MFS[RegTM] UTILITIES SERIES
PROSPECTUS
May 1, 1998
MFS[RegTM] NEW DISCOVERY SERIES
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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 Utilities Series (the "Utilities Series"), which seeks capital growth
and current income (income above that available from a portfolio invested
entirely in equity securities); and
- -- MFS New Discovery Series (the "New Discovery Series"), which seeks capital
appreciation.
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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 NEW DISCOVERY SERIES IS 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 THE INVESTMENT POLICIES PERMITTING INVESTMENT
IN FOREIGN SECURITIES, INVESTMENTS IN THIS 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>
<CAPTION>
Page
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<S> <C>
1. Expense Summary ............................................... 3
2. Condensed Financial Information ............................... 4
3. Investment Concept of the Trust ............................... 5
4. Investment Objectives and Policies ............................ 5
MFS Utilities Series .......................................... 6
MFS New Discovery Series ...................................... 7
5. Certain Securities and Investment Techniques .................. 8
6. Additional Risk Factors ....................................... 14
7. Management of the Series ...................................... 17
8. Information Concerning Shares of Each Series .................. 19
Purchases and Redemptions ..................................... 19
Net Asset Value ............................................... 20
Distributions ................................................. 20
Tax Status .................................................... 20
Description of Shares, Voting Rights and Liabilities .......... 20
Performance Information ....................................... 21
Expenses ...................................................... 21
Shareholder Communications .................................... 22
Appendix A--Description of Bond Ratings ........................... A-1
Appendix B--Principal Sectors of the Utilities Industry ........... B-1
</TABLE>
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1. EXPENSE SUMMARY
Annual Operating Expenses (as a percentage of average net assets):
<TABLE>
<CAPTION>
MFS
MFS New
Utilities Discovery
Series Series
--------------- ---------------
<S> <C> <C>
Management Fee .............................................. 0.75% 0.90%
Other Expenses (after expense limitation)(1) ................ 0.25%(2) 0.25%(2)
------- -------
Total Operating Expenses (after expense limitation) ......... 1.00%(2) 1.15%(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 each such Series would be:
<TABLE>
<CAPTION>
"Other Expenses" "Total Operating Expenses"
Without Expense Without Expense
Series Limitation Limitation
- ----------------------------------------- ------------------ ---------------------------
<S> <C> <C>
Utilities ........................ 0.45% 1.20%
New Discovery (estimate) ......... 0.47% 1.37%
</TABLE>
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>
Utilities .................. $10 $32 $55 $122
New Discovery .............. 12 37 N/A N/A
</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.
Utilities 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 .................... $ 13.66 $ 12.57 $ 10.00
------- ------- --------
Income from investment operations#--
Net investment income ss. .............................. $ 0.44 $ 0.55 $ 0.39
Net realized and unrealized gain on investments and
foreign currency transactions ........................ 3.89 1.78 3.00
------- ------- --------
Total from investment operations ..................... $ 4.33 $ 2.33 $ 3.39
------- ------- --------
Less distributions declared to shareholders--
From net investment income ............................. $ -- $ (0.35) $ (0.24)
From net realized gain on investments and foreign
currency transactions ................................ -- (0.88) ( 0.58)
In excess of realized gain on investments and foreign
currency transactions ................................ -- (0.01) --
------- ------- --------
Total distributions declared to shareholders ......... $ -- $ (1.24) $ (0.82)
------- ------- --------
Net asset value--end of period .......................... $ 17.99 $ 13.66 $ 12.57
======= ======= ========
Total return ............................................ 31.70% 18.51% 33.94%++
Ratios (to average net assets)/Supplemental data ss.:
Expenses ............................................... 1.00% 1.00% 1.00%+
Net investment income .................................. 2.92% 4.19% 3.66%+
Portfolio turnover ...................................... 69% 121% 94%
Average commission rate### .............................. $0.0306 $0.0416 $ --
Net assets at end of period (000 omitted) ............... $30,147 $ 9,572 $ 2,373
</TABLE>
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* For the period from the commencement of the Series' investment operations,
January 3, 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.
