<PAGE>
[logo] M F S(SM) ANNUAL REPORT
INVESTMENT MANAGEMENT FOR YEAR ENDED
DECEMBER 31, 1996
MFS(R) BOND SERIES
A SERIES OF MFS(R) VARIABLE INSURANCE TRUST
[Graphic Omitted]
<PAGE>
MFS(R) BOND SERIES
A SERIES OF MFS(R) VARIABLE INSURANCE TRUST
TRUSTEES INVESTMENT ADVISER
A. Keith Brodkin* Massachusetts Financial Services
Chairman and President Company
500 Boylston Street
Nelson J. Darling, Jr. Boston, MA 02116-3741
Trustee, Eastern Enterprises
(diversified holding company) DISTRIBUTOR
MFS Fund Distributors, Inc.
William R. Gutow 500 Boylston Street
Vice Chairman, Boston, MA 02116-3741
Capitol Entertainment Management Company
(Blockbuster Video Franchise) SHAREHOLDER SERVICE CENTER
MFS Service Center, Inc.
PORTFOLIO MANAGER P.O. Box 1400
Geoffrey L. Kurinsky* Boston, MA 02107-9906
TREASURER For additional information,
W. Thomas London* contact your financial adviser.
ASSISTANT TREASURER CUSTODIAN
James O. Yost* Investors Bank & Trust Company
SECRETARY AUDITORS
Stephen E. Cavan* Deloitte & Touche LLP
ASSISTANT SECRETARY WORLD WIDE WEB
James R. Bordewick, Jr.* www.mfs.com
*Affiliated with the Investment Adviser
<PAGE>
Dear Contract Owner:
The pattern of slow but sustainable growth seen in most of the world in 1996
seems likely to continue in 1997. While it looks as if U.S. growth in 1997 will
slow modestly relative to 1996, there is evidence that Europe and, to a lesser
degree, Japan are continuing their recoveries from recession. At the same time,
companies in many emerging markets are reporting robust increases in earnings as
these markets benefit from higher-than-average economic growth and market
reforms, which should continue to provide more opportunities for development and
trade.
After more than six years of expansion, the U.S. economy appears headed
toward another year of at least moderate growth in 1997, although a few signs
point to the possibility of a modest rise in inflation during the year. On the
positive side, the pattern of moderate growth and inflation set over the past
few years now seems fairly well entrenched in the economy and, short of a major
international or domestic crisis, appears to have enough momentum to remain on
track for some time. Recent gains in such important sectors as housing,
automobiles, industrial production, and exports indicate a fair amount of
underlying strength in the economy. However, some reason for caution can be seen
in the continuing high level of consumer debt and the attendant rise in personal
bankruptcies, as well as in the modestly disappointing level of holiday sales.
Also, the ongoing tightness in labor markets, and price rises in such important
sectors as energy, could add some inflationary pressures to the economy. Given
these somewhat conflicting indicators, we expect real (inflation-adjusted)
growth to revolve around 2% in 1997, which would represent a modest decline from
1996.
We continue to urge U.S. equity investors to lower their expectations for
1997 and to point out that the impressive gains of the past two years are not
sustainable. Just as the slowdown in corporate earnings growth and increases in
interest rates in 1996 raised some near-term concerns, further interest rate
increases and an acceleration of inflation could negatively affect the stock
market in 1997. However, to the extent that some slowdown in earnings means that
the economy is not overheating, this may be beneficial for the equity market in
the long run. Also, we believe many of the technology-driven productivity gains
that U.S. companies have made in recent years will continue to enhance corporate
America's competitiveness and profitability. Therefore, while we have some
near-term concerns, we remain reasonably positive about the long-term viability
of the equity market.
In U.S. bond markets, conflicting signals over the strength of the economy
have created near-term volatility. Even comments by Federal Reserve Chairman
Alan Greenspan late in 1996 created some uncertainty over the Federal Reserve
Board's next move. We expect the Fed to maintain its anti-inflationary stance
should signs of more rapid economic growth and, particularly, higher inflation
resurface. While inflationary forces largely remained in check in 1996, the
continued strength in the labor market and rising energy prices mean that a
pickup in inflation is still possible. At the same time, the U.S. budget deficit
continues to decline and, as a percentage of gross domestic product, is now less
than 2%, which we consider a positive development for the bond markets. Although
interest rates may move higher over the coming months, we believe that, at
current levels, fixed-income markets remain equitably valued.
