<PAGE>
[Logo] MFS(R)
INVESTMENT MANAGEMENT(R)
75 YEARS
We invented the mutual fund
MFS(R) NEW
DISCOVERY FUND
SEMIANNUAL REPORT o FEBRUARY 28, 1999
<PAGE>
Table of Contents
Letter from the Chairman .................................................. 1
Management Review and Outlook ............................................. 3
Performance Summary ....................................................... 8
Portfolio of Investments .................................................. 11
Financial Statements ...................................................... 18
Notes to Financial Statements ............................................. 25
MFS' Year 2000 Readiness Disclosure ....................................... 31
Trustees and Officers ..................................................... 33
MFS Celebrates its Diamond Anniversary!
March 21, 1999, marks the 75th anniversary of MFS' invention of
the mutual fund. The mutual fund industry has brought the power
of investing to every American, offering them the opportunity for
college degrees, home ownership, and comfortable retirement.
Imagine today's world without mutual
funds. We couldn't. And while the ----------------------
years ahead will bring a number of MFS 75 YEARS
challenges, our 75 years of experience [graphic omitted]
will help guide a new generation of
investors into the future. EXPERIENCE THE FUTURE(SM)
----------------------
- --------------------------------------------------------------------------------
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
- --------------------------------------------------------------------------------
<PAGE>
Letter from the Chairman
[Photo of Jeffrey L. Shames]
Jeffrey L. Shames
Dear Shareholders,
Since we launched Massachusetts Investors Trust, the nation's first mutual
fund, 75 years ago, MFS has weathered numerous market and economic cycles,
from the occasional recession to long periods of growth and prosperity.
Throughout that time, we have tried to give investors a realistic assessment
of the investment markets and, when necessary, to sound a note of caution --
even when market conditions appear quite favorable.
Although the equity markets have overcome last year's volatility, we still
think stocks are overdue for a correction that will rid them of the excesses
that have developed. Perhaps the most glaring measure of those excesses is the
high level of valuations, that is, the amount equity investors are paying for
each dollar of earnings. By mid-March, the price-to-earnings (P/E) ratio of
the average stock in the Standard & Poor's 500 Composite Index, a popular,
unmanaged index of common stock total return performance, was almost 28%
higher than it was a year ago. While P/E ratios keep going up, earnings have
essentially been flat, and we believe they are likely to stay that way, for a
few months at least. This leaves stock prices vulnerable to negative events
such as a domestic or international crisis, a sudden increase in interest
rates, or a slowing economy, any of which could lead to lower corporate
earnings.
While risks in the overall market have increased, one industry calls for
particular attention. For several months, Internet-related stocks have
exhibited extreme price volatility. The Internet's potential impact on the way
individuals and companies communicate and conduct business is certainly great,
but we feel that most of the recent run-up in the share prices of these
companies is unjustified. Many of them have not yet reported any profits, and
there is no way of knowing which of today's "hot" Internet stocks will be
successful -- or even in existence -- a few years from now. Therefore, we
think the frenzy surrounding even the best-known Internet stocks is purely
speculative.
However, there are some established companies offering Internet-related
products and services that may generate revenue. These include companies that
provide networking equipment, that make servers to store information, and that
help customers make better use of Internet services. Because they already have
profitable businesses as well as the potential to use the Internet to increase
their opportunities to generate revenue, these companies have been the focus
of our research efforts.
Although we think valuations for the overall equity market, and especially for
Internet stocks, are excessive, we see this situation as an opportunity for
our portfolio managers to capitalize on MFS(R) Original Research(SM). This is
a fundamental, company-by-company process that helps us find investments that
we believe are most likely to achieve long-term earnings growth, through both
negative and positive market cycles.
We also rely heavily on our research process when investing in the fixed-
income markets. Last year, turmoil in emerging markets and volatility in the
U.S. stock market helped create a "flight to quality," meaning that investors
moved toward U.S. Treasury securities, which are seen as carrying less risk,
and away from almost everything else. As a result, yields on non-Treasury
securities increased, while yields on Treasuries fell. Some of these yield
spreads, or differentials, have narrowed, but they have not returned to the
levels seen before last year's market turmoil. We think this has created
opportunities for our portfolio managers to find attractive yields in
these markets.
Individual investors, meanwhile, should keep in mind that the tremendous
increases in the broad stock market averages of the past several years
are a historical aberration and do not necessarily indicate future market
performance. If they are not already diversified across a range of
investments, including growth stock funds, value-oriented funds, and fixed-
income funds, investors may want to talk to their financial advisers about
developing well-diversified portfolios with the potential to weather
unexpected changes in the markets. Doing so may help investors more
effectively meet their long-term financial goals. 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)
March 16, 1999
<PAGE>
Management Review and Outlook
[Photo of Brian E. Stack]
Brian E. Stack
For the six months ended February 28, 1999, Class A shares of the Fund
provided a total return of 21.83%, Class B shares 21.49%, Class C shares
21.37%, and Class I shares 22.14%. These returns include the reinvestment of
distributions but exclude the effects of any sales charges and compare to a
16.79% return for the Russell 2000 Total Return Index (the Russell 2000) for
the same period. The Russell 2000 is 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. The average
small-cap growth fund, as reported by Lipper Analytical Services, Inc., an
independent firm that tracks mutual fund performance, returned 16.43% over the
same period.
Q. What were some of the factors that contributed to the Fund's performance over
the past six months?
A. In the early part of the period, the Asian economic crisis dragged the entire
equity market down. From the market's low point in early October, we saw a
substantial rebound in stock prices, and the Fund was able to capitalize on
that, beating the Russell 2000 and the Lipper average. We feel this
performance is a function of MFS(R) Original Research(SM), by which stocks
are selected after in-depth fundamental analysis of companies' predicted
earnings growth, current and potential market positions, management teams'
strength, and products potential. Equally important is my own investment
discipline, which emphasizes a long-term view of stocks whose growth
prospects are in line with their actual fundamental strengths. This
discipline leads me away from highly speculative stocks, such as several of
the best-known Internet companies. Though those stocks may be hot at the
moment, they do not give me a high degree of confidence in their abilities to
generate consistent earnings streams in the future; therefore, I'll avoid
them until they can prove their fundamentals are strong. As a result of the
portfolio's investment discipline and research focus, I think we can capture
positive performance while generally avoiding highly valued stocks that can
drop sharply at the first hint of trouble.
Q. In what industry sectors are you finding the best growth opportunities?
A. Business services, which are lumped into the conglomerates and special
products/services category, and technology are our largest sectors, and they
are interrelated. Technology is driving the increased business productivity
that has aided the prolonged U.S. economic expansion. Though technology
started off 1999 with some volatility, that has not impacted our long-term
optimism about many of these stocks. Business services companies help
businesses and consumers integrate technology into their daily lives and
provide key business functions to customers on a contract basis. The growth
of technology and the trend to outsourcing noncore business functions as a
means of boosting corporate efficiency are driving the growth of these
companies. Technology Solutions, which specifies, designs, installs, and
maintains complex technologies that help customers run their businesses, is a
good example of a services company that has done well for the Fund.
