<PAGE>
[LOGO] MFS(SM) Annual Report
INVESTMENT MANAGEMENT for Year Ended
November 30, 1996
MFS(R) WORLD GOVERNMENTS FUND
[GRAPHIC OMITTED]
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AMERICA LEARNS HOW "WE INVENTED THE MUTUAL FUND", (see page 31)
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<PAGE>
TABLE OF CONTENTS
Letter from the Chairman ................................................... 1
A Discussion with the Portfolio Manager .................................... 3
Portfolio Manager's Profile ................................................ 7
Fund Facts ................................................................. 8
Performance Summary ........................................................ 8
Tax Form Summary ...........................................................10
Portfolio of Investments ...................................................11
Financial Statements .......................................................14
Notes to Financial Statements ..............................................21
Independent Auditors' Report ...............................................30
MFS Family of Funds ........................................................32
Trustees and Officers ......................................................33
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HIGHLIGHTS
o FOR THE 12 MONTHS ENDED NOVEMBER 30, 1996, CLASS A SHARES OF THE FUND
PROVIDED A TOTAL RETURN AT NET ASSET VALUE OF 7.36%, CLASS B SHARES 6.39%,
AND CLASS C SHARES 6.56%.
o THE BEST-PERFORMING BOND MARKETS THIS PAST YEAR WERE THE HIGHER- YIELDING
MARKETS, SUCH AS AUSTRALIA, CANADA, SPAIN, AND ITALY, WHILE THE CORE MARKETS
-- THE UNITED STATES, JAPAN, AND GERMANY -- WERE THE WORST PERFORMERS.
o WHILE ALL COUNTRIES ARE TRYING TO REDUCE DEFICITS, SUCCESS HAS BEEN ELUSIVE
FOR SOME, PARTLY DUE TO THEIR WEAK ECONOMIES. TAX REVENUES ARE NOT GROWING
RAPIDLY, AND SOCIAL PAYMENTS SUCH AS UNEMPLOYMENT BENEFITS ARE RISING IN
SOME COUNTRIES.
o OUR OUTLOOK FOR JAPAN CALLS FOR A CONTINUATION OF SLOW, SOMEWHAT CHOPPY
GROWTH WITH VERY LOW INFLATION -- AT ESSENTIALLY ZERO, AND POSSIBLY EVEN
NEGATIVE.
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<PAGE>
LETTER FROM THE CHAIRMAN
- ----------------------------
[Photo of A. Keith Brodkin]
- ----------------------------
A. Keith Brodkin
Dear Shareholders:
The U.S. economy appears to have settled into a pattern of moderate growth and
inflation -- two factors that we think can be important contributors to a
favorable long-term investment climate. During the first quarter of 1996, real
(inflation-adjusted) economic growth was 2.3% on an annualized basis, followed
by a rate of 4.7% in the second quarter. However, this unexpectedly high level
was followed by a more moderate 2.0% pace during the third quarter. Overall,
real growth in gross domestic product has surpassed our expectations this year,
and we now expect that growth for all of 1996 could exceed 2.5%. While the
consumer appears to be carrying an excessive debt load, this sector, which
represents two-thirds of the economy, provided some support to the automobile
and housing markets through much of the year. Consumer spending has also been
positively impacted by widespread job growth and, more recently, modestly
increasing wages. Retail sales, which have been flat for several months, appear
to be improving during the holiday shopping season. The economies of Europe and
Japan, meanwhile, continue to be in the doldrums, weakening U.S. export markets.
Finally, the capital spending plans of American corporations are far from
robust. Thus, while economic growth should continue, we expect some slackening
toward the end of the year.
In the bond markets, persistent signs of economic weakness led to decreases in
short-term interest rates by the Federal Reserve Board in late 1995 and early
1996. Should signs of more rapid economic growth and, particularly, of higher
inflation resurface, we would expect the Fed to maintain its anti- inflationary
stance. Through the middle of the year, bond markets traded in a narrow range as
investors shifted between concern for the lack of a budget resolution in
Washington and hope that sluggish economic reports and low inflation might lead
to lower interest rates. Later, fixed-income markets began reacting to
conflicting signals regarding the economy's strength with more volatile trading
patterns marked by a downward bias in interest rates. Interest rates may move
higher over the coming months, but we believe that, at current levels,
fixed-income markets are equitably valued.
Outside the United States, we see similar economic backdrops, with slow to
moderate growth and low inflation in the developed countries of Europe and
Japan. We believe the long-term underperformance of many of these markets
relative to the United States has created some attractive valuations. European
markets such as the United Kingdom and Germany have recently eased monetary
policy, a trend which may continue as German and other central banks seek
economic stimulus. Meanwhile, corporate earnings growth is expected to improve
in these markets, which may lead to their outperforming the U.S. market.
Finally, as you may notice, this report to shareholders incorporates a number
of changes which we hope you will find informative and useful. Following a
discussion with the Portfolio Manager, we have added new information on the
Fund's holdings, including charts illustrating the portfolio's concentration in
the types of investments that meet its criteria. Near the back of the report,
telephone numbers and addresses are listed if you would like to contact MFS.
We appreciate your support and welcome any questions or comments you may have.
Respectfully,
/s/ A. Keith Brodkin
A. Keith Brodkin
Chairman and President
December 12, 1996
<PAGE>
A DISCUSSION WITH THE PORTFOLIO MANAGER
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[Photo of Richard O. Hawkins]
- ---------------------------------
Richard O. Hawkins
For the 12 months ended November 30, 1996, Class A shares of the Fund provided a
total return of 7.36%, Class B shares 6.39%, and Class C shares 6.56%. All of
these returns assume the reinvestment of distributions but exclude the effects
of any sales charges and compare to a 6.43% return for the J.P. Morgan Global
Government Bond Index (the Morgan Index), an aggregate index of actively traded
government bonds issued by 13 countries, including the United States, with
remaining maturities of at least one year.
Q. WHAT DO YOU SEE AS SOME OF THE REASONS FOR THIS PERFORMANCE, RICHARD?
A. The best-performing bond markets this past year were the higher-yielding
markets of Australia, Canada, Spain, Sweden, and Italy. In local currency terms,
the core markets -- the United States, Japan, and Germany -- were the worst
performers. This mix of performance reflected the relatively better fundamental
trends in the noncore markets. Since our focus is to identify and benefit from
improving fundamental conditions, we have been overweighted in the noncore
markets. The strong local bond returns were reduced by the rise in the U.S.
dollar. Since a good portion of the portfolio was hedged back into the dollar
for most of this period, the Fund's Class A return exceeded the Morgan Index
benchmark.
