MFS WORLD GOVERNMENTS FUND
(A SERIES OF MFS SERIES TRUST VII)
500 BOYLSTON STREET o BOSTON o MASSACHUSETTS 02116-3741
617 o 954-5000
July 19, 1996
VIA EDGAR
- ---------
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, DC 20549
Re: MFS Series Trust VII (File No. 811-3090), on Behalf of
MFS World Governments Fund
Ladies and Gentlemen:
Pursuant to the requirements of Section 30(b) of the Investment Company Act
of 1940 and Rule 30b2-1 thereunder, we hereby file a copy of the Seminnual
Report to Shareholders dated May 31, 1996 of MFS World Governments Fund.
Very truly yours,
APRIL ANDERSON
April Anderson
Senior Production Editor
<PAGE>
[MFS LOGO] SEMIANNUAL REPORT
THE FIRST NAME IN MUTUAL FUNDS MAY 31, 1996
MFS [Registration Mark] WORLD GOVERNMENTS FUND
[Cover: A Photo of Two Men in a Window]
<PAGE>
MFS [Registration Mark] WORLD GOVERNMENTS FUND
TRUSTEES
A. Keith Brodkin* - Chairman and President
Richard B. Bailey* - Private Investor; Former Chairman and Director (until
1991), Massachusetts Financial Services Company; Director, Cambridge Bancorp;
Director, Cambridge Trust Company
Peter G. Harwood - Private Investor
J. Atwood Ives - Chairman and Chief Executive Officer, Eastern Enterprises
Lawrence T. Perera - Partner, Hemenway & Barnes
William J. Poorvu - Adjunct Professor, Harvard University Graduate School of
Business Administration
Charles W. Schmidt - Private Investor; Former Senior Vice President and Group
Executive (until 1990), Raytheon Company
Arnold D. Scott* - Senior Executive Vice President, Director and Secretary,
Massachusetts Financial Services Company
Jeffrey L. Shames* - President and Director, Massachusetts Financial Services
Company
Elaine R. Smith - Independent Consultant
David B. Stone - Chairman, North American Management Corp. (investment
advisers)
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116-3741
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116-3741
PORTFOLIO MANAGER
Richard O. Hawkins*
TREASURER
W. Thomas London*
ASSISTANT TREASURER
James O. Yost*
SECRETARY
Stephen E. Cavan*
ASSISTANT SECRETARY
James R. Bordewick, Jr.*
CUSTODIAN
State Street Bank and Trust Company
AUDITORS
Ernst &Young llp
INVESTOR INFORMATION
For MFS stock and bond market outlooks, call toll free: 1-800-637-4458
anytime from a touch-tone telephone.
For information on MFS mutual funds, call your financial adviser or, for an
information kit, call toll free: 1-800-637-2929 any business day from 9 a.m.
to 5 p.m. Eastern time (or leave a message anytime).
INVESTOR SERVICE MFS Service Center, Inc.
P.O. Box 2281
Boston, MA 02107-9906
For current account service, call toll free: 1-800-225-2606 any business day
from 8 a.m. to 8 p.m. Eastern time.
For service to speech- or hearing-impaired, call toll free: 1-800-637-6576
any business day from 9 a.m. to 5 p.m. Eastern time. (To use this service,
your phone must be equipped with a Telecommunications Device for the Deaf.)
For share prices, account balances and exchanges, call toll free: 1-800-MFS-TALK
(1-800-637-8255) anytime from a touch-tone telephone.
TOP-RATED SERVICE
For the second year in a row, MFS earned a #1 ranking in DALBAR, Inc.'s
Broker/Dealer Survey, Main Office Operations Service Quality category. The firm
achieved a 3.49 overall score - on a scale of 1 to 4 - in the 1995 survey. A
total of 71 firms responded, offering input on the quality of service they
receive from 36 mutual fund companies nationwide. The survey contained questions
about service quality in 17 categories, including "knowledge of phone service
contacts," "accuracy of transaction processing," and "overall ease of doing
business with the firm."
*Affiliated with the Investment Adviser
<PAGE>
LETTER TO SHAREHOLDERS
Dear Shareholders:
For the six months ended May 31, 1996, the total return for Class A shares of
the Fund was -0.35%, for Class B shares -0.83%, and for Class C shares -0.66%.
All of these returns assume the reinvestment of distributions but exclude the
effects of any sales charges and compare to a -0.80% return for the J.P. Morgan
Global Government Bond Index (the Morgan Index), an aggregate index of actively
traded government bonds issued from 13 countries, including the United States,
with remaining maturities of at least one year. Our decision to keep average
maturities in the Fund shorter than those in the Morgan Index contributed to
performance, as did underweighted positions in the U.S. market and in the
European currency bloc. A discussion of the Fund's performance may be found in
the Portfolio Performance and Strategy section of this letter.
Economic Environment
Real (inflation-adjusted) economic growth in the United States during the first
quarter of 1996 was 2.3% on an annualized basis, and it appears that
second-quarter growth could be even stronger. Thus, real growth in gross
domestic product will have been above its long-term average in the first half of
the year and above our initial expectations. While we continue to believe that
growth from quarter to quarter will be uneven, it is now our expectation that
growth for all of 1996 could exceed 2-1/2%. Although individual consumers appear
to be carrying an excessive debt load, the consumer sector itself, which
represents two-thirds of the economy, continues to be impressive as the auto and
housing markets remain resilient. Consumer spending has also been positively
impacted by widespread job growth. At the same time, however, the economies of
Europe and Japan are experiencing slow growth, weakening U.S. export markets
while subduing the capital spending plans of American corporations. Finally, due
to the pickup in economic activity and increasing job growth, it appears that
inflation may accelerate slightly this year, and the Federal Reserve Board is
expected to continue its diligent anti-inflationary stance.
Portfolio Performance and Strategy
The most important factor for the international fixed-income markets over the
past six months has been the better-than-expected strength of the U.S. economy.
Market expectations for further interest rate reductions by the Federal Reserve
have swung to concerns of possible interest rate increases later this year if
growth remains in an above-trend pattern. Long-term interest rates have also
risen, reflecting increased concerns about inflation and disappointment with the
failed attempt to reach an accord on the federal budget. The rise in U.S. rates
has helped push up rates worldwide, although foreign rates have generally risen
less than in the United States. The outperformance versus the United States has
been most pronounced in some of the higher-yielding European bond markets.
1
<PAGE>
LETTER TO SHAREHOLDERS - continued
During this challenging period, the Fund's overweighting in European
markets generally and, in particular, the higher-yielding markets there,
contributed to performance against the Morgan Index. In addition, the Fund's
average maturity was shortened in the first quarter to reduce sensitivity to
changes in interest rates. Within Europe, our weightings have been concentrated
in markets where central banks have been reducing short-term interest rates.
Earlier in the period, Germany led the way and represented a significant
exposure for the Fund. More recently, with German rate cuts nearing an end, the
weightings have shifted in favor of the higher-yielding markets such as Italy,
Spain, and Sweden. Growth in these countries is falling, bringing inflation down
with it and allowing the central banks to drop their official rates quite
considerably.
Within the dollar bloc, our concerns about U.S. growth and inflation risks
have led us to overweight the other markets in the bloc, especially Canada and
Australia. Canadian growth and inflation are both lower than in the United
States, while fiscal consolidation is well on track to reduce significantly the
budget deficits at the federal and provincial levels. Australian bonds offer a
yield advantage which we believe more than adequately compensates for the
economic risks there, especially since the new government entered office. New
Zealand, where we have often been overweighted during the past several years, is
approaching a crossroads. In October, voters will face a new proportional voting
system. In addition, polls show strong support for parties wishing to unravel
the fiscal gains of the last decade. until the risks are reduced, we expect to
have little, if any, exposure to New Zealand in the portfolio.
The stronger-than-expected U.S. economy was also a major factor in the
currency markets. The rise in U.S. interest rates coincided with further
reductions in short-term rates in Europe, causing the yield advantage of U.S.
dollars over German marks to grow even more attractive. The weaker mark also
helped the performance of some of the higher-yielding European currencies. The
Fund has been overweighted in dollars against the mark and has benefited from
the improvement in certain other European currencies. Our underweighted yen
position has benefited from the yen's weakening trend.
