<PAGE>
As filed with the Securities and Exchange Commission on October 1, 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. 98
AND
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 109
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)
[_] on [date] 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.
================================================================================
<PAGE>
MFS VARIABLE INSURANCE TRUST
MFS EMERGING GROWTH SERIES
MFS VALUE SERIES
MFS RESEARCH SERIES
MFS GROWTH WITH INCOME SERIES
MFS TOTAL RETURN SERIES
MFS UTILITIES SERIES
MFS HIGH INCOME SERIES
MFS WORLD GOVERNMENTS SERIES
MFS/FOREIGN & COLONIAL EMERGING MARKETS EQUITY SERIES
MFS BOND SERIES
MFS LIMITED MATURITY SERIES
MFS MONEY MARKET SERIES
CROSS REFERENCE SHEET
---------------------
(Pursuant to Rule 404 showing location in Prospectus and/or Statement of
Additional Information of the responses to the Items in Parts A and B of Form N-
1A)
<TABLE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>
1 (a), (b) Front Cover Page *
2 (a) Expense Summary *
(b), (c) * *
3 (a) Condensed Financial Information *
(b) * *
(c) Information Concerning Shares *
of Each Series - Performance
Information
(d) Condensed Financial Information *
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------- -------------------
<S> <C> <C>
4 (a) Front Cover Page; Investment *
Concept of the Trust;
Investment Objectives and
Policies; Investment Techniques
(b) Investment Objectives and *
Policies; Investment Techniques
(c) Investment Objectives and *
Policies; Additional Risk Factors
5 (a) Investment Concept of the Trust; *
Management of the Series
(b) Management of the Series - *
Investment Adviser;
Back Cover Page
(c) Management of the Series - *
Investment Adviser
(d) Management of the Series - Management of the Trust -
Administrator Administrator
(e) Management of the Series - *
Shareholder Servicing Agent;
Back Cover Page
(f) Information Concerning Shares *
of Each Series - Expenses;
Condensed Financial
Information; Expense Summary
(g) Additional Risk Factors - Portfolio *
Trading
(h) * *
5A (a), (b), (c) ** **
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>
6 (a) Information Concerning Shares *
of Each Series - Description of
Shares, Voting Rights and
Liabilities; Information
Concerning Shares of Each
Series - Purchases and
Redemptions
(b) Information Concerning Shares *
of Each Series - Description of
Shares, Voting Rights and
Liabilities
(c), (d) * *
(e) Shareholder Communications *
(f) Information Concerning Shares *
of Each Series - Distributions;
(g) Information Concerning Shares *
of Each Series - Tax Status;
Information Concerning Shares
of Each Series - Distributions
(h) * *
7 (a) Management of the Series - *
Distributor; Back Cover Page
(b) Information Concerning Shares *
of Each Series - Purchases and
Redemptions; Information
Concerning Shares of Each
Series - Net Asset Value
(c), (d), (e), (f) *
(g) * *
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ------------------- ------------------ -------------------
<S> <C> <C>
8 (a), (b) Information Concerning Shares *
of Each Series - Purchases and
Redemptions
(c) * *
(d) Information Concerning Shares *
of Each Series - Purchases and
Redemptions
9 * *
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART B PROSPECTUS CAPTION INFORMATION CAPTION
- ------------------- ------------------ -------------------------
<S> <C> <C>
10 (a), (b) * Front Cover Page
11 * Front Cover Page
12 * General Information and
Definitions
13 (a) * Investment Techniques
(b) * Investment Techniques;
Investment Restrictions
(c) * Investment Restrictions
(d) Additional Risk Factors - *
Portfolio Trading
14 (a), (b) * Management of the Trust -
Trustees and Officers
(c) * Management of the Trust -
Trustee Compensation
Table
15 (a) * *
(b), (c) * Management of the Trust
16 (a) Management of the Series - Management of the Trust -
Investment Adviser Investment Adviser;
Management of the Trust -
Trustees and Officers
(b) Management of the Series - Management of the Trust -
Investment Adviser; Investment Adviser
Expenses
(c) * *
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART B PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ --------------------
<S> <C> <C>
(d) Management of the Series - Management of the Trust -
Administrator Administrator
(e) * Portfolio Transactions and
Brokerage Commissions
(f), (g) * *
(h) * Management of the Trust -
Custodian; Independent
Auditors and Financial
Statements; Back Cover Page
(i) * Management of the Trust -
Shareholder Servicing Agent
(a), (b), (c), * Portfolio Transactions and
17 (d), (e) Brokerage Commissions
18 (a) * Description of Shares, Voting
Rights and Liabilities
(b) * *
19 (a) * *
Management of the Trust -
(b) Information Concerning Shares Distributor; Determination
of Each Series - Net Asset of Net Asset Value;
Value; Information Concerning Performance Information -
Shares of Each Series - Net Asset Value
Purchases and Redemptions
(c) * *
20 * Tax Status
21 (a), (b) * Management of the Trust -
Distributor
(c) * *
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART B PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>
22 (a), (b) * Determination of Net Asset
Value; Performance
Information
23 * Independent Auditors
and Financial Statements
</TABLE>
_______________________
* Not Applicable
** Contained in Annual Report
<PAGE>
MFS(R) VARIABLE
INSURANCE TRUST PROSPECTUS
- -------------------------------------------------------------------------------
MFS(R) VARIABLE INSURANCE TRUSTSM September 30, 1997
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 in-
come;
- --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 port-
folio of fixed income securities, some of which may involve equity features;
- --MFS WORLD GOVERNMENTS SERIES (the "World Governments Series"), which seeks
not only preservation but also growth of capital, together with moderate
current income;
- --MFS/FOREIGN & COLONIAL EMERGING MARKETS EQUITY SERIES (the "Emerging Markets
Equity Series"), which seeks capital appreciation;
- --MFS BOND SERIES (the "Bond Series"), which seeks primarily to provide as
high a level of current income as is believed consistent with prudent in-
vestment 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 share-
holders' 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 MAY INVEST UP TO 100% OF ITS NET ASSETS IN LOWER RATED
BONDS, COMMONLY KNOWN AS "JUNK BONDS," THAT ENTAIL GREATER RISKS, INCLUDING
DEFAULT RISKS, THAN THOSE FOUND IN HIGHER RATED SECURITIES. INVESTORS SHOULD
CAREFULLY CONSIDER THESE RISKS BEFORE INVESTING (SEE "ADDITIONAL RISK FAC-
TORS -- LOWER RATED BONDS"). THE EMERGING GROWTH SERIES, THE VALUE SERIES, THE
RESEARCH SERIES, THE GROWTH WITH INCOME SERIES AND THE EMERGING MARKETS EQUITY
SERIES ARE INTENDED FOR INVESTORS WHO UNDERSTAND AND ARE WILLING TO ACCEPT THE
RISKS ENTAILED IN SEEKING LONG-TERM GROWTH OF CAPITAL OR CAPITAL APPRECIATION.
BECAUSE OF THEIR INVESTMENT POLICIES PERMITTING INVESTMENT IN FOREIGN SECURI-
TIES, 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 IN-
VESTMENTS IN OTHER INVESTMENT COMPANIES WHICH INVEST ENTIRELY IN DOMESTIC SE-
CURITIES.
----------------
<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
September 30, 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........................................ 7
4. Investment Objectives and Policies..................................... 18
MFS Emerging Growth Series............................................. 18
MFS Value Series....................................................... 19
MFS Research Series.................................................... 19
MFS Growth With Income Series.......................................... 20
MFS Total Return Series................................................ 20
MFS Utilities Series................................................... 21
MFS High Income Series................................................. 22
MFS World Governments Series........................................... 23
MFS/Foreign & Colonial Emerging Markets Equity Series.................. 25
MFS Bond Series........................................................ 25
MFS Limited Maturity Series............................................ 26
MFS Money Market Series................................................ 27
5. Investment Techniques.................................................. 28
6. Additional Risk Factors................................................ 37
7. Management of the Series............................................... 42
8. Information Concerning Shares of Each Series........................... 46
Purchases and Redemptions.............................................. 46
Net Asset Value........................................................ 46
Distributions.......................................................... 46
Tax Status............................................................. 47
Description of Shares, Voting Rights and Liabilities................... 47
Performance Information................................................ 48
Expenses............................................................... 49
Shareholder Communications............................................. 49
Appendix A -- Description of Bond Ratings................................. A-1
Appendix B -- Principal Sectors of the Utilities Industry................. B-1
Appendix C -- Portfolio Composition Charts................................ C-1
</TABLE>
3
<PAGE>
1.EXPENSE SUMMARY
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS):
<TABLE>
<CAPTION>
MFS
EMERGING MFS MFS GROWTH
GROWTH MFS 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/
FOREIGN &
COLONIAL
EMERGING MFS
MARKETS LIMITED MFS MONEY
EQUITY MFS BOND MATURITY MARKET
SERIES SERIES SERIES SERIES
--------- --------- -------- -----------
<S> <C> <C> <C> <C>
Management Fee................... 1.25% 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)/........ 1.50% 1.00% 1.00% 0.60%
</TABLE>
- --------------------
/1/ Each Series has an expense offset arrangement which reduces the Series' cus-
todian fee based upon the amount of cash maintained by the Series with its
custodian and dividend disbursing agent, and may enter into other such ar-
rangements 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 reim-
bursement by each Series, such that each Series' "Other Expenses" shall not
exceed the following percentages of the average daily net assets of the Se-
ries 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 Se-
ries--Expenses." Otherwise, "Other Expenses" and "Total Operating Expenses"
for each Series would be:
<TABLE>
<CAPTION>
"OTHER EXPENSES" "TOTAL OPERATING
WITHOUT EXPENSES" 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%
Emerging Markets Equity
(estimate)....................... 0.48% 1.73%
Bond.............................. 8.85% 9.45%
Limited Maturity.................. 7.00% 7.55%
Money Market...................... 27.24% 27.74%
</TABLE>
4
<PAGE>
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a $1,000
investment in each Series, assuming (a) 5% annual return and (b) redemption at
the end of each of the time periods indicated:
<TABLE>
<CAPTION>
PERIOD
-------------------------------
SERIES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------ ------- ------- --------
<S> <C> <C> <C> <C>
Emerging Growth........................... 10 32 55 122
Value..................................... 10 32 55 122
Research.................................. 10 32 55 122
Growth With Income........................ 10 32 55 122
Total Return.............................. 10 32 55 122
Utilities................................. 10 32 55 122
High Income............................... 10 32 55 122
World Governments......................... 10 32 55 122
Emerging Markets Equity................... 15 47 N/A N/A
Bond...................................... 10 32 55 122
Limited Maturity.......................... 10 32 55 122
Money Market.............................. 6 19 33 75
</TABLE>
The purpose of the expense table above is to assist investors in understand-
ing the various costs and expenses that a shareholder of the Series will bear
directly or indirectly. The Series' annual operating expenses do not reflect
expenses imposed by separate accounts of Participating Insurance Companies
through which an investment in a Series is made or their related Contracts. A
separate account's expenses are disclosed in the prospectus through which the
Contract relating to that separate account is offered for sale.
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OF ANY SERIES; ACTUAL EXPENSES MAY BE GREATER OR LESS
THAN THOSE SHOWN.
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, Emerging Markets Equity Series, Bond
Series, Limited Maturity Series and Money Market Series. Each Series is a seg-
regated, separately managed portfolio of securities. All of the Series, except
the Utilities Series and the World Governments Series, are diversified. Addi-
tional 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 Decla-
ration of Trust dated February 1, 1994.
The Trust currently offers shares of each Series to insurance company sepa-
rate 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 re-
strictions 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 applica-
ble 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
5
<PAGE>
annuity and variable life insurance contracts ("mixed funding"). Due to dif-
ferences 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 with-
draw its investments in one or more Series. This might force a Series to sell
securities at disadvantageous prices.
Individual Contract holders are not the "shareholders" of the Trust. Rather,
the Participating Insurance Companies and their separate accounts are the
shareholders or investors, although such companies may pass through voting
rights to their Contract holders.
The Trust's Board of Trustees provides broad supervision over the affairs of
the Trust and the Series. Massachusetts Financial Services Company, a Delaware
corporation ("MFS" or the "Adviser"), is the investment adviser to each Se-
ries. A majority of the Trustees of the Trust are not affiliated with the Ad-
viser. The Adviser is responsible for the management of the assets of each Se-
ries and the officers of the Trust are responsible for the operations. The Ad-
viser manages the Series' portfolios from day to day in accordance with the
investment objectives and policies of each Series. The selection of invest-
ments and the way they are managed depend on the conditions and trends in the
economy and the financial marketplaces.
6
<PAGE>
3.CONDENSED FINANCIAL INFORMATION
The following financial information (presented for each Series which com-
menced 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' An-
nual 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 Emerging
Markets Equity Series had not commenced investment operations prior to Decem-
ber 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)(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
</TABLE>
- --------------------
* 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 begin-
ning 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 ra-
tios would have been:
<TABLE>
<S> <C> <C>
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>
7
<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 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
</TABLE>
- --------------------
* 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) TheAdviser 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 ra-
tios would have been:
<TABLE>
<S> <C>
Net investment loss...................................... $(0.04)
Ratios (to average net assets):
Expenses................................................ 3.83%+
Net investment loss..................................... (1.11)%+
</TABLE>
8
<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 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
</TABLE>
- --------------------
* 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 ex-
penses were over these limitations, the net investment loss per share and
the ratios would have been:
<TABLE>
<S> <C> <C>
Net investment loss.................... -- $(0.08)
Ratios (to average net assets):
Expenses.............................. 1.48% 3.90%+
Net investment loss................... -- (1.73)%+
</TABLE>
9
<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 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
</TABLE>
- --------------------
* 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.
(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 ex-
penses were over these limitations, the net investment income (loss) per
share and the ratios would have been:
<TABLE>
<S> <C> <C>
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>
10
<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 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
</TABLE>
- --------------------
* 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 ex-
penses were over these limitations, the net investment income per share and
the ratios would have been:
<TABLE>
<S> <C> <C>
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>
11
<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 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###................ $0.0416 --
Net assets at end of period (000
omitted)................................. $ 9,572 $2,373
</TABLE>
- --------------------
* 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 ex-
penses were over these limitations, the net investment income per share and
the ratios would have been:
<TABLE>
<S> <C> <C>
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>
12
<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 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
</TABLE>
- --------------------
* 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 ra-
tios would have been:
<TABLE>
<S> <C> <C>
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>
13
<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
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
</TABLE>
- --------------------
* 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 ra-
tios would have been:
<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>
14
<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 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
</TABLE>
- --------------------
* 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 ra-
tios would have been:
<TABLE>
<S> <C> <C>
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>
15
<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 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
</TABLE>
- --------------------
* 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 ra-
tios would have been:
<TABLE>
<S> <C>
Net investment income.................................... $0.01
Ratios (to average net assets):
Expenses................................................ 7.55%+
Net investment income................................... 0.06%+
</TABLE>
16
<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 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
</TABLE>
- --------------------
* 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:
<TABLE>
<S> <C> <C>
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>
17
<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 objec-
tives 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 as-
surance that the objectives of any Series will be achieved.
In addition to the specific investment practices described below, each Se-
ries may also engage in certain investment techniques as described under the
caption "Investment Techniques" below and in the SAI under the caption "In-
vestment 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 en-
terprises (emerging growth companies). Such companies generally would be ex-
pected 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 ac-
celerate because of special factors, such as rejuvenated management, new prod-
ucts, changes in consumer demand, or basic changes in the economic environ-
ment. 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 Pro-
spectus.
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 finan-
cial resources, and they may be dependent on one-person management. In addi-
tion, 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 av-
erages 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.
18
<PAGE>
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 val-
ues make such purchases appear attractive either as individual issues or as
types of securities in certain economic environments. The Series may invest in
non-convertible fixed income securities rated lower than "investment grade"
(rated Ba or lower by Moody's or BB or lower by S&P 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 apprecia-
tion 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 agree-
ments 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 meas-
ure 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 in-
dustries 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 responsi-
bility.
The Research Series' policy is to invest a substantial proportion of its as-
sets in equity securities of companies believed to possess better than average
prospects for long-term growth. Equity securities in which the Series may in-
vest 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 securi-
ties 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 re-
spect 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 descrip-
tion 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 (in-
cluding emerging market securities) which are not traded on a U.S. exchange.
19
<PAGE>
MFS GROWTH WITH INCOME SERIES -- The Growth With Income Series' investment ob-
jectives are to provide reasonable current income and long-term growth of cap-
ital 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 con-
vertible into stocks; and depositary receipts for those securities. These se-
curities 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.
MFS TOTAL RETURN SERIES -- The Total Return Series' primary investment objec-
tive is to provide above-average income (compared to a portfolio invested en-
tirely in equity securities) consistent with the prudent employment of capi-
tal, and its secondary objective is to provide a reasonable opportunity for
growth of capital and income, since many securities offering a better than av-
erage 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 in-
vested 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. Eq-
uity securities in which the Series may invest include the following: common
stocks, preferred stocks and preference stocks; securities such as bonds, war-
rants 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-convert-
ible fixed income investments may consist of both "investment grade" securi-
ties (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 se-
curities that are in these lower rating categories and comparable unrated se-
curities (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, includ-
ing: (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. Trea-
sury 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) obliga-
tions issued or guaranteed by U.S. Government agencies, authorities or instru-
mentalities, 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 it-
self, e.g., obligations of the Student Loan Marketing Association (collective-
ly, "U.S. Government Securities"). The term "U.S. Government Securities" also
includes interests in trusts or other entities representing interests in obli-
gations that are
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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 instrumentali-
ties.
Consistent with its investment objective and policies described above, the
Series may also invest up to 20% of its net assets in foreign securities (in-
cluding 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 portfo-
lio 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 for-
eign companies in the utilities industry. Equity securities in which the Se-
ries may invest include the following: common stocks; preferred stocks and
preference stocks; securities such as bonds, warrants or rights that are con-
vertible into stocks; and depositary receipts for those securities. These se-
curities may be listed on securities exchanges, traded in various over-the-
counter markets or have no organized markets. At least 80% of the non-convert-
ible 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 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 commu-
nications media (but not companies engaged in public broadcasting). The Ad-
viser 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 por-
tion 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 fur-
ther 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 (in-
cluding emerging market securities and Brady Bonds) which are not traded on a
U.S. exchange.
Since the Utilities Series' investments are concentrated in utility securi-
ties, 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 gov-
ernmental 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 uncer-
tainties, including: risks of increases in fuel and other operating costs; the
high cost of borrowing to finance capital construction during inflationary pe-
riods; difficulty obtaining adequate returns on invested capital, even if fre-
quent 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
21
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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 mar-
kets; technological innovations which may render existing plants, equipment or
products obsolete; the potential impact of natural or man-made disasters; dif-
ficulties 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 fa-
cilities, including technical factors and costs, and the possibility that fed-
eral, state and municipal government authorities may from time to time review
existing requirements and impose additional requirements. Certain utility com-
panies, especially gas and telephone utility companies, have in recent years
been affected by increased competition, which could adversely affect the prof-
itability of such utility companies. Furthermore, there are uncertainties re-
sulting from certain telecommunications companies' diversification into new
domestic and international businesses as well as agreements by many such com-
panies linking future rate increases to inflation or other factors not di-
rectly related to the active operating profits of the enterprise.
