<PAGE>
[Logo] M F S(R) Semiannual Report
INVESTMENT MANAGEMENT June 30, 1998
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MFS(R) WORLD GOVERNMENTS SERIES
A Series of MFS(R) Variable Insurance Trust(SM)
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[Graphic Omitted]
<PAGE>
<TABLE>
MFS(R) WORLD GOVERNMENTS SERIES
A SERIES OF MFS(R) VARIABLE INSURANCE TRUST(SM)
<S> <C>
TRUSTEES INVESTMENT ADVISER
Jeffrey L. Shames* Massachusetts Financial Services Company
Chairman, Chief Executive Officer, and Director, 500 Boylston Street
MFS(R) Investment Management(SM) Boston, MA 02116-3741
DISTRIBUTOR
Nelson J. Darling, Jr. MFS Fund Distributors, Inc.
Professional Trustee 500 Boylston Street
Boston, MA 02116-3741
William R. Gutow
Vice Chairman, SHAREHOLDER SERVICE CENTER
Capitol Entertainment Management Company; MFS Service Center, Inc.
Real Estate Consultant P.O. Box 2281
Boston, MA 02107-9906
PORTFOLIO MANAGER
Stephen C. Bryant* For additional information,
Chairman and President contact your financial adviser.
Jeffrey L. Shames*
CUSTODIAN
TREASURER State Street Bank and Trust Company
W. Thomas London*
WORLD WIDE WEB
ASSISTANT TREASURERS www.mfs.com
Mark E. Bradley*
Ellen Moynihan*
James O. Yost*
SECRETARY
Stephen E. Cavan*
ASSISTANT SECRETARY
James R. Bordewick, Jr.*
*Affiliated with the Investment Adviser
</TABLE>
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NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
- --------------------------------------------------------------------------------
<PAGE>
LETTER FROM THE CHAIRMAN
Dear Contract Owners:
With the U.S. stock market well into its fourth year of record-breaking
advances, it is necessary to take a cautious outlook. By most commonly
accepted measures, equity valuations appear to have risen to a point at which
the stock market has become more vulnerable to changes in the investment
environment such as rising inflation and interest rates or a slowing economy.
As a result, while we continue to hold a favorable long-term outlook for the
equity markets, we also believe that a significant market correction is
possible and that such a correction would be a healthy near-term event.
Currently, equity investors seem to be primarily focused on interest rates,
which have been relatively stable for several months as inflation has remained
low. In an environment of low interest rates, stocks become more attractive
than most fixed-income investments, while low inflation helps control
companies' costs, such as for raw materials, wages, and benefits. The near-
term outlook for a continuation of this environment appears relatively
favorable. However, this year has seen a marked slowdown in corporate
earnings. This means that as equity prices continue to rise, price-to-earnings
(P/E) ratios, or the amount an investor pays for a stock in relation to the
company's earnings per share, also go up. A year ago, the average P/E ratio
for stocks in the unmanaged Standard & Poor's 500 Composite Index stood at
approximately 22; this summer, the average P/E ratio was 32% higher, at about
29. In some cases, such as with some of the newer companies associated with
the Internet, P/E ratios have soared to levels that are unlikely to be
sustained.
As long as interest rates remain low and the economy continues to grow, it is
possible that some of these valuations can be supported. We expect corporate
earnings to grow 4% to 6% this year. However, just as no one can predict
market cycles, so too no one can predict economic cycles -- except to say that
these cycles do exist and that an economic slowdown at some point is
inevitable.
Internationally, the economic turmoil in Asia continues to be a concern to us,
and we believe the United States has yet to see the full impact of this
crisis. There have been brief periods when some Asian economies appeared to
improve, but the situation remains quite dynamic and could turn worse before
getting better. While the crisis has affected all countries in Asia, Japan was
a major factor behind the turmoil as excesses in its banking and real estate
sectors have led to severe currency problems. In the long run, Japan will be
the engine that drives the region's eventual recovery, thus it warrants closer
investor scrutiny. At the same time, the Asian turmoil has had the beneficial
effect of moderating U.S. growth and keeping inflation in check, which has
helped establish a favorable interest-rate environment.