ss. 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 per share
and the ratios would have been:
<TABLE>
<S> <C> <C> <C>
Net investment income .......... $ 0.41 $ 0.32 $ 0.17
Ratios (to average net assets):
Expenses## .................... 1.20% 2.75% 3.08%+
Net investment income ......... 2.71% 2.44% 1.62%+
</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 Utilities Series -- The Utilities Series' investment objective is to seek
capital growth and current income (income above that available from a portfolio
invested entirely in equity securities).
The Utilities Series will seek to achieve its objective by investing,
under normal circumstances, at least 65% (but up to 100% at the discretion of
the Adviser) of its assets in equity and debt securities of both domestic and
foreign companies in the utilities industry. These securities may be listed on
securities exchanges, traded in various over-the-counter markets or have no
organized markets. At least 80% of the non-convertible fixed income securities
held by the Series will be rated at the time of investment at least Baa by
Moody's or BBB by S&P, by Fitch or by Duff & Phelps, or will be of comparable
quality as determined by the Adviser (see "Additional Risk Factors" below). See
Appendix A to this Prospectus for a description of these ratings. The Series
may also invest in debt and equity securities of issuers in other industries,
as discussed below, although under normal circumstances not more than 35% of
the Series' assets will be so invested. In addition, the Series may hold a
portion of its assets in cash and money market instruments.
Companies in the utilities industry include (i) companies engaged in the
manufacture, production, generation, transmission, sale or distribution of
electric, gas or other types of energy, water or other sanitary services and
(ii) companies engaged in telecommunications, including telephone, cellular
telephones, telegraph, satellite, microwave, cable television and other
communications media (but not companies engaged in public broadcasting). The
Adviser deems a particular company to be in the utilities industry if, at the
time of investment, the Adviser determines that at least 50% of the company's
assets or revenues are derived from one or more of those industries. The
portion of the Utilities Series' assets invested in a particular type of
utility and in equity or debt securities will vary in light of changes in
interest rates, market conditions and economic conditions and other factors.
For further information on the principal sectors of the utilities industry in
which the Series may invest, see Appendix B to this Prospectus.
Consistent with its investment objective and policies described above, the
Series may also invest up to 35% of its net assets in foreign securities
(including emerging market securities and Brady Bonds) which are not traded on
a U.S. exchange.
Since the Utilities Series' investments are concentrated in utility
securities, the value of the Series' shares will be especially affected by
factors peculiar to the utilities industry, and may fluctuate more widely than
the value of shares of a fund that invests in a broader range of industries.
The rates many utility companies may charge their customers are controlled by
governmental regulatory commissions which may result in a delay in the utility
company passing along increases in costs to its customers. Furthermore, there
is no assurance that regulatory authorities will, in the future, grant rate
increases or that such increases will be adequate to permit the payment of
dividends on common stocks. Many utility companies, especially electric and gas
and other energy related utility companies, are subject to various
uncertainties, including: risks of increases in fuel and other operating costs;
the high cost of borrowing to finance capital construction during inflationary
periods; difficulty obtaining adequate returns on invested capital, even if
frequent rate increases are approved by public service commissions;
restrictions on operations and increased costs and delays as a result of
environmental and nuclear safety regulations; securing financing for large
construction projects during an inflationary period; difficulties of the
capital markets in absorbing utility debt and equity securities; difficulty in
raising capital in adequate amounts on reasonable terms in periods of high
inflation and unsettled capital markets; technological innovations which may
render existing plants, equipment or products obsolete; the potential impact of
natural or man-made disasters; difficulties in obtaining natural gas for resale
or fuel for electric generation at reasonable prices; coping with the general
effects of energy conservation, particularly in light of changing policies
regarding energy; and special risks associated with the construction and
operation of nuclear power generating facilities, including technical factors
and costs, and the possibility that federal, state and municipal government
authorities may from time to time review existing requirements
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and impose additional requirements. Certain utility companies, especially gas
and telephone utility companies, have in recent years been affected by
increased competition, which could adversely affect the profitability of such
utility companies. Furthermore, there are uncertainties resulting from certain
telecommunications companies' diversification into new domestic and
international businesses as well as agreements by many such companies linking
future rate increases to inflation or other factors not directly related to the
active operating profits of the enterprise.
