<PAGE>
[Logo] M F S(SM) Annual Report
INSTITUTIONAL ADVISORS, INC for Year Ended
June 30, 1998
- --------------------------------------------------------------------------------
MFS(R) INSTITUTIONAL INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------
[Graphic Omitted]
<PAGE>
MFS(R) INSTITUTIONAL INTERNATIONAL EQUITY FUND
TRUSTEES INVESTMENT ADVISER
Jeffrey L. Shames* Massachusetts Financial Services
Chairman, Chief Executive Officer, Company
and 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 1400
Boston, MA 02107-9906
PORTFOLIO MANAGER
David R. Mannheim* 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.*
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
*Affiliated with the Investment Adviser
- -------------------------------------------------------------------------------
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
- -------------------------------------------------------------------------------
<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 twelve months ended June 30, 1998, the Fund provided a total return of
10.13%, which compares to a 6.38% return for the Morgan Stanley Capital
International (MSCI) Europe, Australia, Far East (EAFE) Index, an unmanaged,
market-capitalization-weighted total return index of developed-country global
stock markets, excluding the United States, Canada, and the South African
mining component.
Europe is in the early stages of a growth cycle similar to what the United
States has experienced. In Europe earnings growth is accelerating, while
growth is slowing in the United States. In addition, European companies have
begun to restructure, outsource, and create greater corporate efficiencies,
which has added steam to corporate earnings growth. Europe looks like it is
headed toward a "virtuous cycle" that would result in higher consumer
confidence, higher employment, and strong demand, just like the current U.S.
situation. Europe is earlier in the cycle than the United States is;
therefore, we think it may be able to sustain this growth rate for an
additional year or two, while U.S. growth slows. About 17% of assets are in
financial services, a sector which is made up mostly of European banking and
insurance concerns but includes no Japanese firms. As interest rates have
fallen, stock markets have risen, with bank stocks a prime beneficiary. The
top holdings in this sector are not household names necessarily but those that
we feel have the best prospects for growth, such as Anglo Irish Bank in
Ireland. The consumer staples sector is our second largest and is comprised of
companies such as Benckiser in the Netherlands, the world leader in dishwasher
detergent, and Henkel in Germany.
Slightly less than 10% of assets are invested in basic materials. Here we've
focused on European specialty chemical companies in the midst of a wave of
consolidation and restructuring that is benefiting their stock prices. Some of
the biggest names include Akzo Nobel and Ciba Specialty. A recent example of
the consolidation going on in this market is Akzo Nobel's proposed acquisition
of Courtalds, a British chemical company. Today, Akzo Nobel is growing faster
than many of it peers, and its stock is trading at a discount when compared to
its earnings growth rate.
Technology is our fourth-largest sector and represents a little less than 9%
of assets. Our investments here are concentrated mostly in Japanese companies
that serve global markets, such as Sony and Canon. These stocks are more keyed
to what's happening in the world than to their own economy.
Our fifth-largest sector, utilities and communications, features stocks such
as Telecomunicacoes Brasileiras (Telebras), which is benefiting from
deregulation and privatization in Brazil.
Regarding the Asian economic turmoil, we believe the situation will stabilize in
two or three years. Whether Asian economies stabilize at high or low levels,
however, is too difficult to call right now. We continue to invest in stocks of
companies that we think have good business models and that can survive political
and local economic shocks. Unfortunately, most of the countries in Southeast
Asia don't have many companies that meet that test. Indonesia is a perfect
example. Its market is depressed, its currency is unstable, and the cost to
hedge (to eliminate currency risk) is high. In the future, we hope to find
through our research sustainable investments with good long-term growth
prospects.
Respectfully,
/s/ David R. Mannheim
David R. Mannheim
Portfolio Manager
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
David R. Mannheim is a Senior Vice President of MFS(R) Investment Management(SM)
and portfolio manager of MFS(R) World Equity Fund, MFS(R) International Growth
Fund, MFS(R) World Asset Allocation(SM) Fund, MFS(R) Institutional International
Equity Fund, MFS(R) Meridian(SM) Global Equity Fund, MFS(R) World Growth Fund,
and the International Series, the World Growth Series, and the World Asset
Allocation(SM) Series offered through MFS(R)/Sun Life annuity products.