Foreign utility companies are also subject to regulation, although such reg-
ulations may or may not be comparable to those in the United States. Foreign
utility companies may be more heavily regulated by their respective govern-
ments 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 for-
eign utilities use fuel that causes more pollution than those used in the
U.S., such utilities may be required to invest in pollution control equipment
to meet any proposed pollution restrictions. Foreign regulatory systems vary
from country to country and may evolve in ways different from regulation in
the U.S.
The Utilities Series is permitted to invest in securities of issuers that
are outside the utilities industry, although under normal circumstances not
more than 35% of the Series' assets will be so invested. Such investments may
include common stocks, debt securities (including municipal debt securities)
and preferred stocks and will be selected to meet the Series' investment ob-
jective of both capital growth and current income. These securities may be is-
sued by either U.S. or non-U.S. companies. Some of these issuers may be in in-
dustries 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 Poli-
cies--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 achiev-
ing 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 man-
aged diversified portfolio of fixed income securities, some of which may in-
volve 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 securi-
ties. 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 re-
cent fiscal year. (See "Additional Risk Factors" below.) However, since avail-
able yields and yield differentials vary over time, no specific level of in-
come or yield differential can ever be assured. The dividends paid by the Se-
ries will increase or decrease in relation to the income received by the Se-
ries from its investments, which would in any case be reduced by the expenses
of the Series before such income is distributed to its shareholders.
22
<PAGE>
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 obliga-
tions), 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 ex-
change rights or warrants for the acquisition of stock of the same or a dif-
ferent issuer; participations based on revenues, sales or profits; or the pur-
chase 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 Se-
ries has authority to invest up to 25% of its total assets in securities is-
sued or guaranteed by foreign governments or their agencies or instrumentali-
ties. (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 rela-
tive risk, marketability, quality and availability of securities of such in-
dustry justifies such an investment.
When and if available, fixed income securities may be purchased at a dis-
count from face value. However, the High Income Series does not intend to hold
such securities to maturity for the purpose of achieving potential capital
gains, unless current yields on these securities remain attractive. From time
to time the Series may purchase securities not paying interest at the time ac-
quired 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 ob-
jective 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 con-
sisting 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 be-
lieved 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 de-
pending 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
23
<PAGE>
diversified. However, for temporary defensive reasons or during times of in-
ternational 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 instrumentali-
ties, 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 secu-
rities 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 in-
vested 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 for-
eign 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 en-
hanced 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 da-
ta. In addition to the foregoing, interest rates are evaluated on the basis of
differentials or anomalies that may exist between different countries. The Se-
ries may hold foreign currency received in connection with investments in for-
eign securities and in anticipation of purchasing foreign securities. (See
"Additional Risk Factors" below.)
The phrase "preservation of capital" when applied to a domestic investment
company is generally understood to imply that the portfolio is invested in
very low risk securities and that the major risk is loss of purchasing power
through the effects of inflation or major changes in interest rates. However,
while the World Governments Series invests in securities which are believed to
have minimal credit risk, an error of judgment in selecting a currency or an
interest rate environment could result in a loss of capital.
It is contemplated that the World Governments Series' long-term debt invest-
ments will consist primarily of securities which are believed by the Adviser
to be of relatively high quality. If after the Series purchases such a securi-
ty, the quality of the security deteriorates significantly, the security will
be sold only if the Adviser believes it is advantageous to do so.
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<PAGE>
MFS/FOREIGN & COLONIAL EMERGING MARKETS EQUITY SERIES -- The Emerging Markets
Equity Series' investment objective is to seek capital appreciation. The se-
lection of securities is made solely on the basis of potential for capital ap-
preciation. Dividend and interest income from portfolio securities, if any, is
incidental to the Series' investment objective of capital appreciation.
The Series seeks to achieve its objective by investing, under normal market
conditions, at least 65% of its total assets in equity securities of issuers
whose principal activities are located in emerging market countries. The Ad-
viser and the Sub-Adviser expect to take a global approach to portfolio man-
agement by weighting the Series' investments towards countries in Latin Ameri-
ca, Asia, Africa, the Middle East and the developing countries of Europe, pri-
marily in Eastern Europe. See "Investment Techniques--Emerging Market Securi-
ties" below. The Series may invest in all types of equity securities, includ-
ing the following: common stocks, preferred stocks and preference stocks; se-
curities such as bonds, warrants or rights that are convertible into stocks;
and depository receipts for those securities. These securities may be listed
on securities exchanges, traded in various over-the-counter markets or have no
organized markets.
While the Series intends to invest primarily in equity securities, the Se-
ries may also invest less than 35% of its net assets in non-convertible fixed
income securities of government, government-related, supranational and corpo-
rate issuers whose principal activities are outside the U.S., rated Ba or
lower by Moody's or BB or lower by S&P, Fitch or Duff & Phelps and comparable
unrated securities. See "Additional Risk Factors--Lower Rated Bonds" below.
The Adviser and the Sub-Adviser consider a variety of factors in selecting
fixed income securities to achieve capital appreciation, including the credit-
worthiness of issuers, interest rates and currency exchange rates.
The Series does not intend to emphasize any particular country or region in
making its investments, but under normal market conditions, the Series will be
invested in at least three countries (outside the U.S.) and will not invest
more than 50% of its net assets in issuers whose principal activities are lo-
cated in a single country. See "Risk Factors--Investments in One or a Limited
Number of Countries" below. Currently, the Series does not expect to invest
more than 25% of its net assets in issuers whose principal activities are lo-
cated in a single country. The Series will seek to reduce risk by investing
its assets in a number of markets and issuers, performing investment analyses
of potential investments and monitoring current developments and trends in
both the international economy and financial markets.
For temporary defensive reasons, such as during times of international po-
litical or economic uncertainty or turmoil, most or all of the Series' invest-
ments may be in cash (U.S. dollars, foreign currencies or multinational cur-
rency units) and/or securities that are denominated in U.S. dollars or whose
issuers are domiciled in the U.S. The Series is not restricted as to the por-
tions of its assets which may be invested in securities denominated in a par-
ticular currency and up to 100% of the Series' net assets may be invested in
securities denominated in foreign currencies and multinational currency units.
MFS BOND SERIES -- The Bond Series' primary investment objective is to provide
as high a level of current income as is believed to be consistent with prudent
investment risk. The Series' secondary objective is to protect shareholders'
capital.
The Series seeks to achieve its investment objectives by investing, under
normal market conditions, at least 65% of its total assets in:
(1) convertible and non-convertible debt securities and preferred stocks;
25
<PAGE>
(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 re-
cent fiscal year. For a discussion of the risks of investing in these securi-
ties 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 re-
ceived 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.
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 mort-
gage 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 Se-
ries' portfolio will have remaining maturities of five years or less or esti-
mated remaining average lives of five years or less. In the case of mortgage-
backed and corporate asset-backed securities as well as collateralized mort-
gage obligations, the average life is likely to be substantially shorter than
the stated final maturity as a result of unscheduled principal prepayments.
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<PAGE>
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 pe-
riod 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-de-
nominated 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 invest-
ing 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 un-
divided 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 Fed-
eral Deposit Insurance Corporation, provided that not more than 10% of the
Series' total assets will be invested in such insured obligations;
(c) commercial paper which at the date of investment is rated A-1 by S&P
or by Fitch or P-1 by Moody's or, if not rated, is issued or guaranteed as
to payment of principal and interest by companies which at the date of in-
vestment 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 compa-
rable high quality and liquidity and provided that such investments are in ac-
cordance 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 Se-
ries 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 possi-
bility that there may be less publicly available information, more volatile
markets, less securities regulation, less favorable tax provisions, war or ex-
propriation. (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
27
<PAGE>
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 antici-
pation 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 Se-
ries) 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 main-
tained 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 is-
suers whose principal activities are located in emerging market countries.
Emerging market countries include any country determined by the Adviser or
Sub-Adviser, as applicable, to have an emerging market economy, taking into
account a number of factors, including whether the country has a low- to mid-
dle-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 or Sub-Adviser, as applicable, determines whether an issuer's
principal activities are located in an emerging market country by considering
such factors as its country of organization, the principal trading market for
its securities and the source of its revenues and assets. The issuer's princi-
pal 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 orga-
nized under the laws of, and maintains a principal office in that country; (c)
the issuer has its principal securities trading market in that country; (d)
the issuer derives 50% or more of its total revenues from goods sold or serv-
ices performed in that country; or (e) the issuer has 50% or more of its as-
sets in that country.
BRADY BONDS: Each Series (except the Research Series and Money Market Se-
ries) may invest in Brady Bonds, which are securities created through the ex-
change 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, Do-
minican 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 collat-
eralized or uncollateralized, are issued in various currencies (but primarily
the U.S. dollar) and are actively traded in over-the-counter secondary mar-
kets. 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 compo-
nents: the collateralized repayment of principal at final maturity; the col-
lateralized 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.
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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 securi-
ties 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 securi-
ties 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 Se-
ries does not pay for such securities until received, and does not start earn-
ing interest on the securities until the contractual settlement date. While
awaiting delivery of securities purchased on such bases, a Series will nor-
mally invest in liquid assets.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: Each of the Total Return Series, the
Bond Series, the World Governments Series, the Limited Maturity Series, the
High Income Series and the Utilities Series may enter into mortgage "dollar
roll" transactions with selected banks and broker-dealers pursuant to which a
Series sells mortgage-backed securities for delivery in the future (generally
within 30 days) and simultaneously contracts to repurchase substantially simi-
lar (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 offset-
ting 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 Se-
ries 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 cur-
rent sales price and the repurchase price.
RESTRICTED SECURITIES: Each Series (except the Growth With Income Series)
may purchase securities that are not registered under the Securities Act of
1933 (the "1933 Act") ("restricted securities"), including those that can be
offered and sold to "qualified institutional buyers" under Rule 144A under the
1933 Act ("Rule 144A securities"). A determination is made based upon a con-
tinuing 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 func-
tion of determining and monitoring the liquidity of Rule 144A securities. The
Board, however, retains oversight, focusing on factors such as valuation, li-
quidity and availability of information. Investing in Rule 144A securities
could have the effect of decreasing the level of liquidity in a Series to the
extent that qualified institutional buyers become for a time uninterested in
purchasing Rule 144A securities held in the Series' portfolio.
CORPORATE ASSET-BACKED SECURITIES: Each of the Emerging Growth Series, the
Total Return Series, the Bond Series, the Limited Maturity Series, the High
Income Series and the Utilities Series may invest in corporate asset-backed
securities. These securities, issued by trusts and special purpose corpora-
tions, 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
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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 receiv-
ables. In addition, because of the large number of vehicles involved in a typ-
ical 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 rep-
resenting the obligations of a number of different parties. To lessen the ef-
fect of failures by obligors on underlying assets to make payments, the secu-
rities 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 ob-
tained 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 respect-
ing the level of credit risk associated with the underlying assets. Delin-
quency or loss in excess of that anticipated or failure of the credit support
could adversely affect the return on an investment in such a security.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS: Each of the Value
Series, the Total Return Series, the Bond Series, the Emerging Markets Equity
Series, the World Governments Series, the Growth With Income Series, the Lim-
ited Maturity Series, the High Income Series and the Utilities Series may in-
vest 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 in-
terest, deferred interest bonds provide for a period of delay before the regu-
lar payment of interest begins. PIK bonds are debt obligations which provide
that the issuer thereof may, at its option, pay interest on such bonds in cash
or in the form of additional debt obligations. Such investments benefit the
issuer by mitigating its need for cash to meet debt service, but also require
a higher rate of return to attract investors who are willing to defer receipt
of such cash. Such investments may experience greater volatility in market
value due to changes in interest rates than debt obligations which make regu-
lar payments of interest. Each Series will accrue income on such investments
for tax and accounting purposes, as required, which is distributable to share-
holders and which, because no cash is received at the time of accrual, may re-
quire the liquidation of other portfolio securities to satisfy the Series'
distribution obligations.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES:
Each of the Bond Series, the World Governments Series, the Limited Maturity
Series, the High Income Series and the Utilities Series may invest a portion
of its assets in collateralized mortgage obligations or "CMOs," which are debt
obligations collateralized by mortgage loans or mortgage pass-through securi-
ties. Typically, CMOs are collateralized by certificates issued by GNMA, the
Federal National Mortgage Association ("FNMA") or the Federal Home Loan Mort-
gage Corporation ("FHLMC"), but also may be collateralized by whole loans or
private mortgage pass-through securities (such collateral collectively
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referred to as "Mortgage Assets"). Each of these Series may also invest a por-
tion 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 instrumentali-
ties of the U.S. Government or by private originators of, or investors in,
mortgage loans, including savings and loan associations, mortgage banks, com-
mercial banks, investment banks and special purpose subsidiaries of the fore-
going. 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 clas-
ses 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 Mort-
gage 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 prior-
ity 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 in-
vestment may be subject to a greater or lesser risk of prepayments than other
types of mortgage-related securities.
Each of the Bond Series, the World Governments Series, the Limited Maturity
Series, the High Income Series and the Utilities Series may also invest in
parallel pay CMOs and Planned Amortization Class CMOs ("PAC Bonds"). Parallel
pay CMOs are structured to provide payments of principal on each payment date
to more than one class. PAC Bonds generally require payments of a specified
amount of principal on each payment date. PAC Bonds are always parallel pay
CMOs with the required principal payment on such securities having the highest
priority after interest has been paid to all classes. For a further descrip-
tion of CMOs, parallel pay CMOs and PAC Bonds and the risks related to trans-
actions therein, see the SAI.
STRIPPED MORTGAGE-BACKED SECURITIES: Each of the Bond Series, the World Gov-
ernments 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 re-
ceive 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 Se-
ries and the Emerging Markets Equity Series may invest a portion of its assets
in "loan participations" and other direct indebtedness. By purchasing a loan
participation, a Series acquires some or all of the interest of a bank or
other lending institution in a loan to a corporate borrower. Many such loans
are secured, and most impose restrictive covenants which must be met by the
borrower. These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate activ-
ities. 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 com-
panies, 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 com-
pany is in default. Certain of the loan participations and other direct in-
debtedness 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 re-
sult, 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 discus-
sion of loan participations, other direct indebtedness and the risks related
to transactions therein, see the SAI.
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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 mort-
gage loans. The Utilities Series may invest in mortgage pass-through securi-
ties 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 mort-
gage pass-through securities (but not the market value of the securities them-
selves) 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. Govern-
ment-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-gov-
ernmental issuers (such as commercial banks, savings and loan institutions,
private mortgage insurance companies, mortgage bankers and other secondary
market issuers). See the SAI for a further discussion of these securities.
FOREIGN GROWTH SECURITIES: The Emerging Markets Equity Series may invest in
securities of foreign growth companies, including established foreign compa-
nies, whose rates of earnings growth are expected to accelerate because of
special factors, such as rejuvenated management, new products, changes in con-
sumer demand, or basic changes in the economic environment or which otherwise
represent opportunities for long-term growth. See "Risk Factors" below. It is
anticipated that these companies will primarily be in nations with more devel-
oped securities markets, such as Japan, Australia, Canada, New Zealand and
most Western European countries, including Great Britain.
FIXED INCOME SECURITIES: Fixed income securities in which the Emerging Mar-
kets Equity Series may invest include all types of long- or short-term debt
obligations, such as bonds, notes, bills, debentures, loans, loan assignments
and commercial paper. The Series may invest in emerging market fixed income
securities, which, in addition to the securities identified above, may take
the form of interests issued by entities organized and operated for the pur-
pose of restructuring the investment characteristics of instruments issued by
emerging market country issuers. Fixed income securities in which the Series
may invest include securities in the lower rating categories of recognized
rating agencies and comparable unrated securities. See "Additional Risk Fac-
tors" below. The Series will not invest 35% or more of its net assets, in non-
convertible fixed income securities rated Ba or lower by Moody's or BB or
lower by S&P, Fitch or Duff & Phelps and comparable unrated securities. See
"Additional Risk Factors -- Fixed Income Securities" below. However, because
most foreign fixed income securities are not rated, the Series will invest in
foreign fixed income securities primarily based on the Adviser's or the Sub-
Adviser's credit analysis without relying on published ratings.
INVESTMENT IN OTHER INVESTMENT COMPANIES: The Emerging Markets Equity Series
may invest in other investment companies to the extent permitted by the 1940
Act (i) as a means by which the Series may invest in securities of certain
countries which do not otherwise permit investment, (ii) as a means to pur-
chase thinly traded securities of emerging market companies, or (iii) when the
Adviser or the Sub-Adviser believes such investments may be more advantageous
to the Series than a direct market purchase of securities. If the Series in-
vests in such investment companies, the Series' shareholders will bear not
only their proportionate share of the expenses of the Series (including oper-
ating expenses and the fees of the Adviser) but also will indirectly bear sim-
ilar expenses of the underlying investment companies.
PRIVATIZATIONS: The governments in some countries, including emerging market
countries, have been engaged in programs of selling part or all of their
stakes in government owned or controlled enterprises ("privatizations"). The
Emerging Markets Equity Series may invest in privatizations. In certain coun-
tries, the ability of foreign entities to participate in privatizations may be
limited by local law and the terms on which the foreign entities may be per-
mitted to participate may be less advantageous than those afforded local in-
vestors.
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DEPOSITARY RECEIPTS: The Emerging Markets Equity Series may invest in Ameri-
can Depositary Receipts ("ADRs"), Global Depositary Receipts ("GDRs") and
other types of depositary receipts. ADRs are certificates issued by a U.S. de-
positary (usually a bank) and represent a specified quantity of shares of an
underlying non-U.S. stock on deposit with a custodian bank as collateral. GDRs
and other types of depositary receipts are typically issued by foreign banks
or trust companies and evidence ownership of underlying securities issued by
either a foreign or a U.S. company. Generally, ADRs are in registered form and
are designed for use in U.S. securities markets and GDRs are in bearer form
and are designed for use in foreign securities markets. For the purposes of
the Series' policy to invest a certain percentage of its assets in foreign se-
curities, the investments of the Series in ADRs, GDRs and other types of de-
positary receipts are deemed to be investments in the underlying securities.
STRUCTURED SECURITIES: The Emerging Markets Equity Series may invest a por-
tion of its assets in entities organized and operated solely for the purpose
of restructuring the investment characteristics of sovereign debt obligations.
