<PAGE>
[Logo] M F S(R) Semiannual Report
INVESTMENT MANAGEMENT June 30, 1998
- --------------------------------------------------------------------------------
MFS(R) TOTAL RETRURN SERIES
A Series of MFS(R) Variable Insurance Trust(SM)
- --------------------------------------------------------------------------------
[Graphic Omitted]
<PAGE>
MFS(R) TOTAL RETURN SERIES
A SERIES OF MFS(R) VARIABLE INSURANCE TRUST(SM)
<TABLE>
<S> <C>
TRUSTEES INVESTMENT ADVISER
Jeffrey L. Shames* Massachusetts Financial Services Company
Chairman, Chief Executive Officer, and Director, 500 Boylston Street
MFS(R) Investment Management(SM) Boston, MA 02116-3741
DISTRIBUTOR
Nelson J. Darling, Jr. MFS Fund Distributors, Inc.
Professional Trustee 500 Boylston Street
Boston, MA 02116-3741
William R. Gutow
Vice Chairman, SHAREHOLDER SERVICE CENTER
Capitol Entertainment Management Company; MFS Service Center, Inc.
Real Estate Consultant P.O. Box 2281
Boston, MA 02107-9906
LEAD PORTFOLIO MANAGER
David M. Calabro* For additional information,
contact your financial adviser.
CHAIRMAN AND PRESIDENT
Jeffrey L. Shames* CUSTODIAN
State Street Bank and Trust Company
TREASURER
W. Thomas London* WORLD WIDE WEB
www.mfs.com
ASSISTANT TREASURERS
Mark E. Bradley*
Ellen Moynihan*
James O. Yost*
SECRETARY
Stephen E. Cavan*
ASSISTANT SECRETARY
James R. Bordewick, Jr.*
</TABLE>
*Affiliated with the Investment Adviser
- --------------------------------------------------------------------------------
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
- --------------------------------------------------------------------------------
<PAGE>
LETTER FROM THE CHAIRMAN
Dear Contract Owners:
With the U.S. stock market well into its fourth year of record-breaking
advances, it is necessary to take a cautious outlook. By most commonly
accepted measures, equity valuations appear to have risen to a point at which
the stock market has become more vulnerable to changes in the investment
environment such as rising inflation and interest rates or a slowing economy.
As a result, while we continue to hold a favorable long-term outlook for the
equity markets, we also believe that a significant market correction is
possible and that such a correction would be a healthy near-term event.
Currently, equity investors seem to be primarily focused on interest rates,
which have been relatively stable for several months as inflation has remained
low. In an environment of low interest rates, stocks become more attractive than
most fixed-income investments, while low inflation helps control companies'
costs, such as for raw materials, wages, and benefits. The near- term outlook
for a continuation of this environment appears relatively favorable. However,
this year has seen a marked slowdown in corporate earnings. This means that as
equity prices continue to rise, price-to-earnings (P/E) ratios, or the amount an
investor pays for a stock in relation to the company's earnings per share, also
go up. A year ago, the average P/E ratio for stocks in the unmanaged Standard &
Poor's 500 Composite Index stood at approximately 22; this summer, the average
P/E ratio was 32% higher, at about 29. In some cases, such as with some of the
newer companies associated with the Internet, P/E ratios have soared to levels
that are unlikely to be sustained.
As long as interest rates remain low and the economy continues to grow, it is
possible that some of these valuations can be supported. We expect corporate
earnings to grow 4% to 6% this year. However, just as no one can predict market
cycles, so too no one can predict economic cycles -- except to say that these
cycles do exist and that an economic slowdown at some point is inevitable.
Given this reality, we believe it is prudent to remind investors of the need
to take a long-term view and to diversify their investments across a range of
asset classes. This includes portfolios that focus on bonds and international
investments as well as on the U.S. stock market. The likelihood of an eventual
market correction also makes it important for us to use original, bottom-up
research to find companies that we think can keep growing or gain market share
in the face of the occasional downturn. To help achieve this, and to provide
the broadest possible coverage of industry sectors and individual companies,
MFS continues to increase its number of full-time research analysts. These
analysts thoroughly investigate each company's earnings potential and position
in its industry as well as the overall prospects for that industry.
MFS also uses active portfolio management on the fixed-income side, taking
advantage of our extensive research and credit analysis to help reduce the
potential for price declines and enhance the opportunity for appreciation.
Every year, both fixed-income and equity managers meet with thousands of
credit issuers and companies. They also attend many presentations, closely
follow sources of industry research, and keep track of competitors.
We believe that applying this discipline of thorough, bottom-up research to
both the equity and fixed-income markets is the best way to provide favorable
long-term performance for our shareholders -- regardless of changes in the
overall market environment.
We appreciate your support and welcome any questions or comments you may have.
Respectfully,
/s/ Jeffrey L. Shames
Jeffrey L. Shames
Chairman and Chief Executive Officer
MFS(R) Investment Management(SM)
July 13, 1998
<PAGE>
MANAGEMENT REVIEW AND OUTLOOK
Dear Contract Owners:
For the six months ended June 30, 1998, the Series provided a total return of
8.68% (including the reinvestment of any distributions). This compares to a
17.71% return for the Standard & Poor's 500 Composite Index (the S&P 500), a
popular, unmanaged index of common stock total return performance, and to a
4.11% 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 domestic corporate debt.
Given what we view as high valuations in the stock market, the Series has
maintained a fairly conservative weighting in equities. Currently,
approximately 59% of assets are invested in common stocks, convertibles, and
preferred securities, which is below that of the balanced-fund peer group.
In stocks, the Series' largest sector weighting is financial services, an
industry in which valuations are attractive and earnings growth is higher than
that of the average company. Earnings growth rates for these companies are in
the double digits, and their yields are good. Also, consolidation has made
this sector more attractive as these companies are able to cut costs. Holdings
include National City and PNC in banking and Lincoln National in insurance.
Another large sector is utilities and communications, in which we see some
attractive opportunities. On the electric side, we think growth is modest but
valuations are attractive compared to the S&P 500. This is the case in
telecommunications, but there is also ongoing consolidation and growth, both
of which we think could enhance capital appreciation.
