<PAGE>
[LOGO] M F S (SM) Semiannual Report
INSTITUTIONAL ADVISORS, INC. December 31, 1997
MFS(R) INSTITUTIONAL EMERGING MARKETS DEBT FUND
(formerly MFS(R) Institutional Emerging Markets Income Fund)
[Graphic Omitted)
<PAGE>
<TABLE>
MFS(R) INSTITUTIONAL EMERGING MARKETS DEBT FUND
(formerly MFS(R) Institutional Emerging Markets Income Fund)
<S> <C>
TRUSTEES INVESTMENT ADVISER
Nelson J. Darling, Jr. Massachusetts Financial Services Company
Trustee, Eastern Enterprises 500 Boylston Street
(diversified holding company) Boston, MA 02116-3741
William R. Gutow DISTRIBUTOR
Vice Chairman, MFS Fund Distributors, Inc.
Capitol Entertainment Management Company 500 Boylston Street
(Blockbuster Video franchise) Boston, MA 02116-3741
PORTFOLIO MANAGER INVESTOR SERVICE
Jeffrey A. Kaufman* MFS Service Center, Inc.
P.O. Box 1400
TREASURER Boston, MA 02107-9906
W. Thomas London*
For additional information,
ASSISTANT TREASURERS contact your financial adviser.
Mark E. Bradley*
Ellen Moynihan* CUSTODIAN
James O. Yost* State Street Bank and Trust Company
SECRETARY WORLD WIDE WEB
Stephen E. Cavan* www.mfs.com
ASSISTANT SECRETARY
James R. Bordewick, Jr.*
[Dalbar Logo] For the fourth year in a row, MFS earned a #1 ranking in the
DALBAR, Inc. Broker/Dealer Survey, Main Office Operations
Service Quality Category. The firm achieved a 3.42 overall
score on a scale of 1 to 4 in the 1997 survey. A total of
111 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 11
categories, including "knowledge of operations contact,"
"keeping you informed," and "ease of doing business"
with the firm.
*Affiliated with the Invesment Adviser
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
</TABLE>
<PAGE>
MFS Mourns Chairman's Passing
It is with deep regret that we inform you of the death on February 2,
1998, of A. Keith Brodkin, Chairman and Chief Executive Officer of MFS
Investment Management(SM). Mr. Brodkin joined MFS in 1970 and made
enormous contributions to the organization, including helping to build the
firm's investment staff, which will continue to manage all of the MFS
investment portfolios. His leadership friendship, and wise counsel will be
sorely missed.
LETTER TO SHAREHOLDERS
Dear Shareholders:
Thanks to a sustained period of relative stability and moderate growth, the
U.S. economy has produced thousands of new jobs, inflation has remained under
control, and the investment climate has -- for the most part -- been
favorable. The increased use of technology and other productivity
enhancements, as well as corporate restructuring and global competition, is
improving companies' balance sheets and helping control inflation. The rapid
pace of growth seen in the first quarter slowed to an annual rate of 3.3% in
the second quarter and 3.5% in the third. We believe this economic momentum
will carry well into the first quarter of 1998 as a result of lower interest
rates and continuing growth in the money supply. While U.S. economic growth
continues to be impressive, events in the Pacific Rim will somewhat offset
that and, therefore, markets are likely to continue to focus on Federal
Reserve Board activity.
Internationally, the second half of 1997 brought turmoil to the world's
investment markets as concerns about Asia mounted and as liquidity, which has
been high for the past few years, began to dry up. While markets in Europe,
the United States, and even Latin America performed reasonably well, the
cumulative effect of large current-account deficits, followed by the collapse
of several large financial institutions and corporations, created a situation
in Asia that could remain unstable for some time. Although the Asian crisis
affected other emerging markets, valuations in several of them have become
more attractive, and we believe the long-term case for emerging markets
remains intact. In Europe, the uncertainty over economic union appears to have
diminished somewhat. Growth has begun accelerating on the continent and may
exceed U.S. growth in 1998.