This type of restructuring involves the deposit with, or purchase by, an enti-
ty, such as a corporation or trust, of specified instruments (such as commer-
cial bank loans or Brady Bonds) and the issuance by that entity of one or more
classes of securities ("Structured Securities") backed by, or representing in-
terests in, the underlying instruments. The cash flow on the underlying in-
struments may be appointed among the newly issued Structured Securities to
create securities with different investment characteristics, such as varying
maturities, payment priorities and interest rate provisions, and the extent of
the payments made with respect to Structured Securities is dependent on the
extent of the cash flow on the underlying instruments. Because Structured Se-
curities of the type in which the Series anticipates it will invest typically
involve no credit enhancement, their credit risk generally will be equivalent
to that of underlying instruments. The Series is permitted to invest in a
class of Structured Securities that is either subordinated or unsubordinated
to the right of payment of another class. Subordinated Structured Securities
typically have higher yields and present greater risks than unsubordinated
Structured Securities. Structured Securities are typically sold in private
placement transactions, and there currently is no active trading market for
Structured Securities.
INDEXED SECURITIES: Each of the Value Series, the Total Return Series, the
High Income Series, the Bond Series, the Utilities Series, the World Govern-
ments Series and the Emerging Markets Equity Series may invest in indexed se-
curities whose value is linked to foreign currencies, interest rates, commodi-
ties, 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 under-
lying instrument or to one or more options on the underlying instrument. In-
dexed securities may be more volatile than the underlying instrument itself.
SWAPS AND RELATED TRANSACTIONS: As one way of managing its exposure to dif-
ferent types of investments, each of the High Income Series, the World Govern-
ments Series, the Emerging Markets Equity Series, the Bond Series and the Lim-
ited 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 pay-
ments 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.
Each of the High Income Series, the World Governments Series, the Emerging
Markets Equity Series, the Bond Series and the Limited Maturity Series may
also purchase and sell caps, floors and collars. In a typical cap or floor
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agreement, one party agrees to make payments only under specified circumstanc-
es, 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 sell-
ing 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 be-
low 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 expo-
sure through offsetting transactions.
Swaps, caps, floors and collars are highly specialized activities which in-
volve certain risks. See the SAI for further information on, and the risks in-
volved in, these activities.
OPTIONS ON SECURITIES: Each of the Emerging Growth Series, the Value Series,
the Total Return Series, the Bond Series, the Emerging Markets Equity Series,
the World Governments Series, the Growth With Income Series and the High In-
come 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 securi-
ties 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 un-
exercised or is closed out by the Series at a profit, it will retain the pre-
mium 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, howev-
er, if the price of the underlying security moves adversely to the Series' po-
sition, the option may be exercised and the Series will be required to pur-
chase 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 Se-
ries 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 Emerging Markets Equity Series and the Emerging
Growth Series may enter into options on Treasury securities that are "reset"
options or "adjustable strike" options. These options provide for periodic ad-
justment 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 dis-
cussion of these investments.
OPTIONS ON STOCK INDICES: Each of the Emerging Growth Series, the Value Se-
ries, the Total Return Series, the Growth With Income Series, the Utilities
Series and the Emerging Markets Equity 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 ex-
pire 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 se-
curities to be acquired. Such transactions, however, will constitute only par-
tial hedges against adverse price fluctuations, since any such fluctuations
will be offset only to the extent of the premium received by a Series for the
writing of the option, less related transaction costs. In addition, if the
value of an underlying index moves adversely to a Series' option position, the
option may be exercised, and the Series will experience a loss which may only
be partially offset by the amount of the premium received.
Each of these Series may also purchase put or call options on stock indices
in order, respectively, to hedge its investments against a decline in value or
to attempt to reduce the risk of missing a market or industry segment advance.
A Series' possible loss in either case will be limited to the premium paid for
the option, plus related transaction costs.
"YIELD CURVE" OPTIONS: Each of the Value Series, the Total Return Series,
the Bond Series, the World Governments Series 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 be-
tween 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 op-
tions written by a Series will be covered as described in the SAI. The trading
of yield curve options is subject to all the risks associated with trading
other types of options, as discussed below under "Additional Risk Factors" and
in the SAI. In addition, such options present risks of loss even if the yield
on one of the underlying securities remains constant, if the spread moves in a
direction or to an extent which was not anticipated.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS: Each of the Total Return
Series, the Bond Series, the Emerging Markets Equity Series, the World Govern-
ments Series, the Limited Maturity Series, the High Income Series and the
Utilities Series may purchase and sell futures contracts on foreign or domes-
tic fixed income securities or indices of such securities, including municipal
bond indices and any other indices of foreign or domestic fixed income securi-
ties that may become available for trading ("Futures Contracts"). Each of
these Series may also purchase and write options on such Futures Contracts
("Options on Futures Contracts"). Each of the Emerging Growth Series, the
Value Series, the Total Return Series, the Growth With Income Series and the
Emerging Markets Equity Series may purchase and sell Futures Contracts on
stock indices, while the Emerging Growth Series, the Value Series, the Total
Return Series, the Emerging Markets Equity Series, the World Governments Se-
ries, 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 Con-
tracts.
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Such transactions will be entered into for hedging purposes or for non-hedg-
ing purposes to the extent permitted by applicable law. Each Series will incur
brokerage fees when it purchases and sells Futures Contracts, and will be re-
quired to maintain margin deposits. In addition, Futures Contracts entail
risks. Although the Adviser believes that use of such Contracts will benefit a
Series, if its investment judgment about the general direction of exchange
rates or the stock market is incorrect, the Series' overall performance may be
poorer than if it had not entered into any such contract and the Series may
realize a loss. A Series will not enter into any Futures Contract if immedi-
ately 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 Con-
tracts 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 posi-
tion. 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 Con-
tracts for hedging purposes and (except for the Bond Series and the High In-
come Series) for non-hedging purposes (i.e., speculative purposes). By enter-
ing 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 transac-
tions, therefore, could be considered speculative. Forward Contracts are
traded over-the-counter and not on organized commodities or securities ex-
changes. As a result, Forward Contracts operate in a manner distinct from ex-
change-traded instruments, and their use involves certain risks beyond those
associated with transactions in Futures Contracts or options traded on ex-
changes. A Series may choose to, or be required to, receive delivery of the
foreign currencies underlying Forward Contracts it has entered into. Under
certain circumstances, such as where the Adviser or Sub-Adviser, as applica-
ble, believes that the applicable exchange rate is unfavorable at the time the
currencies are received or the Adviser or Sub-Adviser, as applicable, antici-
pates, 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 or Sub-Adviser, as applica-
ble, a reasonable degree of correlation can be expected between movements in
the values of the two currencies. Each of these Series has established proce-
dures 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 Emerging Markets Equity
Series, the World Governments Series, the Growth With Income Series, the High
Income Series and the Utilities Series may purchase and write options on for-
eign currencies ("Options on Foreign Currencies") for the purpose of protect-
ing 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 re-
ceived, and a
36
<PAGE>
Series may be required to purchase or sell foreign currencies at disadvanta-
geous exchange rates, thereby incurring losses. The purchase of an Option on
Foreign Currency may constitute an effective hedge against fluctuations in ex-
change rates although, in the event of rate movements adverse to a Series' po-
sition, 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.
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 loss-
es. Certain Series also may enter into transactions in options, Futures Con-
tracts, Options on Futures Contracts and Forward Contracts for other than
hedging purposes, which involves greater risk. In particular, such transac-
tions may result in losses for a Series which are not offset by gains on other
portfolio positions, thereby reducing gross income. In addition, foreign cur-
rency 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 pur-
chased or sold, and a Series may be required to maintain a position until ex-
ercise or expiration, which could result in losses. The SAI contains a de-
scription of the nature and trading mechanics of options, Futures Contracts,
Options on Futures Contracts, Forward Contracts and Options on Foreign Curren-
cies, 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 en-
tered into on U.S. exchanges regulated by the Commodity Futures Trading Com-
mission and on foreign exchanges. In addition, the securities and indexes un-
derlying 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 Matu-
rity Series, the Emerging Markets Equity 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 secu-
rities, while normally exhibiting adequate protection parameters, have specu-
lative characteristics and changes in economic conditions or other circum-
stances 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 pro-
viding greater income than investments in higher rated securities, will in-
volve greater risk of principal and income (including the possibility of de-
fault 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 gen-
eral level of interest rates (although these lower rated fixed income securi-
ties are also affected by changes in interest rates, the market's perception
of their credit quality, and the outlook for economic
37
<PAGE>
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 is-
suers of such securities. Due to the fixed income payments of these securi-
ties, 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 mar-
ket for investment grade fixed income securities, and judgment may at times
play a greater role in valuing these securities than in the case of investment
grade fixed income securities. Changes in the value of securities subsequent
to their acquisition will not affect cash income or yield to maturity to a Se-
ries 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-denomi-
nated 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 is-
suers generally involves risks not ordinarily associated with investing in se-
curities of domestic issuers. These include changes in currency rates, ex-
change control regulations, governmental administration or economic or mone-
tary policy (in the U.S. or abroad) or circumstances in dealings between na-
tions. 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 liq-
uid, 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 difficul-
ties 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 securi-
ties. 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 Matu-
rity Series and the Money Market Series) may invest in ADRs which are certifi-
cates 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 Ad-
viser does not treat them as foreign securities (except with respect to the
Emerging Markets Equity Series). 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 Se-
ries) may invest in emerging markets. In addition to the general risks of in-
vesting 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 pur-
chases due to settlement problems
38
<PAGE>
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 secu-
rities, 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 de-
livery, 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. Securi-
ties 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, ad may have less protection of prop-
erty 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 suf-
fer from extreme and volatile debt burdens or inflation rates. Local securi-
ties markets may trade a small number of securities and may be unable to re-
spond effectively to increases in trading volume, potentially making prompt
liquidation of substantial holdings difficult or impossible at times. Securi-
ties 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 repatria-
tion of investment income, capital or the proceeds of sales of securities by
foreign investors. In addition, if a deterioration occurs in an emerging mar-
ket's balance of payments or for other reasons, a country could impose tempo-
rary restrictions on foreign capital remittances. A Series could be adversely
affected by delays in, or a refusal to grant, any required governmental ap-
proval for repatriation of capital, as well as by the application to the Se-
ries of any restrictions on investments.
Investment in certain foreign emerging market debt obligations may be re-
stricted or controlled to varying degrees. These restrictions or controls may
at times preclude investment in certain foreign emerging market debt obliga-
tions and increase the expenses of a Series.
ALLOCATION AMONG EMERGING MARKETS: The Emerging Markets Equity Series may
allocate all or a portion of its investments in emerging market securities
among the emerging markets of Latin America, Asia, Africa, the Middle East and
the developing countries of Europe, primarily in Eastern Europe. The Series
will allocate its investments among these emerging markets in accordance with
the Adviser's and the Sub-Adviser's determination as to the allocation most
appropriate with respect to the Series' investment objective and policies. The
Series may invest its assets allocated to investment in emerging markets with-
out limitation in any particular region, and, in accordance with the Adviser's
and the Sub-Adviser's investment discretion, at times may invest all of its
assets allocated to investment in emerging markets in securities of emerging
market issuers located in a single region (e.g., Latin America). To the extent
that the Series' investments are concentrated in one or a few emerging market
regions, the Series' investment performance correspondingly will be more de-
pendent upon the economic, political and social conditions and changes in
those regions. The ability of the Series to allocate its investments among
emerging market regions without restriction may have the effect of increasing
the volatility of the Series, as compared to a series which limits such allo-
cations.
INVESTMENTS IN ONE OR A LIMITED NUMBER OF COUNTRIES: The Emerging Markets
Equity Series will seek to reduce risk by investing its assets in a number of
markets and issuers. However, the Series may invest up to 50% of its net as-
sets in issuers located in a single country. To the extent that the Series in-
vests a significant portion of its assets in a single or limited number of
countries, the Series' investment performance correspondingly will be more de-
pendent upon the economic, political and social conditions and changes in that
country or countries, and the risks associated with investments in such coun-
try or countries will be particularly significant. The ability of the Series
to focus its investments in one or a limited number of countries may have the
effect of increasing the volatility of the Series.
39
<PAGE>
FOREIGN CURRENCIES: Because the Emerging Markets Equity Series may invest up
to 100% of its assets in securities denominated in currencies other than the
U.S. dollar, and because the Series may hold foreign currencies, the value of
the Series' investments, and the value of dividends and interest earned by the
Series, may be significantly affected by changes in currency exchange rates.
Some foreign currency values may be volatile, and there is the possibility of
governmental controls on currency exchange or governmental intervention in
currency markets, which could adversely affect the Series. Although the Ad-
viser and Sub-Adviser may attempt to manage currency exchange rate risks,
there is no assurance that the Adviser and Sub-Adviser will do so at an appro-
priate time or that the Adviser and Sub-Adviser will be able to predict ex-
change rates accurately. For example, if the Adviser and Sub- Adviser hedge
the Series' exposure to a foreign currency, and that currency's value rises,
the Series will lose the opportunity to participate in the currency's appreci-
ation. The Series may hold foreign currency received in connection with in-
vestments in foreign securities, and enter into Forward Contracts, Futures
Contracts and Options on Foreign Currencies when, in the judgment of the Ad-
viser or Sub-Adviser, it would be beneficial to convert such currency into
U.S. dollars at a later date, based on anticipated changes in the relevant ex-
change rates. While the holding of foreign currencies will permit the Series
to take advantage of favorable movements in the applicable exchange rate, it
also exposes the Series to risk of loss if such rates move in a direction ad-
verse to the Series' position. Such losses could also adversely affect the Se-
ries' hedging strategies. See the SAI for further discussion of the holding of
foreign currencies as well as the associated risks.
NON-DIVERSIFICATION: Each of the World Governments Series and the Utilities
Series is "non-diversified," as that term is defined in the Investment Company
Act of 1940 ( the "1940 Act"), but intends to qualify as a "regulated invest-
ment 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 re-
spect to its portfolio securities than a fund that invests in a broader range
of securities, because changes in the financial condition or market assessment
of a single issuer may cause greater fluctuations in the Series' total return
and the net asset value of its shares.
----------------
SHORT-TERM INVESTMENTS FOR TEMPORARY DEFENSIVE PURPOSES -- During periods of
unusual market conditions when the Adviser or Sub-Adviser, as applicable, be-
lieves 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 (includ-
ing certificates of deposit, bankers' acceptances, time deposits and repur-
chase agreements), commercial paper, short-term notes, U.S. Government Securi-
ties and related repurchase agreements.
PORTFOLIO TRADING
Each Series intends to manage its portfolio by buying and selling securi-
ties, 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 invest-
ment objectives. In trading portfolio securities, a Series seeks to take ad-
vantage of market developments, yield disparities and variations in the cred-
itworthiness of issuers. For a description of the strategies
40
<PAGE>
which may be used by the Series in trading portfolio securities, see "Portfo-
lio Transactions and Brokerage Commissions" in the SAI. The Total Return Se-
ries' portfolio will be managed actively with respect to the Series' fixed in-
come securities and the asset allocations modified as the Adviser deems neces-
sary. 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 Re-
turn Series does not intend to trade in securities for short-term profits and
anticipates that portfolio securities ordinarily will be held for one year or
longer. However, the Series will effect trades whenever it believes that
changes in its portfolio securities are appropriate.
Because each of the Utilities Series, the High Income Series, the World Gov-
ernments 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 Emerg-
ing Markets Equity Series is not anticipated to have a portfolio turnover rate
in excess of 100%.
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain, and maintain the availability of,
execution at the most favorable prices and in the most effective manner possi-
ble. 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 Ad-
viser may consider sales of Contracts for which the Trust is an investment op-
tion, 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 Se-
ries' investment limitations, policies and rating standards are adhered to at
the time of purchase or utilization of assets; a subsequent change in circum-
stances will not be considered to result in a violation of policy.
41
<PAGE>
7.MANAGEMENT OF THE SERIES
The Trust's Board of Trustees, as part of its overall management responsi-
bility, oversees various organizations responsible for each Series' day-to-day
management.
INVESTMENT ADVISER -- MFS manages each Series pursuant to an Amended and Re-
stated Investment Advisory Agreement with the Trust on behalf of each Series
dated April 14, 1994, as amended and restated on October 16, 1997 (the "Advi-
sory 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 serv-
ices 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 as-
sets of each Series:
<TABLE>
<CAPTION>
PERCENTAGE OF THE AVERAGE
DAILY NET ASSETS
SERIES OF EACH SERIES
- ------ -------------------------
<S> <C>
Emerging Growth Series................................ 0.75%
Value Series.......................................... 0.75%
Research Series....................................... 0.75%
Growth With Income Series............................. 0.75%
Total Return Series................................... 0.75%
Utilities Series...................................... 0.75%
High Income Series.................................... 0.75%
World Governments Series.............................. 0.75%
Emerging Markets Equity Series........................ 1.25%
Bond Series........................................... 0.60%
Limited Maturity Series............................... 0.55%
Money Market Series................................... 0.50%
</TABLE>
For the fiscal year ended December 31, 1996, MFS received the following man-
agement fees from the Series under the Advisory Agreement and assumed the fol-
lowing 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>
FCM--The Emerging Markets Equity Series Advisory Agreement permits the Ad-
viser from time to time to engage one or more sub-advisers to assist in the
performance of its services. Pursuant to the Advisory Agreement, the Adviser
has engaged Foreign & Colonial Management Ltd., a company incorporated under
the laws of England and Wales
42
<PAGE>
("FCM"), located at Exchange House, Primrose Street, London EC2A 2NY, United
Kingdom, as sub-adviser to render advisory services to the Series. FCM is a
wholly owned subsidiary of Hypo Foreign & Colonial Management (Holdings) Ltd.
("Hypo F&C"). Sixty-Five percent of the outstanding voting securities of Hypo
F&C is owned by Hypo (U.K.) Holdings Ltd., which is a wholly owned subsidiary
of HYPO-BANK (Bayerische Hypotheken-und Wechsel-Bank AG), the oldest publicly
listed, and fifth largest, commercial bank in Germany, founded in 1835. The
remaining 35% of the outstanding voting securities of Hypo F&C is owned by 4
closed-end publicly listed investment trusts managed by FCM, including Foreign
& Colonial Investment Trust PLC. FCM has a history of money management dating
from 1868 and the establishment of the world's oldest closed-end fund, Foreign
& Colonial Investment Trust PLC. As of May 31, 1997, FCM managed approximately
U.S. $45.64 billion of assets, including approximately U.S. $35.85 billion of
assets in equity securities and approximately U.S. $9.79 billion of assets in
fixed income securities.
Under a separate Sub-Advisory Agreement between the Adviser and FCM, dated
October 16, 1997 (the "Sub-Advisory Agreement"), the Adviser may delegate to
FCM the authority to make investment decisions for the Series. It is presently
intended that FCM will provide portfolio management services for the Series.
