<PAGE>
[Logo] M F S(SM) Annual Report
INSTITUTIONAL ADVISORS, INC. for Year Ended
June 30, 1998
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MFS(R) INSTITUTIONAL RESEARCH FUND
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[Graphic Omitted]
<PAGE>
MFS(R) INSTITUTIONAL RESEARCH 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; Real Estate Consultant MFS Service Center, Inc.
P.O. Box 2281
DIRECTOR OF EQUITY RESEARCH Boston, MA 02107-9906
Kevin R. Parke*
For additional information, contact
CHAIRMAN AND PRESIDENT your financial adviser.
Jeffrey L. Shames*
CUSTODIAN
TREASURER State Street Bank and Trust Company
W. Thomas London*
AUDITORS
ASSISTANT TREASURERS Deloitte & Touche LLP
Mark E. Bradley*
Ellen Moynihan* WORLD WIDE WEB
James O. Yost* www.mfs.com
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.
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
<PAGE>
MANAGEMENT REVIEW AND OUTLOOK
Dear Shareholders:
For the year ended June 30, 1998, the Fund provided a total return of 26.86%.
This compares to a return of 30.16% for the Standard & Poor's 500 Composite
Index (the S&P 500), a popular, unmanaged index of common stock total return
performance.
The Fund's underperformance relative to the S&P 500 can be attributed to a
number of factors, including: the narrowness of the U.S. equity market, in
which much of the growth has been driven by huge, multinational companies that
are not included in this portfolio; the decline in value of numerous foreign
holdings in the fourth quarter of 1997 due to the impact of Asia's economic
difficulties; and our relative weightings in the technology, financial
services, and health care sectors of the market, all of which experienced some
pressure on their share prices at various times during the past 12 months.
Over the year sector weightings in the portfolio have not shifted a great
deal, as our analysts have maintained their positions in stocks they feel can
be long-term achievers. The only significant changes have come in the consumer
staples and energy sectors. Regarding consumer staples, we have decreased our
position by more than 4% by selling Coca-Cola and Philip Morris stock. Our
food and beverage analyst was concerned that Coca-Cola's significant Asian
exposure could have negative volume and currency implications for the company,
and that the demise of the congressional tobacco settlement would create
further legislative uncertainty and difficulties for Philip Morris.
In the energy sector, we have increased the portfolio's weighting by close to
3% because our analysts have noticed a compelling trend in oil-sensitive
stocks. As Asian economies fell in the latter part of 1997, a supply and
demand "disconnect" was created because these Asian countries comprise a key
component of global demand. Oil prices plummeted, and oil-sensitive stocks
began to underperform the market. However, our analysts have since picked up
on various signals that this "disconnect" should begin to correct and that oil
companies should benefit from an improvement in oil prices spurred by reduced
production. As a result, we have invested in blue-chip oil companies such as
Chevron, Texaco, and British Petroleum. The risk/reward trade-offs for these
companies have become very attractive recently, and all methods of valuation
appear favorable relative to the market.
In regard to technology, the Fund remains significantly overweighted relative
to the market, and while the short-term fluctuations in various large holdings
hurt performance in the latter part of 1997, we have seen a significant
turnaround in our stocks over the last six months. The concentration in this
sector has shifted toward companies that participate in the high-end product
market, in which demand has remained strong and in which we have found good
growth opportunities. We have trimmed positions in technology stocks that are
more likely to be impacted by the continuing turmoil in Southeast Asia.
Microsoft continues to be the top holding in the portfolio and has performed
exceptionally well over the first two quarters of 1998, during which the
company introduced new products and posted strong earnings. Compuware, BMC
Software, and Cisco Systems are substantial holdings and strong performers.
Some stocks that have not kept pace with the market include Teradyne and
Analog Devices, two semiconductor companies that have been hurt by the
downturn in that industry keyed to the ongoing economic troubles in Asia.
However, they have fared well in comparison to their competitors, have very
favorable valuations relative to the market, and have maintained healthy
backlogs, strong customer bases, and consistent sales. Our analyst believes
that they may very well be the greatest beneficiaries of an upturn in the
semiconductor industry.
In the health care sector, we still remain slightly underweighted relative to
the market, although we have increased the portfolio's weighting here. Within
this sector, the portfolio is overweighted in medical services and managed
care companies such as United Healthcare and HBO & Co., as well as in
pharmaceutical companies. In the managed care industry, our analysts believe
that, after years of poor pricing, the cycle has finally turned and should
translate into substantial margin expansion for these companies over the next
two to three years. Our pharmaceutical analyst continues to look for companies
that are focused on new product development, such as Bristol-Myers Squibb and
American Home Products. Both companies continue to have quite strong growth
rates. All of these health care companies performed very well over the first
six months of 1998 and contributed to the Fund's performance.
