<PAGE>
[Logo] M F S(R) ANNUAL REPORT
INVESTMENT MANAGEMENT JUNE 30, 1999
75 YEARS
WE INVENTED THE MUTUAL FUND(R)
[graphic omitted]
MFS(R) INSTITUTIONAL EMERGING
MARKETS DEBT FUND
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
MFS(R) INSTITUTIONAL EMERGING MARKETS DEBT FUND
TRUSTEES INVESTMENT ADVISER
Jeffrey L. Shames* Massachusetts Financial Services Company
Chairman, Chief Executive Officer, and 500 Boylston Street
Director, MFS Investment Management(R) 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 Company; INVESTOR SERVICE
Private investor and real estate consultant MFS Service Center, Inc.
P.O. Box 2281
CHAIRMAN AND PRESIDENT Boston, MA 02107-9906
Jeffrey L. Shames*
For additional information,
PORTFOLIO MANAGER contact your financial adviser.
Matthew W. Ryan*
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.*
*Affiliated with the Investment Adviser
- --------------------------------------------------------------------------------
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
LETTER FROM THE CHAIRMAN
Dear Shareholders,
It has been almost two years since financial turmoil began to rock markets in
Asia, Russia, and Latin America. Even developed markets such as Europe and the
United States were not immune. In the U.S. equity market, for example,
investors focused on a narrow group of 50 of the largest-company growth stocks
because they seemed to offer less volatility in uncertain times. Fixed-income
investors also became more concerned about risk, moving money into U.S.
Treasury securities and out of corporate and municipal bonds and mortgage-
backed securities.
The narrowness of the market was just one of three broad issues that dominated
the U.S. equity market until recently. The other two were a slowdown in
corporate earnings growth and high valuations, with stocks of many companies
selling at extremely high prices relative to their earnings.
Although these have been challenging issues, we now see signs that we feel
demonstrate each one is changing for the better. Today, we believe the markets
are presenting more opportunities for investors to diversify, for our
portfolio managers to find good values, and for us to show the benefits of
staying with our long-term objectives and strategies. Investors seem to be
regaining confidence in a wider range of companies. Stocks of some small and
mid-sized companies, as well as some large industrial companies, have begun to
perform better in the past few months than they had for the previous year or
so. These companies appear to have benefited from early signs of stability in
emerging markets and a continuation of economic growth in the United States.
U.S. companies also have produced better earnings. Corporate earnings were, on
average, relatively flat in 1998. However, we expect earnings to grow 12% to
14% this year because more companies have benefited from the strong economy
and from aggressive consolidation and cost-cutting measures they have taken
over the past several years.
Based on their earnings projections, our analysts estimate that the U.S. stock
market is still about 30% overvalued. While there has been some shift to a
wider group of stocks, many investors are still focusing on the large-company
stocks. As a result, most of the overvaluation is in the 50 largest stocks in
the Standard & Poor's 500 Composite Index (the S&P 500), a popular, unmanaged
index of common stock total return performance. That means about 450 stocks
are selling at more attractive prices, particularly given what we see as the
improved earnings outlooks for these and many small and mid-sized companies
not in the S&P 500. These companies also benefit from consolidation, cost
cutting, and global growth. Because they are smaller, they may be able to
respond to these changes more quickly, and thus they have the potential to
grow faster than the big companies.
The fixed-income markets, meanwhile, seem to be approaching the level of
relative stability they enjoyed before the Asian turmoil. Some credit for this
stability goes to the Federal Reserve Board (the Fed), which has reassured
investors that it will act to prevent rapid economic growth from causing
higher inflation and reduced purchasing power. Also, once investors saw that
the overseas turmoil had little, if any, effect on the financial strength of
most domestic bond issuers, the major non-Treasury markets -- corporate,
municipal, and mortgage -- began to rebound. Our portfolio managers are now
finding more opportunities to buy bonds with relatively stable prices and
attractive yields.
The past two years have challenged investors. However, we believe we are well
positioned for the current environment because our analysts and portfolio
managers continue to rely on MFS(R) Original Research(SM) to help evaluate the
long-term investment potential of each holding being considered for our
portfolios. Also, we believe our discipline of staying with our clearly
defined investment strategies can help us offer investment products with the
potential to sustain returns over a variety of market cycles.
We appreciate your confidence and welcome any questions or comments you may
have.
