<PAGE>
[Logo] M F S(R)
INVESTMENT MANAGEMENT
75 YEARS ANNUAL REPORT
WE INVENTED THE MUTUAL FUND(R) DECEMBER 31, 1998
[graphic omitted]
A SERIES OF MFS(R) VARIABLE INSURANCE TRUST(SM)
MFS(R) BOND SERIES
<PAGE>
<TABLE>
MFS(R) BOND SERIES
A SERIES OF MFS(R) VARIABLE INSURANCE TRUST(SM)
<S> <C>
TRUSTEES INVESTMENT ADVISER
Jeffrey L. Shames* Massachusetts Financial Services Company
Chairman, Chief Executive Officer, and 500 Boylston Street
Director, MFS Investment Management(R) Boston, MA 02116-3741
Nelson J. Darling, Jr. DISTRIBUTOR
Professional Trustee MFS Fund Distributors, Inc.
500 Boylston Street
William R. Gutow Boston, MA 02116-3741
Vice Chairman,
Capitol Entertainment Management Company; SHAREHOLDER SERVICE CENTER
Real Estate Consultant MFS Service Center, Inc.
P.O. Box 2281
PORTFOLIO MANAGER Boston, MA 02107-9906
Geoffrey L. Kurinsky*
For additional information,
CHAIRMAN AND PRESIDENT contact your financial adviser.
Jeffrey L. Shames*
CUSTODIAN
TREASURER State Street Bank and Trust Company
W. Thomas London*
AUDITORS
ASSISTANT TREASURERS Deloitte & Touche LLP
Mark E. Bradley*
Ellen Moynihan* WORLD WIDE WEB
James O. Yost* www.mfs.com
SECRETARY
Stephen E. Cavan*
ASSISTANT SECRETARY
James R. Bordewick, Jr.*
*Affiliated with the Investment Adviser
- --------------------------------------------------------------------------------------------------
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
- --------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
LETTER FROM THE CHAIRMAN
Dear Contract Owners:
In 1999, MFS celebrates its 75th anniversary. The nation's first mutual fund
- -- our Massachusetts Investors Trust (MIT) -- was introduced to the public on
March 21, 1924. Since then, MFS Investment Management(R), the company that
grew out of that original fund, has helped guide shareholders through many
economic and investment cycles, primarily by focusing on the long-term
opportunities created by an expanding global economy. As of December 31, 1998,
MFS manages nearly $100 billion, and the firm's 2,000 people serve almost four
million investors and their financial advisers worldwide.
One of the elements in the success of MIT did not exist before our founders
invented it in 1924. That is daily redemption. This innovation meant that if
you wanted to sell your investment in any MFS mutual fund, you would have the
security of knowing that you could do so immediately by exchanging into
another MFS fund. Or, if you needed your money for other purposes, it could
quickly be wired or mailed to you. This daily redemption feature, through
which new shares were created when people invested in MIT and were redeemed
when people sold, brought another important change to the industry. Now, the
price of a mutual fund's shares wasn't determined by supply and demand, but by
the value of the securities owned by the fund.
Another factor in our growth was the development of one of the industry's
first in-house research departments in 1932. Unlike companies that rely on
Wall Street research reports, which can be used by many investors at the same
time, MIT's managers built its long-term track record by visiting companies,
talking to managers and competitors, and "kicking the tires" so they could
judge the quality and potential of each company's products and services for
themselves. Today, MFS has more than 100 full-time portfolio managers, stock
analysts, and credit analysts who track the equity and bond markets. That
number includes over 35 equity analysts who specialize in industries such as
aviation, media, technology, automobiles, and utilities.
While MIT introduced the daily redemption feature, that was not our only
invention. We also established the nation's first global bond fund, first
high-yield municipal bond fund, and first high-yield municipal closed-end bond
fund.
We are proud of the record of MIT and of the funds in the MFS Family of Funds,
but we are also proud of our long-standing relationship with financial
advisers. Not only do we believe investors can benefit from the advice of
these experts but, as was shown during the market volatility of 1998, people
who work with financial advisers are less likely to abandon their carefully
designed, long-term investment strategies.
If there is a common thread running through these milestones, it is our
always-increasing commitment to providing you with the best possible
investment management and shareholder service, just as we have done for the
past 75 years.
As we celebrate this anniversary, it is also a time for MFS to look ahead and
build on our 75 years of innovation and experience to help meet your
investment needs in the next century. We appreciate your confidence and
welcome any questions or comments you may have.
Respectfully,
/s/ Jeffrey L. Shames
Jeffrey L. Shames
Chairman and Chief Executive Officer
MFS Investment Management
January 15, 1999
<PAGE>
MANAGEMENT REVIEW AND OUTLOOK
Dear Contract Owners:
For the year ended December 31, 1998, the Series provided a total return of
6.79% (including the reinvestment of any distributions). This compares to a
9.49% return for the Lehman Brothers Government/Corporate Bond Index (the
Lehman Index), an unmanaged, market-value-weighted index of U.S. Treasury and
government-agency securities (excluding mortgage-backed securities) and
investment-grade debt obligations of domestic corporations.