Countering the situation in Asia has been the greater-than-expected strength
of European economies. As Europe moves toward economic union, these countries
have benefited from a convergence of interest rates to lower levels, a rapid
expansion of manufacturing and service businesses, and an increasingly strong
consumer sector. This has helped American exporters offset some of their Asian
losses, while providing numerous investment opportunities in developed and
emerging European markets.
Given the uncertainty arising from these conflicting developments, we believe
it is prudent to remind investors of the need to take a long-term view and to
diversify their investments across a range of asset classes. This includes
portfolios that focus on bonds and international investments as well as on the
U.S. stock market. The likelihood of an eventual market correction also makes
it important for us to use original, bottom-up research to find companies that
we think can keep growing or gain market share in the face of the occasional
downturn. To help achieve this, and to provide the broadest possible coverage
of industry sectors and individual companies, MFS continues to increase its
number of full-time research analysts. These analysts thoroughly investigate
each company's earnings potential and position in its industry as well as the
overall prospects for that industry.
MFS also uses active portfolio management on the fixed-income side, taking
advantage of our extensive research and credit analysis to help reduce the
potential for price declines and enhance the opportunity for appreciation.
Every year, both fixed-income and equity managers meet with thousands of
credit issuers and companies. They also attend many presentations, closely
follow sources of industry research, and keep track of competitors.
We believe that applying this discipline of thorough, bottom-up research to
both the equity and fixed-income markets is the best way to provide favorable
long-term performance for our shareholders -- regardless of changes in the
overall market environment.
We appreciate your support and welcome any questions or comments you may have.
Respectfully,
/s/ Jeffrey L. Shames
Jeffrey L. Shames
Chairman and Chief Executive Officer
MFS(R) Investment Management(SM)
July 13, 1998
MANAGEMENT REVIEW AND OUTLOOK
Dear Contract Owners:
For the six months ended June 30, 1998, the Series provided a total return of
2.15% (including the reinvestment of any distributions). This compares to a
3.27% return for the J.P. Morgan Global Government Bond Index (the Morgan
Index), an aggregate index of actively traded government bonds issued by 13
countries, including the United States, with remaining maturities of at least
one year.
Over the past six months, we have been aggressive in changing asset
allocations to take advantage of world economic opportunities. Generally, the
portfolio did well through the first quarter of 1998, though performance was
recently set back due to the Asian turmoil. We are very optimistic about the
outlook for bonds and feel that the portfolio's flexible strategy helps us
respond to changes in the world's investment climate.
With regard to the Asian turmoil, we feel the economic problems in Asia have a
way to go before a resolution is reached, so we are being highly selective with
investments there. In the future, perhaps six months or more, there may be
opportunities to invest in additional corporate and government debt in the
region. Despite the troubles in Asia, we have increased the allocation to
emerging markets from 0% to 9% to take advantage of cheap bond prices in Brazil,
Mexico, South Korea, and Russia, which we believe is making serious efforts to
restructure and reform its economy. We feel that, today, Russia represents a
buying opportunity.
Europe is showing economic strength right now, which is improving European
credit ratings but pushing interest rates down. The ongoing convergence of
countries into a single economic bloc has reduced the opportunities to take
advantage of the differences in yield between nations, diminished the value of
government debt, and limited investment opportunities. Additionally, the drive
toward monetary union has limited the value of investing in local currencies.
As a result, we have reduced the portfolio's exposure to Organization of
Economic Cooperation and Development (OECD) countries, including Germany, the
Netherlands, Italy, and Spain.
We had been concerned that, due to the extreme inflation of the value of U.S.
assets, particularly stock and real estate prices, the U.S. Federal Reserve
Board (the Fed) would raise interest rates. The turmoil in Asia and the lack
of inflation seems to have dissuaded the Fed from taking action at this time.
As a result, we are more comfortable increasing the portfolio's sensitivity to
interest rates, or duration, because we don't see much risk of a rate hike in
the near future, which should keep bond prices at higher levels.
We are optimistic about the worldwide environment for bonds. If we have a
major concern, it is that the world may have an excess of liquidity at the
moment, which has been a factor in the run-up in the equity markets. There is
a possibility that some of this liquidity will be withdrawn from world markets
to combat the troubles in Asia. If this happens, it will negatively impact the
stock market. A reduction in equity prices would prove to be favorable to the
bond market.