Mr. Mannheim joined MFS in 1988 and was named Investment Officer in 1990,
Assistant Vice President in 1991, Vice President and portfolio manager of MFS
World Equity Fund in 1992, and Senior Vice President in 1997. He is a graduate
of Amherst College and the Massachusetts Institute of Technology Sloan School
of Management.
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.
<PAGE>
FUND FACTS
Objective: Seeks 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.
Commencement of
investment operations: January 31, 1996
Size: $12.5 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 February 1, 1996, through June 30, 1998)
MFS
INSTITUTIONAL CONSUMER
INTERNATIONAL MSCI PRICE
EQUITY EAFE INDEX
FUND INDEX -- U.S.
- --------------------------------------------------------
2/96 $3,000,000 $3,000,000 $3,000,000
12/96 3,535,000 3,177,000 3,083,000
12/97 3,917,000 3,242,000 3,136,000
6/98 4,452,937 3,763,898 3,170,786
AVERAGE ANNUAL TOTAL RETURNS THROUGH JUNE 30, 1998
1 Year 10 Years/Life
- -----------------------------------------------------------------------------
MFS Institutional International Equity Fund* +10.13% +17.76%
- -----------------------------------------------------------------------------
MSCI EAFE Index# + 6.38% + 9.87%
- -----------------------------------------------------------------------------
Consumer Price Index#+ + 1.75% + 2.32%
- -----------------------------------------------------------------------------
* "Life" refers to the period from the commencement of the Fund's investment
operations, January 31, 1996, through June 30, 1998.
# Source: CDA/Wiesenberger. "Life" refers to the period from January 1, 1996,
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>
PORTFOLIO OF INVESTMENTS - June 30, 1998
<TABLE>
<CAPTION>
Stocks - 98.4%
- -----------------------------------------------------------------------------------------------
Issuer Shares Value
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Foreign Stocks - 98.4%
Australia - 3.0%
QBE Insurance Group Ltd. (Insurance) 65,007 $ 229,475
Seven Network Ltd. (Entertainment) 37,000 111,363
Tab Ltd. (Gaming)* 18,800 27,710
-----------
$ 368,548
- -----------------------------------------------------------------------------------------------
Brazil - 1.8%
Companhia Electricas est Rio de Janeiro (Utilities -
Electric)* 145,700 $ 71,811
Companhia Paranaense de Energia, ADR (Utilities -
Electric) 8,400 77,700
Telecomunicacoes Brasileiras S.A., ADR
(Telecommunications) 700 76,431
-----------
$ 225,942
- -----------------------------------------------------------------------------------------------
Canada - 4.5%
Canadian National Railway Co. (Railroads) 8,400 $ 446,250
Legacy Hotel Real Estate Investment Trust (Real Estate
Investment Trust)## 4,000 23,400
T. Eaton Co., Ltd. (Stores)* 8,900 90,538
-----------
$ 560,188
- -----------------------------------------------------------------------------------------------
Chile - 1.3%
Chilectra S.A., ADR (Utilities - Electric) 7,400 $ 158,360
- -----------------------------------------------------------------------------------------------
Czech Republic - 0.5%
Tabak AS (Tobacco) 243 $ 58,509
- -----------------------------------------------------------------------------------------------
Finland - 4.9%
Helsingin Puhelin Oy (Telecommunications) 2,200 $ 102,236
Huhtamaki Oy Group (Conglomerate) 1,700 97,279
Pohjola Insurance Group (Insurance) 4,000 199,005
TT Tieto Oy (Computer Software - Services) 2,745 208,603
