<PAGE>
[Logo] M F S(R)
INVESTMENT MANAGEMENT SEMIANNUAL REPORT
75 YEARS JUNE 30, 1999
WE INVENTED THE MUTUAL FUND(R)
[graphic omitted]
A SERIES OF MFS(R) VARIABLE INSURANCE TRUST(SM)
MFS(R) HIGH
INCOME SERIES
<PAGE>
<TABLE>
MFS(R) HIGH INCOME SERIES
A SERIES OF MFS(R) VARIABLE INSURANCE TRUST(SM)
<S> <C>
TRUSTEES INVESTMENT ADVISER
Jeffrey L. Shames* Massachusetts Financial Services Company
Chairman, Chief Executive Officer, and 500 Boylston Street
Director, MFS Investment Management(R) Boston, MA 02116-3741
Nelson J. Darling, Jr. DISTRIBUTOR
Professional trustee MFS Fund Distributors, Inc.
500 Boylston Street
William R. Gutow Boston, MA 02116-3741
Vice Chairman,
Capitol Entertainment Management Company; SHAREHOLDER SERVICE CENTER
Private investor and real estate consultant MFS Service Center, Inc.
P.O. Box 2281
CHAIRMAN AND PRESIDENT Boston, MA 02107-9906
Jeffrey L. Shames*
PORTFOLIO MANAGER For additional information,
Bernard A. Scozzafava* contact your financial adviser.
TREASURER CUSTODIAN
W. Thomas London* State Street Bank and Trust Company
ASSISTANT TREASURERS WORLD WIDE WEB
Mark E. Bradley* www.mfs.com
Ellen Moynihan*
James O. Yost*
SECRETARY
Stephen E. Cavan*
ASSISTANT SECRETARY
James R. Bordewick, Jr.*
*Affiliated with the Investment Adviser
- --------------------------------------------------------------------------------------------
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
- --------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
LETTER FROM THE CHAIRMAN
Dear Contract Owners,
It has been almost two years since financial turmoil began to rock markets in
Asia, Russia, and Latin America. Even developed markets such as Europe and the
United States were not immune. In the U.S. equity market, for example,
investors focused on a narrow group of 50 of the largest-company growth stocks
because they seemed to offer less volatility in uncertain times. Fixed-income
investors also became more concerned about risk, moving money into U.S.
Treasury securities and out of corporate and municipal bonds and mortgage-
backed securities.
The narrowness of the market was just one of three broad issues that dominated
the U.S. equity market until recently. The other two were a slowdown in
corporate earnings growth and high valuations, with stocks of many companies
selling at extremely high prices relative to their earnings.
Although these have been challenging issues, we now see signs that we feel
demonstrate each one is changing for the better. Today, we believe the markets
are presenting more opportunities for investors to diversify, for our
portfolio managers to find good values, and for us to show the benefits of
staying with our long-term objectives and strategies. Investors seem to be
regaining confidence in a wider range of companies. Stocks of some small and
mid-sized companies, as well as some large industrial companies, have begun to
perform better in the past few months than they had for the previous year or
so. These companies appear to have benefited from early signs of stability in
emerging markets and a continuation of economic growth in the United States.
U.S. companies also have produced better earnings. Corporate earnings were, on
average, relatively flat in 1998. However, we expect earnings to grow 12% to
14% this year because more companies have benefited from the strong economy
and from aggressive consolidation and cost-cutting measures they have taken
over the past several years.
Based on their earnings projections, our analysts estimate that the U.S. stock
market is still about 30% overvalued. While there has been some shift to a
wider group of stocks, many investors are still focusing on the large-company
stocks. As a result, most of the overvaluation is in the 50 largest stocks in
the Standard & Poor's 500 Composite Index (the S&P 500), a popular, unmanaged
index of common stock total return performance. That means about 450 stocks
are selling at more attractive prices, particularly given what we see as the
improved earnings outlooks for these and many small and mid-sized companies
not in the S&P 500. These companies also benefit from consolidation, cost
cutting, and global growth. Because they are smaller, they may be able to
respond to these changes more quickly, and thus they have the potential to
grow faster than the big companies.
The fixed-income markets, meanwhile, seem to be approaching the level of
relative stability they enjoyed before the Asian turmoil. Some credit for this
stability goes to the Federal Reserve Board (the Fed), which has reassured
investors that it will act to prevent rapid economic growth from causing
higher inflation and reduced purchasing power. Also, once investors saw that
the overseas turmoil had little, if any, effect on the financial strength of
most domestic bond issuers, the major non-Treasury markets -- corporate,
municipal, and mortgage -- began to rebound. Our portfolio managers are now
finding more opportunities to buy bonds with relatively stable prices and
attractive yields.
The past two years have challenged investors. However, we believe we are well
positioned for the current environment because our analysts and portfolio
managers continue to rely on MFS(R) Original Research(SM) to help evaluate the
long-term investment potential of each holding being considered for our
portfolios. Also, we believe our discipline of staying with our clearly
defined investment strategies can help us offer investment products with the
potential to sustain returns over a variety of market cycles.
We appreciate your confidence and welcome any questions or comments you may
have.
Respectfully,
/s/ Jeffrey L. Shames
Jeffrey L. Shames
Chairman and Chief Executive Officer
MFS Investment Management(R)
July 15, 1999
MANAGEMENT REVIEW AND OUTLOOK
Dear Contract Owners,
For the six months ended June 30, 1999, the Series provided a total return of
4.96% (including the reinvestment of any distributions), which compares to a
return of 3.56% for the average high current yield fund tracked by Lipper
Analytical Services, Inc, an independent firm that reports mutual fund
performance. Over the same period, the Series' return also compares to 2.20%
for the Lehman Brothers High Yield Bond Index, an unmanaged index of
noninvestment-grade corporate debt, and to 3.85% for the Lipper High Yield
Bond Fund Index. The Lipper mutual fund indices are unmanaged, net-asset-
value-weighted indices of the largest qualifying mutual funds within their
respective investment objectives, adjusted for the reinvestment of capital
gain distributions and income dividends.