Q. HOW WOULD YOU DESCRIBE THE OVERALL ECONOMIC ENVIRONMENT YOU FACED OVER THE
PAST YEAR, PARTICULARLY AS IT RELATES TO THE FUND?
A. Roughly speaking, the year can be divided into two halves. During the first
half, concerns about accelerating U.S. growth, and its potential boost to
other major economies, set off a rise in interest rates based on fears of
higher inflation and one or more rate hikes by the Federal Reserve Board. It
was during this period that the majority of the U.S. dollar rise was seen. In
the second half, the U.S. economy slowed, inflation fears receded, and rates
declined. In Europe, generally, and Japan, the story is more one of gradual
economic recovery.
Q. LET'S LOOK AT SOME SPECIFIC MARKETS. HOW HAS THE U.S. MARKET PERFORMED OVER
THE PAST YEAR, AND WHAT IS YOUR OUTLOOK FOR THE UNITED STATES GOING FORWARD?
A. As we mentioned, U.S. rates rose due to the strength of the economy. At the
beginning of the year, when rates were at their low, the market was also
expecting, or hoping for, further efforts in Washington to curtail the deficit.
When the election season got underway, these plans were put on hold,
disappointing the market. On the other hand, despite solid growth, it became
clear by the second half that underlying inflation had actually continued to
fall, a fact which contributed to the rate decline seen since the summer. Going
forward, the outlook is fairly neutral. Growth should remain on track and
inflation subdued. Month-to-month oscillations in the economy may cause rates to
shift, but the overall prospect for next year would seem to be for rates to
fluctuate in a range around current levels.
Q. WHAT ABOUT OTHER DOLLAR-BLOC MARKETS? THEY PERFORMED WELL OVER THE LAST
YEAR. DO YOU BELIEVE THEY CAN CONTINUE TO DO WELL?
A. We believe Australia and Canada have good potential to outperform the
United States again next year. In Canada, inflation is likely to remain below
U.S. levels, and the government is making great progress on the budget
deficit. In Australia, the story is similar, in that the government is working
to cut the budget deficit and increase national savings, while inflation is
tame.
Q. LET'S GO TO JAPAN. WHAT SIGNS ARE WE SEEING THAT THE RECOVERY IS CONTINUING
OR SLOWING DOWN, AND HOW ARE YOUR OBSERVATIONS REFLECTED IN THE FUND?
A. Japan is in a situation similar to the U.S. economy's in the early 1990s, but
their problems are proportionally bigger. Even though the stock market and real
estate bubbles in Japan burst early in this decade, the banks, which were
lending against stocks and buildings as collateral, have not yet fully written
down their bad debt. Officials, seeking rightly to avoid an outright depression,
are moving very slowly to deregulate the economy. The weaker yen has clearly
helped revive the export sector, but Japanese consumers and businesspeople
remain nervous. Our outlook calls for a continuation of slow, somewhat choppy
growth with very low inflation -- essentially zero, and possibly even negative.
These conditions are quite positive for fixed-income investments, but we are
underweighted in Japan because we feel other markets offer better prospects.
Q. EUROPE, MEANWHILE, IS STILL MOVING TOWARD MONETARY UNION IN JANUARY 1999.
TO GET READY, EUROPEAN COUNTRIES ARE SUPPOSED TO BE CUTTING THEIR BUDGETS AND
REDUCING DEFICITS. HOW'S THIS COMING?
A. All countries are making efforts to reduce deficits, but success has been
elusive for some. The weak economic environment has been partly at fault, since
tax revenues are not growing rapidly, and social payments such as unemployment
benefits are rising in some countries. Ironically, the German deficit has, if
anything, deteriorated this year. An economic upturn in 1997 may help, but the
underlying problem remains low potential growth. European businesses have high
cost structures in the form of direct payments, such as wages and taxes, and
indirect costs from rigid regulations. On this front, progress has been
generally slow, so longer-term issues still need to be addressed.
This is good and bad news for bond markets. For most of the year, European
bonds were overweighted to take advantage of low growth, declining deficits, and
falling official interest rates. Over this period, German interest rates dropped
relative to U.S. rates by 1.00%. Other European markets, where the portfolio was
overweighted, outperformed Germany's. As the year draws to a close, however, the
room for further outperformance by Europe as a whole appears more limited. At
present, the Fund is back to a neutral weighting in Europe overall.
Q. WHAT CAN YOU TELL US ABOUT THE FUND'S CURRENCY SIDE? WHERE ARE YOUR LARGEST
CURRENCY WEIGHTINGS, AND WHAT IS YOUR OUTLOOK FOR THESE MARKETS?
A. Just as low growth and falling inflation have generally supported foreign
bonds this past year, these same forces weighed down their respective
currencies. A sizable portion of the foreign bonds in the portfolio were
judiciously hedged back into U.S. dollars for most of the year, helping to
protect against the stronger dollar. In 1997, it is harder to see the case for a
similar rise in the U.S. dollar. The United States still needs to borrow immense
sums from the rest of the world every year, although foreigners have been
willing lenders in 1996. The question remains how long their interest will be
sustained. Also, while stronger U.S. growth pushed the dollar up relative to
currencies of countries with weaker economies this year, next year that
advantage could be less apparent. Our current weightings are neutral, reflecting
the fine balance between these factors.
Q. CAN YOU TALK ABOUT SOME COUNTRIES THAT PERFORMED AS WELL AS OR BETTER THAN
EXPECTED OVER THE PAST YEAR, AND WHY YOU THINK THEY DID WELL?
A. Overall, our weightings decisions were correct, favoring the noncore bond
markets and U.S. dollar-related currencies, as we have already discussed. Our
expectations of even higher rates in the United States did not materialize in
the second half of the year, however. We overestimated the consumers'
willingness to spend and underestimated their desire to increase savings. As
measured in the national statistics, savings rose very rapidly by historical
standards in 1996. In our view, one of the risks for the U.S. bond market in
1997 is the possibility that consumer spending growth could return to higher
levels. Emerging market debt performed very well this past year. In particular,
dollar-denominated Brady bonds rallied as new investors entered the markets and
issuers refinanced some of these bonds. The Fund participated to some extent in
this move, but not to the degree that some other funds in our category did.
Let me explain our approach to emerging market debt. First, emerging debt can
be divided into investment-grade (rated "BBB" or higher) and below-
investment-grade debt. The Fund aims to represent a relatively high-quality
portfolio, so we do not believe it should be too heavily exposed to the below-
investment-grade sector. In addition, emerging markets, even if the issuer is
highly rated, are at times quite volatile -- a volatility that comes with the
territory. However, using an approach similar to that applied in the major
markets, we have identified what we believe are attractive investment
opportunities in these markets.