Respectfully,
/s/ Stephen C. Bryant
Stephen C. Bryant
Portfolio Manager
Note to Contract Owners: Effective August 1, 1998, the Series is being managed
by James T. Swanson. Mr. Swanson joined MFS in 1985 as Vice President --
Investments and was named Senior Vice President in 1989. He is a graduate of
Colgate University and the Harvard University Graduate School of Business
Administration.
The opinions expressed in this report are those of the portfolio manager and
are only through the end of the period of the report as stated on the cover.
The manager's views are subject to change at any time based on market and
other conditions, and no forecasts can be guaranteed.
PORTFOLIO MANAGER'S PROFILE
Stephen C. Bryant is a Senior Vice President of MFS(R) Investment Management
(SM) and portfolio manager of the World Governments Series offered through
MFS(R)/Sun Life annuity products. He also is a member of the team that manages
MFS(R) World Governments Fund and the MFS(R) World Governments Series, part of
MFS(R) Variable Insurance Trust(SM), MFS(R) Institutional Global Fixed Income
Fund, and MFS(R) Government Markets Income Trust, a closed-end fund. He also
manages the foreign bond portions of MFS(R) World Total Return Fund and MFS(R)
Intermediate Income Fund.
He joined MFS in 1987 as Assistant Vice President -- Investments. He was named
Vice President -- Investments in 1989 and Senior Vice President in 1993. Mr.
Bryant is a graduate of Wesleyan University.
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 for the product being offered. Please read
it carefully before investing or sending money.
<PAGE>
SERIES FACTS
Objective: Seeks not only preservation but also growth of capital,
together with moderate current income.
Commencement of
investment operations: June 14, 1994
Size: $41.5 million net assets as of June 30, 1998
PERFORMANCE SUMMARY
Because the Series is designed for investors with long-term goals, we have
provided cumulative results as well as the average annual total returns for
the applicable time periods.
AVERAGE ANNUAL AND CUMULATIVE TOTAL RATES OF RETURN THROUGH JUNE 30, 1998
6 Months 1 Year 3 Years 10 Years/Life*
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Cumulative Total Return +2.15% +2.75% +8.16% +21.12%
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Average Annual Total Return -- +2.75% +2.65% + 4.85%
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*For the period from the commencement of the Series' investment operations,
June 14, 1994, through June 30, 1998.
All results are historical and assume the reinvestment of dividends and
capital gains. 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. Performance results
reflect any applicable expense subsidies and waivers, without which the
results would have been less favorable. Subsidies and waivers may be rescinded
at any time. See the prospectus for details.
Returns shown do not reflect the deduction of the mortality and expense risk
charges and administration fees. Please refer to the annuity product's annual
report for performance that reflects the deduction of the fees and charges
imposed by insurance company separate accounts.
Investments in foreign and emerging market securities may provide superior
returns but also involve greater risk than U.S. investments. Investments in
foreign and emerging market securities may be favorably or unfavorably
affected by changes in interest rates and currency exchange rates, market
conditions, and the economic and political conditions of the countries where
investments are made. These risks may increase share price volatility.
