<PAGE>
[Logo] M F S(SM) Annual Report
INSTITUTIONAL ADVISORS, INC for Year Ended
June 30, 1998
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MFS(R) INSTITUTIONAL EMERGING MARKETS DEBT FUND
(FORMERLY MFS(R) INSTITUTIONAL EMERGING MARKETS INCOME FUND)
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[Graphic Omitted]
<PAGE>
MFS(R) INSTITUTIONAL EMERGING MARKETS DEBT FUND
(FORMERLY MFS(R) INSTITUTIONAL EMERGING MARKETS INCOME FUND)
TRUSTEES INVESTMENT ADVISER
Jeffrey L. Shames* Massachusetts Financial Services
Chairman, Chief Executive Officer, and Company
Director, MFS(R) Investment 500 Boylston Street
Management(SM) Boston, MA 02116-3741
Nelson J. Darling, Jr. DISTRIBUTOR
Professional Trustee MFS Fund Distributors, Inc.
500 Boylston Street
William R. Gutow Boston, MA 02116-3741
Vice Chairman,
Capitol Entertainment Management INVESTOR SERVICE
Company; MFS Service Center, Inc.
Real Estate Consultant P.O. Box 2281
Boston, MA 02107-9906
PORTFOLIO MANAGER
Jeffrey A. Kaufman* For additional information,
contact your financial adviser.
CHAIRMAN AND PRESIDENT
Jeffrey L. Shames* CUSTODIAN
State Street Bank and Trust Company
TREASURER
W. Thomas London* AUDITORS
Deloitte & Touche LLP
ASSISTANT TREASURERS
Mark E. Bradley* WORLD WIDE WEB
Ellen Moynihan* www.mfs.com
James O. Yost*
SECRETARY
Stephen E. Cavan*
ASSISTANT SECRETARY
James R. Bordewick, Jr.*
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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
[Dalbar logo] 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.
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*Affiliated with the Investment Adviser
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NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
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<PAGE>
LETTER FROM THE CHAIRMAN
Dear Shareholders:
With the U.S. stock market well into its fourth year of record-breaking
advances, it is necessary to take a cautious outlook. By most commonly accepted
measures, equity valuations appear to have risen to a point at which the stock
market has become more vulnerable to changes in the investment environment such
as rising inflation and interest rates or a slowing economy. As a result, while
we continue to hold a favorable long-term outlook for the equity markets, we
also believe that a significant market correction is possible and that such a
correction would be a healthy near-term event.
Currently, equity investors seem to be primarily focused on interest rates,
which have been relatively stable for several months as inflation has remained
low. In an environment of low interest rates, stocks become more attractive than
most fixed-income investments, while low inflation helps control companies'
costs, such as for raw materials, wages, and benefits. The near-term outlook for
a continuation of this environment appears relatively favorable. However, this
year has seen a marked slowdown in corporate earnings. This means that as equity
prices continue to rise, price-to-earnings (P/E) ratios, or the amount an
investor pays for a stock in relation to the company's earnings per share, also
go up. A year ago, the average P/E ratio for stocks in the unmanaged Standard &
Poor's 500 Composite Index stood at approximately 22; this summer, the average
P/E ratio was 32% higher, at about 29. In some cases, such as with some of the
newer companies associated with the Internet, P/E ratios have soared to levels
that are unlikely to be sustained.
As long as interest rates remain low and the economy continues to grow, it is
possible that some of these valuations can be supported. We expect corporate
earnings to grow 4% to 6% this year. However, just as no one can predict market
cycles, so too no one can predict economic cycles -- except to say that these
cycles do exist and that an economic slowdown at some point is inevitable.
Internationally, the economic turmoil in Asia continues to be a concern to us,
and we believe the United States has yet to see the full impact of this crisis.
There have been brief periods when some Asian economies appeared to improve, but
the situation remains quite dynamic and could turn worse before getting better.
While the crisis has affected all countries in Asia, Japan was a major factor
behind the turmoil as excesses in its banking and real estate sectors have led
to severe currency problems. In the long run, Japan will be the engine that
drives the region's eventual recovery, thus it warrants closer investor
scrutiny. At the same time, the Asian turmoil has had the beneficial effect of
moderating U.S. growth and keeping inflation in check, which has helped
establish a favorable interest-rate environment.