Q. AS YOU LOOK AHEAD, WHAT CHANGES DO YOU SEE IN THE OVERALL MARKET OR ECONOMIC
ENVIRONMENT, PARTICULARLY AS IT RELATES TO THE FUND, AND HOW ARE YOU POSITIONING
THE FUND TO TRY TO TAKE ADVANTAGE OF THOSE CHANGES?
A. As always, we will focus on fundamental trends. Currently, nearly all
countries in which we invest are characterized by improving budget trends and
low or falling inflation -- a positive environment for global bonds. Since there
remains a wide range of growth prospects and policy issues among these
countries, and major events such as the formation of a single European currency
loom on the horizon, we believe global bond investing should continue to offer
the kinds of diversification and return opportunities so clearly demonstrated
this year. Respectfully,
/s/ Richard O. Hawkins
Richard O. Hawkins
Portfolio Manager
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PORTFOLIO MANAGER'S PROFILE
RICHARD O. HAWKINS IS SENIOR VICE PRESIDENT OF MASSACHUSETTS FINANCIAL
SERVICES AND DIRECTOR OF THE INTERNATIONAL FIXED INCOME DEPARTMENT. HE IS
PORTFOLIO MANAGER OF MFS WORLD GOVERNMENTS FUND AND HEADS THE TEAM THAT
MANAGES THE FOREIGN BOND AND CURRENCY POSITIONS OF MFS WORLD TOTAL RETURN
FUND, THE MFS MERIDIAN AND MFS INTERNATIONAL FUNDS, FOUR CLOSED- END FUNDS,
AND MFS VARIABLE ANNUITIES.
MR. HAWKINS IS A 1978 GRADUATE OF BROWN UNIVERSITY AND RECEIVED A MASTER'S
DEGREE IN BUSINESS ADMINISTRATION FROM THE UNIVERSITY OF PENNSYLVANIA'S
WHARTON SCHOOL OF BUSINESS IN 1986.
HE JOINED MFS IN AUGUST 1988 AND WAS NAMED VICE PRESIDENT IN 1991,
SENIOR VICE PRESIDENT IN 1994, AND INTERNATIONAL FIXED INCOME DEPARTMENT
HEAD IN 1995.
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COUNTRY WEIGHTINGS
Ireland 10%
Germany 12%
Australia 10%
United States 23%
Italy 11%
Other Countries* 34%
*For a more complete breakdown, refer to the Portfolio of Investments.
<PAGE>
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FUND FACTS
STRATEGY: THE FUND'S OBJECTIVE IS TO SEEK NOT ONLY PRESERVATION,
BUT GROWTH OF CAPITAL, TOGETHER WITH MODERATE CURRENT
INCOME.
COMMENCEMENT OF
INVESTMENT OPERATIONS: FEBRUARY 26, 1981
SIZE: $401 MILLION NET ASSETS AS OF NOVEMBER 30, 1996
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PERFORMANCE SUMMARY
The information below and on the following page illustrates the historical
performance of MFS World Governments Fund Class A shares in comparison to
various market indicators. Class A share results 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 are
historical and assume the reinvestment of dividends and capital gains. The
performance of Class B and C would be greater or less than the line shown, based
on differences in loads and fees.
The following line graphs, comparing the performance of the Fund to a benchmark
index, now include a new index, the J. P. Morgan Global Government Bond Index,
an unmanaged index of actively traded government bonds issued from 13 countries
(including the United States) with remaining maturities of at least one year.
MFS believes that this index is more representative of the countries in which
the Fund invests than the Salomon Brothers World Government Bond Index (an
unmanaged index representing a wider universe of government bonds), the index
which the Fund has been using in previous reports as a benchmark. For this
report only, the Salomon index is also included in the graphs.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 5-Year Period Ended November 30, 1996)
MFS J.P. Morgan Salomon Brothers
World Governments Consumer Global World
Fund Price Index - Government Government
Class A U.S. Bond Index Bond Index
----------------- ------------- ----------- ----------------
11/91 $ 9,528 $10,000 $10,000 $10,000
11/92 10,292 10,305 10,881 11,036
11/93 12,003 10,581 12,207 12,469
11/94 11,448 10,864 12,458 12,835
11/95 13,042 11,143 14,715 15,161
11/96 14,002 11,524 15,662 16,004
<PAGE>
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 10-Year Period Ended November 30, 1996)
MFS J.P. Morgan Salomon Brothers
World Governments Consumer Global World
Fund Price Index - Government Government
Class A U.S. Bond Index Bond Index
----------------- ------------- ----------- ----------------
11/86 $ 9,528 $10,000 $10,000 $10,000
11/88 12,850 10,891 12,167 12,969
11/90 16,050 12,113 14,279 14,556
11/92 18,459 12,856 17,263 17,859
11/94 20,532 13,553 19,766 20,769
11/96 25,112 14,377 24,849 25,898
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
1 Year 3 Years 5 Years 10 Years
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<S> <C> <C> <C> <C>
MFS World Governments Fund (Class A)
including 4.75% sales charge + 2.27% + 3.57% + 6.96% + 9.64%
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MFS World Governments Fund (Class A) at net asset value + 7.36% + 5.27% + 8.00% +10.18%
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MFS World Governments Fund (Class B) with CDSC + 2.65% + 3.59% + 7.16% + 9.88%
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MFS World Governments Fund (Class B) without CDSC + 6.39% + 4.39% + 7.43% + 9.88%
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MFS World Governments Fund (Class C) with CDSC + 5.63% + 4.45% + 7.50% + 9.92%
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MFS World Governments Fund (Class C) without CDSC + 6.56% + 4.45% + 7.50% + 9.92%
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Average general world income fund** +13.19% + 6.71% + 7.69% + 8.84%
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Salomon Brothers World Government Bond Index*** + 5.56% + 8.68% + 9.86% + 9.98%
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J.P. Morgan Global Government Bond Index + 6.43% + 8.66% + 9.39% + 9.53%
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Consumer Price Index* + 3.42% + 2.89% + 2.88% + 3.70%
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</TABLE>
* The Consumer Price Index is a popular measure of change in prices.
** Source: Lipper Analytical Services.
*** The Salomon Brothers World Government Bond Index is unmanaged and consists
of complete universes of government bonds with remaining maturities of at
least five years.
Investment return and principal value will fluctuate, and shares, when redeemed,
may be worth more or less than their original cost. Past performance is no
guarantee of future results.
