<PAGE>
[Logo]M F S(R)
INVESTMENT MANAGEMENT
We invented the mutual fund(R)
[GRAPHIC OMITTED]
ANNUAL REPORT
JULY 31, 1998
o MFS(R) EMERGING MARKETS
DEBT FUND
o MFS(R) SMALL CAP VALUE FUND
o MFS(R) STRATEGIC VALUE FUND
<PAGE>
MFS(R) EMERGING MARKETS DEBT FUND
MFS(R) SMALL CAP VALUE FUND
MFS(R) STRATEGIC VALUE FUND
TRUSTEES CUSTODIAN
Richard B. Bailey* - Private State Street Bank and Trust Company
Investor; Former Chairman and
Director (until 1991), MFS AUDITORS
Investment Management Ernst & Young LLP
Peter G. Harwood - Private Investor INVESTOR INFORMATION
For MFS stock and bond market
J. Atwood Ives - Chairman and Chief outlooks, call toll free:
Executive Officer, Eastern 1-800-637-4458 anytime from a
Enterprises (diversified services touch-tone telephone.
company)
For information on MFS mutual
Lawrence T. Perera - Partner, funds, call your financial adviser
Hemenway & Barnes (attorneys) or, for an information kit, call
toll free: 1-800-637-2929 any
William J. Poorvu - Adjunct business day from 9 a.m. to 5 p.m.
Professor, Harvard University Eastern time (or leave a message
Graduate School of Business anytime).
Administration
INVESTOR SERVICE
Charles W. Schmidt - Private MFS Service Center, Inc.
Investor P.O. Box 2281
Boston, MA 02107-9906
Arnold D. Scott* - Senior Executive
Vice President, Director, and For general information, call toll
Secretary, MFS Investment free: 1-800-225-2606 any business
Management day from 8 a.m. to 8 p.m. Eastern
time.
Jeffrey L. Shames* - Chairman,
Chief Executive Officer, and For service to speech- or
Director, MFS Investment Management hearing-impaired, call toll free:
1-800-637-6576 any business day
Elaine R. Smith - Independent from 9 a.m. to 5 p.m. Eastern time.
Consultant (To use this service, your phone
must be equipped with a
David B. Stone - Chairman and Telecommunications Device for the
Director, North American Management Deaf.)
Corp. (investment advisers)
For share prices, account balances,
INVESTMENT ADVISER and exchanges, call toll free:
Massachusetts Financial Services Company 1-800-MFS-TALK (1-800-637-8255)
500 Boylston Street anytime from a touch-tone
Boston, MA 02116-3741 telephone.
DISTRIBUTOR WORLD WIDE WEB
MFS Fund Distributors, Inc. www.mfs.com
500 Boylston Street
Boston, MA 02116-3741
PORTFOLIO MANAGERS
Kenneth J. Enright*
Robert J. Manning*
Kevin R. Parke*
Matthew W. Ryan*
TREASURER
W. Thomas London*
ASSISTANT TREASURERS
Mark E. Bradley*
Ellen Moynihan*
James O. Yost*
SECRETARY
Stephen E. Cavan*
ASSISTANT SECRETARY
James R. Bordewick, Jr.*
*Affiliated with the Investment Adviser
<PAGE>
LETTER FROM THE CHAIRMAN
[Photo of Jeffrey L. Shames]
Jeffrey L. Shames
Dear Shareholders,
Although the U.S. stock market has enjoyed several years of double-digit
advances, this summer's volatility shows the necessity of taking a cautious
outlook. By most commonly accepted measures, equity valuations appear to have
risen to a point at which stock prices have become more vulnerable to changes in
the investment environment such as rising inflation and interest rates, a
slowing economy, or -- as we have seen recently -- earnings disappointments. As
a result, while we continue to hold a favorable long-term outlook for the equity
markets, we also believe that a significant market correction would be a healthy
near-term event.
Currently, equity investors seem to be primarily focused on the slowdown in
corporate earnings. In the second quarter, average earnings growth for companies
in the Standard & Poor's 500 Composite Index (the S&P 500), a popular, unmanaged
index of common stock total return performance, was about 3%, well below what
people were expecting a year ago. As a result, the stock market has begun to
retreat from the record-high levels set in mid-July. This retreat may help
correct some of the overvaluations that have been building in the market for
some time. Prior to July, equity prices had continued to rise without a
corresponding increase in corporate earnings. As a result, price-to-earnings
(P/E) ratios, or the amount investors paid for stocks in relation to companies'
earnings per share, also went up. A year ago this July, the average P/E ratio
for stocks in the S&P 500 stood at approximately 23; this July, the average P/E
ratio was some 20% higher, at about 28. If this summer's downturn helps create
more reasonable valuations, we believe the correction could provide a sounder
long-term foundation for the equity markets. On another positive note, interest
rates 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.
As long as interest rates remain low and the economy continues to grow, we
expect stock prices to advance over the next 12 months in line with corporate
earnings, that is, about 8% to 10%. 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.
Internationally, the economic turmoil in Asia continues to be a concern to us,
and we believe the United States has yet to see the full impact of this crisis.
There have been brief periods of improvement in a few countries but, for the
most part, the region's economies are still very weak and the situation could
turn worse before getting better. While the crisis has affected all countries in
Asia, Japan was the major factor behind the turmoil as excesses in its banking
and real estate sectors led to severe currency problems. Although Japan now has
a new government, questions remain about the nation's commitment to ending the
loan crisis and reforming its banking system. At the same time, the Asian
turmoil has had the beneficial effect of moderating U.S. growth and keeping
inflation in check, which has helped establish a favorable interest-rate
environment.
Countering the situation in Asia has been the growing strength of European
economies, although European equity markets have also seen some volatility this
summer. But as these countries move toward economic union, they have benefited
from a convergence of interest rates to lower levels, a rapid expansion of
manufacturing and service businesses, and an increasingly strong consumer
sector. This has helped American exporters offset some of their Asian losses,
while providing investment opportunities in developed and emerging European
markets.
Given the uncertainty arising from these conflicting developments, 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. This includes
portfolios that focus on bond and international investments as well as on the
U.S. stock market. At MFS, we also believe our commitment to original,
company-by-company research gives us an advantage by helping us find companies
that we think can keep growing or gain market share during periods of market
turmoil. To help fulfill this commitment, 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 confidence 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(R)
August 14, 1998
<PAGE>
MANAGEMENT REVIEW AND OUTLOOK
MFS Emerging Markets Debt Fund
Dear Shareholders,
Emerging-market debt has experienced substantial volatility in recent months.
First quarter gains were reversed in the second quarter due primarily to
instability in Russia, continued weakness in Asia, concerns about contagion from
that region, and the downturn in commodity prices, particularly oil. Many
emerging-market countries rely on commodity exports for fiscal and current
account revenues. Coupled with the deterioration in the economic and political
landscape has been the adverse impact of a wave of selling by leveraged
investors forced to liquidate positions.
Dramatic swings in returns are unsettling, but certainly not unprecedented for
this asset class. In 1995, Brady bonds experienced similar declines in the first
quarter, but rebounded and provided returns of over 30% for the year. And,
although past performance is no guarantee of future results, investors have been
rewarded for maintaining their investments in emerging-market debt. Between 1991
and 1998, average annual returns on Brady bonds were just over 19%.
