<PAGE>
[logo] M F S(SM) SEMIANNUAL REPORT
INSTITUTIONAL ADVISORS, INC. DECEMBER 31, 1996
MFS(R) INSTITUTIONAL INTERNATIONAL EQUITY FUND
[Graphic Omitted]
<PAGE>
MFS(R) INSTITUTIONAL INTERNATIONAL EQUITY FUND
<TABLE>
<C> <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
PORTFOLIO MANAGER Boston, MA 02107-9906
David Mannheim*
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 7.50% which includes the reinvestment of distributions. This compares to a
1.62% return for the Morgan Stanley Capital International EAFE (MSCI Europe
Australia Far East) Index, a broad, unmanaged index of non-U.S. equities. The
Fund seeks to provide capital appreciation by investing in the stocks of
companies whose principal activities are located outside the United States.
Our investment philosophy is to emphasize stock selection as opposed to
industry, country, or currency selection. This bottom-up approach to
stockpicking focuses on quality companies with superior growth prospects that
trade at attractive valuations. Country weightings are merely the by-product
of where we find what we believe are the most attractive investments.
In general, the world's economies have shown slower growth than
anticipated at the beginning of 1996. The United States has experienced
moderate economic growth, with subdued inflation, as opposed to earlier
concerns about excessive growth and increasing inflationary pressures.
Europe's economy, particularly the Continent, showed little to no growth, and
inflation fell. In Japan, the economic recovery has been choppy and very
modest, with disinflation more of an issue. As a result, interest rates have
fallen around the world. This has created a favorable environment for
equities, and stock market valuations have risen as a result.
Stock Markets
In the past year, several of the world's equity markets generated double-digit
returns. As mentioned above, the return on MSCI EAFE Index was 1.62%, although
components of that index, such as the MSCI Europe Index gained 11.74% with
returns ranging from -0.6% in Italy to 23.4% in Spain. The MSCI Far East
Index, meanwhile, declined 8.08%, with returns ranging from -11.52% in Japan
to 18.01% in Hong Kong. The emerging markets also showed negative returns,
with the IFC Composite Index, measured in U.S. currency, down 4.94%. (The IFC
Composite Index is an unmanaged, market-capitalization-weighted index of the
most active stocks of emerging markets, as defined by the World Bank.)
Portfolio Performance and Strategy
During the past six months, currency changes acted as a drag on the Fund's
performance, with the U.S. dollar gaining 5.6% against the Japanese yen and
1.1% against the German mark. One offset was that the dollar did weaken
against the British pound, with a decline of 9.4%.
Although the performance of the Fund was partly influenced by market
returns and currency changes, we continue to believe stock selection is the
key driver behind performance. We have stuck to our bottom-up approach to
stock selection, with a concentration on high-quality companies which we
believe have superior growth prospects and are trading at attractive
valuations.
While the number of countries in which the Fund holds investments within
has increased, there have been only incremental changes to the broad
geographic weightings. The Fund's assets are allocated around the world as
follows: 55% of the Fund's equity holdings in Europe, 6% in the Americas, and
39% in Asia/Pacific.
We continue to find that companies that we characterize as steady earners
offer the most attractive growth prospects relative to valuation. The Fund has
large holdings in the leisure and health care industries. Representative
holdings include Astra in Sweden, Takeda Chemical in Japan, and Sky City
Casino in New Zealand.
The Fund is also overweighted in the utilities and communications sector,
with large concentrations in mobile phone operators such as DDI Corp., Telecom
Italia Mobile, and Korea Mobile Telecom, and holdings in electric and
telephone utilities operating in what we see as high-growth economies, such as
Korea Electric Power, Chilectra, and Hong Kong Electric. At the same time, we
are underweighted in most of the cyclical sectors, including such basic
materials as chemicals and papers, because their valuations based on average
cycle prices appear too rich relative to the growth prospects for those
sectors. Some of the biggest contributors to the Fund's performance include:
Sparbanken in Sweden, Royal Dutch Petroleum, and QBE Insurance in Australia.
