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[LOGO]
THE FIRST NAME IN MUTUAL FUNDS
Semiannual Report
February 29, 1996
MFS(R) OTC FUND
[graphic: picture of two men in front of window]
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MFS(R) OTC FUND
<TABLE>
<CAPTION>
<S> <C>
TRUSTEES CUSTODIAN
A. Keith Brodkin* - Chairman and President Investors Bank & Trust Company
Richard B. Bailey* - Private Investor;
Former Chairman and Director (until 1991), INVESTOR INFORMATION
Massachusetts Financial Services Company; For MFS stock and bond market outlooks,
Director, Cambridge Bancorp; Director, call toll free: 1-800-637-4458 anytime from
Cambridge Trust Company a touch-tone telephone.
Peter G. Harwood - Private Investor
J. Atwood Ives - Chairman and Chief Executive For information on MFS mutual funds,
Officer, Eastern Enterprises call your financial adviser or, for an
Lawrence T. Perera - Partner, information kit, call toll free:
Hemenway & Barnes 1-800-637-2929 any business day from
William J. Poorvu - Adjunct Professor, 9 a.m. to 5 p.m. Eastern time (or leave
Harvard University Graduate School of a message anytime).
Business Administration
Charles W. Schmidt - Private Investor INVESTOR SERVICE
Arnold D. Scott* - Senior Executive Vice MFS Service Center, Inc.
President, Director and Secretary, P.O. Box 2281
Massachusetts Financial Services Company Boston, MA 02107-9906
Jeffrey L. Shames* - President and Director,
Massachusetts Financial Services Company For general information, call toll free:
Elaine R. Smith - Independent Consultant 1-800-225-2606 any business day from
David B. Stone - Chairman, North American 8 a.m. to 8 p.m. Eastern time.
Management Corp. (investment adviser) For service to speech- or hearing-impaired,
call toll free: 1-800-637-6576 any business
INVESTMENT ADVISER day from 9 a.m. to 5 p.m. Eastern time.
Massachusetts Financial Services Company (To use this service, your phone must be
500 Boylston Street equipped with a Telecommunications Device for
Boston, MA 02116-3741 the Deaf.)
DISTRIBUTOR For share prices, account balances and
MFS Fund Distributors, Inc. exchanges, call toll free: 1-800-MFS-TALK
500 Boylston Street (1-800-637-8255) anytime from a touch-tone
Boston, MA 02116-3741 telephone.
PORTFOLIO MANAGER --------------------------------------------
Mark Regan*
TOP RATED SERVICE
TREASURER For the second year in a row,
W. Thomas London* DALBAR MFS earned a #1 ranking in
DALBAR, Inc.'s Broker/Dealer
ASSISTANT TREASURER LOGO Survey, Main Office Operations
James O. Yost* Service Quality category. The
firm achieved a 3.49 overall score - on a
SECRETARY scale of 1 to 4 - in the 1995 survey. A total
Stephen E. Cavan* of 71 firms responded, offering input on the
quality of service they receive from 36
ASSISTANT SECRETARY mutual fund companies nationwide. The survey
James R. Bordewick, Jr.* contained questions about service quality in
17 categories, including "knowledge of phone
*Affiliated with the Investment Adviser service contracts," "accuracy of transaction
processing," and "overall ease of doing
business with the firm."
</TABLE>
<PAGE>
LETTER TO SHAREHOLDERS
Dear Shareholders:
In a period of relative market strength that also included some areas of
weakness -- including a number of technology stocks -- the Fund outperformed
the Russell 2000 Total Return Index (the Russell Index), although it
underperformed the Standard & Poor's 500 Composite Index (the S&P 500). For
the six months ended February 29, 1996, Class A shares of the Fund had a total
return of 9.08%, Class B shares had a total return of 8.69%, and Class C
shares had a total return of 8.61%. These returns compare to a 7.12% return
for the Russell Index, an unmanaged index of 2,000 of the smallest U.S.-
domiciled company common stocks which are traded on the New York Stock
Exchange, the American Stock Exchange, and NASDAQ; and to a 15.31% return for
the S&P 500, a popular, unmanaged index of common stock performance. All of
the Fund's returns include the reinvestment of distributions but exclude the
effects of any sales charges. Complete performance information for the Fund is
provided on pages four and five of this report.
Economic Environment
We believe the U.S. economy will continue to grow in 1996 -- although
"subdued" may be the best way to describe this growth. One factor holding
growth in check is the continued sluggishness of the consumer sector, an area
that represents approximately two-thirds of the economy. Going into this year,
consumers have been left in a somewhat weakened position, due in part to an
increase in consumer installment debt of some 30% over the past two years. A
second reason for the economy's weakness is the "lag effect" of increases in
short-term interest rates by the Federal Reserve Board in 1994 and into 1995.