The Fund remains overweighted in retailing, a sector in which companies such
as Rite Aid, Home Depot, and Safeway have enhanced returns, and in the
financial services sector, in which companies continue to benefit from cost-
cutting, consolidation, and low inflation. Conversely, the Fund remains
underweighted in utilities and communications relative to the S&P 500 because
our analysts believe that deregulation will decelerate the earnings of the
large players in this industry as competition increases. We are therefore
focusing on the smaller companies that are likely to be acquired in a
consolidation environment.
The Fund continues to be underweighted in automobiles, housing, industrial
goods and services, and leisure. In the leisure sector, the major story has
been Cendant Corp. Cendant, a hotel, real estate, and consumer services
company franchiser that was created by a merger of HFS and CUC International,
has been a major disappointment. Earlier this year the company uncovered
potential accounting fraud in the former CUC, and we're closely monitoring the
situation while the company reviews its accounting practices and attempts to
uncover the depth of the problem. We feel that, absent any additional
discoveries of fraud, a continued focus on acquisitions and strong core
businesses should return much of the value to Cendant's stock price over the
long term.
We will continue to seek fundamentally strong companies to add in the year
ahead. The portfolio continues to be based upon the research analysts' best
ideas within their industries. Stocks are selected after careful, in-depth
fundamental analysis of companies' earnings outlooks. These companies
typically demonstrate dominant or growing market share, quality new or
existing products, superior management teams, and strong financial statements.
Portfolio sector and industry weightings are a fallout of the "best ideas"
stock-selection process. However, the analysts revisit weightings regularly to
assure agreement within the changing economic landscape.
Respectfully,
/s/ Kevin R. Parke
Kevin R. Parke
Director of Equity Research
The committee of MFS research analysts is responsible for the day-to-day
management of the Fund under the general supervision of Mr. Parke.
The opinions expressed in this report are those of the Director of Equity
Research and are only through the end of the period of the report as stated on
the cover. His views are subject to change at any time based on market and
other conditions, and no forecasts can be guaranteed.
<PAGE>
FUND FACTS
Objective: Seeks to provide long-term growth of capital and
future income. The Fund invests, under normal market
conditions, at least 65% of its total assets in
equity securities of companies believed to possess
better-than-average prospects for long-term growth.
Commencement of
investment operations: May 21, 1996
Size: $100.4 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 June 1, 1996, through June 30, 1998)
MFS S&P CONSUMER
INSTITUTIONAL 500 PRICE
RESEARCH COMPOSITE INDEX
FUND INDEX - U.S.
- ---------------------------------------------------------------
6/96 $3,000,000 $3,000,000 $3,000,000
12/96 3,226,000 3,363,000 3,041,000
12/97 3,897,000 4,485,000 3,092,000
6/98 4,619,659 5,279,824 3,126,817
AVERAGE ANNUAL TOTAL RETURNS THROUGH JUNE 30, 1998
1 Year 10 Years/Life
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MFS Institutional Research Fund* +26.86% +22.68%
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Standard & Poor's 500 Composite Index# +30.16% +31.33%
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Consumer Price Index#+ + 1.75% + 2.02%
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* "Life" refers to the period from the commencement of the Fund's investment
operations, May 21, 1996, through June 30, 1998.