The key question investors must ask going forward is whether they are being paid
for current perceived risks in the form of higher yields. Caution is warranted,
but we believe recent increases in yields provide more attractive valuations and
substantial upside potential and oversold markets can present opportunities for
patient investors. As selloffs by leveraged investors taper off, we believe the
market should develop a firmer tone while credits with sound underlying
fundamentals that are more insulated from Asian and/or Russian contagion effects
could offer profitable opportunities that will be realized over time.
The Fund, which commenced operations on March 17, 1998, has been positioned
defensively through the recent crisis, with minimal exposure to local currency
debt, no exposure to Russian ruble-denominated debt or to Asian corporate debt.
Rather, the Fund has focused on high-quality, liquid sovereign credits. We
believe such an emphasis affords the Fund greater flexibility and can protect
underlying value for shareholders. (Investments in foreign and emerging market
securities may provide superior returns but also involve greater risk than U.S.
investments. Investments in foreign and emerging market securities may be
favorably or unfavorably affected by changes in interest rates and currency
exchange rates, market conditions, and the economic and political conditions of
the countries where investments are made. These risks may increase share price
volatility.)
Although the entire asset class has experienced declines, the Fund's performance
was enhanced by overweighted positions in Mexico and Panama. The Fund benefited
from underweighting Venezuela as well as from avoiding the "land mines" noted
above. Fund performance was hindered, however, by exposure to Russian
dollar-denominated debt as well as by underweightings in Argentina and the
Philippines.
Looking ahead, the Fund will emphasize credits that we believe have solid and/
or improving fundamentals that offer good valuations. As always, preference for
good current yields will be reflected in asset selection. We will continue to
monitor the situation in Russia closely, and will remain attentive to contagion
effects on Brazil and other Latin economies. Developments in Asia warrant
continued active scrutiny. The Fund will maintain a prudent cash position to
retain flexibility.
Respectfully,
/s/ Robert J. Manning /s/ Matthew W. Ryan
Robert J. Manning Matthew W. Ryan
Portfolio Manager Portfolio Manager
Note to Shareholders: Effective July 24, 1998, the Fund is being managed by
Robert J. Manning and Matthew W. Ryan, who succeed Jeffrey A. Kaufman.
<PAGE>
MANAGEMENT REVIEW AND OUTLOOK - continued
MFS Small Cap Value Fund
Dear Shareholders,
The Fund is focused on finding the best ideas in stocks of companies in the
small-capitalization arena. (Investing in small or emerging growth companies
involves greater risk than is customarily associated with more established
companies. These risks may increase share price volatility.) These stocks not
only must have solid long-term growth prospects but also must be available at
attractive prices; hence, the value component of the Fund's objective. In this
market, we seek growth at a reasonable price. Essentially, we look for stocks
with improving fundamentals and increasing growth rates whose share prices may
be depressed because they are in a turnaround mode, have had recent earnings
disappointments, or are misunderstood for some reason by analysts on Wall
Street.
The Fund, which commenced operations on March 17, 1998, is a natural extension
of the MFS(R) Original Research(SM) discipline and is managed by a committee of
research analysts in a fashion similar to our MFS(R) Research Fund, MFS(R)
Research International Fund, and MFS(R) Research Growth and Income Fund. The
portfolio is based on the research analysts' best ideas within their industries.
Stocks are selected after careful, in-depth fundamental analysis of companies'
earnings outlooks. These companies typically demonstrate growing market share,
quality products, superior management teams, and strong financial statements.
They must also sell at prices that we feel represent a discount to their true
value. The Fund is run on a sector model similar to the broad weightings of the
Russell 2000 Total Return Index, an unmanaged index comprised of 2,000 of the
smallest U.S. domiciled company common stocks, that are traded on the New York
Stock Exchange, the American Stock Exchange, and NASDAQ. However, within each
sector we overweight or underweight individual stocks and industries that we
feel have the best prospects for earnings growth and share price appreciation.
Portfolio sector and industry weightings are a fallout of the "best ideas"
stock-selection process. The analysts revisit investments regularly to assure
continued agreement between their research analysis and investment objectives.
In today's market climate, companies that disappoint on their earnings are
brutally punished by Wall Street. MFS Original Research allows us to get solid
firsthand data on each of our portfolio companies, so we feel we are less prone
to surprises resulting from short-term underperformance. Also, our rigorous
research allows us to uncover small-company opportunities that might go
unnoticed by less rigorous investors.
Currently, one of the Fund's best ideas is PSS World Medical, a distributor of
medical and surgical supplies to alternative care sites such as nursing homes
and surgical centers. The company has experienced some rockiness lately as a
result of accounting errors discovered at an acquired company that impacted its
earnings, but PSS is run by a strong management team and is well positioned in a
growing field of the health care market. Therefore, we believe the stock
represents a good value at its current price in comparison to its growth
prospects. Additionally, the company may be a good partner for some of the
larger drug distributors that are looking to expand their market reach to
include products other than drugs.
Another large holding in the Fund is LoJack. LoJack manufactures and distributes
an electronic tracking system that allows law enforcement organizations to track
and recover stolen vehicles. The company offers an established product with very
little competition thanks to its strong patent protection and the infrastructure
it has already developed with law enforcement agencies. The company has grown
revenues at more than 20% per year and earnings at more than 25% per year.
LoJack is actively increasing its presence in established markets and expanding
to new markets in both the United States and internationally. New efforts to
market the product to companies that use fleets of vehicles, such as shipping
and express delivery companies, have also been successful. Currently, LoJack's
valuation is low. The stock trades at roughly 18 times its projected earnings
for 1998 and roughly 13 times projected 1999 earnings. Additionally, management
is very shareholder-value oriented, as evidenced by the amount of stock
repurchased over the past few years and the lack of debt on its balance sheet.
The broad market is trading in a very narrow list of large-cap stocks. Investors
are willing to pay a premium for the liquidity inherent in those shares. As a
result, we feel that excellent values can be found in the small- cap arena and
that this is an optimum time to invest for the long term in these companies. Our
aggressive research efforts should continue to help us find good small companies
at good share prices.
Respectfully,
/s/ Kevin R. Parke
Kevin R. Parke
Director of Equity Research
The committee of MFS research analysts is responsible for the day-to-day
management of the Fund under the general supervision of Mr. Parke.
MFS Strategic Value Fund
Dear Shareholders,
The Fund, which commenced operations on March 17, 1998, invests in high-quality
companies around the world that are currently out of favor but that still
exhibit strong operating performance, good balance sheets, and the potential for
long-term capital appreciation. We maintain a highly flexible investment style
and examine aspects of corporate performance such as asset values, cash flows,
and industry-wide trends to determine the true value of an investment and its
market. We resist any overriding bias to any particular sector or industry.
Often we find good value in companies that are restructuring due to market
forces or internal efforts. We believe that strong management is a critical
factor in the ultimate success of these efforts and in the attractiveness of the
investment. We also seek companies whose valuations are low relative to their
peers or to the broader market.
One of the larger holdings in the Fund that contributed to our strong
performance for the period is ING, a Dutch financial services company. Banks and
insurance companies are consolidating, particularly in the United States, and
ING is a major player in this process. Through consolidation, ING is building a
global franchise with excellent prospects for extending its business and
enhancing revenue growth. Lincoln National is an insurance company that has also
done well as a result of its ability to grow its revenue stream by acquiring and
consolidating companies in its industry.
In technology, IBM has performed relatively well. The company is another large
holding with an internationally recognized brand that is undervalued and that
has restructured to take advantage of changes in the global technology market.