Countering the situation in Asia has been the greater-than-expected strength of
European economies. As Europe moves toward economic union, these countries have
benefited from a convergence of interest rates to lower levels, a rapid
expansion of manufacturing and service businesses, and an increasingly strong
consumer sector. This has helped American exporters offset some of their Asian
losses, while providing numerous investment opportunities in developed and
emerging European markets.
Given the uncertainty arising from these conflicting developments, we believe it
is prudent to remind investors of the need to take a long-term view and to
diversify their investments across a range of asset classes. This includes
portfolios that focus on bonds and international investments as well as on the
U.S. stock market. The likelihood of an eventual market correction also makes it
important for us to use original, bottom-up research to find companies that we
think can keep growing or gain market share in the face of the occasional
downturn. To help achieve this, and to provide the broadest possible coverage of
industry sectors and individual companies, MFS continues to increase its number
of full-time research analysts. These analysts thoroughly investigate each
company's earnings potential and position in its industry as well as the overall
prospects for that industry.
MFS also uses active portfolio management on the fixed-income side, taking
advantage of our extensive research and credit analysis to help reduce the
potential for price declines and enhance the opportunity for appreciation. Every
year, both fixed-income and equity managers meet with thousands of credit
issuers and companies. They also attend many presentations, closely follow
sources of industry research, and keep track of competitors.
We believe that applying this discipline of thorough, bottom-up research to both
the equity and fixed-income markets is the best way to provide favorable
long-term performance for our shareholders -- regardless of changes in the
overall market environment.
We appreciate your support and welcome any questions or comments you may have.
Respectfully,
/s/ Jeffrey L. Shames
Jeffrey L. Shames
Chairman and Chief Executive Officer
MFS(R) Investment Management(SM)
July 13, 1998
MANAGEMENT REVIEW AND OUTLOOK
Dear Shareholders:
For the year ended June 30, 1998, the Fund provided a total return of 1.67%
(including the reinvestment of any distributions), as emerging markets debt was
buffeted by several negative developments. The Fund's return compares to a
- -7.41% return for the Fund's custom index, a blend of the J.P. Morgan Emerging
Markets Bond Index Plus (50% of the custom index) and the J.P. Morgan Emerging
Local Markets Index (50%). The J.P. Morgan Emerging Markets Bond Index Plus is
comprised of Brady bonds (U.S. dollar-denominated restructured bank loans),
while the J.P. Morgan Emerging Local Markets Index is comprised of local-
currency, short-term instruments. The Fund typically invests half its net assets
in Brady bonds and half in local-currency instruments.
Emerging markets have experienced a series of shocks over the past year that
have dampened performance of their debt and currencies. Devaluations across Asia
started in Thailand in July 1997 and spread to Indonesia, the Philippines,
Malaysia, and South Korea, among others. Partly as a result of slowing Asian
growth, oil prices dropped precipitously, putting pressure on major
oil-exporting countries such as Venezuela, Mexico, and Russia. And lastly, key
elections in Brazil, Venezuela, Colombia, and Ecuador raised political concerns
that further undermined global emerging market sentiment.
In this environment, the International Monetary Fund (IMF) has been extremely
busy coordinating financing packages for countries in need of liquidity support.
Official creditors have been called upon to backstop several countries and have
had the willingness and resources to do so. However, there is growing concern
that the IMF's resources may need to be replenished if it is to carry on its
work.
Despite the near-term concerns, we believe the outlook for emerging market debt
is favorable. Broadly speaking, governments in most emerging markets have
continued to implement market-oriented reforms such as pursuing tight fiscal and
monetary policies, privatizing state-owned enterprises, and deregulating
markets. From the investor perspective, European monetary union has eliminated
the possibility of return enhancement and diversification within Europe, so
emerging market debt is replacing Italian, Swedish, and Spanish bonds in many
portfolios. We believe many economic and political factors should help support
strong performance in emerging market debt.
The Fund benefited from its zero weightings in Asian currencies and moderate
underweightings in Brady bonds over most of the period. Looking to individual
country selection, the Fund's performance was helped by overweightings in
Panamanian, Mexican Brady, and Mexican Eurobonds. The Fund's performance was
hurt by underweightings in Argentine Brady bonds and the Czech koruna.
