<PAGE>
[Logo] MFS(R) SEMIANNUAL REPORT
INVESTMENT MANAGEMENT DECEMBER 31, 1998
75 YEARS
WE INVENTED THE MUTUAL FUND(R)
MFS(R) INSTITUTIONAL EMERGING
MARKETS DEBT FUND
[Graphic Omitted]
<PAGE>
MFS(R) INSTITUTIONAL EMERGING MARKETS DEBT FUND
<TABLE>
<S> <C>
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
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 MANAGERS contact your financial adviser.
Robert J. Manning*
Matthew W. Ryan* CUSTODIAN
State Street Bank and Trust Company
TREASURER
W. Thomas London* WORLD WIDE WEB
www.mfs.com
ASSISTANT TREASURERS
Mark E. Bradley*
Ellen Moynihan*
James O. Yost*
SECRETARY
Stephen E. Cavan*
ASSISTANT SECRETARY
James R. Bordewick, Jr.*
</TABLE>
*Affiliated with the Investment Adviser
- -------------------------------------------------------------------------------
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
- -------------------------------------------------------------------------------
<PAGE>
LETTER FROM THE CHAIRMAN
Dear Shareholders,
In 1999, MFS celebrates its 75th anniversary. The nation's first mutual fund --
our Massachusetts Investors Trust (MIT) -- was introduced to the public on March
21, 1924. Since then, MFS Investment Management(R), the company that grew out of
that original fund, has helped guide shareholders through many economic and
investment cycles, primarily by focusing on the long-term opportunities created
by an expanding global economy. As of December 31, 1998, MFS manages nearly $100
billion, and the firm's 2,000 people serve almost four million investors and
their financial advisers worldwide. Meanwhile, MIT's assets have grown to over
$12 billion, and 56 mutual funds are offered in the MFS Family of Funds(R).
One of the elements in the success of MIT did not exist before our founders
invented it in 1924. That is daily redemption. This innovation means that if you
want to sell your investment in any MFS mutual fund, you have the security of
knowing that you may do so immediately by exchanging into another MFS fund. Or,
if you need your money for other purposes, it can quickly be wired or mailed to
you. This daily redemption feature, through which new shares were created when
people invested in MIT and were redeemed when people sold, brought another
important change to the industry. Now, the price of a mutual fund's shares
wasn't determined by supply and demand, but by the value of the securities owned
by the fund.
Another factor in our growth was the development of one of the industry's first
in-house research departments in 1932. Unlike companies that rely on Wall Street
research reports, which can be used by many investors at the same time, MIT's
managers built its long-term track record by visiting companies, talking to
managers and competitors, and "kicking the tires" so they could judge the
quality and potential of each company's products and services for themselves.
Today, MFS has more than 100 full-time portfolio managers, stock analysts, and
credit analysts who track the equity and bond markets. That number includes over
35 equity analysts who specialize in industries such as aviation, media,
technology, automobiles, and utilities.
While MIT introduced the daily redemption feature, that was not our only
invention. We also established the nation's first global bond fund, first
high-yield municipal bond fund, and first high-yield municipal closed-end bond
fund.
We are proud of the record of MIT and of the funds in the MFS Family of Funds,
but we are also proud of our long-standing relationship with financial advisers.
Not only do we believe investors can benefit from the advice of these experts
but, as was shown during the market volatility of 1998, people who work with
financial advisers are less likely to abandon their carefully designed,
long-term investment strategies.
Our ability to service your investment and information needs is also extremely
important to us. The MFS Service Center handles millions of transactions and
phone calls every year. Supporting the work of financial advisers, promptly
sending out statements and confirmations, and answering hundreds of investors'
questions every day are crucial elements in maintaining long-term relationships
with our fund shareholders. That link to our investors has also been enhanced by
our site on the World Wide Web: WWW.MFS.COM. Since 1996, this site has given
investors and the general public access to up-to-date information about MFS
products and services, as well as market outlooks and retirement information.