The Series has benefited from a favorable economic environment for high-yield
securities -- specifically, moderate economic growth and low inflation in the
United States. The continued strength of the U.S. economy in 1999 has helped
strengthen investor confidence in the high-yield market as companies have
generally posted improved operating results.
However, the Series' slight underweighting in the energy sector, plus the fact
that we owned higher-quality bonds within that sector, detracted from
performance. As oil prices rose, we missed the bond price rally by medium-
quality energy companies. At the same time, however, our focus on high-quality
issuers meant that we avoided the numerous bankruptcies among low-rated, high-
yield energy companies earlier in the year.
We believe the telecommunications sector still offers the best investment
opportunities in the high-yield market. Since the deregulation of this
industry in 1996, several companies have issued high-yield bonds to help fund
the development of their communications networks. These companies have
benefited from the tremendous increase in voice and data traffic, which was
driven in part by the growth in Internet usage. Examples include MetroNet, a
dominant competitive local exchange company in Canada. Bonds issued by
MetroNet appreciated when it was announced that the company would merge with
AT&T Canada, an investment-grade company with considerably better financial
resources. Our position in Nextel Communication, a company that provides
wireless telecommunications services, rose in value after Microsoft announced
that it would invest $600 million in the company.
The Series' second-largest industry is media. We have been investing in cable
companies since the mid-1980s. On its own, we think cable is a good defensive
industry that tends to have steady revenue streams through varying economic
conditions. Now, cable television systems are being recognized as efficient
ways to deliver high speed Internet services to the home, which makes this
industry even more attractive to us. An example of our cable television
holdings is Charter Communications.
The Series' overseas holdings are primarily in Europe, where our focus is the
same as with our domestic holdings. We like telecommunications and media
companies such as NTL, which offers cable and telephone services to homes in the
United Kingdom, and Esprit Telecom, a U.K.-based telecommunications company.
Europe was slower to deregulate these industries than the United States, but we
now are seeing more bonds being issued by cable and telecommunications companies
in Germany, France, Spain, and the United Kingdom.
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 Vice President of MFS Investment Management(R). He is
portfolio manager of the High Yield Series offered through MFS(R)/Sun Life
annuity products and MFS(R) High Income Series (part of MFS(R) Variable
Insurance Trust(SM)).
He joined MFS in 1989 as Investment Officer and was named Assistant Vice
President in 1991, Vice President in 1993, and portfolio manager in 1994.
Prior to joining MFS, he worked as a securities trader and a research analyst
for the Federal Reserve Bank of New York. Mr. Scozzafava is a graduate of
Hamilton College and earned a Master of Science degree from the Massachusetts
Institute of Technology.
All portfolio managers at MFS Investment Management(R) are supported by an
investment staff of over 100 professionals utilizing MFS(R) Original
Research(SM), a company- oriented, bottom-up process of selecting securities.
SERIES FACTS
Objective: Seeks high current income by investing primarily in a
professionally managed, diversified portfolio of fixed-income securities, some
of which may involve equity features.
Commencement of investment operations: July 26, 1995
Size: $50.2 million net assets as of June 30, 1999
This report is prepared for the general information of contract owners. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus. A prospectus containing more information,
including the exchange privilege and all charges and expenses, for any other
MFS product is available from your financial adviser, or by calling MFS at
1-800-225-2606. Please read it carefully before investing or sending money.
<PAGE>
PERFORMANCE SUMMARY
Because the Series is designed for investors with long-term goals, we have
provided the cumulative as well as the average annual total returns for the
applicable time periods. (See Notes to Performance Summary for more
information.)
<TABLE>
AVERAGE ANNUAL AND CUMULATIVE TOTAL RATES OF RETURN THROUGH JUNE 30, 1999
<CAPTION>
6 Months 1 Year 3 Years Life*
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return +4.96% +0.10% +29.32% +40.07%
- -------------------------------------------------------------------------------------------------------------------
Average Annual Total Return -- +0.10% + 8.95% + 8.95%
- -------------------------------------------------------------------------------------------------------------------
* For the period from the commencement of the Series' investment operations, July 26, 1995, through June 30, 1999.
</TABLE>
NOTES TO PERFORMANCE SUMMARY
All results are historical and assume the reinvestment of dividends and
capital gains. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND
UNITS, 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.
Lower-rated securities may provide greater returns, but they are also
associated with greater-than-average risk. These risks may increase unit price
volatility. See the prospectus for details.
