<PAGE>
MFS(R) EMERGING EQUITIES FUND
TRUSTEES INVESTMENT ADVISER
A. Keith Brodkin* Massachusetts Financial Services Company
Chairman and President 500 Boylston Street
Boston, Massachusetts 02116-3741
Nelson J. Darling, Jr. PORTFOLIO MANAGERS
Trustee, Eastern Enterprises John W. Ballen*
Christian Felipe*
William R. Gutow TREASURER
Private Investor; W. Thomas London*
Senior Vice President, Capitol ASSISTANT TREASURER
Entertainment James O. Yost*
SECRETARY
Stephen E. Cavan*
ASSISTANT SECRETARY
James R. Bordewick, Jr.*
INVESTOR SERVICE
MFS Service Center, Inc.
P.O. Box 2281
Boston, MA 02107-9906
For general information, call toll free:
1-800-637-2262
CUSTODIAN
State Street Bank and Trust Company
*Affiliated with the Investment Adviser
<PAGE>
LETTER TO SHAREHOLDERS
Dear Shareholders:
During the past six months, the Fund provided a total return of +21.06%
(including the reinvestment of distributions). We are particularly glad to
report these positive results in this challenging year when stocks turned in
largely negative performance, reflecting investor fears over rising interest
rates and the ripple effect of disappointing earnings in a few, very visible
companies.
Economic Environment
The economic expansion, about to enter its fifth year, has gained firmer
underpinnings as employers have been stepping up hiring levels. Increased
employment, stronger capital spending by businesses, and strengthening overseas
economies resulted in 4% real (adjusted for inflation) gross domestic product
growth in 1994. Interest rates rose significantly in 1994, which should help
restrain, but not curtail, the economic expansion. Based on improving economic
fundamentals both here and abroad, we expect the business expansion to continue
well into 1995.
Stock Market
The stock market proved volatile in 1994, influenced by both a strengthening
economy and uncertainty over interest rates. Although the stronger economy has
been beneficial to corporate earnings, higher interest rates have negatively
impacted price-to-earnings multiples (or stock valuations). Given our
expectation of further upward pressure on short-term interest rates as the
Federal Reserve Board continues to lean against the current economic expansion,
we believe the stock market will have difficulty sustaining any significant
improvement. When interest rates finally stabilize, however, we expect the stock
market to benefit given our continuing outlook for improved corporate earnings.
<PAGE>
LETTER TO SHAREHOLDERS - continued
Portfolio Performance and Strategy
The portfolio's favorable performance during the period resulted primarily from
significant overweightings in two industry sectors: technology and health care.
The technology sector continues to be critically important to the world economy
as industrialized countries strive to become more competitive, improve product
and service quality, and reduce costs. Newly industrialized countries are
becoming heavy users of technology as well. In this sector, software companies
such as Powersoft and Informix, and network companies such as Cabletron Systems,
which have been adding value to existing technological products, have been
strong performers in the past year. Similarly, in the computer-aided design and
electronic design field, Autodesk and Cadence Design contributed to portfolio
performance.
Our substantial investments in health care companies rebounded strongly in
the second half of 1994 following poor performance during 1993 and early 1994.
Health maintenance organization (HMO) holdings such as Mid-Atlantic Medical,
U.S. Healthcare and Pacificare increased dramatically in value. With the
unlikelihood of national health care reform, these companies' private sector
cost-control solutions are doing exceptionally well. In addition, the
Republican-dominated Congress, under Speaker Gingrich's leadership, seems
interested in moving Medicare to managed care, which should benefit these
companies. Another good performer in this sector has been Integrated Health
Systems, a leader in the sub-acute, alternative site business, which transfers
patients from costly hospital settings to less costly nursing homes.
During the final quarter, several larger companies (e.g., Oracle, Sybase and
Promus) were sold in favor of smaller, faster growing companies with very
favorable earnings growth. New purchases included Softkey International and
Powersoft (software) and Micrel (electrical equipment). We also took advantage
of attractive opportunities in the leisure sector, adding positions in Clear
Channel Communications and Pulitzer Publishing.
