<PAGE>
Annual Report
[Logo] for Year Ended
INVESTMENT MANAGEMENT December 31, 1996
MFS(R) WORLD GOVERNMENTS SERIES
A Series of MFS(R) Variable Insurance Trust
[Graphic Omitted]
<PAGE>
MFS(R) WORLD GOVERNMENTS SERIES
A SERIES OF MFS(R) VARIABLE INSURANCE TRUST
TRUSTEES INVESTMENT ADVISER
A. Keith Brodkin* Massachusetts Financial Services Company
Chairman and President 500 Boylston Street
Boston, MA 02116-3741
Nelson J. Darling, Jr.
Trustee, Eastern Enterprises DISTRIBUTOR
(diversified holding company) MFS Fund Distributors, Inc.
500 Boylston Street
William R. Gutow Boston, MA 02116-3741
Vice Chairman,
Capitol Entertainment Management SHAREHOLDER SERVICE CENTER
Company (Blockbuster Video Franchise) MFS Service Center, Inc.
P.O. Box 1400
PORTFOLIO MANAGER Boston, MA 02107-9906
Stephen C. Bryant*
For additional information,
TREASURER contact your financial adviser.
W. Thomas London*
CUSTODIAN
ASSISTANT TREASURER Investors Bank & Trust Company
James O. Yost*
AUDITORS
SECRETARY Deloitte & Touche LLP
Stephen E. Cavan*
WORLD WIDE WEB
ASSISTANT SECRETARY www.mfs.com
James R. Bordewick, Jr.*
*Affiliated with the Investment Adviser
<PAGE>
Dear Contract Owner:
The pattern of slow but sustainable growth seen in most of the world in 1996
seems likely to continue in 1997. While it looks like U.S. growth in 1997 will
slow modestly relative to 1996, there is evidence that Europe and, to a lesser
degree, Japan are continuing their recoveries from recession. At the same time,
companies in many emerging markets are reporting robust increases in earnings as
these markets benefit from higher-than-average economic growth and market
reforms, which should continue to provide more opportunities for development and
trade.
After more than six years of expansion, the U.S. economy appears headed
toward another year of moderate growth in 1997, although a few signs point to
the possibility of a modest rise in inflation during the year. On the positive
side, the pattern of moderate growth and inflation set over the past few years
now seems fairly well entrenched in the economy and, short of a major
international or domestic crisis, appears to have enough momentum to remain on
track for some time. Recent gains in such important sectors as housing,
automobiles, industrial production, and exports indicate a fair amount of
underlying strength in the economy. However, some reason for caution can be seen
in the continuing high level of consumer debt and the attendant rise in personal
bankruptcies, as well as in the modestly disappointing levels of holiday sales.
Furthermore, the ongoing tightness in labor markets, and price rises in such
important sectors as energy, could add some inflationary pressures to the
economy. Given these somewhat conflicting indicators, we expect real
(inflation-adjusted) growth to revolve around 2% in 1997, which would represent
a modest decline from 1996.
We continue to urge U.S. equity investors to lower their expectations for
1997 and to point out that the impressive gains of the past two years are not
sustainable. Just as the slowdown in corporate earnings growth and increases in
interest rates in 1996 raised some near-term concerns, further interest rate
increases and an acceleration of inflation could negatively affect the stock
market in 1997. However, to the extent that some slowdown in earnings means that
the economy is not overheating, this may be beneficial for the equity market in
the long run. Also, we believe many of the technology-driven productivity gains
that U.S. companies have made in recent years will continue to enhance corporate
America's competitiveness and profitability. Therefore, while we have some
near-term concerns, we remain reasonably positive about the long-term viability
of the equity market.
In U.S. bond markets, conflicting signals over the strength of the economy
have created near-term volatility. Even comments by Federal Reserve Board
Chairman Alan Greenspan in late 1996 created some uncertainty over the Federal
Reserve's next move. We expect the Fed to maintain its anti-inflationary stance
should signs of more rapid economic growth and, particularly, higher inflation
resurface. While inflationary forces largely remained in check in 1996, the
continued strength in the labor market and rising energy prices mean that a
pickup in inflation is still possible. At the same time, the U.S. budget deficit
continues to decline and, as a percentage of gross domestic product, is now less
than 2%, which we consider a positive development for the bond markets. Although
interest rates may move higher over the coming months, we believe that, at
current levels, fixed-income markets remain equitably valued.
Internationally, the environment of moderate growth, benign inflation, and
fairly steady interest rates is also providing support for investment markets
and should help support valuation levels in the coming year. Throughout the
world, the key to stock market performance in 1997 will be corporate earnings
growth. While U.S. earnings growth is slowing but still expected to be fairly
healthy, we anticipate that a number of European countries will see an
acceleration in earnings growth and improved valuations in 1997. Despite this
environment, many European countries trade at discounts to the United States. In
particular, we see opportunities in some of the multinationals and businesses
with the ability to generate steady earnings growth. In Japan, a recovery
appears to be taking place, but at a very modest rate, with valuations still at
high levels. In the emerging markets, the long-term economic growth story
remains intact and, although selectivity is even more important in these
markets, more companies are benefiting from this growth and trading at
below-average global valuations.
