<PAGE>
[Logo] Semiannual Report
INSTITUTIONAL ADVISORS, INC. December 31, 1996
MFS(R) Institutional Research Fund
[Graphic Omitted]
<PAGE>
<TABLE>
MFS(R) INSTITUTIONAL RESEARCH FUND
<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 SHAREHOLDER SERVICE CENTER
(Blockbuster Video Franchise) MFS Service Center, Inc.
P.O. Box 1400
DIRECTOR OF RESEARCH Boston, MA 02107-9906
Kevin R. Parke*
For additional information,
TREASURER call toll free: 1-800-637-2262
W. Thomas London*
CUSTODIAN
ASSISTANT TREASURER State Street Bank and Trust Company
James O. Yost*
WORLD WIDE WEB
SECRETARY www.mfs.com
Stephen E. Cavan*
ASSISTANT SECRETARY
James R. Bordewick, Jr.*
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
LETTER TO SHAREHOLDERS
Dear Shareholders:
For the six months ended December 31, 1996, the Fund provided a total return
of 9.96%. This compares to a return of 11.68% for the Standard & Poor's 500
Composite Index (the S&P 500), a popular, unmanaged index of common stock
performance, for the same period. A discussion of the Fund's performance
during the reporting period may be found in the Portfolio Performance and
Strategy section of this letter.
Economic Outlook
After more than six years of expansion, the U.S. economy appears headed toward
another year of moderate growth in 1997, although a few signs point to the
possibility of a modest rise in inflation during the year. On the positive
side, the pattern of moderate growth and inflation set over the past few years
now seems fairly well entrenched in the economy and, short of a major
international or domestic crisis, appears to have enough momentum to remain on
track for some time. Also, recent gains in important sectors such as housing,
automobiles, industrial production, and exports indicate a fair amount of
underlying strength in the economy. However, some reason for caution can be
seen in the continuing high level of consumer debt and the attendant rise in
personal bankruptcies, as well as the modestly disappointing levels of holiday
sales. Also, the ongoing tightness in labor markets, and price increases in
such sectors as energy, could add some inflationary pressures to the economy.
Given these somewhat conflicting indicators, we expect real (inflation-
adjusted) growth to revolve around 2% in 1997, which would represent a modest
decline from 1996.
Stock Market
We continue to urge U.S. equity investors to lower their expectations for 1997
and to realize that the impressive gains of the past two years are not
sustainable. Just as the slowdown in corporate earnings growth and increases
in interest rates in 1996 raised some near-term concerns, further interest
rate increases and an acceleration of inflation could negatively affect the
stock market in 1997. However, to the extent that some slowdown in earnings
means that the economy is not overheating, this may be beneficial for the
equity market in the long run. Also, we believe many of the technology-driven
productivity gains that U.S. companies have made in recent years will continue
to enhance corporate America's competitiveness and profitability. Therefore,
while we have some near-term concerns, we remain reasonably positive about the
long-term viability of the equity market.
Portfolio Performance and Strategy
The Fund remains overweighted compared to the S&P 500 in several sectors,
including technology, industrial goods and services, consumer staples, and
business services. Relatively neutral weightings to the S&P 500 include
financial services, health care, retail, and leisure. The Fund continued to be
underweighted in energy, and utilities and communications.
Within the technology sector, several stocks contributed to the Fund's
performance over the past six months. Some software companies include
Microsoft Corp., Compuware, BMC Software, and Cisco Systems. These companies
have developed solid competitive positions within their industry which have
translated into successful stock performance.
Several companies within the financial services sector also performed well
over the latter half of 1996. Life insurance companies such as Conseco,
Allstate, and ITT Hartford have implemented several cost-saving initiatives
which have contributed to earnings. In addition, several banks have benefited
from the consolidation of this industry. Both Chase Manhattan and BankBoston
have proven that a successful merger or acquisition, coupled with strong
management teams, can contribute to earnings much sooner than anticipated.
While the Fund was underweighted in both energy and utilities and
communications, three companies have provided strong returns over the past six
months. Newfield Exploration and PanEnergy Corporation have been excellent
additions, and MCI Communications appreciated following the announced planned
acquisition by British Telecommunications PLC.