Internationally, the environment of moderate growth, benign inflation, and
fairly steady interest rates is also providing support for investment markets
and should help support valuation levels in the coming year. Throughout the
world, the key to stock market performance in 1997 will be corporate earnings
growth. While U.S. earnings growth is slowing but still expected to be fairly
healthy, we anticipate that a number of European countries will see an
acceleration in earnings growth and improved valuations in 1997. Despite this
environment, many European countries trade at discounts to the United States. In
particular, we see opportunities in some of the multinationals and businesses
with the ability to generate steady earnings growth. In Japan, a recovery
appears to be taking place, but at a very modest rate, with valuations still at
high levels. In the emerging markets, the long-term economic growth story
remains intact and, although selectivity is even more important in these
markets, more companies are benefiting from this growth and trading at
below-average global valuations.
<PAGE>
Comments from the portfolio manager of the Series are presented below. We
appreciate your support and welcome any questions or comments you may have.
Respectfully,
/s/ A. Keith Brodkin /s/ Geoffrey L. Kurinsky
A. Keith Brodkin Geoffrey L. Kurinsky
Chairman and President Portfolio Manager
January 13, 1997
MFS BOND SERIES
For the year ended December 31, 1996, the Series provided a total return of
2.09%. This compares to a 2.90% return for the Lehman Brothers Government/
Corporate Bond Index, an unmanaged, market-value-weighted index of all debt
obligations of the U.S. Treasury and U.S. government agencies (excluding
mortgage-backed securities) and of all publicly issued fixed-rate,
nonconvertible, investment-grade domestic corporate debt. While intra-year
volatility moved interest rates in many directions in 1996, as a whole, interest
rates moved higher, making it a tough year for fixed-income investors. After
beginning the year at 5.5%, interest rates on 10-year Treasury securities ended
the year around 6.5%. This backup was caused by an unexpected pickup in economic
activity over the first half of the year and by fears of accelerating inflation,
which turned out to be unfounded.
The Series continued to build up its weighting in investment-grade corporate
securities, which reached approximately 50% of the portfolio by year-end. We are
targeting an eventual 65% to 75% allocation of both high-grade and high-yield
corporate securities. As the U.S. economy continues its growth, we expect the
general rule that corporate securities outperform Treasury securities during
periods of economic growth will continue to prevail (although the principal
value and interest on Treasury securities are guaranteed by the U.S. government
if held to maturity). Credit fundamentals of corporations generally improve
during periods of economic growth and deteriorate during periods of recession.
In terms of specific sectors, the Series' overweighted position in the
airline sector contributed to its strong performance. This sector provided a
return of 7.25% for the period, which was the best-performing sector of the
investment-grade corporate bond market. The sector continues to benefit from the
pickup in economic activity and a 10% to 20% increase in airline fares.
The Series' exposure to the cable/media sector was a drag on performance
during the period. The sector's performance of 2.19% was among the worst in the
investment-grade corporate bond market. The Series' largest holding,
TeleCommunications Inc., underperformed as the Standard & Poor's rating agency
has alerted that it may return its rating to below-investment-grade status. We
have retained our position based on our view that the downgrade is already
reflected in current pricing. If the investment-grade ratings are affirmed,
there is the potential for significant price appreciation.
Given our view that the market is fairly valued, we are maintaining the
Series duration (a measure of interest rate sensitivity) at 5.8 years, which we
consider appropriate for this Series' universe. We will persist in building our
exposure to both the investment-grade and high-yield corporate bond markets
based on our outlook for continued steady economic growth into 1997.
PORTFOLIO MANAGER'S PROFILE
Geoffrey L. Kurinsky is Senior Vice President of Massachusetts Financial
Services (MFS) and has managed MFS Bond Series since its inception in 1995. He
joined MFS in 1987 in the Fixed Income Department and was named Vice President
in 1990 and Senior Vice President in 1993. Mr. Kurinsky is a graduate of the
University of Massachusetts and holds a Master's in Business Administration and
Finance from Boston University.
