<PAGE>
[Logo] M F S(R) ANNUAL REPORT
INVESTMENT MANAGEMENT JUNE 30, 1999
75 YEARS
WE INVENTED THE MUTUAL FUND(R)
[graphic omitted]
MFS(R) INSTITUTIONAL
HIGH YIELD FUND
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
MFS(R) INSTITUTIONAL HIGH YIELD FUND
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; INVESTOR SERVICE
Private investor and real estate consultant MFS Service Center, Inc.
P.O. Box 2281
CHAIRMAN AND PRESIDENT Boston, MA 02107-9906
Jeffrey L. Shames*
For additional information,
PORTFOLIO MANAGER contact your financial adviser.
Bernard A. Scozzafava*
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 Shareholders,
It has been almost two years since financial turmoil began to rock markets in
Asia, Russia, and Latin America. Even developed markets such as Europe and the
United States were not immune. In the U.S. equity market, for example,
investors focused on a narrow group of 50 of the largest-company growth stocks
because they seemed to offer less volatility in uncertain times. Fixed-income
investors also became more concerned about risk, moving money into U.S.
Treasury securities and out of corporate and municipal bonds and mortgage-
backed securities.
The narrowness of the market was just one of three broad issues that dominated
the U.S. equity market until recently. The other two were a slowdown in
corporate earnings growth and high valuations, with stocks of many companies
selling at extremely high prices relative to their earnings.
Although these have been challenging issues, we now see signs that we feel
demonstrate each one is changing for the better. Today, we believe the markets
are presenting more opportunities for investors to diversify, for our
portfolio managers to find good values, and for us to show the benefits of
staying with our long-term objectives and strategies. Investors seem to be
regaining confidence in a wider range of companies. Stocks of some small and
mid-sized companies, as well as some large industrial companies, have begun to
perform better in the past few months than they had for the previous year or
so. These companies appear to have benefited from early signs of stability in
emerging markets and a continuation of economic growth in the United States.
U.S. companies also have produced better earnings. Corporate earnings were, on
average, relatively flat in 1998. However, we expect earnings to grow 12% to
14% this year because more companies have benefited from the strong economy
and from aggressive consolidation and cost-cutting measures they have taken
over the past several years.
Based on their earnings projections, our analysts estimate that the U.S. stock
market is still about 30% overvalued. While there has been some shift to a
wider group of stocks, many investors are still focusing on the large-company
stocks. As a result, most of the overvaluation is in the 50 largest stocks in
the Standard & Poor's 500 Composite Index (the S&P 500), a popular, unmanaged
index of common stock total return performance. That means about 450 stocks
are selling at more attractive prices, particularly given what we see as the
improved earnings outlooks for these and many small and mid-sized companies
not in the S&P 500. These companies also benefit from consolidation, cost
cutting, and global growth. Because they are smaller, they may be able to
respond to these changes more quickly, and thus they have the potential to
grow faster than the big companies.
The fixed-income markets, meanwhile, seem to be approaching the level of
relative stability they enjoyed before the Asian turmoil. Some credit for this
stability goes to the Federal Reserve Board (the Fed), which has reassured
investors that it will act to prevent rapid economic growth from causing
higher inflation and reduced purchasing power. Also, once investors saw that
the overseas turmoil had little, if any, effect on the financial strength of
most domestic bond issuers, the major non-Treasury markets -- corporate,
municipal, and mortgage -- began to rebound. Our portfolio managers are now
finding more opportunities to buy bonds with relatively stable prices and
attractive yields.
The past two years have challenged investors. However, we believe we are well
positioned for the current environment because our analysts and portfolio
managers continue to rely on MFS(R) Original Research(SM) to help evaluate the
long-term investment potential of each holding being considered for our
portfolios. Also, we believe our discipline of staying with our clearly
defined investment strategies can help us offer investment products with the
potential to sustain returns over a variety of market cycles.
We appreciate your confidence and welcome any questions or comments you may
have.