Q. Please discuss some individual holdings' performance highlights during the
period.
A. PMC-Sierra was a strong performer during the period. The company provides
computer chips to the internetworking market and has capitalized on the
growth of the Internet and of corporate data networks. Gemstar International
is also part of the Internet boom, but in a different way. The company
manufactures software that, when coupled with the right hardware, allows
consumers to access the Internet from their television sets. It has
established business relationships with many of the big players in the TV and
personal computer markets, and we feel that its growth prospects are good.
Pharmaceutical Marketing performed well during the period. The company
provides market research to pharmaceutical companies that, traditionally,
would have conducted in-house research at great expense. The company is part
of the business services theme we just discussed, and has been able to
capitalize on the strong growth of the major pharmaceutical manufacturing
companies. Additionally, the company is in the process of being acquired,
which has further boosted its stock price.
Q. What stocks in the Fund were disappointments during the period? Are you
holding on to these and, if so, why?
A. Aspect Telecommunication, which makes call-center software, lagged during the
period because it missed its earnings estimate and is in the midst of a
product transition. We're holding on to the stock, however, because we
consider the issues short-term in nature and are optimistic about the
company's ability to be a long-term leader in a growing market. Total Renal
Care, which provides dialysis treatment in its medical centers, also missed
an earnings estimate because of larger-than-expected operating expenses
during the period. Again, we like the long-term earnings growth prospects for
the company and feel that management can get expenses back under control. The
company is a leader in the market, so we've held the stock.
Q. What is your opinion of the Year 2000 (Y2K) computer problem's impact on the
investments in the portfolio?
A. We do not see an investment opportunity in companies that can gain only
short-term benefits by providing Year 2000 correction services. Any revenue
boosts these companies may experience are short term and are probably already
reflected in their stock prices. The portfolio as a whole has experienced
some very short-term negative impact from Y2K because companies have
curtailed technology purchases and service contracts as they work to fix
their installed base of computers, software, and networks in advance of
January 1, 2000. As I said, these are temporary hiccups and don't change our
outlook for technology or services companies as a whole. There has been a
psychological impact as well because investors have been nervous about a
perceived downturn, but we think that many of the stocks in the portfolio
that have felt this are very well positioned to grow quickly after January 1,
2000.
Q. With all the interest in the Internet, are you investing in this area of the
market?
A. I try to avoid stocks of companies whose business models are tied purely to
the Internet. Many of these companies are still figuring out how to do
business on the Web and don't even know how they will make money in the
future. By and large, these are speculative investments that don't match our
research-driven investment method. We prefer to leverage the growth of the
Internet by buying stocks of companies that don't rely solely on the 'Net to
generate revenue or that are providing products and services to help build
the Internet itself. Companies such as PMC-Sierra, and Catalina Marketing,
which is using the 'Net to expand its consumer coupon service, are good
examples. We have exactly one pure Internet stock in the portfolio,
SportsLine USA, which we bought at a very modest valuation when the NBA was
on strike, robbing the firm of much of its Web site traffic and advertising
revenues. Since our purchase, it has performed well, and its advertising
revenues from the Web site are up strongly. That stock is the exception,
however.
Q. What's your investment outlook for the small-cap growth market for the first
half of 1999?
A. Valuations for small-cap stocks are still very low in comparison to large-
cap stocks. Generally, we feel that the better-positioned small-cap stocks
driven by their abilities to innovate and grow their businesses more
quickly than big, multinational companies, still offer the best long-term
prospects for strong earnings growth. Though it remains to be seen when
exactly this dichotomy will be corrected, history is on the side of people
like me who believe that at some point the gap will narrow as small
companies return to favor and large companies encounter difficulty
maintaining their growth rates. We're starting to see some small hints that
this is beginning to happen. For example, Dell, a leading large-cap stock,
took a hit in early 1999 as its profit margins fell for the first time in
several quarters. Small-cap stock investors understand that small companies
can offer robust earnings growth and healthy profit margins, but they also
must be comfortable taking a long-term view of the market's performance as
a whole.
/s/ Brian E. Stack
Brian E. Stack
Portfolio Manager
The opinions expressed in this report are those of the portfolio manager and
are only through the end of the period of the report as stated on the cover.
The manager's views are subject to change at any time based on market and
other conditions, and no forecasts can be guaranteed.
It is not possible to invest directly in an index.
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO MANAGER'S PROFILE
- --------------------------------------------------------------------------------
Brian E. Stack is Senior Vice President of MFS Investment Management(R) and
portfolio manager of MFS(R) New Discovery Fund, and the New Discovery Series
offered through MFS(R)/Sun Life Annuity products. He is also a portfolio manager
of MFS(R) Institutional Emerging Equities Fund.
Mr. Stack joined MFS in 1993 as a research analyst following the chemical,
hospital management, health maintenance organizations, medical services, and
business services industries. He was named portfolio manager in 1996 and Senior
Vice President in 1999. Prior to joining MFS, he had worked as an equity analyst
since 1987. He is a graduate of Boston College and has an M.B.A. degree from the
University of Virginia.
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(R) Original
Research(SM), a company-oriented, bottom up process of selecting securities.
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus. A prospectus containing more information,
including the exchange privilege and all charges and expenses, for any other MFS
product is available from your financial adviser, or by calling MFS at
1-800-225-2606. Please read it carefully before investing or sending money.
<PAGE>
- --------------------------------------------------------------------------------
FUND FACTS
- --------------------------------------------------------------------------------
OBJECTIVE: SEEKS CAPITAL APPRECIATION.
COMMENCEMENT OF
INVESTMENT OPERATIONS: JANUARY 2, 1997
CLASS INCEPTION: CLASS A JANUARY 2, 1997
CLASS B NOVEMBER 3, 1997
CLASS C NOVEMBER 3, 1997
CLASS I JANUARY 2, 1997
SIZE: $317.1 MILLION NET ASSETS AS OF FEBRUARY 28, 1999
PERFORMANCE SUMMARY
Because mutual funds are designed for investors with long-term goals, we have
provided cumulative results as well as the average annual total returns for
the applicable time periods. Investment results reflect the percentage change
in net asset value, including reinvestment of dividends.
AVERAGE ANNUAL AND CUMULATIVE TOTAL RATES OF RETURN THROUGH FEBRUARY 28, 1999
Class A
6 Months 1 Year 10 Years/Life*
- ------------------------------------------------------------------------------
Cumulative Total Return +21.83% -3.17% +51.48%
- ------------------------------------------------------------------------------
Average Annual Total Return -- -3.17% +21.24%
- ------------------------------------------------------------------------------
SEC Results -- -8.74% +17.95%
- ------------------------------------------------------------------------------
Class B
6 Months 1 Year 10 Years/Life*
- ------------------------------------------------------------------------------
Cumulative Total Return +21.49% -3.68% +50.32%
- ------------------------------------------------------------------------------
Average Annual Total Return -- -3.68% +20.81%
- ------------------------------------------------------------------------------
SEC Results -- -7.50% +19.69%
- ------------------------------------------------------------------------------
Class C
6 Months 1 Year 10 Years/Life*
- ------------------------------------------------------------------------------
Cumulative Total Return +21.37% -3.75% +50.32%
- ------------------------------------------------------------------------------
Average Annual Total Return -- -3.75% +20.81%
- ------------------------------------------------------------------------------
SEC Results -- -4.71% +20.81%
- ------------------------------------------------------------------------------
* For the period from the commencement of the Fund's investment operations,
January 2, 1997, through February 28, 1999.