We continue to shy away from the technology sector. Given our objective to
provide consistent returns with low volatility, we have not seen much
opportunity within this sector.
As the year progresses, we believe it will become more difficult to make money
in the equity markets because prices continue to rise while corporate earnings
are slowing.
Based on our outlook for interest rates remaining low, the duration, or
sensitivity to changes in interest rates, of the Series' bond allocation is
slightly longer than that of the Lehman Index. Most of this allocation is in
the corporate sector because we believe that as long as the economy remains
sound and inflation remains low, corporate bonds should continue to perform
well. About 20% of this allocation is in high-yield corporates. Healthy
economic growth has contributed to the high-yield market's performance as more
companies have posted improved operating results and have had little trouble
making their debt payments. The biggest high-yield sector is media and
entertainment and includes Time Warner, News Corp., and Telecommunications,
Inc. This industry continues to benefit from consolidation and cost cutting
resulting from the 1996 Telecommunications Act.
Respectfully,
/s/ David M. Calabro
David M. Calabro
(On behalf of the MFS Total Return Series team)
The opinions expressed in this report are those of the portfolio managers and
are only through the end of the period of the report as stated on the cover.
The managers' views are subject to change at any time based on market and
other conditions, and no forecasts can be guaranteed.
<PAGE>
PORTFOLIO MANAGERS' PROFILES
David M. Calabro, Senior Vice President; Geoffrey L. Kurinsky, Senior Vice
President; Constantinos Mokas, Vice President; Lisa B. Nurme, Senior Vice
President; and Maura A. Shaughnessy, Senior Vice President, are the Series'
portfolio managers. Mr. Calabro is the head of this portfolio management team
and a manager of the common stock portion of the Series' portfolio. Mr.
Calabro has been employed by MFS since 1992. Mr. Kurinsky, the manager of the
Series' fixed-income securities, has been employed by MFS since 1987. Mr.
Mokas replaced Judith Lamb as the manager of the Series' convertible
securities on April 1, 1998, and has been employed by MFS since 1990. Ms.
Nurme, a manager of the common stock portion of the Series' portfolio, has
been employed by MFS since 1987. Ms. Shaughnessy, also a manager of the common
stock portion of the Series' portfolio, has been employed by MFS since 1991.
SERIES FACTS
Objective: Primarily seeks above-average income (compared to a
portfolio invested entirely in equity securities)
consistent with the prudent employment of capital, and
secondarily seeks a reasonable opportunity for growth
of capital and income.
Commencement of
investment operations: January 3, 1995
Size: $123.3 million net assets as of June 30, 1998
PERFORMANCE SUMMARY
Because the Series is 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.
AVERAGE ANNUAL AND CUMULATIVE TOTAL RATES OF RETURN THROUGH JUNE 30, 1998
<TABLE>
<CAPTION>
6 Months 1 Year 3 Years 10 Years/Life*
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return +8.68% +18.36% +69.45% +92.11%
- -----------------------------------------------------------------------------------------------------------------------------
Average Annual Total Return -- +18.36% +19.22% +20.57%
- -----------------------------------------------------------------------------------------------------------------------------
* For the period from the commencement of the Series' investment operations, January 3, 1995, through June 30, 1998.
</TABLE>
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.
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 for the product being offered. Please
read it carefully before investing or sending money.
<PAGE>
PORTFOLIO OF INVESTMENTS (Unaudited) - June 30, 1998
<TABLE>
Stocks - 57.9%
<CAPTION>
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Issuer Shares Value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Stocks - 49.5%
Aerospace - 3.4%
Allied Signal, Inc. 32,100 $ 1,424,437
General Dynamics Corp. 14,000 651,000
Goodrich (B.F.) Co. 8,450 419,331
Lockheed-Martin Corp. 6,300 667,013
Raytheon Co., "A" 4,779 275,390
Raytheon Co., "B" 9,550 564,644
United Technologies Corp. 1,480 136,900
------------
$ 4,138,715
- --------------------------------------------------------------------------------------------------------
Automotive - 1.2%
Ford Motor Co. 7,400 $ 436,600
TRW, Inc. 18,600 1,016,025
------------
$ 1,452,625
- --------------------------------------------------------------------------------------------------------
Banks and Credit Companies - 4.2%
Bank of New York, Inc. 12,560 $ 762,235
Fleet Financial Group, Inc. 2,650 221,275
National City Corp. 20,600 1,462,600
NationsBank Corp. 8,080 618,120
Northern Trust Corp. 5,500 419,375
Norwest Corp. 15,000 560,625
PNC Bank Corp. 22,100 1,189,256
------------
$ 5,233,486
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Business Machines - 1.2%
International Business Machines Corp. 12,520 $ 1,437,452
- --------------------------------------------------------------------------------------------------------
Cellular Telephones - 0.1%
Telephone & Data Systems, Inc. 4,500 $ 177,188
- --------------------------------------------------------------------------------------------------------
Chemicals - 0.5%
Air Products & Chemicals, Inc. 12,200 $ 488,000
Dow Chemical Co. 980 94,754
------------
$ 582,754
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Computer Software - Personal Computers
Compaq Computer Corp. 1,512 $ 42,903
- --------------------------------------------------------------------------------------------------------
Conglomerates
Eastern Enterprises 1,400 $ 60,025
- --------------------------------------------------------------------------------------------------------
Consumer Goods and Services - 2.0%
Colgate-Palmolive Co. 1,000 $ 88,000
Kimberly-Clark Corp. 8,200 376,175
Philip Morris Cos., Inc. 19,630 772,931
Rubbermaid, Inc. 13,110 435,088
Service Corp. International 7,657 328,294
Tyco International Ltd. 7,000 441,000
------------
$ 2,441,488
- --------------------------------------------------------------------------------------------------------