The past year's volatility has helped create some good values in the bond
markets. Yield spreads in the high-yield and high-grade markets are as high as
they've been since the last recession in 1990-91. Among industries, we
continue to focus on the media and entertainment sector, which has benefited
from consolidations over the past few years. Companies are using increased
revenue streams from these acquisitions to retire the debt they took on during
the asset-accumulation phase. As a result, their credit quality continues to
improve. We think credits that have risen from the top of the below-
investment-grade range, that is, "BB" as rated by Standard & Poor's Corp., to
"BBB," the lowest rung of investment-grade status, should continue their
ascent. Holdings in the Series include Telecommunications, Inc., Time Warner,
News America Holdings, Continental Cablevision, and Qwest Communications, a
recent addition. Also, we continue to have about 15% of assets in the utility
sector, to which we've added Calenergy. The company recently acquired
MidAmerica Energy Holdings, and we think the combined entity has an
investment-grade profile. This puts it into the category of crossover bonds,
that is, bonds that don't have investment-grade ratings yet but that we expect
to be upgraded in the next 12 to 18 months. Buying crossover bonds is a core
strategy of the portfolio.
The duration of the Series continues to be longer than its normal 5.8 to 5.9
years. At the end of the year, the duration was about 10% longer, at 6.6
years. This reflects our general view that the Federal Reserve Board's easing
of monetary policy should cause long-term rates to move a little lower. A
longer duration could help the portfolio achieve a higher total return when
interest rates fall.
Looking ahead, we believe the fixed-income markets are going to continue to be
volatile for a few months. The corporate market is going to have tremendous
supply. With interest rates as low as they are, companies can issue bonds at 6%,
a level that has not been seen since the 1960s. Also, the markets are trying to
figure out whether the economy is going to weaken and, if it does, how bad it
will be. We don't know the answer yet because the effects of the Asian slowdown
haven't worked their way through the whole economy. More information will be
available in the first quarter of 1999, but as long as people are comfortable
with the idea that we're not going into a recession and that any slowdown is not
as bad as they feared, then the spread markets (that is, the markets with higher
yield spreads over U.S. Treasuries) will start to improve. So we think it's a
time to be selective in adding corporate securities.
Respectfully,
/s/ Geoffrey L. Kurinsky
Geoffrey L. Kurinsky
Portfolio Manager
The opinions expressed in this report are those of the portfolio manager and
are only through the end of the period of the report as stated on the cover.
The manager's views are subject to change at any time based on market and
other conditions, and no forecasts can be guaranteed.
The portfolio is actively managed, and current holdings may be different.
<PAGE>
PORTFOLIO MANAGER'S PROFILE
Geoffrey L. Kurinsky is a Senior Vice President and a member of the Fixed
Income Management Group of MFS Investment Management(R). He is portfolio
manager of MFS(R) Bond Fund, MFS(R) Institutional Core Fixed Income Fund, and
MFS(R) Bond Series (part of MFS(R) Variable Insurance Trust(SM)). He also
manages the U.S. high-grade fixed-income portions of MFS(R) Total Return Fund
and MFS(R) Global Asset Allocation Fund and the Total Return Series offered
through MFS(R)/Sun Life annuity products.
He joined the MFS Fixed Income Department in 1987 and was named Vice President
in 1989 and Senior Vice President in 1993.
Mr. Kurinsky is a graduate of the University of Massachusetts and earned an
M.B.A. degree in finance from Boston University.
OBJECTIVE AND POLICIES
The Series' primary investment objective is to provide as high a level of
current income as is believed to be consistent with prudent investment risk.
The Series' secondary objective is to protect shareholders' capital.
Commencement of investment operations: October 24, 1995
Size: $12.1 million net assets as of December 31, 1998
This report is prepared for the general information of contract owners. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus. A prospectus containing more information,
including the exchange privilege and all charges and expenses, for any other
MFS product is available from your financial adviser, or by calling MFS at
1-800-225-2606. Please read it carefully before investing or sending money.
<PAGE>
PERFORMANCE SUMMARY
The information below illustrates the historical performance of the Series in
comparison to various market indicators. Benchmark comparisons are unmanaged
and do not reflect any fees or expenses. It is not possible to invest directly
in an index.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the period from November 1, 1995, through December 31, 1998)
Lehman Brothers Consumer
MFS Government/ Price
Bond Corporate Index
Series Bond Index - U.S.
- -----------------------------------------------
11/95 $10,000 $10,000 $10,000
12/95 10,300 10,310 9,980
12/96 10,520 10,610 10,320
12/97 11,580 11,650 10,500
12/98 12,369 12,755 10,683
<TABLE>
AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 1998
<CAPTION>
1 Year 3 Years 10 Years/Life
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MFS Bond Series* +6.79% +6.29% +6.90%
- ---------------------------------------------------------------------------------------------------------------------
Lehman Brothers Government/Corporate Bond Index** +9.49% +7.34% +7.99%
- ---------------------------------------------------------------------------------------------------------------------
Consumer Price Index**+ +1.80% +2.30% +2.11%
- ---------------------------------------------------------------------------------------------------------------------
* For the period from the commencement of the Series' investment operations, October 24, 1995, through December 31,
1998.