The main structuring decision for the Fund has been to overweight emerging
Europe relative to the benchmark. We believe that yields on Russian and
Bulgarian bonds are too high, both in relation to their underlying
creditworthiness and to that of Latin American and emerging Asian countries.
With regard to foreign exchange exposure, we remain wary of Asian currencies and
are focusing on less-vulnerable opportunities in Latin America and emerging
Europe.
Respectfully,
/s/ Jeffrey A. Kaufman
Jeffrey A. Kaufman
Portfolio Manager
Note to Shareholders: Effective July 24, 1998, the Fund is being managed by
Robert J. Manning and Matthew W. Ryan. Mr. Manning joined MFS in 1984 as a
research analyst in the High Yield Bond Department. He was named Vice
President in 1988, portfolio manager of MFS Special Value Trust in 1992,
Senior Vice President in 1993, and portfolio manager of MFS High Income Fund
in 1994. Mr. Ryan has been employed by MFS as an analyst since April 1997. He
previously worked as an economist with the U.S. Executive Director's Office of
the International Monetary Fund.
The opinions expressed in this report are those of the portfolio manager and are
only through the end of the period of the report as stated on the cover. The
manager's views are subject to change at any time based on market and other
conditions, and no forecasts can be guaranteed.
PORTFOLIO MANAGER'S PROFILE
Jeffrey A. Kaufman is Vice President of MFS(R) Investment Management(SM) and
portfolio manager of MFS(R) Meridian Emerging Markets Debt Fund and MFS(R)
Institutional Emerging Markets Debt Fund.
Mr. Kaufman joined MFS in March 1994 after working as a consultant to the
emerging markets group of Salomon Brothers. In 1996 he was named an Assistant
Vice President -- Investments, specializing in emerging market debt.
He is a graduate of the University of North Carolina and has Master in Business
Administration and Master in International Affairs degrees from Columbia
University.
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. Please read it carefully before investing
or sending money.
FUND FACTS
Note: The Fund changed its name from MFS(R) Institutional Emerging Markets
Income Fund to MFS Institutional Emerging Markets Debt Fund effective November
1, 1997.
Objective: Seeks total return (high current income and
long-term growth of capital). The Fund invests,
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.
Commencement of
investment operations: August 7, 1995
Size: $5.3 million net assets as of June 30, 1998
PERFORMANCE SUMMARY
The information below illustrates the historical performance of the Fund in
comparison to various market indicators. Benchmark comparisons are unmanaged and
do not reflect any fees or expenses. It is not possible to invest directly in an
index. The minimum initial investment is generally $3 million. Shares of the
Fund are purchased at net asset value.
GROWTH OF A HYPOTHETICAL $3,000,000 INVESTMENT
(For the period from September 1, 1995, through June 30, 1998)
MFS 50% J.P. Morgan J.P. Morgan
Institutional Emerging Local Emerging
Emerging Markets Index Local Consumer
Markets 50% J.P. Morgan Markets Price
Debt Emerging Markets Bond Index
Fund Bond Index Plus Index - U.S.
- ---------------------------------------------------------------------------
9/95 $3,000,000 $3,000,000 $3,000,000 $3,000,000
12/95 3,142,000 3,217,000 3,012,000 3,010,000
12/96 3,784,000 3,995,000 3,460,000 3,112,000
12/97 4,144,000 4,044,000 3,027,000 3,165,000
6/98 4,229,690 4,006,614 2,967,824 3,200,171
AVERAGE ANNUAL TOTAL RETURNS THROUGH JUNE 30, 1998
1 Year 10 Years/Life
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MFS Institutional Emerging Markets Debt Fund* +1.67% +12.58%
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50% J.P. Morgan Emerging Local Markets Index/
50% J.P. Morgan Emerging Markets Bond Index Plus# -7.41% +10.44%
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J.P. Morgan Emerging Local Markets Index# -18.31% - 0.50%
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Consumer Price Index##+ + 1.75% + 2.31%
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*"Life" refers to the period from the commencement of the Fund's investment
operations, August 7, 1995, through June 30, 1998.
#Source: Datastream. "Life" refers to the period from September 1, 1995,
through June 30, 1998.
##Source: CDA/Wiesenberger. "Life" refers to the period from September 1, 1995,
through June 30, 1998.
