<PAGE>
MFS INSTITUTIONAL EMERGING MARKETS FIXED INCOME FUND
A SERIES OF
MFS INSTITUTIONAL TRUST
(THE "EMERGING MARKETS FUND")
SUPPLEMENT TO THE DECEMBER 1, 1995 STATEMENT OF ADDITIONAL INFORMATION
MANAGEMENT OF THE TRUST
As of January 10, 1996, certain benefit and pension plans of Massachusetts
Financial Services Company ("MFS") were the record owners of 100% of the
outstanding shares of the Emerging Markets Fund.
DETERMINATION OF NET ASSET VALUE; PERFORMANCE INFORMATION
The aggregate total rate of return for the Emerging Markets Fund for the period
from August 7, 1995 (commencement of investment operations) to December 31, 1995
was 4.73%, unannualized. The results would have been lower had MFS not borne
certain expenses of the Fund.
FINANCIAL STATEMENTS
The Emerging Markets Fund's Financial Statements, consisting of the Portfolio of
Investments at December 31, 1995, the Statement of Assets and Liabilities at
December 31, 1995, the Statement of Operations for the period from the
commencement of investment operations on August 7, 1995 to December 31, 1995,
the Statement of Changes in Net Assets for the period from the commencement of
investment operations on August 7, 1995 to December 31, 1995, and the Notes to
the Financial Statements are attached to and form a part of this supplement.
THE DATE OF THIS SUPPLEMENT IS FEBRUARY 8, 1996.
<PAGE>
PORTFOLIO OF INVESTMENTS - December 31, 1995 (Unaudited)
Bonds - 48.4%
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Foreign U.S. Dollar Denominated
Argentina - 6.8%
Republic of Argentina, 5.0s, 2023 $ 250 $ 142,813
- -----------------------------------------------------------------------------
Brazil - 13.7%
Federal Republic of Brazil, 6.813s, 2024 $ 250 $ 153,750
Federal Republic of Brazil, 4.75s, 2024 250 132,500
----------
$ 286,250
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Bulgaria - 6.3%
National Republic of Bulgaria, "A", 6.75s, 2024 $ 250 $ 132,813
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Mexico - 17.3%
United States of Mexico, "A", 6.765s, 2019 $ 250 $ 180,625
United States of Mexico, "D", 6.5468s, 2019 250 180,625
----------
$ 361,250
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Ecuador - 4.3%
Republic of Ecuador, 3.0s, 2025 $ 250 $ 90,312
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Total Bonds (Identified Cost, $984,402) $1,013,438
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Warrant - 0.0%
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Shares
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Foreign Stock - 0.0%
Mexico VRR Discount (Identified cost, $0) 768,000 $ --
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Short-Term Obligations - 50.6%
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Principal Amount
(000 Omitted)
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U.S. Dollar Denominated - 46.1%
Federal Home Loan Mortgage Corp., due 1/02/96 $ 965 $ 964,846
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Foreign Denominated - 4.5%
Mexican Peso
Mexico Cetes, due 2/15/96 MXP 7,700 $ 93,999
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Total Short-Term Obligations (Identified Cost, $1,059,650) $1,058,845
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Total Investments (Identified Cost, $2,044,052) $2,072,283
Other Assets, Less Liabilities - 1.0% 21,582
- -----------------------------------------------------------------------------
Net Assets - 100.0% $2,093,865
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Abbreviations have been used throughout this report to indicate amounts shown
in currencies other than the U.S. dollar. A list of abbreviations is shown
below.