** Source: CDA/Wiesenberger. "Life" refers to the period from November 1, 1995, through December 31, 1998.
+ The Consumer Price Index is published by the U.S. Bureau of Labor Statistics and measures the cost of living
(inflation).
</TABLE>
NOTES TO PERFORMANCE SUMMARY
All results are historical and assume the reinvestment of dividends and
capital gains. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Performance results
reflect any applicable expense subsidies and waivers, without which the
results would have been less favorable. Subsidies and waivers may be rescinded
at any time. See the prospectus for details.
Returns shown do not reflect the deduction of the mortality and expense risk
charges and administration fees. Please refer to the annuity product's annual
report for performance that reflects the deduction of the fees and charges
imposed by insurance company separate accounts.
<PAGE>
<TABLE>
PORTFOLIO OF INVESTMENTS - December 31, 1998
Bonds - 99.1%
<CAPTION>
- -----------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Bonds - 94.5%
Aerospace - 0.4%
BE Aerospace, Inc., 8s, 2008 $ 40 $ 39,200
Northrup Grumman Corp., 9.375s, 2024 5 5,708
-----------
$ 44,908
- -----------------------------------------------------------------------------------------------------
Airlines - 0.7%
Continental Airlines Pass-Through Trust, Inc.,
6.648s, 2017 $ 5 $ 4,921
Continental Airlines, Inc., 9.5s, 2001 35 36,807
Jet Equipment Trust, 8.64s, 2012## 5 5,144
Jet Equipment Trust, 9.41s, 2010## 5 6,044
Northwest Airlines, Inc., 7.625s, 2005 20 18,959
Northwest Airlines, Inc., 8.7s, 2007 8 7,884
United Airlines Pass-Through Trust, 7.27s, 2013! 5 4,895
-----------
$ 84,654
- -----------------------------------------------------------------------------------------------------
Apparel and Textiles - 5.9%
Dillards, Inc., 7.13s, 2018 $ 20 $ 20,456
Hilfiger (Tommy) USA, Inc., 6.5s, 2003 15 14,784
Hilfiger (Tommy) USA, Inc., 6.85s, 2008 11 10,594
Jones Apparel, 6.25s, 2001## 28 27,865
Saks Inc., 8.25s, 2008 105 111,969
Saks, Inc., 7.25s, 2004 200 200,916
Saks, Inc., 7.5s, 2010 345 332,131
-----------
$ 718,715
- -----------------------------------------------------------------------------------------------------
Automotive - 0.2%
Federal Mogul Corp., 7.5s, 2004 $ 20 $ 20,193
Federal Mogul Corp., 7.75s, 2006 5 5,077
-----------
$ 25,270
- -----------------------------------------------------------------------------------------------------
Banks and Credit Companies - 6.4%
Advanta Corp., 6.925s, 2002 $ 5 $ 4,345
Bayerische Landesbank NY, 5.875s, 2008 47 47,506
Capital One Financial Corp., 7.25s, 2003 10 9,857
Criimi Mae Commercial Mortgage Trust, 7s, 2011 250 234,648
Marlin Water Capital Trust, 7.09s, 2001## 235 234,765
MBNA Capital, 8.278s, 2026 35 35,909
Newcourt Credit Group Inc., 7.125s, 2003## 145 143,646
Riggs Capital II, 8.875s, 2027 10 10,646
Riggs National Corp., 8.5s, 2006 5 5,204
Washington Mutual Capital I, 8.375s, 2027 50 54,841
-----------
$ 781,367
- -----------------------------------------------------------------------------------------------------
Beverages - 1.4%
Seagram (Joseph) & Sons, Inc., 7.5s, 2018 $ 145 $ 145,588
Seagram (Joseph) & Sons, Inc., 9s, 2021 20 22,899
-----------
$ 168,487
- -----------------------------------------------------------------------------------------------------
Building - 3.0%
Building Materials Corp., 8s, 2008## $ 340 $ 341,275
Nortek, Inc., 9.25s, 2007 20 20,700
-----------
$ 361,975
- -----------------------------------------------------------------------------------------------------
Chemicals - 0.2%
Solutia, Inc., 7.375s, 2027 $ 25 $ 24,508
- -----------------------------------------------------------------------------------------------------
Consumer Goods and Services - 0.6%
Kindercare Learning Centers, Inc., 9.5s, 2009 $ 25 $ 24,875
Protection One Alarm Monit Inc., 7.375s, 2005## 50 50,293
-----------
$ 75,168
- -----------------------------------------------------------------------------------------------------
Containers - 1.8%
Owens Illinois Inc., 7.35s, 2008 $ 55 $ 56,111
Owens Illinois Inc., 7.5s, 2010 155 157,948
-----------
$ 214,059
- -----------------------------------------------------------------------------------------------------
Corporate Asset Backed - 6.7%
Amresco Residential Securities Mortgage Loan, 5.94s, 2015 $ 61 $ 60,981
Contimortgage Home Equity Loan Trust, 6.19s, 2014 125 125,664
The Money Store Home Equity Trust, 6.87s, 2039 400 405,366
Time Warner Pass-Through Asset Trust, 6.1s, 2001## 220 223,544
-----------
$ 815,555
- -----------------------------------------------------------------------------------------------------
Entertainment - 3.7%
Hearst Argyle Television, Inc., 7.5s, 2027 $ 15 $ 15,651