-----------
$ 607,123
- -----------------------------------------------------------------------------------------------
France - 7.5%
Television Francaise (Broadcasting) 1,640 $ 253,808
Thomson CSF (Aerospace and Defense) 3,900 148,154
Total S.A., "B" (Oils) 1,900 246,660
Union des Assurances Federales S.A. (Insurance) 1,800 283,326
-----------
$ 931,948
- -----------------------------------------------------------------------------------------------
Germany - 7.6%
Adidas-Salomon AG (Apparel and Textiles) 900 $ 156,684
Henkel KGaA (Chemicals) 4,600 454,525
SKW Trostberg AG (Chemicals) 2,700 97,149
Wella AG (Cosmetics) 220 246,001
-----------
$ 954,359
- -----------------------------------------------------------------------------------------------
Greece - 0.9%
Hellenic Telecommunication Organization S.A., GDR
(Telecommunications) 4,444 $ 113,885
- -----------------------------------------------------------------------------------------------
Hong Kong - 1.2%
Li & Fung Ltd. (Wholesale) 40,000 $ 64,545
Liu Chong Hing Bank (Banks and Credit Cos.) 27,000 23,004
Peregrine Investment Holdings (Finance)*(+) 37,000 0
Wing Hang Bank Ltd. (Banks and Credit Cos.) 44,200 59,055
-----------
$ 146,604
- -----------------------------------------------------------------------------------------------
Ireland - 2.5%
Anglo Irish Bank Corp. PLC (Banks and Credit Cos.) 116,549 $ 312,990
- -----------------------------------------------------------------------------------------------
Italy - 2.2%
Banca Carige S.p.A. (Banks and Credit Cos.)* 11,700 $ 104,504
ERG S.p.A. (Oils)* 23,000 92,052
Telecom Italia S.p.A., Saving Shares
(Telecommunications) 24,000 80,944
-----------
$ 277,500
- -----------------------------------------------------------------------------------------------
Japan - 12.4%
Canon, Inc. (Office Equipment) 8,000 $ 182,384
Eisai Co. Ltd. (Pharmaceuticals) 7,000 95,752
Kinki Coca-Cola Bottling Co. (Beverages) 4,000 48,636
Kirin Beverage Corp. (Beverages) 8,000 150,829
NTT Data Corp. (Computer Software - Services) 3 108,779
Osaka Sanso Kogyo Ltd. (Chemicals) 19,000 39,191
Rohm Co. (Electronics) 1,000 103,134
Sankyo Co. Ltd. (Pharmaceuticals) 3,000 68,611
Sony Corp. (Electronics) 3,300 285,409
Sony Corp., ADR (Electronics) 550 47,334
Takeda Chemical Industries (Pharmaceuticals) 5,000 133,531
TDK Corp. (Special Products and Services) 1,000 74,184
Tokyo Broadcasting System, Inc. (Broadcasting) 7,000 78,526
Ushio, Inc. (Electronics) 17,000 135,341
-----------
$ 1,551,641
- -----------------------------------------------------------------------------------------------
Malaysia - 1.2%
New Straits Times Press Berhad (Printing and
Publishing) 30,500 $ 11,399
Tanjong PLC (Entertainment) 103,000 143,733
-----------
$ 155,132
- -----------------------------------------------------------------------------------------------
Netherlands - 12.2%
Akzo Nobel N.V. (Chemicals) 2,210 $ 490,727
Benckiser N.V., "B" (Consumer Goods and Services)* 6,300 387,002
IHC Caland N.V. (Marine Equipment) 1,537 86,416
ING Groep N.V. (Financial Services) 4,241 277,388
Koninklijke Ahrend Groep N.V. (Consumer Goods and
Services) 4,162 135,702
Royal Dutch Petroleum Co. (Oils) 2,650 146,781
-----------
$ 1,524,016
- -----------------------------------------------------------------------------------------------
Peru - 0.8%
Telefonica del Peru S.A., ADR (Telecommunications) 4,700 $ 96,056
- -----------------------------------------------------------------------------------------------