The site has rapidly become one of our primary vehicles for communicating with
our investors and educating the public about mutual funds in general and MFS in
particular.
If there is a common thread running through these milestones, it is our
always-increasing commitment to providing you with the best possible investment
management and shareholder service, just as we have done for the past 75 years.
As we celebrate this anniversary, it is also a time for MFS to look ahead and
build on our 75 years of innovation and experience to help meet your investment
needs in the next century. 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
January 15, 1999
MANAGEMENT REVIEW AND OUTLOOK
Dear Shareholders,
For the six months ended December 31, 1998, the Fund provided a total return of
- -8.95% (including the reinvestment of any distributions). The Fund's return
compares to a 6.19% return for the Fund's custom index, a blend of the J.P.
Morgan Emerging Markets Bond Index Plus (EMBI+), which comprises 50% of the
custom index, and the J.P. Morgan Emerging Local Markets Index (50%). The EMBI+
is comprised of Brady bonds (U.S. dollar-denominated restructured bank loans),
while the J.P. Morgan Emerging Local Markets Index is comprised of
local-currency, short-term instruments. The Fund typically invests half its net
assets in Brady bonds and half in local-currency instruments.
Emerging markets debt experienced substantial volatility in the second half of
1998. In August alone, the EMBI+ declined nearly 30% before recovering by some
29% from mid-September to November. Financial and economic collapse in Russia
was the primary cause of the market decline, sending prices of Russian assets
spiraling and precipitating a sell-off of emerging markets debt generally.
Leveraged investors with large positions in Russia were forced to liquidate
portfolios in order to meet margin calls. A vicious cycle of forced and panic
selling ensued, fueled by continued Asian economic weakness, low commodity
prices, and the perceived vulnerability of other economies, such as Brazil's.
Some stability and recovery began to take hold in October following actions by
the Federal Reserve Board and other central bankers to lower interest rates.
Other factors contributing to the market's rebound included establishment of an
International Monetary Fund (IMF) loan program for Brazil, increased funding of
the IMF's capital base, and Japanese actions to correct weaknesses in that
country's economic and banking systems. Also, the recovery in equity markets
provided support to credit markets generally.
Large swings in returns are not unprecedented for this asset class. Returns on
Brady bonds experienced similar declines in the first quarter of 1995 but
rebounded and returned over 30% for the year. Between 1991 and 1998, average
annual Brady bond returns were just over 19%.
With EMBI+ yields of 16% to 17%, we believe the market offers investors an
appropriately large risk premium. Low commodity prices will continue to pressure
fiscal and external accounts in a number of countries, particularly in Latin
America. This region is vulnerable to further volatility due to the continued
unsettled situation in Brazil. That said, we are encouraged by recent policy
actions in Mexico to correct banking system weaknesses and to maintain a tight
fiscal stance. Looking beyond Latin America, which comprises over 80% of the
EMBI+, we have begun to see improvements in underlying fundamentals in a number
of countries -- South Korea being a notable example -- that have contributed to
significantly favorable performance. Signs of a turnaround are evident in
various other developing Asian economies as well. We believe select Eastern
European countries, particularly Poland and Bulgaria, are strong candidates for
upgrades by credit-rating agencies.
It is important to note that while the balance of risk in emerging markets has
shifted to Latin America, bond yields have generally adjusted to reflect this
risk. So while the Fund has benefited from underweighting the region, we are
comfortable with existing Latin American positions. We have benefited from
overweighting Eastern European and Asian bonds. Moreover, country selection has
generally contributed to performance. The Fund has emphasized markets with
stable and/or improving economic fundamentals and manageable debt service
obligations, such as Mexico, Panama, and Bulgaria. Consistent with our global
focus, we have also sought to exploit diversification benefits by investing in
markets such as Poland, Croatia, and Morocco that seem less susceptible to
commodity price downturns or contagion from Latin America or Russia. The Fund's
exposure to Russia hurt performance. Although it had no ruble exposure, the Fund
was adversely affected by the sell-off in dollar-denominated global bonds.