Time Warner, Inc., 6.625s, 2029 160 166,400
Time Warner, Inc., 7.57s, 2024 25 28,296
Time Warner, Inc., 9.15s, 2023 38 50,203
Viacom Inc., 6.75s, 2003 185 190,337
-----------
$ 450,887
- -----------------------------------------------------------------------------------------------------
Financial Institutions - 7.2%
Associates Corp., 5.75s, 2003 $ 400 $ 403,300
Capital One Bank, 6.7s, 2008 10 9,670
Contifinancial Corp., 7.5s, 2002 63 45,302
Donaldson Lufkin & Jenrette, 6.5s, 2008 5 5,141
First Empire Capital Trust I, 8.234s, 2027 5 5,527
Goldman Sachs Group LP, 5.9s, 2003 160 161,801
Goldman Sachs Group LP, 6.2s, 2001 60 60,911
GS Escrow Corp., 6.75s, 2001## 110 107,423
GS Escrow Corp., 7.125s, 2005## 75 73,899
-----------
$ 872,974
- -----------------------------------------------------------------------------------------------------
Food Products - 0.1%
Nabisco, Inc., 6.375s, 2035 $ 10 $ 9,682
- -----------------------------------------------------------------------------------------------------
Forest and Paper Products - 3.5%
Georgia Pacific Corp., 7.25s, 2028 $ 14 $ 14,104
Georgia Pacific Corp., 9.5s, 2022 50 56,352
Georgia Pacific Corp., 9.95s, 2002 305 340,179
U.S. Timberlands, 9.625s, 2007 10 10,125
-----------
$ 420,760
- -----------------------------------------------------------------------------------------------------
Government National Mortgage Association - 6.2%
GNMA, 7s, 2028 $ 270 $ 275,742
GNMA, 7.5s, 2025 - 2027 438 451,912
GNMA, 8s, 2024 - 2025 26 27,049
-----------
$ 754,703
- -----------------------------------------------------------------------------------------------------
Industrial - 0.1%
Natexis Ambs Co. LLC, 8.44s, 2049## $ 15 $ 13,800
- -----------------------------------------------------------------------------------------------------
Insurance - 0.9%
Atlantic Mutual Insurance Co., 8.15s, 2028 $ 35 $ 35,221
Conseco, Inc., 6.4s, 2001 25 24,084
Fairfax Financial Holdings Ltd., 7.375s, 2018 14 13,555
NGC Corp. Capital Trust I, 8.316s, 2027 25 25,336
Safeco Capital Trust I, 8.072s, 2037 10 11,143
-----------
$ 109,339
- -----------------------------------------------------------------------------------------------------
Media - 0.9%
Chancellor Media Corp., 8.75s, 2007 $ 10 $ 10,250
Frontiervision Operating Partnership LP, 11s, 2006 20 22,125
News America Holdings, Inc., 8s, 2016 15 16,523
News America Holdings, Inc., 8.875s, 2023 25 30,304
News America Holdings, Inc., 9.5s, 2024 15 19,315
Outdoor Systems, Inc., 8.875s, 2007 10 10,675
-----------
$ 109,192
- -----------------------------------------------------------------------------------------------------
Medical and Health Products - 0.2%
Bausch & Lomb, Inc., 6.5s, 2005 $ 15 $ 14,589
Bausch & Lomb, Inc., 7.125s, 2028 15 14,011
-----------
$ 28,600
- -----------------------------------------------------------------------------------------------------
Medical and Health Technology and Services - 1.0%
Columbia/HCA Healthcare Corp., 6.875s, 2001 $ 4 $ 3,970
Columbia/HCA Healthcare Corp., 7.69s, 2025 16 14,500
Tenet Healthcare Corp., 7.625s, 2008## 5 5,075
Tenet Healthcare Corp., 8s, 2005 100 101,500
-----------
$ 125,045
- -----------------------------------------------------------------------------------------------------
Metals and Minerals - 0.2%
Kaiser Aluminum & Chemical Corp., 10.875s, 2006 $ 25 $ 25,125
- -----------------------------------------------------------------------------------------------------
Oil Services - 1.2%
KCS Energy, Inc., 8.875s, 2008 $ 5 $ 3,500
McDermott, Inc., 9.375s, 2002 135 140,469
Ultramar Diamond Shamrock Corp., 7.2s, 2017 5 4,978
-----------
$ 148,947
- -----------------------------------------------------------------------------------------------------
Oils - 2.9%
Husky Oil Ltd., 8.9s, 2028 $ 50 $ 51,619
Lasmo USA, Inc., 6.75s, 2007 15 15,099
Petroleum Geo-Services, 6.25s, 2003## 140 137,690
Petroleum Geo-Services, 7.125s, 2028 25 23,360
Seagull Energy Corp., 7.5s, 2027 12 10,748
Sun Co., Inc., 9s, 2024 101 112,632
-----------
$ 351,148
- -----------------------------------------------------------------------------------------------------
Railroads - 0.4%
Union Pacific Corp., 6.34s, 2003 $ 45 $ 45,243
- -----------------------------------------------------------------------------------------------------
Supermarkets - 3.3%
Safeway, Inc., 5.875s, 2001 $ 400 $ 401,504
- -----------------------------------------------------------------------------------------------------
Telecommunications - 6.1%
Century Communications Corp., 0s, 2008 $ 200 $ 102,500
Comcast Cable Communications I, 6.2s, 2008 320 324,000
Continental Cablevision, Inc., 11s, 2007 55 59,075
MCI Worldcom, Inc., 7.55s, 2004 10 10,905
Qwest Communications International, Inc., 7.5s, 2008## 35 36,356
