MFS[RegTM] RESEARCH SERIES PROSPECTUS
MFS[RegTM] GROWTH WITH INCOME SERIES May 1, 1998
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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 13
separate mutual fund series (individually or collectively hereinafter referred
to as a "Series" or the "Series"), two of which are offered pursuant to this
Prospectus:
- -- MFS Research Series (the "Research Series"), which seeks to provide
long-term growth of capital and future income; and
- -- MFS Growth With Income Series (the "Growth With Income Series"), which seeks
to provide reasonable current income and long-term growth of capital and
income.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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This Prospectus sets forth concisely the information about each Series that a
prospective investor should know before applying for the Contracts offered by
the separate accounts of certain insurance companies ("Participating Insurance
Companies"). Investors are advised to read this Prospectus and the applicable
Contract prospectus carefully and retain them for future reference. If you
require more detailed information, a Statement of Additional Information dated
May 1, 1998, 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 (http://www.sec.gov) 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.
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SHARES OF THE TRUST ARE AVAILABLE AND ARE BEING MARKETED AS A POOLED FUNDING
VEHICLE FOR LIFE INSURANCE COMPANIES WRITING ALL TYPES OF CONTRACTS.
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THE RESEARCH SERIES AND THE GROWTH WITH INCOME SERIES ARE INTENDED FOR
INVESTORS WHO UNDERSTAND AND ARE WILLING TO ACCEPT THE RISKS ENTAILED IN
SEEKING LONG-TERM GROWTH OF CAPITAL OR CAPITAL APPRECIATION. BECAUSE OF THEIR
INVESTMENT POLICIES PERMITTING INVESTMENT IN FOREIGN SECURITIES, INVESTMENTS IN
EACH SERIES MAY BE SUBJECT TO A GREATER DEGREE OF RISK THAN INVESTMENTS IN
OTHER INVESTMENT COMPANIES WHICH INVEST ENTIRELY IN DOMESTIC SECURITIES.
Investors should read this Prospectus and retain it for future reference.
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TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
1. Expense Summary ............................................... 3
2. Condensed Financial Information ............................... 4
3. Investment Concept of the Trust ............................... 6
4. Investment Objectives and Policies ............................ 6
MFS Research Series ....................................... 7
MFS Growth With Income Series ............................. 7
5. Certain Securities and Investment Techniques .................. 7
6. Additional Risk Factors ....................................... 11
7. Management of the Series ...................................... 14
8. Information Concerning Shares of Each Series .................. 16
Purchases and Redemptions ................................. 16
Net Asset Value ........................................... 17
Distributions ............................................. 17
Tax Status ................................................ 17
Description of Shares, Voting Rights and Liabilities ...... 17
Performance Information ................................... 18
Expenses .................................................. 18
Shareholder Communications ................................ 19
Appendix A--Description of Bond Ratings ........................... A-1
</TABLE>
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1. EXPENSE SUMMARY
Annual Operating Expenses (as a percentage of average net assets):
<TABLE>
<CAPTION>
MFS
MFS Growth
Research With Income
Series Series
---------- ---------------
<S> <C> <C>
Management Fee .............................................. 0.75% 0.75%
Other Expenses (after expense limitation)(1) ................ 0.13% 0.25%(2)
---- -------
Total Operating Expenses (after expense limitation) ......... 0.88% 1.00%(2)
</TABLE>
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(1) Each Series has an expense offset arrangement which reduces the Series'
custodian fee based upon the amount of cash maintained by the Series with
its custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have
the effect of reducing the Series' expenses). Any such fee reductions are
not reflected under "Other Expenses."
(2) The Adviser has agreed to bear expenses for these Series, subject to
reimbursement by these Series, such that each such Series' "Other
Expenses" shall not exceed 0.25% of the average daily net assets of the
Series during the current fiscal year. See "Information Concerning Shares
of Each Series--Expenses." Otherwise, "Other Expenses" and "Total
Operating Expenses" for the Growth With Income Series would be 0.35% and
1.10%, respectively.
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>
Research ................... $ 9 $29 $51 $113
Growth With Income ......... 10 32 55 122
</TABLE>
The purpose of the expense table above is to assist investors in
understanding the various costs and expenses that a shareholder of the Series
will bear directly or indirectly. The Series' annual operating expenses do not
reflect expenses 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.
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2. CONDENSED FINANCIAL INFORMATION
The following financial information has been audited since the
commencement of investment operations of each Series and should be read in
conjunction with the financial statements included in the Series' Annual
Reports to Shareholders. These financial statements are incorporated by
reference into the SAI in reliance upon the report of the Series' independent
auditors given upon their authority as experts in accounting and auditing. The
Series' current independent auditors are Deloitte & Touche LLP.
Research Series
<TABLE>
<CAPTION>
Year Ended Year Ended Period Ended
December 31, 1997 December 31, 1996 December 31, 1995*
------------------- ------------------- -------------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value--beginning of period ............................... $ 13.13 $ 10.89 $10.00
-------- ------- ------
Income from investment operations#--
Net investment income[sec] ........................................ $ 0.05 $ 0.06 $ 0.05
Net realized and unrealized gain on investments and
foreign currency transactions ................................... 2.62 2.37 1.01
-------- ------- ------
Total from investment operations ................................ $ 2.67 $ 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 ..................................... $ 15.80 $ 13.13 $10.89
======== ======= ======
Total return ....................................................... 20.26% 22.33% 10.62%++
Ratios (to average net assets)/Supplemental data[sec]:
Expenses .......................................................... 0.92% 1.00% 1.00%+
Net investment income ............................................. 0.34% 0.47% 1.15%+
Portfolio turnover ................................................. 99% 56% 28%
Average commission rate### ......................................... $ 0.0544 $0.0295 --
Net assets at end of period (000 omitted) .......................... $285,845 $35,710 $2,530
</TABLE>
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* For the period from the commencement of the Series' investment
operations, July 26, 1995, through December 31, 1995.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Series' expenses are calculated without reduction for fees paid
indirectly.
### Average commission rate is calculated with fiscal years beginning on or
after September 1, 1995.
