.49
CC/Ca
C/C
Default .58 .58
----- ----- -----
TOTAL 86.50 3.93 90.43
</TABLE>
The chart does not necessarily indicate what the composition of the Series'
portfolio will be in subsequent years. Rather, the Series' investment objective,
policies and restrictions indicate the extent to which the Series may purchase
securities in the various categories.
C-1
<PAGE>
APPENDIX C (CONT.)
MFS BOND SERIES
PORTFOLIO COMPOSITION CHART
FOR FISCAL YEAR ENDED DECEMBER 31, 1996
The table below shows the percentages of the Series' assets at December 31, 1996
invested in bonds assigned to the various rating categories by S&P, Moody's
(provided only for bonds not rated by S&P), Fitch (provided only for bonds not
rated by S&P or Moody's) and Duff & Phelps (provided only for bonds not rated by
S&P, Moody's or Fitch) and in unrated bonds determined by MFS to be of
comparable quality. For split rated bonds, the higher of the S&P or Moody's
rating is used. When neither an S&P or Moody's rating is available, secondary
sources are selected in the following order: Fitch and Duff & Phelps.
<TABLE>
<CAPTION>
COMPILED
RATING RATINGS TOTAL
- ----------- ----------- ----------
<S> <C> <C> <C>
AAA/Aaa 31.50 31.50
AA/Aa 1.69 1.69
A/A 7.61 7.61
BBB/Baa 28.46 28.46
BB/Ba 14.35 14.35
B/B 1.28 1.28
CCC/Caa
CC/Ca
C/C
Default
----- -----
TOTAL 84.89 84.89
</TABLE>
The chart does not necessarily indicate what the composition of the Series'
portfolio will be in subsequent years. Rather, the Series' investment objective,
policies and restrictions indicate the extent to which the Series may purchase
securities in the various categories.
C-2
<PAGE>
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
(800) 637-8730
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN
Investors Bank & Trust Company
89 South Street, Boston, MA 02111
DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 343-2829, ext. 3500
MAILING ADDRESS:
P.O. Box 1400, Boston, MA 02104-9985
INDEPENDENT AUDITORS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
------------------------------------
MFS-REGISTERED TRADEMARK-
VARIABLE
INSURANCE
TRUST
[LOGO]
PROSPECTUS
MAY 1, 1997
[LOGO]
MFS-REGISTERED TRADEMARK- VARIABLE INSURANCE TRUST
500 Boylston Street, Boston, MA 02116
------------------------
<PAGE>
<TABLE>
<S> <C>
MFS-REGISTERED TRADEMARK- VARIABLE STATEMENT OF
INSURANCE TRUST-SM- ADDITIONAL INFORMATION
MAY 1, 1997
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
-----
<C> <S> <C>
1. General Information and Definitions.................................................. 2
2. Investment Techniques................................................................ 2
3. Investment Restrictions.............................................................. 16
4. Management of the Trust.............................................................. 18
Trustees............................................................................. 18
Officers............................................................................. 18
Trustee Compensation Table........................................................... 19
Investment Adviser................................................................... 20
Investment Advisory Agreement........................................................ 20
Administrator........................................................................ 21
Custodian............................................................................ 21
Shareholder Servicing Agent.......................................................... 21
Distributor.......................................................................... 21
5. Portfolio Transactions and Brokerage Commissions..................................... 21
6. Tax Status........................................................................... 23
7. Net Income and Distributions......................................................... 23
8. Determination of Net Asset Value; Performance Information............................ 24
9. Description of Shares, Voting Rights and Liabilities................................. 26
10. Independent Auditors and Financial Statements........................................ 26
11. Appendix A........................................................................... A-1
</TABLE>
MFS-Registered Trademark- VARIABLE INSURANCE TRUST-SM-
500 Boylston Street, Boston, Massachusetts 02116
(617) 954-5000
This Statement of Additional Information, as amended or supplemented from time
to time (the "SAI"), sets forth information which may be of interest to
investors but which is not necessarily included in the Trust's Prospectus, dated
May 1, 1997, as supplemented from time to time. This SAI should be read in
conjunction with the Prospectus, a copy of which may be obtained without charge
by contacting the Shareholder Servicing Agent (see back cover for address and
phone number).
THIS SAI RELATES TO THE 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 SAI INCLUDES INFORMATION ON
OTHER SERIES WHICH ARE NOT OFFERED PURSUANT TO SUCH PROSPECTUSES; IN WHICH CASE
INFORMATION CONCERNING THESE OTHER SERIES CONTAINED HEREIN SHOULD BE
DISREGARDED.
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
UST-13 12/93 785
<PAGE>
1. GENERAL INFORMATION AND DEFINITIONS
MFS Variable Insurance Trust (the "Trust") is a professionally managed open-end
management investment company (a "mutual fund") consisting of twelve separate
series: MFS Emerging Growth Series (the "Emerging Growth Series"), MFS Value
Series (the "Value Series"), MFS Research Series (the "Research Series"), MFS
Growth With Income Series (the "Growth With Income Series"), MFS Total Return
Series (the "Total Return Series"), MFS Utilities Series (the "Utilities
Series"), MFS High Income Series (the "High Income Series"), MFS World
Governments Series (the "World Governments Series"), MFS 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"). The Emerging Growth
Series was previously known as the "OTC Series" until its name was changed on
June 1, 1995. The Value Series was previously known as the "Growth Series" until
its name was changed on April 25, 1996.
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, United States ("U.S.") Treasury securities or an irrevocable letter of
credit maintained on a current basis at an amount at least equal to the market
value of the securities loaned. A Series would have the right to call a loan and
obtain the securities loaned at any time on customary industry settlement notice
(which will not usually exceed five business days). For the duration of a loan,
the Series would continue to receive the equivalent of the interest or dividends
paid by the issuer on the securities loaned and would also receive compensation
from the investment of cash 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 10% of the
value of a Series' net assets.
REPURCHASE AGREEMENTS: Each of the Series may enter into repurchase agreements
with sellers who are member firms (or a subsidiary thereof) of the Exchange or
members of the Federal Reserve System, recognized primary U.S. Government
securities dealers or institutions which the Adviser has determined to be of
comparable creditworthiness. The securities that a Series purchases and holds
through its agent are U.S. Government securities, the values of which are equal
to or greater than the repurchase price agreed to be paid by the seller. The
repurchase price may be higher than the purchase price, the difference being
income to the Series, or the purchase and repurchase prices may be the same,
with interest at a standard rate due to the Series together with the repurchase
price on repurchase. In either case, the income to the Series is unrelated to
the interest rate on the Government securities.
The repurchase agreement provides that in the event the seller fails to pay the
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 liquid assets
sufficient to cover any commitments or to limit any potential risk. Although no
Series intends to make such purchases for speculative purposes and each Series
intends to adhere to the provisions of the SEC policy, purchases of securities
on such bases may involve more risk than other types of purchases. For example,
a Series may have to sell assets which have been set aside in order to meet
redemptions. Also, if a Series determines it is necessary to sell the "when-
issued" or "forward delivery" securities before delivery, the Series may incur a
loss because of market fluctuations since the time the commitment to purchase
such securities was made.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: Each of the Total Return Series, the Bond
Series, the Strategic Fixed Income Series, the World Governments Series, the
Limited Maturity Series, the High
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Income Series and the Utilities Series may enter into mortgage "dollar roll"
transactions pursuant to which it sells mortgage-backed securities for delivery
in the future and simultaneously contracts to repurchase substantially similar
securities on a specified future date. The Series record these transactions as
sale and purchase transactions, rather than as borrowing transactions. During
the roll period, a Series foregoes principal and interest paid on the
mortgage-backed securities. A Series is compensated for the lost interest by the
difference between the current sales price and the lower price for the future
purchase (often referred to as the "drop") as well as by the interest earned on
the cash proceeds of the initial sale. A Series may also be compensated by
receipt of a commitment fee. In the event that the party with whom the Series
contracts to replace substantially similar securities on a future date fails to
deliver such securities, the Series may not be able to obtain such securities at
the price specified in such contract and thus may not benefit from the price
differential between the current sales price and the repurchase price.
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 Strategic Fixed Income 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
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Mortgage Assets, while the other class will receive most of the interest and the
remainder of the principal. In the most extreme case, one class will receive all
of the interest (the interest-only or "IO" class) while the other class will
receive all of the principal (the principal-only or "PO" class). The yield to
maturity on an IO is extremely sensitive to the rate of principal payments,
including prepayments on the related underlying Mortgage Assets, and a rapid
rate of principal payments may have a material adverse effect on such security's
yield to maturity. If the underlying Mortgage Assets experience greater than
anticipated prepayments of principal, a Series may fail to fully recoup its
initial investment in these securities. The market value of the class consisting
primarily or entirely of principal payments generally is unusually volatile in
response to changes in interest rates. Because SMBS were only recently
introduced, established trading markets for these securities have not yet
developed, although the securities are traded among institutional investors and
investment banking firms.
LOAN PARTICIPATIONS AND OTHER DIRECT INDEBTEDNESS: Each of the Emerging Growth
Series, the Value Series, the Total Return Series, the 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 owed by
the company to a supplier of goods or services. These claims may also be
purchased at a time when the company is in default.
Certain of the loan participations and the other direct indebtedness acquired by
a Series may involve revolving credit facilities or other standby financing
commitments which obligate the Series to pay additional cash on a certain date
or on demand. These commitments may have the effect of requiring a Series to
increase its investment in a company at a time when the Series might not
otherwise decide to do so (including at a time when the company's financial
condition makes it unlikely that such amounts will be repaid). To the extent
that a Series is committed to advance additional funds, it will at all times
hold and maintain in a segregated account liquid assets in an amount sufficient
to meet such commitments.
A Series' ability to receive payment of principal, interest and other amounts
due in connection with these investments will depend primarily on the financial
condition of the borrower. In selecting the loan participations and other direct
indebtedness which a Series will purchase, the Adviser will rely upon its own
(and not the original lending institution's) credit analysis of the borrower. As
the Series may be required to rely upon another lending institution to collect
and pass onto the Series amounts payable with respect to the loan and to enforce
the Series' rights under the loan and other direct indebtedness, an insolvency,
bankruptcy or reorganization of the lending institution may delay or prevent the
Series from receiving such amounts. In such cases, the Series will evaluate as
well the creditworthiness of the lending institution and will treat both the
borrower and the lending institution as an "issuer" of the loan participation
for purposes of certain investment restrictions pertaining to the
diversification of the Series' portfolio investments. The highly leveraged
nature of many such loans and other direct indebtedness may make such loans and
other direct indebtedness especially vulnerable to adverse changes in economic
or market conditions. Investments in such loans and other direct indebtedness
may involve additional risk to a Series. For example, if a loan or other direct
indebtedness is foreclosed, a Series could become part owner of any collateral,
and would bear the costs and liabilities associated with owning and disposing of
the collateral. In addition, it is conceivable that under emerging legal
theories of lender liability, a Series could be held liable as a co-lender. It
is unclear whether loans and other forms of direct indebtedness offer securities
law protections against fraud and misrepresentation. In the absence of
definitive regulatory guidance, each Series relies on the Adviser's research in
an attempt to avoid situations where fraud and misrepresentation could adversely
affect a Series. In addition, loan participations and other direct investments
may not be in the form of securities or may be subject to restrictions on
transfer, and only limited opportunities may exist to resell such instruments.
As a result, a Series may be unable to sell such investments at an opportune
time or may have to resell them at less than fair market value. To the extent
that the Adviser determines that any such investments are illiquid, a Series
will include them in the investment limitations described below.
MORTGAGE PASS-THROUGH SECURITIES: Each of the Total Return Series, the Bond
Series, the World Governments Series, the Limited Maturity Series and the High
Income Series may invest in mortgage pass-through securities. The Utilities
Series may invest in mortgage pass-through securities that are securities issued
or guaranteed as to principal and interest by the U.S. Government, its agencies,
authorities or instrumentalities. Mortgage pass-through securities are
securities representing interests in "pools" of mortgage loans. Monthly payments
of interest and principal by the individual borrowers on mortgages are passed
through to the holders of the securities (net of fees paid to the issuer or
guarantor of the securities) as the mortgages in the underlying mortgage pools
are paid off. The average lives of mortgage pass-throughs
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are variable when issued because their average lives depend on prepayment rates.
The average life of these securities is likely to be substantially shorter than
their stated final maturity as a result of unscheduled principal prepayment.
Prepayments on underlying mortgages result in a loss of anticipated interest,
and all or part of a premium if any has been paid, and the actual yield (or
total return) to the Series may be different than the quoted yield on the
securities. Mortgage premiums generally increase with falling interest rates and
decrease with rising interest rates. Like other fixed income securities, when
interest rates rise the value of mortgage pass-through security generally will
decline; however, when interest rates are declining, the value of mortgage
pass-through securities with prepayment features may not increase as much as
that of other fixed-income securities.
Payment of principal and interest on some mortgage pass-through securities (but
not the market value of the securities themselves) may be guaranteed by the full
faith and credit of the U.S. Government (in the case of securities guaranteed by
the Government National Mortgage Association ("GNMA"); or guaranteed by agencies
or instrumentalities of the U.S. Government (such as the Federal National
Mortgage Association ("FNMA") or the Federal Home Loan Mortgage Corporation,
("FHLMC") which are supported only by the discretionary authority of the U.S.
Government to purchase the agency's obligations). Mortgage pass-through
securities may also be issued by non-governmental issuers (such as commercial
banks, savings and loan institutions, private mortgage insurance companies,
mortgage bankers and other secondary market issuers). Some of these mortgage
pass-through securities may be supported by various forms of insurance or
guarantees.
Interests in pools of mortgage-related securities differ from other forms of
debt securities, which normally provide for periodic payment of interest in
fixed amounts with principal payments at maturity or specified call dates.
Instead, these securities provide a monthly payment which consists of both
interest and principal payments. In effect, these payments are a "pass-through"
of the monthly payments made by the individual borrowers on their mortgage
loans, net of any fees paid to the issuer or guarantor of such securities.
Additional payments are caused by prepayments of principal resulting from the
sale, refinancing or foreclosure of the underlying property, net of fees or
costs which may be incurred. Some mortgage pass-through securities (such as
securities issued by the GNMA) are described as "modified pass-through." These
securities entitle the holder to receive all interests and principal payments
owed on the mortgages in the mortgage pool, net of certain fees, at the
scheduled payment dates regardless of whether the mortgagor actually makes the
payment.
The principal governmental guarantor of mortgage pass-through securities is
GNMA. GNMA is a wholly owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the U.S. Government, the timely payment of principal and
interest on securities issued by institutions approved by GNMA (such as savings
and loan institutions, commercial banks and mortgage bankers) and backed by
pools of FHA-insured or VA-guaranteed mortgages. These guarantees, however, do
not apply to the market value or yield of mortgage pass-through securities. GNMA
securities are often purchased at a premium over the maturity value of the
underlying mortgages. This premium is not guaranteed and will be lost if
prepayment occurs.
Government-related guarantors (I.E., whose guarantees are not backed by the full
faith and credit of the U.S. Government) include FNMA and FHLMC. FNMA is a
government-sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases conventional residential mortgages (I.E., mortgages not insured
or guaranteed by any governmental agency) from a list of approved
seller/servicers which include state and federally chartered savings and loan
associations, mutual savings banks, commercial banks, credit unions and mortgage
bankers. Pass-through securities issued by FNMA are guaranteed as to timely
payment by FNMA of principal and interest.
FHLMC is also a government-sponsored corporation owned by private stockholders.
FHLMC issues Participation Certificates ("PCs") which represent interests in
conventional mortgages (I.E., not federally insured or guaranteed) for FHLMC's
national portfolio. FHLMC guarantees timely payment of interest and ultimate
collection of principal regardless of the status of the underlying mortgage
loans.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of mortgage loans. Such issuers may also be the originators
and/or servicers of the underlying mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments in the former pools. However, timely
payment of interest and principal of mortgage loans in these pools may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit. The insurance and
guarantees are issued by governmental entities, private insurers and the
mortgage poolers. There can be no assurance that the private insurers or
guarantors can meet their obligations under the insurance policies or guarantee
arrangements. A Series may also buy mortgage-related securities without
insurance or guarantees.
INDEXED SECURITIES: Each of the Value Series, the Total Return Series, the High
Income Series, the Bond Series, the Utilities Series 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 (i.e.,
principal value) or coupon rate is determined by reference to a specific
instrument or statistic. Gold-indexed securities, for example, typically provide
for a maturity value that depends on the price of gold, resulting in a security
whose price tends to rise and fall together with gold prices. Currency-indexed
securities typically are short-term to intermediate-term debt securities whose
maturity values or interest rates are determined by reference to the values of
one or more specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed securities
may be positively or negatively indexed; that is,
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their maturity value may increase when the specified currency value increases,
resulting in a security that performs similarly to a foreign-denominated
instrument, or their maturity value may decline when foreign currencies
increase, resulting in a security whose price characteristics are similar to a
put on the underlying currency. Currency-indexed securities may also have prices
that depend on the values of a number of different foreign currencies relative
to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or 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 Value 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 liquid assets in a segregated account with its custodian. A put
option written by a Series is "covered" if the Series maintains liquid assets
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 liquid assets 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 counterparty with which, the option is traded, and
applicable laws and regulations. If the writer's obligation is not so covered,
it is subject to the risk of the full change in value of the underlying security
from the time the option is written until exercise.
Effecting a closing transaction in the case of a written call option will permit
a Series to write another call option on the underlying security with either a
different exercise price or expiration date or both, or in the case of a written
put option will permit the Series to write another put option to the extent that
the exercise price thereof is secured by liquid assets. Such transactions permit
a Series to generate additional premium income, which will partially offset
declines in the value of portfolio securities or increases in the cost of
securities to be acquired. Also, effecting a closing transaction will permit the
cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other investments of a Series, provided that another
option on such security is not written. If a Series desires to sell a particular
security from its
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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 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
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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 Series than if the strike price had been fixed at the
initiation of the option. In addition, the premium paid for the purchase of the
option may be determined at the termination, rather than the initiation, of the
option. If the premium is paid at termination, the Series assumes the risk that
(i) the premium may be less than the premium which would otherwise have been
received at the initiation of the option because of such factors as the
volatility in yield of the underlying Treasury security over the term of the
option and adjustments made to the strike price of the option, and (ii) the
option purchaser may default on its obligation to pay the premium at the
termination of the option.
OPTIONS ON STOCK INDICES: Each of the Emerging Growth Series, the Value Series,
the Total Return Series, the Growth With Income Series 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 liquid assets in a segregated account with its
custodian. A Series may cover put options on stock indices by maintaining liquid
assets with a value equal to the exercise price in a segregated account 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 liquid assets 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.
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.
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YIELD CURVE OPTIONS: Each of the Value 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. Specifically, a Series may purchase or write such options for
hedging purposes. For example, a Series may purchase a call option on the yield
spread between two securities, if it owns one of the securities and anticipates
purchasing the other security and wants to hedge against an adverse change in
the yield spread between the two securities. A Series may also purchase or write
yield curve options for other than hedging purposes (I.E., in an effort to
increase its current income) if, in the judgment of the Adviser, the Series will
be able to profit from movements in the spread between the yields of the
underlying securities. The trading of yield curve options is subject to all of
the risks associated with the trading of other types of options. In addition,
however, such options present risk of loss even if the yield of one of the
underlying securities remains constant, if the spread moves in a direction or to
an extent which was not anticipated. Yield curve options written by a Series
will be "covered." A call (or put) option is covered if the Series holds another
call (or put) option on the spread between the same two securities and 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. Because these securities are
over-the-counter, the SEC has taken the position that yield curve options are
illiquid and, therefore, together with other illiquid securities, cannot exceed
a certain percentage of a Series' assets (the "SEC illiquidity ceiling").
The staff of the SEC has taken the position that purchased over-the-counter
options and assets used to cover written over-the-counter options are illiquid
and, therefore, cannot exceed the SEC illiquidity ceiling. Although the Adviser
disagrees with this position, the Adviser intends to limit each Series' writing
of over-the-counter options in accordance with the following procedure. Except
as provided below, a Series intends to write over-the-counter options only with
primary U.S. Government securities dealers recognized by the Federal Reserve
Bank of New York. Also, the contracts which a Series has in place with such
primary dealers will provide that the Series has the absolute right to
repurchase an option it writes at any time at a price which represents the fair
market value, as determined in good faith through negotiation between the
parties, but which in no event will exceed a price determined pursuant to a
formula in the contract. Although the specific formula may vary between
contracts with different primary dealers, the formula will generally be based on
a multiple of the premium received by a Series for writing the option, plus the
amount, if any, of the option's intrinsic value (I.E., the amount that the
option is in-the-money). The formula may also include a factor to account for
the difference between the price of the security and the strike price of the
option if the option is written out-of-money. A Series will treat all or a part
of the formula price as illiquid for purposes of the SEC illiquidity ceiling. A
Series may also write over-the-counter options with non-primary dealers,
including foreign dealers, and will treat the assets used to cover these options
as illiquid for purposes of such SEC illiquidity ceiling.
FUTURES CONTRACTS: Each of the Total Return Series, the Bond Series, the
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 Value 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 Value 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.
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
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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 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
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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
liquid assets 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 liquid assets in an amount equal to
the value of the security or index underlying the Futures Contract, or (c)
through the holding of a put on the same Futures Contract and in the same
principal amount as the put written where the exercise price of the put held is
equal to or greater than the exercise price of the put written or where the
exercise price of the put held is less than the exercise price of the put
written if the difference is maintained by the Series in liquid assets 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
Value 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, in certain Series,
non-hedging purposes (collectively, "Forward Contracts"). Forward Contracts may
be used for hedging to attempt to minimize the risk to the Series from adverse
changes in the relationship between the U.S. dollar and foreign currencies. The
Series intend to enter into Forward Contracts for hedging purposes similar to
those described above in connection with foreign currency futures contracts. In
particular, a Forward Contract to sell a currency may be entered into in lieu of
the sale of a foreign currency futures contract where a Series seeks to protect
against an anticipated increase in the exchange rate for a specific currency
which could reduce the dollar value of portfolio securities denominated in such
currency. Conversely, a Series may enter into a Forward Contract to purchase a
given currency to protect against a projected increase in the dollar value of
securities denominated in such currency which the Series intends to acquire. A
Series also may enter into a Forward Contract in order to assure itself of a
predetermined exchange rate in connection with a fixed income security
denominated in a foreign currency. In addition, the Series may enter into
Forward Contracts for "cross hedging" purposes (E.G., the purchase or sale of a
Forward Contract on one type of currency, as a hedge against adverse
fluctuations in the value of a second type of currency).
If a hedging transaction in Forward Contracts is successful, the decline in the
value of portfolio securities or other assets or the increase in the cost of
securities or other assets to be acquired may be offset, at least in part, by
profits on the Forward Contract. Nevertheless, by entering into such Forward
Contracts, a Series may be required to forego all or a portion of the benefits
which otherwise could have been obtained from favorable movements in exchange
rates or natural resources prices. The Series do not intend, in most instances,
to hold Forward Contracts entered into until 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.
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.
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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, liquid assets, which will be marked to market
on a daily basis, in an amount equal to the value of its commitments under
Forward Contracts. While these contracts are not presently regulated by the
CFTC, the CFTC may in the future assert authority to regulate Forward Contracts.
In such event, the Series' ability to utilize Forward Contracts in the manner
set forth above may be restricted.
OPTIONS ON FOREIGN CURRENCIES: Each of the Emerging Growth Series, the Value
Series, the Total Return Series, the Bond Series, the 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 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.
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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.
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
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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 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
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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 leveraging effect of such futures is minimized.
RISKS OF INVESTING IN LOWER RATED BONDS
Each of the Emerging Growth Series, the Value Series, the Research Series, the
Total Return Series, the Bond Series, the Limited Maturity Series, the 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 Services ("S&P") or Fitch
Investors Service, Inc. ("Fitch") and comparable unrated securities. These
securities, while normally exhibiting adequate protection parameters, have
speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than in the case of higher grade 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
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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 dollar-denominated securities
of foreign issuers and in dollar-denominated securities of foreign branches of
U.S. banks, such as negotiable certificates of deposit (Eurodollars). The
remaining Series may invest in dollar-denominated and non dollar-denominated
foreign securities. As discussed in the Prospectus, investing in foreign
securities generally represents a greater degree of risk than investing in
domestic securities due to possible exchange rate fluctuations, less publicly
available information, more volatile markets, less securities regulation, less
favorable tax provisions, war or expropriation. As a result of its investments
in foreign securities, a Series may receive interest or dividend payments, or
the proceeds of the sale or redemption of such securities,in the foreign
currencies in which such securities are denominated. Under certain
circumstances, such as where the Adviser believes that the applicable exchange
rate is unfavorable at the time the currencies are received or the Adviser
anticipates, for any other reason, that the exchange rate will improve, a Series
may hold such currencies for an indefinite period of time. While the holding of
currencies will permit a Series to take advantage of favorable movements in the
applicable exchange rate, such strategy also exposes the Series to risk of loss
if exchange rates move in a direction adverse to the Series' position. Such
losses could reduce any profits or increase any losses sustained by the Series
from the sale or redemption of securities and could reduce the dollar value of
interest or dividend payments received.
AMERICAN DEPOSITARY RECEIPTS
Each of the Series (except the Limited Maturity Series and the Money Market
Series) may invest in American Depositary Receipts ("ADRs") which are
certificates issued by a U.S. depositary (usually a bank) and represent a
specified quantity of shares of an underlying non-U.S. stock on deposit with a
custodian bank as collateral. ADRs may be sponsored or unsponsored. A sponsored
ADR is issued by a depository which has an exclusive relationship with the
issuer of the underlying security. An unsponsored ADR may be issued by any
number of U.S. depositories. A Series may invest in either type of ADR. Under
the terms of most sponsored arrangements, depositaries agree to distribute
notices of shareholder meetings and voting instructions, and to provide
shareholder communications and other information to the ADR holders at the
request of the issuer of the deposited securities. The depositary of an
unsponsored ADR, on the other hand, is under no obligation to distribute
shareholder communications received from the issuer of the deposited securities
or to pass through voting rights to ADR holders in respect of the deposited
securities. Although the U.S. investor holds a substitute receipt of ownership
rather than direct stock certificates, the use of the depositary receipts in the
United States can reduce costs and delays as well as potential currency exchange
and other difficulties. A Series may purchase securities in local markets and
direct delivery of these ordinary shares to the local depository of an ADR agent
bank in the foreign country. Simultaneously, the ADR agents create a certificate
which settles at the Series' custodian in five days. A Series may also execute
trades on the U.S. markets using existing ADRs. A foreign issuer of the security
underlying an ADR is generally not subject to the same reporting requirements in
the United States as a domestic issuer. Accordingly the information available to
a U.S. investor will be limited to the information the foreign issuer is
required to disclose in its own country and the market value of an ADR may not
reflect undisclosed material information concerning the issuer of the underlying
security. ADRs may also be subject to exchange rate risks if the underlying
foreign securities are denominated in foreign currency.
-------------------
A Series' limitations, policies and ratings restrictions are adhered to at the
time of purchase or utilization of assets; a subsequent change in circumstances
will not be considered to result in a violation of policy.
3. INVESTMENT RESTRICTIONS
Each Series has adopted the following restrictions which cannot be changed
without the approval of the holders of a majority of the Series' shares (which,
as used in this SAI, means the lesser of (i) more than 50% of the outstanding
shares of the Trust or a Series, as applicable, or (ii) 67% or more of the
outstanding shares of the Trust or a Series, as applicable, present at a meeting
if holders of more than 50% of the outstanding shares of the Trust or a Series,
as applicable, are represented in person or by proxy).
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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;
(3) purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests
therein and securities of companies, such as real estate investment trusts,
which deal in real estate or interests therein), interests in oil, gas or
mineral leases, commodities or commodity contracts (excluding currencies and
any type of option, Futures Contracts and Forward Contracts) in the ordinary
course of its business. The Series reserves the freedom of action to hold
and to sell real estate, mineral leases, commodities or commodity contracts
(including currencies and any type of option, Futures Contracts and Forward
Contracts) acquired as a result of the ownership of securities;
(4) issue any senior securities except as permitted by the 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;
(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;
17
<PAGE>
(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, 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; (iii) no Series may borrow amounts in excess
of 10% of its net assets when borrowing for any general purpose or in excess of
25% of net assets when borrowing as a temporary measure to facilitate
redemptions; and (iv) no Series may enter into hedging transactions by
purchasing put and call options, futures contracts or other derivative
instruments on securities, in an aggregate market value equivalent to more than
10% of its total assets. For purposes of clauses (i) and (ii) above, ADRs and
European Depositary Receipts shall be deemed to be foreign securities.
4. MANAGEMENT OF THE TRUST
The Board of Trustees of the Trust provides broad supervision over the affairs
of each Series. MFS is responsible for the investment management of each Series'
assets and the officers of the Trust are responsible for its operations. The
Trustees and officers of the Trust are listed below, together with their
principal occupations during the past five years. (Their titles may have varied
during that period.)
TRUSTEES
A. KEITH BRODKIN*, Chairman and President (born 8/4/35)
Massachusetts Financial Services Company, Chairman.
NELSON J. DARLING, JR. (born 12/27/20)
Professional Trustee
Address: 27 School Street, Boston, Massachusetts
WILLIAM R. GUTOW (born 9/27/41)
Private Investor; Real Estate Consultant; Capitol Entertainment (Blockbuster
Video Franchise), Vice Chairman.
Address: 3102 Maple Avenue, #100, Dallas, Texas
OFFICERS
W. THOMAS LONDON*, Treasurer (born 3/1/44)
Massachusetts Financial Services Company, Senior Vice President.
STEPHEN E. CAVAN*, Secretary and Clerk (born 11/6/53)
Massachusetts Financial Services Company, Senior Vice President, General Counsel
and Assistant Secretary.
JAMES R. BORDEWICK, JR.*, Assistant Secretary (born 3/6/59)
Massachusetts Financial Services Company, Senior Vice President and Associate
General Counsel.
JAMES O. YOST*, Assistant Treasurer (born 6/12/60)
Massachusetts Financial Services Company, Vice President.
- ------------------------
*"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 March 31, 1997, all Trustees and officers as a group owned less than 1% of
each Series.
Listed in the chart below are the name, address and percentage of ownership of
each person of record or known by the Trust to own of record or beneficially
five percent or more of any Series' outstanding securities as of March 31, 1997.
<TABLE>
<CAPTION>
% OF
OUTSTANDING
SERIES OWNER & ADDRESS SHARES
- -------------- ---------------------------------- -------------
<S> <C> <C>
MFS Emerging Ameritas Life Insurance Company 13.77%
Growth Separate Account VA-2 (Annuity)
Series 5900 O Street
Lincoln, NE 68510-2234
United of Omaha Life Insurance 20.11%
Company
Mutual of Omaha Plaza
Omaha, NE 68175
Union Central Life Insurance 8.49%
Company
Group Annuity
Mutual Funds -- Station 3
1876 Waycross Road
Cincinnati, OH 45240-2899
Merrill Lynch Life Insurance 11.04%
Company
4804 Deer Lake Drive, East
Jacksonville, FL 32246-6484
Pruco Life of Arizona 9.19%
Flexible Premium Variable Annuity
Account
1111 Durham Avenue
South Plainfield, NJ 07080-2305
Aetna Life Insurance & Annuity 8.19%
Company
151 Farmington Avenue
Hartford, CT 06156-0001
CUNA Mutual Life Insurance Company 13.43%
Variable Annuity Account
2000 Heritage Way
Waverly, IA 50677-9202
MFS Value Aetna Life Insurance & Annuity 35.93%
Series Company
151 Farmington Avenue
Hartford, CT 06156-0001
MFS Fund Distributors, Inc. 58.67%
500 Boylston Street
Boston, MA 02116-3740
MFS Research United of Omaha Life Insurance 25.14%
Series Company
Mutual of Omaha Plaza
Omaha, NE 68175
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
% OF
OUTSTANDING
SERIES OWNER & ADDRESS SHARES
- -------------- ---------------------------------- -------------
<S> <C> <C>
MFS Research Merrill Lynch Life Insurance 33.19%
Series Company
(Cont.) 4804 Deer Lake Drive, East
Jacksonville, FL 32246-6484
Pruco Life of Arizona 10.13%
Flexible Premium Variable Annuity
Account
1111 Durham Avenue
South Plainfield, NJ 07080-2305
Aetna Life Insurance & Annuity 14.30%
Company
151 Farmington Avenue
Hartford, CT 06156-0001
Aetna Investment Company of 5.28%
America
151 Farmington Avenue
Hartford, CT 06156-0001
MFS Growth Union Central Life Insurance 38.83%
With Company
Income Group Annuity
Series Mutual Funds -- Station 3
1876 Waycross Road
Cincinnati, OH 45240-2899
Union Central Life Insurance 56.50%
Company
Individual Annuity
Mutual Funds -- Station 3
1876 Waycross Road
Cincinnati, OH 45240-2899
MFS Total Cigna Variable Annuity 8.91%
Return Separate Account I
Series 900 Cottage Grove Road
S-203
Hartford, Ct 06152-0001
CG Variable Annuity 40.14%
Separate Account II
900 Cottage Grove Road
S-204
Hartford, CT 06152-0001
United Companies Life Insurance 8.08%
Company
Separate Account One
8545 United Plaza Blvd.
Baton Rouge, LA 70809-2264
Aetna Life Insurance & Annuity 24.01%
Company
151 Farmington Avenue
Hartford, CT 06156-0001
Aetna Investment Company of 8.31%
America
151 Farmington Avenue
Hartford, CT 06156-0001
MFS Utilities Ameritas Life Insurance Company 55.29%
Series Separate Account VA-2 (Annuity)
5900 O Street
Lincoln, NE 68510-2252
CG Variable Annuity 28.05%
Separate Account II
900 Cottage Grove Road
S-204
Hartford, CT 06152-0001
MFS High United of Omaha Life Insurance 73.97%
Income Company
Series Mutual of Omaha Plaza
Omaha, NE 68175
Union Central Life Insurance 12.11%
Company
Group Annuity
Mutual Funds -- Station 3
1876 Waycross Road
Cincinnati, OH 45240-2899
% OF
OUTSTANDING
SERIES OWNER & ADDRESS SHARES
- -------------- ---------------------------------- -------------
MFS High Union Central Life Insurance 9.71%
Income Company
Series Individual Annuity
(Cont.) Mutual Funds -- Station 3
1876 Waycross Road
Cincinnati, OH 45240-2899
MFS World CUNA Mutual Life Insurance 43.98%
Governments Variable Annuity Account
Series 2000 Heritage Way
Waverly, IA 50677-9202
United of Omaha Life Insurance 32.24%
Company
Mutual of Omaha Plaza
Omaha, NE 68175
MFS Strategic Massachusetts Financial Services 98.84%
Fixed Income Company
Series 500 Boylston Street
Boston, MA 02116-3740
MFS Bond Kansas City Life Insurance Company 52.71%
Series Variable Annuity
P.O. Box 419139
Kansas City, MO 64141-6139
MFS Fund Distributors, Inc. 16.19%
500 Boylston Street
Boston, MA 02116-3740
First Citicorp Life Insurance 25.24%
Company
Citicorp Plaza
P.O. Box 7031
Dover, DE 19903-7031
MFS Limited MFS Fund Distributors, Inc. 98.31%
Maturity 500 Boylston Street
Series Boston, MA 02116-3740
MFS Money Citicorp Life Insurance Company 25.81%
Market Citicorp Plaza
Series P.O. Box 7031
Dover, DE 19903-7031
First Citicorp Life Insurance 69.62%
Company
Citicorp Plaza
P.O. Box 7031
Dover, DE 19903-7031
</TABLE>
The Trust pays the compensation of non-interested Trustees (who will receive a
fee of $217 per year per Series plus $100 per meeting and $100 per committee
meeting attended per Series, together with such Trustee's out-of-pocket
expenses).
TRUSTEE COMPENSATION TABLE
<TABLE>
<CAPTION>
TRUSTEE
FEES FROM
EACH SERIES
OTHER THAN
THE VALUE
SERIES, THE
LIMITED
TRUSTEE FEES MATURITY
FROM THE SERIES AND
VALUE SERIES THE TOTAL
AND THE STRATEGIC TRUSTEE FEES
LIMITED FIXED FROM THE
MATURITY INCOME FUND COMPLEX
NAME OF TRUSTEE SERIES (1) SERIES (1) (2)
- ---------------------------- ------------- ----------- ------------
<S> <C> <C> <C>
A. Keith Brodkin............ N/A N/A N/A
Nelson J. Darling........... $ 254 $ 1,017 $ 25,133
William R. Gutow............ 254 1,017 25,133
</TABLE>
NOTES:
(1) For fiscal year ended December 31, 1996.
19
<PAGE>
(2) For calendar year ended December 31, 1996. All Trustees receiving
compensation served as Trustees of 18 funds advised by MFS (having aggregate
net assets at December 31, 1996 of approximately $696 million).
The Declaration of Trust provides that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Trust, unless,
as to liabilities of the Trust or its shareholders, it is finally adjudicated
that they engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in their offices, or with respect to
any matter, unless it is adjudicated that they did not act in good faith in the
reasonable belief that their actions were in the best interest of the Trust. In
the case of settlement, such indemnification will not be provided unless it has
been determined pursuant to the Declaration of Trust, that such officers or
Trustees have not engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of their duties.
INVESTMENT ADVISER
MFS and its predecessor organizations have a history of money management dating
from 1924. MFS is a subsidiary of Sun Life of Canada (U.S.), which in turn is a
wholly owned 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"). Under the Advisory Agreement, MFS provides the
Series with overall investment advisory services. Subject to such policies as
the Trustees may determine, MFS makes investment decisions for the Series. For
these services and facilities, the Adviser receives an annual management fee,
computed and paid monthly, as disclosed in the Prospectus under the heading
"Management of the Series."
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.
For the Trust's fiscal years ended December 31, 1996, 1995 and 1994,
respectively, MFS received the following aggregate fees and MFS waived the
following fees, in whole or in part, for the same periods:
For the fiscal year ended December 31, 1996:
<TABLE>
<CAPTION>
MANAGEMENT FEE EXPENSES ASSUMED
SERIES(1) PAID TO MFS(2) BY MFS
- ---------------------------- --------------- -----------------
<S> <C> <C>
Emerging Growth Series...... $ 314,262 $ 62,962
Value Series(3)............. 3,196 12,079
Research Series............. 92,348 56,859
Growth With Income Series... 30,792 42,658
Total Return Series......... 60,979 87,721
Utilities Series............ 39,863 91,877
High Income Series.......... 56,169 45,293
<CAPTION>
MANAGEMENT FEE EXPENSES ASSUMED
SERIES(1) PAID TO MFS(2) BY MFS
- ---------------------------- --------------- -----------------
<S> <C> <C>
World Governments Series.... 126,898 172,556
Bond Series................. 2,924 40,829
Limited Maturity Series(3) 1,064 12,705
Money Market Series......... 858 46,831
</TABLE>
- ------------------------------
(1)The Strategic Fixed Income Series had not commenced investment operations
prior to December 31, 1996.
(2)After any applicable fee reduction.
(3)For the period from the commencement of investment operations on August 14,
1996 to December 31, 1996.
For the fiscal year ended December 30, 1995:
<TABLE>
<CAPTION>
MANAGEMENT FEE EXPENSES ASSUMED
SERIES(1) PAID TO MFS(2) BY MFS
- ---------------------------- --------------- -----------------
<S> <C> <C>
Emerging Growth Series(3)... $ 6,262 $ 15,659
Research Series(4).......... 4,424 16,913
Growth With Income
Series(5).................. 597 16,226
Total Return Series(6)...... 10,826 25,092
Utilities Series(6)......... 9,376 25,513
High Income Series(4)....... 3,996 17,847
World Governments Series.... 33,869 43,311
Bond Series(7).............. 247 17,623
Money Market Series(6)...... 594 24,976
</TABLE>
- ------------------------------
(1)The Value Series, the Strategic Fixed Income Series and the Limited Maturity
Series had not commenced investment operations prior to December 31, 1995.
(2)After any applicable fee reduction.
(3)For the period from the commencement of investment operations on July 24,
1995 to December 31, 1995.
(4)For the period from the commencement of investment operations on July 26,
1995 to December 31, 1995.
(5)For the period from the commencement of investment operations on October 9,
1995 to December 31, 1995.
(6)For the period from the commencement of investment operations on January 3,
1995 to December 31, 1995.
(7)For the period from the commencement of investment operations on October 24,
1995 to December 31, 1995.
For the fiscal year ended December 31, 1994:
<TABLE>
<CAPTION>
MANAGEMENT FEE EXPENSES ASSUMED
SERIES(1) PAID TO MFS(2) BY MFS
- ---------------------------- --------------- -----------------
<S> <C> <C>
World Governments
Series(3).................. $ 7,604 $ 36,473
</TABLE>
- ------------------------------
(1)The remaining Series had not commenced investment operations prior to
December 31, 1994.
(2)After any applicable fee reduction.
(3)For the period from the commencement of investment operations on June 14,
1994 to December 31, 1994.
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,
1997, 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
20
<PAGE>
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.
ADMINISTRATOR
MFS provides the Series with certain administrative services pursuant to a
Master Administrative Services Agreement dated March 1, 1997. Under this
Agreement, MFS provides the Series with certain financial, legal, compliance,
shareholder communications and other administrative services. As a partial
reimbursement for the cost of providing these services, the Series pays MFS an
administrative fee up to 0.015% per annum of the Series' average daily net
assets, provided that the administrative fee is not assessed on Series assets
that exceed $3 billion.
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 calculated as a percentage of the average daily net assets at an
effective annual rate of up to 0.035%. In addition, the Shareholder Servicing
Agent will be reimbursed by a Series for certain expenses incurred by the
Shareholder Servicing Agent on behalf of the Series. State Street Bank and Trust
Company, the dividend and distribution disbursing agent for the Series, has
contracted with the Shareholder Servicing Agent to administer and perform
certain dividend and distribution disbursing functions for the Series.
DISTRIBUTOR
MFD, a wholly owned subsidiary of MFS, serves as the distributor for the
continuous offering of shares of the Trust pursuant to a Distribution Agreement
dated as of April 14, 1994 (the "Distribution Agreement").
As agent, MFD currently offers shares of each Series on a continuous basis to
the separate accounts of Participating Insurance Companies in all states in
which the Series or the Trust may from time to time be registered or where
permitted by applicable law. The Distribution Agreement provides that MFD
accepts orders for shares at net asset value as no sales commission or load is
charged. MFD has made no firm commitment to acquire shares of any Series.
The Distribution Agreement will remain in effect until August 1, 1997 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
21
<PAGE>
Contracts and Options on Futures Contracts and the purchase and sale of
underlying securities upon exercise of options. The brokerage commissions
associated with buying and selling options may be proportionately higher than
those associated with general securities transactions. From time to time,
soliciting dealer fees are available to MFS on the tender of a Series' portfolio
securities in so-called tender or exchange offers. Such soliciting dealer fees
are in effect recaptured for the Series by MFS. At present no other recapture
arrangements are in effect.
Under the Advisory Agreements and as permitted by Section 28(e) of the
Securities Exchange Act of 1934, as amended, MFS may cause a Series to pay a
broker-dealer which provides brokerage and research services to MFS an amount of
commission for effecting a securities transaction for a Series in excess of the
amount other broker-dealers would have charged for the transaction if MFS
determines in good faith that the greater commission is reasonable in relation
to the value of the brokerage and research services provided by the executing
broker-dealer viewed in terms of either a particular transaction or MFS's
overall responsibilities to the Series or to its other clients. Not all of such
services are useful or of value in advising a Series.
The term "brokerage and research services" includes advice as to the value of
securities, the advisability of purchasing or selling securities, and the
availability of purchasers or sellers of securities; furnishing analyses and
reports concerning issues, industries, securities, economic factors and trends,
portfolio strategy and the performance of accounts; and effecting securities
transactions and performing functions incidental thereto such as clearance and
settlement.
Although commissions paid on every transaction will, in the judgment of MFS, be
reasonable in relation to the value of the brokerage services provided,
commissions exceeding those which another broker might charge may be paid to
broker-dealers who were selected to execute transactions on behalf of the
Series' and MFS's other clients in part for providing advice as to the
availability of purchasers or sellers of securities and services in effecting
securities transactions and performing functions incidental thereto such as
clearance and settlement.
Broker-dealers may be willing to furnish statistical, research and other factual
information or services ("Research") to MFS for no consideration other than
brokerage or underwriting commissions. Securities may be bought or sold from
time to time through such broker-dealers on behalf of a Series. The Trustees
(together with the Trustees of the other MFS Funds) have directed MFS to
allocate a total of $39,100 of commission business from the various MFS Funds to
the Pershing Division of Donaldson, Lufkin & Jenrette as consideration for the
annual renewal of certain publications provided by Lipper Analytical Securities
Corporation (which provides information useful to the Trustees in reviewing the
relationship between each Fund and MFS).
The investment management personnel of MFS attempt to evaluate the quality of
Research provided by brokers. Results of this effort are sometimes used by MFS
as a consideration in the selection of brokers to execute portfolio
transactions. However, MFS is unable to quantify the amount of commissions which
will be paid as a result of such Research because a substantial number of
transactions will be effected through brokers which provide Research but which
were selected principally because of their execution capabilities.
The management fee that each Series pays to MFS will not be reduced as a
consequence of the receipt of brokerage and research services by MFS. To the
extent a Series' portfolio transactions are used to obtain such services, the
brokerage commissions paid by the Series will exceed those that might otherwise
be paid, by an amount which cannot be presently determined. Such services would
be useful and of value to MFS in serving both a Series and other clients and,
conversely, such services obtained by the placement of brokerage business of
other clients would be useful to MFS in carrying out its obligations to the
Series. While such services are not expected to reduce the expenses of MFS, MFS
would, through use of the services, avoid the additional expenses which would be
incurred if it should attempt to develop comparable information through its own
staff.
For fiscal year ended December 31, 1996, the Emerging Growth Series, Value
Series, Research Series, Growth With Income Series, Total Return Series and
Utilities Series paid brokerage commissions of $110,808, $2,473, $49,208,
$7,661, $10,035 and $20,924, respectively, on total transactions of $73,634,924,
$1,578,092, $31,609,275, $9,321,266, $9,329,814, and $11,241,156, respectively.
For fiscal year ended December 31, 1995, the Emerging Growth Series, Utilities
Series, Total Return Series, Growth With Income Series and Research Series paid
brokerage commissions of $9,408, $8,281, $2,571, $191 and $6,332, respectively,
on total transactions of $6,057,384, $4,450,825, $2,161,403, $346,170 and
$4,278,466, respectively. Not all of the Series' transactions are equity
security transactions which involve the payment of brokerage commissions. During
the fiscal year ended December 31, 1996, the Research Series owned securities
issued by Chase Manhattan, Inc., which had a value of $512,000 at fiscal year
end, Growth With Income Series owned securities issued by Chase Manhattan and
Merrill Lynch, which had a value of $60,000 at fiscal year end, Total Return
Series owned securities issued by Chase Manhattan, Inc., Bank of America, Lehman
Brothers and Nations Bank, which had a value of $375,000 at fiscal year end, and
Bond Series owned securities issued by Lehman Brothers and Bank of America,
which had a value of $15,000 at fiscal year end. Each of these entities are
regular broker dealers of such Series.
In certain instances there may be securities which are suitable for a Series'
portfolio as well as for that of one or more of the other clients of MFS.
Investment decisions for a Series and for such other clients are made with a
view to achieving their respective investment objectives. It may develop that a
particular security is bought or sold for only one client even though it might
be held by, or bought or sold for, other clients. Likewise, a particular
security may be bought for one or more clients when one or more other clients
are selling that same security. Some simultaneous transactions are inevitable
when several clients receive investment advice from the same investment adviser,
particularly when the same security is suitable for the investment objectives of
more than one client. When two or more clients are simultaneously engaged in the
purchase or sale of the same security, the securities are allocated among
clients in a manner believed by the Adviser to be equitable
22
<PAGE>
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 gains to
shareholders in accordance with the timing requirements imposed by the Code, it
is not expected that any of the Series will be required to pay any federal
income or excise taxes, although a Series which has foreign-source income may be
subject to foreign withholding taxes. If any of the Series should fail to
qualify as a "regulated investment company" in any year, that Series would incur
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. Any dividends of a
Series that are declared in October, November, or December, that are payable to
shareholders of record in such month and that are paid the following January,
will be treated 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, swaps
and related transactions will be subject to special tax rules that may affect
the amount, timing, and character of Series income and distributions to
shareholders. For example, certain positions held by a Series on the last
business day of each taxable year will be marked to market (I.E., treated as if
closed out) on such day, and any gain or loss associated with the positions will
be treated as 60% long-term and 40% short-term capital gain or loss. Certain
positions held by 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 swaps and
related transactions to the extent necessary to meet the requirements of
Subchapter M of the Code.
Special tax considerations apply with respect to foreign investments of a
Series. Foreign exchange gains and losses realized by the Series will generally
be treated as ordinary income and losses. Use of foreign currencies for
non-hedging purposes 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 foreign securities may be subject to foreign income
taxes withheld at the source. The United States has entered into tax treaties
with many foreign countries that may entitle a Series to a reduced rate of tax
or an exemption from tax on such income; the Series' intend to qualify for
treaty reduced rates where available. It is impossible, however, to determine a
Series effective rate of foreign tax in advance since the amount of the Series'
assets to be invested within various countries is not known.
7. NET INCOME AND DISTRIBUTIONS
MONEY MARKET SERIES: The net income attributable to the Money Market Series is
determined each day during which the Exchange is open for trading. As of the
date of this SAI, the Exchange is open for trading every weekday except for the
following holidays (or the days on which they are observed): New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, Christmas Day. (For taxation information on distributions, see
"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
23
<PAGE>
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 quality as determined by any major rating service or, in
the case of any instrument that is not so rated, of comparable quality as
determined by the Board of Trustees. The Money Market Series has also agreed to
maintain a dollar-weighted average maturity of 90 days or less and to invest
only in securities maturing in 13 months or less. The Board of Trustees has
established procedures designed to stabilize the net asset value per share of
the Money Market Series, as computed for the purposes of sales and redemptions,
at $1.00 per share. If the Trustees determine that a deviation from the $1.00
per share price may exist which may result in a material dilution or other
unfair result to investors or existing shareholders, they will take corrective
action they regard as necessary and appropriate, which action could include the
sale of instruments prior to maturity (to realize capital gains or losses);
shortening average portfolio maturity; withholding dividends; or using market
quotations for valuation purposes.
ALL OTHER SERIES: Securities, futures contracts and options in a Series'
portfolio (other than short-term obligations) for which the principal market is
one or more securities or commodities exchanges will be valued at the last
reported sale price or at the settlement price prior to the determination (or if
there has been no current sale, at the closing bid price) on the primary
exchange on which such securities, futures contracts or options are traded; but
if a securities exchange is not the principal market for securities, such
securities will, if market quotations are readily available, be valued at
current bid prices, unless such securities are reported on the Nasdaq stock
market, in which case they are valued at the last sale price or, if no sales
occurred during the day, at the last quoted bid price. Debt securities (other
than short-term obligations but including listed issues) in a Series' portfolio
are valued on the basis of valuations furnished by a pricing service which
utilizes both dealer-supplied valuations and electronic data processing
techniques which take into account appropriate factors such as
institutional-sized trading in similar groups of securities, yields, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data, without exclusive reliance upon quoted prices or exchange or
over-the-counter prices, since such valuations are believed to reflect more
accurately the fair value of such securities. Short-term obligations, if any, in
a Series' portfolio are valued at amortized cost, which constitutes fair value
as determined by the Board of Trustees. Short-term securities with a remaining
maturity in excess of 60 days will be valued based upon dealer supplied
valuations. Portfolio securities and over-the-counter options, for which there
are no quotations or valuations are valued at fair value as determined in good
faith by or at the direction of the Board of Trustees.
PERFORMANCE INFORMATION
MONEY MARKET SERIES: The Money Market Series will provide current annualized and
effective annualized yield quotations based on the daily dividends of shares of
the Money Market Series. These quotations may from time to time be used in
advertisements, shareholder reports or other communications to shareholders.
Any current yield quotation of the Money Market Series which is used in such a
manner as to be subject to the provisions of Rule 482(d) under the 1933 Act
shall consist of an annualized historical yield, carried at least to the nearest
hundredth of one percent, based on a specific seven calendar day period and
shall be calculated by dividing the net change in the value of an account having
a balance of one share of that class at the beginning of the period by the value
of the account at the beginning of the period and
24
<PAGE>
multiplying the quotient by 365/7. For this purpose the net change in account
value would reflect the value of additional shares purchased with dividends
declared on the original share and dividends declared on both the original share
and any such additional shares, but would not reflect any realized gains or
losses from the sale of securities or any unrealized appreciation or
depreciation on portfolio securities. In addition, any effective yield quotation
of the Money Market Series so used shall be calculated by compounding the
current yield quotation for such period by multiplying such quotation by 7/365,
adding 1 to the product, raising the sum to a power equal to 365/7, and
subtracting 1 from the result. These yield quotations should not be considered
as representative of the yield of the Money Market Series in the future since
the yield will vary based on the type, quality and maturities of the securities
held in its portfolio, fluctuations in short-term interest rates and changes in
the Money Market Series expenses. Yield quotations for the Series are presented
in Appendix A attached hereto.
ALL OTHER SERIES:
TOTAL RATE OF RETURN -- Each Series, other than the Money Market Series, will
calculate its total rate of return of its shares for certain periods by
determining the average annual compounded rates of return over those periods
that would cause an investment of $1,000 (made with all distributions
reinvested) to reach the value of that investment at the end of the periods.
Each Series may also calculate total rates of return which represent aggregate
performance over a period or year-by-year performance. Total rate of return
quotations for each Series are presented in Appendix A attached hereto.
YIELD -- Any yield quotation for a Series, other than the Money Market Series,
is based on the annualized net investment income per share of that Series for
the 30-day period ended December 31, 1996 (the end of the Trust's fiscal year).
The yield for such a Series is calculated by dividing its net investment income
earned during the period by the offering price per share of that Series on the
last day of the period. The resulting figure is then annualized. Net investment
income per share is determined by dividing (i) the dividends and interest of
that Series during the period, minus accrued expenses of that Series for the
period by (ii) the average number of shares of that Series entitled to receive
dividends during the period multiplied by the offering price per share on the
last day of the period. Yield quotations for each Series are presented in
Appendix A attached hereto.
From time to time each Series may, as appropriate, quote fund rankings or
reprint all or a portion of evaluations of fund performance and operations
appearing in various independent publications, including but not limited to the
following: Money, Fortune, U.S. News and World Report, Kiplinger's Personal
Finance, The Wall Street Journal, Barron's, Investors Business Daily, Newsweek,
Financial World, Financial Planning, Investment Advisor, USA Today, Pensions and
Investments, SmartMoney, Forbes, Global Finance, Registered Representative,
Institutional Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical Services, Inc., Variable Annuity Research Data
Service, CDA Wiesenberger, Shearson Lehman and Salomon Bros. Indices, Ibbotson,
Business Week, Lowry Associates, Media General, Investment Company Data, The New
York Times, Your Money, Strangers Investment Advisor, Financial Planning on Wall
Street, Standard and Poor's, Individual Investor, THE 100 BEST MUTUAL FUNDS YOU
CAN BUY, by Gordon K. Williamson, Consumer Price Index, and Sanford C. Bernstein
& Co. Series' performance may also be compared to the performance of other
mutual funds tracked by financial or business publications or periodicals.
From time to time a Series may discuss or quote its current portfolio manager as
well as other investment personnel, including such persons' views on: the
economy; securities markets; portfolio securities and their issuers; investment
philosophies, strategies, techniques and criteria used in the selection of
securities to be purchased or sold for the Series; the Series' portfolio
holdings; the investment research and analysis process; the formulation and
evaluation of investment recommendations; and the assessment and evaluation of
credit, interest rate, market and economic risks and similar or related matters.
The Series may also quote evaluations mentioned in independent radio or
television broadcasts.
From time to time the Series may use charts and graphs to illustrate the past
performance of various indices such as those mentioned above.
From time to time the Fund may also discuss or quote the views of its
distributor, its investment adviser and other financial planning, legal, tax,
accounting, insurance, estate planning and other professionals, or from surveys,
regarding individual and family financial planning. Such views may include
information regarding: retirement planning; tax management strategies; estate
planning; general investment techniques (E.G., asset allocation and disciplined
saving and investing); business succession; ideas and information provided
through the MFS Heritage Planning-SM- program, an intergenerational financial
planning assistance program; issues with respect to insurance (E.G., disability
and life insurance and Medicare supplemental insurance); issues regarding
financial and health care management for elderly family members; and similar or
related matters.
MFS FIRSTS: MFS has a long history of innovations.
- -- 1924 -- Massachusetts Investors Trust is established as the first open-end
mutual fund in America.
- -- 1924 -- Massachusetts Investors Trust is the first mutual fund to make full
public disclosure of its operations in shareholder reports.
- -- 1932 -- One of the first internal research departments is established to
provide in-house analytical capability for an investment management firm.