TCI Communications Financing III, 9.65s, 2027 30 37,045
TCI Communications, Inc., 7.125s, 2028 25 27,244
TCI Communications, Inc., 8s, 2005 8 9,006
Tele-Communications, Inc., 7.875s, 2013 115 134,731
Turner Broadcasting Systems, Inc., 8.375s, 2013 2 2,391
WorldCom, Inc., 8.875s, 2006 5 5,465
-----------
$ 748,718
- -----------------------------------------------------------------------------------------------------
Transportation - 0.3%
Federal Express Corp., 7.65s, 2014 $ 39 $ 41,017
- -----------------------------------------------------------------------------------------------------
U.S. Federal Agencies - 2.2%
Federal National Mortgage Association, 4.75s, 2003 $ 50 $ 49,359
Federal National Mortgage Association, 6s, 2013 223 223,308
-----------
$ 272,667
- -----------------------------------------------------------------------------------------------------
U.S. Treasury Obligations - 18.9%
U.S. Treasury Bonds, 5.25s, 2028 $ 108 $ 110,565
U.S. Treasury Bonds, 6.125s, 2027 861 963,778
U.S. Treasury Bonds, 6.375s, 2027 540 620,660
U.S. Treasury Notes, 4.75s, 2008 20 20,156
U.S. Treasury Notes, 5.5s, 2003 150 154,430
U.S. Treasury Notes, 5.875s, 2005 95 101,338
U.S. Treasury Notes, 6.5s, 2005 171 189,270
U.S. Treasury Notes, 6.625s, 2002 80 84,562
U.S. Treasury Notes, 7.875s, 2004 50 57,930
-----------
$ 2,302,689
- -----------------------------------------------------------------------------------------------------
Utilities - Electric - 6.0%
Beaver Valley Funding Corp., 9s, 2017 $ 50 $ 57,691
BVPS II Funding Corp., 8.89s, 2017 75 88,912
CalEnergy Co., Inc., 7.23s, 2005 25 25,465
CalEnergy Co., Inc., 7.52s, 2008 35 36,637
Cleveland Electric Illuminating Co., 7.88s, 2017 20 20,670
Commonwealth Edison Co., 6.95s, 2018 15 15,540
Connecticut Light & Power Co., 7.875s, 2024 10 10,374
Connecticut Light & Power Co., 8.59s, 2003 100 103,750
GG1B Funding Corp., 7.43s, 2011 58 60,249
Midland Cogeneration Venture Corp., 10.33s, 2002 10 10,826
Niagara Mohawk Power Corp., 7.75s, 2006 20 21,960
Niagara Mohawk Power Corp., 8.5s, 2023 10 10,654
Niagara Mohawk Power Corp., 8.75s, 2022 20 21,810
Northeast Utilities, 8.58s, 2006 12 12,541
Salton Sea Funding Corp., 7.84s, 2010 145 166,676
Seabrook Station - Unit 1, 7.83s, 2019 9 10,376
Texas & New Mexico Power Co., 12.5s, 1999 5 5,008
Texas Utilities Co., 6.375s, 2008 15 14,740
Waterford 3 Funding Entergy Corp., 8.09s, 2017 35 37,945
-----------
$ 731,824
- -----------------------------------------------------------------------------------------------------
Utilities - Gas - 1.9%
Coastal Corp., 7.42s, 2037 $ 62 $ 65,494
Coastal Corp., 7.75s, 2035 35 38,521
Coastal Corp., 6.5s, 2008 5 5,125
Tennessee Gas Pipeline Co., 7s, 2028 15 15,305
Texas Gas Transmission Corp., 7.25s, 2027 100 102,540
-----------
$ 226,985
- -----------------------------------------------------------------------------------------------------
Total U.S. Bonds $11,505,515
- -----------------------------------------------------------------------------------------------------
Foreign Bonds - 4.5%
Argentina - 0.2%
Hidroelectrica Alicura, 8.375s, 1999 (Utilities - Electric)## $ 20 $ 19,500
- -----------------------------------------------------------------------------------------------------
Bulgaria - 0.4%
National Republic of Bulgaria, 6.688s, 2024 $ 60 $ 42,000
- -----------------------------------------------------------------------------------------------------
Chile - 2.0%
Empresa Nacional de Electric, 7.325s, 2037
(Utilities - Electric) $ 5 $ 4,407
Empresa Electric Guacolda S.A., 7.6s, 2001
(Utilities - Electric)## 250 238,893
-----------
$ 243,300
- -----------------------------------------------------------------------------------------------------
Colombia - 0.2%
Republic of Columbia, 12.243s, 2005 $ 31 $ 28,365
- -----------------------------------------------------------------------------------------------------
Finland - 0.8%
UPM Kymmene Corp., 7.45s, 2027 (Forest and Paper Products)## $ 100 $ 100,082
- -----------------------------------------------------------------------------------------------------
Greece - 0.9%
Republic of Greece, 7.74s, 2008 GRD 29,000 $ 114,903
- -----------------------------------------------------------------------------------------------------
Total Foreign Bonds $ 548,150
- -----------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $11,958,687) $12,053,665
- -----------------------------------------------------------------------------------------------------
Other Assets, Less Liabilities - 0.9% 110,856
- -----------------------------------------------------------------------------------------------------
Net Assets - 100.0% $12,164,521
- -----------------------------------------------------------------------------------------------------