<PAGE>
<TABLE>
PORTFOLIO OF INVESTMENTS (Unaudited) - June 30, 1999
Bonds - 92.3%
<CAPTION>
- --------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Bonds - 79.9%
Aerospace - 3.4%
Airplane Pass-Through Trust, 10.875s, 2019+ $ 75 $ 74,948
Argo Tech Corp., 8.625s, 2007 130 125,125
Argo Tech Corp., "C", 8.625s, 2007 100 92,500
BE Aerospace, Inc., 9.875s, 2006 170 173,400
BE Aerospace, Inc., 8s, 2008 90 84,150
K & F Industries, Inc., 9.25s, 2007 325 320,125
L-3 Communications Corp., 10.375s, 2007 400 423,000
MOOG, Inc., 10s, 2006 255 265,200
Stellex Industries, Inc., 9.5s, 2007 65 58,906
United Defense Industries, Inc., 8.75s, 2007 100 98,250
-----------
$ 1,715,604
- --------------------------------------------------------------------------------------------------------
Automotive - 0.6%
Dura Operating Corp., 9s, 2009## $ 150 $ 144,375
Oxford Automotive, Inc., 10.125s, 2007 165 161,700
-----------
$ 306,075
- --------------------------------------------------------------------------------------------------------
Building - 3.3%
AAF-McQuay, Inc., 8.875s, 2003 $ 275 $ 263,313
Building Materials Corp., 8.625s, 2006 400 392,000
Formica Corp., 10.875s, 2009## 225 218,250
MMI Products, Inc., 11.25s, 2007 125 128,125
Nortek, Inc., 9.25s, 2007 245 245,612
Schuff Steel Co., 10.5s, 2008 160 148,400
Williams Scotsman, Inc., 9.875s, 2007 250 242,188
-----------
$ 1,637,888
- --------------------------------------------------------------------------------------------------------
Business Services - 2.2%
Anacomp, Inc., 10.875s, 2004 $ 370 $ 385,725
Iron Mountain, Inc., 10.125s, 2006 300 318,000
Iron Mountain, Inc., 8.75s, 2009 125 123,437
Pierce Leahy Corp., 11.125s, 2006 49 54,390
Pierce Leahy Corp., 9.125s, 2007 125 126,875
Unisys Corp., 12s, 2003 75 81,938
-----------
$ 1,090,365
- --------------------------------------------------------------------------------------------------------
Chemicals - 2.3%
Huntsman ICI Chemicals, Inc., 10.125s, 2009## $ 375 $ 376,406
Lyondell Chemical Co., 9.625s, 2007## 125 127,969
Lyondell Chemical Co., 9.875s, 2007## 350 356,562
Sterling Chemicals, Inc., 11.75s, 2006 150 114,750
Sterling Chemicals, Inc., 11.25s, 2007 235 173,900
-----------
$ 1,149,587
- --------------------------------------------------------------------------------------------------------
Consumer Goods and Services - 3.8%
General Binding Corp., 9.375s, 2008 $ 125 $ 118,281
Kindercare Learning Centers, Inc., 9.5s, 2009 180 170,550
Polymer Group, Inc., 9s, 2007 375 366,562
Remington Products Co. LLC, 11s, 2006 160 130,800
Revlon Consumer Products Corp., 8.125s, 2006 200 195,000
Samsonite Corp., 10.75s, 2008 100 80,500
Simmons Co., 10.25s, 2009## 275 279,813
Synthetic Industries, Inc., 9.25s, 2007 560 576,800
-----------
$ 1,918,306
- --------------------------------------------------------------------------------------------------------
Container, Forest and Paper Products - 5.9%
Applied Extrusion Technologies, Inc., 11.5s, 2002 $ 100 $ 102,000
Atlantis Group, Inc., 11s, 2003 90 90,900
Ball Corp., 8.25s, 2008## 275 268,125
Buckeye Cellulose Corp., 8.5s, 2005 190 186,200
Buckeye Cellulose Corp., 9.25s, 2008 35 35,700
Gaylord Container Corp., 9.75s, 2007 275 263,312
Gaylord Container Corp., 9.875s, 2008 500 445,000
Graham Packaging/GPC Capital Co., 8.75s, 2008 100 94,188
Packaging Corp. of America, 9.625s, 2009## 125 126,875
Riverwood International Corp., 10.25s, 2006 250 252,500
Riverwood International Corp., 10.875s, 2008 20 19,400
Silgan Holdings, Inc., 9s, 2009 400 396,000
Speciality Paperboard, Inc., 9.375s, 2006 125 127,031
U.S. Can Corp., 10.125s, 2006 245 257,863
U.S. Timberlands, 9.625s, 2007 280 282,100
-----------
$ 2,947,194
- --------------------------------------------------------------------------------------------------------
Energy - 4.2%
Cheasapeake Energy Corp., 9.625s, 2005 $ 255 $ 234,600
Clark Refining & Marketing, Inc., 8.625s, 2008 160 151,400
Clark USA, Inc., 10.875s, 2005 315 271,688
Continental Resources, Inc., 10.25s, 2008 200 146,500
Forest Oil Corp., 10.5s, 2006 275 285,312
Giant Industries, Inc., 9s, 2007 100 95,500
HS Resources, Inc., 9.25s, 2006 275 270,875
P&L Coal Holdings Corp., 9.625s, 2008 400 403,000
Pool Energy Services Co., 8.625s, 2008 125 129,375
Pride International, Inc., 10s, 2009 135 137,025
-----------
$ 2,125,275
- --------------------------------------------------------------------------------------------------------
Entertainment - 1.3%
AMC Entertainment, Inc., 9.5s, 2009 $ 150 $ 144,000
American Skiing Co., 12s, 2006 25 19,937
Cinemark USA, Inc., 9.625s, 2008 225 221,625
Regal Cinemas, Inc., 9.5s, 2008 265 249,100
-----------
$ 634,662
- --------------------------------------------------------------------------------------------------------
Financial Institutions - 0.7%
Willis Corroon Corp., 9s, 2009## $ 350 $ 337,313
- --------------------------------------------------------------------------------------------------------
Food and Beverage Products - 0.4%
Friendly Ice Cream Corp., 10.5s, 2007 $ 65 $ 57,688
Vlasic Foods International, Inc., 10.25s, 2009## 150 148,312
-----------
$ 206,000
- --------------------------------------------------------------------------------------------------------
Gaming and Hotels - 4.4%
Boyd Gaming Corp., 9.5s, 2007 $ 450 $ 445,500
Coast Hotels & Casinos, Inc., 9.5s, 2009## 500 481,250
Eldorado Resorts LLC, 10.5s, 2006 100 106,375
Florida Panthers Holdings, Inc., 9.875s, 2009## 200 187,000
Hollywood Park, Inc., 9.25s, 2007 150 147,375
