<PAGE>
[Logo] M F S(R) SEMIANNUAL REPORT
INVESTMENT MANAGEMENT DECEMBER 31, 1999
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 and Chief Executive Officer, 500 Boylston Street
MFS Investment Management(R) Boston, MA 02116-3741
Nelson J. Darling, Jr.+ DISTRIBUTOR
Private investor and trustee MFS Fund Distributors, Inc.
500 Boylston Street
William R. Gutow+ Boston, MA 02116-3741
Private investor and real estate consultant;
Vice Chairman, Capitol Entertainment INVESTOR SERVICE
Management Company (video franchise) 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 consultant.
Bernard A. Scozzafava*
CUSTODIAN
TREASURER State Street Bank and Trust Company
W. Thomas London*
WORLD WIDE WEB
ASSISTANT TREASURERS www.mfs.com
Mark E. Bradley*
Ellen Moynihan*
James O. Yost*
SECRETARY
Stephen E. Cavan*
ASSISTANT SECRETARY
James R. Bordewick, Jr.*
* Affiliated with the Investment Adviser
+ Independent Trustee
- --------------------------------------------------------------------------------------------
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
- --------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
LETTER FROM THE CHAIRMAN
Dear Shareholders,
One could easily argue that the Internet represents the greatest technological
development most of us may see in our lifetimes. There is no disputing that this
new communication medium is changing forever the way we work, play, and shop.
One might also argue that investing in this new technology represents the
investment opportunity of a lifetime. The question for any investor is whether
and how to take advantage of it.
The popular press, it seems, would have us believe that by surfing the Web, we
can learn everything we need to know about investing. Indeed, there is no doubt
that Internet-delivered information and brokerage services enable individual
investors to be well-informed and to trade at bargain prices. But we believe the
facts argue that, for most of us, professionally managed investment portfolios
purchased through a financial consultant will continue to be one of the best
products for long-term investing in this new millennium.
Why do we believe managed portfolios plus professional advice will continue to
define the best course of action for many investors? Let's look at some of the
characteristics of a successful long-term investment approach:
o HAVING A PLAN AND STICKING TO IT: Our experience is that successful
investors -- those whose lives are enriched by the fruits of their investing
-- share two characteristics. They have a plan for reaching their monetary
goals, and they stick with that plan through up markets and down. And for
many investors, working with a financial consultant may be the best way to
develop a plan. Although the Internet abounds with calculators for
developing all sorts of investment plans, none has your consultant's high
level of experience and an understanding of your unique situation. And no
calculator can counsel you during a down market, when you may be tempted to
abandon your goals and your plan.
o DIVERSIFICATION: Few individual investors can afford to own a large number
of holdings, so poor performance of one company can potentially drag down
their entire personal portfolio. This is especially true when investing in
volatile new areas such as the Internet. On the other hand, a diversified,
professionally managed investment portfolio that owns dozens or even
hundreds of holdings is better positioned to survive a disappointment in one
or several investments.
o GOOD IN A DOWN MARKET: As we enter the tenth year of the greatest bull
market in history, it's easy to forget that market downturns are an almost
inevitable part of investing. Few investment portfolios, of course, are
going to be up when the overall market is down. But we believe diversified,
professionally managed investment portfolios may be less likely to suffer
the extreme downturns experienced by a large number of individual holdings
when the market heads south.
o MFS ORIGINAL RESEARCH(R): The Internet is one of the greatest research tools
ever invented, but it's still not the same as being eyeball to eyeball with
the management of a company and discussing their plans for their firm's
future.
o GOOD PERFORMANCE AT AN ACCEPTABLE LEVEL OF RISK: Investing in individual
stocks or bonds does indeed offer the potential of exhilarating performance
that few managed portfolios even attempt. The downside is that the most
exciting investments are also likely to be the ones that give you sleepless
nights. The diversification and professional management of investment
portfolios helps make them inherently less risky than individual stock
picking, and managed portfolios are available in a wide range of risk
profiles.
We believe that now, more than ever, managed portfolios sold by an investment
professional may offer many investors the best way to participate in whatever
investment opportunities the new millennium may bring. The combination of
professional portfolio management and professional advice recognizes the key
reason that investors give us their money: because they don't want to make a
hobby or a second profession out of investing; they simply want their money to
work for them so they have a better likelihood of realizing their dreams.
As always, we appreciate your confidence in MFS 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(R)
January 15, 2000
Investments in mutual funds will fluctuate and may be worth more or less upon
redemption.
Mutual funds are designed for long-term retirement investing; please see your
financial consultant for more information.