# Source: CDA/Wiesenberger. "Life" refers to the period from June 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.
<PAGE>
PORTFOLIO OF INVESTMENTS - June 30, 1998
Stocks - 97.5%
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Issuer Shares Value
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U.S. Stocks - 89.3%
Aerospace - 2.9%
Lockheed-Martin Corp. 7,900 $ 836,412
United Technologies Corp. 22,000 2,035,000
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$ 2,871,412
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Airlines - 0.7%
AMR Corp.* 4,400 $ 366,300
US Airways Group, Inc.* 4,100 324,925
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$ 691,225
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Automotive - 0.1%
Ford Motor Co. 1,500 $ 88,500
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Banks and Credit Companies - 5.4%
BankBoston Corp. 12,680 $ 705,325
Chase Manhattan Corp. 17,600 1,328,800
Comerica, Inc. 14,700 973,875
Fleet Financial Group, Inc. 12,100 1,010,350
National City Corp. 11,600 823,600
PNC Bank Corp. 10,700 575,794
------------
$ 5,417,744
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Building - 0.5%
American Standard Cos., Inc.* 11,900 $ 531,781
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Business Machines - 1.5%
Sun Microsystems, Inc.* 25,400 $ 1,103,313
Xerox Corp. 4,000 406,500
------------
$ 1,509,813
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Business Services - 0.5%
AccuStaff, Inc.* 17,200 $ 537,500
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Chemicals - 2.0%
Air Products & Chemicals, Inc. 16,800 $ 672,000
Cambrex Corp. 8,600 225,750
Cytec Industries, Inc.* 5,700 252,225
DuPont (E. I.) de Nemours & Co., Inc. 3,200 238,800
Sigma-Aldrich Corp. 18,500 649,813
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$ 2,038,588
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Computer Hardware - Systems - 0.6%
EMC Corp.* 12,300 $ 551,194
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Computer Software - Personal Computers - 4.3%
Electronic Arts, Inc.* 15,800 $ 853,200
Microsoft Corp.* 31,900 3,457,162
------------
$ 4,310,362
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Computer Software - Systems - 6.6%
Adobe Systems, Inc. 7,100 $ 301,306
BMC Software, Inc.* 28,200 1,464,638
Cadence Design Systems, Inc.* 35,500 1,109,375
Computer Associates International, Inc. 15,750 875,109
Compuware Corp.* 22,200 1,134,975
Oracle Corp.* 50,450 1,239,178
Synopsys, Inc.* 10,400 475,800
------------
$ 6,600,381
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Consumer Goods and Services - 10.7%
Black & Decker Corp. 14,200 $ 866,200
Clorox Co. 8,800 839,300
Colgate-Palmolive Co. 18,000 1,584,000
Dial Corp. 17,800 461,688
Gillette Co. 26,600 1,507,887
Kimberly-Clark Corp. 28,200 1,293,675
Procter & Gamble Co. 10,700 974,369
Revlon, Inc., "A"* 9,700 498,337
Tyco International Ltd. 43,620 2,748,060
------------
$ 10,773,516
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Containers - 0.8%
Stone Container Corp.* 49,800 $ 778,125
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Electrical Equipment - 1.5%
Cooper Industries, Inc. 2,500 $ 137,344
General Electric Co. 15,400 1,401,400
------------
$ 1,538,744
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Electronics - 0.9%
Analog Devices, Inc.* 13,733 $ 337,317
Teradyne, Inc.* 22,400 599,200
------------
$ 936,517
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Entertainment - 1.2%
CBS Corp. 19,000 $ 603,250
Jacor Communications, Inc.* 10,700 631,300
------------
$ 1,234,550
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Financial Institutions - 4.7%
Associates First Capital Corp., "A" 7,260 $ 558,113
CIT Group, Inc., "A" 5,800 217,500
Federal National Mortgage Assn 14,900 905,175
First Union Corp. 17,172 1,000,269
Green Tree Financial Corp. 1,700 72,781
Merrill Lynch & Co., Inc. 4,800 442,800
Morgan Stanley, Dean Witter & Co. 11,500 1,050,812
Union Planters Corp. 7,932 466,501
------------
$ 4,713,951
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Food and Beverage Products - 1.3%
Archer-Daniels-Midland Co. 24,500 $ 474,687
Corn Products International, Inc.* 11,800 399,725
McCormick & Co., Inc. 10,500 375,047
Nabisco Holdings Corp., "A" 3,000 108,188
------------
$ 1,357,647
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Insurance - 8.3%
Allstate Corp. 7,900 $ 723,344
Chubb Corp. 9,200 739,450
CIGNA Corp. 14,700 1,014,300
Conseco, Inc. 33,100 1,547,425
FPIC Insurance Group, Inc.* 3,200 107,600
Hartford Financial Services Group, Inc. 8,900 1,017,937
Life Re Corp. 2,700 223,763
Lincoln National Corp. 14,300 1,306,662
Nationwide Financial Services, Inc., "A" 7,200 367,200
Reliastar Financial Corp. 15,450 741,600
Travelers Group, Inc. 8,750 530,469
------------
$ 8,319,750
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Machinery - 0.6%
Eaton Corp. 2,600 $ 202,150
Lear Corp.* 6,900 354,056
------------
$ 556,206
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Medical and Health Products - 5.2%
American Home Products Corp. 32,400 $ 1,676,700
Boston Scientific Corp.* 10,500 752,063
Bristol-Myers Squibb Co. 24,200 2,781,487
------------
$ 5,210,250