Respectfully,
/s/Jeffrey L. Shames
- ------------------------
Jeffrey L. Shames
Chairman and Chief Executive Officer
MFS Investment Management(R)
July 15, 1999
MANAGEMENT REVIEW AND OUTLOOK
Dear Shareholders,
For the 12 months ended June 30, 1999, the Fund provided a total return of
0.18% (including the reinvestment of any distributions), which compares to a
- -10.63% return for the average emerging markets debt fund tracked by Lipper
Analytical Services, Inc., an independent firm that reports mutual fund
performance (Lipper). Over the same period, the Fund's return also compares to
a 42.93% return for the J.P. Morgan Emerging Local Markets Index (the Emerging
Local Markets Index), which is comprised of local-currency, short-term
instruments, and to a 17.94% return for its custom index (the Custom Index), a
blend of the J.P. Morgan Emerging Markets Bond Index Plus (EMBI+), which
comprises 50% of the custom index, and the Emerging Local Markets Index (50%).
The EMBI+ is comprised of Brady bonds (U.S. dollar-denominated restructured
bank loans). The Fund typically invests half its net assets in Brady bonds and
half in local-currency instruments.
The past 12 months have been characterized by crisis and recovery. The
emerging Asian economies were the first to experience financial instability,
beginning in 1997 and carrying over to 1998. Russia's economic collapse in
August 1998 marked the second and most virulent phase of the emerging market
crisis, triggering a generalized sell-off of the asset class. The resulting
withdrawal of capital from emerging market economies exposed vulnerabilities
in a number of countries, including Brazil, which was forced to devalue its
currency in January 1999.
The Fund was affected adversely by exposure to Russian dollar debt during the
second half of 1998. Overweighted positions in more defensive countries, such
as Mexico, Peru, Panama, and Morocco, helped performance. The Fund was
underweighted in Argentina, however, which outperformed the market last year.
The biggest contributor to last year's underperformance against the custom
benchmark was the underweighting of Asian currencies during the second half of
1998. The Fund's cautious stance vis-a-vis these currencies benefited
performance at the onset of the crisis, but hurt returns during their recovery
in the second half of 1998.
The Fund's performance improved sharply with the market rebound in the first
half of 1999. Over the last six months, the Fund provided a return of 10.02%,
which compares to a return of 9.72% for the average emerging markets debt fund
tracked by Lipper, 12.82% for the Emerging Local Markets Index, and 11.70% for
the Custom Index. Overweighted positions in Korea and the Philippines
benefited from the surprisingly strong recovery in non-Japan Asia. We continue
to be encouraged by the creditworthiness of a number of countries in the
region, but the scarcity of compelling valuations has limited our current
exposure. The Fund took profits in Korea in the first half of 1999.
Latin America today is a patchwork of countries in widely different economic
circumstances. The Fund has maintained an overweighted position in Mexican
bonds despite rather rich valuations compared to other emerging credits. We
continue to be impressed by Mexico's sound policy management, economic
performance, and credit upgrade prospects. The Fund's Mexican peso positions
have been profitable and have fluctuated depending on peso levels. We have
reduced our position in Brazil because reform momentum has slowed in line with
the decline in the political fortunes of its President.
We modestly have increased our low exposure to Argentina recently. As the
market has penalized this deteriorating credit, we believe valuations have
approached more reasonable levels. We remain concerned about developments in
Ecuador, Venezuela, and Colombia. Each of these oil exporters benefits from
the increase in oil prices, but we believe Algeria to be a much more
attractive oil-related credit.
The Fund benefited from a cautiously rebuilt position in Russia, where bond
valuations had plunged to default levels and where fears of social and
economic implosion have not been borne out. Another credit that has returned
to favor is Bulgaria, an upgrade candidate with a reinvigorated reform
program. We continue to like Poland, both in local currency and in corporate
dollar-denominated credits.
We are confident regarding emerging market debt at current valuations. We
believe a number of profitable opportunities exist, although careful
differentiation among credits remains critical. Given reduced global
liquidity, associated with fears of further Federal Reserve Board interest-
rate increases and Year 2000 concerns, we believe the markets will remain
skittish. In this environment, we will continue to focus on stable or
improving credits that are not significantly dependent on continued access to
international capital markets.
Respectfully,
/s/Matthew W. Ryan
- ---------------------------
Matthew W. Ryan
Portfolio Manager
The opinions expressed in this report are those of the portfolio manager and
are current 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.
The portfolio is actively managed, and current holdings may be different.
