<PAGE>
MFS WORLD GOVERNMENTS FUND
(A SERIES OF MFS SERIES TRUST VII)
500 BOYLSTON STREET o BOSTON o MASSACHUSETTS 02116-3741
617 o 954-5000
January 25, 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 Annual
Report to Shareholders dated November 30, 1995 of MFS World Governments Fund.
Very truly yours,
LORRAINE K. GRIP
Lorraine K. Grip
Senior Production Editor
LKG/kha
<PAGE>
MFS Logo ANNUAL REPORT FOR
YEAR ENDED
NOVEMBER 30, 1995
MFS [Registration Mark] WORLD GOVERNMENTS FUND
Front cover
A photo of two airplanes.
<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
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 adviser)
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 MANAGERS
Leslie J. Nanberg*
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 general information, 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.
[DALBAR LOGO]
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:
The past year has been a good period for most fixed-income markets around the
world. For the 12 months ended November 30, 1995, Class A shares of the Fund
provided a total return of +13.93%, Class B shares +13.01%, and Class C shares
+13.11%. All of these returns assume the reinvestment of distributions but
exclude the effects of any sales charges and compare to an +18.12% 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
overweighting in core European markets and Japan contributed to positive
performance against the Morgan Index, while our underweighting in the U.S. mar
ket in the first part of the year had a negative effect on bond performance. A
discussion of other factors which contributed to the Fund's performance may be
found in the Portfolio Performance and Strategy section of this letter.
Economic Outlook
Moderate, but sustainable, growth has been the hallmark of the economic
expansion's fifth year. While initial estimates showed the U.S. economy growing
at an annual rate of 4.2% in the third quarter, this surprisingly strong growth
was mainly driven by a pickup in consumer spending and an increase in business
and government outlays. Although impressive, this rate of growth is not expected
to continue in coming months. Recent retail sales have been disappointing, in
part because of rising levels of consumer debt. An extended period of lower
mortgage rates seems to have relieved much of the pent-up demand for housing.
Growth is not expected to get much help from the manufacturing sector, either,
as order flows from manufacturers have moderated. Export activity, meanwhile, is
also expected to remain modest as continued weakness abroad has limited demand
for many U.S. goods. However, the Federal Reserve Board's consistent and, so
far, successful efforts to fight inflation seem to be giving consumers and
businesses enough longer term confidence to help maintain modest growth in real
(adjusted for inflation) gross domestic product into 1996.
Global Markets
As in the United States, a pattern of slow to moderate growth and low and
controlled inflation remains a dominant theme in major industrialized countries.
While the recent recovery of the dollar against the mark and the yen has added
some strength to the economies of Europe and Japan, our outlook is for sluggish
economic growth, in the near term at least. And although moves by central banks
in Germany and Japan to lower interest rates have helped stimulate domestic
demand, many industrial companies in these countries are still struggling to
compete in a global marketplace in which price competition is intense.
1
<PAGE>
LETTER TO SHAREHOLDERS - continued
On the positive side, this does mean little to no inflationary pressure in these
countries, and we believe that this, combined with further reductions in
interest rates, could help provide a foundation for stronger economic growth in
the long run.
Portfolio Performance and Strategy
As we anticipated, the dollar did recover somewhat during the last six months.
However, we believe the dollar cannot begin a long-term rally until the United
States becomes less reliant on foreign capital to finance its investments. For
the next year, we anticipate that the dollar's overall trend will remain
downward, although slow U.S. growth, if it continues, could lead to a cyclical
reduction in our borrowing of foreign capital, taking some of the pressure off
the dollar.
The majority of our foreign-based holdings remains in Europe. The core
markets, such as Germany and the Netherlands, continue to provide solid returns
against a backdrop of slow growth, low inflation and declining official interest
rates and remain an important anchor to our foreign holdings. Other European
markets, such as Denmark, offer a combination of higher yields with moderate
growth and low inflation. The highest yielding markets have recovered over the
last six months, and the Fund has increased both its bond and currency
weightings in these markets. We believe the first part of next year could be
supportive of fixed-income investments. Moderate to slow growth, with
commensurate declines in overall inflation rates, could lead to further
reductions in official interest rates.
In addition to these economic developments, European governments are
engaged in multi-year programs to reduce their budget deficits and debt levels.
These programs are positive for bonds because lower government spending tends to
reduce inflationary pressures and lower issuance of government debt reduces the
supply pressures on the bond market.
In the Japanese market, powerful deflationary forces have supported a drop
in yields to historically low levels. We feel this process may be drawing to an
end, given a reversal of priorities at the central bank from fighting inflation,
which is now non-existent, to offsetting the downward spiral of deflation. Thus,
the weighting in Japan, which has been neutral for much of the past year, will
most likely be reduced in the coming year.
The high returns of the U.S. market have been echoed in other U.S.
dollar-bloc markets. Australia, New Zealand and Canada have all contributed to
performance over the last 12 months. The Australian market currently offers
significantly higher yields than the U.S. market and represents good value. As
long as the outlook for U.S. bonds remains positive, we believe these related
markets should outperform the U.S. Market.
2
<PAGE>
LETTER TO SHAREHOLDERS - continued
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
[Signature] [Signature]
A. Keith Brodkin Leslie J. Nanberg
Chairman and President Portfolio Manager
December 13, 1995
Note to Shareholders: Effective January 1, 1996, Richard O. Hawkins succeeds Mr.
Nanberg as Portfolio Manager of the Fund. He has also assumed the position of
director of the International Fixed Income Department at MFS. Mr. Nanberg will
continue in his role as chief fixed income officer, overseeing the
implementation of the overall fixed-income strategy at MFS, while Mr. Hawkins
will maintain his current responsibilities as co-manager of MFS Intermediate
Income Fund and MFS Intermediate Income Trust.