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Medical and Health Technology and Services - 5.9%
Cardinal Health, Inc. 4,800 $ 450,000
Columbia/HCA Healthcare Corp. 29,900 870,838
HBO & Co. 45,200 1,593,300
HealthSouth Corp.* 37,145 991,307
United Healthcare Corp. 31,600 2,006,600
------------
$ 5,912,045
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Metals and Minerals - 0.4%
Minerals Technologies, Inc. 7,600 $ 386,650
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Oil Services - 1.3%
Cooper Cameron Corp.* 7,500 $ 382,500
Diamond Offshore Drilling, Inc. 10,800 432,000
EVI Weatherford, Inc.* 13,705 508,798
------------
$ 1,323,298
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Oils - 3.9%
Chevron Corp. 7,900 $ 656,194
Mobil Corp. 6,700 513,387
Texaco, Inc. 24,800 1,480,250
USX-Marathon Group 35,600 1,221,525
------------
$ 3,871,356
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Pollution Control - 0.4%
Browning Ferris Industries, Inc. 7,800 $ 271,050
Waste Management, Inc. 5,000 175,000
------------
$ 446,050
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Railroads - 0.5%
Wisconsin Central Transportation Corp.* 24,800 $ 542,500
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Restaurants and Lodging - 1.9%
Cendant Corp.* 31,900 $ 665,913
CKE Restaurants, Inc. 12,400 511,500
McDonalds Corp. 8,400 579,600
Promus Hotel Corp.* 4,500 173,250
------------
$ 1,930,263
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Special Products and Services - 0.6%
Newport News Shipbuilding, Inc. 21,300 $ 569,775
- ------------------------------------------------------------------------------
Stores - 5.3%
CVS Corp. 23,600 $ 918,925
Home Depot, Inc. 14,700 1,221,019
Nordstrom, Inc. 9,000 695,250
Office Depot, Inc.* 18,700 590,219
Rite Aid Corp. 49,700 1,866,856
------------
$ 5,292,269
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Supermarkets - 2.1%
Meyer (Fred), Inc.* 14,200 $ 603,500
Safeway, Inc.* 36,000 1,464,750
------------
$ 2,068,250
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Telecommunications - 5.2%
Aspect Telecommunications Corp.* 22,200 $ 607,725
Cisco Systems, Inc.* 16,500 1,519,031
Intermedia Communications, Inc.* 11,400 478,088
MCI Communications Corp. 10,700 621,937
Sprint Corp. 10,400 733,200
WorldCom, Inc.* 25,925 1,255,742
------------
$ 5,215,723
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Utilities - Electric - 0.5%
CalEnergy Co., Inc.* 17,300 $ 520,081
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Utilities - Gas - 1.0%
Columbia Gas System, Inc. 4,550 $ 253,094
KN Energy, Inc. 13,400 726,112
------------
$ 979,206
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Total U.S. Stocks $ 89,625,222
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Foreign Stocks - 8.2%
Bermuda - 0.7%
Ace Ltd. 12,500 $ 487,500
Exel Ltd. (Insurance) 3,000 233,438
------------
$ 720,938
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Brazil - 0.2%
Companhia Cervejaria Brahma, ADR (Beverages) 15,600 $ 195,000
- ------------------------------------------------------------------------------
France - 1.4%
Alcatel Alsthom Compagnie, ADR (Telecommunications) 35,400 $ 1,440,337
- ------------------------------------------------------------------------------
Germany - 0.2%
Henkel KGaA (Chemicals) 2,500 $ 247,025
- ------------------------------------------------------------------------------
Hong Kong - 0.4%
Hutchison Whampoa Ltd. (Conglomerate) 74,000 $ 390,705
- ------------------------------------------------------------------------------
Japan - 0.9%
Sony Corp. (Electronics) 10,700 $ 925,418
- ------------------------------------------------------------------------------
Netherlands - 1.4%
Akzo Nobel N.V. (Chemicals) 1,500 $ 333,072
ING Groep N.V. (Financial Services)* 15,653 1,023,805
------------
$ 1,356,877
- ------------------------------------------------------------------------------
Sweden - 1.1%
Skandia Forsakrings AB (Insurance) 79,000 $ 1,127,865
- ------------------------------------------------------------------------------
United Kingdom - 1.9%
British Petroleum PLC, ADR (Oils) 18,518 $ 1,634,213
Jarvis Hotels PLC (Restaurants and Lodging)+ 77,500 222,345
------------
$ 1,856,558
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Total Foreign Stocks $ 8,260,723
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Total Stocks (Identified Cost, $84,036,727) $ 97,885,945
- ------------------------------------------------------------------------------
Short-Term Obligation - 2.1%
- ------------------------------------------------------------------------------
Principal Amount
(000 Omitted)
- ------------------------------------------------------------------------------
Federal Home Loan Bank, due 7/01/98,
at Amortized Cost $2,100 $ 2,100,000
- ------------------------------------------------------------------------------
Total Investments (Identified Cost, $86,136,727) $ 99,985,945
Other Assets, Less Liabilities - 0.4% 391,283
- ------------------------------------------------------------------------------
Net Assets - 100.0% $100,377,228
- ------------------------------------------------------------------------------
* Non-income producing security.