Portugal - 3.3%
Banco Espirito Santo e Comercial de Lisboa S.A. (Banks
and Credit Cos.)* 650 $ 19,499
Banco Pinto & Sotto Mayor, S.A. (Banks and Credit
Cos.)(+) 11,200 231,109
Portugal Telecom S.A. (Telecommunications) 3,000 158,834
-----------
$ 409,442
- -----------------------------------------------------------------------------------------------
Singapore - 1.4%
Hong Leong Finance Ltd. (Finance)+ 36,000 $ 29,536
Overseas Union Bank (Banks and Credit Cos.) 69,000 151,784
-----------
$ 181,320
- -----------------------------------------------------------------------------------------------
Spain - 2.3%
Acerinox S.A. (Iron and Steel) 910 $ 121,033
Repsol S.A. (Oils) 3,000 165,114
-----------
$ 286,147
- -----------------------------------------------------------------------------------------------
Sweden - 5.5%
Astra AB (Pharmaceuticals) 10,816 $ 215,372
Saab AB,"B" (Aerospace)* 20,625 216,969
Skandia Forsakrings AB (Insurance) 6,500 92,799
Volvo AB (Automobiles) 5,400 160,614
-----------
$ 685,754
- -----------------------------------------------------------------------------------------------
Switzerland - 4.8%
Barry Callebaut AG (Food Products)* 200 $ 43,140
Ciba Specialty AG (Chemicals) 1,920 246,649
Clariant AG (Chemicals) 250 164,743
Novartis AG (Pharmaceuticals) 84 139,852
-----------
$ 594,384
- -----------------------------------------------------------------------------------------------
United Kingdom - 16.1%
ASDA Group PLC (Supermarkets) 65,800 $ 225,820
Avis Europe PLC (Auto Rental)## 36,400 164,739
British Aerospace (Aerospace and Defense)* 39,508 302,478
British Petroleum PLC (Oils)* 17,620 256,870
Capital Radio PLC (Broadcasting) 1,700 20,154
Diageo PLC (Food and Beverage Products) 8,000 94,743
Jarvis Hotels PLC (Restaurants and Lodging)+ 24,000 68,855
Kwik-Fit Holdings PLC (Automotive Repair Centers) 14,400 116,733
Lloyds TSB Group PLC (Banks and Credit Cos.) 12,268 171,583
LucasVarity PLC (Automotive) 64,000 254,070
Next PLC (Retail) 16,500 141,738
Tomkins PLC (Conglomerate) 35,200 190,966
-----------
$ 2,008,749
- -----------------------------------------------------------------------------------------------
Venezuela - 0.5%
Compania Anonima Nacional Telefonos de Venezuela, ADR
(Telecommunications) 2,700 $ 67,500
- -----------------------------------------------------------------------------------------------
Total Foreign Stocks $12,276,097
- -----------------------------------------------------------------------------------------------
Total Stocks (Identified Cost, $10,533,582) $12,276,097
- -----------------------------------------------------------------------------------------------
Short-Term Obligations - 2.1%
- -----------------------------------------------------------------------------------------------
Principal Amount
(000 Omitted)
- -----------------------------------------------------------------------------------------------
Federal Home Loan Bank, due 7/01/98, at Amortized Cost $ 260 $ 260,000
- -----------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $10,793,582) 12,536,097
Other Assets, Less Liabilities - (0.5)% (59,185)
- -----------------------------------------------------------------------------------------------
Net Assets - 100.0% $12,476,912
- -----------------------------------------------------------------------------------------------
* Non-income producing security.
## SEC Rule 144A restriction.
+ Restricted security.