Foreign utility companies are also subject to regulation, although such
regulations may or may not be comparable to those in the United States. Foreign
utility companies may be more heavily regulated by their respective governments
than utilities in the U.S. and, as in the U.S., generally are required to seek
government approval for rate increases. In addition, since many foreign
utilities use fuel that causes more pollution than those used in the U.S., such
utilities may be required to invest in pollution control equipment to meet any
proposed pollution restrictions. Foreign regulatory systems vary from country
to country and may evolve in ways different from regulation in the U.S.
The Utilities Series is permitted to invest in securities of issuers that
are outside the utilities industry, although under normal circumstances not
more than 35% of the Series' assets will be so invested. Such investments may
include common stocks, debt securities (including municipal debt securities)
and preferred stocks and will be selected to meet the Series' investment
objective of both capital growth and current income. These securities may be
issued by either U.S. or non-U.S. companies. Some of these issuers may be in
industries related to the utilities industry and, therefore, may be subject to
similar risks.
Investments outside the utilities industry may also include U.S.
Government Securities, as that term is defined under "Investment Objectives and
Policies--MFS Total Return Series" above. When and if available, U.S.
Government Securities may be purchased at a discount from face value. However,
the Series does not intend to hold such securities to maturity for the purpose
of achieving potential capital gains, unless current yields on the securities
remain attractive.
MFS New Discovery Series -- The New Discovery Series' investment objective is to
seek capital appreciation.
The Series seeks to achieve its objective by investing, under normal
market conditions, at least 65% of its total assets in companies that the
Adviser believes offer superior prospects for growth. Such securities may
either be listed on securities exchanges or traded in the over-the-counter
markets and may be U.S. or foreign companies. While companies in which the
Series invests may be of any size, such as companies in a relatively early
stage of development that offer the potential for accelerated earnings or
revenue growth (emerging growth companies), or larger or more established
companies whose rates of earnings growth are expected to accelerate because of
special factors, such as rejuvenated management, new products, or structural
changes in the economy, the Series will generally invest in companies with
small market capitalizations relative to companies included in the Standard &
Poor's 500 Stock Index. Such companies generally would be expected to show
earnings growth over time that is well above the growth rate of the overall
economy and the rate of inflation, and would have the products, management and
market opportunities which are usually necessary to become more widely
recognized as growth companies. The Series seeks to maintain a portfolio
weighted median capitalization of $2 billion or less.
The Series may also invest in fixed income securities offering an
opportunity for capital appreciation, including up to 10% of its net assets in
fixed income securities rated BB or lower by S&P, Fitch or Duff & Phelps, or Ba
or lower by Moody's, or if unrated, determined to be of equivalent quality by
the Adviser (commonly referred to as "junk bonds"). For a description of these
ratings, see Appendix B to the Prospectus (see also "Additional Risk Factors -
Lower Rated Bonds" in the Prospectus.
The Series may engage in short sales of securities which the Adviser
expects to decline in price (see "Short Sales" below).
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Consistent with its investment objective and policies described above, the
Series may also invest up to (but not including) 20% of its net assets in
foreign securities which are not traded on a U.S. exchange (not including
American Depositary Receipts).
5. CERTAIN SECURITIES AND INVESTMENT TECHNIQUES
Equity Securities: Each 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 Series may seek to increase its income
by lending portfolio securities. Such loans will usually be made to member
firms (and subsidiaries thereof) of the New York Stock Exchange (the
"Exchange") and to member banks of the Federal Reserve System, and would be
required to be secured continuously by collateral in cash, U.S. Treasury
securities or an irrevocable letter of credit maintained on a current basis at
an amount at least equal to the market value of the securities loaned. If the
Adviser determines to make securities loans, it is intended that the value of
the securities loaned would not exceed 10% of the value of the net assets of
the Series making the loans.