- -- 1933 -- Massachusetts Investors Trust is the first mutual fund to register
under the 1933 Act ("Truth in Securities Act" or "Full Disclosure Act").
- -- 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders take capital gain distributions either in additional shares or
in cash.
- -- 1976 -- MFS-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.
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<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.
To the extent any Series' shareholder owns a controlling percentage of the
Series' shares, such shareholder may affect the outcome of such matters to a
greater extent that other Series shareholders (see "Description of Shares,
Voting Rights and Liabilities" in the Prospectus). Although Trustees are not
elected annually by the shareholders, shareholders have under certain
circumstances the right to remove one or more Trustees in accordance with the
provisions of Section 16(c) of the 1940 Act. No material amendment may be made
to the Declaration of Trust without the affirmative vote of a majority of the
Trust's shares. Shares have no pre-emptive or conversion rights. Shares are
fully paid and non-assessable. The Trust may enter into a merger or
consolidation, or sell all or substantially all of its assets (or all or
substantially all of the assets belonging to any series of the Trust), if
approved by the vote of the holders of two-thirds of the Trust's outstanding
shares voting as a single class, or of the affected series of the Trust, as the
case may be, except that if the Trustees of the Trust recommend such merger,
consolidation or sale, the approval by vote of the holders of a majority of the
Trust's or the affected series' outstanding shares (as defined in "Investment
Restrictions") will be sufficient. The Trust or any series of the Trust may also
be terminated (i) upon liquidation and distribution of its assets, if approved
by the vote of the holders of two-thirds of its outstanding shares, or (ii) by
the Trustees by written notice to the shareholders of the Trust of the affected
series. If not so terminated, the Trust will continue indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Trust and provides for indemnification
and reimbursement of expenses out of Trust property for any shareholder held
personally liable for the obligations of the Trust. The Declaration of Trust
also provides that it shall maintain appropriate insurance (for example,
fidelity bonding and errors and omissions insurance) for the protection of the
Trust, its shareholders, Trustees, officers, employees and agents covering
possible tort or other liabilities. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which both inadequate insurance existed and the Trust itself was unable to
meet its obligations.
The Declaration of Trust further provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust
and that the Trustees will not be liable for any action or failure to act, but
nothing in the Declaration of Trust protects a Trustee against any liability to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
his office.
10. INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS
Deloitte & Touche LLP are the Trust's independent auditors, providing audit
services, tax return preparation, and assistance and consultation with respect
to the preparation of filings with the SEC. The Statement of Assets and
Liabilities for the MFS Strategic Fixed Income Series at December 31, 1996, the
Notes thereto and the Independent Auditors' Report dated February 7, 1997 have
been included in this SAI in reliance upon the report of Deloitte and Touche
LLP, independent certified public accountants, as experts in accounting and
auditing. With respect to the Emerging Growth, Value, Research, Growth With
Income, Total Return, Utilities, High Income, World Governments, Bond, Limited
Maturity and Money
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<PAGE>
Market Series, the Portfolio of Investments at December 31, 1996, the Statement
of Assets and Liabilities at December 31, 1996, the Statement of Operations for
the period ended December 31, 1996, the Statement of Changes in Net Assets for
the period ended December 31, 1996, the Notes to Financial Statements and the
Independent Auditors' Report, each of which is included in the Annual Reports to
Shareholders of these Series, are incorporated by reference into this SAI and
have been so incorporated in reliance upon the report of Deloitte & Touche LLP,
independent certified public accountants, as experts in accounting and auditing.
Copies of these Annual Reports accompany this SAI.
27
<PAGE>
MFS STRATEGIC FIXED INCOME SERIES
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
<TABLE>
<S> <C>
Assets:
Cash.......................................................................................................... $ 7,638
Deferred organization expenses................................................................................ 9,188
-----------
Total assets................................................................................................ $ 16,826
Liabilities:
Accrued expenses.............................................................................................. 8,226
-----------
Net assets.................................................................................................. $ 8,600
-----------
-----------
Net Asset Value, Redemption Price and Offering Price Per Share of Beneficial Interest
(860 shares outstanding for each Series)...................................................................... $ 10.00
-----------
-----------
<CAPTION>
Assets:
<S> <C>
Cash..........................................................................................................
Deferred organization expenses................................................................................
Total assets................................................................................................
Liabilities:
Accrued expenses..............................................................................................
Net assets..................................................................................................
Net Asset Value, Redemption Price and Offering Price Per Share of Beneficial Interest
(860 shares outstanding for each Series)......................................................................
<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 Emerging Growth Series, MFS Value Series, MFS
Research Series, MFS Growth with Income Series, MFS Total Return Series, MFS
Utilities Series, MFS High Income Series, MFS World Governments Series, MFS
Strategic Fixed Income Series, MFS Bond Series, MFS Limited Maturity Series
and MFS Money Market Series. The MFS Strategic Fixed Income 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 (the
"initial shares") of each such Series 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.
</TABLE>
28
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees of MFS Variable Insurance Trust and Shareholders of MFS
Strategic Fixed Income Series:
We have audited the accompanying statement of assets and liabilities of MFS
Strategic Fixed Income Series (the "Series") (a series of the MFS Variable
Insurance Trust (the "Trust")) as of December 31, 1996. This financial statement
is the responsibility of the Trust's management. Our responsibility is to
express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement of assets and liabilities is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statement of assets and
liabilities. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit of the statement of
assets and liabilities provides a reasonable basis for our opinion.
In our opinion, such statement of assets and liabilities presents fairly, in all
material respects, the financial position of the Series at December 31, 1996 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Boston, Massachusetts
February 7, 1997
29
<PAGE>
APPENDIX A
PERFORMANCE QUOTATIONS
All performance quotations are for the period ended December 31, 1996.
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURNS ACTUAL 30-DAY 30-DAY
---------------------- YIELD YIELD
LIFE OF (INCLUDING (WITHOUT
SERIES 1 YEAR SERIES WAIVERS) WAIVERS)
- ------------------------------------------------------------------- --------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Emerging Growth.................................................... 17.02% 24.67%(1) -- --
Value.............................................................. -- 8.78%(2) -- --
Research........................................................... 22.33% 23.46%(3) -- --
Growth with Income................................................. 24.46% 25.88%(4) -- --
Total Return....................................................... 14.37% 20.74%(5) -- --
Utilities.......................................................... 18.51% 26.07%(5) -- --
High Income........................................................ 11.80% 12.00%(3) 7.88% 5.80%
World Governments.................................................. 4.03% 7.39%(6) 4.68% 4.03%
Bond............................................................... 2.09% 4.32%(7) 4.60% -20.86%
Limited Maturity................................................... -- 2.61%(2) 5.32% -1.26%
Money Market....................................................... 4.55% 4.47%(5) N/A N/A
</TABLE>
- ------------------------------
(1) From the commencement of investment operations on July 24, 1995.
(2) Aggregate Annual Total Rate of Return from the commencement of investment
operations on August 14, 1996.
(3) From the commencement of investment operations on July 26, 1995.
(4) From the commencement of investment operations on October 9, 1995.
(5) From the commencement of investment operations on January 3, 1995.
(6) From the commencement of investment operations on June 14, 1994.
(7) From the commencement of investment operations on October 24, 1995.
The current annualized yield of the Money Market Series for the seven-day period
ended December 31, 1996 was 4.71%, and the effective annualized yield of the
Money Market Series for such period was 4.82%.
A-1
<PAGE>
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
(800) 637-8730
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN
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 AUDITORS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
MFS-REGISTERED TRADEMARK- VARIABLE
INSURANCE TRUST-SM-
500 Boylston Street
Boston, MA 02116
[LOGO]
<PAGE>
[logo] M F S(SM) ANNUAL REPORT
INVESTMENT MANAGEMENT FOR YEAR ENDED
DECEMBER 31, 1996
MFS(R) EMERGING GROWTH SERIES
A SERIES OF MFS(R) VARIABLE INSURANCE TRUST
[Graphic Omitted]
<PAGE>
MFS(R) EMERGING GROWTH SERIES
A SERIES OF MFS(R) VARIABLE INSURANCE TRUST
<TABLE>
<C> <C>
TRUSTEES INVESTMENT ADVISER
A. Keith Brodkin* Massachusetts Financial Services Company
Chairman and President 500 Boylston Street
Boston, MA 02116-3741
Nelson J. Darling, Jr.
Trustee, Eastern Enterprises DISTRIBUTOR
(diversified holding company) MFS Fund Distributors, Inc.
500 Boylston Street
William R. Gutow Boston, MA 02116-3741
Vice Chairman,
Capitol Entertainment Management Company SHAREHOLDER SERVICE CENTER
(Blockbuster Video Franchise) MFS Service Center, Inc.
P.O. Box 1400
PORTFOLIO MANAGERS Boston, MA 02107-9906
John W. Ballen*
Toni Y. Shimura* For additional information,
contact your financial adviser.
TREASURER
W. Thomas London* CUSTODIAN
Investors Bank & Trust Company
ASSISTANT TREASURER
James O. Yost* AUDITORS
Deloitte & Touche LLP
SECRETARY
Stephen E. Cavan* WORLD WIDE WEB
www.mfs.com
ASSISTANT SECRETARY
James R. Bordewick, Jr.*
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
Dear Contract Owner:
The pattern of slow but sustainable growth seen in most of the world in 1996
seems likely to continue in 1997. While it looks as if U.S. growth in 1997
will slow modestly relative to 1996, there is evidence that Europe and, to a
lesser degree, Japan are continuing their recoveries from recession. At the
same time, companies in many emerging markets are reporting robust increases
in earnings as these markets benefit from higher-than-average economic growth
and market reforms, which should continue to provide more opportunities for
development and trade.
After more than six years of expansion, the U.S. economy appears headed
toward another year of at least moderate growth in 1997, although a few signs
point to the possibility of a modest rise in inflation during the year. On the
positive side, the pattern of moderate growth and inflation set over the past
few years now seems fairly well entrenched in the economy and, short of a
major international or domestic crisis, appears to have enough momentum to
remain on track for some time. Recent gains in such important sectors as
housing, automobiles, industrial production, and exports indicate a fair
amount of underlying strength in the economy. However, some reason for caution
can be seen in the continuing high levels of consumer debt and their attendant
rise in personal bankruptcies, as well as in the modestly disappointing levels
of holiday sales. Also, the ongoing tightness in labor markets, and price
rises in such important sectors as energy, could add some inflationary
pressures to the economy. Given these somewhat conflicting indicators, we
expect real (inflation-adjusted) growth to revolve around 2% in 1997, which
would represent a modest decline from 1996.
We continue to urge U.S. equity investors to lower their expectations for
1997 and to point out that the impressive gains of the past two years are not
sustainable. Just as the slowdown in corporate earnings growth and increases
in interest rates in 1996 raised some near-term concerns, further interest
rate increases and an acceleration of inflation could negatively affect the
stock market in 1997. However, to the extent that some slowdown in earnings
means that the economy is not overheating, this may be beneficial for the
equity market in the long run. Also, we believe many of the technology-driven
productivity gains that U.S. companies have made in recent years will continue
to enhance corporate America's competitiveness and profitability. Therefore,
while we have some near-term concerns, we remain reasonably positive about the
long-term viability of the equity market.
In U.S. bond markets, conflicting signals over the strength of the economy
have created near-term volatility. Even comments by Federal Reserve Chairman
Alan Greenspan late in 1996 created some uncertainty over the Federal Reserve
Board's next move. We expect the Fed to maintain its anti-inflationary stance
should signs of more rapid economic growth and, particularly, higher inflation
resurface. While inflationary forces largely remained in check in 1996, the
continued strength in the labor market and rising energy prices mean that a
pickup in inflation is still possible. At the same time, the U.S. budget
deficit continues to decline and, as a percentage of gross domestic product,
is now less than 2%, which we consider a positive development for the bond
markets. Although interest rates may move higher over the coming months, we
believe that, at current levels, fixed-income markets remain equitably valued.
Internationally, the environment of moderate growth, benign inflation, and
fairly steady interest rates is also providing support for investment markets
and should help support valuation levels in the coming year. Throughout the
world, the key to stock market performance in 1997 will be corporate earnings
growth. While U.S. earnings growth is slowing but still expected to be fairly
healthy, we anticipate that a number of European countries will see an
acceleration in earnings growth and improved valuations in 1997. Despite this
environment, many European countries trade at discounts to the United States.
In particular, we see opportunities in some of the multinationals and
businesses with the ability to generate steady earnings growth. In Japan, a
recovery appears to be taking place, but at a very modest rate, with
valuations still at high levels. In the emerging markets, the long-term
economic growth story remains intact and, although selectivity is even more
important in these markets, more companies are benefiting from this growth and
trading at below-average global valuations.
Comments from the portfolio managers of the Series are presented below. We
appreciate your support and welcome any questions or comments you may have.
Respectfully,
/s/A. Keith Brodkin /s/John W. Ballen /s/Toni Y. Shimura
A. Keith Brodkin John W. Ballen Toni Y. Shimura
Chairman and President Portfolio Manager Portfolio Manager
January 16, 1997
MFS EMERGING GROWTH SERIES
For the 12 months ended December 31, 1996, the Series provided a total return
of 17.02%. This compares to a 16.35% return for the Russell 2000 Total Return
Index (the Russell 2000) and a 22.64% return for the Standard & Poor's 500
Composite Index (the S&P 500) for the same period. The Russell 2000 is an
unmanaged index comprised of 2,000 of the smallest U.S.-domiciled companies'
common stocks (on the basis of capitalization) that are traded in the United
States on the New York Stock Exchange, the American Stock Exchange, and the
NASDAQ. The S&P 500 is an unmanaged index of common stock performance. It is
not possible to invest in an index. Although the Series' performance benefited
from the strong stock price appreciation of many of its holdings in the
technology and consumer sectors, the overall stock market in 1996 was
dominated by the larger capitalization issues as represented by the Dow Jones
Industrial Average and the S&P 500. However, the Series' performance compared
favorably to the Russell 2000 as investors rewarded the earnings growth of
many of the companies owned by the Series.
Generally, the business and economic environment was benign. Modest
economic growth coupled with productivity gains by corporate America provided
a favorable environment. However, semiconductor issues performed poorly as
inventory surpluses hurt sales. Health maintenance organizations (HMOs) also
performed weakly as companies underestimated health care costs and set their
prices too low. This poor performance spilled over into the first half of the
year for the entire technology and health care sectors -- the larger
components of the portfolio. Also, many smaller companies underperformed most
of the year. With a very strong market, investors ignored the strong earnings
growth of the smaller companies and bid up prices of the larger companies
instead. Earnings results for the smaller companies within the Series
generally remained strong all year.
The performance of the Series' largest sector, technology stocks, reflects
the restructuring occurring throughout corporate America, which has improved
productivity. Much of this restructuring has been made possible by technology
companies, especially software and networking companies, that are helping
their corporate customers reduce costs. Oracle Systems, a database and
applications provider, BMC Software, Computer Associates, and Compuware have
all performed well.
At the same time, consumer service companies such as HFS, Inc. have also
helped the Series' performance. HFS has acquired companies in the hotel, real
estate, and car rental businesses and produced over 30% internal growth from
revenue opportunities and cost savings. Supplementing this internal growth has
been what we believe is the best acquisition team thus far during the 1990s.
Several acquisitions greatly increased HFS' earnings growth rate in 1996.
While the stock has outperformed the market, its valuation has lagged its
earnings growth rate, making it attractively priced.
One sector that did not perform as well as expected is health care. HMOs
set their prices too low to ensure revenues in 1996. United Healthcare,
Healthsource, and MidAtlantic Medical all underperformed. We are, however,
optimistic that these companies will benefit from price increases implemented
in 1997.
Looking ahead, we see a continuation of the slow economic growth that the
United States has been experiencing for the last few years. Although this has
been a slow-growing economy, it has been great for corporate earnings as
restructurings have lowered corporate costs and improved margins. Many of the
smaller companies, having lower costs, can thereby capitalize on this trend.
We believe technology and outsourcing companies, which are large holdings for
the Series, can continue to benefit from these developments.
PORTFOLIO MANAGERS' PROFILES
John Ballen began his career at Massachusetts Financial Services (MFS) as an
industry specialist in 1984. A graduate of Harvard College, the University of
New South Wales, and the Stanford University Graduate School of Business
Administration, he was promoted to Investment Officer in 1986, Vice President
- - Investments in 1987, Director of Research in 1988, and Senior Vice President
in 1990. In 1993, he became Director of Equity Portfolio Management and in
1995 he became Chief Equity Officer. He has managed MFS Emerging Growth Series
since its inception in 1995.
Toni Y. Shimura joined the MFS Research Department in 1987. A graduate of
Wellesley College and of Massachusetts Institute of Technology's Sloan School
of Management, she was promoted to Investment Officer in 1990, Assistant Vice
President - Investments in 1991, and Vice President - Investments in 1992. She
has managed MFS Emerging Growth Series since 1995.
DIVIDENDS-RECEIVED DEDUCTION
The MFS Emerging Growth Series has designated $90,363 as a long-term capital
gain.
For the year ended December 31, 1996, the amount of distributions from income
eligible for the 70% dividends-received deduction for corporations came to
2.63%.
PERFORMANCE SUMMARY
The information below illustrates the historical performance of MFS Emerging
Growth Series shares in comparison to various market indicators. Benchmark
comparisons are unmanaged and do not reflect any fees or expenses. You cannot
invest in an index.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the Period from August 1, 1995 to December 31, 1996)
MFS Consumer
Emerging S&P 500 Price
Growth Composite Index - Russell
Date Series Index U.S. 2000
- ---- ------- --------- -------- -------
8/95 10000.0 10000.0 10000.0 10000.0
12/95 11740.0 11063.0 10059.0 10614.0
3/96 12543.0 11659.0 10198.0 11156.0
6/96 13510.0 12177.0 10272.0 11714.0
9/96 13973.0 12548.0 10348.0 11754.0
12/96 13739.0 13591.0 10420.0 12365.0
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1996
1 Year Life+
- ---------------------------------------------------------------------------
MFS Emerging Growth Series +17.02% +24.67%
- ---------------------------------------------------------------------------
Russell 2000 Total Return Index++ +16.35% +16.14%
- ---------------------------------------------------------------------------
Standard & Poor's 500 Composite Index++ +22.64% +24.13%
- ---------------------------------------------------------------------------
Consumer Price Index*++ + 3.56% + 2.80%
- ---------------------------------------------------------------------------
+For the period from the commencement of investment operations, July 24, 1995
to December 31, 1996.
*The Consumer Price Index is a popular measure of change in prices.
++Source: CDA/Wiesenberger. Benchmark comparisons begin on 8/1/96.
Returns shown do not reflect the deduction of the mortality and expense risk
charges and administration fees. Please refer to the product's annual report
for performance that reflects the fees and charges imposed by insurance
company separate accounts.
Investment return and principal value will fluctuate, and shares, when
redeemed, may be worth more or less than their original cost. Past performance
is no guarantee of future results.
Series results reflect any applicable expense subsidies and waivers, without
which the performance results would have been less favorable. Subsidies and
waivers may be rescinded at any time. See the prospectus for details.
<PAGE>
PORTFOLIO OF INVESTMENTS - December 31, 1996
Stocks - 91.7%
- -----------------------------------------------------------------------------
Issuer Shares Value
- -----------------------------------------------------------------------------
U.S. Stocks - 86.9%
Apparel and Textiles - 0.1%
Nine West Group, Inc.* 2,700 $ 125,213
- -----------------------------------------------------------------------------
Automotive
APS Holding Corp., "A"* 2,000 $ 31,000
- -----------------------------------------------------------------------------
Business Machines - 2.5%
Affiliated Computer Co.* 32,400 $ 963,900
Sun Microsystems, Inc.* 62,900 1,615,744
------------
$ 2,579,644
- -----------------------------------------------------------------------------
Business Services - 11.8%
ADT, Ltd.* 37,800 $ 864,675
Accustaff, Inc.* 49,400 1,043,575
Alco Standard Corp. 9,400 485,275
CUC International, Inc. 55,000 1,306,250
Computer Sciences, Inc.* 11,000 903,375
DST Systems, Inc.* 28,300 887,912
Employee Solutions, Inc.* 27,600 565,800
Equity Corporation International* 2,100 42,000
Forrester Research, Inc.* 400 10,300
International Network Services* 200 6,038
Learning Tree International, Inc.* 76,600 2,259,700
Loewen Group, Inc. 9,600 375,600
Nu Skin Asia, Inc., "A"* 500 15,438
Sabre Group Holdings, Inc.* 3,900 108,712
Superior Consultant Holdings Corp.* 800 19,800
Technology Solutions Co.* 73,650 3,056,475
Thermo Fibergen, Inc.* 6,200 65,100
Transaction System Architects, Inc., "A"* 11,300 375,725
------------
$ 12,391,750
- -----------------------------------------------------------------------------
Chemicals - 0.3%
Betzdearborn, Inc. 5,000 $ 292,500
- -----------------------------------------------------------------------------
Computer Software - Personal Computers - 3.6%
Autodesk, Inc. 285 $ 7,980
First Data Corp. 39,600 1,445,400
Microsoft Corp.* 27,550 2,276,319
Spectrum Holobyte Industries, Inc.* 1,000 7,500
------------
$ 3,737,199
- -----------------------------------------------------------------------------
Computer Software - Systems - 21.6%
Adobe Systems, Inc. 2,800 $ 104,650
BMC Software, Inc.* 119,600 4,948,450
Cadence Design Systems, Inc.* 48,675 1,934,831
Computer Associates International, Inc. 87,900 4,373,025
Compuware Corp.* 36,700 1,839,588
Information Management Resources, Inc.* 500 10,562
Ingram Micro, Inc., "A"* 1,400 32,200
Oracle Systems Corp.* 135,800 5,669,650
Parametric Technology Co.* 27,900 1,433,362
Sterling Software, Inc.* 21,500 679,938
Sybase, Inc.* 16,350 272,841
Synopsys, Inc.* 15,600 721,500
USCS International, Inc.* 7,900 133,312
Viasoft, Inc.* 5,900 278,775
Xionics Document Technologies, Inc.* 19,000 237,500
------------
$ 22,670,184
- -----------------------------------------------------------------------------
Construction Services - 0.8%
Shaw Group Inc.* 35,000 $ 818,125
- -----------------------------------------------------------------------------
Consumer Goods and Services - 2.8%
Carson, Inc.* 63,600 $ 882,450
Service Corp. International 3,500 98,000
Tyco International Ltd. 37,500 1,982,813
------------
$ 2,963,263
- -----------------------------------------------------------------------------
Electronics - 7.5%
Actel Corp.* 9,000 $ 213,750
Altera Corp.* 25,100 1,824,456
Analog Devices, Inc.* 26,200 887,525
Atmel Corp.* 11,700 387,562
Intel Corp. 5,300 693,969
LSI Logic Corp.* 24,300 650,025
Lattice Semiconductor Corp.* 15,200 699,200
Linear Technology Corp. 18,100 794,138
Novellus Systems, Inc.* 1,600 89,200
Teradyne, Inc.* 17,800 433,875
Ultratech Stepper, Inc.* 6,200 147,250
VLSI Technology, Inc.* 23,700 565,837
Xilinx, Inc.* 14,300 526,419
------------
$ 7,913,206
- -----------------------------------------------------------------------------
Entertainment - 2.1%
Cox Radio, Inc., "A"* 20,700 $ 362,250
Harrah's Entertainment, Inc.* 19,700 391,537
Heritage Media Corp., "A"* 17,100 192,375
International Speedway Corp., "A"* 500 10,250
Jacor Communications, Inc.* 3,900 106,763
LIN Television Corp.* 21,100 891,475
Sinclair Broadcasting Group, Inc., "A"* 3,500 91,000
Univision Communications, Inc.* 4,800 177,600
------------
$ 2,223,250
- -----------------------------------------------------------------------------
Financial Institutions - 1.8%
Associates First Capital Corp.* 13,900 $ 613,337
Dean Witter Discover & Co. 5,700 377,625
Franklin Resources, Inc. 2,000 136,750
MBNA Corp. 18,300 759,450
------------
$ 1,887,162
- -----------------------------------------------------------------------------
Food and Beverage Products - 0.7%
Earthgrains Co. 13,400 $ 700,150
- -----------------------------------------------------------------------------
Machinery - 0.2%
SI Handling Systems, Inc. 15,700 $ 236,481
- -----------------------------------------------------------------------------
Medical and Health Products - 0.1%
Ventritex, Inc.* 3,900 $ 96,038
- -----------------------------------------------------------------------------
Medical and Health Technology and Services - 8.6%
Columbia/HCA Healthcare Corp. 150 $ 6,112
Foundation Health Corp.* 200 6,350
Healthsource, Inc.* 15,900 208,688
Healthsouth Corp.* 51,500 1,989,188
Pacificare Health Systems, Inc., "B"* 20,400 1,739,100
St. Jude Medical, Inc.* 8,300 353,787
United Healthcare Corp. 103,500 4,657,500
------------
$ 8,960,725
- -----------------------------------------------------------------------------
Oil Services
National-Oilwell, Inc.* 500 $ 15,375
Offshore Energy Development Corp.* 100 1,525
------------
$ 16,900
- -----------------------------------------------------------------------------
Oils - 0.2%
Barrett Resources Corp.* 4,200 $ 179,025
Titan Exploration, Inc.* 2,600 31,200
------------
$ 210,225
- -----------------------------------------------------------------------------
Pollution Control - 0.8%
Republic Industries, Inc.* 200 $ 6,237
USA Waste Services, Inc.* 26,300 838,312
------------
$ 844,549
- -----------------------------------------------------------------------------
Printing and Publishing
Pulitzer Publishing Co. 1 $ 46
- -----------------------------------------------------------------------------
Railroads - 0.9%
Kansas City Southern Industries, Inc. 14,600 $ 657,000
Wisconsin Central Transportation Corp.* 7,900 313,038
------------
$ 970,038
- -----------------------------------------------------------------------------
Restaurants and Lodging - 6.2%
Applebee's International, Inc.* 22,100 $ 607,750
HFS, Inc.* 92,100 5,502,975
Promus Hotel Corp.* 5,900 174,787
Renaissance Hotel Group N.V.* 7,500 176,250
U.S. Franchise Systems, Inc., "A"* 500 5,063
------------
$ 6,466,825
- -----------------------------------------------------------------------------
Stores - 3.0%
BT Office Products International, Inc.* 1,700 $ 15,087
Corporate Express, Inc.* 26,400 777,150
General Nutrition Cos., Inc.* 20,600 347,625
Hollywood Entertainment, Corp.* 2,300 42,550
Linens "N" Things, Inc.* 3,500 68,688
Mazel Stores, Inc.* 300 6,750
Micro Warehouse, Inc.* 800 9,400
Office Depot, Inc.* 20,500 363,875
Staples, Inc.* 85,600 1,546,150
------------
$ 3,177,275
- -----------------------------------------------------------------------------
Telecommunications - 11.3%
3Com Corp.* 19,100 $ 1,401,462
Bay Networks, Inc.* 400 8,350
Cabletron Systems, Inc.* 56,400 1,875,300
Cisco Systems, Inc.* 69,500 4,421,938
Glenayre Technologies, Inc.* 40,800 879,750
Lucent Technologies, Inc. 11,100 513,375
Tel-Save Holdings, Inc.* 400 11,600
Worldcom, Inc.* 106,800 2,783,475
------------
$ 11,895,250
- -----------------------------------------------------------------------------
Total U.S. Stocks $ 91,206,998
- -----------------------------------------------------------------------------
Foreign Stocks - 4.8%
Canada - 0.9%
BioChem Pharma, Inc. (Medical and Health
Products)* 19,650 $ 987,413
- -----------------------------------------------------------------------------
Germany - 1.2%
SAP AG (Computer Software - Systems) 8,125 $ 1,118,540
SAP AG, ADR (Computer Software - Systems)## 3,300 152,212
------------
$ 1,270,752
- -----------------------------------------------------------------------------
Italy - 0.6%
Fila Holdings S.p.A., ADR (Apparel and Textiles) 10,150 $ 589,969
- -----------------------------------------------------------------------------
Netherlands - 0.1%
Gucci Group N.V. (Apparel and Textiles)* 1,500 $ 95,813
- -----------------------------------------------------------------------------
United Kingdom - 2.0%
Danka Business Systems PLC, ADR (Business
Services) 37,100 $ 1,312,412
Pace Micro Technology PLC (Electronics)* 194,000 764,418
------------
$ 2,076,830
- -----------------------------------------------------------------------------
Total Foreign Stocks $ 5,020,777
- -----------------------------------------------------------------------------
Total Stocks (Identified Cost, $94,818,903) $ 96,227,775
- -----------------------------------------------------------------------------
Rights
- -----------------------------------------------------------------------------
Thermo Fibergen, Inc. (Business Services)*
(Identified Cost, $12,234) 6,200 $ 15,500
- -----------------------------------------------------------------------------
Warrants - 2.4%
- -----------------------------------------------------------------------------
Intel Corp. (Electronics)* (Identified Cost,
$1,911,513) 26,800 $ 2,472,300
- -----------------------------------------------------------------------------
Convertible Bond
- -----------------------------------------------------------------------------
Principal Amount
(000 Omitted)
- -----------------------------------------------------------------------------
Ventritex, Inc., 5.75s, 2001 (Medical and Health
Products) (Identified Cost, $20,000) $ 20 $ 30,925
- -----------------------------------------------------------------------------
Short-Term Obligations - 18.3%
- -----------------------------------------------------------------------------
Federal Home Loan Mortgage Corp.,
due 1/06/97 - 1/30/97 $ 7,000 $ 6,962,672
Student Loan Marketing Assn., due 1/02/97 12,210 12,205,760
- -----------------------------------------------------------------------------
Total Short-Term Obligations, at Amortized Cost $ 19,168,432
- -----------------------------------------------------------------------------
Total Investments (Identified Cost, $115,931,082) $117,914,932
Other Assets, Less Liabilities - (12.4)% (12,958,628)
- -----------------------------------------------------------------------------
Net Assets - 100.0% $104,956,304
- -----------------------------------------------------------------------------
*Non-income producing security.
##SEC Rule 144A restriction.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ------------------------------------------------------------------------------
December 31, 1996
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $115,931,082) $117,914,932
Cash 6,202
Receivable for Series shares sold 1,277,098
Interest and dividends receivable 31,458
Receivable from investment adviser 61,869
Deferred organization expenses 6,546
Other assets 42
------------
Total assets $119,298,147
------------
Liabilities:
Payable for Series shares reacquired $ 561,351
Payable for investments purchased 13,706,027
Payable to affiliate for management fee 6,364
Accrued expenses and other liabilities 68,101
------------
Total liabilities $ 14,341,843
------------
Net assets $104,956,304
============
Net assets consist of:
Paid-in capital $103,393,432
Unrealized appreciation on investments 1,983,850
Accumulated net realized loss on investments and foreign
currency transactions (420,978)
------------
Total $104,956,304
============
Shares of beneficial interest outstanding 7,928,680
=========
Net asset value per share
(net assets of $104,956,304 / 7,928,680 shares of
beneficial interest outstanding) $13.24
======
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- ------------------------------------------------------------------------------
Year Ended December 31, 1996
- ------------------------------------------------------------------------------
Net investment income:
Income -
Interest $ 351,048
Dividends 37,634
Foreign taxes withheld (1,125)
----------
Total investment income $ 387,557
----------
Expenses -
Management fee $ 314,262
Trustees' compensation 2,033
Shareholder servicing agent fee 14,380
Printing 65,001
Auditing fees 29,156
Custodian fee 17,940
Amortization of organization expenses 1,842
Legal fees 1,421
Miscellaneous 37,062
----------
Total expenses $ 483,097
Fees paid indirectly (1,120)
Reduction of expenses by investment adviser (62,962)
----------
Net expenses $ 419,015
----------
Net investment loss $ (31,458)
----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 504,626
Foreign currency transactions (1,029)
----------
Net realized gain on investments and foreign currency
transactions $ 503,597
----------
Change in unrealized appreciation on investments $1,810,131
----------
Net realized and unrealized gain on investments and
foreign currency $2,313,728
----------
Increase in net assets from operations $2,282,270
==========
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
- ------------------------------------------------------------------------------------------------------------------
Year Ended Period Ended
December 31, 1996 December 31, 1995*
- ------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets:
<S> <C> <C>
From operations -
Net investment income (loss) $ (31,458) $ 877
Net realized gain on investments and foreign currency transactions 503,597 81,576
Net unrealized gain on investments 1,810,131 173,719
------------ -----------
Increase in net assets from operations $ 2,282,270 $ 256,172
------------ -----------
Distributions declared to shareholders -
From net investment income $ -- $ (877)
From net realized gain on investments and foreign currency transactions (503,597) (81,576)
In excess of net investment income -- (283)
In excess of net realized gain on investments and foreign currency
transactions (374,343) --
Tax return of capital -- (21,847)
------------ -----------
Total distributions declared to shareholders $ (877,940) $ (104,583)
------------ -----------
Series share (principal) transactions -
Net proceeds from sale of shares $149,594,616 $ 5,564,342
Net asset value of shares issued to shareholders in reinvestment of
distributions 877,940 104,583
Cost of shares reacquired (50,789,212) (1,960,484)
------------ -----------
Increase in net assets from Series share transactions $ 99,683,344 $ 3,708,441
------------ -----------
Total increase in net assets $101,087,674 $ 3,860,030
Net assets:
At beginning of period 3,868,630 8,600
------------ -----------
At end of period $104,956,304 $ 3,868,630
============ ===========
*For the period from the commencement of investment operations, July 24, 1995 to December 31, 1995.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
- -----------------------------------------------------------------------------------------------------------
Year Ended Period Ended
December 31, 1996 December 31, 1995*
- -----------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C>
Net asset value - beginning of period $11.41 $10.00
------ ------
Income from investment operations# -
Net investment income (loss)(S) $(0.01) $ 0.01
Net realized and unrealized gain on investments and foreign currency
transactions 1.95 1.74
------ ------
Total from investment operations $ 1.94 $ 1.75
------ ------
Less distributions declared to shareholders -
From net investment income $ -- $(0.01)
From net realized gain on investments and foreign currency
transactions (0.06) (0.26)
In excess of net realized gain on investments and foreign currency
transactions (0.05) --
Tax return of capital -- (0.07)
------ ------
Total distributions declared to shareholders $(0.11) $(0.34)
------ ------
Net asset value - end of period $13.24 $11.41
====== ======
Total return 17.02% 17.41%++
Ratios (to average net assets)/Supplemental data(S):
Expenses 1.00% 1.00%+
Net investment income (loss) (0.08)% 0.10%+
Portfolio turnover 96% 73%
Average commission rate### $0.0401 --
Net assets at end of period (000 omitted) $104,956 $3,869
*For the period from the commencement of investment operations, July 24, 1995 to December 31, 1995.
+Annualized.
++Not annualized.
#Per share data is based on average shares outstanding.
###Average commission rate is calculated for Series' with fiscal years beginning on or after September 1, 1995.
(S)The adviser voluntarily agreed to maintain the expenses of the Series at not more than 1.00% of average daily
net assets. To the extent actual expenses were over these limitations, the net investment loss per share and
the ratios would have been:
Net investment loss $(0.03) $(0.18)
Ratios (to average net assets):
Expenses 1.16% 2.91%+
Net investment loss (0.23)% (1.78)%+
</TABLE>
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Emerging Growth Series (the Series) is a diversified series of MFS
Variable Insurance Trust (the Trust) which is comprised of the following 12
series: MFS Bond Series, MFS Emerging Growth Series, MFS Growth with Income
Series, MFS High Income Series, MFS Limited Maturity Series, MFS Money Market
Series, MFS Research Series, MFS Strategic Fixed Income Series, MFS Total
Return Series, MFS Utilities Series, MFS Value Series, and MFS World
Governments Series. The Trust is organized as a Massachusetts business trust
and is registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company.
The shareholders of each Series of the Trust are separate accounts of
insurance companies which offer variable annuity and/or life insurance
products. As of December 31, 1996 there were 31 shareholders in the Series.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investments in foreign securities are vulnerable to the effects of changes in
the relative values of the local currency and the U.S. dollar and to the
effects of changes in each country's legal, political and economic
environment.
Investment Valuations - Equity securities listed on securities exchanges or
reported through the NASDAQ system are valued at last sales prices. Unlisted
equity securities or listed equity securities for which last sale prices are
not available are valued at last quoted bid prices. Debt securities (other
than short-term obligations which mature in 60 days or less), including listed
issues, are valued on the basis of valuations furnished by dealers or by a
pricing service with consideration to factors such as institutional-size
trading in similar groups of securities, yield, quality, coupon rate,
maturity, type of issue, trading characteristics and other market data,
without exclusive reliance upon exchange or over-the-counter prices. Short-
term obligations, which mature in 60 days or less, are valued at amortized
cost, which approximates market value. Securities for which there are no such
quotations or valuations are valued at fair value as determined in good faith
by or at the direction of the Trustees.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases
and sales of foreign investments, income and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates
of such transactions. Gains and losses attributable to foreign currency
exchange rates on sales of securities are recorded for financial statement
purposes as net realized gains and losses on investments. Gains and losses
attributable to foreign exchange rate movements on income and expenses are
recorded for financial statement purposes as foreign currency transaction
gains and losses. That portion of both realized and unrealized gains and
losses on investments that result from fluctuations in foreign currency
exchange rates is not separately disclosed.
Deferred Organization Expenses - Costs incurred by the Series in connection
with its organization have been deferred and are being amortized on a
straight-line basis over a five-year period beginning on the date of
commencement of Series operations.
Forward Foreign Currency Exchange Contracts - The Series may enter into
forward foreign currency exchange contracts for the purchase or sale of a
specific foreign currency at a fixed price on a future date. Risks may arise
upon entering into these contracts from the potential inability of
counterparties to meet the terms of their contracts and from unanticipated
movements in the value of a foreign currency relative to the U.S. dollar. The
Series will enter into forward contracts for hedging purposes as well as for
non-hedging purposes. For hedging purposes, the Series may enter into
contracts to deliver or receive foreign currency it will receive from or
require for its normal investment activities. The Series may also use
contracts in a manner intended to protect foreign currency-denominated
securities from declines in value due to unfavorable exchange rate movements.
For non-hedging purposes, the Series may enter into contracts with the intent
of changing the relative exposure of the Series' portfolio of securities to
different currencies to take advantage of anticipated changes. The forward
foreign currency exchange contracts are adjusted by the daily exchange rate of
the underlying currency and any gains or losses are recorded for financial
statement purposes as unrealized until the contract settlement date.
Investment Transactions and Income - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
and original issue discount are amortized or accreted for financial statement
and tax reporting purposes as required by federal income tax regulations.
Dividend income is recorded on the ex-dividend date for dividends received in
cash. Dividend and interest payments received in additional securities are
recorded on the ex-dividend or ex-interest date in an amount equal to the
value of the security on such date.
Fees Paid Indirectly - The Series' custodian bank calculates its fee based on
the Series' average daily net assets. This fee is reduced according to an
expense offset arrangement with State Street Bank, the dividend disbursing
agent, which provides for partial reimbursement of custody fees based on a
formula developed to measure the value of cash deposited by the Series with
the custodian and with the dividend disbursing agent. This amount is shown as
a reduction of expenses on the Statement of Operations.
Tax Matters and Distributions - The Series' policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. The Series files a tax
return annually using tax accounting methods required under provisions of the
Code which may differ from generally accepted accounting principles, the basis
on which these financial statements are prepared. Accordingly, the amount of
net investment income and net realized gain reported on these financial
statements may differ from that reported on the Series' tax return and,
consequently, the character of distributions to shareholders reported in the
financial highlights may differ from that reported to shareholders on Form
1099-DIV. Foreign taxes have been provided for on interest and dividend income
earned on foreign investments in accordance with the applicable country's tax
rates and to the extent unrecoverable are recorded as a reduction of
investment income. The Series expects to pass through to shareholders foreign
income taxes paid. The election increases the taxable distributions of the
Series by the amount of foreign taxes paid. An individual shareholder who
itemizes deductions, or a corporate shareholder, will be able to claim an
offsetting deduction or tax credit (but not both) on their federal income tax
returns. Individuals who do not itemize deductions may claim a foreign tax
credit but not a deduction. The foreign source income is considered passive
income for the purpose of computing the foreign tax credit limitations.
Distributions to shareholders are recorded on the ex-dividend date.
The Series distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a tax return
of capital. Differences in the recognition or classification of income between
the financial statements and tax earnings and profits which result in
temporary over-distributions for financial statement purposes, are classified
as distributions in excess of net investment income or accumulated net
realized gains. During the year ended December 31, 1996, $46,635 was
reclassified from accumulated net realized loss on investments and foreign
currency transactions and $15,177 and $31,458 were reclassified to paid-in
capital and accumulated net investment loss, respectively, due to differences
between book and tax accounting for reclass of net operating loss and currency
transactions. This change had no effect on the net assets or net asset value
per share. At December 31, 1996, accumulated net realized loss on investments
and foreign currency transactions under book accounting were different from
tax accounting due to temporary differences in accounting for wash sales.
(3) Transactions with Affiliates
Investment Adviser - The Series has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.75% of
average daily net assets. Under a temporary expense limitation agreement with
MFS, MFS has voluntarily agreed to pay all of the Series' operating expenses,
exclusive of management fees, which exceed 0.25% of the Series' average daily
net assets. The Series in turn will pay MFS an expense reimbursement fee not
greater than 0.25% of the Series' average daily net assets. To the extent that
the expense reimbursement fee exceeds the Series' actual expenses, the excess
will be applied to amounts paid by MFS in prior years. At December 31, 1996, the
aggregate unreimbursed expenses owed to MFS by the Series amounted to $78,621,
including $62,962 incurred in the current year.
The Series pays no compensation directly to its Trustees who are officers of
the investment adviser, or to officers of the Series, all of whom receive
remuneration for their services to the Series from MFS. Certain officers and
Trustees of the Series are officers or directors of MFS and MFS Service
Center, Inc. (MFSC).
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as
a percentage of the average daily net assets at an effective annual rate of up
to 0.035%.
(4) Portfolio Securities
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions and short-term obligations, aggregated
$128,473,774 and $35,416,621, respectively.
The cost and unrealized appreciation or depreciation in value of the
investments owned by the Series, as computed on a federal income tax basis,
are as follows:
Aggregate cost $115,931,082
============
Gross unrealized appreciation $ 6,064,316
Gross unrealized depreciation (4,080,466)
------------
Net unrealized appreciation $ 1,983,850
============
(5) Shares of Beneficial Interest
The Series' Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par
value). Transactions in Series shares were as follows:
<TABLE>
<CAPTION>
Year Ended Period Ended
December 31, 1996 December 31, 1995*
---------------------------------- -------------------------------
Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 11,363,299 $149,594,616 501,081 $ 5,564,342
Shares issued to shareholders in
reinvestment of distributions 66,160 877,940 9,255 104,583
Shares reacquired (3,839,801) (50,789,212) (172,174) (1,960,484)
---------- ------------ ------- -----------
Net increase 7,589,658 $ 99,683,344 338,162 $ 3,708,441
========== ============ ======= ===========
*For the period from the commencement of investment operations, July 24, 1995 to December 31, 1995.
</TABLE>
(6) Line of Credit
The Series entered into an agreement which enables it to participate with
other funds managed by MFS in an unsecured line of credit with a bank which
permits borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Series shares. Interest is charged to
each fund, based on its borrowings, at a rate equal to the bank's base rate.
In addition, a commitment fee, based on the average daily unused portion of
the line of credit, is allocated among the participating funds at the end of
each quarter. The commitment fee allocated to the Series for the year ended
December 31, 1996 was $504.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Variable Insurance Trust and Shareholders of MFS
Emerging Growth Series:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of MFS Emerging Growth Series (the
Series) (one of the series constituting the MFS Variable Insurance Trust) as
of December 31, 1996, the related statement of operations for the year then
ended, the statements of changes in net assets and financial highlights for
the year then ended and for the period from July 24, 1995 (the commencement of
investment operations) to December 31, 1995. These financial statements and
financial highlights are the responsibility of the Series' management. Our
responsibility is to express an opinion on these financial statements and
financial highlights 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 financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of the
securities owned at December 31, 1996 by correspondence with the custodian and
brokers; where replies were not received from brokers, we performed other
auditing procedures. 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 provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Emerging
Growth Series at December 31, 1996, the results of its operations, the changes
in its net assets, and its financial highlights for the respective stated
periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 7, 1997
---------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
VEG 2/97 16.5M
<PAGE>
[logo] M F S(SM) ANNUAL REPORT
INVESTMENT MANAGEMENT FOR YEAR ENDED
DECEMBER 31, 1996
MFS(R) VALUE SERIES
A SERIES OF MFS(R) VARIABLE INSURANCE TRUST
[Graphic Omitted]
<PAGE>
MFS(R) VALUE SERIES
A SERIES OF MFS(R) VARIABLE INSURANCE TRUST
<TABLE>
<C> <C>
TRUSTEES INVESTMENT ADVISER
A. Keith Brodkin* Massachusetts Financial Services Company
Chairman and President 500 Boylston Street
Boston, MA 02116-3741
Nelson J. Darling, Jr.
Trustee, Eastern Enterprises DISTRIBUTOR
(diversified holding company) MFS Fund Distributors, Inc.
500 Boylston Street
William R. Gutow Boston, MA 02116-3741
Vice Chairman,
Capitol Entertainment Management Company SHAREHOLDER SERVICE CENTER
(Blockbuster Video Franchise) MFS Service Center, Inc.
P.O. Box 1400
PORTFOLIO MANAGER Boston, MA 02107-9906
John F. Brennan, Jr.*
For additional information,
TREASURER contact your financial adviser.
W. Thomas London*
CUSTODIAN
ASSISTANT TREASURER Investors Bank & Trust Company
James O. Yost*
AUDITORS
SECRETARY Deloitte & Touche LLP
Stephen E. Cavan*
WORLD WIDE WEB
ASSISTANT SECRETARY www.mfs.com
James R. Bordewick, Jr.*
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
Dear Contract Owner:
The pattern of slow but sustainable growth seen in most of the world in 1996
seems likely to continue in 1997. While it looks like U.S. growth in 1997 will
slow modestly relative to 1996, there is evidence that Europe and, to a lesser
degree, Japan are continuing their recoveries from recession. At the same
time, companies in many emerging markets are reporting robust increases in
earnings as these markets benefit from higher-than-average economic growth and
market reforms. This should continue to provide more opportunities for
development and trade.
After more than six years of expansion, the U.S. economy appears headed
toward another year of moderate growth in 1997, although a few signs point to
the possibility of a modest increase in inflation during the year. On the
positive side, the pattern of moderate growth and inflation set over the past
few years now seems fairly well entrenched in the economy and, short of a
major international or domestic crisis, appears to have enough momentum to
remain on track for some time. Recent gains in such important sectors as
housing, automobiles, industrial production, and exports indicate a fair
amount of underlying strength in the economy. However, some reason for caution
can be seen in the continuing high level of consumer debt and the attendant
rise in personal bankruptcies, as well as in the modestly disappointing level
of holiday sales. Furthermore, the ongoing tightness in labor markets, and
price rises in such important sectors as energy, could add some inflationary
pressures to the economy. Given these somewhat conflicting indicators, we
expect real (inflation-adjusted) growth to revolve around 2% in 1997, which
would represent a modest decline from 1996.
We continue to urge U.S. equity investors to lower their expectations for
1997 and to point out that the impressive gains of the past two years are not
sustainable. Just as the slowdown in corporate earnings growth and increases
in interest rates in 1996 raised some near-term concerns, further interest
rate increases and an acceleration of inflation could negatively affect the
stock market in 1997. However, to the extent that some slowdown in earnings
means that the economy is not overheating, this may be beneficial for the
equity market in the long run. Also, we believe many of the technology-driven
productivity gains that U.S. companies have made in recent years will continue
to enhance corporate America's competitiveness and profitability. Therefore,
while we have some near-term concerns, we remain reasonably positive about the
long-term viability of the equity market.
In U.S. bond markets, conflicting signals over the strength of the economy
have created near-term volatility. Even comments by Federal Reserve Chairman
Alan Greenspan in late 1996 created some uncertainty over the Federal Reserve
Board's next move. We expect the Fed to maintain its anti-inflationary stance
should signs of more rapid economic growth and, particularly, higher inflation
resurface. While inflationary forces largely remained in check in 1996, the
continued strength in the labor market and rising energy prices mean that a
pickup in inflation is still possible. At the same time, the U.S. budget
deficit continues to decline and, as a percentage of gross domestic product,
is now less than 2%, which we consider a positive development for the bond
markets. Although interest rates may move higher over the coming months, we
believe that, at current levels, fixed-income markets remain equitably valued.
Internationally, the environment of moderate growth, benign inflation, and
fairly steady interest rates is also providing support for investment markets
and should help support valuation levels in the coming year. Throughout the
world, the key to stock market performance in 1997 will be corporate earnings
growth. While U.S. earnings growth is slowing, but still expected to be fairly
healthy, we anticipate that a number of European countries will see an
acceleration in earnings growth and improved valuations in 1997. Despite this
environment, many European countries trade at discounts to the United States.
In particular, we see opportunities in some of the multinationals, and
businesses with the ability to generate steady earnings growth. In Japan, a
recovery appears to be taking place, but at a very modest rate, with
valuations still at high levels. In the emerging markets, the long-term
economic growth story remains intact and, although selectivity is even more
important in these markets, more companies are benefiting from this growth and
trading at below-average global valuations.
Comments from the portfolio manager of the Series are presented below. We
appreciate your support and welcome any questions or comments you may have.
Respectfully,
/s/A. Keith Brodkin /s/John F. Brennan, Jr.
A. Keith Brodkin John F. Brennan, Jr.
Chairman and President Portfolio Manager
January 9, 1997
MFS(R) VALUE SERIES
Over the past 12 months, the three best-performing sectors of the Standard &
Poor's 500 Composite Index (the S&P 500), a popular, unmanaged index of common
stock performance, were technology, which was up 46.9%; financial services, up
35.8%; and industrial goods and services, up 28.9%. The worst-performing
sector was utilities and communications, which gained just 1.6%. The Series
was slightly underweighted in technology versus the S&P 500 (9.0% of the
portfolio versus 12.0% of the S&P 500), slightly underweighted in financial
services (12.1% versus 14.8%), and slightly underweighted in industrial goods
and services (7.1% versus 7.9%). Our overweighting in the utilities and
communications sector (10.9% versus 9.5%) is primarily concentrated in the
cellular industry with a large holding in Cellular Communications
International, a member of the Italian licensee Omnitel.
Leisure, our largest sector (21.7% of the portfolio), is a diverse mix of
companies and industries. The Series' primary focus is on the gaming and
lodging industry as well as the broadcasting industry. We believe the lodging
industry will continue to exhibit favorable trends over the near term. Supply
continues to be tight, especially for the high-end, full-service hotels, and
demand remains robust. We expect the key measurements of performance, and
occupancy rates to be positive throughout 1997. While the gaming industry's
expansion slowed in 1996, we continue our enthusiasm for long-term prospects.
Harrah's Entertainment is currently one of the more attractively valued
companies in this industry and results should turn more favorable in the
second half of 1997. In the broadcasting industry, our holdings range across
television and radio -- industries which may benefit from recent deregulation.
Ongoing consolidation should aid revenue and costs as pricing flexibility
increases and programming expenses diminish. Our favorite holdings in this
industry are American Radio and LIN Television.
The Series' industrial goods holdings are focused on the aerospace
industry, which we expect to have a strong runup in profits as the commercial
aircraft cycle evolves over the next several years. We believe BE Aerospace
and BF Goodrich are expected to show strong earnings momentum over this
period.
International holdings are currently 18% of equities and range across
European and Asian markets. In addition to Cellular Communications
International, other large holdings include Tranz Rail (a New Zealand railway)
and Korea Mobile Telecom (a South Korean cellular franchise).
Our outlook for the coming year is cautious. With stock market valuations
at record levels and the recent uptick in interest rates, we believe the
market is vulnerable to negative news. Therefore, we are positioned
conservatively.
PORTFOLIO MANAGER'S PROFILE
John F. Brennan, Jr. is Senior Vice President of MFS and manages MFS Value
Series. He joined MFS as an industry specialist in 1985. He was named Vice
President in 1988 and Senior Vice President in 1995. Mr. Brennan is a graduate
of the University of Rhode Island and the Stanford University Graduate School
of Business Administration.
DIVIDENDS-RECEIVED DEDUCTION
For the year ended December 31, 1996, the amount of distributions from income
eligible for the 70% dividends-received deduction for corporations came to
13.82%.
PERFORMANCE SUMMARY
The information below illustrates the historical performance of MFS Value
Series shares in comparison to various market indicators. Benchmark
comparisons are unmanaged and do not reflect any fees or expenses. You cannot
invest in an index.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the Period from August 1, 1996 to December 31, 1996)
Consumer
MFS Price S&P 500
Value Index - Composite
Date Series U.S. Index
- ---- ------- -------- ---------
8/96 10000.0 10000.0 10000.0
8/96 9960.0 10020.0 10207.0
9/96 10460.0 10054.0 10778.0
10/96 10370.0 10086.0 11079.0
11/96 10800.0 10105.0 11911.0
12/96 10878.0 10124.0 11674.0
AGGREGATE TOTAL RETURNS AS OF DECEMBER 31, 1996
Life+
- ---------------------------------------------------------
MFS Value Series + 8.78%
- ---------------------------------------------------------
Standard & Poor's 500 Composite Index++ +16.74%
- ---------------------------------------------------------
Consumer Price Index*++ + 1.24%
- ---------------------------------------------------------
+For the period from the commencement of investment operations, August 14,
1996 to December 31, 1996.
++Source: CDA/Wiesenberger.
*The Consumer Price Index is a popular measure of change in prices.
Returns shown do not reflect the deduction of mortality and expense risk
charges and administrative fees. Please refer to the product's annual report
for performance that reflects the fees and charges imposed by insurance
company separate accounts.
Investment return and principal value will fluctuate, and shares, when
redeemed, may be worth more or less than their original cost. Past performance
is no guarantee of future results.
Series results reflect any applicable expense subsidies and waivers, without
which the performance results would have been less favorable. Subsidies and
waivers may be rescinded at any time. See the prospectus for details.