Looking ahead, we see a continuation of subdued inflation and we believe
that, in most markets around the world, interest rates are unlikely to repeat
their recent declines. With this factor removed, we expect corporate earnings
growth to be the key to future performance. In this environment, stock
selection becomes even more critical, and we believe the Fund can benefit from
our ability to identify those companies that, on a global basis, can sustain
above-average earnings growth and trade at attractive relative valuations.
Respectfully,
/s/A. Keith Brodkin /s/David Mannheim
A. Keith Brodkin David Mannheim
Chairman and President Portfolio Manager
January 14, 1997
PORTFOLIO MANAGER'S PROFILE
David Mannheim began his career at MFS in 1988 as a research specialist and
was promoted to Assistant Vice President - Investments in 1991 and Vice
President - Investments in 1992. In 1995, he was named Portfolio Manager of
MFS Institutional International Equity Fund. Mr. Mannheim is a graduate of
Amherst College and of Massachusetts Institute of Technology's Sloan School of
Business Management.
OBJECTIVE AND POLICIES
The Fund's investment objective is to provide long-term growth of capital. The
Fund invests, under normal market conditions, at least 65% of its total assets
in equity securities of companies whose principal activities are located
outside the United States.
PERFORMANCE SUMMARY
Because mutual funds like MFS Institutional International Equity 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.
CUMULATIVE TOTAL RATE OF RETURN AS OF DECEMBER 31, 1996
(net asset value change including reinvested distributions)
6 Months Life of Fund*
- ----------------------------------------------------------------------
Cumulative Total Return +7.50% +17.82%
- ----------------------------------------------------------------------
*Actual results, for the period from the commencement of investment
operations, January 31, 1996 to 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
Foreign Stocks - 94.7%
- -----------------------------------------------------------------------------
Issuer Shares Value
- -----------------------------------------------------------------------------
Australia - 3.6%
QBE Insurance Group Ltd. (Insurance) 10,957 $ 57,665
Seven Network Ltd. (Broadcasting)* 13,100 44,611
Southern Star Group (Entertainment) 3,600 5,058
----------
$ 107,334
- -----------------------------------------------------------------------------
Canada - 3.0%
Canadian National Railway Co. (Railroads)* 2,350 $ 89,300
- -----------------------------------------------------------------------------
Chile - 1.0%
Chilectra S.A., ADR (Utilities - Electric) 550 $ 29,288
- -----------------------------------------------------------------------------
Finland - 3.2%
Aamulehti Ii (Publishing) 750 $ 22,816
Huhtamaki Oy (Consumer Products) 600 27,900
Tt Tieto Oy (Computer Software - Systems) 500 42,252
----------
$ 92,968
- -----------------------------------------------------------------------------
France - 5.8%
Michelin, "B" (Tire and Rubber) 616 $ 33,271
Rhone-Poulenc Rorer, Inc. 600 46,875
TOTAL S.A., "B" (Oils) 379 30,840
Union des Assurances Federales S.A. (Insurance) 480 59,236
----------
$ 170,222
- -----------------------------------------------------------------------------
Germany - 4.6%
Adidas AG (Apparel) 820 $ 70,887
Henkel Kgaa (Chemicals) 700 35,171
Volkswagen AG (Automobiles) 70 29,119
----------
$ 135,177
- -----------------------------------------------------------------------------
Greece - 1.2%
Ote Greek Telecom (Telecommunications) 1,200 $ 20,522
Papastratos Cigarettes S.A. (Consumer Goods and
Services) 800 14,672
----------
$ 35,194
- -----------------------------------------------------------------------------
Hong Kong - 6.5%
Asia Satellite Telecommunications, ADR
(Telecommunications)* 1,000 $ 23,375
Giordano International Ltd. (Retail) 30,000 25,601
Hong Kong Electric Holdings Ltd. (Utilities - Electric) 7,000 23,261