Comments from the portfolio manager of the Series are presented below. We
appreciate your support and welcome any questions or comments you may have.
Respectfully,
/s/ A. Keith Brodkin /s/ Stephen C. Bryant
A. Keith Brodkin Stephen C. Bryant
Chairman and President Portfolio Manager
January 9, 1997
MFS WORLD GOVERNMENTS SERIES
As noted above, the first half of 1996 witnessed concerns about accelerating
U.S. growth and its potential resultant boost to other major economies, which
set off a rise in interest rates based on fears of higher inflation and
potential rate hikes by the Federal Reserve Board. However, in the second half,
these concerns proved unwarranted as the U.S. economy slowed, inflation fears
receded, and rates aggressively declined. During this second half, most central
banks, with the exception of the United States, lowered official interest rates.
In this environment, the Series provided a total return of 4.03% for the 12
months ended December 31, 1996. This compares to a 3.62% return for the Salomon
Brothers World Government Bond Index (the Salomon Index) for the same period.
The Salomon Index is unmanaged and consists of complete universes of government
bonds with remaining maturities of at least five years. The Fund's return also
compares to a 4.39% return for the J.P. Morgan Global Government Bond Index (the
Morgan Index) for the same period. The Morgan Index is an unmanaged aggregate of
actively traded government bonds issued from 13 countries (including the United
States) with maturities of at least one year. However, the Morgan Index is being
replaced with the Salomon Index as a benchmark because MFS believes this index
is more representative of the countries in which the Fund invests than the
Morgan Index.
By the end of the year, all markets, as measured by the Salomon Index in
local currency returns, registered positive returns but with significant
differences. For example, the core markets -- United States, Japan, and Germany
- -- were the worst performers, while the higher-yielding markets of Australia,
Canada, Spain, and Italy were among the better performers. The Series benefited
by being overweighted in these higher-yielding markets for most of the year.
In preparation for the monetary union due to commence in January 1999,
almost all European countries announced tight fiscal budgets, while at the same
time cutting interest rates due to slow growth and low inflation. Within Europe,
a dramatic narrowing of yield spread differentials, or outperformance, began in
earnest during the third quarter with Spain, Italy, and Sweden being the main
beneficiaries. Although a good part of this convergence has now taken place, we
anticipate these markets will continue to outperform as European monetary union
approaches.
Meanwhile, looking at the dollar bloc, both Canadian and Australian markets
continue to benefit from low inflation, slow growth, and tight fiscal budgets.
The Series benefited by being overweighted in both these markets for most of the
year. Looking ahead, while there is yet no immediate threat of higher inflation
in Canada, economic growth is finally picking up and we expect the Bank of
Canada to be more accommodative in 1997. Although an underweighted position in
U.S. bonds has been beneficial in 1996, the Series' performance was hindered
during the third quarter as the U.S. position's duration (a measure of interest
rate sensitivity) was low in anticipation of a pickup in U.S. economic growth
that never materialized.
Regarding the Japanese bond market, the Series was underweighted for most of
the year because we believed other markets offered better value. However, the
Japanese bond market was helped by continued depressed real estate and banking
sectors, as well as weak consumer spending. Our outlook calls for a continuation
of slow, choppy growth with a modest increase in inflation.
For 1996, the overall rise in U.S. interest rates, coinciding with
reductions in short-term rates in Europe, enabled the dollar to appreciate
against the German mark. Additionally, the dollar benefited from yield
convergence within Europe. The dollar has continued to strengthen versus the
Japanese yen, based primarily on Japan's low interest rates and its government
policy of engineering a weaker currency in order to stimulate its beleaguered
economy. Looking forward, we anticipate modest but further lowering of interest
rates by central banks in many European countries as well as in Australia and
New Zealand, which we believe could continue to be positive for bonds. However,
some caution is warranted as ultimately lower rates in these countries could
result in a pickup in economic growth and, possibly, inflation. Moreover, with
the U.S. currency benefiting from positive interest rate differentials, renewed
hope for a balanced budget, and movement toward an inclusive, single European
currency, the prospects for a stable dollar remain favorable.
PORTFOLIO MANAGER'S PROFILE
Stephen C. Bryant joined Massachusetts Financial Services (MFS) in 1987 as
Assistant Vice President - Investments in the International Fixed Income
Department. He was named Vice President - Investments in 1989 and Senior Vice
President in 1993. Mr. Bryant is a graduate of Wesleyan University and has
managed MFS World Governments Series since its inception in June 1994.
PERFORMANCE SUMMARY
The information below illustrates the historical performance of MFS World
Governments Series shares in comparison to various market indicators. Benchmark
comparisons are unmanaged and do not reflect any fees or expenses.
You cannot invest in an index.
GROWTH OF A $10,000 HYPOTHETICAL INVESTMENT
(For the Period from June 1, 1994 to December 31, 1996)
JP Salomon
MFS Consumer Morgan Brothers
World Price Global World
Governments Index Gov't Gov't.