CZK = Czech Republic Korunas IDR = Indonesian Rupiahs
DEM = Deutsche Marks MXP = Mexican Peso
HKD = Hong Kong Dollars THB = Thailand Baht
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ------------------------------------------------------------------------------
December 31, 1995 (Unaudited)
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $2,044,052) $2,072,283
Cash 2,306
Net receivable for forward foreign currency exchange
contracts purchased 760
Interest receivable 19,941
Deferred organization expense 18,830
----------
Total assets $2,114,120
----------
Liabilities:
Net payable for forward foreign currency exchange contracts
sold $ 688
Net payable for forward foreign currency exchange contracts 511
Payable to affiliate for management fee 147
Accrued expenses and other liabilities 18,909
----------
Total liabilities $ 20,255
----------
Net assets $2,093,865
==========
Net assets consist of:
Paid-in capital $2,076,104
Unrealized appreciation on investments and translation of
assets and liabilities in foreign currencies 27,792
Accumulated undistributed net realized loss on investments
and foreign currency transactions (13,371)
Accumulated undistributed net investment income 3,340
----------
Total $2,093,865
==========
Shares of beneficial interest outstanding 207,603
==========
Net asset value and redemption price per share
(net assets of $2,093,865 / 207,603 shares of beneficial
interest outstanding) $10.09
======
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- ------------------------------------------------------------------------------
Period Ended December 31, 1995* (Unaudited)
- ------------------------------------------------------------------------------
Net investment income:
Interest income $ 89,155
--------
Expenses -
Management fee $ 6,665
Shareholder servicing agent fee 58
Custodian fee 533
Printing 9,000
Auditing fees 7,800
Legal fees 1,191
Amortization of organization expenses 1,588
Miscellaneous 955
--------
Total expenses $ 27,790
Preliminary refund of expenses by investment adviser (17,979)
--------
Net expenses $ 9,811
--------
Net investment income $ 79,344
--------
Realized and unrealized loss on investments:
Realized loss (identified cost basis) -
Investment transactions $(11,283)
Foreign currency transactions (2,088)
--------
Net realized loss on investments $(13,371)
--------
Change in unrealized appreciation (depreciation) -
Investments $ 28,231
Translation of assets and liabilities in foreign currencies (439)
--------
Net unrealized gain on investments $ 27,792
--------
Net realized and unrealized gain on investments and
foreign currency $ 14,421
--------
Increase in net assets from operations $ 93,765
========
*For the period from the commencement of investment operations, August 7,
1995.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
- ------------------------------------------------------------------------------
Period Ended December 31, 1995* (Unaudited)
- ------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment income $ 79,344
Net realized loss on investments and foreign currency
transactions (13,371)
Net unrealized gain on investments and foreign currency 27,792
----------
Increase in net assets from operations $ 93,765
----------
Distributions declared to shareholders from net investment
income $ (76,004)
----------
Fund share (principal) transactions -
Net proceeds from sale of shares $2,000,000
Net asset value of shares issued to shareholders in
reinvestment of distributions 76,004
----------
Increase in net assets from Fund share transactions $2,076,004
----------
Total increase in net assets $2,093,765
Net assets:
At beginning of period 100
----------
At end of period (including accumulated undistributed net
investment income of $3,340) $2,093,865
==========
*For the period from the commencement of investment operations, August 7, 1995.
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(1) Business and Organization
MFS Institutional Emerging Markets Fixed Income 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 - Debt securities (other than short-term obligations which
mature in 60 days or less), including listed issues and forward contracts, are
valued on the basis of valuations furnished by dealers or by a pricing service
with consideration to factors such as institutional-size trading in similar
groups of securities, yield, quality, coupon rate, maturity, type of issue,
trading characteristics and other market data, without exclusive reliance upon
exchange or over-the-counter prices. Short-term obligations, which mature in 60
days or less, are valued at amortized cost, which approximates market value.
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 in good faith by or
determined 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.
