<PAGE>
[LOGO] M F S(SM) Annual Report
INSTITUTIONAL ADVISORS, INC. for Year Ended
June 30, 1997
MFS(R) INSTITUTIONAL EMERGING MARKETS INCOME FUND
[Graphic omitted]
<PAGE>
MFS(R) INSTITUTIONAL EMERGING MARKETS INCOME FUND
<TABLE>
<CAPTION>
<S> <C>
TRUSTEES INVESTMENT ADVISER
A. Keith Brodkin* Massachusetts Financial Services Company
Chairman and President 500 Boylston Street
Boston, MA 02116-3741
Nelson J. Darling, Jr.
Trustee, Eastern Enterprises DISTRIBUTOR
(diversified holding company) MFS Fund Distributors, Inc.
500 Boylston Street
William R. Gutow Boston, MA 02116-3741
Vice Chairman,
Capitol Entertainment Management Company INVESTOR SERVICE
(Blockbuster Video franchise) MFS Service Center, Inc.
P.O. Box 2281
PORTFOLIO MANAGER Boston, MA 02107-9906
Jeffrey A. Kaufman*
For additional information,
TREASURER contact your financial adviser.
W. Thomas London*
CUSTODIAN
ASSISTANT TREASURERS State Street Bank and Trust Company
Mark E. Bradley*
Ellen Moynihan* AUDITORS
James O. Yost* Deloitte & Touche LLP
SECRETARY WORLD WIDE WEB
Stephen E. Cavan* www.mfs.com
ASSISTANT SECRETARY [DALBAR For the third year in a row,
James R. Bordewick, Jr.* LOGO] MFS earned a #1 ranking in the
DALBAR, Inc. Broker/Dealer Survey,
Main Office Operations Service Quality
Category. The firm achieved a 3.48
overall score on a scale of 1 to 4 in
the 1996 survey. A total of 110 firms
responded, offering input on the
quality of service they received from
29 mutual fund companies nationwide.
The survey contained questions about
service quality in 15 categories,
including "knowledge of phone service
contacts," "accuracy of transaction
processing," and "overall ease of
doing business with the firm."
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
LETTER TO SHAREHOLDERS
Dear Shareholders:
For the 12 months ended June 30, 1997, the Fund provided a total return of
22.79% (including the reinvestment of distributions), as emerging market debt
remained in investors' favor. The Fund's return compares to a 21.24% return for
the Fund's custom index, an equally weighted composite of the J.P. Morgan
Emerging Markets Bond Index, which had a 31.97% return for the period, and the
J.P. Morgan Emerging Local Markets Index, which returned 11.10%. The J.P. Morgan
Emerging Markets Bond Index is comprised of Brady bonds (U.S. dollar-denominated
restructured bank loans), while the J.P. Morgan Emerging Local Markets Index is
comprised of local currency, short-term instruments. The Fund typically invests
half its net assets in U.S. dollar-denominated bonds and half in local currency
instruments.
Economic and Financial Environment
Several structural factors have supported past gains in emerging market debt
and, we believe, should underpin future performance. Global growth appears
strong enough to ensure healthy export growth in many emerging markets, while
interest rates there are low enough to ensure debt service. Broadly speaking,
governments in most emerging markets have continued to implement market-
oriented reforms: pursuing tight fiscal and monetary policies, privatizing
state-owned enterprises, and deregulating markets. Furthermore, many countries
are flush with liquidity and are choosing to buy back their own debt or
refinance it at lower interest rates. The result of all these developments has
been improving creditworthiness, tighter yield spreads to U.S. Treasuries, and
impressive returns.
Looking at the demand for emerging market debt, institutional investors in the
United States, Asia, and Europe have become more comfortable with investing in
this asset class. Many U.S. investors feel there is sufficient history on
volatilities and correlations in emerging market debt to make informed
investment decisions. European investors have traditionally looked to Italian,
Swedish, and Spanish bonds for return enhancement and diversification; as Europe
moves toward currency union, emerging market debt is displacing those markets in
that role. We believe that many structural factors should support continued
strong performance in emerging market debt.