[sec] The investment adviser voluntarily agreed to maintain, subject to
reimbursement by the Series, the expenses of the Series at not more than
1.00% of average daily net assets. To the extent actual expenses were over
or under this limitation, the net investment income (loss) per share and
the ratios would have been:
<TABLE>
<S> <C> <C> <C>
Net investment income (loss) .......... $0.06 -- $(0.08)
Ratios (to average net assets):
Expenses## ........................... 0.88% 1.48% 3.90%+
Net investment income (loss) ......... 0.38% -- (1.73)%+
</TABLE>
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Growth With Income Series
<TABLE>
<CAPTION>
Year Ended Year Ended Period Ended
December 31, 1997 December 31, 1996 December 31, 1995*
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<S> <C> <C> <C>
Per share data (for a share outstanding throughout
each period):
Net asset value--beginning of period .................... $ 12.98 $ 10.61 $10.00
------- ------- ------
Income from investment operations#--
Net investment income[sec] ............................. $ 0.16 $ 0.18 $ 0.05
Net realized and unrealized gain on investments and
foreign currency transactions ........................ 3.70 2.42 0.61
------- ------- ------
Total from investment operations ..................... $ 3.86 $ 2.60 $ 0.66
------- ------- ------
Less distributions declared to shareholders--
From net investment income ............................. $ (0.07) $ (0.09) $(0.05)
From net realized gain on investments and foreign
currency transactions ................................ (0.29) (0.13) --
In excess of net realized gain on investments and
foreign currency transactions ........................ (0.04) (0.01) --
------- ------- ------
Total distributions declared to shareholders ......... $ (0.40) $ (0.23) $(0.05)
------- ------- ------
Net asset value--end of period .......................... $ 16.44 $ 12.98 $10.61
======= ======= ======
Total return ............................................ 29.78% 24.46% 6.64%++
Ratios (to average net assets)/Supplemental data[sec]:
Expenses ............................................... 1.00% 1.00% 1.00%+
Net investment income .................................. 0.93% 1.52% 2.20%+
Portfolio turnover ...................................... 42% 41% 2%
Average commission rate### .............................. $0.0455 $0.0351 --
Net assets at end of period (000 omitted) ............... $58,045 $ 9,174 $ 365
</TABLE>
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* For the period from the commencement of the Series' investment
operations, October 9, 1995, through December 31, 1995.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, expenses are
calculated without reduction for fees paid indirectly.
### Average commission rate is calculated for Series with fiscal years
beginning on or after September 1, 1995.
[sec] 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 this limitation, the net investment income (loss) per
share and the ratios would have been:
<TABLE>
<S> <C> <C> <C>
Net investment income (loss) .......... $0.13 $0.05 $(0.41)
Ratios (to average net assets):
Expenses## ........................... 1.10% 2.07% 21.44%+
Net investment income (loss) ......... 0.82% 0.46% (18.24)%+
</TABLE>
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3. INVESTMENT CONCEPT OF THE TRUST
The Trust is an open-end, registered management investment company
comprised of the following thirteen 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, Money Market Series and New
Discovery Series. Each Series is a segregated, separately managed portfolio of
securities. All of the Series, except the Utilities Series and the World
Governments Series, are diversified. Additional series may be created from time
to time. The Trust was organized as a business trust under the laws of The
Commonwealth of Massachusetts by a Declaration of Trust dated February 1, 1994.
The Trust currently offers shares of each Series to insurance company
separate accounts that fund Contracts. Separate accounts may purchase or redeem
shares at net asset value without any sales or redemption charge. Fees and
charges imposed by a separate account, however, will affect the actual return to
the holder of a Contract. A separate account may also impose certain
restrictions or limitations on the allocation of purchase payments or Contract
value to one or more Series, and not all Series may be available in connection
with a particular Contract. Prospective investors should consult the applicable
Contract prospectus for information regarding fees and expenses of the Contract
and separate account and any applicable restrictions or limitations. The Trust
assumes no responsibility for such prospectuses.
Shares of the Series are offered to the separate accounts of Participating
Insurance Companies that are affiliated or unaffiliated ("shared funding").
Shares of the Series may serve as the underlying investments for both variable
annuity and variable life insurance contracts ("mixed funding"). Due to
differences in tax treatment or other considerations, the interests of various
Contract owners might at some time be in conflict. The Trust currently does not
foresee any such conflict. Nevertheless, the Trust's Trustees intend to monitor
events in order to identify any material irreconcilable conflicts which may
possibly arise and to determine what action, if any, should be taken in response
thereto. If such a conflict were to occur, one or more separate accounts of the
Participating Insurance Companies might be required to withdraw its investments
in one or more Series. This might force a Series to sell securities at
disadvantageous prices.
Individual Contract holders are not the "shareholders" of the Trust.
Rather, the Participating Insurance Companies and their separate accounts are
the shareholders or investors, although such companies may pass through voting
rights to their Contract holders.
The Trust's Board of Trustees provides broad supervision over the affairs
of the Trust and the Series. Massachusetts Financial Services Company, a
Delaware corporation ("MFS" or the "Adviser"), is the investment adviser to each
Series. A majority of the Trustees of the Trust are not affiliated with the
Adviser. The Adviser is responsible for the management of the assets of each
Series and the officers of the Trust are responsible for the operations. The
Adviser manages the Series' portfolios from day to day in accordance with the
investment objectives and policies of each Series. The selection of investments
and the way they are managed depend on the conditions and trends in the economy
and the financial marketplaces.
4. INVESTMENT OBJECTIVES AND POLICIES
Each Series has different investment objectives which it pursues through
separate investment policies, as described below. The differences in objectives
and policies among the Series can be expected to affect the degree of market and
financial risk to which each Series is subject and the return of each Series.
The investment objectives and policies of each Series may, unless otherwise
specifically stated, be changed by the Trustees of the Trust without a vote of
the shareholders. Any investment involves risk and there is no assurance that
the objectives of any Series will be achieved.
In addition to the specific investment practices described below, each
Series may also engage in certain investment techniques as described under the
caption "Certain Securities and Investment Techniques" below and in the SAI
under the caption "Certain Securities and Investment Techniques." The Series'
investments are subject to certain risks, as
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described in the above-referenced sections of this Prospectus and the SAI and
as described below under the caption "Additional Risk Factors."
MFS Research Series -- The Research Series' investment objective is to provide
long-term growth of capital and future income.
The portfolio securities of the Research Series are selected by a
committee of investment research analysts. This committee includes investment
analysts employed not only by the Adviser but also by MFS International (U.K.)
Limited, a wholly owned subsidiary of MFS. The Series' assets are allocated
among industries by the analysts acting together as a group. Individual
analysts are then responsible for selecting what they view as the securities
best suited to meet the Series' investment objective within their assigned
industry responsibility.
The Research Series' policy is to invest a substantial proportion of its
assets in equity securities of companies believed to possess better than
average prospects for long-term growth. A smaller proportion of the assets may
be invested in bonds, short-term obligations, preferred stocks or common stocks
whose principal characteristic is income production rather than growth. Such
securities may also offer opportunities for growth of capital as well as
income. In the case of both growth stocks and income issues, emphasis is placed
on the selection of progressive, well-managed companies. The Series'
non-convertible debt investments, if any, may consist of "investment grade"
securities (rated Baa or better by Moody's or BBB or better by S&P or by
Fitch), and, with respect to no more than 10% of the Series' net assets,
securities in the lower rated categories (rated Ba or lower by Moody's or BB or
lower by S&P, by Fitch or by Duff & Phelps) or securities which the Adviser
believes to be of similar quality to these lower rated securities (commonly
known as "junk bonds"). For a description of bond ratings, see Appendix A to
this Prospectus.
Consistent with its investment objective and policies described above, the
Series may also invest up to 20% of its net assets in foreign securities
(including emerging market securities) which are not traded on a U.S. exchange.
MFS Growth With Income Series -- The Growth With Income Series' investment
objectives are to provide reasonable current income and long-term growth of
capital and income.
Under normal market conditions, the Growth With Income Series will invest
at least 65% of its assets in equity securities of companies that are believed
to have long-term prospects for growth and income.