Class I
6 Months 1 Year 10 Years/Life*
- ------------------------------------------------------------------------------
Cumulative Total Return +22.14% -2.62% +52.56%
- ------------------------------------------------------------------------------
Average Annual Total Return -- -2.62% +21.64%
- ------------------------------------------------------------------------------
* For the period from the commencement of the Fund's investment operations,
January 2, 1997, through February 28, 1999.
NOTES TO PERFORMANCE SUMMARY
Class A share ("A") SEC results include the maximum 5.75% sales charge. Class
B share ("B") SEC results reflect the applicable contingent deferred sales
charge (CDSC), which declines over six years from 4% to 0%. Class C shares
("C") have no initial sales charge but, like B, have higher annual fees and
expenses than A. C SEC results reflect the 1% CDSC applicable to shares
redeemed within 12 months. Class I shares ("I") have no sales charge or Rule
12b-1 fees and are only available to certain institutional investors.
B and C results include the performance and the operating expenses (e.g., Rule
12b-1 fees) of A for periods prior to the inception of B and C. Because
operating expenses of B and C are higher than those of A, B and C performance
generally would have been lower than A performance. The A performance included
in the B and C SEC performance has been adjusted to reflect the CDSC generally
applicable to B and C rather than the initial sales charge generally
applicable to A.
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.
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. See the prospectus for details.
<PAGE>
PORTFOLIO CONCENTRATION AS OF FEBRUARY 28, 1999
FIVE LARGEST STOCK SECTORS
CONGLOMERATES, SPECIAL PRODUCTS/SERVICES 28.9%
TECHNOLOGY 23.1%
HEALTH CARE 15.2%
LEISURE 11.5%
RETAILING 6.1%
TOP 10 STOCK HOLDINGS
<TABLE>
<S> <C>
GEMSTAR INTERNATIONAL GROUP LTD. 3.0% CBT GROUP PLC 1.7%
Audio/video products company Interactive education software provider
AFFILIATED COMPUTER SERVICES, INC. 2.5% SPORTSLINE USA, INC. 1.6%
Information technology services company Internet sports media company
BISYS GROUP, INC. 2.5% INTERMEDIA COMMUNICATIONS INC. 1.6%
Banking computer services company Telecommunications and datacommunications
service provider
DST SYSTEMS, INC. 2.5%
Financial information services company SYNOPSYS INC. 1.5%
Integrated circuits design software
IDEXX Laboratories, Inc. 2.0% provider
Medical instruments company
PHARMACEUTICAL MARKETING SERVICES, INC. 1.8%
Pharmaceutical market information and research
services provider
</TABLE>
The portfolio is actively managed, and holdings are subject to change.
<PAGE>
Portfolio of Investments (Unaudited) -- February 28, 1999
<TABLE>
<CAPTION>
STOCKS - 95.5%
- --------------------------------------------------------------------------------------------------------
ISSUER SHARES VALUE
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Stocks - 93.7%
Advertising - 2.4%
Pharmaceutical Marketing Service, Inc.* 366,200 $ 5,309,900
Snyder Communications, Inc.* 30,400 1,041,200
TMP Worldwide, Inc.* 25,196 1,417,275
------------
$ 7,768,375
- --------------------------------------------------------------------------------------------------------
Airlines - 1.1%
Atlas Air, Inc.* 82,264 $ 2,478,203
Skywest, Inc. 28,467 894,931
------------
$ 3,373,134
- --------------------------------------------------------------------------------------------------------
Building - 0.3%
Eagle Hardware & Garden, Inc.* 26,400 $ 991,650
- --------------------------------------------------------------------------------------------------------
Business Machines - 3.4%
Affiliated Computer Services, Inc., "A"*### 164,259 $ 7,596,979
Kulicke & Soffa Industries, Inc.* 131,200 3,329,200
------------
$ 10,926,179
- --------------------------------------------------------------------------------------------------------
Business Services - 16.5%
BISYS Group, Inc.* 141,036 $ 7,527,796
Bright Horizons Family Solutions, Inc.* 32,500 686,563
Catalina Marketing Corp.* 33,537 2,158,944
Ceridian Corp.* 37,944 2,717,739
Complete Business Solutions, Inc. 25,800 728,850
Computer Horizons Corp.* 60,800 908,200
Dendrite International, Inc.* 80,233 2,256,553
DST Systems, Inc.* 137,457 7,457,042
Envoy Corp.* 71,072 3,446,992
Fiserv, Inc.* 35,818 1,683,446
Global Directmail Corp.* 67,182 1,104,304
IMRglobal Corp.* 35,600 645,250
Interim Services, Inc.* 170,696 3,243,224
International Network Services* 12,400 633,950
Learning Tree International, Inc.* 203,581 1,704,991
Memberworks, Inc.* 23,179 805,470
Meta Group, Inc.* 84,749 1,896,259
Modis Professional Services, Inc.* 144,011 1,971,151
NOVA Corp.* 115,472 2,886,800
Paymentech, Inc.* 55,710 1,065,454
Personnel Group of America, Inc.* 41,599 548,587
Preview Travel, Inc.* 18,300 372,863
Professional Detailing, Inc.* 28,649 891,700
Renaissance Worldwide, Inc.* 212,527 1,328,294
Technology Solutions Co.* 408,360 3,343,447
Teletech Holdings, Inc.* 56,200 393,400
------------
$ 52,407,269
- --------------------------------------------------------------------------------------------------------
Computer Software - Services - 0.5%
Hyperion Solutions Corp.* 101,800 $ 1,444,287
- --------------------------------------------------------------------------------------------------------
Computer Software - Systems - 12.6%
Acxiom Corp.* 71,462 $ 1,710,622
Aspen Technology, Inc.*### 117,113 1,500,510
Black Box Corp.* 47,380 1,528,005
Cadence Design Systems, Inc.* 113,370 2,727,966
Cambridge Technology Partners, Inc.* 119,810 3,010,226
Checkfree Holdings Corp.* 28,800 986,400
Compuware Corp.* 27,300 1,527,094
Edify Corp.* 40,000 237,500
Engineering Animation, Inc.* 30,725 1,390,306
Exchange Applications Software* 78,500 1,295,250
Fair, Isaac & Co., Inc. 16,660 766,360
Harbinger Corp.* 127,602 829,413
JDA Software Group, Inc.* 110,100 688,125
Peerless Systems Corp.* 67,800 635,625
RWD Technologies, Inc.* 11,030 151,663
SCB Computer Technology, Inc.* 57,324 401,268
Security Dynamics Technologies, Inc.* 109,265 2,021,402
Sterling Software, Inc.* 119,420 3,045,210
Summit Design, Inc.* 188,000 658,000
SunGard Data Systems, Inc.* 86,790 3,439,054
Synopsys, Inc.* 97,745 4,520,706
Transaction System Architects, Inc., "A"* 91,676 3,604,013
Vantive Corp.* 163,427 1,879,410
Wind River Systems, Inc.* 57,300 1,307,156
------------
$ 39,861,284
- --------------------------------------------------------------------------------------------------------
Conglomerates - 0.5%
Sodexho Marriott Services, Inc.* 71,000 $ 1,659,625