Portfolio Performance and Strategy
The overall theme for the Fund over the past year was that security selection
was good, more than offsetting a moderately underweighted position in Brady
bonds at various times during the period. The Fund's performance was helped by
overweighted positions in Bulgarian and Venezuelan Brady bonds, the Greek
drachma, and the Philippine peso, as well as by underweighted positions in
Polish Brady bonds and the South African rand. The Fund's performance was hurt
by underweighted positions in Argentinean and Ecuadorean Brady bonds and the
Mexican peso.
The main allocation decision for the Fund has been to overweight emerging
European markets relative to the benchmark at the expense of Latin America. If
the U.S. Federal Reserve Board were to increase short-term interest rates, we
feel that emerging markets tied to the European economy, such as Russia and
Bulgaria, would be less affected than Latin American markets. Furthermore,
Russia and Bulgaria yield more than the major Latin American countries such as
Argentina, Brazil, Mexico, and Venezuela, while their credit fundamentals are
improving more rapidly. In Russia, a reinvigorated cabinet is tackling the
fiscal deficit, and foreign exchange reserves are growing briskly. In Bulgaria,
the implementation of a currency board following the election of a reformist
government has brightened prospects dramatically. Our overall outlook on
emerging market debt is positive, and we plan to keep the Fund fully invested.
We appreciate your support and welcome any questions or comments you may have.
Respectfully,
/s/ A. Keith Brodkin /s/ Jeffrey A. Kaufman
A. Keith Brodkin Jeffrey A. Kaufman
Chairman and President Portfolio Manager
July 14, 1997
<PAGE>
PORTFOLIO MANAGER'S PROFILE
Jeffrey A. Kaufman joined MFS in 1994 and was named Assistant Vice President in
1996. He is a graduate of the University of North Carolina and has master's
degrees in Business Administration and in International Affairs from Columbia
University. Mr. Kaufman specializes in emerging market debt. He has managed the
fund since 1995.
OBJECTIVE AND POLICIES
The Fund's investment objective is to seek total return (high current income and
long-term growth of capital). The Fund seeks to achieve its objective by
investing, under normal market conditions, at least 65% of its total assets in
fixed-income securities of government, government-related, supranational, and
corporate issuers that are located, or primarily conducting their business, in
emerging markets. The Fund will generally invest not less than 50% of its total
assets in government and government-related issuers. Until such time as the net
assets of the Fund reach $10 million, the Fund has adopted an investment policy
to invest, under normal market conditions, at least 65% of its total assets in
the fixed-income securities listed above, and forward foreign currency exchange
contracts. Shares of the Fund are purchased at net asset value. The minimum
initial investment is generally $3 million.
Commencement of Investment Operations: August 7, 1995.
TAX FORM SUMMARY
In January 1998, shareholders will be mailed a Tax Form Summary reporting the
federal tax status of all distributions paid during the calendar year 1997.
PERFORMANCE SUMMARY
The information below illustrates the historical performance of MFS
Institutional Emerging Markets Income Fund shares in comparison to various
market indicators. Benchmark comparisons are unmanaged and do not reflect any
fees or expenses. It is not possible to invest directly in an index.
GROWTH OF A HYPOTHETICAL $3,000,000 INVESTMENT
(For the period September 1, 1995, through June 30, 1997)
50% J.P. Morgan
Emerging Local
Markets Index
MFS Institutional 50% J.P. Morgan J.P. Morgan
Consumer Price Emerging Markets Emerging Markets Emerging Local
Index -- U.S. Income Fund Bond Index Markets Index
- --------------------------------------------------------------------------------
"9/95" 3.00 3.00 3.00 3.00
"12/95" 3.02 3.14 3.21 3.01
"12/96" 3.12 3.78 3.99 3.46
"6/97" 3.15 4.16 4.33 3.63
<PAGE>
AVERAGE ANNUAL TOTAL RETURNS AS OF JUNE 30, 1997
1 Year Life of Fund*
- ---------------------------------------------------------------------------
MFS Institutional Emerging Markets Income Fund +22.79% +18.79%
- ---------------------------------------------------------------------------
50% J.P. Morgan Emerging Local Markets Index
50% J.P. Morgan Emerging Markets Bond Index +21.24% +21.08%
- ---------------------------------------------------------------------------
J.P. Morgan Emerging Local Markets Index** +11.10% +10.29%
- ---------------------------------------------------------------------------
Consumer Price Index+ + 2.14% + 2.56%
- ---------------------------------------------------------------------------
*For the period from the commencement of the Fund's investment
operations, August 7, 1995, through June 30, 1997.