Emerging Market Securities: Consistent with their respective objectives, each
Series may invest in securities of issuers whose principal activities are
located in emerging market countries. Emerging market countries include any
country determined by the Adviser 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: Each Series may invest in Brady Bonds, which are securities
created through the exchange of existing commercial bank loans to public and
private entities in certain emerging markets for new bonds in connection with
debt restructurings under a debt restructuring plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan
debt restructurings have been implemented to date in Argentina, Brazil,
Bulgaria, Costa Rica, 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 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
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seller's agreement to repurchase at a specified time and price. If the seller
becomes subject to a proceeding under the bankruptcy laws or its assets are
otherwise subject to a stay order, the Series' right to liquidate the
securities may be restricted (during which time the value of the securities
could decline). As discussed in the SAI, each Series has adopted certain
procedures intended to minimize risk.
"When-Issued" Securities: Each Series 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.
Mortgage "Dollar Roll" Transactions: The Utilities Series may enter into
mortgage "dollar roll" transactions with selected banks and broker-dealers
pursuant to which the Series sells mortgage-backed securities for delivery in
the future (generally within 30 days) and simultaneously contracts to
repurchase substantially similar (same type, coupon and maturity) securities on
a specified future date. The Series records these transactions as sale and
purchase transactions, rather than as borrowing transactions. The Series will
only enter into covered rolls. A "covered roll" is a specific type of dollar
roll for which there is an offsetting cash position or a cash equivalent
security position which matures on or before the forward settlement date of the
dollar roll transaction. In the event that the party with whom the Series
contracts to replace substantially similar securities on a future date fails to
deliver such securities, the Series may not be able to obtain such securities
at the price specified in such contract and thus may not benefit from the price
differential between the current sales price and the repurchase price.
Restricted Securities: Each Series 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 securities. 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.
Corporate Asset-Backed Securities: The Utilities Series may invest in
corporate asset-backed securities. These securities, issued by trusts and
special purpose corporations, are backed by a pool of assets, such as credit
card and automobile loan receivables, representing the obligations of a number
of different parties.
Corporate asset-backed securities present certain risks. For instance, in
the case of credit card receivables, these securities may not have the benefit
of any security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there
is the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on
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these securities. The underlying assets (e.g., loans) are also subject to
prepayments which shorten the securities' weighted average life and may lower
their return.
Corporate asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection; and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from ultimate default ensures payment through insurance policies or
letters of credit obtained by the issuer or sponsor from third parties. The
Series will not pay any additional or separate fees for credit support. The
degree of credit support provided for each issue is generally based on
historical information respecting the level of credit risk associated with the
underlying assets. Delinquency or loss in excess of that anticipated or failure
of the credit support could adversely affect the return on an investment in
such a security.
Zero Coupon Bonds, Deferred Interest Bonds and PIK Bonds: Each Series may
invest in zero coupon bonds. Zero coupon 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.
Zero coupon bonds do not require the periodic payment of interest. 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.
Collateralized Mortgage Obligations and Multiclass Pass-Through Securities:
The Utilities Series may invest a portion of its assets in collateralized
mortgage obligations or "CMOs," which are debt obligations collateralized by
mortgage loans or mortgage pass-through securities. Typically, CMOs are
collateralized by certificates issued by GNMA, the Federal National Mortgage
Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"),
but also may be collateralized by whole loans or private mortgage pass-through
securities (such collateral collectively referred to as "Mortgage Assets"). The
Series may also invest a portion of its assets in multiclass pass-through
securities which are interests in a trust composed of Mortgage Assets. CMOs
(which include multiclass pass-through securities) may be issued by agencies,
authorities or instrumentalities of the U.S. Government or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, mortgage banks, commercial banks, investment banks and special
purpose subsidiaries of the foregoing. Payments of principal of and interest on
the Mortgage Assets, and any reinvestment income thereon, provide the funds to
pay debt service on the CMOs or make scheduled distributions on the multiclass
pass-through securities. In a CMO, a series of bonds or certificates are
usually issued in multiple classes with different maturities. Each class of
CMOs, often referred to as a "tranche," is issued at a specific fixed or
floating coupon rate and has a stated maturity or final distribution date.