<PAGE>
PORTFOLIO OF INVESTMENTS - December 31, 1996
Stocks - 91.9%
- -----------------------------------------------------------------------------
Issuer Shares Value
- -----------------------------------------------------------------------------
U.S. Stocks - 76.9%
Advertising - 0.9%
Outdoor Systems, Inc.* 450 $ 12,656
- -----------------------------------------------------------------------------
Aerospace - 3.3%
AlliedSignal, Inc. 200 $ 13,400
BE Aerospace, Inc.* 1,100 29,837
Raytheon Co. 20 963
----------
$ 44,200
- -----------------------------------------------------------------------------
Agricultural Products - 1.7%
AGCO Corp. 440 $ 12,595
Case Corp. 200 10,900
----------
$ 23,495
- -----------------------------------------------------------------------------
Automotive - 2.6%
Ford Motor Co. 400 $ 12,750
Goodrich (B.F.) Co. 300 12,150
Harvard Industries, Inc., "B"* 2,400 10,800
----------
$ 35,700
- -----------------------------------------------------------------------------
Banks and Credit Companies - 1.3%
Wells Fargo & Co. 65 $ 17,534
- -----------------------------------------------------------------------------
Business Machines - 0.8%
Sun Microsystems, Inc.* 400 $ 10,275
- -----------------------------------------------------------------------------
Business Services - 2.7%
ADT Ltd.* 800 $ 18,300
Alco Standard Corp. 300 15,487
Sabre Group Holdings, Inc.* 100 2,787
----------
$ 36,574
- -----------------------------------------------------------------------------
Cellular Telephones - 0.8%
Telephone & Data Systems, Inc. 300 $ 10,875
- -----------------------------------------------------------------------------
Chemicals - 1.1%
Dexter Corp. 400 $ 12,750
NL Industries, Inc. 200 2,175
----------
$ 14,925
- -----------------------------------------------------------------------------
Computer Software - Systems - 3.3%
Adobe Systems, Inc. 300 $ 11,213
Cerner Corp.* 600 9,300
Sybase, Inc.* 1,400 23,363
----------
$ 43,876
- -----------------------------------------------------------------------------
Consumer Goods and Services - 3.5%
Philip Morris Cos., Inc. 140 $ 15,767
Tyco International Ltd. 600 31,725
----------
$ 47,492
- -----------------------------------------------------------------------------
Containers - 0.4%
Stone Container Corp. 400 $ 5,950
- -----------------------------------------------------------------------------
Defense Electronics - 0.3%
Loral Space & Communications Corp.* 200 $ 3,675
- -----------------------------------------------------------------------------
Electrical Equipment - 0.3%
Rofin-Sinar Technologies, Inc.* 300 $ 3,525
- -----------------------------------------------------------------------------
Electronics - 2.4%
Atmel Corp.* 500 $ 16,562
Intel Corp. 70 9,166
Kulicke & Soffa Industries, Inc.* 100 1,900
LTX Corp.* 700 4,113
----------
$ 31,741
- -----------------------------------------------------------------------------
Entertainment - 7.9%
American Radio Systems Corp., "A"* 330 $ 8,993
Argosy Gaming Co.* 400 1,850
Casino America, Inc.* 800 2,550
Central European Media Enterprises Ltd.* 400 12,700
Chancellor Broadcasting Co., "A"* 280 6,650
EZ Communications, Inc., "A"* 300 10,988
Golden Bear Golf, Inc.* 200 2,250
Harrah's Entertainment, Inc.* 1,600 31,800
Harveys Casino Resorts 200 3,375
LIN Television Corp.* 400 16,900
Showboat, Inc. 300 5,175
Univision Communications, Inc.* 100 3,700
----------
$ 106,931
- -----------------------------------------------------------------------------
Financial Institutions - 3.8%
Benefical Corp. 220 $ 13,943
Federal Home Loan Mortgage Corp. 200 22,025
Union Planters Corp. 400 15,600
----------
$ 51,568
- -----------------------------------------------------------------------------
Food and Beverage Products - 1.3%
Earthgrains Co. 100 $ 5,225
Interstate Bakeries Corp. 260 12,772
----------
$ 17,997
- -----------------------------------------------------------------------------
Forest and Paper Products - 1.4%
Kimberly-Clark Corp. 200 $ 19,050
- -----------------------------------------------------------------------------
Insurance - 4.4%
Chubb Corp. 240 $ 12,900
CIGNA Corp. 100 13,662
ITT Hartford Group, Inc. 200 13,500
Penncorp Financial Group, Inc. 520 18,720
----------
$ 58,782
- -----------------------------------------------------------------------------
Machinery - 1.1%
Stewart & Stevenson Services, Inc. 500 $ 14,563
- -----------------------------------------------------------------------------
Medical and Health Products - 2.6%
Pharmacia & Upjohn, Inc. 360 $ 14,265
Rhone-Poulenc Rorer, Inc. 200 15,625
Uromed Corp.* 500 4,875
----------
$ 34,765
- -----------------------------------------------------------------------------
Medical and Health Technology and Services - 3.2%
Pacificare Health Systems, Inc., "B"* 70 $ 5,687
Regency Health Services, Inc.* 400 3,850
St. Jude Medical, Inc.* 500 21,312
United Healthcare Corp. 260 11,700
----------
$ 42,549
- -----------------------------------------------------------------------------
Oil Services - 0.3%
Tidewater, Inc. 100 $ 4,525
- -----------------------------------------------------------------------------
Oils - 1.8%
Occidental Petroleum Corp. 500 $ 11,688
Texaco, Inc. 130 12,756
----------
$ 24,444
- -----------------------------------------------------------------------------
Photographic Products - 0.6%
Eastman Kodak Co. 100 $ 8,025
- -----------------------------------------------------------------------------
Printing and Publishing - 1.9%
Gannett Co., Inc. 170 $ 12,729
Pulitzer Publishing Co. 101 4,684
Scripps (E.W.) Co., "A" 245 8,575
----------
$ 25,988
- -----------------------------------------------------------------------------
Railroads - 1.9%
Burlington Northern-Santa Fe 160 $ 13,820
Wisconsin Central Transportation Corp.* 300 11,887
----------
$ 25,707
- -----------------------------------------------------------------------------
Restaurants and Lodging - 6.9%
Host Marriott Corp.* 2,320 $ 37,120
Prime Hospitality Corp.* 1,000 16,125
Promus Hotel Corp.* 800 23,700
Renaissance Hotel Group N.V.* 100 2,350
Servico, Inc.* 600 9,675
Showbiz Pizza Time, Inc.* 200 3,625
----------
$ 92,595
- -----------------------------------------------------------------------------
Stores - 3.1%
Ann Taylor Stores Corp.* 400 $ 7,000
Gymboree Corp.* 300 6,863
Rite Aid Corp. 370 14,708
Sears, Roebuck & Co. 300 13,837
----------
$ 42,408
- -----------------------------------------------------------------------------
Supermarkets - 1.3%
Vons Cos., Inc.* 300 $ 17,963
- -----------------------------------------------------------------------------
Telecommunications - 6.2%
Cabletron Systems, Inc.* 380 $ 12,635
Cellular Communications International,
Inc.* 2,200 63,800
U.S. Robotics Corp.* 100 7,200
----------
$ 83,635
- -----------------------------------------------------------------------------
Utilities - Telephone - 1.8%
MCI Communications Corp. 760 $ 24,842
- -----------------------------------------------------------------------------
Total U.S. Stocks $1,038,830
- -----------------------------------------------------------------------------
Foreign Stocks - 15.0%
Finland - 2.4%
Huhtamaki Oy (Consumer Goods and Services) 200 $ 9,300
Nokia Corp., ADR (Telecommunications) 400 23,050
----------
$ 32,350
- -----------------------------------------------------------------------------
France - 0.9%
Union Assurances Federale S.A. (Insurance) 100 $ 12,341
- -----------------------------------------------------------------------------
Hong Kong - 2.0%
Cafe de Coral Group (Restaurants and
Lodging) 20,000 $ 5,364
Giordano International Ltd. (Apparel and
Textiles) 8,000 6,826
Liu Chong Hing Bank Ltd. (Banks and Credit
Companies) 2,000 3,336
Wharf Holdings Ltd. (Real Estate Investment
Trusts) 1,000 4,991
Wing Hang Bank Ltd. (Bank and Credit
Companies) 1,500 6,808
----------
$ 27,325
- -----------------------------------------------------------------------------
Italy - 0.8%
Fila Holdings S.p.A., ADR (Apparel and
Textiles) 100 $ 5,812
Olivetti Group (Office Equipment)* 13,600 4,792
----------
$ 10,604
- -----------------------------------------------------------------------------
New Zealand - 2.7%
Lion Nathan Ltd. (Food and Beverage
Products) 3,000 $ 7,185
Sky City Ltd. (Entertainment)* 1,900 10,350
Tranz Rail Holdings Ltd., ADR (Railroads)* 1,040 18,395
----------
$ 35,930
- -----------------------------------------------------------------------------
Philippines - 0.3%
Pilpino Telephone & Telegraph Corp.
(Telecommunications)* 4,800 $ 4,067
- -----------------------------------------------------------------------------
South Korea - 1.3%
Korea Electric Power Corp., ADR (Utilities -
Electric) 500 $ 10,250
Korea Mobile Telecommunications, ADR
(Telecommunications) 618 7,957
----------
$ 18,207
- -----------------------------------------------------------------------------
Sweden - 1.4%
Enator AB (Computer Services)* 480 $ 12,290
Nobel Biocare (Medical and Health Products) 400 7,043
----------
$ 19,333
- -----------------------------------------------------------------------------
United Kingdom - 3.2%
British Petroleum PLC, ADR (Oils) 100 $ 14,137
Jarvis Hotels PLC (Restaurants and Lodging)+ 2,900 7,999
Kwik-Fit Holdings PLC (Automotive) 1,200 4,471
PowerGen PLC (Utilities - Electric) 1,400 13,719
Storehouse PLC (Stores) 700 3,100
----------
$ 43,426
- -----------------------------------------------------------------------------
Total Foreign Stocks $ 203,583
- -----------------------------------------------------------------------------
Total Stocks (Identified Cost, $1,168,334) $1,242,413
- -----------------------------------------------------------------------------
Bonds - 2.2%
- -----------------------------------------------------------------------------
Principal Amount
(000 Omitted)
- -----------------------------------------------------------------------------
Harrah's Jazz Co., 14.25s, 2001** (Identified
Cost, $31,496) $ 60 $ 29,721
- -----------------------------------------------------------------------------
Put Option Purchased - 1.7%
- -------------------------------------------------------------------------------
Principal Amount
of Contracts
Description/Expiration Month/Strike Price (000 Omitted) Value
- -----------------------------------------------------------------------------
S&P Index/September/775 $ 2 $ 9,825
S&P Index/September/800 2 12,500
- -----------------------------------------------------------------------------
Total Put Options Purchased (Premiums Paid, $21,499) $ 22,325
- -----------------------------------------------------------------------------
Short-Term Obligations - 3.0%
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted)
- -----------------------------------------------------------------------------
Federal Home Loan Bank, due 1/02/97,
at Amortized Cost $ 40 $ 39,988
- -----------------------------------------------------------------------------
Total Investments (Identified Cost, $1,261,317) $1,334,447
Other Assets, Less Liabilities - 1.2% 16,808
- -----------------------------------------------------------------------------
Net Assets - 100.0% $1,351,255
- -----------------------------------------------------------------------------
*Non-income producing security.
**Non-income producing security - in default.
+Restricted security.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ----------------------------------------------------------------------------
December 31, 1996
- ----------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $1,261,317) $1,334,447
Cash 3,534
Receivable for Series shares sold 9,996
Interest and dividends receivable 1,752
Deferred organization expenses 8,499
----------
Total assets $1,358,228
----------
Liabilities:
Payable for Series shares reacquired $ 24
Payable to affiliate for management fee 81
Accrued expenses and other liabilities 6,868
----------
Total liabilities $ 6,973
----------
Net assets $1,351,255
==========
Net assets consist of:
Paid-in capital $1,279,148
Unrealized appreciation on investments and translation of
assets and liabilities in foreign currencies 73,135
Accumulated net realized loss on investments and foreign
currency transactions (1,028)
----------
Total $1,351,255
==========
Shares of beneficial interest outstanding 126,723
=======
Net asset value per share
(net assets of $1,351,255 / 126,723 shares of beneficial
interest outstanding) $10.66
======
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- --------------------------------------------------------------------------
Period Ended December 31, 1996*
- --------------------------------------------------------------------------
Net investment income:
Income -
Dividends $ 5,551
Interest 1,832
-------
Total investment income $ 7,383
-------
Expenses -
Management fee $ 3,196
Trustees' compensation 508
Shareholder servicing agent fee 145
Printing 6,506
Auditing fees 2,006
Legal fees 1,922
Amortization of organization expenses 689
Custodian fee 469
Miscellaneous 982
-------
Total expenses $16,423
Fees paid indirectly (84)
Reduction of expenses by investment adviser (12,079)
-------
Net expenses $ 4,260
-------
Net investment income $ 3,123
-------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $18,596
Foreign currency transactions (56)
-------
Net realized gain on investments and foreign currency
transactions $18,540
-------
Change in unrealized appreciation -
Investments $73,130
Translation of assets and liabilities in foreign
currencies 5
-------
Net unrealized gain on investments and foreign currency
translation $73,135
-------
Net realized and unrealized gain on investments and
foreign currency $91,675
-------
Increase in net assets from operations $94,798
=======
*For the period from the commencement of investment operations, August 14,
1996 to December 31, 1996.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statements of Changes in Net Assets
- ---------------------------------------------------------------------------
Period Ended December 31, 1996*
Increase (decrease) in net assets:
From operations -
Net investment income $ 3,123
Net realized gain on investments and foreign currency
transactions 18,540
Net unrealized gain on investments and foreign currency
translation 73,135
----------
Increase in net assets from operations $ 94,798
----------
Distributions declared to shareholders -
From net investment income $ (3,068)
From net realized gain on investments and foreign currency
transactions (18,540)
In excess of net realized gain on investments and foreign
currency transactions (1,083)
Tax return of capital (3,853)
----------
Total distributions declared to shareholders $ (26,544)
----------
Series share (principal) transactions -
Net proceeds from sale of shares $1,251,706
Net asset value of shares issued to shareholders in
reinvestment of distributions 26,544
Cost of shares reacquired (3,849)
----------
Increase in net assets from Series share transactions $1,274,401
----------
Total increase in net assets $1,342,655
Net assets:
At beginning of period 8,600
----------
At end of period $1,351,255
==========
*For the period from the commencement of investment operations, August 14,
1996 to December 31, 1996.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights
- ---------------------------------------------------------------------------
Period Ended December 31, 1996*
- ---------------------------------------------------------------------------
Per share data (for a share outstanding throughout the period):
Net asset value - beginning of period $ 10.00
-------
Income from investment operations# -
Net investment income(S) $ 0.07
Net realized and unrealized gain on investments
and foreign currency transactions 0.88
-------
Total from investment operations $ 0.95
-------
Less distributions declared to shareholders -
From net investment income $ (0.03)
From net realized gain on investments and foreign currency
transactions (0.21)
In excess of net realized gain on investments and foreign
currency transactions (0.01)
Tax return of capital (0.04)
-------
Total distributions declared to shareholders $ (0.29)
-------
Net asset value - end of period $ 10.66
=======
Total return 8.78%++
Ratios (to average net assets)/Supplemental data(S):
Expenses 1.00%+
Net investment income 1.72%+
Portfolio turnover 44%
Average commission rate $0.0204
Net assets at end of period (000 omitted) $1,351
*For the period from the commencement of investment operations, August 14,
1996 to December 31, 1996.
+Annualized.
++Not annualized.
#Per share data is based on average shares outstanding.
(S)The Adviser voluntarily agreed to maintain the expenses of the Series at
not more than 1.00% of average daily net assets. To the extent actual
expenses were over these limitations, the net investment loss per share
and the ratios would have been:
Net investment loss $ (0.04)
Ratios (to average net assets):
Expenses 3.83%+
Net investment loss (1.11)%+
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Value Series (the Series) is a diversified series of MFS Variable
Insurance Trust (the Trust) which is comprised of the following 12 series: MFS
Bond Series, MFS Emerging Growth Series, MFS Growth with Income Series, MFS
High Income Series, MFS Limited Maturity Series, MFS Money Market Series, MFS
Research Series, MFS Strategic Fixed Income Series, MFS Total Return Series,
MFS Utilities Series, MFS Value Series and MFS World Governments Series. The
Trust is organized as a Massachusetts business trust and is registered under
the Investment Company Act of 1940, as amended, as an open-end management
investment company.
The shareholders of each Series of the Trust are separate accounts of
insurance companies which offer variable annuity and/or life insurance
products. As of December 31, 1996 there were eight shareholders in the Series.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investments in foreign securities are vulnerable to the effects of changes in
the relative values of the local currency and the U.S. dollar and to the
effects of changes in each country's legal, political and economic
environment.
Investment Valuations - Equity securities listed on securities exchanges or
reported through the NASDAQ system are valued at last sale prices. Unlisted
equity securities or listed equity securities for which last sale prices are
not available are valued at last quoted bid prices. Debt securities (other
than short-term obligations which mature in 60 days or less), including listed
issues and forward contracts, are valued on the basis of valuations furnished
by dealers or by a pricing service with consideration to factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data, without exclusive reliance upon exchange or over-the-counter prices.
Short-term obligations, which mature in 60 days or less, are valued at
amortized cost, which approximates market value. Options listed on commodities
exchanges are valued at closing settlement prices. Over-the-counter options
are valued by brokers through the use of a pricing model which takes into
account closing bond valuations, implied volatility and short-term repurchase
rates. Securities for which there are no such quotations or valuations are
valued at fair value as determined in good faith by or at the direction of the
Trustees.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases
and sales of foreign investments, income and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates
of such transactions. Gains and losses attributable to foreign currency
exchange rates on sales of securities are recorded for financial statement
purposes as net realized gains and losses on investments. Gains and losses
attributable to foreign exchange rate movements on income and expenses are
recorded for financial statement purposes as foreign currency transaction
gains and losses. That portion of both realized and unrealized gains and
losses on investments that result from fluctuations in foreign currency
exchange rates is not separately disclosed.
Deferred Organization Expenses - Costs incurred by the Series in connection
with its organization have been deferred and are being amortized on a
straight-line basis over a five-year period beginning on the date of
commencement of Series operations.
Forward Foreign Currency Exchange Contracts - The Series may enter into
forward foreign currency exchange contracts for the purchase or sale of a
specific foreign currency at a fixed price on a future date. Risks may arise
upon entering into these contracts from the potential inability of
counterparties to meet the terms of their contracts and from unanticipated
movements in the value of a foreign currency relative to the U.S. dollar. The
Series will enter into forward contracts for hedging purposes as well as for
non-hedging purposes. For hedging purposes, the Series may enter into
contracts to deliver or receive foreign currency it will receive from or
require for its normal investment activities. The Series may also use
contracts in a manner intended to protect foreign currency-denominated
securities from declines in value due to unfavorable exchange rate movements.
For non-hedging purposes, the Series may enter into contracts with the intent
of changing the relative exposure of the Series' portfolio of securities to
different currencies to take advantage of anticipated changes. The forward
foreign currency exchange contracts are adjusted by the daily exchange rate of
the underlying currency and any gains or losses are recorded for financial
statement purposes as unrealized until the contract settlement date.
Investment Transactions and Income - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
and original issue discount are amortized or accreted for financial statement
and tax reporting purposes as required by federal income tax regulations.
Dividend income is recorded on the ex-dividend date for dividends received in
cash. Dividend and interest payments received in additional securities are
recorded on the ex-dividend or ex-interest date in an amount equal to the
value of the security on such date.
Fees Paid Indirectly - The Series' custodian bank calculates its fee based on
the Series' average daily net assets. This fee is reduced according to an
expense offset arrangement with State Street Bank, the dividend disbursing
agent, which provides for partial reimbursement of custody fees based on a
formula developed to measure the value of cash deposited by the Series with
the custodian and with the dividend disbursing agent. This amount is shown as
a reduction of expenses on the Statement of Operations.
Tax Matters and Distributions - The Series' policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. The Series files a tax
return annually using tax accounting methods required under provisions of the
Code which may differ from generally accepted accounting principles, the basis
on which these financial statements are prepared. Accordingly, the amount of
net investment income and net realized gain reported on these financial
statements may differ from that reported on the Series' tax return and,
consequently, the character of distributions to shareholders reported in the
financial highlights may differ from that reported to shareholders on Form
1099-DIV. Foreign taxes have been provided for on interest and dividend income
earned on foreign investments in accordance with the applicable country's tax
rates and to the extent unrecoverable are recorded as a reduction of
investment income. The Series expects to pass through to shareholders foreign
income taxes paid. The election increases the taxable distributions of the
Series by the amount of the foreign taxes paid. An individual shareholder who
itemizes deductions, or a corporate shareholder, will be able to claim an
offsetting deduction or a tax credit (but not both) on their federal income
tax returns. Individuals who do not itemize deductions may claim a foreign tax
credit but not a deduction. The foreign source income is considered passive
income for the purpose of computing the foreign tax credit limitations.
Distributions to shareholders are recorded on the ex-dividend date.
The Series distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a tax return
of capital. Differences in the recognition or classification of income between
the financial statements and tax earnings and profits which result in
temporary over-distributions for financial statement purposes, are classified
as distributions in excess of net investment income or accumulated net
realized gains. During the period ended Decemer 31, 1996, $55 was reclassified
from accumulated undistributed net investment income to accumulated net
realized loss on investments and foreign currency due to differences between
book and tax accounting for currency transactions. This change had no effect
on the net assets or net asset value per share. At December 31, 1996,
accumulated net realized loss on investments and foreign currency transactions
under book accounting were different from tax accounting due to temporary
differences in accounting for wash sales.
(3) Transactions with Affiliates
Investment Adviser - The Series has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an effective annual rate
of 0.75% of average daily net assets. Under a temporary expense limitation
agreement with MFS, MFS has voluntarily agreed to pay all of the Series'
operating expenses, exclusive of management fees, which exceed 0.25% of the
Series' average daily net assets. The Series in turn will pay MFS an expense
reimbursement fee not greater than 0.25% of the Series' average daily net
assets. To the extent that the expense reimbursement fee exceeds the Series'
actual expenses, the excess will be applied to amounts paid by MFS in prior
years. At December 31, 1996, the aggregate unreimbursed expenses owed to MFS
by the Series amounted to $12,079.
The Series pays no compensation directly to its Trustees who are officers of
the investment adviser, or to officers of the Series, all of whom receive
remuneration for their services to the Series from MFS. Certain officers and
Trustees of the Series are officers or directors of MFS and MFS Service
Center, Inc. (MFSC).
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as
a percentage of the average daily net assets at an effective annual rate of up
to 0.035%.
(4) Portfolio Securities
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions and short-term obligations, aggregated
$1,659,247 and $478,962, respectively.
The cost and unrealized appreciation or depreciation in value of the
investments owned by the Series, as computed on a federal income tax basis,
are as follows:
Aggregate cost $1,261,317
==========
Gross unrealized appreciation $ 112,716
Gross unrealized depreciation (39,586)
----------
Net unrealized appreciation $ 73,130
==========
(5) Shares of Beneficial Interest
The Series' Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par
value). Transactions in Series shares were as follows:
Period Ended
December 31, 1996*
------------------------
Shares Amount
- ------------------------------------------------------------------------------
Shares sold 123,715 $1,251,706
Shares issued to shareholders in reinvestment
of distributions 2,506 26,544
Shares reacquired (358) (3,849)
------- ----------
Net increase 125,863 $1,274,401
======= ==========
*For the period from the commencement of investment operations, August 14,
1996 to December 31, 1996.
(6) Line of Credit
The Series entered into an agreement which enables it to participate with
other funds managed by MFS in an unsecured line of credit with a bank which
permits borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Series shares. Interest is charged to
each fund, based on its borrowings, at a rate equal to the bank's base rate.
In addition, a commitment fee, based on the average daily unused portion of
the line of credit, is allocated among the participating funds at the end of
each quarter. The commitment fee allocated to the Series for the period ended
December 31, 1996 was $6.
(7) Restricted Security
The Series may invest not more than 15% of its net assets in securities which
are subject to legal or contractual restrictions on resale. At December 31,
1996, the Series owned the following restricted security (consisting of 0.6%
of net assets) which may not be publicly sold without registration under the
Securities Act of 1993. The Series does not have the right to demand that such
security be registered. The value of this security is determined by valuations
supplied by a pricing service or brokers or, if not available, in good faith
by or at the direction of the Trustees.
Description Date of Acquisition Shares Cost Value
- -----------------------------------------------------------------------------
Jarvis Hotels PLC 8/16/96 - 8/23/96 2,900 $7,487 $7,999
======
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Variable Insurance Trust and Shareholders of MFS Value
Series:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of MFS Value Series (the Series) (one of the
series constituting MFS Variable Insurance Trust) as of December 31, 1996, the
related statement of operations for the year then ended, the statements of
changes in net assets and financial highlights for the period from August 14,
1996 (commencement of investment operations) to December 31, 1996. These
financial statements and financial highlights are the responsibility of the
Series' management. Our responsibility is to express an opinion on these
financial statements and financial highlights 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 financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of the
securities owned at December 31, 1996 by correspondence with the custodian and
brokers. 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 provide a
reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Value Series
at December 31, 1996, the results of its operations, the changes in its net
assets, and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 7, 1997
---------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
VGS-2/97 230
<PAGE>
Annual Report
[Logo] for year Ended
INVESTMENT MANAGEMENT December 31, 1996
MFS(R) RESEARCH SERIES
A Series of MFS(R) Variable Insurance Trust
[Graphic Omitted]
<PAGE>
MFS(R) RESEARCH SERIES
A Series of MFS(R) Variable Insurance Trust
TRUSTEES INVESTMENT ADVISER
A. Keith Brodkin* Massachusetts Financial Services Company
Chairman and President 500 Boylston Street
Boston, MA 02116-3741
Nelson J. Darling, Jr.
Trustee, Eastern Enterprises DISTRIBUTOR
(diversified holding company) MFS Fund Distributors, Inc.
500 Boylston Street
William R. Gutow Boston, MA 02116-3741
Vice Chairman,
Capitol Entertainment Management SHAREHOLDER SERVICE CENTER
Company MFS Service Center, Inc.
(Blockbuster Video Franchise) P.O. Box 1400
Boston, MA 02107-9906
DIRECTOR OF RESEARCH
Kevin R. Parke* For additional information,
contact your financial adviser.
TREASURER
W. Thomas London* CUSTODIAN
Investors Bank & Trust Company
ASSISTANT TREASURER
James O. Yost* AUDITORS
Deloitte & Touche LLP
SECRETARY
Stephen E. Cavan* WORLD WIDE WEB
www.mfs.com
ASSISTANT SECRETARY
James R. Bordewick, Jr.*
*Affiliated with the Investment Adviser
<PAGE>
Dear Contract Owner:
The pattern of slow but sustainable growth seen in most of the world in 1996
seems likely to continue in 1997. While it looks as if U.S. growth in 1997 will
slow modestly relative to 1996, there is evidence that Europe and, to a lesser
degree, Japan are continuing their recoveries from recession. At the same time,
companies in many emerging markets are reporting robust increases in earnings as
these markets benefit from higher-than-average economic growth and market
reforms, which should continue to provide more opportunities for development and
trade.
After more than six years of expansion, the U.S. economy appears headed
toward another year of at least moderate growth in 1997, although a few signs
point to the possibility of a modest rise in inflation during the year. On the
positive side, the pattern of moderate growth and inflation set over the past
few years now seems fairly well entrenched in the economy and, short of a major
international or domestic crisis, appears to have enough momentum to remain on
track for some time. Recent gains in such important sectors as housing,
automobiles, industrial production, and exports indicate a fair amount of
underlying strength in the economy. However, some reason for caution can be seen
in the continuing high level of consumer debt and the attendant rise in personal
bankruptcies, as well as in the modestly disappointing levels of holiday sales.
Also, the ongoing tightness in labor markets, and price rises in such important
sectors as energy, could add some inflationary pressures to the economy. Given
these somewhat conflicting indicators, we expect real (inflation-adjusted)
growth to revolve around 2% in 1997, which would represent a modest decline from
1996.
We continue to urge U.S. equity investors to lower their expectations for
1997 and to point out that the impressive gains of the past two years are not
sustainable. Just as the slowdown in corporate earnings growth and increases in
interest rates in 1996 raised some near-term concerns, further interest rate
increases and an acceleration of inflation could negatively affect the stock
market in 1997. However, to the extent that some slowdown in earnings means that
the economy is not overheating, this may be beneficial for the equity market in
the long run. Also, we believe many of the technology-driven productivity gains
that U.S. companies have made in recent years will continue to enhance corporate
America's competitiveness and profitability. Therefore, while we have some
near-term concerns, we remain reasonably positive about the long-term viability
of the equity market.
In U.S. bond markets, conflicting signals over the strength of the economy
have created near-term volatility. Even comments by Federal Reserve Chairman
Alan Greenspan late in 1996 created some uncertainty over the Federal Reserve
Board's next move. We expect the Fed to maintain its anti-inflationary stance
should signs of more rapid economic growth and, particularly, higher inflation
resurface. While inflationary forces largely remained in check in 1996, the
continued strength in the labor market and rising energy prices mean that a
pickup in inflation is still possible. At the same time, the U.S. budget deficit
continues to decline and, as a percentage of gross domestic product, is now less
than 2%, which we consider a positive development for the bond markets. Although
interest rates may move higher over the coming months, we believe that, at
current levels, fixed-income markets remain equitably valued.
Internationally, the environment of moderate growth, benign inflation, and
fairly steady interest rates is also providing support for investment markets
and should help support valuation levels in the coming year. Throughout the
world, the key to stock market performance in 1997 will be corporate earnings
growth. While U.S. earnings growth is slowing but still expected to be fairly
healthy, we anticipate that a number of European countries will see an
acceleration in earnings growth and improved valuations in 1997. Despite this
environment, many European countries trade at discounts to the United States. In
particular, we see opportunities in some of the multinationals and businesses
with the ability to generate steady earnings growth. In Japan, a recovery
appears to be taking place, but at a very modest rate, with valuations still at
high levels. In the emerging markets, the long-term economic growth story
remains intact and, although selectivity is even more important in these
markets, more companies are benefiting from this growth and trading at
below-average global valuations.
<PAGE>
Comments from the Director of Research are presented below. We appreciate
your support and welcome any questions or comments you may have.
Respectfully,
/s/ A. Keith Brodkin /s/ Kevin R. Parke
A. Keith Brodkin Kevin R. Parke
Chairman and President Director of Research
January 16, 1997
A Committee of MFS Research Analysts is responsible for the day-to-day
management of the Series under the general supervision of Mr. Parke.
MFS RESEARCH SERIES
For the year ended December 31, 1996, the Series provided a total return of
22.33% (including the reinvestment of distributions). This compares to a return
of 22.64% for the Standard & Poor's 500 Composite Index (the S&P 500), a
popular, unmanaged index of common stock performance, for the same period.
The Series remains overweighted compared to the S&P 500 in several sectors
including technology, industrial goods and services, consumer staples, and
business services. Relatively neutral weightings to the S&P 500 include
financial services, health care, retailing, and leisure. The Series continues to
be underweighted in energy and in utilities and communications.
Within the technology sector, there were several stocks which contributed
to the Series' performance over the past 12 months. Software companies including
Microsoft, Compuware, BMC Software, and Cisco Systems have established solid
competitive standings within their industry which has led to successful stock
performance.
Several companies within the financial services sector have also performed
well during the past year. Life insurance companies such as Conseco, Allstate,
and ITT Hartford have implemented several cost-savings initiatives which
contributed to recent earnings. Additionally, several banks benefited from the
consolidation in the industry. Both Chase Manhattan and BankBoston proved that a
successful merger or acquisition, coupled with a strong management team, can
contribute to earnings much sooner than anticipated.
While the Series was underweighted in both energy and in utilities and
communications, three companies provided strong returns over the past year.
Newfield Exploration and PanEnergy Corporation proved to have been excellent
additions. Meanwhile, MCI Communications appreciated following the announcement
of a planned acquisition by British Telecommunications PLC.
DIVIDENDS-RECEIVED DEDUCTION
The MFS Research Series has designated $42,311 as a long-term capital gain.
For the year ended December 31, 1996, the amount of distributions from
income eligible for the 70% dividends-received deduction for corporations came
to 20.77%.
<PAGE>
PERFORMANCE SUMMARY
The information below illustrates the historical performance of MFS Research
Series shares in comparison to various market indicators. Benchmark comparisons
are unmanaged and do not reflect any fees or expenses. You cannot invest in an
index.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the Period from August 1, 1995 through December 31, 1996)
MFS S&P 500 Consumer Price
Research Series Composite Index Index - U.S.
--------------- --------------- --------------
8/95 10000.0 10000.0 10000.0
12/95 11062.0 11063.0 10059.0
3/96 11702.0 11659.0 10198.0
6/96 12403.0 12177.0 10272.0
9/96 12880.0 12548.0 10348.0
12/96 13532.0 13591.0 10420.0
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1996
1 Year Life+
- -------------------------------------------------------------------------------
MFS Research Series +22.33% +23.46%
- -------------------------------------------------------------------------------
Standard & Poor's 500++ +22.64% +26.72%
- -------------------------------------------------------------------------------
Consumer Price Index*++ + 3.56% + 2.91%
- -------------------------------------------------------------------------------
+For the period from the commencement of investment operations, July 26, 1995
to December 31, 1996.
*The Consumer Price Index is a popular measure of change in prices.
++Source: CDA/Wiesenberger.
Returns shown do not reflect the deduction of the mortality and expense risk
charges and administration fees. Please refer to the product's annual report for
performance that reflects the fees and charges imposed by insurance company
separate accounts.
Investment return and principal value will fluctuate, and shares, when redeemed,
may be worth more or less than their original cost. Past performance is no
guarantee of future results.
Series results reflect any applicable expense subsidies and waivers, without
which the performance results would have been less favorable. Subsidies and
waivers may be rescinded at any time. See the prospectus for details.
<PAGE>
PORTFOLIO OF INVESTMENTS - December 31, 1996
Stocks - 94.2%
- -----------------------------------------------------------------------------
Issuer Shares Value
- -----------------------------------------------------------------------------
U.S. Stocks - 85.6%
Aerospace - 6.2%
General Dynamics Corp. 3,700 $ 260,850
Lockheed-Martin Corp. 5,400 494,100
McDonnell Douglas Corp. 12,000 768,000
United Technologies Corp. 10,200 673,200
-----------
$ 2,196,150
- -----------------------------------------------------------------------------
Agricultural Products - 1.6%
Case Corp. 10,300 $ 561,350
- -----------------------------------------------------------------------------
Apparel and Textiles - 0.7%
Nike, Inc., "B" 2,500 $ 149,375
Reebok International Ltd. 2,400 100,800
-----------
$ 250,175
- -----------------------------------------------------------------------------
Automotive - 0.4%
Goodrich (B.F.) Co. 3,700 $ 149,850
- -------------------------------------------------------------------------------
Banks and Credit Companies - 3.5%
Bank of Boston Corp. 4,140 $ 265,995
Chase Manhattan Corp. 5,732 511,581
Compass Bancshares, Inc. 1,300 51,675
Crestar Financial Corp. 2,300 171,063
Fleet Financial Group, Inc. 4,800 239,400
-----------
$ 1,239,714
- -----------------------------------------------------------------------------
Building - 0.6%
Newport News Shipbuilding, Inc.* 14,900 $ 223,500
- -----------------------------------------------------------------------------
Business Machines - 0.9%
Affiliated Computer Co.* 1,100 $ 32,725
Sun Microsystems, Inc.* 11,000 282,562
-----------
$ 315,287
- -----------------------------------------------------------------------------
Business Services - 3.4%
Accustaff, Inc.* 21,400 $ 452,075
Alco Standard Corp. 6,800 351,050
DST Systems, Inc. 8,300 260,413
Technology Solutions Co.* 3,500 145,250
-----------
$ 1,208,788
- -----------------------------------------------------------------------------
Chemicals - 4.0%
Air Products & Chemicals, Inc. 8,900 $ 615,212
Praxair, Inc. 17,200 793,350
-----------
$ 1,408,562
- -----------------------------------------------------------------------------
Computer Software - Personal Computers - 3.2%
Electronic Arts, Inc.* 8,700 $ 260,456
First Data Corp. 7,400 270,100
Microsoft Corp.* 7,600 627,950
-----------
$ 1,158,506
- -----------------------------------------------------------------------------
Computer Software - Systems - 6.2%
Adobe Systems, Inc. 6,000 $ 224,250
BMC Software, Inc.* 7,800 322,725
Cadence Design Systems, Inc.* 8,175 324,956
Computer Associates International, Inc. 5,150 256,212
Compuware Corp.* 2,100 105,263
Oracle Systems Corp.* 15,500 647,125
Sybase, Inc.* 5,300 88,444
Synopsys, Inc.* 5,300 245,125
-----------
$ 2,214,100
- -----------------------------------------------------------------------------
Consumer Goods and Services - 10.1%
Colgate-Palmolive Co. 6,500 $ 599,625
Estee Lauder Cos., "A" 3,700 188,237
Gillette Co. 6,900 536,475
Philip Morris Cos., Inc. 7,500 844,688
Procter & Gamble Co. 5,400 580,500
Revlon, Inc., "A"* 5,500 164,312
Sherwin-Williams Co. 6,100 341,600
Tyco International Ltd. 6,600 348,975
-----------
$ 3,604,412
- -----------------------------------------------------------------------------
Defense Electronics - 0.7%
Loral Space & Communications Corp.* 13,600 $ 249,900
- -----------------------------------------------------------------------------
Electronics - 1.2%
Analog Devices, Inc.* 4,700 $ 159,212
LSI Logic Corp.* 2,400 64,200
Lattice Semiconductor Corp.* 1,300 59,800
Xilinx, Inc.* 4,300 158,294
-----------
$ 441,506
- -----------------------------------------------------------------------------
Entertainment - 1.8%
Clear Channel Communications, Inc.* 1,700 $ 61,413
Jacor Communications, Inc.* 8,600 235,425
Showboat, Inc. 3,200 55,200
Viacom, Inc., "B"* 8,700 303,412
-----------
$ 655,450
- -----------------------------------------------------------------------------
Financial Institutions - 2.1%
Advanta Corp., "B" 9,600 $ 392,400
Union Planters Corp. 9,218 359,483
-----------
$ 751,883
- -----------------------------------------------------------------------------
Food and Beverage Products - 2.6%
Earthgrains Co. 3,500 $ 182,875
McCormick & Co., Inc. 9,100 214,419
PepsiCo, Inc. 6,300 184,275
Tyson Foods, Inc., "A" 10,000 342,500
-----------
$ 924,069
- -----------------------------------------------------------------------------
Forest and Paper Products - 1.8%
Kimberly-Clark Corp. 6,600 $ 628,650
- -----------------------------------------------------------------------------
Insurance - 6.7%
Allstate Corp. 6,600 $ 381,975
Amerin Corp.* 3,500 90,125
CIGNA Corp. 4,000 546,500
Chubb Corp. 4,100 220,375
Conseco, Inc. 2,900 184,875
Equitable of Iowa Cos. 3,700 169,737
ITT Hartford Group, Inc. 4,200 $ 283,500
Penncorp Financial Group, Inc. 13,900 500,400
-----------
$ 2,377,487
- -----------------------------------------------------------------------------
Medical and Health Products - 2.9%
Pfizer, Inc. 3,500 $ 290,063
Pharmacia & Upjohn, Inc. 6,200 245,675
Rhone-Poulenc Rorer, Inc. 2,200 171,875
Uromed Corp.* 12,400 120,900
Ventritex, Inc.* 8,000 197,000
Zoll Medical Corp.* 1,000 10,750
-----------
$ 1,036,263
- -----------------------------------------------------------------------------
Medical and Health Technology and Services - 4.3%
Coventry Corp.* 3,700 $ 34,283
Pacificare Health Systems, Inc., "A"* 4,400 357,500
Pacificare Health Systems, Inc., "B"* 1,100 93,775
RISCORP, Inc., "A"* 1,900 6,887
St. Jude Medical, Inc.* 13,400 571,175
United Healthcare Corp. 10,700 481,500
-----------
$ 1,545,120
- -----------------------------------------------------------------------------
Oil Services - 0.6%
Transocean Offshore, Inc. 3,300 $ 206,662
- -----------------------------------------------------------------------------
Oils - 2.0%
Barrett Resources Corp.* 4,500 $ 191,813
Mobil Corp. 3,000 366,750
Newfield Exploration Co.* 5,800 150,800
-----------
$ 709,363
- -----------------------------------------------------------------------------
Railroads - 3.2%
Burlington Northern-Santa Fe 3,700 $ 319,587
Conrail, Inc. 2,254 224,555
Wisconsin Central Transportation Corp.* 15,400 610,225
-----------
$ 1,154,367
- -----------------------------------------------------------------------------
Restaurants and Lodging - 3.4%
HFS, Inc.* 9,800 $ 585,550
Host Marriott Corp.* 24,400 390,400
MGM Grand, Inc.* 6,500 226,688
Promus Hotel Corp.* 900 26,662
-----------
$ 1,229,300
- -----------------------------------------------------------------------------
Special Products and Services - 0.8%
Stanley Works 11,100 $ 299,700
- -----------------------------------------------------------------------------
Stores - 3.3%
Ann Taylor Stores* 9,600 $ 168,000
CompUSA, Inc.* 12,500 257,813
Gymboree Corp.* 8,100 185,287
Hollywood Entertainment Corp.* 1,400 25,900
Home Depot, Inc. 4,000 200,500
Lowe's Cos., Inc. 5,000 177,500
Micro Warehouse, Inc.* 1,400 16,450
Staples, Inc.* 8,300 149,919
-----------
$ 1,181,369
- -----------------------------------------------------------------------------
Supermarkets - 1.3%
Safeway, Inc.* 10,700 $ 457,425
- -----------------------------------------------------------------------------
Telecommunications - 2.8%
Ascend Communications, Inc.* 800 $ 49,700
Cabletron Systems, Inc.* 5,000 166,250
Cisco Systems, Inc.* 5,300 337,213
Glenayre Technologies, Inc.* 9,600 207,000
Lucent Technologies, Inc. 5,100 235,875
-----------
$ 996,038
- -----------------------------------------------------------------------------
Utilities - Gas - 2.2%
Coastal Corp. 8,500 $ 415,437
PanEnergy Corp. 8,400 378,000
-----------
$ 793,437
- -----------------------------------------------------------------------------
Utilities - Telephone - 1.1%
MCI Communications Corp. 12,400 $ 405,325
- -----------------------------------------------------------------------------
Total U.S. Stocks $30,573,708
- -----------------------------------------------------------------------------
Foreign Stocks - 8.6%
Denmark - 0.2%
ISS International Service System A/S, "B"
(Business Services) 3,100 $ 81,599
- -----------------------------------------------------------------------------
Finland - 0.7%
Huhtamake Group (Conglomerates) 4,500 $ 209,252
TT Tieto OY, "B" (Computer Software - Systems) 600 50,703
-----------
$ 259,955
- -----------------------------------------------------------------------------
France - 0.4%
Union Assurances Federale S.A. (Insurance) 1,200 $ 148,091
- -----------------------------------------------------------------------------
Germany
SAP AG (Computer Software - Systems) 100 $ 13,767
- -----------------------------------------------------------------------------
Greece - 0.3%
Hellenic Telecommunication Organization
S.A. (Telecommunications) 5,000 $ 85,510
- -----------------------------------------------------------------------------
Hong Kong - 1.9%
Giordano International Ltd. (Apparel and Textiles) 142,000 $ 121,169
Wharf Holdings Ltd. (Real Estate
Investment Trusts) 99,000 494,099
Wing Hang Bank Ltd. (Banks and Credit Companies) 16,500 74,884
-----------
$ 690,152
- -----------------------------------------------------------------------------
Italy - 0.5%
Telecom Italia Mobile S.p.A. (Telecommunications)* 128,100 $ 182,658
- -----------------------------------------------------------------------------
Philippines - 0.2%
Pilipino Telegraph & Telephone Corp.
(Telecommunications) 79,500 $ 67,352
- -----------------------------------------------------------------------------
South Korea - 0.4%
Korea Mobile Telecommunications, ADR
(Telecommunications) 9,952 $ 128,132
- -----------------------------------------------------------------------------
Sweden - 1.8%
Astra AB, Free Shares, "B" (Medical and
Health Products) 8,800 $ 424,827
Enator AB (Computer Services)* 3,560 91,155
Nobel Biocare (Medical and Health Products) 6,700 117,975
-----------
$ 633,957
- -----------------------------------------------------------------------------
United Kingdom - 2.2%
British Petroleum PLC, ADR (Oils) 2,908 $ 411,118
Jarvis Hotels PLC (Restaurants and Lodging)+ 56,800 156,669
Kwik-Fit Holdings PLC (Automotive) 43,800 162,454
Storehouse PLC (Stores) 8,000 35,429
-----------
$ 765,670
- -----------------------------------------------------------------------------
Total Foreign Stocks $ 3,056,843
- -----------------------------------------------------------------------------
Total Stocks (Identified Cost, $31,691,287) $33,630,551
- -----------------------------------------------------------------------------
Short-Term Obligation - 17.1%
- -----------------------------------------------------------------------------
Principal Amount
(000 Omitted)
- -----------------------------------------------------------------------------
Student Loan Marketing Assn., due 1/02/96,
at Amortized Cost $6,100 $ 6,097,882
- -----------------------------------------------------------------------------
Total Investments (Identified Cost, $37,789,169) $39,728,433
Other Assets, Less Liabilities - (11.3)% (4,018,047)
- -----------------------------------------------------------------------------
Net Assets - 100.0% $35,710,386
- -----------------------------------------------------------------------------
*Non-income producing security.
+Restricted security.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- -------------------------------------------------------------------------------
December 31, 1996
- -------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $37,789,169) $39,728,433
Cash 12,608
Receivable for Series shares sold 402,978
Interest and dividends receivable 32,530
Receivable from investment adviser 32,111
Deferred organization expenses 6,556
Other assets 678
-----------
Total assets $40,215,894
-----------
Liabilities:
Payable for Series shares reacquired $ 3,555
Payable for investments purchased 4,463,028
Payable to affiliate for management fee 2,146
Accrued expenses and other liabilities 36,779
-----------
Total liabilities $ 4,505,508
-----------
Net assets $35,710,386
===========
Net assets consist of:
Paid-in capital $33,784,941
Unrealized appreciation on investments and translation of
assets and liabilities in foreign currencies 1,939,303
Accumulated net realized loss on investments and foreign
currency transactions (14,261)
Accumulated undistributed net investment income 403
-----------
Total $35,710,386
===========
Shares of beneficial interest outstanding 2,719,712
=========
Net asset value per share
(net assets of $35,710,386 / 2,719,712 shares of beneficial
interest outstanding) $13.13
======
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- -------------------------------------------------------------------------------
Year Ended December 31, 1996
- -------------------------------------------------------------------------------
Net investment income:
Income -
Dividends $ 124,226
Interest 58,384
Foreign taxes withheld (1,755)
-----------
Total investment income $ 180,855
-----------
Expenses -
Management fee $ 92,348
Trustees' compensation 2,033
Shareholder servicing agent fee 4,217
Printing 30,815
Auditing fees 29,156
Registration fees 11,131
Custodian fee 7,005
Amortization of organization expenses 1,842
Legal fees 1,138
Miscellaneous 969
-----------
Total expenses $ 180,654
Fees paid indirectly (664)
Reduction of expenses by investment adviser (56,859)
-----------
Net expenses $ 123,131
-----------
Net investment income $ 57,724
-----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 435,932
Foreign currency transactions (1,335)
-----------
Net realized gain on investments and foreign
currency transactions $ 434,597
-----------
Change in unrealized appreciation -
Investments $ 1,826,282
Translation of assets and liabilities in foreign
currencies 38
-----------
Net unrealized gain on investments and foreign
currency translation $ 1,826,320
-----------
Net realized and unrealized gain on investments
and foreign currency $ 2,260,917
-----------
Increase in net assets from operations $ 2,318,641
===========
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
Year Ended Period Ended
December 31, 1996 December 31, 1995*
- --------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment income $ 57,724 $ 6,749
Net realized gain on investments and
foreign currency transactions 434,597 31,088
Net unrealized gain on investments and
foreign currency translation 1,826,320 112,983
----------- -----------
Increase in net assets from operations $ 2,318,641 $ 150,820
----------- -----------
Distributions declared to shareholders -
From net investment income $ (55,987) $ (6,583)
From net realized gain on investments and
foreign currency transactions (434,345) (31,088)
In excess of net realized gain on
investments and foreign currency
transactions (15,595) (418)
----------- -----------
Total distributions declared to
shareholders $ (505,927) $ (38,089)
----------- -----------
Series share (principal) transactions -
Net proceeds from sale of shares $36,570,809 $ 2,485,755
Net asset value of shares issued to
shareholders in reinvestment of
distributions 505,927 38,091
Cost of shares reacquired (5,709,233) (115,008)
----------- -----------
Increase in net assets from Series
share transactions $31,367,503 $ 2,408,838
----------- -----------
Total increase in net assets $33,180,217 $ 2,521,569
Net assets:
At beginning of period 2,530,169 8,600
----------- -----------
At end of period (including accumulated
undistributed net investment income of
$403 and $0, respectively) $35,710,386 $ 2,530,169
=========== ===========
*For the period from the commencement of investment operations, July 26, 1995
to December 31, 1995.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights
- -------------------------------------------------------------------------------
Year Ended Period Ended
December 31, 1996 December 31, 1995*
- -------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $10.89 $10.00
------ ------
Income from investment operations# -
Net investment income(S) $ 0.06 $ 0.05
Net realized and unrealized gain on
investments and foreign currency
transactions 2.37 1.01
------ ------
Total from investment operations $ 2.43 $ 1.06
------ ------
Less distributions declared to shareholders -
From net investment income $(0.02) (0.03)
From net realized gain on investments
and foreign currency transactions (0.16) (0.14)
In excess of net realized gain on
investments and foreign currency
transactions (0.01) --
------ ------
Total distributions declared to
shareholders $(0.19) (0.17)
------ ------
Net asset value - end of period $13.13 $10.89
====== ======
Total return 22.33% 10.62%++
Ratios (to average net assets)/
Supplemental data(S):
Expenses 1.00% 1.00%+
Net investment income 0.47% 1.15%+
Portfolio turnover 56% 28%
Average commission rate### $0.0295 --
Net assets at end of period (000 omitted) $35,710 $2,530
*For the period from the commencement of investment operations, July 26, 1995
to December 31, 1995.
+Annualized.
++Not annualized.
#Per share data is based on average shares outstanding.
###Average commission rate is calculated for funds with fiscal years beginning
on or after September 1, 1995.
(S)The adviser voluntarily agreed to maintain the expenses of the Series at not
more than 1.00% of average daily net assets. To the extent actual expenses
were over these limitations, the net investment loss per share and the ratios
would have been:
Net investment loss -- (0.08)
Ratios (to average net assets):
Expenses 1.48% 3.90%+
Net investment loss -- (1.73)%+
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Research Series (the Series) is a diversified series of MFS Variable
Insurance Trust (the Trust) which is comprised of the following 12 series: MFS
Bond Series, MFS Emerging Growth Series, MFS Growth with Income Series, MFS High
Income Series, MFS Limited Maturity Series, MFS Money Market Series, MFS
Research Series, MFS Strategic Fixed Income Series, MFS Total Return Series, MFS
Utilities Series, MFS Value Series, and MFS World Governments Series. The Trust
is organized as a Massachusetts business trust and is registered under the
Investment Company Act of 1940, as amended, as an open-end management investment
company.
The shareholders of each Series of the Trust are separate accounts of insurance
companies which offer variable annuity and/or life insurance products. As of
December 31, 1996 there were 20 shareholders in the Series.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Investments
in foreign securities are vulnerable to the effects of changes in the relative
values of the local currency and the U.S. dollar and to the effects of changes
in each country's legal, political and economic environment.
Investment Valuations - Equity securities listed on securities exchanges or
reported through the NASDAQ system are valued at last sale prices. Unlisted
equity securities or listed equity securities for which last sale prices are not
available are valued at last quoted bid prices. Debt securities (other than
short-term obligations which mature in 60 days or less), including listed
issues, are valued on the basis of valuations furnished by dealers or by a
pricing service with consideration to factors such as institutional-size trading
in similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics and other market data, without exclusive reliance
upon exchange or over-the-counter prices. Short-term obligations, which mature
in 60 days or less, are valued at amortized cost, which approximates market
value. Securities for which there are no such quotations or valuations are
valued at fair value as determined in good faith by or at the direction of the
Trustees.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases and
sales of foreign investments, income and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates of
such transactions. Gains and losses attributable to foreign currency exchange
rates on sales of securities are recorded for financial statement purposes as
net realized gains and losses on investments. Gains and losses attributable to
foreign exchange rate movements on income and expenses are recorded for
financial statement purposes as foreign currency transaction gains and losses.
That portion of both realized and unrealized gains and losses on investments
that result from fluctuations in foreign currency exchange rates is not
separately disclosed.
Deferred Organization Expenses - Costs incurred by the Series in connection with
its organization have been deferred and are being amortized on a straight-line
basis over a five-year period beginning on the date of commencement of Series
operations.
Forward Foreign Currency Exchange Contracts - The Series may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering into these contracts from the potential inability of counterparties to
meet the terms of their contracts and from unanticipated movements in the value
of a foreign currency relative to the U.S. dollar. The Series will enter into
forward contracts for hedging purposes as well as for non-hedging purposes. For
hedging purposes, the Series may enter into contracts to deliver or receive
foreign currency it will receive from or require for its normal investment
activities. The Series may also use contracts in a manner intended to protect
foreign currency-denominated securities from declines in value due to
unfavorable exchange rate movements. For non-hedging purposes, the Series may
enter into contracts with the intent of changing the relative exposure of the
Series' portfolio of securities to different currencies to take advantage of
anticipated changes. The forward foreign currency exchange contracts are
adjusted by the daily exchange rate of the underlying currency and any gains or
losses are recorded for financial statement purposes as unrealized until the
contract settlement date.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for financial statement and
tax reporting purposes as required by federal income tax regulations. Dividend
income is recorded on the ex-dividend date for dividends received in cash.
Dividend and interest payments received in additional securities are recorded on
the ex-dividend or ex-interest date in an amount equal to the value of the
security on such date.
Fees Paid Indirectly - The Series' custodian bank calculates its fee based on
the Series' average daily net assets. This fee is reduced according to an
expense offset arrangement with State Street Bank, the dividend disbursing
agent, which provides for partial reimbursement of custody fees based on a
formula developed to measure the value of cash deposited by the Series with the
custodian and with the dividend disbursing agent. This amount is shown as a
reduction of expenses on the Statement of Operations.
Tax Matters and Distributions - The Series' policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. The Series files a tax
return annually using tax accounting methods required under provisions of the
Code which may differ from generally accepted accounting principles, the basis
on which these financial statements are prepared. Accordingly, the amount of net
investment income and net realized gain reported on these financial statements
may differ from that reported on the Series' tax return and, consequently, the
character of distributions to shareholders reported in the financial highlights
may differ from that reported to shareholders on Form 1099-DIV. Foreign taxes
have been provided for on interest and dividend income earned on foreign
investments in accordance with the applicable country's tax rates and to the
extent unrecoverable are recorded as a reduction of investment income. The
Series expects to pass through to shareholders foreign income taxes paid. The
election increases the taxable distributions of the Series by the amount of the
foreign taxes paid. An individual shareholder who itemizes deductions, or a
corporate shareholder, will be able to claim an offsetting deduction or a tax
credit (but not both) on their federal income tax returns. Individuals who do
not itemize deductions may claim a foreign tax credit but not a deduction. The
foreign source income is considered passive income for the purpose of computing
the foreign tax credit limitations. Distributions to shareholders are recorded
on the ex-dividend date.
The Series distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a tax return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains. During the year ended December 31, 1996, $1,334 was reclassified from
accumulated undistributed net investment income to accumulated net realized loss
on investments and foreign currency transactions due to differences between book
and tax accounting for currency transactions. This change had no effect on the
net assets or net asset value per share. At December 31, 1996, accumulated net
realized loss on investments and foreign currency transactions under book
accounting was different from tax accounting due to temporary differences in
accounting for wash sales.
(3) Transactions with Affiliates
Investment Adviser - The Series has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.75% of
average daily net assets. Under a temporary expense limitation agreement with
MFS, MFS has voluntarily agreed to pay all of the Series' operating expenses,
exclusive of management fees, which exceed 0.25% of the Series' average daily
net assets. The Series in turn will pay MFS an expense reimbursement fee not
greater than 0.25% of the Series' average daily net assets. To the extent that
the expense reimbursement fee exceeds the Series' actual expenses, the excess
will be applied to amounts paid by MFS in prior years. At December 31, 1996, the
aggregate unreimbursed expenses owed to MFS by the Series amounted to $73,772,
including $56,859 incurred in the current year.
The Series pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Series, all of whom receive
remuneration for their services to the Series from MFS. Certain officers and
Trustees of the Series are officers or directors of MFS and MFS Service Center,
Inc. (MFSC).
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as a
percentage of the average daily net assets at an effective annual rate of up to
0.035%.
(4) Portfolio Securities
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions and short-term obligations, aggregated $35,701,131
and $6,650,754, respectively.
The cost and unrealized appreciation or depreciation in value of the investments
owned by the Series, as computed on a federal income tax basis, are as follows:
Aggregate cost $37,789,169
===========
Gross unrealized appreciation $ 2,613,234
Gross unrealized depreciation (673,970)
-----------
Net unrealized appreciation $ 1,939,264
===========
(5) Shares of Beneficial Interest
The Series' Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Series shares were as follows:
<TABLE>
<CAPTION>
Year Ended Period Ended
December 31, 1996 December 31, 1995*
------------------------------- -----------------------------
Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 2,923,453 $36,570,809 238,822 $2,485,755
Shares issued to shareholders in
reinvestment of distributions 38,386 505,927 3,521 38,091
Shares reacquired (474,538) (5,709,233) (10,792) (115,008)
--------- ----------- ------- ----------
Net increase 2,487,301 $31,367,503 231,551 $2,408,838
========= =========== ======= ==========
*For the period from the commencement of investment operations, July 26, 1995 to
December 31, 1995.
</TABLE>
(6) Line of Credit
The Series entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Series shares. Interest is charged to each
fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating funds at the end of each
quarter. The commitment fee allocated to the Series for the year ended December
31, 1996 was $155.
(7) Restricted Security
The Series may invest not more than 15% of its net assets in securities which
are subject to legal or contractual restrictions on resale. At December 31,
1996, the Series owned the following restricted security (constituting 0.4% of
net assets) which may not be publicly sold without registration under the
Securities Act of 1933. The value of this security is determined by valuations
supplied by a pricing service or brokers or, if not available, in good faith by
or at the direction of the Trustees.
Description Date of Acquisition Shares Cost Value
- -------------------------------------------------------------------------------
Jarvis Hotels PLC 6/21/96 - 11/27/96 56,800 $150,129 $156,669
========
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Variable Insurance Trust and
Shareholders of MFS Research Series:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of MFS Research Series (the Series) (one of the
series constituting the MFS Variable Insurance Trust) as of December 31, 1996,
the related statement of operations for the year then ended, the statements of
changes in net assets and financial highlights for the year then ended and for
the period from July 26, 1995 (the commencement of investment operations) to
December 31, 1995. These financial statements and financial highlights are the
responsibility of the Series' management. Our responsibility is to express an
opinion on these financial statements and financial highlights 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 financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned at
December 31, 1996 by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
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 provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Research Series
at December 31, 1996, the results of its operations, the changes in its net
assets, and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 7, 1997
---------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
VFR-2/97 11M
<PAGE>
Annual Report
[logo] for Year Ended
INVESTMENT MANAGEMENT December 31, 1996
MFS(R) GROWTH WITH INCOME SERIES
A Series of MFS(R) Variable Insurance Trust
[Graphic Omitted]
<PAGE>
<TABLE>
MFS(R) GROWTH WITH INCOME SERIES
A SERIES OF MFS(R) VARIABLE INSURANCE TRUST
<S> <C>
TRUSTEES INVESTMENT ADVISER
A. Keith Brodkin* Massachusetts Financial Services Company
Chairman and President 500 Boylston Street
Boston, MA 02116-3741
Nelson J. Darling, Jr.