Respectfully,
/s/ A. Keith Brodkin /s/ Kevin R. Parke
Chairman and President Director of Research
January 13, 1997
A Committee of MFS Research Analysts is responsible for the day-to-day
management of the Fund under the general supervision of Mr. Parke.
OBJECTIVE AND POLICY
The Fund's investment objective is to provide long-term growth of capital and
future income. The Fund invests, under normal market conditions, at least 65%
of its total assets in equity securities of companies believed to possess
better-than-average prospects for long-term growth.
PERFORMANCE SUMMARY
Because mutual funds like MFS Institutional Research Fund are designed for
investors with long-term goals, we have provided cumulative results as well as
the average annual total returns for the applicable time periods. The minimum
initial investment is generally $3 million. Shares of the Fund are purchased
at net asset value.
AVERAGE ANNUAL AND CUMULATIVE TOTAL RATES OF RETURN
AS OF DECEMBER 31, 1996
(net asset value change including reinvested distributions)
6 Months Life of Fund*
- --------------------------------------------------------------------------------
Cumulative Total Return +9.96% +7.54%
- --------------------------------------------------------------------------------
*For the period from the commencement of investment operations, May 20, 1996
through December 31, 1996.
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.
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 (UNAUDITED) - December 31, 1996
Stocks - 95.7%
- -----------------------------------------------------------------------------
Issuer Shares Value
- -----------------------------------------------------------------------------
U.S. Stocks - 86.3%
Aerospace - 5.5%
General Dynamics Corp. 2,900 $ 204,450
Lockheed Martin Corp. 3,900 356,850
McDonnell-Douglas Corp. 6,000 384,000
United Technologies Corp. 6,600 435,600
-----------
$ 1,380,900
- ----------------------------------------------------------------------------
Agricultural Products - 1.7%
Case Corp. 7,800 $ 425,100
- ----------------------------------------------------------------------------
Apparel and Textiles - 0.7%
Nike, Inc., "B" 1,500 $ 89,625
Reebok International Ltd. 1,800 75,600
-----------
$ 165,225
- ----------------------------------------------------------------------------
Automotive - 0.5%
Goodrich (B.F.) Co. 2,900 $ 117,450
- ----------------------------------------------------------------------------
Banks and Credit Companies - 3.2%
Bank of Boston Corp. 2,940 $ 188,895
Chase Manhattan Corp. 3,900 348,075
Compass Bancshares, Inc. 200 7,950
Crestar Financial Corp. 1,300 96,688
Fleet/Norstar Financial Group, Inc. 2,900 144,637
-----------
$ 786,245
- ----------------------------------------------------------------------------
Building - 0.7%
Newport News Shipbuilding, Inc. 12,400 $ 186,000
- ----------------------------------------------------------------------------
Business Machines - 0.8%
Sun Microsystems, Inc.* 8,000 $ 205,500
- ----------------------------------------------------------------------------
Business Services - 3.5%
AccuStaff, Inc.* 13,400 $ 283,075
Affiliated Computer Services, Inc., "A"* 900 26,775
ALCO Standard Corp. 4,600 237,475
DST Systems, Inc.* 5,400 169,425
Technology Solutions Co.* 3,900 161,850
-----------
$ 878,600
- ----------------------------------------------------------------------------
Chemicals - 3.8%
Air Products & Chemicals, Inc. 5,800 $ 400,925
Betzdearborn, Inc. 900 52,650
Praxair, Inc. 10,800 498,150
-----------
$ 951,725
- ----------------------------------------------------------------------------
Computer Software - Personal Computers - 3.2%
Electronic Arts, Inc.* 6,000 $ 179,625
First Data Corp. 5,400 197,100
Microsoft Corp.* 5,000 413,125
-----------
$ 789,850
- ----------------------------------------------------------------------------
Computer Software - Systems - 6.9%
Adobe Systems, Inc. 4,300 $ 160,712
BMC Software, Inc.* 5,800 239,975
Cadence Design Systems, Inc.* 9,200 365,700
Computer Associates International, Inc. 3,300 164,175
Compuware Corp.* 1,800 90,225
Lattice Semiconductor Corp. 1,000 $ 46,000
Oracle Systems Corp.* 10,100 421,675
Sybase, Inc.* 3,700 61,744