This lag effect can last up to two years, although a series of reductions in
short-term rates by the Fed, which began late last year, could provide some
support to the economy through 1996. A third reason for weakness is the
ongoing economic doldrums in Europe and Japan, important markets for U.S.
exports. Here again, we are seeing a few signs, particularly in Japan, of
modest recoveries that could lead to improved prospects for U.S. exporters.
Also, we believe lower interest rates will give a boost to the U.S. housing
market, an important segment of the economy since it also affects such
industries as major appliances, furniture, and building-supply companies.
Finally, although the first few weeks of 1996 saw some signs of inflationary
pressures, caused primarily by rising energy prices and followed by an upward
movement in gold, we believe inflation will remain under control this year,
due mainly to the subdued level of economic growth.
Stock Markets
While we do not expect the U.S. stock market to match the extraordinary
performance of 1995, we continue to be positive about the equity markets this
year. First, the broad decline in interest rates in 1995 made fixed-income
investments less competitive with equity investments, which helped overall
stock valuations. In 1996, however, any additional declines in interest rates
are expected to be much more modest. Another trend from 1995 that seems likely
to decelerate in 1996 is the growth of corporate earnings, as more companies
report lower earnings gains resulting from the slower economy. However, to the
extent that some earnings disappointments are a sign that the economy is not
overheating, which could lead to higher inflation, this may prove beneficial
for the longer-term health of the equity markets. For the market as a whole,
we believe corporate earnings will grow modestly in 1996, but well below the
strong earnings gains of 1995. Longer term, we expect that many of the
technology-driven gains in productivity that U.S. companies have made in
recent years will continue to enhance corporate America's competitiveness and
profitability.
Portfolio Performance and Strategy
The Fund's large exposure to the health care sector -- health maintenance
organizations (HMOs), nursing care facilities, and medical devices -- was a
strong contributor to performance during the past six months, as was the
Fund's exposure to the entertainment and gaming sectors. Computer software
stocks, including the Learning Company, Sierra On-Line, and Davidson, also
contributed to performance as a number of these companies were acquired at
significant premiums during the period.
On the other hand, the apparent slowdown in sales of personal computers
and price declines in semiconductors have helped depress prices of many
technology stocks. Our technology weighting remains at about 33% of the
portfolio, with a focus on software, communications, and distributed
processing. We believe that these companies will benefit from lower
semiconductor prices. The software companies appear likely to benefit from the
improved price/performance characteristics of the semiconductor and hardware
companies. In our view, these companies, which provide new software to help
companies upgrade existing computer systems, offer greater potential for
stability than commodity semiconductor or hardware manufacturers.
The Fund's very large positions in HMOs were reduced during the past six
months as the market viewed these companies more favorably, and prices of
these stocks rose approximately 50%. Meanwhile, several retailing,
distribution, and restaurant companies were added to the Fund in the early
part of 1996. We regard these stocks, which included Applebee's, Gymboree, and
Gateway 2000, as high-quality companies whose prices had been driven down to
attractive levels.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
- --------------------------- ---------------------------
[Photo of A. Keith Brodkin, [Photo of Mark Regan,
Chairman and President] Portfolio Manager]
- --------------------------- ---------------------------
/s/ A. Keith Brodkin /s/ Mark Regan
A. Keith Brodkin Mark Regan
Chairman and President Portfolio Manager
March 14, 1996
OBJECTIVE AND POLICIES
The Fund's primary investment objective is to provide long-term growth of
capital.
The Fund seeks to achieve its objective by investing, under normal market
conditions, at least 65% of its assets in securities principally traded on the
over-the-counter (OTC) securities market. OTC securities tend to be securities
of companies which are smaller or newer than those listed on the New York or
American Stock Exchanges. The Fund may invest in securities of companies that
are not traded on the OTC securities market that represent opportunities for
capital appreciation, as well as in fixed-income securities.
PORTFOLIO MANAGER PROFILE
Mark Regan began his career at MFS in 1989 as a research analyst. A graduate
of Cornell University and the Sloan School of Management at the Massachusetts
Institute of Technology, he was promoted to Investment Officer in 1990,
Assistant Vice President - Investments in 1991, and Vice President -
Investments in 1992. Mr. Regan has served as Portfolio Manager for MFS OTC
Fund since its inception in 1993.