- --------------------------------------------------------------------------------------------------------
Consumer Goods and Services - 3.6%
Alternative Resources Corp.* 130,920 $ 1,407,390
Galileo International, Inc. 56,439 2,850,169
InfoUSA, Inc., "A"* 136,209 817,254
InfoUSA, Inc., "B"* 78,856 487,922
LoJack Corp.* 96,000 864,000
Sportsline USA, Inc.* 108,425 4,879,125
------------
$ 11,305,860
- --------------------------------------------------------------------------------------------------------
Electrical Equipment - 0.8%
AFC Cable Systems, Inc.* 35,167 $ 1,164,907
Barnett, Inc.* 58,477 610,354
Belden, Inc. 35,200 635,800
------------
$ 2,411,061
- --------------------------------------------------------------------------------------------------------
Electronics - 6.6%
Actel Corp.* 15,211 $ 197,743
Analog Devices, Inc.* 101,365 2,540,460
Applied Micro Circuits Corp.* 26,400 1,036,200
Burr-Brown Corp.* 132,609 2,685,332
Cable Design Technologies Corp.* 124,762 1,614,108
Credence Systems Corp.* 41,300 872,463
DuPont Photomasks, Inc.* 24,800 973,400
Lattice Semiconductor Corp.* 71,134 2,836,468
Microchip Technology, Inc.* 22,385 609,991
Photronics, Inc.* 91,655 1,884,656
PMC-Sierra, Inc.* 36,307 2,573,259
SDL, Inc. 26,400 1,438,800
SIPEX Corp.* 145,773 1,667,279
------------
$ 20,930,159
- --------------------------------------------------------------------------------------------------------
Entertainment - 4.6%
Cox Radio, Inc., "A"* 9,000 $ 397,125
Entercom Communications Corp.* 1,000 31,375
Gemstar International Group Ltd.* 142,044 9,090,816
Heftel Broadcasting Corp., "A"* 32,300 1,332,375
Jacor Communications, Inc.* 51,411 3,585,917
------------
$ 14,437,608
- --------------------------------------------------------------------------------------------------------
Financial Institutions - 1.3%
Conning Corp. 32,641 $ 522,256
Federated Investors, Inc., "A" 63,320 1,214,953
Student Loan Corp. 17,132 769,869
Waddell & Reed Financial, Inc., "A" 92,608 1,747,976
------------
$ 4,255,054
- --------------------------------------------------------------------------------------------------------
Food and Beverage Products - 0.4%
Del Monte Foods Co.* 54,300 $ 743,231
Robert Mondavi Corp.* 18,067 621,053
------------
$ 1,364,284
- --------------------------------------------------------------------------------------------------------
Insurance - 0.7%
Annuity & Life Re Holdings Ltd. 36,200 $ 803,188
Executive Risk, Inc. 18,737 1,316,274
------------
$ 2,119,462
- --------------------------------------------------------------------------------------------------------
Medical and Health Products - 1.8%
AmeriSource Health Corp., "A"* 11,925 $ 889,903
Haemonetics Corp.* 121,518 2,027,832
PSS World Medical, Inc.* 238,446 2,712,323
------------
$ 5,630,058
- --------------------------------------------------------------------------------------------------------
Medical and Health Technology and Services - 11.3%
ABR Information Services, Inc.* 73,100 $ 1,288,387
Concentra Managed Care, Inc.* 284,722 3,025,171
Cytyc Corp.* 81,361 1,474,668
Henry Schein, Inc.* 36,700 940,437
Hologic, Inc.* 100,543 1,011,714
IDEXX Laboratories, Inc.* 272,711 6,101,909
IDX Systems Corp.* 72,637 1,725,129
Impath, Inc.* 126,900 3,196,294
MEDE AMERICA Corp.* 600 10,275
Mid Atlantic Medical Services, Inc.* 195,207 1,525,055
NCS Healthcare, Inc., "A"* 62,382 885,045
Orthodontic Centers of America, Inc.* 63,175 947,625
PAREXEL International Corp.* 131,700 2,741,006
Quorum Health Group, Inc.* 112,300 1,038,775
STERIS Corp.* 45,934 1,510,080
Sunrise Assisted Living, Inc. 25,600 988,800
Superior Consultant Holdings Corp.* 22,725 749,925
Total Renal Care Holdings, Inc.* 353,937 3,141,191
Ventana Medical Systems, Inc.* 100,466 1,745,597
Virgin Islands Technologies, Inc.* 175,221 1,971,236
------------
$ 36,018,319
- --------------------------------------------------------------------------------------------------------
Oil Services - 2.4%
Cooper Cameron Corp.* 78,800 $ 1,822,250
Dril-Quip, Inc.* 26,645 339,724
Global Industries, Inc.* 297,775 1,507,486
Input/Output, Inc.* 288,597 1,623,358
National Oilwell, Inc.* 59,785 530,592
Noble Drilling Corp.* 116,200 1,437,975
Weatherford International, Inc.* 28,800 489,600
------------
$ 7,750,985
- --------------------------------------------------------------------------------------------------------
Oils - 0.2%
Newfield Exploration Co.* 44,900 $ 729,625
- --------------------------------------------------------------------------------------------------------
Pharmaceuticals - 1.1%
Boron Lepore & Assoc., Inc. 148,700 $ 1,877,337
Sepracor, Inc.* 13,385 1,669,779
------------
$ 3,547,116
- --------------------------------------------------------------------------------------------------------
Pollution Control - 0.6%
Superior Services, Inc.* 87,262 $ 1,753,421
- --------------------------------------------------------------------------------------------------------
Printing and Publishing - 1.6%
CMP Media, Inc., "A"* 19,108 $ 573,240
Scholastic Corp.* 88,796 4,373,203
------------
$ 4,946,443
- --------------------------------------------------------------------------------------------------------
Real Estate Investment Trusts - 0.5%
Kilroy Realty Corp. 27,600 $ 595,125
MeriStar Hospitality Corp. 50,857 905,890
------------
$ 1,501,015
- --------------------------------------------------------------------------------------------------------
Restaurants and Lodging - 3.0%
Buffets, Inc.* 266,735 $ 2,684,021
Four Seasons Hotels, Inc. 36,357 1,286,129
Landry's Seafood Restaurants, Inc.* 120,891 823,570
Mortons Restaurant Group, Inc.* 43,800 782,925
Outback Steakhouse, Inc.* 38,400 1,684,800
Papa John's International, Inc.* 18,787 812,537
Sonic Corp.* 58,386 1,401,264
------------
$ 9,475,246
- --------------------------------------------------------------------------------------------------------
Special Products and Services - 2.0%
Caliber Learning Network, Inc.* 104,818 $ 399,619
Edutrek International, Inc., "A"* 74,660 475,958
Gartner Group, Inc.* 50,300 1,128,606
Newport News Shipbuilding, Inc.### 90,700 2,624,631
Sylvan Learning Systems, Inc.* 20,087 667,893
Watsco, Inc. 83,093 971,149
------------
$ 6,267,856
- --------------------------------------------------------------------------------------------------------
Stores - 6.1%
BJ's Wholesale Club, Inc.* 38,917 $ 1,695,322
Borders Group, Inc.* 57,000 787,313
Copart, Inc.* 175,446 3,070,305
CSK Auto Corp.* 84,423 2,896,764
Duane Reade, Inc.* 12,828 388,047
Elder-Beerman Stores Corp.* 54,609 431,752
Gymboree Corp.* 171,263 1,798,262