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.
5. CERTAIN SECURITIES AND INVESTMENT TECHNIQUES
Equity Securities: Each of the Series may invest in all types of equity
securities, including the following: common stocks, preferred stocks and
preference stocks; securities such as bonds, warrants or rights that are
convertible into stocks; and 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.
Lending of Portfolio Securities: Each of the Series may seek to increase
its income by lending portfolio securities. Such loans will usually be made to
member firms (and subsidiaries thereof) of the New York Stock Exchange (the
"Exchange") and to member banks of the Federal Reserve System, and would be
required to be secured continuously by collateral in cash, U.S. Treasury
securities or an irrevocable letter of credit maintained on a current basis at
an amount at least equal to the market value of the securities loaned. If the
Adviser determines to make securities loans, it is intended that the value of
the securities loaned would not exceed 10% of the value of the net assets of the
Series making the loans.
Emerging Market Securities: Consistent with their respective objectives,
each of the Series may invest in securities of issuers whose principal
activities are located in emerging market countries. Emerging market countries
include any
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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 middle-income economy according to the
International Bank for Reconstruction and Development, the country's foreign
currency debt rating, its political and economic stability and the development
of its financial and capital markets. The Adviser 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 location of its assets. The issuer's principal activities
generally are deemed to be located in a particular country if: (a) the security
is issued or guaranteed by the government of that country or any of its
agencies, authorities or instrumentalities; (b) the issuer is organized under
the laws of, and maintains a principal office in that country; (c) the issuer
has its principal securities trading market in that country; (d) the issuer
derives 50% or more of its total revenues from goods sold or services performed
in that country; or (e) the issuer has 50% or more of its assets in that
country.
Brady Bonds: The Growth With Income may invest in Brady Bonds, which are
securities created through the exchange of existing commercial bank loans to
public and private entities in certain emerging markets for new bonds in
connection with debt restructurings under a debt restructuring plan introduced
by former U.S. Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan").
Brady Plan debt restructurings have been implemented to date in Argentina,
Brazil, Bulgaria, Costa Rica, Croatia, Dominican Republic, Ecuador, Jordan,
Mexico, Morocco, Nigeria, Panama, Peru, the Philippines, Poland, Slovenia,
Uruguay and Venezuela. Brady Bonds have been issued only recently, and for that
reason do not have a long payment history. Brady Bonds may be collateralized or
uncollateralized, are issued in various currencies (but primarily the U.S.
dollar) and are actively traded in over-the-counter secondary markets. U.S.
dollar-denominated, collateralized Brady Bonds, which may be fixed-rate bonds or
floating-rate bonds, are generally collateralized in full as to principal by
U.S. Treasury zero coupon bonds having the same maturity as the bonds. Brady
Bonds are often viewed as having three or four valuation components: the
collateralized repayment of principal at final maturity; the collateralized
interest payments; the uncollateralized interest payments; and any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constituting the "residual risk"). In light of the residual risk of
Brady Bonds and the history of defaults of countries issuing Brady Bonds with
respect to commercial bank loans by public and private entities, investments in
Brady Bonds may be viewed as speculative.
Repurchase Agreements: Each of the Series may enter into repurchase
agreements in order to earn income on available cash or as a temporary defensive
measure. Under a repurchase agreement, a Series acquires securities subject to
the seller's agreement to repurchase at a specified time and price. If the
seller becomes subject to a proceeding under the bankruptcy laws or its assets
are otherwise subject to a stay order, the Series' right to liquidate the
securities may be restricted (during which time the value of the securities
could decline). As discussed in the SAI, each Series has adopted certain
procedures intended to minimize risk.
"When-Issued" Securities: The Growth With Income may purchase securities on
a "when-issued" or on a "forward delivery" basis, which means that the
securities will be delivered to the Series at a future date usually beyond
customary settlement time. The commitment to purchase a security for which
payment will be made on a future date may be deemed a separate security. In
general, a Series does not pay for such securities until received, and does not
start earning interest on the securities until the contractual settlement date.
While awaiting delivery of securities purchased on such bases, a Series will
segregate liquid assets sufficient to cover its commitments.
Restricted Securities: The Research 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 continuing review of the
trading markets for a specific Rule 144A security, whether such security is
liquid and thus not subject to the Series' limitation on investing not more than
15% of its net assets in illiquid investments. The Board of Trustees has adopted
guidelines and delegated to MFS the daily function of determining and monitoring
the liquidity of Rule 144A secu-
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rities. The Board, however, retains oversight of the liquidity determinations,
focusing on factors such as valuation, liquidity and availability of
information. Investing in Rule 144A securities could have the effect of
decreasing the level of liquidity in a Series to the extent that qualified
institutional buyers become for a time uninterested in purchasing Rule 144A
securities held in the Series' portfolio.
Zero Coupon Bonds, Deferred Interest Bonds and PIK Bonds: The Growth With
Income Series may invest in zero coupon bonds. Zero coupon and deferred interest
bonds are debt obligations which are issued or purchased at a significant
discount from face value. The discount approximates the total amount of interest
the bonds will accrue and compound over the period until maturity or the first
interest payment date at a rate of interest reflecting the market rate of the
security at the time of issuance. While zero coupon bonds do not require the
periodic payment of interest, deferred interest bonds provide for a period of
delay before the regular payment of interest begins. PIK bonds are debt
obligations which provide that the issuer thereof may, at its option, pay
interest on such bonds in cash or in the form of additional debt obligations.
Such investments benefit the issuer by mitigating its need for cash to meet debt
service, but also require a higher rate of return to attract investors who are
willing to defer receipt of such cash. Such investments may experience greater
volatility in market value due to changes in interest rates than debt
obligations which make regular payments of interest. Each Series will accrue
income on such investments for tax and accounting purposes, as required, which
is distributable to shareholders and which, because no cash is received at the
time of accrual, may require the liquidation of other portfolio securities to
satisfy the Series' distribution obligations.
Foreign Growth Securities: Each of the Series may invest in securities of
foreign growth companies, including established foreign companies, whose rates
of earnings growth are expected to accelerate because of special factors, such
as rejuvenated management, new products, changes in consumer demand, or basic
changes in the economic environment 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 developed securities markets,
such as Japan, Australia, Canada, New Zealand and most Western European
countries, including Great Britain.
Depositary Receipts: Each of the Series may invest in American Depositary
Receipts ("ADRs"). ADRs are certificates issued by a U.S. depository (usually a
bank) and represent a specified quantity of shares of an underlying non-U.S.
stock on deposit with a custodian bank as collateral. Because ADRs trade on U.S.
securities exchanges, the Adviser generally does not treat them as foreign
securities. However, they are subject to many of the risks of foreign securities
such as changes in exchange rates and more limited information about foreign
issuers. Generally, ADRs are in registered form and are designed for use in U.S.
securities markets.
Options on Securities: The Growth With Income Series may write (sell)
covered put and call options and purchase put and call options on securities.