PORTFOLIO MANAGER PROFILES
Leslie Nanberg joined MFS in 1980 as a member of the Fixed Income Department. He
is a graduate of the University of Illinois, and holds graduate degrees from
Northwestern University and the Northwestern University Graduate School of
Management. He was named Assistant Vice President - Investments in 1981, Vice
President - Investments in 1983 and Senior Vice President in 1986. Mr. Nanberg
has senior responsibility for all fixed-income assets under MFS management.
Richard Hawkins joined MFS in 1988 as a member of the Fixed Income Department.
He is a graduate of Brown University, and received a Masters in Business
Administration degree from the University of Pennsylvania's Wharton School of
Business. He was named Vice President in 1991 and Senior Vice President in 1994.
As of January 1, 1996, Mr. Hawkins will be director of the International Fixed
Income Department as well as Portfolio Manager of the Fund.
3
<PAGE>
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.
PERFORMANCE
The information below on the following page illustrates the historical
performance of MFS World Governments Fund Class A shares in comparison to
various market indicators. Fund results in the graphs reflect the deduction of
the 4.75% maximum sales charge; benchmark comparisons are unmanaged and do not
reflect any fees or expenses. You cannot invest in an index. All results reflect
the reinvestment of all dividends and capital gains. Class B shares were offered
effective September 7, 1993. Information on Class B share performance appears on
the next page.
Please note that effective January 3, 1994, Class C shares were offered.
Information on Class C share performance appears on the next page.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 5-Year Period Ended November 30, 1995)
Line graph representing the growth of a $10,000 investment for the five-year
period ended November 30, 1995. The graph is scaled from $8,000 to $18,000 in
$2,000 segments. The years are marked in 12-month segments from 1990 to 1995.
There are four lines drawn to scale. One is a solid line representing MFS World
Governments Fund (Class A), a second line of short dashes represents the Salomon
Brothers World Government Bond Index, a third line of very-short dashes
represents the J.P. Morgan Global Government Bond Index, and a fourth line of
medium-short dashes represents the Consumer Price Index.
MFS World Governments Fund (Class A) $13,882
Salomon Brothers World Government Bond Index $16,855
J.P. Morgan Global Government Bond Index $16,350
Consumer Price Index $11,480
4
<PAGE>
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 10-Year Period Ended November 30, 1995)
Line graph representing the growth of a $10,000 investment for the ten-year
period ended November 30, 1995. The graph is scaled from $0 to $50,000 in
$10,000 segments. The years are marked in 12-month segments from 1985 to 1995.
There are three lines drawn to scale. One is a solid line representing MFS World
Governments Fund (Class A), a second line of short dashes represents the Salomon
Brothers World Government Bond Index, a third line of medium-short dashes
represents the Consumer Price Index.
MFS World Governments Fund (Class A) $30,378
Salomon Brothers World Government Bond Index $30,269
Consumer Price Index $14,089
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
1 year 3 years 5 years 10 years
====================================================================================================
<S> <C> <C> <C> <C>
MFS World Governments Fund (Class A)
including 4.75% sales charge + 8.50% + 6.46% + 6.78% +11.71%
- ----------------------------------------------------------------------------------------------------
MFS World Governments Fund (Class A) at net asset value +13.93% + 8.21% + 7.82% +12.25%
- ----------------------------------------------------------------------------------------------------
MFS World Governments Fund (Class B) with CDSC+ + 9.01% -- -- + 2.30%*
- ----------------------------------------------------------------------------------------------------
MFS World Governments Fund (Class B) without CDSC +13.01% -- -- + 3.50%*
- ----------------------------------------------------------------------------------------------------
MFS World Governments Fund (Class C) +13.11% -- -- + 2.73%#
- ----------------------------------------------------------------------------------------------------
Average General World Income Fund +13.97% + 8.01% + 7.87% + 8.47%
- ----------------------------------------------------------------------------------------------------
Salomon Brothers World Government Bond Index++ +18.13% +11.17% +11.01% +11.75%
- ----------------------------------------------------------------------------------------------------
J.P. Morgan Global Government Bond Index** +18.12% +10.59% +10.33% --
- ----------------------------------------------------------------------------------------------------
Consumer Price Index + 2.61% + 2.65% + 2.80% + 3.49%
- ----------------------------------------------------------------------------------------------------
<FN>
+ These returns reflect the current Class B contingent deferred sales charge (CDSC) of 4% for the
1-year period and 3% for the period commencing September 7, 1993.
++ The Salomon Brothers World Government Bond Index is market-value weighted and includes straight
issue bonds from the complete universes of 14 government sectors with remaining maturities of
at least one year.
* For the period from the commencement of offering of Class B shares, September 7, 1993 to
November 30, 1995.
** The J.P. Morgan Global Government Bond Index has not been in existence for 10 years. The index
is an aggregate index of activity traded government bonds issued from 13 countries, including
the United States, with remaining maturities of at least one year.
# For the period from the commencement of offering of Class C shares, January 3, 1994 to November
30, 1995. Class C shares have no initial sales charge or CDSC but, along with Class B shares,
have higher annual fees and expenses than Class A shares.
[ss] The Consumer Price Index is a popular measure of change in prices.
</FN>
</TABLE>
5
<PAGE>
AVERAGE ANNUAL TOTAL RETURNS - continued
In the previous table, we have included the average annual total returns of all
general world income funds (including the Fund) tracked by Lipper Analytical
Services, Inc. (an independent firm which rates mutual fund performance) for the
applicable time periods. Because these returns do not reflect any applicable
sales charges, we have also included the Fund's results at net asset value (no
sales charge) for comparison.
