<PAGE>
[Logo] M F S (R)
INVESTMENT MANAGEMENT
75 YEARS
WE INVENTED THE MUTUAL FUND(R)
[Graphic Omitted]
MFS(R) EQUITY
INCOME FUND
ANNUAL REPORT o AUGUST 31, 1999
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DIVERSIFYING YOUR INVESTMENT PORTFOLIO (see page 35)
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<PAGE>
TABLE OF CONTENTS
Letter from the Chairman .................................................. 1
Management Review and Outlook ............................................. 3
Performance Summary ....................................................... 8
Portfolio of Investments .................................................. 12
Financial Statements ...................................................... 18
Notes to Financial Statements ............................................. 25
Independent Auditors' Report .............................................. 32
MFS' Year 2000 Readiness Disclosure ....................................... 34
Trustees and Officers ..................................................... 37
MFS ORIGINAL RESEARCH(R)
RESEARCH HAS BEEN CENTRAL TO INVESTMENT MANAGEMENT AT MFS
SINCE 1932, WHEN WE CREATED ONE OF THE FIRST IN-HOUSE
RESEARCH DEPARTMENTS IN THE MUTUAL FUND (SM)
INDUSTRY. ORIGINAL RESEARCH(SM) AT MFS IS MORE ORIGINAL RESEARCH
THAN JUST CRUNCHING NUMBERS AND CREATING
ECONOMIC MODELS: IT'S GETTING TO KNOW MFS
EACH SECURITY AND EACH COMPANY PERSONALLY.
MAKES A DIFFERENCE
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NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
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<PAGE>
LETTER FROM THE CHAIRMAN
[Photo of Jeffrey L. Shames]
Jeffrey L. Shames
Dear Shareholders,
The current investment and economic environment bears little resemblance to
last year's. One year ago, global economies were floundering, and the crisis
in Asia threatened an already weak U.S. economy. Corporate earnings were flat,
and economists used the word "deflation" for the first time in recent memory.
Entering 1999, expectations for corporate earnings growth were lowered
dramatically. In an attempt to foster U.S. growth, the Federal Reserve Board
(the Fed) lowered interest rates.
As a result, this year the U.S. economy is booming and unemployment is low.
Many corporations are focused on improving their profitability, and investors
have been rewarded with positive surprises across a variety of industries. Our
analysts predict that corporate earnings growth for 1999
will average 12% - 15%.
Global economies also are showing signs of strength, and the Asian crisis
has passed. In fact, Japan's economic woes seem to have reached bottom.
Although the process is in its infancy, some Japanese corporations not only
are talking about restructuring and cost cutting, they also are beginning to
take action, looking within to become more competitive and improve returns on
equity. While still lagging the United States, Europe is beginning to
restructure and consolidate. These signs of international growth have
contributed to concerns that the U.S. economy now may be too strong.
In June, and again in August, the Fed raised rates by one-quarter of a
percentage point to help ward off the specter of inflation.
After an unprecedented four years of 20% annual returns in the U.S. equity
market, we fear that many investors have become accustomed to high returns and
have lost sight of the risks they take on to achieve them. In the current
market many investors are taking on additional risk - whether through day
trading or investing in speculative Internet stocks.
Risks are as much a part of the market today as they were one year ago.
We believe the market remains overvalued, with stocks priced 30% above our
analysts' earnings projections. And market narrowness has not abated; the top
25 stocks in the Standard & Poor's 500 Composite Index, a popular, unmanaged
index of common stock total return performance, are still the most overvalued.
Such extreme overvaluation makes the stock market sensitive to interest-rate
news and any negative earnings surprises. The Year 2000 (Y2K) computer problem
is another factor causing investor concern. While we believe corporate America
is well prepared to address any Y2K situations that may arise at year-end, no
one can predict investor behavior. In our opinion, it is investor behavior
that has the greatest potential to create market volatility.
We believe the best way to address Y2K and other market risks is
through our continuing commitment to MFS Original Research(R) and our
fundamental investment tenet of long-term investing. Whether markets
are up or down, MFS analysts focus on analyzing industries and visiting
companies to determine the long-term winners and the prices that will make
them attractive opportunities. Because all companies will not benefit equally
from the improving international environment, bottom-up research remains
critical to identifying those that we believe are successfully restructuring,
consolidating, and gaining market share.
Changes in market and economic conditions can't be predicted but should always
be expected. The changes we have seen over the past year only reinforce our
commitment to long-term planning and investing. We believe volatility helps to
create opportunity for long-term investors to buy solid companies at
attractive prices. For this reason, we are continuing to expand our domestic
and international capabilities to ensure that MFS has primary, in-house
research on companies worldwide. We believe that we have built the right
investment team, backed by MFS Original Research, to take advantage of those
opportunities for our shareholders.
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)
September 15, 1999
<PAGE>
MANAGEMENT REVIEW AND OUTLOOK
[Photo of Lisa B. Nurme]
Lisa B. Nurme
For the 12 months ended August 31, 1999, Class A shares of the Fund provided a
total return of 24.27%, Class B and Class C shares 23.47%, and Class I shares
24.97%. These returns, which include the reinvestment of any distributions but
exclude the effects of any sales charges, compare to 24.37% for the average
equity income fund tracked by Lipper Analytical Services, Inc., an independent
firm that reports mutual fund performance, and to 39.83% for the Standard &
Poor's 500 Composite Index (the S&P 500) for the same period. The S&P 500 is a
popular, unmanaged index of common stock total return performance.
Q. WHAT HAS CONTRIBUTED TO PERFORMANCE OVER THE PAST YEAR?
A. In the energy sector, industry fundamentals have been improving significantly
since the beginning of the year and decreasing supply has driven prices
higher. In particular, our holding in BP Amoco has benefited from this trend.
The company's ability to execute its acquisition strategy also has served to
boost the price of the stock. Natural gas utility stocks also have
contributed significantly to performance. The industry has continued its
consolidation trend with companies such as WICOR, which was bought out by
Wisconsin Energy at the end of June. Other cyclical stocks came back into
favor in April after the global economic outlook began to show signs of
improvement. Our position in Bowater has continued to do well on the strength
of an improving outlook for newsprint and pulp markets, particularly in Asia,
where demand is on the rise.
We continue to favor the consolidation theme in the telecommunications
sector, where we own GTE. The company has benefited from growth in the data
traffic area and continues to have a reasonable valuation relative to other
companies in the sector. Looking forward, we also like the prospects for the
company being created by the merger of Bell Atlantic and GTE.
Q. WERE THERE ANY DISAPPOINTMENTS?
A. In general, electric utilities have underperformed this year because the
consolidation theme has not worked in the same way as it has in
the natural gas industry. Regulators routinely have forced the utility
companies to pass a great deal of merger cost savings on to the customer.
However, we do own shares of Duke Energy Corporation because we believe it
is a quality electric company with a strong management team.
Q. WHAT FACTORS DO YOU USE TO IDENTIFY PROMISING VALUE STOCKS FOR THE FUND?
A. We believe yield is a good indicator of value, and we use it to highlight
stocks that are out of favor. For example, their relative yield gave us
confidence that energy and chemical stocks were inexpensive at the
beginning of this year. We also believe yield helps us to mitigate the
downside risk in our stock investments and reduce the volatility of the
Fund by providing a source of income, regardless of market conditions.
It is important to understand that in our search for undervalued companies,
we have a real bias for quality. The portfolio is not investing in companies
in distressed turnaround situations. Our preferred companies have solid,
defendable business franchises, healthy balance sheets, and good cash flow
dynamics. However, they happen to be out of favor or overlooked by a market
that has been very narrow in its appetite for higher-growth and higher-risk
stocks.
Q. HOW HAVE YOU APPLIED THIS STRATEGY IN PICKING STOCKS?
A. We start with out-of-favor stocks that also are underowned. We are quite
comfortable trafficking in underloved and underfollowed areas such as the
utility sector. This does not mean, however, that we hold positions in
small, unproven companies. In fact, our holdings tend to be concentrated in
sizable companies with meaningful market positions and solid financials
that have not been the center of attention in a market that
has been focusing exclusively on large-cap growth, technology, and
Internet stocks.