Trustee, Eastern Enterprises DISTRIBUTOR
(diversified holding company) MFS Fund Distributors, Inc.
500 Boylston Street
William R. Gutow Boston, MA 02116-3741
Vice Chairman,
Capitol Entertainment Management Company SHAREHOLDER SERVICE CENTER
(Blockbuster Video Franchise) MFS Service Center, Inc.
P.O. Box 1400
PORTFOLIO MANAGERS Boston, MA 02107-9906
John D. Laupheimer, Jr.*
Kevin R. Parke* For additional information,
contact your financial adviser.
TREASURER
W. Thomas London* CUSTODIAN
Investors Bank & Trust Company
ASSISTANT TREASURER
James O. Yost* AUDITORS
Deloitte & Touche LLP
SECRETARY
Stephen E. Cavan* WORLD WIDE WEB
www.mfs.com
ASSISTANT SECRETARY
James R. Bordewick, Jr.*
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
Dear Contract Owner:
The pattern of slow but sustainable growth seen in most of the world in 1996
seems likely to continue in 1997. While it looks like U.S. growth in 1997 will
slow modestly relative to 1996, there is evidence that Europe and, to a lesser
degree, Japan are continuing their recoveries from recession. At the same time,
companies in many emerging markets are reporting robust increases in earnings as
these markets benefit from higher-than-average economic growth and market
reforms. This should continue to provide more opportunities for development and
trade.
After more than six years of expansion, the U.S. economy appears headed
toward another year of moderate growth in 1997, although a few signs point to
the possibility of a modest increase in inflation during the year. On the
positive side, the pattern of moderate growth and inflation set over the past
few years now seems fairly well entrenched in the economy and, short of a major
international or domestic crisis, appears to have enough momentum to remain on
track for some time. Recent gains in such important sectors as housing,
automobiles, industrial production, and exports indicate a fair amount of
underlying strength in the economy. However, some reason for caution can be seen
in the continuing high level of consumer debt and the attendant rise in personal
bankruptcies, as well as in the modestly disappointing level of holiday sales.
Furthermore, the ongoing tightness in labor markets, and price rises in such
important sectors as energy, could add some inflationary pressures to the
economy. Given these somewhat conflicting indicators, we expect real
(inflation-adjusted) growth to revolve around 2% in 1997, which would represent
a modest decline from 1996.
We continue to urge U.S. equity investors to lower their expectations for
1997 and to point out that the impressive gains of the past two years are not
sustainable. Just as the slowdown in corporate earnings growth and increases in
interest rates in 1996 raised some near-term concerns, further interest rate
increases and an acceleration of inflation could negatively affect the stock
market in 1997. However, to the extent that some slowdown in earnings means that
the economy is not overheating, this may be beneficial for the equity market in
the long run. We believe many of the technology-driven productivity gains that
U.S. companies have made in recent years will continue to enhance corporate
America's competitiveness and profitability. Therefore, while we have some
near-term concerns, we remain reasonably positive about the long-term viability
of the equity market.
In U.S. bond markets, conflicting signals over the strength of the economy
have created near-term volatility. Even comments by Federal Reserve Chairman
Alan Greenspan in late 1996 created some uncertainty over the Federal Reserve
Board's next move. However, we expect the Fed to maintain its anti-inflationary
stance should signs of more rapid economic growth and, particularly, higher
inflation resurface. While inflationary forces largely remained in check in
1996, the continued strength in the labor market and rising energy prices mean
that a pickup in inflation is still possible. At the same time, the U.S. budget
deficit continues to decline and, as a percentage of gross domestic product, is
now less than 2%, which we consider a positive development for the bond markets.
Although interest rates may move higher over the coming months, we believe that,
at current levels, fixed-income markets remain equitably valued.
Internationally, the environment of moderate growth, benign inflation, and
fairly steady interest rates is also providing support for investment markets
and should help support valuation levels in the coming year. Throughout the
world, the key to stock market performance in 1997 will be corporate earnings
growth. While U.S. earnings growth is slowing, but still expected to be fairly
healthy, we anticipate that a number of European countries will see an
acceleration in earnings growth and improved valuations in 1997. Despite this
environment, many European countries trade at discounts to the United States. In
particular, we see opportunities in some of the multinationals and businesses
with the ability to generate steady earnings growth. In Japan, a recovery
appears to be taking place, but at a very modest rate, with valuations still at
high levels. In the emerging markets, the long-term economic growth story
remains intact and, although selectivity is even more important in these
markets, more companies are benefiting from this growth and trading at
below-average global valuations.
<PAGE>
Comments from the portfolio manager of the Series are presented below. We
appreciate your support and welcome any questions or comments you may have.
Respectfully,
/s/ A. Keith Brodkin /s/ John D. Laupheimer, Jr. /s/ Kevin R. Parke
A. Keith Brodkin John D. Laupheimer, Jr. Kevin R. Parke
Chairman and President Portfolio Manager Portfolio Manager
January 13, 1997
MFS GROWTH WITH INCOME SERIES
For the year ended December 31, 1996, the Growth with Income Series provided a
total return of 24.46%. This compares to a 22.64% return for the Standard &
Poor's 500 Composite Index (the S&P 500), a popular, unmanaged index of common
stock performance.
The past year produced a mostly benign investment environment with growth
slowly progressing, which allowed interest rates to stay low and led to improved
valuations. At the same time, many companies continued to report significant
gains in earnings. The Series also benefited from this favorable investment
environment, by being overweighted in sectors that outperformed the market,
while being underweighted in those that lagged the market. For example, the
Series was overweighted in financial services stocks and industrial goods and
services, particularly aerospace and defense stocks, both of which outperformed
the market, as measured by the S&P 500. Meanwhile, underweighted sectors such as
utilities and leisure underperformed the market as measured by the S&P 500.
Financial services stocks benefited from a number of favorable developments.
First, some companies such as First Bank Systems and Norwest have been selling
at significant discounts to the market -- discounts which we feel are not
warranted given their underlying strength. Second, the ongoing and necessary
consolidation of the banking industry benefits the acquiring companies, which
are able to reach broader markets and realize economies of scales, as well as
the stocks of companies being taken over, as they have been bought at
significant premiums.
Meanwhile, the defense and aerospace industry is also going through a
massive consolidation as the defense business shrinks. In most cases, the
resulting acquisitions and mergers are enhancing, not diluting, earnings as
these companies also enjoy increased economies of scale and increased purchasing
power and global strength. We think there will be more mergers in the future.
One industry that did not perform as well as expected was retailing. Going
into the year, we were overweighted in the retail stocks, as they had performed
poorly both in 1994 and 1995, and we felt their valuations were at fairly
attractive levels. As 1996 progressed, however, we reduced our positions in the
retail sector as these companies continued to underperform. Part of the reason
for this underperformance was the continuing high levels of consumer debt and
the overall saturation of retail stores.
Looking ahead, we have some concerns about the S&P 500's ability to continue
to increase earnings at the same pace as the last couple of years. As the
economy slows, the ability of companies to make their earnings estimates will
become more and more significant. As a result, stock selection will become even
more important. In this environment, we believe that our emphasis on original
research, combined with our bottom-up approach to stock selection, should
continue to benefit the Series over the long term.
<PAGE>
PORTFOLIO MANAGERS' PROFILES
John D. Laupheimer, Jr. joined Massachusetts Financial Services (MFS) in 1981 as
an industry specialist and is Portfolio Manager of MFS Growth with Income
Series. A graduate of Boston University and the Sloan School of Management of
Massachusetts Institute of Technology, he was named Investment Officer in 1983,
Assistant Vice President - Investments in 1984, Vice President - Investments in
1986, and Senior Vice President in 1995.
Kevin R. Parke is Senior Vice President of MFS, Director of Equity Research,
and Portfolio Manager of MFS Growth with Income Series. Mr. Parke joined MFS
in 1985 as an industry specialist. He was named Assistant Vice President -
Investments in 1987, Vice President - Investments in 1988, Senior Vice
President in 1993, and Director of Equity Research in 1995. Mr. Parke is a
graduate of Lehigh University and the Harvard University Graduate School of
Business Administration.
FEDERAL INCOME TAX INFORMATION ON DISTRIBUTIONS
The MFS Growth with Income Series has designated $14,070 as a long-term capital
gain.
DIVIDENDS-RECEIVED DEDUCTION
For the year ended December 31, 1996, the amount of distributions from income
eligible for the 70% dividends-received deduction for corporations came to
47.42%.
<PAGE>
PERFORMANCE SUMMARY
The information below illustrates the historical performance of MFS Growth with
Income Series shares in comparison to various market indicators. Benchmark
comparisons are unmanaged and do not reflect any fees or expenses.
You cannot invest in an index.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the Period from October 1, 1995 to December 31, 1996)
MFS Growth Consumer S&P 500
with Income Series Price Index - U.S. Composite Index
------------------ ------------------ ---------------
10/95 $10,000 $10,000 $10,000
12/95 10,664 10,025 10,601
3/96 11,418 10,152 11,171
6/96 11,850 10,225 11,668
9/96 12,403 10,300 12,024
12/96 13,272 10,372 13,023
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1996
1 Year Life+
- --------------------------------------------------------------------------------
MFS Growth with Income Series +24.46% +25.88%
- --------------------------------------------------------------------------------
Standard & Poor's 500 Composite Index++ +22.64% +23.95%
- --------------------------------------------------------------------------------
Consumer Price Index*++ + 3.56% + 3.01%
- --------------------------------------------------------------------------------
+For the period from the commencement of investment operations, October 9, 1995
to December 31, 1996.
++Source: CDA/Wiesenberger.
*The Consumer Price Index is a popular measure of change in prices.
Returns shown do not reflect the deduction of the mortality and expense risk
charges and administrative fees. Please refer to the product's annual report for
performance that reflects the fees and charges imposed by insurance company
separate accounts.
Investment return and principal value will fluctuate, and shares, when redeemed,
may be worth more or less than their original cost. Past performance is no
guarantee of future results.
Series results reflect any applicable expense subsidies and waivers, without
which the performance results would have been less favorable. Subsidies and
waivers may be rescinded at any time. See the prospectus for details.
<PAGE>
PORTFOLIO OF INVESTMENTS - December 31, 1996
Stocks - 90.6%
- -----------------------------------------------------------------------------
Issuer Shares Value
- -----------------------------------------------------------------------------
U.S. Stocks - 86.9%
Aerospace - 7.4%
Allied Signal, Inc. 1,450 $ 97,150
General Dynamics Corp. 1,000 70,500
Lockheed-Martin Corp. 1,592 145,668
McDonnell Douglas Corp. 2,400 153,600
Raytheon Co. 1,900 91,438
United Technologies Corp. 1,900 125,400
----------
$ 683,756
- -----------------------------------------------------------------------------
Agricultural Products - 0.5%
Case Corp. 800 $ 43,600
- -----------------------------------------------------------------------------
Apparel and Textiles - 1.7%
Nike, Inc., "B" 1,400 $ 83,650
Reebok International Ltd. 500 21,000
VF Corp. 700 47,250
----------
$ 151,900
- -----------------------------------------------------------------------------
Automotive - 0.9%
Goodrich (B.F.) Co. 2,000 $ 81,000
- -----------------------------------------------------------------------------
Banks and Credit Companies - 8.7%
Bank of Boston Corp. 600 $ 38,550
Chase Manhattan Corp. 400 35,700
Comerica, Inc. 1,100 57,613
Corestates Financial Corp. 100 5,187
Crestar Financial Corp. 800 59,500
First Bank System, Inc. 2,000 136,500
First Chicago NBD Corp. 450 24,187
Firstar Corp. 900 47,250
National City Corp. 1,200 53,850
Northern Trust Co. 1,700 61,625
Norwest Corp. 3,900 169,650
SunTrust Banks, Inc. 1,400 68,950
U.S. Bancorp 900 40,444
----------
$ 799,006
- -----------------------------------------------------------------------------
Business Machines - 0.6%
International Business Machines Corp. 300 $ 45,300
Xerox Corp. 100 5,262
----------
$ 50,562
- -----------------------------------------------------------------------------
Business Services - 1.7%
Alco Standard Corp. 1,400 $ 72,275
Ceridian Corp.* 100 4,050
Computer Sciences, Inc.* 800 65,700
DST Systems, Inc.* 200 6,275
Sabre Group Holdings, Inc.* 400 11,150
----------
$ 159,450
- -----------------------------------------------------------------------------
Cellular Telephones - 0.1%
AirTouch Communications, Inc.* 200 $ 5,050
- -----------------------------------------------------------------------------
Chemicals - 2.8%
Air Products & Chemicals, Inc. 1,200 $ 82,950
Betzdearborn, Inc. 100 5,850
du Pont (E. I.) de Nemours & Co. 800 75,500
Monsanto Corp 1,100 42,763
Praxair, Inc. 1,000 46,125
----------
$ 253,188
- -----------------------------------------------------------------------------
Computer Software - Personal Computers - 1.3%
First Data Corp. 1,300 $ 47,450
Microsoft Corp.* 900 74,362
----------
$ 121,812
- -----------------------------------------------------------------------------
Computer Software - Systems - 1.6%
Computer Associates International, Inc. 1,850 $ 92,038
Electronic Data Systems Corp. 100 4,325
Oracle Systems Corp.* 1,100 45,925
----------
$ 142,288
- -----------------------------------------------------------------------------
Consumer Goods and Services - 8.8%
Colgate-Palmolive Co. 1,700 $ 156,825
Gillette Co. 2,450 190,487
Philip Morris Cos., Inc. 2,200 247,775
Procter & Gamble Co. 700 75,250
Service Corp. International 200 5,600
Sherwin-Williams Co. 800 44,800
Tyco International Ltd. 700 37,012
UST, Inc. 1,400 45,325
----------
$ 803,074
- -----------------------------------------------------------------------------
Defense Electronics - 0.2%
Loral Space & Communications Corp.* 1,300 $ 23,888
- -----------------------------------------------------------------------------
Electrical Equipment - 3.2%
General Electric Co. 1,800 $ 177,975
Honeywell, Inc. 1,750 115,062
----------
$ 293,037
- -----------------------------------------------------------------------------
Electronics - 0.9%
Intel Corp. 600 $ 78,563
- -----------------------------------------------------------------------------
Entertainment - 0.3%
Viacom, Inc., "B"* 700 $ 24,413
- -----------------------------------------------------------------------------
Financial Institutions - 4.2%
American Express Co. 600 $ 33,900
Beneficial Corp 2,150 136,256
Federal Home Loan Mortgage Corp. 400 44,050
MBNA Corp. 100 4,150
Merrill Lynch & Co., Inc. 300 24,450
State Street Boston Corp. 1,900 122,550
Union Planters Corp. 600 23,400
----------
$ 388,756
- -----------------------------------------------------------------------------
Food and Beverage Products - 4.8%
Archer Daniels-Midland Co. 1,500 $ 33,000
CPC International, Inc. 900 69,750
Coca Cola Co. 600 31,575
General Mills, Inc. 1,400 88,725
McCormick & Co., Inc. 200 4,712
PepsiCo, Inc. 3,000 87,750
Ralston-Purina Group 650 47,694
Tyson Foods, Inc., "A" 1,100 $ 37,675
Wrigley (William) Jr. Co. 700 39,375
----------
$ 440,256
- -----------------------------------------------------------------------------
Forest and Paper Products - 1.3%
Kimberly-Clark Corp. 1,300 $ 123,825
- -----------------------------------------------------------------------------
Insurance - 6.8%
AFLAC, Inc 1,300 $ 55,575
Allstate Corp. 1,200 69,450
CIGNA Corp. 750 102,469
Chubb Corp. 300 16,125
ITT Hartford Group, Inc. 1,000 67,500
MBIA, Inc. 100 10,125
Progressive Corp. Ohio 1,700 114,537
St. Paul Cos., Inc. 900 52,762
Torchmark Corp. 1,050 53,025
Transamerica Corp. 700 55,300
Travelers Group, Inc. 500 22,687
UNUM Corp. 100 7,225
----------
$ 626,780
- -----------------------------------------------------------------------------
Machinery - 1.7%
Deere & Co., Inc. 850 $ 34,531
Ingersoll Rand Co. 1,400 62,300
York International Corp. 1,000 55,875
----------
$ 152,706
- -----------------------------------------------------------------------------
Medical and Health Products - 5.8%
American Home Products Corp. 600 $ 35,175
Fresenius National Medical Care* 100 11
Johnson & Johnson 2,500 124,375
Lilly (Eli) & Co. 700 51,100
Pfizer, Inc. 700 58,012
Pharmacia & Upjohn, Inc. 700 27,738
Rhone-Poulenc Rorer, Inc. 1,500 117,188
Warner-Lambert Co. 1,600 120,000
----------
$ 533,599
- -----------------------------------------------------------------------------
Medical and Health Technology and Services - 2.1%
Medtronic, Inc. 400 $ 27,200
Pacificare Health Systems, Inc., "B"* 600 51,150
St. Jude Medical, Inc.* 2,000 85,250
United Healthcare Corp. 700 31,500
----------
$ 195,100
- -----------------------------------------------------------------------------
Metals and Minerals - 0.5%
Phelps Dodge Corp. 700 $ 47,250
- -------------------------------------------------------------------------------
Oil Services - 0.3%
Schlumberger Ltd. 300 $ 29,962
- -----------------------------------------------------------------------------
Oils - 5.2%
Amoco Corp. 300 $ 24,150
Chevron Corp. 800 52,000
Exxon Corp. 1,100 107,800
Mobil Corp. 1,250 $ 152,813
Texaco, Inc. 1,400 137,375
----------
$ 474,138
- -----------------------------------------------------------------------------
Photographic Products - 0.8%
Eastman Kodak Co. 900 $ 72,225
- -----------------------------------------------------------------------------
Printing and Publishing - 1.6%
Gannett Co., Inc. 1,100 $ 82,362
Tribune Co., Inc. 800 63,100
----------
$ 145,462
- -----------------------------------------------------------------------------
Railroads - 2.0%
Burlington Northern-Santa Fe 600 $ 51,825
CSX Corp. 1,300 54,925
Conrail, Inc. 459 45,728
Illinois Central Corp. 1,125 36,000
----------
$ 188,478
- -----------------------------------------------------------------------------
Restaurants and Lodging - 0.1%
McDonald's Corp. 200 $ 9,050
- -------------------------------------------------------------------------------
Special Products and Services - 0.2%
Stanley Works 700 $ 18,900
- -------------------------------------------------------------------------------
Stores - 2.3%
CVS Corp. 400 $ 16,550
Circuit City Stores, Inc. 600 18,075
Home Depot, Inc. 800 40,100
Lowe's Cos., Inc. 1,100 39,050
Penney (J.C.), Inc. 1,000 48,750
Sears, Roebuck & Co. 600 27,675
Staples, Inc.* 300 5,419
Talbots, Inc. 500 14,313
----------
$ 209,932
- -----------------------------------------------------------------------------
Supermarkets - 0.8%
Kroger Co.* 100 $ 4,650
Safeway, Inc.* 1,000 42,750
Vons Cos., Inc.* 500 29,938
----------
$ 77,338
- -----------------------------------------------------------------------------
Telecommunications - 0.4%
Lucent Technologies, Inc. 800 $ 37,000
- -------------------------------------------------------------------------------
Utilities - Electric - 1.6%
Allegheny Power System, Inc. 600 $ 18,225
CMS Energy Corp. 100 3,363
Cinergy Corp. 600 20,025
DPL, Inc. 600 14,700
FPL Group, Inc. 1,000 46,000
GPU, Inc. 100 3,363
Illinova Corp. 100 2,750
Pinnacle West Capital Corp. 100 3,175
Portland General Corp. 800 33,600
----------
$ 145,201
- -----------------------------------------------------------------------------
Utilities - Gas - 0.8%
Consolidated Natural Gas Co. 500 $ 27,625
Pacific Enterprises 500 15,187
PanEnergy Corp. 700 31,500
----------
$ 74,312
- -----------------------------------------------------------------------------
Utilities - Telephone - 2.9%
Ameritech Corp. 100 $ 6,062
BellSouth Corp. 100 4,037
GTE Corp. 2,150 97,825
MCI Communications Corp. 3,500 114,406
Pacific Telesis Group 600 22,050
SBC Communications, Inc. 500 25,875
----------
$ 270,255
- -----------------------------------------------------------------------------
Total U.S. Stocks $7,975,112
- -----------------------------------------------------------------------------
Foreign Stocks - 3.7%
Germany - 0.2%
Henkel KGaA (Chemicals) 200 $ 9,863
Hoechst AG (Chemicals) 200 9,253
----------
$ 19,116
- -----------------------------------------------------------------------------
Hong Kong - 0.7%
Hongkong Land Holdings Ltd. (Real Estate
Investment Trusts) 6,000 $ 16,680
Mandarin Oriental International Ltd.
(Restaurants and Lodging) 6,000 8,460
Swire Pacific Ltd., "A" (Airlines)* 1,500 14,302
Wharf Holdings Ltd. (Real Estate
Investment Trusts) 4,000 19,961
----------
$ 59,403
- -----------------------------------------------------------------------------
Japan - 0.2%
Canon, Inc. (Business Machines) 1,000 $ 22,056
- -----------------------------------------------------------------------------
Netherlands - 0.2%
Royal Dutch Petroleum Co. (Oils) 100 $ 17,075
- -----------------------------------------------------------------------------
New Zealand - 0.1%
Lion Nathan Ltd. (Food and Beverage
Products) 5,400 $ 12,934
- -----------------------------------------------------------------------------
South Korea - 0.2%
Korea Mobile Telecommunications, ADR
(Telecommunications) 1,133 $ 14,587
- -------------------------------------------------------------------------------
Sweden - 0.9%
Astra AB, Free Shares, "B" (Medical and
Health Products) 1,250 $ 60,230
Sparbanken Svergie, "A" (Financial
Services) 1,200 20,562
----------
$ 80,792
- -----------------------------------------------------------------------------
United Kingdom - 1.2%
British Petroleum PLC, ADR (Oils) 300 $ 42,413
PowerGen PLC (Utilities - Electric) 6,400 62,647
SmithKline Beecham PLC, ADR (Medical and
Health Products) 100 6,800
----------
$ 111,860
- -----------------------------------------------------------------------------
Total Foreign Stocks $ 337,823
- -----------------------------------------------------------------------------
Total Stocks (Identified Cost, $7,477,367) $8,312,935
- -----------------------------------------------------------------------------
Convertible Preferred Stocks - 0.1%
- -----------------------------------------------------------------------------
Atlantic Richfield Co., 9s (Oils) 300 $ 6,450
Tosco Financing Trust, 5.75s (Financial
Institutions)## 100 5,137
- -----------------------------------------------------------------------------
Total Convertible Preferred Stocks (Identified Cost, $12,434) $ 11,587
- -----------------------------------------------------------------------------
Convertible Bond - 0.2%
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Sandoz Capital BVI Ltd., 2s, 2002 (Chemicals)##
(Identified Cost, $16,038) $ 15 $ 16,125
- -----------------------------------------------------------------------------
Short-Term Obligation - 8.3%
- -----------------------------------------------------------------------------
Federal Home Loan Bank, due 1/02/97, at
Amortized Cost $760 $ 759,778
- -----------------------------------------------------------------------------
Total Investments (Identified Cost, $8,265,617) $9,100,425
Other Assets, Less Liabilities - 0.8% 73,688
- -----------------------------------------------------------------------------
Net Assets - 100.0% $9,174,113
- -----------------------------------------------------------------------------
*Non-income producing security.
##SEC Rule 144A restriction.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ------------------------------------------------------------------------------
December 31, 1996
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $8,265,617) $ 9,100,425
Cash 3,065
Receivable for Series shares sold 54,054
Interest and dividends receivable 15,931
Receivable from investment adviser 20,150
Deferred organization expenses 6,923
Other assets 4
-----------
Total assets $ 9,200,552
-----------
Liabilities:
Payable for Series shares reacquired $ 30
Payable to affiliate for management fee 559
Accrued expenses and other liabilities 25,850
-----------
Total liabilities $ 26,439
-----------
Net assets $ 9,174,113
===========
Net assets consist of:
Paid-in capital $ 8,348,221
Unrealized appreciation on investments
and translation of assets and liabilities in foreign
currencies 834,814
Accumulated net realized loss on investments
and foreign currency transactions (10,421)
Accumulated undistributed net investment income 1,499
-----------
Total $ 9,174,113
===========
Shares of beneficial interest outstanding 706,552
=======
Net asset value per share
(net assets of $9,174,113 / 706,552 shares of beneficial
interest outstanding) $12.98
======
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- --------------------------------------------------------------------------------
Year Ended December 31, 1996
- --------------------------------------------------------------------------------
Net investment income:
Income -
Dividends $ 75,866
Interest 27,710
Foreign taxes withheld (730)
---------
Total investment income $ 102,846
---------
Expenses -
Management fee $ 30,792
Trustees' compensation 2,033
Shareholder servicing agent fee 1,412
Auditing fees 22,806
Printing 16,973
Custodian fee 3,633
Amortization of organization expenses 1,842
Legal fees 1,214
Miscellaneous 3,555
---------
Total expenses $ 84,260
Fees paid indirectly (545)
Reduction of expenses by investment adviser (42,658)
---------
Net expenses $ 41,057
---------
Net investment income $ 61,789
---------
Realized and unrealized gain on investments:
Realized gain (identified cost basis) -
Investment transactions $ 85,728
Foreign currency transactions 100
---------
Net realized gain on investments and foreign
currency transactions $ 85,828
---------
Change in unrealized appreciation -
Investments $ 814,056
Translation of assets and liabilities in foreign
currencies 6
---------
Net unrealized gain on investments and foreign
currency translation $ 814,062
---------
Net realized and unrealized gain on
investments and foreign currency $ 899,890
---------
Increase in net assets from operations $ 961,679
=========
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statements of Changes in Net Assets
- -------------------------------------------------------------------------------
Year Ended Period Ended
December 31, 1996 December 31, 1995*
- -------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment income $ 61,789 $ 1,747
Net realized gain on investments and
foreign currency transactions 85,828 47
Net unrealized gain on investments and
foreign currency translation 814,062 20,752
---------- --------
Increase in net assets from operations $ 961,679 $ 22,546
---------- --------
Distributions declared to shareholders -
From net investment income $ (60,288) $ (1,794)
From net realized gain on investments and
foreign currency transactions (85,828) (20)
In excess of net realized gain on
investments and foreign currency
transactions (10,368) --
Tax return of capital -- (35)
---------- --------
Total distributions declared to
shareholders $ (156,484) $ (1,849)
---------- --------
Series share (principal) transactions -
Net proceeds from sale of shares $8,604,219 $338,677
Net asset value of shares issued to
shareholders in reinvestment of
distributions 156,483 1,849
Cost of shares reacquired (756,607) (5,000)
---------- --------
Increase in net assets from Series
share transactions $8,004,095 $335,526
---------- --------
Total increase in net assets $8,809,290 $356,223
Net assets:
At beginning of period 364,823 8,600
---------- --------
At end of period (including accumulated
undistributed net investment income of
$1,499 and $0, respectively) $9,174,113 $364,823
========== ========
*For the period from the commencement of investment operations, October 9, 1995
to December 31, 1995.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights
- --------------------------------------------------------------------------------
Year Ended Period Ended
December 31, 1996 December 31, 1995*
- --------------------------------------------------------------------------------
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $10.61 $10.00
------ ------
Income from investment operations# -
Net investment income(S) $ 0.18 $ 0.05
Net realized and unrealized gain on
investments
and foreign currency transactions 2.42 0.61
------ ------
Total from investment operations $ 2.60 $ 0.66
------ ------
Less distributions declared to
shareholders -
From net investment income $(0.09) $(0.05)
From net realized gain on investments
and foreign currency transactions (0.13) --
In excess of net realized gain on
investments and foreign currency
transactions (0.01) --
------ ------
Total distributions declared to
shareholders $(0.23) $(0.05)
------ ------
Net asset value - end of period $12.98 $10.61
====== ======
Total return 24.46% 6.64%++
Ratios (to average net assets)
/Supplemental data(S):
Expenses 1.00% 1.00%+
Net investment income 1.52% 2.20%+
Portfolio turnover 41% 2%
Average commission rate### $0.0351 --
Net assets at end of period (000 omitted) $9,174 $365
* For the period from the commencement of investment operations, October 9,
1995 to December 31, 1995.
+ Annualized.
++ Not annualized.
# Per share data is based on average shares outstanding.
### Average commision rate is calculated for funds with fiscal years beginning
on or after September 1, 1995.
(S) The Adviser voluntarily agreed to maintain the expenses of the Series at not
more than 1.00% of average daily net assets. To the extent actual expenses
were over these limitations, the net investment income (loss) per share and
the ratios would have been:
Net investment income (loss) $ 0.05 $(0.41)
Ratios (to average net assets):
Expenses 2.07% 21.44%+
Net investment income (loss) 0.46% (18.24)%+
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Growth with Income Series (the Series) is a diversified series of MFS
Variable Insurance Trust (the Trust) which is comprised of the following 12
series: MFS Bond Series, MFS Emerging Growth Series, MFS Growth with Income
Series, MFS High Income Series, MFS Limited Maturity Series, MFS Money Market
Series, MFS Research Series, MFS Strategic Fixed Income Series, MFS Total Return
Series, MFS Utilities Series, MFS Value Series and MFS World Governments Series.
The Trust is organized as a Massachusetts business trust and is registered under
the Investment Company Act of 1940, as amended, as an open-end management
investment company.
The shareholders of each Series of the Trust are separate accounts of insurance
companies which offer variable annuity and/or life insurance products. As of
December 31, 1996 there were 17 shareholders in the Series.
(2) Significant Accounting
Policies General - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Investments
in foreign securities are vulnerable to the effects of changes in the relative
values of the local currency and the U.S. dollar and to the effects of changes
in each country's legal, political and economic environment.
Investment Valuations - Equity securities listed on securities exchanges or
reported through the NASDAQ system are valued at last sale prices. Unlisted
equity securities or listed equity securities for which last sale prices are not
available are valued at last quoted bid prices. Debt securities (other than
short-term obligations which mature in 60 days or less), including listed issues
and forward contracts, are valued on the basis of valuations furnished by
dealers or by a pricing service with consideration to factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data, without exclusive reliance upon exchange or over-the-counter prices.
Short-term obligations, which mature in 60 days or less, are valued at amortized
cost, which approximates market value. Securities for which there are no such
quotations or valuations are valued at fair value as determined in good faith by
or at the direction of the Trustees.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases and
sales of foreign investments, income and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates of
such transactions. Gains and losses attributable to foreign currency exchange
rates on sales of securities are recorded for financial statement purposes as
net realized gains and losses on investments. Gains and losses attributable to
foreign exchange rate movements on income and expenses are recorded for
financial statement purposes as foreign currency transaction gains and losses.
That portion of both realized and unrealized gains and losses on investments
that result from fluctuations in foreign currency exchange rates is not
separately disclosed.
Deferred Organization Expenses - Costs incurred by the Series in connection with
its organization have been deferred and are being amortized on a straight-line
basis over a five-year period beginning on the date of commencement of Series
operations.
Forward Foreign Currency Exchange Contracts - The Series may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering into these contracts from the potential inability of counterparties to
meet the terms of their contracts and from unanticipated movements in the value
of a foreign currency relative to the U.S. dollar. The Series will enter into
forward contracts for hedging purposes as well as for non-hedging purposes. For
hedging purposes, the Series may enter into contracts to deliver or receive
foreign currency it will receive from or require for its normal investment
activities. The Series may also use contracts in a manner intended to protect
foreign currency-denominated securities from declines in value due to
unfavorable exchange rate movements. For non-hedging purposes, the Series may
enter into contracts with the intent of changing the relative exposure of the
Series' portfolio of securities to different currencies to take advantage of
anticipated changes. The forward foreign currency exchange contracts are
adjusted by the daily exchange rate of the underlying currency and any gains or
losses are recorded for financial statement purposes as unrealized until the
contract settlement date.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for financial statement and
tax reporting purposes as required by federal income tax regulations. Dividend
income is recorded on the ex-dividend date for dividends received in cash.
Dividend and interest payments received in additional securities are recorded on
the ex-dividend or ex-interest date in an amount equal to the value of the
security on such date.
Fees Paid Indirectly - The Series' custodian bank calculates its fee based on
the Series' average daily net assets. This fee is reduced according to an
expense offset arrangement with State Street Bank, the dividend disbursing
agent, which provides for partial reimbursement of custody fees based on a
formula developed to measure the value of cash deposited by the Series with the
custodian and with the dividend disbursing agent. This amount is shown as a
reduction of expenses on the Statement of Operations.
Tax Matters and Distributions - The Series' policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. The Series files a tax
return annually using tax accounting methods required under provisions of the
Code which may differ from generally accepted accounting principles, the basis
on which these financial statements are prepared. Accordingly, the amount of net
investment income and net realized gain reported on these financial statements
may differ from that reported on the Series' tax return and, consequently, the
character of distributions to shareholders reported in the financial highlights
may differ from that reported to shareholders on Form 1099-DIV. Foreign taxes
have been provided for on interest and dividend income earned on foreign
investments in accordance with the applicable country's tax rates and to the
extent unrecoverable are recorded as a reduction of investment income.
Distributions to shareholders are recorded on the ex-dividend date. The Series
expects to pass through to shareholders foreign income taxes paid. The election
increases the taxable distributions of the Series by the amount of the foreign
taxes paid. An individual shareholder who itemizes deductions, or a corporate
shareholder, will be able to claim an offsetting deduction or a tax credit (but
not both) on their federal income tax returns. Individuals who do not itemize
deductions may claim a foreign tax credit but not a deduction. The foreign
source income is considered passive income for the purpose of computing the
foreign tax credit limitations.
The Series distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a tax return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains. During the year ended December 31, 1996, $2 and $53 was reclassified from
accumulated undistributed net investment income and accumulated net realized
loss on investments and foreign currency transactions, respectively, to paid-in
capital due to differences between book and tax accounting for currency
transactions. This change had no effect on the net assets or net asset value per
share. At December 31, 1996, accumulated undistributed net investment income and
accumulated net realized loss on investments and foreign currency transactions
under book accounting were different from tax accounting due to temporary
differences in accounting for wash sales and tax spillbacks.
(3) Transactions with Affiliates
Investment Adviser - The Series has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.75% of
average daily net assets. Under a temporary expense limitation agreement with
MFS, MFS has voluntarily agreed to pay all of the Series' operating expenses,
exclusive of management fees, which exceed 0.25% of the Series' average daily
net assets. The Series in turn will pay MFS an expense reimbursement fee not
greater than 0.25% of the Series' average daily net assets. To the extent that
the expense reimbursement fee exceeds the Series' actual expenses, the excess
will be applied to amounts paid by MFS in prior years. At December 31, 1996, the
aggregate unreimbursed expenses owed to MFS by the Series amounted to $58,884,
including $42,658 incurred in the current year.
The Series pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Series, all of whom receive
remuneration for their services to the Series from MFS. Certain officers and
Trustees of the Series are officers or directors of MFS and MFS Service Center,
Inc. (MFSC).
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as a
percentage of the average daily net assets at an effective annual rate of up to
0.035%.
(4) Portfolio Securities
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions and short-term obligations, aggregated $8,634,771
and $1,538,106, respectively.
The cost and unrealized appreciation or depreciation in value of the investments
owned by the Series, as computed on a federal income tax basis, are as follows:
Aggregate cost $8,265,617
==========
Gross unrealized appreciation $ 894,924
Gross unrealized depreciation (60,116)
----------
Net unrealized appreciation $ 834,808
==========
(5) Shares of Beneficial Interest
The Series' Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Series shares were as follows:
Year Ended Period Ended
December 31, 1996 December 31, 1995*
--------------------------- ------------------
Shares Amount Shares Amount
- --------------------------------------------------------------------------------
Shares sold 720,635 $8,604,219 33,867 $338,677
Shares issued to shareholders
in reinvestment of
distributions 11,899 156,483 175 1,849
Shares reacquired (60,384) (756,607) (500) (5,000)
------- ---------- ------ --------
Net increase 672,150 $8,004,095 33,542 $335,526
======= ========== ====== ========
*For the period from the commencement of investment operations, October 9, 1995,
to December 31, 1995.
(6) Line of Credit
The Series entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Series shares. Interest is charged to each
fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating funds at the end of each
quarter. The commitment fee allocated to the Series for the year ended December
31, 1996 was $51.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Variable Insurance Trust and Shareholders of MFS Growth
with Income Series:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of MFS Growth with Income Series (the Series) (one
of the series constituting the MFS Variable Insurance Trust) as of December 31,
1996, the related statement of operations for the year then ended, the
statements of changes in net assets and financial highlights for the year then
ended and for the period from October 9, 1995 (the commencement of investment
operations) to December 31, 1995. These financial statements and financial
highlights are the responsibility of the Series' management. Our responsibility
is to express an opinion on these financial statements and financial highlights
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 financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned at
December 31, 1996 by correspondence with the custodian and brokers. 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 provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Growth with
Income Series at December 31, 1996, the results of its operations, the changes
in its net assets, and its financial highlights for the respective stated
periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 7, 1997
---------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
VGI-2/97 4M
<PAGE>
[logo] M F S(SM) ANNUAL REPORT
INVESTMENT MANAGEMENT FOR YEAR ENDED
DECEMBER 31, 1996
MFS(R) TOTAL RETURN SERIES
A SERIES OF MFS(R) VARIABLE INSURANCE TRUST
[Graphic Omitted]
<PAGE>
MFS(R) TOTAL RETURN SERIES
A SERIES OF MFS(R) VARIABLE INSURANCE TRUST
<TABLE>
<C> <C>
TRUSTEES INVESTMENT ADVISER
A. Keith Brodkin* Massachusetts Financial Services Company
Chairman and President 500 Boylston Street
Boston, MA 02116-3741
Nelson J. Darling, Jr.
Trustee, Eastern Enterprises DISTRIBUTOR
(diversified holding company) MFS Fund Distributors, Inc.
500 Boylston Street
William R. Gutow Boston, MA 02116-3741
Vice Chairman,
Capitol Entertainment Management Company SHAREHOLDER SERVICE CENTER
(Blockbuster Video Franchise) MFS Service Center, Inc.
P.O. Box 1400
PORTFOLIO MANAGEMENT Boston, MA 02107-9906
David Calabro*
(Head of Portfolio Management Team) For additional information,
contact your financial adviser.
TREASURER
W. Thomas London* CUSTODIAN
Investors Bank & Trust Company
ASSISTANT TREASURER
James O. Yost* AUDITORS
Deloitte & Touche LLP
SECRETARY
Stephen E. Cavan* WORLD WIDE WEB
www.mfs.com
ASSISTANT SECRETARY
James R. Bordewick, Jr.*
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
Dear Contract Owners:
The pattern of slow but sustainable growth seen in most of the world in 1996
seems likely to continue in 1997. While it looks like U.S. growth in 1997 will
slow modestly relative to 1996, there is evidence that Europe and, to a lesser
degree, Japan are continuing their recoveries from recession. At the same
time, companies in many emerging markets are reporting robust increases in
earnings as these markets benefit from higher-than-average economic growth and
market reforms. This should continue to provide more opportunities for
development and trade.
After more than six years of expansion, the U.S. economy appears headed
toward another year of moderate growth in 1997, although a few signs point to
the possibility of a modest increase in inflation during the year. On the
positive side, the pattern of moderate growth and inflation set over the past
few years now seems fairly well entrenched in the economy and, short of a
major international or domestic crisis, appears to have enough momentum to
remain on track for some time. Recent gains in such important sectors as
housing, automobiles, industrial production, and exports indicate a fair
amount of underlying strength in the economy. However, some reason for caution
can be seen in the continuing high level of consumer debt and the attendant
rise in personal bankruptcies, as well as in the modestly disappointing level
of holiday sales. Furthermore, the ongoing tightness in labor markets, and
price rises in such important sectors as energy, could add some inflationary
pressures to the economy. Given these somewhat conflicting indicators, we
expect real (inflation-adjusted) growth to revolve around 2% in 1997, which
would represent a modest decline from 1996.
We continue to urge U.S. equity investors to lower their expectations for
1997 and to point out that the impressive gains of the past two years are not
sustainable. Just as the slowdown in corporate earnings growth and increases
in interest rates in 1996 raised some near-term concerns, further interest
rate increases and an acceleration of inflation could negatively affect the
stock market in 1997. However, to the extent that some slowdown in earnings
means that the economy is not overheating, this may be beneficial for the
equity market in the long run. We believe many of the technology-driven
productivity gains that U.S. companies have made in recent years will continue
to enhance corporate America's competitiveness and profitability. Therefore,
while we have some near-term concerns, we remain reasonably positive about the
long-term viability of the equity market.
In U.S. bond markets, conflicting signals over the strength of the economy
have created near-term volatility. Even comments by Federal Reserve Chairman
Alan Greenspan in late 1996 created some uncertainty over the Federal Reserve
Board's next move. We expect the Fed to maintain its anti-inflationary stance
should signs of more rapid economic growth and, particularly, higher inflation
resurface. While inflationary forces largely remained in check in 1996, the
continued strength in the labor market and rising energy prices mean that a
pickup in inflation is still possible. At the same time, the U.S. budget
deficit continues to decline and, as a percentage of gross domestic product,
is now less than 2%, which we consider a positive development for the bond
markets. Although interest rates may move higher over the coming months, we
believe that, at current levels, fixed-income markets remain equitably valued.
Internationally, the environment of moderate growth, benign inflation, and
fairly steady interest rates is also providing support for investment markets
and should help support valuation levels in the coming year. Throughout the
world, the key to stock market performance in 1997 will be corporate earnings
growth. While U.S. earnings growth is slowing, but still expected to be fairly
healthy, we anticipate that a number of European countries will see an
acceleration in earnings growth and improved valuations in 1997. Despite this
environment, many European countries trade at discounts to the United States.
In particular, we see opportunities in some of the multinationals, and
businesses with the ability to generate steady earnings growth. In Japan, a
recovery appears to be taking place, but at a very modest rate, with
valuations still at high levels. In the emerging markets, the long-term
economic growth story remains intact and, although selectivity is even more
important in these markets, more companies are benefiting from this growth and
trading at below-average global valuations.
Comments from the portfolio manager of the Series are presented below. We
appreciate your support and welcome any questions or comments you may have.
Respectfully,
/s/A. Keith Brodkin /s/David Calabro
A. Keith Brodkin David Calabro
Chairman and President Head of Portfolio Management Team
January 13, 1997
MFS(R) TOTAL RETURN SERIES
For the year ended December 31, 1996, the Series provided a total return of
14.37%. This compares to a 13.01% return for the Balanced Fund Index, as
reported by Lipper Analytical Services, Inc., for the same period. (Lipper is
an independent firm that tracks mutual fund performance.) As a balanced fund,
a large portion of the Series' total assets is invested in both stocks and
bonds. Additionally, the Series purchases preferred stocks and convertible
bonds, which in many cases can provide similar returns to common stocks with
less risk. Over the past year, the Series held about 55% of its assets in
common stocks, preferred stocks, and convertible bonds. This allocation
provided the bulk of the return for the Series as a whole in 1996, as the U.S.
stock market continued its upward 1995 trend, posting spectacular gains as
measured by the Standard and Poor's 500 Composite Index ("S&P 500") which
gained 22.64% over the 12-month period. (The S&P 500 is an unmanaged index of
500 widely held common stocks.) The remainder of the Series was invested in a
blend of corporate bonds and U.S. Treasury bonds, with an overall duration of
five to six years. The fixed-income sector also provided positive returns;
however their magnitude was far less than that of the Series' stock portion.
For example, the securities in the Lehman Brothers Government Corporate Bond
Index were fairly representative of the Series' bond allocation, and this
index gained 2.88% over the period. (The Lehman Brothers Government Corporate
Bond Index is an unmanaged, market-value weighted index of U.S. Treasury and
government agency securities, excluding mortgage-backed securities.)
The Series' stock investment strategy has focused on companies that, in
our view, have earnings prospects or asset values equal to or higher than the
overall market as measured by the S&P 500. Two sectors that we believe fit our
investment criteria are the energy and financial services sectors. Bank stocks
have done particularly well because earnings have risen steadily and an
increase in merger activity has made most banks more valuable. We also favor
the health care sector, where strong earnings and industry consolidation have
improved the outlook for the stocks of many of these companies. Additionally,
we currently favor the aerospace industry, which we believe will benefit from
a cyclical increase in the number of aircraft being built over the next three
years. During the year, we avoided the technology sector because, in our view,
many of these stocks have high growth prospects but also have high valuations,
which means they often carry greater risk. The Series is also underweighted in
consumer companies because of their inability to raise prices as the U.S.
consumer continues to demand more value at lower prices.
Considering present equity valuations, we feel comfortable with our
current asset allocation. However, should the stock market experience a
meaningful correction, we would be looking to increase our stock allocation.
PORTFOLIO MANAGER PROFILES
David M. Calabro, Vice President, heads the MFS Total Return Series team and
manages that portfolio's common stocks. Mr. Calabro has been employed by MFS
since 1992. Geoffrey L. Kurinsky, Senior Vice President, manages the Series'
fixed-income securities and has been employed by MFS since 1987. Judith N.
Lamb, Vice President, has been employed by MFS since 1992 and manages the
Series' convertible securities. Lisa B. Nurme, Vice President, has been
employed by MFS since 1987 and also manages the portfolio's common stocks as
does Maura A. Shaughnessy, Vice President. Ms. Shaughnessy has been employed
by MFS since 1991.
PERFORMANCE SUMMARY
The information below illustrates the historical performance of MFS Total
Return Series shares in comparison to various market indicators. Benchmark
comparisons are unmanaged and do not reflect any fees or expenses. You cannot
invest in an index.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the Period from January 1, 1995 to December 31, 1996)
MFS Consumer Lehman Brothers
Total Price Government/
Return Index - Corporate
Date Series U.S. Bond Index
- ---- ------- -------- ---------------
1/95 10000.0 10000.0 10000.0
6/95 11330.0 10187.0 11380.0
12/95 12734.0 10247.0 12225.0
6/96 13399.0 10464.0 11963.0
12/96 14564.0 10615.0 12270.0
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1996
1 Year Life+
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
MFS Total Return Series +14.37% +20.74%
- ----------------------------------------------------------------------------------------------------
Average Balanced Fund** +13.76% +17.21%
- ----------------------------------------------------------------------------------------------------
Lehman Brothers Government/Corporate Bond Index++ + 2.88% +10.79%
- ----------------------------------------------------------------------------------------------------
Lipper Balanced Fund Index** +13.01% +18.80%
- ----------------------------------------------------------------------------------------------------
Standard & Poor's 500 Composite Index++ +22.64% +30.04%
- ----------------------------------------------------------------------------------------------------
Consumer Price Index*++ + 3.59% + 3.04%
- ----------------------------------------------------------------------------------------------------
+For the period from the commencement of investment operations, January 3, 1995 to December 31, 1996.
*The Consumer Price Index is a popular measure of change in prices.
**Source: Lipper Analytical Services.
++Source: CDA/Wiesenberger.
</TABLE>
Returns shown do not reflect the deduction of the mortality and expense risk
charges and administration fees. Please refer to the product's annual report
for performance that reflects the fees and charges imposed by insurance
company separate accounts.
Investment return and principal value will fluctuate, and shares, when
redeemed, may be worth more or less than their original cost. Past performance
is no guarantee of future results.
Series results reflect any applicable expense subsidies and waivers, without
which the performance results would have been less favorable. Subsidies and
waivers may be rescinded at any time. See the prospectus for details.