Series U.S. Bond Index Bond Index
----------- ------ ---------- ----------
6/94 10000.0 10000.0 10000.0 10000.0
12/94 10078.0 10149.0 10284.0 10313.0
6/95 11197.0 10339.0 11884.0 12051.0
12/95 11528.0 10400.0 12269.0 12276.0
6/96 11720.0 10620.0 12127.0 12095.0
12/96 11993.0 10773.0 12808.0 12721.0
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1996
1 Year Life+
- ----------------------------------------------------------------------------
MFS World Governments Series +4.03% +7.39%
- ----------------------------------------------------------------------------
Salomon Brothers World Government Bond Index** +3.62% +9.76%
- ----------------------------------------------------------------------------
JP Morgan Global Government Bond Index# +4.39% +9.74%
- ----------------------------------------------------------------------------
Consumer Price Index*++ +3.56% +2.96%
- ----------------------------------------------------------------------------
+For the period from the commencement of investment operations, June
14, 1994 to December 31, 1996. *The Consumer Price Index is a popular
measure of change in prices.
++Source: CDA/Wiesenberger.
**Source: Lipper Analytical Services.
#Source: Asset Investment Management (AIM).
Returns shown do not reflect the deduction of the mortality and expense risk
charges and administration fees. Please refer to the product's annual report for
performance that reflects the fees and charges imposed by insurance company
separate accounts.
Investment return and principal value will fluctuate, and shares, when redeemed,
may be worth more or less than their original cost. Past performance is no
guarantee of future results.
Series results reflect any applicable expense subsidies and waivers, without
which the performance results would have been less favorable. Subsidies and
waivers may be rescinded at any time. See the prospectus for details.
<PAGE>
PORTFOLIO OF INVESTMENTS - December 31, 1996
Bonds - 90.0%
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Foreign Bonds - 69.8%
Australia - 11.1%
Commonwealth of Australia,
9.75s, 2002 AUD 2,050 $ 1,814,428
Commonwealth of Australia,
10s, 2002 1,200 1,079,250
-----------
$ 2,893,678
- -----------------------------------------------------------------------------
Belgium - 1.4%
Kingdom of Belgium, 8.75s, 2002 BEF 10,000 $ 371,989
- -----------------------------------------------------------------------------
Canada - 2.6%
Government of Canada, 9s, 2004 CAD 400 $ 342,494
Government of Canada, 8.75s,
2005 400 339,575
-----------
$ 682,069
- -----------------------------------------------------------------------------
Denmark - 6.1%
Kingdom of Denmark, 6s, 1999 DKK 1,787 $ 315,460
Kingdom of Denmark, 9s, 2000 5,850 1,131,553
Kingdom of Denmark, 7s, 2007 868 149,912
-----------
$ 1,596,925
- -----------------------------------------------------------------------------
Germany - 12.5%
Republic of Germany, 6.875s,
1999 DEM 760 $ 526,838
Republic of Germany, 8.75s, 2000 2,743 2,038,216
Republic of Germany, 7.125s, 2002
970 691,956
-----------
$ 3,257,010
- -----------------------------------------------------------------------------
Ireland - 7.9%
Republic of Ireland, 6.5s, 2001 IEP 450 $ 774,817
Republic of Ireland, 9.25s, 2003 650 1,275,491
-----------
$ 2,050,308
- -----------------------------------------------------------------------------
Italy - 8.0%
Republic of Italy, 9.5s, 1999 ITL 1,315,000 $ 923,900
Republic of Italy, 9.5s, 2006 1,535,000 1,145,904
-----------
$ 2,069,804
- -----------------------------------------------------------------------------
Japan - 5.3%
Export-Import Bank of Japan,
4.375s, 2003 JPY 70,000 $ 681,850
IBRD-Global Bonds, 4.5s, 2000 43,000 413,090
World Bank Euro-Yen, 5.25s, 2002 28,000 283,267
-----------
$ 1,378,207
- -----------------------------------------------------------------------------
New Zealand - 2.6%
Government of New Zealand, 8s,
2004 NZD 900 $ 662,874
- -----------------------------------------------------------------------------
Spain - 6.8%
Government of Spain, 8.4s, 2001 ESP 3,400 $ 28,628
Government of Spain, 10.1s, 2001 120,000 1,063,433
Government of Spain, 7.9s, 2002 82,000 674,462
-----------
$ 1,766,523
- -----------------------------------------------------------------------------
Sweden - 2.0%
Government of Sweden, 11s, 1999 SEK 2,500 $ 411,922
Government of Sweden, 10.25s,
2000 600 101,555
-----------
$ 513,477
- -----------------------------------------------------------------------------
United Kingdom - 3.5%
United Kingdom Gilts, 7s, 2001 GBP 540 $ 915,588
- -----------------------------------------------------------------------------
Total Foreign Bonds $18,158,452
- -----------------------------------------------------------------------------
U.S. Bonds - 20.2%
U.S. Treasury Notes, 6.25s, 2001 $ 400 $ 400,376
U.S. Treasury Notes, 6.625s, 2001 1,625 1,650,904
U.S. Treasury Notes, 6.25s, 2003 3,200 3,196,000
- -----------------------------------------------------------------------------
Total U.S. Bonds $ 5,247,280
- -----------------------------------------------------------------------------
Total Bonds (Identified Cost, $23,413,386) $23,405,732
- -----------------------------------------------------------------------------
Call Options Purchased - 0.2%
- -----------------------------------------------------------------------------
Principal Amount
Description/Expiration Month/Strike of Contracts