Isle of Capri Casinos, Inc., 8.75s, 2009## 225 211,500
Prime Hospitality Corp., 9.75s, 2007 150 148,500
Red Roof Inns, Inc., 9.625s, 2003 205 207,562
Santa Fe Hotel, Inc., 11s, 2000 65 61,750
Station Casinos, Inc., 8.875s, 2008## 225 219,375
-----------
$ 2,216,187
- --------------------------------------------------------------------------------------------------------
Industrial - 7.6%
Buckeye Technologies, Inc., 8s, 2010 $ 100 $ 95,500
Columbus Mckinnon Corp., 8.5s, 2008 315 312,637
Day International Group, Inc., 11.125s, 2005 50 53,000
Fairfield Manufacturing Co., Inc., 9.625s, 2008## 125 123,125
Federal-Mogul Corp., 7.5s, 2009## 450 415,278
Furon Co., 8.125s, 2008 135 126,900
Hayes Wheels International, Inc., 11s, 2006 325 351,000
Haynes International, Inc., 11.625s, 2004 300 285,000
IMO Industries, Inc., 11.75s, 2006 200 204,000
International Knife & Saw, Inc., 11.375s, 2006 100 98,500
Johnstown America Industries, 11.75s, 2005 150 159,750
Motors & Gears, Inc., 10.75s, 2006 265 267,981
Newcor, Inc., 9.875s, 2008 350 313,250
Numatics, Inc., 9.625s, 2008 100 90,625
Simonds Industries, Inc., 10.25s, 2008 225 220,500
Talon Automotive Group, Inc., 9.625s, 2008 50 43,000
Thermadyne Holdings Corp. 0s to 2003, 12.5s to 2008 625 296,875
Thermadyne Manufacturing/Capital Corp., 9.875s, 2008 150 140,063
Venture Holdings Trust, 9.75s, 2004 200 209,750
-----------
$ 3,806,734
- --------------------------------------------------------------------------------------------------------
Manufacturing - 0.6%
American Standard, Inc., 7.375s, 2008 $ 300 $ 282,000
- --------------------------------------------------------------------------------------------------------
Media - 15.4%
Acme Television LLC, 0s to 2000, 10.875s to 2004 $ 100 $ 82,125
Adelphia Communications Corp., 8.375s, 2008## 300 288,704
Allbritton Communications Co., 9.75s, 2007 160 160,800
Avalon Cable of Michigan, 9.375s, 2008## 325 330,281
Big Flower Press Holdings, Inc., 8.875s, 2007 100 94,750
Big Flower Press Holdings, Inc., 8.625s, 2008## 125 115,000
Bresnan Communications Group, 8s, 2009## 170 170,425
Bresnan Communications Group, 0s to 2004, 9.25s to 2009## 100 65,000
Chancellor Media Corp., 8.125s, 2007 160 156,000
Chancellor Media Corp., 8.75s, 2007 200 199,000
Chancellor Media Corp., 8s, 2008## 250 245,000
Charter Communications Holdings, 8.25s, 2007## 575 547,687
Classic Cable, Inc., 9.875s, 2008## 300 310,500
CSC Holdings, Inc., 8.125s, 2009 330 331,752
Cumulus Media, Inc., 10.375s, 2008 215 227,900
Echostar Dbs Corp., 9.375s, 2009## 625 637,500
Fox/Liberty Networks LLC, Inc., 8.875s, 2007 325 338,000
Frontiervision Operating Partnership LP, 11s, 2006 250 275,000
Golden Books Publishing, Inc., 7.65s, 2002** 75 30,563
Granite Broadcasting Corp., 10.375s, 2005 200 203,000
Granite Broadcasting Corp., 8.875s, 2008 150 145,500
Hollinger International Publishing, Inc., 9.25s, 2007 50 51,125
Intermedia Capital Partners IV, LP, 11.25s, 2006 100 113,500
Lenfest Communications, Inc., 10.5s, 2006 515 592,250
Liberty Group Operating, Inc., 9.375s, 2008 180 172,800
LIN Holdings Corp., 0s to 2003, 10s to 2008 325 214,500
Marvel Holdings, Inc., 0s, 1998** 185 0
NTL, Inc., 0s to 2003, 9.75s to 2008 300 205,500
NTL, Inc., 0s to 2003, 12.375s to 2008 375 252,188
Outdoor Systems, Inc., 8.875s, 2007 125 130,625
Telemundo Holdings, Inc., 0s to 2003, 11.5s to 2008## 405 214,650
Transwestern Publishing Co., 9.625s, 2007 85 83,300
United International Holdings, Inc., 0s to 2003,
10.75s to 2008 785 518,100
World Color Press, Inc., 8.375s, 2008 100 99,500
World Color Press, Inc., 7.75s, 2009 135 125,550
-----------
$ 7,728,075
- --------------------------------------------------------------------------------------------------------
Medical and Health Technology and Services - 0.8%
Alaris Medical, Inc., 0s to 2003, 11.125s to 2008## $ 175 $ 94,938
Prime Medical Services, Inc., 8.75s, 2008 325 316,875
-----------
$ 411,813
- --------------------------------------------------------------------------------------------------------
Metals and Minerals - 3.1%
Alaska Steel Corp., 7.875s, 2009## $ 75 $ 72,000
Alaska Steel Holdings Corp., 9.125s, 2006 150 153,750
Algoma Steel, Inc., 12.375s, 2005 125 121,250
Commonwealth Aluminum Corp., 10.75s, 2006 225 229,500
Doe Run Resources Corp., 11.25s, 2005 200 181,000
Kaiser Aluminum & Chemical Corp., 9.875s, 2002 50 50,375
Kaiser Aluminum & Chemical Corp., 10.875s, 2006 100 104,000
Keystone Consolidated Industries, Inc., 9.625s, 2007 175 170,625
Metal Management, Inc., 10s, 2008 135 108,675
WCI Steel, Inc., 10s, 2004 230 234,025
Weirton Steel Corp., 10.75s, 2005 150 142,500
-----------
$ 1,567,700
- --------------------------------------------------------------------------------------------------------
Retail - 2.9%
Cole National Group, Inc., 8.625s, 2007 $ 225 $ 193,500
Finlay Enterprises, Inc., 9s, 2008 200 190,500
Finlay Fine Jewelry Corp., 8.375s, 2008 75 73,500
J.Crew Operating Corp., 10.375s, 2007 460 461,150
Musicland Group, Inc., 9.875s, 2008 300 292,500
Southland Corp., 5s, 2003 300 259,500
-----------
$ 1,470,650
- --------------------------------------------------------------------------------------------------------
Supermarkets - 0.8%
Jitney-Jungle Stores of America, Inc., 12s, 2006 $ 275 $ 225,500
Jitney-Jungle Stores of America, Inc., 10.375s, 2007 35 12,250
Pathmark Stores, Inc., 11.625s, 2002 175 177,625
-----------
$ 415,375
- --------------------------------------------------------------------------------------------------------
Telecommunications - 15.5%