PORTFOLIO CONCENTRATION AS OF FEBRUARY 29, 1996
<TABLE>
<CAPTION>
<S> <C>
Percent of Percent of
Five Largest Industries Net Assets Ten Largest Holdings Net Assets
- ------------------------------------------------------------------------------------------------
Medical and Health Products 14.8 Medisense, Inc. 7.1
- ----------------------------------------------- -------------------------------------------
Computer Software - Systems 13.8 Showboat, Inc. 5.8
- ----------------------------------------------- -------------------------------------------
Computer Software - Personal Computers 13.7 Uromed Corp. 5.0
- ----------------------------------------------- -------------------------------------------
Entertainment 13.5 Pacificare Health Systems, Inc. 5.0
- ----------------------------------------------- -------------------------------------------
Telecommunications 10.1 Rogers Communications, Inc. 4.9
- ----------------------------------------------- -------------------------------------------
Rogers Cantel Mobile Co. 4.3
-------------------------------------------
Sierra On-Line, Inc. 4.0
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Electronic Arts, Inc. 3.5
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Argosy Gaming Corp. 3.3
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Spectrum Holobyte Industries 3.2
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</TABLE>
PERFORMANCE SUMMARY
Because mutual funds like MFS OTC Fund are designed for investors with long-
term goals, we have provided cumulative results as well as the average annual
total returns for Class A, Class B and Class C shares for the applicable time
periods.
AVERAGE ANNUAL AND CUMULATIVE TOTAL RATES OF RETURN
Class A Investment Results
(net asset value change including reinvested distributions)
12/01/93# -
6 Months 1 Year 2/29/96
- ------------------------------------------------------------------------------
Cumulative Total Return* +9.08% +33.44% +44.82%
- ------------------------------------------------------------------------------
Average Annual Total Return* -- +33.44% +17.92%
- ------------------------------------------------------------------------------
The average annual total returns, calculated for the period ended as of the
most recent calendar quarter as required by the Securities and Exchange
Commission (the SEC), with all distributions reinvested and reflecting the
maximum sales charge of 5.75% on the initial investment for the 1-year period
ended December 31, 1995 and for the period from December 1, 1993# to
December 31, 1995, were +15.18% and +11.77%, respectively.
AVERAGE ANNUAL AND CUMULATIVE TOTAL RATES OF RETURN - continued
Class B Investment Results
(net asset value change including reinvested distributions)
12/01/93# -
6 Months 1 Year 2/29/96
- ------------------------------------------------------------------------------
Cumulative Total Return## +8.69% +32.40% +41.60%
- ------------------------------------------------------------------------------
Average Annual Total Return## -- +32.40% +16.74%
- ------------------------------------------------------------------------------
The average annual total returns, calculated for the period ended as of the
most recent calendar quarter as required by the SEC, with all distributions
reinvested and reflecting the contingent deferred sales charge (CDSC) of 4%
for the 1-year period ended December 31, 1995, and 3% for the period from
December 1, 1993# to December 31, 1995, were +17.22% and +12.11%, respectively.
Class C Investment Results
(net asset value change including reinvested distributions)
8/01/94# -
6 Months 1 Year 2/29/96
- ------------------------------------------------------------------------------
Cumulative Total Return(S) +8.61% +32.55% +42.22%
- ------------------------------------------------------------------------------
Average Annual Total Return(S) -- +32.55% +24.96%
- ------------------------------------------------------------------------------
The average annual total returns, calculated for the period ended as of the
most recent calendar quarter as required by the SEC, with all distributions
reinvested for the 1-year period ended December 31, 1995 and for the period
from August 1, 1994# to December 31, 1995, were +21.38% and +21.44%,
respectively.
All results represent past performance and are not an indication of future
results. Investment return and principal value will fluctuate, and shares,
when redeemed, may be worth more or less than their original cost.
# Commencement of offering of this class of shares.
* These results do not include the sales charge. If the charge had been
included, the results would have been lower.
## These results do not include any CDSC. If the charge had been included, the
results would have been lower.
(S) Class C shares have no initial sales charge or CDSC but, along with Class B
shares, have higher annual fees and expenses than Class A shares.