Hong Kong Land Holdings Ltd. (Real Estate) 9,142 25,415
Liu Chong Hing Bank Ltd. (Banks and Credit Companies) 19,000 31,691
Peregrine Investment Holdings (Finance) 12,000 20,558
Wing Hang Bank Limited (Banks and Credit Companies) 9,000 40,846
----------
$ 190,747
- -----------------------------------------------------------------------------
Indonesia - 0.4%
Semen Gresik (Building Materials) 3,500 $ 11,266
- -----------------------------------------------------------------------------
Italy - 2.1%
Telecom Italia Mobile S.p.A. (Telecommunications) 43,500 $ 62,030
- -----------------------------------------------------------------------------
Japan - 16.2%
Bridgestone Corp. (Tire and Rubber) 2,000 $ 38,029
Canon, Inc. (Office Equipment) 3,000 66,379
DDI Corp. (Telecommunications) 12 79,447
East Japan Railway Co. (Railroads) 6 27,018
Eisai Co., Ltd. (Pharmaceuticals) 1,000 19,706
Kinki Coca-Cola (Beverages) 1,000 11,841
Kirin Beverage (Beverages) 2,000 26,966
Matsushita Electric Industrial Co. (Electrical
Equipment) 1,000 16,335
Nitto Denko Corporation (Industrials) 3,000 44,080
Omron Corp. (Electronics) 1,000 18,842
Osaka Sanso Kogyo (Chemicals) 7,000 20,570
Takeda Chemical Industries (Pharmaceuticals) 3,000 63,008
Ushio Inc. (Electronics) 4,000 43,561
----------
$ 475,782
- -----------------------------------------------------------------------------
Malaysia - 1.1%
New Straits Times Press Berhad (Printing and
Publishing) 5,500 $ 31,802
- -----------------------------------------------------------------------------
Netherlands - 2.6%
IHC Caland NV (Transportation) 550 $ 31,441
Royal Dutch Petroleum Co. (Oils) 260 45,612
----------
$ 77,053
- -----------------------------------------------------------------------------
New Zealand - 2.2%
Lion Nathan Ltd. (Beverages) 6,000 $ 14,370
Sky City Ltd. (Entertainment) 9,500 51,748
----------
$ 66,118
- -----------------------------------------------------------------------------
Peru - 0.8%
Telefonica del Peru S.A., ADR (Telecommunications) 1,300 $ 24,538
- -----------------------------------------------------------------------------
Philippines - 1.0%
Alson's Cement Corp. (Building Materials)##* 44,500 $ 17,370
Pilipino Telephone Corp. (Telecommunications)* 15,000 12,709
----------
$ 30,079
- -----------------------------------------------------------------------------
Portugal - 0.9%
Banco Totta e Acores (Banks and Credit Companies)## 1,400 $ 26,410
- -----------------------------------------------------------------------------
Singapore - 2.1%
Mandarin Oriental International Ltd. (Restaurants and
Lodging) 16,000 $ 22,560
Singapore Finance Ltd. (Financial Institutions) 24,000 38,605
----------
$ 61,165
- -----------------------------------------------------------------------------
South Korea - 2.4%
Korea Electric Power Corp. (Utilities - Electric) 1,000 $ 29,199
Korea Mobile Telecommunications (Telecommunications) 40 40,052
----------
$ 69,251
- -----------------------------------------------------------------------------
Spain - 4.5%
Acerinox Sa (Iron and Steel) 380 $ 54,892
Cubiertas Y Mzov (Engineering and Construction) 400 30,800
Repsol S.A. (Oils) 1,200 46,015
----------
$ 131,707
- -----------------------------------------------------------------------------
Sweden - 9.7%
ABB AB (Electrical Equipment) 700 $ 79,296
Astra AB, "B" (Pharmaceuticals) 1,480 71,448
Enator AB (Computer Software - Systems)* 300 7,572
Enator AB (Computer Software - Systems)* 1,400 35,847
Nobel Biocare AB (Medical and Health Products) 1,000 17,608
Pharmacia & Upjohn, Inc. 750 29,719
Sparbanken Sverige AB, "A" (Banks and Credit Companies) 2,650 45,495
----------
$ 286,985
- -----------------------------------------------------------------------------
Switzerland - 1.6%
Novartis AG (Pharmaceuticals)* 40 $ 46,209
- -----------------------------------------------------------------------------
Thailand - 1.1%
Siam City Cement Co. Ltd. (Building Materials) 2,000 $ 10,450
Total Access Communications Public Co., Ltd.