Principal prepayments on the Mortgage Assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution dates,
resulting in a loss of all or part of the premium if any has been paid. Certain
classes of CMOs have priority over others with respect to the receipt of
prepayments on the mortgages. Therefore, depending on the type of CMOs in which
the Series invests, the investment may be subject to a greater or lesser risk
of prepayments than other types of mortgage-related securities.
The Utilities Series may also invest in parallel pay CMOs and Planned
Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. PAC
Bonds generally require payments of a specified amount of principal on each
payment date. PAC Bonds are always parallel pay CMOs with the required
principal payment on such securities having the highest priority after interest
has been paid to
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<PAGE>
all classes. For a further description of CMOs, parallel pay CMOs and PAC Bonds
and the risks related to transactions therein, see the SAI.
Foreign Growth Securities: Each 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.
Indexed Securities: The New Discovery Series may invest in indexed
securities whose value is linked to foreign currencies, interest rates,
commodities, indices or other financial indicators. Most indexed securities are
short- to intermediate-term fixed income securities whose values at maturity
(i.e., principal value) and/or interest rates rise or fall according to changes
in the value of one or more specified underlying instruments. Indexed
securities may be positively or negatively indexed (i.e., their principal value
or interest rates may increase or decrease if the underlying instrument
appreciates), and may have return characteristics similar to direct investments
in the underlying instrument or to one or more options on the underlying
instrument. Indexed securities may be more volatile than the underlying
instrument itself and could involve the loss of all or a portion of the
principal amount of or interest on the instrument.
Swaps Transactions: The New Discovery Series may enter into interest rate
swaps, currency swaps and other types of available swap agreements, such as
caps, collars and floors. Swaps involve the exchange by the Series with another
party of cash payments based upon different interest rate indexes, currencies,
and other prices or rates, such as the value of mortgage prepayment rates. For
example, in the typical interest rate swap, the Series might exchange a
sequence of cash payments based on a floating rate index for cash payments
based on a fixed rate. Payments made by both parties to a swap transaction are
based on a notional principal amount determined by the parties.
Swap agreements could be used to shift the Series' investment exposure
from one type of investment to another. For example, if the Series agreed to
exchange payments in dollars for payments in foreign currency, in each case
based on a fixed rate, the swap agreement would tend to decrease the Series'
exposure to U.S. interest rates and increase its exposure to foreign currency
and interest rates. Caps and floors have an effect similar to buying or writing
options. Depending on how they are used, swap agreements may increase or
decrease the overall volatility of the Series' investments and its share price
and yield.
Swap agreements are sophisticated hedging instruments that typically
involve a small investment of cash relative to the magnitude of risks assumed,
or no investment of cash. As a result, swaps can be highly volatile and may
have a considerable impact on the Series' performance. Swap agreements are
subject to risks related to the counterparty's ability to perform, and may
decline in value if the counterparty's creditworthiness deteriorates. The
Series may also suffer losses if it is unable to terminate outstanding swap
agreements or reduce its exposure through offsetting transactions.
Swaps, caps, floors and collars are highly specialized activities which
involve certain risks. See the SAI for further information on, and the risks
involved in, these activities.
Options on Securities: The New Discovery 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
11
<PAGE>
to protect the value of its portfolio. In particular, where the 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, the 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.