All results are historical and, therefore, are not an indication of future
results. The investment return and principal value of an investment in a mutual
fund will vary with changes in market conditions, and shares, when redeemed, may
be worth more or less than their original cost. All Class A results reflect the
applicable expense subsidy which is explained in the Notes to Financial
Statements. Had the subsidy not been in effect, the results would have been less
favorable.
TAX FORM SUMMARY
In January 1996, shareholders will be mailed a Tax Form Summary reporting the
federal tax status of all distributions paid during the calendar year 1995.
FEDERAL INCOME TAX INFORMATION ON DISTRIBUTIONS
For the year ended November 30, 1995, distributions from long-term capital gains
are $17,680,157.
6
<PAGE>
PORTFOLIO OF INVESTMENTS - November 30, 1995
Bonds - 105.9%
================================================================================
Principal Amount
Issuer (000 Omitted) Value
- --------------------------------------------------------------------------------
Foreign Denominated - 59.1%
Australia - 6.0%
Commonwealth of Australia, 9.75s, 2002 AUD 7,610 $ 6,140,839
Commonwealth of Australia, 9.5s, 2003 15,000 12,015,026
Queensland Treasury Corp., 8s, 2001 11,600 8,615,318
------------
$ 26,771,183
- --------------------------------------------------------------------------------
Canada - 3.8%
Government of Canada, 8.5s, 2000 CAD 1,500 $ 1,178,169
Government of Canada, 9.75s, 2001 18,500 15,531,234
------------
$ 16,709,403
- --------------------------------------------------------------------------------
Czech Republic - 0.6%
Czech Electric, 16.5s, 1998 CZK 66,000 $ 2,628,691
- --------------------------------------------------------------------------------
Denmark - 5.9%
Danish Nykredit, 9s, 2026 DKK 1 $ 181
Kingdom of Denmark, 9s, 1998 54,720 10,575,650
Kingdom of Denmark, 9s, 2000 39,600 7,806,160
Kingdom of Denmark, 8s, 2001 42,480 8,059,861
------------
$ 26,441,852
- --------------------------------------------------------------------------------
France - 4.4%
Government of France, 7s, 1999 FRF 42,180 $ 8,740,610
Government of France, 7.75s, 2000 51,810 11,001,180
------------
$ 19,741,790
- --------------------------------------------------------------------------------
Germany - 11.7%
German Unity Fund, 8.5s, 2001 DEM 10,605 $ 8,368,896
Republic of Germany, 6.5s, 2003 21,990 15,703,886
Republic of Germany, 6.875s, 2005 38,545 27,939,462
------------
$ 52,012,244
- --------------------------------------------------------------------------------
Italy - 6.3%
Republic of Italy, 8.5s, 1999 ITL 26,235,000 $ 15,509,515
Republic of Italy, 9.5s, 1999 7,535,000 4,508,740
Republic of Italy, 8.5s, 2004 14,945,000 8,018,675
------------
$ 28,036,930
- --------------------------------------------------------------------------------
Netherlands - 7.9%
Dutch State Loan, 6.25s, 1998 NLG 4,820 $ 3,113,184
Government of Netherlands, 8.25s, 2007 45,153 32,162,482
------------
$ 35,275,666
- --------------------------------------------------------------------------------
New Zealand - 3.4%
Government of New Zealand, 10s, 2002 NZD 20,000 $ 14,957,239
- --------------------------------------------------------------------------------
Spain - 6.1%
Government of Spain, 10.9s, 2003 ESP 1,665,000 $ 14,027,166
Government of Spain, 10.5s, 2003 1,610,400 13,299,385
------------
$ 27,326,551
- --------------------------------------------------------------------------------
United Kingdom - 3.0%
United Kingdom Gilts, 8s, 2000 GBP 8,400 $ 13,455,994
- --------------------------------------------------------------------------------
Total Foreign Denominated $263,357,543
- --------------------------------------------------------------------------------
7
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Bonds - continued
================================================================================
Principal Amount
Issuer (000 Omitted) Value
- --------------------------------------------------------------------------------
Foreign - U.S. Dollar Denominated - 3.7%
Federative Republic of Brazil,
Floating Rate, 2024 $ 10,500 $ 6,234,375
Republic of Argentina, Floating Rate, 2005 6,000 3,922,500
United Mexican States, "A," Floating Rate, 2019 6,250 4,304,687
United Mexican States," A," 6.25s, 2019 3,500 2,148,125
------------
$ 16,609,687
- --------------------------------------------------------------------------------
U.S. Dollar Denominated - 43.1%
Government National Mortgage Association - 5.9%
GNMA, 8s, 2025 $ 25,427 $ 26,308,438
- --------------------------------------------------------------------------------
U.S. Treasury Obligations - 37.2%
U.S. Treasury Notes, 9.375s, 1996 $ 33,000 $ 33,453,750
U.S. Treasury Notes, 7.25s, 2004 20,040 21,997,106
U.S. Treasury Notes, 5.875s, 2005 64,500 65,040,625
U.S. Treasury Notes, 6.5s, 2005 43,160 45,418,994
------------
$165,910,475
- --------------------------------------------------------------------------------
Total U.S. Dollar Denominated $192,218,913
- --------------------------------------------------------------------------------
Total Bonds (Identified Cost, $463,300,861) $472,186,143
- --------------------------------------------------------------------------------
Warrants
================================================================================
Shares
- --------------------------------------------------------------------------------
United Mexican States, Value Recovery Rights 13,114,000 $ --
- --------------------------------------------------------------------------------
Call Options Purchased - 0.6%
================================================================================
Principal Amount
of Contracts
Description/Expiration Month/Strike Price (000 Omitted)
- --------------------------------------------------------------------------------
Deutsche Marks
December/1.378 DEM 35,750 $ 2,824
Italian Lire
January/1085 ITL 20,425,125 61,275