Price (000 Omitted)
- -----------------------------------------------------------------------------
German Marks/Swiss Francs
February/0.84 DEM 2,115 $ 54,034
Italian Lire/German Marks
January/995 ITL 1,280,754 6,404
- -----------------------------------------------------------------------------
Total Call Options Purchased (Premiums Paid, $15,724) $ 60,438
- -----------------------------------------------------------------------------
Put Options Purchased - 1.6%
- -----------------------------------------------------------------------------
German Marks/British Pounds
January/2.45 DEM 3,097 $ 148,965
January/2.51 3,173 99,693
January/2.56 3,236 61,632
Swiss Francs/German Marks
January/0.829 CHF 1,221 43,757
February/0.84 1,237 31,624
March/0.86 3,431 37,236
- -----------------------------------------------------------------------------
Total Put Options Purchased (Premiums Paid, $93,381) $ 422,907
- -----------------------------------------------------------------------------
Short-Term Obligations - 7.9%
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted)
- -----------------------------------------------------------------------------
Federal Home Loan Bank, due 1/02/97 $ 1,380 1,379,597
Federal Home Loan Mortgage Corp.,
due 1/07/97 680 677,483
- -----------------------------------------------------------------------------
Total Short-Term Obligations, at Amortized Cost $ 2,057,080
- -----------------------------------------------------------------------------
Total Investments (Identified Cost, $25,579,571) $25,946,157
- -----------------------------------------------------------------------------
Call Options Written
- -----------------------------------------------------------------------------
Principal Amount
Description/Expiration Month/Strike of Contracts
Price (000 Omitted)
- -----------------------------------------------------------------------------
German Marks/British Pounds
August/2.239 DEM 2,994 $ 0
Swiss Francs/German Marks
February/0.8265 CHF 2,081 (12)
- -----------------------------------------------------------------------------
Total Call Options Written (Premiums Received, $17,785) $ (12)
- -----------------------------------------------------------------------------
Put Options Written - (1.4)%
- -----------------------------------------------------------------------------
Principal Amount
Description/Expiration Month/Strike of Contracts
Price (000 Omitted) Value
- -------------------------------------------------------------------------------
German Marks/British Pounds
January/2.3682 DEM 2,994 $ 0
January/2.45 3,097 (148,355)
January/2.5105 3,173 (99,295)
Swiss Francs/German Marks
January/0.829 CHF 1,221 (43,787)
February/0.84 3,351 (85,696)
- -------------------------------------------------------------------------------
Total Put Options Written (Premiums Received, $153,765) $ (377,133)
- -------------------------------------------------------------------------------
Other Assets, Less Liabilities - 1.7% $ 453,941
- -------------------------------------------------------------------------------
Net Assets - 100.0% $26,022,953
- -------------------------------------------------------------------------------
Abbreviations have been used throughout this report to indicate amounts shown in
currencies other than the U.S. dollar. A list of abbreviations is show below.
AUD = Australian Dollars GBP = British Pounds
BEF = Belgian Francs IEP = Irish Punts
CAD = Canadian Dollars ITL = Italian Lire
CHF = Swiss Francs JPY = Japanese Yen
DEM = Deutsche Marks NLG = Dutch Guilders
DKK = Danish Kroner NOK = Norwegian Krone
ECU = European Currency Units NZD = New Zealand Dollars
ESP = Spanish Pesetas SEK = Swedish Kronor
FRF = French Francs
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ----------------------------------------------------------------------------
December 31, 1996
- ----------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $25,579,571) $25,946,157
Cash 36,029
Net receivable for forward foreign currency exchange
contracts sold 233,881
Net receivable for closed forward foreign currency exchange
contracts 385,985
Receivable for Series shares sold 252,795
Receivable for investments sold 2,427,988
Interest receivable 596,957
Receivable from investment adviser 68,518
Deferred organization expenses 2,299
Other assets 80
-----------
Total assets $29,950,689
-----------
Liabilities:
Payable for Series shares reacquired $ 171,811
Payable for investments purchased 2,305,799
Written options outstanding, at value (premiums received,
$171,550) 377,145
Net payable for forward foreign currency exchange contracts
purchased 1,005,387
Payable to affiliate for management fee 1,589
Accrued expenses and other liabilities 66,005
-----------
Total liabilities $ 3,927,736
-----------
Net assets $26,022,953
===========
Net assets consist of:
Paid-in capital $25,151,769
Unrealized depreciation on investments and translation of
assets and liabilities in foreign currencies (227,087)
Accumulated undistributed net realized gain on investments
and foreign currency transactions 221,999
Accumulated undistributed net investment income 876,272
-----------
Total $26,022,953
===========
Shares of beneficial interest outstanding 2,459,773
=========
Net asset value per share
(net assets of $26,022,953 / 2,459,773 shares of beneficial
interest outstanding) $10.58
======