The New Discovery 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 the 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: Each Series may write (sell) covered call and put
options and purchase call and put options on stock indices. Each Series may
write options on stock indices for the purpose of increasing its gross income
and to protect its portfolio against declines in the value of securities it
owns or increases in the value of securities to be acquired. When a Series
writes an option on a stock index, and the value of the index moves adversely
to the holder's position, the option will not be exercised, and the Series will
either close out the option at a profit or allow it to expire unexercised. A
Series will thereby retain the amount of the premium, less related transaction
costs, which will increase its gross income and offset part of the reduced
value of portfolio securities or the increased cost of securities to be
acquired. Such transactions, however, will constitute only partial hedges
against adverse price fluctuations, since any such fluctuations will be offset
only to the extent of the premium received by a Series for the writing of the
option, less related transaction costs. In addition, if the value of an
underlying index moves adversely to a Series' option position, the option may
be exercised, and the Series will experience a loss which may only be partially
offset by the amount of the premium received.
Each Series may also purchase put or call options on stock indices in
order, respectively, to hedge its investments against a decline in value or to
attempt to reduce the risk of missing a market or industry segment advance. A
Series' possible loss in either case will be limited to the premium paid for
the option, plus related transaction costs.
"Yield Curve" Options: The New Discovery Series may enter into options on
the yield "spread," or yield differential, between two securities, a
transaction referred to as a "yield curve" option, for hedging and non-hedging
(an effort to increase current income) purposes. In contrast to other types of
options, a yield curve option is based on the difference between the yields of
designated securities rather than the actual prices of the individual
securities, and is settled through cash payments. Accordingly, a yield curve
option is profitable to the holder if this differential widens (in the case of
a call) or narrows (in the case of a put), regardless of whether the yields of
the underlying securities increase or decrease. Yield curve options written by
the Series will be covered as described in the SAI. The trading of yield curve
options is subject to all the risks associated with trading other types of
options, as discussed below under "Additional Risk Factors" and in the SAI. In
addition, such options present risks of loss even if the yield on one of the
underlying securities remains constant, if the spread moves in a direction or
to an extent which was not anticipated.
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<PAGE>
Futures Contracts and Options on Futures Contracts: Each Series may purchase
and sell futures contracts on foreign or domestic fixed income securities or
indices of such securities, including municipal bond indices and any other
indices of foreign or domestic fixed income securities that may become
available for trading ("Futures Contracts"). Each Series may also purchase and
write options on such Futures Contracts ("Options on Futures Contracts"). The
New Discovery Series may purchase and sell Futures Contracts on stock indices,
while each Series may purchase and sell Futures Contracts on foreign currencies
or indices of foreign currencies. Each Series may also purchase and write
Options on such Futures Contracts.
Such transactions will be entered into for hedging purposes or for
non-hedging purposes to the extent permitted by applicable law. Each Series
will incur brokerage fees when it purchases and sells Futures Contracts, and
will be required to maintain margin deposits. In addition, Futures Contracts
entail risks. Although the Adviser believes that use of such Contracts 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 Series may enter into forward foreign currency
exchange contracts for the purchase or sale of a fixed quantity of a foreign
currency at a future date ("Forward Contracts"). Each of these Series may enter
into Forward Contracts for hedging purposes and for non-hedging purposes (i.e.,
speculative purposes). By entering into transactions in Forward Contracts for
hedging purposes, a Series may be required to forego the benefits of
advantageous changes in exchange rates and, in the case of Forward Contracts
entered into for non-hedging purposes, a Series may sustain losses which will
reduce its gross income. Such transactions, therefore, could be considered
speculative. Forward Contracts are traded over-the-counter and not on organized
commodities or securities exchanges. As a result, Forward Contracts operate in
a manner distinct from exchange-traded instruments, and their use involves
certain risks beyond those associated with transactions in Futures Contracts or
options traded on exchanges. A Series may choose to, or be required to, receive
delivery of the foreign currencies underlying Forward Contracts it has entered
into. Under certain circumstances, such as where the Adviser 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: Each 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
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<PAGE>
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.