Synopsys, Inc.* 3,800 175,750
-----------
$ 1,725,956
- ----------------------------------------------------------------------------
Consumer Goods and Services - 9.7%
Colgate-Palmolive Co. 4,500 $ 415,125
Estee Lauder Cos., "A"* 2,600 132,275
Gillette Co. 5,000 388,750
Philip Morris Cos., Inc. 4,300 484,287
Procter & Gamble Co. 3,800 408,500
Revlon, Inc., "A"* 3,800 113,525
Sherwin Williams Co. 4,100 229,600
Tyco International Ltd. 4,800 253,800
-----------
$ 2,425,862
- ----------------------------------------------------------------------------
Defense Electronics - 0.7%
Loral Space & Communications Corp.* 10,000 $ 183,750
- ----------------------------------------------------------------------------
Electronics - 0.9%
Analog Devices, Inc.* 3,100 $ 105,013
Xilinx, Inc.* 3,200 117,800
-----------
$ 222,813
- ----------------------------------------------------------------------------
Entertainment - 2.1%
Clear Channel Communications, Inc.* 1,500 $ 54,188
Jacor Communications, Inc., "A"* 6,200 169,725
Showboat, Inc. 6,200 106,950
Viacom, Inc., "B"* 5,800 202,275
-----------
$ 533,138
- ----------------------------------------------------------------------------
Financial Institutions - 1.9%
Advanta Corp., "B" 6,300 $ 257,513
Union Planters Corp. 5,632 219,648
-----------
$ 477,161
- ----------------------------------------------------------------------------
Food and Beverage Products - 2.8%
Earthgrains Co. 2,700 $ 141,075
McCormick & Co., Inc. 5,700 134,306
PepsiCo, Inc. 4,300 125,775
Tyson Foods, Inc. 8,600 294,550
-----------
$ 695,706
- ----------------------------------------------------------------------------
Forest and Paper Products - 1.8%
Kimberly-Clark Corp. 4,800 $ 457,200
- ----------------------------------------------------------------------------
Insurance - 6.3%
Allstate Corp. 4,300 $ 248,862
Amerin Corp.* 2,700 69,525
Chubb Corp. 2,900 155,875
CIGNA Corp. 2,900 396,212
Equitable of Iowa Cos. 2,900 133,038
ITT Hartford Group, Inc. 3,100 209,250
PennCorp Financial Group, Inc. 10,100 363,600
-----------
$ 1,576,362
- ----------------------------------------------------------------------------
Medical and Health Products - 3.9%
Pfizer, Inc. 2,200 $ 182,325
Pharmacia & Upjohn, Inc. 4,000 158,500
Rhone-Poulenc Rorer, Inc. 2,100 164,063
Uromed Corp. 20,300 197,925
Ventritex, Inc.* 10,700 263,487
-----------
$ 966,300
- ----------------------------------------------------------------------------
Medical and Health Technology and Services - 4.2%
Coventry Corp.* 6,900 $ 63,933
Pacificare Health Systems, Inc., "A"* 2,600 211,250
Pacificare Health Systems, Inc., "B"* 300 25,575
Riscorp, Inc., "A" 2,200 7,975
St. Jude Medical, Inc.* 9,300 396,412
United Healthcare Corp. 7,500 337,500
-----------
$ 1,042,645
- ----------------------------------------------------------------------------
Oil Services - 1.3%
Barrett Resources Corp.* 3,800 $ 161,975
Transocean Offshore Inc. 2,400 150,300
-----------
$ 312,275
- ----------------------------------------------------------------------------
Oils - 1.2%
Mobil Corp. 1,800 $ 220,050
Newfield Exploration Co. 3,200 83,200
-----------
$ 303,250
- ----------------------------------------------------------------------------
Railroads - 3.1%
Burlington Northern Santa Fe Railway Co. 2,700 $ 233,213
Conrail, Inc. 1,531 152,526
Wisconsin Central Transportation Corp.* 9,900 392,287
-----------
$ 778,026
- ----------------------------------------------------------------------------
Restaurants and Lodging - 3.3%
HFS, Inc.* 6,700 $ 400,325
Host Marriott Corp. 17,000 272,000
MGM Grand, Inc.* 4,400 153,450
-----------
$ 825,775
- ----------------------------------------------------------------------------
Special Products and Services - 0.9%
Stanley Works 8,300 $ 224,100
- ----------------------------------------------------------------------------
Stores - 3.3%
Ann Taylor Stores Corp.* 6,900 $ 120,750
CompUSA, Inc. 9,400 193,875
Gymboree Corp.* 6,700 153,262
Home Depot, Inc. 2,900 145,363
Lowes Co., Inc. 3,300 117,150
Staples, Inc.* 5,700 102,956
-----------
$ 833,356
- ----------------------------------------------------------------------------
Supermarkets - 1.4%
Safeway, Inc.* 8,400 $ 359,100