Micro Warehouse, Inc.* 39,079 771,810
Office Depot, Inc.* 39,100 1,395,381
Petco Animal Supplies, Inc.* 229,749 1,852,351
Pier 1 Imports, Inc. 119,700 1,032,413
Regis Corp. 70,156 2,622,080
Rite Aid Corp. 2,300 95,163
Stage Stores, Inc.* 86,744 628,894
------------
$ 19,465,857
- --------------------------------------------------------------------------------------------------------
Telecommunications - 7.2%
Adelphia Communications Corp.* 26,692 $ 1,504,761
Advanced Fibre Communications, Inc.* 56,800 461,500
American Tower Corp., "A"* 69,663 1,867,839
Aspect Telecommunications Corp.* 365,371 2,808,790
Hyperion Telecommunications, Inc., "A"* 23,700 266,625
Intermedia Communications, Inc.* 259,538 4,704,126
International Telecommunication Data Systems, Inc.* 96,200 1,322,750
IXC Communications, Inc.* 33,100 1,721,200
Lightbridge, Inc.* 104,633 497,007
Natural Microsystems Corp.* 30,448 184,591
Nextlink Communications, Inc., "A"* 46,092 2,108,709
Pinnicle Holdings, Inc.* 98,900 1,403,144
Proxim, Inc.* 52,300 1,634,375
Transaction Network Services, Inc.* 103,305 2,027,361
VDI Media* 63,000 287,437
------------
$ 22,800,215
- --------------------------------------------------------------------------------------------------------
Transportation - 0.6%
Carey International, Inc.* 48,100 $ 844,756
Coach USA, Inc.* 47,069 1,106,122
------------
$ 1,950,878
- --------------------------------------------------------------------------------------------------------
Total U.S. Stocks $297,092,325
- --------------------------------------------------------------------------------------------------------
Foreign Stocks - 1.8%
United Kingdom - 1.8%
CBT Group PLC, ADR (Computer Software - Personal Computers)* 328,341 $ 5,232,935
Saville Systems PLC, ADR (Computer Software - Systems)* 26,113 520,628
- --------------------------------------------------------------------------------------------------------
Total Foreign Stocks $ 5,753,563
- --------------------------------------------------------------------------------------------------------
Total Stocks (Identified Cost, $306,414,311) $302,845,888
- --------------------------------------------------------------------------------------------------------
Convertible Preferred Stock - 0.1%
- --------------------------------------------------------------------------------------------------------
Medical and Health Technology and Services - 0.1%
Concentra Managed Care, Inc., 4.50%
(Identified Cost, $338,199) 550,000 $ 433,813
- --------------------------------------------------------------------------------------------------------
SHORT-TERM OBLIGATIONS - 20.2%
- --------------------------------------------------------------------------------------------------------
SHARES/
ISSUER PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------
CIT Group Holdings, Inc., due 3/01/99 $ 6,500,000 $ 6,500,000
Federal Agricultural Mortgage Corp.,
due 3/25/99 6,230,083 6,230,083
Navigator Securities Lending Prime Portfolio 51,248,278 51,248,278
- --------------------------------------------------------------------------------------------------------
Total Short-Term Obligations, at Amortized Cost $ 63,978,361
- --------------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $370,730,871) $367,258,062
- --------------------------------------------------------------------------------------------------------
Securities Sold Short
- --------------------------------------------------------------------------------------------------------
SHARES
- --------------------------------------------------------------------------------------------------------
Stores
Books-A-Million, Inc. (Proceeds Received, $65,098) (4,800) $ (53,700)
- --------------------------------------------------------------------------------------------------------
Other Assets, Less Liabilities - (15.8)% (50,071,790)
- --------------------------------------------------------------------------------------------------------
Net Assets - 100.0% $317,132,572
- --------------------------------------------------------------------------------------------------------
* Non-income producing security.
### Security or a portion of the security was pledged to cover margin requirements for securities sold
short. At the period end, the value of securities pledged amounted to $5,477,625.
</TABLE>
See notes to financial statements
<PAGE>
Financial Statements
Statement of Assets and Liabilities (Unaudited)
- --------------------------------------------------------------------------------
FEBRUARY 28, 1999
- --------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $370,730,871) $367,258,062
Cash 67,557
Receivable for Fund shares sold 2,519,124
Receivable for investments sold 816,428
Dividends receivable 22,764
Other assets 11,365
------------
Total assets $370,695,300
------------
Liabilities:
Securities sold short, at value (proceeds received, $65,098) $ 53,700
Payable for investments purchased 1,372,935
Collateral for securities loaned, at value 51,248,278
Payable for Fund shares reacquired 658,633
Payable to affiliates -
Management fee 23,681
Distribution and service fee 197,553
Accrued expenses and other liabilities 7,948
------------
Total liabilities $ 53,562,728
------------
Net assets $317,132,572
============
Net assets consist of:
Paid-in capital $320,925,454
Unrealized depreciation on investments and translation of
assets and liabilities in foreign currencies (3,461,411)
Accumulated undistributed net realized gain on
investments and foreign currency transactions 1,490,041
Accumulated net investment loss (1,821,512)
------------
Total $317,132,572
============
Total shares of beneficial interest outstanding 24,769,658
==========
Class A shares:
Net asset value per share
(net assets of $130,597,606 / 10,169,281 shares of
beneficial interest outstanding) $12.84
======
Offering price per share (100 / 94.25) $13.63
======
Class B shares:
Net asset value and offering price per share
(net assets of $131,857,254 / 10,326,907 shares of
beneficial interest outstanding) $12.77
======
Class C shares:
Net asset value and offering price per share
(net assets of $47,388,097 / 3,709,360 shares of
beneficial interest outstanding) $12.78
======
Class I shares:
Net asset value, offering price, and redemption price per share
(net assets of $7,289,615 / 564,110 shares of
beneficial interest outstanding) $12.92
======
On sales of $50,000 or more, the offering price of Class A shares is reduced. A
contingent deferred sales charge may be imposed on redemptions of Class A, Class
B, and Class C shares.