+The Consumer Price Index is measured by the U.S. Bureau of Labor Statistics
and measures the cost of living (inflation).
All results are historical and assume the reinvestment of dividends and capital
gains. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. PAST PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS. Performance results reflect any applicable
expense subsidies and waivers, without which the results would have been less
favorable. Subsidies and waivers may be rescinded at any time. See the
prospectus for details.
Investments in foreign and emerging market securities may provide superior
returns but also involve greater risk than U.S. investments. Investments in
foreign and emerging market securities may be favorably or unfavorably affected
by changes in interest rates and currency exchange rates, market conditions, and
the economic and political conditions of the countries where investments are
made. These risks may increase share price volatility.
<PAGE>
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PORTFOLIO OF INVESTMENTS - June 30, 1998
BONDS - 65.0%
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Principal Amount
Issuer (000 Omitted) Value
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Foreign Bonds - 65.0%
Brazil - 19.7%
Federal Republic of Brazil, 6.875s, 2001 $ 700 $ 665,000
Federal Republic of Brazil, 6.625s, 2024 500 386,250
----------
$1,051,250
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Bulgaria - 7.2%
National Republic of Bulgaria, 6.563s, 2024 $ 500 $ 381,900
- --------------------------------------------------------------------------------
Mexico - 16.3%
Petroleos Mexicanos, 9.25s, 2018 (Industrial)## $ 200 $ 191,260
United Mexican States, 6.477s, 2019 250 224,700
United Mexican States, 6.594s, 2019 250 224,700
United Mexican States, 6.617s, 2019 250 224,700
----------
$ 865,360
- --------------------------------------------------------------------------------
Panama - 3.5%
Republic of Panama, 8.875s, 2027 $ 200 $ 188,800
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Peru - 2.0%
Republic of Peru, 4s, 2017 $ 175 $ 107,852
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Philippines - 3.9%
ING Bank NV London Branch, 0s, 1999 (Banks
and Credit Companies)## $ 200 $ 206,000
- --------------------------------------------------------------------------------
Poland - 3.1%
Government of Poland, 3s, 2024 $ 250 $ 164,700
- --------------------------------------------------------------------------------
Russia - 3.6%
Ministry of Finance, Russia, 10s, 2007 $ 150 $ 112,500
Ministry of Finance, Russia, 12.75s, 2028## 90 80,550
----------
$ 193,050
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South Africa - 3.1%
Eskom, 15s, 1998 (Utilities - Electric) ZAR 1,000 $ 164,417
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South Korea - 2.6%
Republic of Korea, 8.875s, 2008 $ 155 $ 140,190
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Total Foreign Bonds (Identified Cost, $3,395,786) $3,463,519
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RIGHTS
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Shares
- --------------------------------------------------------------------------------
United Mexican States (Identified Cost, $0)* 385,000 $ --
- --------------------------------------------------------------------------------
SHORT-TERM OBLIGATION - 33.3%
- --------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- --------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp.,
due 7/01/98, at Amortized Cost $1,775 $ 1,775,000
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Total Investments (Identified Cost, $5,170,786) $ 5,238,519
OTHER ASSETS, LESS LIABILITIES - 1.7% 87,988
- --------------------------------------------------------------------------------
Net Assets - 100.0% $ 5,326,507
- --------------------------------------------------------------------------------
*Non-income producing security.
##SEC Rule 144A restriction.
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.