<PAGE>
PERFORMANCE SUMMARY
The information below illustrates the historical performance of MFS Bond Series
shares in comparison to various market indicators. Benchmark comparisons are
unmanaged and do not reflect any fees or expenses. You cannot invest in an
index.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the Period from November 1, 1995 to December 31, 1996)
Lehman Brothers Government/ Consumer
MFS Bond Series Corporate Bond Index Price Index -- U.S.
11/95 10000.0 10000.0 10000.0
12/95 10300.0 10314.0 10013.0
3/96 10027.0 10073.0 10152.0
6/96 9987.0 10120.0 10225.0
9/96 10149.0 10299.0 10300.0
12/96 10516.0 10614.0 10372.0
AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 1996
1 Year Life+
- --------------------------------------------------------------------------------
MFS Bond Series +2.09% +4.32%
- --------------------------------------------------------------------------------
Lehman Brothers Government/Corporate Bond Index(++) +2.90% +6.44%
- --------------------------------------------------------------------------------
Consumer Price Index*(++) +3.56% +3.12%
- --------------------------------------------------------------------------------
(+) For the period from the commencement of investment operations, October 24,
1995 to December 31, 1996.
* The Consumer Price Index is a popular measure of change in prices.
(++) Source: CDA/ Wiesenberger.
Returns shown do not reflect the deduction of the mortality and expense risk
charges and administration fees. Please refer to the product's annual report for
performance that reflects the fees and charges imposed by insurance company
separate accounts.
Investment return and principal value will fluctuate, and shares, when redeemed,
may be worth more or less than their original cost. Past performance is no
guarantee of future results.
Series results reflect any applicable expense subsidies and waivers, without
which the performance results would have been less favorable. Subsidies and
waivers may be rescinded at any time. See the prospectus for details.
<PAGE>
PORTFOLIO OF INVESTMENTS - December 31, 1996
Bonds - 83.4%
- --------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- --------------------------------------------------------------------------------
U.S. Bonds - 76.8%
Airlines - 4.4%
Continental Airlines, Inc., 9.5s, 2001## $ 10 $ 10,200
Continental Airlines, Inc., 9.5s, 2013 5 5,625
Delta Airlines, Inc., 8.5s, 2002 10 10,588
Jet Equipment Trust, 9.41s, 2010## 5 5,769
Jet Equipment Trust, 8.64s, 2012## 4 5,310
--------
$ 37,492
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Automotive - 0.6%
Mark IV Industries, Inc., 7.75s, 2006 $ 5 $ 4,912
- --------------------------------------------------------------------------------
Banks and Credit Companies - 4.6%
ABN Amro Bank N.V., 7.3s, 2026 $ 5 $ 4,838
Advanta Corp., 7.47s, 2001 5 5,100
BankAmerica Capital, 8s, 2026 5 5,060
Capital One Bank, 6.75s, 2000 10 9,987
Capital One Financial Corp., 7.25s, 2003 10 9,838
MBNA Capital, 8.278s, 2026 5 5,019
--------
$ 39,842
- --------------------------------------------------------------------------------
Building - 1.2%
USG Corp., 9.25s, 2001 $ 10 $ 10,650
- --------------------------------------------------------------------------------
Business Machines - 0.5%
International Business Machines Corp.,
7.125s, 2006 $ 5 $ 4,831
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Consumer Goods and Services - 0.6%
Philip Morris Cos., Inc., 7.65s, 2008 $ 5 $ 5,106
- --------------------------------------------------------------------------------
Entertainment - 1.8%
Time Warner, Inc., 7.45s, 1998 $ 5 $ 5,055
Time Warner, Inc., 8.375s, 2023 10 10,138
--------
$ 15,193
- --------------------------------------------------------------------------------
Financial Institutions - 3.6%
Contifinancial Corp., 8.375s, 2003 $ 5 $ 5,150
Crown, Cork & Seal Finance, 7s, 2006 5 4,944
Hubco, Inc., 8.2s, 2006## 5 5,200
Lehman Brothers Holdings, 7.5s, 2026 10 10,250
Salton Sea Funding Corp., 7.84s, 2010 5 5,027
--------
$ 30,571
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Food and Beverage Products - 1.2%
RJR Nabisco, Inc., 8.75s, 2004 $ 10 $ 10,093