Although the Fund achieved a total return of +14.16% for 1994, rising
interest rates have created a difficult environment for equities and especially
small-company stocks in the past few months. In this environment, many stocks of
companies with excellent prospects have not performed as well as we would have
expected. As a result, many of these companies currently have much lower
valuations than they did at the beginning of 1994 while their earnings are 20%
to 25% higher. We cannot predict when these companies will again receive
favorable valuations, but we are confident that those with rapid earnings growth
will eventually be recognized in the marketplace.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
A. Keith Brodkin John W. Ballen Christian Felipe
Chairman and President Portfolio Manager Portfolio Manager
January 20, 1995
<PAGE>
PORTFOLIO MANAGERS PROFILES
John Ballen joined MFS in 1984 as an Industry Specialist. A graduate of Harvard
College, the University of New South Wales and Stanford University's Graduate
School of Business Administration, he was named Investment Officer in 1986, Vice
President - Investments in 1987, Director of Research in 1988 and Senior Vice
President in 1990. In 1993, he was named Director of Equity Portfolio
Management. Mr. Ballen has served as a Portfolio Manager of MFS Emerging
Equities Fund since 1993.
Christian Felipe joined the MFS Research Department in 1986. A graduate of
U.C.L.A. and the University of Pennsylvania's Wharton School of Finance and
Commerce, he was named Investment Officer in 1987, Assistant Vice President -
Investments in 1988 and Vice President - Investments in 1989. Mr. Felipe has
served as a Portfolio Manager of MFS Emerging Equities Fund since 1993.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to seek long-term growth of capital. Any
investment involves risk and there can be no assurance that the Fund will
achieve its investment objective. The Fund's policy is to invest primarily (at
least 80% of assets under normal circumstances) in common stocks of small and
medium-sized companies that are early in their life cycle but which have the
potential to become major enterprises (emerging growth companies). The Fund may
also invest in more established companies whose rates of earning growth are
expected to accelerate and, to a limited extent, in other types of securities
such as foreign or convertible securities and warrants or cash equivalents.
PERFORMANCE SUMMARY
Because mutual funds like MFS Emerging Equities Fund are designed for investors
with long-term goals, we have provided cumulative results as well as the average
annual total returns for the past 6-month and 1-year periods ended December 31,
1994 and for the period from June 16, 1993+ to December 31, 1994, respectively.
AVERAGE ANNUAL AND CUMULATIVE TOTAL RATES OF RETURN
Investment Results
(net asset value change including reinvested distributions)
6/16/93+ -
6 Months 1 Year 12/31/94
- ------------------------------------------------------------------------------
Cumulative Total Return +21.06% +14.16% +44.66%
- ------------------------------------------------------------------------------
Average Annual Total Return -- +14.16% +27.04%
- ------------------------------------------------------------------------------
All results represent past performance and are not necessarily an indication of
future results. Investment return and principal value will fluctuate, and
shares, when redeemed, may be worth more or less than their original cost. All
Fund results reflect the applicable expense subsidy which is explained in the
Notes to Financial Statements. Had the subsidy not been in effect, the results
would have been less favorable. The subsidy may be rescinded at any time.
+ Commencement of offering of shares.
<PAGE>
PORTFOLIO OF INVESTMENTS (UNAUDITED)- December 31, 1994
Common Stocks - 91.2%
- -----------------------------------------------------------------------------
Issuer Shares Value
- -----------------------------------------------------------------------------
Apparel and Textiles - 0.6%
Nine West Group, Inc.* 15,200 $ 431,300
- -----------------------------------------------------------------------------
Biotechnology - 0.3%
Guidant Corp.* 13,600 $ 217,600
- -----------------------------------------------------------------------------
Business Machines - 0.4%
Affiliated Computer Services, Inc.* 12,700 $ 273,050