The opinions expressed in this letter are those of Jeffrey L. Shames, and no
forecasts can be guaranteed.
MANAGEMENT REVIEW AND OUTLOOK
Dear Shareholders,
For the six months ended December 31, 1999, the Fund provided a total return of
1.71% (including the reinvestment of any distributions). This compares to
returns of 0.93% for the average high current yield fund tracked by Lipper
Analytical Services, Inc., an independent firm that reports mutual fund
performance, and -0.03% for the Salomon Brothers High Yield Index (the 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+.
While many high-yield companies benefited from improved operating results in
1999, the high-yield market's overall performance for the year was lackluster.
Heavy new issuance of high-yield bonds and a rise in the default rate exerted
downward pressure on the prices of existing bonds. We believe the increase in
credit problems was largely due to the effects that soft oil prices and Medicare
reform had on companies in the energy and health care industries, respectively.
While performance for most of the year was indeed lackluster, the high-yield
bond market finished on a strong note as more investors began to appreciate the
attractive spreads available in this segment of the marketplace.
Compared to its category, the Fund performed relatively well this year. Our team
held firm to the belief that avoiding mistakes is just as important as picking
the best investments. That's why MFS Original Research(R) and depth of
professional experience remained so critical to the Fund's relative success.
Our time-tested experience in the high-yield bond arena was also critical to our
ability to steer clear of trouble spots and avoid bankruptcies in various
sectors of the economy. Years of observing the dynamics in energy and health
care, for example, enabled us to anticipate as well as avoid the problems that
ultimately plagued these industries.
The Fund's performance benefited from an increased overweighting in the
telecommunications sector, which remains one of the best performing sectors in
the high-yield market. Deregulation, both in the United States and in Europe,
has contributed to the exceptional growth in new telecommunication networks,
many of which have been financed with high-yield bonds. We continue to favor
facility-based operators that are experiencing strong customer demand, in part
due to the explosion of Internet traffic. The telecom sector has benefited from
consolidation as well as equity investments from outside the industry. We
invested in the debt of telecom companies such as MetroNet and Nextel. MetroNet,
a competitive local exchange company (CLEC) in Canada, saw its bonds appreciate
after announcing its merger with AT&T Canada, an investment-grade company with
better financial resources. Our position in Nextel Communications rose in value
after Microsoft announced its $600 million investment in the company.
Our second largest exposure was in media, a highly defensive industry. Core
holdings included cable television and radio entities such as Charter
Communication, one of the fastest growing companies in the field. Controlled by
Paul Allen, the co-founder of Microsoft, Charter's valuation has risen following
the increased utilization of cable networks as a means of accessing the
Internet.
Given our optimistic outlook for continued growth of corporate earnings in 2000
as well as the higher yield levels available in the market today, we believe
that high-yield bonds remain an attractive asset class.
Respectfully,
/s/ Bernard A. 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.
It is not possible to invest directly in an index.
The portfolio is actively managed, and current holdings may be different.
PORTFOLIO MANAGER'S PROFILE
Bernard A. Scozzafava is Senior 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, portfolio manager in 1994, and Senior
Vice President in 2000. 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 Original Research(R), a
global, 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 consultant, 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 December 31, 1999
PERFORMANCE SUMMARY
Because mutual funds are designed for investors with long-term goals, we have
provided cumulative results as well as the average annual total returns for the
applicable time periods. Investment results reflect the percentage change in net
asset value, including reinvestment of dividends. The minimum investment is
generally $3 million. Shares of the Fund are purchased at net asset value. (See
Notes to Performance Summary.)
AVERAGE ANNUAL AND CUMULATIVE TOTAL RATES OF RETURN THROUGH DECEMBER 31, 1999
6 Months Life*
- ------------------------------------------------------------------
Cumulative Total Return +1.71% +5.18%
- ------------------------------------------------------------------
Average Annual Total Return -- +5.18%
- ------------------------------------------------------------------
*For the period from the commencement of the Fund's investment operations,
December 31, 1998, through December 31, 1999.