Japanese Bonds
December/112.062 JPY 686,000 104,272
Japanese Yen
January/69.4 7,062,189 607,348
Swedish Kronor
February/4.535 SEK 279,938 501,929
- --------------------------------------------------------------------------------
Total Call Options Purchased (Premiums Paid, $2,116,870) $ 2,680,776
- --------------------------------------------------------------------------------
Put Options Purchased - 0.1%
================================================================================
Australian Dollars
January/0.745 AUD 11,747 $ 160,394
Deutsche Marks
December/1.510 DEM 42,330 --
January/2.230 33,896 217,511
- --------------------------------------------------------------------------------
Total Put Options Purchased (Premiums Paid, $653,258) $ 377,905
- --------------------------------------------------------------------------------
8
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Short-Term Obligations - 0.8%
================================================================================
Principal Amount
Issuer (000 Omitted) Value
- --------------------------------------------------------------------------------
Foreign Denominated - 0.8%
Mexican Cetes, due 2/15/96 MXP 16,000 $ 1,844,240
Unilever, due 3/11/96 CZK 50,000 1,783,528
- --------------------------------------------------------------------------------
Total Short-Term Obligations (Amortized Cost, $4,210,481) $ 3,627,768
- --------------------------------------------------------------------------------
Total Investments (Identified Cost, $470,281,470) $478,872,592
- --------------------------------------------------------------------------------
Call Options Written - (0.3)%
================================================================================
Principal Amount
of Contracts
Description/Expiration Month/Strike Price (000 Omitted)
- --------------------------------------------------------------------------------
Australian Dollars
February/0.763 AUD 9,064 $ (57,655)
Deutsche Marks/British Pounds
January/2.123 DEM 32,282 (50,070)
Italian Lire/Deutsche Marks
August/1125 ITL 61,372,554 (1,043,333)
- --------------------------------------------------------------------------------
Total Call Options Written (Premiums Received, $1,281,940) $ (1,151,058)
- --------------------------------------------------------------------------------
Put Options Written - (0.6)%
================================================================================
Australian Dollars
January/0.745 AUD 11,747 $ (160,394)
February/0.720 8,559 (52,302)
Deutsche Marks
December/1.560 DEM 43,731 --
Italian Lire/Deutsche Marks
August/1125 ITL 61,372,554 (2,025,294)
Japanese Bonds
December/112.062 JPY 686,000 (10,290)
March/107.489 2,558,000 (347,888)
Japanese Yen/Deutsche Marks
January/72.4 7,367,471 (257,861)
- --------------------------------------------------------------------------------
Total Put Options Written (Premiums Received, $3,313,903) $ (2,854,029)
- --------------------------------------------------------------------------------
Other Assets, Less Liabilities - (6.5)% $(28,888,211)
================================================================================
Net Assets - 100.0% $445,979,294
- --------------------------------------------------------------------------------
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 ESP = Spanish Pesetas JPY = Japanese Yen
CAD = Canadian Dollars FIM = Finnish Markkaa MXP = Mexican Pesos
CHF = Swiss Francs FRF = French Francs NLG = Dutch Guilders
CZK = Czech Republic Korunas GBP = British Pounds NZD = New Zealand Dollars
DEM = Deutsche Marks ITL = Italian Lire SEK = Swedish Kronor
DKK = Danish Kroner
See notes to financial statements
9
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
================================================================================
November 30, 1995
- --------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $470,281,470) $478,872,592
Foreign currency, at value (identified cost, $1,045,937) 1,091,315
Net receivable for forward foreign currency
exchange contracts sold 23,521,482
Premium receivable on options written 109,955
Receivable for investments sold 38,004,541
Receivable for Fund shares sold 812,024
Interest receivable 9,476,728
Other assets 5,564
------------
Total assets $551,894,201
============
Liabilities:
Cash overdraft $ 17,133,552
Payable for investments purchased 65,337,235
Payable for Fund shares reacquired 704,021
Written options outstanding, at value
(premiums received, $4,595,843) 4,005,087
Net payable for forward foreign currency
exchange contracts purchased 17,968,459
Net payable for forward foreign currency
exchange contracts 251,892
Payable to affiliates -
Management fee 10,996
Distribution fee 201,976
Shareholder servicing agent fee 2,030
Accrued expenses and other liabilities 299,659
------------
Total liabilities $105,914,907
------------
Net assets $445,979,294
============
Net assets consist of:
Paid-in capital $396,986,481
Unrealized appreciation on investments and translation
of assets and liabilities in foreign currencies 14,441,806
Accumulated net realized loss on investments
and foreign currency transactions (6,580,054)
Accumulated undistributed net investment income 41,131,061
------------
Total $445,979,294
============
Shares of beneficial interest outstanding 35,912,667
------------
Class A shares:
Net asset value and redemption price per share
(net assets of $343,187,811 / 27,541,597 shares of
beneficial interest outstanding) $12.46
======
Offering price per share (100/95.25 of net asset value per share) $13.08
======
Class B shares:
Net asset value and offering price per share
(net assets of $90,978,434 / 7,409,698 shares of
beneficial interest outstanding) $12.28
======
Class C shares:
Net asset value, offering price, and redemption price per share
(net assets of $11,813,049 / 961,372 shares of
beneficial interest outstanding) $12.29
======
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 and
Class B shares.
