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[Logo]
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
MFS(R) Capital
Opportunities Fund
(formerly MFS(R) Value Fund)
Semiannual Report o May 31, 1998
MFS(R) Capital Opportunities Fund
15th
ANNIVERSARY
1983-1998
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Now two MFS(R) IRA choices (see page 31)
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<PAGE>
IN MEMORIAM
A. KEITH BRODKIN
1935 - 1998
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
MFS(R) INVESTMENT MANAGEMENT(SM)
- --------------------------- On February 2, 1998, Keith Brodkin, a friend
and leader to everyone at MFS, died
unexpectedly at age 62. His thoughtful
[Photo of A. Keith Brodkin] letters to shareholders on the markets and
economy have been an integral part of
MFS shareholder reports like this one for
- --------------------------- many years.
Keith joined MFS in 1970 as the firm's first fixed-income manager, managing
the bond portion of MFS(R) Total Return Fund. He went on to manage our first
pure bond fund, MFS(R) Bond Fund, when it was introduced in 1974, and he was
considered a pioneer in the art of active bond management.
Keith was named President and Chief Investment Officer of MFS in 1987 and
four years later became Chairman and Chief Executive Officer. During his
stewardship, MFS has achieved significant growth in total assets under
management, rising from some $25 billion in 1991 to the over $80 billion
today entrusted to us by three million individual and institutional investors
worldwide. Under Keith's leadership, MFS has carefully but steadily built its
domestic and international investment capabilities through the introduction
of a range of new products and a still-growing staff that now numbers over
100 equity and fixed-income professionals.
Throughout his career, Keith was very active in a wide range of charitable
endeavors. He is survived by his wife and three children.
His leadership, friendship, and wise counsel will be sorely missed.
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TABLE OF CONTENTS
Letter from the Chairman .................................................. 2
Management Review and Outlook ............................................. 4
Performance Summary ....................................................... 8
Portfolio of Investments .................................................. 11
Financial Statements ...................................................... 16
Notes to Financial Statements ............................................. 24
Trustees and Officers ..................................................... 33
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HIGHLIGHTS
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o FOR THE SIX MONTHS ENDED MAY 31, 1998, CLASS A SHARES OF THE FUND PROVIDED
A TOTAL RETURN AT NET ASSET VALUE OF 19.65%, CLASS B SHARES 19.21%, CLASS
C SHARES 19.25%, AND CLASS I SHARES 19.84%. (SEE PERFORMANCE SUMMARY FOR
MORE INFORMATION.)
o THE FUND HAS BENEFITED FROM BEING INVESTED IN A NUMBER OF SECTORS,
INCLUDING RETAILING AND LEISURE, WHICH HAVE OUTPERFORMED THE OVERALL
MARKET, WHILE BEING UNDERWEIGHTED IN SOME POORER-PERFORMING SECTORS, SUCH
AS ENERGY AND INDUSTRIALS.
o FINANCIAL SERVICES COMPANIES, AN INDUSTRY IN WHICH WE BELIEVE VALUATIONS
REMAIN REASONABLE AND EARNINGS GROWTH RATES OF 13% TO 15% REMAIN
ACHIEVABLE, MAKE UP THE FUND'S LARGEST SECTOR.
o WHILE THE NAME OF THE FUND HAS BEEN CHANGED FROM MFS(R) VALUE FUND TO
MFS(R) CAPITAL OPPORTUNITIES FUND, THE INVESTMENT STRATEGY HAS NOT
CHANGED. WE BELIEVE THE NAME CHANGE BETTER REFLECTS THE FUND'S OBJECTIVE
OF SEEKING CAPITAL APPRECIATION AND ITS FLEXIBILITY TO INVEST IN COMPANIES
THAT WE BELIEVE ARE ATTRACTIVELY VALUED RELATIVE TO THEIR GROWTH
PROSPECTS.
o ON JUNE 13, 1998, THE FUND MARKS ITS 15TH ANNIVERSARY.
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NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
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<PAGE>
LETTER FROM THE CHAIRMAN
- ----------------------------
[Photo of Jeffrey L. Shames]
- ----------------------------
Jeffrey L. Shames
Dear Shareholders:
With the U.S. stock market well into its fourth year of record-breaking
advances, it is necessary to take a cautious outlook. By most commonly accepted
measures, equity valuations appear to have risen to a point at which the stock
market has become more vulnerable to changes in the investment environment such
as rising inflation and interest rates or a slowing economy. As a result, while
we continue to hold a favorable long-term outlook for the equity markets, we
also believe that a market correction is possible in the near term. In such a
correction, equity prices would remain relatively flat or decline, possibly for
an extended period.
Currently, equity investors seem to be primarily focused on interest rates,
which have been relatively stable for several months as inflation has remained
low. In an environment of low interest rates, stocks become more attractive than
most fixed-income investments, while low inflation helps control companies'
costs, such as for raw materials, wages, and benefits. The near- term outlook
for a continuation of this environment appears relatively favorable. However,
this year has seen a marked slowdown in corporate earnings. This means that as
equity prices continue to rise, price-to-earnings (P/E) ratios, or the amount an
investor pays for a stock in relation to the company's earnings per share, also
go up. A year ago, the average P/E ratio for stocks in the unmanaged Standard &
Poor's 500 Composite Index stood at approximately 21; this spring, the average
P/E was 33% higher, at about 28. In some cases, such as with some of the newer
companies associated with the Internet, P/Es have soared to levels that are
unlikely to be sustained.
As long as interest rates remain low and the economy continues to grow, it is
possible that some of these valuations can be supported. We expect corporate
earnings to grow 8% to 10% this year. However, just as no one can predict market
cycles, so too no one can predict economic cycles -- except to say that these
cycles do exist and that an economic slowdown at some point is inevitable.
Given this reality, we believe it is prudent to remind investors of the need to
take a long-term view and to diversify their investments across a range of asset
classes, including mutual funds that focus on bonds and international
investments as well as on the U.S. stock market. The likelihood of an eventual
market correction also makes it important for us to use original, bottom-up
research to find companies that we think can keep growing or gain market share
in the face of the occasional downturn. To help achieve this, and to provide the
broadest possible coverage of industry sectors and individual companies, MFS
continues to increase its number of full-time research analysts. These analysts
thoroughly investigate each company's earnings potential and position in its
industry as well as the overall prospects for that industry.
MFS also uses active portfolio management on the fixed-income side, taking
advantage of our extensive research and credit analysis to help reduce the
potential for price declines and enhance the opportunity for appreciation. Every
year, both fixed-income and equity managers meet with thousands of credit
issuers and companies. They also attend many presentations, closely follow
sources of industry research, and keep track of competitors.
We believe that applying this discipline of thorough, bottom-up research to both
the equity and fixed-income markets is the best way to provide favorable
long-term performance for our shareholders -- regardless of changes in the
overall market environment.
We appreciate your support and welcome any questions or comments you may have.
Respectfully,
/s/ Jeffrey L. Shames
Jeffrey L. Shames
Chairman and Chief Executive Officer
MFS Investment Management
June 12, 1998
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JEFFREY L. SHAMES, A GRADUATE OF WESLEYAN UNIVERSITY AND THE
MASSACHUSETTS INSTITUTE OF TECHNOLOGY SLOAN SCHOOL OF MANAGEMENT, JOINED
MFS IN 1983. AFTER FOUR YEARS AS AN INDUSTRY ANALYST AND PORTFOLIO
MANAGER, HE WAS NAMED CHIEF EQUITY OFFICER IN 1987 AND PRESIDENT AND A
MEMBER OF THE BOARD OF DIRECTORS IN 1993. MR. SHAMES WAS APPOINTED
CHAIRMAN AND CHIEF EXECUTIVE OFFICER IN FEBRUARY 1998.