Tyco International, another large Fund holding, is a conglomerate with an
excellent management team that has a leadership position in each of its four
major industry segments. The company has been an aggressive acquiror that
successfully integrates its acquisitions to enhance market share concentration
and cost and distribution efficiencies and thus produce margin growth. The stock
has been a strong performer for this Fund and, based on our expectations, we
believe it remains attractive.
Another area in which we are finding good value is consumer staples,
particularly in food manufacturers like Hershey, Nabisco, and Archer-Daniels-
Midland. These companies are out of favor with the market now, but each is a
large, multinational company with a strong brand or franchise. While their
relative growth rates are forecast to be lower than the market's, they have
strong prospects for capital appreciation over the long term.
Internationally, our holdings include Glaxo Wellcome, a global pharmaceutical
provider, and Alcatel, a French supplier of telecommunications equipment that is
leveraging the trend across Europe toward deregulation in that industry. Also,
we think Hoechst, a German chemical and pharmaceutical company, is attractive
because it is in the process of restructuring, has solid long-term growth
prospects, and is undervalued relative to its industry peers.
We will continue to leverage MFS' expertise as a meticulous researcher of stocks
to seek good investment values for this Fund.
Respectfully,
/s/ Kenneth J. Enright
Kenneth J. Enright
Portfolio Manager
Note to Shareholders: Effective May 11, 1998, the Fund is being managed by
Kenneth J. Enright, who succeeds David M. Calabro.
The opinions expressed in this report are those of the portfolio managers and
are only through the end of the period of the report as stated on the cover.
The managers' views are subject to change at any time based on market and
other conditions, and no forecasts can be guaranteed.
<PAGE>
PORTFOLIO OF INVESTMENTS - July 31, 1998
MFS EMERGING MARKETS DEBT FUND
Bonds - 84.4%
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PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
- -----------------------------------------------------------------------------
Argentina - 4.5%
Republic of Argentina, 9.75s, 2027 $ 45 $ 43,222
- -----------------------------------------------------------------------------
Brazil - 9.3%
Federal Republic of Brazil, 10.125s, 2027 $ 100 $ 89,630
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Bulgaria - 7.8%
National Republic of Bulgaria, 6.688s, 2011 $ 50 $ 36,440
National Republic of Bulgaria, 6.688s, 2024 50 38,500
----------
$ 74,940
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Ecuador - 2.9%
Republic of Ecuador, 6.625s, 2025 $ 40 $ 28,200
-----------------------------------------------------------------------------
Mexico - 20.5%
Petroleos Mexicanos, 9.25s, 2018 (Oil)## $ 40 $ 38,152
United Mexican States, 9.875s, 2007 150 158,250
----------
$ 196,402
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Netherlands - 4.4%
PTC International Finance BV, 0s, 2007 (Finance) $ 60 $ 42,150
- -----------------------------------------------------------------------------
Panama - 4.4%
Republic of Panama, 8.875s, 2027 $ 45 $ 42,187
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Peru - 4.9%
Republic of Peru, 4s, 2017 $ 75 $ 47,250
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Poland - 4.8%
Republic of Poland, 4s, 2014 $ 50 $ 45,750
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Russia - 18.4%
Ministry of Finance, Russia, 10s, 2007 $ 30 $ 21,000
Ministry of Finance, Russia, 12.75s, 2028## 30 24,600
Russian Federation, 8.75s, 2005## 100 66,750
Vnesheconombank, 6.625s, 2015 127 64,629
----------
$ 176,979
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South Korea - 2.5%
Republic of Korea, 8.875s, 2008 $ 25 $ 23,493
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Total Bonds (Identified Cost, $875,669) $810,203
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Short-Term Obligation - 12.0%
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Federal Home Loan Mortgage Corp., due 8/03/98,
at Amortized Cost $ 115 $ 114,964
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Total Investments (Identified Cost, $990,633) $ 925,167
Other Assets, Less Liabilities - 3.6% 34,578
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Net Assets - 100.0% $ 959,745
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## SEC Rule 144A restriction.
See notes to financial statements
<PAGE>
PORTFOLIO OF INVESTMENTS - July 31, 1998
MFS SMALL CAP VALUE FUND
Stocks - 82.7%
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ISSUER SHARES VALUE
- -----------------------------------------------------------------------------
U.S. Stocks - 72.7%
Aerospace - 0.8%
Orbital Sciences Corp.* 250 $ 6,812
-----------------------------------------------------------------------------
Automotive - 1.2%
Dura Automotive Systems, Inc.* 197 $ 6,550
Tower Automotive, Inc.* 200 4,600
----------
$ 11,150
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Banks and Credit Companies - 2.6%
First Midwest Bancorp, Inc. 216 $ 8,964
Provident Bankshares Corp. 263 7,035
St. Paul Bancorp, Inc. 323 7,268
----------
$ 23,267
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Business Services - 3.7%
Diamond Technology Partners, Inc., "A"* 220 $ 6,243
Learning Tree International, Inc.* 354 5,354
Policy Management Systems Corp.* 223 9,784
Renaissance Worldwide, Inc.* 400 6,050
Technology Solutions Co.* 220 5,603
----------
$ 33,034
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Chemicals - 1.2%
Cambrex Corp. 268 $ 7,186
Cytec Industries, Inc.* 124 3,991
----------
$ 11,177
- -----------------------------------------------------------------------------
Computer Software - Personal Computers - 1.4%
Activision, Inc.* 776 $ 9,797
Verio, Inc.* 100 2,825
----------
$ 12,622
- -----------------------------------------------------------------------------
Computer Software - Systems - 4.7%
Aspen Technology, Inc.* 264 $ 6,996
Comverse Technology, Inc.* 403 20,578
Rational Sofware Corp.* 250 4,125
Summit Design, Inc.* 722 7,040
Synopsys, Inc.* 100 3,800
----------
$ 42,539
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Consumer Goods and Services - 2.4%
Asia Pacific Resource Holding Ltd.* 2,400 $ 3,450
LoJack Corp.* 1,200 14,550
Schweitzer-Mauduit International, Inc. 162 3,939
----------
$ 21,939
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Containers - 0.9%
Gaylord Container Corp.* 351 $ 2,018
Stone Container Corp.* 491 6,414
----------
$ 8,432
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Electronics - 2.1%
Burr-Brown Corp.* 377 $ 7,375
Cable Design Technologies Corp.* 271 5,674
Lattice Semiconductor Corp.* 202 6,136
----------
$ 19,185
- -----------------------------------------------------------------------------
Entertainment - 1.8%
Citadel Communications Corp.* 100 $ 2,200
Cox Radio, Inc., "A"* 200 8,712