- -----------------------------------------------------------------------------
Business Services - 10.2%
BISYS Group, Inc.* 34,300 $ 758,888
CUC International, Inc.* 36,400 1,219,400
Ceridian Corp.* 42,300 1,136,812
Computer Sciences, Inc.* 27,900 1,422,900
FIserv, Inc.* 23,100 496,650
Interim Services, Inc.* 48,600 1,196,775
Policy Management Systems Corp.* 2,500 105,000
SPS Transaction Services Corp.* 42,200 1,107,750
-----------
$ 7,444,175
- -----------------------------------------------------------------------------
Cellular Phones - 2.2%
Cellular Communications of Puerto Rico* 32,200 $ 1,078,700
Telephone & Data Systems, Inc. 10,900 502,763
-----------
$ 1,581,463
- -----------------------------------------------------------------------------
Computer Software - Personal Computers - 6.2%
Autodesk, Inc. 61,200 $ 2,425,050
Network Peripherals* 1,600 43,600
Powersoft Corp.* 22,500 1,850,625
Softkey International, Inc.* 9,200 234,600
-----------
$ 4,553,875
- -----------------------------------------------------------------------------
Computer Software - Systems - 9.4%
BMC Software, Inc.* 10,100 $ 574,438
Cadence Design Systems, Inc.* 67,800 1,398,375
Compuware Corp.* 40,800 1,468,800
Informix Corp.* 54,600 1,754,025
Keane, Inc.* 29,850 708,938
Micrel, Inc.* 12,800 185,600
System Software Associates, Inc. 50,700 798,524
-----------
$ 6,888,700
- -----------------------------------------------------------------------------
Consumer Goods and Services - 1.5%
Blyth Industries, Inc.* 5,500 $ 157,437
Club Car, Inc.* 29,000 478,500
Perrigo Co.* 36,700 458,750
-----------
$ 1,094,687
- -----------------------------------------------------------------------------
Electronics - 4.9%
LSI Logic Corp.* 30,000 $ 1,211,250
Linear Technology Corp. 15,200 752,400
Xilinx, Inc.* 27,400 1,623,450
-----------
$ 3,587,100
- -----------------------------------------------------------------------------
Entertainment - 3.4%
Casino America, Inc.* 17,400 $ 139,200
Clear Channel Communications* 5,900 299,425
Heftel Broadcasting Corp., "A"* 8,500 85,000
Hollywood Park, Inc.* 21,500 236,500
<PAGE>
PORTFOLIO OF INVESTMENTS (UNAUDITED) - continued
Common Stocks - continued
- -----------------------------------------------------------------------------
Issuer Shares Value
- -----------------------------------------------------------------------------
Entertainment - continued
Infinity Broadcasting Corp., "A"* 26,300 $ 828,450
International Family Entertainment, Inc., "B"* 15,000 189,375
Mirage Resorts, Inc.* 24,800 508,400
National Gaming Corp.* 11,700 140,400
Radica Games Ltd.* 7,900 38,512
-----------
$ 2,465,262
- -----------------------------------------------------------------------------
Financial Institutions - 3.1%
Concord Holding Corp.* 800 $ 11,200
Franklin Resources, Inc. 46,400 1,653,000
Student Loan Corp. 32,400 591,300
-----------
$ 2,255,500
- -----------------------------------------------------------------------------
Insurance - 1.7%
Equitable of Iowa Cos. 43,300 $ 1,223,225
- -----------------------------------------------------------------------------
Machinery - 0.4%
Watts Industries, Inc., "A" 13,500 $ 285,188
- -----------------------------------------------------------------------------
Medical and Health Products - 0.8%
U.S. Healthcare, Inc. 14,400 $ 594,000
- -----------------------------------------------------------------------------
Medical and Health Technology and Services - 17.8%
Community Health Systems* 38,800 $ 1,057,300
Foundation Health Corp.* 6,500 201,500
Health Care & Retirement Corp.* 12,700 382,588
Health Management Assoc., Inc., "A"* 60,100 1,502,500
Health Wise of America, Inc.* 25,600 844,800
Integrated Health Services, Inc.* 49,100 1,939,450
Lincare Holdings, Inc. 10,500 304,500
Living Centers of America, Inc.* 21,900 730,912
Mariner Health Group, Inc.* 19,000 410,875
Mid-Atlantic Medical Services, Inc.* 94,800 2,168,550
Pacificare Health Systems, Inc., "B"* 30,400 2,006,400
Sierra Health Services, Inc.* 900 28,462
Surgical Care Affiliates, Inc. 70,400 1,425,600
-----------
$13,003,437
- -----------------------------------------------------------------------------
Printing and Publishing - 1.2%
Nelson Thomas, Inc. 30,400 $ 729,600
Pulitzer Publishing Co. 3,900 156,488
-----------
$ 886,088
- -----------------------------------------------------------------------------
Restaurants and Lodging - 9.0%
Applebee's International, Inc. 36,100 $ 482,838