For its services, the Adviser pays FCM a management fee, computed and paid
monthly, in an amount equal to 0.65% of the average daily net assets managed
by FCM of the Series on an annualized basis. The Adviser and FCM have agreed
to cooperate in distributing, advising and managing investment products
throughout the world. In this arrangement they anticipate that certain
expenses and revenues relating to their cooperative activities, including
investment advisory fees received from the Series and certain expenses
incurred by MFS, FCM and their affiliates attributable to their services to
the Series, will be shared.
FCEM--The Emerging Markets Equity Series Sub-Advisory Agreement permits FCM
from time to time to engage one or more sub-advisers to assist in the perfor-
mance of its services. Pursuant to the Sub-Advisory Agreement, FCM has engaged
Foreign & Colonial Emerging Markets Limited, a company incorporated under the
laws of England and Wales ("FCEM"), located at Exchange House, Primrose
Street, London EC2A 2NY, United Kingdom, as sub-adviser to render advisory
services to the Series. FCEM is a wholly owned subsidiary of FCM. FCEM serves
as the investment adviser to public closed-end and open-end funds and segre-
gated accounts specializing in emerging markets. As of May 31, 1997, FCEM man-
aged approximately U.S. $4.92 billion of assets invested in emerging markets.
Under a separate Sub-Advisory Agreement between FCM and FCEM, dated October
16, 1997, FCM may delegate to FCEM the authority to make investment decisions
for the Series. It is presently intended that FCEM will provide management
services for the portion of the assets of the Series invested in emerging mar-
kets securities. For its services, FCM pays FCEM a management fee, computed
and paid monthly, in an amount equal to 0.65% of the average daily net assets
managed by FCEM of the Series on an annualized basis.
The identity and background of the portfolio managers for each Series is set
forth below. Unless indicated otherwise, each portfolio manager has acted in
that capacity since the commencement of investment operations of each Series.
<TABLE>
<CAPTION>
SERIES PORTFOLIO MANAGERS
------ ------------------
<C> <S>
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.
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
SERIES PORTFOLIO MANAGERS
------ ------------------
<C> <S>
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.
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.
World Governments Series Stephen C. Bryant, a Senior Vice President of the
Adviser, has been employed by the Adviser as a
portfolio manager since 1987.
Emerging Markets Dr. Arnab Kumar Banerji, Chief Investment Officer of
Equity Series FCEM, has been employed by FCEM as a portfolio
manager since 1993. Prior to 1993, Mr. Banerji
served as Joint Head of Emerging Markets for
Citibank Global Asset Management. Jeffery Chowdhry,
a Director of FCEM, has been employed by FCEM as a
portfolio manager since 1994. Prior to 1994, Mr.
Chowdry was a portfolio manager at BZW Investment
Management.
Bond Series Geoffrey L. Kurinsky, a Senior Vice President of the
Limited Maturity Series Adviser, has been employed by the Adviser as a
Money Market Series portfolio manager since 1987.
</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(R) Municipal Income Trust, MFS
Multimarket Income Trust, MFS Government Markets Income Trust, MFS Intermedi-
ate Income Trust, MFS Charter Income Trust, MFS Special Value Trust, MFS In-
stitutional Trust, MFS Union Standard Trust, MFS/Sun Life Series Trust, and
seven variable accounts, each of which is a registered investment company es-
tablished 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 con-
tracts. MFS and its wholly owned subsidiary, MFS Asset Management, Inc., pro-
vide investment advice to substantial private clients.
44
<PAGE>
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 Invest-
ors Trust. Net assets under the management of the MFS organization were ap-
proximately $52.8 billion on behalf of approximately 2.3 million investor ac-
counts as of February 28, 1997. As of such date, the MFS organization managed
approximately $28.9 billion of assets invested in equity securities and ap-
proximately $19.4 billion of assets invested in fixed income securities. Ap-
proximately $4.0 billion of the assets managed by MFS are invested in securi-
ties of foreign issuers and non-U.S. dollar-denominated securities of U.S. is-
suers. 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 FCM. As part of this alliance,
the portfolio managers and investment analysts of MFS and FCM share their
views on a variety of investment related issues, such as the economy, securi-
ties markets, portfolio securities and their issuers, investment recommenda-
tions, strategies and techniques, risk analysis, trading strategies and other
portfolio management matters. MFS has access to the extensive international
equity investment expertise of FCM, and FCM has access to the extensive U.S.
equity investment expertise of MFS. MFS and FCM each have investment personnel
working in each other's offices in Boston and London, respectively.
In certain instances there may be securities which are suitable for a Se-
ries' portfolio as well as for portfolios of other clients of MFS or clients
of FCM or FCEM. Some simultaneous transactions are inevitable when several
clients receive investment advice from MFS and FCM or FCEM, 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 ef-
fect of lowering that Series' expense ratio, while the redemption by the Ad-
viser of shares of a Series may have the effect of increasing that Series' ex-
pense ratio.
DISTRIBUTOR -- MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidi-
ary 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 serv-
ices 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 servic-
es. 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.
45
<PAGE>
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 re-
ceived by the Trust before the close of regular trading on the Exchange (nor-
mally 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 deter-
mined 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 re-
ceipt 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. Pur-
chase 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 holi-
day closings or during which trading on the Exchange is restricted; (ii) when
the SEC determines that a state of emergency exists which may make payment or
transfer not reasonably practicable; (iii) as the SEC may by order permit for
the protection of the security holders of the Trust; or (iv) at any time when
the Trust may, under applicable laws, rules and regulations, suspend payment
on the redemption of its shares.
Should any conflict between Contract holders arise which would require that
a substantial amount of net assets be withdrawn from any Series, orderly port-
folio management could be disrupted to the potential detriment of such Con-
tract.
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 Mar-
ket 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 in-
vestment 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 short-term capital gains. In determining the net investment income
available for distribution, a Series may rely on projections of its antici-
pated net investment income (which may include short-term capital gains from
the sales of securities or other assets, and, if allowed by Series' investment
restrictions, premiums from options written), over a longer term, rather than
its actual net investment income for the period.
46
<PAGE>
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 in-
vestment 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 tax-
es.
Shares of the Series are offered only to the Participating Insurance Compa-
nies' separate accounts that fund Contracts. See the applicable Contract pro-
spectus for a discussion of the federal income tax treatment of (1) the sepa-
rate accounts that purchase and hold Series shares and (2) the holders of the
Contracts that are funded through those accounts. In addition to the diversi-
fication 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 enti-
tled to vote separately to approve investment advisory agreements or changes
in investment restrictions with respect to that Series, but shares of all Se-
ries vote together in the election of Trustees and selection of accountants.
Additionally, each Series will vote separately on any other matter that af-
fects solely that Series, but will otherwise vote together with all other Se-
ries on all other matters. The Trust does not intend to hold annual share-
holder meetings. The Declaration of Trust provides that a Trustee may be re-
moved 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 Se-
ries 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 certif-
icates will not be issued.
The Trust is an entity of the type commonly known as a "Massachusetts busi-
ness trust." Under Massachusetts law, shareholders of such a trust may, under
certain circumstances, be held personally liable as partners for its obliga-
tions. 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.
47
<PAGE>
As of March 31, 1997, 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 In-
come 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, Cincin-
nati, OH, own 28.17% and 52.03%, respectively, of the Growth With Income Se-
ries' 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 Se-
ries; 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 Emerging Markets Equity 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 his-
torical results and is not intended to indicate future performance. Perfor-
mance quoted for a Series includes the effect of deducting that Series' ex-
penses, but may not include charges and expenses attributable to any particu-
lar 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 condi-
tions, 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 An-
nual Reports may be obtained without charge by contacting the Shareholder Ser-
vicing Agent (see back cover for address and phone number).
MONEY MARKET SERIES: From time to time, quotations of the Money Market Se-
ries' "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 dur-
ing that week is assumed to be generated during each week over a 365 day pe-
riod 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 as-
sumed to be reinvested. The effective yield will be slightly higher than the
yield because of the compounding effect of this assumed reinvestment.
OTHER SERIES: From time to time, quotations of a Series' total return and
yield may be included in advertisements, sales literature or reports to share-
holders or prospective investors. The total return of a Series refers to re-
turn 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. Cumu-
lative total return represents the cumulative change in value of an investment
in a Series. Both will assume that all dividends and capital gains distribu-
tions 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 in-
come is then "annualized." That is, the amount of income generated by the Se-
ries 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.
48
<PAGE>
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 repurchas-
ing and redeeming shares and servicing shareholder accounts; expenses of pre-
paring, printing and mailing prospectuses, periodic reports, notices and proxy
statements to shareholders and to governmental officers and commissions; bro-
kerage and other expenses connected with the execution, recording and settle-
ment 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 re-
quired 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 pro-
spectuses 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 ex-
cept for management fees, do not exceed the following percentages of the aver-
age 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 Per-
centage. The payments made by MFS on behalf of each Series under this arrange-
ment are subject to reimbursement by the Series to MFS, which will be accom-
plished 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 as-
sets for its then current fiscal year, with a limitation that immediately af-
ter such payment the Series' "Other Expenses" will not exceed the Maximum Per-
centage. 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 pay-
ment of such reimbursable expenses by MFS or December 31, 2004.
SHAREHOLDER COMMUNICATIONS
Owners of Contracts issued by Participating Insurance Companies for which
shares of one or more Series are the investment vehicle will receive from the
Participating Insurance Companies semi-annual financial statements and audited
year-end financial statements certified by the Trust's independent certified
public accountants. Each report will show the investments owned by the Trust
and the valuations thereof as determined by the Trustees and will provide
other information about the Trust and its operations.
Participating Insurance Companies with inquiries regarding the Trust may
call the Trust's Shareholder Servicing Agent. (See back cover for address and
phone number.)
----------------
The SAI for the Trust, dated September 30, 1997, as amended or supplemented
from time to time, contains more detailed information about each of the Se-
ries, including information related to: (i) the investment policies and re-
strictions 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 cal-
culate yield and total rate of return quotations of each Series; (vi) the de-
termination of net asset value of shares of each Series; and (vii) certain
voting rights of shareholders of each Series.
49
<PAGE>
APPENDIX A
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the qual-
ity of various debt instruments. It should be emphasized, however, that rat-
ings 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 exception-
ally stable margin and principal is secure. While the various protective ele-
ments are likely to change, such changes as can be visualized are most un-
likely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all stan-
dards. 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 protec-
tive elements may be of greater amplitude or there may be other elements pres-
ent which make the long-term risks appear somewhat larger than in Aaa securi-
ties.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving secu-
rity 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 pay-
ments and principal security appear adequate for the present but certain pro-
tective elements may be lacking or may be characteristically unreliable over
any great length of time. Such bonds lack outstanding investment characteris-
tics 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 char-
acterizes 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 shortcom-
ings.
C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has
been suspended or withdrawn, it may be for reasons unrelated to the quality of
the issue.
A-1
<PAGE>
Should no rating be assigned, the reason may be one of the following:
1. an application for rating was not received or accepted;
2. the issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy;
3. there is a lack of essential data pertaining to the issue or issuer; or
4. the issue was privately placed, in which case the rating is not pub-
lished 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 prin-
cipal 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 inter-
est and repay principal. Whereas it normally exhibits adequate protection pa-
rameters, 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 in-
adequate capacity to meet timely interest and principal payments. The BB rat-
ing category is also used for debt subordinated to senior debt that is as-
signed 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.
A-2
<PAGE>
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 jeopar-
dized.
PLUS (+) OR MINUS (-): The ratings from AA to CCC may be modified by the ad-
dition of a plus or minus sign to show relative standing within the major rat-
ing categories.
NR: Indicates that no public rating has been requested, that there is insuf-
ficient 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 indi-
cates that the degree of safety regarding timely payment is either overwhelm-
ing 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 capac-
ity 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 reli-
ance on debt and ample asset protection; (4) broad margins in earnings cover-
age of fixed financial charges and high internal cash generation; and (5) well
established access to a range of financial markets and assured sources of al-
ternate liquidity.
FITCH INVESTORS SERVICE, INC.
AAA: Bonds considered to be investment grade and of the highest credit qual-
ity. The obligor has an exceptionally strong ability to pay interest and pre-
pay 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, al-
though not quite as strong as bonds rated "AAA'. Because bonds rated in the
"AAA' and "AA' categories are not significantly vulnerable to foreseeable fu-
ture developments, short-term debt of these issuers is generally rated "F-1+'.
A: Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings.
A-3
<PAGE>
BBB: Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is consid-
ered 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 as-
sist 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 through-
out 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.
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 in-
dicate 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 oc-
currence that is likely to result in a rating change and the likely direction
of such change. These are designated a "Positive," indicating a potential up-
grade, "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 qual-
ity. 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, al-
though not quite as strong as bonds rated "AAA'. Because bonds rated in the
"AAA' and "AA' categories are not significantly vulnerable to foreseeable fu-
ture developments, short-term debt of these issuers is generally rated "D-1+'.
A-4
<PAGE>
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 consid-
ered 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 through-
out 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.
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 obli-
gations.
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 sup-
ported by good fundamental protection factors. Risk factors are very small.
D-2: Good certainty of timely payment. Liquidity factors and company funda-
mentals 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 en-
gaged 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 out-
side of their traditional geographic areas. Electric utility companies histor-
ically 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. In-
creased scrutiny might result in higher operating costs and higher capital ex-
penditures, 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 nu-
clear 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 tele-
phone networks comprise the greatest portion of this segment. Telephone compa-
nies 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 un-
dergoing 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 pric-
es. 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, envi-
ronmental 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 frag-
mented 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, in-
cluding 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 objec-
tive, policies and restrictions indicate the extent to which the Series may
purchase securities in the various categories.
C-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, 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
[LOGO OF MFS INVESTMENT MANAGEMENT APPEARS HERE]
MFS(R) VARIABLE INSURANCE TRUST
500 Boylston Street, Boston, MA 02116
--------------------------
MFS(R) VARIABLE INSURANCE TRUST
[LOGO OF MFS VARIABLE INSURANCE TRUST APPEARS HERE]
PROSPECTUS
SEPTEMBER 30, 1997
--------------------------
<PAGE>
MFS(R) VARIABLE STATEMENT OF
INSURANCE TRUST/SM/ ADDITIONAL INFORMATION
September 30, 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
1. General Information and Definitions.................................. 2
2. Investment Techniques................................................ 2
3. Investment Restrictions.............................................. 20
4. Management of the Trust.............................................. 21
Trustees............................................................. 21
Officers............................................................. 21
Trustee Compensation Table........................................... 23
Investment Adviser................................................... 23
Investment Advisory Agreement........................................ 23
Administrator........................................................ 25
Custodian............................................................ 25
Shareholder Servicing Agent.......................................... 25
Distributor.......................................................... 25
5. Portfolio Transactions and Brokerage Commissions..................... 25
6. Tax Status........................................................... 27
7. Net Income and Distributions......................................... 27
8. Determination of Net Asset Value; Performance Information............ 28
9. Description of Shares, Voting Rights and Liabilities................. 30
10. Independent Auditors and Financial Statements........................ 31
11. Appendix A--Performance Quotations................................... A-1
</TABLE>
MFS(R) 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 in-
vestors but which is not necessarily included in the Trust's Prospectus, dated
September 30, 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 ad-
dress and phone number).
THIS SAI RELATES TO THE TWELVE SERIES OF THE TRUST IDENTIFIED ON PAGE 2 HERE-
OF. SHARES OF THESE SERIES ARE OFFERED TO SEPARATE ACCOUNTS OF CERTAIN INSUR-
ANCE COMPANIES ("PARTICIPATING INSURANCE COMPANIES") THAT FUND VARIABLE ANNU-
ITY AND VARIABLE LIFE INSURANCE CONTRACTS ("CONTRACTS"). PARTICIPATING INSUR-
ANCE 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 PRO-
SPECTUS FOR THOSE PARTICIPATING INSURANCE COMPANIES WILL BE REVISED TO DE-
SCRIBE 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 CON-
TAINED HEREIN SHOULD BE DISREGARDED.
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
<PAGE>
1. GENERAL INFORMATION AND DEFINITIONS
MFS Variable Insurance Trust (the "Trust") is a professionally managed open-
end management investment company (a "mutual fund") consisting of twelve sepa-
rate series: MFS Emerging Growth Series (the "Emerging Growth Series"), MFS
Value Series (the "Value Series"), MFS Research Series (the "Research Se-
ries"), MFS Growth With Income Series (the "Growth With Income Series"), MFS
Total Return Series (the "Total Return Series"), MFS Utilities Series (the
"Utilities Series"), MFS High Income Series (the "High Income Series"), MFS
World Governments Series (the "World Governments Series"), MFS/Foreign & Colo-
nial Emerging Markets Equity Series (the "Emerging Markets Equity Series"),
MFS Bond Series (the "Bond Series"), MFS Limited Maturity Series (the "Limited
Maturity Series") and MFS Money Market Series (the "Money Market Series") (in-
dividually or collectively hereinafter referred to as a "Series" or the "Se-
ries"). The Emerging Growth Series was previously known as the "OTC Series"
until its name was changed on June 1, 1995. The Value Series was previously
known as the "Growth Series" until its name was changed on April 25, 1996. The
Emerging Markets Equity Series was previously known as the "Strategic Fixed
Income Series" until its name was changed on July 31, 1997.
Each Series' investment adviser and distributor is, respectively, Massachu-
setts Financial Services Company ("MFS" or the "Adviser") and MFS Fund Dis-
tributors, Inc. ("MFD" or the "Distributor"), each a Delaware corporation.
The Emerging Markets Equity Series has retained as its sub-advisers Foreign &
Colonial Management Ltd. ("FCM") and Foreign & Colonial Emerging Markets Lim-
ited ("FCEM") (collectively, the "Sub-Adviser"), both of which are located at
Exchange House, Primrose Street, London EC2A 2NY, United Kingdom.
2. INVESTMENT TECHNIQUES
EMERGING MARKETS: The Emerging Markets Equity Series may invest up to 100% of
its assets in securities of government, government-related, supranational and
corporate issuers located in emerging markets. Each other Series may invest in
emerging market securities to the extent that they can invest in foreign secu-
rities. Such investments entail significant risks as described in the Prospec-
tus under the caption "Additional Risk Factors" and as more fully described
below.
COMPANY DEBT -- Governments of many emerging market countries have exercised
and continue to exercise substantial influence over many aspects of the pri-
vate sector through the ownership or control of many companies, including some
of the largest in any given country. As a result, government actions in the
future could have a significant effect on economic conditions in emerging mar-
kets, which in turn, may adversely affect companies in the private sector,
general market conditions and prices and yields of certain of the securities
in the Series' portfolio. Expropriation, confiscatory taxation, national-
ization, political, economic or social instability or other similar develop-
ments have occurred frequently over the history of certain emerging markets
and could adversely affect the Series' assets should these conditions recur.