PORTFOLIO MANAGER'S PROFILE
Matthew W. Ryan is Vice President of MFS Investment Management(R) and
portfolio manager of MFS(R) Institutional Emerging Markets Debt Fund. Before
joining the firm in 1997, Mr. Ryan worked as an economist for four years at
the International Monetary Fund and for five years as an international
economist with the U.S. Treasury Department. He was named portfolio manager in
1998 and Vice President in 1999. He is a graduate of Williams College and
earned a master's degree in international economics and foreign policy from
Johns Hopkins University. Mr. Ryan is also a Chartered Financial Analyst.
All portfolio managers at MFS Investment Management(R) are supported by an
investment staff of over 100 professionals utilizing MFS(R) Original
Research(SM), a company-oriented, bottom-up process of selecting securities.
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. A prospectus containing more information,
including the exchange privilege and all charges and expenses, for any other
MFS product is available from your financial adviser, or by calling MFS at
1-800-225-2606. Please read it carefully before investing or sending money.
<PAGE>
FUND FACTS
Objective: Seeks total return (high current income and long-term growth of
capital).
Commencement of investment operations: August 7, 1995
Size: $3.6 million net assets as of June 30, 1999
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. (See Notes to Performance Summary
for more information.)
GROWTH OF A HYPOTHETICAL $3,000,000 INVESTMENT
(For the period from August 7, 1995, through June 30, 1999)
[Graphic Omitted]
50% J.P. Morgan
Emerging Markets
MFS Institutional Bond Index Plus/50%
Emerging Markets J.P. Morgan Emerging J.P. Morgan Emerging
Debt Fund Local Markets Index Local Markets Index
- --------------------------------------------------------------------------------
8/95 $3,000,000 $3,000,000 $3,000,000
6/97 4,160,000 4,374,000 3,633,000
6/98 4,229,000 4,000,000 2,968,000
6/99 4,237,241 4,717,800 4,242,010
AVERAGE ANNUAL AND CUMULATIVE TOTAL RATES OF RETURN THROUGH JUNE 30, 1999
<TABLE>
<CAPTION>
1 Year 3 Years Life*
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return + 0.18% +25.06% +41.24%
- ----------------------------------------------------------------------------------------------------------
Average Annual Total Return + 0.18% + 7.74% + 9.26%
- ----------------------------------------------------------------------------------------------------------
COMPARATIVE INDICES
- ----------------------------------------------------------------------------------------------------------
Average emerging markets debt fund+ -10.63% + 5.17% +10.85%
- ----------------------------------------------------------------------------------------------------------
50% J.P. Morgan Emerging Markets Bond Index Plus/
50% J.P. Morgan Emerging Local Markets Index** +17.94% + 9.50% +12.54%
- ----------------------------------------------------------------------------------------------------------
J.P. Morgan Emerging Local Markets Index** +42.93% + 9.06% + 9.46%
- ----------------------------------------------------------------------------------------------------------
*For the period from the commencement of the Fund's investment operations,
August 7, 1995, through June 30, 1999. Index returns are from September 1, 1995.
+Source: Lipper Analytical Services, Inc.
**Source: Standard & Poor's Micropal, Inc.
</TABLE>
<PAGE>
NOTES TO PERFORMANCE SUMMARY
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 ecomomic and political conditions of the countries where
investments are made. These risks may increase share price volatility. See the
prospectus for details.