We appreciate your support and welcome any questions or comments you may have.
Respectfully,
/s/ Jeffrey L. Shames
Jeffrey L. Shames
President, MFS Investment Management
January 12, 1998
<PAGE>
PORTFOLIO MANAGER'S OVERVIEW
Dear Shareholders:
For the six months ended December 31, 1997, the Fund provided a total return
of -0.39% (including the reinvestment of distributions), as emerging markets
debt was affected by contagion from the Asian crisis. The Fund's return
compares to a -7.32% return for the Fund's custom index, an equally weighted
blend of the J.P. Morgan Emerging Markets Bond Index Plus, which advanced
2.50% for the period, and the J.P. Morgan Emerging Local Markets Index, which
declined 16.75%. The J.P. Morgan Emerging Markets Bond Index Plus is comprised
of Brady bonds (restructured bank loans) and other dollar-denominated bonds,
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 dollar-denominated bonds and half in money market instruments.
The global economic environment grew more volatile, though still supportive,
for emerging markets during the second half of 1997. Economic growth in the
OECD (Organization for Economic Cooperation and Development) was strong enough
to provide export opportunities for most emerging markets, yet low enough to
preclude significant rises in interest rates and external debt service. As
Europe approaches monetary union in 1999, traditional sources of high yields
such as Italian, Spanish, and Scandinavian bonds have disappeared. Global
investors increasingly have looked to emerging markets debt to provide high
yields and diversification no longer available in Europe.
Economic fundamentals in most emerging markets outside Asia have been solid,
assuring the continuation of the long-term, secular trend of rising capital
flows to emerging markets. Gross domestic product (GDP) growth has been strong
in Latin America following impressive new-policy implementation, is still
somewhat uneven throughout emerging Europe as the transition from communism
continues, and is collapsing from high levels in emerging Asia as banking
crises and political uncertainties grip that region. Broadly speaking, fiscal
trends in developing countries remain healthy and closer to balance than in
industrial countries. Current-account deficits are generally manageable and
are being financed with more direct foreign investment and with more longer-
maturity debt than in previous years.
The Fund's performance was helped by its underweighting in Asian currencies
and in Philippine and Nigerian Brady bonds, as well as by overweightings in
Mexican and Bulgarian Brady bonds. The Fund's performance was hurt by
underweightings in Peruvian and Ecuadoran Brady bonds and in the Mexican peso.
Looking forward, we remain sanguine about the policy environment in most
emerging markets for the long term. We do have some short-term concerns
related to further contagion effects from Asia and the sustainability of oil
prices. However, our overall outlook is positive for the coming year.
Respectfully,
/s/ Jeffrey A. Kaufman
Jeffrey A. Kaufman
Portfolio Manager
<PAGE>
PORTFOLIO MANAGER'S PROFILE
Jeffrey A. Kaufman joined MFS in 1994 and was named Assistant Vice President
in 1996 and Vice President in 1998. He is a graduate of the University of
North Carolina and has master degrees in Business Administration and in
International Affairs from Columbia University. He specializes in emerging
markets debt and has managed MFS Institutional Emerging Markets Debt 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 issues. The Fund also may
invest in fixed-income securities of companies in emerging markets countries.
Commencement of investment operations: August 7, 1995
PERFORMANCE SUMMARY
Because mutual funds like MFS Institutional Emerging Markets Debt 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. Shares of the Fund are purchased at net asset value. The minimum
initial investment is generally $3 million.
AVERAGE ANNUAL AND CUMULATIVE TOTAL RATES OF RETURN AS OF DECEMBER 31, 1997
(net asset value change including reinvested distributions)
6 Months 1 Year Life of Fund*
- --------------------------------------------------------------------------------
Cumulative Total Return -0.39% +9.52% +38.13%
- --------------------------------------------------------------------------------
Average Annual Total Return -- +9.52% +14.39%
- --------------------------------------------------------------------------------
*For the period from the commencement of the Fund's investment operations,
August 7, 1995, through December 31, 1997.