Class B SEC results with contingent deferred sales charge (CDSC), reflect the
applicable CDSC which declines over six years as follows: 4%, 4%, 3%, 3%, 2%,
1%, 0%. Class C shares have no initial sales charge but, along with Class B
shares, have higher annual fees and expenses than Class A shares. As of April 1,
1996, Class C shares redeemed within 12 months of purchase will be subject to a
1% CDSC.
Class B and Class C share performance includes the performance of the Fund's
Class A shares for periods prior to the commencement of offering of Class B
shares on September 7, 1993 and of Class C shares on January 3, 1994. Sales
charges and operating expenses for Class A, Class B, and Class C shares differ.
The Class A share performance, which is included within the Class B and Class C
share performance with CDSC, has been adjusted to reflect the CDSC generally
applicable to Class B and Class C shares rather than the initial sales charge
generally applicable to Class A shares. Class B and Class C share performance
has not been adjusted, however, to reflect differences in operating expenses
(e.g., Rule 12b-1 fees), which generally are lower for Class A shares. Fund
results reflect any applicable expense subsidies and waivers, without which the
performance results would have been less favorable. Subsidies and waivers may be
rescinded at any time. See the prospectus for details.
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TAX FORM SUMMARY
In January 1997, shareholders will be mailed a tax form summary reporting the
federal tax status of all distributions paid during the calendar year 1996.
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<PAGE>
PORTFOLIO OF INVESTMENTS - November 30, 1996
Bonds - 81.8%
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Principal Amount
Issuer (000 Omitted) Value
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Foreign Bonds - 69.8%
Australia - 9.9%
Commonwealth of Australia, 8.75s, 2001 AUD 11,915 $ 10,378,455
Commonwealth of Australia, 9.75s, 2002 9,000 8,228,220
Commonwealth of Australia, 9.5s, 2003 16,400 15,093,915
Queensland Treasury Corp., 8s, 2003 7,200 6,121,825
--------------
$ 39,822,415
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Belgium - 3.5%
Kingdom of Belgium, 9s, 1998 BEF 130,000 $ 4,462,411
Kingdom of Belgium, 8.75s, 2002 90,000 3,352,908
Kingdom of Belgium, 7.25s, 2004 95,000 3,318,487
Kingdom of Belgium, 8.5s, 2007 75,000 2,836,407
--------------
$ 13,970,213
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Canada - 3.1%
Government of Canada, 7.5s, 2003 CAD 9,800 $ 8,041,622
Government of Canada, 9s, 2004 4,750 4,238,142
--------------
$ 12,279,764
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Denmark - 5.1%
Kingdom of Denmark, 6s, 1999 DKK 23,494 $ 4,129,524
Kingdom of Denmark, 8s, 2001 77,248 14,507,941
Kingdom of Denmark, 7s, 2007 11,411 1,970,822
--------------
$ 20,608,287
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Germany - 12.0%
Federal Republic of Germany,
6.875s, 1999 DEM 13,530 $ 9,395,345
Federal Republic of Germany,
7.125s, 2002 15,547 11,175,038
German Unity Fund, 8.75s, 2000 14,962 11,182,587
Treuhandanstalt Obligationen,
6.375s, 1999 23,615 16,314,004
--------------
$ 48,066,974
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Ireland - 9.6%
Republic of Ireland, 6.25s, 1999 IEP 4,300 $ 7,301,294
Republic of Ireland, 9.25s, 2003 15,750 31,001,905
--------------
$ 38,303,199
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Italy - 5.8%
Republic of Italy, 8.313s, 1999 ITL 3,475,000 $ 2,442,426
Republic of Italy, 8.313s, 2006 27,805,000 20,762,979
--------------
$ 23,205,405
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Mexico - 2.7%
United Mexican States, 7.563s, 2001## $ 11,000 $ 11,018,700
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New Zealand - 3.1%
Government of New Zealand, 8s, 2001 NZD 17,000 $ 12,566,203
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Spain - 7.8%
Government of Spain, 8.4s, 2001 ESP 2,297,530 $ 19,173,823
Government of Spain, 8s, 2004 1,454,300 12,014,562
--------------
$ 31,188,385
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Sweden - 2.9%
Kingdom of Sweden, 11s, 1999 SEK 42,500 $ 7,063,840
Kingdom of Sweden, 10.25s, 2000 27,800 4,719,007
--------------
$ 11,782,847
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United Kingdom - 4.3%
United Kingdom Treasury, 7s, 2001 GBP 10,200 $ 17,119,452
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Total Foreign Bonds $279,931,844
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U.S. Bonds - 12.0%
U.S. Treasury Obligations - 12.0%
U.S. Treasury Notes, 6.875s, 2006 $ 8,300 $ 8,772,021
U.S. Treasury Stripped Interest
Payments, 2006 50,295 27,311,191
U.S. Treasury Stripped Interest
Payments, 2016 43,000 11,837,470
--------------
$ 47,920,682
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Total U.S. Bonds $ 47,920,682
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Total Bonds (Identified Cost, $319,772,034) $327,852,526
- -----------------------------------------------------------------------------
Short-Term Obligations - 16.2%
- -----------------------------------------------------------------------------
Eurolira Time Deposit, due 4/21/97 ITL 29,660,000 $ 19,656,822
Federal Farm Credit Bank, due 12/04/96 $ 7,155 7,151,870
Federal Home Loan Mortgage Corp.,
due 12/02/96 - 12/05/96 17,175 17,167,532
Federal National Mortgage Assn., due
12/06/96 11,760 11,751,507
General Electric Co., due 12/03/96 9,125 9,122,323
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Total Short-Term Obligations (Identified Cost, $64,407,059) $ 64,850,054
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Call Options Purchased - 0.3%
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Principal Amount
of Contracts
Description/Expiration Month/Strike Price (000 Omitted)
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Japanese Government Bonds
December/108.155 JPY 1,321,000 $ 499,338
December/111.174 852,000 276,048
January/111.279 1,074,000 434,970
February/116.80 1,338,000 167,250
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Total Call Options Purchased (Premiums Paid, $380,655) $ 1,377,606
- -----------------------------------------------------------------------------
Deutsche Marks
December/1.495 DEM 38,802 $ 237,355
Deutsche Marks/British Pounds
December/2.535 36,986 70,126
January/2.45 53,162 1,771,896
January/2.51 54,464 1,021,420
Japanese Government Bonds
December/111.774 JPY 1,321,000 34,346
Swiss Francs/Deutsche Marks
January/0.829 CHF 21,947 380,030
February/0.84 35,649 334,711
February/0.84 22,238 208,192
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Total Put Options Purchased (Premiums Paid, $1,415,969) $ 4,058,076
- -----------------------------------------------------------------------------
Total Investments (Identified Cost, $385,975,717) $ 398,138,262
- -----------------------------------------------------------------------------
Call Options Written
- -----------------------------------------------------------------------------
Deutsche Marks/British Pounds
January/2.3682 DEM 51,387 $ (617)
Japanese Government Bonds
December/111.774 JPY 1,321,000 (113,605)
Swiss Francs/Deutsche Marks
February/0.8265 CHF 35,076 (24,413)
- -----------------------------------------------------------------------------
Total Call Options Written (Premiums Received, $398,581) $ (138,635)
- -----------------------------------------------------------------------------
Put Options Written - (0.6)%
- -----------------------------------------------------------------------------
Deutsche Marks/British Pounds
January/2.45 DEM 53,162 $ (1,765,092)
Japanese Government Bonds
December/108.155 JPY 1,321,000 --
December/111.174 852,000 --
January/111.279 1,074,000 (2,148)
February/116.8 1,338,000 (36,126)
Swiss Francs/Deutsche Marks
January/0.829 CHF 21,947 (379,987)
- -----------------------------------------------------------------------------
Total Put Options Written (Premiums Received, $1,312,648) $ (2,183,353)
- -----------------------------------------------------------------------------
Other Assets, Less Liabilities - 1.3% $ 5,158,527
- -----------------------------------------------------------------------------
Net Assets - 100.0% $ 400,974,801
- -----------------------------------------------------------------------------
##SEC Rule 144A restriction.