<PAGE>
PORTFOLIO OF INVESTMENTS - June 30, 1999
Bonds - 72.4%
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
- -------------------------------------------------------------------------------------------------
Foreign Bonds - 72.4%
Algeria - 4.5%
<S> <C> <C>
Algeria Chase Manhattan, 6s, 2006 $ 140 $ 86,450
Algeria Reprofiling LNS, 6.75s, 2000 45 42,638
Algeria Tranche, 6.644s, 2010+ 55 30,800
----------
$ 159,888
- -------------------------------------------------------------------------------------------------
Argentina - 4.1%
Republic of Argentina, 5.938s, 2005 $ 130 $ 110,839
Republic of Argentina, 11.75s, 2009 40 36,200
----------
$ 147,039
- -------------------------------------------------------------------------------------------------
Brazil - 11.7%
Banco Nacional De Desenvolvi, 15.224s, 2008 (Banks and
Credit Cos.)## $ 130 $ 108,875
Federal Republic of Brazil, 5s, 2014 143 92,514
Federal Republic of Brazil, 5.875s, 2024 75 47,348
Federal Republic of Brazil, 5.938s, 2009-2012 180 113,409
Federal Republic of Brazil, 11.625s, 2004 60 55,878
----------
$ 418,024
- -------------------------------------------------------------------------------------------------
Bulgaria - 4.4%
National Republic of Bulgaria, 5.875s, 2011-2024 $ 230 $ 155,825
- -------------------------------------------------------------------------------------------------
Indonesia - 1.9%
Indah Kiat Finance Mauritius Ltd., 10s, 2007 (Paper &
Forest Products) $ 100 $ 69,000
- -------------------------------------------------------------------------------------------------
Mexico - 12.7%
Alestra S.A. De RL De C.V., 12.625s, 2009 (Utilities -
Telephone)## $ 70 $ 66,500
Petroleos Mexicanos, 9.5s, 2027 (Oil Services)## 100 94,500
Satelites Mexicanos S.A. De C.V., 10.125s, 2004
(Telecommunications) 65 51,837
United Mexican States, 9.75s, 2005 60 60,900
United Mexican States, 10.375s, 2009 175 178,500
----------
$ 452,237
- -------------------------------------------------------------------------------------------------
Morocco - 3.5%
Morocco Tranche A, 5.906s, 2009+ $ 158 $ 126,476
- -------------------------------------------------------------------------------------------------
Panama - 2.8%
Republic of Panama, 4s, 2014 $ 50 $ 36,625
Republic of Panama, 5.938s, 2016 53 39,029
Republic of Panama, 8.875s, 2027 30 24,825
----------
$ 100,479
- -------------------------------------------------------------------------------------------------
Peru - 3.1%
Republic of Peru, 4.5s, 2017 $ 180 $ 110,484
- -------------------------------------------------------------------------------------------------
Philippines - 3.5%
Republic of Philippines, 9.875s, 2019 $ 125 $ 122,500
- -------------------------------------------------------------------------------------------------
Poland - 6.7%
Government of Poland, 3s, 2024 $ 150 $ 89,250
Government of Poland, 10s, 2004 PLN 600 150,535
----------
$ 239,785
- -------------------------------------------------------------------------------------------------
Russia - 4.6%
Ministry of Finance, Russia, 10s, 2007 $ 80 $ 39,600
Ministry of Finance, Russia, 11s, 2018 90 44,325
Ministry of Finance, Russia, 12.75s, 2028 50 28,000
Russia Principal Loans, 6.063s, 2020+ ** 430 52,159
----------
$ 164,084
- -------------------------------------------------------------------------------------------------
South Africa - 3.3%
Republic of South Africa, 13s, 2010 ZAR 800 $ 116,920
- -------------------------------------------------------------------------------------------------
Turkey - 2.9%
Cellco Finance N.V., 15s, 2005 (Financial Services)## $ 100 $ 103,000
- -------------------------------------------------------------------------------------------------
Venezuela - 2.7%
Republic of Venezuela, 9.25s, 2027 $ 150 $ 97,695
- -------------------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $2,489,163) $2,583,436
- -------------------------------------------------------------------------------------------------
Rights
- -------------------------------------------------------------------------------------------------
SHARES
- -------------------------------------------------------------------------------------------------
United Mexican States* (Identified Cost, $0) 385,000 $ 0
- -------------------------------------------------------------------------------------------------
Short-Term Obligations - 23.8%
- -------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- -------------------------------------------------------------------------------------------------
Federal Farm Credit Bank, due 7/01/99 at Amortized Cost $ 850 $ 850,000
- -------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $3,339,163) $3,433,436
Other Assets, Less Liabilities - 3.8% 136,208
- -------------------------------------------------------------------------------------------------
Net Assets - 100.0% $3,569,644
- -------------------------------------------------------------------------------------------------
</TABLE>
*Non-income producing security.
**Non-income producing security-in default.
##SEC Rule 144A restriction.
+Restricted security.
Abbreviations have been used throughout this report to indicate amounts shown
in currencies other than the U.S. dollar. A list of abbreviations is shown
below.