Like any true value investor, we try to capture a stock at its bottom -- when
earnings power is at its lowest -- but the downside of the stock is largely
evident and discounted in the price of the stock. Conversely, we also try to
sell early, or at a point when the company's improving fundamentals are more
generously reflected in the stock's valuation. We are willing to give up some
of the late upside in a stock if we can avoid a sizable downside. An example
of this was when we pared our drug industry ownership during the second half
of 1998. The industry was enjoying positive fundamentals, which were not
likely to improve from their peak levels. Furthermore, we thought the
valuations were fully reflecting these fundamentals and the downside risk in
these stocks exceeded the remaining upside potential. We did the same thing
with Rite Aid, a drug store stock we had owned since January 1997. By
September 1998, we felt that the stock was no longer inexpensive and we
became concerned that the fundamentals had peaked. We gave up some
appreciation in the stock through the beginning of this year, but avoided
significant downside in March when the stock collapsed.
Q. ANY SPECIFIC COMPANIES THAT FIT THE VALUE CRITERIA?
A. TRW, an automotive parts manufacturer, is a great example. We think its
auto parts division, the largest part of the company, is extremely well
situated since it has a dominant position in safety restraints, steering,
and suspension, some of the higher value-added and technology-heavy parts
of a car. However, its management has not been aggressive enough in
extracting the sort of profitability that we think is warranted from its
solid franchise in auto parts. Fortunately, TRW's management has indicated
a strong desire to raise profitability in its core auto parts business as
well as an inclination to consider different options for recognizing the
value of its aerospace business.
Another example is Archer Daniels Midland Company (ADM), an agricultural food
processor. Asian weakness, which has led to poor export demand and soft
agriculture commodity pricing, has hurt ADM, but we think the company may be
bottoming now in terms of earnings power. With the significant amount of
capital investment and acquisitions the company has made since 1995, we
believe the company's earnings power may be substantially higher with any
sort of recovery. We think ADM has the ability to earn significantly more
than it has been earning, which would indicate significant upside from
current levels.
Lastly, we have held Lincoln National, a multiline insurance company, for
quite some time now and we believe the company will continue to reap the
benefits of a major restructuring that was put in place a few years ago and
still is unfolding. Lincoln has transformed itself into a much more focused
financial services powerhouse, consisting of life insurance, annuities, and
money management. When Lincoln sold its volatile property/casualty business,
it took the proceeds and bought life insurance and annuity assets. Lincoln
also began a sizable share repurchase program. The stock price performance
has reflected this successful transformation into a more predictable and
higher- value franchise. We believe we will continue to see sizable
consolidation activity in the life insurance industry, and we think Lincoln
is considered a premiere property.
Q. THREE FACTORS CREATING VOLATILITY TODAY ARE INTEREST RATES, INFLATION, AND
CORPORATE EARNINGS. HOW DO YOU SEE THESE FACTORS IMPACTING THE PORTFOLIO?
A. Recently, we have seen significant strength in corporate earnings as the
U.S. economy continues to chug along, and we continue to see signs that the
global economy may be recovering. For example, Asia has started to rebound
and Japan may be on the mend. European economies also have begun to
strengthen. So the bias in interest rates still seems to be up. At a
minimum, we have moved from a period in which the trend in interest rates
was flat to down, to a period in which the trend is flat to up. In general,
rising interest rates are problematic for the equity market. However, they
present a bigger risk to the high-multiple, growth stocks that are not held
in this portfolio than to the lower-multiple, value stocks that do populate
this portfolio. Also, the cyclical stocks and the global exposure of the
portfolio should benefit if the global economy continues to strengthen.
Therefore, we think the portfolio is comfortably positioned for what could
be a volatile equity market.
/s/ Lisa B. Nurme
Lisa B. Nurme
Portfolio Manager
The opinions expressed in this report are those of the portfolio manager and
are current only through the end of the period of the report as stated on the
cover. The manager's views are subject to change at any time based on market
and other conditions, and no forecasts can be guaranteed.
<PAGE>
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PORTFOLIO MANAGER'S PROFILE
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LISA B. NURME IS SENIOR VICE PRESIDENT OF MFS INVESTMENT MANAGEMENT(R)
AND DIRECTOR OF CONSERVATIVE PORTFOLIO MANAGEMENT. SHE IS PORTFOLIO
MANAGER OF MFS(R) EQUITY INCOME FUND AND THE EQUITY INCOME SERIES
OFFERED THROUGH MFS(R)/SUN LIFE ANNUITY PRODUCTS. SHE IS ALSO A
PORTFOLIO MANAGER OF MFS(R) TOTAL RETURN FUND, MFS(R) TOTAL RETURN
SERIES (PART OF MFS(R) VARIABLE INSURANCE TRUST(SM)), AND THE TOTAL
RETURN SERIES OFFERED THROUGH MFS(R)/SUN LIFE ANNUITY PRODUCTS.
SHE JOINED MFS IN 1987 AS A RESEARCH ANALYST. SHE WAS NAMED INVESTMENT
OFFICER IN 1990, ASSISTANT VICE PRESIDENT IN 1991, VICE PRESIDENT IN
1992, PORTFOLIO MANAGER IN 1995, SENIOR VICE PRESIDENT IN 1998, AND
DIRECTOR OF CONSERVATIVE PORTFOLIO MANAGEMENT IN 1999. MS. NURME IS A
GRADUATE OF THE UNIVERSITY OF NORTH CAROLINA, WHERE SHE WAS ELECTED TO
PHI BETA KAPPA.
ALL EQUITY PORTFOLIO MANAGERS BEGAN THEIR CAREERS AT MFS INVESTMENT
MANAGEMENT(R) AS RESEARCH ANALYSTS. OUR PORTFOLIO MANAGERS ARE SUPPORTED
BY AN INVESTMENT STAFF OF OVER 100 PROFESSIONALS UTILIZING MFS ORIGINAL
RESEARCH(R), A COMPANY-ORIENTED, BOTTOM-UP PROCESS OF SELECTING
SECURITIES.
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This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus. A prospectus containing more information,
including the exchange privilege and all charges and expenses, for any other MFS
product is available from your financial consultant, or by calling MFS at
1-800-225-2606. Please read it carefully before investing or sending money.
<PAGE>
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FUND FACTS
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OBJECTIVE: PRIMARILY SEEKS REASONABLE INCOME, WITH A
SECONDARY OBJECTIVE OF CAPITAL APPRECIATION.
COMMENCEMENT OF
INVESTMENT OPERATIONS: JANUARY 2, 1996
CLASS INCEPTION: CLASS A JANUARY 2, 1996
CLASS B NOVEMBER 4, 1997
CLASS C NOVEMBER 5, 1997
CLASS I JANUARY 2, 1997
SIZE: $126.8 MILLION NET ASSETS AS OF AUGUST 31, 1999
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PERFORMANCE SUMMARY
The following information illustrates the historical performance of the Fund's
original share class in comparison to various market indicators. Performance
results include the deduction of the maximum applicable sales charge and
reflect the percentage change in net asset value, including reinvestment of
dividends. Benchmark comparisons are unmanaged and do not reflect any fees or
expenses. The performance of other share classes will be greater than or less
than the line shown. (See Notes to Performance Summary for more information.)
It is not possible to invest directly in an index.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the period from the commencement of the Fund's investment operations,
January 2, 1996, through August 31, 1999. Index information is from January 1,
1996.)
MFS Equity Income S&P 500
Fund Class A Composite Index
1/96 $10,000 $10,000
8/96 10,433 10,745
8/97 14,403 15,113
8/98 15,772 16,336
8/99 19,601 22,842
<PAGE>
AVERAGE ANNUAL AND CUMULATIVE TOTAL RATES OF RETURN
THROUGH AUGUST 31, 1999
CLASS A
1 Year 3 Years Life*
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Cumulative Total Return +24.27% +87.86% +107.96%
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Average Annual Total Return +24.27% +23.39% + 22.13%
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SEC Results +17.13% +20.98% + 20.17%
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CLASS B
1 Year 3 Years Life*
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Cumulative Total Return +23.47% +85.77% +105.65%
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Average Annual Total Return +23.47% +22.93% + 21.75%
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SEC Results +19.47% +22.27% + 21.27%
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CLASS C
1 Year 3 Years Life*
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Cumulative Total Return +23.47% +85.72% +105.59%
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Average Annual Total Return +23.47% +22.92% + 21.74%
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SEC Results +22.47% +22.92% + 21.74%
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CLASS I
1 Year 3 Years Life*
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Cumulative Total Return +24.97% +88.27% +108.41%
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Average Annual Total Return +24.97% +23.48% + 22.20%
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COMPARATIVE INDICES
1 Year 3 Years Life*
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Average equity income fund+ +24.37% +17.89% +16.32%
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Standard & Poor's 500 Composite Index# +39.83% +28.58% +25.27%
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* For the period from the commencement of the Fund's investment operations,
January 2, 1996, through August 31, 1999. Index information is from January
1, 1996.