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 (Unaudited) - December 31, 1997
Bonds - 58.0%
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Foreign Bonds - 58.0%
Brazil - 22.1%
Federal Republic of Brazil, 6.688s, 2024 $500 $ 409,400
Federal Republic of Brazil, 6.813s, 2001 785 747,712
----------
$1,157,112
- -----------------------------------------------------------------------------
Bulgaria - 7.4%
National Republic of Bulgaria, 6.688s, 2024 $500 $ 385,000
- -----------------------------------------------------------------------------
Mexico - 13.3%
United Mexican States, 6.617s, 2019 $250 $ 231,250
United Mexican States, 6.693s, 2019 250 231,250
United Mexican States, 6.719s, 2019 250 231,250
----------
$ 693,750
- -----------------------------------------------------------------------------
Panama - 3.6%
Republic of Panama, 8.875s, 2027 $200 $ 188,100
- -----------------------------------------------------------------------------
Poland - 2.9%
Government of Poland, 3s, 2024 $250 $ 153,125
- -----------------------------------------------------------------------------
Russia - 4.4%
Ministry of Finance, Russia, 10s, 2007 $250 $ 231,625
- -----------------------------------------------------------------------------
Venezuela - 4.3%
Republic of Venezuela, 9.25s, 2027 $250 $ 222,875
- -----------------------------------------------------------------------------
Total Foreign Bonds $3,031,587
- -----------------------------------------------------------------------------
Total Bonds (Identified Cost, $2,817,836) $3,031,587
- -----------------------------------------------------------------------------
Rights
- -----------------------------------------------------------------------------
Shares
- -----------------------------------------------------------------------------
United Mexican States* (Identified Cost, $0) 385,000 $ 0
- -----------------------------------------------------------------------------
Warrants
- -----------------------------------------------------------------------------
Republic of Venezuela* (Identified Cost, $0) 1,250 $ 0
- -----------------------------------------------------------------------------
Short-Term Obligations - 35.4%
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Argentina T bill Ars, due 1/16/98 ARS 250 $ 248,626
Poland T Bill, due 4/01/98 PLN 750 202,068
Federal Home Loan Bank Corp., due 1/02/98 $ 1,400 1,399,802
- -----------------------------------------------------------------------------
Total Short-Term Obligations, at Amortized Cost $1,850,496
- -----------------------------------------------------------------------------
Total Investments (Identified Cost, $4,674,686) $4,882,083
- -----------------------------------------------------------------------------
Other Assets, Less Liabilities - 6.6% 342,815
- -----------------------------------------------------------------------------
Net Assets - 100.0% $5,224,898
- -----------------------------------------------------------------------------
*Non-income producing 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.