Overall, the combination of rising interest rates and a stronger dollar
has translated into negative performance for international bonds. Looking
forward, we believe dollar strength may continue until growth in Europe, and
especially in Germany, rebounds, which we believe may occur during the second
half of this year. The outlook for world growth is continuing to improve and,
thus, some caution regarding bond markets is probably warranted. Given this
outlook, we expect the bond portfolio to emphasize shorter-maturity and
higher-yielding issues.
2
<PAGE>
LETTER TO SHAREHOLDERS - continued
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
[Photo of [Photo of
A. Keith Brodkin] Richard O. Hawkins]
[Signature of [Signature of
A. Keith Brodkin] Richard O. Hawkins]
A. Keith Brodkin Richard O. Hawkins
Chairman and President Portfolio Manager
June 10, 1996
PORTFOLIO MANAGER PROFILE
Richard Hawkins joined MFS in 1988 as a member of the Fixed Income Department. A
graduate of Brown University and the University of Pennsylvania's Wharton School
of Business, he was named Vice President in 1991 and Senior Vice President in
1994. On January 1, 1996, Mr. Hawkins was named Director of the International
Fixed Income Department as well as Portfolio Manager of the Fund.
OBJECTIVE AND POLICIES
The Fund's investment objective is to seek not only preservation but also growth
of capital, together with moderate current income. The Fund seeks to achieve its
investment objective through a professionally managed, internationally
diversified portfolio consisting primarily of debt securities and to a lesser
extent equity securities.
The Fund varies the percentage of assets invested in securities issued in
relation to the state of the economies of the principal countries of the world,
their financial markets and the relationship of their currencies to the U.S.
dollar. The Fund may also invest in U.S. securities. In addition, the Fund may
engage in options and futures transactions and enter into forward foreign
currency exchange contracts.
3
<PAGE>
Performance Summary
Because mutual funds like MFS World Governments Fund are designed for investors
with long-term goals, we have provided cumulative results as well as the average
annual total returns for Class A, Class B and Class C shares for the applicable
time periods.
AVERAGE ANNUAL AND CUMULATIVE TOTAL RATES OF RETURN
Class A Investment Results
(net asset value change including reinvested distributions)
6 Months 1 Year 5 Years 10 Years
================================================================================
Cumulative Total Return* -0.35% +2.11% +46.40% +172.03%
- --------------------------------------------------------------------------------
Average Annual Total Return* -- +2.11% + 7.92% + 10.53%
- --------------------------------------------------------------------------------
The average annual total returns, calculated for the period ended as of the most
recent calendar quarter as required by the Securities and Exchange Commission
(the SEC), with all distributions reinvested and reflecting the maximum sales
charge of 4.75% on the initial investment for the 1-, 5- and 10-year periods
ended March 31, 1996, were -1.06%, +7.16% and +10.11%, respectively.
Class B Investment Results
(net asset value change including 9/07/93+-
reinvested distributions) 6 Months 1 Year 5/31/96
================================================================================
Cumulative Total Return++ -0.83% +1.23% +7.08%
- --------------------------------------------------------------------------------
Average Annual Total Return++ -- +1.23% +2.53%
- --------------------------------------------------------------------------------
The average annual total returns, calculated for the period ended as of the most
recent calendar quarter as required by the SEC, with all distributions
reinvested and reflecting the contingent deferred sales charge (CDSC) of 4% for
the 1-year period ended March 31, 1996, and 3% for the period from September 7,
1993+ to March 31, 1996, were -0.63% and +1.64%, respectively.
Class C Investment Results
(net asset value change including 1/03/94+-
reinvested distributions) 6 Months 1 Year 5/31/96
================================================================================
Cumulative Total Return[ss] -0.66% +1.40% +4.58%
- --------------------------------------------------------------------------------
Average Annual Total Return[ss] -- +1.40% +1.88%
- --------------------------------------------------------------------------------
The average annual total returns, calculated for the period ended as of the most
recent calendar quarter as required by the SEC, with all distributions
reinvested for the 1-year period ended March 31, 1996 and for the period from
January 3, 1994+ to March 31, 1996, were +3.17% and +1.85%, respectively.
All results represent past performance and are not an indication of future
results. Investment return and principal value will fluctuate, and shares, when
redeemed, may be worth more or less than their original cost.
* These results do not include the sales charge. If the charge had been
included, the results would have been lower.
+ Commencement of offering of this class of shares.
++ These results do not include any CDSC. If the charge had been included, the
results would have been lower.
[ss] Class C shares have no initial sales charge but, along with Class B shares,
have higher annual fees and expenses than Class A shares. Class C share
purchases made on or after April 1, 1996 will be subject to a 1% CDSC if
redeemed within 12 months of purchase.
4
<PAGE>
PORTFOLIO OF INVESTMENTS - May 31, 1996
Bonds - 74.6%
================================================================================
Principal Amount
Issuer (000 Omitted) Value
- --------------------------------------------------------------------------------
Foreign Denominated - 68.3%
Australia - 7.6%
Government of Australia, 7s, 1998 AUD 12,450 $ 9,685,508
Government of Australia, 7s, 2000 6,075 4,607,304
Government of Australia, 8.75s, 2001 15,475 12,409,239
Government of Australia, 9s, 2004 5,200 4,186,421
------------
$ 30,888,472
- --------------------------------------------------------------------------------
Belgium - 3.4%
Kingdom of Belgium, 9s, 1998 BEF 130,000 $ 4,573,674
Kingdom of Belgium, 8.75s, 2002 90,000 3,289,457
Kingdom of Belgium, 7.25s, 2004 95,000 3,188,419
Kingdom of Belgium, 8.5s, 2007 75,000 2,698,562
------------
$ 13,750,112
- --------------------------------------------------------------------------------
Canada - 7.9%
Government of Canada, 7.5s, 2001 CAD 9,000 $ 6,681,022
Government of Canada, 7.5s, 2003 4,200 3,059,562
Government of Canada, 9.5s, 2010 27,400 22,550,000
------------
$ 32,290,584
- --------------------------------------------------------------------------------
Czech Republic - 0.6%
Czech Electric, 16.5s, 1998 CZK 66,000 $ 2,437,100
- --------------------------------------------------------------------------------
Denmark - 5.0%
Danish Nykredit, 9s, 2026 DKK 1 $ 173
Kingdom of Denmark, 8s, 2001 110,811 20,102,880
------------
$ 20,103,053
- --------------------------------------------------------------------------------
Germany - 9.3%
German Unity Fund, 8.5s, 2001 DEM 13,472 $ 9,993,356
Treuhandanstalt Obligationen, 6.375s, 1999 40,432 27,893,298
------------
$ 37,886,654
- --------------------------------------------------------------------------------
Ireland - 3.9%
Republic of Ireland, 8s, 2000 IEP 9,750 $ 16,058,561
- --------------------------------------------------------------------------------
Italy - 6.2%
Republic of Italy, 9.5s, 1999 ITL 25,215,000 $ 16,727,042
Republic of Italy, 8.5s, 2004 13,500,000 8,390,162
------------
$ 25,117,204
- --------------------------------------------------------------------------------
New Zealand - 4.9%
Government of New Zealand, 8s, 1998 NZD 8,725 $ 5,799,409
Government of New Zealand, 8s, 2001 21,475 13,939,014
------------
$ 19,738,423
- --------------------------------------------------------------------------------
Spain - 7.2%
Government of Spain, 8.3s, 1998 ESP 2,673,300 $ 20,991,405
Government of Spain, 10.1s, 2001 1,000,000 8,259,819
Government of Spain, 10s, 2005 13,000 105,818
------------
$ 29,357,042
- --------------------------------------------------------------------------------
Sweden - 7.1%
Government of Sweden, 11s, 1999 SEK 27,800 $ 4,539,748