Allegiance Telecommunications, Inc., 12.875s, 2008 $ 125 $ 132,500
Allegiance Telecommunications, Inc., 0s to 2003, 11.75s to 2008 150 92,625
American Celluar Corp., 10.5s, 2008## 150 153,000
AMSC Acquisition Co., Inc., 12.25s, 2008 110 84,150
Centennial Cellular Operating Co., 10.75s, 2008## 250 258,750
Charter Commerce Holdings LLC, 0s to 2004, 9.92s to 2011## 325 201,500
Exodus Communications, Inc., 11.25s, 2008 300 315,750
GCI, Inc., 9.75s, 2007 300 300,000
Global Crossings Holdings Ltd., 9.625s, 2008 225 243,000
Hyperion Telecommunications, 12s, 2007## 200 202,000
ICG Holdings, Inc., 0s to 2001, 12.5s to 2006 475 380,000
Intermedia Communications, Inc., 8.875s, 2007 275 257,125
ITC Deltacom, Inc., 11s, 2007 111 119,325
ITC Deltacom, Inc., 9.75s, 2008## 325 333,125
KMC Telecom Holdings, Inc., 13.5s, 2009## 100 99,500
Level 3 Communications, Inc., 9.125s, 2008 460 452,525
McCaw International Ltd., 0s to 2002, 13s to 2007## 175 103,250
Metromedia Fiber Network, Inc., 10s, 2008## 200 205,500
MJD Communications, Inc., 9.5s, 2008 190 189,525
Mobile Telecommunication Technologies Corp., 13.5s, 2002 385 435,050
Nextel Communications, Inc., 0s to 2002, 9.75s to 2007 50 34,875
Nextel Communications, Inc., 0s to 2003, 9.95s to 2008 285 196,650
Nextel Communications, Inc., 0s to 1999, 9.75s to 2004 160 162,400
Nextel International, Inc., 0s to 2003, 12.125s to 2008 385 200,200
Nextlink Communications, Inc., 9.625s, 2007 25 24,125
Nextlink Communications, Inc., 10.75s, 2009 560 574,000
Northeast Optic Network, 12.75s, 2008 100 103,500
Pagemart Wireless, Inc., 0s to 2003, 11.25s to 2008 225 92,250
Psinet, Inc., 10s, 2005 50 49,750
Qwest Communications International, Inc., 7.5s, 2008## 125 124,985
Qwest Communications International, Inc., 0s to 2002, 9.47s to 2007 50 39,082
Rural Cellular Corp., 9.625s, 2008 100 103,750
Spectrasite Holdings, Inc., 0s to 2003, 12s to 2008## 175 110,250
Spectrasite Holdings, Inc., 0s to 2004, 11.25s to 2009## 625 355,469
Time Warner Telecommunications LLC, 9.75s, 2008 450 461,250
Triton PCS, Inc., 0s to 2003, 11s to 2008 350 224,000
Verio, Inc., 10.375s, 2005 50 50,500
Viatel, Inc., 11.25s, 2008 100 101,500
Western Wireless Corp., 10.5s, 2007 200 215,750
-----------
$ 7,782,486
- --------------------------------------------------------------------------------------------------------
Transportation - 0.1%
Moran Transportation Co., 11.75s, 2004 $ 50 $ 53,875
- --------------------------------------------------------------------------------------------------------
Utilities - Electric - 0.6%
El Paso Electric Co., 8.9s, 2006 $ 75 $ 81,428
International Utility Structures, 10.75s, 2008 235 236,175
-----------
$ 317,603
- --------------------------------------------------------------------------------------------------------
Total U.S. Bonds $40,120,767
- --------------------------------------------------------------------------------------------------------
Foreign Bonds - 12.4%
Canada - 3.4%
Clearnet Communications, Inc., 0s to 2000, 14.75s to
2005 (Telecommunications) $ 175 $ 159,250
MetroNet Communications Corp., 0s to 2002, 10.75s to
2007 (Telecommunications) 320 249,600
MetroNet Communications Corp., 0s to 2003, 9.95s to
2008 (Telecommunications) 610 451,400
PCI Chemicals Canada, Inc., 9.25s, 2007 (Chemicals) 165 140,250
Repap New Brunswick, Inc., 9s, 2004 (Containers,
Forest & Paper Products) 275 255,063
Rogers Cablesystems, Inc., 10.125s, 2012 (Media) 300 321,000
Telesystem International Wireless, Inc., 0s to 2002,
13.25s to 2007 (Telecommunications) 275 145,406
-----------
$ 1,721,969
- --------------------------------------------------------------------------------------------------------
Greece - 0.1%
Fage Dairy Industries S.A., 9s, 2007(Food & Beverage Products) $ 75 $ 67,500
- --------------------------------------------------------------------------------------------------------
Ireland - 1.1%
Esat Holdings Ltd., 0s to 2002, 12.5s to 2007
(Telecommunications)## $ 500 $ 355,000
Esat Telecom Group PLC, 11.875s, 2008 (Telecommunications)## 200 206,000
-----------
$ 561,000
- --------------------------------------------------------------------------------------------------------
Luxembourg - 0.6%
Millicom International Cellular Communications Corp.,
0s to 2001, 13.5s to 2006 (Telecommunications) $ 380 $ 283,100
- --------------------------------------------------------------------------------------------------------
Mexico - 0.4%
Satelites Mexicanos SA De CV, 10.125s, 2004
(Telecommunications) $ 240 $ 191,400
- --------------------------------------------------------------------------------------------------------
Netherlands - 1.0%
Completel Europe NV, 0s to 2004, 14s to 2009 (Telecommunications)## $ 300 $ 159,000
Hermes Europe Railtel BV, 10.375s, 2009 (Telecommunications) 200 202,500
PTC International Finance B.V., 0s to 2002, 10.75s to 2007
(Financial Services) 175 127,531
-----------
$ 489,031
- --------------------------------------------------------------------------------------------------------
United Kingdom - 5.8%
Colt Telecommunications Group PLC, 0s to 2001,12s to
2006 (Telecommunications) $ 560 $ 462,000
Dialog Corporation PLC, 11s, 2007 (Telecommunications) 200 185,500
Diamond Cable Communications Corp. PLC, 0s to 2000,
11.75s to 2005 (Media) 10 8,925
Dolphin Telecom PLC, 11.5s, 2008 (Telecommunications) 475 236,906
Dolphin Telecom PLC, 0s, 2009 (Telecommunications)## 150 72,000
Energis PLC, 9.75s, 2009 (Telecommunications)## 300 306,000
Esprit Telecom Group PLC, 10.875s, 2008 (Telecommunications) 200 206,000