The Series will write options on securities for the purpose of increasing its
return and/or to protect the value of its portfolio. In particular, where a
Series writes an option that expires unexercised or is closed out by the Series
at a profit, it will retain the premium paid for the option which will increase
its gross income and will offset in part the reduced value of the portfolio
security underlying the option, or the increased cost of portfolio securities to
be acquired. However, the writing of options constitutes only a partial hedge,
up to the amount of the premium, less any transaction costs. In contrast, if the
price of the underlying security moves adversely to the Series' position, the
option may be exercised and the Series will be required to purchase or sell the
underlying security at a disadvantageous price, which may only be partially
offset by the amount of the premium. The Series may also write combinations of
put and call options on the same security, known as "straddles." Such
transactions can generate additional premium income but also present increased
risk.
By writing a call option on a security, a Series limits its opportunity to
profit from any increase in the market value of the underlying security, since
the holder will usually exercise the call option when the market value of the
underlying security exceeds the exercise price of the call. However, the Series
retains the risk of depreciation in value of securities on which it has written
call options.
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The Growth With Income 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.
Options on Stock Indices: The Growth With Income Series may write (sell)
covered call and put options and purchase call and put options on stock indices.
The Series may also 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
the Series writes an option on a stock index, and the value of the index moves
adversely to the holder's position, the option will not be exercised, and the
Series will either close out the option at a profit or allow it to expire
unexercised. A Series will thereby retain the amount of the premium, less
related transaction costs, which will increase its gross income and offset part
of the reduced value of portfolio securities or the increased cost of securities
to be acquired. Such transactions, however, will constitute only partial hedges
against adverse price fluctuations, since any such fluctuations will be offset
only to the extent of the premium received by the 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.
The Growth With Income 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.
Futures Contracts and Options on Futures Contracts: The Growth With Income
Series may purchase and sell Futures Contracts on stock indices, and on foreign
currencies or indices of foreign currencies. The Series may also purchase and
write Options on such Futures Contracts.
Such transactions will be entered into for hedging purposes or for
non-hedging purposes to the extent permitted by applicable law. The Series will
incur brokerage fees when it purchases and sells Futures Contracts, and will be
required to maintain margin deposits. In addition, Futures Contracts entail
risks. Although the Adviser believes that use of such Contracts will benefit 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.
Purchases of Options on Futures Contracts may present less risk in hedging
a Series' portfolio than the purchase or sale of the underlying Futures
Contracts since the potential loss is limited to the amount of the premium plus
related transaction costs, although it may be necessary to exercise the option
to realize any profit, which results in the establishment of a futures
position. The writing of Options on Futures Contracts, however, does not
present less risk than the trading of Futures Contracts and will constitute
only a partial hedge, up to the amount of the premium received. In addition, if
an option is exercised, a Series may suffer a loss on the transaction.
Futures Contracts and Options on Futures Contracts that are entered into
by a Series will be traded on U.S. and foreign exchanges.
Forward Contracts: Each of the 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 the Series may
enter into Forward Contracts for hedging purposes and for non-hedging purposes
(i.e., speculative purposes). By entering into transactions in Forward Contracts
for hedging purposes, a Series may be required to forego the benefits of
advantageous
10
<PAGE>
changes in exchange rates and, in the case of Forward Contracts entered into
for non-hedging purposes, a Series may sustain losses which will reduce its
gross income. Such transactions, therefore, could be considered speculative.
Forward Contracts are traded over-the-counter and not on organized commodities
or securities exchanges. As a result, Forward Contracts operate in a manner
distinct from exchange-traded instruments, and their use involves certain risks
beyond those associated with transactions in Futures Contracts or options
traded on exchanges. A Series may choose to, or be required to, receive
delivery of the foreign currencies underlying Forward Contracts it has entered
into. Under certain circumstances, such as where the Adviser or Sub-Adviser, as
applicable, believes that the applicable exchange rate is unfavorable at the
time the currencies are received or the Adviser or Sub-Adviser, as applicable,
anticipates, for any other reason, that the exchange rate will improve, the
Series may hold such currencies for an indefinite period of time. A Series may
also enter into a Forward Contract on one currency to hedge against risk of
loss arising from fluctuations in the value of a second currency (referred to
as a "cross hedge") if, in the judgment of the Adviser or Sub-Adviser, as
applicable, a reasonable degree of correlation can be expected between
movements in the values of the two currencies. Each of these Series has
established procedures which require use of segregated assets or "cover" in
connection with the purchase and sale of such contracts.
Options on Foreign Currencies: The Growth With Income Series may purchase
and write options on foreign currencies ("Options on Foreign Currencies") for
the purpose of protecting against declines in the dollar value of portfolio
securities and against increases in the dollar cost of securities to be
acquired. As in the case of other types of options, however, the writing of an
Option on Foreign Currency will constitute only a partial hedge, up to the
amount of the premium received, and a Series may be required to purchase or sell
foreign currencies at disadvantageous exchange rates, thereby incurring losses.
The purchase of an Option on Foreign Currency may constitute an effective hedge
against fluctuations in exchange rates although, in the event of rate movements
adverse to a Series' position, it may forfeit the entire amount of the premium
paid for the option plus related transaction costs. A Series may also choose to,
or be required to, receive delivery of the foreign currencies underlying Options
on Foreign Currencies it has entered into. Under certain circumstances, such as
where the Adviser believes that the applicable exchange rate is unfavorable at
the time the currencies are received or the Adviser anticipates, for any other
reason, that the exchange rate will improve, a Series may hold such currencies
for an indefinite period of time.
6. ADDITIONAL RISK FACTORS
Options, Futures Contracts and Forward Contracts: Although certain Series
will enter into transactions in options, Futures Contracts, Options on Futures
Contracts, Forward Contracts and Options on Foreign Currencies for hedging
purposes, such transactions nevertheless involve certain risks. For example, a
lack of correlation between the instrument underlying an option or Futures
Contract and the assets being hedged, or unexpected adverse price movements,
could render a Series' hedging strategy unsuccessful and could result in losses.
Certain Series also may enter into transactions in options, Futures Contracts,
Options on Futures Contracts and Forward Contracts for other than hedging
purposes, which involves greater risk. In particular, such transactions may
result in losses for a Series which are not offset by gains on other portfolio
positions, thereby reducing gross income. In addition, foreign currency markets
may be extremely volatile from time to time. There can be no assurance that a
liquid secondary market will exist for any contract purchased or sold, and a
Series may be required to maintain a position until exercise or expiration,
which could result in losses. The SAI contains a description of the nature and
trading mechanics of options, Futures Contracts, Options on Futures Contracts,
Forward Contracts and Options on Foreign Currencies, and includes a discussion
of the risks related to transactions therein.
Transactions in Forward Contracts may be entered into only in the
over-the-counter market. Futures Contracts and Options on Futures Contracts may
be entered into on U.S. exchanges regulated by the Commodity Futures Trading
Commission and on foreign exchanges. In addition, the securities and indexes
underlying options, Futures Contracts and Options on Futures Contracts traded
by the Series will include both domestic and foreign securities.
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<PAGE>
Lower Rated Bonds: The Research Series may invest in fixed income
securities rated Baa by Moody's or BBB by S&P, Fitch or Duff & Phelps and
comparable unrated securities. These securities, while normally exhibiting
adequate protection parameters, have speculative characteristics and changes in
economic conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than in the case of higher
grade securities.