Fund performance was most adversely affected by underweightings in currency
positions, particularly in Asia but also in the Czech Republic and Turkey.
Concern over the vulnerability of Asian currencies to further weakness, given
banking system problems, economic fragility, and the deterioration of the yen,
turned out to be overly pessimistic. Still, we remain cautious regarding
currencies going forward, seeing the most value in Eastern Europe.
Respectfully,
/s/ Robert J. Manning /s/ Matthew W. Ryan
Robert J. Manning Matthew W. Ryan
Portfolio Manager Portfolio Manager
The opinions expressed in this report are those of the portfolio managers and
are only through the end of the period of the report as stated on the cover. The
managers' 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.
It is not possible to invest directly in an index.
PORTFOLIO MANAGERS' PROFILES
Robert J. Manning is a Senior Vice President, Director of Fixed Income Research,
and a member of the Fixed Income Management Group of MFS Investment
Management(R). He is portfolio manager of MFS(R) High Income Fund, MFS(R) High
Yield Opportunities Fund, MFS(R) Special Value Trust, MFS(R) American(SM) U.S.
High Yield Fund, and MFS(R) Meridian(SM) U.S. High Yield Fund. In addition, he
is co-manager of MFS(R) Institutional Emerging Debt Fund. Mr. Manning joined MFS
in 1984 as a research analyst in the High Yield Bond Department. He was named
Vice President in 1988, portfolio manager of MFS Special Value Trust in 1992,
Senior Vice President in 1993, portfolio manager of MFS(R) High Income Fund in
1994, portfolio manager of MFS(R) High Yield Opportunities Fund in 1998, and
Director of Fixed Income Research in 1999. He is a graduate of the University of
Lowell and earned an M.B.A. degree in finance from Boston College.
Matthew W. Ryan is Vice President of MFS Investment Management(R) and portfolio
manager of MFS(R) Institutional Emerging Markets Debt Fund with co-manager
Robert J. Manning. 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
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.
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). The Fund invests,
under normal market conditions, at least 65% of
its total assets in fixed-income securities of
government, government-related, supranational and
corporate issuers that are located or primarily
conducting their business in emerging markets.
Commencement of
investment operations: August 7, 1995
Size: $4.8 million net assets as of December 31, 1998
PERFORMANCE SUMMARY
Because mutual funds are designed for investors with long-term goals, we have
provided cumulative results as well as the average annual total returns for the
applicable time periods. Investment results reflect the percentage change in net
asset value, including reinvestment of dividends. The minimum initial investment
is generally $3 million. Shares of the Fund are purchased at net asset value.
AVERAGE ANNUAL AND CUMULATIVE TOTAL RATES OF RETURN
6 Months 1 Year 3 Years 10 Years/Life*
- -------------------------------------------------------------------------------
Cumulative Total Return -8.95% -7.06% +22.57% +28.39%
- -------------------------------------------------------------------------------
Average Annual Total Return -- -7.06% + 7.02% + 7.62%
- -------------------------------------------------------------------------------
* For the period from the commencement of the Fund's investment operations,
August 7, 1995, through December 31, 1998.