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<PAGE>
MANAGEMENT REVIEW AND OUTLOOK
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[Photo of John F. Brennan, Jr.]
- -------------------------------
John F. Brennan, Jr.
For the six months ended May 31, 1998, Class A shares of the Fund provided a
total return of 19.65%, Class B shares 19.21%, Class C shares 19.25%, and Class
I shares 19.84%. These returns include the reinvestment of distributions but
exclude the effects of any sales charges and compare to a 15.06% return for the
Standard & Poor's 500 Composite Index (the S&P 500), a popular, unmanaged index
of common stock total return performance.
Q. COULD YOU DISCUSS SOME OF THE FACTORS THAT HAVE CONTRIBUTED TO THE FUND'S
RECENT PERFORMANCE?
A. A combination of good sector selection and individual stock performance
resulted in significant outperformance of the Fund relative to the S&P 500.
The top three performing sectors of the S&P 500 over the past six months were
autos and housing, which advanced 37.0%; retailing, which was up 25.7%; and
leisure, which gained 19.3%. The Fund was significantly overweighted in
retailing and leisure while slightly underweighted in autos and housing. The
three worst- performing sectors of the S&P 500 were transportation, which was
up just 2.5%; energy, up 4.7%; and industrials, up 9.5%. The Fund was
significantly underweighted in energy and industrials but slightly
overweighted in transportation.
Each of the Fund's top four sectors outperformed the S&P 500, with financial
services gaining 17.9%, leisure advancing 19.3%, health care up 22.4%, and
retailing up 25.7%. Seven of the Fund's top 10 holdings also significantly
outperformed the S&P 500, with particularly strong performance from Cellular
Communications International, which gained 61%; Tyco International, which was
up 42%; Fred Meyer, up 30%; and American Radio Systems, also ahead 30%. The
Fund's international exposure also contributed significantly to performance.
Telecom Italia, Banco Totta, Alcatel, Henkel, and Wella were all strong
performers.
Q. HOW WOULD YOU DESCRIBE THE RECENT BUSINESS AND INVESTMENT ENVIRONMENT?
A. Domestically, the business environment remains excellent. Low inflation,
coupled with a solid economy and strong European export demand, underpins a
sound fundamental outlook. Asia continues to struggle, however, as the
region's economic turmoil continues. Recent evidence of weakening economies
in China and Japan could prove to make a quick recovery unlikely.
Q. THE NAME OF THE FUND, WHICH MARKS ITS 15TH ANNIVERSARY THIS YEAR, HAS BEEN
CHANGED FROM MFS VALUE FUND TO MFS CAPITAL OPPORTUNITIES FUND. HOW HAS THE
STRATEGY CHANGED?
A. The investment strategy has not changed. We believe the name change better
reflects the Fund's objective of seeking capital appreciation and its
flexibility to pursue an opportunistic strategy of investing in companies
that we believe are attractively valued relative to their growth prospects.
Q. FINANCIAL SERVICES COMPANIES MAKE UP THE FUND'S LARGEST SECTOR. WHAT MAKES
THIS BUSINESS ATTRACTIVE, AND WHAT KIND OF COMPANIES DO YOU LIKE?
A. This is one sector of the stock market in which we believe valuations
remain reasonable and earnings growth rates of 13% to 15% remain
achievable. The focus of the Fund has been on the insurance and banking
industries, in which positive fundamentals and reasonable valuations, along
with industry consolidation, have driven stock performance.
Q. THE NEXT-LARGEST SECTOR IS LEISURE. WHAT KIND OF COMPANIES DO YOU LIKE HERE?
A. This is quite a hodgepodge of industries including broadcasting and cable,
entertainment, toys, printing and publishing, gaming and lodging, and
restaurants. While the Fund has no specific industry focus in this sector,
three individual stocks -- American Radio, Harrah's, and Promus Hotel --
make up the bulk of our weighting. American Radio is in the midst of a
merger with CBS and will shortly spin off a new company, American Tower,
which we believe will prove to be a rewarding investment over the next
several years. Harrah's should continue to outperform in a very difficult
gaming industry environment thanks to the strong cash flow and cost-cutting
prospects available through its recent merger with Showboat. Promus Hotel
is currently being affected by the negative investor sentiment surrounding
the lodging industry as concerns over the supply and demand balance have
resurfaced. We believe Promus' earnings outlook should be relatively
unaffected because the bulk of its revenue stream is centered on franchise
and management fees that should continue to grow throughout the cycle.
Q. AND WHAT ABOUT HEALTH CARE, WHICH IS THE THIRD-LARGEST SECTOR?
A. Here, our focus has shifted from the pharmaceutical industry to the health
maintenance organizations (HMOs). While the fundamental outlook for the
pharmaceuticals continues to be very good, we believe valuations are more
than discounting these prospects. On the other hand, we believe the
fundamentals in the HMO industry are just starting to improve after several
years of dismal results. Pricing trends are picking up, and medical cost
trends are being maintained at the same 3% to 4% annual growth rate as the
past few years. We believe this should result in substantial future
earnings improvements.
Q. HAS THE TURMOIL IN ASIA BEGUN TO AFFECT ANY OF THE FUND'S HOLDINGS, EITHER
THOSE IN THE UNITED STATES OR ELSEWHERE?
A. The Asian crisis has certainly affected many industries throughout
the market. Commodity prices have weakened significantly as Asian companies
have dumped products to generate the hard currency needed to repay debts,
as well as to purchase required raw materials. Companies that go head-to-
head with Asian competitors have also seen excess supply and falling prices
in their end markets. Semiconductors have been particularly hard hit.
Exporters to the Asian region have seen demand weaken as Japan and China
have both slowed. Fortunately, the Fund has not been significantly affected
by this turmoil. Our exposure to the region is minimal on both a direct and
indirect basis. We have begun to build small positions in several well-
capitalized, well-managed companies in the region because we do expect the
long-term growth prospects to remain solid and, therefore, the long-term
investment returns should be quite good. Our total exposure continues to be
small, however.
Q. WHAT KIND OF MARKET OR ECONOMIC ENVIRONMENT DO YOU ANTICIPATE GOING FORWARD,
AND HOW MIGHT THIS AFFECT SOME OF YOUR INVESTMENT DECISIONS FOR THE FUND?
A. The economic outlook continues to be excellent. Our only concerns continue
to be the spread of the Asian crisis and the very low level of
unemployment. So far, the Asian crisis has yet to have a meaningful impact
on U.S. economic growth in the aggregate. The further weakening in the
Japanese economy as well as a ratcheting down of growth in China may make
the next 12 months a bit more difficult. We expect a slowdown in the
domestic economy to result. If this occurs, our second concern may become
moot. The low level of unemployment does not leave much room for
noninflationary growth in the future. If the Asian problem does not result
in a noticeable slowdown in domestic growth, then an interest-rate increase
by the Federal Reserve Board (the Fed) could become increasingly likely.
Any tightening of Fed policy would likely result in downward pressure on
stock market valuations. Our current view is that the Asian crisis will
result in a noticeable domestic slowdown, given recent trends in Japan and
China. This should defer any Fed action and allow employment levels to
rebalance. Our investment approach continues to be very valuation
sensitive, however, given the downside risk if a Fed tightening becomes
necessary.