Gemstar International Group Ltd.* 150 5,588
----------
$ 16,500
-----------------------------------------------------------------------------
Financial Institutions - 8.1%
ARM Financial Group, Inc., "A" 280 $ 6,948
Federated Investors, Inc., "A"* 100 1,775
Freedom Securities Corp.* 700 13,475
Imperial Bancorp* 293 8,314
Keystone Financial, Inc. 362 12,104
Peoples Heritage Financial Group 362 8,190
Sirrom Capital Corp. 500 7,781
UMB Financial Corp. 142 6,710
Webster Financial Corp. 269 8,154
----------
$ 73,451
- -----------------------------------------------------------------------------
Food and Beverage Products - 1.3%
Corn Products International, Inc.* 163 $ 4,849
Golden State Vinters, Inc.* 500 7,000
----------
$ 11,849
- -----------------------------------------------------------------------------
Insurance - 3.8%
FPIC Insurance Group, Inc.* 200 $ 6,900
Life Re Corp. 155 14,134
Nationwide Financial Services, Inc., "A" 245 13,337
----------
$ 34,371
- -----------------------------------------------------------------------------
Machinery - 0.4%
DT Industries, Inc. 179 $ 3,558
- -----------------------------------------------------------------------------
Medical and Health Products - 3.4%
AmeriSource Health Corp., "A"* 94 $ 7,156
King Pharmaceuticals, Inc.* 230 3,709
Mentor Corp. 285 5,771
PSS World Medical, Inc.* 900 13,978
----------
$ 30,614
-----------------------------------------------------------------------------
Medical and Health Technology and Services - 3.7%
Concentra Managed Care, Inc.* 607 $ 13,961
Cytyc Corp.* 300 4,425
Mid Atlantic Medical Services, Inc.* 900 7,087
Renal Care Group, Inc.* 188 7,708
----------
$ 33,181
- -----------------------------------------------------------------------------
Metals and Minerals - 2.3%
Kaiser Aluminum Corp.* 663 $ 6,008
Minerals Technologies, Inc. 130 6,354
USEC, Inc. 600 8,550
----------
$ 20,912
- -----------------------------------------------------------------------------
Oil Services - 0.6%
Global Industries, Inc.* 407 $ 5,062
-----------------------------------------------------------------------------
Oils - 0.6%
Newfield Exploration Co.* 267 $ 5,290
- -----------------------------------------------------------------------------
Pollution Control - 2.1%
Superior Services, Inc.* 355 $ 9,985
Waste Industries, Inc.* 402 8,693
----------
$ 18,678
- -----------------------------------------------------------------------------
Printing and Publishing - 0.8%
Scholastic Corp.* 167 $ 6,998
- -----------------------------------------------------------------------------
Real Estate Investment Trusts - 3.0%
Prentiss Properties Trust* 287 $ 6,834
Beacon Capital Partners, Inc.*## 363 7,260
Highwoods Properties, Inc. 215 6,652
Prime Group Realty Trust 361 6,633
----------
$ 27,379
- -----------------------------------------------------------------------------
Restaurants and Lodging - 0.7%
Sunterra Corp.* 600 $ 6,675
- -----------------------------------------------------------------------------
Special Products and Services - 1.5%
Caliber Learning Network, Inc.* 100 $ 1,000
Rayovac Corp.* 396 6,930
ResortQuest International, Inc.* 100 1,569
SPX Corp.* 75 4,261
----------
$ 13,760
- -----------------------------------------------------------------------------
Stores - 8.5%
AnnTaylor Stores Corp.* 369 $ 7,772
BJ's Wholesale Club, Inc.* 367 13,579
CompUSA, Inc.* 400 7,575
CSK Auto Corp.* 491 12,152
Duane Reade, Inc.* 249 7,517
Micro Warehouse, Inc.* 470 10,972
Petco Animal Supplies, Inc.* 450 4,669
The Elder-Beerman Stores Corp. 200 4,612
The Sports Authority, Inc. 611 7,790
----------
$ 76,638
- -----------------------------------------------------------------------------
Telecommunications - 6.4%
Aspect Telecommunications Corp.* 821 $ 26,195
Globalstar Telecommunications Ltd.* 274 6,302
Hyperion Telecommunications, Inc., "A"* 100 1,350
L-3 Communications Holding, Inc.* 100 3,456
Omnipoint Corp.* 397 8,362
Vanguard Cellular Systems, Inc.* 515 11,861
----------
$ 57,526
- -----------------------------------------------------------------------------
Transportation - 0.6%
Dynamex, Inc.* 500 $ 5,750
- -----------------------------------------------------------------------------
Utilities - Electric - 1.4%
CalEnergy Co., Inc.* 467 $ 12,697
- -----------------------------------------------------------------------------
Utilities - Gas - 0.7%
National Fuel Gas Co. 154 $ 6,362
- -----------------------------------------------------------------------------
Total U.S. Stocks $ 657,408
- -----------------------------------------------------------------------------
Foreign Stocks - 10.0%
Bermuda - 2.0%
Mutual Risk Management Ltd. (Insurance) 211 $ 8,044
Stirling Cooke Brown Holdings Ltd. (Insurance) 420 10,080
----------
$ 18,124
- -----------------------------------------------------------------------------
Finland - 0.8%
Valmet Corp. (Conglomerate) 402 $ 6,786
- -----------------------------------------------------------------------------
France - 1.2%
Compagnie Generale de Geophysique S.A., ADR (Oil
Services)* 446 $ 11,150
- -----------------------------------------------------------------------------
Italy - 0.8%
Industrie Natuzzi S.p.A., ADR (Consumer Goods and
Services) 300 $ 7,481
- -----------------------------------------------------------------------------
Japan - 1.7%
Fujimi, Inc. (Electronics) 100 $ 3,479
Meitec Corp. (Computer Software - Systems) 300 11,514
----------
$ 14,993
- -----------------------------------------------------------------------------
Netherlands - 1.6%
Elsag Bailey Process Automation N.V. (Machinery)* 400 $ 10,775
Fugro N.V. (Engineering)* 102 3,866
----------
$ 14,641
- -----------------------------------------------------------------------------
Spain - 0.5%
Acerinox S.A. (Steel)* 220 $ 4,933
- -----------------------------------------------------------------------------
Switzerland - 0.5%
Barry Callebaut AG (Food and Beverage Products)* 18 $ 4,166
- -----------------------------------------------------------------------------
United Kingdom - 0.9%
Taylor Nelson Sofres PLC (Market Research) 4,000 $ 8,492
- -----------------------------------------------------------------------------
Total Foreign Stocks $ 90,766
- -----------------------------------------------------------------------------
Total Stocks (Identified Cost, $805,610) $ 748,174
- -----------------------------------------------------------------------------
Short-Term Obligation - 7.2%
- -----------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- -----------------------------------------------------------------------------
Federal Home Loan Mortgage Corp., due 8/03/98, at
Amortized Cost $ 65 $ 64,980
- -----------------------------------------------------------------------------
Total Investments (Identified Cost, $870,590) $ 813,154
Other Assets, Less Liabilities - 10.1% 90,909
- -----------------------------------------------------------------------------
Net Assets - 100.0% $ 904,063
- -----------------------------------------------------------------------------
* Non-income producing security.