**Source: Data Stream.
+The Consumer Price Index is published by the U.S. Bureau of Labor Statistics
and measures the cost of living (inflation).
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.
Fund results reflect any applicable expense subsidies and waivers, without which
the performance results would have been less favorable. Subsidies and waivers
may be rescinded at any time. See the prospectus for details.
<PAGE>
PORTFOLIO OF INVESTMENTS - June 30, 1997
Bonds - 67.4%
- -------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------
Foreign Bonds - 67.4%
Argentina - 4.3%
Republic of Argentina, 6.75s, 2005 $ 243 $ 227,950
- -------------------------------------------------------------------------------
Brazil - 7.9%
Federal Republic of Brazil, 6.875s, 2024 $ 500 $ 420,625
- -------------------------------------------------------------------------------
Bulgaria - 3.5%
National Republic of Bulgaria, 6.563s, 2024 $ 250 $ 183,750
- -------------------------------------------------------------------------------
Czech Republic - 2.8%
Komercni Banka, 12.363s, 1999 CZK 5,000 $ 151,431
- -------------------------------------------------------------------------------
Greece - 3.5%
Hellenic Republic, 12.6s, 2003 GRD 50,000 $ 187,707
- -------------------------------------------------------------------------------
Mexico - 4.4%
United Mexican States, 6.836s, 2019 $ 250 $ 231,875
- -------------------------------------------------------------------------------
Philippines - 4.6%
Bangko Sentral Philipinas, 8.6s, 2027 $ 250 $ 246,563
- -------------------------------------------------------------------------------
Poland - 7.3%
Government of Poland, 2.75s, 2024 $ 250 $ 142,500
Government of Poland, 6.938s, 2024 250 244,375
-----------
$ 386,875
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Russia - 13.0%
City of Moscow, 9.5s, 2000## $ 200 $ 202,744
CSFB Moscow Note, 0s, 1997 250 236,885
Russia Min Finance, 9.25s, 2001 250 251,750
-----------
$ 691,379
- -------------------------------------------------------------------------------
South Africa - 3.7%
ING Bank, 16.125s, 1998 ZAR 900 $ 198,103
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Venezuela - 12.4%
Republic of Venezuela, 6.75s, 2007 - 2020 $ 750 $ 659,687
- -------------------------------------------------------------------------------
Total Foreign Bonds $3,585,945
- -------------------------------------------------------------------------------
Total Bonds (Identified Cost, $3,419,972) $3,585,945
- -------------------------------------------------------------------------------
Rights
- -------------------------------------------------------------------------------
Shares
- -------------------------------------------------------------------------------
Mexico
United Mexican States (Identified Cost,
$0)* 385,000 $ --
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Warrants
- -------------------------------------------------------------------------------
Venezuela
Republic of Venezuela (Identified Cost,
$0)* 1,250 $ --
- -------------------------------------------------------------------------------
Short-Term Obligations - 26.6%
- -------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------
CSFB Russia Note, due 7/21/97+ $ 250 $ 248,357
Federal Home Loan Mortgage Corp., due 7/01/97 1,170 1,170,000
- -------------------------------------------------------------------------------
Total Short-Term Obligations at Amortized Cost $1,418,357
- -------------------------------------------------------------------------------
Total Investments (Identified Cost, $4,838,329) $5,004,302
Other Assets, Less Liabilities - 6.0% 321,213
- -------------------------------------------------------------------------------
Net Assets - 100.0% $5,325,515
- -------------------------------------------------------------------------------
*Non income producing security.
##SEC Rule 144A restriction.
+Restricted Security.