Brinker International, Inc.* 28,100 509,313
Buffets, Inc.* 56,800 560,900
Doubletree Corp.* 1,800 32,850
Hometown Buffet, Inc.* 11,750 114,562
Hospitality Franchise System, Inc.* 119,600 3,169,400
ShoLodge, Inc.* 51,666 1,097,902
Sonic Corp.* 11,500 232,875
Taco Cabana, Inc., "A"* 38,800 354,050
-----------
$ 6,554,690
- -----------------------------------------------------------------------------
Stores - 9.1%
Consolidated Stores Corp.* 96,900 $ 1,804,763
Corporate Express, Inc.* 1,100 21,450
Discount Auto Parts, Inc.* 13,800 260,475
Duty Free International, Inc. 12,700 141,288
<PAGE>
PORTFOLIO OF INVESTMENTS (UNAUDITED) - continued
Common Stocks - continued
- -----------------------------------------------------------------------------
Issuer Shares Value
- -----------------------------------------------------------------------------
Stores - continued
Finish Line (The), Inc., "A"* 2,500 $ 18,750
General Nutrition Cos., Inc.* 16,100 466,900
Gymboree Corp.* 5,800 166,750
Micro Warehouse, Inc.* 41,400 1,449,000
Mothers Work, Inc.* 16,300 142,625
Office Depot, Inc.* 64,450 1,546,800
Officemax, Inc.* 3,700 98,050
Sports & Recreation, Inc.* 7,600 195,700
Sports Club, Inc.* 13,000 87,750
Sunglass Hut International, Inc.* 11,200 257,600
Welcome Home, Inc.* 3,000 19,874
-----------
$ 6,677,775
- -----------------------------------------------------------------------------
Telecommunications - 8.7%
Bay Networks, Inc.* 17,885 $ 527,608
Cabletron Systems, Inc.* 26,300 1,222,950
Cisco Systems, Inc.* 48,600 1,707,075
Glenayre Technologies, Inc.* 9,400 542,850
IDB Communications Group, Inc.* 24,900 228,769
Newbridge Networks Corp.* 39,300 1,503,225
Ortel Corp.* 1,300 34,124
Paging Network, Inc.* 18,350 623,900
-----------
$ 6,390,501
- -----------------------------------------------------------------------------
Utilities - Telephone - 0.3%
LDDS Communications* 11,600 $ 225,475
- -----------------------------------------------------------------------------
Total Common Stocks (Identified Cost, $61,374,668) $66,633,091
- -----------------------------------------------------------------------------
Short-Term Obligations - 6.9%
- -----------------------------------------------------------------------------
Principal Amount
(000 Omitted)
- -----------------------------------------------------------------------------
Federal Farm Credit Corp., 5.86s, due 1/04/95 $1,810 $ 1,809,116
Federal Home Loan Bank, 5.75s, due 1/03/95 2,100 2,099,329
Federal Home Loan Bank, 5.85s, due 1/06/95 1,190 1,189,033
- -----------------------------------------------------------------------------
Total Short-Term Obligations, at Amortized Cost $ 5,097,478
- -----------------------------------------------------------------------------
Total Investments (Identified Cost, $66,472,146) $71,730,569
Other Assets, Less Liabilities - 1.9% 1,420,153
- -----------------------------------------------------------------------------
Net Assets - 100.0% $73,150,722
- -----------------------------------------------------------------------------
*Non-income producing security.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities (Unaudited)
- ------------------------------------------------------------------------------
December 31, 1994
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $66,472,146) $71,730,569
Cash 197,267
Receivable for investments sold 3,473,797
Receivable for Fund shares sold 11,000
Interest and dividends receivable 14,492
Receivable from investment adviser 60,292
Deferred organization expenses 4,618
Other assets 205
-----------
Total assets $75,492,240
-----------
Liabilities:
Payable for investments purchased $ 2,308,444
Payable for Fund shares reacquired 243
Payable to affiliates -
Management fee 2,981
Shareholder servicing agent fee 140
Accrued expenses and other liabilities 29,710
-----------
Total liabilities $ 2,341,518
-----------
Net assets $73,150,722
-----------
Net assets consist of:
Paid-in capital $67,059,244
Unrealized appreciation on investments and translation of
assets and liabilities in foreign currencies 5,258,423
Accumulated undistributed net realized gain on
investments and foreign currency transactions 863,127
Accumulated net investment loss (30,072)
-----------
Total $73,150,722
-----------
Shares of beneficial interest outstanding 5,271,987
-----------
Net asset value and redemption price per share
(net assets of $73,150,722 / 5,271,987 shares of beneficial