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 (Unaudited) - December 31, 1998
Bonds - 76.7%
- --------------------------------------------------------------------------------
PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
- --------------------------------------------------------------------------------
Foreign Bonds - 76.7%
Argentina - 8.6%
Republic of Argentina, 11s, 2005 $ 200 $ 199,000
Republic of Argentina, 11.75s, 2007## 250 214,687
----------
$ 413,687
- --------------------------------------------------------------------------------
Brazil - 12.3%
Banco Nacional De Desenvolvi, 14.724s, 2008
(Banks and Credit Companies)## $ 300 $ 241,500
Federal Republic of Brazil, 6.125s, 2006 144 92,347
Federal Republic of Brazil, 9.375s, 2008 375 256,875
----------
$ 590,722
- --------------------------------------------------------------------------------
Bulgaria - 5.8%
National Republic of Bulgaria, 6.688s, 2024 $ 400 $ 280,000
- --------------------------------------------------------------------------------
Colombia - 2.3%
Republic of Columbia, 12.243s, 2005 $ 120 $ 109,800
- --------------------------------------------------------------------------------
Croatia - 2.0%
Republic of Croatia, 6.653s, 2006 $ 118 $ 94,685
- --------------------------------------------------------------------------------
Greece - 3.1%
Hellenic Republic, 8.6s, 2008 GDR 37,000 $ 146,600
- --------------------------------------------------------------------------------
Mexico - 14.1%
Petroleos Mexicanos, 9.574s, 2005
(Oil Services)## $ 90 $ 81,900
United Mexican States, 6.201s, 2019 250 203,125
United Mexican States, 9.875s, 2007 400 393,000
----------
$ 678,025
- --------------------------------------------------------------------------------
Morocco - 4.1%
Morocco Tranche A, 6.063s, 2009+ $ 250 $ 195,000
- --------------------------------------------------------------------------------
Panama - 2.9%
Republic of Panama, 8.875s, 2027 $ 150 $ 140,250
- --------------------------------------------------------------------------------
Peru - 2.4%
Republic of Peru, 4s, 2017 $ 180 $ 112,950
- --------------------------------------------------------------------------------
Philippines - 4.7%
ING Bank NV London Branch, 0s, 1999
(Banks and Credit Companies) $ 200 $ 227,000
- --------------------------------------------------------------------------------
Poland - 9.7%
Government of Poland, 3s, 2024 $ 250 $ 165,625
Telekomunikacja Polska SA Finance BV,
7.75s, 2008 (Utilities - Telephone)## 300 297,750
----------
$ 463,375
- --------------------------------------------------------------------------------
Russia - 1.5%
Russian Federation, 8.75s, 2005## $ 300 $ 70,500
- --------------------------------------------------------------------------------
South Korea - 3.2%
Republic of Korea, 8.875s, 2008 $ 150 $ 153,336
- --------------------------------------------------------------------------------
Total Bonds (Identified Cost, $3,790,500) $3,675,930
- --------------------------------------------------------------------------------
Rights
- --------------------------------------------------------------------------------
ISSUER SHARES VALUE
- --------------------------------------------------------------------------------
United Mexican States (Identified Cost, $0)* 385,000 $ 0
- --------------------------------------------------------------------------------
Short-Term Obligations - 19.8%
- --------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- --------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp.
due 1/04/99 at Amortized Cost $ 950 $ 949,644
- --------------------------------------------------------------------------------
Total Investments (Identified Cost, $4,740,144) $4,625,574
Other Assets, Less Liabilities - 3.5% 167,306
- --------------------------------------------------------------------------------
Net Assets - 100.0% $4,792,880
- --------------------------------------------------------------------------------
* - Non-income producing security.