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 Coruna GRD = Greek Drachma
EGP = Egyptian Pound ZAR = South African Rand
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- -------------------------------------------------------------------------------
June 30, 1997
- -------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $4,838,329) $5,004,302
Cash 4,083
Receivable for investments sold 953,858
Interest receivable 58,873
Net receivable for foreign currency exchange contracts closed
or subject to masternetting agreements 41,171
Deferred organization expenses 12,714
Other assets 41
----------
Total assets $6,075,042
----------
Liabilities:
Payable for investments purchased $ 733,619
Net payable for forward foreign currency exchange contracts
to purchase 2,647
Payable to affiliate for management fee 373
Accrued expenses and other liabilities 12,888
----------
Total liabilities $ 749,527
----------
Net assets $5,325,515
==========
Net assets consist of:
Paid-in capital $4,599,616
Unrealized appreciation on investments and translation of
assets and liabilities in foreign currency 203,781
Accumulated undistributed net realized gain on investments
and foreign currency transactions 365,182
Accumulated undistributed net investment income 156,936
----------
Total $5,325,515
==========
Shares of beneficial interest outstanding 445,905
=======
Net asset value, offering price, and redemption price
per share (net asset of $5,325,515/445,905 shares of
beneficial interest outstanding) $11.94
======
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- -------------------------------------------------------------------------------
Year Ended June 30, 1997
- -------------------------------------------------------------------------------
Net investment income:
Income -
Interest $448,441
Dividends 708
--------
Total investment income $449,149
--------
Expenses -
Management fee $ 39,957
Trustees' compensation 4,680
Shareholder servicing agent fee 352
Administrative fee 250
Auditing fee 32,081
Custodian fee 7,784
Registration fee 7,110
Amortization of organization expenses 4,081
Legal fee 439
Miscellaneous 594
--------
Total expenses $ 97,328
Fees paid indirectly (1,689)
Reduction of expenses by investment adviser (36,879)
--------
Net expenses $ 58,760
--------
Net investment income $390,389
--------
Realized and unrealized gain on investments:
Realized gain (identified cost basis) -
Investment transactions $434,480
Futures contracts 3,027
Foreign currency transactions 45,292
--------
Net realized gain on investment and foreign
currency transactions $482,799
--------
Change in unrealized appreciation -
Investments $ 68,631
Translation of assets and liabilities in foreign
currencies 26,043
--------
Net unrealized gain on investments and
foreign currency translation $ 94,674
--------
Net realized and unrealized gain on
investments and foreign currency $577,473
--------
Increase in net assets from operations $967,862
========
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Year Ended Period Ended
June 30, 1997 June 30, 1996*
<S> <C> <C>
- -----------------------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment income $ 390,389 $ 178,435
Net realized gain on investments and foreign
currency transactions 482,799 45,233
Net unrealized gain on investments and foreign
currency translation 94,674 109,107
---------- ----------
Increase in net assets from operations $ 967,862 $ 332,775
---------- ----------
Distributions declared to shareholders -
From net investment income $ (320,320) $ (76,004)
From net realized gain on investments and foreign
currency transactions (178,414) --
---------- -----------
Total distributions declared to shareholders $ (498,734) $ (76,004)
---------- -----------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 209,020 $3,826,723
Net asset value of shares issued to shareholders in
reinvestment of distributions 498,734 76,004
Cost of shares reacquired (10,888) (77)
---------- ----------
Increase in net assets from Fund share
transactions $ 696,866 $3,902,650
---------- ----------
Total increase in net assets $1,165,994 $4,159,421
Net assets:
At beginning of period 4,159,521 100
---------- ----------
At end of period (including accumulated
undistributed net investment income of $136,104
and $66,035, respectively) $5,325,515 $4,159,521
========== ==========
*For the period from the commencement of the Fund's investment operations,
August 7, 1995, through June 30, 1996.
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Year Ended Period Ended
June 30, 1997 June 30, 1996*
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $10.88 $10.00
------ ------
Income from investment operations# -
Net investment income(S) $ 0.94 $ 0.70
Net realized and unrealized gain on investments and
foreign currency transactions 1.41 0.56
------ ------
Total from investment operations $ 2.35 $ 1.26
------ ------
Less distributions declared to shareholders -
From net investment income $(0.83) $(0.38)
From net realized gain on investments and foreign
currency transactions (0.46) --
------ ------
Total distributions declared to shareholders $(1.29) $(0.38)
------ ------
Net asset value - end of period $11.94 $10.88
====== ======
Total return 22.79% 12.93%++
Ratios (to average net assets)/Supplemental data(S):
Expenses 1.25% 1.25%+
Net investment income 8.30% 7.59%+
Portfolio turnover 473% 285%
Net assets, at end of period (000 omitted) $5,326 $4,160
*For the period from the commencement of the Fund's investment
operations, August 7, 1995, through June 30, 1996.