<PAGE>
PORTFOLIO OF INVESTMENTS (UNAUDITED) - February 29, 1996
Common Stocks and Warrants - 98.4%
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Issuer Shares Value
- -----------------------------------------------------------------------------
Agricultural Products - 0.2%
AGCO Corp. 7,000 $ 189,875
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Apparel and Textiles - 0.6%
Mossimo, Inc.* 400 $ 9,800
Nine West Group, Inc.* 15,000 588,750
-----------
$ 598,550
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Business Machines - 2.1%
Gateway 2000, Inc.* 60,000 $ 1,770,000
Sun Microsystems, Inc.* 5,000 262,500
-----------
$ 2,032,500
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Business Services - 0.9%
Franklin Quest Co.* 45,000 $ 900,000
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Computer Software - 0.3%
Cheyenne Software, Inc.* 10,000 $ 233,750
Documentum, Inc.* 300 11,625
-----------
$ 245,375
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Computer Software - Personal Computers - 13.7%
Autodesk, Inc. 17,700 $ 626,137
Electronic Arts, Inc.* 135,000 3,375,000
MAXIS, Inc.* 43,800 1,270,200
Microsoft Corp.* 10,000 986,875
Sierra On-Line, Inc.* 100,000 3,812,500
Spectrum Holobyte Industries* 380,400 3,090,750
-----------
$13,161,462
- -----------------------------------------------------------------------------
Computer Software - Systems - 13.8%
Adobe Systems, Inc. 42,500 $ 1,423,750
BMC Software, Inc.* 40,400 2,252,300
Cadence Design Systems, Inc.* 22,000 981,750
Compuware Corp.* 40,350 928,050
Cybercash, Inc.* 200 10,050
Cylink Corp.* 900 21,150
Davidson & Associates* 44,000 1,199,000
Engineering Animation, Inc.* 500 9,000
Indus Group, Inc.* 500 7,500
Open Text Corp.* 500 6,187
Oracle Systems Corp.* 48,000 2,496,000
Raptor Systems, Inc.* 300 9,525
Red Brick Systems, Inc.* 300 15,300
SCB Computer Technology* 300 5,700
Sybase, Inc.* 80,200 2,516,275
Synopsys, Inc.* 40,200 1,316,550
-----------
$13,198,087
- -----------------------------------------------------------------------------
Electronics - 4.5%
Intel Corp. 13,500 $ 793,969
LSI Logic Corp.* 80,000 2,210,000
National Semiconductor Corp.* 60,000 937,500
Xilinx, Inc.* 10,000 386,250
-----------
$ 4,327,719
- -----------------------------------------------------------------------------
Entertainment - 13.5%
Argosy Gaming Corp.* 350,100 $ 3,150,900
Casino America, Inc.* 45,050 273,116
Chancellor Corp.* 1,100 22,550
Harrah's Entertainment* 37,300 1,011,762
Harveys Casino Resorts 30,000 465,000
Showboat, Inc. 230,600 5,534,400
Starsight Telecast, Inc.* 478,200 2,480,662
-----------
$12,938,390
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Financial Institutions - 2.4%
Advanta Corp., "B" 15,000 $ 675,000
Contifinancial Corp.* 1,200 30,900
Meridian Bancorp, Inc. 12,000 618,000
National Auto Credit, Inc.* 73,300 971,225
RAC Financial Group, Inc.* 2,400 48,000
-----------
$ 2,343,125
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Insurance - 0.4%
Amerin Corp.* 2,800 $ 73,500
Sphere Drake Holdings Ltd. 30,000 330,000
-----------
$ 403,500
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Medical and Health Products - 14.8%
Arthrocare Corp.* 200 $ 4,500
Cohr, Inc.* 800 11,200
Conceptus, Inc.* 800 15,800
Medisense, Inc.* 220,000 6,847,500
NCS Healthcare, Inc.* 900 22,725
Uromed Corp.* 345,200 4,832,800
Vitalcom* 500 6,625
Zoll Medical Corp.* 212,800 2,453,839
-----------
$14,194,989
- -----------------------------------------------------------------------------
Medical and Health Technology and Services - 9.4%
Beverly Enterprises* 100,000 $ 1,212,500
HealthWise of America, Inc.* 20,200 838,300
Living Centers of America* 2,900 117,450
Mariner Health Group, Inc.* 70,000 1,330,000
Pacificare Health Systems, Inc.* 51,700 4,808,100
Phymatrix, Inc.* 2,600 58,500
Regency Health Services* 51,800 641,025
Riscorp, Inc.* 1,700 32,300
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$ 9,038,175
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Metals and Minerals - 1.1%
J & L Specialty Steel 60,000 $ 1,050,000
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Precious Metals and Minerals - 0.8%
Southern Africa Minerals Corp.* 810,000 $ 797,121
- -----------------------------------------------------------------------------
Oils - 1.2%
Seacor Holdings* 35,300 $ 1,182,550
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Pollution Control - 0.1%
Allied Waste Industries* 5,300 $ 43,725
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Printing and Publishing - 0.6%
Pulitzer Publishing Co. 10,000 $ 505,000
World Color Press, Inc.* 3,300 68,887
-----------
$ 573,887
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Restaurants and Lodging - 2.3%
Applebee's International, Inc. 90,000 $ 1,890,000
Promus Hotel Corp.* 12,450 323,700
-----------
$ 2,213,700
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Stores - 1.6%
Alrenco, Inc.* 1,400 $ 20,650
Gymboree Corp.* 60,000 1,560,000
-----------
$ 1,580,650
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Telecommunications - 10.1%
CSG Systems International, Inc.* 600 $ 13,200
Cisco Systems, Inc.* 16,000 760,000
Lambert Communication* 33,000 330
Omnipoint Corp.* 1,000 27,000
Rogers Cantel Mobile Co.* 175,000 4,156,250
Rogers Communications, Inc.* 467,200 4,683,214
Trescom International, Inc.* 1,100 16,500
U.S. Satellite Broadcasting* 600 19,500
-----------
$ 9,675,994
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Utilities - Telephone - 2.8%
American Media, Inc., Warrants* 1,351,600 $ 21,085
MCI Communications Corp. 90,000 2,632,500
-----------
$ 2,653,585
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Foreign Stocks - 1.2%
Hong Kong - 0.6%
Giordano Holdings Ltd. 524,000 $ 559,213
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Sweden - 0.6%
Noblepharma AB* 34,000 $ 569,225
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Total Common Stocks and Warrants (Identified Cost, $90,804,105) $94,471,397
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Convertible Bond - 0.1%
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Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Spectrum Holobyte, 6.5s, due
2002+ (Identified Cost, $150,000) $ 150 $ 109,500
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Short-Term Obligation - 1.6%
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General Electric Capital Corp, 5.42s, due
3/01/96, at Amortized Cost $1,480 $ 1,479,777
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Total Investments (Identified Cost, $92,433,882) $96,060,674
Other Assets, Less Liabilities - (0.1)% (77,840)
- -----------------------------------------------------------------------------
Net Assets - 100.0% $95,982,834
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* Non-income producing security.