interest outstanding) $13.88
-----
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations (Unaudited)
- ------------------------------------------------------------------------------
Six Months Ended December 31, 1994
- ------------------------------------------------------------------------------
Net investment income:
Income -
Interest $ 118,969
Dividends 46,522
----------
Total investment income $ 165,491
----------
Expenses -
Management fee $ 195,449
Trustees' compensation 1,076
Shareholder servicing agent fee 108
Auditing fees 15,775
Printing 10,188
Custodian fee 5,059
Legal fees 2,980
Amortization of organization expenses 787
Miscellaneous 24,433
----------
Total expenses $ 255,855
Preliminary reduction of expenses by investment adviser (60,292)
----------
Net expenses $ 195,563
----------
Net investment loss $ (30,072)
----------
Realized and unrealized gain (loss) on investments:
Realized gain (identified cost basis) on investment
transactions $1,568,084
Change in unrealized appreciation on investments 7,017,649
----------
Net realized and unrealized gain on investments and foreign
currency $8,585,733
----------
Increase in net assets from operations $8,555,661
----------
See notes to financial statements
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
- ------------------------------------------------------------------------------
Six Months Ended
December 31, 1994 Year Ended
(Unaudited) June 30, 1994
- ------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment loss $ (30,072) $ (44,665)
Net realized gain on investments and
foreign currency transactions 1,568,084 1,333,284
Net unrealized gain (loss) on
investments and foreign currency 7,017,649 (1,808,622)
----------- -----------
Increase (decrease) in net assets
from operations $ 8,555,661 $ (520,003)
----------- -----------
Distributions declared to shareholders -
From net investment income
$ -- $ (2,129)
From net realized loss on
investments and foreign
currency transactions (1,742,406) (251,261)
----------- -----------
Total distributions declared to
shareholders $(1,742,406) $ (253,390)
----------- -----------
Fund share (principal) transactions -
Net proceeds from sale of shares $37,276,940 $25,044,402
Net asset value of shares issued to
shareholders in reinvestment of
distributions 1,614,508 236,286
Cost of shares reacquired (113,142) --
----------- -----------
Increase in net assets from Fund
share transactions $38,778,306 $25,280,688
----------- -----------
Total increase in net assets $45,591,561 $24,507,295
Net assets:
At beginning of period 27,559,161 3,051,866
----------- -----------
At end of period (including
accumulated net investment loss of
$30,072 and $0, respectively) $73,150,722 $27,559,161
----------- -----------
See notes to financial statements
FINANCIAL STATEMENTS -continued
<TABLE>
Financial Highlights
- ----------------------------------------------------------------------------------------------
<CAPTION>
Six Months Ended Year Ended June 30,
December 31, 1994 -----------------------
(Unaudited) 1994 1993<F1>
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $11.75 $10.17 $10.00
------ ------ ------
Income from investment operations<F6> -
Net investment income (loss)<F7> $(0.01) $(0.03) $ 0.01
Net realized and unrealized gain
(loss) on investments 2.48 1.82<F2> 0.16
------ ------ ------
Total from investment operations $ 2.47 $ 1.79 $ 0.17
------ ------ ------
Less distributions declared to shareholders -
From net investment income $ -- $ --<F5> $ --
From net realized gain on investments (0.34) (0.21) --
------ ------ ------
Total distributions declared to shareholders $(0.34) $(0.21) $ --
------ ------ ------
Net asset value - end of period $13.88 $11.75 $10.17
------ ------ ------
Total return 21.06%<F4> 17.50% 1.70%<F4>
Ratios (to average net assets)/Supplemental data<F7>:
Expenses 0.75%<F3> 0.78% 0.90%<F3>
Net investment income (loss) (0.12)%<F3> (0.27)% 2.24%<F3>
Portfolio turnover 41% 94% 0%
Net assets at end of period (000 omitted) $73,151 $27,559 $3,052
<FN>
<F1> For the period from the commencement of investment operations, June 16,
1993 to June 30, 1993.
<F2> The per share data is not in accordance with the net realized and
unrealized gain (loss) for the period because of the timing of sales of
Fund shares and the amount of per share realized and unrealized gains and
losses at such time.
<F3> Annualized.
<F4> Not annualized.