<PAGE>
<TABLE>
PORTFOLIO OF INVESTMENTS (Unaudited) - June 30, 1998
Bonds - 97.2%
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Bonds - 54.2%
Automotive - 2.0%
General Motors Corporation, 6.75s, 2028 $ 836 $ 838,132
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Broadcasting - 1.0%
Time Warner Incorporated, 6.95s, 2028 $ 420 $ 421,201
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Consumer Goods and Services - 2.0%
Tommy Hilfiger, 6.85s, 2008 $ 836 $ 835,131
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Electrical Equipment - 1.0%
Honeywell, Inc., 6.625s, 2028 $ 418 $ 423,283
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Entertainment - 1.1%
Hearst Argyle Television, Inc., 7.5s, 2027 $ 418 $ 445,270
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Federal National Mortgage Association - 1.3%
FNMA, 2.125s, 2007 JPY 70,000 $ 527,394
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Government National Mortgage Association - 8.9%
GNMA, 6.5s, 2027 $ 3,681 $ 3,672,951
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U.S. Treasury Obligations - 36.9%
U.S. Treasury Notes, 6.625s, 2002 $ 4,900 $ 5,079,928
U.S. Treasury Notes, 5.5s, 2003 5,090 5,086,030
U.S. Treasury Notes, 6.5s, 2005 4,850 5,119,029
-----------
$15,284,987
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Total U.S. Bonds $22,448,349
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Foreign Bonds - 43.0%
Brazil - 1.7%
Republic of Brazil, 9.375s, 2008 $ 800 $ 709,600
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Denmark - 2.5%
Danish Nykredit, 6s, 2026 DKK 7,200 $ 1,034,840
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Germany - 6.4%
Germany Federal Republic, 6s, 2007 DEM 3,725 $ 2,244,485
Germany Federal Republic, 6.5s, 2027 614 396,814
-----------
$ 2,641,299
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Italy - 7.0%
Republic of Italy, 5.75s, 2002 ITL 4,950,000 $ 2,897,378
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Mexico - 3.5%
United Mexican States, 9.875s, 2007 $ 1,400 $ 1,456,000
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New Zealand - 3.4%
Government of New Zealand, 8s, 2004 NZD 2,570 $ 1,415,86
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Russia - 1.8%
Russia, Ministry of Finance, 10s, 2007 $ 660 $ 495,000
Russia, Ministry of Finance, 12.75s, 2028## 290 259,550
-----------
$ 754,550
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South Korea - 1.8%
Republic of Korea, 8.75s, 2003 $ 400 $ 388,000
Republic of Korea, 8.875s, 2008 400 361,780
-----------
$ 749,780
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United Kingdom - 14.9%
United Kingdom Treasury, 8.5s, 2005 GBP 2,119 $ 4,046,996
United Kingdom Treasury, 9s, 2008 1,039 2,151,585
-----------
$ 6,198,581
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Total Foreign Bonds $17,857,889
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Total Bonds (Identified Cost, $40,508,491) $40,306,238
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Short-Term Obligations - 4.5%
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Student Loan Marketing Discount Note, due 7/01/98,
at Amortized Cost and Value $ 1,885 $ 1,885,000
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Put Option Purchased
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Principal Amount
of Contracts
Description/Expiration Month/Strike Price (000 Omitted)
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Japanese Yen/New Zealand Dollars/September/69
(Premium Paid, $8,356) JPY 241,978 $ 8,356
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Call Options Purchased - 0.1%
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Australian Dollars/December/0.71 AUD 2,198 $ 1,288
Japanese Yen/New Zealand Dollars/September/75 JPY 241,978 8,356
Japanese Yen/July/132 JPY 1,246,522 16,527
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Total Call Options Purchased (Premiums Paid, $30,525) $ 26,171
- ----------------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $42,432,372) $42,225,765
- ----------------------------------------------------------------------------------------------------------
Call Option Written
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Japanese Yen/Deutsche Marks/August/66.52
(Premiums Received, $107,488) JPY 462,202 $ (462)
- ----------------------------------------------------------------------------------------------------------
Put Options Written - (0.1)%
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Canadian Dollars/July/1.43 CAD 2,763 $ (52,126)
Japanese Yen/March/170 JPY 782,178 (7,822)
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Total Put Options Written (Premiums Received, $23,679) $ (59,948)
Other Assets, Less Liabilities - (1.7)% (697,621)
- ----------------------------------------------------------------------------------------------------------
Net Assets - 100.0% $41,467,734
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##SEC Rule 144A restriction.
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.