This Series may also invest in securities rated Ba or lower by Moody's or
BB or lower by S&P, Fitch or Duff & Phelps and comparable unrated securities
(commonly known as "junk bonds") to the extent described above. See Appendix A
to this Prospectus for a description of these ratings. These securities are
considered speculative and, while generally providing greater income than
investments in higher rated securities, will involve greater risk of principal
and income (including the possibility of default or bankruptcy of the issuers
of such securities) and may involve greater volatility of price (especially
during periods of economic uncertainty or change) than securities in the higher
rating categories. However, since yields vary over time, no specific level of
income can ever be assured. These lower rated high yielding fixed income
securities generally tend to reflect economic changes and short-term corporate
and industry developments to a greater extent than higher rated securities
which react primarily to fluctuations in the general level of interest rates
(although these lower rated fixed income securities are also affected by
changes in interest rates, the market's perception of their credit quality, and
the outlook for economic growth). In the past, economic downturns or an
increase in interest rates have, under certain circumstances, caused a higher
incidence of default by the issuers of these securities and may do so in the
future, especially in the case of highly leveraged issuers. During certain
periods, the higher yields on a Series' lower rated high yielding fixed income
securities are paid primarily because of the increased risk of loss of
principal and income, arising from such factors as the heightened possibility
of default or bankruptcy of the issuers of such securities. Due to the fixed
income payments of these securities, a Series may continue to earn the same
level of interest income while its net asset value declines due to portfolio
losses, which could result in an increase in the Series' yield despite the
actual loss of principal. The market for these lower rated fixed income
securities may be less liquid than the market for investment grade fixed income
securities, and judgment may at times play a greater role in valuing these
securities than in the case of investment grade fixed income securities.
Changes in the value of securities subsequent to their acquisition will not
affect cash income or yield to maturity to a Series but will be reflected in
the net asset value of shares of the Series. See the SAI for more information
on lower rated securities.
Foreign Securities: Each of the Series may invest in dollar-denominated and
non-dollar-denominated foreign securities. Investing in securities of foreign
issuers generally involves risks not ordinarily associated with investing in
securities of domestic issuers. These include changes in currency rates,
exchange control regulations, governmental administration or economic or
monetary policy (in the U.S. or abroad) or circumstances in dealings between
nations. Costs may be incurred in connection with conversions between various
currencies. Special considerations may also include more limited information
about foreign issuers, higher brokerage costs, different accounting standards
and thinner trading markets. Foreign securities markets may also be less liquid,
more volatile and less subject to government supervision than in the United
States. Investments in foreign countries could be affected by other factors
including expropriation, confiscatory taxation and potential difficulties in
enforcing contractual obligations and could be subject to extended settlement
periods. Each of the Series may hold foreign currency received in connection
with investments in foreign securities when, in the judgment of the Adviser, it
would be beneficial to convert such currency into U.S. dollars at a later date,
based on anticipated changes in the relevant exchange rate. Such Series may also
hold foreign currency in anticipation of purchasing foreign securities. See the
SAI for further discussion of foreign securities and the holding of foreign
currency, as well as the associated risks.
Emerging Market Securities: Each of the Series may invest in emerging
markets. In addition to the general risks of investing in foreign securities,
investments in emerging markets involve special risks. Securities of many
issuers in emerging markets may be less liquid and more volatile than securities
of comparable domestic issuers. These securities may be considered speculative
and, while generally offering higher income and the potential for capital
appreciation, may present significantly greater risk. Emerging markets may have
different clearance and settlement procedures, and in certain
12
<PAGE>
markets there have been times when settlements have been unable to keep pace
with the volume of securities transactions, making it difficult to conduct such
transactions. Delays in settlement could result in temporary periods when a
portion of the assets of a Series is uninvested and no return is earned
thereon. The inability of a Series to make intended security purchases due to
settlement problems could cause a Series to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result in losses to a Series due to subsequent declines in value
of the portfolio securities, a decrease in the level of liquidity in a Series'
portfolio, or if a Series has entered into a contract to sell the security,
possible liability to the purchaser. Certain markets may require payment for
securities before delivery, and in such markets a Series bears the risk that
the securities will not be delivered and that the Series' payments will not be
returned. Securities prices in emerging markets can be significantly more
volatile than in the more developed nations of the world, reflecting the
greater uncertainties of investing in less established markets and economies.
In particular, countries with emerging markets may have relatively unstable
governments, present the risk of nationalization of businesses, restrictions on
foreign ownership, or prohibitions of repatriation of assets, and may have less
protection of property rights than more developed countries. The economies of
countries with emerging markets may be predominantly based on only a few
industries, may be highly vulnerable to changes in local or global trade
conditions, and may suffer from extreme and volatile debt burdens or inflation
rates. Local securities markets may trade a small number of securities and may
be unable to respond effectively to increases in trading volume, potentially
making prompt liquidation of substantial holdings difficult or impossible at
times. Securities of issuers located in countries with emerging markets may
have limited marketability and may be subject to more abrupt or erratic
movements.
Certain emerging markets may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in an
emerging market's balance of payments or for other reasons, a country could
impose temporary restrictions on foreign capital remittances. A Series could be
adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by the
application to the Series of any restrictions on investments.
Investment in certain foreign emerging market debt obligations may be
restricted or controlled to varying degrees. These restrictions or controls may
at times preclude investment in certain foreign emerging market debt
obligations and increase the expenses of a Series.
Short-Term Investments for Temporary Defensive Purposes -- During periods of
unusual market conditions when the Adviser or Sub-Adviser, as applicable,
believes that investing for temporary defensive purposes is appropriate, or in
order to meet anticipated redemption requests, a large portion or all of the
assets of each Series may be invested in cash (including foreign currency) or
cash equivalents including, but not limited to, obligations of banks (including
certificates of deposit, bankers' acceptances, time deposits and repurchase
agreements), commercial paper, short-term notes, U.S. Government Securities and
related repurchase agreements.
Portfolio Trading
Each of the Series intends to manage its portfolio by buying and selling
securities, as well as holding securities to maturity, to help attain its
investment objectives and policies.
Each of the Series will engage in portfolio trading if it believes a
transaction, net of costs (including custodian charges), will help in attaining
its investment objectives. In trading portfolio securities, a Series seeks to
take advantage of market developments, yield disparities and variations in the
creditworthiness of issuers. For a description of the strategies which may be
used by the Series in trading portfolio securities, see "Portfolio Transactions
and Brokerage Commissions" in the SAI.
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain, and maintain the availability of,
execution at the most favorable prices and in the most effective manner
possible. Consistent
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<PAGE>
with the foregoing primary consideration, the Conduct Rules of the National
Association of Securities Dealers, Inc. (the "NASD") and such other policies as
the Trustees of the Trust may determine, the Adviser may consider sales of
Contracts for which the Trust is an investment option, together with sales of
shares of other investment company clients of MFS Fund Distributors, Inc., the
distributor of shares of the Trust and of the MFS Family of Funds, as a factor
in the selection of broker-dealers to execute each Series' portfolio
transactions. From time to time the Adviser may direct certain portfolio
transactions to broker-dealer firms which, in turn, have agreed to pay a
portion of the Series' operating expenses (e.g., fees charged by the custodian
of the Series' assets). For a further discussion of portfolio trading, see the
SAI.