+ SEC Rule 144A restriction.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities (Unaudited)
- ------------------------------------------------------------------------------
February 29, 1996
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $92,433,882) $96,060,674
Cash 3,087
Net receivable for forward foreign currency exchange
contracts purchased 57
Receivable for investments sold 723,146
Receivable for Fund shares sold 133,644
Interest and dividends receivable 10,989
Other assets 1,227
-----------
Total assets $96,932,824
-----------
Liabilities:
Payable for Fund shares reacquired $ 95,232
Payable for investments purchased 756,270
Payable to affiliates -
Management fee 1,993
Shareholder servicing agent fee 515
Distribution fee 20,691
Accrued expenses and other liabilities 75,289
-----------
Total liabilities $ 949,990
-----------
Net assets $95,982,834
===========
Net assets consist of:
Paid-in capital $89,945,711
Unrealized appreciation on investments and translation of
assets and liabilities in foreign currencies 3,626,792
Accumulated undistributed net realized gain on investments
and foreign currency transactions 3,152,660
Accumulated net investment loss (742,329)
-----------
Total $95,982,834
===========
Shares of beneficial interest outstanding 10,814,800
===========
Class A shares:
Net asset value and redemption price per share
(net assets of $31,282,337 / 3,497,507 shares of
beneficial interest outstanding) $8.94
=====
Offering price per share (100/94.25) $9.49
=====
Class B shares:
Net asset value and offering price per share
(net assets of $60,175,240 / 6,801,463 shares of
beneficial interest outstanding) $8.85
=====
Class C shares:
Net asset value, offering price, and redemption price per share
(net assets of $4,525,257 / 515,830 shares of beneficial
interest outstanding) $8.77
=====
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
and Class B shares.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations (Unaudited)
- ------------------------------------------------------------------------------
Six Months Ended February 29, 1996
- ------------------------------------------------------------------------------
Net investment income:
Income -
Interest $ 60,036
Dividends 39,737
----------
Total investment income $ 99,773
----------
Expenses -
Management fee $ 338,713
Trustees' compensation 6,434
Shareholder servicing agent fee (Class A) 21,609
Shareholder servicing agent fee (Class B) 63,537
Shareholder servicing agent fee (Class C) 2,813
Distribution and service fee (Class B) 248,925
Distribution and service fee (Class C) 18,753
Custodian fee 18,837
Auditing fees 15,070
Postage 12,431
Printing 4,315
Legal fees 3,808
Miscellaneous 85,022
----------
Total expenses $ 840,267
Fees paid indirectly (1,427)
----------
Net expenses $ 838,840
----------
Net investment loss $ (739,067)
----------
Realized and unrealized gain (loss) on investments:
Net realized gain on investments $8,324,451
Net unrealized loss on investments (333,466)
----------
Net realized and unrealized gain on investments $7,990,985
----------
Increase in net assets from operations $7,251,918
==========
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
- ------------------------------------------------------------------------------
Six Months Ended
February 29, 1996 Year Ended
(Unaudited) August 31, 1995
- ------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment loss $ (739,067) $ (876,305)
Net realized gain on investments and
foreign currency transactions 8,324,451 14,682,099
Net unrealized gain (loss) on
investments and foreign
currency translation (333,466) 959,367
------------ ------------
Increase in net assets from
operations $ 7,251,918 $ 14,765,161
------------ ------------
Distributions declared to shareholders -
From net realized gain on investments
and foreign currency
transactions (Class A) $ (5,350,459) $ (918,344)
From net realized gain on investments
and foreign currency
transactions (Class B) (10,344,167) (1,440,882)
From net realized gain on investments
and foreign currency
transactions (Class C) (756,617) (47,151)
------------ ------------