+ Source: Lipper Analytical Services, Inc.
# Source: Standard & Poor's Micropal, Inc.
<PAGE>
NOTES TO PERFORMANCE SUMMARY
Class A shares ("A") SEC results include the maximum 5.75% sales charge. Class
B share ("B") SEC results reflect the applicable contingent deferred sales
charge (CDSC), which declines over six years from 4% to 0%. Class C shares
("C") have no initial sales charge but, like B, have higher annual fees and
expenses than A. C SEC results reflect the 1% CDSC applicable to shares
redeemed within 12 months. Class I shares ("I") have no sales charge or Rule
12b-1 fees and are only available to certain institutional investors.
B and C results include the performance and the operating expenses
(e.g., Rule 12b-1 fees) of A for periods prior to the inception of B and C.
Because operating expenses of B and C are higher than those of A, B and C
performance generally would have been lower than A performance. The A
performance included in the B and C SEC performance has been adjusted to
reflect the CDSC generally applicable to B and C rather than the initial sales
charge generally applicable to A.
I results include the performance and the operating expenses (e.g., Rule 12b-1
fees) of A for periods prior to the inception of I. Because operating expenses
of A are greater than those of I, I performance generally would have been
higher than A performance. The A performance included in the I performance has
been adjusted to reflect the fact that I have no initial sales charge.
Performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Subsidies and
waivers may be rescinded at any time. See the prospectus for details.
All results are historical and assume the reinvestment of dividends and
capital gains.
INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. PAST PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS.
<PAGE>
PORTFOLIO CONCENTRATION AS OF AUGUST 31, 1999
FIVE LARGEST STOCK SECTORS
UTILITIES & COMMUNICATIONS 31.3%
FINANCIAL SERVICES 19.5%
CONSUMER STAPLES 9.2%
ENERGY 8.1%
BASIC MATERIALS 7.3%
TOP 10 STOCK HOLDINGS
BP AMOCO PLC 2.1% AKZO NOBEL N.V. 1.5%
British oil and petrochemical company Diversified Dutch chemical company
COASTAL CORP. 1.8% TRW INC. 1.5%
U.S. oil and natural gas company U.S. automotive and transport
equipment company
GTE CORP. 1.6%
U.S. telecommunications company BELL ATLANTIC 1.3%
U.S. integrated telecommunications
LINCOLN NATIONAL CORP. 1.6% company
U.S. multiline insurance company
ARTHUR J. GALLAGHER & CO. 1.3%
RELIASTAR FINANCIAL CORP. 1.6% U.S. insurance and risk management
U.S. life and health insurance company services company
NATIONAL FUEL GAS CO. 1.3%
U.S. gas utility company
The portfolio is actively managed, and current holdings may be different.
<PAGE>
PORTFOLIO OF INVESTMENTS -- August 31, 1999
Stocks - 90.9%
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ISSUER SHARES VALUE
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U.S. Stocks - 75.8%
Aerospace - 3.0%
Lockheed-Martin Corp. 14,995 $ 554,815
Raytheon Co., "A" 22,192 1,489,638
TRW, Inc. 33,435 1,822,207
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$ 3,866,660
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Banks and Credit Companies - 5.0%
Bank America Corp. 25,330 $ 1,532,465
Bank of New York Co., Inc. 35,252 1,260,259
Mellon Bank Corp. 37,198 1,241,483
PNC Bank Corp. 28,096 1,469,772
Wells Fargo Co. 19,935 793,662
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$ 6,297,641
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Beverages - 0.7%
Coca-Cola Bottling Co. 15,615 $ 899,814
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Building - 0.7%
Sherwin Williams Co. 34,100 $ 831,188
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Business Machines - 1.0%
Motorola, Inc. 14,131 $ 1,303,585
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Chemicals - 3.3%
Dow Chemical Co. 9,386 $ 1,066,484
Engelhard Corp. 53,085 1,058,382
PPG Industries, Inc. 19,378 1,163,891
Rohm & Haas Co. 25,685 959,977
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$ 4,248,734
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Conglomerates - 2.1%
AlliedSignal, Inc. 21,132 $ 1,294,335
Eastern Enterprises Co. 30,195 1,356,888
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$ 2,651,223
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Consumer Goods and Services - 1.7%
Fortune Brands, Inc. 26,919 $ 1,009,463
International Flavours 27,691 1,128,408
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$ 2,137,871
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Containers - 0.4%
Owens Illinois, Inc.* 22,872 $ 566,082
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Electrical Equipment - 2.8%
Cooper Industries, Inc. 12,187 $ 632,201
Emerson Electric Co. 18,283 1,144,973
Honeywell, Inc. 4,169 473,181
Thomas & Betts Corp. 29,137 1,311,165
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$ 3,561,520
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Entertainment - 0.5%
Disney (Walt) Co. 22,290 $ 618,548
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Financial Institutions - 0.4%
State Street Corp. 9,000 $ 538,875
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Food and Beverage Products - 3.3%
Archer-Daniels-Midland Co. 98,905 $ 1,285,765
Bestfoods Co. 24,581 1,207,542
Seagram Limited* 11,200 585,900
Smucker (J. M.) Co. 53,523 1,070,460
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$ 4,149,667
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Forest and Paper Products - 1.7%
Bowater, Inc. 18,715 $ 1,003,592
International Paper Co. 15,385 724,057
Weyerhaeuser Co. 7,222 406,237
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$ 2,133,886
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Insurance - 10.0%
American International Group, Inc. 11,838 $ 1,097,235
Aon Corp. 16,940 565,372
Chubb Corp. 2,784 159,210
CIGNA Corp. 14,453 1,298,060
Gallagher (Arthur J.) & Co. 29,940 1,635,472
Hartford Financial Services Group, Inc. 33,100 1,503,981
Jefferson Pilot Corp. 18,544 1,237,812
Lincoln National Corp. 41,474 1,944,094
ReliaStar Financial Corp. 43,772 1,972,476
St. Paul Cos., Inc. 39,631 1,270,669
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$ 12,684,381
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Machinery - 0.6%
Deere & Co., Inc. 19,040 $ 740,180
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Medical and Health Products - 1.3%
American Home Products Corp. 17,251 $ 715,916
Pharmacia & Upjohn, Inc. 17,372 907,687
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$ 1,623,603
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Metals and Minerals - 0.6%
USEC, Inc. 65,499 $ 708,208
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Oils - 6.5%
Atlantic Richfield Co. 3,374 $ 296,701
Chevron Corp. 6,935 639,754
Coastal Corp. 52,019 2,253,073
Conoco, Inc. 2,570 69,069
Conoco, Inc., "A" 47,980 1,283,465
Exxon Corp. 12,149 958,252
Mobil Corp. 11,802 1,208,229
Phillips Petroleum Co. 14,623 $ 745,773
Unocal Corp. 20,210 846,294
------------
$ 8,300,610
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Photographic Products - 0.5%
Polaroid Corp. 25,100 $ 680,838
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Printing and Publishing - 2.5%
Gannett Co., Inc. 17,476 $ 1,187,276
Meredith Corp. 28,995 1,005,764
Tribune Co. 9,860 920,061
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$ 3,113,101
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Railroads - 0.4%
Burlington Northern Santa Fe Railway Co. 15,533 $ 450,457
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Real Estate Investment Trusts - 1.6%
CarrAmerica Realty Corp. 17,384 $ 399,832
Equity Residential Properties Trust 16,481 725,164
First Industrial Realty Trust, Inc. 15,657 401,210
Kilroy Realty Corp. 14,244 326,722
TriNet Corporate Realty Trust, Inc. 4,884 119,353
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$ 1,972,281
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Restaurants and Lodging - 1.1%
McDonald's Corp. 34,449 $ 1,425,327
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Special Products and Services - 0.8%
Xerox Corp. 21,898 $ 1,045,630
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Supermarkets - 0.4%