HKD = Hong Kong Dollars ZAR = South African Rand
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
June 30, 1998
- --------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $5,170,786) $5,238,519
Cash 12,110
Interest receivable 74,580
Net receivable for forward foreign currency exchange
contracts to sell 3,994
Deferred organization expenses 8,632
Other assets 35
----------
Total assets $5,337,870
----------
Liabilities:
Net payable for foreign currency exchange contracts closed or
subject to master netting agreements $ 1,910
Payable for daily variation margin on open futures contracts 281
Payable to affiliates -
Management fee 368
Shareholder servicing agent fee 3
Administrative fee 6
Accrued expenses and other liabilities 8,795
----------
Total liabilities $ 11,363
----------
Net assets $5,326,507
==========
Net assets consist of:
Paid-in capital $5,064,511
Unrealized appreciation on investments and translation of
assets and liabilities in foreign currencies 68,792
Accumulated distributions in excess of net realized gain on
investments and foreign currency transactions (29,084)
Accumulated undistributed net investment income 222,288
----------
Total $5,326,507
==========
Shares of beneficial interest outstanding 490,571
=======
Net asset value, offering price, and redemption price per share
(net assets of $5,326,507 / 490,571 shares of beneficial
interest outstanding) $10.86
======
See notes to financial statements
<PAGE>
Financial Statements - continued
Statement of Operations
- -------------------------------------------------------------------------------
Year Ended June 30, 1998
- -------------------------------------------------------------------------------
Net investment income:
Income -
Interest $ 409,499
Dividends 1,078
---------
Total investment income $ 410,577
---------
Expenses -
Management fee $ 45,250
Trustees' compensation 5,000
Shareholder servicing agent fee 402
Administrative fee 759
Auditing fees 18,725
Registration fee 13,314
Printing 7,289
Custodian fee 4,853
Amortization of organization expenses 4,082
Legal fees 1,671
Miscellaneous 195
---------
Total expenses $ 101,540
Fees paid indirectly (2,755)
Reduction of expenses by investment advisor (32,242)
---------
Net expenses $ 66,543
---------
Net investment income $ 344,034
---------
Realized and unrealized gain/loss on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ (98,860)
Futures contracts 4,540
Foreign currency transactions (30,474)
---------
Net realized loss on investments and foreign currency
transactions $(124,794)
---------
Change in unrealized depreciation -
Investments $ (98,240)
Futures contracts (29)
Translation of assets and liabilities in foreign currencies (36,720)
---------
Net unrealized loss on investments and foreign currency
translation $(134,989)
---------
Net realized and unrealized loss on investments and
foreign currency $(259,783)
---------
Increase in net assets from operations $ 84,251
=========
See notes to financial statements
<PAGE>
Financial Statements - continued
<TABLE>
Statement of Changes in Net Assets
- ----------------------------------------------------------------------------------------------
<CAPTION>
Year Ended Year Ended
June 30, 1998 June 30, 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 344,034 $ 390,389
Net realized gain (loss) on investments and foreign
currency transactions (124,794) 482,799
Net unrealized gain (loss) on investments and
foreign currency translation (134,989) 94,674
---------- ----------
Increase in net assets from operations $ 84,251 $ 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) (178,414)
In excess of net realized gain on investments and
foreign currency transactions (7,721) --
---------- ----------
Total distributions declared to shareholders $ (548,154) $ (498,734)
---------- ----------
Net increase in net assets from Fund share
transactions $ 464,895 $ 696,866
---------- ----------
Total increase in net assets $ 992 $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 $222,288
and $156,936, respectively) $5,326,507 $5,325,515
========== ==========
</TABLE>
See notes to financial statements
<PAGE>
Financial Statements - continued
<TABLE>
Financial Highlights
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended Year Ended Period Ended
June 30, 1998 June 30, 1997 June 30, 1996*
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $11.94 $10.88 $10.00
------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.73 $ 0.94 $ 0.70
Net realized and unrealized gain/loss on investments
and foreign currency transactions (0.56) 1.41 0.56
------ ------ ------
Total from investment operations $ 0.17 $ 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 $10.86 $11.94 $10.88
====== ====== ======
Total return 1.67% 22.79% 12.93%++
Ratios (to average net assets)/Supplemental data(S):
Expenses 1.25% 1.25% 1.25%+
Net investment income 6.46% 8.30% 7.59%+
Portfolio turnover 159% 473% 285%
Net assets at end of period (000 omitted) $5,327 $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 this limitation;
the net investment income per share and ratios would have been:
Net investment income# $ 0.66 $ 0.85 $ 0.43
Ratios (to average net assets):
Expenses## 1.91% 2.07% 4.21%+
Net investment income 5.86% 7.48% 4.63%+
</TABLE>
See notes to financial statements
<PAGE>
Notes to Financial Statements
(1) Business and Organization
MFS Institutional Emerging Markets Debt Fund (the Fund) is a non-diversified
series of MFS Institutional Trust (the Trust). The Trust is organized as a
Massachusetts business trust and is registered under the Investment Company Act
of 1940, as amended, as an open-end management investment company.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Investments
in foreign securities are vulnerable to the effects of changes in the relative
values of the local currency and the U.S. dollar and to the effects of changes
in each country's legal, political, and economic environment.