Total distributions declared to
shareholders $(16,451,243) $ (2,406,377)
------------ ------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 28,470,779 $110,456,952
Net asset value of shares issued to
shareholders in reinvestment of
distributions 14,792,085 2,174,647
Cost of shares reacquired (33,224,921) (84,557,685)
------------ ------------
Increase in net assets from Fund
share transactions $ 10,037,943 $ 28,073,914
------------ ------------
Total increase in net assets $ 838,618 $ 40,432,698
Net assets:
At beginning of period 95,144,216 54,711,518
------------ ------------
At end of period (including
accumulated net investment loss
of $742,329 and $3,262,
respectively) $ 95,982,834 $ 95,144,216
============ ============
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Six Months Ended Year Ended August 31,
February 29, 1996 ------------------------------------
(Unaudited) 1995 1994<F1>
- ---------------------------------------------------------------------------------------------------------------
Class A
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $10.08 $ 8.68 $ 7.83
------ ------ ------
Income from investment operations<F5> -
Net investment loss $(0.05) $(0.03) $(0.05)
Net realized and unrealized gain on investments 0.79 1.69 0.90
------ ------ ------
Total from investment operations $ 0.74 $ 1.66 $ 0.85
------ ------ ------
Less distributions declared to shareholders from net
realized gain on investments $(1.88) $(0.26) $ --
------ ------ ------
Net asset value - end of period $ 8.94 $10.08 $ 8.68
====== ====== ======
Total return<F4> 9.08%<F3> 19.77% 10.86%<F3>
Ratios (to average net assets)/Supplemental data<F7>:
Expenses<F6> 1.22%<F2> 1.29% 1.50%<F2>
Net investment loss (1.00)%<F2> (0.40)% (0.87)%<F2>
Average commission rate $0.0426 -- --
Portfolio turnover 81% 218% 82%
Net assets at end of period (000 omitted) $31,282 $30,194 $17,776
<FN>
<F1> For the period from commencement of investment operations, December 1, 1993 to August 31, 1994.
<F2> Annualized.
<F3> Not annualized.
<F4> 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.
<F5> Per share data is based upon average shares outstanding.
<F6> For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without
reduction for fees paid indirectly.
<F7> The investment adviser and distributor did not impose a portion of their management fee and
distribution fee, respectively, for certain of the periods indicated. If these fees had been
incurred by the Fund, the net investment loss per share and ratios would have been:
Net investment loss -- -- $(0.08)
Ratios (to average net assets):
Expenses -- -- 2.03%<F2>
Net investment loss -- -- (1.40)%<F2>
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Six Months Ended Year Ended August 31,
February 29, 1996 ------------------------------------
(Unaudited) 1995 1994<F1>
- ---------------------------------------------------------------------------------------------------------------
Class B
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 9.94 $ 8.59 $ 7.83
------ ------ ------
Income from investment operations<F4> -
Net investment loss $(0.09) $(0.13) $(0.12)
Net realized and unrealized gain on investments 0.79 1.69 0.88
------ ------ ------
Total from investment operations $ 0.70 $ 1.56 $ 0.76
------ ------ ------
Less distributions declared to shareholders from net
realized gain on investments $(1.79) $(0.21) $ --
------ ------ ------
Net asset value - end of period $ 8.85 $ 9.94 $ 8.59
====== ====== ======
Total return 8.69%<F3> 18.75% 9.71%<F3>
Ratios (to average net assets)/Supplemental data<F6>:
Expenses<F5> 2.14%<F2> 2.29% 2.57%<F2>
Net investment loss (1.93)%<F2> (1.44)% (2.02)%<F2>
Average commission rate $0.0426 -- --
Portfolio turnover 81% 218% 82%
Net assets at end of period (000 omitted) $60,175 $61,742 $36,849
<FN>
<F1> For the period from commencement of investment operations, December 1, 1993 to August 31, 1994.
<F2> Annualized.
<F3> Not annualized.
<F4> Per share data is based upon average shares outstanding.
<F5> For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without
reduction for fees paid indirectly.