Government of Sweden, 10.25s, 2000 148,600 24,279,714
------------
$ 28,819,462
- --------------------------------------------------------------------------------
5
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Bonds - continued
================================================================================
Principal Amount
Issuer (000 Omitted) Value
- --------------------------------------------------------------------------------
Foreign Denominated - continued
United Kingdom - 5.2%
United Kingdom Gilts, 9s, 2000 GBP 9,115 $ 14,861,913
United Kingdom Gilts, 7s, 2001 4,200 6,324,901
------------
$ 21,186,814
- --------------------------------------------------------------------------------
Total Foreign Denominated $277,633,481
- --------------------------------------------------------------------------------
U.S. Treasury Obligation - 6.3%
Stripped Interest Payments, 0s, 2006 $ 51,000 $ 25,623,420
- --------------------------------------------------------------------------------
Total Bonds (Identified Cost, $304,816,618) $303,256,901
- --------------------------------------------------------------------------------
Short-Term Obligations - 22.0%
================================================================================
Foreign Denominated - 4.9%
Euro Lire Time Deposit, due 10/21/96 ITL 27,430,000 $ 17,811,688
Unilever, due 6/11/96 CZK 55,000 1,983,926
------------
$ 19,795,614
- --------------------------------------------------------------------------------
U.S. Dollar Denominated - 17.1%
Federal Home Loan Bank, due 6/03/96 $ 9,340 $ 9,337,285
Federal Home Loan Mortgage Corp.,
due 6/05/96 - 6/20/96 14,425 14,394,786
Federal National Mortgage Assn.,
due 6/04/96 - 6/18/96 26,330 26,289,790
Gannett Co., due 6/06/96 10,000 9,992,694
Raytheon Co., due 6/07/96 9,720 9,711,495
------------
$ 69,726,050
- --------------------------------------------------------------------------------
Total Short-Term Obligations (Identified Cost, $89,206,575) $ 89,521,664
- --------------------------------------------------------------------------------
Call Options Purchased - 0.4%
================================================================================
Principal Amount of
Issuer/Expiration Date/Strike Price Contracts (000 Omitted)
- --------------------------------------------------------------------------------
Australian Dollars
July/0.80 AUD 20,480 $ 142,234
Canadian Dollars
October/1.332 CAD 34,193 64,350
Deutsche Marks
June/1.53 DEM 58,054 454,444
Italian Lire/Deutsche Marks
June/1060 ITL 11,505,545 333,661
Japanese Bonds
June/99.036 JPY 2,100,000 30,042
June/108.961 968,000 84,216
July/108.277 187,000 37,026
August/113.318 1,233,000 183,717
August/113.3606 935,000 118,745
September/96.324 1,193,000 104,630
Spanish Pesetas/Deutsche Marks
June/83.97 ESP 2,182,528 28,373
August/83.65 2,877,560 46,041
- --------------------------------------------------------------------------------
Total Call Options Purchased (Premiums Paid, $1,167,236) $ 1,627,479
- --------------------------------------------------------------------------------
6
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Put Options Purchased - 0.3%
================================================================================
Principal Amount of
Issuer/Expiration Date/Strike Price Contracts (000 Omitted) Value
- --------------------------------------------------------------------------------
Deutsche Marks
July/1.55 DEM 101,745 $ 172,254
Deutsche Marks/British Pounds
August/2.3316 70,898 666,299
French Francs/Deutsche Marks
July/3.6 FRF 220,680 0
Italian Lire/Deutsche Marks
April/1155.85 ITL 58,448,084 58,448
Japanese Yen
June/107.56 JPY 2,161,956 155,661
Swiss Francs/Deutsche Marks
July/0.805 CHF 21,441 306,198
- --------------------------------------------------------------------------------
Total Put Options Purchased
(Premiums Paid, $1,879,179) $ 1,358,860
- --------------------------------------------------------------------------------
Total Investments
(Identified Cost, $397,069,608) $395,764,904
- --------------------------------------------------------------------------------
Call Options Written - (0.1)%
Deutsche Marks
July/1.492 DEM 97,938 $ (189,216)
Deutsche Marks/British Pounds
August/2.239 68,082 (10,621)
Italian Lire/Deutsche Marks
April/1015 ITL 51,325,696 (256,628)
- --------------------------------------------------------------------------------
Total Call Options Written
(Premiums Received, $1,036,034) $ (456,465)
- --------------------------------------------------------------------------------
Put Options Written - (0.1)%
================================================================================
Canadian Dollars
June/1.385 CAD 20,318 $ (10,585)
October/1.3858 35,573 (133,757)
Japanese Bonds
June/108.961 JPY 968,000 (14,520)
July/108.277 187,000 (1,309)
August/113.318 1,233,000 (11,097)
August/113.3606 935,000 (44,880)
September/96.324 1,193,000 (104,984)
Japanese Yen
June/109.5 2,301,138 (32,216)
Spanish Pesetas/Deutsche Marks
June/86.35 ESP 2,244,390 (2,244)
August/86 2,958,400 (65,085)
- --------------------------------------------------------------------------------
Total Put Options Written
(Premiums Received, $849,791) $ (420,677)
- --------------------------------------------------------------------------------
Other Assets, Less Liabilities - 2.9% $ 11,888,464
================================================================================
Net Assets - 100.0% $406,776,226
- --------------------------------------------------------------------------------
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.
AUD = Australian Dollars DEM = Deutsche Marks HKD = Hong Kong Dollars
BEF = Belgian Francs DKK = Danish Kroner IEP = Irish Punts
CAD = Canadian Dollars ESP = Spanish Pesetas ITL = Italian Lire
CHF = Swiss Francs FIM = Finnish Markkaa JPY = Japanese Yen
CZK = Czech Republic Korunas FRF = French Francs NZD = New Zealand Dollars
GBP =British Pounds SEK = Swedish Kronor
See notes to financial statements
7
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
================================================================================
May 31, 1996
- --------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $397,069,608) $395,764,904
Cash 14,328
Foreign currency, at value (identified cost, $76,483) 86,965
Net receivable for forward foreign
currency exchange contracts sold 11,957,031
Premium receivable on options written 104,630
Receivable for investments sold 1,248,589
Receivable for Fund shares sold 666,724
Net receivable for interest rate swap agreements 290,331
Interest receivable 9,287,727
Other assets 4,233
------------
Total assets $419,425,462
============
Liabilities:
Payable for investments purchased $ 1,058,903
Payable for Fund shares reacquired 945,748
Written options outstanding, at value
(premiums received, $1,885,825) 877,142
Net payable for forward foreign currency
exchange contracts purchased 7,032,374
Net payable for forward foreign currency exchange contracts 2,178,317
Payable to affiliates -
Management fee 10,070
Distribution fee 187,323
Shareholder servicing agent fee 1,856
Accrued expenses and other liabilities 357,503
------------
Total liabilities $ 12,649,236
------------
Net assets $406,776,226
============
Net assets consist of:
Paid-in capital $415,317,237
Unrealized appreciation on investments and translation of
assets and liabilities in foreign currencies 2,630,297
Accumulated net realized loss on investments and
foreign currency transactions (8,517,014)
Accumulated distributions in excess of net investment income (2,654,294)
------------
Total $406,776,226
============
Shares of beneficial interest outstanding 37,589,267
============
Class A shares:
Net asset value and redemption price per share
(net assets of $300,800,455 / 27,698,747 shares
of beneficial interest outstanding) $10.86
======
Offering price per share
(100/95.25 of net asset value per share) $11.40
======
Class B shares:
Net asset value and offering price per share
(net assets of $92,434,069 / 8,627,082 shares
of beneficial interest outstanding) $10.71
======
Class C shares:
Net asset value, offering price, and redemption price per share
(net assets of $13,541,702 / 1,263,438 shares of
beneficial interest outstanding) $10.72
======
On sales of $100,000 or more, the offering price of Class A shares is reduced.
A contingent deferred sales charge may be imposed on redemptions of Class A,
Class B and Class C shares.