Jazztel PLC, 14s, 2009 (Telecommunications)## 265 261,025
NTL, Inc., 0s to 2004, 9.75s to 2009 (Media)## GBP 250 238,370
Ono Finance PLC, 13s, 2009 (Financial Services)## $ 275 283,250
Telewest Communications PLC, 0s to 2004, 9.25s to 2009 (Media)## 425 280,500
Telewest PLC, 9.625s, 2006 (Media) 225 231,750
ZSC Specialty, 11s, 2009 (Chemicals)## 150 151,125
-----------
$ 2,923,351
- --------------------------------------------------------------------------------------------------------
Total Foreign Bonds $ 6,237,351
- --------------------------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $47,978,935) $46,358,118
- --------------------------------------------------------------------------------------------------------
Stocks - 0.1%
- --------------------------------------------------------------------------------------------------------
SHARES
- --------------------------------------------------------------------------------------------------------
U.S. Stocks
Telecommunications
Viatel, Inc.* (Identified Cost, $9,048) 1,136 $ 63,758
- --------------------------------------------------------------------------------------------------------
Preferred Stock - 1.9%
- --------------------------------------------------------------------------------------------------------
Consumer Goods and Services
Renaissance Cosmetics, Inc., 14s# 149 $ 0
- --------------------------------------------------------------------------------------------------------
Media - 1.1%
CSC Holdings, Inc., 11.125s# 1,269 $ 140,859
Primedia, Inc., 8.625s 2,650 254,402
Primedia, Inc., 10s 1,500 156,000
-----------
$ 551,261
- --------------------------------------------------------------------------------------------------------
Supermarkets - 0.1%
Supermarkets General Holdings Corp., $3.52 Exch., 2007# 1,500 $ 55,500
- --------------------------------------------------------------------------------------------------------
Telecommunications - 0.7%
Global Crossing Holdings Ltd., 10.5s#,## 1,150 $ 122,044
Rural Cellular Corp., 11.375s# 223 225,230
-----------
$ 347,274
- --------------------------------------------------------------------------------------------------------
Total Preferred Stock (Identified Cost, $960,807) $ 954,035
- --------------------------------------------------------------------------------------------------------
Warrants - 0.3%
- --------------------------------------------------------------------------------------------------------
Allegiance Telecommunications, Inc. (Telecommunications)* 200 $ 1,150
American Mobile Satellite Corp. (Telecommunications)*## 110 4,400
Colt Telecommunications Group PLC (Telecommunications)*## 71 44,450
DTI Holdings, Inc. (Telecommunications)* 1,250 12
Esat Holdings Ltd. (Telecommunications)*## 500 35,000
Jazztel Plc (Telecommunications)*## 1,325 23,850
Loral Orion Network Systems (Telecommunications) * 100 800
Loral Orion Network Systems, Inc. (Telecommunications) * 200 3,600
McCaw International Ltd. (Telecommunications)*## 175 219
Renaissance Cosmetics, Inc. (Consumer Goods & Services)* 129 0
Versatel Telecom B.V. (Telecommunications)* 350 17,500
- --------------------------------------------------------------------------------------------------------
Total Warrants (Identified Cost, $48,946) $ 130,981
- --------------------------------------------------------------------------------------------------------
Bond Unit - 1.4%
- --------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- --------------------------------------------------------------------------------------------------------
Canada - 0.3%
Russel Metals Inc, 10s, 2009 $ 175 $ 175,088
- --------------------------------------------------------------------------------------------------------
Telecommunications - 1.1%
DTI Holdings, Inc., 0s to 2003, 12.5s to 2008 $ 250 $ 91,250
Versatel Telecom B.V., 13.25s, 2008## 350 365,750
Viatel, Inc., 0s to 2003, 12.5s to 2008 150 96,000
-----------
$ 553,000
- --------------------------------------------------------------------------------------------------------
Total Bond Unit (Identified Cost, $773,843) $ 728,088
- --------------------------------------------------------------------------------------------------------
Short-Term Obligations - 2.4%
- --------------------------------------------------------------------------------------------------------
Federal Home Loan Bank, due 7/01/99 at Amortized Cost $1,200 $ 1,200,000
- --------------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $50,971,579) $49,434,980
Other Assets, Less Liabilities - 1.6% 802,301
- --------------------------------------------------------------------------------------------------------
Net Assets - 100.0% $50,237,281
- --------------------------------------------------------------------------------------------------------
* Non-income producing security.
** Non-income producing security in default.
# Payment-in-kind security.
## SEC Rule 144A restriction.
+ Restricted security.
Abbreviations have been used throughout this report to indicate amounts shown in currencies other than
the U.S. dollar. A list of abbreviations is shown below.
GBP = British Pounds
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities (Unaudited)
- -------------------------------------------------------------------------------
JUNE 30, 1999
- -------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $50,971,579) $49,434,980
Cash 45,763
Receivable for Series shares sold 121,553
Receivable for investments sold 125,359