See notes to financial statements
10
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
================================================================================
Year Ended November 30, 1995
- --------------------------------------------------------------------------------
Net investment income:
Interest income $35,141,886
-----------
Expenses -
Management fee $ 3,991,068
Trustees' compensation 33,872
Shareholder servicing agent fee (Class A) 527,652
Shareholder servicing agent fee (Class B) 180,312
Shareholder servicing agent fee (Class C) 14,585
Distribution and service fee (Class A) 1,231,191
Distribution and service fee (Class B) 819,598
Distribution and service fee (Class C) 97,235
Custodian fee 424,052
Printing 113,245
Postage 67,487
Auditing 56,059
Legal 4,460
Miscellaneous 238,559
------------
Total expenses $ 7,799,375
Reduction of expenses by distributor (351,769)
Fees paid indirectly (9,276)
------------
Net expenses $ 7,438,330
------------
Net investment income $ 27,703,556
------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 29,695,966
Written option transactions 2,087,543
Foreign currency transactions (25,553,146)
------------
Net realized gain on investments and foreign
currency transactions $ 6,230,363
------------
Change in unrealized appreciation -
Investments $ 14,488,958
Written options 1,841,730
Translation of assets and liabilities in foreign currencies 6,728,903
------------
Net unrealized gain on investments $ 23,059,591
------------
Net realized and unrealized gain on investments
and foreign currency $ 29,289,954
------------
Increase in net assets from operations $ 56,993,510
============
See notes to financial statements
11
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
================================================================================
Year Ended November 30, 1995 1994
- --------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment income $ 27,703,556 $ 25,417,486
Net realized gain (loss) on investments and
foreign currency transactions 6,230,363 (48,681,897)
Net unrealized gain (loss) on investments and
foreign currency translation 23,059,591 (831,027)
------------ ------------
Increase (decrease) in net assets
from operations $ 56,993,510 $(24,095,438)
------------ ------------
Distributions declared to shareholders -
From net investment income (Class A) $ -- $(38,773,645)
From net investment income (Class B) -- (3,332,371)
From net investment income (Class C) -- (99,440)
From net realized gain on investments and
foreign currency transactions (Class A) (14,380,757) (9,595,121)
From net realized gain on investments and
foreign currency transactions (Class B) (2,952,759) (754,139)
From net realized gain on investments and
foreign currency transactions (Class C) (346,641) --
------------ ------------
Total distributions declared to shareholders $(17,680,157) $(52,554,716)
------------ ------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 89,711,602 $180,053,701
Net asset value of shares issued to shareholders
in reinvestment of distributions 14,249,917 37,130,247
Cost of shares reacquired (149,551,002) (156,172,084)
------------ ------------
Increase (decrease) in net assets from
Fund share transactions $(45,589,483) $ 61,011,864
------------ ------------
Total decrease in net assets $ (6,276,130) $(15,638,290)
Net assets:
At beginning of year 452,255,424 467,893,714
------------ ------------
At end of year (including accumulated
undistributed (distributions in excess of)
net investment income of $41,131,061 and
$(7,092,064), respectively) $445,979,294 $452,255,424
============ ============
See notes to financial statements
12
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended November 30, Year Ended December 31,
---------------------------------- ----------------------------------
1995 1994 1993+++ 1992 1991 1990
- ----------------------------------------------------------------------------------------------------------------------------
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 $ 11.39 $ 13.37 $ 11.50 $ 12.63 $ 12.00 $ 11.45
-------- -------- -------- -------- -------- --------
Income from investment operations# -
Net investment income [ss] $ 0.76 $ 0.63 $ 0.58 $ 0.87 $ 0.94 $ 0.98
Net realized and unrealized gain (loss)
on investments and foreign
currency transactions 0.76 (1.17) 1.29 (0.70) 0.67 1.07
-------- -------- -------- -------- -------- --------
Total from investment operations $ 1.52 $ (0.54) $ 1.87 $ 0.17 $ 1.61 $ 2.05
======== ======== ======== ======== ======== ========
Less distributions declared to shareholders -
From net investment income $ -- $ (1.15) $ -- $ (1.30) $ (0.75) $ (0.95)
From net realized gain on investments
and foreign currency transactions (0.45) (0.29) -- -- -- (0.50)
From paid-in capital -- -- -- -- (0.23) (0.05)
-------- -------- -------- -------- -------- --------
Total distributions declared to
shareholders $ (0.45) $ (1.44) $ -- $ (1.30) $ (0.98) $ (1.50)
======== ======== ======== ======== ======== ========
Net asset value - end of period $ 12.46 $ 11.39 $ 13.37 $ 11.50 $ 12.63 $ 12.00
======== ======== ======== ======== ======== ========
Total return++ 13.93% (4.63)% 17.77% 1.35% 13.42% 17.90%
Ratios (to average net assets)/Supplemental data:
Expenses## 1.51% 1.54% 1.54% 1.53% 1.61% 1.44%
Net investment income 6.42% 5.45% 5.66% 6.78% 7.75% 8.06%
Portfolio Turnover 277% 358% 179% 163% 208% 220%
Net assets at end of period (000 omitted) $343,188 $370,110 $443,304 $340,347 $286,089 $145,202
<FN>
+ Annualized
++ 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.
+++ 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.