SOVEREIGN DEBT -- Investment in sovereign debt can involve a high degree of
risk. The governmental entity that controls the repayment of sovereign debt
may not be able or willing to repay the principal and/or interest when due in
accordance with the terms of such debt. A governmental entity's willingness or
ability to repay principal and interest due in a timely manner may be affected
by, among other factors, its cash flow situation, the extent of its foreign
reserves, the availability of sufficient foreign exchange on the date a pay-
ment is due, the relative size of the debt service burden to the economy as a
whole, the governmental entity's policy towards the International Monetary
Fund and the political constraints to which a governmental entity may be sub-
ject. Governmental entities may also be dependent on expected disbursements
from foreign governments, multilateral agencies and others abroad to reduce
principal and interest on their debt. The commitment on the part of these gov-
ernments, agencies and others to make such disbursements may be conditioned on
a governmental entity's implementation of economic reforms and/or economic
performance and the timely service of such debtor's obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may result in the cancellation of such third
parties' commitments to lend funds to the governmental entity, which may fur-
ther impair such debtor's ability or willingness to service its debts in a
timely manner. Consequently, governmental entities may default on their sover-
eign debt. Holders of sovereign debt (including the Series) may be requested
to participate in the rescheduling of such debt and to extend further loans to
governmental entities. There is no bankruptcy proceeding by which sovereign
debt on which governmental entities have defaulted may be collected in whole
or in part.
Emerging market governmental issuers are among the largest debtors to commer-
cial banks, foreign governments, international financial organizations and
other financial institutions. Certain emerging market governmental issuers
have not been able to make payments of interest on or principal of debt obli-
gations as those payments have come due. Obligations arising from past re-
structuring agreements may affect the economic performance and political and
social stability of those issuers.
The ability of emerging market governmental issuers to make timely payments on
their obligations is likely to be influenced strongly by the issuer's balance
of payments, including export performance, and its access to international
credits and investments. An emerging market whose exports are concentrated in
a few commodities could be vulnerable to a decline in the international prices
of one or more of those commodities. Increased protectionism on the part of an
emerging market's trading partners could also adversely affect the country's
exports and tarnish its trade account surplus, if any. To the extent that
emerging markets receive payment for their exports in currencies
2
<PAGE>
other than dollars or non-emerging market currencies, its ability to make debt
payments denominated in dollars or non-emerging market currencies could be af-
fected.
To the extent that an emerging market country cannot generate a trade surplus,
it must depend on continuing loans from foreign governments, multilateral or-
ganizations or private commercial banks, aid payments from foreign governments
and on inflows of foreign investment. The access of emerging markets to these
forms of external funding may not be certain, and a withdrawal of external
funding could adversely affect the capacity of emerging market country govern-
mental issuers to make payments on their obligations. In addition, the cost of
servicing emerging market debt obligations can be affected by a change in in-
ternational interest rates since the majority of these obligations carry in-
terest rates that are adjusted periodically based upon international rates.
Another factor bearing on the ability of emerging market countries to repay
debt obligations is the level of international reserves of the country. Fluc-
tuations in the level of these reserves affect the amount of foreign exchange
readily available for external debt payments and thus could have a bearing on
the capacity of emerging market countries to make payments on these debt obli-
gations.
LIQUIDITY; TRADING VOLUME; REGULATORY OVERSIGHT -- The securities markets of
emerging market countries are substantially smaller, less developed, less liq-
uid and more volatile than the major securities markets in the U.S. Disclosure
and regulatory standards are in many respects less stringent than U.S stan-
dards. Furthermore, there is a lower level of monitoring and regulation of the
markets and the activities of investors in such markets.
The limited size of many emerging market securities markets and limited trad-
ing volume in the securities of emerging market issuers compared to volume of
trading in the securities of U.S. issuers could cause prices to be erratic for
reasons apart from factors that affect the soundness and competitiveness of
the securities issuers. For example, limited market size may cause
prices to be unduly influenced by traders who control large positions. Adverse
publicity and investors' perceptions, whether or not based on in-depth funda-
mental analysis, may decrease the value and liquidity of portfolio securities.
The risk also exists that an emergency situation may arise in one or more
emerging markets, as a result of which trading of securities may cease or may
be substantially curtailed and prices for the Series' securities in such mar-
kets may not be readily available. The Trust may suspend redemption of its
shares for any period during which an emergency exists, as determined by the
Securities and Exchange Commission (the "SEC"). Accordingly, if the Series be-
lieves that appropriate circumstances exist, it will promptly apply to the SEC
for a determination that an emergency is present. During the period commencing
from the Series' identification of such condition until the date of the SEC
action, the Series' securities in the affected markets will be valued at fair
value determined in good faith by or under the direction of the Board of
Trustees.
DEFAULT; LEGAL RECOURSE -- The Series may have limited legal recourse in the
event of a default with respect to certain debt obligations it may hold. If
the issuer of a fixed-income security owned by the Series defaults, the Series
may incur additional expenses to seek recovery. Debt obligations issued by
emerging market governments differ from debt obligations of private entities,
remedies from defaults on debt obligations issued by emerging market govern-
ments, unlike those on private debt, must be pursued in the courts of the de-
faulting party itself. The Series' ability to enforce its rights against pri-
vate issuers may be limited. The ability to attach assets to enforce a judg-
ment may be limited. Legal recourse is therefore somewhat diminished. Bank-
ruptcy, moratorium and other similar laws applicable to private issuers of
debt obligations may be substantially different from those of other countries.
The political context, expressed as an emerging market governmental issuer's
willingness to meet the terms of the debt obligation, for example, is of con-
siderable importance. In addition, no assurance can be given that the holders
of commercial bank debt may not contest payments to the holders of debt obli-
gations in the event of default under commercial bank loan agreements.
INFLATION -- Many emerging markets have experienced substantial, and in some
periods extremely high, rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have adverse ef-
fects on the economies and securities markets of certain emerging market coun-
tries. In an attempt to control inflation, wage and price controls have been
imposed in certain countries. Of these countries, some, in recent years, have
begun to control inflation through prudent economic policies.
WITHHOLDING -- Income from securities held by the Series could be reduced by a
withholding tax on the source or other taxes imposed by the emerging market
countries in which the Series makes its investments. The Series' net asset
value may also be affected by changes in the rates or methods of taxation ap-
plicable to the Series or to entities in which the Series has invested. The
Adviser and the Sub-Adviser will consider the cost of any taxes in determining
whether to acquire any particular investments, but can provide no assurance
that the taxes will not be subject to change.
FOREIGN CURRENCIES -- The Series may invest in securities denominated in for-
eign currencies. Accordingly, changes in the value of these currencies against
the U.S. dollar may result in corresponding changes in the U.S. dollar value
of the Series' assets denominated in those currencies. The Series may attempt
to minimize the impact of these changes to the U.S. dollar value of the Se-
ries' portfolio by engaging in certain hedging practices, such as entering
into Futures Contracts and Options on Foreign Securities as described below.
Some emerging market countries also may have managed currencies, which are not
free floating against the U.S. dollar. In
3
<PAGE>
addition, there is risk that certain emerging market countries may restrict
the free conversion of their currencies into other currencies. Further, cer-
tain emerging market currencies may not be internationally traded. Certain of
these currencies have experienced a steep devaluation relative to the U.S.
dollar. Any devaluations in the currencies in which the Series' portfolio se-
curities are denominated may have a detrimental impact on the Series' net as-
set value.
INVESTMENT IN OTHER INVESTMENT COMPANIES: The Emerging Markets Equity Series'
investment in other investment companies, as described in the Prospectus, is
limited in amount by the Investment Company Act of 1940, as amended (the "1940
Act"), and applicable state securities laws. Such investment may also involve
the payment of substantial premiums above the value of such investment compa-
nies' portfolio securities, and the total return on such investment will be
reduced by the operating expenses and fees of such other investment companies,
including advisory fees.
LENDING OF PORTFOLIO SECURITIES: Each of the Series (except the Money Market
Series) may seek to increase its income by lending portfolio securities. Such
loans will usually be made only to member firms of the New York Stock Exchange
(the "Exchange") (and subsidiaries thereof) and member banks of the Federal
Reserve System, and would be required to be secured continuously by collateral
in cash, United States ("U.S.") Treasury securities or an irrevocable letter
of credit maintained on a current basis at an amount at least equal to the
market value of the securities loaned. A Series would have the right to call a
loan and obtain the securities loaned at any time on customary industry set-
tlement notice (which will not usually exceed five business days). For the du-
ration 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 antic-
ipation 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 re-
covery or even loss of rights in the collateral should the borrower of the se-
curities 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 se-
curities 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 be-
ing 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 re-
purchase price on repurchase. In either case, the income to the Series is un-
related 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 liqui-
date the securities, the seller is subject to a proceeding under the bank-
ruptcy 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 Ad-
viser 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 Se-
ries has the right to make margin calls at any time if the value of the secu-
rities 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 "for-
ward delivery" basis, it will set up procedures consistent with the General
Statement of Policy of the Securities and Exchange Commission (the "SEC") con-
cerning 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 pur-
poses 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.
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MORTGAGE "DOLLAR ROLL" TRANSACTIONS: Each of the Total Return Series, the Bond
Series, the World Governments Series, the Limited Maturity Series, the High
Income Series and the Utilities Series may enter into mortgage "dollar roll"
transactions pursuant to which it sells mortgage-backed securities for deliv-
ery in the future and simultaneously contracts to repurchase substantially
similar securities on a specified future date. The Series record these trans-
actions as sale and purchase transactions, rather than as borrowing transac-
tions. During the roll period, a Series foregoes principal and interest paid
on the mortgage-backed securities. A Series is compensated for the lost inter-
est 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 inter-
est earned on the cash proceeds of the initial sale. A Series may also be com-
pensated 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 bene-
fit from the price differential between the current sales price and the repur-
chase price.
CORPORATE ASSET-BACKED SECURITIES: Each of the Emerging Growth Series, the To-
tal Return Series, the Bond Series, the Limited Maturity Series, the High In-
come Series and the Utilities Series may invest in corporate asset-backed se-
curities. These securities, issued by trusts and special purpose corporations,
are backed by a pool of assets, such as credit card and automobile loan re-
ceivables, 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 auto-
mobile receivables. In addition, because of the large number of vehicles in-
volved 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. There-
fore, 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 repre-
senting 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) li-
quidity protection and (ii) protection against losses resulting from ultimate
default by an obligor on the underlying assets. Liquidity protection refers to
the provision of advances, generally by the entity administering the pool of
assets, to ensure that the receipt of payments on the underlying pool occurs
in a timely fashion. Protection against losses resulting from ultimate default
ensures payment through insurance policies or letters of credit obtained by
the issuer or sponsor from third parties. A Series will not pay any additional
or separate fees for credit support. The degree of credit support provided for
each issue is generally based on historical information respecting the level
of credit risk associated with the underlying assets. Delinquency or loss in
excess of that anticipated or failure of the credit support could adversely
affect the return on an investment in such a security.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES:
Each of the Bond Series, the World Governments Series, the Limited Maturity
Series, the High Income Series and the Utilities Series may invest a portion
of its assets in collateralized mortgage obligations or "CMOs", which are debt
obligations collateralized by mortgage loans or mortgage pass-through securi-
ties (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 distribu-
tion 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 distribu-
tion date have been paid in full. Certain CMOs may be stripped (securities
which provide only the principal or interest factor of the underlying securi-
ty). See "Stripped Mortgage-Backed Securities" below for a discussion of the
risks of investing in these stripped securities and of investing in classes
consisting of principals of interest payments or principal payments.
Each of the Bond Series, the World Governments Series, the Limited Maturity
Series, the High Income Series and the Utilities Series may also invest in
parallel pay CMOs and Planned Amortization Class CMOs ("'PAC Bonds"). Parallel
pay CMOs are structured to provide payments of principal on each payment date
to more than one class. These simultaneous payments are taken into account in
calculating the stated maturity date or final distribution date of each class,
which, as with other CMO structures, must be retired by its stated maturity
date or final distribution date but may be retired earlier.
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STRIPPED MORTGAGE-BACKED SECURITIES: Each of the Bond Series, the World Gov-
ernments 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 propor-
tions of the interest and principal distributions from a pool of mortgage as-
sets. A common type of SMBS will have one class receiving some of the interest
and most of the principal from the Mortgage Assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the interest-only or
"IO" class) while the other class will receive all of the principal (the prin-
cipal-only or "PO" class). The yield to maturity on an IO is extremely sensi-
tive 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 under-
lying Mortgage Assets experience greater than anticipated prepayments of prin-
cipal, a Series may fail to fully recoup its initial investment in these secu-
rities. 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 trad-
ing markets for these securities have not yet developed, although the securi-
ties are traded among institutional investors and investment banking firms.
LOAN PARTICIPATIONS AND OTHER DIRECT INDEBTEDNESS: Each of the Emerging Growth
Series, the Value Series, the Total Return Series, the Emerging Markets Equity
Series and the High Income Series may purchase loan participations and other
direct indebtedness. In purchasing a loan participation, a Series acquires
some or all of the interest of a bank or other lending institution in a loan
to a corporate borrower. Many such loans are secured, although some may be
unsecured. Such loans may be in default at the time of purchase. Loans and
other direct indebtedness that are fully secured offer a Series more protec-
tion than an unsecured loan in the event of non-payment of scheduled interest
or principal. However, there is no assurance that the liquidation of collat-
eral from a secured loan or other direct indebtedness would satisfy the corpo-
rate borrower's obligation, or that the collateral can be liquidated.
These loans and other direct indebtedness are made generally to finance inter-
nal 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 re-
sponsible 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 Se-
ries 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 pur-
chase 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 oth-
erwise decide to do so (including at a time when the company's financial con-
dition 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 finan-
cial 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 institu-
tion 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 indebt-
edness, 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 institu-
tion and will treat both the borrower and the lending institution as an "issu-
er" 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 misrepresenta-
tion. In the absence of definitive regulatory guidance, each Series relies on
the Adviser's research in an attempt to avoid situations where fraud and mis-
representation could adversely affect a Series. In addition, loan participa-
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tions 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 ex-
ist 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 in-
vestments are illiquid, a Series will include them in the investment limita-
tions 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 is-
sued or guaranteed as to principal and interest by the U.S. Government, its
agencies, authorities or instrumentalities. Mortgage pass-through securities
are securities representing interests in "pools" of mortgage loans. Monthly
payments of interest and principal by the individual borrowers on mortgages
are passed through to the holders of the securities (net of fees paid to the
issuer or guarantor of the securities) as the mortgages in the underlying
mortgage pools are paid off. The average lives of mortgage pass-throughs are
variable when issued because their average lives depend on prepayment rates.
The average life of these securities is likely to be substantially shorter
than their stated final maturity as a result of unscheduled principal prepay-
ment. Prepayments on underlying mortgages result in a loss of anticipated in-
terest, 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 securi-
ties, 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 guar-
anteed by agencies or instrumentalities of the U.S. Government (such as the
Federal National Mortgage Association ("FNMA") or the Federal Home Loan Mort-
gage Corporation, ("FHLMC") which are supported only by the discretionary
authority of the U.S. Government to purchase the agency's obligations). Mort-
gage pass-through securities may also be issued by non-governmental issuers
(such as commercial banks, savings and loan institutions, private mortgage in-
surance 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. In-
stead, these securities provide a monthly payment which consists of both in-
terest 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. Ad-
ditional 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 sched-
uled payment dates regardless of whether the mortgagor actually makes the pay-
ment.
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 Devel-
opment. 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 mort-
gage 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 stockhold-
ers. 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
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created by such non-governmental issuers generally offer a higher rate of in-
terest than government and government-related pools because there are no di-
rect 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, in-
cluding individual loan, title, pool and hazard insurance and letters of cred-
it. The insurance and guarantees are issued by governmental entities, private
insurers and the mortgage poolers. There can be no assurance that the private
insurers or guarantors can meet their obligations under the insurance policies
or guarantee arrangements. A Series may also buy mortgage-related securities
without insurance or guarantees.
INDEXED SECURITIES: Each of the Value Series, the Total Return Series, the
High Income Series, the Bond Series, the Utilities Series, the World Govern-
ments Series and the Emerging Markets Equity Series may purchase securities
whose prices are indexed to the prices of other securities, securities indi-
ces, currencies, precious metals or other commodities, or other financial in-
dicators. Indexed securities typically, but not always, are debt securities or
deposits whose value at maturity (i.e., principal value) or coupon rate is de-
termined by reference to a specific instrument or statistic. Gold-indexed se-
curities, 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 for-
eign currencies, and may offer higher yields than U.S. dollar-denominated se-
curities of equivalent issuers. Currency-indexed securities may be positively
or negatively indexed; that is, their maturity value may increase when the
specified currency value increases, resulting in a security that performs sim-
ilarly to a foreign-denominated instrument, or their maturity value may de-
cline when foreign currencies increase, resulting in a security whose price
characteristics are similar to a put on the underlying currency. Currency-in-
dexed 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 perfor-
mance of the security, currency, or other instrument to which they are in-
dexed, 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 sub-
stantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S. govern-
ment agencies.
SWAPS AND RELATED TRANSACTIONS: Each of the High Income Series, the World Gov-
ernments Series, the Emerging Markets Equity 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 expo-
sure to a variety of different types of investments or market factors. Depend-
ing on their structure, swap agreements may increase or decrease a Series' ex-
posure to long or short-term interest rates (in the U.S. or abroad), foreign
currency values, mortgage securities, corporate borrowing rates, or other fac-
tors 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 lim-
ited to any particular form or variety of swap agreement if MFS determines it
is consistent with the Series' investment objective and policies.
Each of the High Income Series, the World Governments Series, the Emerging
Markets Equity Series, the Bond Series and the Limited Maturity Series will
maintain cash or appropriate liquid assets 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 Custo-
dian 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 Se-
ries 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 as-
sets 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 col-
lars is the change in the specific interest rate, currency or other factor
that determines the amount of payments to be made under the arrangement. If
the Adviser or Sub-Adviser, as applicable, is incorrect in its forecasts of
such factors, the investment performance of a Series would be less than what
it would have been if these investment techniques had not been used. If a swap
agreement calls for payments by a Series, the Series must be prepared to make
such payments when due. In addition, if the counterparty's creditworthiness
declined, the value of the swap agreement would be likely to decline, poten-
tially resulting in losses.
If the counterparty defaults, a Series' risk of loss consists of the net
amount of payments that the Series is contractually entitled to receive. Each
Series anticipates that it will be able to eliminate or reduce its exposure
under these arrangements by assignment or other disposition or by entering
into an offsetting agreement with the same or another counterparty.
OPTIONS ON SECURITIES: Each of the Emerging Growth Series, the Value Series,
the Total Return Series, the Bond Series, the Emerging Markets Equity Series,
the World Governments Series, the Growth With Income Series and the High In-
come Series may write (sell) covered put and call options, and purchase
8
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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 se-
curity without additional cash consideration (or for additional cash consider-
ation held in a segregated account by its custodian) upon conversion or ex-
change of other securities held in its portfolio. A call option is also cov-
ered 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 cus-
todian, 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 trad-
ed, 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 under-
lying security from the time the option is written until exercise.