Interest receivable 950,551
Deferred organization expenses 1,972
Other assets 198
-----------
Total assets $50,680,376
-----------
Liabilities:
Payable for Series shares reacquired $ 65,124
Payable for investments purchased 375,528
Payable to affiliate for management fee 1,030
Accrued expenses and other liabilities 1,413
-----------
Total liabilities $ 443,095
-----------
Net assets $50,237,281
===========
Net assets consist of:
Paid-in capital $50,519,745
Unrealized depreciation on investments (1,536,599)
Accumulated net realized loss on investments and foreign
currency transactions (798,271)
Accumulated undistributed net investment income 2,052,406
-----------
Total $50,237,281
===========
Shares of beneficial interest outstanding 4,432,677
=========
Net asset value per share
(net assets / shares of beneficial interest outstanding) $11.33
======
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations (Unaudited)
- -------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1999
- -------------------------------------------------------------------------------
Net investment income (loss):
Income -
Interest $ 2,287,838
Dividends 24,931
-----------
Total investment income $ 2,312,769
-----------
Expenses -
Management fee $ 176,397
Trustees' compensation 1,123
Shareholder servicing agent fee 8,225
Administrative fee 3,507
Custodian fee 8,008
Auditing fees 16,379
Legal fees 628
Amortization of organization expenses 911
Miscellaneous 26
-----------
Total expenses $ 215,204
Fees paid indirectly (4,187)
Reimbursement of expenses to investment adviser 24,180
-----------
Net expenses $ 235,197
-----------
Net investment income $ 2,077,572
-----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ (527,846)
Foreign currency transactions (44)
-----------
Net realized loss on investments and foreign currency
transactions $ (527,890)
Change in unrealized appreciation on investments 630,706
-----------
Net realized and unrealized gain on investments and
foreign currency transactions $ 102,816
-----------
Increase in net assets from operations $ 2,180,388
===========
See notes to financial statements
<PAGE>
<TABLE>
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1999 DECEMBER 31, 1998
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 2,077,572 $ 3,264,771
Net realized loss on investments and foreign currency
transactions (527,890) (260,575)
Net unrealized gain (loss) on investments 630,706 (2,913,850)
----------- -----------
Increase in net assets from operations $ 2,180,388 $ 90,346
----------- -----------
Distributions declared to shareholders -
From net investment income $(3,290,275) $(1,834,167)
From net realized gain on investments and foreign currency
transactions -- (624,907)
In excess of net realized gain on investments and foreign
currency transactions -- (4,172)
----------- -----------
Total distributions declared to shareholders $(3,290,275) $(2,463,246)
----------- -----------
Net increase in net assets from Series share transactions $ 8,456,680 $14,601,822
----------- -----------
Total increase in net assets $ 7,346,793 $12,228,922
Net assets:
At beginning of period 42,890,488 30,661,566
----------- -----------
At end of period (including accumulated undistributed net
investment income of $2,052,406 and $3,265,109,
respectively) $50,237,281 $42,890,488
=========== ===========
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS - continued
Financial Highlights
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
SIX MONTHS ENDED -----------------------------------------------------------
JUNE 30, 1999 1998 1997 1996 1995*
(UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $11.53 $12.34 $10.87 $10.29 $10.00
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.51 $ 1.04 $ 0.95 $ 0.89 $ 0.34
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions 0.08 (1.02) 0.52 0.32 0.18
------ ------ ------ ------ ------
Total from investment operations $ 0.59 $ 0.02 $ 1.47 $ 1.21 $ 0.52
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.79) $(0.62) $ -- $(0.53) $(0.23)
From net realized gain on investments and
foreign currency transactions -- (0.21) -- (0.10) --
In excess of net realized gain on
investments and foreign currency
transactions -- (0.00)+++ -- -- --
------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.79) $(0.83) $ -- $(0.63) $(0.23)
------ ------ ------ ------ ------
Net asset value - end of period $11.33 $11.53 $12.34 $10.87 $10.29
====== ====== ====== ====== ======
Total return 4.96%++ (0.18)% 13.52% 11.80% 5.25%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.01%+ 1.03% 1.01% 1.01% 1.03%+
Net investment income 8.79%+ 8.67% 8.17% 8.18% 8.17%+
Portfolio turnover 36% 146% 139% 135% 32%
Net assets at end of period (000 omitted) $50,237 $42,890 $30,662 $12,994 $1,946
(S) Subject to reimbursement by the Series, the investment adviser 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 $ 0.52 $ 1.05 $ 0.93 $ 0.82 $ 0.20
Ratios (to average net assets):
Expenses## 0.91%+ 0.96% 1.15% 1.62% 4.38%+
Net investment income 8.89%+ 8.74% 8.03% 7.57% 4.82%+
* For the period from the commencement of the Series' investment operations, July 26, 1995, through December 31, 1995.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## The Series had an expense offset arrangement which reduces the Series' custodian fee based upon the amount of cash
maintained by the Series with its custodian and dividend disbursing agent. The Series' expenses are calculated without
reduction for this expense offset arrangement.