## - 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.
GRD = Greek Drachma HKD = Hong Kong Dollars
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities (Unaudited)
- -------------------------------------------------------------------------------
DECEMBER 31, 1998
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets:
Investments, at value (identified cost, $4,740,144) $4,625,574
Cash 15,049
Interest receivable 94,347
Net receivable for forward foreign currency exchange contracts to
purchase 27,609
Net receivable for forward foreign currency exchange contracts subject to
master netting agreements 41,551
Receivable from investment adviser 27,808
Deferred organization expenses 6,575
Other assets 35
----------
Total assets $4,838,548
----------
Liabilities:
Net payable for forward foreign currency exchange contracts to sell $ 39,706
Payable to affiliates -
Management fee 111
Shareholder servicing agent fee 1
Accrued expenses and other liabilities 5,850
----------
Total liabilities $ 45,668
----------
Net assets $4,792,880
==========
Net assets consist of:
Paid-in capital $5,403,965
Unrealized depreciation on investments and translation of assets and
liabilities in foreign currencies (85,197)
Accumulated distributions in excess of net realized gain on investments
and foreign currency transactions (563,143)
Accumulated undistributed net investment income 37,255
----------
Total $4,792,880
==========
Shares of beneficial interest outstanding 528,127
=======
Net asset value, offering price, and redemption price per share (net assets of
$4,792,880 / 528,127 shares of beneficial interest outstanding) $9.08
=====
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations (Unaudited)
- -------------------------------------------------------------------------------
SIX MONTHS ENDED DECEMBER 31, 1998
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
Net investment income:
Interest income $ 207,594
----------
Expenses -
Management fee $ 20,320
Trustees' compensation 2,200
Shareholder servicing agent fee 180
Administrative fee 243
Auditing fees 9,473
Registration fees 9,264
Custodian fee 5,386
Printing 3,188
Amortization of organization expenses 2,057
Legal fees 410
Miscellaneous 47
----------
Total expenses $ 52,768
Fees paid indirectly (1,707)
Preliminary reduction of expenses by investment adviser (21,178)
----------
Net expenses $ 29,883
----------
Net investment income $ 177,711
----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ (518,991)
Futures contracts (7,421)
Foreign currency transactions 20,335
----------
Net realized loss on investments and foreign currency transactions $ (506,077)
----------
Change in unrealized appreciation (depreciation) -
Investments $ (182,303)
Futures contracts 29
Translation of assets and liabilities in foreign currencies 28,285
----------
Net unrealized loss on investments and foreign currency translation $ (153,989)
----------
Net realized and unrealized loss on investments and foreign
currency $ (660,066)
----------
Decrease in net assets from operations $ (482,355)
==========
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- ------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1998 JUNE 30, 1998
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 177,711 $ 344,034
Net realized loss on investments and foreign currency
transactions (506,077) (124,794)
Net unrealized loss on investments and foreign currency
translation (153,989) (134,989)
---------- ----------
Increase (decrease) in net assets from operations $ (482,355) $ 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 in net assets from Fund share transactions $ 339,454 $ 464,895
---------- ----------
Total increase (decrease) in net assets $ (533,627) $ 992
Net assets:
At beginning of period 5,326,507 5,325,515
---------- ----------
At end of period (including accumulated undistributed net
investment income of $37,255 and $222,288, respectively) $4,792,880 $5,326,507
========== ==========
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
- ---------------------------------------------------------------------------------------------------------------------------
YEAR ENDED
JUNE 30,
SIX MONTHS ENDED ---------------------------- PERIOD ENDED
DECEMBER 31, 1998 1998 1997 JUNE 30, 1996*
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------
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) $ 0.36 $ 0.73 $ 0.94 $ 0.70
Net realized and unrealized gain (loss) on
investments and foreign currency transactions (1.33) (0.56) 1.41 0.56
------ ------ ------ ------
Total from investment operations $(0.97) $ 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 $ 9.08 $10.86 $11.94 $10.88
====== ====== ====== ======
Total return (8.95)%++ 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 7.39%+ 6.46% 8.30% 7.59%+
Portfolio turnover 131% 159% 473% 285%
Net assets at end of period (000 omitted) $4,793 $5,327 $5,326 $4,160
* For the period from the commencement of the Fund's investment operations, August 7, 1995, through June 30, 1996.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund 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.
(S) Subject to reimbursement, the investment adviser voluntarily agreed to maintain the expenses of the Fund (excluding
management fee) at not more than 0.40% of average daily net assets. To the extent that actual expenses were over these
limitations, the net investment income per share and ratios would have been:
Net investment income $ 0.32 $ 0.66 $ 0.85 $ 0.43
Ratios (to average net assets):
Expenses## 2.20%+ 1.91% 2.07% 4.21%+
Net investment income 6.51%+ 5.86% 7.48% 4.63%+
</TABLE>
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(1) Business and Organization
MFS Institutional Emerging Markets Debt Fund (the Fund) is a 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 or at the direction of the Trustees.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases and
sales of foreign investments, income, and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates of
such transactions. Gains and losses attributable to foreign currency exchange
rates on sales of securities are recorded for financial statement purposes as
net realized gains and losses on investments. Gains and losses attributable to
foreign exchange rate movements on income and expenses are recorded for
financial statement purposes as foreign currency transaction gains and losses.