/s/ John F. Brennan, Jr.
John F. Brennan, Jr.
Portfolio Manager
The opinions expressed in this report are those of the portfolio manager and
are only through the end of the period of the report as stated on the cover.
The manager's views are subject to change at any time based on market and
other conditions, and no forecasts can be guaranteed.
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PORTFOLIO MANAGER'S PROFILE
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JOHN F. BRENNAN, JR., IS A SENIOR VICE PRESIDENT OF MFS(R) INVESTMENT
MANAGEMENT(SM) AND PORTFOLIO MANAGER OF MFS(R) CAPITAL OPPORTUNITIES FUND. HE
ALSO MANAGES THE CAPITAL OPPORTUNITIES SERIES OFFERED THROUGH MFS(R)/SUN LIFE
ANNUITY PRODUCTS, MFS(R) VALUE SERIES, PART OF MFS(R) VARIABLE INSURANCE
TRUST(SM), AND THE EQUITY PORTION OF MFS(R) SPECIAL VALUE TRUST, A CLOSED-END
FUND.
MR. BRENNAN JOINED MFS IN 1985 AS AN INDUSTRY SPECIALIST IN THE EQUITY
RESEARCH DEPARTMENT. HE WAS NAMED ASSISTANT VICE PRESIDENT -- INVESTMENTS IN
1987, VICE PRESIDENT -- INVESTMENTS IN 1988, PORTFOLIO MANAGER OF MFS(R)
CAPITAL OPPORTUNITIES FUND IN SEPTEMBER 1991, AND SENIOR VICE PRESIDENT IN
1995.
MR. BRENNAN IS A GRADUATE OF THE UNIVERSITY OF RHODE ISLAND AND THE STANFORD
UNIVERSITY GRADUATE SCHOOL OF BUSINESS ADMINISTRATION.
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. A prospectus containing more information,
including the exchange privilege and all charges and expenses, for any other MFS
product is available from your financial adviser, or by calling MFS at
1-800-225-2606. Please read it carefully before investing or sending money.
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FUND FACTS
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NOTE: THE FUND CHANGED ITS NAME FROM MFS VALUE FUND TO MFS CAPITAL OPPORTUNITIES
FUND EFFECTIVE APRIL 1, 1998.
OBJECTIVE: SEEKS CAPITAL APPRECIATION. DIVIDEND INCOME, IF ANY,
IS INCIDENTAL.
COMMENCEMENT OF
INVESTMENT OPERATIONS: JUNE 13, 1983
CLASS INCEPTION: CLASS A JUNE 13, 1983
CLASS B SEPTEMBER 7, 1993
CLASS C APRIL 1, 1996
CLASS I JANUARY 2, 1997
SIZE: $1.5 BILLION NET ASSETS AS OF MAY 31, 1998
PERFORMANCE SUMMARY
Because mutual funds are designed for investors with long-term goals, we have
provided cumulative results as well as the average annual total returns for
the applicable time periods. Investment results reflect the percentage change
in net asset value, including reinvestment of dividends.
<TABLE>
AVERAGE ANNUAL AND CUMULATIVE TOTAL RATES OF RETURN THROUGH MAY 31, 1998
<CAPTION>
CLASS A
6 Months 1 Year 3 Years 5 Years 10 Years/Life
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<S> <C> <C> <C> <C> <C>
Cumulative Total Return +19.65% +37.31% +117.78% +169.83% +429.63%
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Average Annual Total Return -- +37.31% + 29.62% + 21.96% + 18.14%
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SEC Results -- +29.42% + 27.09% + 20.52% + 17.44%
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<CAPTION>
CLASS B
6 Months 1 Year 3 Years 5 Years 10 Years/Life
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<S> <C> <C> <C> <C> <C>
Cumulative Total Return +19.21% +36.28% +112.58% +159.70% +409.80%
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Average Annual Total Return -- +36.28% + 28.58% + 21.03% + 17.69%
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SEC Results -- +32.28% + 27.97% + 20.84% + 17.69%
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<CAPTION>
CLASS C
6 Months 1 Year 3 Years 5 Years 10 Years/Life
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<S> <C> <C> <C> <C> <C>
Cumulative Total Return +19.25% +36.25% +114.42% +165.65% +421.61%
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Average Annual Total Return -- +36.25% + 28.95% + 21.58% + 17.96%
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SEC Results -- +35.25% + 28.95% + 21.58% + 17.96%
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<CAPTION>
CLASS I
6 Months 1 Year 3 Years 5 Years 10 Years/Life
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<S> <C> <C> <C> <C> <C>
Cumulative Total Return +19.84% +37.61% +118.43% +170.60% +431.42%
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Average Annual Total Return -- +37.61% + 29.75% + 22.03% + 18.18%
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</TABLE>
Class A share ("A") SEC results include the maximum 5.75% sales charge. Class
B share ("B") SEC results reflect the applicable contingent deferred sales
charge (CDSC), which declines over six years from 4% to 0%. Class C shares
("C") have no initial sales charge but, like B, have higher annual fees and
expenses than A. C SEC results reflect the 1% CDSC applicable to shares
redeemed within 12 months. Class I shares ("I") have no sales charge or Rule
12b-1 fees and are only available to certain institutional investors.
B and C results include the performance and the operating expenses
(e.g., Rule 12b-1 fees) of A for periods prior to the inception of B and C.
Because operating expenses of B and C are higher than those of A, B and C
performance generally would have been lower than A performance. The A
performance included in the B and C SEC performance has been adjusted to
reflect the CDSC generally applicable to B and C rather than the initial sales
charge generally applicable to A.
I results include the performance and the operating expenses (e.g., Rule 12b-1
fees) of A for periods prior to the inception of I. Because operating expenses
of A are greater than those of I, I performance generally would have been
higher than A performance. The A performance included in the I performance has
been adjusted to reflect the fact that I have no initial sales charge.
Performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Subsidies and
waivers may be rescinded at any time. See the prospectus for details.
All results are historical and assume the reinvestment of dividends and
capital gains.
Investment return and principal value will fluctuate, and shares, when
redeemed, may be worth more or less than their original cost. Past performance
is no guarantee of future results.
PORTFOLIO CONCENTRATION AS OF MAY 31, 1998
FIVE LARGEST STOCK SECTORS
FINANCIAL SERVICES 17.5%
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LEISURE 12.4%
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HEALTH CARE 11.5%
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RETAILING 11.3%
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SPECIAL BUSINESS 10.4%
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For a more complete breakdown, refer to the Portfolio of Investments.