Electrical Equipment - 2.2%
Cooper Industries, Inc. 10,900 $ 598,819
General Electric Co. 17,800 1,619,800
Hubbell, Inc. 11,500 478,687
------------
$ 2,697,306
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Electronics - 0.1%
Analog Devices, Inc.* 6,000 $ 147,375
- --------------------------------------------------------------------------------------------------------
Entertainment - 0.8%
Viacom, Inc., "B"* 16,100 $ 937,825
- --------------------------------------------------------------------------------------------------------
Financial Institutions - 2.9%
American Express Co. 3,490 $ 397,860
Associates First Capital Corp., "A" 5,373 413,049
Beneficial Corp. 1,200 183,825
Edwards (A.G.), Inc. 7,950 339,366
Federal Home Loan Mortgage Corp. 14,340 674,876
Federal National Mortgage Assn 6,300 382,725
Federated Investors, Inc., "A"* 700 12,950
First Union Corp. 7,282 424,176
Morgan (J.P.) & Co. 2,900 339,663
Morgan Stanley, Dean Witter & Co. 4,300 392,913
------------
$ 3,561,403
- --------------------------------------------------------------------------------------------------------
Food and Beverage Products - 1.1%
Archer-Daniels-Midland Co. 38,200 $ 740,125
General Mills, Inc. 5,150 352,131
McCormick & Co., Inc. 7,500 267,891
------------
$ 1,360,147
- --------------------------------------------------------------------------------------------------------
Forest and Paper Products - 1.1%
Champion International Corp. 12,800 $ 629,600
Weyerhaeuser Co. 16,200 748,238
------------
$ 1,377,838
- --------------------------------------------------------------------------------------------------------
Insurance - 6.0%
Chubb Corp. 16,100 $ 1,294,037
CIGNA Corp. 13,700 945,300
Equitable Cos., Inc. 11,200 839,300
Jefferson Pilot Corp. 11,600 672,075
Lincoln National Corp. 15,600 1,425,450
Provident Cos., Inc. 13,200 455,400
Torchmark Corp. 21,400 979,050
Transamerica Corp. 6,800 782,850
------------
$ 7,393,462
- --------------------------------------------------------------------------------------------------------
Machinery - 0.4%
Deere & Co., Inc. 3,150 $ 166,556
Lear Corp.* 5,100 261,694
York International Corp. 780 33,979
------------
$ 462,229
- --------------------------------------------------------------------------------------------------------
Medical and Health Products - 2.8%
American Home Products Corp. 20,560 $ 1,063,980
Baxter International, Inc. 2,480 133,455
Bristol-Myers Squibb Co. 19,300 2,218,294
------------
$ 3,415,729
- --------------------------------------------------------------------------------------------------------
Medical and Health Technology and Services - 1.0%
Columbia/HCA Healthcare Corp. 27,100 $ 789,288
United Healthcare Corp. 7,000 444,500
------------
$ 1,233,788
- --------------------------------------------------------------------------------------------------------
Metals and Minerals - 0.4%
Aluminum Cos. of America 7,750 $ 511,016
- --------------------------------------------------------------------------------------------------------
Oil Services - 0.3%
Baker Hughes, Inc. 5,100 $ 176,269
Schlumberger Ltd. 3,400 232,262
------------
$ 408,531
- --------------------------------------------------------------------------------------------------------
Oils - 3.9%
Amoco Corp. 7,780 $ 323,843
Atlantic Richfield Co. 8,620 673,437
Exxon Corp. 10,400 741,650
Mobil Corp. 4,160 318,760
Occidental Petroleum Corp. 14,000 378,000
Texaco, Inc. 17,200 1,026,625
Unocal Corp. 14,100 504,075
USX-Marathon Group 23,400 802,912
------------
$ 4,769,302
- --------------------------------------------------------------------------------------------------------
Photographic Products - 0.2%
Eastman Kodak Co. 3,430 $ 250,604
- --------------------------------------------------------------------------------------------------------
Pollution Control - 0.5%
Browning Ferris Industries, Inc. 19,000 $ 660,250
- --------------------------------------------------------------------------------------------------------
Railroads - 0.3%
Norfolk Southern Corp. 10,300 $ 307,069
- --------------------------------------------------------------------------------------------------------
Real Estate Investment Trusts - 1.0%
Arden Realty, Inc. 8,100 $ 209,588
Boston Properties, Inc. 6,400 220,800
Hospitality Properties Trust 7,400 237,725
Prime Group Realty Trust 10,400 178,100
TriNet Corporate Realty Trust, Inc. 9,600 326,400
------------
$ 1,172,613
- --------------------------------------------------------------------------------------------------------
Stores - 2.4%
Penney (J.C.), Inc. 12,000 $ 867,750
Rite Aid Corp. 32,600 1,224,537
Sears, Roebuck & Co. 15,700 958,681
------------
$ 3,050,968
- --------------------------------------------------------------------------------------------------------
Supermarkets - 0.6%
Meyer (Fred), Inc.* 6,600 $ 280,500
Safeway, Inc.* 11,600 471,975
------------
$ 752,475
- --------------------------------------------------------------------------------------------------------
Telecommunications - 0.7%
Sprint Corp. 13,100 $ 923,550
- --------------------------------------------------------------------------------------------------------
Utilities - Electric - 3.2%
Carolina Power & Light Co. 19,500 $ 845,812
Cinergy Corp. 12,700 444,500
CMS Energy Corp., "G" 7,500 330,000
FPL Group, Inc. 2,700 170,100
GPU, Inc. 7,700 291,156
New Century Energies, Inc. 9,900 449,831
Pacificorp 14,500 328,063
Pinnacle West Capital Corp. 10,300 463,500
Southern Co. 23,400 647,888
------------
$ 3,970,850
- --------------------------------------------------------------------------------------------------------
Utilities - Gas - 2.1%
Coastal Corp. 17,630 $ 1,230,794
Columbia Gas System, Inc. 10,200 567,375
Marketspan Corp.* 13,000 389,187
UGI Corp. 10,900 271,138
Williams Cos., Inc. 2,500 84,375
------------
$ 2,542,869
- --------------------------------------------------------------------------------------------------------
Utilities - Telephone - 2.9%
AT&T Corp. 13,200 $ 754,050
Bell Atlantic Corp. 11,600 529,250
BellSouth Corp. 1,900 127,537
GTE Corp. 24,950 1,387,844
SBC Communications, Inc. 20,544 821,760
------------
$ 3,620,441
- --------------------------------------------------------------------------------------------------------
Total U.S. Stocks $ 61,094,276