Investment Valuations - Debt securities (other than short-term obligations which
mature in 60 days or less), including listed issues and forward contracts, are
valued on the basis of valuations furnished by dealers or by a pricing service
with consideration to factors such as institutional-size trading in similar
groups of securities, yield, quality, coupon rate, maturity, type of issue,
trading characteristics, and other market data, without exclusive reliance upon
exchange or over-the-counter prices. Futures contracts listed on commodities
exchanges are reported at market value using closing settlement prices. Equity
securities listed on securities exchanges or reported through the NASDAQ system
are reported at market value using last sale prices. Unlisted equity securities
or listed equity securities for which last sale prices are not available are
reported at market value using last quoted bid prices. Short-term obligations,
which mature in 60 days or less, are valued at amortized cost, which
approximates market value. Non-U.S. dollar denominated short-term obligations
are valued at amortized cost as calculated in the foreign currency and
translated into U.S. dollars at the closing daily exchange rate. Securities for
which there are no such quotations or valuations are valued at fair value as
determined in good faith by or at the direction of the Trustees.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases and
sales of foreign investments, income, and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates of
such transactions. Gains and losses attributable to foreign currency exchange
rates on sales of securities are recorded for financial statement purposes as
net realized gains and losses on investments. Gains and losses attributable to
foreign exchange rate movements on income and expenses are recorded for
financial statement purposes as foreign currency transaction gains and losses.
That portion of both realized and unrealized gains and losses on investments
that results from fluctuations in foreign currency exchange rates is not
separately disclosed.
Deferred Organization Expenses - Costs incurred by the Fund in connection with
its organization have been deferred and are being amortized on a straight-line
basis over a five-year period beginning on the date of commencement of Fund
operations.
Futures Contracts - The Fund may enter into futures contracts for the delayed
delivery of securities or currency, or contracts based on financial indexes at a
fixed price on a future date. In entering such contracts, the Fund is required
to deposit with the broker either in cash or securities an amount equal to a
certain percentage of the contract amount. Subsequent payments are made or
received by the Fund each day, depending on the daily fluctuations in the value
of the contract, and are recorded for financial statement purposes as unrealized
gains or losses by the Fund. The Fund's investment in futures contracts is
designed to hedge against anticipated future changes in interest or exchange
rates or securities prices. Should interest or exchange rates or securities
prices move unexpectedly, the Fund may not achieve the anticipated benefits of
the futures contracts and may realize a loss.
Forward Foreign Currency Exchange Contracts - The Fund may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering into these contracts from the potential inability of counterparties to
meet the terms of their contracts and from unanticipated movements in the value
of a foreign currency relative to the U.S. dollar. The Fund will enter into
forward contracts for hedging purposes as well as for non-hedging purposes. For
hedging purposes, the Fund may enter into contracts to deliver or receive
foreign currency it will receive from or require for its normal investment
activities. The Fund may also use contracts in a manner intended to protect
foreign currency-denominated securities from declines in value due to
unfavorable exchange rate movements. For non-hedging purposes, the Fund may
enter into contracts with the intent of changing the relative exposure of the
Fund's portfolio of securities to different currencies to take advantage of
anticipated changes. The forward foreign currency exchange contracts are
adjusted by the daily exchange rate of the underlying currency and any gains or
losses are recorded 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.
Fees Paid Indirectly - The Fund's custody fee is calculated as a percentage of
the Fund's month end 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. Capital gains taxes have been provided on
unrealized and realized gains from securities transactions in countries where
such a capital gains tax is applicable. Realized and unrealized gain is reported
net of any capital gains tax in the Statement of Operations.
Distributions to shareholders are recorded on the ex-dividend date. The Fund
distinguishes between distributions on a tax basis and a financial reporting
basis and requires that only distributions in excess of tax basis earnings and
profits are reported in the financial statements as a tax return of capital.