See notes to financial statements
<PAGE>
Financial Statements -- continued
Statement of Operations (Unaudited)
- --------------------------------------------------------------------------------
SIX MONTHS ENDED FEBRUARY 28, 1999
- --------------------------------------------------------------------------------
Net investment income (loss):
Income -
Dividends $ 142,480
Interest 405,073
Income on securities loaned 59,711
Foreign taxes withheld (217)
-----------
Total investment income $ 607,047
-----------
Expenses -
Management fee $ 1,168,503
Trustees' compensation 11,300
Shareholder servicing agent fee 146,485
Distribution and service fee (Class A) 179,508
Distribution and service fee (Class B) 579,626
Distribution and service fee (Class C) 181,245
Administrative fee 12,921
Custodian fees 62,687
Printing 51,316
Postage 41,866
Auditing fees 15,401
Registration fees 111,049
Miscellaneous 74,907
-----------
Total expenses $ 2,636,814
Fees paid indirectly (19,115)
Preliminary reduction of expenses by investment adviser (189,140)
-----------
Net expenses $ 2,428,559
-----------
Net investment loss $(1,821,512)
-----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 4,214,709
Securities sold short (511,541)
Foreign currency transactions 431
-----------
Net realized gain on investments and foreign currency
transactions $ 3,703,599
-----------
Change in unrealized appreciation (depreciation) -
Investments $38,793,414
Securities sold short (569,832)
-----------
Net unrealized gain on investments $38,223,582
-----------
Net realized and unrealized gain on investments
and foreign currency $41,927,181
-----------
Increase in net assets from operations $40,105,669
===========
See notes to financial statements
<PAGE>
Financial Statements -- continued
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- -------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
FEBRUARY 28, 1999 AUGUST 31, 1998
(UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment loss $ (1,821,512) $ (1,057,836)
Net realized gain on investments and foreign currency
transactions 3,703,599 1,583,465
Net unrealized gain (loss) on investments and foreign
currency 38,223,582 (41,863,394)
------------ ------------
Increase (decrease) in net assets from operations $ 40,105,669 $(41,337,765)
------------ ------------
Distributions declared to shareholders -
From net investment income (Class A) $ -- $ (41,464)
From net investment income (Class I) -- (104,204)
From net realized gain on investments and foreign
currency transactions (Class A) (1,158,786) (70,362)
From net realized gain on investments and foreign
currency transactions (Class B) (1,050,387) --
From net realized gain on investments and foreign
currency transactions (Class C) (311,497) --
From net realized gain on investments and foreign
currency transactions (Class I) (59,727) (176,826)
------------ ------------
Total distributions declared to shareholders $ (2,580,397) $ (392,856)
------------ ------------
Net increase in net assets from Fund share transactions $106,064,171 $213,243,887
------------ ------------
Total increase in net assets $143,589,443 $171,513,266
Net assets:
At beginning of period 173,543,129 2,029,863
------------ ------------
At end of period (including accumulated net investment
loss of $1,821,512 and $0, respectively) $317,132,572 $173,543,129
============ ============
</TABLE>
See notes to financial statements
<PAGE>
Financial Statements -- continued
<TABLE>
<CAPTION>
Financial Highlights
- --------------------------------------------------------------------------------------------------------------
SIX MONTHS YEAR PERIOD
ENDED ENDED ENDED
FEBRUARY 28, AUGUST 31, AUGUST 31,
1999 1998 1997*
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------
CLASS A
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $10.65 $13.07 $10.00
------ ------ ------
Income from investment operations# -
Net investment income (loss)(S) $(0.07) $(0.11) $ 0.98
Net realized and unrealized gain (loss) on
investments and foreign currency 2.40 (0.36) 2.09
------ ------ ------
Total from investment operations $ 2.33 $(0.47) $ 3.07
------ ------ ------
Less distributions declared to shareholders -
From net investment income $ -- $(0.72) $ --
From net realized gain on investments and foreign
currency transactions (0.14) (1.23) --
------ ------ ------
Total distributions declared to shareholders $(0.14) $(1.95) $ --
------ ------ ------
Net asset value - end of period $12.84 $10.65 $13.07
====== ====== ======
Total return(+) 21.83%++ (4.88)% 30.70%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.52%+ 1.53% 1.54%+
Net investment income (loss) (1.04)%+ (0.82)% 12.41%+
Portfolio turnover 51% 196% 887%
Net assets at end of period (000 omitted) $130,598 $63,740 $536
* For the period from the commencement of the Fund's investment operations, 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.
(+) 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.
(S) Subject to reimbursement by the Fund, the investment adviser agreed to maintain the expenses of the Fund,
exclusive of management and distribution and service fees, at not more than 0.25% of average daily net
assets, effective November 1, 1997. Prior to November 1, 1997, subject to reimbursement by the Fund, the
investment adviser agreed to maintain the expenses of the Fund at not more than 1.50% of the Fund's average
daily net assets, and the investment adviser, distributor and shareholder servicing agent did not impose
any of their fees. If these fees had not been waived and actual expenses had been over this limitation, the
net investment income (loss) per share and the ratios would have been:
Net investment income (loss) $(0.08) $(0.12) $ 0.89
Ratios (to average net assets):
Expenses## 1.67%+ 1.63% 3.10%+
Net investment income (loss) (1.19)%+ (0.92)% 10.81%+
</TABLE>
See notes to financial statements
<PAGE>
Financial Statements -- continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- ------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED PERIOD ENDED
FEBRUARY 28, 1999 AUGUST 31, 1998**
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------
CLASS B
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $10.60 $11.80
------ ------
Income from investment operations# -
Net investment loss(S) $(0.10) $(0.17)
Net realized and unrealized gain (loss) on
investments and foreign currency 2.38 (1.03)
------ ------
Total from investment operations $ 2.28 $(1.20)
------ ------
Less distributions declared to shareholders from net
realized gain on investments and foreign currency
transactions $(0.11) $ --
------ ------
Net asset value - end of period $12.77 $10.60
====== ======
Total return 21.49%++ (10.17)%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 2.17%+ 2.18%+
Net investment loss (1.68)%+ (1.49)%+
Portfolio turnover 51% 196%
Net assets at end of period (000 omitted) $131,857 $82,032
** For the period from the inception of Class B, November 3, 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 fees 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.