(+) Security valued by or at the direction of the Trustees.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ----------------------------------------------------------------------------
June 30, 1998
- ----------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $10,793,582) $ 12,536,097
Cash 9,034
Foreign currency, at value (identified cost, $10,133) 10,203
Net receivable for forward foreign exchange contracts to
purchase 7,675
Receivable for investments sold 31,080
Dividends receivable 23,451
Receivable from investment adviser 57,177
Deferred organization expenses 3,615
Other assets 71
------------
Total assets $ 12,678,403
------------
Liabilities:
Payable for investments purchased $ 154,927
Net payable for foreign currency exchange contracts closed
or subject to master netting agreements 23,867
Payable to affiliates -
Management fee 757
Shareholder servicing agent fee 9
Administrative fee 15
Accrued expenses and other liabilities 21,916
------------
Total liabilities $ 201,491
------------
Net assets $ 12,476,912
============
Net assets consist of:
Paid-in capital $ 10,281,587
Unrealized appreciation on investments and translation of
assets and liabilities in foreign currencies 1,726,190
Accumulated undistributed net realized gain on investment
and foreign currency transactions 374,873
Accumulated undistributed net investment income 94,262
------------
Total $ 12,476,912
============
Shares of beneficial interest outstanding 899,158
=======
Net asset value, offering price, and redemption price per
share (net assets / shares of beneficial interest
outstanding) $13.88
======
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- --------------------------------------------------------------------
Year Ended June 30, 1998
- --------------------------------------------------------------------
Net investment income:
Income -
Dividends $ 237,544
Interest 8,638
Foreign taxes withheld (24,571)
----------
Total investment income $ 221,611
----------
Expenses -
Management fee $ 86,245
Trustees' compensation 5,000
Shareholder servicing agent fee 870
Administrative fee 1,644
Auditing fees 19,627
Custodian fee 17,830
Registration fees 15,007
Printing 8,651
Legal fees 1,630
Amortization of organization expenses 1,396
Miscellaneous 1,430
----------
Total expenses $ 159,330
Fees paid indirectly (1,616)
Reduction of expenses by investment adviser (59,970)
----------
Net expenses $ 97,744
----------
Net investment income $ 123,867
----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 432,164
Foreign currency transactions (29,608)
----------
Net realized gain on investment and foreign
currency transactions $ 402,556
----------
Change in unrealized appreciation (depreciation) -
Investments $ 602,206
Translation of assets and liabilities in foreign
currency (16,638)
----------
Net unrealized gain on investments and foreign
currency translation $ 585,568
----------
Net realized and unrealized gain on investments
and foreign currency $ 988,124
----------
Increase in net assets from operations $1,111,991
==========
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- -------------------------------------------------------------------------------------------------
Year Ended June 30, 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 123,867 $ 84,412
Net realized gain on investment and foreign currency
transactions 402,556 267,140
Net unrealized gain on investments and foreign currency
translation 585,568 977,772
----------- -----------
Increase in net assets from operations $ 1,111,991 $ 1,329,324
----------- -----------
Distributions declared to shareholders -
From net investment income $ (68,852) $ (32,941)
From net realized gain on investment and foreign
currency transactions (292,025) (61,500)
----------- -----------
Total distributions declared to shareholders $ (360,877) $ (94,441)
----------- -----------
Net increase in net assets from Fund share transactions $ 1,037,376 $ 6,955,675
----------- -----------
Total increase in net assets $ 1,788,490 $ 8,190,558
Net assets:
At beginning of period 10,688,422 2,497,864
----------- -----------
At end of period (including accumulated undistributed
net investment income of $94,262 and $68,855,
respectively) $12,476,912 $10,688,422
=========== ===========
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
- -----------------------------------------------------------------------------------------------------------------
Year Ended Year Ended Period Ended
June 30, 1998 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 $ 13.04 $ 10.96 $10.00
------- ------- ------
Income from investment operations# -
Net investment income(S) $ 0.14 $ 0.23 $ 0.13
Net realized and unrealized
gain on investments and
foreign currency
transactions 1.12 2.23 0.83
------- ------- ------
Total from investment operations $ 1.26 $ 2.46 $ 0.96
------- ------- ------
Less distributions declared to shareholders -
From net investment income $ (0.08) $ (0.13) $ --
From net realized gain on
investment and foreign
currency transactions (0.34) (0.25) --
------- ------- ------
Total distributions declared to
shareholders $ (0.42) $ (0.38) $ --
------- ------- ------
Net asset value - end of period $ 13.88 $ 13.04 $10.96
======= ======= ======
Total return 10.13% 22.97% 9.60%++
Ratios (to average net assets)/Supplemental data(S):
Expenses 0.85% 0.85% 0.94%+
Net investment income 1.08% 1.98% 2.46%+
Portfolio turnover 64% 76% 19%
Net assets at end of period (000 omitted) $12,477 $10,688 $2,498
* For the period from the commencement of the Fund's investment operations, January 31, 1996, 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) Effective May 3, 1996, the investment adviser voluntarily agreed to maintain the expenses of the Fund, exclusive of
management fees, at no more than 0.10% of average daily net assets. During the period January 31, 1996, through May 2, 1996,
the investment adviser voluntarily agreed to maintain the expenses of the Fund, exclusive of management fees, at no more than
0.20% of average daily net assets. To the extent actual expenses were over/under these limitations, the net investment income
(loss) per share and the ratios would have been:
Net investment income (loss) $ 0.07 $ 0.10 $(0.08)
Ratios (to average net assets):
Expenses## 1.39% 2.01% 4.91%+
Net investment income (loss) 0.54% 0.85% (1.51)%+
</TABLE>
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(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 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. Debt securities (other than short-term obligations which mature in 60
days or less), including 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.