That portion of both realized and unrealized gains and losses on investments
that results from fluctuations in foreign currency exchange rates is not
separately disclosed.
Deferred Organization Expenses - Costs incurred by the Fund in connection with
its organization have been deferred and are being amortized on a straight-line
basis over a five-year period beginning on the date of commencement of Fund
operations.
Futures Contracts - The Fund may enter into futures contracts for the delayed
delivery of securities or currency, or contracts based on financial 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 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-dividend or ex-interest date in an amount
equal to the value of the security on such date.
Fees Paid Indirectly - The Fund's custody fee is calculated as a percentage of
the Fund's month end net assets. The fee is reduced according to an arrangement
that measures the value of cash deposited with the custodian by the Fund. This
amount is shown as a reduction of expenses on the Statement of Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided.
The Fund files a tax return annually using tax accounting methods required under
provisions of the Code, which may differ from generally accepted accounting
principles, the basis on which these financial statements are prepared.
Accordingly, the amount of net investment income and net realized gain reported
on these financial statements may differ from that reported on the Fund's tax
return and, consequently, the character of distributions to shareholders
reported in the financial highlights may differ from that reported to
shareholders on Form 1099-DIV.
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.
(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 December 31, 1998, the aggregate
unreimbursed expenses owed to MFS by the Fund amounted to $159,726.
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).
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 $5,329,947 and $4,432,326, respectively.
The cost and unrealized appreciation or depreciation in value of the investments
owned by the Fund, as computed on a federal income tax basis, are as follows:
Aggregate cost $4,740,144
----------
Gross unrealized depreciation $ (256,276)
Gross unrealized appreciation 141,706
----------
Net unrealized depreciation $ (114,570)
==========
(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>
SIX MONTHS ENDED DECEMBER 31, 1998 YEAR ENDED JUNE 30, 1998
---------------------------------- ------------------------
SHARES AMOUNT SHARES AMOUNT
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 1,815 $ 18,171 4,979 $ 57,265
Shares issued to shareholders in reinvestment
of distributions 43,174 390,726 51,762 548,154
Shares reacquired (7,433) (69,443) (12,075) (140,524)
------- ---------- -------- ----------
Net increase 37,556 $ 339,454 44,666 $ 464,895
======= ========== ======== ==========
</TABLE>
(6) Line of Credit
The Fund and other affiliated funds participate in an $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 period ended December 31, 1998, was $24.
(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 3/19/99 DEM 312,585 $175,000 $188,117 $(13,117)
5/03/99 HKD 2,200,000 276,799 283,532 (6,733)
3/19/99 HUF 58,591,500 244,948 264,804 (19,856)
-------- -------- --------
$696,747 $736,453 $(39,706)
======== ======== ========
Purchases 3/19/99 DEM 312,585 $178,722 $188,117 $ 9,395
5/03/99 HKD 1,100,00 138,356 141,766 3,410
3/19/99 HUF 58,591,500 250,000 264,804 14,804
-------- -------- --------
$567,078 $594,687 $ 27,609
======== ======== ========
</TABLE>
Forward foreign currency purchases and sales under master netting agreements
excluded above amounted to a net receivable of $41,551 with Merrill Lynch at
December 31, 1998.
At December 31, 1998, the Fund had sufficient cash and/or securities to cover
any commitments 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 December 31, 1998,
the Fund owned the following restricted securities (constituting 4.07% 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.
<TABLE>
<CAPTION>
PAR
DESCRIPTION DATE OF ACQUISITION AMOUNT COST VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Morocco Tranche A, 6.0635, 2009 8/26/98 $250,000 $172,501 $195,000
--------
$195,000
========
</TABLE>
<PAGE>
(C)1998 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
IMD-2 2/99 .5M