ARS = Argentine Peso
PLN = Polish Zloty
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities (Unaudited)
- --------------------------------------------------------------------------------
December 31, 1997
- --------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $4,674,686) $4,882,083
Cash 246,213
Interest receivable 69,414
Net receivable for foreign currency exchange contracts closed
or subject to master netting agreements 27,324
Deferred organization expenses 10,656
Other assets 42
----------
Total assets $5,235,732
----------
Liabilities:
Payable to affiliates -
Management fee 121
Administrative fee 47
Accrued expenses and other liabilities 10,666
----------
Total liabilities $ 10,834
----------
Net assets $5,224,898
==========
Net assets consist of:
Paid-in capital $5,069,625
Unrealized appreciation on investments and translation of
assets and liabilities in foreign currencies 234,721
Accumulated distributions in excess of net realized gain on
investments and foreign currency transactions (237,922)
Accumulated undistributed net investment income 158,474
----------
Total $5,224,898
==========
Shares of beneficial interest outstanding 490,987
=======
Net asset value, offering price, and redemption price per share
(net assets of $5,224,898 / 490,987 shares of beneficial
interest outstanding) $10.64
======
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations (Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Six Months Ended December 31, 1997
- ---------------------------------------------------------------------------------------------------
<S> <C>
Net investment income:
Income -
Interest $ 208,923
Dividends 1,004
----------
Total investment income $ 209,927
----------
Expenses -
Management fee $ 22,534
Trustees' compensation 3,334
Shareholder servicing agent fee 202
Administrative fee 405
Registration fee 10,224
Auditing fees 5,738
Printing 2,531
Amortization of organization expenses 2,058
Legal fees 1,481
Custodian fee 1,423
Miscellaneous 135
----------
Total expenses $ 50,065
Fees paid indirectly (1,395)
Reduction of expenses by investment adviser (15,532)
----------
Net expenses $ 33,138
----------
Net investment income $ 176,789
----------
Realized and unrealized loss on investments:
Realized loss (identified cost basis) -
Investment transactions $ (107,867)
Foreign currency transactions (122,334)
----------
Net realized loss on investments and foreign currency transactions (230,201)
----------
Change in unrealized appreciation (depreciation) -
Investments $ 41,424
Translation of assets and liabilities in foreign currencies (10,484)
----------
Net unrealized gain on investments and foreign currency translation $ 30,940
----------
Net realized and unrealized loss on investments and foreign
currency $ (199,261)
----------
Decrease in net assets from operations $ (22,472)
==========
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Six Months Ended
December 31, 1997 Year Ended
(Unaudited) June 30, 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Decrease in net assets:
From operations -
Net investment income $ 176,789 $ 390,389
Net realized gain (loss) on investments and
foreign currency transactions (230,201) 482,799
Net unrealized gain on investments and foreign
currency translation 30,940 94,674
---------- ----------
Increase (decrease) in net assets from
operations $ (22,472) $ 967,862
---------- ----------
Distributions declared to shareholders -
From net investment income $ (175,251) $ (320,320)
From net realized gain on investments and foreign
currency transactions (365,182) --
In excess of net realized gain on investments
and foreign currency transactions (7,721) (178,414)
---------- ----------
Total distributions declared to shareholders $ (548,154) $ (498,734)
---------- ----------
Fund share (principal) transactions -
Net increase in net assets from Fund share
transactions $ 470,009 $ 696,866
---------- ----------
Total increase (decrease) in net assets $ (100,617) $1,165,994
Net assets:
At beginning of period 5,325,515 4,159,521
---------- ----------
At end of period (including accumulated
undistributed net investment income of
$158,474 and $156,936, respectively) $5,224,898 $5,325,515
========== ==========
</TABLE>
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS - continued
Financial Highlights
- ----------------------------------------------------------------------------------------------------------------------------
Six Months Ended
December 31, 1997 Year Ended Period Ended
(Unaudited) June 30, 1997 June 30, 1996*
- --------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C>
Net asset value - beginning of period $11.94 $10.88 $10.00
------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.40 $ 0.94 $ 0.70
Net realized and unrealized gain (loss) on
investments and foreign currency transactions (0.45) 1.41 0.56
------ ------ ------
Total from investment operations $(0.05) $ 2.35 $ 1.26
------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.40) $(0.83) $(0.38)
From net realized gain on investments and foreign
currency transactions (0.83) (0.46) --
In excess of net realized gain on investments and
foreign currency transactions (0.02) -- --
------ ------ ------
Total distributions declared to shareholders $(1.25) $(1.29) $(0.38)
------ ------ ------
Net asset value - end of period $10.64 $11.94 $10.88
====== ====== ======
Total return (0.39)%++ 22.79% 12.93%++
Ratios (to average net assets)/Supplemental data(S):
Expenses 1.25%+ 1.25% 1.25%+
Net investment income 6.72%+ 8.30% 7.59%+
Portfolio turnover 130% 473% 285%
Net assets at end of period (000 omitted) $5,225 $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.