+ Restricted security.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ------------------------------------------------------------------------------
June 30, 1998
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $86,136,727) $ 99,985,945
Cash 29,881
Foreign currency, at value (identified cost $1,963) 2,009
Receivable for Fund shares sold 54,841
Receivable for investments sold 487,837
Dividends receivable 86,298
Receivable from investment adviser 66,299
Deferred organization expenses 4,036
Other assets 304
------------
Total assets $100,717,450
------------
Liabilities:
Payable for fund shares reacquired $ 27
Payable for investments purchased 303,923
Payable to affiliates -
Management fee 4,895
Shareholder servicing agent fee 62
Administrative fee 123
Accrued expenses and other liabilities 31,192
------------
Total liabilities $ 340,222
------------
Net assets $100,377,228
============
Net assets consist of:
Paid-in capital $ 83,105,644
Unrealized appreciation on investments and translation of
assets and liabilities in foreign currency 13,849,164
Accumulated undistributed net realized gain on investments
and foreign currency transactions 3,211,115
Accumulated undistributed net investment income 211,305
------------
Total $100,377,228
============
Shares of beneficial interest outstanding 6,798,917
=========
Net asset value, offering price, and redemption price per share
(net assets of $100,377,228 / 6,798,917 shares of
beneficial interest outstanding) $14.76
======
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- -------------------------------------------------------------------------------
Year Ended June 30, 1998
- -------------------------------------------------------------------------------
Net investment income:
Income -
Dividends $ 593,154
Interest 116,435
Foreign taxes withheld (9,460)
-----------
Total investment income $ 700,129
-----------
Expenses -
Management fee $ 367,149
Trustees' compensation 5,000
Shareholder servicing agent fee 4,613
Administrative fee 8,829
Custodian fee 26,690
Auditing fees 26,603
Registration fees 15,916
Printing 6,967
Legal fees 1,726
Amortization of organization expenses 1,394
Miscellaneous 3,605
-----------
Total expenses $ 468,492
Fees paid indirectly (5,138)
Reduction of expenses by investment adviser (65,608)
-----------
Net expenses $ 397,746
-----------
Net investment income $ 302,383
-----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 4,859,212
Foreign currency transactions (5,280)
-----------
Net realized gain on investments and foreign currency
transactions $ 4,853,932
-----------
Change in unrealized appreciation -
Investments $ 8,733,125
Translation of assets and liabilities in foreign currencies 127
-----------
Net unrealized gain on investments and foreign currency
translation $ 8,733,252
-----------
Net realized and unrealized gain on investments and
foreign currency $13,587,184
-----------
Increase in net assets from operations $13,889,567
===========
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
- ------------------------------------------------------------------------------------------------
Year Ended June 30, 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 302,383 $ 145,609
Net realized gain (loss) on investments and foreign
currency transactions 4,853,932 (29,793)
Net unrealized gain on investments and foreign currency
translation 8,733,252 5,643,580
------------ -----------
Increase in net assets from operations $ 13,889,567 $ 5,759,396
------------ -----------
Distributions declared to shareholders -
From net investment income $ (191,092) $ (79,710)
From net realized gain on investments and foreign
currency transactions (1,547,045) --
------------ -----------
Total distributions declared to shareholders $ (1,738,137) $ (79,710)
------------ -----------
Net increase in net assets from Fund share transactions $ 45,934,074 $13,832,936
------------ -----------
Total increase in net assets $ 58,085,504 $19,512,622
Net assets:
At beginning of period $ 42,291,724 $22,779,102
------------ -----------
At end of period (including accumulated undistributed
net investment income of $211,305 and $103,379,
respectively) $100,377,228 $42,291,724
============ ===========
</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 $12.10 $ 9.78 $10.00
------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.07 $ 0.06 $ 0.02
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 3.07 2.29 (0.24)
------ ------ ------
Total from investment operations $ 3.14 $ 2.35 $(0.22)
------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.05) $(0.03) $ --
From net realized gain on investments and foreign
currency transactions (0.43) -- --
------ ------ ------
Total distributions declared to shareholders $(0.48) $(0.03) $ --
------ ------ ------
Net asset value - end of period $14.76 $12.10 $ 9.78
====== ====== ======
Total return 26.86% 24.12% (2.20)%++
Ratios (to average net assets)/Supplemental data(S):
Expenses 0.65% 0.65% 0.65%+
Net investment income 0.49% 0.56% 1.52%+
Portfolio turnover 73% 84% 6%
Net assets at end of period (000 omitted) $100,377 $42,292 $22,779