[ss] The distributor waived a portion of the Class A distribution fee for the periods indicated. If this fee had been incurred
by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.74 $ 0.62 $ 0.58 -- -- --
Ratio (to average net assets):
Expenses## 1.61% 1.64% 1.57% -- -- --
Net investment income 6.32% 5.35% 5.63% -- -- --
</FN>
</TABLE>
See notes to financial statements
13
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
Year ended December 31, 1989 1988 1987 1986 1985
- ---------------------------------------------------------------------------------------------------------------------
Class A
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 11.11 $ 11.87 $ 11.45 $ 10.70 $ 9.40
-------- -------- -------- -------- --------
Income from investment operations -
Net investment income $ 1.07 $ 0.94 $ 0.91 $ 0.82 $ 0.75
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions (0.26) (0.42) 1.86 2.35 1.94
-------- -------- -------- -------- --------
Total from investment operations $ 0.81 $ 0.52 $ 2.77 $ 3.17 $ 2.69
======== ======== ======== ======== ========
Less distributions declared to shareholders -
From net investment income $ (0.47) $ (0.90) $ (0.90) $ (0.82) $ (0.74)
From net realized gain on investments
and foreign currency transactions -- (0.32) (1.40) (1.52) (0.65)
From paid-in capital -- (0.06) (0.05) (0.08) --
-------- -------- -------- -------- --------
Total distributions declared
to shareholders $ (0.47) $ (1.28) $ (2.35) $ (2.42) $ (1.39)
======== ======== ======== ======== ========
Net asset value -- end of period $ 11.45 $ 11.11 $ 11.87 $ 11.45 $ 10.70
======== ======== ======== ======== ========
Total return 7.27% 3.68% 23.29% 29.36% 28.72%
Ratios (to average net assets)/Supplemental data [ss]:
Expenses 1.42% 1.12% 1.13% 1.17% 1.43%
Net investment income 8.42% 7.91% 7.54% 6.57% 7.45%
Portfolio turnover 282% 232% 378% 371% 307%
Net assets at end of period (000 omitted) $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
14
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
===================================================================================================================================
Year Ended November 30, 1995 1994 1993* 1995 1994**
- -----------------------------------------------------------------------------------------------------------------------------------
Class B Class C
- -----------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 11.32 $ 13.35 $ 13.22 $ 11.31 $ 12.30
-------- -------- -------- -------- --------
Income from investment operations# -
Net investment income $ 0.65 $ 0.56 $ 0.07 $ 0.66 $ 0.50
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions 0.76 (1.19) 0.06 0.77 (1.35)
-------- -------- -------- -------- --------
Total from investment operations $ 1.41 $ (0.63) $ 0.13 $ 1.43 $ (0.85)
======== ======== ======== ======== ========
Less distributions declared to shareholders -
From net investment income $ -- $ (1.11) $ -- $ -- $ (0.14)
From net realized gain on investments
and foreign currency transactions (0.45) (0.29) -- (0.45) --
-------- -------- -------- -------- --------
Total distributions declared
to shareholders $ (0.45) $ (1.40) $ -- $ (0.45) $ (0.14)
======== ======== ======== ======== ========
Net asset value - end of period $ 12.28 $ 11.32 $ 13.35 $ 12.29 $ 11.31
======== ======== ======== ======== ========
Total return 13.01% (5.39)% 4.32%13.11% (6.92)%
Ratios (to average net assets)/Supplemental data:
Expenses## 2.33% 2.38% 2.48% 2.26% 2.32%
Net investment income 5.59% 4.81% 4.72% 5.67% 5.06%
Portfolio turnover 277% 358% 179% 277% 358%
Net assets at end of period (000 omitted) $ 90,978 $ 73,458 24,590 $ 11,813 $ 8,687
<FN>
+ 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
15
<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
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 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
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
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
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.
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.
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
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.
Fees Paid Indirectly - The Fund's custodian bank calculates its fee based on the
Fund's average daily net assets. The fee is reduced according to a fee
agreement, which provides for custody fees to be reduced based on a formula
developed to measure the value of cash deposited with the custodian by the Fund.
This amount is shown as a reduction of expenses on the Statement of Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net 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 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 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. During the year ended November 30, 1995, accumulated undistributed net
investment income was increased by $20,519,569, accumulated net realized loss on
investments and foreign currency was decreased by $20,773,303, and paid-in
capital was increased by $253,734, due to differences between book and tax
accounting for currency transactions. This change had no effect on the net
assets or net asset value per share. 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
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
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 $8,917 for the year ended
November 30, 1995.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$108,086 for the year ended November 30, 1995, 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 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 $138,167 for the year
ended November 30, 1995. MFD is waiving the 0.10% distribution fee for an
indefinite period. Fees incurred
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
under the distribution plan during the year ended November 30, 1995 were 0.25%
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. The service fee is not charged on Class B shares held over one year. 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 $10,315 and $2,744 for Class B and Class C shares,
respectively, for the year ended November 30, 1995. Fees incurred under the
distribution plans during the year ended November 30, 1995 were 1.00% of average
daily net assets attributable to Class B and Class C shares on an annualized
basis.
A contingent deferred sales charge is imposed on shareholder redemptions of
Class A shares, on purchases of $1 million or more, in the event of a share
redemption within twelve months following the share 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. MFD receives
all contingent deferred sales charges. Contingent deferred sales charges imposed
during the year ended November 30, 1995 were $768, and $266,769 for Class A and
Class B shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as a 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.