- --------------------------------------------------------------------------------
Forest and Paper Products - 1.2%
Boise Cascade Corp., 7.43s, 2005 $ 10 $ 10,150
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Insurance - 4.4%
Equitable Life Assurance, 7.7s, 2015 $ 3 $ 3,026
Fairfax Financial Holdings Ltd., 8.3s, 2026 5 5,217
Liberty Mutual Insurance Co., 8.2s, 2007## 5 5,310
Nationwide Mutual Insurance Co., 7.5s, 2024## 10 9,320
Travelers Capital, 7.75s, 2036 15 14,550
--------
$ 37,423
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Medical and Health Technology and Services - 0.6%
Tenet Healthcare Corp., 8.625s, 2003 $ 5 $ 5,275
- --------------------------------------------------------------------------------
Oils - 4.1%
Enserch Exploration, Inc., 7.54s, 2009## $ 5 $ 4,925
Mitchell Energy & Development Corp.,
6.75s, 2004 10 9,339
Oryx Energy Co., 8.375s, 2004 10 10,334
Tosco Corp., 7.625s, 2006 10 10,324
--------
$ 34,922
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Real Estate Investment Trusts - 1.8%
Loewen Group International, Inc., 7.5s, 2001 $ 10 $ 10,000
Taubman Realty Group, 8s, 2001 5 5,161
--------
$ 15,161
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Special Products and Services - 0.6%
Stewart Enterprises, 6.7s, 2003 $ 5 $ 4,906
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Stores - 0.6%
Price/Costco, Inc., 7.125s, 2005 $ 5 $ 5,001
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Telecommunications - 3.8%
360 Communications Co., 7.5s, 2006 $ 7 $ 6,943
Tele-Communications, Inc., 7.385s, 2001 20 20,198
Tele-Communications, Inc., 10.125s, 2022 5 5,490
--------
$ 32,631
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U.S. Treasury Obligations - 31.0%
U.S. Treasury Notes, 6s, 1999 $ 10 $ 9,998
U.S. Treasury Notes, 9.125s, 1999 5 5,343
U.S. Treasury Notes, 6.5s, 2001 5 5,055
U.S. Treasury Notes, 6.5s, 2005 5 5,032
U.S. Treasury Notes, 6.5s, 2006 41 41,224
U.S. Treasury Notes, 6.875s, 2006 110 113,352
U.S. Treasury Notes, 7s, 2006 36 37,401
U.S. Treasury Bonds, 7.625s, 2025 6 6,665
U.S. Treasury Bonds, 6.75s, 2026 40 40,300
--------
$264,370
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Utilities - Electric - 7.8%
Arkansas Power & Light Co., 8.75s, 2026 $ 10 $ 10,302
Coastal Corp., 7.75s, 2035 20 20,361
First PV Funding Corp., 10.3s, 2014 5 5,325
Long Island Lighting Co., 8.9s, 2019 15 15,304
Louisiana Power & Light Co., 8.75s, 2026 5 5,056
Niagara Mohawk Power, 8s, 2004 5 4,803
Texas-New Mexico Power Co., 12.5s, 1999 5 5,432
--------
$ 66,583
- --------------------------------------------------------------------------------
Utilities - Gas - 2.4%
California Energy Co., 0s, 2004 $ 5 $ 5,268
Louis Dreyfus Natural Gas, 9.25s, 2004 5 5,256
NGC Corp., 7.625s, 2026 5 5,094
Ras Laffan Gas, 8.294s, 2014## 5 5,067
--------
$ 20,685
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Total U.S. Bonds $655,797
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Foreign Bonds - 6.6%
Australia - 0.6%
Qantas Airways Ltd., 7.5s, 2003
(Airlines)## $ 5 $ 5,114
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Canada - 2.4%
Canadian Pacific Forest, 9.25s, 2002
(Forest and Paper Products) $ 5 $ 5,080
Gulf Canada Resources Ltd., 8.35s, 2006
(Utilities - Gas) 5 5,169
Husky Oil Ltd., 7.125s, 2006 (Oils) 10 10,000
--------
$ 20,249
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Chile - 1.8%
Empresa Electric Pehuenche, 7.3s, 2003
(Utilities - Electric) $ 15 $ 15,164
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South Africa - 0.6%
Republic of South Africa, 8.375s, 2006
(Government) $ 5 $ 5,000
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Thailand - 1.2%
Northrop-Grumman Corp., 9.375s, 2024
(Aerospace) $ 5 $ 5,594
Total Access Communications, 8.375s, 2006
(Telecommunications)## 5 5,016
--------
$ 10,610
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Total Foreign Bonds $ 56,137
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Total Bonds (Identified Cost, $705,657) $711,934
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Short-Term Obligation - 25.8%
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Federal Home Loan Bank, due 1/02/97, at