Short Sales: If the New Discovery Series anticipates that the price of a
security will decline, it may sell the security short and borrow the same type
of security from a broker or other institution to complete the sale. The Series
may make a profit or loss depending upon whether the market price of the
security decreases or increases between the date of the short sale and the date
on which the Series must replace the borrowed security. Possible losses from
short sales differ from losses that could be incurred from a purchase of a
security, because losses from short sales may be unlimited, whereas losses from
purchases of a security can equal only the total amount invested. The Series
will segregate liquid assets to cover its short sale obligations. The Series
will not sell short securities whose underlying value, minus amounts pledged by
the Series as collateral (which does not include the proceeds from the short
sale), exceeds 40% of its net assets.
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.
Lower Rated Bonds: Each 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.
Each 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
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<PAGE>
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 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 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 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,
15
<PAGE>
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.
Non-diversification: The Utilities Series is "non-diversified," as that term
is defined in the Investment Company Act of 1940 ( the "1940 Act"), but intends
to continue to qualify as a "regulated investment company" ("RIC") for federal
income tax purposes. This means, in general, that although more than 5% of the
Series' total assets may be invested in the securities of one issuer (including
a foreign government), at the close of each quarter of its taxable year the
aggregate amount of such holdings (excluding holdings of U.S. Government
Securities) may not exceed 50% of the value of its total assets, and no more
than 25% of the value of its total assets may be invested in the securities of
a single issuer (other than U.S. Government Securities). To the extent that a
non-diversified Series at times may hold the securities of a smaller number of
issuers than if it were "diversified" (as defined in the 1940 Act), the Series
will at such times be subject to greater risk with respect to its portfolio
securities than a fund that invests in a broader range of securities, because
changes in the financial condition or market assessment of a single issuer may
cause greater fluctuations in the Series' total return and the net asset value
of its shares.
Short-Term Investments for Temporary Defensive Purposes -- During periods of
unusual market conditions when the Adviser 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 Series intends to manage its portfolio by buying and selling
securities, as well as holding securities to maturity, to help attain its
investment objectives and policies.
Each Series will engage in portfolio trading if it believes a transaction,
net of costs (including custodian charges), will help in attaining its
investment objectives. In trading portfolio securities, a Series seeks to take
advantage of market developments, yield disparities and variations in the
creditworthiness of issuers. For a description of the strategies which may be
used by the Series in trading portfolio securities, see "Portfolio Transactions
and Brokerage Commissions" in the SAI.
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain, and maintain the availability of,
execution at the most favorable prices and in the most effective manner
possible. Consistent with the foregoing primary consideration, the Conduct
Rules of the National Association of Securities Dealers, Inc. (the
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<PAGE>
"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>
Utilities Series ............. 0.75%
New Discovery Series ......... 0.90%
</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>
Utilities Series ......... $131,652 $35,371
</TABLE>
MFS or its affiliates will pay a fee to Protective Life Insurance Company
("Protective") equal, on an annualized basis, to 0.20% of the aggregate net
assets of the Trust up to $1 billion and 0.25% of the aggregate net assets of
the Trust over $1 billion attributable to Contracts offered by separate
accounts of Protective or their affiliates. Such fees will not be paid by the
Series, their shareholders, or by the Contract holders.
17
<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>
Utilities Series Maura A. Shaughnessy, a Senior Vice President of the Adviser, has been employed by the
Adviser as a portfolio manager since 1991.
New Discovery Series Brian E. Stack, a Vice President of the Adviser, has been employed by the Adviser as a
portfolio manager since 1993.
</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.
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.
18
<PAGE>
8. INFORMATION CONCERNING SHARES OF EACH SERIES
Purchases and Redemptions
The separate accounts of the Participating Insurance Companies place
orders to purchase and redeem shares of each Series based on, among other
things, the amount of premium payments to be invested and surrender and
transfer requests to be effected on that day pursuant to Contracts. Orders
received by the Trust are effected on days on which the Exchange is open for
trading. For orders 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.
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.
19
<PAGE>
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
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.