(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 $479,566,766 $451,672,386
============ ============
Investments (non-U.S. Government securities) $594,703,805 $608,319,117
============ ============
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 $ 470,281,598
=============
Gross unrealized appreciation $ 10,612,799
Gross unrealized depreciation (2,021,805)
-------------
Net unrealized appreciation $ 8,590,994
=============
20
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
(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 1995 1994
--------------------------- ----------------------------
Year Ended November 30, Shares Amount Shares Amount
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 3,654,873 $ 43,257,969 6,994,122 $ 83,202,907
Shares issued to shareholders
in reinvestment of distributions 1,062,150 11,588,708 2,765,118 33,750,055
Shares reacquired (9,674,268) (113,405,139) (10,416,982) (120,789,728)
---------- ------------- ----------- -------------
Net decrease (4,957,245) $ (58,558,462) (657,742) $ (3,836,766)
========== ============= =========== =============
Class B Shares 1995 1994
--------------------------- ----------------------------
Year Ended November 30, Shares Amount Shares Amount
- --------------------------------------------------------------------------------------------------
Shares sold 3,283,886 $ 38,572,444 7,078,760 $ 83,400,018
Shares issued to shareholders
in reinvestment of distributions 223,471 2,421,082 275,106 3,329,286
Shares reacquired (2,588,468) (30,297,163) (2,704,874) (30,935,821)
---------- ------------- ----------- -------------
Net increase 918,889 $ 10,696,363 4,648,992 $ 55,793,483
========== ============= =========== =============
Class C Shares 1995 1994*
--------------------------- ----------------------------
Year Ended November 30, Shares Amount Shares Amount
- --------------------------------------------------------------------------------------------------
Shares sold 670,695 $ 7,881,189 1,159,179 $ 13,450,776
Shares issued to shareholders
in reinvestment of distributions 22,172 240,127 4,578 50,906
Shares reacquired (499,286) (5,848,700) (395,966) (4,446,535)
---------- ------------- ----------- -------------
Net increase 193,581 $ 2,272,616 767,791 $ 9,055,147
========== ============= =========== =============
<FN>
* For the period from the commencement of offering of Class C shares,
January 3, 1994 to November 30, 1994.
</FN>
</TABLE>
(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 year ended November
30, 1995 was $5,766.
21
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
(7) Financial Instruments
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 and forward foreign currency exchange
contracts. 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 November 30, 1995, is as
follows:
<TABLE>
<CAPTION>
Written Option Transactions 1995 Calls 1995 Puts
---------------------------------- ------------------------------------
Principal Amounts Principal Amounts
of Contracts of Contracts
(000 Omitted) Premiums (000 Omitted) Premiums
<S> <C> <C> <C> <C>
Outstanding, beginning of period -
Canadian Dollars -- $ -- 13,696 $ 71,457
Deutsche Marks 147,651 1,875,077 -- --
Japanese Yen 3,530,848 533,572 2,279,000 244,928
Swiss Francs/Deutsche Marks 21,051 88,635 -- --
Options written -
Australian Dollars 44,638 408,865 76,302 881,957
British Pounds 17,912 309,088 16,710 309,088
Canadian Dollars 27,401 57,470 53,065 210,236
Deutsche Marks 407,496 1,771,250 468,247 3,123,414
Deutsche Marks/British Pounds 45,397 292,360 60,188 205,757
Italian Lire/Deutsche Marks 159,715,211 1,565,782 102,517,429 2,731,910
Japanese Yen 21,948,733 5,339,569 69,005,128 7,346,278
Japanese Yen/Deutsche Marks -- -- 7,367,471 262,659
Spanish Pesetas/Deutsche Marks -- -- 1,568,959 102,820
Swedish Kronor/Deutsche Marks 221,275 142,925 -- --
U.S. Dollars -- -- 23,000 303,672
Options terminated in closing transactions -
Australian Dollars (35,574) (351,213) (55,996) (679,072)
British Pounds (17,912) (309,088) -- --
Canadian Dollars (27,401) (57,470) (66,761) (281,693)
Deutsche Marks (63,152) (313,437) (345,010) (2,606,042)
Deutsche Marks/British Pounds (13,115) (85,169) (60,188) (205,757)
Italian Lire/Deutsche Marks -- -- (11,827,115) (88,490)
Japanese Yen (19,513,894) (5,191,333) (66,048,883) (7,067,440)
Japanese Yen/Deutsche Marks -- -- -- --
Spanish Pesetas/Deutsche Marks -- -- (1,568,959) (102,820)
Swedish Kronor/Deutsche Marks (221,275) (142,925) -- --
U.S. Dollars -- -- (23,000) (303,672)
</TABLE>
22
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Written Option Transactions - continued
1995 Calls 1995 Puts
---------------------------------- ------------------------------------
Principal Amounts Principal Amounts
of Contracts of Contracts
(000 Omitted) Premiums (000 Omitted) Premiums
<S> <C> <C> <C> <C>
Options exercised -
Deutsche Marks (185,144) $(1,994,901) -- $ --
Italian Lire/Deutsche Marks -- -- (26,617,260) (361,933)
Swiss Francs/Deutsche Marks (21,051) (88,635) -- --
Options expired -
British Pounds -- -- (16,710) (309,088)
Deutsche Marks (306,851) (1,337,989) (79,506) (357,584)
Italian Lire/Deutsche Marks (98,342,657) (548,685) (2,700,500) (21,688)
Japanese Yen (5,965,687) (681,808) (1,991,245) (94,994)
----------- ----------- ----------- -----------
Outstanding, end of period 61,413,900 $ 1,281,940 72,048,062 $ 3,313,903
=========== =========== ========== ===========
Options outstanding at end of period consist of -
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
Japanese Yen -- -- 3,244,000 428,772
Japanese Yen/Deutsche Marks -- -- 7,367,471 262,659
----------- ----------- ----------- -----------
Outstanding, end of period 61,413,900 $ 1,281,940 72,048,062 $ 3,313,903
=========== =========== ========== ===========
</TABLE>
At November 30, 1995, the Fund had sufficient cash and/or securities at least
equal to the value of the written options.