(Telecommunications) 3,000 20,700
----------
$ 31,150
- -----------------------------------------------------------------------------
United Kingdom - 16.6%
ASDA Group PLC (Stores) 33,000 $ 69,538
British Aerospace (Aerospace) 2,600 56,926
British Petroleum PLC (Oils) 4,000 47,970
Capital Radio PLC (Broadcasting) 1,700 15,815
Dr. Solomons Group PLC (Computer Software - Personal
Computers)* 600 10,275
Jarvis Hotels PLC (Lodging)+ 9,000 24,824
Kwik-Fit Holdings PLC (Retail) 9,800 36,517
Lloyds TSB Group PLC (Banks and Credit Companies) 5,272 38,928
PowerGen PLC (Utilities - Electric) 14,400 141,113
Storehouse PLC (Retail) 10,468 46,359
----------
$ 488,265
- -----------------------------------------------------------------------------
Venezuela - 0.5%
Compania Anonima Nacional Telefonos de Venezuela, ADR*
(Telecommunications) 500 $ 14,063
- -----------------------------------------------------------------------------
Total Foreign Stocks (Identified Cost, $2,497,309) $2,784,103
- -----------------------------------------------------------------------------
Warrant
- -----------------------------------------------------------------------------
Hong Kong
Peregrine Investment Holdings (Identified Cost, $149) 1,200 $ 384
- -----------------------------------------------------------------------------
Total Investments (Identified Cost, $2,497,458) $2,784,487
Other Assets, Less Liabilities - 5.3% 157,224
- -----------------------------------------------------------------------------
Net Assets - 100.0% $2,941,711
- -----------------------------------------------------------------------------
*Non-income producing security.
##SEC Rule 144A restriction.
+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, $2,497,458) $2,784,487
Cash 81,345
Foreign currency, at value (identified cost, $4,606) 4,694
Receivable for investments sold 47,920
Dividends receivable 3,722
Receivable from investment adviser 40,483
Deferred organization expenses 5,703
----------
Total assets $2,968,354
----------
Liabilities:
Payable for investments purchased $ 9,726
Payable to affiliate for management fee 176
Accrued expenses and other liabilities 16,741
----------
Total liabilities $ 26,643
----------
Net assets $2,941,711
==========
Net assets consist of:
Paid-in capital $2,619,202
Unrealized appreciation on investments and translation of
assets and liabilities in foreign currencies 287,184
Accumulated undistributed net realized gain on investments
and foreign currency transactions 34,677
Accumulated undistributed net investment income 648
----------
Total $2,941,711
==========
Shares of beneficial interest outstanding 258,036
=======
Net asset value, redemption price, and offering price per
share (net assets of $2,941,711 / 258,036 shares of
beneficial interest outstanding) $11.40
======
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations (Unaudited)
- -----------------------------------------------------------------------------
Six Months Ended December 31, 1996
- -----------------------------------------------------------------------------
Net investment income:
Income -
Dividends $ 21,710
Interest 1,832
--------
Total investment income $ 23,542
--------
Expenses -
Management fee $ 10,628
Trustees' compensation 2,180
Shareholder servicing agent fee 104
Auditing fees 13,287
Custodian fee 4,884
Amortization of organization expenses 704
Miscellaneous 5,893
--------
Total expenses $ 37,680
Fees paid indirectly (115)
Preliminary reduction of expenses by investment adviser (25,787)
--------
Net expenses $ 11,778
--------
Net investment income $ 11,764
--------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 72,310
Foreign currency transactions (786)
--------
Net realized gain on investments and foreign currency
transactions $ 71,524
--------
Change in unrealized appreciation -
Investments $124,170
Translation of assets and liabilities in foreign currencies 164
--------
Net unrealized gain on investments and foreign currency
translation $124,334
--------
Net realized and unrealized gain on investments and
foreign currency $195,858
--------
Increase in net assets from operations $207,622
========
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- ---------------------------------------------------------------------------------------------------------------
Six Months Ended
December 31, 1996 Period Ended
(Unaudited) June 30, 1996*
- ---------------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets:
<S> <C> <C>
From operations -
Net investment income $ 11,764 $ 22,994
Net realized gain on investments and foreign currency translation 71,524 23,484
Net unrealized gain on investments and foreign currency translation 124,334 162,850
---------- ----------
Increase in net assets from operations $ 207,622 $ 209,328