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
20
<PAGE>
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, Ameritas Life Insurance Company--Separate Account
VA-2 (Annuity), Lincoln, NE, owns of record 47.61% of the Utilities 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 taking into effect any compensating balance and offset arrangements)
except for management fees, taxes, extraordinary expenses, and brokerage and
transaction costs, do not exceed the following percentages of the average daily
net assets of the Series (the "Maximum Percentage"): 0.25% for each Series. The
payments made by MFS on behalf of each Series under this arrangement are
subject
21
<PAGE>
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 (May 1,
2001, in the case of the New Discovery 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.
22
<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>
APPENDIX B
Principal Sectors of the Utilities Industry
The principal sectors of the utility industry in which the Utilities
Series may invest are discussed below.
Electric -- The electric utility industry consists of companies that are
engaged principally in the generation, transmission and sale of electric
energy, although many also provide other energy-related services. Domestic
electric utility companies, in general, recently have been favorably affected
by lower fuel and financing costs and the full or near completion of major
construction programs. In addition, many of these companies recently have
generated cash flows in excess of current operating expenses and construction
expenditures, permitting some degree of diversification into unregulated
businesses. Some electric utilities have also taken advantage of the right to
sell power outside of their traditional geographic areas. Electric utility
companies historically have been subject to the risks associated with increases
in fuel and other operating costs, high interest costs on borrowings needed for
capital construction programs, costs associated with compliance with
environmental and safety regulations and changes in the regulatory climate.
In the U.S., the construction and operation of nuclear power facilities is
subject to increased scrutiny by, and evolving regulations of, the Nuclear
Regulatory Commission and state agencies having comparable jurisdiction.
Increased scrutiny might result in higher operating costs and higher capital
expenditures, with the risk that the regulators may disallow inclusion of these
costs in rate authorizations or the risk that a company may not be permitted to
operate or complete construction of a facility. In addition, operators of
nuclear power plants may be subject to significant costs for disposal of
nuclear fuel and for the de-commissioning of such plants.
Telecommunications -- The telephone industry is large and highly concentrated.
Companies that distribute telephone services and provide access to the
telephone networks comprise the greatest portion of this segment. Telephone
companies in the U.S. are still experiencing the effects of the breakup of
American Telephone & Telegraph Company, which occurred in 1984. Since 1984,
companies engaged in telephone communication services have expanded their
non-regulated activities into other businesses, including cellular telephone
services, data processing, equipment retailing, computer software and hardware
services, and financial services. This expansion has provided significant
opportunities for certain telephone companies to increase their earnings and
dividends at faster rates than had been allowed in traditionally regulated
businesses. Increasing competition, technological innovations and other
structural changes, however, could adversely affect the profitability of such
utilities.
Gas -- Gas transmission companies and gas distribution companies are also
undergoing significant changes. In the U.S., interstate transmission companies
are regulated by the Federal Energy Regulatory Commission, which is reducing
its regulation of the industry. Many companies have diversified into oil and
gas exploration and development, making returns more sensitive to energy
prices. In the recent decade, gas utility companies have been adversely
affected by disruptions in the oil industry and have also been affected by
increased concentration and competition. In the opinion of the Adviser,
however, environmental considerations could improve the gas industry outlook in
the future. For example, natural gas is the cleanest of the hydrocarbon fuels,
and this may result in incremental shifts in fuel consumption toward natural
gas and away from oil and coal.
Water -- Water supply utilities are companies that collect, purify, distribute
and sell water. In the U.S. and around the world, the industry is highly
fragmented because most of the supplies are owned by local authorities.
Companies in this industry are generally mature and are experiencing little or
no per capita volume growth.
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There can be no assurance that the positive developments noted above,
including those relating to changing regulation, will occur or that risk
factors other than those noted above will not develop in the future.
B-1
<PAGE>
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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INVESTMENT MANAGEMENT
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MFS[RegTM] VARIABLE INSURANCE TRUST
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May 1, 1998
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