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- ------------------------------------------------------------------------------
Year Ended December 31, 1996
- -----------------------------------------------------------------------------
Net investment income:
Interest income $1,156,162
----------
Expenses -
Management fee $ 126,898
Trustees' compensation 2,033
Shareholder servicing agent fee 5,869
Printing 85,838
Auditing fees 67,150
Custodian fee 44,443
Amortization of organization expenses 1,509
Legal fees 1,196
Miscellaneous 8,534
----------
Total expenses $ 343,470
Fees paid indirectly (1,716)
Reduction of expenses by investment adviser (172,556)
----------
Net expenses $ 169,198
----------
Net investment income $ 986,964
----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 642,196
Written option transactions 53,876
Foreign currency transactions (588,976)
----------
Net realized gain on investments and foreign
currency transactions $ 107,096
----------
Change in unrealized appreciation (depreciation) -
Investments $ 232,845
Written options (208,572)
Translation of assets and liabilities in foreign
currencies (157,165)
----------
Net unrealized loss on investments and foreign
currency translation $ (132,892)
----------
Net realized and unrealized loss on investments
and foreign currency $ (25,796)
----------
Increase in net assets from operations $ 961,168
==========
See notes to financial statements
<PAGE>
<TABLE>
FINANCIAL STATEMENTS - continued
Statements of Changes in Net Assets
- -------------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended December 31, 1996 1995
- -------------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets:
<S> <C> <C>
From operations -
Net investment income $ 986,964 $ 272,353
Net realized gain on investments and foreign currency transactions 107,096 398,163
Net unrealized loss on investments and foreign currency translation (132,892) (80,131)
------------ -----------
Increase in net assets from operations $ 961,168 $ 590,385
------------ -----------
Distributions declared to shareholders -
From net investment income $ -- $ (272,353)
In excess of net investment income -- (357,618)
Tax return of capital -- (63,028)
------------ -----------
Total distributions declared to shareholders $ -- $ (692,999)
------------ -----------
Series share (principal) transactions -
Net proceeds from sale of shares $ 33,174,815 $ 9,272,850
Net asset value of shares issued to shareholders in reinvestment
of distributions -- 692,995
Cost of shares reacquired (15,536,671) (5,320,839)
------------ -----------
Increase in net assets from Series share transactions $ 17,638,144 $ 4,645,006
------------ -----------
Total increase in net assets $ 18,599,312 $ 4,542,392
Net assets:
At beginning of period 7,423,641 2,881,249
------------ -----------
At end of period (including accumulated undistributed net
investment income of $876,272 and $166,765, respectively) $ 26,022,953 $ 7,423,641
============ ===========
</TABLE>
See notes to financial statements
<PAGE>
<TABLE>
FINANCIAL STATEMENTS - continued
Financial Highlights
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended Year Ended Period Ended
December 31, December 31, December 31,
1996 1995 1994*
- ---------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding
throughout each period):
<S> <C> <C> <C>
Net asset value - beginning of period $10.17 $ 9.82 $10.00
------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.60 $ 0.63 $ 0.17
Net realized and unrealized gain (loss)
on investments and foreign
currency transactions (0.19) 0.78 (0.09)
------ ------ ------
Total from investment operations $ 0.41 $ 1.41 $ 0.08
------ ------ ------
Less distributions declared to shareholders -
From net investment income $ -- $(0.42) $(0.17)
In excess of net investment income -- (0.54) (0.09)
Tax return of capital -- (0.10) --
------ ------ ------
Total distributions declared to shareholders $ -- $(1.06) $(0.26)
------ ------ ------
Net asset value - end of period $10.58 $10.17 $ 9.82
====== ====== ======
Total return 4.03% 14.38% 0.79%++
Ratios (to average net assets)/Supplemental data(S):
Expenses 1.00% 1.00% 1.00%+
Net investment income 5.84% 6.05% 4.68%+
Portfolio turnover 361% 211% 62%
Net assets at end of period (000 omitted) $26,023 $7,424 $2,881
*For the period from the commencement of investment operations, June 14, 1994 to December 31, 1994.
+Annualized.
++Not annualized.
#Per share data is based on average shares outstanding.
(S)The adviser voluntarily agreed to maintain the expenses of the Series at not more than 1.00% of average
daily net assets. To the extent actual expenses were over these limitations, the net investment income
per share and the ratios would have been:
Net investment income $ 0.50 $ 0.53 $ 0.16
Ratios (to average net assets):
Expenses 2.03% 1.99% 1.10%+
Net investment income 4.81% 5.09% 4.58%+
</TABLE>
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS World Governments Series (the Series) is a non-diversified series of MFS
Variable Insurance Trust (the Trust) which is comprised of the following twelve
series: MFS Bond Series, MFS Emerging Growth Series, MFS Growth with Income
Series, MFS High Income Series, MFS Limited Maturity Series, MFS Money Market
Series, MFS Research Series, MFS Strategic Fixed Income Series, MFS Total Return
Series, MFS Utilities Series, MFS Value Series and MFS World Governments Series.