See notes to financial statements
8
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
================================================================================
Six Months Ended May 31, 1996
- --------------------------------------------------------------------------------
Net investment income:
Interest income $ 15,504,368
------------
Expenses -
Management fee $ 1,936,394
Trustees' compensation 15,821
Shareholder servicing agent fee (Class A) 244,252
Shareholder servicing agent fee (Class B) 100,917
Shareholder servicing agent fee (Class C) 9,673
Distribution and service fee (Class A) 378,158
Distribution and service fee (Class B) 458,714
Distribution and service fee (Class C) 64,487
Custodian fee 205,046
Auditing fees 28,583
Postage 24,473
Printing 17,167
Legal fees 737
Miscellaneous 220,183
------------
Total expenses $ 3,704,605
------------
Net investment income $ 11,799,763
------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ (520,650)
Written option transactions 1,892,369
Foreign currency transactions (3,304,495)
Futures contracts (4,184)
------------
Net realized loss on investments and
foreign currency transactions $ (1,936,960)
------------
Change in unrealized appreciation (depreciation) -
Investments and interest rate swap agreements $(10,491,638)
Written options 417,927
Translation of assets and liabilities in foreign currencies (1,737,798)
------------
Net unrealized loss on investments and
foreign currency translation $(11,811,509)
------------
Net realized and unrealized loss on
investments and foreign currency $(13,748,469)
------------
Decrease in net assets from operations $ (1,948,706)
============
See notes to financial statements
9
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
================================================================================
Six Months Ended Year Ended
May 31, 1996 November 30, 1995
- --------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment income $ 11,799,763 $ 27,703,556
Net realized gain (loss) on investments
and foreign currency transactions (1,936,960) 6,230,363
Net unrealized gain (loss) on investments
and foreign currency translation (11,811,509) 23,059,591
------------ ------------
Increase (decrease) in net assets
from operations $ (1,948,706) $ 56,993,510
------------ ------------
Distributions declared to shareholders -
From net investment income (Class A) $(43,075,354) $ --
From net investment income (Class B) (11,027,123) --
From net investment income (Class C) (1,482,641) --
From net realized gain on investments and
foreign currency transactions (Class A) -- (14,380,757)
From net realized gain on investments and
foreign currency transactions (Class B) -- (2,952,759)
From net realized gain on investments and
foreign currency transactions (Class C) -- (346,641)
------------ ------------
Total distributions declared to
shareholders $(55,585,118) $(17,680,157)
------------ ------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 47,813,819 $ 89,711,602
Net asset value of shares issued to
shareholders in reinvestment
of distribution 43,473,498 14,249,917
Cost of shares reacquired (72,956,561) (149,551,002)
------------ ------------
Increase (decrease) in net assets
from Fund transactions $ 18,330,756 $(45,589,483)
------------ ------------
Total decrease in net assets $(39,203,068) $ (6,276,130)
Net assets:
At beginning of period 445,979,294 452,255,424
------------ ------------
At end of period (including accumulated
undistributed (distributions in excess of)
net investment income of $(2,654,294)
and $41,131,061, respectively) $406,776,226 $445,979,294
------------ ------------
See notes to financial statements
10
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
==================================================================================================================
Six Months Year Ended Year Ended
Ended November 30, December 31,
May 31 -------------------------------- ---------------------
1996 1995 1994 1993=== 1992 1991
- ------------------------------------------------------------------------------------------------------------------
Class A
- ------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 12.46 $ 11.39 $ 13.37 $ 11.50 $ 12.63 $ 12.00
-------- -------- -------- -------- -------- --------
Income from investment operations# -
Net investment income $ 0.32 $ 0.76 $ 0.63 $ 0.58 $ 0.87 $ 0.94
Net realized and unrealized gain (loss)
on investments and foreign
currency transactions (0.34) 0.76 (1.17) 1.29 (0.70) 0.67
-------- -------- -------- -------- -------- --------
Total from investment operations $ (0.02) $ 1.52 $ (0.54) $ 1.87 $ 0.17 $ 1.61
-------- -------- -------- -------- -------- --------
Less distributions declared to shareholders -
From net investment income $ (1.58) $ -- $ (1.15) $ -- $ (1.30) $ (0.75)
From net realized gain on investments
and foreign currency transactions -- (0.45) (0.29) -- -- --
From paid-in capital -- -- -- -- -- (0.23)
-------- -------- -------- -------- -------- --------
Total distributions declared
to shareholders $ (1.58) $ (0.45) $ (1.44) $ -- $ (1.30) $ (0.98)
-------- -------- -------- -------- -------- --------
Net asset value - end of period $ 10.86 $ 12.46 $ 11.39 $ 13.37 $ 11.50 $ 12.63
======== ======== ======== ======== ======== ========
Total return=== (0.35)%++ 13.93% (4.63)% 17.77%+ 1.35% 13.42%
Ratios (to average net assets)/Supplemental data:
Expenses## 1.53%+ 1.51% 1.54% 1.54%+ 1.53% 1.61%
Net investment income 5.71%+ 6.42% 5.45% 5.66%+ 6.78% 7.75%
Portfolio turnover 223% 277% 358% 179%+ 163% 208%
Net assets at end of period (000 omitted) $300,800 $343,188 $370,110 $443,304 $340,347 $286,089
<FN>
+ Annualized.
++ Not annualized.
+++ Total returns for Class A shares do not include the applicable sales charge. If the charge had been included,
the results would have been lower.
=== For the eleven months ended November 30, 1993.
# Per share data for the periods subsequent to November 30, 1993 is based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees
paid indirectly.
</FN>
</TABLE>
See notes to financial statements
11
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
=============================================================================================================================
Year Ended December 31, 1990 1989 1988 1987 1986 1985
- -----------------------------------------------------------------------------------------------------------------------------
Class A
- -----------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 11.45 $ 11.11 $ 11.87 $ 11.45 $ 10.70 $ 9.40
-------- -------- -------- -------- -------- --------
Income from investment operations -
Net investment income $ 0.98 $ 1.07 $ 0.94 $ 0.91 $ 0.82 $ 0.75
Net realized and unrealized gain (loss)
on investments and foreign
currency transactions 1.07 (0.26) (0.42) 1.86 2.35 1.94
-------- -------- -------- -------- -------- --------
Total from investment operations $ 2.05 $ 0.81 $ 0.52 $ 2.77 $ 3.17 $ 2.69
-------- -------- -------- -------- -------- --------
Less distributions declared to shareholders -
From net investment income $ (0.95) $ (0.47) $ (0.90) $ (0.90) $ (0.82) $ (0.74)
From net realized gain on investments
and foreign currency transactions (0.50) -- (0.32) (1.40) (1.52) (0.65)
From paid-in capital (0.05) -- (0.06) (0.05) (0.08) --
-------- -------- -------- -------- -------- --------
Total distributions declared
to shareholders $ (1.50) $ (0.47) $ (1.28) $ (2.35) $ (2.42) $ (1.39)
-------- -------- -------- -------- -------- --------
Net asset value - end of period $ 12.00 $ 11.45 $ 11.11 $ 11.87 $ 11.45 $ 10.70
======== ======== ======== ======== ======== ========
Total return+++ 17.90% 7.27% 3.68% 23.29% 29.36% 28.72%
Ratios (to average net assets)/Supplemental data:
Expenses 1.44% 1.42% 1.12% 1.13% 1.17% 1.43%
Net investment income 8.06% 8.42% 7.91% 7.54% 6.57% 7.45%
Portfolio turnover 220% 282% 232% 378% 371% 307%
Net assets at end of period (000 omitted) $145,202 $124,935 $190,590 $182,738 $142,183 $ 69,581
<FN>
+++ Total returns for Class A shares do not include the applicable sales charge (except for reinvested dividends prior
to October 1, 1989). If the charge had been included, the results would have been lower.