TOP 10 STOCK HOLDINGS
TYCO INTERNATIONAL LTD. 8.0% Fire HARRAH'S ENTERTAINMENT, INC. 2.7%
protection, packaging, and electronic Gaming operator in several states
equipment manufacturer
PROMUS HOTEL CORP. 2.6%
AMERICAN RADIO SYSTEMS CORP. 5.0% Hotel operator
Radio broadcasting company
RITE AID CORP. 2.3%
FRED MEYER, INC. 4.5% Drug store chain
Northwestern U.S. supermarket chain
COMPUTER ASSOCIATES INTERNATIONAL,
CELLULAR COMMUNICATIONS INC. 2.3%
INTERNATIONAL, INC. 4.2% Computer software company
Italian cellular telephone company
UNITED HEALTHCARE CORP. 2.0%
SANOFI S.A. 3.1% Health maintenance organization
French pharmaceutical company
<PAGE>
PORTFOLIO OF INVESTMENTS (Unaudited) - May 31, 1998
Stocks - 95.0%
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ISSUER SHARES VALUE
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U.S. Stocks - 79.8%
Aerospace - 1.8%
Allied Signal, Inc. 110,537 $ 4,725,457
Raytheon Co., "A" 421,900 22,492,543
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$ 27,218,000
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Airlines - 1.1%
Southwest Airlines Co. 232,100 $ 6,194,169
US Airways Group, Inc.* 134,700 9,429,000
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$ 15,623,169
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Automotive - 0.1%
Hayes Lemmerz International, Inc.* 37,750 $ 1,479,328
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Banks and Credit Companies - 4.0%
Fleet Financial Group, Inc. 178,871 $ 14,667,422
National City Corp. 214,200 14,512,050
PNC Bank Corp. 253,700 14,651,175
Wells Fargo & Co. 42,736 15,449,064
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$ 59,279,711
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Business Machines - 0.7%
Affiliated Computer Services, Inc., "A"* 312,800 $ 10,420,150
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Business Services - 1.9%
Ceridian Corp.* 139,500 $ 7,533,000
Computer Sciences Corp. 274,880 14,276,580
Galileo International, Inc. 172,900 6,807,937
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$ 28,617,517
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Chemicals - 0.5%
Cambrex Corp. 130,103 $ 7,277,637
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Computer Software - Systems - 4.9%
Adobe Systems, Inc. 77,177 $ 3,082,256
Computer Associates International, Inc. 604,126 31,716,615
Oracle Corp.* 657,400 15,531,075
Synopsys, Inc.* 529,745 22,745,926
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$ 73,075,872
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Construction Services - 1.2%
Martin Marietta Materials, Inc. 373,600 $ 17,185,600
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Consumer Goods and Services - 9.6%
Black & Decker Corp. 315,500 $ 18,417,313
Philip Morris Cos., Inc. 288,840 10,795,395
Tyco International Ltd. 2,037,828 112,844,725
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$ 142,057,433
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Containers - 1.0%
Stone Container Corp.* 817,093 $ 14,503,401
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Electronics - 0.7%
Analog Devices, Inc.* 405,410 $ 10,008,559
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Entertainment - 8.5%
American Radio Systems Corp., "A"* 1,055,369 $ 69,786,275
Casino America, Inc.* 502,410 2,009,640
Gemstar International Group Ltd.* 72,500 3,153,750
Harrah's Entertainment, Inc.* 1,511,585 37,789,625
Hearst-Argyle Television, Inc.* 69,700 2,509,200
Telemundo Group, Inc.* 115,658 4,886,551
Univision Communications, Inc., "A"* 146,000 5,073,500
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$ 125,208,541
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Finance - 0.3%
Resource America, Inc., "A" 64,250 $ 4,288,688
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Financial Institutions - 1.6%
Federal Home Loan Mortgage Corp. 525,985 $ 23,932,318
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Insurance - 7.6%
Ace Ltd. 398,600 $ 14,200,125
Annuity & Life Re Holdings Ltd.* 480,400 10,959,125
CIGNA Corp. 178,617 12,235,264
ESG Re Ltd.* 582,700 12,236,700
Hartford Financial Services Group, Inc. 67,138 7,389,376
Life Re Corp. 97,700 7,193,163
Lincoln National Corp. 82,124 7,380,894
Mid Ocean Ltd. 22,300 1,697,588
Nationwide Financial Services, Inc., "A" 308,400 13,396,125
Reliastar Financial Corp. 292,917 12,668,660
Travelers Group, Inc. 225,700 13,767,700
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$ 113,124,720
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Medical and Health Products - 0.8%
AmeriSource Health Corp., "A"* 60,549 $ 3,292,352
Datascope Corp.* 279,700 7,866,562
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$ 11,158,914
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Medical and Health Technology and Services - 7.2%
Beverly Enterprises, Inc. 232,500 $ 3,327,656
Columbia/HCA Healthcare Corp. 812,600 26,561,862
MedPartners, Inc.* 1,421,300 12,702,869
Mid Atlantic Medical Services, Inc.* 641,800 8,303,288
Tenet Healthcare Corp.* 386,274 13,519,590
United Healthcare Corp. 441,043 28,226,752
Wellpoint Health Networks, Inc.* 212,100 13,786,500
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$ 106,428,517
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Oil Services - 1.2%
EVI Weatherford, Inc. 345,420 $ 17,465,299
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Oils - 0.8%
Enron Oil & Gas Co. 580,104 $ 11,783,363
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Pollution Control - 1.0%
Waste Management, Inc. 455,000 $ 14,787,500
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Railroads - 0.5%
Wisconsin Central Transportation Corp.* 335,720 $ 7,868,438
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Restaurants and Lodging - 3.1%
Hilton Hotels Corp. 196,115 $ 6,165,365
Outback Steakhouse, Inc.* 52,300 1,928,563
Promus Hotel Corp.* 855,493 37,000,072
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$ 45,094,000
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Special Products and Services - 0.9%
Cordant Technologies, Inc. 186,008 $ 9,277,149
Newport News Shipbuilding, Inc. 154,200 4,317,600
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$ 13,594,749
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Stores - 3.9%
Office Depot, Inc.* 111,800 $ 3,298,100
Rite Aid Corp. 913,674 32,720,950
Sears, Roebuck & Co. 358,100 22,135,056
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$ 58,154,106
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Supermarkets - 6.8%
Giant Food, Inc., "A" 394,150 $ 16,948,450
Meyer (Fred), Inc.* 1,455,065 62,567,795
Safeway, Inc.* 575,921 20,985,121
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$ 100,501,366
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Telecommunications - 7.9%
Ascend Communications, Inc.* 108,200 $ 4,672,887
Cellular Communications International, Inc.*++ 1,263,417 59,538,526
Century Telephone Enterprises, Inc. 338,400 14,995,350
Global TeleSystems Group, Inc.* 232,950 8,924,897
Intermedia Communications, Inc.* 92,800 6,878,800
L-3 Communications Holding, Inc.* 2,700 75,600
Sprint Corp. 310,984 22,313,102
--------------
$ 117,399,162
- --------------------------------------------------------------------------------
Utilities - Gas - 0.2%
KN Energy, Inc. 40,745 $ 2,205,323
- --------------------------------------------------------------------------------
Total U.S. Stocks $1,179,741,381
- --------------------------------------------------------------------------------
Foreign Stocks - 15.2%
Bermuda - 1.0%
Exel Ltd. (Insurance) 198,700 $ 14,952,175
- --------------------------------------------------------------------------------
Canada - 0.8%
Canadian National Railway Co. (Railroads) 204,667 $ 12,100,936