<PAGE>
PORTFOLIO OF INVESTMENTS - December 31, 1996
Non-Convertible Bonds - 34.0%
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
U.S. Bonds - 32.7%
Airlines - 0.7%
Continental Airlines, Inc., 9.5s, 2001## $ 50 $ 51,000
Continental Airlines, Inc., 9.5s, 2013 25 28,123
Delta Airlines, Inc., 8.5s, 2002 50 52,941
-----------
$ 132,064
- -----------------------------------------------------------------------------
Automotive - 0.1%
Mark IV Industries, Inc., 7.75s, 2006 $ 20 $ 19,650
- -----------------------------------------------------------------------------
Banks and Credit Companies - 0.7%
ABN Amro Bank N.V., 7.3s, 2026 $ 20 $ 19,350
Advanta Corp., 7.47s, 2001 5 5,100
BankAmerica Capital, 8s, 2026 20 20,239
Capital One Bank Co., 6.75s, 2000 25 24,968
Capital One Financial Corp., 7.25s, 2003 50 49,188
MBNA Capital, 8.278s, 2026 20 20,075
-----------
$ 138,920
- -----------------------------------------------------------------------------
Building - 0.3%
USG Corp., 9.25s, 2001 $ 50 $ 53,250
- -----------------------------------------------------------------------------
Business Machines - 0.1%
International Business Machines Corp.,
7.125s, 2066 $ 20 $ 19,325
- -----------------------------------------------------------------------------
Consumer Goods and Services - 0.1%
Philip Morris Cos., Inc., 7.65s, 2008 $ 25 $ 25,532
- -----------------------------------------------------------------------------
Entertainment - 0.3%
Time Warner, Inc., 8.375s, 2023 $ 50 $ 50,693
- -----------------------------------------------------------------------------
Financial Institutions - 0.6%
Contifinancial Corp., 8.375s, 2003 $ 20 $ 20,600
Crown, Cork & Seal Finance, 7s, 2006 20 19,830
Hubco, Inc., 8.2s, 2006## 30 31,200
Lehman Brothers Holdings, 7.5s, 2026 10 10,139
Salton Sea Funding Corp., 7.84s, 2010 25 25,137
-----------
$ 106,906
- -----------------------------------------------------------------------------
Food and Beverage Products - 0.1%
RJR Nabisco, Inc., 8.75s, 2004 $ 25 $ 25,231
- -----------------------------------------------------------------------------
Forest and Paper Products - 0.4%
Boise Cascade Corp., 9.85s, 2002 $ 25 $ 28,272
Boise Cascade Corp., 7.43s, 2005 50 50,750
-----------
$ 79,022
- -----------------------------------------------------------------------------
Insurance - 0.3%
Nationwide Mutual Insurance Co., 7.5s,
2024## $ 25 $ 23,300
Travelers Capital, 7.75s, 2036 25 24,250
-----------
$ 47,550
- -----------------------------------------------------------------------------
Medical and Health Technology and Services - 0.2%
National Data Corp., 5s, 2003 $ 10 $ 10,450
Tenet Healthcare Corp., 8.625s, 2003 20 21,100
-----------
$ 31,550
- -----------------------------------------------------------------------------
Oils - 0.9%
Enserch Exploration, Inc., 7.54s, 2009## $ 20 $ 19,700
Mitchell Energy & Development Corp.,
6.75s, 2004 40 37,356
Oryx Energy Co., 8.375s, 2004 50 51,938
Tosco Corp., 7.625s, 2006 $ 60 61,945
-----------
$ 170,939
- -----------------------------------------------------------------------------
Real Estate Investment Trusts - 0.4%
Loewen Group International, Inc., 7.5s,
2001 $ 55 $ 55,000
Taubman Realty Group, 8s, 2001 25 25,803
-----------
$ 80,803
- -----------------------------------------------------------------------------
Special Products and Services - 0.1%
Stewart Enterprises, 6.7s, 2003 $ 20 $ 19,688
- -----------------------------------------------------------------------------
Stores - 0.1%
Price/Costco, Inc., 7.125s, 2005 $ 20 $ 20,002
- -----------------------------------------------------------------------------
Telecommunications - 1.0%
360 Communications Co., 7.5s, 2006 $ 33 $ 32,733
Tele-Communications, Inc., 7.385s, 2001 140 141,386
Tele-Communications, Inc., 10.125s, 2022 20 21,960
-----------
$ 196,079
- -----------------------------------------------------------------------------
U.S. Treasury Obligations - 24.3%
U.S. Treasury Notes, 5.875s, 1998 $ 176 $ 176,083
U.S. Treasury Notes, 6s, 1998 400 401,000
U.S. Treasury Notes, 9.125s, 1999 40 42,744
U.S. Treasury Notes, 8.5s, 2000 260 277,672
U.S. Treasury Notes, 6.5s, 2001 425 429,649
U.S. Treasury Notes, 6.625s, 2001 1,100 1,117,699
U.S. Treasury Notes, 7.5s, 2001 300 315,798
U.S. Treasury Notes, 7.875s, 2004 200 218,250
U.S. Treasury Notes, 6.5s, 2006 165 165,903
U.S. Treasury Notes, 6.875s, 2006 300 309,328
U.S. Treasury Notes, 7s, 2006 45 46,751
U.S. Treasury Bonds, 6.75s, 2026 1,093 1,101,198
U.S. Treasury Bonds, 12s, 2005 60 81,469
-----------
$ 4,683,544
- -----------------------------------------------------------------------------
Utilities - Electric - 1.6%
Cleveland Electric Illuminating, 9.25s,
1999 $ 50 $ 52,198
Coastal Corp., 7.75s, 2035 70 71,265
First PV Funding Corp., 10.3s, 2014 50 53,250
Long Island Lighting Co., 8.9s, 2019 50 51,012
Long Island Lighting Co., 9.625s, 2024 25 26,588
Niagra Mohawk Power, 8s, 2004 40 38,427
Texas-New Mexico Power Co., 12.5s, 1999 20 21,727
-----------
$ 314,467
- -----------------------------------------------------------------------------
Utilities - Gas - 0.4%
California Energy Co., 10.25s, 2004 $ 15 $ 15,806
Louis Dreyfus Natural Gas, 9.25s, 2004 20 21,025
NGC Corp., 7.625s, 2026 20 20,375
Ras Laffan Gas, 8.294s, 2014## 20 20,267
-----------
$ 77,473
- -----------------------------------------------------------------------------
Total U.S. Bonds $ 6,292,688
- -----------------------------------------------------------------------------
Foreign Bonds - 1.3%
Australia - 0.1%
Qantas Airways, Ltd., 7.5s, 2003
(Airlines)## $ 25 $ 25,568
- -----------------------------------------------------------------------------
Canada - 0.5%
Canadian Pacific Forest, 9.25s, 2002
(Forest and Paper Products) $ 25 $ 25,399
Gulf Canada Resources Ltd., 8.35s, 2006
(Utilities - Gas) 25 25,844
Husky Oil Ltd., 7.125s, 2006 (Oils) 50 50,250
-----------
$ 101,493
- -----------------------------------------------------------------------------
Chile - 0.3%
Empresa Electric Pehuenche, 7.3s, 2003
(Utilties - Electric) $ 50 $ 50,546
- -----------------------------------------------------------------------------
South Africa - 0.1%
Republic of South Africa, 8.375s, 2006
(Government) $ 20 $ 20,000
- -----------------------------------------------------------------------------
Thailand - 0.3%
Northrop-Grumman Corp., 9.375s, 2024
(Aerospace) $ 20 $ 22,110
Total Access Communications, 8.375s, 2006
(Telecommunications)## 40 40,244
-----------
$ 62,354
- -----------------------------------------------------------------------------
Total Foreign Bonds $ 259,961
- -----------------------------------------------------------------------------
Total Non-Convertible Bonds (Identified Cost, $6,520,507) $ 6,552,649
- -----------------------------------------------------------------------------
Convertible Bonds - 0.6%
- -----------------------------------------------------------------------------
ADT Operations, Inc., 0s, 2010 (Electronics) $ 28 $ 18,165
Time Warner, Inc., 7.45s, 1998
(Entertainment) 70 70,771
Valhi, Inc., 0s, 2007 (Chemicals) 63 28,980
- -----------------------------------------------------------------------------
Total Convertible Bonds (Identified Cost, $107,839) $ 117,916
- -----------------------------------------------------------------------------
Stocks - 54.2%
- -----------------------------------------------------------------------------
Shares
- -----------------------------------------------------------------------------
U.S. Stocks - 48.9%
Aerospace - 3.8%
Allied Signal, Inc. 2,680 $ 179,560
General Dynamics Corp. 1,400 98,700
Lockheed-Martin Corp. 700 64,050
Raytheon Co. 2,250 108,281
United Technologies Corp. 4,180 275,880
-----------
$ 726,471
- -----------------------------------------------------------------------------
Apparel and Textiles - 0.6%
VF Corp. 1,730 $ 116,775
- -----------------------------------------------------------------------------
Automotive - 1.0%
Dana Corp. 2,510 $ 81,889
Ford Motor Co. 3,000 95,625
General Motors Corp. 350 19,513
-----------
$ 197,027
- -----------------------------------------------------------------------------
Banks and Credit Companies - 6.1%
Bank of Boston Corp. 1,850 $ 118,862
Bank of New York, Inc. 3,060 103,275
Chase Manhattan Corp. 1,962 175,109
Comerica, Inc. 300 15,713
Crestar Financial Corp. 500 37,187
Fleet Financial Group, Inc. 2,950 147,131
National City Corp. 2,700 121,162
NationsBank Corp. 1,740 170,085
Northern Trust Co. 900 32,625
Norwest Corp. 2,500 108,750
Southern National Corp. 4,150 150,438
-----------
$ 1,180,337
- -----------------------------------------------------------------------------
Business Machines - 1.0%
Digital Equipment Corp.* 2,400 $ 87,300
International Business Machines Corp. 660 99,660
-----------
$ 186,960
- -----------------------------------------------------------------------------
Cellular Telephones - 0.2%
Telephone & Data Systems, Inc. 900 $ 32,625
- -----------------------------------------------------------------------------
Chemicals - 2.9%
Air Products & Chemicals, Inc. 900 $ 62,212
Dexter Corp. 1,400 44,625
Dow Chemical Co. 580 45,457
du Pont (E.I.) de Nemours & Co. 1,420 134,013
Nalco Chemical Co. 1,900 68,638
Praxair, Inc. 1,400 64,575
Rohm & Haas Co. 1,300 106,113
Witco Corp. 1,180 35,990
-----------
$ 561,623
- -----------------------------------------------------------------------------
Conglomerates - 1.2%
Eastern Enterprises 1,700 $ 60,137
Goodrich (B.F.) Co. 4,050 164,025
-----------
$ 224,162
- -----------------------------------------------------------------------------
Consumer Goods and Services - 2.7%
American Brands, Inc. 1,030 $ 51,114
Colgate-Palmolive Co. 1,100 101,475
Olin Corp. 980 36,872
Philip Morris Cos., Inc. 2,210 248,901
Rubbermaid, Inc. 710 16,152
Sherwin-Williams Co. 1,200 67,200
-----------
$ 521,714
- -----------------------------------------------------------------------------
Electrical Equipment - 1.6%
Cooper Industries, Inc. 1,100 $ 46,337
General Electric Co. 2,000 197,750
Honeywell, Inc. 1,010 66,407
-----------
$ 310,494
- -----------------------------------------------------------------------------
Electronics - 0.1%
Analog Devices, Inc. 300 $ 10,162
- -----------------------------------------------------------------------------
Financial Institutions - 1.1%
American Express Co. 1,890 $ 106,785
Associates First Capital Corp.* 200 8,825
Federal Home Loan Mortgage Corp. 960 105,720
-----------
$ 221,330
- -----------------------------------------------------------------------------
Food and Beverage Products - 1.1%
Anheuser-Busch Cos., Inc. 200 $ 8,000
Dimon, Inc. 800 18,500
General Mills, Inc. 1,350 85,556
McCormick & Co., Inc. 1,900 44,769
PepsiCo, Inc. 1,900 55,575
-----------
$ 212,400
- -----------------------------------------------------------------------------
Forest and Paper Products - 0.3%
Weyerhauser Co. 1,300 $ 61,587
- -----------------------------------------------------------------------------
Insurance - 3.5%
Allstate Corp. 2,200 $ 127,325
CIGNA Corp. 1,200 163,950
Chubb Corp. 1,600 86,000
St. Paul Cos., Inc. 1,990 116,664
Torchmark Corp. 2,200 111,100
Travelers Group, Inc. 1,667 75,623
-----------
$ 680,662
- -----------------------------------------------------------------------------
Machinery - 0.8%
Deere & Co., Inc. 3,000 $ 121,875
York International Corp. 580 32,407
-----------
$ 154,282
- -----------------------------------------------------------------------------
Medical and Health Products - 2.0%
American Home Products Corp. 1,940 $ 113,732
Baxter International, Inc. 1,180 48,380
Pharmacia & Upjohn, Inc. 2,900 114,913
Rhone-Poulenc Rorer, Inc. 1,300 101,562
-----------
$ 378,587
- -----------------------------------------------------------------------------
Medical and Health Technology and Services - 1.0%
Columbia/HCA Healthcare Corp. 1,800 $ 73,350
St. Jude Medical, Inc.* 530 22,591
United Healthcare Corp. 2,300 103,500
-----------
$ 199,441
- -----------------------------------------------------------------------------
Metals and Minerals - 0.5%
Aluminum Company of America 1,350 $ 86,062
Phelps Dodge Corp. 300 20,250
-----------
$ 106,312
- -----------------------------------------------------------------------------
Oil Services - 0.7%
Schlumberger Ltd. 1,270 $ 126,841
- -----------------------------------------------------------------------------
Oils - 5.2%
Amoco Corp. 1,390 $ 111,895
Atlantic Richfield Co. 810 107,325
Exxon Corp. 1,500 147,000
Mobil Corp. 1,130 138,142
Occidental Petroleum Corp. 3,900 91,163
Sun Co., Inc. 270 6,581
Texaco, Inc. 1,400 137,375
USX-Marathon Group 6,900 164,737
Ultramar Corp. 500 15,813
Union Pacific Resources Group, Inc. 2,600 76,050
-----------
$ 996,081
- -----------------------------------------------------------------------------
Photographic Products - 0.8%
Eastman Kodak Co. 2,030 $ 162,908
- -----------------------------------------------------------------------------
Pollution Control - 0.5%
Browning-Ferris Industries, Inc. 1,500 $ 39,375
WMX Technologies, Inc. 1,600 52,200
-----------
$ 91,575
- -----------------------------------------------------------------------------
Railroads - 1.2%
Burlington Northern-Santa Fe 1,170 $ 101,059
CSX Corp. 1,010 42,672
Illinois Central Corp. 2,950 94,400
-----------
$ 238,131
- -----------------------------------------------------------------------------
Real Estate Investment Trusts - 0.8%
Arden Realty Group, Inc. 500 $ 13,875
Hospitality Properties Trust 2,500 72,500
Meditrust Corp. 1,500 60,000
-----------
$ 146,375
- -----------------------------------------------------------------------------
Special Products and Services - 0.4%
Stanley Works 2,600 $ 70,200
- -----------------------------------------------------------------------------
Stores - 0.9%
May Department Stores Co. 950 $ 44,413
Rite Aid Corp. 400 15,900
Sears, Roebuck & Co. 1,800 83,025
Wal-Mart Stores, Inc. 1,450 33,169
-----------
$ 176,507
- -----------------------------------------------------------------------------
Utilities - Electric - 2.5%
Allegheny Power System, Inc. 900 $ 27,337
CMS Energy Corp. 2,000 67,250
Carolina Power & Light Co. 2,400 87,600
DPL, Inc. 600 14,700
FPL Group, Inc. 2,300 105,800
PECO Energy Co. 800 20,200
Pinnacle West Capital Corp. 1,800 57,150
Portland General Corp. 1,400 58,800
Texas Utilities Co. 950 38,713
-----------
$ 477,550
- -----------------------------------------------------------------------------
Utilities - Gas - 2.1%
Coastal Corp. 1,730 $ 84,554
Pacific Enterprises 500 15,188
PanEnergy Corp. 3,100 139,500
Sonat, Inc. 1,150 59,225
UGI Corp. 2,400 53,700
Williams Cos., Inc. 1,500 56,250
-----------
$ 408,417
- -----------------------------------------------------------------------------
Utilities - Telephone - 2.3%
AT&T Corp. 300 $ 13,050
Ameritech Corp. 820 49,713
BellSouth Corp. 2,500 100,938
GTE Corp. 3,050 138,775
MCI Communications Corp. 4,300 140,556
-----------
$ 443,032
- -----------------------------------------------------------------------------
Total U.S. Stocks $ 9,420,568
- -----------------------------------------------------------------------------
Foreign Stocks - 5.3%
Canada - 0.1%
Canadian National Railway Co. (Railroads)* 500 $ 19,000
- -----------------------------------------------------------------------------
Germany - 0.3%
Henkel KGaA (Chemicals) 1,100 $ 55,268
- -----------------------------------------------------------------------------
Netherlands - 0.9%
Royal Dutch Petroleum Co. (Oils) 1,020 $ 174,165
- -----------------------------------------------------------------------------
New Zealand
Lion Nathan Ltd. (Food and Beverage
Products) 2,100 $ 5,030
- -----------------------------------------------------------------------------
Spain - 0.4%
Repsol S.A., ADR (Oil Services) 2,000 $ 76,250
- -----------------------------------------------------------------------------
Sweden - 0.5%
Astra AB, ADR (Medical and Health
Products) 1,500 $ 73,500
Volvo AB, "B", ADR (Automotive) 590 12,833
-----------
$ 86,333
- -----------------------------------------------------------------------------
Switzerland - 0.9%
Novartis AG (Medical and Health Products)* 148 $ 169,570
- -----------------------------------------------------------------------------
United Kingdom - 2.2%
British Petroleum PLC, ADR (Oils) 1,807 $ 255,465
SmithKline Beecham PLC, ADR (Medical and
Health Products) 2,580 175,440
-----------
$ 430,905
- -----------------------------------------------------------------------------
Total Foreign Stocks $ 1,016,521
- -----------------------------------------------------------------------------
Total Stocks (Identified Cost, $9,439,235) $10,437,089
- -----------------------------------------------------------------------------
Convertible Preferred Stocks - 2.3%
- -----------------------------------------------------------------------------
American Radio Systems, 7s (Entertainment)## 300 $ 13,650
Case Corp., $4.50 (Agricultural Products) 700 92,925
Enron Corp. (Utilities - Gas) 1,300 31,200
Finova Finance Trust, 5.5s (FinancialInstitutions) 600 31,500
Host Marriott Financial, 6.75s (Restaurants
and Lodging)## 2,000 106,000
Loral Space & Communications, 6s (Aerospace)## 900 50,850
SCI Finance LLC, "A", $3.125 (Medical and
Health Technology and Services) 200 18,825
Salomon, Inc., 6.25s (Utilities - Telephone) 100 6,025
Timet Capital Trust, 6.625s (Metals and Minerals)## 700 38,325
Unocal Corp., 7s (Utilities - Gas) 946 53,708
- -----------------------------------------------------------------------------
Total Convertible Preferred Stocks (Identified Cost, $409,123) $ 443,008
- -----------------------------------------------------------------------------
Short-Term Obligation - 11.6%
- -----------------------------------------------------------------------------
Principal Amount
(000 Omitted)
- -----------------------------------------------------------------------------
Student Loan Marketing Assn., due 1/02/97,
at Amortized Cost $ 2,230 $ 2,229,226
- -----------------------------------------------------------------------------
Total Investments (Identified Cost, $18,705,930) $19,779,888
Other Assets, Less Liabilities - (2.7)% (530,116)
- -----------------------------------------------------------------------------
Net Assets -100.0% $19,249,772
- -----------------------------------------------------------------------------
*Non-income producing security.
##SEC Rule 144A restriction.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ------------------------------------------------------------------------------
December 31, 1996
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $18,705,930) $19,779,888
Cash 10,862
Receivable for Series shares sold 93,834
Interest and dividends receivable 131,774
Receivable from investment adviser 41,944
Deferred organization expenses 5,535
Other assets 429
-----------
Total assets $20,064,266
-----------
Liabilities:
Payable for Series shares reacquired $ 10,444
Payable for investments purchased 754,763
Payable to affiliate for management fee 1,167
Accrued expenses and other liabilities 48,120
-----------
Total liabilities $ 814,494
-----------
Net assets $19,249,772
===========
Net assets consist of:
Paid-in capital $18,170,528
Unrealized appreciation on investments and translation of
assets and liabilities in foreign currencies 1,073,950
Accumulated undistributed net realized gain on investments
and foreign currency transactions 5,068
Accumulated undistributed net investment income 226
-----------
Total $19,249,772
===========
Shares of beneficial interest outstanding 1,404,528
=========
Net asset value per share
(net assets of $19,249,772 / 1,404,528 shares of beneficial
interest outstanding) $13.71
======
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statement of Operations
- ------------------------------------------------------------------------------------------
Year Ended December 31, 1996
- ------------------------------------------------------------------------------------------
<S> <C>
Net investment income:
Income -
Interest $ 247,023
Dividends 125,576
Foreign taxes withheld (1,297)
----------
Total investment income $ 371,302
----------
Expenses -
Management fee $ 60,979
Trustees' compensation 2,033
Shareholder servicing agent fee 2,799
Auditing fees 59,356
Printing 29,675
Custodian fee 5,117
Amortization of organization expenses 1,842
Legal fees 1,214
Miscellaneous 6,672
----------
Total expenses $ 169,687
Fees paid indirectly (662)
Reduction of expenses by investment adviser (87,721)
----------
Net expenses $ 81,304
----------
Net investment income $ 289,998
----------
Realized and unrealized gain (loss) on investments:
Realized gain (identified cost basis) -
Investment transactions $ 124,940
Foreign currency transactions 226
----------
Net realized gain on investments and foreign currency transactions $ 125,166
----------
Change in unrealized appreciation (depreciation) -
Investments $ 823,214
Translation of assets and liabilities in foreign currencies (8)
----------
Net unrealized gain on investments and foreign currency translation $ 823,206
----------
Net realized and unrealized gain on investments and foreign currency $ 948,372
----------
Increase in net assets from operations $1,238,370
==========
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
- -----------------------------------------------------------------------------------------------------------------
Year Ended Period Ended
December 31, 1996 December 31, 1995*
- -----------------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets:
<S> <C> <C>
From operations -
Net investment income $ 289,998 $ 55,290
Net realized gain on investments and foreign currency transactions 125,166 50,806
Net unrealized gain on investments and foreign currency translation 823,206 250,744
----------- ----------
Increase in net assets from operations $ 1,238,370 $ 356,840
----------- ----------
Distributions declared to shareholders -
From net investment income $ (287,177) $ (54,152)
From net realized gain on investments and foreign currency transactions (124,941) (50,806)
In excess of net realized gain on investments and foreign currency
transactions -- (14)
----------- ----------
Total distributions declared to shareholders $ (412,118) $ (104,972)
----------- ----------
Series share (principal) transactions -
Net proceeds from sale of shares $17,739,649 $3,794,238
Net asset value of shares issued to shareholders in reinvestment of
distributions 412,118 104,970
Cost of shares reacquired (2,525,317) (1,362,606)
----------- ----------
Increase in net assets from Series share transactions $15,626,450 $2,536,602
----------- ----------
Total increase in net assets $16,452,702 $2,788,470
Net assets:
At beginning of period 2,797,070 8,600
----------- ----------
At end of period (including accumulated undistributed net investment
income of $226 and $1,138, respectively) $19,249,772 $2,797,070
=========== ==========
*For the period from the commencement of investment operations, January 3, 1995 to December 31, 1995.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
- ---------------------------------------------------------------------------------------------------------
Year Ended Period Ended
December 31, 1996 December 31, 1995*
- ---------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C>
Net asset value - beginning of period $12.25 $10.00
------ ------
Income from investment operations# -
Net investment income(S) $ 0.46 $ 0.41
Net realized and unrealized gain on investments and foreign currency
transactions 1.30 2.32
------ ------
Total from investment operations $ 1.76 $ 2.73
------ ------
Less distributions declared to shareholders -
From net investment income $(0.21) $(0.25)
From net realized gain on investments and foreign currency
transactions (0.09) (0.23)
------ ------
Total distributions declared to shareholders $(0.30) $(0.48)
------ ------
Net asset value - end of period $13.71 $12.25
====== ======
Total return 14.37% 27.34%++
Ratios (to average net assets)/Supplemental data(S):
Expenses 1.00% 1.00%+
Net investment income 3.59% 3.83%+
Portfolio turnover 76% 16%
Average commission rate### $0.0485 --
Net assets at end of period (000 omitted) $19,250 $2,797
*For the period from the commencement of investment operations, January 3, 1995 to December 31, 1995.
+Annualized.
++Not annualized.
#Per share data is based on average shares outstanding.
###Average commission rate is calculated for funds with fiscal years beginning on or after September 1, 1995.
(S)The Adviser voluntarily agreed to maintain the expenses of the Series at not more than 1.00% of average
daily net assets. To the extent actual expenses were over these limitations, the net investment income per
share and the ratios would have been:
Net investment income $ 0.32 $ 0.22
Ratios (to average net assets):
Expenses 2.10% 2.49%+
Net investment income 2.49% 2.09%+
</TABLE>
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Total Return Series (the Series) is a diversified series of MFS Variable
Insurance Trust (the Trust) which is comprised of the following twelve series:
MFS Bond Series, MFS Emerging Growth Series, MFS Growth with Income Series,
MFS High Income Series, MFS Limited Maturity Series, MFS Money Market Series,
MFS Research Series, MFS Strategic Fixed Income Series, MFS Total Return
Series, MFS Utilities Series, MFS Value Series and MFS World Governments
Series. The Trust is organized as a Massachusetts business trust and is
registered under the Investment Company Act of 1940, as amended, as an open-
end management investment company.
The shareholders of each Series of the Trust are separate accounts of
insurance companies which offer variable annuity and/or life insurance
products. As of December 31, 1996 there were 20 shareholders in the Series.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investments in foreign securities are vulnerable to the effects of changes in
the relative values of the local currency and the U.S. dollar and to the
effects of changes in each country's legal, political and economic
environment.
Investment Valuations - Equity securities listed on securities exchanges or
reported through the NASDAQ system are valued at last sale prices. Unlisted
equity securities or listed equity securities for which last sale prices are
not available are valued at last quoted bid prices. Debt securities (other
than short-term obligations which mature in 60 days or less), including listed
issues, are valued on the basis of valuations furnished by dealers or by a
pricing service with consideration to factors such as institutional-size
trading in similar groups of securities, yield, quality, coupon rate,
maturity, type of issue, trading characteristics and other market data,
without exclusive reliance upon exchange or over-the-counter prices. Short-
term obligations, which mature in 60 days or less, are valued at amortized
cost, which approximates market value. Securities for which there are no such
quotations or valuations are valued at fair value as determined in good faith
by or at the direction of the Trustees.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases
and sales of foreign investments, income and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates
of such transactions. Gains and losses attributable to foreign currency
exchange rates on sales of securities are recorded for financial statement
purposes as net realized gains and losses on investments. Gains and losses
attributable to foreign exchange rate movements on income and expenses are
recorded for financial statement purposes as foreign currency transaction
gains and losses. That portion of both realized and unrealized gains and
losses on investments that result from fluctuations in foreign currency
exchange rates is not separately disclosed.
Deferred Organization Expenses - Costs incurred by the Series in connection
with its organization have been deferred and are being amortized on a
straight-line basis over a five-year period beginning on the date of
commencement of Series operations.
Investment Transactions and Income - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
and original issue discount are amortized or accreted for financial statement
and tax reporting purposes as required by federal income tax regulations.
Dividend income is recorded on the ex-dividend date for dividends received in
cash. Dividend and interest payments received in additional securities are
recorded on the ex-dividend or ex-interest date in an amount equal to the
value of the security on such date.
Fees Paid Indirectly - The Series' custodian bank calculates its fee based on
the Series' average daily net assets. This fee is reduced according to an
expense offset arrangement with State Street Bank, the dividend disbursing
agent, which provides for partial reimbursement of custody fees based on a
formula developed to measure the value of cash deposited by the Series with
the custodian and with the dividend disbursing agent. This amount is shown as
a reduction of expenses on the Statement of Operations.
Tax Matters and Distributions - The Series' policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. The Series files a tax
return annually using tax accounting methods required under provisions of the
Code which may differ from generally accepted accounting principles, the basis
on which these financial statements are prepared. Accordingly, the amount of
net investment income and net realized gain reported on these financial
statements may differ from that reported on the Series' tax return and,
consequently, the character of distributions to shareholders reported in the
financial highlights may differ from that reported to shareholders on Form
1099-DIV. Foreign taxes have been provided for on interest and dividend income
earned on foreign investments in accordance with the applicable country's tax
rates and to the extent unrecoverable are recorded as a reduction of
investment income. The Series expects to pass through to shareholders foreign
income taxes paid. The election increases the taxable distributions of the
Series by the amount of the foreign taxes paid. An individual shareholder who
itemizes deductions, or a corporate shareholder, will be able to claim an
offsetting deduction or a tax credit (but not both) on their federal income
tax returns. Individuals who do not itemize deductions may claim a foreign tax
credit but not a deduction. The foreign source income is considered passive
income for the purpose of computing the foreign tax credit limitations.
Distributions to shareholders are recorded on the ex-dividend date.
The Series distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a tax return
of capital. Differences in the recognition or classification of income between
the financial statements and tax earnings and profits which result in
temporary over-distributions for financial statement purposes, are classified
as distributions in excess of net investment income or accumulated net
realized gains. During the year ended December 31, 1996, $1,124 was
reclassified from paid-in capital and $226 and $898 were reclassified to
accumulated undistributed net investment income and accumulated undistributed
net realized gain on investments and foreign currency transactions,
respectively, due to differences between book and tax accounting for currency
transactions. This change had no effect on the net assets or net asset value
per share. At December 31, 1996, accumulated undistributed net investment
income and accumulated undistributed net realized gain on investments and
foreign currency transactions under book accounting were different from tax
accounting due to temporary differences in accounting for tax spillbacks and
wash sales.
(3) Transactions with Affiliates
Investment Adviser - The Series has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.75%
of average daily net assets. Under a temporary expense limitation agreement
with MFS, MFS has voluntarily agreed to pay all of the Series' operating
expenses, exclusive of management fees, which exceed 0.25% of the Series'
average daily net assets. The Series in turn will pay MFS an expense
reimbursement fee not greater than 0.25% of the Series' average daily net
assets. To the extent that the expense reimbursement fee exceeds the Series'
actual expenses, the excess will be applied to amounts paid by MFS in prior
years. At December 31, 1996, the aggregate unreimbursed expenses owed to MFS
by the Series amounted to $112,813, including $87,721 incurred in the current
year.
The Series pays no compensation directly to its Trustees who are officers of
the investment adviser, or to officers of the Series, all of whom receive
remuneration for their services to the Series from MFS. Certain officers and
Trustees of the Series are officers or directors of MFS and MFS Service
Center, Inc. (MFSC).
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as
a percentage of the average daily net assets at an effective annual rate of up
to 0.035%.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions
and short-term obligations, were as follows:
Purchases Sales
- ----------------------------------------------------------------------------
U.S. government securities $ 6,444,830 $2,530,636
=========== ==========
Investments (non-U.S. government securities) $13,196,056 $2,933,540
=========== ==========
The cost and unrealized appreciation or depreciation in value of the
investments owned by the Series, as computed on a federal income tax basis,
are as follows:
Aggregate cost $18,705,930
===========
Gross unrealized appreciation $ 1,159,676
Gross unrealized depreciation (85,718)
-----------
Net unrealized appreciation $ 1,073,958
===========
(5) Shares of Beneficial Interest
The Series' Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par
value). Transactions in Series shares were as follows:
<TABLE>
<CAPTION>
Year Ended Period Ended
December 31, 1996 December 31, 1995*
-------------------------------- ------------------------------
Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 1,341,544 $17,739,649 333,436 $3,794,238
Shares issued to shareholders in
reinvestment of distributions 29,841 412,118 8,611 104,970
Shares reacquired (195,111) (2,525,317) (114,653) (1,362,606)
--------- ----------- ------- ----------
Net increase 1,176,274 $15,626,450 227,394 $2,536,602
========= =========== ======= ==========
*For the period from the commencement of investment operations, January 3, 1995 to December 31, 1995.
</TABLE>
(6) Line of Credit
The Series entered into an agreement which enables it to participate with
other funds managed by MFS in an unsecured line of credit with a bank which
permits borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Series shares. Interest is charged to
each fund, based on its borrowings, at a rate equal to the bank's base rate.
In addition, a commitment fee, based on the average daily unused portion of
the line of credit, is allocated among the participating funds at the end of
each quarter. The commitment fee allocated to the Series for the year ended
December 31, 1996 was $99.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Variable Insurance Trust and Shareholders of MFS Total
Return Series:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of MFS Total Return Series (the
Series) (one of the series constituting the MFS Variable Insurance Trust) as
of December 31, 1996, the related statement of operations for the year then
ended, the statements of changes in net assets and financial highlights for
the year then ended and for the period from January 3, 1995 (the commencement
of investment operations) to December 31, 1995. These financial statements and
financial highlights are the responsibility of the Series' management. Our
responsibility is to express an opinion on these financial statements and
financial highlights 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 financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of the
securities owned at December 31, 1996 by correspondence with the custodian and
brokers; where replies were not received from brokers, we performed other
auditing procedures. 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 provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Total Return
Series at December 31, 1996, the results of its operations, the changes in its
net assets, and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 7, 1997
---------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
VTR 2/97 2.5M
<PAGE>
[Logo] M F S(SM) ANNUAL REPORT
INVESTMENT MANAGEMENT FOR YEAR ENDED
DECEMBER 31, 1996
MFS(R) UTILITIES SERIES
A SERIES OF MFS(R) VARIABLE INSURANCE TRUST
[Graphic Omitted]
<PAGE>
MFS(R) UTILITIES SERIES
A SERIES OF MFS(R) VARIABLE INSURANCE TRUST
TRUSTEES INVESTMENT ADVISER
A. Keith Brodkin* Massachusetts Financial Services
Chairman and President Company
500 Boylston Street
Nelson J. Darling, Jr. Boston, MA 02116-3741
Trustee, Eastern Enterprises
(diversified holding company) DISTRIBUTOR
MFS Fund Distributors, Inc.
William R. Gutow 500 Boylston Street
Vice Chairman, Boston, MA 02116-3741
Capitol Entertainment Management Company
(Blockbuster Video Franchise) SHAREHOLDER SERVICE CENTER
MFS Service Center, Inc.
PORTFOLIO MANAGER P.O. Box 1400
Maura Shaughnessy* Boston, MA 02107-9906
TREASURER For additional information,
W. Thomas London* contact your financial adviser.
ASSISTANT TREASURER CUSTODIAN
James O. Yost* Investors Bank & Trust Company
SECRETARY AUDITORS
Stephen E. Cavan* Deloitte & Touche LLP
ASSISTANT SECRETARY WORLD WIDE WEB
James R. Bordewick, Jr.* www.mfs.com
*Affiliated with the Investment Adviser
<PAGE>
Dear Contract Owner:
The pattern of slow but sustainable growth seen in most of the world in 1996
seems likely to continue in 1997. While it looks like U.S. growth in 1997 will
slow modestly relative to 1996, there is evidence that Europe and, to a lesser
degree, Japan are continuing their recoveries from recession. At the same time,
companies in many emerging markets are reporting robust increases in earnings as
these markets benefit from higher-than-average economic growth and market
reforms, which should continue to provide more opportunities for development and
trade.
After more than six years of expansion, the U.S. economy appears headed
toward another year of moderate growth in 1997, although a few signs point to
the possibility of a modest rise in inflation during the year. On the positive
side, the pattern of moderate growth and inflation set over the past few years
now seems fairly well entrenched in the economy and, short of a major
international or domestic crisis, appears to have enough momentum to remain on
track for some time. Recent gains in such important sectors as housing,
automobiles, industrial production, and exports indicate a fair amount of
underlying strength in the economy. However, some reason for caution can be seen
in the continuing high level of consumer debt and the attendant rise in personal
bankruptcies, as well as in the modestly disappointing levels of holiday sales.
Furthermore, the ongoing tightness in labor markets, and price rises in such
important sectors as energy, could add some inflationary pressures to the
economy. Given these somewhat conflicting indicators, we expect real
(inflation-adjusted) growth to revolve around 2% in 1997, which would represent
a modest decline from 1996.
We continue to urge U.S. equity investors to lower their expectations for
1997 and to point out that the impressive gains of the past two years are not
sustainable. Just as the slowdown in corporate earnings growth and increases in
interest rates in 1996 raised some near-term concerns, further interest rate
increases and an acceleration of inflation could negatively affect the stock
market in 1997. However, to the extent that some slowdown in earnings means that
the economy is not overheating, this may be beneficial for the equity market in
the long run. Also, we believe many of the technology-driven productivity gains
that U.S. companies have made in recent years will continue to enhance corporate
America's competitiveness and profitability. Therefore, while we have some
near-term concerns, we remain reasonably positive about the long-term viability
of the equity market.
In U.S. bond markets, conflicting signals over the strength of the economy
have created near-term volatility. Even comments by Federal Reserve Board
Chairman Alan Greenspan in late 1996 created some uncertainty over the Federal
Reserve's next move. We expect the Fed to maintain its anti-inflationary stance
should signs of more rapid economic growth and, particularly, higher inflation
resurface. While inflationary forces largely remained in check in 1996, the
continued strength in the labor market and rising energy prices mean that a
pickup in inflation is still possible. At the same time, the U.S. budget deficit
continues to decline and, as a percentage of gross domestic product, is now less
than 2%, which we consider a positive development for the bond markets. Although
interest rates may move higher over the coming months, we believe that, at
current levels, fixed-income markets remain equitably valued.
Internationally, the environment of moderate growth, benign inflation, and
fairly steady interest rates is also providing support for investment markets
and should help support valuation levels in the coming year. Throughout the
world, the key to stock market performance in 1997 will be corporate earnings
growth. While U.S. earnings growth is slowing but still expected to be fairly
healthy, we anticipate that a number of European countries will see an
acceleration in earnings growth and improved valuations in 1997. Despite this
environment, many European countries trade at discounts to the United States. In
particular, we see opportunities in some of the multinationals and businesses
with the ability to generate steady earnings growth. In Japan, a recovery
appears to be taking place, but at a very modest rate, with valuations still at
high levels. In the emerging markets, the long-term economic growth story
remains intact and, although selectivity is even more important in these
markets, more companies are benefiting from this growth and trading at
below-average global valuations.
Comments from the portfolio manager of the Series are presented below. We
appreciate your support and welcome any questions or comments you may have.
Respectfully,
/s/ A. Keith Brodkin /s/ Maura Shaughnessy
A. Keith Brodkin Maura Shaughnessy
Chairman and President Portfolio Manager
January 9, 1997
MFS UTILITIES SERIES
For the 12 months ended December 31, 1996, the Series provided a total return of
18.51%, which compares to a 3.12% return for the Standard & Poor's Utility Index
(the Utility Index), an unmanaged, market-value weighted, total-return index of
all utility stocks in the Standard & Poor's 500 Composite Index (the S&P 500).
The Series' performance benefited from its overweighting in natural gas
stocks, which were terrific performers in 1996. Also, two of the Series' larger
holdings, Portland General and MCI Communications, were bought out by Enron and
British Telephone, respectively. Electric utility stocks comprise a large
portion of the Series' equity position, and although electric utilities are
facing a period of deregulation, the pace of change is slower than had been
anticipated, which is favorable for these stocks, while certain companies are
preparing themselves to thrive in the new environment. Meanwhile, natural gas
companies are benefiting from stronger-than-expected earnings growth due to
robust earnings from nonregulated businesses.
Generally, the Series' assets are more interest rate sensitive than the
overall market, and while the weak bond market in the first half of the Series'
fiscal year hurt utility stocks, its recent strengthening has helped them.
The Series was underweighted in telecommunications stocks for the entire
year. The passage of the federal Telecommunications Act placed an overhang of
uncertainty on these stocks, and we expect it will be several years before we
know who the winners and losers are from this legislation. For the large-
capitalization stocks in this sector, we expect earnings per share growth to
decline.
About 20% of the Series is invested internationally. Typically, while they
may carry more risk, international markets can offer much higher growth and, at
times, a more constructive regulatory environment than the United States.
PowerGen, a U.K. electric generating company, is one of the cheapest utilities
in the world based on growth relative to its earnings and cash flow generation.
Telefonica del Peru, meanwhile, is enjoying an excellent combination of robust
growth and rational regulation.
Another 10% of assets is invested in REITs (real estate investment trusts),
which we believe offer higher yields and stronger dividend growth than the
typical utility. Our strategy is to hold a diversified group including health
care, self-storage, hotel, apartment, office, and industrial REITs.
PORTFOLIO MANAGER'S PROFILE
Maura Shaughnessy joined MFS in 1991 as an equity analyst. A graduate of Colby
College and the Amos Tuck School of Business at Dartmouth College, she was
promoted to Assistant Vice President in 1992 and Vice President in 1993. She has
managed MFS Utilities Series since January 1995. Ms. Shaughnessy is a Chartered
Financial Analyst.
FEDERAL INCOME TAX INFORMATION ON DISTRIBUTIONS
The MFS Utilities Series has designated $139,948.00 as a long-term capital gain.
DIVIDENDS-RECEIVED DEDUCTION
For the year ended December 31, 1996, the amount of distributions from income
eligible for the 70% dividends-received deduction for corporations, came to
17.55%.
PERFORMANCE SUMMARY
The information below illustrates the historical performance of MFS Utilities
Series shares in comparison to various market indicators. Benchmark comparisons
are unmanaged and do not reflect any fees or expenses. You cannot invest in an
index.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the Period from January 1, 1995 to December 31, 1996)
MFS Utilities Series Consumer Price Index - U.S. S&P Utility Index
1/95 10000.0 10000.0 10000.0
6/95 11260.0 10187.0 11484.0
12/95 13394.0 10247.0 14113.0
6/96 13969.0 10464.0 14119.0
12/96 15873.0 10615.0 14553.0
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1996
1 Year Life(+)
- ------------------------------------------------------------------------------
MFS Utilities Series +18.51% +26.07%
- ------------------------------------------------------------------------------
Standard & Poor's Utility Index** + 3.12% +20.64%
- ------------------------------------------------------------------------------
Consumer Price Index* + 3.59% + 3.04%
- ------------------------------------------------------------------------------
+ For the period from the commencement of investment operations, January 3,
1995 to December 31, 1996.
** Source: Lipper Analytical Services.
* The Consumer Price Index is a popular measure of change in prices.
Returns shown do not reflect the deduction of the mortality and expense risk
charges and administration fees. Please refer to the product's annual report for
performance that reflects the fees and charges imposed by insurance company
separate accounts.
Investment return and principal value will fluctuate, and shares, when redeemed,
may be worth more or less than their original cost. Past performance is no
guarantee of future results.
Series results reflect any applicable expense subsidies and waivers, without
which the performance results would have been less favorable. Subsidies and
waivers may be rescinded at any time. See the prospectus for details.
<PAGE>
PORTFOLIO OF INVESTMENTS - December 31, 1996
Non-Convertible Bonds - 16.4%
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
U.S. Bonds - 16.1%
Financial Institutions - 0.2%
Boise Cascade Corp., 7.43s, 2005 $ 15 $ 15,225
Equitable Life Assurance, 7.7s, 2015 3 2,999
Liberty Mutual Insurance Co., 8.2s, 2007## 5 5,310
----------
$ 23,534
- -------------------------------------------------------------------------------
Real Estate Investment Trust - 0.3%
Loewen Group International, Inc., 7.75s, 2001## $ 25 $ 25,438
- -------------------------------------------------------------------------------
Telecommunications - 0.3%
Continental Cablevision, 8.3s, 2006 $ 25 $ 26,632
- -------------------------------------------------------------------------------
U.S. Treasury Obligations - 9.5%
U.S. Treasury Notes, 5.875s, 1998 $ 271 $ 271,127
U.S. Treasury Notes, 6.5s, 2006 40 40,218
U.S. Treasury Notes, 7s, 2006 255 264,922
U.S. Treasury Bonds, 7.625s, 2025 300 333,234
U.S. Treasury Bonds, 6.75s, 2026 5 5,037
----------
$ 914,538
- -------------------------------------------------------------------------------
Utilities - Electric - 1.8%
Arkansas Power & Light Co., 8.75s, 2026 $ 10 $ 10,302
First PV Funding Corp., 10.3s, 2014 25 26,625
First PV Funding Corp., 10.15s, 2016 25 26,562
Long Island Lighting Co., 9s, 2022 25 26,313
Louisiana Power & Light Co., 8.75s, 2026 5 5,056
Montana Power Co., 7.875s, 2026 25 25,219
System Energy Resources, 7.38s, 2000 50 49,852
----------
$ 169,929
- -------------------------------------------------------------------------------
Utilities - Gas - 3.7%
Coastal Corp., 7.75s, 2035 $ 50 $ 49,625
Husky Oil Ltd., 7.125s, 2006 100 100,500
Louis Dreyfus Natural Gas Corp., 9.25s, 2004 25 26,281
Oryx Energy Co., 10s, 2001 25 27,442
Tosco Corp., 7.625s, 2006 125 129,053
Transcontinental Gas, 7.25s, 2026 25 24,500
----------
$ 357,401
- -------------------------------------------------------------------------------
Other - 0.3%
Delta Air Lines Inc., 8.5s, 2002 $ 25 $ 26,470
- -------------------------------------------------------------------------------
Total U.S. Bonds $1,543,942
- -------------------------------------------------------------------------------
Foreign Bonds - 0.3%
Canada - 0.1%
Fairfax Financial Holdings, 8.3s, 2026
(Financial Institutions) $ 5 $ 5,208
Enersis S A, 6.9s, 2006 (Computer Services) 5 4,869
----------
$ 10,077
- -------------------------------------------------------------------------------
Chile - 0.2%
Empresa Electric Del Norts, 7.75s, 2006
(Utilities - Electric)## $ 20 $ 20,163
- -------------------------------------------------------------------------------
Total Foreign Bonds $ 30,240
- -------------------------------------------------------------------------------
Total Non-Convertible Bonds (Identified Cost, $1,602,900) $1,574,182
- -------------------------------------------------------------------------------
Stocks - 78.8%
- -------------------------------------------------------------------------------
Issuer Shares Value
- -------------------------------------------------------------------------------
U.S. Stocks - 61.3%
Consumer Goods and Services - 1.3%
Philip Morris Cos., Inc. 1,100 $ 123,888
- -------------------------------------------------------------------------------
Real Estate Investment Trusts - 11.4%
American General Hospitality Corp. 5,700 $ 135,375
Boykin Lodging Co. 3,600 86,400
Brandywine Realty Trust 5,600 109,200
First Industrial Realty Trust, Inc. 1,100 33,413
Hospitality Properties Trust 3,900 113,100
Innkeepers USA Trust 6,400 88,800
National Health Investors, Inc. 1,850 70,069
Oasis Residential, Inc. 2,900 65,975
Prentiss Properties Trust 3,000 75,000
Shurgard Storage Centers, Inc. 800 23,700
Sovran Self Storage, Inc. 2,000 62,500
Storage Trust Realty 5,400 145,800
Winston Hotels, Inc. 5,800 79,025
----------
$1,088,357
- -------------------------------------------------------------------------------
Utilities - Electric - 23.2%
Allegheny Power Systems, Inc. 1,700 $ 51,638
Boston Edison Co. 4,400 118,250
CMS Energy Corp. 6,950 233,694
Cinergy Corp. 2,800 93,450
Edison International 5,100 101,363
FPL Group, Inc. 1,100 50,600
GPU, Inc. 4,500 151,313
Illinova Corp. 5,500 151,250
NIPSCO Industries, Inc. 2,900 114,913
Pacific Gas & Electric Co. 4,500 94,500
Pinnacle West Capital Corp. 2,500 79,375
Portland General Corp. 3,200 134,400
Public Service Company of Colorado 2,300 89,413
Public Service Company of New Mexico 12,300 241,387
Sierra Pacific Resources 9,600 276,000
Texas Utilities Co. 1,700 69,275
Unicom Corp. 1,800 48,825
Utilicorp United, Inc. 4,500 121,500
----------
$2,221,146
- -------------------------------------------------------------------------------
Utilities - Gas - 11.9%
Atmos Energy Corp. 700 $ 16,713
Coastal Corp. 1,900 92,863
Columbia Gas Systems, Inc. 2,100 133,612
El Paso Natural Gas Co. 1,800 90,900
Energen Corp. 500 15,125
K N Energy, Inc. 3,100 121,675
Noble Affiliates, Inc. 1,100 52,662
PanEnergy Corp. 3,500 157,500
Sonat, Inc. 1,900 97,850
Tejas Gas Corp.* 700 33,338
Union Pacific Resources Group, Inc. 2,400 70,200
Westcoast Energy, Inc. 2,920 48,910
Western Gas Resources, Inc. 5,700 109,725
Williams Cos., Inc. 2,700 $ 101,250
----------
$1,142,323
- -------------------------------------------------------------------------------
Utilities - Telephone - 13.5%
BCE, Inc. 1,100 $ 52,525
BellSouth Corp. 1,500 60,562
Frontier Corp. 2,900 65,613
GTE Corp. 3,700 168,350
ICG Communications, Inc.* 4,800 84,600
MCI Communications Corp. 5,900 192,856
MFS Communications Co., Inc. 4,700 256,150
NYNEX Corp. 2,000 96,250
Pacific Telesis Group 3,300 121,275
SBC Communications, Inc. 1,600 82,800
Telephone & Data Systems, Inc. 3,000 108,750
----------
$1,289,731
- -------------------------------------------------------------------------------
Total U.S. Stocks $5,865,445
- -------------------------------------------------------------------------------
Foreign Stocks - 17.5%
Argentina - 1.0%
Central Costenera, ADR (Utilities - Electric)## 3,200 $ 97,937
- -------------------------------------------------------------------------------
Brazil - 2.3%
Centrais Electricas Brasileiras S.A.,
ADR (Utilities - Electric) 3,700 $ 68,723
Telecomunicacoes Brasileiras S.A., ADR
(Utilities - Telephone) 2,000 153,000
----------
$ 221,723
- -------------------------------------------------------------------------------
Canada - 0.5%
TransCanada Pipe Lines Ltd. (Utilities - Gas) 2,700 $ 47,250
- -------------------------------------------------------------------------------
Chile - 1.8%
Chilectra S.A., ADR (Utilities - Electric) 2,200 $ 117,700
Chilgener S.A., ADR (Utilities - Electric) 2,700 56,362
----------
$ 174,062
- -------------------------------------------------------------------------------
Italy - 1.0%
Telecom Italia S.p.A. Di Risp
(Utilities - Telephone) 67,400 $ 95,964
- -------------------------------------------------------------------------------
Peru - 1.8%
Telefonica del Peru S.A.,
ADR (Utilities - Telephone) 7,900 $ 149,112
Telefonica del Peru S.A.,
"B" (Utilities - Telephone) 14,500 27,083
----------
$ 176,195
- -------------------------------------------------------------------------------
Philippines - 0.3%
Pilpino Telephone (Utilities - Telephone) 29,000 $ 24,534
- -------------------------------------------------------------------------------
Portugal - 1.1%
Portugal Telecom S.A., ADR (Utilities - Telephone) 2,400 $ 67,800
Portugal Telecom S.A. (Utilities - Telephone) 1,200 34,164
----------
$ 101,964
- -------------------------------------------------------------------------------
South Korea - 0.8%
Korea Mobile Telecommunications, ADR
(Utilities - Telephone)* 6,180 $ 79,567
- -------------------------------------------------------------------------------
Spain - 2.6%
Empresa Nacional de Electricidad, ADR
(Utilities - Electric) 1,300 $ 91,000
Empresa Nacional de Electricidad, ADR
(Utilities - Electric) 1,800 27,900
Iberdrola S.A. (Utilities - Electric) 6,100 86,288
Telefonica de Espana S.A., ADR
(Utilities - Telephone) 600 $ 41,550
----------
$ 246,738
- -------------------------------------------------------------------------------
United Kingdom - 4.3%
National Grid Group PLC (Utilities - Electric) 27,000 $ 90,099
National Power PLC (Utilities - Electric) 11,400 95,504
PowerGen PLC (Utilities - Electric) 22,800 223,180
----------
$ 408,783
- -------------------------------------------------------------------------------
Total Foreign Stocks $1,674,717
- -------------------------------------------------------------------------------
Total Stocks (Identified Cost, $6,899,724) $7,540,162
- -------------------------------------------------------------------------------
Foreign Convertible Preferred Stock - 0.1%
- -------------------------------------------------------------------------------
Argentina
Compania Inversiones Telephone, 7%
(Utilities - Telephone)##
(Identified Cost, $5,775) 100 $ 5,200
- -------------------------------------------------------------------------------
Short-Term Obligation - 4.4%
- -------------------------------------------------------------------------------
Principal Amount
(000 Omitted)
- -------------------------------------------------------------------------------
Student Loan Marketing Assn., due 1/02/97,
at Amortized Cost $ 420 $ 419,854
- -------------------------------------------------------------------------------
Total Investments (Identified Cost, $8,928,253) $9,539,398
Other Assets, Less Liabilities - 0.3% 32,743
- -------------------------------------------------------------------------------
Net Assets - 100.0% $9,572,141
- -------------------------------------------------------------------------------
*Non-income producing security.
##SEC Rule 144A restriction.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ------------------------------------------------------------------------------
December 31, 1996
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $8,928,253) $9,539,398
Cash 10,176
Receivable for Series shares sold 64,821
Receivable for investments sold 53,579
Interest and dividends receivable 68,278
Receivable from investment adviser 37,645
Deferred organization expenses 5,535
Other assets 26
----------
Total assets $9,779,458
----------
Liabilities:
Distributions payable $ 71
Payable for Series shares reacquired 8,676
Payable for investments purchased 156,022
Payable to affiliate for management fee 552
Accrued expenses and other liabilities 41,996
----------
Total liabilities $ 207,317
----------
Net assets $9,572,141
==========
Net assets consist of:
Paid-in capital $8,962,715
Unrealized appreciation on investments and translation of
assets and liabilities in foreign currencies 611,242
Accumulated net realized loss on investments and foreign
currency transactions (1,816)
----------
Total $9,572,141
==========
Shares of beneficial interest outstanding 700,567
=======
Net asset value per share
(net assets of $9,572,141 / 700,567 shares of beneficial
interest outstanding) $13.66
======
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- ------------------------------------------------------------------------------
Year Ended December 31, 1996
- ------------------------------------------------------------------------------
Net investment income:
Income -
Dividends $ 206,973
Interest 79,239
Foreign taxes withheld (11,554)
----------
Total investment income $ 274,658
----------
Expenses -
Management fee $ 39,863
Trustees' compensation 2,033
Shareholder servicing agent fee 1,841
Auditing fees 47,656
Printing 44,183
Custodian fee 3,367
Amortization of organization expenses 1,842
Legal fees 1,214
Miscellaneous 3,590
----------
Total expenses $ 145,589
Fees paid indirectly (562)
Reduction of expenses by investment adviser (91,877)
----------
Net expenses $ 53,150
----------
Net investment income $ 221,508
----------
Realized and unrealized gain on investments:
Realized gain (identified cost basis) -
Investment transactions $ 562,324
Foreign currency transactions 739
----------
Net realized gain on investments and foreign currency
transactions $ 563,063
----------
Change in unrealized appreciation -
Investments $ 375,075
Translation of assets and liabilities in foreign currencies 175
----------
Net unrealized gain on investments and foreign currency
translation $ 375,250
----------
Net realized and unrealized gain on investments and
foreign currency $ 938,313
----------
Increase in net assets from operations $1,159,821
==========
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statements of Changes in Net Assets
- ------------------------------------------------------------------------------
Year Ended Period Ended
December 31, 1996 December 31, 1995*
- ------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment income $ 221,508 $ 45,685
Net realized gain on investments
and foreign currency transactions 563,063 103,820
Net unrealized gain on investments
and foreign currency translation 375,250 235,992
----------- -----------
Increase in net assets from
operations $ 1,159,821 $ 385,497
----------- -----------
Distributions declared to shareholders -
From net investment income $ (219,486) $ (42,590)
From net realized gain on investments
and foreign currency transactions (565,934) (100,949)
In excess of net realized gain on
investments and foreign currency
transactions (3,558) --
----------- -----------
Total distributions declared to
shareholders $ (788,978) $ (143,539)
----------- -----------
Series share (principal) transactions -
Net proceeds from sale of shares $10,713,267 $ 3,789,585
Net asset value of shares issued to
shareholders in reinvestment of
distributions 788,907 143,519
Cost of shares reacquired (4,674,045) (1,810,493)
----------- -----------
Increase in net assets from
Series share transactions $ 6,828,129 $ 2,122,611
----------- -----------
Total increase in net assets $ 7,198,972 $ 2,364,569
Net assets:
At beginning of period 2,373,169 8,600
----------- -----------
At end of period (including
accumulated undistributed net
investment income of $0 and
$3,095, respectively) $ 9,572,141 $ 2,373,169
=========== ===========
*For the period from the commencement of investment operations, January 3,
1995 to December 31, 1995.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights
- --------------------------------------------------------------------------------
Year Ended Period Ended
December 31, 1996 December 31, 1995*
- --------------------------------------------------------------------------------
Per share data (for a share
outstanding throughout each period):
Net asset value - beginning of period $12.57 $10.00
------ ------
Income from investment operations# -
Net investment income(S) $ 0.55 $ 0.39
Net realized and unrealized gain on
investments and foreign currency
transactions 1.78 3.00
------ ------
Total from investment operations $ 2.33 $ 3.39
------ ------
Less distributions declared to
shareholders -
From net investment income $(0.35) $(0.24)
From net realized gain on
investments and foreign currency
transactions (0.88) (0.58)
In excess of realized gain on
investments and foreign currency
transactions (0.01) --
------ ------
Total distributions declared to shareholders $(1.24) $(0.82)
------ ------
Net asset value - end of period $13.66 $12.57
====== ======
Total return 18.51% 33.94%++
Ratios (to average net assets)/Supplemental data(S):
Expenses 1.00% 1.00%+
Net investment income 4.19% 3.66%+
Portfolio turnover 121% 94%
Average commission rate### $0.041
6 --
Net assets at end of period (000 omitted) $9,572 $2,373
* For the period from the commencement of investment operations, January 3,
1995 to December 31, 1995.
+ Annualized.
++ Not annualized.
# Per share data is based on average shares outstanding.
### Average commission rate is calculated for funds with fiscal years beginning
on or after September 1, 1995.
(S) The Adviser voluntarily agreed to maintain the expenses of the Series at not
more than 1.00% of average daily net assets. To the extent actual expenses
were over these limitations, the net investment income per share and the
ratios would have been:
Net investment income $ 0.32 $ 0.17
Ratios (to average net assets):
Expenses 2.75% 3.08%+
Net investment income 2.44% 1.62%+
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Utilities Series (the Series) is a non-diversified series of MFS Variable
Insurance Trust (the Trust) which is comprised of the following 12 series: MFS
Bond Series, MFS Emerging Growth Series, MFS Growth with Income Series, MFS High
Income Series, MFS Limited Maturity Series, MFS Money Market Series, MFS
Research Series, MFS Strategic Fixed Income Series, MFS Total Return Series, MFS
Utilities Series, MFS Value Series and MFS World Governments Series. The Trust
is organized as a Massachusetts business trust and is registered under the
Investment Company Act of 1940, as amended, as an open-end management investment
company.
The shareholders of each Series of the Trust are separate accounts of insurance
companies which offer variable annuity and/or life insurance products. As of
December 31, 1996 there were 16 shareholders in the Series.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Investments
in foreign securities are vulnerable to the effects of changes in the relative
values of the local currency and the U.S. dollar and to the effects of changes
in each country's legal, political and economic environment.
Investment Valuations - Equity securities listed on securities exchanges or
reported through the NASDAQ system are valued at last sale prices. Unlisted
equity securities or listed equity securities for which last sale prices are not
available are valued at last quoted bid prices. Debt securities (other than
short-term obligations which mature in 60 days or less), including listed issues
and forward contracts, are valued on the basis of valuations furnished by
dealers or by a pricing service with consideration to factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data, without exclusive reliance upon exchange or over-the-counter prices.
Short-term obligations, which mature in 60 days or less, are valued at amortized
cost, which approximates market value. Securities for which there are no such
quotations or valuations are valued at fair value as determined in good faith by
or at the direction of the Trustees.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases and
sales of foreign investments, income and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates of
such transactions. Gains and losses attributable to foreign currency exchange
rates on sales of securities are recorded for financial statement purposes as
net realized gains and losses on investments. Gains and losses attributable to
foreign exchange rate movements on income and expenses are recorded for
financial statement purposes as foreign currency transaction gains and losses.
That portion of both realized and unrealized gains and losses on investments
that result from fluctuations in foreign currency exchange rates is not
separately disclosed.
Deferred Organization Expenses - Costs incurred by the Series in connection with
its organization have been deferred and are being amortized on a straight-line
basis over a five-year period beginning on the date of commencement of Series
operations.
Forward Foreign Currency Exchange Contracts - The Series may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering into these contracts from the potential inability of counterparties to
meet the terms of their contracts and from unanticipated movements in the value
of a foreign currency relative to the U.S. dollar. The Series will enter into
forward contracts for hedging purposes as well as for non-hedging purposes. For
hedging purposes, the Series may enter into contracts to deliver or receive
foreign currency it will receive from or require for its normal investment
activities. The Series may also use contracts in a manner intended to protect
foreign currency-denominated securities from declines in value due to
unfavorable exchange rate movements. For non-hedging purposes, the Series may
enter into contracts with the intent of changing the relative exposure of the
Series' portfolio of securities to different currencies to take advantage of
anticipated changes. The forward foreign currency exchange contracts are
adjusted by the daily exchange rate of the underlying currency and any gains or
losses are recorded for financial statement purposes as unrealized until the
contract settlement date.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for financial statement and
tax reporting purposes as required by federal income tax regulations. Dividend
income is recorded on the ex-dividend date for dividends received in cash.
Dividend and interest payments received in additional securities are recorded on
the ex-dividend or ex-interest date in an amount equal to the value of the
security on such date.
Fees Paid Indirectly - The Series' custodian bank calculates its fee based on
the Series' average daily net assets. This fee is reduced according to an
expense offset arrangement with State Street Bank, the dividend disbursing
agent, which provides for partial reimbursement of custody fees based on a
formula developed to measure the value of cash deposited by the Series with the
custodian and with the dividend disbursing agent. This amount is shown as a
reduction of expenses on the Statement of Operations.
Tax Matters and Distributions - The Series' policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. The Series files a tax
return annually using tax accounting methods required under provisions of the
Code which may differ from generally accepted accounting principles, the basis
on which these financial statements are prepared. Accordingly, the amount of net
investment income and net realized gain reported on these financial statements
may differ from that reported on the Series' tax return and, consequently, the
character of distributions to shareholders reported in the financial highlights
may differ from that reported to shareholders on Form 1099-DIV. Foreign taxes
have been provided for on interest and dividend income earned on foreign
investments in accordance with the applicable country's tax rates and to the
extent unrecoverable are recorded as a reduction of investment income. The
Series expects to pass through to shareholders foreign income taxes paid. The
election increases the taxable distributions of the Series by the amount of the
foreign taxes paid. An individual shareholder who itemizes deductions, or a
corporate shareholder, will be able to claim an offsetting deduction or a tax
credit (but not both) on their federal income tax returns. Individuals who do
not itemize deductions may claim a foreign tax credit but not a deduction. The
foreign source income is considered passive income for the purpose of computing
the foreign tax credit limitations. Distributions to shareholders are recorded
on the ex-dividend date.
The Series distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a tax return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains. During the year ended Decemer 31, 1996, $5,117 was reclassified from
accumulated undistributed net investment income and $1,742 and $3,376 were
reclassified to accumulated net realized loss on investments and foreign
currency transactions and paid-in capital, respectively, due to differences
between book and tax accounting for real estate investment trusts and currency
transactions. This change had no effect on the net assets or net asset value per
share. At December 31, 1996, accumulated net realized loss on investments and
foreign currency transactions under book accounting were different from tax
accounting due to temporary differences in accounting for wash sales.
(3) Transactions with Affiliates
Investment Adviser - The Series has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.75% of
average daily net assets. Under a temporary expense limitation agreement with
MFS, MFS has voluntarily agreed to pay all of the Series' operating expenses,
exclusive of management fees, which exceed 0.25% of average daily net assets.
The Series in turn will pay MFS an expense reimbursement fee not greater than
0.25% of the Series' average daily net assets. To the extent that the expense
reimbursement fee exceeds the Series' actual expenses, the excess will be
applied to amounts paid by MFS in prior years. At December 31, 1996, the
aggregate unreimbursed expenses owed to MFS by the Series amounted to $117,390,
including $91,877 incurred in the current year.
The Series pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Series, all of whom receive
remuneration for their services to the Series from MFS. Certain officers and
Trustees of the Series are officers or directors of MFS and MFS Service Center,
Inc. (MFSC).
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as a
percentage of the average daily net assets at an effective annual rate of up to
0.035%.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions and
short-term obligations, were as follows:
Purchases Sales
- ------------------------------------------------------------------------------
U.S. government securities $ 1,962,349 $1,264,570
=========== ==========
Investments (non-U.S. government securities) $10,603,151 $5,257,370
=========== ==========
The cost and unrealized appreciation or depreciation in value of the investments
owned by the Series, as computed on a federal income tax basis, are as follows:
Aggregate cost $8,928,253
==========
Gross unrealized appreciation 826,690
Gross unrealized depreciation (215,545)
----------
Net unrealized appreciation $ 611,145
==========
(5) Shares of Beneficial Interest
The Series' Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Series shares were as follows:
Year Ended Period Ended
December 31, 1996 December 31, 1995*
------------------------ -------------------------
Shares Amount Shares Amount
- ------------------------------------------------------------------------------
Shares sold 809,814 $10,713,267 322,691 $ 3,789,585
Shares issued to
shareholders in
reinvestment
of distributions 57,710 788,907 11,463 143,519
Shares reacquired (355,735) (4,674,045) (146,236) (1,810,493)
-------- ---------- -------- -----------
Net increase 511,789 $ 6,828,129 187,918 $ 2,122,611
======= =========== ======= ===========
*For the period from the commencement of investment operations, January 3, 1995
to December 31, 1995.