The Trust is organized as a Massachusetts business trust and is registered under
the Investment Company Act of 1940, as amended, as an open-end management
investment company.
The shareholders of each Series of the Trust are separate accounts of insurance
companies which offer variable annuity and/or life insurance products. As of
December 31, 1996 there were 23 shareholders in the Series.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Investments
in foreign securities are vulnerable to the effects of changes in the relative
values of the local currency and the U.S. dollar and to the effects of changes
in each country's legal, political and economic environment.
Investment Valuations - Debt securities (other than short-term obligations which
mature in 60 days or less), including listed issues and forward contracts, are
valued on the basis of valuations furnished by dealers or by a pricing service
with consideration to factors such as institutional-size trading in similar
groups of securities, yield, quality, coupon rate, maturity, type of issue,
trading characteristics and other market data, without exclusive reliance upon
exchange or over-the-counter prices. Short-term obligations, which mature in 60
days or less, are valued at amortized cost, which approximates market value.
Options listed on commodities exchanges are valued at closing settlement prices.
Over-the-counter options are valued by brokers through the use of a pricing
model which takes into account closing bond valuations, implied volatility and
short-term repurchase rates. Securities for which there are no such quotations
or valuations are valued at fair value as determined in good faith by or at the
direction of the Trustees.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases and
sales of foreign investments, income and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates of
such transactions. Gains and losses attributable to foreign currency exchange
rates on sales of securities are recorded for financial statement purposes as
net realized gains and losses on investments. Gains and losses attributable to
foreign exchange rate movements on income and expenses are recorded for
financial statement purposes as foreign currency transaction gains and losses.
That portion of both realized and unrealized gains and losses on investments
that result from fluctuations in foreign currency exchange rates is not
separately disclosed.
Deferred Organization Expenses - Costs incurred by the Series in connection with
its organization have been deferred and are being amortized on a straight-line
basis over a five-year period beginning on the date of commencement of Series
operations.
Written Options - The Series may write covered call or put options for which
premiums are received and are recorded as liabilities, and are subsequently
adjusted to the current value of the options written. Premiums received from
writing options which expire are treated as realized gains. Premiums received
from writing options which are exercised or are closed are offset against the
proceeds or amount paid on the transaction to determine the realized gain or
loss. If a put option is exercised, the premium reduces the cost basis of the
security purchased by the Series. The Series, as writer of an option, may have
no control over whether the underlying securities may be sold (call) or
purchased (put) and, as a result, bears the market risk of an unfavorable change
in the price of the securities underlying the written option. In general,
written call options may serve as a partial hedge against decreases in value in
the underlying securities to the extent of the premium received. Written options
may also be used as part of an income producing strategy reflecting the view of
the Series' management on the direction of interest rates.
Forward Foreign Currency Exchange Contracts - The Series may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering into these contracts from the potential inability of counterparties to
meet the terms of their contracts and from unanticipated movements in the value
of a foreign currency relative to the U.S. dollar. The Series will enter into
forward contracts for hedging purposes as well as for non-hedging purposes. For
hedging purposes, the Series may enter into contracts to deliver or receive
foreign currency it will receive from or require for its normal investment
activities. The Series may also use contracts in a manner intended to protect
foreign currency-denominated securities from declines in value due to
unfavorable exchange rate movements. For non-hedging purposes, the Series may
enter into contracts with the intent of changing the relative exposure of the
Series' portfolio of securities to different currencies to take advantage of
anticipated changes. The forward foreign currency exchange contracts are
adjusted by the daily exchange rate of the underlying currency and any gains or
losses are recorded for financial statement purposes as unrealized until the
contract settlement date.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for financial statement and
tax reporting purposes as required by federal income tax regulations. Interest
payments received in additional securities are recorded on the ex-interest date
in an amount equal to the value of the security on such date.
Fees Paid Indirectly - The Series' custodian bank calculates its fee based on
the Series' average daily net assets. This fee is reduced according to an
expense offset arrangement with State Street Bank, the dividend disbursing
agent, which provides for partial reimbursement of custody fees based on a
formula developed to measure the value of cash deposited by the Series with the
custodian and with the dividend disbursing agent. This amount is shown as a
reduction of expenses on the Statement of Operations.
Tax Matters and Distributions - The Series' policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. The Series files a tax
return annually using tax accounting methods required under provisions of the
Code which may differ from generally accepted accounting principles, the basis
on which these financial statements are prepared. Accordingly, the amount of net
investment income and net realized gain reported on these financial statements
may differ from that reported on the Series' tax return and, consequently, the
character of distributions to shareholders reported in the financial highlights
may differ from that reported to shareholders on Form 1099-DIV. Foreign taxes
have been provided for on interest and dividend income earned on foreign
investments in accordance with the applicable country's tax rates and to the
extent unrecoverable are recorded as a reduction of investment income. The
Series expects to pass through to shareholders foreign income taxes paid. The
election increases the taxable distributions of the Series by the amount of the
foreign taxes paid. An individual shareholder who itemizes deductions, or a
corporate shareholder, will be able to claim an offsetting deduction or a tax
credit (but not both) on their federal income tax returns. Individuals who do
not itemize deductions may claim a foreign tax credit but not a deduction. The
foreign source income is considered passive income for the purpose of computing
the foreign tax credit limitations. Distributions to shareholders are recorded
on the ex-dividend date.