---------- ----------
Distributions declared to shareholders
From net investment income $ (32,941) $ --
From net realized gain on investments and foreign currency
transactions (61,500) --
---------- ----------
Total distributions declared to shareholders $ (94,441) $ --
---------- ----------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 332,807 $2,288,526
Net asset value of shares issued to shareholders in reinvestment of
distributions 94,439 --
Cost of shares reacquired (96,580) --
---------- ----------
Increase in net assets from Fund share transactions $ 330,666 $2,288,526
---------- ----------
Total increase in net assets $ 443,847 $2,497,854
Net assets:
At beginning of period 2,497,864 10
---------- ----------
At end of period (including accumulated undistributed net investment
income of $648 and $21,825, respectively) $2,941,711 $2,497,864
========== ==========
*For the period from the commencement of investment operations, January 31, 1996 to June 30, 1996.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
- -------------------------------------------------------------------------------------------------------------------------------
Six Months Ended
December 31, 1996 Period Ended
(Unaudited) June 30, 1996*
- -----------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C>
Net asset value - beginning of period $10.96 $10.00
------ ------
Income from investment operations# -
Net investment income(S) $ 0.05 $ 0.13
Net realized and unrealized gain on investments and foreign currency
transactions 0.77 0.83
------ ------
Total from investment operations $ 0.82 $ 0.96
------ ------
Less distributions declared to shareholders -
From net investment income $(0.13) $ --
From net realized gain on investments and foreign currency
transactions (0.25) --
------ ------
Total distributions declared to shareholders $(0.38) $ --
------ ------
Net asset value - end of period $11.40 $10.96
====== ======
Total return 7.50%++ 9.60%++
Ratios (to average net assets)/Supplemental data(S):
Expenses 0.85%+ 0.94%+
Net investment income 1.70%+ 2.46%+
Portfolio turnover 46% 19%
Average commission rate### $0.0194 $0.0182
Net assets at end of period (000 omitted) $ 2,942 $ 2,498
*For the period from the commencement of investment operations, January 31, 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 investment adviser voluntarily agreed to maintain the expenses of the Fund at not more than 0.85% of
average daily net assets effective May 3, 1996. To the extent actual expenses were over these limitations,
the net investment (loss) per share and ratios would have been:
Net investment loss $ (0.12) $ (0.08)
Ratios (to average net assets):
Expenses## 2.72%+ 4.91%+
Net investment loss (1.01)%+ (1.51)%+
</TABLE>
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(1) Business and Organization
MFS Institutional International Equity 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. 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
0.75% 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 in
the Statement of Operations. The investment adviser 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 0.85% 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 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 $1,356,940 and $1,237,242, 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 $2,497,458
==========
Gross unrealized appreciation $ 379,114
Gross unrealized depreciation (92,085)
----------
Net unrealized appreciation $ 287,029
==========
<PAGE>
(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>
Six Months Ended Period Ended
December 31, 1996 June 30, 1996*
-------------------------- -----------------------------
Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 30,470 $332,807 227,904 $2,288,526
Shares issued to shareholders in
reinvestment of distributions 8,372 94,439 -- --
Shares reacquired (8,710) (96,580) -- --
------ -------- ------- ----------
Net increase 30,132 $330,666 227,904 $2,288,526
====== ======== ======= ==========
*For the period from the commencement of investment operations, January 31, 1996 to June 30, 1996.
</TABLE>
(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 $16.
(7) Restricted Security
The Fund may invest not more than 15% of its net assets in security which are
subject to legal or contractual restrictions on resale. At December 31, 1996,
the Fund owned the following restricted security (constituting 0.84% 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.
<TABLE>
Description Date of Acquisition Share Amount Cost Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Jarvis Hotels PLC 6/21/96 - 9/6/96 9,000 $23,490 $24,824
=======
</TABLE>
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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.