(6) Line of Credit
The Series entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Series shares. Interest is charged to each
fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating funds at the end of each
quarter. The commitment fee allocated to the Series for the year ended December
31, 1996 was $60.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Variable Insurance Trust and Shareholders of MFS
Utilities Series:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of MFS Utilities Series (the Series) (one of the
series constituting MFS Variable Insurance Trust) as of December 31, 1996, the
related statement of operations for the year then ended, the statements of
changes in net assets and financial highlights for the year then ended and for
the period from January 3, 1995 (commencement of investment operations) to
December 31, 1995. These financial statements and financial highlights are the
responsibility of the Series' management. Our responsibility is to express an
opinion on these financial statements and financial highlights 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 financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned at
December 31, 1996 by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
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 provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Utilities Series
at December 31, 1996, the results of its operations, the changes in its net
assets, and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 7, 1997
---------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
VUF-2/97 11M
<PAGE>
Annual Report
[logo] for Year Ended
INVESTMENT MANAGEMENT December 31, 1996
MFS(R) HIGH INCOME SERIES
A Series of MFS(R) Variable Insurance Trust
[Graphic Omitted]
<PAGE>
<TABLE>
MFS(R) HIGH INCOME SERIES
A SERIES OF MFS(R) VARIABLE INSURANCE TRUST
<S> <C>
TRUSTEES INVESTMENT ADVISER
A. Keith Brodkin* Massachusetts Financial Services Company
Chairman and President 500 Boylston Street
Boston, MA 02116-3741
Nelson J. Darling, Jr.
Trustee, Eastern Enterprises DISTRIBUTOR
(diversified holding company) MFS Fund Distributors, Inc.
500 Boylston Street
William R. Gutow Boston, MA 02116-3741
Vice Chairman,
Capitol Entertainment Management Company SHAREHOLDER SERVICE CENTER
(Blockbuster Video Franchise) MFS Service Center, Inc.
P.O. Box 1400
PORTFOLIO MANAGER Boston, MA 02107-9906
Joan S. Batchelder*
For additional information,
TREASURER contact your financial adviser.
W. Thomas London*
CUSTODIAN
ASSISTANT TREASURER Investors Bank & Trust Company
James O. Yost*
AUDITORS
SECRETARY Deloitte & Touche LLP
Stephen E. Cavan*
WORLD WIDE WEB
ASSISTANT SECRETARY www.mfs.com
James R. Bordewick, Jr.*
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
Dear Contract Owner:
The pattern of slow but sustainable growth seen in most of the world in 1996
seems likely to continue in 1997. While it looks like U.S. growth in 1997 will
slow modestly relative to 1996, there is evidence that Europe and, to a lesser
degree, Japan are continuing their recoveries from recession. At the same time,
companies in many emerging markets are reporting robust increases in earnings as
these markets benefit from higher-than-average economic growth and market
reforms, which should continue to provide more opportunities for development and
trade.
After more than six years of expansion, the U.S. economy appears headed
toward another year of moderate growth in 1997, although a few signs point to
the possibility of a modest rise in inflation during the year. On the positive
side, the pattern of moderate growth and inflation set over the past few years
now seems fairly well entrenched in the economy and, short of a major
international or domestic crisis, appears to have enough momentum to remain on
track for some time. Also, recent gains in such important sectors as housing,
automobiles, industrial production, and exports indicate a fair amount of
underlying strength in the economy. However, some reason for caution can be seen
in the continuing high level of consumer debt and the attendant rise in personal
bankruptcies, as well as in the modestly disappointing levels of holiday sales.
Furthermore, the ongoing tightness in labor markets, and price rises in such
important sectors as energy, could add some inflationary pressures to the
economy. Given these somewhat conflicting indicators, we expect real
(inflation-adjusted) growth to revolve around 2% in 1997, which would represent
a modest decline from 1996.
We continue to urge U.S. equity investors to lower their expectations for
1997 and to point out that the impressive gains of the past two years are not
sustainable. Just as the slowdown in corporate earnings growth and increases in
interest rates in 1996 raised some near-term concerns, further interest rate
increases and an acceleration of inflation could negatively affect the stock
market in 1997. However, to the extent that some slowdown in earnings means that
the economy is not overheating, this may be beneficial for the equity market in
the long run. Also, we believe many of the technology-driven productivity gains
that U.S. companies have made in recent years will continue to enhance corporate
America's competitiveness and profitability. Therefore, while we have some
near-term concerns, we remain reasonably positive about the long-term viability
of the equity market.
In U.S. bond markets, conflicting signals over the strength of the economy
have created near-term volatility. Even comments by Federal Reserve Board
Chairman Alan Greenspan in late 1996 created some uncertainty over the Federal
Reserve's next move. We expect the Fed to maintain its anti-inflationary stance
should signs of more rapid economic growth and, particularly, higher inflation
resurface. While inflationary forces largely remained in check in 1996, the
continued strength in the labor market and rising energy prices mean that a
pickup in inflation is still possible. At the same time, the U.S. budget deficit
continues to decline and, as a percentage of gross domestic product, is now less
than 2%, which we consider a positive development for the bond markets. Although
interest rates may move higher over the coming months, we believe that, at
current levels, fixed-income markets remain equitably valued.
Internationally, the environment of moderate growth, benign inflation, and
fairly steady interest rates is also providing support for investment markets
and should help support valuation levels in the coming year. Throughout the
world, the key to stock market performance in 1997 will be corporate earnings
growth. While U.S. earnings growth is slowing but still expected to be fairly
healthy, we anticipate that a number of European countries will see an
acceleration in earnings growth and improved valuations in 1997. Despite this
environment, many European countries trade at discounts to the United States. In
particular, we see opportunities in some of the multinationals and businesses
with the ability to generate steady earnings growth. In Japan, a recovery
appears to be taking place, but at a very modest rate, with valuations still at
high levels. In the emerging markets, the long-term economic growth story
remains intact and, although selectivity is even more important in these
markets, more companies are benefiting from this growth and trading at
below-average global valuations.
Comments from the portfolio manager of the Series are presented below. We
appreciate your support and welcome any questions or comments you may have.
Respectfully,
/s/ A. Keith Brodkin /s/ Joan S. Batchelder
A. Keith Brodkin Joan S. Batchelder
Chairman and President Portfolio Manager
January 9, 1997
MFS(R) HIGH INCOME SERIES
For the 12 months ended December 31, 1996, the Series provided a total return of
11.80%. Our investment strategy is to seek companies which have improving credit
quality and whose high-yield bonds offer attractive expected returns. We look
for companies we regard as having successful management teams, leadership
positions within their industries, consistent operating results, and reasonable
leverage.
The high-yield market was the best-performing fixed-income market in 1996.
The economy was stronger than generally forecast, and most issuers fared well.
Favorable technical factors reinforced these positive fundamentals. Continued
inflows into high-yield mutual funds and increased purchases by crossover
buyers, insurance companies, and pension plan sponsors all fueled demand for
these securities. These favorable credit and technical factors caused the yield
spread between high-yield and Treasury securities to narrow from 4.25 percentage
points a year ago to 3.25 percentage points presently. (Principal value and
interest on Treasury securities are guaranteed by the U.S. government if held to
maturity.)
The Series' portfolio is overweighted in issues in the consumer products,
general industrial, and telecommunications sectors. We have emphasized companies
where we think credit quality will improve primarily due to either good growth
potential (such as Revlon or Sprint Spectrum), or from being able to generate
enough free cash flow to pay down debt (such as many of our industrial
holdings). We have concentrated our holdings in the bonds of better-quality
companies as we do not think investors are adequately compensated for the risk
of lower-tier credits.
The high-yield market's yield premium to Treasuries of 3.25 percentage
points is near the narrow end of its historic range. However, we do not
anticipate a downturn in the economy this year and, therefore, we believe that
this 50% premium to yields available on Treasury securities is adequate
compensation for the credit risk in today's market.
PORTFOLIO MANAGER'S PROFILE
Joan S. Batchelder is head of the MFS Fixed Income High Yield Department and has
managed High Income Series since its inception in 1995. She first joined MFS in
1978 as an investment officer and was appointed Assistant Vice President -
Investments in 1979, Vice President - Investments in 1980, and Senior Vice
President in 1983. Ms. Batchelder is a graduate of Colorado College and also
received a master's degree from the Maxwell School of Syracuse University. She
is a Chartered Financial Analyst, a Director of the Boston Bond Analysts
Society, a member of the Boston Securities Analyst Society, and a member of the
Boston Economics Club.
<PAGE>
PERFORMANCE SUMMARY
The information below illustrates the historical performance of MFS High Income
Series shares in comparison to various market indicators. Benchmark comparisons
are unmanaged and do not reflect any fees or expenses. You cannot invest in an
index.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the Period from August 1, 1995 to December 31, 1996)
MFS Consumer Lipper High Yield
High Income Series Price Index - U.S. Bond Fund Index
------------------ ------------------ ---------------
8/95 $10,000 $10,000 $10,000
12/95 10,525 10,059 10,418
3/96 10,658 10,198 10,684
6/96 10,831 10,272 10,856
9/96 11,435 10,348 11,359
12/96 11,767 10,420 11,736
AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 1996
1 Year Life+
- --------------------------------------------------------------------------------
MFS High Income Series +11.80% +12.00%
- --------------------------------------------------------------------------------
Lipper High Yield Bond Fund Index** +12.66% +11.97%
- --------------------------------------------------------------------------------
Consumer Price Index* + 3.56% + 2.91%
- --------------------------------------------------------------------------------
+For the period from the commencement of investment operations, July 26, 1995
to December 31, 1996.
*The Consumer Price Index is a popular measure of change in prices.
**Source: Lipper Analytical Services.
Returns shown do not reflect the deduction of the mortality and expense risk
charges and administration fees. Please refer to the product's annual report for
performance that reflects the fees and charges imposed by insurance company
separate accounts.
Investment return and principal value will fluctuate, and shares, when redeemed,
may be worth more or less than their original cost. Past performance is no
guarantee of future results.
Series results reflect any applicable expense subsidies and waivers, without
which the performance results would have been less favorable. Subsidies and
waivers may be rescinded at any time. See the prospectus for details.
<PAGE>
PORTFOLIO OF INVESTMENTS - December 31, 1996
Bonds - 89.2%
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
U.S. Bonds - 82.6%
Aerospace - 0.8%
BE Aerospace, 9.875s, 2006 $ 100 $ 105,000
- -----------------------------------------------------------------------------
Airlines - 2.9%
Airplanes Pass-Through Trust (GPA Group
Lease), 10.875s, 2019 $ 75 $ 82,730
K & F Industries, 10.375s, 2004 250 262,500
MOOG, Inc., 10s, 2006 25 26,250
-----------
$ 371,480
- -----------------------------------------------------------------------------
Automotive - 1.8%
Harvard Industries, Inc., 11.125s, 2005 $ 50 $ 41,500
Hayes Wheels International, Inc., 11s,
2006 100 109,125
Lear Corp., 9.5s, 2006 75 80,437
-----------
$ 231,062
- -----------------------------------------------------------------------------
Building - 6.2%
American Standard Cos., Inc., 0s to 1998,
10.5s to 2005 $ 75 $ 69,750
Building Materials Corp., 0s to 1999,
11.75s to 2004 361 312,265
Building Materials Corp., 8.625s, 2006## 10 9,875
Nortek, Inc., 9.875s, 2004 225 227,250
Schuller International Group, Inc.,
10.875s, 2004 50 55,625
USG Corp., 9.25s, 2001 125 133,125
-----------
$ 807,890
- -----------------------------------------------------------------------------
Chemicals - 1.0%
NL Industries, Inc., 11.75s, 2003 $ 25 $ 26,500
UCC Investors Holdings, Inc., 10.5s, 2002 100 109,000
-----------
$ 135,500
- -----------------------------------------------------------------------------
Consumer Goods and Services - 8.1%
E & S Holdings Corp., 10.375s, 2006## $ 250 $ 261,875
Genmar Holdings, 13.5s, 2001 40 38,800
Iron Mountain, Inc., 10.125s, 2006 200 211,250
Pierce Leahy Corp., 11.125s, 2006 75 81,937
Reeves Industries, Inc., 11s, 2002 50 47,750
Revlon Worldwide Corp., 0s, 1998 200 172,000
Westpoint Stevens, Inc., 9.375s, 2005 225 231,750
-----------
$ 1,045,362
- -----------------------------------------------------------------------------
Containers - 5.7%
Atlantis Group, Inc., 11s, 2003 $ 70 $ 71,050
Calmar, Inc., 11.5s, 2005 100 103,500
Gaylord Container Corp., 12.75s, 2005 160 176,800
Ivex Packaging Corp., 12.5s, 2002 50 54,125
Owens-Illinois, Inc., 11s, 2003 250 278,125
Plastic Containers, Inc., 10s, 2006## 50 51,500
-----------
$ 735,100
- -----------------------------------------------------------------------------
Defense Electronics - 0.2%
Alliant Techsystems, Inc., 11.75s, 2003 $ 25 $ 28,062
- -------------------------------------------------------------------------------
Electronics - 0.4%
Clark-Schwebel, Inc., 10.5s, 2006 $ 50 $ 53,000
- -------------------------------------------------------------------------------
Entertainment - 0.5%
American Skiing Corp., 12s, 2006## $ 25 $ 26,313
Marvel Holdings, Inc., 0s, 1998** 265 39,750
-----------
$ 66,063
- -----------------------------------------------------------------------------
Food and Beverage Products - 4.3%
Delta Beverage Group, 9.75s, 2003## $ 60 $ 61,500
Foodbrands America, Inc., 10.75s, 2006 150 157,500
Keebler Corp., 10.75s, 2006## 100 109,250
PMI Acquisition Corp., 10.25s, 2003 220 226,600
-----------
$ 554,850
- -----------------------------------------------------------------------------
Forest and Paper Products - 1.6%
Pacific Lumber Co., 10.5s, 2003 $ 75 $ 76,125
U.S. Can Corp., 10.125s, 2006## 125 130,938
-----------
$ 207,063
- -----------------------------------------------------------------------------
Machinery - 2.0%
AGCO Corp., 8.5s, 2006 $ 50 $ 51,375
Motors & Gears, Inc., 10.75s, 2006## 200 206,000
-----------
$ 257,375
- -----------------------------------------------------------------------------
Medical and Health Products - 0.4%
Quest Diagnostic, Inc., 10.75s, 2006 $ 50 $ 52,625
- -----------------------------------------------------------------------------
Medical and Health Technology and Services - 2.0%
Quorum Health Group, Inc., 8.75s, 2005 $ 100 $ 102,500
Tenet Healthcare Corp., 10.125s, 2005 125 138,437
Unilab Corp., 11s, 2006 25 16,875
-----------
$ 257,812
- -----------------------------------------------------------------------------
Metals and Minerals - 1.8%
Haynes International, Inc., 11.625s, 2004 $ 200 $ 211,000
Kaiser Aluminum & Chemical Corp., 12.75s, 2003 25 26,875
-----------
$ 237,875
- -----------------------------------------------------------------------------
Oil Services - 1.4%
Falcon Drilling Co., 8.875s, 2003 $ 25 $ 25,500
Mesa Operating Co., 10.625s, 2006 125 135,625
Noble Drilling Corp., 9.125s, 2006 25 26,875
-----------
$ 188,000
- -----------------------------------------------------------------------------
Printing and Publishing - 0.6%
Day International Group, Inc., 11.125s, 2005 $ 50 $ 51,938
Golden Books Publishing, Inc., 7.65s, 2002 25 22,375
-----------
$ 74,313
- -----------------------------------------------------------------------------
Restaurants and Lodging - 4.4%
Aztar Corp., 11s, 2002 $ 25 $ 24,187
Boomtown, Inc., 11.5s, 2003 25 26,312
Coast Hotels & Casino, 13s, 2002 25 27,594
Eldorado Resorts, 10.5s, 2006## 100 105,750
Grand Casinos, Inc., 10.125s, 2003 150 150,750
Griffin Gaming & Entertainment, 8.15s, 2000 50 49,000
Harvey Casinos Resorts, 10.625s, 2006 75 80,250
Red Roof Inns, Inc., 9.625s, 2003 70 70,000
Santa Fe Hotel, Inc., 11s, 2000 45 33,075
-----------
$ 566,918
- -----------------------------------------------------------------------------
Special Products and Services - 14.4%
AAF-McQuay, Inc., 8.875s, 2003 $ 25 $ 25,063
Buckeye Cellulose Corp., 8.5s, 2005 40 40,100
Fairfield Manufacturing, 11.375s, 2001 75 78,375
Howmet Corp., 10s, 2003 125 135,938
IMO Industries, Inc., 11.75s, 2006 245 225,400
Idex Corp., 9.75s, 2002 25 26,125
Interlake Corp., 12s, 2001 50 53,500
Interlake Corp., 12.125s, 2002 175 181,125
International Knife & Saw, 11.375s, 2006## 100 103,750
Mettler-Toledo, Inc., 9.75s, 2006 150 157,500
Polymer Group, Inc., 12.25s, 2002 212 231,610
Synthetic Industries, Inc., 12.75s, 2002 395 435,488
Thermadyne Holdings Corp., 10.25s, 2002 150 153,750
Thermadyne Holdings Corp., 10.75s, 2003 26 26,780
-----------
$ 1,874,504
- -----------------------------------------------------------------------------
Steel - 4.3%
AK Steel Corp., 9.125s, 2006## $ 50 $ 51,000
Carbide/Graphite Group, Inc., 11.5s, 2003 25 27,125
Jorgensen, (Earle M.) Co., 10.75s, 2000 70 71,400
Kaiser Aluminum & Chemical Corp.,
9.875s, 2002 25 25,625
WCI Steel, Inc., 10s, 2004## 375 380,625
-----------
$ 555,775
- -----------------------------------------------------------------------------
Stores - 2.1%
Finlay Enterprises, Inc., 0s to 1998, 12s to 2005 $ 275 $ 235,125
Parisian, Inc., 9.875s, 2003 38 38,380
-----------
$ 273,505
- -----------------------------------------------------------------------------
Supermarkets - 2.9%
Dominick's Finer Foods, Inc., 10.875s, 2005 $ 50 $ 55,375
Fleming Cos., Inc., 10.625s, 2001 10 10,150
Grand Union Co., 12s, 2004 75 79,125
Jitney-Jungle Stores, 12s, 2006 30 31,725
Pathmark Stores, Inc., 9.625s, 2003 75 71,813
Ralph's Grocery Co., 10.45s, 2004 75 79,781
Smith's Food & Drug Co., 11.25s, 2007 50 55,250
-----------
$ 383,219
- -----------------------------------------------------------------------------
Telecommunications - 12.0%
American Radio Systems Corp., 9s, 2006 $ 50 $ 49,000
Charter Communications, 11.25s, 2006 25 26,125
Echostar Communications Corp., 0s to 1999,
12.875s, 2004 100 75,500
Echostar Communications Corp., 0s to 2000,
13.125s, to 2004 50 41,375
ICG Holdings, Inc., 0s to 2001, 12.5s
to 2006 50 32,625
Jones Intercable, Inc., 10.5s, 2008 100 107,750
K-III Communications Corp., 10.625s, 2002 40 42,000
Lenfest Communications, 10.5s, 2006 100 105,000
MFS Communications Co., Inc., 0s to 2001,
8.875s to 2006 100 72,750
Marcus Cable Operating Co., 0s to 1999,
13.5s to 2004 200 164,000
Mobile Telecom Technology Corp.,
13.5s, 2002 25 25,000
Mobilemedia Communications Corp., 0s to
1998, 10.5s to 2003 40 8,400
Mobilemedia Corp., 9.375s, 2007** 100 27,000
Paging Network, Inc., 8.875s, 2006 50 47,625
Park Broadcasting, Inc., 11.75s, 2004 150 176,250
Sprint Spectrum, 11s, 2006 250 270,000
Sygnet Wireless, Inc., 11.5s, 2006 100 103,000
Teleport Communications, 0s to 2001,
11.125s to 2007 200 137,000
Western Wireless Corp., 10.5s, 2007 50 51,875
-----------
$ 1,562,275
- -----------------------------------------------------------------------------
Transportation - 0.4%
Moran Transportation Co., 11.75s, 2004 $ 50 $ 54,000
- -----------------------------------------------------------------------------
Utilities - Electric - 0.4%
El Paso Electric Co., 8.9s, 2006 $ 50 $ 52,125
- -----------------------------------------------------------------------------
Total U.S. Bonds $10,730,753
- -----------------------------------------------------------------------------
Foreign Bonds - 6.6%
Canada - 2.6%
Algoma Steel, Inc., 12.375s, 2005 (Steel) CAD 25 $ 27,000
CHC Helicopter Corp., 11.5s, 2002
(Aerospace) 75 76,969
Gulf Canada Resources Ltd., 9.25s, 2004
(Oils) 90 95,175
International Semi-Tech Microelectronics,
Inc., 0s to 2000,
11.5s to 2003 (Consumer Goods and
Services) 50 32,250
Rogers Cablesystems Ltd., 10.125s, 2012
(Telecommunications) 50 51,875
Rogers Cantel, Inc., 9.375s, 2008
(Cellular Telephones) 50 52,500
-----------
$ 335,769
- -----------------------------------------------------------------------------
Luxembourg - 0.8%
Millicom International Cellular
Communications, 0s to 2001,
13.5s, to 2006 (Cellular Telephones) BEF 175 $ 108,500
- -------------------------------------------------------------------------------
United Kingdom - 3.2%
Bell Cablemedia PLC, 0s to 2000, 11.875s,
2005 (Telecommunications) GBP 50 $ 40,125
Colt Telecom Group, 0s to 1997, 12s to
2006 (Telecommunications) 500 297,500
Diamond Cable Communications PLC, 0s to
2005, 11.75s to 2005
(Telecommunications) 10 7,200
Newsquest Capital, 11s, 2006
(Telecommunications)## 25 25,500
Videotron Holdings PLC, 0s to 2005, 11s to
2005 (Telecommunications) 50 40,250
-----------
$ 410,575
- -----------------------------------------------------------------------------
Total Foreign Bonds $ 854,844
- -----------------------------------------------------------------------------
Total Bonds (Identified Cost, $11,317,019) $11,585,597
- -----------------------------------------------------------------------------
Preferred Stocks - 3.0%
- -----------------------------------------------------------------------------
Issuer Shares Value
- -----------------------------------------------------------------------------
Cablevision Systems Corp., 11.125s, 2008,
"L" (Telecommunications) 1,623 $ 141,599
Renaissance Cosmetics, 14s (Consumer Goods
and Services)+ 100 101,000
Supermarkets General Holdings Corp., $3.52
Exch., 2007 (Supermarkets)* 1,500 38,250
Time-Warner, Inc., 10.25s, "K"
(Entertainment) 104 112,840
- -----------------------------------------------------------------------------
Total Preferred Stocks (Identified Cost, $385,297) $ 393,689
- -----------------------------------------------------------------------------
Short-Term Obligations - 7.1%
- -----------------------------------------------------------------------------
Principal Amount
(000 Omitted)
- -----------------------------------------------------------------------------
Student Loan Marketing Assn., due 1/02/97,
at Amortized Cost $ 920 $ 919,680
- -----------------------------------------------------------------------------
Total Investments (Identified Cost, $12,621,996) $12,898,966
Other Assets, less Liabilities - 0.7% 95,157
- -----------------------------------------------------------------------------
Net Assets - 100.0% $12,994,123
- -----------------------------------------------------------------------------
*Non-income producing security.
**Non-income producing security - in default.
##SEC Rule 144A restriction.
+Restricted security.
Abbreviations have been used throughout this report to indicate amounts shown in
currencies other than the U.S. dollar. A list of abbreviations is shown below.
BEF = Belgian Francs CAD = Canadian Dollars GBP = British Pounds
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ------------------------------------------------------------------------------
December 31, 1996
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $12,621,996) $12,898,966
Cash 9,008
Receivable for Series shares sold 58,016
Interest receivable 265,860
Receivable from investment adviser 21,617
Deferred organization expenses 6,556
Other assets 23
-----------
Total assets $13,260,046
-----------
Liabilities:
Payable for Series shares reacquired $ 3,202
Payable for investments purchased 235,279
Payable to affiliate for management fee 764
Accrued expenses and other liabilities 26,678
-----------
Total liabilities $ 265,923
-----------
Net assets $12,994,123
===========
Net assets consist of:
Paid-in capital $12,704,316
Unrealized appreciation on investments 276,970
Accumulated net realized loss on investments (158)
Accumulated undistributed net investment income 12,995
-----------
Total $12,994,123
===========
Shares of beneficial interest outstanding 1,195,325
=========
Net asset value per share
(net assets of $12,994,123 / 1,195,325 shares of beneficial
interest outstanding) $10.87
======
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- -------------------------------------------------------------------------------
Year Ended December 31, 1996
- -------------------------------------------------------------------------------
Net investment income:
Interest income $683,617
--------
Expenses -
Management fee $ 56,169
Trustees' compensation 2,033
Shareholder servicing agent fee 2,591
Auditing fees 24,256
Printing 21,241
Custodian fee 6,576
Amortization of organization expenses 1,842
Legal fees 1,402
Miscellaneous 4,788
--------
Total expenses $120,898
Fees paid indirectly (714)
Reduction of expenses by investment adviser (45,293)
--------
Net expenses $ 74,891
--------
Net investment income $608,726
--------
Realized and unrealized gain on investments:
Realized gain (identified cost basis) on net investment
transactions $116,891
--------
Change in unrealized appreciation on investments $248,395
--------
Net realized and unrealized gain on investments $365,286
--------
Increase in net assets from operations $974,012
========
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statements of Changes in Net Assets
- -------------------------------------------------------------------------------
Year Ended Period Ended
December 31, 1996 December 31, 1995*
- -------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment income $ 608,726 $ 43,562
Net realized gain (loss) on investments 116,891 (2,558)
Net unrealized gain on investments 248,395 28,575
----------- ----------
Increase in net assets from operations $ 974,012 $ 69,579
----------- ----------
Distributions declared to shareholders -
From net investment income $ (596,086) $ (43,207)
From net realized gain on investments (114,491) --
----------- ----------
Total distributions declared to
shareholders $ (710,577) $ (43,207)
----------- ----------
Series share (principal) transactions -
Net proceeds from sale of shares $18,788,696 $2,003,297
Net asset value of shares issued to
shareholders in reinvestment of
distributions 710,575 43,207
Cost of shares reacquired (8,715,074) (134,985)
----------- ----------
Increase in net assets from Series
share transactions $10,784,197 $1,911,519
----------- ----------
Total increase in net assets $11,047,632 $1,937,891
Net assets:
At beginning of period 1,946,491 8,600
----------- ----------
At end of period (including accumulated
undistributed net investment income of
$12,995 and $355, respectively) $12,994,123 $1,946,491
=========== ==========
*For the period from the commencement of investment operations, July 26, 1995
to December 31, 1995.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights
- -------------------------------------------------------------------------------
Year Ended Period Ended
December 31, 1996 December 31, 1995*
- -------------------------------------------------------------------------------
Per share data (for a share
outstanding throughout each period):
Net asset value - beginning of period $ 10.29 $10.00
------- ------
Income from investment operations# -
Net investment income(S) $ 0.89 $ 0.34
Net realized and unrealized gain on
investments 0.32 0.18
------- ------
Total from investment operations $ 1.21 $ 0.52
------- ------
Less distributions declared to
shareholders -
From net investment income $ (0.53) $(0.23)
From net realized gain on investments (0.10) -
------- ------
Total distributions declared to
shareholders $ (0.63) $(0.23)
------- ------
Net asset value - end of period $ 10.87 $10.29
======= ======
Total return 11.80% 5.25%++
Ratios (to average net assets)
/Supplemental data(S):
Expenses 1.00% 1.00%+
Net investment income 8.18% 8.17%+
Portfolio turnover 135% 32%
Net assets at end of period
(000 omitted) $12,994 $1,946
* For the period from the commencement of investment operations, July 26, 1995
to December 31, 1995.
+ Annualized.
++ Not annualized.
# Per share data is based on average shares outstanding.
(S) The adviser voluntarily agreed to maintain the expenses of the Series at not
more than 1.00% of average daily net assets. To the extent actual expenses
were over these limitations, the net investment income per share and the
ratios would have been:
Net investment income $ 0.82 $ 0.20
Ratios (to average net assets):
Expenses 1.62% 4.38%+
Net investment income 7.56% 4.82%+
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS High Income Series (the Series) is a diversified series of MFS Variable
Insurance Trust (the Trust) which is comprised of the following 12 series: MFS
Bond Series, MFS Emerging Growth Series, MFS Growth with Income Series, MFS High
Income Series, MFS Limited Maturity Series, MFS Money Market Series, MFS
Research Series, MFS Strategic Fixed Income Series, MFS Total Return Series, MFS
Utilities Series, MFS Value Series and MFS World Governments Series. The Trust
is organized as a Massachusetts business trust and is registered under the
Investment Company Act of 1940, as amended, as an open-end management investment
company.
The shareholders of each Series of the Trust are separate accounts of insurance
companies which offer variable annuity and/or life insurance products. As of
December 31, 1996 there were 11 shareholders in the Series.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investment Valuations - Debt securities (other than short-term obligations which
mature in 60 days or less), including listed issues, are valued on the basis of
valuations furnished by dealers or by a pricing service with consideration to
factors such as institutional-size trading in similar groups of securities,
yield, quality, coupon rate, maturity, type of issue, trading characteristics
and other market data, without exclusive reliance upon exchange or
over-the-counter prices. Short-term obligations, which mature in 60 days or
less, are valued at amortized cost, which approximates market value. Equity
securities listed on securities exchanges or reported through the NASDAQ system
are valued at last sale prices. Unlisted equity securities or listed equity
securities for which last sale prices are not available are valued at last
quoted bid prices. Securities for which there are no such quotations or
valuations are valued at fair value as determined in good faith by or at the
direction of the Trustees.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases and
sales of foreign investments, income and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates of
such transactions. Gains and losses attributable to foreign currency exchange
rates on sales of securities are recorded for financial statement purposes as
net realized gains and losses on investments. Gains and losses attributable to
foreign exchange rate movements on income and expenses are recorded for
financial statement purposes as foreign currency transaction gains and losses.
That portion of both realized and unrealized gains and losses on investments
that result from fluctuations in foreign currency exchange rates is not
separately disclosed.
Deferred Organization Expenses - Costs incurred by the Series in connection with
its organization have been deferred and are being amortized on a straight-line
basis over a five-year period beginning on the date of commencement of Series
operations.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for financial statement and
tax reporting purposes as required by federal income tax regulations. Interest
payments received in additional securities are recorded on the ex-dividend or
ex-interest date in an amount equal to the value of the security on such date.
The Series can invest up to 100% of its portfolio in high-yield securities rated
below investment grade. Investments in high-yield securities involve greater
degrees of credit and market risk than investments in higher-rated securities,
and tend to be more sensitive to economic conditions.
Fees Paid Indirectly - The Series' custodian bank calculates its fee based on
the Series' average daily net assets. This fee is reduced according to an
expense offset arrangement with State Street Bank, the dividend disbursing
agent, which provides for partial reimbursement of custody fees based on a
formula developed to measure the value of cash deposited by the Series with the
custodian and with the dividend disbursing agent. This amount is shown as a
reduction of expenses on the Statement of Operations.
Tax Matters and Distributions - The Series' policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. The Series files a tax
return annually using tax accounting methods required under provisions of the
Code which may differ from generally accepted accounting principles, the basis
on which these financial statements are prepared. Accordingly, the amount of net
investment income and net realized gain reported on these financial statements
may differ from that reported on the Series' tax return and, consequently, the
character of distributions to shareholders reported in the financial highlights
may differ from that reported to shareholders on Form 1099-DIV. Foreign taxes
have been provided for on interest and dividend income earned on foreign
investments in accordance with the applicable country's tax rates and to the
extent unrecoverable are recorded as a reduction of investment income. The
Series expects to pass through to shareholders foreign income taxes paid. The
election increases the taxable distributions of the Series by the amount of
foreign taxes paid. An individual shareholder who itemizes deductions, or a
corporate shareholder, will be able to claim an offsetting deduction or tax
credit (but not both) on their federal income tax returns. Individuals who do
not itemize deductions may claim a foreign tax credit but not a deduction. The
foreign source income is considered passive income for the purpose of computing
the foreign tax credit limitations. Distributions to shareholders are recorded
on the ex-dividend date.
The Series distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a tax return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains.
(3) Transactions with Affiliates
Investment Adviser - The Series has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.75% of
average daily net assets. Under a temporary expense limitation agreement with
MFS, MFS has voluntarily agreed to pay all of the Series' operating expenses,
exclusive of management fees, which exceed 0.25% of the Series' average daily
net assets. The Series in turn will pay MFS an expense reimbursement fee not
greater than 0.25% of the Series' average daily net assets. To the extent that
the expense reimbursement fee exceeds the Series' actual expenses, the excess
will be applied to amounts paid by MFS in prior years. At December 31, 1996, the
aggregate unreimbursed expenses owed to MFS by the Series amounted to $63,140,
including $45,293 incurred in the current year.
The Series pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Series, all of whom receive
remuneration for their services to the Series from MFS. Certain officers and
Trustees of the Series are officers or directors of MFS and MFS Service Center,
Inc. (MFSC).
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as a
percentage of the average daily net assets at an effective annual rate of up to
0.035%.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions and
short-term obligations were as follows:
Purchases Sales
- -------------------------------------------------------------------------------
U.S. government securities $ 121,784 $ 120,726
=========== ===========
Investments (non-U.S. government securities) $18,931,803 $ 9,235,031
=========== ===========
The cost and unrealized appreciation or depreciation in value of the investments
owned by the Series, as computed on a federal income tax basis, are as follows:
Aggregate cost $12,621,966
===========
Gross unrealized appreciation $ 518,789
Gross unrealized depreciation (241,819)
-----------
Net unrealized appreciation $ 276,970
===========
(5) Shares of Beneficial Interest
The Series' Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Series shares were as follows:
<TABLE>
<CAPTION>
Year Ended Period Ended
December 31, 1996 December 31, 1995*
----------------------- ---------------------
Shares Amount Shares Amount
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 1,753,000 $18,788,696 197,072 $2,003,297
Shares issued to shareholders in
reinvestment of distributions 65,370 710,575 4,211 43,207
Shares reacquired (812,190) (8,715,074) (12,998) (134,985)
--------- ----------- ------- ----------
Net increase 1,006,180 $10,784,197 188,285 $1,911,519
========= =========== ======= ==========
</TABLE>
*For the period from the commencement of investment operations, July 26, 1995 to
December 31, 1995.
(6) Line of Credit
The Series entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Series shares. Interest is charged to each
fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating funds at the end of each
quarter. The commitment fee allocated to the Series for the year ended December
31, 1996 was $99.
(7) Restricted Securities
The Series may invest not more than 15% of its net assets in securities which
are subject to legal or contractual restrictions on resale. At December 31,
1996, the Series owned the following restricted security (constituting 0.8% of
net assets) which may not be publicly sold without registration under the
Securities Act of 1933 (the 1933 Act). The Series does not have the right to
demand that such security be registered. The value of this security is
determined by valuations supplied by a pricing service or brokers or, if not
available, in good faith by or at the direction of the Trustees.
Date of
Description Acquisition Shares Cost Value
- --------------------------------------------------------------------------------
Renaissance Cosmetics, 14s 8/08/96 100 $100,000 $101,000
========
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Variable Insurance Trust and Shareholders of MFS High
Income Series:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of MFS High Income Series (the Series) (one of the
series constituting MFS Variable Insurance Trust) as of December 31, 1996, the
related statement of operations for the year then ended, the statements of
changes in net assets and financial highlights for the year then ended and for
the period from July 26, 1995 (commencement of investment operations) to
December 31, 1995. These financial statements and financial highlights are the
responsibility of the Series' management. Our responsibility is to express an
opinion on these financial statements and financial highlights 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 financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned at
December 31, 1996 by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
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 provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS High Income
Series at December 31, 1996, the results of its operations, the changes in its
net assets, and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 7, 1997
---------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
VHI-2/97 7M
<PAGE>
Annual Report
[Logo] for Year Ended
INVESTMENT MANAGEMENT December 31, 1996
MFS(R) WORLD GOVERNMENTS SERIES
A Series of MFS(R) Variable Insurance Trust
[Graphic Omitted]
<PAGE>
MFS(R) WORLD GOVERNMENTS SERIES
A SERIES OF MFS(R) VARIABLE INSURANCE TRUST
TRUSTEES INVESTMENT ADVISER
A. Keith Brodkin* Massachusetts Financial Services Company
Chairman and President 500 Boylston Street
Boston, MA 02116-3741
Nelson J. Darling, Jr.
Trustee, Eastern Enterprises DISTRIBUTOR
(diversified holding company) MFS Fund Distributors, Inc.
500 Boylston Street
William R. Gutow Boston, MA 02116-3741
Vice Chairman,
Capitol Entertainment Management SHAREHOLDER SERVICE CENTER
Company (Blockbuster Video Franchise) MFS Service Center, Inc.
P.O. Box 1400
PORTFOLIO MANAGER Boston, MA 02107-9906
Stephen C. Bryant*
For additional information,
TREASURER contact your financial adviser.
W. Thomas London*
CUSTODIAN
ASSISTANT TREASURER Investors Bank & Trust Company
James O. Yost*
AUDITORS
SECRETARY Deloitte & Touche LLP
Stephen E. Cavan*
WORLD WIDE WEB
ASSISTANT SECRETARY www.mfs.com
James R. Bordewick, Jr.*
*Affiliated with the Investment Adviser
<PAGE>
Dear Contract Owner:
The pattern of slow but sustainable growth seen in most of the world in 1996
seems likely to continue in 1997. While it looks like U.S. growth in 1997 will
slow modestly relative to 1996, there is evidence that Europe and, to a lesser
degree, Japan are continuing their recoveries from recession. At the same time,
companies in many emerging markets are reporting robust increases in earnings as
these markets benefit from higher-than-average economic growth and market
reforms, which should continue to provide more opportunities for development and
trade.
After more than six years of expansion, the U.S. economy appears headed
toward another year of moderate growth in 1997, although a few signs point to
the possibility of a modest rise in inflation during the year. On the positive
side, the pattern of moderate growth and inflation set over the past few years
now seems fairly well entrenched in the economy and, short of a major
international or domestic crisis, appears to have enough momentum to remain on
track for some time. Recent gains in such important sectors as housing,
automobiles, industrial production, and exports indicate a fair amount of
underlying strength in the economy. However, some reason for caution can be seen
in the continuing high level of consumer debt and the attendant rise in personal
bankruptcies, as well as in the modestly disappointing levels of holiday sales.
Furthermore, the ongoing tightness in labor markets, and price rises in such
important sectors as energy, could add some inflationary pressures to the
economy. Given these somewhat conflicting indicators, we expect real
(inflation-adjusted) growth to revolve around 2% in 1997, which would represent
a modest decline from 1996.
We continue to urge U.S. equity investors to lower their expectations for
1997 and to point out that the impressive gains of the past two years are not
sustainable. Just as the slowdown in corporate earnings growth and increases in
interest rates in 1996 raised some near-term concerns, further interest rate
increases and an acceleration of inflation could negatively affect the stock
market in 1997. However, to the extent that some slowdown in earnings means that
the economy is not overheating, this may be beneficial for the equity market in
the long run. Also, we believe many of the technology-driven productivity gains
that U.S. companies have made in recent years will continue to enhance corporate
America's competitiveness and profitability. Therefore, while we have some
near-term concerns, we remain reasonably positive about the long-term viability
of the equity market.
In U.S. bond markets, conflicting signals over the strength of the economy
have created near-term volatility. Even comments by Federal Reserve Board
Chairman Alan Greenspan in late 1996 created some uncertainty over the Federal
Reserve's next move. We expect the Fed to maintain its anti-inflationary stance
should signs of more rapid economic growth and, particularly, higher inflation
resurface. While inflationary forces largely remained in check in 1996, the
continued strength in the labor market and rising energy prices mean that a
pickup in inflation is still possible. At the same time, the U.S. budget deficit
continues to decline and, as a percentage of gross domestic product, is now less
than 2%, which we consider a positive development for the bond markets. Although
interest rates may move higher over the coming months, we believe that, at
current levels, fixed-income markets remain equitably valued.
Internationally, the environment of moderate growth, benign inflation, and
fairly steady interest rates is also providing support for investment markets
and should help support valuation levels in the coming year. Throughout the
world, the key to stock market performance in 1997 will be corporate earnings
growth. While U.S. earnings growth is slowing but still expected to be fairly
healthy, we anticipate that a number of European countries will see an
acceleration in earnings growth and improved valuations in 1997. Despite this
environment, many European countries trade at discounts to the United States. In
particular, we see opportunities in some of the multinationals and businesses
with the ability to generate steady earnings growth. In Japan, a recovery
appears to be taking place, but at a very modest rate, with valuations still at
high levels. In the emerging markets, the long-term economic growth story
remains intact and, although selectivity is even more important in these
markets, more companies are benefiting from this growth and trading at
below-average global valuations.
Comments from the portfolio manager of the Series are presented below. We
appreciate your support and welcome any questions or comments you may have.
Respectfully,
/s/ A. Keith Brodkin /s/ Stephen C. Bryant
A. Keith Brodkin Stephen C. Bryant
Chairman and President Portfolio Manager
January 9, 1997
MFS WORLD GOVERNMENTS SERIES
As noted above, the first half of 1996 witnessed concerns about accelerating
U.S. growth and its potential resultant boost to other major economies, which
set off a rise in interest rates based on fears of higher inflation and
potential rate hikes by the Federal Reserve Board. However, in the second half,
these concerns proved unwarranted as the U.S. economy slowed, inflation fears
receded, and rates aggressively declined. During this second half, most central
banks, with the exception of the United States, lowered official interest rates.
In this environment, the Series provided a total return of 4.03% for the 12
months ended December 31, 1996. This compares to a 3.62% return for the Salomon
Brothers World Government Bond Index (the Salomon Index) for the same period.
The Salomon Index is unmanaged and consists of complete universes of government
bonds with remaining maturities of at least five years. The Fund's return also
compares to a 4.39% return for the J.P. Morgan Global Government Bond Index (the
Morgan Index) for the same period. The Morgan Index is an unmanaged aggregate of
actively traded government bonds issued from 13 countries (including the United
States) with maturities of at least one year. However, the Morgan Index is being
replaced with the Salomon Index as a benchmark because MFS believes this index
is more representative of the countries in which the Fund invests than the
Morgan Index.
By the end of the year, all markets, as measured by the Salomon Index in
local currency returns, registered positive returns but with significant
differences. For example, the core markets -- United States, Japan, and Germany
- -- were the worst performers, while the higher-yielding markets of Australia,
Canada, Spain, and Italy were among the better performers. The Series benefited
by being overweighted in these higher-yielding markets for most of the year.
In preparation for the monetary union due to commence in January 1999,
almost all European countries announced tight fiscal budgets, while at the same
time cutting interest rates due to slow growth and low inflation. Within Europe,
a dramatic narrowing of yield spread differentials, or outperformance, began in
earnest during the third quarter with Spain, Italy, and Sweden being the main
beneficiaries. Although a good part of this convergence has now taken place, we
anticipate these markets will continue to outperform as European monetary union
approaches.
Meanwhile, looking at the dollar bloc, both Canadian and Australian markets
continue to benefit from low inflation, slow growth, and tight fiscal budgets.
The Series benefited by being overweighted in both these markets for most of the
year. Looking ahead, while there is yet no immediate threat of higher inflation
in Canada, economic growth is finally picking up and we expect the Bank of
Canada to be more accommodative in 1997. Although an underweighted position in
U.S. bonds has been beneficial in 1996, the Series' performance was hindered
during the third quarter as the U.S. position's duration (a measure of interest
rate sensitivity) was low in anticipation of a pickup in U.S. economic growth
that never materialized.
Regarding the Japanese bond market, the Series was underweighted for most of
the year because we believed other markets offered better value. However, the
Japanese bond market was helped by continued depressed real estate and banking
sectors, as well as weak consumer spending. Our outlook calls for a continuation
of slow, choppy growth with a modest increase in inflation.
For 1996, the overall rise in U.S. interest rates, coinciding with
reductions in short-term rates in Europe, enabled the dollar to appreciate
against the German mark. Additionally, the dollar benefited from yield
convergence within Europe. The dollar has continued to strengthen versus the
Japanese yen, based primarily on Japan's low interest rates and its government
policy of engineering a weaker currency in order to stimulate its beleaguered
economy. Looking forward, we anticipate modest but further lowering of interest
rates by central banks in many European countries as well as in Australia and
New Zealand, which we believe could continue to be positive for bonds. However,
some caution is warranted as ultimately lower rates in these countries could
result in a pickup in economic growth and, possibly, inflation. Moreover, with
the U.S. currency benefiting from positive interest rate differentials, renewed
hope for a balanced budget, and movement toward an inclusive, single European
currency, the prospects for a stable dollar remain favorable.
PORTFOLIO MANAGER'S PROFILE
Stephen C. Bryant joined Massachusetts Financial Services (MFS) in 1987 as
Assistant Vice President - Investments in the International Fixed Income
Department. He was named Vice President - Investments in 1989 and Senior Vice
President in 1993. Mr. Bryant is a graduate of Wesleyan University and has
managed MFS World Governments Series since its inception in June 1994.
PERFORMANCE SUMMARY
The information below illustrates the historical performance of MFS World
Governments Series shares in comparison to various market indicators. Benchmark
comparisons are unmanaged and do not reflect any fees or expenses.
You cannot invest in an index.
GROWTH OF A $10,000 HYPOTHETICAL INVESTMENT
(For the Period from June 1, 1994 to December 31, 1996)
JP Salomon
MFS Consumer Morgan Brothers
World Price Global World
Governments Index Gov't Gov't.
Series U.S. Bond Index Bond Index
----------- ------ ---------- ----------
6/94 10000.0 10000.0 10000.0 10000.0
12/94 10078.0 10149.0 10284.0 10313.0
6/95 11197.0 10339.0 11884.0 12051.0
12/95 11528.0 10400.0 12269.0 12276.0
6/96 11720.0 10620.0 12127.0 12095.0
12/96 11993.0 10773.0 12808.0 12721.0
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1996
1 Year Life+
- ----------------------------------------------------------------------------
MFS World Governments Series +4.03% +7.39%
- ----------------------------------------------------------------------------
Salomon Brothers World Government Bond Index** +3.62% +9.76%
- ----------------------------------------------------------------------------
JP Morgan Global Government Bond Index# +4.39% +9.74%
- ----------------------------------------------------------------------------
Consumer Price Index*++ +3.56% +2.96%
- ----------------------------------------------------------------------------
+For the period from the commencement of investment operations, June
14, 1994 to December 31, 1996. *The Consumer Price Index is a popular
measure of change in prices.
++Source: CDA/Wiesenberger.
**Source: Lipper Analytical Services.
#Source: Asset Investment Management (AIM).
Returns shown do not reflect the deduction of the mortality and expense risk
charges and administration fees. Please refer to the product's annual report for
performance that reflects the fees and charges imposed by insurance company
separate accounts.
Investment return and principal value will fluctuate, and shares, when redeemed,
may be worth more or less than their original cost. Past performance is no
guarantee of future results.
Series results reflect any applicable expense subsidies and waivers, without
which the performance results would have been less favorable. Subsidies and
waivers may be rescinded at any time. See the prospectus for details.
<PAGE>
PORTFOLIO OF INVESTMENTS - December 31, 1996
Bonds - 90.0%
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Foreign Bonds - 69.8%
Australia - 11.1%
Commonwealth of Australia,
9.75s, 2002 AUD 2,050 $ 1,814,428
Commonwealth of Australia,
10s, 2002 1,200 1,079,250
-----------
$ 2,893,678
- -----------------------------------------------------------------------------
Belgium - 1.4%
Kingdom of Belgium, 8.75s, 2002 BEF 10,000 $ 371,989
- -----------------------------------------------------------------------------
Canada - 2.6%
Government of Canada, 9s, 2004 CAD 400 $ 342,494
Government of Canada, 8.75s,
2005 400 339,575
-----------
$ 682,069
- -----------------------------------------------------------------------------
Denmark - 6.1%
Kingdom of Denmark, 6s, 1999 DKK 1,787 $ 315,460
Kingdom of Denmark, 9s, 2000 5,850 1,131,553
Kingdom of Denmark, 7s, 2007 868 149,912
-----------
$ 1,596,925
- -----------------------------------------------------------------------------
Germany - 12.5%
Republic of Germany, 6.875s,
1999 DEM 760 $ 526,838
Republic of Germany, 8.75s, 2000 2,743 2,038,216
Republic of Germany, 7.125s, 2002
970 691,956
-----------
$ 3,257,010
- -----------------------------------------------------------------------------
Ireland - 7.9%
Republic of Ireland, 6.5s, 2001 IEP 450 $ 774,817
Republic of Ireland, 9.25s, 2003 650 1,275,491
-----------
$ 2,050,308
- -----------------------------------------------------------------------------
Italy - 8.0%
Republic of Italy, 9.5s, 1999 ITL 1,315,000 $ 923,900
Republic of Italy, 9.5s, 2006 1,535,000 1,145,904
-----------
$ 2,069,804
- -----------------------------------------------------------------------------
Japan - 5.3%
Export-Import Bank of Japan,
4.375s, 2003 JPY 70,000 $ 681,850
IBRD-Global Bonds, 4.5s, 2000 43,000 413,090
World Bank Euro-Yen, 5.25s, 2002 28,000 283,267
-----------
$ 1,378,207
- -----------------------------------------------------------------------------
New Zealand - 2.6%
Government of New Zealand, 8s,
2004 NZD 900 $ 662,874
- -----------------------------------------------------------------------------
Spain - 6.8%
Government of Spain, 8.4s, 2001 ESP 3,400 $ 28,628
Government of Spain, 10.1s, 2001 120,000 1,063,433
Government of Spain, 7.9s, 2002 82,000 674,462
-----------
$ 1,766,523
- -----------------------------------------------------------------------------
Sweden - 2.0%
Government of Sweden, 11s, 1999 SEK 2,500 $ 411,922
Government of Sweden, 10.25s,
2000 600 101,555
-----------
$ 513,477
- -----------------------------------------------------------------------------
United Kingdom - 3.5%
United Kingdom Gilts, 7s, 2001 GBP 540 $ 915,588
- -----------------------------------------------------------------------------
Total Foreign Bonds $18,158,452
- -----------------------------------------------------------------------------
U.S. Bonds - 20.2%
U.S. Treasury Notes, 6.25s, 2001 $ 400 $ 400,376
U.S. Treasury Notes, 6.625s, 2001 1,625 1,650,904
U.S. Treasury Notes, 6.25s, 2003 3,200 3,196,000
- -----------------------------------------------------------------------------
Total U.S. Bonds $ 5,247,280
- -----------------------------------------------------------------------------
Total Bonds (Identified Cost, $23,413,386) $23,405,732
- -----------------------------------------------------------------------------
Call Options Purchased - 0.2%
- -----------------------------------------------------------------------------
Principal Amount
Description/Expiration Month/Strike of Contracts
Price (000 Omitted)
- -----------------------------------------------------------------------------
German Marks/Swiss Francs
February/0.84 DEM 2,115 $ 54,034
Italian Lire/German Marks
January/995 ITL 1,280,754 6,404
- -----------------------------------------------------------------------------
Total Call Options Purchased (Premiums Paid, $15,724) $ 60,438
- -----------------------------------------------------------------------------
Put Options Purchased - 1.6%
- -----------------------------------------------------------------------------
German Marks/British Pounds
January/2.45 DEM 3,097 $ 148,965
January/2.51 3,173 99,693
January/2.56 3,236 61,632
Swiss Francs/German Marks
January/0.829 CHF 1,221 43,757
February/0.84 1,237 31,624
March/0.86 3,431 37,236
- -----------------------------------------------------------------------------
Total Put Options Purchased (Premiums Paid, $93,381) $ 422,907
- -----------------------------------------------------------------------------
Short-Term Obligations - 7.9%
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted)
- -----------------------------------------------------------------------------
Federal Home Loan Bank, due 1/02/97 $ 1,380 1,379,597
Federal Home Loan Mortgage Corp.,
due 1/07/97 680 677,483
- -----------------------------------------------------------------------------
Total Short-Term Obligations, at Amortized Cost $ 2,057,080
- -----------------------------------------------------------------------------
Total Investments (Identified Cost, $25,579,571) $25,946,157
- -----------------------------------------------------------------------------
Call Options Written
- -----------------------------------------------------------------------------
Principal Amount
Description/Expiration Month/Strike of Contracts
Price (000 Omitted)
- -----------------------------------------------------------------------------
German Marks/British Pounds
August/2.239 DEM 2,994 $ 0
Swiss Francs/German Marks
February/0.8265 CHF 2,081 (12)
- -----------------------------------------------------------------------------
Total Call Options Written (Premiums Received, $17,785) $ (12)
- -----------------------------------------------------------------------------
Put Options Written - (1.4)%
- -----------------------------------------------------------------------------
Principal Amount
Description/Expiration Month/Strike of Contracts
Price (000 Omitted) Value
- -------------------------------------------------------------------------------
German Marks/British Pounds
January/2.3682 DEM 2,994 $ 0
January/2.45 3,097 (148,355)
January/2.5105 3,173 (99,295)
Swiss Francs/German Marks
January/0.829 CHF 1,221 (43,787)
February/0.84 3,351 (85,696)
- -------------------------------------------------------------------------------
Total Put Options Written (Premiums Received, $153,765) $ (377,133)
- -------------------------------------------------------------------------------
Other Assets, Less Liabilities - 1.7% $ 453,941
- -------------------------------------------------------------------------------
Net Assets - 100.0% $26,022,953
- -------------------------------------------------------------------------------
Abbreviations have been used throughout this report to indicate amounts shown in
currencies other than the U.S. dollar. A list of abbreviations is show below.