## SEC Rule 144A restriction.
See notes to financial statements
<PAGE>
PORTFOLIO OF INVESTMENTS - July 31, 1998
MFS STRATEGIC VALUE FUND
Stocks - 98.9%
- -----------------------------------------------------------------------------
ISSUER SHARES VALUE
- -----------------------------------------------------------------------------
U.S. Stocks - 87.9%
Aerospace - 4.5%
Allied Signal, Inc. 294 $ 12,789
Lockheed-Martin Corp. 50 4,984
Raytheon Co., "A" 116 6,286
United Technologies Corp. 100 9,581
----------
$ 33,640
- -----------------------------------------------------------------------------
Automotive - 2.9%
Ford Motor Co. 133 $ 7,572
TRW, Inc. 260 14,089
----------
$ 21,661
- -----------------------------------------------------------------------------
Banks and Credit Companies - 4.3%
BankAmerica Corp. 79 $ 7,090
National City Corp. 220 14,712
PNC Bank Corp. 200 10,788
----------
$ 32,590
- -----------------------------------------------------------------------------
Building - 1.3%
American Standard Cos., Inc.* 200 $ 9,525
- -----------------------------------------------------------------------------
Business Machines - 3.6%
International Business Machines Corp. 125 $ 16,563
Xerox Corp. 100 10,556
----------
$ 27,119
- -----------------------------------------------------------------------------
Cellular Telephones - 1.2%
Telephone & Data Systems, Inc. 220 $ 8,800
- -----------------------------------------------------------------------------
Computer Software - Systems - 0.9%
Computer Associates International, Inc. 200 $ 6,638
- -----------------------------------------------------------------------------
Consumer Goods and Services - 5.0%
Kimberly-Clark Corp. 170 $ 7,639
Philip Morris Cos., Inc. 200 8,763
Rubbermaid, Inc. 178 5,930
Tyco International Ltd. 250 15,484
----------
$ 37,816
- -----------------------------------------------------------------------------
Electrical Equipment - 1.2%
Cooper Industries, Inc. 175 $ 9,177
- -----------------------------------------------------------------------------
Entertainment - 2.4%
Citadel Communications Corp.* 100 $ 2,200
Harrah's Entertainment, Inc.* 209 4,415
Mirage Resorts, Inc.* 191 4,107
Viacom, Inc., "B"* 111 7,603
----------
$ 18,325
- -----------------------------------------------------------------------------
Financial Institutions - 5.2%
Associates First Capital Corp., "A" 150 $ 11,653
First Union Corp. 177 10,664
Heller Financial, Inc., "A"* 100 2,994
Morgan (J.P.) & Co. 48 6,048
Union Planters Corp. 150 8,175
----------
$ 39,534
- -----------------------------------------------------------------------------
Food and Beverage Products - 4.9%
Archer-Daniels-Midland Co. 500 $ 8,563
Hershey Foods Corp. 150 9,469
McCormick & Co., Inc. 250 8,109
Nabisco Holdings Corp., "A" 300 10,687
----------
$ 36,828
- -----------------------------------------------------------------------------
Forest and Paper Products - 1.5%
Champion International Corp. 139 $ 5,899
Weyerhaeuser Co. 139 5,838
----------
$ 11,737
- -----------------------------------------------------------------------------
Insurance - 14.2%
Allstate Corp. 120 $ 5,093
American General Corp. 100 6,831
Chubb Corp. 140 10,272
CIGNA Corp. 75 4,955
Equitable Cos., Inc. 143 10,734
Jefferson Pilot Corp. 137 7,723
Life Re Corp. 100 9,119
Lincoln National Corp. 148 14,171
Provident Cos., Inc. 175 6,453
Torchmark Corp. 260 11,391
Transamerica Corp. 110 12,994
Travelers Group, Inc. 110 7,370
----------
$ 107,106
- -----------------------------------------------------------------------------
Machinery - 3.1%
Eaton Corp. 120 $ 7,830
Lear Corp.* 200 10,612
York International Corp. 111 4,891
----------
$ 23,333
- -----------------------------------------------------------------------------
Medical and Health Products - 3.0%
American Home Products Corp. 300 $ 15,450
Bristol-Myers Squibb Co. 60 6,836
----------
$ 22,286
- -----------------------------------------------------------------------------
Medical and Health Technology and Services - 3.0%
Columbia/HCA Healthcare Corp. 300 $ 8,550
United Healthcare Corp. 250 14,125
----------
$ 22,675
- -----------------------------------------------------------------------------
Metals and Minerals - 1.8%
Aluminum Cos. of America 90 $ 6,238
USEC, Inc.* 500 7,125
----------
$ 13,363
- -----------------------------------------------------------------------------
Oils - 5.3%
Mobil Corp. 136 $ 9,486
Occidental Petroleum Corp. 360 8,010
Texaco, Inc. 174 10,582
Unocal Corp. 220 7,205
USX-Marathon Group 137 4,675
----------
$ 39,958
- -----------------------------------------------------------------------------
Pollution Control - 0.7%
Browning Ferris Industries, Inc. 148 $ 5,208
- -----------------------------------------------------------------------------
Printing and Publishing - 1.1%
Gannett Co., Inc. 125 $ 7,992
- -----------------------------------------------------------------------------
Real Estate Investment Trusts - 2.9%
Arden Realty, Inc. 300 $ 7,087
Patriot American Hospitality, Inc. 400 7,600
TriNet Corporate Realty Trust, Inc. 230 7,576
----------
$ 22,263
- -----------------------------------------------------------------------------
Restaurants and Lodging - 0.6%
MGM Grand, Inc.* 141 $ 4,679
- -----------------------------------------------------------------------------
Stores - 2.8%
American Stores Co. 270 $ 6,261
Rite Aid Corp. 200 7,900
Sears, Roebuck & Co. 134 6,800
----------
$ 20,961
- -----------------------------------------------------------------------------
Supermarkets - 2.5%
Meyer (Fred), Inc.* 270 $ 11,897
Safeway, Inc.* 150 6,647
----------
$ 18,544
- -----------------------------------------------------------------------------
Telecommunications - 1.5%
GTE Corp. 75 $ 4,078
Sprint Corp. 100 7,000
----------
$ 11,078
- -----------------------------------------------------------------------------
Transportation - 2.4%
FDX Corp.* 120 $ 7,283
Union Pacific Corp. 250 10,500
----------
$ 17,783
- -----------------------------------------------------------------------------
Utilities - Electric - 1.6%
Carolina Power & Light Co. 164 $ 6,673
Southern Co. 200 5,100
----------
$ 11,773
- -----------------------------------------------------------------------------
Utilities - Gas - 2.5%
Coastal Corp. 240 $ 7,860
Columbia Gas Systems, Inc. 129 6,861
Marketspan Corp. 141 3,886
----------
$ 18,607
- -----------------------------------------------------------------------------
Total U.S. Stocks $660,999
- -----------------------------------------------------------------------------
Foreign Stocks - 11.0%
France - 1.4%
Alcatel Alsthom Compagnie, ADR
(Telecommunications) 260 $ 10,189
- -----------------------------------------------------------------------------
Germany - 1.5%
Daimler Benz AG (Automotive) 35 $ 3,553
Hoechst AG (Chemicals) 171 7,748
----------
$ 11,301
- -----------------------------------------------------------------------------
Netherlands - 3.8%
Elsag Bailey Process Automation N.V. (Machinery)* 400 $ 10,775
ING Groep N.V., ADR (Financial Services) 242 18,139
----------
$ 28,914
- -----------------------------------------------------------------------------
Sweden - 1.1%
Volvo AB, ADR (Automotive) 270 $ 8,286
- -----------------------------------------------------------------------------
United Kingdom - 3.2%
British Petroleum PLC, ADR (Oils) 163 $ 13,080
Glaxo Wellcome PLC, ADR (Medical and Health Produ 182 11,068
----------
$ 24,148
- -----------------------------------------------------------------------------
Total Foreign Stocks $ 82,838
- -----------------------------------------------------------------------------
Total Stocks (Identified Cost, $744,314) $ 743,837
- -----------------------------------------------------------------------------
Convertible Preferred Stock - 0.8%
- -----------------------------------------------------------------------------
Consumer Goods and Services - 0.8%
Newell Financial Trust Co.*## (Identified Cost, $5 100 $ 6,019
- -----------------------------------------------------------------------------
Total Investments (Identified Cost, $750,052) $ 749,856
Other Assets, Less Liabilities - 0.3% 1,032
- -----------------------------------------------------------------------------
Net Assets - 100.0% $ 750,888
- -----------------------------------------------------------------------------
* Non-income producing security.