Effecting a closing transaction in the case of a written call option will per-
mit a Series to write another call option on the underlying security with ei-
ther a different exercise price or expiration date or both, or in the case of
a written put option will permit the Series to write another put option to the
extent that the exercise price thereof is secured by liquid assets. Such
transactions permit a Series to generate additional premium income, which will
partially offset declines in the value of portfolio securities or increases in
the cost of securities to be acquired. Also, effecting a closing transaction
will permit the cash or proceeds from the concurrent sale of any securities
subject to the option to be used for other investments of a Series, provided
that another option on such security is not written. If a Series desires to
sell a particular security from its portfolio on which it has written a call
option, it will effect a closing transaction in connection with the option
prior to or concurrent with the sale of the security.
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 establish-
ing the option position. Because increases in the market price of a call op-
tion 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 se-
curity alone. If the call options are exercised in such transactions, a Se-
ries' 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 de-
clines, 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 charac-
teristics 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 Se-
ries 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 secu-
rity, 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 exer-
cised. 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
9
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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 re-
ceived on the writing of the two options. Conversely, if the price of the se-
curity 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 pur-
chase 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 securi-
ties 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 transac-
tions. 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 ac-
quired, 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 port-
folio 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 secu-
rities at the exercise price, or to close out the options at a profit. The
premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by a Series upon exercise of the option, and, unless
the price of the underlying security rises sufficiently, the option may expire
worthless to the Series.
In certain instances, the Emerging Growth Series may enter into options on
U.S. Treasury securities which provide for periodic adjustment of the strike
price and may also provide for the periodic adjustment of the premium during
the term of each such option. Like other types of options, these transactions,
which may be referred to as "reset" options or "adjustable strike" options,
grant the purchaser the right to purchase (in the case of a "call") or sell
(in the case of a "put"), a specified type and series of U.S. Treasury secu-
rity 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 de-
termined 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 termina-
tion, 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 Se-
ries, the Total Return Series, the Growth With Income Series, the Utilities
Series and the Emerging Markets Equity Series may write (sell) covered call
and put options and purchase call and put options on stock indices. In con-
trast 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 settle-
ment 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 addi-
tional 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 liq-
uid 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
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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 in-
creases 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 appreci-
ation in the Series' stock investments. By writing a put option, a Series as-
sumes 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 in-
dex, 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 invest-
ments 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 in-
crease, the Series' loss will be limited to the premium paid for the option
plus related transaction costs. The success of this strategy will largely de-
pend 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 at-
tempt 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 op-
tions 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 pur-
chase 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 sim-
ilar 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 se-
curities of particular industry groups, such as those of oil and gas or tech-
nology companies. A stock index assigns relative values to the stocks included
in the index and the index fluctuates with changes in the market values of the
stocks so included. The composition of the index is changed periodically.
YIELD CURVE OPTIONS: Each of the Value Series, the Total Return Series, the
Bond Series, the World Governments Series 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 dif-
ference 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 se-
curities. Specifically, a Series may purchase or write such options for hedg-
ing 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 antici-
pates purchasing the other security and wants to hedge against an adverse
change in the yield spread between the two securities. A Series may also pur-
chase 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 op-
tions. 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 cov-
ered 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 custo-
dian cash or cash equivalents sufficient to cover the Series' net liability
under the two options. Therefore, a Series' liability for such a covered op-
tion 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 man-
ner 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 de-
veloped. 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' as-
sets (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-
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counter options are illiquid and, therefore, cannot exceed the SEC illiquidity
ceiling. Although the Adviser disagrees with this position, the Adviser in-
tends 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 con-
tracts 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 ex-
ceed 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 in-
trinsic value (i.e., the amount that the option is in-the-money). The formula
may also include a factor to account for the difference between the price of
the security and the strike price of the option if the option is written out-
of-money. A Series will treat all or a part of the formula price as illiquid
for purposes of the SEC illiquidity ceiling. A Series may also write over-the-
counter options with non-primary dealers, including foreign dealers, and will
treat the assets used to cover these options as illiquid for purposes of such
SEC illiquidity ceiling.
FUTURES CONTRACTS: Each of the Total Return Series, the Bond Series, the
Emerging Markets Equity Series, the World Governments Series, the Limited Ma-
turity 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, the Growth With Income Se-
ries and the Emerging Markets Equity Series may purchase and sell Futures Con-
tracts on stock indexes, while the Emerging Growth Series, the Value Series,
the Total Return Series, the World Governments Series, the Growth With Income
Series, the Emerging Markets Equity Series and the Utilities Series may pur-
chase 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 cur-
rency, 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 set-
tled 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 bro-
ker, referred to as "variation margin," are made on a daily basis as the value
of the index or instrument underlying the Futures Contract fluctuates, making
positions in the Futures Contract more or less valuable -- a process known as
"mark-to-market."
Purchases or sales of stock index futures contracts are used to attempt to
protect a Series' current or intended stock investments from broad fluctua-
tions in stock prices. For example, a Series may sell stock index futures con-
tracts in anticipation of or during a market decline to attempt to offset the
decrease in market value of the Series' securities portfolio that might other-
wise 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 Se-
ries is not fully invested in the securities market and anticipates a signifi-
cant 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 en-
ter 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
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<PAGE>
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 al-
lows a Series to hedge its interest rate risk without having to sell its port-
folio 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 fluc-
tuations 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 for-
eign-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 un-
derlying 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 Con-
tracts (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 pur-
poses 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 associ-
ated 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 re-
quirements on the option position.
A position in an Option on a Futures Contract may be terminated by the pur-
chaser 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 exer-
cise 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 Com-
modities Futures Trading Commission (the "CFTC") and the performance guarantee
of the exchange clearinghouse. In addition, Options on Futures Contracts may
be traded on foreign exchanges.
A Series may cover the writing of call Options on Futures Contracts (a)
through purchases of the underlying Futures Contract, (b) through ownership of
the instrument, or instruments included in the index, underlying the Futures
Contract, or (c) through the holding of a call on the same Futures Contract
and in the same principal amount as the call written where the exercise price
of the call held (i) is equal to or less than the exercise price of the call
written or (ii) is greater than the exercise price of the call written if the
difference is maintained by the Series in liquid assets in a segregated ac-
count 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 exer-
cise 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 pur-
chase the underlying Futures Contract which, if the Series has covered its ob-
ligation through the sale of such Contract, will close out its futures posi-
tion.
The writing of a call option on a Futures Contract for hedging purposes con-
stitutes a partial hedge against declining prices of the securities or other
instruments required to be delivered un-
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der 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 par-
tial 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 par-
tial 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 par-
tial 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 exer-
cised, 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 portfo-
lio securities.
The Series may purchase Options on Futures Contracts for hedging purposes in-
stead of purchasing or selling the underlying Futures Contracts. For example,
where a decrease in the value of portfolio securities is anticipated as a re-
sult of a projected market-wide decline or changes in interest or exchange
rates, a Series could, in lieu of selling Futures Contracts, purchase put op-
tions 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 pur-
chasing the underlying Futures Contracts.
FORWARD CONTRACTS ON FOREIGN CURRENCY: Each of the Emerging Growth Series, the
Value Series, the Research Series, the Total Return Series, the Bond Series,
the Emerging Markets Equity Series, the World Governments Series, the Growth
With Income Series, the High Income Series 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 Con-
tracts 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 pur-
poses 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 secu-
rities 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 For-
ward 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 offset-
ting 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 in-
volves increased risk. For example, a Series may purchase a given foreign cur-
rency 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 be-
lieves that its value will decline relative to the dollar.
A Series entering into such transactions will profit if the anticipated move-
ments 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 an-
ticipated, 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 connec-
tion 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 mar-
ket 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 Con-
tracts. In such event, the Series' ability to utilize Forward Contracts in the
manner set forth above may be restricted.
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OPTIONS ON FOREIGN CURRENCIES: Each of the Emerging Growth Series, the Value
Series, the Total Return Series, the Bond Series, the Emerging Markets Equity
Series, the World Governments Series, the Growth With Income Series, the High
Income Series and the Utilities Series may purchase and write options on for-
eign currencies for hedging purposes in a manner similar to that in which
futures contracts on foreign currencies, or Forward Contracts, will be uti-
lized. 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 securi-
ties, 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 cur-
rency 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, howev-
er, the benefit to a Series deriving from purchases of foreign currency op-
tions 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 ex-
change 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 pro-
jected, 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 writ-
ing 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 re-
quired 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 Con-
tracts, Forward Contracts and options on foreign currencies depend on the de-
gree 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 dupli-
cate 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 For-
ward 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 de-
creases less than the value of the hedged securities, the Series would experi-
ence a loss which is not completely offset by the put option. It is also pos-
sible 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 addi-
tion, a Series may enter into transactions in Forward Contracts or options on
foreign currencies in order to hedge against exposure arising from the curren-
cies underlying such instruments. In such instances, the Series will be sub-
ject to the additional risk of imperfect correlation between changes in the
value of the currencies underlying such forwards or options and changes in the
value of the currencies being hedged.
It should be noted that stock index futures contracts or options based upon a
narrower index of securities, such as those of a particular industry group,
may present greater risk than options or futures based on a broad market in-
dex. 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.
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The trading of Futures Contracts, options and Forward Contracts for hedging
purposes entails the additional risk of imperfect correlation between move-
ments 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 re-
quirements, the liquidity of such markets and the participation of speculators
in the options, futures and forward markets. In this regard, trading by specu-
lators in options, futures and Forward Contracts has in the past occasionally
resulted in market distortions, which may be difficult or impossible to pre-
dict, 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, gener-
ally tends to diminish as the maturity date of the Futures Contract or expira-
tion date of the option approaches.
Further, with respect to options on securities, options on stock indexes, op-
tions 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 cov-
ers 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 ob-
ligation 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 exer-
cised, 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 ob-
tained 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 hedg-
ing transactions.
Those Series that may enter transactions in options (except for Options on
Foreign Currencies), Futures Contracts, Options on Futures Contracts and For-
ward 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 secu-
rities 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 accor-
dance with the rules of the exchange on which the option is traded and appli-
cable laws and regulations. Nevertheless, the method of covering an option em-
ployed 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 en-
tered 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 as-
surance that such a market will exist for any particular contracts at any spe-
cific 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 instru-
ment underlying an option, make or receive a cash settlement or meet ongoing
variation margin requirements. Under such circumstances, if the Series has in-
sufficient cash available to meet margin requirements, it will be necessary to
liquidate portfolio securities or other assets at a time when it is disadvan-
tageous
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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 con-
tract, no trades may be entered into at a price beyond the limit, thus pre-
venting 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, gov-
ernment 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 success-
ful, 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 associ-
ated 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 ex-
changes or held or written in one or more accounts or through one or more bro-
kers). 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 portfo-
lios 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 pur-
chased, 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 addi-
tional 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 CON-
DUCTED ON U.S. EXCHANGES. Transactions in Forward Contracts on foreign curren-
cies, as well as futures and options on foreign currencies and transactions
executed on foreign exchanges, are subject to all of the correlation, liquid-
ity 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 elimi-
nate trading and could have a substantial adverse effect on the value of posi-
tions held by a Series. Further, the value of such positions could be ad-
versely 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 sys-
tematic reporting of last sale information with respect to the foreign curren-
cies 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 cur-
rency 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 ex-
change-traded options, options on foreign currencies, Forward Contracts and
over-the-counter options on securities are not traded on contract markets reg-
ulated by the CFTC or (with the exception of certain foreign currency options)
the SEC. To the contrary, such instruments are traded through financial insti-
tutions acting as market-makers, although foreign currency options are also
traded on certain national securities
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<PAGE>
exchanges, such as the Philadelphia Stock Exchange and the Chicago Board Op-
tions Exchange, subject to SEC regulation. In an over-the-counter trading en-
vironment, many of the protections afforded to exchange participants will not
be available. For example, there are no daily price fluctuation limits, and
adverse market movements could therefore continue to an unlimited extent over
a period of time. Although the purchaser of an option cannot lose more than
the amount of the premium plus related transaction costs, this entire amount
could be lost. Moreover, the option writer and a trader of Forward Contracts
could lose amounts substantially in excess of their initial investments, due
to the margin and collateral requirements associated with such positions.
In addition, over-the-counter transactions can only be entered into with a fi-
nancial institution willing to take the opposite side, as principal, of a Se-
ries' position unless the institution acts as broker and is able to find an-
other 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 re-
tain 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 re-
sult 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 re-
stricting 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 ex-
changes. 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 per-
mitting 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 de-
scribed above, as well as the risks regarding adverse market movements, mar-
gining 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 curren-
cies 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 set-
tlement 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 curren-
cy, 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 pur-
poses 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 regula-
tions), 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 Con-
tract, thereby insuring that the leveraging effect of such futures is mini-
mized.
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 Emerg-
ing Markets Equity Series, the High Income Series and the Utilities Series may
invest in fixed income securities rated Baa by Moody's Investors Serv-
18
<PAGE>
ice, 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 securi-
ties.
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 gener-
ally providing greater income than investments in higher rated securities,
will involve greater risk of principal and income (including the possibility
of default or bankruptcy of the issuers of such securities) and may involve
greater volatility of price (especially during periods of economic uncertainty
or change) than securities in the higher rating categories and because yields
vary over time, no specific level of income can ever be assured. These lower
rated high yielding fixed income securities generally tend to reflect economic
changes (and the outlook for economic growth), short-term corporate and indus-
try developments and the market's perception of their credit quality (espe-
cially 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 per-
ception 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 in-
vestment grade fixed income securities, and it also may be more difficult dur-
ing times of certain adverse market conditions to sell these lower rated secu-
rities 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 Ad-
viser's own independent and ongoing review of credit quality. To the extent
the Series invests in these lower rated securities, the achievement of its in-
vestment 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 securi-
ties. These lower rated securities may also include zero coupon bonds, de-
ferred interest bonds and PIK bonds.
FOREIGN SECURITIES
The Limited Maturity Series may invest in dollar-denominated foreign debt se-
curities. 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 re-
maining Series may invest in dollar-denominated and non dollar-denominated
foreign securities. As discussed in the Prospectus, investing in foreign secu-
rities generally represents a greater degree of risk than investing in domes-
tic 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 cur-
rencies in which such securities are denominated. Under certain circumstances,
such as where the Adviser believes that the applicable exchange rate is unfa-
vorable 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 curren-
cies will permit a Series to take advantage of favorable movements in the ap-
plicable 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 certif-
icates 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 com-
munications and other information to the ADR holders at the request of the is-
suer 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 re-
duce costs and delays as well as
19
<PAGE>
potential currency exchange and other difficulties. A Series may purchase se-
curities 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 sub-
ject to the same reporting requirements in the United States as a domestic is-
suer. 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 coun-
try an the market value of an ADR may not reflect undisclosed material infor-
mation concerning the issuer of the underlying security. ADRs may also be sub-
ject to exchange rate risks if the underlying foreign securities are denomi-
nated 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 circum-
stances 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 out-
standing shares of the Trust or a Series, as applicable, or (ii) 67% or more
of the outstanding shares of the Trust or a Series, as applicable, present at
a meeting if holders of more than 50% of the outstanding shares of the Trust
or a Series, as applicable, are represented in person or by proxy). Except for
Investment Restriction (1), these investment restrictions and policies are ad-
hered 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 emer-
gency 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 collat-
eral 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 com-
mercial paper, the purchase of a portion or all of an issue of debt securi-
ties, 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 In-
come Series may invest up to 40% of its gross assets in each of the elec-
tric 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 mar-
ket 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 Se-
ries 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 securi-
ties. Securities that are not registered under the
20
<PAGE>
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) limita-
tion;
(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 neces-
sary 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 equiva-
lent 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 as-
sets. For purposes of this restriction, collateral arrangements with re-
spect 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 curren-
cies and Futures Contracts;
(7) invest for the purpose of exercising control or management;
(8) hold obligations issued or guaranteed by any one U.S. Governmental
agency or instrumentality, at the end of any calendar quarter (or within 30
days thereafter), to the extent such holdings would cause the Series to
fail to comply with the diversification requirements imposed by Section
817(h) of the Internal Revenue Code of 1986, as amended (the "Code"), and
the Treasury regulations issued thereunder on segregated asset accounts
that fund variable contracts.
In addition, as nonfundamental policies which may be changed by vote of the
Trust's Board of Trustees: (i) each Series, to the extent that it invests in
foreign securities, 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 facil-
itate redemptions; and (iv) no Series may enter into hedging transactions by
purchasing put and call options, futures contracts or other derivative instru-
ments 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 Eu-
ropean 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 Se-
ries' 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 var-
ied during that period.)
TRUSTEES
A. KEITH BRODKIN*, Chairman and President (born 8/4/35) Massachusetts Finan-
cial 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; Capi-
tol 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 Secre-
tary.
JAMES R. BORDEWICK, JR.*, Assistant Secretary (born 3/6/59) Massachusetts Fi-
nancial 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.
21
<PAGE>
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 invest-
ment 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
(except with respect to the Emerging Markets Equity Series, which shows per-
centage of ownership of outstanding securities as of September 2, 1997).
<TABLE>
<CAPTION>
% OF
OUTSTANDING
SERIES OWNER & ADDRESS SHARES
------------ ----------------------------------------- -----------
<C> <S> <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 Company 20.11%
Mutual of Omaha Plaza
Omaha, NE 68175
Union Central Life Insurance Company 8.49%
Group Annuity
Mutual Funds -- Station 3
1876 Waycross Road
Cincinnati, OH 45240-2899
Merrill Lynch Life Insurance Company 11.04%
4804 Deer Lake Drive,
East Jacksonville, FL 32246-6484
Pruco Life of Arizona 9.19%
Flexible Premium Variable Annuity Account
213 Washington Street
Floor 7
Newark, NJ 07102-2917
Aetna Life Insurance & Annuity Company 8.19%
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 Company 35.93%
Series 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 Company 25.14%
Series Mutual of Omaha Plaza
Omaha, NE 68175
Merrill Lynch Life Insurance Company 33.19%
4804 Deer Lake Drive,
East Jacksonville, FL 32246-6484
</TABLE>
<TABLE>
<CAPTION>
% OF
OUTSTANDING
SERIES OWNER & ADDRESS SHARES
- --------------- ----------------------------------------- -----------
<S> <C> <C>
MFS Research Pruco Life of Arizona 10.13%
Series Flexible Premium Variable Annuity Account
(Cont.) 213 Washington Street
Floor 7
Newark, NJ 07102-2917
Aetna Life Insurance & Annuity Company 14.30%
151 Farmington Avenue
Hartford, CT 06156-0001
MFS Growth Union Central Life Insurance Company 38.83%
With Income Group Annuity
Series Mutual Funds -- Station 3
1876 Waycross Road
Cincinnati, OH 45240-2899
Union Central Life Insurance Company 56.50%
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 Company 8.08%
Separate Account One
8545 United Plaza Blvd.
Baton Rouge, LA 70809-2264
Aetna Life Insurance & Annuity Company 24.01%
151 Farmington Avenue
Hartford, CT 06156-0001
Aetna Investment Company of America 8.31%
151 Farmington Avenue
Hartford, CT 06156-0001
MFS Ameritas Life Insurance Company 55.29%
Utilities Separate Account VA-2 (Annuity)
Series 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 Company 73.97%
Income Series Mutual of Omaha Plaza
Omaha, NE 68175
Union Central Life Insurance Company 12.11%
Group Annuity
Mutual Funds -- Station 3
1876 Waycross Road
Cincinnati, OH 45240-2899
Union Central Life Insurance Company 9.71%
Individual Annuity
Mutual Funds--Station 3
1876 Waycross Road
Cincinnati, OH 45240-2899
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
% OF
OUTSTANDING
SERIES OWNER & ADDRESS SHARES
- ------------ ---------------------------------------- -----------
<S> <C> <C>
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 Company 32.24%
Mutual of Omaha Plaza
Omaha, NE 68175
MFS/Foreign Massachusetts Financial Services Company 98.84%
& Colonial 500 Boylston Street
Emerging Boston, MA 02116-3740
Markets
Equity
Series
(Formerly
known as
MFS
Strategic
Fixed
Income
Series)
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 Company 25.24%
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 Company 69.62%
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 ex-
penses).