The Series distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a tax return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains. During the year ended December 31, 1996, $277,457 was reclassified from
accumulated undistributed net investment income to accumulated undistributed net
realized gain on investments and foreign currency transactions due to
differences between book and tax accounting for currency transactions. This
change had no effect on the net assets or net asset value per share. At December
31, 1996, accumulated undistributed net investment income under book accounting
were different from tax accounting due to temporary differences in accounting
for currency transactions.
(3) Transactions with Affiliates
Investment Adviser - The Series has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.75% of
average daily net assets. Under a temporary expense limitation agreement with
MFS, MFS has voluntarily agreed to pay all of the Series' operating expenses,
exclusive of management fees, which exceed 0.25% of the Series' average daily
net assets. The Series in turn will pay MFS an expense reimbursement fee not
greater than 0.25% of the Series' average daily net assets. To the extent that
the expense reimbursement fee exceeds the Series' actual expenses, the excess
will be applied to amounts paid by MFS in prior years. At December 31, 1996, the
aggregate unreimbursed expenses owed to MFS by the Series amounted to $252,340,
including $172,556 incurred in the current year.
The Series pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Series, all of whom receive
remuneration for their services to the Series from MFS. Certain officers and
Trustees of the Series are officers or directors of MFS and MFS Service Center,
Inc. (MFSC).
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as a
percentage of the average daily net assets at an effective annual rate of up to
0.035%.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions and
short-term obligations, were as follows:
Purchases Sales
- ------------------------------------------------------------------------------
U.S. government securities $23,204,684 $20,453,094
=========== ===========
Investments (non-U.S. government securities) $48,546,607 $34,428,896
=========== ===========
The cost and unrealized appreciation or depreciation in value of the investments
owned by the Series, as computed on a federal income tax basis, are as follows:
Aggregate cost $25,579,571
===========
Gross unrealized appreciation $ 550,208
Gross unrealized depreciation (183,622)
-----------
Net unrealized appreciation $ 366,586
===========
(5) Shares of Beneficial Interest
The Series' Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Series shares were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1996 December 31, 1995
--------------------------------- -------------------------------
Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 3,252,833 $ 33,174,815 861,022 $ 9,272,850
Shares issued to shareholders in
reinvestment of distributions -- -- 68,274 692,995
Shares reacquired (1,522,662) (15,536,671) (493,000) (5,320,839)
---------- -------------- -------- -------------
Net increase 1,730,171 $ 17,638,144 436,296 $ 4,645,006
========== ============== ======== =============
</TABLE>
(6) Line of Credit
The Series entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Series shares. Interest is charged to each
fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating funds at the end of each
quarter. The commitment fee allocated to the Series for the year ended December
31, 1996 was $108.
(7) Financial Instruments
The Series trades financial instruments with off-balance sheet risk in the
normal course of its investing activities in order to manage exposure to market
risks such as interest rates and foreign currency exchange rates. These
financial instruments include written options and forward foreign currency
exchange contracts. The notional or contractual amounts of these instruments
represent the investment the Series has in particular classes of financial
instruments and does not necessarily represent the amounts potentially subject
to risk. The measurement of the risks associated with these instruments is
meaningful only when all related and offsetting transactions are considered.
Written Option Transactions
<TABLE>
<CAPTION>
1996 Calls 1996 Puts
------------------------------------ ------------------------------------
Principal Amounts Principal Amounts
of Contracts of Contracts
(000 Omitted) Premiums (000 Omitted) Premiums
- -------------------------------------------------------------------------------------------------------------------
OUTSTANDING, BEGINNING OF PERIOD -
<S> <C> <C> <C> <C>
Australian Dollars -- $ -- 145 $ 1,853
German Marks/British Pounds 623 2,769 -- --
Italian Lire/German Marks 596,334 9,883 596,334 21,958
Japanese Yen -- -- 26,950 3,514
Options written -
Australian Dollars 306 1,659 -- --
Canadian Dollars 721 740 1,714 5,226
German Marks 11,659 56,784 1,683 4,619
German Marks/British Pounds 8,516 32,055 6,270 97,304
Italian Lire/German Marks 1,651,102 12,004 -- --
Japanese Yen 76,546 961 132,377 8,463
New Zealand Dollar -- -- 705 1,048
Spanish Peseta/German Marks -- -- 129,477 3,205
Swiss Francs/German Marks 2,081 6,314 4,572 56,461
Options terminated in closing transactions -
Australian Dollars (306) (1,659) -- --
German Marks (11,659) (56,784) (1,683) (4,619)
German Marks/British Pounds (2,019) (6,568) -- --
Italian Lire/German Marks (2,247,436) (21,887) (596,334) (21,958)
Japanese Yen (76,546) (961) (85,950) (7,621)
New Zealand Dollar -- -- (705) (1,048)
Options expired -
Australian Dollars -- -- (145) (1,853)
Canadian Dollars (721) (740) (1,714) (5,226)
German Marks/British Pounds (4,126) (16,785) -- --
Japanese Yen -- -- (73,377) (4,356)
Spanish Peseta/German Marks -- -- (129,477) (3,205)
--------- ---------- ------- --------
OUTSTANDING, END OF PERIOD 5,075 $ 17,785 10,842 $153,765
========= ========== ======= ========
OPTIONS OUTSTANDING AT END OF PERIOD CONSIST OF:
German Marks/British Pounds 2,994 $ 11,471 6,270 $ 97,304
Swiss Francs/German Marks 2,081 6,314 4,572 56,461
--------- ---------- ------- --------
OUTSTANDING, END OF PERIOD 5,075 $ 17,785 10,842 $153,765
========= ========== ======= ========
</TABLE>
At December 31, 1996, the Series had sufficient cash and/or securities at least
equal to the value of the written options.