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.
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 discount is
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 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 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.
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 net realized gains. During
the year ended June 30, 1998, $29,608 was reclassified from accumulated
undistributed net investment income to accumulated net realized gain on
investments due to differences between book and tax accounting for foreign
currency transactions. This change had no effect on the net assets or net asset
value per share.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.75% of
average daily net assets. The investment adviser has voluntarily agreed to pay
the expenses of the Fund, exclusive of management fees, in order to maintain
other expenses at no more than 0.10% per annum of the Fund's average daily net
assets. This is reflected as a reduction of expenses in the Statement of
Operations.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive remuneration
for their services to the Fund from MFS. Certain officers and Trustees of the
Fund are officers or directors of MFS and MFS Service Center, Inc. (MFSC).
Administrator - 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%
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 $8,011,201
and $7,202,490, 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 $10,794,229
===========
Gross unrealized appreciation $ 2,639,063
Gross unrealized depreciation (897,195)
-----------
Net unrealized appreciation $ 1,741,868
===========
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
Year Ended June 30, 1998 Year Ended June 30, 1997
----------------------- ------------------------
Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 96,523 $1,273,048 601,125 $7,068,597
Shares issued to shareholders in
reinvestment of distributions 27,197 329,631 8,372 94,441
Shares reacquired (44,030) (565,303) (17,934) (207,363)
------- ---------- --------- ----------
Net increase 79,690 $1,037,376 591,563 $6,955,675
======= ========== ========= ==========
</TABLE>
(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 $6.
(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
<TABLE>
<CAPTION>
Net
Contracts to Contracts Unrealized
Settlement Date Deliver/Receive In Exchange for at Value Appreciation
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Purchases 9/25/98 GBP 266,000 $433,912 $ 441,587 $ 7,675
======== ========= ========
</TABLE>
Forward foreign currency sales under master netting agreements amounted to a
net payable of $21,061 with Deutsche Bank and $2,806 with Merrill Lynch & Co.
at June 30, 1998.
At June 30, 1998, the Fund had sufficient cash to cover any commmitments under
these contracts.
(8) Restricted Securities
The Fund may invest not more than 15% of its net assets in securities which are
subject to legal or contractual restrictions on resale. At June 30, 1998, the
Fund owned the following restricted securities (constituting 0.79% of net
assets) which may not be publicly sold without registration under the Securities
Act of 1933. The Fund does not have the right to demand that such securities be
registered. The value of these securities is determined by valuations furnished
by dealers or by a pricing service, or if not available, are valued at fair
value as determined in good faith by or at the direction of the Trustees.
<TABLE>
<CAPTION>
Description Date of Acquisition Shares Cost Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Hong Leong Finance Ltd. 4/04/97 - 10/17/97 36,000 $104,365 $29,536
Jarvis Hotels PLC 6/12/96 - 5/20/97 24,000 74,793 68,855
-------- -------
$179,158 $98,391
======== =======
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees and Shareholders of MFS Institutional International Equity Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MFS Institutional International Equity Fund
as of June 30, 1998, the related statements of operations for the year then
ended, and the statements 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 and brokers; where replies were
not received from brokers, we performed other auditing procedures. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the MFS
Institutional International Equity 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
The Fund has designated $135,816 as a capital gain dividend.
For the year ended June 30, 1998, income from foreign sources was $237,544 and
foreign taxes withheld were $23,134.
<PAGE>
(C)1998 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
IIE-2 8/98 0.5M