HKD = Hong Kong Dollars PLN = Polish Zloty
PHP = Philippine Pesos ZAR = South African Rand
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ------------------------------------------------------------------------------
JUNE 30, 1999
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $3,339,163) $3,433,436
Cash 3,474
Foreign currency, at value (identified cost, $18) 17
Receivable for investments sold 12,107
Interest receivable 76,103
Net receivable for forward foreign currency exchange
contracts to purchase 4,629
Net receivable for forward foreign currency exchange
contracts subject to master netting agreements 45,931
Receivable from investment adviser 862
Deferred organization expenses 4,551
Other assets 35
----------
Total assets $3,581,145
----------
Liabilities:
Payable for investments purchased $ 3,525
Net payable for forward foreign currency exchange contracts to sell 306
Payable for daily variation margin on open futures contracts 3,000
Payable to affiliates -
Management fee 83
Shareholder servicing agent fee 1
Administrative fee 2
Accrued expenses and other liabilities 4,584
----------
Total liabilities $ 11,501
----------
Net assets $3,569,644
==========
Net assets consist of:
Paid-in capital $3,847,933
Unrealized appreciation on investments and
translation of assets and liabilities in foreign currencies 140,807
Accumulated distributions in excess of net realized gain on
investments and foreign currency transactions (693,217)
Accumulated undistributed net investment income 274,121
----------
Total $3,569,644
==========
Shares of beneficial interest outstanding 358,431
=======
Net asset value, offering price, and redemption price per share
(net assets / shares of beneficial interest outstanding) $9.96
=====
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- ------------------------------------------------------------------------------
YEAR ENDED JUNE 30, 1999
- ------------------------------------------------------------------------------
Net investment income:
Interest income $ 440,304
---------
Expenses -
Management fee $ 36,786
Trustees' compensation 5,300
Shareholder servicing agent fee 325
Administrative fee 534
Auditing fees 36,928
Registration fees 11,418
Custodian fee 8,496
Printing 7,809
Amortization of organization expenses 4,081
Legal fees 2,259
Miscellaneous 362
----------
Total expenses 114,298
Fees paid indirectly (2,950)
Reduction of expenses by investment adviser (57,251)
----------
Net expenses $ 54,097
----------
Net investment income 386,207
----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ (689,961)
Futures contracts 2,707
Foreign currency transactions 79,473
----------
Net realized loss on investments and
foreign currency transactions $ (607,781)
----------
Change in unrealized appreciation (depreciation) -
Investments $ 26,540
Futures contracts (3,835)
Translation of assets and liabilities in foreign currencies 49,310
----------
Net unrealized gain on investments and foreign
currency translation $ 72,015
----------
Net realized and unrealized loss on investments
and foreign currency $ (535,766)
----------
Decrease in net assets from operations $ (149,559)
==========
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- ---------------------------------------------------------------------------------------------
YEAR ENDED JUNE 30, 1999 1998
- ---------------------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
<S> <C> <C>
Net investment income $ 386,207 $ 344,034
Net realized loss on investments and foreign currency
transactions (607,781) (124,794)
Net unrealized gain (loss) on investments and foreign
currency translation 72,015 (134,989)
----------- ----------
Increase (decrease) in net assets from operations $ (149,559) $ 84,251
----------- ----------
Distributions declared to shareholders -
From net investment income $ (362,744) $ (175,251)
From net realized gain on investments and foreign currency
transactions -- (365,182)
In excess of net realized gain on investments and foreign
currency transactions (27,982) (7,721)
----------- ----------
Total distributions declared to shareholders $ (390,726) $ (548,154)
----------- ----------
Net increase (decrease) in net assets from Fund share
transactions (1,216,578) $ 464,895
----------- ----------
Total increase (decrease) in net assets (1,756,863) $ 992
Net assets:
At beginning of period 5,326,507 5,325,515
----------- ----------
At end of period (including accumulated undistributed net
investment income of $274,121 and $222,288, respectively) $ 3,569,644 $5,326,507
=========== ==========
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
- ----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JUNE 30,
-----------------------------------------------------------------------
1999 1998 1997 1996*
- ----------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C>
Net asset value - beginning of period $10.86 $11.94 $10.88 $10.00
------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.84 $ 0.73 $ 0.94 $ 0.70
Net realized and unrealized gain (loss) on
investments and foreign currency transactions (0.93) (0.56) 1.41 0.56
------ ------ ------ ------
Total from investment operations $(0.09) $ 0.17 $ 2.35 $ 1.26
------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.75) $(0.40) $(0.83) $(0.38)
From net realized gain on investments and
foreign currency transactions -- (0.83) (0.46) --
In excess of net realized gain on investments
and foreign currency transactions (0.06) (0.02) -- --
------ ------ ------ ------
Total distributions declared to shareholders $(0.81) $(1.25) $(1.29) $(0.38)
------ ------ ------ ------
Net asset value - end of period $ 9.96 $10.86 $11.94 $10.88
====== ====== ====== ======
Total return 0.18% 1.67% 22.79% 12.93%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.31% 1.30% 1.29% 1.25%+
Net investment income 8.88% 6.46% 8.30% 7.59%+
Portfolio turnover 399% 159% 473% 285%
Net assets at end of period (000 omitted) $3,570 $5,327 $5,326 $4,160
<CAPTION>
*For the period from the commencement of the Fund's investment operations, August 7, 1995, through
June 30, 1996.