Amortized Cost $ 220 $219,936
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Total Investments (Identified Cost, $925,593) $931,870
Other Assets, Less Liabilities - (9.2)% (78,669)
- --------------------------------------------------------------------------------
Net Assets - 100.0% $853,201
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##SEC Rule 144A restriction.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ------------------------------------------------------------------------------
December 31, 1996
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $925,593) $931,870
Cash 10,219
Receivable for Series shares sold 659
Interest receivable 12,654
Receivable from investment adviser 14,958
Deferred organization expenses 7,009
Other assets 2
--------
Total assets $977,371
--------
Liabilities:
Payable for Series shares reacquired $ 86
Payable for investments purchased 104,021
Payable to affiliate for management fee 41
Accrued expenses and other liabilities 20,022
--------
Total liabilities $124,170
--------
Net assets $853,201
========
Net assets consist of:
Paid-in capital $850,160
Unrealized appreciation on investments 6,277
Accumulated net realized loss on investments (3,478)
Accumulated undistributed net investment income 242
--------
Total $853,201
========
Shares of beneficial interest outstanding 84,785
======
Net asset value per share
(net assets of $853,201 / 84,785 shares of beneficial interest
outstanding) $10.06
======
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- ------------------------------------------------------------------------------
Year Ended December 31, 1996
- ------------------------------------------------------------------------------
Net investment income:
Interest income $33,192
-------
Expenses -
Management fee $ 2,924
Trustees' compensation 2,033
Shareholder servicing agent fee 169
Auditing fees 21,306
Printing 13,563
Custodian fee 2,266
Amortization of organization expenses 1,842
Legal fees 1,026
Miscellaneous 728
-------
Total expenses $45,857
Fees paid indirectly (154)
Reduction of expenses by investment adviser (40,829)
-------
Net expenses $ 4,874
-------
Net investment income $28,318
-------
Realized and unrealized gain (loss) on investments:
Realized loss on investment transactions (identified cost basis) $(3,478)
-------
Change in unrealized appreciation on investments $ 2,384
-------
Net realized and unrealized loss on investments $(1,094)
-------
Increase in net assets from operations $27,224
=======
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statements of Changes in Net Assets
- ------------------------------------------------------------------------------
Year Ended Period Ended
December 31, 1996 December 31, 1995*
- ------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment income $ 28,318 $ 2,011
Net realized gain (loss) on
investments (3,478) 643
Net unrealized gain on investments 2,384 3,893
-------- --------
Increase in net assets from
operations $ 27,224 $ 6,547
-------- --------
Distributions declared to shareholders -
From net investment income $(28,266) $ (2,011)
From net realized gain on
investments -- (453)
-------- --------
Total distributions declared to
shareholders $(28,266) $ (2,464)
-------- --------
Series share (principal) transactions -
Net proceeds from sale of shares $683,975 $217,828
Net asset value of shares issued to
shareholders in reinvestment of
distributions 28,266 2,464
Cost of shares reacquired (85,933) (5,040)
-------- --------
Increase in net assets from
Series share transactions $626,308 $215,252
-------- --------
Total increase in net assets $625,266 $219,335
Net assets:
At beginning of period 227,935 8,600
-------- --------
At end of period (including
accumulated undistributed net
investment income of $242 and $0,
respectively) $853,201 $227,935
======== ========
*For the period from the commencement of investment operations, October 24,
1995 to December 31, 1995.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights
- -------------------------------------------------------------------------------
Year Ended Period Ended
December 31, 1996 December 31, 1995*