- --------------------------------------------------------------------------------------------------------
Foreign Stocks - 8.4%
Canada - 0.3%
Canadian National Railway Co. (Railroads) 6,600 $ 350,625
- --------------------------------------------------------------------------------------------------------
France - 0.4%
Alcatel Alsthom Compagnie, ADR (Telecommunications) 10,800 $ 439,425
- --------------------------------------------------------------------------------------------------------
Germany - 1.2%
Henkel KGaA (Chemicals) 10,900 $ 1,077,027
Hoechst AG (Chemicals) 8,000 401,882
------------
$ 1,478,909
- --------------------------------------------------------------------------------------------------------
Netherlands - 2.4%
AKZO Nobel N.V. (Chemicals) 6,300 $ 1,398,900
ING Groep N.V. (Financial Services)* 16,728 1,094,117
Royal Dutch Petroleum Co., ADR (Oils) 9,380 514,141
------------
$ 3,007,158
- --------------------------------------------------------------------------------------------------------
Sweden - 0.6%
Volvo AB, ADR (Automotive) 27,000 $ 798,187
- --------------------------------------------------------------------------------------------------------
Switzerland - 0.6%
Nestle AG, Registered Shares (Food and Beverage Products) 370 $ 792,230
- --------------------------------------------------------------------------------------------------------
United Kingdom - 2.9%
British Petroleum PLC, ADR (Oils) 25,696 $ 2,267,672
Diageo PLC (Food and Beverage Products) 16,971 200,985
Glaxo Wellcome PLC, ADR (Medical and Health Products) 11,700 699,806
SmithKline-Beecham PLC, ADR (Medical and Health Products) 5,760 348,480
------------
$ 3,516,943
- --------------------------------------------------------------------------------------------------------
Total Foreign Stocks $ 10,383,477
- --------------------------------------------------------------------------------------------------------
Total Stocks (Identified Cost, $63,191,461) $ 71,477,753
- --------------------------------------------------------------------------------------------------------
Bonds - 34.2%
- --------------------------------------------------------------------------------------------------------
Principal Amount
(000 Omitted)
- --------------------------------------------------------------------------------------------------------
U.S. Bonds - 33.9%
Aerospace - 0.6%
B E Aerospace, 8s, 2008 $ 250 $ 249,375
K & F Industries, Inc., 9.25s, 2007 260 262,600
Northrup Grumman Corp., 9.375s, 2024 20 24,475
Stellex Industries, Inc., 9.5s, 2007 150 147,375
------------
$ 683,825
- --------------------------------------------------------------------------------------------------------
Airlines - 0.3%
Continental Airlines, Inc., 9.5s, 2001 $ 150 $ 159,563
Northwest Airlines, Inc., 7.625s, 2005 132 132,516
Northwest Airlines, Inc., 8.7s, 2007 55 57,738
------------
$ 349,817
- --------------------------------------------------------------------------------------------------------
Apparel and Textiles
Burlington Industries, Inc., 7.25s, 2027 $ 20 $ 20,633
- --------------------------------------------------------------------------------------------------------
Automotive - 0.3%
Federal Mogul Corp., 7.5s, 2004 $ 140 $ 139,718
Federal Mogul Corp., 7.75s, 2006 45 44,984
Ford Motor Co., 8.9s, 2032 20 25,594
Ford Motor Credit Co., 6.125s, 2003 110 110,008
------------
$ 320,304
- --------------------------------------------------------------------------------------------------------
Banks and Credit Companies - 0.8%
Beaver Valley Funding Corp., 9s, 2017 $ 300 $ 343,065
Capital One Financial Corp., 7.25s, 2003 50 50,625
MBNA Capital, 8.278s, 2026 270 292,737
Riggs National Corp., 8.5s, 2006 20 20,944
Washington Mutual Capital I, 8.375s, 2027 210 236,901
------------
$ 944,272
- --------------------------------------------------------------------------------------------------------
Building - 0.2%
American Standard, Inc., 7.625s, 2010 $ 36 $ 35,280
McDermott, Inc., 9.375s, 2002 140 149,906
Nortek, Inc., 9.25s, 2007 50 51,000
Williams Scotsman, Inc., 9.875s, 2007 50 52,000
------------
$ 288,186
- --------------------------------------------------------------------------------------------------------
Business Machines - 0.2%
Xerox Corp., 0s, 2018 $ 460 $ 262,200
- --------------------------------------------------------------------------------------------------------
Cellular Telephones - 0.1%
Airtouch Communications, Inc., 6.65s, 2008 $ 140 $ 141,082
- --------------------------------------------------------------------------------------------------------
Conglomerates - 0.6%
News America Holdings, Inc., 6.625s, 2008 $ 95 $ 94,859
News America Holdings, Inc., 7.75s, 2045 10 10,732
News America Holdings, Inc., 8s, 2016 20 22,035
News America Holdings, Inc., 8.875s, 2023 500 595,720
------------
$ 723,346
- --------------------------------------------------------------------------------------------------------
Construction Services - 0.5%
Georgia Pacific Corp., 9.5s, 2022 $ 500 $ 583,065
- --------------------------------------------------------------------------------------------------------
Consumer Goods and Services - 0.3%
Hilfiger (Tommy) USA, Inc., 6.5s, 2003 $ 105 $ 104,908
Hilfiger (Tommy) USA, Inc., 6.85s, 2008 80 79,917
Kindercare Learning Centers, Inc., 9.5s, 2009 150 150,750
------------
$ 335,575
- --------------------------------------------------------------------------------------------------------
Corporate Asset Backed - 0.4%
Beneficial Home Equity Loan Trust, 5.768s, 2037 $ 370 $ 369,655
Continental Airlines, Inc., 9.5s, 2013 24 28,100
Continental Airlines Pass-Through Trust, 6.648s, 2017 20 20,408
Criimi Mae Commercial Mortgage Trust, 7s, 2011+ 100 98,031
United Airlines Pass-Through Trust, 7.27s, 2013+ 19 20,223
------------
$ 536,417
- --------------------------------------------------------------------------------------------------------
Electrical Equipment
Honeywell, Inc., 6.625s, 2028 $ 50 $ 50,632
- --------------------------------------------------------------------------------------------------------
Entertainment - 2.2%
Circus Circus Enterprises, Inc., 7s, 2036 $ 40 $ 38,727
Hearst Argyle Television, Inc., 7.5s, 2027 1,099 1,170,699
Time Warner, Inc., 0s to 2016, 8.3s to 2036 374 121,688
Time Warner, Inc., 9.125s, 2013 79 96,147
Time Warner, Inc., 9.15s, 2023 709 893,879