+Annualized.
++Not annualized.
#Per share data are based on average shares outstanding.
##The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the
amount of cash maintained by the Fund with its custodian and dividend disbursing agent. The Fund's
expenses are calculated without reduction for this expense offset arrangement.
(S)Subject to reimbursement by the Fund, the investment adviser agreed to maintain the expenses of
the Fund, exclusive of management fees, at not more than 0.40% 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:
<S> <C> <C> <C> <C>
Net investment income $ 0.71 $ 0.66 $ 0.85 $ 0.43
Ratios (to average net assets):
Expenses## 2.63% 1.91% 2.07% 4.21%+
Net investment income 7.56% 5.86% 7.48% 4.63%+
</TABLE>
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Institutional Emerging Markets Debt Fund (the Fund) is a non-diversified
series of MFS Institutional Trust (the Trust). The Trust is organized as a
Massachusetts business trust and is registered under the Investment Company
Act of 1940, as amended, as an open-end management investment company.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investments in foreign securities are vulnerable to the effects of changes in
the relative values of the local currency and the U.S. dollar and to the
effects of changes in each country's legal, political, and economic
environment.
Investment Valuations - Debt securities (other than short-term obligations
which mature in 60 days or less), including listed issues and forward
contracts, are valued on the basis of valuations furnished by dealers or by a
pricing service with consideration to factors such as institutional-size
trading in similar groups of securities, yield, quality, coupon rate,
maturity, type of issue, trading characteristics, and other market data,
without exclusive reliance upon exchange or over-the-counter prices. Futures
contracts listed on commodities exchanges are reported at market value using
closing settlement prices. Short-term obligations, which mature in 60 days or
less, are valued at amortized cost, which approximates market value. Non-U.S.
dollar denominated short-term obligations are valued at amortized cost as
calculated in the foreign currency and translated into U.S. dollars at the
closing daily exchange rate. Securities for which there are no such quotations
or valuations are valued at fair value as determined in good faith by the
Trustees.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases
and sales of foreign investments, income, and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates
of such transactions. Gains and losses attributable to foreign currency
exchange rates on sales of securities are recorded for financial statement
purposes as net realized gains and losses on investments. Gains and losses
attributable to foreign exchange rate movements on income and expenses are
recorded for financial statement purposes as foreign currency transaction
gains and losses. That portion of both realized and unrealized gains and
losses on investments that results from fluctuations in foreign currency
exchange rates is not separately disclosed.
Deferred Organization Expenses - Costs incurred by the Fund in connection with
its organization have been deferred and are being amortized on a straight-line
basis over a five-year period beginning on the date of commencement of Fund
operations.
Futures Contracts - The Fund may enter into futures contracts for the delayed
delivery of securities or currency, or contracts based on financial indices at
a fixed price on a future date. In entering such contracts, the Fund is
required to deposit with the broker either in cash or securities an amount
equal to a certain percentage of the contract amount. Subsequent payments are
made or received by the Fund each day, depending on the daily fluctuations in
the value of the contract, and are recorded for financial statement purposes
as unrealized gains or losses by the Fund. The Fund's investment in futures
contracts is designed to hedge against anticipated future changes in interest
or exchange rates or securities prices. Should interest or exchange rates or
securities prices move unexpectedly, the Fund may not achieve the anticipated
benefits of the futures contracts and may realize a loss.