</FN>
</TABLE>
See notes to financial statements
12
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
===========================================================================================================================
Six Six
Months Year Ended Months Year Ended
Ended November 30, Ended November 30,
May 31, ----------------------------- May 31, -------------------
1996 1995 1994 1993* 1996 1995 1994**
- ---------------------------------------------------------------------------------------------------------------------------
Class B Class C
- ---------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 12.28 $ 11.32 $ 13.35 $ 13.22 $ 12.29 $ 11.31 $ 12.30
------- ------- ------- ------- ------- ------- -------
Income from investment operations# -
Net investment income $ 0.26 $ 0.65 $ 0.56 $ 0.07 $ 0.27 $ 0.66 $ 0.50
Net realized and unrealized gain
(loss) on investments and
foreign currency transactions (0.34) 0.76 (1.19) 0.06 (0.34) 0.77 (1.35)
------- ------- ------- ------- ------- ------- -------
Total from investment operations $ (0.08) $ 1.41 $ (0.63) $ 0.13 $ (0.07) $ 1.43 $ (0.85)
------- ------- ------- ------- ------- ------- -------
Less distributions declared to shareholders -
From net investment income $ (1.49) $ -- $ (1.11) $ -- $ (1.50) $ -- $ (0.14)
From net realized gain on
investments and foreign
currency transactions -- (0.45) (0.29) -- -- (0.45) --
------- ------- ------- ------- ------- ------- -------
Total distributions
declared to shareholders $ (1.49) $ (0.45) $ (1.40) $ -- $ (1.50) $ (0.45) $ (0.14)
------- ------- ------- ------- ------- ------- -------
Net asset value - end of period $ 10.71 $ 12.28 $ 11.32 $ 13.35 $ 10.72 $ 12.29 $ 11.31
======= ======= ======= ======= ======= ======= =======
Total return (0.83)%++ 13.01% (5.39)% 4.32%+ (0.66)%++ 13.11% (6.92)%
Ratios (to average net assets)/Supplemental data:
Expenses## 2.37%+ 2.33% 2.38% 2.48%+ 2.31%+ 2.26% 2.32%+
Net investment income 4.88%+ 5.59% 4.81% 4.72%+ 4.95%+ 5.67% 5.06%+
Portfolio turnover 223% 277% 358% 179%+ 223% 277% 358%
Net assets at end of period (000 omitted) $92,434 $90,978 $73,458 $24,590 $13,542 $11,813 $ 8,687
<FN>
+ Annualized.
++ Not annualized.
* For the period from the commencement of offering of Class B shares, September 7, 1993 to November 30, 1993.
** For the period from the commencement of offering of Class C shares, January 3, 1994 to November 30, 1994.
# Per share data for the periods subsequent to November 30, 1993 is based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
</FN>
</TABLE>
See notes to financial statements
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS World Governments Fund (the Fund) is a non-diversified series of MFS Series
Trust VII (the Trust). The Trust is organized as a Massachusetts business trust
and is registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company.
(2) Significant Accounting Policies
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Investment Valuations - Debt securities (other than short-term obligations which
mature in 60 days or less), including listed issues 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.
Non-U.S. dollar denominated short-term obligations are valued at amortized cost
as calculated in the base currency and translated into U.S. dollars at the
closing daily exchange rate. Futures contracts, options and options on futures
contracts listed on commodities exchanges are valued at closing settlement
prices. Over-the-counter options are valued by brokers through the use of a
pricing model which takes into account closing bond valuations, implied
volatility and short-term repurchase rates. 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.
Written Options - The Fund may write covered call or put options for which
premiums are received and are recorded as liabilities, and are subsequently
adjusted to the current value of the options written. Premiums received from
writing options which expire are treated as realized gains. Premiums received
from writing options which are exercised or
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
are closed are offset against the proceeds or amount paid on the transaction to
determine the realized gain or loss. If a put option is exercised, the premium
reduces the cost basis of the security purchased by the Fund. The Fund, as
writer of an option, may have no control over whether the underlying securities
may be sold (call) or purchased (put) and, as a result, bears the market risk of
an unfavorable change in the price of the securities underlying the written
option. In general, written call options may serve as a partial hedge against
decreases in value in the underlying securities to the extent of the premium
received. Written options may also be used as a part of an income producing
strategy reflecting the view of the Fund's management on the direction of
interest rates.
Futures Contracts - The Fund may enter into futures contracts for the delayed
delivery of securities, currency or contracts based on financial indices at a
fixed price on a future date. In entering such contracts, the Fund is required
to deposit either in cash or securities an amount equal to a certain percentage
of the contract amount. Subsequent payments are made or received by the Fund
each day, depending on the daily fluctuations in the value of the underlying
security, and are recorded for financial statement purposes as unrealized gains
or losses by the Fund. The Fund's investment in futures contracts is designed to
hedge against anticipated future changes in interest or exchange rates or
securities prices. Investments in interest rate futures for purposes other than
hedging may be made to modify the duration of the portfolio without incurring
the additional transaction costs involved in buying and selling the underlying
securities. Investments in currency futures for purposes other than hedging may
be made to change the Fund's relative position in one or more currencies without
buying and selling portfolio assets. Investments in equity-index contracts, or
contracts on related options, for purposes other than hedging may be made when
the Fund has cash on hand and wishes to participate in anticipated market
appreciation while the cash is being invested. Should interest or exchange rates
or securities prices move unexpectedly, the Fund may not achieve the anticipated
benefits of the futures contracts and may realize a loss.
Forward Foreign Currency Exchange Contracts - The Fund may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering these contracts from the potential inability of counterparties to meet
the terms of their contracts and from unanticipated movements in the value of a
foreign currency relative to the U.S. dollar. The Fund will enter into forward
contracts for hedging purposes as well as for non-hedging purposes. For hedging
purposes, the Fund may enter into contracts to deliver or receive foreign
currency it will receive from or require for its normal investment activities.
It may also use contracts in a manner intended to protect foreign
currency-denominated securities from declines in value due to unfavorable
exchange rate movements. For non-hedging purposes, the Fund may enter into
contracts with the intent of changing the relative exposure of the Fund's
portfolio of securities to different currencies to take advantage of anticipated
changes. The forward foreign currency exchange contracts are adjusted by the
daily exchange rate of the underlying currency and any gains or losses are
recorded for financial statement purposes as unrealized until the contract
settlement date.
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
Swap Agreements - The Fund may enter into swap agreements. A swap is an exchange
of cash payments between the Fund and another party which is based on a specific
financial index. Cash payments are exchanged at specified intervals and the
expected income or expense is recorded on the accrual basis. The value of the
swap is adjusted daily and the change in value is recorded as unrealized
appreciation or depreciation. Risks may arise upon entering into these
agreements from the potential inability of counterparties to meet the terms of
their contract and from unanticipated changes in the value of the financial
index on which the swap agreement is based. The Fund uses swaps for both hedging
and non-hedging purposes. For hedging purposes, the Fund may use swaps to reduce
its exposure to interest and foreign exchange rate fluctuations. For non-hedging
purposes the Fund may use swaps to take a position on anticipated changes in the
underlying financial index.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for both financial statement
and tax reporting purposes as required by federal income tax regulations.
Interest payments received in additional securities are recorded on the
ex-interest date in an amount equal to the value of the security on such date.
The Fund uses the effective interest method for reporting interest income on
payment-in-kind (PIK) bonds, whereby interest income on PIK bonds is recorded
ratably by the Fund at a constant yield to maturity. Legal fees and other
related expenses incurred to preserve and protect the value of a security owned
are added to the cost of the security; other legal fees are expensed. Capital
infusions, which are generally non-recurring, incurred to protect or enhance the
value of high-yield debt securities, are reported as an addition 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 considered workout expenses and are reported as rea lized
losses. Ongoing costs incurred to protect or enhance an investment, or costs
incurred to pursue other claims or legal actions, are reported as operating
expenses.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided.
The Fund 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 Fund's tax
return and, consequently, the character of distributions to shareholders
reported in the financial highlights may differ from that reported to
shareholders on Form 1099-DIV. Foreign taxes have been provided for on interest
income earned on foreign investments in accordance with the applicable
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
country's tax rates and to the extent unrecoverable are recorded as a
reduction of investment income. Distributions to shareholders are recorded on
the ex-dividend date.
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as 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 accumulated net realized
gains.