--------------------
The SAI includes a discussion of other investment policies and listing of
specific investment restrictions which govern the investment policies of each
Series. The specific investment restrictions listed in the SAI may be changed
without shareholder approval unless indicated otherwise (see the SAI). Except
with respect to the Series' policy on borrowing and investing in illiquid
securities, the Series' investment limitations, policies and rating standards
are adhered to at the time of purchase or utilization of assets; a subsequent
change in circumstances will not be considered to result in a violation of
policy.
7. MANAGEMENT OF THE SERIES
The Trust's Board of Trustees, as part of its overall management
responsibility, oversees various organizations responsible for each Series'
day-to-day management.
Investment Adviser -- MFS manages each Series pursuant to an Amended and
Restated Investment Advisory Agreement with the Trust on behalf of each Series
dated April 14, 1994, as amended and restated on April 30, 1998 (the "Advisory
Agreement"). Under the Advisory Agreement, MFS provides the Series with overall
investment advisory services. Subject to such policies as the Trustees may
determine, MFS makes investment decisions for each Series. For its services and
facilities, MFS receives a management fee, computed and paid monthly, in an
amount equal to the following annual rates of the average daily net assets of
each Series:
<TABLE>
<CAPTION>
Percentage of the average
daily net assets
Series of each Series
- ----------------------------------- --------------------------
<S> <C>
Research Series ................... 0.75%
Growth With Income Series ......... 0.75%
</TABLE>
For the fiscal year ended December 31, 1997, MFS received the following
management fees from the Series under the Advisory Agreement and assumed the
following amounts of the Series' expenses (see "Expenses" below):
<TABLE>
<CAPTION>
Management Fee Expenses Assumed
Series Paid to MFS by MFS
- ----------------------------------- ---------------- -----------------
<S> <C> <C>
Research Series ................... $1,343,324 $ 0
Growth With Income Series ......... 188,365 26,920
</TABLE>
MFS or its affiliates will pay a fee to New York Life Insurance Company
("New York Life") equal, on an annualized basis, to 0.20% of the aggregate net
assets of the Trust attributable to Contracts offered by separate accounts of
New York Life or their affiliates. Such fees will not be paid by the Series,
their shareholders, or by the Contract holders.
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<PAGE>
The identity and background of the portfolio managers for each Series is
set forth below. Unless indicated otherwise, each portfolio manager has acted
in that capacity since the commencement of investment operations of each
Series.
<TABLE>
<CAPTION>
Series Portfolio Managers
- --------------------------- ---------------------------------------------------------------------------------------
<S> <C>
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, an Executive 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.
</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[RegTM] Municipal Income Trust,
MFS Multimarket Income Trust, MFS Government Markets Income Trust, MFS
Intermediate Income Trust, MFS Charter Income Trust, MFS Special Value Trust,
MFS Institutional Trust, MFS/Sun Life Series Trust, and seven variable
accounts, each of which is a registered investment company established by Sun
Life Assurance Company of Canada (U.S.), a subsidiary of Sun Life Assurance
Company of Canada ("Sun Life"), in connection with the sale of various
fixed/variable annuity contracts. MFS and its wholly owned subsidiary, MFS
Institutional Advisors, Inc., provide investment advice to substantial private
clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts Investors
Trust. Net assets under the management of the MFS organization were
approximately $72.0 billion on behalf of approximately 2.8 million investor
accounts as of January 30, 1998. As of such date, the MFS organization managed
approximately $47.2 billion of assets invested in equity securities and
approximately $20.8 billion of assets invested in fixed income securities.
Approximately $4.2 billion of the assets managed by MFS are invested in
securities of foreign issuers and non-U.S. dollar-denominated securities of
U.S. issuers. MFS is a subsidiary of Sun Life of Canada (U.S.) Financial
Services Holdings, Inc., which in turn is an indirect wholly owned subsidiary
of Sun Life. The Directors of MFS are Jeffrey L. Shames, Arnold D. Scott, John
W. Ballen, John D. McNeil and Donald A. Stewart. Mr. Shames is the Chairman and
President and Mr. Scott is the Secretary and a Senior Executive Vice President
of MFS. Mr. Ballen is an Executive Vice President and Chief Equity Officer.
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.
W. Thomas London, Stephen E. Cavan, James R. Bordewick, Jr., Ellen
Moynihan, Mark E. Bradley and James O. Yost, all of whom are officers of MFS,
are officers of the Trust.
From time to time, the Adviser may purchase, redeem and exchange shares of
any Series. The purchase by the Adviser of shares of a Series may have the
effect of lowering that Series' expense ratio, while the redemption by the
Adviser of shares of a Series may have the effect of increasing that Series'
expense ratio.
Distributor -- MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary
of MFS, is the distributor of shares of each Series and also serves as
distributor for each of the other mutual funds managed by MFS.
Administrator -- MFS provides each Series with certain financial, legal,
compliance, shareholder communications and other administrative services
pursuant to a Master Administrative Services Agreement dated March 1, 1997, as
amended. Under this Agreement, each Series pays MFS an administrative fee of up
to 0.015% per annum of the Series' average daily net assets. This fee
reimburses MFS for a portion of the costs it incurs to provide such services.
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<PAGE>
Shareholder Servicing Agent -- MFS Service Center, Inc. (the "Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency,
certain dividend disbursing agency and other services for each Series.
8. INFORMATION CONCERNING SHARES OF EACH SERIES
Purchases and Redemptions
The separate accounts of the Participating Insurance Companies place
orders to purchase and redeem shares of each Series based on, among other
things, the amount of premium payments to be invested and surrender and
transfer requests to be effected on that day pursuant to Contracts. Orders
received by the Trust are effected on days on which the Exchange is open for
trading. For orders received by the Trust before the close of regular trading
on the Exchange (normally 4 p.m. eastern time), such purchases and redemptions
of the shares of each Series are effected at the respective net asset values
per share determined as of the close of regular trading on the Exchange on that
same day. Participating Insurance Companies shall be the designee of the Trust
for receipt of purchase and redemption orders from Contract holders and receipt
by such designee shall constitute receipt by the Trust; provided that the Trust
receives notice of such order generally 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.
At the sole discretion of the Trust, each Series may pay redemptions
either totally or partially by a distribution in-kind of securities (instead of
cash) from such Series' portfolio. The securities distributed in such a
distribution would be valued at the same amount as that assigned to them in
calculating the net asset value for the shares being sold. Securities
distributed by a Series will be selected by the Adviser in light of the Series'
objective and may not generally represent a pro rata distribution of each
security held in the Series' portfolio. If a shareholder received a
distribution in-kind, the shareholder could incur brokerage or transaction
charges when converting the securities to cash.