Kroger Co.* 20,270 $ 468,744
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Telecommunications - 4.8%
Bell Atlantic Corp. 25,929 $ 1,588,151
GTE Corp. 28,453 1,952,587
SBC Communications, Inc. 25,887 1,242,576
Sprint Corp. 28,853 1,280,352
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$ 6,063,666
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Utilities - Electric - 7.7%
CTG Resources, Inc. 15,949 $ 571,174
DQE, Inc. 20,625 797,930
Duke Energy Corp. 23,446 1,348,145
Florida Progress Corp. 26,766 1,254,656
GPU, Inc. 25,282 862,748
Keyspan Corp. 20,736 611,712
Niagara Mohawk Holdings, Inc. 81,964 1,239,705
NiSource, Inc. 11,633 276,284
Pinnacle West Capital Corp. 26,269 998,222
Public Service Enterprise Group 26,735 1,096,135
Scana Corp. 27,000 675,000
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$ 9,731,711
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Utilities - Gas - 10.4%
AGL Resources, Inc. 41,026 $ 741,032
Berkshire Energy Resources 28,327 690,471
Colonial Gas Co. 21,697 816,350
Columbia Energy Group 24,771 1,463,037
Connecticut Energy Group 13,440 502,320
Consolidated Natural Gas Co. 16,136 1,027,661
El Paso Energy Corp. 24,407 892,381
Fall River Gas Co. 24,393 493,958
National Fuel Gas Co. 34,112 1,605,396
NICOR, Inc. 33,005 1,276,881
Providence Energy Corp. 28,335 772,129
Sonat, Inc. 16,403 592,558
Washington Gas Light Co. 29,030 774,738
WICOR, Inc. 41,461 1,212,734
Williams Cos., Inc. 9,410 388,163
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$ 13,249,809
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Total U.S. Stocks $ 96,063,840
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Foreign Stocks - 15.1%
Canada - 1.8%
Aliant, Inc. (Telecommunications)* 41,360 $ 627,630
Canadian National Railway Co. (Railroads) 17,292 1,099,123
Manitoba Telephone Systems (Telecommunications) 53,080 604,996
------------
$ 2,331,749
- --------------------------------------------------------------------------------
France - 1.8%
AXA (Insurance) 11,821 $ 1,473,070
Pernod Ricard Co. (Beverages) 10,505 806,783
------------
$ 2,279,853
- --------------------------------------------------------------------------------
Germany - 0.9%
Henkel KGaA, Preferred (Chemicals) 16,840 $ 1,220,272
- --------------------------------------------------------------------------------
Japan - 2.7%
Fuji Heavy Industries, Ltd. (Automotive) 83,000 $ 661,966
Hitachi (Electronics) 55,000 558,879
Mitsubishi Motor (Automotive) 84,000 457,127
Nippon Telephone & Telegraph Co. (Utilities -
Telephone) 115 1,293,730
Uni-Charm Corp. (Forest and Paper Products) 8,500 442,356
------------
$ 3,414,058
- --------------------------------------------------------------------------------
Netherlands - 3.2%
Akzo Nobel N.V. (Chemicals) 38,127 $ 1,776,652
Koninklijke Philips Electronics N.V. (Electronics) 8,780 906,037
Royal Dutch Petroleum Co., ADR (Oils) 22,209 1,374,182
------------
$ 4,056,871
- --------------------------------------------------------------------------------
Switzerland - 1.2%
Nestle S.A. (Food and Beverage Products) 753 $ 1,488,378
- --------------------------------------------------------------------------------
United Kingdom - 3.5%
BP Amoco PLC, ADR (Oils) 22,715 $ 2,546,919
British Telecommunications PLC (Telecommunications)* 77,370 1,184,982
Diageo PLC (Food and Beverage Products)* 67,500 685,229
------------
$ 4,417,130
- --------------------------------------------------------------------------------
Total Foreign Stocks $ 19,208,311
- --------------------------------------------------------------------------------
Total Stocks (Identified Cost, $113,040,286) $115,272,151
- --------------------------------------------------------------------------------
Convertible Preferred Stocks - 2.2%
- --------------------------------------------------------------------------------
Containers - 0.1%
Owens Illinois, Inc., 4.75% 4,264 $ 156,169
- --------------------------------------------------------------------------------
Insurance - 0.4%
Lincoln National Corp., 7.75% 18,285 $ 461,696
- --------------------------------------------------------------------------------
Oil Services - 0.2%
Enron Corp., 7.00% 13,500 $ 312,795
- --------------------------------------------------------------------------------
Telecommunications - 0.4%
Winstar Communications, Inc. 7.25%## 500 $ 482,500
- --------------------------------------------------------------------------------
Utilities - Electric - 0.8%
Houston Industries, Inc., 7.00% 4,183 $ 430,849
Texas Utilities Co., 9.25% 12,063 627,276
------------
$ 1,058,125
- --------------------------------------------------------------------------------
Utilities - Gas - 0.3%
El Paso Energy Capital Trust I, 4.75% 7,000 $ 343,875
- --------------------------------------------------------------------------------
Total Convertible Preferred Stocks (Identified Cost,
$2,887,243) $ 2,815,160
- --------------------------------------------------------------------------------
Preferred Stocks - 1.8%
- --------------------------------------------------------------------------------
U.S. Stocks - 1.3%
Oils - 0.2%
Coastal Corp., 5.58% 6,400 $ 152,000
Coastal Corp., 6.625% 5,800 159,138
------------
$ 311,138
- --------------------------------------------------------------------------------
Telecommunications - 0.5%
Cox Communications, Inc., 0.25% 14,100 $ 643,383
- --------------------------------------------------------------------------------
Utilities - Electric - 0.6%
NiSource, Inc., 7.75% 16,160 $ 737,300
- --------------------------------------------------------------------------------
Total U.S. Stocks $ 1,691,821
- --------------------------------------------------------------------------------
Foreign Stocks - 0.5%
Canada - 0.5%
Canadian National Railway Co., 5.25% (Railroads) 10,860 $ 572,865
- --------------------------------------------------------------------------------
Total Preferred Stocks (Identified Cost, $2,244,031) $ 2,264,686
- --------------------------------------------------------------------------------
Convertible Bonds - 2.0%
- --------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- --------------------------------------------------------------------------------
U.S. Bonds - 1.4%
Business Machines - 0.3%
Xerox Corp., 0s, 2018## $ 693 $ 407,949
- --------------------------------------------------------------------------------
Conglomerates - 0.4%
Loews Corp., 3.125s, 2007 $ 499 $ 444,110
- --------------------------------------------------------------------------------
Financial Services - 0.7%
Bell Atlantic Financial Services, Inc.,
4.25s, 2005## $ 805 $ 855,312
- --------------------------------------------------------------------------------
Total U.S. Bonds $ 1,707,371
- --------------------------------------------------------------------------------
Foreign Bonds - 0.6%
Switzerland - 0.6%
Swiss Life Finance Ltd., 1.5s, 2003 (Finance) $ 543 $ 796,853
- --------------------------------------------------------------------------------
Total Convertible Bonds (Identified Cost, $2,353,181) $ 2,504,224
- --------------------------------------------------------------------------------
Short-Term Obligations - 5.5%
- --------------------------------------------------------------------------------
Student Loan Marketing Assn., due 9/01/99,
at Amortized Cost $ 7,050 $ 7,050,000
- --------------------------------------------------------------------------------
Other Short-Term Obligations - 20.7%
- --------------------------------------------------------------------------------
SHARES
- --------------------------------------------------------------------------------
Navigator Securities Lending Prime Portfolio
(Identified Cost, $26,249,835) 26,249,835 $ 26,249,835
- --------------------------------------------------------------------------------
Total Investments (Identified Cost, $153,824,576) $156,156,056
Other Assets, Less Liabilities - (23.1)% (29,350,951)
- --------------------------------------------------------------------------------
Net Assets - 100.0% $126,805,105
- --------------------------------------------------------------------------------
* Non-income producing security.