## SEC Rule 144A restriction.
+ Restricted security.
Abbreviations have been used throughout this report to indicate amounts shown in currencies other
than the U.S. dollar. A list of abbreviations is shown below.
GRD = Greek Drachmas
See Notes to Financial Statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $11,958,687) $12,053,665
Receivable for Series shares sold 72,198
Receivable for securities sold 103,672
Interest receivable 151,674
Deferred organization expenses 3,335
Other assets 25
-----------
Total assets $12,384,569
-----------
Liabilities:
Notes payable $ 100,562
Payable for Series shares reacquired 116,809
Net payable for forward foreign currency exchange
contracts closed or subject to master netting agreements 11
Payable to affiliates -
Management fee 201
Shareholder servicing agent fee 12
Accrued expenses and other liabilities 2,453
-----------
Total liabilities $ 220,048
-----------
Net assets $12,164,521
===========
Net assets consist of:
Paid-in capital $11,617,677
Unrealized appreciation on investments and translation of
assets and liabilities in foreign currencies 94,903
Accumulated undistributed net realized gain on investments
and foreign currency transactions 29,276
Accumulated undistributed net investment income 422,665
-----------
Total $12,164,521
===========
Shares of beneficial interest outstanding 1,068,472
=========
Net asset value per share
(net assets / shares of beneficial interest outstanding) $11.38
======
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- -------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
- -------------------------------------------------------------------------------
Net investment income:
Interest income $497,714
--------
Expenses -
Management fee $ 44,154
Trustees' compensation 1,943
Shareholder servicing agent fee 2,575
Administrative fee 823
Printing 22,283
Auditing fee 8,550
Custodian fee 4,778
Amortization or organization expenses 2,770
Legal fee 1,381
Interest expense 524
Miscellaneous 975
--------
Total expenses $ 90,756
Fees paid indirectly (1,418)
Reduction of expenses by investment adviser (15,747)
--------
Net expenses $ 73,591
--------
Net investment income $424,123
--------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 29,734
Foreign currency transactions (882)
--------
Net realized gain on investments and foreign currency
transactions $ 28,852
--------
Change in unrealized appreciation (depreciation) - Investments $ 37,384
Translation of assets and liabilities in foreign currencies (75)
--------
Net unrealized appreciation on investments and foreign
currency translation $ 37,309
--------
Net realized and unrealized gain on investments and
foreign currency $ 66,161
--------
Increase in net assets from operations $490,284
========
See notes to financial statements
<PAGE>
<TABLE>
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 424,123 $ 138,768
Net realized gain on investments and foreign currency
transactions 28,852 71,311
Net unrealized gain on investments and foreign currency
translation 37,309 51,317
----------- ----------
Increase in net assets from operations $ 490,284 $ 261,396
----------- ----------
Distributions declared to shareholders -
From net investment income $ (139,107) $ --
From net realized gain on investments and foreign currency
transactions (68,528) --
----------- ----------
Total distributions declared to shareholders $ (207,635) $ --
----------- ----------
Increase in net assets from Series share transactions $ 7,878,318 $2,888,957
----------- ----------
Total increase in net assets $ 8,160,967 $3,150,353
Net assets:
At beginning of period 4,003,554 853,201
----------- ----------
At end of period (including accumulated undistributed net
investment income of $422,665 and $138,532, respectively) $12,164,521 $4,003,554
=========== ==========
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS - continued
Financial Highlights
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998 1997 1996 1995*
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $11.08 $10.06 $10.19 $10.00
------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.64 $ 0.64 $ 0.58 $ 0.09
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 0.09 0.38 (0.36) 0.21
------ ------ ------ ------
Total from investment operations $ 0.73 $ 1.02 $ 0.22 $ 0.30
------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.29) $-- $(0.35) $(0.09)
From net realized gain on investments and foreign
currency transactions (0.14) -- -- (0.02)
------ ------ ------ ------
Total distributions declared to shareholders $(0.43) $-- $(0.35) $(0.11)
------ ------ ------ ------
Net asset value - end of period $11.38 $11.08 $10.06 $10.19
====== ====== ====== ======
Total return 6.79% 10.14% 2.09% 3.02%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.02% 1.01% 1.03% 1.00%+!