- -------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $10.19 $ 10.00
------ -------
Income from investment operations# -
Net investment income(S) $ 0.58 $ 0.09
Net realized and unrealized gain (loss) on
investments (0.36) 0.21
------ -------
Total from investment operations $ 0.22 $ 0.30
------ -------
Less distributions declared to shareholders -
From net investment income $(0.35) $ (0.09)
From net realized gain on investments -- (0.02)
------ -------
Total distributions declared to
shareholders $(0.35) $ (0.11)
------ -------
Net asset value - end of period $10.06 $ 10.19
====== =======
Total return 2.09% 3.02%++
Ratios (to average net assets)/Supplemental data(S):
Expenses 1.00% 1.00%+
Net investment income 5.84% 4.89%+
Portfolio turnover 231% 55%
Net assets at end of period (000 omitted) $ 853 $ 228
* For the period from the commencement of investment operations, October 24,
1995 to December 31, 1995.
+ Annualized.
++ Not annualized.
# Per share data is based on average shares outstanding.
(S) The adviser voluntarily agreed to maintain the expenses of the Series at not
more than 1.00% of average daily net assets. To the extent actual expenses
were over these limitations, the net investment loss per share and the
ratios would have been:
Net investment loss $(0.26) $ (0.70)
Ratios (to average net assets):
Expenses 9.45% 43.85%+
Net investment loss (2.61)% (37.96)%+
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Bond Series (the Series) is a diversified series of MFS Variable Insurance
Trust (the Trust) which is comprised of the following 12 series: MFS Bond
Series, MFS Emerging Growth Series, MFS Growth with Income Series, MFS High
Income Series, MFS Limited Maturity Series, MFS Money Market Series, MFS
Research Series, MFS Strategic Fixed Income Series, MFS Total Return Series, MFS
Utilities Series, MFS Value Series and MFS World Governments Series. The Trust
is organized as a Massachusetts business trust and is registered under the
Investment Company Act of 1940, as amended, as an open-end management investment
company.
The shareholders of each Series of the Trust are separate accounts of insurance
companies which offer variable annuity and/or life insurance products. As of
December 31, 1996 there were eight shareholders in the Series.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investment Valuations - Debt securities (other than short-term obligations which
mature in 60 days or less), including listed issues, are valued on the basis of
valuations furnished by dealers or by a pricing service with consideration to
factors such as institutional-size trading in similar groups of securities,
yield, quality, coupon rate, maturity, type of issue, trading characteristics
and other market data, without exclusive reliance upon exchange or
over-the-counter prices. Short-term obligations, which mature in 60 days or
less, are valued at amortized cost, which approximates market value. Securities
for which there are no such quotations or valuations are valued at fair value as
determined in good faith by or at the direction of the Trustees.
Deferred Organization Expenses - Costs incurred by the Series in connection with
its organization have been deferred and are being amortized on a straight-line
basis over a five-year period beginning on the date of commencement of Series
operations.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for financial statement and
tax reporting purposes as required by federal income tax regulations. Interest
payments received in additional securities are recorded on the ex- interest date
in an amount equal to the value of the security on such date.
Fees Paid Indirectly - The Series' custodian bank calculates its fee based on
the Series' average daily net assets. This fee is reduced according to an
expense offset arrangement with State Street Bank, the dividend disbursing
agent, which provides for partial reimbursement of custody fees based on a
formula developed to measure the value of cash deposited by the Series with the
custodian and with the dividend disbursing agent. This amount is shown as a
reduction of expenses on the Statement of Operations.