23
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Forward Foreign Currency Exchange Contracts
Net Unrealized
Contracts To Contracts Appreciation
Settlement Date Deliver/receive in Exchange for at Value (Depreciation)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales 12/07/95-12/20/95 AUD 45,914,654 $ 34,381,315 $ 34,082,244 $ 299,071
2/26/96-2/29/96 CAD 42,701,123 31,150,018 31,416,088 (266,070)
12/15/95-5/31/96 CHF 92,289,347 80,957,795 79,462,141 1,495,654
12/07/95-5/31/96 DEM 992,115,637 695,963,435 687,187,850 8,775,585
12/07/95-4/12/96 DKK 279,358,728 51,122,618 49,922,656 1,199,962
12/07/95 ESP 4,400,902,471 35,839,820 35,682,517 157,303
12/15/95 FIM 34,491,678 7,840,800 8,027,559 (186,759)
12/13/95-4/12/96 FRF 238,563,446 48,115,230 47,821,524 293,706
1/30/96 GBP 8,610,439 13,380,622 13,175,977 204,645
12/07/95-12/21/95 ITL 153,430,211,567 94,900,616 95,876,935 (976,319)
12/01/95-6/07/96 JPY 47,791,959,698 485,166,550 473,070,604 12,095,946
12/14/95-1/22/96 NLG 85,294,895 54,375,909 52,818,453 1,557,456
12/20/95 NZD 11,208,000 7,308,176 7,302,516 5,660
12/14/95-12/21/95 SEK 607,695,778 91,482,979 92,617,337 (1,134,358)
---------------- --------------- ----------------
$ 1,731,985,883 $ 1,708,464,401 $ 23,521,482
================ ================ ===============
Purchases 12/07/95-2/29/96 AUD 73,881,659 $ 55,373,304 $ 54,699,735 $ (673,569)
2/26/96-2/29/96 CAD 27,522,036 20,330,207 20,248,928 (81,279)
12/14/95-2/29/96 CHF 66,588,776 57,496,513 56,769,585 (726,928)
1/17/95-2/15/96 CZK 354,621,819 13,331,436 13,242,891 (88,545)
12/01/95-5/31/96 DEM 1,089,782,730 769,315,440 754,929,651 (14,385,789)
2/29/96-4/12/96 DKK 314,707,415 57,411,419 56,281,165 (1,130,254)
12/07/95 ESP 1,414,515,357 11,119,355 11,468,891 349,536
12/14/95 FIM 33,684,095 7,848,221 7,839,300 (8,921)
4/12/96-5/31/96 FRF 245,967,801 50,137,688 49,233,135 (904,553)
12/07/95-1/31/96 ITL 108,213,695,880 67,034,617 67,558,716 524,099
12/07/95-3/27/96 JPY 46,177,952,655 460,040,957 455,504,387 (4,536,570)
12/14/95 NLG 25,636,663 16,371,421 15,849,560 (521,861)
12/04/95-12/20/95 NZD 23,428,409 15,499,823 15,275,071 (224,752)
12/11/95-2/29/96 SEK 560,329,881 80,735,405 85,176,332 4,440,927
---------------- --------------- ----------------
$ 1,682,045,806 $ 1,664,077,347 $ (17,968,459)
================ =============== ================
</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 $251,892 at November 30, 1995.
At November 30, 1995, the Fund had sufficient cash and/or securities to
cover any commitments under these contracts.
24
<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 portfolio of investments, as of November
30, 1995, and the related statement of operations for the year then ended and
the statement of changes in net assets and the financial highlights for each of
the two years in the period then ended. 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
November 30, 1995, 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 November 30, 1995, the results of its operations for
the year then ended and the changes in its net assets and financial highlights
for each of the two years in the period then ended, in conformity with generally
accepted accounting principles.
[Signature of Ernst & Young LLP]
Boston, Massachusetts
January 5, 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.
25
<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 15 20 25
----------------------------------------------------------------
<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.
26
<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.
MFS PERSONAL SERVICE
[GRAPHIC OMITTED]
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).
MFS MAILING ADDRESSES
FOR PERSONAL ACCOUNTS:
MFS Service Center, Inc.
P.O. Box 2281
Boston, MA 02107-9906
FOR IRA ACCOUNTS:
MFS Service Center, Inc.
J.W. McCormack Station
P.O. Box 4501
Boston, MA 02101-9817
27
<PAGE>
MFS INVESTMENT OPPORTUNITIES
MUTUAL FUNDS
The MFS Family of Funds, 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 anytime).
[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.
28
<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 1-800-637-2929
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 Market 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[SM]
- --------------------------------------------------------------------------------
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, Louisiana, Maryland,
Massachusetts, Mississippi, New York, North Carolina, Pennsylvania, South
Carolina, Tennessee, Texas, Virginia, Washington, West Virginia
- --------------------------------------------------------------------------------
MONEY MARKET
================================================================================
MFS [Registration Mark] Cash Reserve Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Government Money Market Fund
- --------------------------------------------------------------------------------
MFS [Registration] Mark Money Market Fund
- --------------------------------------------------------------------------------
<PAGE>
MFS [Registration Mark] WORLD [DALBAR LOGO] BULK RATE
GOVERNMENTS FUND U.S. POSTAGE
P A I D
500 Boylston Street PERMIT #55638
Boston, MA 02116 BOSTON, MA
[MFS Logo]
MWG-2 1/96 40M 20/220/320
<PAGE>