## SEC Rule 144A restriction.
See notes to financial statements.
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- -------------------------------------------------------------------------------
AUGUST 31, 1999
- -------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $153,824,576) $156,156,056
Cash 2,621
Foreign currency, at value (identified cost, $251) 249
Receivable for Fund shares sold 1,929,876
Receivable for investments sold 108,996
Interest and dividends receivable 290,597
Deferred organization expenses 582
Other assets 1,121
------------
Total assets $158,490,098
------------
Liabilities:
Payable for Fund shares reacquired $ 365,746
Payable for investments purchased 4,680,132
Collateral for securities loaned, at value 26,249,835
Net payable for forward foreign currency exchange
contracts sold 301,460
Payable to affiliates -
Management fee 6,206
Shareholder servicing agent fee 1,039
Distribution and service fee 74,403
Administrative fee 156
Accrued expenses and other liabilities 6,016
------------
Total liabilities $ 31,684,993
------------
Net assets $126,805,105
============
Net assets consist of:
Paid-in capital $121,401,721
Unrealized appreciation on investments and translation of
assets and liabilities in foreign currencies 2,030,210
Accumulated undistributed net realized gain on
investments and foreign
currency transactions 2,888,910
Accumulated undistributed net investment income 484,264
------------
Total $126,805,105
============
Shares of beneficial interest outstanding 7,398,710
=========
Class A shares:
Net asset value per share
(net assets of $51,753,032 / 3,013,730 shares of
beneficial interest outstanding) $17.17
======
Offering price per share (100 / 94.25 of net asset value
per share) $18.22
======
Class B shares:
Net asset value and offering price per share
(net assets of $52,586,156 / 3,072,969 shares of
beneficial interest outstanding) $17.11
======
Class C shares:
Net asset value and offering price per share
(net assets of $19,052,480 / 1,113,991 shares of
beneficial interest outstanding) $17.10
======
Class I shares:
Net asset value, offering price, and redemption price
per share (net assets of $3,413,437 / 198,020 shares of
beneficial interest outstanding) $17.24
======
On sales of $50,000 or more, the offering price of Class A shares is reduced. A
contingent deferred sales charge may be imposed on redemptions of Class A, Class
B, and Class C shares.
See notes to financial statements.
<PAGE>
FINANCIAL STATEMENTS -- continued
Statement of Operations
- -------------------------------------------------------------------------------
YEAR ENDED AUGUST 31, 1999
- -------------------------------------------------------------------------------
Net investment income:
Income -
Dividends $ 1,797,356
Interest 169,582
Foreign taxes withheld (15,509)
-----------
Total investment income $ 1,951,429
-----------
Expenses -
Management fee $ 413,740
Shareholder servicing agent fee 72,836
Distribution and service fee (Class A) 90,373
Distribution and service fee (Class B) 315,248
Distribution and service fee (Class C) 94,939
Administrative fee 9,172
Custodian fee 29,806
Printing 26,774
Postage 15,210
Auditing fees 29,699
Legal fees 2,551
Amortization of organization expenses 434
Registration fees 61,176
Miscellaneous 24,209
-----------
Total expenses $ 1,186,167
Fees paid indirectly (6,674)
Reimbursement of expenses to investment adviser 10,630
-----------
Net expenses $ 1,190,123
-----------
Net investment income $ 761,306
-----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 3,286,935
Foreign currency transactions (20,160)
-----------
Net realized gain on investments and foreign currency
transactions $ 3,266,775
-----------
Change in unrealized appreciation (depreciation) -
Investments $ 5,197,190
Translation of assets and liabilities in foreign
currencies (301,392)
-----------
Net unrealized gain on investments and foreign
currency translation $ 4,895,798
-----------
Net realized and unrealized gain on investments
and foreign currency $ 8,162,573
-----------
Increase in net assets from operations $ 8,923,879
===========
See notes to financial statements.
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- -------------------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31, 1999 1998
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 761,306 $ 144,338
Net realized gain on investments and foreign currency
transactions 3,266,775 604,001
Net unrealized gain (loss) on investments and foreign
currency translation 4,895,798 (3,025,615)
------------ ------------
Increase (decrease) in net assets from operations $ 8,923,879 $ (2,277,276)
------------ ------------
Distributions declared to shareholders -
From net investment income (Class A) $ (305,404) $ (37,223)
From net investment income (Class B) (214,389) (21,410)
From net investment income (Class C) (66,138) (3,686)
From net investment income (Class I) (30,307) (13,832)
From net realized gain on investments and foreign currency
transactions (Class A) (234,405) (60,087)
From net realized gain on investments and foreign currency
transactions (Class B) (338,765) --
From net realized gain on investments and foreign currency
transactions (Class C) (81,871) --
From net realized gain on investments and foreign currency
transactions (Class I) (16,658) (109,502)
------------ ------------
Total distributions declared to shareholders $ (1,287,937) $ (245,740)
------------ ------------
Net increase in net assets from Fund share transactions $ 86,624,801 $ 33,593,325
------------ ------------
Total increase in net assets $ 94,260,743 $ 31,070,309
Net assets:
At beginning of period 32,544,362 1,474,053
------------ ------------
At end of period (including accumulated undistributed net
investment income of $484,264 and $75,651, respectively) $126,805,105 $ 32,544,362
============ ============
See notes to financial statements.
</TABLE>
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights
- ---------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31, PERIOD ENDED
------------------------------ AUGUST 31,
1999 1998 1997 1996*
- ---------------------------------------------------------------------------------------------
CLASS A
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $14.20 $14.82 $11.07 $10.00
------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.24 $ 0.22 $ 0.22 $ 0.13
Net realized and unrealized gain on
investments and foreign currency### 3.17 1.07 3.91 0.94
------ ------ ------ ------
Total from investment operations $ 3.41 $ 1.29 $ 4.13 $ 1.07
------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.22) $(0.20) $(0.16) $ --
From net realized gain on investments
and foreign currency transactions (0.22) (1.71) (0.22) --
------ ------ ------ ------
Total distributions declared to
shareholders $(0.44) $(1.91) $(0.38) $ --
------ ------ ------ ------
Net asset value - end of period $17.17 $14.20 $14.82 $11.07
====== ====== ====== ======
Total return(+) 24.27% 9.50% 38.05% 10.70%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.36% 1.46% 1.54% 1.50%+
Net investment income 1.47% 1.45% 1.75% 1.83%+
Portfolio turnover 97% 89% 118% 56%
Net assets at end of period (000 omitted) $51,753 $11,146 $ 510 $ 477
(S) Effective November 1, 1997, subject to reimbursement by the Fund, the investment adviser agreed to
maintain expenses of the Fund, exclusive of management, distribution, and service fees, at not more
than 0.40% of average daily net assets. Prior to November 1, 1997, subject to reimbursement by the
Fund, the investment adviser agreed to maintain the expenses of the Fund, exclusive of management,
distribution, and service fees, at not more than 1.50% of average daily net assets. To the extent
actual expenses were over/under this limitation, the net investment income (loss) per share and the
ratios would have been:
Net investment income (loss) $ 0.24 $ 0.11 $ 0.02 $(0.06)
Ratios (to average net assets):
Expenses## 1.36% 2.20% 3.40% 4.67%+
Net investment income (loss) 1.47% 0.70% (0.15)% (0.78)%+
* For the period from the commencement of the Fund's investment operations, January 2, 1996, through
August 31, 1996.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the
amount of cash maintained by the Fund with its custodian and dividend disbursing agent. The Fund's
expenses are calculated without reduction for this expense offset arrangement.
### The per share amount is not in accordance with the net realized and unrealized gain (loss) for the
year ended August 31, 1998, because of the timing of sales of Fund shares and the amount of per share
realized and unrealized gains and losses at such time.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been
included, the results would have been lower.
</TABLE>
See notes to financial statements.