## SEC Rule 144A restriction.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Statements of Assets and Liabilities
- --------------------------------------------------------------------------------------------------------------
EMERGING
MARKETS SMALL CAP STRATEGIC
JULY 31, 1998 DEBT FUND VALUE FUND VALUE FUND
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets:
Investments, at value (identified cost, $990,633,
$870,590 and $750,052, respectively) $ 925,167 $ 813,154 $ 749,856
Cash 1,764 274 7
Foreign currency, at value (identified cost, $0, $501 --
and $102, respectively)
453 102
Net receivable for forward foreign currency exchange
contracts sold 390 -- --
Net receivable for forward foreign currency exchange
contracts subject to master netting agreement 423 -- --
Receivable for investments sold 19,382 10,482 4,400
Receivable for Fund shares sold -- 94,777 --
Interest and dividends receivable 12,735 170 949
----------- ----------- -----------
Total assets $ 959,861 $ 919,310 $ 755,314
----------- ----------- -----------
Liabilities:
Payable for investments purchased $ -- $ 15,217 $ 4,400
Accrued expenses and other liabilities 116 30 26
----------- ----------- -----------
Total liabilities $ 116 $ 15,247 $ 4,426
----------- ----------- -----------
Net assets $ 959,745 $ 904,063 $ 750,888
=========== =========== ===========
Net assets consist of:
Paid-in capital $ 1,001,461 $ 906,230 $ 712,446
Unrealized depreciation on investments and
translation of assets and liabilities in foreign
currencies (64,653) (57,482) (196)
Accumulated undistributed net realized gain (loss) on
investments and foreign currency transactions (3,546) 55,038 35,588
Accumulated undistributed net investment income 26,483 277 3,050
----------- ----------- -----------
Total $ 959,745 $ 904,063 $ 750,888
=========== =========== ===========
Shares of beneficial interest outstanding:
Class A 100,021 41,760 54,888
Class I 126.143 48,489 15,547
----------- ----------- -----------
Total shares of beneficial interest outstanding 100,147 90,249 70,435
=========== =========== ===========
Net assets
Class A $ 958,536 $ 418,359 $ 585,301
Class I 1,209 485,704 165,587
----------- ----------- -----------
Total net assets $ 959,745 $ 904,063 $ 750,888
=========== =========== ===========
Class A shares:
Net asset value, offering price, and redemption price per share
(net assets / shares of beneficial interest
outstanding) $9.58 $10.02 $10.66
===== ====== ======
Class I shares:
Net asset value and redemption price per share
(net assets / shares of beneficial interest
outstanding) $9.58 $10.02 $10.65
===== ====== ======
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statements of Operations
- ----------------------------------------------------------------------------------------------------------------
EMERGING
MARKETS SMALL CAP STRATEGIC
PERIOD ENDED JULY 31, 1998* DEBT FUND VALUE FUND VALUE FUND
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income:
Income -
Interest $ 30,696 $ 1,981 $ 1,067
Dividends -- 2,324 5,257
Foreign taxes withheld -- (56) (132)
----------- ----------- -----------
Total investment income $ 30,696 $ 4,249 $ 6,192
----------- ----------- -----------
Expenses -
Management fees $ 3,144 $ 2,696 $ 1,885
Shareholder servicing agent fees 410 337 283
Distribution and service fees - (Class A) 1,293 558 703
Administrative fees 54 45 37
Custodian fees 472 476 88
Printing 8,477 10,857 6,678
Auditing fees 5,700 5,500 5,500
Legal fees 993 893 1,293
Registration fees 4,300 4,010 4,000
Miscellaneous 634 240 925
----------- ----------- -----------
Total expenses $ 25,477 $ 25,612 $ 21,392
Fees paid indirectly (190) (61) (30)
Reduction of expenses by investment adviser and distributor (19,197) (21,656) (18,223)
----------- ----------- -----------
Net expenses $ 6,090 $ 3,895 $ 3,139
----------- ----------- -----------
Net investment income $ 24,606 $ 354 $ 3,053
----------- ----------- -----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ (5,438) $ 55,038 $ 35,588
Futures transactions 1,892 -- --
Foreign currency transactions 1,877 (77) (3)
----------- ----------- -----------
Net realized gain (loss) on investments, futures
and foreign currency transactions $ (1,669) $ 54,961 $ 35,585
----------- ----------- -----------
Change in unrealized appreciation (depreciation) -
Investments $ (65,466) $ (57,484) $ (196)
Translation of assets and liabilities in foreign
currencies 813 2 --
----------- ----------- -----------
Net unrealized loss on investments, futures and
foreign currency translation $ (64,653) $ (57,482) $ (196)
----------- ----------- -----------
Net realized and unrealized gain (loss) on
investments and foreign currency $ (66,322) $ (2,521) $ 35,389
----------- ----------- -----------
Increase (decrease) in net assets from operations $ (41,716) $ (2,167) $ 38,442
=========== =========== ===========
* For the period from the commencement of each Fund's investment operations, March 17, 1998, through July 31, 1998.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
- ----------------------------------------------------------------------------------------------------------------
EMERGING
MARKETS SMALL CAP STRATEGIC
PERIOD ENDED JULY 31, 1998* DEBT FUND VALUE FUND VALUE FUND
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase in net assets:
From operations -
Net investment income $ 24,606 $ 354 $ 3,053
Net realized gain (loss) on investments and foreign
currency transactions (1,669) 54,961 35,585
Net unrealized loss on investments and foreign
currency translation (64,653) (57,482) (196)
----------- ----------- -----------
Increase (decrease) in net assets from operations $ (41,716) $ (2,167) $ 38,442
----------- ----------- -----------
Net increase in net assets from Fund share transactions $ 1,001,461 $ 906,230 $ 712,446
----------- ----------- -----------
Net assets:
At end of period (including accumulated undistributed
net investment income of $26,483, $277 and $3,050, respectively) $ 959,745 $ 904,063 $ 750,888
=========== =========== ===========
*For the period from the commencement of each Fund's investment operations, March 17, 1998, through July 31, 1998.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
- ---------------------------------------------------------------------------------------------------------
PERIOD ENDED JULY 31, 1998* EMERGING MARKETS DEBT FUND
- ---------------------------------------------------------------------------------------------------------
CLASS A CLASS I
- ---------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout the period):
<S> <C> <C>
Net asset value - beginning of period $10.00 $10.00
------ ------
Income from investment operations# -
Net investment income(S) $ 0.25 $ 0.25
Net realized and unrealized loss on investments and foreign
currency transactions (0.67) (0.67)
------ ------
Total from investment operations $(0.42) $(0.42)
------ ------
Net asset value - end of period $ 9.58 $ 9.58
====== ======
Total return (4.20)%++ (4.20)%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.65%+ 1.65%+
Net investment income 6.65%+ 6.92%+
Portfolio turnover 68% 68%
Net assets at end of period (000 omitted) $959 $1
* For the period from the commencement of the Fund's investment operations, March 17, 1998, through July 31, 1998.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated with reduction for fees paid indirectly. If they had not been, the ratios woul
be 1.70% and 1.70%, respectively, for Class A and I.