(S) Subject to reimbursement by the Fund, the investment adviser agreed to maintain the expenses of
the Fund, exclusive of management and distribution and service fees, at not more than 0.25% of
average daily net assets. To the extent actual expenses were over this limitation, the net
investment loss per share and the ratios would have been:
Net investment loss $(0.11) $(0.18)
Ratios (to average net assets):
Expenses## 2.32%+ 2.28%+
Net investment loss (1.83)%+ (1.59)%+
</TABLE>
See notes to financial statements
<PAGE>
Financial Statements -- continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- ------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED PERIOD ENDED
FEBRUARY 28, 1999 AUGUST 31, 1998**
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------
CLASS C
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $10.61 $11.80
------ ------
Income from investment operations# -
Net investment loss(S) $(0.10) $(0.17)
Net realized and unrealized gain (loss) on
investments and foreign currency 2.38 (1.02)
------ ------
Total from investment operations $ 2.28 $(1.19)
------ ------
Less distributions declared to shareholders from net
realized gain on investments and foreign currency
transactions $(0.11) $ --
------ ------
Net asset value - end of period $12.78 $10.61
====== ======
Total return 21.37%++ (10.08)%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 2.17%+ 2.18%+
Net investment loss (1.69)%+ (1.51)%+
Portfolio turnover 51% 196%
Net assets at end of period (000 omitted) $47,388 $24,450
** For the period from the inception of Class C, November 3, 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 fees 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.
(S) Subject to reimbursement by the Fund, the investment adviser agreed to maintain the expenses of
the Fund, exclusive of management and distribution and service fees, at not more than 0.25% of
average daily net assets. To the extent actual expenses were over this limitation, the net
investment loss per share and the ratios would have been:
Net investment loss $(0.11) $(0.17)
Ratios (to average net assets):
Expenses## 2.32%+ 2.28%+
Net investment loss (1.84)%+ (1.61)%+
</TABLE>
See notes to financial statements
<PAGE>
Financial Statements -- continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- --------------------------------------------------------------------------------------------------------------
SIX MONTHS YEAR PERIOD
ENDED ENDED ENDED
FEBRUARY 28, AUGUST 31, AUGUST 31,
1999 1998 1997*
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------
CLASS I
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $10.70 $13.08 $10.00
------ ------ ------
Income from investment operations# -
Net investment income (loss)(S) $(0.04) $(0.03) $ 1.01
Net realized and unrealized gain (loss) on
investments and foreign currency 2.41 (0.40) 2.07
------ ------ ------
Total from investment operations $ 2.37 $(0.43) $ 3.08
------ ------ ------
Less distributions declared to shareholders -
From net investment income $ -- $(0.72) $ --
From net realized gain on investments and foreign
currency transactions (0.15) (1.23) --
------ ------ ------
Total distributions declared to shareholders $(0.15) $(1.95) $ --
------ ------ ------
Net asset value - end of period $12.92 $10.70 $13.08
====== ====== ======
Total return 22.14%++ (4.50)% 30.80%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.17%+ 1.18% 1.54%+
Net investment income (loss) (0.69)%+ (0.21)% 12.65%+
Portfolio turnover 51% 196% 887%
Net assets at end of period (000 omitted) $7,290 $3,321 $1,494
* For the period from the commencement of the Fund's investment operations, 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.
(S) Subject to reimbursement by the Fund, the investment adviser agreed to maintain the expenses of the Fund,
exclusive of management and distribution and service fees, at not more than 0.25% of average daily net
assets, effective November 1, 1997. Prior to November 1, 1997, subject to reimbursement by the Fund, the
investment adviser agreed to maintain the expenses of the Fund at not more than 1.50% of the Fund's average
daily net assets, and the investment adviser, distributor and shareholder servicing agent did not impose
any of their fees. If these fees had not been waived and actual expenses had been over this limitation, the
net investment income (loss) per share and the ratios would have been:
Net investment income (loss) $(0.05) $(0.03) $ 0.92
Ratios (to average net assets):
Expenses## 1.32% 1.28% 2.52%+
Net investment income (loss) (0.84)% (0.31)% 11.63%+
</TABLE>
See notes to financial statements
<PAGE>
Notes to Financial Statements (Unaudited)
(1) Business and Organization
MFS New Discovery Fund is a diversified series of MFS Series Trust I. 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.
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. 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.
Security Loans - The Fund may lend its securities to member banks of the
Federal Reserve System and to member firms of the New York Stock Exchange or
subsidiaries thereof. The securities are loaned by State Street Bank and Trust
Company ("State Street") as agent, to certain brokers approved by the Fund
(the "Borrowers"). The loans are collateralized at all times by cash in an
amount at least equal to the market value of securities loaned. State Street
provides the Fund with indemnfication against Borrower default. The Fund bears
the risk loss with respect to the investment of cash collateral.
At February 28, 1999, the value of securities loaned was $48,287,304. These
loans were collateralized by cash of $51,248,278. 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. The dividend and interest income
earned on the securities loaned is accounted for in the same manner as other
dividend and interest income.
Short Sales - The Fund may enter into short sales. A short sale transaction
involves selling a security which the Fund does not own with the intent of
purchasing it later at a lower price. The Fund will realize a gain if the
security price decreases and a loss if the security price increases between
the date of the short sale and the date on which the Fund must replace the
borrowed security. Losses can exceed the proceeds from short sales and can be
greater than losses from the actual purchase of a security. The amount of any
gain will be decreased, and the amount of any loss increased, by the amount of
the premium, dividends, or interest the Fund may be required to pay in
connection with a short sale. Whenever the Fund engages in short sales, its
custodian segregates cash or marketable securities in an amount that, when
combined with the amount of proceeds from the short sale deposited with the
broker, at least equals the current market value of the security sold short.
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 payments received in additional securities are
recorded on the ex-dividend in an amount equal to the value of the security on
such date.
Fees Paid Indirectly - The Fund's custody fee is calculated as a percentage of
the Fund's month end net assets. The fee is reduced according to an
arrangement that measures the value of cash deposited with the custodian by
the Fund. This amount is shown as a reduction of expenses on the Statement of
Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. The Fund files a tax
return annually using tax accounting methods required under provisions of the
Code, which may differ from generally accepted accounting principles, the
basis on which these financial statements are prepared. Accordingly, the
amount of net investment income and net realized gain reported on these
financial statements may differ from that reported on the Fund's tax return
and, consequently, the character of distributions to shareholders reported in
the financial highlights may differ from that reported to shareholders on Form
1099-DIV.
Distributions to shareholders are recorded on the ex-dividend date. The Fund
distinguishes between distributions on a tax basis and a financial reporting
basis and requires that only distributions in excess of tax basis earnings and
profits are reported in the financial statements as a tax return of capital.
Differences in the recognition or classification of income between the
financial statements and tax earnings and profits, which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or net realized gains.
Multiple Classes of Shares of Beneficial Interest - The Fund offers multiple
classes of shares, which differ in their respective distribution and service
fees. All shareholders bear the common expenses of the Fund based on average
daily net assets of each class, without distinction between share classes.
Dividends are declared separately for each class. No class has preferential
dividend rights; differences in per share dividend rates are generally due to
differences in separate class expenses. Class B shares will convert to Class A
shares approximately eight years after purchase.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.90%
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 0.25% 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 February 28, 1999, the
aggregate unreimbursed expenses owed to MFS by the Fund amounted to $279,473.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive
remuneration for their services to the Fund from MFS. Certain officers and
Trustees of the Fund are officers or directors of MFS, MFS Fund Distributors,
Inc. (MFD), and MFS Service Center, Inc. (MFSC). The Fund has an unfunded
defined benefit plan for all of its independent Trustees and Mr. Bailey. The
trustees are currently 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
$142,626 for the six months ended February 28, 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 $4,168 for
the six months ended February 28, 1999. Fees incurred under the distribution
plan during the six months ended February 28, 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 $10 and $0 for Class B
and Class C shares, respectively, for the six months ended February 28, 1999.