Forward Foreign Currency Exchange Contracts - The Fund may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering these contracts from the potential inability of counterparties to
meet the terms of their contracts and from unanticipated movements in the
value of a foreign currency relative to the U.S. dollar. The Fund will enter
into forward contracts for hedging purposes as well as for non-hedging
purposes. For hedging purposes, the Fund may enter into contracts to deliver
or receive foreign currency it will receive from or require for its normal
investment activities. It may also use contracts in a manner intended to
protect foreign currency-denominated securities from declines in value due to
unfavorable exchange rate movements. For non-hedging purposes, the Fund may
enter into contracts with the intent of changing the relative exposure of the
Fund's portfolio of securities to different currencies to take advantage of
<PAGE>
anticipated changes. The forward foreign currency exchange contracts are
adjusted by the daily exchange rate of the underlying currency and any gains
or losses are recorded for financial statement purposes as unrealized until
the contract settlement date.
Investment Transactions and Income - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
and original issue discount are amortized or accreted for both financial
statement and tax reporting purposes as required by federal income tax
regulations.
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.
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.
(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 effective annual rate of
0.85% of average daily net assets.
Under a temporary expense reimbursement agreement with MFS, MFS has voluntarily
agreed to pay all of the Fund's operating expenses, exclusive of management
fees. The Fund in turn will pay MFS an expense reimbursement fee not greater
than 0.40% of average daily net assets. To the extent that the expense
reimbursement fee exceeds the Fund's actual expenses, the excess will be applied
to amounts paid by MFS in prior years. At December 31, 1995, the aggregate
unreimbursed expenses owed to MFS by the Fund amounted to $17,979, incurred in
the current period.
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 and MFS Service
Center, Inc. (MFSC).
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as
a percentage of the average daily net assets of the Fund at an effective
annual rate of 0.0075%.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions
and short-term obligations, aggregated $1,322,313 and $362,875, respectively.
The cost and unrealized appreciation or depreciation in value of the
investments owned by the Fund, as computed on a federal income tax basis, are
as follows:
Aggregate cost $2,044,052
==========
Gross unrealized appreciation $ 30,380
Gross unrealized depreciation (2,149)
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<PAGE>
Net unrealized appreciation $ 28,231
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(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:
Shares Amount
- --------------------------------------------------------------------------------
Shares sold 200,000 $2,000,000
Shares issued to shareholders in reinvestment
of distributions 7,593 76,004
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Net increase 207,593 $2,076,004
======= ==========
(6) Financial Instruments
The Fund trades financial instruments with off-balance sheet risk in the
normal course of its investing activities in order to manage exposure to
market risks such as interest rates and foreign currency exchange rates. These
financial instruments include forward foreign currency exchange contracts. The
notional or contractual amounts of these instruments represent the investment
the Fund has in particular classes of financial instruments and does not
necessarily represent the amounts potentially subject to risk. The measurement
of the risks associated with these instruments is meaningful only when all
related and offsetting transactions are considered. A summary of obligations
under these financial instruments at December 31, 1995, is as follows:
Forward Foreign Currency Exchange Contracts
<TABLE>
<CAPTION>
Net Unrealized
Contracts to
Contracts Appreciation
Settlement Date Deliver/Receive at Value In Exchange
For (Depreciation)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
<C> <C>
Sales 01/17/96 - 03/11/96 DEM 357,049 $249,052
$248,570 $ (482)
12/03/96 HKD 1,547,100 199,446
199,240 (206)
----------- --------
- -------- -------
1,904,149 $448,498
$447,810 $ (688)
=========== ========
======== =======
Purchases 02/15/96 CZK 5,370,500 $200,427
$202,592 $(2,165)
02/26/96 IDR 468,100,000 202,219
200,000 2,219
02/22/96 - 02/26/96 THB 5,067,500 200,037
199,331 706
----------- --------
- -------- -------
478,538,000 $602,683
$601,923 $ 760
=========== ========
======== =======
</TABLE>
Forward foreign currency purchases and sales under master netting arrangements
and closed forward foreign currency exchange contracts excluded above amounted
to a net payable of $511 at December 31, 1995.
At December 31, 1995, the Fund had sufficient cash and/or securities to cover
any commitments under these contracts.