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. MORE RECENT
RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. 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 (Unaudited) - December 31, 1999
<TABLE>
<CAPTION>
Bonds - 88.9%
- -----------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Bonds - 82.1%
Aerospace - 3.3%
Argo Tech Corp., 8.625s, 2007 $ 40 $ 35,600
BE Aerospace, Inc., 8s, 2008 40 34,500
--------------
$ 70,100
- -----------------------------------------------------------------------------------------------------
Automotive - 1.7%
Lear Corp., 9.5s, 2006 $ 35 $ 35,088
- -----------------------------------------------------------------------------------------------------
Building Materials - 3.7%
Nortek, Inc., 9.25s, 2007 $ 40 $ 39,100
Williams Scotsman, Inc., 9.875s, 2007 40 38,700
--------------
$ 77,800
- -----------------------------------------------------------------------------------------------------
Business Services - 5.5%
Anacomp, Inc., 10.875s, 2004 $ 40 $ 39,900
Iron Mountain, Inc., 8.75s, 2009 40 38,400
Unisys Corp., 7.875s, 2008 40 38,700
--------------
$ 117,000
- -----------------------------------------------------------------------------------------------------
Chemicals - 3.7%
Lyondell Chemical Co., 9.625s, 2007 $ 35 $ 35,788
NL Industries, Inc., 11.75s, 2003 40 41,400
--------------
$ 77,188
- -----------------------------------------------------------------------------------------------------
Consumer Goods and Services - 3.0%
Polymer Group, Inc., 8.75s, 2008 $ 40 $ 38,700
Revlon Consumer Products Corp., 8.125s, 2006 35 25,375
--------------
$ 64,075
- -----------------------------------------------------------------------------------------------------
Container, Forest and Paper Products - 6.1%
Buckeye Cellulose Corp., 9.25s, 2008 $ 40 $ 40,400
Gaylord Container Corp., 9.875s, 2008 50 43,000
Silgan Holdings, Inc., 9s, 2009 20 19,200
U.S. Can Corp., 10.125s, 2006 25 25,562
--------------
$ 128,162
- -----------------------------------------------------------------------------------------------------
Energy - 3.9%
Cheasapeake Energy Corp., 9.625s, 2005 $ 45 $ 42,750
P&L Coal Holdings Corp., 9.625s, 2008 40 38,900
--------------
$ 81,650
- -----------------------------------------------------------------------------------------------------
Entertainment - 1.7%
AMC Entertainment, Inc., 9.5s, 2009 $ 40 $ 35,300
- -----------------------------------------------------------------------------------------------------
Financial Institutions - 1.4%
Willis Corroon Corp., 9s, 2009 $ 35 $ 29,138
- -----------------------------------------------------------------------------------------------------
Gaming and Hotels - 3.7%
Boyd Gaming Corp., 9.5s, 2007 $ 40 $ 39,600
Station Casinos, Inc., 8.875s, 2008 40 38,400
--------------
$ 78,000
- -----------------------------------------------------------------------------------------------------
Media - 12.4%
Chancellor Media Corp., 8.125s, 2007 $ 40 $ 40,100
Charter Communications Holdings, 8.25s, 2007 25 23,250
CSC Holdings, Inc., 8.125s, 2009 40 39,299
Fox/Liberty Networks LLC, Inc., 8.875s, 2007 40 40,700
Frontiervision Operating Partnership LP, 11s, 2006 35 37,100
Lenfest Communications, Inc., 10.5s, 2006 35 38,500
Telemundo Holdings, Inc., 0s to 2003, 11.5s to 2008 70 41,650
--------------
$ 260,599
- -----------------------------------------------------------------------------------------------------
Medical and Health Technology and Services - 1.8%
Tenet Healthcare Corp., 8.125s, 2008 $ 40 $ 37,200
- -----------------------------------------------------------------------------------------------------
Metals and Minerals - 4.3%
AK Steel Holdings Corp., 9.125s, 2006 $ 40 $ 40,600
Metal Management, Inc., 10s, 2008 65 49,725
--------------
$ 90,325
- -----------------------------------------------------------------------------------------------------
Restaurants and Lodging - 2.3%
Aztar Corp., 8.875s, 2007 $ 50 $ 48,000
- -----------------------------------------------------------------------------------------------------
Retail - 1.3%
Cole National Group, Inc., 8.625s, 2007 $ 40 $ 28,700
- -----------------------------------------------------------------------------------------------------
Telecommunications - 16.8%
Adelphia Communications Corp., 7.5s, 2004 $ 40 $ 37,000
Centennial Cellular Operating Co., 10.75s, 2008 40 43,000
Global Crossings Holdings Ltd., 9.625s, 2008 40 39,900
ICG Holdings, Inc., 0s to 2001, 12.5s to 2006 50 37,750
ITC Deltacom, Inc., 9.75s, 2008 15 15,150
Level 3 Communications, Inc., 9.125s, 2008 40 37,800
Nextel Communications, Inc., 0s to 2003, 9.95s to 2008 65 45,662
Nextlink Communications, Inc., 10.75s, 2009 30 30,900
Spectrasite Holdings, Inc., 0s to 2004, 11.25s to 2009 75 39,844
Voicestream Wire, 10.375s, 2009## 25 25,750
--------------
$ 352,756
- -----------------------------------------------------------------------------------------------------
Transportation - 0.2%
Fairfield Manufacturing, Inc., 9.625s, 2008 $ 5 $ 4,725