Respectfully,
/s/ Jeffrey Shames
- --------------------------------
Jeffrey L. Shames
Chairman and Chief Executive Officer
MFS Investment Management(R)
July 15, 1999
MANAGEMENT REVIEW AND OUTLOOK
Dear Shareholders,
For the period from the commencement of the Fund's investment operations,
December 31, 1998, through June 30, 1999, the Fund provided a total return of
3.41% (including the reinvestment of any distributions). This compares to a
return of +3.55% for the average high current yield fund tracked by Lipper
Analytical Services, Inc., an independent firm that reports mutual fund
performance, and 1.76% for the Salomon Brothers High Yield Index an unmanaged
market-value-weighted index which includes public, nonconvertible, cash-pay,
and deferred-interest U.S. corporate bonds with remaining maturities of at
least seven years and a credit rating between CCC and BB+.
The Fund has benefited from a favorable economic environment for high-yield
securities -- specifically, moderate economic growth and low inflation in the
United States. The continued strength of the U.S. economy in 1999 has helped
strengthen investor confidence in the high-yield market as companies have
generally posted improved operating results.
However, the Fund's slight underweighting in the energy sector, plus the fact
that we owned higher-quality bonds within that sector, detracted from
performance. As oil prices rose recently, we missed the price rally in the
bonds of medium-quality energy companies. At the same time, however, our focus
on high-quality issuers meant that we avoided the numerous bankruptcies among
low-rated, high-yield energy companies earlier in the year.
We believe the telecommunications sector still offers the best investment
opportunities in the high-yield market. Since the deregulation of this
industry in 1996, several companies have issued high-yield bonds to help fund
the development of their communications networks. These companies have
benefited from the tremendous increase in voice and data traffic, driven in
part by the growth in Internet usage. An example is MetroNet, a dominant
competitive local exchange company in Canada. Bonds issued by MetroNet
appreciated when it was announced that the company would merge with AT&T
Canada, an investment-grade company with considerably better financial
resources. Finally, our position in Nextel Communications, a company that
provides wireless telecommunications services, rose in value after Microsoft
announced that it would invest $600 million in the company.
The Fund's second-largest industry is media. We have been investing in cable
companies since the mid-1980s. On its own, we think cable is a good, defensive
industry that has tended to have steady revenue streams through varying
economic conditions. Now, cable television systems are being recognized as
efficient ways to deliver high-speed Internet services to the home, which
makes this industry even more attractive to us.
Respectfully,
/s/Bernard Scozzafava
- -------------------------------
Bernard A. Scozzafava
Portfolio Manager
The opinions expressed in this report are those of the portfolio manager and
are current 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.
PORTFOLIO MANAGER'S PROFILE
Bernard A. Scozzafava is Vice President of MFS Investment Management(R). He is
portfolio manager of the High Yield Series offered through MFS(R)/Sun Life
annuity products and MFS(R) High Income Series (part of MFS(R) Variable
Insurance Trust(SM)).
He joined MFS in 1989 as Investment Officer and was named Assistant Vice
President in 1991, Vice President in 1993, and portfolio manager in 1994.
Prior to joining MFS, he worked as a securities trader and a research analyst
for the Federal Reserve Bank of New York. Mr. Scozzafava is a graduate of
Hamilton College and earned a Master of Science degree from the Massachusetts
Institute of Technology.
All portfolio managers at MFS Investment Management(R) are supported by an
investment staff of over 100 professionals utilizing MFS(R) Original
Research(SM), a company- oriented, bottom-up process of selecting securities.
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. 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>
FUND FACTS
Objective: Seeks high current income.
Commencement of investment operations: December 31, 1998
Size: $2.1 million net assets as of June 30, 1999
PERFORMANCE SUMMARY
The information below illustrates the historical performance of the Fund 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. The minimum initial investment is generally $3 million. Shares of
the Fund are purchased at net asset value. (See Notes to Performance Summary
for more information.)