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
BEF = Belgian Francs FIM = Finnish Markkaa NLG = Dutch Guilders
CAD = Canadian Dollars FRF = French Francs NOK = Norwegian Kroner
CHF = Swiss Francs GBP = British Pounds NZD = New Zealand Dollars
DEM = Deutsche Marks HKD = Hong Kong Dollars SEK = Swedish Kronor
DKK = Danish Kroner IEP = Irish Punts THB = Thai Bahts
ECU = European Currency Units ITL = Italian Lire
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ------------------------------------------------------------------------------
November 30, 1996
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $385,975,717) $398,138,262
Cash 30,325
Net receivable for forward foreign currency exchange
contracts sold 11,888,836
Receivable for investments sold 12,891,772
Receivable for Fund shares sold 291,824
Net receivable for interest rate swap agreements 1,307,519
Interest receivable 9,938,290
Other assets 4,232
------------
Total assets $434,491,060
------------
Liabilities:
Payable for investments purchased $ 12,969,017
Payable for Fund shares reacquired 428,121
Written options outstanding, at value (premiums received,
$1,711,229) 2,321,988
Net payable for forward foreign currency exchange contracts
purchased 16,327,375
Net payable for forward foreign currency exchange contracts 1,031,570
Payable to affiliates -
Management fee 24,717
Distribution fee 6,340
Shareholder servicing agent fee 5,535
Accrued expenses and other liabilities 401,596
------------
Total liabilities $ 33,516,259
------------
Net assets $400,974,801
============
Net assets consists of:
Paid-in capital $380,188,634
Unrealized appreciation on investments and translation of
assets and liabilities in foreign currencies 7,310,863
Accumulated undistributed net realized gain on investments
and foreign currency transactions 2,011,498
Accumulated undistributed net investment income 11,463,806
------------
Total $400,974,801
============
Shares of beneficial interest outstanding 34,437,816
==========
Class A shares:
Net asset value per share
(net assets of $283,770,256 / 24,245,272 shares of
beneficial interest outstanding) $11.70
======
Offering price per share (100 / 95.25 of net asset value per
share) $12.28
======
Class B shares:
Net asset value and offering price per share
(net assets of $102,717,351 / 8,933,379 shares of
beneficial interest outstanding) $11.50
======
Class C shares:
Net asset value and offering price per share
(net assets of $14,487,194 / 1,259,165 shares of beneficial
interest outstanding) $11.51
======
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
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- ------------------------------------------------------------------------------
Year Ended November 30, 1996
- ------------------------------------------------------------------------------
Net investment income:
Interest income $ 29,740,001
------------
Expenses -
Management fee $ 3,491,716
Trustees' compensation 31,891
Shareholder servicing agent fee (Class A) 461,884
Shareholder servicing agent fee (Class B) 208,126
Shareholder servicing agent fee (Class C) 20,060
Distribution and service fee (Class A) 682,511
Distribution and service fee (Class B) 946,025
Distribution and service fee (Class C) 133,734
Custodian fee 418,321
Auditing 58,183
Postage 51,347
Printing 29,326
Legal 5,202
Miscellaneous 245,201
------------
Total expenses $ 6,783,527
Fees paid indirectly (26,799)
------------
Net expenses $ 6,756,728
------------
Net investment income $ 22,983,273
============
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 12,574,227
Written option transactions 3,859,882
Foreign currency transactions (4,903,783)
Futures contracts (4,184)
------------
Net realized gain on investments and foreign currency
transactions $ 11,526,142
------------
Change in unrealized appreciation (depreciation) -
Investments and interest rate swap agreements $ 4,296,226
Written options (1,201,514)
Translation of assets and liabilities in foreign currencies (10,225,655)
------------
Net unrealized loss on investments and foreign currency
translation $ (7,130,943)
------------
Net realized and unrealized gain on investments and
foreign currency $ 4,395,199
------------
Increase in net assets from operations $ 27,378,472
============
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
- ------------------------------------------------------------------------------
Year Ended November 30, 1996 1995
- ------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment income $ 22,983,273 $ 27,703,556
Net realized gain on investments and foreign
currency transactions 11,526,142 6,230,363
Net unrealized gain (loss) on investments
and foreign currency
translation (7,130,943) 23,059,591
------------- -------------
Increase in net assets from operations $ 27,378,472 $ 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 $ 82,946,761 $ 89,711,602
Net asset value of shares issued to
shareholders in reinvestment
of distributions 43,475,232 14,249,917
Cost of shares reacquired (143,219,840) (149,551,002)
------------- -------------
Decrease in net assets from Fund share
transactions $ (16,797,847) $ (45,589,483)
------------- -------------
Total decrease in net assets $ (45,004,493) $ (6,276,130)
Net assets:
At beginning of year 445,979,294 452,255,424
------------- -------------
At end of year (including accumulated
undistributed net investment income of
$11,463,806 and $41,131,061, respectively) $ 400,974,801 $ 445,979,294
============= =============
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
- -----------------------------------------------------------------------------------------------------------
Year Ended
Year Ended November 30, December 31,
-------------------------------------------------------------------------------
1996 1995 1994 1993(++) 1992 1991
- -----------------------------------------------------------------------------------------------------------
Class A
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
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 $ 0.65 $ 0.76 $ 0.63 $ 0.58 $ 0.87 $ 0.94
Net realized and unrealized
gain (loss) on investments
and foreign currency
transactions 0.17 0.76 (1.17) 1.29 (0.70) 0.67
------ ------ ------ ------ ------ ------
Total from investment
operations $ 0.82 $ 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 $11.70 $12.46 $11.39 $13.37 $11.50 $12.63
====== ====== ====== ====== ====== ======
Total return++ 7.36% 13.93% (4.63)% 17.77%+ 1.35% 13.42%
Ratios (to average net assets)/Supplemental data:
Expenses## 1.42% 1.51% 1.54% 1.54%+ 1.53% 1.61%
Net investment income 5.70% 6.42% 5.45% 5.66%+ 6.78% 7.75%
Portfolio turnover 370% 277% 358% 179%+ 163% 208%
Net assets at end of period
(000 omitted) $283,770 $343,188 $370,110 $443,304 $340,347 $286,089