- --------------------------------------------------------------------------------
France - 4.4%
Alcatel Alsthom Compagnie (Telecommunications) 97,301 $ 20,811,309
Sanofi S.A. (Medical and Health Products) 373,500 43,750,272
--------------
$ 64,561,581
- --------------------------------------------------------------------------------
Germany - 1.0%
Henkel KGaA (Chemicals) 94,420 $ 8,462,469
Wella AG (Cosmetics) 7,100 6,816,827
--------------
$ 15,279,296
- --------------------------------------------------------------------------------
Hong Kong - 0.6%
Cafe de Coral Holding Co. (Restaurants) 5,838,000 $ 1,808,247
Dah Sing Financial Group
(Banks and Credit Cos.) 1,278,200 2,144,492
Liu Chong Hing Bank (Banks and Credit Cos.) 1,862,000 2,054,604
Wing Hang Bank Ltd. (Banks and Credit Cos.) 1,392,000 2,622,856
--------------
$ 8,630,199
- --------------------------------------------------------------------------------
Italy - 1.1%
Telecom Italia S.p.A. (Telecommunications)* 3,103,700 $ 16,719,557
- --------------------------------------------------------------------------------
Malaysia - 0.1%
New Straits Times Press Berhad (Printing and
Publishing) 1,621,000 $ 1,145,673
Tanjong PLC (Entertainment) 234,000 388,959
--------------
$ 1,534,632
- --------------------------------------------------------------------------------
Netherlands - 1.7%
Akzo Nobel N.V. (Chemicals) 64,647 $ 13,500,656
Benckiser N.V. (Consumer Goods and Services)* 164,700 9,347,815
Elsag Bailey Process Automation N.V
(Machinery 87,600 1,921,725
--------------
$ 24,770,196
- --------------------------------------------------------------------------------
Peru - 0.5%
Telefonica del Peru S.A., ADR
(Telecommunications) 329,300 $ 7,121,113
- --------------------------------------------------------------------------------
Portugal - 1.0%
Banco Totta e Acores (Banks and Credit Cos.) 413,539 $ 15,309,549
- --------------------------------------------------------------------------------
Singapore - 0.2%
Hong Leong Finance Ltd. (Finance)+ 1,602,200 $ 1,732,885
Overseas Union Bank (Finance) 592,000 1,804,123
--------------
$ 3,537,008
- --------------------------------------------------------------------------------
South Korea - 0.2%
SK Telecom Ltd., ADR (Telecommunications)* 72,512 $ 462,264
SK Telecommunications (Telecommunications) 5,290 2,398,560
--------------
$ 2,860,824
- --------------------------------------------------------------------------------
Sweden - 0.6%
Skandia Forsakring AB (Insurance) 571,500 $ 8,346,524
- --------------------------------------------------------------------------------
United Kingdom - 2.0%
Booker PLC (Food - Wholesale) 1,437,300 $ 6,875,776
British Petroleum PLC, ADR (Oils) 172,338 15,273,455
Lucas Varity PLC (Automotive) 1,725,200 7,605,187
--------------
$ 29,754,418
- --------------------------------------------------------------------------------
Total Foreign Stocks $ 225,478,008
- --------------------------------------------------------------------------------
Total Stocks (Identified Cost, $1,127,610,894) $1,405,219,389
- --------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- --------------------------------------------------------------------------------
Short-Term Obligation - 3.4%
- --------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp., due
6/01/98 - 6/19/98, at Amortized Cost $ 50,829 $ 50,760,783
- --------------------------------------------------------------------------------
Total Investments (Identified Cost,
$1,178,371,677) $1,455,980,172
Other Assets, Less Liabilities - 1.6% 23,246,702
- --------------------------------------------------------------------------------
Net Assets - 100.0% $1,479,226,874
- --------------------------------------------------------------------------------
*Non-income producing security.
+Restricted security.
++Affiliated issuers are those in which the Fund's holdings of an issuer
represent 5% or more of the outstanding voting securities of the issuer.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities (Unaudited)
- --------------------------------------------------------------------------------
MAY 31, 1998
- --------------------------------------------------------------------------------
Assets:
Investments, at value:
Unaffiliated issuers (identified cost, $1,152,359,290) $1,396,441,646
Affiliated issuer (identified cost, $26,012,387) 59,538,526
--------------
Total investments, at value (identified cost
$1,178,371,677) $1,455,980,172
Cash 15,466
Receivable for Fund shares sold 6,265,267
Receivable for investments sold 43,756,677
Interest and dividends receivable 988,913
Other assets 6,510
--------------
Total assets $1,507,013,005
--------------
Liabilities:
Payable for Fund shares reacquired $ 6,370,767
Payable for investments purchased 19,818,638
Net payable for forward foreign currency exchange contracts
closed or subject to master netting agreements 517,615
Payable to affiliates -
Management fee 90,518
Shareholder servicing agent fee 13,578
Distribution and service fee 787,600
Administrative fee 1,714
Accrued expenses and other liabilities 185,701
--------------
Total liabilities $ 27,786,131
--------------
Net assets $1,479,226,874
==============
Net assets consist of:
Paid-in capital $1,108,302,969
Unrealized appreciation on investments and translation
of assets and liabilities in foreign currencies 277,076,532
Accumulated undistributed net realized gain on
investments and foreign currency transactions 96,579,352
Accumulated distributions in excess of net investment
income (2,731,979)
--------------
Total $1,479,226,874
==============
Shares of beneficial interest outstanding 92,369,348
==========
Class A shares:
Net asset value per share
(net assets of $796,716,690 / 48,938,806 shares of
beneficial interest outstanding) $16.28
======
Offering price per share (100 / 94.25 of net asset
value per share) $17.27
======
Class B shares:
Net asset value and offering price per share
(net assets of $558,352,311 / 35,578,570 shares of
beneficial interest outstanding) $15.69
======
Class C shares:
Net asset value and offering price per share
(net assets of $94,328,346 / 6,021,033 shares of
beneficial interest outstanding) $15.67
======
Class I shares:
Net asset value, offering price, and redemption price per share
(net assets of $29,829,527 / 1,830,939 shares of
beneficial interest outstanding) $16.29
======
On sales of $50,000 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 (Unaudited)
- --------------------------------------------------------------------------------
SIX MONTHS ENDED MAY 31, 1998
- --------------------------------------------------------------------------------
Net investment income:
Income -
Dividends $ 5,163,622
Interest 2,462,601
Foreign taxes withheld (214,864)
------------
Total investment income $ 7,411,359
------------
Expenses -
Management fee $ 4,870,889
Trustees' compensation 32,509
Shareholder servicing agent fee 755,986
Distribution and service fee (Class A) 887,301
Distribution and service fee (Class B) 2,415,016
Distribution and service fee (Class C) 397,657
Administrative fee 84,047
Custodian fee 215,261
Postage 94,006
Auditing fees 15,253
Printing 10,088
Legal fees 1,927
Miscellaneous 383,904
------------
Total expenses $ 10,163,844
Fees paid indirectly (147,120)
------------
Net expenses $ 10,016,724
------------
Net investment loss $ (2,605,365)
------------
Realized and unrealized gain (loss) on investments:
Realized gain (identified cost basis) -
Investment transactions $ 98,089,890
Foreign currency transactions 170,451
------------
Net realized gain on investments and foreign currency
transactions $ 98,260,341
------------
Change in unrealized appreciation (depreciation) -
Investments $129,090,213