- -----------------------------------------------------------------------------------------------------
Utilities - Electric - 5.3%
El Paso Electric Co., 8.9s, 2006 $ 35 $ 36,411
Esi Tractebel Acquisition Corp., 7.99s, 2011 40 36,000
Toledo Edison Co., 7.875s, 2004 40 39,709
--------------
$ 112,120
- -----------------------------------------------------------------------------------------------------
Total U.S. Bonds $ 1,727,926
- -----------------------------------------------------------------------------------------------------
Foreign Bonds - 6.8%
Canada - 2.7%
MetroNet Communications Corp., 0s to 2003, 9.95s to
2008 (Telecommunications) $ 70 $ 55,266
- -----------------------------------------------------------------------------------------------------
Netherlands - 2.0%
Versatel Telecom B.V., 13.25s, 2008
(Telecommunications) $ 40 $ 42,600
- -----------------------------------------------------------------------------------------------------
United Kingdom - 2.1%
Colt Telecommunications Group PLC, 0s to 2001, 12s to
2006 (Telecommunications) $ 50 $ 44,000
- -----------------------------------------------------------------------------------------------------
Total Foreign Bonds $ 141,866
- -----------------------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $1,956,339) $1,869,792
- -----------------------------------------------------------------------------------------------------
Preferred Stock - 2.2%
- -----------------------------------------------------------------------------------------------------
SHARES
- -----------------------------------------------------------------------------------------------------
Crown Castle International Corp.
(Telecommunications)
(Identified Cost, $40,600) 44 $ 45,540
- -----------------------------------------------------------------------------------------------------
Warrants - 0.7%
- -----------------------------------------------------------------------------------------------------
Versatel Telecom B.V. (Telecommunications)*
(Identified Cost, $400) 40 $ 16,000
- -----------------------------------------------------------------------------------------------------
Short-Term Obligations - 5.9%
- -----------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- -----------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp.,
due 1/03/00, at Amortized Cost $125 $ 124,990
- -----------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $2,122,329) $ 2,056,322
Other Assets, Less Liabilities - 2.3% 47,748
- -----------------------------------------------------------------------------------------------------
Net Assets - 100.0% $ 2,104,070
- -----------------------------------------------------------------------------------------------------
* Non-income producing security.
## SEC Rule 144A restriction.
</TABLE>
See notes to financial statements.
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities (Unaudited)
- ------------------------------------------------------------------------------
DECEMBER 31, 1999
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $2,122,329) $ 2,056,322
Cash 3,574
Interest receivable 35,120
Receivable from investment adviser 27,155
------------
Total assets $ 2,122,171
------------
Liabilities:
Payable to affiliates for management fee $ 29
Accrued expenses and other liabilities 18,072
------------
Total liabilities $ 18,101
------------
Net assets $ 2,104,070
============
Net assets consist of:
Paid-in capital $ 2,172,558
Unrealized depreciation on investments and translation
of assets and liabilities in foreign currencies (66,007)
Accumulated net realized loss on investments and foreign
currency transactions (7,088)
Accumulated undistributed net investment income 4,607
------------
Total $ 2,104,070
============
Shares of beneficial interest outstanding 217,496
=======
Net asset value, offering price and redemption price per share
(net assets / shares of beneficial interest outstanding) $9.67
=====
See notes to financial statements.
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations (Unaudited)
- -----------------------------------------------------------------------------
SIX MONTHS ENDED DECEMBER 31, 1999
- -----------------------------------------------------------------------------
Net investment income:
Interest income $ 99,834
---------
Expenses -
Management fee $ 5,170
Trustees' compensation 3,100
Administrative fee 138
Custodian fee 2,870
Printing 4,668
Auditing fees 7,250
Legal fees 537
Registration fees 6,196
Miscellaneous 4,224
---------
Total expenses $ 34,153
Fees paid indirectly (278)
Reduction of expenses by investment adviser (27,155)
---------
Net expenses $ 6,720
---------
Net investment income $ 93,114
---------
Realized and unrealized loss on investments:
Realized loss (identified cost basis) on investment
transactions $ (7,088)
Change in unrealized depreciation on investments (48,974)
---------
Net realized and unrealized loss on investments
and foreign currency $ (56,062)
---------
Increase in net assets from operations $ 37,052
=========
See notes to financial statements.