At November 30, 1995, the Fund, for federal income tax purposes, had a capital
loss carryforward of $13,121,348, which may be applied against any net taxable
realized gains of each succeeding year until the earlier of its utilization or
expiration on November 30, 2003.
Multiple Classes of Shares of Beneficial Interest - The Fund offers Class A,
Class B and Class C shares. The three classes of shares differ in their
respective shareholder servicing agent, distribution and service fees.
Shareholders of each class also bear certain expenses that pertain only to that
particular class. All shareholders bear the common expenses of the Fund pro rata
based on the average daily net assets of each class, without distinction between
share classes. Dividends are declared separately for each class. No class has
preferential dividend rights; differences in per share dividend rates are
generally due to differences in separate class expenses.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an effective annual rate of
0.90% of average daily net assets.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive remuneration
for their services to the Fund from MFS. Certain of the officers and Trustees of
the Fund are officers or directors of MFS, MFS Fund Distributors, Inc. (MFD) and
MFS Service Center, Inc. (MFSC). The Fund has an unfunded defined benefit plan
for all its independent Trustees and Mr. Bailey. Included in Trustees'
compensation is a net periodic pension expense of $5,451 for the period ended
May 31, 1996.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$58,487 for the period ended May 31, 1996, as its portion of the sales charge on
sales of Class A shares of the Fund.
The Trustees have adopted separate distribution plans for Class A, Class B and
Class C shares pursuant to Rule 12b-1 of the Investment Company Act of 1940 as
follows:
The Class A distribution plan provides that the Fund will pay MFD up to 0.35%
per annum of its average daily net assets attributable to Class A shares in
order that MFD may pay expenses on behalf of the Fund related to the
distribution and servicing of its
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
shares. These expenses include a service fee to each securities dealer that
enters into a sales agreement with MFD of up to 0.25% per annum of the Fund's
average daily net assets attributable to Class A shares which are attributable
to that securities dealer, a distribution fee to MFD of up to 0.10% per annum of
the Fund's average daily net assets attributable to Class A shares, commissions
to dealers and payments to MFD wholesalers for sales at or above a certain
dollar level, and other such distribution-related expenses that are approved by
the Fund. MFD retains the service fee for accounts not attributable to a
securities dealer which amounted to $62,699 for the period ended May 31, 1996.
MFD is not imposing the 0.10% distribution fee for an indefinite period. Fees
incurred under the distribution plan during the period ended May 31, 1996 were
0.23% of average daily net assets attributable to Class A shares on an
annualized basis.
The Class B and Class C distribution plans provide that the Fund will pay MFD a
distribution fee of 0.75% per annum, and a service fee of up to 0.25% per annum,
of the Fund's average daily net assets attributable to Class B and Class C
shares. MFD will pay to securities dealers that enter into a sales agreement
with MFD all or a portion of the service fee attributable to Class B and Class C
shares, and will pay to such securities dealers all of the distribution fee
attributable to Class C shares. The service fee is intended to be additional
consideration for services rendered by the dealer with respect to Class B or
Class C shares. MFD retains the service fee for accounts not attributable to a
securities dealer, which amounted to $7,190 and $977 for Class B and Class C
shares, respectively, for the period ended May 31, 1996. Fees incurred under the
distribution plans during the period ended May 31, 1996 were 1.00% of average
daily net assets attributable to Class B and Class C shares on an annualized
basis.
Purchases over $1 million into class A shares and certain purchases into
retirement plans are subject to a contingent deferred sales charge in the event
of a shareholder redemption within twelve months following such purchase. A
contingent deferred sales charge is imposed on shareholder redemptions of Class
B shares in the event of a shareholder redemption within six years of purchase.
A contingent deferred sales charge is imposed on shareholder redemptions of
class C shares in the event of a shareholder redemption within twelve months of
purchases made on or after April 1, 1996. MFD receives all contingent deferred
sales charges. Contingent deferred sales charges imposed during the period ended
May 31, 1996 were $8,922, $95,037, and $510 for Class A, Class B, and class C
shares, respectively.
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 average daily net assets of each class of shares at an
effective annual rate of up to 0.15%, up to 0.22% and up to 0.15% attributable
to Class A, Class B and Class C shares, respectively.
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
(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 $196,064,058 $331,745,974
------------ ------------
Investments (non-U.S. government securities) $530,654,752 $555,830,625
------------ ------------
The cost and unrealized appreciation or depreciation in value of the investments
owned by the Fund, as computed on a federal income tax basis, are as follows:
Aggregate cost $ 397,694,603
=============
Gross unrealized depreciation $ (6,459,452)
Gross unrealized appreciation 4,529,753
-------------
Net unrealized depreciation $ (1,929,699)
=============
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
Class A Shares Period Ended May 31, 1996 Year Ended November 30, 1995
--------------------------- ----------------------------
Shares Amount Shares Amount
===================================================================================================
<S> <C> <C> <C> <C>
Shares sold 2,141,445 $ 23,680,359 3,654,873 $ 43,257,969
Shares issued to shareholders
in reinvestment of distributions 3,084,411 33,897,800 1,062,150 11,588,708
Shares reacquired (5,068,706) (55,763,267) (9,674,268) (113,405,139)
---------- ------------ ---------- -------------
Net increase (decrease) 157,150 $ 1,814,892 (4,957,245) $ (58,558,462)
---------- ------------ ---------- -------------
</TABLE>
<TABLE>
<CAPTION>
Class B Shares Period Ended May 31, 1996 Year Ended November 30, 1995
--------------------------- ----------------------------
Shares Amount Shares Amount
===================================================================================================
<S> <C> <C> <C> <C>
Shares sold 1,774,513 $ 19,387,816 3,283,886 $ 38,572,444
Shares issued to shareholders
in reinvestment of distributions 800,013 8,704,153 223,471 2,421,082
Shares reacquired (1,357,142) (14,882,946) (2,588,468) (30,297,163)
---------- ------------ ---------- -------------
Net increase 1,217,384 $ 13,209,023 918,889 $ 10,696,363
---------- ------------ ---------- -------------
</TABLE>
<TABLE>
<CAPTION>
Class C Shares Period Ended May 31, 1996 Year Ended November 30, 1995
--------------------------- ----------------------------
Shares Amount Shares Amount
===================================================================================================
<S> <C> <C> <C> <C>
Shares sold 433,432 $ 4,745,644 670,695 $ 7,881,189
Shares issued to shareholders
in reinvestment of distributions 80,105 871,545 22,172 240,127
Shares reacquired (211,471) (2,310,348) (499,286) (5,848,700)
---------- ------------ ---------- -------------
Net increase 302,066 $ 3,306,841 193,581 $ 2,272,616
---------- ------------ ---------- -------------
</TABLE>
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Fund shares. Interest is charged to each
fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating funds at the end of each
quarter. The commitment fee allocated to the Fund for the period ended May 31,
1996 was $2,472.
(7) Financial Instruments
The Fund trades financial instruments with off-balance sheet risk in the normal
course of its investing activities in order to manage exposure to market risks
such as interest rates and foreign currency exchange rates. These financial
instruments include written options, forward foreign currency exchange
contracts, and interest rate swaps. The notional or contractual amounts of these
instruments represent the investment the Fund has in particular classes of
financial instruments and does not necessarily represent the amounts potentially
subject to risk. The measurement of the risks associated with these instruments
is meaningful only when all related and offsetting transactions are considered.