GROWTH OF A HYPOTHETICAL $3,000,000 INVESTMENT
(For the period from December 31, 1998, through June 30, 1999)
MFS Institutional Salomon Brothers
High Yield Fund High Yield Index
- --------------------------------------------------------------------------------
12/98 $3,000,000 $3,000,000
6/99 3,102,313 3,052,939
AVERAGE ANNUAL AND CUMULATIVE TOTAL RATES OF RETURN THROUGH JUNE 30, 1999
Life*
- --------------------------------------------------------------------------------
Cumulative Total Return +3.41%
- --------------------------------------------------------------------------------
Average Annual Total Return --
- --------------------------------------------------------------------------------
COMPARATIVE INDICES
- --------------------------------------------------------------------------------
Average high current yield fund+ +3.55%
- --------------------------------------------------------------------------------
Salomon Brothers High Yield Index** +1.76%
- --------------------------------------------------------------------------------
*For the period from the commencement of the Fund's investment operations,
December 31, 1998, through June 30, 1999. Index returns are from
January 1, 1999.
+Source: Lipper Analytical Services, Inc.
**Source: Standard & Poor's Micropal, Inc.
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.
Lower-rated securities may provide greater returns, but they are also
associated with greater-than-average risk. These risks may increase share
price volatility. See the prospectus for details.
<PAGE>
PORTFOLIO OF INVESTMENTS - June 30, 1999
Bonds - 93.9%
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
- ------------------------------------------------------------------------------------------------------
U.S. Bonds - 87.4%
Aerospace - 3.6%
<S> <C> <C>
Argo Tech Corp., 8.625s, 2007## $40 $ 37,000
BE Aerospace, Inc., 8s, 2008 40 37,400
---------
$ 74,400
- -------------------------------------------------------------------------------------------------------
Automotive - 2.1%
Lear Corp., 9.5s, 2006 $40 $ 43,700
- -------------------------------------------------------------------------------------------------------
Building - 3.8%
Nortek, Inc., 9.25s, 2007 $40 $ 40,100
Williams Scotsman, Inc., 9.875s, 2007 40 38,750
---------
$ 78,850
- -------------------------------------------------------------------------------------------------------
Business Services - 5.9%
Anacomp, Inc., 10.875s, 2004 $40 $ 41,700
Iron Mountain, Inc., 8.75s, 2009 40 39,500
Unisys Corp., 7.875s, 2008 40 40,600
---------
$ 121,800
- -------------------------------------------------------------------------------------------------------
Chemicals - 3.8%
Lyondell Chemical Co., 9.625s, 2007## $35 $ 35,831
NL Industries, Inc., 11.75s, 2003 40 42,400
---------
$ 78,231
- -------------------------------------------------------------------------------------------------------
Consumer Goods and Services - 3.5%
Polymer Group, Inc., 8.75s, 2008 $40 $ 38,700
Revlon Consumer Products Corp., 8.125s, 2006 35 34,125
---------
$ 72,825
- -------------------------------------------------------------------------------------------------------
Containers - 3.1%
Gaylord Container Corp., 9.875s, 2008 $50 $ 44,500
Silgan Holdings, Inc., 9s, 2009 20 19,800
---------
$ 64,300
- -------------------------------------------------------------------------------------------------------
Energy - 4.0%
Cheasapeake Energy Corp., 9.625s, 2005 $45 $ 41,400
P&L Coal Holdings Corp., 9.625s, 2008 40 40,300
---------
$ 81,700
- -------------------------------------------------------------------------------------------------------
Entertainment - 1.9%
AMC Entertainment, Inc., 9.5s, 2009 $40 $ 38,400
- -------------------------------------------------------------------------------------------------------
Financial Institutions - 1.6%
Willis Corroon Corporation, 9s, 2009## $35 $ 33,731
- -------------------------------------------------------------------------------------------------------
Forest and Paper Products - 2.0%
Buckeye Cellulose Corp., 9.25s, 2008 $40 $ 40,800
- -------------------------------------------------------------------------------------------------------
Gaming - 3.8%
Boyd Gaming Corp., 9.5s, 2007 $40 $ 39,600
Station Casinos, Inc., 8.875s, 2008 40 39,000
---------
$ 78,600
- -------------------------------------------------------------------------------------------------------
Industrial - 0.2%