TRUSTEE COMPENSATION TABLE
<TABLE>
<CAPTION>
TRUSTEE FEES
FROM EACH
SERIES OTHER
TRUSTEE FEES THAN THE VALUE
FROM THE SERIES, THE
VALUE SERIES LIMITED MATURITY
AND THE SERIES AND TOTAL TRUSTEE
LIMITED THE STRATEGIC FEES FROM
MATURITY FIXED INCOME THE FUND
NAME OF TRUSTEE SERIES(1) SERIES(1) COMPLEX(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.
(2) For calendar year ended December 31, 1996. All Trustees receiving compen-
sation 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 lit-
igation 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 ad-
judicated that they engaged in willful misfeasance, bad faith, gross negli-
gence 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 pro-
vided 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 dat-
ing 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 Se-
ries with overall investment advisory services. Subject to such policies as
the Trustees may determine, MFS makes investment decisions for the Series. For
these services and facilities, the Adviser receives an annual management fee,
computed and paid monthly, as disclosed in the Prospectus under the heading
"Management of the Series."
For the Trust's fiscal years ended December 31, 1996, 1995 and 1994, respec-
tively, 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
World Governments Series........................ 126,898 172,556
Bond Series..................................... 2,924 40,829
Limited Maturity Series/3/...................... 1,064 12,705
Money Market Series............................. 858 46,831
</TABLE>
- -----------------
/1/The Emerging Markets Equity Series had not commenced investment operations
prior to December 31, 1996.
/2/After any applicable fee reduction.
/3/For the period from the commencement of investment operations on August 14,
1996 to December 31, 1996.
23
<PAGE>
For the fiscal year ended December 31, 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 Emerging Markets Equity Series and the Limited Matu-
rity 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 Decem-
ber 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 adminis-
trative services, including office space, equipment, clerical personnel, in-
vestment advisory facilities, and all executive and supervisory personnel nec-
essary for managing each Series' investments, effecting its portfolio transac-
tions 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 "In-
vestment Restrictions") and, in either case, by a majority of the Trustees who
are not parties to the Advisory Agreement or interested persons of any such
party. The Advisory Agreement terminates automatically if it is assigned and
may be terminated with respect to any Series without penalty by vote of a ma-
jority of the Series' shares (as defined in "Investment Restrictions") or by
either party on not more than 60 days' nor less than 30 days' written notice.
The Advisory Agreement with respect to each Series provides that if MFS ceases
to serve as the investment adviser to the Series, the Series will change its
name so as to delete the term "MFS" and that MFS may render services to others
and may permit other fund clients to use the term "MFS" in their names. The
Advisory Agreement also provides that neither MFS nor its personnel shall be
liable for any error of judgment or mistake of law or for any loss arising out
of any investment or for any act or omission in the execution and management
of the Series, except for willful misfeasance, bad faith or gross negligence
in the performance of its or their duties or by reason of reckless disregard
of its or their obligations and duties under the Advisory Agreement.
FCM -- FCM serves as the Emerging Markets Equity Series' sub-adviser pursuant
to a Sub-Advisory Agreement, dated October 16, 1997 between the Adviser and
FCM (the "FCM Sub-Advisory Agreements"). The FCM Sub- Advisory Agreement pro-
vides that the Adviser may delegate to FCM the authority to make investment
decisions for the Series. It is presently intended that FCM will provide port-
folio management services for the Series. For these services, the Adviser pays
FCM an annual fee computed and paid monthly in an amount equal to 0.65% of the
average daily net assets managed by FCM of the Series.
FCEM -- FCEM serves as the Foreign & Colonial Emerging Markets Equity Series'
sub-adviser pursuant to a Sub-Advisory Agreement, dated October 16, 1997 be-
tween FCM and FCEM (the "FCEM Sub-Advisory Agreement" and together with the
FCM Sub-Advisory Agreement, the "Sub-Advisory Agreement"). The FCEM Sub-Advi-
sory Agreement provides that FCM may delegate to FCEM the authority to make
investment decisions for the Series. It is presently intended that FCEM will
provide portfolio management services for the portion of the assets of the Se-
ries invested in emerging markets securities. For these services, FCM pays
FCEM an annual fee computed and paid monthly in an amount equal to 0.65% of
the average daily net assets managed by FCEM of the Series.
SUB-ADVISORY AGREEMENTS -- Each Sub-Advisory Agreement will remain in effect
until October 16, 1999, and will continue in effect thereafter only if such
continuance is specifically approved at least annually by the Board of Trust-
ees or by the vote of a majority of the Series' outstanding shares, and, in
either case, by a majority of the Trustees who are not parties to the Sub-Ad-
visory Agreement or interested persons of any such party. Each FCM Sub-Advi-
sory Agreement terminates automatically if it is assigned and may be termi-
nated without penalty by the Trustees, by vote of a majority of the Series'
outstanding shares, by the Adviser on not less than 30 days' nor more than 60
days' written notice or by FCM, on not less than 60 days' nor more than 90
days' written notice. The FCEM Sub-Advisory Agreement terminates automatically
if it is assigned and may be terminated without penalty by the Trustees, by
vote of a majority of the Series' on not less than 60 days' nor more than 90
days' written notice.
The FCM Sub-Advisory Agreement provides that if FCM ceases to serve as the
sub-adviser to the Series, the Series will change its name so as to delete the
words "Foreign & Colonial" and that FCM may render services to others and may
permit other fund clients to use the words "Foreign & Colonial" in their
24
<PAGE>
names. Each Sub-Advisory Agreement specifically provides that neither FCM or
FCEM, as the case may be, nor its personnel shall be liable for any error of
judgment or mistake of law or for any loss arising out of any investment or
for any act or omission in the execution and management of the Series, except
for willful misfeasance, bad faith or gross negligence in the performance of
its or their duties or by reason of reckless disregard of its or their obliga-
tions and duties under the Sub- 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 re-
imbursement 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 as-
sets, 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 con-
trolling 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 deter-
mine the investment policies of the Series or decide which securities the Se-
ries will buy or sell. Each Series may, however, invest in securities of the
Custodian and may deal with the Custodian as principal in securities transac-
tions. The Custodian has contracted with MFS for MFS to perform certain ac-
counting functions related to certain transactions for which the Adviser re-
ceives 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 Agree-
ment"). 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 redemp-
tion 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 Share-
holder Servicing Agent will be reimbursed by a Series for certain expenses in-
curred 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 admin-
ister 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 con-
tinuous 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 ac-
cepts 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 ap-
proved 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 pen-
alty 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 em-
ployees of MFS, who are appointed and supervised by its senior officers.
Changes in a Series' investments are reviewed by the Trust's Board of Trust-
ees. A Series' portfolio manager may serve other clients of MFS or any subsid-
iary of MFS in a similar capacity.
The primary consideration in placing portfolio security transactions with bro-
ker-dealers for execution is to obtain and maintain the availability of execu-
tion 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 com-
missions. 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 com-
missions 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 pur-
chased from underwriters, the cost of such securities gen-
25
<PAGE>
erally includes a fixed underwriting commission or concession. Securities
firms or futures commission merchants may receive brokerage commissions on
transactions involving options, Futures Contracts and Options on Futures Con-
tracts and the purchase and sale of underlying securities upon exercise of op-
tions. 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 ex-
change 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 Securi-
ties 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 com-
mission for effecting a securities transaction for a Series in excess of the
amount other broker-dealers would have charged for the transaction if MFS de-
termines 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 se-
curities 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 Se-
ries' and MFS's other clients in part for providing advice as to the avail-
ability of purchasers or sellers of securities and services in effecting secu-
rities transactions and performing functions incidental thereto such as clear-
ance and settlement.
Broker-dealers may be willing to furnish statistical, research and other fac-
tual 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 considera-
tion for the annual renewal of certain publications provided by Lipper Analyt-
ical 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 transac-
tions. 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 transac-
tions 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 con-
sequence of the receipt of brokerage and research services by MFS. To the ex-
tent a Series' portfolio transactions are used to obtain such services, the
brokerage commissions paid by the Series will exceed those that might other-
wise 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 Se-
ries, 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 Se-
ries, Utilities Series, Total Return Series, Growth With Income Series and Re-
search 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 Re-
search Series owned securities issued by Chase Manhattan, Inc., which had a
value of $512,000 at fiscal year end, Growth With Income Series owned securi-
ties 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 Man-
hattan, 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. In-
vestment decisions for a Series and for
26
<PAGE>
such other clients are made with a view to achieving their respective invest-
ment 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 invest-
ment advice from the same investment adviser, particularly when the same secu-
rity is suitable for the investment objectives of more than one client. When
two or more clients are simultaneously engaged in the purchase or sale of the
same security, the securities are allocated among clients in a manner believed
by the Adviser to be equitable to each. It is recognized that in some cases
this system could have a detrimental effect on the price or volume of the se-
curity as far as a Series is concerned. In other cases, however, it is be-
lieved that a Series' ability to participate in volume transactions will pro-
duce better executions for the Series.
6. TAX STATUS
Shares of the Series are offered only to the separate accounts of the Partici-
pating 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 hold-
ing 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 in-
cur 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 ad-
dition to the diversification requirements of Subchapter M, place certain lim-
itations 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 lite in-
surance 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 pay-
able 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, pay-
ment-in-kind bonds, certain stripped securities and certain securities pur-
chased 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 re-
quired to liquidate portfolio securities that it might otherwise have contin-
ued 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 share-
holders. 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 loss-
es, adjustments in the holding periods of Series securities and conversion of
short-term into long-term capital losses. Certain tax elections exist for
straddles that may alter the effects of these rules. Each Series will limit
its activities in options, Futures Contracts, Forward Contracts 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 Se-
ries. 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. Invest-
ment by a Series in "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 effec-
tive 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
27
<PAGE>
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 the
Money Market Series determined in accordance with generally accepted account-
ing principles, and (iii) plus or minus net realized gains and losses and net
unrealized appreciation or depreciation on the assets of the Money Market Se-
ries. 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 de-
termined, 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 dec-
laration. Any increase in the value of a shareholder's investment, represent-
ing the reinvestment of dividend income, is reflected by an increase in the
number of shares in its account.
It is expected that the shares of the Money Market Series will have a positive
net income at the time of each determination thereof. If for any reason the
net income determined at any time is a negative amount, which could occur, for
instance, upon default by an issuer of a portfolio security, the Money Market
Series would first offset the negative amount with respect to each shareholder
account from the dividends declared during the month with respect to each such
account. If and to the extent that such negative amount exceeds such declared
dividends at the end of the month (or during the month in the case of an ac-
count 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 share-
holder 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 proce-
dure 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. Share-
holders will be informed of the tax consequences of such distributions, in-
cluding 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 val-
ued at amortized cost, which the Trustees have determined in good faith con-
stitutes fair value for the purposes of complying with the 1940 Act. This val-
uation method will continue to be used until such time as the Trustees deter-
mine that it does not constitute fair value for such purposes. The Money Mar-
ket Series will limit its portfolio to those investments in U.S. dollar-denom-
inated 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 devia-
tion 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' port-
folio (other than short-term obligations) for which the principal market is
one or more securities or commodities exchanges will be valued at the last re-
ported 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 ex-
change on which such securities, futures contracts or options are traded; but
if a securities exchange is not the principal market for securities, such se-
curities will, if market quotations are readily available, be valued at cur-
rent bid prices, unless such securities are reported on the Nasdaq stock mar-
ket, in which case they are valued at the last sale price or, if no sales oc-
curred during the day, at the last quoted bid price. Debt securities (other
than short-term obligations but including listed issues) in a Series' portfo-
lio are valued on the basis of valua-
28
<PAGE>
tions furnished by a pricing service which utilizes both dealer-supplied valu-
ations and electronic data processing techniques which take into account ap-
propriate factors such as institutional-sized trading in similar groups of se-
curities, yields, quality, coupon rate, maturity, type of issue, trading char-
acteristics and other market data, without exclusive reliance upon quoted
prices or exchange or over-the-counter prices, since such valuations are be-
lieved 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 share-
holders.
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 near-
est hundredth of one percent, based on a specific seven calendar day period
and shall be calculated by dividing the net change in the value of an account
having a balance of one share of that class at the beginning of the period by
the value of the account at the beginning of the period and multiplying the
quotient by 365/7. For this purpose the net change in account value would re-
flect 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 Se-
ries 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 prod-
uct, raising the sum to a power equal to 365/7, and subtracting 1 from the re-
sult. 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 Se-
ries expenses. Yield quotations for the Series are presented in Appendix A at-
tached 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 deter-
mining 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 invest-
ment 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 en-
titled 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 re-
print all or a portion of evaluations of fund performance and operations ap-
pearing 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, News-
week, Financial World, Financial Planning, Investment Advisor, USA Today, Pen-
sions and Investments, SmartMoney, Forbes, Global Finance, Registered Repre-
sentative, Institutional Investor, the Investment Company Institute, Johnson's
Charts, Morningstar, Lipper Analytical Services, Inc., Variable Annuity Re-
search Data Service, CDA Wiesenberger, Shearson Lehman and Salomon Bros. Indi-
ces, Ibbotson, Business Week, Lowry Associates, Media General, Investment Com-
pany Data, The New York Times, Your Money, Strangers Investment Advisor, Fi-
nancial Planning on Wall Street, Standard and Poor's, Individual Investor, The
100 Best Mutual Funds You Can Buy, by Gordon K. Williamson, Consumer Price In-
dex, and Sanford C. Bernstein & Co. Series' performance may also be compared
to the performance of other mutual funds tracked by financial or business pub-
lications 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; invest-
ment 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 mat-
ters.
29
<PAGE>
The Series may also quote evaluations mentioned in independent radio or tele-
vision 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 distrib-
utor, its investment adviser and other financial planning, legal, tax, ac-
counting, insurance, estate planning and other professionals, or from surveys,
regarding individual and family financial planning. Such views may include in-
formation regarding: retirement planning; tax management strategies; estate
planning; general investment techniques (e.g., asset allocation and disci-
plined saving and investing); business succession; ideas and information pro-
vided through the MFS Heritage Planning(TM) program, an intergenerational fi-
nancial planning assistance program; issues with respect to insurance (e.g.,
disability and life insurance and Medicare supplemental insurance); issues re-
garding 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(R) Municipal Bond Fund is among the first municipal bond funds
established.
- --1979 -- Spectrum becomes the first combination fixed/ variable annuity with
no initial sales charge.
- --1981 -- MFS(R) World Governments Fund is established as America's first
globally diversified fixed income mutual fund.
- --1984 -- MFS(R) Municipal High Income Fund is the first mutual fund to seek
high tax-free income from lower-rated municipal securities.
- --1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to target
and shift investments among industry sectors for shareholders.
- --1986 -- MFS(R) Municipal Income Trust is the first closed-end, high-yield
municipal bond fund traded on the New York Stock Exchange.
- --1987 -- MFS(R) 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 ad-
justed fixed/variable annuity.
- --1990 -- MFS(R) World Total Return Fund is the first global balanced fund.
- --1993 -- MFS(R) 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(R) Union Standard Trust, the first
trust to invest solely in companies deemed to be union-friendly by an Advi-
sory Board of senior labor officials, senior managers of companies with sig-
nificant labor contracts, academics and other national labor leaders or ex-
perts.
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 chang-
ing 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 re-
classify 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 share-
holders. 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 sharehold-
ers. To the extent any Series' shareholder owns a controlling percentage of
the Series' shares, such shareholder may affect the outcome of such matters to
a greater extent than other Series shareholders (see "Description of Shares,
Voting Rights and Liabilities" in the Pro -
30
<PAGE>
spectus). 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 af-
firmative 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 cer-
tain circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust contains an express disclaimer of share-
holder liability for acts or obligations of the Trust and provides for indem-
nification and reimbursement of expenses out of Trust property for any share-
holder held personally liable for the obligations of the Trust. The Declara-
tion of Trust also provides that it shall maintain appropriate insurance (for
example, fidelity bonding and errors and omissions insurance) for the protec-
tion 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 misfea-
sance, bad faith, gross negligence, or reckless disregard of the duties in-
volved 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 Statements of Assets and Lia-
bilities for the Emerging Markets Equity Series, formerly known as the MFS
Strategic Fixed Income Series, at December 31, 1996 and June 30, 1997, respec-
tively, the Notes thereto and the Independent Auditors' Reports dated February
7, 1997 and August 1, 1997, respectively, 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 Market Se-
ries, the Portfolio of Investments at December 31, 1996, the Statement of As-
sets 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 In-
dependent 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.
31
<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
=======
</TABLE>
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 Massa-
chusetts. 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 Utili-
ties Series, MFS High Income Series, MFS World Governments Series, MFS
Strategic Fixed Income Series, MFS Bond Series, MFS Limited Maturity Se-
ries and MFS Money Market Series. The MFS Strategic Fixed Income Series
has been inactive since that date except for matters relating to its or-
ganization 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 Fi-
nancial 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 re-
duced 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.
* renamed "MFS/Foreign & Colonial Emerging Markets Equity Series"
32
<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 In-
surance Trust (the "Trust")) as of December 31, 1996. This financial statement
is the responsibility of the Trust's management. Our responsibility is to ex-
press an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing stan-
dards. 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 over-
all financial statement presentation. We believe that our audit of the state-
ment 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
* renamed "MFS/Foreign & Colonial Emerging Markets Equity Series"
33
<PAGE>
MFS STRATEGIC FIXED INCOME SERIES*
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1997
<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
=======
</TABLE>
NOTES TO FINANCIAL STATEMENTS
(1) 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 "Se-
ries"): 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 Se-
ries. 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 Se-
ries to Massachusetts Financial Services Company.