Translation of assets and liabilities in foreign
currencies (401,549)
------------
Net unrealized gain on investments and foreign currency
translation $128,688,664
------------
Net realized and unrealized gain on investments and
foreign currency $226,949,005
------------
Increase in net assets from operations $224,343,640
============
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
Statement of Changes in Net Assets
<CAPTION>
- --------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
MAY 31, 1998 NOVEMBER 30, 1997
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income (loss) $ (2,605,365) $ 1,578,558
Net realized gain on investments and foreign
currency transactions 98,260,341 114,638,154
Net unrealized gain on investments and foreign
currency translation 128,688,664 88,884,455
-------------- --------------
Increase in net assets from operations $ 224,343,640 $ 205,101,167
-------------- --------------
Distributions declared to shareholders -
From net investment income (Class A) $ (1,025,267) $ (946,436)
From net investment income (Class B) -- --
From net investment income (Class C) -- (28,491)
From net investment income (Class I) (96,642) --
From net realized gain on investments and foreign
currency transactions (Class A) (63,537,243) (36,139,796)
From net realized gain on investments and foreign
currency transactions (Class B) (44,463,674) (21,106,896)
From net realized gain on investments and foreign
currency transactions (Class C) (7,148,876) (2,868,779)
From net realized gain on investments and foreign
currency transactions (Class I) (2,630,447) --
-------------- --------------
Total distributions declared to shareholders $ (118,902,149) $ (61,090,398)
-------------- --------------
Net increase in net assets from Fund share
transactions $ 256,291,495 $ 269,839,092
-------------- --------------
Total increase in net assets $ 361,732,986 $ 413,849,861
Net assets:
At beginning of period 1,117,493,888 703,644,027
-------------- --------------
At end of period (including accumulated undistributed
(distributions in excess of) net investment income of
$(2,731,979) and $995,295, respectively) $1,479,226,874 $1,117,493,888
============== ==============
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
Financial Highlights
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30,
SIX MONTHS ENDED -------------------------------------------------------------------------
MAY 31, 1998 1997 1996 1995 1994 1993
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------
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 $15.23 $13.34 $12.39 $ 9.44 $10.82 $10.17
------ ------ ------ ------ ------ ------
Income from investment operations# -
Net investment income (loss) $(0.01) $ 0.07 $ 0.05 $ 0.01 $(0.01) $ 0.02
Net realized and unrealized
gain on investments and
foreign currency transactions 2.67 2.97 2.04 3.64 0.26 1.96
------ ------ ------ ------ ------ ------
Total from investment
operations $ 2.66 $ 3.04 $ 2.09 $ 3.65 $ 0.25 $ 1.98
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.03) $(0.03) $ -- $ -- $(0.03) $ --
From net realized gain on
investments and foreign
currency transactions (1.58) (1.12) (1.14) (0.70) (1.60) (1.33)
------ ------ ------ ------ ------ ------
Total distributions
declared to shareholders $(1.61) $(1.15) $(1.14) $(0.70) $(1.63) $(1.33)
------ ------ ------ ------ ------ ------
Net asset value - end of period $16.28 $15.23 $13.34 $12.39 $ 9.44 $10.82
====== ====== ====== ====== ====== ======
Total return(+) 19.65%++ 24.96% 18.50% 41.67% 1.92% 22.10%
Ratios (to average net assets)/
Supplemental data:
Expenses## 1.25%+ 1.29% 1.32% 1.35% 1.37% 1.42%
Net investment income (loss) (0.08)%+ 0.49% 0.43% 0.06% (0.05)% 0.09%
Portfolio turnover 51% 144% 112% 109% 91% 95%
Net assets at end of period (000
omitted) $796,717 $609,189 $427,478 $227,555 $141,790 $132,207
+ Annualized.
++ Not annualized.
# Per share data for the periods subsequent to November 30, 1993, are 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.
(+) 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>
Financial Highlights - continued
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED SIX MONTHS
NOVEMBER 30, ENDED YEAR ENDED MAY 31,
--------------------------- NOVEMBER 30, --------------------------------------
1992 1991 1990 1990 1989 1988
- ------------------------------------------------------------------------------------------------------------------------------
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 $ 8.73 $ 7.46 $ 8.99 $10.52 $ 8.70 $ 9.60
------ ------ ------ ------ ------ ------
Income from investment operations -
Net investment income $ -- $ 0.14 $ 0.09 $ 0.33 $ 0.21 $ 0.10
Net realized and unrealized
gain (loss) on investments
and foreign currency
transactions 2.03 1.21 (1.38) 0.17 2.17 (0.86)
------ ------ ------ ------ ------ ------
Total from investment
operations $ 2.03 $ 1.35 $(1.29) $ 0.50 $ 2.38 $(0.76)
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders -
From net investment income $(0.07) $(0.08) $(0.11) $(0.34) $(0.17) $(0.03)
From net realized gain on
investments and foreign
currency transactions (0.52) -- (0.05) (1.69) (0.39) (0.11)
From paid-in capital -- -- (0.08) -- -- --
------ ------ ------ ------ ------ ------
Total distributions
declared to shareholders $(0.59) $(0.08) $(0.24) $(2.03) $(0.56) $(0.14)
------ ------ ------ ------ ------ ------
Net asset value - end of period $10.17 $ 8.73 $ 7.46 $ 8.99 $10.52 $ 8.70
====== ====== ====== ====== ====== ======
Total return(+) 24.60% 18.26% (29.48)%+ 5.13% 28.47% (7.63)%
Ratios (to average net assets)/
Supplemental data:
Expenses 1.53% 1.50% 1.51%+ 1.26% 1.41% 1.33%
Net investment income -- 1.65% 2.30%+ 3.38% 2.29% 1.12%
Portfolio turnover 111% 132% 36% 88% 80% 99%
Net assets at end of period
(000 omitted) $112,958 $104,600 $100,398 $125,191 $133,219 $116,218
+ 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.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
Financial Highlights - continued
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30,
SIX MONTHS ENDED -------------------------------------------------------------------------
MAY 31, 1998 1997 1996 1995 1994 1993*
(UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------------------
CLASS B
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of
period $14.77 $13.01 $12.15 $ 9.34 $10.79 $10.61
------ ------ ------ ------ ------ ------
Income from investment operations# -
Net investment loss $(0.06) $(0.04) $(0.04) $(0.08) $(0.09) $(0.01)
Net realized and unrealized
gain on investments and
foreign currency transactions 2.56 2.89 2.00 3.59 0.27 0.19
------ ------ ------ ------ ------ ------
Total from investment
operations $ 2.50 $ 2.85 $ 1.96 $ 3.51 $ 0.18 $ 0.18
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders -
From net realized gain on
investments and foreign
currency transactions $(1.58) $(1.09) $(1.10) $(0.70) $(1.60) $ --
In excess of net investment
income -- -- -- -- (0.03) --
------ ------ ------ ------ ------ ------
Total distributions
declared to shareholders $(1.58) $(1.09) $(1.10) $(0.70) $(1.63) $ --
------ ------ ------ ------ ------ ------
Net asset value - end of period $15.69 $14.77 $13.01 $12.15 $ 9.34 $10.79
====== ====== ====== ====== ====== ======
Total return 19.21%++ 24.03% 17.50% 40.53% 1.15% 1.70%++
Ratios (to average net assets)/
Supplemental data:
Expenses## 2.00%+ 2.04% 2.16% 2.17% 2.25% 2.46%+
Net investment loss (0.83)%+ (0.28)% (0.33)% (0.77)% (0.96)% (1.37)%+
Portfolio turnover 51% 144% 112% 109% 91% 95%
Net assets at end of period
(000 omitted) $558,352 $411,640 $244,247 $46,068 $17,189 $1,097
* For the period from the inception of Class B, September 7, 1993, through November 30, 1993.
+ Annualized.
++ Not annualized.