Net investment income 5.76% 6.04% 5.84% 4.89%+
Portfolio turnover 244% 219% 231% 55%
Net assets at end of period (000 omitted) $12,165 $4,004 $853 $228
* For the period from the commencement of the Series' investment operations, October 24, 1995, through December 31,
1995.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The 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. The Series' expenses are calculated without reduction for this expense
offset arrangement.
(S) Subject to reimbursement by the Series, the investment adviser agreed to maintain the expenses of the Series,
exclusive of management fee, at not more than 0.40% of average daily net assets. To the extent actual expenses were
over this limitation, the net investment income (loss) per share and ratios would have been:
Net investment income (loss)# $ 0.61 $ 0.37 $(0.26) $(0.70)
Ratios (to average net assets):
Expenses## 1.23% 3.58% 9.45% 43.85%+
Net investment income (loss) 5.55% 3.46% (2.61)% (37.96)%+
See notes to financial statements
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Bond Series (the Series) is a diversified series of MFS(R) Variable
Insurance Trust(SM) (the Trust) which is comprised of the following 13 Series:
MFS Bond Series, MFS(R) Emerging Growth Series, MFS(R)/Foreign & Colonial
Emerging Markets Equity Series, MFS(R) Growth with Income Series, MFS(R) High
Income Series, MFS(R) Limited Maturity Series, MFS(R) Money Market Series,
MFS(R) New Discovery Series, MFS(R) Research Series, MFS(R) Total Return
Series, MFS(R) Utilities Series, MFS(R) Value Series, and MFS(R) 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 the Series of the Trust are
separate accounts of insurance companies which offer variable annuity and/or
life insurance products. As of December 31, 1998, there were 16 shareholders
in the Series.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investments in foreign securities are vulnerable to the effects of changes in
the relative values of the local currency and the U.S. dollar and to the
effects of changes in each country's legal, political, and economic
environment.
Investment Valuations - Debt securities (other than short-term obligations
which mature in 60 days or less), including listed issues, forward contracts,
and swap agreements, are valued on the basis of valuations furnished by
dealers or by a pricing service with consideration to factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics, and other
market data, without exclusive reliance upon exchange or over-the-counter
prices. Short-term obligations, which mature in 60 days or less, are valued at
amortized cost, which approximates market value. Securities for which there
are no such quotations or valuations are valued at fair value as determined in
good faith by or at the direction of the Trustees.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases
and sales of foreign investments, income, and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates
of such transactions. Gains and losses attributable to foreign currency
exchange rates on sales of securities are recorded for financial statement
purposes as net realized gains and losses on investments. Gains and losses
attributable to foreign exchange rate movements on income and expenses are
recorded for financial statement purposes as foreign currency transaction
gains and losses. That portion of both realized and unrealized gains and
losses on investments that results from fluctuations in foreign currency
exchange rates is not separately disclosed.
Deferred Organization Expenses - Costs incurred by the Series in connection
with its organization have been deferred and are being amortized on a
straight-line basis over a five-year period beginning on the date of
commencement of Series operations.
Forward Foreign Currency Exchange Contracts - The Fund 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 Fund may enter
into forward contracts for hedging purposes as well as for non-hedging
purposes. For hedging purposes, the Fund may enter into contracts to deliver
or receive foreign currency it will receive from or require for its normal
investment activities. The Fund 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 Fund may
enter into contracts with the intent of changing the relative exposure of the
Fund's portfolio of securities to different currencies to take advantage of
anticipated changes. The forward foreign currency exchange contracts are
adjusted by the daily exchange rate of the underlying currency and any gains
or losses are recorded as unrealized until the contract settlement date. On
contract settlement date, the gains or losses are recorded as realized gains
or losses on foreign currency transactions.
Investment Transactions and Income - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All discount
is 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-dividend or ex-interest date in an amount
equal to the value of the security on such date.
Fees Paid Indirectly - The Series' custody fee is calculated as a percentage
of the Series' month end net assets. The fee is reduced according to an
arrangement that measures the value of cash deposited with the custodian by
the Series. 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.
Distributions to shareholders are recorded on the ex-dividend date. The
Series' distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a tax return
of capital. Differences in the recognition or classification of income between
the financial statements and tax earnings and profits, which result in
temporary over-distributions for financial statement purposes, are classified
as distributions in excess of net investment income or net realized gains.
During the year ended December 31, 1998, $883 was reclassified from
accumulated undistributed net investment income to accumulated net realized
gain on investments 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.