<F5> The per share distribution from net investment income was $0.00175.
<F6> Certain of the per share data is based on average shares outstanding for
all periods presented.
<F7> The investment adviser did not impose a portion of its management fee for
the periods indicated. If this fee had been incurred by the Fund, the net
investment income per share and ratios would have been:
Net investment income (loss) $ (0.03) $(0.13) $ 0.00
Ratios (to average net assets):
Expenses 0.98%<F3> 1.54% 2.50%<F3>
Net investment income (loss) (0.35)%<F3> (1.02)% 0.64%<F3>
</TABLE>
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(1) Business and Organization
MFS Emerging Equities Fund (the Fund) is a non-diversified series of MFS
Institutional Trust (the Trust). The Trust is organized as a Massachusetts
business trust and is registered under the Investment Company Act of 1940, as
amended, as an open-end management investment company.
(2) Significant Accounting Policies
Investment Valuations - Equity securities listed on securities exchanges or
reported through the NASDAQ system are valued at last sale prices. Unlisted
equity securities or listed equity securities for which last sale prices are not
available are valued at last quoted bid prices. Debt securities (other than
short-term obligations which mature in 60 days or less), including listed
issues, 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 value.
Non-U.S. dollar denominated short-term obligations are valued at amortized cost
as calculated in the base currency and translated into U.S. dollars at the
closing daily exchange rate. Futures contracts, options and options on futures
contracts listed on commodities exchanges are valued at closing settlement
prices. Over-the-counter options are valued by brokers through the use of a
pricing model which takes into account closing bond valuations, implied
volatility and short-term repurchase rates. 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.
Repurchase Agreements - The Fund may enter into repurchase agreements with
institutions that the Fund's investment adviser has determined are creditworthy.
Each repurchase agreement is recorded at cost. The Fund requires that the
securities purchased in a repurchase transaction be transferred to the custodian
in a manner sufficient to enable the Fund to obtain those securities in the
event of a default under the repurchase agreement. The Fund monitors, on a daily
basis, the value of the securities transferred to ensure that the value,
including accrued interest, of the securities under each repurchase agreement is
greater than amounts owed to the Fund under each such repurchase agreement.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases and
sales of foreign investments and income and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates of
such transactions. Gains and losses attributable to foreign currency exchange
rates on sales of securities are recorded for financial statement purposes as
net realized gains and losses on investments. Gains and losses attributable to
foreign exchange rate movements on income and expenses are recorded for
financial statement purposes as foreign currency transaction gains and losses.
That portion of both realized and unrealized gains and losses on investments
that results from fluctuations in foreign currency exchange rates is not
separately disclosed.
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
operations of the Fund.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)- continued
Written Options - The Fund may write covered call or put options for which
premiums are received and are recorded as liabilities, and are subsequently
adjusted to the current value of the options written. Premiums received from
writing options which expire are treated as realized gains. Premiums received
from writing options which are exercised or are closed are offset against the
proceeds or amount paid on the transaction to determine the realized gain or
loss. If a put option is exercised, the premium reduces the cost basis of the
security purchased by the Fund. The Fund, as writer of an option, may have no
control over whether the underlying securities may be sold (call) or purchased
(put) and, as a result, bears the market risk of an unfavorable change in the
price of the securities underlying the written option. In general, written call
options may serve as a partial hedge against decreases in value in the
underlying securities to the extent of the premium received. Written options may
also be used as a part of an income-producing strategy reflecting the view of
the Fund's management on the direction of interest rates.
Futures Contracts - The Fund may enter into stock-index futures contracts. In
entering such contracts, the Fund is required to deposit either in cash or
securities an amount equal to a certain percentage of the contract amount.
Subsequent payments are made or received by the Fund each day, depending on the
daily fluctuations in the value of the underlying security, and are recorded for
financial statement purposes as unrealized gains or losses by the Fund. The
Fund's investment in stock-index futures contracts is designed to hedge against
anticipated future changes in securities prices. The Fund may also invest in
stock-index futures for non-hedging purposes to the extent permitted by
applicable law. In the event that an anticipated decrease in the value of
portfolio securities occurs as a result of a general decline in the stock
market, the adverse effects of such changes may be offset, in whole or in part,
by gains on the sale of futures contracts. Should securities prices move
unexpectedly, the Fund may not achieve the anticipated benefits of the futures
contracts and may realize a loss.