### The Fund's expenses are calculated without reduction for fees paid indirectly.
(S) Subject to reimbursement by the Fund, the investment adviser voluntarily agreed to maintain other expenses of th
Fund, exclusive of management and distribution fees, at not more than 1.65% of average daily net assets. The
investment adviser and the distributor did not impose any of their fees for the period indicated. If these fees
had not been waived and other expenses had not been limited, the net investment income per share and the ratios
would have been:
Net investment income $ 0.06 $ 0.07
Ratios (to average net assets):
Expenses### 6.89%+ 6.54%+
Net investment income 1.46%+ 2.08%+
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- ---------------------------------------------------------------------------------------------------------
PERIOD ENDED JULY 31, 1998* SMALL CAP VALUE FUND
- ---------------------------------------------------------------------------------------------------------
CLASS A CLASS I
- ---------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout the period):
<S> <C> <C>
Net asset value - beginning of period $10.00 $10.00
------ ------
Income from investment operations# -
Net investment income(S) $ 0.01 $ 0.01
Net realized and unrealized gain on investments and foreign
currency transactions### 0.01 0.01
------ ------
Total from investment operations $ 0.02 $ 0.02
------ ------
Net asset value - end of period $10.02 $10.02
====== ======
Total return 0.10%++ 0.10%++
Ratios (to average net assets)/Supplemental data(S):
Expenses 1.30%+ 1.30%+
Net investment income 0.13%+ 0.10%+
Portfolio turnover 67% 67%
Net assets at end of period (000 omitted) $418 $486
* For the period from the commencement of the Fund's investment operations, March 17, 1998, through July 31, 1998.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly.
### The per share amount is not in accordance with the net realized and unrealized loss for the period because
of the timing of sales of Fund shares and the amount of per share realized and unrealized gains and losses
at such time.
(S) Subject to reimbursement by the Fund, the investment adviser voluntarily agreed to maintain other expenses
of the Fund, exclusive of management and distribution fees at not more than 1.30% of average daily net assets.
The investment adviser and the distributor did not impose any of their fees for the period indicated. If these
fees had not been waived and other expenses had not been limited, the net investment loss per share and the
ratios would have been:
Net investment loss $(0.28) $(0.26)
Ratios (to average net assets):
Expenses## 8.71%+ 8.36%+
Net investment loss (7.26)%+ (6.94)%+
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- ------------------------------------------------------------------------------------------------------------------
PERIOD ENDED JULY 31, 1998* STRATEGIC VALUE FUND
- ------------------------------------------------------------------------------------------------------------------
CLASS A CLASS I
- ------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout the period):
<S> <C> <C>
Net asset value - beginning of period $10.00 $10.00
------ ------
Income from investment operations# -
Net investment income(S) $ 0.05 $ 0.05
Net realized and unrealized gain on investments and foreign
currency transactions 0.61 0.60
------ ------
Total from investment operations $ 0.66 $ 0.65
------ ------
Net asset value - end of period $10.66 $10.65
====== ======
Total return 6.70%++ 6.50%++
Ratios (to average net assets)/Supplemental data(S):
Expenses 1.25%+ 1.25%+
Net investment income 1.22%+ 1.19%+
Portfolio turnover 48% 48%
Net assets at end of period (000 omitted) $585 $166
* For the period from the commencement of the Fund's investment operations, March 17, 1998, through July 31, 1998.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly.
(S) Subject to reimbursement by the Fund, the investment adviser voluntarily agreed to maintain other expenses of the
Fund, exclusive of management and distribution fees, at not more than 1.25% of average daily net assets. The
investment adviser and the distributor did not impose any of their fees for the period indicated. If these fees had
not been waived and other expenses had not been limited, the net investment loss per share and the ratios would
have been:
Net investment loss $(0.23) $(0.25)
Ratios (to average net assets):
Expenses## 8.58%+ 8.23%+
Net investment loss (6.10)%+ (5.78)%+
</TABLE>
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Small Cap Value Fund and MFS Strategic Value Fund are each a diversified
series of MFS Series Trust X (the Trust). The Emerging Markets Debt Fund is a
non-diversified series of the Trust. The Trust is organized as a Massachusetts
business trust and is registered under the Investment Company Act of 1940, as
amended, as an open-end management investment company.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Investments
in foreign securities are vulnerable to the effects of changes in the relative
values of the local currency and the U.S. dollar and to the effects of changes
in each country's legal, political, and economic environment.
Investment Valuations - 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. Debt securities (other than short-term obligations which mature in 60
days or less), including listed issues and forward contracts, are valued on the
basis of valuations furnished by dealers or by a pricing service with
consideration to factors such as institutional-size trading in similar groups of
securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics, and other market data, without exclusive reliance upon exchange
or over-the-counter prices. Short-term obligations, which mature in 60 days or
less, are valued at amortized cost, which approximates market value. Securities
for which there are no such quotations or valuations are valued at fair value as
determined in good faith by or at the direction of the Trustees.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases and
sales of foreign investments, income, and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates of
such transactions. Gains and losses attributable to foreign currency exchange
rates on sales of securities are recorded for financial statement purposes as
net realized gains and losses on investments. Gains and losses attributable to
foreign exchange rate movements on income and expenses are recorded for
financial statement purposes as foreign currency transaction gains and losses.
That portion of both realized and unrealized gains and losses on investments
that results from fluctuations in foreign currency exchange rates is not
separately disclosed.
Forward Foreign Currency Exchange Contracts - Each 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. Each Fund will enter into
forward contracts for hedging purposes as well as for non-hedging purposes. For
hedging purposes, each Fund may enter into contracts to deliver or receive
foreign currency it will receive from or require for its normal investment
activities. Each 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, each Fund may
enter into contracts with the intent of changing the relative exposure of each
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.
The Emerging Markets Debt Fund can invest up to 100% of its portfolio in high-
yield securities rated below investment grade. Investments in high-yield
securities involve greater degrees of credit and market risk than investments in
higher-rated securities and tend to be more sensitive to economic conditions.
Fees Paid Indirectly - Each 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 - Each 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. Each 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 each Fund's tax return.
Distributions to shareholders are recorded on the ex-dividend date. Each 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.
During the period ended July 31, 1998, the following amounts were reclassified
from/to accumulated undistributed net investment income to/from accumulated net
realized gain on investments due to differences between book and tax accounting
for currency transactions. This change had no effect on the net assets or net
asset value per share.
<TABLE>
<CAPTION>
EMERGING MARKETS SMALL CAP STRATEGIC
INCREASE (DECREASE) DEBT FUND VALUE FUND VALUE FUND
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Accumulated undistributed net realized gain (loss)
on investments and foreign currency transactions $(1,877) $ 77 $ 3
Accumulated undistributed net investment income $ 1,877 $(77) $(3)
</TABLE>
At July 31, 1998, Emerging Markets Debt Fund had a capital loss carryforward of
$577 for federal income tax purposes which may be applied against any net
taxable realized gains of each succeeding year until the earlier of its
utilization or its expiration on July 31, 2006.
Multiple Classes of Shares of Beneficial Interest - Each Fund offers multiple
classes of shares, which differ in their respective distribution and service
fees. All shareholders bear the common expenses of each 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.
(3) Transactions with Affiliates
Investment Adviser - Each 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 0.85%,
0.90%, and 0.75% of average daily net assets of the Emerging Market Debt Fund,
the Small Cap Value Fund, and the Strategic Value Fund, respectively. The
investment adviser has voluntarily agreed to waive its fee, which is reflected
as a reduction of expenses in the Statements of Operations.