+Annualized.
++Not annualized.
#Per share data are based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses
are calculated without reduction for fees paid indirectly.
(S)The investment adviser voluntarily agreed to maintain the expenses of
the Fund at not more than 1.25% of average daily net assets. To the
extent that actual expenses were over these limitations, the net
investment income per share and the ratios would have been:
Net investment income $ 0.85 $ 0.43
Ratios (to average net assets):
Expenses## 2.07% 4.21%+
Net investment income 7.48% 4.63%+
See notes to financial statements
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Institutional Emerging Markets 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
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Investments
in foreign securities are vulnerable to the effects of changes in the relative
values of the local currency and the U.S. dollar and to the effects of changes
in each country's legal, political, and economic environment.
Investment Valuations - 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. 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. Non-U.S.
dollar denominated short-term obligations are valued at amortized cost as
calculated in the foreign currency and translated into U.S. dollars at the
closing daily exchange rate. 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 result from fluctuations in foreign currency exchange rates is not
separately disclosed.
Deferred Organization Expenses - Costs incurred by the Fund in connection with
its organization have been deferred and are being amortized on a straight-line
basis over a five-year period beginning on the date of commencement of Fund
operations.
Futures Contracts - The Fund may enter into futures contracts for the delayed
delivery of securities or currency or contracts based on financial indexes at a
fixed price on a future date. 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 futures contracts is designed to
hedge against anticipated future changes in interest or exchange rates or
securities prices. Should interest or exchange rates or securities prices move
unexpectedly, the Fund may not achieve the anticipated benefits of the futures
contracts and may realize a loss.
Forward Foreign Currency Exchange Contracts - The Fund may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering into these contracts from the potential inability of counterparties to
meet the terms of their contracts and from unanticipated movements in the value
of a foreign currency relative to the U.S. dollar. The Fund 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. The Fund may also use contracts in a manner intended to protect
foreign currency-denominated securities from declines in value due to
unfavorable exchange rate movements. For non-hedging purposes, the Fund may
enter into contracts with the intent of changing the relative exposure of the
Fund's portfolio of securities to different currencies to take advantage of
anticipated changes. The forward foreign currency exchange contracts are
adjusted by the daily exchange rate of the underlying currency and any gains or
losses are recorded for financial statement purposes as unrealized until the
contract settlement date. On contract settlement date, the gains or losses are
recorded as realized gains or losses on foreign currency transactions.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premiums and
original issue discounts are amortized or accreted for financial statement and
tax reporting purposes as required by federal income tax regulations. Dividends
received in cash are recorded on the ex-dividend date. Dividend and interest
payments received in additional securities are recorded on the ex- dividend or
ex-interest date in an amount equal to the value of the security on such date.
Fees Paid Indirectly - The Fund's custody fee is calculated as a percentage of
the Fund's average daily net assets. The fee is reduced according to an
arrangement which 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 net 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. Capital gains
taxes have been provided on unrealized and realized gains from securities
transactions in countries where such a capital gains tax is applicable. Realized
and unrealized gain is reported net of any capital gains tax in the Statement of
Operations.
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 accumulated net realized
gains. During the year ended June 30, 1997, $20,832 was reclassified to
accumulated undistributed net investment income from accumulated net realized
gain on investments due to differences between book and tax accounting for
currency transactions. This change had no effect on the net assets or net asset
value per share.
(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.
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 fees such that total operating expenses do not exceed, 1.25% of its
average daily net assets. 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 June 30, 1997, the aggregate
unreimbursed expenses owed to MFS by the Fund amounted to $106,305.
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 and MFS Service Center, Inc. (MFSC).
Administrator - Effective March 1, 1997, the Fund has an administrative services
agreement with MFS to provide the Fund with certain financial, legal, and other
administrative services. As a partial reimbursement for the cost of providing
these services, the Fund pays MFS an administrative fee up to 0.015% per annum
of the Fund's average daily net assets, provided that the administrative fee is
not assessed on Fund assets that exceed $3 billion.