Fairfield Manufacturing Co., Inc., 9.625s, 2008## $ 5 $ 4,925
- -------------------------------------------------------------------------------------------------------
Media - 15.2%
Adelphia Communications Corp., 7.5s, 2004## $40 $ 37,800
Chancellor Media Corp., 8.125s, 2007 40 39,000
CSC Holdings, Inc., 8.125s, 2009 40 40,212
Fox/Liberty Networks LLC, Inc., 8.875s, 2007 40 41,600
Frontiervision Operating Partnership LP, 11s, 2006 35 38,500
Lenfest Communications, Inc., 10.5s, 2006 35 40,250
Telemundo Holdings, Inc., 0s to 2003, 11.5s to 2008 70 37,100
World Color Press, Inc., 8.375s, 2008 40 39,800
---------
$ 314,262
- -------------------------------------------------------------------------------------------------------
Medical and Health Technology and Services - 1.8%
Tenet Healthcare Corp., 8.125s, 2008## $40 $ 37,600
- -------------------------------------------------------------------------------------------------------
Metals and Minerals - 4.5%
Alaska Steel Holdings Corp., 9.125s, 2006 $40 $ 41,000
Metal Management, Inc., 10s, 2008 65 52,325
---------
$ 93,325
- -------------------------------------------------------------------------------------------------------
Retail - 1.7%
Cole National Group, Inc., 8.625s, 2007 $40 $ 34,400
- -------------------------------------------------------------------------------------------------------
Supermarkets - 2.0%
Pathmark Stores, Inc., 9.625s, 2003 $40 $ 40,800
- -------------------------------------------------------------------------------------------------------
Telecommunications - 17.2%
Centennial Cellular Operating Co., 10.75s, 2008## $40 $ 41,400
Global Crossing Holdings Ltd., 9.625s, 2008 40 43,200
ITC Deltacom, Inc., 9.75s, 2008 40 41,000
Level 3 Communications, Inc., 9.125s, 2008 40 39,350
Mobile Telecommunication Technologies Corp., 13.5s, 2002 30 33,900
Nextel Communications, Inc., 0s to 2003, 9.95s to 2008 65 44,850
Nextlink Communications, Inc., 10.75s, 2009 30 30,750
Qwest Communications International, Inc., 7.25s, 2008## 40 39,203
Spectrasite Holdings, Inc., 0s to 2004, 11.25s to 2009## 75 42,656
----------
$ 356,309
- -------------------------------------------------------------------------------------------------------
Utilities - Electric - 5.7%
El Paso Electric Co., 8.9s, 2006 $35 $ 38,000
Esi Tractebel Acquisition Corp., 7.99s, 2011 40 39,250
Toledo Edison Co., 7.875s, 2004 40 40,674
----------
$ 117,924
- -------------------------------------------------------------------------------------------------------
Total U.S. Bonds $1,806,882
- -------------------------------------------------------------------------------------------------------
Foreign Bonds - 6.5%
Canada - 2.5%
MetroNet Communications Corp., 0s to 2003, 9.95s to 2008
(Telecommunications) $70 $ 51,800
- -------------------------------------------------------------------------------------------------------
Netherlands - 2.0%
Versatel Telecom B.V., 13.25s, 2008
(Telecommunications) $40 $ 41,800
- -------------------------------------------------------------------------------------------------------
United Kingdom - 2.0%
Colt Telecommunications Group PLC, 0s to 2001, 12s to
2006 (Telecommunications) $50 $ 41,250
- -------------------------------------------------------------------------------------------------------
Total Foreign Bonds $ 134,850
- -------------------------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $1,963,865) $1,941,732
- -------------------------------------------------------------------------------------------------------
Preferred Stock - 2.1%
- -----------------------------------------------------------------------------------------------------
SHARES
- -----------------------------------------------------------------------------------------------------
Crown Castle International Corp. (Telecommunications)
(Identified Cost, $40,600)## 42 $ 44,100
- -------------------------------------------------------------------------------------------------------
Warrants - 0.1%
- -------------------------------------------------------------------------------------------------------
Versatel Telecom B.V. (Telecommunications)*
(Identified Cost, $400) 40 $ 2,000
- -------------------------------------------------------------------------------------------------------
Short-Term Obligations - 1.0%
- -------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- -------------------------------------------------------------------------------------------------------