<PAGE>
Forward Foreign Currency Exchange Contracts
<TABLE>
<CAPTION>
Net Unrealized
Contracts In Exchange Contracts Appreciation
Settlement Date to Deliver/Receive for at Value (Depreciation)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales 2/20/97 - 4/21/97 AUD 2,697,746 $ 2,134,083 $ 2,139,540 $ (5,457)
2/24/97 BEF 11,969,832 394,004 378,957 15,047
2/20/97 CAD 12,909 9,458 9,452 6
2/07/97 CHF 3,820,672 3,008,669 2,866,911 141,758
1/10/97 - 4/21/97 DEM 58,542,880 38,304,017 38,295,146 8,871
2/03/97 DKK 4,224,107 740,526 718,705 21,821
5/09/97 ECU 909,100 1,157,421 1,146,046 11,375
2/07/97 FRF 4,064,400 789,342 785,492 3,850
2/24/97 - 4/21/97 GBP 2,506,514 4,125,258 4,286,104 (160,846)
2/24/97 IEP 1,255,768 2,040,649 2,127,185 (86,536)
1/03/97 - 2/07/97 ITL 1,531,569,914 1,005,821 1,006,791 (970)
1/29/97 - 4/21/97 JPY 1,389,345,557 12,442,313 12,176,795 265,518
4/21/97 NZD 1,054,619 743,511 740,432 3,079
2/03/97 - 2/07/97 SEK 4,207,527 634,772 618,407 16,365
----------- ----------- -----------
$67,529,844 $67,295,963 $ 233,881
=========== =========== ============
Purchases 2/20/97 - 4/21/97 AUD 1,810,075 $ 1,453,770 $ 1,435,555 $ (18,215)
2/07/97 CHF 3,718,357 2,956,135 2,790,137 (165,998)
2/07/97 - 4/22/97 DEM 40,624,120 26,488,345 26,561,042 72,697
2/07/97 DKK 3,024,120 510,305 514,641 4,336
4/21/97 ESP 24,636,350 189,579 189,319 (260)
2/07/97 FRF 4,067,555 806,193 786,102 (20,091)
2/24/97 - 4/21/97 GBP 1,058,929 1,752,499 1,810,366 57,867
1/10/97 - 2/07/97 ITL 2,064,401,327 1,347,349 1,357,335 9,986
1/21/97 - 4/22/97 JPY 3,360,250,862 30,383,032 29,458,921 (924,111)
2/03/97 NLG 33,399 19,620 19,389 (231)
5/09/97 NOK 7,337,586 1,157,421 1,145,970 (11,451)
4/21/97 NZD 5,295 3,724 3,717 (7)
2/03/97 SEK 2,239,575 339,039 329,130 (9,909)
----------- ----------- -----------
$67,407,011 $66,401,624 $(1,005,387)
=========== =========== ===========
</TABLE>
Forward foreign currency purchases and sales under master netting arrangements
and closed forward foreign currency exchange contracts excluded above amounted
to a net payable of $132,652 with Bankers Trust Company, a net payable of
$34,163 with Swiss Bank, a net receivable of $499,084 with First Boston, a net
receivable of $28,645 with Goldman Sachs, a net receivable of $16,595 with JP
Morgan, and a net receivable of $8,476 with Merrill Lynch at December 31, 1996.
At December 31, 1996, the Series had sufficient cash and/or securities to cover
any commitments under these contracts.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Variable Insurance Trust and Shareholders of MFS World
Governments Series:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of MFS World Governments Series (the Series) (one
of the series constituting the MFS Variable Insurance Trust) as of December 31,
1996, the related statement of operations for the year then ended, and the
statements of changes in net assets and financial highlights for the years ended
December 31, 1996 and December 31, 1995 and for the period from June 14, 1994
(the commencement of investment operations) to December 31, 1994. These
financial statements and financial highlights are the responsibility of the
Series' management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned at
December 31, 1996 by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS World
Governments Series at December 31, 1996, the results of its operations, the
changes in its net assets, and its financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 7, 1997
---------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
VWG-2/97 12M