(2) Organization expenses are being deferred and will be amortized over a
five years beginning with the commencement of investment operations. The
amount paid by the Series on any redemption by Massachusetts Financial Serv-
ices Company, or any current holder of any Series' initial shares, will be re-
duced 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.
* renamed "MFS/Foreign & Colonial Emerging Markets Equity Series"
34
<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 In-
surance trust (the "Trust")) as of June 30, 1997. 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 stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of mate-
rial misstatement. An audit includes examining, on a test basis, evidence sup-
porting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement pre-
sentation. We believe that our audit provides a reasonable basis for our opin-
ion.
In our opinion, such statement of assets and liabilities presents fairly, in
all material respects, the financial position of the Series at June 30, 1997
in conformity with generally accepted accounting principles.
Deloitte & Touche llp
Boston, Massachusetts
August 1, 1997
*renamed "MFS/Foreign & Colonial Emerging Markets Equity Series"
35
<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>
APPENDIX A
PERFORMANCE QUOTATIONS
All performance quotations are for the period ended December 31, 1996.
<TABLE>
<CAPTION>
AVERAGE ANNUAL 30-DAY
TOTAL RETURNS ACTUAL 30-DAY YIELD
---------------------- YIELD (INCLUDING (WITHOUT
SERIES 1 YEAR LIFE OF 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 pe-
riod 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(R) VARIABLE
INSURANCE TRUST/SM/
500 BOYLSTON STREET
BOSTON, MA 02116
[ART]
<PAGE>
PART C
------
ITEM 24. (A) FINANCIAL STATEMENTS AND EXHIBITS
---------------------------------
ALL SERIES (EXCEPT MFS/FOREIGN & COLONIAL EMERGING MARKETS EQUITY
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.
MFS/FOREIGN & COLONIAL EMERGING MARKETS EQUITY 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
At June 30, 1997:
Statement of Assets and Liabilities
Opinion of Independent Auditors
<PAGE>
________________________
* Incorporated by reference to the Annual Reports to Shareholders of the Series
(with the exception of the MFS Strategic Fixed Income Series, now known as the
MFS/Foreign & Colonial Emerging Markets Equity 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)
(e) Certificate of Amendment to Declaration of Trust -
Redesignation of Series; filed herewith.
2 By-Laws, dated January 28, 1994. (3)
3 Not Applicable.
4 Not Applicable.
5 (a) Form of Investment Advisory Agreement by and between
Registrant and Massachusetts Financial Services Company,
dated April 14, 1994 as amended and restated on October 16,
1997. (8)
(b) Form of Sub-Advisory Agreement by and between Massachusetts
Financial Services Company and Foreign & Colonial
Management Ltd., dated October 16, 1997. (8)
(c) Form of Sub-Advisory Agreement by and between Foreign &
Colonial Management Ltd. and Foreign & Colonial Emerging
Markets Limited, dated October 16, 1997. (8)
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) Third Amendment dated February 14, 1997 to Loan Agreement
dated February 21, 1995 by and among the Banks named
therein and The First National Bank of Boston. (7)
(e) 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(a) Financial Data Schedules for each operational Series of the
Trust for the year ended December 30, 1996. (6)
(b) Financial Data Schedule for MFS Strategic Fixed Income
Series for the six months ended June 30, 1997; filed
herewith.
18 Not Applicable.
Power of Attorney dated August 12, 1994. (3)
<PAGE>
____________________________
(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.
(6) Incorporated by reference to Registrant's Post-Effective Amendment No. 7
filed with the SEC via EDGAR on April 29, 1997.
(7) Incorporated by reference to MFS Series Trust I (File Nos. 33-7638 and 811-
4777) Post-Effective Amendment No. 28 filed with the SEC via EDGAR on June
26, 1997.
(8) Incorporated by reference to Registrant's Post-Effective Amendment No. 8
filed with the SEC via EDGAR on August 1, 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 48
(without par value) (as of September 19, 1997)
MFS VALUE SERIES
----
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Shares of Beneficial Interest 10
(without par value) (as of September 19, 1997)
MFS RESEARCH SERIES
-------------------
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Shares of Beneficial Interest 34
(without par value) (as of September 19, 1997)
MFS GROWTH WITH INCOME SERIES
-----------------------------
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Shares of Beneficial Interest 22
(without par value) (as of September 19, 1997)
MFS TOTAL RETURN SERIES
-----------------------
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Shares of Beneficial Interest 25
(without par value) (as of September 19, 1997)
<PAGE>
MFS UTILITIES SERIES
--------------------
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Shares of Beneficial Interest 17
(without par value) (as of September 19, 1997)
MFS HIGH INCOME SERIES
----------------------
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Shares of Beneficial Interest 12
(without par value) (as of September 19, 1997)
MFS WORLD GOVERNMENTS SERIES
----------------------------
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Shares of Beneficial Interest 25
(without par value) (as of September 19, 1997)
MFS STRATEGIC FIXED INCOME SERIES, NOW KNOWN AS
------------------------------------------------
MFS/FOREIGN & COLONIAL EMERGING MARKETS EQUITY SERIES
-----------------------------------------------------
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Shares of Beneficial Interest 4
(without par value) (as of September 19, 1997)
MFS BOND SERIES
---------------
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Shares of Beneficial Interest 11
(without par value) (as of September 19, 1997)
MFS LIMITED MATURITY SERIES
---------------------------
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Shares of Beneficial Interest 8
(without par value) (as of September 19, 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 September 19, 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 thirteen 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, MFS
Special Opportunities Fund, MFS Convertible Securities Fund, MFS Blue Chip Fund,
MFS New Discovery Fund, MFS Science and Technology Fund and MFS Research
International Fund), MFS Series Trust II (which has four series: MFS Emerging
Growth Fund, MFS 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,
<PAGE>
MFS New York Municipal Bond Fund, MFS North Carolina Municipal Bond Fund, MFS
Pennsylvania Municipal Bond Fund, MFS South Carolina Municipal Bond Fund, MFS
Tennessee Municipal Bond Fund, MFS Virginia Municipal Bond Fund, MFS West
Virginia Municipal Bond Fund and MFS Municipal Income Fund) (the "MFS Funds").
The principal business address of each of the MFS Funds is 500 Boylston Street,
Boston, Massachusetts 02116.
MFS also serves as investment adviser of the following 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"). The principal business address of each of the
aforementioned funds is 500 Boylston Street, Boston, Massachusetts 02116.
In addition, MFS serves as investment adviser to the following closed-
end funds: MFS Municipal Income Trust, MFS Multimarket Income Trust, MFS
Government Markets Income Trust, MFS Intermediate Income Trust, MFS Charter
Income Trust and MFS Special Value Trust (the "MFS Closed-End Funds"). The
principal business address of each of the MFS Closed-End Funds is 500 Boylston
Street, Boston, Massachusetts 02116.
Lastly, MFS serves as investment adviser to MFS/Sun Life Series Trust
("MFS/SL"), 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 of the aforementioned
funds is One Sun Life Executive Park, Wellesley Hills, Massachusetts 02181.
MFS International Ltd. ("MIL"), a limited liability company organized
under the laws of Bermuda and a subsidiary of MFS, whose principal business
address is Cedar House, 41 Cedar Avenue, Hamilton HM12 Bermuda, serves as
investment adviser to and distributor for MFS American Funds (which has six
portfolios: MFS American Funds-U.S. Equity Fund, MFS American Funds-U.S.
Emerging Growth Fund, MFS American Funds-U.S. High Yield Bond Fund, MFS American
Funds - U.S. Dollar Reserve Fund, MFS American Funds-Charter Income Fund and MFS
American Funds-U.S. Research Fund) (the "MIL Funds"). The MIL Funds are
organized in Luxembourg and qualify as an undertaking for collective investments
in transferable securities (UCITS). The principal business address of the MIL
Funds is 47, Boulevard Royal, L-2449 Luxembourg.
MIL also serves as investment adviser to and distributor for MFS
Meridian U.S. Government Bond Fund, MFS Meridian Charter Income Fund, MFS
Meridian Global 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, MFS Meridian Research Fund, MFS
Meridian U.S. High Yield Fund and MFS Emerging Markets Debt Fund (collectively
the "MFS Meridian Funds"). Each of the MFS Meridian Funds is organized as an
exempt company under the laws of the Cayman Islands. The principal business
address of each of the MFS Meridian Funds is P.O. Box 309, Grand Cayman, Cayman
Islands, British West Indies.
<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 Institutional Advisors, Inc. ("MFSI"), a wholly owned subsidiary
of MFS, provides investment advice to substantial private clients.
MFS Retirement Services, Inc. ("RSI"), a wholly owned subsidiary of
MFS, markets MFS products to retirement plans and provides administrative and
record keeping services for retirement plans.
MFS
---
The Directors of MFS are A. Keith Brodkin, Jeffrey L. Shames, Arnold
D. Scott, Donald A. Stewart 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., Patricia A.
Zlotin, John W. Ballen, Thomas J. Cashman, Jr., Joseph W. Dello Russo and Kevin
R. Parke are Executive Vice Presidents, Stephen E. Cavan is a Senior Vice
President, General Counsel and an Assistant Secretary, Robert T. Burns is a
Senior Vice President, Associate General Counsel and an Assistant Secretary of
MFS, and Thomas B. Hastings is a Vice President and Treasurer of MFS.
MASSACHUSETTS INVESTORS TRUST
-----------------------------
MASSACHUSETTS INVESTORS GROWTH STOCK FUND
-----------------------------------------
MFS GROWTH OPPORTUNITIES FUND
-----------------------------
MFS GOVERNMENT SECURITIES FUND
------------------------------
MFS SERIES TRUST I
------------------
MFS SERIES TRUST V
------------------
MFS SERIES TRUST VI
-------------------
MFS SERIES TRUST X
------------------
MFS GOVERNMENT LIMITED MATURITY FUND
------------------------------------
A. Keith Brodkin is the Chairman and President, Stephen E. Cavan is
the Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M.
Moynihan and Mark E.
<PAGE>
Bradley, Vice Presidents of MFS, are the Assistant Treasurers, James R.
Bordewick, Jr., Senior Vice President and Associate General Counsel of MFS, is
the Assistant Secretary.
MFS SERIES TRUST II
-------------------
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, Ellen M. Moynihan
and Mark E. Bradley are the Assistant Treasurers, and James R. Bordewick, Jr.,
is the Assistant Secretary.
MFS GOVERNMENT MARKETS INCOME TRUST
-----------------------------------
MFS INTERMEDIATE INCOME TRUST
-----------------------------
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, Ellen M. Moynihan
and Mark E. Bradley are the Assistant Treasurers, 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, and Bernard Scozzafava, Vice President of MFS, are Vice
Presidents, Sheila Burns-Magnan, Assistant Vice President of MFS, and Daniel E.
McManus, Vice President of MFS, are Assistant Vice Presidents, Stephen E. Cavan
is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M.
Moynihan and Mark E. Bradley are the Assistant Treasurers, and James R.
Bordewick, Jr., is the Assistant Secretary.
MFS SERIES TRUST IV
-------------------
MFS SERIES TRUST IX
-------------------
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, Ellen M. Moynihan and Mark E. Bradley are the Assistant Treasurers 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,
Ellen M. Moynihan and Mark E. Bradley are the Assistant Treasurers and James R.
Bordewick, Jr., is the Assistant Secretary.
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
<PAGE>
Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers and James R. Bordewick, Jr., is the Assistant
Secretary.
MFS MUNICIPAL SERIES TRUST
--------------------------
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,
Vice President of MFS, is an Assistant Vice President, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan
and Mark E. Bradley are the Assistant Treasurers and James R. Bordewick, Jr., is
the Assistant Secretary.
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, Ellen M.
Moynihan and Mark E. Bradley are the Assistant Treasurers 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, Ellen M. Moynihan and Mark E.
Bradley are the Assistant Treasurers and James R. Bordewick, Jr., is the
Assistant Secretary.
MFS MULTIMARKET INCOME TRUST
----------------------------
MFS CHARTER INCOME TRUST
------------------------
A. Keith Brodkin is the Chairman and President, Leslie J. Nanberg and
James T. Swanson are Vice Presidents, Stephen E. Cavan is the Secretary, W.
Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E.
Bradley are the Assistant Treasurers and James R. Bordewick, Jr., is the
Assistant Secretary.
MFS SPECIAL VALUE TRUST
-----------------------
A. Keith Brodkin is the Chairman and President, Jeffrey L. Shames and
Robert J. Manning are Vice Presidents, Stephen E. Cavan is the Secretary, W.
Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E.
Bradley are the Assistant Treasurers and James R. Bordewick, Jr., is the
Assistant Secretary.
MFS/SUN LIFE SERIES TRUST
-------------------------
John D. McNeil, Chairman and Director of Sun Life Assurance Company of
Canada, is the Chairman, Stephen E. Cavan is the Secretary, W. Thomas London is
the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers and James R. Bordewick, Jr., is the Assistant
Secretary.
<PAGE>
MONEY MARKET VARIABLE ACCOUNT
-----------------------------
HIGH YIELD VARIABLE ACCOUNT
---------------------------
CAPITAL APPRECIATION VARIABLE ACCOUNT
-------------------------------------
GOVERNMENT SECURITIES VARIABLE ACCOUNT
--------------------------------------
TOTAL RETURN VARIABLE ACCOUNT
-----------------------------
WORLD GOVERNMENTS VARIABLE ACCOUNT
----------------------------------
MANAGED SECTORS VARIABLE ACCOUNT
--------------------------------
John D. McNeil is the Chairman, Stephen E. Cavan is the Secretary, and
James R. Bordewick, Jr., is the Assistant Secretary.
MIL
---
A. Keith Brodkin is a Director and the Chairman, Arnold D. Scott and
Jeffrey L. Shames are Directors, Thomas J. Cashman, Jr., an Executive 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, Executive Vice President and Chief Financial Officer of MFS, 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, 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, Ellen M. Moynihan and Mark E. Bradley are the Assistant
Treasurers and James R. Bordewick, Jr., is the Assistant Secretary.
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 and James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers.
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.
<PAGE>
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 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.
MFSI
----
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 (who is an Executive Vice President of MFS) 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
Donald A. Stewart President and a Director, Sun Life Assurance
Company of Canada, Sun Life Centre, 150 King
Street West, Toronto, Ontario, Canada (Mr.
Stewart is also an officer and/or Director of
various subsidiaries and affiliates of Sun
Life)
<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 Director of Mutual Fund Operations, The Boston
Russo 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:
<TABLE>
<CAPTION>
NAME ADDRESS
--------------------------------- -------------------
<S> <C>
Massachusetts Financial Services 500 Boylston Street
Company (investment adviser) Boston, MA 02116
MFS Fund Distributors, Inc. 500 Boylston Street
(distributor) Boston, MA 02116
Investors Bank & Trust 89 South Street
Company (custodian) Boston, MA 02111
MFS Service Center, Inc. 500 Boylston Street
(transfer agent) Boston, MA 02116
</TABLE>
The Registrant's corporate documents are kept by the Registrant at its
offices. Portfolio brokerage orders, other purchase orders, reasons for
brokerage allocation and lists of persons authorized to transact business for
the Registrant are kept by Massachusetts Financial Services Company at 500
Boylston Street, Boston, Massachusetts 02116. Shareholder account records are
kept by MFS Service Center, Inc. at 500 Boylston Street, Boston, Massachusetts
02116. Transaction journals, receipts for the acceptance and delivery of
securities and cash, ledgers and trial balances are kept by Investors Bank &
Trust Company, 89 South Street, Boston, MA 02111.
<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 29th day of September, 1997.
MFS VARIABLE INSURANCE
TRUST
By: /s/ 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 September 29, 1997.
SIGNATURE TITLE
--------- -----
/s/ A. KEITH BRODKIN* Chairman, President (Principal
- ------------------------
A. Keith Brodkin Executive Officer) and Trustee
/s/ W. THOMAS LONDON* Treasurer (Principal Financial Officer
- ------------------------
W. Thomas London and Principal Accounting Officer)
/s/ WILLIAM R. GUTOW* Trustee
- ------------------------
William R. Gutow
<PAGE>
/s/ NELSON J. DARLING, JR.* Trustee
- ---------------------------
Nelson J. Darling, Jr.
*By: /s/ 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
electronically with the Securities and
Exchange Commission on October 26, 1995.
<PAGE>
INDEX TO EXHIBITS
-----------------
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO.
- ----------- ---------------------- --------
1 (e) Certificate of Amendment to Declaration of Trust -
Redesignation of Series
11 Consent of Deloitte & Touche LLP
17 (b) Financial Data Schedule for MFS Strategic Fixed
Income Series for the six months ended
June 30, 1997
<PAGE>
EXHIBIT 1(E)
MFS VARIABLE INSURANCE TRUST
CERTIFICATION OF AMENDMENT
TO DECLARATION OF TRUST
REDESIGNATION OF SERIES
Pursuant to Section 6.9 of the Amended and Restated Declaration of
Trust dated January 24, 1996 (the "Declaration"), of MFS Variable Insurance
Trust (the "Trust"), the Trustees of the Trust hereby redesignate an existing
series of Shares (as defined in the Declaration) as follows:
1. The series designated as MFS Strategic Fixed Income Series shall
be redesignated as MFS/Foreign & Colonial Emerging Markets Equity Series.
Pursuant to Section 6.9(i) of the Declaration, this redesignation of
series of Shares shall be effective upon the execution of a majority of the
Trustees of the Trust.
<PAGE>
IN WITNESS WHEREOF, a majority of the Trustees of the Trust have
executed this redesignation of series this 9th day of September, 1997.
/s/ A. Keith Brodkin
- --------------------------
A. Keith Brodkin
76 Farm Road
Sherborn, MA 01770
/s/ Nelson J. Darling, Jr.
- --------------------------
Nelson J. Darling, Jr.
74 Beach Bluff Avenue
Swampscott, MA 01907
/s/ William R. Gutow
- --------------------------
William R. Gutow
3 Rue Dulac
Dallas, TX 75230
<PAGE>
EXHIBIT 11
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Post-Effective
Amendment No. 9 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 each of our two reports, dated February 7, 1997 and
August 1, 1997, relating to the statement of assets and liabilities of
MFS/Foreign & Colonial Emerging Markets Equity Series, formerly known as MFS
Strategic Fixed Income Series, as of December 31, 1996 and June 30, 1997,
respectively. 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
September 29, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000918571
<NAME> MFS VARIABLE INSURANCE TRUST
<SERIES>
<NUMBER> 10
<NAME> MFS STRATEGIC FIXED INCOME SERIES
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 8,333
<TOTAL-ASSETS> 8,333
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8,333
<SHARES-COMMON-STOCK> 833
<SHARES-COMMON-PRIOR> 833
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 8,333
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 8,333
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.00
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.00
<EXPENSE-RATIO> 0.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