- ----------------------------------------------------------------------------
Telecommunications - 3.2%
Ascend Communications, Inc.* 1,100 $ 68,338
Cabletron Systems, Inc.* 4,600 152,950
Cisco Systems, Inc.* 3,700 235,412
Glenayre Technologies, Inc.* 8,500 183,281
Lucent Technologies, Inc. 3,600 166,500
-----------
$ 806,481
- ----------------------------------------------------------------------------
Utilities - Gas - 2.2%
Coastal Corp. 5,700 $ 278,588
Pan Energy Eastern Corp. 5,900 265,500
-----------
$ 544,088
- ----------------------------------------------------------------------------
Utilities - Telephone - 1.1%
MCI Communications Corp. 8,400 $ 274,575
- ----------------------------------------------------------------------------
Other - 0.5%
Conseco, Inc. 2,000 $ 127,500
- ----------------------------------------------------------------------------
Total U.S. Stocks $21,582,014
- ----------------------------------------------------------------------------
Foreign Stocks - 9.4%
Denmark - 0.3%
ISS International Service System, "B"
(Special Products and Services) 2,500 $ 65,806
- ----------------------------------------------------------------------------
Finland - 0.8%
Huhtamaki Oy (Conglomerates) 3,700 $ 172,052
Tt Tieto Oy (Computer Software -
Systems) 500 42,252
-----------
$ 214,304
- ----------------------------------------------------------------------------
France - 0.5%
Union des Assurances Federales S.A.
(Insurance) 1,000 $ 123,409
- ----------------------------------------------------------------------------
Germany - 0.2%
SAP AG (Computer Software - Systems) 300 $ 41,924
- ----------------------------------------------------------------------------
Greece - 0.3%
Ote Greek Telecom (Telecommunications) 4,100 $ 70,119
- ----------------------------------------------------------------------------
Hong Kong - 2.1%
Giordano International Ltd. (Stores) 136,000 $ 116,059
Wharf Holdings Ltd. (Real Estate) 65,000 324,412
Wing Hang Bank Ltd. (Banks and Credit
Companies) 16,500 74,883
-----------
$ 515,354
- ----------------------------------------------------------------------------
Italy - 0.4%
Telecom Italia S.p.A.
(Telecommunications) 65,700 $ 93,687
- ----------------------------------------------------------------------------
Philippines
Pilipino Telegraph & Telephone Corp.
(Telecommunications) 12,600 $ 10,676
- ----------------------------------------------------------------------------
South Korea - 0.4%
Korea Mobile Telecommunications, ADR
(Telecommunications) 7,725 $ 99,459
- ----------------------------------------------------------------------------
Sweden - 2.1%
Astra AB, "B" (Pharmaceuticals) 7,100 $ 342,759
Enator AB (Computer Software - Systems) 500 12,619
Enator AB (Computer Software - Systems)* 2,500 64,013
Nobel Biocare AB (Medical and Health
Products) 6,400 112,693
-----------
$ 532,084
- ----------------------------------------------------------------------------
United Kingdom - 2.3%
British Petroleum PLC, ADR (Oils) 2,015 $ 284,871
Jarvis Hotels PLC (Lodging)+ 51,500 142,050
Kwik-Fit Holdings PLC (Retail) 33,800 125,946
Storehouse PLC (Retail) 5,800 25,686
-----------
$ 578,553
- ----------------------------------------------------------------------------
Total Foreign Stocks $ 2,345,375
- ----------------------------------------------------------------------------
Total Stocks (Identified Cost, $22,054,579) $23,927,389
- ----------------------------------------------------------------------------
Short-Term Obligation - 4.1%
- ----------------------------------------------------------------------------
Principal Amount
(000 Omitted)
- ----------------------------------------------------------------------------
Federal Home Loan Bank, due 1/02/97, at
Amortized Cost and Value $1,030 $ 1,029,850
- ----------------------------------------------------------------------------
Total Investments (Identified Cost, $23,084,429) $24,957,239
Other Assets, Less Liabilities - 0.2% 44,975
- ----------------------------------------------------------------------------
Net Assets - 100.0% $25,002,214
- ----------------------------------------------------------------------------
* Non-income producing security.