AUD = Australian Dollars GBP = British Pounds
BEF = Belgian Francs IEP = Irish Punts
CAD = Canadian Dollars ITL = Italian Lire
CHF = Swiss Francs JPY = Japanese Yen
DEM = Deutsche Marks NLG = Dutch Guilders
DKK = Danish Kroner NOK = Norwegian Krone
ECU = European Currency Units NZD = New Zealand Dollars
ESP = Spanish Pesetas SEK = Swedish Kronor
FRF = French Francs
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ----------------------------------------------------------------------------
December 31, 1996
- ----------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $25,579,571) $25,946,157
Cash 36,029
Net receivable for forward foreign currency exchange
contracts sold 233,881
Net receivable for closed forward foreign currency exchange
contracts 385,985
Receivable for Series shares sold 252,795
Receivable for investments sold 2,427,988
Interest receivable 596,957
Receivable from investment adviser 68,518
Deferred organization expenses 2,299
Other assets 80
-----------
Total assets $29,950,689
-----------
Liabilities:
Payable for Series shares reacquired $ 171,811
Payable for investments purchased 2,305,799
Written options outstanding, at value (premiums received,
$171,550) 377,145
Net payable for forward foreign currency exchange contracts
purchased 1,005,387
Payable to affiliate for management fee 1,589
Accrued expenses and other liabilities 66,005
-----------
Total liabilities $ 3,927,736
-----------
Net assets $26,022,953
===========
Net assets consist of:
Paid-in capital $25,151,769
Unrealized depreciation on investments and translation of
assets and liabilities in foreign currencies (227,087)
Accumulated undistributed net realized gain on investments
and foreign currency transactions 221,999
Accumulated undistributed net investment income 876,272
-----------
Total $26,022,953
===========
Shares of beneficial interest outstanding 2,459,773
=========
Net asset value per share
(net assets of $26,022,953 / 2,459,773 shares of beneficial
interest outstanding) $10.58
======
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- ------------------------------------------------------------------------------
Year Ended December 31, 1996
- -----------------------------------------------------------------------------
Net investment income:
Interest income $1,156,162
----------
Expenses -
Management fee $ 126,898
Trustees' compensation 2,033
Shareholder servicing agent fee 5,869
Printing 85,838
Auditing fees 67,150
Custodian fee 44,443
Amortization of organization expenses 1,509
Legal fees 1,196
Miscellaneous 8,534
----------
Total expenses $ 343,470
Fees paid indirectly (1,716)
Reduction of expenses by investment adviser (172,556)
----------
Net expenses $ 169,198
----------
Net investment income $ 986,964
----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 642,196
Written option transactions 53,876
Foreign currency transactions (588,976)
----------
Net realized gain on investments and foreign
currency transactions $ 107,096
----------
Change in unrealized appreciation (depreciation) -
Investments $ 232,845
Written options (208,572)
Translation of assets and liabilities in foreign
currencies (157,165)
----------
Net unrealized loss on investments and foreign
currency translation $ (132,892)
----------
Net realized and unrealized loss on investments
and foreign currency $ (25,796)
----------
Increase in net assets from operations $ 961,168
==========
See notes to financial statements
<PAGE>
<TABLE>
FINANCIAL STATEMENTS - continued
Statements of Changes in Net Assets
- -------------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended December 31, 1996 1995
- -------------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets:
<S> <C> <C>
From operations -
Net investment income $ 986,964 $ 272,353
Net realized gain on investments and foreign currency transactions 107,096 398,163
Net unrealized loss on investments and foreign currency translation (132,892) (80,131)
------------ -----------
Increase in net assets from operations $ 961,168 $ 590,385
------------ -----------
Distributions declared to shareholders -
From net investment income $ -- $ (272,353)
In excess of net investment income -- (357,618)
Tax return of capital -- (63,028)
------------ -----------
Total distributions declared to shareholders $ -- $ (692,999)
------------ -----------
Series share (principal) transactions -
Net proceeds from sale of shares $ 33,174,815 $ 9,272,850
Net asset value of shares issued to shareholders in reinvestment
of distributions -- 692,995
Cost of shares reacquired (15,536,671) (5,320,839)
------------ -----------
Increase in net assets from Series share transactions $ 17,638,144 $ 4,645,006
------------ -----------
Total increase in net assets $ 18,599,312 $ 4,542,392
Net assets:
At beginning of period 7,423,641 2,881,249
------------ -----------
At end of period (including accumulated undistributed net
investment income of $876,272 and $166,765, respectively) $ 26,022,953 $ 7,423,641
============ ===========
</TABLE>
See notes to financial statements
<PAGE>
<TABLE>
FINANCIAL STATEMENTS - continued
Financial Highlights
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended Year Ended Period Ended
December 31, December 31, December 31,
1996 1995 1994*
- ---------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding
throughout each period):
<S> <C> <C> <C>
Net asset value - beginning of period $10.17 $ 9.82 $10.00
------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.60 $ 0.63 $ 0.17
Net realized and unrealized gain (loss)
on investments and foreign
currency transactions (0.19) 0.78 (0.09)
------ ------ ------
Total from investment operations $ 0.41 $ 1.41 $ 0.08
------ ------ ------
Less distributions declared to shareholders -
From net investment income $ -- $(0.42) $(0.17)
In excess of net investment income -- (0.54) (0.09)
Tax return of capital -- (0.10) --
------ ------ ------
Total distributions declared to shareholders $ -- $(1.06) $(0.26)
------ ------ ------
Net asset value - end of period $10.58 $10.17 $ 9.82
====== ====== ======
Total return 4.03% 14.38% 0.79%++
Ratios (to average net assets)/Supplemental data(S):
Expenses 1.00% 1.00% 1.00%+
Net investment income 5.84% 6.05% 4.68%+
Portfolio turnover 361% 211% 62%
Net assets at end of period (000 omitted) $26,023 $7,424 $2,881
*For the period from the commencement of investment operations, June 14, 1994 to December 31, 1994.
+Annualized.
++Not annualized.
#Per share data is based on average shares outstanding.
(S)The adviser voluntarily agreed to maintain the expenses of the Series at not more than 1.00% of average
daily net assets. To the extent actual expenses were over these limitations, the net investment income
per share and the ratios would have been:
Net investment income $ 0.50 $ 0.53 $ 0.16
Ratios (to average net assets):
Expenses 2.03% 1.99% 1.10%+
Net investment income 4.81% 5.09% 4.58%+
</TABLE>
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS World Governments Series (the Series) is a non-diversified series of MFS
Variable Insurance Trust (the Trust) which is comprised of the following twelve
series: MFS Bond Series, MFS Emerging Growth Series, MFS Growth with Income
Series, MFS High Income Series, MFS Limited Maturity Series, MFS Money Market
Series, MFS Research Series, MFS Strategic Fixed Income Series, MFS Total Return
Series, MFS Utilities Series, MFS Value Series and MFS World Governments Series.
The Trust is organized as a Massachusetts business trust and is registered under
the Investment Company Act of 1940, as amended, as an open-end management
investment company.
The shareholders of each Series of the Trust are separate accounts of insurance
companies which offer variable annuity and/or life insurance products. As of
December 31, 1996 there were 23 shareholders in the Series.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Investments
in foreign securities are vulnerable to the effects of changes in the relative
values of the local currency and the U.S. dollar and to the effects of changes
in each country's legal, political and economic environment.
Investment Valuations - Debt securities (other than short-term obligations which
mature in 60 days or less), including listed issues and forward contracts, are
valued on the basis of valuations furnished by dealers or by a pricing service
with consideration to factors such as institutional-size trading in similar
groups of securities, yield, quality, coupon rate, maturity, type of issue,
trading characteristics and other market data, without exclusive reliance upon
exchange or over-the-counter prices. Short-term obligations, which mature in 60
days or less, are valued at amortized cost, which approximates market value.
Options listed on commodities exchanges are valued at closing settlement prices.
Over-the-counter options are valued by brokers through the use of a pricing
model which takes into account closing bond valuations, implied volatility and
short-term repurchase rates. Securities for which there are no such quotations
or valuations are valued at fair value as determined in good faith by or at the
direction of the Trustees.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases and
sales of foreign investments, income and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates of
such transactions. Gains and losses attributable to foreign currency exchange
rates on sales of securities are recorded for financial statement purposes as
net realized gains and losses on investments. Gains and losses attributable to
foreign exchange rate movements on income and expenses are recorded for
financial statement purposes as foreign currency transaction gains and losses.
That portion of both realized and unrealized gains and losses on investments
that result from fluctuations in foreign currency exchange rates is not
separately disclosed.
Deferred Organization Expenses - Costs incurred by the Series in connection with
its organization have been deferred and are being amortized on a straight-line
basis over a five-year period beginning on the date of commencement of Series
operations.
Written Options - The Series may write covered call or put options for which
premiums are received and are recorded as liabilities, and are subsequently
adjusted to the current value of the options written. Premiums received from
writing options which expire are treated as realized gains. Premiums received
from writing options which are exercised or are closed are offset against the
proceeds or amount paid on the transaction to determine the realized gain or
loss. If a put option is exercised, the premium reduces the cost basis of the
security purchased by the Series. The Series, as writer of an option, may have
no control over whether the underlying securities may be sold (call) or
purchased (put) and, as a result, bears the market risk of an unfavorable change
in the price of the securities underlying the written option. In general,
written call options may serve as a partial hedge against decreases in value in
the underlying securities to the extent of the premium received. Written options
may also be used as part of an income producing strategy reflecting the view of
the Series' management on the direction of interest rates.
Forward Foreign Currency Exchange Contracts - The Series may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering into these contracts from the potential inability of counterparties to
meet the terms of their contracts and from unanticipated movements in the value
of a foreign currency relative to the U.S. dollar. The Series will enter into
forward contracts for hedging purposes as well as for non-hedging purposes. For
hedging purposes, the Series may enter into contracts to deliver or receive
foreign currency it will receive from or require for its normal investment
activities. The Series may also use contracts in a manner intended to protect
foreign currency-denominated securities from declines in value due to
unfavorable exchange rate movements. For non-hedging purposes, the Series may
enter into contracts with the intent of changing the relative exposure of the
Series' portfolio of securities to different currencies to take advantage of
anticipated changes. The forward foreign currency exchange contracts are
adjusted by the daily exchange rate of the underlying currency and any gains or
losses are recorded for financial statement purposes as unrealized until the
contract settlement date.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for financial statement and
tax reporting purposes as required by federal income tax regulations. Interest
payments received in additional securities are recorded on the ex-interest date
in an amount equal to the value of the security on such date.
Fees Paid Indirectly - The Series' custodian bank calculates its fee based on
the Series' average daily net assets. This fee is reduced according to an
expense offset arrangement with State Street Bank, the dividend disbursing
agent, which provides for partial reimbursement of custody fees based on a
formula developed to measure the value of cash deposited by the Series with the
custodian and with the dividend disbursing agent. This amount is shown as a
reduction of expenses on the Statement of Operations.
Tax Matters and Distributions - The Series' policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. The Series files a tax
return annually using tax accounting methods required under provisions of the
Code which may differ from generally accepted accounting principles, the basis
on which these financial statements are prepared. Accordingly, the amount of net
investment income and net realized gain reported on these financial statements
may differ from that reported on the Series' tax return and, consequently, the
character of distributions to shareholders reported in the financial highlights
may differ from that reported to shareholders on Form 1099-DIV. Foreign taxes
have been provided for on interest and dividend income earned on foreign
investments in accordance with the applicable country's tax rates and to the
extent unrecoverable are recorded as a reduction of investment income. The
Series expects to pass through to shareholders foreign income taxes paid. The
election increases the taxable distributions of the Series by the amount of the
foreign taxes paid. An individual shareholder who itemizes deductions, or a
corporate shareholder, will be able to claim an offsetting deduction or a tax
credit (but not both) on their federal income tax returns. Individuals who do
not itemize deductions may claim a foreign tax credit but not a deduction. The
foreign source income is considered passive income for the purpose of computing
the foreign tax credit limitations. Distributions to shareholders are recorded
on the ex-dividend date.
The Series distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a tax return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains. During the year ended December 31, 1996, $277,457 was reclassified from
accumulated undistributed net investment income to accumulated undistributed net
realized gain on investments and foreign currency transactions due to
differences between book and tax accounting for currency transactions. This
change had no effect on the net assets or net asset value per share. At December
31, 1996, accumulated undistributed net investment income under book accounting
were different from tax accounting due to temporary differences in accounting
for currency transactions.
(3) Transactions with Affiliates
Investment Adviser - The Series has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.75% of
average daily net assets. Under a temporary expense limitation agreement with
MFS, MFS has voluntarily agreed to pay all of the Series' operating expenses,
exclusive of management fees, which exceed 0.25% of the Series' average daily
net assets. The Series in turn will pay MFS an expense reimbursement fee not
greater than 0.25% of the Series' average daily net assets. To the extent that
the expense reimbursement fee exceeds the Series' actual expenses, the excess
will be applied to amounts paid by MFS in prior years. At December 31, 1996, the
aggregate unreimbursed expenses owed to MFS by the Series amounted to $252,340,
including $172,556 incurred in the current year.
The Series pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Series, all of whom receive
remuneration for their services to the Series from MFS. Certain officers and
Trustees of the Series are officers or directors of MFS and MFS Service Center,
Inc. (MFSC).
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as a
percentage of the average daily net assets at an effective annual rate of up to
0.035%.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions and
short-term obligations, were as follows:
Purchases Sales
- ------------------------------------------------------------------------------
U.S. government securities $23,204,684 $20,453,094
=========== ===========
Investments (non-U.S. government securities) $48,546,607 $34,428,896
=========== ===========
The cost and unrealized appreciation or depreciation in value of the investments
owned by the Series, as computed on a federal income tax basis, are as follows:
Aggregate cost $25,579,571
===========
Gross unrealized appreciation $ 550,208
Gross unrealized depreciation (183,622)
-----------
Net unrealized appreciation $ 366,586
===========
(5) Shares of Beneficial Interest
The Series' Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Series shares were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1996 December 31, 1995
--------------------------------- -------------------------------
Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 3,252,833 $ 33,174,815 861,022 $ 9,272,850
Shares issued to shareholders in
reinvestment of distributions -- -- 68,274 692,995
Shares reacquired (1,522,662) (15,536,671) (493,000) (5,320,839)
---------- -------------- -------- -------------
Net increase 1,730,171 $ 17,638,144 436,296 $ 4,645,006
========== ============== ======== =============
</TABLE>
(6) Line of Credit
The Series entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Series shares. Interest is charged to each
fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating funds at the end of each
quarter. The commitment fee allocated to the Series for the year ended December
31, 1996 was $108.
(7) Financial Instruments
The Series trades financial instruments with off-balance sheet risk in the
normal course of its investing activities in order to manage exposure to market
risks such as interest rates and foreign currency exchange rates. These
financial instruments include written options and forward foreign currency
exchange contracts. The notional or contractual amounts of these instruments
represent the investment the Series has in particular classes of financial
instruments and does not necessarily represent the amounts potentially subject
to risk. The measurement of the risks associated with these instruments is
meaningful only when all related and offsetting transactions are considered.
Written Option Transactions
<TABLE>
<CAPTION>
1996 Calls 1996 Puts
------------------------------------ ------------------------------------
Principal Amounts Principal Amounts
of Contracts of Contracts
(000 Omitted) Premiums (000 Omitted) Premiums
- -------------------------------------------------------------------------------------------------------------------
OUTSTANDING, BEGINNING OF PERIOD -
<S> <C> <C> <C> <C>
Australian Dollars -- $ -- 145 $ 1,853
German Marks/British Pounds 623 2,769 -- --
Italian Lire/German Marks 596,334 9,883 596,334 21,958
Japanese Yen -- -- 26,950 3,514
Options written -
Australian Dollars 306 1,659 -- --
Canadian Dollars 721 740 1,714 5,226
German Marks 11,659 56,784 1,683 4,619
German Marks/British Pounds 8,516 32,055 6,270 97,304
Italian Lire/German Marks 1,651,102 12,004 -- --
Japanese Yen 76,546 961 132,377 8,463
New Zealand Dollar -- -- 705 1,048
Spanish Peseta/German Marks -- -- 129,477 3,205
Swiss Francs/German Marks 2,081 6,314 4,572 56,461
Options terminated in closing transactions -
Australian Dollars (306) (1,659) -- --
German Marks (11,659) (56,784) (1,683) (4,619)
German Marks/British Pounds (2,019) (6,568) -- --
Italian Lire/German Marks (2,247,436) (21,887) (596,334) (21,958)
Japanese Yen (76,546) (961) (85,950) (7,621)
New Zealand Dollar -- -- (705) (1,048)
Options expired -
Australian Dollars -- -- (145) (1,853)
Canadian Dollars (721) (740) (1,714) (5,226)
German Marks/British Pounds (4,126) (16,785) -- --
Japanese Yen -- -- (73,377) (4,356)
Spanish Peseta/German Marks -- -- (129,477) (3,205)
--------- ---------- ------- --------
OUTSTANDING, END OF PERIOD 5,075 $ 17,785 10,842 $153,765
========= ========== ======= ========
OPTIONS OUTSTANDING AT END OF PERIOD CONSIST OF:
German Marks/British Pounds 2,994 $ 11,471 6,270 $ 97,304
Swiss Francs/German Marks 2,081 6,314 4,572 56,461
--------- ---------- ------- --------
OUTSTANDING, END OF PERIOD 5,075 $ 17,785 10,842 $153,765
========= ========== ======= ========
</TABLE>
At December 31, 1996, the Series had sufficient cash and/or securities at least
equal to the value of the written options.
<PAGE>
Forward Foreign Currency Exchange Contracts
<TABLE>
<CAPTION>
Net Unrealized
Contracts In Exchange Contracts Appreciation
Settlement Date to Deliver/Receive for at Value (Depreciation)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales 2/20/97 - 4/21/97 AUD 2,697,746 $ 2,134,083 $ 2,139,540 $ (5,457)
2/24/97 BEF 11,969,832 394,004 378,957 15,047
2/20/97 CAD 12,909 9,458 9,452 6
2/07/97 CHF 3,820,672 3,008,669 2,866,911 141,758
1/10/97 - 4/21/97 DEM 58,542,880 38,304,017 38,295,146 8,871
2/03/97 DKK 4,224,107 740,526 718,705 21,821
5/09/97 ECU 909,100 1,157,421 1,146,046 11,375
2/07/97 FRF 4,064,400 789,342 785,492 3,850
2/24/97 - 4/21/97 GBP 2,506,514 4,125,258 4,286,104 (160,846)
2/24/97 IEP 1,255,768 2,040,649 2,127,185 (86,536)
1/03/97 - 2/07/97 ITL 1,531,569,914 1,005,821 1,006,791 (970)
1/29/97 - 4/21/97 JPY 1,389,345,557 12,442,313 12,176,795 265,518
4/21/97 NZD 1,054,619 743,511 740,432 3,079
2/03/97 - 2/07/97 SEK 4,207,527 634,772 618,407 16,365
----------- ----------- -----------
$67,529,844 $67,295,963 $ 233,881
=========== =========== ============
Purchases 2/20/97 - 4/21/97 AUD 1,810,075 $ 1,453,770 $ 1,435,555 $ (18,215)
2/07/97 CHF 3,718,357 2,956,135 2,790,137 (165,998)
2/07/97 - 4/22/97 DEM 40,624,120 26,488,345 26,561,042 72,697
2/07/97 DKK 3,024,120 510,305 514,641 4,336
4/21/97 ESP 24,636,350 189,579 189,319 (260)
2/07/97 FRF 4,067,555 806,193 786,102 (20,091)
2/24/97 - 4/21/97 GBP 1,058,929 1,752,499 1,810,366 57,867
1/10/97 - 2/07/97 ITL 2,064,401,327 1,347,349 1,357,335 9,986
1/21/97 - 4/22/97 JPY 3,360,250,862 30,383,032 29,458,921 (924,111)
2/03/97 NLG 33,399 19,620 19,389 (231)
5/09/97 NOK 7,337,586 1,157,421 1,145,970 (11,451)
4/21/97 NZD 5,295 3,724 3,717 (7)
2/03/97 SEK 2,239,575 339,039 329,130 (9,909)
----------- ----------- -----------
$67,407,011 $66,401,624 $(1,005,387)
=========== =========== ===========
</TABLE>
Forward foreign currency purchases and sales under master netting arrangements
and closed forward foreign currency exchange contracts excluded above amounted
to a net payable of $132,652 with Bankers Trust Company, a net payable of
$34,163 with Swiss Bank, a net receivable of $499,084 with First Boston, a net
receivable of $28,645 with Goldman Sachs, a net receivable of $16,595 with JP
Morgan, and a net receivable of $8,476 with Merrill Lynch at December 31, 1996.
At December 31, 1996, the Series had sufficient cash and/or securities to cover
any commitments under these contracts.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Variable Insurance Trust and Shareholders of MFS World
Governments Series:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of MFS World Governments Series (the Series) (one
of the series constituting the MFS Variable Insurance Trust) as of December 31,
1996, the related statement of operations for the year then ended, and the
statements of changes in net assets and financial highlights for the years ended
December 31, 1996 and December 31, 1995 and for the period from June 14, 1994
(the commencement of investment operations) to December 31, 1994. These
financial statements and financial highlights are the responsibility of the
Series' management. Our responsibility is to express an opinion on these
financial statements and financial highlights 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 financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned at
December 31, 1996 by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
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 provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS World
Governments Series at December 31, 1996, the results of its operations, the
changes in its net assets, and its financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 7, 1997
---------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
VWG-2/97 12M
<PAGE>
[logo] M F S(SM) ANNUAL REPORT
INVESTMENT MANAGEMENT FOR YEAR ENDED
DECEMBER 31, 1996
MFS(R) BOND SERIES
A SERIES OF MFS(R) VARIABLE INSURANCE TRUST
[Graphic Omitted]
<PAGE>
MFS(R) BOND SERIES
A SERIES OF MFS(R) VARIABLE INSURANCE TRUST
TRUSTEES INVESTMENT ADVISER
A. Keith Brodkin* Massachusetts Financial Services
Chairman and President Company
500 Boylston Street
Nelson J. Darling, Jr. Boston, MA 02116-3741
Trustee, Eastern Enterprises
(diversified holding company) DISTRIBUTOR
MFS Fund Distributors, Inc.
William R. Gutow 500 Boylston Street
Vice Chairman, Boston, MA 02116-3741
Capitol Entertainment Management Company
(Blockbuster Video Franchise) SHAREHOLDER SERVICE CENTER
MFS Service Center, Inc.
PORTFOLIO MANAGER P.O. Box 1400
Geoffrey L. Kurinsky* Boston, MA 02107-9906
TREASURER For additional information,
W. Thomas London* contact your financial adviser.
ASSISTANT TREASURER CUSTODIAN
James O. Yost* Investors Bank & Trust Company
SECRETARY AUDITORS
Stephen E. Cavan* Deloitte & Touche LLP
ASSISTANT SECRETARY WORLD WIDE WEB
James R. Bordewick, Jr.* www.mfs.com
*Affiliated with the Investment Adviser
<PAGE>
Dear Contract Owner:
The pattern of slow but sustainable growth seen in most of the world in 1996
seems likely to continue in 1997. While it looks as if U.S. growth in 1997 will
slow modestly relative to 1996, there is evidence that Europe and, to a lesser
degree, Japan are continuing their recoveries from recession. At the same time,
companies in many emerging markets are reporting robust increases in earnings as
these markets benefit from higher-than-average economic growth and market
reforms, which should continue to provide more opportunities for development and
trade.
After more than six years of expansion, the U.S. economy appears headed
toward another year of at least moderate growth in 1997, although a few signs
point to the possibility of a modest rise in inflation during the year. On the
positive side, the pattern of moderate growth and inflation set over the past
few years now seems fairly well entrenched in the economy and, short of a major
international or domestic crisis, appears to have enough momentum to remain on
track for some time. Recent gains in such important sectors as housing,
automobiles, industrial production, and exports indicate a fair amount of
underlying strength in the economy. However, some reason for caution can be seen
in the continuing high level of consumer debt and the attendant rise in personal
bankruptcies, as well as in the modestly disappointing level of holiday sales.
Also, the ongoing tightness in labor markets, and price rises in such important
sectors as energy, could add some inflationary pressures to the economy. Given
these somewhat conflicting indicators, we expect real (inflation-adjusted)
growth to revolve around 2% in 1997, which would represent a modest decline from
1996.
We continue to urge U.S. equity investors to lower their expectations for
1997 and to point out that the impressive gains of the past two years are not
sustainable. Just as the slowdown in corporate earnings growth and increases in
interest rates in 1996 raised some near-term concerns, further interest rate
increases and an acceleration of inflation could negatively affect the stock
market in 1997. However, to the extent that some slowdown in earnings means that
the economy is not overheating, this may be beneficial for the equity market in
the long run. Also, we believe many of the technology-driven productivity gains
that U.S. companies have made in recent years will continue to enhance corporate
America's competitiveness and profitability. Therefore, while we have some
near-term concerns, we remain reasonably positive about the long-term viability
of the equity market.
In U.S. bond markets, conflicting signals over the strength of the economy
have created near-term volatility. Even comments by Federal Reserve Chairman
Alan Greenspan late in 1996 created some uncertainty over the Federal Reserve
Board's next move. We expect the Fed to maintain its anti-inflationary stance
should signs of more rapid economic growth and, particularly, higher inflation
resurface. While inflationary forces largely remained in check in 1996, the
continued strength in the labor market and rising energy prices mean that a
pickup in inflation is still possible. At the same time, the U.S. budget deficit
continues to decline and, as a percentage of gross domestic product, is now less
than 2%, which we consider a positive development for the bond markets. Although
interest rates may move higher over the coming months, we believe that, at
current levels, fixed-income markets remain equitably valued.
Internationally, the environment of moderate growth, benign inflation, and
fairly steady interest rates is also providing support for investment markets
and should help support valuation levels in the coming year. Throughout the
world, the key to stock market performance in 1997 will be corporate earnings
growth. While U.S. earnings growth is slowing but still expected to be fairly
healthy, we anticipate that a number of European countries will see an
acceleration in earnings growth and improved valuations in 1997. Despite this
environment, many European countries trade at discounts to the United States. In
particular, we see opportunities in some of the multinationals and businesses
with the ability to generate steady earnings growth. In Japan, a recovery
appears to be taking place, but at a very modest rate, with valuations still at
high levels. In the emerging markets, the long-term economic growth story
remains intact and, although selectivity is even more important in these
markets, more companies are benefiting from this growth and trading at
below-average global valuations.
<PAGE>
Comments from the portfolio manager of the Series are presented below. We
appreciate your support and welcome any questions or comments you may have.
Respectfully,
/s/ A. Keith Brodkin /s/ Geoffrey L. Kurinsky
A. Keith Brodkin Geoffrey L. Kurinsky
Chairman and President Portfolio Manager
January 13, 1997
MFS BOND SERIES
For the year ended December 31, 1996, the Series provided a total return of
2.09%. This compares to a 2.90% return for the Lehman Brothers Government/
Corporate Bond Index, an unmanaged, market-value-weighted index of all debt
obligations of the U.S. Treasury and U.S. government agencies (excluding
mortgage-backed securities) and of all publicly issued fixed-rate,
nonconvertible, investment-grade domestic corporate debt. While intra-year
volatility moved interest rates in many directions in 1996, as a whole, interest
rates moved higher, making it a tough year for fixed-income investors. After
beginning the year at 5.5%, interest rates on 10-year Treasury securities ended
the year around 6.5%. This backup was caused by an unexpected pickup in economic
activity over the first half of the year and by fears of accelerating inflation,
which turned out to be unfounded.
The Series continued to build up its weighting in investment-grade corporate
securities, which reached approximately 50% of the portfolio by year-end. We are
targeting an eventual 65% to 75% allocation of both high-grade and high-yield
corporate securities. As the U.S. economy continues its growth, we expect the
general rule that corporate securities outperform Treasury securities during
periods of economic growth will continue to prevail (although the principal
value and interest on Treasury securities are guaranteed by the U.S. government
if held to maturity). Credit fundamentals of corporations generally improve
during periods of economic growth and deteriorate during periods of recession.
In terms of specific sectors, the Series' overweighted position in the
airline sector contributed to its strong performance. This sector provided a
return of 7.25% for the period, which was the best-performing sector of the
investment-grade corporate bond market. The sector continues to benefit from the
pickup in economic activity and a 10% to 20% increase in airline fares.
The Series' exposure to the cable/media sector was a drag on performance
during the period. The sector's performance of 2.19% was among the worst in the
investment-grade corporate bond market. The Series' largest holding,
TeleCommunications Inc., underperformed as the Standard & Poor's rating agency
has alerted that it may return its rating to below-investment-grade status. We
have retained our position based on our view that the downgrade is already
reflected in current pricing. If the investment-grade ratings are affirmed,
there is the potential for significant price appreciation.
Given our view that the market is fairly valued, we are maintaining the
Series duration (a measure of interest rate sensitivity) at 5.8 years, which we
consider appropriate for this Series' universe. We will persist in building our
exposure to both the investment-grade and high-yield corporate bond markets
based on our outlook for continued steady economic growth into 1997.
PORTFOLIO MANAGER'S PROFILE
Geoffrey L. Kurinsky is Senior Vice President of Massachusetts Financial
Services (MFS) and has managed MFS Bond Series since its inception in 1995. He
joined MFS in 1987 in the Fixed Income Department and was named Vice President
in 1990 and Senior Vice President in 1993. Mr. Kurinsky is a graduate of the
University of Massachusetts and holds a Master's in Business Administration and
Finance from Boston University.
<PAGE>
PERFORMANCE SUMMARY
The information below illustrates the historical performance of MFS Bond Series
shares in comparison to various market indicators. Benchmark comparisons are
unmanaged and do not reflect any fees or expenses. You cannot invest in an
index.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the Period from November 1, 1995 to December 31, 1996)
Lehman Brothers Government/ Consumer
MFS Bond Series Corporate Bond Index Price Index -- U.S.
11/95 10000.0 10000.0 10000.0
12/95 10300.0 10314.0 10013.0
3/96 10027.0 10073.0 10152.0
6/96 9987.0 10120.0 10225.0
9/96 10149.0 10299.0 10300.0
12/96 10516.0 10614.0 10372.0
AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 1996
1 Year Life+
- --------------------------------------------------------------------------------
MFS Bond Series +2.09% +4.32%
- --------------------------------------------------------------------------------
Lehman Brothers Government/Corporate Bond Index(++) +2.90% +6.44%
- --------------------------------------------------------------------------------
Consumer Price Index*(++) +3.56% +3.12%
- --------------------------------------------------------------------------------
(+) For the period from the commencement of investment operations, October 24,
1995 to December 31, 1996.
* The Consumer Price Index is a popular measure of change in prices.
(++) Source: CDA/ Wiesenberger.
Returns shown do not reflect the deduction of the mortality and expense risk
charges and administration fees. Please refer to the product's annual report for
performance that reflects the fees and charges imposed by insurance company
separate accounts.
Investment return and principal value will fluctuate, and shares, when redeemed,
may be worth more or less than their original cost. Past performance is no
guarantee of future results.
Series results reflect any applicable expense subsidies and waivers, without
which the performance results would have been less favorable. Subsidies and
waivers may be rescinded at any time. See the prospectus for details.
<PAGE>
PORTFOLIO OF INVESTMENTS - December 31, 1996
Bonds - 83.4%
- --------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- --------------------------------------------------------------------------------
U.S. Bonds - 76.8%
Airlines - 4.4%
Continental Airlines, Inc., 9.5s, 2001## $ 10 $ 10,200
Continental Airlines, Inc., 9.5s, 2013 5 5,625
Delta Airlines, Inc., 8.5s, 2002 10 10,588
Jet Equipment Trust, 9.41s, 2010## 5 5,769
Jet Equipment Trust, 8.64s, 2012## 4 5,310
--------
$ 37,492
- --------------------------------------------------------------------------------
Automotive - 0.6%
Mark IV Industries, Inc., 7.75s, 2006 $ 5 $ 4,912
- --------------------------------------------------------------------------------
Banks and Credit Companies - 4.6%
ABN Amro Bank N.V., 7.3s, 2026 $ 5 $ 4,838
Advanta Corp., 7.47s, 2001 5 5,100
BankAmerica Capital, 8s, 2026 5 5,060
Capital One Bank, 6.75s, 2000 10 9,987
Capital One Financial Corp., 7.25s, 2003 10 9,838
MBNA Capital, 8.278s, 2026 5 5,019
--------
$ 39,842
- --------------------------------------------------------------------------------
Building - 1.2%
USG Corp., 9.25s, 2001 $ 10 $ 10,650
- --------------------------------------------------------------------------------
Business Machines - 0.5%
International Business Machines Corp.,
7.125s, 2006 $ 5 $ 4,831
- --------------------------------------------------------------------------------
Consumer Goods and Services - 0.6%
Philip Morris Cos., Inc., 7.65s, 2008 $ 5 $ 5,106
- --------------------------------------------------------------------------------
Entertainment - 1.8%
Time Warner, Inc., 7.45s, 1998 $ 5 $ 5,055
Time Warner, Inc., 8.375s, 2023 10 10,138
--------
$ 15,193
- --------------------------------------------------------------------------------
Financial Institutions - 3.6%
Contifinancial Corp., 8.375s, 2003 $ 5 $ 5,150
Crown, Cork & Seal Finance, 7s, 2006 5 4,944
Hubco, Inc., 8.2s, 2006## 5 5,200
Lehman Brothers Holdings, 7.5s, 2026 10 10,250
Salton Sea Funding Corp., 7.84s, 2010 5 5,027
--------
$ 30,571
- --------------------------------------------------------------------------------
Food and Beverage Products - 1.2%
RJR Nabisco, Inc., 8.75s, 2004 $ 10 $ 10,093
- --------------------------------------------------------------------------------
Forest and Paper Products - 1.2%
Boise Cascade Corp., 7.43s, 2005 $ 10 $ 10,150
- --------------------------------------------------------------------------------
Insurance - 4.4%
Equitable Life Assurance, 7.7s, 2015 $ 3 $ 3,026
Fairfax Financial Holdings Ltd., 8.3s, 2026 5 5,217
Liberty Mutual Insurance Co., 8.2s, 2007## 5 5,310
Nationwide Mutual Insurance Co., 7.5s, 2024## 10 9,320
Travelers Capital, 7.75s, 2036 15 14,550
--------
$ 37,423
- --------------------------------------------------------------------------------
Medical and Health Technology and Services - 0.6%
Tenet Healthcare Corp., 8.625s, 2003 $ 5 $ 5,275
- --------------------------------------------------------------------------------
Oils - 4.1%
Enserch Exploration, Inc., 7.54s, 2009## $ 5 $ 4,925
Mitchell Energy & Development Corp.,
6.75s, 2004 10 9,339
Oryx Energy Co., 8.375s, 2004 10 10,334
Tosco Corp., 7.625s, 2006 10 10,324
--------
$ 34,922
- --------------------------------------------------------------------------------
Real Estate Investment Trusts - 1.8%
Loewen Group International, Inc., 7.5s, 2001 $ 10 $ 10,000
Taubman Realty Group, 8s, 2001 5 5,161
--------
$ 15,161
- --------------------------------------------------------------------------------
Special Products and Services - 0.6%
Stewart Enterprises, 6.7s, 2003 $ 5 $ 4,906
- --------------------------------------------------------------------------------
Stores - 0.6%
Price/Costco, Inc., 7.125s, 2005 $ 5 $ 5,001
- --------------------------------------------------------------------------------
Telecommunications - 3.8%
360 Communications Co., 7.5s, 2006 $ 7 $ 6,943
Tele-Communications, Inc., 7.385s, 2001 20 20,198
Tele-Communications, Inc., 10.125s, 2022 5 5,490
--------
$ 32,631
- --------------------------------------------------------------------------------
U.S. Treasury Obligations - 31.0%
U.S. Treasury Notes, 6s, 1999 $ 10 $ 9,998
U.S. Treasury Notes, 9.125s, 1999 5 5,343
U.S. Treasury Notes, 6.5s, 2001 5 5,055
U.S. Treasury Notes, 6.5s, 2005 5 5,032
U.S. Treasury Notes, 6.5s, 2006 41 41,224
U.S. Treasury Notes, 6.875s, 2006 110 113,352
U.S. Treasury Notes, 7s, 2006 36 37,401
U.S. Treasury Bonds, 7.625s, 2025 6 6,665
U.S. Treasury Bonds, 6.75s, 2026 40 40,300
--------
$264,370
- --------------------------------------------------------------------------------
Utilities - Electric - 7.8%
Arkansas Power & Light Co., 8.75s, 2026 $ 10 $ 10,302
Coastal Corp., 7.75s, 2035 20 20,361
First PV Funding Corp., 10.3s, 2014 5 5,325
Long Island Lighting Co., 8.9s, 2019 15 15,304
Louisiana Power & Light Co., 8.75s, 2026 5 5,056
Niagara Mohawk Power, 8s, 2004 5 4,803
Texas-New Mexico Power Co., 12.5s, 1999 5 5,432
--------
$ 66,583
- --------------------------------------------------------------------------------
Utilities - Gas - 2.4%
California Energy Co., 0s, 2004 $ 5 $ 5,268
Louis Dreyfus Natural Gas, 9.25s, 2004 5 5,256
NGC Corp., 7.625s, 2026 5 5,094
Ras Laffan Gas, 8.294s, 2014## 5 5,067
--------
$ 20,685
- --------------------------------------------------------------------------------
Total U.S. Bonds $655,797
- --------------------------------------------------------------------------------
Foreign Bonds - 6.6%
Australia - 0.6%
Qantas Airways Ltd., 7.5s, 2003
(Airlines)## $ 5 $ 5,114
- --------------------------------------------------------------------------------
Canada - 2.4%
Canadian Pacific Forest, 9.25s, 2002
(Forest and Paper Products) $ 5 $ 5,080
Gulf Canada Resources Ltd., 8.35s, 2006
(Utilities - Gas) 5 5,169
Husky Oil Ltd., 7.125s, 2006 (Oils) 10 10,000
--------
$ 20,249
- --------------------------------------------------------------------------------
Chile - 1.8%
Empresa Electric Pehuenche, 7.3s, 2003
(Utilities - Electric) $ 15 $ 15,164
- --------------------------------------------------------------------------------
South Africa - 0.6%
Republic of South Africa, 8.375s, 2006
(Government) $ 5 $ 5,000
- --------------------------------------------------------------------------------
Thailand - 1.2%
Northrop-Grumman Corp., 9.375s, 2024
(Aerospace) $ 5 $ 5,594
Total Access Communications, 8.375s, 2006
(Telecommunications)## 5 5,016
--------
$ 10,610
- --------------------------------------------------------------------------------
Total Foreign Bonds $ 56,137
- --------------------------------------------------------------------------------
Total Bonds (Identified Cost, $705,657) $711,934
- --------------------------------------------------------------------------------
Short-Term Obligation - 25.8%
- --------------------------------------------------------------------------------
Federal Home Loan Bank, due 1/02/97, at
Amortized Cost $ 220 $219,936
- --------------------------------------------------------------------------------
Total Investments (Identified Cost, $925,593) $931,870
Other Assets, Less Liabilities - (9.2)% (78,669)
- --------------------------------------------------------------------------------
Net Assets - 100.0% $853,201
- --------------------------------------------------------------------------------
##SEC Rule 144A restriction.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ------------------------------------------------------------------------------
December 31, 1996
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $925,593) $931,870
Cash 10,219
Receivable for Series shares sold 659
Interest receivable 12,654
Receivable from investment adviser 14,958
Deferred organization expenses 7,009
Other assets 2
--------
Total assets $977,371
--------
Liabilities:
Payable for Series shares reacquired $ 86
Payable for investments purchased 104,021
Payable to affiliate for management fee 41
Accrued expenses and other liabilities 20,022
--------
Total liabilities $124,170
--------
Net assets $853,201
========
Net assets consist of:
Paid-in capital $850,160
Unrealized appreciation on investments 6,277
Accumulated net realized loss on investments (3,478)
Accumulated undistributed net investment income 242
--------
Total $853,201
========
Shares of beneficial interest outstanding 84,785
======
Net asset value per share
(net assets of $853,201 / 84,785 shares of beneficial interest
outstanding) $10.06
======
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- ------------------------------------------------------------------------------
Year Ended December 31, 1996
- ------------------------------------------------------------------------------
Net investment income:
Interest income $33,192
-------
Expenses -
Management fee $ 2,924
Trustees' compensation 2,033
Shareholder servicing agent fee 169
Auditing fees 21,306
Printing 13,563
Custodian fee 2,266
Amortization of organization expenses 1,842
Legal fees 1,026
Miscellaneous 728
-------
Total expenses $45,857
Fees paid indirectly (154)
Reduction of expenses by investment adviser (40,829)
-------
Net expenses $ 4,874
-------
Net investment income $28,318
-------
Realized and unrealized gain (loss) on investments:
Realized loss on investment transactions (identified cost basis) $(3,478)
-------
Change in unrealized appreciation on investments $ 2,384
-------
Net realized and unrealized loss on investments $(1,094)
-------
Increase in net assets from operations $27,224
=======
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statements of Changes in Net Assets
- ------------------------------------------------------------------------------
Year Ended Period Ended
December 31, 1996 December 31, 1995*
- ------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment income $ 28,318 $ 2,011
Net realized gain (loss) on
investments (3,478) 643
Net unrealized gain on investments 2,384 3,893
-------- --------
Increase in net assets from
operations $ 27,224 $ 6,547
-------- --------
Distributions declared to shareholders -
From net investment income $(28,266) $ (2,011)
From net realized gain on
investments -- (453)
-------- --------
Total distributions declared to
shareholders $(28,266) $ (2,464)
-------- --------
Series share (principal) transactions -
Net proceeds from sale of shares $683,975 $217,828
Net asset value of shares issued to
shareholders in reinvestment of
distributions 28,266 2,464
Cost of shares reacquired (85,933) (5,040)
-------- --------
Increase in net assets from
Series share transactions $626,308 $215,252
-------- --------
Total increase in net assets $625,266 $219,335
Net assets:
At beginning of period 227,935 8,600
-------- --------
At end of period (including
accumulated undistributed net
investment income of $242 and $0,
respectively) $853,201 $227,935
======== ========
*For the period from the commencement of investment operations, October 24,
1995 to December 31, 1995.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights
- -------------------------------------------------------------------------------
Year Ended Period Ended
December 31, 1996 December 31, 1995*
- -------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $10.19 $ 10.00
------ -------
Income from investment operations# -
Net investment income(S) $ 0.58 $ 0.09
Net realized and unrealized gain (loss) on
investments (0.36) 0.21
------ -------
Total from investment operations $ 0.22 $ 0.30
------ -------
Less distributions declared to shareholders -
From net investment income $(0.35) $ (0.09)
From net realized gain on investments -- (0.02)
------ -------
Total distributions declared to
shareholders $(0.35) $ (0.11)
------ -------
Net asset value - end of period $10.06 $ 10.19
====== =======
Total return 2.09% 3.02%++
Ratios (to average net assets)/Supplemental data(S):
Expenses 1.00% 1.00%+
Net investment income 5.84% 4.89%+
Portfolio turnover 231% 55%
Net assets at end of period (000 omitted) $ 853 $ 228
* For the period from the commencement of investment operations, October 24,
1995 to December 31, 1995.
+ Annualized.
++ Not annualized.
# Per share data is based on average shares outstanding.
(S) The adviser voluntarily agreed to maintain the expenses of the Series at not
more than 1.00% of average daily net assets. To the extent actual expenses
were over these limitations, the net investment loss per share and the
ratios would have been:
Net investment loss $(0.26) $ (0.70)
Ratios (to average net assets):
Expenses 9.45% 43.85%+
Net investment loss (2.61)% (37.96)%+
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Bond Series (the Series) is a diversified series of MFS Variable Insurance
Trust (the Trust) which is comprised of the following 12 series: MFS Bond
Series, MFS Emerging Growth Series, MFS Growth with Income Series, MFS High
Income Series, MFS Limited Maturity Series, MFS Money Market Series, MFS
Research Series, MFS Strategic Fixed Income Series, MFS Total Return Series, MFS
Utilities Series, MFS Value Series and MFS World Governments Series. The Trust
is organized as a Massachusetts business trust and is registered under the
Investment Company Act of 1940, as amended, as an open-end management investment
company.
The shareholders of each Series of the Trust are separate accounts of insurance
companies which offer variable annuity and/or life insurance products. As of
December 31, 1996 there were eight shareholders in the Series.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investment Valuations - Debt securities (other than short-term obligations which
mature in 60 days or less), including listed issues, are valued on the basis of
valuations furnished by dealers or by a pricing service with consideration to
factors such as institutional-size trading in similar groups of securities,
yield, quality, coupon rate, maturity, type of issue, trading characteristics
and other market data, without exclusive reliance upon exchange or
over-the-counter prices. Short-term obligations, which mature in 60 days or
less, are valued at amortized cost, which approximates market value. Securities
for which there are no such quotations or valuations are valued at fair value as
determined in good faith by or at the direction of the Trustees.
Deferred Organization Expenses - Costs incurred by the Series in connection with
its organization have been deferred and are being amortized on a straight-line
basis over a five-year period beginning on the date of commencement of Series
operations.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for financial statement and
tax reporting purposes as required by federal income tax regulations. Interest
payments received in additional securities are recorded on the ex- interest date
in an amount equal to the value of the security on such date.
Fees Paid Indirectly - The Series' custodian bank calculates its fee based on
the Series' average daily net assets. This fee is reduced according to an
expense offset arrangement with State Street Bank, the dividend disbursing
agent, which provides for partial reimbursement of custody fees based on a
formula developed to measure the value of cash deposited by the Series with the
custodian and with the dividend disbursing agent. This amount is shown as a
reduction of expenses on the Statement of Operations.
Tax Matters and Distributions - The Series' policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. The Series files a tax
return annually using tax accounting methods required under provisions of the
Code which may differ from generally accepted accounting principles, the basis
on which these financial statements are prepared. Accordingly, the amount of net
investment income and net realized gain reported on these financial statements
may differ from that reported on the Series' tax return and, consequently, the
character of distributions to shareholders reported in the financial highlights
may differ from that reported to shareholders on Form 1099-DIV. Distributions to
shareholders are recorded on the ex-dividend date.
The Series distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a tax return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains. During the year ended December 31, 1996, $190 was reclassified from
accumulated net realized loss on investments to accumulated undistributed net
investment income due to differences between book and tax accounting for
distributions. This change had no effect on the net assets or net asset value
per share. At December 31, 1996, accumulated undistributed net investment income
and accumulated net realized loss on investments under book accounting were
different from tax accounting due to temporary differences in accounting for
wash sales and spillbacks.
At December 31, 1996, the Series, for federal income tax purposes, had a capital
loss carryforward of $3,306 which may be applied against any net taxable
realized gains of each succeeding year until the earlier of its utilization or
expiration on December 31, 2004.
(3) Transactions with Affiliates
Investment Adviser - The Series has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.60% of
average daily net assets. Under a temporary expense limitation agreement with
MFS, MFS has voluntarily agreed to pay all of the Series' operating expenses,
exclusive of management fees, which exceed 0.40% of the Series' average daily
net assets. The Series in turn will pay MFS an expense reimbursement fee not
greater than 0.40% of the Series' average daily net assets. To the extent that
the expense reimbursement fee exceeds the Series' actual expenses, the excess
will be applied to amounts paid by MFS in prior years. At December 31, 1996, the
aggregate unreimbursed expenses owed to MFS by the Series amounted to $58,452,
including $40,829 incurred in the current year.
The Series pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Series, all of whom receive
remuneration for their services to the Series from MFS. Certain officers and
Trustees of the Series are officers or directors of MFS and MFS Service Center,
Inc. (MFSC).
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as a
percentage of the average daily net assets at an effective annual rate of up to
0.035%.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions and
short-term obligations, were as follows:
Purchases Sales
- ------------------------------------------------------------------------------
U.S. government securities $575,086 $373,317
======== ========
Investments (non-U.S. government securities) $833,741 $558,370
======== ========
The cost and unrealized appreciation or depreciation in value of the investments
owned by the Series, as computed on a federal income tax basis, are as follows:
Aggregate cost $925,593
========
Gross unrealized appreciation $ 8,930
Gross unrealized depreciation (2,653)
--------
Net unrealized appreciation $ 6,277
========
(5) Shares of Beneficial Interest
The Series' Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Series shares were as follows:
Year Ended Period Ended
December 31, 1996 December 31, 1995*
-------------------------- --------------------------
Shares Amount Shares Amount
- --------------------------------------------------------------------------
Shares sold 68,218 $683,975 21,762 $217,828
Shares issued to
shareholders in
reinvestment of
distributions 2,796 28,266 242 2,464
Shares reacquired (8,589) (85,933) (504) (5,040)
------ -------- ------ --------
Net increase 62,425 $626,308 21,500 $215,252
====== ======== ====== ========
* For the period from the commencement of investment operations, October 24,
1995 to December 31, 1995.
(6) Line of Credit
The Series entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Series shares. Interest is charged to each
fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating funds at the end of each
quarter. The commitment fee allocated to the Series for the year ended December
31, 1996 was $6.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Variable Insurance Trust and Shareholders of MFS Bond
Series:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of MFS Bond Series (the Series) (one of the series
constituting the MFS Variable Insurance Trust) as of December 31, 1996, the
related statement of operations for the year then ended, the statements of
changes in net assets and financial highlights for the year then ended and for
the period from October 24, 1995 (the commencement of investment operations) to
December 31, 1995. These financial statements and financial highlights are the
responsibility of the Series' management. Our responsibility is to express an
opinion on these financial statements and financial highlights 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 financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned at
December 31, 1996 by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
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 provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Bond Series at
December 31, 1996, the results of its operations, the changes in its net assets,
and its financial highlights for the respective stated periods in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 7, 1997
---------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
VFB-X 2/97 2M
<PAGE>
[logo] M F S(SM) ANNUAL REPORT
INVESTMENT MANAGEMENT FOR YEAR ENDED
DECEMBER 31, 1996
MFS(R) LIMITED MATURITY SERIES
A SERIES OF MFS(R) VARIABLE INSURANCE TRUST
[Graphic Omitted]
<PAGE>
MFS(R) LIMITED MATURITY SERIES
A SERIES OF MFS(R) VARIABLE INSURANCE TRUST
<TABLE>
<C> <C>
TRUSTEES INVESTMENT ADVISER
A. Keith Brodkin* Massachusetts Financial Services Company
Chairman and President 500 Boylston Street
Boston, MA 02116-3741
Nelson J. Darling, Jr.
Trustee, Eastern Enterprises DISTRIBUTOR
(diversified holding company) MFS Fund Distributors, Inc.
500 Boylston Street
William R. Gutow Boston, MA 02116-3741
Vice Chairman,
Capitol Entertainment Management Company SHAREHOLDER SERVICE CENTER
(Blockbuster Video Franchise) MFS Service Center, Inc.
P.O. Box 1400
PORTFOLIO MANAGER Boston, MA 02107-9906
Geoffrey L. Kurinsky*
For additional information,
TREASURER contact your financial adviser.
W. Thomas London*
CUSTODIAN
ASSISTANT TREASURER Investors Bank & Trust Company
James O. Yost*
AUDITORS
SECRETARY Deloitte & Touche LLP
Stephen E. Cavan*
WORLD WIDE WEB
ASSISTANT SECRETARY www.mfs.com
James R. Bordewick, Jr.*
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
Dear Contract Owner:
The pattern of slow but sustainable growth seen in most of the world in 1996
seems likely to continue in 1997. While it looks like U.S. growth in 1997 will
slow modestly relative to 1996, there is evidence that Europe and, to a lesser
degree, Japan are continuing their recoveries from recession. At the same
time, companies in many emerging markets are reporting robust increases in
earnings as these markets benefit from higher-than-average economic growth and
market reforms. This should continue to provide more opportunities for
development and trade.
After more than six years of expansion, the U.S. economy appears headed
toward another year of moderate growth in 1997, although a few signs point to
the possibility of a modest rise in inflation during the year. On the positive
side, the pattern of moderate growth and inflation set over the past few years
now seems fairly well entrenched in the economy and, short of a major
international or domestic crisis, appears to have enough momentum to remain on
track for some time. Recent gains in such important sectors as housing,
automobiles, industrial production, and exports indicate a fair amount of
underlying strength in the economy. However, some reason for caution can be
seen in the continuing high level of consumer debt and the attendant rise in
personal bankruptcies, as well as in the modestly disappointing level of
holiday sales. Furthermore, the ongoing tightness in labor markets, and price
rises in such important sectors as energy, could add some inflationary
pressures to the economy. Given these somewhat conflicting indicators, we
expect real (inflation-adjusted) growth to revolve around 2% in 1997, which
would represent a modest decline from 1996.
We continue to urge U.S. equity investors to lower their expectations for
1997 and to point out that the impressive gains of the past two years are not
sustainable. Just as the slowdown in corporate earnings growth and increases
in interest rates in 1996 raised some near-term concerns, further interest
rate increases and an acceleration of inflation could negatively affect the
stock market in 1997. However, to the extent that some slowdown in earnings
means that the economy is not overheating, this may be beneficial for the
equity market in the long run. We believe many of the technology-driven
productivity gains that U.S. companies have made in recent years will continue
to enhance corporate America's competitiveness and profitability. Therefore,
while we have some near-term concerns, we remain reasonably positive about the
long-term viability of the equity market.
In U.S. bond markets, conflicting signals over the strength of the economy
have created near-term volatility. Even comments by Federal Reserve Chairman
Alan Greenspan in late 1996 created some uncertainty over the Federal Reserve
Board's next move. We expect the Fed to maintain its anti-inflationary stance
should signs of more rapid economic growth and, particularly, higher inflation
resurface. While inflationary forces largely remained in check in 1996, the
continued strength in the labor market and rising energy prices mean that a
pickup in inflation is still possible. At the same time, the U.S. budget
deficit continues to decline and, as a percentage of gross domestic product,
is now less than 2%, which we consider a positive development for the bond
markets. Although interest rates may move higher over the coming months, we
believe that, at current levels, fixed-income markets remain equitably valued.
Internationally, the environment of moderate growth, benign inflation, and
fairly steady interest rates is also providing support for investment markets
and should help support valuation levels in the coming year. Throughout the
world, the key to stock market performance in 1997 will be corporate earnings
growth. While U.S. earnings growth is slowing, but still expected to be fairly
healthy, we anticipate that a number of European countries will see an
acceleration in earnings growth and improved valuations in 1997. Despite this
environment, many European countries trade at discounts to the United States.
In particular, we see opportunities in some of the multinationals, and
businesses with the ability to generate steady earnings growth. In Japan, a
recovery appears to be taking place, but at a very modest rate, with
valuations still at high levels. In the emerging markets, the long-term
economic growth story remains intact and, although selectivity is even more
important in these markets, more companies are benefiting from this growth and
trading at below-average global valuations.
<PAGE>
Comments from the portfolio manager of the Series are presented below. We
appreciate your support and welcome any questions or comments you may have.
Respectfully,
/s/A. Keith Brodkin /s/Geoffrey L. Kurinsky
A. Keith Brodkin Geoffrey L. Kurinsky
Chairman and President Portfolio Manager
January 9, 1997
MFS LIMITED MATURITY SERIES
The Series commenced operations on August 14, 1996, and from that date through
December 31, 1996, provided a total return of 2.61%. This was a strong period
for shorter-maturity fixed-income securities as interest rates on two-year
Treasuries fell from 6.40% to 5.75%, while the market adopted the view that
the pace of economic growth was declining. There was no change in rates from
the Federal Reserve as the economy continued to grow, albeit at a slower pace,
and inflationary pressures remained absent. Despite market concerns over a
pickup in the pace of inflation, both labor costs and commodity prices
remained relatively restrained.
The Series' performance benefited from the decline in interest rates and
the Series' overweighting in investment-grade securities. As is typical in
periods of strong economic activity, the 3.83% return of short-term "BBB"
investment-grade corporate securities for the last half of 1996 outperformed
Treasury securities, which returned 3.57% according to Lehman Brothers.
(Principal value and interest on Treasury securities are guaranteed by the
U.S. government if held to maturity.) The Series' weightings in "BBB"
investment-grade securities stands at around 45% of the portfolio, which is a
higher exposure than competing funds of the competitive universe as defined by
Lipper Analytical Services, Inc., an independent firm which reports mutual
fund performance.
Looking forward, we will continue to increase the Series' exposure to
investment-grade corporate securities toward the 65% level. This is consistent
with our view that the corporate securities will continue outperforming
Treasuries as 1997 marks another year of steady economic growth.
PORTFOLIO MANAGER'S PROFILE
Geoffrey L. Kurinsky is Senior Vice President of Massachusetts Financial
Services (MFS) and manages MFS Limited Maturity Series. He joined MFS as
Portfolio Manager in the Fixed Income Department in 1987 and was named Vice
President in 1990 and Senior Vice President in 1993. Mr. Kurinsky is a
graduate of the University of Massachusetts and holds an M.B.A. in Finance
from Boston University.
PERFORMANCE SUMMARY
The information below illustrates the historical performance of MFS Limited
Maturity Series shares in comparison to various market indicators. Benchmark
comparisons are unmanaged and do not reflect any fees or expenses. You cannot
invest in an index.
<PAGE>
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the Period from August 1, 1996 to December 31, 1996)
MFS Consumer Merrill Lynch
Limited Price 1-5 Year
Maturity Index - Government/Corporate
Date Series U.S. Bond Index
- ---- -------- -------- --------------------
8/96 10000.0 10000.0 10000.0
8/96 9940.0 10020.0 10024.0
9/96 10060.0 10054.0 10134.0
10/96 10200.0 10086.0 10274.0
11/96 10300.0 10105.0 10375.0
12/96 10260.0 10124.0 10348.0
AGGREGATE TOTAL RETURNS AS OF DECEMBER 31, 1996
Life+
- ------------------------------------------------------------------------------
MFS Limited Maturity Series + 2.61%
- ------------------------------------------------------------------------------
Average short-term investment-grade debt fund + 2.48%
- ------------------------------------------------------------------------------
Merrill Lynch One- to Five-year Government/Corporate Bond Index++** + 3.48%
- ------------------------------------------------------------------------------
Consumer Price Index*++ + 1.24%
- ------------------------------------------------------------------------------
*The Consumer Price Index is a popular measure of change in prices.
**The Merrill Lynch one- to five-year Government/Corporate Bond Index is an
unmanaged composite of coupon-bearing Treasury issues, debt of the U.S.
government and its agencies, and corporate debt rated BB/Baa or better.
+For the period from the commencement of investment operations, August 14,
1996 to December 31, 1996.
++Source: CDA/Wiesenberger.
Returns shown do not reflect the deduction of the mortality and expense risk
charges and administrative fees. Please refer to the product's annual report
for performance that reflects the fees and charges imposed by insurance
company separate accounts.
Investment return and principal value will fluctuate, and shares, when
redeemed, may be worth more or less than their original cost. Past performance
is no guarantee of future results.
Series results reflect any applicable expense subsidies and waivers, without
which the performance results would have been less favorable. Subsidies and
waivers may be rescinded at any time. See the prospectus for details.