Time Warner Pass-Through Asset Trust, 6.1s, 2001## 320 318,438
Viacom, Inc., 6.75s, 2003 65 65,650
------------
$ 2,705,228
- --------------------------------------------------------------------------------------------------------
Financial Institutions - 1.9%
Bear Stearns Cos., Inc., 6.2s, 2003 $ 110 $ 110,235
Capital One Bank, 6.7s, 2008 70 70,739
Donaldson, Lufkin & Jenrette, 6.5s, 2008 80 79,994
First Empire Capital Trust I, 8.234s, 2027 20 21,912
Goldman Sachs Group LP, 5.9s, 2003 1,300 1,282,840
Lehman Brothers, Inc., 6.5s, 2008 70 70,363
Lehman Brothers, Inc., 7.5s, 2026 4 4,461
Natexis Ambs Co. LLC, 8.44s, 2049 190 189,354
Paine Webber Group, Inc., 6.55s, 2008 50 49,667
Riggs Capital II, 8.875s, 2027 111 123,626
Salton Sea Funding Corp., 7.84s, 2010 325 353,733
------------
$ 2,356,924
- --------------------------------------------------------------------------------------------------------
Financial Services - 0.3%
Contifinancial Corp., 7.5s, 2002 $ 418 $ 416,077
- --------------------------------------------------------------------------------------------------------
Food Products - 0.1%
Nabisco, Inc., 6.375s, 2035 $ 70 $ 69,550
- --------------------------------------------------------------------------------------------------------
Forest and Paper Products - 0.3%
Boise Cascade Co., 7.43s, 2005 $ 50 $ 51,193
Georgia Pacific Corp., 7.25s, 2028 95 96,892
U.S. Timberlands, 9.625s, 2007 30 30,375
Waterford 3 Funding Corp., 8.09s, 2017 190 196,943
------------
$ 375,403
- --------------------------------------------------------------------------------------------------------
Industrial - 1.1%
Interace, Inc., 7.3s, 2008 $ 300 $ 302,817
Owens Illinois, Inc., 7.5s, 2010 1,000 1,013,970
------------
$ 1,316,787
- --------------------------------------------------------------------------------------------------------
Insurance - 0.4%
Atlantic Mutual Insurance Co., 8.15s, 2028 $ 221 $ 228,425
Conseco, Inc., 6.4s, 2001 160 159,898
Fairfax Financial Holdings Limited, 7.375s, 2018 95 97,453
Nationwide Mutual Life Insurance Co., 7.5s, 2024## 25 25,919
Safeco Capital Trust I, 8.072s, 2037 40 42,744
Travelers Capital III, 7.75s, 2036 20 20,958
------------
$ 575,397
- --------------------------------------------------------------------------------------------------------
Media - 0.1%
Frontiervision Operating Partnership LP, 11s, 2006 $ 50 $ 55,375
Outdoor Systems, Inc., 8.875s, 2007 30 31,238
------------
$ 86,613
- --------------------------------------------------------------------------------------------------------
Medical and Health Products
Tenet Healthcare Corp., 7.625s, 2008## $ 20 $ 20,225
- --------------------------------------------------------------------------------------------------------
Medical and Health Technology and Services - 0.3%
Columbia/HCA Healthcare Corp., 6.875s, 2001 $ 40 $ 39,222
Columbia/HCA Healthcare Corp., 6.91s, 2005 70 67,989
Columbia/HCA Healthcare Corp., 7.69s, 2025 275 265,702
HealthSouth Corp., 6.875s, 2005 20 20,007
------------
$ 392,920
- --------------------------------------------------------------------------------------------------------
Metal Fabrication - 0.2%
Metals USA, Inc., 8.625s, 2008 $ 260 $ 252,200
- --------------------------------------------------------------------------------------------------------
Metals and Minerals - 0.2%
Kaiser Aluminum & Chemical Corp., 10.875s, 2006 $ 200 $ 215,000
- --------------------------------------------------------------------------------------------------------
Oil Services - 0.1%
Clark Refining & Marketing, Inc., 8.375s, 2007 $ 20 $ 20,100
Kcs Energy, 8.875s, 2008 20 19,000
Ultramar Diamond Shamrock Corp., 7.2s, 2017 20 20,797
Vintage Petroleum, Inc., 8.625s, 2009 20 20,200
------------
$ 80,097
- --------------------------------------------------------------------------------------------------------
Oils - 1.8%
Belco Oil & Gas Corp., 8.875s, 2007 $ 20 $ 19,300
Cliffs Drilling Co., 10.25s, 2003 20 21,400
Lasmo USA, Inc., 7.3s, 2027 79 78,764
Oryx Energy Co., 8.375s, 2004 350 377,346
Petroleum Geo Services, 7.125s, 2028 160 161,926
Sun Co., Inc., 9s, 2024 1,200 1,490,868
Synder Oil Corp., 8.75s, 2007 10 10,050
Transocean Offshore, Inc., 8s, 2027 40 45,389
Wiser Oil Co., 9.5s, 2007 20 18,800
------------
$ 2,223,843
- --------------------------------------------------------------------------------------------------------
Special Products and Services
Polymer Group, Inc., 9s, 2007 $ 30 $ 30,525
- --------------------------------------------------------------------------------------------------------
Supermarkets
Marsh Supermarkets, Inc., 8.875s, 2007 $ 30 $ 30,600
- --------------------------------------------------------------------------------------------------------
Telecommunications - 1.1%
Allbritton Communications Co., 8.875s, 2008 $ 50 $ 54,000
Century Communications Corp., 0s, 2008 500 226,875
Chancellor Media Corp., 8.75s, 2007 30 31,275
Continental Cablevision, Inc., 11s, 2007 270 294,783
Intermedia Communications, Inc., 0s to 2002, 11.25s to 2007 50 36,500
Level 3 Commerce, Inc., 9.125s, 2008## 50 48,625
Nextel Communications, Inc., 0s to 1999, 9.75s to 2004 150 145,875
Pagemart Wireless, Inc., 0s to 2003, 11.25s to 2008 50 30,000
TCI Communications Financing III, 9.65s, 2027 20 24,499
TCI Communications, Inc., 6.375s, 2003 90 90,662
TCI Communications, Inc., 8s, 2005 60 65,514
Tele-Communications, Inc., 6.34s, 2002 150 149,446
Turner Broadcasting Systems, Inc., 8.375s, 2013 5 5,731
Western Wireless Corp., 10.5s, 2007 150 161,250
WorldCom, Inc., 8.875s, 2006 20 21,758
------------
$ 1,386,793
- --------------------------------------------------------------------------------------------------------
Transportation - 0.2%
Federal Express Corp., 7.65s, 2014 $ 246 $ 267,001
- --------------------------------------------------------------------------------------------------------
U.S. Federal Agencies - 1.1%
Federal National Mortgage Association - 1.1%
FNMA, 6.5s, 2013 $ 1,364 $ 1,371,908
- --------------------------------------------------------------------------------------------------------
U.S. Government Guaranteed - 13.6%
Government National Mortgage Association - 2.2%
GNMA, 7s, 2028 $ 354 $ 360,003
GNMA, 7.5s, 2026 - 2027 1,150 1,181,971
GNMA, 8s, 2025 - 2027 1,127 1,167,190
------------
$ 2,709,164