Federal Farm Credit Bank, due 7/01/99 at Amortized
Cost $20 $ 20,000
- -------------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $2,024,865) $2,007,832
Other Assets, Less Liabilities - 2.9% 58,988
- -------------------------------------------------------------------------------------------------------
Net Assets - 100.0% $2,066,820
- -------------------------------------------------------------------------------------------------------
</TABLE>
##SEC Rule 144A restriction.
*Non-income producing security.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
JUNE 30, 1999
- --------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $2,024,865) $ 2,007,832
Cash 3,850
Interest receivable 35,205
Receivable from investment adviser 41,590
------------
Total assets $ 2,088,477
------------
Liabilities:
Payable to affiliates -
Management fee $ 28
Accrued expenses and other liabilities 21,629
------------
Total liabilities $ 21,657
------------
Net assets $ 2,066,820
============
Net assets consist of:
Paid-in capital $ 2,082,667
Unrealized depreciation on investments and translation
of assets and liabilities in foreign currencies (17,033)
Accumulated undistributed net investment income 1,186
------------
Total $ 2,066,820
============
Shares of beneficial interest outstanding 208,210
============
Net asset value, redemption price, and offering
price per share (net assets / shares of beneficial
interest outstanding) $9.93
=====
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- ------------------------------------------------------------------------------
PERIOD ENDED JUNE 30, 1999*
- ------------------------------------------------------------------------------
Net investment income:
Income -
Interest $ 90,156
---------
Expenses -
Management fee $ 4,938
Trustees' compensation 2,800
Shareholder servicing agent fee 745
Administrative fee 147
Custodian fee 1,665
Printing 1,321
Auditing fees 14,893
Legal fees 1,569
Registration fees 19,067
Miscellaneous 1,114
---------
Total expenses $ 48,259
Fees paid indirectly (249)
Reduction of expenses by investment adviser (41,590)
---------
Net expenses $ 6,420
---------
Net investment income $ 83,736
---------
Realized and unrealized gain (loss) on investments:
Realized gain (identified cost basis) on investment transactions $ 17
Change in unrealized depreciation on investments (17,033)
---------
Net realized and unrealized loss on investments
and foreign currency $ (17,016)
---------
Increase in net assets from operations $ 66,720
=========
*For the period from the commencement of the Fund's investment operations,
December 31, 1998, through June 30, 1999.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------------------------
PERIOD ENDED
JUNE 30, 1999*
- --------------------------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
<S> <C>
Net investment income $ 83,736
Net realized gain on investments and foreign currency transactions 17
Net unrealized loss on investments and foreign currency translation (17,033)
----------
Increase in net assets from operations $ 66,720
----------
Distributions declared to shareholders from net investment income $ (82,567)
----------
Net increase in net assets from Fund share transactions $2,082,667
----------
Total increase in net assets $2,066,820
Net assets:
At beginning of period --
----------
At end of period (including accumulated undistributed net investment
income of $1,186) $2,066,820
==========
</TABLE>
*For the period from the commencement of the Fund's investment operations,
December 31, 1998, through June 30, 1999.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
- --------------------------------------------------------------------------------------------
PERIOD ENDED
JUNE 30, 1999*
- --------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C>
Net asset value - beginning of period $10.00
------
Income from investment operations# -
Net investment income $ 0.50
Net realized and unrealized loss on investments
and foreign currency transactions (0.16)
------
Total from investment operations $ 0.34
------
Less distributions declared to shareholders from net investment income $(0.41)
------
Net asset value - end of period $ 9.93
======
Total return 3.41%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 0.68%+
Net investment income 8.43%+
Portfolio turnover 24%
Net assets at end of period (000 omitted) $2,067
*For the period from the commencement of the Fund's investment operations, December 31, 1998,
through June 30, 1999.