AUD = Australian Dollars ITL = Italian Lire
CAD = Canadian Dollars JPY = Japanese Yen
DEM = Deutsche Marks NLG = Dutch Guilders
DKK = Danish Kroner NZD = New Zealand Dollars
GBP = British Pounds
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities (Unaudited)
- ------------------------------------------------------------------------------
June 30, 1998
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $42,432,372) $42,225,765
Cash 4,136
Net receivable for forward foreign currency exchange
contracts to sell 309,458
Receivable for Series shares sold 172,273
Interest receivable 692,993
Receivable from investment adviser 5,012
Deferred organization expenses 1,415
-----------
Total assets $43,411,052
-----------
Liabilities:
Payable for Series shares reacquired $ 1,081,846
Payable for investments purchased 33,238
Net payable for forward foreign currency exchange contracts
to purchase 708,298
Net payable for forward foreign currency exchange contracts
subject to master netting agreements 56,667
Written options outstanding, at value
(premiums received, $131,167) 60,410
Payable to affiliates -
Management fee 2,506
Accrued expenses and other liabilities 353
-----------
Total liabilities $ 1,943,318
-----------
Net assets $41,467,734
===========
Net assets consist of:
Paid-in capital $40,867,189
Unrealized depreciation on investments and translation of
assets and liabilities in foreign currencies (592,504)
Accumulated undistributed net realized gain on investments
and foreign currency transactions 161,823
Accumulated undistributed net investment income 1,031,226
===========
Total $41,467,734
===========
Shares of beneficial interest outstanding 4,025,065
=========
Net asset value per share
(net assets of $41,467,734 / 4,025,065 shares of beneficial
interest outstanding) $10.30
======
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations (Unaudited)
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Six Months Ended June 30, 1998
- --------------------------------------------------------------------------------
Net investment income:
Interest income $1,168,148
----------
Expenses -
Management fee $ 147,116
Administrative fee 2,471
Trustees' compensation 1,356
Shareholder servicing agent fee 5,840
Custodian fee 21,268
Printing 30,242
Auditing fees 17,500
Amortization of organization expenses 753
Legal fees 1,206
Miscellaneous 440
----------
Total expenses $ 228,192
Fees paid indirectly (676)
Preliminary reduction of expenses by investment adviser (31,362)
----------
Net expenses $ 196,154
----------
Net investment income $ 971,994
----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 568,335
Written option transactions 108,357
Foreign currency transactions (276,770)
----------
Net realized gain on investments and foreign
currency transactions $ 399,922
----------
Change in unrealized appreciation (depreciation) -
Investments $ (123,046)
Written options 36,496
Translation of assets and liabilities in
foreign currencies (443,959)
----------
Net unrealized loss on investments and foreign
currency translation $ (530,509)
----------
Net realized and unrealized loss on investments
and foreign currency $ (130,587)
----------
Increase in net assets from operations $ 841,407
==========
See notes to financial statements
<PAGE>
<TABLE>
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Six Months Ended Year Ended
June 30, 1998 December 31, 1997
(Unaudited)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets:
From operations -
Net investment income $ 971,994 $ 1,973,024
Net realized gain (loss) on investments and
foreign currency transactions 399,922 (2,045,124)
Net unrealized gain (loss) on investments and
foreign currency transactions (530,509) 165,092
----------- -----------
Increase in net assets from operations $ 841,407 $ 92,992
----------- -----------
Distributions declared to shareholders -
From net investment income $ (492,886) $ (490,069)
From net realized gain on investments and
foreign currency transactions -- (221,999)
In excess of net realized gain on investments
and foreign currency transactions -- (84)
----------- -----------
Total distributions declared to shareholders $ (492,886) $ (712,152)
----------- -----------
Net increase in net assets from Series share
transactions $ 3,060,746 $12,654,674
----------- -----------
Total increase in net assets $ 3,409,267 $12,035,514
Net assets:
At beginning of period 38,058,467 26,022,953
----------- -----------
At end of period (including accumulated
undistributed net investment income of
$1,031,226 and $552,118, respectively) $41,467,734 $38,058,467
=========== ===========
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS - continued
Financial Highlights
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
Six Months Ended ------------------------------ Period Ended
June 30, 1998 1997 1996 1995 December 31, 1994*
(Unaudited)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $10.21 $10.58 $10.17 $ 9.82 $10.00
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.25 $ 0.61 $ 0.60 $ 0.63 $ 0.17
Net realized and unrealized gain
(loss) on investments and foreign
currency transactions (0.03) (0.73) (0.19) 0.78 (0.09)
------ ------ ------ ------ ------
Total from investment operations $ 0.22 $(0.12) $ 0.41 $ 1.41 $ 0.08
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.13) $(0.17) $ -- $(0.42) $(0.17)
From net realized gain on investments
and foreign currency transactions -- (0.08) -- -- --
In excess of net investment income -- -- -- (0.54) (0.09)
In excess of net realized gain on
investments and foreign currency
transactions -- -- (+) -- -- --
From tax return of capital -- -- -- (0.10) --
------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.13) $(0.25) $ -- $(1.06) $(0.26)
------ ------ ------ ------ ------
Net asset value - end of period $10.30 $10.21 $10.58 $10.17 $ 9.82
====== ====== ====== ====== ======
Total return 2.15%++ (1.13)% 4.03% 14.38% 0.79%++
Ratios (to average net assets)/Supplemental data(S):
Expenses 1.00%+ 1.00% 1.00% 1.00% 1.00%+
Net investment income 4.96%+ 5.96% 5.84% 6.05% 4.68%+
Portfolio turnover 216% 335% 361% 211% 62%
Net assets at end of period (000 omitted) $41,468 $38,058 $26,023 $7,424 $2,881
* For the period from the commencement of the Series' investment operations, June 14, 1994, through
December 31, 1994.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Series' expenses are calculated without
reduction for fees paid indirectly.