+ 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 11 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.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- --------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1990 1989 1988 1987 1986
- --------------------------------------------------------------------------------------------------------------
Class A
- --------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $11.45 $11.11 $11.87 $11.45 $10.70
------ ------ ------ ------ ------
Income from investment operations
Net investment income $ 0.98 $ 1.07 $ 0.94 $ 0.91 $ 0.82
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions 1.07 (0.26) (0.42) 1.86 2.35
------ ------ ------ ------ ------
Total from investment operations $ 2.05 $ 0.81 $ 0.52 $ 2.77 $ 3.17
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.95) $(0.47) $(0.90) $(0.90) $(0.82)
From net realized gain on investment and
foreign currency transactions (0.50) -- (0.32) (1.40) (1.52)
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)
------ ------ ------ ------ ------
Net asset value - end of period $12.00 $11.45 $11.11 $11.87 $11.45
====== ====== ====== ====== ======
Total return++ 17.90% 7.27% 3.68% 23.29% 29.36%
Ratios (to average net assets)/Supplemental data:
Expenses 1.44% 1.42% 1.12% 1.13% 1.17%
Net investment income 8.06% 8.42% 7.91% 7.54% 6.57%
Portfolio turnover 220% 282% 232% 378% 371%
Net assets at end of period (000 omitted) $145,202 $124,935 $190,590 $182,738 $142,183
++ 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.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- ------------------------------------------------------------------------------------------
Year Ended November 30, 1996 1995 1994 1993*
- ------------------------------------------------------------------------------------------
Class B
- ------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C>
Net asset value - beginning of period $12.28 $11.32 $13.35 $13.22
------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.54 $ 0.65 $ 0.56 $ 0.07
Net realized and unrealized gain
(loss) on investments and
foreign currency transactions 0.17 0.76 (1.19) 0.06
------ ------ ------ ------
Total from investment
operations $ 0.71 $ 1.41 $(0.63) $ 0.13
------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(1.49) $ -- $(1.11) $ --
From net realized gain on
investments and foreign
currency transactions -- (0.45) (0.29) --
------ ------ ------ ------
Total distributions
declared to shareholders $(1.49) $(0.45) $(1.40) $ --
------ ------ ------ ------
Net asset value - end of period $11.50 $12.28 $11.32 $13.35
====== ====== ====== ======
Total return 6.39% 13.01% (5.39)% 4.32%+
Ratios (to average net assets)/Supplemental data:
Expenses## 2.27% 2.33% 2.38% 2.48%+
Net investment income 4.89% 5.59% 4.81% 4.72%+
Portfolio turnover 370% 277% 358% 179%+
Net assets at end of period
(000 omitted) $102,717 $90,978 $73,458 $24,590
+ Annualized.
* For the period from the commencement of offering of Class B shares, September 7, 1993 to
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.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -----------------------------------------------------------------------------------------
Year Ended November 30, 1996 1995 1994**
- -----------------------------------------------------------------------------------------
Class C
- -----------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C>
Net asset value - beginning of period $12.29 $11.31 $12.30
------ ------ ------
Income from investment operations# -
Net investment income $ 0.55 $ 0.66 $ 0.50
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 0.17 0.77 (1.35)
------ ------ ------
Total from investment operations $ 0.72 $ 1.43 $(0.85)
------ ------ ------
Less distributions declared to shareholders -
From net investment income $(1.50) $ -- $(0.14)
From net realized gain on investments and foreign
currency transactions -- (0.45) --
------ ------ ------
Total distributions declared to shareholders $(1.50) $(0.45) $(0.14)
------ ------ ------
Net asset value - end of period $11.51 $12.29 $11.31
====== ====== ======
Total return 6.56% 13.11% (6.92)%
Ratios (to average net assets)/Supplemental data:
Expenses## 2.20% 2.26% 2.32%+
Net investment income 4.97% 5.67% 5.06%+
Portfolio turnover 370% 277% 358%
Net assets at end of period (000 omitted) $14,487 $11,813 $ 8,687
+ Annualized.
** For the period from the commencement of offering of Class C shares, January
3, 1994 to November 30, 1994.
# Per share data 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.
</TABLE>
See notes to financial statements
<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
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Investments
in foreign securities are vulnerable to the effects of changes in the relative
values of the local currency and the U.S. dollar and to the effects of changes
in each country's legal, political and economic environment.
Investment Valuations - 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 result 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 hedge against decreases in value in the
underlying securities to the extent of the premium received. Written options may
also be used as 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. 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 into 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. The Fund 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.
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 financial statement and
tax reporting purposes as required by federal income tax regulations. Dividend
income is recorded on the ex-dividend date for dividends received in cash.
Dividend and interest payments received in additional securities are recorded on
the ex-dividend or ex-interest date in an amount equal to the value of the
security on such date.
The 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 reported as realized 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
arrangement, 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 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 and dividend 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 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. During the year ended November 30, 1996, $2,934,590 was reclassified from
accumulated net realized gain on investments to accumulated undistributed net
investment income 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, 1996, accumulated undistributed net investment
income (realized gain on investments and foreign currency transactions) under
book accounting were different from tax accounting due to temporary differences
in accounting for foreign currency and foreign tax credits.