<F6> The investment adviser and distributor did not impose a portion of their management fee and
distribution fee, respectively, for certain of the periods indicated. If these fees had been
incurred by the Fund, the net investment loss per share and ratios would have been:
Net investment loss -- -- $(0.15)
Ratios (to average net assets):
Expenses -- -- 3.10%<F2>
Net investment loss -- -- (2.56)%<F2>
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Six Months Ended Year Ended August 31,
February 29, 1996 ------------------------------------
(Unaudited) 1995 1994<F1>
- ---------------------------------------------------------------------------------------------------------------
Class C
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 9.91 $ 8.61 $ 7.80
------ ------ ------
Income from investment operations<F4> -
Net investment loss $(0.09) $(0.14) $(0.04)
Net realized and unrealized gain on investments 0.78 1.69 0.85
------ ------ ------
Total from investment operations $ 0.69 $ 1.55 $ 0.81
------ ------ ------
Less distributions declared to shareholders from net
realized gain on investments $(1.83) $(0.25) $ --
------ ------ ------
Net asset value - end of period $ 8.77 $ 9.91 $ 8.61
====== ====== ======
Total return 8.61%<F3> 18.63% 10.38%<F3>
Ratios (to average net assets)/Supplemental data(S):
Expenses<F5> 2.21%<F2> 2.30% 2.50%<F2>
Net investment loss (2.00)%<F2> (1.55)% (2.22)%<F2>
Average commission rate $0.0426 -- --
Portfolio turnover 81% 218% 82%
Net assets at end of period (000 omitted) $4,525 $3,209 $87
<FN>
<F1> For the period from the commencement of offering of Class C shares, August 1, 1994 to August 31,
1994.
<F2> Annualized.
<F3> Not annualized.
<F4> Per share data is based upon average shares outstanding.
<F5> For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without
reduction for fees paid indirectly.
<F6> The investment adviser and distributor did not impose a portion of their management fee and
distribution fee, respectively, for certain of the periods indicated. If these fees had been
incurred by the Fund, the net investment loss per share and ratios would have been:
Net investment loss -- -- $(0.05)
Ratios (to average net assets):
Expenses -- -- 3.03%<F2>
Net investment loss -- -- (2.71)%<F2>
</TABLE>
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(1) Business and Organization
MFS OTC Fund (the Fund) is a non-diversified series of MFS Series Trust IV
(the Trust). The Trust is organized as a Massachusetts business trust and is
registered under the Investment Company Act of 1940, as amended, as an open-
end management investment company.
(2) Significant Accounting Policies
Investment Valuations - Equity securities listed on securities exchanges or
reported through the NASDAQ system are valued at last sale prices. Unlisted
equity securities or listed equity securities for which last sale prices are
not available are valued at last quoted bid prices. Short-term obligations,
which mature in 60 days or less, are valued at amortized cost, which
approximates market value.
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 and 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 these contracts from the potential inability of counterparties to
meet the terms of their contracts and from unanticipated movements in the
value of a foreign currency relative to the U.S. dollar. The Fund will enter
into forward contracts for hedging purposes as well as for non-hedging
purposes. For hedging purposes, the Fund may enter into contracts to deliver
or receive foreign currency it will receive from or require for its normal
investment activities. It may also use contracts in a manner intended to
protect foreign currency-denominated securities from declines in value due to
unfavorable exchange rate movements. For non-hedging purposes, the Fund may
enter into contracts with the intent of changing the relative exposure of the
Fund's portfolio of securities to different currencies to take advantage of
anticipated changes. The forward foreign currency exchange contracts are
adjusted by the daily exchange rate of the underlying currency and any gains
or losses are recorded for financial statement purposes as unrealized until
the contract settlement date.
Investment Transactions and Income - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
and original issue discount are amortized or accreted for 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.
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 an
expense offset arrangement with State Street Bank, the dividend disbursing
agent, which provides for partial reimbursement of custody fees based on a
formula developed to measure the value of cash deposited by the Fund with the
custodian and with the dividend disbursing agent. 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 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.
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 is computed daily and paid monthly at an 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 of the officers and Trustees of the Fund are officers or
directors of MFS, MFS Fund Distributors, Inc. (MFD) and MFS Service Center,
Inc. (MFSC). The Fund has an unfunded defined benefit plan for all of its
independent Trustees and Mr. Bailey. Included in Trustees' compensation is a
net periodic pension expense of $934 for the six months ended February 29,
1996.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$6,226 for the six months ended February 29, 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 that enters into a sales agreement with MFD of up to
0.25% per annum of the Fund's average daily net assets attributable to Class A
shares which are attributable to that securities dealer, a distribution fee to
MFD of up to 0.10% per annum of the Fund's average daily net assets
attributable to Class A shares, commissions to dealers and payments to MFD
wholesalers for sales at or above a certain dollar level, and other such
distribution-related expenses that are approved by the Fund. Payment of this
fee will commence under the distribution plan when the value of the net assets
of the Fund attributable to Class A shares first equals or exceeds $40
million.