A summary of obligations under these financial instruments at May 31, 1996, is
as follows:
<TABLE>
<CAPTION>
Written Option Transactions 1996 Calls 1996 Puts
------------------------------- --------------------------------
Principal Amounts Principal Amounts
of Contracts of Contracts
(000 Omitted) Premiums (000 Omitted) Premiums
===============================================================================================
<S> <C> <C>
Outstanding, beginning of period -
Australian Dollars 9,064 $ 57,652 20,306 $ 202,885
Deutsche Marks -- -- 43,731 159,788
Deutsche Marks/British Pounds 32,282 207,191 -- --
Italian Lire/Deutsche Marks 61,372,554 1,017,097 61,372,554 2,259,799
Japanese Yen -- -- 3,244,000 428,772
Japanese Yen/Deutsche Marks -- -- 7,367,471 262,659
Options written -
Australian Dollars 11,378 61,663 -- --
Canadian Dollars 37,260 38,244 55,891 168,693
Deutsche Marks 135,833 820,788 -- --
Deutsche Marks/British Pounds 109,102 389,102 -- --
Italian Lire/Deutsche Marks 51,325,696 373,091 -- --
Japanese Yen 2,643,990 33,209 11,622,137 977,839
New Zealand Dollars -- -- 29,833 44,362
Spanish Pesetas/Deutsche Marks -- -- 5,202,789 129,176
</TABLE>
20
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Written Option Transactions - continued
1996 Calls 1996 Puts
------------------------------- --------------------------------
Principal Amounts Principal Amounts
of Contracts of Contracts
(000 Omitted) Premiums (000 Omitted) Premiums
===============================================================================================
<S> <C> <C> <C> <C>
Options terminated in closing transactions -
Australian Dollars (20,442) $ (119,315) (8,559) $ (52,303)
Deutsche Marks (37,895) (364,577) -- --
Deutsche Marks/British Pounds (52,791) (298,376) -- --
Italian Lire/Deutsche Marks (61,372,554) (1,017,097) (61,372,554) (2,259,799)
Japanese Yen (2,643,990) (33,209) (8,049,000) (854,689)
Japanese Yen/Deutsche Marks -- -- (7,367,471) (262,659)
New Zealand Dollars -- -- (29,833) (44,362)
Options expired -
Australian Dollars -- -- (11,747) (150,582)
Canadian Dollars (37,260) (38,244) -- --
Deutsche Marks -- -- (43,731) (159,788)
Deutsche Marks/British Pounds (20,511) (91,185) -- --
----------- ---------- ----------- ----------
Outstanding, end of period 51,491,716 $1,036,034 12,075,817 $ 849,791
----------- ---------- ----------- ----------
Options outstanding at end of period consist of -
Canadian Dollars -- $ -- 55,891 $ 168,693
Deutsche Marks 97,938 456,211 -- --
Deutsche Marks/British Pounds 68,082 206,732 -- --
Italian Lire/Deutsche Marks 51,325,696 373,091 -- --
Japanese Yen -- 6,817,137 551,922
Spanish Pesetas/Deutsche Marks -- -- 5,202,789 129,176
----------- ---------- ----------- ----------
Outstanding, end of period 51,491,716 $1,036,034 12,075,817 $ 849,791
----------- ---------- ----------- ----------
</TABLE>
At May 31, 1996, the Fund had sufficient cash and/or securities at least equal
to the value of the written options.
21
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Forward Foreign Currency Exchange Contracts
Net Unrealized
Contracts to In Exchange Contracts Appreciation
Settlement Date Deliver/Receive for at Value (Depreciation)
======================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Sales 8/22/96 BEF 445,685,159 $ 14,225,506 $ 14,309,612 $ (84,106)
8/30/96 - 11/01/96 CAD 52,111 38,168,166 38,118,842 49,324
8/14/96 CHF 36,058,731 29,154,585 29,083,134 71,451
6/12/96 - 14/28/97 DEM 466,471,775 308,086,475 308,459,197 (372,722)
9/09/96 DKK 120,183,688 20,349,422 20,540,113 (190,691)
8/13/96 ESP 2,319,260,229 18,121,363 18,002,098 119,265
8/02/96 FIM 96,138,624 19,913,135 20,561,264 (648,129)
8/09/96 GBP 25,702,167 39,149,204 39,822,346 (673,142)
12/04/96 HKD 171,000,000 22,009,705 22,110,813 (101,108)
8/22/96 IEP 10,626,709 16,589,356 16,879,975 (290,619)
7/24/96 - 18/06/96 ITL 149,597,246,063 95,125,734 96,506,868 (1,381,134)
6/07/96 - 17/25/96 JPY 25,713,909,899 254,142,333 238,564,686 15,577,647
10/18/96 NZD 26,930,421 18,175,254 17,993,049 182,205
8/02/96 SEK 152,979,382 22,472,678 22,773,888 (301,210)
------------ ------------ ------------
$915,682,916 $903,725,885 $ 11,957,031
============ ============ ============
Purchases 8/20/96 AUD 16,839,747 $ 13,321,523 $ 13,376,906 $ 55,383
8/15/96 CZK 79,449,560 2,824,813 2,841,355 16,542
6/12/96 - 11/04/96 DEM 479,420,292 319,941,285 315,680,568 (4,260,717)
8/02/96 FIM 95,508,454 20,104,738 20,426,489 321,751
9/09/96 FRF 165,299,165 31,948,041 32,235,982 287,941
8/09/96 GBP 15,322,167 23,166,578 23,739,813 573,235
9/23/96 IEP 12,401,427 19,389,135 19,704,789 315,654
7/24/96 - 14/28/97 ITL 116,333,272,466 74,136,135 74,721,328 585,193
6/07/96 - 18/29/96 JPY 22,220,771,726 211,316,386 206,389,030 (4,927,356)
------------ ------------ ------------
$716,148,634 $709,116,260 $ (7,032,374)
============ ============ ============
</TABLE>
Forward foreign currency purchases and sales under master netting arrangements
and closed forward foreign currency exchange contracts excluded above amounted
to a net payable of $2,178,317 at May 31, 1996.
At May 31, 1996, the Fund had sufficient cash and/or securities to cover any
commitments under these contracts.
<TABLE>
<CAPTION>
Interest Rate Swaps
Cash Flows Cash Flows
Notional Principal Paid by the Received by the Unrealized
Expiration Amount of Contract Fund Fund Appreciation
========================================================================================
<C> <C> <C> <C> <C>
4/20/99 ITL 27,430,000,000 Floating - 6 M Libor Fixed - 9.535% $290,331
</TABLE>
At May 31, 1996, the Fund has segregated sufficient securities to cover margin
requirements on open interest rate swaps.
22
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Trustees of MFS Series Trust VII and Shareholders of MFS World
Governments Fund:
We have audited the accompanying statement of assets and liabilities of MFS
World Governments Fund, including the schedule of portfolio investments as of
May 31, 1996, and the related statement of operations for the six month period
ended May 31, 1996, the statement of changes in net assets for the six month
period ended May 31, 1996 and for the year ended November 30, 1995, and the
financial highlights for the six month period ended May 31, 1996 and for each of
the two years in the period ended November 30, 1995. These financial statements
and financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits. The financial highlights for the
periods prior to the year ended November 30, 1994 indicated herein, were audited
by other auditors whose report dated January 19, 1994 expressed an unqualified
opinion on those financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1996, by correspondence with the custodian and brokers or by other
appropriate auditing procedures where replies from brokers were not received. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of MFS
World Governments Fund at May 31, 1996, the results of its operations for the
six month period ended May 31, 1996, the changes in its net assets for the six
month period ended May 31, 1996 and the year ended November 30, 1995, and
financial highlights for the six month period ended May 31, 1996 and for each of
the two years in the period ended November 30, 1995, in conformity with
generally accepted accounting principles.
[Signature of Ernst & Young LLP]
Boston, Massachusetts
July 3, 1996
------------------------------------------------------------
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.
23
<PAGE>
A WORD ABOUT MFS PRODUCTS AND SERVICES
MAKING ADDITIONAL INVESTMENTS AT YOUR CONVENIENCE
There are several easy ways to make additional single investments of at least
$50:
o send a check with the lower portion of your account statement
o contact your financial adviser to purchase shares on your behalf
o wire additional investments through your bank; call us first
for instructions.
MAKING ADDITIONAL INVESTMENTS AUTOMATICALLY
By investing a set amount at regular intervals, over time you will buy more
shares when prices are low, and fewer shares when prices are high. Because
dollar cost averaging involves periodic purchases regardless of fluctuating
share prices, you should consider your financial ability to continue investing
in periods of low prices. MFS offers two dollar-cost-averaging programs. See the
prospectus for further details. Dollar cost averaging does not assure a profit
or avoid a loss.