<PAGE>
FINANCIAL STATEMENTS -- continued
Financial Highlights - continued
- ------------------------------------------------------------------------------
YEAR ENDED PERIOD ENDED
AUGUST 31, AUGUST 31,
1999 1998*
- ------------------------------------------------------------------------------
CLASS B
- ------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $14.16 $13.61
------ ------
Income from investment operations# -
Net investment income(S) $ 0.14 $ 0.10
Net realized and unrealized gain on
investments and foreign currency### 3.15 0.47
------ ------
Total from investment operations $ 3.29 $ 0.57
------ ------
Less distributions declared to shareholders -
From net investment income $(0.12) $(0.02)
From net realized gain on investments and
foreign currency transactions (0.22) --
------ ------
Total distributions declared to
shareholders $(0.34) $(0.02)
------ ------
Net asset value - end of period $17.11 $14.16
====== ======
Total return 23.47% 4.20%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 2.01% 2.11%+
Net investment income 0.83% 0.66%+
Portfolio turnover 97% 89%
Net assets at end of period (000 omitted) $52,586 $16,786
(S) Subject to reimbursement by the Fund, the investment adviser agreed to
maintain expenses of the Fund, exclusive of management, distribution, and
service fees, at not more than 0.40% of average daily net assets. To the
extent actual expenses were over/under this limitation, the net investment
income (loss) per share and the ratios would have been:
Net investment income (loss) $ 0.14 $ (0.02)
Ratios (to average net assets):
Expenses## 2.01% 2.85%+
Net investment income (loss) 0.83% (0.09)%+
* For the period from the inception of Class B, November 4, 1997, through
August 31, 1998.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its
custodian and dividend disbursing agent. The Fund's expenses are calculated
without reduction for this expense offset arrangement.
### The per share amount is not in accordance with the net realized and
unrealized gain (loss) for the period ended August 31, 1998, because of the
timing of sales of Fund shares and the amount of per share realized and
unrealized gains and losses at such time.
See notes to financial statements.
<PAGE>
FINANCIAL STATEMENTS -- continued
Financial Highlights - continued
- ------------------------------------------------------------------------------
YEAR ENDED PERIOD ENDED
AUGUST 31, AUGUST 31,
1999 1998*
- ------------------------------------------------------------------------------
CLASS C
- ------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $14.16 $13.63
------ ------
Income from investment operations# -
Net investment income(S) $ 0.14 $ 0.10
Net realized and unrealized gain on
investments and foreign currency### 3.15 0.45
------ ------
Total from investment operations $ 3.29 $ 0.55
------ ------
Less distributions declared to shareholders -
From net investment income $(0.13) $(0.02)
From net realized gain on investments and
foreign currency transactions (0.22) --
------ ------
Total distributions declared to
shareholders $(0.35) $(0.02)
------ ------
Net asset value - end of period $17.10 $14.16
====== ======
Total return 23.47% 4.02%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 2.01% 2.09%+
Net investment income 0.84% 0.66%+
Portfolio turnover 97% 89%
Net assets at end of period (000 omitted) $19,053 $3,613
(S) Subject to reimbursement by the Fund, the investment adviser agreed to
maintain expenses of the Fund, exclusive of management, distribution, and
service fees, at not more than 0.40% of average daily net assets. To the
extent actual expenses were over/under this limitation, the net investment
income (loss) per share and the ratios would have been:
Net investment income (loss) $ 0.14 $(0.02)
Ratios (to average net assets):
Expenses## 2.01% 2.83%+
Net investment income (loss) 0.84% (0.09)%+
* For the period from the inception of Class C, November 5, 1997, through
August 31, 1998.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its
custodian and dividend disbursing agent. The Fund's expenses are calculated
without reduction for this expense offset arrangement.
### The per share amount is not in accordance with the net realized and
unrealized gain (loss) for the period ended August 31, 1998, because of the
timing of sales of Fund shares and the amount of per share realized and
unrealized gains and losses at such time.
See notes to financial statements.
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- ---------------------------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31, PERIOD ENDED
----------------------------------- AUGUST 31,
1999 1998 1997*
- ---------------------------------------------------------------------------------------------------------------
CLASS I
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $14.22 $14.81 $12.20
------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.31 $ 0.24 $ 0.15
Net realized and unrealized gain on investments
and foreign currency### 3.20 1.09 2.46
------ ------ ------
Total from investment operations $ 3.51 $ 1.33 $ 2.61
------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.27) $(0.21) $ --
From net realized gain on investments and
foreign currency transactions (0.22) (1.71) --
------ ------ ------
Total distributions declared to shareholders $(0.49) $(1.92) $ --
------ ------ ------
Net asset value - end of period $17.24 $14.22 $14.81
====== ====== ======
Total return 24.97% 9.83% 21.39%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.01% 1.19% 1.54%+
Net investment income 1.85% 1.57% 1.51%+
Portfolio turnover 97% 89% 118%
Net assets at end of period (000 omitted) $3,413 $ 999 $ 964
(S) Effective November 1, 1997, subject to reimbursement by the Fund, the investment adviser agreed to maintain
expenses of the Fund, exclusive of management, distribution, and service fees, at not more than 0.40% of
average daily net assets. Prior to November 1, 1997, subject to reimbursement by the Fund, the investment
adviser agreed to maintain the expenses of the Fund, exclusive of management, distribution, and service
fees, at not more than 1.50% of average daily net assets. To the extent actual expenses were over/ under
this limitation, the net investment income per share and the ratios would have been:
Net investment income $ 0.31 $ 0.12 $ 0.03
Ratios (to average net assets):
Expenses## 1.01% 1.93% 2.67%+
Net investment income 0.85% 0.82% 0.35%+
* For the period from the inception of Class I, January 2, 1997 through August 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of
cash maintained by the Fund with its custodian and dividend disbursing agent. The Fund's expenses are
calculated without reduction for this expense offset arrangement.
### The per share amount is not in accordance with the net realized and unrealized gain (loss) for the year
ended August 31, 1998, because of the timing of sales of Fund shares and the amount of per share realized
and unrealized gains and losses at such time.
</TABLE>
See notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Equity Income Fund (the Fund) is a diversified series of MFS Series Trust
I (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 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.
Deferred Organization Expenses - Costs incurred by the Fund in connection with
its organization have been deferred and are being amortized on a straight-line
basis over a five-year period beginning on the date of commencement of Fund
operations.
Security Loans - State Street Bank and Trust Company ("State Street"), as
agent, may loan the securities of the Fund to certain brokers (the
"Borrowers") approved by the Fund. The loans are collateralized at all times
by cash and U.S. Treasury securities in an amount at least equal to the market
value of the securities loaned. State Street provides the Fund with
indemnification against Borrower default. The Fund bears the risk of loss with
respect to the investment of cash collateral.
At August 31, 1999, the value of securities loaned was $26,173,403. These
loans were collateralized by cash of $26,249,835. Cash collateral is invested
in short-term securities, which are included in the Portfolio of Investments.
A portion of the income generated upon investment of the collateral is
remitted to the Borrowers, and the remainder is allocated between the Fund and
State Street in its capacity as lending agent. On loans collateralized by U.S.
Treasury securities, a fee is received from the Borrower, and is allocated
between the Fund and State Street. Income from securities lending is included
in interest income on the Statement of Operations. The dividend and interest
income earned on the securities loaned is accounted for in the same manner as
other dividend and interest income.
Forward Foreign Currency Exchange Contracts - The Fund may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering into these contracts from the potential inability of counterparties
to meet the terms of their contracts and from unanticipated movements in the
value of a foreign currency relative to the U.S. dollar. The Fund may enter
into forward contracts for hedging purposes as well as for non-hedging
purposes. For hedging purposes, the Fund may enter into contracts to deliver
or receive foreign currency it will receive from or require for its normal
investment activities. The Fund may also use contracts in a manner intended to
protect foreign currency-denominated securities from declines in value due to
unfavorable exchange rate movements. For non-hedging purposes, the Fund may
enter into contracts with the intent of changing the relative exposure of the
Fund's portfolio of securities to different currencies to take advantage of
anticipated changes. The forward foreign currency exchange contracts are
adjusted by the daily exchange rate of the underlying currency and any gains
or losses are recorded as unrealized until the contract settlement date. On
contract settlement date, the gains or losses are recorded as realized gains
or losses on foreign currency transactions.