(+) Per share amount was less than $0.01 per share.
(S) The investment adviser voluntarily agreed to maintain the expenses of the Series at not more than
1.00% of average daily 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 $ 0.24 $ 0.59 $ 0.50 $ 0.53 $ 0.16
Ratios (to average net assets):
Expenses## 1.16%+ 1.15% 2.03% 1.99% 1.10%+
Net investment income 4.80%+ 5.81% 4.81% 5.09% 4.58%+
See notes to financial statements
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(1) Business and Organization
MFS World Governments Series (the Series) is a non-diversified series of
MFS(R) Variable Insurance Trust(SM) (the Trust) which is comprised of the
following 13 series: MFS(R) Bond Series, MFS(R) Emerging Growth Series,
MFS(R)/Foreign & Colonial Emerging Market Equity Series, MFS(R) Growth with
Income Series, MFS(R) High Income Series, MFS(R) Limited Maturity Series,
MFS(R) Money Market Series, MFS(R) New Discovery Series, MFS(R) Research
Series, MFS(R) Total Return Series, MFS(R) Utilities Series, MFS(R) 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 June 30, 1998, there were 26 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, forward contracts,
and swap agreements, 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. Futures contracts, options,
and options on futures contracts listed on commodities exchanges are reported
at market value using closing settlement prices. Over-the-counter options on
securities are valued by brokers. Over-the-counter currency options are valued
through the use of a pricing model which takes into account foreign currency
exchange spot and forward rates, 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 results 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 call or put options in exchange for a
premium. The premium is initially recorded as a liability which is
subsequently adjusted to the current value of the options contract. When a
written option expires, the Series realizes a gain equal to the amount of the
premium received. When a written call option is exercised or closed, the
premium received is offset against the proceeds to determine the realized gain
or loss. When a written 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 as unrealized
until the contract settlement date. On contract settlement date, the gains or
losses are recorded as realized gains or losses on foreign currency
transactions.
Investment Transactions and Income - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
discount is amortized for financial statement and tax reporting purposes as
required by federal income tax regulations.
Fees Paid Indirectly - The Series' custody fee is calculated as a percentage
of the Series' month end net assets. The fee is reduced according to an
arrangement that measures the value of cash deposited with the custodian by
the Fund. 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 net realized gains.
At December 31, 1997, the Series, for federal income tax purposes, had a
capital loss carryforward of $195,092, 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, 2005.
(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. The Series has a temporary expense reimbursement
agreement whereby MFS has voluntarily agreed to pay all of the Series'
operating expenses, exclusive of management fees. The Series in turn will pay
MFS an expense reimbursement fee not greater than 0.25% of 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 June 30, 1998, the aggregate unreimbursed expenses owed to MFS by
the Series amounted to $334,469.