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 loans are collateralized at all times by cash or
securities with a market value at least equal to the market value of securities
loaned. As with other extensions of credit, the Fund may bear the risk of delay
in recovery or even loss of rights in the collateral should the borrower of the
securities fail financially. The Fund receives compensation for lending its
securities in the form of fees or from all or a portion of the income from
investment of the collateral. At December 31, 1994, the Fund had no securities
on loan.
Forward Foreign Currency Exchange Contracts - The Fund may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering these contracts from the potential inability of counterparties to meet
the terms of their contracts and from unanticipated movements in the value of a
foreign currency relative to the U.S. dollar. The Fund will enter into forward
contracts for hedging purposes only. For hedging purposes, the Fund may enter
into contracts to deliver or receive foreign currency it will receive from or
require for its normal investment activities. It may also use contracts in a
manner intended to protect foreign currency denominated securities from declines
in value due to unfavorable exchange rate movements. The forward foreign
currency exchange contracts are adjusted by the daily exchange rate of the
underlying currency and any gains or losses are recorded for financial statement
purposes as unrealized until the contract settlement date.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for both financial statement
and tax reporting purposes as required by federal income tax regulations.
Dividend income is recorded on the ex-dividend date for dividends received in
cash. Dividend payments received in additional securities are recorded on the
ex-dividend date in an amount equal to the value of the security on such date.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)- continued
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. The Fund files a tax
return annually using tax accounting methods required under provisions of the
Code which may differ from generally accepted accounting principles, the basis
on which these financial statements are prepared. Accordingly, the amount of net
investment income and net realized gain reported on these financial statements
may differ from that reported on the Fund's tax return, and consequently, the
character of distributions to shareholders reported in the financial highlights
may differ from that reported to shareholders on Form 1099-DIV. Foreign taxes
have been provided for on interest and dividend income earned on foreign
investments in accordance with the applicable country's tax rates and to the
extent unrecoverable are recorded as a reduction of investment income.
Distributions to shareholders are recorded on the ex-dividend date.
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains. During the six months ended June 30, 1994, $44,574 was reclassified from
accumulated net realized gain on investments to undistributed net investment
income due to differences between book and tax accounting for net investment
losses and short-term capital gains. This change had no effect on the net assets
or net asset value per share.
(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, computed daily and paid monthly at an effective annual rate of
0.75% of average daily net assets, amounted to $195,449. MFS has voluntarily
agreed, through June 30, 1997, to waive its fees and/or pay expenses of the Fund
in order to maintain total expenses for the Fund at no more than 0.75% of
average daily net assets each year. Accordingly, the investment adviser did not
impose a portion of its fee ($60,292) which is reflected as a preliminary
reduction of expenses in the Statement of Operations.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive remuneration
for their services to the Fund from MFS. Certain of the officers and Trustees of
the Fund are officers or directors of MFS, MFS Fund Distributors, Inc. (MFD) and
MFS Service Center, Inc. (MFSC). The Fund has an unfunded defined benefit plan
for all of its independent Trustees. Effective January 1, 1995, MFS Financial
Services, Inc. (FSI) became MFS Fund Distributors (MFD).
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earned
$108 for its services as shareholder servicing agent. The fee is based on the
number of shareholder accounts of the Fund.
(4) Portfolio Securities
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions and short-term obligations, aggregated $51,900,822
and $20,513,262, respectively.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)- continued
The cost and unrealized appreciation or depreciation in value of the investments
owned by the Fund, as computed on a federal income tax basis, are as follows:
Aggregate cost $66,472,146
-----------
Gross unrealized appreciation $ 7,398,571
Gross unrealized depreciation (2,140,148)
-----------
Net unrealized appreciation $ 5,258,423
-----------
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
Six Months Ended Year Ended
December 31, 1994 June 30, 1994
----------------------------- -----------------------------
Shares Amount Shares Amount
- ----------------------------------------------------------------------------
Shares sold 2,815,899 $37,276,940 2,026,731 $25,044,402
Shares issued to
shareholders in
reinvestment of
distributions 118,453 1,614,508 19,242 236,286
Shares
reacquired (8,363) (113,142) -- --
--------- ----------- --------- -----------
Net increase 2,925,989 $38,778,306 2,045,973 $25,280,688
--------- ----------- --------- -----------
----------------------------------------------
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.