Forward Foreign Currency Exchange Contracts - The Fund may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering into these contracts from the potential inability of counterparties
to meet the terms of their contracts and from unanticipated movements in the
value of a foreign currency relative to the U.S. dollar. The Fund may enter
into forward contracts for hedging purposes as well as for non-hedging
purposes. For hedging purposes, the Fund may enter into contracts to deliver
or receive foreign currency it will receive from or require for its normal
investment activities. The Fund may also use contracts in a manner intended to
protect foreign currency-denominated securities from declines in value due to
unfavorable exchange rate movements. For non-hedging purposes, the Fund may
enter into contracts with the intent of changing the relative exposure of the
Fund's portfolio of securities to different currencies to take advantage of
anticipated changes. The forward foreign currency exchange contracts are
adjusted by the daily exchange rate of the underlying currency and any gains
or losses are recorded as unrealized until the contract settlement date. On
contract settlement date, the gains or losses are recorded as realized gains
or losses on foreign currency transactions.
Investment Transactions and Income - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
and original issue discount is accreted for financial statement and tax
reporting purposes as required by federal income tax regulations. Interest
payments received in additional securities are recorded on the ex-interest
date in an amount equal to the value of the security on such date.
Fees Paid Indirectly - The Fund's custody fee is calculated as a percentage of
the Fund's month end net assets. The fee is reduced according to an
arrangement that measures the value of cash deposited with the custodian by
the Fund. This amount is shown as a reduction of expenses on the Statement of
Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided.
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 distributions from paid-in
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, 1999, $28,370 from accumulated distributions in excess
of net realized gain on investments and foreign currency transactions was
reclassified to accumulated undistributed net investment income. This change had
no effect on the net assets or net asset value per share. At June 30, 1999,
accumulated undistributed net investment income and accumulated distributions in
excess of net realized gain on investments and foreign currency transactions
under book accounting were different from tax accounting due to temporary
differences in accounting for capital losses and foreign currency.
At June 30, 1999, the Fund, for federal income tax purposes, had a capital
loss carryforward of $597,483 which may be applied against any net taxable
realized gains of each succeeding year until the earlier of its utilization or
expiration on June 30, 2007.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.85%
of the Fund's average daily net assets.
The Fund has a temporary expense reimbursement agreement whereby MFS has
voluntarily agreed to pay all of the Fund's operating expenses, exclusive of
management fees. The Fund in turn will pay MFS an expense reimbursement fee
not greater than 0.40% of average daily net assets. To the extent that the
expense reimbursement fee exceeds the Fund's actual expenses, the excess will
be applied to amounts paid by MFS in prior years. At June 30, 1999, the
aggregate unreimbursed expenses owed to MFS by the Fund amounted to $195,799.
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 and
short-term obligations, aggregated $12,408,890 and $12,665,971, respectively.
The cost and unrealized appreciation and depreciation in the value of the
investments owned by the Fund, as computed on a federal income tax basis, are
as follows:
Aggregate cost $3,350,620
----------
Gross unrealized appreciation $ 132,413
Gross unrealized depreciation (49,597)
----------
Net unrealized appreciation $ 82,816
==========
(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. Transactions in
Fund shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1999 YEAR ENDED JUNE 30, 1998
------------------------------ ---------------------------
SHARES AMOUNT SHARES AMOUNT
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 3,006 $ 29,302 4,979 $ 57,265
Shares issued to shareholders in
reinvestment of distributions 43,174 390,726 51,762 548,154
Shares reacquired (178,320) (1,636,606) (12,075) (140,524)
--------- ------------- -------- ---------
Net increase (decrease) (132,140) $ (1,216,578) 44,666 $ 464,895
======== ============= ====== ==========
</TABLE>
(6) Line of Credit
The Fund and other affiliated funds participate in a $820 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, 1999, was $36.
(7) Financial Instruments
The Fund trades financial instruments with off-balance-sheet risk in the
normal course of its investing activities in order to manage exposure to
market risks such as interest rates and foreign currency exchange rates. These
financial instruments include forward foreign currency exchange contracts and
futures contracts. The notional or contractual amounts of these instruments
represent the investment the Fund has in particular classes of financial
instruments and does not necessarily represent the amounts potentially subject
to risk. The measurement of the risks associated with these instruments is
meaningful only when all related and offsetting transactions are considered.
Forward Foreign Currency Exchange Contracts
<TABLE>
<CAPTION>
NET
UNREALIZED
CONTRACTS TO CONTRACTS APPRECIATION
SETTLEMENT DATE DELIVER/RECEIVE IN EXCHANGE FOR AT VALUE (DEPRECIATION)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales 5/03/00 HKD 1,332,681 $170,000 $170,306 $(306)
-------- ------
Purchases 7/06/99 PHP 4,731,600 $120,000 $124,629 $4,629
-------- ------
</TABLE>
At June 30, 1999, forward foreign currency purchases and sales under master
netting agreements excluded above amounted to a net receivable of $41,230 with
Merrill Lynch and $4,701 with Deutsche Bank.