Administrator - The Series has an administrative services agreement with MFS
to provide the Series with certain financial, legal, shareholder servicing,
compliance, and other administrative services. As a partial reimbursement for
the cost of providing these services, the Series pays MFS an administrative
fee at the following annual percentages of the Series' average daily net
assets:
First $1 billion 0.0150%
Next $1 billion 0.0125%
Next $1 billion 0.0100%
In excess of $3 billion 0.0000%
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 Series' average daily net assets at an effective annual
rate of 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 $37,610,752 $35,409,462
=========== ===========
Investments (non-U.S. government securities) $44,158,148 $42,112,721
=========== ===========
The cost and unrealized appreciation or depreciation in value of the
investments owned by the Fund, as computed on a federal income tax basis, are
as follows:
Aggregate cost $ 42,432,372
============
Gross unrealized depreciation (294,747)
Gross unrealized appreciation $ 88,140
------------
Net unrealized depreciation $ (206,607)
============
(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>
Six Months Ended June 30, 1998 Year Ended December 31, 1997
-------------------------------- -------------------------------
Shares Amount Shares Amount
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 1,528,768 $ 15,738,586 3,486,026 $ 35,259,856
Shares issued to shareholders in
reinvestment of distributions 48,322 492,886 71,073 712,152
Shares reacquired (1,279,890) (13,170,726) (2,289,007) (23,317,334)
---------- ------------ ---------- ------------
Net increase 297,200 $ 3,060,746 1,268,092 $ 12,654,674
========== ============ ========== ============
</TABLE>
(6) Line of Credit
The Series and other affiliated funds participate in a $805 million unsecured
line of credit provided by a syndication of banks under a line of credit
agreement. Borrowings may be made to temporarily finance the repurchase of
Series shares. Interest is charged to each series, 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 June 30, 1998, was $125.
(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, forward foreign currency
exchange contracts, swap agreements, and futures 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.
<TABLE>
Written Option Transactions
<CAPTION>
1998 Calls 1998 Puts
-------------------------------- -----------------------------------
Principal Amounts Principal Amounts
of Contracts of Contracts
(000 Omitted) Premiums (000 Omitted) Premiums
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding, beginning of period -
Japanese Yen 446,022 $ 70,389 -- $ --
Options written -
Canadian Dollars -- -- 2,763 10,336
Japanese Government Bonds 504,000 7,744 1,009,200 28,531
Japanese Yen -- -- 1,518,346 39,569
Japanese Yen/Deutsche Marks 462,202 107,488 -- --
Options terminated in closing transactions -
Japanese Government Bonds (504,000) (7,744) (1,009,200) (28,531)
Japanese Yen -- -- (736,168) (26,226)
Options expired -
Japanese Yen (446,022) (70,389) -- --
-------- --------
Outstanding, end of period $107,488 $ 23,679
======== ========
Options outstanding at end of period consists of:
Canadian Dollars -- $ -- 2,763 $ 10,336
Japanese Yen -- -- 782,178 13,343
Japanese Yen/Deutsche Marks 462,202 107,488 -- --
-------- --------
Outstanding, end of period $107,488 $ 23,679
======== ========
</TABLE>
At June 30, 1998, the Series had sufficient cash and/or securities at least
equal to the value of the written options.
<TABLE>
Forward Foreign Currency Exchange Contracts
<CAPTION>
Net Unrealized
Contracts to Contracts Appreciation
Settlement Date Deliver/Receive In Exchange for at Value (Depreciation)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales 9/25/98 DKK 7,109,602 $ 1,064,642 $ 1,037,626 $ 27,016
9/25/98 JPY 1,019,080,886 7,749,533 7,467,091 282,442
----------- ----------- ---------
$ 8,814,175 $ 8,504,717 $ 309,458
=========== =========== =========
Purchases 9/25/98 CAD 9,870,207 $ 6,837,536 $ 6,727,488 $(110,048)
9/25/98 ITL 752,792,628 435,517 423,759 (11,758)
9/25/98 JPY 1,696,515,392 13,017,277 12,430,843 (586,434)
9/25/98 NLG 6,123 3,080 3,022 (58)
----------- ----------- ---------
$20,293,410 $19,585,112 $(708,298)
=========== =========== =========
</TABLE>
Forward foreign currency purchases and sales under master netting agreements
excluded above amounted to a net payable of $47,520 with Merrill Lynch, and
$138,172 with Swiss Bank Corp. and a net receivable of $21,505 with Banker's
Trust Company, $56,835 with Deutsche, and $50,685 with C.S. First Boston Bank
at June 30, 1998.
At June 30, 1998, the Series had sufficient cash and/or securities to cover
any commitments under these contracts.
<PAGE>
(C)1998 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
VWG-3 8/98 34.2M