Each Fund has a temporary expense reimbursement agreement whereby MFS has
voluntarily agreed to pay all of the Fund's operating expenses, exclusive of
management, distribution, and service fees. The Fund in turn will pay MFS an
expense reimbursement fee not greater than 1.65%, 1.30%, and 1.25% of average
daily net assets of the Emerging Markets Debt Fund, the Small Cap Value Fund,
and the Strategic Value Fund, respectively. To the extent that the expense
reimbursement fee exceeds the Fund's actual expenses, the excess will be applied
to amounts paid by MFS in prior years. At July 31, 1998, the aggregate
unreimbursed expenses owed to MFS by each Fund amounted to:
EMERGING MARKETS SMALL CAP STRATEGIC
DEBT FUND VALUE FUND VALUE FUND
---------------------------------------------------------------
$14,760 $18,402 $15,635
Each Fund pays no compensation directly to its Trustees who are officers of
the investment adviser, or to officers of each Fund, all of whom receive
remuneration for their services to each Fund from MFS. Certain officers and
Trustees of each Fund are officers or directors of MFS and MFS Service Center,
Inc. (MFSC). The Trustees currently are not receiving any payments for their
services to each Fund.
Administrator - Each Fund has an administrative services agreement with MFS to
provide each Fund with certain financial, legal, shareholder servicing,
compliance, and other administrative services. As a partial reimbursement for
the cost of providing these services, each 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%
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, did not
receive any sales charges on sales on Class A shares of each Fund for the
period ended July 31, 1998.
The Trustees have adopted a distribution plan for Class A shares pursuant to
Rule 12b-1 of the Investment Company Act of 1940 as follows:
Each Fund's distribution plan provides that each 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 each 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 each Fund's average daily net assets attributable to Class
A shares which are attributable to that securities dealer and a distribution fee
to MFD of up to 0.10% per annum of each Fund's average daily net assets
attributable to Class A shares, commissions to dealers and payments to MFD
wholesalers for sales at or above certain dollar level, and other such
distribution-related expenses that are approved by each Fund. Distribution and
service fees under the Class A distribution plan are currently being waived.
Certain Class A shares are subject to a contingent deferred sales charge in the
event of a shareholder redemption within 12 months following purchase. There
were no contingent deferred sales charges imposed during the period ended July
31, 1998.
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 each Fund's average daily net assets at an effective annual rate
of 0.1125%.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions
and short-term obligations, were as follows:
<TABLE>
<CAPTION>
EMERGING MARKETS SMALL CAP STRATEGIC
DEBT FUND VALUE FUND VALUE FUND
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Purchases
- ---------
Investments (non-U.S. government securities) $1,384,851 $1,253,973 $1,019,982
Sales
- -----
Investments (non-U.S. government securities) $ 505,674 $ 503,377 $ 306,170
The cost and unrealized appreciation or depreciation in value of the investments owned by each Fund, as computed
on a federal income tax basis, are as follows:
<CAPTION>
EMERGING MARKETS SMALL CAP STRATEGIC
DEBT FUND VALUE FUND VALUE FUND
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggregate cost $ 993,602 $ 870,741 $ 750,255
---------- ---------- ----------
Gross unrealized appreciation $ 347 $ 36,037 $ 40,309
Gross unrealized depreciation (68,782) (93,624) (40,708)
---------- ---------- ----------
Net unrealized depreciation $ (68,435) $ (57,587) $ (399)
========== ========== ==========
</TABLE>
(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
<TABLE>
<CAPTION>
PERIOD ENDED JULY 31, 1998*
---------------------------------------------------------------------------------------
EMERGING MARKETS SMALL CAP STRATEGIC
DEBT FUND VALUE FUND VALUE FUND
---------------------------- --------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 100,021 $ 1,000,210 54,402 $ 548,209 55,362 $ 557,894
Shares reacquired -- (2) (12,642) (131,214) (474) (4,991)
----------- -------------- ----------- ------------- ---------- ------------
Net increase 100,021 $ 1,000,208 41,760 $ 416,995 54,888 $ 552,903
=========== ============== =========== ============= ========== ============
<CAPTION>
Class I Shares
PERIOD ENDED JULY 31, 1998*
---------------------------------------------------------------------------------------
EMERGING MARKETS SMALL CAP STRATEGIC
DEBT FUND VALUE FUND VALUE FUND
---------------------------- --------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 212 $ 2,100 49,168 $ 496,434 15,558 $ 159,668
Shares reacquired (86) (847) (679) (7,199) (11) (125)
----------- -------------- ----------- ------------- ---------- ------------
Net increase 126 $ 1,253 48,489 $ 489,235 15,547 $ 159,543
=========== ============== =========== ============= ========== ============
*For the period from the commencement of each Fund's investment operations, March 17, 1998, through July 31, 1998.
</TABLE>
(6) Line of Credit
Each Fund and other affiliated funds participate in an $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
each Fund's 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.
(7) Financial Instruments
Each 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
each 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
<TABLE>
<CAPTION>
EMERGING MARKETS DEBT FUND
CONTRACTS CONTRACTS NET UNREALIZED
SETTLEMENT DATE TO DELIVER IN EXCHANGE FOR AT VALUE APPRECIATION
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales 5/03/99 HKD 400,000 $50,327 $49,937 $390
------- ----
</TABLE>
Forward foreign currency purchases and sales under master netting agreements
excluded above amounted to a net receivable of $423 with Banker's Trust Co.
At July 31, 1998, the Fund had sufficient cash and/or securities to cover any
commitments under these contracts.
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Trustees of MFS Series Trust X and Shareholders of MFS Emerging Markets
Debt Fund, MFS Small Cap Value Fund and MFS Strategic Value Fund:
We have audited the accompanying statements of assets and liabilities of MFS
Emerging Markets Debt Fund, MFS Small Cap Fund and MFS Strategic Value Fund
including the schedules of portfolio investments, as of July 31, 1998, and the
statements of operations, the statements of changes in net assets and the
financial highlights for the period from March 17, 1998 (commencement of
operations) to July 31, 1998. These financial statements and financial
highlights are the responsibility of the Funds' management. Our responsibility
is to express an opinion on these financial statements and financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and financial highlights. Our procedures included
confirmation of securities owned as of July 31, 1998, by correspondence with
the custodian and brokers or by other appropriate auditing procedures where
replies from brokers were not received. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial positions of MFS
Emerging Markets Debt Fund, MFS Small Cap Value Fund and MFS Strategic Value
Fund at July 31, 1998, and the results of their operations, the changes in
their net assets and the financial highlights for the period from March 17,
1998 (commencement of operations) to July 31, 1998, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Boston, Massachusetts
September 8, 1998
--------------------------------------------
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>
FEDERAL TAX INFORMATION
In January 1999, shareholders will be mailed a Form 1099 reporting the federal
tax status of all distributions paid during the calendar year 1998.
<PAGE>
MFS(R) EMERGING MARKETS DEBT FUND
MFS(R) SMALL CAP VALUE FUND
MFS(R) STRATEGIC VALUE FUND
[Logo] M F S(R)
INVESTMENT MANAGEMENT
We invented the mutual fund(R)
500 Boylston Street
Boston, MA 02116-3741
(c)1998 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
INC-3 9/98 2.8M