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
0.0075%.
(4) Portfolio Securities
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions, and short-term obligations, aggregated
$13,713,734 and $13,018,760 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 $4,838,329
==========
Gross unrealized appreciation $ 220,695
Gross unrealized depreciation (54,722)
----------
Net unrealized appreciation $ 165,973
==========
(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:
<TABLE>
<CAPTION>
Year Ended June 30, 1997 Period Ended June 30, 1996*
-------------------------- -----------------------------
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
Shares sold 18,645 $209,020 374,769 $3,826,723
Shares issued to shareholders in reinvestment
of distributions 45,839 498,734 7,593 76,004
Shares reacquired (943) (10,888) (8) (77)
------ -------- ------- ----------
Net increase 63,541 $696,866 382,354 $3,902,650
====== ======== ======= ==========
*For the period from the commencement of the Fund's investment operations,
August 7, 1995 through June 30, 1996.
</TABLE>
(6) Line of Credit
The Fund and other affiliated funds participate in a $400 million unsecured line
of credit provided by a syndication of banks under a line of credit agreement.
Borrowings may be made to temporarily finance the repurchase of Fund shares.
Interest is charged to each fund, based on its borrowings, at a rate equal to
the bank's base rate. In addition, a commitment fee, based on the average daily
unused portion of the line of credit, is allocated among the participating funds
at the end of each quarter. The commitment fee allocated to the Fund for the
year ended June 30, 1997, was $45.
(7) Financial Instruments
The Fund trades financial instruments with off-balance-sheet risk in the normal
course of its investing activities in order to manage exposure to market risks
such as interest rates and foreign currency exchange rates. These financial
instruments include forward foreign currency exchange contracts and futures
contracts. The notional or contractual amounts of these instruments represent
the investment the Fund has in particular classes of financial instruments and
does not necessarily represent the amounts potentially subject to risk. The
measurement of the risks associated with these instruments is meaningful only
when all related and offsetting transactions are considered.
Forward Foreign Currency Exchange Contracts
<TABLE>
<CAPTION>
Contracts to Contracts Net Unrealized
Settlement Date Deliver/Receive In Exchange for at Value Depreciation
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales -- -- -- -- -- --
======== ======== =======
Purchases 9/29/97 EGP 1,701,950 $500,000 $497,353 $(2,647)
======== ======== =======
</TABLE>
Forward foreign currency purchases and sales under master netting arrangements
and closed forward foreign currency exchange contracts excluded above amounted
to a net receivable of $18,115 with Bankers Trust, $282 with Swiss Bank Corp.,
and $22,774 with Merrill Lynch at June 30, 1997.
At June 30, 1997, the Fund had sufficient cash and/or securities to cover any
commitments under these contracts.
(8) Restricted Securities
The Fund may invest not more than 15% of its net assets in securities which are
subject to legal or contractual restrictions on resale. At June 30, 1997, the
Fund owned the following restricted securities (constituting 4.7% of total net
assets) which may not be publicly sold without registration under the Securities
Act of 1933 (the 1933 Act). The Fund does not have the right to demand that such
securities be registered. The value of these securities is determined by
valuations supplied by a pricing service or brokers or, if not available, in
good faith by or at the direction of the Trustees.
<TABLE>
<CAPTION>
Date of Share/Par
Description Acquisition Amount Cost Value
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
CSFB Russia Note, due 7/21/97 4/25/97 250,000 $248,357 $248,357
======== ========
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Institutional Trust and Shareholders of MFS Institutional
Emerging Markets Income Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of MFS Institutional Emerging Markets Income Fund
(one of the series comprising MFS Institutional Trust) as of June 30, 1997, the
related statement of operations for the year then ended, the statement of
changes in net assets and the financial highlights for the years ended June 30,
1997 and 1996. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned at June
30, 1997 by correspondence with the custodian and brokers; where replies were
not received from brokers, we performed other auditing procedures. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Institutional
Emerging Markets Income Fund at June 30, 1997, the results of its operations,
the changes in its net assets, and its financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
August 1, 1997
--------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
(c)1997 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
MEE-3 8/97 500