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. 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 was computed daily and paid monthly at an effective annual rate
of 0.90% of average daily net assets through June 30, 1996. Effective July 1,
1996, the management fee is computed daily and paid monthly at an effective
annual rate of 0.75% 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 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 of its independent Trustees and Mr. Bailey. Included in Trustees'
compensation is a net periodic pension expense of $10,211 for the year ended
November 30, 1996.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$86,771 for the year ended November 30, 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 shares. These expenses include a service fee
to each securities dealer who 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 $148,049 for the year
ended November 30, 1996. Payment of the 0.10% per annum Class A distribution fee
will commence on such date as the Trustees of the Trust may determine. Fees
incurred under the distribution plan during the year ended November 30, 1996
were 0.22% 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 who 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 and
Class C shares. MFD retains the service fee for accounts not attributable to a
securities dealer, which amounted to $16,637 and $6,237 for Class B and Class C
shares, respectively, for the year ended November 30, 1996. Fees incurred under
the distribution plans during the year ended November 30, 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 of 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 12 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 12 months of
purchases made on or after April 1, 1996. MFD receives all contingent deferred
sales charges. Contingent deferred sales charges imposed during the year ended
November 30, 1996 were $9,358, $212,515 and $609 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.
(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 $ 258,265,376 $ 375,899,606
============== ==============
Investments (non-U.S. government securities) $1,181,673,546 $1,338,600,377
============== ==============
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 $386,214,567
============
Gross unrealized appreciation $ 13,812,148
Gross unrealized depreciation (1,888,453)
------------
Net unrealized appreciation $ 11,923,695
============
(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:
Class A Shares
Year Ended November 30, 1996 Year Ended November 30, 1995
---------------------------- ----------------------------
Shares Amount Shares Amount
- -----------------------------------------------------------------------------
Shares sold 3,456,886 $ 38,473,626 3,654,873 $ 43,257,969
Shares issued to
shareholders in
reinvestment of
distributions 3,084,576 33,899,680 1,062,150 11,588,708
Shares
reacquired (9,837,787) (109,032,589) (9,674,268) (113,405,139)
---------- ------------ ---------- ------------
Net decrease (3,296,325) $(36,659,283) (4,957,245) $(58,558,462)
========== ============ ========== ============
Class B Shares
Year Ended November 30, 1996 Year Ended November 30, 1995
---------------------------- ----------------------------
Shares Amount Shares Amount
- -----------------------------------------------------------------------------
Shares sold 3,389,303 $ 37,175,577 3,283,886 $ 38,572,444
Shares issued to
shareholders in
reinvestment of
distributions 799,999 8,704,007 223,471 2,421,082
Shares
reacquired (2,665,621) (29,293,670) (2,588,468) (30,297,163)
--------- ------------ ------- ------------
Net increase 1,523,681 $ 16,585,914 918,889 $ 10,696,363
========= ============ ======= ============
Class C Shares
Year Ended November 30, 1996 Year Ended November 30, 1995
---------------------------- ----------------------------
Shares Amount Shares Amount
- -----------------------------------------------------------------------------
Shares sold 663,887 $ 7,297,558 670,695 $ 7,881,189
Shares issued to
shareholders in
reinvestment of
distributions 80,105 871,545 22,172 240,127
Shares
reacquired (446,199) (4,893,581) (499,286) (5,848,700)
------- ------------ ------- ------------
Net increase 297,793 $ 3,275,522 193,581 $ 2,272,616
======= ============ ======= ============
(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, 1996 was $4,428.
(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 November 30, 1996,
is as follows:
<TABLE>
Written Option Transactions
<CAPTION>
1996 Calls 1996 Puts
-------------------------------- --------------------------------
Principal Amounts Principal Amounts
of Contracts of Contracts
(000 Omitted) Premiums (000 Omitted) Premiums
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <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 55,892 168,693
Deutsche Marks 232,635 1,281,857 37,819 103,816
Deutsche Marks/British Pounds 201,659 746,201 53,162 685,137
Italian Lire/Deutsche Marks 51,325,696 403,061 -- --
Japanese Yen 6,768,052 355,264 20,815,137 1,691,763
New Zealand Dollars -- -- 29,833 44,362
Spanish Pesetas -- -- 5,202,789 129,176
Swiss Francs/Deutsche Marks 35,076 106,449 21,947 246,856
Options terminated in closing
transactions -
Australian Dollars (20,442) (119,315) (8,559) (52,303)
Deutsche Marks (232,635) (1,281,857) (37,819) (103,816)
Deutsche Marks/British Pounds (120,874) (505,107) -- --
Italian Lire/Deutsche Marks (112,698,250) (1,420,158) (61,372,554) (2,259,799)
Japanese Yen (5,447,052) (260,036) (17,173,000) (1,603,282)
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) (55,892) (168,693)
Deutsche Marks -- -- (43,731) (159,788)
Deutsche Marks/British Pounds (61,680) (251,381) -- --
Japanese Yen -- -- (2,301,137) (136,598)
Spanish Pesetas -- -- (5,202,789) (129,176)
----------- ------------ ----------- ------------
OUTSTANDING, END OF PERIOD 1,407,463 $ 398,581 4,660,109 $ 1,312,648
=========== ============ =========== ============
OPTIONS OUTSTANDING AT END OF PERIOD
CONSIST OF:
Deutsche Marks/British Pounds 51,387 $ 196,904 53,162 $ 685,137
Japanese Yen 1,321,000 95,228 4,585,000 380,655
Swiss Francs/Deutsche Marks 35,076 106,449 21,947 246,856
----------- ------------ ----------- ------------
OUTSTANDING, END OF PERIOD 1,407,463 $ 398,581 4,660,109 $ 1,312,648
=========== ============ =========== ============
</TABLE>
At November 30, 1996, the Fund had sufficient cash and/or securities at least
equal to the value of the written options.