##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 (excluding
management fee) at not more than 0.40% of average daily net assets. To the extent that actual
expenses were over these limitations; the net investment income per share and ratios would have
been:
Net investment income# $ 0.36 $ 0.85 $ 0.43
Ratios (to average net assets):
Expenses## 1.89%+ 2.07% 4.21%+
Net investment income 6.13%+ 7.48% 4.63%+
</TABLE>
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(1) Business and Organization
MFS Institutional Emerging Markets Debt Fund (the Fund) is a nondiversified
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.
Repurchase Agreements - The Fund may enter into repurchase agreements with
institutions that the Fund's investment adviser has determined are
creditworthy. Each repurchase agreement is recorded at cost. The Fund requires
that the securities purchased in a repurchase transaction be transferred to
the custodian in a manner sufficient to enable the Fund to obtain those
securities in the event of a default under the repurchase agreement. The Fund
monitors, on a daily basis, the value of the securities transferred to ensure
that the value, including accrued interest, of the securities under each
repurchase agreement is greater than amounts owed to the Fund under each such
repurchase agreement. The Fund, along with other affiliated entities of
Massachusetts Financial Services Company (MFS), may utilize a joint trading
account for the purpose of entering into one or more repurchase agreements.
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.
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 nonhedging
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 nonhedging 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 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 premium
and original issue discount is 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.
The Fund can invest up to 100% of its portfolio in high-yield securities rated
below investment grade. Investments in high-yield securities involve greater
degrees of credit and market risk than investments in higher-rated securities
and tend to be more sensitive to economic conditions.
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 that 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 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.
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 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 and service fees. The Fund in turn will pay MFS an expense
reimbursement fee not greater than 0.40% of average daily net assets. To the
extent that the expense reimbursement fee exceeds the Fund's actual expenses,
the excess will be applied to amounts paid by MFS in prior years. At December
31, 1997, the aggregate unreimbursed expenses owed to MFS by the Fund amounted
to $121,839.
Administrator - The Fund has an administrative services agreement with MFS to
provide the Fund with certain financial, legal, shareholder servicing,
compliance, and other administrative services. As a partial reimbursement for
the cost of providing these services, the Fund pays MFS an administrative fee
at the following annual percentages of the Fund's average daily net assets,
provided that the administrative fee is not assessed on Fund assets that
exceed $3 billion:
First $1 billion 0.0150%
Next $1 billion 0.0125%
Next $1 billion 0.0100%
In excess of $3 billion 0.0000%
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, MFS Fund Distributors,
Inc. (MFD), 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 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
$4,041,471 and $4,111,101 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 $4,674,686
==========
Gross unrealized appreciation $ 238,454
Gross unrealized depreciation (31,057)
---------
Net unrealized appreciation $ 207,397
==========
(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:
Year Ended
Six Months Ended December 31, 1997 June 30, 1997
---------------------------------- ------------------
Shares Amount Shares Amount
- --------------------------------------------------------------------------------
Shares sold 2,748 $ 33,026 18,645 $209,020
Shares issued to shareholders in
reinvestment of distributions 51,761 548,154 45,839 498,734
Shares reacquired (9,427) (111,171) (943) (10,888)
------ -------- ------- ---------
Net increase 45,082 $470,009 63,541 $696,866
====== ======== ====== ========
(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 period ended December 31, 1997, was $13.
(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. 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
Forward foreign currency purchases and sales under master netting agreements
amounted to a net receivable of $25,628 with Bankers' Trust, $3,616 with
Deutsche Bank, and a net payable of $1,920 with Merrill Lynch at December 31,
1997.
At December 31, 1997, the Fund had sufficient cash and/or securities to cover
any commitments under these contracts.
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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.
<PAGE>
[C]1998 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
EFI-3 2/98 .2M