Differences in the recognition or classification of income between the financial
statements and tax earnings and profits, which result in temporary
over-distributions for financial statement purposes are classified as
distributions in excess of net investment income or accumulated net realized
gains. During the year ended June 30, 1998, $103,431 was reclassified from
accumulated undistributed net investment income to accumulated distributions in
excess of net realized gain on investments and foreign currency transactions due
to differences between book and tax accounting for currency transactions. This
change had no effect on the net assets or net asset value per share. At June 30,
1998, accumulated distributions in excess of net realized gain on investments
and foreign currency transactions under book accounting were different from tax
accounting due to temporary differences in accounting for Post October Losses.
(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 fee. The Fund in turn will pay MFS an expense reimbursement fee not
greater than 0.40% of average daily net assets. To the extent that the expense
reimbursement fee exceeds the Fund's actual expenses, the excess will be applied
to amounts paid by MFS in prior years. At June 30, 1998, the aggregate
unreimbursed expenses owed to MFS by the Fund amounted to $138,548.
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:
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 and
short-term obligations, aggregated $5,617,302 and $5,124,981, 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 $5,170,786
==========
Gross unrealized appreciation $ 195,341
Gross unrealized depreciation (127,608)
----------
Net unrealized appreciation $ 67,733
==========
(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 June 30, 1998 Year Ended June 30, 1997
------------------------ ------------------------
Shares Amount Shares Amount
- --------------------------------------------------------------------------------
Shares sold 4,979 $ 57,265 18,645 $209,020
Shares issued to shareholders in
reinvestment of distributions 51,762 548,154 45,839 498,734
Shares reacquired (12,075) (140,524) (943) (10,888)
------ -------- ------ --------
Net increase 44,666 $464,895 63,541 $696,866
====== ======== ====== ========
(6) Line of Credit
The Fund and other affiliated funds participate in a $805 million unsecured line
of credit provided by a syndication of banks under a line of credit agreement.
Borrowings may be made to temporarily finance the repurchase of Fund shares.
Interest is charged to each fund, based on its borrowings, at a rate equal to
the bank's base rate. In addition, a commitment fee, based on the average daily
unused portion of the line of credit, is allocated among the participating funds
at the end of each quarter. The commitment fee allocated to the Fund for the
year ended June 30, 1998, was $28.
(7) Financial Instruments
The Fund trades financial instruments with off-balance-sheet risk in the normal
course of its investing activities in order to manage exposure to market risks
such as interest rates and foreign currency exchange rates. These financial
instruments include forward foreign currency exchange contracts and futures
contracts. The notional or contractual amounts of these instruments represent
the investment the Fund has in particular classes of financial instruments and
does not necessarily represent the amounts potentially subject to risk. The
measurement of the risks associated with these instruments is meaningful only
when all related and offsetting transactions are considered.
Forward Foreign Currency Exchange Contracts
<TABLE>
<CAPTION>
Net
Contracts to Contracts Unrealized
Settlement Date Deliver/Receive In Exchange for at Value Appreciation
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales 5/03/99 HKD 2,200,000 $276,799 $272,805 $3,994
-------- -------- ------
</TABLE>
Forward foreign currency purchases and sales under master netting agreements
excluded above amounted to a net receivable of $3,355 with Merrill Lynch, and a
net payable of $5,265 with Bankers' Trust at June 30, 1998.
At June 30, 1998, the Fund had sufficient cash and/or securities to cover any
commitments under these contracts.
Futures Contracts
<TABLE>
<CAPTION>
Unrealized
Description Expiration Contracts Position Depreciation
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury September 1998 1 Short $(29)
----
</TABLE>
At June 30, 1998, the Fund had sufficient cash and/or securities to cover margin
requirements on open futures contracts.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Institutional Trust and Shareholders of MFS Institutional
Emerging Markets Debt Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of MFS Institutional Emerging Markets Debt Fund
(one of the series comprising MFS Institutional Trust) as of June 30, 1998, the
related statement of operations for the year then ended, the statement of
changes in net assets for the years ended June 30, 1998 and 1997 and the
financial highlights for each of the years in the three-year period ended June
30, 1998. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned at June
30, 1998 by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Institutional
Emerging Markets Debt Fund at June 30, 1998, the results of its operations, the
changes in its net assets, and its financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
August 7, 1998
<PAGE>
Federal Tax Information
In January 1999, shareholders will be mailed a Form 1099 reporting the federal
tax status of all distributions paid during the calendar year 1998.
<PAGE>
(C)1998 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
IMD-2 8/98 .5M