Fees incurred under the distribution plan during the six months ended February
28, 1999, were 1.00% of average daily net assets attributable to both Class B
and Class C shares on an annualized basis.
Purchases over $1 million of Class A shares and certain purchases by
retirement plans 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 redemption's of
Class B shares in the event of a shareholder redemption within six years of
purchase. A contingent deferred sales charge is imposed on shareholder
redemption's of Class C shares in the event of a shareholder redemption within
12 months of purchase. MFD receives all contingent deferred sales charges.
Contingent deferred sales charges imposed during the six months ended February
28, 1999, were $1,688, $132,320, and $21,564 for Class A, Class B, and Class C
shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as
a percentage of the Fund's average daily net assets at an effective annual
rate of 0.1125%.
(4) Portfolio Securities
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions, and short-term obligations, aggregated
$236,256,152 and $125,298,565, 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 $370,730,871
------------
Gross unrealized depreciation $(41,756,145)
Gross unrealized appreciation 38,283,336
------------
Net unrealized depreciation $ (3,472,809)
============
(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
SIX MONTHS ENDED FEBRUARY 28, 1999 YEAR ENDED AUGUST 31, 1998
---------------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 6,769,464 $ 86,450,490 6,522,857 $ 86,204,526
Shares issued to shareholders in
reinvestment of distributions 83,631 1,082,386 9,647 112,487
Shares reacquired (2,666,603) (34,684,518) (590,723) (7,830,314)
----------- ------------- ------------ -------------
Net increase 4,186,492 $ 52,848,358 5,941,781 $ 78,486,699
=========== ============= ============ =============
<CAPTION>
Class B Shares
SIX MONTHS ENDED FEBRUARY 28, 1999 PERIOD ENDED AUGUST 31, 1998*
---------------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 4,399,079 $ 55,372,434 8,309,021 $ 108,983,495
Shares issued to shareholders in
reinvestment of distributions 72,859 939,149 -- --
Shares reacquired (1,887,391) (24,555,593) (566,661) (7,267,880)
----------- ------------- ------------ -------------
Net increase 2,584,547 $ 31,755,990 7,742,360 $ 101,715,615
=========== ============= ============ =============
*For the period from the inception of Class B and Class C, November 3, 1997,
through
August 31, 1998.
<CAPTION>
Class C Shares
SIX MONTHS ENDED FEBRUARY 28, 1999 PERIOD ENDED AUGUST 31, 1998*
---------------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 1,787,152 $ 23,063,443 2,453,434 $ 32,412,325
Shares issued to shareholders in
reinvestment of distributions 17,696 228,460 -- --
Shares reacquired (400,946) (5,078,498) (147,976) (1,922,241)
----------- ------------- ------------ -------------
Net increase 1,403,902 $ 18,213,405 2,305,458 $ 30,490,084
=========== ============= ============ =============
<CAPTION>
Class I Shares
SIX MONTHS ENDED FEBRUARY 28, 1999 YEAR ENDED AUGUST 31, 1998
---------------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 284,161 $ 3,660,008 216,000 $ 2,875,329
Shares issued to shareholders in
reinvestment of distributions 4,587 59,727 24,101 281,020
Shares reacquired (34,887) (473,317) (44,090) (604,860)
----------- ------------- ------------ -------------
Net increase 253,861 $ 3,246,418 196,011 $ 2,551,489
=========== ============= ============ =============
* For the period from the inception of Class B and Class C, November 3, 1997, through August 31, 1998.
</TABLE>
(6) Line of Credit
The 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 Fund
shares. Interest is charged to each fund, based on its borrowings, at a rate
equal to the bank's base rate. In addition, a commitment fee, based on the
average daily unused portion of the line of credit, is allocated among the
participating funds at the end of each quarter. The commitment fee allocated to
the Fund for the six months ended February 28, 1999 was $1,046.
<PAGE>
<TABLE>
MFS(R) New Discovery Fund
<S> <C>
TRUSTEES SECRETARY
Richard B. Bailey* - Private Investor; Former Stephen E. Cavan*
Chairman and Director (until 1991), MFS Investment
Management ASSISTANT SECRETARY
James R. Bordewick, Jr.*
Marshall N. Cohan - Private Investor
CUSTODIAN
Lawrence H. Cohn, M.D. - Chief of Cardiac Surgery, State Street Bank and Trust Company
Brigham and Women's Hospital; Professor of
Surgery, Harvard Medical School INVESTOR INFORMATION
For MFS stock and bond market outlooks,
The Hon. Sir J. David Gibbons, KBE - Chief call toll free: 1-800-637-4458 anytime from
Executive Officer, Edmund Gibbons Ltd.; Chairman, a touch-tone telephone.
Colonial Insurance Company, Ltd.
For information on MFS mutual funds, call your
Abby M. O'Neill - Private Investor financial adviser or, for an information kit, call
toll free: 1-800-637-2929 any business day from
Walter E. Robb, III - President and Treasurer, 9 a.m. to 5 p.m. Eastern time (or leave a message
Benchmark Advisors, Inc. (corporate financial anytime).
consultants); President, Benchmark Consulting
Group, Inc. (office services) INVESTOR SERVICE
MFS Service Center, Inc.
Arnold D. Scott* - Senior Executive P.O. Box 2281
Vice President, Director, and Secretary, Boston, MA 02107-9906
MFS Investment Management
For general information, call toll free:
Jeffrey L. Shames* - Chairman, Chief 1-800-225-2606 any business day from
Executive Officer, and Director, 8 a.m. to 8 p.m. Eastern time.
MFS Investment Management
For service to speech- or hearing-impaired, call
J. Dale Sherratt - President, Insight Resources, toll free: 1-800-637-6576 any business day from
Inc. (acquisition planning specialists) 9 a.m. to 5 p.m. Eastern time. (To use this
service, your phone must be equipped with a
Ward Smith - Former Chairman (until 1994), NACCO Telecommunications Device for the Deaf.) For share
Industries (holding company) prices, account balances, and exchanges, call toll
free: 1-800-MFS-TALK (1-800-637-8255) anytime from
INVESTMENT ADVISER a touch-tone telephone.
Massachusetts Financial Services Company
500 Boylston Street WORLD WIDE WEB
Boston, MA 02116-3741 www.mfs.com
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116-3741
PORTFOLIO MANAGER
Brian E. Stack*
TREASURER
W. Thomas London*
ASSISTANT TREASURERS
Mark E. Bradley*
Ellen Moynihan*
James O. Yost*
</TABLE>
*Affiliated with the Investment Adviser
<PAGE>
MFS(R) NEW DISCOVERY 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 Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
MND-3 4/99 47M 97/297/897