+ Restricted security.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities (Unaudited)
- ------------------------------------------------------------------------------
December 31, 1996
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $23,084,429) $24,957,239
Cash 7,185
Receivable for investments sold 2,609
Receivable from investment adviser 53,257
Dividends and interest receivable 27,972
Deferred organization expenses 6,122
-----------
Total assets $25,054,384
-----------
Liabilities:
Payable for investments purchased $ 25,944
Payable to affiliate for management fee 1,234
Accrued expenses and other liabilities 24,992
-----------
Total liabilities $ 52,170
-----------
Net assets $25,002,214
===========
Net assets consist of:
Paid-in capital $23,532,451
Unrealized appreciation on investments and translation of
assets and liabilities in foreign currencies 1,872,824
Accumulated net realized loss on investments and foreign
currency transactions (419,016)
Accumulated undistributed net investment income 15,955
-----------
Total $25,002,214
===========
Shares of beneficial interest outstanding 2,331,986
=========
Net asset value, redemption price, and offering price per share
(net assets of $25,002,214 / 2,331,986 shares of beneficial
interest outstanding) $10.72
======
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations (Unaudited)
- --------------------------------------------------------------------------------
Six Months Ended December 31, 1996
- --------------------------------------------------------------------------------
Net investment income:
Income -
Dividends $ 20,641
Interest 112,916
----------
Total investment income $ 133,557
----------
Expenses -
Management fee $ 69,427
Trustees' compensation 2,200
Shareholder servicing agent fee 675
Auditing fees 13,037
Custodian fee 7,176
Printing 652
Amortization of organization expenses 702
Miscellaneous 15,182
----------
Total expenses $ 109,051
Fees paid indirectly (623)
Preliminary reduction of expenses by investment adviser (34,252)
----------
Net expenses $ 74,176
----------
Net investment income $ 59,381
----------
Realized and unrealized gain (loss) on investments:
Realized loss (identified cost basis) -
Investment transactions $ (435,676)
Foreign currency transactions (1,085)
----------
Net realized loss on investments and foreign currency
transactions $ (436,761)
----------
Change in unrealized appreciation -
Investments $2,400,440
Translation of assets and liabilities in foreign currencies 52
----------
Net unrealized gain on investments and foreign currency
translation $2,400,492
----------
Net realized and unrealized gain on investments and
foreign currency $1,963,731
----------
Increase in net assets from operations $2,023,112
==========
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
Six Months Ended
December 31, 1996 Period Ended
(Unaudited) June 30, 1996*
- --------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment income $ 59,381 $ 36,283
Net realized gain (loss) on investments
and foreign currency transactions (436,761) 17,745
Net unrealized gain (loss) on investments
and foreign currency translation 2,400,492 (527,668)
----------- -----------
Increase (decrease) in net assets from
operations $ 2,023,112 $ (473,640)
----------- -----------
Distributions declared to shareholders
from net investment income $ (79,709) $ --
----------- -----------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 2,000,000 $23,252,732
Net asset value of shares issued to
shareholders in reinvestment of
distributions 79,709 --
Cost of shares reacquired (1,800,000) --
----------- -----------
Increase in net assets from Fund share
transactions $ 279,709 $23,252,732
----------- -----------
Total increase in net assets $ 2,223,112 $22,779,092
Net assets:
At beginning of period 22,779,102 10
----------- ------------
At end of period (including accumulated
undistributed net investment income of
$15,955 and $36,283 respectively). $25,002,214 $22,779,102
=========== ===========
* For the period from the commencement of investment operations, May 21, 1996
to June 30, 1996.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights
- --------------------------------------------------------------------------------
Six Months Ended
December 31, 1996 Period Ended
(Unaudited) June 30, 1996*
- --------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 9.78 $10.00
------ ------
Income from investment operations# -
Net investment income(S) $ 0.03 $ 0.02
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 0.94 (0.24)
------ ------
Total from investment operations $ 0.97 $(0.22)
------ ------
Less distributions declared to
shareholders from net investment income $(0.03) $ --
------ ------
Net asset value - end of period $10.72 $ 9.78
====== ======
Total return 9.96%++ (2.20)%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 0.65%+ 0.65%+
Net investment income 0.52%+ 1.52%+
Portfolio turnover 39% 6%
Average commission rate### $0.0224 $0.0260
Net assets at end of period (000 omitted) $25,002 $22,779
* For the period from the commencement of investment operations, May 21, 1996,
to June 30, 1996.