Purchases and exchanges should be made for investment purposes only. The
Trust and MFD each reserves the right to reject or restrict any specific
purchase or exchange request. The Trust is not designed for professional market
timing organizations or other entities using programmed or frequent exchanges.
The Trust defines a "market timer" as an individual, or organization acting on
behalf of one or more individuals, if the individual or organization makes six
or more exchange requests out of any Series per calendar year. Accounts under
common ownership or control, including accounts administered by market timers,
will be aggregated for purposes of this definition.
As noted above, the Trust and MFD each reserves the right to reject or
restrict any specific purchase and exchange request and, in addition, may
impose specific limitations with respect to market timers, including delaying
for up to seven days the purchase side of an exchange request by market timers
or specifically rejecting or otherwise restricting purchase and exchange
requests by market timers. In the event that any individual or entity is
determined either by the Trust or MFD, in its sole discretion, to be a market
timer with respect to any calendar year, the Trust and/or MFD may reject all
exchange requests into the Series during the remainder of that year.
The Trust may suspend the right of redemption of shares of any Series and
may postpone payment for any period: (i) during which the Exchange is closed
other than customary weekend and holiday closings or during which trading on
the Exchange is restricted; (ii) when the SEC determines that a state of
emergency exists which may make payment or transfer not reasonably practicable;
(iii) as the SEC may by order permit for the protection of the security holders
of the Trust; or (iv) at any time when the Trust may, under applicable laws,
rules and regulations, suspend payment on the redemption of its shares.
16
<PAGE>
Should any conflict between Contract holders arise which would require
that a substantial amount of net assets be withdrawn from any Series, orderly
portfolio management could be disrupted to the potential detriment of such
Contract.
Net Asset Value
The net asset value per share of each Series is determined each day during
which the Exchange is open for trading. This determination is made once during
each such day as of the close of regular trading on the Exchange by deducting
the amount of the Series' liabilities from the value of the Series' assets and
dividing the difference by the number of shares of the Series outstanding.
Values of assets in a Series' portfolio are determined on the basis of their
market or other fair value, as described in the SAI. All investments, assets
and liabilities are expressed in U.S. dollars based upon current currency
exchange rates.
Distributions
All of each Series' net investment income for any calendar year is
declared and paid to its shareholders as dividends on an annual basis. In
addition, each Series will make one or more distributions during the calendar
year to its shareholders from any net realized long-term and short-term capital
gains.
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 RIC 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 realized 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 any federal income or excise taxes.
Shares of the Series are offered only to the Participating Insurance
Companies' separate accounts that fund Contracts. See the applicable Contract
prospectus for a discussion of the federal income tax treatment of (1) the
separate accounts that purchase and hold Series shares and (2) the holders of
the Contracts that are funded through those accounts. In addition to the
diversification requirements of Subchapter M of the Code, each Series also
intends to continue to diversify its assets as required by Code Section
817(h)(1) and the regulations thereunder. See also "Tax Status" in the SAI.
Description of Shares, Voting Rights and Liabilities
Each Series currently has one class of shares, entitled Shares of
Beneficial Interest (without par value). The Trust has reserved the right to
create and issue additional classes and series of shares, in which case each
class of shares of a series would participate equally in the earnings,
dividends and assets attributable to that class of that particular series.
Shareholders are entitled to one vote for each share held, and shares of each
Series are entitled to vote separately to approve investment advisory
agreements or changes in investment restrictions with respect to that Series,
but shares of all Series vote together in the election of Trustees and
selection of accountants. Additionally, each Series will vote separately on any
other matter that affects solely that Series, but will otherwise vote together
with all other Series on all other matters. The Trust does not intend to hold
annual shareholder meetings. The Declaration of Trust provides that a Trustee
may be removed from office in certain instances. See "Description of Shares,
Voting Rights and Liabilities" in the SAI.
Each share of a Series represents an equal proportionate interest in the
Series with each share, subject to the liabilities of the particular Series.
Shares have no pre-emptive or conversion rights. Shares are fully paid and
non-assessable. Should a Series be liquidated, shareholders are entitled to
share pro rata in the net assets available for distribution to shareholders.
Shares will remain on deposit with the Shareholder Servicing Agent and
certificates will not be issued.
17
<PAGE>
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a trust may,
under certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed (e.g., fidelity bonding and omission insurance)
and the Trust itself was unable to meet its obligations.
As of February 27, 1998, Merrill Lynch Life Insurance Company,
Jacksonville, FL, owns of record 42.18% of the Research Series' shares, and,
therefore, is a controlling entity of the Series.
Performance Information
Each Series' performance may be quoted in advertising in terms of yield
and total return. Performance is based on historical results and is not
intended to indicate future performance. Performance quoted for a Series
includes the effect of deducting that Series' expenses, but may not include
charges and expenses attributable to any particular insurance product.
Excluding these charges from quotations of a Series' performance has the effect
of increasing the performance quoted. Performance for a Series will vary based
on, among other things, changes in market conditions, the level of interest
rates and the level of the Series' expenses. For further information about the
Series' performance for the fiscal year ended December 31, 1997, please see the
Series' Annual Reports. A copy of these Annual Reports may be obtained without
charge by contacting the Shareholder Servicing Agent (see back cover for
address and phone number).
From time to time, quotations of a Series' total return and yield may be
included in advertisements, sales literature or reports to shareholders or
prospective investors. The total return of a Series refers to return assuming
an investment has been held in the Series for one year and for the life of the
Series (the ending date of which will be stated). The total return quotations
may be expressed in terms of average annual or cumulative rates of return for
all periods quoted. Average annual total return refers to the average annual
compound rate of return of an investment in a Series. Cumulative total return
represents the cumulative change in value of an investment in a Series. Both
will assume that all dividends and capital gains distributions were reinvested.
The yield of a Series refers to net investment income generated by a Series
over a specified 30-day (or one month) period. This income is then
"annualized." That is, the amount of income generated by the Series during that
30-day (or one month) period is assumed to be generated over a 12-month period
and is shown as a percentage of net asset value.
Expenses
The Trust pays the compensation of the Trustees who are not officers of
MFS and all expenses of each Series (other than those assumed by MFS) including
but not limited to: advisory and administrative services; governmental fees;
interest charges; taxes; membership dues in the Investment Company Institute
allocable to each Series; fees and expenses of independent auditors, of legal
counsel, and of any transfer agent, registrar or dividend disbursing agent of
each Series; expenses of repurchasing and redeeming shares and servicing
shareholder accounts; expenses of preparing, printing and mailing prospectuses,
periodic reports, notices and proxy statements to shareholders and to
governmental officers and commissions; brokerage and other expenses connected
with the execution, recording and settlement of portfolio security
transactions; insurance premiums; fees and expenses of State Street Bank and
Trust Company, the Trust's Custodian, for all services to each Series,
including safekeeping of funds and securities and maintaining required books
and accounts; expenses of calculating the net asset value of shares of each
Series; and expenses of shareholder meetings. Expenses relating to the
issuance, registration and qualification of shares of each Series and the
preparation, printing and mailing of prospectuses are borne by each Series
except that the Distribution Agreement with MFD requires MFD to pay for
prospectuses that are to be used for sales purposes. Expenses of the Trust
which are not attributable to a specific Series are allocated between the
Series in a manner believed by management of the Trust to be fair and
equitable.