The Class B and Class C distribution plans provide that the Fund will pay MFD
a distribution fee of 0.75% per annum, and a service fee of up to 0.25% per
annum, of the Fund's average daily net assets attributable to Class B and
Class C shares. The service fee is currently suspended on Class B shares held
over one year. MFD will pay to securities dealers that enter into a sales
agreement with MFD all or a portion of the service fee attributable to Class B
and Class C shares, and will pay to such securities dealers all of the
distribution fee attributable to Class C shares. The service fee is intended
to be additional consideration for services rendered by the dealer with
respect to Class B and Class C shares. Fees incurred under the distribution
plans during the six months ended February 29, 1996 were 0.94% and 1.00% of
average daily net assets attributable to Class B and Class C shares,
respectively, on an annualized basis.
A contingent deferred sales charge is imposed on shareholder redemptions of
Class A shares, on purchases of $1 million or more, in the event of a
shareholder redemption within 12 months following the share purchase. A
contingent deferred sales charge is imposed on shareholder redemptions of
Class B shares in the event of a shareholder redemption within six years of
purchase. MFD receives all contingent deferred sales charges. Contingent
deferred sales charges imposed during the six months ended February 29, 1996
were $14 and $62,739 for Class A and Class B shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as 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 U.S. government securities,
purchased option transactions and short-term obligations, aggregated
$60,091,679 and $65,921,785, respectively.
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 $92,433,882
===========
Gross unrealized appreciation $16,684,964
Gross unrealized depreciation (13,058,172)
-----------
Net unrealized appreciation $ 3,626,792
===========
(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
Period Ended
February 29, 1996 Year Ended
(Unaudited) August 31, 1995
------------------------------ -----------------------------
Shares Amount Shares Amount
- ------------------------------------------------------------------------------
Shares sold 940,480 $ 8,817,084 4,680,448 $ 39,610,152
Shares issued to
shareholders in
reinvestment of
distributions 609,465 4,991,856 104,971 868,094
Shares
reacquired (1,048,694) (9,737,556) (3,837,263) (32,341,967)
---------- ----------- ---------- ------------
Net increase 501,251 $ 4,071,384 948,156 $ 8,136,279
========== =========== ========== ============
Class B Shares
Period Ended
February 29, 1996 Year Ended
(Unaudited) August 31, 1995
------------------------------ -----------------------------
Shares Amount Shares Amount
- ------------------------------------------------------------------------------
Shares sold 1,180,451 $10,720,950 7,325,159 $ 62,579,527
Shares issued to
shareholders in
reinvestment of
distributions 1,119,285 9,077,495 154,411 1,266,051
Shares
reacquired (1,711,924) (15,516,523) (5,554,198) (46,622,744)
---------- ----------- ---------- ------------
Net increase 587,812 $ 4,281,922 1,925,372 $ 17,222,834
========== =========== ========== ============
Class C Shares
Period Ended
February 29, 1996 Year Ended
(Unaudited) August 31, 1995
------------------------------ -----------------------------
Shares Amount Shares Amount
- ------------------------------------------------------------------------------
Shares sold 964,207 $ 8,932,745 948,839 $ 8,267,273
Shares issued to
shareholders in
reinvestment of
distributions 89,938 722,734 4,957 40,502
Shares
reacquired (862,134) (7,970,842) (640,099) (5,592,974)
---------- ----------- ---------- ------------
Net increase 192,011 $ 1,684,637 313,697 $ 2,714,801
========== =========== ========== ============
(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 six months ended
February 29, 1996 was $461.
(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. A summary of obligations
under these financial instruments at February 29, 1996, is as follows:
Forward Foreign Currency Exchange Contracts
<TABLE>
<CAPTION>
Settlement Contracts to Contracts Net Unrealized
Date Receive In Exchange for at Value Appreciation
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Purchases 3/01/96 HKD 4,008,803 $518,516 $518,573 $57
======== ======== ===
</TABLE>
HKD = Hong Kong Dollars
At February 29, 1996, the Fund had sufficient cash and/or securities to cover
any commitments under this contract.
(8) Restricted Securities
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 February 29,
1996, the Fund owned the following restricted security (constituting 0.11% of
net assets), which may not be publicly sold without registration under the
Securities Act of 1933 (the 1933 Act). The Fund does not have the right to
demand that such a security be registered. The value of this security is
determined by valuations supplied by a pricing service or brokers. This
security may be offered and sold to "qualified institutional buyers" under
Rule 144A of the 1933 Act.
Date of Share
Description Acquisition Amount Cost Value
- ------------------------------------------------------------------------------
Spectrum Holobyte, 6.5s,
due 2002 9/27/95 $150,000 $150,000 $109,500
========
---------------------------------------------
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) OTC FUND -------------
[LOGO: NUMBER 1 VALUE BULK RATE
TOP RATED SERVICE] U.S. POSTAGE
PAID
500 Boylston Street PERMIT #55638
Boston, MA 02116 BOSTON, MA
-------------
[LOGO: M F S]
THE FIRST NAME IN MUTUAL FUNDS
OTC-3 4/96 16M 83/283/383