# Per share data for the periods subsequent to November 30, 1993, are 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>
Financial Highlights - continued
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED PERIOD ENDED
MAY 31, 1998 NOVEMBER 30, 1997 NOVEMBER 30, 1996**
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------
CLASS C
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $14.74 $13.03 $12.00
------ ------ ------
Income from investment operations# -
Net investment loss $(0.06) $(0.04) $(0.01)
Net realized and unrealized gain on investments and
foreign currency transactions 2.57 2.88 1.04
------ ------ ------
Total from investment operations $ 2.51 $ 2.84 $ 1.03
------ ------ ------
Less distributions declared to shareholders -
From net investment income $ -- $(0.01) $ --
From net realized gain on investments and foreign
currency transactions (1.58) (1.12) --
------ ------ ------
Total distributions declared to shareholders
$(1.58) $(1.13) $ --
------ ------ ------
Net asset value - end of period $15.67 $14.74 $13.03
====== ====== ======
Total return 19.25%++ 24.02% 7.95%++
Ratios (to average net assets)/Supplemental data:
Expenses## 2.00%+ 2.04% 2.11%+
Net investment loss (0.83)%+ (0.28)% (0.17)%+
Portfolio turnover 51% 144% 112%
Net assets at end of period (000 omitted) $94,328 $66,148 $31,919
** For the period from the inception of Class C, April 1, 1996, through November 30, 1996.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
Financial Highlights - continued
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED PERIOD ENDED
MAY 31, 1998 NOVEMBER 30, 1997***
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------
CLASS I
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $15.26 $12.22
------ ------
Income from investment operations# -
Net investment income $ 0.01 $ 0.08
Net realized and unrealized gain on investments and foreign
currency transactions 2.66 2.96
------ ------
Total from investment operations $ 2.67 $ 3.04
------ ------
Less distributions declared to shareholders -
From net investment income $(0.06) $ --
From net realized gain on investments and foreign currency
transactions (1.58) --
------ ------
Total distributions declared to shareholders $(1.64) $ --
------ ------
Net asset value - end of period $16.29 $15.26
====== ======
Total return 19.84%++ 24.88%++
Ratios (to average net assets)/Supplemental data:
Expenses## 1.00%+ 1.01%+
Net investment income 0.17%+ 0.65%+
Portfolio turnover 51% 144%
Net assets at end of period (000 omitted) $29,830 $30,517
*** For the period from the inception of Class I, January 2, 1997, through November 30, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly.
</TABLE>
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(1) Business and Organization
MFS Capital Opportunities Fund (the Fund) is a 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. Effective April 1, 1998, the name of the
Fund was changed from MFS Value Fund to MFS Capital Opportunities Fund.
(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.
Investment Valuations - Equity securities listed on securities exchanges or
reported through the NASDAQ system are reported at market value using last sale
prices. Unlisted equity securities or listed equity securities for which last
sale prices are not available are reported at market value using last quoted bid
prices. 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. Debt securities (other than short-term obligations which mature in 60
days or less), including forward contracts, are valued on the basis of
valuations furnished by dealers or by a pricing service with consideration to
factors such as institutional-size trading in similar groups of securities,
yield, quality, coupon rate, maturity, type of issue, trading characteristics,
and other market data, without exclusive reliance upon exchange or over-the-
counter prices. Short-term obligations, which mature in 60 days or less, are
valued at amortized cost, which approximates market value. Securities for which
there are no such quotations or valuations are valued at fair value as
determined in good faith by or at the discretion 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.
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 as unrealized until the contract settlement date. On
contract settlement date, the gains or losses are recorded as realized gains or
losses on foreign currency transactions.
Investment Transactions and Income - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All discount
is accreted for financial statement and tax reporting purposes as required by
federal income tax regulations. Dividends received in cash are recorded on the
ex-dividend date. Dividend and interest payments received in additional
securities are recorded on the ex-dividend or ex-interest date in an amount
equal to the value of the security on such date.
Fees Paid Indirectly - The Fund's custody fee is calculated as a percentage of
the Fund's month end net assets. The fee is reduced according to an
arrangement that measures 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.
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 net realized gains.
Multiple Classes of Shares of Beneficial Interest - The Fund offers multiple
classes of shares, which differ in their respective distribution and service
fees. All shareholders bear the common expenses of the Fund based on 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. Class B shares will convert to Class A
shares approximately eight years after purchase.
(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 annual rate of 0.75% of
average daily net assets.
Administrator - The Fund has an administrative services agreement with MFS to
provide the Fund with certain financial, legal, shareholder servicing,
compliance, and other administrative services. As a partial reimbursement for
the cost of providing these services, the Fund pays MFS an administrative fee
at the following annual percentages of the Fund's average daily net assets:
First $1 billion 0.0150%
Next $1 billion 0.0125%
Next $1 billion 0.0100%
In excess of $3 billion 0.0000%
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 $9,502 for the six months
ended May 31, 1998.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$289,385 for the six months ended May 31, 1998, as its portion of the sales
charge on sales of Class A shares of the Fund.
The Trustees have adopted a distribution plan for Class A, Class B, and Class
C shares pursuant to Rule 12b-1 of the Investment Company Act of 1940 as
follows:
The Fund's 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 paid 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 which are attributable to that
securities dealer and 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. Payment of the
0.10% per annum Class A distribution fee will be implemented on such date as the
Trustees of the Trust may determine. MFD retains the service fee for accounts
not attributable to a securities dealer, which amounted to $98,217 for the six
months ended May 31, 1998. Fees incurred under the distribution plan during the
six months ended May 31, 1998, were 0.25% of average daily net assets
attributable to Class A shares on an annualized basis.
The Fund's distribution plan provides that the Fund will pay MFD a distribution
fee of 0.75% per annum, and a service fee of up to 0.25% per annum, of the
Fund's average daily net assets attributable to Class B and Class C shares. MFD
will pay to securities dealers that enter into a sales agreement with MFD all or
a portion of the service fee attributable to Class B and Class C shares, and
will pay to such securities dealers all of the distribution fee attributable to
Class C shares. The service fee is intended to be 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 $58,561 and $71,776 for Class B and Class C shares, respectively,
for the six months ended May 31, 1998. Fees incurred under the distribution plan
during the six months ended May 31, 1998, were 1.00% of average daily net assets
attributable to both Class B and Class C shares.
Certain Class A shares and Class C shares are subject to a contingent deferred
sales charge in the event of a shareholder redemption within 12 months following
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 six months ended May 31,
1998, were $0, $303,880, and $13,055 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 Fund's average daily net assets at an effective annual rate of
0.1125%. Prior to January 1, 1998, the fee was calculated as a percentage of the
average daily net assets at an effective annual rate of 0.13%.