+Annualized.
++Not annualized.
#Per share data are based on average shares outstanding.
##The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the
amount of cash maintained by the Fund with its custodian and dividend disbursing agent. The Fund's
expenses are calculated without reduction for this expense offset arrangement.
(S)The investment adviser agreed to maintain the expenses of the Fund, exclusive of management fee,
at not more than 0.15% of average daily net assets. To the extent actual expenses were over this
limitation, the net investment income per share and the ratios would have been:
Net investment income $0.25
Ratios (to average net assets)
Expenses## 4.86%+
Net investment income 4.25%+
</TABLE>
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Institutional High Yield Fund (the Fund) is a diversified fund of MFS
Institutional Trust (the Trust). 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.
(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.
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.
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 is 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.
The Fund uses the effective interest method for reporting interest income on
payment-in-kind (PIK) bonds. Legal fees and other related expenses incurred to
preserve and protect the value of a security owned are added to the cost of
the security; other legal fees are expensed. Capital infusions, which are
generally non-recurring, incurred to protect or enhance the value of high-
yield debt securities, are reported as additions to the cost basis of the
security. Costs that are incurred to negotiate the terms or conditions of
capital infusions or that are expected to result in a plan of reorganization
are reported as realized losses. Ongoing costs incurred to protect or enhance
an investment, or costs incurred to pursue other claims or legal actions, are
expensed.
Fees Paid Indirectly - The Fund's custody fee is calculated as a percentage of
the Fund's month end net assets. The fee is reduced according to an
arrangement that measures the value of cash deposited with the custodian by
the Fund. This amount is shown as a reduction of expenses on the Statement of
Operations.
Tax Matters and Distributions - The Fund's 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.
Distributions to shareholders are recorded on the ex-dividend date. The Fund
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 distributions from paid in
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 period ended June 30, 1999, $17 was reclassified to accumulated
undistributed net investment income from accumulated net realized gain on
investments due to differences between book and tax accounting. This change had
no effect on the net assets or net asset value per share.
(3) Transactions with Affiliates
Investment Adviser - The Fund 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 0.50%
of the average daily net assets. The investment adviser has voluntarily agreed
to pay the Fund's operating expenses exclusive of management fee such that the
Fund's aggregate expenses do not exceed 0.15% of its average daily net assets.
This is reflected as a reduction of expenses in the Statement of Operations.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive
remuneration for their services to the Fund from MFS. Certain officers and
Trustees of the Fund are officers or directors of MFS and MFS Service Center,
Inc. (MFSC).
Administrator - The Fund 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 Fund's 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 Fund's average daily net assets at an effective annual
rate of 0.075%.
(4) Portfolio Securities
Purchases and sales of investments, other than short-term obligations,
aggregated $2,476,161 and $482,636, respectively.
The cost and unrealized appreciation or depreciation in value of the
investments owned by the Fund, as computed on a federal income tax basis, are
as follows:
Aggregate cost $2,024,865
----------
Gross unrealized appreciation $ 44,306
Gross unrealized depreciation (61,339)
----------
Net unrealized depreciation $ (17,033)
==========
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par
value). Transactions in Fund shares were as follows:
PERIOD ENDED JUNE 30, 1999*
---------------------------
SHARES AMOUNT
- ------------------------------------------------------------------------------
Shares sold 200,010 $2,000,100
Shares issued to shareholders in reinvestment of
distributions 8,200 82,567
------- ----------
Net increase 208,210 $2,082,667
======= ==========
*For the period from the commencement of the Fund's investment operations,
December 31, 1998, through June 30, 1999.