- --------------------------------------------------------------------------------------------------------
U.S. Treasury Obligations - 11.4%
U.S. Treasury Bonds, 6.125s, 2027 $ 606 $ 649,365
U.S. Treasury Bonds, 9.875s, 2015 30 43,697
U.S. Treasury Notes, 5.5s, 2003 2,625 2,622,952
U.S. Treasury Notes, 5.625s, 2008 592 600,045
U.S. Treasury Notes, 5.75s, 2000 2,000 2,009,844
U.S. Treasury Notes, 6.25s, 2002 2,900 2,975,661
U.S. Treasury Notes, 6.5s, 2006 1,479 1,570,506
U.S. Treasury Notes, 6.625s, 2002 205 212,335
U.S. Treasury Notes, 7s, 2006 30 65,522
U.S. Treasury Notes, 7.5s, 2001 300 317,766
U.S. Treasury Notes, 7.875s, 2004 940 1,055,733
U.S. Treasury Notes, 8.5s, 2000 1,145 1,197,063
U.S. Treasury Notes, 9.125s, 1999 715 736,672
------------
$ 14,057,161
- --------------------------------------------------------------------------------------------------------
Total U.S. Government Guaranteed $ 16,766,325
- --------------------------------------------------------------------------------------------------------
Utilities - Electric - 2.5%
Cleveland Electric Illuminating Co., 7.43s, 2009 $ 119 $ 123,917
Cleveland Electric Illuminating Co., 7.88s, 2017 120 130,981
Commonwealth Edison Co., 7.625s, 2007 20 21,261
Connecticut Light & Power Co., 7.875s, 2024 70 71,421
Connecticut Light & Power Co., 8.59s, 2003 400 404,500
First PV Funding Corp., 10.3s, 2014 47 50,081
GGIB Funding Corp., 7.43s, 2011 377 379,109
Long Island Lighting Co., 8.2s, 2023 800 894,016
Long Island Lighting Co., 9s, 2022 40 45,624
Midland Cogeneration Venture Corp., 10.33s, 2002 43 46,164
Niagara Mohawk Power Corp., 7.75s, 2006 110 117,687
Niagara Mohawk Power Corp., 8.5s, 2023 50 55,327
Niagara Mohawk Power Corp., 8.75s, 2022 60 65,996
Niagara Mohawk Power Corp., 8.77s, 2018 128 136,957
Texas & New Mexico Power Co., 12.5s, 1999 20 20,603
Texas Utilities Co., 6.375s, 2008 60 58,797
Toledo Edison Co., 7.875s, 2004 400 421,544
United Illuminating Co., 6.25s, 2002 20 19,863
------------
$ 3,063,848
- --------------------------------------------------------------------------------------------------------
Utilities - Gas - 2.1%
Coastal Corp., 6.95s, 2028 $ 610 $ 589,303
Coastal Corp., 7.42s, 2037 810 846,847
Consumers Energy Co., 6.375s, 2008 58 57,096
Tennessee Gas Pipeline Co., 7.625s, 2037 400 432,948
Texas Gas Transmission Corp., 7.25s, 2027 600 624,330
------------
$ 2,550,524
- --------------------------------------------------------------------------------------------------------
Total U.S. Bonds $ 41,793,142
- --------------------------------------------------------------------------------------------------------
Foreign Bonds - 0.3%
Argentina - 0.2%
Hidroelectrica Alicura, 8.375s, 1999 (Utilities - Electric)## $ 200 $ 199,000
- --------------------------------------------------------------------------------------------------------
Chile
Empresa Nacional de Electric, 7.325s, 2037 (Utilities - Electric) $ 20 $ 19,541
- --------------------------------------------------------------------------------------------------------
Finland
Upm Kymmene Corp., 7.45s, 2027 (Forest and Paper Products) $ 20 $ 21,182
- --------------------------------------------------------------------------------------------------------
Mexico - 0.1%
Banco Commercial S.A., 8.25s, 2007 (Banks and Credit Cos.) $ 100 $ 98,720
Corporacion Andina de Fomento, 7.1s, 2003 (Banks and Credit Cos.) 50 51,270
------------
$ 149,990
- --------------------------------------------------------------------------------------------------------
Panama
Republic of Panama, 8.25s, 2008 (Government) $ 40 $ 39,000
- --------------------------------------------------------------------------------------------------------
Total Foreign Bonds $ 428,713
- --------------------------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $41,736,156) $ 42,221,855
- --------------------------------------------------------------------------------------------------------
Preferred Stock - 0.1%
- --------------------------------------------------------------------------------------------------------
Shares
- --------------------------------------------------------------------------------------------------------
Banks and Credit Companies - 0.1%
NB Capital Corp., 8.3%* (Identified Cost, $100,000) 100 $ 108,100
- --------------------------------------------------------------------------------------------------------
Convertible Preferred Stock - 0.8%
- --------------------------------------------------------------------------------------------------------
Banks and Credit Companies - 0.2%
McKesson Financing Trust, 5%*## 2,330 $ 261,688
- --------------------------------------------------------------------------------------------------------
Consumer Goods and Services - 0.6%
Newell Financial Trust Co., 5.25% (Industrial)* 11,500 $ 664,125
- --------------------------------------------------------------------------------------------------------
Total Convertible Preferred Stock (Identified Cost, $759,821) $ 925,813
- --------------------------------------------------------------------------------------------------------
Convertible Bond - 0.1%
- --------------------------------------------------------------------------------------------------------
Principal Amount
(000 Omitted)
- --------------------------------------------------------------------------------------------------------
Germany - 0.1%
Daimler Benz, 0s, 2017 (Automotive) (Identified Cost, $106,900) $ 220 $ 121,550
- --------------------------------------------------------------------------------------------------------
Rights - 0.4%
- --------------------------------------------------------------------------------------------------------
CVS Automatic Common Exchange Security* (Identified
Cost, $409,607) $ 5,800 $ 442,613
- --------------------------------------------------------------------------------------------------------
Short-Term Obligations - 8.7%
- --------------------------------------------------------------------------------------------------------
Federal Farm Credit Bank, due 7/06/98 $ 2,000 $ 1,998,472
Federal Home Loan Bank, due 7/01/98 4,700 4,700,000
Federal Home Loan Mortgage Corp., due 7/27/98 2,000 1,992,099
Federal National Mortgage Assn., due 7/17/98 2,000 1,995,143
- --------------------------------------------------------------------------------------------------------