Tax Matters and Distributions - The Series' policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. The Series files a tax
return annually using tax accounting methods required under provisions of the
Code which may differ from generally accepted accounting principles, the basis
on which these financial statements are prepared. Accordingly, the amount of net
investment income and net realized gain reported on these financial statements
may differ from that reported on the Series' tax return and, consequently, the
character of distributions to shareholders reported in the financial highlights
may differ from that reported to shareholders on Form 1099-DIV. Distributions to
shareholders are recorded on the ex-dividend date.
The Series distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a tax return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains. During the year ended December 31, 1996, $190 was reclassified from
accumulated net realized loss on investments to accumulated undistributed net
investment income due to differences between book and tax accounting for
distributions. This change had no effect on the net assets or net asset value
per share. At December 31, 1996, accumulated undistributed net investment income
and accumulated net realized loss on investments under book accounting were
different from tax accounting due to temporary differences in accounting for
wash sales and spillbacks.
At December 31, 1996, the Series, for federal income tax purposes, had a capital
loss carryforward of $3,306 which may be applied against any net taxable
realized gains of each succeeding year until the earlier of its utilization or
expiration on December 31, 2004.
(3) Transactions with Affiliates
Investment Adviser - The Series has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.60% of
average daily net assets. Under a temporary expense limitation agreement with
MFS, MFS has voluntarily agreed to pay all of the Series' operating expenses,
exclusive of management fees, which exceed 0.40% of the Series' average daily
net assets. The Series in turn will pay MFS an expense reimbursement fee not
greater than 0.40% of the Series' average daily net assets. To the extent that
the expense reimbursement fee exceeds the Series' actual expenses, the excess
will be applied to amounts paid by MFS in prior years. At December 31, 1996, the
aggregate unreimbursed expenses owed to MFS by the Series amounted to $58,452,
including $40,829 incurred in the current year.
The Series pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Series, all of whom receive
remuneration for their services to the Series from MFS. Certain officers and
Trustees of the Series are officers or directors of MFS and MFS Service Center,
Inc. (MFSC).
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as a
percentage of the average daily net assets at an effective annual rate of up to
0.035%.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions and
short-term obligations, were as follows:
Purchases Sales
- ------------------------------------------------------------------------------
U.S. government securities $575,086 $373,317
======== ========
Investments (non-U.S. government securities) $833,741 $558,370
======== ========
The cost and unrealized appreciation or depreciation in value of the investments
owned by the Series, as computed on a federal income tax basis, are as follows:
Aggregate cost $925,593
========
Gross unrealized appreciation $ 8,930
Gross unrealized depreciation (2,653)
--------
Net unrealized appreciation $ 6,277
========
(5) Shares of Beneficial Interest
The Series' Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Series shares were as follows:
Year Ended Period Ended
December 31, 1996 December 31, 1995*
-------------------------- --------------------------
Shares Amount Shares Amount
- --------------------------------------------------------------------------
Shares sold 68,218 $683,975 21,762 $217,828
Shares issued to
shareholders in
reinvestment of
distributions 2,796 28,266 242 2,464
Shares reacquired (8,589) (85,933) (504) (5,040)
------ -------- ------ --------
Net increase 62,425 $626,308 21,500 $215,252
====== ======== ====== ========
* For the period from the commencement of investment operations, October 24,
1995 to December 31, 1995.
(6) Line of Credit
The Series entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Series shares. Interest is charged to each
fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating funds at the end of each
quarter. The commitment fee allocated to the Series for the year ended December
31, 1996 was $6.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Variable Insurance Trust and Shareholders of MFS Bond
Series:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of MFS Bond Series (the Series) (one of the series
constituting the MFS Variable Insurance Trust) as of December 31, 1996, the
related statement of operations for the year then ended, the statements of
changes in net assets and financial highlights for the year then ended and for
the period from October 24, 1995 (the commencement of investment operations) to
December 31, 1995. These financial statements and financial highlights are the
responsibility of the Series' management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned at
December 31, 1996 by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Bond Series at
December 31, 1996, the results of its operations, the changes in its net assets,
and its financial highlights for the respective stated periods in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 7, 1997
---------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
VFB-X 2/97 2M