Investment Transactions and Income - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All discount
is accreted for financial statement and tax reporting purposes as required by
federal income tax regulations. Dividends received in cash are recorded on the
ex-dividend date. Dividend and interest payments received in additional
securities are recorded on the ex-dividend or ex-interest date in an amount
equal to the value of the security on such date.
Fees Paid Indirectly - The Fund's custody fee is calculated as a percentage of
the Fund's month end net assets. The fee is reduced according to an
arrangement that measures the value of cash deposited with the custodian by
the Fund. This amount is shown as a reduction of expenses on the Statement of
Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided.
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 distributions from paid-in
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 year ended August 31, 1999, accumulated undistributed net
investment income was increased by $263,545, accumulated net realized gain on
investments and foreign currency transactions was decreased by $267,364, and
paid-in capital was increased by $3,819 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.
Multiple Classes of Shares of Beneficial Interest - The Fund offers multiple
classes of shares, which differ in their respective distribution and service
fees. All shareholders bear the common expenses of the Fund based on daily net
assets of each class, without distinction between share classes. Dividends are
declared separately for each class Differences in per share dividend rates are
generally due to differences in separate class expenses. Class B shares will
convert to Class A shares approximately eight years after purchase.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.60%
of the Fund's average daily net assets.
The 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 0.40% of average daily net assets.
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
August 31, 1999, the aggregate unreimbursed expenses owed to MFS by the Fund
amounted to $96,445.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive
remuneration for their services to the Fund from MFS. Certain officers and
Trustees of the Fund are officers or directors of MFS, MFS Fund Distributors,
Inc. (MFD), and MFS Service Center, Inc. (MFSC). Currently, the Trustees are
not receiving any payments for their services to the Fund.
Administrator - The Fund has an administrative services agreement with MFS to
provide the Fund with certain financial, legal, shareholder servicing,
compliance, and other administrative services. As a partial reimbursement for
the cost of providing these services, the Fund pays MFS an administrative fee
at the following annual percentages of the Fund's average daily net assets:
First $1 billion 0.0150%
Next $1 billion 0.0125%
Next $1 billion 0.0100%
In excess of $3 billion 0.0000%
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$111,219 for the year ended August 31, 1999, as its portion of the sales
charge on sales of Class A shares of the Fund.
The Trustees have adopted a distribution plan for Class A, Class B, and Class
C shares pursuant to Rule 12b-1 of the Investment Company Act of 1940 as
follows:
The Fund's distribution plan provides that the Fund will pay MFD up to 0.35%
per annum of its average daily net assets attributable to Class A shares in
order that MFD may pay expenses on behalf of the Fund related to the
distribution and servicing of its shares. These expenses include a service fee
paid to each securities dealer that enters into a sales agreement with MFD of
up to 0.25% per annum of the Fund's average daily net assets 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 the Fund's average daily
net assets attributable to Class A shares. MFD retains the service fee for
accounts not attributable to a securities dealer, which amounted to $3,095 for
the year ended August 31, 1999. Fees incurred under the distribution plan
during the year ended August 31, 1999, were 0.35% of average daily net assets
attributable to Class A shares on an annualized basis.
The Fund's distribution plan provides that the Fund will pay MFD a
distribution fee of 0.75% per annum, and a service fee of up to 0.25% per
annum, of the Fund's average daily net assets attributable to Class B and
Class C shares. MFD will pay to securities dealers that enter into a sales
agreement with MFD all or a portion of the service fee attributable to Class B
and Class C shares, and will pay to such securities dealers all of the
distribution fee attributable to Class C shares. The service fee is intended
to be consideration for services rendered by the dealer with respect to Class
B and Class C shares. MFD retains the service fee for accounts not
attributable to a securities dealer, which amounted to $63 and $5 for Class B
and Class C shares, respectively, for the year ended August 31, 1999. Fees
incurred under the distribution plan during the year ended August 31, 1999,
were 1.00% and 1.00% of average daily net assets attributable to Class B and
Class C shares, respectively, on an annualized basis.
Certain Class A and Class C shares are subject to a contingent deferred sales
charge in the event of a shareholder redemption within 12 months following
purchase. A contingent deferred sales charge is imposed on shareholder
redemptions of Class B shares in the event of a shareholder redemption within
six years of purchase. MFD receives all contingent deferred sales charges.
Contingent deferred sales charges imposed during the year ended August 31,
1999, were $1,280, $68,666, and $2,641 for Class A, Class B, and Class C
shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as
a percentage of the Fund's average daily net assets at an annual rate of
0.10%. Prior to April 1, 1999, the fee was calculated as a percentage of the
Fund's average daily net assets at an annual rate of 0.1125%.
(4) Portfolio Securities
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions, and short-term obligations, aggregated
$147,558,824 and $65,525,060, respectively.
The cost and unrealized appreciation and depreciation in the value of the
investments owned by the Fund, as computed on a federal income tax basis, are
as follows:
Aggregate cost $153,919,555
------------
Gross unrealized appreciation $ 6,074,460
Gross unrealized depreciation (3,837,959)
------------
Net unrealized appreciation $ 2,236,501
============
(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. Transactions in
Fund shares were
as follows:
<TABLE>
<CAPTION>
Class A Shares
YEAR ENDED AUGUST 31, 1999 YEAR ENDED AUGUST 31, 1998
--------------------------------- --------------------------------
SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 3,144,380 $53,319,306 926,375 $14,265,389
Shares issued to shareholders in
reinvestment of distributions 31,189 505,466 6,821 95,820
Shares reacquired (946,878) (15,768,741) (182,591) (2,735,072)
---------- ----------- ---------- -----------
Net increase 2,228,691 $38,056,031 750,605 $11,626,137
========== =========== ========== ===========
<CAPTION>
Class B Shares
YEAR ENDED AUGUST 31, 1999 YEAR ENDED AUGUST 31, 1998
--------------------------------- --------------------------------
SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 2,269,759 $38,132,910 1,290,212 $19,644,691
Shares issued to shareholders in
reinvestment of distributions 31,770 508,820 1,193 18,889
Shares reacquired (413,918) (6,803,474) (106,047) (1,624,609)
---------- ----------- ---------- -----------
Net increase 1,887,611 $31,838,256 1,185,358 $18,038,971
========== =========== ========== ===========
<CAPTION>
Class C Shares
YEAR ENDED AUGUST 31, 1999 YEAR ENDED AUGUST 31, 1998
--------------------------------- --------------------------------
SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 1,123,279 $19,082,909 271,897 $ 4,122,597
Shares issued to shareholders in
reinvestment of distributions 8,003 129,061 190 3,002
Shares reacquired (272,488) (4,633,129) (16,890) (253,965)
---------- ----------- ---------- -----------
Net increase 858,794 $14,578,841 255,197 $ 3,871,634
========== =========== ========== ===========
<CAPTION>
Class I Shares
YEAR ENDED AUGUST 31, 1999 YEAR ENDED AUGUST 31, 1998
--------------------------------- --------------------------------
SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 134,400 $ 2,270,223 12,779 $ 195,481
Shares issued to shareholders in
reinvestment of distributions 2,875 46,965 9,194 123,327
Shares reacquired (9,523) (165,515) (16,779) (262,225)
---------- ----------- ---------- -----------
Net increase 127,752 $ 2,151,673 5,194 $ 56,583
========== =========== ========== ===========
</TABLE>
(6) Line of Credit
The Fund and other affiliated funds participate in an $820 million unsecured
line of credit provided by a syndication of banks under a line of credit
agreement. Borrowings may be made to temporarily finance the repurchase of Fund
shares. Interest is charged to each fund, based on its borrowings, at a rate
equal to the bank's base rate. In addition, a commitment fee, based on the
average daily unused portion of the line of credit, is allocated among the
participating funds at the end of each quarter. The commitment fee allocated to
the Fund for the year ended August 31, 1999, was $563. The Fund had no
borrowings during the year.