<PAGE>
<TABLE>
Forward Foreign Currency Exchange Contracts
<CAPTION>
Net Unrealized
Contracts to Contracts Appreciation
Settlement Date Deliver/Receive In Exchange for at Value (Depreciation)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales 2/20/97 AUD 30,718,131 $ 24,029,512 $ 24,987,970 $ (958,458)
2/24/96 BEF 445,685,159 14,670,348 14,126,437 543,911
2/20/97 CAD 23,697,665 17,737,774 17,664,169 73,605
2/07/97 CHF 90,390,058 75,677,248 69,696,249 5,980,999
12/12/96 - 4/28/97 DEM 509,047,214 337,735,526 332,447,531 5,287,995
2/03/97 DKK 120,183,688 21,069,333 20,475,575 593,758
5/09/97 ECU 15,325,665 19,511,872 19,332,698, 179,174
2/07/97 FIM 90,037,327 19,924,236 19,599,415 324,821
2/24/97 GBP 29,141,019 47,684,757 48,893,531 (1,208,774)
2/04/97 HKD 171,000,000 22,009,705 22,117,311 (107,606)
2/24/97 IEP 21,188,013 33,990,524 35,566,474 (1,575,950)
12/12/96 - 4/28/97 ITL 87,539,668,825 57,275,314 57,700,956 (425,642)
1/29/97 - 4/21/97 JPY 14,993,454,576 137,320,672 133,731,002 3,589,670
2/03/97 NLG 14,819,043 9,050,350 8,621,230 429,120
12/13/96 NZD 46,098,882 31,682,185 32,749,245 (1,067,060)
2/03/97 SEK 86,967,170 13,192,252 12,962,979 229,273
------------ ------------ ------------
$882,561,608 $870,672,772 $ 11,888,836
============ ============ ============
Purchases 2/20/97 AUD 16,312,572 $ 12,854,307 $ 13,269,625 $ 415,318
2/20/97 CAD 27,734,943 20,825,000 20,673,543 (151,457)
1/31/97 - 2/07/97 CHF 109,673,081 89,904,208 84,559,302 (5,344,906)
12/12/96 - 4/28/97 DEM 515,900,293 343,143,120 336,756,502 (6,386,618)
2/03/97 DKK 38,326,941 6,600,719 6,529,723 (70,996)
2/07/97 FIM 90,037,327 19,951,088 19,599,415 (351,673)
2/07/97 FRF 96,753,967 19,159,202 18,579,858 (579,344)
12/13/96 - 2/24/97 GBP 26,959,491 44,467,390 45,250,295 782,905
2/07/97 - 4/28/97 ITL 57,088,589,626 36,613,272 37,513,180 899,908
1/21/97 - 4/14/97 JPY 18,871,719,244 173,784,696 168,044,424 (5,740,272)
2/03/97 NLG 15,655,430 9,196,499 9,107,813 (88,686)
5/09/97 NOK 123,697,455 19,511,871 19,377,701 (134,170)
12/13/96 NZD 28,933,122 20,035,429 20,554,466 519,037
2/03/97 SEK 56,160,144 8,501,827 8,371,006 (130,821)
12/24/96 - 1/31/97 THB 212,765,000 8,254,215 8,288,615 34,400
------------ ------------ ------------
$832,802,843 $816,475,468 $(16,327,375)
============ ============ ============
</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 $1,031,570 at November 30, 1996.
At November 30, 1996, the Fund had sufficient cash and/or securities to cover
any commitments under these contracts.
<TABLE>
Interest Rate Swaps
<CAPTION>
Cash Flows
Notional Principal Cash Flows Paid Received by Unrealized
Expiration Amount of Contracts by the Fund the Fund Appreciation
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
10/22/01 ITL 29,660,000,000 Floating - 6 Month LIBOR Fixed - 8.055% $1,307,519
==========
</TABLE>
At November 30, 1996, the Fund has segregated sufficient securities to cover
margin requirements on open interest rate swaps.
<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
November 30, 1996, and the related statement of operations for the year then
ended, the statement of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the three 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, 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 November 30, 1996, the results of its operations for
the year then ended, the changes in its net assets for each of the two years
in the period then ended, and the financial highlights for each of the three
years in the period then ended, in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
January 8, 1997
--------------------------------------------
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.
<PAGE>
MFS(R) WORLD GOVERNMENTS FUND
<TABLE>
<S> <C>
TRUSTEES CUSTODIAN
A. Keith Brodkin* - Chairman and President State Street Bank and Trust Company
Richard B. Bailey* - Private Investor; INVESTOR INFORMATION
Former Chairman and Director (until 1991), For MFS stock and bond market outlooks,
Massachusetts Financial Services Company; call toll free: 1-800-637-4458 anytime from
Director, Cambridge Bancorp; Director; a touch-tone telephone.
Cambridge Trust Company
For information on MFS mutual funds,
Peter G. Harwood - Private Investor call your financial adviser or, for an
information kit, call toll free:
J. Atwood Ives - Chairman and Chief Executive 1-800-637-2929 any business day from
Officer, Eastern Enterprises 9 a.m. to 5 p.m. Eastern time (or leave
a message anytime).
Lawrence T. Perera - Partner
Hemenway & Barnes INVESTOR SERVICE
MFS Service Center, Inc.
William J. Poorvu - Adjunct Professor, P.O. Box 2281
Harvard University Graduate School of Boston, MA 02107-9906
Business Administration
For current account service, call toll free:
Charles W. Schmidt - Private Investor 1-800-225-2606 any business day from
8 a.m. to 8 p.m. Eastern time.
Arnold D. Scott* - Senior Executive Vice President,
Director and Secretary, Massachusetts Financial For service to speech- or hearing-impaired,
Services Company call toll free: 1-800-637-6576 any business
day from 9 a.m. to 5 p.m. Eastern time.
Jeffrey L. Shames* - President and Director, (To use this service, your phone must be
Massachusetts Financial Services Company equipped with a Telecommunications
Device for the Deaf.)
Elaine R. Smith - Independent Consultant
For share prices, account balances, and
David B. Stone - Chairman, North American exchanges, call toll free: 1-800-MFS-TALK
Management Corp. (investment advisers) (1-800-637-8255) anytime from a touch-tone
telephone.
INVESTMENT ADVISER
Massachusetts Financial Services Company WORLD WIDE WEB
500 Boylston Street www.mfs.com
Boston, MA 02116-3741
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street ------------------------------------------------
Boston, MA 02116-3741 [DALBAR For the third year in a row,
LOGO] MFS earned a #1 ranking in
PORTFOLIO MANAGER TOP RATED DALBAR, Inc. Broker/Dealer
Richard O. Hawkins* SERVICE Survey, Main Office Operations
Service Quality Category. The
TREASURER firm achieved a 3.48 overall score on a
W. Thomas London* scale of 1 to 4 in the 1996 survey. A total
of 110 firms responded, offering input on the
ASSISTANT TREASURER quality of service they received from 29
James O. Yost* mutual fund companies nationwide. The survey
contained questions about service quality in
SECRETARY 15 categories, including "knowledge of phone
Stephen E. Cavan* service contacts," "accuracy of transaction
processing," and "overall ease of doing
ASSISTANT SECRETARY business with the firm."
James R. Bordewick, Jr.* ------------------------------------------------
AUDITORS
Ernst & Young LLP
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
MFS(R) WORLD -------------
GOVERNMENTS FUND [LOGO: NUMBER 1 DALBAR BULK RATE
TOP-RATED SERVICE] U.S. POSTAGE
PAID
500 Boylston Street PERMIT #55638
Boston, MA 02116 BOSTON, MA
-------------
[LOGO: M F S(SM)]
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND(SM)
(C)1997 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116
MWG-2 1/97 39M 20/220/320