* For the period from the commencement of the Fund's investment operations, May 21, 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) The investment adviser voluntarily agreed to maintain the other expenses of the Fund, exclusive of management
fees, at not more than 0.05% of average daily net assets. To the extent actual expenses were over this
limitation, the net investment income per share and the ratios would have been:
Net investment income $ 0.05 $ 0.03 $ --
Ratios (to average net assets):
Expenses## 0.76% 0.90% 2.03%+
Net investment income 0.38% 0.31% 0.14%+
</TABLE>
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Institutional Research Fund (the Fund) is a diversified series of MFS
Institutional Trust (the Trust). The Trust is organized as a Massachusetts
business trust and is registered under the Investment Company Act of 1940, as
amended, as an open-end management investment company.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investments in foreign securities are vulnerable to the effects of changes in
the relative values of the local currency and the U.S. dollar and to the
effects of changes in each country's legal, political, and economic
environment.
Investment Valuations - Equity securities listed on securities exchanges or
reported through the NASDAQ system are 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. 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.
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 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 net realized gains. During
the year ended June 30, 1998, $3,365 was reclassified from accumulated
undistributed net investment income and $82,527 was reclassified from
accumulated undistributed net realized gain on investments and foreign
currency transactions to paid-in-capital due to differences between book and
tax accounting for currency transactions and capital gain distributions,
respectively. 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 0.60%
of average daily net assets. The investment adviser has voluntarily agreed to
pay the Fund's operating expenses exclusive of management fees, such that the
Fund's other expenses do not exceed 0.05% of its average daily net assets.
This is reflected as a reduction of expenses in the Statement of Operations.
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 short-term obligations, were as
follows:
Purchases Sales
- ------------------------------------------------------------------------------
U.S. government securities $ 482,473 $ --
----------- -----------
Investments (non-U.S. government securities) $87,242,197 $44,511,184
----------- -----------
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 $86,278,087
===========
Gross unrealized appreciation $15,586,644
Gross unrealized depreciation (1,878,786)
-----------
Net unrealized appreciation $13,707,858
===========
(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 3,750,333 $52,046,353 1,574,044 $17,800,872
Shares issued to shareholders in
reinvestment of distributions 141,908 1,725,601 7,415 79,710
Shares reacquired (588,716) (7,837,880) (415,234) (4,047,646)
--------- ----------- --------- -----------
Net increase 3,303,525 $45,934,074 1,166,225 $13,832,936
========= =========== ========= ===========
</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 $291.
(7) 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 security (constituting 0.22% 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
security be registered. The value of this security is determined by valuations
furnished by dealers or by a pricing service, or if not available, is valued
at fair value as determined in good faith by or at the direction of the
Trustees.
Description Dates of Acquisition Share Amount Cost Value
- -------------------------------------------------------------------------------
Jarvis Hotels PLC 6/21/96 - 7/02/97 77,500 $207,830 $222,345
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Institutional Trust and Shareholders of MFS
Institutional Research Fund:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of the MFS Institutional Research 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 June 30, 1997, and
the financial highlights for each of the years in the three-year period ended
June 30, 1998. These 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 conduct 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 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 MFS Institutional
Research 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
--------------------------------------------
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>
FEDERAL TAX INFORMATION
In January 1999, shareholders will be mailed a tax form summary reporting the
federal tax status of all distributions paid during the calendar year 1998.
For the year ended June 30, 1998, the amount of distributions from income
eligible for the 70% dividends received deduction for corporations came to
35%.
The Fund has designated $633,629 as a capital gain dividend.
<PAGE>
(C)1998 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
IRF-2 8/98 .5M