(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 $ 15,456,011 $ --
------------ ------------
Investments (non-U.S. government securities) $816,918,538 $621,474,221
------------ ------------
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 $1,178,371,677
--------------
Gross unrealized appreciation $ 301,409,702
Gross unrealized depreciation (23,801,207)
--------------
Net unrealized appreciation $ 277,608,495
==============
(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
SIX MONTHS ENDED MAY 31, 1998 YEAR ENDED NOVEMBER 30, 1997
------------------------------ -------------------------------
SHARES AMOUNT SHARES AMOUNT
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 14,922,928 $230,679,228 21,945,096 $296,891,395
Shares issued to shareholders in
reinvestment of distributions 4,438,551 59,432,656 2,783,995 33,768,741
Shares transferred to Class I -- -- (1,547,626) (18,911,993)
Shares reacquired (10,413,103) (161,994,264) (15,224,032) (209,041,747)
---------- ------------ ---------- ------------
Net increase 8,948,376 $128,117,620 7,957,433 $102,706,396
========== ============ ========== ============
<CAPTION>
Class B Shares
SIX MONTHS ENDED MAY 31, 1998 YEAR ENDED NOVEMBER 30, 1997
------------------------------ -------------------------------
SHARES AMOUNT SHARES AMOUNT
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 8,232,586 $123,156,144 11,370,630 $148,136,021
Shares issued to shareholders in
reinvestment of distributions 2,859,338 37,028,533 1,482,412 17,551,958
Shares reacquired (3,389,419) (51,139,589) (3,749,784) (49,366,876)
---------- ------------ ---------- ------------
Net increase 7,702,505 $109,045,088 9,103,258 $116,321,103
========== ============ ========== ============
<CAPTION>
Class C Shares
SIX MONTHS ENDED MAY 31, 1998 YEAR ENDED NOVEMBER 30, 1997
------------------------------ -------------------------------
SHARES AMOUNT SHARES AMOUNT
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 2,278,303 $ 33,688,487 2,563,925 $ 33,259,494
Shares issued to shareholders in
reinvestment of distributions 301,208 3,891,641 120,178 1,420,490
Shares reacquired (1,044,636) (15,716,414) (648,339) (8,661,075)
---------- ------------ ---------- ------------
Net increase 1,534,875 $ 21,863,714 2,035,764 $ 26,018,909
========== ============ ========== ============
<CAPTION>
Class I Shares
SIX MONTHS ENDED MAY 31, 1998 PERIOD ENDED NOVEMBER 30, 1997*
------------------------------ -------------------------------
SHARES AMOUNT SHARES AMOUNT
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 214,744 $ 3,378,008 721,994 $ 9,428,729
Shares transferred to Class A -- -- 1,547,626 18,911,993
Shares issued to shareholders in
reinvestment of distributions 127,923 1,711,616 -- --
Shares reacquired (511,689) (7,824,551) (269,659) (3,548,038)
---------- ------------ ---------- ------------
Net increase (decrease) (169,022) $ (2,734,927) 1,999,961 $ 24,792,684
========== ============ ========== ============
</TABLE>
* For the period from the inception of Class I, January 2, 1997, through
November 30, 1997.
(6) Line of Credit
The Fund and other affiliated funds participate in a $805 million unsecured line
of credit provided by a syndication of banks under a line of credit agreement.
Borrowings may be made to temporarily finance the repurchase of 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 six
months ended May 31, 1998 was $3,422.
(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 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.
Forward Foreign Currency Exchange Contracts - Forward foreign currency purchases
under master netting agreements amounted to a net payable of $517,615 with
Merrill Lynch & Co.
At May 31, 1998, the Fund had sufficient cash and/or securities to cover any
commitments under these contracts.
(8) Transactions in Securities of Affiliated Issuers
Affiliated issuers, as defined under the Investment Company Act of 1940, are
those in which the Fund's holdings of an issuer represent 5% of more of the
outstanding voting securities of the issuer. A summary of the Fund's
transactions in the securities of these issuers during the six months ended May
31, 1998, is set forth below:
<TABLE>
<CAPTION>
ACQUISITIONS DISPOSITIONS
BEGINNING -------------------------- --------------------------
AFFILIATE SHARES SHARES COST SHARES COST
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cellular Communications
International, Inc. 1,216,917* 46,500 $1,487,711 0 $ 0
========= ====== ========== ==== ====
<CAPTION>
ENDING REALIZED DIVIDEND ENDING
AFFILIATE SHARES GAIN (LOSS) INCOME VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cellular Communications
International, Inc. 1,263,417 $ 0 $ 0 $59,538,526
========= ==== ==== ===========
</TABLE>
* Adjusted to reflect a 3-for-2 stock split with a payment date of 4/14/98.
(9) Restricted Security
The Fund may invest not more than 15% of its net assets in securities which are
subject to legal or contractual restrictions on resale. At May 31, 1998, the
Fund owned the following restricted security (constituting 0.12% of net assets)
which may not be publicly sold without registration under the Securities Act of
1933. The Fund does not have the right to demand that such security be
registered. The value of this security is determined by valuations furnished by
dealers or by a pricing service, or if not available, is valued at fair value as
determined in good faith by or at the direction of the Trustees.
<TABLE>
<CAPTION>
DESCRIPTION DATE OF ACQUISITION SHARES COST VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Hong Leong Finance Ltd. 3/26/98-5/06/98 1,602,200 $2,599,356 $1,732,885
</TABLE>
<PAGE>
MFS(R) Capital Opportunities Fund
<TABLE>
<S> <C>
Trustees Custodian
Richard B. Bailey* - Private Investor; State Street Bank and Trust Company
Former Chairman and Director (until 1991),
MFS Investment Management Investor Information
For MFS stock and bond market outlooks, call
Peter G. Harwood - Private Investor toll free: 1-800-637-4458 anytime from a
touch-tone telephone.
J. Atwood Ives - Chairman and Chief Executive
Officer, Eastern Enterprises (diversified For information on MFS mutual funds, call your
services company) financial adviser or, for an information kit,
call toll free: 1-800-637-2929 any business
Lawrence T. Perera - Partner, Hemenway day from 9 a.m. to 5 p.m. Eastern time (or
& Barnes (attorneys) leave a message anytime).
William J. Poorvu - Adjunct Professor, Harvard Investor Service
University Graduate School of Business MFS Service Center, Inc.
Administration P.O. Box 2281
Boston, MA 02107-9906
Charles W. Schmidt - Private Investor
For general information, call toll free:
Arnold D. Scott* - Senior Executive 1-800-225-2606 any business day from
Vice President, Director, and Secretary, 8 a.m. to 8 p.m. Eastern time.
MFS Investment Management
For service to speech- or hearing-impaired,
Jeffrey L. Shames* - Chairman, Chief call toll free: 1-800-637-6576 any business
Executive Officer, and Director, day from 9 a.m. to 5 p.m. Eastern time. (To
MFS Investment Management use this service, your phone must be equipped
with a Telecommunications Device for the
Elaine R. Smith - Independent Consultant Deaf.)
David B. Stone - Chairman and Director, For share prices, account balances, and
North American Management Corp. exchanges, call toll free: 1-800-MFS-TALK
(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
For the fourth year in a row,
Distributor MFS earned a #1 ranking in the
MFS Fund Distributors, Inc. [Dalbar Logo] DALBAR, Inc. Broker/Dealer
500 Boylston Street Survey, Main Office Operation
Boston, MA 02116-3741 Service Quality Category. The
firm achieved a 3.42 overall score on a
Portfolio Manager scale of 1 to 4 in the 1997 survey. A total
John F. Brennan, Jr.* of 111 firms responded, offering input on
the quality of service they received from 29
Treasurer mutual fund companies nationwide. The survey
W. Thomas London* contained questions about service quality in
11 categories, including "knowledge of
Assistant Treasurers operations contact," "keeping you informed,"
Mark E. Bradley* and "ease of doing business" with the firm.
Ellen Moynihan*
James O. Yost*
Secretary
Stephen E. Cavan*
Assistant Secretary
James R. Bordewick, Jr.*
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
-----------------
MFS(R) CAPITAL OPPORTUNITIES FUND Bulk Rate
U.S. Postage
Paid
[Logo] M F S(SM) MFS
INVESTMENT MANAGEMENT -----------------
We invented the mutual fund(SM)
500 Boylston Street
Boston, MA 02116-3741
[DALBAR LOGO]
(C)1998 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
MCO-3 7/98 118M 23/223/323/823