+ Annualized.
++ Not annualized.
# Per share data is based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid
indirectly.
### Average commission rate is calculated for funds with fiscal years beginning
on or after September 1, 1995.
(S) The adviser voluntarily agreed to maintain the expenses of the Fund at not
more than 0.65% of average daily net assets. To the extent actual expenses
were over/under these limitations, the net investment income per share and
ratios would have been:
Net investment income $ 0.01 $ --
Ratios (to average net assets):
Expenses## 0.96% 2.03%+
Net investment income 0.22% 0.14%+
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(1) Business and Organization
MFS Institutional Research Fund (the Fund) is a 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 - 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 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.
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.
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 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.
Fees Paid Indirectly - The Fund's custodian bank calculates its fee based on
the Fund's average daily net assets. The fee is reduced according to a fee
arrangement, which provides for custody fees to be reduced based on a formula
developed to measure the value of cash deposited with the custodian by the
Fund. This amount is shown as a reduction of expenses on the Statement of
Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. The Fund files a tax
return annually using tax accounting methods required under provisions of the
Code which may differ from generally accepted accounting principles, the basis
on which these financial statements are prepared. Accordingly, the amount of
net investment income and net realized gain reported on these financial
statements may differ from that reported on the Fund's tax return and,
consequently, the character of distributions to shareholders reported in the
financial highlights may differ from that reported to shareholders on Form
1099-DIV. 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 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.
(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 0.60% of average daily net assets. The investment adviser did not impose a
portion of its fee, which is reflected as a preliminary reduction of expenses
on the Statement of Operations. The investment advisor has voluntarily agreed
to waive its management fee and/or pay expenses of the Fund, in order to
maintain total expenses at no more than 0.65% of the Fund's average daily net
assets.
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 up to 0.0075%.
(4) Portfolio Securities
Purchases and sales of investments, other than U.S. government securities and
short-term obligations, aggregated $8,485,557 and $9,323,148, 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 $23,084,429
===========
Gross unrealized appreciation $ 2,762,104
Gross unrealized depreciation (889,280)
-----------
Net unrealized appreciation $ 1,872,824
===========
(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 Period Ended
December 31, 1996 June 30, 1996*
------------------ -------------------
Shares Amount Shares Amount
- --------------------------------------------------------------------------------
Shares sold 193,424 $2,000,000 2,329,166 $23,252,732
Shares issued to shareholders in
reinvestment of distributions 7,415 79,709 -- --
Shares reacquired (198,020) (1,800,000) -- --
------- ---------- --------- -----------
Net increase 2,819 $ 279,709 2,329,166 $23,252,732
======= ========== ========= ===========
* For the period from the commencement of investment operations, May 21, 1996
to June 30, 1996.
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. 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 period ended
December 31, 1996 was $179.
(7) Restricted Security
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 December 31,
1996, the Fund owned the following restricted security (constituting 0.57% of
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 security be registered. The value of this security 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.
Description Date of Acquisition Share Amount Cost Value
- --------------------------------------------------------------------------------
Jarvis Hotels PLC 6/21/96 - 10/21/96 51,500 $140,370 $142,050
========
------------------------------------
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.