<PAGE>
PORTFOLIO OF INVESTMENTS - December 31, 1996
Bonds - 95.2%
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
U.S. Bonds - 91.3%
Banks and Credit Companies - 7.7%
Advanta Corp., 7.47s, 2001 $ 20 $ 20,345
Capital One Financial Corp., 7.25s, 2003 20 19,675
--------
$ 40,020
- -----------------------------------------------------------------------------
Entertainment - 3.9%
Time Warner, Inc., 7.45s, 1998 $ 20 $ 20,220
- -----------------------------------------------------------------------------
Financial Services - 1.0%
United Cos. Financial Corp., 9.35s, 1999 $ 5 $ 5,318
- -----------------------------------------------------------------------------
Food and Beverage Products - 11.7%
Great Atlantic & Pacific Tea Co., Inc.,
9.125s, 1998 $ 20 $ 20,514
Nabisco, Inc., 8s, 2000 20 20,775
RJR Nabisco, Inc., 8s, 2001 20 20,064
--------
$ 61,353
- -----------------------------------------------------------------------------
Forest and Paper Products - 2.1%
Boise Cascade Corp., 9.9s, 2001 $ 10 $ 11,199
- -----------------------------------------------------------------------------
Real Estate Investment Trusts - 3.9%
Taubman Realty Group, 8s, 2001 $ 20 $ 20,643
- -----------------------------------------------------------------------------
Telecommunications - 3.8%
Tele-Communications, Inc., 6.275s, 2003 $ 20 $ 19,900
- -----------------------------------------------------------------------------
U.S. Government and Agency Obligations - 55.3%
Federal National Mortgage Assn., 7.5s, 2011 $ 97 $ 99,205
U.S. Treasury Notes, 9.125s, 1999 135 144,260
U.S. Treasury Notes, 6.875s, 2000 20 20,450
U.S. Treasury Notes, 6.25s, 2001 25 25,023
--------
$288,938
- -----------------------------------------------------------------------------
Utilities - Electric - 1.9%
System Energy Resources, 7.8s, 2000 $ 10 $ 10,121
- -----------------------------------------------------------------------------
Total U.S. Bonds $477,712
- -----------------------------------------------------------------------------
Foreign Bonds - 3.9%
Chile
Empresa Electrica Guacolda S.A., 7.6s, 2001
(Utilities - Electric)## $ 20 $ 20,275
- -----------------------------------------------------------------------------
Total Bonds (Identified Cost, $496,110) $497,987
- -----------------------------------------------------------------------------
Short-Term Obligations - 1.9%
- -----------------------------------------------------------------------------
Federal Home Loan Bank, due 1/02/97,
at Amortized Cost $ 10 $ 9,997
- -----------------------------------------------------------------------------
Total Investments (Identified Cost, $506,107) $507,984
Other Assets, Less Liabilities - 2.9% 14,948
- -----------------------------------------------------------------------------
Net Assets - 100.0% $522,932
- -----------------------------------------------------------------------------
## SEC Rule 144A restriction.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ----------------------------------------------------------------------------
December 31, 1996
- ----------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $506,107) $507,984
Cash 1,378
Interest receivable 7,464
Receivable from investment adviser 2,771
Deferred organization expenses 8,499
--------
Total assets $528,096
--------
Liabilities:
Payable to affiliate for management fee $ 23
Accrued expenses and other liabilities 5,141
--------
Total liabilities $ 5,164
--------
Net assets $522,932
========
Net assets consist of:
Paid-in capital $522,437
Unrealized appreciation on investments 1,877
Accumulated net realized loss on investments (1,431)
Accumulated undistributed net investment income 49
--------
Total $522,932
========
Shares of beneficial interest outstanding 52,239
======
Net asset value per share
(net assets of $522,932 / 52,239 shares of beneficial
interest outstanding) $10.01
======
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- -----------------------------------------------------------------------------
Period Ended December 31, 1996*
- -----------------------------------------------------------------------------
Net investment income:
Interest income $14,813
-------
Expenses -
Management fee $ 1,064
Trustees' compensation 508
Shareholder servicing agent fee 66
Custodian fee 82
Printing 8,401
Auditing fees 2,356
Legal fees 994
Amortization of organization expenses 689
Miscellaneous 540
-------
Total expenses $14,700
Fees paid indirectly (59)
Reduction of expenses by investment adviser (12,705)
-------
Net expenses $ 1,936
-------
Net investment income $12,877
-------
Realized and unrealized gain (loss) on investments:
Realized loss (identified cost basis) on investment
transactions $(1,440)
-------
Change in unrealized appreciation on investments $ 1,877
-------
Net realized and unrealized gain on investments $ 437
-------
Increase in net assets from operations $13,314
=======
*For the period from the commencement of investment operations, August 14,
1996 to December 31, 1996.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
- ----------------------------------------------------------------------------
Period Ended December 31, 1996*
- ----------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment income $ 12,877
Net realized loss on investments (1,440)
Net unrealized gain on investments 1,877
--------
Increase in net assets from operations $ 13,314
--------
Distributions declared to shareholders from net investment
income $(12,819)
--------
Series share (principal) transactions -
Net proceeds from sale of shares $501,018
Net asset value of shares issued to shareholders in
reinvestment of distributions 12,819
--------
Increase in net assets from Series share transactions $513,837
--------
Total increase in net assets $514,332
Net assets:
At beginning of period 8,600
--------
At end of period (including accumulated undistributed net
investment income of $49) $522,932
========
*For the period from the commencement of investment operations, August 14,
1996 to December 31, 1996.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights
- ---------------------------------------------------------------------------
Period Ended December 31, 1996*
- ---------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $10.00
------
Income from investment operations# -
Net investment income(S) $ 0.25
Net realized and unrealized gain on investments and foreign
currency transactions 0.01
------
Total from investment operations $ 0.26
------
Less distributions declared to shareholders -
From net investment income $(0.25)
------
Net asset value - end of period $10.01
======
Total return 2.61%++
Ratios (to average net assets)/Supplemental data(S):
Expenses 1.00%+
Net investment income 6.61%+
Portfolio turnover 109%
Average commission rate
Net assets at end of period (000 omitted) $ 523
* For the period from the commencement of investment operations, August 14,
1996 to December 31, 1996.
+ Annualized.
++ Not annualized.
# Per share data is based on average shares outstanding.
(S) The Adviser voluntarily agreed to maintain the expenses of the Series at
not more than 1.00% of average daily net assets. To the extent actual
expenses were over these limitations, the net investment income per share
and the ratios would have been:
Net investment income $ 0.01
Ratios (to average net assets):
Expenses 7.55%+
Net investment income 0.06%+
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Limited Maturity Series (the Series) is a diversified series of MFS
Variable Insurance Trust (the Trust) which is comprised of the following 12
series: MFS Bond Series, MFS Emerging Growth Series, MFS Growth with Income
Series, MFS High Income Series, MFS Limited Maturity Series, MFS Money Market
Series, MFS Research Series, MFS Strategic Fixed Income Series, MFS Total
Return Series, MFS Utilities Series, MFS Value Series and MFS World
Governments Series. The Trust is organized as a Massachusetts business trust
and is registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company.
The shareholders of each Series of the Trust are separate accounts of
insurance companies which offer variable annuity and/or life insurance
products. As of December 31, 1996 there were eight shareholders in the Series.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investment Valuations - Debt securities (other than short-term obligations
which mature in 60 days or less), including listed issues, are valued on the
basis of valuations furnished by dealers or by a pricing service with
consideration to factors such as institutional-size trading in similar groups
of securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics and other market data, without exclusive reliance upon
exchange or over-the-counter prices. Short-term obligations, which mature in
60 days or less, are valued at amortized cost, which approximates market
value. Securities for which there are no such quotations or valuations are
valued at fair value as determined in good faith by or at the direction of the
Trustees.
Deferred Organization Expenses - Costs incurred by the Series in connection
with its organization have been deferred and are being amortized on a
straight-line basis over a five-year period beginning on the date of
commencement of Series operations.
Investment Transactions and Income - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
and original issue discount are amortized or accreted for financial statement
and tax reporting purposes as required by federal income tax regulations.
Interest payments received in additional securities are recorded on the ex-
interest date in an amount equal to the value of the security on such date.
Fees Paid Indirectly - The Series' custodian bank calculates its fee based on
the Series' average daily net assets. This fee is reduced according to an
expense offset arrangement with State Street Bank, the dividend disbursing
agent, which provides for partial reimbursement of custody fees based on a
formula developed to measure the value of cash deposited by the Series with
the custodian and with the dividend disbursing agent. This amount is shown as
a reduction of expenses on the Statement of Operations.
Tax Matters and Distributions - The Series' policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. The Series files a tax
return annually using tax accounting methods required under provisions of the
Code which may differ from generally accepted accounting principles, the basis
on which these financial statements are prepared. Accordingly, the amount of
net investment income and net realized gain reported on these financial
statements may differ from that reported on the Series' tax return and,
consequently, the character of distributions to shareholders reported in the
financial highlights may differ from that reported to shareholders on Form
1099-DIV. Distributions to shareholders are recorded on the ex-dividend date.
The Series distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a tax return
of capital. Differences in the recognition or classification of income between
the financial statements and tax earnings and profits which result in
temporary over-distributions for financial statement purposes, are classified
as distributions in excess of net investment income or accumulated net
realized gains. During the period ended December 31, 1996, $9 was reclassified
from accumulated undistributed net investment income to accumulated net
realized loss on investments due to differences between book and tax
accounting for asset-backed securities. This change had no effect on the net
assets or net asset value per share. At December 31, 1996, accumulated
undistributed net investment income and net realized loss on investments under
book accounting were different from tax accounting due to temporary
differences in accounting for wash sales and capital loss carryforwards.
At December 31, 1996, the Series, for federal income tax purposes, had a
capital loss carryforward of $1,267 which may be applied against any net
taxable realized gains of each succeeding year until the earlier of its
utilization or expiration on December 31, 2004.
(3) Transactions with Affiliates
Investment Adviser - The Series has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.55%
of average daily net assets. Under a temporary expense limitation agreement
with MFS, MFS has voluntarily agreed to pay all of the Series' operating
expenses, exclusive of management fees, which exceed 0.45% of the Series'
average daily net assets. The Series in turn will pay MFS an expense
reimbursement fee not greater than 0.45% of the Series' average daily net
assets. To the extent that the expense reimbursement fee exceeds the Series'
actual expenses, the excess will be applied to amounts paid by MFS in prior
years. At December 31, 1996, the aggregate unreimbursed expenses owed to MFS
by the Series amounted to $12,705.
The Series pays no compensation directly to its Trustees who are officers of
the investment adviser, or to officers of the Series, all of whom receive
remuneration for their services to the Series from MFS. Certain officers and
Trustees of the Series are officers or directors of MFS and MFS Service
Center, Inc. (MFSC).
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as
a percentage of the average daily net assets at an effective annual rate of up
to 0.035%.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions
and short-term obligations, were as follows:
Purchases Sales
- -----------------------------------------------------------------------
U.S. government securities $580,641 $387,764
======== ========
Investments (non-U.S. government securities) $456,493 $150,622
======== ========
The cost and unrealized appreciation or depreciation in value of the
investments owned by the Series, as computed on a federal income tax basis,
are as follows:
Aggregate cost $506,107
========
Gross unrealized appreciation $ 3,067
Gross unrealized depreciation (1,190)
--------
Net unrealized appreciation $ 1,877
========
(5) Shares of Beneficial Interest
The Series' Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par
value). Transactions in Series shares were as follows:
Period Ended
December 31, 1996*
-------------------------
Shares Amount
- ------------------------------------------------------------------------
Shares sold 50,102 $501,018
Shares issued to shareholders in
reinvestment of distributions 1,277 12,819
------ --------
Net increase 51,379 $513,837
====== ========
*For the period from the commencement of investment operations, August 14,
1996 to December 31, 1996.
(6) Line of Credit
The Series entered into an agreement which enables it to participate with
other funds managed by MFS in an unsecured line of credit with a bank which
permits borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Series shares. Interest is charged to
each fund, based on its borrowings, at a rate equal to the bank's base rate.
In addition, a commitment fee, based on the average daily unused portion of
the line of credit, is allocated among the participating funds at the end of
each quarter. The commitment fee allocated to the Series for the period ended
December 31, 1996 was $4.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Variable Insurance Trust and Shareholders of MFS
Limited Maturity Series:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of MFS Limited Maturity Series (the
Series) (one of the series constituting the MFS Variable Insurance Trust) as
of December 31, 1996, the related statement of operations and the statements
of changes in net assets and financial highlights for the period from August
14, 1996 (the commencement of investment operations) to December 31, 1996.
These financial statements and financial highlights are the responsibility of
the Series' management. Our responsibility is to express an opinion on these
financial statements and financial highlights 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 financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of the
securities owned at December 31, 1996 by correspondence with the custodian and
brokers. 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 provide a
reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Limited
Maturity Series at December 31, 1996, the results of its operations, the
changes in its net assets, and its financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 7, 1997
---------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
VLM-2/97 230
<PAGE>
[logo] M F S(SM) ANNUAL REPORT
INVESTMENT MANAGEMENT FOR YEAR ENDED
DECEMBER 31, 1996
MFS(R) MONEY MARKET SERIES
A SERIES OF MFS(R) VARIABLE INSURANCE TRUST
[graphic omitted]
<PAGE>
MFS(R) MONEY MARKET SERIES
A SERIES OF MFS(R) VARIABLE INSURANCE TRUST
<TABLE>
<S> <C>
TRUSTEES INVESTMENT ADVISER
A. Keith Brodkin* Massachusetts Financial Services Company
Chairman and President 500 Boylston Street
Boston, MA 02116-3741
Nelson J. Darling, Jr.
Trustee, Eastern Enterprises DISTRIBUTOR
(diversified holding company) MFS Fund Distributors, Inc.
500 Boylston Street
William R. Gutow Boston, MA 02116-3741
Vice Chairman,
Capitol Entertainment Management Company SHAREHOLDER SERVICE CENTER
(Blockbuster Video Franchise) MFS Service Center, Inc.
P.O. Box 1400
PORTFOLIO MANAGER Boston, MA 02107-9906
Geoffrey L. Kurinsky*
For additional information,
TREASURER contact your financial adviser.
W. Thomas London*
CUSTODIAN
ASSISTANT TREASURER Investors Bank & Trust Company
James O. Yost*
AUDITORS
SECRETARY Deloitte & Touche LLP
Stephen E. Cavan*
WORLD WIDE WEB
ASSISTANT SECRETARY www.mfs.com
James R. Bordewick, Jr.*
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
Dear Contract Owner:
The pattern of slow but sustainable growth seen in most of the world in 1996
seems likely to continue in 1997. While it looks like U.S. growth in 1997 will
slow modestly relative to 1996, there is evidence that Europe and, to a lesser
degree, Japan are continuing their recoveries from recession. At the same time,
companies in many emerging markets are reporting robust increases in earnings as
these markets benefit from higher-than-average economic growth and market
reforms. This should continue to provide more opportunities for development and
trade.
After more than six years of expansion, the U.S. economy appears headed
toward another year of moderate growth in 1997, although a few signs point to
the possibility of a modest increase in inflation during the year. On the
positive side, the pattern of moderate growth and inflation set over the past
few years now seems fairly well entrenched in the economy and, short of a major
international or domestic crisis, appears to have enough momentum to remain on
track for some time. Recent gains in such important sectors as housing,
automobiles, industrial production, and exports indicate a fair amount of
underlying strength in the economy. However, some reason for caution can be seen
in the continuing high level of consumer debt and the attendant rise in personal
bankruptcies, as well as in the modestly disappointing level of holiday sales.
Furthermore, the ongoing tightness in labor markets, and price rises in such
important sectors as energy, could add some inflationary pressures to the
economy. Given these somewhat conflicting indicators, we expect real
(inflation-adjusted) growth to revolve around 2% in 1997, which would represent
a modest decline from 1996.
We continue to urge U.S. equity investors to lower their expectations for
1997 and to point out that the impressive gains of the past two years are not
sustainable. Just as the slowdown in corporate earnings growth and increases in
interest rates in 1996 raised some near-term concerns, further interest rate
increases and an acceleration of inflation could negatively affect the stock
market in 1997. However, to the extent that some slowdown in earnings means that
the economy is not overheating, this may be beneficial for the equity market in
the long run. We believe many of the technology-driven productivity gains that
U.S. companies have made in recent years will continue to enhance corporate
America's competitiveness and profitability. Therefore, while we have some
near-term concerns, we remain reasonably positive about the long-term viability
of the equity market.
In U.S. bond markets, conflicting signals over the strength of the economy
have created near-term volatility. Even comments by Federal Reserve Board
Chairman Alan Greenspan in late 1996 created some uncertainty over the Federal
Reserve's next move. However, we expect the Fed to maintain its
anti-inflationary stance should signs of more rapid economic growth and,
particularly, higher inflation resurface. While inflationary forces largely
remained in check in 1996, the continued strength in the labor market and rising
energy prices mean that a pickup in inflation is still possible. At the same
time, the U.S. budget deficit continues to decline and, as a percentage of gross
domestic product, is now less than 2%, which we consider a positive development
for the bond markets. Although interest rates may move higher over the coming
months, we believe that, at current levels, fixed-income markets remain
equitably valued.
Internationally, the environment of moderate growth, benign inflation, and
fairly steady interest rates is also providing support for investment markets
and should help support valuation levels in the coming year. Throughout the
world, the key to stock market performance in 1997 will be corporate earnings
growth. While U.S. earnings growth is slowing, but still expected to be fairly
healthy, we anticipate that a number of European countries will see an
acceleration in earnings growth and improved valuations in 1997. Despite this
environment, many European countries trade at discounts to the United States. In
particular, we see opportunities in some of the multinationals and businesses
with the ability to generate steady earnings growth. In Japan, a recovery
appears to be taking place, but at a very modest rate, with valuations still at
high levels. In the emerging markets, the long-term economic growth story
remains intact and, although selectivity is even more important in these
markets, more companies are benefiting from this growth and trading at
below-average global valuations.
Comments from the portfolio manager of the Series are presented below. We
appreciate your support and welcome any questions or comments you may have.
Respectfully,
/s/ A. Keith Brodkin /s/Geoffrey L. Kurinsky
A. Keith Brodkin Geoffrey L. Kurinsky
Chairman and President Portfolio Manager
January 13, 1997
MFS MONEY MARKET SERIES
The Series seeks as high a level of current income as is considered consistent
with the preservation of capital and liquidity. The Series endeavors to achieve
this by investing in short-term money market securities issued or guaranteed by
the U.S. Treasury or its agencies, or instrumentalities of the U.S. government,
as well as the highest quality corporate issues in order to minimize credit
risk. As of December 31, 1996, the portfolio had assets of approximately
$632,000, which were invested in seven different government issues with an
average maturity of 44 days.
We anticipate short-term interest rates to remain flat over the next several
months.
The Series is neither insured nor guaranteed by the U.S. government, and
there can be no assurance that it will be able to maintain a stable net asset
value of $1.00 per share.
PORTFOLIO MANAGER'S PROFILE
Geoffrey L. Kurinsky is Senior Vice President of Massachusetts Financial
Services (MFS) and has managed MFS Money Market Series since 1995. He joined
MFS as Portfolio Manager in the Fixed Income Department in 1987 and was named
Vice President in 1990 and Senior Vice President in 1993. Mr. Kurinsky is a
graduate of the University of Massachusetts and holds an M.B.A. in Finance
from Boston University.
TAX FORM SUMMARY
In January 1997, shareholders will be mailed a tax form summary reporting the
federal tax status of all distributions paid during the calendar year 1996.
PERFORMANCE SUMMARY
The information below illustrates the historical performance of MFS Money Market
Series shares in comparison to various market indicators. Benchmark comparisons
are unmanaged and do not reflect any fees or expenses. You cannot invest in an
index.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1996
1 Year Life+
- --------------------------------------------------------------------------
MFS Money Market Series +4.55% +4.47%
- --------------------------------------------------------------------------
Consumer Price Index++* +3.56% +3.04%
- --------------------------------------------------------------------------
+For the period from the commencement of investment operations, January 3, 1995
to December 31, 1996.
++Source: CDA/Wiesenberger.
*The Consumer Price Index is a popular measure of change in prices.
Returns shown do not reflect the deduction of the mortality and expense risk
charges and administrative fees. Please refer to the product's annual report for
performance that reflects the fees and charges imposed by insurance company
separate accounts.
Results are based on past performance which is no guarantee of future results.
Series results reflect any applicable expense subsidies and waivers, without
which the performance results would have been less favorable. Subsidies and
waivers may be rescinded at any time. See the prospectus for details.
<PAGE>
PORTFOLIO OF INVESTMENTS - December 31, 1996
U.S. Government and Agency Obligations - 100.1%
- -------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------
Federal Farm Credit Bank, due 1/22/97 - 11/17/97 $110 $108,000
Federal Home Loan Bank, due 1/02/97 - 2/14/97 96 95,640
Federal Home Loan Mortgage Corp., due 1/02/97 - 2/13/97 130 129,474
Federal National Mortgage Assn., due 1/07/97 - 6/16/97 131 129,962
Student Loan Marketing Assn., due 1/02/97 110 109,980
Tennessee Valley Authority, due 1/06/97 - 1/28/97 30 29,946
U.S. Treasury Bills, due 1/09/97 30 29,970
- -------------------------------------------------------------------------------
Total Investments, at Amortized Cost $632,972
Other Assets, Less Liabilities - (0.1)% (354)
- -------------------------------------------------------------------------------
Net Assets - 100.0% $632,618
- -------------------------------------------------------------------------------
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ------------------------------------------------------------------------------
December 31, 1996
- ------------------------------------------------------------------------------
Assets:
Investments, at amortized cost and value $632,972
Cash 1,689
Receivable from investment adviser 16,635
Deferred organization expenses 5,535
--------
Total assets $656,831
--------
Liabilities:
Distributions payable $ 1,875
Payable to affiliates for management fee 26
Accrued expenses and other liabilities 22,312
--------
Total liabilities $ 24,213
--------
Net assets (represented by paid-in capital) $632,618
========
Shares of beneficial interest outstanding 632,618
=======
Net asset value per share
(net assets of $632,618 / 632,618 shares of beneficial
interest outstanding) $1.00
=====
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- ------------------------------------------------------------------------------
Year Ended December 31, 1996
- ------------------------------------------------------------------------------
Net investment income:
Interest income $ 8,853
-------
Expenses -
Management fee $ 858
Trustees' compensation 2,033
Shareholder servicing agent fee 59
Auditing fees 28,106
Printing 12,858
Amortization of organization expenses 1,842
Legal fees 1,146
Custodian fee 341
Miscellaneous 662
-------
Total expenses $47,905
Fees paid indirectly (43)
Reduction of expenses by investment adviser (46,831)
-------
Net expenses $ 1,031
-------
Net investment income $ 7,822
=======
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statements of Changes in Net Assets
- -------------------------------------------------------------------------------
Year Ended Period Ended
December 31, 1996 December 31, 1995*
- -------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment income, declared as
distributions to shareholders $ 7,822 $ 5,423
-------- --------
Series share (principal) transactions at net asset
value of $1.00 per share -
Net proceeds from sale of shares $643,286 $290,633
Net asset value of shares issued to
shareholders in reinvestment of
distributions 5,947 5,321
Cost of shares reacquired (196,749) (124,420)
-------- --------
Total increase in net assets $452,484 $171,534
Net assets:
At beginning of period 180,134 8,600
-------- --------
At end of period $632,618 $180,134
======== ========
*For the period from the commencement of investment operations, January 3, 1995
to December 31, 1995.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights
- -------------------------------------------------------------------------------
Year Ended Period Ended
December 31, 1996 December 31, 1995*
- -------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 1.00 $ 1.00
------ ------
Income from investment operations# -
Net investment income(S) $ 0.04 $ 0.04
------ ------
Less distributions declared to shareholders
from net investment income (0.04) (0.04)
------ ------
Net asset value - end of period $ 1.00 $ 1.00
====== ======
Total return 4.55% 4.37%++
Ratios (to average net assets)/Supplemental data(S):
Expenses 0.60% 0.60%+
Net investment income 4.53% 4.54%+
Net assets at end of period (000 omitted) $ 633 $ 180
*For the period from the commencement of investment operations, January 3,
1995 to December 31, 1995.
+Annualized.
++Not annualized.
#Per share data is based on average shares outstanding.
(S)The Adviser voluntarily agreed to maintain the expenses of the Series at not
more than 0.60% of average daily net assets. To the extent actual expenses
were over these limitations, the net investment loss per share and the ratios
would have been:
Net investment loss $(0.21) $(0.14)
Ratios (to average net assets):
Expenses 27.74% 21.54%+
Net investment loss (22.61)% (16.37)%+
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Money Market Series (the Series) is a diversified series of MFS Variable
Insurance Trust (the Trust) which is comprised of the following 12 series: MFS
Bond Series, MFS Emerging Growth Series, MFS Growth with Income Series, MFS High
Income Series, MFS Limited Maturity Series, MFS Money Market Series, MFS
Research Series, MFS Strategic Fixed Income Series, MFS Total Return Series, MFS
Utilities Series, MFS Value Series and MFS World Governments Series. The Trust
is organized as a Massachusetts business trust and is registered under the
Investment Company Act of 1940, as amended, as an open-end management investment
company.
The shareholders of each Series of the Trust are separate accounts of insurance
companies which offer variable annuity and/or life insurance products. As of
December 31, 1996 there were eight shareholders in the Series.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investment Valuation - Money market instruments are valued at amortized cost,
which the Trustees have determined in good faith constitutes fair value. The
Trust's use of amortized cost is subject to the Trust's compliance with certain
conditions as specified under Rule 2a-7 of the Investment Company Act of 1940.
Deferred Organization Expenses - Costs incurred by the Series in connection with
its organization have been deferred and are being amortized on a straight-line
basis over a five-year period beginning on the date of commencement of Series
operations.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for financial statement and
tax reporting purposes as required by federal income tax regulations.
Fees Paid Indirectly - The Series' custodian bank calculates its fee based on
the Series' average daily net assets. This fee is reduced according to an
expense offset arrangement with State Street Bank, the dividend disbursing
agent, which provides for partial reimbursement of custody fees based on a
formula developed to measure the value of cash deposited by the Series with the
custodian and with the dividend disbursing agent. This amount is shown as a
reduction of expenses on the Statement of Operations.
Tax Matters and Distributions - The Series' policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. The Series files a tax
return annually using tax accounting methods required under provisions of the
Code which may differ from generally accepted accounting principles, the basis
on which these financial statements are prepared. Accordingly, the amount of net
investment income and net realized gain reported on these financial statements
may differ from that reported on the Series' tax return and, consequently, the
character of distributions to shareholders reported in the financial highlights
may differ from that reported to shareholders on Form 1099-DIV.
The Series distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a tax return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains.
(3) Transactions with Affiliates
Investment Adviser - The Series has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.50% of
average daily net assets. Under a temporary expense limitation agreement with
MFS, MFS has voluntarily agreed to pay all of the Series' operating expenses,
exclusive of management fees, which exceed 0.10% of the Series' average daily
net assets. The Series in turn will pay MFS an expense reimbursement fee not
greater than 0.10% of the Series' average daily net assets. To the extent that
the expense reimbursement fee exceeds the Series' actual expenses, the excess
will be applied to amounts paid by MFS in prior years. At December 31, 1996, the
aggregate unreimbursed expenses owed to MFS by the Series amounted to $71,807,
including $46,831 incurred in the current year.
The Series pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Series, all of whom receive
remuneration for their services to the Series from MFS. Certain officers and
Trustees of the Series are officers or directors of MFS and MFS Service Center,
Inc. (MFSC).
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as a
percentage of the average daily net assets at an effective annual rate of up to
0.035%.
(4) Portfolio Securities
Purchases and sales of investments of money market investments, exclusive of
securities subject to repurchase agreements, consisted solely of U.S. government
securities and aggregated $5,046,308 and $4,591,485, respectively.
(5) Shares of Beneficial Interest
The Series' Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
(6) Line of Credit
The Series entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Series shares. Interest is charged to each
fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating funds at the end of each
quarter. The commitment fee allocated to the Series for the year ended December
31, 1996 was $2.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Variable Insurance Trust and Shareholders of MFS Money
Market Series:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of MFS Money Market Series (the Series) (one of
the series constituting the MFS Variable Insurance Trust) as of December 31,
1996, the related statement of operations for the year then ended, the
statements of changes in net assets and financial highlights for the year then
ended and for the period from January 3, 1995 (the commencement of investment
operations) to December 31, 1995. These financial statements and financial
highlights are the responsibility of the Series' management. Our responsibility
is to express an opinion on these financial statements and financial highlights
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 financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned at
December 31, 1996 by correspondence with the custodian and brokers. 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 provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Money Market
Series at December 31, 1996, the results of its operations, the changes in its
net assets, and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 7, 1997
---------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
VMM-3 2/97 230
<PAGE>
PART C
ITEM 24. (A) FINANCIAL STATEMENTS AND EXHIBITS
ALL SERIES (EXCEPT MFS STRATEGIC FIXED INCOME SERIES)
FINANCIAL STATEMENTS INCLUDED IN PARTS A AND B:
INCLUDED IN PART A OF THIS REGISTRATION STATEMENT:
Financial Highlights for:
the MFS Emerging Growth Series for the period from commencement
of investment operations on July 24, 1995 to December 31, 1996;
the MFS Value Series and the MFS Limited Maturity Series for the
period from commencement of investment operations on August 14,
1996 to December 31, 1996;
the MFS Research Series and the MFS High Income Series for the
period from commencement of investment operations on July 26, 1995
to December 31, 1996;
the MFS Total Return Series, the MFS Utilities Series and the MFS
Money Market Series for the period from commencement of investment
operations on January 3, 1995 to December 31, 1996;
the MFS Growth With Income Series for the period from
commencement of investment operations on October 9, 1995 to
December 31, 1996;
the MFS World Governments Series for the period from commencement
of investment operations on June 14, 1994 to December 31, 1996; and
the MFS Bond Series for the period from commencement of
investment operations on October 24, 1995 to December 31, 1996.
INCLUDED IN PART B OF THIS REGISTRATION STATEMENT:
At December 31, 1996:
Portfolio of Investments*
Statement of Assets and Liabilities*
For the year ended December 31, 1996:
Statement of Operations*
<PAGE>
For the two years in the period ended December 31, 1996:
Statement of Changes in Net Assets*
Statement of Operations* and Statement of Changes in Net Assets* for:
the MFS Emerging Growth Series for the period from commencement
of investment operations on July 24, 1995 to December 31, 1996;
the MFS Value Series and the MFS Limited Maturity Series for the
period from commencement of investment operations on August 14,
1996 to December 31, 1996;
the MFS Research Series and the MFS High Income Series for the
period from commencement of investment operations on July 26,
1995 to December 31, 1996;
the MFS Growth With Income Series for the period from
commencement of investment operations on October 9, 1995 to
December 31, 1996;
the MFS Total Return Series, the MFS Utilities Series and the MFS
Money Market Series for the period from commencement of investment
operations on January 3, 1995 to December 31, 1996;
the MFS World Governments Series for the two years in the period
ended December 31, 1996; and
the MFS Bond Series for the period from commencement of
investment operations on October 24, 1995 to December 31, 1996.
<PAGE>
MFS STRATEGIC FIXED INCOME SERIES
FINANCIAL STATEMENTS INCLUDED IN PARTS A AND B:
INCLUDED IN PART A OF THIS REGISTRATION STATEMENT:
None
INCLUDED IN PART B OF THIS REGISTRATION STATEMENT:
At December 31, 1996:
Statement of Assets and Liabilities
Opinion of Independent Auditors
________________________
* Incorporated by reference to the Annual Reports to Shareholders of the
Series (with the exception of the MFS Strategic Fixed Income Series),
each dated December 31, 1996, filed with the SEC via EDGAR on March 4,
1997.
(B) EXHIBITS
1 (a) Declaration of Trust, dated January 28, 1994. (3)
(b) Amendment to Declaration of Trust - Designation of
Series of Shares dated January 31, 1994. (3)
(c) Amendment to Declaration of Trust - Redesignation of
Series, dated June 1, 1995. (3)
(d) Amendment to Declaration of Trust - Redesignation of
Series, dated April 25, 1996. (4)
2 By-Laws, dated January 28, 1994. (3)
3 Not Applicable.
4 Not Applicable.
5 Investment Advisory Agreement by and between Registrant
and Massachusetts Financial Services Company, dated
April 14, 1994. (3)
6 Distribution Agreement between Registrant and
Massachusetts Investors Services, Inc., dated April 14,
1994. (3)
<PAGE>
7 Not Applicable.
8 Custodian Agreement between Registrant and Investors
Bank & Trust Company, dated April 14, 1994. (3)
9 (a) Shareholder Servicing Agent Agreement between Registrant
and MFS Service Center, dated April 14, 1994. (3)
(b) Dividend Disbursing Agency Agreement between Registrant
and State Street Bank and Trust, dated April 14, 1994. (3)
(c) Loan Agreement among MFS Borrowers and The First National
Bank of Boston, dated as of February 21, 1995 (2)
(d) Master Administrative Services Agreement, dated March 1,
1997. (5)
10 Opinion and Consent of Counsel filed with Registrant's
Rule 24f-2 Notice for fiscal year ended December 31,
1996 on February 28, 1997.
11 Consent of Deloitte & Touche LLP; filed herewith.
12 Not Applicable.
13 Investment Representation Letter. (3)
14 Not Applicable.
15 Not Applicable.
16 Schedule of Computation for Performance Quotations -
Average Annual Total Rate of Return, Aggregate Total
Rate of Return and Standardized Yield. (1)
17 Financial Data Schedule for each operational Series
of the Trust; filed herewith.
18 Not Applicable.
Power of Attorney dated August 12, 1994. (2)
____________________________
(1) Incorporated by reference to MFS Municipal Series Trust (File
Nos. 2-92915 and 811-4096) Post-Effective Amendment No. 26 filed
with the SEC via EDGAR on February 22, 1995.
(2) Incorporated by reference to Amendment No. 8 on Form N-2 for MFS
Municipal Income Trust (File No. 811-4841) filed with the SEC via
EDGAR on February 28, 1995.
(3) Incorporated by reference to Registrant's Post-Effective Amendment
No. 4 filed with the SEC via EDGAR on October 26, 1995.
(4) Incorporated by reference to Registrant's Post-Effective Amendment
No. 6 filed with the SEC via EDGAR on May 30, 1996.
(5) Incorporated by reference to MFS/Sun Life Series Trust (File
Nos. 2-83616 and 811-3732) Post-Effective Amendment No. 19 filed
with the SEC via EDGAR on March 18, 1997.
<PAGE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
MFS EMERGING GROWTH SERIES
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Shares of Beneficial Interest 34
(without par value) (as of March 31, 1997)
MFS VALUE SERIES
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Shares of Beneficial Interest 10
(without par value) (as of March 31, 1997)
MFS RESEARCH SERIES
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Shares of Beneficial Interest 24
(without par value) (as of March 31, 1997)
MFS GROWTH WITH INCOME SERIES
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Shares of Beneficial Interest 13
(without par value) (as of March 31, 1997)
MFS TOTAL RETURN SERIES
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Shares of Beneficial Interest 22
(without par value) (as of March 31, 1997)
<PAGE>
MFS UTILITIES SERIES
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Shares of Beneficial Interest 15
(without par value) (as of March 31, 1997)
MFS HIGH INCOME SERIES
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Shares of Beneficial Interest 11
(without par value) (as of March 31, 1997)
MFS WORLD GOVERNMENTS SERIES
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Shares of Beneficial Interest 23
(without par value) (as of March 31, 1997)
MFS STRATEGIC FIXED INCOME SERIES
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Shares of Beneficial Interest 4
(without par value) (as of March 31, 1997)
MFS BOND SERIES
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Shares of Beneficial Interest 10
(without par value) (as of March 31, 1997)
MFS LIMITED MATURITY SERIES
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Shares of Beneficial Interest 9
(without par value) (as of March 31, 1997)
<PAGE>
MFS MONEY MARKET SERIES
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Shares of Beneficial Interest 8
(without par value) (as of March 31, 1997)
ITEM 27. INDEMNIFICATION
Reference is hereby made to (a) Section 5.3 of the Registrant's
Declaration of Trust; and (b) Section 9 of the Shareholder Servicing Agent
Agreement between the Registrant and MFS Service Center, Inc.
The Trustees and officers of the Registrant and the personnel of the
Registrant's investment adviser and distributor will be insured as of the
effective date of this Registration Statement under an errors and omissions
liability insurance policy. The Registrant and its officers are also insured
under the fidelity bond required by Rule 17g-1 under the Investment Company
Act of 1940, as amended.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
MFS serves as investment adviser to the following open-end Funds
comprising the MFS Family of Funds: Massachusetts Investors Trust,
Massachusetts Investors Growth Stock Fund, MFS Growth Opportunities Fund, MFS
Government Securities Fund, MFS Government Limited Maturity Fund, MFS Series
Trust I (which has eight series: MFS Managed Sectors Fund, MFS Cash Reserve
Fund, MFS World Asset Allocation Fund, MFS Aggressive Growth Fund, MFS
Research Growth and Income Fund, MFS Core Growth Fund, MFS Equity Income Fund
and MFS Special Opportunities Fund), MFS Series Trust II (which has four
series: MFS Emerging Growth Fund, MFS Capital Growth Fund, MFS Intermediate
Income Fund and MFS Gold & Natural Resources Fund), MFS Series Trust III
(which has two series: MFS High Income Fund and MFS Municipal High Income
Fund), MFS Series Trust IV (which has four series: MFS Money Market Fund, MFS
Government Money Market Fund, MFS Municipal Bond Fund and MFS OTC Fund), MFS
Series Trust V (which has two series: MFS Total Return Fund and MFS Research
Fund), MFS Series Trust VI (which has three series: MFS World Total Return
Fund, MFS Utilities Fund and MFS World Equity Fund), MFS Series Trust VII
(which has two series: MFS World Governments Fund and MFS Value Fund), MFS
Series Trust VIII (which has two series: MFS Strategic Income Fund and MFS
World Growth Fund), MFS Series Trust IX (which has three series: MFS Bond
Fund, MFS Limited Maturity Fund and MFS Municipal Limited Maturity Fund), MFS
Series Trust X (which has four series: MFS Government Mortgage Fund,
MFS/Foreign & Colonial Emerging Markets Equity Fund, MFS/Foreign & Colonial
International Growth Fund and MFS/Foreign & Colonial International Growth and
Income Fund), and MFS Municipal Series Trust (which has 16 series: MFS
Alabama Municipal Bond Fund, MFS Arkansas Municipal Bond Fund, MFS California
Municipal Bond Fund, MFS Florida Municipal Bond Fund, MFS Georgia Municipal
Bond Fund, MFS Maryland Municipal Bond Fund, MFS Massachusetts Municipal Bond
Fund, MFS Mississippi Municipal Bond Fund, MFS New York Municipal Bond Fund,
MFS North Carolina Municipal Bond Fund,
<PAGE>
MFS Pennsylvania Municipal Bond Fund, MFS South Carolina Municipal Bond
Fund, MFS Tennessee Municipal Bond Fund, MFS Virginia Municipal Bond Fund,
MFS West Virginia Municipal Bond Fund and MFS Municipal Income Fund) (the
"MFS Funds"). The principal business address of each of the aforementioned
Funds is 500 Boylston Street, Boston, Massachusetts 02116.
MFS also serves as investment adviser of the following no-load, open-end
Funds: MFS Institutional Trust ("MFSIT") (which has seven series), MFS
Variable Insurance Trust ("MVI") (which has twelve series) and MFS Union
Standard Trust ("UST") (which has two series). The principal business
address of each of the aforementioned Funds is 500 Boylston Street, Boston,
Massachusetts 02116.
In addition, MFS serves as investment adviser to the following closed-end
Funds: MFS Municipal Income Trust, MFS Multimarket Income Trust, MFS
Government Markets Income Trust, MFS Intermediate Income Trust, MFS Charter
Income Trust and MFS Special Value Trust (the "MFS Closed-End Funds"). The
principal business address of each of the aforementioned Funds is 500
Boylston Street, Boston, Massachusetts 02116.
Lastly, MFS serves as investment adviser to MFS/Sun Life Series Trust
("MFS/SL"), Sun Growth Variable Annuity Funds, Inc. ("SGVAF"), Money Market
Variable Account, High Yield Variable Account, Capital Appreciation Variable
Account, Government Securities Variable Account, World Governments Variable
Account, Total Return Variable Account and Managed Sectors Variable Account.
The principal business address of each is One Sun Life Executive Park,
Wellesley Hills, Massachusetts 02181.
MFS International Ltd. ("MIL"), a limited liability company organized
under the laws of the Republic of Ireland and a subsidiary of MFS, whose
principal business address is 41-45 St. Stephen's Green, Dublin 2, Ireland,
serves as investment adviser to and distributor for MFS International Fund
(which has four portfolios: MFS International Funds-U.S. Equity Fund, MFS
International Funds-U.S. Emerging Growth Fund, MFS International Funds-Global
Governments Fund, MFS International Funds - U.S. Dollar Reserve Fund and MFS
International Funds-Charter Income Fund) (the "MIL Funds"). The MIL Funds
are organized in Luxembourg and qualify as an undertaking for collective
investments in transferable securities (UCITS). The principal business
address of the MIL Funds is 47, Boulevard Royal, L-2449 Luxembourg.
MIL also serves as investment adviser to and distributor for MFS Meridian
U.S. Government Bond Fund, MFS Meridian Charter Income Fund, MFS Meridian
Global Government Fund, MFS Meridian U.S. Emerging Growth Fund, MFS Meridian
Global Equity Fund, MFS Meridian Limited Maturity Fund, MFS Meridian World
Growth Fund, MFS Meridian Money Market Fund, MFS Meridian World Total Return
Fund, MFS Meridian U.S. Equity Fund and MFS Meridian Research Fund
(collectively the "MFS Meridian Funds"). Each of the MFS Meridian Funds is
organized as an exempt company under the laws of the Cayman Islands. The
principal business address of each of the MFS Meridian Funds is P.O. Box 309,
Grand Cayman, Cayman Islands, British West Indies.
<PAGE>
MFS International (U.K.) Ltd. ("MIL-UK"), a private limited company
registered with the Registrar of Companies for England and Wales whose
current address is 4 John Carpenter Street, London, England ED4Y 0NH, is
involved primarily in marketing and investment research activities with
respect to private clients and the MIL Funds and the MFS Meridian Funds.
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary of MFS,
serves as distributor for the MFS Funds, MVI, UST and MFSIT.
Clarendon Insurance Agency, Inc. ("CIAI"), a wholly owned subsidiary of
MFS, serves as distributor for certain life insurance and annuity contracts
issued by Sun Life Assurance Company of Canada (U.S.).
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS,
serves as shareholder servicing agent to the MFS Funds, the MFS Closed-End
Funds, MFSIT, MVI and UST.
MFS Asset Management, Inc. ("AMI"), a wholly owned subsidiary of MFS,
provides investment advice to substantial private clients.
MFS Retirement Services, Inc. ("RSI"), a wholly owned subsidiary of MFS,
markets MFS products to retirement plans and provides administrative and
record keeping services for retirement plans.
MFS
The Directors of MFS are A. Keith Brodkin, Jeffrey L. Shames, Arnold D.
Scott, John R. Gardner and John D. McNeil. Mr. Brodkin is the Chairman, Mr.
Shames is the President, Mr. Scott is a Senior Executive Vice President and
Secretary, Bruce C. Avery, William S. Harris, William W. Scott, Jr., and
Patricia A. Zlotin are Executive Vice Presidents, Stephen E. Cavan is a
Senior Vice President, General Counsel and an Assistant Secretary, Joseph W.
Dello Russo is a Senior Vice President, Chief Financial Officer and
Treasurer, Robert T. Burns is a Vice President, Associate General Counsel and
an Assistant Secretary of MFS, and Thomas B. Hastings is a Vice President and
Assistant Treasurer.
MASSACHUSETTS INVESTORS TRUST
MASSACHUSETTS INVESTORS GROWTH STOCK FUND
MFS GROWTH OPPORTUNITIES FUND
MFS GOVERNMENT SECURITIES FUND
MFS SERIES TRUST I
MFS SERIES TRUST V
MFS SERIES TRUST VI
MFS SERIES TRUST X
MFS GOVERNMENT LIMITED MATURITY FUND
<PAGE>
A. Keith Brodkin is the Chairman and President, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost, Vice President
of MFS, is the Assistant Treasurer, James R. Bordewick, Jr., Vice President
and Associate General Counsel of MFS, is the Assistant Secretary.
MFS SERIES TRUST II
A. Keith Brodkin is the Chairman and President, Leslie J. Nanberg, Senior
Vice President of MFS, is a Vice President, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant
Treasurer, and James R. Bordewick, Jr., is the Assistant Secretary.
MFS GOVERNMENT MARKETS INCOME TRUST
MFS INTERMEDIATE INCOME TRUST
A. Keith Brodkin is the Chairman and President, Patricia A. Zlotin,
Executive Vice President of MFS and Leslie J. Nanberg, Senior Vice President
of MFS, are Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas
London is the Treasurer, James O. Yost is the Assistant Treasurer, and James
R. Bordewick, Jr., is the Assistant Secretary.
MFS SERIES TRUST III
A. Keith Brodkin is the Chairman and President, James T. Swanson, Robert
J. Manning, Cynthia M. Brown and Joan S. Batchelder, Senior Vice Presidents
of MFS, Bernard Scozzafava, Vice President of MFS, and Matthew Fontaine,
Assistant Vice President of MFS, are Vice Presidents, Sheila Burns-Magnan and
Daniel E. McManus, Assistant Vice Presidents of MFS, are Assistant Vice
Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is the
Treasurer, James O. Yost is the Assistant Treasurer, and James R. Bordewick,
Jr., is the Assistant Secretary.
MFS SERIES TRUST IV
MFS SERIES TRUST IX
A. Keith Brodkin is the Chairman and President, Robert A. Dennis and Geoffrey
L. Kurinsky, Senior Vice Presidents of MFS, are Vice Presidents, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost is
the Assistant Treasurer and James R. Bordewick, Jr., is the Assistant
Secretary.
MFS SERIES TRUST VII
A. Keith Brodkin is the Chairman and President, Leslie J. Nanberg and
Stephen C. Bryant, Senior Vice Presidents of MFS, are Vice Presidents,
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James
O. Yost is the Assistant Treasurer and James R. Bordewick, Jr., is the
Assistant Secretary.
<PAGE>
MFS SERIES TRUST VIII
A. Keith Brodkin is the Chairman and President, Jeffrey L. Shames, Leslie
J. Nanberg, Patricia A. Zlotin, James T. Swanson and John D. Laupheimer, Jr.,
Vice President of MFS, are Vice Presidents, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant
Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS MUNICIPAL SERIES TRUST
A. Keith Brodkin is the Chairman and President, Cynthia M. Brown and
Robert A. Dennis are Vice Presidents, David B. Smith, Geoffrey L. Schechter
and David R. King, Vice Presidents of MFS, are Vice Presidents, Daniel E.
McManus, Assistant Vice President of MFS, is an Assistant Vice President,
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James
O. Yost is the Assistant Treasurer and James R. Bordewick, Jr., is the
Assistant Secretary.
MFS VARIABLE INSURANCE TRUST
MFS UNION STANDARD TRUST
MFS INSTITUTIONAL TRUST
A. Keith Brodkin is the Chairman and President, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant
Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS MUNICIPAL INCOME TRUST
A. Keith Brodkin is the Chairman and President, Cynthia M. Brown and
Robert J. Manning are Vice Presidents, Stephen E. Cavan is the Secretary, W.
Thomas London is the Treasurer, James O. Yost, is the Assistant Treasurer and
James R. Bordewick, Jr., is the Assistant Secretary.
MFS MULTIMARKET INCOME TRUST
MFS CHARTER INCOME TRUST
A. Keith Brodkin is the Chairman and President, Patricia A. Zlotin,
Leslie J. Nanberg and James T. Swanson are Vice Presidents, Stephen E. Cavan
is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Vice
President of MFS, is the Assistant Treasurer and James R. Bordewick, Jr., is
the Assistant Secretary.
MFS SPECIAL VALUE TRUST
A. Keith Brodkin is the Chairman and President, Jeffrey L. Shames,
Patricia A. Zlotin and Robert J. Manning are Vice Presidents, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, and James O. Yost,
is the Assistant Treasurer and James R. Bordewick, Jr., is the Assistant
Secretary.
<PAGE>
SGVAF
W. Thomas London is the Treasurer.
MIL
A. Keith Brodkin is a Director and the Chairman, Arnold D. Scott and
Jeffrey L. Shames are Directors, Ziad Malek, Senior Vice President of MFS, is
the President, Thomas J. Cashman, Jr., a Senior Vice President of MFS, is a
Senior Vice President, Stephen E. Cavan is a Director, Senior Vice President
and the Clerk, James R. Bordewick, Jr. is a Director, Vice President and an
Assistant Clerk, Robert T. Burns is an Assistant Clerk, Joseph W. Dello Russo
is the Treasurer and Thomas B. Hastings is the Assistant Treasurer.
MIL-UK
A. Keith Brodkin is a Director and the Chairman, Arnold D. Scott, Jeffrey
L. Shames, and James R. Bordewick, Jr., are Directors, Stephen E. Cavan is a
Director and the Secretary, Ziad Malek is the President, James E. Russell is
the Treasurer, and Robert T. Burns is the Assistant Secretary.
MIL FUNDS
A. Keith Brodkin is the Chairman, President and a Director, Richard B.
Bailey, John A. Brindle, Richard W. S. Baker and William F. Waters are
Directors, Stephen E. Cavan is the Secretary, W. Thomas London is the
Treasurer, James O. Yost is the Assistant Treasurer and James R. Bordewick,
Jr., is the Assistant Secretary, and Ziad Malek is a Senior Vice President.
MFS MERIDIAN FUNDS
A. Keith Brodkin is the Chairman, President and a Director, Richard B.
Bailey, John A. Brindle, Richard W. S. Baker, Arnold D. Scott, Jeffrey L.
Shames and William F. Waters are Directors, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James R. Bordewick, Jr., is the
Assistant Secretary, James O. Yost is the Assistant Treasurer, and Ziad Malek
is a Senior Vice President.
MFD
A. Keith Brodkin is the Chairman and a Director, Arnold D. Scott and
Jeffrey L. Shames are Directors, William W. Scott, Jr., an Executive Vice
President of MFS, is the President, Stephen E. Cavan is the Secretary, Robert
T. Burns is the Assistant Secretary, Joseph W. Dello Russo is the Treasurer,
and Thomas B. Hastings is the Assistant Treasurer.
CIAI
A. Keith Brodkin is the Chairman and a Director, Arnold D. Scott and
Jeffrey L. Shames are Directors, Cynthia Orcott is President, Bruce C. Avery
is the Vice President, Joseph
<PAGE>
W. Dello Russo is the Treasurer, Thomas B. Hastings is the Assistant
Treasurer, Stephen E. Cavan is the Secretary, and Robert T. Burns is the
Assistant Secretary.
MFSC
A. Keith Brodkin is the Chairman and a Director, Arnold D. Scott and
Jeffrey L. Shames are Directors, Joseph A. Recomendes, a Senior Vice
President of MFS, is Vice Chairman and a Director, Janet A. Clifford is the
Executive Vice President, Joseph W. Dello Russo is the Treasurer, Thomas B.
Hastings is the Assistant Treasurer, Stephen E. Cavan is the Secretary, and
Robert T. Burns is the Assistant Secretary.
AMI
A. Keith Brodkin is the Chairman and a Director, Jeffrey L. Shames, and
Arnold D. Scott are Directors, Thomas J. Cashman, Jr., is the President and a
Director, Leslie J. Nanberg is a Senior Vice President, a Managing Director
and a Director, George F. Bennett, Carol A. Corley, John A. Gee, Brianne
Grady and Kevin R. Parke are Senior Vice Presidents and Managing Directors,
Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the Assistant
Treasurer and Robert T. Burns is the Secretary.
RSI
William W. Scott, Jr. and Bruce C. Avery are Directors, Arnold D. Scott
is the Chairman and a Director, Joseph W. Dello Russo is the Treasurer,
Thomas B. Hastings is the Assistant Treasurer, Stephen E. Cavan is the
Secretary, Robert T. Burns is the Assistant Secretary and Sharon A. Brovelli
and Martin E. Beaulieu are Senior Vice Presidents.
In addition, the following persons, Directors or officers of MFS, have
the affiliations indicated:
A. Keith Brodkin Director, Sun Life Assurance Company of
Canada (U.S.), One Sun Life Executive Park,
Wellesley Hills, Massachusetts
Director, Sun Life Insurance and Annuity
Company of New York, 67 Broad Street,
New York, New York
John R. Gardner President and a Director, Sun Life Assurance
Company of Canada, Sun Life Centre, 150
King Street West, Toronto, Ontario, Canada
(Mr. Gardner is also an officer and/or
Director of various subsidiaries and
affiliates of Sun Life)
<PAGE>
John D. McNeil Chairman, Sun Life Assurance Company of
Canada, Sun Life Centre, 150 King Street
West, Toronto, Ontario, Canada (Mr. McNeil
is also an officer and/or Director of
various subsidiaries and affiliates of
Sun Life)
Joseph W. Dello Russo Director of Mutual Fund Operations, The Boston
Company, Exchange Place, Boston,
Massachusetts (until August, 1994)
ITEM 29. DISTRIBUTORS
(a) Reference is hereby made to Item 28 above.
(b) Reference is hereby made to Item 28 above; the principal
business address of each of these persons is 500 Boylston Street, Boston,
Massachusetts 02116.
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The accounts and records of the Registrant are located, in whole or in
part, at the office of the Registrant and the following locations:
NAME ADDRESS
---- -------
Massachusetts Financial Services 500 Boylston Street
Company (investment adviser) Boston, MA 02116
MFS Fund Distributors, Inc. 500 Boylston Street
(distributor) Boston, MA 02116
Investors Bank & Trust 89 South Street
Company (custodian) Boston, MA 02111
MFS Service Center, Inc. 500 Boylston Street
(transfer agent) Boston, MA 02116
The Registrant's corporate documents are kept by the Registrant at its
offices. Portfolio brokerage orders, other purchase orders, reasons for
brokerage allocation and lists of persons authorized to transact business for
the Registrant are kept by Massachusetts Financial Services Company at 500
Boylston Street, Boston, Massachusetts 02116. Shareholder account records
are kept by MFS Service Center, Inc. at 500 Boylston Street, Boston,
Massachusetts 02116. Transaction journals, receipts for the acceptance and
delivery of securities and cash, ledgers and trial balances are kept by
Investors Bank & Trust Company, 89 South Street, Boston, MA 02111.
<PAGE>
ITEM 31. MANAGEMENT SERVICES
Not applicable.
ITEM 32. UNDERTAKINGS
(a) Not applicable.
(b) Not Applicable.
(c) Registrant undertakes to furnish each person to whom a
prospectus is delivered with a copy of its latest annual report to
shareholders upon request and without charge.
(d) Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the provisions set forth in Item 27 of
this Part C, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the Securities
being Registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of Boston and
The Commonwealth of Massachusetts on the 25th day of April, 1997.
MFS VARIABLE INSURANCE
TRUST
By: JAMES R. BORDEWICK, JR.
-----------------------
Name: James R. Bordewick, Jr.
Title: Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to its Registration Statement has been signed below
by the following persons in the capacities indicated on April 25, 1997.
SIGNATURE TITLE
--------- -----
A. KEITH BRODKIN* Chairman, President (Principal
- ----------------- Executive Officer) and Trustee
A. Keith Brodkin
W. THOMAS LONDON* Treasurer (Principal Financial Officer
- ----------------- and Principal Accounting Officer)
W. Thomas London
WILLIAM R. GUTOW* Trustee
- -----------------
William R. Gutow
<PAGE>
NELSON J. DARLING, JR.* Trustee
- -----------------------
Nelson J. Darling, Jr.
*By: JAMES R. BORDEWICK, JR.
-----------------------
Name: James R. Bordewick, Jr.
as Attorney-in-fact
Executed by James R. Bordewick, Jr. on
behalf of those indicated pursuant
to a Power of Attorney dated
August 12, 1994, incorporated by
reference to the Registrant's
Post-Effective Amendment No. 4
filed with the Securities and Exchange
Commission on October 26, 1995.
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO.
- ----------- ---------------------- --------
11 Consent of Deloitte & Touche LLP.
17 Financial Data Schedules for each Series of
the Trust.
<PAGE>
EXHIBIT 99.11
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Post-Effective
Amendment No. 7 to the Registration Statement (File No. 33-74668) of MFS
Variable Insurance Trust of our reports, each dated February 7, 1997,
appearing in the annual reports to shareholders of MFS Emerging Growth
Series, MFS Value Series, MFS Research Series, MFS Growth With Income Series,
MFS Total Return Series, MFS Utilities Series, MFS High Income Series, MFS
World Governments Series, MFS Bond Series, MFS Limited Maturity Series and
MFS Money Market Series, for the year ended December 31, 1996, and to the
inclusion in such Registration Statement of our report dated February 7, 1997
relating to the statement of assets and liabilities of MFS Strategic Fixed
Income Series as of December 31, 1996. We also consent to the references to
us under the headings "Condensed Financial Information" in the Prospectus and
"Independent Auditors and Financial Statements" in the Statement of
Additional Information, both of which are part of such Registration Statement.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
April 28, 1997
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<NAME> MFS STRATEGIC FIXED INCOME FUND
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