Total Short-Term Obligations, at Amortized Cost $ 10,685,714
- --------------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $116,989,659) $125,983,398
Other Assets, Less Liabilities - (2.2)% (2,670,127)
- --------------------------------------------------------------------------------------------------------
Net Assets - 100.0% $123,313,271
- --------------------------------------------------------------------------------------------------------
* Non-income producing security.
## SEC Rule 144A restriction.
+ Restricted security.
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities (Unaudited)
- --------------------------------------------------------------------------------
June 30, 1998
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $116,989,659) $125,983,398
Cash 40,668
Receivable for Series shares sold 983,674
Receivable for investments sold 70,515
Interest and dividends receivable 794,412
Deferred organization expenses 2,787
------------
Total assets $127,875,454
------------
Liabilities:
Payable for Series shares reacquired $ 25,939
Payable for investments purchased 4,524,881
Payable to affiliates -
Management fee 7,554
Shareholder servicing agent fee 318
Administrative fee 150
Accrued expenses and other liabilities 3,341
------------
Total liabilities $ 4,562,183
------------
Net assets $123,313,271
============
Net assets consist of:
Paid-in capital $109,463,971
Unrealized appreciation on investments and translation of
assets and liabilities in foreign currencies 8,993,601
Accumulated undistributed net realized gain on investment
and foreign currency transactions 3,340,488
Accumulated undistributed net investment income 1,515,211
------------
Total $123,313,271
============
Shares of beneficial interest outstanding 7,036,363
=========
Net asset value per share
(net assets / shares of beneficial interest outstanding) $17.53
======
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations (Unaudited)
- -------------------------------------------------------------------------------
Six Months Ended June 30, 1998
- -------------------------------------------------------------------------------
Net investment income:
Income -
Interest $1,394,218
Dividends 638,955
Foreign tax withheld (10,024)
----------
Total investment income $2,023,149
----------
Expenses -
Management fee $ 366,440
Trustees' compensation 1,017
Shareholder servicing agent fee 17,070
Administrative fee 7,347
Printing 31,553
Auditing fees 22,500
Custodian fee 18,602
Amortization of organization expenses 911
Miscellaneous 2,907
----------
Total expenses $ 468,347
Fees paid indirectly (2,227)
Preliminary reimbursement of expense to investment adviser 22,480
----------
Net expenses $ 488,600
----------
Net investment income $1,534,549
----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $3,367,967
Foreign currency transactions (1,257)
----------
Net realized gain on investment and foreign currency
transactions $3,366,710
----------
Change in unrealized appreciation (depreciation) -
Investments $2,793,144
Translation of assets and liabilities in foreign currencies (91)
----------
Net unrealized gain on investments and foreign currency
translation $2,793,053
----------
Net realized and unrealized gain on investments and
foreign currency $6,159,763
----------
Increase in net assets from operations $7,694,312
==========
See notes to financial statements
<PAGE>
<TABLE>
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
<CAPTION>
- --------------------------------------------------------------------------------------------------
Six Months Ended Year Ended
June 30, 1998 December 31, 1997
(Unaudited)
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 1,534,549 $ 1,447,106
Net realized gain on investments and foreign
currency transactions 3,366,710 1,695,568
Net unrealized gain on investments and foreign
currency translation 2,793,053 5,126,598
------------ -----------
Increase in net assets from operations $ 7,694,312 $ 8,269,272
------------ -----------
Distributions declared to shareholders -
From net investment income $ (1,465,065) $ --
From net realized gain on investments and
foreign currency transactions (1,722,619) --
------------ -----------
Total distributions declared to shareholders $ (3,187,684) $ --
------------ -----------
Net increase in net assets from Series share
transactions $ 43,194,513 $48,093,086
------------ -----------
Total increase in net assets $ 47,701,141 $56,362,358
Net assets:
At beginning of period 75,612,130 19,249,772
------------ -----------
At end of period (including accumulated
undistributed net investment income of
$1,515,211 and $1,445,727, respectively) $123,313,271 $75,612,130
============ ===========
</TABLE>
See notes to financial statements
<PAGE>
<TABLE>
FINANCIAL STATEMENTS - continued
Financial Highlights
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended December 31,
Six Months Ended --------------------------------- Period Ended
June 30, 1998 1997 1996 December 31, 1995*
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $16.63 $13.71 $12.25 $10.00
------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.27 $ 0.52 $ 0.46 $ 0.41
Net realized and unrealized gain on
investments and foreign currency
transactions 0.90 2.40 1.30 2.32
------ ------ ------ ------
Total from investment operations $ 1.17 $ 2.92 $ 1.76 $ 2.73
------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.24) $ -- $(0.21) $(0.25)
From net realized gain on investment and
foreign currency transactions (0.03) -- (0.09) (0.23)
------ ------ ------ ------
Total distributions declared to
shareholders $(0.27) $ -- $(0.30) $(0.48)
------ ------ ------ ------
Net asset value - end of period $17.53 $16.63 $13.71 $12.25
====== ====== ====== ======
Total return 8.68%++ 21.30% 14.37% 27.34%++
Ratios (to average net assets)/Supplemental
data(S):
Expenses 1.00%+ 1.00% 1.00% 1.00%+
Net investment income 3.14%+ 3.25% 3.59% 3.83%+
Portfolio turnover 47% 93% 76% 16%
Net assets at end of period (000 omitted) $123,313 $75,612 $19,250 $2,797
* For the period from the commencement of the Series' investment operations, January 3, 1995, through December 31, 1995.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## Expenses are calculated without reduction for fees paid indirectly.