(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 the average daily net assets. The Series has a temporary expense
reimbursement agreement whereby MFS has voluntarily agreed to pay all of the
Series' operating expenses, exclusive of management fees. The Series in turn
will pay MFS an expense reimbursement fee not greater than 0.40% of average
daily net assets. To the extent that the expense reimbursement fee exceeds the
Series' actual expenses, the excess will be applied to amounts paid by MFS in
prior years. At December 31, 1998, the aggregate unreimbursed expenses owed to
MFS by the Fund amounted to $133,599, including $15,747 incurred in the
current year.
Administrator - The Series has an administrative services agreement with MFS
to provide the Fund with certain financial, legal, shareholder servicing,
compliance, and other administrative services. As a partial reimbursement for
the cost of providing these services, the Fund pays MFS an administrative fee
at the following annual percentages of the Series' average daily net assets:
First $1 billion 0.0150%
Next $1 billion 0.0125%
Next $1 billion 0.0100%
In excess of $3 billion 0.0000%
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as
a percentage of the Series' average daily net assets at an effective annual
rate of 0.035%.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions
and short-term obligations, were as follows:
PURCHASES SALES
- -------------------------------------------------------------------------------
U.S. government securities $ 9,070,197 $7,683,174
----------- ----------
Investments (non-U.S. government securities) $16,690,752 $9,399,574
----------- ----------
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 $11,960,907
-----------
Gross unrealized appreciation $ 204,540
Gross unrealized depreciation (111,782)
-----------
Net unrealized appreciation $ 92,758
===========
(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. Transactions in
Series shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
---------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 890,572 $ 9,947,215 302,671 $3,167,115
Shares issued to shareholders in
reinvestment of distributions 19,405 207,633 -- --
Shares reacquired (202,741) (2,276,530) (26,220) (278,158)
-------- ----------- ------- ----------
Net increase 707,236 $ 7,878,318 276,451 $2,888,957
======== =========== ======= ==========
</TABLE>
(6) Line of Credit
The Series and other affiliated funds participate in an $805 million unsecured
line of credit provided by a syndication of banks under a line of credit
agreement. Borrowings may be made to temporarily finance the repurchase of
Series shares. Interest is charged to each Series, based on its borrowings, at
a rate equal to the bank's base rate. In addition, a commitment fee, based on
the average daily unused portion of the line of credit, is allocated among the
participating funds at the end of each quarter. The commitment fee allocated
to the Fund for the year ended December 31, 1998, was $55.
The Fund and other affiliated funds also participate in a $20 million
uncommitted, unsecured line of credit provided by State Street Bank and Trust
Company under a line of credit agreement. Borrowings may be made to
temporarily finance the purchase of securities, the redemption of shares, or
emergency expenses. During the year ended December 31, 1998, the maximum
amount outstanding and the amount outstanding at December 31, 1998, were
$214,816 and $100,476, respectively. Interest expense incurred on the
borrowings amounted to $524 for the year ended December 31, 1998, at a
weighted average interest rate on borrowings of 6.1%.
(7) Financial Instruments
The Series trades financial instruments with off-balance-sheet risk in the
normal course of its investing activities in order to manage exposure to
market risks such as interest rates and foreign currency exchange rates. These
financial instruments include written options, forward foreign currency
exchange contracts, swap agreements, and futures contracts. The notional or
contractual amounts of these instruments represent the investment the Series
has in particular classes of financial instruments and does not necessarily
represent the amounts potentially subject to risk. The measurement of the
risks associated with these instruments is meaningful only when all related
and offsetting transactions are considered.
Forward Foreign Currency Exchange Contracts
Forward foreign currency purchases and sales under master netting agreements
amounted to a net payable of $11 with Merrill Lynch at December 31, 1998.
At December 31, 1998, the Series had sufficient cash and/or securities to
cover any commitments under these contracts.
(8) Restricted Securities
The Series may invest not more than 15% of its net assets in securities which
are subject to legal or contractual restrictions on resale. At December 31,
1998, the Series owned the following restricted security (constituting 0.04%
of net assets) which may not be publicly sold without registration under the
Securities Act of 1933. The Series does not have the right to demand that this
security be registered. The value of this security is determined by valuations
furnished by dealers or by a pricing service, or if not available, is valued
at fair value as determined in good faith by or at the direction of the
Trustees.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
DESCRIPTION DATE OF ACQUISITION (000 OMITTED) COST VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
United Airlines Pass-Through Trust, 7.27s, 2013 7/14/1997 $5 $4,910 $4,895
------
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of the 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, 1998, the related statement of operations for the year then ended, the
statements of changes in net assets for the years ended December 31, 1998 and
1997, and the financial highlights for each of the years in the four-year
period ended December 31, 1998. These financial statements and financial
highlights are the responsibility of the Series' management. Our
responsibility is to express an opinion on these 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, 1998 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, 1998, 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 4, 1999
<PAGE>
FEDERAL TAX INFORMATION
The Series has designated $2,147 as a capital gain dividend.
<PAGE>
(C)1999 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
VFB-2 2/99 19M