See notes to financial statements
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(1) Business and Organization
MFS High Income Series (the Series) is a diversified series of MFS(R) Variable
Insurance Trust(SM) (the Trust) which is composed of the following 15 series:
MFS(R) Bond Series, MFS(R) Capital Opportunities Series (formerly MFS(R) Value
Series), MFS(R) Emerging Growth Series, MFS(R)/Foreign & Colonial Emerging
Markets Equity Series, MFS(R) Global Equity Series, MFS(R) Global Government
Series (formerly MFS(R) World Government Series), MFS(R) Growth Series, MFS(R)
Growth with Income Securities, MFS High Income Series, MFS(R) Limited Maturity
Series, MFS(R) Money Market Series, MFS(R) New Discovery Series, MFS(R)
Research Series, MFS(R) Total Return Series and MFS(R) Utilities 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, 1999, there were 18 shareholders in the Series.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investments in foreign securities are vulnerable to the effects of changes in
the relative values of the local currency and the U.S. dollar and to the
effects of changes in each country's legal, political, and economic
environment.
The Series can invest up to 100% of its portfolio in high-yield securities
rated below investment grade. Investments in high-yield securities involve
greater degrees of credit and market risk than investments in higher-rated
securities and tend to be more sensitive to economic conditions.
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. Equity securities listed on securities exchanges or reported through
the NASDAQ system are reported at market value using last sales prices.
Unlisted equity securities or listed equity securities for which last sales
prices are not available are reported at market value using last quoted bid
prices. Securities for which there are no such quotations or valuations are
valued at fair value as determined in good faith by 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.
The Series 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 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.
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 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.
At December 31, 1998, the Series, for federal income tax purposes, had a
capital loss carryforward of $267,151 which may be applied against any net
taxable realized gains of each succeeding year until the earlier of its
utilization or expiration on December 31, 2006.
(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 the Series' 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, 1999, the
aggregate unreimbursed expenses owed to MFS by the Series amounted to $44,214.
Each Series pays no compensation directly to its Trustees who are officers of
the investment adviser, or to officers of the Series, all of whom receive
remuneration for their services to the Series from MFS. Certain officers and
Trustees of the Series are officers or directors of MFS and MFS Service
Center, Inc. (MFSC).
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 U.S. government securities,
purchased option transactions and short-term obligations, aggregated,
$26,393,168 and $16,032,411, respectively.
The cost and unrealized appreciation and depreciation in the value of the
investments owned by the Series, as computed on a federal income tax basis,
are as follows:
Aggregate cost $50,971,579
-----------
Gross unrealized depreciation $(2,287,329)
Gross unrealized appreciation 750,730
-----------
Net unrealized depreciation $(1,536,599)
===========
(5) Shares of Beneficial Interest
The Series' Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest. Transactions in
Series shares were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999 YEAR ENDED DECEMBER 31, 1998
------------------------------ -----------------------------
SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 1,815,705 $ 21,406,429 3,654,161 $ 43,579,726
Shares issued to shareholders in
reinvestment of distributions 285,119 3,290,270 204,758 2,463,244
Shares reacquired (1,388,099) (16,240,019) (2,623,755) (31,441,148)
---------- ------------ ---------- ------------
Net increase 712,725 $ 8,456,680 1,235,164 $ 14,601,822
========== ============ ========== ============
</TABLE>
(6) Line of Credit
The Series and other affiliated funds participate in a $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
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, 1999, was $171. The Series had
no significant borrowings during the period.
(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, 1999,
the Series owned the following restricted security, excluding securities
issued under Rule 144A, constituting 0.2% 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 security be registered. The
value of this security 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 the Trustees.
<TABLE>
<CAPTION>
PRINCIPAL
DESCRIPTION DATE OF ACQUISITION AMOUNT COST VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Airplane Pass-Through Trust 10.875s, 2019 3/13/1996 $75,000 $75,000 $74,948
</TABLE>
<PAGE>
(C)1999 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
VHI-3 8/99 22M