(S) Subject to reimbursement by the Series, the investment adviser voluntarily agreed to maintain the expenses of the
Series, exclusive of management fees, at not more than 0.25% of average daily net assets. To the extent actual expenses
were over/under this limitation, the net investment income per share and the ratios would have been:
Net investment income $ 0.27 $ 0.52 $ 0.32 $ 0.22
Ratios (to average net assets):
Expenses## 0.96%+ 1.02% 2.10% 2.49%+
Net investment income 3.18%+ 3.23% 2.49% 2.09%+
See notes to financial statements
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(1) Business and Organization
MFS Total Return 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(R) 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 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 each Series of the Trust are
separate accounts of insurance companies which offer variable annuity and/or
life insurance products. As of June 30, 1998, there were 35 shareholders of 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 - Equity securities listed on securities exchanges or
reported through the NASDAQ system are reported at market value using last
sale prices. Unlisted equity securities or listed equity securities for which
last sale prices are not available are reported at market value using last
quoted bid prices. Debt securities (other than short-term obligations which
mature in 60 days or less), including listed issues and forward contracts, are
valued on the basis of valuations furnished by dealers or by a pricing service
with consideration to factors such as institutional-size trading in similar
groups of securities, yield, quality, coupon rate, maturity, type of issue,
trading characteristics, and other market data, without exclusive reliance
upon exchange or over-the-counter prices. Short-term obligations, which mature
in 60 days or less, are valued at amortized cost, which approximates market
value. 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.
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. Dividends received in cash are recorded on the
ex-dividend date. Dividend and 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.
(3) Transactions with Affiliates
Investment Adviser - The Series has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.75%
of average daily net assets. 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 0.25% 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 June 30, 1998, the aggregate unreimbursed expenses owed to MFS by
the Series amounted to $99,983.
The Series pays no compensation directly to its Trustees who are officers of
the investment adviser, or to officers of the Series, all of whom receive
remuneration for their services to the Series from MFS. Certain officers and
Trustees of the Series are officers or directors of MFS, MFS Fund
Distributors, Inc. (MFD), and MFS Service Center, Inc. (MFSC).
Administrator - The Series has an administrative services agreement with MFS
to provide the Series with certain financial, legal, shareholder servicing,
compliance, and other administrative services. As a partial reimbursement for
the cost of providing these services, the Series 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 $38,661,604 $13,260,121
----------- -----------
Investments (non-U.S. government securities) $45,459,443 $29,778,410
----------- -----------
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 $116,989,659
------------
Gross unrealized appreciation $ 10,001,809
Gross unrealized depreciation (1,008,070)
------------
Net unrealized appreciation $ 8,993,739
============
(5) Shares of Beneficial Interest
The Series' Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par
value). Transactions in Series shares were as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30, 1998 Year Ended December 31, 1997
------------------------------ ----------------------------
Shares Amount Shares Amount
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 2,643,850 $45,925,789 3,451,865 $52,887,638
Shares issued to shareholders
in reinvestment of distributions 186,754 3,187,885 -- --
Shares reacquired (340,849) (5,919,161) (309,785) (4,794,552)
--------- ----------- --------- -----------
Net increase 2,489,755 $43,194,513 3,142,080 $48,093,086
========= =========== ========= ===========
</TABLE>
(6) Line of Credit
The Series and other affiliated funds participate in a $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 fund, based on its borrowings, at a
rate equal to the bank's base rate. In addition, a commitment fee, based on
the average daily unused portion of the line of credit, is allocated among the
participating funds at the end of each quarter. The commitment fee allocated
to the Series for the six-months ended June 30, 1998, was $240.
(7) 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 June 30, 1998,
the Series owned the following restricted securities (constituting 0.10% 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 such securities
be registered. The value of these securities is determined by valuations
furnished by dealers or by a pricing service, or if not available, are valued at
fair value as determined in good faith by or at the direction of the Trustees.
<TABLE>
<CAPTION>
Description Date of Acquisition Par Amount Cost Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Criimi Mae Commercial Mortgage Trust, 7s, 2011 5/6/98 100,000 $97,078 $ 98,031
United Airlines Pass-Through Trust, 7.27s, 2013 7/14/97 19,356 19,635 20,223
--------
$118,254
========
</TABLE>
<PAGE>
(C)1998 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
VTR-3 8/98 22M