(7) Financial Instruments
The Fund trades financial instruments with off-balance-sheet risk in the normal
course of its investing activities in order to manage exposure to market risks
such as interest rates and foreign currency exchange rates. These financial
instruments include forward foreign currency exchange contracts.The notional or
contractual amounts of these instruments represent the investment the Fund has
in particular classes of financial instruments and does not necessarily
represent the amounts potentially subject to risk. The measurement of the risks
associated with these instruments is meaningful only when all related and
offsetting transactions are considered.
Forward Foreign Currency Exchange Contracts
NET
CONTRACTS TO IN EXCHANGE CONTRACTS UNREALIZED
SETTLEMENT DATE DELIVER/RECEIVE FOR AT VALUE DEPRECIATION
- ----------------------------------------------------------------------------
Sales 9/16/99 JPY 330,800,555 $2,731,496 $3,032,956 $(301,460)
---------- ---------- ---------
At August 31, 1999, 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 the MFS Series Trust I and the Shareholders of MFS Equity
Income Fund:
We have audited the accompanying statement of assets and liabilities of MFS
Equity Income Fund (the Fund), including the schedule of portfolio
investments, as of August 31, 1999, and the related statement of operations
for the year then ended, the statement of changes in net assets for each of
the two years in the period then ended, and the financial highlights for each
of the three years in the period then ended, and for the period from January
2, 1996 (commencement of operations) to August 31, 1996. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and financial highlights. Our procedures included
confirmation of securities owned at August 31, 1999, by correspondence with
the custodian and brokers or by other appropriate auditing procedures where
replies from brokers were not received. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of MFS
Equity Income Fund at August 31, 1999, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in
the period then ended, and the financial highlights for each of the three
years in the period then ended, and for the period from January 2, 1996
(commencement of operations) to August 31, 1996, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
October 9, 1999
<PAGE>
- --------------------------------------------------------------------------------
FEDERAL TAX INFORMATION
- --------------------------------------------------------------------------------
IN JANUARY 2000, SHAREHOLDERS WILL BE MAILED A FORM 1099-DIV REPORTING
THE FEDERAL TAX STATUS OF ALL DISTRIBUTIONS PAID DURING THE CALENDAR
YEAR 1999.
THE FUND HAS DESIGNATED $107,559 AS A CAPITAL GAIN DIVIDEND.
FOR THE YEAR ENDED AUGUST 31, 1999, THE AMOUNT OF DISTRIBUTIONS FROM
INCOME ELIGIBLE FOR THE 70% DIVIDENDS-RECEIVED DEDUCTION FOR
CORPORATIONS CAME TO 40.24%.
- --------------------------------------------------------------------------------
<PAGE>
MFS' YEAR 2000 READINESS DISCLOSURE
MFS Investment Management(R), as an investment adviser and on behalf of the MFS
funds, is committed to the effective use of technology in managing our portfolio
investments, delivering high-quality service to MFS fund shareholders,
retirement plan participants, and MFS' institutional clients, and supporting the
financial consultants who sell our products. With that in mind, we created a
separately funded Year 2000 Program Management Office in 1996 comprised of a
specialized staff reporting directly to MFS senior management.
The Year 2000 (Y2K) problem arises because calendar-year fields in computers
and software applications traditionally have used two-digit codes so that, for
example, the year 1998 is coded as "98," with the "19" being implied. In the
year 2000, unless necessary corrections have been made, computer applications
may assume "00" refers to 1900 rather than 2000, thus resulting in systems
failures or miscalculations. To address this issue, our team of dedicated
business and technology managers, working with outside experts, is taking
steps to ascertain the Y2K readiness of MFS' internal systems and is working
with our external systems vendors to determine whether they expect their
systems to be ready.
MFS recognizes that fund shareholders and institutional clients also are
concerned about whether the companies whose securities are held in their
portfolios are addressing Y2K issues. As part of the MFS Original Research(R)
process of evaluating portfolio investments, one of the many relevant factors
that MFS' portfolio managers and research analysts may consider is a company's
Y2K readiness. Each year, MFS' research analysts and portfolio managers
conduct more than 1,000 on-site meetings with companies whose securities are,
or may be, held in fund and client portfolios, and host an additional 1,500
meetings at MFS' headquarters. When assessing the Y2K readiness of these
companies, MFS' research analysts and portfolio managers may rely upon
discussions at these meetings as well as SEC disclosure documents and third-
party reports.
Y2K readiness is an enormously complex, worldwide issue. No company or
institution can guarantee that it will be unaffected by the Y2K issue. While
MFS is taking significant steps to protect the integrity of its internal
systems, there can be no assurance that these steps will be sufficient to
avoid any adverse impact on MFS, shareholders of MFS funds, participants in
retirement plans administered by MFS, or MFS' institutional clients.
If you have further questions regarding MFS' Year 2000 Readiness Program,
please visit our Web site at www.mfs.com or contact the MFS Year 2000 Program
Management Office by e-mail at [email protected] or by letter at 500 Boylston
Street, Boston, MA 02116-3741.
<PAGE>
MFS(R) EQUITY INCOME FUND
<TABLE>
<S> <C>
TRUSTEES ASSISTANT TREASURERS
Richard B. Bailey* - Private Investor; Former Mark E. Bradley*
Chairman and Director (until 1991), MFS Investment Ellen Moynihan*
Management James O. Yost*
Marshall N. Cohan - Private Investor SECRETARY
Stephen E. Cavan*
Lawrence H. Cohn, M.D. - Chief of Cardiac Surgery,
Brigham and Women's Hospital; Professor of ASSISTANT SECRETARY
Surgery, Harvard Medical School James R. Bordewick, Jr.*
The Hon. Sir J. David Gibbons, KBE - Chief CUSTODIAN
Executive Officer, Edmund Gibbons Ltd.; Chairman, State Street Bank and Trust Company
Colonial Insurance Company, Ltd.
AUDITORS
Abby M. O'Neill - Private Investor Ernst & Young LLP
Walter E. Robb, III - President and Treasurer, INVESTOR INFORMATION
Benchmark Advisors, Inc.; President, Benchmark For MFS stock and bond market outlooks, call toll
Consulting Group, Inc. free: 1-800-637-4458 anytime from a touch-tone
telephone.
Arnold D. Scott* - Senior Executive
Vice President, Director, and Secretary, For information on MFS mutual funds, call your
MFS Investment Management financial consultant or, for an information kit,
call toll free: 1-800-637-2929 any business day
Jeffrey L. Shames* - Chairman, Chief from 9 a.m. to 5 p.m. Eastern time (or leave a
Executive Officer, and Director, message anytime).
MFS Investment Management
INVESTOR SERVICE
J. Dale Sherratt - President, Insight MFS Service Center, Inc.
Resources, Inc.; Managing General Partner, P.O. Box 2281
Wellfleet Investments; Chief Executive Boston, MA 02107-9906
Officer, Cambridge Nutraceuticals
For general information, call toll free:
Ward Smith - Former Chairman (until 1994), NACCO 1-800-225-2606 any business day from
Industries 8 a.m. to 8 p.m. Eastern time.
INVESTMENT ADVISER For service to speech- or hearing-impaired, call
Massachusetts Financial Services Company toll free: 1-800-637-6576 any business day from 9
500 Boylston Street a.m. to 5 p.m. Eastern time. (To use this service,
Boston, MA 02116-3741 your phone must be equipped with a
Telecommunications Device for the Deaf.)
DISTRIBUTOR
MFS Fund Distributors, Inc. For share prices, account balances, and exchanges,
500 Boylston Street call toll free: 1-800-MFS-TALK (1-800-637-8255)
Boston, MA 02116-3741 anytime from a touch-tone telephone.
CHAIRMAN AND PRESIDENT WORLD WIDE WEB
Jeffrey L. Shames* www.mfs.com
PORTFOLIO MANAGER
Lisa B. Nurme*
TREASURER
W. Thomas London*
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
MFS(R) EQUITY INCOME FUND ------------
BULK RATE
U.S. POSTAGE
[Logo] M F S(R) PAID
INVESTMENT MANAGEMENT MFS
We invented the mutual fund(R) ------------
500 Boylston Street
Boston, MA 02116-3741
(c)1999 MFS Investment Management.(R)
MFS(R) investment products are offered through MFS Fund Distributors, Inc.,
500 Boylston Street, Boston, MA 02116
MEI-2 10/99 15M 93/293/393/893