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- ------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED PERIOD ENDED
DECEMBER 31, 1999 JUNE 30, 1999*
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 93,114 $ 83,736
Net realized gain (loss) on investments and foreign currency
transactions (7,088) 17
Net unrealized loss on investments and foreign currency
translation (48,974) (17,033)
---------- ----------
Increase in net assets from operations $ 37,052 $ 66,720
---------- ----------
Distributions declared to shareholders from net investment
income $ (89,693) $ (82,567)
---------- ----------
Net increase in net assets from Fund share transactions $ 89,891 $2,082,667
---------- ----------
Total increase in net assets $ 37,250 $2,066,820
Net assets:
At beginning of period 2,066,820 --
---------- ----------
At end of period (including accumulated undistributed net
investment income of $4,607 and $1,186, respectively) $2,104,070 $2,066,820
========== ==========
* For the period from the commencement of the Fund's investment operations, December 31, 1998, through
June 30, 1999.
</TABLE>
See notes to financial statements.
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
- ----------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED PERIOD ENDED
DECEMBER 31, 1999 JUNE 30, 1999*
(UNAUDITED)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 9.93 $ 10.00
--------- ---------
Income from investment operations# -
Net investment income(S) $ 0.44 $ 0.50
Net realized and unrealized loss on investments and foreign currency (0.28) (0.16)
--------- ---------
Total from investment operations $ 0.16 $ 0.34
--------- ---------
Less distributions declared to shareholders from net investment income $ (0.42) $ (0.41)
--------- ---------
Net asset value - end of period $ 9.67 $ 9.93
========= =========
Total return 1.71%++ 3.41%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 0.68+ 0.68%+
Net investment income 8.98%+ 8.43%+
Portfolio turnover 21% 24%
Net assets at end of period (000 Omitted) $ 2,104 $ 2,067
(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 $ 0.22 $ 0.25
Ratios (to average net assets):
Expenses## 3.32%+ 4.86%+
Net investment income 6.34%+ 4.25%+
* 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.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
</TABLE>
See notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(1) Business and Organization
MFS Institutional High Yield Fund (the Fund) is a diversified series of MFS
Series 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 made directly to the security issuer, 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 be 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.
(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 annual rate of 0.075%.
(4) Portfolio Securities
Purchases and sales of investments, other than short-term obligations,
aggregated $407,306 and $423,791, 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 $2,122,329
==========
Gross unrealized depreciation $ (120,515)
Gross unrealized appreciation 54,508
----------
Net unrealized depreciation $ (66,007)
==========
(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:
SIX MONTHS PERIOD ENDED JUNE
ENDED DECEMBER 31, 1999 30, 1999*
----------------------- -------------------
SHARES AMOUNT SHARES AMOUNT
- ------------------------------------------------------------------------------
Shares sold 20 $ 200 200,010 $2,000,100
Shares issued to shareholders in
reinvestment of distributions 9,266 89,691 8,200 82,567
----- ------- ------- ----------
Net increase 9,286 $89,891 208,210 $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 six months ended
December 31, 1999, there was no commitment fee allocated to the Fund. The Fund
had no borrowings during the period.
<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, [Graphic Omitted]
retirement plan participants, and MFS' institutional
clients, and supporting the financial consultants who sell
our products.
MFS can now say that it is ready for the Year 2000. Our testing has demonstrated
that MFS' computer hardware and software will recognize "00" as the Year 2000
and will not confuse those digits with 1900. All of our critical business
applications and processes have been successfully tested, and we have adopted
companywide policies that will help us maintain our readiness through the
remainder of the year. Any new technology that is brought into the company
before the end of the year will be held to the same stringent standards as our
current technology. We have also developed a vendor readiness survey, contacted
over 700 of our vendors, and established an ongoing process to review responses,
as well as to review readiness statements of new vendors and products.
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 Original Research(R)
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.
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 fund shareholders, retirement plan participants, or
institutional clients.
If you have further questions regarding MFS' Year 2000 Readiness Program, please
visit our Web site at WWW.MFS.COM, call our toll-free line, 1-800-637-4406, or
write to 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)2000 MFS Investment Management(R)
MFS(R) investment products are offered through MFS Fund Distributors, Inc.,
500 Boylston Street, Boston, MA 02116. IHY-3 02/00 200