(6) Line of Credit
The Fund and other affiliated funds participate in an $820 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
Fund 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. For the period ended June 30,
1999, there was no commitment fee allocated to the Fund. The Fund had no
significant borrowings during the period.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees and Shareholders of MFS Institutional High Yield Fund:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of MFS Institutional High Yield Fund
(one of the series constituting MFS Institutional Trust) as of June 30, 1999,
the related statements of operations and changes in net assets, and the
financial highlights for the period from December 31, 1998 (commencement of
investment operations) to June 30, 1999. These financial statements and
financial highlights are the responsibility of the Trust's management. Our
responsibility is to express an opinion on these statements and financial
highlights based on our audit.
We conducted our audit 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 June 30, 1999 by correspondence with the custodian. 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 audit provides 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 Institutional
High Yield Fund at June 30, 1999, the results of its operations, the changes
in its net assets, and its financial highlights for the period June 30, 1999
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
August 6, 1999
<PAGE>
FEDERAL TAX INFORMATION
In January 2000, shareholders will be mailed a Form 1099-DIV reporting the
federal tax status of all distributions paid during the calendar year 1999.
<PAGE>
MFS' YEAR 2000 READINESS DISCLOSURE
MFS Investment Management(R), as an investment adviser and on behalf of the
MFS funds, is committed to the effective use of technology in managing our
portfolio investments, delivering high-quality service to MFS fund
shareholders, retirement plan participants, and MFS' institutional clients,
and supporting the financial advisers who sell our products. With that in
mind, we created a separately funded Year 2000 Program
Management Office in 1996 comprised of a specialized staff reporting directly
to MFS senior management.
The Year 2000 (Y2K) problem arises because calendar-year fields in computers
and software applications traditionally have used two-digit codes so that, for
example, the year 1998 is coded as "98," with the "19" being implied. In the
year 2000, unless necessary corrections have been made, computer applications
may assume "00" refers to 1900 rather than 2000, thus resulting in systems
failures or miscalculations. To address this issue, our team of dedicated
business and technology managers, working with outside experts, is taking
steps to ascertain the Y2K readiness of MFS' internal systems and is working
with our external systems vendors to determine whether they expect their
systems to be ready.
MFS recognizes that fund shareholders and institutional clients also are
concerned about whether the companies whose securities are held in their
portfolios are addressing Y2K issues. As part of the MFS(R) Original
Research(SM) process of evaluating portfolio investments, one of the many
relevant factors that MFS' portfolio managers and research analysts may consider
is a company's Y2K readiness. Each year, MFS' research analysts and portfolio
managers conduct more than 1,000 on-site meetings with companies whose
securities are, or may be, held in fund and client portfolios, and host an
additional 1,500 meetings at MFS' headquarters. When assessing the Y2K readiness
of these companies, MFS' research analysts and portfolio managers may rely upon
discussions at these meetings as well as SEC disclosure documents and
third-party reports.
Y2K readiness is an enormously complex, worldwide issue. No company or
institution can guarantee that it will be unaffected by the Y2K issue. While
MFS is taking significant steps to protect the integrity of its internal
systems, there can be no assurance that these steps will be sufficient to
avoid any adverse impact on MFS, shareholders of MFS funds, participants in
retirement plans administered by MFS, or MFS' institutional clients.
If you have further questions regarding MFS' Year 2000 Readiness Program,
please visit our Web site at www.mfs.com or contact the MFS Year 2000 Program
Management Office by e-mail at [email protected] or by letter at 500 Boylston
Street, Boston, MA 02116-3741.
<PAGE>
(C)1999 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 0216-3741
IHY-2 8/99 .5M