Subject to termination or revision at the sole discretion of MFS, MFS has
agreed to bear expenses of each of the Series such that the respective Series'
"Other Expenses," which are defined to include all expenses of the Series
(after
18
<PAGE>
taking into effect any compensating balance and offset arrangements) except for
management fees, taxes, extraordinary expenses, and brokerage and transaction
costs, do not exceed 0.25% of the average daily net assets of the Series (the
"Maximum Percentage"). The payments made by MFS on behalf of each Series under
this arrangement are subject to reimbursement by the Series to MFS, which will
be accomplished by the payment of an expense reimbursement fee by the Series to
MFS computed and paid monthly at a percentage of the Series' average daily net
assets for its then current fiscal year, with a limitation that immediately
after such payment the Series' "Other Expenses" will not exceed the Maximum
Percentage. The obligation of MFS to bear a Series' Other Expenses pursuant to
this arrangement, and the Series' obligation to pay the reimbursement fee to
MFS, terminates on the earlier of the date on which payments made by the Series
equal the prior payment of such reimbursable expenses by MFS, or December 31,
2004.
The expense reimbursement arrangement has terminated for the Research
Series.
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 May 1, 1998, as amended or supplemented from
time to time, contains more detailed information about each of the Series,
including information related to: (i) the investment policies and restrictions
of each Series; (ii) the Trustees, officers and investment adviser of the
Trust; (iii) portfolio transactions; (iv) the shares of each Series, including
rights and liabilities of shareholders; (v) the method used to calculate yield
and total rate of return quotations of each Series; (vi) the determination of
net asset value of shares of each Series; and (vii) certain voting rights of
shareholders of each Series.
19
<PAGE>
APPENDIX A
Description of Bond Ratings
The ratings of Moody's, S&P, Fitch and Duff & Phelps represent their
opinions as to the quality of various debt instruments. It should be
emphasized, however, that ratings are not absolute standards of quality.
Consequently, debt instruments with the same maturity, coupon and rating may
have different yields while debt instruments of the same maturity and coupon
with different ratings may have the same yield.
Moody's Investors Service, Inc.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Absence of Rating: Where no rating has been assigned or where a rating has
been suspended or withdrawn, it may be for reasons unrelated to the quality of
the issue.
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
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances
arise, the effects of which preclude satisfactory analysis; if there is no
longer available reasonable up-to-date data to permit a judgment to be formed;
if a bond is called for redemption; or for other reasons.
Standard & Poor's Ratings Services
AAA: An obligation rated 'AAA' has the highest rating assigned by Standard
& Poor's. The obligor's capacity to meet its financial commitment on the
obligation is EXTREMELY STRONG.
AA: An obligation rated 'AA' differs from the highest rated obligations
only in small degree. The obligor's capacity to meet its financial commitment on
the obligation is VERY STRONG.
A: An obligation rated 'A' is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still STRONG.
BBB: An obligation rated 'BBB' exhibits ADEQUATE protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
Obligations rated 'BB', 'B', 'CCC', 'CC', and 'C' are regarded as having
significant speculative characteristics. 'BB' indicates the least degree of
speculation and 'C' the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB: An obligation rated 'BB' is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B: An obligation rated 'B' is MORE VULNERABLE to nonpayment than
obligations rated 'BB', but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC: An obligation rated 'CCC' is CURRENTLY VULNERABLE to nonpayment, and
is dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC: An obligation rated 'CC' is CURRENTLY HIGHLY VULNERABLE to nonpayment.
C: The 'C' rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on this
obligation are being continued.
A-2
<PAGE>
D: An obligation rated 'D' is in payment default. The 'D' rating category
is used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The 'D' rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
Plus (+) or minus (-): The ratings from 'AA' to 'CCC' may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
r: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk--such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
A-1 and P-1 Commercial Paper Ratings
Description of S&P, Fitch and Moody's highest commercial paper ratings:
The rating "A" is the highest commercial paper rating assigned by S&P and
Fitch, and issues so rated are regarded as having the greatest capacity for
timely payment. Issues in the "A" category are delineated with the numbers 1, 2
and 3 to indicate the relative degree of safety. The A-1 designation indicates
that the degree of safety regarding timely payment is either overwhelming or
very strong. Those A-1 issues determined to possess overwhelming safety
characteristics will be denoted with a plus (+) sign designation.
The rating P-1 is the highest commercial paper rating assigned by Moody's.
Issuers rated P-1 have a superior ability for repayment. P-1 repayment capacity
will normally be evidenced by the following characteristics: (1) leading market
positions in well established industries; (2) high rates of return on funds
employed; (3) conservative capitalization structure with moderate reliance on
debt and ample asset protection; (4) broad margins in earnings coverage of
fixed financial charges and high internal cash generation; and (5) well
established access to a range of financial markets and assured sources of
alternate liquidity.
Fitch IBCA
AAA: Highest credit quality. 'AAA' ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity for
timely payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
AA: Very high credit quality. 'AA' ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
A: High credit quality. 'A' ratings denote a low expectation of credit
risk. The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher ratings.
BBB: Good credit quality. 'BBB' ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.
Speculative Grade
BB: Speculative. 'BB' ratings indicate that there is a possibility of
credit risk developing, particularly as the result of adverse economic change
over time; however, business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this category are not
investment grade.
A-3
<PAGE>
B: Highly speculative. 'B' ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent upon
a sustained, favorable business and economic environment.
CCC, CC, C: High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A 'CC' rating indicates that default of some
kind appears probable. 'C' ratings signal imminent default.
DDD, DD, and D: Default. Securities are not meeting current obligations and
are extremely speculative. 'DDD' designates the highest potential for recovery
of amounts outstanding on any securities involved. For U.S. corporates, for
example, 'DD' indicates expected recovery of 50%-90% of such outstandings, and
'D' the lowest recovery potential, i.e. below 50%.
Duff & Phelps Credit Rating Co.
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic conditions.
A+, A, A-: Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
BBB+, BBB, BBB-: Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may move
up or down frequently within this category.
B+, B, B-: Below investment grade and possession risk that obligations will
not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or into
a higher or lower rating grade.
CCC: Well below investment-grade securities. Considerable uncertainty
exists as to timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with unfavorable
economic/ industry conditions, and/or with unfavorable company developments.
DD: Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP: Preferred stock with dividend arrearages.
A-4
<PAGE>
Duff & Phelps Short-Term Ratings
D-1+: Highest certainty of timely payment. Short-term liquidity, including
internal operation factors and/or access to alternative sources of funds, is
outstanding and safety is just below risk-free U.S. Treasury short-term
obligations.
D-1: Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
D-1: High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
D-2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
D-3: Satisfactory liquidity and other protection factors qualify issues as
to investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
D-4: Speculative investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors and market access
may be subject to a high degree of variation.
D-5: Issuer failed to meet scheduled principal and/or interest payments.
A-5
<PAGE>
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
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 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) 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
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