At June 30, 1999, the Fund had sufficient cash and/or securities to cover any
commitments under
these contracts.
Futures Contracts
<TABLE>
<CAPTION>
UNREALIZED
DESCRIPTION EXPIRATION CONTRACTS POSITION DEPRECIATION
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury September 1999 4 Short $(3,864)
--------
</TABLE>
At June 30, 1999, the Fund had sufficient cash and/or securities to cover any
margin requirements 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, 1999,
the Fund owned the following restricted securities, excluding securities
issued under Rule 144A, constituting 5.87% 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>
SHARE/PAR
DESCRIPTION DATE OF ACQUISITION AMOUNT COST VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Algeria Tranche, 6.644s, 3/04/2010 5/12/99 55,000 $ 29,333 $ 30,800
Morocco Tranche A, 5.906s, 1/01/2009 8/26/98 158,095 110,421 126,476
Russia Principal Loans, 6.063s, 12/15/2020 5/06/99 430,000 34,264 52,159
--------
$209,435
========
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Institutional Trust and Shareholders of MFS
Institutional Emerging Markets Debt Fund:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of MFS Institutional Emerging Markets
Debt Fund (one of the series comprising MFS Institutional Trust) as of June
30, 1999, the related statement of operations for the year then ended, the
statement of changes in net assets for the years ended June 30, 1999 and 1998,
and the financial highlights for each of the years in the four-year period
ended June 30, 1999. 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, 1999 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
Emerging Markets Debt Fund at June 30, 1999, 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 6, 1999
<PAGE>
FEDERAL TAX INFORMATION
In January 2000, shareholders will be mailed a Form 1099-DIV reporting the
federal tax status of all distributions paid during the calendar year 1999.
<PAGE>
MFS' YEAR 2000 READINESS DISCLOSURE
MFS Investment Management(R), as an investment adviser and on behalf of the
MFS funds, is committed to the effective use of technology in managing our
portfolio investments, delivering high-quality service to MFS fund
shareholders, retirement plan participants, and MFS' institutional clients,
and supporting the financial advisers who sell our products. With that in
mind, we created a separately funded Year 2000 Program
Management Office in 1996 comprised of a specialized staff reporting directly
to MFS senior management.
The Year 2000 (Y2K) problem arises because calendar-year fields in computers
and software applications traditionally have used two-digit codes so that, for
example, the year 1998 is coded as "98," with the "19" being implied. In the
year 2000, unless necessary corrections have been made, computer applications
may assume "00" refers to 1900 rather than 2000, thus resulting in systems
failures or miscalculations. To address this issue, our team of dedicated
business and technology managers, working with outside experts, is taking
steps to ascertain the Y2K readiness of MFS' internal systems and is working
with our external systems vendors to determine whether they expect their
systems to be ready.
MFS recognizes that fund shareholders and institutional clients also are
concerned about whether the companies whose securities are held in their
portfolios are addressing Y2K issues. As part of the MFS(R) Original Research
(SM) process of evaluating portfolio investments, one of the many relevant
factors that MFS' portfolio managers and research analysts may consider is a
company's Y2K readiness. Each year, MFS' research analysts and portfolio
managers conduct more than 1,000 on-site meetings with companies whose
securities are, or may be, held in fund and client portfolios, and host an
additional 1,500 meetings at MFS' headquarters. When assessing the Y2K
readiness of these companies, MFS' research analysts and portfolio managers
may rely upon discussions at these meetings as well as SEC disclosure
documents and third-party reports.
Y2K readiness is an enormously complex, worldwide issue. No company or
institution can guarantee that it will be unaffected by the Y2K issue. While
MFS is taking significant steps to protect the integrity of its internal
systems, there can be no assurance that these steps will be sufficient to
avoid any adverse impact on MFS, shareholders of MFS funds, participants in
retirement plans administered by MFS, or MFS' institutional clients.
If you have further questions regarding MFS' Year 2000 Readiness Program,
please visit our Web site at www.mfs.com or contact the MFS Year 2000 Program
Management Office by e-mail at [email protected] or by letter at 500 Boylston
Street, Boston, MA 02116-3741.
<PAGE>
(C)1999 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
EFI-2 8/99 .5M