THE AUTOMATIC INVESTMENT PLAN offers a simple way to make regular investments of
at least $50 through automatic withdrawals from your checking account.
THE AUTOMATIC EXCHANGE PLAN automatically exchanges shares from any MFS fund
with $5,000 or more into the same class of shares in up to four other MFS funds.
You choose the amounts of the exchanges (as little as $50) and their frequency.
<TABLE>
<CAPTION>
A HYPOTHETICAL EXAMPLE OF AUTOMATIC MONTHLY INVESTING
COMPOUNDING AT 8% YEAR
Amount 5 Years 10 Years 15 Years 20 Years 25 Years
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$50 3,671 9,064 16,989 28,633 45,742
$75 5,506 13,596 25,483 42,950 68,613
$100 7,341 18,128 33,978 57,266 91,484
$200 14,683 36,257 67,956 114,532 182,968
</TABLE>
For illustration only. Not indicative of future performance of any MFS fund.
For applications or further information call 1-800-225-2606 any business day
from 8 a.m. to 8 p.m. Eastern time.
If you are a participant in a retirement plan, check with your plan sponsor
regarding the availability of these options.
24
<PAGE>
A FINANCIAL ADVISER CAN HELP YOU BE A BETTER INVESTOR
Financial advisers can be valuable resources for their clients, providing
ongoing education and guidance about investments, as well as a wide range of
services. Here are just some of the ways your financial adviser may be able to
help you be a better investor:
# Day-to-day monitoring of your portfolio
# Tax recordkeeping
# In-depth information on fund managers, their track records and their tenure
# Risk/reward analyses of current or potential holdings
# Asset allocation advice
# Construction of a detailed personal financial profile
# Order and confirmation processing
# Information on a fund group's range of shareholder services
# Portfolio adjustments based on lifestyle changes
# Assistance with business retirement planning
# Evaluation of lump-sum distribution options
# Recommendations on a selection of fund groups
# Specialized research and investment information not readily available to
individuals
# In-depth knowledge of markets and products, kept current by ongoing tracking
# Estate, tax, insurance, and business planning
# Help with possible savings on sales charges through breakpoints, rights of
accumulation, and letters of intent
25
<PAGE>
MFS INVESTMENT OPPORTUNITIES
MUTUAL FUNDS
The MFS Family of Funds [Registration Mark], shown on the facing page, falls
into the eight general categories below. All offer full-time professional
management, a diversified portfolio, and a wide array of shareholder services.
STOCK FUNDS seek growth of capital rather than income through investments in
stocks.
STOCK AND BOND FUNDS seek current income and growth of capital through
investments in both stocks and bonds.
BOND FUNDS seek current income through investments in debt securities.
WORLD FUNDS seek stock, balanced, and bond fund objectives through investments
in U.S. and foreign stocks and bonds.
LIMITED-MATURITY FUNDS seek current income and preservation of capital through
investments in debt securities with remaining maturities of five years or less.
NATIONAL TAX-FREE BOND FUNDS seek current income exempt from federal income tax
through investments in debt securities issued by states and municipalities.[1]
STATE TAX-FREE BOND FUNDS seek current income exempt from federal and state
income taxes through investments in debt securities issued by a single state and
its municipalities.[1]
Money market funds seek preservation of capital and current income through
investments in short-term debt securities.[2]
To determine which MFS fund may be appropriate for you, please contact your
financial adviser, who can help you relate these investment opportunities to
your financial goals. If you prefer, you may call MFS Investor Information for
literature[3] on MFS products and services: 1-800-637-2929, from 9 a.m. to
5 p.m. Eastern time any business day (leave a message any time).
[1] A small portion of the income may be subject to federal, state and/or
alternative minimum tax.
[2] Investments in money market funds are not issued or guaranteed by the U.S.
government and there is no assurance that the fund will be able to maintain
a stable net asset value.
[3] Including a prospectus containing more complete information including
charges and expenses. Read the prospectus carefully before investing.
26
<PAGE>
THE MFS FAMILY OF FUNDS [Registration Mark]
America's Oldest Mutual Fund Group
The members of the MFS Family of Funds are grouped below according to the types
of securities in their portfolios. For free prospectuses containing more
complete information, including the exchange privilege and all charges and
expenses, please contact your financial adviser or call MFS at 1-800-637-2 929
any business day from 9 a.m. to 5 p.m. Eastern time (or leave a message
anytime). This material should be read carefully before investing or sending
money.
STOCK
================================================================================
Massachusetts Investors Trust
- --------------------------------------------------------------------------------
Massachusetts Investors Growth Stock Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Capital Growth Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Emerging Growth Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Gold & Natural Resources Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Growth Opportunities Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Managed Sectors Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] OTC Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Research Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Value Fund
- --------------------------------------------------------------------------------
STOCK AND BOND
================================================================================
MFS [Registration Mark] Total Return Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Utilities Fund
- --------------------------------------------------------------------------------
BOND
================================================================================
MFS [Registration Mark] Bond Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Government Mortgage Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Government Securities Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] High Income Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Intermediate Income Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Strategic Income Fund
- --------------------------------------------------------------------------------
LIMITED MATURITY BOND
================================================================================
MFS [Registration Mark] Government Limited Maturity Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Limited Maturity Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Municipal Limited Maturity Fund
- --------------------------------------------------------------------------------
WORLD
- --------------------------------------------------------------------------------
MFS [Registration Mark]/Foreign & Colonial Emerging Markets Equity Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark]/Foreign & Colonial International Growth Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark]/Foreign & Colonial International Growth and Income Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] World Asset Allocation Fund [Service Mark]
- --------------------------------------------------------------------------------
MFS [Registration Mark] World Equity Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] World Governments Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] World Growth Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] World Total Return Fund
- --------------------------------------------------------------------------------
NATIONAL TAX-FREE BOND
- --------------------------------------------------------------------------------
MFS [Registration Mark] Municipal Bond Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Municipal High Income Fund
(closed to new investors)
- --------------------------------------------------------------------------------
MFS [Registration Mark] Municipal Income Fund
- --------------------------------------------------------------------------------
STATE TAX-FREE BOND
================================================================================
Alabama, Arkansas, California, Florida, Georgia, Maryland, Massachusetts,
Mississippi, New York, North Carolina, Pennsylvania, South Carolina, Tennessee,
Virginia, West Virginia
- --------------------------------------------------------------------------------
MONEY MARKET
================================================================================
MFS [Registration Mark] Cash Reserve Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Government Money Market Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Money Market Fund
- --------------------------------------------------------------------------------
27
<PAGE>
IT'S EASY TO CONTACT US
[GRAPHIC OMITTED]
MFS AUTOMATED INFORMATION
ACCOUNT INFORMATION:
Call 1-800-MFS-TALK (1-800-637-8255) anytime.
MARKET OUTLOOK:
Call 1-800-637-4458 anytime for the MFS outlook on the bond and stock
markets.
[GRAPHIC OMITTED]
MFS PERSONAL SERVICE
ACCOUNT SERVICE:
Call 1-800-225-2606 any business day from 8 a.m. to 8 p.m. Eastern time.
PRODUCT INFORMATION:
Call 1-800-637-2929 any business day from 9 a.m. to 5 p.m. Eastern time.
IRA SERVICE:
Call 1-800-637-1255 any business day from 8 a.m. to 6 p.m. Eastern time.
SERVICE FOR THE HEARING-IMPAIRED:
Call 1-800-637-6576 any business day from 9 a.m. to 5 p.m. Eastern time
(TDD required).
[GRAPHIC OMITTED]
MFS MAILING ADDRESSES
MFS Service Center, Inc.
P.O. Box 2281
Boston, MA 02107-9906
MFS Service Center, Inc.
P.O. Box 4501
Boston, MA 02101-9817
28
<PAGE>
MFS [Register Mark] WORLD [Dalbar Logo] BULK RATE
GOVERNMENTS FUND U.S. POSTAGE
PAID
500 Boylston Street PERMIT #55638
Boston, MA 02116 BOSTON, MA
[MFS Logo]
MWG-3 7/96/40M 20/220/320
<PAGE>
